Challenges in the energy sector and how government intends to resolve it

The Minister of Finance, Ken Ofori-Atta has indicated that starting August 1, 2019, government will cancel all existing power-purchasing agreements which require that the country pays for power which it does not consume.

According to him, the country pays over half a billion U.S. dollars or over GH¢2.5 billion annually for power generation capacity that is not needed.

Presenting the mid-year budget review to Parliament, Mr Ofori-Atta said the wasteful expenditures in the energy sector are one of the main causes of increases in end-user electricity tariffs; making Ghana uncompetitive for manufacturing.

He noted that government had put in place measures to address the challenges facing the energy sector.

Challenges

According to Mr Ofori-Atta, the challenges in the energy sector, include:

• electricity tariffs that do not cover the costs of non-portfolio Power Purchase Agreements (PPAs);
• low collection, high technical and commercial losses;
• absence of a proper system for measuring and paying for the costs of power for street lighting;
• non-payment of utility bills by MDAs; and
• a high level of net sector arrears of US$2.7 billion (GH¢14.04 billion) as of January 2019.

What has been done so far

The Finance Minister noted that the total costs in the energy sector that government had to cover in 2018 amounted to US$520 million (GH¢2.7 billion).

He said by end-June 2019, government had made total payments of US$604 million (GH¢3.14 billion).

Forecast

According to Mr Ofori-Atta, if urgent steps are not taken to address the problems in the energy sector, projected payments in 2019 will be at least US$1 billion, (GH¢5.2 billion).

He added that the Energy Sector Reform Programme (ESRP) estimates that government would be paying over US$12.5 billion by 2023.

Resolution

As part of measures to address the energy sector challenges, Mr Ofori-Atta noted that government would convert all Take-or-pay contracts to Take-and-pay contracts.

“Accordingly, starting August 1st 2019, Government is to pay for energy and gas that we actually consume. All Take-or-pay contracts will be renegotiated to convert to Take-and-pay for both PPAs and Gas Supply Agreements (GSAs). Government will seek Parliamentary ratification where appropriate,” he said.

Consequently, Government has resolved as follows:

•  to suspend indefinitely or terminate all PPAs currently under negotiation;
• to immediately place a complete moratorium on signing new PPAs and Put-Call Option Agreements (PCOAs);
• to subject all future PPAs competitive and transparent procurement procedures. Government will therefore no longer entertain any unsolicited proposals.
• to implement the economic merit order dispatch which means that the most efficient power plants will be dispatched first;
• to improving the performance of the distribution utility and has agreed with the concessionaire a plan to reduce electricity losses and increase collections based on an agreed investment plan.
• to significantly shift in the medium-term, the energy mix to gas and renewables.
• to implement the recommendations of the Energy Sector Recovery Programme (ESRP) as approved by Cabinet; and
• to mandate the Energy Sector Task Force, as constituted by Cabinet based on the recommendations in the ESRP, to ensure and oversee the implementation of the sector recovery programme.

In addition to the above, Government is also taking steps to:

•  Relocate the Karpowership to Takoradi to immediately utilize Sankofa gas;
• Increase power exports by extending the grid to other West African countries;
• Streamline management of street lighting to ensure accountability and transparency in billing and payments;
• Increase productive uses of electricity and natural gas to spur industrialization; and
• Engage gas suppliers with a view to reducing the price of natural gas.