ESQ Energy and Power School: Charting the way forward on viable power projects

By Oke Peter

In its determination aimed at ensuring a functional power sector, foremost legal practitioner committed to the promotion of excellence in the Nigerian legal practice, ESQ Legal Practice, recently organised a training tagged: ‘Energy and Power School’. The training, according to the organiser, was designed to equip delegates with a detailed understanding of the power sector, critical issues to be considered when negotiating power projects as well as a robust project financing ‘toolkit’ that encompasses risk analysis, debt documentation, and borrower/sponsor consideration.

The four-day training, held at the ILX Centre, Lekki, Lagos, commenced on Tuesday, April 2, 2019. It was divided into four parts namely: ‘Focuses on the regulatory framework of power; Understanding the power sector and the key negotiation/documentation issues in power contracts; Focuses on the Engineering Procurement and Construction (EPC) contracts and Power project financing.’

The Commissioner, Legal Licensing and Compliance, Nigerian Electricity Regulatory Commission (NERC), Barrister Dafe Akpeneye, started the discussion with the presentation of a paper on ‘Regulatory framework of power: Putting into practice — The power case studies.

Akpeneye took time to explain detailed regulatory processes and efforts being made by the commission to ensuring quality and affordable services.

According to him: “Stable power supply in residential, commercial and industrial is a requisite for an improved economy. As a regulatory agency, we are working hard to maintain quality and affordable service for all Nigerians irrespective of class. However, power sector is demanding. It is a billion-dollar investment that needs time to grow.”

He further urged Nigerians to reason with the Federal Government on the power sector, saying, “Concerted efforts are ongoing to resolve various problems confronting the sector. NERC discovered that many electricity consumers are unmetered, we have also noticed that Electricity Distribution Companies (Discos) are technically insolvent and cannot provide meter for their customers, the reason NERC introduced the Meter Asset Provider (MAP) Regulation 2018, to eliminate the practice of estimated billing.

“Under this scheme, private firms were licensed to provide meters to customers on the personal arrangement. MAP will also ensure Advanced Metering Infrastructure (AMI), AMI extends automatic meter reading (AMR) technology by providing two-way meter communications, allowing commands to be sent toward the home for multiple purposes, including time-based pricing information, demand-response actions, or remote service disconnects,” he said.

Akpeneye said: “It is interesting to know that Nigeria has a generation capacity of 13,000MW; transmission capacity of 7,000MW but a worrying distribution capacity of 3,500MW. Despite these challenges, more than 70 percent of meters are bypassed while energy theft is rampant in various communities across the country.”

He, however, charged the Federal Government to take advantage of the country’s growing population as well as her mineral resources to improve the power sector.

He also advised journalists covering the power sector to inculcate tenets of investigative journalism on sensitive issues before publishing unconfirmed reports.

“Power sector is very wide and it concerns every household in the country, hence the need to always feed the public the fact and reliable information.

“Journalists should dig deep into what is happening in the sector than emphasising sensational headlines that can only sell papers, ” he said.

On Wednesday, a partner at the Bloomfield Law Practice, Ayodele Oni, delivered a lecture entitled: ‘Interface agreement and managing contractual disputes in power transactions’. Expatiating on ‘Managing contractual disputes in power transactions’.

He described interface agreement as the totality of interactions between personnel and equipment at a connection site of a generation company with transmission/distribution facilities. These are applicable to On-grid power projects but mini-grid and embedded power projects also need an interface to enable power to reach the final off-taker/customer.

He mentioned examples of Interface Agreements as: Grid connection agreements; Ancilary services agreements and Use of transmission network agreements.

Oni stressed further that: “The CIA is st to the provisions of: The Electric Power Sector Reform Act 2005; The grid code; the distribution code; the market rules; the metering rule, health and safety manual. CIA – Operational matters and key provisions charges, to be determined periodically between Transmission Service Provider and NERC, while payment made on or before the end of the first month of a new calendar year. Payment shall be made once annually or as agreed by parties.”

Speaking on ‘Managing contractual disputes in power transactions’,
Oni said: “Preparing for disputes is compulsory in any transaction. According to industry statistics, to generate 1MW, the power developer would require a capital of $1,000,000. Hence, power projects are most likely to be having international participation due to the huge financing costs associated with the development of power projects.”

“The probability of disputes occurring in contracts of this nature is very high. Thus, having proper negotiation skills and effective draft/review of the Power Purchase Agreement prior to execution is crucial.

“Proper allocation of risks should also be factored in contractual documentation to minimise breach and potential dispute issues. The likelihood of a party defaulting on an obligation should also be considered when drafting and reviewing a Power Purchase Agreement should also be a consideration.”

He said all the legal and regulatory issues should be considered; offer practical solutions to disputes; structure and re-structure transaction to avoid disputes as well as exploring useful tactics in managing contractual disputes.

He concluded that each negotiation is unique and the considerations are different, urging practitioners to present considerations and pressure points as beneficial to all parties.

On Thursday, Anthony Madagua of Peatts Engineering and Development Company Limited took participants on topic tagged: ‘Engineering, Procurement, and Construction (EPC) Contract’.

Madagua described the EPC Contract as a commercial arrangement whereby the contractor is responsible for engineering design, the entire range of procurement and construction.

“EPC Contracts are “turnkey” which means that the contractor provides the complete package that will enable the employer/owner take over the operations of the structure/facility “at the turn of a key.”

“EPC Contract allows the client the leverage to minimise its project risk by passing the risk to the contractor for the design, procurement of the necessary materials and construction of the plant. EPC Contractor will typically guarantee that the completed facility will achieve certain performance spresent considerationsng on the output, efficiency, availability, and reliability of the facility.”

He explained various forms of contract; differences between an EPC; factors that influence the contracting method and reason for choosing EPC for power projects? Choice and types of terms and conditions for EPC contract; time, costs and quality issues and stages in EPC contracting.

He said: “Preparation of inquiry documents, the technical scope of work and specifications, effective tendering for EPC contracts, effective management of the tender process, tender evaluation and negotiations, programmes (Schedules), final contract preparation as well as effective contract management is essential in preparing EPC contract.”

“Performance guarantees cover the entire installation and go way beyond manufacturer warranties that only cover specific parts or equipment and not the system as a whole.

“For EPC power plant construction contracts, guarantees are usually given for timing of completion of the project, net plant heat rate, and net electrical output.

“Performance guarantee informs the contractor to use the most reliable and performing equipment to ensure that highest standards are maintained throughout the installation and in any details that could influence long-term performance.

Commenting on the Suggested Risk Mitigants. Madagua said: “EPC must have data and expertise in all the required fields, know the local codes and statutory requirements; know the market conditions for materials supply and labour availability and performance.”

He concluded the lecture with an insight on the ‘Challenges of moving the EPC contracts to financial closure in Nigeria – These include: Sourcing of development fund, Land acquisition and Community Agreement, Navigating the regulatory licenses, permits etc. Power General License, PPA, Transmission Cooperation Agreement, Water Permit, Tie-in Approval, Sourcing for funds- debt/equity fund, Accessing and negotiating guarantees for the loan portion of the project cost and Sourcing for O &M Contractor and O &M Funding.

Also on Friday, a Partner at TEMPLARS, Desmond Ogba, took its turn to examine a paper on ‘Power project financing in Nigeria’.

According to Ogba, “Finance is the blood of any power project, Nigeria’s power sector is “anemic” and in dire need of a revival, Mid-term power sufficiency estimate: 40,000 MW, Financing estimate: US$35 billion (over the next several years for generation) and about $100 billion for the entire value chain.

“The huge capital requirement is a challenge for governments, sponsors and financial institutions.”

He explained among other things ‘How sponsors get the required funds for their projects; How parties structure their power project finance transactions; The frequent risks or issues that arise on these transactions; How financiers analyse projects for creditworthiness; How project risks be mitigated so as to make the project bankable; How to document power project finance transactions and some practical lessons on power project finance.

Ogba noted that: “The Azura project is particularly apt for our purpose because it enjoys distinction and market leadership in many respects including by being the first IPP to be developed on a pure project finance basis; concludes a power purchase agreement with the government-backed bulk power purchaser, the Nigerian Bulk Electricity Trading plc (NBET); the first to benefit from the Federal Government of Nigeria’s put and call options agreement (PCOA) covering termination risks; the first to receive World Bank’s Partial Risk Guarantees (PRG) for the financial obligations of the Government counterparties on the project; the first in Nigeria to obtain full MIGA political risk insurance coverage for both project debt and equity; the first Nigerian power project to attract debt financing from about 14 lenders from eight different countries; and the “template creator” since the project documents negotiated for the project (including the power purchase agreement, the gas purchase agreement, the grid connection agreement, the gas transportation agreement, etc.) have become template documents for other IPP Projects under development.”

He said: “Financing is required by different players in the power sector for several reasons including acquisition of existing power assets (whether GENCOs or DISCOs) as happened during the privatisation and in more recent power sector M&A deals (QIPP/BlackRhino; Nova Solar 5/Amaya; Starsight/AIIM & Helios, etc.); development of greenfield power plants (Azura; MBH Power; Proton Delta Sunrise; Nova Scotia Jigawa; Solar Abeokuta IPP, etc); refurbishment, overhaul or expansion of power assets (including distribution and transmission companies); and general working capital purposes.”

He stressed further that “financing for power projects can be by way of equity; debt or hybrids. Influencers: the cost of capital; purpose; tax treatment; availability of funds; anti-dilution concerns; existing capital structure, etc.
Equity financing: Power companies can raise equity finance from sponsors/developers; private equity funds; infrastructure funds; sovereign wealth funds; venture capital/early stage investors; and impact/angel investors (Shell All On).

The equity funding can be raised public offerings of their shares; private placements; rights issues; offers for sale or direct subscription by their shareholders.

While speaking on debt financing and a common form of financing power projects in Nigeria. He said different funding approaches: acquisition finance (mostly for brownfields – PHCN, NIPP assets, and other recent private acquisitions); corporate or “on-balance sheet” finance (mostly capital expenditure and operating expenses); debt capital markets (project bonds especially for refinancing and general corporate purposes.

Ensuring bankability on power project finance transactions, Capital is risk-shy — risk identification and allocation are key components of power project finance;
Project site matters — Mode of acquisition (private acquisition, lease, government allocation or compulsory acquisition?); Acquisition compensation and topping up for international standards.
Expanding the frontiers – Compliance with NERC (Acquisition of Lands and Access Rights for Electricity Projects) Regulations, 2012; Resettlement of project affected persons; Dealing with monuments, burial grounds, shrines, sacred places and archaeological finds; Competing interests in land; Proximity to fuel or feedstock source; Proximity to gas transportation pipelines; Proximity to industries (excess capacity or downtime (if no capacity payments); embedded project; eligible customer).

“Some legal and regulatory issues that may arise include: Operating licenses – Licence, Licence duration versus loan tenor (remedying a mismatch: licence renewals; regulatory assurances; lapse of authorisation; LPFM); Public procurement – BPP approval under Public Procurement Act for a PPA; Compliance with NERC Regulation for the Procurement of Generation Capacity, 2014; and Compliance with Public Procurement Act for purchase of shares or assets under the PCOA.

“Other licenses and permits: EIA certification; NESREA approvals; NOTAP certifications; building permits; factories registration; water license; permit to survey; oil pipeline license; NAICOM approval for offshore insurance and re-insurance; CBN approval for any special FX regime, etc.

The event was brought to a conclusion on Friday, while the participants, most of whom were legal practitioners expressed satisfaction with the course content and facilitators, saying they have been able to gain more knowledge and exposed to a new ideology that would help them in facilitating a viable transaction in the power sector.