License the Independent Power Generators in Ghana under the Ghana’s Free Zones Act for Competitiveness in the Regional Electricity Market

Ghana’s electricity sector faces considerable challenges, with a pressing need to address the underutilized generation capacity that places significant financial strain on the Electricity Company of Ghana (ECG).

Licensing the country’s electricity capacity market, particularly for Independent Power Generators (IPGs), under the Ghana Free Zones Act, presents a viable solution to enhance Ghana’s competitiveness in the West African regional electricity export market. This approach will not only enable Ghana to capitalize on regional energy demands but will also help alleviate the economic and operational burdens associated with the under-utilized capacities.

Understanding Ghana’s Capacity Challenges in the Electricity Sector

Ghana’s power sector has experienced notable expansion over the years, resulting in installed capacity far exceeding domestic peak demand. Despite this growth, Ghana's energy market suffers from inefficiencies and financial burdens tied to surplus generation, as outlined below:

- Capacity Under-utilization: Ghana’s installed generation capacity is approximately 5,300 MW, while peak demand over 3600 MW, creating an excess of generation capacity.

- Financial Strain from Take-or-Pay Contracts: Most IPPs operate under take-or-pay agreements, obligating ECG to pay for unutilized or idle capacity, which has culminated in a sector debt of around $2 billion.

- Limited Competitive Pressure: The current market lacks incentives for IPPs to innovate or reduce prices, given their reliance on guaranteed payments and fixed tariffs through take-or-pay contracts.

These conditions highlight the need for innovative solutions that can integrate Ghana into regional electricity markets, where its excess capacity could meet demand in neighboring countries, providing economic benefits and relieving ECG of the financial burdens associated with surplus capacity.

The GFZA As A Framework for Electricity Export Competitiveness

The Ghana Free Zones Act, enacted in 1995, provides a favorable regulatory framework aimed at attracting investment, stimulating exports, and enhancing Ghana’s economic integration into regional and global markets. Traditionally applied to manufacturing and trade, the Act’s principles can be effectively extended to the electricity sector to support IPPs in becoming competitive electricity exporters. Key features and benefits of the Act are as follows:

Tax Incentives and Exemptions

- Corporate Tax Holiday: Free Zone enterprises enjoy a ten-year tax holiday, with a maximum tax rate of 15% applicable thereafter. Extending this incentive to IPPs would reduce their operational costs, making it financially viable to sell electricity at competitive rates in the regional market.

- Import Duty Exemptions: IPPs would benefit from exemptions on import duties and levies on lubricants, components and parts, capital goods, and other inputs, reducing costs related to plant maintenance, technology upgrades, and others.

- Withholding Tax Exemptions: The Free Zones Act includes a 100% withholding tax exemption on dividends and profits, making IPPs more attractive to foreign investors who seek lower tax liabilities on their returns.

Export-Driven Growth

- Export Quota Flexibility: Free Zones enterprises are required to export at least 70% of their production. By positioning IPPs as export-oriented entities, Ghana could effectively channel surplus electricity to regional markets, turning capacity challenges into revenue-generating opportunities.

- Priority Access to Regional Markets: The Free Zones Act creates an export-centric business environment, enabling IPPs to seamlessly integrate into regional trade structures such as the West African Power Pool (WAPP), facilitating electricity exports to markets with high demand, such as Burkina Faso, Niger, Mali, Liberia, Sierra Leone, Guinea, Côte d’Ivoire,Benin and Togo.

Enhanced Operational Efficiency and Investor Confidence

- Simplified Regulatory Processes: The Free Zones Act provides a streamlined regulatory framework with simplified licensing processes, removing bureaucratic bottlenecks. This would allow IPPs to quickly adjust capacity allocation for export purposes.

- Incentives for Innovation and Scale: Tax and regulatory benefits under the Act can incentivize IPPs to innovate, expand production capacities, and adopt efficient, cost-effective technologies to meet regional demands competitively.

- Attracting Foreign Direct Investment (FDI): By positioning electricity generation within the Free Zones Act, Ghana could attract increased FDI specifically aimed at IPP-driven projects. Foreign investment would be pivotal in upgrading infrastructure, enhancing efficiency, and enabling IPPs to establish a competitive presence in regional markets.

Steps to License IPPs Under the Free Zones Act:

The strategy to license Ghana's IPPs under the Free Zones Act would involve steps aimed at operationalizing the capacity market for export. The following are critical industry-specific actions to achieve this transformation:

Develop a Capacity Market Framework Tailored to IPP Export Goals

Ghana must establish a structured capacity market that includes:

- Capacity Pricing Mechanisms: To make exports profitable, Ghana’s regulatory authorities must design pricing frameworks that enable IPPs to export electricity at rates competitive within the WAPP.

- Interconnection Agreements and Infrastructure Investments: Expand and upgrade transmission infrastructure in collaboration with WAPP to improve connectivity and facilitate power exports.

Facilitate IPP Licensing and Export Compliance Under Free Zones

The government can support IPPs in obtaining Free Zones licenses by:

- Amending the Free Zones Act to explicitly include IPPs as eligible entities, enabling them to leverage tax and regulatory benefits.

- Setting Export Compliance Standards in collaboration with ECOWAS, ensuring that electricity exports meet quality, safety, and pricing requirements within the WAPP framework.

Build Regional Partnerships to Secure Demand for Ghanaian Electricity

The Ministry of Energy should consider it a religious duty to develop, promote and establish Bilateral Agreements with neighboring countries. Formalize power purchase agreements with neighbouring countries and bulk consumers etc.