What is the challenge?

There is a looming power-supply shortage for the Ugandan national power grid. Demand on the national grid is likely to start out-stripping supply by 2014/15. As a result of power and fuel supply shortages between 2006-2008, Uganda saw its GDP growth reduced from 6-6.5 % to 4.5 %, costing the economy hundreds of millions of dollars. Unless new renewable power sources are brought online, the sector will again face load-shedding or become reliant upon expensive thermal generation. According to Multiconsult|Norplan (July, 2013), this supply-demand gap is expected to start modestly in 2014/15 and grow steadily until the commissioning of the larger hydropower plants including Muzizi (46MW), Isimba (183MW) and Karuma (600MW). Even if these plants are commissioned on time, thermal plant generation will put a high cost on the system unless new sources are developed. According to ERA (January 2015), the supply-demand gap is in fact already emerging. While the thermal capacity available to the Ugandan grid is still sufficient as to meet the current peak demand and avoid considerable load shedding, the utilization of these capacities represents high costs. ERA expects a significant increase in demand also throughout 2015/16. Hence, ERA strongly confirms that the GET FiT  portfolio of small renewable energy projects is critical in order to avoid increased use of thermal power generation and eventually more frequent load shedding due to supply shortage. 
 
While the Ugandan power sector has undergone considerable reform over the past decade, several challenges remain in terms of attracting investments particularly in small renewables:
 
Patchy enabling environment for investment in small renewables. Uganda was ranked 132 out of 189 in the World Bank’s Doing Business index (2014), indicating an up-hill battle for a Government and energy sector eagerly seeking foreign investment. Despite significant potential, especially in small hydropower and biomass, developers and investors have expressed significant frustration in terms of ensuring predictability, consistency and transparency in bringing their projects from concept to profitable investment.
 
Insufficient incentives to encourage investment in small renewables. While ERA has introduced (2007) a Renewable Energy Policy and a multi-generation type REFiT policy for promoting small-scale renewables, the proposed tariff levels have been widely viewed by investors as insufficient to unlock investments in the sector. These relatively low tariff levels combined with uncertain and often prolonged development processes have provided inadequate financial incentives especially for early-stage equity investment towards project development. 
 
High demands on GoU as a counterpart in the timely realization of small renewables. The demands and expectations placed on public authorities in light of private investment in renewables, especially those that are part of project non-recourse financing, is considerable. There are high demands especially from financial investors in terms of predictable policies and actions, transparency, responsiveness, analytical capabilities, coherent negotiations and ultimately guarantee backup for payments and defaults. Like for most countries in the region, Ugandan authorities are in a constant process to meet these expectations and generally require international expertise to complement their efforts.
 
Promoting renewables while minimizing public/end-user financial burden.  The Government of Uganda and ERA are committed to full cost reflectiveness in the energy sector. However, balancing actual costs and the ability of Ugandan consumers to pay for their power is one of the key challenges faced by the sector. With an average of about EURc 15 per kWh Ugandan consumers are already paying a high price for power, also in comparison with neighboring countries. Supporting investments in renewables has long term financial impact and while there is a clear economic incentive to promote small renewable generation with its relatively short lead times, ERA must take a closely considered and balanced approach to ensure an efficient level of support. The relatively weak enabling environment and perceived risk levels make the achievement of this balance particularly challenging for a regulator.