eBusiness Weekly
The main talking point in business circles has now moved from foreign currency and inflation, both at least ameliorated to large degrees, and has moved to energy, in particular electricity supplies and regrettably this is likely to be a talking point, at variable volumes, for some time.
Right now Zimbabwe can generate at peak output less than 40 percent of peak demand, and even with the imports now being negotiated this this will not to rise to what we need, perhaps 55 percent at a push. The advent of Hwange 7 and its 300MW could well bring in more than the extra imports. There is a little bit of extra capacity in Mozambique, although the two companies in that country want a reasonable price, and a little bit in Zambia from both Zesco and the independents, but the rest of Southern Africa is short itself.
So while some extra power is coming in the very short term, over the next couple of weeks, we will still be short, and thus waiting for rains, and in particular for the rains in the south-east third of Angola (where 80 percent of Kariba water comes from) and western Zambia where almost all the rest of Kariba water comes from. The contribution from Zimbabwe to Kariba is trivial, which is why damming the Gwaii and Shangani rivers, the biggest in Matabeleland North, just below their confluence has not raised even a whisper of concern from those worried about Lake Kariba levels.
Many businesses in Zimbabwe do have back-up diesel generators, but the energy these generate is expensive, around 36cUS a kilowatt hour for fuel alone at the present diesel price of US$1,70 a litre, and then if the generator is of reasonable size and well maintained. It will be slightly pricier on smaller generators and on generators not run close to maximum load, but the extra is not very much, and almost certainly less than 40cUS/kWh. There are maintenance costs on top of those figures.
Generators, incidentally, only output about 35 percent of the actual energy contained in diesel fuel, largely because of the inherent and appalling inefficiencies of internal combustion engines. The generator half of a diesel generator operates at high efficiencies, but the motor driving the generator suffers from the low efficiency of these sort of engines.
This high cost is where businesses have to be careful. It can be tolerable when we are talking about “back up” for occasional breaks in supply, but to run on diesel for full production cycles day after day will affect the bottom line. For commercial sectors, where electricity is used for lighting and refrigeration, the costs are again tolerable, since electricity costs are only a small fraction of fixed costs. But once you are using electricity for heating, which includes water heating and cooking, or for operating heavy machinery, which includes lifts, the costs can rocket if you are using diesel.
There have been suggestions that, during national emergencies such as we are facing now, tax-free diesel for electric generation could be supplied. The usual problem of cheating would arise, but perhaps a bureaucrat accompanying a dedicated delivery tanker and seals on tanks would help stop that, along with the usual warning that cheats face jail. It would certainly be worth trying, with the Treasury only losing tax that in normal circumstance would not be paid, since businesses would use Zesa, not diesel.
The high cost of diesel derived electricity is one major reason why solar installations have become so much more popular where these make sense. There are still high capital costs, but almost zero operating costs. The storage costs are a major extra expense, and the batteries required are not cheap. Again there are suggestions that duty on the batteries fitted to solar installations could be duty free as are the panels. Again there would have to be some sort of control to ensure that the batteries were wired to solar panels, but some sort of deal whereby licensed dealers did the fitting and the batteries were identified could work.
Government and Zesa have noted that private solar installations are proliferating and that what would otherwise be a major problem in the operation of solar, the variable output from the zero in the night to maximum at noon, can be eased by the special metering that allows the owner of these installations to sell surplus back to Zesa while buying Zesa power in the night. In effect the Zesa mark-ups can be considered a storage charge.
That metering needs to be pushed hard right now, especially for installations where the company might be having its annual shutdown soon. This would give Zesa some extra daytime capacity over Christmas and New Year, and give your average CFO something to brighten their Christmas.
In theory the same metering would work on larger diesel generators, but here there would be the high operating costs of diesel fuel to overcome. In a total emergency, and we are not there yet, such meters would allow Zesa to in effect run the private diesel generators, but buying power at 40cUS/kWh is not really a commercially viable deal.
But companies and households wanting secure power supplies need to consider solar. When the heating element is just hot water, or mainly hot water, then adding solar water heaters to the row of solar panels makes sense, as can be seen in quite a few homes in say Borrowdale, where the house owner is moving as far as possible from reliance on Zesa.
One major factor, brought up by both Zesa and by Finance and Economic Development Minister Mthuli Ncube in his budget, is the costing of electricity. We are charging too little, and perhaps quite a lot too little. A whole generation of Zimbabweans grew up with very cheap electricity, with almost everything coming from Kariba with its very low operating costs, and then capital costs not factored in after Ian Smith repudiated the Kariba loans after being chucked out of the sterling area following UDI, and thus triggering the British guarantees for the Federal loans.
Even when Hwange was commissioned in two phases in the 1980s, around 40 percent of electricity was cheap from Kariba South, but already at this stage pressure for low tariffs probably denied Zesa the required funds for maintenance at the required levels for Hwange. People argue about how much Zesa inefficiency, and there was some, contributed and how much too-low tariffs contributed, but even a hyper-efficient Zesa probably would have needed a higher tariff.
The increasing percentage of new capacity into the mix of generation supplies, either through imports, Hwange extension or rebuilding the older 920MW at Hwange, plus the sort of tariffs that the independent power producers can show they need through agreed formulas, will see more and more pricier inputs into the final costing formula.
Regulator Zera is going to have to figure out the tariff problem. It will need to assume a rational level of efficiency at Zesa, since people and businesses must not suffer because of unacceptable inefficiency. But on the other hand it needs to ensure that new capacity can be added and that independents, or at least efficient independents, can be viable.
Poorer residential users are a particularly vulnerable group. The present Zera system of cross subsidisation with a residential tariff higher than the commercial tariff, but with the actual charges rising in steps from that first 50kWh at a very low price, seems rational, but could be damaged by the fact that the wealthier consumers, who pay the cross subsidies, are just the sort of people who can afford to buy a bank of panels and batteries.
Zera not only needs to fix viable tariffs for the present but almost certainly needs to be pro-active and start engaging ZETDC and Zesa about what adding new stations will do to the tariff and about what an independent producer can legitimately expect when they are in the position to sell. The two are linked because the final tariff will depend on what Zesa has to pay for each contribution. The twin vital criteria are viability and efficiency, with affordability coming in a poor third. IPPs do need a viable tariff deal, but cannot push their luck by demanding guarantees as some are, since private investment does carry risk, even when prices are fixed by a formula.
Businesses will at least note higher tariffs at worse will still be below half the 40cUS/kWh that diesel generators need for operating costs alone.
But another innovation would be to extend the maximum demand tariff right down the line, as once was the case. Major consumers do not buy energy, they buy power. Zesa charges them for the maximum demand they place on the system in a month, although there are a lot of industrial consumers who pay a slighter lower power tariff plus a low energy tariff. This is because new power stations and sources of supply are needed to meet maximum demand, and those who need the extra power station can pay for it. It also encourages the major users to watch their maximum demand, and figure out ways of getting a high load factor, that is using as close as possible to their maximum demand 24/7, to minimise energy costs.
We used to do that with load limiters in high density suburbs. The 5A Harare limit was ridiculous; Bulawayo went for 7,5A after a far smarter official lined up a hot plate, a radio and a number of lights and found what limit was needed to safely operate these together, with the family then switching on the geyser after switching off the stove. These days a minimum 15A limit would make more sense, but would still reduce energy costs and perhaps middle-income consumers could have a choice of 20A or 30A limits.
