Article: Why the monster called “Dumsor” dwells with us Ghanaians—Part 2

The Return of “Dumsor”

Aside the country being significantly endowed with natural gas to fuel power plants which are largely dual-fueled, the Volta Lake is also currently recording a decent level of over 77 meters (as at April 12^th 2019); compared to the prior year level of 75 meters, and far above its minimum operating level of 73.15 meters by the end of the dry season. The Installed power generation capacity has moved from a paltry 1,730 megawatts (MW) in 2006 to over 4,750 MW. More so, the current Dependable capacity is approximately 4,320 MW; far in excess of its current Peak demand of roughly 2,670 MW.

These positive scenarios are recipe for an aggressive and rapid industrialization, to provide economic opportunities for its growing population, and also nipping in the bud the recurrence of “a persistent, irregular, and unpredictable electric power outage” called “Dumsor” in local parlance.

However, since November 2018 to date, Ghana has been experiencing a recurring power outages even though the Installed generation capacity is far in excess of the country’s peak demand.

But for the recent decent level recorded by the Volta Lake, the situation could have been worse. To the extent that since November 2018 to date the country have largely been supported by hydro-electric power, with Akosombo, Bui and Kpong running almost all turbine units to generate over 50 percent of electricity for the country; in sharp contrast to recommended mode of operation for 2018/2019.

It is worth noting that, the failure to adhere to the recommended plan for hydro-electric power production as captured in the “2018 Energy (Supply and Demand) Outlook for Ghana” could significantly compromise reservoir integrity for subsequent years.

Influencing Factors

The return of “Dumsor” has been made possible due to the numerous challenges confronting the power sector. Aside the technical, regulatory, and procurement reasons, the key factor impacting on the reliability of electricity supply in Ghana, is the sector’s poor financial health which is driven largely by mounting legacy debt, operational inefficiencies, poor revenue collection, exchange rate fluctuations, and the poor tariff structure. Political interference in decision making and poor planning are also to blame for the inability of the power sector to deliver reliable supply of electricity in recent times.

• Poor Financial Health

Central to the recent power sector’s inability to provide reliable electricity supply is the weak financial position of the power utilities which impacts on the availability of funds to procure the required quantity of fuel for power plants in a timely manner, carry out maintenance services to ensure the availability of the required plant capacities, and maintain/expand transmission and distribution infrastructure to ensure system efficiency that may lead to reduced system and revenue losses.

The tariffs and service charges collected by the power utilities from consumers and bulk customers, yields liquidity for the entire value chain ― the capital so much needed to offset costs related with the generation, transmission, and distribution of electricity, and more importantly the fuel supply cost.

Aside the current Tariff Structure not being cost reflective to generate the needed capital, the power sector is also susceptible to Foreign exchange exposure.

The low tariff regime have left both transmission and distribution companies in perilous financial position, as prices per kilowatt hour (KWh) of electricity transmitted or sold to customers still fall short of actual cost; rendering it impossible for the transmission and distribution companies to recover costs and expand infrastructure. Foreign exchange volatility is also accumulating huge debts in the books of the utilities, especially the distributor who pays Independent Power Producers (IPPs) in Dollar equivalent while collecting revenue in Ghana Cedis.

More so, the costs associated with investments in transmission and distribution network infrastructure are also in foreign currencies, increasing the foreign exchange exposure. And as a result of this foreign exchange risk, further debts are being accumulated due to the non-application of the Automatic Adjustment Formula (AAF) aimed at sustaining the real value of the tariffs.

The high transmission and distribution losses between the point of supply and the point of consumption, arising from operational inefficiencies as well as poor collection of revenue from consumers, is another critical aspect that must be addressed in the power supply chain since it contributes greatly to the illiquidity in the sector.

Over the last decade and on annual basis, approximately 28 percent of gross electricity generated is lost through the transmission and distribution process. While transmission losses for the period only averaged 4.2 percent, distribution losses which is a mix of technical and commercial losses averaged 24.2 percent on annual basis.

The huge distribution losses can be attributed to inefficiency in the distribution network due to obsolete nature of some of the equipment in the system (technical losses), and also the loss of revenue to especially power theft and non-payment of power used by customers (commercial losses).

The effect is that any revenue shortfall from especially the transmission and distribution companies will invariably affect the settlement of invoices submitted by power generation and transmission utilities, financiers, service providers, and suppliers et cetera; impacting on the profitability of the entire power supply chain. Again, routine maintenance and progress of ongoing upgrades or expansion on transmission/distribution network could stall, rendering the systems inadequate to reduce technical losses. The foreign exchange fluctuations, transmission and distribution losses, and the lack of cost-reflective tariffs, are equally contributing immensely to the existing energy sector debts.

• Poor Planning

The current challenge in the power sector reveals one old age problem of adequate planning and projections on infrastructure requirement. The sector still lacks decisive and timely decision-making or adherence to plans (if any); to break the propensity to resort to reactive measures that often come too late when proactive approach could have produced superior results.

For instance, in contributing to the recent case of power outages, the country failed woefully to put in place appropriate infrastructure for the evacuation of the natural gas from Offshore Cape Three Point (OCTP) for the use of power plants. This failure to put in place the off-take infrastructure at least a year prior to the completion of the development and production of gas from the Sankofa field per industry standard, forced some power plants to go idle for lack of natural gas, and costing the country about $28 million per month based on the Take-or-Pay clause in the OCTP Gas contract.

• Political Interference

The failures of the sector can also be attributed to inefficiencies intrinsic to the country’s political processes which undermines regulatory and managerial independence. It is mostly the case that managerial decisions at state-owned power companies and allied agencies like the Public Utility and Regulatory Commission (PURC) are largely influenced by government objectives that are mostly at variant with the business objectives of the utilities.

For instance, it has always been challenging for successive governments to adjust tariffs to ensure full cost recovery given the impact on the consumers, and for that matter voters.  As a result of the political interference, tariffs are mostly not cost-reflective; and can seldom cover even variable operating costs.

Again, government’s interference in procurement processes often results in the lack of adequate and secured quantities of reasonably-priced-fuels for power plants, which invariably impact on power generation and compromises electricity supply reliability. And as the economics of the struggling utilities are worsened, it undermines their credit worthiness and makes it difficult to invest to improve service delivery.

Way Forward

The PURC must as a matter of urgency put in place tariffs that reflects fully the costs associated with operations and maintenance in the power supply chain. The utilities proposed tariffs which are largely founded on reflective cost of sales, business sustainability, and depreciation of the Cedi among others, must be factored in PURC’s computation alongside all other revenue losses or gaps that have risen in the setting of tariffs; so as to reflect market fundamentals. The PURC must also re-introduce the Automatic Adjustment Formula (AAF) aimed at sustaining the real value of the tariffs by adjusting it based on variations in factors such as fuel prices, foreign exchange, inflation and power generation mix.

Distribution and transmission companies must intensive moves to reinforce and modernize their network to improve system efficiency aimed at reducing technical losses. Power distributors must equally strengthen their measures aimed at reducing non-technical (commercial) losses through smart metering technologies, promotion of energy efficiency programs, and the expansion of the pre-paid metering system to include all public and private institutions et cetera.

Ghana must free its power utilities and regulators from political and administrative interference and ensure accountability and competition to make the power sector financially and technically strong. Also, adequate planning and projections or the adherence to plans are necessary to prevent reactive approaches which comes too late.

Not until these steps are taken to address transmission/distribution system inefficiencies, political interference, poor planning, and the liquidity challenges in Ghana’s power sector; “Dumsor” would recur and continue to dwell with us.

(End of Part 2)

Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security ©2019

The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media.