The denomination of the price of gas sold to electricity generation companies in the United States dollars is sending ripples across the entire value chain of the Nigerian electricity supply industry.
The Gencos have raised concern about the issue, with the distribution companies also worried that it has contributed to a major mismatch between the invoices they receive and the revenue they collect from consumers.
But gas producers said their contracts should be denominated in dollars because their plants were executed in the same currency.
They also said being paid in naira, using the prevailing official exchange rate, had exposed them to significant foreign exchange risk, which was threatening the continuity of their businesses
About 80 per cent of the electricity generated in the country is from gas-fired power plants, with hydro plants contributing the rest.
The President, Nigerian Gas Association, Mr. Dada Thomas, said the nation could be plunged into darkness if the forex risk remained unresolved amid a debt of over $500m owed gas producers by the power sector.
He stated, “The gas contracts are denominated in US dollars but are paid in naira at the CBN rate. What it means is that gas suppliers are being made to bear the foreign exchange exposure for the entire power sector.
“We are the ones being punished by the entire electricity value chain for taking a risk in putting down gas plants to feed the Gencos.”
Thomas, who is the Chief Executive Officer of Frontier Oil Limited, described the situation as unfair, saying gas producers should be paid in dollars, because “we spend dollars to generate the product.”
“My preference is that we get paid in dollars. But if that is not doable, let the central bank provide a platform for gas producers to be able to source dollars at the same rate at which we are paid our gas invoices so that we don’t lose any money,” he added.
According to him, gas producers are being paid at N305/dollar and then they have to go and look for dollar at N365.
The NGA president said, “We lose N60 for every dollar sale we made. That means the business will go bankrupt; it is just a matter of time. We are drowning.
“If that happens, Nigeria will be plunged into darkness because we will all stop supplying gas. It means that no new gas project can be undertaken because the investors know that they cannot get their dollars back.”
The Nigerian Electricity Regulatory Commission in 2014 approved a new gas-to-power pricing benchmark of $2.50 per thousand cubic feet from $1.5 per mcf, and $0.80/mcf as transportation costs for new capacity.
The Executive Secretary, Association of Power Generation Companies, Dr. Joy Ogaji, said the Gencos would like the price of gas being sold to them to be denominated in naira.
She said, “Why should we pay for gas in dollars? Don’t you see the challenges of foreign exchange? You have to go to the black market to be able to change naira to dollars before you can buy gas.
“We pay the naira equivalent and some of the companies expect that we pay in dollars.”
The government-owned Nigerian Bulk Electricity Trading Plc buys electricity in bulk from the generating companies and sell to the Discos, which then supply it to the consumers.
“Clearly, it (dollar-denominated gas pricing) has an impact on the retail end of the value chain,” the Chief Executive Officer, Association of Nigerian Electricity Distributors, an umbrella body for the Discos, Mr. Azu Obiaya, said.
According to him, under the minor review of electricity tariff, there is a requirement that gas prices flow through to consumers and the tariff be adjusted for any forex impact.
“So, if the tariff is not adjusted under the minor review, it means that the NBET will continue to bill the Discos for energy that has increased by the cost of that forex impact; but the Discos cannot recover it from their customers,” Obiaya said.
He stressed the need for an adjustment that would put everything in realignment.
The Multi-Year Tariff Order for 2015 to 2018 authorised NERC to provide for minor reviews of the tariff to be conducted bi-annually to update the total cost of electricity.
The variables that are to be considered during the review are the cost of fuel (gas price), foreign exchange rates, inflation rate, and actual available generation capacity.
Obiaya stated, “You have gas prices in dollars but you have your electricity tariff in naira, which is not reflecting the devaluation of the naira. There is a major mismatch, which is contributing significantly to the inflated invoices that the Discos are receiving.
“We have always agreed with the Gencos’ position that the government needs to give consideration to pricing gas in naira, because it will do two fundamental things.”
According to the ANED CEO, it will make the market more aligned and minimise the impact of price increase on the consumers at the retail end.
The regulator, NERC, said in February this year that it had proposed to the government the option of pricing gas in the local currency in order to mitigate the foreign exchange risk, which it described as the major cause for the gap in tariff.
“But we haven’t heard anything specifically in terms of government’s position on this proposal,” Obiaya said.
The spokesperson for NERC, Mr. Usman Arabi, did not immediately respond to an emailed message sent to him on Friday seeking comment on the outcome of the proposal.
The Chief Executive Officer, Eko Electricity Distribution Company, Mr. Oladele Amoda, told our correspondent that there had been several tariff reviews, which were not implemented.
Amoda explained, “We still charge the customers on N197 to a dollar; they (Gencos) charge us on N305/dollar every month. If it goes up, they use the prevailing exchange rate. That is why we are saying let us have a tariff review to reflect this.
“Then, we are also saying that the government should see to it that dollar-denominated invoices should be converted to naira. They are looking at finding a lasting solution.”
The NGA president said the association met with the CBN governor in March; had made representations to the Federal Ministry of Investment, Trade and Industry; and presented many papers to the Minister of Power, Works and Housing, Mr. Babatunde Fashola, that it was not right for the gas supplier to bear the forex risk.
“They have not yet come up with a solution,” he said.