Your diesel generator – what does it truly cost your business?

A majority of businesses in Nigeria own and operate a diesel generator due to the lack of stable power supply from the national grid. In this article, we shall delve into the true costs of operating a diesel generator as a business owner. As will be seen, the cost of energy from running a generator is above 3X that from the national grid.

Diesel Generator Cost of Capital:

Owning and operating a generator first starts with capital investment to purchase the generator. Raising that capital has its cost to a business, either a loan is taken or funds that could have been used in the business is diverted to purchase the generator. This cost of capital (interest rates on loans) differs per business. In Nigeria, it ranges from 15% to 35%.

Most businesses will require a consistent supply of electricity to maximize its productivity. Let’s use a bank (Bank ABC) that requires a constant power supply, as a point of reference in this case. For our example, Bank ABC is a typical two-story bank branch in Ikeja, Lagos. Due to misaligned incentives and challenges in Nigeria’s power industry, a typical Bank branch only has 20% supply from the power grid. To make up for the difference it would purchase a 100kVA generator for a branch location to ensure it can carry out business.

With prime lending rates ranging from 15% to 35% in Nigeria, let us assume a 25% cost of capital for a 100 kVA generator and a purchase price of NGN 7.5M. This means that each year, as a business, you will have to expense NGN1.875M. This equates to NGN 156,250 in monthly costs until the loan is repaid.

Asset Depreciation:

Once the generator is purchased, it becomes an asset to the business. However, this asset depreciates over time and hence a depreciating cost must be accounted for. Generators have a 4 to 6-year useful life depending on how often it is used.

For this example, we shall assume a 4-year life with a straight line depreciation, i.e. the generator’s value depreciates to its salvage value (or zero) by the same amount each year. Including this as a line item adds an additional cost of NGN 156,250 per month.

Diesel Generator Maintenance:

To ensure optimal performance of the generator, regular maintenance must be carried out. Typical maintenance includes changing of fuel and oil filter, cleaning of the generator, and running computer diagnostics. Depending on the age of the generator, this cost varies. A cost of NGN 50,000 a month is typical for a 100kVA generator that is maintained properly.

Diesel Cost:

The monthly diesel expense of a diesel generator varies due to three main factors – the price of diesel per litre, the average generator run-time, and the average load on the generator.

For this example, let us break down the diesel cost that Bank ABC will have to incur based on each element described above:

• Generator run-time: A typical Bank branch runs from 8:00 AM to 5:00 AM, hence a 9 hours a day. Assuming Bank ABC is fully operational 21 days a month, this leads to a generator run-time of 189 hours per month

• Diesel consumption per hour: Assuming the average load on the generator is 50kW (This is typical for a 2-story building bank branch), Bank ABC will consume approximately 15 litres per hour. Please see the consumption chart below which shows how much diesel a generator consumes per hour based on the electrical load on it.
  
  With a run-time of 189 hours per month, the total diesel consumption for Bank ABC is 2,835 litres per month.

• Diesel price: Using the current (Dec 2018) diesel cost of NGN 250/ litre, this puts Bank ABC’s monthly diesel cost at NGN 708,750.

• Monthly energy consumption: 50kW * 189 hours/month = 9,450kWh/month. This gives the amount of energy (kWh) that was consumed in that month.

Feature image credit: fgwilson