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Thursday, 7 November 2013

Where Next for ZESCO?

Government has approved the proposal by ZESCO to increase electricity tariffs. Energy Minister Christopher Yaluma says that the Energy Regulation Board (ERB) approved ZESCO’s application, without indicating by how much the tariffs will rise.

Earlier this year ZESCO applied for electricity tariffs to increase 26% on average in order to meet its operational costs, high inflation and meet rising demand for electricity in the country. Yaluma says that the new electricity tariffs will increase less than 26%, but he has refused to state the exact amount. We have to wait for ERB to announce how much has been approved.

Electricity is vital for economic and social development. Unfortunately, affordable access to electricity clean remains an elusive dream for many of our people, especially those living outside of urban centres and the poor. Only 30 percent of our population have access to electricity, which means that the remaining 70% live in the dark! Rural areas are virtually disconnected from the national electrical grid, with less than 4 percent of people living in rural villages using electricity, while over 95 percent use firewood for cooking.

Over the past decade, Zambia has increased access to electricity at a rate of less than 0.5 percent per year. At this rate, it would take us well into the 22nd century to achieve universal electrification. While power is relatively abundant in Zambia, much of that power is going to the mining sector, leaving relatively little for domestic consumption.

On the flip side, at $0.03–$0.04 per kWh, Zambia has some of the lowest power tariffs in Africa. Namibia charges as much as $7,83/kWh. Malawi and SA have roughly the same end-user tariff of $4,47/kWh and $4,02/kWh respectively. While Zambia’s power production costs are low, tariffs are lower. Tariffs are capturing only about 40 percent of historic costs, and the power sector today is living on the investments of the past without making provision for the future.

The question is what should be done?

The first thing is that ZESCO should press ahead with increasing tariffs to fund the additional power. I have long been a supporter of GRZ efforts to increase electricity tariffs towards cost reflective levels. Given the financial mess Zambia finds itself it is important this step is taken urgently. The key is to ensure everyone pays the full cost of use.

The government also needs to ensure that the it pays its own bills to ZESCO. Last year we learnt that GRZ ministries owe ZESCO over $40m in unpaid electricity bills. To help address the situation, the government apparently intends "to settle the bill through the introduction of pre-paid meters in all government ministries... 40 percent of all electricity purchased will be going towards offsetting the bill". It is not clear how much progress has been made on that promise. 

One thing is certain : the idea of a “pre-paid” meter at a police station or hospital is a non-starter. At the end of the day the real problem is that there are perverse incentives for GRZ to let ZESCO carry the loses because it is an easier way of hiding inefficiencies. The public does not understand that it is losing out on ZESCO. What we are actually told is that we have little capacity because the economy is growing. This may true but its not the whole truth!

Which brings us to the real issue that needs to be sorted. We need to reform ZESCO. My standing proposal is that ZESCO should unbundled into three - generation, transmission and distribution. A monopoly is only needed for transmission due to network benefits. There's nothing radical about that idea because it has cross party support. A parliamentary committee on  Economic Affairs and Labour (2009) concluded
ZESCO, which is a major player in the energy sector, is in-efficient and undercapitalised due to poor management and a bloated management structure. ZESCO must be restructured by unbundling it into generation, supply and distribution components to run as separate entities. Unbundling ZESCO will make it more efficient and responsive to the current challenges in the sector. This will address the inefficiency that exists in ZESCO.
Unfortunately Yaluma is on the wrong page of history because he continues to insist ZESCO has been totally transformed. Earlier this year he claimed that “The ZESCO of about nine months ago is totally different from the ZESCO is see today...Clearly the ZESCO of today is far much better than the ZESCO we had before”. With that attitude don’t expect any reforms!

Then there’s the question of the mining companies. We were told earlier this year that GRZ will gradually raise the electricity tariffs it charges mining firms so that by 2015 they reflect the true cost of producing power : "We would like to see a situation where all the mines pay cost-reflective tariffs and we want to see this migration by 2015". No more subsidies they said! We are still not sure where we are with that. Given the control that mining companies appear to have over Yaluma, the forthcoming ERB statement will be interesting to read!

The bottom line of course is that the tariffs have to go up! That's unavoidable! The key point is that any new prices must be put forward as part of an overall policy package that includes renewed obligations by GRZ to settle its own debt on time; mining companies paying a fair price; and, new privatisation reforms for ZESCO that sees it only retaining monopoly over transmission. After the fuel subsidies were transferred to civil service wages, many people will rightly oppose the new tariffs. Therefore it is important PF follow my suggested advice above to help restore policy credibility.
Chola Mukanga | Economist
Copyright © Zambian Economist 2013


  1. A valuable comparison of regional tarrifs.

    Does also show the problem is bad governance.

  2. Factually wrong about kWh rates in South Africa.


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