Ghana's energy sector is teetering on the brink of financial collapse.

At the heart of this crisis is the Electricity Company of Ghana (ECG), a critical player in the electricity supply value chain, struggling to raise the necessary revenue to meet its obligations to Independent Power Producers (IPPs) and fuel suppliers.

This ongoing inability to pay debts is driving the energy sector into a vicious cycle of debt accumulation, energy insecurity, and economic disruption. While inefficiencies, technical losses, and revenue collection challenges often dominate public discussions, one factor has been conveniently glossed over: the government’s deliberate preference for the procurement of exorbitantly priced and environmentally unfriendly liquid fuels, such as light crude oil (LCO) and diesel, over cost-effective and cleaner alternatives like natural gas.

What appears to be an energy strategy has, in reality, become a revenue-generating scheme for the government or some so-called influencial individuals, at the expense of a sustainable and financially viable energy sector.

Historically, natural gas has been recognized as the least-cost fuel for power generation, offering a cleaner and more stable supply compared to liquid fuels like light crude oil and diesel, per the Energy Sector Recovery Program recommendations. Yet, in recent years and months, Ghana’s energy policies have veered towards the procurement of these expensive fuels, at the least chance, which carry significantly higher costs both in terms of price and environmental impact.

This begs the question: why would any government choose such a path when cheaper, cleaner, and more reliable alternatives are readily available to religiously pursue?

The answer is unsettling. The government's preference for liquid fuels stems not from necessity or energy security concerns, but from its ability to profit from the importation of these fuels. Unlike natural gas, whose pricing is more stable and often determined by long-term contracts, liquid fuels are purchased on the international market, where prices fluctuate frequently.

This volatility creates opportunities for markups, commissions, and profit margins at various points along the procurement chain. By exploiting these price differences, the government can cash in on procurement deals, earning excessive gains at the cost of the energy sector’s financial health.

The direct result of this strategy is an unsustainable financial burden on ECG. Power generation from light crude oil and diesel is significantly more expensive than from natural gas. These inflated generation costs, in turn, inflate the tariffs that ECG must charge consumers.

However, due to the politically sensitive nature of electricity pricing in Ghana, the company is unable to pass on the full cost to consumers, as tariffs are often set below the actual cost of generating and distributing electricity. This mismatch between costs and revenue leaves ECG operating at a deficit, incapable of meeting its obligations to IPPs.

These financial shortfalls have devastating effects on the entire electricity supply value chain. IPPs, which provide a significant portion of Ghana’s power, rely on timely payments from ECG to continue operations. When payments are delayed, IPPs are forced to scale back their operations or halt them altogether, leading to power shortages and disruptions.

Additionally, fuel suppliers, who are critical to ensuring a steady supply of light crude oil and diesel, are left unpaid, further exacerbating the sector’s financial instability. The ripple effect is clear: from generation to distribution, the entire system is compromised, and the result is frequent power outages, mounting debts, and reduced investor confidence in the sector.

While the government’s pursuit of profit through liquid fuel procurement carries obvious financial consequences, the environmental cost is equally, if not more, concerning. Light crude oil and diesel are some of the dirtiest fuels available for power generation, producing significantly higher levels of greenhouse gas emissions compared to natural gas.

In an era when global attention is focused on reducing carbon footprints and transitioning to cleaner energy sources, Ghana’s continued reliance on these environmentally harmful fuels runs counter to both international trends and the country’s own commitments to combating climate change.

This reliance on liquid fuels also jeopardizes Ghana’s potential to develop a sustainable energy sector. Instead of capitalizing on the growing opportunities in renewable energy, such as solar and wind, which are becoming increasingly cost-competitive, the country remains shackled to an outdated and environmentally damaging energy policy.

This approach not only undermines global efforts to reduce emissions but also limits Ghana’s ability to attract investment in clean energy infrastructure, which could help to stabilize the sector in the long term.

Natural gas presents an economically and environmentally viable alternative to liquid fuels. It is not only cheaper to produce electricity from natural gas, but it is also cleaner, emitting up to 50% less carbon dioxide compared to oil-based fuels.

The availability of natural gas through domestic production and regional supply agreements, such as the West African Gas Pipeline, makes it a logical choice for power generation in Ghana.

Furthermore, the stability of natural gas prices, often determined through long-term contracts, provides an added layer of financial predictability. This would allow ECG to better plan its revenue streams, meet its obligations to IPPs, and ensure a more stable supply of electricity for consumers.

A transition to natural gas would also free up funds that are currently being wasted on overpriced liquid fuels, allowing the government to invest in renewable energy development, grid modernization, and other critical infrastructure improvements.

To break free from the financial chokehold that the government’s liquid fuel procurement strategy has placed on the energy sector, bold policy reforms are required:

1. Prioritize Natural Gas: The government must urgently transition to natural gas as the primary fuel for power generation. This shift would reduce generation costs, stabilize electricity tariffs, and free up revenue for reinvestment in the sector.

2. Enforce Cost-Reflective Tariffs: While politically sensitive, there is no escaping the need for cost-reflective tariffs. ECG’s inability to raise adequate revenue is partly due to artificially low tariffs. A gradual and transparent process for adjusting tariffs to reflect the true cost of electricity production and distribution is essential for the sector’s financial sustainability.

3. Regulate Fuel Procurement: The energy sector needs stricter regulation and oversight of fuel procurement processes to eliminate the opportunities for excessive markups and profiteering. A transparent, competitive bidding process for fuel procurement should be enforced to ensure that Ghana gets the best possible price on its fuel imports.

4. Invest in Renewable Energy: In the long term, the government should prioritize investments in renewable energy sources like solar and wind. These sources are not only environmentally friendly but also offer a hedge against the volatility of fossil fuel markets.

Conclusion

Ghana’s energy sector is facing a crisis, but it is a crisis of choice, not necessity. The government’s appetite for profiteering through the procurement of expensive and environmentally damaging liquid fuels is driving the sector into financial ruin. ECG, the backbone of the electricity supply value chain, is unable to generate the revenue needed to meet its obligations, leaving the entire system vulnerable to collapse.

However, by realigning its priorities towards natural gas and renewable energy, and by enacting necessary reforms in fuel procurement and tariff setting, Ghana can not only stabilize its energy sector but also pave the way for a cleaner, more affordable, and sustainable future. The path forward is clear; it is now up to the government to act in the national interest rather than its own short-term financial gains.

Sincerely,

Dr Elikplim Kwabla Apetorgbor

(Power Systems Economist)

September 11, 2024