Energy and infrastructure challenges in Ghana

As one of the resident energy geeks on our trip to Ghana, I found myself diving into a number of fascinating conversations about electricity regulation and access. Electricity access is critical for nearly all businesses, and having access to two additional hours of lighting per day for studying can lead to dramatic improvements in education outcomes.

Let me start by pointing out an important dynamic to electricity markets in developing countries. Some countries subsidize (or otherwise artificially lower) the cost of electricity so that it is more affordable. However, one result of this is that investors cannot justify investments in new generation resources and therefore supply growth is minimal. Low electricity costs have their benefits, but high electricity costs are not necessarily bad. I will discuss here a few conversations I had in Ghana which show the challenges and opportunities presented by the present situation of the country’s electric power system.

The first conversation I had was with Tanko Mohammed, a 2003 MBA alum from MIT Sloan. Tanko explained to me that electricity generation is provided by an open market, but that all transmission and generation is operated by the government-owned Electricity Company of Ghana (ECG). In other words, private investors can generate electricity and connect to the grid, then that grid is operated by ECG.

Tanko then told me that electricity prices are determined by a uniform price auction. This means that all generators bid a price at which they are able to generate electricity. ECG then figures out how much electricity it needs, and tells all of the lowest-cost generators to operate. ECG pays each of these generators the same price (per kWh). The price paid is equal to the highest bid of the generators that were selected.

This year, Ghana is experiencing shortages in energy supply (caused largely by a light rain season that is limiting hydroelectric production). As a result, the government has had to bring in a large oil-fired generator on a barge in Accra’s harbor to meet electricity demand. This plant is very expensive to operate, and its operation significantly raises prices for all electricity customers because of the uniform price auction. In fact, electricity prices in Ghana are now nearly four times the 2012 prices.

Two days after my conversation, with Tanko, I met Georg Baunbach. Georg is the Founder and CEO of Etility, a startup focused on energy management and solar for commercial businesses in West Africa. Georg mentioned that many of his customers are more engaged now than ever before, because of their high electricity bills (earlier in the day, an executive at Touton Group had told our group that electricity is their greatest cost).

The sharp increase in electricity prices is helping Georg push his customers forward. The economics of energy efficiency and solar energy improve when grid electricity is higher.

However, it is not enough to look at electricity on its own. While high grid electricity prices encourage customers to improve efficiency and install solar or other generation sources, high interest rates make these projects very difficult to finance. A holistic approach is therefore needed for regulators, operators, and customers of Ghana’s electric power grid.

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