Nigeria secures $750m additional financing for power program

Nigeria power sector recovery program gets World Bank boost to cover tariff shortfalls, adding to earlier financing; government seeks an end to new tariff shortfall payments from 2025

The World Bank board earlier this month approved a $750 million commitment to Nigeria as additional financing through the Bank’s Power Sector Recovery Performance Based Operation Programme (PSRO). The Bank’s project details website shows that the loan was approved by the board on June 9.

The PSRO is a ‘Program-for-Results’ (PforR) programme that supports the Nigerian government in the implementation of its Power Sector Recovery Programme (PSRP). The PSRP was initiated in 2017 and aims to improve electricity supply reliability, achieve financial and fiscal sustainability, and enhance accountability in the power sector.

In 2020, the World Bank approved a $750 million loan to Nigeria for the program. This financing will run out by June 30.

The funding was used to cover historical (2015-19) and new tariff shortfalls, and debt repayments to the Central Bank of Nigeria’s (CBN) Payment Assurance Facility – a facility that had earlier funded most of the tariff shortfalls from 2017 to the first half of 2020.

The PSRP is funded via three sources: annual government budgetary allocations; value added tax (VAT) from distribution companies (DisCos); financing from the World Bank’s Program for Results Power Sector Recovery Operation (PSRO).

Improving cost recovery

According to the World Bank, the PSRP has successfully addressed some urgent power sector issues, including  improvement in electricity distribution companies’ (DisCos) cost recovery level to 96.4 percent and the reduction of tariff shortfalls.

Additionally, the Bank notes in its technical assessment of the program that measures such as the monitoring of the implementation of DisCos’ Performance Improvement Plans (PIPs) and the enforcement of discipline through a waterfall payment mechanism managed by the CBN and the industry regulator (NERC) have enhanced DisCos’ accountability and governance.

The new $750 million additional financing will fund only new (2023-2026) tariff shortfalls – to a lesser degree than the parent program – as well as the implementation of transmission system rehabilitation projects, and the establishment of an Independent Systems Operator (ISO). The Bank believes that these activities are fundamental to helping Nigeria deliver cleaner and cheaper energy needed to meet its energy access and transition targets.

Liquidity issues in Nigeria’s electricity sector

The Nigerian electricity market suffers from a severe liquidity crisis, of which one of the causes is the huge tariff shortfall, as electricity customers do not pay cost-reflective tariffs.

The DisCos are mandated to collect revenue based on an approved tariff which is a fraction of the cost-reflective tariff.  As a result, the government covers this shortfall via payments to the market players. In 2020, the Nigerian government paid about ₦380 billion (US$960 million) to cover the shortfalls.

The lack of sector liquidity severely limits the sector’s ability to attract the private investments needed to improve electricity supply capacity. It also hampers the stakeholders’ – distribution, generation, and transmission companies – abilities to invest in improving the power supply infrastructure.

One of the key activities of the PSRP program is to support the government's phase-out of these subsidy payments by moving the market to cost-reflective tariffs and improving financial transparency and accountability. In 2020, the PSRP reforms helped increase the average electricity tariff by 38 percent, saving the government ₦82 billion (US$195 million) in tariff shortfall payments.

The government does not envisage new tariff shortfall payments from 2025 onwards – as the tariff would become cost-reflective. It also plans to complete the payment of historical shortfalls by 2028.

Energy & Utilties reported last week that Africa energy sectors anticipated rising investment from Middle East sovereign wealth funds. E&U reported last month that Nigeria launched construction of a solar photovoltaic cell production plant in Gora, Nasarawa State, just west of the capital Abuja.