Ghana looks to renegotiate IPP contracts

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GHANA’S government is stepping in to renegotiate take-or-pay arrangements with independent gas-to-power producers, a move that faces strong opposition but could help speed up gasification of the economy.

Ghana’s decision to temporarily suspend payments to all independent power producers (IPPs) is a blow to investor confidence in the short term, but over time it could galvanise the country’s crippled electricity sector and facilitate the implementation of Ghana’s gas utilisation master plan.

According to the Finance Ministry, a special committee – the Energy Sector Recovery Task Force – will engage with the country’s IPPs and their fuel suppliers in a bid to renegotiate their take-or-pay contracts.

But the Chamber of Independent Power Producers – a lobby group representing nine companies with assets that amount to just under one-third of the country’s 4.9 GW of power capacity – has dismissed the plans, arguing it will accept only an upfront termination settlement of $2bn. The companies the group represents have already had to contend with long-standing payment delinquency, transmission losses and growing indebtedness.

The proposed renegotiations would likely see mixed results. Undoubtedly, breaking contractual terms would damage investor confidence in the short term. It would also shift the burden of liabilities from the state-owned power sector to Ghana’s central bank. This would compel the bank to issue more debt as a result, which would substantially raise the country’s sovereign risk.

However, in the long term the renegotiation could help boost Ghana’s electricity sector by freeing up investment capital for state companies. This would facilitate the possible unbundling of the Volta River Authority and allow the utility and the country’s distributors to focus on expanding their customer base. This would speed up the gasification of the economy in line with the gas utilisation masterplan – a sector-wide blueprint set to run until 2040.

The renegotiation could yield benefits in the longer term if the current shortfall in power demand can be addressed. The power sector is expected to account for approximately 80 percent of the gas Ghana will consume throughout the masterplan’s forecast period.

Wasted resources

According to the ministry’s estimates, around $454 million per year is spent on power that is not consumed. Ghana produces double the amount of electricity it needs to supply the domestic market but cannot sell the surplus abroad because of the high prices it pays under the take-or-pay contracts. The liabilities are felt further up the value chain; Ghana National Gas Company’s unpaid receivables from the sale of gas to power producers were worth more than $751 million in 2018.

Oversupply could raise the country’s debt by an extra $850 million per year from 2020 as a result of additional domestic supply and imports commitments. Chaotic policymaking has seen the government back the construction of a 1.7 million tonne per annum (mtpa) LNG terminal at Tema that is set to come online by 2020, while also being committed to receive imports via the West African Gas Pipeline under stringent take-or-pay arrangements with Nigerian suppliers.

All but one of Ghana’s 13 IPPs are diesel- or gas-fired power stations, and several of them were commissioned haphazardly under former President John Mahama’s administration between 2013 and 2015. During that period, the country experienced prolonged power outages as it struggled to pay for fuel while insufficient rainfall incapacitated state-owned hydroelectric plants.

International lenders were unwilling to finance parastatals because of restructuring efforts and instead flocked to greenfield gas-fired power ventures. These projects offered attractive alternatives given offshore upstream discoveries and the rapid approvals issued by the government as it sought to fast-track additional capacity. Up to 40 power-purchase agreements are said to have been reviewed when President Nana Akufo-Addo’s government took office, and many have since been rescinded.

 

 

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