The Minister of Finance, Mr Ken Ofori-Atta, has pledged that the government will soon make all take-or-pay contracts in the country’s energy sector a ‘beast’ of the past.
He said the obnoxious take-or-pay contracts in the energy sector posed a significant challenge to the economy and the government had therefore resolved to convert all take-or-pay contracts to take-and-pay contracts.
From August 1, 2019, he said the government would pay for energy and gas that was actually consumed.
Presenting the Mid Year Budget Review in Parliament, he said: “All take-or-pay contracts will be renegotiated to convert to take-and-pay for both Power Purchasing Agreements (PPAS) and Gas Supply Agreements (GSAs).”
As part of measures to address the rising energy sector cost, he said, the government would also suspend indefinitely or terminate all PPAs currently under negotiation and immediately place a complete moratorium on signing new PPAs.
Going forward, he said, the government would subject all future PPAs to competitive and transparent procurement procedures and no longer entertain any unsolicited proposals.
Mr Ofori-Atta pointed out that despite the significant progress the government had made so far, the serious challenges facing the energy sector posed grave financial risks to the whole economy.
“At the heart of these challenges are the obnoxious take-or-pay contracts signed by the NDC, which obligate us to pay for capacity we do not need.”
Currently, according to the Energy Commission, the country had installed capacity of 5,083 MW which was almost double what the country required at peak demand of around 2,700 MW.
Notably, 2,300 MW of the installed capacity had been contracted on a take-or-pay basis.
“This means that we are contractually obliged to throw away money for this excess capacity which we do not consume. This has resulted in us paying over GH¢2.5 billion annually for power generation capacity that we do not need,” Mr Ofori-Atta indicated.
Similarly for gas, he said, the country had contracted for around 750 mmscf per day by 2023.
He said this was even after this government terminated two other LNG contracts in 2017.
“Current demand is around 250 mmscf per day, and this is projected to rise to between 450 and 550 mmscf per day by 2023. About 640 mmscf of the contracted gas supply is on a take-or-pay basis, meaning we have to pay whether we use it or not. From 2020, if nothing is done, we will be facing annual excess gas capacity charges of between US$550 and US$850 million every year,” he explained.
“Currently, for Sankofa Offshore Cape Three Points gas alone, we pay over US$51 million a month under a take-or-pay contract for 154 mmscf per day even though we only actually take 60 mmscf per day on average.”
“We cannot allow this situation to continue. There is no doubt that the situation in the energy sector is shocking the economy. We are in a state of emergency and must, therefore, respond with urgency and boldness,” he noted.
Total energy costs
The Finance Minister also pointed out that the total costs in the energy sector that the government had to cover in 2018 amounted to US$520 million (GH¢2.7 billion).
By the first half of this year, he said the government had made total payments of US$604 million (GH¢3.14 billion).
“If we do not urgently address the problems in the sector, the projected government payments in 2019 will be at least US$1 billion, (GH¢5.2 billion).”
Energy Sector Reform Programme
To address the problems in the sector, he said, the ministry’s top technical experts, assisted by counterparts from the World Bank, have subjected the energy sector to a thorough analysis and produced the Energy Sector Reform Programme (ESRP), which identified the key issues in the sector and proposed solutions.
“According to the ESRP, which has been approved by Cabinet, if we continue with business as usual in the energy sector, the costs to Government will increase over time to an accumulated total of over US$12.5 billion by 2023.”
“Our macroeconomic stability and the hard-earned economic gains we have made are at serious risk of being derailed if we do not immediately take drastic steps to arrest these reprehensible legacy issues in the energy sector,” he stated.