The drop in power tariffs has also coincided with a more predictable cost recovery mechanism for investors in the electricity supply industry, attracting more investment capital into the country.
While there was a 46 per cent weighted average jump in power tariffs in the first year following government’s decision to change the electricity subsidization policy in 2012, figures published by the Electricity Regulatory Authority from quarter to quarter point to a gradual decline in electricity prices.
This drop, when compared to Uganda’s regional peers in East Africa, points to a strong regulatory system that has ensured electricity consumers pay a fair price for the service they receive.
The drop is realized despite a study by the World Bank that ranked Uganda and Seychelles as the only countries in Africa charging close to cost reflective tariffs. ERA is charged with setting power tariffs.
In January 2012, domestic consumers paid Shs 524.5 ($0.217) per unit of electricity. But by January 2021, that figure had gone up to Shs 750.9 ($0.201).
Large industrial consumers paid Shs 361 ($0.097) in January 2021, up from Shs 312.8 ($0.129) in January 2012. However, if you look at the dollar rate, a key component in setting the power tariff, it means the amount of money that electricity consumers have been paying over the years has actually gone down in real terms. (The electricity tariffs have been adjusted according to the dollar rate at the time.)
But for businesses that are struggling with different costs of production such as rent and petroleum products – all of which are going up, the decline in electricity tariffs comes as a major financial relief. There are not many products in Uganda’s markets that have registered a gradual reduction in prices over a 10-year horizon like electricity.
These figures are important in offering perspective to the latest bashing from President Yoweri Museveni, who, in his latest state of the nation address a month ago, pointed to the “mistakes” the government made with regards to the Bujagali hydropower tariff and the Umeme Limited concession.
Museveni said: “The cost of electricity is distorted by mistakes committed by some of our actors without my knowledge, even when I was heading the government. Especially the mistakes of Bujagali and Umeme add 55.3 per cent to the cost of electricity per unit.”
He added: “… the cost of power from Kiira is US cents 1.19 per unit, Nalubaale – US cents 1.119 per unit, Isimba – US cents 4.16 per unit, Karuma-US cents 4.97 per unit; but Bujagali US cents 8.30 per unit. Bujagali, at one time, was US cents 13.8 per unit. We shall see how to get out of this mistake. One solution that I have already ordered for industrial parks is to supply power direct from some of the government dams to them. I will not be deflected from that.”
Museveni’s statements on the “mistakes” over the Bujagali and Umeme agreements speak directly to the main reason behind the government’s decision to place some segments of the electricity supply industry in the hands of private investors.
FACTS BEHIND THE FIGURES
To get a clearer picture of how electricity tariffs are arrived at, and to put in context the comparisons Museveni made between the charges from the different power plants, there is a need to lay out the facts behind the figures.
In December 1953, the first of the six turbines at the Owen Falls dam, sometimes known as the Nalubaale dam, was switched on. The dam, which has a total capacity of 180MW, was constructed with a World Bank loan of nearly $9 million extended towards the expansion and distribution of electricity and given a shelf-life of about 50 years before it could be decommissioned.
That World Bank loan was expected to have been fully paid back in 20 years. While the Owen Falls dam faced poor operation and maintenance works during the politically-volatile years of 1971 to 1986 which saw its capacity drop to less than a half, government still managed to relieve itself of the debt burden on the project.
So, today Nalubaale can charge less than US cents 2 because its debt is fully paid and the tariff is used to recover costs for just the operation and maintenance and minimal restorative investments.
By the nature of electricity projects, then and now, which are partly financed by external credit, tariffs are used to recover the investment capital, mostly the debt. Tariffs tend to shoot up during the first initial years when the interest rate kicks in before finally going down when the debt has reduced, and ultimately fully paid back.
Take the 250MW Bujagali hydropower project which was constructed by a consortium of companies led by the Aga Khan group. Museveni said the tariff at Bujagali was at one time US cents 13.8 per unit, but is now at US cents 8.3 per unit. Here is partly why: Construction of Bujagali hydropower dam began in 2007, right in the middle of a power crisis and load shedding in Uganda.
Also, this was at a time when the global economy was slipping into a financial crisis, which made it difficult for investors to mobilize debt. In situations such as these, project finance terms tend to be stringent. Interest rates on credit tend to be high.
As part of the conditions from lenders, the providers of equity financing are required to sink in the equity contribution first for project development before the project can draw down on the available credit.
Understandably, return on equity is more expensive than the interest on debt. Under project finance, the capital deployed (both equity and debt) attracts interest during construction.
Sources within the electricity sector indicate that for Bujagali hydropower project, the actual debt was $590 million before the start of construction. But by the full commissioning of the project in 2012, that amount had skyrocketed to slightly over $700 million.
Documents published on the website of the sector regulator – the Electricity Regulatory Authority indicate that by 2021, the outstanding and non-paid Bujagali debt to be recovered through the tariff is about $384 million. Final payment of the debt, which accounts for the highest component for the costs, is expected in 2032.
The Bujagali tariff is, therefore, expected to drop after the debt is repaid. Today, the Bujagali hydropower dam accounts for the largest share of the generation tariff build in Uganda, at 23.1 per cent. This figure should go down when the 600MW Karuma hydropower project hits commercial operations next year.
The other large combination is from the distribution segment, driven mainly by Umeme Limited. However, power generation costs account for nearly 60 per cent of the electricity tariff that consumers pay.
So, why, then, was the initial tariff from Bujagali higher than the US cents 4.9 that the 600MW from Karuma will charge at the start?
To answer this question, one needs to look at different aspects of the projects. But critically, finding out who financed the project, and the stage in the lifecycle of the project goes a long way in getting the answer. Bujagali was fully financed by the private sector with no government contribution to the project development costs.
The debt for Bujagali was extended to the project special purpose vehicle (Bujagali Energy Limited) under project finance and not to government. While for Karuma on the other hand, government made a direct equity contribution of 15 per cent of the project costs.
The Karuma debt was directly sourced by government from Exim Bank of China – with government as the borrower and not the project special purpose vehicle. The government contribution may not be recoverable, but also the government-to government (China to Uganda) borrowing is on concession terms with much lower interest rates.
Under this arrangement, the loan is primarily repaid by government and not the project. The loan could be repaid even when the project is not operational – substantially reducing the risks for the lenders.
Without considering the cost of capital, the project development costs for Bujagali are comparable to those of Karuma and Isimba, according to figures from the supervisors of the projects. For Naluubale dam, the debt is fully repaid. For all projects (including Bujagali) when debt is repaid, the generation tariff is expected to significantly reduce.
Comparing Naluubale, Bujagali and Karuma without consideration of the peculiarity of the projects is inappropriate. The other issues to look at as cause for changes in generation prices are the different generation technologies (wind, solar, hydro, heavy fuel oil), the capacity of the plant, the stage in the project lifecycle, just to mention a few.
The bigger the generation capacity of a plant, the better the economies of scale, which make the project a little cheaper. A number of players in the electricity supply industry continue to hold the Bujagali hydropower project in high esteem; they say the project helped save Uganda from load shedding, reduced generation from the more expensive diesel generators of Aggreko, and was privately financed without government contribution at a time when international credit was expensive.
ENTER UMEME
Just like Bujagali, Umeme Limited’s tariff application is usually meant to recover its investment costs, and any other revenue requirement to offer a quality service to the consumer.
Umeme Limited kicked off its 20-year concession in the first quarter of 2005, right on the eve of a drought that would later hamper power generation at the Nalubaale and Kiira dams. A stringent power rationing schedule after electricity production dropped meant that there were little units to distribute around, sparking off power losses as more people found ways to make illegal power connections.
To mitigate the impact of low electricity production, the government licensed the expensive thermal power generators because in the words of Fred Kabagambe Kaliisa, the former Permanent Secretary in the Ministry of Energy, “it is better to have expensive power than no power.” All these factors meant that there would be an increase in power tariffs.
Power tariffs for domestic consumers more than doubled in the first seven years of Umeme’s concession, moving up to Shs 524.5 in January 2012 from Shs 212.5 in April 2005. However, that erratic movement of the tariff stabilized thereafter when the Bujagali project was commissioned.
Other interventions by the sector regulator such as the creation of the extra-large consumers, the introduction of the Renewable Energy Feed-in Tariff for small renewable energy projects all partly led to a more predictable tariff regime.
CHANGING COURSE?
On two separate occasions in recent weeks, Museveni, in the spirit of influencing a drop in power tariffs, has said that government will ensure that electricity is distributed straight from the generation plants to manufacturers in industrial parks.
In so doing, Umeme’s services would be bypassed for the industrial electricity consumers. Such a move would be interpreted as if government is ready to play a deeper role in the distribution network of electricity.
If that is the case, then it begs two questions: why did government allow private players in the electricity supply industry in the first place? And what has changed now to cut these investors short?
About 20 years ago, government made a strategic decision to allow private sector participation in the electricity supply industry mainly because it did not have the money to make those kinds of investments.
In any case, government had more pressing needs such as weak health, education and agricultural sectors that needed more urgent attention. Also, the electricity supply industry being capital intensive, any attempts for government to borrow would directly affect the debt to GDP ratio for Uganda and affecting government borrowing for other sectors.
To answer the second question, nothing appears to have changed over the years in terms of government having enough financial power to invest in the electricity supply industry, especially now that Uganda’s debt level is above the East Africa ceiling of 50 per cent of the country’s gross domestic product.
Finance Minister Matia Kasaija was recently quoted in the press that Uganda’s debt level is now worrying. All of this then leaves the government with few options to try and bring down the tariff.
However, to influence the tariff further down, government could renegotiate the Umeme concession with better terms for the country now that the sector has been de-risked; invest in demand-growth initiatives such as boosting industrial parks; promote local products to limit exposure to the dollar; and spend more money to increase the transmission network to evacuate power from the generation plants. For now, these appear to be safer bets to bring down the power tariff.
