Dear Editor,
The proposed gas to energy project for 300MW per day will cover electricity consumption of 6% to 12% of the population, if the reported average consumption for Guyana and the US are used to establish the consumption range (Source U.S. Energy Information Administration). Per the 50% cost reduction assumption stated on Hess.com, the cost per kWh will be on par with that of the U.S. if the current average cost of electricity in Guyana is used as the reference. Based on the figures shared in the press, the resulting cost to finance the project was surprisingly generous. The reported numbers resulted in a discount rate that is below Exxon’s Weighted Average Cost of Capital [WACC] and there also appears to be no discount rate associated with the government’s portion of the cost of the project. Although this may seem generous, it also causes the project to appear more financially attractive than it really should be and also raises the question as to whether the cost associated with the project has been inflated. However, according to Statista.com and the U.S. Energy Information Administration, the cost of the project is within the range for the cost to construct a gas to energy project with the pipeline cost excluded.
That leaves the focus on the generous discount rate. Given that the rate of borrowing from the Bank of Guyana is at 5% (source: take-profit.org) and the WACC for Exxon is at approximately 8% (source: valueinvesting.io) at the lower end of the spectrum, the resulting additional cost of the project would skyrocket and significantly reduce its attractiveness with a resulting payback period that brings into question the feasibility of the project based on earnings and savings from the sale of electricity. Even if we were to disregard the overcompensation in the discount rate for the project and take only the total future cost as stated in the press, and then assume that the electricity generated would be bought at today’s rates or that consumers would save 100% on their electricity costs associated with this project, the payback period is clearly unacceptable if this project is to eventually pay for itself. However, given the historical economic philosophy of the government, this project is better viewed as a social program to generate lower cost electricity for our citizens, and an opportunity to reduce the electricity shortage.
The question then becomes, is this the direction that we prefer to take, and is there a better use for the funds associated with this project that could generate additional income for the nation, which can then be used to increase the earnings of our citizens. Many would argue that such an approach would add more value to the economy and foster increased sustainable economic development for Guyana and be of more benefit to our citizens. Guyanese could also use the funds gained from the increased economic activity to purchase solar energy for their homes and gain further energy independence. Others could argue the contrary, which is that the reduced energy costs would provide an opportunity for businesses to become more competitive, especially if a manufacturing or industrial park is developed in the area around the gas to energy plant. This becomes even more important to the overall gas to energy strategy when we consider that the impact is limited to a fraction of the population, and the benefit of access to lower electricity costs that are on par with the US must be capitalized on to generate additional jobs and income.
The current administration should take a closer look into how we maximize the economic value that can be generated by the proposed gas to energy project. In lieu of doing so, our limited funds may not be used in the most effective manner. Maximizing the economic value of the project should be the primary objective.
Sincerely,
Jamil Changlee
Chairman
The Cooperative Republicans of
Guyana
