A Memorandum on Electricity Sector in Uganda-2012

Monday, September 30th, 2013

A Memorandum on Electricity Sector in Uganda-2012

1. Background/Introduction

The Electricity Industry in Uganda has for the last twelve (12) years under gone several structural reforms all aimed at addressing the problems associated with electricity supply and distribution network.

In 1999, Uganda Electricity Board (UEB) was unbundled to promote the industry. It was replaced by a range of distribution, transmission and generation companies for effective management of the power sector in Uganda. These include Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL), and Uganda Electricity Distribution Company Limited (UEDCL). Under the Electricity Act of 1999, a regulator was created charged with several responsibilities which include among others to license all the key players in power sector.

In May 2004 UEDCL turned out to be a consortium known as ‘Umeme’ which is 56 per cent Globeleq (the investment arm of the UK government) and 44 per cent Eskom (the publicly owned integrated South African electric utility). It leased the distribution subsector assets by a 20 year concession, which makes Umeme responsible for investment, charges and management of the distribution system.

Contrary to the intentions of the Power structural adjustment program, Ugandans are currently facing the worst crisis in its history. There is a 24 hour load shedding program as a result several businesses have closed down leading to loss of revenue for the country. This has been compounded by reduced power supply by thermal power generation companies like Aggreko thermal power plant that shut down due to the government’s declaration that it would not renew its purchasing agreement. Also Jacobsen and Electro-maxx thermal power plants are not supplying power because of the billions of shillings in arrears owed by the government.

 

2. The problem statement

In Uganda, while the energy sector has been liberalized, legislative and regulatory gaps still exist, resulting into unfair practices by the players. These calls for government intervention to ensure fair play, consumer protection, and financial viability of private investments promote competition. The main functions of ERA are to ensure licenses and prescribe fees, to establish a tariff structure and develop and enforce codes of conduct, performance and quality standard. However the power subsector still faces several challenges and these range from inadequate public financing to develop electricity supply projects to match growing demand, high subsidy cost of power sector arising its inability to service its long term debt, low quality of electricity supply and customer service, high technical and non technical losses, very low electricity coverage through the country especially In rural areas , inadequate systems and controls for meter reading , high power tariffs and low operational efficiency.

3. Objective

The primary objective of this paper is to review the challenges faced in the electricity sector since 1999 when Uganda Electricity Board (UEB) was unbundled.

4. Privatization in Uganda

The enabling legislation for Privatization and Utility Reform is the Public Enterprises Restructuring & Divestiture (PERD) Statute which was enacted in 1993.

The PERD Statute inters alia:

  • provided guidelines for reform and divestiture;
  • classified public enterprises for divestiture and reforms;
  • established the institutional framework for policy implementation
  • Promotion of local enterprises.

5. Overview of the power sector

Prior to the introduction of the power sector reforms, the Uganda Power Sector was dominated by a public vertically integrated utility, the Uganda Electricity Board (UEB).

UEB assumed both a regulatory role and a monopoly to generate, transmit and distribute electric power in Uganda. It also had export agreements with the neighboring countries.

Currently, about 220,000 Ugandan households that is about 12%, are connected to the grid system

6. Rationale of the power sector reform

The main factors that justified the need for the reforms were:

  • Private sector led economic growth hence the need to get rid of monopoly.
  • Low efficiency
  • High level of technical and non technical losses up to 40%
  • Very poor supply reliability characterized by extensive and increasing load shedding constraining business development.
  • inadequate investment in all parts of the sector and an inability to finance future required investment,
  • Very low coverage and access to the grid
  • The Utility (UEB)’s inability to service its debts
  • Unfulfilled export potential
  • Very poor commercial performance by the UEB characterized by low collection rates
  • Low productivity and
  • Poor rate of connection of new customers

7. The legal framework

To enable the reform process in the electricity sector proceed, a new Electricity Act was enacted in 1999, repealing the 1964 one. Its main objectives were to:

  • remove the monopoly of UEB and thus enables private participation in the power sector
  • provide for regulation through the Electricity Regulatory Authority (ERA), and
  • Permit the privatization of UEB.
  • The Electricity Act, 1999 together with the PERD Statute, 1993 (and its amendments) provided the legal framework for the reforms.

8. Institutional framework

A Utility Reform Unit (URU) was created in the Ministry of Finance, Planning & Economic Development as lead agency for privatization.

URU reports to the Divestiture & Reform Implementation Committee (DRIC) made

up of a team of Cabinet Ministers.

URU however, works closely with the sector Ministry of Energy & Mineral Development.

9. Privatization of UEB and its successor companies

The unbundling of UEB was formally commenced on 1st April 2001. Successor companies were created and assets and liabilities of UEB were transferred to them as follows:

Uganda Electricity Generation Co. Ltd (UEGCL) that owns the two major hydro-power plants at Nalubaale and Kiira hydro power stations which have combined installed capacity of 380MW.Unfortunately current average production of hydro electric energy stands at 135MW.

Uganda Electricity Transmission Co. Ltd (UETCL) which owns and operates the transmission infrastructure above 33 kV.

Uganda Electricity Distribution Co. Ltd (UEDCL) that owns and operates the distribution network at 33 kV and below.

Uganda Electricity Board (Statutory Corporation) that remained in place in order to wind up.

The Government of Uganda adopted the methodology of privatizing UEGCL & UEDCL through long-term concessions.

9.1 Overview of generation concession

A 20-years Concession were granted to Eskom (U) Ltd (the Concessionaire) to maintain and operate the Kiira and Nalubaale hydroelectric power stations owned by UEGCL. In addition, Eskom took over management on April 1 2003 and agreed to the following:

  • Paid an upfront transaction fee to Government.
  • Committed to an agreed investment programme.
  • Pays a monthly concession fee to UEGCL for the assets it operates.
  • Receives from UETCL a monthly capacity payment for the power it sells.

There is clearly a strategic risk in leasing the entirety of Ugandan generation capacity to a Single private operator and guaranteeing payments regardless of how much electricity is Consumed. However, it was widely held that Uganda’s market conditions made it difficult, So governments introduced competition. The government also believed that

Competition in the generation sub-sector would be achieved through IPPs investment which however turned to be expensive due to expensive thermal generators.

9.2 Overview of distribution concession

A new concession company, Umeme Ltd. has been established by a Consortium; Globeleq and Eskom Enterprises which leased distribution subsector assets under a long-term concession.

  • The concession involves Umeme and other parties entering into a number of agreements
  • Lease and Assignment Agreement with UEDCL
  • Support Agreement with Government of Uganda
  • Power Sales Agreement with UETCL
  • Licenses by ERA for Distribution ,Supply and Embedded generation

The unbundled distribution sub-sector company needed to be more efficient and financially viable, since the crucial issue for the Ugandan electricity sector is grid expansion and rural electrification, which would require massive investments. The distribution segment of UEB was to be transformed into the maximum number of viable distribution companies, large enough to attract private sector operators. However, the number of ‘viable’ distribution companies turned out to be a single entity’ UMEME’, and as a result, reforms did not result into increased competition, which is a prerequisite for the private sector to promote distribution sub-sector efficiency.

9.3 The agreements

The Lease and Assignment Agreement includes the following features:

  • 20-years Concession by umeme to maintain and operate the electricity distribution network owned by UEDCL and to collect revenues from all connected customers based on the tariff set by the Electricity Regulatory Authority (ERA).
  • An obligation to make minimum annual investments in system rehabilitation and reinforcement
  • The obligation to return control of the assets, including all new investments, to UEDCL at the end of the lease, but with a payment for any un-depreciated new assets
  • An obligation for UEDCL to complete the investments already financed and presently under implementation (e.g. African Development Bank Urban Power Rehabilitation Project)
  • The supply and distribution licenses provide for:
  • An exclusive right to supply electricity in an area up to one kilometer radial distance from the existing distribution lines, with other firms being free to compete to supply electricity beyond this area.
  • An obligation to provide service within the area of exclusivity.
  • grants or donations from sources acceptable to the Minister and
  • The Minister responsible for finance

9.4 Regulation

The Electricity Regulatory Authority (ERA) was established in April 2000.

The key functions of the ERA are:

  • Issuing licenses for electricity generation, transmission, distribution, Supply, imports and exports
  • Establish a tariff structure through reviewing and approving tariffs
  • Establishing and enforcing the electricity sector performance standards
  • Approve standards for quality electricity supply

The Uganda power regulator ERA appears to be continuously struggling to establish itself as an independent regulator in the decision making and also operational matters. All key stakeholders with in the electricity sector should therefore fully appreciate the role of the regulator in the power sector in Uganda and the importance of facilitating the regulator to become a functional institution independent of external pressures undermining its autonomy.

10. Reforms and tariffs

The viability of the Ugandan electricity sector therefore depends on the tariff levels set by the

New Electricity Regulation Authority (ERA) under the Electricity Act 1999 and on the viability of such tariffs, as cost will be a crucial determining factor in the prospects for increased access to electricity. The ERA’s core task is to regularly review tariff levels according to ‘sound economic and financial criteria’, so as to ensure both cost recovery and increased efficiency. The critical factor such as the issue of lowering tariffs has been ignored by the reform implementers. The reason is that the reform has been undertaken by the need to satisfy investor interests at the expense of public interstate for stance between 1980 and 1992, the tariff did not exceed 52.30shillings.However it is surprising that since 1993-2012, of which this period includes the reform period, the tariff has been increasing at a very alarming rate. In 2005 Umeme increased prices by 24%, and again in 2006 by a further 37%and the recent 40% increase. The increase in tariff has made it difficult for the poor to access and afford this expensive power.

11. Rural electrification

A crucial issue for the Ugandan electricity sector therefore is grid expansion and rural electrification, which would require massive investments. However, allowances were not made for investment in the distribution sub-sector, World Bank and government sources all argue that the private sector could not finance a massive expansion of rural electrification in Uganda. Uganda’s rural electrification rate is as low as 6%, one of the lowest in Sub- Saharan Africa and in the world. This implies that very few Ugandans are electrified. In addition the current reform is failing to link rural electrification to the overall objective of improving the performance of the power sector. For this matter, the regulator issues licenses and gives out concessions without considering the ability of the license/concessionaire to increase electricity access. More so, the new utilities do not have any new electrification target linked to future tariff adjustments. Nevertheless, despite private sector involvement, government should recognize continued subsidization of rural electrification.

12. Electricity dispute tribunal

There is establishment of the Electricity Disputes Tribunal under the electricity act with a chairperson that is appointed by the Minister, in consultation with the Judicial Service Commission. It was put in place in 2003, however the tribunal lacks guiding regulations and operational regulations which should be put in place to guide aggrieved electricity consumers and to facilitate proceedings before it.

13. Status of the competition in the sector

Competition has been introduced into the sector through the licensing of independent power producers (IPPs). A number of IPPs obtained Permits from the Electricity Regulatory Authority with potential to generate mini-hydro power. These include Aggreko International, Jacobsen Uganda power plant Company, Electro-maxxpower plant. However, the IPPs are expensive due to high costs of diesel for generators. In addition, there is still monopoly in the distribution by UMEME as the only company in operation .This has led to increased tariffs, increased costs and losses and increased government subsidies.

14. Functions of Electricity Regulatory Authority (ERA)

The National Energy Policy clearly indicates the role of ERA as well as its independence as the regulator of the electricity sector. However, this is not in the electricity Act. The roles and independence of ERA are only implied in the Act. Therefore It would help to have the electricity Act amended to change this normality

The Electricity Act clearly separates the role of ERA from the role of the Rural Electrification Agency which is the regulator and policy implementer for Uganda’s rural electrification scheme. The National Energy Policy further clarifies on the roles as established under the Act, and mentions that, while the Ministry of Energy and Mineral Development is in charge of policy, ERA is in charge of regulation of the electricity sector and is completely independent of the Ministry in exercising its mandate.

The critical analysis of the Energy Policy shows that the responsibilities of the policy making body which is the Ministry of Energy and Mineral Development (MEMD) are not defined by the law; While, the responsibilities of the regulator are clearly defined. There is no clear division of

labor between the policy making bodies and the regulator. The Minister gives directives to the authority with respect to the policy to be observed and implemented by the authority, except that the policy shall not adversely affect or interfere with the performance, functions and exercise of the powers of the authority.

The responsibilities of ERA and Ministry of Energy and Mineral Development are spelt out under the Power Sector Investment Plan. The Ministry of Energy and Mineral Development is charged with the overall responsibility for the power sector within government, overseeing and coordinating the implementation of all power projects. While ERA is charged with regulating power sector activities as spelt out in the law. The separation of power between the policy making body of government in MEMD is lost in the detail in the law and the perceived independence of the ERA is non-existent. The oversight role of the power sector has been infringed on by the ministry contrary to the provisions of the law. The law falls short of clearly separating the responsibilities of the policy body from those ERA.

The roles of UEGCL, UETCL, and UEDCL are also clearly highlighted and separated under the Uganda Energy Policy as business entities with the mandate to carry out the generation, transmission and distribution functions respectively. The Electricity Act goes on to further place these functions within the regulatory mandate of ERA as the ‘regulator’ of the subsector. This should however be highlighted clearly if it’s the function of UEGCL,UETCL and UEDCL as business entities with the mandate to carry out the generation, transmission and distribution functions respectively or ERA.

Mention should also be made of the fact that the generation and distribution functions were concessioned out to private sector players namely ESKOM and UMEME respectively; as such, the concessionaires have the mandate to carry out the same generation and distribution functions as mentioned, in accordance with the Act, together with their contractual obligations under the concession agreements they entered into with the government of Uganda. This unfortunately seems to have created a situation where UEGCL, UETCL and UEDCL consider themselves regulators of their segments in the sector value chain which is a mistake and should as such be corrected.

There is no clear identification and separation of roles of the key stakeholders in the electricity sector. These include the policy maker (MEMD), the regulator (ERA), and the regulated companies (public and private investors in the power sector).Therefore, there is need to amend the law so that the policy statements align with it.

While performing its functions and duties, the Authority is mandated to exercise of its powers. The Authority is not subject to the direction or control of any person or authority except the declared policy of the government. This is a claw back provision of the law which kind of empowers the government to exercise its control over the Authority; as a result, undermining ERA’s independence through the use of policy tools. There is therefore need to amend this provision so as to ensure that the independence of the regulator is protected against by the government interference as exercised within the policy documents.

In addition, ERA, REA, UEGCL, UETCL and UEDCL at the same level under the Ministry on the governance structure diagram. This is incorrect as it undermines the regulatory position of ERA as the ‘regulator’ of the sector. The independence of ERA needs to be reflected in the governance structure, but as long as it remains answerable to the policy body (MEMD), conflict of interest from the policy body and the ‘regulator’ shall prevail to the detriment of the power sub-sector.

The major objective of the law is to regulate the electricity sector. The law is therefore the principal regulator of the Electricity sector and not ERA. ERA is charged with carry out functions in line with regulation. Recognizing that the Law provides for both policy oversight and regulatory functions as exercised by ERA, there is need to transfer the mandate of regulation from the law to the authority, and provide for the definition of the’ regulator’ . The problem with the law in its current status is that the regulatory mandate lies in the law and not the authority, there is always a challenge that this mandate will always be infringed on by the policy body which is the Ministry of Energy and Mineral Development since the purported regulator is not fully defined and identified within the law.

One of the major objectives of the Energy Policy is to improve energy governance and administration and in so doing it empowers government to clarify the roles and functions of the various institutions involved in the energy sector among others. While the responsibilities of ERA and the regulated public and private companies are well defined by the policy and the Law, the policy recognizes that legislative and regulatory gaps still exists and thus calls for government’s intervention to ensure fair play, protect consumers and ensure financial viability of private investments, promote competition and collect information. Unfortunately this ministerial mandate coincides with the mandate of ERA causing a conflict of interest between the policy body and “regulatory” body.

15. Compulsion with other countries

15.1 Philippines

Development in the electricity sector is a matter of good planning and effective execution of those plans. This has helped countries like Philippines to consistently pursue a sustainable development agenda. This country has spent all her energies evaluating each and every company / investor that comes to invest in her country Philippines managed to use only (sh102b) which the country borrowed from the world bank to develop her power sector and now the country has over 90%electricity access and it is among the countries that produce the cheapest power in the world. “Efficiency, quality and zero tolerance to corruption” was the 1960 Philippine power reform Initiative motto and there was no privatization.

15.2 Tanzania

In 2006 Tanzania scrapped the plan to privatize its distributor Tanesco, and there will therefore be no privatization for the foreseeable future, yet it has cheaper power tariffs compared to Uganda with $0.12 for domestic consumers,$0.10 for commercial, $o.06 for medium industries, $0.05 for large industries and $0.08 for street lighting. Tanzania is also in the process of

Nationalizing an IPP and thereby saving $1.5m per year, based on the realization that publicly owned and financed power stations are much cheaper, because public finance is cheaper.

15.3 South Africa

South Africa has abandoned its earlier plans for the privatization of the electricity industry, and retained Eskom as an integrated parastatal electricity company responsible for generation, transmission and distribution, and it is expected to retain its own in-house engineering and construction divisions.

Elsewhere, countries such as Brazil, South Korea, Mexico, and Thailand have reviewed their previous policies of liberalization and privatization.

16. Independent Power Producing Companies (IPPs)

All the IPPs that are connected to the main grid sell electricity to UETCL
The IPPs that are not interconnected to the main grid are licensed by the Regulator to generate, distribute and sale electricity.

16.1 Aggreko international

Salim Saleh report notes significant discrepancies in the logistics costs and consumption rates of different thermal plant. Aggreko kiira (50mw) and Aggreko Mutundwe (50mw) consumption rate and the fuel logistics were altered from 0.26 liters per kWh to 0.279 liters per kWh. This however contradicts the general principle where thermal plants should not make profits on on fuel and fuel costs should be a pure pass-through cost.

16.2 Jacobsen Uganda power Plant Company (JUPPCL)

Furthermore, according to Salim Saleh report, the project costs of Jacobsen Namanve (50MW) are Euro 54.96 million or US$83 million which may have been exaggerated. The report further points out that the fuel currently being used is CST380 as opposed to CST180 that was licensed .This affects the life span of the engines. The report claims that the invoicing has been based on CST 180 which gives Jacobsen a margin of US$25-30/Mton. All these claims however have never either been verified or investigated by the regulator (ERA) thus leave the burden to the electricity consumers.

16.3 Electromax power plant in Tororo (Heavy Fuel Oil plant) -This has the capacity to produce 17.5MW but it produces 8MW.

16.4 WENRECO (Heavy Fuel Oil plant) – Not connected to the main grid. It generates 1.5MW and distributes to consumers in West Nile.

17. The power crisis

Nasser Road traders protest over power cuts in November. Source: New vision online

Over the last 10 years, Uganda has suffered serious power shortages due to (a) delays (failure) in developing additional generation capacity to overcome the supply constraints in a least-cost and environmentally and socially sustainable manner due to poor planning and overdependence on hydropower as the main source of electricity in the country; (b) over abstraction of water from Lake Victoria through the existing Nalubaale and Kiira power stations on River Nile that resulted in decline of Lake water levels, which in turn, led to reduced generation output of the existing hydropower plants; (c) the high level of technical losses in the distribution system; and (d) an escalating electricity demand growth rate of about 8% per annum that annually put additional pressure on the existing power system.

Uganda has hydropower installed capacity of 433MW without Bujagali power station; on the other hand, small hydropower plants peppered throughout the country when combined have installed capacity of 53MW. Moreover, Mpanga and Bugoye power stations have an installed capacity of 18MW and 13MW, but deliver only 0.3MW and 3.8MW respectively.

17.1 Hydrological risks

Civil Society (CS): Asserts that there is a hydrological risk that makes Bujagali not a feasible project for the proposed site. There is no enough water for Bujagali to generate the proposed designed capacity 250MW. Bujagali could induce further abstraction of water from Lake Victoria way-above the Agreed Curve and worsen the already bad situation in Lake Victoria caused by the addition of Kiira Power station on the existing Owen Falls power station; moreover, Kiira and Nalubaale power stations have combined installed capacity of 380MW. However, the actual electricity produced averages 135MW; therefore the two power stations do not produce to their full capacity. If the dams were producing to their full capacity, then there would be no need for the expensive thermal generators that have led to increase of the power tariffs.

While it is true that the hydrology of the Victoria basin is complex, the actual cause of the drop in lake water levels is mainly attributed to the operations of the Nalubaale and Kiira power complex and not drought as claimed by Government of Uganda.

18. Conclusion

Uganda’s power sector reform over the last eleven years leave limited hopes for the government’s four key goals for the reform process to be met. These were (a) to extend electrification, particularly in rural areas, (b) to increase generation capacity to meet growing domestic and export demand (c) to ensure an adequate and reliable supply of electricity to consumers at Least cost (d) to ensure that the electricity sector is financially viable, without need for Government subsidies. As a result, only 12% of the Ugandan population is connected to the national grid system; there is still 24 hour load shedding in the country and Uganda’s rural electrification rate is as low as 6%, one of the lowest in sub Saharan Africa and in the world. Therefore, for effective management of the electricity sector, efficiency, transparency, accountability and good governance should be the main principles. And for Uganda to have a vibrant electricity sector, these democratic principles must be upheld.

RECOMMENDATION

  • Rural electrification requires Government support and can be carried out successfully through both public and private sector involvement.
  • Strengthen the regulatory framework by enhancing their independence, requirement for increased accountability and transparency.
  • Adequate sector planning coordinated by some agency with adequate technical capacity.
  • Ensure clarity of roles of each of the institutions and improve institutional coordination.
  • Set more realistic and monitor able performance targets
  • ERA should set tighter consumption rates based on operational experience of the already licensed thermal plants.
  • An audit of the Independent power Producers project costs should be undertaken preferably by an independent auditor procured by the government.
  • Remove the monopoly in distribution and create billing and collection franchises similar to the mobile phone companies
  • Carry out a complete audit of the investments carried out by umeme and other independent power producers
  • Successor companies should not invest outside their principal licensed activities.
  • Establish codes and standards including good business conduct and ethics
  • There should be amendment of the law so that the policy statements align with it.

By Doris Atwijukire
AFRICA INSTITUTE FOR ENERGY GOVERNANCE (AFIEGO)
doratwijukye@yahoo.com