THE EFFECT OF ELECTRICITY SUPPLY ON EAST AFRICA’S ECONOMIC GROWTH: A CASE STUDY OF UGANDA
CHAPTER ONE
1.0 Introduction
1.1 Background to the Problem
Energy is a fundamental input in the production process, and its development is essential for economies striving to achieve sustainable growth and attract private investment. The energy sector is closely linked to other sectors of the economy, as it provides a critical input for the production of goods and services. Among various forms of energy, electricity stands out as one of the most versatile and controllable sources (IMF, 2017). It contributes to economic growth both directly—through value addition in production processes, technological advancement, and distribution systems—and indirectly through employment creation.
Technological progress in many industries has increased the reliance on electricity as a key component of production. In such sectors, productivity growth is often higher when electricity prices are relatively low. At the household level, access to electricity enables the fulfillment of basic needs, thereby improving living standards (World Bank, 2017). However, disruptions in energy supply can significantly affect economic performance across countries. Stable and affordable energy prices play a crucial role in stimulating economic growth by increasing consumers’ disposable income and reducing production costs for firms. Consequently, improved profit margins and higher purchasing power contribute to accelerated economic expansion.
According to Easterly (1999), assessing economic growth requires examining indicators such as production, consumption, and development metrics—including electricity consumption, mortality rates, credit availability, and fiscal revenues. Understanding the relationship between electricity consumption and economic growth is therefore essential for designing effective policies, regulating the energy sector, and enhancing firm-level performance.
1.2 Statement of the Problem
As Uganda aspires to achieve industrialization and sustained economic growth, electricity generation and distribution have been identified as key strategic priorities under national frameworks such as NDP II and Vision 2040. Significant investments have been made in the electricity sub-sector to enhance supply and accessibility. This aligns with ecological growth theories, which emphasize the critical role of energy in driving economic growth through production processes (Stern & Cleveland, 2004; Kummel et al., 2010; Hall et al., 2001; Stern, 2010). In contrast, the neoclassical growth model proposed by Solow (1956) treats energy as a substitutable intermediate input.
Despite increased investment, Uganda currently faces a short-term electricity surplus alongside relatively low demand. This situation is largely attributed to high electricity tariffs, which increase production costs and commodity prices, thereby contributing to inflation and reducing aggregate demand. Additionally, economic shocks—such as fluctuations in prices and declining GDP growth—have increased income poverty levels, leading to reduced electricity consumption (UNHS, 2017).
To fully harness the benefits of electricity, including enhanced productivity, employment creation, and improved service delivery, it is important to examine both the relationship and causal links between electricity consumption and economic growth. Such analysis is vital for informing energy and economic policies.
1.3 Objectives of the Study
i. To determine the extent to which electricity consumption depends on economic and technical factors in Uganda.
ii. To establish the causal relationship between electricity consumption and economic growth in Uganda.
1.4 Significance of the Study
Although numerous empirical studies have explored the relationship between energy consumption and economic growth, most have focused on developed countries (Ozturk & Acaravci, 2011; Payne, 2010; Odhiambo, 2009a, 2010). Many of these studies rely on Granger causality within a bivariate framework, often producing inconclusive results due to omitted variables such as energy prices and input quality (Stern, 2010).
This study seeks to address these limitations by employing a multivariate approach that incorporates relevant variables affecting both electricity consumption and economic growth. Using updated datasets, the study aims to provide more robust insights into both the direction and magnitude of the relationship (Odhiambo, 2010; Stern, 2017).
Furthermore, understanding the dynamics between electricity consumption and economic growth will support the formulation of well-informed policies and programs in the energy sector, ultimately contributing to improved economic performance.
1.5 Scope of the Study
The study examines the relationship between electricity consumption and economic growth in Uganda using annual data from 1982 to 2016. Uganda is selected due to the availability and reliability of data. The study utilizes data from sources such as the World Development Indicators (WDI), Uganda Bureau of Statistics (UBOS), and Electricity Regulatory Authority (ERA).
1.6 Organization of the Study
The study is structured into five chapters. Chapter One introduces the study. Chapter Two reviews both theoretical and empirical literature related to electricity consumption and economic growth. Chapter Three outlines the research methodology, including model specification, variable definitions, estimation techniques, and data sources. Chapter Four presents and discusses the findings, while Chapter Five provides conclusions, policy recommendations, study limitations, and suggestions for future research.
CHAPTER TWO
2.1 Overview of the Electricity Sector in Uganda
Over the past decade, the Government of Uganda has implemented significant reforms in the electricity sector aimed at improving efficiency and sustainability. The Power Sub-sector Reform Programme led to structural changes designed to create a financially viable electricity industry capable of delivering reliable and affordable power (Karekezi et al., 2004).
The enactment of the Electricity Act (1999) liberalized the sector and established key institutions such as the Electricity Regulatory Authority (ERA), Rural Electrification Fund, and Electricity Dispute Tribunal. The former Uganda Electricity Board (UEB) was unbundled into three entities: Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL), and Uganda Electricity Distribution Company Limited (UEDCL). In 2005, UMEME Limited assumed responsibility for electricity distribution under a public-private partnership arrangement.
Uganda’s electricity generation is predominantly hydro-based, accounting for approximately 80% of total generation. While installed capacity has increased over time, demand growth has not kept pace, resulting in a temporary surplus. Investments in large hydropower projects such as Karuma and Isimba, as well as rural electrification initiatives, are expected to enhance supply and support economic development.
Despite these efforts, access to electricity remains limited, particularly in rural areas. Low electrification rates and high tariffs continue to constrain economic activity and household welfare. Consequently, many households rely on biomass fuels, contributing to environmental degradation.
