ghana power sector - eca uk

ECONOMIC CONSULTING ASSOCIATES LIMITED41 Lonsdale Road London NW6 6RA UKtel +44 (0)20 7604 4545 / fax +44 (0)20 7604 4547www.eca-uk.com

1 (C) 2003. Economic Consulting Associates Ltd

Ghana Power Sector

Review of Reform ProgrammeRay Tomkins (ECA)

Workshop on 7 February 2003, Accra


Aims andScope

ECA’s consulting assignment:

Assist the Government of Ghana(GoG) to take stock of the powersector reform measures to dateAdvise on further development ofinstitutional reformsScope:

analysis of power sector restricted toreview of previous documents and 1week visitWe were not required to carry out anynew analysis of performance


DriversforChange

Increase access to electricityImprove efficiency to keep pricesas low as possible

Increase management effectiveness andaccountabilityPromote private sector investment:

to help meet financing requirement for thegrowth, including electrificationattract private investors while minimising thefuture requirement for GoG guarantees

This needs a more modern structure forthe industry, a market, and a strongregulatory framework


Status ofreformprogramme

Create 5 distribution concessions (Distco),privatise

Not done

1997 reform proposal Indicative time

Large consumers. Rationalise and establishbasis for bilateral contracts with IPPs

EC considering newdefinition of eligibleconsumers

VRA - unbundling into 4 main activities VRA has started somework on separatingaccounts

ECG set up a holding company for 5DistCos

Not done

Establish separated activities as businessunits

Not done

Put in place performance contracts for ECGand VRA

Not done

Establish regulators and regulatoryframework

2 regulators established with2 acts, limited developmentof regulatory framework

Issue regulations and technical rules for thegrid and creation of wholesale market

Not done


Creating a Wholesale Market

CentralMarketFunctions

Balancing Market

TSO

Disco

G IPPs G

VRA

DiscoDistCosEligible

Consumers

Eligible ConsumersFranchise

Consumers

Hydro

Imports/Exports

Regulated Market Non-Regulated Market

G


CurrentSituation

VRA is the main producer andbuyer of electricity, as well asoperator of the transmissionsystem

VRA is a dominant market player,this is a potential barrier tocompetition and marketdevelopment


What is aMarket?

An electricity market is defined by:

Who are the sellersWho are the buyersHow they trade


Optionsfor Sellers

Sellers in Ghana will be VRA (hydroplant, and thermal plant), importers,new hydro and private thermal IPPsShort term competition is notpossible with current generationconfiguration

too few power plants to operate a pool

Ghana is too risky for ‘merchantpower plantsCompetition might be possible in 10years


Optionsfor Buyers

Must be creditworthy ...... to be able to guaranteefinancing for IPP (15 yearbankable projects)The Tico project developed byCMS is reported to have a highROE due to perceived riskThree potential buyers for privatelyfinanced power :

VRALarge customersDistribution companies


1.VRA asOfftaker

If VRA procured future thermalpower plants…VRA’s current role as singlebuyer/seller would continueindefinitelyVRA is the most creditable buyer,but investors likely to continue toseek government guaranteesThis is the single buyermarket modelNeed to kick-start the market


2.LargeConsumersasOfftakers

Private participants should haveopen access to the transmissionnetwork at fair and cost-reflectivepricesVRA as transmission owner mustbe regulated:

Transmission charges must be cost-reflectiveNo discrimination between usersPURC should ensure transmission chargesdo not over-recover costsone option is full unbundling of VRAanother option is the accounting separationof VRA with third party access (TPA)


Market Model: Bilateral Contracts withBalancing Market

CentralMarketFunctions Balancing

Market

TSO

Disco

G IPPs G

VRA

DiscoDistCosEligible

Consumers

Eligible Consumers

FranchiseConsumers

Hydro

Imports/Exports

Regulated Market Non-Regulated Market

G


IsUnbundlingof VRANecessary?

Full unbundling of VRA wouldensure ‘level playing field’ for IPPsWhy not unbundle VRAimmediately?

cost of restructuring would be highstill not certain that IPPs would come

First step should be:Accounting separation and functionalseparation of system operatorCreation of market rules and grid codeStrong regulation

If this fails, move rapidly tocomplete unbundling


EligibleConsumers

Large consumers meeting the criteria(5 MW) for eligibility in theunregulated marketEnergy Commission is considering achange of eligible customerdefinitionWhat is most important is thepercentage share of the marketopened to competition and thenumber of customersWill the eligible customers be largeenough to support financing of nextgeneration plant?


TradingArrangements(MarketRules)

Competition in this market is forbilateral contractsA potential new entrant must aimto deliver lower average pricesthan those from VRAIssue: VRA currently has thebenefit of the existing hydrogeneration and could under-cut anew thermal plantResult: VRA ends up building nextthermal plant even though IPP’splant could have been cheaper


CompetitionforContractsand Cost ofGeneration

VRA currently sells at a bundled priceThe hydro is priced at financial cost - low costthermal plant is high costBut VRA’s price would be lower than IPPs

One possibility is:all contracts including hydro (other than VALCo)priced at no less than LRMChydro-based contract offered to IPPs and largecustomersoffer different wholesale tariffsthe windfall profit on hydro could be applied torural electrification or transmission investments

Problem: it could raise pricesOpportunity: but offset by recyclingthe windfall profitBenefit: IPPs can compete with VRA onequal terms


Contracts Require Balancing

Shortfall

Spill

Shortfall

An IPP and theset of largecustomers theysupply can neverexactly matchthe generationto the load.

VRA must supplythe balancingservice andrecover its costs(part of marketrules)


3.DistCos asOfftakers

Could DistCos to be one of theprinciple offtakers?Might not be viewed as strongcreditable counter parties by IPPs

ECG is facing major challenges , eglosses, revenue collection etcmanagement strength is key factorStrong requirement for regulation ofpower procurement at least costHorizontal unbundling into severalcompanies is more likely to weaken thedistribution companies as buyers

Market model: ‘multiple’ singlebuyers


WayForward

Create opportunity for largeconsumers to contract with IPPsThis would require

non-discriminatory transmission pricesand fair accessprovision of balancing marketmust be able to compete against VRAon fair basis

Strengthen DistCos so theybecome credible counter-parties infutureLonger term there areopportunities in the regionalmarket (WAPP)


GenerationIssues


Introduction

Who willbuild thenextthermalplant?

VRA is facing almost no reservesIn 2000, system has 1250 MW ofcapacity with generating capabilityof 7960 GWh compared to arequirement of 1380 MW and8340 GWh of energyEven after building of T2 energywill still be constrained by waterGoG wants private sectorparticipation, however problemshave occurred with CMS projectThe AES project has notprogressed


Competitionin ElectricityMarkets

3 arenas:between existing generators fordispatch in the short term (‘pool’)for long term contracts betweengenerators and large customersfor new entry between investors

Short term - difficult due to smallnumber of plants and highlypredictable merit orderLong term bilateral marketrequires competing wholesalesuppliers and eligible customers


Competitionin a ‘pool’

Now:not possible

in 10 years:maybepossible

Average cost c/kWh

2

1

0

1

2

3

4

5

6

7

8

9

0 200 400 600 800 1000 1200 1400 1600

Akosombo

Kpong

Nangbeto

Tako

Tico

Load

Average cost c/kWh

2

1

0

1

2

3

4

5

6

7

8

9

0 500 1000 1500 2000 2500 3000

AkosomboKpongNangbetoNew 1New 2New 3New 4TakoNew 5New 6New 7TicoNew 8Load


Options forCreatingCompetitionfor BilateralContracts

Privatisation of Takodari 1New ImportsNew thermal power plantscontracted to parties other thanVRAVRA required to contract some oftheir capacity to independentwholesale suppliers (VIPPs)


NewGeneration

Preferred option is newIPPs/eligible customersRequires effective TPA (access)Single buyer model has failed inseveral countriesIf VRA procures an IPP, shouldpursue an open competitivetender approachWhy should VRA be the ‘producerof last resort’?… because it is dominantgenerator


TransmissionIssues


Transmission Open Access is criticalBilateral contract market is thepreferred option, therefore TPA isessentialMust establish an independentSystem Operator (functionalunbundling)Transmission (wires business) canstay with generationAccounting separation is difficultto achieve, therefore toughregulation is essential


TransmissionPrices

High transmission charges woulddiscourage new IPPsIn other countries, integratedutilities try to load their costs ontotransmission chargesVRA benchmark of 0.9c/kWh ishigh (but not highest) compared toother countriesPURC should approve majorinvestments in advanceWheeling charge is only half butcustomer pays total 0.9Calculation must be transparent


TransmissionAccess

Conditions for fair open access:

Legal access rightPlanning (intentions of thirdparties to be considered)Congestion management rulesSystem operation and ancillaryservicesPublic announcement of networkcapacities and availabilityIndependent governance of rules(technical and market rules)


Responsibilityfor planning

VRA currently has responsibilityIndicative planning must be donecentrally even in a marketThe SO should assumeresponsibility

security of supplyregular and transparent planningtransmission investments subject toapprovalRegulator/GoG to instruct VRA to carryout investment if there is a shortage ofIPP capacity


VRA’s Role inthe NewMarketArrangements


CurrentSituation

VRA is the main producer andsingle buyer of electricity

VRA owns the hydro capacity andTakoradi 1 thermal power plantVRA buys power from Takoradi 2 undera PPA with CMS EnergyVRA buys imports from CIEVRA owns the transmission system andoffers bulk electricity for sale at bundledpricesVRA has a small distribution activityVRA has non-core activities

VRA is the dominant playerIn the medium term, VRA will befully unbundled


Generation Short term:Focus on hydro investmentsRole in thermal generation shouldbe restricted:

support development of markets byproviding balancing servicesprevented from under-pricing hydro

Principal buyer for competitivelytendered thermal power projects(only if instructed by government)Act as supplier of last resortLonger term: divest thermal plant


Transmissionand SystemOperation

Implement accounting separationFunctional separation of SOTransmission assets continue to beowned by VRAVRA’s transmission function shouldthen be strongly regulated

pricesaccess

SO should operate systemaccording to technical and marketrulesLong term: could divesttransmission


Distribution There is no strong reason for VRAto retain a role in distribution(through NED)The future of NED should beconsidered along with therestructuring of ECG


Gas VRA has taken a role indevelopment of WAGPAs a principal buyer of gas it islikely to be involved in theguaranteeing of the gas purchaseNo strong justification for VRA tobe involved in gas supplyMust fully separate gas activitiesfrom power generationPURC to ensure IPPs are offeredgas on non-discriminatory terms


DistributionIssues:DistributionRestructuring,Tariffs andElectrification


CurrentSituation

Two entities, ECG and NEDLarge customers can, in theory,choose supplierSome management areas toimprove: losses, collections etcShortage of investmentWhat is agreed?PSP can help improve:

management performancecapital for network expansionestablish distcos as creditworthy buyers

Some re-organisation of ECGneeded


How ManyCompanies?

Advantage of 1 Distco is:the avoidance of major restructuringfinancial strength and ability to cross-subsidise

Advantages of more than 1 Distco:presence of more than 1 investordifferentiation between urban and ruralareas (create focused RE entity)management closer to ‘problem’

ECG proposes several businessunits with management autonomyIssue: Restructure first? = delayOpportunity: Attract privatepartner to assist with restructuring


AttractingPrivateOperators

To attract strong private sectorparticipant should be 1 or 2separate companies, ie largercompaniesPrivate sector can help, butwhich way?What form of private sectorparticipation (PSP)?

Management contractStrategic investor (eg 25% of shares)ConcessionFull privatisation


ManagementContractsandStrategicInvestors

Opportunities for managementstrengthening - bring in privateoperator (utility, not consultant)But many well-known problemswith some management contractsDesign contract very carefully -good incentivesMany options:

Performance based incentive contractManagement contractor not allowed tobe investorFirst select Strategic Investor (SI), thenrequire them to do managementcontract for 3 years


OnePossibleApproach

Select SI, grant option to buy 25%in 3 yearsImmediately must undertakemanagement contract, steps:

year 1, service contract to reorganiseyear 2, performance based contractyear 3, allowed to buy shares at optionprice subject to satisfactory performanceof management contract

How many DistCos? 2 DistCos:1 focused on existing urban andindustrial customers, commercialoperation, no subsidies1 on RE, focused output-based subsidiesfor investment and to cover lifeline tariff


Tariffs Major constraint of low tariffs hasbeen substantially removed:

PURC has a transitional plan for tariffincreasesIn 2003 tariff levels will be raised byapproximately 11% and reviewedadjustment mechanism to take accountof fuel prices and inflation, but needsimprovingTariffs do not cover electrificationinvestment requirement

Lifeline block is too low to coveroperating costs in some areasNeed targeted subsidy tocompensate utility for lifeline tariff


RuralElectrification

RE should be a key part of reformprocessRE has generally been implemented byexternal fundsRE has not been strongly supportedA benefit of stronger RE would be tomake reform more acceptableNeed focused RE entityTargeted subsidies for capital

subsidies should be transparentif necessary, also for lifeline tariff block

Issue: What form should RE entity be:an independent funda utility with RE focus


Regulation and SectorManagement

Licensing

Board

Management Committee

Issuing licenses

Amending licences

Legal services

Tariffs

Tariff rules

Price approvals

Economic analysis

Financial analysis

Regulation

Monitoring

Enforcement

Disputes

Industry codes

Admin

Finance

Public Relations

IT, computers

Human Relations

Market supervision


RegulatoryRisk

Strong regulatory frameworkrequired to implement a marketWhy 2 regulatory bodies? Is 2better than 1?Split of regulation between twobodies weakens rather thanstrengthens regulationMain concerns for privateinvestors:

Split of regulatory function increasesregulatory risklack of independenceinadequate dispute resolutionprocedures


Roles ofRegulators

The differences:Energy Commission (EC) notindependent, arm of governmentPURC independentEC focuses on advice to Minister,plans, resource utilisation,technical issuesPURC focuses on fair play betweenutilities and consumers, prices andcompetition = the marketTherefore functions requiringindependent regulation andbalance between participantsshould be done by PURC


RegulatoryFunctions

Roles of the MOE, PURC and ECneed to be clarified andrationalisedPolicy making and advice,responsibility of the MOELicensing, continue to be carriedout by the Commission for now,although PURC could assume thisrole in future

PURC may need to use licensing toenforce competition in the market


FunctionsofRegulation

Technical standards - ECCustomer service quality standards- PURCTechnical standards ofperformance - ECTariffs - PURCPromotion of indigenous resourcesand network development - ECOversight of the development ofthe market and competition -PURCTechnical rules (‘grid code’) - ECMarket rules - PURC


Independence Independence is necessary toprotect interest of consumers andproducersPrivate investors want to seeregulators make independentdecisionsKey conditions for sufficientmeasure of regulatoryindependence:

terms for appointment and dismissalterms for funding of the organisationPURC needs a source of independentfunding


WeakeningofRegulatoryFramework

PURC’s functions include the setting of tariffs,the promotion of competition and themonitoring of standards of performance.Limitations include:

standards of performance overlapbetween PURC and ECPURC does not have power to setstandardsremoval or suspension of licence canonly be recommended to ECPURC must set uniform tariff but doesnot have the power to create financialmechanism to compensate loss ofrevenues to distribution areas(subsidies)


DisputeResolution

Energy Commission Act:disputes in relation to licensing referredas a complaint to the MinisterMinister’s decision may be challengedin court

Public Utilities RegulatoryCommission Act

Complaints initially submitted to PURCPURC determines own procedures forinvestigating complaintsNo provision for appeal or disputeagainst the decisions of PURC

Need mediation and arbitrationsteps


KeyIssues forDiscussion

Restructuring of VRAWhat criteria to apply for success (ofgradualist approach) or failure (henceneed to fully unbundle)

Restructuring of distributiontransitional management contract, thenStrategic Investor, ordirect to Strategic Investor

If more than one DistCo, how to definetheir territory, size and role

Regulationwhich steps to strengthen the regulatoryframework?

ECONOMIC CONSULTING ASSOCIATES LIMITED41 Lonsdale Road London NW6 6RA UKtel +44 (0)20 7604 4545 / fax +44 (0)20 7604 4547www.eca-uk.com


Ghana Power Sector

Review of Reform ProgrammeRay Tomkins (ECA)

Workshop on 7 February 2003, Accra


Privatisation Sale of all or some of the equity to aprivate investorAdvantages

kick start the reform processimprove creditworthiness of distributionclear governance situationcreates strongest incentives forefficiency improvements

Disadvantageslittle experience of privatisation in Africacurrent climate among internationalinvestors is weakno certainty that a privatisationtransaction would succeed todayprice for assets would be lower than ifdistcos were in a stronger shape


ConcessionsConcession can be viewed asbeing positioned between amanagement contract andprivatisationAdvantages

some investment risk immediatelytransferredimprove credit-worthiness ofdistributioninnovative benefit sharing formulations

Disadvantagessimilar uncertainties to those withprivatisationhard to adjust the concession contractlaterdispute riskinsufficient interest

ghana power sector - eca uk

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