• Friday, March 29, 2024
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The curious case of excess electricity in Ghana

electricity

An interesting crisis has arisen in Ghana recently. There is too much electricity in the country, and it cannot afford to pay for it all. The most evocative headline statistic of this Ghana power surplus crisis is as follows: peak national electricity demand in 2018 required only slightly more than 2,500 megawatts of installed capacity (according to the Energy Commission of Ghana), versus nearly 5,000 megawatts of actually available generation capacity nationally.

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Perhaps more importantly, much of that available capacity has been contracted (by the government through its nominees) with private independent power producers (so-called IPPs), on the basis of purchase agreements that now require more than $450 million annually in payments for electricity that Ghana “does not need” according to the finance minister. How has such a problem arisen, in a continent and region perhaps best known for its significant and crippling infrastructure and electricity supply deficit?

Firstly, it is important to note that more than 85 percent of Ghanaians now have access to electricity, one of the highest in sub-Saharan Africa. However, connectivity rates are the lowest in rural and peri-urban areas, particularly among micro, small and medium enterprises in poorer areas. Indeed, industrial and residential (mostly urban) consumers account for more than 60 percent of the energy consumed in Ghana, those two categories being ahead only of transmission and distribution losses, which account for more than 20 percent annually on average.

Most of those losses are of the so-called “distribution and commercial” nature, which for the most part means the energy consumed but not paid for. This perhaps is already one pointer to a source of the problem: the government is contracted as a buyer or guarantor of energy being faithfully made available by private suppliers, but more than 20 percent of that electricity is not being paid for; contributing to a “surplus” energy problem from a generation perspective.

But distribution and commercial losses do not entirely explain the problem, given the scale of the surplus relative to demand. What else is happening here? This brings us to a second important point to note: electricity demand has barely expanded in Ghana during the last decade. In fact, just under 1,500 megawatts of capacity was sufficient to meet national consumption in 2006, implying an effective annual growth rate of no more than 5.5 percent in a dozen years to 2018.

Macroeconomic challenges in the intervening period (major currency, consumer price and fiscal crises, as well as commodity price swings across oil, cocoa, gold and bauxite), have been partly responsible. Inadequate reforms to improve the environment for doing business and enhance governance are also at play here, just as in most other African countries. The net effect has been on aggregate private investment trending flat or downwards at around the (still not immaterial) 20 percent of GDP level. In summary, there has been insufficient expansion in the levels of energy-intensive, heavy industrial, agro-processing and manufacturing investments that drive energy consumption.

Still, inadequate collections and poor macroeconomic conditions are not the only factors at play here. A legitimate question that is still being asked is: did the country simply procure too much electricity, relative to reasonable levels of projected demand?

At Africa Finance Corporation (AFC) – one of the leading private investors in Ghana over the last decade, including in electricity generation, where we are indirect investors in more than 500 megawatts of IPP capacity – we clearly disagree. Electricity production value chains are intimately linked, and the elimination of bottlenecks in one segment (in this case, generation) simply result in the creation of new problem areas when implementation is not properly wholistic. Much work remains to be done to improve operational efficiency at the distribution and collection levels, the coalface of revenue generation in this industry.

A recently awarded 20-year concession to private investor-operators in relation to the state-owned electricity distribution utility is intended to improve performance in that regard. The thorny question of cost-reflective end-user tariffs will again need to be looked at, as will the appropriate measures to phase-out the more expensive sources of energy in the system. In the immediate term, there will clearly be a need to work with global development partners to create sustainable liquidity mechanisms that cover contracted energy payments.

In all the inevitable recriminations and finger-pointing, with a crisis of this nature, it is important not to forget the good news in all of this: Ghana has proven that electricity deficits can be eliminated in Africa, and within very short periods of time too, utilising time-tested, globally relevant private-sector led procurement strategies. It is important to build upon this success in addressing the future challenges, and to avoid any actions that harm the hard work and good faith of development partners and private investors currently bought into the future of the country. It is also important to learn from any mistakes made.

What lessons can be learnt from the curious case of excess electricity in Ghana?

Firstly, African development is a long-term project, and even great successes will lead to new challenges that must be met. However, there is no substitute for careful planning and implementation discipline, across all areas that are to be affected by any policy or program. Finally, macroeconomic stability remains one of the most under-rated economic and human development factors. If Ghana can achieve this (and there are a lot of positive signals in this direction), the private investment in energy-intensive and job-creating industry will follow. At which point, the conversation might shift from the curiosity of excess, unaffordable supply, to the prescience of investing in energy infrastructure for the future.

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FOLA FAGBULE