Key View: Zambia will remain heavily reliant on hydroelectricity throughout our forecast period to 2031, increasingly so with the completion of new hydropower capacity in the near term. This will further increase the risk of country-wide blackouts during drought, illustrated several times over recent years. While more than 3GW of capacity are currently in the development pipeline, we expect the current electricity crisis will motivate more investment in power sector diversification and a shift away from new large-scale hydropower investment. However, we also note that projects at advanced construction stages will likely continue regardless, while government's commitment to jointly develop the Batoka Gorge Hydropower project poses a considerable upside risk to our long-term forecasts.

Latest Updates

• The Exim Bank of China and Industrial and Commercial Bank of China (ICBC) have reportedly frozen financing distributions to the 700MW Kafue Gorge Lower Power Plant project after the Zambian power utility Zesco reportedly failed to meet its contractual obligations. This is expected to delay the project further as contractor Sinohydro has also reportedly made little progress over recent months approaching the project's expected completion date. While we have not revised our forecast to reflect completion after 2022, we continue to monitor the project's progress and will do so if evidence supporting such a delay arises.

Structural Trends

We estimate that Zambia's hydropower sector generated 16.4TWh in 2021, up from an estimated 15.0TWh in 2020 and 13.7TWh in 2019 as the country recovered slowly from its worst drought since 1981. Improved rainfall and the completion of the 750MW Kafue Gorge Lower hydropower project in 2022 informs our forecast for a rapid increase in hydroelectric generation between 2022 and 2023, levelling out thereafter. Overall, we expect hydropower's share of Zambia's total generation to fall from 89.0% in 2022 to 85.9% by 2031 as hydropower capacity remains stagnant after 2022 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. By mid-April 2020, Lake Kariba's usable storage rose to 21.4%; a promising sign of recovery. However, ZESCO had, by that time, already used more than 25% of its allocated water expenditure for the year (as determined by intergovernmental regulator ZRA) with outflow rates trending higher. The ZRA has since increased water allocations for power production, reducing the risk of late-year downturns in hydropower supply. By late-October 2021, the ZRA reported usable water levels in Lake Kariba surpassing 35% and on a downward trend approaching the catchment area's rainy season which begins in December.

Despite boosting hydroelectric production, the country continued to sustain nationwide blackouts necessitated by shortfalls in power supply throughout 2020. In March 2020, government officials announced that the country's electricity deficit had grown by more than 17% to 810MW from 690MW in September 2019, with scheduled power cuts lasting up to 10 hours each day despite higher hydroelectric output.

The 2.4GW Batoka Gorge hydropower plant, a joint project between the governments of Zambia and Zimbabwe, was originally scheduled to start construction in between 2017 and 2019. However, difficulties in financing and planning have delayed the project, which has not yet begun construction at the time of writing. 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 reportedly 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 Batoka Gorge hydropower plant into our forecasts. While we also note that 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.

In early 2017, the UK's CDC Group indicated its interest in investing in the Kalungwishi hydropower project. The dam is estimated to cost USD850mn, with a planned capacity of 247MW. Furthermore, the Zambian government reportedly set aside USD700mn at the start of 2018 for its development, indicating that it expected construction to begin in late 2018 and completion in 2022. However, we have not found any evidence that construction has yet begun.

New Africa Power, a joint venture between Norfund, Vineyard and Kenya-based responsAbility Renewable Energy Holding, is undertaking feasibility studies for the development of 65MW of run-of-the-river hydropower projects in Zambia at a cost of USD4.6mn. We note that this will provide a further boost to the hydroelectric sector if the projects do come online within our forecast period.

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.

Key View: Thermal power will make up an average of approximately 8.2% of Zambia's annual net power generation over our 10-year forecast period to 2031. Coal- and oil-fired power plants will provide Zambia with a reliable source of baseload capacity, which will be integral in mitigating power cuts during drought. However, Zambia's government remains focused on hydropower and solar power investment, leaving little potential for new grid-connected thermal power plant development. This is highlighted in the absence of any new utility-scale thermal power plants in the pipeline which informs our view that the country's thermal power capacity will remain stagnant throughout the coming decade.

Latest Updates

• We have not made any notable changes to our forecasts for Zambia's thermal power growth this quarter. The absence of evidence contrary to our bearish outlook on the sub-sector, the lack of thermal power plants under development and the government's rhetoric strongly supportive of solar power and hydroelectricity all feed into our downbeat projections on thermal power.

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.

Key View: Zambia will remain an attractive market for non-hydropower renewables investment over our decade-long forecast period to 2031, having eased its regulatory environment to allow for private ownership and operation of solar power plants. Considerable economic growth, heavy industrial development and the pressing need for power security will all support significant investment in the solar power sector, motivating our bullish renewables growth forecasts this quarter. While we remain relatively conservative in our renewables growth forecasts, we highlight significant upside risk in private solar power investment, and to a lesser extent, wind power development.

Updates

• Chariot Limited, Total Eren and First Quantum Minerals (FQM) have formed a partnership to develop 430MW of combined wind and solar power to provide electricity to FQM's Zambian mining operations. The project will help FQM reach its goal to reduce its carbon emissions by 30% by 2025. Chariot Limited and Total Eren signed an agreement in 2019 to jointly develop wind and solar power projects specifically for mining firms in Africa. The plant will begin construction in 2023 at an estimated cost of USD500mn.

Structural Trends

The first Scaling Solar tender in Zambia attracted 48 developers, with Enel Green Power and the consortium of Neoen and First Solar being announced as the winners, while bidding prices reached as low as USD0.06 per kWh. We forecast that if the projects selected in the first round are successfully implemented, this will provide an impetus for further non-hydropower renewable electricity investment in Zambia. Neoen/First Solar and Enel Green Power signed 25-year power purchase agreements with state-owned power company ZESCO in March 2017 for solar photovoltaic (PV) capacities of 54.3MW and 34MW respectively.

The 54.3MW Neoen solar power scheme was the first project from the first round of solar tenders to reach construction phase in 2017. The official name for the project, according to the World Bank, is the West Lunga Scaling Solar Energy Project. However, it is commonly referred to as the Bangweulu Solar PV Project, and less-commonly referred to as the Lusaka South Multi-Facility Economic Zone Solar Power Plant. The plant is owned and operated by Bangweulu Power Company Limited, a special-purpose vehicle created by Neoen, First Solar and Zambia's Industrial Development Corporation. In mid-2018, the OPIC and the International Finance Corporation committed up to USD45mn in a combined debt and equity loan with a ratio of up to 75:25. Both projects reached completion in 2019, boosting the country's total grid-connected solar power capacity from 5.0MW in 2018 to 96.4MW by the end of 2019.

Completion of the Bangweulu and Ngonye solar power projects will bode well for further non-hydropower renewable electricity generation in Zambia and for the progress of the World Bank's Scaling Solar initiative as a whole. The initiative seeks to incorporate competitive bidding and cost reduction in the procurement of non-hydropower renewable electricity capacity in emerging markets with high solar power potential. Success in Scaling Solar's first round of projects will likely improve investor sentiment and attract more bidders, which will in turn lead to lower electricity tariffs for states involved in the initiative.

With the unprecedented success of its first solar capacity auction, the Zambian government set an ambitious target to add a total of 600MW of new solar capacity to the national grid in 2020. While we note that the growing number of solar projects in the pipeline highlights rising investor interest and bodes well for future growth, the 600MW target proved overly ambitious with an estimated 3MW added in 2020 and to reach only 99MW in total operational solar capacity that year. Nonetheless, the market remains attractive to investors and the early planning stage progress on a number of new initiatives poses an upside risk to our conservatively upbeat forecasts this quarter.

In April 2019, the Zambian government awarded a construction contract for the development of a 300MW solar project in central Zambia to a consortium led by Kenyan renewables developer Xago Africa. Zambian company Blue Chip Resources will act as construction partner, while a subsidiary of UK firm Solarcentury provides technical advice. We await evidence showing the start of construction on the project, in addition to an official construction schedule, before factoring the project into our upcoming forecasts.

In the same month, GET FiT Zambia awarded a total of six 20MW contracts split equally between three consortia in its first round of solar power auctions. The joint venture between Building Energy and Pele Energy presented the lowest winning bid of USDc3.999 per kWh (a record low for Sub-Saharan Africa), while the weighted average of all six bids came in at USDc4.410 per kWh. The remaining two successful bidding parties were the joint venture between Globeleq and Aurora Power Solutions, and the joint venture between InnoVent and CEC. While we have not yet found evidence of an official commercial operations deadline on these projects, we expect that they offer a considerable upside risk to our solar power forecasts in the medium term.

The USTDA signed an agreement with Kalahari GeoEnergy for a USD1.5mn grant in June 2017. The grant will be used to fund a feasibility study for the development of 10MW to 20MW of geothermal electricity capacity. Having identified the Bwengwe River geothermal zone as a candidate for the development of geothermal power production, Kalahari GeoEnergy completed the identification-of-resource procedure and planned to conduct test drilling in late 2018 and begin feasibility studies in the first half of 2019. The company began drilling boreholes to conduct resource feasibility studies for the project in 2020, and plans to install a 0.25MW pilot power plant once drilling is completed. The pilot project is scheduled to enter commercial operations by mid-2021. If successful in proving the resource's feasibility for the larger 15MW plant, the USTDA will reportedly fund a full technical and economic feasibility study.

In May 2020, ZESCO signed contracts with POWERCHINA to develop three grid-connected solar PV plants each with a capacity of 200MW, at a combined cost of USD548mn. The three plants will be located in the districts of Chibombo, Chirundu and Siavonga. The time frames for the projects have not yet been released.

As a result of the progress on projects in 2018 and 2019, and growing investor interest in non-hydropower renewables in the country, we maintain our view that Zambia will be a bright spot for new renewable electricity investment over our forecast period to 2031. While we note the presence of large-scale wind power projects in Zambia's project pipeline, we anticipate the majority of growth in the sector will come from the development of new solar power capacity over the coming decade.