1. The Nigeria Electricity & Gas Improvement Project (NEGIP) World Bank April 2009 1

2. Working with the Government of Nigeria the project will: 2 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 3

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 4

5. Unbundling of the Power Sector: First Stage of Electricity Sector Reforms in 2005 NEPA Nigerian Electric Power Authority PHCN Power Holding Company of Nigeria After passage of Electric 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 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 Vertically integrated monopoly power utility responsible for power generation, power transport (transmission), and power delivery to end-users (distribution) 1972--2005 5

6. 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 6

7. 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) 7

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9. Sector Wide 9 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

10. 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 10 Generation

11. 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 11 Transmission

12. 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) 12 Distribution

13. Changing Shape of the Nigerian Power Sector: Increase in Number of Stakeholders & Coordination Required for Second Generation of Reforms Pre 2005 Institutional Setup in the Power Sector (Only Two Actors) MINISTRY OF POWER AND 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) 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 13

14. Installed Power Generation Capacity in dilapidated State Requires $$$$ to become fully functional AND Requires reliable and high Quality Gas Supply to Operate Planned Capacity also suffers from gas supply shortages Requires reliable and high Quality Gas Supply to Operate 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 TO DEVELOPMENT OF POWER SECTOR SUPPLY CHAIN IDA PRG TEMPLATE WILL BE DEVELOPED AND REPLICATED TO SUPPORT BILATERAL GAS CONTRACT WITH PHCN (IOC MUST MEET ITS DOM.SUPPLY OBLIGATION) IDA WILL ALSO SUPPORT DEVELOPMENT OF ACTION PLAN SHOWING CRITICAL REPAIRS NEEDED (REHABILITATION ACTION PLAN) AND WILL 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 14

15. Nigeria has 7th largest Gas Reserves in the World: Where is the Gas? DOMESTIC GAS SUPPLY IS ESSENTIAL FOR INCREASED POWER GENERATION IOCs Crude oilExport markets Associated Gas as byproduct of Crude Oil extraction MAINLY BEING FLARED /BURNED (no economic value to IOC but 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 are recovered through lucrative export markets) 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 DOMESTIC GAS MARKET 86% of demand comes from the Power Sector, i.e. PHCN 14% others e.g. Fertilizer, Cement Steel, Other Manuf.Ind 15

16. Coordination Between Gas Market Pricing Reforms and Power Market Pricing Reforms 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 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 IOCs have to meet Domestic Supply Obligations (DSO) for gas to 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 services to 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 16

17. 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 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 Gas Market Development: Issues and Challenges 17

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” 18

19. 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 OutputsStakeholder 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 19

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 20