Revisiting the power situation

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THE Zimbabwe Electricity Supply Authority Holdings (Zesa) began receiving electricity imports totaling 400 megawatts (MW) from Eskom of South Africa on August 9 2019.

The imports came as a relief to the Zimbabwean economy after nearly four months of 18-hour load shedding cycles that had crippled production and economic output. Under the new deal, Zesa will be supplied with 50MW on a firm contract basis during peak hours and 350MW on non-firm contract basis during off-peak hours.

Peak hours are from 5am to 10am and from 5pm to 10pm, thus off-peak hours stretch from 10am to 5pm. The electricity supply is conditional, meaning Eskom will only supply Zesa if it is not experiencing any load shedding and if it has surplus, which is mainly during off-peak hours.

As part of the deal, the Reserve Bank of Zimbabwe will pay Eskom US$890 000 (R13,5 million) per week and a local bank will provide a US$15 million guarantee that the obligation will be met periodically as agreed. Even though this does not do away with load shedding completely, it improves electricity availability for key sectors of the economy such as mining, manufacturing, tourism, telecommunications and agriculture among others. It also improves Zesa’s income-generating capacity as metered consumers will now prepay for electricity, therefore it is commendable.

Zimbabwe is currently generating less than 631MW from its four power stations against a daily peak demand of 1800MW in winter and 1600MW in summer. Generation capacity at Kariba hydroelectric plant has fallen below 200MW from 1 050MW at peak while Hwange Thermal Power Station is producing 421MW. Harare and Bulawayo power stations can only manage a meagre 34MW due to antiquated equipment constraints. This means that even after importing 400MW from Eskom, there is still a power deficit of 600MW at any point in time.

There is a likelihood that Kariba Power Station will be shut down completely before November 2019 due to low water levels in the dam. Zimbabwe will need to import more power from neighbouring Hidroeléctrica de Cahora Bassa (HCB) of Mozambique or other suppliers under the Southern African Power Pool (SAPP).

It is estimated that the local economy lost more than US$1,5 billion in revenue, production output, exports and product losses since the beginning of May due to power cuts. Capacity utilisation in the manufacturing sector had plunged from 45% to below 30%, with a host of producers closing shop or downsizing. In the mining sector, output declined by 10% in the first half of 2019 with the Chamber of Mines warning of depressed production for the full year. Retailers and telecommunications companies have been forced to run on costly diesel generators to sustain their operations during business hours.

Zimbabwe still owes Eskom US$23 million and HCB US$51 million, which means that foreign currency remains central to any increase in power imports from the two regional suppliers and there is a greater need to adhere to agreed payment terms on legacy debts.

A prominent question that comes to mind is on whether the country does not have capacity to import adequate electricity in the short term, considering its strong export performance and the economic losses caused by power cuts. To guarantee stable power suppliers to the local producers, Zesa requires close to US$20 million to import a total of 850MW per month from regional suppliers. Zimbabwe exported commodities worth more than US$1,9 billion in the first half of 2019 (before foreign investments and remittances are considered) with mining commodities accounting for 68% of those export earnings.

With the central bank retaining more than 50% of all export earnings and converting the remainder into Zimbabwean dollars (using the prevailing interbank rate) if not utilised within 30 days, it is fair to say the country has enough foreign currency to channel towards power imports in the short term. Electricity imports are as strategic as other consumables such as fuel, wheat, maize and cooking oil that receive preferential treatment from the central bank. The central bank should therefore prioritise electricity on its foreign currency allocations so as to maintain production, but then again, the management of foreign currency is done secretively in Zimbabwe.

Earlier this month, the government hiked electricity tariffs from Z$0,0986 to Z$0,27 per kilowatt hour (KWh) for domestic consumers and farmers, and Z$0,45/kWh for non-exporting business consumers. Tariffs for ferrochrome smelters and the rest of miners were pegged at US$0,067/kWh and US$0,0986/kWh respectively. Zesa was also allowed to bill all other exporters and foreign currency earners in forex currency and must ensure that the resources are ring-fenced in a special account solely for purposes of importing electricity.

However, the Zimbabwean dollar tariffs are still lower than the generation and importation cost. The government is likely going to allow the tariff to be adjusted upwards gradually until it matches the previous tariff of US$0,0986/kWh which equates to Z$1/kWh if the prevailing interbank rate is used. This requires the loosening of electricity subsidies and movement towards a cost reflective tariff which allows Zesa to operate competitively.

Going forward, Zesa needs to smart meter all electricity consumers according to their classes as a critical success factor. Zesa so far has less than 700 000 smart meters countrywide against a target of more than 2,5 million. The main targets for the metering exercise should be big debtors such as local authorities, farms, government departments, parastatals and manufacturers who owe the local utility close to US$1 billion. An ideal model can involve periodic deductions or payment plans to settle legacy debts in exchange for electricity.

Smart metering allows the struggling power utility to collect steady revenue inflows to import power that guarantees uninterrupted production while servicing local and off-shore credit lines. Supplying subsidised power to non-paying consumers will incapacitate Zesa and create debt traps in the near future. Zimbabwe’s business hours stretch from 8am to 5pm, meaning that they are predominantly off-peak hours and this is the time when most production is realised in most sectors of the local economy.

Zesa needs to take advantage of lower import tariffs during off-peak hours that average $0,06/kWh and increase electricity imports during those productive hours while prioritising key producers such as mines and manufacturers during peak hours.

Victor Bhoroma is an economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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