This policy proposal presents actionable strategies for reforming electricity tariff determination in Ghana to ensure the financial independence of the Electricity Company of Ghana (ECG) and long-term sustainability of the power sector. The recommendations include removing VAT on electricity, indexing tariffs to exchange rates, enforcing operational efficiency, optimizing natural gas utilization, and leveraging idle generation capacity for regional exports. These measures aim to improve financial stability across the electricity supply value chain while enhancing competitiveness and sector sustainability.

Context and Challenges

The power sector in Ghana faces a dual challenge: ensuring affordable electricity for consumers while maintaining financial sustainability across the value chain. ECG’s inability to meet its financial obligations to generators, transmission companies, and suppliers is a result of Non-cost-reflective tariffs approved by PURC,High operational inefficiencies and energy losses,Exposure to currency depreciation without mitigation mechanisms,Unfavorable fiscal policies like VAT on electricity and supplies to ECG.

The cumulative impact of these challenges threatens the sustainability of Ghana’s power sector. Experiences from countries like Nigeria, where poor tariff structures led to the collapse of privatized utilities, and Kenya, which achieved substantial reductions in losses through operational reforms, highlight the importance of addressing these systemic issues with urgency.

Policy Recommendations 1. Remove VAT on Electricity Consumption and Supplies to ECG

Rationale: VAT adds significant costs to ECG’s operations without direct benefits to the sector. Eliminating VAT will allow ECG to retain more revenue, providing space for PURC to adjust tariffs upward for full cost recovery. Example: Rwanda removed VAT on electricity for industrial users in 2019, enhancing sector productivity and improving cash flow for the utility.

Proposed Actions:Advocate with policymakers for VAT exemptions on electricity consumption and supplies,Direct savings from VAT exemptions towards clearing ECG’s payment arrears,Monitor tariff adjustments to ensure sector revenue sufficiency.

Expected Outcomes:Cost savings and revenue stabilization for ECG,Improved liquidity for the entire value chain,Reduced dependence on government financial support.

2. Index Tariffs to Exchange Rate Fluctuations

Rationale: ECG’s obligations under dollar-denominated PPAs leave it vulnerable to currency depreciation. An automatic tariff adjustment mechanism is necessary to protect revenue stability. Example: South Africa implemented quarterly automatic tariff adjustments in response to exchange rate fluctuations, stabilizing utility finances.

Proposed Actions:Introduce an exchange rate-based tariff adjustment formula, Conduct quarterly reviews to ensure timely alignment with macroeconomic realities,Establish a stabilization fund to mitigate extreme exchange rate shocks.

Expected Outcomes:Protection of ECG’s revenue from currency depreciation,Predictable cash flow for generators and suppliers,Greater confidence in the power sector for investors.

3. Enforce Operational Efficiency in Distribution and Transmission

Rationale: High technical and commercial losses, inefficiencies, and redundancies in ECG and GRIDCo contribute to avoidable costs, which undermine financial sustainability.Example: Kenya Power reduced its distribution losses by 5% over five years through grid modernization and the deployment of advanced metering infrastructure.

Proposed Actions:Conduct operational and financial audits to identify inefficiencies,Expand smart metering systems to monitor and reduce technical losses,Implement strict penalties and enforcement measures to curb energy theft, Streamline administrative processes to eliminate redundancies.

Expected Outcomes:Lower operational costs and improved financial performance, Reduced pressure to increase tariffs due to inefficiency-related losses, Enhanced consumer trust and willingness to pay.

4. Optimize Natural Gas Utilization

Rationale: Efficient use of domestic natural gas can reduce generation costs and enhance productivity, minimizing reliance on expensive imported fuels.Example: Egypt transitioned its power generation mix to prioritize natural gas, reducing production costs by 20% and stabilizing electricity supply.

Proposed Actions:Prioritize domestic gas over liquid fuels to reduce generation costs, Collaborate with gas producers to ensure steady supply, Promote co-generation and combined-cycle to maximize efficiency.

Expected Outcomes:Lower generation costs and improved energy affordability,Increased generation capacity utilization, Strengthened energy security.

5. Leverage Idle Generation Capacity for Electricity Exports

Rationale: Ghana’s surplus generation capacity can be monetized through regional exports, providing additional revenue in foreign currency.Example: Côte d’Ivoire generated over $100 million annually by exporting electricity through the West African Power Pool (WAPP).

Proposed Actions:Partner with WAPP to expand regional trade, Upgrade transmission infrastructure to facilitate cross-border electricity flow, Secure bilateral agreements with neighboring countries.

Expected Outcomes:Increased foreign exchange revenue for the electricity sector,Reduced reliance on domestic consumers for revenue generation, Strengthened economic ties with neighboring countries.

Expert Summary

This proposal recommends critical policy interventions to ensure the financial independence and sustainability of Ghana’s electricity sector. By removing and exempting VAT on consumption and supplies to ECG, indexing tariffs to exchange rates, enforcing operational efficiency, optimizing natural gas use, and leveraging excess generation capacity, PURC can enable ECG to meet its financial obligations, reduce reliance on government support, and strengthen its role as a cornerstone of Ghana’s economic development.

PURC’s leadership in implementing these measures will drive long-term benefits for all stakeholders, from domestic consumers to international investors.