Following Part 1 of the second instalment of BLP’s Power to Africa series which examined the institutions and policies that govern Ghana’s power sector, this Part 2 focuses on the challenges Ghana’s power sector faces and the opportunities the country has to address such challenges.
As noted in Part 1 of this instalment, only about 64 per cent of Ghana’s 28 million people have access to electricity. This problem is likely to be exacerbated as demand for electricity rises due to a growing population and rapid growth of urbanization, real income and the industrial and service sector.
President, Nana Akufo-Addo, who won the Ghanaian national elections on 7 December 2016 promised significant investment in the national energy industry and will, therefore, be expected to set out to address the country’s power issues with effective policies and strong investment in infrastructure.
The gap between power production and demand is a consequence of the challenges facing the power sector in Ghana, but also shows the huge opportunities available to power investors in Ghana. These challenges and opportunities are explored below.
In general, Ghanaian infrastructure has not developed quickly enough to support industrialisation and the rapid growth of a population greedy for power. This is largely down to the demand and supply side challenges explored below:
- Tariffs and subsidies: electricity in Ghana is heavily subsidised and Ghanaian public utility companies have struggled to recoup costs due to low tariffs which, in 2015 for example, were set at an average of USD0.05 per kwh of electricity generated. These rates are around USD0.09 below Sub-Saharan Africa’s average of USD0.14. Subsidies and low tariffs have left the transmission and distribution authorities crippled due to the inability to maintain or expand the required infrastructure. Since 2004, the Government of Ghana (GoG) has spent over USD900 million on fuel subsidies to the Volta River Authority (VRA) alone.
- Debts: in May 2016, officials of the Electricity Company of Ghana (ECG) stated that the GoG had been unable to repay around USD240 million it owes the ECG. Additionally, the VRA, the main generator and supplier of electricity in Ghana, is reportedly in financial difficulties with banks and supply chain corporates. The GoG’s grim financial position has slowed private investment and infrastructure development. It was projected to finish 2016 with a 74% debt to GDP ratio according to the International Monetary Fund. This problem was exasperated in 2016 by the Golar Tundra floating regasification and storage unit (FSRU) project. The FSRU project was expected to have entered operations by mid-2016 to supply 250 mmcf per day of regasified LNG to the 230-MW Kpone thermal power plant owned by VRA. However, West African Gas Ltd, sponsored by the GoG, was unable to pay its fees which delayed the project.
- Obsolete/inadequate infrastructure: much of Ghana’s transmission and distribution systems are aging and increasingly unreliable leading to several total system collapse in the last few years. For example, in the FSRU project referenced above, the dispute over fees was complimented by a lack of sufficient infrastructure at the Tema port to accommodate the FRSU vessel, requiring it to moor at sea and further delayed the project.
- Climate change: Ghana has long had a strong dependence upon rainfall powering its hydropower sector. However, the increasingly uncertain pattern of rainfall and inflows into the hydropower facilities has made this source of power less predictable with growing supply shortages.
- Over reliance on oil and gas: shortages in the water supply (as explained above) has meant that thermal power plants are increasingly fuelled by oil and gas. However, the low global oil and gas price has meant that extraction has been held back and so supply is more limited. Consequently, these plants have been unable to attain full generation capacity.
Despite the challenges, the potential in Ghana’s power sector remains vast. With the right policy adoptions and energy focus, there is no reason why the GoG cannot sustainably meet the country’s growing power demands. We set out below five areas where we believe the biggest opportunities exist:
- Oil and gas: Ghana’s oil reserves are estimated at around 2 billion barrels with gas reserves thought to be between 1.5 – 1.7 trillion cubic feet. However, recent discoveries suggest that Ghana’s reserves may be larger than first thought. This could serve as feedstock to power plants, reduce dependence on foreign oil and gas and provide stability in an era of fluctuating oil and gas prices. A recent success in the Ghanaian oil and gas sector was the World Bank’s provision of USD7.7 billion worth of support for the Sankofa project to be developed by Vitol and Eni in partnership with the Ghana National Petroleum Corporation. It is hoped that this project will provide a reliable and stable source of natural gas from the offshore Sankorfa field and a daily production of oil of 10,000 barrels by 2019. This could generate enough fuel to power Ghana’s thermal power operations for over a decade.
- Wind: average wind speeds in Ghana of between 5 – 7 m/s shows the possibilities for wind power project development especially along the eastern coastal areas and mountainous regions. As part of the VRA’s Renewable Development Programme, the VRA is looking to install about 100 to 150-MW worth of wind projects to supplement power generation in Ghana. Additionally, Mainstream Renewable Power signed a deal with Swiss developer NEK Umwelttechnik to buy the 225-MW Ayitepa wind project which is set to become Ghana’s first utility-scale wind farm with the potential to power up to 10% of the country’s electricity demand.
- Solar: Ghana is endowed with solar resources which allow for very high potential in both grid and off-grid solar power solutions. As at May 2015, the ECG had issued licenses and permits to utility-scale solar projects totalling 1,835-MW, and a construction permit for a 20-MW project. The 155-MW Nzema plant in the Western region of Ghana is expected to provide electricity to over 100,000 households and increase the nation’s electricity generating capacity by 6%.
- Bio Energy: Ghana has a vast areas of arable and degraded land which has the potential for the cultivation of crops and plants to be converted into a wide range of solid and liquid bio-fuels. This development of alternative transportation fuels could help Ghana diversify and secure its future energy supplies.
- Private sector participation: Attracting private funding is crucial to unlocking progress in Ghana’s power sector. The GoG has shown its commitment to further private investment through the establishment of the Ghana Investment Promotion Centre (GIPC) to promote and facilitate investment in different sectors of the economy, including power. However, it remains to be seen whether the GIPC can deliver on its mandate. Additionally, the US backed Millennium Challenge Corporation provided Ghana with a provisional USD498 million grant to support the transformation of the country’s power sector and stimulate private investment.
Through Part 1 and Part 2 of this installment on the Ghanaian power sector we have identified the institutions governing the industry and the relevant laws and policies adopted by the GoG all with the aim of solving the supply crisis which blights the country’s development. We have seen the specific challenges that the GoG faces and some potential opportunities which, if adopted and maximized by market participants, could address the country’s issues.
It appears that Ghana is on the right path; with new discoveries of oil and gas and an increasing focus on alternative, greener sources of energy, Ghana should be able to bridge the gap between supply and demand of electricity throughout the country. However, it is vital for the new government to continue this trend and increase investment to rejuvenate an ageing infrastructure system.
This article was written in partnership with Ghanaian law firm, Ashong Benjamin & Associates, with whom we have a very close relationship through our Preferred Firm network.