Electricity generating companies (GenCos) in Nigeria are facing a significant drop in gas supply, resulting in the inability to operate their thermal plants at full capacity. Consequently, the power supplied to the national grid has been declining, falling below 4,000 megawatts (MW) for over a week, with an average of 3,500MW on Monday. This power deficit is posing challenges to economic activity and national productivity, especially with the removal of subsidies, which increases the reliance of homes and small businesses on grid supply.
Within the past week, Nigeria's power sector has experienced an average loss of about 20 percent of its supply due to mounting debts to gas suppliers. These debts have arisen from the operators' failure to meet their contractual obligations. Last year, market participants, including GenCos, distribution companies (DisCos), the Transmission Company of Nigeria (TCN), gas suppliers, and NBET, entered into a Power Purchase Agreement (PPA) to ensure a minimum supply of 5,000MW of power daily. However, the agreement did not yield the intended results as parties struggled to fulfill their commitments.
The Association of Power Generation Companies (APGC) highlighted significant challenges with gas availability, as many power plants rely on 'associated gas' from crude oil exploration. Any drop in crude oil production results in reduced gas availability, making the plants more vulnerable. Additionally, thermal plants face difficulties due to poor gas transmission infrastructure, obtaining gas from the national gas transmission system that suffers from insecurity and supply quality issues.
Despite efforts to strengthen contractual terms, the situation has not improved significantly, leaving the electricity market facing crucial hurdles in transitioning to a full Transitional Electricity Market (TEM) Phase. The TEM is an intermediary step toward a fully competitive market structure, designed to bring more varied market players and foster competition. However, the plan encounters obstacles, including highly indebted DisCos that lack adequate network investments and TCN's capacity gaps.
On the bright side, a transitional market offers substantial benefits for consumers. It may lead to increased hours of available electricity, potentially impacting the prices they pay per kilowatt-hour. However, the transition to bilateral contracts between GenCos and DisCos poses challenges, requiring credible off-takers and credit-worthy parties for the contracts to be effective and the market to remain liquid.
Three major DisCos - Eko Electricity Distribution Company, Ikeja Electric, and Abuja Electricity Distribution Company - have been instructed by the regulator, NERC, to implement bilateral contracts with GenCos. Nevertheless, analysts believe that inefficiencies in the electricity sector have been overlooked for a long time, adding further complexity to the negotiations.
For the contracts to be successful, mechanisms for converting vesting contracts into bilateral agreements need to be developed. Additionally, DisCos must fully collect the value of the energy they receive, raising questions about who settles the differential when the National Bulk Electricity Trader (NBET) no longer provides a guarantee.
To address the gas supply challenges, the Nigerian government has established a N5 billion Gas Stabilisation Fund. However, gas suppliers are demanding settlement of their legacy debts before committing more gas molecules to the sector. This has hindered GenCos from ramping up generation as gas companies now require upfront payments due to past unsettled debts.
As Nigeria grapples with these issues, it remains to be seen how the bilateral contracts will shape the electricity market and whether the power sector can overcome its current hurdles to meet the nation's growing energy demands.
