Electricity Tariff Hike Looms as FG Raises Gas Price

The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has announced a new base price for natural gas at $2.42 per Million British Thermal Unit (MMBTU) for power sector and $2.92 for commercial users.

The agency announced the new domestic base price and wholesale prices of natural gas for 2024 in a statement on Monday.

Farouk Ahmed, the chief Executive of the NMDPRA, in a letter obtained by EnergyPlanets said that the domestic base price is the minimum amount at which natural gas can be sold to the domestic market.

The review, which is a raise from the previous rate of $2.18 MMBTU, could lead to a tariff hike as Nigeria generates over 70 percent of its electricity from power plants that are powered by gas.

He said that the DBP must be of a level to bring forward sufficient natural gas supplies for the domestic market on a voluntary basis by the upstream producers, “the price shall not be higher than the average of similar natural gas prices in major emerging countries that are significant producers of natural gas, lowest cost of gas supply based on three tier cost of supply framework, market related prices tied to international benchmarks.

“In line with Section 167, the Third and Fourth Schedule of the PIA 2021, they Nigerian Midstream & Downstream Petroleum Regulatory Authority (NMDPRA) is mandated to determine the Domestic Base Price (DBP) and the market wholesale price of natural gas supplied to the strategic sectors.

“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 USD 2.42 / MMBTU and wholesole prices of natural gas in the strategic sector,” he said.

What does this mean for the Power Sector?

Approximately 83 percent of the power generation in Nigeria is from thermal GenCos fuelled by natural gas. An 11 percent increase in the base price will directly mean increased generation costs for GenCos and,consequently, an increase in the wholesale energy costs of grid power,especially when adjusted for foreign exchange impact.

Babatunde Osadare, an energy analyst, said that the cost is expected to be passed to the wholesale offtaker (NBET) in line with existing Power Purchase Agreements (PPAs) and ultimately to the Discos, who in turn will pass it on totheir customers.

Recall further that the Discos Tariff Order-Multi-Year Tariff Order 2024captures all upstream costs, including the increased wholesalegeneration costs in the determination of customer tariffs. This increasedcost is expected to be captured in subsequent MYTO reviews.

Will increased costs be passed on to customers immediately?

According to Osadare, this is unlikely in the short term, but should not be ruled out. On the back of the recent economic pressures in Nigeria, the government hastaken a decision to subsidise the actual costs of electricity forcustomers.

Adebayo Adelabu, the Power Minister, recentlydisclosed that the sum of N3 trillion represents the subsidy burden thegovernment is expected to bear at the end of 2024. This is in addition tothe current debt owed to the Gencos.

This is a lot of burden for any government to bear, especially one that isstruggling to manage its financial pressures and other socio-economic challenges. The situation is probably worse when the subsidy in thepetroleum sector is further dimensioned.

“Some industry stakeholders therefore believe that the subsidy burden is unsustainable for thegovernment, and customers must be prepared to pay the true costs ofpower; especially those that are receiving a reasonable level of service inline with the regulated service-based tariffs should pay the full cost ofpower and be removed from the subsidy bracket.”

“From the regulatory certainty point of view, the approved MYTO by the requlator has clearly stated the Discos’ revenue requirement based oncurrent market realities, cost-reflective tariff, allowable tariff, and tariffshortfall, which in essence represents the subsidy burden of the government.

“As the power value chain requires real-time liquidity to operate, government has assured stakeholders of willingness to play its part towards the stability of the power market,” he said.