Political Economy Analysis (PEA) of the Binding Constraints to Renewable Energy Investment in Ghana

Report for the Green Growth Diagnostics for Africa projec

The Political Economy of Renewable Energy Investment in Ghana

The high level of fossil fuel consumption globally is wreaking havoc on the global climate through the emissions of greenhouse gases. Against this backdrop, there have been calls from national and international stakeholders for a transition towards renewable energy (RE). However, the investment and adoption of renewable energy technologies especially, in developing countries have been woefully inadequate. Even though various policy and legislative instruments in support of RE development abound in Ghana, the contribution of RE to the energy generation mix is notably insignificant, due to constraints that limit high investment. Using the Political Economy Analysis (PEA) approach, this article examines the deficiencies in these policy strategies, and unravels the complexity as well as the alignments of interests of stakeholders regarding policies that could provide a more favourable investment in renewables in Ghana. The article recommends that Ghana’s leaders champion those policies with the highest support across all stakeholders

Introduction: Overcoming the Constraints to Green Electricity in Africa

The phenomenon of inadequate power supply in sub-Saharan Africa (SSA) has been a subject of great interest over the years because of its intractable nature and its importance for development; SSA accommodates about 55 per cent of the more than one billion people without access to electricity globally. Moreover, in many SSA countries, electricity access rates are decreasing because electrification efforts are slower than population growth. In recent years, however, certain SSA countries have demonstrated that with political will and access to appropriate finance, electricity access can be accelerated. The overwhelming calls for clean (green) energy sources into the energy mix cannot be overemphasised. Drawing from different disciplines, this IDS Bulletin provides new perspectives that go beyond the identification of obstacles to renewable energy development in SSA. The contents of these contributions underscore the complexity surrounding the clean electrification challenge in SSA; and demonstrate the benefits of a multidisciplinary approach in the design of interventions

Green Power for Africa: Overcoming the Main Constraints

Inadequate power supply in sub-Saharan Africa (SSA) means that only 37 per cent of sub-Saharan Africans have access to electricity. Those with access are prone to experience problems with regular power outages. In many sub- SSA countries, electricity access rates are decreasing because electrification efforts are slower than population growth. In recent years, however, some SSA countries have demonstrated that with political will and opportunities for appropriate finance, access to electricity can be accelerated. Alongside increased awareness in the international development community of the importance of energy for human development, the requirement for energy to be ‘green’ means that calls for the provision of clean, renewable energy sources cannot be ignored. The authors of this IDS Bulletin provide insights from power systems engineering, macroeconomics, microeconomics, and political economy on how to overcome constraints to green electricity in Africa. One of the biggest contributions of this issue is that is allows a dialogue between academics and practitioners that would not normally be published in the same journal. What also emerges as an underlying thread is the essential role of donors to achieve sustainable energy for all in Africa. The contributions to the IDS Bulletin underline the enormity of the clean electrification challenge in Africa, and demonstrate the benefits of a multidisciplinary approach where technical, economic, and political perspectives are involved in the design of interventions

Cost and Returns of Renewable Energy in Sub-Saharan Africa: A Comparison of Kenya and Ghana

The allocation of finance for the provision of green electricity in sub-Saharan Africa (SSA) should be informed by two questions. Which generation technologies are financially viable? And which generation technologies are affordable? Our analysis addresses these for Kenya and Ghana by calculating the levelised cost of energy (LCOE) and internal rate of return (IRR) for a portfolio of renewable energy (RE) technologies under different scenarios. Our results show better fundamentals in Kenya for the successful implementation of renewable energy projects. Wind and geothermal technology offer low-cost electricity and healthy returns on investment. Solar photovoltaics (PV) could be competitive with expensive diesel generation but its current price does not allow for cost recovery. Kenyan feed-in tariffs (FiTs) protect investors against currency devaluation and the off-taker is creditworthy. Ghana’s renewable electricity (except hydro) is expensive in comparison and offers lower returns. This is mainly due to high financing costs and lower-quality RE resources. Additionally, RE investors in Ghana are not protected against further currency devaluation by the existing FiT scheme and there are concerns about the creditworthiness of the off-taker. Policymakers should target these key constraints to affordability and profitability to support a higher penetration of renewables in the country. The role of public finance and public–private partnership is particularly highlighted as a way forward to improve the financial performance of renewable energy in SSA.UK Department for International Development; EPSR

Exploring the Macroeconomic Impacts of Low-Carbon Energy Transitions: A Simulation Analysis for Kenya and Ghana

The study applies purpose-built dynamic computable general equilibrium models for Kenya and Ghana with a disaggregated country‑specific representation of the power sector, to simulate the prospective medium-run growth and distributional implications associated with a shift towards a higher share of renewables in the power mix, up to 2025. In both countries, the share of fossil fuel-based thermal electricity generation in the power mix will increase sharply over the next decade and beyond according to current national energy sector development plans. The overarching general message suggested by the simulation results is that in both countries it appears feasible to reduce the carbon content of electricity generation significantly without adverse consequences for economic growth and without noteworthy distributional effects

Diagnoses of the Adaptive Capacity of Urban Households to Floods: The Case of Dome Community in the Greater Accra Region of Ghana

Urban areas are adversely affected by climate change effects such as flooding and temperature increase, with developing countries being more susceptible to these effects. This paper therefore draws on the adaptive capacity framework to understand the determinants of the capacity of residents in an urban context to deal with floods. The determinants considered in the paper include knowledge and awareness, technology, infrastructure, institutions and economic resources. Using Dome in the Greater Accra Region of Ghana as a case study, a systematic random sampling technique was used to sample 371 respondents for the household questionnaire survey whilst institutional heads were purposively selected for in-depth interviews. The study revealed that flooding is the most prevalent climate related hazard in the study area. The study also established that the adaptive capacity of the people of Dome to floods is very low when all the determinants are taken into consideration; the awareness, ability and action dimensions with respect to wealth, gender and education categories are higher at all levels compared to the overall adaptive capacity. This is a clear indication that the determinants of the adaptive capacity are intertwined. Therefore, in order to ensure the presence of a high adaptive capacity in households of Dome to flood, all the determinants should be supported

Macroeconomic Effects of a Low-Carbon Electricity Transition in Kenya and Ghana: An Exploratory Dynamic General Equilibrium Analysis

Report for the Green Growth Diagnostics for Africa project.Report for the Green Growth Diagnostics for Africa project

From Growth to Green Investment Diagnostics

The need to shift from fossil fuels to renewable energy systems is now broadly accepted, and our understanding of how different policy mechanisms can support this process is growing. To date, much of this research has focused on developed countries, but the need for this shift is increasingly being recognised as important in countries at all levels of development. The circumstances of these countries are different, however, suggesting that approaches to policy identification and evaluation may also need to be adapted. These differences are found in three areas: first, many developing country governments face severe budget constraints and competing calls on public resources to address poverty. The finances available to support policy mechanisms are therefore more limited than in many developed countries. Second, given the immaturity of financial systems, the most important obstacles to investment in renewable energy may be unrelated to the specifics of these investments, but reflect more general problems. Third, while issues of political economy are important for power sectors everywhere, they can be particularly pronounced in developing country settings. Before we can assess the potential effectiveness of different policy mechanisms to support renewable energy investment in developing countries, therefore, we need first to understand what the most important constraints to these investments are. Given the very large number of potential constraints, an approach is needed to narrow this set systematically, and identify those constraints which are most important, or ‘binding’. The research presented in this paper adapts and extends the ‘growth diagnostics’ approach developed by Hausmann, Rodrik and Velasco (2004) for this purpose, and applies this to renewable energy investment in two developing countries: Ghana and Kenya. The resulting ‘green investment diagnostics’ thus complements existing work on policy evaluation in developed countries, offering a diagnostic tool specifically designed for developing country settings that could be applied alongside these mechanisms

Green Investment Diagnostics for Africa: What are the Binding Constraints to Investment in Renewables in Kenya and Ghana?

The vast potential of renewable energy is failing to be realised in many African countries, in spite of the many pledges made by donors and international financiers. This is not due to a lack of policies supporting investment. Many African countries have renewable energy targets, feed-in-tariffs (FiT), or import duty exemptions for renewable energy technologies. In some cases these policies are not fully implemented. In others they are implemented but, put in the language of this report, they are not targeting the most binding constraints to investment. Whatever the reason for their lack of success, it is clear that simply introducing formal policies is not enough. This Research Report presents the Green Investment Diagnostics methodology that aims at supporting policymakers to better target policies for the promotion of renewable energy investment. Our approach draws from the original Growth Diagnostics developed by Hausmann, Rodrik and Velasco (2004) to identify the most binding constraints to economic growth in developing countries. We adapt that approach to the particular case of the energy sector, so that we can identify the main bottlenecks faced by renewable energy investors in a particular country. We start by asking: for this particular country, at this particular time, what is preventing higher levels of investment in renewable energy generation technologies for which there is an economic rationale? To answer this question we follow a systematic approach, which starts with a decision tree analysis and continues with the cumulative building of evidence to back up potentially binding constraints. We apply the new methodology to two Sub-Saharan African countries, Kenya and Ghana, but this exercise could be replicated in any other context. In Ghana, we look for the reasons for underinvestment in renewable generation capacity. We find that renewable energy investments provide low returns in the country, disproportionate with the very high risks coming from an unreliable off‑taker, poor regulation, macroeconomic imbalances and corruption. Furthermore, there is insufficient access to finance due to scarce domestic finance and high returns expectation for short-term loans. In Kenya, we first look for factors behind the successful attraction of investment for large-scale renewables, mainly wind and geothermal. We then focus on the constraints to future investment, particularly in flexible, smaller-scale technologies more appropriate for increasing electrification rates in rural areas. Kenya offers generous returns to investment in renewables and least cost generation from geothermal and wind. However, it faces high system costs due to a lack of networking infrastructure and an inflexible generation mix. It also presents regulatory constraints at the planning and procurement stages and serious problems of social acceptance. Social problems are exacerbated by uncertain land property rights and consultation processes, inequality in access to services, and the rent-seeking behaviour of local elites. At the heart of each country’s constraints there is a stable status quo in each country: the over-borrowing state in Ghana, and a rent-capturing elite in Kenya