Final report Assessing the total economic value of electricity in Ghana A step toward energising economic growth Jonathan D. Quartey Wisdom D. Ametorwotia August 2017 When citing this paper, please use the title and the following reference number: E-33402-GHA-1 ASSESSING THE TOTAL ECONOMIC VALUE OF ELECTRICITY IN GHANA: A STEP TOWARD ENERGIZING ECONOMIC GROWTH A REPORT PRESENTED TO INTERNATIONAL GROWTH CENTRE (IGC) FOR PROJECT NUMBER 1-VCE-VGHA-VXXXX-33402 BY JONATHAN D. QUARTEY Department of Economics Kwame Nkrumah University of Science and Technology AND WISDOM D. AMETORWOTIA Department of Economics Kwame Nkrumah University of Science and Technology AUGUST, 2017 i TABLE OF CONTENTS TABLE OF CONTENTS .................................................................................................... ii LIST OF TABLES ............................................................................................................. iv LIST OF FIGURES ............................................................................................................ v LIST OF ABBREVIATIONS ............................................................................................ vi EXECUTIVE SUMMARY .............................................................................................. vii 1. INTRODUCTION ....................................................................................................... 1 2. BACKGROUND OF THE STUDY ............................................................................ 3 2.1 Trend in end user tariff .............................................................................................. 4 2.2 Institutional framework for electricity in Ghana ....................................................... 6 3. AIM AND OBJECTIVES ........................................................................................... 9 4. RESEARCH QUESTIONS ......................................................................................... 9 5. RELEVANCE OF STUDY ....................................................................................... 10 6. REVIEW OF RELATED LITERATURE ................................................................. 10 6.1 The Concept of Economic Value ............................................................................ 10 6.2 Types of economic value......................................................................................... 11 6.3 Economic Value and price ...................................................................................... 13 6.4 Electricity Demand .................................................................................................. 14 6.5 Non-analytical derivation of electricity demand ..................................................... 14 6.6 Misplaced Terminology .......................................................................................... 15 6.7 Specification of the Demand Equation.................................................................... 16 6.8 Demand Response ................................................................................................... 17 6.9 Developments in demand response for electricity management ............................. 18 6.10 Toward efficient allocation of electricity .............................................................. 18 6.11 The Economic Theory of Contingent Valuation ................................................... 19 6.12 Empirical Review .................................................................................................. 20 6.13 Methodological review of CV ............................................................................... 23 6.14 Application of CV in developing countries........................................................... 24 7. METHODOLOGY .................................................................................................... 26 7.1 The Research Design ............................................................................................... 26 7.2 Market Description .................................................................................................. 27 7.3 Sample Selection ..................................................................................................... 28 7.4 Sample Size ............................................................................................................. 28 7.5 The Estimation Models ........................................................................................... 32 7.6 Variable definition................................................................................................... 32 7.7 Data Collection Procedure ...................................................................................... 35 7.8 Ensuring Reliability of CV Procedure .................................................................... 36 7.9 Data Processing ....................................................................................................... 36 8. ANALYSIS ............................................................................................................... 37 8.1 Frequency distribution of WTP responses .............................................................. 38 8.2 Cross-tabulations of WTP responses with socioeconomic characteristics.............. 39 ii 8.3 Multivariate analysis of the determinants of WTP responses ................................. 41 8.3.1 Regression Diagnostics Result ......................................................................... 41 8.3.2 Regression Results ............................................................................................ 44 8.4 Computation of total economic value of electricity ................................................ 50 8.4.1 Calculating benefits .......................................................................................... 50 8.4.3 Value Type ....................................................................................................... 53 8.5 Elasticity Estimation ............................................................................................ 53 8.5.1 Willingness to Pay Elasticity of Demand ......................................................... 53 8.5.2 Income Elasticity of WTP ................................................................................ 56 8.6 Household Income, Mean WTP and End User Tariffs ........................................... 57 9.0 Expected Revenue ................................................................................................ 59 10. ANALYSIS FOR ZERO BID TARIFFS ................................................................ 62 11. COMMUNITIES WITHOUT LIGHT ........................................................................ 66 11.1 Regression Diagnostics ......................................................................................... 68 11.2 Willingness to Pay ................................................................................................. 70 11. POLICY IMPLICATION AND RECOMMENDATIONS ........................................ 74 12. SUMMARY AND CONCLUSIONS ......................................................................... 78 REFERENCES: ................................................................................................................ 81 APPENDIXES .................................................................................................................. 87 APPENDIX A : QUESTIONNAIRE ............................................................................ 87 APPENDIX B: REGRESSION RESULTS USED IN ELASTICITY CALCULATION ....................................................................................................................................... 92 APPENDIX C LIST OF PARTICIPANTS ................................................................... 94 APPENDIX D: Institutions visited and individuals interviewed .................................. 94 iii LIST OF TABLES Table 1: Major Institutions in Ghana’s Electricity Sector ................................................................ 6 Table 2: Installed capacity of electricity in Ghana ........................................................................... 7 Table 3: Components of the Total Economic Value of Electricity ................................................. 12 Table 4: Sample Distribution ......................................................................................................... 29 Table 5 Reliability Checks for NOAA guidelines for survey ........................................................... 36 Table 6 Descriptive summary of selected continuous variables ................................................... 37 Table 7: Descriptive summary of categorical variables ................................................................. 38 Table 8 Frequency Distribution of WTP bids ................................................................................. 38 Table 9: Frequency distribution of domestic use of electricity ..................................................... 39 Table 10 Cross tabulation of WTP and Socioeconomic characteristics of households ................. 39 Table 11 Multicollinearity Test ...................................................................................................... 41 Table 12 Constant Variance Test Results ...................................................................................... 42 Table 13 Model specification Test Results ...................................................................................