Why It Is Imperative To Provide Some Clarification To The News That FGN Has Provided Subsidy To Electricity. –GENCOS

 

 

This tariff issued by EERC  has set a precedent for all other States.

From their tariff order, only N45 naira is captured for generation cost out of N112. This portends bigger issue in the decentralisation of power or electricity to the states.

There are many, and burning questions about dealing with obligations and liabilities (all legacy debts post privatisation but before the exit to state independence) in the decentralisation discourse.

1. Does this position mean, EERC are looking over to FGN to continue subsidizing their electricity?
2. How does EERC account for their share of the accumulated sector debt or are they assuming assets with no liability?
3. ⁠Should EERC not be designing its tariff to remove its dependency on the FGN and make its market arrractive for investors?

 

*CLARITY ON “SUBSIDIES “*  

It is imperative to state that there is no FGN policy on subsidies. IT IS DEBT ACCUMULATION!!! If anyone has the proposed policy document please kindly share publicly.

1. THE GENCOS MONTHLY GENERATION INVOICES AVERAGES AT ABOUT N250B
2. ⁠FGN budget only 900bn for 2025 which is NOT CASH BACKED TILL THIS MORNING (21/7/2025).

Now Please do your maths? The N45 of generation cost that EERC is assuming in their tariff setting, out of average N112, implies they are accounting for just 40%. Hence, 60% is left to be covered by the assumed FGN subsidy, which for this year is just N900bn and not CASH BACKED TILL TODAY!

3. ⁠This is a huge contagion that needs to be dealt with but at the Presidency level.
4. ⁠Outstanding Payments: Recall that GenCos are currently owed about ₦4 trillion (₦2 trillion for 2024 and ₦1.9 trillion in legacy debts) (2015-2024) with an accumulated debt of N1.2trn for first half of 2025 alone. There are NO workable solutions, including cash payments, financial instruments, and debt swaps in sight at the moment.
5. ⁠Budget Allocation Concerns: The 2025 government budget allocates only ₦900 billion, raising concerns about its adequacy to cover arrears and future deficits.The power generated by GenCos have continued to be consumed in full without corresponding full payment.

 

*IN THE BEGINNING*

At the inception of the privatisation, as part of the takeover process and in line with the Government’s objectives, the GenCos entered into several agreements, including the Performance agreement, which defined the contractual relationship between FGN and GenCos, guaranteeing amongst others that GenCos:

• Had sufficient and guaranteed gas supply,
• ⁠Had requisite regulatory approvals to generate power
• ⁠Had grid connection and access to evacuate the quantum of energy generated,
• ⁠Had securitised assurance that they would be paid as and when due by the offtaker, and that
• ⁠They would receive Capacity Charge payments for Generation Capacity made available if they were prevented from generating energy for reasons beyond their control.

*Today’s NESI reality is, GenCos have never:*

1. A) Received 100% payment from inception.
2. B) Had sufficient and guaranteed gas supply by the offtaker (NBET).
3. C) Been paid as and when due by the off-taker.
4. D) Been protected from Grid inefficiencies (GenCos are orphaned).
5. E) protection from the forex volatility notwithstanding the aggravated effects of inefficient grid operations which has increased their machine maintenance costs with over 90% of their operational cost in dollars.

F). The reality is, GenCos engaged in a massive capacity recovery but have been constantly paid less than 100% of their invoice monthly.

About 12 years after the privatization, Available data shows that GenCos Available Generation Capacity requirements has been exceeded.

The implication of this is that GenCos have kept to their industry agreement with the Bureau of Public Enterprise (BPE) and the NESI as a market.

• Despite the growth of power both available capacity and declared capacity, power still remains a national problem, as over 50% of this capacity is not being enjoyed by consumers due to constraints at the transmission and distribution subsector, hampering GenCos operations.

At the inception of the Transitional Electricity Market (TEM) in 2015, commitments were made to “guarantee” GenCos full payment of their invoices, underpinned by security deposits which the Distribution Companies (“DisCos”) were meant to provide, to cover monthly shortfall in payments. GenCos relied on this supposed guarantee and payment assurance to increase their investment in additional capacity.

Sadly, as at today, the payment assurances and supposed guarantees (whether from Nigerian Bulk Electricity Plc [NBET] or the Electricity Distribution Companies [DisCos] are not in place with resultant dire consequences for GenCos, the entire power sector and the Nigerian economy.

GenCos, as good corporate citizens with patriotic zeal, have made large-scale investments in the power sector with associated business risks while fulfilling their obligations as stipulated in the terms and conditions and guidelines contained in the various industry agreements and have continued to add capacity, despite the difficulties being faced by them on their part.

For the clarity of purpose and the avoidance of any doubt, the critically disruptive obligations of the industry to GenCos include:

• Outstanding indebtedness on already invoiced Energy and Capacity delivered/availed.
• Non-payment of interest on unpaid invoiced amounts (time value of money).
• Resolution of the issues associated with Available Capacity and payment of its relevant Deemed Capacity.
• Procurement of Spinning Reserves and Payment for Ancillary Services.
• Full activation of the Operating Power Purchase Agreements (“PPAs”); and going forward, a sustainable full invoice payment arrangement that will enable the GenCos to continue to meet their various obligations and operate as going concerns.

GenCos are bearing ALL the sector risks, including:

• Unutilised capacity, as even the declared capacity is ignored and not fully utilised
• Non-adherence to the contract and conditions of services.
• Grid instability and high-frequency challenges
• Risks of Lenders and banks pressure, including host community restiveness & Aparty.
• Instances of overloaded lines abound
• Due to aged & Weak Transmission And Distribution System, Generated Power

Becomes Rejected Or  Forced To Be Reduced To Match the Infrastructure that distributes this Power to the Customer, making GenCos Operate Below Their optimum.

It is international industry best practice, in critically underserved countries, that available generation capability should be equal to average generation (energy utilized). However, In Nigeria, available generation means increased stranded capacity.

 

*Impact of  the  foregoing on GENCOS:*

GenCos face difficulty in servicing their debt and equity in procuring these assets (in 2013, Exchange Rate was $1= N157, now in 2025, it is $1 = N1600)

• Operation and Maintenance are heavily affected!
• New investments and expansions are hampered; a good example is the NIPP, which attracted very little attention due to the hurdles in the sector.
• Poor credit rating is currently hampering GenCos’ ability to obtain loans and procure essential parts.
• Poor business viability image to investors who would review GenCos’ financial statements to evaluate the financial health of the company.

 

*Again, The negative impact of Poor Liquidity on the GenCos are*:

• GenCos face difficulty in servicing their debt and equity in procuring these assets
• Operations and Maintenance are affected
• New investments are hampered; a good example is the NIPP, which attracted very little attention due to the hurdles in the sector.
• Poor credit rating is currently hampering GenCos’ ability to obtain loans and procure essential parts.
• Poor business viability image to investors who would review GenCos’ financial statements to evaluate the financial health of the company.
• Instances abound where GenCos have had to resort to other means other than the electricity market to support the gas and other services just to put power on the national grid.

From Genco’s point of view, investing to increase the capacity of their power plants in the Nigerian Electricity Market (NEM) translates to more risks in terms of machine breakdown, maintenance and repair costs.

The above portends a huge contagion that needs to be dealt with Immediately.

Should GENCOS Not be worried?

• Given that the minimum or Disco remittance Order (MRO) DRO accounts for far less than GenCos’ invoice, with no top-up plan or cash-backed subsidies.
• Given that there is no clear financing plan to take care of the gaping hole the unpaid invoices are creating, how are GenCos expected to

continue operating?

• Tax and Regulatory Challenges: High corporate income tax, concession fees, royalty charges, and new FRC compliance obligations are further straining GenCos’ revenue in addition to host community demands.
• Need for a workable market design that can stabilise the market.

 

*POTENTIAL OF THE NESI TO GDP*

• Electricity plays a critical role in economic growth, security, and provide stability in human existence, development, as well as poverty eradication.
• The Nigerian Electricity Market (NEM) has the potential to absorb significant

investments and provide rewarding returns on those investments if the market is allowed to run on a competitive basis with little or no government interference.

• Research has shown that for every 1% increase in electricity supply, an economy is expected to grow or decrease by 3.94%, vis-à-vis GDP.
• NESI will attract more investors and Nigerian-made products, leading to less reliance on imported products, bringing about competition and cost effectiveness with little or no government interference.

Nigerian electricity sector is at a tipping point that presents significant opportunities and challenges for investors, entrepreneurs, and policymakers.

• By implementing reforms that improve power’ operational and financial performance, NESI can in turn become financially sound and can attract private investment.
• Maintaining the bankability of the sector is important to ensure continued investments to maintain existing capacity, expand or introduce renewable energy technologies, and investments in new power projects.
• To achieve the anticipated economic growth, Nigeria needs to unlock its potential by taking specific steps to build capabilities and enable growth across multiple sectors via enabling policy structure, sound contractual framework underpinned by favourable legislative and legally established competitive yet regulated market environment.
• Exploring and implementing innovative solutions like well-structured bilateral contracts, off-grid alternatives,

IEDNs, and targeted grid upgrades can unlock the potential for increased efficiency, improved power supply, and economic growth.

• Addressing the challenges, particularly financial viability, regulatory clarity, and infrastructure limitations, is crucial for the success of these initiatives.
• Without a sustainable payment mechanism that deals with this contagion permanently, GenCos’ challenges of funding and bankability of major maintenance and future projects will continue.
• Hampering future expansions geared towards increasing the total national power supply. This also has a very high potential to negatively impact the level of confidence of foreign investors in the power sector.

 

NOTE*:

• BANKABLE DEMAND DRIVES PRODUCTION.
• ⁠THERE IS A CLARION CALL TO DEFINE BANKABLE DEMAND IN THE NESI IF WE WANT VIABILITY AND SUSTAINABILITY IN POWER.

 

*REMEMBER!!*

GenCos are patriotic to the National Course, and this

has been demonstrated, up until now…

BUT..…

Patriotism alone cannot keep the machines Operational & KEEP THE LIGHTS ON !