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The Government Induced Financial Threats To Ghana’s Energy Sector: Needs Urgent Budget Response

Ghana’s energy sector (power and gas) is confronted with severe financial threats notwithstanding the energy sector levy (ESLA) introduced by the previous administration and bequeathed to the present Government. Indeed, the sector is currently experiencing unprecedented financial crisis and according to the Energy Sector Recovery Plan(ESRP), as at January 2019, the net sector arrears stood at US$ 2.748 Billion. If nothing is done, electricity  production will grind to a halt and deprive Ghanaians of regular and adequate supply of power for domestic and commercial use.

Of this indebtedness, a whopping US$851 million is owed to the private sector. Furthermore, the ESRP document emphasises that unless there is an intervention, an additional US$1.268 Billion will be added to this deficit by close of 2019.  It is projected that at this rate, by 2023, the net arrears will balloon to about US$12.524 billion.

The purpose of this article, therefore, is not only to draw the attention of the government and other sector stakeholders  to this imminent energy sector catastrophe but also to reveal that gas contracts signed by this government, refusal of MDAs to pay for the power they consume, government interference in the running of the PURC, EGG’s technical and commercial losses including the PDS saga and the delay in the completion of the Tema-Takoradi interconnection pipeline among others have together conspired to create this unprecedented financial fracture in the energy sector.

In addition, this article aims to prompt Government to outline viable strategies in the imminent 2020 budget in order to resolve the financial threats to Ghana’s energy sector instead of hoping to spin the problem away with capacity charges allegations.

Ministries, Departments and Agencies (MDAs) Indebtedness to ECG

Every year, the Electricity Company of Ghana loses revenue of over US$180 million because consumers fail or refuse to pay their liabilities. Eighty percent (80%) of this amount, US$150 million, constitutes the indebtedness of MDAs to ECG due to both suppressed budgetary allocations and a blatant refusal by MDAs to pay for their energy cost. Over and above mismanagement of the ESLA funds and choking energy sector debts, the current government appears to have abandoned the laudable  initiative of the Mahama government which ensured a continuous replacement of post-paid (credit) meters with pre-paid meters.

You may recall, the NDC government replaced both post-paid meters and in some cases prepaid meters with smart meters that provided customers confidence in the metering system. The, then, government also initiated the installation of smart boundary meters to equip district managers of power to take full responsibility and account for electricity supplied to their jurisdictions.

The Financial Loss of US$190 Million Due To The PDS Saga

The overall technical and commercial losses in the power sector as at 2018 was 23%. In monetary terms, it amounted to US$400 million annually. The altruistic quest  to improve the technical and operational efficiency of ECG motivated the NDC administration to opt for the Millennium Challenge Corporation’s Compact II. As a result, the Government of the United States of America has, so far, injected about US$300 million into Ghana’s energy sector. But not anymore – because the additional US$190 million which was expected to address the technical challenges of ECG has been cancelled.

Unfortunately, this huge financial loss is due to the present Government’s handling of the compact and has caused the US Government to terminate the arrangement. A simple procurement process which transitioned ECG’s operational functions to PDS on 1st March, 2019 was botched due to cronyism, nepotism and an unbridled quest for self-gain. The consequential loss was easily avoidable hence unforgivable.  

Delays in Gas Infrastructure Completion

So far, avoidable delays in the construction of gas infrastructure have constrained and continue to impede gas offtake in Takoradi and Tema. The cost to Ghana is estimated at US$750 million (US$20-30 million every month since September 2017 when the project should have been completed as envisaged by the Mahama administration).

President Mahama recognised the need to implement the reverse flow project to interconnect the West Africa Gas Pipeline and the Ghana Gas Pipeline System in Takoradi. As earlier stated, the project was to be completed in September 2017. This innovation was envisaged to provide flexibility in the use of gas by thermal plants located in the eastern and western parts of Ghana with the ultimate view of ensuring regular supply of power to Ghanaians and industry even when gas supply from the West Africa Gas Pipeline fluctuates.

Unfortunately, the Akufo-Addo government has delayed this project under the guise of conducting a forensic audit. Three years on, no report has been produced on the so-called audit; yet there has been an expensive delay of the project. In addition to this, has been the twin delays: in relocating the Karpowership from Tema to the Sekondi Naval Base; and in upgrades at the Tema metering station.

These projects were aimed at allowing optimum utilization of gas produced from the Offshore Cape Three Point Sankofa fields and also to reduce payments for unutilized natural gas.

Excess Gas Supply

In 2019, gas demand was lower than contracted supply. This was mainly due to avoidable infrastructure bottlenecks. This resulted in a gas supply revenue shortfall  of about US$168 million. The state was obliged to pay for this under its obligations to Offshore Cape Three Points (OCTP) Sankofa agreement. In the midst of plenty gas, and curiously, the NPP government has gone to pursue other LNG contracts: the Takoradi (due in 2020) and the Tema (due in 2023) LNG projects.

According to the Energy Sector Recovery Plan, in 2020, excess gas supply will increase by an additional 250 mmcfd, carrying a take-or-pay obligation of $ 822 million annually at an assumed Brent Crude oil price of USD 66 per bbl. Furthermore, in 2022, excess gas supply will increase by a further 180 mmcfd, also increasing the take-or-pay obligation by another US$523 million annually at an assumed Brent Crude oil price of $ 66 per bbl.

Like capacity payments for excess power generation, the current PURC gas tariff methodology does not include take-or-pay commitments in the tariff, so costs are incurred without a source of revenue.

Questions to ask are, in the face of gas glut and no present national emergency because the Mahama administration fixed ‘dumsor’, why will the Akufo-Addo government go ahead to contract new LNG projects on a take or pay basis? I call on Government to immediately terminate the two LNG projects and announce same in the 2020 budget if Ghana is to avoid any unnecessary burdening of the sector with more crippling debts.

Excess Power Generation Capacity and Government’s Empty Spin

According to Government, in 2018 power generation capacity in Ghana was in excess and it led to an estimated US$320 million in capacity charges. Their spin is that the NDC procured too much generation capacity which resulted in increasing debts from “take or pay” contracts. Did I hear too much generation capacity? Too much generation capacity in an economy that should have been celebrating one factory in every district by now; if the government had been truthful and sincere about its One-District-One-Factory promise?

Indeed, Government maintains that with new power plants coming on stream in 2019, the excess generation capacity will grow and increase the capacity charge costs to US$620 million annually. Government further contends  that under the current PURC electricity tariff methodology, capacity charges for excess capacity in electricity are neither included in the tariff, nor are financing costs for any shortfall.

But, what the Government has deliberately hidden from Ghanaians is that the NDC Government entered into a number of Power Purchase agreements which were scheduled to come on-stream in a step-by-step manner at later dates, to address annual electricity demand increases, meet the existing suppressed demand, cater for the deficits that will be occasioned when emergency plants with shorter tenure are taken off-stream and replace obsolete plants like the TAPCo plant that are old enough to be decommissioned.

The government as part of its spinning machinery suggests that, the net dependable capacity as of December 2018 was 3,982 MW, which is expected to increase to approximately 4,650 MW by the end of 2019. At peak hours the demand for electricity is 2700MW.

Again what government is not telling Ghanaians is that for the system to run effectively at all times, best practice dictates that Ghana has a spinning reserve of 540MW. The spinning reserve is an ancillary service in any electricity market and provides  excess capacity to meet urgent and emergency requirements if called upon by the system operator.

Equally, Government’s spin doctors do not tell Ghanaians that we still have about 14% of Ghanaians who in this 21st century do not have access to electricity and must be hooked to the national grid in order to free them from poverty and enhance their chances of economic prosperity. I will not over-stretch VALCo’s need of 300MW to enable them increase their operations to five potlines so as to create the needed jobs in the integrated aluminium downstream industry.

Beyond consumption within Ghana, under President John Dramani Mahama’s administration, the transmission line from Ghana to Burkina Faso was being upgraded from a 161kV to a 330kV. This was to enable Ghana export power to our northern neighbours. From the schedule, Ghana should have been exporting about 400MW of power to Burkina Faso and other Sahelian countries, by now.

Unfortunately this project was suspended because Agence Française de Development (AFD), the financiers of the project, felt that the financial covenants that GRIDCo had entered into with them had all not been met because of the avoidable liquidity crisis GRIDCo is experiencing presently even though the ESLA funds continue to accrue to Government coffers.

I am informed AFD is currently requesting a government of Ghana guarantee before the resumption of  disbursement of the remaining funds.

I, also, expect the Finance minister to outline concrete steps to enable GRIDCo pursue this AFD project. The market within the sub-region is large and lucrative. Therefore, if managed well – as was done under the NDC administration which made the Volta River Authority exceed their revenue targets in 2018 mainly because of export of  power – we can derive even greater profit from our neighbouring countries.

Conclusion

I have sought to draw attention to the unprecedented financial crisis in which the energy sector of Ghana has been plunged into by the Akufo-Addo administration notwithstanding the continuous presence of the ESLA funds. I have also shed light on how mismanagement of the MCC Compact II has caused a direct financial loss of US$190 million to the energy sector of Ghana through the nepotistic PDS scandal.

Furthermore, the refusal of MDAs to pay for power due to inadequate budgetary allocations coupled with needless and avoidable delays in the completion of the Tema-Takoradi interconnection pipeline and the AFD sponsored Ghana-Burkina Faso transmission lines upgrade projects have also been shown to be contributory factors to the sector’s crisis.

From the foregoing, it is important that in the 2020 budget which essentially is going to be the last budget for this government,  the Minister for Finance must, in addition to addressing  these crippling debts, state clearly how he is going to:

1.    Help GRIDCo complete the 330Kv Transmission Line to Bolgatanga to enable, VRA and ECG export excess power to Burkina Faso and its environments;

 

2.    Ensure that VALCo gets its full complement of power requirement at a tariff that makes them competitive to create jobs for Ghanaians;

 

3.    Aggressively extend the national grid to the 14% of Ghanaians who do not have access to power in the midst of excess capacity;

 

4.    Handle the LNG contracts that have been signed by the current government on a take or pay basis even in the face of gas glut;

 

5.    Ensure that government’s indebtedness to the Power SOEs are settled and new ones not occasioned;

 

6.    Help the Utility companies reduce their technical and commercial loses through deployment of new and modern infrastructure;

 

7.    Fully complete the Takoradi-Tema Interconnection pipeline to evacuate stranded gas in the west to the eastern power enclave; and

 

8.    Complete the relocation of the Karpowership to Takoradi to make use of excess gas in the Aboadze enclave.

Failure to adequately address these germane issues will spell doom not only for Ghanaians but also, for the next government  of the NDC from 2021 and beyond, the time to take action is now.

Hon. Edward Abambire Bawa (MP)

Bongo Constituency

November 10, 2019