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Power Generation Drops 20% As Debts Hamper Gas Supply

Electricity generating companies (GenCos) are not turning on their full thermal plant capacity due to a drop in gas supply, and this is showing up in the decline in power generated for the grid.

For over a week, power supplied to the national grid has fallen below 4,000 megawatts (MW) with an average of 3500MW supplied across Nigeria on Monday, a development that is hampering economic activity, and national productivity, especially as subsidy removal means more homes and small businesses rely more on the grid supply.

Nigeria’s power sector has been losing on average about 20 percent of supply within the past week as debts to gas suppliers have begun to pile up following the inability of the operators to fulfill their contractual obligation.

In June last year, operators agreed with the regulator, the Nigerian Electricity Regulatory Commission (NERC), to commit to a minimum supply of 5000MW through a Power Purchase Agreement (PPA) activated by market participants.

NERC had on June 15, 2022, announced in Lagos that market participants including the GenCos, distribution companies (DisCos), the Transmission Company of Nigeria (TCN), gas suppliers and NBET had signed a contract that would ensure that at least 5000MW of power was generated, paid for 100 percent and successfully delivered to consumers on a daily basis with effect from July 1, 2022.

But the deal failed to yield the desired results as the parties were unable to honour their commitments. DisCos could not demonstrate the ability to raise collections above 70 percent of the market invoice, the TCN lacked the capacity to wheel all the power delivered and GenCos insisted that the new agreement was an imposition and conflicts with terms in their existing contracts.

Joy Ogaji, executive secretary of the Association of Power Generation Companies (APGC), explained that there were significant challenges with gas availability as most of the power plants are dependent on ‘associated gas’ i.e., gas produced during crude oil exploration, which puts the plants at an added level of exposure because a significant drop in crude oil production will also mean reduced gas availability to run the plants.

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Thermal plants are also vulnerable to poor gas transmission infrastructure. Since most of the plants are not co-located with gas production facilities, they obtain their gas from the national gas transmission infrastructure, which has faced challenges of insecurity as well as supply quality i.e., gas purity and gas pressure.

Asked on Tuesday if the situation has improved, considering that operators are committing to stricter contract terms, she said: “Nothing has changed.”

This year, electricity sector operators began negotiating bilateral contracts to enable power purchase agreements in the contract market phase of the market set to begin this July.

NERC is seeking to move the electricity market into a full Transitional Electricity Market (TEM) Phase, which is the intermediary step between an integrated total utility and a fully competitive market structure, with more varied market players structured to bring competition into the market.

After TEM, a multiple-buyer model is supposed to follow and this allows customers and DisCos to buy electricity through bilateral contracts with the bulk trader, in addition to buying directly from the GenCos and independent power producers.

However, a transitional market has immense benefits for consumers.

“This will translate to consumers having more hours of electricity available, which might impact the price they are currently paying. The cost of a kilowatt per hour will increase,” said Habu Sadik, a financial analyst and energy sector expert.

Sadik said the bilateral stage will be brutal and effective. “A DisCo can use any method possible to recover their money because failure to do that will put them out of business.”

It would also open up the sector as DisCos would find value in delivering better supply to customers with the ability to pay including estates and companies.

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Three DisCos – Eko Electricity Distribution Company, Ikeja Electric, and Abuja Electricity Distribution Company – have recently been instructed by NERC, the regulator, to begin the implementation of bilateral contracts with the GenCos.

These negotiations were contending with inefficiencies that have been glossed over in the electricity sector for a long time, analysts say.

Some GenCos have power purchase agreements; others have interim agreements executed pending the formalisation of PPAs. The electricity purchased by NBET through PPAs are resold to DisCos through vesting contracts and transported on a physical network that forms the electricity value chain. Other contractual arrangements include gas supply agreements, gas transportation agreements, and grid connection agreements.

One key challenge is developing a mechanism for the conversion of vesting contracts into bilateral agreements between GenCos and DisCos. The process for such migration or procurement is a crucial factor that needs to be managed within such a framework, experts say.

For these contracts to work and the market to be liquid, DisCos must be credible off-takers and other parties must be credit-worthy. Under the bilateral agreement, DisCos have to fully collect for the value of the energy it received; so a sticking point is who settles the differential since NBET would no longer provide a guarantee.

In the interim, the Nigerian government has set a N5 billion Gas Stabilisation Fund to guarantee gas supplies to the power sector but it’s yet to make a difference because gas suppliers are asking for settlement of their legacy debts before committing more gas molecules 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.

It is still early days yet, but the first month of this bilateral contract has seen a steep decline in the power supplied to consumers.

Source: businessday

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