Zambia - Energy sector strategy

Joint UNDP/World Bank Energy Sector Management Assistance Program Activity Completion Report No. 094/88 Country: ZAMBIA Activity: ENERGY SECTOR STRATEGY DECEMBER 1988 A report of the rgy Efficiency and Strategy Unit and the Department of Energy ustry and Energy Department Ministry of Power, ld Bank Transport and Communications hington D.C. 20433 Lusaka .A. Zambia Report of the Joint UNDP/ibMld Bank Energy Sector Management Assistance Program This document has a restricted distribution. Its contents may not be disdosed without authorization from the Government, the UNDP or the World Bank.  ENERGY SECTOR MANAGEMENT ASSISTANCE PROCRAM PURPOSE ; The Joint JNDP/World Bank Energy Sector Management Assistance Program. (ESMAP) was started in .1983 as a companion to the Energy Assessment Program, established in 1980. The Assessment Program was designed to identify and analyze the most serious energy probltams in developing countries. ESMAP was designed as a pre-investment facility, partly to assist in implementing the actions recommended in the Assessments. Today ESMAP carries out pl.Je--nvestment activities in 45 countries and provides institutional and poLicy advice to developing country decision-makers. The Program aims to supplement, advance, and strengthen the impact of bilateral and multilateral resources already available for technical assistance in the energy sector. The reports produced under the ESMAP Program provide governments, donors, and potential investors with information needed to speed up project prepar- ation and implementation. ESMAP activities fall into two major groupings t - Energy Efficiency and Strategy, addressing the institutional, financial, and policy issues of the energy sector, including design of sector strategies, improving energy- end-use,. definidig investment programs, and strengthening sector enterprises; and - Household, Rural, and Renewable Energy, addressing the tech- nical, economic, financial, institutional and policy issues affecting energy supply and demand, including energy from tradit.ional and modern sources for use by rural and urban households and rural industries. FUNDING The Program is a major international effort supported by the UNDP, the World Bank, and bilateral agencies in a-number of countties including the Netherlands, Canada, Switzerland, Norway, Sweden, Italy, Australia, Denmark, France, Finland, the United Kingdom, Ireland, Japan, New Zealand, Iceland, and the USA. INQUIRIES For further information on the Program or to obtain copies of the completed ESMAP reports listed at the end of this document, contact: Division for Global and OR Energy Strategy, Management Interregional Projects and Assessment Division United Nations Development Industry and Energy Department Programme World Bank One United Nations Plaza 1818 H Street, N.W. New York, N.Y. 10017 Washington, D.C. 20433  ZAMBIA IIGCY SECTOR STRATEGY DECEMBER 1988 Energy Efficiency and Strategy Unit Industry and Energy Department  ACROlINS AND ABRM ATIONS ADB African Development Bank Boe Barrel of Oil Equivalent BTU British Thermal Unit CAPC Central African Power Corporation DOE Department of Energy, Ministry of Power, Transport and Communications DUT Dead Weight Tons ERR Economic Rate of Return ESMAP Joint UNDP/World Bank Energy Sector Management Assistance Program CDP Cross Domestic Product CNP Gross National Product Clh Gigawatt hour IDA International Development Association km Kilometer kV Kilovolt (1,000 Volts) kWh Kilowatthour LPG Liquid Petroleum Gas MW Megawatt MWh Megawatthour NCDP National Commission for Development Planning NCSR National Council for Scientific Research TDAU Technology Development and Advisory Unit (University of Zambia) toe Ton of oil equivalent tpa Tons per annum T?L Tazama Pipelines Limited UNDP United Nations Development Program UNZA University of Zambia ZAFFICO Zambia Forestry and Forest Industries Corporation ZCCM Zambia Consolidated Copper Mines Limited ZES8O Zambia Electricity Supply Corporation Limited ZINCO Zambia Industrial and Mining Corporation Limited ZR Zambia Railways  ECHANCI RATE OFFICIAL EXCHANGE RATE SHADOW EXCHANGE RATE 8 Kwacha US$1 12 Kwacha = US$1 1 Kwacha US$0.13 1 Kwacha US$0.08 (March 1988) ENRCMY CONVERSION FACTORS FUEL PHYSICAL UNITS PER toe 1/ Liquid Fuel (metric tons) 2/ LPG 0.92 Gasoline 0.95 Kerosene/Turbo Fuel 0.97 Diesel Oil 0.98 Fuel Oil 1.04 coal (tons) 1.67 Electricity (MWh) 11.6 3/ Biomass Fuels (tons) Firewood 2.84 Charcoal 1.40 1/ 1 toe - 39.68 million BTU = 6.61 Boe 2/ Regular gasoline a 359.6 gallon/mt Premium gasoline - 356.9 gallon/mt Kerosene = 336.6 gallon/mt Diesel a 314.4 gallon/mt Fuel Oil = 278.2 gallon/mt 3/ Converted on a heat equivalent basis.  TABL1 OF CONTENTS Page I. INTRODUCTIONV.... 00I0004000000400040000400040000000000004000 1 II. UECUTIVE ............... ............0.40000.00.000000000.2 2.1 Economic Background.............................................. 2 2.2 Energy Resources ............. 000400...0.....0.0..0....0 2 2.3 Energy Strategy Objectives and Constraints............. 3 2.4 Strategic Direction for the Energy Sector.............. 3 2.5 Major Strategic Proposals.............................. 4 2.6 Electric Power Issues and Strategy..................... 5 2.7 Petroleum Issues and Strategy.......................... 7 2.8 Coal Issues and Strategy ............................ . 8 2.9 Woodfuel and Household Energy Issues and Strategy ...... 9 2.10 Renewable Energy Issues and Strategy................... 10 2.11 Conservation and Substitution of Conventional Fuels.... 11 2.12 Energy Policy and Planning Systems..................... 12 2.13 Priority Investment Program............................ 13 Summary of Major Issues and Recommendations................. 15 11. ENERGY AND THE ECONOMY - CURRENT SITUATION AND F CASTS...00 24 3.1 Structure of the Economy............................... 24 3.2 Recent Economic Performance and Strategy............... 24 3.3 Pattern of Energy Supply............................... 25 3.4 Energy Transformation.............................................* 27 3.5 Pattern of Energy Demand............................... 27 3.6 Economic Projections, 1988-2006 ........................ 28 3.7 Energy Strategy Objectives and Constraints............. 29 3.8 Energy Demand Forecasts, 1988-2006..................... 30 3.9 Balance of Payments Implications of Energy Forecasts... 33 IV. ELECTRIC ................... ....................... 35 4.1 Characteristics of the Existing Power System........... 35 4.2 Policy Issues and Options.............................. 39 4.3 Electricity Demand Forecasts 1988-2006................. 40 4.4 Priority Power System Investment Program............... 43 4.5 Power System Planning and Operational Improvements..... 50 4.6 Power Costs and Tariffs. ....................oo.ooooeooo* 53 V. PETsOLEUN ..................s............... ***o**o***ooo ***. 58 5.1 Policy Issues and Options.............................. 58 5.2 Oil and Gas Exploration................................ 58 5.3 Petroleum Consumption and Supply....................... 61 5.4 Petroleum Pricing...................................000 64 5.5 Demand Forecasts.. 0000.004400*0004000000000000000000000 68 5.6 The Tazama Pipeline.................................... 70 5.7 Indeni Refineryo.......................4..............o 71 5.8 Storage, Transport, and Terminal Facilities*..,*...**** 72 5.9 The Economics of Refinery Closure...................... 72 5.10 Potential Refinery Conversion.......................... 74  - vi - VI. OWFL ..............+77 601 Reserveso.............0...*.o.*oe*o*oe...ooo. .o.oooo..o. , 77 6.2 Policy Issues and Options ti.......oon soo.. oo..........o 77 6.3 Recent Production and Saleso a lo.......oeos............ 78 6.4 Current Production.. 00 0 000000000000000000 78 6.5 Market Prospectsoo.eooo. .o..oo.oo..eoo. 00OO** *000 79 6.6 Coal Transport and Storage Requirements..............so 82 6.7 Mine Operational Improvements and Contingency Planning 83 6.8 Long-Run Economic and Financial Cost and Pricesoe..s0o0 84 6.9 Recommended Pricing Structure.....................ooo.. 85 6.10 Investment Priorities..... .oo...eooo0 ooo000 oo0o00e0o0o 86 VTI. MOODVElL AIM UOUSEOLD ENE3 U.o.Yoooo 00000o0 .....o.* 87 7.1 Supply and Consumption Estimates and Forecastst.osooo.. 87 7.2 Prices and Economics Costs o s ts...o.o.o.......ooooo. 91 7.3 Household Energy Policy Objectives..o.oo.o.....o.ooo.o. 94 7.4 Policy I s s u esoo............... ooooosoue00*0000000000 95 7.5 Household Energy Options.oo.o.oo. oo.ooo. oo. ooo...oo 95 7.6 Policy Recommendations.o00o00000o000oo..oo.oo..o.o..*o 101 VIII.B891 licy ................ ...VA... . *.*00 **.0...*............ 101 8.1 Policy O p tions...0.ooo***oooooooooo 103 8.2 Institutionso o.. oooo.oo. oo.o....ooooo.ooo0o0 0o000. 103 8.3 Solar Energy Potentialo................. ........ o .*oo 104 8.4 Solar Water Heatingo............................. ..ooo 105 8.S Solar Fish and Vegetable Drying y i n g+oooo..o..o..oo.o.o. 106 8.6 Long-Term Solar Potentialoooo...ooooooe.o..oo.....o.ooo 108 8.7 Wind Energy.o0000000o00000000 .000000o0oo 0.ooooo00 000 108 8g.8 Biogaso io......oogas.oo.. o.o... ooo.o.oo...o..oo....o... 110 8.9 Geothermal Energyo................ ..........*.......* 111 IX. COEBSRVATION AND SUBSTITUTION OF COUYEUTOoL .U0&.0...... 113 9.1 Policy Issues and Options.............................. 113 9.2 Fuel Substitution in the Copper Industryo000.00000....o 115 9.3 Fuel Substitution in Industry and Commerce............. 116 904 Energy Conservation in the Copper Mining Industryo..... 119 9.5 Energy Conservation in Industry and Commerce........... 119 9.6 Energy Conservation at NCZ and CLilanga Cement...0... . 122 9.7 Recommendations on Energy Substitution and Conservation in Industry............................... 124 9.8 Energy Conservation in Road Transport.................. 125 X. ENERGY PLA&UNTI SYSTUSO AND INSTITUTIONAL CAPABILITIESo...... 131 10.1 Energy Institutions and Current Planning Systemso...... 131 10.2 Recommendations ......................o.e..o..ooo.oo..... 132 10.3 Operational Energy Institutions.......................O 134 TABLES 2.1 Priority Energy Sector Projects, 1989-93....................... 13 2.2 Potential Energy Sector Projects, 1989-93...................... 13 2.3 Long-term Energy Sector Projects, 1994-2006.................... 14 3.1 Sectoral Composition of CDP, 1985985oooo.o.ooo..oo.oo.......... 24  - vii - 3.2 WB/DOE Energy Strategy Study - Energy Balance for 1986......... 26 3.3 Forecast Final Energy Consumption by Sourceo................,... 31 3.4 Forecast Final Energy Consumption by Sector.................... 31 4.1 Installed Power Capacity and Estimated Firm Energy Capability, 98................................. 36 4.2 Electric Energy Production and Bulk Supply on the Interconnected System 1983-84 to 1987-88....................... 38 4.3 Simultaneous Maximum Demand on the Zambian Interconnected 4.4 Forecast Power System Loads at Bulk Supply Points at Time of System ....... ................................................. 40 4.5 Forecast of Electric Energy and Maximum Power Demand 1988-2006 ..................... .................... 42 4.6 Components and Costs of the Priority Lusaka Power Distribution Project ................. *0.00@0.00@00 .....~............ 0000000047 4.7 Components and Costs of the Priority Copperbelt Sub-Transmission Projects...................................... 48 4.8 Co3ts of New Electricity Connections during the Period 1988-2006 (US$ milo).....................49 4.9 Annual Cost of Electricity Distribution Expansio., with Alternative Standards and Customer Densitieso.................. 50 4.10 Electricity Tariffs for Selected Consumer Croups............... 54 4.11 Average Revenue and Costs of Isolated Diesel Systems........... 54 4.12 Estimated Long-Run Economic Costs of Power and Current Average Revenues..,............................................ 56 5.1 Domestic Market Sales of PetroleumFuels............,.......... 62 5.2 Petroleum Product Consumption and Exports, 1986................ 63 5.3 Petroleum Product Consumption and Exports, 1987*************................ 63 5.4 Petroleum Product Financial Costs and Prices, 1987............. 64 5.5 Kerosene and Gas Oil Economic Costs and Wholesale Prices, 1987 65 5.6 Premium Gasoline and Fuel Oil Economic Costs and Wholesale Pricest 1987.00..... . ...................... ........... 65 5S7 Prices and Duties on Kerosene and Gas Oil...................... 66 5.8 Forecast Consumption of Petroleum Products under Alternative GDP Growth Scenarios... 0....0000...00.0..0. .................... 68 5.9 Net Present Value of the Costs of Alternative Petroleum Supply Arrangements. ................. 74 6.1 Coal Production, Sales and Prices (1980/81 - 1987/88).......... 78 6.2 Production Capacity at Maamba Colliery ........................ 79 6.3 Coal Production by Crade Quality ............................... 79 6.4 Annual Forecast Coal D dm a n d 80 6.5 Rail Transport of Coal in Base Case Peak Demand Year (1992/93) .0.0..**......... ...0000000000000000000000000000 83 7.1 Regional Distribution of Population and Forests***ests**.*****. 88 7.2 Estimated Sectoral Woodfuel Consumption, 1985. .o******.*******. 89 7.3 Base Case Woodfuel Demand Forecaste.............................O 91 7.4 Puelwood Prices in July 1983............................o.r 92 7.5 Retail Prices of Charcoal per Large Bag...ag.0................. 92 7.6 Index of Nominal and Real Charcoal Prices in Lusaka............ 93 7.7 Charcoal Prices for Various Quantities in Lusaka, January 198600...................................... .000 93  - viii - 7.8 Estimated of the Composition of Charcoal Prices in Lusaka, September 18 .......................... 94 7.9 Charcoal Consumption with & without Improved Stoves ves......... 98 7.10 Equivalent Monthly Costs of Alternative Household Cooking Device/Fuel Combinations in Lusaka, 1988....................... 100 8.1 Global Sol4r Radiation and Rainfall Values in Zambia biao....... 104 8.2 Fish Catch, 1985 ... .................................... 106 9.1 Financial Cost of Energy from Various Fuel Sources Compared on the Basis of Thermal Value, at Representative Efficiency of Use and at Prices as oi January 1988 114 9.2 Major ZCCM Petroleum Product Consumers......................... 115 9.3 Fuel Substitution Potential in Companies with Diesel Fired Boilr/ lraes.s / F u r naec es* ...... 117 9.4 Fuel Substitution Savings in Companies vith HFO/LFO Fired Boilr/ lraes.. s /040000 u r n a c es0*6****Oo000 118 9.5 Installed Industrial Process Heating Units.. 120 9.6 Summary of Energy Saving Opportunities at Six Audited Plants... 121 9.7 Kapiri Class Products Plant Analysis of Comparable Energy Performance, 1986 and 1987.. 123 9.8 Estimated Fuel Consumption blr Type of Vehicle, 1986*.oo........ 126 9.9 Level and Composition of Transport Fuel Prices, Lusaka 1988.... 127 9.10 Excise Duty on Gasoline and Diesel Oil... 127 9.11 Comparative International Fuel Prices, February 1987 .......... 128 APP-MIC'S 3.1 Forecast Energy Balances for 1996 and 2006, Base Case, Low Growch, and High Gr owth . 135 3.2 Energy Demand Forecasts.... .o...........e.. . .. . . ........ 141 4.1 Electric Energy and Power Export Potential...*00600*00000000... 146 4.2 ZESCO Electricity Tariffs, January 1, 1988 .............. ...... 152 4.3 ZESCO Financial Forecasts 1988-2006... 154 4.4 Estimates of Financial Cost of Electricity Supply by Diesel.... 157 4.5 ZESCO Long-Run Marginal Costs of Supply........................ 159 5.1 Cost-Benefit Analysis of Refinery Closure.o s ur..***............ 162 5.2 The Economics of Adding a Mild Hydrocracker to the Ndola Refinery........................... . ...........***..~.*.: ...... 168 7.1 Replacement Cost of Plantation Wood for Charcoal Productionoo. 173 8.1 Cost/Benefit Analysis of Renewable Energy Technologieso........ 175 MAP World Bank Map No. 20984-R.  I. INTRODUCTIOM This report outlines the first comprehensive energy strategy for Zambia. It identifies a priority energy sector investment program for 'S.he period 1989-93, reflecting the current economic situation, the condition of the energy supply systems, and the most pressing needs of energy consumers. The report also recommends a set of energy policies and technical assistance activities designed to facilitate the achievement of the energy strategy's objectives. It is issued at an important juncture in Zambia's economic de- velopment. Investment resources and skills are, and will remain in short supply. With a large overhang of debt, foreign exchange will be extreme- ly scarce. However, the persistent decline in Zambia's terms of trade may be over, or at least moderating, if the recent improvement in world cop- per prices is maintained. Zambia's agriculture and manufacturing indus- tries show signs of achieving higher productivity and increased exports, on which the future of the country depends. Hopefully, the energy strate- gy will help to achieve the long-awaited economic recovery. The major part of the report was dtafted in Zambia by a joint team of Zambian energy planners, international energy consultants and World Bank staff. Further work was undertaken at the World Bank in Washington, principally to verify the main conclusions with experts know- ledgeable on Zambia's energy sector and those of neighboring countries. The Zambian team members were drawn from the Department of Energy of the Ministry of Power, Transport and Communications. The international energy consultants were funded by the Swedish International Development Agency (IDA), through the joint UNDP/World Bank Energy Sector Management Assistance Program (ESMAP). The Zambian team was led by Mr. Dominic Mbewe, Director of the Department of Energy. He was assisted by Mr. Wilfred Serenje (Energy Planner), Mr. Collins Konayuma (Conservation and Substitution Engineer), Mr. Silvester Hibajene (Household and Renewal Energy Specialist) and Mr. Renato Ezban (Energy Planner and Computer Specialist). The ESMAP team was led by Mr. Robin Broadfield (Energy Economist) and consisted of the following consultants: Mr. Fred Thackeray (Energy Economist); Mr. John Stocks (Mining Engineer); Mr. Robert High (Petroleum Refinery Specialist); Mr. Harald Berg (Power System Economist); Mr. Jean-R&n6 Leidner (Renewable Energy Specialist); and Mr. Bjorn Gildestad (Transport Energy Economist). Mr. Eric Daffern (Principal Energy Specialist) and Mr. Jack Warren (Senior Petroleum Geologist) represented the World Bank. Ms. Pauline Griller (Staff Assistant) was responsible for word processing in Zambia, and Ms. Paula Earp (Staff Assistant) in Washington. The team members wish to express their gratitude for the exten- sive assistance received from individuals and organizations in the Zambian energy sector, without which the production of this report would not have been possible.  - 2 - II, *8KCUTIVU SUMMARY 2.1 Economic Background The Zambian economy was built largely on the production and ex- port of copper, which, for many years, made the country grow and pros- per. GNP per capita rose steadily from US$400 in 1970 to over US$650 in 1981. Copper sales earned substantial quantities of foreign exchange with which to buy foreign capital and consumer goods. Consequently, the economy became highly open, with imports and exports equivalent to nearly 502 of GDP. In 1975, a persistent decline in the world price of copper set in. Over the next ten years, its real price fell by over 60%. Over the same period, Zambian copper ,roduction declined from a peak of 713,000 tons in 1976 to less than 480,000 tons in 1985. As a result, real export earnings fell by two-thirds and imports contracted sharply, although heavy borrowing cushioned some of the fall. From its 1981 peak of US$650, GNP per capita fell to less than US$400 in 1986. In 1988, Zambia is struggling to recover from this long period of economic decline. With investment down to less than 10% of GDP, a de- valued currency, and scheduled debt payments larger than total export revenues, the recovery process will inevitably be hard and long. The ob- jective of this energy strategy is to ensure that Zambia's energy sector makes the maximum possible contribution to that process. 2.2 Energy Resources Zambia is fortunate in being well-endowed with energy re- sources. Ita woodlands and forests produce over 20 million cubic meters of wood annually (contributing 66Z of the nation's total energy needs), although wood demand exceeds supply in some areas. It has over 1,600 MW of installed hydroelectric generating capacity, providing another 13% of energy needs. Proven coal reserves exzeed 30 million tons, and satisfy 91 of energy demand. The only major energy import is petroleum, which accounts for about 10% of total imports and satisfies 12% of energy demand. Zambia's economic problems have had two major implications for the energy sector. First, they have arrested the gro th in energy con- sumption, leaving many of the energy supply systems vith excess capacity. For example, demand for electric energy is nearly 20% belw -cdpacity, coal production is at least 100,000 tons pec year below potential, and the oil pipeline and refinery are running at about 60% of capacity. Second, economic difficulties have starved the energy sector of the foreign exchange required for essential maintenance and new capital investment. As a consequence, the condition of the power supply system  -3- has deteriorated, and subtransmission investment has lagged behind the changing pattern of demand. The oil pipeline has corroded, partly from poor management and inadequate maintenance. Coal output fell for many years, until a recent major rehabilitation program arrested the decline. Correcting these problems at least cost is one of the major is- sues in the energy sector. A second and related major issue is how to make better use of the excess capacity once the supply systems are re- habilitated, particularly to ease the burden of energy imports on the balance of payments. A third major issue is how to arrest the localized depletion of Zambia's woodfuel resource, the primary source of household energy supply. 2.3 Energy Strategy Objectives and Constraints The agreed objectives of the energy strategy are to: (a) ensure the provision of adequate and reliable energy supplies, at least cost, to the productive sectors of the economy, on which economic recovery depends; (b) minimize net imports of energy by substituting lower-cost do- mestic fuels for imports and promoting economically-justified energy exports; (c) satisfy the basic energy needs of the population; (d) protect the environment; and (e) ensure the long-term viability of the organizations responsible for energy production and supply. With a large overhang of foreign debt, depressed incomes, and low sav- ings, this must be done with very limited investment resources. Assuming energy takes its traditional share of 10-152 of total public investmezt. and assuming public investment averages about US$200 million per year for the next five years (which is about the maximum that seems feasible), public energy sector investment can average no more than US$20-30 million per year. 2.4 Strategic DirecFion for the Energy Sector The energy strategy is focussed on the next five years, 1989- 93, when critical decisions must be made to foster economic recovery in a situation of resource scarcity. The strategy seeks to avoid major risks, such as failure of a critical energy supply system--a power station, the oil pipeline or the coal mine, for example. The strategy is conservative in terms of investment expenditure, because investment resources will be  - 4 - very scarce. It avoids large-se2le, speculative investments, and empha- sizes making better use of existing resources. The main features of the strategy are: (a) avoidance of investment in new energy supply facilities which, due to the existence of surplus capacity, are not needed; (b) an emphasis on high-return investments in the rehabilitation and reinforcement of existing supply capacity and systems; (c) minimization of energy imports through efficiency measures and the substitution of petroleum by indigenous energy resources; (d) maximization of economically-justified energy exports; (e) greater efforts to improve the management and operational effi- _cency of the energy supply organizations by better training, better rewards, and use of outside expertise, where necessary; and (f) the establishment of effective systems and capabilities for strategic and contingency planning within the energy supply or- ganizations and their major customers, and the creation of a mechan)sm to coordinate and systematize the process of national energy planning and policy review. 2.5 Major Strategic Proposals The major strategic proposals for each energy subsector are summarized at the end of this Chapter. From amongst these, the following strategic energy sector priorities can be highlighted: (a) selective repairs to the Kafue Gorge power station and rehabil- itation of the Victoria Falls power station; (b) reinforcement and rehabilitation of the electricity subtrans- mission and distribution systems serving Lusaka, Ndola and Kitwe, to increase access to poker supply and reduce the risk of major power outages in these larger cities; (c) completion of committed power system extension projects; (d) rehabilitation of the Tazama oil pipeline and the strengthening of its management and maintenance procedures, so as to reduce the risk of a major pipeline failure, which would cause serious environmental damage to Tanzania or Zambia and interrupt critical supplies of petroleum products;  - 5 - (e) rehabilitation of the Indeni petroleum refinery and investment in measures to reduce refinery fuel use and loss; (f) energy audits and investments to increase the efficiency of energy use in industry, commerce and transport and to promote the substitution of indigenous electricity and coal for oil; (g) a large-scale program to produce and market improved charcoal stoves, to reduce the pressure on woodfuel supplies, parti- cularly around the major urban centers; (h) increases in the price of imported diesel oil to reflect the high scarcity value of foreign exchange; (i) increases in electricity tariffs to cover ZESCO's financial needs and to better reflect the economic costs of electricity supply; (j) preparation of contingency plans to cope with the possibility of accidents interrupting vital energy supplies, for example coal (possible dragline failure), and oil (the lack of refinery storage in the event of a pipeline failure); (k) when urban power transmission and distribution facilities have been strengthened, acceleration of the rate of household elec- tricity connections, coupled with term financing arrangements for connection costs, house wiring and appliance purchase; and (1) improved operational performance by the major energy supply organizations and better overall energy sector planning. 2.6 Electric Power Issues and Strategy Although domestic electricity consumption is forecast to rise during the 1990s, previously large exports to Zimbabwe have declined, and will probably remain well below their peak of the mid-1980s. About the year 2000, power demand from ZCCM,, ZESCO's largest domestic customer, will start to fall as copper production declines. Existing electric power generating capacity should therefore be sufficient to satisfy domestic electricity demand well into the next century, even if the economy averages 3.51 GDP growth per year. No investment in new power generating capacity is foreseen until after the year 2006. Although no investment will be needed in new generating facili- ties, the existing generating stations are in need of selective running repairs and equipment replacement. Most urgent is repair of the liquid chillers and other ancillary equipment at the Kafue Gorge power sta- tion. A major failure there would cause serious power shortages. Imme- diate electrical, mechanical, and civil engineering diagnostic work is needed, followed by a modest repair program, probably costing about US$2  - 6 - million. Also a priority are civil works and rehabilitation at the Victoria Falls power station (US$2-3 million). Less urgent are minor investments in the northern hydro system (US$0.2 million). Establishment of a generation and transmission spares emergency fund of at least US$100,000 is recommended. Existing 330 kV transmission capacity will be adequate to handle forecast power loads up to 2006, with the possible exception of the Kabwe-Kitwe link in the late 1990s, if demand growth in the Copperbelt equals or exceeds the high growth scenario. While growing domestic demand for electricity is not stretching generation and bulk transmission capacity, it has overloaded the sub- transmission and distribution system serving Lusaka. Repair and rein- forcement of several key substations is urgently needed. Work should begin very shortly on the construction of a new 132 kV ring around Lusaka to replace the overloaded 88 kV system. Including associated substation and subtransmission investments, the first phase of this program, known as the Lusaka Distribution Project, will cost about US$29.9 million. In addition to Lusaka, about US$10.6 million of investment is needed to replace obsolete switchgear and to reinforce the power networks around Ndola and Kitwe. Concessionary finance has been obtained for two power transmis- sion extension projects: (a) construction of a new 132 kV line from Lusiwasi to Msoro and a new 66 kV line from Chipata to Lundazi, followed by a new 132 kV line from Msoro to Chipata (US$19 million); and (b) elec- trification of the Mkushi Farming Block (US$25 million). As these funds are committed, the two projects should proceed to completion. In the major urban centers of Lusaka and the Copperbelt, the other strategic priority in the power subsector is to accelerate the pace of household connections. To keep pace with urbanization, ZESCO needs to complete about 7,000 new connections per year, but recently has been managing less than 3,000 per year. As a result, the proportion of urban households with electricity is falling, and there is a backlog of appli- cations. Once the necessary transmission and distribution capacity has been installed, investment in new distribution lines and residential connections needs to be stepped up, and ways found to reduce the high up- front charge for house wiring and connection--up to K5,000 (US$625) per household--and the high cost of electric cooking equipment. The most promising option may be to introduce a term payment scheme, whereby the customer can pay for both connection and equipment by installments on the electricity bill. Efforts must also be made to reduce the cost of dis- tribution expansion, for example, by making greater use of overhead lines. To cover ZESCO's current financial costs, electricity tariffs need to be raised from an average of 5 ngwee/kWh (US$0.006/kwh) to 8 ngwee/kWh (US$0.01/kWh) in early 1988 prices. To finance the recom-  - 7 - mended five-year power system investment program, average tariffs will need to rise further in real terms to about 11 ngwee/kWh (US$0.014/kWh) by 1993. The only alternatives to higher tariffs are Government sub- sidization of ZESCO, which is infeasible on budgetary grounds, inadequate provision for future investment, or a further deterioration in its day- to-day operational performance. The required tariff increase will be less if ZESCO can improve its financial performance and efficiency. Considerable scope for im- provement exists, including streamlined metering and billing arrange- ments, a new billing system, and improved debt collections. Engineering management and planning skills are in short supply and should be strengthened. Terms and conditions of professional staff need to be im- proved to attract and retain good management and technical staff. 2.7 Petroleum Issues and Strategy The immediate objectives with respect to petroleum products are to improve the security of supply and to raise the efficiency of supply systems. Coupled with these objectives is the special requirement, because petroleum is wholly imported, to efficiently minimize imports and the call on the country's scarce earnings of foreign exchange. There is no foreseeable requirement to invest in new supply capacity. Even on the high growth scenario, forecast petroleum demand of 660,000 tons by 2006 is below the capacities of the Tazama pipeline and the Indeni refinery. The current system of importing reconstituted crude via the Tazama pipeline and reprocessing the import mix at the Indeni refinery is the least-cost supply option, and should not be changed. The discounted present value of the costs of the alternative--closing the refinery and importing batched white products by pipeline and rail--is over US$50 million higher. The following measures are required to improve security and ef- ficiency of supply: (a) rehabilitation of the Tazama pipeline, on which detailed en- gineering has started (US$41.2 million in 1989-93, followed by US$30-40 million in 1994-2006); (b) scaff training at Tazama Pipelines Limited, to ensure there is no recurrence of the problems to be remedied under the rehabil- itation program, anc to enhance operational efficiency; (c) implementation of the proposal to install strategic storage at the Indeni refinery as a safeguard against possible interrup- tions of supply (US$3 million); and  -8- (d) scheduled maintenance and critical repairs and improvements to the Indeni refinery, which will reduce the level of refinery fuel use and loss from 7% to about 5.5X. The priority measures to minimize foreign exchange expenditure on petroleum imports are to: (a) continue the present commercial and credit arrangements for pe- troleum supplies, including the innovative practice of im- porting reconstituted crude, compriaing the correct balance of products required to meet demand; (b) develop profitable export sales through more aggressive market- ing and the acquisition of more road tankers (USs 2 million); (c) realign the wholesale prices of petroleum products to reflect their economic costs. In particular, increase the price of diesel oil to reflect the scarcity value of foreign exchange so that: (i) cross-subsidization of the middle distillate pro- ducts by gasoline is reduced; and (ii) there are stronger in- centives for conservation in the use of automotive diesel; and (d) promote petroleum conservation and the substitution of in- digenous fuels in the industrial sector through an active pro- gram of industrial energy audits, followed by the provision of finance for energy efficiency and substitution investments. Consideration should also be given to further petroleum promo- tion, if such measures appear likely to produce a significant response from the private sector. The first step should be to thoroughly analyze existing exploration data. Expenditure of up to US$6.6 million, phased over several years, could be justified. 2.8 Coal Issues and Strategy With the completion of the Maamba Colliery rehabilitation pro- gram, financed by ADB/IDA, the capacity of Maamba Colliery is now 650,000 tons per annum (tpa). This could be raised to about 700,000 tpa by relo- cation of the main drive of the ropeway, which transports the coal to the railhead at Masuku, and the addition of more buckets. Estimated coal demand in 1988-89 is about 484,000 tons. Demand could reach a maximum of 568,000 tons in 2002 under the high growth scenario. No major investments are therefore needed in raising coal sup- ply capacity. However, measures should be taken to maintain and improve efficiency. An analysis should be done of the costs and benefits of contingency investment to prevent the possible lengthy disruption of out- put which could occur if a major component of the walking dragline used for stripping the overburden was to fail. If justified, the investment could be up to US$1 million, including the purchase of essential parts.  -9- It is also important to ensure that adequate foreign exchange is avail- able to cover the purchase of necessary routine spares and replacement machines, as these needs arise. To guarantee high standards of colliery maintenance, it is ..- sential to ensure the availability of sufficient, adequately skilled personnel. This requires competitive compensation and a training and work experience program for Zambian nationals, which should be supported by technical assistance from experienced expatriate staff. Rail transport to consumers is a persistent coal supply bottle- neck. In addition to investments in additional locomotives and other measures to improve the railway's capability and efficiency, it is sug- gested that greater use be made of the coal stocking facilities of major coal customers, such as Chilanga Cement and Nitrogen Chemicals of Zambia (NCZ). These companies could build up stocks when the railway is able to deliver to ensure availability of coal when deliveries fall short. Two changes should be made in coal pricing. The first is to raise the prices to domestic consumers at least to the financial cost of coal production (K447/ton, or US$55.9/ton). The second recommendation, which will assist coal marketing, is to adjust the differential between prices for the grades of coal marketed to better reflect BTU content and the handling and transport cost of coals with high ash. Household consumer acceptability tests should be run on smoke- less coal briquettes. If the results are positive, the financial and economic feasibility of commercial briquette production should be assessed. 2.9 Woodfuel and Household Energy Issues and Strategy Woodfuel, which is used predominantly as a household cooking fuel, is the country's single largest source of energy. In the rural areas, it is used as firewood; in the urban areas, it is used mainly in the form of charcoal. Nationally, there is no shortage of woodfuel supply. HSwever, around the principal towns in the Copperbelt, Lusaka Province, and Southern Province, tree-cutting for charcoal production, coupled with agricultural land clearing and woodfuel demand, have created worsening problems of local deforestation. Improved wood resource management and measures to increase the efficiency of charcoal production and use are the top priorities. The promotion of community plantations and agroforestry are also proven lower-cost supply solutions. Improved charcoal-burning stoves developed by UNZA typically offer 30% savings in charcoal consumption and a payback period of 2-3  - 10 - months. The impact on woodfuel consumption of a successful program to disseminate these or similar stoves would be dramatic. If, by 2006, such stoves are used by 90% of urban households, annual charcoal consumption will be reduced from an estimated 1.8 million tons to 1.3 million tons, or by 27X. With assistance from the UNDP/World Bank ESMAP Household Energy Strategy project it is recommended to: (a) develop a program for the large scale production, testing and dissemination of improved charcoal stoves; (b) encourage the adoption of more efficient charcoal kilns, through demonstracion and training; (c) undertake in-depth studies of the financial and economic com- petitiveness of electricity as a substitute for charcoal in urban household cooking; (d) devise measures to overcome the present financial and other hurdles which have reduced the rate of household electricity connections to a trickle. Also, consider what measures %:an be developed to assist potential consumers to finance connection charges and the purchase of electric appliances; (e) develop a structure of electricity tariffs reflective of the economic and financial cost of supply which will facilitate household electricity use; and (f) test the consumer acceptability of coal briquettes for urban household cooking and, if the results are positive, analyze the financial and economic prospects for their commercial-scale production as an indigenous substitute for charcoal. As elements of a complementary effort to preserve wood stocks and encourage reforestation: (a) increase stumpage fees to cover the economic costs of supply, as incurred by ZAFFICO and the Forest Department; (b) strengthen natural wood resource management through more effc- tive extension, financed by stumpage fees on commercial wood cutting in natural woodland; and (c) encourage community and private sector tree planting, without substantial Government funding. 2.10 Renewable Energy Issues and Strategy Although Zambia has considerable renewable energy potential, particularly in the field of solar energy applications, efforts to pro-  - 11 - mote appropriate renewable energy technologies have been limited and spasmodic. Good levels of insolation through the country suggest there is scope for the promotion of solar fish and crop drying. The former would substitute for increasingly scarce wood, which is used extensively for fish smoking, and both could reduce losses due to spoilage. Wind and biogas energy have limited current economic poten- tial. As technologies improve over time, the former could be economic for water pumping, as a substitute for manual labor and for diesel pump- ing in isolated areas, and the latter perhaps for rural household cook- ing. Technical assistance is recommended to promote technology tr-nsfer and its application in solar fist and crop drying. 2.11 Conservation and Substitution of Conventional Fuels Cost reductions, energy savings and the minimization of foreign exchange expenditures are the triple objectives of energy conservation and substitution policy. Appropriate energy pricing is a pre-requisite to achieving improved efficiency of energy use. The aim should be to establish an energy price structure under which financial costs of supply are covered and prices reflect economic costs. Economically and financially viable opportunities exist for both energy substitution and energy conservation. In the copper in- dustry, the scope for substituting coal for fuel oil is technically con- strained. However, there is a significant possibility at the Nkana smelter. After installation of the planned new oxy-fuel furnace, coal probably can be substituted for 18,000 tpa of fuel oil. The investment cost is modest-about K16 million (US$2 million). There is also scope for further substitution of electric power for diesel in underground traction. In industry, the Department of Energy's audit program has begun to identify opportunities for substituting electricity and/or coal for fuel oil and diesel. Several such opportunities offer the possibility of comparatively small investment costs and rapid pay-backs. Similar oppor- tunities have been identified by the audit program for energy-saving pro- jects. Action is needed to ensure that the economic potential for in- dustrial energy substitution and conservation is realized. A program of technical assistance in energy conservation and substitution is recom- mended, to provide skills and resources to the Department of Energy, strengthening the activity begun by the Department's own staff. It is estimated that about two man-years of consultant technical assistance is required at a cost of about US$300,000. Its objective would be to iden-  - 12 - tify a package of high return energy conservation and substitution in- vestments, ready for feasibility analysis and presentation to potential donors. On the basis of indicative estimates prepared by the Department of Energy, the package of recommended investments might be in the range of US$20-25 million, offering annual cost savings of about US$6-9 mil- lion. In road transport, the task of improving energy efficiency is a difficult one. Higher diesel oil prices would be one useful step. On the basis of a preliminary analysis, other tentative recommendations for policy action in this fic.d are: (a) increase expenditure on road maintenance. This would both im- prove the energy efficiency of road transport and enhance road safety. Finance could come from higher fuel excise duties; (b) regularly inspect all Government vehicles to check against poor maintenance and excessive fuel consumption. This requires reac- tivation of the Preventive Maintenance Section at the Mechanical Services Department; (c) set minimum fuel efficiency standards for all new vehicles; and (d) study the scope for developing back-haul freight traffic, and identify ways of promoting it. If the scope proves to be con- siderable, back-hauling could produce substantial savings in transport fuel consumption. 2.12 Energy Policy and Planning Systems Coordination between the various Governmental, parastatal and semi-private organizations active in the energy field is relatively weak. There is no adequate institutional mechanism for designing and im- plementing a coherent strategy for the energy sector, and for systemati- cally addressing the major energy policy issues. To overcome these weaknesses, and to promote effective sectoral policy coordination and planning, it is recommended that the Energy Development Committee, which oversaw preparation of the energy chapter of the Fourth National Development Plan, be retained as a permanent energy policy coordinating body. The Committee would be representative of the major ministries and parastatal companies concerned with energy. Chaired by the Permanent Secretary of the Ministry of Power, Transport and Communications, its membership would consist of senior representatives of the Ministry of Mines, the Forestry Department, the NCDP, the NCSR, ZIMCO, ZESCO, ZCCM, and perhaps ZIMCO's constituent energy companies. It would meet at least quarterly, and be supported by a Secretariat drawn from the Department of Energy (DWE) and ZIMCO.  - 13 - Its functions would be to: (a) oversee the preparation and im- plementation of the national energy strategy, the annual energy plan and rolling five-year investment plan; (b) review and advise on all signifi- cant energy capital expenditures; and (c) advise on all energy policy is- sues, including price levels and structures. In order to exercise its secretariat functions efficiently, the DOE must be recognized as the coordinating Government body for energy. Its staff needs to be strengthened by the addition of a Chief Economist, Chief Technical Officer and Senior Financial Adviser. 2.13 Priority Investment Program The priority energy sector investment program required to sup- port the proposed energy sector strategy over the 1989-93 period totals about US$143 million and is summarized in Table 2.1 below. Table 2.1: PRIORITY ENERGY SECTOR PROJECTS, 1989-93 Project Estimated Cost (USS mTIlion, end-1987 prices) Tazama Pipeline Rehabilitation, Phase 1 41.2 Power Generation Rehabilitation 5.0 Lusaka Power Distribution, Phase 1 29.9 Ndola/KAtwe Rehabilitation/Reactive Comp. 11.7 Lusiwasi-Chipata-Lundazi Power Trans. 19.0 'kushi Farming Block Electrification 25.0 Indeni Refinery RehabilItatIon and EfficIency 6.0 Strategic Petroleum Storage 3.0 Petroleum Road Tankers 2.0 TOTAL 142.8 Table 2.2 lists two potential projects that could be added to 1;11e program if further analysis proves they are justified and funds are available. Table 2.2: POTENTIAL ENERGY SECTOR PROJECTS, 1989-93 Project Estimated Cost CUSS million, end-1987 prices) Industrial Energy Conservation/Substitution, up to 20.0 Petroleum Exploration Promotion, up to 6.6 TOTAL 26.6  - 14 - Priority energy sector investments for the longer term (1994- 2006) that have been identified at this stage are set out in Table 2.3 below. These exclude expenditures on routine maintenance and rehabilita- tion not yet identified. Table 2.3: LONG-TEiRM ENERGY SECTOR PROJECTS, 1994-2006 Project Estimated Cost (USS milion, end 1987 prices) Tazama PIpelIne Phase II and II1 35.0 Lusaka Power Distributlon, Phase I1 14.6 Kitwe and Ndola Power Subtransmission 16.5 Pensulo-Samfya Power Interconnectlon 10.5 Power Subtransmission Expansion 50.7 Power Distrlbution Expansion up to 136.5 Coal Exploratlon 2.0 TOTAL 265.8  Sunary of Major Issues and Recoimendations Issues Objectives Recommendations Responsible Agency Priority A. E nergy Sector Investment Program 1. Resources available for capi- Use the limited resources avail- Devote available capital re- Ministry of Power Transport High tal investment In the energy able for investment in the energy sources to high-return projects and Communications sector will be limited by the sector on projects that will that rehabilitate and reinforce Ministry of Mines shortage of foreign exchange generate the highest possible existing energy supply systems Ministry of Lends and and low domestic saving. As- economic return. and make more efficient use of Natural Resources suming 10-15J of public In- energy. Improve the operational National Coaission for vestment is devoted to ener- efficiency of energy supply or- Development Planning gy, sector Investment can ganizations to reduce supply ZlD probably average no more than cost. Systematize energy plan- USS20-30 million for the next ning to improve decision-making. five years. S. Electric Power 1. Kafue Gorge power station is Return the station to good opera- Undertake selective repairs to ZESCO High In need of minor repair In ting condition to reduce the pos- key ancillary equipment (chil- order to operate re lably. sibility of operational problems. lers, pumps, etc.); check condi- tion of 300 kV cables and water Intakes and repair as neces- sary. Complete critical spares Inventory. 2. Victoria Falls power station Return Victoria Falls to satis- Overhaul turbines and generators ZESCO Med-High has operational problems be- factory working o4der to maximize and replace power cables, switch- cause of neglected electri- generation at this run-of-river gear and control equipment In the cal, mechanical and civil station and conserve water at A station; Install surge arres- works repairs. Kariba. tors on the generator connections in the 8 station; rectify the vi- bration problem in the C station, probably by increasing turbine submersion; rehabilitate water Intakes.  Issues Obiectives Recommendations Responsible Agency Priority 3. Critical generation and Provide sufficient spares to en- Establish a spares replacement ZESCO High transmission spares are not sure prompt replacement of criti- fund of at least USS100,000 per always available. cal components in the event of year that can be drawn on at the failure. discretion of the Oivisional M4anager, Generation and Transmis- s ion. 4. The capacity of the subtrans- Ensure that the subtransmisslon Begin construction of a 132 kV ZESCO High mission and distribution and distribution system serving ring around Lusaka, to replace system serving Lusaka Ie in- Lusaka has adequate capacity to the over-loaded 88 kV lines; re- adequate for current and satisfy viable demand. habilitate and reinforce key sub- forecast loads. stat ions. 5. Power distribution in the Provide reliable power supply to Replace distribution switchgear ZESOO Ned-High Copperbelt is becoming pro- power consumers In the Copper- and cables that have exceeded gressively less reliable be- belt. their useful life and reinforce cause switchgear and cables overloaded substations and feeder have exceeded their useful cables, t lives. 6. The average cost of adding a Establish optimal englneerin., Review existing distribution and ZESCO High new power customer in the standards for distribution engi- connection design standards and Lusaka area has been about neering and connections that ml- adopt new lower-cost standards USS4,000. This high cost nimize costs at acceptable risk. that are consistent with safe makes expansion of the power operation of the power sysiem. system difficult to justify economically and deters new consumers, because of high connection fees. 7. ZESCO's coamercial operations Achieve industry standard levels improve meter reading and ZESCO High (metering, billing and col- of efficiency in ZESCO comnercial testing; streamline billing lections) are less efficient operations. systems; improve collections than they could be, which through late payment surcharges raises the financial cost of and prompt disconnection of non- power supply. payers.  Issues ObJectives Recommendations Responsible Agency Priority 8. ZESCO cannot recruit or re- Recruit and retain a sufficient Improve ZESOO salaries and terms ZESCO High tain sufficient qualified number of skilled personnel to and conditions so that they are ZiNCO staff for efficient operation ensure efficient operation of the at least competitive with those of the power system due to power system. of other parastatal companies. inadequate salaries and con- ditions of employment. 9 Power tariffs are insuffi- Set power tariffs to fully cover Raise average tariffs to about ZESCO High cient to cover ZESCO's cur- ZESCO's current financial costs, K0.08AkWh in end 1987 prices and ZiNCO rent financial costs and to including debt service, and to adjust the tariff structure to Prices and Incomes finance priority power system reflect economic costs. Plan better reflect economic cost. Coamission Investents. Their structure tariff adjustments that will pro- Plan future tariff Increases that does not reflect the economic duce sufficient revenue to fi- will cover the cost of future in- costs of power supply. nance future operating and debt vestments and operational im- service requirements, without re- provements. sort to government subsidy. 10. Power tariffs are not ad- Establish a tariff adjustment Introduce an automatic annual or ZESCO High Justed promptly, even when mechanism that results in prompt semi-annual tariff review system fully justified by higher adjustments when financially and fixed adjustment date. costs. justified. C. Petroleum 1. The Tazami oil pipeline Is Return the Tazama pipeline to Replace most severely corroded ZIHOO High leaking substantial and in- reliable operating condition. pipeline sections, strengthen TPL creasing quantities of petro- management of TPL and improve leum products, at oonsidera- operator training. ble environmental and finan- cial cost. 2. Various lndenl oil refinery Ensure that the refinery is in Replace furnace coils, heat ex- ZINIO High components, such as furnace good operating condition through changer parts and instruments Indeni coils, heat exchangers and prompt attention to major that have exceeded their useful instruments, have exceeded maintenance needs. life. their useful life.  Issues Objectives Recommendations Responsible Agency Priority 3. Indent refinery fuel use and Reduce refinery fuel use and loss Invest selectively in energy- Zli1CO Ned-High loss Is averaoging about 7% on to Industry standards of about conserving refinery equipment. Indeni a weight basis, about 1ij 5.5%. above achievable performance. 4. The prices of kerosene and Price petroleum products at full Raise the prices of industrial ZluD High gasoil are below economic economic cost to encourage effi- kerosene and gasoil to economic Prices and Incomes cost. cient consumption. cost, based on a shadow exchange eomission rate of K12/USSl. S. Oil exploration efforts have Encourage a thorough program of Strengthen the Hydrocarbon UnTit Ministry of Mines Meditum not examinsd all prospective private sector oil exploration in by moving it under the Geological areas and some data needed all promising areas. Survey and providing further for exploration planning are training and technical assis- lacking. tance. Fully interpret existing data. 6. Insufficient road petroleum Minimize cost of transporting pe- Purchase additional road petro- ZIMCO Medium CD tank wagons are available to troleum products and ensure leum tankers. I efficiently serve domestic transport bottlenecks do not re- and export petroleum markets. sult in lost exports. 0. coal 1. Failure of the walking drag- Optimize the risk of a major in- Analyze the costs and benefits of Maamba Colliery Ned-High line could result In a terruption in coal output. a contingency plan for repair of lengthy Interruption in coal the walking dragline and obtain production. the necessary spares, if justi- fied. 2. Inadequate coal transporta- Ensure that all coal consumers Improve the efficiency of the Zambia Railways High tion capacity has meant that have adequate supplies. rail system and ensure provision Coal Consumers some orders could not be met of sufficient locomotives and in a timely manner. wagons to move coal supplies. Encourage consumers to hold larger coal stocks, perhaps through Incentive pricing.  Issues ObJectives Recommendations Responsible Aaency Priority 3. Meamba Colliery's financial Price coal so that Meamba's Raise the price of coal to about Maamba Colliery High performance Is inadequate. revenues at least cover its K450/ton (USS56/ton) in early ZiMHO In some years it has not financial costs, including debt 1988 prices. covered its costs and it has service. never earned an adequate financial surplus. 4. The structure of coal prices Price coal In relation to Its Price coal In early 1988 prices Meamba Colliery Medium does not accurately reflect calorific value to encourage as follows: ZINCO its calorific value. optimal consumption decisions. Premium - K480/t Standard - K455/t Medium - K440/t 5. Future coal reserves other Obtain sufficient data on min- During the period 1995-2000, Ministry of Mines LoW than at Heamba are uncertain. eable coal reserves to plan new undertake a coal exploration mining opeWrations as needed. program. Advance the program if coal demand rises sharply. E. Woodfuels and Household Energy %0 t. Stumpage fees are only a Price wood at or above the cost Raise stumpage fees closer to the Ministry ot Lands and Medium-High fraction of the cost of plan- of production to provide an in- cost of wood production and exam- Natural Resources tation wood and are not al- centive for replacement and col- Ine ways to improve collection. ZAFFICO ways enforced. lect payments due. 2. There Is no charge for com- Price wood at its replacement Introduce a stumpage fee for Ministry of Lands and High mercial cutting of wood from cost and enforce collection of commercial exploitation of Natural Resources natural woodland and little fees. Introduce efficient natural wood resources. active management of this management of natural woodlands. Strengthen natural woodland resource, management with resulting rMvenue. 3. Low-efficiency charcoal cook- Substitute high-efficiency stoves Establish an Improved charcoal Department of Energy High Ing stoves are used by the for the low-efficiency models stove customer testing program. WNZA majority of urban households, currently in general use. Select the most popular high- Ahlch results in excessive efficiency stove and organize charcoal consumption. mass production and dissemina- tion, using local artisans and markets.  Issues ObJectives Recommendations Responsible Agency Priority 4. Not enough is known about ur- Obtain sufficient information on Organize studies of (a) urban Department of Energy High ban household energy demand urban household energy demand and household energy demand; (b) Ministry of Lands and and supply costs to design a supply to design a least-cost ur- woodfuel marketing and distri- Natural Resources strategy for satisfying urban ban household energy strategy. bution; (c) charcoal production household energy demand at methods; (d) biomass availability least cost. In penr-urban areas; and (e) the financial and economic costs of alternative fuels. Prepare and implement a household energy strategy based on these studies. 5. The high up-front costs ci Facilitate household electrifica- Identify steps to reduce the cost ZESCO High electricity connection, house tion, where it is economically of electricity connections, house Dept. of Energy wiring and appliance purchase Justified, through improving its wiring, and appliances are deterrents to household affordability. (especially hotplates and electrification. cookers) and explore ways to spread those costs over a longer period, e.g. by term payment on electricity bills. O 6. Coal briquettes may be an Ascertain whether coal briquettes Organize a consumer acceptance Dept. of Energy Medium acceptable and competitive are an acceptable and competitive testing program for coal briquet- UNZA alternative to charcoal for charcoal substitute and, if so, tes as household fuel. If they i'aamba Colliery urban household cooking. begin commercial production. are acceptable, assess their fi- nancial and economic feasibility as a charcoal substitute. If briquettes are competitive with charcoal, Implement a commercial- scale production and marketing project.  Issues Objectives Recommendations Responsible Agency Priority F. Renewable Energy 1. Solar fish and crop drying Establish the feasibility of Institute a solar fish and crop Dept. of Energy Medium could reduce losses due to solar fish and crop drying. If drying test program by adopting Fisheries Department spoilage and conserve wood feasible, promote their use, proven designs and directly In- Ministry of currently used for fish particularly in areas of wood volving the Fisheries Department, Agriculture smoking. shortage. Agricultural and Fish Coopera- UNZA tives. 2. Wind and biogas are not Keep abreast with renewable Monitor technical development of Department of Energy Low generally economic In Zambia, energy technology development to windpumping, biogas, and other UNZA but technical advances could determine when such technologies technologies potentially appro- NCSR change that over time. could be generally viable In priate to Zambian conditions. Zambla. 3. Geothermal electricity Ascertain whether and where If the current tests are success- Geological Survey Med-Low generation Is being tested at geothermal electricity generation ful and suggest the technology Is Department of Energy Kasaba Bay on Lake could be economic. viable, assess the costs and ZESCO Tanganyika. The economic benefits of geothermal electri- feasibility of this city generation at a small sample technology has yet to be of the more promising sites. established.  Issues Objectives Recauendations Responsible Agency Priority G. Energy Conservation and Substitution Substitute coal for Imported fuel Confirm whether, after Installa- ZiWOD Med-High 1. Furtner substitution of coal oil at Nkana, If feasible. tion of the new oxy-fuel smelting for fuel oil at the Nkana technology at Nkana, coal sub- Smelter appears to be techni- stitution is technically feasible cally and economically and economic. If so. implement a viable. substitution program. 2. There appears to be substan- Identify and Implement cost- Provide technical assistance to Department of Energy High tial scope for efficiently effective energy conservation and the Department of Energy to ex- ZiMCO conserving energy and for substitution measures in Industry pand the industrial and commer- substituting Indigenous coal and comrerce. cial energy audit program and and electricity for imported identify economically justified petroleum fuels in industry energy conservation and substitu- and comerce. tion measures. 3. Excise duties on transport Generate sufficient revenue from Consider raising the excise ZiMCO Medium fuels barely cover expendi- vehicle and fuel taxes to cover duties on transport fuels, Ministry of Power, ture on road construction and all road user costs and maintain particularly automotive diesel. Transport and maintenance, which Is Insuf- the roads in good condition. Coamunications ficlent to keep the road Ministry of Finance network in good condition. This reduces the efficiency of energy use in transport. 4. Little effort has been made Encourage transport fuel users to Consider mandating a minimum fuel Ministry of Power, Medium to encourage energy use fuel efficiently. efficiency standard for all new Transport and Coamunica- conservation in transport, imported vehicles and introducing tions which is the major user of maximum speed limits. imported petroleum fuels,  Issues Objectives Recommendations Responsible Agency Priority H. Energy Institutions and Pol icy 1. There Is no adequate mecha- Develop and Implement an energy Retain the Energy Development Government of Zambia High nism for establishing and strategy that satisfies viable Committee, representative of the Implementing an energy stra- demand for energy at least cost. major Ministries and paras*atal tegy for Zambia. companies concerned with energy, to oversee updating and implemen- tation of the energy strategy. Form an expert secretariat from the Department of Energy and ZiNCO. 2. The Department of Energy Is Provide the Energy Development Build up the Department of Ministry of Power, Med-High not adequately staffed to act Committee with a secretariat Energy's staff over time to a Transport and as secretariat to the Energy capable of performing the total of about eight profes- Communications Development Committee. analysis needed to update and sionals, Including a Chief implement the energy strategy. Economist, Chief Technical Officer and Senior Financial Adviser.  - 24 - III. ENERGY AND THE ECONOfY - CURRENT SITUATION AND FORECASTS 3.1 Structure of the Economy Manufacturing accounts for 22X of Zambia's GDP, mining, agri- culture, and private services for about 14X each, and other sectors for the balance (Table 3.1). Table 3.1: SECTORAL COMPOSITION OF GOP, 1985 ) Manufacturing 22.0 Mining 14.2 Agriculture 14.5 Services 14.8 Others 34.5 Total 100.0 Source: NCDP. This structure marks a radical change from 1965, when copper mining accounted for over 401 of GDP. Copper production subsequently peaked at 713,000 tons in 1976. By 1984-85, it had fallen to less than 480,000 tons, before recovering slightly in 1987 to 490,000 tons. Although copper mining's relative share of GDP has fallen sharply, it remains the dominant influence on the Zambian economy. Despite copper exports having fallen from 667,000 tons per annum in 1970- 72 to 480,000 tons in 1985, and prices having declined by 60% in real terms between 1975 and 1986, copper still accounts for about 90% of Zambia's export earnings. In 1987, this percentage was even higher, as world copper prices rose and Zambian exports increased. A further legacy of its copper export dependence is that the Zambian economy is also highly open, the total of imports and exports representing nearly 50% of GDP. 3.2 Recent Economic Performance and Strategy The persistent decline in world copper prices and Zambian cop- per production, coupled with then rising oil prices and global recession, caused a severe slowdown in economic growth during the late 1970s. At- tempts to maintain domestic production and consumption in the face of falling foreign exchange earnings led to heavy borrowing. By 1986, the external debt was four times GDP and scheduled debt service was 100% of export earnings.  - 25 - Shortages of foreign exchange reduced investment, which fell by over 60% between 1981 and 1985. By 1985-86, gross fixed capital forma- tion was at an all-time low of 7% of GDP, well below the requirement for replacement and rehabilitation of the existing capital stock. In the mid-1980s, faced by persistent economic stagnation and a steadily worsening balance of payments and debt situation, the Government launched an ambitious program of economic liberalization. Price controls were removed from most products and subsidies reduced. Interest rates were liberalized and a foreign exchange auction system introduced. The maize and fertilizer marketing monopolies were ended. Unfortunately, copper prices continued to decline, and the eco- nomy did not respond quickly to these measures. The backlog of external payments and the scarcity of foreign exchange resulted in a nearly seven-fold devaluation of the Kwacha between October 1985 and October 1986. Foreign debt service costs rose in proportion, and inflation ac- celerated sharply, from an average of 20Z in 1983-84 to about 60% in 1986. At the beginning of 1987, the government abandoned the foreign exchange auction and set a fixed exchange rate of K8/US$1. 1/ Interest rate ceilings were reimposed and debt payments limited to 10% of export earnings. Foreign aid flows and commercial bank lending were still far below Zambia's needs, but copper prices rose and provided some relief, reaching US$1.40/lb in late 1987, before settling back to around US$1.00/lb in early 1988. Coupled with a slight increase in copper ex- ports, this partly offset the low level of multi-lateral and commercial lending. However, it was not sufficient to reverse the net outflow of resources or cause a resumption in economic growth. 3.3 Pattern of Energy Supply In such difficult economic conditions, Zambia is fortunate in having considerable indigenous energy resources, particularly of wood- fuels, hydropower, and coal, which satisfy about 90% of its energy needs. With the exception of petroleum, the country is virtually self- sufficient in energy, and is a net exporter of hydropower. The energy balance for 1986, the last full year for which com- prehensive energy data are available, is set out in Table 3.2. 1/ Between early 1987, when the exchange rate of K8/US$1 was established, and end 1987, Zambia experienced inflation of over 50%. Project costs used in this Report were estimated as of end-1987. To reflect the economic value of the currency at this time, a shadow exchange rate of K12/US$1 is used for the economic analysis. In late 1988, the Kwacha was devalued to K10/$US1.  Tabto 3.2: %B/DOE ENERGY STRArEGY StDWY - ENERGY FMLANCE FOR 1986 ('000 too) S O U R C E S A N D F O R t S O F E N E R G Y P R I t A R Y E N F R G Y S E C ON N DA R Y E N E R G Y 1 2 3 4 5 6 7 a 9 tO It 12 13 14 t5 16 1t7 i SPIKED HYMOR- TOTAL DIESEt/ tOtAt tlIONS l EttIttY CRUDE FLEC- PRIMARY GAS OIL/ AVIATION FUEL fLEC- SFOONI)APY OIL COAL lRICITY YOD souCrS StIPER REGULAR LSG FUEL KEROSENE OIL LPG BITtWUN ODKE TRICITY CKARO AI (tatcr. TOIAL SUPPLY I COpstic produetlon 356.7 840.2 4482.7 568I.5 581.5 2 lpoorts 603.4 0.1 603.5 1.4 24.6 25.9 629.5 S VarIatlen In stocks -51.4 -5.8 -57.2 1.0 6.0 3.2 5.7 -1.4 2.5 0.4 0.6 16.0 -41.2 4 Total tsppIy 552.0 352.9 840.3 4482.7 6227.8 1.0 6.0 3.2 5.0 -1.4 2.5 0.4 0.6 24.6 41.9 6269.7 5 Exports 14.1 244.7 258.8 7.3 1.7 0.2 4.1 0.2 13.6 272.4 6 tomstle sPply 852.0 338.8 895.5 4482.7 5969.0 1.0 -1.3 1.5 5.0 -1.4 2.3 -3.7 0.4 24.6 28.4 8997.3 II. lRAMSFRT TION 7 Retlnmrles -552.0 -552.0 74.6 19.3 246.1 38.9 28.3 84.t 4.1 14.4 509.8 -42.3 * ElectricIty utiltIes 0.0 -89.5 -595.5 -1.7 597.4 595.6 O.t 9 XI Ins -2220.4 -7220.4 832.9 532.9 -t687.5 10 Total Troosforetnon -552.0 0.0 -95.5 -2220.4 -3367.9 74.6 19.3 244.4 38.9 28.3 84.1 4.1 14.4 597.4 532.9 1638.3 -1729.6 fit. OIST./TRASM. LOSSES IL ss 59.7 59.7 59.7 t IV. TOTA SUPPLY FC9 FINM. CONS. 12 total supply 338.8 0.0 2262.3 2601.1 75.6 I8.O 245.9 43.9 26.9 86.4 0.4 14.8 24.6 537.6 532.9 1606.9 4208.0 V. AI1JENS I3 AtJustmnt -3.1 0.0 -3.3 -6.4 2.5 -6.0 -4.9 5.4 -0.2 -1.0 -t.2 0.4 -0.1 -17.4 -26.6 -33.0 Adjustment tn S of fInal can -0.9 -0.1 -0.2 3.4 -24.8 -3.5 13.9 -0.9 -1.2 -74.3 2.6 0.0 0.0 -3.2 -1.6 -0.8 VI. FINAL tISUIPTION 14 Households 1858.9 1858.9 16.0 42.7 548.0 606.7 2465.6 15 AgrIculre end forestry 203.3 203.3 14.8 0.3 0.0 8.4 23.6 226.9 16 ZCCP .84.3 164.3 0.8 1.1 63.4 6.2 63.5 24.6 389.3 2.3 551.3 735.5 t7 Industry and 141.5 203.3 344.8 36.3 3.6 17.6 1.6 14.4 70.6 144.1 488.9 to Go'w rment/srvl co 16.1 t6.t 0.6 6.3 26.6 33.5 49.6 19 Tranport 72.3 22.9 140.3 38.6 0.4 274.4 274.4 20 Total filoo Consumptlen 341.8 2265.6 2607.4 73.1 24.0 254.8 38.6 27.1 87.4 1.6 14.4 24.6 537.1 550.3 1653.5 4240.9 Notes: (a) The utltltzatlon of crop ridues. dung.. bhesse do not apper on the belance altiouql the are used as fuels. However, vwy little Inter_tlon Is avalleblo and tt consunptlon Is ttoutht to be comparatively small. fb) The fInal conlsueton of wood for Agrculture aid Forestry' and for "Industry and Commerce* we estl_eted to total 105 of consumption of d for household nry utS (both firewood end charcoal).  - 27 - In that year, primary energy production totalled 5.7 million tons of oil equivalent (toe). Two hundred and fifty nine thousand toe were exported, primarily in the form of hydropower to Zimbabwe, and 603,500 toe of pe- troleum products were imported. Wood was, and is, the dominant source of energy, contributing 72X of total primary supply, followed by hydroelec- tricity (13%), 2/ petroleum products (9%) and coal (6%). 3.4 Energy Transformation In 1986, approximately 501, or about 2.2 million toe of fuel- wood was converted into charcoal, at an estimated average conversion ef- ficiency of 25X. Total charcoal production was about 533,000 toe. The 603,500 toe of petroleum products were imported in commin- gled form, via the Tazama pipeline from Dar-es-Salaam to Ndola, and se- parated at the Indeni hydroskimming refinery. Pipeline losses and refin- ery own use and loss in 1986 totalled 42,300 toe, or 8X of total petro- leum product imports. Refinery operations were estimated to account for about 7% of the 8% loss, pipeline and other losses for the balance. 3.5 Pattern of Energy Demand Final domestic energy consumption in 1986 totalled 4.2 million toe, of which households were estimated to account for 58%, mining for 17%, industry and commerce for 12%, transport for 7X, agriculture for 51, and Government and services for the remainder. Household energy demand is met primarily from wood (76Z) and charcoal (22%). As most wood is gathered, not bought, accurate figures of consumption are not available. Electricity accounts for just under 2% of domestic energy consumption, and kerosene for the small balance. Po- pulation growth is rapid, averaging about 3.5 per year, and urbanization (and hence the use of charcoal) is increasing. Consequently, woodfuel consumption is rising faster than population growth. The energy demand of the mining industry is met primarily by electricity (53%), coal (251), diesel and fuel oil (9% each). Mining is the largest domestic consumer of electricity, coal and fuel oil, account- ing for 72%, 54%, and 73Z of total national consumption of these fuels respectively. Declining copper production has meant stagnant or falling energy demand from the industry for the past 10 years. Conventional (non-wood) energy use in industry and commerce is dominated by coal and electricity. Wood and charcoal are used in signi- ficant, but unknown quantities. In constructing the energy balance, in- 2/ Converting hydroelectricity on a heat equivalent basis of 1 GWh = 85 toe.  - 28 - dustry and commerce were assumed to be responsible for 5% of total wood consumption. As a result of Zambia's difficult economic situation, total energy use in the sector has been virtually stagnant for the past 10 years. The energy needs of the transport sector are met largely by diesel oil (51%), gasoline (34%), and aviation fuel (14%). This sector accounts for 54% of total national demand for petroleum products. Over the past 10 years, transport energy demand has been static, suppressed by falling incomes, the high cost of imported vehicles, and by the scarcity of foreign exchange. If and when these constraints are eased, transport fuel demand could rise, with adverse implications for the balance of pay- ments. Agriculture and services are not large users of energy. How- ever, the economic strategy of diversification and greater reliance on the use of indigenous resources implies rapid growth in agricultural out- put. This in turn will mean higher energy demand, particularly for diesel oil and electricity. Due to the low level of current agricultural energy consumption, the effect on aggregate energy demand will be mod- est. However, in the case of electricity, the investment implications could be considerable. 3.6 Economic Projections, 1988-2006 Future economic growth is highly uncertain, depending on sever- al unpredictable factors. Among the most important are: (a) the price of copper and other export minerals; (b) the levels of official aid flows and foreign commercial lending; and (c) the performance of the domestic agriculture and manufacturing sectors in the face of current severe shortages of imported inputs. The prospects for sustained higher copper prices in the long- term are not good. World demand is relatively inelastic; substitution, particularly by optical fibers, is continuing; and other producers, in- cluding some with lower costs than Zambia, are capable of increasing their output in response to higher short-term prices. Official aid flows to Africa are increasing, but Zambia's share is uncertain. Commercial lending to developing countries has fallen, and Zambia's recent debt ser- vice problems are likely to rule this out as a significant source of new money. Consequently, foreign exchange will probably remain scarce, im- posing severe constraints on the supply of imported inputs for agricul- ture and manufacturing. Due to the current difficult economic situation, GDP is fore- cast to remain unchanged in 1988. For the period 1989-2006, three alter- native economic scenarios have been selected to assist in forecasting future energy demand: a base, a low, and a high case.  - 29 - (a) The Base Case assumes average annual growth in aggregate real GDP of 2%, which represents an improvement over recent economic performance, but not a return to the high performance of the late 1960s and the early 1970s. (b) The High Case assumes average annual real CDP growth of 3.5X. Broadly in line with the Government's current economic targets, this represents a substantial improvement in recent economic performance. Starting from the current low base, growth might be sbove 3.5% in the short-run, and below in the long-run. (c) The Low Case assumes real GDP remains static. This slight wor- sening of recent economic performance assumes a pessimistic combination of weak copper prices and persistent shortages of foreign exchange. It should be stressed that these are only economic scenarios not forecasts. Their purpose is simply to provide a quantitative basis for forecasting the possible evolution of energy demand. While the sce- narios are projected through the year 2006, they become increasingly spe- culative in the later years. Actual economic events will almost certain- ly not parallel any of the scenarios exactly. As the future economic si- tuation develops over time, the scenarios should be reexamined and more realistic alternatives used to update the energy strategy. 3.7 Energy Strately Objectives and Constraints The basic objective of Zambia's national energy strategy is to satisfy demand for energy at the least economic cost, and in a way that is consistent with national development priorities, with the availability of resources, and with the long-term viability of the energy supply or- ganizations. This broad strategic objective can be translated into a number of specific sub-objectives, among the most important of which are: (a) providing adequate, reliable, least-cost energy supply to the productive sectors of the economy, on which economic develop- ment depends; (b) providing sufficient affordable energy to households, to satis- fy their basic energy needs; (c) without compromising the objective of least-cost supply, mini- mizing net imports of energy, in order to conserve foreign ex- change; (d) meeting energy needs in an environmentally-sound manner; and (e) ensuring adequate maintenance of energy supply systems and the financial viability of the organizations responsible for them.  - 30 - Limited investment resources, both domestic and foreign exchan- ge, are the principal strategic constraint. Currently, the level of do- mestic savings and investment is extremely low, only 7X of GDP in 1986. The flow of official aid and commercial lending is also depressed, al- though at least the former should increase. On balance, the outlook is for severe capital scarcity over the next several years. Therefore, the energy strategy seeks to minimize investment re- quirements by emphasizing improvement in existing capacity utilization and efficiency. It also sets priorities among the limited investments that are recommended, and ensures that they provide sufficient flexibili- ty to allow the energy sector to adjust to future uncertainty. In view of the difficult and upredictable economic situation, the focus of the energy strategy is on the next five years, 1989-93. Predicting events and energy priorities beyond this period is highly spe- culative, and of less importance than getting the near-term priorities right. To take account of emerging energy priorities over the longer term, and the evolving economic situation, the energy strategy must be updated at least every five years, and the energy plan, every year. With this need in mind, the energy strategy report examines the role, skill and manpower requirements of the organizations responsible for energy planning, and recommends steps to enaure that they are adequate for this task. 3.8 Energy Demand Forecasts, 1988-2006 Three domestic energy demand forecasts have been developed, a low, a high, and a base case forecast, corresponding to the three econo- mic scenarios. The purpose of the energy demand forecasts is to deter- mine the energy requirements of the economy under the different demand assumptions, which assists identification of the strategic energy issues in the short, medium, and long-term. Energy exports have been forecast exogenously, using conservative assumptions for each export product and market. Tables 3.3 and 3.4 show the three alternative forecasts of do- mestic final energy demand by consuming sector and by energy source for 1996 and 2006. Projected Energy Balances for 1996 and 2006 are set out in Appendix 3.1. The forecast methodology is described in Appendix 3.2.  - 31 - Table 3.3: FORECAST FINAL ENERGY CONSUMPTION BY SOURCE (toe 'OOOs) Sources 1986 1996 Forecast 200f Forecast Actual Low Case Base Case High Case Low Case Base Case High Case toe o toe S toe % toe % toe % toe % toe s Electricity 538 13 594 12 617 12 642 12 483 8 539 9 608 9 Coal/Coke 366 9 325 6 338 6 354 7 317 5 344 5 385 6 White Pet. Prod 418 10 383 8 430 8 468 9 370 6 488 8 605 9 Fuel Oil 87 2 62 1 65 1 68 1 38 1 44 1 50 1 Bitumen/LPG 16 0 16 0 18 0 21 0 16 0 23 0 29 0 Subtotal 1,425 34 1,380 27 1,469 28 1,552 29 1,224 21 1,437 23 1,677 25 Firewood 2,266 53 2,745 54 2,805 54 2,853 54 3,168 53 3,322 53 3,473 52 Charcoal 550 13 961 19 943 18 917 17 1,559 26 1,516 24 1,468 22 Subtotal 2,816 66 3,705 73 3,748 72 3,770 71 4,727 79 4,838 77 4,941 75 Total 4,241 100 5,085 100 5,217 100 5,322 100 5,950 100 6,276 100 6,619 100 Source: Department of Energy. Table 3.4: FORECAST FINAL ENERGY CONSUMPTION BY SECTOR (toe '000)s 1986 1996 Forecast 2006 Forecast Sector Actual Low Case Base Case High Case Low Case Base Case High Case toe % toe % toe % toe % toe % toe % toe % Households 2,466 58 3,371 66 3,350 64 3,316 62 4,412 74 4,358 69 4,308 65 Agriculture 227 5 230 5 269 5 305 6 236 4 342 5 448 7 ZCCm 736 17 639 13 639 12 639 12 470 8 470 7 470 7 Industry 489 12 538 11 602 12 663 12 531 9 682 11 848 13 Govt/Service 50 1 50 1 58 1 65 1 50 1 71 1 92 1 Transport 274 6 258 5 298 6 334 6 251 4 352 6 453 7 Total 4,241 100 5,085 100 5,217 100 5,322 100 5,951 100 6,276 130 6,619 100 Source: Department of Energy.  - 32 - 3.8.1 Forecast Sectoral Pattern of Energy Demand The main features of the domestic energy demand pattern are un- likely to change drastically during the period under consideration. The household sector will continue to dominate total energy demand. Its re- lative share in overall final demand is forecast to increase from 58% to 69% by 2006 in the base case forecast. This is because the projected rate of growth of population is higher than the asssumed growth rate of the economy. Households rely almost entirely on woodfuels for their energy needs (87%). Therefore, the relative share of woodfuels in total energy consumption is forecast also to increase, as is total consumption of woodfuels, which is expected to rise by about 701 by 2006. ZCCM will continue to be by far the largest domestic consumer of conventional (non-wood) energy resources, accounting for about 40% of total conventional energy consumption in 2006. However, its dominating role will diminish as copper production declines. The other sectors of the economy are expected roughly to maintain their relative shares of consumption during the period. Total final domestic energy consumption rises in all three forecasts, the largest contribution coming from fuelwood and charcoal. Domestic consumption of conventional energy decreases in the low scenario from 1986 to 2006. In the base case, conventional energy consumption in 2006 is forecast to be roughly the same as in 1986. In the high case, there is a modest increase in conventional energy consumption over the forecast period. The decrease of energy consumption in the low case is explained by the fact that the energy consumption of ZCCM is forecast to decline by 2006, while the consumption of the other sectors is stag- nant. In the base and high case, the growth of the other sectors coun- terbalances the forecast decline in the consumption of ZCCM. 3.8.2 Forecast Pattern of Energy Demand by Fuel Type Domestic consumption of petroleum products is assumed to be strongly linked to economic growth. In the high scenario, petroleum pro- duct consumption is forecast to increase by 29% from 1986 to 2006, which is much more than the increase of electricity and coal/coke (21% and 3% respectively). This is primarily due to forecast expansion of transport energy demand, which is the largest consumer of petroleum products. The consumption pattern of both electricity and coal, on the other hand, is dominated by a small number of consumers whose consumption is not so strongly linked to average income growth. In the case of electricity, ZCCM is the dominant consumer. In the case of coal, the main consumers are ZCCM, NCZ, and Chilanga Cement. ZCCM's and NCZ's energy demand is largely dependent on technical factors, and is not strongly affected by growth elsewhere in the economy. A dramatic change is foreseen in the level of electricity ex- ports. From 2,879 GWh (245,000 toe) in 1986, they are forecast to de- cline to 1,165 GWh (99,000 toe) in 1996. This follows Zimbabwe's drive  - 33 - for greater self-sufficiency in power supply, and more than offsets the modest forecast increase in domestic consumption. Exports of petroleum products and coal are relatively small and volatile. Recent past export performance is simply projected into the future, implying an annual average of 50,000 tons of petroleum product exports and 35,000 tons of coal exports. The most important feature of these forecasts is that, even in the high scenario, the forecast consumption of electricity, petroleum products and coal do not surpass the existing capacity of the respective supply facilities over the period to 2006. In the case of electricity, total domestic and export demand is forecast to be below its 1986 level by the end of the period. Unless new export markets can be developed, the surplus of available electric power capacity and energy will there- fore increase, relative to 1986. The high scenario demand for petroleum products, which requires 725,000 tons of imports, is within the capacity of both the Tazama pipeline and the Indeni refinery, as currently confi- gured. In the case of coal, the high demand forecast is 570,000 tons (385,000 toe), which is well below tho present capacity of the mine. 3.9 Balance of Payments Implications of Energy Forecasts 3.9.1 Recent Situation Zambia's net balance of energy trade is dominated by two items: petroleum product imports and power export sales to Zimbabwe. During the mid-1980s, the cost of petroleum imports averaged about US$90 million per year. At their peak in 1986, power export revenues were over US$40 million. Taking account of coal and other energy exports, the energy balance of trade was in deficit by just under US$50 million in that year. In 1987, power export sales declined sharply to less than US$20 million, and the energy balance of trade widened to about US$70 mil- lion. In 1988, the picture is likely to be similar, perhaps a little worse, if the further expected decline in power exports materializes. 3.9.2 Forecast Evolution Over the period 1989-93, petroleum import volumes are forecast to rise at a modest rate of about 2X per year in the base case. Future petroleum prices are highly uncertain. In the short run (1988-89), they appear likely to be stable. Moving into the 1990s, the general consensus is that prices will start to rise as increasing world demand soaks up ex- isting excess supply. In that event, the cost of petroleum product im- ports is likely to rise over this part of the forecast period. Beyond the mid-1990s, the trend in prices is highly uncertain, but few experts expect a return to mid-1980s low price levels.  - 34 - With the commissioning of the Hwange 1 power station, there is little immediate prospect of a recovery in power export sales to Zimbabwe to early 1980s levels. However, sales in the range of 1,000-2,000 GWh per year and 150-250 MW should be possible over the 1989-93 period, pro- ducing export earnings of about US$10-20 million per year. Beyond 1993, power export prospects are highly uncertain. As- suming Zimbabwe continues its policy of self-sufficiency in power, there is little prospect of a major recovery in Zambian exports, despite the low cost of Zambian supplies. However, some export sales should be pos- sible, particularly in years when Zimbabwean capacity is stretched. In its own interests, and those of promoting efficient use of existing power capacity, Zambia should continue to emphasize its potential as a reliable source of substantial quantities of low-cost power. Malawi and Botswana offer potential for modest exports, but nowhere near enough to compensate for the expected drop in Zimbabwean sales. Coal exports in 1986-87 were about 30,000 tons, earning over US$1 million in foreign exchange. The capacity exists to supply future coal export markets, but the markets themselves are limited and volatile. A major increase in coal exports is therefore not foreseen. Overall, the outlook is for a deficit in the balance of energy trade of about US$70-80 million over the 1989-93 period. Looking further ahead, the prospect is for further deterioration, assuming petroleum pro- duct prices start to increase in the 1990s.  - 35 - IV. ELECTRIC POllE 4.1 Characteristics of the Existing Power System The Zambian power system consists of one large, interconnected system, usually known as the main grid; a smaller interconnected system, known as the northeastern system; and several small, isolated systems served by diesel generating units. The main grid and the northeastern system will be interconnected at Pensulo, near Serenje, probably during the course of 1989. The power stations and transmission system are shown on IBRD Map 20984 at the end of this Report. 4.1.1 Installed Generation Capacity Hydro generating capacity on the main grid totals 1,608 MW. The main hydro stations and their respective installed capacities are Kariba North (600 MW) and Victoria Falls (108 MW) on the Zambezi River, and Kafue Gorge (900 MW) on the Kafue River (Table 4.1). Until recently, the Kariba North and South stations were run as a single complex by the Central African Power Corporation (CAPC). In 1987, they were transferred to the national power utilities of Zambia and Zimbabwe respectively. CAPC was dissolved, and its role of managing the Kariba dam was taken over by the Zambezi River Authority. The northeastern system consists of four small hydro stations, with a combined capacity of 24 MW, and 2 MW of diesel standby. Seven diesel generators, with a combined capacity of 5 MW, supply the isolated systems. Zambia Consolidated Copper Mines (ZCCM) owns four gas turbine generators and a waste heat plant, located in the Copperbelt. The gas turbines have a total installed capacity 80 MW, and are kept on cold standby. The waste heat plant has a nominal capacity of 40 MW, but sup- plies an average of only about 3 MW. The Zambian power system is interconnected at high voltage with those of neighboring Zimbabwe and Zaire. Zambia exports to and provides standby capacity to Zimbabwe in the event of emergency. In the case of Zaire, major support is given at cost. It has reciprocal access to standby capacity from these two countries. 4.1.2 Available Firm Energy The estimated firm energy capabilities of the various stations are also shown in Table 4.1. The firm energy capabilities of Kariba North and Kafue Gorge were originally estimated at 4,700 GWh/year and 5,256 GWh/year respectively. Recent hydrological experience suggests that the estimate for Kariba North should be revised downwards, probably to a range of 3,750-4,250 CWh/year. In the case of Kafue Gorge, water- rights have been set aside for agricultural purposes. Although not fully  - 36 - utilized, they justify a downward revision in the plant's firm generation capability to about 5,000 GWh/year. Water-flow measurement is recommend- ed, and could lead to further revision of these firm energy estimates. Table 4.1: INSTALLED POWER CAPACITY AND ESTIMATED FIRM ENERGY CAPABILITY, 1988 Power Station Installed Capacity Firm Energy MW GWh/a Interconnected System Kariba North 600 3,750-4,250 Kafue Gorge 900 5,000 Victoria Falls 108 770 S3UBTOTAL I,608 9,520-10,020 Northeastern System Lusiwasi 12 50 Chishimba Falls 6 20 Musonda Falls 5 30 Lunzua 1 5 Diesels 2 - SUBTOTAL 26 105 Isolated Diesels 5 ZCCM Gas Turbine a/ 80 Waste-Heat Thermal b/ 40 - GRAND TOTAL 1,759 9,625-10,125 a/ Standby b/ Output is typically in the range of 3 MW. Source: ZESCO and World Bank estimates. Transmission losses on the interconnected 330/220 kV network are about 3.5%. Assuming a conservative 4,000 GWh/year from Kariba North and using the above estimates for the other stations, the average avail- able firm energy capability of the grid at bulk supply points is 0.965 x 9,875 - 9,529 GWh/year, after completion of the Pensulo substation in 1989. 4.1.3 Potential Generating Capacity Zambia is drained by two major river systems, the Zambezi and the Luapula. The Zambezi and its major tributaries, the Kafue and the  - 37 - Luangwa, drain about 75X of the total land area. Zambia's potential hy- dro reserves on these two river systems are considerable, totalling about 4,000 MU and over 21,000 GWh/year. Zambia also has large coal deposits, which could be used for thermal power generation. 4.1.4 Existing Transmission and Distribution System The backbone of the power transmission system is 1,900 km of 330 kV lines, connecting the major generating stations with the load cen- ters, of which the largest are the Copperbelt and Lusaka. There are also traismission lines operating at 220 kV (510 km), 88 kV (510 km) and 66 kV (3,100 km). Primary distribution voltages are 33 and 11 kV. The three- phase secondary systems operate at 400 volts. The transmission and distribution network covers most of the urban areas and larger towns. Ninety-one townships were recorded in the 1980 census, of which 56 were classified as "urban areas". By 1988, 83 had electricity supply--78 from ZESCO and 5 from ZCCM. 4.1.5 Rural Electrification The Department of Energy sets priorities for the "rural elec- trification" program, the capital costs of which are funded from the Central Government budget. It consists of the interconnection of the re- maining isolated towns to the grid, construction of mini-hydro stations to replace diesel generators, and rehabilitation of existing diesel sta- tions. Operation of the facilities is entrusted to ZESCO. Due to the extreme shortage of funds, recent investments in rural electrification have been modest. They have consisted exclusively of completing on- going, long-delayed projects. 4.1.6 Generation and Sales Data on the production and bulk supply of electric energy on the interconnected system, by major source and customer group, for the last five ZESCO fiscal years (April-March), are shown in Table 4.2. Be- tween 1983-84 and 1986-871, energy production was roughly constant at 9,430-9,750 GWh/year. In 1987-88, production declined to 7,727 GWh, due to a sharp fall in export sales to Zimbabwe. This was the result of Zimbabwe increasing generation at its Hwange thermal power station. In 1987-88, energy production was some 1,802 GWh (19Z) below the conserva- tive estimate of firm energy availability.  - 38 - Table 4.2: ELECTRIC ENERGY PRODUCTION AND BULK SUPPLY ON THE INTERCONNECTED SYSTEM 1983-84 to 1987-88 a/ (GWh) 1983-84 1984-85 1985-86 1986-87 1987-88 PRODUiCTION Kariba North 3,788 3,996 3,475 3,337 2,788 Kafue Gorge 5,152 4,677 5,594 5,436 4,407 Victoria Falls 769 756 680 697 624 TOTAL 9,709 9,429 9,749 9,470 7,819 TRANSMISSION LOSSES 264 299 352 287 307 BULK SUPPLY Domestic supplies ZESCO South 1,217 1,211 1,221 1,288 1,361 ZESCO North 624 630 636 654 656 ZCCM 4,293 4,249 4,138 4,465 4,459 TOTAL Domestic 6,134 6,090 5,995 6,407 6,476 Exports b/ Zimbabwe 3,172 3,039 3,410 2,776 1,036 a/ ZESCO fiscal year, April-March. :/ Excluding net transfers of energy to Zaire which In theory sum to zero. Source: ZESCO. Simultaneous maximum demand on the Zambian system (including exports) peaked at 1,396 MW in 1984-85. It declined to 1,279 MW in 1985- 86, rose to 1,320 MW in 1986-87, then fell in 1987-88, following the re- duction in Zimbabwean demand (Table 4.3). Table 4.3: SIMULTANEOUS MAXIMUM DEMAND a/ ON THE ZAMBIAN INTERCONNECTED SYSTEM (MW) Source 1983-84 1984-85 1985-86 1986-87 Zambia 897 895 895 936 Zimbabwe 447 501 384 384 TOTAL 1,344 1,396 1,279 1,320 a/ Including transmission losses within Zambia. Source: ZESCO.  - 39 - 4.2 Policy Issues and Options To facilitate economic recovery, the power system must provide reliable and adequate supplies of electricity to the productive sectors of the Zambian economy. A priority is therefore to identify the critical weaknesses in the existing supply system and the actions necessary to overcome them. With surplus power and energy capacity, investment in new generating capacity is clearly not needed, but the existing generating scations must operate reliably. Bulk transmission capacities are ade- quate for existing loads, but the firm capacity of the 330/88 kV trans- formers and the 88 kV lines serving Lusaka is less than the city's peak demand. Many of the city's primary and secondary distribution lines are also overloaded. A priority program to eliminate the risk of a major power failure in the capital must be defined. Other economic priorities are to make better use of indigenous energy resources and to ease the shortage of foreign exchange. Surplus power is available for export; to substitute for imported petroleum and/- or household charcoal; and to increase agricultural irrigation. There- fore, the potential for power exports must be assessed, and a power ex- port strategy proposed that maximizes net revenue from export sales. In industry, the potential for substituting electricity for petroleum pro- ducts must be identified, as is outlined in Chapter 9. Options for con- necting isolated load centers to the grid, and thereby substituting hydro for diesel power, must be evaluated. So too must potential agricultural irrigation schemes. Satisfying the basic needs of the people is the fundamental ob- jective of the economic recovery program. One of those basic needs is household energy. With rapid urbanization, the cost of charcoal is ris- ing. One option is to accelerate household electrification. The major issues are: (a) whether it is economic to do so; (b) how to minimize the cost (e.g., by using less costly distribution standards); and (c) how to make access to electricity affordable (e.g., by term payment of connec- tions). The issue of timing is also important, be.;ause adequate trans- mission and distribution capacity must be in place before household con- nections can be increased. Power tariffs are the final major issue. They must: (a) cover ZESCO's financial requirements, including operations, maintenance, existing debt, and the local and foreign costs of esqential new power system investment; (b) reflect the economic cost of power supply; and (c) facilitate the expanded use of electricity by making it as af- fordable as possible.  - 40 - 4.3 Electricity Demand Forecasts 1988-2006 4.3.1 Zambian Demand ZCCM is ZESCO's largest customer, accounting for nearly 70% of current domestic electricity sales. ZCCM's demand for electric energy is forecast to rise from 4,482 GWh in 1987 to 5,067 GWh in 1998, then fall, in steps, to 4,037 GWh in 2003, and remain stable for the rest of the forecast period. This pattern results from an assumed slight upward trend in production in the early/mid-1990s, followed by the closure of the Nchanga open pit and the Mufulira smelter at the end of the decade. With the exception of NCZ and Chilanga Cement, for whom speci- fic demand forecasts are made, other industrial, service and transport sector power demand is forecast to rise in proportion to GDP. Agricul- tural demand is forecast to grow slightly faster than GDP, as a result of increased irrigation. Household demand for electricity is forecast under three alter- native demand scenarios as follows: (a) Base - 4,000 new ZESCO connections per year. (b) High - 7,000 new ZESCO connections per year. (c) Low - 2,000 new ZESCO connections per year. The resulting forecast peak loads at ZESCO bulk supply points are shown in Table 4.4. Table 4.4: FORECAST POWER SYSTEM LOADS AT BULK SUPPLY POINTS AT TIME OF SYSTEM PEAK (MW) 1987 1998 2006 High Base Low High Base Low ZESCO South 246 409 346 279 572 446 311 ZESCO North 652 793 764 735 740 680 619 TOTAL 898 1,202 1,110 1,014 1,312 1,126 930 Source: World Bank estimates. 4.3.2 Export Demand Zambia's power export potential to its southern African neigh- bors is limited by their generally favorable power resource endowment, by the existence of excess capacity, by economic constraints, and by poli- tics. Zambia is one of several countries in the region with surplus, low  - 41 - cost hydro capacity. Alternative sources of generation in the region in- clude coal for thermal generation, also low cost and fairly widely avail- able. Together with the difficulties many countries in the region exper- ience in paying for imports in hard currency, the potential for signifi- cant Zambian power exports must be regarded as limited and uncertain, the only significant exceptions being short- and medium-term power exports to Zimbabwe, and, in the longer-term, possibly to Botswana also. Exports to Zimbabwe are forecast to range between zero and 2,000 CWh/year up to 1994, and are very speculative thereafter. The interconnections with other neighboring countries, both existing and planned, are not expected to lead to significant energy salts. Prospects for exports to each neighboring country are discussed in Appendix 4.1. The scope for exports of power is greater than energy, because network interconnections can reduce the capacity investment needed for standby purposes. Connections with Tanzania and Malawi are under cuisi- deration, and interconnections with Zimbabwe and Zaire have been in oper- ation for sometime. Power exports to Zimbabwe could range between 150 and 300 MW up to 1994. In addition, there is potential for small addi- tional exports of power to Botswana. 4.3.3 Total System Demand The base, high, and low electric energy and power demand fore- casts are summarized in Table 4.5. Energy losses on the Zambian bulk supply network are estimated to be 3.5% and in the retail system to be 15%. These are assumed to remain constant. Comparison of columns "d" and "e" of the Table shows that the resulting forecast demands for electric energy and power for 1989-2006 are less than a conservative estimate of firm energy and a rough estimate of available power capacity (1,490 MW) 3/ in every year. The closest de- mand approaches existing capacity is for energy in the high scenario for year 2006, when firm energy is 500 CWh greater than the forecast demand within Zambia. For some of the diesel power networks, however, capacity will need to be increased over time to keep up with increasing demand, assuming their interconnection is uneconomic. 3/ Installed capacity of 1,754 MW, minus 15% capacity reserve traditionally assumed by ZESCO.  - 42 - TABE 4.5 FORECAST OF ELECTRIC ENERGY AND MAXIMUM POWER DEMAND 1988-2006 ZCCM ZESCO Losses Zambia Available firm Available demand demand to bulk ener8y generation for points demand capability export Year GWh Gof GWh GWh OWh OWh a b a d f -3.5Xta+b) -a+b+c cw-d 1987 ICS 4482 2005 227 6714 10575 3861 1) SHy 0 85 3 88 105 0 IDi 0 7 0 7 0 0 Sum 4482 2097 230 6809 10680 3861 SCENARIO 1989 Base 4531 2118 233 6882 9675 2793 High 4531 2134 234 6919 9675 2756 Low 4531 2075 231 6838 9675 2837 1992 Base 4943 2391 257 7591 9675 2084 High 4943 2562 263 7768 9679 1907 Low 4943 2201 250 7394 9675 2281 1998 Base 5067 2977 282 8326 9675 1349 High 5067 3498 300 8865 9675 810 Lov 5067 2427 262 7756 9675 1919 2006 Base 4037 3736 272 8045 9675 1630 High 4037 4828 310 9175 9675 500 Lov 4037 2611 233 6881 9675 2794 SIMULTANEOUS MAXIMUM DEMAND Avallable Available At bulk Tram- At total for -supply points miss.. geer. eapacity eaport zCCM ZESCO losses plants Year MW MW mH MW MW MN a b c 4 a f -6-(2+b) -&+b+c *e-4 1987 IC$ 544 342 53 939 1468 529 2) Smy 0 19 1 20 23 - IDi 0 5 0 5 8 - sum 544 366 55 965 1499 - Sim 544 356 54 954 1490 536 SCENARIO Six 1989 Base 550 360 55 965 1490 525 High 550 367 55 972 1490 518 Lov 550 353 54 957 1490 533 1992 2ase 600 407 60 1067 1490 423 Nigh 600 436 62 1098 1490 392 Lov 600 375 58 1033 1490 457 1998 Base 615 507 67 1189 1490 301 Bigh 615 595 73 1283 1490 207 Lov 615 413 62 1090 1490 400 2006 Base 490 636 68 1193 1490 297 High 490 822 79 1390 1490 100 Lov 490 444 56 990 1490 500 XEYs ICS- Interconnected system. SBym Separate hydro system. 10D- Isolated diesel system. Sum- Total Zesco system. SIM- Simultanious Max Demand in Zesco main system if SEy had been interconnected in 1987. ZCCM- Bulk delivery to ZCCMQ excluding Zesco North. ZESC4O Buk delLvery to ZESCO South + North. 1) Actual exports are estLmated at 1300 M.W 2) Actual maximum emand exports to Zmbabwe vere 52.5 MW, but only 372 MV, when e"aured on occation of maximum simltaeous load. It is unclear to what extent the maxim demand export to Zaire of about 100 NW wa coincident With max4mu simultaneous load.  - 43 - 4.4 Priority Power System Investment Program 4.4.1 Hydro Generation Investment The major new generation investment options are the Kafue Lower hydroelectric plant (450 MW, 2,500 GWh/year firm energy), located down- stream of the existing Kafue Gorge plant, or further joint developments with Zimbabwe on the Zambezi River, probably Batoka Gorge (1,600 MW), up- stream of Kariba. Because forecast demand for electric power and energy is not expected to exceed Zambia's existing generating capacity until after 2006, there is no need for Zambia to begin planning new network hy- dro-electric generation capacity unless substantial additional firm ex- port sales can be guaranteed. However, if Zimbabwe wishes to proceed with development of the Batoka Gorge site, exploratory work will be needed on a possible future north bank power station in Zambia. The two key generating stations on the existing interconnected system are Kariba North and Kafue Gorge. Their condition, and that of the other power system assets, is described more fully in a companion ESMAP Power Subsector Efficiency Study. 4/ This rep.rt concludes that the Kariba North station is in excellent condition, and no major repair work is required. However, at Kafue Gorge the following work is recom- mended to bring the power station up to satisfactory working order: (a) completion of the ongoing NORAD-fundgd rehabilitation of the turbines and alternators; (b) replacement of auxiliary systems, including: air conditioning chillers (US$100,000 per unit), pumps, and fan coil units (US$509,000); (c) installation of an additional 200 m of deep booms to divert weeds from the headrace intake (US$80,000); (d) inspection and, if necessary, replacement of the 190 kV cables connecting the power station to the pothead yard; (e) inspection and, if necessary, repair of the waterways; and (f) provision of essential spare parts, including transformer wind- ings and cylinder gate pistons. The Victoria Falls power station has persistent operational problems and the following work is needed to repair the power station: 4/ Zambia : Power Subsector Efficiency Study. Joint UNDP/World Bank Energy Sector Management Assistance Program, December 1988.  - 44 - (a) overhaul of the turbines and alternators in the "A" station and replacement of the power cables, switchgear, and control equip- ment; (b) installation of surge arrestors on each of the three phases of the generator connections to the cables in the "B" station; (c) rectification of the vibration problem at the "C" station, pro- bably by increasing the submersion of the turbine and adding volume to the afterbay arrangement; and (d) installation of bulkhead gates or retrievable steel stoplogs on the water intakes, strengthening of the trashrack cleaners, in- stallation of 200 m of deep booms upstream of the intakes to divert weeds over the main falls, and rehabilitation of the hy- draulic systems of the penstock intake gates. Turbine and generator overhaul and civil engineering repairs are also needed at the Chishimba Falls, Musonda Falls, and Lusiwasi power stations. These should follow commissioning of the Pensulo substation, when substitute power from the main grid will become available. The potential economic benefits of completing the modest re- pairs required at the Kafue Gorge power station are considerable, because loss of this station would leave the power system substantially short of capacity and energy. Little of this could be made up from Kariba North, because the lake is at an all-time low. A major failure of the Kafue Gorge station would therefore deprive essential Zambian industries of power supply. The benefit of rehabilitating the Victoria Falls station to at- tain its rated capacity is the saving in generation required elsewhere. Because the station is a run-of-the-river installation, any additional generation will require less generation at the Kafue Gorge or Kariba com- plexes. The economic value of incremental generation on the intercon- nected system is the marginal cost of power from the highest-cost sta- tion, which is the Hwange thermal station in Zimbabwe. The economic be- nefit to Zambia alone of increased generation is the tariff at which ZESCO sells incremental energy to Zimbabwe, which is US$0.006/kWh. On this basis, and assuming a 70% capacity factor, the benefits of repairing Victoria Falls amount to US$368,000 per annum. At an investment cost of US$2.75 million and an assumed life of 20 years, the project's economic rate of return is about 12Z. In view of its high economic benefits, priority should be given to the repair of Kafue Gorge. There is also a sound case for the reha- bilitation of Victoria Falls. The total cost of the two repair and reha- bilitation programs is not known accurately. For the purpose of invest- ment planning, an indicative figure of US$5 million over and above the NORAD-funded program at Kafue Gorge is assumed, including about US$100,000 for the necessary diagnostic services.  - 45 - In addition to essential repair and rehabilitation of the two generating plants, spare parts supply should be improved at all the gen- erating stations. A list of essential spares and preventive mair.tenance routines should be prepared at the smaller stations. Due to shortages of foreign exchange for spare parts, there is a backlog of parts maintenance and repair on all the existing generating stations, with the exception of Kariba North. Establishment of a fund for the purchase of spare parts totalling at least US$100,000/year is recommended. On completion of the Pensulo substation in the vicinity of Serenje in 1989, the currently isolated northeastern hydro system will be interconnected with the main grid. This will come at a time when the electric energy and maximum power demand on the northeastern system has largely caught up with the system's available generating capability. In the short-term, further demand growth in the northeastern area should be covered by supply from the main grid. When the power ge- neration facilities in the area are rehabilitated, temporary augmentation of the supply will be required from the same source. However, supply from the main grid is by a single circuit, and is therefore not firm. Due to the long distances involved, the installation of reactive compen- sation capacity at receiving points for voltage control may be required. 4.4.2 Diesel Generation Demand in several of the towns now supplied by diesel genera- tors is expected to grow beyond present generation capacities before 2006. Unless they are linked to the hydro-electric network in the in- terim, these isolated systems will need investments in additional diesel engines or, if economically feasible, in mini-hydro facilities, in line with the growth of demand. Total investments for this purpose up to year 2006 are estimated at US$0.6 million in the high demand scenario. 4.4.3 Transmission System On the base and low power demand forecasts, it is estimated that the capacity of the 330 kV transmission network will be adequate to satisfy domestic energy and power demand on the interconnected system through the year 2006. However, 330 kV transmission capacity between Leopards Hill and Kabwe is marginally exceeded in 1998 on the high demand scenario. This situation would be temporary, pending closure of the Nchanga Open Pit and/or the Nufulira smelter, both of which are forecast to occur around 1999. It is obviously uneconomic to construct an additional transmis- sion line to the Copperbelt to cover a brief period of possible under-ca- pacity. Demand growth in the Copperbelt should therefore be monitored closely during the early 1990s. If it is close to or above the high de- mand scenario, the options to consider are: (a) reducing load growth in the Copperbelt, e.g., by a temporary tariff surcharge or (b) making greater use of ZCCM's gas turbine generating capacity for peaking.  - 46 - A project to construct a 132 kV line from Lusiwasi to Maorot a 66 kV line from Chipata to Lundazi, and later a 132 kV line from Maoro to Chipata, is in progress. The total cost of Phases I and I$ is US$19 mil- lion. Grant financing has been obtained for the project, which should be completed as part of the priority energy investment program. Funding has also been obtained for a US$25 million project to electrify the Mkushi farming block. Mkushi is an area of large-scale commercial farming, and requires power for irrigation and crop proces- sing. As the project is committed and funded by a soft loan, it too is included in the priority energy investment program. The only other major potential transmission project is the in- terconnection of the four isolated western diesel centers (Kaoma, Zambezi, Kasempa, and Kabompo), plus the towns of Lukulu and Chizela, with the main grid at Mongu and Mumbwa. The capital cost of the project is about US$80 million, equivalent to about US$12 million per year, as- suming repayment over 25 years at 12X. The benefits consist primarily of savings in diesel fuel, estimated at about US$500,000 per year in finan- cial terms and US$750,000 per year in economic terms, plus avoided diesel replacement and the extension of power supply to new customers in Lukulu and Chizela. As is evident, total benefits are only a small fraction of cos;s, so the project is clearly not viable. Cne further small transmission expansion project is justified in the short-term (1989-93). This is the installation of reactive com- pensation capacity to raise the capacity of the transmission lines feed- ing the Copperbelt (US$1.1 million). 4.4.4 Subtransmission and Distribution Rehabilitation The most urgent subtransmission and distribution investments in the short-term (1988-93) are in the selective reinforcement and rehabili- tation of the Lusaka subtransmission and distribution systems. The firm capacity of the existing 88 kV subtransmission system serving Lusaka is 110 MW, and Lusaka's peak demand is already in excess of 120 MW. Also, there is a substantial backlog of requests for power connections in the city, for which secure supply is not available. These investments have been identified by EKONO, IVO Interna- tional, FINNIDA, and the World Bank, which all confirm their priority. They are necessary both to eliminate serious overloading of the existing subtransmission and distribution system, and to facilitate additional consumer connections. Failure to reinforce the existing system could lead to major power interruptions to the capital city. The cost of the priority elements of this rehabilitation program is estimated to be US$29.9 million, made up as shown in Table 4.6.  - 47 - Table 4,6: COMiONENTS AND COSTS OF THE PRIORITY LUSAKA POWER DISTRIBUTION PROJECT Components Cost a/ (USS million) A. Lusaka Distribution Project, Phase I 1. EstablIshment of a new Roma 132/33 kV, 2 x 40 MVA, and 33/11 kV, 2 x 10 MVA sub-station Including 27.2 km 132 kV transmission line Leopards Hill-Rome 5.1 2. EstablIshment of a new 132/33 kV, 2 x 40 WVA and 33/11 kV, 2 x 20 MVA substation at Coventry and 330/132 kV, 2 x 124 MVA extension at Leopards Hilll Including 28.5 km uprating of exIsting, 88 kV Leopards Hill-Coventry line to 132 kV 11.4 3. Load transfer rehabilitation and reinforcement of 33/11 kV substations at Cheiston, Dublin and University, including 33 kV connections to Roma 3.0 4. Extensions, reinforcement and rehabilitation of the 11 kV distribution system In Lusaka 3.1 5. Engineering and supervision for Phase I above 2.6 Subtotal 25.2 B. Other ProJect Components 6. 88/33 kV, 30 MVA transformer at Chongwe substation 1.6 7. Addition of 330/88 kV, 60 WVA transformer at Leopards Hill substation 1.0 8. Replacement of 33 and 11 kV swItchgear at Coventry St. substation 0.5 9. Change of feed point of Chisamba load to Chongwe substation 0.6 10. Addition of 88/33 kV, 30/45 WVA transformer at Waterworks substation 1.0 Subtotal 4.7 TOTAL 29,9 a/ End-1987 prices. Source: FINNIDA and World Bank estimates.  - 48 - The FINNIDA prefeasibility analysis 5/ of the Lusaka Distribu- tion Project made some rough ettimates of the project's economic bene- fits. Assuming 5 load growth in the Lusaka area and valuing the econo- mic benefit of electricity to the end-user at US$0.05/kWh and the cost of potential supply interruptions at US$1 million per year, the project has an estimated economic rate of return (ERR) of 30Z. Assuming load growth of only 3Z and ignoring the economic cost of power interruptions, the ERR is 21x, s0 the project is clearly justified. Further investment could be needed in the Lusaka area after 1993 to provide for possible future load growth in the capital. Plans for this investment should be prepared simultaneously with the engineer- ing design work for the priority 1989-93 program. In addition to Lusaka, selective short-term replacement and re- inforcement investments are also needed in the subtransmission and dis- tribution systems serving Ndola and Kitwe, two of the principal Copper- belt towns. The total cost of these investments is estimated to be US$10.6 million, and their components are summarized in Table 4.7. Table 4.7: COMPONENTS AND COSTS OF THE PRIORITY COPPERBELT SUB-TRANSMISSION PFROJECTS Cost a/ Components (USS mlIlion) 1. Replacement of obsolete HV and NV switchgear in Ndola and Kitwe 2.6 2. Replacement of obsolete HV and MV swltchgear in the Copperbelt 3.8 3. Replacement of underground cable in Ndola industrial area 0.6 4. Reinforcement of existing substations in Ndola residential areas 0.1 5. Fourth bulk supply point In Kitwe Industrial area, Including new feeder cables 3.0 6. Improvement of telephone and radio communication 0.5 TOTAL 10.6 a/ End-1987 prices. Source: World Sank estimates. 5/ Lusaka Power Distribution Project, Prefeasibility Report, FINNIDA, September 1987.  - 49 - The investments are to replace equipment that is obsolete and past its useful life. Their economic benefits are increased supply and the cost of the avoided power interruptions that otherwise would occur. These cannot be estimated accurately, but are relatively large, due to the advanced age and extremely poor condition of the existing equipment and the resulting high probability of system failure. In these circum- stances, the projects are considered to be highly economic. 4.4.5 Distribution Expansion Three scenarios for the future number of new ZESCO connections are presented in Section 4.3.1 above. The base case assumes 4,000 new connections, the high case 7,000, and the low case 2,000 new connections per year. ZESCO has recently averaged less than 3,000 connections per year. This could, and should, be improved by: (a) the supply of addi- tional distribution materials; (b) more aggressive marketing (e.g., dis- counts to new agricultural consumers); (c) supplying less costly hot- plates; and (d) by reducing the cost of new connections. The average cost per connection on the existing distribution system is estimated to be US$4,500. This high figure is due to the cost- ly standard of underground cable and overhead lines used and the sparse distribution of consumers. Using less costly distribution standards could reduce this figure to about US$2,300 per connection. In the more densely populated urban areas, the cost per connection could be reduced to US$1,000 or less if a large proportion of the households were connect- ed. Estimated total costs of distribution expansion over the 1988- 2006 period are shown in Table 4.8 for the base, high, and low scenarios, assuming use of either: (a) the past standard of construction and densi- ty of connections; (b) a lower-cost standard and the same density as in the past; or (c) a lower cost standard and a high density of connections. Table 4.8: COSTS OF NEW ELECTRICITY CONNECTIONS DURING THE PERIOD 1988-2006 (USS million) a/ Annual Reduced standard Reduced standard Scenario Number of Present standard with mostly with high density Connections of connections 014-lInes of connections Base 4000 308 199 68 High 7000 540 349 120 Low 2000 155 100 34 a/ End-1987 prices. Source: World Bank estimates.  - 50 - The estimated annual costs of the distribution expansion in- vestment program under the base, high, and low expansion scenarios using the three alternative connection costs is shown in Table 4.9. At the historic average cost of US$4,500 per connection, even the low scenario program would cost US$9 million per annum, a large proportion of which would be in foreign exchange. Table 4,9: ANNUAL COST OF ELECTRICITY DISTRIBUTION EXPANSION WITH ALTERNATIVE STANDARDS AND CUSTOMER DENSITIES (USS million) Expansion Historic standard/ Reduced standard/ Reduced standard/ scenario low density low density high density (USS4,500/connection) (USS2,300/connection) (USSi,OO0/connection) Base (4000) 18.0 9.2 4.0 High (7000) 31.5 16.1 7.0 Low (2000) 9.0 4.6 2.0 Source: World Bank estimates. If the rate of new power connections is to be accelerated; (a) the cost per connection must be reduced by adopting cheaper materials and lower standards; (b) investment must be concentrated in high density areas where consumer surveys confirm there is a substantial potential demand for electricity; and (c) consumers must be encouraged to connect by the provision of cheaper wiring and cookers and by term payment schemes. 4.5 Power System Planning and Operational Improvements 4.5.1 System Planning Prior to 1988, all major generation and high-voltage transmis- sion planning was done by CAPCO. Planning for the generation, transmis- sion, and subtransmission systems is now done by the Planning Department of ZESCO's Engineering Services Division. Planning and reinforcement of the distribution network (33 kV and below) are done by the planning sec- tions of the Distribution Supply Divisions North and South. Local net- works are planned by the District Engineers. ZESCO's planning resources are very limited. The Head of the Planning Department is also Chief Electrical Engineer, and is able to de- vote little time to planning. On average his staff consists of three engineers, sometimes less. Only the most urgent matters are attended to, and there is virtually no long-term planning. For example, no attempt has been made to update the Power System Master Plan, issued in 1984.  - 51 - With the transfer to ZESCO of generation and voltage transmis- sion planning responsibilities from CAPCO, strengthening of ZESCO's plan- ning capability is an urgent requirement. The Planning Department should be capable of producing short- and medium-term demand forecasts with which to periodically update the Power System Master Plan, and identify- ing and appraising priority investment projects. Strengthening of the staff complement, staff training and foreign technical assistance is re- quired, perhaps through cooperation with a major foreign power utility. 4.5.2 Commercial Operations The ESMAP Power Subsector Efficiency Study includes a detailed review of ZESCO's commercial operations and recommendations for their im- provement. This section summarizes the major findings of that report. Metering. The existing standard of metering contributes to ZESCO's non-technical losses and could be improved. The following im- provements are recommended: (a) inspect, seal and issue new identity numbers for all meters and record their installation, movement, and maintenance history; (b) strengthen meter workshop staffs and routinely test all meters every 10 years; and (c) for all new connections, install meters on building exteriors. Meter Reading. The following actions are recommended to im- prove the efficiency of meter reading: (a) reduce the frequency of meter reading from one to two months for all consumers other than those in the "D" category, but continue to bill monthly, based on estimated readings; (b) redesign the meter books to include only the account number, address and meter number, and with carbon inserts, so a copy of the reading can be sent directly to the Computer Department; (c) prepare a meter reading, billing and collection mannual; (d) institute a meter reader training and testing program; and (e) set productivity standards, measure employee performance, and replace inadequate performers. Billing. A further contributory factor to ZESCO's inadequate cash-flow is the time which elapses between meter reading and billing, which averages about six weeks. The purchase of a new computer provides an excellent opportunity for improvement. The following changes are pro- posed:  - 52 - (a) install a new billing program, tailored to ZESCO's needs; (b) use the meter reader's data sheet as the source for on-line computer data-entry; and (c) hand-prepare and deliver bills to large customers. Collections. The level of non-technical losses within the ZESCO system are believed to be substantial. A program to meter distri- bution feeders or transformers and compare supplies with recorded sales is recommended. This would allow the major sources of non-technical losses to be identified and remedial action taken. There is also a problem of excessive payments arrears, which are equivalent to about five months' revenue. To reduce these arrears, it is recommended that: (a) a surcharge be added to the bills of late payers; and (b) non-paying consumers be disconnected after two months of non- payment. 4.5.3 Management Information System ZESCO has no comprehensive, computerized management information system, which means that the flow of technical and financial information to management is slow and incomplete, and data from different sources are sometimes inconsistent. A new accounting system has recently been in- stalled, a technical statistical databook will be set up over the next year, and a computerized billing system is proposed above. When these three databases are operating satisfactorily, a Management Information System that would extract key performance data for management should be established. 4.5.4 Training/Skills ZESCO operates two training centers and is assisted by regional and international institutions in the training of its employees. It also organizes in-house seminars and courses. The most urgent manpower pro- blem is the inability to attract and retain an adequate number of quali- fied persons. This is a result of the low salaries paid by ZESCO in com- parison to private enterprise firms and even some other parastatal orga- nizations. ZESCO should seek approval to raise the salaries and benefits of skilled personnel to a level at least equal to the best practice in the parastatal sector. 4.5.5 Export Marketing Strategy As mentioned earlier, most neighboring countries have access to low-cost domestic power supplies. With few exceptions, ZESCO's export  - 53 - prospects are relatively limited. The optimum power export marketing strategy for Zambia therefore is to: (a) establish a standing joint committee on power cooperation be- tween Zimbabwe (the main potential market) and Zambia, dealing with both power trade and power generation planning. In this context, Zambia should continue to stress the importance of the benefits of long-term power sector cooperation; (b) promote, through the Southern African Development Coordinating Conference (SADCC), the concept and analysis of the potential for mutual support in power supply, so that regional reserve margins can be minimized and low-cost power can be exchanged on an as-available basis; (c) encourage contacts between the respective national utilities at senior and middle management to develop mutual confidence in system reliability; (d) cooperate with other neighbours through standby connections (if achievable at reasonable cost) and small-scale cross border supplies to isolated communities; and (e) pursue power export opportunities to economically strong, re- source weak countries, such as Botswana. 4.6 Power Costs and Tariffs To achieve the strategic objectives of reliable power supply to existing customers and extension of the supply to economically and finan- cially viable new customers, electricity tariffs must: (a) cover ZESCO's future revenue requirements; (b) reflect the marginal economic costs of power to different con- sumer groups; and (c) encourage additional economic uses of power, e.g., through off- peak supplies for irrigation, etc. 4.6.1 Existing tariffs and tariff proposals March 1988 electricity tafiffs for selected major consumer ca- tegories are summarized in Table 4.10 and the full tariff schedule is set out in Appendix 4.2. By world standards, current tariffs are extremely low, averaging about 5 ngwee/kWh (US$0.006/kWh).  - 54 - Table 4.10: ELECTRICITY TARIFFS FOR SELECTED CONSUMER GROUPS (March 1988) Custooer Category Fixed Charge Max. Demand Charge Unit Charge k/month USS/month k/kVA/month USS/kVA/month ngweeAkWh UStAkWh Bulk (ZCCM) - - 402.64 50.33 0.99 0.12 Large Industrial (D3) a/ 17,225.0 2,153.13 11.80 3.51 3.51 0.44 Small Industrial (E4) b/ 71.5 8.94 - - 10.14 1.27 Household (E3) b/ 15.0 1.88 - - 7.00 0.88 a/ Max mhe demand 300-2,000 kVA. b; Unrestricted single phase and up to 15 kVA three phase. Source: ZESCO. ZESCO has requested an average 28% tariff increase, to be ef- fective October 1988. However, with inflation averaging about 50% per year, this will be insufficient to prevent a decline in real tariffs dur- ing 1988. 4.6.2 Current financial costs of supply on the main hydro network The average financial cost of power supply in 1987-88 is esti- mated to be about 8.3 ngwee/kWh, some 50 above forecast average revenue per kWh sold (Appendix 4.3, Table 2, column 1). Consequently, it is an- ticipated that the utility will make a substantial loss in 1987-88 and a further loss in 19g8-89, even if the current tariff request is granted. 4.6.3 Current financial cost of supply of isolated diesel networks The average financial cost of supply for isolated diesel sys- tems are estimated in Appendix 4.4 and summarized in Table 4.11 below: Table 4.11: AVERAGE REVENUE AND COSTS OF ISOLATED DIESEL SYSTEMS Parameter Kwacha/kWh Average revenue 0.33 Financial cost 1.26 Source: World Bank estimates. In order to cover financial costs, tariffs for power supply by diesel need to be increased by nearly 300%. Increases of this magnitude are not recommended, but efforts should be made to reduce the subsidy to isolated diesel electricity consumers.  - 55 - 4.6.4 Tariffs required for future financial viability Assuming a constant exchange rate and that ZESCO borrows through the Government US$50 million during the period 1989-93 to fund its priority five-year rehabilitation/reinforcement investment program at 8X with 5 years grace and 20 years amortization, and then finances the distribution expansion program from its own resources, it is estimated that, in constant price terms, electricity tariffs would need to average about 11 ngwee/kWh in the Low and Base demand scenarios, and nearly 12 ngwee/kWh in the High scenario to ensure financial viability over the 1989-2006 period. March 1988 tariffs, if maintained in real terms, would generate less than 50% of the revenue required to finance the investment program. The required tariff increase would be less if ZESCO could in- crease its efficiency, borrow on more concessional terms to finance the 1989-93 investment program, or obtain concessional funds for the 1994- 2006 component of its projected investment program. 4.6.5 Tariffs and long-run economic costs Tariffs should reflect the economic cost of power supply so as to give the correct price signals to new consumers and encourage an eco- nomically efficient pattern of future power investment and consumption. Economic cost is best approximated by the long-run marginal cost (LRMC) of supply, which is the cost of an incremental expansion of the power system. Based on the recommended power system investment program for 1989-2006, and assuming a cost of US$1,000 per new connection at the dis- tribution level, the LRMC of electricity is estimated to be 5.6 ngwee/kWh (US$0.007/kWh) at the 66 kV level; 32 ngwee/kWh (US$0.04/kWh) at the 11 kV level; and Kwacha 1.28/kWh (US$0.16/kWh) at the 400 V level. A comparison of these three estimated LRMCs with current average revenue per kWh for the corresponding large industrial (D3), small industri- al/commercial (E4) and household (E3) customer groups (Table 4.11) shows that: (a) for the large industrial customer, current average revenue (n 6/kWh) is slightly higher than LRMC at the 66 kV level (n 5.6/kwh); (b) for the small industrial/commercial customer, average revenue (n 17/kWh) is just over 50% of LRMC (n 32/kWh); and (c) for the household customer, average revenue (n 10/kWh) is less than 102 of LRMC (K1.28/kWh).  - 56 - Table 4.12: ESTIMATED LOhG-RUN ECONOMIC COSTS OF POWER AND CURRENT AVERAGE REVENUES (kWh) Equivalent LRMC Current Average Customer Group voltage Kwacha USS Revenue level Kwacha USS Large Industrial (D3) 66 kV 0.056 0.007 0.06 0.008 Small Industrial (E4) 11 kV 0.32 0.04 0.17 0.02 Household (E3) 400v 1.28 0.16 0.10 0.01 Source: World Bank estimates. It is not recommended that tariffs be adjusted to match long- run marginal costs exactly. However, over time, their structure should be brought more closely into alignment with economic costs. This implies that future tariff increases should be proportionately larger at the 33 kV level and below, and proportionately smaller for high voltage con- sumers. A lifeline tariff should be considered for household consumers of small quantities of power and energy to protect them from the impact of low voltage tariff increases. 4.6.8 Export Tariffs The present tariff for sales to Zimbabwe is set in Kwacha at a fixed US dollar exchange rate and with agreed annual increases. The price per unit is modest (US$0.01-0.02/kWh, depending on the load fac- tor). Nevertheless, because of their volume, these exports have made an important contribution to ZESCO's overhead. Although the tariffs are above the economic cost of supply, they are below the marginal cost of alternative generation from coal fired plants in Zimbabwe. This might provide the opportunity for some future escalation. There is an agreed tariff for imports from or exports to Zaire, but Zaire has not paid for imports of power since July 1986. This arran- gement is highly uneconomic to Zambia, as Zaire often imports energy dur- ing the Zambian peak, which has occasionally led to load-shedding in the Copperbelt. ZESCO has thereby lost revenues from domestic customers, and economic costs have been imposed on Zambia due to lack of power. It would be appropriate for ZESCO to insist on payment or limit the supply to Zaire to a level that can be accommodated without load-shedding. 4.6.9 Off-Peak Tariff With surplus, low-cost energy, an off-peak tariff could be jus- tified for substantial new uses of electric power if these require no in- vestment by ZESCO in additional distribution capacity. One potential use for such a tariff would be irrigation, which could use power exclusively outside the peak period. Such a tariff would support the Government's  - 57 - drive to increase agricultural output. Another possibility is to encour- age the substitution of electricity for higher-cost alternative fuels for off-peak industrial use. ZESCO should seek to identify such opportuni- ties and negotiate special contracts that would result in additional re- venue at low financial and economic cost. 4.6.10 Timeliness of Tariff Adjustment A contributory factor to ZESCO's currently inadequate revenues is the length of time it takes to agree a change in tariffs. In theory, the procedure takes five months. In practice, it often takes over a year. To overcome this problem, it is recommended that tariffs be re- viewed automatically at least once each year, on a firm time schedule, and the new tariff announced and implemented by a fixed tariff review date, perhaps April 1.  - 58 - V. PTROLE 5.1 Policy Issues and Options When world oil prices peaked after 1979, petroleum imports ac- counted for nearly 20% of Zambia's total foreign exchange earnings. In 1988, oil prices are well below their earlier peak, but petroleum imports still account for over 10% of export revenues. Shortages of foreign ex- change are the fundamental constraint to Zambia's economic development. Therefore, minimizing the cost of petroleum imports must be a major ob- jective of the energy strategy. When world oil prices start to rise, as they surely will, and copper exports to decline, the need could become still more pressing. Against this background, the following petroleum sub-sector is- sues are examined: (a) the optimal future petroleum exploration strategy, and the ac- tions required to implement it; (b) petroleum pricing and taxation policy; (c) the condition of the Tazama oil pipeline and associated infra- structure, and the steps needed to ensure reliable pipeline operation in the future; (d) the efficiency of the Indeni refinery; (e) the oil market conditions under which refinery upgrading should be considered; and (f) whether continued import of commingled products and their re- refining, or import of finished products would be cheaper. In Chapter 9, the scope for conservation and substitution of petroleum products is assessed. 5.2 Oil and Gas Exploration 5.2.1 Potential Altho-sh Zambia has no known petroleum deposits, there are four sedimentary bas- s in the country, the largtst of which is the Western Zambia Basin, which covers about 180,000 km of Western Zambia and ex- tends into neighbouring Botswana and Angola. The deepest basin is proba- bly the Luangwa Basin, which lies in the Luangwa Valley, and is perceived to be the most promising basin for oil and gas.  - 59 - 5.2.2 Exploration Promotion Program Prior to 1982, there had been no seismic surveys or exploratory drilling in Zambia. A World Bank Petroleum Exploration Promotion Project subsequently funded an aeromagnetic survey over much of the country and a limited gravity survey. A comprehensive geological report and model con- tract were presented to the ;etroleum industry in June 1935. Two companies agreed to undertake preliminary surveys and ex- ploration drilling. Placid Oil Co. took up two of the four blocks on of- fer (one in the Luangwa Valley and one to the west of Lusaka close to the Kafue National Park) and Mobil Oil Co. took up one block to the south of Placid's Luangwa block. The fourth block in Western Zambia was of insuf- ficient interest to attract a bidder. Placid's agreement, signed in February 1986, was for a four- year exploration period. This started with gravity and seismic surveys in both its blocks. Completion of these surveys during 1986 led to ces- sation of work on the Kafue Block and a decision to drill in the Luangwa Block, starting in September 1987. In the subsequent six months, two dry holes were drilled. Mobil signed an agreement about one year after Placid, in January 1987. It has conducted gravity and seismic surveys, interpreta- tion of which was completed in March 1988. It is understood that Mobil did not find promising structures in its Luangwa block and will cease op- erations in that block. Placid and Mobil have each expressed an interest in a new area, lying to the north of Lake Kariba, an area which was not included in the initial offering. Placid is also understood to be seeking a partner for continued exploration work in its Luangwa block, and has applied for other exploration acreage north-west of this block. The Government's Hydrocarbon Unit is planning a seismic survey in the western part of the country, to be financed by the Government at a cost of KS million. 5.2.3 Environmental Aspects The Luangwa Valley conta;ns two of Zambia's most important na- tional parks and is an area of international wildlife repute. The Placid exploration activity has been outside the national park, but Mobil's was substantially within it. The model concession agreement accepted by both companies gives the Government the right to suspend operations if neces- sary to prevent environmental or wildlife damage, and to order restitu- tion. At the exploration stage, the physical damage is primarily the construction of access roads, which will grow back within a year or so. Nevertheless, careful and continual monitoring is required.  - 60 - 5.2.4 Future Exploration Promotion Strategy The reasons for encouraging international oil companies to ex- plore in Zambia are as strong as ever. Even a limited chance of success is worth pursuing, provided the bulk of risk capital comes from interna- tional sources. Although the two tests drilled by Placid are somewhat discouraging, the fact that Mobil and Placid are looking to stay in the country suggests that the area has not been condemned. The Government should therefore consider enhancing its efforts to encourage direct for- eign investment in oil exploration. The objectives of the next phase of the exploration promotion strategy should be to: (a) sustain the interest of Placid and Mobil in undertaking further exploration, in existing agreement areas and in new ones, at minimum cost to Zambia; (b) improve the Government's understanding of the country's hydro- carbon potential by analyzing the results of the surveys and drilling carried out by the two companies, which should be made available promptly to the Hydrocarbon Unit; (c) reinterpret old data on other areas not taken by companies to better assess their potential; and (d) improve information on the unallocated block in the western part of the country, and follow up with other surveys, where these appear likely to yield useful results. As a prerequisite for all the above, and to ensure that Zambia gains the full benefit of the oil companies' exploration activities, it is essential to strengthen the Hydrocarbon Unit so that it is able to: (a) monitor the work of the oil companies effectively; (b) undertake fur- ther essential data acquisition, and interpretation; and (c) encourage further exploration activity. This requires training of its personnel, provision of operational support, and development of an adequate geologi- cal information base. 5.2.5 Recommendations To ensure the continuation of the exploration effort, follow-up Petroleum Exploration Promotion technical assistance is recommended. This could consist of some or all of the following elements: (a) efforts to upgrade the Block in Western Zambia by seismic surveys; (b) integra- tion of data on the Block in which Placid has not drilled; (c) interpre- tation of existing airmag data on areas not originally offered; (d) col- lection of new airmag data on the Chambeshi area and the area north of Lake Kariba; and (e) strengthening of the Hydrocarbon Unit by the addi- tion of an expatriate petroleum specialist and staff training. The total cost is provisionally estimated at up to US$6.6 million, spread over a  - 61 - number of years. The various steps should be planned in line with the availability of grant aid and budgetary resources. Private investors should be encouraged to undertake all or part of the geophysical work. It is recommended that the Hydrocarbon Unit be linked to and physically relocated near the Geological Survey. This will enable it to share facilities, equipment, and personnel. Subject to obtaining suffi- cient data, and to strengthening the Unit, a selective, targetted explor- ation promotion effort is recommended, directed at companies potentially interested in medium-scale deposits appropriate to the regional market. The terms of any future concession agreements will need adjustment to re- flect this. 5.3 Petroleum Consumption and Supply 5.3.1 Recent Consumption Trends Compared with peak sales of 818,565 tons in 1976-77, the cur- rent sales of most petroleum products show very sharp declines. In to- tal, sales in 2986-87 were down by one-third, to 546,873 tons, against 10 years' earlier. The only exceptions to the decline were illuminating ke- rosene and bitumen (Table 5.1). In recent years, the rate of decline in sales has elowed and, in the case of gas/diesel oil, consumption has actually shown a slight increase. The pattern of consumption as between products has changed markedly. The important features of these changes are a decrease in the share of gasoline and an increase in the share of diesel. The latter has been coupled with an increase in the shares of both illuminating kerosene and jet fuel (the latter, however, having decreased in absolute tonnage), resulting in a sharp jump in the share of middle distillates as a whole from 53.7% in 1976-77 to 61.4% in 1986-87. The long-term trend statistics shown in Table 5.1 are inclusive of exports by the private oil companies, which are not available sepa- rately for most of the years covered. Separate data for domestic and ex- port demand are, however, available for calendar years 1986 and 1987, and are given in Tables 5.2 and 5.3. The striking feature of these data is the sharp increases recorded in 1987 in the domestic consumption of each major product except regular gasoline and light fuel oil. Exports were also much higher, following rather low figure in 1986. A number of difficulties were experienced in obtaining consis- tent data on all aspects of petroleum supply and demand and the sectoral breakdown of consumption. Consequently, it is recommended that a greater effort be put into data collection, and that the various operating com- panies in the sector understand their duty to collaborate promptly in this effort.  Table 5.1: DOMESTIC MARKET SALES OF PETROLEUM FUELS a/ (Tons) % Change % Shares Product 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1976/77 1976/7 1986/87 to 1986/87 Gasoline Premium 145.333 92,029 75,046 62,382 73,562 78,331 80,813 86,544 80,620 77,465 77,297 (47) 17.8 14.1 Regular 40,931 68,223 72,639 45,084 44,097 39,377 30,231 24.545 23,546 24,426 20,1S1 (49.5) 5.0 3.8 Total gas 186,264 160,252 147,685 107,466 117,659 117,708 ;11,044 111,089 104,166 101,891 97,948 (47.5) 22.8 17.9 Gas Oil Diesel (Incl. LSGO b/ 362,652 317,052 303,128 241,640 273.229 275,405 271,154 261,015 247,035 220.714 266.379 (26.5) 44.3 48.7 I-Kerosine 24,687 24,111 26,929 27,545 29,608 34,347 32,515 35,098 29,073 25,968 26,901 9 3.0 4.9 N Jet A-1 52,527 58,686 54,745 64,670 64.634 59,207 53,199 54,391 45,769 39,941 42,363 (19.4) 6.4 7.8 Fuel Oil HFO 174,238 181,616 162,086 164,992 172,298 134.052 106,391 111,570 97,013 80,995 72,473 (58.4) 21.3 13.3 LFO 857 3.732 5.567 9.669 11,909 11,093 7.794 12,787 22,812 17,827 20.622 c/ 0.1 3.8 Total FO 175.095 185,348 167,653 174.661 184.207 145.145 114,185 124,307 119.825 98.882 93.095 (46.8) 21.4 17.1 Bitumen 9,200 7,695 5,561 7,888 8,588 14,065 13,419 14,175 15,307 15,902 14,362 56 1.1 2.6 LPG 8,140 9,553 5,979 2,069 2,363 2,802 6,967 2,169 6,535 6,544 5,037 (38.1) 1.0 0.9 Others - - - 390 399 552 396 394 218 603 788 _ - 1 Total 818,565 762,697 711,680 626,239 680,687 649,32 602,879 602,638 567,928 510,385 546,873 (33.2) 100.0 100.0 a/ Includes exports by the ofl companies, but not exports by ZIMOIL (formerly ZNEL). b/ Low sulphur gas oll. cl Large Increase. Source: ZIHCO.  - 63 - Table 5.2: PETROLEUM PRODUCT CONSUMPTION AND EXPORTS, 1986 ('000 tons) Domestic Sales Exports Total Premium gasoline 73.8 - 73.8 Regular gasoline 17.6 7.1 24.7 Kerosene 26.0 - 26.0 Jet fuel 41.1 - 41.1 Gas oil a/ 242.6 1.7 244.3 Light fuel oil 19.8 0.1 19.9 Heavy fuel oil 68.8 0.1 68.9 LPG 4.5 4.5 Bitumen 14.8 0.2 1S.O Naphtha 0.3 - 0.3 Other 0.4 0.2 0.6 TOTAL 505.2 13.9 519.1 8/ Including low-sulphur gas oil. Source: ZIMCO. Table 5.3: PETROLEUM PRODUCT CONSUMPTION AND EXPORTS, 1987 ('000 tons) Domestic Sales Exports Total Premium Gasoline 83.6 5.2 88.8 Regular Gasoline 9.8 26.4 36.1 Kerosene 31.3 - 31.3 Jet Fuel 50.2 - 50.2 Gas Oil a/ 257.5 19.9 277.4 Light Fuel Oil 15.4 0.3 15.7 Heavy Fuel Oil 74.9 _ 74.9 LPG 0.2 6.3 6.5 Bitumen 14.1 2.5 16.6 Other 0.7 0.4 1.1 TOTAL 537.6 61.0 598.6 a/ Including Low-sulphur gas oil. Source: ZIMCO. 5.3.2 Supply Arrangements and Sources Under the terms of a contract between the Government and the Kuwait Petroleum Co. (KCP), signed in April 1987, petroleum supplies in 1987-88 were purchased wholly as a mix of products. The mix comprised specified proportions of each major product to match anticipated de-  - 64 - mand. The contract included provisions for extension on the basis of mu- tual agreement, and negotiations for such extension were completed on si- milar, but revised terms, in March 1988. The commingled products are imported through a Single Point Mo- oring (SPM) terminal at Dar-es-Salaam, delivered to a tank farm, and transferred to the Tazama pipeline for transport 1,700 km across Tanzania to the Indeni refinery near Ndola in Zambia. At Indeni, the petroleum product mixture is re-processed to yield approximately the products de- manded by the markets. Terms of the supply contract and the financing terms are good. FOB prices are based on Platts at Arabian Gulf, and the contract incorporates a freight charge based on the published World Scale rate. There seems to be little purpose in disturbing these arrangements, for example to explore wider cooperation with neighboring countries in bulk purchase of petroleum. 5.4 Petroleum Pricing 5.4.1 Financial Analysis While wholesale petroleum product prices in 1987 were not sub- sidized overall, gasoline was priced about 75X above financial cost and kerosene about 7X below financial cost, measured as import parity plus pipeline and refinery cost. (Table 5.4) Table 5.4: PETROLEUM PR00iCT FINANCIAL COSTS AND PRICES, 1987 Cost/Price Kerosene Gas Oil Gasoline Fuel oll ------------ -US$/ton--------