A Review of the Nigerian Energy Industry

Is a single regulator for gas and electricity ideal?

05 May 2015, Abuja – As the new government takes control assumes leadership of the country, the difficulties that continue to undermine Nigeria’s protracted resolution of the problems with electricity remain disturbingly intractable.  Quite simply, the quantity of electricity generated – this being so grossly inadequate, at its highest, to meet a justifiably growing demand – continues to be affected by a number of factors responsible for the shrinking output.

Chief amongst the reasons for the generation deficiencies is the availability of gas, a natural resource that Nigeria possesses in large quantities. Despite its ordinarily believed natural availability, the problems around the difficulties regarding its availability continue to confound many and have remained frustratingly complex.

Gas availability remains the critical factor in attaining the stability that the power sector seeks.  It is the foundation upon which the growth of the sector will be built because it is only by its long-term resolution that the necessary additional investment required to grow capacity will happen.  Central to this development is the question of the regulatory regime for the delivery of gas to the power sector but also to the energy chain as a whole.

Commenting on the recent low generation status of the power sector, Dr Sam Amadi, Chairman of the Nigerian Electricity Regulatory Commission, who was reported in This Day on 28 April 2015, raised this critical issue when he suggested that NERC, as the Power Sector Regulator, was unable to exercise any form of control over the supply of gas to the power plants and that this lack of control meant that it was unable to project and guarantee, accurately, the country’s generation capacity year on year.

Describing gas supply as the “Achilles heel” of the sector, he explained that because NERC was unable to exert any level of control, it would remain difficult for it to drive electricity generation to the level that it has set in its Multi Year Tariff Order (MYTO).  Gas, he argues, is the most crucial fuel in electricity generation, and remains outside NERC’s control. He asserts that this gap in the control process completely handicaps NERC in its critical estimation and planning functions as to the amount of electricity that should be generated at every point in time.  He suggest that an important resolution of this situation should see the alignment of gas supply to the power sector being achieved by bringing the governance of both the electricity industry and gas supply under the purview of NERC.  He cites the examples of the United Kingdom and the United States from where we have borrowed heavily in creating the structure that we now operate in Nigeria.

There is force in this suggestion.  But the problems here are so much greater than this incapacity.  Critically, regulatory control has far less to do with the availability issues.  Whilst it is correct that NERC’s accountability to Nigerians in its projection of available electricity supply is hinged on its knowledge – and not necessarily regulatory control – of gas supply, it is difficult to see how this can enhance supply.  Aside this, there are a number of reasons why even affirmative resolution of this issue can only provide limited assistance to NERC or indeed the regulatory framework in combating gas unavailability.  Both the United Kingdom and United States arrived at their combined regulatory umbrella through a long, even arduous, developmental journey influenced by a number of other prominent market and industry factors.

In the United Kingdom, the Office of Gas and Electricity Markets (OFGEM) whose work is amply augmented by the Gas and Electricity Markets Authority regulates both the Downstream Natural Gas and the Electricity Markets. This has been the position following the merger of the Offices of Electricity Regulation and Gas Supply.  This was the end product of a journey in the development both of the markets and regulatory control that began in the 1980s with the government of Margaret Thatcher.

OFGEM’s main regulatory objective is to protect existing and future consumers’ interests in relation to gas conveyed through pipes and electricity conveyed by distribution or transmission systems.  Its powers and duties are largely provided for in statutes (namely, amongst others, the United Kingdom Gas Act 1986, the Electricity Act 1989, the Utilities Act 2000, the Competition Act 1998, the Enterprise Act 2002, the Energy Act 2004, the Energy Act 2008 and the Energy Act 2010). These acts of legislation are additionally considerably impacted by effective European Community legislation. Broadly, therefore, duties and functions concerning gas are set out in the Gas Acts and those relating to electricity are set out in the Electricity Acts.  So in the regulator’s role, its responsibility is to ensure the observance of clearly demarcated obligations in settled legislation.  This is how, since 2010, it has imposed fines and levies amounting to over £100 million on energy suppliers including the May 2014 £12m redress levy on E.ON and the July 2014 £1m levy on British Gas for industry and consumer breaches.

The United States Federal Energy Regulatory Commission is the agency responsible for regulating interstate sales of electricity in almost all its ramifications.  This includes jurisdiction over bulk or wholesale electricity prices, licensing; electricity co-ordination including hydro-electricity licensing and non-federal hydro power projects.  For Gas, its regulatory responsibility spans natural gas pricing; oil and pipeline rates; liquefied natural gas terminals; interstate natural gas pipelines.

Added to these are smart grid, demand response and the integration of renewables.  This represent the widest possible span of regulatory control although given the size of the US electricity and gas markets, there are some excluded areas. Again, like the United Kingdom, this relatively settled state emerged after so many years committed to the separate development of both sectors.  The forerunner of FERC was initially the entity known as the Federal Power Commission, established first in 1930.  It gained independent regulatory powers in 1935; acquired increased jurisdiction for gas first in 1938 following the passage of the US Natural Gas Act, in 1942 to cover licensing for natural gas facilities and by a 1954 Supreme Court decision in Phillips Petroleum v Wisconsin extending its jurisdiction to wellhead sales of natural gas in interstate commerce.  In 1977, the US consolidated its energy related agencies but insisted on retaining a separate, independent regulatory agency.  This is how the Federal Power Commission came to be renamed FERC which is the name it still bears, to date.  Its jurisdictional capacity continued to evolve such that by 1989, when Congress decided to end federal regulation of wellhead natural head prices by the passage of the US Wellhead Natural Decontrol Act 1989, its vast operational sphere was already well settled.  The Energy Policy Act of 2005 expanded and encapsulated its wide authority across the gas and electricity markets in both regulatory and operational dimensions in the manner that it now operates, to date.

Where are we in Nigeria, by comparison?  The development of the regulatory framework for the gas – within the petroleum – sector in Nigeria has not evolved with the desired importance or even urgency. The key legislation regulating the oil and gas industry includes the Petroleum Act 1969, and all amendments, subsidiary legislation, regulations and instruments; the Nigerian Oil and Gas Industry Content Development Act 2010, the Oil Pipelines Act 1965; the Oil in Navigable Waters Act 1968; the Associated Gas Reinjection Act 1979; the Petroleum Profits Tax Act 1958 and the Environmental Impact Assessment Act 1992.  The Federal Ministry of Petroleum Resources has primary supervisory oversight over the oil and gas industry. It is responsible for formulation, implementation and co-ordination of government policy for the industry.  It also exercises its regulatory functions through the Department of Petroleum Resources (DPR). which is responsible for the day-to-day monitoring of the petroleum industry and for supervising all petroleum industry operations. Within the Ministry, the Department of Gas Resources (DGR), established under the National Gas Supply and Pricing Regulations is responsible for regulating the gas sector. All this space is heavily dominated by a crude oil theme. 2008 produced the National Gas Policy comprising, largely a downstream gas policy and giving rise to the much vaunted National Gas Master Plan. Emerging in a manner that portended hope, these fall woefully short when placed beside the examined comparisons.

The Federal Government of Nigeria’s response, hitherto, has been captured in provisions set out in the much debated draft Petroleum Industry Bill (PIB), which, when enacted should improve the situation. An attempt to amalgamate under a single legislation, the various legislative, regulatory and fiscal policies, instruments, structures and institutions that govern the petroleum industry as a whole, the PIB falls into the continuing error of seeking to administer gas as an appendage to petroleum.  There are a number of reasons why this is wrong.  It is common knowledge that Nigeria has the 7th largest Gas Reserves in the world in the region of 187 Trillion Cubic Feet of gas.  A large proportion of this is largely unexploited.  90 Trillion Cubic feet of this is unassociated gas, namely gas isolated in natural gas fields alone. This is a multi-billion dollar industry of immense potential. To continue to consider gas an adjunct product to crude oil clearly ignores gas’ enormous potential.  The draft PIB contains, for gas, a number of key changes to the management of the country’s vast resources.  These include as part of the proposed unbundling of NNPC, hiving off the National Gas Company; carving out natural gas from the exploitation and exploration of crude such that a distinct licensing and authorization regime is put in place.  All these are to be achieved by the enactment of separate legislation including a Downstream Gas Act (DGA). The DGA would establish a proposed Gas Regulatory Commission with functions including regulating the price of gas downstream as well as monitoring and imposing pricing restrictions on licensees.

Essentially therefore, with Nigeria, the landscape is still markedly different.  The electricity market is really at this stage beset with so much fluidity if not uncertainty.  This is largely because although the reform underpinned by the Electric Power Sector Reform Act 2005 is in advanced stages of implementation, its effect on the provision of regular electricity is still delivering limited visible impact especially the transition from public owned to private, privatization-driven ownership and control of electricity assets. The merging of the regulation of gas and electricity occurred in these jurisdictions after years of sustained effort culminating in virtually settled markets emerging from those prolonged periods of high resource commitment.

– This Day

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