Ghana - Issues and options in the energy sector

Ghana: lssues an-id Opt,!-n,sC- in the Energv Sector Nonvember 1')38, Report of the joint UNDP/!World Bartk Energy Sector Assest neL-id Pi-ogranm Ti Itt n ment has .q rest ! if,! 'iht) 4lo . ! ) (-it t- rx,-! f ,iYs i-- %iA-h.ut authwization fromi the GtAl'v111 i ")'(t. t I' DP or thc Vli IriO Bolf,  JOINT UNDP/ORLD BANK ENERGY SECTOR ASSESSMENT PROGRAM REPORTS ALREADY ISSUED Courntry Date Number Indonesia November 1981 3543-TN) Mauritius December 1981 3510-MAS Kenya MaY 1982 3800-KE Sri Lanka May 1982 3792-CE Zimbabwe June 1982 3765-ZIM Haiti June 1982 3672-HA Panua New Guinea June 1982 3882-PNG Rurundi June 1982 3778-RBT Rwanda June 1982 3779-RW Malawi August 1982 3903-MAL Bangladesh October 1982 3873-RD Zambia January 1983 4110-ZA Turkey March 1983 3877-TU Bolivia April 1983 4213-BO Fiii June 1983 4462-EIJ Solomon Islands June 1983 4404-SOL Senegal Julv 1983 4182-SE Sudan July 1983 4511-Sl1 Uganda July 1983 4453-UG Nigeria August 1983 4440-UNI Nepal August 1983 4474-NEP Gambia November 1983 4743-GM Peru Janutarv 1984 4677-PF Costa Rica January 1984 4655-CR Lesotho Januarv 1984 4676-LSO Seychelles January 1984 4693-SEY Morocco March 1984 4157-MOR Portugal April 1984 4824-PO Niger May 1984 4642-NIR Ethionia July 1984 4741-ET Cane Verde August 1984 5073-CV Guinea Bissau August 1984 5083-GUB Botswana Sentember 1984 4998-BT St. Vin^ent and the Grenadines September 1984 5103-STV St. Lucia September 1984 5111-SLU Paraguay October 1984 5145-PA Tanzania November 1984 4969-TA Yemen Arab Republic necember 1984 4892-YAR Liberia December 1984 5279-LBR Islamic Republic of Mauritania April 1985 5224-MAlI Jamaica April 1985 5466-JM Ivory Coast April 1985 5250-TVC Benin June 1985 5222-BEN Togo June 1985 5221-TO Vanuatu June 1985 5577-VA Tonga June 1985 5498-TON Western Samoa June 1985 5497-WSO Burma June 1985 5416-BA Thailand September 1985 5793-TH Sao Tome & Principe October 1985 5803-STP E.cuador December 1985 5865-EC Somalia December 1985 5796-SO Burkina Januarv 1986 5730-BUR Zaire Mav 1986 5837-ZR Syria May 1986 5822-SYR  FOR OFFICIAL USE ONLY REPORT NO. 6234-GH CHAR ISSUES AND OPTIONS IN THE ENERGY SECTOR NOVEMBER 1986 This is one of a series of reports of the Joint UNDP/World Bank Energy Sector Assessment Program. Finance for the work has been provided, in part, by the UNDP Energy Account, the Canadian International Development Agency and the European Economic Community, and the work has been carried out by the World Bank. The report has a restricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Bank.  ABSTRACT Despite a favorable resource endowment, inadequate energy supplies in recent years have posed a major problem for Ghana s weakened economy. The energy sector is beset by severe constraints, such as (a) the scarcity of foreign exchange needed for maintenance and rehabilitation; (b) the high cost of petroleum imports; (c) accelerated deforestation, especially in the north- east; and (d) institutional weaknesses at the sectoral level and in the operating entities. Despite the recent drop in prices, petroleum imports are likely to preempt close to 201 of foreign exchange earnings by the early 1990. Consumptiou of fuelwood, if left unchecked, would threaten the sustained-yield balance of the still ample forest resources. In order to make the energy sector more viable, the required response consists, in the short term, of (a) rehabilitating the infrastructure and productive installations in the electricitv and petroleum subsectors; (b) improving energy demand management through economic-cost pricing end non-pricing measures to increase energy efficiency; (c) strengthening the operating entities; and (d) strengthening energy planning and policy coordination. Over the meaium term, an investment program based on least-cost options for meeting future energy requirement needs to be implemented which offers scope for increased private sector involvement. Development expenditure requirements in the energy sector during 1986-95 consistent with this Report's Action- oriented Scenario are projected to total nearly US$620 million (1986 prices and exchange rates) of which about US$280 million would remain to be financed. The growing complexity of managing the energy sector makes well-coordinated technical assistance necessary. The program outlined by the Report emphasizes institutional strengthening, policy analysis and project preparation.  ABB8E IATIONS bbl barrel bpd barrel per day cm3 cubic centimeter ft3 cubic foot ha hectare I.G. imperial gallon kgoe kilogram of oil equivalent LPG Liquefied Petroleum Gas mm millimeter m2 square meter# m3 cubic meter Mcf thousand cubic feet (Natural Gas) M.T. metric ton RON Research Octane Number sec. second toe ton of oil equivalent tpy metric ton per year ACRONYMS BEICIP Bureau d'Etudes Industrielles et de Cooperation de l'Institut Franicais du Pttrole CDC Commonwealth Development Corporation CEB Communaute Electrique du Benin (Benin-Togo Binational Electricty Authority) CIDA Canadian International Development Agency CTFT Pentre Technique Forestier Tropical ECG Electricity Corporation of Ghana ECOWAS Economic Community of West Africa EECI Energie Electrique de la C8te d'Ivoire EIB European Investment Bank ESB Electricity Supply Board of Ireland ESMAP Energy Sector Management Assistance Program GRAIP GCana Italian Petroleum Company GIHOC Ghana Industrial Holding Company GOIL Ghana Oil Company Ltd. GNPC Ghana National Petroleum Corporation GRC Ghana Railways Corporation KfW Kreditanstalt fur Wiederaufbau (Federal Republic of Germany) MPP Ministry of Fuel and Power NEB National Energy Board NORRIP Northern Region Rural Intregrated Program ODA Overseas Development Administration (United Kingdom) PCIAC Petro Canada International Assistance Corporation PNDC Provisional National Defense Council UNCTC United Nations Center on Transnational Corporations UNDTCD United Nations Department of Technical Cooperation for Development UNIDO United Nations Industrial Development Organization VALCO Volta Aluminum Company VRA Volta River Authority  OFFICIAL PIWCAL YEAR January 1 - December 31 CURHICY BQUIVALUM Currency Unit: Cedi (t) US0l.00 -59.88 (October 1985) 60.00 (January 1986) EMERGY COUNVERSIO FACTORS Physical Calorific Oil Unit Value Equivalent (kcal million/ (toe/physical physical unit) unit) Fuelwood m3 2.90 0.25 Puelwood M.T. 3.50 0.34 Charcoal M.T. 6.90 0.68 Agricultural Residues M.T. 2.00 0.20 Crude Oi M.T. 10.20 1.00 LPG M.T. 10.85 1.06 Gasoline M.T. 10.46 1.03 Kerosene M.T. 10.33 1.01 Jet Fuel M.T. 10.40 1.02 Gas Oil M.T. 10.24 1.00 Fuel Oil M.T. 9.40 0.92 Electricity (GWh) 1001 Generation Efficiency 860 84.3 34% Generation Efficiency 2,530 248 This report is based on the findings of an energy assessment mission which visited Ghana in November 1985. Its members were: Messrs. Joerg-Uwe Richter (Mission Leader), Jahangir Boroumand (Research Analyst), Mikail Grut (Forest Economist), Robert van der Plas (Woodstove and Renewable Energy Specialist), Sunil Mathrani (Electricity Economist), Carlos Mena (Electricity Engineer), John Shillingford (Petroleum Specialist, Consultant), Acefa Telahun (Institutional Specialist, Consultant), and Michael Boddington (Energy Efficiency Specialist, Consultant).  TABLE OF CONTENTS Page SUMMARY OF ISSUES AND RECOMMENDATIONS ..... .... i-xv I. ENERGY AND THE ECONOMY..................................... 1 Energy Constraints on Economic Development.............. 3 Sector Objectives and Government Institutions........... 4 Government Objectives and Strategies ................. 4 Institutional Structure .................. ............ 5 Energy Strategy Requirements.......................... 6 Energy Resources, Production and Consumption ........... 7 Energy Resources....7............ ' .......... 7 Primary Energy Supplies and Conversion.0.............. 8 Energy Consumption... .. ..0.....0...00.s00o0** 10 Commercial Energy Consumption and GDP................. 13 Energy Outlook, 1986-95.0.. ..000*00..*0...00 14 Energy Scenarios ......... 14 Energy Imports and Exports............................ 16 II* ENERGY DEMAND MANAGEMENT.. .........o.. ................. . 19 General.e....... ..*#o ... ................. 19 Energy ................ ................................. 19 Petroleum Products........ ................ 21 Electricity ..0.0..0......................................... 24 Woodfuels. ...... oo..*. ........... .................... 27 Comparative Energy Prices and Costs...........,....... 28 Non-price Measures to Improve the Efficiency of Energy End-Use ................. 31 G,eneral .*.**.............................................. 31 Household Sector .................................... 31 Transport Sector ............... 34 Industrial Sector ........... ....0 37 Requirements and Recommendations .***...*o*.....o 41 III. FORESTRY AND WOODFUELS ......................... ....... 44 Development Contraints .................. 44 Development Options and Requirements ................... 45 Government Objectives ................ .............. 45 Woodfuels Strategy ............... ...... 46 Institutional Strengthening** ...... **... 47 Direct Measures to Enhance Woodfuels Supplies**......* 52 Tree Plantations ...** ....000000 o0000000400000000 oooo. . 52 Improving the Use of Wood Residues ...... ..... 55  IV. HYDROCARBONS .e.e................................................. 58 Ceea ................................... ....................... 58 Exploration and Field Development....................... 58 Potential and Exploration History..................... 58 Government Strategy ........... .... . 59 Policy and Institutional Pequirements................. 61 Petroleum Procuremente................................... 63 Petroleum Refining.............................................. 64 Technical and Economic Issues......................... 64 ........... .................. ........... ..... ... ..... 65 Government ................... ........................ 67 Options and Requirements to Improve Refininging....... Petroleum Products Marketing............................ 72 Present Position...................................... 72 Development Options and Requirements.................. 73 V. L7 IY...............................TI8 78 System ......................... ....................... 78 Operations ........................................... 78 Loss Reduction ....................................... 80 Institutional ........... ............................... 80 Present Framework. ......................... . .......... 80 Government Policies................................... 82 Recommendationse......... ....... ....... .......... ...... 83 Medium to Long-term Expansion Options and Requirements osoes...oo........................................ 84 General ..................................................... 84 Increasing Supplies and Supply Management............. 84 West Africa Interconnection........................... 88 ransmission ......... X ~~~~89 Distribution ...... ..... ..... 93 Rural Electrification......e........................... 94 VI. INSTITUTIONAL ISSUES ............... 97 Energy Planning and Policy Coordination................. 97 Background............................................ 97 Coordination Issues..................... .............. 97 Options and Requirements ............................. 98 Proposed Action ........... ........................... 100 Management and Organization of the Operating Entities... 101 Manpower Development and Training....................... 102 General..... ..................................... e.... 102 Manpower Development.............. . ................. 102 Training.............................................. 102  VII. DEVELOPXENT EXPENDITURE AND TECHNICAL ASSISTANCE REQUIREMENTS ......... ... 104 Development Expenditure, 1976-85........................ 104 Future Requirements, 1986-95.............................0 104 Private Sector Involvement............................ 107 Priority Areas.........................o.o............... 107 Financing Requirementso............................... 112 Current Expenditt're Requirem0nts00o0.00...o.o.... 113 Technical Assistance Requirements........................ 114 TABLES 1.1 Energy and the Balance of Payments, 1980-85............... 3 1.2 Forest Resourtes.............o.....o...o........o..oou r s e s 7 1.3 Energy Indicators, 1975; 1985............................. 12 1.4 Commercial Energy Consumption and CDP, 1975; 1984; 1985... 14 1.5 Projected Energy Indicators, 1990; 1995................... 15 1.6 Projected Puelwood Balance, 1986-2000..................... 17 2.1 Price Structure of Petroleum Products, 1985-86o...........0 20 2.2 Economic Cost and Official Prices of Petroleum Products, 1985-86o............................................... 22 2.3 Costs and Prices of Charcoal, Various Locations, November 1985........................................... 28 2.4 Retail Prices of Energy per Useful kWh, Accra, April 1986 29 2.5 Comparative Residential Energy Cost, Accra, April 1986.... 30 2.6 Comparative Industrial Energy Cost, Accra, April 1986..... 39 4.1 Petroleum Data, 1980-85...................000.000000.0 000000 59 4.2 Options to Improve Refining Viability, 19860.............. 68 4.3 Potential Recovery of LPG from Refining ining*..o.....o.... 70 404 Market Shares and Retailing Outlets for Petroleum Products, 198985.000.850....... .00.0. 0000 05 72 5.1 Electricity Data, 1975, 1980-85o.......................... 79 5.2 Minimum Contract Demands and Projected Supplies of Electricity from VRA, 1986-90..,................... 86 5.3 Proposed Reinforcement and Extension of the 161 kV Grid up to 1990 991..... 9...............................0.0.. 92  7.1 Estimated Development Expenditure in the Energy Sector, 1976-85....... ........................... 105 7.2 Projected Development Expenditure in the Energy Sector, 1986-95... 106 7.3 Projected Development Expenditure on Forestry and Household Energy, 1986-95., 108 7.4 Projected Development Expenditure on Hydrocarbons, 1986-95... 109 7.5 Projected Development Expenditure on Electricity. 1986-95........ 000 0000*0000000000000000000000 .......... * 110 7.6 Projected Development Expenditure on Energy Efficiency Enhancement, 1986-95.... 111 7.7 Projected Development Expenditure on New and Renewable Energy, 1986-95... 112 7.8 Projected Incremental Current Expenditure in the Energy Sector, 1988; 1995........................ 114 ANNEXES 1. Estimated Energy Supply-Demand Balance, 197575............ 118 2. Estimated Energy Supply-Demand Bala'ce, 1985... 8S......... 119 3. Projected Energy Supply-Demand Balance, 1990 - Action-Orieuted Scenario ............ 000000000000000*000 120 4. Projected Energy Supply-Demand Balance, 1995 - Action-Oriented Scenario. 00.00000 **O*.................. 121 5. Projected Energy Supply-Demand Balance, 1990 - Trend-Based .................... 00............ ............122 6. Projected Energy Supply-Demand Balance, 1995 - Trend-Based Scenario. ..................... ,............. 123 7. Energy Demand Projections, 1986-95: Assumptions Used..... 124 8. Projected Household Energy Consumptione................... 129 9. Projected Woodfuels Requirements, 1990; 1995 .............. 131 10. Comparative Prices of Petroleum Products, September 1986.. 132 11. Comparative Household Energy Cost, Accra, April 1986 ...... 133 12. Storage Capacity for Petroleum Products, 1985............. 134 MAPS IBRD 19542: Renewable Energy Resources IBRD 19676: Commercial Energy Activities  SUMNARY OF ISSUES AND RECONMENDATIONS Basic Constraints and Development Requirements 1. Despite a substantial and diversified energy potential consisting of biomass, hydropower and, possibly, hydrocarbons, the development of Ghana's energy sector has been hold back by a weak institutional and policy framework, operational inefficiencies and the scarcity of financial resources. Energy end-use in the economy is estimated at 3.1 million TOO in 1985, met through biomass (i.e. woodfuels and agricultural residues), 72%; imported petroleum, about 24%; and electricity, 4%. Two large-scale hydropower plants at the Volta River supply most of the country's electricity needs and generate substantial exportable surpluses. However, their potential is strongly affected by hydrological conditions which requires skillful reservoir management and, in the medium to longer term, thermal complementation to avoid shortfalls in electricity generation. Forest resources still are ample but are subject to the pressures of population concentration and over- exploitation and, therefore, might be seriously depleted by the early 19909 if deforestation is not slowed down. Imports of crude oil meet all of the domestic petroleum requirements and in 1985 absorbed 26% of foreign exchange earnings. Even if international petroleum prices remained at two-thirds of their 1985 levels and Ghana succeeded in increasing exports, petroleum imports still would account for nearly 20% of foreign exchange earnings by the early 1990s unless indigenous production of hydrocarbons were to become viable. 2. In confronting the challenges, the covernment's basic objective for the sector is to secure energy supplies needed for the revitalization of the economy through diversifying supplies and reducing petroleum imports. To make the energy sector more resilient, a comprehensive and well-coordinated strategy is needed whose principal elements should be (a) energy demand management; (b) least-cost solutions to increasing energy production which emphasize rehabilitation and efficiency enhancement over new investment, and projects suitable for foreign financing; (c) institution building through restructuring, planning and systematic manpower development at both the administrative and operational levels; and (d) mobilizing the potential for increased participation by private and other nor-governmental entities in energy development. Energy Demand Management 3. Since raising the productive potential of the energy sector is feasible only over the longer term, measures aimed at increasing the efficiency of energy use are of particular importance at least over the short- to medium-term. Appropriate energy pricing reflecting the  - i;1. - economic cost of supply is the most important instrument for effective demand management. The Government in recent years has made considerable progress in moving towards realistic energy pricing and eliminating consumer subsidies. However, direct, non-pricing measures focusing on specific energy conservation and substitution options in major economic sectors still have to be put into place. Energy Pricing 4. Petroleum Products. The relative prices of petroleum products are distorted by marked differences in ex-refinery prices and fuel taxes. They should more closely reflect the price relationships prevailing in international markets. This calls for setting ex-refinery prices in line with world market levels and applying broadly similar taxation to fuels used for the same purposes. Taxes on transport fuels would need to be considerably increased to generate revenues of a magnitude in line with requirements to meet annual road mainwnance costs. While the Government plans to stimulate the use of kerosene and LPG as substitutes for charcoal, their prices need to bear a reasonable relationship to the economic cost of charcoal, taking into account the greater convenience associated with their use and the higher ability to pay of LPC and kerosene consumers. Since their economic costs are already lower than those of woodfuels, kerosene and LPG do not need to be subsidized to be competitive. The subsidy on LPG and kerosene therefore should be removed as expeditiously as possible. 5. Electricity. While th- present block tariffs allow VRA to obtain significant financial surplises, ECG's retail tariffs probably are just about one-half the economic cost of thermal generation in its isolated load centers (where the same tariffs are applied as in the hydropower-supplied grid). Electricity pricing consistent with economic principles is best achieved through tariffs based on long- un marginal cost, adjusted regularly for changes in variable costs to ensure full cost recovery. However, as existing generating capacity in Ghana is substantial relative to domestic requirements, short term marginal costs are considerably lower than those in the medium to longer term when rela- tively larger additions of thermal generation capacities will be needed. Given that generating costs in the interconnected system largely depend on storage levels in the Akosombo reservoir, it would be reasotab1e to consider for purposes of tariff setting the vsriations in generating costs under various hydrological scenarios. A two-part tariff could be devised consisting of (a) a basic component related to the volume of water initially stored (which, duly updated, would indicate how generating costs are evolving over time), and (b) a scarcity premium in dry years to encourage consumers to save electricity, or a discount in wet years permitting higher consumption. Retail tariffs should reflect the variations in transmission and distribution cost according to load centers and consumer groups. In line with higher costs, tariffs in the isolated load centers should be increased and any remaining losses covered through a surcharge on electricity consumption in the larger load centers. Pending the results of the tariff study under the ongoing IDA  - iii - Power Rehabilitation Project, graduated tariff increases should be continued to generate the financial resources needed for VRA and ECG to cover future cost increases. f,. Woodfuels The market-determined prices of fuelwood and charcoal have increassed in line with prices of petroleum products but stumpage fees on fuelwood averaging 024/M.T. are far below the long-run marginal cost of reforestation, estimated at O570/M.T. These fees should be increased at least for fuelwood produced from the Forest Reserves and their collection made more efficient. Increasing the stumpege fee to the level equivalent to long-run marginal cost would raise the annual revenue accruing to the Forestry Department by about