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July 17, 2017 | Research Findings

IMANI Report: Privatisation of the Electricity Company of Ghana Futuristically Useful. – Comparative Lessons from India and Uganda Suggest.

IMANI

This study seeks to measure the success of reforms in electricity distribution for Ghana, Uganda and India and then extrapolate based on the findings, potential gains to Ghana from incorporating private participation into the distribution of electricity. The general assumption is that, the long term concession model that Ghana purports to adopt in the reform of electricity distribution has been applied by Uganda and India (Delhi). Therefore, the successes or otherwise of this reform strategy as observed in these countries may be similar to what Ghana may experience. The study is in three main parts;

1. Measuring the current success of reforms in electricity distribution for Ghana, Uganda and India

2. Analysis and discussion of findings
3. Recommendations and conclusion
Measuring the Success of Reforms in Electricity Distribution

METHODOLOGY
The study adopts the framework and methodology developed by Jena & Andoh (2014) [1] for measuring the success of electricity sector reforms and modifies it to measure the success of reforms in the power distribution sector of Ghana, India and Uganda.

The methodology hinges on two general schools of thought concerning the measurement of successful power sector reforms namely the nearness of market structure to retail competition and the sustainability of reforms. According to the first school of thought, indicators of successful reforms should include improved efficiency of the sector, lower prices/tariffs and better quality of service [2] . The second school of thought posits that in measuring the success of power sector reforms, greater weightage must be given to supporting the reform process once begun to ensure sustainability [3] .

Based on these schools of thought, Jena and Andoh (2014) identify indicators for measurement of successful electricity sector reforms as follows:

Degree of Private Participation: The theory that the funding of public expenditure through taxes leads to loss in social welfare because of the deadweight loss makes a strong case for private funding for investments in the electricity sector. It is also noted that, increases in private participation in the electricity sector, particularly electricity distribution is most likely to result in reduced system losses, lower prices, cost efficiency and improved revenue collection [4] .

Degree of adherence to the elements of reform: The elements of reform as suggested by Newbery [5] is presented in the figure below

7172017113947 diagram

Our focus here is not on the overall reform of the electricity sector in Ghana as this has already been initiated, but on reforms in distribution. Given the poor performance of the Electricity Company of Ghana (ECG), Ghana’s main distribution utility (high system losses of about 30% of power purchased, low levels of revenue collection-60% of power sold, accumulation of debts among others), the general consensus is that reform in distribution is required. Through the Millennium Challenge Corporation’s Ghana Power Compact, Ghana has opted for the incorporation of Private Sector Participation (PSP) into distribution as a means of improving the efficiency of electricity distribution. Key to reform in distribution, Jamasb (2004) [6] notes that the greater the number of distribution entities, the greater the competition and the greater the efficiency. Further, incentive regulation and third-party access work to improve the efficiency of distribution while the cost-plus method of tariff determination helps in the reduction of cross subsidies. This indicator will, therefore, measure the overall adherence to these elements.

Degree of competition and market power: In a properly functioning competitive market, it is assumed that there is the presence of more players which ensures efficiency, all other things equal. However in replicating this model in electricity business, it is useful to ensure that efficiencies generated through unbundling exceed economies of coordination enjoyed by the vertically integrated electricity sector before unbundling [7] . Further, the concentration of ownership gives rise to market power which could potentially erode efficiency therefore the smaller the market share of each player, the better for the realization of efficiency gains [8] . To foster competition, other key requirements are to open up access to transmission and distribution networks either through regulated or negotiated third party access and to ensure that rules for allocation of transmission charges, congestion pricing and arrangements for financing of transmission network are well laid out.

Degree of marginal cost based tariff: A key to efficiency in the electricity sector is that tariffs must reflect the true cost of power generation and must tend to marginal costs in the long run where there are no supernormal profits [9] . However in most developing countries, government offers generous subsidies to make electricity affordable which causes tariffs to deviate from marginal costs. The greater the degree of subsidies, the more difficult it is for reforms to work in the short term [10] . In view of this, reforms must target the removal of subsidies since welfare gains by those who benefit from removal of subsidy is usually greater than the welfare loss to consumers who would have enjoyed subsidy [11] (Joskow, 2004). The ratio of actual tariff and marginal cost could be an important indicator for measuring reforms (Newbery, 2002).

Degree of sustainability of reforms: Bhattacharyya (2007) [12] develops a framework for measuring the sustainability of reforms. This framework hinges on political acceptability of the reform process, social desirability, ability to implement, being environmentally benign, economically efficient and financially viable.

Degree of technical efficiency: The focus here is to ascertain the efficiency of operating capital assets which have a direct impact on the costs of power generation and distribution. This can be done using parameters such as plant load factor, capacity factor, fuel efficiency, labour productivity and in the case of distribution the Pivotal Supply Index (PSI).

Framework
The methodology grafts these indicators into a framework that measures the success of reforms in the electricity sector. For the purposes of measuring the success of reforms in electricity distribution for Ghana, India and Uganda, this study modifies the Jena-B framework as follows:

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