Energy sector: Merger risks Price hikes

– IES, ASEC raise red flags

By Daniel NONOR, Accra

THE Institute for Energy Security (IES) and the Africa Sustainable Energy Centre (ASEC) have jointly raised red flags about the government’s proposed merger of key institutions in Ghana’s energy sector.

Both organizations warn that these changes could severely compromise the country’s energy security, financial stability, and affordability of electricity for consumers.

The IES warned of the potential for higher electricity tariffs as a result of the merger. The Institute emphasised the need for a comprehensive impact assessment before proceeding with the changes.

 “Given the current economic pressures on the populace, any reforms that could lead to higher energy prices must be thoroughly examined,”

The Public Utility Regulatory Commission (PURC) in its second quarterly review for 2024, increased the rate for residential electricity consumers by  5.84%  and a 3.45% for lifeline consumers.

The proposed bill seeks to merge the Volta River Authority (VRA) with the Bui Power Authority (BPA) and consolidate the Electricity Company of Ghana (ECG) with the Northern Electricity Distribution Company (NEDCo).

Energy think-tank, IES further cautioned that the potential dismantling of VRA’s diverse energy portfolio, which includes hydro, thermal, and renewable sources, could disrupt the balance required for a stable power supply.

Nana Amoasi VII, the Executive Director of the Institute for Energy Security who spoke on the Zed fm morning show said, it is important that government engages extensively before making any move

“If we are taking our time to dot our i’s and cross our t’s, some of these issues could be avoided and the seeming tension between players could also be avoided”. The suspicions of having the thermal plant for cronies in government could all be avoided”.

The Institute emphasised the critical role VRA’s thermal assets play in meeting energy demands and ensuring grid stability.

“The integration of hydro and thermal power has been key to Ghana’s ability to maintain a secure energy supply,” the IES statement noted. “Separating these assets could have dire consequences for the reliability of electricity generation, resulting in more frequent outages and increased vulnerability to energy shortfalls.”

The IES also pointed out that VRA’s thermal plants are significant revenue generators arguing that divesting or reallocating these assets could harm the financial viability of VRA, limiting its ability to fund ongoing maintenance and future energy projects.

 “The loss of thermal assets would have a profound impact on VRA’s revenue streams, likely leading to higher costs for consumers and reduced operational efficiency,”

In addition to the operational concerns, IES flagged the financial pressures already plaguing the energy sector, particularly related to delayed payments to VRA from ECG and VALCO under the Cash Waterfall Mechanism. The Institute expressed concerns that the proposed merger would further exacerbate VRA’s liquidity crisis, making it harder for the company to function effectively without stable cash flows.

“Before considering any restructuring, it is critical to resolve outstanding debts between VRA, ECG, and VALCO. Failing to do so will only worsen financial instability and disrupt energy supply,” IES asserted.

The Africa Sustainable Energy Centre (ASEC) also joined IES in its opposition to the proposed merger, also raising concerns over the risks posed by potential price hikes and monopolization of Ghana’s energy resources.

The Centre specifically pointed out that VRA has historically acted as a stabilizing force in the energy market, shielding consumers from excessive price increases.

According to ASEC, privatizing VRA’s thermal assets would allow Independent Power Producers (IPPs) to manipulate electricity prices, leading to significant tariff hikes.

“VRA has been a crucial bulwark against high energy costs, particularly in its dealings with IPPs. Privatizing its thermal assets would remove that protection and expose the public to uncontrollable price increases,” ASEC warned.

ASEC further questioned the necessity of the merger, given VRA’s solid financial standing. The Centre pointed to VRA’s GHC156 million profit in 2020 as evidence that the entity is not in need of restructuring.

 “Privatization is generally reserved for underperforming public bodies. This is not the case with VRA, which continues to be financially sound and operationally efficient,” the statement noted.

The Centre also raised concerns about the potential for monopoly control in the hydropower sector if the VRA and BPA were merged.

 “Hydropower is naturally a monopolistic industry due to its reliance on limited water resources. Consolidating these institutions could stifle competition and innovation, leading to inefficiencies in the long run,” ASEC argued.

Citing historical examples of failed privatization efforts, including the collapse of California’s energy market in the early 2000s, ASEC urged Ghana to avoid a similar fate. “We must learn from the mistakes of others. Ghana cannot afford to gamble with its energy security,” the Centre stated.

ASEC also pointed to the dangers posed by droughts and water shortages, which have already affected 28% of the country’s energy generation stressing that a merger between VRA and BPA could exacerbate these risks, particularly given both entities’ reliance on the Volta River for hydroelectric power.

On the proposed merger of ECG and NEDCo, ASEC was concerned that is a recipe for disaster since both entities are currently making operational loses. It warned that combining their operations could only exacerbate their financial woes. “Rather than creating a larger problem, the government should focus on fixing the core issues that plague these companies”.