The take-or-pay model - a concept that allows a generator of electricity to be paid regardless of whether the electricity has been evacuated onto the grid or not - has come under heavy criticism in light of the huge amounts of money that the country is paying for the available power that has been generated but not consumed, otherwise known as 'deemed energy'.
Patrick Tutembe, the chief economist, Pricing, at the
President
In his speech during Labour Day celebrations in 2021, he lashed out at
Museveni complained: "The power for industrial parks will go straight from the generation point to the industries and not through
For more than a decade, international power project developers have demanded that for any investment they intend to make, the contract has to be drafted with a take-or-pay clause in it. This way the investors are always assured that they would recover their investment from the electricity sales.
Projects such as the 250MW Bujagali hydropower project, currently the largest power plant in the country, is run under a take-or-pay model. The take-or-pay model shields such investors like Bujagali from risks arising from disruptions within the transmission segment, whose operation is out of their control.
However, more than a decade after the take-or-pay model was introduced,
The amount of money that the government pays investors for power that had not been evacuated from the source appears to have hit a level that has called for new changes.
According to the Auditor General report of 2021, government paid Shs 87.7 billion in deemed energy costs that year for 13 power purchase agreements because the electricity was available but it was not dispatched to consumers for different reasons, especially the constraints in the transmission network.
Now, it seems that government feels that the country's electricity supply industry, and the consumption market have matured enough to offer investors confidence that their investments will be recouped. And, therefore, government feels there might not be a need for take- or-pay contracts in the industry.
Although the idea of doing away with the take-or-pay model had long loomed large in the corridors of the ministry
of Energy, Museveni's insistence of direct supply from the generators to the consumers appeared to have gained traction from that Labour Day speech.
The scrapping of the take-or-pay model is expected to rattle investors, especially in a country such as
To produce just one megawatt of electricity in
Also, that
It is not clear whether the scrapping of the take-or-pay model will work retrospectively, considering there are already running projects with the incentive embedded within their contracts. It is likely that the government will renegotiate the contracts of the current power developers to ensure there is fair competition with the new players that might enter the market.
Government is said to be drafting a legal framework that will guide a new model of investments in the electricity industry, with expectations of it coming into force at the end of March, 2023.
Usually, when a take-or-pay model is done away with, it is replaced with a take-and-pay model. One of the differences between the two concepts is that with the take-and-pay model, the generator of the electricity is not automatically compensated when the electricity is not bought.
However, in the event that the electricity is not bought, the generator can seek legal redress based on the contract signed with the buyer of the electricity.
The electricity generation capacity in
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