Power tariff hikes threaten to derail Zambian mining

 

Lusaka -The cost of doing business in Zambia is yet again to considerably go up after the country’s power utility, Zesco, recently announced a 24-percent power tariff increase effective July 1 this year.

The tariff revision comes barely two months after the Zambia Electricity Supply Corporation (Zesco) announced a 28.8 percent power increase for mining companies, a move that has caused an uproar in the industry amid low copper prices on the international metal market.

Despite the outcry from consumers that this increase could affect the livelihoods of most Zambians, especially the poor, a recent study by the Southern African Development Community (SADC), has found that the country remains one of the cheapest in terms of electricity tariffs in the region. Zambia is now the fourth cheapest country out of 16 countries in southern and eastern Africa with an increment of US$6.61 per hour from number two at US$5.70 per hour.

However, despite the low tariffs, Zambia has failed to attract reputable companies to share the energy sector in the provision of electricity to domestic and industrial consumers with the country facing various outages.

This has in turn affected both end users with the country generating a paltry 1 400 megawatts per day which rises during peak hours to 1 800 megawatts, but still insufficient to meet demand at home and for exports under the power sharing agreement under Southern African Power Pool (SAPP)

On June 2, 2013, the electricity regulator, Energy Regulation Board (ERB) approved Zesco’s application to increase electricity tariffs by 24 percent for domestic customers and 15 percent for commercial users effective July 1, 2014.

This ostensibly means that on average, the cost of electricity has gone up by 16 percent for both domestic and commercial consumers.

Before the adjustments, the Democratic Republic of Congo was the cheapest in terms of tariffs at US$4.80 followed by Zambia with US$5.70, Lesotho US$5.90 and Angola US$6.00 in the southern and eastern African regions.

Rwanda has the highest electricity tariffs at US$25.62, Uganda is at US$25.14 while Kenya comes in third place at US$14.01 per hour.

Zesco spokesperson, Henry Kapata, says the increase in tariffs will increase competition and attract investment in the power-generation sector and that increase in electricity tariffs has been prompted by the rising cost of machinery coupled with changing conditions in the economy in the last four years. 

Increase in electricity tariffs is long overdue as electricity imports are also on the high side.

“No investor will come to invest in the sector as long as the tariffs are too low no matter how much you attract them, so many people have come on board but they have failed because people want to make money.

“Prices of major raw materials such as copper, steel, aluminum and oil have more than doubled since 2000, consequently the prices for spares, machinery, equipment used by Zesco have increased,” Kapata says.

However, Zesco’s decision to review tariffs has raised eyebrows among consumers, with the Zambia Consumers Association (ZACA) saying the hike in the prices of electricity tariffs will adversely affect the average Zambian.

Many Zambians, according to a new study, will bear the cost of production, says its executive secretary, Samuel Simutunda, adding that Zesco should have looked at the prevailing economic conditions before increasing the tariffs.

The opposition, too, has expressed disappointed with the development, with Forum for Democracy and Development (FDD) president, Edith Nawakwi, contending that it was wrong for the Energy Regulation Board (ERB) to allow Zesco to increase electricity tariffs. 

Nawakwi has urged the government to lift the freeze on public service workers salaries to ease the plight of the people.

According to FDD, the tariff increment will make life difficult for the average Zambian and also have a spiral effect on the prices of goods as providers of goods and services pass on the power tariff increase down to the consumer.

ERB approved Zesco’s application to increase electricity tariffs by 24 percent for domestic consumers and 15 percent for commercial users.

Meanwhile, Nawakwi has challenged Minister of Finance, Alexander Chikwanda, and central bank governor, Michael Gondwe, to provide answers for the falling Kwacha against major foreign currencies, arguing that continued depreciation of the Kwacha against major foreign currencies is negatively affecting not only the country’s economy but the lives of people, especially the poor as commodity prices continue to go up.

Recently, the central bank, in defence of the poor performance of the local currency ‑ which has hit its highest peak since independence at US$1 for K7 000 ‑ said prospects for the Zambian economy are still strong and positive with growth expected to exceed 7 percent this year despite the rapid depreciation of the Kwacha in recent months.

The Lusaka-based Bank of Zambia forecast inflation to be maintained at 6.5 percent this year and the supply chain of foreign exchange to the interbank market has on average exceeded demand, while the central bank’s foreign exchange reserves position has improved significantly.

“Following disbursements of the Eurobond proceeds, the Bank of Zambia stands in an even stronger position to allow the economy to absorb any real economic shock.

“In the meantime, the Bank of Zambia remains unwavering to its policy of prudently intervening in the foreign exchange market with a view to reducing volatility and building international reserves,” the central bank has said.

It has further stated that the Kwacha has in the recent weeks experienced rapid depreciation against major trading partner currencies in the foreign exchange market. The central bank attributes the depreciation of the Kwacha to the low price of copper, which since the beginning of the year has averaged US$6 500 per tonne.

On April 2, the ERB revised its energy tariffs for the mines to 28.8 percent to meet various obligations, a move which riled the Chamber of Mines of Zambia.

Chambers of Mines of Zambia Chief Executive Officer, Maureen Dlamini, recently expressed concern over the ERB power tariff increases, arguing that while the mines understand the need for utilities to earn a fair return on investment to be able to efficiently and sustainably operate and maintain the infrastructure, cognizance must be taken of the long-term nature of the mining business.

Due to the long-term nature of mining investments, corresponding long-term planning from a policy and regulatory perspective is necessary to attract and retain investment in this sector.

She pointed out the fact that power supply to mining companies is governed by commercial contracts entered into mutually by ZESCO and respective companies taking into account the full commercial circumstances prevailing at the time of entering into such contracts, and anticipated to occur over the life of the contract.

Dlamini added that the mining sector had agreed to extra ordinary tariff increases of 35 percent in 2008 and 30 percent in 2011 outside existing contracts on the understanding that investments would be made to improve the quality of power being supplied to the industry.

June 2014
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