Reflections on Cost Reflective Electricity Tariffs in Zambia

THE Energy Regulation Board (ERB) has allowed Zambia Electricity Supply Corporation (ZESCO) to increase electricity tariffs for domestic consumers by 24.63 % effective July, 2014. The increment would also see tariffs for commercial consumers increase by 15.38 %, 19.49 % for small power and 5.11 % for large power while social services would pay 15.38 per cent. Private sector development specialist Yusuf Dodia earlier last week opposed the hike in electricity tariffs arguing that electricity should never be treated in commercial terms as it was a public good hence there is no need to have cost reflective tariffs as government was obliged to provide affordable energy to stabilise the economy and make life bearable for its citizens.

I think this needs further debate.

My view is that electricity tarrifs in Zambia need upward adjustment in order to make electricity power generation and transmission more sustainable and to attract investment in the sector. However this upward adjustment should have been done in very gradual phases with increments of no more than 7% annually in order to minimise upsets in the economy. Furthermore  the Energy Regulation Board (ERB) should have only entertained this upward adjustment with measures to improve ZESCO's operational performance.
Government argues that Zesco's tariffs are very low. Zambia’s Energy Minister Yamfwa Mukanga hinted that ZESCO electricity tariffs will continue going up.  

“Investors can never come in when tariffs are very low. They need to make a profit and they will shun our sector if it is not profitable. We have just started moving towards cost reflective tariffs and people are already mourning. The people must understand…that this is a most natural way of trying to run an effective and reliable power supply utility." Mukanga said.
In Zambia access to electricity is still at 25% meaning that 75% of Zambia does not have access to electricity. A significant challenge for citizens is affordability of capital contribution or connection fees. ZESCO and the Rural Electrification Authority (REA) have embarked on facilitating a connection fee subsidy scheme aimed at extending electricity to many more households.  The current domestic peak demand for electricity exceeds generated capacity by about 165mw during peak

Zambia without doubt needs more funds for revamping the capacity in generation, transmission and distribution. The government targets that Zambia's electricity output would rise to close to 3,000 megawatts by 2018 once the 750-megawatt Kafue Gorge Lower hydropower project and the 300 megawatt coal-fired project by Maamba Collieries comes on stream

According to The Zambia Development Agency (ZDA) Energy Sector Profile (June 2013), Zambia has about 6,000 (MW) megawatts unutilized hydropower potential, while only about 1,985 MW has been developed. This comes from the scenario that Zambia possesses vast water resources in the Southern Africa (SADC) region. Only 14% of the energy consumed by Zambians is supplied by the national grid meaning that over 70% of the energy consumed by Zambians is from biomass.

Despite Zambia’s vast renewable and non-renewable energy sources, little of these have been utilized to improve the attractiveness of the energy sector and transfer the benefits for industrial expansion, employment creation and poverty reduction.

Electricity power tariffs in Zambia are amongst the lowest in the subregion. Some analysts argue that the lower tariff structures in Zambia should actually serve as an attraction for foreign Direct Investment (FDI) and assist in economic diversification through power exports to the sub-regional markets. The policy challenge for Zambia is managing the inefficiencies of the public energy generation and transmission infrastructure to ensure a viable business environment that supports sustained economic growth and industrial expansion.

ZESCO has a huge task to improve access to electricity and ensure security of supply through rehabilitation and periodic maintenance of electricity equipment.

In its current state ZESCO has structural problems that make it highly inefficient and prone to political manipulation.

YOUR VIEWS

Matongo Kanenga Musiba Maumbi commented on this issue on my Facebook page as follows: "From my little understanding, why should a parastatal like ZESCO go full throttle on high profit making. In case you have forgotten they have been very gradual in increments from 2012. By next year they will reach 100% increase. Millions of dollars were pumped in from the Euro Bond. It's disheartening to see ZESCO getting fatter at the expense of ordinary Zambians. I would be made to think commercial entities like mines pay less for their electricity. Let ZESCO operate as a service provider and in the commercial way it is."

Brian Kambita wrote,"Well, I have a different opinion from that of Yusuf Dodia's, where he is suggesting that electricity is a public good. The moment we view it as such, we would be equating it to services like Police, Health, Education services and the like. For quite some time now, it has been everyone's assertion that before ERB approved ZESCO tariff hikes, they needed to consider reviewing the parastatal's efficient use of resources. I believe this is where the problem lays. There should be a practical and political will to do that first step before any hike could be meaningful. Otherwise, the hikes may not resolve anything as resources tend to be inherently scarce at all times. Yes, we need commercial rates for our electricity company to be efficient and effective enough in its quest to provide this invariable much needed service, but this could be done better if the consumer population was separated into quotas to cushion domestic consumers from high tariffs. Electricity cannot safely be regarded as a public good in this sense. We are capable of earning more from it as a nation, by exporting power to deficit areas in the sub-region, provided we run a cost efficient and effective ZESCO. In short, without political interference ZESCO would be effective and its costs of running would not demand the kind of hikes we usually experience. Of cause this would take some time and civilization among our politicians to achieve. Lets prove that by first reviewing its operations, division by division."

 Mwenda Mupashi  write, "firstly my view is that electricity is indeed a PUBLIC GOOD in the strict sense of the meaning. Because its consumption and supply is ideally supposed to be NON-RIVALRIOUS and NON-EXCLUDABLE. This is evident in GRZ`s quest to have universal access to electricity by the rural electrification project/programme. The GRZ, ZESCO, Ministry of Energy & ERB have failed to identify and sort out the FREE RIDER problems affecting the management of electricity in Zambia. The quick fix they do year in year out is to pass on costs to domestic consumers

What makes electricity an EXLUDABLE service in Zambia are the technical, infrastructural, administrative and organisational culture short comings at ZESCO. ZESCO need a SMART approach to business. Imagine, I hear that the multi million $ project to electrify LUMWANA & KANSANSHI mines were singularly financed by ZESCO and the two mines refused to be SAR CHARGED on the tarrif despite taking power to there door steps. These are FREE RIDER problems. Now for this un-SMART approach ZESCO has passed this bill to domestic consumers; running amok increasingly tarrifs and installing pre paid meters on every street light poll.

Lusaka business journalist Brian Mwale says: Hey Bruce without sounding much academic or using economic jargons. Electricity is an essential service that every government across the globe ensures it provides for its citizens because its energy is cardinal in our everyday needs. Thus this is never so much supposed to be commercialized. I am aware of rural areas that have been electrifies by the Rural Electrification Authority. I know many stakeholders have time and again said its very difficult for Zambia to attract investments in power generation because of low tariffs when the investments is capital intensive. We have a hydro power potential of 6,000MW as a country, our current generation is around 1,800MW against consumption of about 2,000MW, ZESCO has over the years been increasing tariffs under the 'guise' of wanting to invest in more generation, but what of the current projects being worked on like the Kafue George, Lunzua and many others dotted across the country?