Hopes of lower tariffs by 2012 as design work on Karuma begins

Saturday February 21 2009

The Bujagali Hydropower project is running ahead of schedule and is expected to begin producing electricity next year. Photo/MORGAN MBABAZI

The Bujagali Hydropower project is running ahead of schedule and is expected to begin producing electricity next year. Photo/MORGAN MBABAZI 

By ESTHER NAKKAZI

Uganda next month embarks on design studies for a massive 750MW hydropower station on Karuma Falls that holds the promise of clawing down consumer tariffs as early as 2012.

“A lot of preparatory work has already been put in. The money is there and the procurement process is on,” a highly placed government official told The EastAfrican, confirming that a political decision had also been taken that the station should have a minimum capacity of 700MW.

The unique aspect of the project is that it is to be fully financed from internal resources. Now officials say enough money has accumulated in the Energy Fund to start work on the $1 billion Karuma Falls power juggernaut.

The procurement process for the technical design, financial viability and other aspects is expected to commence in early March, with funds to be sourced from the accumulated ring-fenced monies in the Energy Fund.

The government has been stashing away ever larger sums of money in the Fund, which was started three years ago to give the country an independent capacity to meet challenges in the energy sector in the long run through the development of large hydropower generation facilities.

President Yoweri Museveni, who has variously blamed the misguided views of the World Bank and environmental activists for the powes woes that brought Uganda to its knees in 2006, set up the Fund to end dependence on donors for critical energy infrastructure.

Junior Minister for Energy Simon D’Ujanga told The EastAfrican that work on the dam will start next month with feasibility studies and within three years, electricity generation should have started. However, the project is expected to have a development cycle of five years.

So far, 10 international consultants including one Ugandan firm have expressed interest in participating in the dam’s feasibility studies.

If the Karuma dam proceeds on track, it will boost Uganda’s installed generation capacity to 1,380MW from the present 380MW. After stumbling for more than a decade, Uganda commissioned the Aga Khan Fund for Economic Development-sponsored Bujagali Hydropower Project, itself expected to add 250MW to the grid when complete. The project is running ahead of schedule and is expected to begin producing electricity next year.

Demand for electric power was last estimated to be growing at 8 per cent per annum, which translates into 30MW per annum. Average peak demand was 399MW in 2008 while off-peak demand was running at 205MW.

Johnson Kwesigabo, company secretary at the Uganda Electricity Regulatory Authority, said demand for power is growing in tandem with the development in the country.

Though he was not specific on projected growth numbers, he said current rates were being constrained by the high tariffs associated with thermal generation, which now accounts for more than 50 per cent of supply. He said the entry of Karuma and its downward pressure on electricity prices was likely to see demand surge.

“The government is doing well to finance Karuma; demand will be much higher because the tariff will be cheaper,” said Mr Kwesigabo.

The proposed design envisages an underground power station, although experts are already warning that it will encounter huge technical challenges in ensuring it does not affect surface flows because wildlife is dependant on the water.

When it was first conceived in the mid 1990s, Karuma was designed to produce 250Mw at a bill of $400 million, but the new design envisages a 200 per cent expansion of the original.

The site was originally awarded to Norwegian power consortium Norpak Power Ltd, but the developer pulled out after failing to raise the money for the project.

Ministry of Energy officials said Norpak had developed a conservative design, for a smaller dam because it anticipated low electricity demand.

The Norwegians later lost interest in the project, mainly due to lack of funding — to the disappointment of the government, which resolved to go solo and fund the project 100 per cent.

Fortunately, the private-public partnership between Norpak and the government ended in a happy divorce, with the private investor handing over most of the study and design documents.

Now the government starts the project with the knowledge that it will be an underground station, armed with the requisite geotechnical and environmental conservation data, and also with the confidence that it can priority develop projects without foreign investors.

After the disappointment with Norpak and the long-drawn-out battle that preceded the construction of Bujagali amid biting power shortages that impacted growth, the government resolved to develop Karuma on its own.

It set up the Energy Fund, whose proceeds were first applied when the government advanced $57 million to Bujagali Energy Ltd to commence work while the developer was still haggling with donors over finance.

The Fund is expected to grow to about $300 million in the financial year that begins on July 1, a sum officials consider large enough to start financing the $1 billion project.

Mr D’Ujanga said the priority sectors for government intervention are roads and energy, the backbone of the agricultural and services sector on which Uganda relies for its economy and development.

Ministry of Finance officials told The EastAfrican that in the coming financial year, 2009/10, budget allocations for the Funds would go up by 60 per cent of the initial deposit for the ring-fenced funds for dam construction.

Dr Ezra Suruma, former minister of finance, while presenting the 2006/07-budget in June, said the Fund would be ring-fenced for dam construction to address the power crisis in the long term and not for routine recurrent expenditures. It is set up at the Bank of Uganda.

Some Ush156 billion ($80million) to Ush166 billion ($86 million) will be set aside, up from the $57 million that was set aside for the initial deposit in 2006/07.

In the subsequent financial years, 2007/08 and 2008/09, the Fund allotments grew to $67 million and $61 million respectively.

Dr Suruma said the increase would come from the Uganda National Roads Authority returns, which have failed to be absorbed because of lack of capacity.

He promised that some of the money sent back to the Treasury by the roads sector would be put into the Energy Fund. As a priority area, the roads sector was allocated Ush1.1 trillion ($558 million) in the past financial year.

Last week, URNA boss Peter Sebanakitta said it was returning at least $116.7 million to the Treasury, funds that have not been used because of low absorption capacity within the sector.      

The initial monies allocated to the Fund were drawn from Stanbic Bank’s initial public offer and the divestiture account controlled by the Privatisation Unit.

At least $27 million was drawn from the divestiture account and $18.6 million was collected from the proceeds of the Stanbic bank IPO, in which the government sold its 10 per cent share to the public.