EAZ Chairperson Energy and Mines Mathews Muyembe outlines “Financial losses arising from the expired bulk supply agreement (BSA) between ZESCO and CEC for ZESCO”.

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THE ECONOMICS ASSOCIATION OF ZAMBIA
Thursday – 18th June 2020

FINANCIAL LOSSES ARISING FROM THE EXPIRED BULK SUPPLY AGREEMENT (BSA) BETWEEN ZESCO AND CEC FOR ZESCO

As Economics Association of Zambia, we have been carefuly studying the issue surrounding the BSA between ZESCO and CEC.

It should be noted that we enjoy warm relationships with both companies and pronouncements that have been made in the energy sector the past few years have been very encouraging because they promote win win situations for all players in the energy sector including ZESCO, CEC and above all the Zambian people who are the consumers.

After studying this issue, we now believe that the matter between ZESCO and CEC is a commercial one and should be understood as such by everyone. Against this backdrop, we give our opinion on this matter. We however restrict ourselves to only issues that are not before the courts of law.

The Economics Assocation of Zambia (EAZ) would like to note that there were many onerous terms and conditions that ZESCO had to simply endure during the more than twenty (20) years that the BSA ran.It is clear that ZESCO has always sought through the years to respect the contractual terms and conditions which were primarily, initially prescribed to prop up the mining economy during the painful transition from ZCCM conglomerate to the post privatisation era and in mid- to late nineties.

These onerous terms included the following issues:
The BSA gave CEC an ‘exclusive franchise ‘ for the supply of power on the Copperbelt. This entailed that only CEC could supply all mining and mining related activities.

This exclusivity was very restrictive and provided a monopoly to CEC with regard to supply of power to the mining customers on the Copperbelt.This meant that though ZESCO was investing in assets to ensure firm supply to the mines,it was never truly able to recover the full cost from the mines,which it was unable to negotiate with on pricing and supply.

As a result of this exclusivity, at the creation of the Chambeshi Economic Zone, ZESCO constructed a new substation at own cost to supply the new economic zone,but was later fined and had to pay $10 million to CEC.The crime was simply that ZESCO had stepped on turf that was exclusively earmarked for propping CEC’s business interests.The lack of openness was not in the interest of the wider Electricity Supply Industry or the consumers who were being “locked in”.

Furthermore, the Economics Assocation of Zambia notes that in March 2000, CEC transferred the supply of power from the townships to ZESCO under the First Amendment of the BSA upon the realization that it was not profitable given the regulated retail tariffs.

This amounted to “cherry picking” as CEC retained control of the infrastructure and the lucrative mines but chose to hand over the “hardwork” of supplying less lucrative retail consumers to ZESCO.

Over the last 20 years, ZESCO has spent in excess of $100m in rehabilitating and expanding the Distribution Network on the Copperbelt that was left in a dilapidated state from the year 2000 which should have been a cost borne by CEC, who still maintained control of the overall supply infrastructure.In addition, ZESCO has to pay CEC close to US$12 million annually, to transmit it’s own power meant for supply to retail consumers sitting behind the CEC “curtain” on the Copperbelt through CEC owned infrastructure (a.k.a wheeling).

Additionally, the Economics Assocation of Zambia took note on the possible lack of transparency on metering by CEC.

As operators of its infrastructure, CEC did not grant or provide access to its meters or metering data to show the true consumption by the mines that showed the true peak on the ZESCO system.

As such,CEC enjoyed the additional benefit from what is known as ‘simultaneous maximum demand.

This is a situation which occurs as a result of the mining companies reaching their maximum demand consumption at different times to the Maximum Demand readings at ZESCO CEC bulk supply points.

This them results in CEC’s summation of its Capacity sales to the mines exceeding the actual Capacity delivered by ZESCO at the bulk supply points. CEC derives this benefit singularly with no benefit to ZESCO and led to a difference of power readings between 50-100MW in any given month.

This meant that ZESCO was losing revenues on unaccounted for power ranging from 50-100MW monthly.

This amounted to approximately $2.3m to $5.6m monthly or up to $67.2 million annually.

This unfornately was borne by ZESCO customers and some of it continues to possibly accrue as debt.

A joint agreement between the Government, ZESCO and the mines agreed that the mines would pay an effective tariff of US$9.3c/kWh.

However, given the BSA,a challenge still existed on the final tariff that the mining companies paid to CEC.

In recognizing the CEC asset on the Copperbelt, ZESCO agreed to charge CEC an effective tariff of US$8.11c/kWh which was effected in two parts, a Capacity Charge and an Energy Charge. However, due to the use of an unrealistic Load Factor in determining the two-part tariff, the cash flow tariff to ZESCO was US$6.8c/kWh resulting in a further loss of approximately $2.5 million per month (or $30 million annually).

Meanwhile, during this same time,ZESCO was purchasing expensive power to supply all consumers including the mines from various IPPs at prices ranging from US$8c/kWh to US$13.5c/kWh (Average of US$11c/kWh) representing a subsidy of up to US$6.7c both CEC and the mines on every unit supplied.

Further, The Economics Assocation of Zambia is aware that the largest beneficiaries to the entering of Agreements by ZESCO and the Independent Power Producers (IPPs) have been the mines as is evident through the drought seasons of 2014/15 and 2019/20.

Mines have continued receiving a significant amount of power for their operations from ZESCO and the majority of the power in a drought season from IPPs.

The average cost of power from IPPs is US$11.0c/kWh against a selling price to CEC of US$6.8c/kWh.

The price to CEC does not represent ZESCO ‘s true cost of providing the power at the points where ZESCO delivers the power to CEC.

If ZESCO was to add the cost of wheeling to the supply of power to the mines on the Copperbelt, it would cost in excess of US$13.0c/kWh.

The loss in monetary terms due to mismatch between the CEC price paid to ZESCO and the actual cost of supply (paid to IPPs by ZESCO) amounts to approximately $10m per month or $120 million annually.

This situation is completely unsustainable going forward.
In ensuring that the mines on the Copperbelt received firm and reliable supply, ZESCO had to invest in transmission infrastructure that provided redundancies.

Given the nature of the mines on the Copperbelt, loss of power would lead to potential loss of life and mining infrastructure assets and ZESCO has therefore invested in excess of $170 million in projects on the central corridor to provide secure and reliable power supply for the Copperbelt and beyond.

Whilst these investments are imperative for the national economy, ZESCO has not seen any meaningful return on such huge investments meant to sustain the mining sector and has always remained an outsider to the Copperbelt market, which was however, a critical driver to ZESCO’s power investments strategy.

These investments are not justifiable owing to the fact that mines hardly pay income tax.

We would also like to note that anyone currently can be an Independent Power Producer in Zambia and enter into agreements with any consumer then negotiate with ZESCO for wheeling of power through ZESCO distribution lines.

If ZESCO does not agree to the terms, the IPP can seek help from the Energy Regulation Board to force ZESCO into an agreement.

That in itself is declaring ZESCO a common carrier.

These are the energy reforms we have been calling for. Energy reforms that commercialize ZESCO activities and not turn ZESCO into an insurance company underwriting market demand for independent power producers because at the end of the day, its ZESCO consumers that foot the bill.
It is understandable that ZESCO no longer wants to carry the loss on behalf of others.

We hope that all parties see these developments in a positive way.

As EAZ, we stand ready to guide all stakeholders through our extensive network of experienced energy experts.

Zambia is a country for everyone to develop in.

Issued by
Mathews Muyembe,
Copperbelt EAZ Chairperson,
EAZ Chairperson Energy and Mines, on behalf of the Board
Lusaka, Zambia