Type: Evaluation Essays
Sample donated: Ann Long
Last updated: March 19, 2019
0 IntroductionThe Nigeria electricity sector is characterized by huge gapbetween the supply and demand of electricity; current power demand is estimatedat 17,520MW including latent and suppressed demand, against 5,300MW peakgeneration. To bridge the gap between the demand and supply of power, the countryhas set a target of 10.2MW by 2019 and the inclusivity all energy mix forelectricity generation by 2030.
In order to achieve this, it is estimated thatthe country will require investments in power generating capacity alone of atleast US$ 3.5 billion per annum. Correspondingly, large investments are alsorequired in the other parts of the supply chain (i.e.
the gas-to-powerinfrastructure, power transmission and distribution networks).Nigeria power sector is an attractive sector for investment due tothe growth opportunities in the Nigerian electricity market where demand is fargreater than current supply. The potential for strong economic growth is highwith population advantage of over 193.4 million. Based on the above gas powerexpansion plan to year 2020 is part of overall energy mix to increasegeneration from current 5,000MW gas thermal plants to above 15,000MW of gasfired plant.Currently in Nigeria, there are two main types of power plantsoperating in Nigeria; hydro-electric and thermal or fossil fuel power plant.Currently as announced by the Minister of Power, Works and Housing, BabatundeFashola, Nigeria is capable of generating 12000megawatts of electricity if alldefects are fixed right in the industry. Considering the constructed and proposedpower plants in Nigeria, Nigeria has over 32 power plants station combining thehydro, natural gas, and coal.
And under construction gas plant is the Azurathermal plant power station (IPP). Itobe Power Plant (planned coal powerplant), and hydro-electric constructed power plant include, Kanji powerstation, Jebba power station, Shiroro power station, and Zamfara power station.Under construction and proposed include; Kano power station, Zamfara powerstation, Kiri power station, and Mambila power station (Energy Commission ofNigeria, 2016).In order to meet the demand for power in the country, influx ofprivate investment is highly imperative. To attract private investmentfinancial incentives are also needed.
According to NAPIMS, the fiscalincentives given are: 3-5-year tax holiday, rate of corporatetax is 30%, IPPs running on gas, coal or renewable energy are also grantedPioneer Industry Status and the profits saved are expected to be ploughed backinto growing the businesses. More incentives are 20% of the cost of providingelectricity infrastructure to greenfield locations is tax deductible and dutyexemption on expansion and rehabilitation equipment for GenCos and DisCosnetworks. 1.1 ProblemStatementHence,the question arises as to whether these Capital incentives are sufficient toincentivize investors to invest in the gas to power projects to meet the energydemand in country. What effect would the application of cost depreciationmethods have on the project economics under uncertainty? If there is an effect,to what magnitude does the cost depreciation methods influence investmentdecision outcomes? The impact of depreciation methods on project economics hasgained less attention as academic literatureare relatively few. According to Onwuka, Iledare, & Echendu (2012), Costdepreciation methods can be a form of incentives when formulating fiscalpolicies given that it influences the economics in the project evaluation. Thisassertion was made as a result of their study which found out that costdepreciation methods impact investment decision outcomes in petroleum offshoreexploration.
It becomes imperative to consider investment in terms of costdeprecation methods and not just a single method which is used commonly ineconomic evaluations assuming non-regulatory practice. Soares, Szklo, & Tolmaasquim (2006)assessed that accelerated depreciation policies as fiscal incentives wouldencourage the increase of combined heat and power plats in Brazil as governmentrevenue would increase over the initial years thereby increasing theprofitability of investors. Koowattanatianchai, Wang, & Charles (2012)postulated that financial incentivegiven by accelerated depreciation is not as strong as that given by aninvestment allowance in promoting investment in clean transport technologies inAustralia.Accordingto Jackson, Liu,& Cecchini (2009) accelerateddepreciation is significantly associated with larger capital investment infirms while straight line method is significantly associated with smallercapital investment. Ackermann, Fochmann, &Wolf (2016) in their experimental study asserted that acceleratedcompared to straight-line depreciation can increase the willingness to invest. Accordingto Jaluakbar & Putra (2017)accelerated depreciation method does not have a large impact on the economicsof POD with high investment, moreover, accelerated depreciation would speedreturns on investment in POD/POFDs with not too high investment by increasingthe IRR and NPV values 1.
2 Objective of the StudyThe aim of this study is to evaluate the merits of costdepreciation patterns on the project economics (investment decision indicators)of a gas powered plant in Nigeria, and then compares the outcomes with incentiveschemes. The study also examines what the outcome would be if various depreciationand investment schemes were used simultaneously.1.
3 Justification of the StudyVarious studies have evaluated the influence of depreciationmethods on investment decision making (Onwuka, Iledare, & Echendu, 2012; Jaluakbar & Putra,2017; Soares, Szklo, & Tolmaasquim, 2006; Jackson, Liu, & Cecchini,2009; Koowattanatianchai, Wang, & Charles, 2012). However, academicliterature on the effect of depreciation methods on gas to power plant assuminga non-regulatory practice is scarce. Hence the study sets in to examine theimpacts of depreciation mthods on a gas to power plant investment decision andalso proceed to make policy suggestions that would incentivize gas to powerinvestment in nigeria based findings therein.
1.4 Scope the StudyScope of the study is limited to the project economics of an opencycle gas turbine (OCTG) power plant in Nigeria. The study uses a deterministicmodel of an open cycle gas turbine (OCTG) power plant with a useful life oftwenty (20) years. Taking into consideration the Net Present Value (NPV),Internal Rate of Rate (IRR), and Profitability Index (also known asBenefit-Cost Ratio) of the Gas to power plant.
1.5 Plan of the StudyThe study is divided into the followingChapters. Chapter 2 discusses the background to the study. Chapter 3 reviewsrelated literature to the study. Chapter 4 then looks at the Theoreticalframework and Methodology of the study.
Chapter 5 consists of the analysis ofthe study. Finally, Chapter 6 presents the summary, recommendations andconclusion of the study.