Uganda - Energy assessment status report

Joint UNDP/World Bank Energy Sector Management Assistance Program Activity Completion Report No. 020/84 Country: UGANMA Activity: EMERGY MUESMEN STATU$"REPORT AUGUSTy 1984 * * b~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Reixort of the joint UNDP/Woirld Bank Energy Sedwo Managemnent Assitance Program This ~document has aretricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Ban.  I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~, ENEORY SKCTOR MANAGIJ0T ASSISTANCB PROCRAM The Joint UNDP/World Bank, Energy Sector Management Assistance I Program (ESMAP), 'started in April. 1983,, assists coun'tries in implementing the main,,. investment and polic'y recommendations of the Energy Sector Assessmient Reports produced under another Joint UJNDP/World 'Bank program. ESMAP provides staff and consultant assistance in formulatinig and justifying' priority pre-in#estment and investment projects and in providing Imanagement, institutional and p~olicy support. The reports produced -under thisf Program provide governments,t donors and potential investors with the information needed to speed up project preparAtion and implementation. ESMAP activities can be clasilfied broadly`'iatd three groups: Enekgy,,Assessme-qt $tatos Reportst these evaluate achievements in the yeaL' fol.lowing issuance of the origina-t,,-iassessment report and point out where,urgent action i1s stilil!needed; Project Formulation and Justification: work designed to accelerate the preparation and implementation of 'investmenit (rojects; and -Institutional and Policy Support: this work allso frequently leads to the identification of t'echnical assistance packages. impact The Program aims to supplement,, advance and strengthen the mu -aalbl o impat ofbilateral aOn, multilateral resources #1readyavlbl fo technical assiston~e in the energy sector. FUNDINGOF THE PROCRAM The Program is'a major international effort'and, while the core finance has been provided by the UNDe and the World Bank, important financial contributions to the Program have also been made by a numbeir of bilateral agencies. Countries which have ssisow made otr pledged initial contributions to the programs through the UNDP Energy Account, or through other cost-sharing arrangements with UNDP, are the Netherlands, Sweden, Australia, Switzerland, Finland, United iingaomn Denmark,, Norway, antd New Zealand. FURTJBft INWORMATrION For further information on the Program or' to obtain copies of completed ESMAP nreports, which are listed at the end of this dcument,h 'please contact:* Division for Global and OR Energy Assessments Divisioh Interregional Projects Energy Department UnitepoNations Development World Bank Program 1818 H Street, N.W. One United Nations Plaza Washington o D.C. 20433 New York, N.Y. 10017 Wtojects; and ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~' - Institutional and Policy Suport: this work al?so frequentl  i,~~~~~~~~~~~~~~~~~~1 a UGANDA ENERGY ASSESSMENT STATUS REPORT AUGUST 1984 a *  ABBRMAVLTIONS ANI ACRONYMS BOU Bank of Uganda EAC East African Community EAD8 East African Development Bank EARC East African Railways Corporation EEC European Economic Community EPD Economic Analysis antd Projections Department (World Bank) COU Government of Uganda GSMD Geological Survey and Mines Depar.ment IDA Jnternational Development Agency (World Bank) ILO International Labor Organization MOT Ministry of Transport MOW Ministry of Works MPED Ministry of Planning and Economic Development MPPT Ministry of Power, Posts and Telecommunications NRC National Research Council ODA Overseas Development Administration (United Kingdom) UEB Uganda Electricity Board UNDP United Nations Development Program URC Uganda Railways Corporation USAID United States Agency for International Development GWh Gigawatt hour kWh Kilowatt hour MW Megawatt TOE Ton -0 oil equivalenc COWOERSION FACTORS Window I: USh 235 = US$1 (Mid-December, 1983) Window II: USh 300 = US$1 (Mid-December, 1983) Liters per TOE per metric ton metric ton Petroleum Products Premium gasoline 1,360 1.03 Regular gasoline 1,310 1.03 Auto. diesel 1,185 0.995 Kerosene (jet aviation fuel) 1,270 1.01 Fuel oil 1,068 0.956 Industrial diesel 1,175 0.995 LP Gas -- 1.07 m3 per Metric Ton Fuelwood (air-dried) 1.43 Fiscal Year July 1 - June 30  TABLE OF CONTENTS Page I. BACKGROUND ......................................... ... 1 II. RECENT DEVELOPMENTS IN THE ENERGY SECTOR................. 3 III. STATUS OF ENERGY ASSESSMENT RECOMMENDATIONS.............. 6 Petroleum Imports ........ ... .......... 6 Petroleum Exploration Promotion...................... 9 Pricing Policy ....*.*.*.*.*.*....0.0..e.e..................*.*.*.*.*. 10 Power Supply ..... ..... e.. 11 Power Tariffs........................... ........... .. 14 Fuelwood ....................................................... 16 Existing Forest Resources. ............................ 16 Expansion of Woodfuel Plantations .................... 17 Fuelwood Prices............................................ 18 Other Renewable Energy Sources... ...................... 19 Energy Effi ciency.. gg . ... 20 Power ..... * ~~~~~~~~~20 Industry ..... ^ ~~~~~~~20 Irndstory.. .. . ....... ............ ....g. .0g.................... 20 Household ............... 24 Institutional Strengtheningo............o..* ...... ....... 24 IV. ONGOING AND PROPOSED TECHNICAL ASSISTANCE IN THE ENERGY SECTOR. ................. 27 Multilateral Assistance............. ............ . . ..... 27 Bilateral Assistance .e.o........eoo.............c.. ... 27 V. PRIORITIES FOR FURTHEr TECHNICAL ASSISTANCE* ............. 28 Institutional ***ie .......... 29 Preliminary Energy tudit in Industrial Plants..... o..... 30 Energy Efficiency Improvements in Rural Industryo....... 30 Power System Efficiency Study ..*.e*9**o**o............ 31 Petroleum Import Arrangements.......................... 31 Peri-urban Fuelwood Plantations..o...... ........c. 32 ANNES 1. Economic Indicatorso.......o............. ee. eo. ......ecc.... 33 2. Petroleum Imports .......... ................ ........... 34 3. Sales of Petroleum Products......................g.o.o..o 35 4. Power Generation and Cottsumptiono ....... 0*9..00...... ....................... 36 5. Changes in Petroleum Prcduct Prices...................... 37 Fuelwood and Charcoal Prices..........g..o .....o.....ce.. 37 6. Import Parity Prices for Petroleum Productso.g.....oe.... o 38 7a. Border Pricing Formula for Petroleum Products............ 39 7b. Retail Pricing Formula for Petroleum Productso.......... e 40 8. Stockpiles of Petroleum Products.......................... 41 Storage Facilities of Petroleum Products as of First Quarter 1984 .......... ........e . .0......... . 41 9. Net Taxes of Petroleum Products.......................... 42  I O BACKGROUND 1.1 The Ugandan economy suffered a serious decline during the 1970s because of a number of shocks which resulted in a largely run-down economy by the end of the decade. After major reforms in 1981 and 1982 which initiated a period of reconstruction and rehabilitation, the over- all economic performance is recovering again. Annex I gives a brief out- line of economic indicato'-s for the last four years. These indicators show a noticeable improvement in the economy which is expected to con- tinue. Real CDP has registered an average annual growth rate of 6.4% over the last three years; inflatiot; has been reduced to 27% in FY 1983 and is expected to decline further. ExporF values have risen during the last two years, wi,ile imports remained mote or less at the same level. The trade deficit declined from more than US$250 million in 1981 to US$136 million in 1983. The investment ratio as well as the gross national savings as proportions of GDP have increase' over the last few years. Until the budget announcement in June, 1984, Uganda maintained a dual exchange rate. The two windows have now merged and the unified rate, which is currently around USh350/$US, will be determined by weekly auctions. 1.2 As the availability of energy is an important determinant in economic recovery, measures for developing energy supply and managing demand need to be planned and implemented in time to prevent energy Lottlenecks from restraining the economic recovery. In October-November, 1982, a World Bank mission visited Uganda to identify issues and options in the country's energy sector, and in July, 1983, a joint UNDP/World Bank Energy Assessment Report 1/ was issued which outlined the mission's findings and recommendations. The report identified a number of issues which needed to be addressed to enable the energy sector to play a more effective part in the econowtic recovery of Uganda. The main issues were: (a) the high cost of petroleum imports; (b) relatively low effi- ciency in the utilization of petroleum products and woodfuels; (c) dis- tortions in retail prices of petroleum products and shortcomings in the retail pricing formula; (d) unreliability of power supply and high power system losses; (e) shortfall in power generation capacity to meet fore- cast demand beyond the mid-1980s; (f) low level of power tariffs and inappropriate tariff structure; (g) insufficient supply of fuelwood, especially in the Kampala/Entebbe region; (h) inadequate level of stump- age fees; and (i) lack of sectorwide coordination and planning. 1.3 This status report 2/ briefly outlines the significant devel- opments that have occurred in the energy sector since November, 1982, and l/ Uganda: Issues and Options in the Energy Sector, July, 1983. 2/ This report was prepared by Messrs. Ziad Alahdad and Bernhard Frueh, based on a mission to Uganda in June, 1984.  -2- in particular the actions taken by the Government of Uganda to implement the major recommerdations made by the Energy Assessment. The report also reviews ongoing technical assistance to the energy sector by the inter- national donor community and identifies some of the priorities for further technical assistance in uLe energy sector.  II. RECEfT DEVEIOPMENTS IN THE MNERGY SECTOR 2.1 Since the Energy .'ssessment mission in late 1982, there have been a number of significant developments in Uganda's energy sector. In general, progress has been steady in spite of the many difficulties the country faces in its uphill tasks of rehabilitation and reconstruction. Under such conditions, the important and well-directed initiatives taken by the Government in the energy sector are all the more encouraging and reflect its sincere desire to enhance the pace of economic recovery. In the last year and a half important programs have been initiated, the positive results of which should become evident in the coming years. This section of the report give5 a brief overview of recent important developments. 2.2 In the petroleum subsector, the Government has succeeded in diversifying petroleum supply sources away from traditional markets in an effort to reduce costs. Alternative supply ro-tes have been investigated and, in collaboration with oil companies, the viability of a new route through Tanzania has been verified through a trial run. Efforts are now being made to use this route regularly in the future. Minimum safety stockpiles of petroleum products have been built up in the country (Annex 8). Although progress in switching to railways for product transpor- tation has been slow, there is evidence of some recent improvement which is expected to continue as a result of the acquisition of additional rolling tock by URC. Petroleum exploration activity is still in its early stajes and the Government is placing emphasis on the identification and promotion of prospects with a view to encouraging future partici- pation of oil companies. The results of a recently completed air-mag survey are being analyzed and the definition of further exploration work will be based on this. Some is expected to be taken up under the Bank's proposed Petroleum Exploration Project which includes the preparation of a promotion package. Draft petroleum legislation has been prepared and its ratification by Parliament is due shortly. 2.3 Total imports of energy-related petroleum products increased at an average annual rate of 3.6% over the last two years (Annex 2). In 1983, the transport sector accounted for 75% of consumption while the industrial and domestic sectors consumed 14% and 11%, respectively (Annex 3). There has been an average annual decline of 10% in the consumption of kerosene. This is mainly due to conversion from kerosene to fuelwood in the domestic sector and, to some extent, a possible reduction in the rate of unrecorded reexports after the recent price increases. 2.4 In the power subsector, UEB has commissioned consultants to prepare two important studies which will provide a sound basis for coher- ent power sector planning and development in the future. These studies relate to the rehabilitation and uprating of the Owen Falls Power Station and the power system transmission and distribution network, and a long- term least-cost power development plan which includes a ranking of future projects. The final report of the first study and an interim report for the second study have been submitted to the Government.  - 4 - 2.5 Total power generation in 1983 was 555 million kWh, which re- presents a 3.5% increase per annum over 1981, although there was a drop of 2.5% between 1982 and 1983. Over the last two years, total domestic power billings has declined at an annual rate of 7.0% (Annex 4), from 288 million kWh in 1981 to 251 kWh in 1983, while exports to Kenya rose from 179 million kWh to 218 million kWh during the same pirioO. Exports accounted for 46.5% of power sales in 1983. The decline in local bil- lings is partly attributable to an increasing reliance on firewood in the industrial and residential sectors. In the latter case, this is prompted by the inability of an increasing proportion of the population to afford electrical appliances and their spare parts. 2.6 SLow progress in the forestry subsector, mainly due to finan- cial resource constraints, is a major cause of concern particularly in view of the country's heavy dependence on fuelwood and the magnitude of the issues confronting this sector. However, a few important develop- ments have taken place. Funds have been secured for a resource inventory of forest plantations (in southwest Uganda) which is due to be imple- mented through 1985, and negotiations are underway for an inventory of natural forest reserves in the same area. Together, these projects would cover about 40% of the country's forest resources. Pilot work is non- tinuing on a number of fuelwood plantation projects in rural areas, but the level of activity is insufficient in relation to the importatnce of the 3ector. Due to'extensive fuelwood shortages in the vicinity of urban centers, the For'st Department is turning its attention to this area and is actively seeking financial and technical support to initiate peri- urban fuelwood projects. There is evidence that households, for reasons outlined above, are increasingly converting to fuelwood from electricity and kerosene. Preliminary estimates indicate a total fuelwood consump- tion of 13.6 million tons in 1983, well above the sustainable annual yield of 10.9 million tons (excluding non-energy uses). This represents a 4% increase over 1982. 2.7 Energy Efficiency improvements in industry are being carried out mainly as part of broader rehabilitation efforts in individual indus- trial units. During the last year and a half, these efforts have re- mained largely in the study phase, although in a few cases implementation has been initiated, including a number of fuel substitution efforts -- conversicn to heavier fuel oil and bagasse. Energy-related rehabilita- tion efforts in the transport sector aim at reducing specific fuel con- sumption through improvements in vehicle maintenance and repair facili- ties, training of drivers and mechanics, railway track repair and regrad- ing, and rehabilitation of road networks. 2.8 The main issues in energy pricing relate to shortcomings in the pricing formula for petroleum products as well as the need to reflect economic costs in the retail prices of petroleum, fuelwood and elec- tricity. 2.9 Since late 1982, the retail prices of premium gasoline, regular gasoline, kerosene and automotive diesel gradually have been increased by  a total of 27X, 28%, 88% and 67%, respectively (Annex 5). Preliminary estimates indicate that these retail prices were above their respective import parity prices in mid-December, 1983 (Annex 6). However, the situation would need to be reviewed again in view of the depreciation of the Ugand-n Shilling during the first half of 1984 and in view of the recent me ger of the exchange rates. 2.10 In November, 1983, the Government introduced a new retail pricing formula (Annex 7) for premium and regular gasoline, kerosene and diesel which differs from the previous one in two main areas. First, the new formula uses the posted Caltex-Babrain product price as the base price instead of the ex-Mombasa refinery price used in the old formula. Second, the oil company operating and capital expenditures are reimbursed by a fixed amount of USh23.1/liter compared with 222 ad valorem in the old formula. However, to make best use of the new formula, i ?ompt ad- justments would be required whenever significant changes occur in real market conditions. 2.11 Electricity tariffs were last increased effective in March, 1984, by 50%. However, further increases would be required to reflect long-run marginal costs of power supply. The tariff structure and level will be reviewed under the Bank's proposed Power II Project which will include a provision for a tariff study. 2.12 In the fuelwood sector, the stumpage fee which has remained unchanged since the Assessment needs to be substantially increased to reflect the economic value of wood as a fuel. 2.13 The Government's initiatives in strengthening the institutional capability of the energy sector are noteworthy. To facilitate energy policy coordination and integrated sector planning, the Government has decided to establish an Energy Department in MPPT. Organizational studies are underway and staff p4sitions have already been sanctioned for the i.rst phase of the Department's proposed operational activity. 2.14 In an effort to generate further support in the energy sector, the Government is actively seeking technical assistance from a number of sources in line witl energy sector priorities. This includes a sis-acti- vity package of pre-investment and policy support under ESMAP, which is expected to generate substantial additional technical assistance and in- vestment follow-up in line with the recommendations of the Energy Assess- ment Report.  -6- III. STATUS Of 8N8RCY ASSSSSMMT RECOMZNDATIONS Petroleum 3.1 Petroleum Imports Recommendation (a) The Government should take a more active role in monitoring petroleum product imports in order to minimize cost of supplies. Specific recommendations are: (i) Strengthen the Government's technical capability to manage product import arrangements. Statue In late 1982, the Government established a Petroleum Desk in the Bank of Uganda as a subsector unit responsible for monitoring petroleum imports and dis- tribution. In early 1983, in response to a request from GOU, the World Bank provided specialist techni- cal assistance support under ESMAP to the Petroleum Desk. The technical assistance aimed at (a) stan- dardizing procedures for information processing at the Petroleum Desk; (b) advising on the format of a quarterly status report; (c) initiating a dialogue between the Petroleum Desk and oil companies operat- ing in Uganda; and (d) identifying, further technical assistance to strengthen oil import arrangements in the country. The technical assistance proposals are being modified and finalized in the light of the findings of the ongoing Energy Sector Institutional Review under ESMAP which would clarify the definition of responsi- bilities/relationships between the Petroleum Desk and energy policy institutions in Uganda (see para 3.14(a)). Recoumendation (ii) Diversify supply sources. Status In response to the Government's suggestion, oil com- panies have initiated a number of measures to reduce oil costs. Less reliance has been placed on the purchase of products on the more expensive Kenyan  -7- market. Since late 1982, oil companies have started purchasing crude and/or netroleum products on the Middle East market 3/ or resumed the processing of crude oil at t..e Mombasa Refinery, which has enabled a substantial reduction in costs. Recommendation (iii) Utilize alternative transport modes, in particular increase the use of railways. Status The decline in the use of the raiLway for transport- ing petroleum products continued during 1982 and 1983. URC statistics show that during 1983, only 1,500 tons of imported oil were transported, compared with 6,000 tons in 1982. This was mainly due to the lack of tank wagons which resulted in heavy reliance on foreign rolling stock and road haulage. However, in 1984, the situation is gradually improving, par- ticularly with the recent acquisition of 'liqui- tainers' 4/, and is expected to improve further with the purchase of 35 tank wagons financed by EEC which are due for delivery shortly. In addition, under an agreement concluded among the former East African Community (EAC) partners for the disposal of assets and debts after the breakup of EAC, Uganda will receive compensation which includes 99 tank wagons for URC, although some of them may need extensive repair. 3/ Under the prevailing regulations in Kenya, if the Kenya orridor is used to transport oil products into Uganda, it is not possible for oil companies operating in Uganda to import products into Kenya un- less under exceptional circumstances. The oil companies have to rely mainly on crude imports which are refined at Mombasa before transport to Uganda. Due to high refining costs at Mombasa (in relation to Middle East refineries), this is a more expensive option than importing products from the Middle East. 4/ 'Liquitainers' are containers of liquid which can be mounted on flat-bed rolling stock. Of the 84 'liquitainers' on order, 40 have been received and the balance will be delivered shortly in installments.  Recoendation (iv) Carry out a feasibility study on alternative options for extending the white products' pipeline westward from Nairobi. Status It is understood that a feasibility study has been prepared by consultants engaged by the Kenya Pipeline Company. However, the outcome of the study is not known and would need to be followed up by the Ugandan authorities. Recommendation (v) Investigate together with the oil companies the feasibility of importing petroleum products via Dar-es-Salaam to reduce the heavy reliance on transport via Kenya. Status In association with Shell, COU carried out a trial run for importing petroleum products via Dar-es- Salaam. Preliminary results indicate that this transport route is not only technically feasible but, because of the diversification of risk, would also prove to be more economical provided that adequate quantities 5/ could be transported and the turnaround time reduced from the present 3-5 weeks to 2 weeks. Administrative arrangements require further stream- lining. A consignment of 3,000 mt of diesel has been transported via this route. Plans are underway to facilitate use of this route in future on a regular basis. Apart from the 'liquitainers' delivered and on order, orders also have been placed for an additional ferry for the Lake Victoria portion of the route (two ferries are currently in use). Recommendation (vi) Maintain a "minimum safety stockpile" of petroleum products to provide protection against sudden disruption in supplies. An inventory of existing storage facilities should be under- taken as a priority measure. S/ The 84 'liquitainers' will enable a transportation capacity well above the 'break-even' level for the route.  -9 - Status The inventory of existing storage facilities has been completed and domestic stocks are being monitored by MPPT/Petroleum Desk in the BOU. A minimum safety stockpile level of four to five weeks based on pre- sent consumption levels is being maintained current- ly. However, the adequacy of storage facilities in rural areas needs to be further investigated. Annex 8 gives the stockpile levels maintained through 1983 and the first quarter of 1984. 3.2 Petroleum Exploration Promotion Recommendation (a) Carry out an air-mag survey to identify prospective areas of petroleum exploration. Status The air-mag survey has been completed and its re- sults, which are being analyzed by consultants, will be available by about August, 1984. The costs of the survey are shared by Uganda, Kenya, Tanzania and Zaire. Uganda's share is being financed under the Bank's First Technical Assistance Credit. Recoimendation (b) Depending upon the findings of the air-mag study, prepare a program for further exploration. status Agreement had been reached to hold a tripartite meet- ing between the Ministry of Lands, Minerals and Water Resources, the Bank, and the consultants in July, 1984, to decide upon the future course of action on the basis of the air-mag interpretation. The Bank's proposed Petroleum Exploration Promotion Project would provide funds for gathering additional infor- mation on prospective areas. This could include: (a) geological data gathering and field mapping where necessary; (b) geophysical surveys (probably gravi- ty); and (c) geochemical studies. The project also would assist in preparing a promotion report that would be offered for sale to oil companies upon com- pletion of the geophysical survey work mentioned above.  - 10- Recomendation (c) Prepare Petroleum Legislation. status Draft Petroleum Legislation and a model agreement prepared by the Conmonwealth Fund for Technical Cooperation (CFTC) and reviewed by the Bank is now being considered by the Cabinet and is due for pre- sentation to the Parliament for ratification short- ly. The Bank group has assisted in drafting this legislation with a view to striking a balance between safeguarding Uganda's interest while providing ade- quate incentive to oil companies. Depending on re- sults of the air-mag survey, GOU would decide whether it chooses to negotiate concessions with individual oil companies or to initiate public bidding. 3.3 Pricing Policy Recomendation (a) Reduce the existing distortions in retail prices of petroleum products. Particular recommendations are: Si) Adjust petroleum product prices whenever there is a major change in the exchange rate to allow prices to reflect their economic value and review net taxation. Status GOU fixes retail prices for premium and regular gaso- line, kerosene and automotive diesel. Since late 1982, GOU has gradually increased the retail prices of these products in response to the depreciation of the exchange rate against the US dollar at window 1. Premium gasoline, regular gasoline, kerosene and diesel have been increased by 27%, 29%, 88%, and 67%, respectively. Preliminary calculations for December, 1983 show that these retail prices were above their import parity, reflecting their economic value. However, the situation would need to be reviewed again in view of the depreciation of the Ugandan Shilling during the first half of 1984 and the recent merger of the exchange rates. Retail prices for other products are set up by the oil companies in line with the rate at which the foreign exchange for their importation was purchased.  - 11 - Regarding effective taxation, preliminary estimates (Annex 9) show that effective tax rates at the end of 1983 ranged from 23% for kerosene to 39% for premium gasoline. However, estimates for June 1984 indicate substantially lower effective tax rates due to the depreciation of the Ugandan Shilling, The estimated rates for June 1984 are 23% for premium gasoline, 21% for regular gasoline, 5% for automotive diesel and 4% for kerosene. Recommendation (ii) it might be necessary on revenue grounds to raise retail prices above import parity when the official exchange rate tends towards the shadow exchange rate. Status See para (i) above. Recomuendation (b) Review the formula for reimbursement of operating and capital expenditures of the oil companies. Status GOU has introduced a new retail pricing formula for premium and regular gasoline, kerosene, and diesel effective November, 1983. The previous 22% rate of the value of the products delivered to Kampala .(ex- cluding customs duty) for reimbursement of operating and capital expenditures has been replaced. Accord- ing to the new formula, the oil companies receive a fixed total of USh 12 per liter product to cover op- erating costs and USh 11.1 per liter as a company margin. In the current formula this amounts to between 31% and 32% of the value of the respective product delivered to Kampala (excluding customs duty) -- an increase over the previous 22%. A further revision of the pricing formula is currently under consideration by the Government. Electricity 3.4 Power Supply Recomendation (a) Give immediate priority to the preparation of a feasibility study on the rehabilitation of Owen Falls Power Station as well as trans- mission and distribution facilities.  - 12 - Status The proposed feasibility study is being prepared by consultants, Mesrs. Kennedy & Donkin, and Sir Alexander Gibb & Partners under financing provided by ODA. In line with the terms of reference recommended in the Energy Assessment Report, the study examines the rehabilitation (and possible further uprating) of Owen Falls Power Station and the transmission/distri- bution system. A draft report containing the main findings has been presented to GOU, and the final report was expected to be available by July, 1984. Preliminary results indicate that rehabilitation of the existing plant would be the least cost solution to Uganda's present power requirements. The rehabi- litation program would increase the total name plate rating of the turbo generator units at Owen Falls Power Station, from the present level of 150 MW up to 180 MW. The rehabilitation of the power plant, transmission/distribution system and associated communication network must proceed without delay in order to maintain supplies and meet the forecast growth in load. A period of five years would be required to complete the rehabilitation work. How- ever, the draft report indicates that power shortages could occur during peak load times during completion of the rehabilitation program. Financing for the rehabilitation of the Owen Falls Power Station is being considered under the Bank's proposed Power II Project which was to be appraised in July, 1984. This rehabilitation component would cover: (a) civil engineering work for repairs to the dam and power house; (b) rehabilitation of electrical and mechanical components of the power station equip- ment; (c) overhaul and replacement of some components in substations, transmission lines, distribution net- works and renewal of the communication system; and (d) transportation facilities for UEB. In addition, the project would include engineering, consulting and supervision services during project implementation. Technically, it also would be feasible to further up- rate the capacity of Owen Falls Station to 210 KW. However, the economic justification of this measure has yet to be sufficiently determined. As such, it had not been included in the Bank's Power II Project, although the justification for its inclusion was to be reviewed during project appraisal. Even if the units art further uprated, the issue is whether the water levei would be sufficient to enable the turbo generators to produce at their full uprated output.  - 13 - Recommendation (b) Prepare a long-term least-cost development program as a matter of immediate priority. Status The least-cost long-term development program needs to be determined as a matter of priority since demand is forecast to exceed available supply even after the rehabilitation of Owen Falls Power Station in 1988- 89. The earliest date by which a new hydro station could be brought on-stream is about 1991. Under ODA financing, consultants are preparing a long-term development plan. An interim report has been pre- sented to GOU and the final report is due in late 1984. In accordance with the terms of reference suggested in the Assessment Report, the study in- cludes: (a) a long-term demand forecast; (b) a study of the hydrology of Lake Victoria and the Victoria Nile; (c) assessment of the optimum utilization of the hydro potential; (d) updating and comparison of the hydro schemes studied in the past; and (e) an in- vestigation of the development of the transmission system. Until now the siting of the second hydro power station has not been clarified. Funding for a feasibility study for developing the site selected for the next hydroelectric station will be considered under the Bank's proposed Power II project. Recommendation (c) Extend the transmission and distribution network to connect all major towns and to replace diesel power stations. Status The least-cost plan for expanding the transmission and distribution system will be developed as part of the two studies mentioned above. According to the two preliminary reports, rehabili- tation and reinforcement of existing transmission and distribution systems would cov4r a three-year period beginning in 1985. As far as extension of the grid is concerned, the main schemes under consideration are as follows: - extending the grid to alLow power exports to Tanzania (EADB is financing the feasibility study);  - 14 - - supply to a number of projects, if implemented, including a copper smelter at Kasese (8.5 MW), Hima Cement Works (6 MW), and Kilembe Copper Mines (5 MW); - a total of 14 rural electrification projects, of which 7 are to be financed by EEC and for which feasibility studies are under preparation. Several of chese schemes would connect areas presently supplied by diesel generators. Recommendation (d) The development of a second hydro-power station specifically for power export should only be considered if satisfactory commitments from purchasers, in terms of price and quantity, can be obtained in advance of commitment to invest in new generation capacity. Status At present, Uganda exports power only to Kenya under an agreement to provide 30 MW of firm capacity. Energy sales to Kenya reached 218 GWh in 1983, which constituted 48.5X of total UEB sales. UEB is now seeking to renegotiate export tariff rates with Kenya (see ra 3.5(e)). The Government recently concluded an agreement to begin exporting 15 MW to Tanzania after the construction of the necessary transmission line and transformer station, for which an engineer- ing study is expected to be completed shortly. Beyond this, further negotiations would depend upon the findings of the long-term power development program. 3.5 Power Tariffs Recommendation (a) Increase tariff levels as soon as practicable. Status After 50% tariff increases in July 1980, January 1981, and July 1982, a further 50% increase has been in effect since March, 1984. Considering the infla- tion rates during recent years and the expected in- crease in real prices within the coming *years, further adjustments will be necessary. UEB is plan- ning to review tariffs again by the end of 1984.  - 15 - Recommeodation (b) Review and adjust electricity tariffs to enable cost recovery, taking into account the cost of the long-term power program. Tariffs should be fully adjusted to the long-run marginal cost of supply at the latest when the next hydropower station is commissioned. Status Present tariff levels are only a small proportion of the economic cost of power as represented by the long-run marginal cost. The average yield during 1983 was about USh 1 per kWh sold (US