POWER PURCHASE AGREEMENTS (PPAs): WHAT THEY MEAN FOR GHANA

 Ghana's energy sector has evolved significantly over the decades, transitioning from hydro-dominated power generation to a mix of thermal, hydro, and renewable sources* (initiative around 2013). Central to this evolution is the concept of Power Purchase Agreements (PPAs), which are contracts between electricity producers and buyers (Ghanaian goverment). PPAs play a pivotal role in ensuring a reliable energy supply but have also been a source of financial strain for Ghana due to their structure and execution. 

This article explores what PPAs are, the agreements Ghana has used, their advantages, disadvantages, and their impact on the country’s energy landscape.

What Are Power Purchase Agreements (PPAs)?

Fig 1. Energy production, distribution and consumption diagram

PPAs are legally binding contracts between electricity generators and buyers that specify the terms for electricity generation, pricing, and supply. These agreements are vital for:

• Securing Investment: They provide financial security to Independent Power Producers (IPPs), enabling them to secure loans and investments to build power plants.
• Ensuring Stability: Governments  use PPAs to guarantee a consistent power supply to meet demand.

In Ghana, PPAs have primarily been signed between the government (i.e Volta River Authority (VRA) and Electricity Company of Ghana (ECG)) and IPPs, especially as the country sought to rapidly mitigate its power deficits through private sector involvement.

Types Of PPA Agreements Ghana Has Used Before

1. Emergency Power PPAs (1998 and Beyond)

To address acute power shortages, Ghana signed emergency PPAs with companies such as:

• Ameri Energy (2015): A 10-year agreement for emergency power supply using thermal plants.
• Karpowership: A deal to bring floating power plants to the Tema and Takoradi ports to provide additional capacity

2. IPP-Based PPAs (2000s-Present)

Ghana entered PPAs with multiple IPPs, including:

• Takoradi International Company (TICO): A thermal plant co-owned by VRA and Abu Dhabi National Energy Company PJSC (TAQA).
• Cenpower: A 350 MW thermal power plant project in Tema Industrial Area
• Asogli Power Plant: Owned by the Shenzhen Energy Group, it uses natural gas to produce electricity.

 Power Purchase Agreements (PPAs) are structured to define the terms under which electricity is purchased from Independent Power Producers (IPPs). These agreements vary based on payment structures and obligations. The primary types include:

1. Take-or-Pay Agreements:

• Description: Under these contracts, the buyers (e.g., the Electricity Company of Ghana or VRA) commits to purchasing a specified amount of power from the IPP. Even if they fail to take the agreed-upon amount, it must still pay for the contracted capacity. 
• Advantages:
  • Provides revenue certainty for IPPs, facilitating easier financing and investment.
  • Ensures that the power producer maintains the capacity to supply the agreed amount of electricity.
• Disadvantages:
  • Can lead to financial strain on the offtaker if actual demand is lower than projected, resulting in payments for unused power.
  • May contribute to overcapacity issues if multiple such agreements are in place without accurate demand forecasting

2. Take-and-Pay Agreements:

• Description: In this model, the buyer pays only for the electricity that is actually delivered and consumed. There is no obligation to pay for unused capacity.

• Advantages 
  
  • Aligns payments with actual consumption, reducing financial waste.
  • Offers flexibility to the buyer to manage varying demand levels without incurring unnecessary costs.
• Disadvantages:
• Provides less revenue certainty for IPPs, which may make financing or getting investments more challenging.
• May discourage IPPs from maintaining additional capacity to meet unexpected demand surges. 

3. Pay-As-You-Go Agreements:

• Description: These agreements involve payments based on the actual amount of electricity consumed, often with a prepayment mechanism.
• Advantages:
  • Reduces the risk of non-payment or delayed payments, as consumption is prepaid.
  • Encourages consumers to manage their electricity usage efficiently.
• Disadvantages:
• Often less suitable for large-scale industrial consumers who require consistent power supply and may not prefer prepayment models.
• May lead to revenue variability for IPPs based on consumption patterns.

NOTE: Depending on the state of the economy, Ghanaian negotiators have often been compelled to accept agreements such as take-or-pay contracts, which may not have been ideal for the long term. However, this type of agreement played a crucial role in attracting several Independent Power Producers to invest in Ghana’s energy infrastructure during periods of load shedding and power crises (“Dumsor”). At such critical times, swift measures were necessary to mitigate the energy shortage and prevent economic paralysis.

Power Purchase Agreements have been instrumental in shaping Ghana’s energy sector, helping to address critical power shortages and attract private investment. However, poorly structured agreements, overcapacity issues, and financial mismanagement have led to significant challenges, including mounting debt and inefficiencies in the energy sector. To move forward, Ghana must renegotiate existing PPAs, align new agreements with actual demand, and prioritize investments in sustainable and cost-effective energy solutions. PPAs remain a double-edged sword - capable of driving progress or deepening challenge - depending on how they are structured and implemented.