Gencos hopeful as new domestic gas price takes off this month

Barring any hitches, the implementation of the new price for domestic gas used for power generation, which was recently increased from $1.5 per 1,000 cubic feet (MCF) to $2.5 with $0.80/MCF as transportation costs for new capacity, is expected to take effect from this month, according to sources close to the Nigerian National Petroleum Corporation (NNPC).

Industry watchers expect that this would bring relief to the power sector , as producers would be encouraged to invest in gas production to service it.

The power sector has suffered from acute gas supply shortages over time, resulting in pronounced electricity outages across the country. The stated benchmark price for gas will rise along with inflation in the United States, and is expected to provide sufficient incentive for gas suppliers to churn out more gas for power and invest in necessary infrastructure.

Diezani Alison-Madueke , minister of Petroleum Resources, said the benchmark would likewise increase with the United States annual inflation statistics

The new pricing and other measures which the government is expected to put in place should ramp up grid power generation significantly within a short period.

Local and foreign companies involved in gas production in Nigeria have always shown a preference for exporting gas because of the high price.

To encourage investment in domestic gas, the price of gas-to- power was earlier increased from $0.5 per mcf to $1 in 2010.

It was further increased to $1.50 in 2011; $2 by the end of 2013, and $2.5 in 2014.

The current increase from $1.5 to $2.5 per 1,000 standard cubic feet, is encouraging but is not yet where the price ought to be, said one industry player.

He said the price of gas in the country is still far from world market prices. “ But this move by the government is encouraging and it shows that slowly, with time, things will change for the better and we would eventually get to the price that is economical for the industry” .

Government, in a recent inter-ministerial meeting involving the ministries of Petroleum Resources, Power, NERC, the Central Bank of Nigeria (CBN) and the Nigerian National Petroleum Corporation (NNPC), said collective efforts were being made to find a lasting solution to shortages in gas supply to power plants in the country.

As a means of ensuring that the new cost of gas is effectively paid for, the Nigerian Electricity Regulatory Commission (NERC) approved a review of the Multi-Year Tariff Order (MYTO) 2 regime, which effectively took-off yesterday.

With the commencement of MYTO 2.1, the commission will now progressively hold electricity distribution, transmission and generation companies, as well as other market operators to the terms and conditions of their licences.

Sam Amadi, the commission’s chairman said, “It is expected that the take-off of MYTO 2.1 will bring about improved service delivery, as distribution companies are now expected to implement their investment plans for metering and strengthen their networks, in line with their bid documents.”

Amadi explained that the adjustment in methodology was not expected to bring about any increase in tariff to residential customers on R1 and R2, who formed majority of electricity consumers, at least not in the next six months.

Explaining the rationale for the adjustment, Amadi said the commission had shielded ordinary Nigerians from the possibility of rates shocks which could have accompanied the review, while pressing the operators for improved service delivery.

He further explained that the review was imperative, given the proposed take-off date of January 1, 2015, for the transition electricity market and the memorandum of understanding between the Central Bank of Nigeria (CBN) and the Nigerian Electricity Supply Industry (NESI).

According to him, all these measures were being put in place to ensure that the new owners could fund their operations and bring about improved electricity supply to the economy, as well as expand the amount of electricity available for economic development.

With this development, the existing regime of Interim Rules, whereby the Commission governs the market without the full rigour of the MYTO would cease, while market activities would be governed by strict contractual obligations.

Olusola Bello http://businessdayonline.com/2015/01/gencos-hopeful-as-new-domestic-gas-price-takes-off-this-month/#.VKbnuCvF-Hw