Eskom troubles loom large as UEGCL eyes fresh funds

In going against a long-held tradition, government is looking at reclaiming some ground it ceded to foreign power firms when the energy industry needed new investment, with the Uganda Electricity Generation Company Limited looking to undertake works that South Africa's Eskom Uganda Limited has failed to pull off at the Nalubaale and Kiira dams, writes JEFF MBANGA.

Germany’s Kfw is expected to hire a tender agent by April 28 as it prepares to offer 100 million Euros in credit to Uganda Electricity Generation Company Limited, which will go towards maintenance works at mainly the Nalubaale power dam in Jinja.

The plan is that by June 2018, the discussions over the credit will have been concluded and the money, about Shs 390bn, disbursed to UEGCL, either in tranches or in full, according to the different industry sources we have spoken to.

While the money is urgently needed at Jinja to improve power production, the big story here is that the 100 million Euros loan offers UEGCL an opportunity to show Eskom Uganda Limited, the South African firm managing the Nalubaale and Kiira dams, how work should be done. Our sources told us that there are growing worries that Eskom might leave the Jinja facilities worse than they found them when their concession ends in 2023.

From a broader perspective, UEGCL’s intention to undertake maintenance works at the Nalubaale and Kiira dams is a damning assessment on Eskom, whose operations are being questioned by a number of industry players, mostly the regulator, the Electricity Regulatory Authority. Eskom is expected to question the legality of UEGCL’s plan and whether the law allows it to interfere with a running concession.

“Uganda Electricity Generation Company Limited is seen to be having an ambition to operate the power plants currently operated by EUL, which at this stage is contrary to the government policy of EUGC playing an oversight role and the operation of the assets left to private players,” Eskom says in one of its internal documents.

In reply to our questions for this story, Thozama Gangi, the chief executive officer of Eskom Uganda, said: “As far as Eskom Uganda is concerned, we have met all our contractual obligations over the past 14 years of the concession.” She then directed us to the Electricity Regulatory Authority.

At stake is something far juicier. Both Eskom and UEGCL are eying the full takeover of operations and maintenance works at the 600MW Karuma dam and the 183MW Isimba dam, which could be commissioned by 2019, according to different documents we have gathered and sources. The combined costs of building the Karuma and Isimba dams is estimated at nearly $3 billion.

Eskom has no intention of leaving Uganda after its concession ends in 2023, according to the sourcing we have gathered. 

MANDATE

“Eskom Uganda Limited, therefore, needs a mandate that will inform and guide its actions with regards to, primarily, the following: pursuing the current concession extension/renewal at its expiry; Pursuing new operations and management concession opportunities in plants currently under construction or planned,” according to one of Eskom’s plans.

“There are power plants currently under construction, planned to be commissioned in 2018 (i.e. Karuma (600MW) and Isimba (180MW), if Eskom Uganda Limited wants to secure the operation and management, it needs to make preparations now.”

UEGCL, on the other hand, has supervisory powers over Karuma and Isimba. While he was still the chairman of the Uganda Electricity Generation Company Limited, Stephen Isabalija pushed aggressively to have government hand over supervisory powers over the two dams by, through proxies, blowing the whistle on the shoddy works at the two projects.

That approach led to UEGCL being handed the instruments to supervise the two dams and the sacking of three commissioners in the ministry of Energy and Mineral Development. Soon after, Isabalija was appointed the permanent secretary in the ministry of energy.

Also, UEGCL recently received licenses over the Karuma and Isimba dams. We could not verify which type of licenses these were and for how long they would run. It, however, shows that UEGCL might be ahead in the race for getting the operation and maintenance works for Karuma and Isimba.

There are, however, questions whether UEGCL has the capacity to handle this task. Also, Eskom boasts of more experience than UEGCL. Eskom knows this assumption. The South African entity has come up with a proposal for this, and it involves partnering UEGCL, according to our sourcing.

“As a counter strategy to the aspirations of UEGC of becoming an operator, Eskom could offer to dispose up to 49% of its equity in EUL, which will result into a partnership and we could work together in finding solutions to existing plants while we become the natural partner for new power stations. UEGC will benefit in participating in operations and maintenance and may help them to develop this capability while we meet our commercial objectives,” Eskom writes in one of its future plans.

According to our industry sources, this plan is rather wild and ambitious as the two parties might not want to work together, and also because of Eskom’s performance.

INSIDE ESKOM

Questions are being asked of Eskom Uganda’s ability to meet its set goals of operating and maintaining the Nalubaale and Kiira dams after a recent meeting with the regulators at the Electricity Regulatory Authority heard of a series of problems that the company was facing. 

The Electricity Regulatory Authority wrote to Eskom on March 23, 2017, where the regulator said Eskom was performing poorly. ERA based its assessment on the fact that Eskom had experience power outages 10 times more than the neighbouring Bujagali power dam.

Also, some of these outages came on the recently refurbished unit six. Of the 380MW capacity at both Kiira and Nalubaale, which account for about 43 per cent of Uganda’s total capacity, Eskom is generating just 149MW.

During a meeting on April 3 at the ERA offices, where Eskom had been called to explain why it was facing such dire issues, the regulators heard that basic equipment such as the fire systems at the Jinja offices were not working, while the speed governors at the Nalubaale dam were down for 330 hours a year, nearly for 15 days each month. Part of the reason, according to insider sources we have spoken to, is down to lack of spare parts to fix the problem.

That is not all. Plant availability at the Nalubaale and Kiira dams was estimated at 94.7 per cent, below the 96.9 per cent target, which, by industry standards, is quite low. Plant reliability is at 97.5 per cent, far below the 99.7 per cent target.

Of deeper worry, though, is that two units – number three and number 10 – that generate 18MW each, are not working; in fact they have not been working for the last three years.

To offer all these problems a financial value, we used the loss time and Eskom’s power tariff of US cents 1.12 to come up with a figure. We estimate that Eskom is losing up to $2 million a year in unrecovered revenues as a result of these problems.

To the country, the problems at Eskom mean that the public is not receiving enough power, and that the country is spending more of taxpayers’ money to build other power plants and yet Nalubaale and Kiira, which have a combined capacity of 380MW, are performing below its target.

Eskom says in its reports that “There are no major findings against EUL that indicate any breach or non-compliance to the prescripts of the concession and related agreements and this is expected to continue until the expiry of the concession.” Eskom says Nalubaale had far deeper problems by the time they took over.

The problems at Eskom are emerging at a time when Uganda’s electricity sector is witnessing a dramatic shift. After more than a decade where Uganda has depended heavily on foreign companies such as Umeme and Eskom to commit huge amounts of capital, and run the show, in the energy sector, there appears to be a growing fatigue among Ugandan technocrats in the way foreign companies are doing business.

The Electricity Regulatory Authority, regardless of its limited capacity, now has the guts to stand up to foreign companies such as Umeme and decline to approve their investment plans. The Uganda Electricity Generation Company Limited has also built its capacity; it now has full supervisory powers over the Karuma and Isimba power dams.

This level of confidence among Uganda technocrats appears to be exposing foreign firms such as Eskom to intense scrutiny. But how did it get to a point where some people say Eskom is neglecting its mandate of operating and maintaining the Nalubaale and Kiira dams efficiently? It helps to go back to the time Uganda decided to disband Uganda Electricity Board (UEB), the state parastatal that governed the energy sector.

Facing pressure from external donors, Uganda was forced to split UEB, which was being weighed down by a pile of debts, into three separate entities: Uganda Electricity Generation Company Limited, Uganda Electricity Transmission Company Limited, and Uganda Electricity Distribution Company Limited.

Uganda then scouted for foreign firms to operate and maintain its assets in the generation and distribution fronts. In 2003, government awarded Eskom a 20-year concession to manage the generation bit, at Nalubaale and Kiira, while Umeme was also handed a 20-year concession to be in charge of the distribution side. The transmission part was left as it was.

The foreign companies – Eskom and Umeme – then found a country that was desperate for a change of fortune. Contracts were handed to these two companies, which some people feel were unfair to Uganda.

For example, members of Parliament found out that Uganda had offered Eskom a sweet take-or-pay contract, where Eskom was to earn money based on the disclosed energy capacity it had and not on the amount it had disbursed. Simply put, Eskom was to be paid money based on whether it supplied power or not, as long as it disclosed the generation capacity it had.

Also, Eskom was to earn a 12 per cent return on investment, while Umeme got a 20 per cent return on investment locked into their contracts, both figures being a little high compared to markets elsewhere.

Eskom Uganda Limited, according to our investigations, had a $6.8 million loan from Eskom Enterprises, the finance arm of the group, from which to draw. But in 2003, the company decided to borrow just $2.7 million of that amount, and it took years before it even considered the option of drawing down on the remainder of the money.

This behaviour, according to the different figures we have looked at, appears to have informed Eskom’s business strategy – invest very little but make as much profit.

The trick is simple: Eskom convinces the regulator to approve its capital investments, which it will recoup from the tariff, but invest less than what it promised.

This assertion is supported by the fact that Eskom’s net profit is almost equal to its investment, which means that Eskom is not bringing new money to the table; rather, reinvesting the profit it makes, which comes with a sweet return. 

It would be too harsh to heap everything on Eskom. Uganda’s energy sector is still at an infant stage, with about 15 per cent of the population connected to the grid. The low demand makes it hard for operators to make huge investments.

Also, the financial problems that Eskom’s parent company in South Africa is facing means the Uganda operation cannot get the support it needs. Also a number of transmission lines are in a dire state, which means that connecting the power remains a challenge. Government’s limited financial resources mean investment in power lines is still low.

Still, that does not relieve Eskom Uganda from dealing with basic issues such as fire engines.

jeff@observer.ug