Electricity retail tariffs: Impact of macroeconomic factors on bills

Consumers are also urged to attend the public hearing on the tariff on December 12 and to engage with ERA either as an individual, group or company

 

BY Diana Naisuna Nambi

IN SUMMARY

The movements. This year, favourable movements in inflation, exchange rate, fuel price, and energy generation mix have resulted into consistent tariff reduction quarter on quarter for all categories of consumers. As an illustration, the tariff for domestic consumers has dropped from a base of Shs696.9 per Kilowatt Hour in January to March 2017 to Shs687.1 per Kilowatt Hour...

The Electricity Regulatory Authority (ERA) will this month approve the End-user (retail) Base Tariffs to be charged to different categories of consumers of electrical energy distributed by Umeme Limited in 2018. These tariffs will form the base upon which adjustments for changes in macroeconomic parameters will be carried out on a quarterly basis throughout the calendar year.
In consultation with key stakeholders, including policy makers and power consumers, ERA is currently undertaking the process of reviewing the electricity tariffs, premised on the Quarterly Tariff Adjustment (QTA) Methodology.
The Authority introduced this methodology in January 2014 and uses it to determine the Electricity Retail Tariffs that are charged by the distribution utility in each billing period. The methodology applies to the tariffs paid by all categories of consumers, namely: domestic, commercial, medium industrial, large industrial, extra-large industrial and street lighting.
Prior to the introduction of the QTA Methodology, the government directly subsidised the electricity tariff, which remained unchanged while government absorbed the changes in costs due to fluctuations in the inflation, exchange rate and the price of fuel on the global market. A change in the government’s Subsidisation Policy in 2012, however, necessitated the development of a transparent and flexible cost-recovery mechanism that ensured adjustment of the End-user Tariff on a quarterly basis. ERA, therefore, developed the QTA Methodology for use in determining electricity tariffs that absorb the costs that licensees incur during the generation, transmission and distribution of electricity, to offset the subsidies that government no longer provides.
With the QTA Methodology, ERA is required to approve Base End-user Electricity Tariffs at the beginning of each year, against which adjustment factors are applied on a quarterly basis to factor in changes in the inflation rate, exchange rate, international fuel prices, and the generation energy mix.
These factors are specifically considered because they affect the cost of generation, transmission and distribution of electricity, which in turn affects the End-user Tariff. The adjustment of the tariff to factor in such changes is provided for in the licenses of the companies that operate in the electricity supply industry.
Unfavourable movements (increase) in inflation, exchange rate and the price of fuel on the international market increase the revenue requirement to run the electricity supply chain. On the other hand, favourable movements (reduction) in the same factors would reduce the costs incurred/revenue required to run the industry thus leading to a reduction in Electricity End-user Tariffs.
The presence of the QTA as a cost-recovery mechanism is an attraction for private investors into the electricity supply industry, and is associated with efficiency gains, especially in the generation and distribution segments that have a significant component of private capital. For the consumers of electricity, the QTA Methodology offers transparency in the electricity pricing process, ensuring that end-users enjoy the advantage of favourable movements in the macroeconomic factors, as manifested through a reduction in the retail tariff.
This year, favourable movements in inflation, exchange rate, fuel price, and energy generation mix have resulted into consistent tariff reduction quarter on quarter for all categories of consumers. As an illustration, the tariff for domestic consumers has dropped from a base of Shs696.9 per Kilowatt Hour in January to March 2017 to Shs687.1 per Kilowatt Hour, Shs686.0 per Kilowatt Hour, and Shs685.6 per Kilowatt Hour for the second, third and fourth quarters of the year, respectively.
This month, the Authority will announce the base tariffs applicable for the calendar year 2018, as prescribed by the QTA Methodology. I encourage all electricity consumers to actively participate in the process leading to the release of the base tariffs for 2018 by reviewing the applications from licensees (which are uploaded on the ERA website: www.era.or.ug and also available at the ERA library).
Consumers are also urged to attend the public hearing on the tariff on December 12 and to engage with ERA either as an individual, group or company.

Ms Nambi is the principal communications officer, Electricity Regulatory Authority. d.nambi@era.or.ug

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