What a mess in the energy sector!

The further development of the economy is contingent upon reliable and affordable sources of electricity. But recent quarrels with energy producers has exposed the government’s vulnerability in the energy sector.

The energy sector – like many sectors of the Ugandan economy today – is in shambles. And if the problems are not addressed appropriately, it could lead to deeper cracks in the national economy. While Ugandans seem to have come to terms with ever-skyrocketing cost of commodities, like the fuel prices which prompted April and May’s Walk to Work protests, the electricity shortages could lead to a renewed public outcry. Foreign and local investors have already registered their dissatisfaction about the erratic nature of the country’s power supply in the country, as well as the high cost at which it comes.

It all started when the independent power producers (IPPs), which produce and supply thermal electricity for the country’s grid, announced recently that the government of Uganda owed them a colossal USh 300 billion. The cash shortage limited their capacity to continue effective production, so they decided to lay down their tools until government cleared the outstanding bills. Two thermal power generation plants switched off their power supply to the transmission body – the Uganda Electricity Transmission Company Limited (UETCL) – leaving UMEME, the power distribution company, with no choice but to start rationing electricity. The result is the day and night load shedding the country is currently experiencing. The power the country is currently running on is being partly generated using imported diesel fuel, causing prices to shoot through the roof.

The problem became apparent in the echelons of power in late July when the Ugandan Parliament’s power supply was cut off for several hours as legislators were going about their business. The shutdown came days after several legislators had taken government to task over load shedding, since the companies that produce thermal energy had received massive government subsidies. The MPs alleged that the IPPs were trying to arm-twist Parliament into approving a USh 209 billion payment, which the government wants to use to settle the outstanding thermal power bills.

Parliamentarians also want to cancel a requested down payment of USh 92 billion. Instead, the MPs want to form a select committee of Parliament to investigate the alleged abuse of public funds in the power sector. Kampala Central MP Muhammad Nsereko (NRM) brought the proposal to the house and was supported by MP Winnie Kiiza (FDC and chief whip of the opposition in Parliament). Nsereko said there had been a lot of waste in the power sector and called for a thorough financial and energy audit.

“We cannot continue putting money in the energy sector without value for money,” Nsereko raged on the floor of Parliament.

Some politicians blame the government for privatizing the former Uganda Electricity Board (UEB), arguing that by privatizing that body, government invited many ‘vultures’ into this sector despite security and economic concerns. After privatization, UEB, which was responsible for the whole electricity industry in the country, was divided into three new entities to oversee power generation, transmission and distribution.

Last year, President Museveni assigned his younger brother Gen. Salim Saleh to investigate the situation in the country’s power sector and make recommendations to improve it. Saleh’s Commission found that power was too expensive in this country and Ugandans were being overcharged. The commission recommended the cost of electricity per unit could be brought down from the current USh 488 to USh 180. However, energy ministry bureaucrats shelved Saleh’s recommendations, because they are said not to agree with these findings.

In a bid to calm the flaring tempers over the high cost of the irregular power supply, the Acting Chief Executive Officer of the Electricity Regulatory Authority (ERA) Benon Mutambi tried to explain the situation. He said there has been an increase in the demand for power, driven by growth in the economy, yet the power supply has remained constrained by a lack of water to generate hydro power. He also cited delays in the commissioning of the Bujagali power plant and other, smaller hydro power plants. He also listed the depreciation of the Shilling and the increase in fuel prices, especially diesel.

“Our tariffs have not been adjusted upwards to absorb the effects of the exchange rate depreciation and the high fuel costs compared to Kenya, where the power tariffs are increased automatically in the event of increased fuel prices and inflation,” Mutambi said.

Mutambi said that with the commissioning of the Bujagali power plant, expected near the end of this year, the situation should improve as more electricity is added to the national grid. On top of that, several other mini-hydro plants are expected to be commissioned in the near future, along with the addition of other renewable fuel sources.

He also revealed that the IPPs using diesel to generate electricity are going to be decommissioned, starting with AGGREKO-Kiira, which has been providing 50 megawatts and whose license was not extended beyond June 30, 2011, and the AGGREKO-Mutundwe plant, which was set up with a $205 million loan and is expected to be decommissioned in December 2011. The move comes in response to diesel prices on the international market and the belief that these plants will not be financially feasible even when Uganda starts pumping its own oil from the Albertine Graben in Bunyoro.

Other thermal-power-generating IPPs that use heavy fuel oils other than diesel will not be decommissioned under the assumption that crude oil will soon be coming from Bunyoro. Pundits say that depending on Uganda’s own oil resources to paint a better picture of the power sector is farfetched, because the country still has a long way to go until it starts producing oil.

The contract with UMEME is also going to be scrutinized before it is extended in February 2012. ERA is going to set a new set of performance targets for the distribution company to curb losses of power, which now stands at 27 percent, down from 35 percent in 2009. The company’s collection rates have also improved from 92.5 percent in 2009 to 96.2 percent now, but ERA insists there is still room for improvement.

The biggest surprise, however, is how many people aren’t even on the grid, yet. In a country of more than 33 million people, there were only 37,000 connections to the grid in 2010. That number is expected to reach 51,000 by the end of this year. The World Bank has approved a $120 million credit facility to improve the reliability and increase the access to electricity supply in southwestern Uganda. This arrangement is expected to get some 655,000 people connected to the national grid, but it will not be complete until 2025.

Even with the prospect of additional power-generating plants to be built, including the enormous Karuma Falls Dam (construction said to begin this year at an estimated cost of $2.2 billion), Uganda is decades away from being able to provide reliable energy to its citizens. And there is little talk of using renewable sources of energy like wind or solar to boost capacity.

Lake Turkana Wind Power consortium (LTWP) is poised to provide 300 MW of clean power to Kenya’s national electricity grid and another one in the Ngong Hills 22km outside of Nairobi, the country’s first wind power plant boasts six wind turbines and is capable of generating up to 5.1MW of electricity.

Over reliance on hydro and diesel power generation has led Uganda into the current situation. Only innovation (not only dams) and forward thinking will lead the country out of it.