PURC’s tariff mechanism is injurious to ECG’s revenue!

The Electricity Company of Ghana (ECG) survival holds the key to the sustainability of the energy sector. However, the company continues to face severe financial challenges that are significantly hindering its ability to meet its revenue requirements and operate sustainably.

One of the primary causes of this financial struggle lies in the tariff-setting decisions of the Public Utilities Regulatory Commission (PURC), which have failed to take into account the real-world dynamics of foreign exchange fluctuations and their direct impact on ECG’s financial obligations.

At the heart of ECG’s difficulties is the persistent gap between the exchange rate used in the PURC-approved tariffs and the actual market rates for the US Dollar.

This discrepancy places a heavy burden on ECG, which is bound by its agreements to pay Independent Power Producers (IPPs) by the market rate equivalent of the US dollars, despite the tariffs it collects from consumers being pegged to the local currency, the Ghanaian cedi.

The most pressing issue with the tariff setting by the PURC is the failure to adjust tariffs by real-time market exchange rates. Independent Power Producers (IPPs) have contractual agreements with ECG that require payment in US dollars or at the market exchange rate equivalent for electricity purchased.

However, the tariffs approved by the PURC are often based on outdated or artificial exchange rates, which are lower than the actual prevailing market rates. This creates a serious mismatch between the revenue ECG collects from customers and the amount it must pay to IPPs.

For example, the PURC’s tariff for the third quarter of 2024 set the exchange rate at GHS 15.3855 to 1 USD. However, the actual market exchange rate stands at GHS 16.40 to 1 USD. The difference in exchange rates—GHS 1.0145 per USD—may appear relatively small on the surface, but in practice, this discrepancy has serious consequences for ECG’s financial health.

The exchange rate discrepancy creates a significant impact on the cost per kilowatt-hour (kWh) of electricity. The foreign exchange differential directly translates into an increase in ECG’s cost of power procurement, as the company is forced to purchase electricity from IPPs at a much higher rate than the revenue it collects from consumers.

To put this into perspective, for every unit of electricity ECG purchases from IPPs, it incurs an additional cost of approximately GHS 1.0145 per kWh due to the exchange rate differential.

If we extrapolate this impact over ECG’s total electricity purchases, the additional cost burden becomes substantial. In essence, ECG is losing over a GHS 1.00 per kWh, which it cannot recover through the existing tariffs set by the PURC.

This financial gap compounds as ECG is unable to charge consumers the full cost of purchasing power from IPPs due to the lower exchange rate used in the tariff decision.

The inability to pass on these increased costs leads to a massive revenue shortfall, making it difficult for ECG to meet its revenue requirements.

The failure to align tariffs with actual market conditions has led to a chronic revenue gap that ECG cannot easily overcome.

The difference between the tariff set by the PURC and the actual market rate translates into huge financial losses for ECG, which is already operating under the strain of high operational costs and significant debts.

The direct result of this misalignment is that ECG is forced to cover the revenue shortfall out of its own operating capital if it can even afford to do so.

Given the highly capital-intensive nature of the energy sector and ECG’s financial constraints, it is unrealistic to expect the company to continue absorbing these losses without facing severe financial distress.

In practical terms, this means ECG is struggling to pay for its power procurement obligations and to maintain the necessary infrastructure to provide reliable electricity to Ghanaians.

The revenue gap also has significant knock-on effects on the wider power sector, as delays in payments to IPPs create a ripple effect that can lead to serious and legitimate consequences,

What ECG desperately needs is a tariff-setting framework that accounts for real-time exchange rate fluctuations and the true cost of electricity procurement. The current approach of using outdated or artificially low exchange rates creates an unsustainable situation for ECG and the broader power sector.

For the system to be financially viable, the PURC must be more flexible in its tariff adjustments, ensuring that the rates reflect the actual costs incurred by ECG in purchasing power.

There are several ways in which the PURC could make its tariff decisions more responsive to the realities of the market.

First, the commission should implement an automatic tariff adjustment mechanism that allows for periodic adjustments based on fluctuations in foreign exchange rates. This mechanism would ensure that ECG is able to recover the true cost of power procurement, ensuring that the company can meet its financial obligations to IPPs while continuing to provide reliable electricity.

Second, the PURC must take into account the overall financial health of ECG and the power sector.

Tariff decisions should not only reflect exchange rates but should also ensure that ECG can recover its full cost of service, including the infrastructure investments necessary to meet growing demand. Tariffs should be set at a level that allows ECG to remain financially sustainable without compromising on efficiency.

Expert Judgement

The current tariff-setting style employed by the PURC is significantly injurious to ECG’s ability to meet its revenue requirements and continue its operations. The mismatch between the tariffs and the market exchange rates has created a revenue gap that ECG struggles to close, undermining the financial stability of the company and the broader electricity sector.

If ECG is to remain financially viable and continue providing reliable electricity to Ghanaians, the PURC must adopt a more market-responsive and realistic approach to tariff setting.

Failure to do so will not only leave ECG with a massive revenue gap but will also jeopardize the stability of the entire power sector, potentially leading to service disruptions and long-term inefficiencies that could impact the entire nation.

It is time for the PURC to recognize the critical need for tariff reforms that reflect the true cost of power procurement, protect ECG’s financial health, and ensure a sustainable future for Ghana’s energy sector.