Following the recovery in mining in the late 1990s, electricity demand has grown steadily. With little investment due to low tariffs, demand overtook supply in 2007. The gap, and the resulting load shedding, continued growing until Kafue Gorge Lower commenced operations in 2021.
To understand the poor performance of the electricity sub-sector some history is necessary 1. Until 2016, when Maamba Coal Power Plant was added to the grid, 95% of Zambia’s electricity was generated by three hydro-electric power stations: Victoria Falls (108 MW), Kariba North Bank (600 MW) and Kafue Gorge Upper (900 MW).
They were built primarily to meet the needs of the mining industry. In 1975 mining accounted for 66% of energy consumption. Kafue Gorge Upper was commissioned in 1971, doubling generation capacity, in anticipation of continued growth in copper production. Instead, following nationalisation of the mines in 1972 and falling world copper prices, copper production fell continuously for the next 25 years.
As a result, ZESCO had substantial surplus capacity from the 1970s until the early 2000s. While some was exported to Zimbabwe, to dispose of the surplus, the mines and residential consumers were charged very low tariffs. They were sufficient to cover ZESCO’s operating costs (including the negligible cost of water), ensuring it remained moderately profitable, but not to produce a return on the capital already invested by the government (GRZ) or to enable ZESCO to accumulate reserves to finance future investment. The lack of return on capital represented a significant implicit subsidy to consumers.
Once these exceptionally low tariffs (and subsidies) were introduced, in the case of residential customers they proved impossible to increase – for over 40 years. [Mining tariffs were increased in the 2000s.] Because tariffs were so low for so long, the public took them for granted. Zambians were unaware that they paid much less for electricity than the rest of the world, let alone that (by deterring investment) this was the fundamental cause of load shedding.
Conscious that the surplus would not last for ever and that hydro-power stations take at least five years to build, ZESCO started warning GRZ in the 1990s that more capacity would be needed and that tariffs needed to go up to attract the necessary finance. However, when ERB undertook public consultations on proposed increases (required by legislation) there was strong resistance. Successive administrations were too scared of the public reaction to agree to ZESCO’s applications for tariff increases – making load shedding inevitable once mining demand recovered.
It was only when load shedding started in 2007 that the MMD administration finally ‘got’ the link with tariffs. The IMF programme (2008–11) committed GRZ to implementing ‘cost-reflective’ tariffs and residential rates were increased to US 8 cents / KWh in 2010, their highest ever level. However, the PF administration then froze tariffs (in Kwacha) until 2017. By 2014 Zambia again had the lowest tariffs (in US cents) in sub-Saharan Africa, with the average Zambian tariff only 38% of the median one (Trimble et al 2016).
Initially, load shedding had little impact on ZESCO’s profitability; the costs (eg generators) fell on its customers. However, droughts in 2015 and 2019 caused sharp falls in hydro generation and greatly increased load shedding. GRZ responded by insisting on expensive emergency imports. While tariffs were increased significantly in Kwacha terms in 2017 and 2020, exchange rate depreciation meant they were still below the cost of imports and purchases from Maamba Coal and other independent power producers (IPPs) which were denominated in US Dollars. As a result, ZESCO started incurring significant operating losses, was unable to service its debt, accumulated substantial arrears (eg Maamba Coal) and got into severe financial difficulties. These were compounded by excessive labour costs and GRZ demands to increase access to the grid.
Things improved considerably in 2021 because of increased hydro generation (including Kafue Gorge Lower) and reduced purchases from IPPs. Along with exchange rate gains this helped ZESCO return to profitability. Further strengthening of the Kwacha in 2022 meant that the residential tariff is currently about US 10 cents / KWh – probably a record. While definitely progress, experience shows that it is easily reversed.
The new government and new IMF Extended Credit Facility (ECF) represent a window of opportunity to finally grasp the nettle of residential tariffs. The ECF once again commits GRZ to implementing cost-reflective tariffs, through a multi-year tariff framework (MYTF) based on the Cost-of-Service Study (COSS). The Structural Benchmark is:
Cabinet to endorse and publish a multi-year tariff framework and a related action plan to ensure cost-reflective and sustainable electricity tariffs, regulations for periodic tariff reviews, and medium-term policies for targeted tariff subsidies [by December 2022].
Publication of the COSS and of GRZ’s response and policy intentions with respect to the MYTF was a Prior Action for the ECF. Slightly worryingly, some of the wording in the Green Paper setting out GRZ’s response could be interpreted as indicating that the current GRZ is as fearful of public reaction to tariff increases as its predecessors. For example, GRZ’s proposed Tariff Setting Principles include:
- Ensure that cost-reflective tariff rates are achieved while ensuring that affordability and social equity policies are taken into account
- Determine a trajectory towards application of cost-reflective tariff rates to all consumers able to pay them that is as gradual as possible within the specified timeframe.
Regarding social equity, three points should be noted.
- Only 30% of Zambians have access to electricity, so no one with access can be considered genuinely poor
- In 2015 the richest 10% of Zambians captured over 50% of electricity subsidies, while the poorest 50% got less than 2% (World Bank Fiscal Incidence Analysis, 2017).
- The tariff structure addresses equity concerns by having a particularly high subsidy (termed ‘lifeline block’) for the first 100 units consumed each month
- For most of its history Zambia has had the lowest electricity tariffs in Africa
- By deterring investment in new capacity, whether by ZESCO or IPPs, this was the main cause of load shedding over the last 15 years and of ZESCO’s financial crisis
- While Zambia does not currently have the lowest tariffs in Africa, they are still below average and need to increase
- Electricity subsidies are pro-rich, with over 50% being captured by the richest 10%
- GRZ failed to sustain cost-reflective tariffs it committed to in the previous IMF programme – it is vital for credibility (with both IMF and IPPs) that it is different this time
- Given the track record, it is vital that GRZ fully implements the MYTF action plan: (a) to restore ZESCO’s finances; and (b) to reassure IPPs that ZESCO is a credible customer for new investments they are contemplating
- Given longstanding public resistance to residential tariff increases, a public education campaign to explain the case for cost-reflective tariffs may be necessary
NOTE: Updated February 2023
For more detail on ZESCO’s history, including data on electricity generation, tariffs and sales going back to the 1970s, see Whitworth, A. Energy Policy in ‘Zambia: Building Prosperity from Resource Wealth’, Adam C, Collier P and Gondwe M (eds.), (2014) Oxford University Press.