That “energy is the fulcrum of our country’s economy” is no understatement. It is the single most important sector that drives all other sectors of our economy. Consequently, all governments endeavour to fashion out very critical policy measures to regulate the sector in the bid to transform or restructure it.
Truly, the sector is fluid and responds quickly to various dynamics, so restructuring per se is not a bad idea. What is key, however, is that any and every form of restructuring of the sector must be geared towards making it fit for a purpose and workability. It against this backdrop that we ought to critically evaluate one of government’s key policy intervention in the sector. And that is the plan to create a “US$2 Billion Energy Sector Fund” to re-finance the existing debt of the Independent Power Producers (IPPs).
Creating US$2 Billion Energy Sector Fund to re-finance the existing debt of the IPPs within Ghana’s energy sector or outright purchasing of some of the IPPs with the primary goal of facilitating extended and cheaper financing to key producers and stakeholders with the aim of reducing Government’s excess capacity payment and overall costs within the sector is not strategic. Any attempt to force this idea on the IPPs will amount to nothing but “Nationalization” of the energy sector, which wouldn’t speak well of the nation.
As a prudent measure, this US$2 Billion Energy Sector Fund must be used to finance the legitimate and non-negotiable Capacity Charges of the IPPs.
Funding the Annual Revenue Gap created by the ignored or deferred capacity charge component in the Public Utility Regulatory Commission’s (PURC’s) tariff methodology, remains the key challenge of the sector. This gap and its cumulative consequence will linger on if a sustainable financing is not arranged. The intended US$2 Billion Energy Sector Fund, and the existing Energy Sector Levy Act (ESLA) should best flaw this challenge. From this, it is clear that the supposed half-a-million dollar cost of excess capacity on the neck of government is candidly an avoidable cost. That is, government only wants to look good before the end user by creating artificial lower tariffs, where some prudent costs are being disallowed.
Tariff Setting
There are two main considerations in electricity tariff setting in any electricity market – the Regulated and the Deregulated. In the regulated market, the state owns the generation assets and may choose to ignore the capacity charges; whereas in the deregulated market, the generation assets are owned by the private sector usually financed by debt and equity.
In setting the applicable electricity tariff for the deregulated, it is required as an industry “best practice” across the globe, to add the Capacity Charge component to the Energy Charge to arrive at the “Bulk Generation Tariff”. That is, sum of Capacity Charge (Capacity Recovery Charge = Debt and Equity) plus Fixed Operating and Maintenance Costs) and the Energy Charge (Fuel Cost + Variable Operating and Maintenance Costs)
Source: Author’s construct
The industry practice is clear. IPPs in Ghana did not re-invent the wheel, and so they must not be seen as people who are only concerned with unbridled profit, and as extortionists. PURC’s tariff methodology must rather be reviewed to avoid government’s funding of the Annual Revenue Gap created by the ignored or deferred Capacity Charge component.
IPPs rely on “take-or-pay” obligations to ensure their revenue is secured and predictable to enable them honor their debt obligations to lenders, aside the fixed operating and maintenance costs of the power plants.
Undue Political Interference
Energy studies is an important discipline in any economy because of the vital nature of the commodity, and cannot be underestimated. Power business is not a business for the politicians and social commentators (“studio energy experts”), most of whom have not worked in or run any power plant, lacks the understanding of power business. Sincerely, unless politicians and other party apparatchiks and hangers-on takes their hands off the sector, the problems of the sector will remain unsolved, whilst we continue to dance around the challenges every year.
A critical lingering challenge plaguing the sector is the current PURC electricity tariff methodology. This tariff methodology neither include the legitimate and undeletable Capacity Charges in the PPAs nor any financing cost for any revenue shortfall, as well as the 20% National Reserve Margin which must be paid for at all cost. Excluding these costs from the tariff calculation adds to the sector shortfall, as they are actual costs incurred by the commitment holder for which there is no anticipated revenue, which government or the off-taker must by all means pay.
Thus, an expert analysis of this situation would have revealed that the most logic thing to do is to use the US$2 Billion Energy Sector Fund to finance the Capacity Charges, if government doesn’t want to recover through the tariff. This is simple.
To lower electricity tariff or Revenue Gap is not to re-finance debts or equity of IPPs. Lowering tariff unnecessarily will cause more harm to the sector. Government must take the bold step to negotiate for a reduce gas price and leave the Capacity Charge competitiveness to competition among the IPPs or generators, and enforce strict implementation of the Economic or Merit Order Dispatch. Government must rather focus on competitiveness, reliability and efficiency, as lowering tariff unnecessarily will cause more harm to the sector.
It has been erroneously mentioned on many platforms that Ghana’s electricity price is the highest in the sub-region in order to make nonsense of the right computation of tariffs.
The above is the confirmed data as at the end of 2019, in which Ghana is ranked 7th lowest, among the 15 nations of the ECOWAS. And the country still have the potential to do better as a country, if the right measures are taken.
No IPP for Sale
It must be noted that “no IPP is up for sale or interested in government participation”. The IPPs who have been a strong backbone to the Ghanaian power sector, committing huge capital to the sector, rather strongly recommend the participation of IPPs in the Electricity Company of Ghana (ECG); given IPPs proven and tested track record of injecting the required finance to the sector, and making available to Ghanaians reliable power at all times. It beats imagination why government would still be looking offshore for financial support of less than US$500 million to inject into ECG’s operations for purposes of enhancing the efficiency of the entity, when IPPs have over a billion-dollar sitting in the books of the ECG.
Any unbiased industry player will question the rationale behind government’s idea to participate in the already successful independent power production. One would wish to question government’s track record in managing any segment of Ghana’s power sector, given for example the AMERI Re-negotiation, and the ECG concession mess, which brought a lot of shame to the country.
Truth be told, any unbiased profiling of the Negotiated Obligations or Terms of the PPAs, will reveal the bare fact that the IPPs performed their obligations 100 percent, but not the government. For a fact, the worst performance of a defaulting may not be less than 98% availability. If the government through the ECG would want to participate in power generation, then the ECG must rather move out of their comfort zone, to go and explore new and emerging market.
Excess Capacity and Associated Costs
A country or power supply system is said to have ”excess capacity” when generation capacity is in excess of the demand or needs of the entire country or system.
Excess Capacity is largely a good consequence because:
- It enhances supply reliability
- It is a measure of demand growth
- It facilitates economic development, especially where tariffs are generally competitive
Simple addition and subtraction is good but it is important to note that Excess Capacity is not measured on Installed Capacity but by availability or otherwise Dependable Capacity.
Source: Energy Commission 2020
The country’s Dependable Capacity as at the end 2019 stood at 4613MW and the Peak Demand at 2881MW (about 3000MW presently). This implies that the excess capacity as at the end of 2019 was 1732MW (about 1613MW presently), if the statutory 20% reserve margin is not accounted for. Factoring in the 20% margin, which in effect is about 1300MW (on Installed Capacity), leaves an “Excess Capacity of a little over 400MW; instead of the unconfirmed 2700MW excess capacity being trumpeted about by government and its commentators. In effect, the so called excess capacity is extinct.
For any existing Excess Capacity, there are unserved effective demands currently – 1DFIF, Steel Industry expansions – B5 alone requires about 100MW to power its new plant. Also Car Assembling Plants, Street lightening, the mines, Alumina and bauxite processing are also unserved markets that will automatically absorbed the current excess capacity, where mention is not made of the annual percentage demand growth against the 18months required to bring a new generation on stream.
But a more serious allegation is that government pays USD$500Million per year for power it doesn’t use. This is nothing but a “Factual Inaccuracy” that must be drowned with all certainty. On the contrary, government incurs USD$420Million, made up of the legitimate USD$320 Million in excess capacity charges and USD$100Million in Eurobond interest. Also, government currently is the single largest debtor to ECG; owing a cumulative amount of US$1.3 Billion (representing 47% of the total sector arrears). ECG is stressed up by this position.
To the extent that ECG loses over US$180Million annually to non-payment, USD150Million annually to MDAs et cetera. ECG’s own annual commercial and technical loses is over US$400 Million, representing about 24% of its total revenue.
To make ECG work again, that is to become operationally and commercially viable, it requires about USD$100Million per annum for five years. This requirement should form the crux of discussion in the sector.
With all these facts and evidence, one is left to ask;
- Where then did IPPs commit crime to be labelled as usurious? How do we pay the power producers adequately, reliably and fairly?
- Between Government and IPPs, who is a better manager of power related issues?
In seeking to restructure the energy, government must be strategic in its approach to ensure the best outcome is achieved, without necessarily attracting unnecessary costs and damages to itself as it has done on many occasions in the past.
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Author: Elikplim Kwabla Apetorgbor, CEO, CIPDiB
E-mail: info@cipdibghana.com