Exploring IDC’s energy vision
Published On January 8, 2016 » 833 Views» By Davies M.M Chanda » Features
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ZAMBIA is blessed with a wide array of natural resources including some of the most envied sustainable energy resources, particularly sunlight and wind.
Despite this, the country is continuously reliant on hydro energy for electricity generation.
Attempts to introduce renewable energy date back to several years and have come a long way to their current position because of the electricity crisis.
Regardless, it is necessary to step up renewable energy targets in the coming years in order to move towards an electricity supply system that allows greater room for flexibility without economically degrading power cuts or electricity buy-backs from intensive energy users.
An electricity system that has a much higher fraction of renewable can be implemented in a relatively short span of time.
At this time in particular, any additional capacity will greatly help the fragile system.
Placing all stakeholder efforts in a well-designed electricity system based on renewable technologies could result in an enviable path towards energy independence that can earn dividends immediately.
Most importantly, Renewable Energy Feed-in Tariffs (REFIT) should be designed to cover generation costs plus a real after tax return on equity.
It is evident that private sponsors and financiers are more than willing to invest in renewable energy if the procurement process is well designed and transparent, and transactions have reasonable levels of profitability, and key risks are mitigated by the Government.
The Government should interact and effectively explain the programme to stakeholders and negotiate with the private sector.
Private sector developers need a clear procurement framework within to invest.
As grid-connected renewable energy independent power projects become more prevalent around the globe, debates have intensified on the most effective policy instruments to accelerate and sustain investment by the private sector into these electricity-generating technologies.
Feed-in Tariffs (FITS) have been the most widely used government support mechanism for accelerating private investment in renewable energy generation.
FITS are meant to reflect the costs of producing particular kinds of energy, as predetermined by government analysis (rather than set as a result of competitive bidding). They are used in offers of long-term supply contracts to renewable energy producers.
However, competitive tenders or auctions have also emerged in many jurisdictions as acceptable techniques, especially in emerging economies.
Tenders have the potential to offer lower prices, while still providing adequate incentives for market entry by renewable energy suppliers.
The initial outcome of this programme, as reported by the Industrial Development Corporation (IDC) chief executive officer Andrew Chipwende in the Times of Zambia of Tuesday, December 29, 2015, has been encouraging.
It had attracted a multitude of international and local private project developers and investors who have channelled large amounts of expertise and investment into grid-connected renewable energy at competitive prices.
This has achieved results in record time, evaluations have been timely and transparent and I hope with the same ingenuity the projects could be under construction soon.
Renewable energy was implemented against an historical background of institutional shortcomings in the country’s energy sector.
Previous efforts to contract independent power producer (IPPs) had been left to Zesco, but all of these efforts failed, perhaps because of a fundamental lack of incentives for Zesco to weaken its monopoly on power generation.
But the Ministry of Energy has also recognised that, like Zesco, it requires huge institutional capacity to run a sophisticated, multi-project, multi-billion dollar international competitive bidding process for renewable energy.
As a consequence, the ministry sought the assistance of the newly created IDC to manage the process.
I am glad that this management team included persons with extreme understanding of the rigorous Public Private Partnership (PPP) project appraisal framework and have been involved with efforts to promote IPPs from the earliest instance.
This then has formed a tight knit team which will be viewed favourably by both the public and private sectors as a professional unit with a track record of considerable expertise in closing PPP contracts and a reputation as problem solvers and facilitators rather regulators.
This kind of credibility will allow the unit to act effectively as a champion of the  renewable energy process.
It is hoped that an exemption has been obtained from the Zambia Public Procurement Authority (ZPPA) in order to maximise economic development objectives.
The ZPPA regulations reflect national legislation and are consistent with best practice in Organisation of Economic Cooperation Development (OECD) countries.
By the same token, they require a complicated, time-consuming, and expensive review process.
The process is required regardless of the size or nature of the project, and has been characterised by some private sector operators and investors as cumbersome and slow.
This process should not be applicable to the IDC process because Zesco, which signs the power purchase agreements with private operators, is considered a state-owned enterprise rather than a government agency, and therefore its purchase of power is not subject to ZPPA regulations.
The renewable energy sector is highly competitive given the diversity of sources, the modular nature of most of the technologies, and the number of project developers.
Manufacturing of components for most renewable technologies involves relatively mature, existing technologies and established industries.
But, for several years these industries have been experiencing global over-capacity and intense competition that has resulted in very thin profit margins, if profits are generated at all.
As a result, the industry continues to experience consolidation, the emergence of increasingly vertically integrated supply chains, and the steady movement of manufacturing firms into project development.
Furthermore, renewable energy markets are in a sharp decline in Europe, and the developers are now looking for new opportunities in emerging markets.
All of this has led to intense interest on the part of the global renewable energy industry and the levels of competition are growing as the bidding progresses.
It is hoped my contribution will make debates and arguments that follow vigorous.
This report is only as good as the many assumptions that have been made, and in order to take the work further, the input of all role players is required. (The author is an electrical consultant)

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