POWER SECTOR MARKET REFORMS : Getting it Right in SADC Presented at ACER/CCRED CONFERENCE (11-12 March, 2016) Livingstone-Zambia By BESA CHIMBAKA ENERGY REGULATION BOARD 1

OUTLINE 2 1.Introduction 2.Electricity Sector Market Structure in SADC 3.Case for Reforms 4.Standard Model of Reforms 5.Theoretical Perspective of Unbundling and Privatisation (Pros & Cons) 6.Experience of Reforms in Kenya 7.Experience of Reforms in Uganda 8.Reforms in Zambia 9.Getting the Reforms Right 10.Structural Options 11.Conclusion

1. Introduction  The electricity sector in most SADC countries is dominated by vertically integrated state owned Utilities. This structure is said to be responsible for the poor performance of the sector. Therefore, some stakeholders have been calling for reforms in the sector to enhance its performance and increase investment.  Most SADC members have been resistant to undertake radical reforms such as unbundling and complete privatisation opting for soft reforms. Some stakeholders have continuously called for implementation of radical reforms (unbundling and privatisation of state owned vertically integrated enterprises) 3

2. Status of Power Sector Market Structure in SADC The power sector in most Sub-Saharan African countries including SADC is characterised by the following:  Small systems with an exception of South Africa which has over 40,000MW of installed generation capacity.  Reliance on hydro power generation with an exception of South Africa which is dominated by thermal power generation  Very Low electricity access rates especially in rural areas. Zambia, Malawi, Mozambique and Lesotho had less than 6% electricity access rate in rural areas by  Heavy hand of government in the sector through vertically integrated state owned enterprises that are near monopolies in their respective countries. For example, ZESCO in Zambia, ESCOM in Malawi, EDM in Mozambique, ESKOM in South Africa, Nampower in Namibia, BPC in Botswana etc 4

3. The Case for Reforms The following were the drivers of the reforms:  Poor technical performance  Poor financial performance  Poor economic performance of countries  Structural Adjustment Program (SAP)  Removal of fiscal stress on government  Facilitation of private sector investment  Herd Behavior 5

4. Standard Model of Reforms The standard model and steps are described as follows:  Corporatisation and Commercialisation  Legal reforms to facilitate private sector entry  Unbundling of vertically integrated state owned utilities to introduce competition  Creation of an independent regulator  Privatisation of state owned electricity enterprises to instill financial discipline  Facilitation of Independent Power Producers (IPPs  Creation of an independent systems operator  Unbundling of the tariffs The anchor of electricity market reforms is market liberalization, competition and privatization. 6

5.Theoretical Perspective of Vertical Integration and Privatisation: Pros & Cons Advantages of Vertical Integration  It is easier to avert cascading failures of grid elements and generation units  Easy coordination of investment in a composite system  Less risk  Economies of scale and scope  Lower tariffs  Enables integrated resource planning Disadvantages of Vertical Integration  Lack of competition  Inherent inefficiencies  Difficult to expose the segment that is inefficient. 7

5.Theoretical Perspective of Vertical Integration and Privatisation: Pros & Cons Advantages of Privatisation  Enhances efficiency  Frees previously owned state enterprises from political interference  Cost efficiency  Enhanced competition Disadvantages of Privatisation  May create private monopolies  May affect public interest  Loss on potential dividends for the government  Fragmentation of the industry  Short termism 8

6. Experience of Reforms in Kenya Reforms  Undertook legal reforms of the sector  Unbundling of generation from transmission and distribution  Partial privatisation but government retained majority ownership KenGen, KETRACO and KPLC  Creation of regulator  Creation of rural electrification agency Mixed Outcomes  Increased generation capacity  Increased IPPs  Tariffs still high  Poor quality of service still present  Access rate still low, though marginal improvement recorded 9

7. Experience of Reforms in Uganda Reforms  Legal reforms of the sector  Unbundling Uganda Electricity Board to create UEGC,UETC and UEDC  Partial privatisation  Creation of Regulator  Creation of rural electrification agency Mixed Outcomes  Growth in electricity generation  Poor quality of supply  Tariff arguably highest in the region  Still low electricity access rate  Poor technical performance. Distribution losses still high. 10

8. Reforms in Zambia Status of electricity industry  Estimated installed capacity of about 2300MW  Over 90% hydro power generation  Electricity access rate of about 22% with rural access rate of 5%  Industry dominated by ZESCO a vertically integrated state owned utility Reforms  Legal reforms to end the monopoly of ZESCO. Electricity supply of 1970 was replaced with electricity Act of 1995 to facilitate private investment.  Corporatisation and commercialisation of ZESCO but utility still remains vertically integrated and state owned  Creation of the regulator (Energy Regulation Board)  Creation of Rural Electrification Authority (REA) 11

8. Reforms in Zambia Contd Outcomes of Reforms  Marginal growth in generation capacity  Improvement in financial performance of ZESCO  Improvement in technical performance of ZESCO  Increased private particiation (LHPC, NEC, Maamba Collieries, EMCO, ITPC, ZPL, NWEC, CEC)  Quality of service still needs improvement especially in rural areas which experience low voltage problem  Access to electricity still remains very low  Though there is improvement in financial performance, ZESCO requires improvement in debt collection  Generation capacity is lower than the demand for electricity hence the need to expand investment in generation. 12

9. Getting the Reforms Right To design appropriate reforms, the following must be considered:  Size of the system - Experience has shown that unbundling is well suited for bigger system and unsuitable for smaller systems.  Political Consideration - There should be political consensus for the reforms to achieve intended outcomes.  Countries National Ideology - The contribution of the electricity sector to the countries national ideology must be considered.  Ability to pay – It has been observed that some reforms are associated with higher tariffs. Therefore Citizens ability to pay becomes critical  Electricity Access Rate – Reforms must aim at achieving increased access especially in rural areas.  Cost Benefit Analysis – Both direct and indirect costs and benefits must be analysed when designing the type of reforms 13

10. Structural Options 14 © Sally Hunt and Graham Shuttleworth

10. Structural Options Contd  For Zambia, given the small system operated by ZESCO, lower national electricity access rate especially in rural areas, lower ability to pay, and other factors, Model 1 will be suitable. i.e maintaing ZESCO as a vertically integrated and state owned utility; or  Adopt Model 2 whereby Generation is separated from Transmission and Distribution. Generation can be privatised but Transmission and Distribution should be maintained under Government ownership for reasons cited above. 15

11. Conclusion  Reforms are a process and not an event. The unsatisfactory performance of the sector justifies calls for reforms  There is no one size fits all model of reforms. Every country has unique social, economic and political conditions. Therefore, reforms must be designed based on country conditions. 16

END OF PRESENTATION 17 THANK YOU FOR YOUR ATTENTION