How reduction of Electricity tariffs will impact the economy

by Christopher Kiiza
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Power regulator, the Electricity Regulatory Authority (ERA) has announced a reduction of the electricity tariffs for the first quarter of 2024 by a weighted average of 1.6% compared the previous quarter (quarter four of 2023).

Commercial and medium industrial consumers are the biggest beneficiaries of the new tariff with highest reductions of 1.8% and 2.8% respectively.

Commercial consumer tariff has been reduced from 611.8 shillings per unit consumed to 600.6 shillings per unit while the medium industrial consumers’ tariff has been slashed from 461.8 shillings per unit consumed in the previous quarter to 448.7 shillings in this quarter.

Commercial consumers include; supermarkets, welders, and other small enterprises.

The tariff for large industrial consumers has been slashed from 384.4 shillings per unit consumed in the previous quarter to 379.2 shillings while the tariff for the extra-large industrial consumers has been reduced from 325.0 shillings per unit of electricity consumed in the previous quarter to 320.6 shillings for this quarter.

For domestic consumers that include residential homes, small shops and kiosks, the lifeline tariff (first 15 units in a month) remains unchanged at 250.0 shillings per unit while the above lifeline tariff (above 15 units in a month), the tariff has been slashed from 805.0 shillings per unit to 797.3 shillings per unit of electricity consumed.

On average, the tariff has been lowered from 493.6 shillings per unit in the previous quarter to 485.9 shillings in this quarter.

ERA Board chairperson, Sarah Wasagali Kanaabi says the reduction of the electricity tariffs for the first quarter of 2024 by a weighted average of 1.6% is equivalent to a saving of 40.3 billion shillings to the electricity consumer.

How Lowered Tariffs Will Impact The Economy

A power tariff reduction directly influences the cost structure for businesses, particularly in the commercial and industrial sectors, leading to lower production expenses. This, in turn, fosters increased competitiveness and profitability for companies, potentially encouraging expansion and attracting investments.

The lowered tariffs alleviate financial burdens on consumers, especially in the domestic sector, translating to increased disposable income for households.

“The tariff has been reduced and it means that we will see the cost of goods produced being affordable. The 1.6% reduction is equivalent of 40 billion shillings. It is something good. Whenever we announce a reduction in tariff, it means we have lost money in a good way but we will see many people use electricity. We want to move away from using charcoal to using electricity,” explains the Minister of Energy and Mineral Development, Ruth Nankabirwa.

“E-cooking is something we must do as we are mandated by the world to move away from cooking using firewood to clean cooking. This reduction in tariffs is helping us move towards achieving that,” she adds.

Government has prioritized lowering costs to make Uganda’s products competitive in the domestic and export markets. First among those costs is the price of electricity, which according to Nanakabirwa, the effort to reduce the end-user electricity tariff remains a key aspiration of government as an enabler of industrialization for social and economic transformation.

It is noteworthy that first among the 2021 strategic guidelines and directives issued to Ministers as the blueprint for the implementation of the NRM Manifest 2021 -2026, was the directive to the Minister of Energy and Mineral Development to reduce the cost of power, particularly for manufacturers to 5 cents of US$ (USh185) per unit from the then 8.7 cents of US$ (USh321) per unit.

Further, President Museveni directed that the manufacturing sector should be supported to buy electricity directly from government power plants since the power of Kiira and Nalubaale hydro power plants is at 1.1 cents per US$ per unit.

The power of Isimba hydro power plant is at 4.16 cents US$ per unit. The one of Karuma will be at 4.97 cents US$ per unit.

“This directive is anchored in the Government’s commitment to reduce the cost of electricity to manufacturing and spur economic development,” Nankabirwa said.

What ERA Considered to Determine The New Electricity Tariffs

In the determination of the Electricity Tariffs for 2024, ERA considered a number of assumptions including: expected commissioning the country’s largest hydro power plant, Karuma which will increase Uganda’s generation capacity to nearly 2000 megawatts, ongoing preparatory activities to ensure smooth transition of the distribution network to the new operator at the end of the Umeme Limited concession in March 2025; provision of reasonable and justified Capital requirements for investments in the electricity supply network across the Value chain of; Generation, Transmission, Distribution, Sale, Export and Import; Provision for Operational, Maintenance and investments requirements to enable smooth Operation of the Nalubaale and Kiira Hydro Power plant Complex by the State-Owned Company; the Uganda Electricity Generation Company limited.

Others include; Provision for cost requirements to facilitate the transition of the main distribution concession from Umeme Limited to the Uganda Electricity Distribution Company limited (UEDCL), and ensure continuity of electricity Supply after March 2025; the depreciation of  Uganda Shilling against the United States Dollar from Ush/USD 3,719.00 used in the determination of the Retail Tariffs for the Fourth Quarter of 2023 to Ush/USD 3,816.25 as at 30th November 2023 as published by the Bank of Uganda representing a depreciation of 2.6%.

Furthermore, electricity demand is expected to grow at an annual rate of approximately 9.53% in 2024; the continuation of implementation of the measures to reduce the Electricity End-User Tariffs for Manufacturers pegged on pre-determined demand growth targets for the year 2024 as approved in February 2023.

The 2040 Ambition of  52,000MW Generation Capacity

Uganda’s energy policy for 2023 aims to achieve the electricity generation capacity target of 52,481MW by 2040 with a grid access rate of 80%.

Although this sounds skeptical in the ears of many Ugandans, Nankabirwa is optimistic that the ambition is achievable.

“To achieve this ambition, we will need to address the sub-sector holistically, not piecemeal. We will need to strengthen electricity generation, transmission, and distribution infrastructure while remaining alive to affordability and environmental concerns,” she said.

She, however, adds that by now, Uganda should be in the initial stages of developing another large hydro plant after Karuma because of the suppressed demand that is being unlocked with investments in transmission and distribution infrastructure.

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