Monday, April 3, 2023

KIIRA-NALUBAALE MAYBE UEGCL’S POISONED CHALICE

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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