President Yoweri Museveni while speaking at the opening of the Uganda Manufacturers Association (UMA) annual trade fair once again promised the industrialists that power tariffs will come down in the near future.
Currently his focus is on Bujagali dam which is selling power to the grid at about $11 cents (sh340) a unit.
The President has expressed his desire the question then is how do we get that price down from current levels?
First of all looking at the composition of the Bujagali tariff of $10.1 cents, the rate at which they sell it to Uganda Electricity Transmission Company Ltd (UETCL), $6.7 cents goes towards repayment of debt and equity repayments to the shareholders, $2.3 cents is earmarked for taxes and repayments to government and $1.0 cents goes towards other costs – operations and maintenance and administration. These are the averages under the current agreement which lasts 30 years from 2012 when the dam was commissioned.
"According to figures that were seen last year which have changed somewhat by now, the simplest – but by far the easiest way, to collapse the tariff would be for government to get $1.4b (about sh5 trillion) or half of all the revenues we collected last year, pay off the shareholders – the Aga Khan’s Industrial Promotion services (IPS) and American private equity firm Sithe Global and retire all the debt. Sithe Global is currently in talks to sell its majority stake to in the project to Norwegian firm SN Power....
With one fell swoop we will have loped of $6.7 cents and brought the tariff down to $3.4 cents.
Ideally we should get all this money in cash so that there are no debt repayment costs and then it can have a real say in setting the tariff.
The challenge is government does not have this kind of cash lying around.
The next best thing would be to refinance the project by extending the term of the current agreement to say 50 years instead of the current 30. The Build Operate & Transfer (BOT) agreement calls for a handover of the asset to Uganda after 30 years.
Under such an agreement the average tariff over the life of the project would almost half to $6.6 cents.
The next best thing would be to pay off all the debt, which people familiar with the project estimate at about $530m, this would account for about $3.8 cents of the tariff bringing it down to $6.3 cents. A removal of government taxes and repayments would then pull the tariff further down, below the magic $5 cents a unit number to $4 cents.
However given that dollars do not pave Kampala’s streets we could either pay off the investors or refinance the debt hopefully with money that will significantly dent the tarrif. And in addition forgo government revenues.
However calculations are that tariff would increase in both instances if we are still saddled with investor dividends and interest rate payments of higher than 8 percent per annum. The current debt costs about 3.8 percent over the duration of the project.
And if we were to borrow to get rid of the private investors on the project – government owns just over four percent, the new lenders would demand a higher usage of Bujagali, a plant factor of much higher than the current 70 percent. The higher the plant factor the lower the tariff.
"It’s clear that we don’t have the cash to send our private partners on their way and to borrow to do so may not have the desired effect, except make another set of arrangers and bankers rich...
But to reduce the tariff is not only a Bujagali challenge, even if the tariff from the dam account for about 60 percent of the current tariff to UETCL.
There is the issue of the 700 MW Karuma dam and the 183 MW Isimba dam which it is expected will come on line within the next five years.
The projections that these dams will sell power at $5.3 and $6.6 cents a unit for Karuma and Isimba dams respectively but that presupposes they will be firing on all cylinders from day one.
However industry experts wonder where the 800 MW of demand will come from. Uganda given its low industrialisation sees seven in every ten units generated going to domestic consumption. There is only so much power a family can use. But even more of concern is that with the roll out of prepaid meters the industry has seen a falloff in demand or at least a slowing down in the growth in consumption.
"If government really needs to ensure the two new dams and Bujagali are working at full capacity and therefore lower the tariffs, they will have to go out and seek investors of the type that snap up this new capacity immediately. This would not be unlike what former energy minister Syda Bumba did in flying around the region to sign the regional power utilities to take up Bujagali’s power when it came on line as a precondition for donors to unlock their taps...
But beyond that we need to work to reduce commercial and technical losses on the transmission and distribution networks so that gains made in generation are not lost before they get to the end user.
Five US cents is the Promised Land, but there will be no silver bullets in getting there.
But I am sure government is well aware of all this and have girded their loins for the battle ahead.