Investing in the electricity sector in Uganda

Publication | February 2015

01 | What is the generation mix in Uganda?

Uganda has an installed capacity of 810MW and peak demand of 509.4MW according to its electricity regulator, the Electricity Regulatory Authority (ERA). The installed capacity is dominated by hydropower (approximately 80 per cent) and supported by heavy fuel oil and biomass cogeneration power plants. As with other Sub-Saharan African countries relying predominantly on hydropower, erratic rainfall and droughts have affected the electricity supply in recent years and led to load shedding. Currently with increased capacity and existence of two 50MW heavy fuel oil (HFO) powered plants, the incidence of load shedding due to shortage in supply is now close to zero. Only around 12 per cent of the population have access to electricity and, aside from electricity, over 90 per cent of energy consumption is biomass; principally firewood or charcoal.

Uganda’s largest hydropower project is the 250MW Bujagali hydropower project which was commissioned in 2012, almost doubling Uganda’s then installed capacity. This is a public private partnership between Government of Uganda (GoU), Blackstone Portfolio Company, Sithe Global Power and the Aga Khan Fund for Economic Development. It is a Build Own Operate Transfer project under a 30 year PPA and the construction included a 100km 220kV high voltage transmission line.

Aside from Bujagali, other substantial independent power projects are the 18MW Mpanga run of the river hydropower project owned by SAEMS, and the 13MW Bugoye run of the river hydropower project owned by TronderEnergi and Norfund, 6MW Ishaha and 9MW Buseruka. Further substantial hydro projects are in the pipeline with the 600MW Karuma and 183MW Isimba projects expected to be commissioned in 2018. These are being constructed by Sinohydro and China International Water and Electric Corp respectively, with 85 per cent of capital costs being funded by a sovereign loan provided by China Exim Bank to the GoU.

To further the increase in power generation capacity, the government of Uganda is promoting the development of the following small hydropower projects – Kikagati 16MW, Mitano 2.9MW, Lubilia 4MW, Nyagak III 4.5MW, Siti 1 & 2 21.5MW, Waki 5.4MW, Rwimi 10.4MW, Nyamwamba 9.2MW, Nengo Bridge 6.5MW and Muzizi 46MW. Some of these projects are being developed under Uganda’s GET FiT regime and indeed Uganda has been ranked tenth out of 55 emerging jurisdictions by Bloomberg in a global survey on investment climate and policies for clean energy and investments.

02 | What is the structure of Uganda’s electricity sector?

The GoU, acting through the Ministry of Energy and Mineral Development (MEMD), implemented a Power Sector Reform and Privatisation Policy, resulting in a liberalisation of Uganda’s power sector which is now relatively advanced. The state-owned Uganda Electricity Board was unbundled in 2001 into the Uganda Electricity Generation Company Limited (UEGCL), the Uganda Electricity Transmission Company Limited (UETCL) and the Uganda Electricity Distribution Company Limited (UEDCL). The unbundling also created a regulatory authority, the Electricity Regulatory Authority (ERA) overseeing the sector.

UEGCL is responsible for power generation and its sale within Uganda or export via interconnectors. It currently owns the 180MW Nalubaale hydropower station and the neighbouring 200MW Kiira hydropower station, although these have been operated and maintained by Eskom Uganda Limited since 2003 pursuant to a 20 year concession agreement. UEGCL is also the implementing agency of the GoU for the Karuma, Isimba, Muzizi and Nyagak III projects.

In 2004 the 33kV distribution assets of UEDCL were transferred under concession to a consortium of Globeleq (56 per cent) and Eskom (44 per cent) pursuant to a 20 year concession agreement. Globeleq and Eskom incorporated a project company for this purpose named Umeme Limited. Umeme Limited is the largest distribution company in Uganda, and is listed on both the Kampala and Nairobi stock exchanges. More recently in May 2014, Actis sold a substantial amount of its shareholding in a secondary offer on each stock exchange, with the US$85.5 million raised used to benefit from lower borrowing costs and fund a five year investment programme to strengthen its distribution network in preparation for new IPPs anticipated to come online. Investec is now the largest shareholder in Umeme with 18.5 per cent of the issued share capital, and each of Actis and the National Social Security Fund of Uganda hold 14.3 per cent.

UETCL is a public limited company owned by the Ministry of Finance, Planning and Economic Development, and remains the single operator of the transmission system and is the counterparty to power purchase agreements (immediately on-selling the power to the distribution network company). It has an operational mandate divided into single buyer business and transmission system operator, and therefore undertakes bulk power purchases and sales, import and export of energy, operation of the high voltage transmission system and the role of national system operator. Since the establishment of UETCL, 150km of 220kV transmission lines and 1441km of 132kV transmission lines have also been added to the national grid. UETCL maintains and operates 16 substations ranging from 66kV to 220kV substations. A number of old 132 kV lines are being reconducted to improve the reliability and quality of supply in certain areas of the country.

The unbundling of the electricity sector has also resulted in the establishment of the Rural Electrification Agency and Board under the MEMD. The GoU plans to achieve a rural electrification rate of at least 26 per cent by 2022 from one per cent at the beginning of the decade.

03 | What is GET FiT?

GET FiT has been highlighted as one of the most wellregarded and successful renewables feed-in-tariff regimes outside of South Africa. It was established in January 2010 by Deutsche Bank Climate Change Advisers, having been asked by The Advisory Group on Energy and Climate Change of the Secretary General of the United Nations to present new concepts for promoting renewable energy investments in developing countries.

The GET FiT regime is structured on the basis of the Uganda public sector establishing a renewable energy feed-in-tariff regime involving a fixed tariff across technology types and priority treatment for renewable energy. This has then been enhanced by public sector development partners (including Germany, the United Kingdom and Norway) providing financial support by way of a Premium Payment Mechanism (PPM) which is implemented by the German development bank KfW. The PPM is payable to the project company on top of the fixed tariff amount. The PPM enhances the viability of the project for the sponsors whilst ensuring that the tariff is affordable for UETCL. In order to avoid particular projects benefitting excessively from the PPM, each technology type has a capacity factor above which no premium payments can be received. In addition, there is a partial risk guarantee provided by the World Bank and a Private Financing Mechanism set out by Deutsche Bank to offer debt and equity at competitive rates.

Under GET FiT the project company would sign a 20 year power purchase agreement (PPA) with UETCL and an implementation agreement with the GoU, acting through MEMD. The payment of the PPM is split, with 50 per cent payable upon the commercial operations date of the project, and the remainder disbursed alongside the PPA against energy delivered, but limited to a five year period and by the capacity factor cap.

Small-scale developers with projects in advanced planning status (i.e. which have carried out feasibility studies), which have obtained a valid developing permit from the ERA under Article 30 of the Electricity Act and are in compliance with the 2012 IFC Performance Standards may apply for PPM via a competitive request for proposal and evaluation process.

Under the GET FiT program the government has been fast tracking the development of a portfolio of 15 small scale renewable energy generation projects ( between 1-20MW) promoted by private developers with a total installed capacity of about 125MW. This has been done under phases 1 and 2, each consisting of a portfolio hydropower, biomass and bagasse power projects, and so far 12 projects representing 103MW have been approved. A third and final request for proposals under the PPM was launched on 10 November 2014 and 18 hydropower developers applied in January 2015.

In 2014, the solar photovoltaic part of GET FiT was launched, involving a reverse auction process similar to South Africa’s renewable energy procurement programme for an aggregate installed capacity of 20–50MW. Concessions were awarded to the cheapest eligible bidders following due diligence on the respective bids.

In respect of Uganda being a potential wind resource, GoU data has stated that wind energy is sufficient for smallscale power generation, with wind speeds in the Kabale, Ntungamo, Kisoro mountainous areas bordering Rwanda and the area around Mount Elgon reportedly averaging up to four metres per second. A study is also currently being carried out for large scale establishment of wind farms in the Karamoja region (which is in the same path as the Turkana region in Kenya).

04 | Is there a geothermal resource in Uganda?

In order to reduce the overdependence on hydropower and increase the energy mix, other sources of energy generation are being planned. Uganda is part of the East African Rift System and geothermal exploration has been ongoing since 1993. There are three main exploration areas – Katwe, Buranga and Kibiro – which are located close to the border between Uganda and the Democratic Republic of Congo. Geothermal resources have been estimated as approximately 450MW.

The GoU has been assisted in capacity building by KenGen and Kenya’s Geothermal Development Company, and has obtained support from the Japan International Cooperation Agency. In order to fast track the process for potential investors in geothermal, the GoU is establishing a separate geothermal resources department, with geothermal issues transferred to this department from the current Geological Survey and Mines Department. This separation replicates the process which is currently happening in Tanzania and highlights a separation required to ensure that geothermal is not unnecessarily overregulated due to being caught between mining and energy departments. As with other East African countries, projects in Uganda are eligible for grants from the Geothermal Risk Mitigation Facility which has been set up by the African Union, the EU Development Fund for Africa and the German Development Agency in cooperation with KfW.

In early 2013 UETCL entered into a PPA with a project company formed by the joint venture of AAE Systems Inc, a US firm, with local investors, in respect of an up to 200MW geothermal power project in the Katwe exploration area. Other overseas investors have also been awarded geothermal licences (with a three year exploration period pursuant to the current Mining Act), but so far these have not advanced into the development stage.

05 | What are the primary statutory instruments for the regulation of the electricity sector and how does the ERA affect power projects?

The electricity sector in Uganda is governed by the Electricity Act 1999, the Energy Policy 2002, the National Environment Act Cap 153, the Renewable Energy Policy 2007 and the statutory instruments and guidelines issued by the ERA.

The ERA is a body corporate established by the Electricity Act 1999, Cap 145, to regulate the generation, transmission, distribution, sale, export and import of electricity in Uganda. It is also responsible for the establishment of a tariff structure at different levels of electricity production, evacuation and final sale to the end users. The ERA approves each PPA entered into by UETCL.

In respect of licensing, the ERA issues licences for generation, transmission, export and import, and bulk supply of electricity. The Electricity Act provides that generation licences may not exceed 40 years, except licences for hydropower plants in excess of 10MW. Where hydropower plants exceed 10MW and are not originally majority owned by GoU, the generation licence will provide for a reversion to GoU of any generation rights, property and installations upon the expiry of the licence. Licences may be granted following a tender or pursuant to an unsolicited application, and the ERA is required to process licences within 180 days of receipt (involving publication of licence applications in a prominent newspaper).

06 | Is governmental support available outside of the GET FiT programme?

Government support in electricity projects is generally derived from government support agreements or implementation agreements.

07 | What foreign investment incentives exist?

The Uganda Investment Authority has published the following incentives:

  • Investment Capital Allowances allowing investors to deduct from their net income a certain percentage of their investment capital.
  • Duty and tax free import of plant and machinery.

08 | What is the scope of a typical Ugandan security package?

In our experience the typical Ugandan law security package has included:

  • legal or equitable mortgage over the land (which, as well as over freehold, can also be granted over leasehold interests in land, including sub-leases)
  • fixed charges over movable assets, account balances, book debts, contractual rights, goodwill and intellectual property rights (which may be drafted and executed by way of debenture)
  • floating charge over the entire undertaking of a project company
  • a pledge of shares in the project company (usually a Ugandan limited liability company).

Generally, security is perfected by registration and payment of the applicable stamp duty. It also important to ensure particularly with registrable security that the security documents are properly executed – improper execution is enough to void otherwise properly registered (and stamped) security. Below is some current guidance on stamp duty:

  • facility agreement (nominal at 5,000 Ugandan shillings)
  • debenture (0.5 per cent)
  • mortgage (0.5 per cent)
  • pledge or pawn agreements (nominal at 5,000 Ugandan shillings)
  • agreement relating to deposit of title deeds (0.5 per cent)
  • transfer of immovable rights (1 per cent).

Registration fees typically range from 22,000 Ugandan shillings to 35,000 Ugandan shillings, depending on the instrument.

09 | Is a foreign governing law of a contract recognised?

Yes. Ugandan law permits parties to elect foreign law as the governing law in commercial agreements subject to certain exceptions some of which are listed below.

10 | Is there reciprocal enforcement of foreign judgements and arbitration awards?

The Ugandan courts recognise and enforce English law judgements on parties domiciled in Uganda via the Reciprocal Enforcement of Judgements Act. To enforce the judgement, it must be registered at the High Court via a court application. The application must be made within 12 months of the initial decision.

Other foreign judgements are also enforceable if they are made in other commonwealth countries and/or have reciprocal enforcement arrangements with Uganda. Where are there is no reciprocal arrangements, a foreign judgement may be registered and enforced on the basis of international law.

The Ugandan courts enforce arbitral awards as Uganda is a signatory to the New York Convention – provided that the legal and registration requirements are met. Enforcing an arbitral award requires the party to make an application to court along with a duly authenticated original arbitral award and the arbitration clause in the relevant contract.

The courts will not enforce a foreign judgement where it, inter alia, (i) contravenes Ugandan law, (ii) seeks to enforce an illegal act, (iii) limits the constitutional right of any citizen or (iv) contradicts public policy. As a general rule of procedure an action to enforce security over immovable property must be instituted (as court of first instance) in the court where the immoveable asset is situated.


Simon Currie

Simon Currie

Steven Gamble

Steven Gamble

Johannesburg Harare
Brian Shonubi

Brian Shonubi

Johannesburg Kampala