Energy PPAs were necessary to rid Uganda of power shortage

Monday March 23 2020

 

By Daudi Migereko

Lately there has been concern about the Power Purchase Agreements (PPAs) which were signed when Uganda was experiencing severe and economically debilitating load shedding. It has been asserted by some officials that government signed bad PPAs. I wish to clarify on the matter and put the record straight having been one of the critical stakeholders during the PPAs’ negotiations.

His Excellency the President had given us a clear strategic policy direction that “Never again should Uganda be short of electricity supply to meet demand; the country should always be ahead of demand.” This strategic policy direction is akin to that of President Kwame Nkrumah of Ghana who had demonstrated similar foresight in the early 1960s when he constructed and commissioned the 1200 MW Akasombo HPP. Many western countries termed it a “ white elephant .“ Nkrumah justified the Akasombo; as the basis for industrialization in Ghana. Both President Nkrumah and Museveni were right because there is no way you can industrialize or run a modern economy without enough power supply.

This strategic policy direction would never have been realized without the right appropriate incentive policy instructions/ instruments like Take or Pay, Feed- In-Tariff and The Energy Fund.
It has been argued that Government spends a considerable amount of money on electricity Ugandans actually do not consume due to contractual clauses that require to pay the energy sellers even for unconsumed energy. In order to understand why these “take or pay” clauses are part of those power purchase agreements, it is important to understand the prevailing economic environment that preceded the issuing of these PPAs.

When the NRM Government came to power in 1986, the economy had virtually collapsed. Government was deeply involved in all sectors of the economy including banking, manufacturing, energy, and marketing of coffee, cotton and produce amongst others. Basic essential commodities like sugar and soap were rationed because of limited supply. The Owen Falls Hydro Power Project (HPP) which had been built in 1954 to generate 150MW was producing only 60MW in 1986. Key decisions had to be taken in order to revamp the economy. Assets which had been seized by Idi Amin from Asians under his economic war were returned to their original owners. It was also decided to privatize many elements of the economy and the Public Enterprises Reform and Divestiture (PERD) Act was put in place to allow for implementation of these reforms in the entire economy.

The Electricity Act 1999 was enacted to allow for private sector investments in the power sub-sector. Equipped with this policy and legal framework, Government could attract private sector investments in Uganda’s power sub-sector. Uganda was viewed as an uncompetitive investment destination at that time. Indeed, as people may appreciate any investor will always evaluate the risk and assess whether to invest in Uganda or elsewhere in the World. If he sees a likelihood of making a loss, the investment will be terminated. Power infrastructure investments require large capital which at that time wasn’t available in Uganda. Multi-lateral concessional lenders, including the World Bank, had stopped lending directly to Governments for purposes of hydro power development. As such, the idea of private sector “Independent Power Producers” (IPPs) came up to develop these projects.

As a country we take too long to decide let alone to implement projects which are of critical strategic importance to our economy. Our first at-tempt to develop the 250 MW Bujagali HPP with the AES Nile IPP, faced this problem. Although, good democratic discussions and decisions had taken place about the project and a good PPA and tariff secured, this happened rather late. By this time, the world’s leading IPPs, including AES and Enron, were facing serious economic problems and were forced to pull out of these projects. In a number of countries the projects were ready for commissioning by the time the world energy sector was hit by this crisis. Governments took over some of these projects and made arrangements to deliver electricity to the consumers.

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In our case we repossessed the site and intellectual properties; we had spent a lot of time discussing and listening to everybody but not starting on construction of the power station. The country had to suffer load shedding, use of expensive diesel generated power and high tariffs. Fresh arrangements to develop Bujagali HPP along competitive terms were put in place and pursued. Mainly, non-concessionary credit was available. Plus the usual long gestation period for such big projects, costs were escalating; the 250 MW was only commissioned in 2012.

Utilization of NSSF funds which would have been cheaper and quicker to advance Bujagali had been resoundingly rejected. Obviously, this decision was not well informed. It denied NSSF/ workers of an opportunity to participate in a potentially lucrative project. Today, NSSF is investing in some energy projects and realizing good returns.
Meantime, other solutions to rid the country of power shortage had to be pursued. The first grid connected private sector power plant was the Kakira/ Madhvani co-generation project which took several years to negotiate. In the early 2000s, it was finally concluded with support from the first phase of the Energy for Rural Transformation (ERT 1). An energy deal was signed off.

In practically all cases, a power plant investor is asking the question “What will happen if the produced energy is not being bought? Who will bear that risk ?” If the Government is not in a position to assure the investor about the uptake of the generated energy, marketing such urgently needed infrastructure projects becomes incredibly difficult. This was the situation the Ugandan Government was in at the time and building the power plants on its own was not an option due to budgetary constraints. Therefore, the risk for the investor associated with low demand had to be shared with Government, hence the necessity of the “take or pay” provisions in the PPAs of that time. Not to mention that these clauses are typical standard provisions in most PPAs all over the developing world.

Government had to share some of the risks with the investors, as a way of clearing the impasse, short of which the PPAs would not be concluded and the power shortage would be compounded. This contractual framework unlocked significant private sector investments and spurred broad economic effects such as job creation, increase of tax revenues or the extension of social services to the project communities to mention a few.

Another reason for applying the “take or pay” provisions was the time pressure the Government was under at the beginning of this century. As the demand for power outstripped supply, the consequence was the heavy load shedding Uganda experienced between 2000 and 2012. To react quickly and to permit faster development of small HPPs, a team of well trained and experienced professionals was given the task of producing standardized PPAs. These were introduced to eliminate the tedi-ous and lengthy period of negotiation of PPAs. Consequently, over 20 small HPPs could be built in a short period of time.

This put together with the strategic decision to establish The Energy Fund, made it easy for the Government of Uganda to fully participate in the development and construction of both Isimba and Karuma HPs, at reduced resultant tariff. This has enabled Uganda to take the giant step from being a country with power shortage to one with surplus capacity. This makes it easy to attract investment in the big mining, industrial, manufacturing and tourism projects in the country.

Concern has also often been raised in regard to, the PPAs concluded with Heavy Fuel Oil (HFO) IPPs, mainly due to the tariff pegged to the cost of imported fuel. The agreements however, clearly catered for a fall in tariff once cheaper or local oil sources were accessed. Mainly, be-cause of climate change, which has led to drought and drying up of water sources leading to a fall in hydro power generation, it has always been prudent to have an energy power supply mix that provides for a fall back arrangement, should the country be faced with drought or any un-foreseen developments . It is under this arrangement that Arua is currently being supplied with power.

In the early 2000s, when Uganda had a severe drought, HFO IPPs were introduced. The Southern African countries, today are experiencing unprecedented loading shedding due to drought and are being supplied by HFO IPPs, as a supplementary arrangement.
Solar power, which is considered to be clean energy and environmentally friendly, is steadily emerging in the power supply mix arrangement in many sub-Sub Saharan African countries. This has been made possible due to improved technology albeit at reduced cost per unit. A few PPAs were signed with IPPs. Consequently, a few decentralized grid areas in Uganda, are supplied or are targeted to be supplied from solar power sources. The surplus being available for connection to the national grid.
It has been argued that the PPA clauses are costly to the Ugandan tax payers because a substantial amount of power generated is not consumed due to low demand and limited access to electricity.

These challenges will not be solved by rewriting existing PPAs, per se. Similarly, increasing market entry barriers for private sector investments is not the solution. Just like apportioning blame will not give the sector the desired solutions.
Rather, attention needs to be paid to the following: Quality power supply is currently one of the major problems, to which we must urgently find a solution. As such investment in upgrading and extension of transmission and distribution networks plus substations and transformers needs to be prioritized. Secondly, the structure of demand and utilization of our power requires some policy direction to ensure enhanced consumption of whatever is generated, at any one time. Thirdly, a number of potential demand centres, such as industrial park sites, agro-processing centres, mining areas, tourism sites, the Standard Gauge Railway (SGR) and oil pipeline are yet to be connected. These will certainly wipe out this perceived surplus.

Next to satisfying all local demand, present and future, efforts are underway to create energy uptake through export, for instance to Eastern DRC, to the South Sudan and the rest of Africa through an integrated regional grid. These markets do require that we scale up investment in transmission and the surplus will be sold off.
I therefore wish to argue that the aforementioned policies put in place to revamp the energy sector and economy were right policies, at that time and have contributed immensely to Uganda’s electricity self-sufficiency. Nevertheless, a review of developments in the sector to capture and cater for new realities is always necessary.

Policy instruments to provide long term credit for energy projects, mining, production, manufacturing, tourism and to address over dependence on imports and foreign firms are needed. Indeed, additional stimulus to spur and propel growth to the middle income status is required. Uganda should however, take the liberty to learn from the experience of other more prosperous countries, to be able to move along a more sustainable trajectory. This put together with the interventions outlined above will increase power consumption and lead to a fall in the tariff.

Mr Migereko is former Energy minister, Presently in the private sector

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