Privatisation of Ghana’s Energy Sector May Aggravate Energy Crisis

Ghana’s plans to privatise the energy sector may not be a sustainable solution to the country’s energy crisis.
Published: Fri 04 Sep 2015

Ghana’s government plans to privatise  its electricity supply industry in an attempt to create a stable supply of electricity but there are concerns that the government could be taking the wrong approach. There are concerns that the proposed private sector participation may see tariffs increase substantially as private companies focus on accumulating profits in the short term instead of developing a long-term and sustainable approach to Ghana’s energy crisis.

Ghana’s energy crisis

The country currently faces its worst energy crisis in over a decade which is paralysing the economy.  Load-shedding leaves Accra and Kumasi, Ghana's two main cities, with 12 hours electricity and 24 hours total blackout.

Currently, Ghana’s total energy demand far exceeds its available power generation capacity. Ghana's electricity demand is increasing by 12% annually, the highest in sub-Saharan Africa. Total demand currently stands at 2,100MW. But against this total demand, available generation supply is just 1,600MW. The country's generation capacity stands at a total of 2,800MW from the mix of hydro and thermal plants installed, but not all of that can be brought into stream because for one thing, an unexpectedly low rainfall has crippled power production from all the three dams which generate hydropower.Two of the country's largest dams – Akosombo and Kpong – have been operating at low levels since last year.

Also, thermal plants fired by gas are also not generating at maximum capacity, and that is largely blamed on Nigeria reneging on its legal obligation to supply Ghana with 120 standard cubic feet of gas through the West African Gas Pipeline. That alone has chopped off 450MW from the total power supply.

Failure to carry out regular maintenance and upgrades at power plants has put additional strain on Ghana's hydroelectric dams, which generate most of the country's electricity.

In addition to the low rainfall challenge, Ghana’s nationwide distribution losses of about 21% is caused mostly by faulty equipment and power theft.

Privatisation to resolve Ghana’s energy crisis?

To resolve the energy crisis, the government plans to privatise the Electricity Company of Ghana (ECG), the state-owned power distribution utility.

Privatising the ECG is the outcome of negotiations between the government and the Millennium Challenge Corporation, an aid agency of the US government.

Under the agreement, the Ghana government will access the Second Millennium Challenge Account (MCA) for a grant of US$498 million to restructure the energy sector with the condition that it allows private sector participation in the energy sector.

Under the agreement conditions, Ghana must improve efficiency in the sector and the privatisation of some of ECG’s operations. The government also needs to see to it that outstanding debts are collected, that distribution losses are reduced and generation capacity improved. The end goal is to create an effective customer service and strengthen financials to be better off-takers of Power Purchase Agreements.

In March this year, deputy finance minister Mona Quartey reported that the government is willing to only privatise the revenue and bill collection arm of the ECG. Interestingly, the state is the biggest consumer of electricity but does not pay its bills. As of October 2014, figures indicate that government indebtedness to the ECG was US$375 million, constituting more than 62% of the company's debts.

By failing to pay its bills, the government is negatively affecting the the power delivery chain. The ECG has to buy power from Volta River Authority (VRA) and Independent Power Producers (IPP) to distribute to household consumers and industries, but who in turn, due to debts owed them by ECG, can neither maintain their plants and equipment nor purchase new ones in order to increase generation.The ability of ECG to even replace their transformers is undermined, thereby causing the unreliable power supply.

One of the conditions for the MCA grant is that the ECG is cleared of its debt in order to attract private investment. In response, the government has agreed to clear all the debts it owes ECG.

Perhaps the government should be settling its power bills (without the incentive of receiving private funding) and focus instead on the power generation shortage.

Questionable energy policies

Over the last two decades, the VRA has been weakened over time by a combination of government policy as well as the particular practices that have affected the ECG.

These policies for example have included the selective suppression of tariffs, which has meant that the generator particularly VRA has not been able to get a proper rate of return.

In 2006 after the government bought aluminium smelter Valco, formerly owned by the American aluminium giant, which by then had become an obsolete plant. Having bought the plant the government had to use it and made VRA supply power at a third of the cost of generation. This created such a crisis for VRA that it became a threat to the whole economy because outages were affecting the whole country. The World Bank had to intervene and make the government pay the arrears owed by Valco to VRA.

This backdrop provides substance to the question of whether ECG is in fact the biggest cause of the irregular power supply. Would privatising the ECG really resolve the energy crisis? If the government needs funding to restructure the operations of the ECG, perhaps this should be sourced locally instead of relying on overseas funds. For instance, by listing ECG on the Ghana Stock Exchange, sufficient funds could be raised. State-owned petroleum products retailer, GOIL, followed this path and is doing well.

When it comes to offering state-owned utilities to foreign companies, Ghana has burnt its fingers before. A few years ago, the government entered into a PPP arrangement with Aqua Vitens Rand Ltd, (AVRL) to manage the Ghana Water Company (GWC), but that ended acrimoniously and the government didn’t renew the contract and repossessed GWC after pressure from workers and civil society organisations who complained of the poor performance of AVRL.

If the challenge of power supply is not given the attention it needs, the private sector participation may bring about increased tariffs and accumulation of profits for the private operator whose ultimate objective may not be to improve the national economy and the general well being and prosperity of Ghana’s citizens.

The success of the privatisation is also highly dependent on the quality of regulation. Regulators should ensure that privatised firms meet certain standards of service and that they keep prices low.