Taking stock of the new electricity sub-sector reforms

Dr Frank Sebbowa 

What you need to know:

  • The first reforms undertaken 23 years ago marked a new chapter for Uganda’s electricity sub-sector in terms of efficiency, investments clocking slightly to more than $2b. Along the way, government saw the need to bring the sub-sector up-to-date by amending the Electricity Act in May.
  • While the amended Act addresses some gaps and heralds second generation reforms, it also introduces new challenges. 

The Electricity (Amendment) Act 2022 is, indeed as expected, a positive legislation drawing on lessons learnt over the past 23 years. 

Government agencies now bear the exclusive responsibility of their mandates unlike previously were policy guidance was under Ministry of Energy while Ministry of Finance reserved the right of ownership. 

Additionally, the new law attempts to separate the roles of the Ministry of Energy and those of Electricity Regulatory Authority (ERA), at least in determination of the need for investment in electricity projects.

Thus, the licensing role by ERA is now a standalone from policies and planning of electricity demand and supply, which is reserved for the Ministry of Energy.  

In the past the ambiguity around this left supply planning unfocused in the hands of Uganda Electricity Transmission Company Limited (UECTL) and the private sector leading to unsolicited electricity generation plants associated with political lobbying and attendant complications. 

The challenge that remains is that ERA cannot invite potential licensees to apply or submit applications without approval of the Minister of Energy, which provides an open window for political interference in what should otherwise be economically driven investment. 

Without a doubt, the political system, in this case the Executive, has oversight over all national economic activities, but there is a likelihood of delays and bureaucracy impacting projects. Also, going by previous examples, the lobbying for tenders has ensnared mostly politicians into fights with technical people.

Another notable highlight is that the Ministry of Energy is expected to ensure one third of its employees are female. 

But does the job market have enough technically qualifying females or will we see this requirement being implemented through large numbers of females at the lower end?

The new law while providing for more financial resources to ERA (0.7 per cent up from 0.3 percent from sales of all generated energy) might not have considered the likely large increase in generation and revenue from other legitimate ERA activities such as licensing and practice permits. ERA approves permits for all electricians.

However, on the overall, the additional powers conferred to ERA are quite positive, although they come with increased regulatory challenges. 

For instance, being able to punish licensees and their top managers for failure to comply with the license terms and conditions is long overdue. But some of the hikes in the punishments might attract some corrupt individuals to negotiate outside the judicial system. 

Tampering with electricity supply equipment now attracts a maximum of 50,000 currency points (approximately Shs1b) and 20-year jail term or both is pretty stiff. Some offenses with unspecified punishment in the law now draw this maximum penalty; this could open room for victimising some individuals.

The good, bad and ugly

The new law further opens energy sales by power generators to some specified power customers, but ERA has a more critical role in this. ERA must specify which customers qualify to by-pass the transmission and distribution licensees. 

ERA must also develop and enforce equitable wheeling charges to enable such generators’ electric energy reach their customers. A mechanism must be developed to ensure that the generator causing congestion (distribution losses and in-efficiencies) on the network pays for it.

With reduced revenues and responsibilities, UETCL and distributors must be supported by ERA’s tariff mechanism to ensure that network expansion and maintenance maintains its pace. It is still government’s intention to provide power access to the hard-to-reach parts of the country, a role previously undertaken by UETCL and funded from the bulk supply tariff.

To encourage development of generation of up to 50 megawatts from renewable resources, ERA has been empowered to prescribe feed-in-tariffs, a delicate task. 

One needs adequate data and competent staff to determine equitable feed-in-tariffs, otherwise the developer could earn huge profits or make losses that can deter growth of investment in the renewables market. 

But feed-in-tariffs by their nature do remove competition from the market, an aspect the regulator needs to mimic when setting the feed-in-tariffs.

While on renewables the new law introduces the “net-metering” model, which allows generators from individual systems to sell any excess energy (up to 20W) to the grid when they have it. The challenge here is system stability. With all grid connected solar systems the grid must have a mechanism to remain stable as solar energy varies with cloud cover, which can be unpredictable.

On the other hand, the law introduces royalty payments to local governments where an energy generator is domiciled.  To the currently high-cost solar energy generators this is an added cost and is likely to lead to complaints to ERA and or higher consumer tariffs.

The amended Act, while an improvement to the old one, still does not give enough prominence (in terms of investment guidance, regulation and operations) to renewable energy. Hopefully the Act implementation regulations will provide better guidance on to drive access beyond the current 57 percent. 

Provided we mitigate the impact of solar fluctuation on the national grid, it is obvious that renewable sources are here to stay and will most likely be in the driving seat for universal access, which includes hard to reach parts of the country.

The bad and ugly

One of the complicated aspects of the law is the consideration to integrate the operations of the Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL), and Uganda Electricity Distribution Company Limited (UETCL) into one entity.  

The Attorney General must expediently provide guidance on what will happen to the agreements each company entered into. Failure to set a legal framework to handle liabilities going into the new entity and the remedial ones will lead to lengthy and costly arbitration and litigation. 

Also there does not seem to have been much thought given to the current process of rationalisation and restructuring and the expected outcome of this process. 

One can only hope that the endpoint of this restructuring will not negate the gains achieved thus far.

A proposal that purports to give shape to what the re-bundled electricity company may look like is in circulation. The plan is to merge the three into a limited liability company, which will allow it to have a private approach to business. 

The proposal for a single board of directors is commendable but then you need an executive board to handle the huge workload occasioned by the operationally separate directorates or departments of generation, transmission, distribution and power sales now that we have distributed bulk sales to large end users. 

As we progress, we note that the staff in the ministries departments and agencies being restructured are mainly Ugandans but earning far above the civil service pay. 

How sure are we that they will accept the new terms and conditions that will come with the new entity? The experience so far of refitting the Rural Electrification Agency back into the Ministry of Energy has been turbulent and untidy. 

The Umeme concession

The elephant in the room is the non-renewal of all running concessions in generation and distribution when they expire. Specifically, Cabinet indicated non-renewal of the Umeme concession when it runs out in 2025.                                                                                        

There are other sector players, whose investment were premised on the existence of Umeme. Indeed, Umeme was included in their contracts as the final off taker. This situation is also a potential litigation issue.                            

If the Umeme concession is not renewed in 2025, has government made provisions for payment of outstanding investment that Umeme has put into the distribution network? ERA is continuously verifying the numbers but by 2025 they could be entitled to millions of dollars with a figure of about $500m (Shs1.8 trillion) already floated 

If the proposed changes are implemented by 2023 that means Umeme’s staff contracts will have to be terminated. 

Will they be compensated or absorbed into the new entity. After the unbundling of UEB government was involved in back-to-back litigation with the former staff over payment of among others severance, terminal and retirement benefits, which had far-reaching implications for the Treasury.

Given that a large portion of the shareholders of Umeme are Ugandans (through NSSF and others at Uganda Securities Exchange) the removal of Umeme from the power supply space might leave some Ugandans richer albeit the inflation it might cause in the economy may have disastrous consequences.                                                  

Now that Cabinet seems to have decided the fate of Umeme, will Umeme continue to be dedicated in the remaining period to expiry of the concession?

How will this leave the system for whoever is going to take over? Let us hope that we will not be in a similar situation that UEB handed to Umeme 18 years ago.                       

Finally, we must recall that with independent system studies in place, it took more than two years to negotiate the transition from UEB or UEDCL to Umeme. Now that a divorce looks inevitable, the relevant teams should be reviewing its implications so as to pave the way forward.  As stakeholders, we can only hope for an amicable separation in which Ugandans benefit.

Dr Frank Sebbowa has more than 40 years of experience in power supply and also served as the executive director of Uganda Investment Authority between  2012  and 2016.

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