In this study the financial and economic feasibility of OnuakuRiver in Aku community of Abia state was evaluated using indicators like the Net Present value (NPV), Payback Period, Benefit cost ratio (BCR) and Internal Rate of Return (IRR) to ascertain the feasibility and viability of the project. Here the breakeven point of the project, profit, cash flow, present and future value of project as well as the expected yearly revenue of the project is shown in advance within the economic life or span of the project. Furthermore a sensitivity analysis to show the responds of the project to both variation in investment cost and the price of electricity, was also carried out using a Microsoft excel based platform to carry out the computations.With an investment cost of less than N12million, a net present value of three million six hundred and thirty thousand, fifty seven naira fifty eight kobo,(N3,630,057.58) was gotten at the 30 years life span of the project with an internal rate of return of 14.25%. Also from the analysis a project payback period of ten years which is timely enough for the client or investor to recover the investment made on a project that can span up to thirty years (minimum) – fifty years (maximum). The benefit cost ratio of the project from analysis is 1.23 which is above unity. Furthermore, sensitivity of the project to variations in investment cost showed that the project is sensitive to variation in the investment cost, as a 30% increase in investment cost throws the project into a negative NPV, and an IRR less than the hurdle rate of 12%. The sensitivity to the variation in the price of electricity shows how the project responds to reduction in electricity price, as a reduction by 20% in electricity price, throws the project into a negative net present value making the project not viable at 20% reduction in electricity price. Hence the results from the analysis above have provided additional information for the decision makers, client and the design engineer to see reasons why this project should be embarked on.
TABLE OF CONTENTS
Title Page – – – – – – – – – i Declaration – – – – – – – – ii Certification – – – – – – – – – iii Dedication – – – – – – – – – iv Acknowledgement – – – – – – – – v Abstract – – – – – – – – – vi Table of content – – – – – – – – x List of Tables – – – – – – – – – xi List of Figures – – – – – – – – – xii List of Abbreviations – – – – – – – – xiii CHAPTER ONE: Introduction 1.1 Background of Study – – – – – – – 1 1.1.1 Hydropower – – – – – – – – 2 1.1.2 Small hydro project development – – – – – 3 1.1.3 Types of Small hydropower developments – – – – 4 1.1.4 Hydro Projects Engineering – – – – – – 7 1.2 Statement of Problem – – – – – – – 9 1.3Aim and Objectives – – – – – – – 10 1.4Significance of Study – – – – – – – 11 1.5 Scope – – – – – – – – – 11 CHAPTER TWO: Literature Review 2.1 Hydropower – – – – – – – – 12
2.1.1 History of hydropower – – – – – – – 12 2.1.2Definition of hydropower Energy – – – – – 12 2.2 Small Hydropower – – – – – – – 13 2.2.1 Definition of Small hydropower – – – – – 13 2.2.2 Small hydropower Potential in Nigeria – – – – – 14 2.3 Government Policy towards SHP – – – – – – 17 2.4 Financing SHP in Nigeria – – – – – – – 19 2.5 Components of Small hydropower schemes – – – – 20 2.6 Advantages and Disadvantages – – – – – – 20 2.7 Economic Analysis – – – – – – – 24 2.7.1 Components of economic Analysis – – – – – 25 2.8 Methods of economic Evaluation – – – – – – 26 2.8.1 Static method – – – – – – – – 27 2.8.2 Dynamic Methods – – – – – – – 28 2.9 Sensitivity Analysis – – – – – – – 30 2.10 Onuaku Community Brief – – – – – – 31 2.11 Review of Past Works – – – – – – – 31 CHAPTER THREE: Methodology 3.1 Introduction – – – – – – – – 33 3.2 Description of the Project Site – – – – – – 34 3.3 Feasibility Analysis – – – – – – – 34 3.4 Load Survey Analysis – – – – – – – 36
CHAPTER FOUR: Results and Discussions 4.1 Results of Study – – – – – – – – 39 4.1.1 Cost of Installation – – – – – – – 40 4.1.2 Energy Generation – – – – – – – 40 4.1.3 Expected Revenue – – – – – – – 41 4.1.4 Depreciation – – – – – – – – 42 4.1.5 Operation and Maintenance Cost – – – – – 42 4.1.6 Alternative Energy Cost Per year – – – – – 43 4.2 Payback Period – – – – – – – – 43 4.3 Net Present Value – – – – – – – – 43 4.4 Internal Rate of Return – – – – – – – 45 4.5 Benefit Cost Ratio – – – – – – – – 47 4.6 Generation Profit – – – – – – – – 49 4.7 Sensitivity Analysis – – – – – – – 51 4.7.1 Sensitivity to investment cost – – – – – – 51 4.7.2 Sensitivity to Electricity price – – – – – – – 51 4.8 Discussions – – – – – – – – 51 4.8.1 Investment cost, O&M and Expected benefit – – – – 52 4.8.2 Economic Indicators – – – – – – 54 4.8.3 Generation Profit – – – – – – – 56 4.8.4 Sensitivity Analysis – – – – – – – 56 CHAPTER FIVE: Conclusion and Recommendation 5.1 Conclusion – – – – – – – – 58 5.2 Recommendation – – – – – – – – 59
References – – – – – – – – – 61
1.1 Background of the Study
All living things depend on energy for survival, and modern civilizations will continue to thrive only if existing sources of energy can be developed to meet the growing demands, hence Energy is “Life” Energy is “Existence”, it is the dividing line between the rich and the poor, between the developed, developing and the underdeveloped (Ohunakins et al., 2011). For a country to grow beyond its subsistence economy, tackle the problem of poverty, the country will need to have minimum access to energy services for the larger proportion of its population (Ohunakins et al., 2011). However, in Nigeria energy supply has been epileptic in nature, causing the socio-economic status of the country to be downgraded (Ohunakins et al., 2011). Nigeria’s energy demand increases with an increase in population, but power supply has remained unreliable and insufficient with a country generation capacity of about 3500 MW as at 2011 (Okeke, 2011). Nigeria as a nation has started feeling the impact of adverse climate change, that may be attributed to the overdependence on fossil fuel fired power plants which is the main source of greenhouse gas emissions (GHG), coupled with activities of manufacturing industries, oil prospecting firms and deforestation, to mention but a few.
Renewable energy (RE) has been identified as the only alternative of addressing these problems. RE is energy derived from an energy source that can generate itself through natural processes within a relatively short period; unlike fossil type resources that take millions of years to form and which is not regenerative. Examples of such energy sources include: Hydropower, wind, solar, tidal, biomass, wave, ocean thermal and
geothermal (RETscreen, 2012). Hydropower amongst other renewable sources mentioned offers a clean and sustainable source for rural power, 24hours a day and even all through the year, provided there is water to power the turbines, causing little or no emissions to the ecosystem (RETScreen, 2005). Inspite of abundance water resources that abound in all states and local government areas in Nigeria, hydropower remains an underutilized resources for electric power generation in Nigeria.
Hydropower is the power generated by using the potential energy stored in flowing water. It is a renewable energy source suitable for rural electrification in developing countries like ours. It is a proven technology that can be connected to the main grid, used as a stand- alone/ off-grid mode. When integrated with irrigation systems and community water supply scheme, the cost sharing effect reduces the cost of electricity production. Hydro power plants are robust and long lasting, easier to install and manage (compared to large hydro power installations) and may not require high investments in transmission lines, when connected in off-grid/decentralized modes, since end users are quite close to the source of generation. In China, the use of small scale hydropower to achieve rural electrification, started in the 1950s, with a strong lead from the government; presently, there are over 600 counties (accounting for 30% of all china counties) that rely mainly on small scale hydropower for electricity,serving over 300 million people (NASENI, 2010).
To overcome the increasing demand for electricity, new energy facilities are under construction all around the world. Fossil fuel fired power plants are the main source of greenhouse gas emissions which increase the threat of climate change. The countries all
around the world are trying to supply their increasing demands for electricity with clean energy technologies. Hydropower as sustainable and renewable resource is one of the major sources of power, which the country looks forward to in the nearby future, though a significant portion of the economically viable hydropower potential of Nigeria has not been harnessed, thus very few hydropower plants are under construction and in program to harness this economically viable potential (NASENI,2010).
1.1.2 Small hydro project development
The development of small hydro power (SHP) projects typically takes from 1 to 5 years to complete, from conception to final commissioning (ESHA, 1998). This time is required to undertake studies and design work, to receive the necessary approvals and to construct the project. Once constructed, small hydro plants require little maintenance over their useful life, which can be well over 50 years (ESHA, 1998). Normally, one part-time operator can easily handle operation and routine maintenance of a small hydro plant, with periodic maintenance of the largercomponents of a plant usually requiring help from outside contractors.The technical and financial viability of each potential small hydro project are very site specific. Power output dependson the available water (flow) and head(drop in elevation). The amount of energy that can be generated depends on the quantity of water available and the variability of flow throughout the year. The economics of a site depends on the power (capacity) and the energy that a project can produce, whether or not theenergy can be sold, and the price paid for the energy. In an isolated area (off-grid and isolated-grid applications) the value of energy generated for consumption is generally significantly more than for systems that are connected to a central-grid. However, isolated areas may not be able to use all the available energy from the small hydro plant and, may be unable to use the energy when it is available because of seasonal variations in water flow and energy consumption. A conservative,
“rule-of-thumb” relationship is that power for a hydro project is equal to seven times the product of the flow (Q) and gross head (H) at the site (P = 7QH)(RetScreen, 2012). Producing 1 kW of power at a site with 100 m of head will require one-tenth the flow of water that a site with 10 m of head would require. The hydro turbine size depends primarily on the flow of water it has to accommodate. Thus, the generating equipment for higher-head, lower-flow installations is generally less expensive than for lower-head, higher-flow plants. The same cannot necessarily be said for the civil works components of a project which arerelated much more to the local topography and physical nature of a site.
1.1.3 Types of small hydro developments
Small hydro projects can generally be categorized as either “run-of-river developments” or“water storage (reservoir) developments,” which are described in more detail below.
a) Run-of-river developments
“Run-of-river” refers to a mode of operation, in which the hydro plant uses only the water that is available in the natural flow of the river (ESHA, 1998), “Run-of-river” implies that there is no water storage and that power fluctuates withthe stream flow. The power output of run-of-river small hydro plants fluctuates with the hydrologic cycle, so they are often best suited to provide energy to a larger electricity system. Individually, they do not generally provide much firm capacity. Therefore, isolated areas that use small hydro resources often require supplemental power. A run-of-river plant can only supply all of the electrical needs of an isolated area or industry if the minimum flow in the river is sufficient to meet the load’s peak power requirements (RETscreen, 2012).
Run-of-river small hydro can involve diversion of the flow in a river. Diversion is often required to take advantage of the drop in elevation that occurs over a distance in the river. Diversion projects reduce the flow in the river between the intake and the powerhouse. A diversion weir or small dam is usually required to divert the flow into the intake, as shown in figure 2.1.
Figure 2.1Typical Arrangement of a Run-off – scheme Small Hydro Power Station (Source: NASENI SHP, 2010)
b) Water storage (reservoir) developments
For a hydroelectric plant to provide power on demand, either to meet a fluctuating load or to provide peak power, water must be stored in one or more reservoirs. Unless a natural lake can be tapped, providing storage usually requires the construction of a dam or dams and the creation of new lakes. This impacts the local environment in both negative and positive ways, although the scale of development often magnifies the negative impacts. This often presents a conflict, as larger hydro projects are attractive because they can provide “stored” power during peak demand periods. Due to the economies of scale and the complex approval process, storage
schemes tend to be relatively large in size. The creation of new storage reservoirs for small hydro plants is generally not financially viable except, possibly, at isolated locations where the value of energy is very high. Storage at a small hydro plant, if any, is generally limited to small volumes of water in a new head pond or existing lake upstream of an existing dam. Pondage is the termused to describe small volumes of water storage. Pondage can provide benefits to small hydro plants in the form of increased energy production and/or increased revenue. Another type of water storage development is “pumped storage” where water is “recycled”between downstream and upstream storage reservoirs. Water is passed through turbines to generate power during peak periods and pumped back to the upper reservoir during off-peak periods. The economics of pumped storage projects depends onthe difference between the values of peak and off-peak power. Due to the inefficiencies involved in pumping versus generating, the recycling of water results in a net consumption of energy. Energy used to pump water has to be generated by other sources. The environmental impacts that can be associated with small hydro developments can vary significantly depending on the location and configuration of the project. The effects on the environment of developing a run-of-river small hydro plant at an existingdam are generally minor and similar to those related to the expansion of an existing facility (RETscreen, 2012). Development of a run-of-river small hydro plant at an undeveloped site can pose additional environmental impacts. A small dam or diversion weir is usually required. The most economical development scheme might involve flooding some rapids upstream of the new small dam or weir. The environmental impacts that can be associated with hydroelectric developments that incorporate water storage (typically larger in size) are mainly related to the creation of a water storage reservoir. The creation of a reservoir
involves the construction of a relatively large dam, or the use of an existing lake to impound water. The creation of a new reservoir with a dam involves the flooding of land upstream of the dam. The use of water stored in the reservoir behind a dam or in a lake results in the fluctuation of water levels and flows in the river downstream. A rigorous environmental assessment is typically required for any project involving water storage. 1.1.4 Hydro projects engineering phases According to Belvoir (2005), there are normally four phases for engineering work requiredto develop a hydro project. Note, however, that for small hydro, the engineering work isoften reduced to three phases in order to reduce costs. Generally, a preliminary investigationis undertaken that combines the work involved in the first two phases described below. The work, however, is completed to a lower level of detail in order to reduce costs. Whilereducing the engineering work increases the risk of the project not being financially viable,this can usually be justified due to the lower costs associated with smaller projects.
i) Reconnaissance surveys and hydraulic studies
This first phase of work frequently covers numerous sites and includes: map studies;delineation of the drainage basins; preliminary estimates of flow and floods; anda one day site visit to each site (by a design engineer and geologist or geotechnicalengineer); preliminary layout; cost estimates (based on formulae or computer data);a final ranking of sites based on power potential; and an index of cost.
ii) Pre-feasibility study
Work on the selected site or sites would include: site mapping and geological investigations(with drilling confined to areas where foundation uncertainty would havea major effect on costs); a reconnaissance for suitable borrow areas (e.g. for sand andgravel); a preliminary layout based on materials known to be available; preliminaryselection of the main project characteristics (installed capacity, type of development,etc.); a cost estimate based on major quantities; the identification of possible environmentalimpacts; and production of a single volume report on each site.
iii) Feasibility study
Work would continue on the selected site with a major foundation investigation programme;delineation and testing of all borrow areas; estimation of diversion, designand probable maximum floods; determination of power potential for a range of damheights and installed capacities for project optimization; determination of the projectdesign earthquake and the maximum credible earthquake; design of all structures insufficient detail to obtain quantities for all items contributing more than about 10%to the cost of individual structures; determination of the dewatering sequence andproject schedule; optimization of the project layout, water levels and components;production of a detailed cost estimate; and finally, an economic and financial evaluationof the project including an assessment of the impact on the existing electricalgrid along with a multi-volume comprehensive feasibility report (Belvior, 2005).
iv) System planning and project engineering
This work would include studies and final design of the transmission system; integrationof the transmission system; integration of the project into the power networkto determine precise operating mode; production of tender drawings and specifications;analysis of bids and detailed design of the project; production of detailedconstruction drawings and review of manufacturer’s equipment drawings. However,the scope of this phase would not include site supervision or project management,since this work would form part of the project execution costs (Belvior, 2005). 1.2 Statement of problem
In the wake of uncertainty about availability of fossil fuels and the adverse effects of pollution, plus degradation of the environment, new and renewable sources of energy are gaining importance day by day. Hydropower is one of the most attractive sources of renewable energy, however the inability to convince investors through proper economic viability analysis or insufficient technicalknowhowon the part of the design engineer to conduct proper economic feasibility and financial viability of such projects has greatly militated against the growth and development of the scheme in Nigeria, coupled with other factors, as there are many SHP projects abandoned and others yet to be harnessed.These set back has had its own fair share in the limited or total lack of access to electricity in rural communities, as Small hydro power (SHP) projects are mostly rural targeted projects, hence a major cause of underdevelopment and limited wealth generation capabilities amongst rural dwellers, as constant and available electric supply, drives the growth of cottage and small scale industries, by providing light, heat and power for productive uses and communication, that results in improved life styles and economies of rural dwellers. This work seeks to address basically the economic viability of SHP projects and its computation for financial investment decision.
1.3 Aim and Objectives of Work The aim of this work is to conduct a feasibility study, on the economic viability of Onuaku River small hydropower project, in Aku community in Isuikwato local government area of Abia state. The specific objectives are;
i) To determine the costof installation per kW, the expected energy to be generated, expected yearly revenue within the project life.
ii) To appraise the economic viability of the Onuaku project in terms of economic indicators like the Payback Period (PBP), Net Present Value (NPV), Internal Rate of Return (IRR), and Benefit Cost Ratio (BCR)
iii) To compute for the generation profit or net profit yearly.
iv) To show the financial inflow and out flow of cash
v) To carry out a sensitivity analysis on the project
1.4 Significance of the Study
Proper economic viability study of a Small hydropower project is Significant to the client and even the private and Government at large in the following
a) To forecast the Risk or gains ahead before financial commitment or project financing is made.
b) To show that the economic metrics of the project are highly favorable
c) To show different level of cash flow during and after the project implementation.
1.5 Scope of the Study
Small hydropower has a key role in reducing the greenhouse gas emissions and adverse environmental effects of fossils fuel consumption. However, the design of SHP projects is not an easy task, as each project is site specific and needs detailed and challenging engineering computations to optimize the benefits of the projects. In this study, primary attention was focused on the economic appraisal of Onuaku Small hydropower plant, using both the static and dynamic methods of economic analysis. However, for the sake of completeness, variables like the estimated cost of project, Installation cost, expected revenue, generation cost, alternative energy cost per year, and the generation profit after tax, was considered. Finally a sensitivity analysis was conducted, to know the effects of a change in variables like the investment cost and the electricity sale price on the project.
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