As with any rapidly expanding economy, Ghana’s high GDP growth rates have gone hand-in-hand with increased industrial and household consumption, which in turn has pushed up demand for key utilities infrastructure, including water, power and sanitation. While its electricity provision ranks ahead of many of its regional peers, the country is expending significant amounts of capital and resources to ensure that its generating, transmission and distribution assets are able to meet future demand and also avoid being exposed to exogenous shocks.
Fortunately, Ghana is endowed with resources such as natural gas, sun and water. These segments are attracting capital via a number of pending projects, such as the country’s first gas processing plant (GPP), as well as several new thermal and coal facilities, To ensure the sector’s attractiveness for private operators, existing tariff structures and off-take agreement frameworks are currently being reviewed. Reuben Atekpe, executive chairman of the Merchant Company of West Africa, told OBG, “Greater electricity production will help to improve the position of Ghana in the region, by allowing it to become a net exporter, as the country’s grid connects to Togo, Benin, Côte d’Ivoire, and Senegal.”
In 1989 the Ministry of Energy formulated the National Electrification Project, which sets out the target of extending electricity to all reaches of the country by 2020. According to the Energy Commission, by the end of 2012, 72% of Ghanaians had access to the grid, a major improvement from 1989, when just 29% of the population had access to electricity. The government is targeting an 80% electrification rate by 2015, which compares favourably with many of its African peers, such as Nigeria and Kenya, where access is below 50%.
The composition of Ghana’s power mix is currently shifting away from hydro towards greater representation from thermal generation. Until 1998 electricity was supplied exclusively from hydroelectric sources, including the massive Akosombo Dam that was built shortly after independence, whereas today, through the addition of around 1000 MW of new thermal generation, the split is roughly 50:50 in terms of installed capacity.
While hydro power is certainly the cheaper and more environmentally friendly alternative of the two, its output potential is considered to be nearing its peak as most of the country’s high-yielding reservoirs have already been dammed. Similarly, lower-than-expected rainfall in 2013-14 – which has resulted in a drop in generation – have highlighted the vulnerability of the plants to external factors. As a result, added capacity going forward will come predominantly from thermal, as well as from renewables, for which the government is targeting a 10% contribution of total generation by 2020.
Thermal output has also been subject to challenges, however, which is in part why the government is hoping to diversify both generation and inputs. Interruptions and shortfalls in natural gas deliveries from Nigeria as well as the delayed completion of the gas off-take infrastructure from Ghana’s offshore Jubilee field have reduced output. As a result, although the installed capacity for each is roughly the same, generation in 2012, consisted of nearly two-thirds hydropower (8071 GWh) and one-third thermal (3639 GWh), according to Ghana’s Energy Commission. That same year, peak load on the transmission grid was 1729 MW, while the total peak on the country’s overall grid system was 1871 MW.
Already In Place
Available hydro generation for 2013, based on an Energy Commission report published that year, comes from the three main hydro stations of Akosombo, which has a capacity of 1020 MW; Kpong, 160 MW; and Bui, 130 MW.
The majority of Ghana’s thermal power is generated from two state-owned Volta River Authority (VRA) plants in the Western Region of Takoradi: the Takoradi Power Company (TAPCO) with 330 MW of installed capacity and Takoradi 3 with 132 MW. The VRA also operates two plants in the port city of Tema with joint capacity of 160 MW. Independent power producers (IPPs) contribute further to the mix via the Takoradi International Company (TICO) with 220 MW of capacity, Sunon-Asogli with 200 MW and Cenit with 126 MW (see analysis). The majority of current thermal plant capacity can be run on combined-cycle turbines that operate on both natural gas and light crude oil, with the exception of Sunon Asogli, which relies exclusively on natural gas as its fuel source. Collectively, and also factoring in 2 MW of installed solar capacity, total capacity at the end of 2012 totalled 2480 MW, approximately half of the 5000-MW target the government has set to be reached by 2016 based on a projected annual demand growth of 12%.
Ensuring the country has a sufficient buffer in terms of generating capacity has been a priority in recent years, emphasised in part by exogenous pressures. Between 2006 and 2007, Ghana faced severe power shortages due to a decline in hydropower production caused by low water levels in Lake Volta. According to an estimate from the World Bank, the power crisis cost the economy around 1% in lost GDP growth during that period.
Five years later, a similar problem occurred when an errant oil tanker off the coast of Togo ran its anchor into and damaged the West African Gas Pipeline (WAGP), preventing gas deliveries from arriving from Nigeria. As a result, a number of plants had to switch from gas to more expensive heavy fuels to power their operations, driving up costs and the import bill. The World Bank estimates that the added cost of purchasing light crude oil (LCO) for power generation when sufficient gas is not available to be around $1m per day. Due to the damage and disruption to the WAGP, only 65m standard cu feet per day (scfd) was available on average.
Though the pipeline has since been repaired and can once again operate at full capacity, the volumes of gas flowing through it have remained substantially below original plans as Nigeria is reducing its exports to meet its own rapidly growing domestic needs. For the first few months of 2014, average daily supply from the WAGP hovered around an all-time low of 20m scfd, according to local press reports.
Based on an assumed oil price of $100 per barrel, the generation costs associated with purchasing imported LCO would come out to be nearly three times as expensive, at $17 per million British thermal units (Btu). This, combined with another year of lower-than-expected rainfall, has resulted in a staggered pattern of load shedding.
Turning To Local Gas
Ghana does benefit from having flex plants that can run on multiple fuels, but the high costs associated with operating them when the primary inputs are no longer available means the country is looking for alternatives.
“While several plants are able to run on both crude oil and gas, it is still imperative for the country to secure a steady supply of gas as when switching between feedstocks, any number of technical issues can arise,” Kirk Koffi, CEO of the VRA, told OBG. Running all of its dual-fuelled thermal plants solely with natural gas would require 180m scfd, which even the WAGP is unable to fulfil at 123m scfd.
As a result, one of the key aspects of Ghana’s plans for its electricity network is to diversify the inputs that it relies on to power generating plants. The large associated deposits of gas in the offshore Jubilee field and its neighbours are thus being targeted for domestic production. Assuming gas from the Jubilee, TEN and Sankofa fields can be delivered along with imported gas from Nigeria, based on projected volumes and schedule, the weighted average unit cost for this gas over the 10-year period between 2014 and 2023 is estimated by the Energy Commission to come out to $6.13 per million Btu.
The main component of Ghana’s local gas infrastructure is the Atuabo GPP, which is fed off the Jubilee-associated deposits and has a capacity of 150m scfd, which was expected to commence operations in 2013 but has been delayed until end-2014. The TEN field, meanwhile, which was expected to start spouting oil in mid-2016, has the potential for producing around 90m scfd of gas over a 20-year operational lifetime. The Sankofa well, anticipated to begin oil production by 2017, has been prospected to contain Ghana’s first non-associated gas find, with potential recovery of 160,000 scfd.
Collectively, an average yield ranging from 100m to 500m scfd could be achieved by 2020 from these three fields, although off-take pricing has yet to be clarified. In the case of Sankofa, because non-associated gas finds are more costly to develop, this may slow capital inflows until investors have greater certainty over potential future returns.
To meet demand from industrial customers and the liquefied petroleum gas (LPG) segment, the estimated natural gas volumes needed for thermal power plants to run predominantly on gas are expected to top 800m scfd by 2017, exceeding the upside potential yield of 500m scfd from local deposits. According to the Energy Commission’s projections, the country is therefore likely to experience gas supply shortfalls through to 2020.
As a result, the government needs to explore all fuel options, including the importation and re-gasification of liquefied natural gas (LNG), to determine the most feasible options to further reduce purchases of costly LCO to power thermal generation. If done effectively, this will give Ghana some flexibility and allow it to get the best development and exploration plans as well as pricing for its own resources. “We cannot think that once Jubilee’s gas becomes available all of our problems will be solved,” Harriette Amissah-Arthur, executive partner at Arthur Energy Advisors, told OBG. “There are a number of other major energy sector issues that need to be addressed to ensure and sustain reliable service delivery.”
As the construction of such facilities takes time – roughly three to four years for a re-gasification plant and one to two years for a floating facility – the government is looking to accelerate development. In December 2013 the VRA announced its intent to construct a $150m facility to offload LNG near Takoradi by the end of 2016. According to press reports, the company will lease floating vessels to store the LNG and handle the re-gasification, and the imported gas, with capacity of 450m cu ft per day, could be used to produce up to 1500 MW of power. The regasification of imported LNG is just the first step, as from there, the gas will need to be transported inland. The Energy Commission has awarded the Bulk Oil Supply and Transport Company (BOST) an exclusive licence for gas transport, tasking the state-owned fuel wholesaler with the responsibility of operating and maintaining the delivery pipeline. Currently, the Ghana National Gas Company (GNGC) builds, owns and operates most existing gas-related infrastructure, including the soon-to-be-commissioned processing plant.
Power Africa Initiative
Announced by US President Barack Obama during his six-day tour of Senegal, South Africa and Tanzania in July 2013, Power Africa is a US government initiative that aims to add 10,000 MW of power generation and double the number of people with access to power in sub-Saharan Africa (see analysis).
Working with governments, the private sector and other partners including the World Bank and African Development Bank, the initiative aims to achieve this goal by unlocking the region’s vast wind, solar, hydropower, natural gas and geothermal resources to improve energy security, reduce poverty and advance broader economic growth. In the initiative’s first phase, which runs through 2018, the US government has committed more than $7bn in financial support and loan guarantees, in addition to the expertise of 12 US government agencies. According to the initiative, reforms across the power sector will be necessary in Ghana for the country to continue obtaining private-sector investment.
On August 5, 2014 US government agency Millennium Challenge Corporation (MCC) signed the largest US government-funded transaction of the initiative to date with the government of Ghana. Playing a vital role in Power Africa, the five-year Ghana Power Compact invests up to $498.2m to increase generation capacity, improve the transmission grid and stimulate private investment. It seeks to create a financially viable power sector that will meet the current and future needs of households and businesses – and ultimately help fight poverty across the country. The government of Ghana has also pledged to invest a minimum of $37.4m, and the compact is expected to catalyse at least $4.6bn in private energy investment and activity from US companies in the coming years.
Private Sector Involvement
The initiative has already spurred private sector activity and US firms investing in Ghana include GE and Symbion Power. Symbion is working to develop a 450-MW IPP in western Ghana. According to a June 2013 White House statement, GE, meanwhile, has also committed “to help bring on-line 5000 MW of new, affordable energy through provision of its technologies, expertise and capital in Tanzania and Ghana”.
The firm announced in August 2014 that it had partnered with the MCC to provide $500m in financing to support development of the Ghana 1000 project, an LNG-to-power joint venture initiated by GE in partnership with Endeavor Energy and Finagestion. Once completed, the five-year project will provide 1000 MW to the country’s national grid.
Although a significant proportion of households are able to access the grid, biomass, mainly in the form of wood and charcoal, remains a major source of power, accounting for just over 60% of all energy consumption. In the most recent 2010 national population census, 40.2% of households indicated that they used firewood for their cooking needs and 33.7% used charcoal, while only 0.5% relied on electricity.
However, recent years have seen a shift towards LPG and away from biomass. This is in part due to household incomes, which according to the 2010 “Ghana Living Standard Survey” had doubled over the preceding decade in both urban and rural areas.
In 2012 LPG was recorded as making up 18.2% of household cooking, a figure that the government would like to climb further as it is considered to be a cleaner and safer alternative. For a limited period, subsidies played a key role in helping to realise these targets, but the removal of subsidies in 2013 has seen the use of charcoal for cooking and other household uses soar. Prior to LPG price hikes, the subsidy made LPG cheaper to use than diesel. A number of commercial vehicles converted their diesel engines to run on LPG to take advantage of the generous subsidies offered in the past, for example.
As a result, the Energy Commission expects the total annual national requirement to be in the range of 250,000 to 300,000 tonnes, but supply is below demand due to a lack of domestic refining activity and limited nation-wide storage and distribution capacity. The Tema Oil Refinery, if operating at 90% capacity, could fulfil half of the national LPG requirement, however, in 2013, due to under-investment and maintenance issues, it was only running at 30% capacity. Once on-line, the Atuabo GPP could potentially yield about 1000 tonnes of LPG a day, which would be enough to meet the country’s short-term demand, but should household usage rise, the government will need to seek alternatives.
The Association of Ghana Industries (AGI) conducts a quarterly “Business Barometer Survey” in which power supply and utility prices are both consistently ranked as two of the top 10 challenges facing the manufacturing sector. The spate of load shedding over the past decade – a challenge throughout West Africa, particularly in Nigeria, where provision of diesel for back-up generators is a $2bn industry – has prompted companies to source alternatives. Indeed, several of the large industrial consumers of electricity in Ghana rely on private back-up generation. “The main complaint is not over the price of electricity, but the quality and reliability of what is supplied,” John Defor, a policy research officer at the AGI, told OBG. “Most companies have to spend on their own generators, and the total outlay can come out to about 40% more than electricity from the grid.”
The mining and petroleum sectors make up the largest industrial consumer group. The cost and availability of electricity can have a significant impact on mining activity in particular. Gold is Ghana’s leading export, and operations tend to shift between underground and surface mining depending on the ratio of the cost of electricity to the world market price for gold. Underground mining requires electricity of 28-29 GWh to extract a tonne of gold, while surface mining requires just 8-9 GWh. The general rule of thumb is that when the cost of electricity surpasses 10% of the gold price, mining moves to the surface.
However, the Volta Aluminium Company (Valco) is by far the country’s largest single individual consumer of electricity. Able to produce 200,000 tonnes of primary aluminium at full capacity, the smelting plant – which dates back five decades and whose sizable demand prompted the construction of the Akosombo Dam in the 1960s – has a power requirement of 320 MW per day and 2900 GWh per year.
During 2004 Valco by itself accounted for 26% to 40% of total national consumption, and around half of all industrial consumption. However, as a result of major power shortfalls experienced around that time, it faced successive periods of shutdowns. In 2006, it came back on-line, but has since been operating at reduced production levels, with only one or two of its five pot lines running.
Valco, a major employer and a significant value chain originator, currently benefits from reduced tariffs of GHS0.015 ($0.006). The World Bank has called for the reduced tariff, which it estimates to cost the country $150m per year, to be scrapped entirely, arguing that the subsidy dents government coffers and that supply to Valco comes at the expense of selling to other end users who would be willing to pay full price. However, so far the government has opted to maintain the subsidies and preserve Valco’s multiplier effect on the larger economy. “Aluminium is an integrated industry, with Valco at the epicentre feeding small and medium-sized enterprises down the chain,” said AGI’s Defor. “In 2013, due to the energy crisis, Valco was running at a third of its capacity and the entire chain was disrupted.”
The power sector has undergone decentralisation reforms since 1994, resulting in there being a number of separate public institutions assigned regulatory and operational tasks. The country’s key stakeholders along the value chain include the Ministry of Energy, which sets out policy and guidelines; the VRA, which owns and manages 79% of the country’s installed generation capacity; the Electricity Company of Ghana (ECG), which along with the Northern Electricity Distribution Company (NEDCo), is in charge of non-wholesale electricity distribution and retail; the Ghana Grid Company (GRIDCo), which handles transmission services; and the Public Utilities Regulatory Commission (PURC) which is responsible for setting tariffs.
The ECG and NEDCo rely on non-residential customers for most of their earnings, as despite making up just 12% of unit sales, they account for 56% of all revenue. This is a result in part of poor payment collection as well as a challenging tariff environment.
Technically, PURC is supposed to implement a quarterly automatic tariff mechanism intended to allow for full cost recovery, however, it will often defer doing so when it deems services to be of inadequate quality or unaffordable for consumers.
The ECG, according to the World Bank, was estimated to suffer direct losses of $44m in 2012 and $60m in 2013. Although this partly has to do with PURC’s not imposing tariff increases on households for some time, it is also attributable to distribution losses of approximately 30%. Poor revenue collection, especially from government institutions, and debt obligations that are climbing each year as the cedi depreciates and are owed in US dollars, are also challenges. The difficult conditions the ECG is grappling with at the moment have made it hard to invest in infrastructure or maintenance improvements and have also had a knock-on effect on the VRA, which in turn, is feeling a squeeze on revenues. Meanwhile, on the cost side it is purchasing expensive LCO as a stopgap measure to power its thermal plants. However, the VRA has continued to upgrade its facilities.
As in any country, setting tariffs is a challenge in Ghana, often requiring a tricky balancing act between maintaining affordability for end users, whether low-income households or major industrial consumers, and ensuring profitability for generation and distribution companies. Eric Owiredu Akrofi, director of Ibis Tek, told OBG, “Cost-recovery tariffs will spur investment in the power sector if there is differentiation between the rural distribution market and the urban distribution market.”
To avoid a significant contribution to headline inflation and ensure continued accessibility for end users, in the last quarter of 2011 residential tariffs were frozen and the adjusted tariff formula abandoned by PURC. This created challenges for the VRA and distribution companies. “You cannot expect the VRA to be able to borrow money from the capital market at market-determined rates to finance a new plant, when the plant’s output then sells below market price. This will invariably cause a huge fiscal mess for the government if the borrowing is backed by the sovereign,” said Sampson Akligoh, the head of research at Databank Financial Services.
As a result, in September 2013, PURC announced an upward adjustment of 78% for electricity tariffs that would take effect on October 1st. Though short of the 166% lobbied for by the utilities, as reported by local news sources, this sudden increase represented a major hike for end users.
“Industry is concerned more with the reliability of electricity than the cost. As much as they don’t like utility price increases, it is the unpredictability of the increases which makes operational planning a challenge,” said Akligoh. Currently, tariffs for industrial users, at $0.082 per KWh, are higher than those for households, which are $1.50 for 50 KWh per month.
“In many places, this is the other way around, with households paying more to cross-subsidise industry, as industry creates jobs,” said Defor. For Arthur Energy’s Amissah-Arthur, while the preferred scenario would be for households to be paying market rates effective immediately, “in a developing country like ours, electricity subsidies need to removed gradually and also contain an education component. You need to explain to them why and how the pain caused by increasing tariffs is absolutely necessary, beneficial for the long term and the lesser of two evils.”
Water & Sanitation
Ghana is well endowed with water resources: the Volta River system covers around 70% of the country’s area, the south-western river system covers 22% and the coastal river system covers around 8%, according to data from the UN’s Food and Agriculture Organisation.
Despite the abundance of domestic water resources, the government is still looking to improve access and infrastructure. According to a 2011 report published by the World Bank’s Water and Sanitation Programme (WSP), annual capital investments of $237m towards water supply and $406m towards sanitation are required for Ghana to meet its Millennium Development Goal objectives. This would entail a doubling of current expenditure and necessitates the combined involvement of government, the private sector and aid organisations.
General water sector policies for rural and urban areas are set by the Water Directorate within the Ministry of Water Resources, Works and Housing (MWRWH). As with electricity, the PURC sets pricing. The Water Resources Commission, meanwhile, manages coordination and regulation. The Community Water and Sanitation Agency is responsible for all water and sanitation facilities in rural areas, along with local district assemblies and communities. The Ghana Water Company (GWC), a state-owned limited liability company, meanwhile, manages the urban water supply.
The GWC is working with foreign investors to ramp up capacity, much of which comes in the form of public-private partnerships whereby the builder receives a lease for 25 years, after which point the plant is taken over by the public utility. A $438m treatment plant by Belgian company Denys and a $115m desalination plant with Spain’s Befesa are currently under construction.
The government, meanwhile, announced in March 2014 that it was completing work on six treatment plants spread outside of the capital at a cost of €7.9m each. The announcement followed a February 2014 declaration by the deputy minister of information and media relations that a total investment of $750m had been made towards the provision of safe water across the country, projecting that 85% of the urban population and 76% of the rural population would enjoy sufficient water supply by 2015.
Meeting those targets will require continued capital expenditures. According to UK charity WaterAid, more than 3m Ghanaians do not have access to safe drinking water and only some 13% of the population has access to adequate sanitation facilities, a factor which the charity believes around 80% of all diseases in the country can be traced to.
“The country has only itself to blame for our water problems. There are plentiful river basins that could provide potable water, and we sit at a coastline for salinating water. The only solution is to open up water further to the private sector,” Kwaku Agyemang-Duah, the CEO of the Association of Oil Marketing Companies of Ghana (AOMCS), told OBG. According to the Accra-based Coalition of NGOs in Water and Sanitation, nearly one-quarter of greater Accra’s population of around 4m does not access water from the tap, a figure that nationally is even higher at 37%.
The GWC’s former managing director was quoted in the press in 2013 as saying that more than half of the water supply goes unaccounted for because of leakage and theft. Many households and companies, to ensure dependable water delivery, opt to contract private water haulers, often paying more than 10 times what the GWC charges.
As with most West Africa economies, sanitation is also a challenge, although most of Ghana’s urban areas benefit from basic formal infrastructure, including partially covered concrete sewer channels. However, 86% of Ghana’s population is estimated to be living without access to a toilet in their home. A 2012 report by the World Bank placed the economic cost linked with poor sanitation service delivery at $290m per annum. Broken down, $215m of this is attributed to premature deaths as nearly 19,000 Ghanaians pass away each year from cholera. Another $54m is spent each year on health care related to complications brought about by poor sanitation, $1.5m is connected to lost productivity stemming from work place absenteeism and a further $19m of losses comes in the form of the lost time, totalling 2.5 days per year, that the average person spends finding a private place to defecate.
Currently, many sanitation services, including waste collection, are operated by the private sector, but this results in a concentration of service in commercial and higher-end residential areas, while waste from rural and lower-income areas is often burned rather than finding its way to dump sites.
The Ministry of Local Government and Rural Development is attempting to address this challenge by setting up a national sanitation taskforce and creating the Zoom Alliance, a consortium which brings together waste management operators and encourages them to jointly conduct anti-littering campaigns and distribute bins and rubbish bags.
Though a lot of financial investment and coordinating effort are required to overcome Ghana’s utilities challenges, the country is fortunate in that it possesses natural resources that can be developed and channelled towards both power generation and clean water supply. As pivotal infrastructure projects such as the GPP and LNG receiver terminal come on stream, this should unlock the potential to more than double current generation capacity. Alongside smaller renewable plants, these new facilities will help diversify the power mix away from crude and make electricity production a cheaper and more environmentally friendly proposition.
To get these projects under way, attracting private and foreign investment is essential. In this regard, a number of regulatory bottlenecks and institutional reforms will need to be addressed, although it appears that foreign investors, inspired by an overall track record of political stability and the potential to earn substantial returns, are committing to projects in a variety of fields. The more of these that break ground and demonstrate success, the greater the likelihood that others will follow.
In the meantime, as it costs less to reduce energy consumption than it does to bring new supply on-stream, observers agree that more could be done on the demand side of the equation as well. While education and awareness programmes are expected to make an impact, eventually the issue of subsidies will need to be addressed as the world over it has been proven that the most effective way to encourage reduced and more efficient consumption of power and water is by charging higher prices for them.
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