Zambia is in the middle of a crippling electricity crisis as the country grapples with a 560 MW power deficit, a situation likely to only get worse as demand for electricity grows 200MW annually. ZESCO has embarked on a countrywide power rationing mechanism in order to preserve the limited water available for power generation until the 2015/16 rainy season. The shortage of electricity has been building for some time but has become more pronounced with reduced water levels at Kariba North Bank Power Station, Kafue Gorge Power Station and Victoria Falls Power Station.
Zambezi River Authority CEO Munyaradzi Munodawafa recently warned that Zambians should brace themselves for total blackout by November 2015 if nothing is done about the low water levels at Kariba Dam. He has been calling on GRZ to take "serious interest in investing in a standby water reservoir". The situation has sent politicians in a frenzy with a group of parliamentarians recently touring Kariba Dam and Kafue Gorge to check on "the real cause" of the load shedding. The Kariba Dam of course has deeper problems with its crumbling walls which recently forced the European Union to donate up €64m in emergency funding.
Load shedding is the new normal for Zambia even though some new power is coming on stream. GRZ is currently pushing to ensure the 120MW Itezhi-tezi power station is commissioned as planned in August 2015, and hopefully that will be followed by 150MW Maamba Coal Powered Station in November 2015. The latter is most likely to slip in delivery. But even if it was delivered on time, it is unlikely to change the situation as energy demands grow. The problem is that GRZ has no money to generate additional investment and are there is insufficient power reserves in the region to import (money for imports is equally tight).
The issue matters because as the power crisis unfolds, the money problems for GRZ only gets worse at the time when it is facing worsening macroeconomic challenges (fiscal deficit, currency depreciation). Direct revenue losses for ZESCO are estimated around $170m from reduced sales to customers and distributors (and growing). This is likely to affect ZESCO’s future investment capacity and potentially exacerbates its existing funding deficit. ZESCO would also need to import power between now and December 2015 estimated at $60m, on top of its existing funding gap of $60m. Government has already authorised importation of 100 mega watts (MW) of power, leaving a gap of 460MW. The overall financial loss to GRZ is around $290m.
The bigger issue is that electricity is the lifeblood of the economy. Needless to say, the power deficit is already having an impact on business operations. Utility companies are beginning to ration water because of the electricity shortage. Mining companies are likely to be more affected going forward. There are plans to cut power supply to mining companies possibly by around 20%. Under the power supply agreements with the mines, Zesco can cut supply by up to 30 percent, but there is a “presidential push” to avoid going all the way. One can understand President Lungu’s concerns. A reduction in power supply after the cost of electricity was increased by 29 percent for mining companies last year (April 2014) would not go down well with the industry. He must be worried because deeper cuts in power supply may lead to closure of some mining units and laying off some workers, at a time when mining companies are facing lower copper prices.
The other major sector already feeling the effect of load shedding is agriculture. The Poultry Association of Zambia (PAZ) recently said long hours of electricity load shedding and increased fuel prices are likely to negatively hinder development in the industry. Power outages are expected to lead to losses especially during the first days where brooding and lighting are critical for poultry. While the aggregate losses cannot be immediately quantified, PAZ "is certain that most players in the sector are finding it difficult to operate at desired operational capacity" (Source : Daily Mail). Many poultry farmers are being forced to invest in alternative sources of power such as the use of generators at a time when cost of fuel is increasing. This is particularly challenging for small-scale entrepreneurial poultry growers who are the most vulnerable because most of them cannot afford alternative sources of power.
Dairy farmers recently told Agriculture Minister Given Lubinda that "load-shedding is causing havoc in the economy". The dairy plants are taking five hours to regenerate after eight hours of power cut, which equates to a loss of around 13 hours. Thi is affecting the dairy farmers because it means their milk cannot be bought. Lubinda has gone on to says that there is no person who can dispute "the [negative] impact of this [power] deficit on the economy generally". (Source : The Post).
The Millers Association of Zambia (MAZ) have also indicated that they intend to increase mealie-meal prices due to the double whammy of higher fuel and load shedding of electricity. MAZ President Allan Sakala recently said increased load shedding has reduced production days from six to three days in a week. The millers want to compensate the reduction in revenue with higher prices.
A reduction in output in these sectors inevitably means lower taxation revenues and economic growth. That in turn has real impacts on the fiscal deficit position and Zambia’s debt levels. It is much more than that. The real losers are ordinary Zambians who not only face the indignity of more load shedding from ZESCO but also higher prices for some products, as business pass on some of the costs to maintain their profit levels.
The JCTR recently noted the potential impact on the poor. It observed that “considering the existing socio-economic conditions and levels of poverty prevailing in our country, the impacts of load shedding will be felt more by the poor majority” . The increase in the cost of production on businesses carries the potential risk of the cost being transferred to consumers through the increase in prices on both basic food items and essential non food items. This means the cost of basic food items, which are fundamental to food security, are likely to go up.
One small benefit to the poorest is that load shedding means “more trees will be cut down for charcoal” increasing the price of charcoal. If you are in the charcoal business perhaps this is boom time! In general, the situation will continue to be bleak. There does not appear to be any solutions in the short term, apart from prayer, as suggested by Mr Lubinda. So our attention must inevitably turn to the medium term. How do we resolve the power crisis beyond 2016?
GRZ has been trying to shift the focus on alternatives. President Lungu recently directed the IDC (INDECO reborn) “to target and develop at least 600 MW of solar power in the shortest possible time to redress the current power deficit the country is currently facing” (Source: Daily Mail). That followed an MoU between IDC and World Bank which is seeking to fund 50 MW solar photo-voltaics (PV) independent power projects in Zambia. Sadly, the truth is that it is clearly wishful thinking to expect that the World Bank or IDC has money to fund an additional 550 MW of solar projects in Zambia in order to address the power deficit.
GRZ has separately proposed a number of projects aimed to address the power deficit which are not yet implemented. These proposed projects include the Lusiwashi Lower hydropower project in Serenje; Kalungwishi Hydropower Station (150MW) ; expansion of Ndola Heavy Fuel Oil plan to 100MW; and construction of the 340MW EMCO thermal powered plant. Zambia and Zimbabwe are also exploring the potential of Batoka hydropower project which is estimated to cost about US$4 billion. The agreement was signed during the council of ministers held at Kariba in Siavonga recently.
The bottom line with all these initiatives is that many are in their early stages and there is currently no funding available. The truth is that GRZ is broke and ZESCO's financial woes have become more amplified. More government borrowing for power projects will lead to greater indebtedness. Therefore any new investment in this sector has to come through foreign direct investment. The problem is that there are three elephants in the room that are likely to make private sector driven investment in this area quite small in the medium term.
First, electricity prices remain below cost recovery levels which reduces any incentive for long term investment in generation and transmission. 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's end-user tariff is around $4,47/kWh. While Zambia’s power production costs are low, tariffs are lower. Tariffs are capturing only about 40 percent of historic costs.
The power sector today is living on the investments of the past without making provision for the future. President Lungu is reportedly open keen to change this by considering a significant rise in the price charged to consumers (who are effectively subsidised) – however with the election looming next year and consumers already facing high fuel prices this is unlikely. Higher electricity prices at the time of load shedding is not a political win. And sadly, as long as prices remain below cost recovery levels private sector investment will generate negative profit.
The second elephant in the room is ZESCO. It is not fit for purpose and needs urgently to be unbundled into three - generation, transmission and distribution. A monopoly is only needed for transmission due to network benefits. In the area of generation there's already private sector involvement, and what that simply needs is the correct pricing incentives. At the distribution end, again, more players should be able to enter. 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 inefficient 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, when this was suggested in 2013 Energy Minister Christopher Yaluma reassured that ZESCO has been totally transformed. He declared 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…....ZESCO has ambitious programme...not just a basket of wish list but approved projects to improve electricity supply.." Now with the power deficit on our hands, he recently changed tune, “we have been very comfortable by relying on hydro-power. Now what next? What is currently happening in the country in terms of power outages is an eye-opener” (Source: Daily Mail)
Which brings us to the third problem, Zambia has no stability in policy development. There is total in terms how policies are made. Given the flip flopping we have seen on mining taxation, large scale investment in energy would need reassurance about Zambia’s long term economic plans. The lack of public involvement in many of the current administration’s policies makes it difficult to incentivise firms to invest in the long term. The policies can change any time because they have no real people ownership!
Where does this leave us? The bottom line is that we are in a power mess of our own making. The tariffs have to go up to cost reflective levels 2016 and beyond! Crucially 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; new privatisation reforms for ZESCO that sees it only retaining monopoly over transmission; and wider public ownership of energy policy. These ideas are only radical to those who refuse to think!
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