A Review of the Nigerian Energy Industry

Power: NERC seeks review of gas supply agreements

22 April 2015, Abuja – For electricity supply to stabilise considerably across the country, the supply of gas to power generation plants must be reviewed and separated from the Nigerian National Petroleum Corporation by the in-coming government of Maj.-Gen. Muhammad Buhari, the Nigerian Electricity Regulatory Commission has said.

Chairman of NERC, Dr. Sam Amadi
Dr. Amadi

It said gas supply to the plants had been the Achilles heels of the power sector and stressed that the fundamental problem was that the regulatory regime for gas transport was different from that of electricity.

The Chairman/Chief Executive Officer, NERC, Dr. Sam Amadi, said there was no strong coordination between the two sectors and this had resulted in poor project management.

Amadi, in a lengthy email to journalists in Abuja on Tuesday, said he had raised this issue upon assumption of office, adding that gas was the most vital feedstock for power generation, but that Nigeria had no decision authority regarding its availability.

“In other jurisdictions like in the United Kingdom and the United States, where we borrowed our model, the regulator of electricity regulates gas transportation and supply to power plants. This makes for coordination and efficiency in the various pricing points. The new government has to review that situation,” he said.

Amadi stated that the second fundamental cause of the gas problem was the problem of commercialisation of the product, explaining that until recently, there was little incentive for gas suppliers to dedicate more of the product to power plants or build gas infrastructure to cope with the growth in electricity demand.

The NERC boss said the power sector was not competitive because gas supply was not based on enforceable contracts.

But with the commencement of the Transitional Electricity Market, he said the value chain of electricity supply would be based on bankable contracts, adding that gas suppliers would now enter into gas supply contracts that would expose them to liability if they did not provide the contracted quantities of gas to the power plants.

“The rest of the problems – stopping vandalism and enforcing domestic supply obligations – are policy intervention by the government. Once this is done, including full commercialisation of the gas market and separation of gas from the NNPC, then we will have steady and ordered procurement of additional generation,” Amadi stated.

He added that the country had not been able to achieve the 6,000 megawatts target largely because of the unavailability of gas supply to the power plants.

The NERC boss noted that ordinarily, Nigeria should not have a problem of gas supply for power generation because it was a gas country.

Amadi said, “But the truth is that having abundance of gas does not translate to gas supply to power plants. The first fact is that gas supply to power is outside the direct control of the regulator of electricity. So, we can’t predict accurately how much gas will be available.

“In the MYTO 1, we forecasted that we would have enough gas to do about 9,000MW. This was in 1998 before I came to NERC. This forecast failed because the gas people failed to deliver. We became wiser and began to benchmark the MYTO on more conservative, almost pessimistic projection of capacity growth. We expected to end 2014 at above 5,000 megawatts, but still, our expectation on gas supply did not materialise.”

The other reason for missing the generation target, according to the NERC boss, is the non-completion of the National Integrated Power Projects. He stressed that this was a problem of project management.

“So, if we have all the NIPP plants fully completed with full and bankable gas agreements, we would be doing more than 6,000MW by now,” Amadi said.

He stated that the commission was responding to these problems with regulatory tools.

He added, “Take for example the problem of commercial incentive for gas supply. We have responded by allowing $2.50 as cost of gas and $0.80 as transport cost for gas. This price encourages gas suppliers to supply to power plants. Again, we have ensured bankability through enforceable gas supply and transport contracts.

“But the biggest response to the lack of capacity in the short to medium term is the embedded generation regulation. With the regulation, we can procure more power quickly off grid; that is, not through central procurement by the bulk trader, while waiting for the bigger megawatts that will take a couple of years to be on the grid.

“So, it is possible for the Discos to increase their portfolio of electricity for the consumers through embedded generation.”

On why the over 30 IPPs licensed by NERC had yet to start generating power, Amadi said the reason was that electricity, unlike telecommunications, required a lot “grandfathering.”

He said, “In telecoms, you just liberalise and the new licensees start to roll out services. This is different in electricity. The former Governor of the CBN and now Emir of Kano informed me that until when NERC announced the new tariff regime, the AFC, owned largely by Nigeria, could not even consider any investment in electricity in Nigeria.

“Why? Because the critical condition for making such investment is not there. Again, until the Nigerian Bulk Electricity Trading Company was established late 2011, all licensees could not close the financial deals because there was no credible off-taker of power. The Discos were totally bankrupt and indebted. That was the reason for the privatisation. Therefore, no investor will be willing to invest without a sovereign guarantee.”

The NERC boss further stated that one of the most formidable bottleneck in the sector was transmission.

He stated that the Federal Government recognised the fragility of transmission capacity as far back as 2001 in the National Electric Power Policy and hired a management contractor to manage transmission instead of relying on public sector bureaucracy.

Amadi explained that there was a doubt if the private firms would fully fund power transmission if it remained a common service.

He said, “This is why the embedded generation regulation is helpful. With it, we can avoid the transmission bottleneck in connecting modular power to demand load.

“But more than this, NERC is proposing a radical solution to the problem. Firstly, we are unbundling the Transmission Company of Nigeria to have two distinct companies. There will be a transmission service provider and an independent system operator coming out of the present TCN.”

On generating electricity from renewable energy sources, Amadi said before now NERC did not pay much attention on renewable energy and other means of generating power.

He added, “But all that has changed now. We have licensed IPPs to generate power from wind. We have the Kaduna Wind Farm. We have received enquiries from firms who want to generate power from coastal wind around Badagry.

“We have solar plants across Nigeria, particularly in northern Nigeria. We have licensed over 2,000MW of coal power. So, in matter of years, we may have over 20 per cent of available energy coming from renewables.”

– Punch

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