Abstract: Access to reliable energy, particularly electricity, has consistently been identified as one the most significant constraints to doing business in Ghana. Improving energy supply remains one of the government’s top priorities indicated by the recent procurement of several thermal-based electricity generation supplies in addition to a commitment to develop the country’s natural gas market. Ghana’s domestic gas resources have the potential to significantly change the fuel supply dynamics over the next 15 to 20 years, however issues with the pricing of natural gas have not been fully understood by stakeholders. This paper analyses the emerging gas industry in Ghana, specifically natural gas price formation and identifies the constraints to the development of gas markets, and the role of policy in shaping this market. Our findings indicate that a review of the current uniform transportation and distribution tariffs is necessary to bring domestic gas prices down. This will, in turn, catalyse broad-based development and inclusive growth through the economic multipliers it creates. The paper provides a basis for informed, evidence-based policy making and discussions on gas use and gas pricing.
The Policy Issue
Access to reliable energy, particularly electricity, has consistently been identified as a significant constraint to doing business in Ghana, especially for small and medium scale enterprises (SMEs) which constitute a significant proportion of the economy (World Bank, 2018 & 2013). Inadequate power supply, resulting in load shedding and power outages, has had a negative impact on businesses, forcing them to resort to more expensive power-generation units that run on petrol and diesel fuel. The increase in their operational costs and the subsequent impact on their cash flows led to reduced output and job losses. The Institute of Statistical, Social and Economic Research (ISSER) estimates that the 2007-2008 and the more recent 2014-2016 power crisis dubbed ‘dumsor’ cost Ghana about 2% of GDP (USD 766 million) from the production of goods and services. This challenge, driven in part by the estimated 10% year-on-year demand growth for power, implies that about 250 megawatts (MW) of new generation capacity needs to be procured annually (Acheampong & Ankrah, 2014).
The discovery of oil and gas in commercial quantities since 2007 and subsequent production has changed Ghana’s fuel supply dynamics. This change has led to the restructuring of energy policy including initiatives to develop the domestic gas (associated and non-associated) reserves to provide fuel for thermal generation and other industrial uses such as petrochemicals. This aligns with government’s vision of making Ghana the petroleum hub of the West African sub-region. At the same time, strategic procuring of alternative liquefied natural gas (LNG) imports for gas-to-power projects to replace expensive liquid fuels namely light crude oil (LCO) and diesel for use in petrochemicals production and transportation is ongoing. Thus, natural gas is poised to play a crucial role in Ghana’s energy sector as power demand grows and thermal generation capacity is expanded.
Despite this changing dynamic, issues of gas use and its ability to drive industrial development, particularly the economic pricing of natural gas have not been fully explored. Issues of gas pricing have been found by companies and countries to be commercially and politically sensitive due to its impacts on what consumers pay and the economics of investing in new infrastructure for future energy demand (International Gas Union, 2014). Also, gas pricing issues have received considerable attention in policy circles in recent years given the transition to more sustainable and environmentally friendly energy systems to address climate change. Considering these developments, we believe that a thorough understanding of natural gas utilisation and pricing is crucial in working out the linkages between energy security and inclusive development. For relevant stakeholders, a detailed understanding of components that feed into the gas price ensures that discussions of gas use and pricing is approached from an informed perspective.
This policy brief provides a concise but comprehensive assessment of gas price formation in Ghana. Further, it contextualises this considering the recent energy and industrial policy changes in Ghana as well as dynamics in the West African region. Our findings indicate that a review of the current uniform transportation and distribution tariffs is necessary to bring domestic gas prices down. This will, in turn, catalyse broad-based development and inclusive growth through the economic multipliers it creates. The brief provides a basis for informed, evidence-based policymaking and discussions on gas use and gas pricing.