Reality Check: Powering Uganda's TransformationCENTRE FOR DEVELOPMENT ALTERNATIVES | KONRAD-ADENAUER-STIFTUNG UGANDA & SOUTH SUDAN

This study explores the relationship between energy and economic transformation in Uganda.

Commissioned by the Konrad-Adenauer-Stiftung and carried out by the Centre for Development Alternatives, it forms the tenth edition of the Reality Check publication series.

It examines to what extent Uganda’s energy system currently drives or hinders economic transformation, identifies the greatest constraints hindering the energy system from being a driver of transformation, and explores opportunities for progress in that regard. In doing so, this study aims to contribute to fostering a richer public discourse on energy in Uganda.

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Analytical Framework

  • GOAL: Economic transformation requires an inclusive, sustainable and resilient energy system that drives productivity throughout the economy.
  • PATHWAY: What will economic transformation look like in Uganda? What does the energy system need to achieve in Uganda in order to drive that transformation?
  • STATUS: How does the current energy system score against criteria derived from the above goal?
  • CONSTRAINTS: What are the binding constraints holding Uganda’s energy back from effectively driving economic transformation?
  • OPPORTUNITIES: What opportunities exist to overcome these binding constraints?

Study Methodology

  • Reviewed quantitative and qualitative data from 70+ sources 
  • Interviewed 20+ energy sector stakeholders
  • Participated at Future Energy Uganda 2017 Conference
  • Validated initial findings with donor energy sector working group 

The Government of Uganda has expressed its commitment towards transforming the country from an agrarian low-income country to a modern upper middle-income status country by 2040, thereby lifting the vast majority of households out of poverty, giving them the purchasing power to buy more modern energy, among other things.

Such a transition will require a fundamental transformation of the economy, whereby a substantial part of the labour force moves from low productivity into modern, high productivity sectors and activities.

Energy is one of the fundamental building blocks of such an economic transformation. All economic activity requires energy; high productivity sectors require more, more reliable and more modern forms of energy. Energy access is not an end in itself. Its benefits extend to all areas of society such as agriculture, commercial activities, health, women economic empowerment, education and welfare for displaced persons. For energy to foster economic growth, its use and benefits will need to be explored independently for each of these sectors.

Defining Economic Transformation

Economic Transformation: Shift of labour and other inputs from low to high productivity activities and sectors

Inclusive Economic Transformation: 

  • Chances to benefit shared broadly among the population
  • Decent and productive employment
  • Wealth distribution
  • Social safety nets

Uganda is growing quickly but transforming slowly

Uganda’s economy shifted rapidly during the 1990s, with output shifting from agriculture to services, and to industry to a lesser degree. However, this was not due to, nor accompanied by, a similar shift in labour.

The services sector has driven growth in Uganda’s economy in the past two decades, with uneven productivity growth concentrated in high-skill sub-sectors.

Uganda is poised for economic transformation

SME growth in high potential labour-intensive sectors

The movement of labour from low to high productivity sectors and activities in Uganda is likely to be driven principally by SMEs in high growth potential industry and services sectors.

Productivity growth in household enterprises

However, household enterprises – mostly informal family businesses – will continue to employ most labour in Uganda in the next two decades. Therefore, raising the productivity of household enterprises will be key to driving economic transformation in Uganda.

Energy for Economic Transformation

  • Energy is inextricably tied to economic growth and transformation
  • Energy is an essential factor of economic production
  • Throughout history, advances in energy have unlocked human productivity

Energy is a driver of economic transformation. Energy powers all economic activity, from industrial machinery, irrigation and mechanised tillage to cooking, transportation, and digital devices. Higher productivity allows an economy to specialise and diversify by expanding the range of products and services it produces.

Energy is also a shaper of economic transformation. How we produce, use and distribute energy bears important economic, social and environmental consequences.

Energy for Economic Transformation in Uganda

Uganda’s projected patterns of economic transformation have important implications for Uganda’s energy system.

Uganda's Energy Sector

87% of the total primary energy consumption in Uganda is generated through biomass; electricity accounts for just 2% of the national energy balance.

Households are by far the biggest consumer of energy. However, hidden in this statistic is the fact that most businesses are informal micro-enterprises that are not easily distinguishable from households.

energy sector overview

Assessing Uganda's Energy Sector

The following framework of criteria was applied in this study to assess the energy system and its ability to drive economic transformation:

  • INCLUSIVE: enables all firms, from microenterprises to large industries, in all parts of the country, and in all key sectors, to become more productive and grow
  • RESILIENT: able to withstand or recover quickly from shocks that threaten its progress or sustenance
  • SUSTAINABLE: as environmentally sustainable as possible

The study identified six binding constraints in Uganda’s energy sector. It then surveyed several opportunities that are being explored by various stakeholders to overcome these binding constraints.

Constraint 1: Electricity Reliability

Despite significant reductions in power outages after the operationalisation of Bujagali Dam which all but eliminated load-shedding, the reliability of electricity continues to be a severe constraint on firm productivity.

Outages and fluctuations due to technical weaknesses in the power transmission and distribution system frequently damage machinery and raw materials and lead to lost time and money.

This hampers the competitiveness and growth prospects of Uganda’s industrial sector.

Constraint 2: Unequal Electricity Access

The electricity distribution network does not evenly serve the national territory.

It is clear that a large number of microenterprises currently operate without a grid connection, and likely that more microenterprises and SMEs would exist in peripheral areas if power was accessible.

Distribution and transmission systems are now lagging behind generation. In parallel to the difficulty to access the grid for many businesses in Uganda, the supply of off-grid technologies for productive use remains limited.

Constraint 3: Electricity Affordability

Uganda’s electricity tariffs have been rising faster than inflation for decades … but are not significantly higher than in other Sub-Saharan African countries.

This especially hurts power-intensive sectors such as heavy manufacturing and cold storage. The addition of new dams won’t be enough to significantly and sustainably reduce tariffs.

Opportunities

  • Expand access through off-grid solutions 

    • 1. Off-grid solar electricity can power irrigation, agro-processing, cold storage and more
    • 2. Strong public-private partnerships, pico-solar solutions, solar home systems and microgrid solutions could all be implemented to radically increase energy access for UG’s small enterprises in peripheral areas

  • Reduce cost through electricity efficiency 

    • 1. Support for firms in financing electricity-efficient machinery
    • 2. Energy audits to raise awareness of electricity-efficiency practices and the confidence to invest in electricity efficiency improvements

  • Spur demand through targeted large-scale investments 

    • 1. 22 designated industrial parks as an opportunity to target high quality high reliability power to high potential and energy-intensive industrial sectors 
    • 2. Standard Gauge Railway, Kampala Light Rail, Phosphate Fertilizer Factory which would all consume large amounts of energy
    • 3. Secondary towns as urban growth centres could spur power demand through the aggregation of production and alleviation of regional inequality 

  • Refinance generation projects

    • Decreasing the debt-servicing burden for repayment of larger power generation projects such as the Bujagali dam could reduce tariffs in the short- to medium-run

  • Targeted electricity subsidies

    • Targeting tariff subsidies could lower the cost of power for those firms who are most dependent on cheap electricity without excessively burdening the government budget

  • Prioritise transmission & distribution

    • 1. Expanded networks would mean grid electricity reaches more businesses and peripheral areas, reducing regional inequalities in electricity access;
    • 2. Higher quality networks would improve reliability by reducing technical faults;
    • 3. Affordability would be improved through (i) further reaching transmission lines reducing losses in distribution by enabling shorter distribution lines and (ii) expanding customer base which would enable the same revenue to be collected through lower tariffs

Constraint 4: Over-reliance on depleting forest reserves

Uganda’s economy is overly reliant on woodfuel and charcoal. Deforestation will soon render wood-based fuels an unsustainable source of energy for productive use.

Opportunities

  • Increase efficiency of biomass production 

    • Stronger regulation, coordination and private investment in the production of charcoal and firewood products for commercial customers.

  • Increase efficiency of biomass conversion for productive use 

    • Reduce losses in production of charcoal, briquettes and other carriers

  • Switch to alternative fuels for process heating and cooking by firms and households 

    • Assumptions are that agricultural and municipal waste combined could produce enough briquettes to replace 6% of the country’s total wood consumption and up to 50% of the charcoal trade. However, practical limitations such as seasonal variations, competing uses and collection significantly lower the amount of raw material available for commercial opportunities.

  • Replenish forest reserves  

    • Concerted efforts to replenish forest reserves could increase sustainability of firewood consumption.
    • This will require promoting intensified, concerted and sustained forest restoration efforts, encouraging agroforestry, and a stronger enabling environment for forestry management to ensure the conservation of existing forests. Stricter forest protection and logging regulations would slow down the unsustainable depletion of forest reserves. Dedicated woodlots at high consumption industries could present a win-win case, securing industries’ firewood supply in a sustainable manner.

Constraint 5: Urban air pollution and greenhouse gas emissions

Kampala is already one of the African cities with the worst air quality in many parts of the urban metropolitan area. Air pollution, induced mainly by the growing number of petrol and diesel vehicles, is a growing health hazard. With the growth of a middle class that can afford to buy vehicles and the rapid pace of urbanization, transport is one of the main drivers for air pollution.

Opportunities

  • Alternative transport fuels 

    •  Technological advances in energy storage are making electric cars competitive in advanced economies and could eventually lead to broad based adoption

  • Transport energy efficiency 

    • The development of mass transit systems such as the Kampala Light Rail and Bus Rapid Transit could make transport energy drastically more efficient in Kampala

  • Vehicle emissions regulations 

    • Regulations in regards to aging vehicles whose combustion is incomplete could reduce their effect on pollution and greenhouse gas emissions

Constraint 6: Vulnerability to petrol price and supply shocks

Uganda is dependent on a single import route from Mombasa for 90% of its petroleum products, making it vulnerable to supply shocks. Ordinarily, fuel is transported from Mombasa through a pipeline to Eldoret and Kisumu from where it is supplied by road to Kampala and other Ugandan cities. This route that has proven prone to supply chain bottlenecks, causing fuel shortages and price shocks in Uganda.

Opportunities

  • Import route diversification

    • Developing an oil import route through Tanzania would enhance the energy sector’s resilience by reducing Uganda’s dependence on petroleum product imports from a single route through Kenya

  • Refinery

    • Although an oil refinery in Uganda probably wouldn’t reduce the price of petroleum products,  a locally produced supply of petroleum products would massively reduce or eliminate Uganda’s dependence on oil imports

Further Research

In the analysis of the current status of Uganda’s energy system, it became clear that there is a dearth of data, which impedes rigorous analysis and, consequently, evidence-based planning and prioritisation.

Therefore, the following further research is needed:

  • Assessment for which firms energy is a binding constraint and how
  • More reliable and time-series data on firm productivity
  • Electricity: Systematic data on percentage of firms connected to grid, regional variation in power outages, frequency of power fluctuations.
  • Biomass: Data on availability and cost of biomass carriers for firms
  • Petroleum: Data on variability in availability, quality and cost of petroleum products across the country

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