Is the power sector ready for renewables?
Replacing traditional sources of energy completely with renewable energy is going to be a challenging task. However, by adding renewable energy to the grid and gradually increasing its contribution, we can realistically expect a future that is powered completely by green energy -Tulsi Tanti [founder of Suzlon Energy]
Ghana’s renewable energy sector again took centre stage at the 2022 COP27 where the President of Ghana assured world leaders of Ghana’s commitment to increase renewable energy in its energy mix as part of the nation’s framework on energy transition. In 2010, Ghana set a target to increase the proportion of renewable energy (solar, wind, mini-hydro and waste to energy) in its energy mix by 10% by 2020 under the Energy Sector Strategy and Development Plan. This led to the passing of the Renewable Energy Act (Act 832) in 2011 to provide the legal and regulatory framework for renewable energy activities in the power sector. However, according to the 2020 Energy Outlook for Ghana, by the end of 2020, Ghana had attained less than 2% renewable energy in its energy mix. The 10% target has now been pushed to 2030 under the Strategic National Energy Plan (2019). Achieving this target is heavily dependent on private sector participation in power generation. This article highlights the current state of private sector participation in the renewable energy sector and some challenges that make the sector unattractive for private investment. Some suggestions on what can be done to improve the sector are also discussed in the article.
Status of Ghana’s renewable energy sector
Ghana is endowed with abundant renewable energy potential such as solar, wind, biomass, wave and tidal energy. Act 832 defines “renewable energy sources” as renewable non-fossil energy sources like wind, solar, geothermal, wave, tidal, hydropower, biomass and landfill gas. Hydro was also defined as water-based energy systems with generating capacity not exceeding 100MW (i.e. small scale hydro). Among these, solar energy has been the most popular due to environmental and social factors. The Energy Commission, the regulator of the sector, has since 2011 issued over 140 licences for the development of grid-connected solar, wind, biomass, waste-to-energy and small-scale hydro renewable projects which demonstrates interest in the sector. However, only eight (8) projects have been developed so far. This is one of the reasons the Energy Commission has since 2017 placed a moratorium on the issuance of wholesale supply licences for the renewable energy sector. There are seven (7) solar plants, four of which are owned by state-owned power producers (i.e. Volta River Authority and the Bui Power Authority) and two owned by independent power producers (IPPs); one small-scale hydro plant owned by Bui Power Authority and one biomass power plant owned by an IPP. The installed capacity of these seven projects is 112.1MW which constitute 2.1% of the total installed energy capacity of 5,449.1MW.
With the amendment of Act 832 in 2020, the definition of “hydro” has been amended to remove the capacity restriction and so, all hydro plants regardless of capacity are considered renewable resources. This brings the Akosombo, Kpong and Bui hydro plants (which together constitute about 28% of the installed capacity) into the renewable energy mix.
Attempts to attract private sector investment
Generally, the cost of renewable energy projects is known to be high in comparison to non-renewable projects due to factors such as the cost of the technologies, difficulty in obtaining equipment and spare parts and difficulty in finding the expertise for development, operation and maintenance. However, project costs have reduced over the years due to increased investment (public and private) in projects, technologies and capacity of the developers. One of the major attempts by states to promote renewable energy is to create an enabling investment climate for renewable energy through its legal and regulatory framework.
The Renewable Energy Act has attempted to promote investment in the sector by introducing a number of incentives including:
- a mandatory connection policy where transmission and distribution system operators are obliged to provide connection services for electricity from renewable energy;
- a renewable energy purchase obligation where distribution companies and bulk consumers are required to procure a percentage of their total purchase of electricity from renewable energy sources;
- a feed-in-tariff system comprising of a tariff rate determined by the Public Utilities Regulatory Commission (PURC) which was substantially higher than tariffs for power from other sources and was guaranteed for a ten (10) year period; and
- the development of the Renewable Energy Fund to provide financial support for the promotion, development, and utilization of renewable energy.
However, with the amendment of the Act in 2020, the purchase obligation is now limited to only bulk consumers. Also, the feed-in-tariff system has been replaced with a competitive procurement system for the purchase of power from renewable energy suppliers. The scrapping of the feed-in-tariff rates may be as a result of the reduction in the price of renewable energy systems and the resultant reduced cost of power generation.
Considering the number of privately developed renewable energy projects in Ghana, it is clear that the sector has not seen as much private sector investment as expected. Some challenges identified are discussed below.
- Access to long-term affordable local funding to minimise capital costs is a major challenge faced by players in the sector. Although the Act has set up the Renewable Energy Fund, a cursory glance at the government budget over the years does not indicate any specific allocations to the Fund. However, budgetary allocations are made for renewable energy development. Related to this is the high cost of financing for power projects in Ghana due to Ghana’s high-risk profile for power projects stemming from the country’s credit rating, history of legacy debt and potential political risks from changes in government or government policy decisions. These risks tend to make financing more expensive. Also, since there are limited local sources of funding, most players depend on external sources of funds which are usually priced in foreign currency and expose the player to foreign exchange risks.
- Another challenge relates to the solicitation process for power projects. Historically, power purchase agreements (PPAs) have been procured through unsolicited proposals from IPPs. This is one of the reasons for the deemed oversupply situation in Ghana which led to the termination and re-negotiation of some PPAs by the Government of Ghana in 2018. In the absence of a transparent and competitive power procurement process based on a needs assessment, private players are reluctant to risk such investments. It is worth noting that in 2019, the government issued a policy for the Competitive Procurement of Energy Supply and Service Contracts. However, this policy is yet to be fully implemented.
- The limited availability of experienced personnel in Ghana to construct, operate and maintain renewable energy technology is also a challenge for private players in the sector. The absence of local capacity necessitates expensive foreign expertise which increases project costs. While the Energy Commission (Local Content and Local Participation) (Electricity Supply Industry) Regulations (L.I. 2354) which was passed in 2017 intends to bridge the local capacity gap by including mandatory training and employment of locals to build local capacity over time, adequate monitoring is required to achieve local content objectives.
- Land acquisition is also a major challenge for renewable energy projects especially solar and wind which usually require large tracts of land. Land acquisition in Ghana is however, fraught with lack of certainty on ownership of land, multiple sales and encroachment on project sites. These challenges with land acquisition do not attract investment in the sector.
- Another challenge is the knowledge gaps in the potential of renewable energy. The general perception is that renewable energy is expensive due to the high initial costs and therefore, renewable energy is not regarded as an economical source of power especially for non-residential purposes. However, the costs of renewable energy technologies have reduced significantly over the years making them a cost-effective source of power compared to non-renewable sources. Also, the role of renewable energy in reducing carbon emissions and combating climate change makes it not only economically beneficial but environmentally sustainable.
A lot can be done to make our renewable energy sector more attractive including the following:
- The institutional framework must adopt a more “investor-friendly” approach. This may take the fully resourcing the Renewable Energy desk at the Energy Commission to enable it to fully liaise with other regulators particularly, GRIDCo, the Environmental Protection Agency (EPA), Lands Commission, Ghana Investment Promotion Centre (GIPC), Ghana Immigration Service, National Fire Service and local authorities for all the permits, licenses or any other assistance the developer may require from these institutions. Such a one-stop shop for all regulatory matters will simplify the process of market entry and operation.
- Incentives can be introduced to promote private-sector participation. This may take the form of discounted prices for licence and permit applications from regulators, provision of land or support with land acquisition, and assistance with access to utility and infrastructure. Also, the development of a carbon market for the trading of carbon credits can be explored as an option to incentivise companies to reduce emissions. For example, the development and utilisation of renewable energy power projects will generate carbon credits for organisations which can be traded. Certainly, such a market will require some regulation and the Government of Ghana has indicated that a carbon market policy is being developed. Such incentives will encourage investment in the renewable energy sector.
- Another way of enhancing participation in the sector is to develop and implement a procurement process which is open, transparent, competitive and based on a needs assessment. Also, all state entities and agencies must be aligned with this policy to ensure uniformity across the sector. This will help to create certainty in the sector which will encourage private sector participation.
- In line with the objective of the Local Content Regulations, there must be emphasis on technical training and capacity building which aligns with the needs of the renewable energy industry. This will require coordinating with the technical and academic institutions in order to ensure that the training provided by these institutions aligns with the capacity needs of the industry. Moreover, the implementation of the Local Content Regulations must balance the interests of both local and foreign players so as not to discourage foreign participation. To this end, the Energy Commission should develop a pool of qualified domestic players and service providers that foreign players can partner with to meet local content and local participation requirements.
- Admittedly, access to local funding is crucial and Ghana may not be in the position to provide grants from internally generated funds. However, some sources of local funding can be exploited. For example, The 2021 Guidelines on Investment of Tier 2 and 3 Pension Scheme Funds have introduced Green Bonds as part of the products in which pension funds can invest. According to the Guidelines, pension funds can invest up to 5% of the Scheme Asset under Management (AUM) in Green Bonds, and this can be used to provide local funding for renewable energy projects. Also, the Ghana Infrastructure Investment Fund (GIIF) and the newly set up Development Bank of Ghana (DBG) can look into creating sustainable financing products or programmes designed specifically for the sector. There are numerous external funds that Ghana can take advantage of to enhance its renewable sector. For example, Ghana has benefited from a number of grants and programmes of the African Development Bank such as the Sustainable Energy Fund for Africa (SEFA), Leveraging Energy Access Finance Framework (LEAF) and the Scaling-Up Renewable Energy Program in Low-Income Countries (SREP) for investment in various aspects of the renewable energy sector. These funds must be applied judiciously towards accessible local financing through direct government funding or incentivising local commercial banks to finance renewable energy projects.
- Finally, in order to increase demand for power from renewable sources, effort must be put into creating public awareness of the need to support the sector as a way of combating climate change and its associated effects. With the combined efforts towards environmental sustainability, it can be expected that there will be increased demand for renewable energy power as a way to reduce carbon emissions. This can already be seen in the growing interest for solar systems for homes, green offices, electric vehicles, solar powered streetlights, among others.
The opportunities for renewable energy exploitation in Ghana are endless. For developing countries like Ghana, the transition from conventional energy to green energy will be gradual but must be intentional. In order to see real impact, the investment climate must support private sector participation if Ghana must meet and possibly exceed its 10% renewable energy mix target by 2030.
[i] Akua is an Associate at AB & David Africa based in the Accra office. She works with the firm’s Energy, Infrastructure and PPP Practice Group and has advised on various transactions in the renewable sector including market entry, projects structuring, regulatory compliance, financing, mergers and acquisitions. She also consults on the development of industry legislation. Email: email@example.com