Energy Stalemate: Independent Power Projects and Power Sector Reform in Ghana
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MIR . Management Programme in Infrastructure Reform & Regulation Energy Stalemate: Independent Power Projects and Power Sector Reform in Ghana Isaac Malgas MIR Working Paper April 2008 University of Cape Town Graduate School of Business Breakwater Campus Private Bag Rondebosch 7701 Cape Town, South Africa www.gsb.uct.ac.az/mir The Management Programme in Infrastructure Reform and Regulation (MIR), based at the University of Cape Town’s Graduate School of Business (GSB) strives to be a leading centre of excellence and expertise in Africa and other emerging and developing economies. It is committed to making a major contribution to enhancing understanding and capacity to manage the reform and regulation of infrastructure industries in support of sustainable development. About the Author Isaac Malgas is a part-time post-graduate student at the Management Programme for Infrastructure Reform and Regulation at the University of Cape Town’s Graduate School of Business. He currently works as a Senior Engineer at Eskom in the Generation Division and has been in the employment of the utility, in various posts, for more than 13 years. He holds an M.Tech(Eng) from the former Witwatersrand Technikon and an MBA from the University of Stellenbosch Business School. 2 Table of Contents Acronyms............................................................................................................................ 4 Acknowledgements............................................................................................................. 5 Abstract............................................................................................................................... 6 1. Introduction................................................................................................................. 7 2. The Ghanaian Power Sector........................................................................................ 7 2.1. Generation................................................................................................................ 7 2.2. Transmission and Distribution................................................................................. 9 3. Power Sector Reforms .............................................................................................. 10 3.1. Tariffs..................................................................................................................... 12 3.2. The Volta Aluminum Company (VALCO) ........................................................... 13 4. Private Sector Participation in Generation – The Takoradi IPP ............................... 14 4.1. The Takoradi International Company (TICO)....................................................... 14 4.1.1. Project Stakeholders.................................................................................. 15 4.1.2. Project Agreements................................................................................... 16 5. Analysis of Outcomes............................................................................................... 17 Country Factors that Shaped Outcomes........................................................................ 17 5.1.1. Investment Climate ................................................................................... 17 5.1.2. IPP Policy and Regulation ........................................................................ 18 5.1.3. PPA Charges and Generation Costs.......................................................... 19 Project Factors that Shaped Outcomes ......................................................................... 20 5.1.4. Off-taker Credibility ................................................................................. 20 5.1.5. Partnering Arrangement and Technology................................................. 21 5.1.6. Project Performance.................................................................................. 21 5.1.7. IPP versus VRA Performance................................................................... 21 6. Conclusion ................................................................................................................ 22 Appendix A Revived and Stillborn Power Plants ..........Error! Bookmark not defined. Appendix B Future Plants ..............................................Error! Bookmark not defined. 3 Acronyms BOOT Build Own Operate Transfer ¢ Ghanaian cedi CCGT Combined Cycle Gas Turbine CEO Chief Executive Officer CFL Compact Fluorescent Light CMS Consumer Michigan Services COD Commercial Operating Date EC Energy Commission ECG Electricity Company of Ghana ECOWAS Economic Community of West African States EDF Electricité de France EFG Energy Foundation of Ghana EPC Engineering Procurement and Construction ESB Electricity Supply Board GDP Gross Domestic Product GSE Ghana Stock Exchange ICB International Competitive Bid IDA International Development Association IMF International Monetary Fund IPP Independent Power Project / Producer KNUST Kwame Nkrumah University of Science and Technology kWh kilowatt hour LRMC Long Run Marginal Cost m million MIR Management Programme in Infrastructure Reform and Regulation MW Megawatt NED Northern Electricity Department NES National Electrification Scheme PESD Program on Energy and Sustainable Development PPA Power Purchase Agreement PRGF Poverty and Growth Reduction Facility PSRC Power Sector Reform Committee PURC Public Utilities Regulatory Commission S&P Standard and Poors SCGT Single Cycle Gas Turbine SIIF Société Internationale d'Investissements Financiers TICO Takoradi International Company US United States (of America) US$ United States Dollar VALCO Volta Aluminium Company VRA Volta River Authority WAGP West African Gas Pipeline 4 Acknowledgements The author acknowledges generous support from the Norwegian Agency for Development Cooperation (Norad) which has supported this work at the Management Programme in Infrastructure Reform and Regulation (MIR) at the University of Cape Town’s Graduate School of Business. The author thanks Erik Woodhouse, David Victor and Thomas Heller, for insights into the research methodology. This paper would not have been possible without the help of all the stakeholder representatives from the Ghanaian Ministry of Mines and Energy, the Volta River Authority, Kwame Nkrumah University of Science and Technology, the Public Utilities Regulatory Commission, the Energy Commission, the Ghana Energy Foundation, CMS, CenPower, Arthur Energy Consultants, and the World Bank, who participated in interviews during the information gathering phase as well as in subsequent reviews of the work. My sincere gratitude and appreciation are expressed to them as partners in this work. A special thanks to the Kumasi Institute of Technology and the Environment for the much-needed support provided in collecting information for this paper. Finally, the author wishes to thank MIR’s Katharine Nawaal Gratwick and Anton Eberhard for their mentorship and extensive comments on earlier drafts. Any omissions or errors are the responsibility of the author. 5 Abstract This paper narrates the experience of Ghana’s first large-scale, long-term independent power project, Takoradi II, in the context of wider power sector reforms. Takoradi II was a response to the emergency power shortages that existed in 1998. The urgent need for power disadvantaged the Energy Ministry and VRA, the off taker, in their initial negotiations with the investor, Consumer Michigan Services (CMS). The all-equity project called for a high rate of return, in part due to the absence of debt in the financing mix. The plant was planned to be converted into a combined cycle unit, but the steam cycle (phase two) was not realised, pushing up the electricity price even further. Besides being the first IPP in a sector that was in the throes of reform, the investment climate in the country was less than favourable at the time, and the power off-taker’s financial position was precarious at best. Nevertheless, without private capital to fund the first phase of Takoradi II, load shedding would probably have occurred during subsequent droughts and constraints in hydro-electric production in Ghana in 2001 and 2002, and would have been more prevalent in 2006 and 2007. Despite the recent equity turnover, the project sponsor, CMS, reported satisfaction with its investment, and no disputes have been entered into since the inception of the contracts. Meanwhile, VRA remains squeezed between high generation costs from the IPP and low consumer tariffs. Until this restraint is addressed, the financial credibility of the off-taker will continue to be an issue, and investors will demand securities such as sovereign guarantees to limit their risk exposure or demand higher returns to compensate for assuming increased risk. A decade after power sector reforms were first instituted (in 1998), Ghana still lacks the coherent power sector planning that will enable it to attract investment and create the conditions conducive to the sustainability of IPPs and the power sector. 6 1. Introduction This paper critically assesses the experience of the only large-scale greenfield independent power project (IPP) that is currently operational in Ghana, Takoradi II. The paper is structured into four main parts. The first section provides a brief description of the energy sector, and in particular the electricity supply industry in Ghana. The next section briefly describes sector reforms. The third section describes the development of Takoradi II and