Identifier
Created
Classification
Origin
07ACCRA1849
2007-09-04 09:09:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Accra
Cable title:  

GHANA'S ENERGY CRISIS: RESTRUCTURING TOWARD FULL

Tags:  ECON ENRG GH 
pdf how-to read a cable
VZCZCXRO7238
RR RUEHMA RUEHPA
DE RUEHAR #1849/01 2470909
ZNR UUUUU ZZH
R 040909Z SEP 07
FM AMEMBASSY ACCRA
TO RUEHC/SECSTATE WASHDC 5209
RUEHZK/ECOWAS COLLECTIVE
UNCLAS SECTION 01 OF 03 ACCRA 001849 

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG GH
SUBJECT: GHANA'S ENERGY CRISIS: RESTRUCTURING TOWARD FULL
COST-RECOVERY

Ref: A) Accra 847; B) Accra 1012; C) Accra 1791; D) Accra 282

UNCLAS SECTION 01 OF 03 ACCRA 001849

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG GH
SUBJECT: GHANA'S ENERGY CRISIS: RESTRUCTURING TOWARD FULL
COST-RECOVERY

Ref: A) Accra 847; B) Accra 1012; C) Accra 1791; D) Accra 282


1. (U) SUMMARY: This is the fourth in a series of cables on Ghana's
energy sector. The first, ref A, provided background on the crisis
and near-term remedial measures. The second, ref B, focused
primarily on the impact of the crisis on the mining sector. The
third, ref C, provided an update on the crisis and progress in
putting in place new generation capacity. This cable addresses
distribution, transmission and regulatory issues. The GoG reform
efforts are being anchored by a recently approved $95 million World
Bank/Global Environment Facility (GEF) Ghana Energy Development and
Access Project (GEDAP). Tariff reform, utility company
restructuring, enhanced regional cooperation and expanded access to
power are among the critical elements Ghana needs to implement in
the near term if it wishes to attract investment and spur private
sector development to meet its growth and poverty reduction goals.
End Summary.

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WORLD BANK ASSISTANCE
--------------


2. (U) In July, the World Bank approved a $95.5 million Ghana Energy
Development and Access Project (GEDAP) comprised of a $90 million
concessional loan from its International Development Association and
a $5.5 million grant from the GEF. The aim of GEDAP is to improve
institutional capacity of the regulator and utility companies,
improve distribution and increase energy efficiency (Ghana loses an
estimated 25% of what is generated in distribution),scale-up energy
access to reduce urban-rural imbalances, and encourage the
development of renewable energy.


3. (U) Among the initiatives to be carried out under GEDAP is the
creation of a Rural Electrification Agency that will coordinate the
connection of 134,000 new customers in rural villages to the
national grid and accelerate achievement of full rural
electrification from 2020 to 2015. Loan disbursement will depend on
making progress in key areas such as tariff adjustment, improving
performance of the Volta River Authority (VRA - responsible for most
generation) and the Electricity Company of Ghana (ECG - responsible
for distribution),obtaining management support services for ECG,
and submitting a renewable energy law to parliament.

--------------
TOWARD FULL COST-RECOVERY

--------------


4. (U) The GoG has been absorbing proposed end-user tariff increases
for more than a year, at a high financial cost. The direct
operating and maintenance cost of thermal energy in 2006 was 3.8
trillion cedis, or approximately $408 million. That amount was
above the total revenue of VRA in 2006. In 2007, the thermal/hydro
mix tilted even more toward thermal (and higher costs) with more
than half of the electricity generated by VRA now coming from
thermal sources. Currently, the GoG provides subsidies worth about
$30 million monthly - largely from tariff absorption. VRA is
currently discussing with the World Bank the option of separating
the financial and managerial aspects of hydroelectric and thermal
power to prevent hidden cross-subsidization of less efficiently-run
thermal plants (VRA has more expertise in hydro) and make revenue
streams more transparent.



5. (SBU) [COMMENT: VRA's poor financial health nearly led to the
shut down of Ghana's joint-venture thermal plant at Takoradi. VRA
was 12 months in arrears in payment to the private partner, TAQA
(formerly CMS Energy). TAQA forced the issue by scheduling a press
conference announcing a shut down of the plant, and the GoG paid
more than $30 million in the nick of time. Although the GoG found
the money to clear the arrears, it placed additional pressure on the
budget. Ghana has rescheduled some promissory notes and are eagerly
awaiting the proceeds from the planned sovereign bond issue (ref C)
to relieve the budget pressure. END COMMENT.]


6. (U) As part of ongoing reform efforts, the Public Utilities
Regulatory Commission (PURC) determined average cost-recovery
tariffs in May 2006. The proposed increases were not immediately
passed to consumers because the government felt there needed to be
improvements in service before consumers could be expected to pay
more. The increase was slated to take effect in November 2006 but
the government again decided to absorb the costs. In April, 2007,
the GoG committed to achieving full cost-recovery tariffs by the end
of 2007; it is one of the critical measures Ghana said it would take
to address its fiscal deficit. GoG acceptance of the need to move
to cost recovery is not a new development but the energy crisis has
added urgency to the reform.


7. (U) Cost-recovery tariffs at the May 2006 level (944 cents per
kilowatt hour) were finally implemented in May 2007 for commercial
users. The tariffs are still below true cost-recovery since costs

ACCRA 00001849 002 OF 003


have risen over the last year. Residential users were supposed to
begin paying increased tariffs August 1 but rates have not changed.
The Public Utility Regulatory Commission (PURC),whose mandate is to
set tariff levels, will conduct an operational and technical audit
of utilities and a tariff study by the end of March 2008 as part of
GEDAP.


8. (U) PURC's forthcoming multi-year tariff regime framework will
provide the basis for passing full costs to end-users. However,
considerable debate can be expected regarding tariff dispersal,
e.g., should industry pay higher rates than the poor. The GoG is
faced with balancing priorities such as providing affordable power
to the underserved and attracting new industrial investment in the
face of stiff regional and global competition. In a recent radio
interview PURC's Chairman estimated that a 20 percent tariff
increase could bring VRA and ECG to cost recovery not including the
high generating cost of the diesel-fueled emergency power plants.


--------------
UTILITY SECTOR REFORM
--------------

Transmission
--------------


9. (SBU) The Ministry of Energy recently created an Electricity
Transmission Utility, the Ghana Grid Company (GridCo),to take over
the transmission activities of VRA and help create a level playing
field for IPPs. GridCo is state-owned but autonomous and will
manage operations and maintenance, as well as the import and export
of West Africa Power Pool (WAPP)-produced electricity. PURC's
Technical Manager for Energy indicated that the separation is sorely
needed but will be difficult to implement. He said account
separation is not a problem but sorting out shared facilities and
ongoing lending programs will be a challenge, as will the fact that
Gridco, as a new company, has no track record that would enable them
to easily access financial resources.

Distribution
--------------


10. (SBU) The Electricity Company of Ghana (ECG) is responsible for
distribution. Under a plan agreed between the GoG and donor
partners, ECG was to be put under a management contract supported by
the Swiss. However, because of negative experiences with management
contracts in the telecom and water sectors, the GoG decided not to
move forward. Instead, the Ministry of Energy said it wishes to
move forward with a plan to restructure ECG into a holding group
with five subsidiary companies. The holding group would provide
broad policy direction while subsidiaries would be responsible for
service delivery and maintenance and held accountable for agreed
performance standards and incentives. According to an Economic
Advisor at the Swiss Embassy, the Swiss are now considering whether
to provide support to ECG through a consultancy and hopes to have a
program in place by early 2008. The ECG and the Ministries of Energy
and Finance concluded a Performance Contract in January 2007 that
sets out service and revenue standards for ECG and may be a basis
for performance benchmarks for the potential consultancy.


11. (SBU) [COMMENT: The existence of the performance contract was
news to donor partners, even those most closely engagedin the
energy sector. It has not been publicized at all and was brought to
the attention of the Swiss only in August, even though donors had
held intensive discussions with the GoG about performance indicators
related to ECG. The value of restructuring ECG as outlined by the
Minister is not entirely clear. The Minister touted it as part of
the decentralization process but it could also simply further weaken
an already weak structure. END COMMENT.]

--------------
REGIONAL INITIATIVES TOWARD EFFICIENCY
--------------

WEST AFRICA POWER POOL (WAPP)
--------------


12. (U) WAPP's goal is to integrate the regional power grid to
create a regional energy reservoir from which West African countries
can draw back-up power to reduce vulnerability to local disruptions.
WAPP's implementation is guided by a "master plan" of capital
investments required by each country in the region to meet its
energy needs.


13. (U) A key piece of the WAPP is a 330 kilo-volt coastal
transmission backbone that will interconnect power lines across
borders and establish new lines within Ghana to transfer power to
other countries. The Lagos (Nigeria) - Sakete (Benin) portion of
this line was commissioned February 13, 2007, thereby enabling Benin
and Togo to be supplied with Nigerian power, in addition to Ghanaian

ACCRA 00001849 003 OF 003


power, which they already can receive. In the face of domestic
shortages, VRA reduced power supply to Togo and Benin from 100MW to
25MW earlier this year.


14. (U) To maximize benefit from the WAPP, which attracts and
facilitates investment in power assets, the GoG needs to invest
about $8 million in new transmission lines. VRA's financial woes
have slowed the pace of investment which, in turn, slows WAPP
progress. The next priorities are to complete the Aboadze
(Takoradi) - Volta (Tema) line and then the Volta - Sakete portion.
The WAPP Secretariat has urged GoG to prioritize the financing of
the Obuasi - Kumasi line, which will eventually connect with the
Takoradi thermal plant (T2),which has long been slated for
expansion from 220MW to 330MW. The GoG insists that even though T2
expansion has been pending for years, it will be completed. If so,
it would help to relieve the western bottleneck which has
exacerbated transmission losses.

WEST AFRICA GAS PIPELINE (WAGP)
--------------


15. (U) The West Africa Gas Pipeline (WAGP) which will channel
Nigerian gas to Benin and Togo, and Tema and Takoradi in Ghana, has
faced numerous hurdles that have delayed completion such as
political instability in gas producing areas, sale of a
subcontractor to another company, challenging shore crossings, and
pipe rupture.


16. (U) The WAGP, in which Chevron has the highest percentage of
ownership in the West Africa Pipeline Company consortium, is now
scheduled to come online during the second quarter of calendar year
2008, though targets for completion have repeatedly slipped. Though
the WAGP will not provide additional generating capacity, gas will
significantly reduce the cost of energy (operating costs will
decrease by 30-40 percent by switching from fuel oil) and could
induce additional private investment.


17. (SBU) The Gas Purchase Agreement among the WAGP countries calls
for 20 years of gas flow from Nigeria (about 135 cubic feet of gas
per day - 124 for VRA and 11 split between Togo and Benin). Gas
will be supplied by Shell, Chevron, and the Nigerian National
Petroleum Corporation. Nigeria initially agreed to supply Ghana
with enough gas to run approximately 660MW of thermal generation,
but most experts project that gas demand will exceed supply and, as
early as 2010, demand will be twice the supply. Nigeria claims
supply constraints are temporary but the uncertainty adds an
additional risk for prospective independent power producers.


18. (U) To maximize the benefit from the WAGP, Ghana should develop
a secondary gas market, which would provide a source of fuel for
industry and an incentive for additional investment in power
generation. Regarding this secondary gas market, more than two
years ago USAID contractors provided advice to the GoG on developing
a regulatory framework. GOG has yet to adopt the regulations and
necessary policy elements for the market to exist.

--------------
COMMENT
--------------


19. (SBU) COMMENT: Avoiding future energy crises in Ghana will
depend largely on Ghana's ability to get its utilities on solid
financial footing and the regulatory environment right for
sustainable private investment in the energy sector. Per reftels,
the GoG is addressing the energy crisis but, for the moment, it is
doing so primarily through expensive emergency generation
investment. Over the medium to long-term, it needs to make
significant progress in providing broader access to power for all
Ghanaians and to stem the financial and technical losses that
currently characterize the sector. END COMMENT.

BRIDGEWATER