ENERGY Minister Peter Kapala says the debt owed by Zesco for power purchases could be attributed to the low water levels following the onset of the drought period in 2014/15.

Speaking in Parliament, Friday, Kapala said Zesco’s total debt stood at US$3.5 billion as of September 2021.

“The Report of the Auditor General on Accounts of Parastatal Bodies and Other Statutory Institutions for the Financial Year Ended 31st December 2019, revealed that ZESCO Limited owed it’s local and cross border power suppliers amounts totalling US$797,902,517.54 as at 31st December 2020. It should be noted that this is the debt owed by the company for power purchases from Independent Power Producers (IPPs) and also from emergency electricity power imports that can be attributed to the low water levels following the onset of the drought period in 2014/15, which necessitated procurement of emergency power imports. However, in terms of the company’s total debt portfolio, it should be noted that as of September 2021, Zesco’s total debt stood at US$3.5 billion,” Kapala said.

He said the $3.5 billion debt was due to costly emergency power imports and increased use of Independent Power Producers’ generated power.

“Madam Speaker, I wish to mention that Zesco’s debt position of US$3.5 billion is largely due to the following: (1) costly emergency power imports: Madam Speaker, following the onset of the 2014/15 drought, the government and Zesco jointly procured emergency power to mitigate the impacts of the power deficit in the country. The importation was procured at triple the price of Zesco’s average electricity selling price. The differential was not passed onto consumers, through an upward tariff adjustment,” Kapala said.

“Further, the below average rainfall led to; A reduction in the amount of electricity generated using Zesco’s hydro-power assets whose tariffs are low; and (2) Increased use of IPP generated power, which is at a higher tariff. Madam Speaker, you may wish to note that during that period, Zesco was constrained from generating at maximum capacity due to low water levels, including the resulting rationing of allocated water volumes for electricity generation at the Kariba Complex by the Zambezi River Authority. This situation further worsened Zesco’s debt position and the company accrued arrears resulting from emergency power imports during the 2015/2016 drought season amounting to over US$200 million.”

Kapala added that the mismatch between the average electricity buying tariff and the selling price had also affected Zesco’s debt position.

“Mismatch between the average electricity buying tariff and the selling price: Madam Speaker, in order to supplement ZESCO’s generation and diversify the energy mix, Zesco as the preferred off-taker, entered into power purchase contracts with Independent Power Producers (IPPs) for the supply of power to the national grid and to mitigate the impact of the power deficit. The mismatch in electricity tariffs is as a result of the fact that Zesco currently buys power from IPPs at an average tariff averaging US$c11/kWh and sells it at an average of US$c7/kWh to its consumers,” he said.

“At the time, it was expected that the tariffs would be allowed to migrate to cover the cost of new IPP generation by the time the plants would come online. The law at the time provided that ZESCO make tariff applications annually to recover the allowable costs. Due to delays in tariff application approvals, Zesco begun accruing arrears, with its Independent Power Producers (Maamba Collieries, Ndola Energy, Itezhi-Tezhi Power Corporation), which currently stand at US$1.1 billion. Despite generating only 20 percent of the power sent out by Zesco, IPPS consume 47 percent of Zesco’s entire revenue. This mismatch in pricing is a major cause of the financial distress that Zesco is currently experiencing.”

Kapala said government also owed Zesco over $39 million, which had compounded the financial challenges faced by the company.

“Non-payment of bills by GRZ and mining customers; Madam Speaker, as at August 2021, Zesco Limited was owed in excess of US$ 39 million by the government through; the central government; water utility companies; local authorities and parastatals to name a few. This has compounded the financial challenges being faced by the company. In addition, disputed invoices, and the inability to pay, by mining companies such as KCM, FQM as well as the Copperbelt Energy Corporation (CEC), has resulted in these entities owing Zesco a combined US$886 million as at August 2021,” he said.

“As a result of this late payment: Penalties on late payments increased to US$ 60 million; and, there has been an increase in the percentage of amounts due to Zesco for goods or services delivered that are expected to be uncollectable, amounting to US$ 0.6 billion over the period 2018 to 2020.”

The Energy Minister revealed that Zesco made losses amounting to $432 million as a result of the Kwacha depreciating against the US Dollar.

“Depreciation of the Kwacha against the US Dollar; Madam Speaker, it is worth noting that ZESCO has been borrowing to fund large capital projects such as the Kafue Gorge Lower Project. About 95 percent of the company’s borrowings are pegged to the US Dollar. Further, 70 percent of ZESCO’s operating costs, which include servicing the Power Purchase Agreements for off-take of power from Independent Power Producers are also in US dollars. What this entails, Madam Speaker, is that, when the Kwacha depreciates against the Dollar, the company makes losses,” Kapala said.

“Madam speaker, this August House, and through this House, the public may wish to note that, in the period between 2018 and 2020, the company made losses amounting to US$ 432 million as a result of the Kwacha depreciating against the US dollar. This August House may further wish to note that, when the last upward tariff adjustment was approved in January 2020, it was based on an exchange rate of US$1 to ZMW 12. Since then, no tariff adjustment has been made to allow the utility company to recover the costs arising from the Kwacha’s depreciation against the dollar during this period, even though the Kwacha weakened to ZMW22 per US$1 during this period. This has, and continues to negatively affect the financial performance of Zesco Limited.”

Kapala said there was need for Zesco to engage with mining customers and the Copperbelt Energy Cooperation in a view to renegotiate tariffs to cost reflective levels.

“The following are some of the measures that are proposed to be implemented in the turnaround strategy: Debt management: (a) engagement with mining customers and the Copperbelt Energy Corporation Plc (CEC), which account for 60 percent of the revenues with the view to renegotiate tariffs to cost reflective levels; (b) renegotiation of IPP tariffs to a level that allows settlement of monthly invoices as and when they fall due to stop the accrual of arrears; (c) formulation of a payment plan to clear IPP arrears, this will involve engaging IPPs for an agreement on a payment plan for outstanding debt that allows settlement of arrears while allowing Zesco to continue operating as a going concern,” he said.

“(d) The settling of arrears to local IPPs arising from tariff, a differential between IPPs purchase tariff and the Zesco average selling tariff amounting to $1.1 billion (e) conversion of loans contracted by government on behalf of Zesco to equity in order to clean up the Zesco Balance Sheet position (f) engagement of lenders on long term debt restructuring through extension of the respective repayment periods to free up liquidity for other operating expenses.”

He said there was need for Zesco to engage with Konkola Copper Mines over the liquidation of the $174 million debt

“Engage Konkola Copper Mines (KCM) over liquidation of arrears of over US$174 million and agree on a sustainable mechanism for KCM to settle the full monthly invoices of US$5.5 million as they fall due; (b) engage government on clearance of outstanding balances owed by government departments and water utility companies amounting to $53 million; (c) develop innovative ways of financing capital investments that allow Zesco to enter new frontier markets in order to earn and generate significant dollar revenue and be aligned with Zesco’s long-term strategy to become the hub for electricity trading in the region,” said Kapala.

“Madam Speaker, a team comprising of experts from the Ministry of Energy, Ministry of Finance, the Industrial Development Corporation and Zesco Limited has been tasked with assisting Zesco Limited to implement this strategy.”