11 January 2013

Uganda: No Escape From Higher Power Tariffs

The Electricity Regulatory Authority (ERA) made a decision not to increase power rates for 2013.

This decision, seen by many observers as a move to appease consumers especially the manufacturers and politicians, is unsustainable because there are insufficient funds to maintain electricity sector operations.

Eskom, the power firm that runs the Nalubaale and Kiira hydropower plants, needs about sh33b this year from sh29.7b last year.

The annual bulk power buying costs have increased to over sh700b in January alone. The increment is on account of increase in power purchase costs.

Power purchase costs are the costs incurred by the transmitting company (UETCL) when buying power from generating companies like Eskom.

Umeme's annual revenue requirements increased to over sh226b from sh189b recorded last year. This was mainly driven by increase in the investment costs despite the new targets.

Why pay in dollars But the most feasible way of raising the money needed to finance the electricity sector is for consumers to pay the true cost of producing electricity.

The retail tariff charges for electricity services need to be subjected to fuel cost charges, foreign exchange rate fluctuation adjustment and an automatic adjustment for inflation.

The tariffs paid by the consumer must be sufficient to recover the costs of power generation, costs of transmitting or delivering this power to distribution companies and the costs of distribution and supply to the end-user consumer.

The cost of generation usually includes investment or capital costs, operation and maintenance and fuel costs. Investment costs are financed either by borrowing (debts) or through shareholders' equity.

This debt is usually contracted in foreign currency because Uganda's capital and financial markets are still nascent.

Lenders are concerned and will always scrutinise the contracts entered into between the generation and the transmission companies to ensure their payments to generation are either in US dollars or euros.

Since the allowable investment costs are in foreign currency and the tariffs are in shillings, it follows that the prevailing exchange rate has to be used to convert the costs in shillings before the tariffs are determined.

An appreciation of the shilling implies the need for fewer dollars and these reduce the tariff.

Similarly the fuel supply contracts signed between thermal generators and fuel suppliers are denominated in foreign currency and therefore the fuel supply costs in shillings for a given month are dependent on the international prices for fuel and the prevailing exchange rate for the month.

The tariffs paid for by the consumer however, are in shillings and are adjusted on a quarterly basis. This scenario has always created a mismatch between the revenue collected by distribution companies and the payment obligation to generation companies.

A monthly adjustment of the end-users retail tariff provides a flexible and transparent mechanism for tariff setting and avoids huge swings in the tariff.

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