Nigeria Faces Electricity Tariff Hike After Gas Price Surge

FG’s new gas pricing sets stage for electricity cost increase

by Oluwatosin Racheal Alabi

In an important development on April 2, 2024, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) announced an increase in the domestic base price of natural gas for power generation companies, setting the stage for a potential surge in electricity tariffs. The adjustment sees the price of natural gas rise from $2.18 to $2.42 per metric million British thermal units (MMBTU), a move that could significantly impact the cost of electricity in a country where over 70% of the power is generated from gas-fired plants.

This price revision is part of a broader strategy announced by the NMDPRA, which also includes an increase in the cost of commercial gas from $2.5 to $2.92 MMBTU. The changes come amid persistent appeals from oil and gas companies for a shift to cost-reflective tariffs to foster investment in the sector. However, this stance has faced opposition from President Bola Tinubu, who has argued for the stabilization of the electricity supply before any implementation of cost-reflective tariffs.

The NMDPRA’s decision is grounded in the provisions of the Petroleum Industry Act 2021, which President Tinubu signed into law on August 16, 2021. The Act offers a comprehensive regulatory framework for establishing a market-based pricing regime for domestic gas, aiming to ensure a steady supply of natural gas for the domestic market through voluntary upstream producer contributions. The Act specifies that the domestic base price (DBP) and the marketable wholesale price of natural gas supplied to strategic sectors must be determined by the regulator based on several principles. These include ensuring the price level is sufficient to attract natural gas supplies, aligning the price with the average in major emerging natural gas-producing countries, and linking market-related prices to international benchmarks.

The NMDPRA’s methodology for setting the 2024 domestic base price at $2.42/MMBTU and wholesale prices for natural gas in strategic sectors followed extensive consultations with industry stakeholders, adhering to the guidelines of the Petroleum Industry Act and gas pricing regulations. This development reflects the federal government’s commitment to transitioning towards a cost-reflective electricity tariff, aiming for a fairer pricing mechanism that reflects the true cost of power generation and supply.

Nigeria’s current practice of subsidizing electricity has resulted in significant debts owed to power generation and gas companies, underscoring the urgent need for a more sustainable approach to pricing electricity. The government’s plan to gradually phase out these subsidies and move towards cost-reflective tariffs is seen as a critical step in addressing the financial imbalances in the power sector, promoting investment, and ensuring the long-term viability of Nigeria’s electricity supply.

However, the transition to cost-reflective tariffs raises concerns about the potential impact on consumers, who may face higher electricity bills as a result of the increased costs of natural gas for power generation. This underscores the importance of implementing accompanying measures to mitigate the financial burden on consumers, such as improving the efficiency of the power supply, enhancing the distribution infrastructure, and accelerating the deployment of metering systems to ensure fair and accurate billing.

As Nigeria navigates the complexities of reforming its power sector, the dialogue between the government, regulatory bodies, industry stakeholders, and consumers will be pivotal in shaping a fair, sustainable, and efficient electricity supply system that can support the country’s development ambitions while protecting the interests of its citizens.

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