Ghana’s electricity sector is facing mounting financial and operational challenges due to the significant underutilisation of its generation capacity.

With an installed generation capacity of around 5,300 MW against a domestic peak demand of approximately 3,600 MW, the sector is grappling with excessive surplus, exacerbated by “take-or-pay” contracts with Independent Power Producers (IPPs) that require payment for unused electricity.

This contractual burden has culminated in a sector debt of nearly $2 billion, placing immense financial pressure on the Electricity Company of Ghana (ECG).

To address these issues, Dr Elikplim Kwablah Afetorgbor, a power system economist, is advocating for a strategic licensing shift; bringing Ghana’s IPPs under the Ghana Free Zones Act.

By doing so, Dr Afetorgbor believes that Ghana could effectively reposition itself within the West African energy market, turning surplus electricity capacity into a valuable export resource while mitigating ECG’s economic pressures.

Ghana’s Capacity Challenges: Insights from Dr. Afetorgbor

Speaking on the sector’s long-standing challenges, Dr Afetorgbor explained, “Ghana’s power sector has expanded considerably in recent years, but this growth has come with significant financial costs. We are producing more electricity than we need domestically, yet we’re paying for the unused power, leading to an unsustainable debt burden on ECG.”

The crux of the issue, according to Dr. Afetorgbor, lies in the operational inefficiencies and rigid contractual structures that discourage competition and innovation.

“Most of our IPPs are tied to take-or-pay contracts. These agreements guarantee payments, whether or not the power is used, creating a scenario where there is little incentive to cut costs or drive down tariffs. The economic toll is immense, and it’s a cycle that we urgently need to break.”

Free Zones Act: A Blueprint for Competitive Electricity Export

Dr Afetorgbor proposes that Ghana harnesses the Ghana Free Zones Act, enacted in 1995, to license IPPs as Free Zones entities. This, he says, would open a path to address Ghana’s surplus energy issues by prioritizing regional exports, especially to power-strapped neighboring countries within the West African Power Pool (WAPP) framework.

“The Free Zones Act was initially designed to attract investment, enhance exports, and integrate Ghana’s economy regionally and globally,” Dr. Afetorgbor pointed out.

“While it was traditionally applied to manufacturing, the act’s principles are well-suited to the energy sector. If IPPs were licensed under this framework, they would gain tax and regulatory benefits that would allow them to compete in the regional electricity market.”

Dr Afetorgbor emphasised that Free Zone status would make IPPs financially viable as export-oriented businesses. This shift, he believes, would turn Ghana’s surplus electricity capacity into a revenue-generating asset.

Key Benefits of the Free Zones Act for IPPs

Dr Afetorgbor highlighted several advantages that IPPs could gain through Free Zones licensing, which would ultimately drive Ghana’s competitiveness in the regional electricity market:

Tax Incentives and Exemptions:

“Free Zone enterprises enjoy a 10-year corporate tax holiday, after which they face a capped tax rate of 15%. For IPPs, this would lower operational costs, enabling them to price electricity competitively. Additionally, exemptions from import duties and withholding tax would make the industry more attractive to foreign investors looking for lower tax liabilities.”

Export-Driven Growth:

“The Free Zones Act mandates that enterprises export at least 70% of their production. By classifying IPPs as export-oriented entities, Ghana could channel its surplus capacity into regional markets, where demand is high. This would transform a domestic challenge into a strategic regional opportunity, generating much-needed revenue.”

Enhanced Efficiency and Investor Confidence:

“With streamlined regulatory processes, Free Zone IPPs would be able to efficiently scale operations and adjust capacity as needed for export. This would also encourage innovation, as IPPs would have stronger incentives to adopt cost-effective technologies and expand their capacities to meet regional demands.”

Dr Afetorgbor believes that these Free Zone benefits would drive foreign direct investment (FDI) into the sector.

“Foreign investment is crucial to upgrading infrastructure and enhancing Ghana’s presence in the regional market,” he added.

“By positioning IPPs within the Free Zones framework, we would make Ghana’s power sector more appealing to investors who can bring in capital and technology to improve efficiency.”

Proposed Steps for Implementing Free Zones Licensing for IPPs

Dr Afetorgbor outlined a roadmap for licensing IPPs under the Free Zones Act, which he believes is essential to achieving Ghana’s regional energy ambitions. The approach includes:

Developing a Capacity Market Framework Tailored to Export:

“Our regulatory authorities must establish a capacity market framework that allows IPPs to price exports competitively. Additionally, we need to strengthen transmission infrastructure and interconnectivity with WAPP to facilitate seamless electricity exports.”

Facilitating IPP Licensing and Export Compliance:

“Amendments to the Free Zones Act could formally include IPPs as eligible entities, making it easier for them to access tax and regulatory benefits. We also need to ensure that Ghana’s exports meet WAPP’s quality and pricing standards by collaborating with ECOWAS.”

Building Regional Partnerships:

“It is critical for the Ministry of Energy to establish bilateral agreements with neighboring countries. Formal power purchase agreements with high-demand markets across West Africa would guarantee demand for Ghanaian electricity, creating a stable revenue stream.”

A Vision for Ghana’s Energy Export Future

Dr Afetorgbor is confident that his proposal could help transform Ghana’s energy sector, turning it into a regional powerhouse and relieving ECG’s financial constraints.

“By embracing the Free Zones Act, we are not only addressing domestic financial issues but also positioning Ghana as a leader in West Africa’s energy market. This is an opportunity to convert an economic burden into a growth asset,” he remarked.

Concluding, Dr Afetorgbor said, “The path forward requires bold policy decisions and a commitment to regional integration. But if we act now, Ghana can establish itself as a competitive energy exporter, drive regional economic growth, and reduce the financial pressures weighing down our energy sector.”

In advocating for these reforms, Dr. Afetorgbor highlighted the need for a new strategic vision that combines regulatory reform, regional market integration, and innovative economic incentives. By licensing IPPs under the Free Zones Act, Ghana could finally unlock the potential of its energy sector, generating not only electricity but also economic growth and resilience for the future.