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The cost of power outages to Zambia's manufacturing firms

Ahmed, I; Baddeley, M; Coffman, D; Meikle, J; Oseni, M; Sianjase, G; (2019) The cost of power outages to Zambia's manufacturing firms. International Growth Centre, London School of Economic and Political Science: London, UK.

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Low rainfall, low reservoir levels, almost complete dependence on hydropower and increasing demand for energy resulted in nationwide power outages in 2015 and 2016 that hit Zambia’s manufacturing electricity-dependent firms. The manufacturing sector’s absolute and relative grid energy consumption fell from 2015 to 2016. Firms unable to self-generate enough diesel-fuelled energy were forced to delay production and firms which delayed production lost clients. The power shortages have sparked a call to arms for Zesco, the Zambian power utility, to expand national installed energy capacity and diverse its portfolio of energy supply. In so doing, Zesco has aimed to raise tariffs to cost-recovery levels inclusive of capacity charges so that it can deliver that extra supply: it did so twice in 2017, while seeking to do so again in 2019. At the same time, the Ministry of Finance called a moratorium on further sovereign guarantees from being issued that would be required to contract energy on a public private partnership basis given Zesco’s financial history. We surveyed 146 large manufacturing firms in Zambia’s industrial hubs between April-August 2018 to assess the impact of outages on Zambia’s manufacturing sector. The observed marginal cost of running generators was more than USD 0.25/kWh. A third of respondents said that they would be willing to pay an average increase of USD 0.04/kWh for reliable on-grid energy. The likelihood of a firm that exports being willing to pay more for reliable energy was 0.9. Distrust in Zesco’s ability to deliver reliable energy was a reason for many declining to pay a higher tariff, with a quarter of respondents reporting that they never received notifications of outages or that they received inaccurate notifications. Firms using voltage regulators, capacitors or power surge factor units decreased their chances of damage to inventory or equipment by 50%. Self-generation as an independent variable was statistically significant in determining whether or not production delays occurred, which in turn was associated with loss in clients. 72% of respondents acquired use of a diesel generator, and less than 5% did not use their operational generators. More than 50% of their oldest generators were from 2015 and 2016, the years of the worst outages. Statistically significant predictors of installed self-generation capacity were firm size, how many hours a week a firm manufactured, whether it exported, and whether it belonged to the food and beverage subsector. Statistically significant predictors of the extent to which a firm used its generators were its size, whether it exported, whether it was located in the town of Kitwe and whether it did not belong to the basic metals subsector. The tariff differential for peak and off-peak hours is significantly lower than Zambia’s neighbouring Zimbabwe which is similarly reliant on Kariba North Dam. The differential for manufacturing wages paid at off-peak hours can far exceed Zesco’s tariff differential. We recommend Zesco increase the tariff differential between standard, off-peak and peak hour tariffs to alleviate pressure to build sufficient installed capacity for peak-hour energy, that it offers a premium service to exporters, and rather than subsidising tariffs for the largest consumers of energy, it save those consumers money by using the extra funds raised by charging more costreflective tariffs by investing in and providing them more reliable energy.

Type: Working / discussion paper
Title: The cost of power outages to Zambia's manufacturing firms
Publisher version: https://www.theigc.org/
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment
URI: https://discovery.ucl.ac.uk/id/eprint/10134294
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