Private partnerships and institutional reform transform Ghana's energy sector

For decades Ghana’s power supply outstripped demand, but that equation has shifted in recent years, with inconsistent electricity generation and transmission constraining economic growth. Traditionally the country has been a strong performer when it comes to power investment, and indeed, as the US Power Africa initiative notes, “as compared to regional countries with similar energy and oil-and-gas investment opportunities, Ghana is well-ranked as an investment destination”.

High Priority

However, the IMF identified the existing power problem as a potential long-term overhang on economic growth: “If the current electricity crisis is not swiftly addressed and energy sector reform is delayed, growth may be even lower than projected in 2015 and not rebound as quickly as expected.” The 2010 Wholesale Power Reliability Assessment, which remains a frequently cited document by industry insiders, found that based on 2009 figures insufficient power supply reduced GDP growth by a rate of between 2% and 6%. More recently, the Ghana Employers’ Association said as many as 13,000 people lost jobs in the first four months of 2015 because of the power outages, known locally as dumsor. Factories saw their costs for electricity rise and experienced a loss of competitiveness as a result, given the need to buy diesel generators and produce their own power at a higher cost than what comes off the grid. “Demand for generators now cuts across several segments, from residential up to small and medium-sized enterprises to larger organisations,” Emad Adeeb, managing director of Mantrac, told OBG. “It is not surprising given the power issues faced in Ghana: the generators help businesses fill the gap left by grid electricity.”

The country has a slew of new projects in the pipeline and presents an attractive investment environment, but progress in building new facilities has been slower than anticipated, prompting protests in 2014 and eventually leading to institutional reform, with the establishment of the Ministry of Power as separate from the energy portfolio. Kwabena Dunkor, the newly installed minister of power, took office with an ambitious mandate, promising that he would resign if the supply shortage is not fixed by the end of 2015.

Challenging Confluence

The mismatch between supply and demand is in part a result of the confluence of a number of different factors. The large proportion of hydropower, for example, has increased vulnerability to climate change. The country gets 37.5% of its electricity from one facility, the Akosombo Dam in the south-east, where low water levels are having a significant impact.

Similarly, demand growth has been unusually high and has outpaced infrastructure construction. The 2010 assessment found that between 2000 and 2009 growth in the rate of peak demand was 44%, whereas new generation capacity expanded by 7%, and few new transmission lines were added to move power to demand centres. “Given the challenges it has faced to date, Ghana needs to streamline the execution of complex and large-scale energy projects,” Michael Zormelo, managing director of Omni Energy, told OBG.

Additional exogenous pressures have exacerbated the issue. Imported gas supply from Nigeria has fallen short of the contractual amount – a result of similar problems in that country – forcing Ghana to import crude oil at a higher price to run through its thermal plants. As a result of broader budgetary problems, buying expensive heavy fuel is difficult, and the government cannot afford to buy enough to generate at full capacity.

The country has also hoped to leverage domestic gas, and certainly has a domestic supply large enough to do so, but the construction and operations of the gas offtake infrastructure has been delayed by several years. The first processing facility was completed in late 2014 and should go some way to reducing the feedstock shortfall.

Bureaucratic and cash flow factors also add to the issue. According to press reports, a number of government agencies have outstanding balances for the power they have used, while the main distributor, the Electricity Company of Ghana (ECG), is in debt to the main generator, the Volta River Authority (VRA). To be sure, these problems are hardly unique to Ghana, and in many ways highlight the country’s sizeable investment needs and opportunities – for independent power producers (IPPs) as well as for private participation in distribution, where elements of operations are expected to be concessioned to outsiders ready to bring their technical expertise to the country.

Size & Scope

About 76% of Ghanaians have access to power, according to the Ministry of Power, and the goal is universal access by 2020. “The Ghanaian population as a whole still does not see electricity to be as much of a necessity for households to the extent that they will purchase generators,” Djan-Tawiah Kwame, the managing director at Cummins, told OBG.

Ghana gets 55% of its power from hydroelectricity, almost 45% from thermal plants using gas or oil products, and less than 1% from solar energy. The VRA is the major producer of power in the country, accounting for 73% of generation, according to its April 2015 update. IPPs account for the rest.

Peak demand in 2014 was 2179.5 MW and installed capacity reached 2719 MW, according to figures by Power Africa, a multinational programme initiated by the US, which aims to expand US private sector investment in the generation, distribution and transmission of Africa’s power sector. However, actual and available production capacity is much lower, as a result of fluctuations in rainfall and essential equipment being cycled off-line for maintenance.

As of April 2015 actual capacity was 1358 MW, according to ECG data. Since February there has been a set schedule posted on the ECG website for load shedding to cope with the shortfall: residential consumers get 24 hours of power followed by 12 hours without. Factories receive electricity for six days followed by two without. In June 2015 Dunkor told Parliament that the load-shedding schedule would be abandoned by December, however, he did not guarantee access free from disruptions after the scheduled end to the rationing on January 1, 2016. As of mid-July 2015 the ECG was not following any timetable because the power received from the source was fluctuating.

Energy consumption grew at a rate of 46.9% from 2000 to 2013, according to government statistics, rising from 6367 GWh to 9355 GWh in the period. Of that total, industrial consumption has been fairly steady at around 4300 GWh, despite a slump in 2003 and a slow recovery in usage since. Residential consumption more than doubled in the period, rising from 1479 GWh to 3228 GWh. Non-residential use almost tripled, from a low base of 551 GWh to 1525 GWh.

Sector Framework

The publicly owned VRA serves as the country’s largest generation company and is also a direct provider to bulk industrial customers. Established in 1961, its first asset was the 1000-MW Akosombo complex, a hydroelectric facility, which was originally built to power what was at the time Africa’s largest aluminium smelter.

The VRA had previously been a vertically integrated state monopoly handling all aspects of the sector, however, Ghana has been a part of the global trend of unbundling these functions in hopes of attracting private investment and reaping the rewards of a more competitive market.

Foreign companies have announced intentions to invest in Ghana’s power sector, such as General Electric’s plan to import liquefied natural gas and build a power plant to use it. However, final investment decisions have yet to be made, and may hinge on the government’s ability to further reform the legal and regulatory environment (see analysis). As a result of sector reforms to date there are now six agencies with primary responsibility over elements of the electricity sector.

Reform Efforts

Early reforms to sector structure included the creation in 1997 of the Energy Commission, established as a licensing authority and technical regulator, and the Public Utilities Regulatory Commission (PURC), to set tariffs. PURC’s mandate includes quarterly adjustments to make sure the regulated prices that consumers pay are high enough to reflect distributors’ costs. There are often delays to these reviews, however, which can be held up if it is determined that services have been of poor quality or that consumers could not afford a hike. In 2005 Ghana separated transmission from generation, and opened up the sector to outside investment in IPPs. Operation of the grid was transferred from the VRA to a separate entity called Ghana Grid Company, which became operational in 2008. The ECG is now the primary distributor and provides the bulk of power, as its coverage territory in the southern part of the country covers almost all major demand centres. The Northern Electricity Department (NEDCo), which is responsible for distribution in Ghana’s less-dense northern region, is a wholly owned subsidiary of the VRA.

Generation

Akosombo remains Ghana’s most important generation facility, and struggles there are a key reason for the current situation. As of April it was producing at 580 MW, according to ECG data. The water level in 2014 and 2015 was hovering close to 73.15 metres, which is the minimum operating level, according to the VRA. The record low was 71.86 metres, on June 12, 1984. That followed the lowest annual inflow of water in the dam’s history, in 1983.

The water level has fallen below the minimum operating level multiple times in recent decades, and these past few years have not been the first period in which lower rainfall has meant less power from Akosombo. When water levels fell in 2006 and 2007 the resultant power crisis cut GDP growth by about 1%, according to a World Bank report. The VRA owns another hydro complex at Kpong in the country’s south-east, with 160 MW of capacity. The third hydro facility, Bui Hydroelectric Project, was built by Chinese construction company Sino Hydro and is owed and managed by the Bui Power Authority. Production from it began in 2013, and capacity is 400 MW.

Ghana has eight thermal power plants, none of which were producing at full capacity as of April 2015, due to factors including technical issues, a lack of maintenance, or insufficient access to gas or oil as feedstock. The plants are clustered in two locations, Tema and Takoradi, both of which are close to large industrial users and each home to one of Ghana’s two main ports.

The Takoradi Power Station is 20 km away from the town, in Aboadze, and includes three facilities with a combined 682 MW of thermal generation capacity. The largest and the smallest – with capacities of 330 MW and 132 MW, respectively – are owned by the VRA. The mid-sized facility, TICO, has capacity to produce 220 MW and is majority owned by the Abu Dhabi National Energy Company (TAQA). TAQA has a 90% stake, with the VRA holding the remaining 10%. All three plants are able to run on either natural gas or light crude oil (LCO).

Tema is home to two VRA-owned power plants with capacity of 110 MW and 50 MW, respectively, that can run on LCO or gas. At the same site is an LCO-fired IPP owned by Cenit Energy with a capacity of 126 MW. Cenit is a special-purpose vehicle of Ghana’s national pension fund, Social Security and National Insurance Trust, and was created to invest in power generation. A fourth plant, a gas-fired IPP with 200 MW of capacity located in Kpone near Tema, is owned by Sunon Asogli, a subsidiary of China’s Shenzen Energy Group, a power producer in the Chinese province of Guangdong.

There are two additional plants under construction near Tema. The VRA is developing a 220-MW thermal power plant at Kpone, the first unit of which was expected to start adding 110 MW to the grid in June 2015. The other is an IPP from Cenpower, an indigenous consortium with a mix of private and multilateral financing sources pooled to build a 340-MW plant expected in 2017.

Renewables 

Renewable-energy sources outside of hydro facilities are not yet a significant contributor to Ghana’s power mix, but the government has in the past said it would like to boost their contribution to 10% of generation capacity by 2020. One step towards this end was the passage in 2011 of the Renewable Energy Act, which established a policy that incentivises investment by basing feed-in tariffs set by PURC on the technologies used and costs of renewables projects, according to a sector overview by the law firm Norton Rose Fulbright. No project has yet come to fruition utilising the feed-in tariffs, although 33 have provisional licences allowing them to develop plants, according to Power Africa. With the proper incentives, renewables could play a greater role. “Isolated solar systems would be the most effective means for rural electrification,” Omane Frimpong, CEO of Wilkins Engineering, told OBG. “However, the government’s non-reflective tariffs with ECG make this solution unpopular,” he added.

The policy direction may be changing, however, as in April 2015 the country capped new capacity via the feed-in tariff at 150 MW, and individual projects at 20 MW. Authorities said they wanted to ensure the viability of the plan, including the grid’s capacity to handle newer and more power.

Feedstock

Now that a processing plant near Aboadze has been completed, Ghana currently has access to two sources of natural gas for its plants – its own domestic gas and imported gas via the West Africa Gas Pipeline (WAGP), which originates in Nigeria and terminates at Takoradi. However, in spring 2015 the country was unable to fully take advantage of either of these sources.

Gas inflows from the 678-km WAGP have been inconsistent at best. Built by a consortium including Chevron and government entities in each of the four countries it passes through, which include Nigeria, Benin, Togo and Ghana, the WAGP’s capacity was initially constructed at 170m standard cu feet per day (scfd) and can be expanded to 460m scfd. Nigeria’s contractual obligation to Ghana via the pipeline is 100m scfd, but supply has never been regular for very long, sinking to as low as 40m scfd at times, according to a report from IMANI, a Ghanaian think tank. Furthermore, supply was completely cut off from August 28, 2012 to July 18, 2013 because the pipeline was severed off in Togo by the anchor of a ship. “In power provision, the system is only as strong as the weakest link,” Harriette Amissah-Arthur, executive partner at Arthur Energy Advisors, told OBG. “Improvements to one link can be cancelled out by shortcomings in another link critical to have a high-level plan for power infrastructure,” she added.

GAS PLANT READY: Plans to build a facility to process domestic gas culminated with the Atuabo Gas Plant coming on-line in late 2014. The long-discussed plant was financed at a cost of $900m using part of a $3bn loan from the China Development Bank. A slower-than-expected pace of disbursement of tranches of that loan contributed to the construction’s delay.

Atuabo is an important element of Ghana’s overall energy strategy. To ensure it extracts the maximum value from its energy sector, Ghana has limited flaring. Indeed, the state’s contract with its partners in the Jubilee field, Ghana’s first producing energy asset, calls for the first 200bn cu feet (bcf) of associated gas to be given to Ghana at no charge. According to the terms of the agreement Ghana was responsible for building a processing plant and a pipeline connecting it to Jubilee, and this job was undertaken by the Ghana National Gas Company, a government entity commonly referred to as Ghana Gas. Commercial operation at Atuabo began in December 2014, although an initial testing period lasted until March 2015. Though the plant has long been seen as a big step forward for the electricity sector and for Ghana as a whole, the benefits have thus far accrued in smaller increments. “Local production of gas is great, but it won’t change energy costs dramatically. Moreover the growing demand for diesel is unlikely to decrease,” Tewiah told OBG.

One hitch is that the VRA’s two thermal plants at Aboadze are in need of maintenance and cannot be run at full capacity. As a result, as of April 2015 Ghana Gas could only send up to 80m scfd, according to the company, which is enough for 320 MW of capacity, as opposed to the theoretical capacity of 632 MW the plants have. Another problem has been uneven gas supply from Jubilee. The most productive day since the plant’s testing period began in November 2014 yielded just 74m scf, according to Ghana Gas. Since then, repair work on a gas compressor meant that supply was suspended for most of July, but gas was flowing at a rate of 100m scfd as of mid-August 2015.

Although both the WAGP and the Jubilee-Atuabo-Aboadze connections are currently operating below capacity, Ghana is looking forward to new sources of domestic supply for its gas-to-power plans. Next up is associated gas from the Tweneboa-Enyenra-Ntomme offshore field, which will also be processed at Atuabo. First oil from the field is expected in mid-2016, according to Tullow, the field’s lead operator. Next up to reach production is the Sankofa field, which is being developed by ENI and Vitol and where reserves are estimated at 1.5trn cu feet – enough to supply all of Ghana’s thermal electricity needs to 2036. Production is expected from 2017, and processing will be done by the companies on an offshore vessel.

That gas, combined with Atuabo’s ability to reach a capacity of 150m scfd, implies that Ghana as it stands now should theoretically be able to end the import of fuels for electricity generation with its own domestic supply, if generation capacity can expand sufficiently to use it all.

Another potential new source to address demand in the shorter term is liquefied natural gas, which is in the works with a group of private investors exploring the potential for a combined-cycle plant fed by a floating storage and regasification unit (see analysis).

Transmission & Distribution

Having electricity use clustered in proximity along the coast helps in the task of operating an efficient grid, but does lead to regional disparities in coverage, with most transmission capacity found in the south, with fewer lines in the north. Still, transmission losses have been below 5% of net generation in every year from 2000 to 2013 save for 2003, when the figure reached 5.9%, according to ECG statistics. “Right now the grid is not a problem,” said Jabesh Amissah-Arthur, business-development manager for Arthur Energy Advisors. “But investment is needed to keep it that way.”

Fee Collection

Commercial losses are a larger issue, as it has been difficult for ECG and NEDCo to ensure that all customers pay for what they use. Illegal connections and metering problems are among the chief contributors to the failure to collect on 22% of power generated in the country, according to IMANI’s research.

The job of improving conditions falls to ECG as the main distributor. Efforts are under way, such as installing pre-paid meters, so those unwilling to pay cannot access power. In December 2014 ECG delivered 30,000 pre-paid smart meters with a built-in automated reading system. Yet while small-scale theft is a problem, as of April 2105, 60% of the non-payment problem comes from government accounts, according to ECG figures.

This has a significant knock-on effect on ECG’s cash flow. As of late 2014 the estimate was that public sector arrears to ECG totalled GHS522m ($144.9m). Efforts have been made in the past to clear these debts, and the structure of the IMF loan-and-reform package for the period of 2015-17 outlines a clear process to eliminate it. That includes an auditing of public agencies’ unpaid bills and a phased payment plan that will reduce arrears to zero by 2017.

Financial Aid 

ECG can also expect some help from one of the US government’s development finance agencies, the Millennium Challenge Corporation. In August 2014 it agreed to an aid package worth up to $498m aimed primarily at ECG and the power sector, including technical capacity-building programmes as well as other investments. As part of that programme the government has announced an intention to invite private investors to take over some of ECG’s functions on a concessionary basis (see analysis).

ECG’s job is also made harder by the low tariffs users pay for electricity in Ghana, which leaves little room for accumulating enough capital to invest in maintenance and new assets. “There is competing pressure to keep consumer tariffs as low as possible, which hampers the establishment of fully cost-reflective tariffs that would support IPPs,” according to Norton Rose Fulbright’s research.

As of April 2015, residential users paid a flat fee of GHS3.97 ($1.10) per month and 21.0795 pesewa ($0.06) for the first 50 KWh of electricity, with the price rising from there to a maximum of 60.9839 pesewa ($0.17) beyond 600 KWh. For non-residential users the fee is GHS6.62 ($1.84) and the cost range per KWh starts at 60.7983 pesewas ($0.17) and is capped at 102.0817 ($0.28). The VRA charges distributors 14.6047 pesewas ($0.04) per KWh. The PURC reviewed electricity and water tariffs and decided on an increase of 51.73% for electricity and 15% for water for the third quarter of 2015, effective July 1, 2015.

Water & Waste

Ghana’s other utilities are also going through transitional phases, although to a lesser extent than the power sector. Water resources in Ghana are handled and managed by the Water Resources Commission (WRC), which was established in 1996. Solid waste removal is a decentralised service which is overseen by regional and local governments.

In the water sector, the WRC has established separate secretariats for river basins declared priority basins. These include the Densu, White Volta, Ankobra, Pra and Tano river basins. Next are the Dayi, Birim and Black Volta basins. One of the main concerns for the WRC has been water quality, due to the rise in illegal and informal mining, which often results in mercury and other chemicals used in separating gold from ore dumped in rivers after use. Another concern comes from larger-scale illegal mining in the dredging of river beds. Declines in measured water quality in rivers such as the Tano, Birim, Offin and Ankobra are almost entirely due to this problem, according to the WRC’s annual report for 2013. The WRC has also been working on a flood early-warning system to improve management, including modelling software and a geographic-information systems database.

According to UNICEF, Ghana has made significant progress providing access to improved water sources to 80% of the population, however, only 15% of Ghanaians have access to improved sanitation, well short of the 2015 goal of 54%.

Solid waste removal services have traditionally been funded through taxation in Ghana, and governments are struggling with the task of providing the service at a cost-effective level. In Kumasi, Ghana’s second-largest city, the amount of waste created on a daily basis tripled between 1995 and 2000, according to an academic study, without a matching increase in funding for removal and management. Moving to a fee-for-service model resulted in some of the same troubles seen in the electricity sector, with the collection of monthly fees becoming a struggle and only a minority of users able to afford them. One option for the future could be a pay-as-you-go model, and piloting of this method in Kumasi found some initial success warranting further use, the study found.

Some private sector companies have emerged in this field. A Ghanaian-owned company, Zoomlion Ghana, for instance, offers waste management services such as door-to-door waste collection.

Outlook

Given the critical impact that it has on headline growth, all eyes are currently on the power sector in Ghana, and all Ghanaians stand to gain or lose in accordance with the success of reforms. An ambitious programme to expand electricity generation has been launched to help assure a consistent power supply and alleviate the frequency of blackouts, with a particular focus on expanding the role of the private sector. With a spate of new generating facilities planned, along with enabling reforms supported by development finance institutions, momentum appears to be picking up and moving in a favourable manner. Ghana may not be set for a big jump in power production in 2015, but, provided it keeps to the reforms and fiscal targets set out in its 2015-17 IMF programme, relief from the currently frustrating situation should be coming in years to follow.