ENERGY Policy Think Tank, the African Centre of Energy Policy (ACEP) has charged government to consolidate fuel supply plans to ensure cost reduction.
Without further delay, government needs to review the Nigeria Gas agreement to establish a clear case for its reliability, Benjamin Boakye Deputy Executive Director said in ACEP’s comments on the 2017 budget with focus on the energy sector.
This, he said, would help government to properly plan gas supply sourcing and avoid the recurrent non-performance.
He urged government to develop a comprehensive plan to pay debt owed for the supply of gas.
ACEP noted that the budget shows in some detail, how government intends to clean up the ailing power sector to ensure reliable and affordable power supply in a way that significantly deviates from existing arrangements, which ACEP believes are weak.
According to ACEP, some of the Independent Power Producers (IPPs) are divesting into providing alternative arrangement for fuel because planning for gas supply has been disjointed and unreliable.
The Energy Policy Think Tank expressed worry that the separate investments by the IPPs into storage capacity and plant conversion for the use of Light Crude Oil (LCO) would be passed on to the consumer through the tariff.
It charged government to fulfil its promise of reviewing all power agreements, something that is relevant for renegotiation of expensive power plants procured in the past.
The thermal company to be established should become a subsidiary of VRA Hydro with private sector participation through the stock market.
1. Restructuring of the energy sector debt
The current government is committed to continue the efforts of the previous government in restructuring the debt of the power sector.
What is novel about the proposed arrangements is the raising of bonds to write off the debt of the utilities and accelerate the process of ensuring a clean balance sheet of the utilities on the back of the Energy Sector Levies Act (ESLA).
The use of the ESLA to pay GHS787.03 million of the debt of the utilities in 2016 is commendable.
However, the fact that VRA still struggles to raise its own letters of credit is an indication that a new approach to dealing with the debts is important.
2. Electricity Tariff Reduction
The budget announced 50% reduction of levies on electricity; a reduction of National Electrification Levy from 5% to 3%, and Public Lighting Levy from 5% to 2%.
This is in addition to budgeted lifeline subsidy of GHS83.8 million.
This will provide some relief for consumers of electricity. We are however disappointed that the 17.5% VAT on industrial consumers was not removed. This could have freed up some cash flow for businesses to invest in expansion and improve production.
In fact, the VAT on industrial consumers is another nuisance tax because government eventually reimburses VAT to industry through the sale of their output.
Since this has a neutralizing effect, it only makes sense for government to remove the 17.5% VAT on electricity to free up capital for investment.
Otherwise, this becomes a lazy way of frontloading government revenue without considering its impact on the health of businesses.
3. Consolidation of all hydro generation under VRA
ACEP welcome the government promises, in the budget, to bring all hydro generation under Volta River Authority (VRA) and create a separate thermal entity to hold the thermal assets currently held by VRA.
This will shift the burden of the highly mismanaged thermal component of VRA from the company and improve efficiency of operation and decision-making through private sector participation.
What ACEP has also proposed in the past is for the prospective thermal company to remain a subsidiary of VRA with private sector participation through listing on the Ghana Stock Exchange.
We recognize that a restructured thermal company could be beneficial to VRA to stabilize its cash flow when the water levels are low in the dams.
4. MCC Compact II
It was refreshing to note from the budget that the Millennium Challenge Corporation (MCC) Compact II will be continued.
The Compact is recognized by the government to be in force, requiring urgent steps to resolve outstanding disagreements between stakeholders to allow for its implementation.
Reforming ECG is important for the efficient management of the power sector and to ensure sustainability of plans to retire the huge energy sector debt.
However, this must be done by building the necessary consensus, mindful of the timelines to comply with the Compact agreement.
5. Renewable Energy
The 2017 target of 2-3% of renewable energy generation promised in the budget is big on solar energy.
In the short-to-medium term, we agree that solar can be deployed quicker than other forms of renewables.
However, the mode of deployment should account for the long term implications on other sectors of the economy.
The impact of utility scale solar on agriculture and climate change, for example, will have to be assessed and properly contextualized.
There is a bigger role of planning and zoning of potential areas where solar can be deployed, but this is currently not given the priority it deserves.
We encourage government to be more aggressive on rooftop deployment while the Energy Commission completes its consultation on the Renewable Energy Master Plan (REMP) with all stakeholders, which will set the priorities for all the options available to Ghana.
The rooftop option helps to spread the investment requirement to many individuals and does not require further displacement of flora and fauna. Biomass and wind power are other options to explore.
6. Capacity Addition
The budget estimates additional installed capacity of 1,200 MW in 2017. This will result in a total capacity of 5,332 MW by end of year. Current demand peaks around 1900-2000 MW.
By applying the 10% growth rate used by Energy Commission, demand is expected to grow to about 2,200 MW by end of 2017.
The total generation capacity required for 2017, accounting for reserve margin, will therefore be about 2,500 MW.
The occurrence of power outages indicates that notwithstanding existing capacity of 4,132 MW, supply is unable to meet current demand.
A confluence of factors, including the low availability of TAPCO, the decreasing output from Akosombo, among others has resulted in current supply deficit.
We therefore support the government’s plans to conduct a technical audit of existing power infrastructure.
We believe that this will form the basis to retire old, inefficient and expensive plants, and make way for low-cost efficient plants.
We further support government’s intention to implement a comprehensive power sector master plan for the development of a resilient and reliable power sector that is capable of meeting our power needs.
In spite of the positives in the budget, there are real concerns that need attention.
1. Fuel Supply
Security of the supply of fuel for power generation is a major hurdle for the sector.
Sadly, not much was said about this. With high costs of electricity currently, cheaper sources of fuel are imperative to ensure some savings that can be passed on to consumers to whip up demand for the excess capacity in generation.
Government needs to consolidate all plans for gas imports and ensure that all thermal plants run on gas.
This is one way electricity tariff can come down. We expect Jubilee, TEN and Sankofa to provide significant relief for 2018 and beyond.
However, with estimated total volume of about 380mmscf/d from these fields, about additional 100mmscf/d of gas is required to meet time-of-use demand
2. Nigeria Gas
Government should have provided information on the plans underway for gas supply from Nigeria.
The historically unreliable gas supply from Nigeria makes planning difficult given that we have a take or pay agreement with Nigeria Gas.
Ghana needs to be able to adequately anticipate the level of gas supply from Nigeria to prevent glut or undersupply of gas.
It is therefore important to bring to closure what the future scenario of gas supply from Nigeria will be.
3. Liquefied Natural Gas (LNG)
The decision to bring in LNG has been on the drawing board for more than 5 years. The Ministry of Energy confirms that three contracts have been signed with investors.
However, the gas supply scenario shows that Ghana will need only one LNG to augment domestic sources.
ACEP recognises that at least one LNG is critical for gas supply stability, given our experience with gas from Jubilee and Nigeria.