Insight: Energy security in Zimbabwe

Achieving energy security continues to be a pressing issue Africa-wide. This year’s Africa Oil and Power (“AOP”) conference held in Cape Town brought together African ministers, senior level government officials and top executives of private sector companies spanning the energy value chain, to discuss the best way to drive Africa’s energy sectors forward through privatisation and energy coalitions.

Suggestions were not only limited to private sector cooperation but also regional cooperation on a government level as well as collaboration between the private and public sectors. In light of the AOP conference, we got to thinking about the ever-present need for energy security in Zimbabwe and herewith our observations on current coalitions and the potential impact of privatised power.

Background

Traditionally within the Zimbabwean power sector, the state was solely responsible for the construction, financing and operation of the infrastructure required for energy production and distribution. One of the largest parastatals in Zimbabwe is the Zimbabwe Electricity Supply Authority (“ZESA”) which generates, transmits and distributes electricity in Zimbabwe through delegation to its subsidiaries, the energy generating company Zimbabwe Power Company (“ZPC”) and the Zimbabwe Electricity Transmission and Distribution Company (“ZETDC”). Fast-forward to 2018 where, according to NewsDay, Zimbabwe’s current peak power demand is 1600 megawatts (“MW”) down from 2200 MW a decade ago owing to deindustrialisation during the 1999-2008 recession. Despite the decline, it remains difficult to meet energy demands. Additionally, The Zimbabwe Energy Regulatory Authority (“ZERA”) has revealed that there are 13 Independent Power Producers (“IPPs”) operating nationally, generating 130 megawatts (“MW”) of power and contributing to 2% of energy supply to the national grid.

Why is this important?

The figures illustrate that Zimbabwe, as with most Africa countries, has yet to achieve energy security, which the International Energy Agency (“IEA”) has defined as “the uninterrupted availability of energy sources at an affordable price”. Naturally, the next question becomes “How do we get there”. The most touted solution is – Privatisation!

So… Let’s Just Privatise!

Zimbabwe’s electricity legal framework is amongst the most liberalised in Africa. In terms of the Electricity (Licensing) Regulations 2008 [Statutory Instrument 103 of 2008] companies incorporated or registered in terms of the Companies Act [24:03] can apply for generation, transmission and bulk supply or distribution and retail licenses thus enabling an IPP to sell directly to the end-user. Growing demand and limited state resource mobilisation has seen the emergence of robust alternative power providers such as IPPs. This in turn has attracted Development Finance Institutions (“DFIs”) and other multilateral lenders. There is now a very clear understanding of the importance and relevance of private and quasi private financiers in the development of power projects and Zimbabwe is certainly no exception.

But at what cost?

DFI’s offer finance on commercial terms and this is often regarded as being “expensive”. Loans to IPPs are assessed based on country risk which includes issues such as nationalisation or expropriation, currency risk, the ability for the buyer to pay and the ability to remit in the denominated currency. All factors which, in Zimbabwe’s current economic and political climate make it increasingly difficult for IPPs to compete with the State owned ZPC. Although often better positioned to provide energy services effectively to consumers, IPPs have no incentives to provide these services unless it is economically rewarding and results in a return on investment.

In order to create an enabling environment for the growth of IPPs and move closer towards energy security, ZESA’s role in electricity transmission must also be reviewed. Currently, IPPs must pay a wheeling charge to ZETDC to deliver power to the consumer. In theory, ZPC is also required to pay the same charge to ZETDC however, in reality there is no fee given that they are both wholly owned subsidiaries of ZESA. ZESA has the added advantage of operating historical power generating plants, such as Kariba and Hwange. The generation costs of those “historical plants” are a fraction of “new build unit costs therefore ZESA has the ability to offer subsidised tariffs to consumers making it difficult for IPPs, who are constrained by loan repayments and wheeling charges, to offer the same competitive pricing.

What about SAPP?

Formed in Zimbabwe and founded in 1995, the Southern African Power Pool (“SAPP”), is a cooperation of national electricity companies in Southern Africa. The members of SAPP have created a common power grid and market for electricity in the Southern African Development Community (“SADC”) region. The SAPP facilitates the development of a competitive electricity market in the SADC region, gives the end user a choice of electricity supplier and ensures sustainable energy developments. The SAPP is one of the paragons of regional collaboration as the most successful power pool sharing arrangement in Africa. Through the SAPP, Zimbabwe has often managed to mitigate energy shortages. Energy in Zimbabwe is therefore not only sourced from ZESA, but also from IPPs and the SAPP.

The bulk of the SAPP’s cross border trading in electricity is governed by fixed co-operative bilateral contracts which generally cover a period of 1-5 years or longer. The agreements guarantee security of supply but are not flexible enough to accommodate varying demand profiles and prices. In 2006, the Day-Ahead Market (“DAM”) system was implemented to run parallel to the bilateral market and support shorter term variation thus allowing flexibility. If one country has excess power, it can offer its excess in terms of the SAPP protocol to anyone who wants to buy it. Following amendments to the agreements that govern SAPP operations, IPPs can become members of SAPP meaning private players such as mines can buy power directly from any producer in SAPP including other IPPs in other jurisdictions. The DAM also allows the flexibility of spot buying power for a short period of time for example 2 days.

The disadvantage is however, the associated cost. The DAM sets prices based on generation and energy transaction bids that are offered in advance to the SAPP. The seller will only sell their

electricity at a price they have set or even higher since there are some buyers who would have bid at a higher rate. Therefore, whilst the DAM creates an opening for IPPs in the market as well as provides an alternative energy source, the SAPP energy needs to be sufficient and more cost effective.

The IPP solution to energy security

There are many ways in which Zimbabwe could move towards energy security. Firstly, if ZPC and ZETDC become standalone entities with ZERA as the regulator, transparency and access for IPPs into the market could be improved. For example, currently, ZETDC determines tariffs for all power generators. In theory, the close affiliation of these entities means that ZPC could have the advantage of offering subsidised tariffs through internal mechanisms at ZESA Holdings level allowing for ZESA to potentially allocate revenue from ZETDC to ZPC as an internal company loan. With ZERA as the overseer, any subsidies that could be recouped, would be recouped through ZERA and would be equally available to ZPC as well as IPPs. Additionally, the separation of ZETDC from ZPC would make all power generators subject to the wheeling charge, allowing IPPs to offer competitive prices to consumers and access blue-chip consumers. Whilst the legal framework allows for IPPs to obtain transmission licenses, the reality is that ZETDC can acquire land based on public interest and connect customers directly. As they are not a state-owned entity, IPPs on the other hand, are restricted by the amount of time and money it takes for them to get various approvals. Ideally, ZETDC could still own the transmission lines as it has the capability to expand the network, however IPPs and ZPC would have equal opportunity to access that network. Although ZPC would be able to maintain competitive advantage through its ownership and operation of historical plants that are fully paid for and carry cheaper generation costs, the environment would be more enabling for IPPs to enter and compete in.

Secondly, in line with this year’s AOP Conference theme, private players need to collaborate. This could effectively be done through infrastructure sharing. For example, digital and electricity networks connect consumers in similar ways. As stressed in a May 2018 article by the World Bank Group, “both require wide distribution networks, yet the cost to build or extend these networks is significant. By sharing networks and working together, these two sectors can help one another achieve access and service quality goals while sharing the costs”. The costs cut through infrastructure sharing could translate into subsidised tariffs and more opportunity for IPPs to enter into the mainstream energy market. To ease the inherent but misguided fear that infrastructure sharing results in lack of ownership, government should maintain ownership of the infrastructure for electricity transmission whilst allowing IPPs to operate and maintain that infrastructure.

Lastly, with regards to the SAPP and the DAM, the onset of IPPs in different jurisdictions could mitigate the premium tariffs of the SAPP if for example, smaller power providers localise supply to domestic consumption and the base load supply coming from the region goes to heavy users such as mines and the manufacturing sector thus ensuring the ability to maintain a power supply to both domestic and industrial concerns with fewer cost implications.

Ultimately, within Africa, IPPs are best positioned in terms of money and capacity to secure energy. It follows therefore that inhibitors to IPPs are inhibitors to energy security. To achieve energy security and sustainability, not only must accurate projections be made regarding the ability for power generation to track and keep up with economic and population growth but there also needs to be de-regularisation of the private sector to allow IPPs entry into the market.

Sustainability is not limited to the availability of power but also the cost and accessibility of that power. Power pools are testament to the power of collaboration however, to make accessing that power less expensive, IPPs and national utilities need to collaborate. By allowing IPPs to supply lighter users whilst entities like ZESA supply the high voltage to heavy consumers, Zimbabwe and indeed the rest of Africa would be closer to energy sustainability and security.

Authors: