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The electricity sector has been unable to attract new investments in the form of new power
generation capacity plants which has been attributed to low tariffs. ZESCO has made two
applications for increase in tariffs in the last 2 years in a quest to improve its operations. The
government has in the past suspended import duty on energy saving and generating equipment in
an effort to address issues of demand side management. The country has also seen reforms in the
electricity sector in an effort to make the sector handle the challenges that it faces.
Forecasted demand for 2010 stands at 2,200 mega watts giving a deficit of about 600 mega
watts. If the forecast demand does not match the installed capacity the load shedding will be
increased. The load shedding will result in reduced production. This will affect the productivity
and the profitability of firms mainly in the manufacturing sector. The under-utilised capacity that
may result will lead to these firms laying off excess staff causing an increase in unemployment.
This policy brief paper has recommended measures geared towards improving efficiency in
service delivery in the energy sector and efficient energy usage by consumers of electrical
energy. Measures recommended include the implementation of an energy efficient policy and the
implementation of a debt management contract for ZESCO. Other recommendations include the
establishment of a framework to spur investment by government through Public Private
Partnerships (PPP) for the construction of power generation plants and the reduction of VAT on
electricity. The other recommendations include the abolishing of cross subsidy regime across the
different tariff groups and investment in other source of energy production.
2.0 INTRODUCTION
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Demand Forecasts for Zambia
3000
2500
2000
W 1500
M
1000
500
0
0 1 2 3 4 5 6 7 8 9 0 1 2
0 0 0 0 0 0 0 0 0 0 1 1 1
0
2 0
2 0
2 0
2 0
2 0
2 0
2 0
2 0
2 0
2 0
2 0
2 0
2
Years
In 2008 as a result of increased demand and rehabilitation of the power infrastructure the country
experienced a power deficit of 450 mega watts. This led ZESCO Ltd to institute scheduled power
rationing. Huge investments in the mining companies led to the rising demand for electricity in
the country. ZESCO lost approximately 30% of its annual revenue due to the load shedding.
450MW is about a third of its total capacity. The Copperbelt Energy Corporation (CEC) that
transmits and distributes power to the mines has predicted a 40% rise in consumption of
electricity by the mines in 2010/2011.
The generation mix is 99% hydro, with 1% thermal. Hydro installed capacity is at 1,672MW and
thermal installed capacity is 8MW.
The country’s hydro power potential is about 6 000MW. The installed capacity is 1,672 MW
with identified potential standing at 4,358 MW. This hydro power potential is far from being
realised. A number of sites have been identified for hydro power generation through the Office
for the Promotion of Private Power Investment (OPPPI). However investment in the sector has
been non-existent. The table below gives the sites with identified potential for hydro power
generation.
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Chikata 1.2 3.5 13.1
Luapula River 1,550 950 1,305
TOTAL 4,457.6 4,358 5,952.3
The country has been unable to attract private investment in the sector which has been attributed
to Zambia having one of the lowest tariffs in the region. It is estimated that an investment of $6
billion is needed in the next 5 years to attain a generation capacity of 4,500MW. (Zesco 2009/10
proposed tariff advert)
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escalating over the years with the highest portion of their cost of distribution being staff costs as
see in the table below.
Therefore the efficiency and accountability of the firm has been questionable. This has resulted
in the resistance to an increase in tariffs by the business community. IMF has indicated that
ZESCO is financially unviable and unable to mobilise resources due to its track record and even
if it managed to increase its tariffs it would still be unviable. Total receivables for ZESCO seem
to be increasing year after year. Total receivables increased from 35% of turnover in January
2008 to 61% of turnover in September 2008. The target for transmission losses was not been met
for 20008. Transmission losses are at 4.5% while distribution losses are above 33%. Though the
utility has been commercialised its internal operations leave much to be desired. As a result
ZESCO is perceived badly by the business community who feel that the utility should first clean
up its act before requesting for any increase in tariffs.
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Mining Deficit/Subsidy Requirement at PPI Escalator of 3% Per Annum
200 177
180 164
160 152
140 123
US$ (Mill)
120
95
100
73
80
55
60 41
40 31
20
20
0
2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
Figure 3: Mining Deficit/Subsidy Requirement (Source IPA Study)
While the perception on increase in tariffs by the business community has been that ZESCO
should first clean up its act, increments are also opposed as they have a direct bearing on the cost
of doing business especially for those businesses that are energy intensive.
ZESCO has introduced a Time of Use (TOU) tariff for Maximum Demand (MD) consumers.
However the tariff is not widely being used. The TOU tariff is not mandatory for MD consumers.
Under the TOU tariff all electricity consumed/used during the standard time period is charged at
the rate indicated in the tariff schedule. All electricity consumed/used during the off-peak time
period is charged with a discount of a 25% discount on energy charges and a 50% discount on
capacity charges. All electricity consumed/used during the peak time period attracts a surcharge
of 25% penalty on both energy and capacity charges.
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and the Chambishi Copper smelter. These investments are heavily reliant on electricity. The
global economic crisis has resulted in the reduced industrial activity and as a result power
consumption by the mines registered a decline of 15% in 2009. The power deficit turned into a
power surplus of 200 megawatts as a result of the reduced economic activity since late 2008
when a number of mines either closed or scaled down operations as global metal prices lowered.
The surplus was short lived as demand has increased as the economy recovers and more mines
come back on stream. This has necessitated the rationing of power once again.
During the deficit period the quality of the electricity was not assured. A load shedding schedule
was drawn up but was not always adhered to. Power would be cut unexpectedly without a clear
indication of when it would be restored. These disruptions on supply resulted in the damage of
equipment and loss of man hours of production. The loss in man hours of production affected
profitability in a lot of industries and affected budgeted production especially for industries that
operated on a 24 hour basis.
The country wide blackouts affected the mining sector with some underground mines flooding as
they had no power to pump out the underground water thereby cutting production. One mine
quantified its net loss after one day of a blackout to $2 million last year. In the most recent
nationwide black out in June this year another mine quantified its loss in revenue of $1.8 million
after having been off supply for 18 hours. Copperbelt Energy Company (CEC), which buys
power from ZESCO Ltd for distribution to the copper mines, said the company had been
importing power and using diesel generators to supply power to the country's copper mines in an
effort to prevent flooding during the black out.
ZESCO has indicated that it needs to increase their tariffs to cost reflective levels. In 2007 the
energy regulator granted ZESCO a three year multi tariff increment of 27% in 2008, 16% in
2009 and 11% in 2010. ZESCO this year again applied to the energy regulator to have the multi-
year tariff increment adjusted upwards asking for an average adjustment of 59% across tariff
groups with domestic consumers having the highest proposed increase of 80% for 2009. The
proposed average tariff increments are as follows; 51% in 2009, 21% in 2011, 21% in 2012 and
7% in 2013. The Energy Regulation Board (ERB) granted ZESCO an average increase of 35%
for 209/10 and 26% for 2010/11. The increment of an average of 59% that ZESCO was asking
for was too high for the industry to absorb especially with the reduced economic activity as a
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result of the global economic crisis. The awarded 35% average increment is still a bit on the high
side as Zambia has a high cost of doing business making companies uncompetitive.
The graph below shows the cost associated to starting a business as a percentage of income per
capita.
Below is a graph that shows the minimum capital required to start a business as a percentage of
income per capita. In both cases Zambia ranks midway of the countries in the study indicating
that the cost of doing business in the country is higher than average.
Figure 5: Minimum Capital to Start a Business (Source Doing Business Data Base)
In a study done by Zambia Association of Chambers of Commerce and Industry (ZACCI) other
factors like infrastructure, access to credit, cost of petroleum products and corruption have an
adverse effect on the cost of doing business in Zambia. Tariff increments would work towards
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further increasing the cost of doing business.
3.3 Policy
The electricity sector has undergone a number of policy changes in the last decade so as to meet
the challenges of having adequate and sustainable supply. This began with the energy policy of
1994. The Electricity Act was then revised in 1995 which removed the monopoly of ZESCO and
provided for the entry of new players. The three main players in the power industry are: ZESCO
Limited, Copperbelt Energy Corporation (CEC), and Lunsemfwa Hydro Power Company
(LHPC). ZESCO Limited is a vertically integrated state owned utility which owns and operates
the bulk of the generation, transmission and distribution infrastructure in the country. CEC is a
privately owned generation and transmission company which owns and operates the 220kV &
66kV transmission network, plus 80MW gas turbines to supply power to the copper mines.
LHPC is a privately owned generation company which operates Lunsemfwa and Mulungushi
hydro power stations with a total installed capacity of 38MW. All power output from LHPC is
contracted to ZESCO Ltd.
In 1995 The Energy Regulation Act was enacted creating the Energy Regulation Board (ERB)
which regulates the energy sector. In 2002, the Energy Regulation Board (ERB) proposed a
program to restructure the Electricity Supply Industry (ESI) through the unbundling of the
generation, transmission and distribution functions, placing them under private management.
Privatisation of ZESCO was one of the objectives set in agreement with the International
Monetary Fund (IMF) in order to reach the Highly Indebted Poor Country (HIPC) completion
point. However, in April 2003, the government announced that ZESCO would be
commercialised, leaving aside the proposal of unbundling the company. Further, in 2004, the
government merged ZESCO with the Kariba North Bank Company.
In response to trying to address the deficit the government removed import duty on energy
saving equipment and energy generating equipment in 2008. In addition a Time of Use (TOU)
tariff was introduced. Industry can subscribe to the tariff on a voluntary basis. The subscription
of industry to TOU has been very low.
An office to look at the private investment in the energy sector has been opened up, this is the
Office for Promotion of Private Power Investment (OPPPI). The office has been instrumental in
identifying possible sites for hydro power generation in the country. The International Finance
Corporation (IFC) is currently carrying out a feasibility study for development of Kafue Lower
power station which will have the capacity to produce 750MW. Fifteen companies showed
interest in developing the $1 billion plant which will be a Public Private Partnership (PPP)
project. The project will take six years to build once the construction commences. Therefore in
the medium term a power deficit is still looming. It is essential to look at measures that will
ensure improved quality and supply of electricity in order to meet the ever increasing demand.
The power deficit is bound to continue as the economy grows since new generation has not been
growing at the same rate as the economy. A few recommendations have been made to address
the power deficit in the short, medium and long term.
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1. Investment in New Power Generation
There is need to invest in new power generation plants. Investment in these plants is a costly
venture. These projects should be Public Private Partnership (PPP) projects. The government
should make commitment to sourcing at least 40% of the funds required from international
financial institutions in order for the projects to take place. These investments are large
strategic investments and need the backing of government. The private sector can raise finance
for such projects through the issuance of energy bonds that can either pay out quarterly
dividends once the power generation plant is up and running or it can be a zero coupon bond
paid back after a specific period. The investment should be backed by government who should
guarantee repayment. Investment in this sector will not be possible without government
involvement.
Zambia needs to attain international credit rating which had been suspended at the onset of the
global economic crisis. This will enable the country access funds from international
commercial sources for such projects.
4. Management Contract
In order to maximise the strides made through commercialisation of ZESCO a management
contract should be entered into with a company that can assist the firm in revenue collection.
This is an effort to turn ZESCO into a more efficient and viable company. This will assist the
company in raising funds in the future.
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The Time of Use (TOU) tariff should not be mandatory for all MD customers. Shifting from
the regular operation hours to other hours may be difficult for companies that are not running
24hr operations. Therefore the TOU tariff should be attractive enough for companies to
subscribe to. Awareness of the tariff should be intensified for users to see the benefit.
6. Mining Tariffs
The mining companies being the largest consumers of power should be made to pay cost
reflective tariffs. The mines currently have tariffs lower than other consumers. The Bulk
purchase agreements between ZESCO and Copperbelt Energy Corporation should be
renegotiated to facilitate this. The table below gives a comparison of the price per kilo watt
hour.
8. Tariff Revisions
As there need to reach cost reflective tariffs, increments should be gradual so as not to
adversely affect the consumer. In addition ZESCO employees should be made to pay for their
electricity like every other consumer. The ZESCO staff tariff should migrate to the normal
domestic tariff.
9. Distribution Loses
Government ministries and departments should settle all their outstanding arrears and should
remain current with payments. There should be no discrimination between government and
private customers when it comes to disconnection as a result of non payments.
Government needs to implement a mechanism for the speedy recovery of debt to electricity
utilities.
10. Regulation
Regulation of the energy sector should be left to the Energy Regulation Board (ERB). The
proposed performance contract between government and ZESCO should fall under the
direction of ERB and not as proposed to be monitored and executed by the five man minister
committee. ERB already has Key Performance Indicators (KPIs) by which it measures
ZESCO’s performance.
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The Energy Regulation Board should handle all aspects of regulation including the mining
tariffs which should not be left to government.
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