Source: PURC COMMUNICATION TEAM
According to the Public Utilities Regulatory Commission (PURC), a rise in power rates of 18.36% for the second quarter of 2023 is justified.
Following the utility regulatory body’s decision to accept the higher prices submitted by the power distribution companies for all consumer groups, Ghanaians will start paying extra for energy usage as of today, June 1, 2023.
The PURC has attributed the decision to factors including the depreciation of the cedi, the cost of gasoline and gas, the rising tariff, and inflation
.
Below is a statement from the PURC outlining the rationale behind the new electricity rates:
JUSTIFICATION OF THE TARIFF ADJUSTMENT FOR THE THIRD QUARTER OF 2023
Background
The Public Utilities Regulatory Commission stands between customers and the companies that offer utility services. While PURC guarantees that utilities have enough income to operate (by setting acceptable revenue requirements for them), the Commission also makes sure that customers have access to dependable services at reasonable costs.
This means that the Commission must strike a balance between utilities’ and consumers’ interests. The Commission approves large tariffs, which are applied throughout a regulatory term, as one of the phases in doing this balancing act. Additionally, the Commission adjusts tariffs quarterly, conducts regulatory audits, keeps tabs on utility performance, informs the public, and receives and handles complaints.
The PURC launched a significant tariff review (2022–2025) in September 2022, during which it took into account issues such as the cost of operating regulated utilities, the exchange rate, inflation, fuel prices, and other costs. Variations in these factors are regarded as pass-through costs because neither the utilities nor the Commission have any control on the currency rate, inflation, or fuel cost.
Additionally, the Commission has no control over the energy mix, which is influenced by the hydrology of the dam and other climatic conditions. As a result, any quarterly tariff adjustment must take this into account.
In order to achieve this, the Commission modifies electricity rates on a quarterly basis in accordance with its rules, taking these four elements into account (exchange rate, inflation, energy mix, and cost of fuel) in order to restore the tariffs’ value and satisfy the utility service providers’ demand for revenue. This is the so-called quarterly tariff adjustment. The water tariff is handled in a manner akin to this.
Explanation of the Quarterly Tariff Adjustment of June 1, 2023
Below are some thorough explanations of the Commission’s Second Quarter Tariff Decision, which is anticipated to go into effect on June 1, 2023.
According to the newly revealed quarterly rate decision, the electrical utilities would recover GHS1.3149 billion during the upcoming three months. This will go toward purchasing fuel to produce, transmit, distribute, and constantly provide power to consumers. The electricity charges should have been raised by 27.51% in order to recoup the full amount. A total of GHS877.70 million will be recovered, leaving a balance of GHS437.22 million to be recovered, based on the authorized tariff of 18.36%. On the other side, GHS 650,267,161 million will be recovered through the water tariff.
We now arrive at the causes of the recoveries. What and why are we recuperating, in other words?
The cost of natural gas is the first.
Jubilee Oil Field produced 32.7% of the gas in the first quarter tariff decision, Sankofa provided roughly 51.8%, and Nigeria Gas (N-Gas) provided 15.1%. According to the weighted average cost of gas (WACOG), gas from the Jubilee Field was priced at USD 0.5/mmbtu, gas from Sankofa at USD 6.6272/mmbtu, and gas from N-Gas at USD 8.1510/mmbtu.
Jubilee Field’s contribution to the second quarter tariff decision decreased slightly to 32.2%, while Sankofa climbed to 53.9%. This reflects adjustments to the natural gas influx from both fields.
On the other hand, the cost of N-Gas rose from USD 8.1510/mmbtu to USD 8.6641/mmbtu, indicating a rise in price.
Overall, this means that the second quarter’s weighted average gas price, which was USD 6.0952/mmbtu in the first quarter, has climbed to USD 6.5165/mmbtu. indicating a 6.9% gain.
Since gas costs are a pass-through expense, it is essential that we pay the difference in gas prices to allow the energy producers to create adequate electricity for consumption. The 6.9% rise in percentage had to be passed through the tariff as a result.
The exchange rate is the second factor.
For the first quarter tariff decision (February to April), the estimated exchange rate was GHS 8.6816 to the USDollar. GHS 10.9507 was the actual exchange rate during that time period vs the US dollar. This resulted in a GHS 2.2690 under-recovery in the exchange rate.
The fact that all Power Purchase Agreements (PPAs) are priced in US dollars should be noted. Therefore, ECG sells electricity in Ghana Cedis while purchasing it in US Dollars. The inference is that the utility’s capacity to buy and sell power is threatened by any under-recoveries in the exchange rate. Additionally, this jeopardizes the power generators’ capacity to obtain fuel for operation. As a result, the exchange rate must be restored.
In the first quarter tariff decision, the Commission only passed on 75% of the exchange rate under-recovery that occurred between September 2022 and January 2023. It was necessary to reclaim the remaining 25%, which is equal to GHS 0.6202. For the second quarter tariff decision, this means that the under-recovery from the first quarter, which was GHS 2.2690, plus 25%, or GHS 0.6202, from September 2022 to January 2023, must be made up.
The Commission decided to recover the GHS 0.6202 under-recovery from the period of September 2022 to January 2023, plus 50% of the GHS 2.2690, or the GHS 1.1345 under-recovery of the previous quarter, for a total of GHS 1.7547 (1.1345+0.6202), taking into account the current economic conditions of Ghanaians and Industry.
Lastly, GHS 10.9571 to the US dollar is predicted to be the exchange rate for the upcoming quarter (June to August). The appropriate exchange rate is GHS 12.7118 to the US Dollar when the under-recovery of GHS 1.7547 from the previous quarter is added to the expected exchange rate of GHS 10.9571. Only recovering 50% of the exchange rate effect means that GHS 437 million has effectively been carried over to the following quarter.
The Hydro-Thermal mix should be taken into account as the third factor.
As opposed to 26.11% for hydro and 73.89% for thermal utilized for the first quarter tariff decision, the hydro-thermal mix used for the second quarter is 29.01% for hydro and 70.99% for thermal. The potential tariff was reduced by around 2.5% thanks to the enhanced hydro allotment of 29.01%. This indicates that the tariff would have climbed by an additional 2.5% without the enhanced hydro allocation.
The last factor is inflation.
The anticipated annual rate of inflation was 42.63%. Inflation would be 10.66% each quarter if this amount were divided into four equal quarters.
For the first quarter, actual inflation on average was 50.47%. Once more, if we divide this by 4, we get an inflation rate of 12.62 percent.
As a result, the inflation effect for the second quarter will be calculated as follows: 12.62% – 10.66%, or 1.96. This number was taken into account while deciding on the tariff for the second quarter.
Conclusion
In summary, the 18.36% power tariff decision for the second quarter aids in the complete recovery of (i) the inflationary effect at 100%, (ii) the gas price effect at 100%, and (iii) the exchange rate effect at 50%.
