A Review of the Nigerian Energy Industry

New gas price may lead to increased electricity tariff

Electricity tarrif*As NERC approves new benchmark price of $3.30 for gas
*Insists no new windfall, subsidy for Successor companies

Oscarline Onwuemenyi

04 August 2014, Sweetcrude, Abuja – There are fears that the projected new increase in the price of gas supplied to power generating companies may ultimately lead to an increase in the electricity tariff paid by consumers, with the ongoing review of the Multi-Year Tariff Order by the National Electricity Regulatory Commission, NERC.

NERC has approved a new benchmark price of $2.50/mcf for gas supply, and $0.80/mcf as transportation cost for new capacity, from 2014. The new benchmark is expected to rise with US inflation annually.

The increase in gas prices was disclosed by the Chairman of NERC, Dr. Sam Amadi, during a recent briefing in Abuja, where he noted that the review of gas prices was done to reflect the current cost of production.

Amadi noted that the new gas price and expected CBN intervention are contingent on and have been captured in the Multi-Year Tariff Order (MYTO 2.1). The MYTO is a five-year tariff recovery plan, which is based on capturing the real cost of power production.

He said that, “Part of the agreement with the new owners(successor companies) is that when they come and take over the assets, they will verify and conduct their losses studies, and NERC will equally verify to ensure that our loss projection is the same as their own, and what follows from that study is a review of the MYTO.

“That process is ongoing, therefore both the new price for gas and the CBN support are part of the cost in the industry that the new review of the existing MYTO model will address. Essentially, it is part of the plan to review the losses and get to a more cost-reflective tariff,” Amadi explained.

He argued that the $2.50/mcf for gas was based on the real cost of production of gas or other sources of power, which is benchmarked against the prevailing global market rate.

“The price of $2.50/mcf is deemed to be a reasonable price when you consider the cost of gas processing and what other industries pay for gas. The price was arrived at through consultation with both the gas producers and the generators, and the power people are prepared to pay a cost that will ensure a much more sustainable supply of gas,” Amadi stated.

The NERC boss further stressed that the projected clearance of the legacy debts owed by power generating companies to gas suppliers by the Central Bank would not be another form of subsidy or windfall for the companies.

He said, “The money supplied by the CBN is not going to be a windfall at all. Those gas costs are stranded costs most of which didn’t necessarily happen under new owners’ watch.

Secondly, the interim rule which we were running has provided for shortfalls in revenue, and part of the provision is that those will be recycled back in the new tariff.

“It means that the N25 billion, or whatever is finally agreed as the actual debt, will still be paid by the distribution companies through the tariff process. So, it is like an intervention to secure for us confidence in the gas market, then the ultimate responsibility will be on distribution companies. Essentially, no one is being let-off here and there is no windfall for any successor company.”

Speaking earlier in a press briefing, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke had revealed a strategic multi-agency collaboration to fast-track a sustainable supply of gas supply power generation companies and ensure improved power supply in the economy.

According to the Minister, a review of gas pricing is now implemented to further reflect the market value. “The Ministry of Petroleum Resources and NERC are in ongoing deliberations to finalize work to ensure that the pricing mechanism of gas to power will reflect market value.

“In the short term, it is expected that this will quickly boost gas supply and in turn power output. In the medium to long term, this new price regime should trigger additional investment in the infrastructure for gas to power.”

She noted, “In addition to the new price, NERC will require firm commitments from gas suppliers that they will supply the agreed quantities of gas to generation companies as long as payment terms are met.

“NERC is presently concluding the review of the Aggregate Technical Commercial and Collection (ATC&C) losses studies submitted by the distribution companies. This will be followed up by a review of the revenue requirement for the power sector that is to be covered by the revised Multi-Year Tariff Order (MYTO) path.

“While the detailed tariff is being worked out, NERC reaffirms its commitment to ensure cost recovery for all prudent and efficient operators,” the Minister added.

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