- What is the current status of the gas-to-power sector in Nigeria, and how does it contribute to the country’s energy mix?
1.1. Nigeria is blessed with vast natural gas reserves, currently estimated at 208.3 trillion cubic feet, accounting for approximately 33% of Africa’s total gas reserves.[1] The country is also the ninth largest producer of gas in the world.[2]This abundance, positions Nigeria as a gas-rich nation with a remarkable life index of 94 years, indicating ample reserves for the foreseeable future.[3] Gas remains the cleanest fossil fuel and is experiencing growth in demand as the most preferred fossil fuel for power production.[4] Nevertheless, gas as a fuel source has not been adequately commercialized in Nigeria due to a number of challenges including gas flaring which has resulted in a lot of loss and great environmental damage.
1.2. Historically, Nigeria has heavily relied on gas for electricity generation and it still remains the primary source of power in the country. However, the country struggles with persistent challenges in its electricity supply, making it one of the countries with the lowest rates of electricity access worldwide, with over 90 million citizens lacking reliable power.[5] It is said that if flared gas is properly harnessed, Nigeria can generate 2.5 GW of power from new and existing Independent Power Plants to power the economy.[6]
1.3. Recently, Nigeria has witnessed efforts aimed at reducing flaring as the country is determined end flaring by 2030.[7]Notably, Nigeria has made significant efforts in trying to mitigate gas flaring. The Nigerian government introduced the Nigerian Gas Flare Commercialization Program (NGFCP) in 2016 with the objective to eliminate gas flaring through technically and commercially sustainable gas utilization projects developed by investors.[8] The government subsequently issued the Flare Gas (Prevention of Waste and Pollution) Regulations 2018 to support the implementation of the NGFCP.[9] More recently, the Petroleum Industry Act (PIA) was issued, which prohibits gas flaring[10] and prescribes penalties for flaring gas.[11] All these, amongst other things signify Nigeria’s commitment to efficiently utilising its gas reserves and harnessing the opportunities it brings forth.
1.4. Nigeria’s energy landscape is largely thermal based which constitutes approximately 80% of its energy mix, with hydroelectric power contributing the remaining 20%. Gas which happens to contribute the most to thermal based generation in Nigeria is challenged by supply constraints. This underscores the need for strategic measures to enhance gas availability and power generation to address the nation’s pressing energy deficit.[12] The Federal Government has been intentional about strengthening the gas-to-power nexus in Nigeria. In that regard, it has rolled out several initiatives like:[13]
- The Nigerian Gas Master Plan approved in 2008, which seeks to stimulate the multiplier effect of gas in the domestic economy;
- The National Domestic Gas Supply and Pricing Policy 2008, which seeks to facilitate and ensure low-cost gas access to spur rapid economic growth;
- The Nigerian National Gas Policy, 2017 which seeks to map out strategies for the introduction of an appropriate institutional, legal, regulatory and commercial framework for the gas sector with the intention of removing the barriers affecting investment and development of the sector; and
- The National Gas Expansion Programme (NGEP) Committee which was inaugurated in 2020 by the Minister of State for Petroleum Resources which seeks to reinforce and expand domestic gas supply and stimulate demand via various implementation mechanisms, including the recent Framework for Implementation of Intervention Fund of the Central Bank of Nigeria in the gas value chain which aims at stimulating finance and investment in the gas value chain.
1.5. There has also been a lot private sector participation leading to some improvement in the sector. For instance, Shell Nigeria Gas (SNG) completed the Agbara-Ota Capacity Project in 2019. The gas plant is reported to have increased the country’s gas production and distribution capacity by over 150%.[14] The Ajaokuta-Kaduna-kano (AKK) Gas Pipeline Project which is capable on completion, of transporting two billion standard cubic feet of gas per day is nearing completion.[15] The Dangote Complex, which is a $2 billion fertilizer plant with a 3.0 MTPA capacity depends on natural gas as feedstock.[16]
[1] https://punchng.com/nigeria-now-accounts-for-33-of-africas-gas-reserves-fg/
[3] Ibid.
[4] https://www.linkedin.com/pulse/gas-to-power-nexus-nigeria-challenges-prospects-outlook-ivie-ehanmo/
[6] https://www.linkedin.com/pulse/gas-to-power-nexus-nigeria-challenges-prospects-outlook-ivie-ehanmo/
[8] https://www.theclimategroup.org/media/3286/download
[9] Ibid
[10] Section 105 PIA.
[11] Section 104 PIA.
[12] NERC Second Quarter Report.
[13] https://www.linkedin.com/pulse/gas-to-power-nexus-nigeria-challenges-prospects-outlook-ivie-ehanmo/
[14] Ibid.
[16] https://www.linkedin.com/pulse/gas-to-power-nexus-nigeria-challenges-prospects-outlook-ivie-ehanmo/
- What are the key challenges and bottlenecks facing the utilization of gas for power generation in Nigeria?
Gas utilization for power generation in Nigeria presents several challenges. Despite ongoing efforts by the Nigerian government to address these issues, they still persist. Some of these challenges include:
- Government Funding Shortfalls: The government faces challenges in securing enough funds for upstream oil and gas developments projects because it has other financial priorities, including political and socio-economic objectives. As a result, the government is unable to fully finance obligations, causing difficulties in investing in the necessary infrastructure for gas production. It is estimated that almost 2,000 MW of power is stranded due to gas unavailability, despite the additional 1,000 MW that is also estimated to be stranded due to non-gas related constraints. Thus it is important to prioritise government spending and improve accountability to cover for the shortfalls.
- Inadequate Infrastructure: Sadly, despite Nigeria’s abundant gas reserves, existing infrastructure is insufficient to meet gas demands from the power sector. Much investments in required to boost adequate gas transportation and gas processing infrastructure across the value chain in Nigeria. Given the capital-intensive nature of the infrastructural projects required in the sector, the government should seek collaborations with private sector stakeholders to help bridge the infrastructural gap plaguing the sector. The AKK Pipeline project and the Dangote Refinery are reflective of Nigeria’s commitment to improving the infrastructure deficit.
- Liquidity Issues: The liquidity challenge is a critical issue facing the utilization of gas for power in Nigeria. It primarily stems from the Distribution Companies (DisCos) being unable to collect sufficient revenue from customers- largely due to absence of cost-reflective tariffs, inadequate metering, estimated billing and lack of willingness to pay by the end users. This results in inadequate remittances to the Nigeria Bulk Electricity Trading Company (NBET) and market operators thus, making NBET unable to pay GenCos. Consequently, GenCos face difficulties in paying their gas suppliers due to NBET’s indebtedness. This liquidity crisis has persisted, with significant payment shortfalls, leading to several interventions like the gas supply stabilisation fund os established by the Nigerian Electricity Regulatory Commission (NERC) to provide advanced payment security for all gas supply and electricity supply industries. Despite these efforts, the issue remains a substantial challenge because gas suppliers are asking for settlement of their legacy debts before committing to supply more gas to the sector. GenCos have been unable to ramp up generation as gas companies demand upfront payment due to an inability to settle previous debts.[2]
- Insecurity: Between 2019 and 2020, Nigeria experienced over 1,000 points of pipeline vandalism, kidnapping and other forms of insecurity. [3] This has negatively impacted the sector. To curb this, the government should intensify efforts to strengthen security around areas with major security challenges. Stricter punishments should also be provided to deter potential offenders.
- Unstable legal and regulatory regime: A notable problem within the gas-to-power sector in Nigeria is the misalignment among the legal, regulatory, and policy aspects. This misalignment results in a lot of challenges. For instance, the CBN on 14 June 2023 issued a circular announcing the convergence of the forex market and the abolishment of the segmentation of the forex market. This move was aimed at reducing arbitrage, hoarding of hard currency and market manipulation, etc. However, months down the line, the Naira seems to be doing very poorly against the USD. This has adverse consequences on the gas to power sector amongst other things.
1.2. Efficient gas utilisation still remains a problem in Nigeria. Recently, NERC in its second quarter report of the year stated that mechanical faults and gas constraints continue to affect the amount of energy generated by gas fired plants. Both Olorunsogo and Alaoji NIPP were unavailable for 84 days which is approximately 91% of the quarter.
[3] https://www.pwc.com/ng/en/assets/pdf/nigeria-petroleum-industry-act-1.pdf
- How can the government and private sector stakeholders collaborate to attract more investment into the gas-to-power sector to meet Nigeria’s growing electricity demand?
1.1. The Electricity Act 2023 (EA) has made provisions with respect to collaborations between the government and the private sector. The EA’s primary objective is “…to provide a comprehensive legal and institutional framework to guide the operation of a privatized, contract and rule-based competitive electricity market in Nigeria and attract through transformative policy and regulatory measures, private sector investments in the entire power value chain of the Nigerian Electricity Supply Industry (NESI)…”[1].
Relatedly, the EA imposes a responsibility on the Ministry responsible for power to develop a National Electricity Policy and Strategic Implementation Plan which shall encompass amongst other things, “public private partnerships for provision of access to electricity to all areas…”[2].The Ministry responsible for power is also charged with the responsiblity for carrying out public partnership arrangements under appropriate statutory framework.
1.2. The foregoing is suggestive of the fact that the government is very intentional about collaborating with the private sector. This can be effectively achieved through the following ways:
- Policy Alignment: Government policies and regulations on gas and power needs to align with the interests of private investors and in addition strive to create a stable and predictable regulatory environment to reduce investment risks.
- Investment Incentives: Attractive investment incentives can be introduced such as tax breaks, reduced import tariffs on relevant equipment and financial incentives to entice private investors. Notably, companies engaged in gas utilisation are entitled to a tax-free period of up to five years, accelerated capital allowance after the tax-free period and tax-free dividends during the tax-free period.[4] Investors in gas pipelines can obtain additional tax-free period of five years as well.[5]
- Capacity Building: The government should strive to invest in workforce development and provide training programmes to ensure that the local workforce possess the necessary skills for the sector’s growth. It should in doing so, leverage the wealth of expertise in the private sector to enhance the effectiveness of the training programmes and foster a synergy between public and private sectors.
- Accountability: Proper mechanisms should be established to monitor project implementation and performance, ensuring that both the government and private sector stakeholders are accountable for their commitments.
[1] Section 1 EA.
[2] Section 3 EA.
[3] Section 112 EA.
[5] Ibid.
- What role can renewable energy sources play in complementing gas-based power generation, and how can they be integrated effectively into the energy mix?
4.1. While Nigeria is very rich in conventional energy sources like coal and gas, it is also abundantly blessed with renewable sources like solar, wind, etc. For instance, Nigeria receives an abundance of more than 2,600 hours of sunshine yearly which has the potential to generate 5.5kwh to 6.7kwh per square meter on a daily basis.[1] Relatedly, the country also has great prospects for wind energy utilisation especially in states like Lagos, Ondo, Rivers, Delta, Bayelsa and Akwa Ibom.[2] Notably, Nigeria currently has an installed renewable capacity of around 2,000 MW operated mainly as mini grids and targeted towards providing electricity to rural areas in the country.[3] The 10 MW Kumbotso solar project in Kano is the first solar power plant to be connected to the national grid.
4.2. Given that gas-based power generation is highly insufficient, it is imperative to leverage the country’s vast untapped renewable energy potential to complement the existing gas-based power generation. This can be effectively achieved through the following ways:
- Enabling environment: A conducive environment will serve as a catalyst for the integration of renewable energy into the mix. Commendably, the EA has as one of its objectives, the provision of a framework to stimulate development and utilisation of renewable energy sources in order to increase the contribution of renewable energy to the energy mix.[4] The EA also provides as one of the functions of NERC, the obligation of increasing the contribution of renewable energy in Nigeria’s energy mix. [5] Commendably, the EA reiterates the feed-in tariffs for renewables and contemplates other incentives for investments in renewables.[6] These are positive signs that will boost renewable energy generation in Nigeria, even though the extent of commitment and implementation remains to be seen.
- Skilled Workforce: To achieve effective integration, it is important to build a workforce that is proficient not only in gas-based power generation, but also in the nuances of renewable energy. These experts will be the backbone of the integration of renewable energy into the energy landscape. This would include enhancing the knowledge of existing experts in renewables and integrating them into the energy mix drive. Additionally, it would also involve recruiting fresh talent with expertise in renewable energy sources.
- Infrastructure: For renewable energy sources to be effectively integrated into the energy mix, there is a need to install appropriate infrastructure and upgrade the ageing infrastructure capable of seamlessly integrating renewable energy generated into the national grid. As highlighted above, we have seen power from the Kumbotso solar plant being fed into the grid.
4.3. Hybridized Generation
In Nigeria, where gas supply can be inconsistent, the integration of renewable sources like solar in hybrid power plants offers a solution to ensure reliable and continuous electricity supply. These hybrid systems effectively complement gas-based power generation by providing a stable backup source when gas availability fluctuates. This approach reduces dependency on a single energy source, and enhances energy security and grid stability.
- How can Nigeria ensure the affordability and accessibility of gas-generated electricity for all citizens while maintaining profitability for investors?
Cost Reflective Tariffs
2.1. Electricity generation and distribution is highly capital intensive. Nigeria subsidizes electricity to keep it relatively affordable. In the first half of 2023, the Federal Government incurred N135.23 billion as subsidy obligation due to the absence of cost reflective tariffs.[7] This applies to invoices generated by NBET which are to be paid by DisCos. The situation highlights that while electricity in Nigeria may appear affordable to consumers, its actual cost is significantly cushioned by government subsidies.
2.2. The EA provides as one of the functions of NERC, the promotion of cost reflective tariffs and service reflective tariffs.[8] Against this back backdrop, there have been many initiatives to promote the setting of cost reflective tariffs in Nigeria. For instance, in a bid to ensure prices charged by licensees are fair to consumers and sufficient to allow the licensees to finance their activities and obtain reasonable profit for efficient operations, NERC established the Multi-Year Tariff Order (MYTO) which is a tariff model for incentive-based regulation that seeks to reward performance above certain benchmarks, reduces technical and non-technical/commercial losses and leads to cost recovery and improved performance standards from all industry operators in the Nigerian Electricity Supply Industry(NESI).[9]
2.3. Therefore, to make electricity more accessible and affordable for all Nigerians while ensuring profitability, it is important to allow DisCos charge cost-reflective tariffs that will enable them to recover their investments and make a reasonable return. This move, in addition to other connected factors (e.g. reduction in technical, commercial and collection losses) will enhance the overall efficiency of the power sector, ultimately resulting in greater accessibility to electricity.
2.4. Moreover, attracting investors to the power sector will contribute to its profitability and long-term sustainability. While the short-term consequences of this adjustment will result in a significant increase in electricity prices, affecting the cost of various goods and services, the long-term benefits will be very substantial and rewarding.
Subsidy targeting
2.5. The government should strive to implement targeted subsidies that benefit low-income households and vulnerable populations, ensuring they can access affordable electricity. This approach allows subsidies to be more efficiently allocated. Commendably, the EA establishes the Power Consumer Assistance Fund (PCAF) which shall be used to subsidise underprivileged power consumers.[10] The EA places the responsibility of determining rates to be contributed the PCAF by designated consumers and eligible consumers on NERC.[11] This approach not only promotes affordability and accessibility for underprivileged consumers but also offers a more efficient and cost-effective mechanism. Unlike the blanket subsidy provided by the government currently, this system will source funding directly from consumers, thereby creating a sustainable means of support that is tailored to the needs of those it aims to assist.
Increased Competition
2.6. Introducing greater competition into the electricity market is important to enhance efficiency, reduce costs, and ultimately make electricity more accessible and affordable to Nigerian citizens. To effectively realize this goal, several key strategies can be employed:
- Incentives for Competition: The government can introduce incentives that encourage new players to enter the market. These incentives may include tax breaks, subsidies, or favorable financing options to stimulate investment and competition.
- Streamlined Regulatory Processes: Simplifying and expediting regulatory procedures can significantly reduce bureaucratic obstacles that often deter potential market entrants. By making it easier for investors to enter the electricity market, competition can flourish. Regulatory bodies can also play a role in ensuring a level playing field and fostering competition.
[4] Section 1 (l) of the EA.
[5] Section 34 (i)
[6] Section 34 EA.
[8] Section 34 (1) (j) EA.
[9] https://nerc.gov.ng/index.php/home/myto
[10] Section 123 EA.
[11] Section 124 EA.
