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This being an election year in Ghana, national attention is naturally focused on the contest to determine who will govern the country from next year. The elections are probably a welcome distraction from the electricity crisis that occupied the nation’s attention for the better part of three years.

Thankfully, the current government has managed to put in place some temporary measures that have brought relief from the incessant power cuts that, for a very long time, severely disrupted daily life for large segments of the population. Despite this improvement, the nation must remain vigilant on the electricity supply issue because it appears that some of the policy mistakes that led to the recent crisis are being repeated. The risk is that these missteps will, in another couple of years, cause the country to re-live the traumatic experiences of recent past.
 

In a recent article, the PURC reportedly blamed the recent power crisis on the government’s decision in 2013 to reduce the requested increase in electricity tariffs at the time from 87.9% to about 57%. That reduction is said to have led to the funding shortfalls that prevented the utility companies from making key investments that would have improved the reliability of the electricity supply system.

Earlier this year, the government once again reduced some of the electricity tariffs that the PURC had approved last year. Those PURC-approved tariffs, according to some press reports, were actually quite a bit lower than what VRA and ECG had originally requested. If such government interference in the setting of tariffs has been clearly identified as one of the primary causes of the recent crisis, it is quite surprising then that the same mistake is being repeated barely two years later. It shouldn’t come as a surprise to anyone then, if the country gets plunged into darkness again in the very near future.

I argued in another article recently that the steep increase in electricity tariffs, particularly on businesses, was detrimental to the country’s economic health. The public’s complaints against those increases were, in my view, largely justified. No price within an economy should increase at several times the rate of inflation so consistently, year after year, as has happened with electricity prices in Ghana. Unfortunately, this has occurred because the people who have been paid by taxpayers over the years to manage the country’s electricity sector have not fulfilled their responsibilities effectively.

Ghanaians should actually be given a lot of credit for their willingness to tolerate such high increases in electricity tariffs. When governments elsewhere attempt to remove energy subsidies, they are often not so lucky. Faced with violent protests, many governments often back down and return to the status quo, which then worsens the dysfunction that those governments were attempting to address. That is why it was very appropriate for the President to thank Ghanaians, as he did in his recent State of the Nation address, for their acceptance of the tariff increases. 

A willingness to pay is one thing though. Ability to pay is a different matter altogether. Electricity is the type of product that is almost impossible to live without, once people get a taste of it. If tariffs become so high that most people cannot afford to pay for electricity, they will do things that possibly, will negate any revenue gains that the utility companies hope to gain from such tariff increases. Stealing of electricity, which is already a serious problem in Ghana, will likely increase. Also, it is likely that many people will become delinquent on their bills, leading to an increase in uncollectible debt for ECG. If either or both of these things were to happen, the state of the country’s electricity sector would quickly worsen.

For the most part, the country has relied on emergency measures to bring about the aforementioned improvement in electricity supply. When patients wait till they are seriously ill before they rush to a hospital emergency room to get medical care, they often pay significantly more money for that care. That, unfortunately, is the approach that Ghana has taken over the last few decades to fix problems in its electricity sector. That is one of the reasons why tariffs have had to be raised so much so often.

Reducing tariffs to cushion the burden on citizens, as the government did, was the right move, in my view. However, that should not be the end of the story. The government cannot force VRA and ECG to consistently sell electricity for less than it costs them to produce and deliver it to consumers, and expect those companies to remain in business. 

Bitter medicine is often required to make sick people feel better. However, such medicine, as everyone knows, has to be taken in tolerable doses over a period of time. Overdosing on medicine can kill a patient; a sudden, steep electricity tariff increase can have a similar effect on a national economy. That is why the government and the PURC, together with VRA, ECG and other relevant stakeholders, need to put forth a credible, long-term plan that will gradually phase in tariff increases to ultimately bring electricity prices to cost-reflective levels.

As I understand it, the government’s recent introduction of the energy sector levy, which imposes additional taxes on a variety of petroleum products, is meant to help raise revenue to pay off the legacy debts of ECG and VRA. That may be a necessary temporary measure, but increases in the prices of petroleum products tend to feed into the prices of most goods and services. 

The levy is therefore likely to increase the cost of living for poor rural folks, some of whom have never had access to electricity, and will likely not be connected to the grid for a long time to come. Such people should not be held responsible for debt that they did not help create. Moreover, even if the levy does the trick, and the legacy debts eventually get paid off, the underpricing and other systemic problems that created those mountains of debt in the first place will still need to be resolved.

There is already in place an automatic adjustment formula that was designed to incorporate energy and currency market price changes into electricity tariffs in Ghana. The fact is that energy and currency markets are both too volatile for such a formula to be an effective mechanism to solve the country’s historical underpricing of electricity problem. It is partly due to such high volatility that energy prices, for instance, are excluded from the calculation of core CPI (consumer price index) in some countries. Ghana should look for better ways to manage the electricity tariff-setting process.

In both the energy and currency markets, there exist a variety of hedging instruments that the people in charge of Ghana’s electricity sector can and should employ to achieve some measure of long-term electricity price stability. Business owners, in particular, need that price stability in order for them to manage their operations effectively. Without that, the country’s high unemployment and broader economic problems will persist.

Ultimately, the goal should be the development of long-term strategies that will lead to the production and delivery of electricity in the country at the lowest cost possible. For far too long, the ad hoc and expensive measures that have been used to manage Ghana’s electricity sector have cost taxpayers dearly. Ordinary citizens, particularly the poor, who already face so many difficulties in their daily lives, should not be made to pay even more for the policy mistakes of leaders whose salaries these same poor people pay.  

*The author is the manager of retail power marketing at UGI Energy Services, LLC, a diversified energy services firm in Pennsylvania, USA. He was previously a financial analyst at UGI. Prior to UGI, he worked as a senior electrical engineer at Caterpillar, Inc. in the US. He holds a master’s degree in electrical engineering from Purdue University in Indiana, USA, and an MBA from Dartmouth College in New Hampshire, USA.