A Case For Increase In Electricity Tariffs

Introduction

Since August 2002, PURC has allowed a number of increases in electricity tariffs. These tariffs were barely adequate to support the operations and maintenance of the existing network. At this point provision was also not made for future network investment projects aimed at meeting the high energy growth, computerizing and automating the sub transmission and distribution network.

When it was realized that the tariff could not address ECG's investment needs, the automatic adjustment formula was introduced in October 2003 in order to help project electricity tariffs gradually to full cost recovery level.

Unfortunately, the automatic adjustment formula was not robust enough to move the tariff (especially the Distribution Service Charge) to full cost recovery levels and therefore it was abandoned after February 2005.

The utilities were then requested to make submissions to PURC as and when there was the need for tariff adjustment.

Recent studies from the utility companies show that an average end-user tariff of GH¢ 0.2001/kWh is required to cover a substantial portion of its costs (This figure is made up of a Bulk Supply Tariff of GH¢ 0.1046/kWh for VRA and a Distribution Service Charge of GH¢ 0.0955/kWh for ECG).

Meanwhile, the current approved average end-user tariff by the Public Utilities Regulatory Commission is GH¢ 0.0944/kWh (May 1, 2006).

The increasing cost of electricity tariffs is mainly due to the need to:

1. Diversify power generation from hydro systems to the use of thermal plants, which depend heavily on crude oil and diesel. This is to ensure that the available sources of power supply will support the high growth in energy demand.

2. Replace obsolete equipment, especially transformers and switchgears. ECG has equipment still in use that is well over 30 years old.

3. Make provision for future investment projects aimed at providing modern, sophisticated and automation equipment on ECG's network.

4. Introduce flexibility into ECG's operations by creating more redundancies on the sub transmission and distribution network.

Previously, the utility companies always prepare proposals for tariff increases with the aim of improving the quality of service delivery, but approval is given for just a fraction of the required amount.

However, any improvement in service delivery requires massive investment in more efficient equipment, something which is very expensive to acquire. Hence previous increases in electricity tariffs have not achieved the desired effect.

Impact of tariff adjustment on ECG
Studies on the impact of approved tariffs on ECG's performance show that as the nominal price of electricity is increasing, the real price is declining. Hence, in real terms the value of the tariff has being decreasing since 2002.

Figures 1 & 2 compare the average end-user tariff in nominal and real terms (Source: Draft report on the impact of tariff adjustments on the financial and operating performance of ECG for the period 2002-2007 – Prepared by the International Institute of Infrastructural Economics & Management).

The above graph shows that in real terms, the BST, the DSC and the EUT decreased for each year from 2002 to 2007. Hence it is important to use real prices and not nominal prices in any analysis/ discussions.

To be continued