ONE issue, which experts say has been impeding private investments in the electricity sub-sector in Zambia, is the past Zesco monopoly of the power infrastructure, particularly the transmission and distribution networks. Lack of open access to the networks has seemingly been a major challenge for potential Independent Power Producers to venture into this subsector. A veteran legal expert looks at the benefits of unbundling Zesco.

JAMES KALOKONI writes that:
Last week, we looked at the meaning of unbundling a power utility and today we focus on the benefits of unbundling the network for everyone.
On accruing benefits, it must be mentioned that Zesco was carrying a host of burdens.
This is because before the current legal changes, the power market in the country was based on a single buyer model in which Zesco was the only electricity buyer from Independent Power Producers (IPPs).
This was done by signing Power Purchase Agreements (PPAs), with them.
The crucial question is: what are the burdens which Zescowas carrying under the PPAs?
Firstly, we must understand the two principal functions which PPAs perform on the power market.
The first principal function is bankability which simply means attractiveness of power investments to the bankers.
From the banker’s view, the PPA is security for loan repayment, meaning that the bankers focus on the cashflow that will accrue to the IPPsunder the PPA.
If the cashflow will be enough, the banks will be ready and willing to finance the power project, otherwise they will not do so.
The PPAs make power investments attractive to bankers.
The second principal function performed by PPAs is risk allocation.
It is through the PPAs that commercial risks are allocated between the parties to it.
It is trite that a commercial risk is allocated to a party which is best able to manage and control it.
To illustrate this point, let us cite two risks which Zesco has been bearing under the PPAs.
The first one is the exchange rate risk.
Zesco buys electricity from the IPPs in foreign currency – in United States (US) dollars, but sells the same power to the local customers in Kwacha.
For instance,Zesco is currently importing power from neighbouring countries and is paying for it in foreign currency while the same power is being sold in Kwacha locally.
When the Kwacha depreciates against the dollar, Zesco will need to buy more Kwacha to pay for the power it is purchasing from IPPs and foreign countries in dollars.
The difference between the Kwacha and dollar exchange rates is the exchange rate risk we are talking about here.
This can amount to a huge sum of money especially when all IPPs are put together.
This money could be spent on improving social services for the people.
The second one is the hydrological risk for hydropower plants only- which is the risk that due to low rainfall, there may be insufficient water flow to enable IPPs to generate sufficient power for sale to Zesco.
For example, Zambia is currently experiencing one of the worst droughts in its recorded history and this risk is most apposite here.
The hydrological risk is unacceptable to both bankers and the IPPs because it implicates a reduction of the revenues available from the project and for loan repayment.
Therefore, this risk is also allocated to the power utility through the take or payand the price clauses in the PPAs.
The price clause in the PPA comprises two elements: the energy charge which caters for the operating costs of the IPPs, and the capacity charge which pays for the fixed costs of the IPPs such as loan repayments.
Therefore, whether the IPPs are generating power or not, the power utility has to honour the price clause so that the IPPs do not default on loan repayments.
In effect, the power utility will be paying for power it is not receiving from the IPPs assuming that these power investors are not producing power in this drought as well.
In this case, if the power utility does not have sufficient funds to pay, the IPPs will have to fall back on the Government Sovereign Guarantees which is a burden on the Consolidated Account of the Republic.
In terms of benefits, therefore, it is the legitimate expectation of everyone that with the unbundling of the network and granting of open access to all IPPs, generally, Zesco will no longer be signing PPAs with IPPs thus drawing the curtain on the cited risks.
This is so because Zesco was signing PPAs with IPPs which had no access to the transmission network since there was no alternative route for delivering power to their customers.
Besides open access, the law has also created a nationwide spot power market for IPPs, meaning that IPPs can now make cash from the sale of power on the spot power market.
This is besides the existing PPA-based bilateral market with bulky buyers such as the mines and other manufacturing industries.
In the premises, the IPPS now have a nationwide power market thus obviating the necessity for continuing signing PPAs with them!
It is also the legitimate expectation of everyone that existing PPAs will be renegotiated under the change of law clause to allow the IPPs to sell power directly on the spot market using the unbundled network.
The released funds will now be available for public projects while the consumers at large will now have a wide choice of suppliers of power besides Zesco.
They can now call upon any IPP to supply power to them at any time not to mention, quality and efficiency of supply it promotes.
However, there is always an exception to every general rule.
The country’s Energy Policy of 2019 seeks to promote“universal access to clean, reliable and affordable energy at the lowest total economic, financial, social and environmental cost consistent with national development goals by 2030.”
By clean energy, it means energy from renewables such as solar and wind energy which does not contribute to climate change.
Therefore, a policy decision can be made to segment the power market by allowing Zesco to continue signing PPAsonly with producers of clean energy as a way of incentivising and catalysing private investment into the renewable energy industry.
In conclusion, unbundling the network and granting open access to IPPs on equal terms has heralded a new era in the electricity industry of Zambia.
The citizens have a legitimate expectation that the burdens they have been carrying under the bundled power market in form of risks identified will come to an end and that there will be a wide customer choice of efficient suppliers of quality power.
Next week, we will focus on the management and control of the distribution network.
Mr Kalokoni is an Advocate of the Superior Courts of Zambia with over 27 years of experience in civil litigation specialising in employment, energy and natural resources law and holds a Master of Laws Degree in Energy Law and Policy from the Centre for Energy Petroleum and Mineral Law and Policy, Dundee University, Scotland.
For comments: +260977246099, +2600955431442 or jmuyanwa2021@gmail.com or contact Author (directly), +260977708045 or jckalokoni@gmail.com.