Uganda could soon see the last of the crippling electric power shortages as the 250MW Bujagali hydropower station comes on line in late November.

According to Ministry of Energy Permanent Secretary Fred Kabagambe Kaliisa, the first unit at Bujagali will begin adding 50MW to the grid from the end of November through April 2012 when the station will become fully operational. (Read: ‘Budhagali’ water spirits find a new resting place)

That, according to Mr Kabagambe should inject 200 MW into the grid, bringing the deficit down to 100 MW. However, increased power supply will not translate into immediate relief for consumers, who will continue to pay Ush400 (14 US cents) per kilowatt hour because the Treasury will instead use the opportunity to reduce the subsidy on the tariff, which currently represents no more than 60 per cent of the realistic cost of delivering electricity.

“There has been a short delay at the Bujagali project, but we are confident that by the end of November it will be generating enough to fill in the current gap of 50MW. We are very confident that by the end of November, the plant will give us power and by April all the capacity should be online,” Mr Kaliisa said.

He said all the turbines at the dam have been installed and are being aligned, so that even with the current constrained water situation, once fully operational, Bujagali should be able to deliver 200MW without a problem. “The lake has recovered and the full capacity will only be needed during peak demand, so there is plenty of scope for managing the water regime to ensure power availability without compromising agreed release levels,” he argued.

The increased power availability is expected to have a huge impact on the weighted average that, with expensive diesel based supply, currently stands at 11 cents per kilowatt hour. While this development will not have any impact on end-user tariffs, industry sources are pointing a finger at the skewed contract enjoyed by distribution company Umeme.

Under the contract, the Treasury not only indemnifies Umeme for 99 per cent of any system losses it declares to the regulator, but the price at which it buys power from Uganda Electricity Transmission Company UETCL, is also locked at eight cents.

On the other hand, UETCL is buying power from generation company Eskom at 11 cents. To deliver the power to Umeme at eight cents, the Treasury must fork out three cents to UETCL. (Umeme retails the power at 300 per cent of the cost at which it bought it).  With the 360 million kilowatt hours that Umeme was buying monthly at one time, these subsidies translated into Ush33 billion per quarter or $16.5million before the shilling was watered down by rapid depreciation.

With such easy money, some commentators say, the government removed any incentive for Umeme to bring down losses while it trapped itself in a situation where any increase in power availability automatically translated into a huge subsidy bill. 

“Losses are the biggest problem in the tariff, because they account for between 65 and 70 per cent of the tariff; without bringing down losses, any increase in power supply translates into more haemorrhage of public resources,” observed one commentator.

Mr Kaliisa disagrees. “It is not an issue of saying you are indemnifying them 99 per cent or they should have driven losses down, there are also triggers on the government side,” he argues.

“We had the unfortunate power deficit and when you have a power deficit, human behaviour changes, leading to an increase in power thefts. This is an issue that has been created by a lack of generation capacity; as partners, the government and Umeme agreed that these were issues beyond the distributor. Because there were circumstances that destabilised Umeme’s business, the targets had to be reviewed.”

The terms of the Umeme concession are up for review in early 2012; according to Mr Kaliisa, the strategy is to remove the high cost centres until such a time as there is no more need for a subsidy.

“When you remove the high cost centres, we shall reduce the level of subsidy, not the consumer tariff; hopefully, the regulator will then ensure that the transmission and distribution companies reduce their losses. They have to set targets — the threshold for distribution losses in 2012 is 27 per cent,” he said.

This figure is all the more puzzling because after an inquiry in 2009, Umeme adjusted its losses from the 38 per cent it had been claiming to 27 per cent in 2010. Quarterly subsidies bucked the trend, dropping from Ush33 billion ($12 million) to just Ush7 billion ($2.52 million).

The impact of power subsidies on the sustainability of Uganda’s power industry came into focus a fortnight ago, when independent power producer Aggreko threatened to switch off its 50MW plant three months ahead of schedule.

The firm was protesting government failure to settle $40 million it owed in arrears for diesel generation. Had the company switched off its plant at Mutundwe, Kampala would have been plunged into near permanent darkness; it took the efforts of donors to prevail on the firm not to execute its threat.

Diesel generation expensive

Aggreko was apparently moving to minimise its exposure after its financial analysts advised the firm to make provisions for the debt.

“We have failed to pay for diesel plants and the truth is that we cannot afford any more diesel generation,” a mid-level official at the electricity regulatory authority, ERA, said while commenting on the subsidy conundrum

In September 2008, Uganda licensed two firms — Invespro and Electromaxx — to install Heavy Fuel Oil Generation units that would inject 150 MW into the grid.

While Electromaxx has managed to set up and supply between 3MW and 5MW of  a planned 20MW, Invespro has failed to take off.

The company blames a cartel of vested interests that it says want to maintain the status quo by blocking HFO plants that would be 60 per cent cheaper to operate.

Now the company says it is stuck and cannot secure finance because Eskom has denied it an interconnection agreement.

Kabagambe Kaliisa doubts Invespro’s claims. “There is a regulator and the law is on their side, why has it not come to my attention? Besides they have a good agreement which obliges us to either take any power they produce or pay for it is we fail, what more would a financier want?” he asks.

But Invespro insists the current power crisis is the result of lack of transparency in the sector and the odd concession agreement which allows Umeme to profit from inefficiency real or cooked up.

(See related: EA plunged into darkness despite massive potential)
Additional Reporting by Esther Nakkazi