This document discusses key issues around power purchase agreements in Nigeria following the passage of the Electric Power Sector Reform Act of 2005, which restructured the country's electricity market. It addresses questions around who will pay generators for power, who will pay for transmission and distribution infrastructure, and where the necessary cash flows will come from. Under the Act, a trading licensee is responsible for purchasing power from independent power producers and state-owned generators and reselling it to distribution companies and eligible customers during the transition period prior to full privatization. However, the document notes there are still questions around how transmission costs will be covered and what entity will be responsible for any subsidies.

1. Power purchase agreements: Who will pay the
generator and who will pay for transmission and
generator and who will pay for transmission and
distribution?
Dr. Adeoye Adefulu
Odujinrin & Adefulu
Barristers, Solicitors & Notaries Public
Barristers Solicitors & Notaries Public
Lagos – Abuja – Port‐Harcourt

2. Outline
Outline
• Background
– Pre EPSRA structures
– Post EPSRA structures
• Power Purchase Agreements
g
• Appropriate Offtaker
• Cashflows
• EPSRA transitional trading arrangements
• Paying for Transmission
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3. Pre‐EPSRA power provision
p p
• NEPA operated as a vertically GENERATION
integrated monopoly
• I 1998 amendments were made
In 1998, d t d
to the Electricity Act & NEPA Act
TRANSMISSION
which removed the utility’sutility s
monopoly, whilst it remained a
vertically integrated monopoly
• This reform allowed for IPPs and DISTRIBUTION
for power to be sold through PPAS
primarily to NEPA
CUSTOMER
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4. EPSRA reform initiatives
• the Electric Power Sector Reform Act, 2005 introduced extensive reforms
h l f d d f
and created a pathway to the establishment of an electricity market
• Provides for:
– establishment of an initial holding company to hold the assets & liabilities of
NEPA (PHCN)
– unbundling of the entity along functional lines
unbundling of the entity along functional lines
• 6 generation companies
• 11 distribution companies
• 1 transmission company
– the establishment the Nigerian Electricity Regulatory
Commission
– evolution of the electricity market
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5. EPSRA reform initiatives & PPAs
• the unbundling of PHCN as well as the introduction
of new IPPs requires a new method of securing the
provision of generated power
– At least 24 new generation licenses have been issued
– AGIP & AES are already producing under pre‐EPSR Act PPAs
G & S l d d i d S
• NERC currently considering the introduction of
vesting contracts & model PPAs
i & d l PPA
– Vesting contracts – Successor Gencos, New IPPs & NIPP
– PPAs for existing IPPs (AES AGIP & Shell)
PPAs for existing IPPs (AES, AGIP & Shell)
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6. Power Offtake Agreements
Power Offtake Agreements
• “a legal contract between an electricity
g
generator and a purchaser of energy or
p gy
capacity (power or ancillary services).”
– Serves to allocate risks between the parties
Serves to allocate risks between the parties
– defines the rights and obligations between the buyer and
seller
– sets the price for energy
– Defines the output and associated revenue stream of the
Defines the output and associated revenue stream of the
plant
• Provides basis for non‐recourse financing
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7. Classic IPP Structure
Classic IPP Structure
Shareholders O&M Contractor
Shareholders Agreement O&M Agreement
Government
Concession A
C i Agreement
t
EPC Contractor
Power Off-taker EPC Contract
Power Purchase
Agreement
IPP Project
Company
Fuel Supplier Regulator
Licence
Li
Fuel Supply Agreement
Insurance Co.
Water Supplier Insurance Agreements
Water Supply Agreement Lenders
Loan Agreement
Globeleq 2007
q
21/09/2009 Odujinrin & Adefuluestd. 1972 7

8. Who pays the generator?
Who pays the generator?
• PPA – who is the proper offtaker?
PPA who is the proper offtaker?
– Credit worthy
• Fi
Financial statements
i l t t t
• Assets
• Where is the cash coming from?
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9. Proper Offtaker
Proper Offtaker
Bulk Cash
Purchaser
P r h r from
Distribution
consumers
Transmission
Generation
Generation Transmission Distribution
• Manage fuel • Transmit power • Step-down voltage,
delivery over long distance distribute and sell Consumer
• Produce electric in high voltage power to
power systems end-consumers
Globeleq 2007
q
21/09/2009 Odujinrin & Adefuluestd. 1972 9

10. What does the law say?
What does the law say?
• Section 25 of EPSRA provides for the trading
arrangements during the transition or pre‐
privatisation stage
– anticipates the establishment and licensing of a trading
licensee holding a bulk purchase and resale license
• Shall purchase and resell power from IPPs & successor Gencos
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11. What does the law say? (contd)
What does the law say? (contd)
– Successor Gencos shall sell power to:
• the Trading Licensee;
• successor Discos; and
• Eligible customers
– IPPs shall sell power to:
• The Trading Licensee; and
g ;
• Successor Discos
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12. EPSRA – Transitional trading arrangements
EPSRA Transitional trading arrangements
IPP IPP GENCO GENCO
TRADING ELIGIBLE
DISTCO DISTCO
LICENSEE CUSTOMER
CUSTOMER CUSTOMER CUSTOMER CUTOMER
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13. Cashflow
Bulk Cash
Subsidies Purchaser from
Distribution
consumers
Transmission
Generation
Generation Transmission Distribution
• Manage fuel • Transmit power • Step-down voltage,
delivery over long distance distribute and sell Consumer
• Produce electric in high voltage power to
power systems end-consumers
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14. Cashflow (contd.)
Cashflow (contd.)
• Subsidy
– Who pays?
p y
• FG, States, FG +States?
– Where is it coming from?
Where is it coming from?
• Budgetary allocation
– What is the mechanism for disb rsing?
What is the mechanism for disbursing?
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15. Transmission who pays?
Transmission – who pays?
• Transmission provides the hub
• Payments must be made for:
Payments must be made for:
– Connection of generators
• Sh ld
Should generators pay for transmission
t f t i i
– Continuous use of system
• Generator, distributor or both
• Balancing risk
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16. Odujinrin & Adefulu has acquired significant experience in the Nigerian
power industry. We have advised government entities and private sector
entities in a range of areas, which include:
areas
– Advising the Nigerian Government on the drafting of the Electric Power Sector
Reform Act;
– Advising NEPA on Power Purchase Agreements;
– Principal counsel in energy litigation;
– Advising a private equity firm on acquiring a significant interest in a Nigerian IPP
g p q y q g g g
project;
– Advising NERC on aspects of the Electric Power Sector Reform Act;
– Advising a major manufacturer on aspects of captive power generation projects
in two locations in South-west Nigeria.
Odujinrin & Adefulu
1st Fl
Floor, Ch h H
Church House
29, Marina, Lagos
enquiries@odujinrinadefulu.com
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