The $250 million for Ghana’s Energy Sector Recovery Program (ESRP) is a futile strategy

The electricity sector is a vital pillar of Ghana’s economy, providing power to industries, businesses, and households that sustain economic growth. In this context, the Electricity Company of Ghana (ECG), which manages the distribution of electricity, plays a crucial role in ensuring that the lights stay on across the southern zone of the country.

However, ECG has faced deep-seated challenges over the years, including operational inefficiencies, financial difficulties, and persistent losses, which have all led to an unstable and unreliable energy sector.

In an attempt to resolve these issues, the government secured parliamentary consent to inject a $250 million facility from the World Bank into the Energy Sector Recovery Program (ESRP) aimed at revitalizing ECG and stabilizing the sector. However, this capital injection is akin to "fetching water in a basket."

It is a short-term, temporary measure that fails to address the fundamental challenges that continue to plague the energy sector. Without a systematic overhaul of these structural problems, the expected outcomes of the recovery program will remain elusive.

Key issues such as political interference in ECG’s revenue administration, pressure to pay for the uncompetitively procured and excessively expensive liquid fuels, high and avoidable costs associated with distribution value addition services, rampant and high profile power theft, and the aggressive targeting of ECG’s most creditworthy customers by the Volta River Authority and other captive generators must be addressed before any substantial progress can be made.

<>Political Interference in ECG's Revenue Administration is one Perennial Obstacle:

One of the most significant hurdles to ECG’s financial recovery is the persistent political interference in its revenue administration. ECG is supposed to operate as a commercial entity with a mandate to generate revenue from electricity sales, recover costs, and reinvest in infrastructure and service delivery. However, political interference has hampered its ability to function independently.

Political actors frequently influence tariff decisions, particularly during election periods, with the aim of winning electoral support. As a result, ECG is short-changed and unable to generate the required revenue which is critical to its financial sustainability.

For instance, electricity tariffs have been kept artificially low for certain politically connected and high energy-consuming businesses, and political pressure to pay for overpriced services to politically connected contractors, limiting ECG’s ability to recover its costs. This erodes ECG’s revenue base and contributes to its financial losses.

Moreover, political interference often manifests in the form of leniency towards delinquent customers, especially those who are politically connected. ECG has struggled to enforce strict revenue collection policies, especially from public institutions and government agencies, which are some of its largest debtors. The pressure to refrain from disconnecting these entities despite significant arrears further diminishes ECG’s ability to collect revenues and reinvest in its operations.

The injection of USD$250 million, while helpful in temporarily covering ECG’s financial shortfall, will not resolve the core issue of political interference.

Without granting ECG the autonomy to collect revenues, and enforce disconnections based on purely commercial considerations, the company will continue to suffer financial setbacks. Until political influence is removed from ECG’s decision-making processes, the injected funds will be nothing more than a temporary bandage on a much larger wound.

Pressure on ECG to Finance Expensive Liquid Fuels for Generation:

Another major issue undermining ECG’s financial health is the pressure to pay for expensive liquid fuel to generate electricity, even when more affordable natural gas options are available to pursue.

Over the years, Ghana has heavily relied on thermal plants that utilize liquid fuels like Heavy Fuel Oil (HFO), Light Crude Oil (LCO), and diesel to produce electricity. These fuels are not only expensive but also subject to volatile global market prices, making them a risky and unsustainable energy source in the long run.

This reliance on costly liquid fuels has been exacerbated by politically entrenched business interests in the liquid fuel supply chain. The procurement of liquid fuel has become a profitable business for certain politicians and entities that benefit from the high costs, and the political pressure on ECG to continue purchasing these fuels. As a result, ECG finds itself burdened with high energy costs, which it struggles to pass on to consumers due to political interference in tariff setting.

What makes this situation even more troubling is that natural gas, a cheaper and more efficient alternative, is available within the country and our next-door neighbour, which could significantly reduce the cost of electricity generation. However, despite the availability of this more affordable option, ECG has been pressured to continue paying for liquid fuels, leading to higher operating costs. If the same pressure and priority in payment for the liquid fuels can be directed towards the natural gas, supply will always be reliable to us.

The USD$250 million injection does little to address this issue. Unless ECG is allowed to prioritize cost-effective fuel sources such as natural gas, the company will continue to bear the burden of excessive generation costs. Without tackling the entrenched interests that profit from liquid fuel procurement, the injection of funds into the sector is unlikely to yield sustainable improvements.

Exorbitant Operational Costs of Distribution Value-Addition Services:

Another factor contributing to ECG's financial difficulties is the excessive operation cost of distribution value-addition services. These include service expansion, network maintenance, and metering services, which are necessary for ECG to deliver electricity to consumers. While such services are essential, ECG's procurement processes for these services have been riddled with political influence, inefficiencies, and, at times, corruption.

The costs of these services are often inflated due to the awarding of contracts based on political connections rather than merit or transaction cost efficiency. Service providers, knowing they can rely on political backing, inflate prices and deliver substandard work, further exacerbating ECG’s financial troubles. The absence of a genuine competitive bidding process and the lack of transparency in contract awards drive up costs, leading to ECG paying far more than necessary for basic operational services.

Even with the USD$250 million injection, ECG will remain financially unstable if the procurement processes that allow for inflated costs are not reformed. It is essential that ECG streamlines its procurement processes, implements competitive bidding, and holds service providers accountable for delivering value for money. Unless these changes are made, the company will continue to hemorrhage funds on overpriced services, rendering any capital injection ineffective in the long term.

Systemic Power Theft - A Hidden Drain on ECG’s Resources:

One of the most pervasive and damaging problems facing ECG is systemic power theft. Power theft through illegal connections, meter tampering, and under-billing significantly reduces ECG’s revenue, creating a wide gap between the electricity delivered and the electricity paid for by consumers. It is estimated that non-technical losses, largely due to power theft, account for as much as 20-25% of ECG’s total electricity distribution.

The problem of power theft is further exacerbated by political and social factors. In certain regions and communities, power theft is tolerated due to the lack of enforcement and fear of political repercussions. ECG’s attempts to crack down on illegal connections are often met with resistance from both local communities and political leaders who view such measures as politically damaging.

The USD$250 million injection does little to address the issue of power theft. Without a comprehensive strategy to tackle illegal connections and meter tampering, ECG will continue to lose a significant portion of its revenue. The deployment of smart meters, stronger enforcement measures, and public education campaigns on the economic impact of power theft are critical to closing the revenue gap. Until such measures are implemented, the financial injection will merely serve as a stopgap solution, rather than a path to sustainable financial recovery.

The Rush After ECG’s Creditworthy Customers is Another Key Threat to ECG’s Revenue Base:

The liberalization and policy decisions of Ghana’s power sector have led to increased competition from some power generators that now supply electricity to bulk customers. While competition can be healthy for the market, there is a growing concern that some of these generators are aggressively targeting ECG’s most creditworthy customers, including large industrial and commercial clients.

These customers represent a significant portion of ECG’s revenue base, and their migration to private suppliers threatens to further weaken ECG’s financial position.

The current regulatory framework does little to protect ECG from losing its high-value customers, and without these customers, ECG will find it even more difficult to sustain its operations. This situation creates a vicious cycle, where ECG's financial instability pushes more customers to seek alternative suppliers, further eroding ECG's revenue base.

The USD$250 million injection will not reverse this trend unless the regulatory environment is adjusted to empower and secure ECG’s businesses and also provide ECG with a more level playing field. Additionally, ECG must improve its service delivery to retain its high-value customers and remain competitive in the face of growing competition.

Conclusion:

The injection of USD$250 million into Ghana's Energy Sector Recovery Program is, at best, a temporary measure that fails to address the underlying structural issues plaguing the Electricity Company of Ghana. Without meaningful reforms to eliminate political interference in revenue administration, reduce reliance on expensive liquid fuels, overhaul procurement processes, combat power theft, and protect ECG’s creditworthy customers, the capital injection will not lead to sustainable improvements in ECG’s financial position or the broader energy sector.

The analogy of "fetching water in a basket" is apt in this context because the financial injection, while necessary for short-term liquidity, will quickly dissipate in the face of these unresolved challenges. What is needed is a comprehensive restructuring of the sector, guided by transparency, accountability, and long-term sustainability. Only by addressing the fundamental flaws in the system can Ghana hope to achieve a stable, reliable, and financially sound energy sector.