Opinion: Power sector reforms – Addressing the gas challenge

by Mofe Binitie

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The Nigerian government can however address this challenge by providing subsidy to producers of gas in the medium to short term until power generation improves significantly before implementing a phased increase of 5-10 % per annum on the retail Multi Year Tariff. 

Recent power sector reforms by the Nigerian government if successful can potentially move Nigeria from a low income status to economic and industrial powerhouse status. The reforms are hinged on market demand driving private sector distribution and generation. Improved power supply would drive economic growth from the present 6.4% (Nigeria Bureau of Statistics) to double digits growth in the region of 10-12%. The reforms would free up capital hereto used in purchase and operation of generating sets.  In the short term, the reforms are expected to add as much as 8500mw to the present 3,158mw (National Electricity Regulatory Commission Jan.2014) generated.

Gas supply constraints pose a serious risk to the success of these reforms as 80% of all power generated is obtained from gas. Inadequate gas transportation infrastructure and vandalization of available infrastructure has adversely affected power generation; vandalization of the Escravos-Warri stretch of the Escravos Lagos Pipeline (ELPS) and the Trans-Forcados crude pipeline has resulted in a drop in generation of over 1600MW.   The delayed passage of the Petroleum Industry Bill (PIB) has discouraged investment in the power sector.

The most significant challenge to gas supply is the current price regime for the domestic power sector market adopted by the Nigerian government as part of the power sector reforms.  The current gas pricing regime of gas for power plants at $1/mmbtu compared with $4/mmbtu in the international market has discouraged gas producers from supplying gas to the power sector and investing in the required transportation infrastructure. Gas producers have instead focused their efforts on the international market with 79.9% of all gas produced in 2013 exported. This trend is expected to continue in the medium to long term except significant reforms to the current pricing regime is enacted. This focus on export will adversely affect generation as existing power plants increase capacity to meet demand and more independent power plants (IPPs) come on-stream; supply shortages will surface.

 

The Nigerian government has developed the gas supply emergency plan to meet the transportation infrastructure challenge and issued domestic supply targets to gas producers in order to meet generation demand. These measures are expected to boost supply in the short term but are ineffective in the medium to long term.

 

In the long term, the Nigerian government plans to increase the price of gas for power plants from the present $1/mmbtu to $2 though. The government hopes this would drive infrastructure investment in the sector and increase domestic supply by making the sector more attractive to investment. The planned increase though commendable would only exacerbate the challenges in the power sector. Any planned increase in gas prices with a corresponding increase the retail Multi Year Tariff Order (MYTO) would wreck the financial models, loan repayment plans, capital raising and other financial assumptions based on the old financial models made by the new owners of the privatized power assets. Investment in the sector would shrink and the reforms will be derailed.

 

The Nigerian government is however unlikely to increase the retail Multi Year Tariff Order because any planned increased would lead to social tensions, public agitation and unrest by the Nigerian populace. However without an increase in the MYTO and gas prices for power plants, the power sector reforms are destined to fail and the power situation worsen.

 

The Nigerian government can however address this challenge by providing subsidy to producers of gas in the medium to short term until power generation improves significantly before implementing a phased increase of 5-10 % per annum on the retail Multi Year Tariff. The phased increase would forestall any unrest because the rewards of improved power would already be felt. Gas Producers would receive the subsidy via tax breaks and royalty credits on exported gas.  The subsidy would bridge the gap between local and international prices.  Local and domestic price alignment would drive investment in gas production and infrastructure.

 

To prevent abuse of the subsidy regime gas producer subsidy claims would be verified against the transported gas volume and power plant gas supply.  Subsidy payment would be in the form of tax and royalty waiver certificates issued by Ministry of petroleum resources upon verification of supply claims. Improved power supply in the short to medium term would build trust in the reform process by the Nigerian public. Public trust and confidence in the process would enable the government implement a gradual withdrawal of the gas subsidy and the alignment of the retail MYTO with international gas prices.

 

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Personal Profile

Mofe Binitie, is a financial analyst with a big four accounting firm. He has an avid interest in economic issues, both local and international, and enjoys writing on them. He enjoys reading, listening to music and is an amateur photographer.

Op-ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija.

 

 

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