|Zambia’s abundent water resources mean that hydropower will remain the main generation resource|
he World Bank, in 2010, identified Zambia as one of the fastest economically reformed countries in the world. Its economy has shown high growth in recent years. The country’s GDP stood at $7.2 billion in 2005, rising to over $18 billion in 2011. By 2016, it is forecast to reach $29.7 billion. Over the same period, Zambia’s population is expected to rise from 11.7 million in 2005 to 15.4 million in 2016.
Thus, the potent combination of an increasing population and strong GDP growth is likely to drive up power consumption. In 2011, electricity consumption was estimated at 8217 GWh, and is expected to grow to more than 10,700 GWh in 2016, primarily driven by the rising power demand of the mining sector.
One restraining factor is Zambia’s very low electrification rate à¢€“ a national rate of 19 per cent but only 3 per cent in rural areas. The government, however, is now making efforts to address this through its Rural Electrification Master Plan (REMP), which has the highly ambitious target of increasing the rate to 51 per cent by 2030. But this comes with a hefty price tag of $1.1 billion.
Between 2005 and 2011, Zambia’s installed capacity increased very little, reaching 1707 MW, a result of a lack of government investment in power infrastructure. By 2020, however, total installed capacity is expected to almost double to 3211 MW.
Its annual power production in 2005 stood at 8846 GWh. Between 2005 and 2011, production rose to over 8960 GWh and is expected to hit 16,207 GWh in 2020.
Currently, hydropower has by far the biggest share of the power generation mix (over 95 per cent), with thermal power trailing at 0.5 per cent. It is not surprising that hydro is the dominant generation source because Zambia is estimated to hold 40 per cent of the total water resources in the Southern African Development Community. By 2020, however, there will be a shift in the power mix. Hydro’s share will decrease to 86 per cent, while thermal’s share will rise to 14 per cent. The major player in the Zambia power sector is Zesco Limited. It is a vertically integrated state-owned utility which owns the majority of the country’s generation, transmission and distribution infrastructure.
The other main industry participant is LHPC, a privately-owned power producer. It owns and operates two small hydropower plants outside the Central Province town of Kabwe. All of the power generated is supplied to Zesco on contractual terms.
In 2010, Zesco had an estimated share of 98 per cent of total cumulative installed capacity, with the remaining 2 per cent was held by LHPC.
Shifting power mix
Although Zambia has a hydro potential of approximately 6000 MW, capacity has remained relatively static at 1700 MW since 2005, with the 990 MW Kafue Gorge plant constituting the bulk of the country’s hydropower output.
By 2020 hydro installed capacity is expected to increase to 2761 MW, mainly due to a number of large hydropower plants coming on line. The Kariba North Extension (360 MW), which is presently under construction, is expected to become operational 2012à¢€“13, with the 120 MW Itezhi Tezhi, also under construction, commissioned by 2015. A number of other hydo plants with a combined capacity of more than 900 MW are also in the planning stage. Thus, Zambia’s hydropower generation in 2011 stood at 8935 GWh and is forecast to reach 14,512 GWh in 2020
Zambia’s thermal installed capacity was estimated at 7 MW in 2011, with all plants using diesel as the primary fuel. However, up to 2020 thermal capacity is expected to undergo an unprecedented increase to reach 450 MW. This is primarily due to the anticipated commissioning of two large coal fired power plants by Maamba Collieries. The power plants will use coal as the primary fuel, so it will overtake diesel as the main thermal fuel. In 2011, thermal generation was 26 GWh, and this is expected to rise to 1695 GWh in 2020.
Zambia has significant potential to develop renewable energy sources. In geothermal, it has 80 hot springs, of which 35 have been identified to have real commercial potential. In1987, the Italian government developed the Kapishya Hot Springs, but it never became operational. Now, Zesco, in collaboration with Ken Gen, has decided to revive the 2 MW project and is currently seeking a $12 million investment.
Zambia’s potential output for solar is 5.5 kWh/m2/day. The government has incorporated the use of solar energy into its rural electrification programme and currently around 400 households have been provided with photovoltaic systems under the Energy Service Companies pilot project in three districts of Eastern Province.
In contrast, the country’s wind potential is relatively low.
A widening supply-demand gap
Back in 2006, Zambia’s peak electricity demand was 1414 MW, against which electricity supply stood at 1630 MW, representing a reserve capacity of 15.3 per cent. However, since 2010 the situation has worsened, as peak electricity demand rose to 1604 MW against an available capacity of 1200 MW, essentially wiping out the reserve margin.
With a projected growth in demand for electricity the reserve margin issue will become a chronic problem unless the government focuses on increasing generation capacity at a much faster rate and, arguably more importantly, promotes greater private investment in the sector. If nothing is done Zambia will be unable to mitigate the negative impact of an ever-widening gap between supply and demand.
Foreign direct investment
Over the last few years, Zambia has made significant progress in strengthening its investment policies. In the early 1990s, the government formulated initiatives to liberalize its trade regime and in 1992 promoted a privatization programme, targeting a few small companies. In 2004, Zambia formed the Private Sector Development Reform Programme (PSDRP) with the aim of attaining faster and sustained growth by promoting a favorable investment scenario.
Between 2005 and 2007, foreign direct investment came close to quadrupling from $357 million to $1324 million, but fell away in both 2008 and 2009 to $695 million, with the worldwide recession likely to have played a part in the decline. However, in 2010 it rose again to $1041 million.
The government also put in place a number of incentives for priority sectors, which includes the power sector. The construction of power plants, for example, qualifies for tax concessions. The concessions are applicable not only at the time of construction but also after commissioning.
There is, however, a significant constraint to attracting greater foreign direct investment and that is although the cost of producing power is low so is the consumer tariff. Zambia, in fact, has one of the lowest tariffs in Africa, and falls below the standard price range of $0.05 to $0.10/kWh. This obviously means low returns, which are less attractive to investors. The government has not indicated it is looking at reviewing tariffs – unlikely to be popular with the electorate – but without exploring options to boost returns on investment Zambia’s power sector will struggle to encourage both domestic and foreign investment.
There is another option open to Zambia to help bridge the supply-demand gap. And that is through the development of regional power trade via the Southern African Power Pool. This would enable Zambia to import more, and importantly cheap, electricity from the neighbouring Democratic Republic of Congo (DRC) via an existing 220 kV interconnection. Thus, the government has to make a strategic decision on whether to develop strong domestic generation infrastructure or promote strong cross-border interconnection with the DRC.
PennWell Corporation is, for the first time, holding a POWER-GEN event on the African continent. POWER-GEN Africa Conference & Exhibition is taking place in Johannesburg, South Africa, between 6-8 November 2012.