Africa Energy Futures: Uganda

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Over the last 5 years, how has the energy mix changed, and what have been the key drivers?

Uganda has four main sources of energy: hydro (82%), thermal (7.8%), co-generation (5.1%) and grid-connected solar (4.7%). Even with an increased focus on renewable energy by the government of Uganda, hydropower continues to command a privileged position as the country’s dominant power source.

The government has set in motion an ambitious target to increase Uganda’s installed capacity from 1274 MW in 2020 to 41,738 MW by 2040. The key objective in this respect is to increase power generation capacity to drive economic development, lower the cost of electricity produced, increase energy efficiency and promote the use of alternative sources of energy.

Due to the need to diversify Uganda’s energy mix and fulfill the country’s climate change commitments, the government’s emphasis will be on renewable forms of energy such as wind, solar and biogas. Nevertheless, it is anticipated that large and mini-hydro will continue to be Uganda’s principal energy supply source in the medium to long-term.

What is the outlook for the energy and natural resources sector in the next 5 years? In particular:

Key policy decisions

Uganda’s 2007 Renewable Energy Policy sets out to make modern renewable energy a substantial part of the energy mix. The overall policy goal is to increase its use to over 60% between 2020-2025.

To promote the development and use of renewable energy sources, the government has developed the renewable energy feed-in-tariff as an instrument for promoting private sector power generation from renewable sources. The feed-in-tariff is designed to provide price certainty to renewable energy producers. Depending on the phase, the tariff covers a number of technologies and is attractive because it is based on the levelized cost of each technology, and not the incremental cost of generating or purchasing power.

The sector regulator, the Electricity Regulatory Authority, also issued a regulatory notice in 2020 stating that the licensing of new generation capacity from wind and solar technology will be subject to a competitive tendering process. This competitive procurement initiative is designed to ensure reasonable and fair pricing of solar and wind power, as well as harness the various technical benefits of modular technologies (system loss reduction and voltage stability).

Main policy challenges

In 2019, the government issued a policy directive which (i) capped the tariff for new projects at USD8 cents per kilowatt hour and (ii) placed a blanket prohibition on take-or-pay clauses in power purchase agreements entered into by the sole off-taker, the Uganda Electricity Transmission Company (Uganda has a single-buyer model for power supplied to the national grid). This policy was passed to control the economic burden that was being placed on the treasury as a result of, among other factors, electricity over-supply and the effects of an underdeveloped transmission and distribution infrastructure.

This policy directive may prove to be a significant commercial disincentive as it will affect what private investors consider to be a competitive internal rate of return. In addition, the lack of take-or-pay assurance in power purchase agreements will have a considerably adverse effect on the ability of sponsors to secure limited recourse financing for projects.

The anticipated role that renewables and/or new technologies will play

Uganda is richly endowed with a variety of renewable energy resources which include woody and non-woody biomass, solar, wind, geothermal and hydrological resources. The exploitation of renewable energy sources will reduce the destruction of valuable ecological resources, attract foreign direct investment (leading to job creation) and diversify Uganda’s energy mix.

What are the key investment opportunities in the energy and natural resources sectors over the next 5 to 10 years?

The government of Uganda’s policy objective is to meet the energy needs of the population in an environmentally sustainable manner. The key interventions that have been earmarked for the medium-term include the further development of generation, transmission and distribution capacity, and promoting renewable energy.

The transmission and distribution functions are currently subject to structural monopolies, but the sector regulator is assessing the possibility of opening up these spaces to unrestricted private sector investment. Renewable energy generation projects will continue to attract private investment, but the tariff level and take-or-pay assurance remain a key viability concern for investors.

Rural electrification remains one of the government’s foremost objectives and there is increasing private sector interest in off-grid electricity supply.

With regard to fossil fuels/conventional energy, the government has earmarked the exploitation of Uganda’s minerals and oil and gas endowments as a major source of growth in the medium term. The government expects that the commercialization of the country’s large oil reserves will generate investments of between USD15–20 billion between 2021 to 2026. Commercial production is expected to commence before 2025, and there will be investment opportunities in the upstream, midstream and downstream value chains.

With particular focus on sustainability, and on reducing carbon emissions, how will the energy and natural resources landscape change over the next 5 to 10 years?

Uganda ratified the Paris Agreement (an agreement within the United Nations Framework Convention on Climate Change) on 21 September 2016. In line with this global commitment, Uganda’s Nationally Determined Contribution Support Program seeks to help the country reduce greenhouse gas emissions in forestry and wetlands, energy, transport and agriculture sectors. It is projected that this program will catalyze investment towards realizing Uganda’s commitment to a 22% reduction in greenhouse gas emissions by 2030. In 2018, Uganda became the first country in Africa to sign the United Nations Development Program Development Partnership Plan for Nationally Determined Contributions.

While this aspiration is commendable, it is not anticipated that Uganda’s energy and natural resources landscape will change significantly, if at all, in the medium to long term. The pace of exploitation of renewable energy sources is not expected to grow exponentially, while the commercialization of the country’s oil and gas reserves will lead to an increase in direct and indirect greenhouse gas emissions.

DLA Piper Africa is a Swiss verein whose members are comprised of independent law firms in Africa working with DLA Piper.