The Cash Waterfall Mechanism (CWM): The Causes, Consequences and Expert Recommendations

Part 1: The Power Sector Payment Gap – Genesis of the CWM

By Dr. Nii Darko Asante – Private Energy Sector Consultant, and Former Technical Director – Energy Commission of Ghana

The Cash Waterfall Mechanism (CWM) is a structured financial model used in Ghana’s energy sector to distribute revenue collected from electricity sales in an equitable and transparent way. Its primary goal is to ensure financial sustainability for all stakeholders in the electricity value chain, including power generators, transmitters, and distributors.

The Payment Gap – Causes

The power sector payment gap stems from the inability of Ghana’s two state-owned distribution utilities, the Electricity Company of Ghana (ECG) and the Northern Electricity Distribution Company (NEDCo), to collect enough money from their customers to pay the bills they receive from their electricity suppliers.  This inability of ECG and NEDCo arises from a combination of their failure to collect the money accrued to them under the tariff, and some inadequacy in the tariff levels set by the PURC.  As shown below, each of these two primary sources of the payment gap has several underlying causes that contribute in different proportions to the liquidity challenges of the sector.

Table 1

The Payment Gap – Consequences

The immediate consequence of the payment gap is that a large portion of the bills of the Ghana Grid Company (GRIDCo) and the generation companies remain unpaid each month, resulting in a large debt being built up over the years.  This situation has persisted for well over two decades, and despite the severity of the problem (and the many committees that have examined the problem), no effective solution has been implemented to close the gap (as will be explained in Part 2 of this article, the CWM itself does not address this problem).

The payment gap or shortfall prevents the generation companies from fully paying for the fuel they consume in generating power, and prevents GRIDCo from paying its regulatory fees in full – further spreading the toxic debt burden.  The payment shortfall also prevents sector entities from adequately servicing loans contracted, and this contributed significantly to the banking crisis of 2017.  More recently, the large and growing power sector debt was a major factor in Ghana being pushed into the arms of the IMF for a 17th time.

The large and growing debt also discourages much needed private sector investment in Ghana’s energy sector, as it encumbers energy sector entities and prevents them from being considered creditworthy. This poses major challenges in providing the securitization required for contracts with the private sector. Consequently, Independent Power Producers (IPPs), and other investors in Ghana’s energy sector, demand payment guarantees from the government to protect themselves from the anticipated non-payment of the utilities. These guarantees are then treated as contingent liabilities of government, further worsening the country’s debt position.

Inequity in Revenue Sharing by ECG – Aggravating Complication

As the largest distribution company in Ghana, ECG contributes the most to the payment gap. In addition, the manner in which it discharges its obligation to pay its power suppliers provides the major aggravating factor that necessitated intervention in the form of the CWM.

Prior to implementation of the CWM, ECG tended to ‘pay itself in full’ from the money it collected, before sharing whatever was left between its power suppliers and service providers.  This starved other power sector entities of funds, whilst ECG effectively had all the funds it required.  In effect, through this practice, ECG was able to fully insulate itself from the consequence of its own poor performance in revenue collection.

Watch out for the continuation and full article in the upcoming August Edition of the Global African Times Magazine

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