17 June 2017

Uganda: Electricity Firm On the Spot Over Breach of Contract

Photo: Daily Monitor
Electricity. Nalubaale hydro power dam in Jinja District. Both Nalubaale and Kiira hydro power stations generate a combined capacity of 380MW.

A report seen by Saturday Monitor has revealed that Eskom Uganda Limited (EUL) is not living up to the terms of the 20-year concession it signed with Uganda Electricity Generation Company Limited (UEGCL) about 15 years ago.

The report, which reviewed the performance of the South African electricity company was prepared by UEGCL at the close of last year.

It indicates that EUL is transferring money out of the country without reinvesting it into the power plant, contrary to the conditions of the concession.

However, in a detailed response, Eskom contests the findings of the report, saying on the contrary, everything possible has been done to implement the Concession and Assignment Agreement (CAA) to the letter.

The 2002 CAA signed between UEGCL and EUL requires the South African electricity company to maintain and operate Kiira and Nalubaale hydroelectric power stations for a period of 20 years.

The two power dams, located in Jinja, eastern Uganda, generate a combined capacity of 380MW.

But findings of the report reveal a number of shortages, key among which include the failure to run the 15 key units in the complex. Only 13 are fully operational, which negatively impact on power generation capacity and availability.

The report also shows that there is currently no plan to conduct remedial works on the Nalubaale Power House despite recommendations from various studies.

According to the report, maintenance of critical equipment is also lacking with some failing to work normally, compromising the safety of the plant.

For instance, the report says, the switchyard computer, compressed air system and 110 VDC battery bank, all at the Kiira Power Station, have been badly maintained and are currently facing the risk of failing.

"EUL has performed satisfactorily from the production side; however, performance in respect to maintenance of the plant(s) is below expectation," the report prepared by UEGCL management late last year, reads in part.

"This in itself points to the fact that Eskom has not fully complied with the CAA objective of restoring and maintaining the plant for posterity of the asset life, and there is an imminent threat of handing over (after the concession has expired) a derelict plant at the end of the concession," the report further reads.

While reviewing the investment injected in operation and maintenance between 2003 and 2015, the report reveals that Eskom has invested less than it should have, contrary to the requirements of the concession.

According to the review of the performance report, operation and maintenance cost into the power complex averages at about Shs5.3b per year, which is about 33 per cent less than the manpower cost.

UEGCL, which owns the two plants on behalf of government, believes that the operation and maintenance budget of the two complexes should be in the region of Shs14b at the very least.

Therefore, the report suggests, it has been difficult for the Electricity Regulatory Authority (ERA) and UEGCL to determine what constitutes investment because there has not been clear and agreed terms of reference to guide the two stakeholders.

For the meantime, however, Eskom continues to make profits with declining revenues that could be a result of low investment in operation and maintenance.

The report also reveals that there could be no investment originating from the Eskom Uganda parent company, considering it has been facing challenges back home.

This, the report reveals, has forced Eskom to rely on a business model that rotates around saving money and making profit from the operation and maintenance.

"The concession of the state-owned asset has not substantially improved. UEGCL feels that now is time to commence preparation to take over the management of the plant as capacity is built within the sector to manage its assets, and reduce on pilferage of assets," part of the report says.

The general breach of the CAA, according to the report, puts the two dams at risk yet there is no sufficient evidence to suggest that Eskom can within the remaining six years of the concession come good on its promise as agreed in the concession.

Regulator's take

When contacted last week, the owners of the two power complexes on behalf of the government had this to say: "It is true UEGCL's mandate includes monitoring the performance of the operation and maintenance regime at Nalubaale and Kiira hydro power complex. Matters arising out of the performance monitoring are addressed in accordance with the CAA."

The UEGCL adds: "Indeed remedial and mitigation measures are clearly spelt out. Failure to heed the asset owners (UEGCL) recommendations and findings have reprimands which are also clearly spelt out in the CAA."

The statement issued by the UEGCL corporate affairs manager, Mr Simon Kasyate, also quoted the acting UEGCL chief executive officer, Mr David Isingoma, as saying: "We can authoritatively say that the issues you are referring to are being handled in accordance with agreed procedures. We remain unwavering in our execution of this cardinal mandate and as such, take the assurance that we are and have been doing our best to ensure proper asset care and management of the Nalubaale/Kiira hydro Power complex."

On Wednesday, the ERA principal communications officer, Mr Julius Wandera, told Saturday Monitor that they have not seen the report (EUL performance review) yet.

He said: "I cannot comment because I am not aware about that report. And even then I will have to internally verify it before saying anything. But at the moment I am not aware about such a report."

Eskom reacts

In a written response to questions from this newspaper, Eskom said all its operation and maintenance activities are highly regulated and approved on an annual basis by ERA, Uganda Electricity Transmission Company Limited (UETCL) and UEGCL.

"We are operating as per the guidelines within the CAA and indeed we have consistently met our obligation," reads part of the statement.

The statement further said the complex is comprised of 15 units, 10 at Nalubaale and five at Kiira power station. And that all the five units at Kiira are fully operational. The two units, three and 10 at Nalubaale, are currently undergoing extensive overhaul and the company expects to bring unit three back to operation by the end of the year.

"High level engineering works are involved as the entire unit is dismantled up to the turbine. Both overhauls were for improving performance of the units and were duly approved by both UEGCL and ERA," the statement reads.

Escom said a technical plan approved for the period 2015-2018 by both ERA and UEGCL was in place, and that it is reviewed annually "in line with current landscape and again approved by both UEGCL and ERA".

On maintenance of key installations, Eskom said although they recognise that all equipment at the plant requires regular maintenance and replacement, "we have prioritised all our technical interventions based on our robust engineering risk assessment, and indeed the prioritisation also involves consultation and approval of the asset owner and the regulator."

Regarding operation and maintenance cost, Eskom wrote: "We don't know the basis where these figures (in the report) were derived from. Our maintenance cost budget is approved by ERA based on the agreed upon outage plan (maintenance programme) by both UETCL and UEGCL. Prior to ERA's approval, the costs were scrutinised and benchmarked and found to be reasonable in line with the needs of the plant and tariff considerations of the country."

The company, in response to the charge that it is not investing enough, said it "is a puzzle to note that we scale down on maintenance to do more investments, at the same time, we are seen not to do investments and remain profitable.

Escom added: "Our revenue is determined by ERA and it includes many parameters that can be well explained by the regulator because not all such parameters are within our control. Notwithstanding, EUL is a profitable company based on its efficient operations and investments."

On the accusation that Escom's parent company has not been supporting Escom financially, Escom Uganda wrote: "The parent company has been supportive right from the start of the concession where we had to meet all the investment obligations as stipulated by the licence agreement and will continue to deliver their support as they are the custodian of the company's funding plan."

Escom added that its annual maintenance plan, which is agreed upon by UETCL and UEGCL and approved by ERA, has been "executed consistently over the years."

Escom said: "It should also be noted that the Concession Agreement requires us to hand over the plant in an operable condition. Aware of this obligation, our maintenance philosophy and investment plan are geared towards this and to date over $20 million (about Shs72 billion) have been invested and additional $25 million (about Shs90 billion) will be invested in the next five years."

To sum it up, Escom argued: "We operate in a highly regulated sector which has a direct influence and impact to our only customer, who is also the system operator (UETCL) to whom we sell the power in line with the power purchase agreement and the regulator (ERA) who regulates our operations in line with our generation licence."

Background

Eskom Uganda took over operations and maintenance of the power generation complex from UEGCL in April 2003 after being awarded a 20-years concession. The concession is now left with about five-six-years to run out. Before then the complex was being managed by UEGCL.

The senior management of the South African electricity company about two months ago in Jinja told President Museveni that more than $2 million (about Shs72.3b) has been invested here to date in upgrading systems and equipment at the power plant.

They also told the President that Eskom intends to invest an additional $25 million (about Shs90 billion) in the remaining period of the concession in upgrades and new systems to sustain electricity availability.

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