ABSTRACT
Manufacturing companies employ
electricity as a key resource input in their production mix. This has generally
led to a situation where manufacturing companies subsist heavily on electricity
for survival and continuity in business. Against this backdrop, the objective
of this study was to examine the effect of power generation on the performance of
manufacturing companies listed on the Ghana Stock Exchange.
A sample of seven firms was
selected for the study using convenience sampling technique. Panel data
covering the period 2008-2012 was adapted from the published financial
statements of sampled firms. Data on power generation were time series data
adapted from the Ghana Energy Commission spanning between the period 2008 and
2012. Multiple linear regression models were used to estimate the relationship
between the variables in the study. The results of the study suggest that
electricity supply has a significant positive impact on both profitability and
efficiency. The effect of System Average Interruption Duration Indexon both
profitability and efficiency were found to be negative. However, System Average
Interruption Frequency Indexwas found to have an insignificant effect on both
profitability and efficiency.
In respect of this, energy
ministry should initiate prudent measures to improve electricity supply to
ensure efficiency and profitability of manufacturing companies.In addition,
manufacturing companies are to invest in other energy efficient technologies to
ensure continuous electricity supply in the event of erratic supply of
electricity from the national grid.
CHAPTER ONE
INTRODUCTION
Introduction
This study looks at power generation and performance of
manufacturing industries listed on the Ghana Stock Exchange. This part looks at
the background of the study and the statement of the problem. The chapter
further looked at the research objectives, questions and research hypotheses
and proceeds to make a justification for the study and ends with limitations
and delimitations of the study
Background of the study
Literature has it that infrastructure services (e.g.
Electricity supply) isa major factor of economic development.Electricity supply
interacts with the economy through multiple and complex processes. It
represents an intermediate input to production, and thus changes in electricity
supply quality and quantity significantly affect the profitability of
production, and invariably the levels of income, output and profit (Adenikinju,
2005). Moreover, electricity supply services raise the productivity of other factors
of production (Kessides, 1993). Electricity is a significant component of
virtually any production process. As such, limited supply has the potential to,
directly and/or indirectly; affect the economic activities of firms.
Ghana, since the establishment of Akosombo Hydroelectric Dam,
has experienced several episodes of electricity supply challenges. The first of
such experience was in 1983-1985 followed by 1998-2000 and then in the period
2006-2007 and the current power crisis which started in 2012 to 2015 as reported by Tano, (2015) on
graphiconline.com. In between these periods there have been several power
supply challenges which have lasted for shorter periods.
Failures in the electricity supply system have a negative
impact on industries and compelthe industries to adapt any of these four
options; decrease productivity, outsourcing, self-generation and energy
efficiency technology (Fisher-Vanden, Mansur&Wang, 2014)
Low quality infrastructure has been identified as one of the
potential contributors to the large productivity gap between developed and
developing countries and one of the obvious examples of infrastructure failures
is inadequate electricity generating plant (Allcott, Collard-Wexler &
O’Connell, 2014). Electricity is intertwined with every aspect of day-to-day
life. From our home to our business, health and recreation, electricity is
crucial. The issue of electricity supply reliability is paramount. In addition
to the inconvenience experienced by consumers during prolonged periods without
electricity service, a power outage can literally mean the difference between
life and death (Rouse & Kelly, 2011). Osborn andKawann (2001), defines
electricity supply reliability as “the ability of power system component to
deliver electricity to all point of consumption, in the quantity and quality
demanded by the consumer”.Dabholkar,Thorpe and Rentz, (1996) also defined
electricity supply reliability as “the degree to which the retail service
provides what was promised and when it was promised”
Rouse and Kelly (2011) explained that electricity was
originally intended as a means of powering light bulbs. However, today,
electricity is used for a wide variety of critical
applications for which reliability is paramount. Industries of all types
heavily depend on electricity supply for their operation
Making investment decision is critical to business activities
as it relates to or affects the overall business objectives. The profitability
level of a firm depends on how good or bad its investment decision is
determined. While a good investment decision increases the profitability and
enhances the financial viability of firms, poor choice of investment reduces
the financial capability and sometimes causes firms to liquidate. Investment in
fixed capital, often referred to as business fixed investment, has both the
relative costs and expected benefits that often influence firm’s decision to
embark on such spending.
Investing in backup generation is a business fixed investment
which comes at higher cost to firms and therefore has to be taken judiciously.
A firm experiencing power outages would have to consider the marginal benefit
of investing in backup and the marginal cost of purchasing and running the
plant. For instance, a firm experiencing frequent power outages would have to
decide whether to invest in backup generation and be able to continue
operations in the events of outages but at the required costs, or not to invest
in backup generation and shuts down operations during power outages. A firm
will consider either of the options depending on which one makes a rational
decision to them. A firm will invest in backup generation if it wants to
continue to run its operation even when there is power outage and that there
will be marginal gains in production.
Manufacturing is largely dependent on
electric power to operate and run the equipment and machines for the process of
converting raw materials, components, or parts into finished goods. The
Association of Ghana Industries (AGI) in its first quarter report of 2015
indicated that inadequate power supply is the number one on the list of ten
major challenges facing the Ghana’s manufacturing sector. In the view of
Oviemuno (2006), one of the major requirements for the development of the
manufacturing industries is affordable and abundant supply of electricity for
driving the industries’ machinery. Power outage is established as a major
challenge to industries growth and performance. According to Khattak and
Hussain (2014), electricity shortage has a significant effecton theperformance
of industries. During long period of power shortage, some industries use
alternative means of generating electricity such as electric generators, to
produce electricity to power their activities and create convenient working
environment for employees. This comes at a higher cost compared to the cost of
grid power. Power outages affect output of most manufacturing industries(Doe
& Selase, 2014). This is because it serves several purposes ranging from
production, storage, powering of office equipment and illumination.
As a resource, power has never been enough for all those who
need it for their activities. It is a scares resource and must be treated as
such. In Ghana, there have been a number of times where power has to be
rationed. This has resulted from inadequate generation capacity by the power
generation companies to meet the demand of the country. The total installed
power generationcapacity of Ghana is 2,936MW (Energy Commission,Ghana, 2014).
With available generation capacity of 2,050MW compared to the installed capacity of 2,936MW, it is obvious
that there are some challenges with the generation system. There are however,
generation and transmission losses which make power production even less than
the available generation capacity when all power generators are operational at
2,050MW (Volta River Authority,2015).
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