‘Deregulation of gas market essential for improved power supply’

One of the challenges confronting stable power supply in Nigeria is inadequate gas supply to some thermal power plants. Besides pipeline vandalism, experts have argued that gas pricing must be in tandem with the international market to promote further investment in the product. In this report, OLATUNDE DODONDAWA examines factors militating against effective gas pricing in Nigeria. 

It is no news that Nigeria’s power sector has defied all proposed solutions by previous administrations till present.

The challenges are becoming insurmountable because power generation lingers below 4000megawatts (MW) for a growing population of over 170 million Nigerians. When the country recorded all time high of 5074MW on February 2, 2016, it was well celebrated and many thought that was the beginning of more improvements to come in the power sector.

However, the feat was short-lived because less than two weeks after, power generation dropped to 3320MW in same month of February 2016. However, power supply plunged to a record low of 1,400MW on May 17, 2016 according to the Transmission Company of Nigeria (TCN).

Currently, power output was put at 3380.9MW and experts have given several factors for the abysmal drop in power supply. They stated that factors such as vandalism of gas pipeline, inadequate gas pricing, non settlement of debt obligations to gas suppliers and lack of much needed investment in the power sector.

The TCN said power generation has been dwindling due to challenges of accessing gas by generation companies.

NGA’s call for new domestic gas pricing policy

The Nigerian Gas Association (NGA) has urged for new domestic gas pricing policy by stressing that Domestic Supply Obligation (DSO) of gas should be predicated on willing buyer-willing seller basis.

The association made the call recently at a stakeholders’ forum on the draft National Gas Policy organised by the Ministry of Petroleum Resources in Abuja. It said relying on the Gas Aggregation Company of Nigeria Limited (GACN) process could not guarantee the desired volumes to domestic market irrespective of the assignment of DSO to operators.

The association said this is because the aggregation process could not support bankable transactions as it introduces an undue layer of uncertainty to the income stream of projects.

“While we support the allocation of DSO to producing companies, we believe that the national objective of guaranteeing sufficient gas volumes to the domestic market can be better achieved if such DSO policy is implemented on a willing buyer, willing seller basis,” the NGA stated.

Furthermore, NGA noted that the 2008 Domestic Gas Supply Pricing and Regulation had contemplated a five-year transition period from 2008 to 2013.

“However, rolling out a new policy with an indeterminate transition period, eight years after, is far from encouraging. Particularly as the triggers for the Wholesale Market Regime and end of regulated pricing suggested in section 4.3.8 of the draft policy seem to be very far-fetched and mostly unachievable within the short to medium term.

“We strongly support a move towards deregulated pricing on a willing buyer-willing seller basis while retaining the existing regulatory approvals by NERC of prices for gas to power transactions,” said Dada Thomas, NGA President.

According to the NGA Publicity Secretary, Frank Uzuegbunam, the draft policy appears to be “too detailed and prescriptive and runs the risk of ultimately conflicting with supporting regulations when put in place.”

The association believes that one major problem for legal separation of upstream and midstream companies as contained in the draft policy is that it will negatively impact existing commercial structures with significant additional tax costs and could end up being a barrier to further investment rather than opening up the sector to increased competition.

“The Policy’s objective to incentivize investment in midstream sector may be hampered by forcing a legal separation between upstream and midstream companies. The Policy should encourage all types of partnerships between upstream producers and midstream participants including vertical integration down the value chain. New entrants who choose to play in a single part of the chain should be adequately protected by legislation/regulation,” NGA said.

Role of unsettled debt obligations to gas suppliers

Power supply is yet to stabilise because of the huge debts owed gas producers and suppliers by the owners of turbines, decline in the production of gas, and poor distribution channels.

Dada Thomas, who also is the Chief Executive Officer, Frontier Oil Limited, has said that power firms were owing gas producers and suppliers huge debts, adding that the problem made it difficult for power generation companies (GENCOs) to access gas for production.

He said gas is still a major problem in the industry. Dada cited poor gas distribution channels and low production as some of the problems in the industry.

“If you ask the gas producers and suppliers how much they are being owed by owners of gas powered plants, they would tell you that it is a lot of money. Given this, one would realise that gas problems cut across stakeholders in the value chain. By this, the problem is from producers to suppliers to the power plants that could not access the product for production due to pipelines vandalism and other infrastructural problems,” he said.

Dada Thomas lamented that NGA members are currently being owed more than N110 billion. He said majority of the debts are owed by power firms, while he added that the intervention by the Central Bank of Nigeria (CBN) was not enough to address the huge indebtedness of the power firms.

Thomas disclosed that the power sector is faced with a serious illiquidity challenge which if not tackled would lead to the total collapse of the sector. “The patient is already collapsing and if pushed a little bit, that is its end. The problem in that power sector needs to be fixed. Gas producers are owed more than N110 billion right now.

“You heard of the CBN intervention, but it was just a drop in the ocean. So we have a serious problem and that is nothing but the truth. It is important to state that all power generation companies, Gencos, who run thermal plants in Nigeria get their gas from gas producers. You can’t run a thermal power plant without gas,” he said.

He further stated that 80 per cent of domestic gas produced by gas companies in the country is sold to power plants, while he bemoaned the fact that these power firms are still in the hands of the Federal Government because of the yet-to-be-completed privatisation exercise, which had also made it difficult to compel the power firms to pay their debts.

“For gas to continue playing a dominant role, a strong alignment of plans, investments and operations is needed across the entire value chain to deliver the benefits of thermal power,” he said.

Also, the Chief Executive Officer, Egbin Power Plant, Mr Dallas M. Peavey, said gas remained a major problem in the sector, in spite of the relative improvement in power generation and supply in the country recently.

He said Egbin plant has not been able to meet the required capacity because of gas, despite that it increased its electricity generation from 300 megawatts to 500MW.

“People are saying that gas supply to the turbines has improved, ditto electricity generation, but nobody has been able to tell Nigerians the volumes or extent to which gas suppliers have supplied the product to the power plants. Egbin plant has an installed capacity of over 1,000MW.

“The plant has gone through rehabilitation in order to produce optimally. Despite this, the plant is yet to meet its capacity. We need to prioritise the issue of gas to power in this country for the growth of the industry,” he said.

A Director of Sahara Energy Group, owner of Egbin Power Plant and Ikeja Electric (IE), James Ogungbemi, said IE, which has the capacity to distribute over 1000MW of electricity, is distributing less than 500 MW due to gas.

He said stable electricity supply would be a mirage, until power generation companies improve generation in the country.

He urged investors to invest in gas production and supply in order to meet the required needs of the turbines in Nigeria and further help in improving power supply.

Ogungbemi said when there are many gas investors in the sector, the issue of debt owed gas supply is going to reduced.

Conclusion

From developed economies’ hypothesis, privatisation attracts investment from private sector to the privatized sector. However, experts have also argued that Nigerian power sector requires an annual investment of $10 billion (about N3.06 trillion) to be able to achieve its aim of producing 12 billion Standard Cubic Feet (SCF) of gas per day, build additional gas-fired plants and produce additional 36 gigawatts (GW) of electricity by 2020.

The Chief Executive officer of Seplat Petroleum Development Company Plc, Mr. Austin Avuru, disclosed that 12 billion SCF per day of domestic gas supply is required to meet the 40GW power generation target; 10 billion SCF per day required increase in domestic gas supply to achieve the 12 billion SCF per day target, while 120 trillion SCF of gas is required to meet and sustain projected demand.

He maintained that gas to power would contribute over 80 percent of Nigeria’s energy mix well into the future, adding that Nigeria has the gas reserves to produce up to 51GW of electricity. He projected that gas demand for power generation would increase by about 12 times, to 12 billion SCF per day, hence, according to him, the need for large-scale investments annually.