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Load-shedding to return with suspension of thermal power operations

By Ibrahim Kasita

Added 14th January 2013 03:00 AM

THE annualized bulk power buying costs have increased to over sh700b in January alone. The increment is on account of increase in power purchase costs.

THE annualized bulk power buying costs have increased to over sh700b in January alone. The increment is on account of increase in power purchase costs.

By Ibrahim Kasita

ELECTRICITY Regulatory Authority (ERA) made a tough decision not to increase power rates for 2013.
 
This decision, seen by many observers as a move to appease consumers especially the manufacturers and politicians, is unsustainable because there is insufficient funds needed to maintain electricity sector operations.
 
Eskom the power firm that runs the Nalubaale and Kiira hydropower plans needs about sh33b this year from sh29.7b last year.
 
The annualized bulk power buying costs have increased to over sh700b in January alone. The increment is on account of increase in power purchase costs.
 
Umeme’s annualized revenue requirements increased to over sh225.4b from sh188.7b recorded last year. This was mainly driven by increase in the investment costs despite the new targets.
 
Besides, Uganda Electricity Transmission Company (UETCL) has arrears to the thermal plants and debts totaling about sh62b.
 
“Pain-killer” policy option

Government changed strategy of subidising the energy sector from providing direct subisidies to end-user consumers but instead invest in large hydropower project like the proposed Karuma dam.
 
It is also takes long to get long-term loans from commercial banks to finance the energy sector.
The regulator has stopped the dispatch of electricity from all heavy-fuel thermal plant, which account to about 7% of Uganda’s energy mix at the moment. This has reduced the end-user tariff by sh32 per unit consumed.
 
Thermal power is more expensive than hydroelectricity.  The two thermal power stations are Electromaxx 50MW Tororo and Jacobsen 50MW Namanve.
 
This means that in the nearby future, Uganda’s economy will experience electricity supply shortages.
 
Although the decision to switch-off the thermal plants will have “minimal” load shedding this month, power cuts will increase in later months as demand increases.
 
To mitigate the quick return of load-shedding, the regulator has requested for more water release at Nalubaale and Kiira power complex to the levels of 860 cubic metres per second (cumex) up from the 800 cumex.
 
This is expected to provide sufficient energy that would have been generated from the thermal plants but at the same time meet the demand.
 
Lake Water levels cannot sustain full operations of the Naluabaale and Kiira power stations unless Uganda wants to drain the lake.
 
Again not dispatching the thermal plants presents a risk in the even that there is a substantial reduction in generation from Nalubaale and Kiira thermal plants.
 
This is because the start-up of thermal plants takes hours and the economy cannot wait to lose even minutes without energy.
 
Swallow the bitter pill to recover or die

But the most feasible way of raising the money needed to finance electricity sector is consumers to pay the true cost of producing electricity.
 
The retail tariff charges for electricity services need to be subject to and liable for automatic fuel costs charges, foreign exchange rate fluctuation adjustment, and an automatic adjustment for inflation.
 
The regulator sets electricity tariffs at levels sufficient to recover all reasonable and prudently incurred costs and a reasonable return on investments.
 
The tariffs paid by the end-user tariffs must be sufficient to recover the costs of power generation, costs association with transmitting or delivering this power to distribution companies and the costs of distribution and supply to the end-user consumer.
 
The cost of generation usually includes investment or capital costs, operation and maintenance and fuel costs. Investment costs are financed either by borrowing (debts) or through shareholders’ equity
 
This debt is usually contracted in foreign currency because Uganda’s capital and financial markets are still nascent.
 
Lenders are concerned and will always scrutinize the contacts entered into between the generation and the transmission companies to ensure their payments to generation are either in US dollars or euros.
 
Since the allowable investment costs are in foreign currency and the tariffs are in shillings, it follows that the prevailing exchange rate has to be used to convert the costs in shillings before the tariffs are determined.
 
An appreciation of the shilling implies the need for fewer and these reduce the tariff. Similarly the fuel supply contracts signed between thermal generators and fuel suppliers are denominated in foreign currency and therefore the fuel supply costs in shillings for a given month are dependent on the international prices for fuel and the prevailing exchange rate for the month.
 
Under the current tariff setting methodology, the end-user retail tariffs are supposed to be received a very quarter to take care of the movements in inflation.
 
The tariffs paid by the consumer are, however in shillings after applying the applicable exchange rate to the portion of the costs that are contracted in dollars.
 
To the extent that generation companies adjust their tariffs at which they sell energy to the transmission company every month for the exchange rate, inflation and international fuel prices; yet end-user retail prices are adjusted on a quarterly basis.
 
This scenario has always created a mismatch between the revenue collected by distribution companies and the payment obligation to generation companies.
 
A monthly adjustment of the end-users retail tariff provides a flexible and transparent mechanism for tariff setting and avoids huge swings in the tariff.
 
The electricity sector needs financial viability to ensure reliable power supply for sustained economic growth.

THE annualized bulk power buying costs have increased to over sh700b in January alone. The increment is on account of increase in power purchase costs.

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