The cost of producing electric power in Uganda is showing signs of easing as the country embarks on the construction of new power projects on the River Nile.
This is good news for businesses that are involved in deepening regional trade with producers enjoying lower cost bases.
Uganda is investing heavily in hydropower, to move the country away from dependence on Independent Power Producers who rely on diesel for generation, which contributes significantly to the country’s carbon footprint.
According to former Uganda Manufacturers Association chairman Abdi Alam, who is also the chief executive at Alam Group, manufacturers typically pay as much as 14 US cents for each kilowatt hour of electricity, which is much higher than what manufacturers in Kenya pay for instance.
But last week, President Yoweri Museveni broke the ground for the 183MW Isimba hydropower station, which will cost $556 million to construct. Although the power station, which will take 40 months to complete, is coming in at $186 million above the initial cost estimates, each Megawatt will be $410,000 cheaper compared with the 250MW Bujagali hydropower station that was commissioned in October 2012.
Even cheaper will be the power from the 600MW Karuma power station, whose unit cost will be $2.8 million per Megawatt based on current estimates. “The cost of power will gradually come down as more hydropower enters the system,” said Mr Alam, “but in the meantime, Ugandan manufacturers can still stay competitive by investing in those areas where the country has a comparative advantage, such as agriculture.”
Power shortages and expensive energy continue to put pressure on manufacturers and households in Uganda.
According to the World Bank, Uganda is the third least electrified country in the East African region after Tanzania and Kenya. Tanzania is the least electrified with 7.2 million off-grid households. This is followed by Kenya (6.2 million), Uganda (5.5 million), Rwanda (1.7 million) and Burundi (1.4 million).
The World Bank further said in a report that Ugandans can expect 11 blackouts a month. This is much lower than Rwanda, which has on average 14 blackouts, followed by Burundi and Tanzania, both with 12 blackouts in a month. Kenya’s power grid is relatively reliable.
With a final project cost of $862 million, which is largely the result of expensive financing since the project was private sector driven, Bujagali set the benchmark for hydro generation in the country, leading to fears that subsequent projects could be equally expensive to implement.
But as the country positions itself to keep the supply of electric power in line with demand, which is growing at eight per cent annually, a new financing model has led to an easing of costs.
The three major projects being implemented are public driven with the government undertaking their construction and getting money on friendlier terms. Karuma, Isimba and Ayago are being financed 85 per cent by the China Exim bank. Ayago will be a cascade of two power stations with a combined output of 600MW. Another two projects, Oriang (400Mw and Kiba (200MW), are also being prepared for tendering.
Although Isimba is costing more than the initial estimate, which was $370 million, Ministry of Energy officials say the final price of $556 million is fair. According to Junior Energy Minister Simon D’Ujanga, Uganda is spending more on relatively smaller projects because of its terrain, which leads to the use of more concrete.
“Compared with Ethiopia, which has deep gorges, we have to build on almost flat terrain, which consumes more cement. We also don’t have direct access to the sea, which increases the cost of procurement for the contractors so considering the terrain, $556 million is a fair price,” he said.
It also emerged that this price is at least $18 million lower than the $574 million that project consultants Fitchner had assigned the project.
Isimba will also have a public bridge spanning half a kilometre on top, providing the third crossing across the River Nile as well as a 19 kilometre transmission line to the Bujagali substation.
These factors according to Energy Ministry spokesman Bukenya Matovu partly account for the cost escalation although the cost of financing remains the major factor.
“In the early designs the bridge was not there but later on it was added as a necessary structure. But the cost of borrowing is the key determinant of price and tariff,” he said.
As the dust settled over the controversy that surrounded the procurement for the Karuma power station, the energy ministry was still dealing with allegations that it turned down a cheaper offer for construction of Isimba from the Indian government.
Mr D’Ujanga said the Indian offer of finance was abandoned after it took too long to come through.
“At the rate demand for power is growing, we would go back to loadshedding if we were to rely on Indian finance because it took them more than a year to respond,” he said.
Other sources, however, place the blame on Ugandan officials, who they say took more than a year to submit the feasibility study report, after President Museveni initially invited Indian participation in September 2011.
The same sources say a cursory look at the cost assigned in the feasibility report ($574 million) convinced Indian experts that the power station could be delivered at a considerably lower cost if all the engineering and procurement were sourced from India.