The effect of electricity technical losses on Ghana's economy: a simulation evaluation

DOIhttp://doi.org/10.1111/opec.12111
Date01 December 2017
Published date01 December 2017
The effect of electricity technical losses on
Ghana’s economy: a simulation evaluation
Kennedy Kwabena Abrokwa*, John Bosco Dramani** and
Keshab Bhattarai***
*Lecturer, Ghana Institute of Management and Public Administration P. O. Box AH 50, Achimota, Accra,
Ghana. Email: kabrokwa@gimpa.edu.gh
**Lecturer, Department of Economics, Kwame Nkrumah University of Science and Technology, Kumasi,
Ghana. Email: boscodramani@knust.edu.gh
***Senior Lecturer, Hull Business School, University of Hull, Hull, UK. Email: k.r.bhattarai@hull.ac.uk
Abstract
This study investigates the effects of electricity distribution inefciencies in Ghanas electricity
sector on output, consumption and investments. Inefciencies are considered as losses in
transmission and distribution channels from the generator to the nal consumer of energy leading
to supplydemand mismatch (shortages and blackouts). We assume that, a high inefciency reects
high electricity cost in the sector. A simple dynamic version of the Ramsey growth model is
developed, providing analytical solutions and applying simulations to evaluate the economic cost.
Results from the simulations show that, electricity shortages and blackouts reduce output,
consumption and investments in the economy. Improvements in energy technologies for generating
and distributing electricity can offset the negative impacts and improve efciency in the sector.
1. Introduction
Mainstream economic growth theories suggest that the contributions of energy to
economic growth are less signicant. The standard neoclassical growth theory assumes
that labour and capital matter most (Solow, 1956). Arguments in endogenous growth
literature suggest that, GDP per capita is essentially driven by a process of capital
accumulation and technology. Investment in technology has also been identied as having
played a signicant role (Romer, 1994; Aghion and Howitt 1998; Galor and Weil, 2000;
Lucas, 2002; Barro and Sala-i-Martin, 2003; Galor, 2005; Aghion and Howitt, 2009).
Thus, these mainstream growth theories do not include energy as a factor of production.
Ayres et al. (2013) explain that two reasons could account for the neglect of energy
as a factor of production: the cost share theorem and historically, near constant cost
shares of energy.
1
Stern and Kander (2012), also note that, this neglect of energy in the
production function could be attributed to the abundance of energy resources in recent
decades. They attribute this to over simplication of energy constraints in growth theory
©2017 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington
Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
286
which collapses when constraints on input factor combinations are made. Also, given
multi-product, multi-sector, multi-factor systems and even a single sector system and a
set of hard constraints, a change in one critical input would have a bigger effect on the
entire economy, greater than the relative cost share of that input.
Although mainstream growth literature does not incorporate energy in the production
function, there is vast literature on growth theories that include the environment and
natural resource variables. On one hand, there is literature that examines sustainability of
the economy in the face of non-renewable natural resources that are relevant in production
with or without technological change. Key conclusions from these growth models that do
not account for technological change include: (i) when technical conditions are met and the
elasticity of substitution between two inputs is unity, sustainability is achievable when
there are no extraction costs and capital does not depreciate (Solow, 1974); and (ii)
efcient growth path could lead to a collapse in the economy and natural resource could
deplete in the presence of constant discount rate (Dasgupta and Heal, 1979).
On the other hand, key conclusions on models that account for technological change are
that: exogenous technical progress allows growth of consumption over time if output
elasticity of resources is less than the rate of technological change divided by the discount
rate, provided that the elasticity between capital and resources is unity (Stiglitz, 1974); it is
possible for consumption to be sustained indenitely and resources not completely
exhausted in the long run if the economy is dependent on innovation and conserve
resources and also provided that there is sufcient accumulation of human capital for
innovation in the long run (Barbier, 1999). Resource-endogenous growth model studies
have made similar conclusions. These studies conclude that, for consumption not to decline
in the long run, the discount rate should not be greater than the rate of resource augmenting
progress, at most, they should be equal (Smulders and De Nooij, 2003; Bretschger, 2005;
Smulders, 2005; Di Maria and Valente, 2008). However, these studies do not specify
whether the natural resource in question is energy or non-energy resources.
In contrast, there are notable exceptions in the environmental-growth literature that
make specic mention of energy as a natural resource and, in addition, show that energy
and material resources are vital for the future growth of economies under substitution
possibilities between energy and capital. K
ummel (1989) models industrial growth in
West Germany and USA by solving a set of differential equations obtained from
homogeneous production functions which depend on labour, capital and energy. The
results show that technical progress was associated with increasing energy use and
partial decoupling of energy and economic growth occurred from substitution of energy
by capital in response to the energy price explosions. Lindenberger and K
ummel (2011)
compute the output elasticities and elasticities of substitution of energy-dependent
CobbDouglas, CES and LinEx production functions for Germany, Japan and United
States and nd them to be larger than the cost share while labour is smaller than its cost
©2017 Organization of the Petroleum Exporting Countries OPEC Energy Review December 2017
Electricity losses on Ghana’s economy 287
share due to technological constraints. This suggests that energy generates more growth
compared to technological progress as claimed by mainstream growth economics.
Similarly, Lindenberger (2003) derives and applies production functions designed to
model service industry evolution to Germany from 1960 to 1989. In addition to
technology parameters, the derived functional forms incorporate energy, labour and
capital. Simulations from numerical results indicate that output elasticities of capital and
energy exceed factor cost shares, while that of labour falls below its factor share.
We have highlighted the signicant role of energy in the growth of economies.
However, most of these theoretical works have been applied extensively to developed
economies. Regardless, empirical evidence show that these conclusions apply to most
developing economies, albeit with mixed results. In panel estimates involving 18
developing economies Lee (2005) found that long-run and short-run causalities run from
energy to economic growth; Wolde-Rufael (2005) found that energy is signicant for the
growth of some developing countries while it is less signicant for others in time series
estimates involving 19 African countries; Lee and Chang (2007) also found that energy
is signicant for economic growth in 22 developed economies and vice versa for 18
developing economies from panel VARs and GMM estimates; similarly, energy does not
have signicant impact on growth of low income countries in a panel VAR and GMM
estimates involving 82 low-, middle- and high-income countries (Huang et al., 2008).
By literature review, we have shown the signicant role energy has played in the
development of modern economies. For Ghana, however, the electricity sector is
presented with numerous challenges and inefciencies such as supply bottlenecks leading
to huge supplydemand mismatch. The net effect has been unreliable and insufcient
electricity supply with severe costs for economic development. In 2014, e.g. it was
estimated that, Ghana could lose between $320 million and $924 million per annum in
productivity and economic growth due to technical losses such as frequent power outages
(Eshun and Amoako-Tuffour, 2016). Nonetheless, minimising inefciencies in the energy
sector is important for a developing economy like Ghana to ensure greater benets in terms
of growth in output, consumption and investments in the long run.
Even though there are other sources of electricity losses in Ghana such as theft or
illegal connection and faulty meters, they are highly insignicant since the distribution
companies have instituted stringent measures to deal severely with theft. They have also
resorted to inspect annually and replace old and faulty meters with digital and more
accurate ones (Ghana Grid Company Limited, 2013). In addition, the introduction of the
Automatic Meter Reading system (AMR), energy auditing and accounting as well as
capturing electricity consumption of street lights and inspection of prepaid meters have
drastically reduced commercial losses (Electricity Company of Ghana, 2014). To this
end, we focus on inefciency along the lines of power outages as in Fisher-Vanden et al.
(2015), distribution losses as in Pacudan and De Guzman (2002), infrastructural gaps as
OPEC Energy Review December 2017 ©2017 Organization of the Petroleum Exporting Countries
288 Abrokwa et al.

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