An internal report prepared by State House officials has observed that the “amendment to the concession agreement of 2005 between the Uganda government and UMEME was done illegally in November 2006” and recommended a roll back of billions of dollars from the power distributor.
According to the confidential report which ChimpReports has seen, the amendments to the original contract were done in Washington “without any letter of no objection from the Solicitor General in accordance with article 119 of the Constitution of the Republic of Uganda and section 29 of the Interpretation Act.”
Umeme holds a 20-year electricity distribution concession in East Africa’s third-largest economy which ends in 2025.
But President Museveni has publicly expressed determination to not renew the contract, accusing the power distributor of failing to address high tariffs.
However, the key issue now is the power losses, the difference between kilowatt-hours generated and those distributed to end-users due to problems such as theft and inefficiency.
The initial contract had not provided for the inclusion of power losses in the tariff as that would have been a disincentive for Umeme to invest in modern power transmission.
Illegality
Now the new report indicates that, “the inclusion of losses in the tariff which accounts to about 30% of the end user tariff subsequently from January 2007 to-date was made in contravention of the Electricity Act Cap 145 section 15, 16 and 17 which states that only the board of Electricity Regulatory Authority can set tariff.”
“There is no evidence whether in minutes or interviews whether the board of Electricity Regulatory Authority approved the setting of that tariff that included the loss in our electricity tariff structure hence carried since January 2007 after the amendment of November 2006 came into effect and therefore liable to be rolled back from UMEME Limited.”
Umeme says vandalism of electricity infrastructure is partly to blame for high energy losses.
Umeme’s Managing Director Selestino Babungi recently said in 2021 alone, the sector lost over Shs 26 billion in stolen copper wires, vandalized transformers and poles amongst others.
Nevertheless, the new State House report sheds more light on the implications of the illegal amendment on generation and consumption of electricity in Uganda, breaking down figures for the President.
The report cites a World Bank Study justifying the construction of Bujagali and various econometric models which point to a mathematical relationship between GDP growth and effective demand for electricity (affordability).
For developed and more efficient countries, the ratio of GDP growth to electricity demand growth is 1% to 4% respectively, meaning for each 1 % growth in GDP, there is a corresponding 4% growth in electricity demand which growth is reflected in increased electricity consumption in manufacturing, agro processing and real estate construction.
For least efficient economies in developing countries, the relationship is 1% to 2.5 % respectively.
In Uganda, which has been growing with a weighted average GDP growth rate of 6% since 2001, the peak demand for electricity was 390MW.
In 2015, after 14 years of GDP growth of 6% per annum, the peak demand for electricity was 490MW, giving a scenario of a GDP growth to electricity demand growth of 1% to 0.05% respectively, according to experts.
“If one uses the World Bank GDP to Electricity demand growth ratio for least efficient economies (which Uganda is not among) for the period 2001 to 2015, then we should be consuming over 2,200 MW at a minimum today,” the report reads in part.
In short, the low demand for electricity due to its unaffordability, has undermined efforts to stimulate Uganda’s economic growth.
Investors who would have poured billions of dollars into Uganda’s economy opt for South Africa and Egypt despite the low cost of labor in Uganda.
The Electricity Regulatory Authority statistical tests done over the last 5 years in Uganda show a mathematical ratio relationship between any increase or decrease in tariff of 1% to 2.7%.
This means that for every 1% increase in the electricity tariff there is a corresponding 2.7% decrease in effective demand / consumption of electricity, according to the report.
And for every 1% decrease in the electricity tariff in Uganda there is a corresponding 2.7% increase in effective demand / consumption of electricity.
In the scenario where the proposals in the Salim Saleh report of 2009 submitted to his committee by ERA had been implemented that showed how a 44% reduction in the Ugandan electricity tariff could be achieved, the effective demand of electricity in Uganda would have jumped up by 118.8%, taking demand at peak from 420 MW(2009) to 918.96MW then.
Constrained generation
The State House officials also argue that generation of electricity is also constrained, giving the example of Isimba hydro dam whose dependable capacity is 183megawatts but is being requested for a monthly weight average of only 47 megawatts.
Constrained demand means energy orders received minus orders that won’t be fulfilled for one reason or other.
The cost of the balance of 136megawatts at 4.8 United States cents is $4.8millon United States dollars (USD) per month or USD $57million per year.
In the case of Karuma hydro dam, given that Isimba cannot be brought down in total because of constrained demand for electricity caused by the illegal tariff, 600 megawatts is going to drain the consolidated fund by USD $21million every month or USD $253million a year.
“This is all because of the constrained demand caused by the inclusion of losses in the electricity tariff illegally,” the report reads in part.
It remains unclear if Museveni has made a decision on Umeme’s future.
However, officials say he has held back to back meetings with legal officials on the matter at State House Entebbe.
For example, last year, legal officials advised Museveni to stop Umeme from undertaking investments in Uganda on grounds that the cost was inflated. He obliged.
According to the terms of the contract, Umeme is liable to a huge buy out payment from the government when its concession ends in 2025.
Umeme is demanding about $300m. However, a legal official recently Museveni at State Lodge Nakasero said that “Umeme’s contract was illegal, null and void and Uganda doesn’t have to pay any amount for buy out.”
Instead, Museveni was advised, the government needs to ask Umeme to refund over $8bn “because putting power losses in the end user tariff was done illegally.”
The State House report also observed that “inclusion of any other generation in Uganda whether in thermal, hydro, nuclear is impossible under this tariff regime if isimba hydro dam power generation (183mw- 47mw = 136mw) can’t be consumed.”
The officials wrote that, “This not only incapacitates the inclusion of Karuma in the distribution grid but also severely impairs the development of other hydro sites in Uganda.”
The report gives the example of Ayago (800 megawatts), Oriang (400megawatts), Kiba (400 megawatts) whose feasibility studies are already complete or any further commercial investment in nuclear for electricity to be generated in Uganda unless constrained demand is removed by reducing the tariff which can only be achieved by removing the illegal component of that tariff which is loss.
