Ghana Energy Situation

Ghana 1. Situation Analysis

1.1. Energy Situation

The electricity infrastructure in Ghana is underdeveloped because of problems on both the supply and demand sides. On the supply side, low electricity generation capacity, shortages in foreign exchange, inefficiency of service providers, imperfections in energy markets and lack of infrastructure are some of the problems. Total installed capacity to date is 1,986 MW. According to the Minister for Energy (speech 21 October 2008), the total installed capacity in Ghana will reach 3,300 MW in 2013, which is 500 MW below the envisaged target... Hydro power is the major source of electricity in Ghana. In addition, gas and crude oil run power plants have been installed in recent years. The Volta River Authority (VRA), a government owned company, is the sole producer of electricity and is through its subsidiary Northern Electricity Department (NED) one out of two companies distributing electricity nationwide. In the southern part of the country electricity supply is being handled by Electricity Company of Ghana (ECG). A separate company called GridCo has been created to operate the transmission grid. Ghana boasts an extensive electricity grid. Access rates are the second highest in Sub-Sahara-Africa, only surpassed by South Africa. The proportion of households with access to electricity increased from 45% in 2005 to 54% in 2007 including more than 17 % of the rural population connected. All rural district capitals and most villages in Ghana have access to the national electricity grid. However, the grid being available in the town or village does not necessarily mean that any prospective customer can easily be connected. Distance to the next pole and unsolved land issues still remain an access barrier, especially for MSMEs. Although the grid might potentially be available in the towns, MSMEs have difficulties in accessing land where it is actually legally for them to operate, which is a pre-conditions to being connected to the grid. This results in many MSMEs not having access, even with the grid being present in the area. The per capita consumption of electricity has not increased significantly from 481kWh in 2005 primarily due to the 2007 electricity crisis. During the year under review, the average number of hours of electricity outages per consumer per year far exceeded the minimum threshold of 100 hours/year set under the Ghana Poverty Reduction Strategy II (GPRS II). These values have however been influenced strongly by a power crisis with extensive load shedding schemes. The power crisis has been overcome since 2008 and power supply has stabilised thanks to improved water levels in the Volta Lake, serving the two largest hydro power plants and the installation of emergency power generation plants. The situation is expected to further improve with the arrival of natural gas from Nigeria through the West African Gas Pipeline. Further improvements on power availability, stability and a reduction in generation cost will be achieved once the Bui hydro-power station is finished in 2012. In Ghana the tariff setting is rather complex. Several tariffs depending on consumption and type of activity apply.

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In general all tariffs are cost covering for generation, transmission and distribution but not for investment and financing cost, which means, in connection with the debt accumulated during the energy crisis, that VRA and ECG cannot establish funds for future investments. Budget for new connections needs to come from the government and donor organisations, otherwise communities have to pay themselves for putting in place a distribution network (self help). VRA and ECG were mandated by the Public Utilities Regulatory Commission to charge a rural electrification levy of 1.5 – 2.0 % on tariffs. This has to be collected and transferred to the Ministry of Energy.

Distribution companies charge a connection fee of around 100 GHS, which some micro and small enterprises a have difficulty to pay. Due to their location in unauthorised places, many MSMEs presently have to rely on informal/illegal electricity connections from neighbours. These so called ―extensions‖ apart from being a serious security threat, are often extremely expensive (sometimes more than 10 times as expensive as official connections).

 Key problems of the energy sector

In the last two decades the demand for electricity has been growing by 10-15 % annually. The expanding commercial and industrial sectors are, together with the high population growth, the main drivers of this process. In order to meet the demand and promote the decentralisation of economic growth and to support the development of small industries outside the main growth centres in the capital and along the coast, it is not only necessary to build additional generation capacity, but especially to provide urgently needed transmission and distribution facilities for productive use. Even where there is sufficient generation capacity to serve the demand of commercial customers, the electricity company has problems to provide enough equipment (meters, transformers etc.) to connect commercial users and the costs for the installation exceed the financial capacities of most enterprises. Moreover, individual business people have hardly any influence and means to push their interests and applications vis-à-vis the electricity company.

1.2. Policy framework, laws and regulations

A key objective of the Government‘s energy policy focus is to ensure universal access to electricity particular for the rural communities in a reasonable time period. The Ghanaian government also embarked on a project to extend electrification to more than 5 communities in every district of the country. The government projects to achieve universal access by 2015, but this seems hardly realistic. Due to their poor financial situation both VRA and ECG have no funds to connect new residential areas and industrial zones. To realise connections three financial schemes apply:

• Government Projects: The Government (Ministry of Energy) allocates budget for new connections, the distribution companies will carry out the projects.
• Self Help Electrification: The self help electrification project (SHEP), requires communities use own budget to build a distribution network (poles) while lines and controls are financed by the ministry to install hardware to connect their distribution network to the grid. 
• Private investment: Households or companies fully finance the hardware and installation to be connected to the grid.

The same financial constrains apply to connecting new industrial zones to the grid. In situations where the entrepreneurs (or others) provide and install all the necessary equipment, VRA-NED or ECG will connect the area to the grid.

The broad policy objectives of the government as outlined in the Medium Term Development Framework (MTDPF) include the following:

•  Improving and sustaining macroeconomic stability,
• Expanding productive infrastructure,
• Accelerating agriculture modernization and agro-based industrial development,
• Developing human resources for national development,
• Ensuring transparent and accountable governance,
• Reducing poverty and income inequalities.

There is a clear focus on:

• Energy supply – To ensure increased access of households and industry to reliable and adequate electricity. This will involve diversifying the national energy mix, including the use of indigenous sources of energy and ensuring efficient management of the energy sector.
• Poverty Reduction – To promote income generation opportunities for the poor and vulnerable including food crop farmers; facilitate and enhance the empowerment of the poor in terms of their economic, social and human rights and environmental protection and security; promote inclusive development processes through decentralization and gender equity; develop and enhance social protection for the poor by ensuring fair and equitable distribution of national wealth.

Another key element of the governmental policy is the Private Sector Development Strategy (PSDS II). The objective of the PSDS is to foster the development of sustainable corporate strategies for enterprise growth and job creation. The Endev 2 intervention has been planned within the framework established by the Second Private Sector Development Strategy (PSDS II) Concept Document of the Ministry of Trade and Industry (Lead Executing Agency). This concept document was recently affirmed by the President. The concept paper sets out the framework for the design and development of the second phase of the Medium-term Private Sector Development Strategy (PSDS II). The GTZ-supported Programme for Sustainable Economic Development (PSED) will provide support for the implementation of the PSDS II. EnDev Ghana activities will be incorporated into the structure of the bi-lateral Programme for Sustainable Economic Development to ensure alignment. There is a draft National Renewable Energy Strategy together with a draft Strategic National Energy Plan 2006 – 2020. The strategy set the target to achieve 10% of renewable energy (not including large hydro power) in the energy mix by 2020, including wind, mini-hydro, modern biomass resources and solar-PV. Ghana has significant potential for hydropower, biomass, wind and solar power. A renewable energy law is under preparation and yet to be finalised. The objective is to develop and enforce standards and codes for renewable energy technologies. This will include standards for bio-fuels, solar lighting and solar water heaters. This draft renewable energy bill was ready for submission to Cabinet as of December 2008. It has to be reviewed again by the new administration to reflect their vision for the energy sector. As the national policies and strategies on renewable energy are still being established, EnDev Ghana will for the time being continue to focus on the energy for productive use interventions started under EnDev I and not include further activities in the field of renewable energy. There are plans under World Bank co-funded GEDAP to create a new institutional and policy platform from which to launch an innovative, multi-faceted approach for expanding electrification in Ghana. This includes the establishment of an independent Rural Electrification Agency (REA), which will coordinate all rural electrification programmes and determine areas to receive electrification based on transparent eligibility criteria and commercial principles.