Energy Minister-designate Dr. Matthew Opoku Prempeh has warned that the energy sector might collapse if reforms are not agreed upon between the government and independent power producers (IPPs) to help reduce the sector’s indebtedness.

Speaking before the Appointments Committee of Parliament on Friday, he said the take-or-pay contracts between the government and IPPs have led to excess power generation, which costs the country over US$500 million annually.

“Frankly, by 2023, if nothing is done dramatically about the energy debt situation, it would hit US$12.5 billion. We can’t produce energy that we can’t take,” he told members of the committee.

“We need to sit down with everybody, unbundle everything and expose ourselves to the IPPs, the transmitters, and say, ‘if we don’t reform and agree on certain parameters, we will all collapse.’”

Last November, the IPPs threatened to shut down their power plants due to unpaid government liabilities. However, more than half of the debts have now been cleared, according to Elikplim Komla Apetorgbor, head of the chamber of IPPs.

The debt outstanding has fallen to about US$750 million, he said.

The government says it has been paying for unused power in the last three years due to excess electricity contracted on a take-or-pay basis with the IPPs.

Take-or-pay power generation contracts are common in the energy industry and oblige the off-taker (government, in this case) to pay for power supplied by the producer irrespective of available demand.

Most of the contracts were signed during the previous administration amid a protracted power crisis that the then government was keen to resolve.

According to the Ministry of Finance, the tariffs agreed in those agreements were not competitive and have contributed significantly to the build-up of debt and oversupply of power in the energy sector.

The payments over the last three years, which were financed with proceeds from loans, have compounded the country’s debt problems, coming on the back of an expensive financial system rescue that has so far cost the state more than GH¢21 billion.

The government has been holding talks with the IPPs to renegotiate the expensive power purchase contracts, hoping that a successful outcome would ease the debt burden in the sector.