Government saves $7.6bn in power deals

Government has saved the country over $7 billion by terminating some surplus Power Purchase Agreements (PPAs) signed by the Electricity Company of Ghana (ECG) under the previous Mahama administration.

The termination of the agreements is to ensure that government does not continue to pay for huge capacity charges in some of the PPAs which would expire within the next 13 years.

The recent power crisis that occurred in the country during the erstwhile Mahama administration necessitated the acquisition and injection of additional power generation capacity into the power system.

But for the termination or renegotiation, the government would have spent an estimated $586 million per annum for 13 years to fund excess or surplus power.

The quantum of power procured as emergency or fast-track, although ameliorated the generation capacity deficit, resulted in excess power supply, taking into consideration other signed Power Purchase Agreements by ECG, if those PPAs were implemented.

The implication of overcapacity in power generation therefore posed potential capacity charge payments.

It, therefore, become imperative that necessary steps were taken to minimize or eliminate, where necessary, these potential overcapacity payments.

Review Committee

The Ministry of Energy subsequently tasked a committee to review the fiscal and legal implications of Power Purchase Agreements (PPAs) signed by ECG for the purchase and supply of energy from Independent Power Producers (IPPs) for conventional thermal power projects in order to advise on the way forward.

The overall objective of the review was to project a new dynamic equilibrium over time as the necessary step for determining how to absorb the projected overcapacity by determining, which projects to cancel, defer or allow to proceed.

“The committee established that even though capacity additions would be required in the years to come, the scheduled capacity addition from the executed PPAs is in excess of the required economic and sustainable capacity additions which include a 20% reserve margin,” the report said.

The review, therefore, considered options of minimizing the overcapacity through terminating (at the least cost), delaying or deferring some of the PPAs.

Three PPAs, including ASG and Chrispod Hydro Power Ltd, have been terminated with eight other agreements also scheduled for termination.

Four PPAs, including Rotan Power, have been deferred to be completed between 2018 and 2025, while three other PPAs will proceed without modification.

In all, 24 power purchase agreements were reviewed leading to the termination of 11 power deals and the rescheduling of eight others.

The committee was headed by Dr. Alfred Ofosu Ahenkorah, Executive Secretary, Energy Commission, with 17 members.

Projections

In order to determine which PPAs to terminate or defer, demand projections were made using the 2017 Electricity Supply Plan incorporating some variations based on information available to the committee.

The demand categories included domestic, export, transmission and network losses, as well as reserve margin.

From the review, it became evident that the capacity additions from the various signed PPAs were far in excess of the required additions inclusive of 20 per cent reserve margin from 2018 through to 2030.

This meant that if all the PPAs were left to proceed and projects were completed as per their Commercial Operation Dates (COD) in the PPAs, there would be excess or surplus capacity and some plants will not be dispatched, yet capacity charges will be paid.

According to the review committee when all the plants under the signed PPAs are allowed to proceed, excess or surplus capacity would increase from a low of 524MW in 2018, when only a few of the scheduled projects would have been completed, to a maximum of 2,887 MW in 2021, when all the projects would have been completed.

This, the committee said, would result in an average excess capacity of about 1,463 MW per annum at an estimated average cost of $586 million per annum within the period from 2018 to 2030.

“To avoid paying such huge capacity charges for surplus (idle) capacities, it required that some PPAs be terminated and others modified (deferred or downsized) even though such terminations and modifications may come with their own cost. From the review, the total cost of terminating all the PPAs of the candidate projects was estimated at about $402.39 million, compared to an average annual cost of $586 million each year for 13 years, or a cumulative cost of $7.619 billion over the 13 year period,” the committee said.

It said comparing the cost of the excess capacities with the cost of terminating some PPAs and deferring others to match the demand projection, it made economic sense to terminate and defer some PPAs.

In response to the surplus capacity, Cabinet requested the Attorney General and Minister for Justice to review the PPAs signed by ECG and advise accordingly.

The PPA Review has been completed and a report submitted by the Attorney General and Minister for Justice to the Minister for Energy for consideration of Cabinet.

The Attorney General proposed that three PPAs should proceed without modification, four PPAs are to be deferred to be completed between 2018 and 2025, four PPAs are to be deferred for completion between 2025 and 2030; and three PPAs should be considered for termination.

In addition, there were eight other PPAs to be terminated.

Speaking at the Financial Times Africa Summit in London last week President Akufo-Addo indicated that “a review of 24 power purchase agreements, which has led to the termination of 11 power deals and the rescheduling of eight others, has enabled us to save the government treasury about $7 billion in excess capacity charges over a 13-year contract period.”