The country is now experiencing an unprecedented level of load-shedding. The hours of load-shedding are now beyond 20 hours in a 24-hour day. In some places, electricity is only seen for one or two hours, or even far less. Even worse, the little hours of supply may come in the dead of the night, when it is of little use, save to pump water in borehole-dependent communities. On top of this, there are recurring faults on ZESCO lines, which push hours of darkness to beyond 24 hours. While this is prevailing, ZESCO made an application to increase electricity tariff, a further blow on the already tormented consumers. There are a number of questions one can ask: Is this the right time to increase tariffs, sure? Would the increase translate to more electricity? Do the current tariffs need increasing?
In addition to the energy crisis, Zambia is currently in a hunger situation due to continued reliance on unpredictable rainfall for agriculture. In the urban areas, there is also load-shedding-induced hunger , affecting especially the artisanal and micro enterprises. These mostly lack capacity to invest in alternative sources of energy. Economic activities are also low, owing to the ongoing load-shedding. Proposing to increase tariffs at such a time is overly being insensitive to the plight of the common man. Moreover, ZESCO did not clearly show how the increase would benefit the consumers through increased generation. ZESCO’s electricity generation is mainly from hydro, relying on the waters along the Kafue and Zambezi rivers. Without increasing water, there is no way of generating more. The additional money would not buy water, for there is no market for such. On the other hand, one may be tempted to think the suggested increase was a greedy way to cushion possible revenue loss due to the lower amount of electricity being sold.
This aside, in this article, I endeavour to contribute to the debate of electricity tariffs in Zambia, whether they are too low as it is being argued by ZESCO and those that buy into the story. To give context, Zambia’s electricity generation is dominated by ZESCO. According to the Energy Regulation Board (ERB) and the Ministry of Energy, total installed generation capacity in the country is around 3350 MW, of which 83% is hydro and 14% is fossil fuel (coal and petroleum). ZESCO proper (to exclude indirect ownership such as Itezhi-tezhi co-owned by ZESCO and Tata) contributes over 2500 MW, or 76% of the total. ZESCO’s generation is almost 100 percent hydro. The other major producers are Mamba collieries using coal at 300 MW (9%), Itezhi-Tezhi Power (ITPC) using hydro at 120 MW (4%) and Ndola Energy at 110 MW using heavy fuel oil. This means there are two main technologies for our electricity: Hydro (ZESCO and ITPC) generating 80% collectively, and those relying on fossil fuels (Mamba and Ndola) producing 12% of electricity. On the consumption side, the mining sector is the largest consumer at about 51%, followed by residentials (our homes) at about 33%. For illustration purposes, we assign the remainder to the industries.
The cost of generation from the two technologies differs quite considerably. The International Hydropower Association estimates the global weighted average cost of electricity from hydro in the region of 50 ngwee/unit equivalent (based on the IMF PPP exchange rate). This technology is cheap, save for huge investment costs, because the main consumable (water) is freely available. Water is a renewable, albeit unreliable, natural resource that Zambians must enjoy.
The fossil fuel technologies, on the other hand, generate electricity at very high cost. This is mainly because of the expensive fuel that has to be bought, internally or externally. Independent power producers such as Maamba Collieries are producing using expensive technology because that is what is available. Evidence suggests that these are pricing their electricity in the region of 10 US cents per unit, which would translate to about K2.50n. This cost is justified; they can point to the expense of coal, a non-renewable resource which they have to procure.
Thus, we have two sources of electricity, coming at different costs. When people talk about cost-reflective tariffs, which cost do they have in mind, the hydro or the thermal production costs? It is okay to sell thermal power at K2.50n, but it would be daylight abuse to sell hydropower at the same price. The problem arises when ZESCO wants to use the cost of thermal electricity to justify increasing the price of hydroelectricity. ZESCO is producing the bulk of electricity (76%) at a very low cost but wants to use the cost of a small fraction to justify an increase. The difficulty created is that ZESCO puts all the electricity in one basket and sell it as one and the same, ignoring differences in cost of generation.
Given the demand structure, where more than half of the energy is going to the mines, independent power producers could be allowed to sell directly to the mines on cost-reflective tariffs. In any case, the mines should pay the full price of any input since they are producing mainly for export. Subsidising export is akin to subsidising the end users of those products, the copper, etc. So allow the mines to buy all the power from the IPP at whatever price, while ZESCO can provide and charge for the wheeling service.
Under this arrangement, residential consumers and the industries would continue to access the cheaper hydroelectricity from ZESCO while the IPPs are left to enjoy the higher tariffs from the mines. This is good for the country. The interest of the government should be to ensure access to affordable electricity by the residential consumers. The industries should also be prioritised because their output ends up on residential tables. Allowing these two to access affordable power would help keep the cost of living lower. Affordable electricity is not referring to subsidised or underpriced. Rather, this is electricity priced at the cost of hydro-generation and not the cost of other technologies, which ZESCO does not use. ZESCO’s generation is enough to meet the residential and industrial needs, which would use about 65% of ZESCO’s capacity.
This scenario would leave the public power producer with 35% to sell to the ideally lucrative mines. The arrangement would also allow IPPs to engage and deal with mines directly. The mines are in better position to pay the full price of any resource they get from the country. Their demand is also high enough to mop up all existing generation by IPPs, most using expensive technologies. The price paid by the mines could also be high enough to attract new investments. Mines can be made to pay the 10 to 15 cents a unit, if that is the cost of producing that electricity by Maamba and other IPPs.
What should not be acceptable is to allow the mines to enjoy and deplete the low-cost hydroelectricity while residential consumers are pushed towards expensive sources. That would not be a genuine call for cost-reflective tariffs. Tariffs for residential areas must reflect the cost of hydro on the part of ZESCO, while the mines pay tariffs reflecting the cost of coal, diesel, and other technologies. The use of ‘attracting new investors’ should not be placed on residential because the mines have the capacity to take up all the electricity from existing and prospective IPPs. The problem arises because ZESCO wants to be paid, not on the basis of their cost but on the basis of the cost that other producers incur. The cost of service study that was conducted some few years back did not help matters. It focussed more on ensuring that ZESCO collects enough revenue, rather than highlighting areas of improvements and cost reduction towards global best practices.
In a nutshell, the drive to attract investment in the energy sector does not need to get residential consumers to pay ZESCO at way above actual cost. In rural areas, there are electric and diesel powered hammer mills. Electric hammer mill operate at low cost and charge less. It would be stealing if one running an electric hammer meal increases price under the guise of encouraging more investment in diesel hammer meals. Consider this scenario. Suppose you go to a trusted supplier to buy 4 tires and they are pegged at say K1000 each. However, the shop has 3 only. The supplier then finds one more from a distant market. While the price may be the same, this one will come with an extra transportation cost of K200. That is, Its cost is 20% higher than the other three. Because of desperation, you accept to pay the extra cost. Does this then allow the supplier with 3 to increase price, arguing that all 4 tires must be equally priced? Surely not. The supplier would be exploiting the buyer, taking advantage of the desperation and lack of alternatives. This is the agenda ZESCO is driving, wanting to be paid according to the cost of another. While it is acceptable for a price enterprise to seize any opportunity or window to increase price, it should not be allowed for a publicly funded corporation. Attracting investment can be achieved by ensuring that existing IPPs are paid the right price, not the price paid to ZESCO. IPPs would get the right price if mines pay the right price. It is that simple. There is enough demand for power from the mines. If they are made to pay the so-called right price, the rest will fall into place.
The other matter needing attention is the role of ZESCO in the electricity subsector. Currently, ZESCO buys power from ‘all’ producers, then sells to the mines, directly or through the CEC. IPPs have about 660 MW of installed capacity, while the mines consume more than 1600 MW of electricity. Given the fungibility of electricity, it is right to argue that all power from the IPPs goes to mines. Fungibility is the property that individual units of a good are perfectly interchangeable. If the mines paid the right price, how does ZESCO struggle to pass on the money to the IPPs? Why would ZESCO become indebted to the IPPs if it sold all the electricity from the IPPs to the mines? This also applied to importation of electricity, which often comes at higher cost. Part of the rationale for tariff increase was to cater for such expensive imports. But even this need not affect the ZESCO price, rather ZESCO must pass on the price for the imported portion. If the mines are not paying the right cost of generation in the other technologies, why have we allowed this to go on? Is it the desperation to keep these elusive investments?
In the policy paper on the Cost of Service study, Government has actually reiterated that any changes to costs in Power Purchase Agreements should be fully passed through to consumers. Perhaps, this debate should actually focus on why ZESCO should continue in this affair of being buyer and supplier, or ‘middle-man’, buying from IPPs and selling to mines. There is no rationale to maintain this arrangement, especially that ZESCO is not profiting from it. Instead, ZESCO seems to be subsidizing even the mines. IPPs can be allowed to directly deal with mines or allow mines to scout for own power, including importation. They already import much of their inputs so adding electricity on the list is not one-too-much. ZESCO can simply provide for the wheeling service given the vast transmission infrastructure, for which an appropriate price must be paid.
Allowing mines to deal with IPPs directly would also allow these multinational mines to support and equip our IPPs for more growth. Such an arrangement would also provide an environment for IPPs to flourish. Mines would pay the market price, which together with a favourable policy environment, should incentivize for more investment in the sector. At the same time, Zambians would continue to enjoy God-given natural resources in the form of hydropower, while it lasts. This would also save ZESCO from possible indebtedness. ZESCO, being a public utility company, must focus on the public good. Where the private sector are able to interact, they normally do it more efficiently, than when a public body such as ZESCO meddles in.
About the author
Dr Obrian Ndhlovu is a Research Fellow at the Environmental-Economics Research Unit of the University of Cape Town. Comments are welcome to [email protected]
2 Responses
Your explanation is plain and straight forward, the problem we have Zambia has no leaders who think outside the box. Zambia has only contractors inform of politicians who always want to make profit on the expense of the poor majority Zambians. They are selfish in nature. Otherwise, no politician can implement your idea, even if there’s value in it.
I have been doing my own research on the tariff dilemma. His analysis is incomplete and misleading. If it were that simple ZESCO would have solved the problem. Here are the gaps in the article 1. He doesn’t admit that currently ZESCO is selling power below cost. 2. He doesn’t even do a comparison of tarrifs in the region to determine how reasonable our cost is or if it reflects market rate. For example the current ZESCO tariff is about 4 cents, and we have most regional tarrifs like Zimbabwe at 23 cents. ZESCO has about 4000 MW of IPP projects which have failed to take off because the IPPs proposed 9 cents but financiers have rejected them as non bankable because the off taker ZESCO is selling below 9 cents at 4 cents. The projects are non viable because of the tariff discrepancy 3. The Doctor needs to do more research or he risks misleading Zambians.