THE Government’s subsidy on electricity since 2004 has reached sh113b, creating doubt whether the sector is financially-viable. The amount translates into sh37.66b annually.
The Electricity Regulatory Authority (ERA) said the sector’s costs have grown by 231% between 2004 and 2007, while the percentage of thermal costs also increased to 70% from 0.2%.
“The Government subsidy on energy alone has grown from nil in 2004 to sh113b in 2007. The distribution costs have been moderated by the balance of increased investment costs, which were reduced by efficiency targets,” the regulator said.
“Other generation costs increased by fluctuations in available capacity and the challenges of attracting investment are the high tariffs and limited ability to pay.”
The regulator said because the cost of capital was high, investing in new projects was difficult, while the subsidy was not sustainable in the long run.
“Sustaining the sector financially requires concentration on developing hydro-generation resources, minimising thermal costs, widening the generation mix to include other sources especially heavy-fuel oil for thermal and accelerating loss reduction in distribution,” the regulator added.
“There is a need to string the transmission network to far flung areas to reduce losses for the distribution network and increase coverage. We also need to liaise with the Rural Electrification Agency for systematic development of rural electrification projects.”
In 2003, South African-based Eskom won a 20-year contract to operate and maintain the Nalubaale and Kiira power stations at the Owen Falls Dam.
The power giant concluded restoration of the plant using $6.7m in May 2007. However, the available capacity has been affected by unfavourable hydrology conditions.
The Uganda Electricity Transmission Company (UETCL) has embarked on a rigorous investment campaign and plans to spend $440m over the next 10 years.
Umeme, which took the distribution concession in March 2005, was contracted to invest $6.5m in the initial five years but “they have reported investment in excess of their obligations, which we are in the process of verifying through an external audit.”
The current regulatory practice is based on the rate of return and contract. The regulated costs and an appropriate return are accumulated to determine the revenue that must be collected for a given period.
This means there is limited flexibility for sector operators because their boundaries are pre-defined. Regulators predict a power shortage during peak hours till 2011and a sizeable surplus after 2011.
They say short-term mitigation measures for the power deficit will lead to expensive supply, which will lead to high tariffs despite the subsidy.
