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Electricity Tariff Computed With Padded Gas Cost, Expert Claims

July 2, 2020

NERC designed a multiyear tariff order which was to run till 2018 in April 2014. It is the indices of that cost structure that were used to effect the electricity tariff increase in February 2016.

The price Nigerians are paying for power presently is calculated with a bloated gas price, President, Nigeria Consumer Protection Network, Kunle Olubiyo, says.

The Nigeria Electricity Regulatory Commission planned its retrospective review of power cost for 2016 to 2018 in August 2019 based on $3.30 per Million British Thermal Units (MMBTU).

However, the global gas price as at the time of writing this piece is $1.70, according to 


The gas policy designed by the Ministry of Petroleum resources in 2017 set the price of gas produced in the country at average export market price minus the costs of regasification, shipping and liquefaction until there is a mature market that can determine the price based on demand and supply.

Observers fear the heads-ups in the oil and gas sector and their clients in the power industry are operating on a different code from that proposed by the policy.

Olubiyo told SaharaReporters that there was no tariff shortfall in the industry as the Nigeria Electricity Regulatory Commission has been reporting. 

He said the electricity bill given to Nigerians at the moment should be reviewed down rather than up.

He says, “There is no shortfall, it is all based on wrong-footing and wrong computation,” he said.

“If the price of gas is as low as $1.10 in some places, and you are quoting $4.00, are you not over bloating it?” he added.

NERC designed a multiyear tariff order which was to run till 2018 in April 2014. It is the indices of that cost structure that were used to effect the electricity tariff increase in February 2016.

Between the price adjustment implemented in November 2014 and February 2016, much of the indices weighted to arrive at the present power cost had already changed, leading to the cries of tariff shortfall that are still being echoed till date.

The power sector recovery programme developed by the federal government in 2017 showed that the federal government set aside N1.93tn to take care of its failure to review the tariff since the last increase in February 2016.

The gas price used in determining the tariff order for 2015 to 2018 was $1.80 per MMBTU and a transportation cost of 30 cents, according to the Multi-Year Tariff Order for 2015-2018 released by NERC.

This means the generation companies were paying $2.10 for every unit of gas purchased. However, NERC said the Nigeria Gas Company (NGC) would at a later time justify the need to increase the transport cost to $0.80 per MMBTU.

In November 2014, NERC, the ministries of power and petroleum as well as the central bank also agreed to increase the unit price of gas to $2.50, add the NGC requested price of 0.80 and it becomes $3.30.

Checks, however, show that both the actual price of $2.10 and the agreed price of $3.30 were lower than the global price of $4.37 in 2014. Just like crude oil, the price of gas changes every day. The lowest gas price in 2014 was $2.74.

In 2015, the average gas price of $2.62 was lower than $3.30 but higher than $2.50 and $2.10. It, however, reached a low of $1.63. In 2016, the trend stayed the same but the cost dropped to a year-low of $1.49.

In 2017, the price of the commodity, averaged at $2.99, was still lower than $3.30. The cost of the commodity reached a low of $2.44. The price of the commodity went above the $3.00 ceiling, averaging $3.15 in 2018. It reached a low of $2.44.

When NERC released its minor adjustments for 2016 to 2018, which it failed to make every six months as mandated by the Electricity Power Sector Reform Act (EPSRA), the average price of the commodity was $2.56 and its lowest was $1.75. It, however, reached a high of $4.25.

Since 2020, when the increase in electricity tariff has been repeatedly pushed back, the average gas price has been $1.81 – lower than the $2.50 deal reached between NERC, the power and petroleum ministries, as well as the CBN.

The belief that certain GenCos purchase the commodity for $4.00 and above, coupled with the fact that the price of natural gas has declined, informs Olubiyo’s call for a reduction in the electricity tariff, rather than an increase.

He said since the country does not import the natural gas to feed the thermal plants that generate 80 percent of its distributed energy, the whole transaction should be naira-denominated.

“Certain percent of our gas should go to domestic obligations so it can be sold to those that are bottling gas, those that are using it for industrial use and power and it should be sold in naira,” he said.

“Once they permanently change the framework, it will crash the price of gas and reduce the electricity tariff,” he added.

Although Olubiyo estimates that natural gas forms 75 per cent of the cost input in electricity generation, it is one of several indicators that go into the final tariff released by the regulator.

Asides from the price of gas, three of the other major indices are the inflation rate which has soared from 8.8 per cent in 2014 to 12.40 per cent in May 2020, the forex rate which has soared from N198 to the NAFEX window rate of N388 to a dollar and the average cost of generating a kilowatt-hour of electricity, which sources estimate stands at N50 as against the N13 estimate of 2016.

If gas is priced in naira as Olubiyo suggests, however, there might be no need to take the forex rate into account.

Wumi Iledare, a professor of Petroleum Economics and Policy Research, shares Olubiyo’s sentiments.

“You have to look at the market you are in and do what they call ‘optimal return on investment strategy.’ And that should be what will determine your price,” he said. “There is a domestic supply obligation; you can’t be looking at what they are pricing abroad as a basis for the Nigerian economy.”

Observers say the 2008 and 2017 gas policies call for a domestic supply obligation to be obeyed by gas producers, processors and suppliers. The federal ministry of petroleum has so far been unable to get the gas industry to sell a portion of the country’s daily generation of an estimated 8 billion cubic feet in naira.

Olubiyo hopes the government will review the gas pricing framework before the first quarter of 2021 when the electricity price will be revisited.