Financial evaluation of large-scale water projects: A case of hydropower development in Nigeria

Abstract

Nigeria is a land with unevenly distributed resources and huge climatic differences. Basic conditions are distorted through the fact that access to these available resources was not guaranteed to all in the past. Increasing population and associated economic growth, together with changing climate, put pressure on water resources. Existing gap between demand and supply in the power and agricultural sectors is widening. Increasing existing capacity of infrastructures in the sectors implies the construction of capital projects with associated high cost. The government and investors need informed decisions in evaluating alternatives. The scheme involves development of Zungeru hydropower (the dam at elevation +230m) downstream of Shiroro to utilize water released from Shiroro reservoir. The choice is whether to increase the dam height to increase capacity for power production or develop an interbasin water transfer scheme (Gurara II dam and water transfer to Shiroro reservoir). The decision is further constrained by climate variability and climate change in the basin. The Unit Reference Value (URV) technique was adopted in assessing the economically feasible option in developing hydropower scheme in Nigeria. Runoff simulations by four climate models were considered as input into the financial evaluation at 10% discount rate. The URV for interbasin scheme is 139.32 US cent/KWh (N515/KWh) for the worst climate model and 16.76 US cent/KWh (N62/KWh) for the best climate model. Under the increasing dam height, the worst climate model has a URV of 210.04 US cent/KWh (N777/KWh) and 40.36 US cent/KWh (N149/KWh) for best climate model. The URV for interbasin transfer option is lower than that of increasing Zungeru dam height. The relative increase in URV for increase dam height over interbasin transfer varies from 125% to 242% for discount rate 10%. Thus, increasing dam height is not a suitable option under an active or inactive government policy. The conclusions of the paper do not entail endorsement by the World Bank or its Board of Directors.