OPTIMAL INVESTMENT DECISION MAKING ON GAS TO POWER PROJECTS IN NIGERIA

Abstract

The increasing demand for electric power in Nigeria,due to population and industrial growth coupled with inadequate supply from hydropower stations is stimulating interest in Gas to Power Projects (GtPP) investments. Most reported investment decisions have focused on planning and designing of the investment on GtPP with little attention to optimisationconditions of investment. This study was therefore designed to determine the optimal investment conditions for electricity generation in Nigeria either at natural gas sources or at central locations away from the gas fields.

Keynes, Hayek and Fisher Theories of investments provided the framework. Cost data for gas and electricity productions were obtained between January 2013 and December 2017 fromEgbin Thermal Power Station(˃100km to the gas source); and Transcorp Power Ughelli, Sapele Power Station, Niger Delta Power Holding Company, Sapele and Nigeria Gas Company, Ekpan(≤100km to the gas source). Real option analysis and Monte Carlos Simulation were used to obtain an optimal investment model. The model was applied to obtain optimal gas and electricity prices for GtPP located away and near the gas source. Volatility was varied to determine waiting and investment regions for the GtPP.Data were analysed using descriptive statistic.

Gas price for plants located near the gas fields increased from $1.70/mbtu (Million British Thermal Unit) to $6.83/mbtu, while plants located away from the gas fields also increased from $3.60mbtu to $9.50/mbtu. There was a sudden fall in price from $4.04/mbtu in April 2015 to $2.16/mbtu in May 2015. The price of electricity generated near the gas fields rose from $0.03/kWh to $0.07/kWh. It rose sharply to $0.08/kWh in January, 2015 before a fall. Price of electricity generated away from the gas fields rose to $0.09/kWh from $0.05/kWh.Analyses show that gas price for plants located near the source stood at $4.32±2.07/mbtu, and away from the source at $6.30±2.06/mbtu, exhibited wide variation, while electricity price for plants located near the source stood at $0.06±0.02/kWh, and away from the sources at $0.08±0.02/kWh, exhibitednarrow variation. The real option analysis of gas prices revealed that the plant gave higher net present value of the investment at higher levels of volatility. Simulation runs with 20 paths indicated high level of uncertainties in the future prices of gas and electricity; as a result of no clear patterns shown between the different paths. Alternatively, the random movements of gas and electricity prices are seen to have mimicked the Brownian motion theory.

Optimal investment conditions for electricity generation exist in Nigeria and itis economical to invest in gas plant near the source when the volatility and prices of the gas is within the region while it is economical to investment in gas plant away from the source when the volatility and prices of the gas is within the region for gas plant away fromthe source.The optimisation of electricity cost, gas prices and distance to gas fields will make it easier to take final investment decision on Gas to Power Projects in Nigeria.