Joint UNDP/World Bank Energy Sector Management Assistance Program Activity Completion Report No. 094/88 Country: ZAMBIA Activity: ENERGY SECTOR STRATEGY DECEMBER 1988 A report of the rgy Efficiency and Strategy Unit and the Department of Energy ustry and Energy Department Ministry of Power, ld Bank Transport and Communications hington D.C. 20433 Lusaka .A. Zambia Report of the Joint UNDP/ibMld Bank Energy Sector Management Assistance Program This document has a restricted distribution. Its contents may not be disdosed without authorization from the Government, the UNDP or the World Bank. ENERGY SECTOR MANAGEMENT ASSISTANCE PROCRAM PURPOSE ; The Joint JNDP/World Bank Energy Sector Management Assistance Program. (ESMAP) was started in .1983 as a companion to the Energy Assessment Program, established in 1980. The Assessment Program was designed to identify and analyze the most serious energy probltams in developing countries. ESMAP was designed as a pre-investment facility, partly to assist in implementing the actions recommended in the Assessments. Today ESMAP carries out pl.Je--nvestment activities in 45 countries and provides institutional and poLicy advice to developing country decision-makers. The Program aims to supplement, advance, and strengthen the impact of bilateral and multilateral resources already available for technical assistance in the energy sector. The reports produced under the ESMAP Program provide governments, donors, and potential investors with information needed to speed up project prepar- ation and implementation. ESMAP activities fall into two major groupings t - Energy Efficiency and Strategy, addressing the institutional, financial, and policy issues of the energy sector, including design of sector strategies, improving energy- end-use,. definidig investment programs, and strengthening sector enterprises; and - Household, Rural, and Renewable Energy, addressing the tech- nical, economic, financial, institutional and policy issues affecting energy supply and demand, including energy from tradit.ional and modern sources for use by rural and urban households and rural industries. FUNDING The Program is a major international effort supported by the UNDP, the World Bank, and bilateral agencies in a-number of countties including the Netherlands, Canada, Switzerland, Norway, Sweden, Italy, Australia, Denmark, France, Finland, the United Kingdom, Ireland, Japan, New Zealand, Iceland, and the USA. INQUIRIES For further information on the Program or to obtain copies of the completed ESMAP reports listed at the end of this document, contact: Division for Global and OR Energy Strategy, Management Interregional Projects and Assessment Division United Nations Development Industry and Energy Department Programme World Bank One United Nations Plaza 1818 H Street, N.W. New York, N.Y. 10017 Washington, D.C. 20433 ZAMBIA IIGCY SECTOR STRATEGY DECEMBER 1988 Energy Efficiency and Strategy Unit Industry and Energy Department ACROlINS AND ABRM ATIONS ADB African Development Bank Boe Barrel of Oil Equivalent BTU British Thermal Unit CAPC Central African Power Corporation DOE Department of Energy, Ministry of Power, Transport and Communications DUT Dead Weight Tons ERR Economic Rate of Return ESMAP Joint UNDP/World Bank Energy Sector Management Assistance Program CDP Cross Domestic Product CNP Gross National Product Clh Gigawatt hour IDA International Development Association km Kilometer kV Kilovolt (1,000 Volts) kWh Kilowatthour LPG Liquid Petroleum Gas MW Megawatt MWh Megawatthour NCDP National Commission for Development Planning NCSR National Council for Scientific Research TDAU Technology Development and Advisory Unit (University of Zambia) toe Ton of oil equivalent tpa Tons per annum T?L Tazama Pipelines Limited UNDP United Nations Development Program UNZA University of Zambia ZAFFICO Zambia Forestry and Forest Industries Corporation ZCCM Zambia Consolidated Copper Mines Limited ZES8O Zambia Electricity Supply Corporation Limited ZINCO Zambia Industrial and Mining Corporation Limited ZR Zambia Railways ECHANCI RATE OFFICIAL EXCHANGE RATE SHADOW EXCHANGE RATE 8 Kwacha US$1 12 Kwacha = US$1 1 Kwacha US$0.13 1 Kwacha US$0.08 (March 1988) ENRCMY CONVERSION FACTORS FUEL PHYSICAL UNITS PER toe 1/ Liquid Fuel (metric tons) 2/ LPG 0.92 Gasoline 0.95 Kerosene/Turbo Fuel 0.97 Diesel Oil 0.98 Fuel Oil 1.04 coal (tons) 1.67 Electricity (MWh) 11.6 3/ Biomass Fuels (tons) Firewood 2.84 Charcoal 1.40 1/ 1 toe - 39.68 million BTU = 6.61 Boe 2/ Regular gasoline a 359.6 gallon/mt Premium gasoline - 356.9 gallon/mt Kerosene = 336.6 gallon/mt Diesel a 314.4 gallon/mt Fuel Oil = 278.2 gallon/mt 3/ Converted on a heat equivalent basis. TABL1 OF CONTENTS Page I. INTRODUCTIONV.... 00I0004000000400040000400040000000000004000 1 II. UECUTIVE ............... ............0.40000.00.000000000.2 2.1 Economic Background.............................................. 2 2.2 Energy Resources ............. 000400...0.....0.0..0....0 2 2.3 Energy Strategy Objectives and Constraints............. 3 2.4 Strategic Direction for the Energy Sector.............. 3 2.5 Major Strategic Proposals.............................. 4 2.6 Electric Power Issues and Strategy..................... 5 2.7 Petroleum Issues and Strategy.......................... 7 2.8 Coal Issues and Strategy ............................ . 8 2.9 Woodfuel and Household Energy Issues and Strategy ...... 9 2.10 Renewable Energy Issues and Strategy................... 10 2.11 Conservation and Substitution of Conventional Fuels.... 11 2.12 Energy Policy and Planning Systems..................... 12 2.13 Priority Investment Program............................ 13 Summary of Major Issues and Recommendations................. 15 11. ENERGY AND THE ECONOMY - CURRENT SITUATION AND F CASTS...00 24 3.1 Structure of the Economy............................... 24 3.2 Recent Economic Performance and Strategy............... 24 3.3 Pattern of Energy Supply............................... 25 3.4 Energy Transformation.............................................* 27 3.5 Pattern of Energy Demand............................... 27 3.6 Economic Projections, 1988-2006 ........................ 28 3.7 Energy Strategy Objectives and Constraints............. 29 3.8 Energy Demand Forecasts, 1988-2006..................... 30 3.9 Balance of Payments Implications of Energy Forecasts... 33 IV. ELECTRIC ................... ....................... 35 4.1 Characteristics of the Existing Power System........... 35 4.2 Policy Issues and Options.............................. 39 4.3 Electricity Demand Forecasts 1988-2006................. 40 4.4 Priority Power System Investment Program............... 43 4.5 Power System Planning and Operational Improvements..... 50 4.6 Power Costs and Tariffs. ....................oo.ooooeooo* 53 V. PETsOLEUN ..................s............... ***o**o***ooo ***. 58 5.1 Policy Issues and Options.............................. 58 5.2 Oil and Gas Exploration................................ 58 5.3 Petroleum Consumption and Supply....................... 61 5.4 Petroleum Pricing...................................000 64 5.5 Demand Forecasts.. 0000.004400*0004000000000000000000000 68 5.6 The Tazama Pipeline.................................... 70 5.7 Indeni Refineryo.......................4..............o 71 5.8 Storage, Transport, and Terminal Facilities*..,*...**** 72 5.9 The Economics of Refinery Closure...................... 72 5.10 Potential Refinery Conversion.......................... 74 - vi - VI. OWFL ..............+77 601 Reserveso.............0...*.o.*oe*o*oe...ooo. .o.oooo..o. , 77 6.2 Policy Issues and Options ti.......oon soo.. oo..........o 77 6.3 Recent Production and Saleso a lo.......oeos............ 78 6.4 Current Production.. 00 0 000000000000000000 78 6.5 Market Prospectsoo.eooo. .o..oo.oo..eoo. 00OO** *000 79 6.6 Coal Transport and Storage Requirements..............so 82 6.7 Mine Operational Improvements and Contingency Planning 83 6.8 Long-Run Economic and Financial Cost and Pricesoe..s0o0 84 6.9 Recommended Pricing Structure.....................ooo.. 85 6.10 Investment Priorities..... .oo...eooo0 ooo000 oo0o00e0o0o 86 VTI. MOODVElL AIM UOUSEOLD ENE3 U.o.Yoooo 00000o0 .....o.* 87 7.1 Supply and Consumption Estimates and Forecastst.osooo.. 87 7.2 Prices and Economics Costs o s ts...o.o.o.......ooooo. 91 7.3 Household Energy Policy Objectives..o.oo.o.....o.ooo.o. 94 7.4 Policy I s s u esoo............... ooooosoue00*0000000000 95 7.5 Household Energy Options.oo.o.oo. oo.ooo. oo. ooo...oo 95 7.6 Policy Recommendations.o00o00000o000oo..oo.oo..o.o..*o 101 VIII.B891 licy ................ ...VA... . *.*00 **.0...*............ 101 8.1 Policy O p tions...0.ooo***oooooooooo 103 8.2 Institutionso o.. oooo.oo. oo.o....ooooo.ooo0o0 0o000. 103 8.3 Solar Energy Potentialo................. ........ o .*oo 104 8.4 Solar Water Heatingo............................. ..ooo 105 8.S Solar Fish and Vegetable Drying y i n g+oooo..o..o..oo.o.o. 106 8.6 Long-Term Solar Potentialoooo...ooooooe.o..oo.....o.ooo 108 8.7 Wind Energy.o0000000o00000000 .000000o0oo 0.ooooo00 000 108 8g.8 Biogaso io......oogas.oo.. o.o... ooo.o.oo...o..oo....o... 110 8.9 Geothermal Energyo................ ..........*.......* 111 IX. COEBSRVATION AND SUBSTITUTION OF COUYEUTOoL .U0&.0...... 113 9.1 Policy Issues and Options.............................. 113 9.2 Fuel Substitution in the Copper Industryo000.00000....o 115 9.3 Fuel Substitution in Industry and Commerce............. 116 904 Energy Conservation in the Copper Mining Industryo..... 119 9.5 Energy Conservation in Industry and Commerce........... 119 9.6 Energy Conservation at NCZ and CLilanga Cement...0... . 122 9.7 Recommendations on Energy Substitution and Conservation in Industry............................... 124 9.8 Energy Conservation in Road Transport.................. 125 X. ENERGY PLA&UNTI SYSTUSO AND INSTITUTIONAL CAPABILITIESo...... 131 10.1 Energy Institutions and Current Planning Systemso...... 131 10.2 Recommendations ......................o.e..o..ooo.oo..... 132 10.3 Operational Energy Institutions.......................O 134 TABLES 2.1 Priority Energy Sector Projects, 1989-93....................... 13 2.2 Potential Energy Sector Projects, 1989-93...................... 13 2.3 Long-term Energy Sector Projects, 1994-2006.................... 14 3.1 Sectoral Composition of CDP, 1985985oooo.o.ooo..oo.oo.......... 24 - vii - 3.2 WB/DOE Energy Strategy Study - Energy Balance for 1986......... 26 3.3 Forecast Final Energy Consumption by Sourceo................,... 31 3.4 Forecast Final Energy Consumption by Sector.................... 31 4.1 Installed Power Capacity and Estimated Firm Energy Capability, 98................................. 36 4.2 Electric Energy Production and Bulk Supply on the Interconnected System 1983-84 to 1987-88....................... 38 4.3 Simultaneous Maximum Demand on the Zambian Interconnected 4.4 Forecast Power System Loads at Bulk Supply Points at Time of System ....... ................................................. 40 4.5 Forecast of Electric Energy and Maximum Power Demand 1988-2006 ..................... .................... 42 4.6 Components and Costs of the Priority Lusaka Power Distribution Project ................. *0.00@0.00@00 .....~............ 0000000047 4.7 Components and Costs of the Priority Copperbelt Sub-Transmission Projects...................................... 48 4.8 Co3ts of New Electricity Connections during the Period 1988-2006 (US$ milo).....................49 4.9 Annual Cost of Electricity Distribution Expansio., with Alternative Standards and Customer Densitieso.................. 50 4.10 Electricity Tariffs for Selected Consumer Croups............... 54 4.11 Average Revenue and Costs of Isolated Diesel Systems........... 54 4.12 Estimated Long-Run Economic Costs of Power and Current Average Revenues..,............................................ 56 5.1 Domestic Market Sales of PetroleumFuels............,.......... 62 5.2 Petroleum Product Consumption and Exports, 1986................ 63 5.3 Petroleum Product Consumption and Exports, 1987*************................ 63 5.4 Petroleum Product Financial Costs and Prices, 1987............. 64 5.5 Kerosene and Gas Oil Economic Costs and Wholesale Prices, 1987 65 5.6 Premium Gasoline and Fuel Oil Economic Costs and Wholesale Pricest 1987.00..... . ...................... ........... 65 5S7 Prices and Duties on Kerosene and Gas Oil...................... 66 5.8 Forecast Consumption of Petroleum Products under Alternative GDP Growth Scenarios... 0....0000...00.0..0. .................... 68 5.9 Net Present Value of the Costs of Alternative Petroleum Supply Arrangements. ................. 74 6.1 Coal Production, Sales and Prices (1980/81 - 1987/88).......... 78 6.2 Production Capacity at Maamba Colliery ........................ 79 6.3 Coal Production by Crade Quality ............................... 79 6.4 Annual Forecast Coal D dm a n d 80 6.5 Rail Transport of Coal in Base Case Peak Demand Year (1992/93) .0.0..**......... ...0000000000000000000000000000 83 7.1 Regional Distribution of Population and Forests***ests**.*****. 88 7.2 Estimated Sectoral Woodfuel Consumption, 1985. .o******.*******. 89 7.3 Base Case Woodfuel Demand Forecaste.............................O 91 7.4 Puelwood Prices in July 1983............................o.r 92 7.5 Retail Prices of Charcoal per Large Bag...ag.0................. 92 7.6 Index of Nominal and Real Charcoal Prices in Lusaka............ 93 7.7 Charcoal Prices for Various Quantities in Lusaka, January 198600...................................... .000 93 - viii - 7.8 Estimated of the Composition of Charcoal Prices in Lusaka, September 18 .......................... 94 7.9 Charcoal Consumption with & without Improved Stoves ves......... 98 7.10 Equivalent Monthly Costs of Alternative Household Cooking Device/Fuel Combinations in Lusaka, 1988....................... 100 8.1 Global Sol4r Radiation and Rainfall Values in Zambia biao....... 104 8.2 Fish Catch, 1985 ... .................................... 106 9.1 Financial Cost of Energy from Various Fuel Sources Compared on the Basis of Thermal Value, at Representative Efficiency of Use and at Prices as oi January 1988 114 9.2 Major ZCCM Petroleum Product Consumers......................... 115 9.3 Fuel Substitution Potential in Companies with Diesel Fired Boilr/ lraes.s / F u r naec es* ...... 117 9.4 Fuel Substitution Savings in Companies vith HFO/LFO Fired Boilr/ lraes.. s /040000 u r n a c es0*6****Oo000 118 9.5 Installed Industrial Process Heating Units.. 120 9.6 Summary of Energy Saving Opportunities at Six Audited Plants... 121 9.7 Kapiri Class Products Plant Analysis of Comparable Energy Performance, 1986 and 1987.. 123 9.8 Estimated Fuel Consumption blr Type of Vehicle, 1986*.oo........ 126 9.9 Level and Composition of Transport Fuel Prices, Lusaka 1988.... 127 9.10 Excise Duty on Gasoline and Diesel Oil... 127 9.11 Comparative International Fuel Prices, February 1987 .......... 128 APP-MIC'S 3.1 Forecast Energy Balances for 1996 and 2006, Base Case, Low Growch, and High Gr owth . 135 3.2 Energy Demand Forecasts.... .o...........e.. . .. . . ........ 141 4.1 Electric Energy and Power Export Potential...*00600*00000000... 146 4.2 ZESCO Electricity Tariffs, January 1, 1988 .............. ...... 152 4.3 ZESCO Financial Forecasts 1988-2006... 154 4.4 Estimates of Financial Cost of Electricity Supply by Diesel.... 157 4.5 ZESCO Long-Run Marginal Costs of Supply........................ 159 5.1 Cost-Benefit Analysis of Refinery Closure.o s ur..***............ 162 5.2 The Economics of Adding a Mild Hydrocracker to the Ndola Refinery........................... . ...........***..~.*.: ...... 168 7.1 Replacement Cost of Plantation Wood for Charcoal Productionoo. 173 8.1 Cost/Benefit Analysis of Renewable Energy Technologieso........ 175 MAP World Bank Map No. 20984-R. I. INTRODUCTIOM This report outlines the first comprehensive energy strategy for Zambia. It identifies a priority energy sector investment program for 'S.he period 1989-93, reflecting the current economic situation, the condition of the energy supply systems, and the most pressing needs of energy consumers. The report also recommends a set of energy policies and technical assistance activities designed to facilitate the achievement of the energy strategy's objectives. It is issued at an important juncture in Zambia's economic de- velopment. Investment resources and skills are, and will remain in short supply. With a large overhang of debt, foreign exchange will be extreme- ly scarce. However, the persistent decline in Zambia's terms of trade may be over, or at least moderating, if the recent improvement in world cop- per prices is maintained. Zambia's agriculture and manufacturing indus- tries show signs of achieving higher productivity and increased exports, on which the future of the country depends. Hopefully, the energy strate- gy will help to achieve the long-awaited economic recovery. The major part of the report was dtafted in Zambia by a joint team of Zambian energy planners, international energy consultants and World Bank staff. Further work was undertaken at the World Bank in Washington, principally to verify the main conclusions with experts know- ledgeable on Zambia's energy sector and those of neighboring countries. The Zambian team members were drawn from the Department of Energy of the Ministry of Power, Transport and Communications. The international energy consultants were funded by the Swedish International Development Agency (IDA), through the joint UNDP/World Bank Energy Sector Management Assistance Program (ESMAP). The Zambian team was led by Mr. Dominic Mbewe, Director of the Department of Energy. He was assisted by Mr. Wilfred Serenje (Energy Planner), Mr. Collins Konayuma (Conservation and Substitution Engineer), Mr. Silvester Hibajene (Household and Renewal Energy Specialist) and Mr. Renato Ezban (Energy Planner and Computer Specialist). The ESMAP team was led by Mr. Robin Broadfield (Energy Economist) and consisted of the following consultants: Mr. Fred Thackeray (Energy Economist); Mr. John Stocks (Mining Engineer); Mr. Robert High (Petroleum Refinery Specialist); Mr. Harald Berg (Power System Economist); Mr. Jean-R&n6 Leidner (Renewable Energy Specialist); and Mr. Bjorn Gildestad (Transport Energy Economist). Mr. Eric Daffern (Principal Energy Specialist) and Mr. Jack Warren (Senior Petroleum Geologist) represented the World Bank. Ms. Pauline Griller (Staff Assistant) was responsible for word processing in Zambia, and Ms. Paula Earp (Staff Assistant) in Washington. The team members wish to express their gratitude for the exten- sive assistance received from individuals and organizations in the Zambian energy sector, without which the production of this report would not have been possible. - 2 - II, *8KCUTIVU SUMMARY 2.1 Economic Background The Zambian economy was built largely on the production and ex- port of copper, which, for many years, made the country grow and pros- per. GNP per capita rose steadily from US$400 in 1970 to over US$650 in 1981. Copper sales earned substantial quantities of foreign exchange with which to buy foreign capital and consumer goods. Consequently, the economy became highly open, with imports and exports equivalent to nearly 502 of GDP. In 1975, a persistent decline in the world price of copper set in. Over the next ten years, its real price fell by over 60%. Over the same period, Zambian copper ,roduction declined from a peak of 713,000 tons in 1976 to less than 480,000 tons in 1985. As a result, real export earnings fell by two-thirds and imports contracted sharply, although heavy borrowing cushioned some of the fall. From its 1981 peak of US$650, GNP per capita fell to less than US$400 in 1986. In 1988, Zambia is struggling to recover from this long period of economic decline. With investment down to less than 10% of GDP, a de- valued currency, and scheduled debt payments larger than total export revenues, the recovery process will inevitably be hard and long. The ob- jective of this energy strategy is to ensure that Zambia's energy sector makes the maximum possible contribution to that process. 2.2 Energy Resources Zambia is fortunate in being well-endowed with energy re- sources. Ita woodlands and forests produce over 20 million cubic meters of wood annually (contributing 66Z of the nation's total energy needs), although wood demand exceeds supply in some areas. It has over 1,600 MW of installed hydroelectric generating capacity, providing another 13% of energy needs. Proven coal reserves exzeed 30 million tons, and satisfy 91 of energy demand. The only major energy import is petroleum, which accounts for about 10% of total imports and satisfies 12% of energy demand. Zambia's economic problems have had two major implications for the energy sector. First, they have arrested the gro th in energy con- sumption, leaving many of the energy supply systems vith excess capacity. For example, demand for electric energy is nearly 20% belw -cdpacity, coal production is at least 100,000 tons pec year below potential, and the oil pipeline and refinery are running at about 60% of capacity. Second, economic difficulties have starved the energy sector of the foreign exchange required for essential maintenance and new capital investment. As a consequence, the condition of the power supply system -3- has deteriorated, and subtransmission investment has lagged behind the changing pattern of demand. The oil pipeline has corroded, partly from poor management and inadequate maintenance. Coal output fell for many years, until a recent major rehabilitation program arrested the decline. Correcting these problems at least cost is one of the major is- sues in the energy sector. A second and related major issue is how to make better use of the excess capacity once the supply systems are re- habilitated, particularly to ease the burden of energy imports on the balance of payments. A third major issue is how to arrest the localized depletion of Zambia's woodfuel resource, the primary source of household energy supply. 2.3 Energy Strategy Objectives and Constraints The agreed objectives of the energy strategy are to: (a) ensure the provision of adequate and reliable energy supplies, at least cost, to the productive sectors of the economy, on which economic recovery depends; (b) minimize net imports of energy by substituting lower-cost do- mestic fuels for imports and promoting economically-justified energy exports; (c) satisfy the basic energy needs of the population; (d) protect the environment; and (e) ensure the long-term viability of the organizations responsible for energy production and supply. With a large overhang of foreign debt, depressed incomes, and low sav- ings, this must be done with very limited investment resources. Assuming energy takes its traditional share of 10-152 of total public investmezt. and assuming public investment averages about US$200 million per year for the next five years (which is about the maximum that seems feasible), public energy sector investment can average no more than US$20-30 million per year. 2.4 Strategic DirecFion for the Energy Sector The energy strategy is focussed on the next five years, 1989- 93, when critical decisions must be made to foster economic recovery in a situation of resource scarcity. The strategy seeks to avoid major risks, such as failure of a critical energy supply system--a power station, the oil pipeline or the coal mine, for example. The strategy is conservative in terms of investment expenditure, because investment resources will be - 4 - very scarce. It avoids large-se2le, speculative investments, and empha- sizes making better use of existing resources. The main features of the strategy are: (a) avoidance of investment in new energy supply facilities which, due to the existence of surplus capacity, are not needed; (b) an emphasis on high-return investments in the rehabilitation and reinforcement of existing supply capacity and systems; (c) minimization of energy imports through efficiency measures and the substitution of petroleum by indigenous energy resources; (d) maximization of economically-justified energy exports; (e) greater efforts to improve the management and operational effi- _cency of the energy supply organizations by better training, better rewards, and use of outside expertise, where necessary; and (f) the establishment of effective systems and capabilities for strategic and contingency planning within the energy supply or- ganizations and their major customers, and the creation of a mechan)sm to coordinate and systematize the process of national energy planning and policy review. 2.5 Major Strategic Proposals The major strategic proposals for each energy subsector are summarized at the end of this Chapter. From amongst these, the following strategic energy sector priorities can be highlighted: (a) selective repairs to the Kafue Gorge power station and rehabil- itation of the Victoria Falls power station; (b) reinforcement and rehabilitation of the electricity subtrans- mission and distribution systems serving Lusaka, Ndola and Kitwe, to increase access to poker supply and reduce the risk of major power outages in these larger cities; (c) completion of committed power system extension projects; (d) rehabilitation of the Tazama oil pipeline and the strengthening of its management and maintenance procedures, so as to reduce the risk of a major pipeline failure, which would cause serious environmental damage to Tanzania or Zambia and interrupt critical supplies of petroleum products; - 5 - (e) rehabilitation of the Indeni petroleum refinery and investment in measures to reduce refinery fuel use and loss; (f) energy audits and investments to increase the efficiency of energy use in industry, commerce and transport and to promote the substitution of indigenous electricity and coal for oil; (g) a large-scale program to produce and market improved charcoal stoves, to reduce the pressure on woodfuel supplies, parti- cularly around the major urban centers; (h) increases in the price of imported diesel oil to reflect the high scarcity value of foreign exchange; (i) increases in electricity tariffs to cover ZESCO's financial needs and to better reflect the economic costs of electricity supply; (j) preparation of contingency plans to cope with the possibility of accidents interrupting vital energy supplies, for example coal (possible dragline failure), and oil (the lack of refinery storage in the event of a pipeline failure); (k) when urban power transmission and distribution facilities have been strengthened, acceleration of the rate of household elec- tricity connections, coupled with term financing arrangements for connection costs, house wiring and appliance purchase; and (1) improved operational performance by the major energy supply organizations and better overall energy sector planning. 2.6 Electric Power Issues and Strategy Although domestic electricity consumption is forecast to rise during the 1990s, previously large exports to Zimbabwe have declined, and will probably remain well below their peak of the mid-1980s. About the year 2000, power demand from ZCCM,, ZESCO's largest domestic customer, will start to fall as copper production declines. Existing electric power generating capacity should therefore be sufficient to satisfy domestic electricity demand well into the next century, even if the economy averages 3.51 GDP growth per year. No investment in new power generating capacity is foreseen until after the year 2006. Although no investment will be needed in new generating facili- ties, the existing generating stations are in need of selective running repairs and equipment replacement. Most urgent is repair of the liquid chillers and other ancillary equipment at the Kafue Gorge power sta- tion. A major failure there would cause serious power shortages. Imme- diate electrical, mechanical, and civil engineering diagnostic work is needed, followed by a modest repair program, probably costing about US$2 - 6 - million. Also a priority are civil works and rehabilitation at the Victoria Falls power station (US$2-3 million). Less urgent are minor investments in the northern hydro system (US$0.2 million). Establishment of a generation and transmission spares emergency fund of at least US$100,000 is recommended. Existing 330 kV transmission capacity will be adequate to handle forecast power loads up to 2006, with the possible exception of the Kabwe-Kitwe link in the late 1990s, if demand growth in the Copperbelt equals or exceeds the high growth scenario. While growing domestic demand for electricity is not stretching generation and bulk transmission capacity, it has overloaded the sub- transmission and distribution system serving Lusaka. Repair and rein- forcement of several key substations is urgently needed. Work should begin very shortly on the construction of a new 132 kV ring around Lusaka to replace the overloaded 88 kV system. Including associated substation and subtransmission investments, the first phase of this program, known as the Lusaka Distribution Project, will cost about US$29.9 million. In addition to Lusaka, about US$10.6 million of investment is needed to replace obsolete switchgear and to reinforce the power networks around Ndola and Kitwe. Concessionary finance has been obtained for two power transmis- sion extension projects: (a) construction of a new 132 kV line from Lusiwasi to Msoro and a new 66 kV line from Chipata to Lundazi, followed by a new 132 kV line from Msoro to Chipata (US$19 million); and (b) elec- trification of the Mkushi Farming Block (US$25 million). As these funds are committed, the two projects should proceed to completion. In the major urban centers of Lusaka and the Copperbelt, the other strategic priority in the power subsector is to accelerate the pace of household connections. To keep pace with urbanization, ZESCO needs to complete about 7,000 new connections per year, but recently has been managing less than 3,000 per year. As a result, the proportion of urban households with electricity is falling, and there is a backlog of appli- cations. Once the necessary transmission and distribution capacity has been installed, investment in new distribution lines and residential connections needs to be stepped up, and ways found to reduce the high up- front charge for house wiring and connection--up to K5,000 (US$625) per household--and the high cost of electric cooking equipment. The most promising option may be to introduce a term payment scheme, whereby the customer can pay for both connection and equipment by installments on the electricity bill. Efforts must also be made to reduce the cost of dis- tribution expansion, for example, by making greater use of overhead lines. To cover ZESCO's current financial costs, electricity tariffs need to be raised from an average of 5 ngwee/kWh (US$0.006/kwh) to 8 ngwee/kWh (US$0.01/kWh) in early 1988 prices. To finance the recom- - 7 - mended five-year power system investment program, average tariffs will need to rise further in real terms to about 11 ngwee/kWh (US$0.014/kWh) by 1993. The only alternatives to higher tariffs are Government sub- sidization of ZESCO, which is infeasible on budgetary grounds, inadequate provision for future investment, or a further deterioration in its day- to-day operational performance. The required tariff increase will be less if ZESCO can improve its financial performance and efficiency. Considerable scope for im- provement exists, including streamlined metering and billing arrange- ments, a new billing system, and improved debt collections. Engineering management and planning skills are in short supply and should be strengthened. Terms and conditions of professional staff need to be im- proved to attract and retain good management and technical staff. 2.7 Petroleum Issues and Strategy The immediate objectives with respect to petroleum products are to improve the security of supply and to raise the efficiency of supply systems. Coupled with these objectives is the special requirement, because petroleum is wholly imported, to efficiently minimize imports and the call on the country's scarce earnings of foreign exchange. There is no foreseeable requirement to invest in new supply capacity. Even on the high growth scenario, forecast petroleum demand of 660,000 tons by 2006 is below the capacities of the Tazama pipeline and the Indeni refinery. The current system of importing reconstituted crude via the Tazama pipeline and reprocessing the import mix at the Indeni refinery is the least-cost supply option, and should not be changed. The discounted present value of the costs of the alternative--closing the refinery and importing batched white products by pipeline and rail--is over US$50 million higher. The following measures are required to improve security and ef- ficiency of supply: (a) rehabilitation of the Tazama pipeline, on which detailed en- gineering has started (US$41.2 million in 1989-93, followed by US$30-40 million in 1994-2006); (b) scaff training at Tazama Pipelines Limited, to ensure there is no recurrence of the problems to be remedied under the rehabil- itation program, anc to enhance operational efficiency; (c) implementation of the proposal to install strategic storage at the Indeni refinery as a safeguard against possible interrup- tions of supply (US$3 million); and -8- (d) scheduled maintenance and critical repairs and improvements to the Indeni refinery, which will reduce the level of refinery fuel use and loss from 7% to about 5.5X. The priority measures to minimize foreign exchange expenditure on petroleum imports are to: (a) continue the present commercial and credit arrangements for pe- troleum supplies, including the innovative practice of im- porting reconstituted crude, compriaing the correct balance of products required to meet demand; (b) develop profitable export sales through more aggressive market- ing and the acquisition of more road tankers (USs 2 million); (c) realign the wholesale prices of petroleum products to reflect their economic costs. In particular, increase the price of diesel oil to reflect the scarcity value of foreign exchange so that: (i) cross-subsidization of the middle distillate pro- ducts by gasoline is reduced; and (ii) there are stronger in- centives for conservation in the use of automotive diesel; and (d) promote petroleum conservation and the substitution of in- digenous fuels in the industrial sector through an active pro- gram of industrial energy audits, followed by the provision of finance for energy efficiency and substitution investments. Consideration should also be given to further petroleum promo- tion, if such measures appear likely to produce a significant response from the private sector. The first step should be to thoroughly analyze existing exploration data. Expenditure of up to US$6.6 million, phased over several years, could be justified. 2.8 Coal Issues and Strategy With the completion of the Maamba Colliery rehabilitation pro- gram, financed by ADB/IDA, the capacity of Maamba Colliery is now 650,000 tons per annum (tpa). This could be raised to about 700,000 tpa by relo- cation of the main drive of the ropeway, which transports the coal to the railhead at Masuku, and the addition of more buckets. Estimated coal demand in 1988-89 is about 484,000 tons. Demand could reach a maximum of 568,000 tons in 2002 under the high growth scenario. No major investments are therefore needed in raising coal sup- ply capacity. However, measures should be taken to maintain and improve efficiency. An analysis should be done of the costs and benefits of contingency investment to prevent the possible lengthy disruption of out- put which could occur if a major component of the walking dragline used for stripping the overburden was to fail. If justified, the investment could be up to US$1 million, including the purchase of essential parts. -9- It is also important to ensure that adequate foreign exchange is avail- able to cover the purchase of necessary routine spares and replacement machines, as these needs arise. To guarantee high standards of colliery maintenance, it is ..- sential to ensure the availability of sufficient, adequately skilled personnel. This requires competitive compensation and a training and work experience program for Zambian nationals, which should be supported by technical assistance from experienced expatriate staff. Rail transport to consumers is a persistent coal supply bottle- neck. In addition to investments in additional locomotives and other measures to improve the railway's capability and efficiency, it is sug- gested that greater use be made of the coal stocking facilities of major coal customers, such as Chilanga Cement and Nitrogen Chemicals of Zambia (NCZ). These companies could build up stocks when the railway is able to deliver to ensure availability of coal when deliveries fall short. Two changes should be made in coal pricing. The first is to raise the prices to domestic consumers at least to the financial cost of coal production (K447/ton, or US$55.9/ton). The second recommendation, which will assist coal marketing, is to adjust the differential between prices for the grades of coal marketed to better reflect BTU content and the handling and transport cost of coals with high ash. Household consumer acceptability tests should be run on smoke- less coal briquettes. If the results are positive, the financial and economic feasibility of commercial briquette production should be assessed. 2.9 Woodfuel and Household Energy Issues and Strategy Woodfuel, which is used predominantly as a household cooking fuel, is the country's single largest source of energy. In the rural areas, it is used as firewood; in the urban areas, it is used mainly in the form of charcoal. Nationally, there is no shortage of woodfuel supply. HSwever, around the principal towns in the Copperbelt, Lusaka Province, and Southern Province, tree-cutting for charcoal production, coupled with agricultural land clearing and woodfuel demand, have created worsening problems of local deforestation. Improved wood resource management and measures to increase the efficiency of charcoal production and use are the top priorities. The promotion of community plantations and agroforestry are also proven lower-cost supply solutions. Improved charcoal-burning stoves developed by UNZA typically offer 30% savings in charcoal consumption and a payback period of 2-3 - 10 - months. The impact on woodfuel consumption of a successful program to disseminate these or similar stoves would be dramatic. If, by 2006, such stoves are used by 90% of urban households, annual charcoal consumption will be reduced from an estimated 1.8 million tons to 1.3 million tons, or by 27X. With assistance from the UNDP/World Bank ESMAP Household Energy Strategy project it is recommended to: (a) develop a program for the large scale production, testing and dissemination of improved charcoal stoves; (b) encourage the adoption of more efficient charcoal kilns, through demonstracion and training; (c) undertake in-depth studies of the financial and economic com- petitiveness of electricity as a substitute for charcoal in urban household cooking; (d) devise measures to overcome the present financial and other hurdles which have reduced the rate of household electricity connections to a trickle. Also, consider what measures %:an be developed to assist potential consumers to finance connection charges and the purchase of electric appliances; (e) develop a structure of electricity tariffs reflective of the economic and financial cost of supply which will facilitate household electricity use; and (f) test the consumer acceptability of coal briquettes for urban household cooking and, if the results are positive, analyze the financial and economic prospects for their commercial-scale production as an indigenous substitute for charcoal. As elements of a complementary effort to preserve wood stocks and encourage reforestation: (a) increase stumpage fees to cover the economic costs of supply, as incurred by ZAFFICO and the Forest Department; (b) strengthen natural wood resource management through more effc- tive extension, financed by stumpage fees on commercial wood cutting in natural woodland; and (c) encourage community and private sector tree planting, without substantial Government funding. 2.10 Renewable Energy Issues and Strategy Although Zambia has considerable renewable energy potential, particularly in the field of solar energy applications, efforts to pro- - 11 - mote appropriate renewable energy technologies have been limited and spasmodic. Good levels of insolation through the country suggest there is scope for the promotion of solar fish and crop drying. The former would substitute for increasingly scarce wood, which is used extensively for fish smoking, and both could reduce losses due to spoilage. Wind and biogas energy have limited current economic poten- tial. As technologies improve over time, the former could be economic for water pumping, as a substitute for manual labor and for diesel pump- ing in isolated areas, and the latter perhaps for rural household cook- ing. Technical assistance is recommended to promote technology tr-nsfer and its application in solar fist and crop drying. 2.11 Conservation and Substitution of Conventional Fuels Cost reductions, energy savings and the minimization of foreign exchange expenditures are the triple objectives of energy conservation and substitution policy. Appropriate energy pricing is a pre-requisite to achieving improved efficiency of energy use. The aim should be to establish an energy price structure under which financial costs of supply are covered and prices reflect economic costs. Economically and financially viable opportunities exist for both energy substitution and energy conservation. In the copper in- dustry, the scope for substituting coal for fuel oil is technically con- strained. However, there is a significant possibility at the Nkana smelter. After installation of the planned new oxy-fuel furnace, coal probably can be substituted for 18,000 tpa of fuel oil. The investment cost is modest-about K16 million (US$2 million). There is also scope for further substitution of electric power for diesel in underground traction. In industry, the Department of Energy's audit program has begun to identify opportunities for substituting electricity and/or coal for fuel oil and diesel. Several such opportunities offer the possibility of comparatively small investment costs and rapid pay-backs. Similar oppor- tunities have been identified by the audit program for energy-saving pro- jects. Action is needed to ensure that the economic potential for in- dustrial energy substitution and conservation is realized. A program of technical assistance in energy conservation and substitution is recom- mended, to provide skills and resources to the Department of Energy, strengthening the activity begun by the Department's own staff. It is estimated that about two man-years of consultant technical assistance is required at a cost of about US$300,000. Its objective would be to iden- - 12 - tify a package of high return energy conservation and substitution in- vestments, ready for feasibility analysis and presentation to potential donors. On the basis of indicative estimates prepared by the Department of Energy, the package of recommended investments might be in the range of US$20-25 million, offering annual cost savings of about US$6-9 mil- lion. In road transport, the task of improving energy efficiency is a difficult one. Higher diesel oil prices would be one useful step. On the basis of a preliminary analysis, other tentative recommendations for policy action in this fic.d are: (a) increase expenditure on road maintenance. This would both im- prove the energy efficiency of road transport and enhance road safety. Finance could come from higher fuel excise duties; (b) regularly inspect all Government vehicles to check against poor maintenance and excessive fuel consumption. This requires reac- tivation of the Preventive Maintenance Section at the Mechanical Services Department; (c) set minimum fuel efficiency standards for all new vehicles; and (d) study the scope for developing back-haul freight traffic, and identify ways of promoting it. If the scope proves to be con- siderable, back-hauling could produce substantial savings in transport fuel consumption. 2.12 Energy Policy and Planning Systems Coordination between the various Governmental, parastatal and semi-private organizations active in the energy field is relatively weak. There is no adequate institutional mechanism for designing and im- plementing a coherent strategy for the energy sector, and for systemati- cally addressing the major energy policy issues. To overcome these weaknesses, and to promote effective sectoral policy coordination and planning, it is recommended that the Energy Development Committee, which oversaw preparation of the energy chapter of the Fourth National Development Plan, be retained as a permanent energy policy coordinating body. The Committee would be representative of the major ministries and parastatal companies concerned with energy. Chaired by the Permanent Secretary of the Ministry of Power, Transport and Communications, its membership would consist of senior representatives of the Ministry of Mines, the Forestry Department, the NCDP, the NCSR, ZIMCO, ZESCO, ZCCM, and perhaps ZIMCO's constituent energy companies. It would meet at least quarterly, and be supported by a Secretariat drawn from the Department of Energy (DWE) and ZIMCO. - 13 - Its functions would be to: (a) oversee the preparation and im- plementation of the national energy strategy, the annual energy plan and rolling five-year investment plan; (b) review and advise on all signifi- cant energy capital expenditures; and (c) advise on all energy policy is- sues, including price levels and structures. In order to exercise its secretariat functions efficiently, the DOE must be recognized as the coordinating Government body for energy. Its staff needs to be strengthened by the addition of a Chief Economist, Chief Technical Officer and Senior Financial Adviser. 2.13 Priority Investment Program The priority energy sector investment program required to sup- port the proposed energy sector strategy over the 1989-93 period totals about US$143 million and is summarized in Table 2.1 below. Table 2.1: PRIORITY ENERGY SECTOR PROJECTS, 1989-93 Project Estimated Cost (USS mTIlion, end-1987 prices) Tazama Pipeline Rehabilitation, Phase 1 41.2 Power Generation Rehabilitation 5.0 Lusaka Power Distribution, Phase 1 29.9 Ndola/KAtwe Rehabilitation/Reactive Comp. 11.7 Lusiwasi-Chipata-Lundazi Power Trans. 19.0 'kushi Farming Block Electrification 25.0 Indeni Refinery RehabilItatIon and EfficIency 6.0 Strategic Petroleum Storage 3.0 Petroleum Road Tankers 2.0 TOTAL 142.8 Table 2.2 lists two potential projects that could be added to 1;11e program if further analysis proves they are justified and funds are available. Table 2.2: POTENTIAL ENERGY SECTOR PROJECTS, 1989-93 Project Estimated Cost CUSS million, end-1987 prices) Industrial Energy Conservation/Substitution, up to 20.0 Petroleum Exploration Promotion, up to 6.6 TOTAL 26.6 - 14 - Priority energy sector investments for the longer term (1994- 2006) that have been identified at this stage are set out in Table 2.3 below. These exclude expenditures on routine maintenance and rehabilita- tion not yet identified. Table 2.3: LONG-TEiRM ENERGY SECTOR PROJECTS, 1994-2006 Project Estimated Cost (USS milion, end 1987 prices) Tazama PIpelIne Phase II and II1 35.0 Lusaka Power Distributlon, Phase I1 14.6 Kitwe and Ndola Power Subtransmission 16.5 Pensulo-Samfya Power Interconnectlon 10.5 Power Subtransmission Expansion 50.7 Power Distrlbution Expansion up to 136.5 Coal Exploratlon 2.0 TOTAL 265.8 Sunary of Major Issues and Recoimendations Issues Objectives Recommendations Responsible Agency Priority A. E nergy Sector Investment Program 1. Resources available for capi- Use the limited resources avail- Devote available capital re- Ministry of Power Transport High tal investment In the energy able for investment in the energy sources to high-return projects and Communications sector will be limited by the sector on projects that will that rehabilitate and reinforce Ministry of Mines shortage of foreign exchange generate the highest possible existing energy supply systems Ministry of Lends and and low domestic saving. As- economic return. and make more efficient use of Natural Resources suming 10-15J of public In- energy. Improve the operational National Coaission for vestment is devoted to ener- efficiency of energy supply or- Development Planning gy, sector Investment can ganizations to reduce supply ZlD probably average no more than cost. Systematize energy plan- USS20-30 million for the next ning to improve decision-making. five years. S. Electric Power 1. Kafue Gorge power station is Return the station to good opera- Undertake selective repairs to ZESCO High In need of minor repair In ting condition to reduce the pos- key ancillary equipment (chil- order to operate re lably. sibility of operational problems. lers, pumps, etc.); check condi- tion of 300 kV cables and water Intakes and repair as neces- sary. Complete critical spares Inventory. 2. Victoria Falls power station Return Victoria Falls to satis- Overhaul turbines and generators ZESCO Med-High has operational problems be- factory working o4der to maximize and replace power cables, switch- cause of neglected electri- generation at this run-of-river gear and control equipment In the cal, mechanical and civil station and conserve water at A station; Install surge arres- works repairs. Kariba. tors on the generator connections in the 8 station; rectify the vi- bration problem in the C station, probably by increasing turbine submersion; rehabilitate water Intakes. Issues Obiectives Recommendations Responsible Agency Priority 3. Critical generation and Provide sufficient spares to en- Establish a spares replacement ZESCO High transmission spares are not sure prompt replacement of criti- fund of at least USS100,000 per always available. cal components in the event of year that can be drawn on at the failure. discretion of the Oivisional M4anager, Generation and Transmis- s ion. 4. The capacity of the subtrans- Ensure that the subtransmisslon Begin construction of a 132 kV ZESCO High mission and distribution and distribution system serving ring around Lusaka, to replace system serving Lusaka Ie in- Lusaka has adequate capacity to the over-loaded 88 kV lines; re- adequate for current and satisfy viable demand. habilitate and reinforce key sub- forecast loads. stat ions. 5. Power distribution in the Provide reliable power supply to Replace distribution switchgear ZESOO Ned-High Copperbelt is becoming pro- power consumers In the Copper- and cables that have exceeded gressively less reliable be- belt. their useful life and reinforce cause switchgear and cables overloaded substations and feeder have exceeded their useful cables, t lives. 6. The average cost of adding a Establish optimal englneerin., Review existing distribution and ZESCO High new power customer in the standards for distribution engi- connection design standards and Lusaka area has been about neering and connections that ml- adopt new lower-cost standards USS4,000. This high cost nimize costs at acceptable risk. that are consistent with safe makes expansion of the power operation of the power sysiem. system difficult to justify economically and deters new consumers, because of high connection fees. 7. ZESCO's coamercial operations Achieve industry standard levels improve meter reading and ZESCO High (metering, billing and col- of efficiency in ZESCO comnercial testing; streamline billing lections) are less efficient operations. systems; improve collections than they could be, which through late payment surcharges raises the financial cost of and prompt disconnection of non- power supply. payers. Issues ObJectives Recommendations Responsible Agency Priority 8. ZESCO cannot recruit or re- Recruit and retain a sufficient Improve ZESOO salaries and terms ZESCO High tain sufficient qualified number of skilled personnel to and conditions so that they are ZiNCO staff for efficient operation ensure efficient operation of the at least competitive with those of the power system due to power system. of other parastatal companies. inadequate salaries and con- ditions of employment. 9 Power tariffs are insuffi- Set power tariffs to fully cover Raise average tariffs to about ZESCO High cient to cover ZESCO's cur- ZESCO's current financial costs, K0.08AkWh in end 1987 prices and ZiNCO rent financial costs and to including debt service, and to adjust the tariff structure to Prices and Incomes finance priority power system reflect economic costs. Plan better reflect economic cost. Coamission Investents. Their structure tariff adjustments that will pro- Plan future tariff Increases that does not reflect the economic duce sufficient revenue to fi- will cover the cost of future in- costs of power supply. nance future operating and debt vestments and operational im- service requirements, without re- provements. sort to government subsidy. 10. Power tariffs are not ad- Establish a tariff adjustment Introduce an automatic annual or ZESCO High Justed promptly, even when mechanism that results in prompt semi-annual tariff review system fully justified by higher adjustments when financially and fixed adjustment date. costs. justified. C. Petroleum 1. The Tazami oil pipeline Is Return the Tazama pipeline to Replace most severely corroded ZIHOO High leaking substantial and in- reliable operating condition. pipeline sections, strengthen TPL creasing quantities of petro- management of TPL and improve leum products, at oonsidera- operator training. ble environmental and finan- cial cost. 2. Various lndenl oil refinery Ensure that the refinery is in Replace furnace coils, heat ex- ZINIO High components, such as furnace good operating condition through changer parts and instruments Indeni coils, heat exchangers and prompt attention to major that have exceeded their useful instruments, have exceeded maintenance needs. life. their useful life. Issues Objectives Recommendations Responsible Agency Priority 3. Indent refinery fuel use and Reduce refinery fuel use and loss Invest selectively in energy- Zli1CO Ned-High loss Is averaoging about 7% on to Industry standards of about conserving refinery equipment. Indeni a weight basis, about 1ij 5.5%. above achievable performance. 4. The prices of kerosene and Price petroleum products at full Raise the prices of industrial ZluD High gasoil are below economic economic cost to encourage effi- kerosene and gasoil to economic Prices and Incomes cost. cient consumption. cost, based on a shadow exchange eomission rate of K12/USSl. S. Oil exploration efforts have Encourage a thorough program of Strengthen the Hydrocarbon UnTit Ministry of Mines Meditum not examinsd all prospective private sector oil exploration in by moving it under the Geological areas and some data needed all promising areas. Survey and providing further for exploration planning are training and technical assis- lacking. tance. Fully interpret existing data. 6. Insufficient road petroleum Minimize cost of transporting pe- Purchase additional road petro- ZIMCO Medium CD tank wagons are available to troleum products and ensure leum tankers. I efficiently serve domestic transport bottlenecks do not re- and export petroleum markets. sult in lost exports. 0. coal 1. Failure of the walking drag- Optimize the risk of a major in- Analyze the costs and benefits of Maamba Colliery Ned-High line could result In a terruption in coal output. a contingency plan for repair of lengthy Interruption in coal the walking dragline and obtain production. the necessary spares, if justi- fied. 2. Inadequate coal transporta- Ensure that all coal consumers Improve the efficiency of the Zambia Railways High tion capacity has meant that have adequate supplies. rail system and ensure provision Coal Consumers some orders could not be met of sufficient locomotives and in a timely manner. wagons to move coal supplies. Encourage consumers to hold larger coal stocks, perhaps through Incentive pricing. Issues ObJectives Recommendations Responsible Aaency Priority 3. Meamba Colliery's financial Price coal so that Meamba's Raise the price of coal to about Maamba Colliery High performance Is inadequate. revenues at least cover its K450/ton (USS56/ton) in early ZiMHO In some years it has not financial costs, including debt 1988 prices. covered its costs and it has service. never earned an adequate financial surplus. 4. The structure of coal prices Price coal In relation to Its Price coal In early 1988 prices Meamba Colliery Medium does not accurately reflect calorific value to encourage as follows: ZINCO its calorific value. optimal consumption decisions. Premium - K480/t Standard - K455/t Medium - K440/t 5. Future coal reserves other Obtain sufficient data on min- During the period 1995-2000, Ministry of Mines LoW than at Heamba are uncertain. eable coal reserves to plan new undertake a coal exploration mining opeWrations as needed. program. Advance the program if coal demand rises sharply. E. Woodfuels and Household Energy %0 t. Stumpage fees are only a Price wood at or above the cost Raise stumpage fees closer to the Ministry ot Lands and Medium-High fraction of the cost of plan- of production to provide an in- cost of wood production and exam- Natural Resources tation wood and are not al- centive for replacement and col- Ine ways to improve collection. ZAFFICO ways enforced. lect payments due. 2. There Is no charge for com- Price wood at its replacement Introduce a stumpage fee for Ministry of Lands and High mercial cutting of wood from cost and enforce collection of commercial exploitation of Natural Resources natural woodland and little fees. Introduce efficient natural wood resources. active management of this management of natural woodlands. Strengthen natural woodland resource, management with resulting rMvenue. 3. Low-efficiency charcoal cook- Substitute high-efficiency stoves Establish an Improved charcoal Department of Energy High Ing stoves are used by the for the low-efficiency models stove customer testing program. WNZA majority of urban households, currently in general use. Select the most popular high- Ahlch results in excessive efficiency stove and organize charcoal consumption. mass production and dissemina- tion, using local artisans and markets. Issues ObJectives Recommendations Responsible Agency Priority 4. Not enough is known about ur- Obtain sufficient information on Organize studies of (a) urban Department of Energy High ban household energy demand urban household energy demand and household energy demand; (b) Ministry of Lands and and supply costs to design a supply to design a least-cost ur- woodfuel marketing and distri- Natural Resources strategy for satisfying urban ban household energy strategy. bution; (c) charcoal production household energy demand at methods; (d) biomass availability least cost. In penr-urban areas; and (e) the financial and economic costs of alternative fuels. Prepare and implement a household energy strategy based on these studies. 5. The high up-front costs ci Facilitate household electrifica- Identify steps to reduce the cost ZESCO High electricity connection, house tion, where it is economically of electricity connections, house Dept. of Energy wiring and appliance purchase Justified, through improving its wiring, and appliances are deterrents to household affordability. (especially hotplates and electrification. cookers) and explore ways to spread those costs over a longer period, e.g. by term payment on electricity bills. O 6. Coal briquettes may be an Ascertain whether coal briquettes Organize a consumer acceptance Dept. of Energy Medium acceptable and competitive are an acceptable and competitive testing program for coal briquet- UNZA alternative to charcoal for charcoal substitute and, if so, tes as household fuel. If they i'aamba Colliery urban household cooking. begin commercial production. are acceptable, assess their fi- nancial and economic feasibility as a charcoal substitute. If briquettes are competitive with charcoal, Implement a commercial- scale production and marketing project. Issues Objectives Recommendations Responsible Agency Priority F. Renewable Energy 1. Solar fish and crop drying Establish the feasibility of Institute a solar fish and crop Dept. of Energy Medium could reduce losses due to solar fish and crop drying. If drying test program by adopting Fisheries Department spoilage and conserve wood feasible, promote their use, proven designs and directly In- Ministry of currently used for fish particularly in areas of wood volving the Fisheries Department, Agriculture smoking. shortage. Agricultural and Fish Coopera- UNZA tives. 2. Wind and biogas are not Keep abreast with renewable Monitor technical development of Department of Energy Low generally economic In Zambia, energy technology development to windpumping, biogas, and other UNZA but technical advances could determine when such technologies technologies potentially appro- NCSR change that over time. could be generally viable In priate to Zambian conditions. Zambla. 3. Geothermal electricity Ascertain whether and where If the current tests are success- Geological Survey Med-Low generation Is being tested at geothermal electricity generation ful and suggest the technology Is Department of Energy Kasaba Bay on Lake could be economic. viable, assess the costs and ZESCO Tanganyika. The economic benefits of geothermal electri- feasibility of this city generation at a small sample technology has yet to be of the more promising sites. established. Issues Objectives Recauendations Responsible Agency Priority G. Energy Conservation and Substitution Substitute coal for Imported fuel Confirm whether, after Installa- ZiWOD Med-High 1. Furtner substitution of coal oil at Nkana, If feasible. tion of the new oxy-fuel smelting for fuel oil at the Nkana technology at Nkana, coal sub- Smelter appears to be techni- stitution is technically feasible cally and economically and economic. If so. implement a viable. substitution program. 2. There appears to be substan- Identify and Implement cost- Provide technical assistance to Department of Energy High tial scope for efficiently effective energy conservation and the Department of Energy to ex- ZiMCO conserving energy and for substitution measures in Industry pand the industrial and commer- substituting Indigenous coal and comrerce. cial energy audit program and and electricity for imported identify economically justified petroleum fuels in industry energy conservation and substitu- and comerce. tion measures. 3. Excise duties on transport Generate sufficient revenue from Consider raising the excise ZiMCO Medium fuels barely cover expendi- vehicle and fuel taxes to cover duties on transport fuels, Ministry of Power, ture on road construction and all road user costs and maintain particularly automotive diesel. Transport and maintenance, which Is Insuf- the roads in good condition. Coamunications ficlent to keep the road Ministry of Finance network in good condition. This reduces the efficiency of energy use in transport. 4. Little effort has been made Encourage transport fuel users to Consider mandating a minimum fuel Ministry of Power, Medium to encourage energy use fuel efficiently. efficiency standard for all new Transport and Coamunica- conservation in transport, imported vehicles and introducing tions which is the major user of maximum speed limits. imported petroleum fuels, Issues Objectives Recommendations Responsible Agency Priority H. Energy Institutions and Pol icy 1. There Is no adequate mecha- Develop and Implement an energy Retain the Energy Development Government of Zambia High nism for establishing and strategy that satisfies viable Committee, representative of the Implementing an energy stra- demand for energy at least cost. major Ministries and paras*atal tegy for Zambia. companies concerned with energy, to oversee updating and implemen- tation of the energy strategy. Form an expert secretariat from the Department of Energy and ZiNCO. 2. The Department of Energy Is Provide the Energy Development Build up the Department of Ministry of Power, Med-High not adequately staffed to act Committee with a secretariat Energy's staff over time to a Transport and as secretariat to the Energy capable of performing the total of about eight profes- Communications Development Committee. analysis needed to update and sionals, Including a Chief implement the energy strategy. Economist, Chief Technical Officer and Senior Financial Adviser. - 24 - III. ENERGY AND THE ECONOfY - CURRENT SITUATION AND FORECASTS 3.1 Structure of the Economy Manufacturing accounts for 22X of Zambia's GDP, mining, agri- culture, and private services for about 14X each, and other sectors for the balance (Table 3.1). Table 3.1: SECTORAL COMPOSITION OF GOP, 1985 ) Manufacturing 22.0 Mining 14.2 Agriculture 14.5 Services 14.8 Others 34.5 Total 100.0 Source: NCDP. This structure marks a radical change from 1965, when copper mining accounted for over 401 of GDP. Copper production subsequently peaked at 713,000 tons in 1976. By 1984-85, it had fallen to less than 480,000 tons, before recovering slightly in 1987 to 490,000 tons. Although copper mining's relative share of GDP has fallen sharply, it remains the dominant influence on the Zambian economy. Despite copper exports having fallen from 667,000 tons per annum in 1970- 72 to 480,000 tons in 1985, and prices having declined by 60% in real terms between 1975 and 1986, copper still accounts for about 90% of Zambia's export earnings. In 1987, this percentage was even higher, as world copper prices rose and Zambian exports increased. A further legacy of its copper export dependence is that the Zambian economy is also highly open, the total of imports and exports representing nearly 50% of GDP. 3.2 Recent Economic Performance and Strategy The persistent decline in world copper prices and Zambian cop- per production, coupled with then rising oil prices and global recession, caused a severe slowdown in economic growth during the late 1970s. At- tempts to maintain domestic production and consumption in the face of falling foreign exchange earnings led to heavy borrowing. By 1986, the external debt was four times GDP and scheduled debt service was 100% of export earnings. - 25 - Shortages of foreign exchange reduced investment, which fell by over 60% between 1981 and 1985. By 1985-86, gross fixed capital forma- tion was at an all-time low of 7% of GDP, well below the requirement for replacement and rehabilitation of the existing capital stock. In the mid-1980s, faced by persistent economic stagnation and a steadily worsening balance of payments and debt situation, the Government launched an ambitious program of economic liberalization. Price controls were removed from most products and subsidies reduced. Interest rates were liberalized and a foreign exchange auction system introduced. The maize and fertilizer marketing monopolies were ended. Unfortunately, copper prices continued to decline, and the eco- nomy did not respond quickly to these measures. The backlog of external payments and the scarcity of foreign exchange resulted in a nearly seven-fold devaluation of the Kwacha between October 1985 and October 1986. Foreign debt service costs rose in proportion, and inflation ac- celerated sharply, from an average of 20Z in 1983-84 to about 60% in 1986. At the beginning of 1987, the government abandoned the foreign exchange auction and set a fixed exchange rate of K8/US$1. 1/ Interest rate ceilings were reimposed and debt payments limited to 10% of export earnings. Foreign aid flows and commercial bank lending were still far below Zambia's needs, but copper prices rose and provided some relief, reaching US$1.40/lb in late 1987, before settling back to around US$1.00/lb in early 1988. Coupled with a slight increase in copper ex- ports, this partly offset the low level of multi-lateral and commercial lending. However, it was not sufficient to reverse the net outflow of resources or cause a resumption in economic growth. 3.3 Pattern of Energy Supply In such difficult economic conditions, Zambia is fortunate in having considerable indigenous energy resources, particularly of wood- fuels, hydropower, and coal, which satisfy about 90% of its energy needs. With the exception of petroleum, the country is virtually self- sufficient in energy, and is a net exporter of hydropower. The energy balance for 1986, the last full year for which com- prehensive energy data are available, is set out in Table 3.2. 1/ Between early 1987, when the exchange rate of K8/US$1 was established, and end 1987, Zambia experienced inflation of over 50%. Project costs used in this Report were estimated as of end-1987. To reflect the economic value of the currency at this time, a shadow exchange rate of K12/US$1 is used for the economic analysis. In late 1988, the Kwacha was devalued to K10/$US1. Tabto 3.2: %B/DOE ENERGY STRArEGY StDWY - ENERGY FMLANCE FOR 1986 ('000 too) S O U R C E S A N D F O R t S O F E N E R G Y P R I t A R Y E N F R G Y S E C ON N DA R Y E N E R G Y 1 2 3 4 5 6 7 a 9 tO It 12 13 14 t5 16 1t7 i SPIKED HYMOR- TOTAL DIESEt/ tOtAt tlIONS l EttIttY CRUDE FLEC- PRIMARY GAS OIL/ AVIATION FUEL fLEC- SFOONI)APY OIL COAL lRICITY YOD souCrS StIPER REGULAR LSG FUEL KEROSENE OIL LPG BITtWUN ODKE TRICITY CKARO AI (tatcr. TOIAL SUPPLY I COpstic produetlon 356.7 840.2 4482.7 568I.5 581.5 2 lpoorts 603.4 0.1 603.5 1.4 24.6 25.9 629.5 S VarIatlen In stocks -51.4 -5.8 -57.2 1.0 6.0 3.2 5.7 -1.4 2.5 0.4 0.6 16.0 -41.2 4 Total tsppIy 552.0 352.9 840.3 4482.7 6227.8 1.0 6.0 3.2 5.0 -1.4 2.5 0.4 0.6 24.6 41.9 6269.7 5 Exports 14.1 244.7 258.8 7.3 1.7 0.2 4.1 0.2 13.6 272.4 6 tomstle sPply 852.0 338.8 895.5 4482.7 5969.0 1.0 -1.3 1.5 5.0 -1.4 2.3 -3.7 0.4 24.6 28.4 8997.3 II. lRAMSFRT TION 7 Retlnmrles -552.0 -552.0 74.6 19.3 246.1 38.9 28.3 84.t 4.1 14.4 509.8 -42.3 * ElectricIty utiltIes 0.0 -89.5 -595.5 -1.7 597.4 595.6 O.t 9 XI Ins -2220.4 -7220.4 832.9 532.9 -t687.5 10 Total Troosforetnon -552.0 0.0 -95.5 -2220.4 -3367.9 74.6 19.3 244.4 38.9 28.3 84.1 4.1 14.4 597.4 532.9 1638.3 -1729.6 fit. OIST./TRASM. LOSSES IL ss 59.7 59.7 59.7 t IV. TOTA SUPPLY FC9 FINM. CONS. 12 total supply 338.8 0.0 2262.3 2601.1 75.6 I8.O 245.9 43.9 26.9 86.4 0.4 14.8 24.6 537.6 532.9 1606.9 4208.0 V. AI1JENS I3 AtJustmnt -3.1 0.0 -3.3 -6.4 2.5 -6.0 -4.9 5.4 -0.2 -1.0 -t.2 0.4 -0.1 -17.4 -26.6 -33.0 Adjustment tn S of fInal can -0.9 -0.1 -0.2 3.4 -24.8 -3.5 13.9 -0.9 -1.2 -74.3 2.6 0.0 0.0 -3.2 -1.6 -0.8 VI. FINAL tISUIPTION 14 Households 1858.9 1858.9 16.0 42.7 548.0 606.7 2465.6 15 AgrIculre end forestry 203.3 203.3 14.8 0.3 0.0 8.4 23.6 226.9 16 ZCCP .84.3 164.3 0.8 1.1 63.4 6.2 63.5 24.6 389.3 2.3 551.3 735.5 t7 Industry and 141.5 203.3 344.8 36.3 3.6 17.6 1.6 14.4 70.6 144.1 488.9 to Go'w rment/srvl co 16.1 t6.t 0.6 6.3 26.6 33.5 49.6 19 Tranport 72.3 22.9 140.3 38.6 0.4 274.4 274.4 20 Total filoo Consumptlen 341.8 2265.6 2607.4 73.1 24.0 254.8 38.6 27.1 87.4 1.6 14.4 24.6 537.1 550.3 1653.5 4240.9 Notes: (a) The utltltzatlon of crop ridues. dung.. bhesse do not apper on the belance altiouql the are used as fuels. However, vwy little Inter_tlon Is avalleblo and tt consunptlon Is ttoutht to be comparatively small. fb) The fInal conlsueton of wood for Agrculture aid Forestry' and for "Industry and Commerce* we estl_eted to total 105 of consumption of d for household nry utS (both firewood end charcoal). - 27 - In that year, primary energy production totalled 5.7 million tons of oil equivalent (toe). Two hundred and fifty nine thousand toe were exported, primarily in the form of hydropower to Zimbabwe, and 603,500 toe of pe- troleum products were imported. Wood was, and is, the dominant source of energy, contributing 72X of total primary supply, followed by hydroelec- tricity (13%), 2/ petroleum products (9%) and coal (6%). 3.4 Energy Transformation In 1986, approximately 501, or about 2.2 million toe of fuel- wood was converted into charcoal, at an estimated average conversion ef- ficiency of 25X. Total charcoal production was about 533,000 toe. The 603,500 toe of petroleum products were imported in commin- gled form, via the Tazama pipeline from Dar-es-Salaam to Ndola, and se- parated at the Indeni hydroskimming refinery. Pipeline losses and refin- ery own use and loss in 1986 totalled 42,300 toe, or 8X of total petro- leum product imports. Refinery operations were estimated to account for about 7% of the 8% loss, pipeline and other losses for the balance. 3.5 Pattern of Energy Demand Final domestic energy consumption in 1986 totalled 4.2 million toe, of which households were estimated to account for 58%, mining for 17%, industry and commerce for 12%, transport for 7X, agriculture for 51, and Government and services for the remainder. Household energy demand is met primarily from wood (76Z) and charcoal (22%). As most wood is gathered, not bought, accurate figures of consumption are not available. Electricity accounts for just under 2% of domestic energy consumption, and kerosene for the small balance. Po- pulation growth is rapid, averaging about 3.5 per year, and urbanization (and hence the use of charcoal) is increasing. Consequently, woodfuel consumption is rising faster than population growth. The energy demand of the mining industry is met primarily by electricity (53%), coal (251), diesel and fuel oil (9% each). Mining is the largest domestic consumer of electricity, coal and fuel oil, account- ing for 72%, 54%, and 73Z of total national consumption of these fuels respectively. Declining copper production has meant stagnant or falling energy demand from the industry for the past 10 years. Conventional (non-wood) energy use in industry and commerce is dominated by coal and electricity. Wood and charcoal are used in signi- ficant, but unknown quantities. In constructing the energy balance, in- 2/ Converting hydroelectricity on a heat equivalent basis of 1 GWh = 85 toe. - 28 - dustry and commerce were assumed to be responsible for 5% of total wood consumption. As a result of Zambia's difficult economic situation, total energy use in the sector has been virtually stagnant for the past 10 years. The energy needs of the transport sector are met largely by diesel oil (51%), gasoline (34%), and aviation fuel (14%). This sector accounts for 54% of total national demand for petroleum products. Over the past 10 years, transport energy demand has been static, suppressed by falling incomes, the high cost of imported vehicles, and by the scarcity of foreign exchange. If and when these constraints are eased, transport fuel demand could rise, with adverse implications for the balance of pay- ments. Agriculture and services are not large users of energy. How- ever, the economic strategy of diversification and greater reliance on the use of indigenous resources implies rapid growth in agricultural out- put. This in turn will mean higher energy demand, particularly for diesel oil and electricity. Due to the low level of current agricultural energy consumption, the effect on aggregate energy demand will be mod- est. However, in the case of electricity, the investment implications could be considerable. 3.6 Economic Projections, 1988-2006 Future economic growth is highly uncertain, depending on sever- al unpredictable factors. Among the most important are: (a) the price of copper and other export minerals; (b) the levels of official aid flows and foreign commercial lending; and (c) the performance of the domestic agriculture and manufacturing sectors in the face of current severe shortages of imported inputs. The prospects for sustained higher copper prices in the long- term are not good. World demand is relatively inelastic; substitution, particularly by optical fibers, is continuing; and other producers, in- cluding some with lower costs than Zambia, are capable of increasing their output in response to higher short-term prices. Official aid flows to Africa are increasing, but Zambia's share is uncertain. Commercial lending to developing countries has fallen, and Zambia's recent debt ser- vice problems are likely to rule this out as a significant source of new money. Consequently, foreign exchange will probably remain scarce, im- posing severe constraints on the supply of imported inputs for agricul- ture and manufacturing. Due to the current difficult economic situation, GDP is fore- cast to remain unchanged in 1988. For the period 1989-2006, three alter- native economic scenarios have been selected to assist in forecasting future energy demand: a base, a low, and a high case. - 29 - (a) The Base Case assumes average annual growth in aggregate real GDP of 2%, which represents an improvement over recent economic performance, but not a return to the high performance of the late 1960s and the early 1970s. (b) The High Case assumes average annual real CDP growth of 3.5X. Broadly in line with the Government's current economic targets, this represents a substantial improvement in recent economic performance. Starting from the current low base, growth might be sbove 3.5% in the short-run, and below in the long-run. (c) The Low Case assumes real GDP remains static. This slight wor- sening of recent economic performance assumes a pessimistic combination of weak copper prices and persistent shortages of foreign exchange. It should be stressed that these are only economic scenarios not forecasts. Their purpose is simply to provide a quantitative basis for forecasting the possible evolution of energy demand. While the sce- narios are projected through the year 2006, they become increasingly spe- culative in the later years. Actual economic events will almost certain- ly not parallel any of the scenarios exactly. As the future economic si- tuation develops over time, the scenarios should be reexamined and more realistic alternatives used to update the energy strategy. 3.7 Energy Strately Objectives and Constraints The basic objective of Zambia's national energy strategy is to satisfy demand for energy at the least economic cost, and in a way that is consistent with national development priorities, with the availability of resources, and with the long-term viability of the energy supply or- ganizations. This broad strategic objective can be translated into a number of specific sub-objectives, among the most important of which are: (a) providing adequate, reliable, least-cost energy supply to the productive sectors of the economy, on which economic develop- ment depends; (b) providing sufficient affordable energy to households, to satis- fy their basic energy needs; (c) without compromising the objective of least-cost supply, mini- mizing net imports of energy, in order to conserve foreign ex- change; (d) meeting energy needs in an environmentally-sound manner; and (e) ensuring adequate maintenance of energy supply systems and the financial viability of the organizations responsible for them. - 30 - Limited investment resources, both domestic and foreign exchan- ge, are the principal strategic constraint. Currently, the level of do- mestic savings and investment is extremely low, only 7X of GDP in 1986. The flow of official aid and commercial lending is also depressed, al- though at least the former should increase. On balance, the outlook is for severe capital scarcity over the next several years. Therefore, the energy strategy seeks to minimize investment re- quirements by emphasizing improvement in existing capacity utilization and efficiency. It also sets priorities among the limited investments that are recommended, and ensures that they provide sufficient flexibili- ty to allow the energy sector to adjust to future uncertainty. In view of the difficult and upredictable economic situation, the focus of the energy strategy is on the next five years, 1989-93. Predicting events and energy priorities beyond this period is highly spe- culative, and of less importance than getting the near-term priorities right. To take account of emerging energy priorities over the longer term, and the evolving economic situation, the energy strategy must be updated at least every five years, and the energy plan, every year. With this need in mind, the energy strategy report examines the role, skill and manpower requirements of the organizations responsible for energy planning, and recommends steps to enaure that they are adequate for this task. 3.8 Energy Demand Forecasts, 1988-2006 Three domestic energy demand forecasts have been developed, a low, a high, and a base case forecast, corresponding to the three econo- mic scenarios. The purpose of the energy demand forecasts is to deter- mine the energy requirements of the economy under the different demand assumptions, which assists identification of the strategic energy issues in the short, medium, and long-term. Energy exports have been forecast exogenously, using conservative assumptions for each export product and market. Tables 3.3 and 3.4 show the three alternative forecasts of do- mestic final energy demand by consuming sector and by energy source for 1996 and 2006. Projected Energy Balances for 1996 and 2006 are set out in Appendix 3.1. The forecast methodology is described in Appendix 3.2. - 31 - Table 3.3: FORECAST FINAL ENERGY CONSUMPTION BY SOURCE (toe 'OOOs) Sources 1986 1996 Forecast 200f Forecast Actual Low Case Base Case High Case Low Case Base Case High Case toe o toe S toe % toe % toe % toe % toe s Electricity 538 13 594 12 617 12 642 12 483 8 539 9 608 9 Coal/Coke 366 9 325 6 338 6 354 7 317 5 344 5 385 6 White Pet. Prod 418 10 383 8 430 8 468 9 370 6 488 8 605 9 Fuel Oil 87 2 62 1 65 1 68 1 38 1 44 1 50 1 Bitumen/LPG 16 0 16 0 18 0 21 0 16 0 23 0 29 0 Subtotal 1,425 34 1,380 27 1,469 28 1,552 29 1,224 21 1,437 23 1,677 25 Firewood 2,266 53 2,745 54 2,805 54 2,853 54 3,168 53 3,322 53 3,473 52 Charcoal 550 13 961 19 943 18 917 17 1,559 26 1,516 24 1,468 22 Subtotal 2,816 66 3,705 73 3,748 72 3,770 71 4,727 79 4,838 77 4,941 75 Total 4,241 100 5,085 100 5,217 100 5,322 100 5,950 100 6,276 100 6,619 100 Source: Department of Energy. Table 3.4: FORECAST FINAL ENERGY CONSUMPTION BY SECTOR (toe '000)s 1986 1996 Forecast 2006 Forecast Sector Actual Low Case Base Case High Case Low Case Base Case High Case toe % toe % toe % toe % toe % toe % toe % Households 2,466 58 3,371 66 3,350 64 3,316 62 4,412 74 4,358 69 4,308 65 Agriculture 227 5 230 5 269 5 305 6 236 4 342 5 448 7 ZCCm 736 17 639 13 639 12 639 12 470 8 470 7 470 7 Industry 489 12 538 11 602 12 663 12 531 9 682 11 848 13 Govt/Service 50 1 50 1 58 1 65 1 50 1 71 1 92 1 Transport 274 6 258 5 298 6 334 6 251 4 352 6 453 7 Total 4,241 100 5,085 100 5,217 100 5,322 100 5,951 100 6,276 130 6,619 100 Source: Department of Energy. - 32 - 3.8.1 Forecast Sectoral Pattern of Energy Demand The main features of the domestic energy demand pattern are un- likely to change drastically during the period under consideration. The household sector will continue to dominate total energy demand. Its re- lative share in overall final demand is forecast to increase from 58% to 69% by 2006 in the base case forecast. This is because the projected rate of growth of population is higher than the asssumed growth rate of the economy. Households rely almost entirely on woodfuels for their energy needs (87%). Therefore, the relative share of woodfuels in total energy consumption is forecast also to increase, as is total consumption of woodfuels, which is expected to rise by about 701 by 2006. ZCCM will continue to be by far the largest domestic consumer of conventional (non-wood) energy resources, accounting for about 40% of total conventional energy consumption in 2006. However, its dominating role will diminish as copper production declines. The other sectors of the economy are expected roughly to maintain their relative shares of consumption during the period. Total final domestic energy consumption rises in all three forecasts, the largest contribution coming from fuelwood and charcoal. Domestic consumption of conventional energy decreases in the low scenario from 1986 to 2006. In the base case, conventional energy consumption in 2006 is forecast to be roughly the same as in 1986. In the high case, there is a modest increase in conventional energy consumption over the forecast period. The decrease of energy consumption in the low case is explained by the fact that the energy consumption of ZCCM is forecast to decline by 2006, while the consumption of the other sectors is stag- nant. In the base and high case, the growth of the other sectors coun- terbalances the forecast decline in the consumption of ZCCM. 3.8.2 Forecast Pattern of Energy Demand by Fuel Type Domestic consumption of petroleum products is assumed to be strongly linked to economic growth. In the high scenario, petroleum pro- duct consumption is forecast to increase by 29% from 1986 to 2006, which is much more than the increase of electricity and coal/coke (21% and 3% respectively). This is primarily due to forecast expansion of transport energy demand, which is the largest consumer of petroleum products. The consumption pattern of both electricity and coal, on the other hand, is dominated by a small number of consumers whose consumption is not so strongly linked to average income growth. In the case of electricity, ZCCM is the dominant consumer. In the case of coal, the main consumers are ZCCM, NCZ, and Chilanga Cement. ZCCM's and NCZ's energy demand is largely dependent on technical factors, and is not strongly affected by growth elsewhere in the economy. A dramatic change is foreseen in the level of electricity ex- ports. From 2,879 GWh (245,000 toe) in 1986, they are forecast to de- cline to 1,165 GWh (99,000 toe) in 1996. This follows Zimbabwe's drive - 33 - for greater self-sufficiency in power supply, and more than offsets the modest forecast increase in domestic consumption. Exports of petroleum products and coal are relatively small and volatile. Recent past export performance is simply projected into the future, implying an annual average of 50,000 tons of petroleum product exports and 35,000 tons of coal exports. The most important feature of these forecasts is that, even in the high scenario, the forecast consumption of electricity, petroleum products and coal do not surpass the existing capacity of the respective supply facilities over the period to 2006. In the case of electricity, total domestic and export demand is forecast to be below its 1986 level by the end of the period. Unless new export markets can be developed, the surplus of available electric power capacity and energy will there- fore increase, relative to 1986. The high scenario demand for petroleum products, which requires 725,000 tons of imports, is within the capacity of both the Tazama pipeline and the Indeni refinery, as currently confi- gured. In the case of coal, the high demand forecast is 570,000 tons (385,000 toe), which is well below tho present capacity of the mine. 3.9 Balance of Payments Implications of Energy Forecasts 3.9.1 Recent Situation Zambia's net balance of energy trade is dominated by two items: petroleum product imports and power export sales to Zimbabwe. During the mid-1980s, the cost of petroleum imports averaged about US$90 million per year. At their peak in 1986, power export revenues were over US$40 million. Taking account of coal and other energy exports, the energy balance of trade was in deficit by just under US$50 million in that year. In 1987, power export sales declined sharply to less than US$20 million, and the energy balance of trade widened to about US$70 mil- lion. In 1988, the picture is likely to be similar, perhaps a little worse, if the further expected decline in power exports materializes. 3.9.2 Forecast Evolution Over the period 1989-93, petroleum import volumes are forecast to rise at a modest rate of about 2X per year in the base case. Future petroleum prices are highly uncertain. In the short run (1988-89), they appear likely to be stable. Moving into the 1990s, the general consensus is that prices will start to rise as increasing world demand soaks up ex- isting excess supply. In that event, the cost of petroleum product im- ports is likely to rise over this part of the forecast period. Beyond the mid-1990s, the trend in prices is highly uncertain, but few experts expect a return to mid-1980s low price levels. - 34 - With the commissioning of the Hwange 1 power station, there is little immediate prospect of a recovery in power export sales to Zimbabwe to early 1980s levels. However, sales in the range of 1,000-2,000 GWh per year and 150-250 MW should be possible over the 1989-93 period, pro- ducing export earnings of about US$10-20 million per year. Beyond 1993, power export prospects are highly uncertain. As- suming Zimbabwe continues its policy of self-sufficiency in power, there is little prospect of a major recovery in Zambian exports, despite the low cost of Zambian supplies. However, some export sales should be pos- sible, particularly in years when Zimbabwean capacity is stretched. In its own interests, and those of promoting efficient use of existing power capacity, Zambia should continue to emphasize its potential as a reliable source of substantial quantities of low-cost power. Malawi and Botswana offer potential for modest exports, but nowhere near enough to compensate for the expected drop in Zimbabwean sales. Coal exports in 1986-87 were about 30,000 tons, earning over US$1 million in foreign exchange. The capacity exists to supply future coal export markets, but the markets themselves are limited and volatile. A major increase in coal exports is therefore not foreseen. Overall, the outlook is for a deficit in the balance of energy trade of about US$70-80 million over the 1989-93 period. Looking further ahead, the prospect is for further deterioration, assuming petroleum pro- duct prices start to increase in the 1990s. - 35 - IV. ELECTRIC POllE 4.1 Characteristics of the Existing Power System The Zambian power system consists of one large, interconnected system, usually known as the main grid; a smaller interconnected system, known as the northeastern system; and several small, isolated systems served by diesel generating units. The main grid and the northeastern system will be interconnected at Pensulo, near Serenje, probably during the course of 1989. The power stations and transmission system are shown on IBRD Map 20984 at the end of this Report. 4.1.1 Installed Generation Capacity Hydro generating capacity on the main grid totals 1,608 MW. The main hydro stations and their respective installed capacities are Kariba North (600 MW) and Victoria Falls (108 MW) on the Zambezi River, and Kafue Gorge (900 MW) on the Kafue River (Table 4.1). Until recently, the Kariba North and South stations were run as a single complex by the Central African Power Corporation (CAPC). In 1987, they were transferred to the national power utilities of Zambia and Zimbabwe respectively. CAPC was dissolved, and its role of managing the Kariba dam was taken over by the Zambezi River Authority. The northeastern system consists of four small hydro stations, with a combined capacity of 24 MW, and 2 MW of diesel standby. Seven diesel generators, with a combined capacity of 5 MW, supply the isolated systems. Zambia Consolidated Copper Mines (ZCCM) owns four gas turbine generators and a waste heat plant, located in the Copperbelt. The gas turbines have a total installed capacity 80 MW, and are kept on cold standby. The waste heat plant has a nominal capacity of 40 MW, but sup- plies an average of only about 3 MW. The Zambian power system is interconnected at high voltage with those of neighboring Zimbabwe and Zaire. Zambia exports to and provides standby capacity to Zimbabwe in the event of emergency. In the case of Zaire, major support is given at cost. It has reciprocal access to standby capacity from these two countries. 4.1.2 Available Firm Energy The estimated firm energy capabilities of the various stations are also shown in Table 4.1. The firm energy capabilities of Kariba North and Kafue Gorge were originally estimated at 4,700 GWh/year and 5,256 GWh/year respectively. Recent hydrological experience suggests that the estimate for Kariba North should be revised downwards, probably to a range of 3,750-4,250 CWh/year. In the case of Kafue Gorge, water- rights have been set aside for agricultural purposes. Although not fully - 36 - utilized, they justify a downward revision in the plant's firm generation capability to about 5,000 GWh/year. Water-flow measurement is recommend- ed, and could lead to further revision of these firm energy estimates. Table 4.1: INSTALLED POWER CAPACITY AND ESTIMATED FIRM ENERGY CAPABILITY, 1988 Power Station Installed Capacity Firm Energy MW GWh/a Interconnected System Kariba North 600 3,750-4,250 Kafue Gorge 900 5,000 Victoria Falls 108 770 S3UBTOTAL I,608 9,520-10,020 Northeastern System Lusiwasi 12 50 Chishimba Falls 6 20 Musonda Falls 5 30 Lunzua 1 5 Diesels 2 - SUBTOTAL 26 105 Isolated Diesels 5 ZCCM Gas Turbine a/ 80 Waste-Heat Thermal b/ 40 - GRAND TOTAL 1,759 9,625-10,125 a/ Standby b/ Output is typically in the range of 3 MW. Source: ZESCO and World Bank estimates. Transmission losses on the interconnected 330/220 kV network are about 3.5%. Assuming a conservative 4,000 GWh/year from Kariba North and using the above estimates for the other stations, the average avail- able firm energy capability of the grid at bulk supply points is 0.965 x 9,875 - 9,529 GWh/year, after completion of the Pensulo substation in 1989. 4.1.3 Potential Generating Capacity Zambia is drained by two major river systems, the Zambezi and the Luapula. The Zambezi and its major tributaries, the Kafue and the - 37 - Luangwa, drain about 75X of the total land area. Zambia's potential hy- dro reserves on these two river systems are considerable, totalling about 4,000 MU and over 21,000 GWh/year. Zambia also has large coal deposits, which could be used for thermal power generation. 4.1.4 Existing Transmission and Distribution System The backbone of the power transmission system is 1,900 km of 330 kV lines, connecting the major generating stations with the load cen- ters, of which the largest are the Copperbelt and Lusaka. There are also traismission lines operating at 220 kV (510 km), 88 kV (510 km) and 66 kV (3,100 km). Primary distribution voltages are 33 and 11 kV. The three- phase secondary systems operate at 400 volts. The transmission and distribution network covers most of the urban areas and larger towns. Ninety-one townships were recorded in the 1980 census, of which 56 were classified as "urban areas". By 1988, 83 had electricity supply--78 from ZESCO and 5 from ZCCM. 4.1.5 Rural Electrification The Department of Energy sets priorities for the "rural elec- trification" program, the capital costs of which are funded from the Central Government budget. It consists of the interconnection of the re- maining isolated towns to the grid, construction of mini-hydro stations to replace diesel generators, and rehabilitation of existing diesel sta- tions. Operation of the facilities is entrusted to ZESCO. Due to the extreme shortage of funds, recent investments in rural electrification have been modest. They have consisted exclusively of completing on- going, long-delayed projects. 4.1.6 Generation and Sales Data on the production and bulk supply of electric energy on the interconnected system, by major source and customer group, for the last five ZESCO fiscal years (April-March), are shown in Table 4.2. Be- tween 1983-84 and 1986-871, energy production was roughly constant at 9,430-9,750 GWh/year. In 1987-88, production declined to 7,727 GWh, due to a sharp fall in export sales to Zimbabwe. This was the result of Zimbabwe increasing generation at its Hwange thermal power station. In 1987-88, energy production was some 1,802 GWh (19Z) below the conserva- tive estimate of firm energy availability. - 38 - Table 4.2: ELECTRIC ENERGY PRODUCTION AND BULK SUPPLY ON THE INTERCONNECTED SYSTEM 1983-84 to 1987-88 a/ (GWh) 1983-84 1984-85 1985-86 1986-87 1987-88 PRODUiCTION Kariba North 3,788 3,996 3,475 3,337 2,788 Kafue Gorge 5,152 4,677 5,594 5,436 4,407 Victoria Falls 769 756 680 697 624 TOTAL 9,709 9,429 9,749 9,470 7,819 TRANSMISSION LOSSES 264 299 352 287 307 BULK SUPPLY Domestic supplies ZESCO South 1,217 1,211 1,221 1,288 1,361 ZESCO North 624 630 636 654 656 ZCCM 4,293 4,249 4,138 4,465 4,459 TOTAL Domestic 6,134 6,090 5,995 6,407 6,476 Exports b/ Zimbabwe 3,172 3,039 3,410 2,776 1,036 a/ ZESCO fiscal year, April-March. :/ Excluding net transfers of energy to Zaire which In theory sum to zero. Source: ZESCO. Simultaneous maximum demand on the Zambian system (including exports) peaked at 1,396 MW in 1984-85. It declined to 1,279 MW in 1985- 86, rose to 1,320 MW in 1986-87, then fell in 1987-88, following the re- duction in Zimbabwean demand (Table 4.3). Table 4.3: SIMULTANEOUS MAXIMUM DEMAND a/ ON THE ZAMBIAN INTERCONNECTED SYSTEM (MW) Source 1983-84 1984-85 1985-86 1986-87 Zambia 897 895 895 936 Zimbabwe 447 501 384 384 TOTAL 1,344 1,396 1,279 1,320 a/ Including transmission losses within Zambia. Source: ZESCO. - 39 - 4.2 Policy Issues and Options To facilitate economic recovery, the power system must provide reliable and adequate supplies of electricity to the productive sectors of the Zambian economy. A priority is therefore to identify the critical weaknesses in the existing supply system and the actions necessary to overcome them. With surplus power and energy capacity, investment in new generating capacity is clearly not needed, but the existing generating scations must operate reliably. Bulk transmission capacities are ade- quate for existing loads, but the firm capacity of the 330/88 kV trans- formers and the 88 kV lines serving Lusaka is less than the city's peak demand. Many of the city's primary and secondary distribution lines are also overloaded. A priority program to eliminate the risk of a major power failure in the capital must be defined. Other economic priorities are to make better use of indigenous energy resources and to ease the shortage of foreign exchange. Surplus power is available for export; to substitute for imported petroleum and/- or household charcoal; and to increase agricultural irrigation. There- fore, the potential for power exports must be assessed, and a power ex- port strategy proposed that maximizes net revenue from export sales. In industry, the potential for substituting electricity for petroleum pro- ducts must be identified, as is outlined in Chapter 9. Options for con- necting isolated load centers to the grid, and thereby substituting hydro for diesel power, must be evaluated. So too must potential agricultural irrigation schemes. Satisfying the basic needs of the people is the fundamental ob- jective of the economic recovery program. One of those basic needs is household energy. With rapid urbanization, the cost of charcoal is ris- ing. One option is to accelerate household electrification. The major issues are: (a) whether it is economic to do so; (b) how to minimize the cost (e.g., by using less costly distribution standards); and (c) how to make access to electricity affordable (e.g., by term payment of connec- tions). The issue of timing is also important, be.;ause adequate trans- mission and distribution capacity must be in place before household con- nections can be increased. Power tariffs are the final major issue. They must: (a) cover ZESCO's financial requirements, including operations, maintenance, existing debt, and the local and foreign costs of esqential new power system investment; (b) reflect the economic cost of power supply; and (c) facilitate the expanded use of electricity by making it as af- fordable as possible. - 40 - 4.3 Electricity Demand Forecasts 1988-2006 4.3.1 Zambian Demand ZCCM is ZESCO's largest customer, accounting for nearly 70% of current domestic electricity sales. ZCCM's demand for electric energy is forecast to rise from 4,482 GWh in 1987 to 5,067 GWh in 1998, then fall, in steps, to 4,037 GWh in 2003, and remain stable for the rest of the forecast period. This pattern results from an assumed slight upward trend in production in the early/mid-1990s, followed by the closure of the Nchanga open pit and the Mufulira smelter at the end of the decade. With the exception of NCZ and Chilanga Cement, for whom speci- fic demand forecasts are made, other industrial, service and transport sector power demand is forecast to rise in proportion to GDP. Agricul- tural demand is forecast to grow slightly faster than GDP, as a result of increased irrigation. Household demand for electricity is forecast under three alter- native demand scenarios as follows: (a) Base - 4,000 new ZESCO connections per year. (b) High - 7,000 new ZESCO connections per year. (c) Low - 2,000 new ZESCO connections per year. The resulting forecast peak loads at ZESCO bulk supply points are shown in Table 4.4. Table 4.4: FORECAST POWER SYSTEM LOADS AT BULK SUPPLY POINTS AT TIME OF SYSTEM PEAK (MW) 1987 1998 2006 High Base Low High Base Low ZESCO South 246 409 346 279 572 446 311 ZESCO North 652 793 764 735 740 680 619 TOTAL 898 1,202 1,110 1,014 1,312 1,126 930 Source: World Bank estimates. 4.3.2 Export Demand Zambia's power export potential to its southern African neigh- bors is limited by their generally favorable power resource endowment, by the existence of excess capacity, by economic constraints, and by poli- tics. Zambia is one of several countries in the region with surplus, low - 41 - cost hydro capacity. Alternative sources of generation in the region in- clude coal for thermal generation, also low cost and fairly widely avail- able. Together with the difficulties many countries in the region exper- ience in paying for imports in hard currency, the potential for signifi- cant Zambian power exports must be regarded as limited and uncertain, the only significant exceptions being short- and medium-term power exports to Zimbabwe, and, in the longer-term, possibly to Botswana also. Exports to Zimbabwe are forecast to range between zero and 2,000 CWh/year up to 1994, and are very speculative thereafter. The interconnections with other neighboring countries, both existing and planned, are not expected to lead to significant energy salts. Prospects for exports to each neighboring country are discussed in Appendix 4.1. The scope for exports of power is greater than energy, because network interconnections can reduce the capacity investment needed for standby purposes. Connections with Tanzania and Malawi are under cuisi- deration, and interconnections with Zimbabwe and Zaire have been in oper- ation for sometime. Power exports to Zimbabwe could range between 150 and 300 MW up to 1994. In addition, there is potential for small addi- tional exports of power to Botswana. 4.3.3 Total System Demand The base, high, and low electric energy and power demand fore- casts are summarized in Table 4.5. Energy losses on the Zambian bulk supply network are estimated to be 3.5% and in the retail system to be 15%. These are assumed to remain constant. Comparison of columns "d" and "e" of the Table shows that the resulting forecast demands for electric energy and power for 1989-2006 are less than a conservative estimate of firm energy and a rough estimate of available power capacity (1,490 MW) 3/ in every year. The closest de- mand approaches existing capacity is for energy in the high scenario for year 2006, when firm energy is 500 CWh greater than the forecast demand within Zambia. For some of the diesel power networks, however, capacity will need to be increased over time to keep up with increasing demand, assuming their interconnection is uneconomic. 3/ Installed capacity of 1,754 MW, minus 15% capacity reserve traditionally assumed by ZESCO. - 42 - TABE 4.5 FORECAST OF ELECTRIC ENERGY AND MAXIMUM POWER DEMAND 1988-2006 ZCCM ZESCO Losses Zambia Available firm Available demand demand to bulk ener8y generation for points demand capability export Year GWh Gof GWh GWh OWh OWh a b a d f -3.5Xta+b) -a+b+c cw-d 1987 ICS 4482 2005 227 6714 10575 3861 1) SHy 0 85 3 88 105 0 IDi 0 7 0 7 0 0 Sum 4482 2097 230 6809 10680 3861 SCENARIO 1989 Base 4531 2118 233 6882 9675 2793 High 4531 2134 234 6919 9675 2756 Low 4531 2075 231 6838 9675 2837 1992 Base 4943 2391 257 7591 9675 2084 High 4943 2562 263 7768 9679 1907 Low 4943 2201 250 7394 9675 2281 1998 Base 5067 2977 282 8326 9675 1349 High 5067 3498 300 8865 9675 810 Lov 5067 2427 262 7756 9675 1919 2006 Base 4037 3736 272 8045 9675 1630 High 4037 4828 310 9175 9675 500 Lov 4037 2611 233 6881 9675 2794 SIMULTANEOUS MAXIMUM DEMAND Avallable Available At bulk Tram- At total for -supply points miss.. geer. eapacity eaport zCCM ZESCO losses plants Year MW MW mH MW MW MN a b c 4 a f -6-(2+b) -&+b+c *e-4 1987 IC$ 544 342 53 939 1468 529 2) Smy 0 19 1 20 23 - IDi 0 5 0 5 8 - sum 544 366 55 965 1499 - Sim 544 356 54 954 1490 536 SCENARIO Six 1989 Base 550 360 55 965 1490 525 High 550 367 55 972 1490 518 Lov 550 353 54 957 1490 533 1992 2ase 600 407 60 1067 1490 423 Nigh 600 436 62 1098 1490 392 Lov 600 375 58 1033 1490 457 1998 Base 615 507 67 1189 1490 301 Bigh 615 595 73 1283 1490 207 Lov 615 413 62 1090 1490 400 2006 Base 490 636 68 1193 1490 297 High 490 822 79 1390 1490 100 Lov 490 444 56 990 1490 500 XEYs ICS- Interconnected system. SBym Separate hydro system. 10D- Isolated diesel system. Sum- Total Zesco system. SIM- Simultanious Max Demand in Zesco main system if SEy had been interconnected in 1987. ZCCM- Bulk delivery to ZCCMQ excluding Zesco North. ZESC4O Buk delLvery to ZESCO South + North. 1) Actual exports are estLmated at 1300 M.W 2) Actual maximum emand exports to Zmbabwe vere 52.5 MW, but only 372 MV, when e"aured on occation of maximum simltaeous load. It is unclear to what extent the maxim demand export to Zaire of about 100 NW wa coincident With max4mu simultaneous load. - 43 - 4.4 Priority Power System Investment Program 4.4.1 Hydro Generation Investment The major new generation investment options are the Kafue Lower hydroelectric plant (450 MW, 2,500 GWh/year firm energy), located down- stream of the existing Kafue Gorge plant, or further joint developments with Zimbabwe on the Zambezi River, probably Batoka Gorge (1,600 MW), up- stream of Kariba. Because forecast demand for electric power and energy is not expected to exceed Zambia's existing generating capacity until after 2006, there is no need for Zambia to begin planning new network hy- dro-electric generation capacity unless substantial additional firm ex- port sales can be guaranteed. However, if Zimbabwe wishes to proceed with development of the Batoka Gorge site, exploratory work will be needed on a possible future north bank power station in Zambia. The two key generating stations on the existing interconnected system are Kariba North and Kafue Gorge. Their condition, and that of the other power system assets, is described more fully in a companion ESMAP Power Subsector Efficiency Study. 4/ This rep.rt concludes that the Kariba North station is in excellent condition, and no major repair work is required. However, at Kafue Gorge the following work is recom- mended to bring the power station up to satisfactory working order: (a) completion of the ongoing NORAD-fundgd rehabilitation of the turbines and alternators; (b) replacement of auxiliary systems, including: air conditioning chillers (US$100,000 per unit), pumps, and fan coil units (US$509,000); (c) installation of an additional 200 m of deep booms to divert weeds from the headrace intake (US$80,000); (d) inspection and, if necessary, replacement of the 190 kV cables connecting the power station to the pothead yard; (e) inspection and, if necessary, repair of the waterways; and (f) provision of essential spare parts, including transformer wind- ings and cylinder gate pistons. The Victoria Falls power station has persistent operational problems and the following work is needed to repair the power station: 4/ Zambia : Power Subsector Efficiency Study. Joint UNDP/World Bank Energy Sector Management Assistance Program, December 1988. - 44 - (a) overhaul of the turbines and alternators in the "A" station and replacement of the power cables, switchgear, and control equip- ment; (b) installation of surge arrestors on each of the three phases of the generator connections to the cables in the "B" station; (c) rectification of the vibration problem at the "C" station, pro- bably by increasing the submersion of the turbine and adding volume to the afterbay arrangement; and (d) installation of bulkhead gates or retrievable steel stoplogs on the water intakes, strengthening of the trashrack cleaners, in- stallation of 200 m of deep booms upstream of the intakes to divert weeds over the main falls, and rehabilitation of the hy- draulic systems of the penstock intake gates. Turbine and generator overhaul and civil engineering repairs are also needed at the Chishimba Falls, Musonda Falls, and Lusiwasi power stations. These should follow commissioning of the Pensulo substation, when substitute power from the main grid will become available. The potential economic benefits of completing the modest re- pairs required at the Kafue Gorge power station are considerable, because loss of this station would leave the power system substantially short of capacity and energy. Little of this could be made up from Kariba North, because the lake is at an all-time low. A major failure of the Kafue Gorge station would therefore deprive essential Zambian industries of power supply. The benefit of rehabilitating the Victoria Falls station to at- tain its rated capacity is the saving in generation required elsewhere. Because the station is a run-of-the-river installation, any additional generation will require less generation at the Kafue Gorge or Kariba com- plexes. The economic value of incremental generation on the intercon- nected system is the marginal cost of power from the highest-cost sta- tion, which is the Hwange thermal station in Zimbabwe. The economic be- nefit to Zambia alone of increased generation is the tariff at which ZESCO sells incremental energy to Zimbabwe, which is US$0.006/kWh. On this basis, and assuming a 70% capacity factor, the benefits of repairing Victoria Falls amount to US$368,000 per annum. At an investment cost of US$2.75 million and an assumed life of 20 years, the project's economic rate of return is about 12Z. In view of its high economic benefits, priority should be given to the repair of Kafue Gorge. There is also a sound case for the reha- bilitation of Victoria Falls. The total cost of the two repair and reha- bilitation programs is not known accurately. For the purpose of invest- ment planning, an indicative figure of US$5 million over and above the NORAD-funded program at Kafue Gorge is assumed, including about US$100,000 for the necessary diagnostic services. - 45 - In addition to essential repair and rehabilitation of the two generating plants, spare parts supply should be improved at all the gen- erating stations. A list of essential spares and preventive mair.tenance routines should be prepared at the smaller stations. Due to shortages of foreign exchange for spare parts, there is a backlog of parts maintenance and repair on all the existing generating stations, with the exception of Kariba North. Establishment of a fund for the purchase of spare parts totalling at least US$100,000/year is recommended. On completion of the Pensulo substation in the vicinity of Serenje in 1989, the currently isolated northeastern hydro system will be interconnected with the main grid. This will come at a time when the electric energy and maximum power demand on the northeastern system has largely caught up with the system's available generating capability. In the short-term, further demand growth in the northeastern area should be covered by supply from the main grid. When the power ge- neration facilities in the area are rehabilitated, temporary augmentation of the supply will be required from the same source. However, supply from the main grid is by a single circuit, and is therefore not firm. Due to the long distances involved, the installation of reactive compen- sation capacity at receiving points for voltage control may be required. 4.4.2 Diesel Generation Demand in several of the towns now supplied by diesel genera- tors is expected to grow beyond present generation capacities before 2006. Unless they are linked to the hydro-electric network in the in- terim, these isolated systems will need investments in additional diesel engines or, if economically feasible, in mini-hydro facilities, in line with the growth of demand. Total investments for this purpose up to year 2006 are estimated at US$0.6 million in the high demand scenario. 4.4.3 Transmission System On the base and low power demand forecasts, it is estimated that the capacity of the 330 kV transmission network will be adequate to satisfy domestic energy and power demand on the interconnected system through the year 2006. However, 330 kV transmission capacity between Leopards Hill and Kabwe is marginally exceeded in 1998 on the high demand scenario. This situation would be temporary, pending closure of the Nchanga Open Pit and/or the Nufulira smelter, both of which are forecast to occur around 1999. It is obviously uneconomic to construct an additional transmis- sion line to the Copperbelt to cover a brief period of possible under-ca- pacity. Demand growth in the Copperbelt should therefore be monitored closely during the early 1990s. If it is close to or above the high de- mand scenario, the options to consider are: (a) reducing load growth in the Copperbelt, e.g., by a temporary tariff surcharge or (b) making greater use of ZCCM's gas turbine generating capacity for peaking. - 46 - A project to construct a 132 kV line from Lusiwasi to Maorot a 66 kV line from Chipata to Lundazi, and later a 132 kV line from Maoro to Chipata, is in progress. The total cost of Phases I and I$ is US$19 mil- lion. Grant financing has been obtained for the project, which should be completed as part of the priority energy investment program. Funding has also been obtained for a US$25 million project to electrify the Mkushi farming block. Mkushi is an area of large-scale commercial farming, and requires power for irrigation and crop proces- sing. As the project is committed and funded by a soft loan, it too is included in the priority energy investment program. The only other major potential transmission project is the in- terconnection of the four isolated western diesel centers (Kaoma, Zambezi, Kasempa, and Kabompo), plus the towns of Lukulu and Chizela, with the main grid at Mongu and Mumbwa. The capital cost of the project is about US$80 million, equivalent to about US$12 million per year, as- suming repayment over 25 years at 12X. The benefits consist primarily of savings in diesel fuel, estimated at about US$500,000 per year in finan- cial terms and US$750,000 per year in economic terms, plus avoided diesel replacement and the extension of power supply to new customers in Lukulu and Chizela. As is evident, total benefits are only a small fraction of cos;s, so the project is clearly not viable. Cne further small transmission expansion project is justified in the short-term (1989-93). This is the installation of reactive com- pensation capacity to raise the capacity of the transmission lines feed- ing the Copperbelt (US$1.1 million). 4.4.4 Subtransmission and Distribution Rehabilitation The most urgent subtransmission and distribution investments in the short-term (1988-93) are in the selective reinforcement and rehabili- tation of the Lusaka subtransmission and distribution systems. The firm capacity of the existing 88 kV subtransmission system serving Lusaka is 110 MW, and Lusaka's peak demand is already in excess of 120 MW. Also, there is a substantial backlog of requests for power connections in the city, for which secure supply is not available. These investments have been identified by EKONO, IVO Interna- tional, FINNIDA, and the World Bank, which all confirm their priority. They are necessary both to eliminate serious overloading of the existing subtransmission and distribution system, and to facilitate additional consumer connections. Failure to reinforce the existing system could lead to major power interruptions to the capital city. The cost of the priority elements of this rehabilitation program is estimated to be US$29.9 million, made up as shown in Table 4.6. - 47 - Table 4,6: COMiONENTS AND COSTS OF THE PRIORITY LUSAKA POWER DISTRIBUTION PROJECT Components Cost a/ (USS million) A. Lusaka Distribution Project, Phase I 1. EstablIshment of a new Roma 132/33 kV, 2 x 40 MVA, and 33/11 kV, 2 x 10 MVA sub-station Including 27.2 km 132 kV transmission line Leopards Hill-Rome 5.1 2. EstablIshment of a new 132/33 kV, 2 x 40 WVA and 33/11 kV, 2 x 20 MVA substation at Coventry and 330/132 kV, 2 x 124 MVA extension at Leopards Hilll Including 28.5 km uprating of exIsting, 88 kV Leopards Hill-Coventry line to 132 kV 11.4 3. Load transfer rehabilitation and reinforcement of 33/11 kV substations at Cheiston, Dublin and University, including 33 kV connections to Roma 3.0 4. Extensions, reinforcement and rehabilitation of the 11 kV distribution system In Lusaka 3.1 5. Engineering and supervision for Phase I above 2.6 Subtotal 25.2 B. Other ProJect Components 6. 88/33 kV, 30 MVA transformer at Chongwe substation 1.6 7. Addition of 330/88 kV, 60 WVA transformer at Leopards Hill substation 1.0 8. Replacement of 33 and 11 kV swItchgear at Coventry St. substation 0.5 9. Change of feed point of Chisamba load to Chongwe substation 0.6 10. Addition of 88/33 kV, 30/45 WVA transformer at Waterworks substation 1.0 Subtotal 4.7 TOTAL 29,9 a/ End-1987 prices. Source: FINNIDA and World Bank estimates. - 48 - The FINNIDA prefeasibility analysis 5/ of the Lusaka Distribu- tion Project made some rough ettimates of the project's economic bene- fits. Assuming 5 load growth in the Lusaka area and valuing the econo- mic benefit of electricity to the end-user at US$0.05/kWh and the cost of potential supply interruptions at US$1 million per year, the project has an estimated economic rate of return (ERR) of 30Z. Assuming load growth of only 3Z and ignoring the economic cost of power interruptions, the ERR is 21x, s0 the project is clearly justified. Further investment could be needed in the Lusaka area after 1993 to provide for possible future load growth in the capital. Plans for this investment should be prepared simultaneously with the engineer- ing design work for the priority 1989-93 program. In addition to Lusaka, selective short-term replacement and re- inforcement investments are also needed in the subtransmission and dis- tribution systems serving Ndola and Kitwe, two of the principal Copper- belt towns. The total cost of these investments is estimated to be US$10.6 million, and their components are summarized in Table 4.7. Table 4.7: COMPONENTS AND COSTS OF THE PRIORITY COPPERBELT SUB-TRANSMISSION PFROJECTS Cost a/ Components (USS mlIlion) 1. Replacement of obsolete HV and NV switchgear in Ndola and Kitwe 2.6 2. Replacement of obsolete HV and MV swltchgear in the Copperbelt 3.8 3. Replacement of underground cable in Ndola industrial area 0.6 4. Reinforcement of existing substations in Ndola residential areas 0.1 5. Fourth bulk supply point In Kitwe Industrial area, Including new feeder cables 3.0 6. Improvement of telephone and radio communication 0.5 TOTAL 10.6 a/ End-1987 prices. Source: World Sank estimates. 5/ Lusaka Power Distribution Project, Prefeasibility Report, FINNIDA, September 1987. - 49 - The investments are to replace equipment that is obsolete and past its useful life. Their economic benefits are increased supply and the cost of the avoided power interruptions that otherwise would occur. These cannot be estimated accurately, but are relatively large, due to the advanced age and extremely poor condition of the existing equipment and the resulting high probability of system failure. In these circum- stances, the projects are considered to be highly economic. 4.4.5 Distribution Expansion Three scenarios for the future number of new ZESCO connections are presented in Section 4.3.1 above. The base case assumes 4,000 new connections, the high case 7,000, and the low case 2,000 new connections per year. ZESCO has recently averaged less than 3,000 connections per year. This could, and should, be improved by: (a) the supply of addi- tional distribution materials; (b) more aggressive marketing (e.g., dis- counts to new agricultural consumers); (c) supplying less costly hot- plates; and (d) by reducing the cost of new connections. The average cost per connection on the existing distribution system is estimated to be US$4,500. This high figure is due to the cost- ly standard of underground cable and overhead lines used and the sparse distribution of consumers. Using less costly distribution standards could reduce this figure to about US$2,300 per connection. In the more densely populated urban areas, the cost per connection could be reduced to US$1,000 or less if a large proportion of the households were connect- ed. Estimated total costs of distribution expansion over the 1988- 2006 period are shown in Table 4.8 for the base, high, and low scenarios, assuming use of either: (a) the past standard of construction and densi- ty of connections; (b) a lower-cost standard and the same density as in the past; or (c) a lower cost standard and a high density of connections. Table 4.8: COSTS OF NEW ELECTRICITY CONNECTIONS DURING THE PERIOD 1988-2006 (USS million) a/ Annual Reduced standard Reduced standard Scenario Number of Present standard with mostly with high density Connections of connections 014-lInes of connections Base 4000 308 199 68 High 7000 540 349 120 Low 2000 155 100 34 a/ End-1987 prices. Source: World Bank estimates. - 50 - The estimated annual costs of the distribution expansion in- vestment program under the base, high, and low expansion scenarios using the three alternative connection costs is shown in Table 4.9. At the historic average cost of US$4,500 per connection, even the low scenario program would cost US$9 million per annum, a large proportion of which would be in foreign exchange. Table 4,9: ANNUAL COST OF ELECTRICITY DISTRIBUTION EXPANSION WITH ALTERNATIVE STANDARDS AND CUSTOMER DENSITIES (USS million) Expansion Historic standard/ Reduced standard/ Reduced standard/ scenario low density low density high density (USS4,500/connection) (USS2,300/connection) (USSi,OO0/connection) Base (4000) 18.0 9.2 4.0 High (7000) 31.5 16.1 7.0 Low (2000) 9.0 4.6 2.0 Source: World Bank estimates. If the rate of new power connections is to be accelerated; (a) the cost per connection must be reduced by adopting cheaper materials and lower standards; (b) investment must be concentrated in high density areas where consumer surveys confirm there is a substantial potential demand for electricity; and (c) consumers must be encouraged to connect by the provision of cheaper wiring and cookers and by term payment schemes. 4.5 Power System Planning and Operational Improvements 4.5.1 System Planning Prior to 1988, all major generation and high-voltage transmis- sion planning was done by CAPCO. Planning for the generation, transmis- sion, and subtransmission systems is now done by the Planning Department of ZESCO's Engineering Services Division. Planning and reinforcement of the distribution network (33 kV and below) are done by the planning sec- tions of the Distribution Supply Divisions North and South. Local net- works are planned by the District Engineers. ZESCO's planning resources are very limited. The Head of the Planning Department is also Chief Electrical Engineer, and is able to de- vote little time to planning. On average his staff consists of three engineers, sometimes less. Only the most urgent matters are attended to, and there is virtually no long-term planning. For example, no attempt has been made to update the Power System Master Plan, issued in 1984. - 51 - With the transfer to ZESCO of generation and voltage transmis- sion planning responsibilities from CAPCO, strengthening of ZESCO's plan- ning capability is an urgent requirement. The Planning Department should be capable of producing short- and medium-term demand forecasts with which to periodically update the Power System Master Plan, and identify- ing and appraising priority investment projects. Strengthening of the staff complement, staff training and foreign technical assistance is re- quired, perhaps through cooperation with a major foreign power utility. 4.5.2 Commercial Operations The ESMAP Power Subsector Efficiency Study includes a detailed review of ZESCO's commercial operations and recommendations for their im- provement. This section summarizes the major findings of that report. Metering. The existing standard of metering contributes to ZESCO's non-technical losses and could be improved. The following im- provements are recommended: (a) inspect, seal and issue new identity numbers for all meters and record their installation, movement, and maintenance history; (b) strengthen meter workshop staffs and routinely test all meters every 10 years; and (c) for all new connections, install meters on building exteriors. Meter Reading. The following actions are recommended to im- prove the efficiency of meter reading: (a) reduce the frequency of meter reading from one to two months for all consumers other than those in the "D" category, but continue to bill monthly, based on estimated readings; (b) redesign the meter books to include only the account number, address and meter number, and with carbon inserts, so a copy of the reading can be sent directly to the Computer Department; (c) prepare a meter reading, billing and collection mannual; (d) institute a meter reader training and testing program; and (e) set productivity standards, measure employee performance, and replace inadequate performers. Billing. A further contributory factor to ZESCO's inadequate cash-flow is the time which elapses between meter reading and billing, which averages about six weeks. The purchase of a new computer provides an excellent opportunity for improvement. The following changes are pro- posed: - 52 - (a) install a new billing program, tailored to ZESCO's needs; (b) use the meter reader's data sheet as the source for on-line computer data-entry; and (c) hand-prepare and deliver bills to large customers. Collections. The level of non-technical losses within the ZESCO system are believed to be substantial. A program to meter distri- bution feeders or transformers and compare supplies with recorded sales is recommended. This would allow the major sources of non-technical losses to be identified and remedial action taken. There is also a problem of excessive payments arrears, which are equivalent to about five months' revenue. To reduce these arrears, it is recommended that: (a) a surcharge be added to the bills of late payers; and (b) non-paying consumers be disconnected after two months of non- payment. 4.5.3 Management Information System ZESCO has no comprehensive, computerized management information system, which means that the flow of technical and financial information to management is slow and incomplete, and data from different sources are sometimes inconsistent. A new accounting system has recently been in- stalled, a technical statistical databook will be set up over the next year, and a computerized billing system is proposed above. When these three databases are operating satisfactorily, a Management Information System that would extract key performance data for management should be established. 4.5.4 Training/Skills ZESCO operates two training centers and is assisted by regional and international institutions in the training of its employees. It also organizes in-house seminars and courses. The most urgent manpower pro- blem is the inability to attract and retain an adequate number of quali- fied persons. This is a result of the low salaries paid by ZESCO in com- parison to private enterprise firms and even some other parastatal orga- nizations. ZESCO should seek approval to raise the salaries and benefits of skilled personnel to a level at least equal to the best practice in the parastatal sector. 4.5.5 Export Marketing Strategy As mentioned earlier, most neighboring countries have access to low-cost domestic power supplies. With few exceptions, ZESCO's export - 53 - prospects are relatively limited. The optimum power export marketing strategy for Zambia therefore is to: (a) establish a standing joint committee on power cooperation be- tween Zimbabwe (the main potential market) and Zambia, dealing with both power trade and power generation planning. In this context, Zambia should continue to stress the importance of the benefits of long-term power sector cooperation; (b) promote, through the Southern African Development Coordinating Conference (SADCC), the concept and analysis of the potential for mutual support in power supply, so that regional reserve margins can be minimized and low-cost power can be exchanged on an as-available basis; (c) encourage contacts between the respective national utilities at senior and middle management to develop mutual confidence in system reliability; (d) cooperate with other neighbours through standby connections (if achievable at reasonable cost) and small-scale cross border supplies to isolated communities; and (e) pursue power export opportunities to economically strong, re- source weak countries, such as Botswana. 4.6 Power Costs and Tariffs To achieve the strategic objectives of reliable power supply to existing customers and extension of the supply to economically and finan- cially viable new customers, electricity tariffs must: (a) cover ZESCO's future revenue requirements; (b) reflect the marginal economic costs of power to different con- sumer groups; and (c) encourage additional economic uses of power, e.g., through off- peak supplies for irrigation, etc. 4.6.1 Existing tariffs and tariff proposals March 1988 electricity tafiffs for selected major consumer ca- tegories are summarized in Table 4.10 and the full tariff schedule is set out in Appendix 4.2. By world standards, current tariffs are extremely low, averaging about 5 ngwee/kWh (US$0.006/kWh). - 54 - Table 4.10: ELECTRICITY TARIFFS FOR SELECTED CONSUMER GROUPS (March 1988) Custooer Category Fixed Charge Max. Demand Charge Unit Charge k/month USS/month k/kVA/month USS/kVA/month ngweeAkWh UStAkWh Bulk (ZCCM) - - 402.64 50.33 0.99 0.12 Large Industrial (D3) a/ 17,225.0 2,153.13 11.80 3.51 3.51 0.44 Small Industrial (E4) b/ 71.5 8.94 - - 10.14 1.27 Household (E3) b/ 15.0 1.88 - - 7.00 0.88 a/ Max mhe demand 300-2,000 kVA. b; Unrestricted single phase and up to 15 kVA three phase. Source: ZESCO. ZESCO has requested an average 28% tariff increase, to be ef- fective October 1988. However, with inflation averaging about 50% per year, this will be insufficient to prevent a decline in real tariffs dur- ing 1988. 4.6.2 Current financial costs of supply on the main hydro network The average financial cost of power supply in 1987-88 is esti- mated to be about 8.3 ngwee/kWh, some 50 above forecast average revenue per kWh sold (Appendix 4.3, Table 2, column 1). Consequently, it is an- ticipated that the utility will make a substantial loss in 1987-88 and a further loss in 19g8-89, even if the current tariff request is granted. 4.6.3 Current financial cost of supply of isolated diesel networks The average financial cost of supply for isolated diesel sys- tems are estimated in Appendix 4.4 and summarized in Table 4.11 below: Table 4.11: AVERAGE REVENUE AND COSTS OF ISOLATED DIESEL SYSTEMS Parameter Kwacha/kWh Average revenue 0.33 Financial cost 1.26 Source: World Bank estimates. In order to cover financial costs, tariffs for power supply by diesel need to be increased by nearly 300%. Increases of this magnitude are not recommended, but efforts should be made to reduce the subsidy to isolated diesel electricity consumers. - 55 - 4.6.4 Tariffs required for future financial viability Assuming a constant exchange rate and that ZESCO borrows through the Government US$50 million during the period 1989-93 to fund its priority five-year rehabilitation/reinforcement investment program at 8X with 5 years grace and 20 years amortization, and then finances the distribution expansion program from its own resources, it is estimated that, in constant price terms, electricity tariffs would need to average about 11 ngwee/kWh in the Low and Base demand scenarios, and nearly 12 ngwee/kWh in the High scenario to ensure financial viability over the 1989-2006 period. March 1988 tariffs, if maintained in real terms, would generate less than 50% of the revenue required to finance the investment program. The required tariff increase would be less if ZESCO could in- crease its efficiency, borrow on more concessional terms to finance the 1989-93 investment program, or obtain concessional funds for the 1994- 2006 component of its projected investment program. 4.6.5 Tariffs and long-run economic costs Tariffs should reflect the economic cost of power supply so as to give the correct price signals to new consumers and encourage an eco- nomically efficient pattern of future power investment and consumption. Economic cost is best approximated by the long-run marginal cost (LRMC) of supply, which is the cost of an incremental expansion of the power system. Based on the recommended power system investment program for 1989-2006, and assuming a cost of US$1,000 per new connection at the dis- tribution level, the LRMC of electricity is estimated to be 5.6 ngwee/kWh (US$0.007/kWh) at the 66 kV level; 32 ngwee/kWh (US$0.04/kWh) at the 11 kV level; and Kwacha 1.28/kWh (US$0.16/kWh) at the 400 V level. A comparison of these three estimated LRMCs with current average revenue per kWh for the corresponding large industrial (D3), small industri- al/commercial (E4) and household (E3) customer groups (Table 4.11) shows that: (a) for the large industrial customer, current average revenue (n 6/kWh) is slightly higher than LRMC at the 66 kV level (n 5.6/kwh); (b) for the small industrial/commercial customer, average revenue (n 17/kWh) is just over 50% of LRMC (n 32/kWh); and (c) for the household customer, average revenue (n 10/kWh) is less than 102 of LRMC (K1.28/kWh). - 56 - Table 4.12: ESTIMATED LOhG-RUN ECONOMIC COSTS OF POWER AND CURRENT AVERAGE REVENUES (kWh) Equivalent LRMC Current Average Customer Group voltage Kwacha USS Revenue level Kwacha USS Large Industrial (D3) 66 kV 0.056 0.007 0.06 0.008 Small Industrial (E4) 11 kV 0.32 0.04 0.17 0.02 Household (E3) 400v 1.28 0.16 0.10 0.01 Source: World Bank estimates. It is not recommended that tariffs be adjusted to match long- run marginal costs exactly. However, over time, their structure should be brought more closely into alignment with economic costs. This implies that future tariff increases should be proportionately larger at the 33 kV level and below, and proportionately smaller for high voltage con- sumers. A lifeline tariff should be considered for household consumers of small quantities of power and energy to protect them from the impact of low voltage tariff increases. 4.6.8 Export Tariffs The present tariff for sales to Zimbabwe is set in Kwacha at a fixed US dollar exchange rate and with agreed annual increases. The price per unit is modest (US$0.01-0.02/kWh, depending on the load fac- tor). Nevertheless, because of their volume, these exports have made an important contribution to ZESCO's overhead. Although the tariffs are above the economic cost of supply, they are below the marginal cost of alternative generation from coal fired plants in Zimbabwe. This might provide the opportunity for some future escalation. There is an agreed tariff for imports from or exports to Zaire, but Zaire has not paid for imports of power since July 1986. This arran- gement is highly uneconomic to Zambia, as Zaire often imports energy dur- ing the Zambian peak, which has occasionally led to load-shedding in the Copperbelt. ZESCO has thereby lost revenues from domestic customers, and economic costs have been imposed on Zambia due to lack of power. It would be appropriate for ZESCO to insist on payment or limit the supply to Zaire to a level that can be accommodated without load-shedding. 4.6.9 Off-Peak Tariff With surplus, low-cost energy, an off-peak tariff could be jus- tified for substantial new uses of electric power if these require no in- vestment by ZESCO in additional distribution capacity. One potential use for such a tariff would be irrigation, which could use power exclusively outside the peak period. Such a tariff would support the Government's - 57 - drive to increase agricultural output. Another possibility is to encour- age the substitution of electricity for higher-cost alternative fuels for off-peak industrial use. ZESCO should seek to identify such opportuni- ties and negotiate special contracts that would result in additional re- venue at low financial and economic cost. 4.6.10 Timeliness of Tariff Adjustment A contributory factor to ZESCO's currently inadequate revenues is the length of time it takes to agree a change in tariffs. In theory, the procedure takes five months. In practice, it often takes over a year. To overcome this problem, it is recommended that tariffs be re- viewed automatically at least once each year, on a firm time schedule, and the new tariff announced and implemented by a fixed tariff review date, perhaps April 1. - 58 - V. PTROLE 5.1 Policy Issues and Options When world oil prices peaked after 1979, petroleum imports ac- counted for nearly 20% of Zambia's total foreign exchange earnings. In 1988, oil prices are well below their earlier peak, but petroleum imports still account for over 10% of export revenues. Shortages of foreign ex- change are the fundamental constraint to Zambia's economic development. Therefore, minimizing the cost of petroleum imports must be a major ob- jective of the energy strategy. When world oil prices start to rise, as they surely will, and copper exports to decline, the need could become still more pressing. Against this background, the following petroleum sub-sector is- sues are examined: (a) the optimal future petroleum exploration strategy, and the ac- tions required to implement it; (b) petroleum pricing and taxation policy; (c) the condition of the Tazama oil pipeline and associated infra- structure, and the steps needed to ensure reliable pipeline operation in the future; (d) the efficiency of the Indeni refinery; (e) the oil market conditions under which refinery upgrading should be considered; and (f) whether continued import of commingled products and their re- refining, or import of finished products would be cheaper. In Chapter 9, the scope for conservation and substitution of petroleum products is assessed. 5.2 Oil and Gas Exploration 5.2.1 Potential Altho-sh Zambia has no known petroleum deposits, there are four sedimentary bas- s in the country, the largtst of which is the Western Zambia Basin, which covers about 180,000 km of Western Zambia and ex- tends into neighbouring Botswana and Angola. The deepest basin is proba- bly the Luangwa Basin, which lies in the Luangwa Valley, and is perceived to be the most promising basin for oil and gas. - 59 - 5.2.2 Exploration Promotion Program Prior to 1982, there had been no seismic surveys or exploratory drilling in Zambia. A World Bank Petroleum Exploration Promotion Project subsequently funded an aeromagnetic survey over much of the country and a limited gravity survey. A comprehensive geological report and model con- tract were presented to the ;etroleum industry in June 1935. Two companies agreed to undertake preliminary surveys and ex- ploration drilling. Placid Oil Co. took up two of the four blocks on of- fer (one in the Luangwa Valley and one to the west of Lusaka close to the Kafue National Park) and Mobil Oil Co. took up one block to the south of Placid's Luangwa block. The fourth block in Western Zambia was of insuf- ficient interest to attract a bidder. Placid's agreement, signed in February 1986, was for a four- year exploration period. This started with gravity and seismic surveys in both its blocks. Completion of these surveys during 1986 led to ces- sation of work on the Kafue Block and a decision to drill in the Luangwa Block, starting in September 1987. In the subsequent six months, two dry holes were drilled. Mobil signed an agreement about one year after Placid, in January 1987. It has conducted gravity and seismic surveys, interpreta- tion of which was completed in March 1988. It is understood that Mobil did not find promising structures in its Luangwa block and will cease op- erations in that block. Placid and Mobil have each expressed an interest in a new area, lying to the north of Lake Kariba, an area which was not included in the initial offering. Placid is also understood to be seeking a partner for continued exploration work in its Luangwa block, and has applied for other exploration acreage north-west of this block. The Government's Hydrocarbon Unit is planning a seismic survey in the western part of the country, to be financed by the Government at a cost of KS million. 5.2.3 Environmental Aspects The Luangwa Valley conta;ns two of Zambia's most important na- tional parks and is an area of international wildlife repute. The Placid exploration activity has been outside the national park, but Mobil's was substantially within it. The model concession agreement accepted by both companies gives the Government the right to suspend operations if neces- sary to prevent environmental or wildlife damage, and to order restitu- tion. At the exploration stage, the physical damage is primarily the construction of access roads, which will grow back within a year or so. Nevertheless, careful and continual monitoring is required. - 60 - 5.2.4 Future Exploration Promotion Strategy The reasons for encouraging international oil companies to ex- plore in Zambia are as strong as ever. Even a limited chance of success is worth pursuing, provided the bulk of risk capital comes from interna- tional sources. Although the two tests drilled by Placid are somewhat discouraging, the fact that Mobil and Placid are looking to stay in the country suggests that the area has not been condemned. The Government should therefore consider enhancing its efforts to encourage direct for- eign investment in oil exploration. The objectives of the next phase of the exploration promotion strategy should be to: (a) sustain the interest of Placid and Mobil in undertaking further exploration, in existing agreement areas and in new ones, at minimum cost to Zambia; (b) improve the Government's understanding of the country's hydro- carbon potential by analyzing the results of the surveys and drilling carried out by the two companies, which should be made available promptly to the Hydrocarbon Unit; (c) reinterpret old data on other areas not taken by companies to better assess their potential; and (d) improve information on the unallocated block in the western part of the country, and follow up with other surveys, where these appear likely to yield useful results. As a prerequisite for all the above, and to ensure that Zambia gains the full benefit of the oil companies' exploration activities, it is essential to strengthen the Hydrocarbon Unit so that it is able to: (a) monitor the work of the oil companies effectively; (b) undertake fur- ther essential data acquisition, and interpretation; and (c) encourage further exploration activity. This requires training of its personnel, provision of operational support, and development of an adequate geologi- cal information base. 5.2.5 Recommendations To ensure the continuation of the exploration effort, follow-up Petroleum Exploration Promotion technical assistance is recommended. This could consist of some or all of the following elements: (a) efforts to upgrade the Block in Western Zambia by seismic surveys; (b) integra- tion of data on the Block in which Placid has not drilled; (c) interpre- tation of existing airmag data on areas not originally offered; (d) col- lection of new airmag data on the Chambeshi area and the area north of Lake Kariba; and (e) strengthening of the Hydrocarbon Unit by the addi- tion of an expatriate petroleum specialist and staff training. The total cost is provisionally estimated at up to US$6.6 million, spread over a - 61 - number of years. The various steps should be planned in line with the availability of grant aid and budgetary resources. Private investors should be encouraged to undertake all or part of the geophysical work. It is recommended that the Hydrocarbon Unit be linked to and physically relocated near the Geological Survey. This will enable it to share facilities, equipment, and personnel. Subject to obtaining suffi- cient data, and to strengthening the Unit, a selective, targetted explor- ation promotion effort is recommended, directed at companies potentially interested in medium-scale deposits appropriate to the regional market. The terms of any future concession agreements will need adjustment to re- flect this. 5.3 Petroleum Consumption and Supply 5.3.1 Recent Consumption Trends Compared with peak sales of 818,565 tons in 1976-77, the cur- rent sales of most petroleum products show very sharp declines. In to- tal, sales in 2986-87 were down by one-third, to 546,873 tons, against 10 years' earlier. The only exceptions to the decline were illuminating ke- rosene and bitumen (Table 5.1). In recent years, the rate of decline in sales has elowed and, in the case of gas/diesel oil, consumption has actually shown a slight increase. The pattern of consumption as between products has changed markedly. The important features of these changes are a decrease in the share of gasoline and an increase in the share of diesel. The latter has been coupled with an increase in the shares of both illuminating kerosene and jet fuel (the latter, however, having decreased in absolute tonnage), resulting in a sharp jump in the share of middle distillates as a whole from 53.7% in 1976-77 to 61.4% in 1986-87. The long-term trend statistics shown in Table 5.1 are inclusive of exports by the private oil companies, which are not available sepa- rately for most of the years covered. Separate data for domestic and ex- port demand are, however, available for calendar years 1986 and 1987, and are given in Tables 5.2 and 5.3. The striking feature of these data is the sharp increases recorded in 1987 in the domestic consumption of each major product except regular gasoline and light fuel oil. Exports were also much higher, following rather low figure in 1986. A number of difficulties were experienced in obtaining consis- tent data on all aspects of petroleum supply and demand and the sectoral breakdown of consumption. Consequently, it is recommended that a greater effort be put into data collection, and that the various operating com- panies in the sector understand their duty to collaborate promptly in this effort. Table 5.1: DOMESTIC MARKET SALES OF PETROLEUM FUELS a/ (Tons) % Change % Shares Product 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1976/77 1976/7 1986/87 to 1986/87 Gasoline Premium 145.333 92,029 75,046 62,382 73,562 78,331 80,813 86,544 80,620 77,465 77,297 (47) 17.8 14.1 Regular 40,931 68,223 72,639 45,084 44,097 39,377 30,231 24.545 23,546 24,426 20,1S1 (49.5) 5.0 3.8 Total gas 186,264 160,252 147,685 107,466 117,659 117,708 ;11,044 111,089 104,166 101,891 97,948 (47.5) 22.8 17.9 Gas Oil Diesel (Incl. LSGO b/ 362,652 317,052 303,128 241,640 273.229 275,405 271,154 261,015 247,035 220.714 266.379 (26.5) 44.3 48.7 I-Kerosine 24,687 24,111 26,929 27,545 29,608 34,347 32,515 35,098 29,073 25,968 26,901 9 3.0 4.9 N Jet A-1 52,527 58,686 54,745 64,670 64.634 59,207 53,199 54,391 45,769 39,941 42,363 (19.4) 6.4 7.8 Fuel Oil HFO 174,238 181,616 162,086 164,992 172,298 134.052 106,391 111,570 97,013 80,995 72,473 (58.4) 21.3 13.3 LFO 857 3.732 5.567 9.669 11,909 11,093 7.794 12,787 22,812 17,827 20.622 c/ 0.1 3.8 Total FO 175.095 185,348 167,653 174.661 184.207 145.145 114,185 124,307 119.825 98.882 93.095 (46.8) 21.4 17.1 Bitumen 9,200 7,695 5,561 7,888 8,588 14,065 13,419 14,175 15,307 15,902 14,362 56 1.1 2.6 LPG 8,140 9,553 5,979 2,069 2,363 2,802 6,967 2,169 6,535 6,544 5,037 (38.1) 1.0 0.9 Others - - - 390 399 552 396 394 218 603 788 _ - 1 Total 818,565 762,697 711,680 626,239 680,687 649,32 602,879 602,638 567,928 510,385 546,873 (33.2) 100.0 100.0 a/ Includes exports by the ofl companies, but not exports by ZIMOIL (formerly ZNEL). b/ Low sulphur gas oll. cl Large Increase. Source: ZIHCO. - 63 - Table 5.2: PETROLEUM PRODUCT CONSUMPTION AND EXPORTS, 1986 ('000 tons) Domestic Sales Exports Total Premium gasoline 73.8 - 73.8 Regular gasoline 17.6 7.1 24.7 Kerosene 26.0 - 26.0 Jet fuel 41.1 - 41.1 Gas oil a/ 242.6 1.7 244.3 Light fuel oil 19.8 0.1 19.9 Heavy fuel oil 68.8 0.1 68.9 LPG 4.5 4.5 Bitumen 14.8 0.2 1S.O Naphtha 0.3 - 0.3 Other 0.4 0.2 0.6 TOTAL 505.2 13.9 519.1 8/ Including low-sulphur gas oil. Source: ZIMCO. Table 5.3: PETROLEUM PRODUCT CONSUMPTION AND EXPORTS, 1987 ('000 tons) Domestic Sales Exports Total Premium Gasoline 83.6 5.2 88.8 Regular Gasoline 9.8 26.4 36.1 Kerosene 31.3 - 31.3 Jet Fuel 50.2 - 50.2 Gas Oil a/ 257.5 19.9 277.4 Light Fuel Oil 15.4 0.3 15.7 Heavy Fuel Oil 74.9 _ 74.9 LPG 0.2 6.3 6.5 Bitumen 14.1 2.5 16.6 Other 0.7 0.4 1.1 TOTAL 537.6 61.0 598.6 a/ Including Low-sulphur gas oil. Source: ZIMCO. 5.3.2 Supply Arrangements and Sources Under the terms of a contract between the Government and the Kuwait Petroleum Co. (KCP), signed in April 1987, petroleum supplies in 1987-88 were purchased wholly as a mix of products. The mix comprised specified proportions of each major product to match anticipated de- - 64 - mand. The contract included provisions for extension on the basis of mu- tual agreement, and negotiations for such extension were completed on si- milar, but revised terms, in March 1988. The commingled products are imported through a Single Point Mo- oring (SPM) terminal at Dar-es-Salaam, delivered to a tank farm, and transferred to the Tazama pipeline for transport 1,700 km across Tanzania to the Indeni refinery near Ndola in Zambia. At Indeni, the petroleum product mixture is re-processed to yield approximately the products de- manded by the markets. Terms of the supply contract and the financing terms are good. FOB prices are based on Platts at Arabian Gulf, and the contract incorporates a freight charge based on the published World Scale rate. There seems to be little purpose in disturbing these arrangements, for example to explore wider cooperation with neighboring countries in bulk purchase of petroleum. 5.4 Petroleum Pricing 5.4.1 Financial Analysis While wholesale petroleum product prices in 1987 were not sub- sidized overall, gasoline was priced about 75X above financial cost and kerosene about 7X below financial cost, measured as import parity plus pipeline and refinery cost. (Table 5.4) Table 5.4: PETROLEUM PR00iCT FINANCIAL COSTS AND PRICES, 1987 Cost/Price Kerosene Gas Oil Gasoline Fuel oll ------------ -US$/ton--------… CIF Oar-es-Salaam 169.6 144.8 158.7 a/ 85.6 b/ Pipeline, off-loading, etc. 27.0 27.0 27.0 27.0 Cost of refinery input 196.6 171.8 185.7 112.6 Cost of refinery output c/ 205.9 179.9 196.5 119.2 …--- ------Kwacha/m3 --.--…----.. Financial cost (K/m3) d/ 1,283 1,197 1,200 927 Wholesale price ex-storage (K/a3) 1,190 1,350 2,120 950 Wholesale price/financial cost 0.93 1.13 1.77 1.02 a/P remium gasolIne estimated by adjusting the CIF cost of naphtha for value of by- products. bl CIF cost of fuel oil, adjusted for bitumen and gas oil yields. c/ Assuming refinery fuel use and loss of 5.5%. d/ Using exchange rate of K8.2/USS1. Source: ZIMCO and World Sank estimates. - 65 - 5.4.2 Economic Analysis Estimates of the end-1987 economic costs of supply of each ma- jor product are shown in Table 5.5 and 5.6. These are based on the con- version of CIF costs from US dollars to Kwacha using a shadow exchange rate of K12/US$1. They also differ from the costs shown in Table 5.4 by the exclusion of financing charges. These estimates show that, for each major product except gasoline, the end 1987 wholesale price was substan- tially below the estimated economic supply cost. While these differences persist, it will be important to use the economic cost in all policy an- alysis and decisions relating to the substitution or conservation of gas oil, kerosene, and fuel oil. Table 5.5: KEiXOSENE AND GAS OIL ECONOMIC COSTS AND WHOLESALE PRICES, 1987 (Price/ton) Item Kerosene Gas Oil CIF cost USS169.6 USS144.8 At K12/USS K2,035 K1,738 Cost of pipeline transport, refinery, etc. a/ US$24.0 K K197 K197 Total costs per ton Input to refinery K2,232 K1,935 Total costs per ton output K2,337 K2,026 Economic costs per m3 K1,996 K1,721 Wholesale price m' K1,279 K1,365 a/ Excluding finance charges. Source: ZIMCO and World Bank estimates. Table 5.6: PREMIUM GASOLINE AND FUEL OIL ECONOMIC COSTS AND WHOLESALE PRICES, 1987 (Kwacha) Item Gasoline Fuel Oil Economic cost per ton K2,267 K1,339 a/ Economic cost per m3 K1,688 K1,270 Wholesale price m3 K2,120 K950 a/ After adjustment of CIF cost for value of bitumen at 1987 requirement and gas oil ylelded In processing. Source: ZIMCO and World Bank estimates. - 66 - 5.4.3. Taxation Policy The pricing of kerosene below gas oil, the reverse of their in- ternational cost relationship, has been reinforced by fiscal policy, which, in 1987, taxed kerosene at K0.192/liter and gas oil at K0.378/liter. The effects of this on wholesale prices inclusive of duty are illustrated in Table 5.7. Table 5.7: PRICES AND DUTIES ON KEROSENE AND GAS OIL (K/m3) Price Coumponent October 1985 August 1987 Kerosene WIholesale price 1,206 1,279 Tax 100 192 Total 1,306 1,471 Gas 01 I Wholesale price 1,272 1,365 Tax 320 378 Total 1,592 1,743 Source: ZIMl. 5.4.4 Pricing Recommendations As a consequence of subsidizing kerosene in the past, it has been used in lieu of gas oil as an industrial fuel. Its consumption has therefore been much more buoyant than that of most other petroleum pro- ducts. In 1987, the consumption of kerosene increased by more than 201. To combat this, ZIMCO decided in 1988 to dye ke5osene for indus- trial use and to raise its wholesale price to K1,481/mr. This resulted in a pre-tax price of about 86X of the economic cost, as estimated in Table 5.5. Consideration should be given to further increasing the price of industrial kerosene. This would make it easier to raise diesel prices by reducing the incentive for kerosene substitution. There are twin ar- guments in favor of such a move. In industry, a higher price for diesel would strengthen the incentive for its substitution by indigenous elec- tricity or coal. In its use as automotive fuel, a higher price for diesel would reduce the present large and distorting differential between diesel and gasoline prices. This would be an administratively easy and effective means to promote fuel conservation in road transport. - 67 - The relationship between gasoline and diesel prices and taxes and the adequacy of those taxes in terms of covering road user costs are discussed in Chapter 9. In the light of this discussion, and of the eco- nomic cost estimates given above, it is recommended that diesel prices be increased significantly to bring them closer to those of gasoline, whilst maintaining a differential between the price of diesel and industrial ke- rosene reflective of the latter's higher economic cost. Higher prices for diesel oil would have a fairly small impact on industrial costs. Few industries other than cement, bricks, glass and steel, are energy intensive, and even a large price increase for petro- leum products will have small impact on total :osts and subsequent infla- tion. Similarly, the inflationary impact of price increases for auto- diesel is often over-emphasized and used as an excuse to continue subsi- dization. Transport fuel is a modest component of the total cost of con- sumer items in Zambia, and is a sensitive but not dominant item in the cost of passenger transport operations. 5.4.5 Retail Prices and Petroleum Marketing Company Margins Retail petroleum prices have been adjusted 11 times over the last 8 years, reflecting both changes in the international oil market and the exchange rate of the Kwacha. ZIMCO regularly monitors international price movements so that Government approval can be sought for adjustments in good time. The lengthy time-span from loading supplies in Kuwsa;t to sales from Indeni allows ample time for this process. Consequently, the major factor affecting the financial position of ZIMOIL and the other pe- troleum marketing companies is being handled very satisfactorily. The marketing companies are allowed a wholesale margin of 6X for motor fuels and lower rates for other products. Retailers are allow- ed a margin of about 6%. These rates are generous, and the various oil distributors are quite profitable. There is an additional transport charge, set according to distance, resulting in different Government-pre- scribed prices in each of 61 towns. Because retail petroleum prices are set by Government, there is little real competition among the distribution companies. This lack of competition inevitably leads to costs higher than would be experienced if the companies competed on price as well as location and service. More- over, for the volume of products sold, there are a large number of out- lets, resulting in high overheads per gallon sold. A move to ceiling prices, rather than fixed prices, is recommended to promote price compe- tition. The Government could also allow ZIMCO to compete with existing distributors for bulk supplies to large enterprises. - 68 - 5.5 Demand Forecasts 5.5.1. Domestic The forecast evolution of petroleum product consumption on the base, low and high scenarios is shown in Table 5.8. Table 5.8: FORECAST CONSUMPTION OF PETROLEUM PR03UCTS UNDER ALTERNATIVE GDP GROWTH SCENARIOS ('000 tons) 1989 1996 5 lncr. 2006 % lncr. (decrease) (decrease) 1989-96 1996-2006 Base Case Gasol Ine 104.3 88.8 (14.9) 95.5 7.6 Jet fuel 50.2 43.6 (13.2) 53.3 22.2 Kerosene 21.0 33.7 60.4 40.6 20.5 Gas olI/Diesel 262.5 265.0 1.0 286.3 8.0 Fuel ofl 108.2 66.5 (38.5) 45.3 (31.9) Other 16.3 18.6 14.1 23.0 23.7 TOTAL 562.5 516.2 (8.2) 5#A.O 5.4 Low Case Gasoline 104.3 79.2 (24.1) 72.0 (9.1) Jet fuel 50.2 37.4 (25.5) 37.4 - Kerosene 21.0 33.5 59.5 40.8 21.8 Gas oIl/Dlesel 262.5 233.2 (11.1) 205.4 (12.0) Fuel oIl 108.2 63.3 (41.5) 39.2 (38.1) Other 16.3 16.0 (1.8) 16.0 - TOTAL 562.5 462.6 (17.8) 410.8 (11.2) High Case GasolIne 104.3 97.4 (6.6) 119.1 22.3 Jet fuel 50.2 49.2 (2.0) 69.2 40.6 Kezosene 21.0 33.5 59.5 40.6 21.2 Gas olI/Diesel 262.5 287.7 9.6 349.5 21.5 Fuel ofl 108.2 69.7 (35.6) 51.4 (26.3) Other 16.3 21.3 30.7 29.7 39.4 TOTAL 562.5 558.8 (0.7) 659.5 18.0 Source: World Bank estimates. - 69 - The key features of the forecasts may be summarised as followss (a) the recent growth of gas oil/diesel consumption is forecast to slow sharply, and, in the low scenario, a decline is foreseen; (b) kerosene consumption is forecast to rise in proportion to the expected increase of the number of households. But, as a con- sequence of higher prices for industrial kerosene, the sharp increases in recent years are not expected to continue; (c) fuel oil consumption is expected to fall sharply, mainly due to the forecast decline in demand from the copper industry during the mid-1990s, assuming the Nkana smelter converts to coal; and (d) gasoline consumption is forecast to decline initially and then to increase moderately by 2006 as the effects of higher diesel prices are felt. In Chapter 9, the scope for substituting electricity for fuel oil and other petroleum products in copper mining and in industry is dis- cussed. The above forecasts incorporate the effects of the planned sub- stitution of coal for fuel oil at ZCCM's Nkana smelter. Other substitu- tion possibilities are more speculative, and their possibile demand ef- fects are not considered. 5.5.2 Exports With an underutilized bulk supply pipeline and refinery, Zambia appears prima facie to be a logical source of petroleum product supply to its similarly land-locked neighbors. The Tazama pipeline-albeit needing substantial rehabilitation investments--and the Indeni refinery are sunk costs, offering a comparatively cheap mode of bulk supply, not only to Zambia, but potentially to those areas of Zaire, Zimbabwe, Malawi, Botswana, and Tanzania which are accessible. In the past, as much as 80,000 tpa of products have been ex- ported to the neighboring region. In 1987, which was a "good" year for exports, they totalled 61,000 tons. The exports have been primarily of regular gasoline, gas oil, and LPG. However, there are obstacles to a continuing high-level of exports. Competition in many cases, e.g., Malawi and Botswana, comes from keenly priced deals made by South Africa. Malawi is also constructing facilities for supply from Dar-es- Salaam. Lack of foreign exchange to pay for imports can be a problem. This applies, for example, to Zaire. And on the supply side, there is the ever-present possibility of Zambia's inability to supply, due to a lack of sufficient road and rail wagons or a temporary shortage of for- eign exchange. This not only leads to interruption of agreed exports, but also to hesitancy on the part of importers to rely on future supplies from Zambia. - 70 - Looking to the future, average exports of 50,000 tons per annum are forecast. The strategic objective should be to maximise profitable exports on a year-to-year basis, after giving priority to domestic re- quirements. Pricing policy for exports will need review, to ensure that prices both cover costs and are competitive with alternative sources of supply. 5.6 The Tazama Pipeline Rehabilitation of the 20 year-old Tazama oil pipeline is pro- bably the highest priority energy investment for Zambia. Sections of the pipeline are badly corroded by incursion of sea water and external chemi- cal action. Detailed engineering analysis has shown that the resulting leakage is extensive and worsening. This threatens both severe ecologi- cal damage along the pipeline route and a major interruption of petroleum product supplies to Zambia. The initial investment required for the core program to reha- bilitate the line is estimated to be US$41.2 million, covering repairs to the pipeline, corrosion protection, mechanical, pump plant, electrical, instrumentation, telecommunications, civil works, tank farm, and en- gineering services. Some five years later, a further program of expendi- ture will be necessary, amounting to around US$15-20 million, and five years later, about another US$15-20 million. Detailed engineering for repair of the pipeline between km 79 and km 155 has been done, and the construction work is scheduled to be completed in December, financed by a US$12 million loan from Italy. Re- flecting the urgency of measures to tackle the critical corrosion pro- blems in the other worst-affected pipeline sections, Zambia has approach- ed the Italian Government for an extra US$10 million loan so that the whole task of emergency repair work can be undertaken as one job. A further US$19.2 million is still required to complete the first phase of the overall repair program. The need for extensive rehabilitation results from many years of inadequate maintenance, little attention to obvious corrosion pro- blems, theft of corrosion protection systems, and lax control of offshore operations, resulting in prolonged and extensive seawater incursions. Tazama' s previous management did not focus its limited resources on these priority issues. In recent months, ZINCO and Tazama's management have taken steps to rectify the situation. Tazama's management has been reorganized and more experienced technical personnel appointed to key positions. ZIMCO has been taking a more active interest in the company and providing the type of support needed to make it a viable entity. The pipeline tariff is now fixed to cover the cost of rehabilitation investment and to provide for adequate maintenance. Continued support from ZIMCO and the - 71 - retention of some expatriate assistance will be required to ensure satis- factory performance in the future. 5.7 Indeni Refinery Opened in 1973, the Indeni hydroskimming refinery has a capaci- ty of 1.1 tons per annum. The two principal issues relating to the re- finery's current operational performance are: (a) The necessity of major maintenance at a refinery that is now 15 years old. Immediate outlays of some US$3 million are estimat- ed to be required for investments in instrumentation, replace- ment of furnace coils, heat exchanger parts, and other work. In subsequent years, further expenditures will be necessary which cannot be forecast with any certainty. It is anticipated that at least some US$3 million of the initial requirement may be obtained from Italy. (b) The possibility of efficiency improvements, which would reduce the rate of refinery fuel use and loss. Now at around 7%, this is not particularly high for a refinery of its type, size, and age. It is important to bear in mind that this percentage is calculated on a weight basis, and is therefore higher than when calculated on a volume basis. However, there is scope for imr- provement, and Indeni management have identified steps to redu- ce fuel use and loss to about 5.5Z. These consist of replace- ment of the hot oil heater; installation of ejectors for the Bitumen Vacuum Unit, reformer feed, vacuum feed and hydrotreat- er feed pre-heaters; modification of the crude pre-heat system; installation of a pre-flash tower; and installation of an API separator. Their total cost is about US$3 million. As a separate matter it is also proposed, but not yet decided by the Cabinet, to invest US$3 million in strategic storage at Indeni, to pro- vide sufficient feedstock to cover operations should there be a breakdown of supplies. This is a relatively small investment for the security it brings. In general, the refinery is well run, despite the fact this it is operated on a cost-plus basis. Overall operating costs, excluding fuel use, average US$2.50 per barrel, reflecting rather high manning levels. Payment is on a processing fee basis at cost plus a 301 dividend to the shareholders, the company being owned 50/50 by AGIP and ZIMCO. It would be appropriate to investigate whether the fee structure can be re- vised to give an incentive for efficiency, and to target ways to gradual- ly reduce manpower levels. - 72 - 5.8 Storage, Transport and Terminal Facilities Petroleum storage facilities are operated at Dar-es-Salaam and Indeni. At Dar-es-Salaam, there are six tanks owned by Tazama Pipelines to receive imports of commingled products brought ashore by pipeline from the single-point mooring (SPM), through which tankers of around 100,000 deadweight tons (DWT) are off-loaded. These tanks comprise three of 37,000 m and three of 40,000 m3. One of each size category is currently not operational, pending repair. Rehabilitation of the tank farm is in- cluded in the estimates cited above for expenditures needed to rehabili- tate the Tazama Pipeline system. The same needs for strengthening man- agement and operational skills apply at the tank farm as to the pipeline. At Indeni, there are two tank farms, one providing operational storage for the refinery, and one storage from which the oil colipanies draw their suppl es. In total, this storage comprises 60,000 mj feed- stock, 106,800 m white products, 36,440 m3 fuel oil and bitumen, 12,200 ml intermediate products, and 1,800 m3 LPG. The tanks are in gen- erally good condition. Transport of finished products from the Indeni terminal is mainly by road wagons over short distances to the principal petroleum consuming areas in the Copperbelt. To Lusaka, transport is by both road and rail. Road tankers are in short supply, and additional numbers are needed. These are included in the priority investment program in the sum of US$2 million. To the extent that rail terminal facilities can be im- proved, coupled with greater efficiency and new investment in the rail- way, increased use of the railway for long-distance movement of petroleum products would bring significant savings both in costs and in energy use per ton transported. Expenditure on distribution storage and rail-hand- ling facilities is recommended only for the Zambian market, and not for export, because foreign markets are too uncertain. The proposed terminal at Livingstone needs to be teconsidered from this viewpoint, as sales po- tential to Zimbabwe and Botswana appears to be limited. A study of that potential should be completed and the market potential clearly establish- ed before any investment is made. 5.9 The Economics of Refinery Closure 5.9.1 The Issue There has been much debate as to the relative costs of the existing petroleum import and processing arrangements vis-a-vis the al- ternative of closing the Indeni refinery and converting the Tazama pipe- line to transport batched white products in lieu of commingled pro- ducts. This option is re-examined here to take fully into account cur- rent and forecast demand patterns for petroleum products and updated ca- pital costs. Details of the analysis are set out in Appendix 5.1. - 73 - The principal cost components of the two options are: Refinery Case (existing system) (a) rehabilitation of the Tazama pipeline, as presently configuredt to transport commingled products; (b) refinery operating and maintenance costs. White Products Case (a) rehabilitation of the Tazama 8-inch line to eliminate use of the 12-inch loops, to avoid excessive batch contamination; (b) additional ocean freight costs from using 30,000 DWT products carriers rather than 100,000 DWT commingled products carriers; (c) import by rail of fuel oil, bitumen, and jet fuels, which can not be moved through a white products line; and (d) purchase of gasoline rather than naphtha (which presently can be upgraded to gasoline by the refinery). Estimates of the above costs were used to prepare a spreadsheet analysis of the total costs, over the period 198"-2006, for the supply of products to meet the base case petroleum product demand forecast. This forecast assumed maximum technical substitution of fuel oil by 2CCM. These costs were discounted to Net Present Value at a discount rate of 12%. 5.9.2 Results of the Analysis This detailed analysis shows that it is less costly to continue with the present transport/refining system than to close the refinery and convert the pipeline to a white products line. The estimated NPV of the costs of supply from closing the refinery and converting the Tazama line to white products is US$221.6 million, which is US$52 million higher than the NPV of the costs of rehabilitating the existing pipeline and continu- ing to import and refine commingled products on terms such as those cur- rently in force. (Table 5.9). Moreover, the current import arrangement requires substantially less investment than refinery closv're and pipeline conversion, because the latter would necessitate rehabilitation of the 8-inch pipeline sec- tions that are currently looped. Therefore, it is more consistent with a constrained energy investment program, which is all that can be financed in Zambia's current economic situation. - 74 - Table 5.9: NET PRESENT VALUE OF THE COSTS OF ALTERNATIVE PETROLEUM SUPPLY ARRANGEMENTS (US3 million) Existing Alternative Commingled Products White Products Refinery Case Pipeline Case Ocean freight cost (net) - 31.66 Interest on working capital 15.44 4.84 Pipeline capital cost 42.75 64.90 Pipeline operating cost 32.46 50.84 Rail cost - 69.38 Refining cost 78.61 - Total cost 169.26 221.62 Source: World Bank estimates. While continued refinery operation is economic at present, re- finery closure and conversion of the pipeline to a white products pipe- line should be reconsidered if and when a major refinery rehabilitation investment is contemplated on a scale that could possibly outweigh the net benefits of the present system. By then, the comparative costs of the present and alternative supply systems are certain to have changed in at least one respect, be- cause the first stage of the pipeline rehabilitation project will have been completed. This expenditure will then be a sunk cost, and no longer relevant for the economic analysis of alternative supply options. It is estimated that this will reduce the NPV of the cost of the existing sys- tem by about US$26 million immediately after rehabilitation. 5.10 Potential Refinery Conversion The possible upgrading of the Indeni refinery by the addition of a hydrocracker was studied extensively between 1983 and 1985. The consultants' studies concluded that the highest economic return was ob- tainable from large-scale investment in a high-pressure hydrocracker. A slightly lower rate of return was obtainable from a smaller investment in a mild hydrocracker. Due to a shortage of investment funds and the volatile world petroleum market, no investment was made. Since 1985, the structure of world petroleum prices has changed in a way that makes refinery upgrading less economic. Growth in Zambian demand for petroleum products has also been substantially less than was forecast several years ago. When reevaluated in the light of these changed circumstances, refinery conversion is now no longer economic. This section summarizes the results of this analysis, which are set out fully in Appendix 5.2. - 75 - The primary function of a refinery conversion scheme would be to upgrade low value heavy fuel oil (HFO) into more valuable products, notably kerosene, gas oil and gasoline. Different kinds of conversion facilities produce different mixes of final and intermediate products which can be further upgraded. At the same time, they leave a certain amount of residual product. This is generally unsuitable for further cracking, but can be used as RFO in boilers. There is a clear physical and economic limit on how small this residual fraction can be, generally iD the region of 15X of total refinery output. Zambia currently imports a mix of petroleum products. The res- idual fuel oil fraction (from which the HFO and bitumen is produced) is about 201. Minor refinery modifications could reduce the minimum resi- dual fuel oil fraction to about 101 through continuously recirculating most of the fuel oil through the refinery. This would enable Zambia to avoid minimum fuel oil production being a constraint on the fuel substi- tution options detailed in this Energy Strategy, but at the cost of in- creased refinery fuel use. Investments in hydrocracking depend for their economic viabili- ty on a sustained and substantial price differential between the major product used (UFO) and the major product produced (gas oil). This would only arise if the present worldwide refinery over-capacity were to be eliminated, and if crude oil or HFO prices were to fall sharply as a re- sult of oversupply. Global demand for refined petroleum products shows little pros- pect of near or medium-term growth at a rate that would put upward pres- sure on the prices of refined petroleum products. As shown in Annex 5.2, at less than 801 hydrocracker utilization, the sustained margin between fuel oil and gas oil prices must exceed US$70/ton to yield a break-even rate of return on a hydrocracker investment. Such margins have been seen for only short time periods over the last decade. To justify the invest- ment, they would need to be achieved, on average, over 15 to 20 years. In the case of Zambia, there are two additional constraints on such an investment. First, the minimum economic size of hydrocracker is bigger than Zambia can currently use. In particular, gasoline demand would have to grow by 501 for the reformer (the part that produces the gasoline) to run at a sufficient level to produce enough hydrogen bypro- duct fir feedstock to the hydrocracker. Second, the volume of fuel oil consumed in Zambia as the preferred fuel (economic as well as physical) is probably less than the minimum fuel oil production from the hydro- cracker. In effect, all schemes for substituting coal or electricity for fuel oil would have to be abandoned. When copper production and smelting begin to decline in less than ten years, a surplus of fuel oil would re- sult, which could only be sold at distressed prices. Were commercial quantities of crude oil to be discovered in Zambia on a scale that precluded exports, it is then highly likely that hydrocracking would be justified at some location, probably, but not ne- - 76 - cessarily, at Indeni. The physical characteristics of the scheme would depend on the type of crude discovered, particularly aspects such as paraffins, wax, gravity, volatiles, sulphur, gas content, distillate fraction etc. It is not useful to speculate in advance on what might be needed. Should export quantities of crude oil be discovered in Zambia, it would probably be most profitable, depending on the quantities and nature of the oil, to export most or all of the crude, with Zambia oper- ating a topping refinery at the oil field and continuing to import other products as needed. - 77 - VI. COAL 6.1 Reserves Zambia's single coal mine at Maamba exploits the near out-crop areas of thick coal development in part of the Siankondobo coalfield, north of Lake Kariba. Major faults divide the coalfield into two main structural units known as the Kazinze and Izuma Basins. In the Izuma Basin, a single thick seam is developed, whilst in Kazinze, the seam is split into two components by a laterally persistent sandstone band. In both basins there is no clear geological demarcation of the top contact of the coal; ash content of about 251 in the main seam grades into coaly mudstones with 401 ash or more. Hence the calculation of mineable coal is controlled by technical/economic factors rather than geological cri- teria. Maamba coal is defined as "a mineral which, when washed, produces a product containing not more than 161 ash, with a minimum recovery rate of 701 in the Coal Preparation Plant." Based on this definition, and a maximum stripping ratio of 8 m3 overburden: 1 ton coal, proven open pit reserves total about 30 million tons, of which 13 million tons are in Kazinze and 17 million tons in Izuma. At a mining recovery rate of 95%, and preparation plant recovery rate of 651, reserves of saleable coal total about 19 million tons. Geo- metrical constraints on pit layout will further reduce this figure. It is conservatively estimated that proven open pit reserves of saleable coal total at least 13 million tons, sufficient for 25 years at present production rates. It is recommended that no account be taken of possible under- ground reserves at Maamba because of serious technical and safety diffi- culties associated with deep mining in these strata. Coal resources are known to exist in the Luangwa, Luano, and Lukusashi areas, and the Western Zambia trough system. Of greater inter- est are resources in the Zambezi Valley, in reasonable proximity to cur- rent Maamba workings. 6.2 Policy Issues and Options The major issues and options with respect to coal are: (a) the long-term demand for coal, taking account of substitution options, and the future investments required to ensure adequate supply; (b) the current limited capability of the rail system to transport coal supplies, and the possibility of improvement and/or in- creasing customer stockpiles as a security measure in the event of future transport difficulties; - 78 - (c) the level and structure of coal prices that will best reflect the financial and economic costs of production and supply; and (d) the potential for using reject fines to make coal briquettes as a substitute for charcoal as an urban household fuel. 6.3 Recent Production and Sales Maamba Colliery was originally designed to produce over 1 mil- lion tons of saleable coal per annum. Its actual capacity has never ap- proached this design target. Table 6.1 gives production and sales figures since 1980. TABLE 6.1: COAL PRODUCTION, SALES AND PRICES, 1980/81-1987/88 (tons) Year Production Average FOB sales price Run-of-mine Washed coal Sales Kwacha/ton USS/ton 1987/88 906,123 572,792 512,022 348.87 43.35 1986/87 784,056 511,970 531,409 218.66 28.43 1985/86 816,445 538,406 499,063 108.10 40.00 1984/85 711,960 510,021 448,537 60.09 33.65 1983/84 772,963 482,901 509,040 45.16 36.13 1982/83 n/a n/a 542,853 37.86 n/a 1981/82 802,614 552,242 539,137 33.53 n/a 1980/81 842,822 575,425 571,062 31.64 40.18 Source: Naamba Collierles. In the early 1980s, production was generally able to meet demand, with some consumer dissatisfaction on quality and delivery uncertainties. In the period 1983-86, capacity was badly impaired by lack of equipment and spare parts, and demand generally outstripped supply. By mid-1986, the major elements of a rehabilitation program, mainly funded by the African Development Bank (ADB), were well in hand. Since that date, capacity has exceeded demand. 6.4 Current Production The main elements of the production system at Naamba comprise: prestripping by truck and shovel; stripping by walking dragline; excava- tion and haulage of run-of-mine coal and sandstone waste; treatment in the Coal Preparation Plant; and transport by aerial ropeway to the Masuku railhead. Capacity is effectively limited by the aerial ropeway (Table 6.2). Relocation of the main drive of the ropeway to a point just - 79 - before the railhead and the addition of more buckets could increase capacity to about 700,000 tons. Table 6.2: PROOUCTION CAPACITY AT MAAMBA COLLIERY Process Annual Capacitj Saleable Coal (tons) Prestripping 3.5 million bcm a/ 770,000 Stripping 2.4 million bcm 690,000 Raw Coal Production 1.2 million tons 760,000 Coal Preparation - 750,000 Ropeway Transport - 650,000 b/ 3/ Bank cubic meters. b/After rehabilitation. Currently it Is about 600,000 tons. Source: World Bank estimates. For the past two years, Maamba coal has been sold in four grades, according to quality. Table 6.3 indicates the proportion of out- put falling into each grade category. From 1988, the production of base grade coal will be discontinued. Table 6,3: COAL PRODUCTION BY GRADE QUALITY Premium Standard Medium Base (-14% ash) (15-17$ ash) (17-19% ash) (19-21% ash) Proportion of output 10% 27% 24% 39% Source: Msamba Collieries, Maamba coal has inherently poor washability characteristics. Quality of output could be improved only by significant reductions in Preparation Plant recovery and throughput, and commensurate reductions in saleable coal reserves. 6.5 Market Prospects 6.5.1 Overview Three coal demand forecasts have been prepared, equivalent to the base, high, and low CDP growth rate assumptions, and taking account - 80 - of firmly planned energy substitution investments. These forecasts are summarized in Table 6.4, and their justification explained in the balance of this section. Table 6.4: ANNUAL FORECAST COAL DEMAND (tons) Demand Scenario Year Low Base High 1908-89 485,000 500,000 540,100 1989-90 440,000 460,000 500,000 1990-91 440,000 450,000 455,000 1991-92 490,000 500,000 505,000 1992-93 525,000 540,000 500,000 i,97-98 490,000 515,000 540,000 2002-03 490,000 525,000 560,000 Source: World Bank estimates. 6.5.2 Copper Industry Demand ZCCM is Maamba Colleries' largest customer. Its Kabwe Division has a life of two years, which could be extended to five yearsp subject to current studies. Coal demand from this source is estimated to be 22,000 tons/year for five years in all demand scenarios and zero there- after. In the Copperbelt, the only ZCCM coal user of signifIzance is the Nkana sme'-ter. ZCCM policy is to maximise the use of Nkana because of the need to produce acid, and to maximise the use of coal. This yields a total coal demand of 148,000 tons in 1988-89, which drops to 111,000 tons for a period of four years during commissioning of the pro- posed new modified smelter technology, which must initially be fuel oil- fired. From 1993-94 onwards, it is assumed the new furnace will convert to coal, and estimated Nkana coal demand will remain constant at about 135,000 tons per annum through to 2006. In 1992-93, an additional demand of about 35,000 tons is envisaged at the Luanshya smelter during a plan- ned major overhaul of the Mufulira electric smelter. ZCCM demand is not sensitive to rate of GDP growth, and hence the above forecasts are used in all three demand scenarios. 6.5.3 Other Consumers' Demand Nitrogen Chemicals of Zambia (NCZ) at Kafue is currently under- going rehabilitation, and has a forecast coal demand of 135,000 tons/year until rehabilitation is complete in 1989-90. Thereafter, demand should rise to about 185,000 tons/year, which is equivalent to the estimated - 81 - maximum practical throughput of the plant. NCZ's coal demand is not di- rectly related to GDP or the agricultural sector growth rate. Chilanga Cement, the third largest customer, forecasts coal consumption of about 65,000 tons in 1988-89. Potential increased activi- ty in the construction sector will be partially offset by decreased ce- ment sales to ZCCM, and the company has significant export sales, which are vulnerable. In the base case, constant consumption of 65,000 tons is assumed. For the low case, a drop in demand to 60,000 tons is envisaged from 1989-90 onwards, reflecting possible weaker cement export sales. In the high case, compound growth of 2Z per annum is assumed. Other significant existing users of Maamba coal include Zambia Sugar, Dunlop, Zambia Breweries, Premium Oil, R.O.P., National Breweries, and retail sales. Forecast consumption for these consumers in 1988-89 is about 80,000 tons, which has been escalated at a rate equal to GDP growth in the out-years. No allowance has been made for possible substitution of coal for petroleum products in industry, although this is technically and eco- nomically feasible. This is mainly because electricity is generally the preferred fuel, so most industrial conversions have involved its substi- tution for petroleum products. 6.5.4 Exports Maamba's export market is volatile. In recent years, exports fluctuated from under 10,000 tons to over 30,000 tons in 1986-87. Maamba forecast 57,000 tons for 1988-89, mainly to Zaire and Tanzania, but this is probably optimistic. Maamba fears it may lose the Tanzanian market in 1990, and sales to Zaire are vulnerable to competition from Zimbabwe, partly because Zambia Railways' transport charges are US$15/ton higher than those of Zimbabwe Railways. Without undertaking a major export mar- keting study, there is no rational basis for forecasting future export demand. Historic data and recent verformance suggest that average export sales are unlikely to exceed 35,000 tons/year. 6.5.5 Briquettes Japanese and German studies have demonstrated the technical feasibility of producing coal briquettes from Haamba reject fines and other locally available ingredients, for possible household energy use. The National Council for Scientific Research has completed all necessary bench-scale testwork. However, there has been no consumer acceptance testing nor feasibility analysis of commercial-scale production. Hence the economic viability of household briquette production remains to be established. These steps are recommended to determine the feasibility of commercial production. Pending their completion, it is not possible to estimate potential demand. Any potential coal briquette project should take account of the limited rail transport capacity from Maamba and in- clude provision for adequate transport facilities. - 82 - 6.5.6 Possible Iron and Steel Projects Zambia is considering two possible iron and steel projects, to be located at Kabwe, north of Lusaka: (a) a pilot sponge iron plant with an output capacity of 15,000 tpa for posuible implementation in 1991-92; and (b) a 200,000 tpa capacity iron and steel project for possible im- plementation in the late 1990s. Smelting would be by electric arc furnace, using coal as a reductant and small quantities of UFO for start-up. The pilot project would require about 20,000 tons of coal per year, which is well within Maamba's capacity to supply. The full-scale project would require up to 230,000 tons of coal per year. Combined with Maamba's other markets, this would raise total coal demand to about 7r5,000 tpa from around the year 2000. This is substantially above the capacity of the existing coal stripping, ropeway and rail transport sys- tem, and at the capacity margin of Maamba's other production facilities (see Table 6.2). In order to meet this demand, Maamba would need to in- vest in additional stripping equipment and a new transport system from the mine to the railhead. Zambia Railways would need to invest in addi- tional locomotives and wagons to move the coal from the Masuku railhead to Kabwe. The program for developing new sources of coal supply would also need to be accelerated. The cost of these investments must be in- cluded in the cost-benefit analysis of the iron and steel project. Their magnitude and high foreign exchange content will reduce the potential project's net financial and economic benefits. 6.6 Coal Transport and Storage Requirements Because of the distances involved and tonnages to be moved, there is no economic alternative to rail transport of coal from the Masuku rail terminal, other than moving small tonnages by road. Table 6.5 summarizes Maamba's rail transport needs for the peak year of the base case demand forecast. - 83 - Table 6.3: RAIL TRANSPORT OF COAL IN UASE CASE PEAK DEMAND YEAR (1992-93) Destinatlon Distance (Km) Tonnage Ton-Km (x 106) Kafue 266 185,000 49.2 Chilanga 298 33,000 9.8 Lusaka 314 37,100 11.6 Kabwe 434 22,000 9.5 Ndola 627 68,500 42.9 Kitwe 693 157,800 109.4 Tanzania 496 (Kapri) 20,000 9.9 Malawi Road Trans. 2,000 Zaire 627 (Ndole) 13,000 8.2 TOTAL - 538,400 250.S Source: World Bank estimates. Rail transport of coal has been a persistent supply bottle- neck. Analysis of Zambia Railways' (ZR) existing capacity suggests that, at its current level of operating efficiency, ZR cannot fully satisfy current or projected future demand for rail transport of coal. Unless either its efficiency is improved, or additional locomotives are obtain- ed, problems of inadequate rail service will persist. As efficiency im- provement will take time, acquisition of additional locomotives is strongly recommended. One way for coal consumers to minimize the problem of unreli- able rail transportation is to hold larger stocks of coal, to be replen- ished whenever ZR is able to run a coal train. The disadvantages are the higher cost and risks of deterioration, particularly during the rains. The two largest coal consumers, ZCCM Nkana and NCZ, have stor- age for at least two months' coal consumption. Maximum use of this stor- age is recommended, as is the provision of expanded storage facilities at other coal customers. In return for holding more stock and accepting fewer deliveries at times more suitable to ZR, coal consumers may be able to negotiate a lower rail transport charge per ton, which would offset at least part of the cost of the additional stocks. 6.7 Mine Operational Improvements and Contingency Planning The AD8/IDA funded rehabilitation program has restored the coal mine to a position where capacity exceeds current and firmly-forecast de- mand. To maintain sufficient capacity, adequate supplies of foreign ex- change for spares and replacement machines must be made available. The mine must also have adequate skilled personnel to guarantee high stan- dards of maintenance. This necessitates a continual training and work - 84 - experience program for Zambian nationals, supported by limited technical assistance from experienced overseas personnel. A planned, internally-funded project to take control of mining and processing magnetite for the Coal Preparation Plant is essential if plant capacity is to be maintained. This is now underway. Current capacity estimates (Section 6.4) assume normal break- downs and repairs. The walking dragline presents special risks. Failure of a major component (e.g., the drive shaft) could dramatically reduce capacity for an extended period. Such components are not available ex- stock and typically have delivery times of at least six months. Allowing for raising credit, shipping, etc., such a failure could drastically re- duce output capacity for six months or more. Mining the Izuma basin by truck and shovel provide some protection against such an eventuality. However, it is recommended that an analysis be done of the probability of major dragline failure and the costs and benefits of holding critical spares. If this is found to be economically justified, the critical spares should be procured. 6.8 Long-Run Economic and Financial Cost and Prices Naamba Colliery's financial performance over the last several years has been relatively poor. Prior to 1987 it made losses for a num- ber of years. Accumulated losses of K23 million (US$2.9 million) peaked in March 1986. A modest profit in 1987 reduced these slightly. Between 1989 and 1993, Meamba faces a decline in s. es as the Nkana smelter is converted to a new oxy-fuel technology, which initially must run on fuel oil. It is not reasonable to expect Maamba to recover all the resulting lost revenue through higher prices, but prices must cover the long-run economic cost of coal production and/or Maamba's future financial obliga- tions, whichever is the higher. It was not possible to estimate accurately the long-run average incremental cost of coal, which is the preferred indicator of its econo- mic cost. This is because no major new investment or expansions of capa- city are envisaged, and there is no way of accurately predicting the future level of outpuz in response to small variations in maintenance and rehabilitation expenditure. Instead, economic cost was estimated by dis- counting forecast 10-year capital and operating costs, exclusive of taxes and duties, with foreign inputs shadow priced at K12/$US1, and dividing by discounted future output. Because costs are roughly constant over time, this should provide a relatively accurate picture. On this basis, the estimated economic cost of coal is K359/ton (US$44.9/ton). The long-run financial cost of coal, i.e., the price on average over the next 10 years needed to cover Maamba's debt obligations and operating costs, including taxes and duties, is estimated to be K447/ton in 1988 prices (US$55.9/ton). - 85 - The average realized price per ton of coal in the last quarter of 1987 was K355.2 (US$44.4/ton). The draft 1988-89 revenue budget pro- poses an average price of R400/ton (US$50/ton). Exports are normally priced at US$38/ton. As is evident from the above cost estimates, the financial cost of coal is the binding constraint on pricing. It is therefore recommend- ed that, at a minimum, Maamba's proposed price of K400/ton be approved for fiscal year 1988-89. This is still nearly R50 below Maamba's long- run financial cost of production, but above its economic cost. A further increase will be required in 1989/90 to fully cover Maamba's financial costs. In the event of devaluation, the increase must be sufficiently large to cover the resulting higher Kwacha cost of servicing Maamba's foreign debt. Coal exports should be priced at a level that, at a minimum, covers both economic cost and short-run financial cost. Moreover, prices to the consumer should be competitive with alternative coal supplies and the prices of competing fuels. Within these constraints, it may be pos- sible to increase revenues and profitability by charging different prices to different export customers. 6.9 Recommended Pricing Structure From 1988, Maamba coal will be sold in three quality grades, with a discount for fines in the lowest grade. The price differential between each grade should accurately reflect: (a) difference in energy content; (b) additional transport cost for higher ash; and (c) additional handling costs for higher ash. Based on the longest haul, to Kitwe in the Copperbelt, each percentage point of ash adds K2/ton (1988 prices) to transport cost for equivalent energy delivered. To allow for additional handling costs, it is suggested that this figure be doubled. An appropriate tariff structu- re would then be: Premium (-14% ash) - Top Price Standard (15-17% ash) - Top Price x 0.965 - K12 Medium (+17% ash) - Top Price x 0.942 - K16 To achieve an average price of R450/ton (the long-run financial cost), the price of each grade would be: Premium (10.5% of output) - K480/t Standard (26.9% of output) - K455/t Medium (62.6% of output) - R440/t - 86 - It is suggested that a discount for fines be given only in the rainy season when there is consumer resistance because of handling problems. 6.10 Investment Priorities 6.10.1 1989-1993 Current capacity at Maamba Colliery exceeds forecast demand throughout the planning period to 2006 on all three demand projections. Except for normal maintenance and replacement investment, the only iden- tified need is for possible contingency investment against major dragline breakdown. The study to assess whether this is justified could be under- taken internally or by consultants, at an estimated cost of US$50,000. Further expenditures could then be needed to implement the plan, probably involving purchase of critical spares, the estimated cost of which is up to US$1 million. 6.10.2 1994-2006 The only other required investment additional to normal re- placement expenditure is US$2 million for exploration to identify addi- tional reserves of coal. The suggested timing is 1995-2000. Should a major new demand for coal be identified, such as from an iron and steel plant, the exploration program should be brought forward. - 87 - VII. iUOPPUEL AND HOUSEHOLD ENERGY 7.1 Supply and Consumption Estimates and Forecasts Wood is Zambia's principal household fuel, and the nation's largest single source of energy. In the rural areas, household woodfuel consumption is mostly in the form of firewood. In the growing urban areas, it is mostly in the form of charcoal. Wood and charcoal are also used as industrial and commercial fuels. At the risk of oversimplifying, there is little evidence at present of a rural fuelwood shortage in Zambia. Locally, however, mainly in the Copperbelt, Lusaka, the Central and Southern Provinces, tree-cut- ting for agriculture and charcoal production has contributed to defores- tation and consequent ecological deterioration. 7.1.1 Woodfuel Supply Woodlands and forests are estimated to cover about 50 million ha, 66Z of Zambia's total land area. Miombo (58x) is the predominant woodland type, followed by Kalahari woodland. 7.4 million ha (151) are protected state forests. Industrial forest plantations cover 59,000 ha and other forests about 2 million ha. The balance of about 40 million ha (80Z) is unreserved natural woodland. The s anding volume of ti ber is estimated to be in the range 2,700 million m to 4,700 million m , a cording to the FAO. 7/ Annual yields vary widely from under 0.3 m /ha to over 0.8 m3rha, being generally higher in the north and lower in the south, where average rainfall is less. Total national stem volume yield per year is estimated to be about 14 million mi. Total above-groufd biomass is in the range of 33-70% above this, i.e., 19-24 million m . In addition, there are isolated farm trees and shrubs, the volume and yield of which are unknown. Although a large proportion of Zambia is still covered by for- est and woodland, the spatial distribution of forests and population are very different. As Table 7.1 shows, highly populated regions have fewer forest resources than less populated areas. 7/ Zambia: Wood Energy Consumption and Resource Survey; FAO; November 1986. FO:DP/ZAM/82/E08, Document No. 2. - 88 - Table 7*1: REGIONAL DISTRIBUTION OF POPULATION AND FORESTS Province % of total % of total population forest Copperbelt 23 6 Lusaka 14 2 Southern 12 7 Northern 11 8 Eastern 11 9 Central 9 10 Western 8 22 Luapula 7 12 North Western 5 25 Source: FAO Wood Energy Consumption and Resource Survey, 7.1.2 Charcoal Supply There are no reliable statistics available, but it is estimated that about half the wood consumed for energy purposes is converted into charcoal. With very minor exceptions, all the charcoal is made with traditional earth kilns or clamps. Their yield is generally low--about 15X on a weight basis. Nearly all charcoal is made from indigenous tree species. OnLy about 5Z of charcoal is made by producers using sources of wood licensed by the Forest Department. They pay a stumpage fee of K8 per cord gUS$1/cord) for wood from Forest Department-managed sources. The stumpage fee is based on 1983 prices and costs. The main sources of the other 95Z of supply are natural woodland within traditional law do- mains and designated forest reserves. Transporters are charged a removal fee of K0.5/bag if no stumpage fee has been paid, but only a small pro- portion of the fees are collected. About 25,000 rural households are believed to be engaged, at least part-time, in charcoal production, and a still larger number in transport and trading of charcoal. Sources of supply are diffused around the major markets of Lusaka and the Copperbelt. Both markets also draw supplies from neighbouring provinces, such as Central, Southern, and North Western. 7.1.3 Firewood and Charcoal Consumption Results of the FAO Wood Energy Consumption and Resource Survey showed that per capita annual consumption of fue wood was about 728 kg (1 m ), and that of charcoal, about 101 kg (1.1 m of wood equivalent). Consumption patterns differ between rural and urban areas. Fuelwood con- sumption is higher in rural than in urban areas (1,243 kg versus 98 kg per capita per year); charcoal consumption is higher in the urban than in - 89 - the rural areas (194 kg versus 23 kg per capita per year). Aggregate na- tional wogdfuel consumption by households was estimated to be about 14.4 million mi in 1985, 8/ and consumption of roundwood and sawnwood about 1.J million m 3 giving total national wood consumption in 1985 of about 15.7 million m! (11 million tnns). With population growth, this had pro- bably reached 16-17 million m by 1988. The woodfuel component is split roughly 50-50 between firewood and wood for producing charcoal. The esti- mated sectoral distribution of woodfuel consumption is shown in Table 7.2. Table 7.2: ESTIMATED SECTORAL WOC0FUEL CO4NSUMPTIONi, 1985 Firewood Charcoal (wond equivalent) million m million tons mlliIon mi million tons Households 6.4 4.9 7.9 5 Agriculture 0.7 0.3 - - Industry/Commerce 0.7 0.3 - - TOTAL 7.8 5.5 7.9 5.5 Source; Department of Energy. 7.1.4 Current Supply/Demand Balance Estimates of the cur ent sustainable yield of Zambia's forests and woodlands (19-24 million m ) and the current consumption of woodfuels and sawn wood (16-17 million in3) suggest that woodfuel demand is not causing deforestation on a national scale. However, two aspects of Zambia's woodfuel supply situation give cause for immediate concern: (a) localized deforestation, due to regional imbalances between woodfuel sup- ply and demand; and (b) agricultural land clearing, which is probably de- pleting wood resources more rapidly than energy demand. Over t.le longer term, progressive local and regional deforestation is in prospect unless ways can be found to reduce the woodfuel demand of a growing population. The variation in the current regional woodfuel supply/demand situation is illustrated by estimated provincial stem volume increment and woodfuel demand balances prepared by the Department of Energy for 1986. These show that North Western, Western, Central, Eastern, Northern, and Luapula Provinces produce more stem volume than they con- sume woodfuel. However, Copperbelt Province consumes 1% more woodfuel than the annual stem volume increment, Southern Province 23% more, and Lusaka Province nearly 300Z more. When account is taken of total above- ground biomass, this means that Southern Province is consuming most of 8/ Op. cit. page 19. - 90 - its aggregate woodfuel supply each year, and Lusaka Province is in a serious wood supply deficit situation. Lusaka is either obtaining a large proportion of its needs from neighboring provinces, thereby worsen- ing their supply situation, or is destroying its wood resources at a rapid rate, or both. All three provinces with the most serious woodfuel supply situ- ation are in the central "spine" of the country. This means that the problems of shrinking local woodfuel resources and resulting environmen- tal degradation are heavily concentrated in that central region. Sources of woodfuel supply are also becoming progressively more distant from cen- ters of demand. The result is rising charcoal transport costs and higher prices to the consumer. The second major problem is destruction of woodland by agricul- tural land clearing. A major culprit is the "ch'temene" system of agri- culture, which is estimated to cover 130,000 km'. It involves lopping trees and burning the cut wood to make minxral ash to enrich the soil. As traditionally practiced, the cleared areas are cultivated for about six years, during which the soil is leached of its nutrients. The area is then abandoned and the woodland regenerates. This land use system can sustain a rural population density of up to four people per km . Beyond this, pressure becomes too high for full regeneration, so soil fertility falls, erosion sets in, and regener- ation is further weakened. With Zambia's growing population, this system is leading to progressive deforestation of rural areas where population density exceeds this limit. The encouragement of smallholder and commercial farming, which is one of the Government's strategic objectives, is adding further to the pressure on wood resources. Twenty percent of the land area has already been cleared for agriculture in Eastern, Northern, Southern, and Luapula Provinces, and farming is becoming progressively more intensive around the main urban centers of the Copperbelt, Lusaka, and along the line of rail. 7.1.5 Demand Forecasts and Their Implications Very little is known about levels of and trends in industrial and agricultural woodfuel consumption. For demand forecasting purposes, the two sectors' estimated 1OZ share of total wood consumption is fore- cast to grow at the same rate as GDP--2Z per year in the base case fore- cast. Household woodfuel consumption, which accounts for at least 901 of the total, is forecast to grow at the same rate as forecast urban/rural household formation. The pattern of urban and rural household use of firewood and charcoal is that estimated by the FAO Wood Consumption and Resource Survey, and it is assumed that no change is made in cooking equipment or techniques. The proportion of urban households - 91 - using conventional fuels in place of charcoal is assumed to remain constant over the forecast period. The resulting base case woodfuel demand forecast through 2006 is summarized in Table 7.3 Table 7.3: EASE CASE WOCOFUEL DEMAND FORECAST (MillIon tons) Actual Forecast Province 1986 1989 1996 2000 2006 Copperbelt 2.14 2.46 3.22 3.57 4.20 Lusaka 0.96 1.15 1.64 2.07 2.74 Central 1.93 2.34 3.36 4.05 5.12 Eastern 1.27 1,40 1.71 1.93 2.28 Southern 1.47 1.66 2.13 2.51 3.09 Northern 1.30 1.43 1.74 1.95 2.27 Western 0.93 1.01 1.20 1.33 1.53 North Western 0.84 0.94 1.17 1.31 1.53 Luapula 0.79 0.86 1.04 1.17 1.35 TOTAL (national) 11.63 13.27 17.22 19.90 24.10 Source: Department of Energy. As is evident from the forecast, national woodfuel consumption is expected to double by about 2006, unless steps are taken to moderate demand growth. The likely effect will be to exhaust the natural wood stock of Lusaka Province, probably before the year 2000. Deforestation will accelerate in parts of the Copperbelt, Central, and Southern Provin- ces during the 1990s. The remaining provinces will not suffer extensive deforestation over the forecast period. In addition to woodfuel supply deficits in the heavily populat- ed region along the line of rail, there will be increasingly severe shortages in several smaller centers. Among the areas likely to be worst affected are Mongu in Western Province, wLich is in an area of savannah grassland; parts of Eastern Province, particularly around areas of inten- sive commercial and semi-commercial farming; and near some of the lakes and rivers in Northeastern and Luapula Provinces, where wood is used ex- tensively to smoke fish. 7.2 Prices and Economics Costs 7.2.1 Prices Data on the prices of fuelwood are very scanty. Prices per m3 of stackwood in 1983 for different areas are shown in the first column of - 92 - Table 7.4. Cumulative inflation batween 1983 and 1988 has been about 500Z, so nominal woodfuel prices are likely to have risen sharply from these levels. Table 7.4: FUELVOOD PRICES IN JULY 1983 (Kwacho) Per m3 of Stackwood Per GJ Lusaka 9.22 0.88 Kabwe 8.80 0.84 Ndola 30.68 2.93 Mansa 10.84 1.03 Source: "The Status and Impact of Woodfuel In Urban Zambia," EX. and S..814. Chidumayo, Depart- ment of Natural Resources, 1984. Statistics are available for retail charcoal prices during 1983-86, and are summarised in Table 7.5. These indicate an approximate tripling of nominal prices between July 1983 and November 1986. Table 7.5: RETAIL PRICES OF CHARCOAL PER LARGE BAG a/ (Kwacha) Lusaka Kitwe Ndola Livingstone 1983 4.00-4.50 n.a. 6.00-7.50 n.a. 1984 5.30-7.00 5.00 8.10-8.55 5.30-5.50 1985 7.70-8.00 7.80-8.00 10.50 n.a. 1986 12.00 15.00 18.00 10.00-13.0 a/ Usually about 40.5 kg. Source: Prices and Incomes Commission. In real terms, charcoal prices remained roughly constant be- tween 1983 and 1986 (Table 7.6). - 93 - Table 7.6: INDEX OF NOMINAL AND REAL CHARCOAL PRICES IN LUSAKA Charcoal Prices GDP Deflator (Large Bags) 1983 100 100 1984 141 118 1985 183 167 1956 282 306 Source: Prices and Incomes Commission. Retail market prices of charcoal are consistently higher than the prices authorized by the Government. For example, in 1985 the offi- cially authorized price in the Copperbelt was K3.50/bag, contrasting sharply with prices from K7.80/bag upwards quoted in the markets of Kitwe and Ndola. Charcoal prices also vary seasonally, being higher during the rainy season from November through April. An important feature of the charcoal market is that small, af- fordable quantities fetch much higher unit prices than large bags. This is illustrated by data for Lusaka in January 1986, shown in Table 7.7 Table 7.7 CHARCOAL PRICES FOR VARIOUS QUANTITIES IN LUSAKA, JANUARY 1986 (Kwacha) Price Price per kg Price per GJ Bag (40 kg) 10.40 0.26 7.9 Buckets (5 kg) 4.05 0.81 24.5 Tins (2 kg) 2.20 1.10 33.3 Heaps (1 kg) 1.73 1.73 52.4 Source: "SADCC Energy Development - Fuelwood"; ETC Foundation; The Netherlands; April 1987. The approximate composition of charcoal prices from producer through to retailer is shown in Table 7.8. - 94 - Table p.8: ESTIMATES OF THE COMPOSITION OF CHARCOAL PRICES IN LUSAKA SEPTEMBER 1986 (Kwacha per 40Kg sack) Price paid to charcoal producers on-site 5.0 Transport charge (truck hire round-trip) 4.0 Average wholesale and retail margin 3.0 Retail price In Lusaka markets 12.0 Sour':e: Estimated from "SADCC Energy Development - Fuelvood"; April 1987. 7.2.2 Economic Costs The economic costs of charcoal production are almost certainly higher than its market price. Even on a highly conservative estimate, the 1986 economic cost of plantation wood was about K3.1/GJ (Appendix 7.1). To this must be added the cost of charcoal production, estimated at K3.6/GJ, giving a total economic cost ex-source of K6.6/GJ. This com- pares with the September 1986 producer price of K3.5/GJ or K5.0 per sack (Table 7.8). The principal cause of the large difference between economic costs and market prices is that the latter do not reflect the costs of replacing the wood used, because most charcoalers pay nothing for wood. Estimated 1986 average economic costs of transport from char- coal producer to market are K4.6/CJ. Added to the above estimate of the economic costs of production, the estimated 1986 economic cost of planta- tion-wood charcoal delivered to market is K11.2/GJ. This is nearly double the 1986 market price of K6.2/GJ (K9.0/sack). 7.3 Household Energy Policy Objectives The principal objectives of Zambia's household energy strategy should be to: (a) minimize the cost to the economy of meeting basic household energy needs; (b) provide adequate s pplies of household energy to Zambian families at the lowest possible cost; (c) avoid subsidizing the supply of household energy and thereby adding to Government's budget deficit; and (d) develop sustainable methods of exploiting Zambia's woodland re- sourcas. - 95 - 7.4 Policy Issues The first major issue with respect to household energy policy is how much emphasis to put on public plantation forestry. The problem with public plantation foresty is that it is not financially viable un- less: (a) the price paid for the wood (stumpage) covers the cost of pro- duction; and (b) the stumpage fees are collected. The second issue is whether there are other, more cost-effec- tive ways of increasing wood supply than public plantation forestry, such as improved management of natural woodland, agroforestry (farm forestry) or communal forest schemes. A third key issue is the extent to which woodfuel and charcoal conservation measures can alleviate the problem of increasing wood short- ages, and whether they are more or less cost-effective than steps to in- crease woodfuel supply. Small-scale experiments have been undertaken, but their full potential has not been thoroughly assessed. The fourth key issue is whether woodfuel substitutes, such as electricity, coal briquettes or kerosene, can be supplied at a lower eco- nomic cost than woodfuel. If so, can they be made available at prices which are both affordable to households and high enough to cover their cost of supply? 7.5 Household Energy Options 7.5.1 Supply Initiatives (a) Forest Plantations Zambia has about 59,000 ha of forest plantations. Of these, 52,000 ha are located in the Copperbelt, and are managed by ZAPFICO, a parastatal, and are used to produce sawn wood and pulp. ZAFFICO also has 10 Mark V metal charcoal kilns which are used for carbonizing wood waste. The remaining 7,000 ha of plantations are managed by the Forestry Department. Scattered around the country, they provide mainly timber and poles, but also some woodfuel for nearby rural communities. Faced by an extreme shortage of fundst the Government cannot afford to subsidize new woodfuel plantations. Any new plantations must therefore be financially viable. The 1986 estimated cost of growing plantation wood for charcoal production is K3.1/GJ, or K4.5 per 40 kg charcoal bag (Appendix 7.1). This is almost equal to the then average price per bag realized by a typical charcoal producer Lor supply to Lusaka. That charcoaler could clearly not have afforded a stumpage fee equivalent to K4.5 per bag and still sold charcoal at the then current price. Designated woodfuel plantations in the areas supplying charcoal to Lusaka, some 100-150 km distant from the capital, do not therefore ap- pear to be viable at 1986 charcoal prices. - 96 - Two factors would improve the viability of woodfuel forestry: (a) locating the plantation on land with a low opportunity value near a major charcoal consumption center f'robably Lusaka), thus saving on char- coal transport costs; and (b) producing high-value poles and sawn timber in addition to woodfuel. Future analysis of potential woodfuel planta- tion projects should concentrate on projects with at least one and pre- ferably both of these attributes. (b) Management of Natural Woodlands In terms of its impact on available woodfuel supply, more ac- tive management of natural woodlands can be a cost-effective alternative to plantation forestry. The objectives are to improve woodland husbandry and cutting practices, and thereby raise wood yields. The two major tar- get audiences are the professional charcoalers and local villagers. They can be taught; (a) how to protect woodland from the incursion of ani- mals; (b) when optimally to cut wood; (c) how to cut so as to maximize re-growth and (d) efficient charcoaling methods. The supply of efficient cutting tools can also help. The key to success is convincing the char- coalers and villagers of the benefits to them of efficient woodlan4 management. This requires an additional effort by the extension ser- vices, reinforced by effective stumpage fee collection for commercial wood cutting, which itself can help pay for the extension service. (c) Community Plantations/Agroforestry Two further alternative means of increasing woodfuel supply are the promotion of community plantations and agroforesty or farm forestry (combining agricultural and woodfuel development, e.g., between fields or in small coppices). Experience elsewhere in Africa has shown that these are lower-cost solutions than public plantations, because much of the labor input and land has no or low financial and opportunity cost, and yields per ha are higher. However, such schemes require thMt public tree nurseries be established and effectively managed, and that extension ser- vices again be strengthened, to teach sound tree care practices. Both initiatives require additional public funds, which are unlikely to be forthcoming in large measure. Hence the potential scope for such action appears to be limited and dependent on the collection of more stumpage fees. 7.5.2 Conservation Initiatives The two major options to conserve woodfuel use are to introduce more efficient methods of charcoal production and more efficient charcoal stoves. (a) Efficient Charcoal Production Above-ground earth clamps, with horizontal wood stacking, are used for charcoal production throughout Zambia. Relative to other - 97 - countries, the clamps are large, sometimes exceeding 40 meters in length. Cycle time is two weeks and yield is 15-20X by weight. ZAFFICO operates several Mark V metal kilns at its sawmills. These have a cycle time of 5 days and yie'd 25-30% by weight. Their dis- advantages are their cost and lack of portability, especially in the rainy season. Their cost alone (K30,000) effectively rules out their widespread use in small-scale charcoal production. However, their high yield does make them suitable where there is a sustained supply of raw material within a short distance, e.g., at sawmills and plantations. Several other initiatives have been taken to test improved charcoal production methods. The Forest Products Research Division in Kitwe has experimented with brick kilns, Argentine half orange kilns, and oil drum kilns. None of these have been widely diffused. Experience elsewhere has shown that costly fixed or portable kilns are not viable as a means of increasing small-scale charcoal pro- duction efficiency. The key is introducing more eff cient !.7ersions of traditional techniques, coupled with effective charcoal producer train- ing. (b) Efficient Charcoal Stoves The staple food is nshima--maize meal, boiled over low heat for about 30 minutes. It is eaten with a relish, including vegetables and small quantities of meat, fish or chicken. Total cooking time is rela- tively long--up to one hour or more. There is little need at present for more efficient wood stoves in Zambia because of the general absence of a rural energy "crisis". However, a strong case can be made for introducing more efficient char- coal stoves in urban areas. The standard charcoal stove--or mbaula--is a single-wall, cy- lindrical, metal stove made from scrap metal. It costs about K10. A large amount of heat is lost through convection, and its fuel efficiency is low--about 10-15%. Several versions of an improved mbaula have been developed by the School of Engineering at the University of Zambia (UNZA). One of the simpler versions, suitable for manufacture by local artisans, costs about K30 and has a thermal heating efficiency of about 22%. Charcoal savings of up to 70% have been achieved, relative to the mbaula, although 30% ap- pears more typical. At this lower figure, the payback period for the consumer is 2-3 months. A still more efficient model of more co-nplex design has also been developed. This would need to be manufactured com- mercially. Following UNZA's preliminary stove efficiency and consumer ac- ceptability tests, it has been wisely decided that efforts will be con- - 98 - centrated on the simpler improved stove model, which will be produced by local artisans in the markets. An information and dissemination campaign will be launched to encourage consumers to test them. Further work may also be done to refine the design, perhaps by the use of a ceramic liner and simplification of the manufacturing process. Improved charcoal stove programs have proved successful else- where in Africa in reducing charcoal use per household. In Kenya, for example, many urban households now used an improved ceramic stove de- veloped in 1982/83 by local artisans with Ministry of Energy assistan- ce. The high relative price of charcoal in Zambia suggests that the prospects for an improved stove program here are good also. If so, the potential impact on woodfuel consumption is consi- derable. Assuming the improved stove program results in use of an im- proved stove by 30% of urban households by 1996 and 90% by 2006, charcoal consumption would be nearly 30% lower in 2006 than without the program (Table 7.9). -ABLE 7,9: CHAROOAL CONSUMPTION WITH AND WITHOUT IMPROVED STOVES ('000 tons) Actual Forecast Consumption 1986 1991 1996 2001 2006 Without Improved stove 706 910 1,173 1,468 1,838 With Improved stove 706 868 1,068 1,197 1,342 Decrease % 0 5 9 18 27 Source: Department of Energy. 7.5.3 Fuel Substitution Options Rapid increases in the market price of charcoal and the exis- tence of excess electric power generation capacity have stimulated inter- est in the potential for substituting electricity (and possibly kerosene) for charcoal in urban areas. Estimating the cost to the consumer of alternative household fuels, in order to test the financial feasibility of fuel substitution, requires the following main parameters: (a) comparative household fuel prices; (b) the purchase cost of appropriate cooking devices and estimates of their useful lives; (c) the combustion efficiency of each device; and - 99 - (d) the cost of any ancilliary equipment, e.g., electrical wiring and connection. Estimates of the comparative financial cost of alternative fuels for household cooking in 1988, based on these data inputs, are shown in Table 7.10. For the purposes of this calculation, the estimated cost of an electrical connection and house wiring has been amortized over 20 years. Although the estimates must be treated with caution, they show that: (a) the cost of cooking with the traditional mbaula (K107.8/month) is about 30% greater than with an improved charcoal stove (K74.5/month), despite the latter's higher up-front cost; (b) the cost of cooking with a kerosene pressure stove (K72.1/month) is roughly the same as with an improved mbaula (K74.5/month), but would be higher if the kerosene subsidy was removed; (c) the relative cost of electricity is highly sensitive to the treatment of the very large up-front capital costs for house wiring, connection and appliance purchase. If these costs are amortized over 20 years, electric hot plate cooking (K45.4/month) is the cheapest household cooking option. If they are financed from a five year loan at a 12Z rate of in- terest, the cost of cooking by electric hotplate rises to X156.2/month, more than twice the cost of cooking with an im- proved charcoal stove (K74.5/month). Similarly, an electric cooker/oven is competitive at R88.8/month if amortized over 20 years, but very expensive (K411.0/month) if the capital cost is repaid over five years at 122. 7.5.4 Economic Analysis The comparisons shown in Table 7.10 are of the financial or market costs, and not the economic costs of alternative cooking fuels. These latter can be, and indeed almost certainly are, very different from the financial costs. Unfortunately, they are hard to estimate accurate- ly, although some broad conclusions can be stated. Table 7,10: EQUIVALENT MONTHLY COSTS OF ALTERNATIVE HOUSEHOLD COOKING DEVICE/FUEL COMBINATIONS IN LUSAKA, 1988 a/ Heat Weight of Petail Running Purchase Cost of Total Device and Efficiency Combustion va ue fuel needed price cost per Life of cost of wirlng & cost per fuel used of device heat re- of fuel per month of fuel month device device connection b/ month. quirements % m/J m/kg kg Kwacha/kg Kwacha months Kwacha Kwacha Kwacha Mbaula/Charcoal 15 3,167 30 106 1.0 106.0 6 10 107.0 Improved stove/Charcoal 22 2,159 30 72 1.0 72.0 12 30 74,5 Wick Burner/Kerosene 37 1,284 42 31 2.7 83.7 36 150 87.9 Pressure Stove/Kerosene 50 950 42 23 2.7 62.1 60 600 72.1 kWh kWh Kwacha/ 0 kWh Single Hot Plate/ Electricity 62 210 - 210 0.1 21.0 72 850 5,000 45.4 c/ or 156.2 d/ Cooker/Oven/Electricity 75 176 - 176 0.1 18.0 96 12,000 5,000 88.8 cl or 411.0 d/ a/ For comparative purposes it is assumed that a household of 5/6 people consumes 47mJ of energy per month, b/ Assumes 50% of the average K10,000 cost of house wiring and connection is attributed to cooking. c/ Assumes that costs of connection and of wiring are amortized over a working life of 20 years using the straight line method. d/ Assumes house wiring and connection is financed by a five-year loan at 12% interest. Sources: "SADCC Energy Development - Fuelw)od"; Department of Energy and World Bank estimates. - 101 - As the earlier estimates showed, the price of plantation wood charcoal is below its economic cost. But the price of household electri- city to new consumers is also below its economic cost, because of the high cost of future distribution extension and household connections. Electric wiring and connection materials are also imported, and the eco- nomic cost of these materials is understated at the current exchange rate. Accurate estimates of the comparative economic cost of charcoal and electric cooking should be made to ascertain which is the lower cost household fuel to the country. Undervaluation of the Kwacha, and the kerosene subsidy, mean the economic cost of kerosene is about 80% above its market price. If a shadow exchange rate of K12/US$1 is assumed and the subsidy eliminated, the economic cost of kerosene cooking would be nearly twice the financial cost shown in Table 7.10. 7.6 Policy Recommendations (a) Tree Planting and Woodland Management Efforts should be made to improve the management of natural woodland through a strengthened exzension service. This should be financed by the introduction and collection of a stumpage fee for commer- cial wood cutting in areas of natural woodland. Community and private sector tree planting efforts that do not require extensive Government funding should be encouraged. One option ib to lease woodland tracts to private individuals or groups for charcoal production, in return for a commitment that the leasee will undertake a replacement tree planting program in each area cut. (b) Improved Charcoal Kilns and Stoves Recognizing that it has insufficient knowledge of charcoal pro- duction, marketing and substitution options to develop optimal efficient charcoal kiln and stove programs, the Government has requested technical assistance from the UNDP/World Bank Energy Sector Management Assistance Program (ESMAP) to help assemble key data and prepare a household energy strategy. Preparation of the strategy will involve the following steps: (i) Urban household energy demand survey, to establish pat- terns of household energy use between different fuels, levels of consumption, responses to changing fuel prices and availability, and to provide a basis for monitoring the effectiveness of improved stove and other household energy programs. (ii) Woodfuel marketing and distribution study, to identify sources of charcoal, transportation and marketing net- - 102 - works, and to *ecurately cost the charcoal production pro- cess. (iii) Charcoal production survey, focussed on traditional char- coal producers, to assess traditional production methods, measure efficiencies achieved, and identify steps to im- prove traditional kilning techniques and incentives for their adoption. (iv) Survey of biomass availability, in the catchment areas of urban settlements covered by the energy demand survey. (c) Fuel Substitution Analysis is needed urgently, and is planned under the ESMAP-assisted project to: (i) refine the estimate of the financial cost of alternative fuels and estimate their comparative economic costs; (ii) identify steps to reduce the financial burden of electri- city connection and wiring, and the cost of hotplates and cookers, either by using less expensive equipment and/or by spreading the cost over a lengthy period; (iii) identify steps to increase the sustainable rate of elec- tricity connections and reduce distribution expansion costs; (iv) assess the impact of increased household use of electrici- ty on the long run economic and financial cost of electri- city; and (v) propose a structure of electricity charges that will fa- cilitate additional household energy use, but reflect the financial and economic cost of household electricity sup- ply, e.g., lifeline tariffs for small consumers. In contrast to electricity, kerosene and LPG do not appear to offer much potential as substitute househuld fuels. This initial conclu- sion will be checked out by the ESMAP project. If it proves correct, kerosene and LPG substitution should not be actively pursued. Work on coal briquettes has not yet reached the stage where their charcoal substitution potential can be assessed accurately. How- ever, initial production trials suggest that a technically-acceptable household fuel can be produced. Consumer acceptability testing is now needed. If the results are positive, prefeasibility analysis of comrer- cial-scale briquette production should determine whether coal briquettes lle financially and economically viable as a substitute household fuel. - 103 - VIII. RIE 1ABLE ENERGY 8.1 Policy Options Being a land-lockedt, oil-importing developing country, Zambia is a prime candidate for the application of new and renewable sources of energy. However, accumulated experience nationwide with these techno- logies is small, and limited to particular settings, such as missions (solar panels) and private farms (windpumps). Because of this low base, programs aimed at making use of re- newable energy sources should initially concentrate on a few well-proven and relativety simple technologies. Energy converters that are reliable and can be repaired locally have a better chance of penetration. This chapter first reviews the scope for applying four of the more promising renewable techologies in Zambian conditions--solar water heating, solar drying, wind water pumping, and biogas. Later, it briefly discusses the potential for geothermal power generation, a test facility for which is under construction. 8.2 Institutions The following institutions are involved in applying renewable energy technologies in Zambia: (a) Technology Development and Advisory Unit (TDAU), University of Zambia Although the TDAU has experienced management problems in the last couple of years, it still has the best equipped and larg- est workshop on campus and a staff of 12. The new management has a pragmatic approach, and see the TDAU as a link between the University and industry. TDAU's present involvement with renewable energy concerns the design and implementation of a micro-hydro installation for water pumping and direct mechanical application, based on a lo- cally made cross-flow turbine. Design parameters have also been evaluated for a small wind water pump. (b) Department of Mechanical Engineering, University of Zambia Renewable energy activities in the Department are limited to solar cooling applications. (c) Department of Water Affairs, Ministry of Water, Lands and Natural Resources The Department of Water Affairs of the MAWD has put into ser- vice close to 100 wind water pumps, mainly based on the - 104 - Southern Cross design. Today, practically all the wind pumps are out of operation for lack of spare parts. (d) National Council for Scientific Research (NCSR) NCSR, attached to the Ministry of Higher Education has tested service biogas digestors in three centers. (e) Department of Energy, Ministry of Power, Transport and Communi- cations The Department carries out a coordinating and supervisory func- tion in energy-related matters. It is now demonstrating renew- ed interest in NRSE by receiving and forwarding requests in this field. As is evident, involvement with new and renewable sources of energy in Zambia has been limited. Diffusion of the technology, linked to increases in welfare (in monetary or sociaL terms), should be the next step. This requires identifying and implementing a diffusion strategy, as well as quantifying and providing the necessary funds. 8.3 Sclar Energy Potential 8.3.1 Technical Potential Zambia enjoys very high solar radiation in all parts of its territory. Global radiation measurements have been made for Lusaka, Livingstone and Ndola since 1977-78 and for Mfuwe, Kasama, Mongu, and Mansa since 1981. The results are summarised in Table 8.1. Solar radiation is relatively steady throughout the year, thus reducing the requirements on surface collector areas and storage capaci- ties of solar energy converting equipment. Table 8.1: GLOBAL SOLAR RADIATION AND RAINFALL VALUES IN ZAMBIA Station Altitude Global Radiation Annual Rainfall (m asl) (kWh/yr) (mm/yr) Lusaka Int. Airport 1,154 1,921 850 Kasama 1,384 2,020 1,250 Mansa 1,258 1,980 1,150 iffuwe 570 2,335 1,050 Ndola 1,270 1,905 1,250 Mongu 1,053 2,300 950 Livingstone 951 2,147 750 Source: MeteorologiIcal Deportment. - 105 - 8.3.2 Solar Conversion Devices Solar conversion devices are essentially of two types: -solar thermal energy converters -solar photovoltaic energy converters Solar thermal energy converters include a wide range of appara- tus, ranging from reflecting surface collectors to solar dryers. Reflec- ting surface collectors make use of direct solar beams in order to achieve high temperatures (200 to 650°C). Flatplate collectors comprise the wide scope of solar conversion devices which supply low-grade heat (from 40 to 150'C). Solar dryers consist of an enclosure, much like a greenhouse, and may or may not include an additional, external flat plate collector to increase thermal energy availability. Solar photovoltaic (PV) energy converters have semi-conductor cells disposed in panels, which convert solar energy into direct-current electricity, at efficiencies of the order of 10%. The cost per kWh ranges between US$0.50 and US$0.80. PV electricity is therefore restric- ted to essential, low-power, remote applications (telecommunications, signalling, vaccine refrigeration, clinic lighting, etc.). 8.3.3 Existing solar energy applications The Department of Mechanical Engineering at UNZA has assembled an experimental cooling device. Funding of K36,000 has been requested to carry out a research pilot project. The Ministry of Health has installed sanitary solar water heaters in a few mission hospitals. (Mission hospi- tals account for 100 out of 1,054 health institutions in the country). No private applications of solar energy are known to exist in Zambia. 8.4 Solar Water Heating 8.4.1 The Technology and its Potential Application One of the potential applications of solar energy in Zambia is for water heating for urban households. A standard modular system could either be designed locally (e.g., at the University of Zambia) or prefer- ably adapted from a standard already available in other countries (Israel, Colombia, etc,). A typical modular design for a family of 4 to 5 would comprise a 2m flat plate collector, a 150 liter storage tank, and piping to the washrocms and kitchen. The thermo-syphon principle should be applied to avoid the use of electrical pumps. Critical points aret ti) the choice of materials to avoid corrosion problems; and (ii) the disposition of elements and tubing dimensioning for the proper opera- tion of the thermo-syphon concept. The converter could be manufactured in Zambia, using local materials, i.e., copper for the plate and tubing, cobalt for blackening of the absorption surface. - 106 - Urban households with water supply and significant hot water demand could potentially use such systems, although initial capital costs would limit affordability. In addition, the market could extend to the service sector in urban areas (hotels and hospitals), in which case lar- ger central systems could be designed. Under Zambian conditions, a typical household solar water heater should be capable of heating 150 liters of water daily to a tem- perature of 60°C. In case of overcast skies, lower temperatures of up to 40C can be expected. 8.4.2 Financial and Economic Analysis It is estimated that the annual cost of electric water heating for a family using 100 liters of water per day is K1,035 in early 1988 prices, and the cost of solar water heating is K835 (Appendix 8.1, Section A). Solar water heating is therefore financially viable in 1988 market conditions. If, as is recommended, electricity tariffs are raised, solar water hearing will become financially more attractive. However, solar water heating is not economic in a household with existing mains electricity supply because of the low marginal cost of electric energy. For this reason, solar water heaters should not be subsidized or promoted with public funds. 8.5 Solar Fish and Vegetable Drying 8.5.1 Potential of Fish Drying Solar dryers have considerable potential application in the fishing sector. Fishing takes place all year round, making a fixed in- vestment in this sector more attractive than in a seasonal activity. Major fisheries in the country produced the following quantities of fish in 1985 (Table 8.2). Table 8.2: FISH CATCH, 1985 (Tons) REG I ON Season (1) (2) (3) (4) (5) (6) (7) Total Jan-Apr 851 1,189 3,534 4,097 1,120 7,167 182 19,863 May-Aug 613 3,005 6,727 1,183 1,066 2,868 696 17,769 Sep-Dec 588 2,739 5,809 1,457 533 1,465 759 14,026 Total 2.052 6.933 16,070 6.737 2.719 11.500 1.637 51.658 Key. Region 1: Lake Kariba Region 5: Lake Mweru/Wa-Ntipa Region 2: Kafue River Region 6: Lake Tanganylka Region 3: Lake Bangweula Region 7: Lukanga Swamp Region 4: Lake Mweru/Luapula River Source: Ministry of Agriculture and Water Development. - 107 - Fish is very important in the Zambian diet, being the main source of protein. Yearly per capita consumption averages 12.15 kg (wet) in the Lusaka area, 5.7 kg in the Copperbelt. Most of the fish is sun-dried e.g., 99X of the catch from bake Bangweulu, and some is smoked. Solar dryers would be superior because: (a) with sun drying, 10 to 152 of catch is lost due to poor proces- sing (too little drying, leading to decomposition, or too much drying, leading to breakage during transportation). The lost value is estimated at K10 million in 1987; (b) solar driers improve the nutritional value and appearance of dried fish; (c) wood for smoking is becoming scarce, and smoking produces a bitter taste; and (d) the water quantity to be removed by drying is enormous, as the dry weight of most fish is 1/3 of their initial weight. Assum- ing 30,000 tons evaporation/annum, this leads to a thermal energy requirement for evaporation of 90TJ, or 25GWh. 8.5.2 Potential of Vegetable Drying At least one farming cooperative has been successfully using a solar vegetable drier for the past seven years. The appearance of dried vegetables is substantially improved through solar drying, which has helped the cooperative to expand its market, including exports to Botswana. 8.5.3 Implementation A project to introduce solar fish dryers on a trial basis is recommended. Project supervision should be allocated to the DOE, which would monitor the progress and adjust the strategy should performance be inadequate. First, the most cost-effective design should be identified and tested at the laboratory level, presumably at the UNZA. It is not neces- sary to start from scratch; proven designs exist worldwide. Technical assistance for transferring know-how on parameter optimization in the design of fish solar dryers (e.g., Brace Research Institute, Montreal, Canada) is recommended, in the form of a one year expert technician. Provincial Fisheries Officers (6) and Fisheries Development Of- ficers (16) from the Fisheries Department should be involved at the early stages of product design. They could provide valuable feedback on mater- ials and design selection. Pilot test runs in selected regioris should be carried out under their supervision. - 108 - Fishermen's cooperatives are the most likely organizations for acquiring the technology and constructing solar dryers, with technical assistance from the extension service of the Fisheries Department. Experience with the use of solar vegetable drying should also be assessed. If this suggests that the technology has potential, the UNZA could evaluate alternative designs in the laboratory and initiate pilot tests of the more efficient designs with selected farming coopera- tives. 8.6 Long-Term Solar Potential In time, the flat plate collector applied research group can fulfill more demanding design tasks on solar converting devices for manu- facturing enterprises, such as concentrating collectors, photovoltaic collectors, and enter more specific markets, such as refrigeration, air cooling, water pumping, etc. 8.7 Wind Energy With the relatively modest wind speeds in Zambia and the cur- rent state of windmill design, wind energy is unlikely to be economic for larger-scale water pumping for villages or agricultural irrigation. How- ever, it may be appropriate for remote and small-scale water demands, i.e., for isolated habitations and small livestock herds. Only limited research on wind conditions and on windmill design is recommended to identify models most suitable for such applications in Zambian condi- tions. 8.7.1 Technical Potential Existing data, which are less than adequate, suggests that average wind speeds are: Kabwe 2.7 m/s Lusaka 3.5 m/s Kasama 2.5 m/s Mongu 3.2 m/s Livingstone 1.6 m/s Ndola 2.3 m/s Source: Meteorological Department. In Central Province (Lusaka), the "windiest" region, the highest winds are recorded in September (4.2 m/s) and the lowest in January (2.0 m/s). This pattern tends to be general for the whole country. Due to the wind distribution about the mean, higher wind velo- cities are often reached during part of the day. Lusaka, for instance, exhibits speeds higher than 4 m/s during 10 hours per day for eight - 109 - months per year, during daytime. The highest gust ever recorded was at 40 m/s. Wind resource data currently available in Zambia are insuffi- cient for e definitive evaluation of wind pumping potential. A one-year data measurement and analysis program is therefore recommended, involving multiple-station measurement, station characteristic recording, and sta- tistical analysis. 8.7.2 Potential and Actual Application in Water Pumping Humans require an average of 25 liters of water per person per day. Cattle consumption averages 40 liters/day. Crop irrigation re- quires up to 86,000 liters/ha/day, in the peak month of October. As less than 50% of the rural population has access to safe water, the technical sre'e for village water pumping systems is very large. Also, 79% of households engaged in agriculture are small subsistence farmers. In the event of droight, maize, the staple food, has to be imported. Simple, appropriate technology irrigation would enable a farmer to have two crops per year and lead the country to self-sufficiency. Not only maize but wheat would also greatly benefit from irrigation. The relatively low-wind regimes in Zambia are not ideal, but do not totally exclude exploitation of the wind resource for this purpose. Multiblade slow moving windmills with high initial torque (as oppposed to high speed 1, 2, or 3-bladed wind electric generators) are technically suitable for water pumping or direct mechanical applications in Zambian wind conditions. The Water Affairs Department of the Ministry of Agriculture and Water Development (MAWD) has installed about 100 windmills for water pumping, mainly in Central Province. Only a handful are still operating, due to lack of maintenance and spares. The equipment installed was generally high capacity (rotor diameters of 7.6 meters), high tower wind- mills. The TDAU has prepared the preliminary design of a small windmill for water pumping. Funds are being requested for building a prototype. Some private farms have successfully installed windmills for water pump- ing, which appear to render good service. 8.7.3 Financial Analysis In village applications, wind power generally substitutes for human effort in drawing water. Whether or not it is financially viable depends on the value of labor time. For a typical 100-person, 50-cattle village, a borehole and windpump would cost K6.65/m3 of water, compared to K2.25/m3 for a borehole and handpump (Appendix 8.1, Section B). Use of the windpump would eliminate the need for 2.5 hours of handpump labor per day. In larger-scale agricultural applications, such as crop irriga- tion, wind pumping is competing against diesel. Assuming a pumping load - 110 - of 10,090 m3/year, diesel pumping would cost K1.57/m3 and wind pumping K2.31/m . The fact that the economic cost of diesel oil is an estimated 50X above its price would narrow the gap by about 20%. Windpumping is therefore only justified if the supply of diesel or repair of diesel equipment is unreliable. 8.8 Biogas 8.8.1 Technical Potential In 1981, Zambia had 2,225,000 head of cattle, 370,000 sheep and goats, and 235,000 hogs. The conversion of cattle manure into biogas has potential in the Zambian setting without putting too much effort into manure collec- tion. Cattle are tended in the daytime by a member of the family, who keeps them out of the crop fields. At night, cattle are brought into kraals. Handling cow or pig dung does not pose any social problem in Zambia. In a biogas digestor, methanisation of manure takes place in the absence of oxygen. Manure and water are introduced in equal quanti- ties in the biodigestor, which then produces gas, due to the action of anaerobic bacteria. Temperature and constant composition of the feed are critical parameters for the correct operation of the biodigestor. In a continuous process, mixture is constantly fed into the biodigestor. Sludge comes out through the other end. Feed can be any organic material (dung, agricultural waste, etc.). The neutral sludge is an ideal fertil- izer, free of odors and unattraitive to flies, etc. The he4t content of biogas is 20,000 to 28,000 KJ/m , as compared to 35,000 KJ/mr for natural gas. There are two basic biogas digestor designs. One consists of a floating dome biogas holder, usually made of steel, which floats on the mixture. Often called the "Indian design", it has the advantage of main- taining constant gas pressure. The second consists of a fixed dome, usu- ally made of bricks or concrete. This is sometimes referred to as the "Chinese design". 8.8.2 Current Applications In Zambia, the NCSR has shown the most int rest in biogas ap- plications. It has developed a standard size 10-11 m digestor, suitable for providing gas to three households for lighting and cooking. The di- gestor is fed weekly, after the initial feeding, with three pails of manure and five pails of water. No temperature problems affecting gasi- fication have been encountered with the experimental units, where mean temperatures of 21.1°C in January and 16.1C in July are to be found. - ill - NCSR has also just completed the construction of a Chinese-type biogas digestor to compare with the Indian-type that it has used so far. NCSR has recently installed a pilot biogas plant in a village in the Southern Province supplying energy to three households. Overall costs for the individual items were as follows: Item Cost (Kwacha) Tank dome 11,000 Pit construction and materials 2,700 Steel plumbing over long distances 5,000 Total 18,700 Operating results of this plant are not yet available. 8.8.3 Financial Cost and Benefits Assuming a conservative daily production rate of I m3 and a yearly cost of K3,300 (annuity with interest 12% over 10 years) the cubic meter cost of biogas is K9.00 or KO.36/MJ. Diesel oil costs K0.08/MJ. Based on these estimates, biogas technology does not appear to be finan- cially or economically competitive in Zambia. However, this conclusion should be reassessed in the light of experience with the field trials currently underway. 8.8.4 Recommendations Biogas is the only source of renewable energy which can reach high cooking temperatures and which can easily be converted into motive power and electricity. The technology should therefore not be totally discarded. However, work should be limited to monitoring developments elsewhere, and to pilot testing by the inter-organization research team established by the NCSR for this purpose. 8.9 Geothermal Energy The Government, through the Geological Survey, and with a grant from the Government of Italy, have embarked on a pilot scheme of geother- mal resource utilization for electricity generation. The stated criteria for development of the resource are: (a) presence of suitable geothermal resources; (b) proximity to reasonably large population centers; and (c) isolation from the national electric grid. The pilot scheme which is presently being developed is a low temperature (88'C-95'C) fresh water resource. The area is located on the southern tip of Lake Tanganyika on Kasaba Bay. It has a population of - 112 - about 50,000, a thriving fishing and tourist industry and some cattle ranching. Two small (500 kW) generators have been supplied by Italy and will be installed in 1988. The turbines will be of the binary type, which utilize a secondary fluid with a fairly low boiling point to ex- tract enthalpy from the geothermal fluid. Italian aid has also funded a national geothermal resource sur- vey. If the pilot generation scheme is technically successful, and the survey identifies other promising sites, a small number should be selec- ted for detailed cost/benefit analysis. The principal selection criteria should be: (a) resource availability and cost; (b) potential electricity demand; and (c) remoteness from the grid. The cost-benefit analysis will involve determining whether geothermal electricity is economically and financially viable and cost-effective compared to diesel generation. If the cost/benefit analysis appears to iustify the development of further geothermal generation plants, the Ministry of Power, Transport and Communications and ZESCO should be involved in the investment deci- sion. To ensure effective operation and maintenance, ZESCO might also be asked to take responsibility for the plants' operation and upkeep. - 113 - IXe CONSERVATION AND SUBSTITUTION OF CONVENTIONAL FUELS 9.1 Policy Issues and Options Experience in other countries has convincingly demonstrated that resources spent on energy conservation and substitution often pro- duce a higher return than expenditure on expanding the supply of ener- gy. The objective of energy conservation and substitution policy and planning is to identify the opportunities to take these high return actions, and to take steps to ensure that they are implemented. Appropriate energy pricing is the most important factor in ensuring that consumers make the correct decisions as to what forms of energy and how much energy to use. That is why each fuel chapter of the energy strategy has recommended energy prices that ref'ect the financial and economic cost of the fuels concerned. In addition to pricing, there are other actions that the authorities can take to promote efficient energy choice and use. These include: (a) the provision of foreign exchange for energy measurement or control devices, or for new equipment that uses a lower cost fuel; (b) assistance in the conduct of energy audits to identify energy conserva- tion and substitution opportunities; and (c) training to energy managers and operatives in energy management techniques. It is logical to concentrate these efforts on the users of the highest cost fuels. In Zambia, the highest cost fuels, both financially and economically, are imported petroleum products. These are also the fuels with the highest foreign exchange content. The last two columns of Table 9.1 compare the 1988 market prices of the two most heavily-used industrial process fuels, light fuel oil (LFO) and gasoil/diesel, with the prices of coal and electricity, allowing for typical efficiencies in use. For a large industrial user, coal was 31% of the cost of LFO and 25Z of the cost of diesel; electricity (D3 tariff) was 44% of the cost of LFO and 35Z of the cost of diesel. The major users of petroleum fuels, and hence the appropriate targets for energy conservation and substitution efforts, can be identi- fied from the Energy Balance (Table 3.2). Road transport is by far the largest user, accounting for 56% of petroleum product consumption, fol- lowed by ZCCM (mining) 28%, and industry and commerce (12%). This chapter deals first with the scope for energy substitution then with the scope for energy conservation. Table 9.1: FINANCIAL COST OF ENERGY FROM VARIOUS FUEL SOURCES COnPARED ON THE BASIS OF THERMAL VALUE, AT REPRESENTATIVE EFFICIENCY OF USE AND AT PRICES AS OF JAUNUARY 1966 Price Gross Meat End User Typical Cost Per Net Fraction Fraction Fuel Per Unit Equivalent Cost Per Efficiency Hest Energy of LFO of Dlesel (Kwacha) Unit Per Unit Unit-Gross of use Produced Cost Cost (MiJ) (K/GJ) (K) (K/JJ) Too (ex ref.) 1,060.00 Ton 40,950 25.89 0.60 32.36 LIGHT FUEL OIL Litre Retail 1.720 Litre 38.3 44.91 0.80 56.14 1.00 0.81 Ton (ex ref.) 865.00 Ton 40,820 21.68 0.75 28.91 HEAVY FUEL OIL Litre Retail 1.20 Litre 38.7 30.98 0.75 41.30 0.74 0.59 Ton (ex ref.) 1,487.50 Ton 42,750 34.80 0.80 43.49 GASOIL/DIESEL Litre Retall 2.02 Litre 36.3 55.58 0.80 69.47 1.24 1.00 KEROSENE 1.53 Litre 34.5 44.35 0.80 55.43 0.99 0.80 OOAL 325.00 Ton 25,000 13.00 0.75 17.33 0.31 0.25 LPG 1,125.00 Ton 45,430 24.76 0.80 30.95 0.55 0.45 ELECTRICITY D3 Marginal a/ 0.0403 kWh 3.6 11.19 0.95 11.78 0.21 0.17 D3 Average (60% Lf)b/ 0.0842 kWh 3.6 23.40 0.95 24.63 0.44 0.35 02 Marginal 0.0613 kWh 3.6 17.03 0.95 17.92 0.32 0.26 D2 Average (60% LF) 0.1101 kWh 3.6 30.59 0.95 32-20 0.57 0.46 ZCCM Marginal 0.0085 kWh 3.6 2.36 0.95 ;.49 0.04 0.04 Z= Average (85% LF) 0.0392 kWh 3.6 10.89 0.95 11.46 0.20 0.16 aJ Marginal prices do not Include the effect of demand kVa on the bill but do Include 15% governeent tax. bZ Average prices include the Impact of demand calculated for a 60 % load factor, 75% power factor, a f Ixed charge of K17,225, and demand charge of K13.81AkVA/ionth; and K1,722.50 fixed charge and K11.80/kVA/month for the D3 anu 02 rates, respectively, as well as 15% tax. Retall price Includes Governoent duty and K150/Ton delIvery. - 115 - 9.2 Fuel Substitution in the Copper Industry 9,2.1 Technical Scope Major ZCCM consumers of petroleum products and their maximum requirements are listed in Table 9.2. Table 9.2: MAJOR ZCCM PETROLEUM PRODUCT CONSUMERS Consumer Annual Petroleum Consumption I. Nchanga Open Pit 46 millon llters diesel In 1988-89, failing to 24 mlliIon litres In 199M-99 2. ZCCM underground mines Approx. 16 million liters of diesel 3. Ndola Lime 25,000 tons HFO In lIme klins 4. Mufullra smelter 19,000 tons ifO In furnaces and driers 5. Kabwe 8,5C0 tons HFO In furnaces, through 1993 6. Nkana smelter 18,000 tons HFO In furnaces and 18,000 tons HFO In wIrebar productlon. Source: ZOM. Petroleum product substitution possibilities in ZCCM are tech- nically constrained. For quality reasons, Ndola Lime and the Nkana wire- bar furnace must continue using HFO. The Kabwe plant has a maximum life of five years, which precludes consideration of substitution there. Nufulira smelter could convert from 19,000 tons of HFO to 30,000 tons of coal/year by the installation of coal grinding and handling plant, but at a capital cost of about KIOO million. Ukana smelter could reduce HFO use by 18,000 tons/year and increase coal consumption by 29,000 tons/year by investment of K16 million on improved coal storage and handling facili- ties, provided the proposed new oxy-fuel smelting technology can be adap- ted to use coal. Technically, the ZCCM underground mines could further substitu- te diesel with electric powered load-haul-dump units, cutting their con- sumption of diesel by up to 75X. This would need to be implemented gra- dually over 5-10 years, and would involve virtually no net capital expen- diture, beyond normal vehicle replacement. However, there would be operator resistance to this change, due to the lesser convenience of electric vehicles. Recommended higher diesel oil prices would increase the substitution incentive and return. Nchanga open pit could reduce diesel concumption by up to 101 by implementing a third stage electric trolley assist. Capital costs and fuel cost savings have not been studied in detail, mainly because of the pit's limited (10-year) life. - 116 - 9.2.2 Financial Analysis Substitution of coal for HFO at Mufulira would require capital investment of K100 million and yield annual fuel cost savings of K6.0 million (assuming 1 ton HFO = 1.6 tons coal, and prices/ton delivered of K1260 for HFO and K590 for coal). The future of Mufulira smelter beyond 10 years is questionable. Hence this investment is not justified on fi- nancial grounds. Substitution of coal for HFO at the Nkana smelter would yield annual fuel cost savings of K5.69 m-llion for an estimated investment of K16 millicn. 8/ Reducing the annual saving to K4 million, to allow for extra handling costs of coal, and discounting at 12%, this project shows a NPV of K6.63 million over a 10-year life. Its implementation is recom- mended. 9.3 Fuel Substitution in Industry and Commerce The Department of Energy's industrial energy audit program has begun to examine the scope for the substitution of low cost indigenous fuels for imported petroleum products in industry and commerce. The fo- cus of this work is on the scope for substituting diesel or LFO with electricity and coal. Nine facilities that currently use diesel boilers or ovens pro- vided information from which the financial costs and benefits of electri- city substitution were estimated. Of the nine installations, it was es- timated that six could achieve a payback of less than five years from electric boiler/furnace substitution. In the other four cases, payback was longer, due to relatively low fuel consumption. The results of this analysis are summarized in Table 9.3. Ten facilities provided information on light fuel oil substitu- tion potential. From this, it was estimated that five of the ten could realize paybacks of five years or less from electriticity substitution. The results of the analysis are shown in Table 9.4. 8/ This low cost assumes relocating existing equipment from another site. Table 9.3: FUEL SUBSTITUTION POTENTIAL IN COiPANIES WITH DIESEL FIPED BOILERS#FUIRNACES Installed Annual Fuel Annl Fuel Equivalent Apprx AnnI Apprx Invest Anal Fuel Annl Fuel Pay-Back Company LOC Capacity Consumption Costs Eloc Boiler Energy Cost in Now Plant b/ Savings Cost Savings Period Capacity 1/ of EIec (KG/HR ) (Liters) (Kwacha) (kW) (Kwacha) (Kwacha) (Liters) (Kuacha) (Years) Dairy Produce oard Lus 2,000 300,000 605,550 1,471 211,943 788,235 195,000 393,608 2 Sonar Colwyn Textiles Ndo 227 24,500 49,453 167 17,309 89,465 15,925 32,145 3 Copper Harvest Foods Ndo 1,000 360,000 726,660 735 254,331 394,118 234,000 472,329 1 Gana Pharmceuticals Ndo 1.200 20,650 41,682 882 14,589 472,941 13,423 27,093 17 Lyons Brooke Bond Ndo 1,800 255,500 515,727 1,324 180,504 709,418 166,075 335,222 2 Monterey Printing Ndo 3,100 192,000 387,552 2,279 135,643 1,221,765 124,800 251,909 5 Supa Baking Lus 2,000 260,000 524,810 1,471 183,684 788,235 169,000 341,127 2 Piggot Naskew Kit 4,490 198,037 399,738 3,301 139,900 1,769,588 128,724 259,829 7 Zambia Pork Products Lus 2,500 28,156 56,833 1,838 19,892 985,294 18,301 36,941 27 Total 18,317 1,638,843 3,308,005 13,468 1,157,802 7,219,053 1,065,248 2,150,203 3 Notes: a/ The equivalent electrode boiler installed capacity is calculated on the basis of a feedwater terperature of 66'C and a pressure of 10 Bars, which results in a steam production of 1.3 kg/hr per kit consumed. b/ The approximate investment cost is based on one supplier's quotation of USS66/kW. Source: Department of Energy. Table 9.4: FUEL SUBSTITUTION SAVINGS IN COMPANIES WITH HFO/LFO FlIED BOILERS/FURNACES Installed Annual Fuel AnnI Fuel Equivalent Apprx Anni Apprx Invest Annl Fuel Anni Fuel Pay-Back Company LOC Capacity Consumption Costs Elec Boller Energy Cost In New Plant Savings Cost Savings Period Capacity of Elec (KG/M) (Liters) 0(wacha) (kW) (Kwacha) (Kuacha) (Liters) (Kwacha) (Years) Speciality Food Lus 4,500 163,429 224,878 3,309 98,946 1,773,529 73,216 125,932 14 Zambia Breweries Ndo 12,500 1,838,226 3,161,749 9,191 1,391,169 4,926,471 1,029,407 1,770,579 3 Ndola Knitting Ndo 4,500 90,568 155,777 3,285 68,542 1,760,584 50,718 87,235 20 Mukuba Textiles Ndo 2,200 133,730 230,016 1,618 101,207 867,059 74,889 128,809 7 Swarp Spinning Ndo 3,200 365,000 627,800 2,353 276,232 1,261,176 204,400 351,568 4 Zambezi Paper Ndo 12,000 694,045 1,193,757 8,824 525,253 4,729,412 388,665 668,504 7 Zambia Pork Prods. Lus 4,500 93,388 281,098 3,309 123,683 1,773,529 91,520 157,415 11 Dairy Produce Bd, Lus 5,200 475,000 817,000 3,824 359,480 2,049,412 266,000 457,520 4 o Mulungushi Textiles Kab 12,500 2,224,665 3,826,423 9,191 1,683,626 4,926,471 1,245,812 2,142,797 2 Kafironda Limited Muf 7,700 1,116,650 1,920,638 5,662 845,081 3,034,706 635,324 1,075,557 3 Total 68,800 7,t94,700 t2,439,135 50,564 5,473,220 27,102,349 4,049,951 6,965,916 4 NWies: See Table 9.3 Source: Department of Energy. - 119 - One important caveat concerning the results is that they did not take account of any investment required in new electricity supply fa- cilities to handle the plants' increased power requirements. Where such investment is required, it could substantially raise the projects' capi- tal cost, and hence increase the pay-back period. Nevertheless, from the results of the study, it is likely that a number of substitutions would prove financially viable, resulting in substantial import fuel savings and increased electricity demand. The example of a recent electric boiler substitution at Kafue Textiles illus- trates one such case. The cost of the new electric boiler, transformer, cables, switchgear and their installation totalled K9.0 million (US$1.1 million) in 1986. As a result of the investment, annual energy costs have been reduced by K6.9 million (US$869,000), giving a pay-back of 1.3 years. Other large users of process diesel and LFO could potentially achieve similar results. Higher electricity tariffs, which are needed to cover ZESCO's financial costs, will reduce the benefit of electricity substitution. In the case of diesel plant, this will be partially offset by the recommended higher diesel prices. 9.4 Energy Conservation in the Copper Mining Industry ZCCM, which is responsible for all major mining operations other than coal, is a major user of diesel oil, primarily for moving waste materials and ore-bearing rock in its open-cast and underground mines. It is also a substantial user of fuel oil in its smelting, lime and wire bar operations. ZCCM is a sophisticated enterprise, which has access to consi- derable engineering skills and investment resources. The company's ener- gy management efforts are therefore of a high standard, relative to those of other Zambian energy users. ZCCM is acutely conscious of the high cost of its diesel con- sumption, and is taking steps to rationalize the number of diesel vehi- cles in use and trips made. The fleet is relatively modern and energy efficient. There is little scope for further improvement in the efficiency of ZCCM fuel oil use, although there is scope for substitution of coal for fuel oil and electricity for diesel, as discussed above. 9.5 Energy Conservation in Industry and Commerce There are fewer than 60 significant petroleum fuel consuming industrial companies and commercial institutions in Zambia (i.e., with boilers over 1 ton/hour capacity) and an estimated 67 significant indus- trial and institutional users of coal and electricity (Table 9.5). - 120 - Table 9,5: INSTALLED INDUSTRIAL PROCESS HEATING UNITS Geographical Diesel LFO/HFO Coal Electricity Area/Operator Facilities/Units FacilIties/UnIts FacilItIes/UnIts FacilIties/UnIts Lusaka Area 9 11 15 25 12 21 19 29 Copperbelt 19 28 10 19 25 46 11 19 Govt. of Zambia 5 11 0 n.a. fla. 1 3 TOTAL 33 50 25 44 37 67 31 51 Source: Department of Energy. As of March 1988, six industrial plants had been subject to de- tailed audit under the Department of Energy's industrial energy audit program--Zambia Breweries, Dairy Produce Board, Kapiri Glass Products, Kafironda (explosives), Zambia Pork Products, and Premium Oils. Prelimi- nary discussions of energy conservation potential had been held with a further 30 plants. A summary of the pattern of energy use and the estimated poten- tial for energy conservation savings from the six audited plants is pre- sented in Table 9.6. Total potential energy conservation savings identi- fied at the six plants were K3.4 million (US$419,000) annually, an aver- age of 181 of total annual energy costs. The major deficiencies found in energy practices were: (a) oversized energy using and heat producing systems; (b) failure to trim energy requirements of combustion systems or process equipment in proportion to reduced production; (c) failure to attend to regular maintenance (a "breakdown" philo- sophy); (d) lack of energy management awareness and information systems; and (e) lack of understanding of actions that can reduce energy waste. Many of the potential improvements could be achieved at little or no cost. However, total investment of K2.6 million (US$330,000) shown as "Cost of Energy Savings" at the foot of Table 9.6, will be necessary at the six plants to achieve the full savings. All the investments have a pay-back of less than two years. - 121 - Table 9.6: SUNMARY OF ENERGY SAVING OPPORTUNITIES AT SIX AUDTED PLANTS Pl ant I tem Dairy KapirI Zambia ZambIa Produce Glass Kafironda Premium Pork Breweries Board Products Explosive 01ls Products Electricity Demand (kVA) ',800 390 3,060 1,000 1,334 300 Consumption (MWh) 6,322 2,098 20,500 4,500 5,215 1,234 Annual Cost (K '000) 777 400 1,560 490 665 156 Coal Consumption (Tons) 7,380 0 20 0 7,259 0 Annual Cost (K '000) 2,399 0 7 0 2,613 0 LightAieavy Fuel Oil Consumption (Tons) 0 503 2,908 1,382 0 109 Annual Cost (K '000) 0 818 3,609 2,033 0 161 Process Diesel Consumption (Tons) 0 0 0 590 0 34 Annual Cost (K '000) 0 0 0 1,074 0 49 Process LPG Consumption (Tons) 0 0 927 0 0 0 Annual Cost (K 000) 0 0 1,515 0 0 0 Total Energy (GJ) TOTAL ENERGY COST (K '000) 3,176 1,218 6,691 3,597 3,278 365 ENERGY COST SAVINGS (K '000) 450 230 450 1,200 1,000 25 PERCENT SAVINGS 14 19 7 33 31 7 ANNUAL FOREX SAVINGS (USS) 56,250 28,750 56,250 150,000 125,000 3,125 COST OF ENERGY SAVINGS (K '000) 50 250 840 1,300 0 0 COST OF ENERGY SAVINGS CUSS) 6,250 31,250 105,000 162,500 0 0 Source: Department of Energy. - 122 - An outstanding example of the potential benefits of the indus- trial energy audit program is afforded by Kapiri Class Products, one of the six plants audited. Between 1986, the year of the energy audit, and 1987, glass production rose by nearly 50% but total energy cost actually fell by 222. Specific energy cost per ton of output improved by 48% in only one year (Table 9.7). Although it is impossible to generalize accurately from such a small sample, the results of the six energy audits suggest there is con- siderable potential for industrial energy conservation cost savings. If the 18% potential savings of the six sample plants are typical, these savings could be worth over US$1 million per year. Unfortunately, there are significant technical. and financial barriers to the realization of this potential, in particular: (a) a lack of technical awareness among managers and supervisors about maintenance practices and how to improve systems perfor- mance; and (b) an acute shortage of foreign exchange and high duties on impor- ted inputs which limit purchases of energy monitoring and con- trol equipment. An aggressive energy conservation program is therefore recom- mended to overcome these barriers. 9.6 Energy Conservation at NCZ and Chilanga Cement The Department of Energy has maintained close contact with the two companies which are Zambia's biggest industrial consumers of energy after ZCCM, namely NCZ and Chilanga Cement. Each of these has developed an energy conservation program. NCZ has identified 10 conservation projects, with an estimated cost of K17.2 million, estimated to yield annual savings totalling K24.48 million. Prima facie, not all these proposals appear viable, but they give an indication of the scope for high-return conservation measures in a sizeable industrial plant. NCZ has already implemented a project to replace fuel oil-fired boilers with low grade coal-fired boilers. Chilanga Cement has already achieved substantial energy savings and forsees the possibility of further large savings in the future. The savings already achieved by Chilanga Cement in the past nine years in- clude: (a) reduction of coal consumption at its Chilanga plant by 16X by the installation of new gas analysis equipment, the refurbish- ing of electrofilters and improving kiln run factors and opera- tion - 123 - Table 9.7: KAPIRI GLASS PRODUCTS PLANT ANALYSIS OF COMPARATIVE ENERGY PERFORMANCE, 1986 AND 1987 S C4ANGE FROM 1986 1987 1986 to 1967 ELECTRICITY 20,449,004 18,327,947 (10,37) (kWh) FUEL OIL 2,907 1,974 (32.09) (Tons) LPG 927 490 (47.16) (Tons) TOTAL ENERGY 243,859 174,559 (28.42) (81 gajoulos) PRODUCTION 8,569 12,834 49.77 (Tons) SPECIFIC ENERGY 29 14 (52.28) (GJ/Ton) TOTAL ENERGY COST 6,311,383 4,932,417 (21.85) (Kwacha) SPECIFIC ENERGY COST 737 384 (47.82) (Kwacha/Ton) Sources Department of Energy. - 124 - (b) reduction of coal consumption at the company's Ndola plant by 23Z by rehabilitation measures; and (c) reduction of diesel consumption at the Ndola plant to 50X of its 1980-81 level by a number of technical improvements and the introduction of a coal-fired furnace. For the future, the possibility is forseen to reduce coal con- sumption further by on-site investigative/training work by supplier spe- cialists and the installation of modern fuel control systems. Such measures might save between 7,000 and 10,000 tons of coal annually, at a saving of between K3.9 and R5.6 million, according to the company's esti- mates made in November 1987. Another project is under study at the Chilanga works to install a high efficiency separator, which would reduce electrical energy consumption by 302. 9.7 Recommendations on Energy Substitution and Conservation in Indust An aggressive program of action is needed to identify and realize the potential energy savings from conservation and substitution measures in mining, industry and commerce. Action is proposed under three heads: (a) policy; (b) technical assistance; and (c) investment financing. 9.7.1 Policy The major objectives of energy conservation and substitution policy are to give the right incentives and correct information to fuel users so that they make efficient energy choices and decisions. Of critical importance is appropriate energy pricing. To en- sure optimal energy use, prices should be set at a level that both covers financial costs and reflects economic costs. Moreover, the structure of fuel prices should be similar to their economic cost structure, so as to give the right incentives !or fuel choice. The major energy price recom- mendations of this report are to: (a) raise the price of diesel oil to reflect its economic cost, based on an appropriate shadow value for the Kwacha; and (b) raise average electricity tariffs to cover ZESCO's finan- cial costs of supply. Other policy measures that should be considered to encourage efficient energy use are: (a) provision of guidelines to new investors on the comparative cost of alternative fuels, and encouragement to consider elec- tricity and coal ahead of petroleum products; (b) compulsory energy audits for all industrial petroleum fuel users with boilers of more than 1 ton/hour capacity, charged at 502 of the cost of the audit; and - 125 - (c) financial and economic appraisal of the energy implications of major new industrial projects by the Department of Energy. 9.7.2 Technical Assistance To identify the full potential for energy conservation and sub- stitution measures in industry and commerce and to bring a package of high return investments to prefeasibility status, ready for feasibility analysis and presentation to potential donors, a program of energy con- servation and substitution technical assistance to the Department of Energy is recommended. This would complement and strengthen the conser- vation/substitution activity already undertaken by DOE staff. About 2 man-years of consultant technical assistance would be required, at a total cost of about US$300,000, including salaries and expenses. This would finance: (a) extension of the on-going energy audit program to all major industrial and commercial users of petroleum products; (b) training of plant engineers in energy management techniques; and (c) preparation of a comprehensive prefeasibility report on energy conservation and sub- stitution potential. 9.7.3 Investment The size of the priority energy conservation and substitution investment program that would emerge from the recommended technical as- sistance project is impossible to predict. However, if electricity sub- stitution is found to be viable in only 251 of the larger diesel and LFO users, the priority electricity substitution investment program could be in the range of US$10-15 million and produce savings of about US$2-3 mil- lion/year in reduced imports of petroleum fuels. In addition, it is pro- bable that the analysis would identify and confirm options for coal sub- stitution. This could result in another US$5 million of investment and US$2-3 million in savings. High return energy conservation investments could be of a similar magnitude, say about US$5 million, and result in a further US$2-3 million in imported energy savings. Such an investment package, in the range of US$20-25 million and with annual benefits of US$6-9 million, should prove very attractive to a multilateral or bilateral donor. The foreign exchange resources could then be on-lent by the Government to industrialists for approved conservation or substitution projects. 9.8 Energy Conservation in Road Transport Although the road transport sector is by far the largest user of petroleum fuels, no systematic effort has been made to explore the scope for improving the efficiency with which energy is used in this sector. In part, this is because the task of imptoving transport energy efficiency is extremely difficult. Demand for transport is highly inel- astic and there are few effective substitutes for petroleum fuels for most transport purposes. The range of effective policy measures is - 126 - therefore limited, and their impact uncertain. The preliminary analysis in this section explores some of the main potential areas for policy ac- tion, including transport fuel pricing and taxation, road maintenance and vehicle maintenance and repair. It also presents some tentative recom- mendations for action. 9.8.1 Level and Distribution of Fuel Consumption in Transport 302 million liters of diesel and gasoline were consumed in the road transport sector in 1986, of which 177 million liters were diesel oil and 125 million liters were gasoline. Fuel use by different type and size of vehicle was estimated from the number of vehicles of each type on the road and the average fuel consumption of each type of vehicle. The number of vehicles in operation was estimated from data on new registra- tions and assumptions about the average life of different types of vehi- cle. The results are shown in Table 9.8. Table 9.8: ESTIMATED FUEL CONSUMPTION BY TYPE OF VEHICLE, 1986 (million liters) Gasoline Diesel Cars 39 2 Vans 46 13 Trucks 9 157 Buses 31 5 TOTAL 125 177 Source: Department of Energy. The above figures give a general picture of fuel use and sug- gest a number of special features of the Zambian transport sector. In particular, it is worth noting that a number of private cars use diesel, probably to take advantage of low prices, and many of the vans are diesel engined, presumably for the same reason. The high proportion of gasoline use in buses is probably a reflection of their age. 9.8.2 Transport Fuel Pricing and Taxation Appropriate pricing of transport fuels is the single most im- portant measure to promote efficient fuel choices and consumption decis- ions by transport energy users. (a) Fuel Prices and Excise Duty Rates The composition of fuel prices, from wholesale to retail pump sales, is shown in Table 9.9. In 1988, the wholesale price of premium - 127 - gasoline was 57X higher than that of diesel, and regular gasoline, 40X higher. Table 9.9: LEVEL AND COMPOSITION OF TRANSPORT FUEL PRICES, LUSAKA 1988 (Kwacha per liter) Price Component Fuel Type Premium Regular Diesel Wholesale price 2.120 1.930 1.350 Excise Duty 0.636 0.579 0.378 Terminal fee 0.007 0.007 0.007 Transport 0.205 0.205 0.205 Oil Company margin 0.178 0.163 0.116 Dealer's margin 0.194 0.175 0.123 Retail Price 3.34 3.06 2.18 Source: ZIMCO. Because diesel oil is considered to be a crucial input to transport, mining and agriculture, its wholesale price, which is subject to approval by the Government, has been kept well below that of premium and regular gasoline. This price discrimination in favour of diesel is further enhanced by the effects of the excise duty. In Kwacha per liter, the excise duty is 68X higher for premium gasoline than for diesel and 532 higher for regular gasoline than for diesel. In 1988, gasoline is relatively more highly taxed than it was in 1985, when the proportions were 312 and 19X (Table 9.10). Table 9.10: EXCISE DUTY ON GASOLINE AND DIESEL OIL KWACHA PER LITER 1985 Feb 1986 Jan 1987 Aug 1987 Premium 0.42 0.45 0.59 0.636 Regular 0.38 0.41 0.54 0.579 Diesel Oil 0.32 0.33 0.35 0.378 RELATIVE TO DIESEL (%) Premium 131 136 169 168 Regular 119 124 154 153 Diesel OfI 100 100 100 100 Source: Z IMCO. In Chapter 5, it is recommended that the prices of white pe- troleum products be aligned more closely with their economic costs. This - 128 - requires that the price of diesel oil be raised, with the objective, in respect of automotive diesel, of promoting its conservation in use. In other countries, gasoline is typically priced at no more than 25% above diesel oil, so that the customer (user) is neutral in choice of fuel. (b) International Price Comparisons The prices of transport fuels in Zambia are low not only relative to economic cost, they are also low compared to those of neighboring countries (Table 9.11). Table 9.11: COMPARATIVE INTERNATIONAL FUEL PRICES, FEBRUARY 1987 (Zambian Kwacha per liter) Fuel Country Premium Regular Diesel Zambia 3.06 2.80 1.96 Zimbabwe - 5.51 3,02 Malawi - 5.07 4.36 Kenya 4.37 4.09 2.73 Source: ZIMCO. This decision to keep fuel prices low, relative to those in other neighbouring countries, induces a relatively larger volume of transport energy demand in Zambia than is considered affordable elsewhere in the region. It may also promote attempts to trade fuel purchased cheaply in Zambia to users in neighboring countries, for instance from heavy vehicles in cross-border transport. 9.8.3 Road Maintenance Expenditures and Policies The Zambian road network consists of 17% bitumen roads, 23% gravel roads and 60% unclassified--mainly earthen tracks. A recent exam- ination of the state of the trunk road network covered 38% of the bitumen roads, a total of 2,375 km, all of which were primary arterial routes, carrying substantial amounts of international transit traffic. The study showed that 14% of the most important roads in Zambia are of an unaccept- able standard, and more than 40% are of poor or lower standards, measured by the roughness of the surface. There can be little doubt that improved standards of road construction and maintenance would have a significant impact on improving energy efficiency in road transport. Whilst there is no justification for a one-to-one ratio between Government expenditures on the roads and the taxes which it collects from road users, it is of interest to note that, whereas the Road Department's capital and recurrent budget in 1986 totalled K105 million, the Govern- ment's revenues from the excise taxes on gasoline and diesel amounted to - 129 - only K113 million, barely covering these costs and making virtually no net contribution to public revenue. Of course, there were other taxes and duties on transport vehicles, but these are not very significant. Higher fuel excise duties should be considered to finance a more effec- tive road maintenance program and to reduce the budget deficit, while si- multaneously encouraging energy conservation. 9.8.4 Condition of the Vehicle Fleet Large parts of the vehicle fleet in Zambia are in poor condi- tion, due to lack of maintenance, excessive use, overloading, and rugged driving conditions. Surveys show that private cars, on average, are driven about 40,000 km annually in Zambia, more than twice the s-erage distance travelled in Europe. This reflects the ongoing effort to satisfy increasing transport demand with an insufficient and declining number of vehicles. New vehicle registrations fell by 65% in the ten years of the period 1974 to 1984, from 14,000 to 5,000 per year. Spare parts for cars are expensive and scarce, limited by the scarcity of foreign exchange. Tires and inner-tubes, which are produced lecally, tend to be of poor quality. The vehicle fleet's age and state of repair affect consumption of both fuel and lubricants. Excessive fuel use may also originate from improperly regulated ignition and insufficient pneumatic pressure in tires. As fuel itself is not scarce, car owners may tend to trade repair and spare parts costs off against fuel costs. In theory, vehicles that are more than five years old are re- quired to be inspected at least every year. This provides a check against poor running condition and excessive fuel consumption. However, lack of capacity at the Road Traffic Commissioner has rendered efficient inspection difficult. The Prevention Maintenance Section al: the Govern- ment's Mechanical Services Department is not in operation. which has se- verely affected the state of repair of official vehicles. Both these or- ganizations should be functioning properly to ensure adequate vehicle maintenance and fuel efficiency. 9.8.5 Possible Steps to Raise the Efficiency of Energy Use in Transport In addition to an increase in diesel prices and excise duty, and other measures discussed above, the following additional possibili- ties should be considered to conserve energy use in road transport: (a) Minimum Standards of Fuel Efficiency for Imported Vehicles A minimum of fuel efficiency could be mandated for all new im- ported vehicles. - 130 - (b) Driver Training Formal driver training should be implemented by transport com- panies with special emphasis on: - energy efficient speed levels; - smooth acceleration; - no idling; and - detecting and mending minor faults. (c) Transport Information System Route planning should be undertaken to avoid empty runs and an information system could be established whereby transport users could find excess return transport capacity. (d) Speed Limits Speed limits could be introduced on all roads outside built-up areas, for example 100 km/hour. This would be both a safety and an energy saving measure. (e) Bicyles The use of bicyles could be promoted through advertizing cam- paigns, separate cycle tracks, and more efficient production of domestic bicyles. (f) Transfer of goods and passengers from road to rail transport Rail is generally a more energy efficient means of transport than road for large quantities of goods over medium to long distances. This and other factors explain why road haulage rates are 70% higher than rail rates per ton-kilometre. Unfor- tunately, Zambian Railways has serious efficiency problems and shortages of locomotives and wagons, resulting in erratic de- liveries and slow services. Attempts at increasing rail traf- fic will not be successful until these have been solved. Ad- dressing them should be a priority. - 131 - X. BEERGY PLAMNING SYSTEMS AND INSTITUTIONAL CAPABILITIES Sound economic and technical choices between energy policy op- tions and investments and effective coordination between government, parastatal companies and the private sector in the design and implementa- tion of energy programs are essential for efficient energy supply and use. This Chapter outlines the steps recommended to strengthen energy policy and planning systems in order to achieve these results. 10.1 Energy Institutions and Current Planning Systems The Department of Energy in the Ministry of Power, Transport and Communications (DOE) has the primary role in energy planning and policy formulation. With the assistance of the National Commission for Development Planning (NCDP) and the other ministries and departments con- cerned with energy, it is responsible for preparing the Energy Chapter of the Governmment's five-year National Development Plan. It advises on the choice of publicy-funded energy projects for inclusion in the Plan, and works to obtain donor funding for them. It also conducts practical anal- ysis to identify opportunities for energy conservation and substitution and for cost-effective application of renewable energy technologies. Presently, it is involved in a large-scale study of the options for im- proving the supply and use of household energy. The DOE has a profes- sional staff of six as well as two technical assistance advisers, both of whom are working in the area of household energy. In the past, it has also received technical assistance in the areas of energy conserva- tion/substitution and energy planning. The DOE's work in preparing the five-year energy development plan is guided by the Energy Development Committee, which is representa- tive of all the major ministries and public organizations concerned with energy. In addition to the DOE, the Committee members include the Ministry of Mines, the Forestry Department of the Ministry of Lands and Natural Resources, the NCDP, the National Council for Scientific Research (NCSR), Zambia Electricity Supply Corporation Limited (ZESCO), and Zambia Industrial and Mining Corporation Limited (ZIMCO). Although the commit- tee's continuation to oversee implementation of the plan was recommended in the original Fourth National Development Plan, this recommendation was not followed. However, in 1988, the Comittee was reconstituted to over- see preparation of the revised Fourth National Development Plan. A second Ministry with important energy planning responsibili- ties is the Ministry of Mines. This has overall responsibility for Maamba Collieries, for the Hydrocarbon Unit, which coordinates oil ex- ploration, and for Zambia Consolidated Copper Mines Limited (ZCCM), the largest energy user. The Ministry of Lands and Natural Resources is res- ponsible for forestry policy and its implementation, and therefore has a major role to play in the key issue of woodfuel supply. Other minis- tries, such as the Ministry of Commerce and Industry, which has oversight - 132 - responsibility for the ZIMCO industrial companies, have a less direct role in energy policy formulation. ZIMCO itself is a key institution in the energy sector. It is the parastatal holding company for all the large suppliers and users of energy. In effect, it has responsibility for implementing most of the energy investment and policy decisions of the Government. It is also responsible for implementing investments in energy-using industries whose actions have a major impact on the level and pattern of energy use. It has in-house technical expertise to analyze and advise on energy issues which are either the responsibility of or affect its constituent com- panies. In the past, there have been two major weaknesses in the formu- lation and implementation of energy plans and policy. (a) The Energy Development Committee, which is responsible for the five-year Energy Development Plan, has not met on a regular basis to systematically coordinate energy policy. (b) The skills and resources of the DOE and ZIM.O have been limited, relative to the task of providing regular advice on all key energy planning and policy issues. The DOE has parti- cularly lacked skills in the areas of energy economics, plan- ning, and financial analysis. These are areas that need to be strengthened if the Department is to perform effectively. 10.2 Recommendations These weaknesses have been recognized and action is being taken to correct them. The first step has been to reconstitute the Energy Development Committee. The proposal to retain the Committee beyond com- pletion of the revised Fourth National Development Plan is strongly sup- ported. Meeting regularly, say four times per year, or more often, if needed, its continuing role would be to ensure the coordination and re- view of all major decisions involving the supply and use of energy. Its specific functions would include: (a) overall supervision of the preparation and implementation of the national energy strategy, annual and rolling five-year energy plans; (b) review of all significant energy capital expenditures; (c) advice on all energy policy issues, including prices, tariff levels and tariff structures, and the financial viability of energy enterprises. The Committee's Secretariat should consist of the DOE, together with one of more representatives of ZIMCO to provide operational - 133 - knowledge and company liaison. The DOE would undertake the major part of the Secretariat's work. Plans are in hand to strengthen the DOE so that it can effec- tively execute the role required of it. Including existing positions, the recommended staffing of an expanded DOE is as follows: Director: (in post) Role: Provide strong overall management and technical leader- ship and liaison with senior officials, corporate re- presentatives, and donor agencies. Chief Economist, Senior Energy Planner, and Senior Economist: Role: Economic analysis of major energy issues and options. Economic review of energy pricing levels and struc- tures. Maintenance and improvement of energy data- base. Energy project investment analysis. Preparation of national energy plans and periodic update of five- year energy strategy. Liaison with energy suppliers and energy users. Chief Technical Officer and one Technical Officer: Role: Advice on technical options in energy supply and use, and identification of efficient new technologies. Pro- motion of energy conservation and substitution analysis, actions, investments, and training. Senior Financial Adviser: Role: Advice on financial viability and performance of energy supply organizations. Analysis of the financial impli- cations of investment policy/strategy and pricing, and monitoring of its implementation. Household and Renewable Energy Specialist: Role: Development and implementation of a household energy strategy. Analysis of policies to improve the supply and efficiency in use of traditional fuels. Applica- tions of appropriate renewable energy technologies. Principal Support Staff: Computer Analyst/Programmer: Role: Support to the DOE in analytical work and in maintaining the eneigy database. - 134 - Statistician: Role: Prepare and maintain an energy database. Clerical Officer; Role: Administration, Office Routines. It must be emphasized that staff skills, experience and "stature" will be more important to the success of the DOE than numbers and job descriptions. The individuals appointed need operational experi- ence with Zambia's energy companies and a salary structure that recog- nizes that energy planning and policy is an important function in Zambia. 10.3 Operational Energy Institutions There is no need for significant changes in the overall struc- ture and role of the operational energy companies. The need throughout, in some cases more than others, is for managerial strengthening, staff training, and improved performance incentives. In parallel with the more proactive role envisaged for the DOE in advising on energy policy, ZIMCO could usefully strengthen the management, coordination, and strategic di- rection of its constituent energy suppliers and major energy consumers. This would entail coordination with the companies at the planning stage, to ensure compatibility of their energy plans, policies, and investments; monitoring of the subsequent implementation; and advice on the overall managment of the operations of the companies. ZIMCO should effectively coordinate the energy companies in their support of the Energy Development Committee, and channel to the Committee, through the DOE, information on major corporate energy invest- ments, pricing and tariff policy, and recommendations on energy strate- gy. In support of this role, ZIMCO would coordinate the maintenance of energy data in the companies. ZIMCO's energy group will need to be rein- forced so that it can take on this wider role. It requires additional expertise in power and coal, and in economic analysis. The institutional issues relating to the individual energy cor- porations were discussed in Chapters 4 to 6. In general, there should be stronger emphasis on strategic planning, on identifying key weaknesses and preparing contingency planst on strengthening management and internal systems, and on a more careful definition of staffing needs. Institu- tional strengthening is an important issue identified by this report. An enhanced private sector role is suggested in petroleum ex- ploration, where renewed efforts to interest foreign oil companies would be appropriate. As indicated in Chapter 5, the margins allowed to pe- troleum distribution companies are high, and so are their unit costs. Cost-cutting should be encouraged through the various options open to Government. Allowing ZIMOIL to compete in bulk fuel supplies would strengthen competition. Ap.dlus 3.1 Po I Of 6 Table 1: WB/DOE ENER6Y STRATEGY STUDY - ENERGY BALANCE FOR 1996 BASE CASE SCENARIO c*000 TOE) S O U R C E A A N D FO RM t S O F E N E R GY PRINARY ENERGY SECONDARY ENERGY 1 2 3 4 5 6 7 8 9 1O !I 12 13 t4 15 16 17 t8 SPIKED HYDRO- TOTAL DIESEL/ TOTAL FLOtS OF ENERGY CRLDE ELEC- PRIMARY GAS OIL/ AVIATION FUEL ELEO- SE(OANRV OIL OAL TRICITY WMOO SOURCES SUPER REGULAR LSG FUEL tEROSENE OIL LPG BtTUttDt COME TRiciTY om ' SDURCES OTAL t . SUPPLY I DCOESTIC PRODUCTION 322 786 6735 7843 7843 2 IMORTS 607 607 26 26 634 3 VARIATION IN STOOCS 0 4 TOTAL SUPPLY 607 322 786 6735 8450 26 26 8476 5EXPGRtS 10 100 llO 4 22 17 0 6 2 5) 161 6OOtESI.C SUPPLY 607 312 f86 6735 0340 -4 -22 -17 0 -6 -2 26 -24 8316 I1. TRANSFOIUATION 7 REFINLICI&S t607 -607 73 45 275 45 36 65 8 Is 565 -42 8 ELECTRICITY UTILITIES -686 -686 686 686 0 t 9 KtLNS -3930 -3930 943 943 -2987 10 TOTAL TRAttSFOPRATIGtt 4607 -6B5 -3930 -223 73 45 275 45 36 65 a l8 686 943 2194 -3029 Ilt. DIST./TtANSN. LOSSES 11 LOSSES 69 69 69 IV. TOTAL SUPPLY FOR FiNAL CONS. 2 TOTAL SUPPLY 312 2805 35t7 68 23 258 45 36 65 2 16 26 617 943 2101 5218 V. ADJUSTMENT IS ADJUSTMtENTt ADJUSTEh tt I Of F1F4AL CONS. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 V$. FINAL CONSVIPTION 14 HOUSEtOLDS 2329 2329 24 57 941 t021 555t 15 AGRICULTURE AlID fORESIRY 238 238 17 0 13 3t 269 t6 ZcN so 8as I 1 45 7 43 425 3 51 659 17 IM)UsTMY Aats aNn IC!, 205 238 443 32 4 ts 2 16 26 90 159 602 18 GOVERNMENT/SERVICE 19 19 1 7 31 39 58 19 tIWtIAtMT 67 21 164 45 t 299 29Q 20 TOTAL FrItN UNSURtVlo 312 2805 3117 68 23 258 45 36 65 2 16 26 617 943 2101 5218 Notes: (a) Ttw util iItlon of crop residueos dunq, baosso do not ppa"r an the bslance aIthouqth tbe are used as funIls. Hwr vwy little InforoatIon Is avollable and ttt consumptlon 1% thnulbt to I.. i,4AMdneIIV0IV .4MIlI. tb) lbe fInal cnsumption of wood for Aqrlcultura and Forestryw and for %industry and Commerce are estImated to total 10% of consumption of wood for household wYrm' uso (Chth ttreowxd ew chor- . ..nt . ALpoedI 3. 1, P9. 2 of 6 Table 2~ %BAOE ENERGY STRATEGY STUDY - ENERGYV BALANCE FOR 2006 BASE CASE SCENARIO (000 TOEI) S O U R C E S A N D F O R M S O f E N E R G Y P RIMNA RY E NE RG6Y S E COND0A RY E N ERG Y t 2 3 4 5 6 7 a 9 tO tt 12 iS t4 t5 t6 17 18 SPIKED NYDRO- TOTAL DOESEL/ TOTAL FLOWS OF ENIERGY aOUDE ELEC- PRIARY GAS OIL/ AVIATION FUML ELEC- SECONDARY OIL COAL TRICITY WM)O SOURCES SUPER REGULAR LSG FUEL KERDSENE OIL LPG 8ITtlEN COKE TRICltY CtAWRL SOURCES TOTAL I. StPPLY I IXEESTIC PRODUCTION 335 699 9639 10675 10673 2 IPTS 65t 65t 19 t9 669 3 VARIATION IN STi S 4 TOTAL SUPPLY 65t 335 699 9639 11324 19 19 1l342 5 EXPORtS 10 100 ttO 4 22 17 0 6 2 St t6t 6 ODESTIC SUPPLY 65t 525 599 9639 t12t4 -4 -22 -17 0 -6 -2 t9 -32 11182 II. TRANSFIOATON 7 REFIMERIES *651 -65t 78 46 306 55 45 44 a 22 605 -46 * ELECTRtCtTY UTILITIES -599 -599 599 599 9 KILtS "317 -63t7 1516 1516 -480m 10 TOTAL TRAMSFORIATIOtt -65t -599 -6317 -7567 78 46 306 55 45 44 8 22 599 1516 2720 -4846 q Off. DIST./fRAMSH. LOSSES it LOSSES 60 60 60 IV. TOTAL StPPLY FOR FltAL CONS. 12 TDTAL SUPPLY 325 3322 364t 74 24 290 55 45 44 2 20 19 539 1516 2628 6276 V. ADJUSTMENT 15 ADJUSTMENT ADJUSTMENT IN S OF FINAL CONS. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 VI. FINtL CONSUIlPTION 14 DUSESHOLDS 2741 2741 53 70 1514 16*8 4358 15 AERICULTt*E AO FCRESTRY 291 291 2t 0 29 51 341 16 ZCCN 8S 88 I t 34 5 24 19 298 2 382 470 17 INDUSTRY An (XUFRCE 2t4 291 505 34 5 It 2 20 t03 "?6 68* is 4x%V*HJNI^1N)H/vItVE 23 23 * t 9 58 48 7t t9 TRAW-'RT 73 25 200 55 1 1 354 334 10 tItAI IlNAI 1It tN4WION1 525 3322 3647 74 24 290 55 45 44 2 20 19 539 1516 2628 6216 Rot.: Gt. thi allitIotkn of crop reslduvsa dunq, bIegsse do not appea on the belane atthouqh thoy we used as fuels. Naw,wer* vary lIttle Intorastlon Is available and the coons tlon Is lhouqht to tw t*I.t4t I11 *t 5** *b t. (bl Iho fInal mw.umptln ot food for MAgrlculture and Forestry* and for *industry and Comwco are estimated to total l0% of eonsumptlon of wood for household moerow use (both fIrewnod nI chat - coal). Pow 3 of 6 Tobte 5s tt8DOE ENERSY STRATEGY STtDY - ENERGY ALANCE FOR 1996 LOW GROMI SCENARIO ('000 TOE) SOURCES AND FORMS OF ENERGY P R I A A R Y E N E R G Y S E C O N D A R Y E N E R G Y I 2 3 4 5 6 7 8 9 tO tt 12 13 14 IS 16 17 t8 SPIKED YORD- TMTAL DIESEL/ TOTAL FLtlS O ENERGY CRtJDE ELEC- 0RIMARY GAS OIL/ AV;ATION FUEL ELeC- SECONDARY OIL ODAL TRICITY V CM SOURCES SUPFER REGULAR LSS FUEL KEROSENE OIL LPS SITMEN ODKE TRICITY CHARCOAL SORCES TOTAL t. SUPPLY I DOtNESTtC FROtIUCTION 308 761 6740 7817 7817 2 IPRTS 349 549 26 26 576 3 VtRIATION IN STOCKS 4 TOTAL StPPLY 549 308 761 6748 8367 26 6 8393 5 EPORTS 10 tOO ttO 4 22 t? 0 6 2 St t6t 6 DOESTIC SUPPLY 549 299 661 6748 8257 -4 -22 -17 0 -6 -2 26 -24 8232 It. TWMISFUWTION 7 tREFINERIES -549 -549 65 43 244 39 35 62 7 16 Sit -38 8 IELECTRICITY UTILITIES -661 -I61 6"t 661 9 KILNS -4004 -4004 961 961 -3043 10 TOTAL TRANSFORMATION -549 -66 -4004 -5214 65 43 244 39 35 62 7 16 66t 961 2132 -3081 lit. DISTSTRANSN. LOSSES 'A It LOSSES 66 66 66 I 19. TOTAL SUPPLY FOR FIN CONS. 12 TOTAL SUFPLY 29S 2745 3043 62 20 228 39 35 62 2 14 26 595 962 2042 5065 V. ADUSTIENT 13 ADJUSITINT ADJUSTNENT IN S OF FINAL CNS. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 VI. FINAL CONSUWTION 14 tDUSENOLDS 2338 2338 24 SO 958 2032 3370 25 AItCULTtRE AND FORESTRY 203 203 is 0 It 26 229 1s nta 08 88 1 t 45 7 43 26 425 3 551 639 17 INIIStRY AN OlERCE 194 203 398 28 4 12 2 14 St t41 55X la 1t*N6NI/SIMVICE 26 t6 0 6 27 35 49 19 TRANSPORT . 60 29 140 39 0 r? VAI .0 IotAi PilAm nlaWl ImNt 799 2/45 043 ot 20 22 39 335 62 2 14 26 395 962 2042 50W5 Notes: Cal Ith utl tlizIon of crup residues. dung. begss. do not appe an the batance altbouh t" are ued as fuels. Mowaver. v t little tnfrtlae n Is aitloboI and the nonpswotlon Is thouqht to be ce.arat1veIy sealI. fbt tb. ttinnl c..m*tIg of wood for *Aqrlcultur. and Forestry* and tor lndustry and Commrce" are estletod to total 10% of emnsuptlon of wood for household anerqy use tOoth firewood and chr- coal). 41p....t * 4t*1 Vaq. 4 of 6 Table 4t tl/E EttERGY STRATEGY STUDY - EERlY 8ALAtCE FOR 2006 LOW GROlFt SCENARIO tOO0 TOE) S OU R C E S A N D F O RS O F E N E R G Y P R I t A R Y E Of E R G Y S E C ON 0 A R Y E N E R G Y t 2 3 4 5 6 7 e 9 tO It 12 13 14 Is ff. U7 la Siti tmKo- 701AL Doff St t/ tOtAt FLOWS Of ftRY CRUDE ELEC- PRIftARY GAS OIL/ AVIATION FUEL EEC- SEtMARY OIL CDOL IRICITY MOM SOURCES StPER REGULtAR LSG FUELM KEROSENE OIL LPG 81TUMEN 8tlKE TRICITY t>AtIlt OtIRCFS TOTAL I. StWLY I WOESTIC PRCOUCTION 308 637 9665 10610 tO6tO 2 ItCTS 530 51O 19 19 52 3 VARIATION Itt STOOtS 4 TOTAL SUPPLY 510 308 637 9f65 11120 19 19 11139 5 EJTWS t0 100 t1O 4 22 t7 0 6 2 St 161 6 OlESTIC SuPPLY 5to 299 536 9665 ttO0t -4 -22 -t7 0 c6 -2 t9 -52 t0978 II. RANSFORIIATION 7 TRFIERIES -5tO -5tO 60 41 230 39 44 35 7 16 474 -36 8 ELECTICITY UTILITIES -536 -536 536 536 9 KILNS -6496 -6496 1559 1559 -4938 10 TOTAL TRtISFWIATIS -5tO -536 -449t 744 60 41 230 39 44 3Y 7 16 536 t559 2370 -4974 Ill. DISTJTRMISI LOSSES I- I LOSSES 54 54 54 00 IV. TOTAL StWPLY FCR FINAL C011. 12 ITL SUPPLY 299 316 3466 55 18 214 39 44 36 2 14 t9 483 1559 24t84 5951 V. ATJISTIEIT 13 A tJUStI6T ADJUSTE IN 7E OF FINAL CS. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 VI. FIlt OSNSICtt 14 HOUSEHOLDS 2761 2761 34 60 1556 t652 4413 15 AMICULTURE NO FOESTRY 203 203 is 0 17 53 236 16 6 se8 a8 I I 34 5 24 t9 296 2 382 470 t7 uIoUSnM AtD CO SCE 191 203 396 25 4 8 2 t4 8t 133 531 t1 OOUefTf/SER"ICE 16 16 0 6 27 3S 49 19 TRSPORT 55 i6 140 39 0 252 252 20 TOTAL FINUL 40NStWTI0I 299 3168 S36 55 t8 214 44 36 2 14 t9 483 1559 2484 5951 aot: to) The uttliltlcn of atd resdues, " baqsse t* Mt OPPsr an ftt belance aIt*c1h are use as fuls. Howe. Vey lIttle tItrntlo0 Is 41l tlbtO VWd 11 OnAuMtlon Ist1"oos to be cAeat1vely sttl. tb) Tht fIfel ptlan of wood for MAgriculture and Forestry* end for 'Industry and Cowme' are eat lated to total tOU of teaon of wood for household _er me (boT ffr_wd d ethe- cool). A.Adwx 3.1 Paqa S of 6 Table 5: BAXE ENOY STMTEGY STUDY - EOY bLAtE FOR 1996 HNIG H WT SCENARIO ('000 TOE) SOURCES AND FORNS OF ENERGY PRINARY ENEttRGY SECONDARY ENERGY t 2 3 4 6 6 7 8 9 10 11 12 13 14 15 tt 17 t8 SPIKED tYDo- TOTAL DIESEL/ TOTAL FLOWS Ol ENEMY CRUDE ELEC- PRIMARY GAS OIL/ AVIATION FUEL ELEC- SECIARY OIL COAL IRICITY I IOD SCES SUIvAW REOMBt LUG FUEL XEMSENE OIL LPS BITUMEN CE tRICITY ONNOAL SMES TOTAL I. SUPPLY I OOlESTIC PRODUCT ION 337 813 6673 7822 782 2 IORTS 654 654 26 26 680 3 YARIATION IN STOCKS 4 TOTAL SUPPLY 654 337 813 6673 8476 26 26 8503 5 EXPORTS to 100 1tO 4 22 17 0 6 2 51 161 6 0OESTIC SIPLY 654 327 713 6673 8366 -4 -22 -17 0 -6 -2 26 -24 8342 St. TRANSF$tATION 7 REFINERIES -654 -654 78 47 300 51 36 68 8 21 68 -46 8 ELECTRICITY UTILtTIES -713 -713 713 713 % 9 KILNS -3820 -3820 917 917 -2903 I0 TOTAL TRANSFIWATION -654 -713 -3820 -5186 78 47 300 St 36 68 8 2t 713 917 2237 -2949 lot. DIST.STRANSI. LOSSES ItI tD1SES 7 IV. TOTAL SumPLY FOR FINAL CONS. 12 TOTAL SPPLY 327 2653 3180 73 24 284 51 36 68 2 19 26 642 917 2147 5322 V. ADJUSTMT 13 ADJUSTMENT ADJUSTMENT IN S Of FIAL COS. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 VS. fINAl CONSISWTION 14 SDUSENOLDS 2516 2316 23 67 914 1004 -ism I's AtCIUIlittl AN) It(W0t4Y 268 24t 20 0 16 26 304 16L LL"8 88 I 1 43 7 43 26 425 3 549 618. 17 ltssTel NAttt) C(xvtt 217 268 488 36 5 17 2 19 99 Ifl 18 6iZtAtNNI,'l.ttvtLl 21 21 I 8 35 44 65 19 TRANSPORT 75 25 In 5t I %. 11/ /0 0ttAI I #tA I tlX4SO'lt(*I 32f 2853 3180 7S 24 284 51 36 68 2 19 26 642 9179 2142 5522 motl.: (a) tI. ulIIznlkm of c,o tesldues. *aO, btt)sse do not aspotr an te btlmn I athouah ttey are use as fuels. ltorevr. veY lIttlo Into tion Is awatlable wnd the cansuutlom Is ttrqh*t tn t. I.)t,,.- tII 1-t * I. t *- .t .* eAlitullure end formtryO and tfor InduItry en,d tawrco are estlited to total 10I of consueptIan ot wood for household eneray t (ath fIretttd td thir- C't I . Aprfd1i5 3t1 P1 A of 6 Table 6: NVUOME &MEr4GY SItAIEGY STUDY - ENERtGY BELAIE FOR 2006 1414 GRnnH SOF10O ('000 13*) S O U R C E S A M O F O R 4 S O r E N E R G Y PRtMARY ENFRGY SECONDARY ENERGY t 2 $ 4 5 6 7 to It 12 ts t4 I _ t6 I? in SPIKED hYD84- TOTAL DIESEL/ TOTAL PLOWS 8F ENERGY CRUDE FLEC- PRIMARY OAS OIL/ AVIATION FMEL FLFC- SFIVII ARY OIL ODAL TRICITY NDW SOURCES StPER REGULAR LSG FUEL KEROSENE OIL UG SITUNE OOKE TRICITY l tM3COAL SOURCES TOTAL I. SUPPLY I DOOESTIC FPROCCTION 376 775 9589 10740 tO40 2 IIMRTS 791 79 19 19 SID 3 VARItATION IN STOCKS 4 TOTAL SUPPLY 79t 376 775 9589 3t53t 19 19 It550 5EXPORTS tO tOO 1t0 4 22 It 0 6 2 51 t6t 60MCESTIC SUPPLY 791 366 675 9589 tl422 -4 -22 -17 0 -6 -2 19 -32 31389 I 1. TRANFcSPIATION 7 REFINERIES -791 -791 96 52 383 72 46 5D 9 28 736 -55 8 ELECTRICITY UTILITIES -675 -675 675 675 9 KILNS 46116 4136 t468 t468 -648t 1t TOTUAL RANSFORPATIWO -791 -675 -6t6 -7582 96 5. 383 72 46 58 9 28 675 1468 2878 -4703 Itt. DIST./TRANSM. LOSSES 11 LOSSES 67 67 67 0 IV. TOTAL SUPPLY FtR FINAL COMS. 12 TOTAL SUPPLY 366 3474 3840 92 30 366 n2 46 50 3 26 t9 607 1468 2779 6619 V. ADJUSTMElt 13 AOJUSTMEMT ADJUSMT IN S OF FINAL ONS. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 VI. FINAL ConStWT3on 34 I@JSE4OLWS 2737 2717 32 1 1466 3590 438 t5 AGRICULTURE ANO FORESTRY 378 378 28 t 4t 69 447 t6 ZCt 88 88 I I 34 5 24 39 298 2 382 470 17 INAISSTRY AND RCO ER 248 378 626 44 6 34 S 26 127 22t 848 18 GOVERNENT/SERVICE 30 30 1 12 49 62 92 19 TRAMSPOT 93 29 261 72 1 414 414 20 TOTAL FINAL M0SUWTION 366 3474 3840 92 30 366 72 46 58 3 26 t9 607 146 2779 66t9 Mots$ to) The utllIs tlon of eo resIdues, du"., bagess do not sappr an t.* belan- altbough the" are used s huels. ioewr. very little InforlMaton Is avalI bla end the, unw,ttn Is tou0It to to coaratlivey small. (b) The final consumptli of twd ftr Agrioulture and For.stry" end for "Iadus+ s d Co_reora are estleted to totol 10% of _outloe of wod for houteold e_ry use (both ftr_ood and e&r- was). - 141 - Appendix 3.2 Page 1 of 5 ENERGY DEMAND FORWCASTS 1. Methodology Three energy demand scenarios have been calculated, a base caset a low case and a high case scenario. The three energy demand scenarios correspond to the three economic growth scenarios. The demand scenarios are based on the energy balance for 1981. 2. Household Sector Households are subdivided into those with and without electricity for both urban and rural areas. It is then assumed that the proportionate consumption of each fuel per household will remain the same in each group from 1986 to 2006. The energy demand of the househo. sector is then calculated from the growth of households in each subgroup. The only difference between the three demand scenarios is the as- sumed number of electricity connections made per year (Table 1). Table 1: NO. OF ELECTRICITY CONNECTIONS PER YEAR Scenario Connections per year Base case 4,000 Low case 2,000 High case 7,000 The demographic forecast of the Central Statistical Office from the 1980 population census has been used to forecast the total number of households in the years 1986-2006. Table 2: 1980 POPULATION CENSUS FORECASTS OF HOUSEHOLDS ('000s) 1986 1996 2006 Urban 554.5 960.7 1553.0 Rural 844.8 1025.1 1152.0 Total 1399.3 1985.8 2705.0 Av. annual growth % 3.6 3,1 - 142 - Appendix 3.2 Page 2 of 5 The above assumptions lead to the following number of urban households with and without access to electricity. The number of rural households with electricity is negligible. Table 3: URBAN HOUSEHOLDS WITH AND WITHOUT ELECTRICITY 1986 - - - --- 2006 -- Households S Base Case Low Growth High Growth With Electricity 38 24 19 32 Without Electricity 62 76 81 68 Total 100 100 100 100 According to the 1980 Population Census, 38Z of all households had access to electricity. By 1988, ZESCO customers were equivalent to about 20X of all households. This means that, on average, two households have access to electricity for each ZESCO connection. This ratio is assumed to remein constant in the forecast, i.e., for each new connection, two households get access to electricity. 3. ZCCM The energy consumption of ZCCM is assumed to be the same in all three demand scenarios. The consumption is estimated on the basis of in- formation from ZCCM. The forecast ZCCM consumption of electricity, diesel, coal and fuel oil are shown below, together with the assumed copper production. The ZCCM consumption of all other fuels is assumed to vary in proportion with copper production. - 143 - Appendix 3.2 Page 3 of 5 Table 4: ZC04 ENERGY CONSUMPTION FORECAST Copper Year Diesel Coal Fuel Oil Electricity Production OOO MT 1000 MT OOON T GWH 1000 MT 1988 65 170 66 4,773 482 1989 65 133 84 5,000 505 1990 65 133 82 5,050 510 1991 65 133 80 5,240 529 1992 57 133 78 5,420 548 1993 50 136 60 4,950 500 1994 50 136 48 4,950 500 1995 50 136 46 4,950 500 1996 44 136 44 4,950 500 1997 44 136 42 4,950 500 1998 44 136 38 4,950 500 1999 33 136 36 3,960 400 2000 33 136 35 3,960 400 2001 33 136 35 3,960 400 2002 33 136 30 3,960 400 2003 33 136 30 3,465 350 2004 33 136 25 3,465 350 2005 33 136 25 3,465 350 2006 33 136 25 3,465 350 4. Industry and Commerce The energy consumption of two of the major industrial energy consumers, NCZ and Chilanga Cement, have been estimated individually on the basis of information from the two companies. The energy consumption of all other consumers in the sector is assumed to grow at the same growth rate as GDP in the three economic scenarios. However, to take ac- count of conservation measures in industry, the forecast consumption of diesel and fuel oil is reduced linearly by 15 and 55Z respectively over the 20-year period. Chilanga Cement The forecast energy consumption of Chilanga Cement is given in Table 5. - 144 - Appendis 3.2 Page 4 of 5 Table 5: FORECAST ENERGY CONSUMPTION OF CHILANCA CEMENT 1966 After 1989 Fuel ease Low High Case Growth Growth Elect. MlWh 43,750 39,375 - 10% + 2% pa Coal '000 MT 72 66 - 10% + 2% pa NCZ The forecast energy consumption of NCZ, which is assumed to be the same in all three scenarios, is shown in Table 6. Table 6: FORECAST ENERGY CONSUlPTION OF NCZ After Fuels 1986 1989 Coal 000 NT 91 185 Electricity GWh 172 310 Fuel oil '000 NT 0,24 0 Diesel '000 MT 8.74 2.7 5. Agriculture and Forestry Special growth rates for the consumption of -electricity in the sector are assumed to take account of an anticipated large increase in hecterage under irrigation. The forecast assumptions are shown in Table 7. Table 7: FORECAST GROlTH IN ELECTRICITY CONUMPTION IN AGRICULTURE w% per year) Scenario 1988-96 1996-2006 Base 6 8 LoW 3 5 High 8 9 The consumption of all other fuels is assumed to grow at the same rate as CDP in the three scenarios. - 145 - Appendix 3.2 Page 5 of 5 6. Transport,, Government and Services The energy consumption of these sectors is assumed to grow at the same percentage rate as GDP. The only exception is gasoline in the transport sector. To take account of the tendency for the consumption of diesel for transport purposes grow faster than the consumption of gaso- line, a lower growth has been assumed for gasoline consumption. The as- sumptions are given in Table 8. Table 8: FORECAST CONSUMPTION OF GASOLINE IN TRANSPORT AS PERCENT OF DIESEL (S) Scenarik 1986 1996 2006 Base 68 54 48 Low 68 56 52 High 68 52 46 - 146 - Appendix 4.1 Page 1 of 6 ELECTRIC ENERGY AND POSlER EPORT POTENTIAL 1. Angola. The potential for exports of Zambian power lied in short extensions of the Zambian grid to supply isolated communities in Angola. Based on a study for mini hydro in Mwinilunga, the export poten- tial in the mid 1990s is put at 1 MW. 2. The Botswana Government plans to make its power system indepen- dent of South Africa, and to limit its imports from other sources to 20%, (e.g., about 25 MW potential for Zambia). Zambia presently supplies about 1 MW direct to north-eastern Botswana via a short spur from the Livingstone-Sesheke 66 kV line. To meet Botswana's needs in other areas, the power would most cost-effectively be wheeled through Zimbabwe. Zimbabwe's policy in this respect is to sell power from its own grid to Botswana (possibly with corresponding purchases from Zambia) at the aver- age of Zimbabwe's and Botswana's marginal generation cost, providing this does not exceed 80% of Botswana's marginal cost. This arrangement would apply for 5 years from commissioning the line at end 1990, and is then subject to renegotiation, at which time Zambia has the right to be in- volved. If Botswana were to import power to the Francistown area through a direct line from Zambia, the cost per kWh can be estimated as follows. The investments for a 500 km long 330 kV line, from Livingstone, plus a 220/330 kW transformer in Livingstone is about US$80 million. A 25 MW base load demand for 7,000 h/year means supply of 175 GWh/year, a capital cost of about US$0.06/kWh. This unit cost could be compared with and set a limit to the unit price Botswana will be pre- pared to pay to Zimbabwe for the corresponding volume of imports via Zimbabwe. The assumed growth rate of the existing small scale supplies is taken as 4% p.a. for maximum demand and 1% p.a. for energy. 3. Malawi has enough low-cost hydro-potential to meet its medium term needs, hence it has no economic incentive to buy power for its main grid from Zambia. Moreover, the Government of Malawi apparently prefers to retain substantial independence in its own power system. An intercon- nection between Chipata in eastern Zambia and Lilongwe could be of inter- est to Malawi as backup to its own system, and possibly for energy sup- plies, until Malawi's next project (Tedzani) comes on stream in about 1994. However, in discussion with Zambia, Malawi has not shown strong interest in anything other than a stand-by connection. The economics of this are questionable. In addition to the above, there are some border areas in northern Malawi where the least cost power supply would probably be from Zambia or from Tanzania. The quantities involved are fairly minimal. - 147 - Appendix 4.1 Page 2 of 6 4. Mozambique has considerable power capacity potential from the Cahora Bassa hydroelectric system which is currently not operating due to rebel activity. Hence no exports from Zambia are anticipated during the study period. When peace is restored in Mozambique, there could be vi- able minor power exports/imports between the two countries to areas close to the common border. 5. Namibia has one small town in the Caprivi Strip within economic reach of the Zambian power system. Because of present political condi- tions, no export of power is assumed for the study period. 6. The Tanzanian and Zambian power systems could be intercon- nected. However, the investment by Zambia to achieve this appears to be excessive in relation to the potential benefits (back-up supply rather than anticipated exports of firm power) and it is assumed that the pro- ject will not be developed before 2006. In addition, two small isolated border areas at Tunduma and Sumbawanga are identified with export poten- tial of 4.0 MW and 1.2 MW respectively. 7. Zaire. Since 1956 the Shaba province of Zaire has been connec- ted to Zambia's Luano substation through a single 220 kV line with a ca- pacity of about 100 KW (this link operated at up to 150 NW in the 1970s, but is now limited to 100 MW). Zaire has surplus low-cost hydro capaci- ty, and consequently the potential for power exports is low. The inter- link is used as mutual reinforcement and to exchange energy without any payment for energy between the two countries . Recently, the intercon- nection has worked to Zaire's advantage, with exports from Zambia often at peak hours and re-imports at offpeak hours. This has apparently cause load shedding the Copperbelt. In accordance with an agreement with SNEL signed in July 1986, ZESCO is billing peak power exports to SNEL, but has not been paid. ZESCO should reconsider the basis on which it continues to operate the interlink both commercially and in terms its imuydcations for meeting Copperbelt demand. For example, ZESCO could insist on pay- ment or seek say 150X offpeak energy in exchange for peak energy. 8. Zimbabwe. 8.1 Past exports. Exports of electric energy to Zimbabwe via the 330 kV tie-line at Kariba since 1980 have been as followss - 148 - Appendix 4.1 Page 3 of 6 Table 1: EXPORT OF ELECTRIC ENERGY TO ZIMBABWE Year Exports (GWh) a/ 1980/81 3,167 1981/82 3,533 1982/83 3,785 1983/84 3,311 1984/85 3,038 1985/86 3,410 1986/87 2,776 1987/88 1,036 b/ a/ Indicated exports are on the basis of April-March results. b/ Extrapolated from 11 months' results. The reduction in exports during 1987-88 is explained by the fact that Zimbabwe is relying increasingly on indigenous electric energy produced in the coal-fired thermal plant at Hwange, a new stage of which has recently been commissioned at a cost above that of importing power from Zambia. The first unit of the first stage of the Hwange thermal plant, comprising 4 x 120 MW installed capacity, was commissioned in 1983. The last unit of the second stage, comprising 2 x 20 MW installed capacity, was commissioned in February 1987. 8.2 Short and medium term prospects. An indication of likely future export sales is that the present agreement between Zambia and Zimbabwe does not include any long-term export commitment. Zimbabwe simply declares its specific import demand for the coming six months, which is firm in a three-month perspective. Up-dating of the declared demand takes place each month on rolling basis. Power exports have varied considerably from month to month since mid-1987. They can be assumed to continue doing so in the short run. For the medium-term, it is possible to anticipate exports of up to 250 MW and 1,000 GWh/year until around 1994, with possible variations in the range of 125-300 MW and 0 to 1,500 GWh/year. These figures include possible demand from Botswana during the period 1991-94. It is doubtful if Zimbabwe will have firm power avail- able for exports to Botswana during this period, and Zimbabwe may there- fore have to import from Zambia for reexport to Botswana. The estimates of Zimbabwean power import requirements are pre- dicted on the basis that Zambia and Zimbabwe continue to cooperate on sharing reserve requirements and emergency back-up. Clearly, Zimbabwe will benefit more than Zambia from this arrangement, although it does not involve Zambia in any costs. The estimates given above are also based on - 149 - Appendix 4.1 Page 4 of 6 the assumption that the two countries are each entitled to half the ac- tual energy generated annually from the Kariba complex, adopting the cur- rently-used long-term estimate of average annual availability of 9,800 CWh and firm energy availability of 8,400 GWh. However, a lower value for firm energy availability may well be appropriate in view of the low flows in the Zambezi during the 1980s. Estimates of this lower firm energy capacity vary between 7,600 and 8,400 GWh for medium and long-term planning purposes (as opposed to short-term operational considerations). 8.3 Long-term prospects. The long-term demand for exports to Zimbabwe is highly uncertain, and no quantification is attempted here. When Zimbabwe requires access to further substantial capacity and energy in the future, the following options are available: (a) Imports from Zambia, provided Zambia has excess production ca- pability to offer. This arrangement could include purchases from the future Kafue Lower hydroelectric plant, located down- stream of the existing Kafue Gorge plant, with 450 MW installed capacity and yielding additional 2,500 GCh/yr energy produc- tion. (b) Further hydropower development on the Zambezi River, most pro- bably a 1600 MW plant at Batoka Gorge, upstream of Kariba. This could be done jointly with Zambia or in stages, e.g. a first stage of up to 800 MW on the south bank, for which Zimbabwe would bear the dam costs and enjoy full water rights until Zambia bought in. (c) Further extensions to the Hwange thermal plant. (d) Imports from Mozambique's Cahora Bassa hydro plant. The Kariba South Extension Project (300 MW) is not expected to make a substantive contribution to Zimbabwe's power supply, especially for firm capacity, and would not influence its demand for power imports. With respect to further development on the Zambezi, it is anti- cipated that Zimbabwe will bring up the issue at a time when Zambia is not yet prepared to commit itself to the considerable investment re- quired; the reason being that Zambia will still have surplus capacity and the option of developing Kafue Lower. In such a situation, Zambia should explore with Zimbabwe the possibility of leasing the land required to construct a plant. If satis- factory conditions were to be offered, Zambia might agree that Zimbabwe implement say Batoka Gorge, provided that Zambia at a later stage was al- lowed to buy into the selected scheme at a price based on a previously agreed formula. - 150 - Appendix 4.1 Page 5 of 6 A deterrent for Zimbabwe receiving long-term supply from Zambia is that such import has to be paid for in foreign convertible currency, according to existing supply terms. Bearing in mind the substantial net merchandise exports from Zimbabwe to Zambia, there is scope for resolving this problem. If an arrangement could be achieved whereby payment was at least partly effected in Zimbabwean currency, imports from Zambia would become considerably more attractive. 9. A summary of the above discussion is quantified in the following Table. The three sets of export projections, high, medium, and low, de- monstrate. th-e stimate. range of uncertainty. of future export demand. They are not related to the three scenarios for domestic demand. In the investment plans and financial projections, the medium alternative is used for all three scenarios. - 151 - Appendix 4.1 Page 6 of 6 PROJECTED EXPORTS OF ELECTRIC PEAK POWER (Mi) AND ENERGY (GWH) Power - MW 1989 1990 1991 1992 1996 1999 2006 Zimbabwe Med 150 200 200 200 High 300 300 300 300 Low 125 125 125 125 Zaire Med 100 100 100 100 100 100 100 High 100 100 100 100 100 100 100 Low 100 100 100 100 100 100 100 Tanzania Med 0 0 0 0 0 0 0 High 0 0 0 0 100 100 100 LOW 0 00 0 0 0 0 0 Malawi Med 0 0 0 0 0 0 0 High 0 0 0 50 50 50 50 LoW 0 0 0 0 0 0 0 Botswana Med 1 1 1 1 1 1 1 High 1 1 1 1 1 1 1 LOW 1 1 1 1 1 1 1 Angola Med 0 0 0 0 0 0 0 High 0 0 0 0 0 1 1 Low 0 0 0 0 0 0 0 Total Med 251 301 301 301 High 401 401 401 451 Low 226 226 226 226 Energy - GWh Zimbabwe Med 1,000 1,000 1,000 1,000 High 1,500 1,500 1,500 1,500 Low 0 0 0 0 Total Med 1,000 1,000 1,000 1,000 High 1,500 1,500 1,500 1,500 Low 0 0 0 0 - 152 - Appendix 4.2 Page 1 of 2 Table 1: ZESCO ELECTRICITY TARIFFS, JANUARY 1, 1988 ENERGY TARIFF "L", "E". AMND "En TARIFF - "L" A B C D E F G H I J K L Load Limiter rating: Amperes (in Kwachas) 1 1.5 2 2.5 3 5 6 7 7.5 10 12.5 15 Monthly charges (ineKwachas) 4.6 5.4 6.3 6.5 7.7 11.1 14.8 16.1 17.5 21.7 25.9 29.4 TARIFF El - Restricted to 5 Amperes, single phase: Fixed monthly charge: 2.50 Kwacha Unit charge: 7.00 !igwee TARIFF E2 - Restricted to 15 Amperes, single phase: Fixed monthly charge: 4.90 Kweacha Unit charge: 7.00 Ngwee Isol. hydro. a EC ) Tariff E3 - Domestic only: unrestricted, Fixed monthly charge: 15.00 Kwacha Dlesel a E6 ) single phase and up to 15 kVA, three phase: Unit charge: 7.00 Ngwee ED ) TARIFF E4 - Commercial only: unrestricted, single phase Fixed monthly charge: 71.50 Kwacha El ) and up to 15 kVA three phase Unit charge: 10.14 Ngwee TARIFF ES - (no fixed charge) Unit charge: 1.50 Ngwe MAXiMUM DEMAND TARIFF "D" DA ) TARIFF D1 - Maximum demand less than 300 kVA Fixed monthly charge: 91.00 Kwacha D ) M.D. charge per kVA/month: 15.43 Kwacha Unit charge: 6.89 Ngwee 0B ) TARIFF 02 - Maximum demand from 300 to 2,000 kVA Fixed monthly charge: 1,722.50 Kwacha OF ) M.D. charge per kVA/month: 13.81 Kwacha Unit charge: 5.33 Ngwee TARIFF D3 - Maximum demand over 2,000 kVA Fixed monthly charge: 17,225.00 Kwacha M,D. charge per kVA/month: 11.80 Kwacha Unit charge: 3.51 Ngwee SURi4ARGES ON ISOLATED NETWS; Tariffs E3, E4, and D itill attract surcharges as follows: (a) The 20% surcharge on isolated networks fed from hydroelectric sources remains unchanged. (b) The 150% surcharge on Isolated networks fed from diesel power stations remains unchanged. SECLRITY DEPOSITS: (a) Restricted supply (maximum 5 Amperes) 30.00 Kwacha (b) Restricted supply (over 5 Amperes) 50.00 Kwacha (c) Unrestricted domestic 200.00 Kwacha (d) Other consumers (excluding M.D. consumers) 500.00 Kwacha RECONNECTION CHARGE: 100.00 Kwacha METER TESTING CHARME: 30.00 Kwacha INSPECTION OF INSTALLATION CHARGE: (a) Residential houses 50.00 Kwacha (b) Commercial and Industrial premises 90.00 Kwacha GOVERNiENr SALES TAX: 15 percent - 153 - ¶pp,ndiz 4.2 Page 2 of 2 Table 2: ZESCO CONSUMERS PER TARIFF CATEGORY Financial Year 1987-88 Number of Consumption Revenue kWh per Revenue per Revenue per TAR Consumers kWh 'OOOs K '000 Consumer Consumer kWh (K) LA 1,824 2,460 307 1,400 170 0.13 LB 159 74 10 500 60 0.14 LD 108 74 8 700 70 0.11 LF 4,418 3,215 S88 700 130 O.18 LI 368 788 77 2,100 210 0.10 LL 50 215 17 4,300 340 0.08 Subtotal 6,927 6,826 1,007 940 150 0.15 El 2,918 2,545 269 900 90 0.11 E2 16,066 31,810 3,479 2,000 220 0.11 E3 68,396 393,578 38,506 5,800 560 0.10 E3H a/ 4,798 20,110 2,709 4,200 560 0.13 E31 b/ 293 783 263 2,700 900 0.34 E4 9,542 79,590 13,171 8,300 1,380 0.17 E4H a/ 1,529 10,122 2,341 6,600 1,530 0.23 E4D b/ 132 524 346 4,000 2,620 0.66 Subtotal 103,674 539,062 62,084 5,200 590 0.11 DI 2,272 241,897 30,728 106,500 13,520 0.13 D1H a/ 242 27,843 4,471 115,100 18,480 0.16 D1D b/ 26 3,045 1,159 117,100 44,580 0.38 D2 222 260,561 26,624 1,173,700 119,920 0.10 OQH a/ 22 20,571 3,258 935,100 148,090 0.16 D3 37 602,925 38,420 16,295,300 1,038,380 0.06 Subtotal 2,821 1,157,442 104,660 410,300 37100 0.09 S1 C/ 1,535 7,740 101 5,000 70 0.01 Total 114,957 1,710,470 166,852 a/ Consumers supplied from the Isolated hydro system. b/ Consumers supplied from the Isolated dlesel systems. cJ ZESC0 staff Source ZESC0. - 154 - Appendix 4.3 Page 1 of 3 ZESOD FInANCIAL FOSECATS 1988-2006 For the purpose of tariff planning, projections of ZESCO ex- penditures and revenues are made in constant prices in each fiscal year up to the year 2006. The results are presented for a selection of years in Tables 1 and 2. The basic assumptions made are summarized in Table 1. The budgeted expenditures in year 1987-88 are used as a base. The formulas used for expenditures in future years are also in4icated in Table 1. The corresponding revenue requirements are calculated in Table 2. On the basis of these assumptions, the results indicate that the real tariff level should be increased by 542 in 1988 and by about 90-100% in the mid-1990s to cover ZESCO's operating costs and debt repayment obliga- tions. Table 1 FINANCIAL OAinis FM UMOO Proec tions of xowns. requlretmmta Ix constat (1987168) prlces. 1. OWERAL. *StUnIIBs AND DIzrB= mncnm MEm$: 19871U 199 199 199 1999 1999 1999 2006 2006 2006 Present Sosnaziot nigh 3... LOW Oigh Bas LOW stab Base Low tariff ASSUTICUS hi.: Kim Satall alts aus 2097 2258 2118 1905 3106 2611 2082 4104 3176 2219 0.12 -bh-ou lde ub 524 S86 419 S32 810 692 5g 1179 974 64 -largr austors CR3b 1573 1672 1699 15S73 2296 1919 1573 2925 2202 1573 Sold to Zimbabwe CK 1000 0 0 0 0 0 0 0 0 0 0.015 Sold bulk S SIcb 473S 4963 4963 4963 5 4655 4655 4037 4037 4037 0.03S 8old totalip Shb 7830 7221 7061 6866 7761 7266 6737 8141 7213 6256 0.0540 Total consowers 104000 119500 11650 114500 161500 140500 126500 21050 168500 140500 C0.neatioasjear 2000 7000 4000 2000 7000 4000 2000 7000 4000 2000 & by diesol Mb 7 9.2 8.3 7.3 11.4 9.5 7.6 14 11 8 USD debt s.rvlcoly USDOO0 11644 11644 11644 11644 1164 11644 11644 0 0 0 Ditto, le ISwsOO. USD000 0 4000 40 4000 60 6500 6500 6500 6500 6500 Ditsr ost Vtolyy K 000 00 56000 32000 16000 56000 32000 16000 56000 32000 16000 1000 - of chick Lo0os USDO00 4900 2800 1400 4900 2800 1400 4900 2800 1400 USDlcona Transamision iuaiy K 000 0 31333 31333 $1333 4246 4246 4246 4246 4246 4246 - of which flres USDOOO 0 3513 351$ 3513 300 300 300 300 300 300 Dtlst rehab Invlyr K 000 0 25333 25333 25S33 0 0 0 0 0 0 - of wtdi frers USDO0O 0 2840 2840 2840 0 0 0 0 0 0 cener ia,Ipw I 000 0 2000 2000 2000 2000 2000 2000 2000 2000 2000 - Of which forer USDOOO 200 200 200 200 200 200 200 200 200 Accal ivestts it 000 0 687996 543996 447996 1061472 773472 581472 2122944 154944 1162944 Assets I 000 2650000 3337996 St19996 3097996 3711472 3423472 3251472 4772944 4196944 381244 Se Loan ("grant) USD 40 million in 1992, at 8*, 5 year prace perLod + 20 yers payback SW toam USD 10 m1i1 in 1992 et 82 intet. 5 gtace period + 20 yer payback lNFMD3US (it 000) 93l 938 tSL "9a 99l 99".L 06 0an OtL Saorie, fined 34012 34012 $4012 34012 34012 34012 34012 34012 34012 34012 salares, Variable 14576 51016 252 14576 51016 29152 14576 51016 29152 14576 was", fied 2042 204U 2042 2042 2042 2042 2042 2042 2042 2042 was" variabl 8162 937 9143 898o6 12675 11027 9928 16520 13224 11027 -faitensue. present assets 13334 26955 26918 26906 27103 26892 26881 27194 26874 26654 laiatename. ew "Sots 0 2408 lo9 1568 3715 2707 2035 7430 5414 4070 COeratiom fuel 4406 5797 5201 4605 7169 5996 480 8812 6924 5035 Supplies 5W5 9687 746 59S 10018 765 6082 10404 7877 61nn TraDnport 25827 S8999 27635 25827 S3674 29443 25627 45197 3228 25827 Adin espewes, fined 1552 20 1552 15520 15520 15520 1552 120 15520 15520 Ain expeome, variale 3860 4458 4346 4272 6025 5242 4719 7853 6286 5242 Electric purchase 274 274 274 274 24 274 274 274 274 274 Kauib e ople 88210 88210 88210 86210 8820 86 88288210 61 s0 88210 ZOCC tranmisin costs 149N8 14988 14988 14988 14968 14968 14988 14988 14988 14968 E_oae loses 719 $57194 5n194 57194 5719 5n79 57194 57194 57194 5714 * l Debt service exist len 93152 93152 93152 93152 93152 93152 93152 0 0 0 Debt servie, aiw leans 0 32000 32000 32000 520 52000 52000 52000 52000 52000 I 0 Equity investments. :'meat 64000 25037 15837 11037 19043 11843 7043 19043 11843 7043 O - EIquty invetamats, forex 0 91629 74829 63629 43203 26403 15203 430 26403 1520I Workibg capital loc " 15000 17236 16803 16514 2329 20264 18245 30361 24303 20264 DiIdends 82 an Assets 1 212000 267040 255520 247840 296918 273878 258518 3918 S635756 305036 SWE 8 iDS 672482 685032 812148 769141 89424 807895 751253 91S109 79080 710610 Source. World bank etiates. TAULS 2 1r3NCZA YR3CASS PCR S800 Nroj-etions of reenue requlremente In ecastant (1987188) prIes. 2. 33Imfl REV==S To OOVO WBUDI!URES EtRa 199718 19 13 1993 199 1999 1999 2006 2006 2006 S819rlo: B31h Use LOW 34k 3.. Lo 313k Bee. LOW RXE3l REYRNES Unlt U_ CMIeetLLea. to" I 000 4897 3500 2000 1000 3500 2000 1000 3500 2000 1000 500 Other inoomes t 000 15833 18193 17736 17432 24587 21390 19258 32047 2565S 21390 Grantse,eeLvd t 000 0 0 0 0 0 0 0 0 0 0 1mns takeft I000 0 0 a 0 0 0 0 0 0 0 Required own financo a 000 651752 863S40 792412 750710 866177 74506 730994 877563 762928 668220 Existing tarlffs glve 1 000 422829 434739 417939 392379 526335 466935 403455 625701 514341 399501 Re4aired Iam"Euietims tarLffs gsve" 1.54 1." 1.90 1.91 1.65 1.68 1.81 1.40 1.48 1.72 Reqired average ng weult Rgwawlkw 8.3 12.0 11.2 10.9 11.2 10.8 10.9 10.8 10.6 11.0 3. SUSZTZVUT AI&ynSIS CY RERqsfnE ntREQUIRKET IF COUNECIXDO FEES ARE ASSW TO 310 2 AND NOW 50 X OF COSTS Ocnnctim fees 1 000 4897 1400 600 400 1400 800 400 1400 800 400 200 Other lneos I 000 15833 18193 17736 17432 24567 21390 19256 32047 2563 21390 Grantrece ived 1 000 0 0 0 0 0 0 0 0 0 0 Nelteam takn 1 000 0 0 0 0 0 0 0 0 0 0 equiLred ow finance I 000 651752 865440 793612 751310 S68277 785706 731594 879663 764128 688620 Exlting tariffs give I 000 422829 434739 417939 392379 526335 466935 403455 625701 514341 399501 Required ewauliating tarliff give 1.54 1.99 1.90 1.91 1.65 1.68 1.81 1.41 1.49 1.72 Reqired xwersge ngwluiuLt Nswelunlt 8.3 12.0 11.2 10.9 11.2 10.6 10.9 10.6 10.6 11.0 Sol oha8e in "required oeva 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Sources orld Bank estimates. 00 51, O # - 157 - Appendix 4.4 Page 1 of 2 BSTIMATES OF FINANCIAL COST OP BLECTRICITY SUPPLY BY DIeSEL Isolated diesels are located in the following ZESCO districts: - ZESCO Northern Division: Kabompo, Kasempa, Mwinilunga, Zambesi; - ZESCO Southern Division: Kaoma, Luangwat Lundazi (Lukulu is to be added as a new diesel-supplied district during 1988). ZESCO's representatives estimate that the cost of the Northern and Southern systems are similar. Due to a lack of specific data for the Southern Division, data from the Northern Division are used to estimate the specific costs for all ZESCO diesel districts. - 158 - Appendix 4.4 Page 2 of 2 TAs 1 HOLATRD ID5L ST7AMP3S SAES DMTA SC0 U #,US c=D:T= 9 LOSSES Data hm 2.eo. aowntewa dtvl oLa 1986157 TOTAL Eabmo &ssa M.W- zm6esi GENIPAU0W DMT ltun" Unlts samotated kWh 2945455 1060800 973756 643523 1067376 c Household KIkMh 0.2948 0.5740 0.3718 0.3502 0.2665 0.2127 0.2004 0.2053 0.1656 0.1682 USDIkWh 0.0368 0.0718 0.0465 0.0438 0.0333 0.0266 0.0250 0.0257 0.0207 0.0210 Large customer KIkMh 0.0433 0.0781 0.0664 0.0602 0.0611 0.0542 0.0511 0.0569 0.0537 0.0554 USDI/kh 0.0054 0.0098 0.0083 0.0075 0.0076 0.0068 0.0064 0.0071 0.0067 0.0069 Bulk supply tIkWh 0.0001 0.0001 0.0001 0.0001 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002 USDIWkh 0.00001 0.00002 0.00002 0.00002 0.00002 0.00002 0.00002 0.00002 0.00002 0.00002 Sources World Bank Estimtes - 162 - Appendix 5.1 Page 1 of 6 COST-BUM IT ANALYSIS OF RUFITIRY CW8URB 1. INTRODUCTION The option evaluated is to close down the Indeni petroleum re- finery and to switch the Tazama pipeline to transport white petroleum products in lieu of commingled products. This option has been extensive- ly discussed hitherto, but is re-examined here to take fully into account the future demand pattern for petroleum products, updated capital costs for the pipeline options, and the recent change to the import of recon- stituted crude oil. The cost factors taken into account are summarised in the following section. 2. THE COSTS USED IN THE ANALYSIS Pipeline Rehabilitation The Tazama pipeline consists of an 8-inch line incorporating four 12-inch loops to expand capacity. To transport batched white petro- leum products, it would be technically infeasible to utilize the loops. Hence it would be necessary to revert to the original 8-inch line, re- placing sections as necessary. This line, including the existing pumping stations, has the potential to transport 646,000 tpa of white products. For this purpose, it would need rehabilitation, the cost of which has been estimated at US$99 million. This sum ipcludes an estimate of US$32 million for a new tank farm of 107,000 mi total capacity, which would be needed at Dar-es-Salaam. The total expenditure of US$99 million would be phased, comprising an initial expenditure of about US$54 million and a subsequent expenditure some five years later of US$45 million. To rehabilitate the existing Tazama pipeline to continue carry- ing commingled products would initially cost about US$41 million, to be spent during 1988-90. Further investment of US$15 million would be re- quired in 1996-97 and again in 2003-04. Operating Costs Operating costs of a rehabilitated 8-inch white products line are estimated at about US$4.6 million per year. The cost of product con- tamination at the interface is dealt with by mixing estimated interface quantities with the next lowest value product. However, because of the small quantitites involved, relative to the amount of contamination, it would be necessary to stop the import of regular gasoline. Special measures, including new tanks at Dar and Indeni, would be necessary to handle an adequate minimum batch size for kerosene. - 163 - Appendiz 5.1 Page 2 of 6 Costs of Jetty Rehabilitation and Dredging Costs of jetty rehabilitation and dredging at Dar were not taken into account due to lack of information. Closure of the Refinery No costs have been included for closure of the refinery. These would need to be carefully assessed and quantified, should circumstances arise where refinery closure could be recommended. Refinery closure costs will include mothballing, care and maintenance costs, employee costs, compensation to Agip as part owner, and a consequental technical assistance contract for the products pipeline and to replace services currently provided by Agip. Overland Transportation of Aviation Kerosene and Black Products In the event of refinery closure, it would be necessary to transport Zambia's required supplies of aviation kerosene, fuel oil and bitumen by the Tazara RSailway. Aviation kerosene demand is forecast at 48,000 tons in 1991 and 53,000 tons in 2006. The minimum requirements for fuel oil are forecast at 104,000 tons in 1991, declining thereafter to 76,500 tons in 1996 and about 55,300 tons in 2006. 1/ Bitumen require- ments are forecast at just over 15,000 tons in 1991, rising thereafter throughout the study period to about 21,000 tons in 2006. Harbour Dues and Refinery Costs It is assumed that the refinery operates with a 5.52 (by weight) fuel and loss and operating costs are made up as follows: US$/mt Harbour Dues 2.20 Processing Fee 12.00 Maintenance 2.00 Inspection & Sundry 0.1. Overheads 0.95 Total 17.25 These costs are taken directly from the 1986-87 ZIMCO operating statistics. The maintenance costs are added to take account of the higher costs incurred in operating a refinery over 15 years old. 1/ This assumes maximum feasible substitution of heavy fuel oil by ZCCM, i.e., substitution of coal for fuel oil at the nkana smelter. -164 - Appendix 5.1 Page 3 of 6 Ocean Freight The costs of freight from Mina Al Ahmadi to Dar are taken as US$4.0/mt for commingled products, in line with the current supply contract with KPC. This figure compares with the US$12.5/mt estimated for the corresponding shipment of white products in smaller vessels mentioned above. Input and Product Prices The prices of the petroleum products refined and/or purchased are required in the analysis. However, as will be explained later, the analysis is set up on a cost basis to minimize their importance. The only use made of these valuations is in estimating the cost of the refin- ery losses and in valuing the product upgrading by the refinery. Since the large volumes of gas oil and kerosene pass through the refinery with only minor changes, the sensitivity of the result to the price forecasts made is minor. One of the important benefits of the existing system is that Zambia buys virgin naphtha instead of gasoline, using Indeni to make the gasoline. There is no fully satisfactory basis for forecasting the levels and relative prices of petroleum products over time. The basis taken in this report is to assume a reasonable return to a modern upgrading refin- ery. The fixed costs on a typical modern upgrading refinery break down as shown below for a medium sized refinery with a capacity of 250,000 bpcd. US$/mt Manpower 1.85 Investment related overheads 3.00 Cost of working capital 2.00 Total 6.85 Operating on Arab Light crude oil at FOB cost of US$15.75/bbl, assuming a freight rate of US$8.5/mt and running for maximum mogas yield, the following price profile gives the required margin. US$/mt LPG 120.00 Naphtha 147.78 Premium Mogas 182.00 Dual Grade Kero 167.58 Gas Oil/Diesel 142.43 3.5Z Sulphur HWO 95.08 - 165 - Appendis 5.1 Page 4 of 6 3. METHODOLOGY OF THE ANALYSIS The objective of the analysis is to compare the costs of the white product pipeline and refinery closure option with the costs of con- tinuing to operate the line as a commingled pipe and running the refin- ery. This approach minimizes the effect of volatile crude oil and pro- duct prices. A spreadsheet model was developed covering the years 1989 to 2006. The model is in three sections. The first computes the costs of the white product pipeline/refinery closure option, the second section computes the costs of the commingled import/refinery operation option. The third section of the model compares the costs developed in the other two sections. The Net Present Value (NPV) of the costs were calculated using a discount factor of 121. The analysis is facilitated by the fact that the refinery uses commingled products. The relative values of crude oil and products are therefore not relevant. Except for the ability to upgrade naptha to gasoline, the costs of the products at Kuwait are essentially the same, whether they are commingled or shipped as separate products. Similarly, since the product demand at the refinery is unchang- ed by the method by which they are supplied, market prices in Zambia are not relevant when comparing the two cases. Product prices are only relevant in the refinery simulation, where: (a) some of the intermediate products are converted into finished products; and (b) in valuing the refinery losses. This is covered in the next section. The capital costs of both options were inserted in the appro- priate years of the analysis. The operating costs of both were split into fixed and variable elements, with the former accounting for 75X of the total costs in 1989. The product demand forecast used is the base case developed for this Report. 4. SIMULATING THE REFINERY OPERATION The object of the refinery simulation is to calculate the pro- duct purchase requirements from the known product demand pattern. It is then possible to calculate the cost of operating the refinery. The first step was to set up a very simple refinery model using a linear programming system. This model also included a representation of the transportation and pipeline costs. It is used to test the metho- dology described in the previous section, prior to developing the more - 166 - Appendix 5.1 Page 5 of 6 accurate spreadsheet model described above. It was also used to develop the refinery operating modes required by the spreadsheet analysis. There are three ways in which the refinery upgrades the product it receives from the pipeline namely: * Converting Naphtha to Gasoline * Extracting Bitumen from Re-processable Residue * When possible, extracting Gas Oil from Reprocessable Residue The following yields were developed for use in the spreadsheet model: Mode Feedstock Mogas Bitumen Gas Oil Products Naphtha Residue Residue Mogas 0.812 - - Gas Oil - 0.142 0.053 EPO 0.133 0.469 0.892 Bitumen - 0.334 - Fuel & Loss 0.055 0.055 0.055 These yields are based on Kuwait crude oil. The yield of heavy fuel oil in the first column is to allow for the production of petroleum gases and hydrogen in the reformer which will be burnt by the refinery, thus increasing the heavy fuel oil available for sale. The second column in the table shows the way in which the im- ported reprocessable residue can be converted into bitumen. The sulphur in the feedstock is concentrated into the bitumen. This allows some of the gas oil which was blended into the resid. at Kuwait so as to meet sulphur specifications to be extracted and sold as diesel at Indeni. The third column is harder to assess. It represents the fact that some of the residue is fired to heat the refinery. The refinery can process fuel oil with higher than 3.5S sulphur without exceeding sulphur emission controls because some of the material burnt is well below the control level. The extent to which this is possible is unclear and thus a conservative estimate has been made. To complete the refinery yield information, it is assumed that there is 5.52 fuel and loss on kerosene and gas oil, which are processed and recovered little changed. The refinery operating costs were described in section 2 above. - 167 - Appendix 5.1 Page 6 of 6 The steps in the spreadsheet calculation are as follows: 1. Calculate the naphtha requirement--mode 1 in the table. 2. Calculate the residue needed to make the bitumen--mode 2. 3. Calculate the balance of the HFO demand using mode 3. 4. Calculate the balance of the gas oil demand as gas oil import. This procedure provides a fairly accurate simulation of the re- finery which is implementable in the spreadsheet model. 5. CONCLUSIONS The spreadsheet model shows that the NPV of the costs of the option of continued refinery operation is US$52 million less than that of the white products pipeline/refinery closure option. The build-up of the costs is shown in the following Table. COMPARISON OF NPVs COMMINGLED PRODUCTS/ WHITE PRODUCTS REFINERY CASE PIPELINE CASE Ocean freight cost - 31.66 Interest on working capital 15.44 4.84 Pipeline capital cost 42.75 64.90 Pipeline operating cost 32.46 50.84 Rail cost - 69.38 Refining cost 78.61 - Total cost 169.26 221.62 The cost of running the refinery is the largest single cost of the current supply system, but this is more than offset by the combined cost of the additional freight costs for white products from Kuwait to Dar, the high cost of rail freighting the heavy fuel oil and aviation ke- rosene from Dar to Indeni, and the higher costs of pipeline rehabilita- tion and operation in the white products case. The conclusion is robust for all feasible patterns of petroleum product demand, i.e.: (a) if all fuel oil is replaced by gas oil and coal; or (b) if fuel oil use is minimized through aggressive coal substi- tution. It holds even if ZCCM were to eliminate the use of fuel oil altogether. However, the option to reconvert the pipeline to white products will need periodic review as circumstances change, particularly if major refinery rehabilitation is contemplated on a scale that would substan- tially change the NPVs set out above. - 168 - Appendix 5.2 Page 1 of 5 TUE ECONOMICS OP ADDINEC A MILD AKDE TO TOE UDOLA REFINERY 1. Introduction The addition of a mild hydrocracker to the Ndola refinery was extensively studied by ZIMCO's consultants UOP between 1983 and 1985. Several configurations were considered. Eventually, the addition of a low pressure UOP MHC Unibon unit, together with a new vacuum distillation unit, was recommended. This was considered to be the highest return in- vestment with available capital. Had unlimited finance been available, it was calculated that a high pressure hydrocracker would have provided a better return. Capital shortage and narrowing margins led to deferral of the hydrocracker proposal. In the present re-evaluation, the oil product demand forecasts have been substantially reduced, relative to those used in the UOP study (see Table 1). Furthermore, crude and product prices have fallen since the UOP study, which also affects the results. Table 1: COMPAMATIVE 1988 OIL PRODUCT DEMAND FORECASTS (Tons) UOP Study Present Study ('000 mt/year) -- LPG 14,997 6,770 Mogas 214,182 98,850 Atk 110,689 50,200 Kerosene 55,808 26,150 Diesel 519,285 260,000 ifO 109,379 99,250 Bitumen 16,754 14,400 Total 1,041,094 555,620 Source: UOP report and World Bank estimates. This preliminary investigation shows that the economics of hydrocracking have deteriorated since 1985, and so detailed re-analysis has not been undertaken. In this section the results of that preliminary investiga- tion are presented and the circumstances indicated which might lead to a need to re-examine the situation in detail. 2. Methodology The size of the mild hydrocracker is taken to be that proposed in the WUP report, namely 440 t/cd. Reduction of the sise of the unit to reflect the lower demand shown in Table 1 would not lead to great savings - 169 - Appendix 5.2 Page 2 of 5 on a small unit such as this, where engineering and erection costs predo- minate. Total capital costs of US$35.1 million were taken directly from Section 1 and 6 of the 1985 UOP report, as were the manpower costs. They were not escalated to 1988 costs. Had this been done, the results would have been even less favorable. 101 interest charges were assumed, with a loan repayment period of 15 years. Maintenance costs were taken as 31 of the BLPP and offsite facilities cost of US$30.47 million calculated in the UOP report. The function of the hydrocracker is to upgrade low-value heavy fuel oil (HFO) to more valuable products, notably kerosene and gas oil. To obtain an estimate of the value added by the hydrocracker, it is as- sumed that the value of its feedstock was that of HFO. The products from the hydrocracker were assigned their market value. In the case of the naphtha produced, it was assumed that this would be processed to gasoline in the reformer with a yield loss of 18% by weight. This method of anal- ysis avoids the need to place a value on crude oil, since only the rela- tive value of products are required. The prices used were the same as those in Appendix 5.1 for the refinery closure analysis. These are based on FOB Gulf prices. The yields from the mild hydrocracker were estimated from data provided in Exhibit D-3 (Case 1 - Design Basis Modifications MHC Unibon and New Vacuum Unit World Bank Demand Scenario) of the final UOP Report in 1985. The yields presented in the above were adjusted to represent only processing of vacuum distillate. The yields thus calculated were compared with those similarly adjusted from Exhibit D-5 of the same re- port and good agreement was obtained. The yields derived are presented in Table 2. Table 2: ESTIMATED OVERALL HYDROCRACKER YIELDS Wt% LPG 1.92 GasolIne 3.62 Kerosene 22.83 Gasol I 31.71 HFO 33.19 Total 93.27 Fuel & Loss 6.73 a/ Source: World Bank estimates. a/ Includes reformer yield loss, vacuum distilla- tion, fuel, steam, and power. In the UOP study, use of Arabian Light crude oil was assumed. However, 'these yields are likely to be typical of the processing of most - 170 - Appendix 5.2 Page 3 of 5 Middle-Elst vacuum distillatest including Kuwait crude, from which the current reconstituted crude oil is derived. There is a potential problem with hydrogen production for the hydrocracker because of the low gasoline demand. The required hydrogen is produced by the reformer, which is run to produce gasoline. If the demand for the latter is low, insufficient hydrogen is produced to com- pletely load the hydrocracker. Based on the revised product demands in Table 1, it was estimated that the hydrocracker could not run at more than 682 of capacity, due to the hydrogen supply constraint. At the low refinery throughputs implied by the Table 1 demands, problems with fuel oil blending might also arise if a hydrocracker were added because of the high proportion of vacuum residue produced. This would require additional blending and fuel oil production, and, in turn, dictates the minimum saleable quantity of fuel oil, a quality essentially the same as that currently consumed. In this preliminary analysis, that possibility has been ignored. It has been assumed that the components produced can be blended. 3. The Revised Economics of Mild Hydrocracking The yields presented in Table 2 were used to calculate the value of products from the hydrocracker, using the prices from Appen- dix 5.1. The detailed calculations for the base case are presented in Table 3. - 171 - Appendix 5.2 Page 4 of 5 Table 3: ESTIMATED PROFIT (LOSS) FROM HYDROCRACKER INSTALLATION Hydrocracker product yields a/ Weight % USS/ton USS/ton LPG 1.92 120.00 GasolIne 3.62 18S.OO Kerosene 22.83 170.58 Gas oil 31.71 145.43 HFO 33.19 98.8 (1) Average hydrocracker yield 126.62 (2) Hydrocracker Feedstock Cost Q ifO value (98.08) Hydrocracker capital and Operating Costs b/ USS 6000 USS/ton Manpower 142.7 1.37 Maintenance 914.1 8.80 Capital Charge 4614.7 44.40 (3) Total capital and operating cost (54.7) (4) Net Profit (Loss) (1)-(2)-C3) (26.03) Source: World Bank estimates. a/ Assuming operation at 301.3 tons/day (H2 limited). b/ Assuming 345 days operation per year. It can be seen from Table 3 that, with the base case assump- tions outlined in section 2, the hydrocracker is unprofitable to the ex- tent of US$26.03/ton of feedstock processed. 4. Sensitivity Tests The returns to hydrocracking are sensitive to the difference between the HPO and gas oil price and to the assumed operating level. To test these sensitivities, a series of simulations were done. The results are shown in Table 4. Table 4: SENSITIVITY TO HWO PRICE AND UTILIZATION iWO Price Utilization rate (USS/mt) 60S 80% 100% 60 (8.15) 7.32 16.59 70 (15.27) 0.31 9.65 80 (21.00) (6.37) 2.97 90 (28.62) (13.05) (3.71) Source: World Dank estimates. - 172 - Appendix 5.2 Page 5 of 5 Even using 1985 capital costs, these show that the hydrocracker is economicaly viable only when the HFO price is very low and the utili- zation is high. The higher utilization level of the hydrocracker could only be achieved by increased product demand (particularly gasoline and fuel oil) in Zambia. The higher gasoline production would have the ef- fect of increasing the hydrogen feed available to the hydrocracker. The low HFO price required to achieve profitability would imply a fall in the HFO price relative to gas oil to well below the historical average dif- ference of US$70/t. 5. External Factors Which Could Favour Hydrocracking In section 4, two circumstances which could favor the construc- tion of a mild hydrocracker were identified, namely: - Higher gasoline demand in Zambia. - Substained low HFO price relative to gas oil. It is also possible that refining margins could improve in a sustained way, making refining more profitable than it has been for the last decade. This is likely to happen only when existing refining capa- city in the Gulf becomes fully utilized and there is a sustained over- supply of crude oil. Under such circumstances, the availability of pro- ducts for blending the reconstituted crude oil would become tight and their price would rise. It might then become profitable for Indeni to refine crude oil. In such circumstances, an upgrading refinery of some sort could provide a higher return than the existing refinery. Should this situation arise, a completely new analysis of the situation would be required, taking into account the product demand fore- casts and prices prevailing at the time. Such a study would not neces- sarily be limited to a review of hydrocracking. Other upgrading proces- ses should also be studied. - 173 - Appendix 7.1 Page 1 of 2 REP1ULACEMT COST OP PLANTATION VOOD FOR CHARCOAL PRODUCTION The following is a simple cost model for the production of plantation woodfuel from exotic tree species in Zambia. Costs are based on information supplied by ZAFFICO for industrial plantation forestry. They measure the estimated cost of wood on the stump, i.e., excluding costs of felling, stacking, etc. Major Assumptions The following major assumptions were made: (a) woodfuel yield is 20m3 solid per ha per year at 152 moisture content; (b) five-year rotation, yielding lOOm3 solid per ha per rotation; (c) calorific value of charcoal = 16/GJ/ton = 11.4 GJ/m3 solid; (d) vegetation cleared from plantation site has no economic value; (e) discount rate 12%. - 174 - Appendix 7.1 Page 2 of 2 COST MOOEL Cost per ha Yield (m3/ha) Year Activity Actual Discounted Actual Discounted ---(Kwacha)--- I Stumping, clearing burning 970 Seedlings 390 Planting and beating up 200 Weeding 450 Fire protection 50 Supervision 163 Total 2,223 1,985 2 Weeding 450 Fire protection 50 Supervision 163 Total 663 528 3 Fire protection & supervision 213 }408 4 Fire protection & supervision 213 5 Fire protection & supervision 213 60 45 3 663 6 Weeding, fire protection & supvn. 663 7-10 Fire protection & supervision 639 130 42 } 377 11-15 Same as 6-10 1,302 115 21 16-20 Same as 6-10 1,302 214 95 10 21-25 Same as 6-10 1,302 122 80 5 To1al 8,733 4,297 500 123 Results Discounted cost of production a K4,297/ha Discounted yield over 25 yearsu 123 m3/ha Cost per m3 a K4,297/123 a K34.9 Cost per GJ a K34.9/11.4 a K3.1 - 175 - Appendis 8.1 Page 1 of 4 COST/RBMRIT ANALYSIS OP RMINABLE HDEGY TECHIOLOGIES This appendix presents the detailed cost-competitiveness calcu- lations for solar water heating and wind pumping of water that are sum- marized in Chapter 8. A. SOLAR WATER HEATING - COST COMPETITIVENESS CALCULATIONS Electric heating: Assumptions: Water usage: 100 liters/day Geyser and Piping Thermal Losses 15% Ceyser Efficiency 90% Cost of Geyser: K2,896 for a 901 boiler, K3,860 for a 1301 boiler Cost of Electricity: K0.07/kWh Lifetime: 5 years: interest 12X; annuity: 0.277 Fixed costs: K802/yr (based on the 901 geyser) Electricity Costs: K233/yr Total yearly cost: K1l035/yr Solar Collector: Water usage: 150 liters/day (available temperature is lower) Cost of completely installed modular system: K5,000 Lifetime: 15 years, interest 121; annuity 0.147; maintenance 2X of investment Total yearly cost: K835/yr B. WIND PUMPING POTENTIAL AND COMPETITIVENESS Potential As shown in the Table below, a 1.7 m rotor diameter wind water pump could meet the needs of a small village in the Lusaka or Ndola area: - 176 - Appendix 8.1 Page 2 of 4 Lusaka (1) (2) (3) (4) (5) (6) (7) depth demand wind m/2 wind pump water nbr [ml [l/dl [Wh/m2/d] [Wh/dl [Wh/m3] [1/dl [units] 10 25 291 661 39 17,000 680 10 40 291 661 39 17,000 425 60 25 291 661 234 2,800 112 60 40 291 661 234 2,800 70 Ndola (1) (2) (3) (4) (5) (6) (7) depth demand wind m/2 wind pump water nbr [ml [l/d] [Wh/m2/dJ [ih/d] [Wh/m3J [li/d [units] 10 25 226 661 39 13,200 528 10 40 226 661 39 13,200 330 60 25 226 661 234 2,200 88 60 40 226 661 234 2,200 55 Notes: (1) Depth of a standard hand dug well or a borehole. (2) Unit demand of water each day. (3) Power ?n the shaft of a standard multiblade wind power pump, for each m of rotor area (yearly average). (4) Daily energy produced by a 1.7m rotor diameter wind power pump (yearly average). 3 (5) Required energy for rpmping lm water, either from a 10m deep well or a 60m borehold (902 of all boreholes in Zambia have this depth), considering an overall pump and transmission efficiency of 702. (6) Resultiqg daily amount of water which can be pumped (column 4 divid- ed by colamn 5). (7) Resulting number of persons or cattle whose daily requirements can be met (column 6 divided by column 2). Supply from a borehole, re- quiring more energy, meets the demand of less people, etc. Cost Effectiveness of for Village Water Pumping The cost comparison is computed on the basis of the m3 cost for satisfying the water requirements of village in the C¶ntral Province, numbering 100 persons an# 50 head of cattle, i.e., 4.5 m per day from a 60m borehole, or 1,650 ml. - 177 - Appendix 8.1 Page 3 of 4 Windpump Cost K8,000 Lifetime 15 years; annuity 14.7% Maintenance: 2% of initial investment Yearly Cost: K1,336 Borehole K16,000 Lifetime: 20 years; annuity 13.4% Maintenance: 1% of cost Yearly cost: K2,304 Total Cost/yr: K3,640 Number of Windmills 3 Total yearly cos_s K10,920 Cost of lm K6.65 Handpump Cost: K5,000 Lifetime: 10 years; annuity 17.7% Maintenance 10% Yearly Cost: R11,385 Borehole Cost: K2,304 Total yearly Cost: K3,689 Cost of lm K2.25 Hand-pumping would be carried out during 2.5 hours each day at an average rate of 0.5 liters/second. Cost Effectiveness of Irrigation The cost comparison is with diesel engine water pumping, as this is the only alternative for water irrigation in remote places. Com- putations consider the cost per m for pumping 10,000 ml/year from a borehole. Diesel pumping: Diesel engine (smallest available 61P) K26,000 pump K5,000 frame K2,000 pulleys K1,000 TOTAL K34,000 Maintenance: yearly 10% of initial investment Lifetime: 10 years;,annuity 17.7% Consumption: 2.4 cm /m3/m (i.f., 10% overall efficiency) with head of 60m: 72cm3/m at K2.80/liter Annual fixed costs: 34,000 x (0.177 + 0.10) K9,418 Annual fuel costs: 0.144 x 2.8 x 10,000 K4,032 Borehold annual costs K2,304 Total K15,754 Cost per m3 of water K1.57 - 178 - Appendix 8.1 Page 4 of 4 Wind Pumping Wind energy convertor and pump: K30,000 Installation: K5,000 Maintenance: yearly 2% of initial investment Lifetime: 20 years; annuity 13.4Z Annual fixed cost R5,390 Borehole annual cost K2,304 Total cost per unit K7,695 Total cost for 3 units K23,082 Cost per m3 of water K2.31 ENRGY SECTOR SACNAAGEMWT ASSISTANCE PROCRAM Activities Completed Country Project Date Number Energy Efficiency and Strategy Africa Regional Participants' Reports - Regional Power Seminar on Reducing Electric System Losses in Africa 8/88 087/88 Bangladesh Power System Efficiency Study 2/85 031/85 Botswana Pump Electrification Prefeasibility Study 1/86 047/86 Review of Electricity Service Connection Policy 7/87 071/87 Tuli Block Farms Electrification Prefeasibility Study 7/87 072/87 Burkina Technical Assistance Program 3/86 052/86 Burundi Presentation of Energy Projects for the Fourth Five-Year Plan (1983-1987) 5/85 036/85 Review of Petroleum Import and Distribution Arrangements 1/84 012/84 Costa Rica Recommended Technical Assistance Projects 11/84 027/84 Ethiopia Power System Efficiency Study 10/85 045/85 The Gambia Petroleum Supply Management Assistance 4/85 035/85 Chana Energy Rationalization in the Industrial Sector of Ghana 6/88 084/88 Guinea- Recommended Technical Assistance Bissau Projects in the Electric Power Sector 4/85 033/85 Indonesia Energy Efficiency Improvement in the Brick, Tile and Lime Industries on Java 4/87 067/87 Power Generation Efficiency Study 2/86 050/86 Jamaica Petroleum Procurement, Refining, and Distribution 11/86 061/86 Kenya Power System Efficiency Report 3/84 014/84 Liberia Power System Efficiency Study 12/87 081/87 Recommended Technical Assistance Projects 6/85 038/85 Madagascar Power System Efficiency Study 12/87 075/87 Malaysia Sabah Power System Efficiency Study 3/87 068/87 Mauritius Power System Efficiency Study 5/87 070/87 Panama Power System Loss Reduction Study 6/83 004/83 Papua New Energy Sector Institutional Review: Proposals Guinea for Strengthening the Department of Minerals and Energy 10/84 023/84 Power Tariff Study 10/84 024/84 Senegal Assistance Givan for Preparation of Documents for Energy Sector Donors' Meeting 4/86 056/86 Seychelles Electric Power System Efficiency Study 8/84 021/84 Sri Lanka Power System Loss Reduction Study 7/83 007/83 Syria Electric Power Efficiency Study 9/88 089/88 Sudan Power System Efficiency Study 6/84 018/84 Management Assistance to the Ministry of Energy and Mining 5/83 003/83 ENERGY SECTOR MANACIENT ASSISTANCE PROGCAM Activities Completed Country Project Date Number Energy Efficiency and Stratesy (Continued) Togo Power System Efficiency Study 12/87 078/87 Uganda Energy Efficiency in Tobacco Curing Industry 2/86 049/86 Institutional Strengthening in the Energy Sector 1/85 029/85 Power System Efficiency Study 12/88 092/88 Zambia Energy Sector Institutional Review 11/86 060/86 Power System Efficiency Study 12/88 093/88 Zimbabwe Power Sector Management Assistance Project: Background, Objectives, and Work Plan 4/85 034/85 Power System Loss Reduction Study 6/83 005/83 Household, Rural, and Renewable Energy Burundi Peat Utilization Project 11/85 046/85 Improved Charcoal Cookstove Strategy 9/85 042/85 C8te Improved Biomass Utilization--Pilot Projects d'Ivoire Using Agro-Industrial Residues 4/87 069/87 Ethiopia Agricultural Residue Briquetting: Pilot Project 12/86 062/86 Bagasse Study 12/86 063/86 The Gambia Solar Water Heating Retrofit Project 2/85 030/85 Solar Photovoltaic Applications 3/85 032/85 Global Proceedings of the ESMAP Eastern & Southern Africa Household Energy Planning Seminar 6/88 085/88 India Opportunities for Commercialization of Non-Conventional Energy Systems 11/88 091/88 Jamaica FIDCO Sawmill Residues Utilization Study 9/88 088/88 Charcoal Production Project 9/88 090/88 Kenya Solar Water Heating Study 2/87 066/87 Urban Woodfuel Development 10/87 076/87 Malawi Technical Assistance to Improve the Efficiency of Fuelwood Use in the Tobacco Industry 11/83 009/83 Mauritius Bagasse Power Potential 10/87 077/87 Niger Household Energy Conservation and Substitution 12/87 082/87 Improved Stoves Project 12/87 080/87 Peru Proposal for a Stove Dissemination Program in the Sierra 2/87 064/87 Rwanda Improved Charcoal Cookstove Strategy 8/86 059/86 Improved Charcoal Production Techniques 2/87 065/87 Senegal Industrial Energy Conservation Project 6/85 037/85 Sri Lanka Industrial Energy Conservaticn: Feasibility Studies for Selected Industries 3/86 054/86 Sudan Wood Energy/Forestry Project 4/88 073/88 Tanzania Woodfuel/Forestry Project 8/88 086/88 Thailand Accelerated Dissemination of Improved Stoves and Charcoal Kilnas 9/87 079/87 Rural Energy Issues and Options 9/85 044/85 Northeast Region Village Forestry and Woodfuel Pre-Investment Study 2/88 083/88 Togo Wood Recovery in the Nangbeto Lake 4/86 055/86 Uganda Fuelwood/Forestry Feasibility Study 3/86 053/86 IIIRD 2WUdP ZAMBIA ELECTRICITY SUPPLY CORPORATION . A N Z A N I A GENERATION AND TRANSMISSION NETWORK ; .r 1988 _ EXISTING HYDROELECTRIC TRANSMISSION UNES& RIVERA POWER STATIONS 3M SWMP A ZESCO DIESEL POWER STATIONS k RIVER BASIN BOUNDARIES 0- 0 SUBSTATIONS, UNDER CONSTRUCTION 132 kV, UNDER CONSTRUCTION 0 PROVINCE CAPITALS * SUBSTATIONS, EXISTING -- - 132 kV, PLANNED * NATIONAL CAPITALS A + TOWNSHIPS W1THOUT ELECTRICITY - kV. - - PROVINCE ROUNDARIES U A (A6kV - INTERNATIONAL SOUNDARIES - 66 kV, UNDER CONSTRUCTION ( ~~~~~~~~~~~~~33 kVN RrH * NOT IN SRVICE (MARCH IH-*I 84STAND-BY LINE { .,.-'- - 4 °KiI-. 0 50 Ioo 150 200 J I / j t ' p 2>.< t~J MilT,O 50 D '' IOU A > - §* - / 1. . 1 X° # 'S, / . /tU - ~ W/tl4i - . 2 K1 2 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i baX ULnA* _... )NGWSZ /A BASI \. ~ 1,~~~~~~~~A " g K A F IJ k s A r E/ v i7 t 1s g .4 . . . .h, . , *-. -..O /ijP$NY s X ~~ZAAMBEZI LAS/V ')_IAZll -rv \ As, Mvoai+ 1AZ MB A B W E{ A~~~~~~~~~~~~~~~~~~~~~M NdR GOVtA \- '"EgsZ ISA,BR _,_@-~~~~~~~~~~~~~~~~~~~~~ Ne0 AIS hIAT IVI B~ IARA A RIM,M RIAR RAM,MRMRm I'o l @ B OTSWAIIA, 2X - ~~ ,,r'... I~~~~~~~,oA" ~~~~ - *~~~.-. NOWMS 1988~~~~~~v