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Gas Price Increase Raises Fears of Electricity Tariff Hike in Nigeria

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As the price of the gas purchased by electricity Generation Companies (Gencos) increase from $2.18 to $2.42, as announced by the Nigerian Midstream and Downstream Regulatory Authority (NMDPRA), a hike in the tariff payable by the consumers is seemingly inevitable.

While it hiked gas-to-power price to $2.42, the authority further increased the rate the commercial sector gets the product to $2.92.

The increments were despite complaints of shortages and undersupply by the Gencos as well as massive “dollarization” of the product sold in Nigeria, whereas power produced in the country with the gas was priced in naira.

A statement announcing the new rates, titled, “Announcement on Establishment of the Year 2024 Domestic Base Price (DBP) and Applicable Wholesale Price of Natural Gas for the Strategic Sectors,” was signed by NMDPRA Chief Executive, Farouk Ahmed.

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It said the Petroleum Industry Act (PIA) 2021, assented to by the then President Muhammadu Buhari, on August 16, 2021 and gazetted on August 27, 2021, provided a clear regulatory framework for the determination of a market-based pricing regime for domestic gas market in Nigeria.

In line with Section 167, the third and fourth schedule of the PIA 2021, NMDPRA said it was mandated to determine the domestic base price and the marketable wholesale price of natural gas supplied to the strategic sectors.

It listed the categories as: power, commercial as well as gas-based industries, which used it for the production of ammonia, urea methanol, polypropylene, low sulphur diesel and others as NMDPRA deemed fit.

The domestic base price at the marketable gas delivery point under Section 167 (1) and other provisions of the PIA, the statement said, shall be determined based on regulations, which incorporate certain principles.

One of the principles, it said, was that the price must be of a level to bring forward sufficient natural gas supplies for the domestic market on a voluntary basis by the upstream producers.

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With the new price, the subsidy to be paid by the federal government in 2024, which was pegged at N1.67 trillion in January this year, was expected to increase markedly.

Besides, NMDPRA explained that the price to be set shall not be higher than the average of similar natural gas prices in major emerging countries that were significant producers of natural gas.

NMDPRA stated that another principle was the deployment of the lowest cost of gas supply based on a three-tier cost of supply framework as well as market-related prices tied to international benchmarks.

It stated, “Accordingly, after due consultation with key stakeholders and taking into cognisance the provisions of the PIA, as well as the gazetted gas pricing and domestic demand regulations, the NMDPRA hereby establishes the Year 2024 domestic base price as $2.42/mmbtu and wholesale prices of natural gas in the strategic sectors.”

While lauding investors in the local market, NMDPRA assured of its commitment to ensuring transparency in the gas market as well as deepening operations in the sector.

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It added, “We thank and appreciate all investors in the domestic gas market sector and assure you of the Authority’s commitment to continuously ensure transparency, deepening of the domestic gas market and creating investor-friendly business environment, as we dutifully implement all the provisions of applicable regulatory frameworks.”

In July 2021, the then Minister of State for Petroleum Resources, Timipre Sylva, announced that the federal government had approved the downward review of gas-to-power for Domestic Supply Obligation (DSO) by 32 cents to $2.18/MMBtu, from $2.50/mmbtu, with immediate effect.

At the turn of this decade, the federal government had said it was embarking on the “decade of gas” that would extend to 2030.

However, four years into the decade, it appears nothing substantial has been achieved, apart from the usual rhetoric.

Completion dates for ongoing gas projects have been variously deferred, putting into doubt the seriousness of the government to keep to announced timelines. The power sector uses more than 60 per cent of the gas currently produced in the country to generate electricity.

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But the statement increasing gas-to-power prices in foreign currency conflicted with a comment by Minister of Power, Chief Adebayo Adelabu, that the government was working to ensure that gas was sold to power generators in naira.

On his X handle in February, Adelabu had stated that the government was proposing for gas producers to sell gas to local power plants in naira to solve the problems of dollar shortage.

Although Nigeria has roughly 26 gas power plants with a combined output capacity of about 13,000mw, it only delivers around 4,00mw of its capacity to the grid due to issues with gas supply.

“Proposing domestic gas payment in naira is a key step toward stability, aligning with our economy’s needs and promoting sustainable energy production,” Adelabu had said.

He added that he planned to create legislative measures that would mandate naira payments for domestic gas supply, even though the gas producers had always argued that the product was sold in dollars to power plants because investments tied to building gas plants and pipelines were priced and paid for in dollars.

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However, local operators have had difficulties making dollar payments since the currency crisis, which has seen the naira lose significant value. The currency weakness is expected to force the price of gas in the domestic market sharply higher.

Although Nigeria has proven gas reserves of over 206 trillion cubic feet and over 600 TCF potential, it has struggled to tap it due to waning investments in the sector.

Investors readily point to gas pricing issues, incessant vandalism of existing transportation infrastructure, among other constraining factors as limiting factors to investing in the sector in Nigeria.

An inter-ministerial committee comprising officials of the Ministry of Power, Ministry of Petroleum (Gas), as well as other relevant offices was recently set up to trash out the issues bordering on gas pricing, especially its sale in dollar.

Emmanuel Addeh

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