On 21st November 1997, the Copperbelt Energy Corporation Plc (CEC) entered into a power supply agreement with ZESCO Limited (ZESCO) which came to an end on 21st March, 2020 marking the end of the 23-year relationship with respect to the bulk supply agreement (BSA). Under this power supply agreement, CEC was the single biggest buyer of electricity from ZESCO, which it purchased at a wholesale price and subsequently supplied to mining companies, corporate clients, retailers and non-mining entities on the Copperbelt province. Following the termination of the agreement, there were reports of talks of a new Bulk Supply Agreement between ZESCO and CEC as well as reports of efforts to sign an interim agreement while ironing out the details of the new power supply agreement that would be mutually beneficial to both parties.
However, on 2nd April 2020, ZESCO Limited issued a statement informing and re-assuring its stakeholders that it had “no intentions whatsoever, of renewing the said agreement, and any claims to that effect are therefore a misrepresentation of the facts”. On 29th May 2020, statutory instrument no. 57 of 2020 was issued which deemed CEC’s transmission and distribution lines as common carrier, and on the same date, the Ministry of Energy notified CEC to “provide a wheeling path for ZESCO’s power supply” to Konkola Copper Mines (KCM) which owes CEC over USD144 million, a move that was seen by many to be well calculated and aimed to squeeze CEC. Is ZESCO’s nationalization of CEC assets a solution to this impasse, and what are the implications for future private investment in the energy sector and Zambia’s growth prospects given that the mining sector plays a crucial role to Zambia’s Gross Domestic Product (GDP)? Would the economy benefit from mutually beneficial co-existence between ZESCO and CEC?
In the last 23 years the company has existed as CEC, it has hugely contributed to the growth of the mining sector which continues to remain the backbone of the Zambian economy and a major source of foreign exchange reserves. While calls to increase the wholesale price offered to CEC are understandable, they must be seen within the wider context of the need for electricity tariffs for all consumer categories to be at the right level to enable the continued provision of power by attracting new investment in the electricity sector and allowing utilities to maintain their existing infrastructure. These calls should also be synchronized with a business model that guarantees fiscal space for CEC in order to ensure continued investment and maintenance of the power infrastructure on the Copperbelt as well as to avoid power disruptions to the mining sector which may be costly.
While ZESCO is justified to demand better terms, not only from its relationship with CEC but from any other contract, the intent should not be to dwarf the profit prospects of CEC and eventually make the company financially unstable to operate in the long run. If reports in the public domain are anything to go by, then ZESCO’s production costs can be attributed to inefficiency and its bloated structure; and definitely not from investment in power generation, distribution and supply over the years. Moreover, ZESCO’s power generation sources have largely remained stagnant over the years as it has not put up any greenfield power generating infrastructure in more than four decades, and one wonders where they will get the investment (if not through debt acquisition) to constantly maintain CEC’s power infrastructure should it fall to them.
By working with CEC as a partner rather than an adversary, ZESCO will save adequate resources which can be channeled towards building new power infrastructure and maintaining its existing infrastructure. Bullying CEC over its infrastructure will only further affect power supply to the Copperbelt, which in turn will be detrimental to the country’s economic growth prospects. So far, the continued stalemate over the power supply agreement between the two utilities has negatively affected the outlook of CEC and its value as can be seen through its falling share price and dwindling market capitalization on the Lusaka Securities Exchange, and if this impasse continues, CEC may be forced to downsize its workforce; further weakening Zambia’s economic position.
A new constructive power supply agreement would ensure that CEC continues to invest in the power infrastructure and operate on a profit basis. It is imperative that ZESCO returns to the negotiating table and views CEC as a partner in development and not as its competitor because CEC not only contributes to taxes but also creates quality employment and socially invests in communities countrywide. The 23-year marriage between ZESCO and CEC ensured that both CEC and ZESCO, on behalf of the country, earned the most from the foreign-owned mining companies because contrary to popular belief, more than 70% of CEC’s revenue ends up with ZESCO. ZESCO charges CEC a tariff averaging 8.3 cents per kilowatt hour on top of which CEC adds a use of system or network tariff, currently averaging 1.5 cents per kilowatt hour, to get a final tariff to its customers.
This tariff basically meets CEC’s cost of maintaining their network to ensure reliable supply of power to the mining companies. When the mining companies pay CEC, it in turn pays ZESCO on the entire tariff it is charged (8.3 cents). CEC keeps payments only for its network tariff (1.5 cents). To put this in context, it is an open secret that the government owes mining companies (including CEC) a lot of money through VAT refunds. If ZESCO takes over the distribution and supply of power to the mines, payment for power may be tied or subject to receiving VAT refunds. This may affect the timely investment into the power sector on the Copperbelt. However, a private arrangement between CEC and mining companies not only guarantees power supply but also ensures that the mines meet their payment obligations on time and that the bulk of the money returns to ZESCO.
The move by ZESCO to seemingly impose itself on CEC’s assets overlooks the crucial role that CEC plays in the supply and distribution of power on the Copperbelt and will have devastating effects on future investments in the energy sector. ZESCO’s hegemony over the process and refusal to renegotiate a new beneficial power supply agreement has the potential to dampen investor confidence or compromise future Independent Power Producing (IPP) investment into a sector that has remained unattractive over the years due to the lack of cost reflective electricity tariffs. Moreover, the impasse has the potential to create further uncertainty in the sector and encourage potential and existing investors to withhold further investments. Overall, economic growth will suffer if ZESCO, which is regarded by many to be inefficient, goes ahead and monopolizes CEC’s assets with the government’s facilitation.
Instead of the government proceeding in the manner they did, they should have encouraged ZESCO to rely on section 14 (1) of the Electricity Act No. 11 of 2019 which provides for access to the transmission network and stipulates that A person who seeks access to a transmission network or distribution network shall apply to the transmission or distribution network service provider in the prescribed manner and form. If CEC had rejected ZESCO’s request, ZESCO could have appealed to the ERB under section 14 (5) which stipulates that A person who is aggrieved with a decision of a transmission network or distribution network service provider under subsection (4) or objects to the conditions imposed for access to a transmission network or distribution network may appeal to the Energy Regulation Board.
This would have allowed ERB to mediate and find a mutual beneficial solution, and if ZESCO was still aggrieved by ERB’s final decision, the Minister would have been the last resort rather than him passing an SI (Statutory Instrument) that in any evident contradicts the law. While the Minister of Energy relied on section 15 (1) of the Electricity Act, which provides that The Minister may, by statutory instrument, declare a transmission or distribution line as a common carrier for the purposes of this Act, to declare CEC’s distribution and transmission lines as common carrier without the engagement and approval of the owners of the network (CEC) as clearly stipulated under section 15 (2) that A transmission or distribution line that is declared as a common carrier may be used for the purpose of an enterprise on terms and conditions that may be agreed between the enterprise and a person who owns or controls the transmission or distribution line concerned or, in default of that agreement, as may be determined by the Energy Regulation Board, with the approval of the Minister.
From the foregoing, it is evident that statutory instrument no.57 that was issued by the Minister of Energy is inconsistent with the enabling legislation and, therefore, can be deemed void to the extent of the inconsistency with respect to exclusively granting the ERB the powers to determine the terms and conditions to underpin the use of the common carrier.
ZESCO should understand that the energy sector stands to lose out in the long run if it is deprived of the much needed injection from a private entity such as CEC. The government through the ERB should encourage ZESCO and CEC to return to the negotiating table to agree on a new power agreement. As a sign of good faith and to reduce further tension and uncertainty, the government should revoke SI 57 or suspend it indefinitely and allow the processes as stipulated in the Electricity Act No. 11 of 2019 to take effect. In the meantime, both parties should be encouraged to implement an interim agreement to facilitate the sale of purchase of bulk power to operate in tandem with discussions for a long term power agreement in order to ensure stability and minimal power disruptions to the mining sector.