Tuesday, 13 August 2019

Take-And-Pay Agreements May Jeopardise Power Sector -Part 2

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Alex Mould Writes…

Just a few days ago, I criticized the Finance Minister Ken Ofori Atta’s (KOA) ill-advised submission to parliament on renegotiating all take-or-pay power agreements to take-and-pay agreements.

However, just when I thought the dust had settled on the issue due to the ongoing PDS/ECG saga, I read an article somewhere titled; “Lessons to be learnt from Ghana’s excess electricity shambles”. An interesting report but one that has unfortunately no independent analysis to corroborate the non-facts.

Furthermore, the disappointing part of this report is its display of extremely shallow investigative research made by the reporter on the Finance Minister’s unfounded conclusions about the power sector in his 2019 mid-year review.

 The first of these conclusions the author makes is that Ghana’s economy is experiencing a huge financial strain based on legacy debt in the energy sector.

The author sadly believes this energy debt and costs were caused as result of “fast-tracked” government private power plants negotiated as “Take-Or-Pay” (TOP) contracts.

As a result Government of Ghana (GoG) is carrying the financial burden of paying for idle capacity.

He goes on therefore to agree with KOA’s commitment to renegotiate ALL these IPP contracts to Take-And-Pay (TAP) as this will remove that financial burden and save Ghana the $500 million being spent annually on this excess capacity.

Firstly, the author erroneously refers to Ghana’s installed plant capacity irrespective of whether that capacity is dependable and/or available, at the required 90% of its installed capacity. This leads to falsely referencing 5GW of installed capacity as dependable and available capacity in Ghana.

Compound this with the article’s lack of analysis of the power landscape pre-Dumsor, and the reader is left with an inflated and distorted view of available, and dependable power generated in Ghana today.

Dumsor, (recorded by some think tanks as driving $3bn in losses in terms of GDP growth), was caused as a result of over 40% gap in power generation required to meet demand despite at that time Ghana had installed capacity (3.1GW)in excess of 50% of the demand (2.0GW) in 2013.

At the peak of Dumsor (2013), 8 IPP’s with an installed capacity of 1.5GW collectively produced at about 50% of their installed capacity, resulting in only 750MW been available from thermal plants.

In addition, our Hydro plants with installed capacity of 1.6GW, were collectively producing 30% installed capacity, resulting in approximately 500MW.  We were therefore producing approximately 1.25MW versus required 2.0MW (62.5%), hence Dumsor.

The article unfortunately includes the full installed capacity of these debilitating plants (in existence pre-Dumsor) into approximations of available and dependable capacity in Ghana today, in an effort to inflate and skew known realities.

To understand what was done to avert Dumsor, and meet Ghana’s power demand projections by 2025 - projected to be in excess of 4000MW with the required industry standard 18% Reserve capacity - it is important to provide a proper breakdown of the power landscape, something the article failed to achieve.

It is only through this breakdown that readers can easily appreciate the inflated and misleading power generation figures.

It is noteworthy that 2025 is referenced, as this is pragmatic technical foresight in planning for any country (which the author quickly glossed over), calling such planning “rushed”. It  was important at the peak of Dumsor in 2013 to not only meet Ghana’s power demands at the time of Dumsor, but also refer to the country’s power demand projections (Including the Reserve Capacity) in the near future (3.4GW in 2020, and 4GW in 2023) by the sector regulator and other power experts.

Now back to today’s landscape, and some basic Math. Power demand and supply is done on a giga watt hours (GWHr) basis but the capacity to produce these GWHr is from Plant capacity which is in giga Watts (GW); for simplicity, and since we are talking capacity, I shall refer to GW and not GWHr;

Ghana’s 2019 peak consumption is projected to be about 2,800MW (2.8GW), give and take, and hydro will supply about 30% of power with the rest coming mainly from thermal; solar is still less than 0.2%.

There are 15 independent power producers (IPP) thermal plants available on record, of which approximately 8 plants, are dependable and available at least 90% of the time and can generate at least the required 80% of their installed capacity annually as per most IPP agreements; these plants can and successfully provide 1.5GW “available” power.

Excess installed capacity does not solve the problem- what is important is that plants are fit for purpose, dependable, available to produce power continuously, and reliable in a sustainable manner to meet demand.

This is because installed capacity only tells you what plant capacity but not necessarily what can be relied upon to meet the demand.

These remaining 7 plants provide the balance of 300-400MW; these are the older plants - mainly the old VRA plants, and dismantled used plants brought to Ghana in the early 2000s.

These debilitating plants are inefficient, lack maintenance, and are performing way below capacity 20-40% on an annual basis; most of these plants are past their sell-by date either due to age or lack of proper scheduled maintenance and are actually producing on a take and pay basis.

If any of these Plants’ PPAs still have TOP agreements then I assume that these IPPs are in violation of their PPAs and these PPAs must be turned into TAP agreements immediately.

Remember, a take-or-pay is a two-way street; the IPP also MUST provide a minimum amount electricity and there are normally penalties if the IPP misses this simple key performing indicator (KPI) of delivering the minimum amount of electricity as agreed in their PPA.