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| PURC |
The Public
Utilities Regulatory Commission (PURC) has justified its decision to increase
electricity tariffs by 18.36% for the 2nd quarter of 2023.
Ghanaians will
from June 1 pay more for electricity following PURC’s decision to approve new
tariffs across board for all consumer groups.
PURC blamed the
decision on the rising cost of fuel and gas, cedi depreciation, inflation among
others.
Below is a
statement from PURC providing further justification for the new electricity
tariffs.
JUSTIFICATION OF
THE 2023 2ND QUARTER TARIFF ADJUSTMENT
Background
The Public
Utilities Regulatory Commission sits between utility service providers and
consumers. While PURC ensures that the utilities are financially viable to
provide adequate services (by approving adequate revenue requirement for them),
the Commission also ensures that consumers get access to reliable and
competitively priced services. This means, the Commission must balance the
interest of both utilities and consumers. As part of steps to perform this
balancing act, the Commission approves major tariffs, which are applicable over
a regulatory period. The Commission also undertakes quarterly adjustments of
the tariffs, performs regulatory audits, monitors performance of the utilities,
educates the public, receives and resolves complaints.
The PURC in September
2022, undertook a major tariff review (2022-2025) in which, it considered the
cost of operation for regulated utilities, exchange rate, inflation, cost of
fuel and other factors. Since the exchange rate, inflation and cost of fuel are
neither under the control of the utilities nor the Commission, variations in
these variables are considered as a pass-through cost. Additionally, the energy
mix, which is subject to the hydrology of the dam and other climatic factors
are beyond the reach of the Commission, thereby necessitating its consideration
in any quarterly tariff adjustment. To this end, the Commission per its
guidelines considers these four factors (exchange rate, inflation, energy mix
and cost of fuel) and adjusts electricity tariffs on a quarterly basis to
restore value of the tariffs and to meet the revenue requirements of the
utility service providers. This is what is referred to as the Quarterly Tariff
Adjustment. A similar approach is applied to water tariff.
Explanation of
the June 1st, 2023 Quarterly Tariff Adjustment
Some detailed
explanations on the 2nd Quarter Tariff Decision of the Commission, which
is expected to take effect from June 1, 2023 is given below.
With the
recently announced quarterly tariff decision, the electricity utilities are to
recoup an amount of GHS1.3149 billion over the next quarter. This is to help
purchase fuel to generate power, transmit, distribute and continuously serve
consumers. To recover the full amount, electricity tariffs should have been
increased by 27.51%. However, given the approved tariff of 18.36%, an amount of
GHS877.70 million will be recovered, leaving a balance of GHS437.22 million to
be recovered. On the other hand, the amount to be recovered through the water
tariff is GHS 650,267,161 million.
This brings us
to the reasons for the recoveries. In other words, what and why are we
recovering?
The first is the
price of natural gas.
In the first
quarter tariff decision, Jubilee Oil Field contributed 32.7% of gas, Sankofa
contributed approximately 51.8%, while Nigeria Gas (N-Gas) contributed 15.1%.
Gas from the Jubilee Field was priced at USD 0.5/mmbtu, Sankofa was at USD
6.6272/mmbtu, while N-Gas was priced at USD 8.1510/mmbtu in the weighted
average cost of gas (WACOG).
For the second
quarter tariff decision, the contribution of Jubilee Field reduced marginally
to 32.2%, whiles Sankofa increased to 53.9%. This reflects changes in the quantity
of Natural Gas received from both fields.
The price of
N-Gas on the other hand, increased from USD 8.1510/mmbtu to USD 8.6641/mmbtu,
reflecting an upward change in price.
The overall
implication is that the weighted average cost of gas which was USD 6.0952/mmbtu
in the first quarter now increased to USD 6.5165/mmbtu in the second quarter.
representing an increase of 6.9%.
Since gas prices
are a pass-through cost, it is imperative that we should pay the gas price
differential to enable the power producers to generate enough power for
consumption. Thus, the percentage increase of 6.9% had to be passed through the
tariff.
The second
variable is the Exchange Rate.
The projected
exchange rate used for the first quarter tariff decision (that is February to
April) was GHS 8.6816 to the USDollar. Meanwhile, the actual exchange rate for
that same period was GHS 10.9507 to the US Dollar. This led to an exchange rate
under-recovery of GHS 2.2690.
It is important
to note that all Power Purchase Agreements (PPAs) are denominated in US
Dollars. This means ECG buys power in US Dollars, but sells in Ghana Cedis. The
implication is that any under-recoveries with the exchange rate threatens the
utility’s ability to procure and sell power. This also threatens the ability of
the power generators to procure fuel for generation. Thus, the exchange rate
has to be recovered.
Additionally,
the Commission only passed on 75% of the exchange rate under-recovery, which
was experienced between September 2022 and January 2023 in the first quarter
tariff decision. The remaining 25% which is equivalent to GHS 0.6202 had to be
recovered. This means that for the second quarter tariff decision, that 25%
equivalent to GHS 0.6202 from September 2022 to January 2023 period plus the
previous quarter under-recovery of GHS 2.2690 has to be recovered.
The Commission
however, considered the present economic circumstances of Ghanaians and
Industry, and decided to recover the GHS 0.6202 under-recovery from September
2022 to January 2023 period, plus 50% of the GHS 2.2690, which is GHS1.1345
under-recovery of the previous quarter, which comes up to GHS 1.7547
(1.1345+0.6202) to be recovered.
Finally, the
projected exchange rate for the next quarter (June to August) is GHS 10.9571 to
the US Dollar. If the under-recovery of GHS 1.7547 of the previous quarter is
added to the projected exchange rate of GHS 10.9571, the applicable exchange
rate amounts to GHS 12.7118 to the US Dollar. Since only 50% of the exchange
rate effect is being recovered, it means, an equivalent of GHS 437 million has
been effectively passed on to the next quarter.
The third variable for consideration is the Hydro-Thermal mix.
The
hydro-thermal mix used for the second quarter is 29.01% for hydro, and 70.99%
for thermal; as against 26.11% for hydro and 73.89% for thermal used for the
first quarter tariff decision. The increased hydro allocation of 29.01% helped
to reduce the potential tariff by about 2.5%. This means that without the
increased hydro allocation, the tariff would have gone up by an additional
2.5%.
The final variable is Inflation.
The projected
inflation figure for the year, was 42.63%. If this figure is divided into four
quarters, that amounts to an inflation rate of 10.66% per quarter.
The average
actual inflation for the first quarter was 50.47%. Again, if this is divided by
four, we get an inflation figure of 12.62%. This means that the inflation
effect for the second quarter will be 12.62% – 10.66% which is 1.96. This
figure is that which was considered in the second quarter tariff decision.
Conclusion
In a nutshell,
the 2nd quarter tariff decision of 18.36% for electricity helps to fully
recover (i)100% of the inflationary effect, (ii)100% of the gas price effect
and (iii)50% of the exchange rate effect.
PURC
Communication Team.
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