CHALLENGES FACING THE ELECTRICITY SECTOR INDUSTRY AND FUTURE OUTLOOK

By Eng.Norbert Semitala (Director, Technical Regulation ERA)

1.0

Introduction In 1987, the Government of Uganda adopted the Economic Recovery Program in order to restore macroeconomic stability. The Economic Recovery Program included the liberalization of the financial sector and privatization of some state owned enterprises. Privatization in particular was meant to get rid of the inefficient government parastatals and replace them with more efficient private companies. The electricity sector as well was inefficient and loads of investment was required to move it to efficient levels. The Ministry of Natural Resources then, developed a strategic power sector plan that sought to lead to the provision of affordable and reliable electricity in order to enhance economic growth and development. In June 1999, the GOU put in place the Power Sector Restructuring and Privatisation Strategy (PSRPS), whose principle objectives were having an efficient and financially viable power sector, meeting demand and expanding coverage, improving quality of electricity and encouraging private and local investment into the sector. The Electricity Act of 1999, came in handy to provide the legal framework in order to achieve objectives of the power sector strategic plan. The main objectives of the Electricity Act were to remove the monopoly in the electricity sector by privatizing some of the functions of the then state owned Uganda Electricity Board (UEB), and put in place a regulatory authority to oversee the activities in the electricity sector. The Electricity Regulatory Authority was established in 2000, to regulate the activities of the electricity industry. With the regulatory body in place, UEB was split into Uganda Electricity Generation Company Ltd (UEGCL), Uganda Electricity Transmission Company Ltd (UETCL), and Uganda Electricity Distribution Company Ltd (UEDCL). UEGCL took ownership of the 380MW capacity Nalubaale/Kiira plant, UETCL took charge of the transmission infrastructure, while UEDCL took over the distribution network.

The figure below shows the Electricity Industry setup.

UEGCL later concessioned its assets to Eskom (U), while UETCL remains a Government entity, considering the nature of investments needed in the transmission arm, vis avis the return, if it were to be operated by a profit motivated company. UEDCL subsequently concessioned its assets for a 20-year period to Umeme (Ltd). With the new sector setup, several private companies have since invested particularly in generation facilities namely; Tronder-Bugoye (13MW), South East Asia Management SystemsMpanga (18MW), Aggreko-Mutundwe (50MW), and Jacobsen-Namanve (50MW) among others. UETCL is the sole transmission company and has the licenses for system operator, import and export, bulk power supply and operation of high voltage grid. The distribution companies include Umeme (which accounts for more than 98% of the total end user sales), Ferdsult Engineering Services (FESL), Kilembe Investments Limited (KIL), Bundibugyo Energy Cooperative Society (BECS), Pakwach-Abim Community Multi Purpose Energy Cooperative Society (PACMECS), and West Nile Rural Electrification Company (WENRECO) among others. 2.0 Tariff Path since 2006. Prior to 2004, Ugandas major source of electricity was hydropower. However, due to the severe drought that affected the country thereafter, the water levels of L.Victoria (which is the main reservoir for the 380 MW Owen Falls Complex) reduced significantly leading to insufficient power supply. A strategic decision that government decided to take at the time was to mitigate the inadequate electricity supply through short term hire of diesel thermal plants which although very expensive compared to hydro, can be installed in a very short time and would go a long way in ensuring the availability of sufficient energy. The Aggreko Lugogo (50MW) was commissioned in 2005 and later another Aggreko-Kiira (50MW) was also procured in 2006 to further mitigate the energy shortage. Later in September 2008, another plant AggrekoMutundwe (50MW) was procured through a World Bank loan and this replaced the Aggreko Lugogo plant. It was recognized at the time that the costs of running and maintaining these plants is high and if they were to be passed on and be paid through the tariff, it would impact on the cost of doing business and render several productive sectors of the economy non-competitive in the region. A strategic decision was thus adopted by Government to subsidize end user customers. This strategy would then be supplemented by medium term interventions of encouraging the private sector through a feed in tariff mechanism to fast rack relatively small hydropower plants typically up to 20 MW, as the longer term interventions like Bujagali and Karuma eventually come on board.

Notwithstanding that decision, it was also necessary that the consumer should pay more than what was being paid before 2005, given that at the time the consumer was paying far less than what was required to meet the sector revenue requirements. As a result, the tariffs were adjusted upwards in April 2005 by 22%, June 2006 by 35% and November 2006 by 41%. Towards the end of 2009 however, some favourable conditions prevailed such as lower oil prices and appreciation of the Shilling against the US Dollar, a situation that necessitated the review of the tariff downwards with the energy subsidy at the time projected at only Shs 8 billion in Q1 2010. The events that followed immediately thereafter (i.e at the beginning of 2010) led to the current subsidy requirement levels that are unsustainable, if the sector is to be self financing. Table 1: Tariff Levels since 2005
Cost Reflective Tariff
Code 10.1 Code 10.2/10.3 Code 20 Medium Industrial 150.3 234.2 463.5 593.6 615.0 Code 30 Large Industrial 60.4 109.6 328.9 438.0 488.4 Code 50 Streetlights 162.5 243.0 487.5 620.0 649.2 Code 10.1

Actual Tariff Paid by end-user

Code 10.2/10.3 Code 20 Code 30 Code 50 Streetlights 162.5 201.5 282.8 403.0 364.3

Period Q1 2005 Q2 2005 Q2 2006 Q4 2006 Q1 2010

Domestic 171.4 256.4 525.1 674.6 713.0

Commercial 164.8 245.7 475.2 605.2 639.9

Domestic 171.4 212.5 298.2 426.1 385.6

Medium Large Commercial Industrial Industrial 164.8 204.4 286.8 398.8 358.6 150.3 178.9 261.5 369.7 333.2 60.4 71.9 120.8 187.2 184.8

3.0

Current status a) Electricity demand supply balance: Peak demand has increased to 443MW in May 2011 compared to 380MW in May 2009. Shoulder demand has increased to 351MW in May 2011 compared to 280MW in May 2009. Off-peak demand has increased to 302MW in May 2011 compared to 230MW in May 2009.

This increase has been largely driven by growth in economic activities in the country. Electricity supply has however remained constrained due to hydrological constraints, delays in reaching commissioning by Bujagali and Mini-hydro plants, and lack of supply by Thermal generators which have switched off due to delays in payment. The current deficit is indicated in Graph 1 below.

Graph1: Current Load shedding on a typical day

500 450 400 350 300 250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Total Generation (MW) Load shedding, MW

Total Demand, (MW)

b) Energy mix: In 2006, thermal generation accounted for 23%, currently thermal generation accounts for 46% of Ugandas energy mix. Thermal generation costs account for about 85% in 2011 compared to 73 % in 2006. c) Sector Revenue requirements: The total sector revenue requirement in 2006 amounted to Shs.420 billion and this increased to Shs.618 billion in 2010 and Shs.1, 076 billion in 2011. The major drivers of the increase in revenue requirement are thermal generation costs which increased from Shs.155 billion in 2006 to about Shs.670 billion in 2011 largely due to the depreciation of the Shilling, increasing fuel prices, and increased dispatch. Please note that contract obligations to all the thermal generators are denominated in USD. d) Distribution efficiency: The number of distribution companies has increased from the two (Umeme and WENRECO) in 2005 to five in 2011. Of these five, Umeme accounts for more than 98% of the market share. Therefore Umeme is the major driver of the distribution costs. Distribution losses (technical and non-technical) have reduced from 35% in 2009 to the targeted 27% for 2011. Correspondingly, Umemes collection rates have improved from
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92.5% in 2009 to 96.2% in 2011. Customer connections have increased from 37,000 in 2010 to the targeted 51,000 in 2011. It is worthwhile noting that on the basis of the 2011 projection of energy sales to Umeme, for every percentage loss reduced, the corresponding saving is Shs.5.78 billion. Reducing losses significantly would therefore lead to a huge saving. e) Electricity projects: A number of generators already in operation are shown in table 2 below, while HydromaxxBuseruka (9MW-Hydro) is nearing completing and Electro-Maxx-Tororo is increasing its capacity to 50MW by the end of 2011.

Table 2: Licensed Operational Generation Companies

No.

Plant 1 Mpanga 2 Hydromax 3 Ishasha 4 KML 5 KCCL 6 Bugoye 7 Eskom 8 Kakira 9 Kinyara 10 Jacobsen 11 Electro-Maxx 12 Aggreko IDA Total Capacity

Installed Capacity(MW) 18 9 6.5 5 9.9 13 380 22 7.5 50 16 50 587

4.0

Challenges facing the sector

a. Exchange rate depreciation: Since November 2009, the Shilling has depreciated by over shs600/US$ from Shs1874/US$. Currently, the sector revenue requirement is estimated at US$400 million, of which 80% is foreign currency based. On account of depreciation alone, the sector revenue requirement has increased by about Shs.192 billion over the past 18 months. b. Increasing fuel prices: The international oil prices have increased to reach the highs of US$120/barrel against the earlier forecast of US$60-70/barrel at the beginning of 2010. This increase has had a significant impact on sector costs. c. Fixed tariffs: Our tariff has not been adjusted upwards to absorb the effects of the exchange rate depreciation and high fuel costs. This is contrary to our neighbor Kenya where there is an automatic adjustment of the tariff for inflation, exchange rate and fuel prices on a monthly basis. As a result, our tariffs are now much lower than those of Kenya and the extra burden of financing has been pushed to government in form of increased subsidies. Table 3 shows the comparison of tariffs in the E. Africa region.
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Table 3: Tariff Comparison in E. Africa

Country Uganda Kenya Rwanda Tanzania Domestic Consumers Commercial 0.15 0.18 0.19 0.13 0.14 0.19 0.19 0.10 Medium Industries 0.13 0.15 0.18 0.06 Large Industries 0.07 0.14 0.18 0.05 Street Lighting 0.14 0.17 0.19 0.08

d. Government subsidies: As a result of unchanged tariffs amidst a depreciating shilling and increasing fuel prices, the impact on government subsidies has reached unsustainable levels. Table of Subsidies (in UShs billion) 2006 2007 2008 2009 107 78 169 229

2010 351

2011 447

e. Constrained Hydrology: Whereas installed capacity at Kiira and Nalubale is 380MW, the L.Victoria which is with reservoir is regulated and the allowed water release is usually 800 cumecs, which can only help generate an average of 138.5MW from the two power stations. There has however been an increase in the water release to 1000 cumecs in order to mitigate the supply deficit by generating as much as 172MW.

The issue of hydrology is also affecting mini hydro plants which have just been commissioned (13MW Bugoye Plant, 18MW Mpanga plant, and the 6.5MW Ishasha plant).

f. Financing Challenges There are also challenges related to financing such as the very high interest rates in Ugandas financial sector markets. This makes local borrowing difficult hence many possible investors take long or totally abandon the projects.

g. Long licensing process; There have also been some complaints regarding the licensing process which takes a long time period. This is due to the statutory requirements that have to be fulfilled before the conclusion of the licensing process. On a number of occasions, the prospective licensees also take long to respond to different questions raised hence dragging the licensing process further.

h. Domestic factors; Inadequate and poor road networks as well as absence of transmission networks to evacuate the generated power are seen as high risk factors. In most instances it is not clear who will construct the power evacuation lines.

i. Lack of skilled manpower locally; Developers experience problems finding skilled labour especially in the area of hydropower development.

5.0

FUTURE OUTLOOK

i.

Commissioning of Bujagali and more mini hydro plants. With the commissioning of Bujagali, the sector revenue requirements (sector costs) are expected to reduce from Shs1075.8bn Q3 2011 to Shs818.1bn in Q1 2012. Renewable energy generation from Baggasse and other sources is expected to add about 50MW to the national grid while mini-hydro plants are expected to add 9MW to the grid in 2012.

ii.

De-commissioning of Diesel Generation Plants: The license for Aggreko Kiira (50MW) plant is not going to be extended beyond June 30th 2011. Similarly, the Aggreko Mutundwe Plant is expected to be de-commissioned by December 2011 after obtaining 100MW from Bujagali. The remaining HFO plants (Jacobsen Namanve 50MW plant and the 20MW Electromaxx plant in Tororo (to be uprated to 50 MW by the end of the year) are expected to use crude oil from the Albertine Graben region.
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iii.

Use of our own crude oil in generating some 50MW from Albertine Graben region at Kaiso-tonya.

iv.

Improving Distribution efficiency: The first seven years of Umeme license are ending in February 2012. Negotiations are about to commence in order to set Umeme a new set of performance targets. Having monitored Umemes performance over these seven years and given the greater experience from the region and other countries, ERA is now in a better position to set Umeme more realistic performance targets on losses, collection rates, customer connections, investments etc.

v.

Improvement in operating efficiency of independent power producers. ERA has embarked on an exercise to audit all independent power producers. This exercise will help in future benchmarking to ensure prudently incurred costs are allowed in the tariff.

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Appendix 1: Permit Holders

Permits
Developer Project Name / Location Nengo Bridge HEP Project, Rukungiri Technology Option Planned Capacity (MW)

Jacobsen Elektro AS ZIBA Ltd. Nsongezi Power Company Limited South Asia Energy Management Systems VS Hydro Greenewus Energy Africa Ltd Hydromax (Nkusi) Ltd. Eco Power (U) Ltd. Butama Hydro Electricity Company Ltd. LTL Holdings (Pvt) Limited TYAX Holding Incorporated Hayleys Industrial Solutions (Pvt) Ltd Hydraulic & Sanitation Consult Limited Jeyam Hydro Power Limited P.A.C.S.P.A Red & White Energy Limited Timex Garments (Pvt) Limited Vidullanka Plc Elemental Energy Limited Carnelian Prime Trust Sesam Energetics 1 Ltd. Kabale Energy Ltd. Apac Energy for Agro Processing Centres (U) Ltd Sugar and Allied Industries Limited Energy Systems for Africa Ltd

Mini Hydro Mini Hydro

6.5 7.0 8.3

Kyambura HEP, Nshungyezi HEP Project, Isingiro Nyamwamba Small hydro Power Project, Siti 1 & 2 Project, Kapchorwa & Bukwo
Kakaka Kasese District Waki, Hoima District Rwimi, Kasese/Kabarole Bundibugyo Hydro Project River Nyamagasani Kyarumba Project River Nyamagasani Project Kanyampara Hydropower Project Nkusi Hydropower Project Sironko Hydropower Project, Achwa-Agago Hydropower Project Lubilia-3 Hydropower Project, Kasese District Bukinda Hydropower Project across River Nkusi River Muvumba Hydropower Project,

Mini Hydro (Own distribution & sale to national grid) 22 Mini Hydro Mini Hydro
Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro Mini Hydro

14 25.7
7.2 8-Feb 9.6 7.5 3 15 7.2 11 7 88.8 5 6.5 4.5

Nyamabuye Hydropower Project, Kisoro District ini Hydro M Nyahuka Hydropower Project, Bundibugyo District Hydro Mini Biomass project, Kampala Generation plant in Kabale Generation plant in Kabale Generation Plant in Jinja Generation Plant at Namugoga, Busiro Waste to Energy Peat Biomass-fired plant Bagasse cogeneration Solar-thermal Micro Hydro Heavy-fuel oil Heavy-fuel oil

2.2 1 33 30 1 20 50 60kW, 230 10

East African Energy Technology Development Network Dirigana Project, Sironko River Albatros Energy (U) Limited Albatros Energy (U) Limited Generation Plant in Tororo Generation Plant in Nebbi

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