POWER TARIFF INCREMENT SHOULD BE DONE MORE FREQUENTLY

 The first increment in power tariffs in four years is likely to cause some grumbling as expected.

The logic behind the increments can not be faulted.  The Electricity Regulatory Authority (ERA), listed as reasons for the tariff increases an Increase in inflation, depreciation of the shilling, increases in fuel prices and a larger than expected reliance of thermal generation power in the last quarter.

"Over the last three months inflation has registered a 6.52 percent upward movement, the Uganda shillings has depreciated 6.92 percent and international fuel prices have jumped by almost a half...

In recent years an increase in tariffs seemed counterproductive to efforts to keep the economy afloat and revive it during and after the Covid-19 pandemic. In a situation of collapsed demand and profit margins the last thing businesses wanted was an increase in power tariffs.

It helped too that Isimba dam came on line just before the pandemic. A lower cost generation plant that helped keep tariffs low.

There are more considerations than a mere mortal like me would know, but I believe as a matter of course our tariff should be allowed to float – go up or down, according to some index, which takes into account the four major drivers of tariff as outlined above.

The knee jerk reaction would be to resist these regular changes, but in the long term it would let us adjust our behaviour and does not mean tariffs will always be heading up.

The well-known experiment of the two frogs comes to mind. One frog was thrown into a beaker of boiling water and understandably jumped out immediately. The second frog was put in a beaker of cold water but which was seating on a fire. It took much longer for the second frog to jump out of the beaker. In some narrations it actually boiled to death.

The point in a roundabout way, is that to allow the prices to respond to the reality on the ground, is the more humane thing to do than try to hold them to a favourable level out of some misplaced sense of charity...

Our recent experience with fuel prices and longer experiences with the exchange rate have borne this out.

Since the beginning of the year the petrol prices have broken the sh5,000 a liter barrier and quickly there after the sh6,000 a liter barrier. There has been much gnashing of the teeth in the hills of Kampala and beyond, as fuel prices crept up. People pointed to neighbours Kenya, where Nairobi committed to subsidise fuel prices and hold them to more affordable levels. Kenya under the new government has dropped the subsidy like a hot potato and prices jumped -- not unlike the frog in the hot water beaker, to reflect the market price.

The cost of subsidizing fuel prices has left a hole in the Kenyan economy, which they will struggle to fill for some time.

In this era of environmental orthodoxy, the argument that keeping power prices down to encourage use of power and discourage use of charcoal is an easy sell.

But keeping prices low prevents the forces of supply and demand to actually bring prices down.

Higher prices, more accurately market sensitive prices, will encourage investment in the sector, spreading the cost of production and lowering eventual tariff to the consumer.

We are living proof of that. Barely 20 years ago we only had two dams Nalubale and Kiira, charging well below production costs. A liberalization of the sector and adjustment of tariffs to be more realistic has seen an explosion on power generation capacity to include solar, thermal in addition to hydro-power electricity we generate.

By the laws of supply and demand if we still had only two dams with a combined generation capacity of 380 MW power would be expensive, maybe not in tariff terms, because the government would be keeping it low, but in opportunity cost that comes with economic activity that has been lost for lack of adequate power supply.

"We suffer that opportunity costs even today. With electricity coverage now of about 25 percent, imagine how much more economic activity would happen if half the population had access to power....

Thankfully its not up to me, but if it was, I would cause an adjustment in tariffs – up or down, every month. Maybe that’s why I will never be in charge.