Powering Nigeria’s future from gas

August 7, 2014

Mo Uddin/
Delta Power Station

In Britain the passage of a bill marks the end of the legislative process and heralds the start of implementation. However, in many developing countries, including Nigeria, legislation is a necessary but insufficient condition for reform. The reforms in the Nigerian Power Sector assisted by the Nigeria Infrastructure Advisory Facility (NIAF), a DfID funded programme implemented by Adam Smith International, provide an example of the importance of ensuring that legal agreements are complemented with strong political will and sound technical assistance through the process of implementation.

Why Nigeria needs to increase power production?

Nigeria lags behind many of its developing country peers in electricity production per capita. The limited access to power is widely recognised as a critical constraint on growth, and indeed a tragedy given the vast oil and gas reserves in Nigeria. Maintaining the status quo would result in lost economic growth as high as $130bn annually — or 50% of Nigeria’s 2012 GDP, and have severe continuing impacts on health and education.

What is the aim?

NIAF is providing technical assistance to the Nigerian Government aimed at increasing power production from 24,000 GWH to 54,000GWH by the end of 2016. Much of this production will come through Independent Power Producers (IPPs) who have financed new gas fired power plants and will increase gas demand by 150%.

The gas to power potential of Nigeria

For the past 50 years, oil has been the big story in Nigeria. However, Nigeria’s gas reserves are far greater than its oil reserves. Gas has the potential to power Nigeria and its neighbours for the next 50 years, and it offers a relatively cheaper, more secure and cleaner way of generating energy.

How does the current system work?

The current gas market in Nigeria operates under the auspices of the NNPC (Nigeria’s national oil company) and its subsidiary the National Gas Company (NGC). The NGC allocates gas between the power sector, industrial sector and export sector. Despite several contractual agreements between the power sector and the NGC, the market still operates on the basis of unofficial agreements and relationships.

Currently, gas is allocated between the three sectors using an opaque method with no public accounting for the volume of gas allocated to each sector. As a result IPPs and the Ministry of Power are unable to predict the levels of gas for future use, and determine whether the gas delivered is in line with legal agreements which allocate a set amount of gas to the power sector. Furthermore, the price paid for gas is lower than contractually agreed or kept secret, and payments by the power sector are in arrears. The result of the existing arrangement is a shortage in the gas supplied to the power sector which will prove a substantial barrier in increasing production to 54,000GWH.

What are the most urgent reforms needed?

The current gas to power arrangement is not compatible with the ambitious goal of increasing power production. The three most significant concerns are timely payments by the power sector for gas used, adherence to a robust legal model and transparency in gas allocation.

Firstly, payment for gas delivered needs to be institutionalised. Currently, payments are not made by IPPs to the NGC. The major reason provided is the inability of the system to extract payment from end users. However, this excuse damages the relationship between the producer and consumer of gas—the NGC has declining financial incentives to keep supplying gas. The transaction between the IPP and the NGC is independent of the end user and payments should not be dependent on a third party. Steady payments will create positive economic incentives, to accompany legal agreements, which will lead to greater responsiveness from the NGC.

Secondly, the gas sector must transition into the system envisioned in the latest legal agreements. Currently the pricing regime for gas, the supplier and operator are working under the old model. The delay in implementing contractually agreed structures significantly diminishes the credibility of the sector for investors.

Finally, clearer information on gas allocation is necessary to ensure compliance with legislation and restore investor confidence. Without this information it is hard to accurately gauge how much gas is being provided to the power sector, and whether this is in line with legal agreements. A long term failure to allocate gas, as agreed with investors, significantly damages the investment rationale for much needed further investments in the power sector.

How is UK Aid helping?

NIAF is working with DfID, the Presidential Task Force on Power and the Ministry of Power to create a working gas market for the power sector. Aid from the UK is being used to:

• Create capacity in power sector agencies that will lead to more responsive customers who understands their rights and obligations under current agreements.

• Promote the formation of a gas and power regulator which can become a neutral arbitrator in disputes over the supply of gas to the power sector.

• Highlight the importance of the gas to power equation in key political arenas like the Ministry of Power and the Presidential Taskforce on Power.

The government strategy supported by NIAF is to change the power sector into a responsible customer in the short run and promote a more responsive supply of gas in the medium to long run. Gas can become a significant part of the answer to Nigeria’s problems, but we must neither underestimate nor ignore the substantial challenges that need to be overcome.

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