Something that is symptomatic of governance in Nigeria is the model of “kicking the can down the road”. While we can give the president credit for removing under-recovery on premium motor spirit and ending the subsidy regime in line with Section 205 of the Petroleum Industry Act of 2021, and also ending the multiple FX windows by moving first from a fixed peg to a managed float and then to a free-floating model (with the allowance of periodic intervention), it’s important to state that the power sector holds a critical lever in writing Nigeria’s industrialisation story.
The recent threat of the GENCOs to shut down supply of load to the GRID because of legacy debts that have now toppled four trillion naira paints a much deeper problem that is not being addressed from the very foundations; let me explain:
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–The International Development Association (IDA) of the World Bank Group provides a partial risk guarantee (PRG) to commercial banks that offer what is called a standby letter of credit (SBLC) to aggregators of gas. This credit line ensures that the FGN indemnifies the PRG of the IDA to the banks and that 19 of 26 generation plants (that run as thermal plants on gas) can take gas through pipes under the domestic gas delivery obligations in Section 108 of the Petroleum Industry Act, without fear of their invoices going unpaid.
–The reason why this PRG is important is because, in the event the GENCOs are unable to get their final settlement statements (invoices) paid by the market operators, also because the market operator is unable to exercise the minimum offtake guarantee instruments presented to it by the DISCOs, then the PRG will ensure that payments are made to the gas aggregators and that there’s no shortage of supply for power generation.
This model is threatened on multiple fronts:
1. Only about 46 percent of customers use prepaid meters for electricity. The electricity theft that results from either the DISCOs not deploying smart meters to ensure theft by consumers or estimated billing leading to either overestimation or underestimation of bills to consumers, with the room for diversion of revenues, has seriously impaired the ability of DISCOs to maintain the credit line they got to buy a licence from the government, maintain their infrastructure, and pay for load from the market operator, while at the same time gunning for profitability as a business.
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2. The technical losses resulting from the unscheduled shutdown of the GRID limit the ability of DISCOs to operate a ‘take or pay model’, which is the kind of guarantee required for the GENCOs to invest in increasing their upstream infrastructure that typically comes at around $1.5m per megawatt.
3. The ability of gas aggregators to invest in trapping more gas (instead of paying flare penalties) at gas fields, aggregate it to flow stations as ‘wet gas’, from where it goes into designated nodes for calibration of pressure, and then sent to central processing facilities for treating and separation (wet gas to lean or dry gas, less the natural gas liquids, then methane from propane and ethane with the ethane de-naturiser), relies extensively on the willingness of the government to confront a reality that it has refused to confront for the longest time – power generation, transmission and distribution is too expensive for you to charge $0.036 per kWh.
4. The floor price of $2.18 per MMBtu in Nigeria happens to be the lowest amongst the countries in the T&T pricing curve because the government has used a national reference price as a cap to compute the product reference price and the cumulative monthly product price (for a quarter) to arrive at an end product factor for the floor price that determines the domestic base price under DGDO, which is a fundamental disincentive to both the gas aggregators investing in trapping wet gas from wellheads or taking advantage of the presidential fiscal incentives to invest in non-associated gas (NAG) fields.
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Not only are GENCOs not investing in raising their output capacity from the inability of the market operator to transmit all the load they generate or provide them with a PRG to limit exposure to impairments, but they also realise that without high pressure on pipes that deliver gas to GBIs because of a lack of a proper pricing framework that properly mimics export parity, there remains a fundamental disconnect in the willingness of the Oil and Gas Sector upstream to comply with DGDO.
A good idea will be for the mid- and downstream regulator to get its modelling team to build technical capability models that can use the Trinidad & Tobago, Saudi Arabia, and Egyptian models for mimicking price-to-export parity as a tool for adjusting the National Reference Price that places a cap on the computation for Domestic Base Price. The second leg of this technical and financial model will be to match the purchasing power parity of Nigerians with the different pricing bands for power and see the sweet spot between affordability and the threshold for survival and profitability of NESI. And these evidence-based data points should form the basis for policy making. What is the basis for having 210 trillion cubic feet of natural gas, being the 8th largest LNG supplier and the 12th largest crude oil-producing country if your markets lack power for industrialisation? The problem with the power sector working is the one of the refusal of government to get out of the way and focus on what it knows how to do best – regulate, supervise, structure, and guarantee.
Kelvin Ayebaefie Emmanuel is an economist.
