MODERN societies and economies such as Zambia are built on energy infrastructure, with the electricity sub-sector playing an important role at both household and industry levels.
In recent years, the supply of electricity has been hampered by reliance on a single source of electricity generation.
Since hydropower contributes to more than 95 percent of electricity generated in the country, effects of low water levels in water bodies have been cited as among the causes of a reduction in generation of electricity.
Therefore, the need for Zambia to diversify its electricity generation mix to include thermal (coal), combined cycle gas thermal, solar, wind and nuclear energy, cannot be over emphasised.
But another factor is having cost-reflective tariffs that should help attract investments in the sector.
The ramifications of the country’s failure to diversify its electricity generation mix came to the fore in 2015 when the energy deficit resulted in unprecedented levels of electricity supply rationing to all consumers.
Demand for electricity stood at 1,949 megawatts (MW), however, the sector was only able to generate 1,281mw. This situation was largely a result of inadequate and delayed investments in generation and transmission infrastructure as well as the failure to diversify energy generation sources over the last 40 years.
This was further compounded by inadequate incentives to attract investment in the sector. The deficit was exacerbated by the effects of climate change, in particular low rainfall, given that Zambia has been highly dependent on hydro power despite the envisaged growth of other sources of energy to about 15 percent by 2030.
To increase supply, there is need to promote investment in hydro, nuclear, geothermal, wind and solar energy generation.
According to current projections, the growth in demand will increase between 150 mw and 200 mw per year.
“The peak demand for electricity in the country is likely to be 3,000 mw by 2021 and is expected to increase to over 4,000 mw in 2030,” one report stated.
In view of the above, measures to grow and diversify the electricity sub-sector to enhance its contribution to economic diversification by expanding power generation and transmission capacities as well as maintaining a stable supply of petroleum products, should be implemented.
It is in this line that Government, in the Seventh National Development Plan (7NDP) outlines broad strategies and reforms to enhance the supply of electricity for economic development.
The objective is to expand and improve electricity generation, transmission and distribution, as well as encouraging the development of small and micro hydro power stations.
Further, the Government will promote the establishment of an open and non-discriminatory transmission access regime in the electricity sub-sector, implement a cost-reflective electricity tariff regime and adopt the electricity grid code.
To implement a cost reflective tariff, a 75 percent increment in electricity charges was effected in two phases, with the first one being 50 percent last May and the balance of 25 percent was effected last September.
To justify the tariff hike, Zesco Limited managing director Victor Mundende says Government cannot continue subsidising the company because it is capable of meeting its obligations if allowed to operate as a business by charging correct tariffs.
Mr Mundende said Zambia requires regular tariff increases to secure reliable power supply and attract investments in the sector.
“If, there is no tariff increase, Zesco will not be competent enough to supply electricity at required quantities in an efficient manner. How does Zesco provide better services when it buys power at 10 US Cents per kilo Watt hour and sell at four US Cents?
“This shows that someone [Government] is paying for the difference, yet the company can sustain itself if it charges the right tariffs and the public resources can be spent on other needy areas,” he said.
Mr Mundende said economic activities in the country have outstripped power generation capacity.
“At independence, we had about three million people but now, we are over 13 million, and in 1992, Zesco had 200,000 customers but now it caters for 900,000, so the company needs to grow by meeting demand of customers.
“Due to low tariffs, there has been no power project since 1976 [Kariba North Bank] until 2013. We can only meet the demand of customers through a correct tariff, otherwise unreliable supply will continue,” he said.
It has also been envisaged that lack of investments will constrain the equipment and it will be difficult to attract investments in other sectors such as mining, agriculture and manufacturing if unreliable supply of power continues.
Given this foregoing, Minister of Energy David Mabumba said the country’s quest to industrialise the economy was under threat if electricity tariffs remained low.
“Existing tariffs makes it impossible for Zambia to attract investments in the sector. Investors want to make a profit and they will look at what is offered in the region and make a choice.
“Zambia is not an island, the same financiers intending to support our projects are the same ones whom everyone else is approaching. If they look at the revenue stream of Zesco, they say, this company will not pay us on time since they charge low tariffs, but Zesco can be financially sound if it sells power at right tariffs,” he argued.
Mr Mabumba further disclosed that Government is reviewing the electricity Act to enable independent power producers (IPPs) to sell power to any consumer other than Zesco Limited.
He said Government has started various reforms to ensure increased production and competitiveness in the petroleum and electricity sub-sectors.
“We want to see investors getting a return on their money and also consumers getting a meaningful service. We are diversifying the energy generation mix considering what happened last year when we had low rainfall that impacted negatively on hydro-power generation,” Mr Mabumba said.
Other notable reforms being undertaken will ensure that energy projects are bankable and the open access system is implemented.
The Open Access is defined as non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licence or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission.
“We don’t want Zesco to be the only off-taker of power but we want producers to sell to any consumer or to any destination of their choice while using the already installed facilities,” Mr Mabumba told a gathering of local and international investors and other industry players at this year’s Zambia International Mining and Energy Conference.
In his address to Parliament last September, President Lungu said Government is implementing a gradual migration towards a cost-reflective tariff regime to promote more private investment in the energy sector.
“To this effect, a 75 percent tariff adjustment has since been implemented. This might appear as a harsh decision on the part of Government in the short term.
“However, in the long-term, the country will benefit from increased investment in the sector, which will generate the much needed electricity for our industrialisation and diversification programme,” he said.
Presenting the 2018 budget, Minister of Finance Felix Mutati said a stable and reliable energy supply is critical to uplifting the welfare of people and productivity of business.
He said priority in the electricity sub-sector will be placed on increasing the energy mix through promotion of off-grid electricity generation and alternative energy sources. “In this regard, Government will continue with on-going reforms in the sector to boost private sector participation. Government in 2018 will bring to Parliament the Energy Regulation Bill and the Electricity Bill for enactment.
“The energy regulation bill will allow for enhanced supervision and regulation of the energy sector, while the electricity bill will, among other things, allow for participation of other players in the industry.”
It is now understood that the rising electricity demand can be met through investments by involving public and private sector participation that should embrace cost-reflective tariffs.
To attract investors in the energy sector, the government must carefully design a viable cost-reflective system. The citizens and commercial enterprises must also be willing to pay the stated tariff price.
This would promote Zambia’s quest towards having cost-reflective tariffs that allow power producers to recover the full costs incurred during electricity generation as well as provide a reliable supply of electricity.