A Journey Through The Energy Sector Debt 3

"The hunter who abandons the trail never reaches the game." An African Proverb

A Decade of Interventions
There have been several interventions aimed at addressing the debt in the energy sector, including regulatory reforms, reforms to financing structures and institutional programmes.

1. The Energy Sector Recovery Programme

Launched in May 2019, the Energy Sector Recovery Programme (ESRP) is Ghana’s most comprehensive attempt to address the sector’s financial issues systematically. At the time of its launch, the sector’s accumulated arrears stood at USD 2.7 billion. By 2019, Ghana's energy sector faced several structural challenges including;

• Annual sector deficits exceeding US$1–2 billion.
• Excess power generation capacity relative to demand.
• Expensive Take-or-Pay contracts with Independent Power Producers (IPPs).
• High technical and commercial losses by ECG.
• Low revenue collection rates.
• Non-cost-reflective tariffs.
• Growing debts to IPPs, gas suppliers, and financial institutions.

The ESRP set out a multi-year roadmap with four central commitments:

· implementing the CWM at full scale;
· Adjusting tariffs to reflect the actual cost of supply;

· Improving ECG’s operational and financial performance;

· Renegotiating legacy contracts with generators and fuel suppliers to reduce contingent liabilities.

The programme achieved meaningful progress in some areas. Cost-saving negotiations with IPPs and gas suppliers reduced the rate of new debt accumulation. Institutional reforms strengthened regulatory capacity.

The ESRP’s limitations were largely structural. Tariff adjustments, while necessary, remained politically contentious and were implemented inconsistently. ECG’s operational performance improved only marginally. Legacy take-or-pay contracts continued to generate invoices that outpaced the government’s payment capacity.

The World Bank PRG — designed as a backstop for exceptional circumstances — began to be drawn on regularly, signalling that the sector’s payment challenges had become chronic rather than episodic.

2. The Cash Waterfall Mechanism: Promise and Reality

One of the most important institutional innovations in Ghana’s energy-sector reform agenda has been the Cash Waterfall Mechanism (CWM). The CWM is a financial payment system introduced in 2020 by the Government of Ghana under the Energy Sector Recovery Programme (ESRP) to ensure that revenues collected from electricity consumers are distributed transparently and fairly among energy sector institutions in accordance with an agreed-upon priority formula.

The CWM is based on a financial distribution model, designed to allocate cash inflows among stakeholders in an orderly manner, while prioritizing the most critical payments.

The operationalization of the CWM in Ghana in 2020 was intended to address payment gaps in the electricity value chain and reduce energy sector debt. ECG was instructed to use CWM as the sole payment mechanism for customer revenues and operate a single holding account for collections.

The mechanism was built around three core objectives.

First, to ensure that revenues collected from the regulated electricity market are allocated equitably and transparently across all sector players.

Second, to establish clearly and comprehensively the gap between the cost of electricity supply and the revenue actually collected.

And third, to ensure that ECG’s collections are disbursed efficiently and in strict priority order — giving generators, gas suppliers, and transmission operators a predictable, rules-based payment schedule.

There has been a significant improvement in the implementation of the CWM since 2025. This has brought some relief to the actors in the electricity value chain, ensuring some payment among the actors

The CWM should be viewed as a financial governance tool rather than a complete solution. It helps determine how available cash is shared, but it does not address the root causes of the sector deficit. Long-term success still depends on:

• reducing ECG losses,
• improving collection efficiency,
• implementing cost-reflective tariffs,
• enforcing the ESRP reforms,
• and managing IPP and fuel-payment obligations

What Lasting Recovery Requires
The 2025/early 2026 landmark clearance provides the country with a rare opportunity: a relatively clean balance sheet from which to build a more sustainable energy-sector financing framework. Whether the country seizes that opportunity will depend on whether it addresses the structural conditions that caused the debt to accumulate in the first place.Some key issues to consider include;

Renegotiating Take-or-Pay Contracts
Ghana urgently contracted several IPPs to address severe power shortages between 2013 and 2017. The objective was to;

• Increase generation capacity rapidly;
• Attract private investment;
• Ensure energy security;
• Avoid future power shortages

This strategy succeeded in increasing generation capacity, but some of these were contracted. Under take or pay contract. Under these contracts, Ghana was obligated to pay Independent Power Producers (IPPs) for contracted generation capacity, whether the electricity was used or not. They lock the government into paying for capacity — and for gas — regardless of whether that capacity is dispatched or that gas is consumed. Future contracts with IPPs and gas suppliers must cap exposure under these provisions, align minimum payment obligations with realistic dispatch expectations, and include mechanisms for demand-based adjustments.

Full Implementation of the Cash Waterfall Mechanism

The CWM cannot deliver its intended benefits on a selective or partial basis. Full implementation requires that all ECG collections flow through the mechanism as designed, that payment allocations are made strictly according to the pre-agreed formula, and that the data underpinning the mechanism on revenue collected, costs incurred, and gaps identified is published transparently and regularly.

Cost-Reflective Tariffs
No payment mechanism can close a gap that begins at the tariff level. As long as electricity is priced below the cost of supply, the sector will run a structural deficit, which will eventually materialize as debt. Tariff reform is politically difficult but economically unavoidable. Phased adjustments, targeted subsidies for vulnerable consumers and independent tariff-setting processes can help manage the political economy of reform.

ECG Restructuring
Every other reform effort is undermined by operational failures at ECG. High technical and commercial losses, collectively estimated at over 25% of electricity generated, represent a massive drain on the sector’s financial resources. Addressing these losses requires sustained investment in grid infrastructure, metering technology and billing systems, alongside institutional reforms that improve accountability and performance management within the utility. Several African countries have introduced varying levels of private sector participation (PSP) in electricity distribution through concessions, management contracts, lease arrangements, franchising, or privatization. The main objectives have been to reduce losses, improve billing and collections, expand access, and mobilize investment.

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