‘Take-Or-Pay’ is not the cause of energy debt; focus on ECG efficiencies – GNPC official
Adnan Adams Mohammed
A top official at Ghana National Petroleum Corporation (GNPC) has dismissed the assertion of government officials at the Energy and Finance ministries purporting that previous government’s Power Purchase Agreement (PPAs) signed with Independent Power Producers (IPPs) are the cause of growing energy debt.
The contracts, signed under conditions of ‘Take-Or-Pay’ were to attract and give guarantee to IPPs to invest in power production in the country to help augment the few state owned power generation plants.
As it can be recalled, shortage of power generation led to power rationing (dumsor) in 2014 and 2015 which brought serious frustrations and consequences for the economy. This forced the Mahama-led government to consider ways to attract more private investments in power generation which led to it signing a ‘Take-Or-Pay’ agreements with the IPPs. However, the current finance minister designate, Ken Ofori Atta have had his bite at those agreements saying it causes the national over US$500 million annually for unused power.
“The energy sector debt we are grappling with is not the issue of ‘Take-Or-Pay’ but inefficiencies of ECG in power distribution and revenue collection for power used”, Joe Dadzie, deputy Chief Executive Officer at GNPC said during a discussion at the NRGI national virtual policy dialogue on extractive governance in Ghana.
“If ECG is efficient is power distribution, revenue collection and loss control, there wouldn’t be unused power because the current power being generated is not enough to feed the whole country.”
In the 2019 mid-year supplementary budget estimates and fiscal policy, the Minister of Finance stated the government’s intention was to convert ‘take-or-pay’ obligations in power purchase agreements (PPAs) into ‘take and pay’ obligations.
According to ministry of energy data, 60 percent of installed capacity, 2,300 megawatts (MW), were contracted between 2011 and 2016 on a take-or-pay basis, and only 40 percent of it is actually used.
Ghana has an installed capacity of over 5,000 megawatts and dependable capacity of about 4,700MW with all time high peak demand of 2,700MW.
This means that since 2017, Ghana has had to look for money to pay for about 600MW of excess capacity that was never used.
To address this inimical issue, government crafted an innovative Energy Sector Reform Programme (ESRP) to effectively deal with all key issues in the energy sector that is seen as a pillar to propel the economy Beyond Aid.
Under the ESRP, the government has begun renegotiating with IPPs to convert purchase agreements from Take-or-Pay to Take-and-Pay to put an end to the payment of excess capacity that keeps adding to Ghana’s debt stock.
This led to the abrogation of the GPGC PPA which has also caused Ghana a judgment debt of over US$138 million.
It is estimated that two out of three households (almost 600 million people) in sub-Saharan Africa have no access to electricity. Ghana has also had its challenges.
Some six years after the country’s economy was devastated with shortage supply of electricity, the situation is different today, excess electricity is again costing the nation.
Mr Ofori-Atta has said that, the problem posed grave financial risks to Ghana’s economy. This is because the government is carrying legacy debt in the energy sector, which threatens to put a huge strain on its finances.
Ghana’s experience is a cautionary tale for countries that find themselves in a situation of having too much electricity at any given point. Without careful forward planning, proper data-driven analysis, and transparent, competitive, corruption-free contracting processes, any country could find itself in the same situation as Ghana.
Challenges with public financing of energy infrastructural projects, have put many countries including Ghana to turn to the private sector for investment in the energy sector. As a result, independent power producers are receiving much more attention on the continent.
Prior to the abrogation of the GPGC PPA, a brief paper published by Araba Attua-Afari of Bentsi-Enchill, Letsa & Ankomah, Ghana, on the government’s intention to convert power purchase agreements from Take-or-Pay to Take-and-Pay outlined some thoughts on the implementation of the policy cautioned that the exercise requires the willingness of the IPPs to come to the table.
“The PPAs to which the Minister of Finance refers are enforceable contracts under Ghanaian law. One party cannot on its own vary the terms of that contract – this is a general principle of contract law. So, in the absence of a provision in the PPAs which allows the Government to unilaterally amend the take-or-pay provision (which is highly unlikely to be the case), any amendments would require the agreement of all the signatories to it. It is just as unlikely that IPPs will agree to the proposed conversion because it would create uncertainty around fuel supply and loan servicing during the operating period of a power project.”
“A move by the Government to replace a take-or-pay obligation with a take-and-pay obligation without the consent of the IPP who has the benefit of the take-or-pay would amount to a breach of contract. Given the importance of a take-or-pay clause to the success of a power project, such a breach would be fundamental and go to the root of the PPA. Thus, the IPP would be entitled to terminate the PPA, and international arbitration would most certainly follow to recover damages arising from the termination. Given the implications of such termination on a power project, the very real potential for substantial damages and associated costs may amount to larger sums than the payments required under the take-or-pay clauses.”
A take-or-pay clause is an agreement between the contracting parties that the offtaker will either ‘take’ power produced, ‘or pay’ for the power produced if it is not required. A take-or-pay provision in a PPA guarantees the power producer a pre-determined amount of revenue on the condition that the power producer makes the power available to the offtaker under the agreement. This, in turn, allows the power producer to cover its fixed costs. Take-or-pay provisions are critical for obtaining project financing, as they evidence certainty around project cashflows.
Along with other material terms in PPAs, they are the subject of heavy negotiation between the IPP and the offtaker – and rightly so. Simply put, where the offtaker does not take delivery of power produced, the take-or-pay obligation creates a debt owed by the Government to the IPP that made the power available. The take-or-pay clause is usually the only contractual remedy available to the IPP when the offtaker fails to take delivery of power. Their importance is underscored by the non-existence of an energy spot market in Ghana.