Biofuel: helping create environmentally sustainable growth
A new biofuel plant in Ghana could not only help meet the country’s power needs and environmental commitments, but also help drive growth in the country’s poorest regions.
While Ghana has developed hydropower and thermal power industries, both posed limitations. Its hydropower services were of relatively low capacity and used mainly for base-load provision (used to maintain steady low-level grid supply), and its thermal plants were confined to the south of the country.
This asymmetry led to a number of problems — grids in different parts of the country struggle to meet energy needs and when energy was transmitted from power-generating hubs in the south to the energy-starved north, some of it was lost through inefficiencies. The response was to build a biomass plant in the Brong Ahafo region of central Ghana, integrated into a 23,000 hectare eucalyptus plantation. The plant will burn material farmed sustainably from the plantation and provide 426GWh of energy a year. The plantation itself will also include protected areas of biodiversity and could help Ghana in meeting its target of 10% renewable power generation by 2020. But its impact could go beyond that.
Fuel for growth
Ghana is one of the richest nations on the African continent, but this doesn’t mean it doesn’t struggle with high levels of poverty, particularly in the north of the country. On paper, Ghana claims a remarkably low 2.5% level of unemployment (Germany, by comparison, scores only 4.5%), but there are a number of factors to consider, including how Ghana defines employment, issues with the unemployment registration system, exclusion of female unemployment and low wages. In this light, the plant is not only good news for power generation and environmental goals — it could also be a key driver of employment and wider growth in the region.
The mighty multiplier
To understand the true impact of Ghana’s biofuel program on the local economy, it's important to understand an important macroeconomic function called the multiplier effect. First described by English economist John Maynard Keynes in his seminal work The General Theory of Employment, Interest and Money, the multiplier effect describes the consequences an exogenous variable has on an endogenous variable.
Put more simply, the multiplier describes mathematically how increasing one factor, such as jobs, will have a wider impact on the economy at large. For example, more employed people means more people will spend money, which in turn creates more money and more employment. The multiplier effect, defined by Keynes as the mathematical function “k,” is key to understanding and modelling economic growth.
To calculate the relative (k) multiplier effect for the Brong Ahafo project, EY teams used the marginal propensity to consume (MPC). This is the predicted change in consumption resulting from increased disposable income in the hands of local workforces. Optimistic and conservative estimations of the MPC yielded k multipliers of 3.6 and 2.61. The team ultimately decided on a realistic multiplier of k equal to 3.0.
On the basis of the application of the multiplier, it was estimated that the power plant project could have the employment effect of creating 2,700 jobs (direct and indirect). This could increase disposable incomes and therefore drive greater private consumption. Applying a multiplier effect k of 3.0 on annual payments for salaries and wages, the added value amounts to US$3.4m in 2015 and US$5.7m in 2019.
The new biomass plant, therefore, could not just help meet Ghana’s distinct energy needs, it could also help contribute to Ghana’s commitment to clean and renewable power, and help drive growth in some of the deprived parts of the country.