Ghana - Energy rationalization in the industrial sector

joint UNDP/World Bank Energy Sector Management Assistance Program Activity Completion Report No. 084/88 Country: GHANA Activity: ENERGY RATIONALIZATION IN THE INDUSTRIAL SECTOR JUNE 1988 Report of the Johnt UNDP/WXId Bank Eney Sector Management Assistance Progm This document has a restricted distribution. Its contents may not be disdosed without authorization from the Government, the UNDP or the World Bank.  ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAM Purpose The Joint UNDP/World Bank Energy Sector Management Assistante Program (ESMAP) wds started in 1983 as a companion to the Energy- Assessment Program, established La 1980. The Assessment Program was designed to identify and analyze the most serious energy problems in developing countries. ESMAP was designed as a pre-investment facility, partly to assist in implementing the actions recommended in the Assessments. Today ESMAP carries out pre-investment activities in 45 countries and provides institutional and policy advice to developing country decision-makers. The Program aims to supplement, advance, and strengthen the impact of bilateral and multilateral resources already available for technical assistance in the energy sector. The reports produced under the ESMAP Program provide governments, donors, and potential investors with information needed to speed up project prepar- ation and implementation. ESMAP activities fall into two major groupings: - Energy Efficiency and Strategy, addressing the institutional, financial, and policy issues of the energy sector, including design of sector strategies, improving energy end-use, defining investment programs, and strengthening sector enterprises; and - Household, Rural, and Renewable Energy, addressing the tech- nical, economic, financial, institutional and policy issues affecting energy supply and demand, including energy from traditional and modern sources for use by rural and urban households and rural industries. Funding The Program is a major international effort supported by the UNDP, the World Bank, and bilateral agencies in a number of countries including the Netherlands, Canada, Switzerland, Norway, Sweden, Italy, Australia, Denmark, France, Finland, the United Kingdom, Ireland, Japan, New Zealand, Iceland, and the USA. Inquiries For further information on the Program or to obtain copies of the completed ESMAP reports listed at the end of this document, contact: Division for Global and OR Energy Strategy, Management Interregional Projects and Assessment Division United Nations Development Industry and Energy Department Programme World Bank One United Nations Plaza 1818 H Street, N.W. New York, N.Y. 10017 Washington, D.C. 20433  ENERGY RATIOIALIZATIOI IF THE INDUSRAL SETR OF CHANA  The energy assessment report on Ghana 1/ identified energy rationalization in the industrial sector as an important option to improve energy demand management and the viability of the energy sector overall. The Government of Ghana in 1986 requested technical assistance from the joint UNDP/World Bank Energy Sector Management Assistance Program (ESMAP) to prepare a program leading to higher energy efficiency in industry. This report represents the findings of an industrial energy rationalization mission which visited Ghana in January 1987. 2/ The mission concluded that a government-supported energy rationalization program in industry is both feasible and necessary. This report outlines a program consisting of policy and institutional measures at the sectoral level and of energy audits and follow-up measures at individual plants, and recommends support for this program through ESMAP. The mission wishes to express its appreciation for the extensive assistance and cooperation received from the National Energy Board and the Government at large. 1/ Ghana: Issues and Options in the Energy Sector. Joint UNDP/Iorld Bank Energy Sector Assessment Program, Report No.6234-GH, November 1986. 2/ The mission comprised Messrs. Joerg-Uwe Richter (Mission Leader; World Bank), Jakob John Mulckhuyse (Industrial Energy Specialist; World Bank) and Uberto Tedeschi (Public Utilities Specialist; under the Italian Consultant's Trust Fund).  ABBREVIATIONS kg kilogram M.T. metric ton tpd ton per day tpy ton per year TOE ton of oil equivalent kV kilowatt MW megawatt kWh kilowatthour MWh megawatthour GCW gigawatthour gal. gallon (U.S.) I.G. imperial gallon LPC liquefied petroleum gas CIDA Canadian International Development Agency COFACE Compagnie pour le financement et assurance du commerce exterieur (France) ECG Electricity Corporation of Ghana ESMAP Energy Sector Management Assistance Program GIHOC Ghana Industrial Holding Corporation GSGM Ghana State Gold Mining Company GWSC Ghana Water and Sewage Corporation ISAC Industrial Sector Adjustment Credit MIST Ministry of Industries, Science and Technology NEB National Energy Board SEC State Enterprises Commission UNDP United Nations Development Program UNDTCD United Nations Department of Technical Cooperation for Development VALCO Volta Aluminum Company VRA Volta River Authority  OFFICIAL FISCAL YEA January 1 - December 31 CURRECY QUIVALET (May 28, 1988) Currency Unit: Cedi (t) US$1.00 = d184.00 (Auction Rate) MERCY CONVERSION FACTORS Physical Calorific Oil Unit Value Equivalent (kcal million/ (toe physical Physical unit) unit) Fuelwood m3 2.90 0.25 Fuelwood M.T. 3.50 0.34 Charcoal M.T. 6.90 0.68 Agricultural Residues M.T. 2.00 0.20 Crude Oil 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) 100% Generation Efficiency 860 84.3 34% Generation Efficiency 2,530 248  TABLE OP CONTNT Page CONCLUSIONS AND RECOMMENDATIONS .... ......................... i-vii I. SECTOR BACKGROUND ........................................ 1 The Industrial Sector in the Economy.................... 1 Structure and Recent Performance...................... 1 Industrial Rehabilitation: Options and Requirements .... .. 1 Energy Consumption in the Industrial Sector............. 2 Structure and Recent Performance...................... 2 Energy Efficiencye.. 000000000.0......... 0.00..0000..00000 3 The Role of Goveranment .. . *....***....*e... 000. ... 5 II. OPTIONS AND REQUIREMENTS FOR ENERGY RATIONALIZATION IN INDUSTRY 7.................................** 7 The Changing Environment 7**..*....*.. .............* 7 Options and Scope to Improve Energy Efficiency.......... 7 7 Feasible aeasures.................................... 8 Requirements for Energy Rationalization................ 10 Requirements at the Government Level ................ 10 Requirements at the Plant Level...................... 12 Requirements Related to Small-and Medium-Scale Firms. 13 The Need for Sustained Government Commitment......... 14 III. A PROGRAM POR INDUSTRIAL ENERGY RATIONALIZATION 15 Operational Objectives and Priorities ...................... 15 Creation of an Energy Efficiency Unit ....... ...... 15 ESMAP Techuical Assistance ............... .................. 16 Strengthening NEB ........................................ 17 Energy Audits.........................o........o* 17 Technical Assistance Coordination and Activity ..................................o......... 19 Participation of Local Experts........................... 19 Scheduling, Costs and Financing....o..................... 20 Expected Benefits and Risks.............................. 22 ANNEXES 1. Summary of Energy Rationalization Options for Plants Visited ...*********** **.** ................. 24 2. Basic Components of an Industrial Energy Rationalization Program .................................... 25 3. Technical Assistance to the National Energy Board for Preparing a Training/Promotional Program for Industrial Energy Rationalization -- Draft Terms of Reference*.......... 27  4. Technical Assistance to the National Energy Board for a Program of Industrial Energy Audits -- Draft Terms of Reference ....... ...e..e. . .. ......... ........ 32 5. Activity Manager to Coordinate the Technical Assistance to the National Energy Board for Preparing an Industrial Energy Rationalization Program -- Draft Terms of Reference . 40 6. Minutes of Plant Visits ................................... 44  CONCLUSIONS AND RECOHMENDATIOIS Objectives of the Activity 1. The proposed ESMAP activity aims at assisting the Government of Ghana in initiating a self-sustaining program of energy rationalization in the industrial sector. The activity addresses three basic requirements: (a) to create a proper institutional and incentive framework, by strengthening the National Energy Board to assume principal responsibility for coordinating energy efficiency efforts and to develop policy measures; (b) to identify the efficiency potential in major industrial firms through energy audits, and to prepare follow-up projects; and (c) to transfer know-how in energy auditing and project evaluation to local specialists. Projects emanating from the audits would play a catalytic role in promoting energy rationalization both through their demonstration value and the development of local expertise for energy audits. Energy rationalization would help to improve industrial efficiency overall and thereby would form an important part of the Government's industrial rehabilitation strategy. Background 2. Energy consumption in the industrial sector in 1985 was estimated at 205,000 TOE, accounting for 511 of electricity sales, 141 of final petroleum consumption, and 31 of fuelwood consumption. Electricity's share in industrial energy consumption is relatively high at about 251. Industrial energy consumption was depressed for extended periods but has recovered in line with industrial activity and has increased since 1985 at about 151 on annual average. 3. Energy efficiency in industry is low, except for the few firms with multilateral ties and resources to pursue energy rationalization. There are several reasons for this. First, as the very survival of many firms is at stake, managers tend to give relatively low priority to energy efficiency. Second, low capacity utilization and frequent interruptions in electricity supplies with attendant high shut-down and start-up costs have depressed energy efficiency. Third, low energy prices, distortions in the relative prices of energy over extended periods, and cost-plus pricing built into the system of price controls have blunted the incentive to reduce costs. Finally, at the plant level, energy efficiency is affected by (a) dilapidated equipment and insufficient maintenance; (b) inadequacies in production processes and process control; (c) faulty operational practices due to the lack of trained staff; (d) use of low-efficiency plant and equipment; and (e) use of higher-cost energy. Most firms are aware of the need to improve energy efficiency but few are able to carry out the necessary measures. This is because managers are unfamiliar with energy rationalization options and the attendant benefits, as the many separate tasks are complex and have low visibility. Professional and technical skills in plants are weak and there are no energy auditing capabilities outside  - ii - plants. While foreign exchange for financing imports of industrial inputs has become more easily available, the weak cash flow position of many firms and the still unsettled economic environment slow down the full utilization of available funds. Finally, the banking system is not yet familiar with financing energy efficiency improvements. 4. The Role of Government. The Government has taken a number of institutional steps, such as giving NEB the responsibility for energy conservation, establishing an Energy Conservation Advisory Committee, organizing an Energy Management Office jointly operated by VRA/ECG and supported by CIDA, and initiating pilot projects and training supported by UNDTCD. The Government also has initiated projects to rehabilitate petroleum refining and marketing installations and ECG's distribution network. These measures have merit in themselves but altogether fall short of a comprehensive program. Most important, they lack consistent pricing of energy according to economic costs. While the Government is committed to economic-cost based pricing of energy, the real prices of fuels and electricity between mid-1986 and early 1987 were allowed to decline in the face of domestic inflation exceeding 20% p.a. and substantial Cedi devaluation, although prices of petroleum products were substantially raised following the exchange rate unification in February 1987 and since then have covered their economic costs by a significant margin. In contrast, the electricity tariff for industrial users still is less than US2/kWh equivalent, as the Government has decided to await the recommendations of the ongoing tdriff study before taking action. The institutional measures taken so far have not been sufficient to enable WEB to organize a national energy efficiency program. Coordirition between NEB and other relevant government entities needs to be substantially improved. No governmental institution at present is in a position to give practical advice to firms on how to evaluate their energy rationalization options, while the work of the VRA/ECG Energy Management Office was restricted to initial walk-through electricity audits and meanwhile has been discontinued. Options and Requirements for Energy Rationalization 5. Energy efficiency in industry can be enhanced by means of (a) improved operational practices, mainly better maintenance and process control; (b) minor investments requiring little expertise; and (c) major investments in retrofitting existing plants, and for switching to lower- cost energy substitutes. The mission estimates that in the Ghanian industrial sector, housekeeping measures alone could generate energy savings of 15-25Z within about three years. Industry-wide, these savings could total US$3-5 million per year (1986 international prices) at an initial cost of less than US$1 million. Investments requiring larger outlays could mobilize additional savings of at least comparable size. Energy rationalization projects are low risk and are attractive under prevailing international energy prices and conservative price projec- tions. For example, economic returns on housekeeping measures are esti- mated to range from 63% (for the Aluworks) to 195% (for the glass bottling plant). Financial returns to these and other firms are equally  - iii - attractive. Projects in individual firms can promote energy efficiency throughout industry, both in their demonstration value and by developing local expertise. By improving maintenance, quality control, cost accounting etc., they also raise overall operational efficiency, yielding second-round benefits. 6. Requirements at the Government Level. In order to stimulate industrial energy efficiency, the Government needs to develop comprehen- sive and well-coordinated policies, and strengthen NEB and the other institutions concerned. The most important requirements are as follows: (a) energy demand management, through appropriate pricing and non- pricing policies; (b) strengthening government institutions to organize sector-wide programs, guide industrial management in energy rationalization, and monitor and disseminate the results of plant-level efforts; (c) fiscal incentives, e.g. accelerated depreciation for energy- saving equipment; grants for demonstration projects and for some energy audits; and free technical support and information; and (d) appropriate financing mechanisms. 7. NEB should become the focal point in this endeavor and should coordinate the relevant efforts within the Goverraient. NEB should (a) advise the Government on strategies and policies; (b) promote measures at the plant level and monitor their results; (c) organize direct support and advisory services, such as systematic training, energy surveys, and project appraisal; and (d) develop a data base on industrial energy use. NEB should be able to screen firms for carrying out energy efficiency measures, and monitor these measures until specialized institutions have acquired the necessary capabilities. NEB will need to liaise more closely with MIST, the industrial associations, and individual firms. NEB's energy conservation technical committee should expand its membership to include other important entities in organizing industrial energy rationalization, such as MIST, GIHOC, the State Enterprises Commission (SEC), and the Bank of Ghana. In monitoring the performance of particular industrial firms, care needs to be taken that NEB and SEC coordinate their respective actions. 8. Requirements at the Plant Level. Energy audits constitute the core of any well-prepared energy efficiency program in industry. They provide estimates of feasible energy savings and of implementation requirements as a basis for prioritizing investment projects. Initially, they should be carried out in all major firms in Ghana whose energy bill accounts for a large share of operating costs and which are viable, and should be extended to medium- and smaller-sized firms, as appropriate. Crucial to the effectiveness of the audit program is the  - iv - development of local technical expertise. High priority should be given to strengthening the capabilities of the plant-level staff through training in energy-saving techniques and improved operational practices. 9. Small- and Medium-scale Firms. As a group, these firms are likely to account for a significant share of industrial energy consump- tion. Their savings potential could be important but is difficult to mobilize. While a government program should reach as many smaller firms as feasible, proper energy pricing therefore is crucial for stimulating efficiency awareness among smaller firms. NEB jointly with MIST shc'ild make arrangements for assisting smaller-sized firms in energy rationalization, based on evaluations by local industrial specialists of groups of firms with similar characteristics. Training initially should focus on preparing government officers to advise small- and medium-scale firms in energy efficiency matters. 10. To ensure that the industrial sector responds vigorously to Government policies, strong commitment needs to be developed among managers to pay proper attention to energy efficiency. In the case of state-owned enterprises, energy rationalization measures shoultd become monitorable actions as part of performance agreements. More widely, any rehabilitation proposals of industrial firms should include measures to improve energy management. Nevertheless, it is possible that the aforementioned measures may not generate a satisfactory response from industry. In that case, further policy and institutional options to promote energy rationalization need to be evaluated. A Proposed Program for Industrial Energy Rationalization 11. Operational Objectives and Priorities. The major operational objectives of an industrial energy rationalizatiun program in Ghana should be (a) sensitizing energy consumers; (b) training and technology transfer; and (c) strengthening project analysis, firancing and implementation capabilities. Progress has already been made in collect- ing data on industrial energy use, analyzing constraints to higher energy efficiency, and identifying target groups. However, many other important tasks remain to be done. These include: strengthening the institutional framework for implementing energy rationalization policies; conducting in-depth energy audits; launching awareness and information campaigns; training energy auditors and plant-level energy managers; establishing financing mechanisms; appraising, evaluating and implementing projects identified through energy audits; and reviewing policies, laws and regulations as appropriate. In the short term, energy rationalization efforts should focus on housekeeping measures in larger firms. Once more information and know-how is available, the remaining profitable options in larger and smaller-sized firms should be considered for implementation. 12. creation of an Energy Task Force at WEB. A small Task Force should be created to provide the underpinning for an industrial energy rationalization program and form the link between this national program  - v - and the related measures of individual firms. The Task Force would be responsible for preparing strategies and policies, developing training and promotion programs, organizing energy audits, and strengthening the data base. The Task Force would need to be provided with economic/ financial expertise, and should comprise a coordinator reporting to NEB's Directorate and liaising with industry and the Government at large, and one staff each responsible for energy auditing, training, and promotion. The Task Force should remain in existence at least until the National Energy Rationalization Program becomes self-sustaining. 13. ESMAP Technical Assistance. The Government has requested technical assistance from ESMAP to support its industrial energy rationalization program. The mission recommends the following activities: (a) assistance to NEB in preparing programs for training and promotion related to industrial energy efficiency; and (b) in-depth energy audits of ten larger-sized industrial firms. 14. NEB would be supported through the services of a training/ promotional expert for six months, for (a) familiarizing plant engineers, industrial consultants, project officers of financial institutions and government officials with the basic concepts of industrial energy rationalization and the technical aspects of energy audits; and (b) information and dissemination throughout industry. The in-depth energy audits would be carried out by a team of internationally renowned specialists and would focus on those firms that are economically viable, energy-intensive, and whose experience is replicable. The mission has identified about a dozen manufacturing firms that have requested energy audits and might be suitable for the program. In addition, the Ghana State Gold Mining Company and the Ghana Water and Sewage Corporation should be audited. Both public and privately-owned firms would be considered. The results of existing initial evaluations would be utilized for the energy audits, as would the experience of firms already having taken energy rationalization measures. No in-depth audits should be carried out on those firms where reequipping is either ongoing or firmly planned although the energy-related aspects of these measures should be assessed. Likewise, there should be no audits on firms that are inherently unviable even though energy savings itself were to be economic. 15. Activity Coordination and Management. NEB would be in charge of preparing and implementing the ESMAP-supported program. Its Task Force coordinator would be responsible for (a) organizing, monitoring and evaluating the energy audits and feasibility studies; (b) organizing training and promotion programs; (c) supervising the consultants; and (d) liaising with the Government at large. If required, the coordinator would be assisted by a non-resident activity manager. For the activity to achieve its objectives, assurances are needed from the Government that (a) the Task Force be given sufficient resources to function effectively;  - vi - (b) the activity manager be provided with direct access to NEB*s Executive Director; and (c) a mechanism be established for regular consultations between the Government and ESMAP on activity implementation. 16. Development of Local Energy Auditing Skills. The Government gives high priority to the development of energy auditing capabilities and the participation of local professionals in the proposed aidits. Professional staff of industrial firms, the VRA/ECG Energy Management Office, and local consulting firms should be trained in energy auditing techniques, participate in audits from the outset, and gradually be given more complex tasks. Eventually, local specialists should acquire full operational responsibility for energy audits, with expatriates called upon for specialized services only. 17. Scheduling of Tasks. The activity would comprise two phases. During the first phase, extending over nine months, the training/ dissemination expert would design a medium-term program, select participants for training, and conduct initial training courses; local counterparts for the energy auditing team would be selected; and about six walk-through audits, three in-depth audits, and one feasibility study would be carried out. The second phase would be based on a thorough evaluation of the results of the first phase and would consist of six to eight additional in-depth audits and three to four feasibility studies, for a duration of fifteen months and for the whole activity, of two years. NEB has started to advance the preparation of the program by (a) carrying out promotion and contacting additional enterprises suitable for in-depth audits; (b) collecting information on the energy efficiency of firms to be audited; and (c) screening local professionals suitable for training in energy auditing. 18. Program Costs and Financing. The cost of the proposed ESMAP activity is estimated at US$800,000. The cost of local professionals is estimated at US$15,000 equivalent for 50 staff-months. Required equipment would be provided by the energy auditors. The share of ESMAP supervision in the overall cost, 10X, is considered the minimum amount needed for effective project administration. Grant financing in the order of US$270,000 has in principle been committed by CIDA of Canada. Other donors have been approached to finance the remainder. Firms audited are assumed to bear at least part of the costs, except possibly for the first few audits to be done on a pilot basis. Payments received from firms should be used to fund the continuation of the energy rationalization program. Any rationalization measures identified through energy audits are expected to be financed by local banks, external donors and/or the industrial firms themselves. Expected Benefits and Risks 19. The proposed activity would be the first stage of a longer-run program to increase energy efficiency in industry, with benefits for overall efficiency in industry and for energy efficiency throughout the  - vii - economy. NEB would be strengthened to carry out its related functions. The energy audits would identify priorities for energy rationalization measures and serve as the basis for preparing projects suitable for external financing. The local expertise developed would allow the Government to extend the auditing program to include additional firms, as part of a self-sustaining program. 20. The main risks are that (a) the Government may not make a satisfactory commitment to the activity nor upgrade the calibre of its staff responsible for energy efficiency matters; (b) the industrial firms would not adequately respond to the program; (c) the performance of the contracted specialists would ntot meet required standards; and (d) future international energy prices might decline. The first two risks are considered to be slight in view of the Government's stated interest in energy rationalization, steps already taken, and industry's initial response to a possible government program. The third risk would be addressed through careful selection and close supervision of the specialists by their own firms, NEB and ESMAP. The downside risk for international energy prices is small given their current relatively low levels where most projects identified by the mission would be viable. To keep the objectives of the proposed activity at the forefront, ESMAP would closely monitor the implementation of the activity.  I. SECTOR BACKGRUND The Industrial Sector in the Economy Structure and Recent Performance 1.1 Ghana's industrial sector including mining, electricity and water supply, and construction contributed about 131 to GDP in 1985-86 (1975 constant prices), which is comparable to its share in overall employment. Food processing is the most important subsector followed by textiles, wood processing and petroleum refining. Few linkages have been developed within industry or with other sectors, except for wood processing and some agro-industries which use local raw materials. Manufacturing exports, essentially wood products, contribute about 12 to L"orchandise exports. The largest industrial firm and most important energy consumer, i.e. the foreign-owned Volta Aluminum Co. (VALCO) meets its raw material requirements entirely through imports and sells only about 10 of its output on the domestic market. 1.2 The Government's industrial development strategy originally was based on pursuing large state-managed projects in basic industries embodying capital- and energy-intensive technology, reinforced through strict import licensing and price controls. This strategy proved to be self-limiting when scarcities of imported inputs emerged resulting in production declines of nearly 132, on annual average, during 1978-83. This was aggravzated by a severe curtailment of electricity and petroleum products in the early 1980s when a prolonged drought affected power generation and petroleum imports were cut in the wake of the foreign exchange crisis. However, the situation improved in 1984-85 as electricity supplies were restored, supplies of petroleum products normalized and import licenses became more easily available. Industrial production thus revived in 1984 and continued to grow in 1985-86 (by 12.82 and 152, respectively), in line with the economic recovery. Industrial Rehabilitation: Options and Requirements 1.3 The existing industrial capacity offers the opportunity for significant short-term increases in output if the required inputs are made available and plants are rehabilitated. Focusing on activities identified as having high-value-added relative to import content would maximize industry's contribution to short-run economic recovery and to long-run competitiveness. The Government is aware of the need for fundamental policy reforms to achieve industrial restructuring and enhance industry's contribution to economic growth. The focus of its industrial development objectives and strategy is (a) in the short term, on greater and more efficient use of streamlined capacity; (b) in the medium term, on selective rehabilitation to break production bottlenecks and reduce costs in viable industries; and (c) in the longer term, on moving towards a sectoral structure more closely linked to Ghana's  - 2 - comparative advantage, through relocating resources towards activities with potential for efficient use of local raw materials. 1.4 Aside from easing infrastructural constraints, including energy, rehabilitation is urgently needed to avoid production bottlenecks (beverages and tobacco), restore capacity in the most viable industries (wood processing) and improve productivity in some strategic industries (tires, steel). In industries with substantial excess capacity and wide inter-firm efficiency variations, productivity may be raised through reorganization to phase out excess capacity (textiles). Difficult choices are posed by some of the large statutory corporations in "strategic" industries (e.g. steel) whose economic viability depends, at best, on substantial reinvestment. In any case, thorough appraisal of the viability of rehabilitation is essential to ensure that resources are channeled into the most productive uses. 1.5 Outlook. The World Bank Country Economic Memorandum on Ghana projects industry to remain the fastest growing sector through the mid- 1990s. l/. Manufacturing growth in the near term would benefit from improved availability of imported inputs and excess capacity in some activities, but net investment will eventually be necessary to respond to increased demand. Growth in mining (particularly gold, bauxite and manganese) depends on the success of ongoing rehabilitation and modernization. 1.6 The Government is implementing more liberal exchange and trade polici,Rs aimed at achieving the objectives of industrial rehabilitation and gvowth. These policies are supported through various IDA credits such as the Import Reconstruction and Industrial Sector Adjustment Credits (Credit Nos.1392-GH; 1573-GH; 1628-GH) and the Structural Adjustment Credit (Credit No. 1777-GH). Structural adjustment policies, through their impact on incentives, should exert a spur to industrial efficiency. The proposed energy rationalization program for the industrial sector would be a component of a wider rehabilitation strategy as it seeks to make producers more efficient by cutting their energy costs, thereby enhancing their competitiveness. Energy Consumption in the Industrial Sector Structure and Recent Performance 1.7 The industrial sector next to transport is the principal consumer of commercial energy. The World Bank/UNDP Energy Assessment estimates 1985 industrial energy consumption at 205,000 TOE, equivalent 1/ Industrial growth is projected at 12% p.a. in 1985-90 and 5.4Z p.a. in 1991-95 under the Continued Reform Scenario. See Ghana: Policies and Issues of Structural Adjustment, March 30, 1987.  - 3 - to 6.71 of final energy consumption in the economy. 21 More specifically, industry in that year accounted for 511 of electricity sales, 142 of final petroleum consumption and 32 of fuelwood consumption. Petroleum products mainly gas oil provide the largest source N industrial energy (45Z) followed by fuelwood (29X) and electricity (26X). Electricity's relatively high share results from past policies to stimulate its use in industry through promotional tariffs. Supplies generally are satisfactory for petroleum products (which are handled through COIL and four private distribution companies) and fueiwood (through private traders) but deficiencies in ECG's network affect electricity distribution and result in poor quality of service. 1.8 Industrial energy consumption has been depressed because of weak industrial activity and severe supply bottlenecks. Consumption of petroleum products in 1985 was estimated at 94,000 M.T., down from 159,000 M.T. in 1975 whereas 1985 electricity consumption, 615 GWh, was 162 below its 1975 level of 731 CWh. However, spurred by industrial recovery, industrial energy consumption since 1985 has resumed to grow at an annual average of 15-201. Energy Efficiency 1.9 Data on industrial energy consumption at the sectoral and plant level are scarce and often unreliable because of irregular operating conditions. 3/ Production in the larger-sized firms tends to be relatively energy-intensive, resulting from the past industrialization pattern emphasizing capital-intensive, import-substituting operations. Energy efficiency is low in industry (i.e. manufacturing as well as mining and water supply), adversely affecting industrial efficiency over- all. Combustion efficiencies are below 701 in some firms (e.g. Ghana Textile Printing). Power factors often are as low as 50-551 because of lacking power factor correction equipment and poorly loaded and oversized electric motors. Energy consumption per unit of output exceeds international norms by a factor of two to three in steel and glass production, beer brewing, and gold mining. Recent savings materialized as a reaction to scarcities during 1983-84 or inadvertently resulted from efforts to reduce waste, with no systematic follow-up, so that any improvements were largely lost when energy supplies returned to mcre normal levels. The few exceptions are those firms benefitting from the expertise and resources of their multinational organizations, and which 2/ This excludes VALCO whose operations are considered to be outside the domestic energy economy. 3/ The industrial surveys prepared by the governmental Statistical Service contain information on purchases, in value terms, of petroleum products and electricity by industrial subsectors (four- digit classification). The forthcoming ISAC-financed Industrial Census would generate this information also in volume terms.  -4- have pursued effective energy rationalization programs for a number of years (e.g. VALCO, Lever Brothers, International Tobacco Ltd). 4/ These efforts have hardly been evaluated and disseminated industry-wide. 1.10 Obstacles to Higher Energy Efficiency. In a situation where their firms very survival was at stake, managements have tended to give relatively low priority to energy efficiency. Low capacity utilization (which still prevails throughout the industrial sector) has resulted in relatively high energy use per unit of output, especially in industries applying continuous processes such as metal processing and non-metallic minerals whose energy requirements decline little if production falls. The lack of foreign exchange has made it difficult to acquire spare parts and more energy efficient equipment, or even energy measuring or monitoring instruments. (A large proportion of equipment in Ghanas industries was acquired second-hand and was relatively energy-inefficient from the outset.) Intermittent electricity supplies with frequent interruptions and voltage fluctuations cause equipment damages and high shut-down and start-up costs. Economic obstacles have included low prices of electricity and petroleum products over extended periods, distortions in the relative prices of comparable energy products, and cost-plus pricing for industrial products built into the system of price controls which have blunted the incentive to reduce costs. even following the substantial increases in domestic prices of petroleum products and electricity since 1983, energy still accounts for a relatively low share of production costs in many activities (save for aluminum processing, steel milling and water supply where they typically exceed 35% of production costs). A number of firms have recently shifted to higher-cost energy (e.g. from fuel oil to electricity for operating boilers and furnaces), which indicates that they do not yet receive or follow proper price signals. 1.11 Numerous shortcomings prevail at the plant level, such as (a) dilapidated equipment, and lack of preventive maintenance, resulting in high energy losses (e.g. through heat radiation, leakage of furnace gas); (b) faulty preparation of production inputs, and inappropriate production processes and process control; 4/ VALCO has reduced its electricity consumption from 16.8 KWh/kg of aluminum to 15.8 KWh/kg and plans further reductions. (World-wide, the most efficient producers using state-of-the-art technology achieve consumption levels of 12.5-13 kWh/kg.) On the other hand, Lever Brothers' (Ghana) steam consumption per ton of product still is 50-10X higher than that of Lever Brothers companies in Trinidad and Tobago, Malawi and Sri Lanka.  -5- (c) lack of energy-saving practices, and lack of control of energy use either plant-wide or for specific equipment, resulting in inefficient equipment operation as well as low output quality; and (d) use of energy-inefficient plant and equipment (e.g., badly designed furnaces; refrigeration cellars instead of cooling tanks). 1.12 Most industrial firms are aware of the need to improve energy efficiency but few are able to carry out the necessary measures. This is because (a) firms lack familiarity with available energy rationalization programs -- normally consisting of many separate items which are complex and have low visibility -- and the benefits of associated options; (b) managerial/engineering and technical skills at the plant level are weak and outside energy auditing capabilities and consulting support hardly exist; (c) spare parts and equipment needed for rehabilitation are scarce; and (d) the availability of own funds and of simple medium-term financing for equipment changes is limited. Engineers are scarce and often not adequately qualified. Once-existing monitoring procedures have been allowed to lapse (e.g. in Bonsa Tyre Co.). Staff responsible for energy normally have other duties taking priority over energy activities. No firm has a formal energy management or budget. Training in maintenance and in energy-efficient operational practices exists only in very few firms. 1.13 Financial Considerations. To a large degree, the firms' willingness to implement energy efficiency measures depends on the expenditures involved and the availability of financing especially for imports. Some of the firms most in need of energy rationalization are least able to borrow the capital required to finance the attendant measures. However, in deciding on financing energy rationalization, the economic and financial viability of the firms' entire operations needs to be evaluated, in addition to that of the energy rationalization measures proper (para 3.8). Financing for imports of industrial inputs has become more easily available under foreign credits, such as from IDA and COFACE of France, although the weak cash flow position of many firms and the still unsettled economic environment at this stage tend to slow down the full utilization of these facilities. The banking system is not yet familiar with financing energy efficiency improvements and a number of banks do not have sufficient liquidity to expand their lending. However, the major banks are prepared to consider requests to finance energy rationalization, as part of industrial rehabilitation projects financed through external sources. The Role of Government 1.14 The Government has a crucial role in setting the institutional and policy framework and stimulating energy efficiency at the plant level. A number of institutional measures have already been taken. The National Energy Board (NEB) has been given responsibility for energy  -6- conservation economy-wide. A technical advisory committee to NEB -- with representation of industry -- has been set up to examine and recommend energy conservation strategies and policies. 5/ An Energy Management Office jointly operated by VRA/ECG and supported through CIDA carried out initial walk-through electricty audits in some industrial firms in 1986- 87 and trained electrical engineers in instrumentation techniques. The Government also has initiated projects to rehabilitate pe.roleum refining and marketing installations and ECG's distribution network, which ought to have a beneficial impact on energy efficiency. 1.15 These measures have merit in themselves but altogether they fall short of a comprehensive program. Most important, consistent economic-cost pricing of energy needs to be reinforced. While the Government is committed to energy pricing based on economic costs, the real price of energy between mid-1986 and March 1987 was allowed to decline in the face of domestic inflation and substantial Cedi devaluation associated with the introduction of foreign exchange auctioning. At one stage, prices of petroleum products chiefly used in industry (i.e. gas oil and industrial diesel) no longer covered their economic costs. However, following the exchange rate unification in February 1987, prices of petroleum products were substantially raised (to US76/gal and USC70/gal equivalent for gas oil and industrial Ciesel, respectively) and since then have exceeded economic cost. Electricity to industrial consumers still costs less than USC 2/kWh equivalent, which is very low compared to other countries with hydro-based electricity systems like Cameroon and Congo. The Government has decided to await the recommendations of the ongoing tariff study before taking action on electricity rates. (This study is likely to propose a system of electricity tariffs based on long-run marginal costs.) 1.16 NEB still lacks sufficient managerial and analytical capability in energy efficiency-related matters. Its small energy conservation cell consisting of two engineers is in no position to cope with the task of preparing, implementing and monitoring a national program of industrial energy rationalization. Nor is any other governmental institution able to give practical advice to firms that might want to evaluate their respective options. Energy efficiency concepts are not systematically promoted, e.g. through evaluating and disseminating improvements already achieved by some firms. The work program of NEB's advisory committee is very broad, with the potential for duplication, and exceeds the committee's resources. NEB does not interface with other relevant Government institutions such as the Ministry of Industries, Science and Technology (MIST), GIHOC, or the Bank of Ghana as lead institution for industrial financing. The activities of the VRA/ECG Energy Management Office have been discontinued. S/ The Committe's institutional membership includes the Ghanian Association of Engineers, Association of Ghana Industries, National Investment Bank, and the Ministry of Transport and Communications.  -7- I1. OPTIONS AND REQUIRNTS FOR DERGY RATIONALIZATION IN IDUTRY The Changing Environment 2.1 Ghana's industrial sector is likely to be affected by developments which will make it important to use energy more economically. First, energy on the domestic market will become more expensive, which would raise its share in operating costs. Following the rise in prices of petroleum products (para 1.15), electricity rates also are likely to increase once a tariff structure based on long-run marginal costs is introduced. A more determined collection drive by ECG has already resulted in appreciable cash outlays for industrial and other consumers to pay their electricity bills. Second, industrial firms find it more difficult to pass on higher costs to consumers because of the virtual elimination of price controls, combined with weak domestic demand for many industrial products. Third, as other constraints on industrial growth are being gradually removed, the availability, cost and end-use efficiency of energy will become more important. As the economic recovery gathers momentum and industrial output increases, a significant upturn in industrial energy consumption also is likely. (The Energy Assessment mission projects industrial energy consumption to increase at 6.5 - 7X p.a. in 1986-90, on the assumption that substantial progress is achieved in energy rationalization.) Options and Scope to Improve Energy Efficiency General 2.2 Energy efficiency can be improved either through reducing energy use per unit of output (conservation) or through switching to cheaper comparable fuels (substitution). Specific energy rationalization options in industry comprise (a) improved housekeeping; 6/ (b) minor investments requiring relatively little expertise; and (c) major investments in retrofitting existing plants requiring more complex evaluations. To be attractive to industrial firms, they need to be at 6/ Improved housekeeping, mainly through better operating and maintenance procedures, includes measures such as improving valves and steam traps, lagging steam pipes, and improving insulation generally (insulation technology has considerably advanced over the past five years or so). Visual inspection can go a long way to discover areas of possible improvements although proper measurements (through automatic instead of manual controls) are required to determine available energy efficiency margins more precisely.  -8- least as profitable as alternative options to improve industrial efficiency and/or increase capacity utilization, for which there is wide scope in Ghana. However, energy rationalization measures through improving maintenance, quality control, cost accounting etc., tend to produce additional benefits, i.e. (i) increased output without increasing non-energy inputs, or (ii) reduced non-energy inputs for a given output. For instance, through lowering the proportion of rejected production (which amounts to 40% in the GIHOC Classworks) the costs of energy and other industial inputs per unit of saleable output would be significantly reduced. Feasible Measures 2.3 Given the low energy efficiency prevailing in Ghana's industries, the scope for improvement is considerable. Lacking data preclude a precise evaluation at this stage, especially for minor and major investments. However, based on visits by the mission of about a dozen relatively larger industrial enterprises (including Ghana State Gold Mine Corp. and Ghana Water and Sewerage Corp.), the following measures appear to be feasible and should be evaluated in more detail: Improved Housekeeping: (a) firmly scheduled preventive maintenance programs (all firms); (b) minor equipment repairs and adjustments, e.g. for combustion air preheating (Aluworks), reducing furnace heat losses and gas leakage, improving combustion control, and eliminating steam leaks and improve steam traps (all plants); (c) improving boiler feed water control (Achimota Brewery); (d) condensate recovery; improving blow-down control (all plants with boilers); (e) improving the preparation of production inputs; introducing quality controls into the production process (GIHOC Steelworks; GIHOC Glassworks); Minor Investments: (f) improving the insulation of steamlines (Achimota Brewery); installing boiler optimizers (textile plants); (g) improving combustion systems (GIHOC Brickworks; Ghana Textile Printing Co.); (h) improving oxygen injection (GIHOC Steelworks); Ci) recovering waste heat from flue gases;  - 9 - (j) steam blow-down; preheating boiler feed water and combustion air; (k) installing power factor correction equipment (all plants); (1) installing proper metering and control equipment (Pioneer Aluminium; Crocodile Macbets; GIHOC Brickworks; GIHOC Glassworks); (m) replacing refrigeration cellars by cooling tanks; use of waste heat from refrigeration equipment (Achimota Brewery; Tema Food Complex)l Major InvestmentsS (n) improving waste heat recovery and use (Aluworks; Crocodile Machets; GIHOC Brickworks; GIHOC Glassworks Bonsa Tyre; International Tobacco); (o) replacing electrode by fuel oil-fired boilers (Achimota Brewery; Accra Brewery) or furnaces (CIHOC Glassworks); (p) remodelling kilns for partial use of sawdust for admixture with fuel oil (GIHOC Brickworks); and (q) replacing electric motors on compressors (Ghana State Gold Mines/Tarkwa). 2.4 Based on available data and on experience made in comparable countries (e.g. Senegal), it is estimated that relatively low-cost housekeeping measures essentially involving training and minor rehabilitation could produce energy savings of 15-25X within about three years. Industry-wide, these savings could total US$3-5 million per year (1986 international prices) at a cost of less than US$ 1 million. Minor and major investments requiring relatively larger outlays in foreign exchange could mobilize additional savings of comparable size. Improved housekeeping would have an economic return to the GIHOC Glassworks of 195X, with a payback of some six months; the A^himota Brewery, 104%; and the Aluworks, 631. Financial returns to the above-mentioned firms are estimated at 144%, 932 and 60%, respectively. Housekeeping measures in other firms visited by the mission appear to be similarly attractive (Annex 1). 2.5 Therefore, energy rationalization measures in most industrial firms in Ghana would be viable under prevailing economic conditions of international energy prices and assuming conservative price projections, and would not depend on future Government incentives. They are low risk and even the higher-cost options typically have a pay-back period of at most three years, which compares favorably with alternative options to increase industrial efficiency. The short pay-backs indicate that more rigorous analyses at the feasibility level would not exclude these  - 10 - projects and may, in fact, identify additional projects. However, improving operational practices and preparing energy rationalization investments requires detailed surveys and specific technical expertise which is not available in Ghana. Therefore, most firms will need techn.cal advise on which options to select. Requirements for Energy Rationalization Requirements at the Government Level 2.6 In order to stimulate energy rationalization in industry, the Government needs to develop comprehensive and well-coordinated policies, and strengthen NEB and other relevant institutions. Energy rationalization policies should be part and parcel of a wider strategy to rehabilitate Ghana's industrial sector, as well as tc. improve the efficiency of energy use throughout the economy. The most important policy requirements are as follows: (a) Energy demand management: Pricing and non-pricing policies should aim at inducing industrial firms to make correct decisions on the type and volumes of energy use and on energy- saving investments. Energy prices should reflect medium-to long-term economic costs to consumers, be established and announced in clear terms, and be predictable in regard to both absolute and relative levels. However, energy prices can meet their efficiency function only to the extent that they are complemented by supporting measures to overcome the technical, economic/financial and institutional barriers to energy rationalization. (b) Fiscal and financial incentives: Promoting industrial energy efficiency largely depends on the policy environment for investment generally, of which investment incentives are but one element. The Government's structural adjustment program, through its impact on the investment climate, will create an environment conducive to energy rationalization. Beyond this, specific options that may be considered include accelerated depreciation and other tax reductions for energy-saving equipment, and grants for demonstration projects and energy audits. However, incentives should not exceed those offered for industrial investment in general, given the high returns inherent in energy rationalization measures. In particular, subsidies are only justified to the extent that they are superior to other measures to achieve efficient energy use. They should be strictly temporary, with the possible exception of subsidized energy audits. (c) Institutional strengthening: The Government should be better equipped to organize energy efficiency programs, guide  - 11 - industrial management, and monitor and disseminate the results of the firms' efforts. NEB should become the focsl point in this endeavor and should (i) advise the Government on strategies and policies; (ii) promote specific measures among industrial firms and monitor their results; (iii) organize direct support and advisory services for industrial firms including systematic and industry-wide training and energy audits; and (iv) manage the data base for industrial energy use, with a view to developing efficient policy tools. NEB needs to build up expertise in industrial energy efficiency programs and in screening suitable firms for carrying out related measures until specialized institutions have acquired the necessary capabilities. NEB will need to liaise more closely with MIST, the industrial associations and individual firms. In monitoring the performance at the plant level, care needs to be taken that NEB and the State Enterprise Commission coordinate their respective actions. NEW's Energy Conservation Technical Committee could become more effective through expanding its membership to include other important entities for organizing industrial energy rationalization, such as MIST, SC, GIHOC, and the Bank of Ghana. (d) Direct support: WEB should assist industrial firms through energy surveys and audits, related information gathering, promotion, and training. However, projects identified through the audits should be appraised by separate specialized institutions. (e) Financin; arrangements: Financing for viable energy rationalization activities needs to be secured and financial intermediaries strengthened to evaluate related requests. Alternative options to bank credit should be evaluated, including loans from state energy enterprises and the leasing of energy-saving equipment (provided that equipment leasing companies can be established and the lease-holders are able to service the lease payments from their cash flow). It is important that financing mechanisms are in place by the time that projects are ready for implementation. 2.7 Training and Promotion. Systematic training in the technical, financial and economic aspects of energy rationalization is crucial for an industry-wide program. It should be directed at plant managers and engineers, local industrial consultants, project officers of development banks and Government officials. Training should focus on auditing techniques and on identifying and preparing energy rationalization projects. The Government should support energy rationalization through information campaigns involving seminars, visits to demonstration projects and dissemination of free technical advice. It is important that the experiences of individual plant-level efforts -- in terms of technologies, organization, and economic/financial results -- be made known throughout the industrial sector. In developing training and promotion programs, institutions such as the Management Development and Productivity Institute should be involved to the feasible extent.  - 12 - 2.8 Additional policy requirements may include the setting of energy efficiency targets and standards as established by equipment manufacturers, whose applicability to industrial subsectors and individual firms in Ghana needs to be carefully evaluated, however. 7/ The Ghana Standards Board at present is in no position to monitor the energy efficiency of industrial equipment but technical assistance through ISAC will enable the entity to better address this need. Affirmative legislation may be necessary -- though not sufficient -- to enforce efficiency targets and standards and stimulate other energy efficiency measures. Legislative action is not likely to be very effective in the absence of other p3licy measures aimed at energy rationalization, but will be less needed when appropriate energy price signals and strong supporting services are in place. Requirements at the Plant Level 2.9 Energy Audits. In-depth energy audits constitute the core of any energy efficiency program in industry. They are needed to (a) quantify waste and estimate rationalization margins; (b) determine measures to achieve energy savings which are feasible from the technical, economic/financial, and institutional point of view; and (c) evaluate the viability of attendant investments, through feasibility studies and appraisal of specific projects, in support of financing requests. 8/ Initially, energy audits in Ghana should be carried out in all major firms that are viable and whose energy bill accounts for a significant share of operating costs. They should eventually be extended to include the more important medium- to smaller-sized firms. ?ollow-up visits to audited firms are important to monitor to which extent recommendations have been put into practice and which obstacles have been encountered in the process. 7/ Energy efficiency targets usually are based on specific options identified through in-depth energy audits, complemented by analyses of the original plant designs. The constraints to reaLizing these options should be duly considered, as should be the scope for fuel substitution and prospects of future modifications of the industrial structure through changes in the product mix and processes. 8/ General ("walk-through") audits involve relatively less technical analysis and therefore are suitable for small- and medium-sized firms. In-depth audits comprise estimates of energy savings from improved operational and maintenance procedures and from equipment or process improvements, together with a detailed description of suitable measures and an estimate of the related investment and operational costs, manpower requirements and implementation schedule. They require detailed analysis of energy flows and balances for each major installation, to be evaluated by industrial process experts.  - 13 - 2.10 The energy auditing process should consist of the following sequence of activities, with due regard to the steps already taken: (a) generating systematic information for major industrial firms covering (i) fuel and electricity input/product output over a given period, (ii) age and efficiency of energy-consuming equipment, and (iii) availability and use of energy saving devices; (b) conducting in-depth audits, and preparing upgrading measures including recommendations on the organization in individual firms for implementing energy efficiency improvements; (c) defining technical, economic and financial targets for energy rationalization, monitoring results, and resetting targets, as appropriate; and (d) prioritizing and preparing larger sized investment projects. 2.11 Development of Operational Capability. Crucial to the effectiveness of the energy audit program is the development of local technical expertise, particularly for brief audits, which at present is not available in Ghana. Engineers of the VRA/ECG Energy Management Office and of those firms pursuing active energy rationalization programs should be trained to eventually become full-fledged energy auditors. Clear objectives should be set to strengthen the capabilities of the plant-level staff through training in energy-saving techniques and improved operational practices. 2.12 Specific technical expertise needs to be created at the plant level for implementing energy audits, improving operational practices and preparing energy rationalization measures. Also, most firms will need advise on which energy rationalization options to select. Requirements Related to Small-and Medium-Scale Firms 2.13 Small- and medium-sized firms face especially severe constraints to improving energy efficiency. They tend to have limited managerial, financial and engineering capabilities, low energy efficiency awareness and tenuous relations with government institutions and the financial community. They face difficulties in obtaining bank credit for which the scope is restricted to a small facility operated by the National Investment Bank. They usually have little energy-consuming equipment and simple energy flows, with fuelwood accounting for a large share of energy consumed. However, their share as a group in industrial energy consumption is likely to be significant and their savings potential relatively important, considering that small firms tend to be even leis energy-efficient than larger firms. This is particularly so for activities such as brick making, ceramics and soap manufacturing where energy costs are significant.  - 14 - 2.14 Developing energy-saving attitudes among small- to medium- sized firms will be a complex task given these firms' diffuseness, low cost awareness and limited technological sophistication. While as many smaller firms as feasible should be reached by the Government's energy efficiency efforts, it is evident that this cannot be achieved through direct intervention on a firm-by-firm basis. Therefore, proper energy pricing based on economic costs is particularly important for stimulating energy efficiency awareness among smaller firms. Local industrial specialists should assess the energy efficiency aspects of groups of firms with similar characteristics (e.g. product category, energy flows) and evaluate the technological, economic/financial and institutional requirements to achieve improvements. A program of assisting these firms in energy rationalization measures should be prepared by NEB jointly with those institutions having relevant expertise, such as MIST's National Board of Small-Scale Industries and the National Investment Bank. This could include some form of energy extension service for smaller firms. Training initially should focus on preparing government officers to advise small- and medium-sized firms in energy efficiency matters as few staff of these firms would have the necessary qualifications or time to benefit from formal training courses. The Need for Sustained Government Commitment 2.15 Sustained institutional and policy commitment to promote energy efficiency is necessary so that industrial firms respond vigorously to policy signals and pay proper attention to energy efficiency matters. In the case of state-owned enterprises, energy rationalization measures should become monitorable actions as part of performance agreements. More widely, any rehabilitation proposals of industrial firms should include measures to improve energy management. Nevertheless, it is possible that the aforementioned policies and other measures may not motivate a satisfactory number of firms to improve energy efficiency, as their decision making does not necessarily mirror that of the Government and is outside governmental control. In that case, ongoing programs and measures would need to be reviewed and further policy and institutional options to promote energy rationalization be evaluated.  - 15 - III. A PROGCRA FOR INDUSTRIAL MUECY RATIONALIZATION Operational Objectives and Priorities 3.1 An industrial energy rationalization program for Ghana needs to address important operational objectives. These are, in sequence: (a) sensitization of energy consumers; (b) training and technology transfer; and (c) strengthening of project analysis, financing and implementation capabilities. Progress has already been made in preparing some elements needed for an energy rationalization program, e.g. collecting data on industrial energy use, analysing constraints to higher energy efficiency, and identifying target groups. However, other important tasks remain to be done. These include: strengthening the institutional framework for implementing energy rationalization policies; conducting in-depth energy audits; launching awareness and information campaigns; training energy auditors and plant-level energy managers; establishing financing mechanisms; appraising, implementing and evaluating energy rationalization projects identified through audits; and reviewing policies, laws and regulations, as appropriate. 9/ 3.2 In the short term, energy rationalization efforts in Ghana should focus on housekeeping measures in larger industrial firms, given that those are likely to be highly profitable and easy to implement compared to capital investments and to any measures in small- to medium- sized firms. (They also would help to prepare related investrents in larger firms and any type of energy rationalization efforts in smaller firms.) Once more information and know-how is available, the remaining profitable energy rationalization options in larger as well as smaller- sized firms should be implemented. Creation of an Energy Efficiency Task Force 3.3 To provide the institutional framework for designing and implementing an industrial energy rationalization program, an Energy Efficiency Unit within NEB would be appropriate. However, giving due regard to the Government's resource limitations, for the time being a small Energy Efficiency Task Force would be created whose nucleus already exists within NEB. The Task Force should be reeponsible for (a) preparing appropriate strategies and policies; (b) developing training and promotion; (c) organizing a program of energy audits and monitoring audit results; and (d) strengthening the data base. The Task Force thus would provide the link between the national program and the related measures of individual firms. 9/ For a listing of the individual tasks pertaining to an industrial energy rationalization program, see Annex 2.  - 16 - 3.4 Proposed Organization. While being part of the NEB, the Task Force should be given the required flexibility for effectively liaising with other governmental institutions and industrial firms. Its staff should be expanded from two to four -- possibly through reassigning NEB staff -- to comprise a coordinator reporting to NEB's Directorate, and one staff each responsible for energy auditing and for training/ promotional matters. The new staff should have solid background in economics and financial analysis to complement NEB's engineering expertise. Annual personnel costs for two higher-level staff are estimated to total 0750,000 (US$5,000 equivalent). Initial outlays for computing and other office equipment, software and reference material are estimated to be of the same magnitude and could be financed through the IDA Energy Project (Credit No. 1373-GH). NEB's general services would provide back-up e.g. for information management. The mission assumes that the Task Force would receive active support from the technical energy conservation committee and industrial associations in matters such as organizing *training and promotion. Should this support not materialize, the Task Force's staffing requirements would be correspondingly larger. The Task Force should remain in existence at least until the industrial energy rationalization program becomes self- sustaining (which is assumed to take three to five years) at which time its objectives, scope and staffing should be reviewed. ESMAP Technical Assistance 3.5 The Government has received only limited assistance through UNDTCD in organizing an industrial energy rationalization program. 10/ Given its prevailing resource constraints, the Government has requested technical assistance from ESMAP for preparing an energy rationalization program in industry. The mission recommends that the following priority activities be carried out under ESMAP, thereby considering the experience 10/ A pilot survey and preliminary audits of 24 industrial firms have been conducted by a local engineering consulting firm.  - 17 - gained by ESMAP and the World Bank group at large: 11/ (a) assistance to NEB in preparing programs for training and promotion related to industrial energy efficiency; and (b) in-depth energy audits of ten larger-sized industrial firms. Strengthening NEB 3.6 NEB would be assisted through the services of a training/promotional expert for about six months to prepare and initiate a program aimed at (a) familiarizing plant engineers, local industrial consultants, project officers in financial institutions and government officials with the basic concepts of industrial energy rationalization and the technical aspects of energy audits; and (b) information and dissemination throughout industry by means of seminars, visits to demonstration projects, promotional materials, etc. In order to meet larger than expected training needs, sufficient flexibility would be incor orated into the activity design, allowing for follow-up training as appropriate. 3.7 NEB's work would significantly benefit from ongoing industrial sector and enterprise evaluations under ISAC, many of which have a direct bearing on energy rationalization. Strengthening the policy and institutional framework would be an important component of the Government's dialogue with ESMAP and the Bank at large, in the course of implementing the proposed activity (para 3.22). Energy Audits 3.8 In-depth audits in ten larger-sized industrial firms would be carried out by a team of internationally renowned specialists with long- range experience in industrial energy rationalization in developing 11/ ESMAP has addressed issues related to industrial energy rationalization in a number of countries including Senegal and Jamaica (institution building), Indonesia (rural brick, tile and lime industries) and Syria (cement industry). The proposed activity also would complement an ESMAP activity in Ghana on the more efficient energy use of sawmill residues. The World Bank Group during 1981-86 has supported some 20 industrial energy conservation projects in 15 countries. The Bank Group's support has included (a) stand-alone projects focusing only on policy and institutional measures (including information dissemination and training), (b) projects combining the above objectives with financing energy-saving measures (fixed investments; others), and (c) projects focusing on energy-intensive industries. The energy conservation components proper of these projects exceed US$600 million of which US$250 million are financed through the World Bank Group.  - 18 - countries. The firms to be audited would be selected by HEB and ESMAP in consultation with MIST. The selected firms would be economically viable, energy intensive, and their experience would be replicable. In accordance with the criteria for determining eligibility for financing under ISAC, firms would be those which (a) mainly process local inputs; (b) produce inputs for other domestic industries; and (c) are export- intensive. The firms' viability would be assessed based on the results of existing evaluations supplemented by the auditing team's own economic and financial analysis. Energy audits would be undertaken only once it is apparent that the firms considered are likely to be viable over the medium to longer term. Firms whose viability is not evident or whose investments do not appear economic would be reviewed first to determine whether they have any comparative advantages justifying rehabilitation before major energy rationalization measures are recommended. No such measures are justified in plants or subsectors which are inherently unviable even if energy rationalization itself were to be economic. Both public and privately-owned firms would be considered. The results of previous initial evaluations by NEB, ESMAP and the VRA/ECG Energy Management Office would be utilized as fully as possible, as would the relevant experience of firms already having taken energy rationalization measures (e.g. Lever Brothers). 3.9 The mission has identified about a dozen manufacturing firms that have requested in-depth energy audits and might be suitable for the program. They include: Aluworks Ltd. Ghana Pioneer Aluminum Factory, Ltd. -- GIHOC Steelworks Co., Ltd. Crocodile Machets GIHOC Glass Manufacturing Co. -- GIHOC Brick and Tile Co., Ltd. -- Bonsa Tyre Co. Tema Food Complex Corp. -- Achimota Brewery Co., Ltd. -- Akosombo Textiles, Ltd. Ghana Textile Manufacturing Co., Ltd. -- Ghana Textile Printing Co., Ltd. 3.10 Energy audits also should be undertaken on the Ghana State Gold Mining Company and Ghana Water and Sewage Corporation, which are heavy consumers of energy. (Both entities are included in the group of public enterprises earmarked for developing corpotate plans under the IDA Structural Adjustment Credit.) In the case of firms where re-equipment measures are either ongoing or firmly planned, the proposed activity should initially be limited to evaluating the feasibility of the energy- related aspects of the envisaged measures before in-depth energy audits are recommended (e.g. GIHOC Steelworks; GIHOC Brick and Tile Co.; Bonsa Tyre Co.). The GHAIP petroleum refinery is subject to a separate energy rationalization effort supported through the IDA Petroleum Refining and Technical Assistance Project (Credit No. 1446-GH) and has therefore not been considered for this activity.  - 19 - 3.11 The first few audits would be of a pilot nature and might be provided largely free of charge. However, the firms so benefitting would be obliged to share the audit results with other interested firms. A nominal charge of at least 10-15% of audit costs should be imposed on subsequent audits. The participating firms would contribute in-kind through making senior management and engineering staff available for the preparation, execution and evaluation of their particular energy audits. Technical Assistance Coordination and Activity Management 3.12 NEB would be in charge of preparing and implementing the training/promotion programs and energy audits. Its Task Force coordinator would have first-line responsibility for implementing the activity, especially for supervising the consultants and liaising between the consultants and NEB, the Government at large, and the industrial firms. The coordinator would also be responsible for (a) organizing training and promotion programs, and (b) organizing the energy audits, monitoring the auditing team, and evaluating the auditing reports and the ensuing feasibility studies. If necessary, the coordinator would be assisted be a non-resident activity manager, who would be thoroughly familiar with energy efficiency training and promotion and with the energy auditing process both at the governmental and plant levels. The activity manager would pay four visits to Ghana totalling ten months during the crucial phases of the program, over a 24-month period, and would regularly inform the Government and ESMAP about the progress of the activity. 3.13 In order for the proposed activity to succeed, it needs to be ensured that (a) the Task Force be given sufficient resources to function effectively; (b) the activity manager be provided with direct access to NEB's Executive Director; and (c) a mechanism be established for regular consultations between the Government and ESMAP on activity implementation. Participation of Local Experts 3.14 The Government gives high priority to the development of technical capabilities for industrial energy audits and the participation of local professionals in the proposed auditing program. A core of energy rationalization specialists should be trained from the professional staff of industrial firms, the VRA/ECG Energy Management Office, and local consulting firms. Arrangements should be made in time to train local professionals in the principles and techniques of energy auditing. Professionals so trained should participate in in-depth energy audits and gradually be given more complex tasks. In particular, staff previously attached to the VRA/ECG Energy Management Office should participate in energy audits from the outset. Eventually, local professionals should acquire full operational responsibility, with expatriates called upon to provide specialized services only.  - 20 - 3.15 NEB Interim Involvement. Prior to the initiation of the proposed activity, NEB has already advanced its preparation through: (a) carrying out promotion and contacting additional industrial firms suitable for in-depth energy audits; (b) upgrading the relevant information on firms to be audited; and (c) screening local professionals suitable for training in energy auditing and participation in the audits. 3.16 NEB would continue these preparatory efforts until the activity proper would get underway. Scheduling, Costs and Financing 3.17 The activity would be carried in two phases. In the first phase extending over nine months, the training/dissemination expert would design a medium-term program, select participants for training, and conduct initial training courses based on programs already carried out. Following completion of the training program, local participants for the energy auditing team would be selected (possibly by the training specialist and the leader of the auditing term). About six walk-through audits, three in-depth audits, and one feasibility study would be carried out. The second phase would be based on a thorough evaluation of the results of the first phase and would basically consist of about seven indepth audits and three additional feasibility studies. This phase is expected to extend over fifteen months, with a duration of the total activity amounting to two years. 3.18 Well-focused field work should be st'rted at least two months prior to the start of the in-depth audits, in time to evaluate the information base, determine additional information requirements, and assist in the preparation of the auditing program. Prior to initiating the in-depth audits, the NEB task force to the possible extent should generate missing information on energy consumption and efficiency of the firms in question and assess the firms' economic and financial viability. The audits are estimated to require about four weeks each including the preparation of a technical report. The first in-depth audits are expected to be carried out by mid-1989, with the entire program to be completed by late 1990. The assistance to NEB in training and promotion would be implemented in parallel with the auditing process. 3.19 The cost of the proposed activity is estimated at US$800,000 (training, dissemination, and promotion, US$85,000; energy audits and feasibility studies, US$510,000; activity manager, US$100,000; ESMAP supervision and miscellaneous, US$105,000). Phase I would account for US$300,000 and Phase II for the remainder. Because of the need for highly qualified experts, 87% of total cost would be for specialized consultants preparing audits and feasibility studies. Equipment to carry out the audits would be provided by NEB or the consultants themselves and  - 21 - the related costs included in the consultants' fees. The cost of local professionals is estimated to total US$15,000 for 50 staff-months. The share of supervision in the overall cost of the activity is estimated at 10% which is considered the minimum amount needed for effective project administration. 3.20 A summary cost estimate for the program is as follows: US$ '000 Phase I Training, Dissemination, and Promotion Training/dissemination expert (six months) 80 Materials 5 85 Energy Audits and Feasibility Studies 5 Walk-through audits 50 3 In-depth audits 120 1 Feasibility study 15 185 Overheads ESMAP supervision 20 Miscellaneous 10 30 Subtotal Phase I 300 Phase II Energy Audits and Feasibility Studies 7 in-depth audits 280 3 Feasibility studies 45 Activity manager 100 425 Overheads ESMAP supervisison 45 Miscellaneous 30 75 Subtotal Phase II 500 Grand Total 800 3.21 The Government's contribution in-kind would be through supervision of the consultants and general logistical support. ESMAP would cover all other costs of the activity on a grant basis. Financing in the order of US$270,000 has in principle been committed by CIDA of Canada. A number of donors have been approached to finance the remainde:. Payments made by firms for the audits (para 3.11) would be used to provide additional funding for the continuation of the energy  - 22 - rationalization program once ESMAP's involvement is completed. Audits of GSCM and CWSC could be financed through IDA credits or other credits made to these institutions. Investments identified through energy audits are expected to be funded by local banks, external donors and the industrial firms themselves. Expected Benefits and Risks 3.22 The proposed ESMAP activity would be the first stage of a longer-range program to reduce energy costs and improve energy efficiency in industry and in the economy at large. As such, the activity would be instrumental in developing a well-focused and effective Government program consisting of institutional and policy measures, training and promotion, and additional energy audits including for medium- and smaller-sized firms. As a result of technical assistance and other mutually reinforcing activities, NEB would be strengthened to carry out its energy efficiency-related functions. The energy audits would determine priorities for rationalization measures in major industrial firms and serve as a basis for preparing projects suitable for external financing. These projects would have a catalytic role in promoting energy rationalization throughout industry. Their demonstration effect is expected to be strong as industrial firms endeavor to become more viable during the ongoing period of economic rehabilitation. An important new technique, energy auditing, would be transferred to Ghana. The local expertise so created would allow extending the audits beyond the relatively limited number of firms earmarked for the ESMAP activity, to eventually cover most of the suitable larger-sized and the more important medium- and smaller-sized firms, as part of a self- sustaining program. 3.23 The main risks are that (a) the Government may not make a satisfactory commitment to the proposed activity nor upgrade the calibre of its staff responsible for energy efficiency matters; (b) the industrial firms would not adequately respond to the program; (c) the performance of the contracted specialists would not meet required standards; and (d) future international energy prices might decline, thus reducing the benefits from energy rationalization. The risk listed under (a) is considered to be slight, given the Government's stated interest, the resources already made available to NEB, and steps taken to secure external assistance for energy efficiency programs. Industry's initial response to an energy rationalization drive has beeis promising and policy and institutional measures proposed under this activity would be designed to reinforce this response. The third risk would be addressed through careful selection and close supervision of the consultants by their own firms, NEB and the Bank. The downside risk for international energy prices is small given their current relatively low levels, at which levels most envisaged projects would be viable. 3.24 To keep the objectives of the proposed activity at the forefront, ESMAP would be closely involved in all phases. Draft terms of reference for the training/promotional program, the energy audits and the  - 23 - activity manager have been prepared (Annexes 3-5). Close monitoring by Bank staff will be an integral part of implementing the activity.  an.- t~s~a Salttag . Pr""ot tstletod I ery Estilmatd of wich 919 .n.tito t to J0en.. *m Cgcitlt caeaatloe, SWIta. Ntmuaeiae Scosmie Fl lsit wousahmogomn Sleas 4US) d 6t)alttlo IS$ 155 C?glty 199 ceait Savia Pr6o6o promelp Tralalg SW Pwa" lowta Ic^am Pi FI)aJ IS) (te htl Steel MUS$1 (U6551 lo5s) 4S6S$ (1695 A_MeM# bir. 3,3001 700-6,000 400400 2,000 40.400 10.000 20,000 30,000 604 93 _- T_t.ses Is 4,00 6, SW 6,40 3M0-150 39,0 41.000 10G.00 30.000 40,000 to is