Columnists

Chamber of Mines’ position on cost-reflective tariffs

TALENT Ng'andwe.

Analysis: TALENT NG’ANDWE
STRANGE as it may seem to you, the Zambia Chamber of Mines agrees with the statement of your headline, ‘Cost-reflective tariffs must be for all’ (Zambia Daily Mail editorial, January 6, 2018).

If you had read our informative booklet, ‘A brighter future: powering Zambia’s economy’, you would know that we are in favour of tariffs that reflect the cost of an efficient, internationally competitive service.
Firstly, you imply that the mines are being subsidised by “law-abiding citizens”.
Due to the differences in the transmission and distribution process, it is always significantly cheaper for a supplier to provide electricity to the largest industrial customers, like Zambia’s big mining operations, than it is to other categories of customers (commercial or residential, for instance). We estimate that it is approximately 4 cents per kWh cheaper to supply high-voltage electricity to the mines than low-voltage electricity to households.
If tariffs were truly ‘cost-reflective’, mines would receive a big discount in tariff compared to other users. However, in Lusaka, residential users in 2017 were paying approximately 2 cents per kWh less than the tariff for North-Western Province’s newest mine, Kalumbila. So, yes, there is subsidisation, but it is not the mines that are being subsidised.
Secondly, the use of the term ‘cost-reflective tariffs’ as short-hand for higher mining tariffs is to imply a knowledge of Zesco’s costs, but no one knows for certain – even though some penetrating analysis has been done by our members – as the last formal cost of Service Study dates to 2007.
What we do know is that Zesco’s revenue requirements have escalated rapidly in recent years. The media would do well to reflect upon why this has happened; as Minister of Finance Felix Mutati said in his 2017 budget speech, ‘cost-reflective’ tariffs “does not mean that consumers should end up paying for inefficiency”.
Our members’ analysis of power procurement does suggest that there are major inefficiencies, and a lack of transparency, in the present system.
For example, we estimate that the current average price of imported emergency power is 62.5 percent above the global benchmark cost of generation, and the proposed tariffs on some of the new power generation projects are also well above international benchmarks, some by as much as 23 percent.
This is bad news for all consumers, and suggests that none of us should not take Zesco’s costs at face value.
Thirdly, the claim that mines should invest in “green energy sources”, presumably to reduce their consumption of Zesco-generated power, other than offices or other non-mining activities, solar power is presently not viable for Zambia’s largest mining operations.
Mines need consistent, continuous power supply to operate their machinery, and to pump millions of litres of underground water that would otherwise flood underground workings. Presently, the battery technology to deliver 180 megawatts of power is very immature, and the size of a solar farm would be enormous. Furthermore, the presence of the sun is never guaranteed, at night-time obviously, and often during the daytime in the rainy season.
Of course, this position may change as technology improves. What is available now is approximately 4.5GW of affordable energy from South Africa that could be wheeled through Zimbabwe to Zambia.
This country needs a reliable supply of cost-efficient, competitively priced electricity. The well-being of its citizens, businesses and economy depends upon it. Zambia’s ability to grow and diversify over the coming decades depends upon it.
The power sector in its current form is unable to deliver this supply, and therefore must be reformed. But this cannot happen successfully without an informed debate, where the facts are clearly understood.
The author is deputy chief executive officer of the Zambia Chamber of Mines.

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