Comments On The 2015 Budget Statement With Focus On The Energy Sector
POWER SECTOR
1. The Power Sector as the Anchor in the Budget
The budget exposed the country’s over-reliance on energy for the achieving the transformation agenda. Particularly, the fundamental pillars expected to derive the economy in 2015 are:
i. The completion of Ghana’s own gas pipelines and processing plant to exploit the free 200 billion cubic feet (bcf) of gas from the Jubilee fields for which the commissioning of gas flows from the oil fields to the plant has started;
ii. The future coming on stream of additional gas and crude oil production and supplies from the Sankofa and Tweneboa-Enyenra-Ntomme (TEN) fields; and
iii. The prospects for further boosts to the economy from the energy sector through the implementation of the Millennium Challenge Corporation (MCC) Compact II Agreement with the United States of America (USA).
This means that barring these major projects; the economy would continue to suffer from low growth. We observe however that whist the gas from the Jubilee field will ensure improvement in power supply, it will not add to generation capacity. At most, it will substitute for light crude oil, save VRA of millions of US dollars from the procurement of light of crude oil, complement gas from Nigeria, lengthen the maintenance period of power plants from 6,000 hours to 12,000 hours, and ensure the burning of cleaner fuel.
However, our analyses of the measures announced in the Budget shows that the budget does not provide a serious indication of how government plans to address the current challenges of load shedding. The measures will however be useful for the medium to long-term resolution of the power sector challenges.
2. Gas Supply Security
However, given that Jubilee gas peaks at 120mmscfd, and TEN gas expected by end 2016 peaks at 80mmscfd, the cumulated indigenous gas will still fall below the total current demand of 400MW (according to estimates from Energy Commission). Government has delayed the approval of the Plan of Development for Sankofa, which will delay gas delivery until 2018. The additional gas expected from Sankofa at 180mmscfd peak, will take indigenous gas to 380mmscfd by 2018 or 2019. The government plans to increase generation capacity to 5,000MW by 2016 largely from thermal generation, yet plans for gas supply will not be sufficient to fire additional power plants.
3. Generation Expansion
We note that whilst the country is in darkness for the most part, the only generation projects expected on stream this year and early 2015 are the Kpone thermal Power Plant and TICO Expansion projects, which together will add 330MW. This is not ambitious enough considering that Ghana has a current shortfall of about 300MW, an annual demand growth equivalent to about 340 MW, and the need for a reserve margin equivalent to 400 MW, the total requirement of additional capacity in 2015 stands at about 1000MW.
The Budget projects additional generation of 803.5 MW of new generation capacity in2015, of which 770MW will come from thermal sources; but it fails to provide information on the number of projects under consideration, financial security for the projects, and the security of fuel for powering the additional plants. We note in particular the rate at which current and planned investments over the years have delayed, whilst private companies continue to sign new PPAs without executing actual projects. This trend is likely to continue, thereby undermining the President’s plan to reach 5,000 MW over the next two years.
This is why we support the proposal in the budget for the use of bonds by the utilities to finance energy projects. We however caution the government to ensure that this process is well regulated to avoid debts that will impose contingent liabilities on the government and the taxpayer.
4. Power Distribution
The Millennium Challenge Compact II promises to overhaul the distribution sub-sector by seeking to position ECG as a credible off-taker. This when successfully implemented, will make ECG financially viable and capable of generating revenues to pay for the power it purchases from VRA and IPPs. The Compact targets reduction in distribution losses from the current 20%, payment of government debts to the utilities, efficiency improvement, etc. Stakeholders believe that the objectives set out by the Compact will not be achieved if ECG and NEDco remain under government control. Partial privatization is therefore being considered.
Whist we support the prospects of better positioning ECG through partial privatization, we are skeptical of the ability of Government to get the citizens to buy into such privatization agenda given that economic circumstances are generally tight. We therefore doubt that period for transforming ECG to a credible off-taker will therefore have to be adjusted further, which will have implications for attracting IPPs into generation expansion.
Our analyses also show that government is more focused on access expansion than in reliability of power supply. This has accounted for the projection in the Budget to increase access rate from 76% in 2014 to 80% in 2015. We do not subscribe to the decision to expand access whilst challenges for distributing electricity are not addressed.
For example, with increased investment in the distribution network, the government could reduce the distribution losses, and thereby making more electricity available to expand access, rather than the current regime where limited capacity is over-stretched to meet access objective. We think that increasing access without reliability of supply makes electricity more expensive to poor and rural communities, as their appliances are in danger of being damaged through power outages.
5. The creation of Ministry of Power
The creation of the new Ministry of Power has generated intense public discussions in the country. Whilst some people have argued that a new Ministry is unnecessary at these difficult economic times in the country, others have questioned what contributions it could make to solve the current problems associated with the power sector.
However, we are of the view that the new Ministry’s efforts will be much felt in the medium to long term. We do not think that the Ministry can address the immediate problems of load shedding due to budgetary constraints. The 2015 Budget allocates
GH¢799,615,234 to the Ministry of Energy, out of which GH¢641,950,004 (about 80%) is expected from Development Partners. Given that donor funding is very volatile, and the fact that most of the donor funds are earmarked for rural electrification and a few transmission projects, the new Ministry is unlikely to get the resources required to address the sector problems in 2015 such as crude oil procurement, gas supply security to meeting total demand for gas, forced outages due to congestion in transmission lines and inadequate transformers, among others.
We recommend that:
a. In the short-term, Government must not abandon the idea for the emergency power barges as they are assured to provide short-term security of supply particular to industry. However, the procurement of these barges should be guided by value for money for the Ghanaian Tax Payer.
b. Also, as the sole shareholder of VRA, government must support the company to procure light crude oil to bring idle capacity into operation and t provide relief to consumers until more gas is available.
c. Government should as a matter of urgency move to approve the Plan of Development for the Sankofa Field to increase the prospects of gas supply security. Government should also accelerate discussions for private sector investment in LNG facilities to ensure augmentation of domestic gas supply with gas imports.
d. The Public Utilities and Regulatory Commission should publish guidelines for load shedding of electricity since the Electricity Supply and Distribution (Technical and Operational) Rules, 2005 (LI1816) is inadequate to make power distribution companies more accountable and for businesses and other consumers to plan. Load shedding should be put into three stages. Stage 1 is declared when only residential and commercial consumers are affected. Stage 2 is declared if it is extended to industrial consumers; whilst Stage 3 is declared if all consumers are affected except strategic installations. This will ensure that consumers can track the severity of the challenge between supply and demand for electricity.
PETROLEUM DOWNSTREAM SUB‐SECTOR
1. Petroleum Product Pricing Reforms
We have noted the recent reforms in petroleum product pricing especially shifting from spot prices to forward prices to address the problems associated with foreign exchange losses, which led to shortages of petroleum products. The 2015 budget further announces more price reforms for petroleum products:
i. Imposition of Special Petroleum Tax of 17.5 percent as part of a rationalization of
VAT regime and change in the petroleum pricing structure.
ii. A mitigation account to manage extremely low and high prices that result in sporadic price increases or decreases under the automatic adjustment formula;
iii. Reversal of excise tax on petroleum from Ad Valorem to specific.
Petroleum products taxes are major sources of revenues for the government. It is therefore not surprising that the 2015 Budget targets petroleum products for additional revenues for the purpose of financing government programmes. In our considered view, petroleum products are over-taxed in Ghana. By May 2014, the following taxes and levies were imposed on petroleum products.
a. Excise Duty
b. TOR Debt Recovery Levy
c. Road Fund Levy
d. e. Energy Fund Levy
f. Exploration Levy
g. Cross-Subsidy Levy
h. UPPF Levy
i. BOST Levy
It is for this reason that the introduction of a new special tax at a high rate of 17.5% becomes very curious. Also, whilst we recognize the introduction of the special tax on users of petroleum products as a measure to generate more revenues for the government, we are equally alarmed that its introduction comes along with the reversal of ad valorem taxes to specific taxes.
Specific taxes as opposed to ad valorem taxes for petroleum products are often appropriate for the preservation of product quality and to address negative externalities of increased petroleum consumption. However, it is often over-shifted in prices to consumers, as they tend to lead to relatively high levels of price, and therefore have negative impact on consumer welfare. Since the volume of petroleum products consumed is unlikely to decrease because of its price inelasticity, the specific tax will only translate into higher prices of petroleum products. Therefore the simultaneous introduction of the special tax of 17.5% and the specific tax regime will no doubt worsen the poor conditions of most consumers of petroleum products.
Moreover, ad valorem taxes have high revenue generation potential since domestic petroleum product prices are usually asymmetric with international crude oil prices.
Thus, we see the move to reform petroleum product pricing as increasing the burden on consumers of petroleum products. The specific excise taxes on petroleum products is also inconsistent with the excise tax regime in Ghana as confirmed by the Minister of Finance in the 2014 Budget Statement “To be consistent with our current excise tax regime, we propose changing the basis of the petroleum excise duty from specific to ad valorem”. We are therefore at a loss why the reverse in just after a year. Such inconsistency in policy does not provide an enabling environment for businesses to plan.
To be continued
