Commercialisation

In March 2003, Government of Zambia decided to commercialise ZESCO Limited as opposed to concessioning. Concessioning would have put the utility in private hands for an initial period of 12 years while under Commercialisation, ZESCO would remain under government control but operate on a commercial basis.

The aim of commercialisation of ZESCO is to:

• Improve the financial performance of ZESCO

• Improve quality of service delivery

• Attract new investment into the sector

• Increase access to electricity in Zambia

• Introduce new technologies into Zambia.

Consultancy

In order to achieve effective monitoring of a commercialised ZESCO, a need arose for a strong regulatory capacity of the ERB. IPA Energy Consulting of Scotland was engaged for the Institutional Capacity and Capability Strengthening of the ERB with the financial support from the World Bank and SIDA in June 2005.

Objectives and Scope

The objective of this project is to strengthen the regulatory capacity and capabilities of the ERB by increasing its overall efficiency and effectiveness and, in particular, its ability to incentivise, monitor and evaluate ZESCO as it progresses towards commercialisation.

The scope of the consultancy project for the ERB includes among others the following:

• Propose amendments to existing licenses with a view of incorporating international "best practice" into the licenses and ensuring a just and fair environment to all market participants (existing and potential) with appropriate incentives and penalties;

• Review the process of enforcing technical standards;

• Establishment of financial and technical performance indicators for monitoring of ZESCO;

• Review and update electricity demand forecasts prepared by ZESCO to 2020;

• Determination of the least cost generation, transmission and distribution expansion plans required to meet load forecast;

• Conduct a cost of service study of ZESCO to establish the costs of providing electricity to the various categories of consumers and separating of these costs amongst generation, transmission, distribution and supply; and

• Tariff design taking into account economic efficiency, financial viability and social objectives

Operation and Benefits

The consultancy project is being conducted on a participatory basis. A core team is involved from ZESCO (all strategic business units) and ERB in order to build capacity even after the Cost of Service is concluded. The aim is for ZESCO to be able to perform certain tasks like conduct load forecasting on a regular basis which the ERB will review based on the same skills acquired during the exercise. Workshops involving both ZESCO and ERB staff have been conducted on Cost of Service, Load forecasting and Generation planning while Transmission and Distribution Planning will be held this November.

The Cost of Service Study will be used for understanding ZESCO's internal costs structure. The costs will be broken down according to the Strategic Business Units (SBU) in order to determine the actual cost component of each business unit. The business units include Generation, Transmission, Distribution, Supply and Corporate.

The Cost of Service Study will provide ZESCO with a powerful management tool because they will be able to know the detailed internal costs of producing and providing electricity, for instance 1 kWh. This will help in cost control and also provide a basis for applying for and effecting economic tariffs as the actual costs will be known. This will also lead to transparency in tariff setting.

Conclusion

The Cost of Service Study has received overwhelming support from both ERB and ZESCO due to the importance it has for both institutions. It will provide ZESCO the incentives to operate efficiently and enable the ERB monitor its performance effectively. This will be to the advantage of all stakeholders of ZESCO and Zambia at large.