Dark art energy economics drills in $2.4b debt for Ghana

It is estimated that Ghana experienced 159 days of power outages in 2015, as the country’s energy crisis deepened, plunging most of the country in darkness, forcing some businesses to shut down, and by the end of 2016 the country is saddled with a $2.4 billion energy debt with no real end to the crisis in sight.

The crisis didn’t start in 2015 but it was how the government of the National Democratic Congress (NDC), handled the crisis that should raise more questions.

As Ghanaians looked up to the government to resolve the issue, the NDC government of John Mahama spent time sweet-talking Ghanaians and making countless definite promises to solve the crisis.

The government then swung into action in a blaze of activities applying some bizarre energy economics that was nothing short of dark art tricks. Operatives, cronies, including family members were all let in frantically into energy deals with no clear strategy in resolving the crisis. They were more financial engineering than anything else. Questionable power deals were signed without any proper energy economics policies guiding them. Public Private Partnerships were signed that tied the Volta River Authority (VRA) to buying fuel to power the plants while the owners of the plants made millions of dollars in revenue. One of such questionable contracts was the AMERI power plant deal.

Ghana reportedly paid more than double the cost of the turbines for the AMERI plant, a Norwegian newspaper, Verdens Gang found. The newspaper reported that according to the agreement that Ghana had signed with AMERI, Ghana will lease the ten gas turbines for five years. After that, Ghana becomes owner of the turbines after paying an equipment cost of $510 million. Ghana could have bought the same equipment at $220 million and saved $290 million.

Even the Karpower deal from Turkey, as unnecessary as it was, the government pursued it with unmatched zeal, despite concerns raised by people involved in the energy business.

Additionally, plants belonging to the VRA, such as the T3 power plant at Aboadze were shut down, that plant has a capacity of some 135MW. And even though it would have cost the state far less to fix that plant and get it running, the state-owned company was compelled by the terms of the contracts that the government has signed with private providers to continue to look for hard cash to fuel the plants owned by the private businesses and ignore the T3 plant.

When he was thoroughly defeated in the December 2016 elections, the worse defeat ever to be suffered by any sitting president in the history of Ghana elections, Mahama said during his concession speech that, he would be remembered by posterity. It’s hard to figure out what exactly posterity would remember him for, when his government racked up a national debt of GH¢122 billion with the justification that he had invested ‘massively’ in infrastructure. This argument immediately raises questions about simple macro-economic policies. Government investments in infrastructure are required to boost growth, but investment in infrastructure should be strategic. The government invested ‘massively’ in infrastructure but by December 2016 the attained GDP growth of 3.6 per cent was the lowest ever that the country has achieved in more than two decades! Invariably requiring more answers as to the efficiency and appropriateness of the ‘massive’ investments. There are also unanswered questions of value for money projects, bloated costs and sole sourcing which further confirm the theory of giving contracts to family, friends and cronies, without real economic value to the country – obviously a dark art of economics that creams off money from the state to enrich cronies.

It was the same with energy projects. Despite all the ‘massive’ investments, including in the energy sector, the country is yet to produce enough power to meet its energy needs. There are still power outages around the country, almost one year after the government announced that the power crisis was over.

“Out of 3800MW of installed power only about 200MW is available, and that gives a per capita usage of 109kw, less than 252kwh as in Ivory Coast. And if VALCO was in operation, the kilowatt per hour usage would have gone lower,” Dr. Amin Anta of the African Centre for Energy Policy, said last August 2016.

“We have seen different options. Emergency power plant of 870MW costing us $2 billion. Thermal generation, the new ones, Kpong Asogli phase two, SEND power, Amandi all costing about $2.5 billion. Co-generation is being planned by VRA for 700MW and that would cost $1.5 billion. In power generation alone we are talking about $5 to $6 billion – where is the money?” He asked.

And then in his first State of the Nation Address to Parliament, after his inauguration as President, Nana Akufo-Addo speaking about the country’s energy sector said; “Mr Speaker, probably the most difficult problem, that has dogged this nation in the past five years, has been in the energy sector. This has caused havoc in small, medium and large enterprises. It has disrupted families and businesses and brought many organizations to their knees.

The most obvious manifestation of the energy problem has earned us notoriety in the world, with the entry into Wikipedia and other dictionaries of the word DUMSOR. It is a phenomenon that has blighted our lives, destroyed appliances and collapsed many companies. The attempts by the previous government to resolve the crisis have led to a gargantuan debt overhang in the sector.”

And then he says, “We have inherited a heavily indebted energy sector, with the net debt reaching $2.4 billion as at December 2016. I have to point out the alarming fact that $800 million of this debt is owed to local banks, which threatens their stability and that of the whole financial sector. Indeed, the huge indebtedness of the energy sector constitutes the single major hurdle to Ghanaians enjoying reliable and affordable electricity supply.”

He then sounded a warning; while acknowledging that there has been some improvement in the power supply since November last year, he pointed out that the challenges facing Ghana’s power sector are far from over.

“The key problem is cost. We produce power from Akosombo at three US cents per kilowatt hour. The marginal price charged for businesses is an effective 42 cents, more than ten times the average tariff in West Africa.

This makes it very difficult to start or run a business here and be competitive. The cost of energy destroys businesses large and small. It is the bane of the vulcanizer, the tailor, the dressmaker and the hairdresser, the carpenter and the wayside fitting mechanic.  It destroys jobs. It compounds poverty. The current state of the energy situation in our country is unsatisfactory.”

The President then proposed the following:  “I am proposing a number of policy interventions. We will improve on transparency in tariff setting, and introduce a new tariff policy that will reclassify consumer categories in order to protect lifeline and strategic industrial consumers. We will also reduce significantly some of the levies and taxes on the tariffs.

As at the end of 2016, the Electricity Company of Ghana (ECG) had signed 43 Power Purchase Agreements (PPA), whilst a further 23 were under discussion. Government is conducting a review of all the Power Agreements entered into by the previous governmentin order to prioritise, renegotiate, defer or cancel outright, if necessary, in the national interest.

Overall, we have begun to develop a national electricity masterplan, which will also explore the benefits of listing VRA and GRIDCO on the Stock Exchange,” he said.

There are sound energy economics principles that could be applied to resolve the country’s energy crisis. Some of these have been applied elsewhere with excellent results.

But when that is done transparently, it won’t be susceptible to manipulations to satisfy individual greed for money. It is therefore convenient for a government to practice the dark art of energy economics that circumvents all rational and globally acceptable corporate governance practices and pretend to be solving a far-reaching problem, in so far as its operatives and cronies make some money at the expense of the suffering of the people.

By Emmanuel K. Dogbevi

Email: [email protected]

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