Key drivers to encourage investments for gas-to-power include- viable business models, clear policy, legal and regulatory frameworks, scaling up incentives, appropriate value chain pricing, etc.
Ultimately, to attract investments in power projects for increased energy access, the government will need to provide the necessary legal and regulatory framework in the gas and electricity sector(s) to underpin the PPA which typically has a duration of 20 or more years alongside other attendant agreements. Consideration should therefore be given to the following recommendations across the gas-to-power value chain.
Infrastructure and Security
Given the government’s policy objectives of building the domestic gas-to-power market, it is pertinent for the government to provide sufficient funding or partner with the private sector for the necessary infrastructural development. However, the government must put in place an enabling legal, regulatory and policy framework to incentivize investment in the sector. In addition, adequate security measures must be put in place to curb the menace of security related activities, one of which is the notorious gas pipeline vandalism, which has a negative domino effect on gas availability and electricity generation output.
Legal and Regulatory
The existing legal framework for gas needs to be restructured to align with international best practice by reducing/eliminating the current high degree of ‘state controlled’ pricing which distorts the anticipated benefits from the projected investment outlook for gas production and supply.
Alignment is needed between price regulation in the power sector and an integrated and effective consideration of investments and cost outlook for gas supply owing to the interconnectedness of both sectors.
In addition, a unified approach to the regulation of domestic supply of gas in Nigeria needs to be established.
There is also a need for coordination and alignment of institutional behaviour across the gas to power value chain which will save a lot of time for gas to power transactions and also reduce transaction and administrative costs. Duplication of functions and regulatory overlaps will be avoided as there will be more regulatory certainty which will enable the Nigerian Electricity Regulatory Commission project more accurate electricity generation capacity growth.
In the alternative, consideration can be given to the establishment of an independent regulator to manage gas market challenges in conjunction with the power sector regulator or one independent regulator to take up both functions.
There is a need for efficient institutional and governance framework in place to cater to pricing and allocation of gas resources between export (LNG) market and the highly-gas dependent domestic markets with adequate mechanisms in place for the enforcement of domestic gas supply obligations.
Consideration should be given to the establishment of a single independent regulatory authority to formulate appropriate regulation to ensure compliance within the sector. Existing laws and regulations will need to be revised to align with the intent of the various policy objectives of the government. If adopted, the structure of the single independent regulator has to be strategically mapped out to ensure regulatory independence and avoid government influence in the decision making process.
Otherwise, the power sector regulator can be tasked to perform dual regulatory functions for gas to power regulation as was done in the UK (OFGEM) and US (FERC).
The long awaited anticipated Petroleum Industry and Governance Bill should be passed into law as the Bill establishes the Nigerian Petroleum Commission to serve as the commission that will consolidate and oversee all upstream, midstream and downstream petroleum operations in Nigeria, of which some of its functions include enforcing pricing frameworks for gas, ensuring that economic and strategic domestic demands for gas are met, and developing market rules for trading in wholesale gas supplies to downstream gas distributors.
The Bill if passed into law is set to harmonize and stabilise gas pricing in Nigelria via the deregulation of the downstream sector through the promotion of a market-based pricing regime, which would boost investments in the gas to power value chain.
Nevertheless, it is important that the proposed gas pricing framework in the Bill is mirrored in power sector regulation and reflected in the MYTO to ensure uniformity of application. Any pass through costs and risks enshrined in documentation across the value chain must conform and align with the regulatory provisions governing each segment of the value chain to avoid any form of dichotomy that will send a negative signal in the market and deter the much needed FDI in the sector.
The Governance framework should complement and not contradict the framework governing other related sectors such as the power sector.
Existing risk factors in the power sector need to be properly managed and mitigated, to enable tangible revenue flows across the gas to power value chain. Pertinent risks in the sector that require urgent attention as earlier highlighted include- non cost-reflective tariffs, government debts (Ministries, Departments and Agencies), low generation and security risks, metering, weak sanctioning regime for energy theft, etc.
It is therefore essential that all contracts (PPA’s and Vesting Contracts) for the sale and purchase of power be activated with adequate enforcement of the performance guarantees and security covers in order to prevent debts amassing which will further hinder investments in gas processing and infrastructure essential for reliability of supply across the gas-to-power value chain. Nevertheless, regulatory and policy consistency is key to align with contractual commitments of the various participants.
The conditions for bankable gas to power projects have to be in place with adequate risk allocation mechanism and enforcement discipline for the gains of gas to power projects to be fully achieved.
Gas Pricing, Electricity Tariffs and Incentives
Domestic gas prices can either be subsidised or benchmarked against international prices with domestic cap provisions to promote local gas trading. However, consideration has to be given to the fact that government involvement via price caps on the commodity will hinder the interplay of market forces, thereby discouraging investment. It is proposed that the supply of gas to domestic markets would only be profitable when prices are deregulated, and market forces are allowed to interface and compete alongside the international gas price. There should therefore be strategic plans by the government to open up the gas market for competition by participants to ensure the gains of its policies are realized.
Subsidized competing fuels or electricity prices in some countries frustrates the sale of associated gas or end-products produced from associated gas feedstock into the local market. Reforms for price subsidy removals have to be implemented to foster a free market interplay.
Nevertheless, during the transitional period, although the intention is for prices to be unregulated but rigorously monitored before the wholesale market is fully established, the unregulated prices should bear a cap to avoid discriminate pricing which may be difficult to monitor.
Incentives however need to be put in place such as a mix of fiscal incentives, associated gas commercial profit sharing, etc.
An appropriate gas pricing framework needs to be developed for the gas to power value chain to facilitate efficiency in gas supply to power.
Azura-Edo IPP is a case in point. The IPP signed a 5 year gas supply agreement (GSA) with the operators, National Petroleum Development Company (NPDC)/Seplat Petroleum Joint Venture on a ‘willing-buyer, willing-seller’ basis for about 116 million standard cubit feet/day of natural gas. It also signed a Gas Transportation Agreement (GTA) with the Nigerian Gas Company (NGC). Project Risks were allocated based on the principle of ‘allocating risks to the party(ies) best able to bear the risk(s)’.
The penalty for gas flaring has to be increased to levels higher than marketing or re-injection alternatives. The Flare Gas (Prevention of Waste and Pollution) Regulation, 2018, somewhat compels Producers to commercialize gas through the increased flaring fees which should discourage routine gas flaring which is a step in the right direction.
The Nigerian Gas Flare Commercialisation Program (NGFCP) currently in abeyance is a step in the right direction for gas to power projects.
For Independent Power Producers and Distribution companies within the franchise areas of the respective flare sites, this would provide great advantages. The certainty of gas supply for embedded power projects would ensure the bankability of supply arrangements. This would in turn result in greater economies of scale for parties to Gas Supply Agreements and Power Purchase Agreements. However, it is doubtful that this would result in an increase in revenue due to the Generation companies from the Distribution companies as other determinant factors must be addressed to ensure revenue assurance in the Nigerian Electricity Supply Industry.
Regional and International Pipeline Projects
The government needs to devise strategies that will address the security risks surrounding the West African Gas Pipeline Project particularly with regard to pipeline vandalism especially in light of the proposed African Single Electricity Market.
The attainment of a viable and functional gas-to-power market is largely dependent on the implementation of the above recommendations, but more importantly on the dual existence of a liberalized gas sector with an appropriate pricing framework and a credit worthy power value chain via the existence of cost reflective tariffs. Ultimately, coordination among the two sectors remains pertinent, in order to maximize and reap the wider economic benefits. Collaboration amongst all stakeholders on energy policies and regulations is therefore paramount.