HOW THE M7’S GOV’T HAS USED COST-REFLECTIVE TARIFF SYSTEM TO DRIVE GROWTH IN UGANDA’S ELECTRICITY SUPPLY SUB SECTOR
By Samuel Kamugisha
When Uganda unbundled Electricity Supply Industry (ESI) monopoly under the Uganda Electricity Board (UEB) and opened up the energy sector to private players in 2000, a lot was at stake. The newly created entities – Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL), Uganda Electricity Distribution Company Limited (UEDCL) and their overseer agency Electricity Regulatory Authority (ERA) – were aware of the huge task ahead of them. And this task was about restoring Ugandans’ confidence in the energy sector by increasing generation, power reliability and quality while attracting investment in the three segments (generation, transmission and distribution).
As a regulator, ERA’s board and management were well aware of the need to create a conducive environment for investors. This included assuring all that potential investors into the electricity supply industry that had been battered by inefficiency and mismanagement (that characterized UEB for years) that the sector would give them a required return on investment. This was always going to be a tall order given that these are global-standing companies boasting of a wealth of experience, financial and technical capacity. You had to make such giants see that Uganda’s energy sector was a profitable investment destination.
Through its team of experts, comprising economists and engineers, ERA soon rightly realized that no investors would want to put their monies into the sector as long as the formula for determining power tariffs didn’t reflect how the investment would be recovered (with a reasonable return on investment).
According to Patrick Tutembe, ERA’s Principal Economist, what makes Uganda’s tariffs’ regime tick and competitive on the African continent standards is its Tariff Regime. Tutembe explains that ERA has put in place a tariff determination methodology that necessitates adjustment of end-use electricity prices whenever there are changes in factors that affect recoverability of costs namely; exchange rate, fuel prices and inflation.
The aim here has been to ensure that investors are not weighed down surging costs and make losses and subsequently pull out of the electricity supply industry. Cost-reflective tariffs have also shielded consumers from high prices since the methodology allows revision of the electricity price downwards when the macroeconomic parameters help lower costs operation. Although some consumers may complain about the fluctuation in prices, Tutembe argues that it is a good practice to revise tariffs depending on prevailing circumstances to strike a balance between a figure that is not too high to hurt consumption and not so low to discourage investment.
WHY THE COST-REFLECTIVE TARIFF?
ERA’s cost monitoring captures impact of inflation, exchange rate volatility, fuel prices on the costs of inputs used across the three segments of generation, transmission and distribution. In the end, ERA sets tariffs that are fair and reasonable to both the investor and the consumer.
The prudence of Uganda’s tariff-setting regime can easily be understood by comparing the number of investors seeking to inject their cash into the country’s electricity supply industry. Over the past two decades, the regulatory environment has endeared Uganda to international investors in the energy sector, with the Pearl of Africa being only second to South Africa in the number of Independent Power Producers (IPPs) in the Sub-Saharan Africa region. Yet despite liberalization and unbundling attempts at varying degrees in different African countries, a number are still struggling to attract just a fraction of what Uganda has attracted as private investment into the ESI. Simply put, cost reflective tariffs are an anchor to a favorable regulatory regime that facilitates a favorable investment climate.
THE UEB ERA
Compared with the period before the year 2000, when UEB enjoyed monopoly over the energy sector, Uganda’s current regulatory regime has attracted more players (both local and foreign investors). These include generators such as Eskom (U) Limited (which took over UEB’s power plant assets at Owen Falls Dam under a 20-year concession), Bujagali Electricity Limited (BEL), Africa EMS Mpanga, Kasese Cobalt Company Limited, Hydromaxx (U) Limited, Eco-power (U) Limited, Jacobsen, Tibet Hima Limited (formerly Kilembe Mines Limited, and Tronder Power Limited, among others.
Under the distribution aspect, private companies or investors Attracted so far have included Umeme Limited, West Nile Rural Electrification Company (WENRECo), Uganda Electricity Distribution Company Limited (UEDCL), Bundibugyo Electricity Cooperative Society (BECS), Kyegegwa Rural Energy Cooperative Society (KRECS), Pader-Abim Community Multi-Purpose Electric Cooperative Society (PACMECS), Kilembe Investments Limited (KIL) and Kalangala Infrastructure Services Limited (KIS).
One of the remarkable benefits of private investment is the increase in Uganda’s Installed electricity generation capacity from 1999’s 404.4 MW to 1,268.9 MW in 2020 comprising of a wide mix of sources ranging from; hydro-electric power, thermal, bagasse (cogeneration) and solar. Yet beyond mere generation, even electricity access/consumption has equally been impacted upon with our current total number of connections standing at over 1.4m.
Over the years, the regulator has been mindful of concerns of both investors and consumers when it comes to tariffs-setting. In order to incorporate consumer views in tariff setting, the regulator periodically engages consumers before making tariff decisions ERA’s Corporate and Consumer Affairs Department always organizes Tariff Review Public Hearings and engagements with special consumer groups such as the Manufacturing consumers, millers and other consumer groups to inform tariff decisions as well as offering explanations of different aspects of efficient electricity usage.
Electricity tariffs are also set/determined to send the right signal to consumers on efficient utilization of power. Tutembe explains that over the years, the regulator has sought to see more Ugandans consider electricity as a productive service that has a value whose use must be paid for in a manner that recovers cost of providing the electricity service. “Tariffs send consumers a signal that electricity is an economic good and utilization should following price signals. For example, an electricity service connection imposes a cost whether or not a consumer purchases units in a particular month. This is the reason why electricity service is associated with fixed costs every month. This is an international standard for electricity pricing. In addition, electricity is priced differently for different periods of the day to signal to customers the need to have demand for electricity spread out uniformly across different hours of the day. This is because, when more electricity is demanded at fewer hours of the day, it means that generation capacity becomes redundant in the hours when it’s not required. It further means that increasing demand in fewer hours will require additional investments which can be avoided” he says. This has led to a change in consumer behavior with more AND MORE Ugandans learning to efficiently use power at their residential, industrial or even business/work premises.
At the heart of an enviable tariff regime is the robust metering practice that has made it easy to collect the recoverable revenues. The practice of having all customer bills/energy purchases metered should not be taken for granted. In some countries, a large proportion of customers pay for electricity consumed based on estimated consumption. This helps allay fears by investors that recovery of funds injected in power projects might not be possible. Therefore, good tariff and metering systems are of great concern to investors keen on the certainty with which their investment and approved return there on can be recovered.
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