Accounting for power : A critical analysis of claims on revenue recognition and arrears owed independent power generators

By Elikplim Kwabla APETORGBOR (Dr)

In a recent press conference at the Ministry of Finance, the Finance Minister, Hon. Amin Adams, suggested that revenue recognition and arrears owed Independent Power Producers (IPPs) under Power Purchase Agreements (PPAs) are realised solely through the monthly invoices received and paid by the Electricity Company of Ghana (ECG).

This assertion oversimplifies the complexities of accounting in the power sector, especially with the involvement of IPPs. Proper accounting for power, particularly in the context of Power Purchase Agreements, is governed by every clause within these agreements.

As stewards of shareholder interests, it is crucial to comprehensively account for every financial obligation. This publication critiques the Finance Minister’s claims, highlights the intricacies of PPA-related financial liabilities and calls for prudence and full disclosure to provide a transparent picture of the sector’s financial state.

The multi-faceted nature of Power Purchase Agreement-driven financial liabilities

Power Purchase Agreements are intricate legal and risk-sharing documents outlining the terms and conditions under which power is produced and sold to utilities like the Electricity Company of Ghana. These agreements are under pass-through cost mechanism which encompass various financial obligations beyond the monthly invoices for electricity supplied by the Independent Power Generators. Key clauses in the PPAs that result in financial liabilities include:

• Changes in law: PPAs often contain provisions allowing IPPs to pass on increased costs due to changes in law, such as new taxes or levies – Growth and Sustainability Levy, Emissions Levy, Energy Commission’s Variable Charge, etcetera. These additional costs form part of the increased costs clearly defined in the PPAs and must be passed on through the tariff to ECG, impacting the overall financial obligation. The Ministry of Finance’s claim falls short of these industry basics;
• Fuel price variations: The cost of fuel significantly influences financial liabilities under a PPA. Escalations in fuel prices increase operational costs for IPPs, which are subsequently reflected in the energy charge of invoices sent to ECG. As experts in our business, we recognise the impact on the tariff and pass it on;
• Idle capacity charges: Under-utilisation of contracted capacity leads to idle capacity charges. When ECG does not fully utilise the power capacity contracted under the PPA, it must still make payment for the idle capacity, resulting in additional legitimate financial liabilities;
• Interest on delayed payments: Delays in honouring monthly invoices attract interest charges. The cumulative effect of these interest charges substantially increases the arrears owed to IPPs;
• Exchange rate losses: Many PPAs are denominated in foreign currencies, introducing exchange rate risks. Adverse currency movements can lead to exchange rate losses, often passed on to ECG; and
• Loan interest surcharges and other claims: IPPs may incur loan interest surcharges and other financial claims covered under the PPA. There were instances where IPPs contracted loan to be able to service debts that were due for payment, as a result of payment default by ECG. These additional costs further complicate the financial landscape of the power sector accounting.

A critical examination of the Finance Minister’s claims

• Indeed, the debt owed the Independent Power Producers is in excess of US$2billion, until a meaningful and win-win deal is reached and sealed.

The Finance Minister’s assertion that he has “reconciled or restructured” the IPPs’ arrears to US$1billion is questionable and oversimplifies the underlying financial obligations. Given the multi-faceted nature of financial liabilities under PPAs, a mere aggregation of the monthly invoices does not capture the full extent of ECG’s commitments. Let’s take propaganda out of this sensitive case and act ethically. To provide a more accurate and reliable picture, the Finance Minister should offer a detailed breakdown of the so-called “US$1 billion” figure, including all PPA-related claims, as I pointed out earlier. It is worrying to learn that these are figures audit firms of high reputation have certified.

Importance of full disclosure

To achieve greater accountability and transparency in the power sector, the Finance Minister must present a realistic picture, no matter the frightening outlook, and make full disclosure of the financial situation. This involves providing a detailed reconciliation that includes:

• A breakdown of all components contributing to the arrears: This should include interest charges on delayed payments, idle capacity charges, exchange rate losses and any additional claims under the PPAs;
• An explanation of how changes in law and fuel price variations have been accounted for: This will ensure that all financial obligations are transparently reported; and
• Clarification of the methodology used to arrive at the usd 1 billion figure: This will help ensure that all financial obligations under the PPAs are accurately reflected.

Challenges and recommendations

To ensure that any debt restructuring proposal is credible, acceptable and not rip off any serious investor of their benefits, it is essential to conduct careful scenario and sensitivity analyses on the options proposed. This ensures a win-win situation for all stakeholders involved. The use of the high office of a Finance Minister for political propaganda undermines the credibility of financial management in the sector.

As stewards of investors’ interest, we implement comprehensive accounting practices. This goes beyond simplistic revenue recognition models and requires meticulous consideration of all contractual obligations stipulated in the PPAs.

Proper accounting for power in Ghana’s energy sector extends far beyond the monthly invoices received and paid by ECG. The Finance Minister’s claims regarding the reconciliation of IPPs’ arrears need to be substantiated with a detailed breakdown that reflects the true financial liabilities arising from PPAs. As stewards of shareholder interests, it is imperative to account for every amount and provide full transparency. The complexities inherent in PPA-driven financial obligations demand a comprehensive approach to accounting, one that goes beyond simplistic revenue recognition models. Only through such rigorous and ethical accounting practices can we hope to achieve financial clarity and stability in Ghana’s power sector.

The writer is a power systems economist & CEO, IPPG

The post Accounting for power : A critical analysis of claims on revenue recognition and arrears owed independent power generators appeared first on The Business & Financial Times.

Read Full Story