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Uganda Scraps Take-or-Pay Contracts In Electricity Industry

The Bujagali hydroelectric dam

Uganda has scrapped take-or-pay contracts within its electricity industry, a business incentive that has been at the centre of attracting more than $5 billion in the country’s power generation segment over the last 15 years.

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The take-or-pay model – a concept that allows a generator of electricity to be paid regardless of whether the electricity has been evacuated onto the grid or not – has come under heavy criticism in light of the huge amounts of money that the country is paying for the available power that has been generated but not consumed, otherwise known as ‘deemed energy’.

Patrick Tutembe, the Chief Economist, Pricing, at the Electricity Regulatory Authority (ERA), announced that “government has done away with the take-or-pay model” during the symposium on energy, oil and gas and minerals, organized by the Office of the Auditor General in Kampala, this week.

President Yoweri Museveni has been a vocal critic of some aspects of the electricity supply industry. He has increasingly grown frustrated over what he believes are high electricity tariffs and complaints of generated power not getting to consumers.

In his speech during Labour Day celebrations in 2021, he lashed out at Umeme Limited, the main distribution company. But in doing so, he by proxy also looped in the operator of the transmission segment, the biggest fall guy for the high costs of deemed energy.

Museveni complained: “The power for industrial parks will go straight from the generation point to the industries and not through Umeme. If Umeme dies, that is their mistake.”

For more than a decade, international power project developers have demanded that for any investment they intend to make, the contract has to be drafted with a take-or-pay clause in it. This way the investors are always assured that they would recover their investment from the electricity sales.

Projects such as the 250MW Bujagali hydropower project, currently the largest power plant in the country, is run under a take-or-pay model.

The take-or-pay model shields such investors like Bujagali from risks arising from disruptions within the transmission segment, whose operation is out of their control.

However, more than a decade after the take-or-pay model was introduced, Uganda’s government has increasingly felt that the investors are enjoying a soft let-off.

The amount of money that the government pays investors for power that had not been evacuated from the source appears to have hit a level that has called for new changes.

According to the Auditor General report of 2021, government paid Shs 87.7 billion in deemed energy costs that year for 13 power purchase agreements because the electricity was available but it was not dispatched to consumers for different reasons, especially the constraints in the transmission network.

Now, it seems that government feels that the country’s electricity supply industry, and the consumption market have matured enough to offer investors confidence that their investments will be recouped. And, therefore, government feels there might not be a need for take-or-pay contracts in the industry.

Although the idea of doing away with the take-or-pay model had long loomed large in the corridors of the ministry of Energy, Museveni’s insistence of direct supply from the generators to the consumers appeared to have gained traction from that Labour Day speech.

The scrapping of the take-or-pay model is expected to rattle investors, especially in a country such as Uganda where long-term financing for electricity projects is simply non-existent.

To produce just one megawatt of electricity in Uganda costs at least $3 million, according to official estimates.

Regardless of the format Uganda’s electricity contracts take, investors will ask for some sweet incentives to produce power in a country where per capita consumption – at 68 kWh – is still one of the lowest in the world.

Also, that Uganda’s electricity transmission network is still low and cannot match the generation capacity of the country is a fact that will not sit well with investors.

And finally, government’s recent decision not to renew Umeme Limited’s 20-year concession, which ends in the first quarter of 2025, has created uncertainty over who will replace it as the country’s main electricity distribution company.

It is not clear whether the scrapping of the take-or-pay model will work retrospectively, considering there are already running projects with the incentive embedded within their contracts.

It is likely that the government will renegotiate the contracts of the current power developers to ensure there is fair competition with the new players that might enter the market.

Government is said to be drafting a legal framework that will guide a new model of investments in the electricity industry, with expectations of it coming into force at the end of March, 2023.

Usually, when a take-or-pay model is done away with, it is replaced with a take-and-pay model. One of the differences between the two concepts is that with the take-and-pay model, the generator of the electricity is not automatically compensated when the electricity is not bought.

However, in the event that the electricity is not bought, the generator can seek legal redress based on the contract signed with the buyer of the electricity.

Uganda is also currently mooting the idea of large consumers directly buying power from the independent power producers, thereby bypassing the transmission and distribution companies.

The electricity generation capacity in Uganda is just over 1,300MW, with that figure expected to go up when some of the units of the 600MW Karuma hydropower dam are commissioned in August this year. The government set itself an ambitious target of generating 17,000MW by 2027.

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Deep Earth
Deep Earth International critically examines developments in the extractive and energy sectors in Uganda and the wider East African region. Drawing from the vast experience of its founders who have each covered and written about these sectors for at least fifteen years, this website is the go-to platform for anyone seeking to get a better understanding of the same.

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