Dr. Apetorgbor calls for VAT removal on electricity and tariff indexation to stabilize Ghana’s power sector

A Power Systems Economist, Dr. Elikplim Kwabla Apetorgbor, has urged the government to remove Value Added Tax (VAT) on electricity consumption and supplies to the Electricity Company of Ghana (ECG) while implementing an automatic tariff indexation mechanism tied to exchange rate fluctuations.

Dr. Apetorgbor argues that these measures, alongside improved operational efficiency, optimized natural gas utilization, and leveraging idle generation capacity for regional exports, will enhance the financial stability and sustainability of Ghana’s power sector.

Challenges Facing Ghana’s Power Sector

Ghana’s electricity sector is grappling with two major challenges: unaffordable tariffs for consumers and financial instability across the value chain. ECG’s inability to settle its financial obligations to power generators, transmission companies, and suppliers stems from:

            •           Non-cost-reflective tariffs approved by the Public Utilities Regulatory Commission (PURC).

            •           High operational inefficiencies and energy losses.

            •           Exposure to currency depreciation without mitigation mechanisms.

            •           Unfavorable fiscal policies, including VAT on electricity consumption and supplies to ECG.

The cumulative impact of these issues threatens the long-term sustainability of the country’s power sector.

Lessons from Other Countries

Dr. Apetorgbor cites international experiences to support his recommendations. He highlights Nigeria, where poor tariff structures led to the collapse of privatized utilities, and Kenya, which successfully reduced losses through operational reforms.

Similarly, Rwanda eliminated VAT on electricity for industrial users in 2019, improving productivity and cash flow for its utility companies. South Africa, on the other hand, introduced quarterly automatic tariff adjustments to counter exchange rate fluctuations, ensuring financial stability for power utilities.

Key Policy Recommendations

            •           Remove VAT on Electricity:
Dr. Apetorgbor contends that VAT imposes additional costs on ECG without directly benefiting the sector. Eliminating VAT will allow ECG to retain more revenue, enabling PURC to implement tariffs that reflect actual costs.

            •           Introduce Automatic Tariff Adjustments:
ECG’s financial obligations under dollar-denominated Public-Private Partnerships (PPPs) make it vulnerable to exchange rate fluctuations. To mitigate this risk, Dr. Apetorgbor advocates for a tariff indexation mechanism that automatically adjusts electricity rates in response to currency depreciation. This, he believes, will protect ECG’s revenue base and prevent financial instability.

A Call for Urgent Reforms With Ghana’s power sector facing mounting financial pressures, Dr. Apetorgbor stresses the need for urgent policy interventions to ensure long-term sustainability. By removing VAT on electricity and implementing exchange rate-linked tariff adjustments, Ghana can enhance its energy sector’s financial health while improving affordability and reliability for consumers.