Research proposal writers

THE EFFECT OF ELECTICITY SUPPLY ON EAST AFRICA’S ECONOMIC GROWTH: THE CASE OF UGANDA.

CHARPTER ONE

1.0 INTRODUCTION

1.1 Background to the problem

Energy is one of the main inputs to the production process and therefore, its development is crucial for developing economies aiming to boost their economic growth and private investment. This sector’s activities relate to and strengthen the rest of the economy as energy forms an input for almost all production processes of goods and services. Electricity is one of the important components of the energy sector as it is the most versatile and easily controlled form of energy (IMF, 2017). It contributes to economic growth directly through value addition associated with extraction and transformation of inputs, technology transfers, marketing and distribution of goods or services and indirectly through employment generation.

In many industries, technology transfers tend to increase the relative share of electricity in the value of output and in these industries, productivity growth is found to be greater the lower the real price of electricity and vice versa. In the case of households, access to electricity allows them to meet their most basic subsistence needs which translate into better standards of living (World Bank, 2017). Supply interruptions of many sources of energy are known to have a great impact as they can harshly impact the economies of almost all countries. In addition, stable and lower energy prices are known to help stimulate the growth rate of any economy. This is because lower energy prices result in increasing disposable income for consumers and lowering costs for firms. The resulting improved profit margins for firms and higher disposable income for consumers provide incentives for accelerated rates of growth.

Easterly, 1999 also argues that in order to validate the information from official statistics on output growth, it is helpful to consider developments in the correlations of production, consumption, and economic development or growth, such as consumption of electricity, the mortality rate, credit, and fiscal revenues. In relation to electricity, it is important to understand the correlations and causal relationships between economic growth and electricity, regarding both consumption and productivity to formulate well directed policies, regulate the industry and manage individual firms.

1.2 Statement of the problem           

As the country moves towards having an industrialized economy with high sustained growth rates, the government of Uganda has identified electricity generation and distribution as one of the key strategic interventions (NDP II; Vision 2040). As a result, it has invested heavily in the energy sector, particularly the electricity sub-sector, with the aim of increasing accessibility and supply. This move signals the importance of electricity in the country’s industrialization process which is in line with the Ecological growth theory that considers energy to be very critical in growth of the economy through the production process (Stern and Cleveland, 2004; Kummel et al, 2010; Hall et al, 2001; and Stern, 2010). This is contrary to the neoclassical school of thought by Solow (1956) which looks at energy as an intermediate input that can easily be substituted with labor or capital.

The increased investment in the sub-sector currently has Uganda enjoying a short term surplus situation amidst low electricity demand. This has mostly been attributed to the high end-user power tariffs that have increased input prices and prices of other commodities, which in turn contribute to higher overall inflation and also dampen aggregate demand and growth. On the other hand, one may argue that the negative shocks in the economy like sharp changes in prices of goods and services and overall decline in GDP growth rate have increased incidence of income poverty hence reduction in consumption “of electricity”, (UNHS, 2017).

Therefore, for the country to maximize the benefits accrued to electricity use such as, employment generation and increased productivity and delivery of services, it is essential to investigate the relationship between electricity consumption and various economic factors and also examine the causal relationship between these two variables as this has important implications for energy and economic growth policies.

• Objective of the Study

1. To determine the dependence of electricity consumption on economic factors and technical factors in Uganda.
2. To estimate the causal relationship between electricity consumption and economic growth in Uganda.

1.4 Significance of the study                                            

Extensive empirical studies have examined the role of energy in the growth process, however, most of these are for the developed world (Ozturk & Acaravci, 2011; Payne, 2010; (Odhiambo, 2009a, 2010). Most of the empirical studies have used Granger causality to test whether energy use causes economic growth or whether energy use is determined by the level of output in the context of a bivariate vector auto-regression. The results have been generally inconclusive probably due to the omission of necessary variables, either the quantities of other inputs (and quality adjustment of the energy input) or energy prices especially due to availability of data (Stern, 2010).

With this in mind, this study seeks to investigate the multi-variate causality between electricity consumption and economic growth using the most recent dataset and incorporating the necessary variables that affect both may change not only the direction of causality between the two variables but also the magnitude of the estimates as indicated by (Odhiambo, 2010; Stern, 2017).

Also the need to learn more about the correlations and causal relationships between economic growth and electricity consumption is important as this will result into well-directed policy and program decisions and incentives regarding the energy sector.

1.5 Scope of the Study

The study investigates the relationship using annual data for the period starting 1982 to 2016. It will focus on Uganda due to availability and reliability of data. The data for the variables to be estimated will be obtained from World Development Indicators (WDI), Uganda Bureau of Statistics (UBOS), and Electricity Regulatory Authority (ERA) databases.

1.6 Outline of the study

The study is organized in five chapters. Chapter one presents the introduction to the study. Chapter two reviews theoretical literature, highlighting the theoretical framework used for the study and empirical literature that explains the relationship between electricity consumption and economic growth. Chapter three describes the methodology of the study, specification of the empirical model, definition and measurement of the variables included in the empirical analysis, estimation techniques and the sources of the data used in the analysis. Chapter four presents and discusses findings from analysis and finally Chapter five summarizes major findings, conclusions from the research report, discusses limitations and suggests areas for further research.

CHAPTER TWO

• Current Electricity Sector in Uganda

The Government of Uganda has for the past decade embarked on a Power sub-sector Reform Programme, which has resulted in the implementation of significant structural changes within the sector. The Reform Programme was aimed at transforming the electricity sector into a financially viable industry that would enable increased supply of adequate, reliable, and least-cost power to meet the country’s demand (Karekezi et al. 2004).

Following the decision to reform the sector, several laws were passed such as the Electricity Act, 1999 that liberalized the electricity industry, established the Electricity Regulatory Authority to regulate the sector, the Rural Electrification Fund and Electricity Dispute Tribunal and also unbundled the Uganda Electricity Board (UEB) leading to three public private partnerships namely Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL) and Uganda Electricity Distribution Company Limited (In 2005, UMEME Limited took over the business to distribute and supply electricity for the next 20 years).

As at end of 2014, 13 power plants were selling power to the national grid with a total licensed generation capacity of 828.5MW and 873.9MW in 2017 (ERA, 2014). Uganda’s Electricity Supply Industry is largely dependent on hydro power plants whose contribution to the generation mix stood at 80% during financial year 2015/16. In the past years this led to occasional load shedding since supply did not increase proportionally. Currently, Uganda has a short term surplus situation amidst low electricity demand. Electricity demand has been growing at an average of 10% per annum mainly resulting from the prominent GDP growth rates of about 6% and increasing population growth rates during the past two decades (MEMD).

The desire to achieve sustained high growth rates coupled with conditions from international donors has pushed major public investments into the energy sector. Even though solid biomass fuels are the most consumed in the region, main focus is on electricity, petroleum and renewable energy sub sectors as these dominate the major economic sectors; agricultural, industrial and service sectors (East African Community, 2016; Othieno & Awange, 2016). An estimated 90 percent of public expenditure on energy infrastructure is invested in extension of the electricity grid. Such projects include large hydro power projects are under construction like Karuma (600MW), Isimba (183MW) and Ayago, smaller hydro power projects as well as transmission lines under the Rural Electrification Programme. This will definitely improve efficiency and effectiveness of traditional sectors (i.e. Agriculture related businesses, especially those centered on value addition) and also aid in the continuous expansion of the industrial and service sectors in the country.

Despite these efforts, the electricity sector remains relatively undeveloped with only 4.4 % of rural households had access to electricity on the grid in 2014 (Mawejje, 2014). As a result, Uganda’s per capita electricity consumption, estimated at 215 kWh per capita per year is one of the lowest in the whole world (Sub-Saharan Africa’s average: 552 kWh per capita, World average: 2,975 per capita). In addition, reliability of electricity supply continues to be a major constraint to private sector competitiveness and growth: one in every four business in Uganda report electricity reliability as the most challenging constraint (World Bank, 2013). The low power accessibility (26.7% according to WDI) has led to forest depletion by 39% since the early 1990s because most people depend on wood fuels and charcoal which is also made out of wood.

Table 1: Electrification Rates (%) in the EAC for the year 2013

Source: WEO Electricity Access database

Uganda’s electricity demand profile reflects strong industrial demand for electricity which accounts for 62% of electricity consumption in 2015 and 64% in 2016. The share of electricity demand by the different categories of consumers, including industrial, commercial, and domestic consumers, and export is shown figure 1 below.

Figure 1: Distribution of electricity demand in 2015

Source: Electricity Regulatory Authority

Electricity Tariffs and Electricity Consumption

Uganda has one of the highest electricity tariffs in East Africa, with pricing in four categories: domestic, street lighting, commercial and medium, large and extra-large industries (ERA, 2018). Energy prices are adjusted every 3 months by ERA taking into account changes in the Consumer Price Index, foreign exchange rates and international fuel prices. Electricity end-user tariffs are reflective of generation, transmission and distribution costs, and the difference being footed from Government budget by way of subsidies. The high power tariffs have discouraged consumption with many small industries failing to take off as a result of the high cost of production while those that have managed to stay in production pass on this cost to final consumers through high prices for their goods and services. However, according to ERA, 2018, failure to utilize generation capacity will lead to increased tariffs as power losses were taken as a major contributing factor for the high power tariffs paid by the consumer. The figure below shows ERA distribution of electricity tariffs from 1991 to 2018-Q2.

Figure 2: ERA distribution of electricity tariffs from 1991 to 2018-Q2

2.2 Economic growth in Uganda

The macro-economic environment in Uganda has undergone significant reforms since the mid-1980s aimed at improving economic performance through price stabilization, attracting investments, increasing employment opportunities and incomes, and improving the productivity and efficiency of public investments. The Ugandan economy showed remarkable resilience in achieving modest Gross Domestic Product (GDP) growth of 4.8% in 2016 compared to 5.5% growth in 2015 (AfricanDevelopmentBank, 2017; WorldEconomicForum, 2017)..

In F/Y 2015/16, GDP at 2009/10 constant prices was estimated to have grown by 4.8 % (UBOS, 2016). Sector performance was recorded as follows; Agriculture, Forestry, and Fisheries (3.2 %), Industry (4.0 %), Services (6.5 %), and Taxes on products (0.9%). In F/Y 2015/16, the nominal GDP stood at 84.4 trillion shillings compared to 77.8 trillion in 2014/15. In constant prices, the GDP stood at 55.8 trillion in F/Y 2015/16 and GDP per Capita income at current prices grew from 2,226,031 shillings in 2014/15 to 2,347,754 shillings in 2015/16.

In regard Consumer Prices Indices, annual average Headline inflation in 2015 was 5.5 % compared to 3.1 % annual average inflation recorded in 2014. Specifically, the annual average Core inflation increased to 5.6 % in 2015 compared to 2.7 % recorded in 2014. Annual average Food Crops inflation for 2015 declined to 6.8 percent compared to 7.6 percent recorded in 2014 while Annual average Energy, Fuel and Utilities (EFU) inflation increased to 3.2 percent compared to 1.9 percent recorded for the year 2014.

Figure 3: Monthly Inflation for Housing, Water, Electricity, Gas and other Fuels

Source: Uganda Bureau of Statistics

2.3 Electricity Consumption and Economic Growth

Uganda’s economy is electricity dependent for its growing industrial sector especially manufacturing, agro-processing and telecommunications and the commercial sector. The energy sector is one of the key sectors in the economy as it provides a major contribution to the treasury resources from fuel taxes, Value Added Tax on electricity, levy on transmission bulk purchases of electricity, license fees and foreign exchange earnings from power exports (ERA, 2018; MEMD, 2018). On the demand side, the Committee on Electricity in Economic Growth, 1986 classified the relationship between economic growth and electricity consumption in two categories namely; the dependence of electricity consumption on economic and technical factors and the contribution of electricity to technical advances thus stimulating the economy through productivity gains.

Performance of the electricity sector has implications for industrial competitiveness, households’ welfare as well as medium long-term economic growth (ERA, 2018). For example, dependable supply of power and electricity use increases the rate of innovation which also increases economic growth. However, unreliable electricity supply coupled with high power tariffs still remain a hurdle for investors which in turn contribute to higher overall inflation, reduced aggregate demand thus limiting private sector competiveness and growth (Mawejje, Munyambonera, & Bategeka, 2013; World Bank, 2013).

CHAPTER THREE

3.0 LITEREATURE REVIEW

3.1 Theoretical Literature

3.1.1 The Production Function

Literature identifies two contrasting theoretical arguments regarding the relationship between energy use and economic growth discussed below.

The Standard theory of growth by Solow (1956) places minor importance on the role of energy in production process and therefore in economic growth. It considers only capital and labor as the primary factors of production and energy is treated as an intermediate input which can be replaced by capital or labor, assuming a unity elasticity of substitution between factors of production. He