Fire-fighting in energy ministry

By Eriasa Mukiibi Sserunjogi

Should government borrow Shs 350bn to pay off unclear debts?

Irene Nafuna Muloni, the new Minister of Energy and Mineral Resources was only 26 years old when President Yoweri Museveni came to power in 1986.

Museveni has now handed Muloni a task he has failed to accomplish after 25 years in power; to ensure that there is a steady supply of cheap electricity.

According to the latest `Status of the electricity Sector and Future Outlook ‘ report  prepared by Dr Benon Mutambi, the Acting Chief Executive Officer of the Electricity Regulatory Authority,  the country’s biggest power dam at Kiira and Nalubale dam, which accounts for 95% of supply, has an installed capacity of 380MW but only generates 138.5MW from the two station.

Muloni’s job is to find a way of supplying the 443MW needed at peak demand. The demand is 351 at shoulder demand and 302 for off-peak demand.

Unfortunately, for Muloni she does not have much wiggle room. The main component of a six-point strategy for fixing the problem involves tweaking Bujagali Power Project to quickly deliver 100MW by December.

Until recently, the biggest headache for previous Energy ministers has been to explain how thermo power generators, who account for 46% of supply and enjoy an almost 60% government subsidy, have accumulated unpaid arrears that the government is failing to pay. Getting Bujagali to produce 100MW by December might prove to be tougher.

The arrangement appears to have been on the cards when the Aga Khan, the owner of the lead company that is building the dam at Bujagali, recently was in Uganda and met with President Museveni.

Sources in the Energy ministry say apart from the generation component at Bujagali, the plants at Bujagali have to be connected to the national transmission grid and that takes time.

“The best case scenario is for Bujagali to produce 50 megawatts by the end of December,” the source said.

Bujagali was expected to be fully operational by July 1, but its completion was delayed by constraints in resource flows.

By switching on the 250 megawatt Bujagali, expected to be fully commissioned by the end of April 2012, the government hopes to substantially reduce the amount of thermo electricity consumed by Ugandans.

Expenditure on thermo power has reached unsustainable levels, prompting thermo generating companies to switch off power earlier this month demanding Shs 207 billion in tariff subsidy arrears. Domestic users in Uganda pay Shs 325 per unit and the government tops up the balance to make Shs 800 per unit, which is currently the average payable per unit of power. This works out at a tariff subsidy of 55 percent of the total tariff, from 20 percent in 2006.

The government has to pay between Shs 36 and 37 billion as tariff subsidy to thermo power generating companies every month, but its budgeted electricity tariff subsidy for the current financial year is Shs 92 billion.

Worse still, this Shs 92 billion is not even enough to cover the outstanding tariff subsidisation arrears, now standing at Shs 207 billion. Less than two months to the end of last financial year, the government got a supplementary budget of Shs 92 billion to settle the electricity tariff subsidy. Despite having Shs 31 billion already approved to be spent on the energy subsidy this year, the government has again asked Parliament for a further Shs 61 billion.

Fire fighting

In what the chairperson of the Budget Committee of Parliament, Tim Lwanga, terms as an attempt at ‘fire fighting’, finance and energy ministers have been in and out of Parliament in recent weeks, originally to request that Parliament to allow them to use the entire Shs 92 billion budgeted for this financial year’s energy subsidy to clear part of last financial year’s arrears.

With the expenditure on tariff subsidisation for this financial year projected at between Shs 432 and 477 billion, the total subsidisation bill payable by government would amount to Shs 639 billion, taking into account the Shs 207 billion the government says is owed to the thermo power producers for the period ending June 30.

The government drafted in thermo power generation companies to supplement the dwindling power supply at Kiira and Nalubaale hydro power dams due to a drop in the hydrology of Lake Victoria.

How did we get there?

Since the second quarter of 2010, says the Electricity Regulatory Authority (ERA), tariff subsidisation rates started to get out of hand. ERA is the statutory body responsible for regulating the electricity sector.

ERA boss Benon Mutambi told the press on July 13 that the cause of the problem is that the growing demand for electricity has not been matched by increases in hydro power generation. Mutambi said 51,000 new connections are expected to add to the 420,000 electricity consumers this year. In 2010, there were 37,000 electricity customers. Peak demand has now increased to 443 mw in May 2011 compared to 380mw in May 2009.

Mutambi said the proportion of thermo power as a percentage of the total power generated increased from 23 percent in 2006 to 46 percent today.

This has increased costs since thermo power is more expensive to produce. At the current rate, says Mutambi, thermo generation costs will account for 85 percent of the total electricity costs in 2011 compared to 73 percent in 2006.

Increasing electricity generation costs in the midst of a ‘fixed’ tariff system, said Mutambi, meant that the increasing costs couldn’t be passed on to the consumers, pushing up the share of government subsidy.

Mutambi says the amount of money required to supply electricity in Uganda has grown phenomenally over the years due to rising fuel prices, inflation and the depreciating shilling. He says in 2006, electricity companies needed to collect revenue amounting to Shs 420 billion to be able to function, but the figure rose to Shs 618 billion in 2010 and Shs 1,076 billion in 2011.

The depreciation of the shilling, adds Mutambi, has not helped matters.  The Uganda Shilling has depreciated by over Shs 600 against the dollar, resulting in an extra electricity sector revenue requirement of Shs 192 billion over the past 18 months. The electricity sector needs to collect US$ 400 million annually, said Mutambi, of which 80 percent is foreign currency based.

The soaring international oil prices, says Mutambi, complete the picture. Against a forecast of $ 60-70 per barrel at the beginning of 2010, the international oil prices have increased to reach the highs of $120 per barrel. Since about 85 percent of the costs of thermo power generation go to fuel, says the ministry of energy, increases in fuel prices automatically increases the price of thermo power.

Government’s plan

The government has a stop gap. Finance State Minister (Privatisation) Aston Kajara told the joint Budget and Natural Resources committee of Parliament that the government intends to contract a US$ 130 million (Approx Shs 350 billion) loan through the Poverty Reduction Support Credit ix (PRSC ix) of the World Bank to pay off the arrears.

The committee was tasked to scrutinise the government’s request for an additional Shs 61 billion over and above the 30 percent of the budget (vote on account) that the government can by law spend before the budget is approved.

MPs wondered why the ministry of finance, aware of the arrears amounting to Shs 207 billion that was accumulated by the end of June, did not make provision for these arrears in the budget. Others wondered whether poverty reduction money can best be spent on paying electricity tariff subsidy arrears.

Shadow energy Minister Beatrice Anywar called the act of thermo electricity plants to switch off power until they were paid an ‘act of terrorism’. She urged Parliament to resist the ‘blackmail’, insisting that the right procedure had to be followed.

Kajara said the US$130 million loan was not included in the budget because they were not very sure then that they would get the money. “We now have it and hope to use it to pay part of the arrears (Shs 92 billion) and keep about Shs 120 billion to meet the current expenditure on the power subsidy,” he said.

The joint committee had a clear answer to government. “We want to help government but our hands are tied,” said the Budget Committee’s Lwanga, “We cannot by law approve more money to be spent as vote on account over and above the 30 percent provided for.” But the committee advised Kajara to make corrigenda adjustments to the budget factoring in the US$ 130 million loan and table it before Parliament for approval.

But even if Parliament approves the additional money to offset the arrears, it is clear the tariff subsidisation situation is unsustainable.

Muloni’s gamble

Minister Muloni, who is an engineer with wide experience in Uganda’s power sector, says her ministry has negotiated with the ministry of water to allow them to use more water at Jinja to enable them produce an extra 40 megawatts of electricity. This, she says, will cover for the decommissioning of the Aggreko Kiira plant, whose licence was not extended beyond June 30.

But Environment Shadow Minister Ken Lukyamuzi told The Independent the releasing of more water at the dam at Jinja could negatively affect the water level in Lake Victoria.

As Bujagali starts to produce power, the government intends to decommission more thermo generators. Mutambi said they hope to decommission the Aggreko Mutundwe plant too by end of December if they realise 100 megawatts from Bujagali.

The decommissioning of the Aggreko Kiira plant on June 30, says Mutambi, means the government will save the Shs 33 billion it would have paid it in tariff subsidisation.

Lingering doubts

As the ministers of Finance and Energy pleaded with the joint committee to pass the money, most MPs were clearly more interested in having certain questions answered. They queried everything, from whether the arrears are genuine to the ownership of the thermo power companies. They maintained the suspicion that there is something fishy about the energy sector.

“There are more problems in the energy sector than meets the eye,” said Lwanga, “but we have left that to the Natural Resources Committee (so that we can) focus on solving the current problem.”

But many MPs insisted on raising the issues “so that the ministers can go with them and prepare answers.” Most of the queries were based on the Gen. Salim Saleh Report on Electricity Tariff Reduction released in September 2009.

Kabale Municipality MP Andrew Baryayanga, reading from pages 37 and 38 of the report, claimed that the oil needs of the thermo plants had been exaggerated to suit some people’s needs.

He referred the committee to these questions raised on page 68 of the Saleh report;

“How were Aggreko Kiira and Aggreko Mutundwe consumption rates altered from 0.26 litres per kilowatt hour to 0.29 litres per kilowatt hour at the extension of the Kiira Plant in January 2009 despite the written rejection of this increase by the board and management of ERA?”

“Who pays from what source for the difference? How accurate are the transport costs of diesel for the Aggreko plants? How are these costs reflected in the invoicing and the tariff compared to the logistics costs of diesel by companies selling to the public?”

The MPs were furious that these questions were not answered since 2009, taking the opportunity to quiz the powerful energy Permanent Secretary Kaliisa Kabagambe, who they accused of frustrating the implementation of the Saleh report.

Baryayanga charged further that Jacobsen, one of the thermo generating companies, is paid arbitrarily.

He turned to the report again, copies of which he had produced for MPs. “The committee learnt that the capacity charge for Jacobsen has two components,” he read out, “namely installed capacity and declared capacity.” Whereas installed capacity payments are fixed payments regardless of what the particular plant is generating, declared capacity payments are variable payments based on how much energy a particular plant is generating.

“Given the fixed expenses (under capacity charge),” the Saleh committee report noted, “The less the electricity generated the higher the generation tariff.”

Saleh’s report is said to have been produced against a background of the scepticism he developed when he was microfinance minister that there was a racket manipulating electricity tariffs to their own advantage.