Economic Analysis of the

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					Economic Analysis of the



     Energy Sector




Prof. Bartholomew Armah
                          List of Acronyms


CPESD   Coordinated Programme of Economic and Social Development
GDP     Gross Domestic Product
GPRS    Ghana Poverty Reduction Strategy
MTP     Medium Term Priorities
TOR     Tema Oil Refinery
VALCO   Volta Aluminium Company
VRA     Volta River Authority




                                  i
Executive Summary

This report provides the economic context for the formulation of the Strategic National
Energy Plan for the period 2000-2020. The first part of the report describes the
economic structure of Ghana. The salient aspects of the economy are that it is largely
agrarian as evidenced by the dominant share of agriculture in total GDP. The relative
shares of the sectors have changed little over time, however, the service sector has
experienced marginal increases in its relative share of the economy. Furthermore, the
growth of the economy has been spurred largely by the service sector. Agriculture and
industry by comparison have experienced relatively slow growth.
The description of the economy is followed by an analysis of the contribution of energy
to the Ghanaian economy. This discussion is restricted to the direct effects of crude oil
and petroleum taxes to the GDP. The indirect effects that occur when a firm uses energy
as an input into its final production requires estimates of input output relationships by
sector.


Since Ghana is a non-oil producing country, crude oil imports are an important
component of its trade basket. Crude oil imports constitute approximately 25 percent of
export earnings, 18 percent of imports and 13 percent of total revenue and grants. In
2001, crude oil imports accounted for approximately 80 percent of the trade deficit.


Given the importance of crude oil to the GDP the discussion then examines the energy
needs of each sector and the types of energy used by such sectors. Woodfuels,
petroleum products and electricity are the main sources of energy used in Ghana. Wood
fuel is used predominantly in rural households and accounts for approximately 60
percent of total energy consumption. Diesel and gasoline on the other hand are the most
widely used petroleum products.


At the sectoral level, total energy consumption is highest at the household level followed
by transport and industry. Agriculture uses the least amount of energy.


The report also discusses the implications of the nation’s development policies for its
future energy needs. The drivers of growth according to the Ghana Poverty Reduction
Strategy   and   the   CPESD      are   agro-based     manufacturing      and   Information



                                            ii
Communications Technology. In effect, the key sectors of emphasis are the agriculture
sector, the manufacturing and the communications subsectors. Of these sectors,
however, energy consumption is highest in manufacturing. Hence, a critical analysis of
the manufacturing sector’s growth path is essential to key to assessing the nation’s
future energy needs.




                                          iii
Introduction

Ghana is largely a small open agrarian economy characterized by frequent episodes of
macro-economic instability. The National Census Secretariat estimates the population
headcount at 18.4 million and the intercensal growth rate at 2.7 percent. The Gross
Domestic product is estimated at $6.0 billion in 2002, which yields a per capita GDP of
$326. As a non-oil producing country, Ghana depends on imported crude oil to meet a
significant share of her energy needs. The dependence on imported crude oil, however,
makes the country vulnerable to changes in crude oil prices. Crude oil imports account
for approximately 10 percent of total commodity trade (i.e., import plus exports), and
consumes between 15 and 40 percent of the nation’s export earnings.         On the other
hand, as a source of tax revenue and input into domestic industrial production, crude oil
contributes to and thereby influences the Gross Domestic Product of the country. Hence,
an assessment of the energy needs of the nation is critical to estimating the growth path
of the economy.


Trends in the GDP

Growth in the Gross Domestic Product (GDP) of Ghana averaged 4.1 percent between
1995 and 2002 and ranged between 3.7 percent and 4.5 percent during the same
period. Notwithstanding the fact that real GDP growth appears to be trapped in a low-
level equilibrium of approximately 4 percent, for the first time in 7 years real GDP has
increased at an increasing rate for three consecutive years.       After declining from a
recent high 4.7 percent in 1998 to 4.4 percent in 1999, real GDP rose steadily from 3.7
percent in 2000 to 4.2 percent in 2001 and then to 4.5 percent in 2002.


Growth was spurred largely by the service sector which has averaged a growth rate of
5.3 percent since 1995. Although the agricultural sector accounts for over a third of the
GDP (36 percent) and averaged 4.1 percent in growth over the 1995-2002 period, the
sector’s growth has lagged behind the industrial and service sectors. In 2001, the
service sector accounted for the largest (1.5 percentage points) contribution to the
overall real GDP growth rate of 4.2 percent followed by the agricultural sector (1.4
percentage points) and the industrial sector (0.7 percentage points).




                                            1
                                                                            Figure 1
                                                     Real GDP Growth Trends
                                                                            Re al GDP Gr ow th




                                              5 .0            4 .6                  4 .7
                                                                                                   4 .4                            4 .5
                                              4 .5                      4 .2                                             4 .2
                                                     4 .0
                                                                                                           3 .7
                                              4 .0
                                              3 .5
                                              3 .0




                                   perc ent
                                              2 .5
                                              2 .0
                                              1 .5
                                              1 .0
                                              0 .5
                                              0 .0

                                                     1995     1996      1997        1998           1999    2000      2001         2002

                                                                                           Y ear




In the medium to long term, projected real GDP growth rate is based on two national
development frameworks; the Ghana Poverty reduction Strategy GPRS and the
Coordinated Programme of Economic and Social Development of Ghana (2003-2012).
The Ghana Poverty Reduction Strategy (GPRS) projects the GDP to rise from 4.2
percent in 2001 to 5 percent in 2005 while The Coordinated Programme of Economic
and Social Development projects an average GDP growth of 7-10 percent for the period
2003 to 2012. This growth rate is expected to double the per capita income by 2012.


                                                                            Figure 2
                                                            Sectoral Growth Rates

                             7.0


                             6.0


                             5.0


                             4.0
                   percent




                             3.0


                             2.0


                             1.0


                             0.0
                                   1995               1996           1997         1998              1999          2000          2001*     2002


                                                                               Agric.      Ind.       Service




                                                                                    2
Sectoral Composition of GDP

The sectoral composition of the GDP reveals an economic structure that has been fairly
stagnant over time with marginal increases in the relative share of the service sector.
Such increases have occurred largely at the expense of the agricultural sector, which
accounts for (35.3 percent) the largest share of total GDP followed by Services (29
percent) and Industry (25.5 percent). The sector averaged a growth rate of 4.1 percent
over the period 1996-2001 compared to growth rates of 4.3 percent and 5.6 percent in
the industrial and service sectors respectively. As a result of its relative size however,
the sector accounted for 30 percent of the GDP growth rate of 4.2 percent in 2001.
Nevertheless, this growth share is less than the sector’s 35 percent contribution to the
total level of GDP in the same year.




                                                   Figure 3
                                           Sectoral GDP Shares

                             40.0
                             35.0
                             30.0
                             25.0
                   percent




                             20.0
                             15.0
                             10.0
                              5.0
                              0.0
                                    1995

                                            1996

                                                   1997

                                                              1998

                                                                        1999

                                                                                 2000

                                                                                         2001*

                                                                                                 2002




                                                   Agric.            Ind.      Service




                                                          3
                                                                           Table 1
                                                     Sectoral and Sub-Sectoral Growth Shares
                                                                                                                                  Weighted
                                                                                                                    %Growth        Shares
                                                   1995    1996    1997    1998     1999    2000 2001* 2002 Average Shares         (2001)
1. AGRICULTURE                                       3.7     5.2     4.3      5.1     3.9     2.1   4.0     4.4   4.1     100.0        1.4
1.1 Agriculture and livestock                        3.5     6.3     2.6      4.4     4.7     1.1    5.0    5.3   3.9      68.3        1.2
1.2 Cocoa Production and Marketing                  11.0     2.9     9.3     11.1    -0.5     6.2   -1.0    9.8   5.6       9.2        0.0
1.3 Forestry and Logging                             2.0     2.7    21.5     10.0     6.8    11.1   4.8     5.0   8.4       9.9        0.2
1.4 Fishing                                          1.6     3.0     0.6      1.8     1.0    -1.6   2.0     2.8   1.2      12.6        0.1
2. INDUSTRY                                          4.1     4.7     6.4      3.2     4.9     3.8    2.9    4.7   4.3     100.0         0.7
2.1 Mining and Quarrying                             5.5     4.2     5.6      6.1     3.0     1.5   -1.6    4.5   3.5      21.1        -0.1
2.2 Manufacturing                                    1.8     3.5     7.3      4.0     4.8     3.8   3.7     4.8   4.1      36.7        0.3
2.3 Electricity and Water                            6.0     6.4    10.2    -10.0     7.8     4.5   4.2     4.1   4.2      10.3        0.1
2.4 Construction                                     5.2     6.1     4.4      5.0     5.5     5.1   4.8     5.0   5.2      31.9        0.4
3. SERVICES                                          4.7     4.2     6.5      6.0     5.0     5.4   5.1     4.7   5.3     100.0        1.5
3.1 Transport, Storage and Communication             4.2     5.0     7.2      5.5     6.0     6.0   5.5     5.7   5.6      16.1        0.3
3.2 Wholesale and Retail Trade, Restaurant and
Hotels                                               6.5     8.3     9.5      6.0     6.5     4.0   5.1     5.6   6.6      23.0        0.4
3.3 Finance, Insurance, Real Estate and Business
Services                                             3.0     4.2     6.7      6.5     4.0     5.0   4.5     5.5   4.8      14.3        0.2
3.4 Government Services                              5.0     2.4     4.3      6.2     4.0     6.0   5.0     3.6   4.7      37.0        0.6
3.5 Community, Social and Personal Services          2.6     1.1     7.3      5.9     5.9     6.9   6.5     4.4   5.2       6.5        0.1
3.6 Producers of Private non-profit Services         3.0     1.8     7.2      5.1     4.1     3.1   3.2     3.1   3.9       3.0        0.0
4. SUB-TOTAL                                         4.1     4.8     5.6      4.9     4.5     3.6   4.1     4.6   4.5 -                0.0
Net Indirect Taxes                                   3.1     3.1    -7.5      3.0     3.5     5.0   5.4     4.3   2.2 -                0.5
Equals: G.D.P in Purchasers' Values                  4.0     4.6     4.2      4.7     4.4     3.7   4.2    4.57   4.3 -                4.2




                                                                              4
                                                            Table 2
                                               Sectoral Share of GDP (Percent)

                                                                  Percent Shares in GDP of each Sector and Sub Sector
                                Item                              1995   1996     1997     1998     1999    2000        2001*
1. AGRICULTURE                                                    36.3    36.5     36.6     36.7     36.5   36.0         35.9
1.1 Agriculture and livestock                                     25.0    25.4     25.0     25.0     25.0   24.3         24.5
1.2 Cocoa Production and Marketing                                 3.2     3.2      3.3      3.5      3.4    3.5          3.3
1.3 Forestry and Logging                                           2.7     2.6      3.1      3.2      3.3    3.5          3.6
1.4 Fishing                                                        5.4     5.4      5.2      5.0      4.9    4.6          4.5
2. INDUSTRY                                                       24.9    24.9     25.4     25.1     25.2   25.2         24.9
2.1 Mining and Quarrying                                          24.9     5.6      5.7      5.8      5.7    5.6          5.3
2.2 Manufacturing                                                  9.0     8.9      9.2      9.1      9.2    9.2          9.1
2.3 Electricity and Water                                          2.7     2.7      2.9      2.5      2.6    2.6          2.6
2.4 Construction                                                   7.6     7.7      7.7      7.7      7.8    7.9          7.9
3. SERVICES                                                       28.1    28.0     28.7     29.0     29.2   29.7         29.9
3.1 Transport, Storage and Communication                           4.4     4.4      4.6      4.6      4.7    4.8          4.8
3.2 Wholesale and Retail Trade, Restaurant and Hotels              6.1     6.3      6.6      6.7      6.8    6.8          6.9
3.3 Finance, Insurance, Real Estate and Business Services          4.1     4.1      4.2      4.2      4.2    4.3          4.3
3.4 Government Services                                           10.9    10.6     10.6     10.8     10.7   11.0         11.1
3.5 Community, Social and Personal Services                        1.8     1.7      1.8      1.8      1.8    1.9          1.9
3.6 Producers of Private non-profit Services                       0.9     0.9      0.9      0.9      0.9    0.9          0.9


Net Indirect Taxes                                                10.6    10.5      9.3      9.2      9.1    9.2          9.3
Equals: G.D.P in Purchasers' Values                               100     100      100       100     100     100         100
Source: Bank of Ghana Statistical Bulletin.




                                                              5
The Energy Sector and the GDP

The energy sector generates both inflows and outflows to the GDP. With respect to
inflows the energy sector contributes to the GDP indirectly through its use as inputs for
production. Such inputs are used in varying proportions across all the sectors of the
economy. Indirect estimates of the contribution of energy to the GDP will, however,
require detailed information on input-output relationships, which were unavailable at the
time of writing this report.


The sector also contributes directly to the GDP through its contribution to tax revenues.
Such taxes accrue largely in the form of petroleum taxes.


With respect to outflows from the GDP, crude constitute a significant share of total
imports and the balance of trade. Data on crude oil imports is easily available hence,
one can estimate the contribution of crude oil imports to imports and the trade balance.

                                                                                   Figure 4


                                              O il Im p o rts a s % o f T o ta l Im p o rts


                         30.00

                         25.00

                         20.00

                         15.00

                         10.00

                          5.00

                          0.00
                                                                                   M a y -0 2
                                 J a n -0 2

                                              F e b -0 2

                                                           M a r-0 2




                                                                                                J u n -0 2

                                                                                                             J u l-0 2

                                                                                                                         A u g -0 2

                                                                                                                                      S e p -0 2

                                                                                                                                                   O c t -0 2

                                                                                                                                                                N o v-0 2

                                                                                                                                                                            D e c -0 2
                                                                       A p r-0 2




                        Source: Bank of Ghana Statistical Bulletin, March, 2003



Crude Oil imports on average represented 18 percent ($508 million) of total imports
($2705.0 million) in Ghana in 2002 and accounted 1.7 percentage points of the 8.9
percent decline in total imports during the 2001-2002 period. Average Monthly crude oil
imports amounted to $42 million in 2002 with the highest import level occurring in April
2002.




                                                                                                6
                                                                                          Table 3
                                                   Trends in Crude Oil Imports
                                     (in $ millions unless otherwise stated)
Imports          Jan-02 Feb-02 Mar-02 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02
Crude Oil         37.93 22.13 46.93 58.12 45.09 40.99 30.92 45.02 50.06 31.46 59.42 40.03
Total Import      239.8 168.68 235.81 226.85 220.77 208.3 301.3 216.19 227.12 215.84 246.66 197.46
Exports          142.62 139.58 261.08 146.85 142.05 237.19 127.32 108.57 231.01 101.93 151.78 273.93
Oil/Import
percent           15.82 13.12 19.90 25.62                                                20.42 19.68 10.26                                                            20.82 22.04 14.58                        24.09 20.27
Oil/export %        26.6     15.9           18.0                    39.6                       31.7                   17.3                  24.3                       41.5                      21.7   30.9    39.1   14.6
Source: Bank of Ghana Statistical Bulletin, March 2003.



In 2002, approximately a quarter (25 percent) of the country export earnings was used to
finance the nation’s crude oil imports. In August, crude oil imports accounted for
approximately 41 percent of export earnings. By December, the figure had declined to
14.6 percent. Overall, April, August and November represented peaks in the crude oil to
export ratio.

                                                                                         Figure 5

                                                   O il Im p o rts a s % o f T o ta l E x p o rts


                              45.0
                              40.0
                              35.0
                              30.0
                              25.0
                              20.0
                              15.0
                              10.0
                               5.0
                               0.0
                                      J a n -0 2


                                                   F e b -0 2


                                                                M a r-0 2


                                                                            Ap r - 0 2


                                                                                         M a y- 0 2


                                                                                                      J u n -0 2


                                                                                                                   J u l-0 2


                                                                                                                               Au g - 0 2


                                                                                                                                            S e p -0 2


                                                                                                                                                         O c t- 0 2


                                                                                                                                                                       N o v- 0 2


                                                                                                                                                                                    D e c -0 2




Contribution to Trade Balance

Crude oil imports have contributed significantly to the deficits in the trade balance.
Between 1999 and 2000, crude oil imports accounted for between 50 and 80 percent of
the trade deficit.




                                                                                                       7
                                                             Figure 6

                                                 Oil Im p o rt S h are o f T rad e D eficit


                                     90
                                     80
                                     70
                                     60




                       p e rce n t
                                     50
                                     40
                                     30
                                     20
                                     10
                                      0
                                          1999           2000           2001          2002     2003




Crude imports accounted for roughly 8-11 percent of total commodity trade, although this
figure has fluctuated over the years.




                                                             Figure 7

                                          Crude Oil Share of Total Trade

                 12
                 10
                  8
                  6
                  4
                  2
                  0
                           1999                   2000               2001               2002          2003
                                                                   percent




Contribution to Total Revenue and Grants

The contribution of petroleum taxes to total revenues has been declining over time. After
reaching a level of 13 percent in 1996, the contribution of petroleum taxes to revenues
declined to less than 8 percent in 2001 before rising to under 10 percent in 2002.
Depending on the elasticity of demand for fuel, the recent rise in fuel prices may result in
a further decline in petrol tax revenues if the increase in price is associated with a
disproportionate decline in demand.




                                                                    8
                                                 Figure 8
              Petroleum Tax as a Percent of Total Revenue and Grants


                            14.0
                            12.0
                            10.0
                  percent    8.0
                             6.0
                             4.0
                             2.0
                             0.0
                                   1996   1997   1998       1999   2000   2001   2002



Contribution to the Budget

After increasing between 2001 and 2002 the energy sector’s share of the budget
declined between 2002 and 2003 largely on account of declining donor contributions to
the sector. The sector’s relative share of GoG contributions declined marginally (from
0.54 percent to 0.37 percent) between 2002 and 2003 however its share of donor
allocations declined even more markedly from 21 percent to 4.5 percent during the same
period. The reason for the decline is not obvious, however, the decline will have adverse
consequences for the sector’s ability to implement its programmes under the Medium
Term Priorities. For instance, the 2003 budget was only able to finance 11 percent of the
sector’s Medium Term Priorities.




                                                        9
                                 Table 4
 Distribution of Total Discretionary Expenditure: 2001-2003

             Sector             2001          2002    2003
            Administration       34.9          19.8    14.2
            Local Govt.         3.3%          2.4%     2.62
            Finance             2.2%          3.1%     2.21
            GGS                21.2%          6.9%        -
            Economic Services    15.0          18.0     9.3
            Agriculture           7.2           4.7     4.0
            Energy                4.9          11.2     1.4
            Infrastructure       11.6          17.2    15.9
            Social               30.2          34.7    39.0
            Education            22.4          24.1    26.6
            Health                6.7           9.4    11.1
            Public Safety         7.9           9.7    11.7
            Utilities         -                 0.0     2.8
            Revenue Agencies -                  0.0     3.2
            Contingency           0.4           0.6     3.9
        Source: 2001-2003 Budget Statements



                                 Table 5
   Trends in the Distribution of GoG Discretionary Funds

                                      2001a      2002          2003
Administration                         41.5       25.8          15.7
Local govt.                             2.4        1.7           1.6
Finance                                 2.9        4.0           1.8
GGS                                    27.8        7.9             -
Economic Services                       5.3        6.8           5.6
Agriculture                             1.4        2.3           1.8
Energy                                 3.26       0.54          0.37
Infrastructure                          4.4        3.7           3.9
Social Services                        37.2       47.4          46.1
Education                              28.4       35.3          33.3
Health                                  7.4       10.3          11.5
Public Safety                          11.0       15.3          15.1
Contingency                             0.5        1.0           5.3
Utilities                                 -          -           3.7
Revenue Agencies                          -          -           4.3

Total                                100.00     100.00        100.00
Source: 2001-2003 Budget Statements
a
  Original 2001 budget figures




                                    10
                                         Table 6
                       Distribution of Donor Funds 2001-2003
                   Donor                     2001         2002     2003

                   Administration                  17.5     10.4     9.90
                   Local Govt.                      5.7        3     5.54
                   Finance                          0.5        2     3.33
                   GGS                              3.8        5        -
                   Economic Services               40.2     35.4    20.28
                   Agriculture                     22.3      8.5    10.69
                   Energy                                   21.5     4.55
                   Infrastructure                  30.5     38.2    51.55
                   Social                          11.8     15.0    16.72
                   Education                        6.9      6.8     6.70
                   Health                           4.9      8.0     9.88
                   Public Safety                    0.0      1.0     1.55
                   Contingency                      0.0      0.0      0.0
                   Total
                   Source: 2001-2003 Budget Statements



Financing Crude Oil Imports

Traditionally, government has subsidized the price of petroleum products in Ghana as a
result energy pricing policies combined with inefficiencies in the Tema Oil Refinery have
resulted in a huge buildup in the debt of the Refinery.             In 2001 the government
restructured a portion of the debt of TOR by transforming them into government bonds
which are currently held by the Ghana Commercial Bank. By December 2002, TOR
bonds amounted to ¢2.4 trillion or 17 percent of the domestic debt stock. Besides
restructuring the TOR debt, government in 2003 imposed a debt recovery charge of
¢640 per liter on petroleum products. In January, the price of fuel was increased by
approximately 90 percent to ensure cost recovery. Sustaining cost recovery pricing will
however, require the implementation of the petroleum pricing formula which ensures that
domestic prices adjust to changing cost conditions.




                                            11
Sectoral Energy Sources and Shares

Overview

The nation’s consumption pattern with respect to energy has changed little since 2000.
Recent survey data (Energy Commission) indicate that wood fuels including charcoal
account for approximately 60 percent of total energy consumption in the country followed
by petroleum products. Diesel and gasoline are the most widely used petroleum
products in the nation, accounting for approximately 35 percent of energy consumption
in 2001. Electricity consumption at both the wholesale (i.e., Electricity bulk) and retail
level accounted for roughly 10 percent of total energy consumed in 2001.

                                         Table 7
                                Energy Shares By Type
                                                               2000
                 Biomass (unspecified)                                  0.6
                 Charcoal                                             15.1
                 Diesel                                               14.2
                 Electricity                                            9.8
                 Gasoline                                             10.4
                 Gasoline premix                                        0.6
                 Jet Kerosene                                           1.8
                 Kerosene                                               2.1
                 LPG                                                    0.7
                 Residual Fuel Oil                                      0.7
                 Wood                                                    44
                 Sum                                                   100



Electric power generation in Ghana has however, fluctuated throughout the 1990s. In
relation to its 1990 level, power generation peaked in 1997, but fell sharply in 1998 by as
much 37 percent below the 1997 level (or 14 percent below the 1990 level). Production
however, increased in 1999 following the return of the rains, but remained below the
1997 level in 1999.




                                            12
                                                                            Figure 9

                                                                Total Energy Generated and Imported
                                                                   Total Generated               Total Imported
                                             8000
                                             7000




                        Millions of Kwh
                                             6000
                                             5000
                                             4000
                                             3000
                                             2000
                                             1000
                                                0
                                                         1995*            1996          1997          1998*        1999
                       *Years of National Load Curtailment
                       Source: Volta River Authority, 38th Report & Accounts, 1999




There are two levels of electricity distribution in Ghana; the wholesale and retail. The
Volta River Authority (VRA) sells bulk or wholesale power to Electricity Company of
Ghana (ECG) and the Northern Electricity Department (NED) who together retail
electricity to residential and industrial/ commercial users in the southern and northern
parts of the country, respectively. The Volta Aluminum Company (VALCO) is the single
largest electricity purchaser, consuming between 25 and 38 percent of total domestic
sales. Approximately 40 to 56 percent of domestic sales go to ECG for onward sales to
residential, industrial, and commercial consumers.


                                                                           Figure 10

                                                   Annual Percentage of Energy Consumed per Class
                                                                    of Customer
                                                  100    4.7        5.2          5.7                    4.8       Exports
                                                                                               8.4
                                                        14.8       15.1          14.5                   15.5
                                                  80                                       18.9

                                                                                                                  Mines and
                                     Percentage




                                                  60    44.3                                                      Others
                                                                   46.4          46.1                   51.3
                                                                                           55.6
                                                  40                                                              ECG

                                                  20    36.2       33.2          33.6                   28.3
                                                                                           17.1                   Valco
                                                   0
                                                        1995*      1996          1997     1998*        1999
                       Years of National Load Curtailment
                       Source: Volta River Authority, 38th Annual Report & Accounts




Survey data from the Energy Commission disaggregates energy demand into six
sectors; Households, Transport, Industry, Agriculture and Fisheries, VALCO and
Commercial and Services. Total energy demand is highest at the level of the household,
which account for over half the total energy consumed in the country. The transport
sector is the second largest consumer of energy followed by industry (15.8 percent) and
VALCO, which accounts for less than 5 percent of total energy consumption. However,



                                                                                  13
VALCO is intensive in the use of electricity hence, its dominance as a consumer is
masked when wood fuels, the largest source of energy, is included in the total. The
Agricultural sector together with the Commercial and Services sector utilizes the least
amount of total energy. Survey data reveal that in 2001 both sectors accounted for less
than 2 percent of total energy consumption.




                                          14
             ANTICIPATING THE NATION’S FUTURE ENERGY NEEDS


Recent Developments in Government Policy

Ghana’s development framework is governed by two documents, The Ghana Poverty
Reduction Strategy and the Coordinated Program of Economic and Social Development.

The GPRS

In recognition of the need to spur economic growth and reduce poverty, The Ghana
Poverty Reduction Strategy (hereafter the GPRS) was initiated in 2000 and by February
2002 a final draft had been produced. The GPRS is a framework that identifies the
requisite strategies to achieve the twin objectives of economic growth and poverty
reduction.

The GPRS has two components, the broad strategic areas and the Medium Term
Priorities (MTP), which focus on immediate interventions that are pre-requisites for
longer-term actions. Five thematic areas underpin the broad GPRS framework are:
      Macro-Stability
      Production and Gainful Employment
      Human Resource Development
      Special Programmes for the Vulnerable and Excluded
      Good Governance


Macro Stability
The focus of macro-stability in the medium term is to ensure prudent fiscal and monetary
policy management to ensure price stability, interest rates that are conducive to
maximizing both savings and investments, ensuring stable yet competitive exchange
rates and a maintaining a fiscally sustainable debt burden. The key policy initiatives
focus on improved debt and expenditure management and more effective resource
mobilization. They also include deepening capital markets, improving budgeting and
cash forecasting, strengthening revenue collecting agencies and fostering transparency
and accountability in the area of public financial management.




                                           15
Production and Gainful Employment
Under    production   and gainful    employment,    the   emphasis      is   on   agricultural
modernization, the promotion of agro-processing industries, increasing environmental
protection through re-afforestation, enhancing infrastructure development to facilitate
internal commerce, intra-regional trade and access to ports and strengthening the
private sector.
In particular, efforts to increase production and gainful employment focus on increasing
the profitability and productivity of the agricultural sector through improved storage and
distribution systems, improved access to irrigation facilities and growing the internal
demand for agricultural products through the development agro-processing industries.

Human Resource Development
This thematic area focuses on programmes geared towards enhancing access to
education, reducing gender disparities in education, improving skills through training,
enhancing access to and delivery of health services, enhancing access by women to
reproductive health services, increasing access to potable water and improving
sanitation.


Programmes for the Vulnerable and Excluded
The emphasis is on rights protection for the vulnerable segments of society particularly
women and children; assisting and supporting people living with HIV/AIDS, supporting
orphans, the handicapped and the aged and providing employable skills for the youth.


Good Governance
Programmes for good governance focus on improving the efficiency and effectiveness of
the civil service, ensuring the rule of law, respect for human rights and the attainment of
social justice and equity.


The Medium Term Priorities
The Medium Term priority areas are a sub-component of the GPRS. They comprise five
priority areas, which are linked to the GPRS. The priority areas are:
       Infrastructure development and upgrading
       Rural development based on modernized agriculture
       Enhanced social services



                                            16
      Good governance and
      Private sector development


The priority areas were distilled from the five thematic areas of the Growth and Poverty
Reduction Strategy and hence are linked to the GPRS thematic areas. For instance
Infrastructure development and modernized agriculture derive from the Production and
Gainful Employment Thematic Area. Enhanced social Services on the other hand falls
under the thematic area of Human Resource Development. Private sector development
is a crosscutting category that straddles all thematic areas but in particular Macro-
Stability and Production and Gainful Employment.


Infrastructure
The goal of infrastructure development is to facilitate both inter regional trade and to
open up the rural areas for investment, productivity expansion and job creation. This
includes modernizing and extending the rail networks to major centers of development,
linking food growing areas to markets, constructing houses and other facilities for critical
groups such as teachers, medical and security personnel. It also includes improving the
telecommunications infrastructure to support and boost the development of Information
Communication Technology Industry (ICT).


Modernized Agriculture Based on Rural Development
Modernizing agriculture based on rural development focuses on transforming the
economy into an agro-processing hub. This involves reforms in the area of land
acquisition to facilitate access to land and more efficient land ownership and title
processes.    To assist and support private sector commitment to the production of
foodcrops, government will provide extension and research services, irrigation facilities
and affordable credit to farmers. In addition, government will provide support for storage
facilities for persishables to assist in reducing the incidence of post harvest losses.


Enhanced Social Services
Under the priority area of Enhanced social services, the emphasis is on improving the
quality and access to education, primary health services and access to potable water. To
this end the government has committed itself to developing model senior secondary
school and health center in every district, ensuring that there is uninterrupted quality


                                             17
education for all Ghanaians from pre-school age to the age of 17 and reforming and
strengthening the technical and vocational education systems including the traditional
apprenticeship system.


Good Governance
Programmes for good governance focus on improving the efficiency and effectiveness of
the civil service, ensuring the rule of law, respect for human rights and the attainment of
social justice and equity.


Private Sector Development
Private sector development is based on the premise that the private sector is the prime
engine of growth hence, constraints to its development must be removed or relaxed to
ensure the efficiency of the private sector. Key actions to be taken include removing
major bureaucratic, legal and regulatory obstacles to the development of Small and
Medium Scale Enterprise development, strengthening the capital markets and creating a
positive environment for investment.


Based on the GPRS/MTP macro-economic projections, over the period 2002-2005, the
GDP is projected to grow at rates of 4.5, 4.7, 5.0 and 5.0 percent 2002, 2003, 2004 and
2005 respectively. These modest growth projections in the short term will be spurred by
improvements in agricultural and manufacturing productivity.

The Coordinated Programme of Economic and Social Development (CPESD)

Although CPESD is based on the medium Term Priorities of the GPRS, it is a more
broad based strategic framework with a greater focus on economic growth. Specifically,
the CPESD is informed by the goal of realizing a per capita income of approximately
$1000 by 2012. At the current per capita of $290, this will require a GDP growth rate in
the range of 7-10% in the medium term and 11-15% in the long term. It is expected that
the emphasis on agricultural modernization will ensure that the food crop growers who
constitute the poorest occupational group, will benefit disproportionately from the
increase in growth.


A critical factor for the successful realization of these growth objectives will be the ability
to meet the energy needs of the country. Like several non-oil producing developing



                                              18
countries, the economy of Ghana is very sensitive to developments energy sector. As a
result, disruptions in energy supply due to droughts and hikes in the world price of crude
oil constitute the key avenues for energy-related shocks, which in turn have potentially
destabilizing effects on the domestic economy. Such developments increase the cost of
production through their impact on the cost of transportation and the price of utilities.
Consequently, they also influence the likelihood that the nation will achieve it’s growth
targets.


It is therefore is essential to forecast the medium to long term energy needs of the
country taking into account its impact on sectoral output. One way this can be done is by
estimating the elasticities of demand for energy in the energy intensive sectors with
respect to changes in output. Where such estimates are unavailable, trend projections
are a good substitute. This in turn requires an assessment of sectoral output trends and
then relating such trends to the sector’s energy needs.


The Growth Drivers of the GPRS and CPESD
The drivers of growth according to the Ghana Poverty Reduction Strategy and the
CPESD are agro-based manufacturing and Information Communications Technology. In
effect, the key sectors of emphasis are the agriculture sector, the manufacturing and the
communications subsectors. Of these sectors, however, energy consumption is highest
in the manufacturing sector. Hence, a critical analysis of the manufacturing sector’s
growth path is essential to key to assessing the nation’s future energy needs.




                                           19
                               Sectoral Energy Shares


This section of the report describes the various sectors of the economy in terms of their
energy shares or contributions to total energy consumption. The discussion also
provides an indication of the types of energy used in various sectors of the economy.
This information can then be used to make both quantitative and qualitative judgments of
the energy resource implications of alternative sectoral growth rates. The sectors
examined are:
      Agriculture and Fisheries
      Commercial & Services
      Households
      Industry
      Transport
      VALCO

                                         Table 8
                           Total Energy Demand by Sector
                                        (percent)
                                      Sector             2000
                           Agriculture & Fisheries        1.65
                           Commercial & Services          1.65
                           Households                     52.7
                           Industry                       15.8
                           Transport                      23.9
                           VALCO                          4.05
                           Sum                             100


As shown in the figure above, Households and Transport sectors account for
approximately 70 percent of total energy demand. Hence, population growth rates will
tend to exert an upward pressure on the demand for energy in the nation.

The Household Sector
Households predominantly rely on wood (60.7 percent) and charcoal (26.8 percent) for
their energy needs. Together, both types of energy accounted for 87 percent of the
sector’s total energy demand. Relative to wood and charcoal, the overall contributions of




                                            20
electricity and kerosene to the total energy consumption needs of households are
minimal.

A rural urban disaggregation of household energy consumption however reveals subtle
differences in the consumption patterns. First, rural inhabitants account for
approximately 75 percent of total energy consumption in the country. Secondly, the
majority of the energy used in the rural sector is in the form of woodfuels (i.e., wood and
charcoal).



                                          Table 9
                   Distribution of Energy Demand by Rural Urban Categories
                                          (percent)


                                                      2000
                                  Rural                75.7
                                  Urban                24.3
                                  Sum                   100
                               Source: Energy Commission



Compared to the urban sector, wood is a relatively more significant source of energy in
the rural sector. It accounted for 76 percent of total energy requirements in both 2000
and 2001. On the other hand, electricity is a marginal source of energy in the rural
sector, accounting for only 1 percent of the sector’s energy needs in the same period.
Although, wood constitutes a relatively smaller share of the urban energy consumption
basket, the urban use of charcoal translates into even greater demand for woodfuel
since charcoal production is woodfuel intensive; it takes 6 units of wood to produce a
unit of charcoal. In effect, increased urbanization can accelerate deforestation and
environmental degradation.




                                             21
                                          Table 10
                           Distribution of Rural Energy Shares
                                          (percent)

                                                          2000
                               Biomass (unspecified)         1.6
                               Charcoal                    17.7
                               Electricity                   0.9
                               Kerosene                      3.8
                               LPG                           0.1
                               Paraffin Wax                    0
                               Solar                           0
                               Wood                        75.9
                               Sum                          100



Energy consumption in the urban sector is less concentrated in a few energy sources.
Although charcoal is the largest source of energy consumption in the urban sector, it
accounted for just over one half (54 percent ) of the sector’s total energy needs in 2000.


                                          Table 11
                            Distribution of Urban Energy Shareses
                                          (percent)

                                                      2000
                                   Charcoal            54.7
                                   Electricity         22.6
                                   Kerosene              4.2
                                   LPG                   3.4
                                   Solar                   0
                                   Wood                15.1
                                   Sum                  100
                              Source: Energy Commission

Together, wood (15 percent) and electricity (23 percent) accounted for almost 40 percent
of urban energy consumption in 2001. Kerosene and LPG are important yet insignificant
sources of urban energy requirements.




                                                 22
                                           Table 12
                    Distribution of Total Household Energy Demand by Source

                                           (percent)
                                                           2000
                                Biomass (unspecified)         1.2
                                Charcoal                    26.7
                                Electricity                   6.2
                                Kerosene                      3.9
                                LPG                           0.9
                                Paraffin Wax                    0
                                Solar                           0
                                Wood                        61.2
                                Sum                          100


Household Consumption Drivers

The factors that drive energy consumption at the household level can be classified as
either demand side drivers or supply side drivers. On the demand side the factors are:

       Real Incomes (reflects price changes)
       Rate of increase in wages
       Expectations about prices
       Population growth rate
       Access to credit
       Tariffs

Real Income
An individual’s real income is the purchasing power of his/her earnings. Real incomes
take into account the erosion in the value of money that may arise from rising prices. All
things being equal, declining real incomes will be associated with a decline in demand
for all commodities including energy. However, given the importance of energy as a
commodity, a 1 percent decline in purchasing power will be associated with a less than 1
percent decline in the demand for energy products. Furthermore, since firewood is
usually not a cash item it is less likely to be affected by changing real incomes. Rising
incomes on the other hand, is associated with increased demand for luxury goods which
tend to be energy intensive (i.e., cars, televisions etc.,).


Expectations
Expectations about future price changes particularly in an upward direction could also
lead to panic buying in the short run particularly for energy products such as LPG ,


                                              23
kerosene and petrol. However, difficulties with storage make this a fairly insignificant
driver of energy demand.


Credit
Access to credit not only boosts one’s real income but facilitates investments which may
be energy intensive (e.g., cold stores, super markets etc.,).


Tariffs
On the other hand, higher tariffs on energy products such as electricity will tend to curb
demand or slow the rate of increase in energy demand. Furthermore, it can lead to a
more judicious use of energy. Subsidized rates will have a reverse impact on demand.


Population Growth
The population growth rate on the other hand can have significant impacts on energy
demand particularly if it is associated with an increase in the ability to purchase energy
intensive commodities such as vehicles, fridges, televisions etc.
Supply Side Drivers
Energy demand cannot exist in a vacuum. It must be validated by a supply of energy.
Hence, supply side factors are also significant drivers of energy consumption. Such
factors include:

         Government policy with respect to rural and urban electrification
         Rainfall patterns and impact on supply of hydroelectricity
         The price of crude oil and its impact on:
             o thermal energy, electricity
             o crude oil products
                       petrol
                       diesel
                       kerosene

Government Policy

Government policies such as the Self Help Electrification Project invariably increase the
supply of electricity and facilitate access to electricity even without a change in incomes.
The realization of such projects of course depends on access to funds. In this respect,
donor funding and in the absence of such, the ability of government to finance such
projects domestically either through increased revenue generation or increased
borrowing is critical.


                                              24
Rainfall Patterns
Given the nation’s dependence on hydro-electricity, rainfall patterns have a significant
impact on energy supply and may result in a greater demand for diesel powered
generators and other alternative energy sources.


Crude Oil Prices
Rising crude oil prices also impacts negatively on the supply of energy and depending
on the degree of subsidization may depress domestic energy consumption. In Ghana,
prior to January 18, subsidized prices of petroleum products implied that government
had to finance the difference through deficit financing, hence, higher crude prices were
not associated with changes in demand since domestic prices were unaffected by
changing crude prices.


The Agricultural Sector

The agricultural sector is dominated by the crops and livestock farming sub-sector
which accounts for 24.5 percent of GDP. The Fisheries, cocoa and forestry and logging
account for roughly equal shares of approximately 3-4 percent. Despite its
disproportionate share of the agricultural sub-sector, crops and livestock farming growth
has been only averaged 4 percent since 1996. After a disappointing growth of 1.1
percent in 2000, the latter sub-sector experienced strong growth rates of 5.0 and 5.2 in
2001 and 2002.


The agricultural sector is projected to grow at 4.7 percent in 2003 up from the provisional
4.5 percent rate experienced in 2002. Historically, agricultural growth has been
dominated by the forestry & logging and cocoa production & marketing subsectors
which averaged 9.5 percent and 4.7 percent respectively over the period 1996-2001.
However, given the relatively limited subsectoral shares (i.e., their contribution to total
output) of both sectors, their contribution to the overall GDP growth was marginal. In
2001, the forestry sub-sector’s accounted for 0.2 percent of the overall growth rate while
the cocoa production and marketing contributed zero percent on account of its negative
growth in 2001.


On the other hand, the foodcrop and livestock sub-sector, which accounts for
approximately 68 percent of the agricultural sectors total output in 2001, accounted for


                                            25
1.2 percentage points of the overall GDP growth in 2001. The fishing subsector is the
second largest component of the agricultural sector, however, its average growth rate
appears to have stagnated at the very low level of 1.1 percent. Consequently, the
sector’s contribution to overall GDP growth in 2001 was a mere 0.1 percentage points.


Agricultural Energy Demand
By virtue of its relatively low capital intensity, limited adaptation of irrigation technology
and heavy reliance on labor-intensive technologies, the agricultural sector has the lowest
energy share of all the sectors. It accounted for approximately 1.7 percent of total energy
consumption in 2001.

                                          Table 13
                            Agricultural Energy Shares by Fuel Type
                                          (percent)

                                  Fuel Type            2000
                                  Diesel                60.7
                                  Electricity             0.2
                                  Gasoline premix       35.8
                                  LPG                       0
                                  Solar                     0
                                  Wood                    3.2
                                  Sum                    100
                           Source: Energy Commission



Survey data (Energy Commission) indicate that the agricultural sector largely consumes
petroleum products particularly diesel and pre-mix fuel; its demand for electricity is
minimal. Indeed, sectoral analysis of electricity consumption reveals that agriculture’s
share of electricity remained unchanged at the less than 1 percent between 2000 and
2001.




                                             26
                                          Table 14
                     Energy Share by Sub-sector in the Agricultural Sector
                                           (percent)
                             Sub-Sector                 2000
                             Fishing                     75.6
                             Irrigation                    0.5
                             Land preparation & harvest 20.6
                             Tobacco Curing                3.2
                             Post harvest processing         0
                             Poultry                       0.1
                             Sum                          100


In order of importance, the energy intensive activities within the agricultural sector are
fishing, plowing, tobacco curing irrigation and poultry. The fishing subsector accounts for
the largest share of energy use in the agricultural sector largely because of the use of
diesel and pre-mix fuel to power fishing vessels.


Plowing activities account for the second largest source of energy use in agriculture
because of the diesel required to power tractors. Poultry activities tend to be electricity
intensive while irrigation facilities are powered by both diesel and electricity. Estimates
by the University of Ghana suggest that approximately 49 percent of irrigation facilities
are powered by electricity (43 percent) or diesel (6 percent). The remainder utilizes
gravity. Recent surveys commissioned in 2001 by the Energy Commission however,
indicate that the majority (60 percent in 2001) of irrigation facilities are diesel powered.
On the other hand tobacco curing relies almost exclusively on woodfuel as an energy
source.

                                          Table 15
                          Energy Shares in the Irrigation Sub-Sector

                                Fuel Type                2000
                                Diesel                    66.4
                                Electricity               33.6
                                Sum                        100


Although irrigation and post harvest processing currently account for less than 1 percent
of energy utilization within the agricultural sector, this share will tend to rise if
government intensifies its irrigation and agro-processing programmes.




                                              27
                                           Table 16
                           Energy Shares in the Poultry Sub-Sector

                                    Fuel Type           2000
                                    Electricity          100
                                    LPG                    0
                                    Sum                  100

These findings suggest that based on current consumption patterns the growth in
agriculture will have limited impact on the nation’s energy consumption. However,
factors such as crude oil price hikes which impact on the demand for petroleum products
will have the greatest impact on the fishing sub-sector followed by the foodcrop sector
because of the plowing activities involved.

                                           Table 17
                           Energy Shares in the Fisheries Sub-Sector

                                  Fuel Type                 2000
                                  Diesel                     52.6
                                  Gasoline premix            47.4
                                  Sum                         100


The current priority given to agricultural modernization will imply increased
mechanization and increased use of irrigation facilities, which will increase the demand
for diesel fuel. However, the impact of improved access to irrigation on energy
consumption will depend on the mix of gravity and non-gravity powered irrigation
technologies adopted.

                                           Table 18
                           Energy Shares in the Tobacco Sub-Sector

                                                     2000
                                        Solar           0
                                        Wood          100
                                        Sum           100


The GPRS adopts a two-pronged approach to irrigation. One approach emphasizes
micro and small irrigation while the second focuses on medium to large scale irrigation.
In general unlike the macro approach, which is relatively capital-intensive, the micro
approach will tend to require less energy due to its labor-intensiveness. The key aspects
of micro and small scale irrigation are the:




                                                28
      development of valley bottoms to harness waterlogged river valleys for the
       cultivation of food and other crops;
      provision of small dugouts, bore holes, tube wells and other simple water
       harvesting structures especially in the three Northern regions.


Medium/large scale irrigation on the other hand, involves the construction of major
dams, pumping stations, diversion canals and long distance conveyance pressure pipe
systems for commercial operators and investors.


With respect to fisheries development, the GPRS strategy is to place more emphasis on
inland fisheries as opposed to marine fisheries because of the depletion of fish from
marine sources. Consequently, aquaculture will be given greater priority. The
development of aquaculture will include the development of hatcheries and production of
fingerlings and the construction of ponds, pens and cages. Undoubtedly, to the extent
that aquaculture is less energy intensive, the focus on aquaculture will minimize the
agricultural sector’s demand for energy, particularly pre-mix fuel.




                                              29
The Industrial Sector

The sectoral composition of industry has changed little over time. The Industrial sector is
dominated by the manufacturing and construction sub-sectors which together account
for approximately 71 percent of the industrial sector’s contribution to the GDP. The
mining sector is the third largest sub-sector (19.4 percent) in the industrial sector
followed by the utilities sub-sector (i.e., electricity, water and gas).


                                                            Figure 11

                                                      Industry Growth Rates


                                       7

                                       6

                                       5

                                       4
                           pe rce nt




                                       3

                                       2

                                       1

                                       0
                                       1995   1996   1997    1998   1999      2000   2001   2002




                        Source: Bank of Ghana Statistical Bulletin, March 2003



Industrial growth in 2002 was 4.7 percent. However, growth averaged 4.3 percent over
the period 1995-2002 with highest growth rate of 6.4 percent occurring in 1997 and the
lowest growth of 2.9 percent occurring in 2001. Based on the GPRS projections, the
industrial sector is targeted to realize a growth rate of 5.2 percent by 2005 representing
approximately a 1 percentage point increase over its average growth rate (over the
1995-2001 period).




                                                               30
                                                    Figure 12
                                    Sectoral Composition of Industry
                                                         (percent)


                                    100%

                                     80%
                       % of Total
                                     60%

                                     40%

                                     20%

                                      0%
                                           1995

                                                  1996

                                                           1997

                                                                  1998

                                                                         1999

                                                                                2000

                                                                                       2001*

                                                                                                 2002
                            Mining & Quarrying            Manuf.         Electricity           Constr.


Energy Utilization

The Industrial sector accounts for the largest share of electricity consumption in the
country, however, the majority of the electricity is consumed in the formal sector;
informal sector activities are intensive in the use of wood fuels. Electricity is used for
cooling, hot air, hot water, steam, direct heat chemicals production and mechanical
purposes. In 2000, the formal sector consumed 80 percent of total energy production.
The majority of electricity consumption in the industrial sector originates from the
manufacturing sub-sector, which accounted for approximately 40 percent of the total
followed by mining and quarrying (27 percent).


Besides electricity fuel oil and diesel are also widely used in production for furnaces,
boilers, hot air, hot water and steam. LPG, kerosene, charcoal and wood are less
significant sources of energy in the formal industrial sector.


On the other hand, the informal Industrial sector is heavily dependent on wood fuels for
food processing activities in the manufacturing subsector. Woodfuel accounts for
approximately 73 percent of the energy used in the formal and informal industrial sector.




                                                             31
                                             Table 19
                             Energy Share In the Industrial Sector
                                              (percent)
                              Fuel Type                             2000
                              Charcoal                                 0.1
                              Diesel                                   8.3
                              Electricity                            14.7
                              Gasoline                                 0.2
                              Kerosene                                 0.1
                              LPG                                      1.1
                              Natural Gas_Nigerian                       0
                              Residual Fuel Oil                          3
                              Wood                                   72.5
                              Sum                                     100
                             Note: Includes informal industrial activities


When wood fuels are excluded from the total, the energy consumption of the industrial
sector is intensive in the use of both electricity and petroleum products. Estimates from
the survey commissioned by the Energy Commission reveals that approximately 54
percent of the energy consumed by the sector is in the form of electricity while the key
petroleum products (Residual Fuel and Diesel) account for approximately 11 percent
and 30 percent of the sector’s total energy consumption respectively.

                                             Table 20
              Energy Shares in the Industrial Sector Excluding Wood and Charcoal

                              Fuel Type                            2000
                              Diesel                                30.4
                              Electricity                           53.9
                              Gasoline                                0.6
                              Kerosene                                0.4
                              LPG                                       4
                              Residual Fuel Oil                     10.8
                              Solar                                     0
                              Sum                                    100


Sub-Sectoral Energy Shares
A subsectoral disaggregation of energy Shares reveals that mining and quarrying
accounts for the majority of energy consumption in the industrial sector, consuming
approximately 50 percent of the sector’s total energy requirements in 2001. The
manufacturing subsector is a close second in terms of energy consumption, accounting
for 44 percent of industrial energy consumption in 2001.


                                                  32
                                            Table 21
             Energy Shares in the Industrial Sub-Sector Excluding Wood and Charcoal

                                                          2000
                                   Construction                0
                                   Utilities                 5.9
                                   Manufacturing           44.1
                                   Mining & quarrying      50.0
                                   Sum                      100


Manufacturing
The manufacturing sub-sector accounts for a significant (44 percent) proportion of
energy consumption and hence, deserves further analysis of the types of energy
consumed by the subsector. Electricity, diesel and residual fuel oil are the major fuels
types consumed by the formal manufacturing sector. The informal manufacturing sector,
on the other hand, is dominated by food processing activities that depend largely on
wood fuel.

                                            Table 22
             Breakdown of Energy Consumption in the Formal Manufacturing Sector


                                                            2000
                                  Charcoal                       0
                                  Diesel                     27.8
                                  Electricity                32.6
                                  Electricity bulk               1
                                  Gasoline                     1.1
                                  Kerosene                     0.8
                                  LPG                          1.1
                                  Natural Gas_Nigerian           0
                                  Residual Fuel Oil          23.2
                                  Wood                       12.3
                                  Sum                         100
                               *Excludes wood and charcoal fuels


The dominant energy users in the manufacturing sector are sawmill & wood products,
textiles, food processing, beverages and iron and steel. With the exception of the
sawmill and wood products sub-sector, which is intensive in the use of wood fuel, the




                                                33
remaining energy intensive sub-sectors are intensive in the use of residual fuel oil,
electricity and diesel.

                                                Table 23
                     Energy Shares in the Formal Manufacturing Sub-Sector

                             Sub-Sector                   2000
                             Chemicals other than Petrol.    7.7
                             Cutlery and nonferrous          4.9
                             Other                           5.1
                             Paper & Printing                2.7
                             Petroleum products              0.3
                             Textiles                      15.5
                             Tobacco Processing              0.5
                             Beverages                     11.6
                             Cement & minerals               5.8
                             Food processing               12.9
                             Iron & steel                  10.6
                             Sawmill & wood products       22.3
                             Sum                            100
                             *Excludes wood and charcoal fuels




                                                Table 24
                          Manufacturing Energy Shares: All Fuels

                                                                 2000
                             Chemicals other than Petrol.           6.8
                             Cutlery and nonferrous                 4.3
                             Other                                  4.5
                             Paper & Printing                       2.4
                             Petroleum products                     0.3
                             Textiles                             13.6
                             Tobacco Processing                     0.4
                             beverages                            10.1
                             cement & minerals                      5.1
                             food processing                      11.3
                             iron & steel                           9.3
                             sawmill & wood products              31.8
                             Sum                                   100
                          Includes Wood and Charcoal



Diesel, wood fuel and electricity are the major types of energy consumed by the sawmill
industry while the Textiles industry is very intensive in the use of residual fuel oil (80.6
percent). Food processing is intensive in the use of RFO (44.8 percent) and electricity



                                                      34
(32 percent) and to a lesser extent diesel fuel (19.7 percent). Beverages is similarly
intensive in the use of RFO however, diesel (35.8 percent) is used more intensively in
this industry than electricity (19.1 percent). The iron and steel industry, on the other
hand, relies quite heavily on electricity (52.5 percent) although diesel (27.1 percent) and
RFO (15.7 percent) are also consumed in significant quantities. The sub-category
Chemicals and Other Products is similarly intensive in the use of electricity (62 percent),
diesel (20.4 percent) and RFO (13.2 percent).


Construction
The survey results indicate that the construction sector relies almost exclusively on
electricity for its source of power. Since construction underpins the infrastructure sector,
developments in this sector will have far reaching consequences for the successful
implementation of the Medium Term Priorities. In 2001, construction accounted for over
50 percent of the total growth in the industrial sector.


                                          Table 25
                         Energy Shares in the Construction Sector

                                                   2000
                                       Diesel         0
                                       Electricity  100
                                       Sum          100


They key drivers of this sector are private sector demand for housing and public sector
infrastructure budget which is heavily donor funded. Thus, donor inflows are a critical
source of financing for construction projects.


Mining
The main source of energy for the mining subsector is electricity. Approximately 66
percent of the total energy consumed in this sector is in the form of electricity of which
45 percent is purchased in bulk from the Volta River Authority (VRA). Although diesel
fuel accounts for over a third of the sector’s energy consumption, other petroleum
products such as gasoline and RFO are insignificant sources of energy for the mining
sector. Given the sector’s importance as the leading foreign exchange earner,
disruptions in the supply of electricity will have profound effects on the nation’s foreign




                                              35
exchange potential. That said, it is important to note that over 60 percent of the foreign
exchange earned in the mining sector is repatriated abroad.


                                          Table 26
                        Energy Shares in the Mining Sub-Sector
                                   Fuel Type         2000
                                   Diesel             34.4
                                   Electricity        20.2
                                   Electricity bulk   45.2
                                   Gasoline             0.2
                                   Kerosene               0
                                   LPG                    0
                                   Residual Fuel Oil      0
                                   Solar                  0
                                   Sum                 100


The Volta Aluminum Company
Kaiser Aluminium Company has a 90 percent stake in the Volta Aluminium Company.
Although VALCO technically falls in the manufacturing sector, its significance as an
energy consumer places it in a special position. VALCO’s energy needs are met almost
exclusively (92.3 percent) from bulk electricity purchases from VRA. RFO and diesel
account for less than 10 percent of VALCO’s energy needs.
VALCO’s shareholders are currently embroiled in a legal battle with the Volta River
Authority over issues concerning the terms of their contract agreement with government.
One of the issues relates to whether the 1967 Power Contract agreement which
presumably expired in 1997 is currently in force. One school of legal thought is that the
1967 Power Contract expired without being renewed in 1997 and that the ad hoc
arrangements made between VRA and Valco since then are not legally binding.
The second emanates from the first issue and revolves around the appropriate price that
VALCO should pay for its energy. VALCO apparently pays 1.23 UScents per kWh, which
is considerably below the already low tariffs that it should pay according to the original
contract escalation provisions. VALCOs position has been strengthened by VRA’s
admission that it has been negligent by not delivering electricity in full to Valco.

However, given the average electricity cost of US6¢ per kilowatt hour and the current
water level of the Akosombo Dam, even the US¢ 2.26 proposed by VRA for Valco



                                              36
appears overly generous, unsustainable and inequitable. Incidentally, VALCO currently
operates 1 out of its 4 potlines because of the low water level. This has freed up more
electricity for other users who on average pay higher rates than does VALCO.

                                          Table 27
                 Energy Shares By VALCO Excluding Wood and Charcoal

                                 Fuel Type              2000
                                 Diesel                    0.6
                                 Electricity                 0
                                 Electricity bulk        92.3
                                 LPG                       0.5
                                 Natural Gas_Nigerian        0
                                 Residual Fuel Oil         6.6
                                 Sum                      100


Manufacturing Growth Drivers
The key factors driving the manufacturing sector growth can be summarized as follows:
      Access to credit: real interest rates
      Energy prices
           o Level of rainfall
           o Price of crude oil
      Rate of increase in inflation
      Rate of increase in public sector wages
      Rate of increase in government expenditure (of which wages form a part)
      Price of inputs (excl. wages and energy)
           o Exchange rate (imported inputs)
      Foreign Direct Investment

Access to credit is largely determined by the real interest rate. The tendency for
government to borrow excessively from the domestic markets through the sale of money
market instruments (i.e., Treasury Bills) has tended to raise interest rates and deprived
the manufacturing sector of loanable funds both in terms of quantity and price (i.e.,
interest rates). Hence, one should expect rising rates on Treasury Bills to be associated
with declining credit to the private sector. It is important to add that rising interest rates
have also been associated with a higher incidence of non-performing loans as the pool
of credible borrowers has declined.


Increases in the inflation rate also undermine manufacturing growth by creating an
environment of uncertainty and thereby creating a disincentive for long-term
investments. Higher rates of inflation also increase input costs, which cannot always be



                                             37
passed on to the consumer particularly in a low wage economy such as Ghana. In a
flexible exchange rate regime, rising inflation rates cause the nominal exchange rate to
depreciate and as a result the price of imported manufacturing inputs rises in terms of
the domestic currency. To the extent that output prices do not rise in step with the rising
cost of imports, manufacturing profits will be squeezed. Furthermore, firms that contract
foreign currency denominated loans are vulnerable to depreciations in the exchange rate
since more local currency will be required to defray their debts.


Increases in the public sector wage bill may compromise manufacturing sector output if
the wage increases are financed through increases in the money supply. On the other
hand, by enhancing public sector productivity, non-inflationary financing of wage bill can
improve manufacturing productivity because of the synergies that exist between the
public and private sector.


Because of the manufacturing sector is intensive in the use of electricity, diesel, RFO
and other energy products, its performance is influenced by the availability of such fuels.
Hence, increased imports of crude oil will tend to have a positive impact on the
performance of the sector.


Furthermore, increased foreign direct investment in the manufacturing sector will boost
the sector’s growth rate.


The Services Sector

The Services Sector accounts for a third of GDP and experienced the fastest growth
rates of all the sectors averaging 5.3 percent over the period 1995-2001. At
approximately 29.0 of GPD, the sector is the second largest contributor to the GDP. Its
share has seen a steady increase in recent years particularly at the expense of the
agricultural sector. The largest sub-sectors in the service sector are government
services , wholesale and retail trade, restaurants & hotels and Transport Storage and
Communication. The Wholesale and Retail Trade, Restaurants & Hotels and the
Transport Storage and Communication subsectors experienced the fastest average
growth rates of 5.9 and 6.6 percent respectively during the 1995-2001 period.




                                            38
The GPRS projects the sector’s share of GDP to remain steady at 5.1 percent between
2003 and 2005. However, the service sector is expected to contribute significantly to the
realization of the $1000 per capita income level expected by 2012. The key drivers of
growth in this sector will be investments in Information Communications Technology and
improvements in the marketing and distribution networks which will be reflected in
increases in the level of wholesale and retail trade in particular. Access to financial
support services is also a critical input for the growth of this sector as is access to
uninterrupted energy supply particularly electricity.


Services Growth Drivers

Several of the factors that drive the manufacturing also influence the service sector.
They include the rate of increase in government expenditure, access to credit, rate of
increase in wages
      Rate of increase in government expenditure
      Inflation rate
      Energy prices
            o Level of rainfall
      Prices of other inputs
            o The real exchange rate

Government expenditures have a significant positive impact on the service sector
particularly because government services is the largest sub-sector of the service sector
in Ghana. Between 1996 and 2002 the government services sub-sector accounted for
11 percent of GDP and grew at a rate (4.6 percent) higher than the average growth rate
of 4.3 percent over the same period.


                                  Energy Consumption


The service sector is second only to the industrial sector in electricity consumption.
During the period 2000-2001 it accounted for approximately 18 percent of total electricity
consumption. The Community, Personal and social services sub-sector accounted for
the majority of electricity consumption in the service sector over the same period.




                                             39
                                       Table 28
                  Energy Shares in the Commercial & Services Sector

                                                   2000
                                   Charcoal         60.7
                                   Diesel               0
                                   Electricity      20.4
                                   Kerosene             0
                                   LPG                4.4
                                   Wood             14.5
                                   Sum               100




                                       Table 29
                  Energy Shares in the Commercial & Services Sector

                                                     2000
                                 Chop bars etc        60.5
                                 Cold stores            0.9
                                 Defence                5.9
                                 Education               11
                                 Health                 2.8
                                 Hotels                 2.2
                                 Offices                3.3
                                 Other                  0.6
                                 Restaurants             11
                                 Street lighting        1.7
                                 Street selling           0
                                 Sum                   100

The Transport Sub-Sector
The transport sector is traditionally listed under the services category, however, its
significance as a consumer of energy necessitates separate categorization. Energy
consumption in the Transport sector is almost evenly split between Diesel and Gasoline
consumption, which represent 49 percent and 43 percent respectively of the sub-sector’s
energy consumption. Jet Kerosene on the other hand, accounts for less than 10 percent
of the total.




                                           40
                                          Table 30
                        Energy Shares in the Transport Sector
                                   Fuel Type          2000
                                   Diesel              49.3
                                   Electricity             0
                                   Ethanol                 0
                                   Gasoline            43.1
                                   Jet Kerosene          7.6
                                   Sum                  100


An efficient transportation system is critical to growth in all sectors of the economy. In
particular, the level of post harvest losses in the agricultural sector depends on an
efficient marketing and distribution system anchored by a dependable transport system.
The key factors that drive the transportation sector are household incomes, the size of
the public sector, population growth rates and the price of petroleum products.
Furthermore, the growth in the private sector as evidenced by sectoral growth rates in
agriculture and manufacturing in particular will have a positive impact on the transport
sector through increased household incomes and because of the fact that transport is an
input for production in all sectors of the economy.



Utilities
                                          Table 31
                              Energy Shares in The Utility Sector

                                                  2000
                                      Diesel        4.8
                                      Electricity 94.3
                                      Gasoline      0.9
                                      Sum          100


The utilities subsector relies heavily on electricity for its activities, particularly for
pumping water. Obviously this partly explains the erratic supply of utility services since
the supply and hence consumption of electricity is generally erratic.




                                              41
                        Appendix


       Table 32: Energy Shares in Paper and Printing
                                       2000
                 Diesel                 33.9
                 Electricity            35.7
                 Gasoline               11.4
                 Kerosene                 0.3
                 LPG                    17.2
                 Residual Fuel Oil        1.5
                 Sum                     100


       Table 33: Energy Shares in Food Processing
                                       2000
                 Heavy distillate           0
                 LPG bulk supply          2.8
                 Natural Gas                0
                 Residual Fuel Oil      44.8
                 diesel all use         19.7
                 electricity all use       32
                 petrol                   0.6
                 Sum                     100


Table 34 Energy Shares in Cutlery and Non-Ferrous Materials
                                         2000
               Diesel                     52.1
               Electricity                  6.2
               Electricity bulk           22.4
               Gasoline                     0.1
               Kerosene                     7.2
               LPG                          0.8
               Natural Gas_Nigerian           0
               Residual Fuel Oil          11.1
               Sum                         100




                            42
   Table 35: Energy Shares in Iron and Steel
                                  2000
         Charcoal                      0
         Diesel                    27.1
         Electricity               52.5
         Gasoline                    0.7
         Kerosene                    3.6
         LPG                         0.4
         Natural Gas_Nigerian          0
         Residual Fuel Oil         15.7
         Sum                        100


Table 36: Energy Shares in Tobacco Processing
                             2000
           Diesel             44.3
           Electricity           46
           Gasoline             7.1
           Residual Fuel Oil    2.7
           Sum                 100




Table 37: Energy Shares in Petroleum Products
                           2000
               Electricity  100
               LPG            0
               Sum          100


     Table 38: Energy Shares in Textiles
                                  2000
         Diesel                      4.5
         Electricity               14.2
         Electricity bulk              0
         Gasoline                    0.5
         Kerosene                      0
         LPG                           0
         Natural Gas_Nigerian          0
         Residual Fuel Oil         80.6
         Sum                        100




                      43
Table 39: Energy Shares in Chemicals other than Petrol
                                     2000
            Diesel                    20.4
            Electricity               62.5
            Gasoline                    0.8
            Kerosene                    1.4
            LPG                         1.7
            Natural Gas_Nigerian          0
            Residual Fuel Oil         13.2
            Sum                        100


Table 40: Energy Shares in Sawmill and Wood Products
                                   2000
               Diesel              41.4
               Electricity         19.3
               Gasoline              0.7
               Residual Fuel Oil       0
               Wood                38.7
               Sum                  100




                         44