The Nigeria Electricity & Gas Improvement Project (NEGIP)

World BankApril 2009

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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

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

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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

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NEPANigerian Electric Power Authority

PHCNPower Holding Company

of Nigeria

After passage ofElectric Power Sector Reform Act in 2005

6 power generation companies

1 transmission company 11 distribution

companies

These are the PHCN successor companies (legacy plants needing rehabilitation).

In addition, Government has embarked on construction of six new powergeneration 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

Vertically integratedmonopoly power utilityresponsible for power generation,power transport (transmission), andpower delivery to end-users (distribution)

1972--2005

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Government’s Reform Initiatives: Looking Back and Looking Forward

PRE- REFORM SITUATION

REFORM (OR INVESTMENT) IMPLEMENTED

IMPACT OF REFORM TO DATE

Institutional: Monopoly parastatal utility (NEPA) with inefficient resource allocation, unclear pricing structure, not commercially viable, highly dependent on public subsidy, low accountability to customers

Passage of Electric Power Sector Reform Act of 2005

Break-up of monopoly utility into separate generation, transmission and distribution companies

Regulation: Ministry in charge of sector regulation; uneven and non-transparent

Creation of Regulatory Agency (NERC) in 2005

•NERC introduces new process of reviewing Power Purchase Agreements in 2007 (increased transparency)•NERC announces Multi Year Tariff Order in 2008 (greater investor confidence, greater certainty)

Access: Ministry in charge of rural electrification, inefficient, many unfinished projects

Creation of Rural Electrification Agency (REA) in 2005

•Rural electrification addressed more systematically•Transparent budget allocation and contract awards

UNFINISHED AGENDA

Institutional: Successor companies to strengthen performance (management, resource flows, coordination, capacity building) and eventual privatization

Regulation: (i) Implementation of MYTO and design of transitional subsidy mechanism; (ii)implem. of IPP contracts

(iii) Review tariff policy

Access: increase power supply and upgrade T&D networks; solve gas shortage for power generation

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PRE- REFORM SITUATION

REFORM (OR INVESTMENT) IMPLEMENTED

IMPACT OF REFORM TO DATE

Very Limited Power Available (installed capacity of 5000MW of which 3,000MW operational, against estimated demand of 10,000MW)

•Expansion of public sector power supply through investment in National Integrated Power Program (NIPP). This is mainly a public sector investment effort to add 7000MW of gas-fired power plants in the Niger Delta•Private Investors (IPPs) encouraged through balanced PPAs

•NIPP Plants not yet complete•New measure to improve gas supply to plants beset with Gas shortages, and other problems

Dilapidated Network•Transmission network collapse, widespread outages.•Distribution network in need of technology upgrading

NIPP and IDA investments to upgrade T&D networks;

Transmission Company better managed

•System losses declining•Private management of Distribution networks•Improved revenue collection

UNFINISHED AGENDA

Generation: (i) rehabilitate old NEPA plants; (ii) complete NIPP construction; (iii) ensure adequate gas supply to all gas-fired plants; (iv) incentivize private investors to build power plants and ensure adequate domestic gas supply through well-functioning gas market

Transmission/Distribution: upgrade networks to enable power delivery to paying customers, and to ensure reduction of losses.

Technical Knowledge:

Upgrade sector oversight through informed policy choices and analysis

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

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Sector Wide

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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

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

• 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

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

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Generation

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

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

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Transmission

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)

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Distribution

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 coveroperating 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 constructionNGC (gas trading company-still minor player in the power sector)

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)

First stage of Reforms, clarifying roles of power sector institutions

Second stage of Reforms, to secure Gas Supply and increase private investment in power generation

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Installed Power GenerationCapacity in dilapidated

StateRequires $$$$ to become

fully functionalAND

Requires reliable and highQuality Gas Supply to Operate

Planned Capacity also suffers from gas supply shortagesRequires reliable and high

Quality Gas Supply toOperate

More Power Generation Capacity Is needed through

Private Investment—Government therefore

Trying to Attract IPPs to build more gas-fired

Power Plants

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)

PRIVATE POWER INVESTORS (IPPs) WILL BE REQUIRED TO INCREASE GENERATION CAPACITY, COMPLEMENTING THE PUBLIC SECTOR INVESTMENTS

TWIN TRACK APPROACH REQUIRED TO SOLVE POWER SECTOR SUPPLY CHAIN PROBLEMS

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Nigeria has 7th largest Gas Reserves in the World:

Where is the Gas?

DOMESTIC GAS SUPPLY IS ESSENTIAL FOR INCREASED POWER GENERATION

IOCs

Crude oil Export markets

Associated Gasas byproduct ofCrude Oil extraction

MAINLY BEING FLARED /BURNED

(no economic value to IOCbut flaring imposes great environmental

cost)

LIMITED AMOUNT OF GAS IS PROCESSED INTO LNG AND EXPORTED WHEN WORLD PRICES ARE HIGH(IOCs must incur investment costs to process LNG, which arerecovered through lucrative export markets)

DOMESTIC MARKET HAS REMAINED UNSERVEDIOCs 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

DOMESTIC GAS MARKET

86% of demand comes from the PowerSector, i.e. PHCN

14% others e.g. Fertilizer, CementSteel, Other Manuf.Ind

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Coordination Between Gas Market Pricing Reforms and Power Market

Pricing Reforms

Under the Gas Master PlanIOCs will receive a phased-in

price increase for gassupplied to the domestic power sector

from 10 cents to $1.00 in four years; this makessupplying domestic power no less attractive

than exporting LNG

Under the MYTOPHCN 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

IOCs have to meetDomestic Supply

Obligations (DSO) for gasto PHCN

Bilateral Commercial

Contracts between IOCs

and PHCN

(NGC’s role to be

limited to transport of

gas only)

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 servicesto the IOCs

Expected positive externality:

WBG PARTIAL RISK GUARANTEE

WILL HELP THIS BILATERAL CONTRACT TO CLOSE

SOONER AND SOLVE POWER SECTOR’S GAS SUPPLY

SHORTAGES

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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

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)

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 eitherside

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

Gas Market Development: Issues and Challenges

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What is the NEGIP?Partial risk guarantee of up to USD250 millionSupport a series of gas contracts to meet the

domestic obligations of international oil companiesCredit of USD187 million to enhance transmission

and distribution capacity includes:Technical assistance to build “best practice”

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The Proposed Project: IDA Support Covers All Critical Aspects of the Power Supply Chain

Gas PRG ($250m); Critical Network Investments ($175m); and TA ($12.5m)

Element of Government Strategy

Proposed Bank Assistance /

Project Component

Outputs Stakeholder Comments Received

(to be added)

•ENSURE ADEQUATE DOMESTIC GAS SUPPLY TO SUSTAIN POWER GENERATION, BY CREATING ORDERLY MARKET•PRICE INCREASE FOR DOMESTIC GAS OFFERED TO IOCs IN EXCHANGE FOR DOMESTIC SUPPLY OBLIGATION (DSO)

•Support gas market development by providing Gas PRG as assurance to IOCs concerned about PHCN’s payment record. PRG will backstop PHCN’s payment obligations for domestic gas supply / (first Gas PRG is test case to develop template, and will be followed by 5-6 more PRGs with other IOCs) ($250m)

•Bilateral contracts between IOCs and PHCN for definite volumes of gas supply to power plants at specified quality standards•Required Gas infrastructure expected to be built by private sector (facilities for gathering, processing, transporting) in order to honor contractual obligations

•INCREASE POWER GENERATION CAPACITY BY ATTRACTING PRIVATE POWER PLANTS TO DIVERSIFY AND ENSURE RELIABILITY OF POWER SUPPLY•PRICE INCREASE FOR POWER THROUGH IMPLEMENTATION OF MYTO

•Support increased power generation to close demand-supply gap by (i) rehabilitation of old public generation capacity and (ii) providing Power PRG as assurance to private power investors concerned about PHCN’s payment record and financial capacity to buy their power

•Rehabilitation Action Plan for all PHCN power plants•Bilateral contracts between new IPPs and PHCN (power purchase agreements)•Government commits resources to start implementing rehab. plan •Action Plan for MYTO and implementation of transitional subsidy

•INVESTMENT IN MPROVING NETWORK EFFICIENCY AND •TA TO SUPPORT ONGOING SECTOR REFORMS

•Complementary IDA Credits to fund construction for elimination of network bottlenecks ($150m)•Technical Assistance ($12.5m)

•Procurement packages for best-practice targeted investments•Knowledge products delivered to key policymakers

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Environmental and Social Issues

No large scale or irreversible environmental inputsFollows current power footprintPotential environmental impacts associated with :

Safety risks in gas pipeline transportationRehabilitation of existing electrical transmission and distribution

substations and distribution networks

Being addressed through:Pipeline integrity studiesEnvironmental and social management plans (ESMP)

No land acquisition or restrictions of access that affect livelihoods

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