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Ghana seeks solutions to power woes for economic growth

By Nana Yaa Mensah and Patrick Smith in Accra
Posted on Friday, 23 February 2018 10:16

A year into his presidency, Nana Akufo-Addo exudes optimism about the prospects of turning the country around. A day after marking 25 years of multiparty politics on Republic Day at Independence Square in central Accra, Akufo-Addo told The Africa Report: “We are on course. We’re delivering free secondary education as promised […]. We have in place a really strong economic team, and we’ve got the lights back on.”

True, the economy is growing strongly again and the free secondary education policy is wildly popular, even if there are gripes about how it is being managed on the ground and questions about how to finance it.

Akufo-Addo concedes that his government’s task was more daunting than expected: “The sheer volume of meetings, social interventions that the president is expected to make across the board […]. That’s something of a shock […], even for someone like me, who has been a minister on the campaign trail.”

For the previous seven hours, Akufo-Addo had been locked in a meeting with the top leaders of the governing New Patriotic Party (NPP). They are determined to consolidate their hefty victory in the December 2016 elections. To do so, they have to keep morale high, they need resources, and, above all, they need a message that resonates.

After a brief respite early last year, politics in Ghana has returned to its former partisan intensity. The opposition National Democratic Congress (NDC) is trying to regroup after its defeat, vowing to defend its former ministers from charges of grand corruption and throwing the same accusations at the new NPP government.

In the first week of 2018, the immigration service advertised for 500 recruits to join its training scheme. Within hours, a queue hundreds of ­metres long had formed, with as many as 50,000 applicants waiting in the sun to submit forms to the recruiting centre at El Wak stadium. This dramatic rush for jobs quickly became the new year story on radio and television. It was a wake-up call to both politicians and business people of the relentless pressure posed on an economy whose structural reliance on commodity exports is out of kilter with rapid urbanisation and demand for higher living standards.

Scramble for jobs

Fixing those economic structures, in effect reforming the colonial economy, was a central promise in Akufo-Addo’s election campaign. To be met, many of his pledges – on education, a factory in each district and a massive job creation programme – demand reliable electricity. Fixing that, at least in the short-term, has been a tangible achievement of the government’s first year. Yet questions linger over how durable the fix is. Have Ghanaians finally cracked a problem that has haunted them for decades, or simply deferred the pain?

In sub-Saharan Africa, Ghana remains second only to South Africa for power provision to the population: 80% of Ghanaians have access to electricity. But the longest-standing players – the Electricity Company of Ghana (ECG), the principal distributor, and Volta River Authority (VRA), the main generator – have failed to manage mountains of debt. The VRA alone was said by late 2016 to owe crude oil suppliers $170m, suppliers of Nigerian natural gas $180m, and Ghana National Gas Company more than $600m. Government departments, which routinely ignore their bills, owed more than $650m to the ECG and producers, and $500m to bulk oil distributors.

The 2012-2015 energy crisis was not the country’s first. In 1997, after a prolonged drought, water levels in the Akosombo Dam fell perilously low. The then NDC government of Jerry Rawlings announced nationwide ‘load shedding’. For the first time since the 1950s, when colonial administrators commissioned diesel plants to light up the cities, the whole country plunged into darkness.

In 1998, the country lacked 300MW of the 1,100MW it required. The biggest single consumer of electricity, the Volta Aluminium Company (Valco) smelter in Tema, curtailed operations by 70%, freeing up 100MW.

A second crisis in 2006 and 2007 under John Kufuor’s NPP government was described by the World Bank as ‘avoidable’. Again, Ghana was forced to shed 30% of its regular supply, now 1,500MW. Rainfall eased the strain but not in time to save the NPP, which lost the 2008 election to John Atta Mills’s NDC. Paradoxically, the 2006-2007 crisis coincided with the discovery of commercial quantities of oil, which soon came to be seen as the only potential plug for Ghana’s power deficit.

The electricity sector failed to keep pace with demand as governments invested little in expanding provision beyond the 400MW Bui Dam, a project first mooted in the 1920s and revived in 2008. Yet the trigger for the 2012-2015 crisis was an accident. An anchor severed the West African Gas Pipeline, which carries Nigerian natural gas to Ghana, shutting down the privately owned Sunon Asogli plant in Greater Accra and wiping 200MW off the grid.

It also left the VRA’s own Takoradi and Tema thermal plants hamstrung, forcing them to fall back on expensive crude oil to keep the turbines turning. Ghana was obliged to shed more than 600MW from a system then generating a dependable 1,800MW. Ordinary Ghanaians bore the full brunt of dumsor (‘off and on’).

This time the effects were far more severe. Manufacturing shrank by 8% in the fourth quarter of 2014 as the lights went out. A 2013 World Bank report estimated ‘Ghana needs to invest over $4bn in the next 10 years to make up for the past investment deficit and upgrade its power-­sector infrastructure’ and called for the restructuring of state-owned interests. The report sharply criticised ECG, VRA and partner institutions, singling out the Public Utilities Regulatory Commission (PURC) for failing to set boundaries for the sector.

Despite a $3bn Chinese loan to develop the Atuabo gas plant in the Western Region, there was no sign of Ghana being able to leverage direct investment so that legacy plants could get needed maintenance and upgrades.

Mahama’s measures

Small businesses, from barber shops to beer bars, folded. A new middle class had come to expect reliable power; these people were unable to work without electricity to charge their phones and fire up their tools, and current fluctuations damaged valuable equipment.

The government, by then led by the NDC’s John Mahama, scrambled to pass the 2015 Energy Sector Levy Act, raising taxes on fuel to address the power utilities’ debts. It also concluded several emergency power purchase agreements (PPAs), with a heavy emphasis on thermal plants.

In the past 10 months, the Akufo-Addo government has announced ambitious plans for growth. Finance minister Ken Ofori-Atta has emphasised that he sees gas, rather than oil, as the main source of power for agriculture projects and other programmes. Indeed, many of the government’s other projects are linked to gas or wholly dependent on it: a petro­chemicals hub in the Western Region, an integrated aluminium industry linking Kyebi and Awaso, and a liquefied natural gas (LNG) plant in Tema.

Though power supply failed to match growth in the early 2010s, the emergency measures that Mahama introduced have bought Ghana breathing space – at a price. Agreements actioned by the last government added 1,400MW to supply, taking provision from under just 3,000MW in 2015 to the present glut of 4,400MW. Usual peak domestic demand hovers between 2,100MW and 2,200MW, which leaves a generous reserve of almost 50% to manage the grid. Another 1,000MW is expected to come on-stream in the next two years.

Electricity remains expensive because of Ghana’s dependence on thermal plants for roughly 1,700MW, which are running at way below the optimum 80% capacity. The new political leaders are exploring ways of slowing the stream of contracts entered into by the past government. In June, energy minister Boakye Agyarko (see box), announced that he had reviewed up to 30 PPAs; the government was seeking to avoid additional capacity charges of $700m that it would incur if all 30 projects were to come online.

More problematically, the government announced in September that it had cancelled a contract with Quantum Energy to build a plant to process imports of LNG in favour of a supply and construction deal with Russia’s Gazprom. Although Energy Minister Agyarko claims this would produce savings of $1bn, the Gazprom deal outlined in the memorandum of understanding with the government doesn’t cover the estimated $300m-$400m cost of building a special jetty to offload the LNG. Subregional power-sharing continues,with sales of electricity to neighbouring Togo, Benin and Burkina Faso, as well as import/export power trading with Côte d’Ivoire.

Weak governance

Kweku Awotwi, the VRA’s board chairman, describes the authority’s stewardship of its hydro plants as still “world-class” but concedes: “For whatever reason, we’ve not been able to replicate that standard for thermal assets.” He attributes this to Ghana having launched thermal technology without investing sufficient care in acquiring the vital expertise, unlike with Akosombo. But he blames the power sector’s systemic problems largely on financial irresponsibility by producers and consumers alike, the high costs of gas, operational inefficiencies of up to 40% and weak governance. At a lecture late last year, he noted that the VRA had lost ¢574m on the 5,746GWh of electricity it supplied to the ECG in 2016. The bulk generation tariff set by the PURC is roughly 10 pesewas per unit lower than production cost.

The regulator, argues Awotwi, has been far too inclined to bow to political pressures to keep energy prices low. Ghanaian consumers will have to adjust to realistic pricing, he says: “Up until 1997/98 when the VRA began to run thermal plants, it was a very solvent institution, making profits of up to $30m to $50m a year. We didn’t have to buy crude oil, so cash wasn’t a problem.” But the World Bank warns that government revenues from oil and gas are likely to peak in 2020 and tail away. The game may already be up for investing in the great white hope of thermal energy.

This article first appeared in the February 2018 print edition of The Africa Report magazine

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