Nigeria’s Energy Future: More Power to More People

1. Nigeria’s Energy Future: More Power to More People The Nigeria Electricity & Gas Improvement Project (NEGIP) World Bank April 2009

2. Working with the Government of Nigeria the project will: • Provide incremental economic benefits: • Increase in reliable and improved quality of gas supply • Reduction of power losses from the grid, transmission and distribution systems • Improved power quality and reliability • Improved financial health of PHCN • Enhanced customer satisfaction • Also environmental benefits by creating more efficient power sources, productivity and competiveness improvements

3. Political Economy Issues • Project national in scope - more gas equals more power that helps entire country. • Creates better overall energy supply which will also benefits the Delta. • Creates a stronger gas market and utilizes a resource now mostly going to waste. • Leverages more benefits from international oil companies. • Aware of Niger Delta political and social issues

4. Political Economy Issues:Consultation • Multi-stakeholder consultation program during preparation (two already completed, three more planned) • Used to add value to project and facilitate dialogue with government and stakeholders • Proposes a power sector stakeholders forum to provide ideas on how to move sector forward, raise concerns and seek answers

5. Unbundling of the Power Sector: First Stage of Electricity Sector Reforms in 2005 1972--2005 PHCN Power Holding Company of Nigeria After passage of Electric Power Sector Reform Act in 2005 NEPA Nigerian Electric Power Authority • Vertically integrated • monopoly power utility • responsible for • power generation, • power transport (transmission), • and • power delivery to end-users • (distribution) 1 transmission company 11 distribution companies 6 power generation companies These are the PHCN successor companies (legacy plants needing rehabilitation). In addition, Government has embarked on construction of six new power generation plants, all gas-fired (NIPP). Why has this not been sufficient to deliver the expected results? A critical challenge is to ensure adequate gas supply for the new plants before their construction is complete, and also secure gas delivery for old plants so they can operate at full capacity to deliver much-needed power supply

6. Government’s Reform Initiatives: Looking Back and Looking Forward

7. Government’s Reform Initiatives: Looking Back and Looking Forward (2)

8. How Does Government Plan to Achieve its Priority of Restoring Generation to Minimum Acceptable Level and Proceed with a Second Generation of Reforms?

9. Sector Wide • GOVERNMENT’S PROPOSED • MITIGATING ACTIONS • Secure increased gas supply for domestic market • Prepare detailed and viable rehabilitation program for all old generation plant, and embark on urgent repairs • Ensure improved gas quality through bilateral contracts with gas suppliers • Address price distortions in both gas and electricity and implement phased pricing reforms with transitional subsidy to ease impact on consumers • CHALLENGES • Existing thermal plants are losing 1/3 of power generation capacity due to gas shortages • Output far less than installed capacity by some estimates less only 1/3 of capacity actually distributed; old, dilapidated, not maintained, underperforming system • Available gas is of poor quality (impurities and moisture cause damage to existing power plants) • Uneconomic pricing of gas and electricity distorting incentives

10. Generation • GOVERNMENT’S PROPOSED MITIGATING ACTIONS • Increase power generation by completing public sector plants and attracting private power generation (IPPs) • Focus on securing gas supply which is essential for increased power production, whether public or private • CHALLENGES • Severe shortfall in power generated; high public frustration; affecting competitiveness of non-oil sector • Lack of gas availability of required quality; will be a binding constraint when new power plants come online

11. Transmission • GOVERNMENT’S PROPOSED MITIGATING ACTIONS • Physical investment to alleviate bottlenecks; this construction must proceed in parallel with generation efforts so that transmission network is ready to evacuate power from generation plants to distribution network as soon as power is available • Physical investments and upgrades in transmission network also reduce system losses • CHALLENGES • Has capacity to carry no more than 4000MW, while 10,000MW is under construction; without remedial action, power cannot reach end-users • Low reliability and efficiency; high losses of scarce power

12. Distribution • CHALLENGES • High technical and commercial losses, widespread power theft • Below-cost tariffs, poor billing and collection efficiency • GOVERNMENT’S PROPOSED MITIGATING ACTIONS • Targeted investments in best-practice packages as demonstrated in CREST pilots, to improve service delivery and reduce theft of power • Address tariff policy and improve cost-recovery through increased efficiency of the utility (management, operational, technical)

13. Changing Shape of the Nigerian Power Sector: Increase in Number of Stakeholders & Coordination Required for Second Generation of Reforms First stage of Reforms, clarifying roles of power sector institutions • Pre 2005 Institutional Setup • in the Power Sector • (Only Two Actors) • MINISTRY OF POWERAND STEEL • Performed all regulatory functions • Delivered federal budget allocation to NEPA • Responsible for Rural Electrification • All policy-making responsibility, but • no support from analytical unit • NEPA • Power Generation • Transmission • Delivery • Received subsidies to cover • operating shortfall and inefficiency • Received sporadic gas deliveries from • Nigeria Gas Company (NGC), another • parastatal monopoly (gas trader) 2005-2008 -Ministry (policy formulation) -PHCN Companies (18) -NERC (regulatory agency) -REA (rural electrif. agency) -IPPs (2) -New plants under construction NGC (gas trading company-still minor player in the power sector) Second stage of Reforms, to secure Gas Supply and increase private investment in power generation mid 2009 onwards--new stakeholders to include: --International Oil Companies (IOCs) as gas suppliers selling gas bilaterally to domestic customers of which PHCN is the largest ---Strategic Gas Aggregator (to be created) --NGC (as gas transporter only) --Other private sector investors to build gas delivery infrastructure to service domestic market --New IPPs (including IOCs investing in gas-fired power generation plants)

14. TWIN TRACK APPROACH REQUIRED TO SOLVE POWER SECTOR SUPPLY CHAIN PROBLEMS Installed Power Generation Capacity in dilapidated State Requires $$$$ to become fully functional AND Requires reliable and high Quality Gas Supply to Operate GAS MARKET DEVELOPMENT MUST BE SUPPORTED AS PART OF SOLUTION TODEVELOPMENT OF POWER SECTOR SUPPLY CHAIN IDA PRG TEMPLATEWILL BE DEVELOPED AND REPLICATED TOSUPPORT BILATERAL GAS CONTRACT WITHPHCN (IOC MUST MEET ITS DOM.SUPPLY OBLIGATION) IDA WILL ALSO SUPPORT DEVELOPMENT OFACTION PLAN SHOWING CRITICAL REPAIRS NEEDED (REHABILITATION ACTION PLAN) ANDWILL FINANCE CRITICAL NETWORK IMPROVE-MENTS) Planned Capacity also suffers from gas supply shortages Requires reliable and high Quality Gas Supply to Operate PRIVATE POWER INVESTORS(IPPs) WILL BE REQUIRED TO INCREASE GENERATION CAPACITY, COMPLEMENTING THE PUBLIC SECTOR INVESTMENTS More Power Generation Capacity Is needed through Private Investment—Government therefore Trying to Attract IPPs to build more gas-fired Power Plants

15. Nigeria has 7th largest Gas Reserves in the World: Where is the Gas? Crude oil Export markets IOCs DOMESTIC GAS SUPPLY IS ESSENTIAL FOR INCREASED POWER GENERATION MAINLY BEING FLARED/BURNED (no economic value to IOC but flaring imposes great environmental cost) Associated Gas as byproduct of Crude Oil extraction LIMITED AMOUNT OF GAS IS PROCESSED INTO LNG AND EXPORTED WHEN WORLD PRICES ARE HIGH (IOCs must incur investment costs to process LNG, which are recovered through lucrative export markets) DOMESTIC GAS MARKET 86% of demand comes from the PowerSector, i.e. PHCN DOMESTIC MARKET HAS REMAINED UNSERVED IOCs would have to invest in gathering, processing, delivering gas to local clients. PHCN would be the anchor customer, but not attractive, so no market developed 14% others e.g. Fertilizer, Cement Steel, Other Manuf.Ind

16. Coordination Between Gas Market Pricing Reforms and Power Market Pricing Reforms Under the MYTO PHCN will be allowed to charge a higher retail tariff (6 cents to 10 cents) to electricity customers, phased in over four years. Higher power sales revenues will allow PHCN to pay more for gas Under the Gas Master Plan IOCs will receive a phased-in price increase for gas supplied to the domestic power sector from 10 cents to $1.00 in four years; this makes supplying domestic power no less attractive than exporting LNG Bilateral Commercial Contracts between IOCs and PHCN (NGC’s role to be limited to transport of gas only) WBG PARTIAL RISK GUARANTEE WILL HELP THIS BILATERAL CONTRACT TO CLOSE SOONER AND SOLVE POWER SECTOR’S GAS SUPPLY SHORTAGES IOCs have to meet Domestic Supply Obligations (DSO) for gas to PHCN Expected positive externality: Once the IOCs make the necessary investments to deliver gas to the anchor customer, PHCN, there will be a functioning domestic gas market in place that can also reliably supply the remaining 14% of users (fertilizer, cement, steel, and other manufacturing industries which use gas for heating). This is expected to boost domestic competitiveness and non-oil growth. Also, other private parties are expected to invest in ancillary services to the IOCs

17. Gas Market Development: Issues and Challenges • Unclear Institutional Roles • The IOCs sell to the Nigerian Gas Company (NGC) • which owns the transmission network and • also acts as a wholesaler/trader for gas. • NGC has no incentive to insist on high quality • of gas (which would require IOCs • to incur additional processing costs to • remove impurities, moisture • and condensates). • NGC sells to PHCN which is only required to pay • 10 US cents to NGC for the gas, • regardless of how much NGC paid to the IOCs • (plus a transportation charge to NGC) • Uneconomic Pricing • Domestic gas prices for supply to the power sector • (which is the largest customer for domestic gas) • have been fixed administratively • at 10 US cents per mmbtu, • and remained unchanged for many years • Inefficient or Absent • Contractual Arrangements • NGC and PHCN are both government • companies and have an ill-defined relationship • NGC cannot contract with IOCs for • regular supplies since PHCN • is not a reliable off-taker • PHCN’s needs for gas are high, • but its payment record to • NGC is poor and below-cost • Since the relationship is not commercial, • it is not accorded high priority by either • side • Inadequate Gas Infrastructure • No party • (IOCs, NGC, third party private entity, • or PHCN) • has any incentive to invest • in gas infrastructure • in this setting • Without Major Changes, • there is no prospect of adequate • gas delivery to domestic users

18. What is the NEGIP? • Partial risk guarantee of up to USD250 million • Support a series of gas contracts to meet the domestic obligations of international oil companies • Credit of USD187 million to enhance transmission and distribution capacity includes: • Technical assistance to build “best practice”

19. The Proposed Project: IDA Support Covers All Critical Aspects of the Power Supply ChainGas PRG ($250m); Critical Network Investments ($175m); and TA ($12.5m)

20. Environmental and Social Issues • No large scale or irreversible environmental inputs • Follows current power footprint • Potential environmental impacts associated with : • Safety risks in gas pipeline transportation • Rehabilitation of existing electrical transmission and distribution substations and distribution networks Being addressed through: • Pipeline integrity studies • Environmental and social management plans (ESMP) • No land acquisition or restrictions of access that affect livelihoods