The three musketeers of Nigeria’s power sector
The lack of steady electric power supply in Nigeria has, over time, been a constant source of concern to successive governments in Nigeria. This insufficient and unreliable power supply had consistently proven to be a significant handicap to the growth of the country’s commercial and manufacturing sectors.
To resolve Nigeria’s electric power sector challenges, the Federal Government of Nigeria (FGN) issued the National Electric Power Policy in 2001 with the intention of implementing comprehensive power sector reforms. Historically, attempts at revamping the problem ridden Nigerian Electricity Supply Industry (NESI) began as early as 1988 with the commercialization of the now defunct National Electric Power Authority (NEPA) and the upward review of tariffs. These efforts, however, hardly yielded any results as the power supply situation grew from bad to worse.
Since the year 1999, however, the FGN has embarked on infrastructural rehabilitation and expansion programmes. The FGN also began the reform process with the enactment of the Electric Power Sector Reform Act (EPSRA) 2005 and the establishment of the Power Holding Company of Nigeria (PHCN). The PHCN was the initial holding company of the assets and liabilities of the defunct NEPA prior to the transfer of such assets, liabilities, staff and contracts to subsequently formed successor companies.
To re-jig the strategy, re-awaken interest after a lull and kick-start the process again, the FGN launched, in 2010, the Roadmap for power sector reforms. Shortly after the launch of the Roadmap which provides graphic details of how government intends to achieve sustainable improvement in the electric power sector, the process began from where it had been stalled for almost two years.
Specifically, the actual transfer of assets and liabilities- in deed and in law, was actualized with the giving of effect to the establishment of the Nigerian Electricity Liability management Company (NELMCO). NELMCO was established to assume the pre-existing liabilities of the successor power generation and distribution companies. The Bulk Trader which would directly purchase electric power from the generation companies and the on-sell to the electricity distribution companies (the DISCOS) and the establishment of the Board of the Bulk Trader were effected. The Bulk Trader does give comfort to generation companies, in particular, that they would get paid for electricity dispatched.
Specifically, the FGN on November 1, 2013, handed over the formerly government owned electricity generation and distribution companies to new private sector owners. The FGN is currently in the process of privatizing 10 government owned power generation companies. In addition to the foregoing, the government is in the process of reforming the domestic gas sector and enhancing the national electricity grid.
The Musketeers
The reforms would, nevertheless, not yield sustainable results if three (3) key issues; the musketeers upon which the sustainability of the reforms and improvements in the sector must be based, are not catered to. These issues are (a) gas supply/availability challenge together with diversification of fuel sources, (b) efficient regulation and (c) grid enhancement. This week, therefore, we commence a two part series on three primary issues that require resolution for sustainable electric power supply improvement and begin with the need to resolve gas issues.
Resolution of Gas Issues:
It is often stated that circa 80% of Nigeria’s available electric power capacity relies on natural gas and that Nigeria is ‘an island of oil sitting on an ocean of gas’ with proven reserves of about 186tcf. Despite Nigeria’s huge gas reserves, availability of gas domestically, has been a major challenge in the energy sector.
This has been as a result of a number of issues including inadequate domestic gas supply infrastructure; a problem gas producers can assist in resolving where given the enabling environment. These gas producers, most of which have the technical and financial capacity, have been somewhat reluctant to put the necessary infrastructure in place to meet domestic gas demand which was initially infinitesimal but has increased substantially in the last few years. Rather, many have chosen to develop export projects.
A major reason for gas producers not wanting to invest in the domestic gas sector infrastructure and the domestic gas market generally has been the other problem in the gas subsector- the absence for a long time, of a commercially viable pricing structure. This non-availability of gas has therefore, been a huge threat to Nigeria’s aspiration to improve its electricity power sector and a multiplier beneficial improvement in the overall economy and quality of life.
To tackle the various challenges particularly as they relate to gas and the power sector, the FGN has made it a policy to prioritize the use of gas as the major fuel for the electric power sector reform and develop a gas to power-plan under the auspices of the Gas Master Plan (GMP or the Plan).
The FGN has realized that, in order to accomplish the objective of reliable and sufficient gas supply, a commercially viable domestic sector was crucial. A sector, where gas producers would be willing to invest in the domestic gas through supply of gas and investing in critical infrastructure was necessary. The FGN also realized that a strategy to create this was a transitional pricing regime based on the ability of various sectors to bear the prices; with the ultimate aim of achieving a willing buyer, willing seller threshold in the sector.
Part of the FGN’s strategy has been to group domestic consumers into three categories: the strategic domestic sector (residential and light commercial users of the power sector); the strategic industrial sector (industries that use gas as feedstock) and other commercial users (manufacturing and industrial power users).
For the first group which is largely related to power supply to homes and other light users (as opposed to industrial users), the Minister of Petroleum Resources in June 2010, announced a 400% increase in the price of gas to power from $0.2 per million British thermal unit of gas (mmbtu) to $1/mmbtu. The Minister also explained that the price was to increase from $1/mmbtu to $1.50/mmbtu by the year 2011 and $2/mmbtu by the year 2013, with further increase in 2014 depending on the inflationary trends, such as the Consumer Price Index changes. It is now expected that by the year 2015 there would be a parity of domestic gas price and the price of gas for export.
Apart from the foregoing, efforts are underway to expand the capacity of the available gas infrastructure and to build new ones to accommodate the expected surge in domestic gas demand expected to be caused primarily by increased demand for same by power generation companies operating in various parts of Nigeria.
It is the writer’s view that with (a) proper pricing of electricity which adequately factors the cost of gas which is what the multi-year tariff order seeks to achieve; (b) the ongoing construction and rehabilitation of gas pipelines; (c) the expected domestic gas and gas export price parity, the challenges in the gas sector can be quickly resolved. Further, the writer believes that the power sector, in particular, is capable of creating a ‘demand pull’ for investments in the gas subsector.
To learn more about the key issues in the electric power sector, read the excellent book “The Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business.”
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Ayodele Oni (ayodeleoni@outlook.com), a solicitor, specializes in international energy (oil, gas and power) investment law and policy and holds an MBA in power and electricity.