7 February 2014

Zimbabwe: Zesa Tariff Hike May Be Justified

Photo: Antony Kaminju/IRIN
Business by candlelight in Harare (file photo).


No one likes increases in the cost of essential services, and ZESA's request for a 5 percent tariff rise is not going to boost the popularity of the utility, already at a pretty low ebb.

But a rise may well be justified. A lot depends on Zesa's costs and its efficiency.

ZESA has four sources of power: Kariba South, Hwange Thermal, imports and the three old thermal stations. The cost to ZESA of these sources differs wildly.

Easily the cheapest is Kariba South. The dam wall is long paid for. The civil engineering works are long paid for. The "fuel" is free, just rain falling in eastern Angola and western Zambia.

So the only real costs are the maintenance of the six turbine-generator units, their associated transformers and other equipment, the annual share of their eventual replacement cost, and some very modest staff costs for running the station.

Hwange Thermal is a lot more expensive. Although most of the concrete is now paid for, there is still the far greater maintenance costs of a thermal station, plus the cost of the coal. So Hwange power is several times the price of Kariba power. The three small thermal stations, when used, are more expensive still.

Coal is far more expensive when railed around the country than at a pit head, and the stations are less efficient than Hwange.

Imports, mainly from Cabora Basa, are not cheap. Southern Africa as a whole is short of electricity but does have a regional grid.

This means that sellers have several bidders, and can move their energy easily to whoever bids the most.

ZESA's eventual tariff has to be based on the weighted average of these sources, with other factors, such as the cost of maintaining its own grid, the cost of sub-stations and the like all added in. Fairly obviously the costing model is not simple, and cannot be simple.

Some of the kilowatt hours it sells cost the utility 10 or 20 times as much as other kilowatt hours; but it must have a single price for everyone. The cost of "maintenance" can hide a lot of inefficiencies.

But this is why we have a regulator.

ZESA cannot be allowed to set its own tariffs, and politicians are not really able to assess all the technical data given in support of a change in tariff. The regulator is supposed to have the technical and financial competence to make a decision, or at least have access to such competence.

ZESA is trumpeting that it uses an internationally accepted costing model. The regulator needs to check that this model is indeed an international standard, which should reward efficiency and hammer inefficiency, and that ZESA has fed the correct data into it.

This means the regulator needs to figure out if ZESA does indeed pay 10,51c for each kilowatt hour it then sells for 9,86c. A lot depends on the actual mix of the energy sources.

A slightly higher percentage of Kariba power in the mix and the cost falls; a slightly higher percentage of thermal and the cost rises. Accurate historical records of how ZESA mixed its energy from the last couple of years would obviously help.

It is vital that a whole system of honest reporting and honest calculations with an acceptable costing model are in place as ZESA starts to expand existing stations and build new ones. The falling percentage of cheap Kariba energy alone will make the costs rise, and we need to remember the planned extensions at Kariba increase flexibility, not actual energy output, even before we look at the capital costs of all this extra work.

So this is a good time, when we are arguing whether an increase should be three percent or four percent or five percent, to check that we have the right model and are getting the sums right, so when ZESA finally starts expanding, and bigger jumps will almost certainly be required as the mix changes, there is general agreement that we know how to do the sums.

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