24 January 2014

Uganda: Power Tariff Tiffs

Though power consumers were largely expecting a tariff increase in the New Year, the Electricity Regulatory Authority (ERA) - on Jan. 14 said it had instead adjusted the power tariffs downwards for all consumers in a move that officials said would spur economic activities and growth of the economy generally.

The power regulator announced a Shs 4.1 reduction for domestic consumers, a Shs 13.2 reduction for commercial consumers, a Shs 6.9 reduction for medium industrialists and a Shs 2.4 reduction for the large industrialists. Ideally, commercial consumers are the biggest 'winners' but domestic consumers would be excused for claiming that they were 'duped' because they will pay more under the new tariff regime.

This is because the 'lifeline' tariff for the first 15 units consumed was raised to Shs 150 per unit from Shs 100, which raises the amount paid by Shs 700 per consumer minus VAT (Shs 125). The increase would ostensibly cater for the higher cost of running thermal generators in the absence of a subsidy from the government, which was scrapped sometime back.

The officials said money is needed as the government would spend Shs 59.5 billion on thermal plants throughout the year to supplement the 516 MW hydro-electric power generated at Bujagali, Kiira and Nalubaale dams. Dan Muhumuza, the group general manager of Shumuk Aluminium Industries Ltd, told The Independent on Jan. 16 that while they welcomed the move by the ERA to reduce the tariffs, they would want to see more reduction as an affordable tariff would support the growth of industries and other productive activities in the economy.

"Of course any small thing you get, you cannot refuse it but we think this was too small," he said, "It is not enough."

Muhumuza said the reduction may not create a significant impact on the operations of their factory, which pays a bill of about Shs 35 million per month. Because of the reduction, they will save Shs 500,000 under the new tariff system, which Muhumuza said was also a welcome relief as it is enough to pay two lowest salaried employees at his company for a month.

ERA's new tariffs are the first in a new regime dubbed the Automatic Power Tariff Adjustment System, which will be announced on a quarterly basis subject to variations in fuel prices, the exchange rate and inflation.

This is different from the old system where the tariffs would be fixed for a period of time - normally over a year.

The reduction, according to the power authority was as a result of a 'favorable' exchange rate regime where the Uganda shilling appreciated from Shs 2, 688 in 2013 to Shs 2, 524 in 2014, and the reduction in Umeme Ltd energy distribution losses from 23% in 2013 to 20% in 2014.

ERA said the government would continue meeting capacity payments to the thermal plants in 2014 estimated at Shs 59.5 billion. Under a new financing plan, the government would convert debt obligations to UEB-successor companies (UEGCL, UETCL and UEDCL) into zero return equity and debt service would not be financed through the tariff.

Benon Mutambi, the ERA chief executive officer, was optimistic that the tariff relief would contribute to the reduction of the cost of doing business and spur economic growth, though he gave no guarantees that the tariffs would continue to go down, going forward.

"For the next quarter, I cannot tell you where the tariff will be," he said. "We need to wait and see where fuel prices, the exchange rate and inflation will be." Apparently, the joy of the lower tariffs could be short-lived come April.

How a consumer of 100 units will pay more under new tariff.


Not worth celebrating?

Various consumers did appreciate the reduction but described it as 'negligible' and that the power authority needs to cut the rates further. Ssebagala Kigozi, the executive director for Uganda Manufacturers Association (UMA), the largest consumers of power in Uganda, told The Independent on Jan.15 that the reduction for small and large industries would only be a good thing if it becomes a trend going forward.

"Having the 'spirit' to [continue reducing] the tariff further is what I want to see in future," he said, adding if there is willingness for the government to do that then that would reduce the cost of doing business on their side.

"For me that reduction is just negligible," he stressed. Sebagala however said they were not consulted by ERA on the implementation of the automatic power tariff system, which he said is now being implemented in a disguised manner.

"We had earlier last year agreed in an out of court settlement that the adjustments be made twice a year but we are hearing a different story," he said. He added that the manufacturers would seek to engage ERA on the issue.

Gideon Badagawa, the executive director for Private Sector Foundation Uganda (PSFU) and Everest Kayondo, the chairman for the Kampala City Traders Association (KACITA), were also of the same view. They said they welcomed the marginal reduction but would be contented to see more reductions in the tariff so as to reduce on the high cost of doing business in the country. According to recent Ease of Doing Business Reports compiled by the World Bank, Uganda has a high cost of doing business, which makes its private sector less competitive in both local and international markets. In an increasingly open regional market, this has to change if Ugandan products are not be outcompeted by their regional counterparts where power is relatively cheaper.

Sam Watasa, the executive director of the Uganda Consumers Protection Association (UCPA), said the reduction for domestic tariff was merely "psychological."

He said increasing the 'lifeline' tariff by Shs 50 would make electricity more expensive for the poor households who consume minimal units of power per month.

A calculation by The Independent shows that because of the higher 'lifeline' tariff, a consumer who uses 100 units per month would be paying Shs 631 more under the new "lower" tariffs than under the old tariffs. To start making a minimal saving benefit from the new tariffs, a household would have to consume a minimum of 260 units per month.

In many countries whose economies have been transformed and where the fight against poverty has been successful, lower input costs such as energy have translated into increased earnings for businesses, more room for expansion, more jobs and more taxes to the government.

Mutambi said the government is intent on taking this course as failure to implement favorable reforms in the sector would deter foreign direct investment, which will be bad news for Uganda whose power demand is estimated to be growing at over 15% per year (about 50MW)- one of the highest in Africa. The trick if power is to be cheaper going forward, according to some analysts, is to increase supply. That ideally means wooing more investors on the generation side but even then the tariff has to be sufficient to enable the investors get a return on their investment. Peter Lokeris, the state minister for minerals, said the government remains committed to attracting more investment in power generation. Lokeris said apart from hydro, further initiatives are being explored including peat, geothermal, solar, wind and HFO from the crude oil to be produced from the Albertine region.

Current estimates put Uganda's population at around 36 million. Of these, slightly over 10% are connected to the national grid.

The country's installed generation capacity stands 818.5MW (MW), but the actual generation oscillates between 558MW and 600MW. Electricity peak demand is currently around 450MW, growing 10 -15% a year with 70% of it being consumed by heavy industries and the rest by households and SMEs.

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