Purchasing power: Striking a balance between rate increases and consumer needs

The capacity of Ghana’s state-owned power providers to improve and expand infrastructure with the necessary speed has encountered a number of financial restraints. The Public Utilities Regulatory Commission (PURC) sets the price consumers pay for electricity artificially low, according to the providers. As a result, the three primary firms – the Volta River Authority (VRA), Ghana Grid Company (GRIDCo) and the Electric Company of Ghana (ECG) – are unable to fund the infrastructure projects needed. Private investors, meanwhile, are loath to invest in a loss-making sector.

TARIFFS: Under the current tariff regime, for example, Bui Power Authority produces power at a unit cost of GHS0.11 ($0.06) per KWh and sells it to ECG for GHS0.08 ($0.04) per KWh. ECG then sells it on to the consumer for GHS0.04 ($0.02), former deputy minister of energy, Kwabena Donkor told local media.

Generation costs rose quickly after the shutdown of the damaged West African Gas Pipeline in August 2012, and Ghana’s thermal power plants were running on light crude oil instead of natural gas. However, with the pipeline coming back on-line in July 2013 generation costs should return to normal. Ghana’s electricity is among the cheapest in Africa, priced similarly to Western European countries such as France. Power operators say that a rate increase is required to improve the consistency and quality of the power supply. Until providers can make a return on their capital, banks are reluctant to loan money and independent power producers hesitant to contract with the government.

“We need to raise the tariff to at least cover costs and balance our books,” Kofi Ellis, the director of planning and business development for the VRA, told OBG. “Then we can get loans.” Indeed, the VRA has found it difficult to secure commercial loans for capital projects and instead relies largely on development banks or government funding. Thanks to transparency and a strong accounting record, GRIDCo has secured some commercial loans for capital improvements. However, the loans are small and projects are often delayed when GRIDCo needs to supplement funding with alternative financing. “Until the tariff increases, we will rely mostly on concessionary loans,” Frank Otchere, the manager of GRIDCo’s system control centre, told OBG.

MAKING A PROFIT: Subsidised rates are currently hindering the VRA’s efforts to contract with independent power producers. “If someone is investing money in a project, he expects to get a return, but with the current tariff rates this is not possible,” Ellis said. Potential providers have had a hard time securing agreements with reliable off-takers, according to a 2013 World Bank report on Ghana’s energy sector. Industry players prefer subsidised power from the VRA, and the ECG is not a bankable partner. In an attempt to balance the books, the PURC has proposed increasing the consumer price of electricity by 166%. This would include a unit increment raise of 128%, 214% and 40% for the VRA, ECG and GRIDCo, respectively.

Industry groups oppose any rate hike, contending that the private sector is being asked to pay more for increasingly unreliable service. “People are willing to pay, but you want reliable power and the right kind of power,”

John Defor, policy research officer at the Association of Ghana Industry, told OBG. Firms in the industrial sector do not believe the government will deliver.

Their concerns were justified in 2011, when the government raised the electricity rate with the promise that supply would be improved. In fact, in 2012 and the first two quarters of 2013, supply deteriorated. “It says something that the government didn’t keep their word,” said Defor. “We don’t trust the institutions anymore.

We’ve been burned before.”

UNCERTAIN FUTURE: It has been universally acknowledged that the electricity tariff will be raised. The question for stakeholders now is how the process will unfold.

“It’s a necessary evil,” Ellis told OBG. “The hope is that it is implemented in a humane way, so that prices are raised each quarter for two years and then there is a major review.” Should the process be handled efficiently, it will be money well spent for everyone involved.

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The Report: Ghana 2013

Utilities chapter from The Report: Ghana 2013

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