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PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB2898

Project Name

/ Ghana: Energy Development and Access Project
Region / AFRICA
Sector / Power, Renewable Energy, Micro and SME development
Project ID / P074191
GEF Focal Area / C-Climate change
Global Supplemental ID / P070970
Borrower(s) / GOVERNMENT OF GHANA
Implementing Agency
Republic of Ghana
Ghana
Electricity Company of Ghana
Electro-Volta House
P.O. Box 521
Accra, Ghana
Tel: (233) 21 676727 Fax: (233) 21 666262

Volta River Authority
Ele P.O. Box M.77ctro-Volta House
Accra, Ghana
Tel: (233) 21 221124 Fax: (233) 21 662610
Ministry of Energy
Government of Ghana
Ghana
Tel: +(233) 21 677 336

Environment Category / [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / Updated March 8, 2007
Date of Appraisal Authorization / March 12, 2007
Date of Board Approval / June 21, 2007
  1. Country and Sector Background

1.1 Ghana is a low-income country of about 20 million inhabitants with a per capita income of US$450 (2005), which is about forty percent below the average of US$745 for Sub-Saharan Africa (SSA). Despite progress in raising per capita income and improving indicators of human development over the last twenty years, there are still large regional disparities within the country. While just under 60 percent of the population lives in rural areas, these areas account for three-quarters of those living on one dollar or less a day. There are also large differences in provision of services between urban and rural areas, which are reflected in the difference in electricity access. While 77 percent of the urban population has access, the rate is only 17 percent in rural area.

1.2 The Government’s objective is to achieve middle income country status by 2015. Accordingly, Ghana’s Growth and Poverty Reduction Strategy for 2006-2009 (GPRS II) focuses on private sector competitiveness, human resource development, and good governance. Annual economic growth has averaged about 5 percent over 2004 - 2006 but it needs to increase to between 8 and 10 percent over the next years for Ghana to achieve middle-income status by 2015. The GPRS II emphasizes the removal of infrastructural bottlenecks as key to achieving the desired growth levels.

1.3 Macroeconomic Environment. Since embarking on economic reforms in the mid-1980s, Ghana has made considerable progress in laying the foundations for sustainable growth and poverty reduction through policies that have fostered macroeconomic stability and debt reduction (internal and external). Despite a rise in domestic debt associated with rising petroleum prices and disruptions in power supply in 2006, the overall trend in public debt remains firmly downwards (from 70 percent in 2005 to 42 percent in 2006).

1.4 Financial Sector. The Government has shown strong, sustained commitment to financial sector reforms since the late 1980s. In 2003, the Cabinet approved the Financial Sector Strategic Plan (FINSSP), which aims at broadening and deepening the financial sector, and is being supported by the Economic Management and Capacity Building (EMCB) project. With 60 percent of the money supply outside the commercial banking system, the rural and community banks (RCBs) play a particularly important role in extending Ghana’s private sector development and poverty reduction strategies to rural areas.

Energy Sector Issues

1.5 Power supply shortage is seriously affecting economic activity in the country. Due to rapid increase in demand - that has been sustained by low prices - and low water inflows to the Akosombo and Kpong hydropower reservoir, Ghana is suffering from a serious electricity supply deficit, which threatens its achievement of economic growth targets. In early 2007 hydropower output had reduced by 25 to 30 percent.

1.6 The financial condition of the power companies Volta River Authority (VRA) and Electricity Company of Ghana (ECG) is fragile. The financial problems stem from below cost tariffs that do not reflect the increased generating cost resulting from a doubling of oil prices and increased share of oil fired generation in the generation mix.

1.7 Distribution losses are high and power supply is frequently disrupted. Inadequate investment and preventive maintenance have led to deterioration in electricity distribution infrastructure resulting in poor quality of electricity supply and operational inefficiencies. Losses in the distribution network are 26 percent.

1.8 There are large disparities in electricity service provision between urban and rural areas. In 2004, Ghana's electrification rate reached 54 percent, significantly higher than the average of 21 percent of Sub-Saharan Africa. However, in the rural areas, only 17 percent of the population has access.

Sector Reform Strategy

1.9 Increasing Generation Capacity through Regional Integration: Regional energy integration has added a new dimension to the sector’s development. Ghana is one of the key players in the regional push towards energy trade. The Parliament of Ghana ratified the ECOWAS Energy Protocol - the umbrella law for all energy integration projects in West Africa - in June 2004 to pave the way for the financial closure for the West African Gas Pipeline (WAGP) and the West African Power Pool (WAPP). Both regional projects are critical to enhance energy security in Ghana. The WAGP would enable Ghana, together with Benin and Togo, to gain access to natural gas resources in Nigeria, and the WAPP would facilitate Ghana’s access to, and sharing of the region’s rich hydro and natural gas resources.

1.10 Restoring the Financial Viability of the Power Companies.

1.11 Improving the Performance of the Power Companies. If the Government is to reduce supply deficits and expand access of electricity, it needs also to upgrade and expand the transmission and distribution networks and remove operational inefficiencies. To do this requires significant and sustained investments and strong management.

1.12 Scaling-up Energy Access to reduce Urban-Rural Imbalance. Since the late nineties, Ghana has spearheaded innovative programs to extend energy access to rural areas. The Ministry of Energy instituted a National Electrification Scheme (NES) in 1989 as the principal instrument to achieve its policy of extending the reach of electricity to all parts of the country over a 30-year period. The first phase of the NES electrified all district capitals and towns/villages on-route to the district capital under the National Electrification Project. The second phase of the NES, the Self-Help Electrification Program, started in 2001. These programs have electrified more than 3,000 communities and increased access from 28 percent of the population in 1989 to 54 percent in 2004.

1.13 The Government is now initiating the third phase of its electrification program. Under this phase, it will develop investment appraisal and funding mechanisms that increase the transparency of the program, promote private sector innovation, and ensure that the program does not impose an uncompensated financial liability on the distribution companies. Instead of relying entirely on ECG to extend the grid to new areas, it is planning to modernize its rural electrification policy to allow both grid-based electrification and off-grid alternatives to coexist and complement each other. In addition, the Government wants to promote renewable energy alternatives in areas that are outside the reach of the national grid through innovative credit facility mechanisms that both lower the upfront cash cost of solar lighting equipment for consumers and improve the business environment for small energy entrepreneurs.

2.  Objectives

2.1 The project’s development objective is to improve the reliability of electricity supply and increase people’s access to electricity.

2.2 The global environmental objective of the project is to support transition to a low-carbon economy through the reduction of greenhouse gas emissions (GHG) in line with the United Nations Framework Convention on Climate Change and its Kyoto Protocol, to which Ghana is a Party (GEF OP 5 and 6). Moreover, the efficiency enhancing measures in the transmission and distribution sector are likely to generate additional GHG reductions for which carbon finance may be claimed. The project will be instrumental in containing carbon dioxide (CO2) emissions by improving energy efficiency of the electricity distribution system through application of new business practices and technology.

2.3 Progress towards achieving these objectives will be measured by the following indicators:

·  Improvement in ECG technical and commercial performance.

·  Increase in household electrification rate.

·  Tons of CO2 emissions avoided, calculated over the estimated lifetime of renewable energy equipment installed under the project.

Higher Objectives

2.4 Ghana Growth and Poverty Reduction Strategy II 2006-2009 (GPRS II). At the country level, the project will support the economic and social objectives of the GPRS II. The Government’s vision for the energy sector is to develop an “Energy Economy” that would ensure secure and reliable supply of high quality energy services for all (both urban and rural) Ghanaian homes, businesses, industries and the transport sector while making significant contribution to the export earnings of the country. The overall objective of the GPRS II is to decrease poverty through a combination of higher economic growth and reduced economic inequalities. The Government has taken the achievement of the Millennium Development Goals (MDGs) for Ghana as the highest-level objective. The MDGs emphasizes the importance of well-developed infrastructure as a facilitator of growth in economic and social activities. In line with this emphasis, the project’s contribution will be to support economic empowerment by removing infrastructure barriers to business development and job creation in areas inside and outside Ghana’s main cities. At the same time, accelerating access to affordable, modern energy for the poorest is critical to meeting the MDGs.

2.5 Country Assistance Strategy 2004-2007. In line with Ghana's poverty reduction goals and the MDGs, the Bank's CAS applicable to the project sets out three major objectives: (a) accelerating growth and employment generation; (b) achieving the human development Millennium Development Goals (MDGs); and (c) enhancing governance for empowerment. Through investments targeted to improve the efficiency of electricity supply, the project will help improve the financial viability of the sector, which in turn will reduce the power sector’s fiscal burden on the economy and create space for social investments. The project will directly support objective (a) and indirectly objective (b).

2.6 Africa Action Plan. At the regional level, the project will support several economic and social objectives of the World Bank's Africa Action Plan. The first and foremost objective that the project will support is the closing of the "infrastructure gap" in Africa to help achieve the economic growth required for a substantial reduction in poverty. In addition, the project supports the development of an African private sector. In this context, the project will remove infrastructure barriers to small and medium-scale business development and facilitate development of financing mechanisms for the development of energy enterprises.

3.  Rationale for Bank Involvement

3.1 IDA has supported Ghana's power sector with nine lending operations over four decades, helping to finance virtually all the major sector investments since Ghana's independence. IDA helped finance the Akosombo and Kpong dams and power plants, rehabilitate the transmission systems, increase thermal generating capacity, and extend the national grid to northern Ghana. IDA funding allowed the Electricity Company of Ghana (ECG) to improve its distribution networks in urban centers and provide electricity to small urban centers, district capitals and rural areas through a systematic electrification program. Furthermore, together with IFC and MIGA, IDA is supporting the development of a regional power market in West Africa.

3.2 The long history of partnership in the energy sector places the Bank in a unique position to assist Ghana in tackling its energy challenges. Bank involvement will: (a) enable substantial financing support; (b) provide knowledge and experience with respect to electrification initiatives and distribution system management; (c) strategically complement regional activities in the energy sector, including the WAGP and the WAPP; and (d) leverage financing from other development partners and contemporary public-private financing instruments hitherto not commonly used in Africa such as “carbon credit” financing of loss reduction and efficiency improvements and GEF financing for renewable energy.

4.  Description

4.1 The project has four components: (a) sector and institutional development; (b) transmission improvement; (c) distribution improvement; and (d) access expansion.

Component A. Sector and Institutional Development

4.2 This component comprises: (a) a corporate strengthening program for ECG; (b) regulatory capacity strengthening; (c) sector policy and strategy development; (d) upgrading staff skills in MOE, VRA, and ECG; and (e) studies and consulting services.

Component B. Transmission Improvement

4.3 This component has two parts: (a) Transmission system enhancement; and (b) technical assistance.

Component C. Distribution Improvement

4.4 The component comprises a Distribution Upgrading Component and a Commercial Systems Upgrading Component.

Component D. Access Expansion

4.5 This component has five sub-components: (a) Capacity building; (b) Increasing market penetration in peri-urban and rural areas where grids already exist; (c) Grid extensions; (d) Mini-grids supplied from mini-hydro, renewable energy, and biomass generation; (e) and Solar PV systems.

  1. Financing

IDA 90.00

Global Environment Facility (GEF) 5.50

Borrower/Recipient 12.60

African Development Bank 30.00

Free-standing Cofinancing Trust Fund 50.00

Global Partnership on Output-based Aid 6.00

Borrowing Country's Financial Intermediaries 9.00

SWITZERLAND: Swiss Agency for Dev. & Coop. (SDC) 12.00

Total 215.10

6.  Implementation

6.1 Overall Project Responsibility. MOE will be in charge of coordinating the overall project, including monitoring and evaluating project progress and achievement of its development objectives, reporting, and ensuring that environmental and social management plans are implemented as required.

6.2 Project Implementation Teams. Each of the participating institutions - VRA, ECG, and MOE - will have a dedicated Project Implementation Teams.

7.  Sustainability

7.1 Sustainability. The IDA grant will finance the capital cost of transmission and distribution investments in urban and rural areas. The sustainability of this infrastructure will depend on the quality of the operations and maintenance as well as systems for financing their costs.

7.2 The main elements for ensuring the sustainability of the ECG and VRA components will be (a) increasing net revenue per unit of electricity sales (through cost-reflective tariffs, selective load-shedding and/or fiscal support); and (b) reducing the per customer unit cost of supply.