Developing an effective plan for financing rural electrification contributes to the growth of a nation and eradication of poverty (Brigham & Houston 2007). Electricity project requires long term planning and continuous funding to achieve results (World Bank 2008). Thus, this review will focus the financial analysis of electrification projects.
China has sustained many electricity projects using different project strategies. The presentation will study different financing methods, with a comparative analysis to situations in Nigeria. Electricity projects in China are funded using four channels namely:
- Government
- International institutions,
- Commercial banks
- The stock market.
These institutions assist with the funding of different energy projects after a careful analysis of the project.
Calculations
Ertan I project = Shareholders injected 50%.
Inflation rate during Ertan II project = 331%
The sensitivity analysis for the hydroelectricity project in Nigeria
NPV at 40% = 476,934 naira
NPV at 50% = 440,047 Naira
Inflation rate
NPV at 2% inflation rate = 2%
NPV at 12% inflation rate = 988,000
NPV at 14% inflation rate = 2,069,565
Cash Flow Overview for the Three Projects
Ertan I energy project:
- Cost of the project = $941 million
- NPV = $704 Million
- IRR = 16.09%
- Payback = 12 years
Ertan II energy project:
- Cost of the project = $2,200 million
- NPV = -$553 million
- IRR = 7.56%
- Payback = 18.89 years
Hydroelectric project in Nigeria:
- Cost of the project = 1/3 x 2,200 = $733.3 million
- NPV = 642,482 million Naira
- IRR = 6.56%
- Payback = 15 years
Ertan I Power Project
Ertan I energy project was funded by the World Bank. The cost of the energy project was $941. 9 million. Six hydro generating systems were delivered. The cost of the project included the resettle fee for the displaced people and a projected inflation cost. The resettlement fee accounted for the increase in local expenditure during the project.
Ertan II Hydroelectric Project
The cost of the project was estimated at $ 2,200 million. International institutions provided $930 million while a local contribution was $ 1,270. The World Bank, China state development bank, and commercial banks were the financiers of the project. The interest rate increased during the project life (Xu & Chen 2006). The disparity in interest rates affects the release of loans by international institutions. The cash flows for the project shows a payback of 18.98 years (Yang 2003). The IRR estimation is lower than the cost of the project thus; the project is not financially unstable (Yang & Yu 2004).
Hypothetical Hydroelectric Project in Nigeria
Let us assume that a similar project will be carried out in Nigeria. The project will be a 1,100 megawatt power plant. The project is one-third of the Phase II energy project in Ertan. The inflation rate in Nigeria increases by 3 percent annually. By estimation, the tax rate, inflation and resettlement fee will affect the cost of the project. The cash flow of the hypothetical energy project can be computed below in the Financial Analysis section.
The cost of the Ertan II energy project affected the financial viability of the project. The increase in the inflation rate, which was higher than the projected rate of inflation, changed the initial project cost. The price of energy consumed did not reflect the higher increase caused by the inflation.
Financial Analysis
The project life of Ertan I is 37 years while the project life of Ertan II is 57 years. The payback period determines the viability of the project, thus, the cash flow of Ertan I show a cumulative flow in 2002. The payback period is obtained from the cumulative and the net cash flow. The cumulative cash flow for Ertan II project turns positive in 2009, which is the 19th year of the project life. The net cash flow for Ertan II project turns negative during the discount. The rate of conversion gives – $553 million. Therefore, the project is not viable. The project in Nigeria is one-third of the Ertan II energy project. The discount rate is 10%. The inflation rate increases of 3% annually. The NPV for the project shows a positive cash flow. Thus, the project is financially viable.
Ertan I project was estimated at $941 million, while the NPV of the project is $704 million. The IRR of the project was estimated at 16.09%. However, the cost of the Ertan II project was estimated at estimated at $2,200 million. The NPV for Ertan II was $553 million while the IRR of the project was estimated at 7.56%. The cost of the hypothetical hydroelectric project in Nigeria was one-third of the Ertan II project. Thus, the NPV of the project will be 624,482 million Naira. The IRR of the project will be reduced by 1%.