While addressing the Ministry of Finance organised 12th National Competitiveness Forum (12th NCF) in December, Prof Augustus Nuwagaba, the keynote speaker, voiced the cost electricity as the main impediment to private sector growth.
He further said “Uganda has one the highest average per unit cost of electricity in the Sub-Saharan region with evidence presented below”.
Broadly, a high unit cost of electricity remains a big challenge despite ongoing efforts by the regulator to reduce it. As of march 2021, the price elasticity of electricity was 0.189 U.S. Dollar per kWh for households and 0.157 U.S. Dollar for businesses. These high costs inhibit access to cheap electric power, render the industrial and agricultural production less competitive, and also expose majority of less fortunate Ugandan households to health hazards as a result of continuous use of kerosene.
Recently, the Electricity Regulatory Authority (ERA) approved new electricity end-user tariffs to be charged by UMEME Limited for the supply of electricity in the billing period of quarter one January to march (2022). According to ERA, approved a new qualification criteria for the lifeline tariff where only domestic customers whose consumption does not exceed 100 units per month based on six months running average shall qualify to purchase the first 15 units charged at a lifeline tariff of UGX 250 per kWh. However, the tariff structure for the rest of the consumer categories i.e. commercial consumers, medium industrial, large industrial consumers, and extra-large industrial consumers as well as street lighting remained unchanged from the previous quarter.
Although tariffs slightly reduced, access and demand for electricity in Uganda remains low, despite its huge hydroelectricity generation capacity. The National Planning Authority indicates that electricity generation capacity increased from 601MW in 2010 to 1,839MW 2019, driven by the government’s investment in energy infrastructure such as the Karuma hydro-electric power plant. Consequently, nationwide access to electricity increased from 11% in 2010 to 24% in 2019 and the cost of electricity reduced marginally from US$ 9 cents and US$ 16 cents in 2013 to US$ 8 cents and US$ 9.8 cents for extra-large and large industries by 2018, respectively.
Whereas the cost of electricity has reduced, it still remains higher than the targeted US$ 5 cents per unit. For instance, the cost for medium industrial consumers is US$ 15.6 cents per unit while for commercial consumers (cottage industries) is US$ 17.5 cents per unit. This increases the cost of production and reduces industrial productivity, which renders most industries uncompetitive in comparison to their peers in the region. Yet industries, especially small-scale cottage industries are the engines of growth and job creation.
Industrilisation in Uganda needs cheaper electricity. Photo/Courtesy
To support Uganda’s industrialization agenda, the government could consider the following efforts to increase access to affordable electricity.
First, reconsider the 2009 energy Master Plan, which laid out energy sector reforms such as privatization. The government should renegotiate some of the terms and conditions of the agreement with the investment firms that were entrusted with the generation of hydroelectricity. For instance, the government could consider owning more shares to minimize the cost of electricity generation. Consequently, this would increase access to affordable electricity that is critical for industrialization.
Second, embrace equity financing mechanisms for high cost long-term investments. For example, instead of overly relying on external debts to finance construction of hydropower dams, the government could utilise equity financing arrangements, which are cheaper, and also reduce electricity transmission losses. This would also save the country from incurring high costs in debt financing and interest payment, thus enhancing access to affordable hydroelectric power by the various consumers.
Third, effective transparency in business agreements with the private sector players is critical. For example, the bad deals that government signed with the private sector, at private sector terms which guarantees greater returns on investment to the project sponsors need to be revisited. The government therefore should divest for example Bujagali project and ensure that all its generated power is bought at lower price than it is today.
Finally, there is need to fast-track the implementation of the reviewed tariff structure launched by the energy minister on the 16th of December 2021. This will enable the country to meet Sustainable Development Goal Number 7 – “affordable, reliable, sustainable and modern energy for all by 2030” – aimed at promoting accelerated access to clean energy for improved welfare of the society for Social-Economic Transformation.
In conclusion, for Uganda to realize its industrialization agenda, access to affordable electricity is critical for stimulating industrial activity. This will ultimately boost competitiveness in production and productivity across all the sectors of the economy and enhance economic and structural transformation.