November 6 and 7,2023, on TV3 morning program the “New Day” and “Good Morning Ghana” on Metro TV respectively, the Hon. Deputy Minister for Energy, Andrew Agyapa Mercer (MP) in trying to give reasons for the Ghanaian economy tail spinning into chaos, stated that, the Banking Sector clean-up, COVID 19, Russia-Ukraine war and excess capacity payments are to blame for our woes.
The essence of this write-up is to state the facts concerning the excess capacity payments, argue that excess capacity payments cannot be the main cause for the energy sector debt payments, and that there are different reasons why the energy sector debt has become a major risk for the Ghanaian Economy.
Government has always argued that power generation capacity in Ghana was in excess of demand and because of the “take or pay” power agreements signed under the previous NDC government, the country is forced to pay for excess capacity. Huge figures have been bandied about as to the level of debt occasioned by excess capacity. E. Mahamudu Bawumia, the current Vice President and Flagbearer for the NPP in the 2024 elections was quoted as saying government had paid about GHS 21 billion to IPPs as a result of excess capacity.
Fortunately, during his censure hearing in Parliament, the Minister of Finance indicated that government paid a total amount of GHS 31 billion (USS3,026.63 million) over the period (2017-2020) to Independent Power Producers(for power purchased and consumed and for shortfall in capacity payments), Fuel suppliers, and excess capacity charges.Out of the GHS17.31 billion paid, an amount of GHS10.01 billion was paid to power producers and GHS 4.99 billion for excess capacity. The remaining amount of GHc7.31 billion were payments to fuel suppliers (gas suppliers and ICO and HFO suppliers). This simply means that the energy sector payments included other elements aside excess capacity charges.
The most pertinent question to ask is what these payments are and how do they arise.
PAYMENTS TO IPPS
Payment to IPPs simply means the energy cost charged by the IPPs. This refers to the price that ECG pays for the actual electricity purchased. This cost covers the expenses associated with generating electricity, which includes Generation Costs, Ancillary Services Costs, Administrative and Overhead Costs and Profit Margin. These are usually captured in the Power Purchase Agreements (PPAs) that are approved by the PURC and thus factored into the End User Tariff.
Unfortunately, every year, the Electricity Company of Ghana loses revenue of over US$180 million because consumers fail or refuse to pay their bills. Eighty percent (80%) of this amount, US$150 million, constitutes the indebtedness of Ministries,Departments and Agencies (MDAs) to ECG due to both suppressed budgetary allocations for their energy use and a blatant refusal by some MDAs to pay for their energy cost. The current government appears to have abandoned the laudable initiative of the Mahama government which ensured a continuous replacement of post-paid (credit) meters with pre-paid meters. This was geared towards reducing the commercial losses of ECG caused by refusal of customers to pay their bills.
The overall technical and commercial losses in the power sector as of now is about 34%. In monetary terms, it amounts to $600 million annually.
The altruistic quest to improve the technical and operational efficiency of ECG motivated the NDC administration to opt for the Millennium Challenge Corporation’s Compact II. As a result, the Government of the United States of America injected about $300 million into Ghana’s energy sector. But unfortunately, the United States cancelled an additional $190 million which was expected to address the technical challenges of EC This huge financial loss was due to the present Government’s handling of the compact. A simple procurement process which transitioned ECG’s operational functions to PDS on March 1, 2019, was botched due to cronyism, nepotism and an unbridled quest for self-gain. The consequential loss was easily avoidable and thus unforgivable.
Consequently, the technical and commercial losses have hindered ECG’s ability to account for the power they purchase. They therefore are unable to pay all their bills to the electricity providers. This explains why the state, the shareholder, steps in to take care of the shortfall capacity payments.
PAYMENTS TO FUEL SUPPLIERS
Payments to fuel suppliers in electricity generation are a significant component of the operational expenses for power generation companies. These payments involve compensating suppliers for the various types of fuel used in the generation process. The specifics of these payments can vary, but they typically include fuel purchase costs, transportation costs, contractual agreements, and price fluctuations. These payments are essential for maintaining a consistent supply of fuel to generate electricity. The structure and terms of these payments depend on the type of fuel and individual contractual arrangements. This cost is again factored into the tariff for consumers to pay and therefore catered for by the End User tariff.
EXCESS CAPACITY CHARGE IN “TAKE OR PAY AGREEMENTS”
In a take-or-pay agreement in electricity generation, an excess capacity charge is a provision that requires the purchaser (typically a utility e.g. ECG) to pay for a certain amount of electricity capacity, even if they do not actually consume or “take” that amount of electricity. This provision is often used to guarantee revenue for power generators, especially in situations where they have invested in the construction of new power plants or capacity expansion. On this, Peter Terium, a former CEO of RWE, a large German utility company said: “you don’t pay the firemen only when there is fire”. It can be seen as a form of insurance for the generator against revenue fluctuations and dispatch risk due to changes in electricity demand.
Take-or-pay agreements are common in long-term energy agreements worldwide and the specific terms, including the excess capacity charge in the case of electricity, are typically negotiated as part of the contract. Indeed, under the NPP government led by President John Kuffour the Power Purchase Agreement between Asogli Power Plant and the ECG was a “take or Pay” agreement. More interestingly, on September 24, 2019, under the current NPP government led by President Nana Addo, the Ghana National Petroleum Corporation signed a “take or pay” agreement with the Tema LNG Terminal company to off-take liquified natural gas for our power plants. These two contracts are examples that speak to the fact that excess capacity charges a a feature of long-term energy contracts.
EXCESS POWER GENERATION CAPACITY AND GOVERNMENT’S EMPTY SPIN
According to Government, power generation capacity in Ghana has been in excess and has led to huge capacity charge payments. Their spin has been that the NDC procured too much generation capacity which resulted in increasing debts from “take or pay” contracts.Too much generation capacity in an economy that should have been celebrating one factory in every district by now if the government had been sincere about its One-District-One-Factory promise.
Indeed, government maintains that with new power plants coming on stream, excess generation capacity grew and increased the capacity charge costs
But, what the Government has deliberately hidden from Ghanaians is that the NDC government entered into a number of Power Purchase agreements which were scheduled to come on-stream in a step-by-step manner at later dates, to address annual electricity demand increases, meet the existing suppressed demand, cater for the deficits that will be occasioned when emergency plants with shorter tenure are taken off-stream and replace obsolete plants like the TAPCo plant that are old enough to be decommissioned.
Furthermore, we still have about 14% of Ghanaians who in this 21stcentury do not have access to electricity and must be hooked to the national grid in order to free them from poverty and enhance their chances of economic prosperity. Unfortunately, the NPP government has simply abandoned the National Electrification Scheme hence our inability to attain universal access to electricity as a country.
The VALCo plant over the years has been crying for 300MW of cheap electricity to enable it increase its operations to five potlines so as to create the needed jobs in the integrated aluminium downstream industry. The NDC government, as a policy, had decided to dedicate part of our hydro resources to industries like VALCo so as to make them competitive as they create employment opportunities for our teaming youth.
Beyond local consumption of power, President John Dramani Mahama’s administration started the upgrade of the transmission line from Ghana to Burkina Faso from a 161kV to a 330kV. This was to enable Ghana export power to our northern neighbours as part of the West Africa Power Pool. The target was to export about 400MW of power to the Sahelian countrie. Unfortunately, this project was suspended for some time because Agence Française de Development (AFD), the financiers of the project, felt that the financial covenants that GRIDCo had entered into with them as part of the agreement, had all not been met because of the avoidable liquidity crisis GRIDCo is experiencing presently even though the ESLA funds continue to accrue to Government coffers. It took a government guarantee to for the project to proceed.
From government’s own spokespersons on energy, admission is made that since 2020 we have not had the cause to pay for excess capacity because we have wiped out our excess capacity as a result of increased demand. Indeed, the peak demand (period of the day when the demand of electricity is at its highest) from the beginning of the year to date is 3561MW while our dependable capacity is 3407MW. Therefore, at peak, not all Ghanaians can now have electricity. This explains the constant load shedding Ghanaians are experiencing of late because of power generation deficit.
SO, WHAT IS THE TRUE REASON FOR THE STATE OF AFFAIRS
Understanding our difficulties is the first step in the search for solutions. To quote Togbe Afede, the Paramount Chief of the Asogli State: “Our chaotic economic situation is the product of a toxic mix of, among others, our dishonesty; partisanship, cronyism and tribalism; greed-fuelled corruption; lack of proper planning, and the consequent episodic approach to economic management; and bad monetary policy….”. The Ghanaian economy is in deep crisis, a crisis marked by huge budget deficits mostly caused by over expenditure in the 2020 elections, an unsustainable public debt, rising inflation, a depreciating currency, ever rising cost of living and loss of confidence by both domestic and international investors. These challenges have been self-inflicted and the earlier the NPP took responsibility the better for the country to recover from this nightmare.
“Take or Pay” agreements are a common feature in long-term energy contracts. It serves as an insurance for the initial huge investments. This is evidenced in the Tema LNG Terminal Company contract with GNPC signed in September 2019 under the Akuffo Addo Government.
If the NPP government had continued with the plan of the NDC to ensure that all Ghanaians have access to electricity by 2020, rapidly complete the upgrade of the necessary infrastructure to enable power export and make electricity available to VALCo to run at full capacity, the country would not have been discussing the issue of excess capacity.
GHS 12.32 billion of the total power sector payments as at 2020 were due to debts occasioned by refusal to pay for fuel suppliers, ECG not paying its bills to the IPPs for power supplied and consumed and shortfalls in capacity payments due to inefficiency and corruption. These variables are passthrough items in the tariff computations and therefore have been paid for by the consumer. It is important to note that this debt has significantly grown because of the continuous non-payment of invoices by ECG to IPPs and fuel suppliers.
The country has not paid for excess capacity since 2020 because there has not been an occasion when a generator has declared availability and has not been dispatched.
Currently the country has a power generation deficit. This is accounting for the load shedding the country is experiencing of late.
More importantly the state of the economy cannot be blamed on excess capacity payment but rather the reckless and bad management of the economy led by Vice President Mahamudu Bawumia.
Source: Edward Bawa | MP for Bongo