Business Editor’s Brief: Musings in the dark

28 Sep, 2014 - 06:09 0 Views
Business Editor’s Brief: Musings in the dark

The Sunday Mail

ZIMBABWEANS have become accomplished stoics, what with the brutal violation they have had to endure from power utility, the Zimbabwe Electricity Supply Authority (Zesa) over the past couple of weeks.

Such nonchalance, however, is pretty much expected, especially from people who have become inured to circumstances they know they can do little to change. In 2004, the Southern African Power Pool (SAPP), a grouping of power utilities in SADC (Southern African Development Community), predicted that from 2007 there would be acute power shortages in the region. The prophecy has since come to pass. Power outages and power rationing are not peculiar to Zimbabwe: almost every other country in Southern Africa is presently nursing the same disease.

But, worryingly, this disease is most vicious in Zimbabwe.

Even at a time when industrial activity has declined below 39 percent, according to industry representative body Confederation of Zimbabwe Industries (CZI), Zesa still cannot meet this depressed demand. Zesa cannot supply enough energy to the low-power consuming roadside “tyre pressure attendants”, let alone households.

The toll that this is having on small and medium enterprises (SMEs) as well as big companies is undoubtedly huge.

It is quite a monstrous catastrophe. A witch-hunt is naturally logical, particularly when our own local circumstances are compared to other African peers who seem to be overcoming their own challenges. A fortnight ago, the Kenyan government announced that electricity prices were expected to drop by at least 30 percent after the introduction of the 70MW of geothermal power into the national grid.

The use of the geothermal power will cumulatively reduce the cost of power from US21 cents per kWh to US7 cents. Although a 12 percent reduction has since been effected against the threshold that had been targeted by government, the Kenyan market cheered it all the same. It is important to note that since 2000, Kenya has been reforming its power-generating sector to ensure that it produces low-cost power for households and industries.

This month alone, the East Africa’s biggest economy managed to inject more than 140 MW of geothermal power into the grid. Geothermal power – a technology that uses dry steam power plants, flash steam power plants and binary cycle power plants – is a cheaper source of power compared to thermal power. Back home, the highest office in the land, the Office of the President of the Republic of Zimbabwe, cannot be faulted for it has made superhuman efforts to ensure that its promises to increase power generation come to fruition.

Government, through the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim-Asset), made a very clear undertaking. Under the energy and utilities cluster, Government made a commitment to increase internal power generation by 300 MW by December 2015, expand both Hwange and Kariba South power stations, and establish a 100 MW solar plant.

The President has led from the front by successfully concluding a pact with the Chinese to begin works at Kariba South. Barring any unforeseen calamity, it is safe to assume that an additional 300MW will be added to the grid within the targeted time frame. Sino Hydro, the Chinese company that is responsible for the project, has also been tasked to expand the Hwange thermal power station.

No doubt, the two key projects will be crucial in managing the country’s energy needs in the short to medium term.

But it seems there are some bureaucrats holed up in some key offices that will blight efforts to decisively deal with our local power deficit.

The sloppy manner in which the recent solar power tenders, which were primed to add another 300MW to the grid and the botched up manner that resulted in China Machinery Engineering Company being disqualified from the Hwange Power Station expansion projects, is nothing short of criminal. Initially, we read that China Jiangxi Corporation, the lowest bidder, had been awarded the tender for the solar project, then we were informed that the Zimbabwe Power Company – one of Zesa’s business units – intended to rope in two other companies Intratrek Zimbabwe and ZTE under unclear circumstances.

The State Procurement Board subsequently cancelled the tender, making the whole undertaking one huge mess.

Last month the Zimbabwe Energy Regulatory Authority (Zera), a statutory creature established to superintend the energy sector, blocked Zesa’s application to effect a 5 percent tariff hike on electricity, a development that would have seen consumers forking out US10,26 per kilowatt hour (kWh) from the current US9,86. Initially, Zesa had applied for a 12 percent increase.

Such “populism” clearly does not work. A study on energy subsidy reform in sub-Saharan Africa by the IMF last year indicated that using the latest annual data for 2008 to 2010, the average cost of electricity in the region was about US15 cents per kWh. It was even higher at US21 cents in countries that rely on thermal generation.

Judging from Zesa’s statistics last week, it seems the bulk of our power comes from thermal power stations.

Of the 1 181 MW that are presently being produced (a figure that cannot be true considering the frequency of our power cuts), 736 MW are generated from thermal sources – Hwange Power Station 504 MW, Harare 20 MW, Munyati 14 MW and Bulawayo 198MW.

Therefore Zesa cannot be making a profit.

What needs to be attacked, however, is the mentality that keeping tariffs low will help the consumers: It doesn’t.

Low tariffs, apart from seriously compromising the ability of the power utility to sponsor rehabilitation and new power generation projects, have over the years spooked potential independent power products (IPPs). Such subtle subsidies, analysts believe, will create inherent inefficiencies that will result in higher taxes, poor infrastructure and low human capital (through brain drain), a phenomenon that ultimately undermines the aspirations that the subsidies seek to create and attract investment.

“While proponents of energy subsidies argue for the need of lower costs to boost competitiveness, inadequate or unreliable supply of electricity has forced customers across SSA (sub-Saharan Africa) to invest heavily in self-generation, raising the effective cost above the subsidised price. In many cases, it is the inadequate supply of electricity rather than its price that weighs most heavily on competitiveness. Indeed, in countries that have undertaken reforms, evidence from surveys shows that customers are willing to pay higher tariffs if better service can be guaranteed,” noted the IMF in the above-mentioned report. Through own generation, or resorting to other alternatives sources of power, consumers are forced to pay more.

For example, expensive own generation constitutes a significant portion of total installed capacity. In the Democratic Republic of the Congo and Equatorial Guinea, back-up generators account for half of installed capacity.

In Zimbabwe most people have resorted to generators, liquid petroleum gas and paraffin, which, on the overall, contributes to consumer’s monthly energy bills. Instructively, the IMF study indicated that consumers are willing to pay more for power if supplies are guaranteed.

After 2009, there were companies that were negotiating with Zesa to get uninterrupted and guaranteed supplies. They were prepared to fork out about US18 cents for the power because they were losing out more from both unscheduled and scheduled power outages. Zera must therefore take heed. If Zesa is incapable of supplying the power, as it has proved thus far, then apart from a reasonable tariff review, the Electricity Act has to be amended to make it easier for entrepreneurs to venture into the commercial production of power. The current strictures, which make it practically impossible for one to generate power and compete with Zesa, are untenable.

Zesa’s monopoly needs to be broken. Under the current framework, it is impossible for IPPs to sell power directly to consumers. One has to offload it to Zesa, which will obviously buy the power at a tariff that is dictated by Zesa. Again, it’s a huge mess.

It’s time to bite the bullet.

Kenya did it. Its reform efforts culminated in the energy policy of 2004, a substantial increase in power tariffs in 2005 to reflect long-run marginal costs and the introduction of an automatic pass-through mechanism to adjust tariffs for changes in fuel costs.

This helped eliminate quasi-fiscal costs where government is forced to take a hit from charging sub-economic prices.

The Electricity Regulatory Commission was also reconstituted. In the post-tariff increase period, Kenya’s average annual increase in power supply was over 5 percent and in Uganda over 9 percent. The results have been telling. It is sad and a serious indictment to policymakers that the combined power generation capacity of the 48 sub Saharan countries is less than that of Spain at 80 gigawatts.

We can definitely do better.

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