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Ghana has outwardly solved many of the problems that were plaguing the power sector as recently as 2016. Customers are no longer facing load shedding popularly known as ‘dumsor’ and the government claims to have cleared its debts to the state energy distributor, the Electricity Company of Ghana (ECG). Negotiations on outstanding debt to independent power producers (IPPs) are going well. So well, in fact, that this month, IPPs agreed to cancel USD 600m worth of government debt. But problems still persist in the form of costly oversupply and a lack of government willingness to reform ECG. The country risks another power crisis in the next few years should the government not take swift action to rectify its misalignment on energy supply and demand.
Legacy debts to IPPs from Mahama’s administration written off
The government has USD 1.4 billion in debts to the IPPs, stemming from the 2014-16 power crisis under President John Dramani Mahama. During this period, the government was forced to sign several emergency power supply agreements, primarily on a take-or-pay basis. The root causes of this power crisis were temporal – there were financial and technical difficulties with procuring gas from the West Africa Gas Pipeline and water levels at the Akosombo dam were hovering around the lowest operating level. Once they were resolved, Ghana was left with a significant oversupply of power. Accra has therefore been paying for unused power since 2016 and has recently sought to renegotiate with the IPPs to ease the financial burden.
With talks starting in earnest in 2020, there was little expectation of any significant concession from the IPPs as, contractually, government was tightly bound. Initially, IPPs (through the Chamber of Independent Power Producers, Distributors and Bulk Consumers, CIPDiB) were threatening to withdraw their services if payment of at least 80 percent of their arrears was not made. However, negotiations between IPPs and government have been more fruitful than expected despite the slow progress. On 10 March, the CEO of the CIPDiB “commend[ed] the energy minister for [his] good leadership and for creating a good working relationship between the IPPs and the Ministry of Energy.”
President Akufo Addo’s appointment of a new minister of energy, Matthew Opoku Prempeh, in March 2021, has ameliorated the situation, with his style said to be “bullish but fair”, according to AML’s sources. We expect both parties to have admitted behind closed doors that many IPPs do not have the capacity to produce what they are billing government for, and the government does not have the ability to pay. The way in which the debt was cancelled suggests that there could have been padding of the debts, with it likely explained by ‘accounting set offs’. The debt write off is positive, but there is no indication that there will be significant reductions in the future tariffs charged by the IPPs. This means that the debt will reaccumulate rapidly.
Growing demand will still likely go unmet
In its own 2019 report on restructuring the power sector, the government predicted that no new energy generation would be required until 2027. This forecast is untenable as demand growth has averaged 10.3 percent annually from 2015 to 2020. There is a solid pipeline of projects should the green light be given for talks to start on new generation, with at least 18 PPAs on hold pending government evaluation of their viability and the sector’s needs. But “the longer such projects are held on ice, the less likely they are to see the light of day,” an energy analyst told us. We agree with this point of view. The impact of increased oil prices and a substantial depreciation of the Ghanaian cedi in 2022 alone means that figures drawn up prior to December are effectively defunct.
The demand side is also likely to see further increases with industrialisation being a key facet of this government’s agenda. The One District, One Factory scheme has been a flagship policy since Akufo-Addo’s accession in 2017 and seeks to establish one factory in 228 of the country’s districts. There are also key programmes seeking to boost manufacturing capacity in the cocoa, petroleum, and automotive sectors.
With government reluctance to admit that new generation will be required, and forecasted increases in demand, the stage is set for more turbulent years for Ghana’s power sector. Our sources on the ground support this view. One source in an Accra-based diplomatic mission with a strong focus on the energy sector told us; “we are concerned that a lack of foresight will lead directly back to where Ghana found itself in 2013-14.” This was corroborated by a source from a major power systems manufacturer, who was more direct; “mark my words, we’ll be looking for emergency power again within the next two or three years.”
Capital logjams at distribution firms hinder investment
Separate from the need for an uptick in generation, significant reforms are needed amongst all in the power supply chain, but particularly at distribution firms of which ECG is the largest. System losses (technical and commercial) in 2020 at ECG were 26.6 percent[1] and there are significant but unquantified outstanding debts owed that they lack the capacity to collect. A revenue collection manager at ECG for a particular district in Accra told us: “corruption is the main issue. People owe, we go to disconnect and then a small conversation is had, and their power is left untouched. There are also thousands of illegal connections that we are not tackling, we are aware of all of it, but nothing is being done.” Corruption stifling revenue collection is a common issue across power distribution companies, and without governance improvements, the firms will remain indebted and therefore constrained in their ability to pay for much-needed transmission improvements.
In May 2021, the energy minister claimed that central government had cleared the final tranche of GHS 2.63 billion (USD 347.7 million) that various government ministries, agencies and departments owed to ECG. However, in March 2022, a taskforce was constituted to collect arrears from numerous ministries and other state infrastructure including Accra’s main sports stadium and the Kotoka International Airport (alone said to owe GHS 48 million/USD 6.4 million). These debts in turn inhibit ECG’s ability to pay the main transmission company, GRIDCo, who themselves then owe power producers such as the Volta River Authority and IPPs. This cascading debt effect limits opportunities for investment at all levels.
Politics must be decoupled from decision making
Constantly increasing legacy debts make the sector unattractive for further investment from generation companies. The government’s inability to pay is further constrained by a generally poor debt outlook that has limited its access to international bond markets. Increased political will is needed to make bold reforms outside of the usual decision-making timeframe that coincides with the electoral calendar.
Many believe that one way in which the situation can be tackled is a re-concession of ECG. The Akufo-Addo administration attempted this in 2019 – issuing a tender that was revoked after only six months due to an improper demand guarantee. Political considerations were blamed for this failure. For the government to move forward and successfully reissue this tender, parochial political concerns should be shelved – a recommendation easier said than done. Without concerted efforts, there is a strong likelihood of another power crisis in Ghana within the next three years.
[1] Independent sources estimate it at 40 percent.
