Economic Update

10 May, 2011

An economy in full growth brings myriad benefits to a country but does have the potential to strain existing resources and infrastructure – as Ghana is finding out. Increasing urbanisation, combined with a rise in primary sector activity and planned industrial expansion have emphasised the need for additional electricity generation capacity in Ghana, prompting the government to adopt a multi-pronged approach to boost supply.

Demand for power has been steadily increasing over the past few years, climbing from an average peak of just over 1200 MW at the start of the decade to 1423 MW by the end of 2009. Moreover, Ghana’s power plants are driven either by water or oil, both of which are volatile resources in terms of either availability or price. This has prompted the country to ensure a minimum reserve margin of 20%, adding to the need for capacity.

As such, Ghana has embarked on an expansion programme targeting the nation’s publicly managed capacity, which is controlled by the Volta River Authority (VRA), along with further encouraging the involvement of independent power producers (IPPs). In total, more than 1500 MW of new electricity capacity is set to come on-line over the next five years. Some 952 MW of this will be overseen by the VRA and the remainder by independents.

Among the VRA-led projects, the Bui Hydro Power Project is the most prominent, adding an estimated 400 MW of capacity and increasing total hydroelectric capacity to 1580 MW. Chinese construction company Sino Hydro is overseeing construction of the dam in partnership with the VRA. Delivery is scheduled for July this year and power supplies to the grid are expected to begin in the first quarter of next year.

The VRA is also expanding its thermal capacity. Canadian engineering firm Magellan Aerospace Corporation expects to deliver a 132-MW dual capability thermal plant before the end of this year. Similarly, Takoradi International, a joint venture between Abu Dhabi National Energy and the VRA, has recently signed an agreement to expand its 220-MW single-cycle plant in Aboadze, near the eastern coastal town of Takoradi, into a 330-MW combined-cycle facility. Delivery is expected in 2014.

Furthermore, inroads are being made to increase power generation from renewable sources. Over the next three years Ghana is aiming to add 110 MW to its grid through wind and solar projects. There are also plans on the table for the construction bioenergy facilities. The most advanced plan concerns the construction of a €2m Jatropha project to be built in the northern part of Ghana and financed by the EU. The project will take five years to complete and would use infertile lands in the area to cultivate Jatropha plants. Similarly, various sites in the country’s sparsely populated Northern Region have been identified for wind and solar farms that will alleviate the need to connect remote regions to the national grid.

Although these projects are a big step in the right direction, more will be needed, particularly given Ghana’s ambitions to ramp up aluminium production. Since its establishment in the 1970s, state-owned Volta Aluminium Company has competed for power supplies with residential demand. As the latter increased, this lead to a gradual downsizing of the plant’s operations over the past decade, and full suspension in March 2010. However, as of January this year the government has restarted production at 20% of the plant’s capacity, and is in discussions with the VRA to ensure there are sufficient energy supplies for a full reopening.

Although less than 40% of the planned additional capacity will come from independents, Ghana is keen to further encourage investments by IPPs. According to Stephen Adu, the executive director of the Public Utilities Regulatory Commission, the country is likely to see increasing involvement from IPPs going forward. “The sector has improved tremendously in the last few years. You don’t need to have friends in high places to get anywhere anymore, and in my mind the situation is ripe for more investment,” he declared at a recent public event.

A much-cited concern among IPPs is electricity rates, which are seen as too low to offset the volatile cost structure of fuel-driven thermal plants. As a result, the country is reassessing its electricity tariff structure.

Following an 89% rise in June last year, more rate hikes are expected. As Kweku Andoh Awotwi, the VRA’s CEO, told OBG, “If we really want a market that signals investment, it must be at a marginal cost.”

Besides increasing rates, Ghana is keen to reduce generation costs. In an initial phase, VRA-monitored plants will benefit from regional and domestic natural gas supplies. From July this year around 123m cu feet per day of compressed gas is scheduled to flow through the West African Gas Pipeline, which runs from Nigeria to Benin, Togo and Ghana, supplying VRA’s thermal plants in Takoradi and Tema. In addition, Ghana’s offshore gas supplies are estimated to bring in another 60m to 113m cu feet per day.

With Ghana’s economic growth ramping up – the IMF has predicted GDP will expand by 13% this year, driven by oil production – the need to increase the supply of electricity has come to the fore. In an effort to secure cost-effective self-sufficiency in power, diversification of sources seems imminent and industry hopes are fixed on higher rates and less volatile fuels, such as natural gas. With regional supplies secured, the prospects for installed generation capacity and independent projects alike look bright.