Tuesday January 21 2014

What power tariff reduction means to consumers

Umeme employees at work in Kampala recently. Power tariffs were recently reduced by 0.8 per cent.

Umeme employees at work in Kampala recently. Power tariffs were recently reduced by 0.8 per cent. PHOTO BY FAISWAL KASIRYE 



The government last week “reduced” the end-user tariffs by between Shs2.4 and Shs13.2 less for each unit of electricity used. This is the first time since 2009 that the Electricity Regulatory Authority (ERA) has reduced the tariffs. In 2009 ERA reduced the tariffs by between Shs2 and Shs41 on the account of increased power generation.

ERA attributes last week’s reduction to five factors. First, it is because the government will be paying Jacobsen and Electromaxx – the remaining two heavy fuel oil plants’ – capacity charges.

Second, the debts of the electricity generation, transmission and distribution companies will not be embedded in the end-user tariffs. Also, the money that shall go to the Karuma and the Isimba hydro power projects transmission lines will be got from the Energy Fund.

Third, it is because of the appreciation of the Shilling against the Dollar from Shs2, 688 (2013) to Shs2, 524 (2014).
Fourth, it is due to a reduction of the distribution losses from 28 per cent (2005) to 24 per cent (2013).

Fifth, ERA said the reduction is a result of the “minimal dispatch” of thermal power into the national power grid. Also, starting in April, the exchange rate, fuel price fluctuations as well as inflation will on a quarterly basis be factored in the tariffs.

Parliament recommendation
Noteworthy though is that ERA’s announcement comes against a backdrop of a debate in Parliament of the Ad Hoc Committee on Energy (ACE) 2012 report, which recommends: “ERA must rise to the challenge to oversee, control and regulate the sub-sector without fear or favour.”
Two months back, power distributor Umeme, had asked ERA to increase the tariffs by 10 per cent to, among others, meet its investment costs.

Over the same period, many legislators had supported the ACE recommendation that the Umeme and Eskom power distribution and generation concessions respectively be terminated.
An official in the Attorney General’s Chambers had earlier told the committee that the AG’s office had not drafted the agreements as dictated by the Constitution. As for Eskom, the ACE said because the energy sector is of strategic importance, it is in public hands in many countries – including South Africa, Eskom’s home country.

The committee said the power distribution should be broken up into zonal areas to foster competitive participation, which would lead to efficiency in distribution and to lower tariffs since the competitors would be trying to win over potential customers.

Impact of traffic reduction
First, a domestic consumer might save Shs30 monthly. How’s that so? Uganda’s kilowatt-hour per capita is 215. If you subtract the first 15 units, which are subsidised, from the 215 you will be left with 200 units. When you multiply those 200 units by the Shs3.9 reduction for a domestic consumer, you get Shs780.

Now, bear in mind that ERA increased the surcharge for the first 15 units from Shs100 to Shs150, meaning the new surcharge is Shs750.
The money that domestic consumer will save is, therefore Shs30 – that is, Shs780 minus 750.
If, however, you consume fewer than 100 units monthly, then – because of the Shs750 surcharge – your bill could increase by Shs360 monthly.
Either way, a domestic consumer in Uganda pays a higher tariff than their counterpart in Kenya.

A domestic consumer in Kenya pays a base tariff of Kshs15.51 (Shs449.79) compared with Shs520.6 in Uganda for each unit consumed. Mr Jacob Oboth-Oboth, the chairperson of the ACE, says ERA could do better by further reducing the tariffs since Uganda has a high hydropower generation capacity. “Electricity consumers yearn for cheaper power,” Mr Oboth-Oboth told the Daily Monitor last week. “Cheaper power would go along way in alleviating the effects of climate change.”
But Umeme’s Tariff and Regulatory Affairs Manager, Dr Martin Francis Kyeyune, says Uganda’s tariffs are competitive.

“When we compare just the base tariff, I think that comparison doesn’t bring it out well. We need to look at full cost for Kenya and the full cost for Uganda. That would help to appreciate who is cheaper. But I am confident that our tariffs are competitive,” Dr Kyeyune told the Daily Monitor in an interview last week.

Manufacturers, who consume 65 per cent of the power distributed in Uganda, are yet to analyse the impact of the reduction. By the time we went to press, we had not yet received UMA’s analysis.

Still, Mr Sebaggala said the reduction could lead to lower production costs.
“Every coin that is reduced from your cost of production results into more profit, bigger capital and money for bringing in larger quantities of raw materials. Definitely our competitive level will equally go up.”

Kenya-Uganda comparison
Comparatively, a large industrial consumer in Kenya pays Ksh18.11 (Shs525.19) per unit whereas their counterpart in Uganda pays Shs310.4 per unit consumed. Second, for Umeme, the company that distributes 97 per cent of the electricity transmitted here, it is still not clear how the reduction will impact on the company’s revenues and collection rates.

Besides the reduction of energy losses, the increase in its customer base and the increase in power supply, the increase of power tariffs by 52 per cent in 2012 partly contributed to Umeme’s increased revenues then.

Domestic consumers accounted for 28 per cent of Umeme’s Shs235 billion 2012 revenue. They consumed 24 per cent of the electricity sold by Umeme.

On the other hand, the large industries bought 47 per cent of the electricity and they accounted for 37 per cent of Umeme’s revenue then. However, Umeme’s Annual 2012 report says the 52 per cent tariff adjustment caused a drop in the collection rate from 98.9 per cent to 94.0 per cent.

Third, the government will have to allocate more of the locally generated resources to power infrastructure.

As of last Financial Year, the Energy Fund had just $600 million (Shs1.5 trillion today). But power transmission lines from Karuma and Isimba hydropower projects will cost about $400 million.

Tariff reduction: the way forward

What more could be done to further reduce the tariffs?
Building more renewable energy power generation plants using local funds. Since the automatic tariff adjustment (ATA) will start applying from April, on a quarterly basis, Uganda should work at improving its exports. It could do this by, for example, adding value to its agriculture products so that they could fetch more foreign currency.
More export earnings could result in corresponding increases in Uganda’s foreign exchange reserves with which to mitigate the exchange rate fluctuations.

Third, reduce the energy losses from 20 per cent to about 14 per cent.
For each loss “allowed” in the tariff, Uganda pays Umeme $4 million (Shs10 billion). So should the losses reduce from 20 per cent to 14 per cent, the tariff could as a whole reduce by another $24 million (Shs60.5 billion).

Loss reduction could be achieved by, among others, investing in prepaid metering so that consumers use only the electricity that they would have paid for in advance. “ERA must claw back all the false claims of losses and investments by Umeme since 2005 to “take it – the tariff – between Shs220 to Shs250 per unit” – Mr Andrew Baryayanga, the Kabale Municipality Member of Parliament said.