Energy Ghana Magazine has published my article titled “Dumsor Ends But Remnants Remain” as the main cover story for the second issue of the magazine. The article looks at the implications of the changing power generation mix for energy pricing and security in Ghana.
Please see below for extracts and links to download the full article
- Despite almost a decade of strong macroeconomic growth, Ghana still lags behind in its ability to generate enough power to catalyse this growth. The rapid deceleration in economic activity over the past three years has been primarily due to persistent energy supply constraints and rising energy-related input costs to production. The ripple effect of this on the economy has been damning as the load-shedding programme, locally referred to as ‘dumsor’, continues to severely impact industry profitability, liquidity, efficiency, productivity and costs particularly for those in the micro, small and medium enterprises (MSMEs) and industrial sectors such as mining, telecoms and manufacturing companies.
- The critical factor in the economics of thermal power generation, and their viability, is the cost of natural gas or LCO. The economics of these thermal power plants look particularly attractive if the cost of fuel, particularly natural gas is low. Though Ghana has discovered significant domestic associated and non-associated gas reserves from the Jubilee, TEN and the Sankofa-Gye Nyame offshore oilfields, it remains to be seen if government will allow power generators to purchase natural gas at comparatively prices (price discriminate) than supply from the WAGP. Given that the Ghana’s Natural Gas Pricing Policy envisages that “all natural gas shall be sold by the aggregator at no less than import parity prices to all users” and “that the import parity price shall be determined by government on the advice of PURC” , one can immediately begin to see that affordable and locally available natural gas for power generation, though a viable policy proposition, is not likely to happen.
- We are led to conclude that a fundamental change in the generation mix in favour of thermal power even in the presence of domestic gas availability, implies consumers having to pay relatively higher tariffs over the medium term as domestic associated gas is likely to sold at landed costs ranging from US$7-8 per MMBtu compared to US$2.5 per MMBtu actual costs. There is not that much economic justification for adopting import parity pricing for the associated offshore gas reserves and/or prioritising the fertiliser sector over other industrial sectors, instead of giving pre-eminence to power sector via lower gas tariffs that should ultimately reduce the cost of electricity to end users. Besides, this approach runs contrary to the other policy approach of promoting export-led industrialization with the country as the sub-regional manufacturing hub, of which availability of power is critical.
- It is evidently clear from the number of new power purchase agreements signed with IPPs that thermal generation will continue to form the backbone of Ghana’s energy mix in the medium term over the next five to ten years. This implies the need for cost reflective tariffs in line with this new generation mix assuming import parity domestic gas prices are maintained. But historically, Ghana’s tariff pricing regime has failed to incentivise power generating companies to make economic returns while ensuring investments in equipment upgrades in order to ensure energy security.
- In conclusion, the current tariffs being paid do not reflect the full cost of power generated, and is even likely to be further exacerbated with more thermal generation capacity coming online over the next five years. On 2 November 2015, the Minister of Power said that Ghanaians needed to brace themselves to pay more for power as the generation mix has fundamentally changed from hydro (generation costs of about US¢2-5 per KWh) towards thermal (generation costs of US¢15 per KWh).
Article can be accessed via: http://magazine.energyghana.com/MAR2016/index.html?page=28
Alternative Download 1: https://www.academia.edu/24035494/Dumsor_Ends_But_Remnants_Remain
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