Power tariffs: Will Umeme’s exit usher in cheaper power?

A his much we know for sure: the amount of money Ugandans pay for electricity triggers all sorts of emotions when being discussed in different public fora.

The topic has drawn comments from as high as the president, who, during the state of the nation address of 2021, was quite vocal on the price of electricity.

“The cost of electricity is distorted by mistakes committed by some of our actors especially the mistakes of Bujagali and Umeme, [which] add 55.3 per cent to the cost of electricity per unit,” President Yoweri Museveni said.

Less than a month later, Umeme Limited, the company running Uganda’s electricity distribution network, ran an article on its website by Prof Samuel Sejjaaka titled Deconstructing the myth of power tariffs. The article attempted to offer a more accurate analysis of what informed the electricity tariff.

For a service that is the lifeblood of large industries and a source of anxiety in homes, the price of electricity is expected to take centre stage when, on March 31, Umeme Limited hands over the concession to distribute electricity in most parts of the country to Uganda Electricity Distribution Company Limited (UEDCL).

Many Ugandans expect to pay less for power now that the distribution of electricity has shifted from the profit-driven hands of Umeme Limited to the more socialist public entity of UEDCL. It will not be that straightforward, though.

BACK TO BASICS

When Umeme Limited winds up its electricity distribution concession on March 31 after 20 years, the transition will hand government near-total control of Uganda’s entire electricity supply industry. The transition will bring the quality of service and the price of electricity into sharp focus as the public awaits what it would take to keep the lights on.

At the centre of it all is the industry regulator, the Electricity Regulatory Authority (ERA), which operates at an arms-length, and whose role is to balance the interests of the operator of the distribution network with those of the consumer needs. ERA insists that it intends to set electricity tariffs that reflect the costs of generating and distributing power to ensure that the developers and the concession holders make reasonable recoveries of their costs.

Before it does that, however, ERA will first look at Uganda’s energy mix. Uganda’s electricity grid is fed from four sources of generation – hydro, bagasse, solar and thermal. At least 84 per cent of Uganda’s total installed capacity of 2,049MW is dispatched from hydropower plants, which also double as the cheapest source of electricity in terms of the tariff in Uganda today.

Most of these hydropower plants, such as Bujagali and Karuma, were constructed using expensive debt sourced by private companies. A large portion of these loans, if not all, were sourced in US dollars. Also, the loans usually have a shorter repayment period of 15 years or less.

Considering that the construction period of these power projects takes more than five years – for Karuma it was 10 years before the plant was commissioned – developers have a short period to sell electricity and repay their loans. That is why the electricity tariff tends to be high in the early years of the plant.

Take the 600MW Karuma hydropower plant, the biggest in Uganda today, which was commissioned in August 2024. For the first 10 years, the Karuma plant has a locked-in tariff of US cents 4.57. From the eleventh to fifteenth year, the tariff will drop to US cents 2.27 before it makes a further drop thereafter.

After ERA has looked at the electricity dispatch and the costs it takes to generate the power, it will turn its attention to three key numbers as it calculates the power tariff: the exchange rate, the inflation print, and the price of oil on the international market.

The exchange rate, which carries the heaviest weight in this index, determines the fluctuation of the dollar against the Uganda shilling. At least 85 per cent of the costs in the generation and distribution of electricity is denominated in dollars, according to figures from ERA. It is, therefore, the key determinant of the tariff.

The rate of inflation, as determined by the Uganda Bureau of Statistics, is used to reflect the costs incurred in Uganda shillings. ERA considers the price of oil on the international market in its determination of the electricity tariff for the plants that use heavy fuel oil, although the dispatch from these plants is quite low.

FUTURE OUTLOOK

In a move that excited the market, ERA reduced the electricity end-user tariffs for the first three months of 2025 by a weighted average of 5.2 per cent compared to the fourth quarter of 2024 – one of the largest drops the market has witnessed in recent times. Some sections of the market have interpreted the decline in the power tariff as a signal of further downward spirals of the tariff going forward.

There are strong indications that the tariff could slump, although with all things economics, nothing is ever a constant. ERA has also recategorized the industrial tariffs by separating the medium and large industrial categories to differentiate manufacturers from service providers. ERA said it did this to “support the productive use of electricity and promote growth in the manufacturing sector…”

UEDCL says it intends to borrow money at a lower interest rate of less than seven per cent per annum, compared to Umeme’s higher rate. The backing of government as a guarantor is expected to ease UEDCL’s negotiations for the loans.

Also, UEDCL will have a lower return on investment compared to Umeme’s 20 per cent. Both these factors – cheaper debt and a lower return on investment – should ease the pressure on the electricity tariff. UEDCL will also have a larger service territory compared to Umeme, with only the West Nile region and Kalangala island not under its control.

The service territory, which comes with more customer numbers, should give UEDCL better economies of scale to seek a lower tariff. From a policy perspective, ERA is close to issuing its first license to a private transmission company. The transmission segment of the electricity supply industry was strictly the preserve of the government entity, the Uganda Electricity Transmission Company Limited.

Right up to 2023, electricity generation companies only had one company to sell power to, which forced them to seek a higher tariff to cover the risk of low uptake of generated electricity. The participation of private companies in the transmission segment leads to more customer connections, and, therefore, there are high chances that the tariff could come down.

And lastly, the introduction of new technologies and availability of finance has dragged electricity tariffs for segments such as solar. The tariff for solar has nearly halved in the last seven years due to new technologies.

Uganda is also exploring the idea of generation plants selling power directly to large consumers, thereby bypassing the distributor. All these interventions require UEDCL managing the concession efficiently by making smart investments into the network. The company has to meet the operational targets to deliver a service that can bring down the tariff.

While the factors appear to favour UEDCL, with President Museveni already calling for the availability of lower tariffs, the company has to ensure that it can attract cheap credit to invest in its network.