23 December 2012

Uganda: Anger As Power Tariffs Go Up

Fears abound that the new tariff system will worsen cost of doing business

As the January 1, 2013 date set by the Electricity Regulatory Authority (ERA) to start implementing the Monthly Automatic Adjustment of power tariffs nears, consumers are angry. Based on the movements by the exchange rate, the rate of inflation and fuel prices, the new system is definitely not good news to most consumers who see it as a clever way by the power distributors to load consumers with higher bills month after month.

The new measure will allow ERA to calculate the electricity tariff in accordance with the changes in inflation, exchange rate and fuel prices month-on-month. At a public hearing in Kampala on Dec. 11, the public angst was clearly on display. With fuel prices, the exchange rate and inflation always tending to up rather than down, consumers said there was no escaping the fact that the consumers will have to dig deeper in their pockets to foot their power bills.

That was also the view of most analysts, who argued that the system would only worsen the cost of doing business particularly for the business community. The better alternative, they argued, was to determine a fixed tariff for a particular period, the way the Uganda Revenue Authority does when determining the exchange rate for tax purposes.

Higher rates:

Barely a year ago, the government announced it had scrapped subsidies on the power sector, ERA was left with no option but to raise the power tariffs. Energy Minister Irene Muloni said that the subsidy bill had mounted to Shs 1.2 trillion ($500m) since 2005 and that the government was finding it hard to meet the cost. As a result power tariff for domestic consumers, who use electricity for lighting and electronics, which was being subsidised by up to 60% went up to Shs 524.5 ($0.21) per unit from Shs 385 ($0.16). The Medium and large industrial users were not spared either as their tariffs got hiked by 38% and 69% respectively.

Umeme, the major power supplier recently put a proposal before the ERA seeking to increase domestic bills by Shs 69 and Shs 52.8 for domestic and commercial and Shs14.6 for mid-sized firms. When approved, a domestic consumer will pay Shs 593.9 instead of the current Shs 524.5 per kilowatt-hour (kwh) of power consumed, a commercial consumer (Shs 540.4 instead of Shs 487.6), medium industry Shs 473.5 instead of Shs 458.9 and a large industry Shs 320.3 instead of Shs 312.8.

The policy makers say the new regime is intended to enhance transparency in the power sector and to enhance security of supply and reliability of power so as to overcome load shedding.

Julius Wandera, the ERA publicist said it is UETCL that has been losing because of the fluctuations in the economic factors - especially the exchange rate - partly because UECTL pays the generators in foreign currencies and thus, it meets extra costs when the exchange rate appreciates in the sense that it uses more shillings to buy dollars. He said when power generators are calculating the costs incurred by them; they do so in foreign currencies because they procure most of the equipment in these currencies.

The same applies to fuel. "So if these factors swing upwards they will automatically influence the upward movement in the generation costs and that means someone has to meet that cost," he said. The generators of power had requested ERA to address these economic factors because they could not make proper budgets hence the need to peg the tariff on these factors.

The private sector is not convinced. The Uganda Manufacturers Association recently issued a statement opposing ERA's planned move saying it should be stayed for the next seven years in order to spur economic growth after an economic turbulent period. The manufacturers argued that the last increase in power costs had already impaired Uganda's industrial sector competitiveness as indeed confirmed by credible publications like the "Doing Business Report" by the World Bank, which indicates clearly that Uganda is a high production cost business destination.

It added that this situation is now even worsened with the recent joining of the COMESA Free Trade Area, which will see low cost producers competing against local manufacturers in Uganda due to the lower power costs that they enjoy. Similar opposition has been staged by traders through their bodies like the Kampala City Traders Association (KACITA) and the Uganda National Chamber of Commerce and Industry.

The ERA Chief Executive Officer, Benon Mutambi, said they had received the complaints from UMA and from a section of traders, and would reach a consensus before the new system is implemented early next year. He however said the system was round. "But this system favors all," he said. "When economic factors become favorable the tariffs will reduce and vice versa," he added. But the experts are supporting the private sector's view.

Lawrence Bategeka, a senior economist and research fellow at the Economic Policy Research Centre at Makerere University, says implementing such a system in a liberalized economy was unfair. "We know the trend of the dollar. It has always appreciated against the shilling at most times. The local unit has appreciated marginally for those times it has had to appreciate," he said, adding that pegging tariffs on the dollar would bring inefficiencies in the power sector. "It is better to fix the price." Henry Rugamba, the head of communications at Umeme, the power distributor, said on average, Umeme pays Shs 60 billion per month to UETCL for the power bought from the latter. He said the amount would rise when more power is generated and consumed in the future.

Parliamentary findings:

A Parliamentary Report on the energy, which was released in October appears to favour the manufacturers' view.

The report said high power tariffs are disastrous to the national economy in that production cost increases reduce the competitiveness of the local manufacturers at both local and international markets. Also, high tariffs lead to power theft/losses as most of the consumers cannot afford to pay for expensive electricity.

According to the report, Uganda continues to post the highest losses in the world standing at 28% by 2011, and yet at the time Umeme took over from UEDCL in 2005, power losses had reduced to about 27%. When compared with other Nile Basin countries say; Kenya, Tanzania, Rwanda, Burundi, Sudan, Ethiopia and Egypt, Uganda has the highest power losses.

Ideally, Uganda should work to catch Egypt, which is recorded at 12%. The report said the government is concerned that if losses are not significantly reduced, the benefits from any additional generation might not be realised. For each percentage point of power loss, $3.2 million is lost annually. That means that for the non-technical (or commercial) losses estimated at 20%, $64million (about Shs160 billion) is lost annually. With such a magnitude of losses, efforts to improve power supply are greatly impeded, according to the report.

The committee recommended that ERA needed to first undertake nationwide stake holder sensitisation on the automatic tariff adjustment billing scheme before its implementation since this may have far reaching consequences that are detrimental to the economy.

With the demand for power in Uganda growing at more than 10% per annum, the country needs to add new generation capacity per year exceeding 50MW. The demand for power is projected to exceed supply within 18-24 months from today, which points to an urgent need to increase generation.

Citing the recently launched 250MW Bujagali power dam, Mubaraka Nkutu, the membership manager and acting executive director for the Uganda Manufacturers Association (UMA), argued that even if the amount of "cheap" hydro power increased, power tariffs would not go down because economic factors such as inflation, exchange rate, fuel prices, have always moved upwards.

"They told us that when Bujagali comes on board power tariffs would reduce but they have instead gone up," he told The Independent on Dec. 17, adding that the proposed system won't help in any way and will negatively impact on the manufacturers and other power consumers. "For us we don't want that." Nkutu however, supported the idea by the government to construct more power dams saying demand for power was increasing and that needed strategic intervention by the government to have it sorted.

Kenya was the first country in East Africa to adopt an automatic tariff adjustment on a monthly basis. This was after the power supply crisis of 1998-1999. Reports say that Kenya now has a strong power sector supporting the private sector investment in Kenya's power sector especially renewable energy (wind, solar and geothermal) is now the strongest on the African continent.

If implemented, within 10 days following the end of the month, ERA will publish and communicate the adjustment factors for the preceding month and the consumers will be able to predict the direction of the tariff.

The generation gap means Uganda has to look for other avenues to generate more power to meet the high demand. According to the 2007 Renewable Energy Policy, Uganda has the potential to generate 450 MW from geothermal in the southern shores of Lake Albert, 1,650MW from biomass, 200 MW from mini-hydro dams, 2, 000MW from large hydro dams and 200 MW from solar.

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