Over the past two years, there have been major changes in the Nigerian Electricity Industry. Management of the transmission company has been transferred to a private utility and virtually all of the successor generation and distribution companies, which emerged from the defunct Power Holding Company of Nigeria Plc (PHCN) have been privatized and transferred to their new private owners. In addition, privatization of the ten power plants within the Nigerian Integrated Power Project is currently underway. In spite of all of these developments, current peak generation remains in the region of 4,331.7MW, nominally lower than peak generation of 4,517.6MW in 2012, prior to the sector reform.
Gas supply constraints have largely stalled growth potentials and adversely impacts generation capacity. Thermal power plants account for about eighty percent (80%) of Nigeria's electricity generation. The future development of the Nigerian electricity industry is intrinsically tied to gas supply. Historically, and faced with a limited market, driven by an inefficient and un-creditworthy single buyer government utility, gas producers had little or no incentive or encouragement to monetize or commercialize gas for domestic use. Export projects and flaring were considered more viable options. However, in the last decade, the government has introduced several policies and incentives aimed at encouraging further investment in domestic gas supply.
The most significant being the introduction of the National Domestic Gas Supply and Pricing Policy (the Policy) and promulgation of the National Domestic Gas Supply and Pricing Regulations (the Regulations), in February 2008. These constitute the backbone of a Gas Master Plan (the Plan) announced by the Federal Government of Nigeria (FGN) in 2008. The Plan is focused on developing the Nigerian domestic gas industry through three (3) key features, (i) price regulation; (ii) imposition of a domestic supply obligation ("DSO") and (iii) development of critical gas network infrastructure. The Policy segmented the domestic gas market into three (gas-to-power, gas-as-feedstock, and gas-as-alternative fuel) and prescribed applicable pricing for each segment.
The Regulations empower the Department of Petroleum Resources (DPR) to allocate a DSO to every company licensed to produce petroleum, at the beginning of every year. Gas producers are required to submit plans for meeting their DSOs and to, when required, supply requisite volumes of gas in accordance with a gas purchase order issued by a gas aggregator. Alongside the mandatory supply obligation, the Policy also sought to further encourage gas supply specifically in relation to power projects by introducing a regulated pricing regime with a floor price determined primarily by establishing the lowest cost of supply that allows a fifteen percent (15%) rate of return to the supplier. The floor price was set at US$0.10/mmbtu in 2008. The pricing structure also took into account an escalation for inflation and an indexation for the real time product price and other indices. When the DSO became fully operational in 2010, the Ministry of Petroleum Resources determined the cost reflective baseline to be US$1.00/mmbtu. The assumption of the FGN was that the combined application of the stick (DSO) and carrot (regulated price) would boost gas-to-power investment.
Though the DSO regime has significantly boosted investment in domestic gas supply infrastructure, gas producers are still reluctant to enter into gas supply arrangements with generation companies. Rather, suppliers appear keener on arrangements with users in other segments of the domestic market that enjoy a better pricing regime. The major impediment to gas supply for power generation is believed to be the regulated price, which has, over the last few years, remained significantly below the market price for natural gas (currently in the region of US$3.80-US$4.00/mcf). To address the pricing issues, in August 2014, the FGN announced the approval of a new floor price of US$2.50/mcf for gas supply for power projects, indexed against annual US inflation rates. The revised price is set to take effect from January 2015 and is meant to apply to both existing and future gas supply arrangements.
Although the increment will bring the regulated price for gas-to-power much closer to market, major producers still insist that it may not make big domestic gas projects economic. There are also concerns in relation to the applicability of the new pricing regime to existing contracts and the potential impact of the price review on existing financing arrangements. In spite of these challenges, there is likely to be growth in gas-to-power projects in the near future on account of the new pricing incentive and falling international gas prices.