Uganda: Power Tariffs - Umeme Faces Long Road Ahead

The recent drop in power prices across all the six different segments of consumers will come as a huge relief for consumers, but for the power utility firm, Umeme Limited, a critical question remains: for how long is this price drop sustainable amid a regulatory investment cap? JEFF MBANGA investigates.

Last week, the Electricity Regulatory Authority announced a new set of power tariffs for the second quarter of 2019 - April to June - that Umeme Limited will charge consumers, offering an average price reduction of close to Shs 9 against the annual base rate.

Domestic consumers, for example, will pay Shs 760.2 for every unit above the first 15 units, down from the annual rate of Shs 769. Nearly similar power tariff reductions were witnessed for the commercial and medium industrial consumers.

The reduction in the power tariffs came nearly a month after the government commissioned the 183MW Isimba hydropower plant amid increased public pressure to bring down prices.

With Isimba dam charging a generation tariff of 4.1 US cents, one of the lowest in East Africa, there has been political pressure, coming from as high as President Yoweri Museveni, to have consumer power tariffs come down.

And it is due to such public expectations and political pressure that the next couple of months will be a delicate balancing act between the regulator and the utility firms over what price of the tariff is favourable for all parties.

The sticky issue is bound to be about the amount of investment Umeme can make to meet the expectations of the regulator. While ERA appears to have set high targets that it feels can be achieved within a certain investment cap, there could be some quarters within Umeme who feel that beating those targets will require more investment. Umeme recoups its investment through the tariff.

Already, there has been a change in the way ERA is setting the tariff for Umeme. Unlike the previous times, where the Electricity Regulatory Authority set the tariff based on three core fundamentals - the exchange rate, the rate of inflation, and the international oil prices - a new factor has been added to the list: Umeme's new performance indicators.

ERA recently concluded setting new performance parameters for Umeme for the next six years, some of which will be used in the setting of the quarterly tariff. The performance indicators look at things such as power losses, connection of new customers and the time spent for reconnection of power, among others. The previous factors and the latest addition will carry nearly the same weight in determining the power tariffs.

The new performance indicators have come with the task of Umeme needing to invest more money in its distribution network. Take government's new power connection policy. Government wants to connect at least 300,000 people every year to the national grid. Umeme, which accounts for just over 95 per cent of the distribution network, is largely responsible for ensuring the connection targets are met.

To achieve this, Umeme will need to pump money in building new power lines, boosting their substations and, most likely, hiring more staff. The failure to beat targets comes with penalties, such as the regulator disallowing some investments where money has already been spent.

And yet, when the discussion turns to the investment needed, heads are bound to roll. For this calendar year, ERA has set a ceiling of $41.8 million that Umeme can invest. This is a huge drop from the $60.4 million that Umeme invested last year, as announced in their recently released financial results. This calendar year, Umeme had hoped to invest up to $70 million. That will not happen.

Even with new generation plants coming on line, such as the 600MW Karuma hydropower dam expected to be commissioned later this year, the most amount of money that Umeme will be able to invest in a calendar year throughout the remaining six years of its concession is $49.7 million in 2025.

So, will Umeme, with a controlled investment budget, be able to beat its targets amid increased power generation and a wider customer base? It is almost hard to see how.

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