It is essential for policymakers to carefully assess the broader economic consequences of the 21% VAT imposition on end user electricity tariffs and consider a more balanced approach that protect the sustainability of the power sector, support economic recovery, stability and industrialization.
In line with the efforts being made towards economic recovery, imposing a 21% VAT on electricity consumption in Ghana can be counter productive and have countless adverse effects on the overall economy and the electricity sector of Ghana:
Reduced Demand and Increase in compensation for Idle Capacity Charge: To cope with higher costs, households might reduce their energy usage, which could lead to under-utilization of essential appliances, affecting their quality of life and productivity. Higher prices can lead to a decrease in electricity consumption as consumers and businesses seek to minimize costs. This reduced demand can affect the overall revenue generation of the sector. Consumers and businesses might shift to alternative energy sources like solar to reduce dependence on the grid, which could lead to under-utilization of existing infrastructure and challenges in grid management. The principal effect in this circumstance is the upsurge in the compensation for Idle Capacity to the Independent Power Producers.
Impact on Economic Growth: High electricity costs can be a deterrent to economic growth. Industries and businesses facing high operational costs due to expensive electricity may reduce production, delay expansion, or relocate to areas with cheaper energy costs. Reduced spending power due to higher utility bills can contribute to a slowdown in economic activity, as consumer spending is a key driver of economic growth.
Energy Poverty: The increased cost might push more households into energy poverty, where a significant portion of their income is spent on energy bills, leading to tough choices between electricity and other necessities. Elevated tariffs can exacerbate energy poverty, where a significant portion of the population cannot afford adequate energy services. This leads to broader social issues and can widen economic disparities.
Investment Disincentives: High tariffs can deter investment in the sector. Potential investors might be cautious about entering a market where high costs could lead to reduced demand or regulatory interventions.
Financial Stress on Utilities: Utilities may face financial stress if high tariffs lead to bill defaults, late payments, or increased instances of electricity theft. If the electricity sector is not able to balance the revenue from high tariffs with investment in infrastructure, it could lead to quality of service issues, such as frequent outages and poor maintenance. Grid Instability: If a significant number of consumers move to off-grid solutions, it could lead to instability in the electricity grid due to fluctuating demand and supply patterns.
Regulatory and Political Challenges: High tariffs can lead to regulatory and political challenges, including public discontent, protests, and pressure on governments to intervene, which can lead to regulatory uncertainty.
Quality of Service Issues: Barriers to Electrification Efforts: In regions where electrification is still underway, high tariffs can be a significant barrier to extending electricity services to underserved or rural areas.
Inflationary Pressure: The increased cost of electricity can contribute to inflation. Since electricity is a fundamental input for many sectors, its cost increase can cascade through the economy affecting prices.
The West Africa Power Pool (WAPP) or Regional Electricity Market (REM) in view
Imposing VAT (Value Added Tax) on end-user electricity tariffs in Ghana could make the country less attractive within the context of the mission of the West African Power Pool (WAPP) or the regional electricity market for several reasons:
Higher Prices for Consumers: The imposition of VAT increases the cost of electricity for consumers in Ghana. This could make Ghana less competitive compared to neighboring countries in the WAPP that have lower electricity costs. Investors and businesses often seek locations with lower operational costs, including energy expenses. At a stage where the Regional Electricity Market is through so much competition with regards to tariff affordability, Ghana is walking out of competition. This is very injurious to economic recovery.
Reduced Cross-Border Energy Trade Appeal: If Ghana’s electricity becomes more expensive due to VAT, it could reduce the attractiveness of the country as a trading partner within the regional electricity market. Neighboring countries might prefer to engage with partners offering more competitive prices. It is country’s goal to make Ghana a net exporter of power and the electricity hub of West Africa, hence the collaborations with the Independent Power Producers to invest in the generation infrastructure.
Impact on Regional Competitiveness & Potential Disincentive for Foreign Investment: Ghana’s overall competitiveness in the region could be affected. High electricity costs can influence not just the energy sector but also manufacturing, services, and other sectors that are significant for the economy. Investors often consider energy costs when making investment decisions. Higher electricity costs in Ghana could discourage foreign direct investment, which is crucial for economic growth and development.
Strain on Regional Integration Efforts: The West African Power Pool aims to create an integrated regional electricity market. Disparities in energy pricing due to VAT could create imbalances and strain these integration efforts.
Challenges in Achieving Economies of Scale: The regional power pool’s effectiveness relies on economies of scale and the efficient distribution of energy resources across borders. Different tax regimes, like Ghana’s VAT on electricity, could complicate these dynamics.
Understanding these implications is crucial. It’s not just about domestic policy but also about how these policies position Ghana within the larger regional energy landscape. Balancing domestic fiscal needs with the goals of regional energy integration and competitiveness is a key in this context.
Source: Dr. Elikplim Kwabla Apetorgbor
(CEO of IPPG & Power Systems Economist)