Feed in Tariff (FiT) Policy Supports Renewable Energy Development in Uganda

Reviewed by Timothy Byakola, CDI / INFORSE East Africa, Uganda.

Background and Context:

Until May 2005, Uganda’s main source of power was from the Nalubaale and Kiira 380MW hydropower dam complex at the mouth of Lake Victoria. The effective generation capacity of the complex was about 230 MW. However, this favourable situation changed drastically as Lake Victoria water levels dropped to lowest levels since 1951. The poor hydrological conditions have led to a substantial decrease in hydropower output from about 230MW in 2005 to a low of 138 MW in 2010.
In spite of the decline in generation, demand for electricity continued to grow widening the gap between supply and demand. In 2006, peak demand reached 380 MW resulting into persistent rolling blackouts at peak of 80-120MW. The shortfall in electricity supply has been met through a combination of measures involving procurement of emergency diesel and heavy fuel generators, promotion of energy efficiency and renewable energy.

The enactment of the Renewable Energy Policy in 2007 marked a major milestone in the drive to promote renewable energy. The policy envisages an increasing share of renewable energy from 4% to 62% by 2017. In addition to generation from mini-hydros, sugar companies have demonstrated potential to step up generation from bagasse and sell surplus power to the grid. It is now expected that by 2013, sugar companies will be selling up to 50 MW to the grid equivalent to 20% of total electricity supply from the grid.

The Electricity Regulatory Authority in 2007 announced feed-in tariffs (FiT) for hydro power plants of less than 20 MW and the Bagasse based cogeneration. The feed-in tariffs were for a 3-year period (2007-2009). A well designed feed-in tariff policy and clear feed-in tariff guidelines have proved an effective instrument in promoting cogeneration particularly in the sugar sector.

Different players

1. Uganda – Electricity Regulatory Authority – Policy Framework

The Electricity Regulatory Authority (ERA) is responsible for receiving and processing applications and issuing permits and licences for generation, transmission, distribution or sale of electricity and prescribing conditions and terms of licences, including prices.

Uganda enacted a new electricity act in 1999 which provided for the unbundling of the vertically integrated government owned utility into separate businesses for generation, transmission and distribution. Under this arrangement, the role of government remained in policy making while the role of licensing and tariff setting was transferred to an independent regulator. Under the Electricity Act, the regulator is supposed to carry out its function in an independent and transparent manner. Electricity tariffs should be set at levels that recover all the reasonable costs incurred by licensees including a reasonable rate of return. The Electricity Act also provides for a single buyer form of market structure.

This arrangement has created market certainty, reduced the risks of low and politically driven tariffs thus attracting independent power producers (IPPs) in generation. The single buyer model type of market structure guarantees a market to the generators for the electricity that is produced. A standardized power purchase agreement has also been developed for renewable energy projects. In addition, Uganda has enjoyed a stable and predictable regulatory environment.

2. Private Sector in Cogeneration

· Kakira Sugar Works Ltd ( KSWL)

In April 2001, KSWL submitted a downsized plan to Ministry of Energy and Mineral Development to supply 7 MW of electricity to the grid on a 24 hour basis. Based on the demand-supply forecasts and the planned construction of Bujagali, Government was only willing to commit to a Power Purchase Agreement (PPA) for peak hours only. Given that the sector was already unbundled at this time, KSWL entered into a tripartite contract with Uganda Electricity Distribution Company Ltd (UEDCL) and Uganda Electricity Transmission Company Ltd (UETCL). The PPA was subsequently signed between UETCL and KSWL in 2003 with an energy purchase price of US$0.049/kWh. In 2007, KSWL and UETCL signed a second PPA to export 12 MW to the grid at a tariff of US$0.0615/kWh. It is important to note that KSWL had obtained a Global Environment Facility Grant of US$3.3 million and a loan of US$ 8 million from the Energy for Rural Transformation Refinance Facility which was used to finance part of the project costs. KSWL has been pushing for a higher tariff of US$0.11/kWh which is closer to the avoided cost of electricity supply and government in May 2010 issued a directive to increase the price for bagasse cogeneration to US$0.08/kWh.

· Kinyara Sugar Works Ltd

Kinyara Sugar Works submitted a notice of intended application for generation of 7.5 MW for own use and sale to the grid in 2006. The company was awarded a generation and sale license in 2007. The company is currently supplying up to 2 MW in an islanded mode due to interconnection problems. The existing distribution line which is operated by Umeme Ltd is experiencing low voltage problems. The Uganda Electricity Distribution Co. Ltd, which owns the distribution assets, has provided funding for the purchase and installation of capacitor banks in order to solve the low voltage problem in the grid and activate under frequency protection on some key circuit breakers in the network for load shedding when Kinyara is overloaded.

Kinyara has also finalized a feasibility study to increase generation from 9.5 MW to 30 MW and will be able to export 22 MW to the grid in the next two years. This however requires the upgrade of the transmission line to 132 KV. The company has also asked for a tariff of US$0.1/kWh up from the current tariff of US$0.07/kWh.

3. Other Small Hydropower Projects

Site District MW Status
1. Mobuku 3 Kasese 10 Kasese Cobalt Corporation Limited
2. Mobuku 1 Kasese 5.4 Kilembe Mines Limited
3. Kuluva Moyo 0.12 Kuluva Hospital
4. Kagando Kasese 0.06 Kagando Hospital
5. Kisizi Rukungiri 0.06 Kisizi Hospital

Benefits and Impacts:

· This Fit policy is proving a powerful instrument for promoting low carbon renewable energy development in Uganda. The policy has contributed to giving renewable energy investors a guarantee for a reasonable rate of return on their investment and hence positively contributing to energy supply security in Uganda.

· The major global environmental benefit associated with this policy is contributing to a reduction of green house gas (ghg) emissions by supporting private sector participation in renewable energy expansion in Uganda.

Recommendations:

Uganda’s experience shows that a Feed in Tariff policy can be a useful incentive in driving private sector investment in renewable energy investment. A predictable regulatory feed in tariff regime has ensured that new entrants are guaranteed of a market for their power to the national grid. But it’s also vital that a Fit policy is supported by favourable long term financing models.

More information:

http://www.inforse.org/africa
http://www.inforse.dk/africa/CDI.htm

Renewable Energy Feed - in -Tariffs (2011-2014) up to a maximum capacity of twenty megawatts (20MW) Link on ERA’s web site: http://www.era.or.ug/FeedInTariffs.php

Uganda Renewable Energy Feed-in Tariff (REFIT), Phase 2, Approved Guidelines for 2011-2012. Link on ERA’s website here.

Uganda Launches Sophisticated Feed-in Tariff Program, By Paul Gipe, Contributor, 20 January 2011. Link on Renewable Energy World’s webite.