ZESCO Makes Their Case for November 2015 Electricity Tariff Hike
The Energy Regulation Board (ERB) has received an application from ZESCO to increase electricity tariffs for its various customer categories (excluding mining, high and low voltage export customer categories) for the year 2015. In its application, ZESCO proposed to increase electricity tariffs for retail customers (Residential, Services, Commercial and Maximum demand).
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Before even talking about the merits of ZESCO’s case to raise electricity tariffs, it’s important to understand that this decision will go through no matter what. The country’s current energy deficit has forced the Government’s hand. They (and previous regimes) have known for a long time that tariffs needed to be a lot higher in order to spur private investment. So don’t waste your time attending any debates or sending any submissions against the increment because it has the FULL backing of the President – which is what ultimately counts in our political system.
The utility company has very strong points and has had them for a very long time. Historically, the country’s power infrastructure has lacked adequate investment primarily because tariffs have been kept artificially low ($0.056 per Kwh and below!). The mining sector (which uses over 50% of Zambia’s electricity) also locked in low tariffs through the non-transparent ‘Bulk Supply Agreements’ meant to make them more attractive during privatization. Would any private investor want to commit to a capital expenditure-heavy power project with a long pay-back horizon at those tariffs? Eh NO.
ZESCO has had to shoulder the burden of investing in the sector (because they are Government owned). And even with the few private power projects that have come online in the recent past, as the sole utility, ZESCO buys power from them at over $0.10 per Kwh to sell at just about half of that to domestic, commercial and mining sector users. The same applies to the more than 400 MW of power being imported to mitigate the current energy crises right now!
The new tariffs are projected to more than triple ZESCO’s 2014 revenues to K14.8 billion in 2016 (first year of full implementation). This will unleash more capital for investment by ZESCO in generation, transmission and distribution infrastructure moving forward. It will also enable the utility to raise more external capital to undertake various projects.
The other side
ZESCO needs to be cleaned up in terms of governance and financials.
Governance: Currently, the President has the power to pick and choose whomever he wants to be the CEO of the utility in addition to handpicking the board of directors (this is the case for all state-owned entities). In addition to the obvious problems this brings about, it also means that a change in Government effectively means a change in leadership at ZESCO.
Financials: The Zambian public is not privy to the audited annual statements of ZESCO. And even though an Initial Public Offering (IPO) on the Lusaka Stock Exchange (LuSE) has been mentioned a few times by the Finance Minister in the recent past, he admitted that ZESCO’s balance sheet still needs to be re-structured. A prime example is their outstanding trade receivables (money owed to them by customers) which stood at over K1 billion in 2013 with 60% being above 90 days! To their credit, they have been working on cutting this down but who knows what that figure was like in 2014.
Costs will also rise further in an environment where they have already been increasing as a result of the effects of the Kwacha’s deprecation. As things stand, paying higher tariffs is analogous to investing in a company with a record of poor governance which does not have a solid balance sheet. On top of this, we don’t know how good or bad their financial statements really are.
Bottom-line: The country needs more energy to grow the economy and this tariff increment will go some ways into facilitating that. This will also create a more solid base for future generations to thrive. However, costs will rise and ZESCO has a lot of issues which need to be tackled from both a governance and financial perspective – the billion dollar question is will this ever happen? Only the President can make that happen.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *