Mchokoliso Tembo, Lusaka, Sunday, 21 July 2024 โ For a great many years, I have dreaded the possibility of our nation plunging into a debilitating crisis because of energy shortages. The energy crisis that Zambia is currently grappling with has touched every corner of the country, affecting family life and business across the board. Our complacency with hydro-power, stretching back decades, has led us here, and now Zambia is in an actual state of emergency.
These scenes of utter frustration and futility, unfortunately, have become all too familiar for Zambians in recent months. Power going off abruptly at significant moments; crops failing in farmlands up and down the country; important deals being sabotaged by lack of power and production grinding to a halt in many a Zambian factoryโour nation is grappling with an unprecedented energy crisis, with load-shedding hours exceeding twelve in many areas. The incessant power outages plaguing Zambia are more than just an inconvenience; they’re a stark wake-up call, urging us to address the fundamental issues in our energy sector. As the Head of Business Development at TCM Business Solutions, I’ve been at the forefront of efforts to address this crisis, and I believe it’s time for a frank discussion about our energy future.
At the heart of our challenges lie two critical and interlocking themes: the need for a comprehensive energy market framework that welcomes cost pass-through mechanisms, and the consequential need for Zambia to migrate to truly cost-reflective tariffs through accelerated tariff reforms. Now, โcost pass-through,โ โcost-reflective tariffsโ and โtariff reformโ may sound like dry, technical concepts, but they hold the key to unlocking Zambia’s energy potential and attracting the investment we desperately need. So, let us start by examining what these terms mean before we move on to how we can implement the underlying principles.
Cost Pass-Through: A mechanism where an energy supplier, such as ZESCO, can directly adjust electricity prices for consumers based on changes in their own costs of generating and distributing the energy. This basically means the ability for power generators and distributers to pass on their costs to their customers. The most important pass-through sought by Independent Power Producers (IPPs) is fuel-cost pass-through, because fluctuations in fuel prices can have a dramatic impact on their bottom lines.
Cost-Reflective Tariffs: This relates to the setting of regulated energy prices at a level that accurately reflects the true cost of providing the energy and a reasonable profit margin for the supplier. Essentially, cost reflectivity of tariffs arise when a cost pass-through mechanism is enshrined in a regulated tariff.
Tariff Reform: This refers to the process of reviewing and adjusting the existing system of energy tariffs. It can encompass implementing cost pass-through mechanisms, thereby setting cost-reflective tariffs, or making broader changes to the pricing structure for different categories of consumers (residential, industrial, etc.).
Implementing cost-pass through mechanisms protects investors from unpredictable changes in their costs. This, in turn, makes their projects more financially viable and less risky. Currently, our energy sector operates under a rigid pricing structure that doesn’t account for these fluctuations. Imagine running a business where your costs can skyrocket overnight, but you’re not allowed to adjust your prices accordingly. That’s the predicament our power producers face. It’s unsustainable and it’s deterring potential investors.
Implementing a cost pass-through mechanism would signal to investors that Zambia understands the realities of the energy market. It would demonstrate our commitment to creating a fair, predictable environment for investment. Admittedly, it might lead to some short-term increases in electricity prices, but the long-term benefits โ increased generation capacity, improved reliability, and ultimately, economic growth โ far outweigh these temporary challenges.
For too long, Zambia has maintained artificially low electricity prices. While this may seem beneficial to consumers in the short term, it’s a false economy. These subsidised rates have left our national utility, ZESCO, unable to invest in maintenance and expansion of its power infrastructure. They’ve also discouraged private investment in the sector.
Cost-reflective tariffs are not about making electricity unaffordable. They relate to ensuring that the price of electricity set by the regulatorโin this case the Energy Regulation Board (ERB)โaccurately reflects the cost of producing and delivering it. This includes not just the immediate operational costs, but also the long-term costs of maintaining and expanding our power infrastructure.
The impact of moving to cost-reflective tariffs on Zambia’s ability to attract investors cannot be overstated. Investors need assurance that they can recoup their costs and make a reasonable return. Without this assurance, they’ll simply take their capital elsewhere.
At TCM Business Solutions, we’ve seen firsthand how the lack of cost-reflective tariffs hinders investment. Promising projects have been shelved because the numbers simply don’t add up under the current pricing structure. This isn’t just a loss for potential investors; it’s a loss for Zambia. Each megawatt of generation capacity we fail to add is a missed opportunity for economic growth and improved quality of life for our citizens.
The recent move by the Energy Regulation Board to introduce a multi-year tariff migration plan is a step in the right direction. This five-year plan signals that Zambia is committed to moving towards cost reflectivity. However, we need to ensure that this plan is implemented consistently and transparently, and that the effort is accelerated.
Critics may argue that increasing electricity tariffs will hurt consumers and businesses. But we need to look at the bigger picture. The true cost of electricity isn’t just the number on the bill โ it’s also the cost of unreliable supply. It’s the diesel burned in generators during blackouts. It’s the productivity lost when businesses can’t operate. It’s the opportunities missed when investors look elsewhere.
Moreover, cost-reflective tariffs don’t necessarily mean unaffordable tariffs. They can be implemented alongside targeted subsidies for vulnerable consumers, ensuring that everyone has access to this essential service. What’s crucial is that these subsidies are transparent and don’t distort the market signals that investors rely on.
The path to reform won’t be easy. It will require political will, public understanding, and private sector engagement. But the cost of inaction is far greater. Every day of load shedding is a day of lost productivity, a day of stunted growth, a day where we fail to meet the aspirations of our people.
As we grapple with this transition, regional cooperation will be key. Zambia’s membership in the Southern African Power Pool (SAPP) provides opportunities for power trading that can help manage short-term supply challenges. At TCM Business Solutions, we’ve recently been involved in importing power to help alleviate the current crisis. But for the SAPP to function effectively in the long term, all member countries need to move towards cost-reflective tariffs and market-based pricing.
The current energy crisis is undoubtedly a challenge, but it’s also an opportunity. An opportunity to reform our tariff structure, to build a more resilient and sustainable system, to position Zambia as a leader in clean energy in Africa. Implementing fuel pass-through mechanisms and moving to cost-reflective tariffs are not just technical adjustments. They’re about creating a sustainable, reliable energy sector that can power Zambia’s development for generations to come. They’re about sending a clear message to investors: Zambia is open for business, and we understand what it takes to create a thriving energy market.
