Arun Velusami, Infrastructure Journal - Generating Growth in Ghana's Power Sector
30 July 2010
As part of a keynote speech on the Ghanaian power sector delivered earlier this year, the Deputy Minister of Energy for Ghana declared that it was government policy to more than double the country's generating capacity from its current level of approximately 2,000MW to 5,000MW by 2015.
It is estimated that the costs of providing this additional capacity, when coupled with associated transmission upgrades, will be in the region of US$4 billion, an amount equivalent to 25 per cent of Ghana's current GDP. A sizable proportion of this investment will need to be supplied by international power developers and their lenders.
This article considers the main state bodies involved in the Ghanaian power sector, some of the challenges facing the private sector in developing independent power projects (IPPs) in Ghana (in particular, fuel supply risk) and how these challenges are being managed in the 126MW Tema Osonor Plant Limited IPP (the TOPL Project) and the 340MW Kpone IPP (the Kpone Project).
Ghana's power sector
The Volta River Authority (VRA) was, by virtue of the Volta River Authority Act of 1961, the state utility responsible for electricity generation, transmission and distribution throughout Ghana. Through its subsidiary company, the Northern Electricity Department (NED), the VRA is responsible for (and is the sole distributor of) electricity in the northern regions of Ghana (being the Brong-Ahafo, Northern, Upper East, Upper West, and parts of Ashanti and Volta Regions of Ghana). Another state utility, the Electricity Company of Ghana (ECG), purchases electricity from the VRA at a bulk tariff and is responsible for distribution in the southern regions.
As part of power sector reforms implemented in 2005, the VRA's mandate was restricted to electricity generation and the electricity transmission functions of VRA are in the process of being transferred to the Ghana Grid Company Limited (GRIDCO). It was established to facilitate the management of the wholesale electricity market in Ghana in a transparent manner.
It is understood that GRIDCO is currently developing a form of electrical connection agreement (ECA) into which power generators in Ghana will be required to enter, although none of the existing generators in Ghana have entered into an interconnection agreement as yet. It is also intended that the VRA's distribution functions in the northern region of Ghana, currently vested in NED, will be transferred to the ECG, thereby creating a national distribution utility.
Generating licenses are granted by the Energy Commission, which is also responsible for formulating electricity policy and rules governing the electricity sector, including a grid code.
Domestic Tariffs
Regulation of the electricity sector in Ghana, including the setting of tariffs, is the responsibility of the Public Utilities Regulatory Commission (PURC) which was established in 1997. Historically, one of the disincentives to private sector investment in power generation projects in Ghana was the prevailing level of tariffs, which were considered to be too low to be economic. This was partly due to the legacy by which the majority of Ghana's power was generated by hydropower projects, as the costs per kilowatt hour are lower for hydropower than for a thermal power project.
Although tariffs have been adjusted on five occasions by PURC, with the aim of moving towards a more cost reflective tariff, this has been undermined through government involvement in setting tariffs, where the politics of maintaining low tariffs for consumers has overridden the establishment of the cost-reflective tariffs that are necessary to develop the IPP sector.
In the interim, IPP developers have preferred to enter into power purchase agreements directly with the Ghanaian government (in the case of the TOPL Project) or with ECG (in the case of the Kpone Project), in order to establish an economic tariff. Notwithstanding this, the continued move towards cost-reflective tariffs by PURC will be a key factor in the growth of the IPP sector in Ghana.
Regulatory Reform
Another issue of concern to IPP developers is the nascent state of Ghana's electricity regulation. As mentioned above, GRIDCO is planning on rolling out ECAs in the future and it is important that existing IPPs should be protected from any additional costs imposed by such ECAs, in order for them to remain bankable and economic. In addition to the issue of ECAs, Ghana is currently trialling a new grid code, which was launched earlier this year.
When the grid code is finalised, it will need to be implemented in a manner that does not increase the costs or threaten the technical integrity of IPPs in Ghana. In any event, IPP developers and their lenders will not typically accept such "change of law" risks, and would expect any increased costs arising out of ECAs, a new grid code or other new electricity rules to be borne by a state utility under the relevant power purchase agreement (PPA).
Fuel Supply
Possibly the biggest constraint to the development of thermal IPPs in Ghana, as is the case in many emerging markets, is the availability of a reliable fuel supply. Take for example, the privately developed Sunon Asogli 560MW power plant at Tema. The project is a Ghanaian and Chinese joint venture which was not project financed and therefore not subject to the usual bankability requirements of a project financed IPP (such as a secure long-term fuel supply). Although construction of the first phase of the project was completed in mid-2009 it is not currently generating electricity, as it is reliant upon gas supply from the West African Gas Pipeline (WAGP).
It had been anticipated that WAGP would play a major role in securing Ghana's energy security and is encouraging the development of gas fired IPPs. However, the supply of gas through WAGP has been repeatedly delayed or suspended through a combination of vandalism in Nigeria and other Nigerian supply constraints.
It is unlikely that developers, lenders and indeed the Ghanaian government acting as offtaker would be willing to assume the supply risk that would be inherent in relying on the delivery of gas from WAGP until a regular and reliable supply of gas through WAGP is established. The only alternative supply of gas, being associated gas from the Jubilee field development in the West of Ghana, is unlikely to come on-stream for at least two years and is dependent upon the construction of suitable processing and pipeline infrastructure.
The lack of a reliable gas supply has resulted in a number of existing power plants being configured to operate on both gas or oil, such as the VRA-owned 126MW TT1PP power plant in Tema, the adjacent GECAD and Aldwych International developed TOPL Project, owned by Tema Osonor Plant Limited and the nearby Kpone Project being developed by African Finance Corporation and Infraco.
The TOPL and Kpone Projects
The TOPL Project is expected to achieve financial close during the summer of 2010 and upon doing so, will be the first IPP in Ghana to be project financed. The TOPL project was initially developed by GECAD Ghana Limited, a Ghanaian company, utilising financing from local banks. Construction on the site commenced in 2008, with a subsidiary of GECAD acting as EPC Contractor but was suspended in 2009, in anticipation of securing project financing.
The proposed lenders to the project are all development finance institutions (DFIs), namely FMO, African Development Bank and ICF Debt Pool, and this was a key factor in the continued appetite to finance the project during the credit crunch over the past two years. Aldwych International has also joined the project as a co-developer and is expected to take equity in the project at financial close, as well as acting as O&M Contractor to the project. It is also expected that Standard Bank of South Africa will take equity in the project.
As mentioned above, the TOPL Project plant is capable of running on low pour fuel oil and diesel, in addition to gas. In any event, the TOPL Project is insulated from the risk of interruptions to fuel supply as the power purchase arrangements are structured on a take-or-pay capacity based tolling arrangement, whereby the Offtaker supplies fuel which TOPL utilises to generate and deliver electricity. As TOPL's obligation is to make available the plant to receive fuel and generate electricity, the risk of any failure by the Offtaker to supply fuel to the Plant remains with the Offtaker.
TOPL earns revenue based both on its capacity to burn the Offtaker's fuel supply to produce electricity and on the delivery of this electricity at a tariff specified in the PPA, rather than from the sale of such electricity at a market tariff. TOPL is therefore not exposed to the risk of tariffs being or becoming non-cost reflective. The Offtaker is also required to provide credit support in the form of a letter of credit, but because the government is the Offtaker, there is no additional requirement for either a government guarantee or a concession agreement.
At a less advanced stage is the Kpone Project. This project was originally developed by Infraco, before it recently sold a controlling stake to African Finance Corporation. A PPA has been entered into with ECG on a take-or-pay basis structure whereby the project company will purchase fuel to generate and sell electricity to ECG.
As it is intended to project finance the Kpone Project, it is critical that secure fuel supply arrangements be entered into for the project. The Kpone Project is located close to the landing point of the WAGP at Tema and it is hoped that the plant will be eventually be supplied by gas from WAGP. In the interim, the Kpone project is configured to operate on both oil and gas and negotiations are currently ongoing to secure fuel oil supplies for the project.
Conclusion
Notwithstanding the challenges facing developers of IPPs in Ghana, the Ghanaian market is viewed by developers as being far more accessible than those of other countries in West Africa, such as Nigeria. This is clearly illustrated by DFI appetite to support projects such as the TOPL Project and investor appetite for the Kpone Project.
Achieving financial close of the TOPL Project shortly and successfully financing the Kpone Project should go a long way towards persuading international power developers to invest in Ghana and to help realise the Ghanaian government's aim of more than doubling Ghana's installed electrical generation capacity by 2015. In order to maintain an environment that is attractive to international IPP developers, it is necessary both to achieve legal and regulatory stability in the power sector as well as securing a reliable supply of gas from WAGP, and possibly the Jubilee field, in the future.