Policy Monitoring and Research Centre – PMRC – Energy Roadmap Delivering Zambia Energy Needs

ENERGY
ROAD MAP
ENERGY ROADMAP – DELIVERING
ZAMBIA’S ENERGY NEEDS
RESEARCH REPORT December 2018
PREPARED BY:
TECHNICAL REVIEW:
Akabondo Kabechani (Head Monitoring & Evaluation), with the support of Bernadette Deka
(Executive Director)
RESEARCH:
Salim Kaunda (Head of Research and Analysis) and Chileshe Chaunga (Researcher)
EDITORIAL TEAM:
Chiti Jacob Nkunde (Communication Specialist) Layout and Design with the support of
Brian Sambo Mwila (Communication Specialist)
Melody M. Simukali (Head Communications and Grants) Editorial
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ENERGY
ROAD MAP
EFFICIENT WATER RESOURCE MANAGEMENT FOR SUSTAINABLE
SOCIAL AND ECONOMIC DEVELOPMENT
ENERGY ROADMAP –
DELIVERING ZAMBIA’S ENERGY
NEEDS
TABLE OF CONTENT
Executive Summary 1
1. Introduction/summary 3
2. Challenges for Zambia’s power sector 4
Rising Demand 4
Figure 1 5
Insufficient capacity 6
Table 1 6
Overdependence on hydropower and vulnerability to failure of rains 6
Power shortages 7
Low rates of electricity access in rural areas 7
3. The role of private sector investment in Zambia’s electricity sector 8
4. Accelerating investment – lessons from comparative experience 10
Legal framework and ERB 11
Power companies 11
Electricity market 12
4.1 Planning 13
4.2 Procurement 14
4.3 Creditworthiness of off-taker 16
4.4 Independent regulator 17
5. Conclusion 18
Appendix 1 – Demand forecast modelling 20
References 21
ABBREVIATIONS AND ACRONYMS
GDP Gross Domestic Product
IPP Independent Power Producers
ZESCO Zambia Electricity Supply Corporation
ERB Energy Regulation Board
1 | Energy Roadmap- Delivering Zambia’s Energy Needs
An adequate power supply underpins any economy. However, Zambia has struggled to
generate enough electricity to meet growing demand as the country has developed. This
longstanding issue came to a head in 2015/16 when poor rains depleted the hydroelectric
power stations which provide over 80% of Zambia’s power. The ensuing load-shedding
had severe consequences for the economy, as businesses scaled back production, small to
medium sized enterprises struggled and households experienced blackouts, with the total
impact estimated to be equivalent to 20% of annual GDP. As demand continues to grow, it
is essential that Zambia gets energy generation right if the country is to fulfil its potential
for growth.
EXECUTIVE SUMMARY
80%
HYDRO-POWER
“Hydroelectric power stations
provide over 80% of Zambia’s
power”
Energy Roadmap- Delivering Zambia’s Energy Needs | 2
While the country has appeared to overcome short-term challenges in electricity
generation, there can be no room for complacency. The fundamental challenge of
exponential increases in demand remains. This paper models energy consumption by
households and economic sectors to project that demand is likely to double, and, in
the most extreme case, triple by 2030 as population, income levels and electrification
increase and the economy continues to grow. Furthermore, without diversification of
power sources, electricity supply will remain vulnerable to seasonal rain pattens and longterm
climate change. Moreover, the Government’s fiscal position in the face of high debt
levels limits the scope for direct investment in improved capacity. The Government faces
an urgent challenge to develop a high-capacity, diversified energy portfolio to meet rising
demand with limited resources.
“Energy consumption
likely to double, and
in extreme cases,
triple by 2030”
2018 2030
The key to adequately improving power supply in line with fiscal consolidation is through
private sector investment in Independent Power Producers (IPPs). The country has
struggled to attract this investment for numerous reasons, including below-cost tariffs,
complex procurement processes and an underperforming regulator. Following PMRC’s
recommendations, the Government has made reforms to increase tariffs to make them
more cost-reflective, which has improved the country’s attractiveness to investors.
However, these changes alone are not enough to stimulate the investment that the country
needs but has struggled to secure.
This paper calls for Government action to secure investment to develop energy capacity
to meet rising demand without compromising its fiscal consolidation programme. Firstly,
the government must make Zambia a more attractive option for investors. Secondly, it
must make institutional changes to its planning and procurement capacity to secure a
productive, cost-effective and diversified investment portfolio.
3 | Energy Roadmap- Delivering Zambia’s Energy Needs
PMRC therefore makes recommends that the Government:
■ Establishes a planning function to develop a strategic vision for Zambia’s energy
portfolio and guide procurement;
■ Establish a procurement function that sits alongside the planning function to
implement the strategy and secure investment at better value for money, through
improved commercial capacity, more competitive tenders and a streamlined
procurement process;
■ Make reforms to improve the credit-worthiness of ZESCO as off-taker to improve
investor confidence through increased financial transparency and more secure
guarantees; and
■ Make governance reforms to the Energy Regulation Board (ERB) to improve its
independence and its effectiveness so that it better serves both investors’ and
consumers’ interests.
1. INTRODUCTION / SUMMARY
Zambia faces a challenge to meet rising demand for electricity as the economy, population
and electrification continue to grow. Load-shedding in 2015-16 demonstrated just how
high the stakes are for meeting this challenge as the economy suffered losses equivalent
to 20% of GDP (Samboko et al 2016) and government bore the cost of expensive energy
imports. As government undergoes fiscal consolidation in response to high debt levels, it
should look to increased investment in Independent Power Producers (IPPs) to develop
energy capacity. This approach offers the opportunity to meet increased demand in a way
that protects fiscal spending and ultimately promotes long-term economic growth.
IPPs offer a sustainable route to increased energy capacity across Sub-Saharan Africa,
where public and utility financing has traditionally been the largest source of investment
in power generation. This picture is true of Zambia, where IPPs currently make up a small
but growing part of Zambia’s energy portfolio through plants ranging in capacity from a
few megawatts to around 300MW. Zambia has faced significant challenges in attracting
IPP investment for several reasons, including below-cost tariffs, its regulatory framework
and procurement processes, all of which need to be addressed if Zambia is to better exploit
the opportunities that IPPs provide.
This report highlights the challenges that policymakers are facing in promoting effective
investment. The report first summarizes the challenges facing Zambia’s energy sector: it
provides a new forecast for increased demand and identifies key problems of insufficient
capacity and overreliance on hydropower. It then analyses the state of the energy sector
and identifies the current role of IPPs. Finally, it looks to other countries in sub-Saharan
Africa for lessons in accelerating investment in IPPs and concludes with recommendations
for how government can develop a healthy market for investment and improve internal
planning and procurement capacity in order to secure a productive, cost-effective and
diversified portfolio of energy generation.
Energy Roadmap- Delivering Zambia’s Energy Needs | 4
2. CHALLENGES FOR ZAMBIA’S POWER SECTOR
Over the last 25 years, Zambia’s economy has been transformed. National income has
more than tripled since 1990, living standards have risen and Zambia has been reclassified
as a middle-income country. Economic growth is expected to keep rising. However, since
2008 electricity supply in Zambia has lagged behind the country’s rapidly growing demand
and threatens to undermine future growth. Due to poor rains in 2015-16, the country
experienced severe load-shedding, which has been found to have caused economic losses
of equivalent to 20% of GDP. The underlying problems of dependency on hydropower and
limited capacity remain and will continue to threaten economic growth: as the population,
economy and electrification continue to grow, the country urgently needs to address a
number of challenges, all within the context of fiscal constraint:
RISING DEMAND
Zambia’s electricity demand has grown rapidly as the economy has expanded. Statistics
from state utility company ZESCO indicate that electricity supplied increased at an average
rate of 3% per year over the period 2010 to 2017. Peak demand grew from about 1,575 MW
in 2010 to 2,300 MW in 2017. Growth is heavily driven by the high demand for electricity
by Zambia’s mining industry, which consumes more than 50% of power produced.
4000MW+
DEMAND 2,300
DEMAND 1,575
2017
2010
Peak demand
grew from
about 1,575 MW
in 2010 to 2,300
MW in 2017
While economic growth has slowed somewhat in recent years, recent projections of
electricity demand are for significant growth over the next 10-15 years:
■ In 2010, the Ministry of Energy (MoE) forecast that peak electricity demand would
reach around 2,800 MW (see PMRC 2013). Tembo and Merven (2013), using the
Long-range Energy Alternative Planning (LEAP) methodology, provide base-case
and ‘high growth’ projections for Zambia’s electricity consumption out to 2030.
5 | Energy Roadmap- Delivering Zambia’s Energy Needs
The base-case forecast sees demand rising to 16,000 GWh by 2020 and to 26,000
GWh by 2030, while the high-growth projections are 24,000 GWh and 47,000 GWh
respectively. This last figure is over four times consumption in 2016.
■ Kabila and Eberhard (2013) provide peak demand and energy consumption forecasts
up to 2030 that are similar. They project peak demand of around 2,800 MW by 2020,
rising to almost 4,000 MW by 2030. Energy consumption is forecast to reach 17,000
GWh by 2020 and 23,000 GWh by 2030, i.e. in the same range as Tembo and Merven’s
base-case scenario.
■ The Seventh National Development Plan (2017-2021) predicts peak demand of
3,000 MW by 2021 and at least 3,525 MW by 2030.
Figure 1: Indicative electricity demand forecast to 2033
PMRC has conducted demand forecasting for the period up to 2033 by modelling
household demand and demand from economic sectors to project future potential energy
requirements using 2015 as a baseline. The base case represents an assumption of a 4%
annual increase in household income and sectoral growth of between 2% and 4% per year;
the low case a 2% annual increase in household income and sectoral growth of between
1% and 2%; and the high case a 6% growth in household income and sectoral growth of
between 3% and 6%. These forecasts show a significant growth in demand (which will
also mean an increase in peak demand): the base case sees demand double by 2030 and
the maximum forecast sees demand nearly triple. Increased demand is driven by domestic
consumption as the population grows, incomes rise and access to electricity increases
to 75% of households by 2033, as the Government drives rural electrification in line
with its master plan, with demand potentially increasing fivefold to over 20,000GWh by
2033.1Growth across sectors could see economic demand roughly double from 2015 to
nearly 15,000GWh (see Appendix A for more information about the model).
1. Note that as these lower income households access the grid, average demand per household will decrease, thereby offsetting
the effects of income growth; as this forecast accounts for this effect, it is somewhat less than others.
Energy Roadmap- Delivering Zambia’s Energy Needs | 6
INSUFFICIENT CAPACITY
Historically, capacity has struggled to remain ahead of peak demand. Peak demand for
electricity in 2017 was 2,300 MW. While nominal capacity was over 2,800 MW (Table 1), not
all plants are available at their full capacity all the time, and using an 80% de-rating factor,
operating capacity is more in the region of 2,250 MW. International good practice would
be to seek to maintain a de-rated capacity margin (i.e. capacity net of peak demand) of 10-
15%. While Zambia has added capacity – most recently with 420 MW from Maamba and
Itezhi-Tezhi in 2016 – more is urgently needed.
Table 1: Electricity generating capacity in 2017
TYPE CAPACITY (MW)
Kafue Gorge Hydro 990
Kariba North Hydro 720
Kariba North Extension Hydro 360
Victoria Falls Hydro 108
Lunzua River Hydro 14.5
Lusiwasi Hydro 12
Chishimba Falls Hydro 6
Shiwang’andu Hydro 1
Itezhi-Tezhi Hydro 120
Mulungushi Hydro 32
Lunsemfwa Hydro 24
Zengamina Hydro 0.75
Maamba Coal 300
Bancroft-CEC Diesel 20
Luano-CEC Diesel 40
Luanshya-CEC Diesel 10
Mufulira-CEC Diesel 10
Other small diesel Diesel 8.6
Ndola Heavy fuel oil 110
Samfya Solar 0.06
Musonda Falls Hydro 10
TOTAL 2897.21
Source: ERB 2017.
7 | Energy Roadmap- Delivering Zambia’s Energy Needs
OVERDEPENDENCE ON HYDROPOWER AND VULNERABILITY TO FAILURE OF RAINS
Zambia is heavily reliant for electricity generation on one technology – hydropower. At
the end of 2017, hydropower made up 83% of installed capacity (ERB 2017), despite
some recent diversification. This capacity itself is highly concentrated, with just three
large hydropower plants at Kariba North, Kafue Gorge and Kariba North Bank Extension
making up almost three-quarters of the country’s total. All of these large plants (along with
a number of smaller ones) are located within the Zambezi River Basin, meaning that the
bulk of Zambia’s electricity supply is dependent on rainfall in a single watershed. The new
Itezhi-Tezhi plant is in the same watershed. In addition to the rainfall failures in 2014 and
2015 that led to recent power shortages, there have been previous droughts in 1991-92
and in the early 2000s with similar effects (Kapika and Eberhard 2013), suggesting that
Zambia experiences drought and accompanying power shortages roughly once every
decade. Moreover, modelling of trends in the Basin suggests that hydropower potential
will gradually decline in future, due to climate change and increasing water demand from
other sources (Yamba et al 2011). This modelling suggests, for example, that the potential
of Lake Kariba may fall by one-third by 2030.
POWER SHORTAGES
The combination of demand growth outpacing capacity and heavy reliance on hydropower
makes Zambia vulnerable to periodic crises of power supply, most recently in 2015/16. In
recent years the system load factor has been remarkably high, reaching nearly 90% in 2013
and 2014. The deficit in output relative to demand hit a high of 1,000 MW in 2015, declining
to 526 MW in 2016 (ERB 2016). Despite importing electricity from neighbouring countries
at a cost of over US$350 million (World Bank 2017), ZESCO could not meet the shortfall
and had to implement power rationing. The economic impact was severe, with key
US$ 350 Million
economic sectors such as mining, manufacturing and agricultural sectors scaling down
production and employment as the intensity of the blackouts increased and imported
energy became expensive. One estimate of the economy-wide effects is that economic
losses were equivalent to around 20% of annual GDP (Samboko et al 2016). A study of
the impact of load-shedding on small to medium sized enterprises showed that over 80%
were affected, at an average cost of almost K20,000 per enterprise, and with up to a third
of businesses having to use back-up diesel generators (Mwila et al 2017). Households on
the other hand endured up to 12 hours of daily load-shedding at the peak of the crisis in
Energy Roadmap- Delivering Zambia’s Energy Needs | 8
July 2016. Power shortages not only damage the economy through decreased production
or increased electricity costs but also create a fiscal burden as government attempts to
make up the shortfall through expensive imports.
LOW RATES OF ELECTRICITY ACCESS IN RURAL AREAS
The challenges above relate only to those sections of the Zambian economy and society
which have access to electricity, but these are still in a minority, and large numbers of
Zambians, especially in rural areas, have yet to get access to electricity. Recent estimates
are that a little under half of the urban population have electricity access (USAID 2015), and
only 4.4% of the rural population have access to grid electricity, with 7.4% having access
to solar power (Musonda 2017). The target for rural access under the Rural Electrification
Master Plan is 51% by 2030, but progress is slow because access has to be expanded faster
than population growth to improve the proportion served. The huge scale of expansion
envisaged should be applauded but is another reason why generation capacity needs to
be radically expanded.
These challenges are all recognised in the Seventh National Development Plan 2017-
2021 (GRZ 2017). The Plan states that the current situation has arisen from ‘inadequate
and delayed investments in generation and transmission infrastructure’ and recognises
the compounding effect of ‘inadequate incentives to attract investment.’ By calling for
‘measures to grow and diversify the energy sector’; it is clear that private sector investment
through IPPs can meet in this ambition, while minimising the impact on government
finances.
3. THE ROLE OF PRIVATE SECTOR INVESTMENT IN ZAMBIA’S ELECTRICITY
SECTOR.
As noted in the 7NDP, there is widespread agreement that Zambia has plentiful resources
for electricity generation, including hydropower, solar, biomass, geothermal and coal (see
also PMRC 2014, Energy Studies Institute 2016). The challenge is getting investment in
power plants that can convert these resources into useful electricity. There is no shortage
of potential pipeline projects (see Table 2). However, many of these projects may never
reach completion.
TABLE 2
ON NEXT PAGE
9 | Energy Roadmap- Delivering Zambia’s Energy Needs
Table 2: Potential pipeline of new capacity – selected major projects
Project Type Expected completion Expected capacity (MW)
IDC Solar Solar 2018 100
IDC Solar Solar 2018 300
Maamba Thermal 2021 270
Chipata Thermal Thermal 2023 180
Muchinga Hydropower 2025 162
Kalungwishi Hydropower 2026 235
Ngonye Falls Hydropower 2026 117
Kafue Gorge Hydropower 2027 713
Source: Kukula Consulting
Historically, Zambia’s approach has been for the Government, via ZESCO, to undertake
investment in capacity. The Government has also led the recent Zambia Power
Rehabilitation Project (PRP) which involved various capacity and transmissions
upgrades as well as demand side management measures. With a budget of more than US$
75 million, it was supported by the World Bank, European Investment Bank (EIB) and
ZESCO. However, the main efforts were concentrated around refurbishment of existing
hydropower facilities and transmission lines which resulted in an effective increase of
available generation by about 100 MW, but this has not been sufficient to close the power
supply gap.
The ability of ZESCO to undertake new investments has also been constrained to a degree
by its ability to raise capital, which in turn is linked to its financial situation. A major
potential factor affecting ZESCO finances are how cost reflective tariffs for electricity are.
For many years Zambia has had low electricity prices by comparison with its neighbours.
However, following the development of a draft multi-year tariff framework by the ERB in
2016 and an application by ZESCO to raise its tariffs, the ERB took the decision in May 2017
to grant a 75% increase in customer tariffs in two phases between May and September
2017. However, it is unclear how far this move has improved ZESCOs financial position
(or whether the revenue has gone into general government budget) as ZESCO does not
produce regular financial reports. It appears that it remains dependent on the Government
to finance new investments, such as its share in the Itezhi-Tezhi hydropower scheme, with
ZESCO’s publicly guaranteed debt rising sharply in recent years (IMF 2017). However, this
strategy is unlikely to be sustainable, as the Government’s own debt situation has also
worsened.
This mix of factors points to the need for Zambia to attract more private investment in
the electricity sector, through public-private joint ventures or through investments by
Energy Roadmap- Delivering Zambia’s Energy Needs | 10
independent power producers (IPPs) who sign long term power purchase agreements
with ZESCO. Zambia has already started to see some investments of this type. Currently
operational IPPs, all selling power to ZESCO under long-term power purchase agreements
(PPAs) are shown in Table 3.
Table 3: Existing IPP and PPP investments in Zambia
Plant Type Owner Capacity (MW) Date
commissioned
IPP investments
Maamba Coal Maamba Collieries 300 2016
Ndola Heavy Fuel Oil Ndola Energy 110 2013
Lunsemfwa Hydro Lunsemfwa Hydro
Power Company 24 Privatised in 2001
Mulungushi Hydro Lunsemfwa Hydro
Power Company 32 Privatised in 2001
Zengamina Hydro Charles Rea 0.75 2007
PPP JVs
Itezhi-Tezhi Hydro ZESCO/Tata Power
of India 120 2016
Sources: ERB (2017), Kukula (2017)
In addition, Copperbelt Energy Corporation Plc (CEC) is an independent power company
that purchases power from ZESCO under a bulk supply agreement and supplies the mines,
in the Copperbelt region via its own transmission and distribution network. CEC also owns
standby gas turbines with a capacity of 80 MW and a regional control centre located in
Kitwe, and exports power to the Democratic Republic of Congo (DRC).
Table 3 shows that the scale of private investment in generating capacity has increased
in recent years. Three major projects (Maamba, Ndola and Itezhi-Tezhi) have all been
commissioned within the last five years. As noted above (see Table 2), there are also many
other potential projects, some of which could involve private backers. However, given the
scale of the challenge outlined in section 2, there is an urgent need to attract more private
sector investment. It is also essential that this is done in a strategic, cost-effective way to
meet the need to diversify energy generation and ensure that Zambian consumers do not
end up paying more for electricity than they need to.
4. ACCELERATING INVESTMENT – LESSONS FROM COMPARATIVE EXPERIENCE
In principle there is a great deal of interest from companies seeking to invest in the electricity
sector in Zambia: for example, the February 2018 launch event of the GET FiT solar
programme was oversubscribed by a factor of two. However, Zambia has as yet relatively
11 | Energy Roadmap- Delivering Zambia’s Energy Needs
little experience in this area. Much can be learned about how to accelerate good quality,
cost-effective investment by Independent Power Producers (IPPs) from looking at the
experience – both good and bad – of neighbouring countries in Africa. PMRC has reviewed
the track record of a number of countries, including Uganda, Kenya, Tanzania and South
Africa, as a way of assessing the situation in Zambia and options for reform. In this section
we first briefly review the institutional organisation of the electricity sector in Zambia as a
preliminary, and then consider the key lessons from comparative experience one by one.
LEGAL FRAMEWORK AND ERB
There are two statutes that together regulate the energy sector, both enacted in 1995.
Amended in 2003 by the Energy Regulation (Amendment) Act, No. 23 of 2003, the
Energy Regulation Act (Cap 436) is established the ERB and defined its powers and
functions including licensing, monitoring efficiency and performance of licensees, and
handling complaints.
The Electricity Act Cap 433, similarly amended in 2003 by the Energy Regulation
(Amendment) Act, provides the regulatory framework for the generation, transmission,
distribution and supply of electricity. It also sets out the ERB’s regulatory duties and
responsibilities to issue requirements for establishing generating stations, approving
changes in capacity and charges and managing licenses.
The Electricity Bill 2014 and Energy Regulation Bill 2014 are in Parliament, and have
the aim of the sharpening the regulatory tools for setting tariffs by expressly providing
the ERB powers to do so for the first time, as well as powers to enforce efficiency
improvements when assessing tariff submissions. Amendments to the Bills offer a
vehicle for improving the way that the regulatory framework promotes private sector
investment through IPPs.
POWER COMPANIES
ZESCO is a vertically integrated power utility carrying out generation, transmission
distribution and supply of electricity. It is wholly owned by the Government through
the Industrial Development Corporation (IDC), a state-owned investment holding
corporation. ZESCO dominates the electricity sector in Zambia. It operates the electricity
grid and is responsible for much of the country’s power generation from four large hydro
power plants (i.e. Kariba North Bank, Kafue Gorge, Kariba North Bank Extension and
Victoria falls) five small and mini hydro plants (i.e. Lusiwasi, Musonda falls, Shiwang’andu,
Chishimba falls and Lunzua) and two diesel power plants (Luangwa and Shang’ambo).
Energy Roadmap- Delivering Zambia’s Energy Needs | 12
Independent Power Producers (IPPs). The operational IPPs providing power through
ZESCO under long-term power purchase agreements (PPAs) are:
■ Lunsemfwa Hydro Power Company Ltd (56 MW)
■ Ndola Energy Company Limited (110 MW, heavy-fuel oil (HFO)
■ Itezhi-Tezhi Power Corporation (120 MW, hydropower)
■ Maamba Collieries Ltd (300 MW, coal-fired)
■ Additionally, the Zengamina Power Limited, an off-grid mini hydro power plant, is
licensed to generate, distribute and supply a rural area in North Western Province
Copperbelt Energy Corporation Plc (CEC) is an independent power company that
purchases power from ZESCO under a bulk supply agreement and supplies the mines, in
the Copperbelt region via its own transmission and distribution network. It also exports
power to the Democratic Republic of Congo (DRC). CEC also owns standby gas turbines
with a capacity of 80 MW and a regional control centre located in Kitwe on the Copperbelt.
North Western Energy Corporation Limited (NWEC) is also a licensed electricity distributor
near Kalene Hill, Mwinilunga district in North Western Province of Zambia; it is also
supplied by ZESCO. The overall power generation capacity of the national electricity grid
was 2,886 MW as of 30 June 2017.
ELECTRICITY MARKET
ZESCO is the de facto single buyer in Zambia. CEC and NWEC are licensed to sell electricity
but they purchase electricity from ZESCO. The Electricity Act Cap 433 states that the
Minister may declare any transmission line to be a common carrier (Paragraph 4 (2)).
Though the third-party access and licensing regulations are necessary conditions for
bilateral contracting between eligible consumers and IPPs/imports, the legislation is not
sufficient. Additional requirements to allow bilateral contracting to take place include
transmission use-of-system tariffs, rules governing the non-discriminatory dispatch of
power plants connected to the grid, the introduction of balancing arrangements such
that when the demand of the eligible consumer does not match the output of the IPP, the
imbalance is provided by a third party and paid for by the parties that are out of balance,
and criteria for defining consumers eligible to participate in a bilateral contract market.
13 | Energy Roadmap- Delivering Zambia’s Energy Needs
Figure 2: Key actors in the Zambia electricity sector
While the ERB’s development of a multi-year tariff framework and subsequent approval
of a 75% increase in customer tariffs in May 2017 has made the investment environment
more attractive by making tariffs more cost-reflective, government needs to make
further reforms in order to attract more investment and secure it strategically and costeffectively.
Lessons are available from around Africa, for example South Africa, which has
developed three wind projects between 2010 and 2014 and made significant progress in
the development of seven small hydropower stations.
4.1 PLANNING
A first lesson from the experience of a number of countries is that effective planning is
important for minimising costs for consumers and making the most of IPPs. Ideally such
planning should use tools that consider both generation and transmission, and identify the
supply and demand-side investments needed to meet projected electricity demand at the
least total cost over a certain period (typically 15–20 years), while also meeting associated
policy objectives such as environmental sustainability.
However, the planning function in government has become dispersed and inconsistent:
■ Up until the 2000s, ZESCO undertook power sector planning, most recently producing
a master plan in 1998. Responsibility then passed to the MEWD, which finalised a
Power System Development Master Plan in 2009 (Kapika and Eberhard 2013).
■ It also appears that the transmission licences held by ZESCO and CEC in principle
Energy Roadmap- Delivering Zambia’s Energy Needs | 14
require them to produce regular plans for the development of the integrated
generation and transmission system, at least every two years, with a time horizon of
no less than 15 years (ibid). However, such plans have not been produced.
■ There does not appear to be a current masterplan, beyond the high-level intention
expressed in the Seventh National Development Plan to expand capacity. In June
2016 the Energy Regulation Board (ERB) announced that it would undertake a Cost of
Service study to provide a framework for accurately estimating “cost reflective tariffs”
for Zambia. The Cost of Service study will effectively involve a least-cost planning
exercise that would help update thinking.
■ It is also the case that specific initiatives, such as the Scaling Solar programme run by
the Industrial Development Corporation and the International Finance Corporation
(World Bank Group), take place outside of normal planning frameworks.
However, ideally, power sector planning should not be a one-off periodic exercise, but
a continuous, dynamic process of keeping up-to-date with technology costs, changes in
demand trajectories and security of supply threats. The government should establish the
planning function and properly resource it in terms of people, software and institutional
capacity, thereby creating a strategic plan for increasing energy capacity in the country,
with due consideration to the role of IPPs.
Experience suggests that effective planning also involves input from a broad range of
stakeholders. For example, Kenya, one of the more successful countries in terms of
attracting IPP investment, has involved stakeholders through the membership of a
planning committee chaired by the energy sector regulator. For Zambia, this committee
could support the planning function by bringing together the ERB, Ministries of Energy,
Finance and National Development Planning, ZESCO, IPPs and representatives for business
and consumers, and could be established through legislation requiring consultation on
planning.
4.2 PROCUREMENT
For planning to play a useful role, it must be translated into appropriate investment and
procurement decisions which encompass both the public and private sectors. However,
few African countries have an explicit connection between planning and procurement.
One common problem is the involvement of more than one actor in procurement. The
official process for an IPP seeking to get permission to make an investment and obtain
a power purchase agreement and a generation licence is shown in Figure 2. In addition,
potential investors may need to obtain permission to develop land with local and/or tribal
authorities. They will also have to negotiate a connection agreement with ZESCO.
such as Itezhi-Tezhi (with Tata Power) and the Kafue Gorge Lower hydropower project (with Sino-Hydro and the China –Africa Development Fund). 2 It should also be noted that, outside of the process illustrated in Figure 2, ZESCO has also entered into partnerships with private investors in joint venture projects,
15 | Energy Roadmap- Delivering Zambia’s Energy Needs
Figure 3: Process for IPP investment
Based on Kukula Consulting (2017)
This procurement process involves input and clearance from up to five different actors,
including Government Agencies, the Ministry, ZESCO and the ERB. There are also some
areas in which there are perceptions of a lack of clarity, for example, in the role of the
Zambia Public Procurement Agency in approving PPAs.2 The whole process can be
expected to take a year at minimum, and in some cases up to four or five years, which acts
as a barrier to entry and can increase costs for the consumer as investors use alternative
routes to procurement that lack the same oversight.
While a few countries have used competitive bidding, a disproportionate share of IPPs in
Africa are developed based on unsolicited proposals and through direct negotiation. This
has generally been the case in Zambia. The risk here is that costs, and therefore prices
for consumers, are higher as a result. Experience shows that competitive procurement
processes produce lower costs, including ultimately for consumers. Eberhard et al (2017),
reviewing 50 projects, find that diesel projects procured by an internationally competitive
process are on average around US¢10/kWh cheaper than directly negotiated PPAs, while
solar PV projects were around US¢8/kWh cheaper. Competitive procurement, such as
reverse auctions, have also yielded lower costs for renewable electricity, such as wind and
solar PV, than administratively set feed-in tariffs.
Within this picture, recent programmes Scaling Solar and GET FiT (developed
successfully in Uganda) are a departure since they have taken a tendering and auctioning
approach respectively which offer a streamlined and simplified process, in which successful
2. It should also be noted that, outside of the process illustrated in Figure 2, ZESCO has also entered into partnerships with
private investors in joint venture projects, such as Itezhi-Tezhi (with Tata Power) and the Kafue Gorge Lower hydropower
project (with Sino-Hydro and the China –Africa Development Fund).
MOE
Energy Roadmap- Delivering Zambia’s Energy Needs | 16
IPP bidders benefit from standardised PPAs and packaged information about the best
locations for grid connections, for example. There have been some challenges in getting a
competitive field for Scaling Solar, but there are high hopes for GET FiT. In December 2017,
GET FiT Zambia became the official implementation program for the Zambian Renewable
Energy Feed-in Tariff (REFiT) Strategy. GET FiT Zambia is designed to assist the Zambian
Government in the implementation of its REFiT Strategy. In line with this strategy, GET FiT
Zambia aims to procure 200 MW of renewable energy projects within the next three years
through small- to medium-scale Independent Power Producer (IPP) projects up to 20 MW,
in line with the REFiT Strategy.
Where projects are directly negotiated, then measures to ensure value for money can also be
taken. Eberhard et al (2016) cite the example of Kenya Power which historically used ‘open
book’ processes, pre-specifying a capital structure for the project and expected returns on
debt and equity, and comparing the resulting prices to other pricing benchmarks—such as
feed-in tariffs (FiTs) and the prices resulting from competitive procurements.
Effective procurement processes lower barriers to entry for investors and secures
investment in a way that meets the country’s strategic needs for a diversified portfolio
of energy generation and protects energy consumers through negotiating good value
for money. The Government should establish a procurement function alongside the
planning function, which has oversight of all procurement of IPPs. Increased oversight
would improve transparency over contract negotiations and bring commercial specialists
together. The Government would be better positioned to hold negotiations with IPPs,
which have a great deal of commercial expertise, carry out more competitive tenders and
develop a streamlined procurement process.
4.3 CREDITWORTHINESS OF OFF-TAKER
In many African countries, the state-owned utilities that are the off-takers of electricity
from IPPs are in poor financial shape, because tariffs are frequently not cost-reflective,
meaning that utilities cannot cover capital and operating costs. Also because of high losses
in distribution lines and a poor record on revenue collection, a combination of factors that
mean losses of up to half of a utility’s turnover. Potential IPPs perceive substantial risk in
17 | Energy Roadmap- Delivering Zambia’s Energy Needs
such conditions, especially the risk of non-payment if the utility is financially fragile. In the
case of ZESCO, some concerns about non-payment to IPPs are expressed.
IPPs will tend to seek safeguards of some kind, including international arbitration,
sovereign guarantees, ring-fencing of revenues or escrow accounts, loan or payment
guarantees from international financial institutions (e.g. the World Bank, AfDB) and various
types of insurance products. The direct involvement of development finance institutions
in large-scale investment can also give private investors greater confidence. In the case
of Zambia, some IPPs will seek guarantees from the Ministry of Energy. The packages for
solar IPPs also offer risk mitigation facilities; e.g. GET FiT offers forms of insurance against
termination of contracts.
However, in the longer term the financial health of off-taking utilities can be established on
a more sustainable basis only through improved governance and management of utilities,
and tariff reform in the direction of cost-reflexivity, or more credible guarantees that
government will underwrite subsidies. ZESCO’s financial performance is unclear but it has
traditionally borne the expense of below-cost tariffs, power losses through transmission
and distribution, at least some of the cost of expensive imports during the load-shedding
of 2015-16. ZESCO has made progress through tariff reforms of 2017 and decreased power
losses in distribution, which were 10% in 2016, decreased from 13.8% in 2011 (Energy
Studies Institute, 2016) (but still above international good practice in the range of 4-8%).
However, without better financial reporting it remains unclear how far these reforms
have improved ZESCO’s financial position (or whether the revenue has gone into general
government budget). In the short-term, increasing transparency over ZESCO’s finances
can reassure investors and drive improved financial management as the organisation
improves its governance and management of utilities, continues to increase tariffs to be
cost-reflective and pursues more credible guarantees.
In the long-term, the government could consider using the Electricity and Energy Regulation
Bill to allow power producers to supply directly into the grid. This would provide suppliers
with an alternative purchaser to ZESCO, although it would not be attractive in the shortterm
as ZESCO buys electricity at a higher tariff than it sells to consumers.
4.4 INDEPENDENT REGULATOR
The existence of transparent, fair and accountable regulators that produce credible and
predictable regulatory decisions is necessary for creating the certainty around market
access, tariffs, and revenues that encourages investment. Ideally, an independent
regulator should enforce best practices in investment transactions and notably
competitive procurement. High quality regulators will also have the capacity to undertake
the regulatory changes, for example in grid codes, which are needed for facilitating the
introduction of intermittent renewable sources of electricity into the system.
Energy Roadmap- Delivering Zambia’s Energy Needs | 18
In Zambia, the presence of a regulator has not necessarily translated into competitive
procurement practices, resulting into captive electricity consumers not benefiting from the
pass-through of competitive generation prices. In recent years the ERB has also undertaken
significant measures to improve ZESCO’s performance, first in establishing a system of
Key Performance Indicators, against which it monitors and reports on compliance, and
secondly in approving tariff reform in 2017 (although this reform was ultimately dependent
on the backing of the President). If the ERB promotes best practice across the sector, it will
be able to serve both investors and consumers
An independent regulator is better able to manage the market in the common interest of
investors and consumers. The ERB has existed as a formally independent regulator since
1996. In theory, the Board’s Members are appointed for five-year terms, although there
have been occasions in the past where the Minister has removed Members (Kapika and
Eberhard 2013), suggesting that the degree of independence in practice is somewhat
weaker. The ERB has a degree of financial independence from the Government, as the bulk
of its income comes from licence and application fees, and in practice it has tended to
be adequately funded (ibid). The government could undertake measures to improve the
independence of the regulator by having the board rather than the Minister of Energy agree
its terms of service and establishing an appeals tribunal, as well as updating legislation to
secure its independence.
5. CONCLUSION
Following poor rainfall in 2014/15, the country experienced extensive load-shedding
from 2015-16, with households experiencing twelve hours of blackouts at its peak in July
2016. Power shortages impacted every corner of the economy from the key economic
sectors, mining, manufacturing and agriculture, which scaled back production and made
redundancies, including small and medium sized enterprises, which experienced average
costs of K20,000. The total impact has been estimated to have been equivalent to 20%
of GDP in economic losses. The severe cost of power shortages demonstrated the urgent
need to improve energy capacity and diversify from hydropower, which provides over 80%
of the country’s power.
The Government has successfully stabilised the country’s energy position since 2016.
However, Zambia cannot afford to be complacent. Demand for electricity will only grow,
driven by domestic consumption as population, income and electrification levels rise and
underpinned by economic growth: this paper forecasts that demand will likely double, and
may even triple, by 2030. Moreover, the country’s debt position has limited the scope for
the government to increase capacity through public and utility investment as it has done
traditionally. It is instead imperative that the government look to private-sector investment
to meet Zambia’s energy generation needs.
19 | Energy Roadmap- Delivering Zambia’s Energy Needs
The amount of power generated by IPPs has increased in recent years, and the government
should be applauded for reforming tariffs to make them more cost-reflective, which will
support this growth. However, more must be done to ensure to make the sector more
attractive to investment and improve government capacity to secure a productive, costeffective
and diversified portfolio of IPPs. Investors currently face high-barriers to entry
due to the lengthy and complicated procurement process in place and are discouraged by
uncertainty over the performance of ZESCO and the regulator. Moreover, government does
not currently employ best practice in planning and procuring investment as the Ministry
of Energy lacks both a comprehensive strategy and oversight over implementing it, with
too much investment secured through one-off, direct negotiations rather than competitive
tenders, which risks raising prices for the consumer.
This paper makes four recommendations for securing more private sector investment in
the Zambia’s power sector:
1. Establish a central planning function, most obviously in the Ministry of Energy, to
develop a strategic vision and delivery plan for increasing and diversifying power
capacity in the country through investment in IPPs.
2. Establish a central procurement function to sit alongside the planning function and
secure investment in line with the Government’s strategic vision. The procurement
process is lengthy and opaque, which has discouraged investment across the board
and created an environment in which deals are made through unsolicited direct
negotiations. The planning function should look to centralise commercial capability,
run more competitive tenders and streamline the procurement process, which will
lower barriers to entry for investors and deliver value for money for consumers.
3. Improve the credit-worthiness of ZESCO: as the sole off-taker, it is essential that
investors have confidence that the organization can purchase the energy generated,
which can be improved through increased financial transparency and providing more
secure guarantees.
4. Develop the governance of the ERB to improve its independence and, therefore,
its effectiveness in serving investor and consumer interests. The Government
should consider having the board rather than minister agree its terms of service
and establishing an appeals tribunal, as well as updating legislation to secure its
independence.
APPENDIX 1 – DEMAND FORECAST MODELLING
The PMRC modelling exercise for forecasting demand has two elements: household
demand and demand from economic sectors.
Energy Roadmap- Delivering Zambia’s Energy Needs | 20
Household demand is estimated on the basis of expected growth in the number of
households, an increasing electrification rate based on the Rural Electrification Master
Plan for 2030, household income growth and an associated income elasticity of demand
for electricity, and an adjustment for falling demand per connection driven by the
connection of poorer households and by energy efficiency measures. The base case for
household demand assumes annual growth of household income of 4%; the low and high
cases assume 2% and 6% respectively.
Demand form economic sectors, including mining, is forecast on the basis of electricity
intensity of output and growth of output in the sector. Growth assumptions for base case,
low and high cases are shown in the table below:
Table 4: Growth rates (%/year)
LOW BASE CASE HIGH
Household income growth 2 4 6
Agriculture 1 2 3
Mining and quarries 2 4 6
Manufacturing 1 3 5
Electricity, gas and water 1 3 5
Construction 1 3 5
Trade 2 4 6
Transport 2 4 6
Finance and property 2 4 6
Others 2 4 6
Full details of the modelling and sources are available on request.
21 | Energy Roadmap- Delivering Zambia’s Energy Needs
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Energy Roadmap- Delivering Zambia’s Energy Needs | 22
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Unlocking Zambia’s Potential
Correspondence on this Briefing Document can be sent to:
info@pmrczambia.net
Policy Monitoring and Research Centre (PMRC)
Plot No. 36c Sable Road, Kabulonga, Lusaka, Zambia
Private Bag KL 11
Tel: +260 211 269 717 | +260 979 015 660
www.pmrczambia.com