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    Zambia Power Forecast Scenario


    August 11, 2022 - Fitch Solutions Sector Intelligence

     

      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Zambia Power Forecast Scenario

      • 11 Aug 2022
      • Zambia
      • Power
      Power Sector Outlook

      Key View: The completion of the Kafue Gorge Lower Power Plant by 2023 will alleviate electricity supply pressures currently causing blackouts in the market, facilitating considerable improvements in electricity access and making Zambia a net exporter of electricity over the following years. However, this will expand the market's reliance on hydroelectric power which has proven highly vulnerable to deficits causing blackouts during times of lower rainfall. Recognising this, the Zambian government has put in place policies allowing for the private ownership and operation of solar power plants, aiming to attract private investment in the sector and diversify its power sector. While we expect this to make Zambia a bright-spot for solar power growth in the region, the country's large base of hydroelectric plants will remain the dominant source of its electricity throughout our forecast period to 2031.

      Latest Updates:

      • State-owned power utility ZESCO has lodged an application with the Energy Regulation Board (ERB) to increase electricity connection fees by between 300% and 970% depending on the area's density and type of distribution line, with one-phase overhead lines at the lower end and three-phase overhead lines at the higher end of the increases. However, Energy Minister Peter Kapala has announced that there would be no increases until the completion of a cost of service study which is expected to be released before end-July 2022. Regardless of the outcome of this application, we expect ZESCO to apply for further electricity tariff hikes for 2023, after failing in its application to hike rates in 2022.
      • Bringing online new capacity not reliant on the Zambezi River, we expect the completion of the 750MW Kafue Gorge Lower Power Project (Located on the Kafue river) to boost electricity generation enough to not only offset any reductions in output from the Kariba Dam, but to enable the exportation of electricity from Zambia over the coming years.
      • This will open up new scope for ZESCO to increase access to electricity in the country. This will be especially impactful in rural areas which had an electrification rate of 14% in 2020, which the government aims to boost to 51% by 2030 under its Rural Electrification Act of 2003.

      Structural Trends

      Zambia continues to rely heavily on hydropower plants for its electricity supply, which make up more than 80% of total generation. While its 2.4GW of hydroelectric capacity is more than capable of supplying enough electricity for the country's demands under normal hydrological conditions, the erosion of hydropower generation during drought has been highlighted several times in recent years, leading to widespread blackouts across the country. Despite this, Zambia is continuing to invest in new hydroelectric capacity, with the Kafue Gorge Lower Power Plant making up more than 50% of total forecast capacity growth in Zambia over our forecast period to 2031.

      Recognising its vulnerability to drought, the Zambian government engaged in the World Bank's Scaling Solar initiative to attract foreign direct investment in its solar power sector. In March 2017, State-owned utility ZESCO signed 25-year power purchase agreements (PPAs) for the country's first two grid-connected solar power plants, which were completed in 2019. As part of the initiative, the World Bank and International Finance Corporation assisted the Zambian government in setting up a regulatory environment to support foreign private investment in the country's solar power sector. Since then, we have seen significant investor interest in the market, growing Zambia's solar project pipeline to more than 700MW at the time of writing and setting Zambia to become a regional solar investment hotspot.

      While the country currently operates more than 500MW of coal-fired power and having access to significant coal reserves in the region, Zambia's thermal power sector shows little prospect for growth over the coming years. Concerns over operating costs, feedstock pricing and supply and detrimental health and environmental impacts associated with coal-fired power have all been mentioned as reasons the national utility has focused primarily on hydroelectric power rather than investment in new coal-fired capacity. Similarly, the high cost of oil-fired power and lack of natural gas have prevented investment in oil- and gas-fired power plants, apart from some token diesel generator capacity used as emergency supply. We do not expect these factors to abate over the foreseeable future, leading to our view that thermal power capacity will remain stagnant throughout our 10-year forecast period.

      Generation Growth To Slow Through The Medium To Long Term
      Zambia - Total Net Generation, By Type (2021-2031)

      e/f = Fitch Solutions estimate/forecast. Source: EIA, IRENA, Fitch Solutions

      Hydropower Generation And Capacity Forecast

      Latest Updates

      • The EXIM Bank of China has frozen funding to Zambia's Kafue Gorge Lower Power Project just months ahead of the plant's expected completion. At this point, two of the plant's five generator units are fully operational, with a third in testing. In a statement Energy Minister Peter Kapala announced that the government would not ask the bank to re-initiate funding, but would instead opt to fund the remaining work directly while trying to reach an agreement with the EXIM Bank of China to make amendments to the repayment plan. According to the minister, the project is scheduled for completion in late-2022, but we have factored final completion into our forecasts in 2023 to account for further delays in commissioning and testing the last two units.
      • Rainfall levels in the Zambezi catchment area have been recorded below historical average over the 2021-2022 rainy season, leading to below-average in-flow rates in Lake Kariba. At the time of writing, the lake's water levels are at 32.25%, coming in significantly below levels exactly one year ago which were recorded at 51.57%. This points to a significant risk of generation-throttling where the Zambezi river Authority (ZRA) limits out-flows for power generation from Lake Kariba in order to preserve water supplies. Being the primary source of electricity for the country, this puts Zambia at risk of resuming scheduled blackouts over late-2022. While we note the significant downside risk to hydroelectric generation this poses, we await confirmation of restrictions from the ZRA before factoring this into our forecasts.

      Structural Trends

      We estimate that Zambia's hydropower sector generated 13.7TWh in 2021 after the country recovered from severe drought in 2015 and 2016, which was recorded as its worst drought since 1981. Improved rainfall and the completion of the five 150MW generation units as the Kafue Gorge Lower hydropower project in 2022-2023 informs our forecast for a rapid increase in hydroelectric generation over the near term, levelling out towards the mid-2020s. Overall, we expect hydropower's share of Zambia's total generation to fall from 88.9% in 2022 to 86.1% by 2031 as hydropower capacity remains stagnant after 2023 in contrast to robust solar power growth.

      The drought that hit Zambia from 2015 to 2016, coupled with scheduled hydroelectric infrastructure repairs, drastically eroded hydropower generation in Zambia, causing widespread power outages across the country. Output improved in 2017 and 2018 with higher rainfall levels and the commissioning of new capacity during the drought in 2016. However, the development of an El Niño climatic event, which developed through the course of late 2018 and strengthened in 2019, brought severe drought and low water levels across the country's major hydroelectric reservoirs through 2019 and early 2020. Rainfall remained low across most of Southern Africa during the summer months in late 2019 and early 2020, in which the region usually receives the majority of its annual rainfall. At the start of January 2020, data from the ZRA showed usable water storage levels at Lake Kariba below 8.4% and falling, down from approximately 17% three months prior and 25% in mid-2018. The ZRA has since increased water allocations for power production, reducing the risk of late-year downturns in hydropower supply. By mid-July 2022, the ZRA reported usable water levels in Lake Kariba at 32.25% and on a downward trend, likely until the Zambezi River catchment area's rainy season which begins late in the year.

      Despite these difficulties, Zambia continues to invest heavily in new hydroelectric capacity. The 2.4GW, USD4.5bn Batoka Gorge hydropower plant, a joint project between the governments of Zambia and Zimbabwe, will become one of the region's largest hydroelectric power plants once completed. The African Development Bank was appointed as the lead coordinator for the project in early 2018, adding to its original role as lead financier for the project. In June 2019, Zambian and Zimbabwean officials selected the consortium led by GE and POWERCHINA to construct the facility through a build-operate-transfer contract. While progress on the project's preliminary works has been noted in recent quarters, we await progress on construction before factoring the plant into our upcoming forecasts. Furthermore, despite the high frequency with which large-scale greenfield hydropower projects in the region suffer lengthy delays during construction, we acknowledge the considerable upside risk posed by the Batoka Gorge project on our bearish long-term power sector forecasts.

      Zambia will remain vulnerable to potential future power deficits if the focus remains on investing in new hydropower capacity without diversifying the sources of power output. The Zambian economy is highly dependent on the mining industry, which consumes almost half of all the electricity generated. We believe that the failure to sufficiently diversify the power sector away from hydropower dependence will be cause for concern among investors in the mining sector.

      Hydroelectricity To Remain Dominant
      Zambia - Share Of Total Net Power Generation By Type, %

      e/f = Fitch Solutions estimate/forecast. Source: EIA, Fitch Solutions

      Thermal Generation And Capacity Forecast

      Structural Trends

      The commissioning of the 300MW Maamba coal-fired power plant in 2016 marked the start of operations at Zambia's first large-scale non-hydroelectric power facility. Although it will not be sufficient to cover any major deficits potentially left by reductions in hydropower output during periods of lower rainfall or drought, Zambia will, nonetheless, have some source of generation to fall back on in such circumstances. It was reported in mid-2017 that the plant was operating at full capacity after technical difficulties delayed full synchronisation into the grid directly after its completion in 2016.

      The plant can contribute up to 1.9TWh of electricity to the Zambian power grid on an annual basis, which we estimate has increased thermal power's share of total generation from 3.4% in 2016 to around 11.7% in 2018. However, we expect that share will decrease to about 10.6% by 2030 as new hydropower and non-hydropower renewables projects come online, while growth in Zambia's thermal power capacity remains stagnant.

      The potential for new thermal power generating capacity in Zambia comes from the 300MW coal-fired facility planned by the Black Rhino group for development near Chipata, Eastern Province. Additionally, reports emerged in 2018 that Maamba Collieries Limited had been meeting with shareholders with the idea of expanding the Maamba plant to 600MW. We note that these projects present an upside risk to our 10-year thermal power forecasts for Zambia. However, we have not found any significant evidence on its progress since that time, and do not factor it into our forecasts.

      Non-Hydropower And Renewables Generation And Capacity Forecast

      Latest Updates

      • Africa GreenCo has attained USD15.5mn in financing from InfraCo Africa, the Danish Investment Fund for Developing Countries (IFU) and EU-funded Electrification Financing Initiative (EDFI ElectriFI) to set up a Zambian subsidia

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