Manila Electric Company (Meralco) will officially take over running the Electricity Company of Ghana Limited (ECG) in February next year, under a 20-year concession agreement.

Finance Minister Ken Oforo-Atta, presenting the 2019 Budget to Parliament last week said: “Preparations are currently underway toward the takeover [of ECG] by the Concessionaire in February, 2019”.

The takeover, he noted, follows renegotiation of the Millennium Challenge Compact II terms between the Republic of Ghana and United States of America, and the selection of a successful bidder through a competitive procurement process.

The negotiated Transaction Agreements – namely the Lease and Assignment Agreement, Bulk Supply Agreement, and Government Support Agreement – to secure the proposed Private Sector Participation (PSP) in ECG were approved by Cabinet and ratified by Parliament.

The Concessionaire, according to the agreement, is expected to inject an amount of US$580m into the distribution system during the agreement period’s first five years.

The Bulk Supply Agreement between ECG and the Concessionaire deals with the Concessionaire’s back-to-back purchase of the capacity and energy made available to ECG under the Power Purchase Agreements (PPAs).

The Concessionaire will do nominations and ECG will supply the power to be paid for by the Concessionaire.

ECG will sell all capacity and energy made available under the Portfolio PPAs to the Concessionaire, in exchange for payment by the company of all capacity and energy charges on a back-to-back basis.

With regard to the Government Support Agreement, it involves government providing a sovereign guarantee to indemnify the Concessionaire for any substantial breach by ECG of the terms and conditions under the Lease and Assignment Agreement and Bulk Supply Agreement.

The areas where the sovereign guarantee is being provided are payment of electricity bills supplied to Ministries, Departments and Agencies (MDAs); and Buy-Out Price after expiration of the 20-year concession period.

ECG’s technical and commercial losses

The ECG experienced approximately 23 percent aggregate Technical and Commercial Losses in 2017.

This figure is high compared to the worldwide industry standards, which presently stand at about 8-9 percent.

ECG’s loss rate is also slightly above the average of 22 percent for sub-Saharan Africa countries.

Advantages of the concession approach

The Concession approach is advantageous to government, partly because the Concessionaire is responsible for all major new investments. This is expected to help minimize the impacts of such investments on the national budget.

Again, the Concessionaire takes responsibility for the delivery and operation of ECG’s power distribution and services infrastructure; thereby transferring the inherent risks from government to the Concessionaire.

TUC’s fears

The Trade Union Congress (TUC), umbrella-body of 17 affiliate trade unions, in its proposal for tariff review submitted to the Public Utilities Regulatory Commission urged PURC to ensure that the new arrangement – changing the status of ECG as an electricity distribution company to asset owner and a bulk energy trader from February 1, 2019 – will not lead to higher tariffs.

“Consumers are yet to be informed of the effects of such a major policy change in the distribution of electricity on electricity tariffs.

“Government, Power Distribution Services of Ghana Limited and the ECG have signed transaction agreements which have been ratified by Parliament,” the TUC said.

Background

On August 5, 2014, the Republic of Ghana and United States of America – acting through the Millennium Challenge Corporation (MCC) – entered into a Millennium Challenge Compact.

The Compact provides for a grant of up to US$498,200,000 to advance economic growth and reduce poverty in Ghana; and commit Ghana and the MCC to a five-year economic development programme that will fund investments in the country’s power sector.

The programme consists of six projects: namely the ECG Financial and Operational Turnaround Project; NEDCO Financial and Operational Turnaround Project; Regulatory Strengthening and Capacity Building Project; Access Project; Power Generation Sector Improvement Project; and Energy Efficiency and Demand Side Management Project.