Roy Moobola, Witney, UK, Saturday, 28 September 2024 – The ongoing electricity crisis in Zambia has been a growing concern, culminating recently in the rejection by the Energy Regulation Board (ERB) of ZESCO’s application to raise electricity tariffs. ZESCO aimed to generate an additional $14 million per month to secure 300 MW of power to offset expected shortfalls during maintenance at Maamba Energy Ltd and Kariba North Bank Power Station. This crisis underscores long-standing issues in Zambia’s electricity sector, which has been grappling with rising demand, insufficient generation capacity and inefficient tariff structures.
Zambia’s Energy Challenges: A Historical Overview
Zambia’s electricity woes are not new. El Niño-induced droughts in 2015 and 2019 led to severe load shedding, at times lasting up to 14 hours a day. While short-term fixes alleviated some of the immediate issues, the country remains vulnerable due to its over-reliance on hydropower. Despite sufficient installed generation capacity to meet peak power demand, annual energy production has been inadequate due to drought conditions in some years. The current situation is critical with the most severe load shedding experienced in the country of 21 or more hours per day. This highlights the need for diversification in the energy mix, especially with an ever-increasing population and higher energy demands.
One major impediment to addressing these challenges is the current tariff structure. Zambia’s tiered electricity tariffs, designed to benefit low-income households, have had unintended consequences. While this system provides social benefits, with higher users subsidising lower users, it has deterred investment in new electricity generation.
As of December 2022, Zambia’s average tariff was the second lowest in the SADC region at 7 cents per kWh (see Figure 1 below), only higher than oil-rich Angola. This low tariff clearly makes it difficult for ZESCO Limited to recover costs, especially with a cost-reflective tariff of 10 cents/kWh as recommended by a 2021 cost-of-service study. Other tariffs were as follows:
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Zimbabwe and DRC had tariffs around 8 cents/kWh.
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Malawi, Tanzania, Botswana and South Africa were around 10 cents/kWh.
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Namibia had a 15 cents/kWh tariff.
Electricity is clearly cheap in Zambia. But is it too cheap?
The Electricity Tariff Regime and Its Impact
The tiered tariff structure, where residential customers pay an average of 6 cents/kWh and industrial customers pay between 4 and 7 cents/kWh (see Figure 2), has historically helped make electricity affordable. However, this low pricing has made ZESCO unsustainable, as it sells electricity below cost for most domestic consumers while relying on higher rates for exports. This pricing imbalance has strained ZESCO’s financial stability, particularly during supply deficits when it seeks to prioritise profitable export contracts over domestic needs. To meet the current power deficit ZESCO is now importing power from ESKOM (South Africa) at 17 cents/kWh, EDM (Mozambique) at 22 cents/kWh and purchasing local diesel generated electricity from Ndola Energy at 26 cents/kWh further exacerbating its financial distress.
Inflation and cost pass-through mechanisms, meant to adjust tariffs to reflect changing economic conditions, have not been fully implemented. For example, inflation between 2020 and 2024 rose by 58%, while electricity tariffs increased only by 25%, further eroding ZESCO’s ability to meet rising costs. Projecting out to 2027 when the current multi-tariff period ends, the graph below shows that for all tariff tiers the tariff increments will still not have kept up with inflation.
Environmental and Social Considerations
The implications of Zambia’s electricity crisis extend beyond economic factors. Deforestation, driven by the widespread use of charcoal and firewood for cooking, remains a significant issue. With 84% of rural households relying on firewood and 59% of urban households using charcoal, the environmental degradation is severe, leading to the loss of up to 300,000 hectares of forest annually. This also contributes to health risks associated with indoor air pollution, disproportionately affecting rural women and children.
The continued use of biofuels for cooking is tied to the low rate of electricity access, especially in rural areas, and the high cost of alternatives. As a result, addressing the energy access challenge in Zambia will not only benefit the environment but also improve public health outcomes.
Proposed Solutions: Dynamic Tariffs
Breaking this vicious cycle requires innovative solutions that balance economic, social, and environmental goals. One promising option is the introduction of Time-of-Use (TOU) tariffs, a dynamic pricing model that adjusts electricity costs based on the time of day and demand levels. TOU tariffs can incentivise consumers to shift usage to off-peak periods, reducing strain on the grid and encouraging investment in alternative energy sources, such as solar.
TOU tariffs would also make electricity prices more reflective of the real costs of generation. For high-consumption consumers that currently rely on expensive diesel generators during load shedding, TOU tariffs could offer a more affordable and reliable alternative. The financial signal sent by these tariffs can modify consumer behaviour, reduce load shedding, and improve grid stability while attracting investment in new generation capacity.
In the long term, market-driven mechanisms, such as TOU tariffs, could align consumer demand with supply capabilities and make electricity generation investments more profitable. With Zambia’s electricity pricing currently failing to keep pace with inflation, these innovative tariffs may provide a pathway to both economic sustainability and increased access to clean energy.
Time-of-Use Tariff Modelling
The daily power demand profile in Zambia modelled in Figure 4 demonstrates clear peaks during the day, particularly between 7:00 hours to 15:00 hours and 18:00 hours to 22:00 hours, which are periods of high electricity usage. These peaks indicate the times when the grid is under the greatest strain, requiring additional energy supply to meet demand. The high demand during these periods is primarily driven by residential consumption, as households tend to use more electricity during morning preparations and evening activities.
Managing this demand is crucial for ensuring grid stability and preventing blackouts or load shedding. Understanding the timing and scale of these peak periods is essential for designing tariffs that can both influence consumer behaviour and ensure the efficient use of electricity resources.
To address the imbalance between electricity supply and demand, Time-of-Use tariffs are proposed as shown in Figure 5. These tariffs are designed to vary based on the time of day, reflecting the real costs of electricity during peak and off-peak periods.
In this model:
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A 50% increase in tariff is applied during mid-range times for tiers R3 and R4
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A 150% increase in tariff is imposed during peak times for tiers R3 and R4.
This creates an effective 53% tariff increase across the day for higher consumption tiers (R3 and R4). The model suggests that the maximum tariff for the R3 tier (300-500 kWh) would rise to 16.5 cents/kWh, while the R4 tier (>500 kWh) could see rates as high as 24 cents/kWh during peak times.
By introducing these higher rates during peak periods, the TOU tariff encourages consumers to shift their usage to off-peak times when electricity is cheaper, thereby reducing demand during the most critical hours. It also encourages the high users to self-generate electricity, e.g. by using solar panel systems during the day, when tariffs are relatively high.
Figure 5: Modelled TOU tariff for R3 and R4 tiers – 50% increase during Mid-Range, 150% increase during Peak times
The modelling shown in Figure 6 indicates that implementing TOU tariffs has significant implications for revenue generation. The model predicts a 42% increase in revenue, assuming that demand remains inelastic relative to tariff price changes. This means that even with higher tariffs, consumers are expected to maintain their electricity consumption, leading to greater revenue for the utility company.
The average modelled residential tariff is projected to rise from 7.3 cents/kWh under the current flat-rate system to 10.4 cents/kWh with the TOU tariffs. This shift would allow the utility to cover more of its operational costs and reduce the financial strain caused by low, non-cost-reflective tariffs. In particular, high-consumption customers in the R4 tariff tier, who are less price-sensitive, would contribute significantly to this revenue increase, helping to ensure the financial sustainability of the electricity supply system. These are the customers who have shown the greatest appetite to adopt self-generated electricity in the current crisis, which is of a higher cost, so would be keener to pay more for a reliable electricity supply.
Figure 6: Utility revenue impact of TOU tariff
Recommendations and Way Forward
To solve Zambia’s electricity crisis, a multi-faceted approach is essential:
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Reform the tariff structure: While continuing to protect low-income consumers with lifeline tariffs, high-consumption users should pay rates closer to cost-reflective values to ensure financial viability for ZESCO and attract investment in new generation.
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Adopt dynamic pricing models: The introduction of TOU tariffs would create incentives for energy efficiency and better alignment between supply and demand, ultimately improving electricity reliability and reducing reliance on costly stop-gap measures like emergency imports.
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Encourage investment: Transparent, cost-reflective pricing, combined with incentives for renewable energy development, will be crucial for attracting both local and international investors.
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Promote alternative energy solutions: Expanding access to clean, renewable energy, particularly in rural areas, would help mitigate the environmental impacts of firewood and charcoal use and reduce indoor air pollution, contributing to better health outcomes.
Zambia’s electricity sector is at a crossroads. The choices made now will determine whether the country can secure reliable, affordable, and sustainable energy for all its citizens while fostering economic growth and environmental protection. TOU tariffs and other dynamic market solutions offer a viable path forward, but political will and regulatory reform are critical to making this vision a reality.
References
Emergency tariff application to ERB July 2024 https://www.erb.org.zm/wp-content/uploads/files/ZESCO-Tarrif-Application-Submission.pdf
ZESCO’s Emergency Tariff Application https://www.erb.org.zm/wp-content/uploads/files/ZESCO-2024-EmergencyTariffPublicConsultationPaper-August2024.pdf
ERB Statistical Bulletin January to December 2022 https://www.erb.org.zm/wp-content/uploads/statBullet2022.pdf
ERB Approved Multi-year Tariffs 2024-2027 https://www.erb.org.zm/wp-content/uploads/files/Tariffs/Approved-ZESCO-Multi-Year-Tariffs-2024-2027.pdf
Zambia Electricity Cost of Service Study https://www.moe.gov.zm/wp-content/uploads/2022/08/COSS_Final-Report.pdf
