Feature: The case for Ghana’s new energy sector levy

On 3rd June 2025, Parliament passed the Energy Sector Levy (Amendment) Bill, introducing a GHS1 increase in the levy on petroleum products. The objective is to raise an additional GHS5.7 billion to support the energy sector—specifically to reduce the country’s growing energy debt and ensure a stable power supply.

According to Finance Minister Dr. Cassiel Ato Forson, Ghana’s energy sector debt currently stands at $3.1 billion, and approximately $3.7 billion is required to clear all arrears. Although the decision to impose a new levy may seem unpopular, it is in fact both justified and timely, given Ghana’s economic conditions and the structural challenges facing the sector.

Ghana’s energy sector debt is not a new problem. It has accumulated over the years due to a mix of policy missteps, poor financial management, and external shocks. For long periods, electricity tariffs were set below cost-recovery levels, leading to persistent revenue shortfalls. The Electricity Company of Ghana (ECG), Volta River Authority (VRA), and other state institutions have struggled to cover operational costs, let alone meet obligations to independent power producers (IPPs).

The problem worsened in the aftermath of the 2012–2016 power crisis. In a bid to address the energy shortfall, the government entered into long-term contracts with several IPPs. Many of these agreements included “take-or-pay” clauses, which require ECG to pay for power capacity whether or not it is utilized. While this helped to restore power supply in the short term, it created long-term financial burdens that persist today.

Other structural weaknesses further deepened the sector’s debt profile. These include high transmission and distribution losses, non-payment by public institutions, weak revenue collection, and the volatility of the Ghana cedi. Since most of Ghana’s power sector contracts are denominated in U.S. dollars, any depreciation of the cedi significantly increases the cost of servicing energy-related obligations.

In recent years, the government has taken steps to address the crisis. The Energy Sector Recovery Programme (ESRP) was introduced to improve efficiency, transparency, and financial viability. The Cash Waterfall Mechanism was also rolled out to ensure fair and transparent distribution of revenues across the sector. Despite these reforms, the financial hole remains deep—and progress has been constrained by the lack of sufficient revenue to clear legacy debts.

It is within this context that the new energy levy must be understood. It is not an arbitrary tax; it is a strategic policy tool designed to tackle a systemic crisis. More importantly, the timing is right. In the past month, the Ghana cedi has appreciated significantly, by over 30% against the U.S. dollar. This has already led to a reduction in fuel prices and provided some relief to consumers. Introducing the levy now, when fuel prices are relatively low, allows for a smoother adjustment with less direct impact on the public.

Moreover, a stronger cedi means the government can get more value out of every cedi collected through the levy when repaying dollar-denominated debts. It also helps prevent future energy crises. IPPs have already signaled frustration over delayed payments. Without intervention, some may reduce power supply or pull out altogether—threatening the reliability of Ghana’s power system and damaging investor confidence in the sector.

Beyond the technical rationale, there is also a broader issue of equity and sustainability. Ghana cannot continue to rely on external financing and emergency bailouts to fix its energy problems. These debts eventually fall back on the taxpayer, either through budget reallocations, cuts in social spending, or inflationary pressures. By introducing a modest GHS1 levy, the government is asking citizens to contribute to a solution—a small sacrifice today to avoid a bigger crisis tomorrow.

Understandably, many Ghanaians are frustrated by the rising cost of living and weary of new levies. But this energy levy is not being introduced in a vacuum. It comes at a time when global oil prices are stable, the cedi is strong, and the space exists to take corrective action. It is a bold but necessary step—one that reflects fiscal responsibility, policy foresight, and a commitment to long-term energy security.

In conclusion, while no new tax is ever welcomed with open arms, the Energy Sector Levy (Amendment) Bill, 2025 is a measured and justified response to a longstanding structural crisis. It reflects the reality that Ghana’s energy future cannot be built on debt and arrears. Rather, it must be financed through a shared national commitment to sustainability and reform. The time to act is now—while we still have the room to do so.

By Prof. Fred Dzanku, ISSER

Source: myjoyonline.com

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