Zambia - Issues and options in the energy sector

Report No. 41 1O-ZA Zambia: Issues and Options in the Energy Sector lanuary -1983 Report of the joint UNDPJWorldl Bank Energy Sector Assessment Program This document has a restricted distribution. Its contents may not be disclosed without authorization from the Government, the UNDP or the World Bank.  'JOT JNDP ?/WOER:LD TA-NKN ANFLRGY SECTOR A-SSEMThE-S NT PROGRAM -REPORTS ALREADY TSSTED Countr,, Date No TIndo resia November 1981 3543-IND t Mauritius December 1981 3510-MAS Kenya May 1982 3800-KE Sri Lanka May 1982 3794-CE Zimbabwe June 1982 3765-ZIN Haiti June 1982 3672-HA Papua NTew Guinea June 1982 3882-PNG Burundi June 1982 3778-BU R-wanda June 1982 3779-RW Malawi August 1982 3903-MAI Bangladesh October 1982 3873-BD f  PRINCIPAL ABBREVIATIONS AND ACRONYMS USED CAPC - Cent:ral Africa Power Company CPC - Copper Belt Power Company CSC - Commonwealth Science Council FD - Forestry Department FPRD - Forest Products Research Department GRZ - Government of the Republic of Zambia IFC - International Finance Corporation MD - Meteorological Department MED - Mechanical Engineering Department (University of Zambia) MLNR - Ministry of Land and Natural Resources MM - Ministry of Mines MPTC - Ministry of Power, Transport and Communications MWS - Ministry of Water Supply NCCM - Nchanga Consolidated Copper Mines Ltd. NCSR - National Council for Scientific Research NEC - National Energy Council NOSCO - National Oil Storage Company PFO - Provincial Forest Offices RCM - Roan. Consolidated Mines TDAU - Technology Development and Advisory Unit UNZA - University of Zambia WER - Wood. Energy Research ZADL - Zambia Agricultural Development Ltd. ZCCM - Zambia Consolidated Copper Mines ZESCO - Zambia Electricity Supply Company ZIMCO - Zambia Industrial and Mining Corporation Ltd. ZNEL - Zambian National Energy Ltd. ZR - Zamblia Railways ZSC - Zambia Sugar Company   CURRENCY EQUIVALENTS USED IN REPORT I/ US$1 = ZK 0.833 (Kwacha) ZK1 = US$ 1.20 MEASUREMENTS a annum Bbl Barrel of Oil = 0.15899 Cubic Meter; 42 U.S. Gallons; 35 Imperial Gallons BTU British thermal unit = 0.252 kilocalories Btuh British thermal unit/hour CF cubic foot = 0.02832 Cubic Meter cfm cubic feet per minute ft3/hr cubic feet/hour Gallon = 3.7853 Litre GWh Gigawatt-hour = 1,000,000 kilowatt-hours (kWh) K (k) Kilo = 1,000 km Kilometer = 0.62 miles = 1000 meters kV Kilovolt (kV) = 1,000 Volts kWh Kilowatt hours 1,000 Watt Hours lb/hr pounds/hour lbm pounds mass ,-a3 cubic meter = 6.289 barrels MB thousand barrels = 1,000 barrels MCFD thousand cubic feet per day MMCF million cubic feet MVA megavolt ampere = 1,000 kilovolt amperes MW Megawatt = 1,000 Kilowatts (kW) MWh megawatt hour = 1,000 kilowatt hours TOE (toe.) tonne of o:il equivalent = 39.68 million BTU tonne metric ton = 1,000 kilogram (kg); 2,204.6 Pound (lb) Tpa (tpa) tonnes per annum ZAMBIAN FISCAL YEAR January 1 - December 31 1/ A 20% devaluation of the Kwacha took place in early January 1983.  ENERGY CONVERSION FACTORS FUEL PHYSICAL UNITS PER TOE _/ Liquid Fuel (metric tons) 2/ Crude Oil 0.98 LPG 0.92 Gasoline 0.95 Kerosene/Turbo Fuel 0.97 Diesel Oil 0.98 Fuel Oil 1.04 Coal (tonnes) Zambian (Maamba) Coal 1.67 Electricity (MWh) 3.97 Biomass Fuels (tonnes) Firewood 2.84 Charcoal 1.40 Bagasse (dry) 5.68 1/ 1 TOE = 39.68 million BTU = 6.61 Boe 2/ Regular gasoline = 359.6 gallon/mt Premium gasoline = 356.9 gallon/mt Kerosene = 336.6 gallon/mt Diesel = 314.4 gallon/mt Fuel Oil = 278.2 gallon/mt This report is based on the findings of the Energy Assessment Mission which visited Zambia in January/February 1982. The composition of the mission was Messrs. Z. Mian (Mission Chief), S. Chattopadhya, A. Armar, A. Oduolowu, P. Hansen, W. Elkan (Consultant), B. Robinson (Consultant), E. Wilson (Consultant) and C. White (Consultant). The additional technical assistance on refinery analysis was provided by Mr. M. Farhandi. The principal author of the report was Akin Oduolowu, secretarial assistance by Angelica Fernandes, Beatrice Moses, Lydia Hancock, Josefina Regino-Suarez and Linda Walker-Adigwe. The report was discussed with the Government of Zambia in Lusaka in January 1983.  FOR OFFICIAL USE ONLY Report No.: 4110-ZA ZAMBIA ISSUES AND OPTIONS IN THE ENERGY SECTOR January 1983 This is one of a series of reports of the Joint UNDP/World Bank Energy Sector Assessment Program. Finance for this work has been provided, in part, by the UNDP Energy Account, and the work has been carried out by the World Bank. This report: has a restricted distribution. Its contents may not be disclosed without the authorization from the Government, the UNDP or the World Bank.   TABLE OF CONTENTS Page No. ISSUES AND RECOMMENDATIONS The Energy Problem ..... . ,.... . .............................. I Energy Supply/Demand Issues... s sueo..s. .... .es ... ..... ii Summary of Major Recommend.c.ation. . xiv Short Term ........... . .... .......... ........................ xiv Long Term ................I..... ,, . .... .. . xv CHAPTER I - ENERGY IN THE ECONOMY Overview ..... e.......44.............. Energy Demand ............*.*. , ...... ................ . 3 Investment in the Energy Sector ..................6 CHAPTER II - ENERGY RESOURCES AND SUPPLY...................... 8 A. Petroleum .......... ... .060.o ..................... 8 Indigenous Potential..*.n.*.**#** ....................... 8 Petroleum Supply ....... .. 8 INDENI Refinery .... .............. ................... 10 B. Electricity .........**..***.*.. ... . ....... .......... .... 15 Existing Facilities. l i t iso... * ...... 16 Kariba Hydroelectric Complex*. ...............p... 16 Kafue Gorge Complex.p*e*... ... a......... ..*... 0... 18 Victoria F a l ls.....** ... 6 ..so.*.. 18 Waste. Heat Plants ....... .. *..... . ... .18 Gas Turbine Plants l a n ts... ........... ... . 18 Interconnection with Zaire 18 New Generating Plalnt ....... . . ...................... 18 Co Coal.** ...... , ... ........ ....... ... 20 Current Potentialo..... .... 20 Maamba Colliery Operation.e ra..oi on.................... 20 Supply of Wooddues............... 22 Fuelwood Plantations. 23 Charcoal Production 'echniques......... 24 Improved Charcoal Stoves 26 Alternative Energy Sources...... ....4s * . 26 Solr.........................r . 26 Wini.............d . 27 Bagseg..a..s.........e. 28 Microhydro (5-100 kw r ooge .. 28 Bioai.........ogas. 000..0.......0. 29 Geothermal.. * . ......... ...29 Ethanol Production....o..444444444444.4.o .... . ....... 29  -2- Page No. CHAPTER III - ENERGY DEMAND .... ... . ....... 32 Historical Demand ....... ........... . 32 Petroleum ... ............................................... 32 Sectoral Consumption ........... ........ . 32 Copper Mines .. 32 Industrial Sector .. 34 Transport and Services Sector ........................... 34 Agriculture ............................................ 35 Electric Power .... 37 Rural Electrification . . . ......... . 38 Coal ....................................................... . 39 Woodfuels . . ................................................. 40 Economic Growth Scenarios ...................................... . 42 Demand Projections . .... ............. .. . 44 Petroleum Products .... 44 Coal ..................................................... 45 Electricity .... 46 W,oodfuel .................................................. ......... 47 CHAPTER IV - OPTIONS FOR FUEL SUBSTITUTION ........... ......... 50 A. The Copper Mining Company ................................ 50 Furnace Replacement and Heat Recovery Measures ............................................... 50 Coal Substitution for Fuel Oil ........................... 50 Electrification of Vehicles .............................. 51 B. Fertilizer Industry ...................................... 55 C. Cooking Fuel Options in Urban Households ................. 56 CHAPTER V - ENERGY PRICING POLICY . . . . 59 Petroleum Products ....... .................................. 59 Analysis of Petroleum Price Structure . . . 64 Coal ........................................................ 67 Electricity ................................................ 67 Fuelwood and Charcoal .......... . 70 Conclusion and Recommendations on Pricing . . 70  -3- Page No. CHAPTER VI - ENERGY SECTOR ORGANIZATION....................... 72 Overview ...... 72 The National Energy Council (NEC) . . 72 Sub-sector Operational Planning .. 73 Institutions in the Power Sector ........... .. .............. 74 Central African Power Corporation (CAPC) . . 74 Zambia Electricity Supply Company (ZESCO) . . 75 The Coal Sector ....................... ................ 76 Institutions for Woodfuel .. 77 Institutional Consideration for Renewable Energy Development . . 78 Technical Assistance for Manpower Development . . 79 CHAPTER VII - INVESTMENT REQUIREMENTS ......................... 80 Summary of Projected Energy Consumption . . 80 Investment Implications . . 80 Short term ............................................... 81 Medium term .............................................. 82 Long term . ............................................... 83  -4- LIST OF TABLES IN TEXT: TABLES 1.1 GDP by Selected Economic Sectors - 1976-80 .............. 2 1.2 Energy Demand by Source 1981 ............................ 4 1.3 Sectoral Pattern of Energy Consumption (1980/81) ........ 5 1.4 Zambia: Energy Balance 1980/81 .......................... 7 2.1 Refinery Design Yield ................................... 11 2.2 Comparison of Refinery Production Slate at Different Spiking Levels with Projected Demand for 1985 ......... 14 2.3 River Systems in Zambia ................................. 15 2.4 Existing Generating Plant in Zambia on the Interconnected System ................................. 17 2.5 Classification of Woodland Areas (1979) ................. 22 2.6 Zambia: Basic Parameters in the Analysis of the Ethanol Project ................................... 31 3.1 Petroleum Product Consumption Profile ................... 33 3.2 Gasoline Demand .......... . 35 3.3 Sectoral Classification of Consumption of Major Petroleum Fuels (%) .. 36 3.4 Coal Consumption ........................................ 40 3.5 Estimates of Charcoal and Firewood Consumption, 1981 - 41 3.6 Recorded Production of Firewood and Charcoal ............ 41 3.7 GDP Projections .42 3.8 Demand Projections for Petroleum ........................ 44 3.9 Projected Coal Demand 1980-2000 ......................... 46 3.10 Projected Demand for Electricity (1980-1990) in GWh ..... 47 3.11 Projected Demand for Woodfuels (1980-2000) .............. 49 4.1 Cost Analysis of Fuel Substitution Options .............. 54 4.2 Investment Implications of Fuel Substitution in the Copper Mines .. 55 4.3 Energy Equivalent Costs of Urban Cooking Fuels in Zambia (1982) ................................ 56 4.4 Equivalent Monthly Household Expenditure on Cooking..... 58 5.1 Estimates of Cross Subsidies on Petroleum Products 1982 ................................ 60 5.2 Comparison of International (Persian Gulf) Postings and Domestic Consumer Prices (1982) .......... 62 5.3 Consumer Prices (1976 Constant Prices) and Consumption 1976-82 for Controlled Petroleum Products ............. 63 5.4 Index of Retail Prices of Petroleum Products in Lusaka Relative to Kerosene ........................... 64 5.5 Price Structure Based on Wholesale Import Parity Prices .................................. 66 5.6 Tariff Structure as of August 1979 ...................... 69 6.1 PFO Personnel Situation in 'Line of Rail' Provinces ..... 78 7.1 Projected Energy Consumption (1990-2000) ................. 80 7.2 Summary of Investments in the Energy Sector 1982-2000 82  -5- Page No. STATISTICAL ANNEXES ............................................ 85 TABLES 1.1 Petroleum Product Sales (1976/77 - 1980/81) ............ 86 2.1 Summary of INDENI Refinery Feedstock and Production .... 87 2.2 Export Petroleum Products .............................. 88 2.3 Cost Comparison of Petroleum Product Supply Options .... 89 2.4 Coal Production (1970--1981) ............................ 90 2.5 Number and Category of Person Employed in the Maamba Colliery (19830/81) ............................ 91 2.6 Hydro Electric Potential Sites on Zambesi and Luapula Rivers ........................... 92 2.7 ZESCO Interconnected System Installed and Available Generating Capacity and Available Energy 1982/83 ..... 93 3.1 Prices and Consumption Patterns of Petroleum Products (1976-80) ................................... 94 3.2 ZESCO Interconnected System (Sales and System Demand 1975/76 - 19130/81) ...................... ...... 95 3.3 ZESCO Sales Forecast (1981/82 - 1995/96) ............... 96 3.4 Electricity Sale in Zambia by Category of Consumer (1980/81) ................................ 97 3.5 GDP Projections (based on different growth scenarios).. 98 3.6 Petroleum Products Demand Projections (1980-2000) ...... 99 3.7 Sectoral Demand Projections for Petroleum Products (1980 - 2000) ........................................ 100 3.8 Projected Coal Consumption .................... ........ 101 3.9 ZESCO Interconnected System Capability to Meet Forecast Requirements ................................ 102 3.10 Current Expansion Program in the Power Sector .......... 103 3.11 Interconnected System Losses - 1980/81 ................. 104 4.1 Industrial Energy Demand (1981/82) ..................... 105 4.2 Summary of Energy Conservation and Fuel Substitution Measures in Industries .................. 106 4.3 Household Demand Pattern for Cooking Fuels (in Districts with Large Urban Centers) 1969 Census ...... 107 5.1 Comparison of Consumer and Import Parity Costs for Petroleum Products (1981/82) ..................... 108 5.2 Retail Prices (Consumers) .............................. 109 5.3 Cost of Coal Production (1980-1982) ......... 110 5.4 Zambia Electricity Supply Corporation Limited Increase of Electricity Tariffs (1979) ............... 111 5.5 Number of Registered Private Vehicles and Government Vehicles in use 1980/81 .............................. 113 5.6 Derivation of Indicative Wholesale Prices for Petroleum Products ............................... 114 7.1 Investments in the Energy Sector ....................... 115 MAPS IBRD 16370 Forest Estate, Urban Population Distribution in "Line of Rail" District 16371 Fuel Resources and Facilities 16372 Solar Insolation 16373 Natural Vegetation Zones and Rainfall 16374 Zambia: Electric Energy Infrastructure   ISSUES AND RECOMMENDATIONS The Energy Problem i. Zambia's commercial energy demand depends largely on the needs of the copper mining sector, which is the main foreign exchange earner for the economy, but which is going into decline due to declining ore grades and increasing production costs (15-20% per annum) and also the depressed state of the international price of copper. 1/ In 1981, the copper mining sector alone consumed (out of the total energy demand in the country) over 74% of elect:ricity, 52% of coal, 94% of fuel oil and about 24% of diesel oil. ii. Although Zambia has abundant resources of hydropower, coal and iwoodfuels, liquid fuels (which are imported in the form of spiked crude and refined at the INDENI refinery) remain important to both mining and non-mining activities. In 1981, total energy consumption including traditional fuels amounted to 4.5 million tonnes of oil equivalent (toe) of which imported petroleum was 16.5% and imported coke 1.3%. Hydropower accounted for 31% and coal for 6% (of total energy consumption) while traditional energy, largely firewood, charcoal and bagasse, accounted for 45% (equivalent to 2.03 million toe) of total energy demand. :Lii. The country has no known petroleum deposits and all petroleum products must therefore be imported. Even though the total volume of petroleum imports has been declining by 1.7% per annum (from 731,000 itonnes in 1976 to 683,000 in 1980), the cost of these imports has been increasing rapidly. In 1981, the petroleum import bill was estimated at US$ 240 million, equivalent to 17.9% of total imports and 19.4% of merchandise exports (1.05). 2/ As a consequence of declining foreign exchange earnings (principaTly from copper), and rising costs of p)etroleum imports,the balance of payments deficit on current account has been increasing. It reached $617 million in 1981; and payments arrears were about US$504 million. iv. Zambia's energy situation has been worsened by problems in the mining sector as well as by inadequate energy planning and policies, coupled with shortages of skilled manpower and management expertise. It is essential, therefore, that measures taken to deal with the energy problems are closely linked with those dealing with the other problems in the economy. The following measures are considered urgent in the energy sector: 1/ In 1980 mining contributed about 90% to the foreign exchange earnings and 18% to GDP (in current prices). In 1982 the contribution to revenue budget by the copper mining insdustry was about $1.2 million or 0.1% of the total budget of $978 million. 2/ Parenthesized numbers refer to paragraphs in the main body of this report.  - ii - (a) reduce the cost of petroleum imports to the economy by reducing fuel own-use/losses at the refinery as well as improving refinery utilization through finding new markets; (b) promote the substitution of fuel oil by coal and/or electricity particularly in the copper mines, and reduce cost of energy use in copper production; (c) increase the efficiency and quantity of coal production; (d) improve the effectiveness of the power distribution system in urban and rural areas; (e) improve the transport system, particularly the railways for carrying coal and petroleum products; (f) rationalize pricing policies and improve the efficiency of energy use; (g) establish technical assistance programs to provide efficient and skilled manpower and managerial expertise; and (h) reorganize the institutions in the energy sector to promote efficient production and management of energy resources. v. However, the ability to implement some of these measures will be constrained by the country's precarious financial situation which has resulted primarily from the depressed price of copper. Priority must therefore be given to those actions that have a large and quick pay-out and could stimulate growth in the other sectors of the economy. Energy Supply/Demand Issues: vi. The Refinery and the Reduction of Petroleum Import Bill: Zambia is not a petroleum intensive economy. Per capita petroleum consumption of around 0.12 toe in 1981 is lower than most middle-income countries with about the same per capita income levels (for example, Honduras 0.17 toe and Bolivia 0.18 toe). It could be lower still but for the technical limitations of the refinery. This refinery, located in Ndola, currently operates well below design capacity due to market limitations and therefore has a high own fuel use/loss of about 6% as compared to less than 4% in refineries of similar size and configuration. 1/ It has no secondary conversion capabilities to enable it to meet major changes in patterns of product demand or to substantially reduce or eliminate the output of fuel oil, which the government has insisted must be used by the 1/ A study on how to reduce such own fuel use/loss at the current operating level has recently been completed by the refinery and is to be implemented.  - iii - copper mines 1/ even though this is uneconomic compared to use of other fuels such as coal or electricity. When output adjustments are necessary in the refinery because of changes in demand, they are handled by spiking the crude feedstock with lighter products. 2/ In addition, the refinery must carry out by itself many ancilliary services such as transport of staff, maintenance of houses, etc., this leading to a relatively large total staff. vii. A two-pronged approach is necessary to reduce the petroleum import bill. First, efforts must be continued to explore for oil and gas, since the mission considers that, on the basis of available data, discoveries cannot be ruled ou1t. 3/ Second, and more urgently, means must be found to reduce the production and consumption of fuel oil, particularly in the mines, by substitution of other cheaper fuels. There are three main options to reduce or eliminate fuel oil production: (a) increase the level of spiking in the refinery feedstock (the current level is 43%). Although designed to process Iranian Light (Agha Jari) crude oil spiked up to 25%, tests have shown that the refinery can accomodate up to 55% spiked crude if the throughput is at least 660,000 tonnes; (b) close down the refinery and import refined petroleum products through the Tazama pipeline now used to supply the spiked feedstock. The Tazama pipeline was originally designed for ref:Lned petroleum products and was converted to supply crude oil when the refinery was built in 1973. It can easily be reconverted to its original use; (c) upgrade or modify the refinery to produce either less fuel oil and more middle distillates from whole crude oil, or eliminate the production of fuel oil. viii. As long as the spiking level does not exceed the 55% of feedstock and there is a minimum throughput of 660,000 tonnes, with the proportion of the distillate yield to the input feedstock not exceeding the design conditions, Option (a) will not involve any significant additional investment either irn the refinery or elsewhere in the economy to meet expected increases in t:he demand for middle distillates and will not increase the production of fuel oil. This could result in an overall _1 The production of fuel oil and subsequent use by the mines was economic when the internationaL price of crude oil was about one tenth the current price. With the increase in crude oil price, production of Euel oil is not economic. Currently there are no other major users of fuel oil in Zambia and export potential is almost non-existent. 2/ Spiked crude feedstock implies crude oil blended with refined lighter products, which in this case are naptha, kerosene and diesel oil. 3/ A Bank petroleum exploraltion promotion loan of $6.6 million was signed in May 1982. (Zambia Petroleum Exploration Promotion Project, ]Report No. P-3206-ZA; Loan No. 2152-ZA).  - iv - reduction in the volume of petroleum imports. However, beyond the spiking level of 55% minor modifications of the refinery will be necessary; this could include installation of a prefractionating column at an estimated cost of about $10-15 million (2.08). ix. Option (b) will mean that the mines (and other users) will have to use coal or electricity instead of fuel oil. This was the situation before the commissioning of the refinery in 1973/74. Based on 1980/81 product consumption, and other things being equal, this option could save the government foreign exchange of about $27-35 million annually in petroleum import costs (2.09-2.10). 1/ However, to implement this option, the following other investments are necessary: (i) $1 million to reconvert the Tazama pipeline to transport refined products rather than crude oil; (ii) $2-5 million to build additional storage facilities at Ndola for refined products; and (iii) depending on the fuel substituted, about $39-50 million for the copper mines, the Maamba Colliery, the Railways and the electric power system (4.08). x. Option (c) will require the mines to use coal or electricity, and also imply investments (iii) under option (b). However, the refinery modification, costing $80-120 million, could produce savings in foreign exchange of about $26-40 million per year in the petroleum import bill alone by reducing or eliminating spikes in the imported crude oil and by reducing the refinery's own fuel use/losses. The refinery could also be modified to produce lower volumes of fuel oil from whole crude oil. xi. Although both options (b) and (c) will enable the government to achieve substantial savings 2/, both require committment of additional investments in either the refinery or in other sectors of the economy. The mission therefore favors option (a) which appears to involve the least amount of investments in the short term (2.12), and given the difficult financial constraints facing Zambia and its problems in raising funds externally, recommends that this option be implemented in the interim while further detailed cost benefit analyses and ranking of the other options are made. These analyses must be done in conjunction with a study of the economic viability of alternative fuel substitution in the mines and on decisions to rehabilitate the copper mines in order to reduce production costs and re-establish the growth of copper production. A refinery modification study is currently in progress to do this. 3/ 1/ Also see para xii and xiii below. 2/ The local cost of the replaced fuel (coal is $15 million or electricity $2 million) must be deducted from these savings. 3/ This refinery modification study will evaluate the least cost options and the implications that any modification of the refinery will have for the petroleum demand mix for the country. (IBRD report no. P3187-ZA: Indeni Refinery Modification Engineering Project).  v xii. Fuel Substitution and Energy Use in the Copper Mines: The mission studied energy use in the copper mining and smelting operations and concluded that, allowing for the age of equipment and the fact that the prices of all energy products to the mines are subsidized, energy use in the mines is reasonably efficient. However, with modest investment, the volume of diesel oil used in the mines could be reduced by 10% by converting some of the earth moving equipment to run on (cheaper) electricity. The mines are already experimenting with modified equipment (4.05). xiii. The copper mining companies consider (and the mission agrees) that electricity or coal can be substituted for fuel oil. If coal is to be substituted, this will require additional investments of about $14 million in the copper mines, about $15 million in the Maamba coal mines and some investments in improving the efficiency of the railway system. 1/ Estimated annual fuel saviings to the mines are about $9.5 million. T/ If electricity is to be substituted, the mines will be required to install smelters at a cost of $40-60 million, but estimated annual fuel savings to the mines are about $22 million (4.08). 3/ Also the mines are evaluating the economic viability of using an oxygen flash furnace to replace both fuel oil and coal. Estimated capital investment is about $160 million, and estimated annual fuel savings to the mines are about $38 million (Table 4.2). However the mission believes that it will be difficult for the mines to raise sufficient funds (in the short term) to finance the oxygen flash furnace option. xiv. Preliminary analysis shows, that the substitution of electricity for fuel oil in the mines requires the lowest investment and appears to have a high benefit/cost ratio (4.09). However, the mission recommends that all the fuel' substitution options should be reviewed in detail during the refinery modification study. xv. Electricity: Hydropower is the most important domestic energy resource; the potential is estimated at 4,000 MW. Installed hydroelectricity capacity in Z'ambia of 1,608 MW is well in excess of current domestic and export demand of 1,308 MW and based on the mission's demand forecasts, including possible electrification of the mines, will 1/ Total investments in the Maamba Colliery are about $30 million to maintain production and efficiency. 50% of this is estimated to be due to the increase in coal demand by the copper mines (see para xxi). The Zambia Railways (ZR) estimates that about $10 million is required to improve the efficiency of its operations. 2/ This is the difference betwen the current subsidised cost of 150,000 tonnes of fuel oil to the mines ($24.5 million) and the cost of 240,000 tonnes of substituted coal ($15 million). 3/ This is the difference between the cost of power at about $3 million per year and fuel oil at $24.5 million per year.  - vi - meet Zambia's needs to 1995. It will also provide exports of 500 MW to Zimbabwe until 1986/87 and 400 MW until 1990 (3.12). For domestic power needs, therefore, new investments in Zambia are not urgent. However, if Zimbabwe needs to increase its power imports, thus providing Zambia with additional export earnings at a profitable rate, decisions on the joint development of the river Zambezi for power projects must be made in the medium term (3.12). For this, a least cost power development program is necessary, and the Government plans to seek financial assistance from the United Kingdom for this study, which the mission supports. xvi. Currently, system losses are high. In the interconnected system (of ZESCO and CPC) losses are estimated at 3.5% in transmission and 18.2% in distributions. In the rural areas, total losses on the transmission lines and the distribution system are about 20% (3.13). This is largely due to lack of funds, especially foreign exchange, for proper maintenance. Vehicles are old and equipment and spares purchases are insufficient. In particular ZESCO's ability to maintain the power system is being eroded and will continue to deteriorate unless its financial position improves. This can be achieved through increases in tariffs to adequate levels (5.17). ZESCO estimates that it needs about US$40 million to purchase spare parts for maintenance and US$37 million to pay outstanding bills to contractors. Non-payment of electricity bills (especially by government ministries and parastatal organizations) amounted to over $8 million in 1980 (2.23). Such bills should be paid immediately. Also ZESCO is short of adequate technical and management expertise (6.11). To upgrade and strengthen its management, ZESCO will have to provide improved working conditions for its staff. It has been difficult to attract and retain capable local Zambians because its salaries and work incentives are not competitive. The mission recommends that ZESCO be assisted through an external technical assistance program to establish an adequate training program to train engineers and managers and also develop an appropriate salary and incentive structure for its staff (6.11). xvii. Rural electrification which is an important social program for the Government, is poorly planned and implemented and has been causing operating losses to ZESCO of US$5-8 million annually since 1978. The rural electrification program comprises two elements: (i) replacing the isolated diesel generation units serving remote townships by direct connection to the national grid; and (ii) a government directed rural electrification program to include new areas. In both cases the transmission distances are long (typically 50-100 km from the grid) because the rural settlements are widely scattered; moreover, neither program appears to have been evaluated according to either financial or economic criteria. The mission recommends that before making further investments a comprehensive rural electrification study be prepared which would establish priorities based on the economic cost of specific investments. In view of ZESCO's difficult financial position, the Governemnt should not require ZESCO to finance with its own resources any further investments in rural electrification which ZESCO would not otherwise undertake (3.14-3.16).  - vii - xviii. The mission also recommends that attempts should be made by all the parties concernea, including the Bank to resolve the outstanding issues relating to the Central African Power Company (CAPC). This organization is jointly owned by the governments of Zambia and Zimbabwe and its main responsibilities are for power generation on the Zambezi and the transmission of power to Zambia and Zimbabwe. Although CAPC plays an important role in power development, there are differences of opinion between the two governments on the role of CAPC and how its services should be financed. It is essential that an independent and effective institution be established for the equitable sharing of the Zambezi waters for power development to the benefit of both Zambia and Zimbabwe (6.05-6.07). xix. Coal: Currently coal is mined at Maamba in the mid-Zambezi basin where proven reserves are about 58 million tonnes. Coal deposits have also been identified in the Luangwa valley in the Northern Province and in the Western Basin but these reserves have not been explored. Although not of immediate priority, the mission recommends that a full evaluation and inventory of the coal resources is necessary to ascertain the total coal potential in the country. At the designed production capacity for the mines of 1.2 million tpa, proven reserves at Maamba are sufficient for about 33 years. 1/ The current production rate at Maamba is 610,000 tonnes per year (610 kmtpa) or about 51% of the designed rate. The major consumers of coal are the copper mines (326 kmtpa), the cement factory (98 kmtpa) and the fertilizer plant (64 kmtpa). The demand for coal is expected to increase by 9% in 1982/83 due to expansion of the fertilizer plant, cement factory and the pulp mill (3.27). xx. To satisfy increased demand, and particularly if coal substi- tution is preferred for copper smelting, the government must improve the mining operations at Maamba. The cost of producing coal at Maamba Colliery is high (about $47/tonne at the mine head (5.11)), despite the fact that open pit mining conditions are relatively easy. Several factors are responsible for this. The major ones are shortage of experienced management and skilled manpower, poor maintenance and lack of foreign exchange to purchase necessary spare parts to replace and maintain equipment. The mission estimates that the Maamba colliery will need about US$30 million for a full rehabilitation which will enable it to increase production to the design capacity of 1.2 million tpy of coal. Such rehabilitation may take 3-5 years to complete. xxi. The railway systems for transporting coal between the mines to the main trunk line and also to the copper mines at Ndola, a distance of over 300 kms., are in poor shape. In 1980/81 over half of the coal requirements of the copper mines were hauled by road from Maamba to Ndola, thus adding considerably to transport costs and energy consumption (5.11). The rehabilitation of the tracks between the mines to the main trunk line and purchase of rolling stock and wagons are estimated by ZR to cost about US$10 million. Further analysis of the cost may, however, reduce this figure somewhat. 2/ 1/ The run-of-the mine production capacity is 1.5 million tonnes per annum. The washed coal production is 1.2 million tonnes per annum. 2/ This amount is in addition to the rehabilitation program currently in progress.  - viii - xxii. Firewood and charcoal are the major household fuels in the rural and urban areas. The main cause of localized woodfuels shortages is excessive cutting of trees for charcoal production. This affects mostly the densely populated areas, particularly along "the line of rail". xxiii. Although supplies of woodfuels to the more widely scattered rural population are adequate, the consumption of charcoal by the urban centers in the Copperbelt and Lusaka provinces has increased the threat of widespread deforestation in the surrounding woodlands. The issues are how to maintain an adequate and reasonably priced supply of charcoal to urban households and how to reduce the demand for charcoal through substitution by other cooking fuels such as electricity. In the mission's view, charcoal and firewood will remain the main source of fuel for cooking in most households until 2000. Therefore, unless extensive programs are immediately undertaken in the affected provinces, these traditional fuels will become increasingly scarce and expensive with serious effects on low and middle income urban households. The mission recommends that ZESCO and the Zambia Oxygen Company (ZAMOX) 1/ should explore the possibility of implementing an effective program to encourage the use of electricity and LPG in urban households so as to further reduce charcoal and firewood consumption (4.11-4.13). xxiv. The mission supports the government's general approach to solve the woodfuel problem which includes: (a) promoting fuelwood plantation schemes such as the woodfuel project in areas surrounding Lusaka and the Copperbelt to supply charcoal burners and improve the supply of woodfuel *to the urban areas 2/ (2.31); (b) improving the traditional earthen kiln charcoal production methods, thereby reducing overall wood requirements for carbonization (2.34); and (c) encouraging ongoing research in the University of Zambia (UNZA) to improve the efficiency and affordability of the local charcoal stove, known as the Mbabula (2.35). xxv. However, it is necessary to strengthen and better define current projects for: (a) demonstration of improved charcoal kilns and stoves (6.16); 1/ The use of LPG should be encouraged only if the refinery remains in production. 2/ And also the supply of woodpoles for use in the mines.  - ix - (b) providing credit for small-holder tree farming schemes sited around the Forest Department's (FD) plantations to supply wood to the charcoal producers (6.16); and (c) reintroducing the short training course for "Ndunas" (volunteer forest guards), seconded by rural or district councils to improve forestry extension programs in the central province (6.15). xxvi. Other Energy Sources: The Government of Zambia (GRZ) has supported solar, wind and biomass research at the University of Zambia (UNZA) and the National Council for Scientific Research (NCSR) (2.36- 2.40). However, it is necessary to develop a technical unit for planning and implementing rural and renewable energy projects as part of the institutional framework for overall energy planning. In the mission's view, the Technology Development and Advisory Unit (TDAU) at UNZA, with some additional technical assistance, could effectively assume this role as it is currently involved in the design and adaptation of solar heaters and driers for agricultural products such as fish, vegetables, etc. It is also necessary that TDAU and UNZA should have sufficient funding to increase their competence in evaluating the economics of various technical options relevant to the energy needs in the rural and agricultural sectors (2.39-2.43 and 6.17-6.18). xxvii. Ethanol: IFC had agreed to finance a project to produce 11.5 million litres/annum of ethanol from molasses at a capital cost of about US$20 million. The ethanol would be blended with regular gasoline (87 octane) to substitute for premium gasoline (95 octane). This volume of ethanol could replace about 10.4% of premium gasoline demand by 1983/84 and about 9.5% by 1990. IFC's calculations for this project show an economic rate of return of 13% (2.45) and were based on the following assumptions: (a) 17,000 tonnes cf molasses, additional to 5,000 tonnes currently surplus, will be available and can be valued at zero opportunity cost; (b) the ethanol will save about 16% in refinery fuel/loss (consisting of 6% refinery fuel; 7% in LPG and 3% additional fuel savings); (c) future increases in the real price of naptha will be 2% per annum; and (d) that the ethanol will enhance the octane rating of regular gasoline by a ral:io of 1.3:1. Conditions in Zambia now are such that due to reduced gasoline consumption concerns have been expressed by the Government about the low level of gasoline production in the refinery and consequent inability to absorb ethanol supply. Therefore the decision to go ahead with this project has been shelved.  -x- xxviii. Pricing Issues: Prices for all forms of energy are controlled by the government and do not reflect opportunity costs. 1/ Kerosene and all other fuels used in the copper mines (coal, power, fuel oil) are subsidized. (a) Petroleum: Petroleum prices ex-refinery, marketers margins, transport costs and retailers margins are all determined by the government. In determining these prices the overriding factors are not the opportunity costs of these products but rather the revenue needs of the budget and the political and social desire to keep the prices of kerosene, diesel oil and fuel oil low. To achieve this the products are differentially taxed and cross-subsidies applied (5.02), resulting in price distortions. In the case of kerosene, the rationale for the subsidy is the assumption that this fuel is used mainly by the rural population although a significant quantity of kerosene is actually used in industries 2/ (3.07), where it replaces the relatively higher priced diesel oil. The subsidy 3/ on fuel oil was a concession to the mines who were compelled to switch from coal to fuel oil when the refinery was commissioned. Premium and regular gasoline and diesel oil are heavily taxed to compensate for the subsidy on fuel oil. A further problem is that since no pricing formula exists to adjust margins and retail prices to reflect cost increases at intermediate stages, the availability of petroleum products at places far from Lusaka at times is tight. In the mission's view, the basis of petroleum product prices needs to be examined in detail to correct these anomalies (5.08). The mission recommends that the subsidies, government taxes, and dealers margin on all products should be rationalized and wholesale prices ex- NOSCO 4/ should reflect the international supply/demand 1/ In late 1982 a decision was taken to "decontrol" all prices in the economy. The ZIMCO Board is now authorized to get economic prices for all products, subject to post facto review by the Prices and Incomes Commission. It is not yet clear what the full impact of this decision will be, although it appears that the new system should reduce substantially the delays in adjusting prices to reflect full costs. 2/ Such as the Broken Hill (Lead and Zinc) Industry and the Rokana Copper Smelting Operations. 3/ Even with this subsidy, fuel oil is still more costly than coal. The fuel oil subsidized price is about $160/tonne or US$0.58 per gallon. The delivered price of coal at the mines is about $60/tonne. Assuming that 1.6 tonne of Maamba coal is equivalent (calorific) to 1.0 tonne of fuel oil, the equivalent cost of coal is about US$0.35 per gallon. 4/ The National Oil Storage Company (NOSCO) is responsible for wholesale marketing of the refined petroleum products.  - xi - relationship between the products. Based on the relative import parity costs, the mission estimates that the wholesale price of premium gasoline and fuel oil should be about 95% and 72% that of kerosene respectively. Currently the wholesale price of premium gasoline is about 218% that of kerosene. (b) Coal: The production cost of coal is high due in part to the inefficiency and lack of proper management of the colliery. Coupled with the poor transport system this results in unnecessarily high delivered prices to consumers. For example, the mine-head cost of Zambia coal is about $47/tonne, whereas the delivered cost to the mines is $60/tonne. 1/ Unless these problems are resolved, the production cost: will further escalate and this could jeopardize any program for fuel substitution that involves coal (5.12). (c) Power: More as a result of political than economic exigencies, power tariffs have intentionally been kept low and do not generate enough finances to maintain and expand the system. ZESCO is currently selling power to the copper mines at about 40% below cost and although ZESCO estimates a surplus of $3 million from total power sales in 1981/82, a deficit is anticipated for 1982/83 (2.23). In order that ZESCO can be financially viable and operate at a profit, an increase in tariffs to all consumers is required. There is therefore a need for a detailed tariff study to determine the level of increase in tariffs that will allow ZESCO to fulfill its loan commitments to maintain an adequate return on assets, and the mission supports ZESCO's decision to commission such a study based on LRMIC for power distribution. 2,/ In the interim, the mission recommends a tariff increase (within Zambia) to all non-mining consumers and to CPC to generate funds to cover part of ZESCO's operating costs (5.17) and allow ZESCO to achieve a reasonable rate of return on its investments. The current rate of return of 4.8% achieved by ZESCO in 1980/81 is far below the 8% agreed between ZESCO and the Bank. Preliminary analysis made by the mission shows that based on the consumption level of 1980/81, ZESCO could realise about $26 million by increasing its tariff by 30% to all non-mining consumers and 40% to CPC. The government has completed a s tudy on export tariffs to Zimbabwe and negotiations have started between the countries on the 1/ This delivered cost is based on haulage by rail. The delivered cost is higher still with road haulage. 2/ ZESCO has awarded the cont:ract to Electricite de France.  - xii - appropriate increase of these tariffs. 1/ The increase in the export tariff requires careful negotiation since it will affect future joint development of the Zambezi by the two countries. If the tariff is too high, Zimbabwe may stop importing power and develop thermal plants using its vast coal resources. If the tariff is too low, Zambia will find it difficult to meet its financial commitments and maintain its power system. (d) Charcoal: Although the Government controls and sets wholesale prices, it is unable to enforce them. The "controlled" prices do not take into account the charcoal market supply/demand situation. For example, controlled prices have declined in real terms from US$2.45 per 40 kg. bag in 1976 to about US$1.52 per 40 kg. bag in 1982. 2/ The actual wholesale prices, although different from the controlled price, reflects the market situation and high transport costs. The current wholesale prices are about 50% above the controlled price. The mission recommends that GRZ review the basis for its controlled wholesale price, with particular reference to transport costs and the objective of developing financially viable wood plantations close to major markets such as Lusaka (5.21). xxix. In the mission's view, the need for a rationalized pricing policy involving all energy resources (coal, power, woodfuel and petroleum products) is urgent. Current pricing policies have caused major distortions and inefficiencies in the energy sector. Although the copper mines seem to be benefiting from these policies (through subsidized fuel oil, coal and electricity), various other energy resource-producing and distributing companies (ZESCO, Maamba Colliery, etc.) are financially weak and are unable to operate efficiently, and risk further deterioration in their ability to satisfy energy demand. The mission recommends that new investments should not be implemented in the energy sector until the pricing policy is revised to ensure that the price of resources reflect their economic costs. xxx. Organization and Planning: In the mission's view, GRZ's objective in creating the National Energy Council (NEC) is sound, and demonstrates its commitment to energy planning. NEC's role is to review and formulate national energy plans of action; identify investment requirements and allocations; and provide directives on policy 1/ This study was done by the consulting firm of Landell Mills Associates Limited which is based in Lusaka, Zambia. 2/ In current dollars the controlled price was $2.45 in 1976 and US$3.00 in 1982 per 40 kgs. bag. However the market price was $3.50 in 1976 and $4.80 in 1982 per 40 kg. bag.  - xiii - instruments such as energy prices, tax provisions, and subsidies. The mission recommends that NEC be supported by a small full-time technical secretariat and also that NEC's effectiveness be reviewed on a regular basis, at least once a year, to ensure that it is meeting the needs of the sector. xxxi. The secretariat to NEC would take over the current responsibilities relating to energy planning and development in the country. Its terms of reference should cover preparation of an energy plan of action including: (i) a five-to-ten year investment program and its tentative sources of financing; (ii) assessment of external financing and technical assistance requirements; (iii) assessment of the energy impact of developments in other sectors such as mining and transport; and (iv) assessment of local manpower development and training needs in the overall energy sector. xxxii. Financial and manpower assistance for the secretariat could be covered under an external technical assistance program. Other energy related institutions should continue with their responsibilities for implementing programs relevant to their ministries and should be responsible for translating the national energy plan into specific action programs. The NEC should be responsible for monitoring the progress of these other agencies to ensure that the work is consistent with the national energy program. xxxiii. Investment Implications: In the short term (1982-85), the following investments in the energy sector are critical to upgrade the efficiency and capabilities of existing system (7.03). These are estimated at about $110 million and include: (i) $40 million for ZESCO to purchase spare parts to rehabilitate the power distributing system; 1/ (ii) $30 million to rehabilitate and continue maintenance of the Maamba Colliery; (iii) $16 million for woodfuel projects; (iv) $10 million in the railways; 1/ ZESCO has recently applied for a $50 million loan from the Bank for system rehabiliation.  - xiv - (v) $10 million for technical assistance and manpower development programs; and (vi) $1 million for the refinery modification study. Although not critical for meeting energy demands the following other finances ($90 million) will be needed: (i) about $37 million for ZESCO to pay outstanding bills; also ZESCO estimates that it needs over $50 million for on-going projects including the installation of a 330 kv line between Kabwe and Serenje, as part of its rural electrification program and (ii) $5 million in the copper mines for continuing the conversion of diesel using equipment to use electricity. Summary of Major Recommendations xxxiv. The major recommendations to develop domestic energy supplies, improve demand management (conservation and fuel substitution), and strengthen energy sector institutions are: Short Term (1) Fuel Substitution and Reduction of Petroleum Imports (i) assess the economic and technical feasibility of substituting coal and/or electricity for fuel oil in copper mines (4.09); (ii) assess the optimal configuration and feedstock characteristics of the refinery (2.12) and the economic implications of; (a) increasing the spiking component of the feedstock; (b) closing the refinery and importing refined products directly; (c) modifying the refinery to reduce or eliminate fuel oil production and maintain or increase production of middle distillates; and (iii) rationalise petroleum, coal and power prices to encourage fuel substitution and a more economic consumption pattern of energy resources (5.22).  - xv - (2) Improvement of Supply System (i) reduce power transmission and distribution losses through improved management and maintenance of the system (3.13). 1/ (ii) study aLnd execute improved operations in coal production at the Maamba Colliery (2.27); (iii) improve the transport system for hauling coal and petroleum products (3.18); (iv) promote exploration of petroleum (2.01); and (v) introduce reforestation programs in areas surrounding Lusaka and Copperbelt markets for charcoal production (2.29); strengthen institutional support for development of renewable energy resources such as solar, wind, biogas (2.36 - 2.43); and (3) Institutional/Organizational (i) strengthe!n the National Energy Council (NEC), by providing it with a small technical secretariat, and giving it the sole responsibility for energy sector planning (6.03); (ii) study and institute an effective organization for charcoal production and marketing (6.16); (iii) review the role of institutions in the power sector particularly CAPC and CPC (6.07) and decide on the future role all these institutions will play in the development of the Zambezi River's hydro potential; and (iv) develop and provide a technical assistance program for training and developing expertise in the energy sector (6.19). Long Term Improvement of Supply System (i) study and execute the least cost option for expanding power capacity in Zambia beyond 1995 (2.23); 1/ The mission recommends that. Zambia should be included in the proposed UNDP power loss study project as a priority country.  - xvi - (ii) prepare a comprehensive the rural electrification program and decide on its implementation (3.16); (iii) promote coal exploration to assess the country's overall potential (2.24); and (iv) continue with hydrocarbon exploration and development if preliminary work appears encouraging (2.01).  CHAPTER I ENERGY IN THE ECONOMY Overview 1.01 Zambia, located in South Central Africa, is landlocked between Angola, Mozambique, Malawi, Tanzania, Zaire and Zimbabwe. It has a total area of 752,600 square kilometers and a population of about 5.65 million (1980 estimate) which is growing at about 3.3% per annum. About 40% of the population is urbanized. The most populous of the eight administrative provinces are the Copperbelt and Central provinces, where internal migration has been towards urban centers. (IBRD Map 16370). 1.02 Before 1965, nearly all of Zambia's energy supplies originated from, or were transported through, what is now Zimbabwe. Petroleum products were shipped north by rail from the Feruka Refinery near Umtali while coal for both industrial use and power generation was shipped by raii from the Wankie coalfields. Except for limited quantities imported from Zaire or generated locally, electricity was supplied from the Kariba South complex on the Zambezi River between Zambia and Zimbabwe. Since 1965 Zambia has moved from complete dependence on energy imports to a high degree of self-sufficiency. Zambia has a large surplus of hydro- power and is currently a nel: exporter. However, it is still totally dependent on imports for its petroleum needs. 1.03 Mining remains the dominant influence in Zambia's economy and currently copper is the main foreign exchange earner. Events during the past decade have emphasized Zambia's vulnerability to regional economic and political disruptions. During this period, political instability, particularly in Zimbabwe and Mozambique, the continuous fall in copper prices 1/ and rising copper production costs (15-20% per annum) 21 have adversely affected the economy. The Government is concerned about this and recognizes that, along with diversification of the economy to lessen Zambia's dependence on copper mining, improvements in the energy and transport sectors are also necessary. 1/ The average price of copper in 1981 was ZK1,554 per tonne (US$1,865 per tonne) as compared to ZK1,692 per tonne (US$2,030 per tonne) in 1980, representing a decline of 8.2%. Copper earnings for 1981 were ZK840 million (US$1 billion) as comupared to ZK884 million (US$1.1 billion) in 1980. Foreign exchange earnings in 1981 were ZK943 million. In 1980 the copper mining contributed approximately ZK41 (US$49 million) to Government revenue. In 1981 contributions to revenue budget were ZK1 million (US$1.2 million). 2/ Over 2/3 of direct or indirect copper production costs are in foreign exchange.  - 2 - 1.04 Zambia's indigenous energy resources are hydropower, coal and woodfuels, but a significant proportion of commercial energy is from coke and oil imports. In 1981, 17.8% of total energy was imported, with petroleum accounting for 16.5% and coke for 1.3% (Table 1.2). 1.05 Zambia has become increasingly concerned about the high cost of imported petroleum products. Between 1976-1980, while the total volume of petroleum imports declined by 1.7% per annum (from 732 thousand metric tonnes (kmt) in 1976 to 683 kmt in 1980), the cost of petroleum imports increased by over 115% (from ZK 72 million to ZK 155 million). In 1981, the import bill for the 683 kmt is estimated at US$240 million, or 17.9% of total imports and 19.4% of merchandise exports (Annex Table 1.1). As a consequence of declining exchange earnings and high petroleum import costs, the balance of payments deficit on current account has averaged about 7% of GDP during 1976-1980 and was 20% of GDP in 1981. GDP has declined by 2.2% per annum over the past five years and in 1980 was 10% lower than its peak in 1976 (Table 1.1). Improvements in the energy sector will therefore play an important role in improving economic growth prospects. Table 1.1: GDP by Selected Economic Sectors - 1976-80 (in 1970 ZK million) Economic Activity 1976 1980 Growth % per annum (1976-1980) Total GDP 1,500 1,370 -2.2 Agriculture, Forestry and Fishing 167 156 -1.6 Mining 494 392 -5.6 Manufacturing and Commerce 152 154 0.4 Electricity Gas and Water 53 67 6.3 Construction 100 79 -5.6 Transport and Communication 67 65 -0.9 Source: Government of Zambia, National Accounts Estimates, 1976-81.  -3- 1.06 Although Zambia's energy problems have been worsened by the situation in the mining sector and rising petroleum import bills, they are largely related to inadequate planning, skilled manpower and management expertise and an ineffective energy policy. These factors have resulted in problems over most of the energy sector, including petroleum refining, coal mining, railway transport of fuels, pricing of energy resources, conservation, and power distribution. As a step towards improving this situation, the goverrment created a National Energy Council (NEC) in April 1981 to provide advice on developing an effective energy policy, Lncluding identifying energy issues, establishing priorities to resolve these issues and preparing an action plan. Energy Demand 1.07 Generally, the demand for energy in Zambia is dependent on: (a) the needs of the copper mining sector; (b) conservation and fuel substitution policies in copper mining; (c) income growth in the economy; (d) the structure of energy prices; and (e) the availability of foreign exchange, which is largely dependent on the situation in copper mining. 1.08 Hydroelectricity is the main source of energy, accounting for about 58% of total commercial energy demand. Between 1976 and 1980 this demand increased steadily while demand for coal and petroleum products declined. In 1981, total energy demand amounted to 4.5 million toe (Table 1.2). This was due largely to the needs of the copper mining sector which in 1981 consumed over 74% of the electricity, 52% of the coal, and 37% of the petroleum products (mainly fuel oil and diesel oil). Although the production of copper is expected to be constant for the rest of this decade (at about 600 km tpa), the consumption of power by the mines will increase due to mining of deeper and relatively lower grade ores (3.28). Except in the agricultural and service sectors, energy demand in the rest of the economy has been declining. This is due to the continuous decline in the earnings of the copper industry since 1975, which has led to a shortage of foreign exchange and a curtailment of activities in such sectors as industry, construction, manufacturing and transport.  - 4 - Table 1.2: Energy Demand by Source 1981 Source '000 TOE 1/ % Imports Petroleum 748 2/ 16.5 Coke 60 1.3 Sub Total 808 17.8 Indigenous Hydropower 1,365 3/ 30.4 Coal 274 6.1 Bagasse 48 1.1 Woodfuel: Charcoal and Firewood 2,000 4/ 44.6 Total 4,495 100.0 1/ 1 toe = 39.68 million Btu. 2/ Including exports and refinery fuel own-use/loss. 3/ Excludes exports to Zimbabwe (of 3,347 Gwh or 840 thousand toe, using conversion factor of 10,000 Btu = 1 Kwh.) 4/ Based on 0.85 m3 per capita consumption; and a conversion factor of 11.3 toe per m3 of wood. Sources: Zambia Economic Report 1980; Indeni Refinery, ZNEL. 1.10 Per capita electricity consumption in Zambia is about 900 kWh per annum (pa), inclusive of mining sector requirements. This figure drops to only 172 kWh capita/pa when mining is excluded. Access to electricity is still mainly limited to large urban areas; hence fuelwood, and some kerosene, is used for cooking and lighting in rural households. The government has embarked on a rural electrification programme: (i) as a means of replacing isolated diesel generating units; and (ii) extending services to other areas (3.14). 1.11 Cultivation practices in agriculture are still mostly tradi- tional and non-mechanized, hence not particularly energy intensive. The government is planning to establish twenty large commercial state farms of 20,000 hectares each over the next ten years in the rural sector. 1/ So far the implementation of this plan has been slow. If the 1/ The mission believes this timetable and plan is optimistic. In the last two years only one of such farm has been established through external aid from East Germany and it is about 600 hectares in area.  -5- farms are successful, energy use in agriculture will increase. Currently the commercial agricultural sector consumes mainly diesel oil for tractors and transport vehicles. :1.12 Petroleum products and coal are the main fuels used in the industrial sector. The demand f-or power in this sector is small at about L8% of total power consumption. In 1975 energy demand in the sector was equivalent to 16.7% of total energy use but due to economic stagnation, this demand fell to 15.0% of tot:al energy use in 1980. This situation is expected to improve because of some anticipated investment in the industrial sector particularly in the fertilizer, woodpulp and cement industries. 1L.13 Commercial energy consumption in the transport and services sectors (mainly petroleum products) grew from 180,000 tonnes in 1976/77 to about 240,000 tonnes in 1980/81. This growth was attributed to the increased use of truck haulage for goods, particularly coal, rather than railways which have declined rapidly in efficiency due to lack of spare parts and proper maintenance. Air services in Zambia have improved. Currently there are about 150 local airports and 2 international airports, at Livingston and Lusaka. The services sector now contributes Up to 6.5% of GDP. 1.14 The general pattern of commercial energy consumption shows a strong dependence on imported petroleum products with a small increase in demand for indigenous resources such as coal or electricity. Table 1.3 shows the sectoral pattern for energy consumption in 1980/81 while Table 1L.4 shows the energy supply/demLnd balance for FY 1980. Table 1.3: Sectoral Pattern Of Energy Consumption (1980/81) (percent) 'ector Petroleum Coke Coal Electricity Woodfuel Bagasse Mining 37 100 52 74 6 - Industry 18 - 48 18 - 100 Transport 35 - - - - Agriculture 1 - - n.a. 1/ - - Others (includ- ing households) 9 - - 8 94 - TOTAL 100 100 100 100 100 100 l/ Power demand in this sector is insignificant because of the small economic size of agrobased industries. Source: 1. Zambia National Energy Limited (ZNEL). 2. Dept of Forestry and ZESCO.  - 6- Investment in the Energy Sector 1.15 Between 1976 and 1980 no major investments were implemented in the energy sector except for the development of the rural electrification projects. Investment for rural electrification amounted to ZK 31 million (US$37.2 million) in 1981/82 and another ZK 20 million (US$ 24 million) has been earmarked for 1982/83. 1.16 Currently the country is faced with the serious problems of maintaining its energy production and distribution systems efficiently. This is the crux of the energy problem in Zambia and this has been exacerbated by the shortage of foreign exchange. Although Zambia has adequate installed capacity in the power sector to last till 1995 (3.12), and enough proven coal reserves to last it for the next 80 years at the current production rate, (2.24), major funding is needed immediately in the power and coal sectors to purchase essential spare parts for maintaining the equipment. This is estimated at over $70 million ($40 million in the power sector and about $30 million in the coal sector). The transport sector, particularly the railways, is also in disrepair and mismanaged resulting in underutilization and inefficiency. Investment requirements for upgrading the railways are estimated at up to $10 million.  Table 1.4: Zambia: Energy Balance 1980/81 ('000 toe) TOTAL COMMERCIAL PETROLEUM COAL COKE ELECTRICITY EN'ERGY FOIELWOOD 1/ BACASSF TOTAT, 1. Primary Supply Production - 366 - 2574 3/ 2958 2000 32 4q9n Imports 748 2/ h - 808 - - 808 Total 748 366 60 2574 3866 2000 32 5798 2. Transformation Refining 748 - - Power Generation -13 4/ 4.0 Refining Losses -44 5/ Export -47 -840 3. Total Supplies 644 366 60 1738 2808 2000 32 4840 4. Transmission and Distribution Losses -348 6/ 5. Net Supply to Consumers 644 366 60 1390 2460 2000 32 4492 6. Final Consumption Mining 238 192 60 1030 1520 120 - 1640 Industry/Commercial 116 174 - 250 540 - 32 572 Transport 225 - - - 225 - - 225 Agriculture 6 - - - 6 - - 6 Others/Households 59 - - 1l1 169 1880 - 204Q 7. Total 644 366 60 1390 2460 2000 32 4492 1/ Based on 0.85 cu. meter per capita consumption; and a conversion factor of 0.3 toe per cU. meter of wood. 2/ Spiked petroleum imports consist of 57% Arabian Light Crude and 43% spikes consisting of 8% Naptha, 12% kerosene and 28% diesel oil. 3/ 1 Cwh = 252 toe; 10,000 BTU/Ywh. 4/ Metric tonne of diesel oil equals 44.34 x 1o6BTTJ. 5/ Refining losses equivalent to 6% of total input. 6/ Transmission and distribution losses at 20% of total Zambia Consumption excluding exports.  -8- CHAPTER II ENERGY RESOURCES AND SUPPLY A. PETROLEUM Indigenous Potential 2.01 Zambia has no known petroleum deposits. However, there are four sedimentary basins, the largest of these being the Western Zambia (Barotse) Basin, which covers about 150,000 sq. km in Western Zambia and extends into neighboring Botswana and Angola. In total, this basin appears to cover some 400-500,000 sq.km. but because of its landlocked location with poor access, it remains one of the largest sedimentary basins in the world in which there has been no seismic or drilling exploration to date. It is therefore difficult to assess its petroleum potential, but the possibility of finding oil or gas cannot be ruled out and the Bank has recently made a loan to the GRZ for promoting hydrocarbon exploration in the Barotse basin. 1/ Petroleum Supply 2.02 The following procedures for obtaining petroleum products in Zambia seem to work well: (i) crude oil 2/ and refined products are bought by major international companies, currently CALTEX, on behalf of the Ministry of Power, Transport and Communication (MPTC), who arranges shipping from the Persian Gulf to Dar-es- Salaam. The Zambia National Energy Limited (ZNEL), a wholly owned subsidiary of Zambia Industrial and Mining Corporation Ltd. (ZIMCO), acts as the government's agent in day-to-day dealings; (ii) the transport of crude oil from Dar-es-Salaam to the refinery in Ndola is handled by Tazama Pipelines Limited, a company jointly owned by the Governments of Zambia (67%) and Tanzania (33%). The Tazama pipeline has a total length of 1,704 km and in addition there are six loops with a total length of 769 km. The pipeline can hold 117,104 cubic meters of product and was originally installed to transport refined products. 3/ In 1981, the 1/ Zambia Petroleum Exploration Promotion Project, Report No. P-3206-ZA, Loan No. 2152ZA, Amount US$6.6 million. 2/ The refinery feedstock consists of 34 API Light Arabian Crude Oil spiked with gas oil, kerosene and naptha. 3/ The pipeline can be reconverted to handle refined products.  cost for transporting the crude through the 1,704 km pipeline was US$19.80/long ton. The company employs about 500 persons, including 10 expatriates and 275 Tanzanians. However, the company has to deal with: (a) lack oif foreign exchange to buy spare parts and pay salaries of the Tanzanian staff; (b) high corrosion due to the acidic soil around the first 300 km which has caused pipeline leaks in the past (ZIMCO indicates that this problem has recently been alleviated through replacement of affected portions and improved cathodic protection); and (c) costly and inadequate supply of diesel oil to the pumps; there are seven diesel-fired booster stations on the pipeline. Attempts are being made to convert these pumps to operate on crude oil and thereby eliminate fuel transport costs. This could save on operatiLon costs as the crude oil would be tapped directLy from the pipeline; (iii) refining is done by the INDENI Petroleum Refining Company Ltd. (INDENI refinery), which is jointly owned by ZIMCO (50%) and ACIP (50%). The refinery currently operates on a cost plus fixed dividend (12% of share capital) basis 1/ and supplies the petroleum products needs of Zambia except those imported directly by the marketing companies. 2/ (iv) the storage of refined products is handled by the Ndola Oil Storage Company (NOSCO), a wholly owned subsidiary of ZNEL. 3/ NOSCO also handles the sale of the refined products on behalf of ZNEL to oil marketing companies at government controlled prices (5.01); and (v) distribution and retail sales are handled by local affiliates of five international oil marketing companies - Shell/BP, AGIP, Mobil, CALTEX and Total. 4/ 1/ On this basis, the refinery always receives the 12% dividend. In 1980, after tax return on the share holder funds over the last three years was 18.3%. 2/ These include lubrication oil, aviation fuel, greases, etc. 3/ Before 1982, NOSCO was jointly owned by the oil marketing companies in Zambia. 4/ The total market is about 16,000 barrels per day of refined products. The market shares of the companies are - Shell-BP 62%, AGIP (marketing) 16%, Mobil 10%, Caltex 6%, and Total 6%. As of early 1983, Shell is no longer represented.  - 10 - INDENI Refinery 2.03 The INDENI refinery is located at Ndola in the north-west section of the country, about 600 km from the border with Tanzania, and about 320 km north of Lusaka (IBRD Map 16371). It came on stream in April 1973 and is operated by AGIP under a management contract. It employs 385 persons, about 24 of whom are expatriates. This staffing appears excessive for a refinery with a capacity of 25,000 barrels per stream day (bpsd) or about 1.1 million tonnes per annum (tpa), although some is explained by the fact that the refinery also has to supply many ancilliary services because of its location. 1/ The refinery process units consist of a primary distillation unit with a capacity of 1.1 million tpa; a hydrotreater with a capacity of 354 kmtpa; a reformer with a capacity of 220 kmtpa; a vacuum distillation unit with a capacity of 120 kmtpa; and an asphalt plant with a capacity of 10 kmtpa. 2.04 The current refinery feedstock and production slate are shown in Annex Table 2.1. From the refinery designed production slate (Table 2.1), it seems that the refinery was designed either to produce a surplus for export to neighboring countries or that Zambia's demand was expected to increase rapidly, particularly its consumption of fuel oil. 2/ Unfortunately, neither has materialized. Consumption of fuel oil has decreased to about 170,000 tonnes per annum against anticipated consumption of 275,000 tonnes per annum, while between 1977 and 1981 exports of petroleum products (mainly diesel oil, jet fuel and gasoline) declined by about 33% per annum (from 70,000 tonnes in 1977 to 14,000 tonnes in 1981 (Annex Table 2.2). This decline is attributable to the poor economic conditions in the region, particularly in Malawi and the mining industry in Zaire. Total petroleum demand in Zambia has declined by 1.7% per annum since 1976 (3.01) and currently there are efforts to further reduce demand by eliminating fuel oil production since the mines (the main consumer of fuel oil) consider other fuels such as coal and electricity cheaper for their copper smelting operations in the long run. 3/ 1/ Current production is about 16,000 bpsd and in 1981, total amount of crude oil refined in 1981 was about 750,000 tonnes. 2/ The refinery was designed to process Iranian Light (Agha Jari) crude oil spiked up to 25% of the feedstock with naptha (8%) and diesel oil (17%), to match changes in market needs. Currently the refinery processes Arabian Light crude oil and increases in the demand for light products and reduction in fuel oil are accommodated by increasing the level of spikes in the refinery feedstock. So far, this has ranged from 40-50% of the refinery feedstock or about 15-25% above the design basis and this has increased the cost of the feedstock. In 1981 the spiking level was 43% of the feedstock but the refinery can process up to a 55% spiking limit. The spiking is necessary in that if the refinery were to run whole crude oil to meet the demand for middle distillates, it would produce large surpluses of fuel oil which would be more than the country could absorb. 3/ Current fuel oil consumption by the mines is expected to decline further to 110,000 tons in 1983.  - ii - Table 2.1: Refinery Design Yield Product '000 tonnes/Year % of Yield Fuel gas 24 2.2 LPG 22 0.2 Gasoline 230 20.9 Kerosene 74 6.8 Gasoil 360 32.7 Fuel Oil 328 29.8 Asphalt 20 1.8 Refinery Fuel 28 2.5 Refinery Losses 14 1.3 Total 1,100 100 Source: INDENI Refinery 2.05 With respect to the refinery, the major issues are as follows: (a) Currently the refinery capacity is underutilized due to the overall decline in consumption and the pattern of petroleum demand mix in the country. Any further decline in consumption will increase the level of underutilization of the refinery 1/; (b) considering the level of refinery utilization the processing cost is high (about $2.30 per barrel). Also the refinery's own fuel use is about 6% of total refined crude which is high, and close to double the rate in similar refineries elsewhere 2/; and (c) the refinery does not have secondary conversion process units that would permit the product yield pattern to be 1/ For the past nine years thie average throughput has been 65% of design capacity and at no time has the refinery operated at more than 74% of its design capacity. 2/ Industry experience of fuel use in refineries with a similar configuration is about 3.5% to 4%. In 1981, refinery fuel use amounted to about 350,000 bbls of input feedstock or about $12 million in import cost. Reduction of refinery fuel use to about 4% could save over $4 million in foreign exchange armnually.  -12 - changed to accomodate different types of crude oil throughput or a reduction in the ratio of fuel oil to middle distillates produced except by increasing the spiking level of the crude feedstock. 2.06 A decision on the refinery cannot be made without full account being taken of the fuel substitution programs to be implemented in the copper mines (4.02 - 4.08), and the impact that such substitution will have on the energy product demand mix in the country (3.26). However, a variety of options are available for eliminating or reducing fuel oil produced by the refinery. 2.07 These options are: (a) increasing the level of spiking in the refinery feedstock, (if necessary) above the current level of 43%, which is within the refinery tested spiking limits of 55%, provided that total throughput of the refinery is not less than 660,000 tonnes of spiked crude, and the total distillate products from the spiked crude is no more than the design limits of the crude unit. (b) closing down the refinery and importing refined petroleum products through the Tazama pipeline; and (c) upgrading and modifying the refinery to produce less fuel oil and more middle distillates. 2.08 Ability to increase the spiking level of the refinery feedstock is dependent on the refinery turn down ratio (TDR) which is 60%, implying that the quantity of spiked crude oil must not be less than 60% of the refinery designed capacity of 1.1 million tonnes (or 660,000 tonnes). As long as this constraint is satisfied, and total distillate yield does not exceed the design capabilities of the refinery, tests have shown that the refinery can operate at a spiking level of up to 55% of feedstock. Beyond this spiking level some modification of the refinery (such as installing a prefractionating column at a cost of $10-15 million) will be necessary. Therefore as long as the spiking level does not exceed 55% for a minimum quantity of 660,000 tonnes of refinery feedstock and the distillate yeilds are not exceeded, option (a) does not involve any investments in the refinery. Increasing the spiking level at the refinery will enable it to meet modest increases in the demand for middle distillates without increasing the supply of fuel oil. Table 2.2 shows: (a) the trend of the refinery production slate (of selected refined petroleum products) for different levels of spiked refinery feedstock; and (b) the projected demand for petroleum products in 1985 (3.26). 1/ 1/ Petroleum demand has been projected under two economic growth scenarios. The high growth scenario assumes a growth of the economy of 3.2% per annum and the low growth assumes a growth of 1.8%. The values in Table 2.2 are for the high growth scenario without any fuel substi- tution in the mines.  - 13 - It seems that demand in 1985 can be met with modest increases in the spiking level of the crude without any modification in the refinery. 1/ The spiking level could even be increased beyond the current limit of 55Z with more technical modifications. However such piecemeal modifications could further increase the fuel used in the refinery. This method is therefore only recommended as a short-term arrangement. 2.09 Option (b) will mean that the mines (and other users) will have to use coal or electricity instead of fuel oil, which was the situation before the commissioning of the refinery in 1973/74. Based on 1980/81 product consumption and other things being equal, preliminary analysis (Annex Table 2.3), shows that estimated foreign exchange savings through direct import of essential refined petroleum products is about $40 million annually. However, when allowances are made for the imported cost of products (such as bitumen $2-5 million) and aviation kerosene ($3-8 million) that cannot be cleanly transported through the pipeline, the overall foreign exchange savings will be reduced to $27-35 million annually. 2/ 2.10 However to implement this option, the following investments are necessary: (i) $1 million t:o reconvert the pipeline to transport clean products; (ii) $2-5 million for storage facilities at Ndola for refined products. Current storage facilities can handle 30-60 days supply of crude and these may be converted to handle refirned products. (iii) depending on the fuel substituted about $39-50 million will be required in the copper mines, the Maamba Colliery, the railway and the power sectors (4.08). 2.11 Option (c) will also require the mines to use coal or electricity and will also imply the investments noted in (iii) under option (b). However, the refinery modification, which will cost $80-120 million (depending on whether a simple hydrocracker unit, a hydrocracker plus desulphurizer unit or another conbination of units is installed), would enable the refinery 1:o reduce the level of spiking of refinery feedstock and provide flexibility for using different types of crude oil. 3/ Although capital intensive, this option will result in savings in 1/ The 1985 projected demand is similar to the 1979/80 consumption figures during which the level of the spikes was 48X as compared to 43% in 1980/81. 2/ The local cost of the fuels substituted would be about $15 million for coal and about $2 millioni for electricity. 3/ The refinery could also be modified (without fuel substitution by the mines) if it is shown to be viable to process whole crude (rather than spiked crude) to produce the same product mix as at present.  - 14 - import bills estimated at about $26-40 million per year. 1/ The overall savings to the economy will be less than this due to the local cost of substituted fuel (2.09). Table 2.2: Comparison of Refinery Production Slate at Different Spiking Levels with Projected Demand for 1985 1/ (Amount in '000 metric tonnes) Selected Refined Projected demand Products 1974/75 1976/77 1979/80 1980/81 for 1985 Gasoline 175 182 129 115 129 Kerosene (Aviation) 39 52 70 65 69 Kerosene (Illumination) 19 25 29 29 34 Diesel Oil 341 364 296 276 294 Fuel Oil 176 180 167 172 159 Bitumen 5 7 8 8 10 Total 755 810 699 665 695 Spiking Level of Feedstock % 43 49 48 43 50 2/ 1/ 1985 demand is based on the high growth scenario with no fuel substitution in the mines. 2/ Mission estimates. Source: Annex Tables 2.1 and 3.6. 2.12 For the short term, the mission favors option (a) because it is the least complicated and does not require any immediate major investments. Secondly, it provides breathing space for Zambia to re- evaluate the costs, benefits and implications of any fuel substitution 1/ Preliminary estimates by Industry Department, World Bank.  - 15 - evaluate the costs, benefits and implications of any fuel substitution option to be implemented in the mines (4.08). Further if the possibility of finding oil in Zambia becomes greater (through current exploration work) then Zambia may need the refinery to process it while if gas is found in commercial quantity, it could be used to substitute for petroleum products in the mines. However for the longer term, Zambia should plan for substituting other fuel, such as coal or electricity, for fuel oil in the mines while proceeding apace with hydrocarbon exploration (2.01). If no oil is found within say 3-6 years, the economics of continuing to keep open the refinery should then be re-evaluated. The government has recently initiated a refinery modification study, which the mission supports, to determine the least cost option in the long term to supply the liquid fuels to the country. The study will also evaluate the need for modifying the refinery and the implications of any modification of the refinery will have on the fuel needs of the mines and the country's petroleum demand mix. 1/ B. ELECTRICITY 2.13 Zambia has substantial hydropower resources, and currently maintains excess power generating capacity. An overall country-wide survey of total hydroelectric potential has not been done, but a survey by a firm of consultants for ZESCO in 1975/76 identified some additional hydro sites and estimated Zambia's potential reserves at 3,924 MW and 21,406 GWh per annum (Annex Table 2.6). The country is drained by two major river systems, the Congo and the Zambezi. The Zambezi and its major tributaries cover about 75% of the total area of Zambia. Tributaries of the Congo river, and other smaller rivers within the internal drainage system of Lake Rukwa (Tanzania), cover the remaining area (Table 2.3). Table 2.3: River Systems in Zambia Main Basin 1/ Rivers Approximate Catchment Area in Zambia. (000 sq. km.) Zambezi Zambezi 170 Kafue 96 Luangwa 62 Lurisemfwa 27 Chambezi 32 Congo Luapulu 64 1/ Lake Rukwa and Lake Tanganyika have catchment areas of 482 km2 and 10,136 km2 respectively in Zambia. 1/ Refer to IBRD Report Nc. P3187-ZA: INDENI Refinery Modification Engineering Project.  - 16 - 2.14 Electricity supply in Zambia is well developed with about 1771 MW of installed capacity. This consists of 1,641 MW of hydro and 130 MW of diesel operated thermal plants (IBRD Map 16374). Table 2.4 shows the existing capacity on the inter-connected system. This system is interconnected with those of Zimbabwe and Zaire. Existing Facilities 2.15 The major hydro sources on the Zambezi and its tributaries within Zambia are the Kariba North Power Station (600 MW), the Kafue Complex (900 MW) and the Victoria Falls (108 MW). The combined Zambia and Zimbabwe estimated power potential of the Zambezi river totals 39,600 GWh (or 9.3 million toe) annually, out of which 10,800 GWh (2.7 million toe) per year is currently exploited at the Kariba Complex and Victoria Falls. There are also wasteheat plants and gas turbines used as stand-by in the mines and 11 diesel power plants and 4 small hydro stations in the rural areas. 2.16 (i) Kariba Hydroelectric Complex: The Kariba hydroelectric complex on the Zambezi consists of the Kariba Arch Dam and two power stations, Kariba South in Zimbabwe (with an installed capacity of 666 MW) and the North Bank Power Station in Zambia (with an installed capacity of 600 MW). The Kariba Arch dam was built between 1955 and 1960, Kariba South Power Station was commissioned between 1960 and 1962, and Kariba North Power Station between 1976 and 1977. There are six generating sets of 111 MW each at Kariba South and four sets of 150 MW each at Kariba North, giving a total installed capacity of 1,266 MW. The total firm energy generating capability of the complex is taken in the agreement between Zambia and Zimbabwe as 10,000 GWh/a. Under the current arrangement, total installed capacity and energy output from both stations is shared equally between the two countries; each is entitled to 633 MW or 5,000 GWh/a. In 1980/81, 8,016 GWh were generated at the Kariba complex but total energy produced from the three main hydro sources in Zambia (Kariba North, Kafue and Victoria Falls), was 9,038 GWh or 96% of total generation. During the same year Zambia exported about 3,347 GWh to Zimbabwe. 1/ 1/ This figure of 3,347 GWh was given by ZESCO. The power sharing agreement between Zambia and Zimbabwe stipulates that the power output of the Kariba Complex (10,000 GWh) be shared equally among them. In 1980, the complex generated 8,016 GWh. Zimbabwe believes its share to be 5,000 GWh. If this basis is used, then Zimbabwe's 1980 imports would amount to 1,756 GWh, (out of the total consumption of 6,756 GWh). However, Zambia considers that Zimbabwe's share of generation is about 4,008 GWh and therefore the exports to Zimbabwe is about 2,748 GWh (using Zimbabwe's power consumption figures) although ZESCO maintains that total power export to Zimbabwe in 1980 was 3,347 GWh. The current power sharing agreement (which expired on July 31, 1981, but remains in force until a new agreement is signed), provides the settlement of imports on the basis of 400 MW guaranteed (plus 100 MW when available). The future power sharing basis between these two countries will be negotiated in the general context of the development of the Zambezi River and would determine the precise volume of electricity exports to Zimbabwe.  - 17 - Table 2.4: Existing Generating Plant In Zambia on the Interconnected System Installed Capacity Available Energy sent out MW GWh/a Hydro Plant Kafue Gorge 900 5256 Kariba North 600 1/ 4205 2/ Victoria Falls 108 757 Sub-total 1608 4/ 10288 Thermal Plants (Industrial) Waste Heat Rokana ) Luanshya ) Mufulira ) 50 3/ 70 Gas Turbine Luana ) Bancroft ) Kankoyo ) Maclaren ) 80 3/ Total 1738 4/ 10288 1/ Total entitlement from the Kariba Complex is 633 MW. This consists of 600 MW installed capacity at the Kariba North bank power station and 33 MW entitlement from the Ka.riba South Bank power station. 2/ Effective output as indic:ated by CAPC 3/ Installed for emergency operation; hence not considered as an effective contribution to the system. 4/ Considering the total entitlement of 633 MW from the Kariba Complex, the hydro plant installed capacity for Zambia is 1641 MW and the total installed capacity is 1771 Mi. Source: ZESCO, CPC and Annex Table 2.7.  - 18 - 2.17 (ii) Kafue Gorge Complex: Stage I of the Kafue Gorge Scheme, comprising of four sets of 150MW capacity each was completed in 1972. Stage II, which included the construction of an upstream storage reservoir at Itezhitezhi and the installation of two sets of 150 MW capacity each at Stage I was completed in 1977 and brought total capacity to 900 MW. The energy output at Stage I and Stage II at Kafue Gorge is about 5,256 GWh per annum (or 51% of total hydro available energy in Zambia). 2.18 (iii) Victoria Falls: There are three power stations at Victoria Falls. A Station - (2 x 3 MW ) - (2 x 1 MW) 8 MW Total B Station - (6 x 10 MW) 60 MW Total C Station - (4 x 10 MW) 40 MW Total 108 MW Total The A & B Stations were completed in the early 1950s; and the C Station in 1972. The available energy at Victoria Falls is taken to be 757 GWh/annum. 2.19 Waste Heat Plants: There are a number of small waste heat power stations in the Copperbelt Area with a total capacity of about 50 MW. The majority of these units are over 40 years old. The output from the plants has declined in recent years because of (a) age; and (b) changes in the copper smelting and refining processes that have reduced the amount of steam required. The effective output from the waste heat plants is now about 8 MW (70 GWh/a). 2.20 Gas Turbine Plant: 80 MW of gas turbine capacity has been installed by Copperbelt Power Company (CPC) at a number of strategic locations in the Copperbelt Area. The plant at Luano (40 MW) provides synchronous compensation for the CPC transmission system. The remaining turbines were installed for emergency operation to support essential services, in the event of loss of supply from ZESCO, to protect plant and avoid danger to personnel. Small thermal power stations at Lusaka and at Chingola have been closed down. 2.21 Interconnection with Zaire: The Shaba province in Zaire has been connected to the Zambia Electricity Supply Company (ZESCO) transmission system via a 220 kV single circuit line between Kitwe in the Copperbelt Area and Seke in Shaba. The transfer capacity of the circuit is between 100 and 150 MW. The line was installed to provide a mutual standby capability for the Zairean and Zambian copperbelts. So far the net annual energy transfer on the line has been negligible. 2.22 New Generating Plant. There are a number of potential sites on the Zambezi where hydro stations might be constructed (Annex Table 2.6). Although Zambia has no firm plans to develop any of these sites or  - 19 - to extend existing ones, Zimbabwe's growing needs may require the joint development of some of these sites, which should be done at a rate that is beneficial to Zambia. 1/ 2.23 The major issue in power supply is ZESCO's inability to continue to maintain the distribution system efficiently. This is due to: (a) shortage of experienced staff. ZESCO has been unable to attract and retain good engineers because of its poor salaries and conditions of service; and (b) shortage of funds, especially foreign exchange. The current tarif-fs are low while non-payment of electricity bills (especially by government ministries and parastatal organizations) amounted to over $8 million in 1980, with a significant amount outstanding from other local consumers. As a result ZESCO has not generated enough funds to maintain the system and expand power distribution since 1979 and although a surplus of $3 million is expected in 1981/82, a deficit is anticipated for 1982/83 unless its management and maintenance situations improve. For example, ZESCO estimates that it requires about ZK66 million (or $79 million) within the next eighteen months in foreign exchange to buy spare parts and pay contractors. The mission supports ZESCO's decision to proceed with a tariff study based on the long run margitnal cost of power distribution in Zambia, 2/ and recommends that in the interim tariffs be raised to both mining (CPC) and non-mining consumers in order to provide funds to ZESCO to cover at least its operating costs arnd meet commitments on its loans. Currently ZESCO sells power to CPC (which accounts for over 74% of total consumption) at 40% below its operational costs. (5.16-5.18). Also ZESCO must be helped through a technical assistance program to develop technical and management expertise. The mission also considers it essential that all outstanding bills be paid forthwith. 1/ The most likely sites eLre the Mpata Gorge and Batoka Gorge schemes with an estimated firm capacity of 1200 MW and 1600 MW respectively. The development of the Mpata Gorge site will cost (in 1981 dollars) about $1.26 billion. For details see Zimbabwe: Issues and Options in the Energy Sector (IBRD Report No. 3765-ZIM). 2/ Actually two tariff studies have been commissioned by ZESCO. The contract for the internal tariff study was awarded to Electricite de France in 1982, but the study has been delayed due to shortage of foreign exchange; the consulting firm of Landell Mills Associates Limited did a study in 1981 on the export tariffs for ZESCO.  - 20 - C. COAL Current Potential 2.24 Zambia has several large coal deposits with probable total reserves of 250 million tonnes, although there has been no proper assessment of the nation's coal resources. Between 1965 and 1967 some exploration work was done and 80 boreholes were drilled. Three coal deposits have been located, at Nkandabwe, Siankondobo, and Mulunga in the Northeast-Southeast. Estimated reserves at Nkandabwe are about 80 million tonnes; at Mulungwa, about 100 million tonnes. Reserves at Siankondobo in the Kanzize and Izuma basins are currently mined by the Maamba Colliery. This is the only coal mining activity in the country. Proved and probable reserves total about 91 million tonnes of which proven reserves amount to about 58 million tonnes of high ash coal 1/ (IBRD Map 16371). At current production rates of 610,000 tonnes per annum, the reserves at Maamba should last the country for about 80 years. Although not of immediate priority, a full evaluation of the coal resources is needed to prepare an appropriate inventory of country's reserves and identify the areas for future development. Maamba Colliery Operations 2.25 The colliery was designed to produce 1.5 million tonnes per annum of run-of-mine-coal and 1.2 million tonnes per annum of washed coal. However, from 1973/74 to 1980/81 coal production declined at an average rate of 2.1% per annum and the 1980-81 production of 610,000 tonnes per annum (610 kmtpa) (Annex Table 2.4) is about 46% below the designed capacity. Several factors are responsible for this low productivity, but as a result of the reduction in coal demand by the copper mines (from 1974) in order to accommodate fuel oil from the refinery (2.05) 2/, the operation of the Maamba Colliery gradually deteriorated. Other factors that have resulted in low efficiency and high production costs at the Maamba open pit mining operation include: (i) poor planning and design of the mines owing largely to a shortage of adequate geological data; (ii) poor design of the beneficiation plant; (iii) poor design and maintenance of the aerial ropeway, which is inadequate to carry the current load of 600 kmpty. This has necessitated the use of trucks to transport the coal from the mines; and 1/ 1 ton of Maamba coal = 0.60 toe. 2/ With the construction of refinery the mines were compelled to substitute coal by fuel oil.  - 21 - (iv) poor management techniques and cost control measures coupled with Jack of technical expertise. 2.26 In addition, the mining equipment is old and has been poorly maintained due to lack of spare parts. Also the number of workers engaged in engineering services and administration (842 compared to a total of 1,328) seems disproportionately high compared to those engaged in production activities (315) even though a number of ancilliary services must be provided by the mines (Annex Table 2.5). Unless these constraints are alleviated, it will be difficult for the Maamba Colliery to continue to produce coal economically, or be capable of satisfying any major increase in demand. 2.27 The mission recommends that a rehabilitation study of the colliery should be done immediately to identify the major problems in the mining operation. Such a stu(dy should include the following elements: (a) a review of current mining, washing and transport operations and an assessment of the major constraints limiting production; (b) development of a rehabilitation program for the colliery to attain the level of production required to meet the projected demand. 1/ The program involves reorganization and reconstruction of the open pit mine, construction of coal benefication plant and an upgrading of the aerial ropeway; ancl developing adequate infrastructure facilities, such as workshop, laboratory and stores; (c) provision of consultancy services to help develop adequate management capability, including cost and management control systems. It is probable that some of the necessary management expertise is available at the Chingola mine in the Copper Belt, and regular visits from suitably qualified engineers from the Chingola operations could help solve this inadequacy if complemented by on- the-job training programs in the copperbelt as well as outside Zambia; (d) the collation of available geological information of the mining concessions to determine the additional exploration program needed to help prepare future mining plans; and (e) the upgrading of engineering and management personnel through on-the-job training. 1/ The Industrial Projects Department of the Bank is currently evaluating a proposal to finance such a study.  - 22 - D. WOODFUELS Supply of Woodfuels 2.28 Over 77% of the natural vegetation of Zambia is woodland (IBRD Map 16373): Table 2.5 shows the Forest Department's estimate of woodland cover. The regional supply situation for woodfuels is not clear because of inadequate data concerning (i) actual standing stock in tree biomass; (ii) yield per hectare of total biomass from standing stock 1/; and (iii) rate of natural regeneration of indigenous woodlands. The Natural Resources Department (NRD) has requested LANDSAT surveillance maps from the Regional ERTS Office 2/ in Nairobi. The objective is to update the existing vegetation maps on Zambia. The mission supports this initiative and recommends that the Forestry Department (FD) adopt the same technique to survey woodland areas and deforestation trends. Table 2.5: Classification of Woodland Areas (1979) Area (million ha) Production Reserves 5.3 Protection Reserves 1.8 Total State Forests 1/ 7.1 Unreserved Woodlands 32.0 Old Barotse Forests 0.3 Other Forests 2/ 1.8 Total Woodlands 41.3 1/ Gazetted Woodlands managed by the Forest Department. 2/ Forest reserved for use by Mining Timbers Ltd. and other enterprises. Source: Forest Department Annual Reports. 1/ Areas such as Isoka district are reported treeless. Stocking intensities in the Copperbelt are estimated at between 70-140 cu. m./ha. The Mean Annual Increment (MAI) in tree growths estimates fall significantly south of the 1000 mm isohyet (IBRD Map 16373). 2/ Earth Resources Satellite, LANDSAT Office.  - 23 - 2.29 Fuelwood Plantations: The main cause of localized woodfuels supply/demand imbalances is the excessive cutting of trees for charcoal production which affects mostly the densely populated areas particularly along "the line of rail". The main issue is how to ensure adequate supplies of wood to charcoal producers serving urban areas such as Lusaka while controlling or eliminating illegal charcoal burners and indiscriminate tree felling. 2.30 The Government of Zambia (GRZ) has recognized the need to develop commercial woodfuel plantations to alleviate this problem, and several projects have been planned for implementation. The Lusaka Woodfuel Project, for examplia, will initially consist of developing wood plantations of about 7,500 ha and necessary supporting infrastructure at a total estimated cost of $2C million. 2.31 The mission, while supporting these plans, recommends that, to ensure that the projects are successful, the Government should: (a) establish the woodfuel projects or FD's tree plantations closer to urban settlements to reduce transport costs (5.21); (b) improve FD's supervisory capabilities through adequate funding and sl:affing so that it can protect the developed woodland from indiscriminate felling of trees; and also by ensuring thal: wood from FD's plantations are made available only to licensed charcoal producers at reasonable prices to reduce the level of illegal tree felling. This will require for the Government to establish a reasonable and effective economic stumpage rate for trees; (c) encourage local farmers through credit assisted tree farming schemes to plant trees as "cash crops" in community lots to supply charcoal producers; and (d) involve the FD directly in charcoal production by establishing centres to disseminate information and educate charcoal producers on more efficient and economic ways of producing charcoal. 2.32 The main charcoal production centers are the Lusaka, Central, and Copperbelt provinces. Figure 1 is a schematic of production, distri- bution and marketing links in Zambia. Demand for charcoal has increased over the past two decades 1/ (IBRD Map 16370), while production has evolved in three stages: (i) pre-1963 when charcoal production was on a subsistence basis using wood residues after land had been cleared for 1/ Population in these large centers grew at an annual rate of 8.9% between 1963 and 1969, and 6 7% between 1969 and 1980.  - 24 - cultivation; (ii) 1963-1971, when large numbers of trees were cut for charcoal alongside major road and rail routes serving Lusaka and large Copperbelt towns, and (iii) since 1971, when production has expanded to serve towns in the region. Tree felling has been extended further onto hillsides such as the lower Kafue Woodlands. Over 7,500 persons 1/ are involved in charcoal burning either on a part time or full time basis. A few charcoal burner associations have been established in the provinces. Charcoal producers sell through wholesale merchants or contractors, retail merchants in urban market centers, or directly from their households to consumers in smaller towns or Bomas. 2.33 The preferred species for carbonisation are the brachystegra and julbernardia, both of which are dominant in Miombo Woodland. Figure 1 shows the main sources of wood charge for licensed and unlicensed charcoal burners. The licensed burners pay 35ngwee/cord from demarcated Forest Department coupes, 2/ and 40ngwee/cord from clear felled areas. The quality of the charcoal is generally poor due to widespread use of the earthen mound or "clamp" technique. On the average 1 tonne of charcoal can be produced from about 6-8 tonnes of wood. 2.34 Charcoal Production Techniques: GRZ has funded local kiln research by the University of Zambia (UNZA) and the Forest Products Research Division (FPRD) at Kitwe. The Forest Department has also completed several feasibility studies on large scale charcoal production to serve urban and industrial markets. FPRD is restricted to testing portable steel kilns and fixed masonry kilns at its research station in Kitwe. A locally fabricated portable steel kiln currently costs ZKl,200 in Kitwe and can produce 1 tonne of charcoal from 4 tonnes of wood. The only major FPRD field test appears to be the ongoing pilot project with the Forest Department's Industrial Plantation Department (IPD). Ten portable steel kilns are being operated with technical assistance from FPRD to carbonize off-cuts and residues from IPD saw mills. The mission supports these activities and recommends that these efforts should be carefully targeted at the existing full-time or professional charcoal producers. The mission also recommends that, initially, FPRD should organize joint field demonstrations and pilot projects with local Professional Charcoal Associations. 3/ 1/ About 1,500 persons produce charcoal in the immediate vicinity of the Industrial Plantations on the Copperbelt. 2/ Coupes are woodland areas allocated by Provincial Forest Offices (PFO) for felling by specified producers. A lot of 3,440 hectares was allocated as fuelwood coupes in 1979. One cord of wood is approximately equal to 1.7 tonnes. 3/ The Kitwe Professional Charcoal Burners Association has already informed FPRD of its interest in the portable kilns.  Figure 1: CHARCOAL PRODUCTION/MARKETING CHANNELS IN ZAMBIA Sources of Wood Charge Type of Charcoal Burner Markets Demarcated Coupes in 35n/cord Mining Unreserved/Reserved Timbers Woodlands Limited Smelters | | ~~~~~~140n/cordK .i_ Feiled Areas for Fuu Time Agriculture, etc. |-40 bags/month Urban Commercial Logging 4 Periodic 'Extra Cash Crop' Retailer Commercial/ Residues, IPD 4 < <40 bags/month Wholesalers (Market Stalls) Household Consumers I . I! s I. 1- - - -__ - - I I Occasional - - I 2 or 3 burns per year ~~~:*______ _________