Who will consume Uganda’s surplus electricity?

When President Museveni was re-elected in February 2016, he said that he would lead Uganda into a middle-income country by 2020. This ambition to reach this status requires the country to also be generating more electricity to supply the industries and small businesses that thrive in any middle-income country. In the estimation, according to the Uganda Electricity Generation Company Limited (UEGCL) and going by the middle-income target in the National Development Plan II, Uganda should have at least 2,500MW by 2020. Going by the current on-going projects, by 2020, the actual installed capacity of electricity of Uganda will have expanded to 1,683 MW.
Some of this new generation of power will come from Karuma and Isimba dams that will generate 600MW and 180MW respectively. The question is that even if the 2020 installed capacity will be below middle-income levels, who is going to consume this power?

Not enough demand
Even with the current installed capacity of 863MW, the demand for power is still considered low, with coverage only being about 20 per cent of the population.
This figure, according to Mr Harrison Mutikanga, the managing director UEGCL, is still below standards of developing countries.
“From the electricity consumption point of view, Uganda’s situation is far below other developing countries,” he says.
The demand is currently not enough to meet supply. However, statistics from research carried out by the Electricity Regulatory Authority (ERA) indicate that at the current rate of growth, by 2018, the country could have turned back to the expensive heavy fuel generators, meaning the cost of power will increase further. Uganda’s installed generation capacity is currently about 862MW – including 100MW from the heavy fuel generators – and effective demand is just short of 600MW.
The total redundancy is estimated at about 200MW. That amount can be taken up within a space of two years.

A surplus is always good
In the early 2000’s, Uganda’s electricity sector was in a crisis. There was almost near zero investment in new dams and new sources of electricity. The result of that was that Uganda faced a power deficit. The most symbolic feature of this poor investment in the electricity sub-sector was the load-shedding. Every month, Umeme would publish a monthly schedule for load-shedding. People in their homes knew that if power were to be off in the evening on Monday, then on Tuesday it would be off in the morning. It was a schedule the economy was getting used to.
In a desperate move to save the situation, the government opted for heavy fuel generators, Aggreko and Jacobsen among others, to supply the deficit that the government was facing. Also, because the generation of power using these heavy fuel generators, it was a rather expensive venture that would have made it hard for the consumers to keep paying their bills. As a result, the government subsidised the cost of electricity, especially on the tariff charged by the heavy fuel generators. That was until 2012 when Bujagali came on board and eased the pressure on the tariff. It was then that the government made the decision to remove subsidies. With Bujagali on board and several mini-hydro dams, Uganda has been operating a surplus, for now, enabling a stable supply of electricity.
“Supply should move ahead of demand. In fact, infrastructure, even if it is an industrial investor, they will look at whether there is enough supply for the next five years. Otherwise, no industries will set-up if a country does not have enough power,” explains Mr Selestino Babungi, the CEO Umeme.
Mr Babungi adds: “What I see in our projections when the dams are completed in a gap of a year, industries will come on board and absorb the electricity being generated.
This is supported by research carried out by Mr Joseph Mawejje and Ms Dorothy N. Mawejje for the Journal of Economic Structures in August 2016, that indicates a relationship between growth and electricity generation. The more the power that is generated, the more it is supportive of the industrial sector, the report notes.
“We can, therefore, conclude that the observed causal relationship between electricity consumption and GDP is supported by the dynamic growth effects in the industrial sector. This is perhaps not surprising given that, as discussed earlier, industrial production accounts for 63 per cent of electricity consumption in Uganda,” the research titled ‘Electricity consumption and sectoral output in Uganda: an empirical investigation’ reads.
It adds: “These results suggest that current efforts to improve electricity generation will accelerate growth in Uganda by facilitating industrial sector growth. Moreover, results suggest electricity conservation policies can be applied in the services sector without hurting growth.”

Demand and supply
That explains the mantra from the government around industrialisation and agro-processing. Industries consume almost 65 per cent of the generated power. So when more industries come on board, it boosts effective demand.
The government has already lined several demand projections based on the projects that will come on board.
According to Mr Mutikanga, some of these include the demand for the Standard Gauge Railway, Namanve Industrial Park, Kampala Light Rail, Iganga Industrial Park, the Osukuru Phosphate Fertiliser Factory and growth in urban centres.
Additionally, there is also expected demand from the Free Zones that the country is setting up through the Free Zones Authority. The working assumption is that these projects will consume a combined excess of over 800MW.
Before these projects come on board, it is likely that the surplus power will remain a burden to consumers and taxpayers.

Will the tariff change?

The private sector has been crying foul over the high tariff that could take them out business. The tariff is mostly dominated by generation costs that Independent Power Producers (IPPs) incur. The tariff structure is reviewed every three months and it includes indicators like inflation, the exchange rate, and global oil prices. The government has been telling the private sector that with new “cheap” power from Karuma and Isimba coming on board, the cost of power is expected to reduce. However, the government is locked into some contracts with IPPs that even they do not purchase power, they will still pay. In 2014/15, the Auditor General’s report revealed that the government spent about Shs77b on idle IPPs that did not generate a single megawatt of power.

President Museveni has continued to blame the high tariff at the moment on the Bujagali Hydro Power Dam, which he says was built using expensive debt, making the cost of generation much higher. The investors in the Dam have up to 15 years to pay their debts before the generation costs can fall.

The government is also locked into an agreement and guarantee with Bujagali that on annual basis, money must be paid to the dam even if power is not purchased. According to several sources within the energy sector, the power tariff structure will reduce but not to the intended level of about 5 cents. This, they say, is because capital recovery has to take place for Bujagali and that the government can’t just stop paying the producers any money.
In part, though, the higher cost of power from Bujagala would be offset by the lower costs of power from Karuma and Isimba.

“The tariffs are a function of the capital recovery of the investments. So the longer the recovery time of those investments, the easier it will be to bring down the tariffs. The current generation tariff is 10 cents and will go down to about 5 cents then overall tariffs will drop further,” Mr Babungi explains.
The talk of Isimba and Bujagali being ‘white elephants’ is only heard of in the corridors. The official line, however, is that the electricity from both dams will be utilised.
Ideally, the government is caught in a catch 22. The dams are being built using loans from China’s Export and Import Bank (EXIM) at cost of about $3b. This is money that has to be recovered. That means, whether the power is consumed or not, the government has provided guarantees for cost recovery.

Reducing operating costs

No subsidy for Bujagali

One year ago, President Museveni directed that options be provided to him over the Bujagali Hydro Power Project on how to reduce the operating costs due to expensive debt acquired by the owners. Some options were placed on the table. One is for the government to buy the dam from the current shareholders.The second option was for the government to have a subsidy regime that takes the burden off the consumer. This would mean the government could pay about half of the 11 cents per Kilowatt Hour used to produce power at Bujagali. The estimated cost of this was about Shs800b annually. The third option is for the shareholders and the government to secure “cheaper debt” that will be used to refinance the expensive debt. In essence, that would be expected to reduce the tariff. The fourth option for government is to allow an extension to the income tax holiday Bujagali enjoys. It was set to expire in July 2017 and lead to an increment in the tariff to about 13.6 cents per KiloWatt Hour.

UEGCL to operate
Karuma, Isimba dams

UEGCL is the government implementing agency for the flagship hydro-power projects of Karuma (600MW) and Isimba (183MW). These two projects, now about 30 per cent complete, are scheduled for commissioning in 2019 and 2018 respectively. Others in line of development include Ayago (840MW), Muzizi (44.7 MW) and Nyagak III (5.5 MW). UEGCL is also currently in the process of securing funding for feasibility studies to develop other small hydro power dams across the country at Okulacere (6.5MW), Latoro (4.2MW), Agbinika (2MW) and Maziba (1MW).

The business model

UEGCL operation and maintenance business model will focus on attaining efficiency and financial sustainability through sound business principles and ensuring the posterity of the assets. UEGCL, working as the asset holder, will manage the various power plants as independent business units under internal performance contracts. This will ensure operational independence, adoption of private sector tenets of management guided by clear targets for operational efficiency gains, lower tariffs through efficiency gains and help build a bankable conglomerate of hydro-power projects capable of further mobilising and leveraging finance for new power plant developments.