Powering up: Looking to the private sector to meet the growing demand for electricity

The issue of electricity generation is once again creeping towards the top of the government’s agenda. With plans for rapid economic and industrial growth fuelled by hydrocarbons production, the burden on the country’s grid is likely to increase substantially over the coming years. As such, the moves toward privatisation which occurred in response to a two-decade-long energy crisis in the 1980s and 1990s are likely to be reinforced and developed, as the government seeks private investment to achieve its ambitious goals.

The electricity sector has already come a long way. National access to electricity has been growing steadily from 15% of the population in 1990 to 72% by the end of 2010. Renewables accounted for 78% of Ghana’s energy consumption in 2011, according to the Ministry of Energy (MoE), with petroleum coming in second at 22%. The sector has also made strides to diversify its generation mix. Although hydropower accounted for 68% of electricity generation in 2011, the days of complete dependence on the source, when droughts led to electricity crises, seem to be over.

GOING PRIVATE: Much of this development is a result of the government decision to deregulate the sector. This entailed the unbundling of the government-owned generator, the Volta River Authority (VRA), stripping it of its transmission responsibilities and handing them to a private company, Gridco, in 2008; and the introduction of independent power plants (IPPs) into the market. The country currently has an installed capacity of 2169.5 MW, significantly above its peak demand of 1636.9 MW in December 2011, according to Gridco and the Energy Commission. Gridco is an electricity transmission company that is building a substation in Kintapo to connect to the Bui Dam, which is also currently under construction. The dam is due to be completed in 2013 and is expected to add 400 MW to the nation’s electricity generation capacity.

The Akosombo Hydroelectric Power Plant, operated by the VRA, accounted for 58% of the electricity generated in 2011. The state-owned company also operates the Kpong Hydroelectric Power Plant (accounting for 9.52% of 2011 generation) and thermal power plants at Tema and Takoradi.

The Energy Commission has so far issued three wholesale electricity supply licences for IPPs: the currently operating 200-MW Sunon Asogli Power Plant as well as licences to Cenit Energy for the Tema Osonor Power Plant and the Cenpower Generation Company that will add 126 MW and 300 MW, respectively, on completion. The second thermal power plant at Takoradi, which accounted for 5.89% of generation in 2011, is owned by the Takoradi International Company (TICO), a joint venture between the VRA (10%) and CMS Generation, a subsidiary of UAE investment firm TAQA.

GROWING DEMAND: These moves towards privatisation have undoubtedly helped the sector, although there are signs that it is still in a precarious state. According to the Energy Commission, the country will require total electricity generation of 12,394-14,673 GWh in 2012, of which 11,000-12,000 GWh could be provided by the grid. The commission concludes in its “2012 Energy Outlook Report”, “The net shortfall plus the requirement for reserve margin is estimated between 3000-4000 GWh and would require an additional installed capacity of 500-600 MW gas-power plant equivalent which should have been in place by 2012.”

TARGETS: The burden on the system is unlikely to ease any time soon. Harriette Amissah-Arthur, executive partner of Arthur Energy Advisors, said, “Even before the discovery of gas, the demand for electricity was growing at 10% per year. If the oil and gas do what they are expected to do for the economy, we should expect the market demand to move even higher.”

As such, the government has set ambitious targets in order to meet these needs. According to the MoE, the government is seeking to increase total generation capacity to 5000 MW by 2015, while also reaching 80% of the population with electricity by 2015, and 100% by 2020. This would also reduce consumption of wood fuel from 66% of total energy in 2010 to 30% by 2020.

REACHING GOALS: To achieve these targets, the government is looking to the private sector and the establishment of more IPPs. However, the introduction of more private generators has been slow and there are still significant challenges for investors. Amissah-Arthur told OBG, “There’s a lot more interest in the market now than when we were established in 2001, but the market needs to move a lot faster.” One of the major problems, Amissah-Arthur said, is that there is the need for further clarification to create the necessary investor confidence; the issue of offtakers need to be adequately addressed to incentivise many more consumers to directly purchase from IPPs. “An IPP investor wants to have some guarantees to do their project, but these requirements prolong the project build-up. They want some guarantees that if there is a default on payment, there is a back-up plan in place since the current default offtaker is government owned,” she said.

The concern of investors, to some extent, centres on electricity pricing. “Potential IPPs want a government guarantee to secure the economic tariffs in the long term and their investment as a whole. said AmissahArthur. “If the projects were a two-year payback, the prices now would be enough. But when you have a 30-year project, you are looking at the long-term investment and a sustained environment that ensures the consumer’s long-term willingness and ability to pay.”

COST INCREASES: A number of factors have been driving up the cost of electricity tariffs, which are set by the Public Utility and Regulatory Commission. As of December 2011, residential customers using more than 50 KWh a month paid GHS17.5 ($10.38) per KWh, a 3% increase on the previous quarter. Nonetheless, the pricing structure, and the government regulation of such, remains a concern for potential investors, although this is perhaps secondary to worries about the management and viability of the distributor, ECG.

This is a new situation for ECG, a company that had previously only been signing power purchase agreements with the VRA, another public entity. Investor demands for liquidity support and calls for a proportion of their revenues to be placed in an escrow account would signal a significant shift in the business model of the offtaker. Indeed, such negotiations, which are slowing down the establishment of IPPs, seem to represent teething troubles in the move towards deregulation. Amissah-Arthur said, “Ghana did well to start the reform, but they need to move beyond this and take stock of what they want to achieve with the reform, what they have achieved so far and finish the job.”

Certain problems, such as the unreliability of gas supply from Nigeria (see analysis), are outside the government’s control and having a big impact on performance and pricing. Nonetheless, many problems are the result of inefficiency. The provision of electricity to commercial, industrial and residential consumers faces substantial challenges. Outages and unreliable supply are major concerns, especially for industrial clients, which accounted for 49% of consumption in 2011.

PRICING: Among the challenges that need to be addressed are the cost of unreliability and non-supply. The costs associated with a brown out can cost manufacturers thousands of dollars, for even just a brief outage. This has very negative effects on the ability of businesses to reliably estimate how many staff to hire and limits their ability to expand. Thus, the reliability of supply is equally important to the pricing, and companies are generally willing to pay more for a guaranteed supply. However, the issue of pricing remains a political one and the Ghanaian public, which has experienced regular price increases accompanied by restrained improvement in outages, is likely to remain sceptical of any further price movement.

The government, nevertheless, needs to find ways of improving the service. This is not simply a case of increasing the country’s reserve margin, but of also improving the transmission and distribution services. The distribution system loses reached 26.8% in 2011, according to ECG quarterly reports. One prospect would be to turn to the private sector, however, only one private distribution utility company has been licensed by the Energy Commission thus far – the Enclave Power Company, which is authorised to distribute and sell electricity for the Tema Free Zone.

LINGERING CONCERNS: It is anticipated that further licences will be issued, but certain questions still remain about how to model the privatisation process. One of the major issues is the discrepancy in profitability for potential distributors by region, with Accra, and the south generally, accounting for the majority of revenue in the sector. Discussions are ongoing to parcel out distribution areas in profitable and unprofitable pairs, so that one distributor would operate in Accra and the most unprofitable region, for example. The glitches in privatising the distribution network are generally illustrative of the challenges facing the utilities sector overall, but the government has made substantial strides, bringing private investment and deregulation to the sector, yet there is a long way to go. Cheap and reliable feedstock from the Jubilee Field will help, but the authorities want to court new investors to enter the market.