Uganda - Third Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9153-UG STAFF APPRAISAL RPORT UGANDA THIRD POWER PROJECT MAY 29, 1991 Industry and Energy Division Eastern Africa Department Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit = Shilling US$1.0 = USh 670 (as at May 1, 1991) WEIGHTS AND MEASURES 1 kilometer (km) = 0.621 miles 1 square kilometer (km2) = 0.386 square miies 1 kilovolt (kV) = 1,000 volts (1,000 V) 1 megawatt (MW) = 1,000 kilowatts (1,000 kW) 1 megavolt ampere (MVA) = 1,000 kilovolt amperes (1,000 kVA) 1 gigawatt hour (GWh) = 1 million kilowatt hours (1,000,000 kWh) I ton of oil equivalent (toe) = 10,500,00U kilocalories ABBREVIATIONS AND ACRONYMS AfDB African Development Bank Fund BITS Swedish Agency for International Technical and Economic Cooperation CDC Commonwealth Development Corporation CIDA Canadian International Development Association EEC European Economic Community EIB European Investment Bank ESMAP Energy Sector Management Assistance Program GSMD Geological Survey and Mines Department GTZ Gesellschaft fuer Technische Zusammenarbeit ISDB Islamic Development Bank ICB International Competitive Bidding IRR Internal Rate of Return JICA Japan International Cooperation Agency KfW Kreditanstalt fir Wiederaufbau KP&L Kenya Power and Lighting Company, Limited LRMC Long-run Marginal Cost MPED Ministry of Planning and Economic Development NORAD Norwegian Agency for Development Assistance ODA Overseas Development Administration (UK) OECF Overseas Economic Corporation Fund OPEC Organization of Petroleum Exporting Countries SCADA System Control and Data Acquisition Fund SIDA Swedish International Development Association UNDP United Nations Development Programme UEB Uganda Electricity Board UEB's Financial Year = Calendar Year  FOR OFFICIAL USE ONLY UGrA rNPA THIRD POWER PROJECT STAFF APPRAISAL REPORT Table of Contents I. THE ENERGY SECTOR Energy Demand and Supply .................................. I Energy Resources ....................... 1 Renewable Energy Resources ....................... 2 Fuelwood ........................ 2 Major Hydroelectric Resources ....................... .. 2 Small Hydroelectric Resources . ........................ 2 Geothermal ....................... 3 Other Renewable Energy Resources ....................... 3 Imported Energy: Petroleum ....................... 3 Petroleum Exploration ....................... 4 Energy Prices and Pricing Policy ................... ........... 4 Petroleum Products ....................... 4 Electricity ....................... 4 Energy Sector Organization ....................... 5 Government Strategy in the Energy Sector ....................... 5 Bank Strategy in the Energy Sector ........... ............ 5 11. THE POWER SU,BSECTOR Uganda Electricity Board (UEB) .......... 6 Generation. 6 This report is the result of an appraisal mission which visited Uganda from June 29 to July 13, 1990. The mission was led by Tony Sparkes (Senior Power Engineer) and included Asaf Malik (Senior Financial Analyst), Rey Castro (Operations Ana3yst), and Robert Til!man (Environmental Specialist). IThe hydrological risk analysis was reviewed ity Mr. J. Cassidy (Consultant Hydrologist), and the design and status of the Owen Falls dam was ieviewed by Dr. O-J. Rescher (Consultant Dam Specialist). Technical advice was provided by Mr. P. Gupta (EMTAG), Mr. M. Wilton (AFTIE), Mr. W. Hay (TENEE), and Mr. J. Besant-Jones (IENED). Mr. Robert Hindle and Mr. Callisto Madavo are th- managing Division Chief and Departnent Director, respectively, for the operation. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed witho X World Bank authorization.  Lake Victoria, Owen Falls Power Station, the Potential of the Owen Falls Site and the Proposed Project .................................... 7 The Existing Scheme . ............................... 7 Owen Falls Dam ................................... 7 Owen Falls Power Station Uprating and Restrictions ........... ................ 7 The Operating Arrangement ............ ................ 7 Ripon Falls .................................... 8 The Proposed Project ................................. 8 Seismicity .................................... 8 Optimizing the Energy Capacity of the Site ...... ............. 8 The Need for Additional Spill Capacity ....... .............. 9 Transmission and Distribution ................................. 9 Sales to Kenya ..................................... 11 Sales to Tanzania ..................................... 12 Previous Bank Lending in the Power Sector ......................... 12 The Ongoing Second Power Project .......................... 12 Other Support for UEB .................................... 13 Kampala Network .................................... 14 Government Strategy in the Power Sector .......................... 14 Bank Strategy in the Power Sector ................ I .............. 14 Demand for Electricity - Historic ................................ 14 Forecasts of Demand for Electricity .............................. 15 Industrial Demand .................................... 16 Commercial Demand ................................... 16 Domestic Demand .................................... 17 Export Demand .................................... 17 Supply, Demand, Current Constraints and System Expansion .................................... 18 UEB's Development Program and the Environment .................... 18 III. INSTITUTIONAL DEVELOPMENT Board of Directors ............................ 19 Management and Organizational Structure .......................... 19 Staffing and Salaries ............................ 20 Training ............................ 20 Technical Economic Losses ............................ 21 Non-technical Losses, Metering Billing and Collection ............................ 21 UEB's Extraneous Operations ............................ 23 Accounting and Audit ............................ 23 Stores and Workshops ............................ 24 Computing Operations ............................ 24  IV. THE PROGRAM AND PROJECT Project Objectives and Bank's Role .............................. 25 Program Description .................................. 25 Program Cost Estimates ................................ 26 The Project ................................ 26 Onlending Arrangement ................................ 29 Project Implementation and Engineering Services ..................... 29 Procurement ................................ 29 Disbursements ................................ 31 Special Account ..................... ....... 31 Project Monitoring and Reporting ..................... 31 Panel of Dam Experts ..................... 31 International Water Rights ..................... 32 Resettlement .................... ..................... 32 Environmental Assessment ..................... 32 V. FINANCIAL ANALYSIS Past Financial Performance ..................... 33 Future Financial Performance ..................... 34 Financial Arrangements ..................... 37 VI. PROJE(CT JUSTIFICATION AND RISKS Project Benefits ..................... 39 Least Cost Development Program ...................... 39 Economic Rate of Return ...................... 39 Project Risks ...................... 39 Owen Falls Extension - Investment Risk Analysis .................. 39 VII. AGREEMENTS REACHED BETWEEN GQU. UEB AND IDA AND RECOMMENDATION Recommendation .................................... 42  UISTf ANNEXES 1 Major Sites with Hydroelectric Potential 2 Estimated Energy Balance for 1989 3 UEB Installed Capacity 4 Generation, Demand and Billings on UEB System to 1990 5 Projections of Demand by Tariff Groups 6 Cost Estimates and Financing Plan 7 Implementation Schedule 8 Estimated Schedule of Disbursement 9 Monitoring Guidelines 10 Sales Projections 11 Income Statement for UEB: Years Ending December 31, 1989-2000 12 Balance Sheets for UEB: Years Ending December 31, 1989-2000 13 Funds Flow Statement for UEB: Years Ending December 31, 1989-2000 14 Notes and Assumptions for Financial Statements 15 UEB Board of Director's Statement of Policy 16 Investment Risk Analysis of Owen Falls Extension 17 Environmental Assessment. Analysis 18 Draft Terms of Reference for a Hydropower Sector Environmental Analysis 19 Supervision Plan 20 UEB's Organogram 21 Economic Analysis of Owen Falls Extension 22 Selected Documents and Data Available in Project File IBRD Map No. 22738  UGANDA THIRD POWER PROJECT Credit and Project Summary Borrower: The Republic of Uganda Beneficiary: Uganda Electricity Board (UEB) Amount: SDR 86.9 million (US$125 million equivalent) Terms: Standard IDA terms, with 40 years maturity. Onlending Terms: For that portion of the credit to be on-lent to UEB, 20 years including a 5-year grace period, at 7-1/2% annual interest; the foreign exchange risk to be borne by UEB. Project Obieives: The program of development, of which the project will be a major part, will continue with the rehabilitation of the power system begun under the Second Power project, will develop Uganda's hydroresources and expand the transmission and distribution system to provide least cost electrical energy, more reliably, to a greater population. Description: The project consists of a spillway capacity to protect the existing Owen Falls dam, measures to increase the stability of the dam, a 3x34 MW extension of hydroelectric generating plant at Owen Falls, and technical assistance to the UEB and to the Ministry of Energy. Project Benefits Ed Risks: Besides contributing to the safety of the dam, the project will benefit private business, commerce and industry, Government and the domestic market. For business as well as for the Government, adequate and reliable power supply would mean enhanced management efficiency, improved coordination of economic activities and would lead to increased productivity and growth and improvements in living conditions in the rural areas. The economic rate of return of a time-slice of UEB's total system development program including the proposed expansion of the transmission distribution system and the extension of Owen Falls is 16.5%, based on an analysis of costs and benefits to the economy. The design and size of the extension is based on dependable records of river  - ii - flows which have persisted since 1960. The risk that the hydrology could revert to a condition described by the pre-1960 data is estimated by the consultants to be less than 1%, which is judged to be an acceptable risk. Other project risks are institutional and financial because the recent improvements to UEB's poor operating and financial performance and/or inadequate management controls are still precarious. The financial and tariff covenants, organization and management measurea and technical assistance component, and UEB's intention to review frequently with IDA the performance monitoring targets should minimize these risks. Benefits will be fast accruing because of the current imbalance between electricity supply and demand as well as projected growth in demand.  - iii - Foreign Local Total ---(US$ million)--- Owen Falls Civil works including spillway 117.2 12.2 129.4 Dam strengthening 23.0 2.0 25.0 Electrical & mechanical equipment 60.4 4.5 64.8 Owners costs (site housing, etc) 1.9 7.8 9.7 Engineering supervision 18.4 1.0 19.4 Technical assistance to UEB and MinEnergy 7.7 0 7.7 Transmission and Distribution 6.5 0.1 6.6 Next major site study 2.9 0.1 3.0 Repaywent of project preparation advance 0.8 0 0.8 Base Cost 238.8 27.6 266.4 Physical Contingencies 29.0 3.4 32.4 Price Contingencies 32 5 3.8 36.3 Total Financing required 300.3 34.8 335.1 A/ Base costs at end-1990 levels. Financing Plan: Foreign Il Total -(US$ million) UEB - 34.8 34.8 IDA 125.0 - 125.0 AlB 45.0 - 45.0 BITS/SIDA 15.0 - 15.0 ISDB 20.0 - 20.0 Norway 24.6 - 24.6 Unidentified 70.7 - 70.7 Total 300.3 34.8 335.1  I. THE ENERGY SECTOR 1.01 Under Uganda's Economic Recovery Program, there has been an impressive increase, since 1987, in GDP of between 6.5 and 7.0 percent per year. Sustained real GDP growth of at least 5 percent per year seems attainable if economic stability continues and tl,e constraints on growth of the productive sectors can be alleviated. The severe deterioration of the power infrastructure has been a serious obstacle to the revival of the commodity-producing sectors. Through the ongoing Second Power project support is being p )vided to relieve immediate electrical energy constraints caused by ill-maintained 30-year old generators at the 150 MW Owen Falls hydroelectric power station, and by the inadequacies of a long-neglected, out-of- date transmission and distribution system. However, in order to meet the medium to long-term electrical energy demands of a growing economy and to provide for possible exports, it will be essential to further exploit Uganda's considerable hydroelectric power potential and to strengthen and extend the country's transmission and distribution facilities. Energy Demand and Supply 1.02 One of the main indicators of the health of the economy and the status of development of a country is its per capita energy consumption. Uganda's total energy consumption is estimated to have declined to about 0.19 ton of oil equivalent per capita (toe) in 1989 compared to 0.35 toe in 1980 and about 0.4 toe in 1970. In 1989, commercial energy - petroleum products, electricity and marketed wood fuels - accounted for only about 0.02 toe per capita, i.e. 90% of the energy used in Uganda came from woodfuels gathered as a free good. Uganda's total energy consumption is much lower than that used in other countries in Africa (e.g. in 1988, Kenya used 0.37 toe, and Zimbabwe 0.83 toe). 1.03 Uganda's commercial energy consumption of 0.02 toe per capita is exceptionally low by any standards (0.1 toe average for sub-Saharan Africa; about 0.3 toe for middle income countries; and about 5 toe for Europe and North America). This low level of commercial energy consumption reflects not only the country's low pei _.pita income but also the dominance of the subsistence sector and the significant decline in the industrial and transport sectors during the civil strife, which has resulted in energy consumption being concentrated in the household sector and supplied mainly from woodfuels. In 1989, traditional fuels (woody biomass) accounted for about 45 percent of commercial energy consumption, with the balance principally coming from imported petroleum products (45 percent) and electricity (10 percent) - only about 6% of the population has access to electricity. The energy balance for 1989 is detaiied in Annex 1. Energy Resources 1.04 Deforestation in Uganda is a rapidiy growing concern and stocks of woodfuels are becoming more economically expensive to gather. Uganda has the e;onomic disadvantages common to many African countries which import all of their petroleum products; besides which it is land-locked. No petroleum or gas has been discovered but the Government is promoting prospects for exploration by oil companies. There is no coal; peat exists but has not justified exploitation. Geothermal resources have been identified in the west of the country, and Govermnent plans to study and, if it finds them economically viable, develop their potential. Uganda's great advantage is its water resource, which has enormous electricity generation potential.  -2 - Renewable Energv Resources 1.05 Fuelwood. According to the 1986 ESMAP report on Uganda's fuelwoods and forestries, fuelwood consumption was 13.6 million tt,ns, well above the sustainable yield of 10.9 million tons. Currently there is a localized scarcity of fuelwood especially in the areas of Kampala, Entebbe and Jinja. In general existing fuelwood supplies are barely adequate to meet present needs. The results of a household energy study (para. 1.11) and its recommendations regarding Government interventions are currently awaited. A Bank-financed forestry project includes the establishment of 900 ha of fuelwood plantations around Kampala, Jinja, Tororo, Mbale, Arua and Mbarara 1.06 Maior Hydroelectric Resources. Uganda is well-endowed with hydroelectric potential. Although sites on a number of rivers have been studied, the potential is concentrated on the Victoria Nile with the vast storage provided by Lake Victoria. The Nile has three distinct sections in Uganda, namely Lake Victoria to Lake Kyoga; Lake Kyoga to Lake Albert (Victoria Nile); and Lake Albert to the Sudanese border at Nimule (Albert Nile). The last section is remote from the load centers and has the least power potential. The difference in elevation between Lakes Victoria and Albert is about 516 meters, of which 103 meters iie between Lake Victoria and Kyoga and 413 meters between Lakes Kyoga and Albert. The available head is concentrated in seven locations (Annex 2). 1.07 The existing Owen Falls power station and dam lie at the exit of Lake Victoria. They were designed in the 1940s and construction began in 1948 (para. 2.04). The design of the station was based on the hydrological records pertaining to the years 1900 to 1946, when the mean flow of the river, through Owen Falls was 630 cubic meters per second (m3/s) with a dependable 505 m3/s available for electricity generation. Recent (1989/90) consultancy studies have included the hydrological record2 for the 30-year period 1960-1990. These records indicate that an average flow of over 1,000 m3/s has persisted over this latter period, with a likelihood in the future of about 860 m3/s being available for electricity generation. Based on these river flows, the total potential capacity of the seven sites (Annex 2) is estimated to be about 2,000 MW with a firm annual generation capability of about 12,500 GWh. 1.08 Small Hlydroelectric Resources. A survey financed by the United Nations Department of Technical Cooperation for Development was completed in December 1988 and updated in November 1989. The survey identified 22 small sites (less than 2 MW potential capacity each) in the north-western, western and south-western regions of the country with a total hydropower generation capacity potential of 35 MW. The report and the up-date indicate that the developinent of relatively high-cost small generating stations at remote hydro-sites can be justified for the provision of electric power to those areas of the country which are inaccessible to the national grid for either technical or economic reasons, to increase overall national power generation capacity, or to provide standby plant in case of transmission failure, or for voltage support and load balancing to limit voltage fluctuations at the end of long transmission lines. The report's conclusions are currently being further refined by considering how the proposal to build the 132 kV transmission line to the west of Uganda (para. 2.16) will impact on the report's recommendations. The report indicates that a site in the north-west should be developedi at Phaida, which is beyond the reach of any proposed extensions of the transmission system, and Government is investigating possible sources of concessional financing for this development, which could bring electricity at least-cost, to an area to the north-west of Lake Albert, which is not likely to be connected to the grid for several years.  - 3 - 1.09 Intermediate sized sites exist at Muzizi (10 MW) and at Nengo Bridge (7.5 MW). The development of these could form an early future part of Uganda's least cost plan to expand its hydroelectric potential, especially as they are sufficiently large to be able to support the voltage at the extremes of the national grid. Government is hoping soon to identify a.d funds to finance the cost of investigating, at feasibility study level, the technical and economic viability of developing them. 1.10 GQeothermal. In 1970 consultants (Dixon and Morton) reported on the thermal springs in Uganda. The report listed 30 locations where thermal or mineral springs had been located. Subsequent reports by Sharma (1971), McNitt (1972) and Stefansson ,1989) recommend a long-term continuous geothermal survey program. The reports recommend that, in addlition to the use of geothermal energy for expanding the capacity of the national grid system and for direct use where the heat is for industrial drying and agro-industry applications, geothermal energy should be considered suitable for small power plants (1-2 MW) located in areas not served at present from the national grid. Because development of this resource could fit in with Uganda's future least-cost power development plan, Government has recently requested that UNDP and the Government of Iceland and the OPEC Fund jointly finance a reconnaissance study of the geothermal potential in the western region. 1.11 Other Renewable Energy Resources. Concerned with the threat of further deforestation, Government is planning to establish a renewable energy demonstration center in each of the 34 districts throughout the country. At each center there will be a community-sized biogas digester, a 10-kW solar-photovoltaic generator, and a solar water pump. Government is also intent on promoting programs in wind applications and power alcohol. The Ministry of Energy has constructed a family-size biogas digester at Makerere University as a pilot scheme and plans to disseminate information on methods of how to construct with indigenous materials similar digesters through much of Uganda in the next five years. Following receipt of the results of the Household Energy Planning Program study, which is being performed by consultants financed under the ongoing Second Power project, Government expects to make other interventions in this area in an attempt to control the use of fuelwoods and to increase fuelwood plantations. Imported Energy: Petroleum 1.12 Uganda imports all of its petroleum requirements by direct purchase on the Kenyan and Middle East markets. White products are transported from Mombasa to Nairobi by pipeline and on to Kampala, via Jinja in the east of the country, by rail and by road. To diversify supply routes some petroleum products are also imported through Dar es Salaam via Mwanza to Jinja in Uganda. In 1989, Uganda imported 251,000 tons of petroleum products compared to 450,000 tons in 1970 - although this is a marked reduction it is a significant increase on the worst year for these imports, which was 1983, when they fell to 189,000 tons. The six oil companies operating in Uganda maintain their own storage facilities to cater for any possible bottlenecks in the supply system. In line with Uganda's pattern of economic activity, distributior. and consumption of petroleum products is currently mainly concentrated around Kampala and Jinja. Due to the resurfacing of roads and rehabilitation of outlying industries plus improvement of security, demand upcountry is steadily rising, and the most economical methods of transportation, storage and distribution are being assessed by the Ministry of Energy with the assistance of a petroleum expert, funded through the Second Power project.  -4- 1.13 In order to minimize foreign exchange costs incured through transport, Uganda has recently acquired over 100 rail tanker-wagons, and by the end of 1989 had increased from 10% (1982) to 60Q the amount of its white products transported by rail from Nairobi. To encourage efficiency and reduce bottlenecks, incentives have also been given to local transporters who are reimbursed with payments 50% in foreign exchange and 50% local currency. 1.14 The petroleum desk was established by Government in 1982 in the Bank of Uganda as a subsector unit responsible for monitoring petroleum imports. The Ministry of Energy is responsible for the formulation of policy through its petroleum department headed by a commissioner. Uganda's minimum strategic stock-pile is equivalent to five weeks based on present consumption levels. Petroleum Exploration 1.15 The ongoing Uganda Petroleum Exploration Promotion project (Credit 1561-UG) followed the East African aeromagnetic survey, the Uganda portion of which was financed from a Technical Assistance Credit (Credit 1077-UG). At least one international oil company group expressed an interest in the Rift Valley portion of Uganda and undertook active negotiations and discussions. The ongoing project is designed to assist the Government in negotiating with oil companies, acquire additional geological and geophysical data, finance exploration consultants, train personnel of the Geological Survey and Mines Department (GSMD), and finance the rehabilitation of the plant and buildings of the GSMD. Negotiations with an oil company group are underway, and Government hopes for a decision soon. If negotiations break down, the strategy will be to prepare a promotional report and hold a promotion meeting in 1991 to interest other companies in the country's possible resources. Energy Prices and Pricing Policy 1.16 PetrQleum Products. The prices of petroleum products are fixed by Government and are adjusted with major changes in the exchange rate to reflect the economic cost of their supply. This has been done regularly since late 1982 and to-date, Government has adjusted petroleum prices periodically so that they reflect economic costs of supply. 1.17 Electricity. Uganda has had a tradition of low power tariffs compared with other countries in the region. J/ For a number of years, the average tariffs remained at around US cents 1.5/kWh. In January 1990, the tariffs were increased to about US cents 2.4/kWh but are still inadequate to provide a reasonable rate of return to UEB and service its debt obligations. The revised tariffs are also well below the estimated long-run marginal cost, which a 1990 study by consultants, financed from Credit 1560-UG, estimated at about US cents 7/kWh (para. 5.06). The bulk tariff for supplies to Kenya under a S0-year supply agreement signed in 1955 is very low, despite a 100% increase in 1988 to US cents 0.8/kWh. The long-run-marginal cost to the Ugandan economy of supplying the energy to Kenya is negligible because these supplies are normally provided during the off-peak demand periods at night, but represent a major economic benefit to Kenya because in the absence of these supplies, Kenya would have used expensive sources of generation. The value of Ugandan energy to Kenya is estimated to be about US cents 10/kWh (para. 2.18 and para. 5.09). There is therefore an urgent need to re-negotiate the tariff I/ Kenya: US cents 7.1/kWh; Somalia: US cents 10.5/kWh; Tanzania: US cents 5.2/kWh  - 5 - with Kenya with a view to arriving at a price of about US cents 5/kWh, which would split the benefits of the export 50/50 with Kenya. Energy Sector Organization 1.18 The institutions involved in the sector are the Ministry of Energy, which is responsible for energy policy coordination and sector planning, the Uganda Electricity Board (UEB), the Bank of Uganda (for petroleum importation and marketing), the Forestry Department in the Ministry of Agriculture and Forestry, the Geological Survey and Mines Department (GSMD) in the Ministry of Lands, Minerals and Water Resources, the National Research Council in the Ministry of Planning and Economic Development (MPED) and the Ministry of the Environment Protection. The importation and marketing of petroleum products in Uganda is handled by six oil companies. Since 1970 the Government has had a 51 percent share in the capital of three: Shell, Total and AGIP. Government Strategy in the Energy Sector 1.19 Government strategy in the sector was outlined in the Ministry of Energy's paper which was submitted to and accepted by the National Resistance Council in September 1989. The strategy is to formulate, periodically update and follow an economic least-cost energy plan aimed at meeting the energy demand of the Government's recovery program as well as Uganda's long- term requirements by rehabilitating existing facilities, constructing new ones, setting ftiel prices, expanding exports, and monitoring and controlling imported energy. Further objectives are to ensure stable and sufficient supplies of petroleum products capable of matching demand; to replace, where possible, petroleum products used by industries and the railway system and to replace the use of other fuels by hydro electricity; to accelerate the program for rural and urban electrification; to accelerate the development and use of alternative new and renewable so,urces of energy; and to encourage research and studies towards efficient use of woodfuel and overall energy conservation. Bank Strategy in the Energy Sector 1.20 The Bank's Country Strategy for Uganda is to support policies and programs which help restore the country's productive capacity while steering the economy towards sustainable long-term growth. The severe deterioration of supporting infrastructure is a serious obstacle to the revival of agricultural and industrial production and is a major constraint on growth of the private sector. In the power sector, ongoing work to rehabilitate the Owen Falls power station and the transmission/distribution systems will relieve immediate power constraints. In order to meet the energy der rnds of a growing economy, however, a substantial expansion of Uganda's electricity generating, transmission and distribution capacity will be needed. Bank strategy is to support this expansion as well as improvements in the operating and financial performance of the power sector. Economic pricing policies, which are essential to ensure the maintenance and efficiency of the system will also be supported.  - 6 - 11. THE POWER SUBSECTOR Uganda Electricity Board 2.01 The Uganda Electricity Board (UEB) was established in 1948 by the Uganda Electricity Ordinance to acquire and operate existing electricity undertakings and to generate, transmit, distribute and supply electricity for Uganda. This Ordinance was replaced by the Electricity Ordinance 1961, the administrative and financial provisions of which took into account the amendments agreed to by Government with the Bank when the IBRD loan 279-UG (para. 2.20) was negotiated in 1961. After Uganda attained independence, this Ordinance was reenacted by the Electricity Act 1964 which is presently in operation. In accordance with the provisions of the Act, the functions and duties of UEB are to generate, transmit, distribute and supply electricity and to establish, acquire, maintain and operate undertakings for that purpose. The Act provides adequate autonomy to UEB to serve the country of Uganda and to export power to neighboring countries. Generation 2.02 Uganda's government-owned electricity generating plant is operated by UEB (Annex 3), and presently has a total name-plate capacity of 154 MW, of which 150 MW is installed at the Owen Falls hydroelectric station, which in 1989 generated 660 GWh (503 GWh to Uganda and 157 GWh exported to Kenya). The power station and dam are the subjects of a major rehabilitation exercise, which began in 1987 (para. 2.06). The balance of UEB's generating capacity is made up of small diesel stations (total 3 MW) in the northern and western regions, and one I MW hydroelectric station at Kabale (Mazebe Gorge). The Kabale power station is not operable due to major flood damage. Its electrical and mechanical equipment has recently been overhauled through funding from GTZ, and a request has been made to EEC to finance the outstanding repairs to the civil works; meanwhile the locale, which is currently remote from UEB's system, is being supplied from expensive to operate diesel generators. UEB's several diesel stations generated 1.13 GWh in 1989. 2.03 In outlying areas some small hydro and diesel power stations have been installed and operated by industries. The Kilembe Copper Mine Corporation operates a hydroelectric power station consisting of two 2.0 MW and two 0.5 MW generators. Although the mine has not been worked for several years, the electricity generated is used for pumping to prevent the workings from flooding, in the eventuality that it becomes economically viable for Government to re-work the mine. The station was rehabilitated and the generators re-commissi3ned in 1990 under an EEC-financed project. When the overhead line to the western region is out of commission (para. 2.15), UEB purchases supplies from the station, and provides these through its local network to consumers in the area. UEB has plans to eventually purchase the station, which can generate about 40 GWh per year, and operate it in parallel with the country-wide network. When the various ongoing programs of rehabilitation are completed, the country's average annual electrical energy generating capacity will be about 900 GWh and this will be almost wholly produced at the Owen Falls hydroelectric station.  -7 - Lake Victoria. Owen Falls Power Station and Dam. the Potential of the Owen Falls Site and the Proposed Proiect 2.04 The Existing Scheme. Uganda's considerable hydroelectric potential was first assessed seriously during the 1930s and 1940s. Construction of the first and only major hydroelectric development in the country was started in 1948, and consisted of a dam and power station at Owen Falls located at Jinja on the Victoria Nile river near to the outlet of Lake Victoria (Map IBRD 22738). The lake, with an area of 68,500 sq km, is the second largest fresh-water lake in the world and provides a reservoir of almost infinite capacity behind the dam. The ten 15-MW turbo-generating sets at Owen Falls were commissioned from 1954 to 1968 (Annex 3), bringing the total installed capacity at the station to 150 MW. The associated transmission system was also commissioned in 1954, consisting of a line westward from Jinja to Kampala. Another line going eastward via Tororo, near to the Kenya border, and then north to Mbale, was constructed in 1957. 2.05 Owen Falls Dam. The gravity dam is 600 meters long, 27 meters high and was built of cyclopean concrete. 2/ When the dam was designed in the 1940s it was decided that in the vicinity of Owen Falls the effects of earthquakes could be ignored (para. 2.10). The dam was designed and built without a control gallery at its heel, which is unusual for a dam of this type. The dam drains are inaccessible and are below tail-water level causing the dam to be subject to high uplift pressures, and reducing its effective weight. To address these shortcomings the proposed project will have a priority component which will consist of dam strengthening using proven techniques of steel wires anchoring the dam to the river bedrock. 2.06 Owen Falls Power Station - Uprating and Restrictions. A component of the ongoing Second Power project, which is being financed by IDA, ODA and CDC, is the rehabilitation, financed by ODA, of the ten generating units of the Owen Falls hydroelectric power station. This work, which is being supervised by ODA-financed consultants Sir Alexander Gibb & Partners and Kennedy and Donkin of UK, includes the rewinding of the 20 to 30-year old electrical generators. Using this opportunity and employing modern insulating technology, the units with their generously designed turbines are being uprated to 18 MW each. But, when the work is completed in 1995, the station's maximum output will be limited because the water through the turbines at high outputs, together with sluice gates throughput (para. 2.09) which exits down-river via the tailrace, raises tailrace -vater levels, thus reducing the head across the turbines and limiting their simultaneous capacity to about 164 MW. However, the rewinding will avail UEB of about 160 MW of station capacity when a set is out of commission for routine or emergency maintenance. 2.07 The Operating Arrangement. Uganda operates the plant in accordance with an operating arrangement between the riparians, so that water in sufficient quantities exits the lake through the turbines and through the sluice gates to ensure that flows in the Victoria Nile correspond to the prevailing lake level in a manner similar to that pertaining before the da.,, was built. The turbines and sluice gates have a maximum through-put spilling capacity of 1,800 cubic meters per second. The rainfall in the basin and this pattern of dam and station operation has led Z/ Concrete with large irregular stones embedded in it.  - 8 - to frequent one-meter fluctuations in the lake level and its shorelines in Uganda, Kenya and Tanzania, and to unrestricted flows in the White Nile through Uganda, Sudan and Egypt. 2.08 Ripon Falls. In 1959 the eighth of the ten units was installea, and the station began to be starved of water due to the effects of the Ripon Falls rapids upstream of the dam, which were the natural control of Lake Victoria. To help ensure a free flow of water to the station, the bed of the river at Ripon Falls was excavated to a depth of about 8 meters. Thus, the Owen Falls dam is now the Lake Victoria control, and its safety is of great importance to the downstream and lakeside riparian nations. 2.09 The Proposed Project. In the period 1961-62 extra heavy rain, which persisted across much of Central Africa, raised the lake level by more than a meter (increasing usable storage by 100,000 million cubic meters). This high lake level has more or less prevailed since that time, notwithstanding that the turbines and sluice gates have been operated in accordance with the 1948 Operating Arrangement (para. 2.07). UEB's consultants, Acres of Canada, in their 1990 study report (financed from Credit 1560-UG, a PPF, and with site subterranean investigations financed by CIDA), conclude that the next component in the least cost expansion program of Uganda's power generation development should be an extension by 102 MW of the Owen Falls plant to utilize this resource, the power potential of which, for the last 30 years, has flowed unharnessed through the sluice gates. The extension would be fed via a canal to a powerhouse structure with a head to the turbines of 20.7 meters. The powerhouse would be located about three quarters of a kilometer downstream of the existing station on the east (right) bank of the river. This location (i) provides the extension with a head about 3 meters higher than the existing station's head (worth about 12 MW), and (ii) ensures that water which otherwise would have interfered with the existing station's capacity (para. 2.06) will be directed to rapids below the existing station's tailrace - providing a gain in maximum capacity at the existing station of up to 16 MW. 2.10 Seismicity. The consultants compiled an earthquake event file for Uganda for the period 1850 to 1989, based on literature sources and information supplied by the United States Geological Survey data base. The results of this file indicate that an earthquake with a magnitude of 7.5 should be taken into account in the dam site area. Therefore, the scheme has been designed for structures on rock foundation to withstand earthquake effects up to 0.15 of gravitational acceleration. 2.11 Optimizing the Energy Capacity of the Site. The consultants also recommend that, to maximize benefits from the existing station and from the proposed extension and to obviate any risk (para. 6.05) of the lake falling to a level which could not sustain the full generating capacity of the site, Ug ida should approach the riparians of the White Nile (Sudan and Egypt) and of the lake (Tanzan d Kenya) with its proposal to modify the operating arrangement, so that the discharge wouia oe the long-term average annual discharge. In effect, this would regulate the flow of the river to a more consistent pattern and utilize the lake as a reservoir. The change in the operating arrangement would result in less fluctuation in flows in the river; extreme low flows would be much less frequent; and the frequency of large flood flows would be reduced. The range in lake level variations would also be reduced. The proposed change in the operational arrangement would thus benefit all the riparian states. Uganda informed the riparians that (a) it proposes to build an extension at Owen Fal' and intends to continue operating the power plant and the dam so that the river has a flow-reg ne v if the dam had not been built, but (b) to gain maximum benefits from the existing station and the extension and, in the absence of objections  - 9 - from any of the riparians, would change the operating Arrangement to utilize the lake as a reservoir as was the intent when the dam was built. Uganda employed the above-mentioned consultants to prepare the technical content of the communication to the other, and the Bank was given the opportunity to comment on it prior to its transmittal in November 1990 (para. 4.17). 2.12 The Need for Additiona! Spill Capacity and Dam Strengthening. The prevailing lake level combined with heavy rains, similar to those experienced in 1961-62, would cause even higher lake levels unless additional spill capacity is built at the dam to allow flood flows to exit the lake. Without such extra spill capacity, water would flow in flood over the dam for many months which would likely cause it damage and probably severely curtail power production. Additional spill capacity would reduce the probability of such extreme flood flows by enabling Uganda to increase lake outflows as a preventive measure. An increase in spillway capacity is imperative, and gates at the downstream end of the proposed car.al and an increase in its capacity to accommodate the extra spill are priority components of the Third Power Project at an incremental cost to the project of about US$60 million. In the vnlikely event of a dam failure, an uncontrolled discharge from the lake would occur, with S to S meters' depth of Lake Victoria (depending on the lake level at the time) draining down the Nile. This would be a flood of catastrophic proportions as each one meter of lake depth is equivalent to a volume of 67 cubic kilometers of water. Had Ripon Falls not been excavated (para. 2.08), the flood flow would be limited to the Owen Falls head pond volum-; the control of Lake Victoria would rapidly revert to its natural condition, and the preconstruction regime of the lake and the Victoria Nile would be reestablished with only minimal flood damage downstream. Thus, the integrity of the structures at Owen Falls is of extreme importance not only to Uganda, but also to downstream countries and any necessary dam strengthening work is a priority of the Third Power Project (para. 4.16). Transmission and Distribution 2.13 The transmission network in Uganda (Map IBRD 22738) consists of overhead transmission lines and substations operated at 132, 66, 33 and 11 kV, and is supplied from the Owen Falls power station. The 132 kV lines connect Owen Falls power station, via Kampala, to Nkenda in the west (near Kasese and Hima); Masaka in the southwest; Tororo in the east; and Lira in the north. A 132 kV line connects the Kenyan system to the Ugandan system at Tororo substation where sales to Kenya are metered. The double circuit 132 kV line between the Kenyan border and Kampala (via Tororo and Owen Falls) and the 66 kV line between Owen Falls and Kampala (Lugogo) are carried on steel towers. Other overhead lines are carried on wooden poles. The distribution system in towns is mainly by means of 33 and 11 kV transmission lines on wooden poles except in the major towns of Kampala, Jinja and Mbale where a small part of the system is carried by underground cables. Major consumers are supplied at 11 kV and 33 kV, while local supplies to small consumers and individual houses are derived from 33/11 kV primary substations and from 33 kV/430 V and 11 kV/430 V 3-phase and single-phase distribution transformers. Distribution in some isolated areas is via lengthy 11 kV lines on wooden poles, which are subject to uneconomic losses and inherent large voltage drops and fluctuations. The total length of the transmission and distribution lines mid-1990 was 9,659 km, and the transmission and distribution transformer capacity in 1990 was 401 MVA. Details are given in Table 2.01.  - 10- Table 2.01: UEB's Transmission and Distribution System in 1990 Transmission and Overhead Underground TOal distribution lines - k... 132 kV 1,009 a/ 1,009 66 kV 80 b/ 89 33 kV 2,220 - 2,220 11 kV 3,890 92 3,982 Lower voltages 2,168 200 2,368 Totals 8,356 249 9,659 1/ Owen Falls to Kampala North - 2x87 km Owen Falls to Tororo - 2xl 15 km Tororo to Lira - I x240 km Kabulasoke to Masaka - I x65 km Kampala North to Nkenda - I x300 km b/ Owen Falls to Lugogo - I x8O km Transformer substations Installed capacity (Primary voltage) (MVA) 132 kV 237.5 66 kV 22.0 33 kV 141.5 Total 401.0 2.14 The transmission system is controlled from the control center located at Owen Falls power station which, with the station, is undergoing rehabilitation and modernization under the Second Power project. Some transmission lines are very long and pass through unpopulated areas, which in the past several years has made them difficult to maintain. The ongoing project of rehabilitation is addressing these problems by providing maintenance vehicles, tools, materials and equipment and, as a result, the lines to Soroti, Gulu and Lira in the North have been rehabilitated by UEB staff, and were recommissioned in 1989. Some expansion is taking place there using materials purchased by UEB with funds received from the potential consumers. By the time of the ongoing project's start-up (para. 2.21), which was delayed for over two years by country-wide disruptions and strife, the condition of the substations throughout the system (already more than 30 years old) had deteriorated further than had been provided for under the project. Only about half of the substations could be rehabilitated from the project funds, and many areas are operating without proper means of protection against faults and without facilities to operate the system safely or efficiently. As a result, parts of the country remain without supply for several days without UEB being aware of the condition and before repairs or switching operations can be carried out, resulting in economic disruptions and negative social impacts. To bridge part of the US$15.5 million funding gap, the Nordic Development Fund, with a credit of US$5 million equivalent, and the Government of Norway, with a grant of US$2.5 million, agreed in 1990 to finance a contract for the supply and installation of a new system control and data acquisition facility (SCADA). The remainder (US$8 million) of the gap will be financed via the Third Power project.  - 11 - 2.15 Worse deterioration has taken place on the nearly 30-year old 132 kV line to the Western Region (including Nkenda, Kasese, and Hima cement factory), to the extent that by 1989 supplies to the region could be sustained for less than half the days of the year. 3/ A feasibility study, carried out by consultants, Lahmeyer or Germany, financed from the proceeds of Credit 1560-UG, has determined that lack of maintenance and uncontrolled termite attack and rot, between 1970 and 1985, has so weakened the line that it is not economic to rehabilitate it, and that it should be replace4 2.16 Representatives of EIB/EEC joined with IDA in appraising the component of the proposed program of development which would consist of a new 132 kV line from Masaka via Mbarara, substation reinforcements at Masaka, and a new 132 kV/33 kV substation at Mbarara, and the rehabilitation of the line between Kampala and Masaka. The least cost design of the transmission line requires that for most (250 km) of its route, which parallels roads and existing lower voltage lines, it be erected on steel lattice towers, but that for aesthetic reasons (Annex 17), the 35 km route through the Queen Elizabeth Park should be erected on dark-colored tubular poles which will be less obtrusive and occupy less space than lattice structures. The original 132 kV line between Kampala, via Kabulasoke, and Masaka has not deteriorated as badly as the rest of the line because it was constructed more recently, and close to the roads which has enabled maintenance to be performed more readily. UEB, with its own staff, transport and tools, and with locally procured wood poles is carrying-out a structured program of rehabilitation of this section of the line. To support this rehabilitation and for other repairs to its lines and expansion of the system, UEB operates a pole treatment plant, which is more than 30 years old, is inefficient despite recent temporary repairs and has insufficient capacity to handle the sizes and numbers of poles which UEB will need in its development program. 2.17 Maintenance of the lower voltage transmission and distribution systems in and around Kampala has also been neglected during the last 20 years, due to lack of access to foreign funds for spares and replacement parts, and because of the conditions which prevailed during the period. The Second Power project addressed some of the reconstruction and rehabilitation work which was identified at the time of project appraisal, but delays in project implementation resulted in the quantity and costs of repairs exceeding the budgeted amounts and much repair and replacement work is outstanding. This causes inefficiency in the network and unreliable supplies to commerce and industry, with resultant heavy losses to the productive sector and the economy. Sales to Kenya 2.18 In 1955 Uganda contracted to supply Kenya with firm power of 45 MW for 50 years starting in 1958. At that time, the incentive for Uganda was a substantial excess of generation capacity at Owen Falls. For Uganda the export of power provided an additional source of foreign exchange, and for Kenya the supply represented large economic benefits because cost of the Ugandan energy, compared with Kenya's generating cost, was extremely low. The agreement was modified in 1964 and the contracted supply of firm power was reduced to 30 MW and Kenya was committed to maintaining a minimum load factor of 90%. Since 1981 Kenya has altered its pattern of demand on the Ugandan system, taking substantially less than 30 MW during the I/ The line west to Kasese was hastily designed and built in 1962 straight across swampland to supply electricity to the Kilembe copper mine when international copper prices were high.  - 12 - period of peak daily load on the Ugandan system which is coincidental with the Kenyan period of maximum demand, but drawing a maximum load of substantially more than 30 MW during the nightly off-peak period. In the early 1980s, which were years when Kenya's hydroelectric output was limited by poor hydrology, and exports averaged about 210 GWh each year, the use of Ugandan power allowed Kenya to limit the draw-down on its reservoir storage as well as minimizing the need for costly thermal generation. Uganda's capacity to export energy declined in the mid to late 1980s because the Owen Falls generators, which were mostly over 20 years old, began to experience major electrical insulation breakdowns (para. 2.06). Since 1986 power has been provided to the Kenya grid mainly during off-peak periods, and the amount of energy Uganda has provided has been on an ad hoc basis. In 1988 exports had declined to 105 GWh but, improvements to the generators carried out by UEB staff, allowed exports to increase in 1989 to 157 GWh, and in 1990 they are expected to reach 200 GWh. Sales to Tanzania 2.19 In 1989 Government/UEB agreed to construct, using an Italian Government soft loan, a transmission link with a capacity of 16 MW (126 GWh/year) for exports to Tanzania along the west side of Lake Victoria to Bukoba, via the Masaka 132 kV substation. Uganda has negotiated a tariff of US cents 5.0/kWh with Tanzania, and the Italian contractor expects to complete construction, so that UEB can begin supplying the area around Bukoba with about 2 MW in 1993. Previous Bank Lending in the Power Sector 2.20 The Bank made a loan to UEB in 1961 of US$8.4 million equivalent (Loan 279-UG) for the expansion and improvement of the transmission and distribution system and construction of small hydroelectric and diesel plants and distribution networks to supply isolated areas. This project was successfully carried out and the loan closed in August 1964. In 1985 the Bank provided a credit to help finance the Second Power project. 2.21 The Ongoing Second Power Proiect. In 1985 the Bank provided a credit of 29.5 million SDR to Uganda for the Second Power project (Credit 1560-UG). The main beneficiary was UEB. Cofinancing was provided in the form of a CDC loan to UEB of