CHAPTER sector is an attractive sector for investment due

CHAPTER ONE:
INTRODUCTION

1.0       Introduction

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The Nigeria electricity sector is characterized by huge gap
between the supply and demand of electricity; current power demand is estimated
at 17,520MW including latent and suppressed demand, against 5,300MW peak
generation. To bridge the gap between the demand and supply of power, the country
has set a target of 10.2MW by 2019 and the inclusivity all energy mix for
electricity generation by 2030. In order to achieve this, it is estimated that
the country will require investments in power generating capacity alone of at
least US$ 3.5 billion per annum. Correspondingly, large investments are also
required in the other parts of the supply chain (i.e. the gas-to-power
infrastructure, power transmission and distribution networks).

Nigeria power sector is an attractive sector for investment due to
the growth opportunities in the Nigerian electricity market where demand is far
greater than current supply. The potential for strong economic growth is high
with population advantage of over 193.4 million. Based on the above gas power
expansion plan to year 2020 is part of overall energy mix to increase
generation from current 5,000MW gas thermal plants to above 15,000MW of gas
fired plant.

Currently in Nigeria, there are two main types of power plants
operating in Nigeria; hydro-electric and thermal or fossil fuel power plant.
Currently as announced by the Minister of Power, Works and Housing, Babatunde
Fashola, Nigeria is capable of generating 12000megawatts of electricity if all
defects are fixed right in the industry. Considering the constructed and proposed
power plants in Nigeria, Nigeria has over 32 power plants station combining the
hydro, natural gas, and coal. And under construction gas plant is the Azura
thermal plant power station (IPP). Itobe Power Plant (planned coal power
plant), and hydro-electric constructed power plant include, Kanji power
station, Jebba power station, Shiroro power station, and Zamfara power station.
Under construction and proposed include; Kano power station, Zamfara power
station, Kiri power station, and Mambila power station (Energy Commission of
Nigeria, 2016).

In order to meet the demand for power in the country, influx of
private investment is highly imperative. To attract private investment
financial incentives are also needed. According to NAPIMS, the fiscal
incentives given are: 3-5-year tax holiday, rate of corporate
tax is 30%, IPPs running on gas, coal or renewable energy are also granted
Pioneer Industry Status and the profits saved are expected to be ploughed back
into growing the businesses. More incentives are 20% of the cost of providing
electricity infrastructure to greenfield locations is tax deductible and duty
exemption on expansion and rehabilitation equipment for GenCos and DisCos
networks.

1.1       Problem
Statement

Hence,
the question arises as to whether these Capital incentives are sufficient to
incentivize investors to invest in the gas to power projects to meet the energy
demand in country. What effect would the application of cost depreciation
methods have on the project economics under uncertainty? If there is an effect,
to what magnitude does the cost depreciation methods influence investment
decision outcomes?

The impact of depreciation methods on project economics has
gained less attention as  academic literature
are relatively few. According to Onwuka, Iledare, & Echendu (2012), Cost
depreciation methods can be a form of incentives when formulating fiscal
policies given that it influences the economics in the project evaluation. This
assertion was made as a result of their study which found out that cost
depreciation methods impact investment decision outcomes in petroleum offshore
exploration. It becomes imperative to consider investment in terms of cost
deprecation methods and not just a single method which is used commonly in
economic evaluations assuming non-regulatory practice. Soares, Szklo, & Tolmaasquim (2006)
assessed that accelerated depreciation policies as fiscal incentives would
encourage the increase of combined heat and power plats in Brazil as government
revenue would increase over the initial years thereby increasing the
profitability of investors. Koowattanatianchai, Wang, & Charles (2012)
postulated that financial incentive
given by accelerated depreciation is not as strong as that given by an
investment allowance in promoting investment in clean transport technologies in
Australia.

According
to Jackson, Liu,
& Cecchini (2009) accelerated
depreciation is significantly associated with larger capital investment in
firms while straight line method is significantly associated with smaller
capital investment. Ackermann, Fochmann, &
Wolf (2016) in their experimental study asserted that accelerated
compared to straight-line depreciation can increase the willingness to invest. According
to Jaluakbar & Putra (2017)
accelerated depreciation method does not have a large impact on the economics
of POD with high investment, moreover, accelerated depreciation would speed
returns on investment in POD/POFDs with not too high investment by increasing
the IRR and NPV values

 

1.2       Objective of the Study

The aim of this study is to evaluate the merits of cost
depreciation patterns on the project economics (investment decision indicators)
of a gas powered plant in Nigeria, and then compares the outcomes with incentive
schemes.

The study also examines what the outcome would be if various depreciation
and investment schemes were used simultaneously.

1.3       Justification of the Study

Various studies have evaluated the influence of depreciation
methods on investment decision making (Onwuka, Iledare, & Echendu, 2012; Jaluakbar & Putra,
2017; Soares, Szklo, & Tolmaasquim, 2006; Jackson, Liu, & Cecchini,
2009; Koowattanatianchai, Wang, & Charles, 2012). However, academic
literature on the effect of depreciation methods on gas to power plant assuming
a non-regulatory practice is scarce. Hence the study sets in to examine the
impacts of depreciation mthods on a gas to power plant investment decision and
also proceed to make policy suggestions that would incentivize gas to power
investment in nigeria based findings therein.

1.4       Scope the Study

Scope of the study is limited to the project economics of an open
cycle gas turbine (OCTG) power plant in Nigeria. The study uses a deterministic
model of an open cycle gas turbine (OCTG) power plant with a useful life of
twenty (20) years. Taking into consideration the Net Present Value (NPV),
Internal Rate of Rate (IRR), and Profitability Index (also known as
Benefit-Cost Ratio) of the Gas to power plant.

1.5       Plan of the Study

The study is divided into the following
Chapters. Chapter 2 discusses the background to the study. Chapter 3 reviews
related literature to the study. Chapter 4 then looks at the Theoretical
framework and Methodology of the study. Chapter 5 consists of the analysis of
the study. Finally, Chapter 6 presents the summary, recommendations and
conclusion of the study.

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