Cost Reflective Tariffs in Zambia - A Critical Factor in Attaining Power Sector Sustainability
Susiku I. Nasinda MPhil, FCCA, FZICA, CESFi, IoDZ ????
Development Finance Expert | Renewable Energy & Sustainable Finance Expert | ESG Expert | Council Member - ZICA | 2020 ACCA Zambia National Advocate of The Year Award Winner | International Speaker | Mentor
1.0 Introduction
Zambia's energy regulator has finally approved ZESCO's Emergency Tariff Application. The Energy Regulation Board (ERB) announced its decision on Thursday, 10th October 2024 in Lusaka.
The Emergency Tariff approval is a positive move. It affirms the urgent need for an immediate, concerted effort from all key stakeholders in resolving Zambia's energy crisis.
Revised tariffs will enable the national power utility to raise US$15m monthly from its Residential, Commercial, and Maximum-Demand (MD) customers to support the importation of an additional 300MW of power from Eskom, EDM, and ZPC. This will bring the total monthly imports to 788MW.?The utility hopes to cut load-shedding from the current 21 hours per day to 17 hours daily.
Zambia is facing a 1300MW electricity deficit following a devastating El Nino-induced drought experienced during the 2023/24 rain season. The drought has adversely impacted electricity generation in a country where 85% of electricity is generated from hydro sources. The blackouts have negatively impacted households and businesses, with a knock-on effect on the entire economy, with energy, agriculture, and water supply being the hardest hit.
Loadshedding reached its peak in September 2024 when blackouts lasted more than four days. This was due to the depletion of water levels for electricity generation at the Kariba complex resulting in the shutdown of the Kariba North Bank Power Station.
This situation was worsened by routine maintenance at Maamba Energy Ltd in September. This resulted in a withdrawal of 300MW from the system. The Zambezi River Authority Original allocated 8 billion cubic meters to ZESCO for power generation in 2024. Zambia has since exhausted its allocation.
Zambia's 2024 GDP growth forecast has been slashed to 2.3% (from 4.8%), and inflation has gone up by 21% in 2024, closing at 15.6% in September 2024 (from 13.2% in January 2024). The Kwacha also remains weak at around K26/ US$1 (20% depreciation since October 2023). This, coupled with high national external debt, prolonged debt restructuring, ZESCO's weak balance sheet, and an IMF Extended Credit Facility (ECF) program in place means that the country has limited capacity to raise external financing and credit to support emergency power imports.
2.0 Emergency Tariff Application
On 1st October, ZESCO Limited submitted an emergency tariff adjustment proposal to the Energy Regulation Board (ERB) per Article 18 subsection (3) of the Electricity Act? No. 11 of 2019? which states that “Where the emergency is declared, the licensee shall submit the proposed tariff adjustment to the ERB for approval“. The ERB declared a state of emergency via a Gazette Notice issued on 12 April 2024, and ZESCO declared force majeure in the same month.
ZESCO needs a total of US$94 million per month to import power from its neighbors and through the Southern African Power Pool (SAPP). Revenue from the emergency tariffs will contribute US$15m while the balance will be raised from other sources. The breakdown of the imports is as follows: (I) 550MW from South Africa (US$59m pm); (ii) 188MW from Mozambique (US$19m pm); (iii) 50MW from SAPP (US$5m pm). The utility will also generate 12.1MW from small in-land diesel generators at a total monthly cost of US$8 million.
ZESCO is currently importing 488MW. The national power utility needs an additional 300MW to reduce load-shedding hours from 21 hours to 17 hours. The country is confident that the situation will normalize by February/ March 2025 once water inflows into the Kariba dam increase. The Zambia Meteorology Department has predicted normal to above normal rainfall during the forthcoming rain season 2024/25.
During the public hearing held on 7th October in Lusaka, key stakeholders such as Mr. Ashu Sagar -President at the Zambia Association of Manufacturers , Ms. Ana Hadjuka - CEO at Africa GreenCo , Mr. Mark O'Donnell - Chairperson at the Business Coalition Taskforce, and Mr. Susiku I. Nasinda - Executive Director/ Chief Climate Finance Officer at NSN Energy Consulting Limited urged ERB to approve the Emergency Tariff Application to save the economy from total collapse.
ERB's approval comes barely six weeks after the regulator rejected ZESCO's earlier application. In its earlier decision, the regulator stated that "increased tariffs would inevitably increase the cost of living and worsen the current state of affairs."
The short duration between the two applications (six weeks) shows the significance of this matter. ZESCO needed urgent intervention from the regulator. Failure to transfer the cost of expensive power imports to end users on time has worsened ZESCO's financial position, impacting both revenue and expenses negatively.
Figure 1: Climate Finance Expert Susiku I. Nasinda
3.0 Approved Emergency Tariffs
The adjusted tariff will take effect on 1st November 2024 and will remain in effect over the emergency period, subject to ERB reviews every 90 days. Maximum Demand Customers (MD3) will now pay US$c9.62/ kWh (up from US$c7.44/kWh). Commercial customers using more than 500 units will pay US$c8.76/ Kwh (40% increase), while residential customers consuming more than 500 units will pay US$c9.38/ kWh (up 162%). The ERB approved the tariffs based on the following:
(i). Tariff Affordability: ZESCO proposed to reduce the tariffs for residential R1, R2, and commercial C1 customers. This will provide relief for low-income households and Small and Medium Enterprises (SMEs). The reductions will result in affordable tariffs to this category of consumers.
Additionally, the adjustments on the MDs are necessary to enable ZESCO to import sufficient power for the industries to ensure that these productive sectors remain sustainable during the Emergency period. The proposal by Zesco to eliminate capacity charges and to adopt an all-energy tariff for the MD customers will also provide the necessary relief to this segment of consumers.
(ii). Impact on Load-Shedding
Zambia currently has a 1,300MW power deficit, resulting in load-shedding of up to 21 hours daily. This has hurt revenues for already struggling businesses. The increased power rationing has subsequently affected their productivity. In its application, ZESCO committed to reducing hours of Load shedding and publishing predictable load shedding schedules, providing much-needed relief to households and businesses.
(iii). ZESCO Financial Performance and its Viability
A review of ZESCO's financial position indicated that the utility has inadequate resources to finance the additional power imports. Therefore, there is a need to support the utility to raise the required funds to close the funding gap for urgent importation of additional power.
Conditions for Approval
ERB approved the Emergency Tariff subject to the following conditions:
Figure 2: ZESCO Board and Management
4.0 History of Electricity Tariffs in Zambia
Zambia has one of the lowest electricity tariffs in the SADC region, second only to Angola. This entails that the government subsidizes electricity for its citizens. The low tariffs have resulted in under-investment in energy generation. This is evident from the current blackouts which confirm inadequate investment in power generation projects and maintenance.
Blackouts have persisted despite the development of additional hydro projects such as the 750MW Kafue Gorge Lower power station which was commissioned in 2023.
Since 2015, the national power utility has consistently struggled to meet electricity demand, plunging the Southern African copper hotspot into one electricity crisis over another. A 2015 World Bank report estimated that the country loses approximately US$300-400 million per annum due to underpricing electricity. Consequently, ZESCO's weak Balance Sheet makes it a risky entity to contract with. Were it an attractive off-taker, prospective private developers could theoretically drive down prices for power generation.
3.1 Key Policy & Regulatory Developments in The Energy Sector
3.1.1 Cost of Service Study
In the Cost of Service Study (CoSS) released by the ERB in August 2022, the final cost-reflective tariff established was US$c10.20/ kWh. However, based on the current Kwacha to US dollar exchange rate of K26/ US$1, Zambia supplies electricity below cost to its customers.
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Residential customers pay US$c3.51/ kWh compared to the SAPP SDAm standard rate of US$c14.2/ kWh. Maximum Demand customers pay US$c7.34/kWh compared to SAPP DAM peak and off-peak rates of US$c31.3/Kwh and US$c7.9/KwH respectively.
Figure 3: Current Tariffs vs SAPP
3.1.2 Integrated Resource Plan
The IRP caters to the Government’s vision of ensuring energy sufficiency and surplus as the economy grows, attaining universal access to electricity by 2030, and positioning Zambia as a regional electricity trading hub.
The Integrated Resource Plan (IRP) identifies Cost Reflective Tariffs as a key component for attaining power sector bankability and sustainability.
Figure 4. Six-Point Framework for Power Sector Bankability
From a system sustainability perspective, ZESCO cannot afford to continue subsidizing electricity. The Government no longer has the resources to support the power utility given Zambia’s fiscal crisis, characterized by huge external debt, a weak local currency, and low copper revenues. Therefore, the country needs a sustainable system that enables cost recovery, facilitates future investments, and guarantees a stable, reliable energy supply.
3.1.3 ZESCO Multi-Year Tariff Framework
As part of the development of the electricity sector to steer it toward cost reflective tariff, the ERB approved ZESCO's Multi-Year-Tariff Framework (2024 to 2027) in April 2023. , with the primary aim of steering the country towards cost-reflective tariffs. This positive move resulted in tariff adjustments in April 2023 and April 2024.
4.0 The ERB's acceptance of ZESCO’s Emergy Tariff Application is a step in the right direction.
The emergency tariff approval is a positive move that affirms the urgent need for immediate, concerted action from all key stakeholders in resolving Zambia's energy crisis.
The tariff adjustments will enable ZESCO to raise additional funding to stabilize the power supply and help reduce load-shedding hours from the current 21 hours per day to 17 hours daily. Cost-reflective tariffs will also save the ailing national power utility from collapse and will help Zambia attract private-sector investment in power generation. This is cardinal for a country that has high external debt obligations.
ZESCO's weak balance sheet was confirmed by Fitzpatrick Kapepe - Head of Business Development who disclosed that the corporation defaulted on its loans in 2018, 2019, and 2020. ZESCO defaulted US$2.4 million in 2028, US$17m in 2019, and US$62m in 2020 (the year when the country also defaulted on its Eurobond).
During the emergency tariff public hearing held on 7th October 2024, ZESCO Board Chair Mr. Vickson Ncube stated that Zambia needs a policy shift.
"Zambia needs a policy shift. Let us move away from postponing pain. This concept of continuously massaging the cost of producing electricity and selling it below cost shall never take us anywhere. ZESCO cannot build reserves that will enable it to invest more because we are already consuming more than we are paying to produce. That cannot work. If your working capital is negative, no one on earth will lend you money unless you have a wealthy uncle. Unfortunately, Zesco has none. It is time for us to bite the bullet and do the right thing,” ~Vickson Ncube, ZESCO Board Chairman
5.0 Conclusion
The need for the country to implement cost-reflective tariffs cannot be over-emphasized. Doing so will enable ZESCO to optimize its cash flow and avoid accumulating further debt.
Additionally, cost-reflective tariffs are essential for attracting private-sector investments in the energy sector. This is cardinal in a country characterized by a constrained fiscal space and high external debt.
To achieve this, there is a need for goal congruence among key stakeholders i.e., government, ZESCO, the business community, and IPPs if Zambia is to successfully deal with the current and future energy crises.
The approval of the emergency tariff by the ERB, recent pronouncements by the Minister of Finance and the Republican President, and support by the private sector show goal congruence among key stakeholders.
Figure 5: Private sector nods to emergency tariff hike
During the 2025 national budget presentation on 27th September 2024, Finance Minister Dr. Situmbeko Musokotwane stated that expensive power is better than no power. Republican President Hakainde Hichilema also made similar remarks during the Presidential Delivery Unit Zambia (PDU) day on 9th October 2024. The President stated that the feedback from the public indicated that it was time to implement cost-reflective tariffs because current tariffs were too low.
Implementing cost reflective tariffs in Zambia is critical in attaining power sector sustainability, and bankability. This is important if the country is to develop a diversified power generation mix that is climate resilient.
The author is a renewable energy and climate finance expert. He is the Executive Director and Chief Climate Finance Officer at NSN Energy Consulting Limited. He holds a Master of Philosophy in Development Finance (majoring in environmental finance) from Stellenbosch Business School, South Africa. He is currently pursuing the Certified Expert in Sustainable Finance Certification from the Frankfurt School of Finance and Management, Germany.
References:
Nasinda S. I., (2024). An Independent, Transparent, Objective Energy Regulator Essential for The Growth of Zambia's Electricity Market. Retrieved from: https://www.dhirubhai.net/pulse/independent-transparent-objective-energy-regulator-susiku-i--w0w9f/?trackingId=3irK16DsBzv82M6%2BXUB7Yw%3D%3D
ERB (2022). Zambia - Electricity Cost of Service Study (COSS)