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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 7 NO 1, JUNE, 2009

DEVELOPING ALTERNATIVE RURAL ENERGY MARKETS IN NIGERIA: A BENEFIT-COST ANALYSIS

Ben U. Omojimite

Department of Economics, Delta State University, Abraka

 

 

Abstract

This article examines the prospects of a sustainable rural fuelwood development programme in a rainforest Delta State.  The objective is to assess the viability of  plantation type fuel wood farms and fuelwood markets.  Data from a field survey were used, the methodology was essentially a Benefit-cost analysis.  The results show that planting and marketing firewood provides the cheapest source of fuel energy as the prices of fossil fuel remain high and unstable.  Even though some form of trade in firewood takes place in the rural and urban centres in Delta State, government has not shown an interest in the development of the trade.  Government initiative in this regard is long overdue.

 

Key words:  Fuel-wood , market,  sustainable,  rural,  energy, benefit,  cost

 


Introduction

 

Man has supported his living over time with one form of energy fuel or the other.  Several forms of energy fuel have been used to move machines, vehicles of transportation and to provide heat and light.  In a study, the World Bank has shown that the economic progress of a society is closed tied to the degree of energy use per man (Park, 1976).

The earliest source of energy supply for man is firewood fuel and this has remained the chief source of supply in the rural communities.  In the urban areas and the industrial areas, coal, crude oil, natural gas and hydro sources provide the main sources of energy supply.  The use of these newer sources of energy supply has also spread to the rural communities for two reasons.  First, the concern over environmental preservation and deforestation has provided the stimuli for popularizing alternative sources of fuel particularly coal and petroleum products to rural communities.  Second, the emergence of petroleum products provided a cheaper and neater energy sources to the rural people.

 

Beginning from the first ‘oil shock’ of the 1970s, the prices of petroleum products rose significantly.  This has made it increasingly difficult for rural communities to procure and use the products at minimum costs and with less instability.  The rural people and the low-income class in the urban centers have to rely more on firewood as the chief source of energy fuel.

In Nigeria the rain forest and savannah grasslands produce rich sources of dried woods used for fuel for domestic cooking.  The estimated consumption of fuel wood in 1991 was 103mm3, which is much higher than other sources of energy, indicating the predominance of fuel wood in rural energy markets (Ogbole, 2000).

 

In Nigeria, three distinct stages of fuel wood exploitation can be discerned.  First, is the stage at which only dried wood are cut down.  This engenders minimum interference to the structure of the forests.  Second, is the stage during which semi-dry wood are cut down due to the increasing difficulty in getting enough dry wood.  In the third stage the dried woods are finished and living trees are cut and left to dry before use.  This third stage is commonly found in areas close to the urban centers.  It is at this stage of wood-land destruction that deep apprehension about the sustainability of fuel wood supplies is expressed.  The World Bank (1992) noted that shortages of wood for domestic use especially firewood and building poles have become a serious problem in many developing countries.  To address this problem some countries opted to plant trees.  Successful cases indicate that trees can be a profitable venture, but farmers must be given the right to sow, cut, and sell them at fair market prices the World Bank reported.(Catriot and Bankourgou,1985)

In Nigeria, the rising prices of petroleum products have necessitated an ever increasing reliance on firewood by both urban and rural dwellers alike.  This trend has created shortages of firewood in the rural areas and has worsened the problem of energy supply to the rural people in particular and the urban poor in general.  This has placed an additional burden on the rural poor, in particular women, who often have to walk long distances in search of firewood, implying that they have to devote a reasonable proportion of their family resources to satisfy their energy requirements.  It is the objective of this article to analyze the benefits/costs implications of alternative sources of energy fuel supply to rural communities as well as the urban poor.  Such an analysis will provide a basis upon which a model of sustainable fuel wood farm and market would be developed.  The remainder of this paper is organized into three sections.  In section II, an analysis of costs and benefits of alternative sources of energy fuel supply is provided.  Based on the data reported in section II, an examination of a possible rural energy market is provided in section III, while section IV concludes the paper.

 

 Benefit – Cost Analysis of Alternative Sources of Fuel Supply:

 

The data used in this paper is based on a field survey undertaken in 2005 in some parts of Delta State.  In that survey shop prices of alternative sources of fuel, like firewood, kerosene and LPG were gathered from retail outlets.  At the household level, the comparative costs of different cooking methods were carried out given different regimes of petroleum products prices.  It is important to note that the prices of firewood vary depending on the season and distance from village source of supply.  In pricing firewood, a lot of value judgment comes to play.  The bundles of wood are not weighted hence prices are not fixed based on any standard unit of measurement such as weight.  This makes it difficult to establish price trends with a reasonable degree of certainty.  However, the data which the survey provided are useful in making inferences.

 

In the rural areas fuel wood markets are essentially of the wholesale type.  The pieces of wood are arranged in logs usually along highways, making it easier for trucks and lorries to evacuate them to the cities.  In the cities wood sellers sometimes combine both retail and wholesale functions.  The retail aspect of the market involves the splitting of the logs into pieces and tied in bundles, whereas the wholesale segment involves the sale of wood in logs.  Women are more involved in the fuel wood trade particularly in the retail segment.  The data which the survey provided are used to compare the relative costs of alternative sources of fuel energy.


 

Table 1: The Relative Costs of Alternative Energy Sources

Energy method

Average Price of Fuel

Monthly Consumption

Monthly Costs (N)

Firewood Tripod stand

N600:00 per heap

1.5 heaps

900:00

Kerosene stove

 N57:50 per liter

33 liters

1881

LPG (Gas Cooker)

N2350:00 per 12.5kg

12.5kg

2,350:00

Source: Field Survey 2005

 


From the table 1 above it can be seen that the firewood tripod stand is the cheapest means of cooking for the rural people while LPG is the most expensive.  The cost differential between LPG and firewood is very significant which helps to explain why majority of rural and urban poor rely on firewood as their main source of energy supply.  Kerosene and LPG have the advantage of being convenient to use.

The following table (2) provides revised estimates of the figures in table (I).  The basis for this revision is to show the effects of the rising prices of petroleum products on consumers’ expenditures.  The rise in petroleum products affects not only the costs of these products but also the cost of transporting the firewood to the markets where they are sold.


 

Table 2: The Revised Relative Costs of Alternative Energy Sources.

Energy method

Average Price of Fuel

Monthly Consumption

Monthly Costs (N)

Firewood Tripod stand

N900:00 per heap

1.5 heaps

1,350

Kerosene stove

 N60:00 per liter

33 liters

1,980

LPG (Gas Cooker)

N2, 750:00 per 12.5kg

12.5kg

2,750:00

Source: Field Survey 2005

From table (2), it is more cost effective to use firewood compared to alternative sources.   Assuming a tax of 10% is imposed on a heap of firewood it will still cost less to use firewood as the source of energy.  This suggests that an investment in the development of fuel wood farm would not only meet its costs but even earn a rate of return that is positive and significant.  If the government’s intension to deregulate the down stream sector of the oil industry is implemented fully, the prices of petroleum products would raise further which will reduce the demand for those products, resulting in a rise in the demand for the substitute fuel i.e. firewood.  Given a rising demand scenario, more and more wood would need to be cut down to meet the demand.  The sustainability of fuel wood under a rising demand condition can only be achieved if there is a conscious effort to produce and market fuel wood.  This has to be an integral part of any land-use development planning programme.  The development of fuel wood as a resource of fuel undoubtedly has benefits and costs (Maler, 1974)

 

The Benefits: The benefits that could be derived from the development of fuel wood resource are both direct and indirect.  First, it will provide employment opportunities to rural dwellers.  Second, it will lead, to a reallocation of resources in favour of the rural areas.  There will be an increase in the cash-flow to those who would be directly involved in the business.  Third, some of the tax revenues would be reinvested in the host communities.

 

The table  below presents a summary of benefits that would accrue to the rural areas if a firewood farm is established.


 

Table 3: Estimates of Benefits from a Fuel Wood Farm:

D

 

YR0

YR1

YR2

YR3

YR4

YR5

Profit from sales N

-

-

-

-

-

-

Sales Revenue N

-

-

-

-

-

200,000

Indirect Benefits (N)

 

 

 

 

 

 

Employment opportunity

300,000

300,000

300,000

300,000

300,000

300,000

Improved standard of living

250,000

250,000

250,000

250,000

250,000

250,000

Reduce crime:

500,000

500,000

500,000

500,000

500,000

500,000

Lives and property saved

 

 

 

 

 

 

Lower Rural/Urban drift

150,000

150,000

150,000

150,000

200,000

200,000

Intangible benefits:

 

 

 

 

 

 

Control rights over land

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

Infrastructure

500,000

500,000

500,000

500,000

800,000

800,000

Control of environmental degradation.

300,000

300,000

300,000

300,000

300,000

300,000

Benefits from Tax Revenue.

Nil

Nil

Nil

Nil

Nil

Nil

Total

N3.5m

N3.5m

N3.5m

N3.5m

N3.55m

N3.55m

irect Benefits (N)

 

Source:  Authors computations

 


The data presented above are estimated benefits from setting up a fuel wood farm in a rural community.  These figures were derived with the assistance of Ministry of Agriculture personnel who have been responsible for managing various forms of forest resources in Delta State.

 

The Costs of Establishing a Fuel Wood Farm

 

In establishing a fuel wood farm the host communities have to be property educated on the gains and responsibilities involved.  In some countries e.g. Burkina Faso where similar ventures were undertaken, government’s involvement was in providing the inputs and training, while the farmers were left to manage the farms.  The associated costs include the cost of land, labour, and other inputs.  Table (4) below shows costs estimates for setting up a fuel wood farm.


 

Table 4 Estimates of Costs of Fuel Wood Farm (10 Hectres) N

 

YR0

YR1

YR2

YR3

YR4

YR5

Set up costs

3.0m

-

-

-

-

-

Maintenance

-

150,000

200,000

250,000

300,000

350,000

Management

-

250,000

250,000

250,000

350,000

350,000

Training

-

250,000

250,000

250,000

250,000

250,000

Production and Transportation

-

100,000

100,000

100,000

100,000

100,000

Contingencies

-

500,000

500,000

1,000,000

1,000,000

1,000,000

Total

N1.25m

N1.3m

N1.3m

N1.35m

N1.5m

N2.05m

Source: Field Survey 2005

           


Tables (3) and (4) above present the stream of estimated benefits and costs associated with the establishment of a rural fuel wood farm.  The benefits are marginal though higher than the costs, which suggests that the establishment of fuel wood farms and markets are viable even in the short-run.

Since these benefits and costs occur at different times, it is important to transform them into present values so that the stream of benefits could be compared with the associated costs. 

Table (5) below presents the discounted benefits using a discount factor of 14%.


 

 

 

Table 5: Discounted Benefits

Yr

Cash Flow N

Discount Factor

P.Vs

YR0

3.5M

1

3.5M

YR1

3.5M

0.8772

3.0702

YR2

3.5M

0.7695

2.6933

YR3

3.5M

0.6750

2.3963

YR4

3.55M

0.5921

2.1020

YR5

3.55M

0.5194

1.993

 

 

NPV

15.011

 

 

Table 6: Discounted Costs

Year

Cash Flow N

Discount Factor

P.Vs NM

YR0

3.0M

1

3.0

YR1

1.25M

0.8772

1.4249

YR2

1.30M

0.7695

1.6894

YR3

1.55M

0.6750

2.000

YR4

1.50M

0.5921

2.5333

YR5

2.05M

0.5194

3.9468

 

 

NPV

14.5944

 


Comparing table (5) with table (6) reveals that the NPV of benefit is higher than the NPV of costs.  That is, since the ratio.

Discounted Benefits       > 0,

Discounted Costs

 


it implies that an investment in a fuel wood farm and market could be a viable option in managing our forest resources.

 

Organized Fuel Wood Market

As the population of Nigeria grows and the economy expands, the need for the development of a sustainable energy market in the rural areas can not be overemphasized.  As the rural communities produce more and more food and inputs for the economy, their fuel energy requirements grow from year to year.  The bulk of these requirements would have to be met by cutting down more firewood.  Even in the urban centers, the urban poor have found it increasingly difficult to buy petroleum products to meet their energy needs.  The pressure on the rural communities to supply fuel wood not for rural consumption but to meet the demand from urban centers could lead to serious deforestation and degradation of the entire forest resources.  One possible way out of such a calamity would be to establish rural fuel wood farms and fuel wood markets in rural areas.

 

As of now there is a growing trade in firewood that is dominated by women in Delta State.  The way and manner the trade is carried out is not only ecologically destructive but economically wasteful.  Since the woods are cut from the forests and woodlands at no price to the wood cutters, optimal pricing policies are not practiced.  Such non-optimal pricing behaviour does not permit the sustainability of the supply side in the fuel wood market,(Brown and Pearce 1994)

 

The data that were presented in the previous section show that the feasibility and profitability of a fuel wood farm is not the question.  What is required is for government to take the initiative and encourage farmers to participate in a programme of fuel wood cultivation.  The farmers would eventually take over the farms and manage them.  Such communities would suddenly find that a stream of benefits await them, as they control their own forests and woodland.

 

The establishment of fuel wood farms would involve some stages.  First, there should be some form of awareness campaign to educate the selected rural communities of the need to save our forests by properly managing them.  They should also be informed of the immense benefits which would accrue to the rural people.

 

The second stage would involve the selection of villages that were found suitable for the farms.  The selection should be based on a detailed assessment of the environment including the types of wood that could be grown in such areas, the availability of abundant forest resources and the level of commitment of the villagers.  The number of existing and potential wood cutters should be assessed.  A detailed assessment of the extent of the land under village control and whether there are land disputes with neighbours (Early, 1975)

 

The next stage is to invite applications from villagers to participate in the fuel wood planting venture.  This will enable government to register individuals and associations who would in turn benefit from government assistance. The final stage is that of providing support and supervision.  Here the volunteers are assisted to plant the trees and maintain them.  It is necessary to provide some financial assistance by paying the volunteers some stipends while waiting for the woods to mature.  This would encourage the farmers to maintain the farms.

 

Conclusion

In the last three decades or so, the plight of the rural poor has attracted the attention of rural development practitioners and environmenta lists.  A lot of concern is also being expressed over the prospect of a sustainable rural environment for rapid development.  The World Bank (1992) reported that shortages of wood for domestic use especially firewood have become a serious problem in many developing countries.  In this circumstance the rural poor are worse hit.

The World Bank suggested that the problem of environmental degradation has become a catastrophe which could be checked by adopting a number of measures which according to it include:

a)         Planting more fast-growing fuel wood trees.

b)         Rehabilitating degraded tropical forest and watershed and;

c)         Providing financial incentives to villages and village organizations to established fuel wood trees and tree plantations (Douglas et al.,1997)

 

The role of government in translating these ideas into reality would be to provide the necessary regulatory and legal framework and to provide the initial finance and support services.  In this regards local government councils could put up proposals to their state governments for approval and assistance.

 

 

References

Brown, Katrina and Pearce, D.W.  (1994), The Causes of Tropical Deforestation.  London: University College London Press.

 

Catrirot, M. and Bankourgou, E. (1985): The Environmental Impact of the

Firewood Crisis.  Working paper, Commission of European Communities.Washington, D.C.:The World

Bank.

 

Douglas, F. B.;  Van Der Plass,R.; and Floor, W. (1997): Tackling the Rural Energy Problem in Developing Countries.  Finance and Development.  June 1997.

 

Earl, D.E. (1975): Forest Energy and Economic Development.  Oxford: Clarendon press.

 

Leach, G. and Mearns, R. (1988):  Beyond the Woodfuel Crisis.  London.  Earthscan press.

 

Maler, Karl-Goran (1974): Environment Economics.  A Theoretical Inquiry.  Baltimore: John Hopkins University Press.

 

Ogbole, M.I. (2000): Promoting Domestic Energy Sources for Sustainable Development.   Unpublished Masters in Energy and Petroleum Economics Dissertation, Delta State University, Abraka.

 

Yoon, S. Park (1976):  Oil Money and the World Economy.  Colorade Westview Press Boulder.