Keeping the lights on has become costlier

Keeping the lights on has become costlier

For Ghanaian taxpayers, there were two bits of unwelcomed news in July from finance minister Ken Ofori-Atta’s revised 2019 Budget. Not only did Mr. Ofori-Atta announce tax increases to counter weak fiscal receipts, he also revealed that public finance was being threatened by “a state of emergency” in the energy sector. The issue is that current power generation capacity is nearly twice the demand, but the government must still pay for the excess supply because it has been contracted on take-or-pay terms from independent power producers. A similar problem exists with regard to natural gas production capacity. The cost to the exchequer, and the headache for the finance minister, is close to US$1 billion in 2019 alone.  

The energy sector is no stranger to crisis. Between 2012 and 2016, the sector suffered arguably its longest-ever crisis, with a slump in power generation causing rolling blackouts that crippled businesses and stifled economic growth. In 2012, economic growth registered 9.3%; one of the fastest in the world. By 2016, it had fallen by almost two-thirds to 3.4%. The International Growth Center, a think tank, estimated that the blackouts cut the monthly productivity of local manufacturing firms by 10%.

In its desperation to resolve the crisis, the previous National Democratic Congress (NDC) administration rushed to sign new power deals with independent power generators, even as other power plants were in the process of construction. Today, this has led to a situation where installed power generation capacity is 5,083 megawatts, but electricity demand at its peak is only 2,700 megawatts. At the same time, natural gas production is in surplus—although this is the result of inadequate pipeline infrastructure to transport all the gas that is being produced offshore to inland power plants that can make use of it. The gas is being produced by international oil companies on take-or-pay terms, meaning the state incurs the full cost of available volumes.  

Between a rock and a hard place

To fix the situation, the government is proposing to renegotiate all take-or-pay power and gas purchase agreements to convert them to take-and-pay arrangements, which would limit its liability to the cost of output consumed rather than supplied. Although renegotiation will come at a cost—since the private investors, supposing they are willing to renegotiate, would demand to be compensated for the less favorable terms that would result—this is seen as cheaper than the status quo in the long term.

Nevertheless, the price is likely to be a high one. The Chamber of Independent Power Producers has said its members will not agree to renegotiation, and where their contracts to be terminated by the government, they would demand the full recompense provided for in the agreements. The cost of termination has been put at US$2 billion by Elikplim Kwabla Apetorgbor, the chamber’s president.

This amount, which is equivalent to one-quarter of total public revenue, can feasibly be raised only through recourse to debt. But the country already has too much debt—59.4% of GDP as at July 2019—that adding this much to it, on top of borrowing to finance regular budget deficits (this year’s will be 4.5% of GDP), risks jeopardizing economic stability. Termination of the agreements will be expensive in another sense; it will probably spawn litigation and dent the government’s credibility with foreign investors, which will restrict investment in the country.

The alternative of continuing to pay for surplus electricity is also not acceptable. One is hard put to suggest a way out of this mess. This is where public officials and bureaucrats paid with taxpayers’ cedis must prove their mettle. They should find a solution that minimizes both the cost to the taxpayer and any possible damage to relationships with investors.  

Manifold problems

Ghana has made strides in energy provision for its population, the share of which with access to electricity is 84.3%, one of the highest in Africa.

Fig. 1
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The oil and gas sector is growing rapidly, with the country now a net exporter of hydrocarbon products. Energy consumption outside the crisis years has been accelerating, fanning economic growth.

In spite of this, the current difficulties showcase the awful management of the power sector in particular. The state-owned power utilities, incredibly inefficient and undercapitalized, are on fiscal life support, as the government has assumed much of their debts (Figure 2) and is servicing them with tax revenues.

Fig 2

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In actual fact, liabilities from the take-or-pay power deals are directly owed by Electricity Company of Ghana (ECG); the main distribution utility to independent power producers but have been taken over by the government, the ultimate debtor.

ECG is arguably the weakest link in the electricity value chain. Its technical and commercial losses are around one-quarter of output (Figure 3). This is double the average in sub-Saharan Africa and three times the world rate. Rickety equipment, pervasive power theft through illegal connections, and weak management accountability are the main reasons for this egregious state of affairs. Independent power producers justifiably bemoan ECG’s lack of credibility as an off-taker, given that it takes a year on average for the company to pay its suppliers. Concurrently, revenue collection is low, as it takes ECG an average of about seven months to collect payments from customers. Government departments are especially guilty of not paying their electricity bills.

Fig 3.

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The United States government is providing aid to reform ECG under an initiative called the Ghana Power Compact. The agreement requires privatization of the company’s management through a long-term concession agreement with an investor. It is anticipated that this will increase investment in the utility and enhance efficiency. The concession agreement came into effect in March but was suspended by the government in late July over claims that demand guarantees posted by the concessionaire, Power Distribution Services Limited, turned out to be spurious. The agreement was still in limbo as at end-September, although the government in principle supports the concession arrangement.  

Electricity pricing is another factor aggravating the problems in the energy sector. Though electricity is not cheap (the average end-user tariff in 2018 was 15.4 US cents per kilowatt hour), its price is rigidly controlled by the government and is invariably inadequate to cover the utilities’ cost of production, contributing to the cycle of indebtedness in the sector.

Radical overhaul needed

The government says it is enlisting the assistance of the World Bank to implement the Energy Sector Reform Program (ESRP), which will address the fundamental ills in the sector in order to avert the financial catastrophe that awaits the country in a business-as-usual scenario. It is evident that the sector needs a radical overhaul, but this intended reform is hardly the first such attempt. Some past initiatives had even loftier objectives, yet left the core issues unsolved. One hopes that this time will be different.

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