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Tuesday, 28 July 2015

Zambia's electricity crisis

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! 

AUTHOR
Chola Mukanga
Copyright © Zambian Economist 2015

21 comments:

  1. This is very informative Mr. Mukanga thank you for the efforts to sensitize on the calamity that has befallen our country but I personally think it's about time we stopped thinking "short" term and start bringing in foreign investors in the energy sector to level the playing field. We cannot be relying on one source of energy at this stage Zambia isn't what it used to be it is fast developing on a very alarming rate may be now would be time to start looking at other sources and expand the energy sector by including other foreign energy companies to invest in Zambia cause with our limping economy the situation will worsen and the average Zambian will surfer more than anyone else cause so far small business scales have already been affected as it is from the constant load shading. I listened to a radio program last time where an engineer explained why there was load shading and the intricacies involved in why Zambia exports power and why we cannot have other sources of energy supply. Germany's power supply is primarily based on coal, which we mine and export, Most of the electricity in China is produced from fossil fuels. We complain about the effect of using these power sources cause of pollution but these load shading is also creating a very massive deforestation which in time will affect the environment more. God has blessed our country very much. All we have to do is use the resources we have wisely. Zambia has been exporting copper before was even born by now we where suppose to have processing plants of copper to be selling out finished copper products to other countries. Let's bring in other player in the energy sector just the way we have done with other departments and resolve this issue otherwise the situation will worsen than it already is.

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    1. As you read in the Article, Zambia electricity is practically subsidized, i.e. almost free. which investor are you going to entice with the idea of spending billions to generate power but not gain any profit from this investment. you raise the price of that electricity to regional norms and you will see riots in the streets believe me.

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  2. Chola, This is one of the best articles on this subject that I've read in a long time. Zambia and ZESCO are in a financial mess. The sooner we dress it the less the pain will be.

    If we wait, like Greece, we will have a bigger problem and our banks will close, and we won't have the EU wanting to bail us out. 1991 is waiting to to repeat it self.

    Chola, keep sounding the alarm.

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  3. Very interesting and educative article. I only have concerns about successive governments in Zambia: They have deaf ears and cannot listen to advice.

    I also liked the emphasis on prayers as our only solution. Well, what are we going to be praying for/ If I may ask! Probably that Lungu and his team may graciously accept that they have failed and leave power to someone else in PF or outside. But again, God does not work this way.

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    1. it seems Zambia has relied on prayers for way to long, who knows, maybe one day it will work lol

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  4. The article is very informative but should have dwelt more on finding solutions. We all know about the problems but very few come up with alternatives and solutions. Another point which is not touched by the writer is energy conservation. We need all to reduce our electricity needs. Look at South Africa they are constantly reminding their people to switch off lights when not needed, geysers etc. They also have incentives for home owners who install solar geysers. What do we have here - nothing. Lets help the Government and our ourselves by becoming inventive and look for alternatives. Solar is the way but it can be used in many different forms. If we don't know how lets invite investors( proper ones) to come here . We have a lot of sunshine during the whole year even in the rainy season. We are blessed with it so lets use what God gave us. Remember God helps those who help themselves. We have become a nation totally relient on Government and that is dangerous

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    1. lol the article clearly states that the solution is praying, ok, jokes aside, the solution has to be renewable energy, with the focus being on Solar. now the problem we have in Zambia is, as you say, its reliance on government. An investor is only interested in profit, the more the better, it is not an NGO/charity organization. there is no humanity in it, their goal is to provide you a service for as little as possible to get as much out of you as possible, these are profit margins. Now back to the government reliance issue. Zambians, from government to people in general, struggle to see someone making money out of them as anything but a crook and this view is not very investor friendly. It is the only solution, Zambias electricity network needs to be sold to the highest bidder, and when this happens the people will see the real price of electricity. They will accuse foreign investors of stealing, the government will set up investigations, charges will be brought, investments will be lost, new investors will be sort, and the whole issue will go round in circles. Even a company selling personal solar panels

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    2. Agreed. Why are these huge advertising boards lit up during ALL hours of the day and night? Who's thinking about buying nshimbi steel or liqui fruit at 4am?

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  5. Where do the tax money going?
    Roads? Infrastructures? Education maybe?.... I don't think it's the rain the problem.

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  6. How about small solar cooperatives, owned by the community, separate from the grid?

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  7. Zambia has the wise people and the man power to move it to the next level,its high time we put behind our political differences and work together as one for our country so that as we travel around the globe,we should be keeping our heads high and be confident to say that we are Zambians.
    Remember 'Lesa afwa bayafwa'' (God helps those who help themselves )lets not wait for donors to make things right for us,if we depend on the donors we will be dancing to the tune,for nothing is given on a silver plate,Donors have there own agenda.
    Thank you so much for the well written and educative article.

    One Zambia one Nation

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    1. S.Theo, 'Zambia has the wise people and the man power' - sorry sir, Zambia has neither. That is why the country has never risen, and never will, until you face reality. Firstly. have a functional and unbiased judiciary, an honest legislature and executive in government, and a free press. Stop kidding yourselves, blaming colonialism, and work hard.

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  8. Thanks Mr Mukanga for an excellent article! I'm one of the founders of a social business, Emerging Cooking Solutions, which started in Zambia 3 years ago with the vision of replacing charcoal for cooking with waste biomass pellets. We've installed one of Africa's largest sawdust pellet plants in Kitwe. With our fuel pellets and special cooking stoves for both domestic and large kitchen we have a solution that is cheaper, faster, healthier and better than both charcoal, electricity and LPG, which more and more people are starting to become aware of. Over the years, we've been trying to find a creative partnership with the government, Zesco and ERB but we have so far not managed to find the right channels to do so. Any suggestion on this subject is welcome! You find more information about our products here: https://www.facebook.com/ecszambia/, http://www.emerging.co.zm/. Thanks, Mattias Ohlson, CEO Emerging Cooking Solutions, 0953 282 484, mattias@emerging.se

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  9. True account of events and circumstances we find ourselves in. but considering the potential this country has, in hydro power alone, we can become an industrious country. If we added solar, wind, thermal and other forms we may be talking about running mega factories.

    The issue of incentives for FDI in this sector can be redressed in my view. If people are serious and prioritise energy, policies and strategies to re-order the status quo can be formulated so that FDI can be registered. The article clearly explains that by ourselves as Zambia we will not be able to sort out this issue because we are short of money. Whichever way we look at things. We have many running projects and obligations that equally need money.

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  10. "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 done 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".

    Good analysis Dr Chola. There will be significant drops in production leading to lay-offs and less money in the Treasury as Roylaties plummet. It's obvious. Import low cost (or lower-cost) off-peak power and save the water for daytime. It's not rocket-science. Not to do so would see mine closures and catastrophic dips in copper production.

    Fred

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  11. Excellent and informative piece! Is it really low water, or is it something more sinister, like the new inefficient turbines installed at Kariba that require more water to generate less electricity? Whatever the real reason it demonstrates a calamitous lack of planning from our leaders. Did no one see this coming? As to solutions PV is a pipe dream and until we accept the obvious i.e. that we need to significantly increase our tariff structure we will, literally, be stuck in the 'dark age'. I hope we have some clever innovative people out there otherwise we are all destined to suffer for some time now.

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  12. What amazes me is that if you go to Zesco's website or the regulator the Energy Resource Board you won't find one announcement explaining the background to the problem or any plan or strategy as to how to address the issue. Surely with a national crisis like this there ought to be a plan on how to limit the negative impacts of the crisis and what steps will be taken both in the short and medium term to fix the situation. You'd think there would be an emergency counsel of stakeholders meeting regularly to monitor the impacts of the situation and chart progress on a solution with press briefings to keep the consumers and Zambian citizens informed. Is anyone being held to account by anyone for the situation? What's the regulator doing? How much taxpayer money is going to be needed to bail out Zesco from this crisis? As usual Zambians are not being provided full information and as usual Zambians just complain to one another but there's no concerted action from citizens, civil society, the church, MPs (PF or opposition), the traditional leaders, industry leaders or anyone else. Oh Zambia how will things progress like this?

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    1. You are very right! It frustrating that even when your on a bus, one is unfairly treated, the other passengers in most cases will just look and not say a word. When they disembark then they go talking amongst themselves of how badly conductors have become..Same with the current way of life in Zambia, so many wrong things going on, but we don't speak up, we only speak when we are in hidden corners because we are afraid of the repercussions! Its so sad, that we continually complain of how things are but when time comes to stand together, to fight against something wrong, everyone will look around and say who will stand up against this? When they do we say yes finally, but we are hiding behind the tree urging him on!Its really sad this country we call home

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  13. First and foremost, the writer of the article has articulated the problem at hand very well. The problem then, has root in the history of the country, however it is high time we moved away from history and starting looking ahead, like the writer has put it. We Zambians must develop the capacity to be able to invest in our country and the run our very economy. Yes it is very good to bring in foreign direct investment, but let us look at the mining sector, how many of these mines are owned by Zambians, and every single day we are complaining about this and that. Therefore let us developed the capacities to run our own economy through those opportunities in disguise. Investors in energy, must be Zambian owned companies, if are to start trusting our very own investment and products, let us show our fullest potentials and capacities, before we start running for Foreign Direct Investment (FDI). Policies is one area where as a we country for the past 51 years we have failed to consolidate on thinking. Every years policies are formulated and no one knows what happens to them when it come to implementation. The documents are suppose to reflect the expectations of the our Zambians and our expectations of all those who wish to embark on ventures are are revenue generating. We must stand up as Zambians and be counted to change the course of our country. Policy formation, interpretation and implementation must free of political interference, the only role politics is suppose to play is to provide an enabling environment for the effective and efficiently implementation of these policies. Technocrats must be allowed to effect their knowledge and skills for the benefit of mother Zambia in order to come up with policy documents that will be acceptable relevant and must involve all stakeholders.

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  14. First and foremost, the writer of the article has articulated the problem at hand very well. The problem then, has root in the history of the country, however it is high time we moved away from history and starting looking ahead, like the writer has put it. We Zambians must develop the capacity to be able to invest in our country and the run our very economy. Yes it is very good to bring in foreign direct investment, but let us look at the mining sector, how many of these mines are owned by Zambians, and every single day we are complaining about this and that. Therefore let us developed the capacities to run our own economy through those opportunities in disguise. Investors in energy, must be Zambian owned companies, if are to start trusting our very own investment and products, let us show our fullest potentials and capacities, before we start running for Foreign Direct Investment (FDI). Policies is one area where as a we country for the past 51 years we have failed to consolidate on thinking. Every years policies are formulated and no one knows what happens to them when it come to implementation. The documents are suppose to reflect the expectations of the our Zambians and our expectations of all those who wish to embark on ventures are are revenue generating. We must stand up as Zambians and be counted to change the course of our country. Policy formation, interpretation and implementation must free of political interference, the only role politics is suppose to play is to provide an enabling environment for the effective and efficiently implementation of these policies. Technocrats must be allowed to effect their knowledge and skills for the benefit of mother Zambia in order to come up with policy documents that will be acceptable relevant and must involve all stakeholders.

    ReplyDelete

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