In 2004, Uganda had the most unreliable electricity supply in the country. It was a mess. The sector lacked investment as electricity being generated was being lost at a rate of over 40%. Customers of the Uganda Electricity Board (UEB) were defaulting on payments whereas company officials responsible for collections were in part failing to remit money to the company and soliciting money from customers. Load shedding was the order of the day.
On 28th February 2018, Umeme concession will be 13 years.
The decision by the government to unbundle the electricity and concession power distribution to an entity that came to be known as Umeme has been one of mixed reactions. The first few years of the Umeme concession were turbulent with some of the “ghosts” of UEB hanging over the new distributor. The problems of the past continued to exit, especially on the energy losses due to low revenue collections. The government had issued a concession that went to a private entity. That entity would be able to invest and when you invest, you have to make a return on investment.
According to Umeme, in the first year alone, about $6m – at the time – was invested. As at the end of June 2017, the investment was valued at about $500m. That would not have happened if there was no expected return on investment. Uganda’s electricity sector at the time of the takeover in itself lacked investment in generation.
The Uganda government entered into panic mode and entered into Power Purchase Agreements with several Independent Power Producers. These were mostly thermal power generators that rely on heavy fuel oils to generate electricity. The electricity was expensive, forcing the government to place a subsidy on the cost. This was to avoid the possibility of high costs of power to the people. That was also meant to guarantee a return on investment for Umeme and the other IPPs.
The game changed in 2012 as the 250MW from Bujagali HPP came on board. The government was dumping the expensive subsidies that had cost about Shs1.53trillion between 2005 and 2012. The result was an increment in the power tariffs by about 46%. Importantly though, in the removal of the subsidies, Bujagali Energy Limited needed guarantees from the government that they would recover their costs of generating power through the tariff. That guarantee came in form of Umeme Limited being the distributor.
The same scenario was played out with Isimba and Karuma projects. Umeme will be distributing this power.
The electricity sector continues to face many other challenges. Supply is still erratic in some areas, the tariff is still high and the grid is not yet as smart as it should be. Overall though, the electricity sector has improved. For the government, it has someone in place that ensures that the power purchased is paid for. This continues to attract investment in the sector even beyond what Umeme would invest.
The theory has often been that if National Water and Sewage Corporation (NWSC) could turn around and become an efficient entity, maybe the same would have happened if Uganda’s power sector remained in the hands of the government, especially the distribution arm. At the time of awarding this concession, the turnaround for this power sector was not expected. The concession has been able to attract investment in the sector and for the last 13 years, there has been considerable improvement in the distribution of electricity in the country.
In the next few months, I will be blogging about some of the issues in the electricity sector relating to the 13 years Umeme concession.