At the beginning of this week South African power company,
Eskom ceremonially handed over the Kiira-Nalubaale dams, they have been running
for the last 20 years, back to Uganda.
And on Saturday, a day after the concession is over, they
will officially hand over the 380 MW plant to Uganda Electricity Generation
Company Ltd (UEGCL).
At the beginning of the 2000s the Uganda Electricity Board
(UEB) was broken up into it constituent parts of generation (UEGCL),
transmission (UETCL) and distribution (UEDCL). In addition, a regulator,
Electricity Regulatory Authority (ERA) was created to oversee the sector.
The idea was that more investment could be attracted into
the sector and we would benefit from the
specialization that would come with one operator focusing on distribution or
generation. A consortium of investors and operators won the deal to distribute
power and formed UMEME Ltd while several private operators set up generation
plants. UETCL remained operated by government.
"A dark cloud hung over what would have been a joyous occasion at the hand over of the plant, because as it turns out, UEGCL is inheriting a plant that is in urgent need of remedial work and the prospect of multimillion dollar rehabilitation of the Nalubaale dam, which will make 70 years in operation next year...
Immediately UEGCL will need at least $10m (sh37b) to make
repairs, which are a result of a back log of maintenance works that have gone
undone over the last few years.
A battery of issues await UEGCL’s takeover, which may lead
to financial loss, danger to workers’ and the general public and reputational
damage to UEGCL, if not handled promptly.
Eskom clearly did not look after the plant very well. More
than half the rehabilitation work on the dam of $51m was done over the last
five years, with the under investment in the plant falling to as little as $91,174 in 2017.
As an indicator of how woefully inadequate these outlays
were the World Bank has recommended that between 2.0 and 2.5 percent of the
initial investment should go into equipment and civil works annually. Given
that the Kiira dam cost us about $270m, annual maintenance costs should be at
least $5.4m. Eskom averaged about $2.5m a year in maintenance costs, explaining
the backlog of headache UEGCL is set to inherit.
"Eskom officials argue that they could not manage that level of investment because ERA set their tariff artificially low, from which they would have got funds to finance a higher commitment...
The Kiira-Nalubaale plant
have the lowest tariff at just over US 1 cent per unit of power of
any generator who sells to the grid.
Other generators are earning at least US7cents. This is mainly because of the
finance costs of the plant have long been recovered.
The ultra-low tariff from Kiira-Nalubaale has been
convenient for ERA to keep the weighted average tariff low but if Eskom are to
believed, has prevented them from investing properly on the plant.
It did not help too, that for years there have been
questions about Eskom’s capability to execute the concession properly, its parent
company having been rendered bankrupt in 2019.
The aforementioned should have a bearing on what government
pay Eskom as compensation for the non-renewal of the concession, but will not
as deficiencies in the original concession agreement means government cannot
fine Eskom for these breaches of the concession agreement. Parliament is
currently mulling over a government request to pay Eskom sh45b in compensation.
So UEGCL will have to shoulder these urgent remedial works,
after they have seen Eskom out the door on Saturday.
"Clearly ERA will have to revise their thinking on suppressing the tariff, if UEGCL is to fund these remedial works and a long overdue refurbishment of the Nalubaale dam, which it is estimated will cost $150m....
Over the years UEGCL has been in running battles with ERA to
allow them charge for depreciation of the plants and a small return on equity.
Charging these would ensure that UEGCL would when need be have enough internal
resources to rehabilitate and even develop new projects.
As it is the UEGCL will have to go bowl in hand to beg for
fund from the finance ministry to pay for Nalubaale’s overhaul, totally
unnecessary if the tariff had been adequate over the last 20 years.
Government currently strapped for cash may not be very
accommodative of new charges on the consolidate fund, especially if it could
have been avoided.
President Yoweri Museveni has made it a goal to bring
generation tariffs down to the magic US5cents, but this has to be achieved
within reason and be adequate enough to allow the sector stand on its own feet.
While talks to give UEGCL an adequate tariff that will allow
them room to maneuver and guarantee the future sustainability of the sector,
are in advanced stages, one cannot help but think that the Kiira-Nalubaale handover
to UEGCL, which has been profitable for the first time over the last two years,
may very well be a poisoned chalice.
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