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GHC12 billion paid for power not used – the cost of NDC’s take-or-pay contracts

Though electricity tariffs increased by 11% in July 2018 and then 5.6% the following October, the evidence shows that cumulatively the NPP has reduced tariffs by about 2%

Ghanaians have enjoyed stable electricity supply since 2017, as opposed to the dreaded “dumsor” they endured between 2011 and 2016.

The interesting thing is that not only has the ingenuity of the managers of Ghana’s economy kept the lights on at affordable prices, but they have miraculously found a way to extend power provision to lifeline consumers since the first signs of COVID-19 in Ghana, and have maintained that provision for free until now.

The means of distribution for this has been the free power policy of the Akufo-Addo-led NPP.

The change in tune from “dumsor” to free electricity would not have been possible without the Finance Minister-designate, Ken Ofori-Atta, having been resourceful since 2017. This is how, in 2021, he has been able to meet Ghana’s financial commitments to independent power producers (IPPs).

Painfully, Ghanaians had to suffer “dumsor” partly because of the government’s inability to pay IPPs to keep the lights on.

One does not have to look far for confirmation. Under persistent pressure in 2015, the then deputy minister of power, John Jinapor, admitted that money was partly to blame for the excruciating power challenges Ghanaians were enduring.

Bad power purchase agreements

The persistently unreliable power supply was compounded by bad power purchase agreements (PPAs), which saddled the nation with huge debts in the energy sector. Sadly, this energy sector debt, which was entirely avoidable, still poses a threat to the economy by adding steadily to the country’s debt stock.

Through the instrumentality of Ofori-Atta, the government has been able to pay much of the huge debt inherited in the energy sector. This has ensured that Ghanaians have been freed from the dreaded dumsor that brought a painful socio-economic crisis to all.

The Ministry of Finance has so far paid over GHC12 billion as the cost of excess energy capacity charges inherited in 2017 just to keep the lights on. This huge sum was paid for electricity that the country does not use (excess capacity) but which had to be paid for anyway, because of the nature of power contracts signed under past governments.

Currently, of the 60% or 2,300 megawatts (MW) of installed capacity of electricity contracted between 2011 and 2016 on a take-or-pay basis, only 40% of installed capacity is actually consumed.

Ghana has an installed capacity of 5,000MW and a dependable capacity of roughly 4,700MW, with an all-time peak demand of 2,700MW. This means that, since 2017, Ghana has had to look for money to pay for excess capacity that is never used.

To address this nuisance, the government BOLDLY and innovatively crafted the Energy Sector Reform Programme (ESRP) to deal effectively with all the most pressing problems in the energy sector, which is widely seen as a pillar to propel the economy beyond aid.

Under the ESRP, the government is in the process of renegotiating with IPPs to convert purchase agreements from “take-or-pay” to “take-and-pay”, to put an end to the payments for excess capacity which keep adding to Ghana’s debt stock.

The government’s attempts to renegotiate with the IPPs seem to be a late response to a herculean task. And yet, with the cordiality that has been created between the players, certainly there is light at the end of the tunnel for Ghana.

Looming danger

Ghana now faces a looming danger: from 2020, the country will also have to pay annual excess gas capacity charges of between US$550 million and US$850 million every year, due – once again – to contracts that the previous government also entered into with gas producers.

Specifically, the government paid a $520 million (GHC2.7 billion) energy sector debt in 2018 and $604 million (GHC3.14 billion) by end June 2019, with a projected $1 billion (GHC5.2 billion) payment by the end of 2019.

The costs to the state will increase over time to a cumulative total of over $12.5 billion by 2023 if business in the energy sector continues as usual.

In response to the expensive power purchase agreements contracted by past governments between 2010 and 2016, which included take-or-pay, the electricity tariff was increased by a cumulative 268%.

Amid persistently unreliable power supply, soaring inflation and rising interest rates, and with the fast-depreciating cedi, the Public Utilities Regulatory Commission (PURC) of the time still went ahead to increase electricity prices by 59.2% in 2015 in a bid to attract competitive private investment.

Once again, the basic excuse was the need to assist service providers to raise funds for maintenance work and avoid immediate collapse of the distribution network. The rises also fulfilled a three-year aid deal with the International Monetary Fund, which the Government of Ghana signed in April 2015 to restore fiscal balance and fix the power crisis.

Focused intervention

Under the New Patriotic Party government of President Akufo-Addo in 2018, Ghana reduced electricity prices for businesses by 30% and for households by 17.5%, an average of roughly 22%.

Although electricity tariffs then increased by 11% in July 2018 and another 5.6% the following October, the evidence shows that the NPP has cumulatively reduced tariffs by approximately 2%.

To the critics, the strength of a government’s performance is not in the talk but in action. In governance, it is the policies, programmes and the relief that these bring to the ordinary citizen that count.

This is an edited version of a piece which first appeared in the Finder newspaper

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