Mozambique - ESMAP country paper

48007 Joint UNDP / World Bank Energy Sector Management Assistance Programme C/OThe World Bank 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. ESMAP Country Paper MOZAMBIQUE December 1993 This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without UNDP or World Bank authorization.  JOINTUNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) was launched in 1983to complement the Energy Assessment Programme, established three years earlier. ESMAP's original purpose was to implement key recommendations of the Energy Assessment reports and ensure that proposed investments in the energy sector represented themost efficient use of scarce domestic and externalresources. In 1990, an internationalCommissionaddressed ESMAP's role for the 1990s and, noting the vital role of adequate and affordable energy in economic growth, concluded that the Programme should intensify its efforts to assist developing countries to manage their energy sectors more effectively. The Commission also recommended that ESMAP concentrate on making long-term efforts in a smaller number of countries. The Commission's report was endorsed at ESMAP's November 1990Annual Meeting and prompted an extensive reorganization and reorientation of the Programme. Today, ESMAP is conducting Energy Assessments, performing preinvestment and prefeasibility work, and providing institutional and policy advice in selected developing countries. Through these efforts, E S U P aims to assist governments, donors, and potential investors in identifying, funding, and implementing economically and environmentally sound energy strategies. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of the UNDP and World Bank, the govenunents and institutions providing hancial support, and repre- sentatives of the recipients of ESMAP's assistance. The ESMAP CG is chaired by the World Bank's Vice President, Finance and Private Sector Development, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Programme's strategic agenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energy planners and economists from the Industry and Energy Department of the World Bank. The Director of this Department is also the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nations agencies, the European Community, Organization of American States (OAS), Latin American Energy Organization (OLADE), and countries including Australia, Bel@um, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information or copies of ESMAP reports, contact: ESMAP C/O Industry and Energy Department The World Bank 1818 H Street N.W. Washington, D.C. 20433 U.S.A.  Joint UNDPiWorld Bank Energy Sector Management Assistance Programme (ESMAP) ESMAP Country Paper MOZAMBIQUE ECP No. 002193 This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without UNDP or World Bank authorization.  ESMAP Country Paper (ECP) Mozambique Contents Preface ............................................................................................................................ v .. Executive Summary ............................................................................................... vii .. The Work Program ...........................................................................................vil Work Program Tasks and Preliminary Cost Estimates ....................................... x . 1 Introduction ..........................................................................................................1 2. Detailed Project Descriptions...............................................................................3 Electricity Tariff Study ..................................................................................... 3 Priorities for Electrification in National Reconstruction ....................................5 Institutional Restructuring and Reform of the Legal and Regulatory Framework of the Energy Sector ....................................................................... 9 Pilot Study of Coal as a Household Cooking Fuel ..............................................10 Detailed Data ....................................................................................................... 10 Annex I ........................................................................................................................... 15 Current Tariff Structure ...................................................................................... 15 Energy Production Issues for Future Tariffs ......................................................20 Annex 11 ......................................................................................................................... 23 Supplies from HCB to the Northern System at Matambo .................................. 23 Supplies from CB to the Southern System. through ESCOM ............................ 24  Preface This report was written following an ESMAP mission to Mozambique that took place in March 1993, following an earlier request by the Mozambique Ministry of Industry and Energy. The report was reviewed and cleared within the World Bank during July-August 1993 and sent for review to Mozambique in October 1993. During October-November 1993, discussions took place between Mozambi.que, the World Bank's Africa Region, and the Energy Sector Management Assistance Programme (ESMAP) over strategy and methods for implementing this country paper. The Department of Energy of the Mozambique Ministry of Industry and Energy signified in October that it had no problems with the paper and gave formal approval and clearance on November 5, 1993, following discussions in Lisbon.  ESMAP Country Paper Mozambique Executive Summary 1 ESMAP conducted an Energy Sector Assessment of Mozambique during 1985- 86, just as that nation was joining the World Bank. The main recommendations of the Assessment were of interest to donors, including the World Bank, or rather IDA, which lent for two projects that were based in good part on the work done during the Energy Assessment. Since thin, however, ESMAP has not been very active in Mozambique, except for carrying out two studies (of electricity for household use and of the Pande gas field). 2 Although civil unrest continued to exact a heavy toll on the population and on economic growth, progress on economic stabilization and reforms also continued, so that by late 1992 and early 1993, inflation had abated, the exchange rate floated but fairly stably against the dollar and the Rand, and the beginning of a supply response was being felt, even though grants and other unrequited transfers continued to make up a large share (40 to 50 percent) of GDP. It was in this context, in late 1992, that Mozambique's Department of Energy (DOE), which is part of the Ministry of Industry and Energy (MIE), sent a formal request for a resumption of, or rather a major expansion in, ESMAP cooperation with Mozambique. 3. To this end, an ESMAP programming mission visited Maputo in March 1993 to discuss and assess the Mozambican request more fully and to develop an assistance program for the energy sector to be carried out through ESMAP. The Work Program 4 The proposed work program for calendar years 1994 and 1995 consists of three major interrelated tasks: (a) a study of electric power tariffs; (b) establishment of priorities for new electrification within the program of national reconstruction; and (c) investigation of institutional shortcomings/obstacles and outlining of institutional reforms needed to facilitate dynamic and efficient development of the energy sector. In addition, a minor task is envisaged: (d) a trial study of coal for as a fuel for household use. The rough order of priority is that the first two tasks should be carried out more or less simultaneously, as they have some complementarities, before the third task. The minor task could be carried out at any time, but since it depends on funding from an ongoing IDA credit, it should be completed before the closing of the credit. Brief descriptions of the identified tasks, agreed to by the Mozambican authorities, follow. viii ESMAP Country Paper, Mozambique Electric Power Tariff Study 5 The tariff structure and level were altered in early 1992 (following a summary tariff study conducted by Coopers and Lybrand under an IDA-financed project); tariffs were last raised in October 1992 and were to have been raised May 1, 1993, by about 30 percent. The tariff schedule is complex and does not really reflect costs of service (i.e., very different tariffs are applied for the same cost of service; capacity charges are ubiquitous). In financial terms, tariff revenues more or less cover operating costs (excluding financial costs, which rise with the depreciation of the Metical, given that technical assistance and external debt service are in foreign exchange), although Electricidade de Mozambique (EDM) is always short of resources and generally has been taking losses, at least in accounting terms. 6 This problematic financial situation has led to rising tariffs (the average is now about 6 US$/kWh with 4 US$/kWh for residential use) and to an increasing number and volume of unpaid bills. Electricity may be becoming too expensive for lower-middle- income urban families, several thousands of whom do not pay their bills or pay very late. This is an alarming phenomenon: although EDM has authority to disconnect delinquent customers, it would need to hire additional personnel just to cut service (and then, presumably, to reconnect). Hence, the reconnection charge is being increased to discourage people from having their service cut. 7 Another important issue is that fact that the Center North grid is supplied with cheap hydropower from Cahora Bassa, whereas Maputo and the Southern system use high-cost electricity imported from South Africa. Part of the financial woes of EDM stem from the need to import power (paying the Rand with Meticals that depreciate continuously), and the Center North regions are beginning to think that they are subsidizing the electricity consumption of Maputo. 8 Several factors affecting power tariffs are thus obvious: the inadequacy of the tariff in relation to the structure of service costs, the financial needs of EDM, the questionable ability and willingness to pay of residential consumers, and the various supply possibilities (resumed supply by Cahora Bassa to South Africa and the Southern system; two recent studies, by Swedish and French experts, respectively; and the possible availability of natural gas). All these factors would justify carrying out the tariff study and would make its results significantly more useful than the previous one. Study of Priorities for Electrification within the National Reconstruction Program 9 The government of Mozambique would like to extend the coverage of electrification, especially to towns in areas not well served or not connected to a major generating plant. The proposed gas pipeline, as well as the now-energized high-voltage transmission lines, could be axes along which electrification could proceed. In addition, the numerous district capitals are considered to have a high priority for electrification.  Executive Summary ix - What is clear is that electrification (or, at times, reelectrification) will have to be coordinated with national reconstruction plans, and no real channel exists to do that. 10 The proposed Electrification Priorities study thus would set out alternative programs together with their implications (generation needs, transmission and distribution lines, investment costs, additional revenues from power sales, etc.) and propose a mechanism to link the electrification programs to the various national reconstruction plans/programs, once they are fully defined and operational. 11 This study would require a lengthy inventory of facilities and their status (in the areas proposed to be reelectrified). The government of Mozambique and EDM have agreed that some of this preparatory work could be carried out by EDM in cooperation with bilaterally supplied power experts resident in Mozambique. Investigation of Institutional Shortcomings/Obstacles and Outlining of Institutional Reforms Needed to Facilitate Dynamic and Efficient Development of the Energy Sector 12 DOE, EDM and other Mozambican agencies are beginning to realize that the advent of peace does not mean that assuring a steady, reliable, economic supply of energy will be a simple proposition, given the weakness of the sectoral institutions and their past experience, namely, that of acting essentially as "firemen" during a situation of near- permanent war. Some of these reflections are stimulated by the simple question of whether, for example, ENH (the National Hydrocarbons Enterprise) can generate and distribute electricity. ENH has a large gas deposit in the vicinity of several large towns (including a provincial capital) with no reliable power supply. ENH had to organize its own, and, naturally, the idea of generating a little bit more to supply its neighbors seemed practical. The same situation could arise in the case of private investors or local governments. In the meantime, M E , DOE, and EDM have set up a task force to examine issues, obstacles, and options in freeing entry to the various parts of the electricity business. The Norwegian Cooperation Agency, NORAD, has been assisting and encouraging EDM to continue in this process. EDM is thinking in terms of a new electricity law that would specifically authorize entry by other parties, even though EDM's monopoly in its areas of service is more de facto than de jure (EDM's enabling legislation does not give it a monopoly over the electricity business). DOE'S request for World Bank/ESMAP assistance in this matter stresses its interest in and need for exposure to other experiences and for an opportunity to discuss alternatives. 13 The World BankIESMAP should certainly respond positively to Mozambique's request, but in the interest of avoiding overlaps and conflicting advice, the only practical way is to conduct this activity in full cooperation, or jointly, with NORAD. So far, NORAD's assistance has been mostly in the conceptual stages of defining a role for government, a role for the power utility, and a framework that is more open and enabling for other economic agents. Undoubtedly, NORAD's assistance will continue, and the x ESMAP Country Paper, Mozambique Bank/ESMAP should coordinate with them in order to complement the initial useful conceptual work provided by the Norwegian experts. D. Trial of Coal as a Household Fuel 14 The IDA-financed ~ousehold Energy Credit provides for a pilot project in the city of Tete studying the use coal for cooking in households. A similar project failed in Maputo essentially because it proved impossible to maintain a reliable coal supply system (because of frequent interruptions in transport from South Africa). Otherwise, however, the coal was well accepted by households, as were the stoves. The idea of a new trial in Tete was prompted by. its closeness to Moatize, where domestic coal is abundantly available. Both the Africa Region and DOE suggested that if ESMAP could take this project over, it could make a useful contribution to resolving the household energy problems of Mozambique. Since all project costs (except ESMAP staff) can be financed under the project, ESMAP staff could either be budgeted by the Africa Region, or ESMAP'S usual bilateral funding could be tapped. A decision on how ESMAP's participation should be funded must be taken quickly, however, because a decision to raise funds through ESMAP will require additional time. Work Program Tasks and Preliminary Cost Estimates 15 The two main tasks related to electric power-the tariff study and the study of priorities for electrification-would be carried out approximately at the same time, with the tariff study probably starting first. The study of the institutional framework for the energy sector would begin when these two studies were well under way. Nonetheless, it would be important for ESMAP to begin immediate liaison with NORAD to keep abreast of progress. 16 Each of the three major tasks will require about US $400,000, and the coal utilization trial would require about US$100,000. The estimated total over the two-year period (calendar 1994 and 1995) thus would be approximately US$1.3 million. More precise figures are shown in Table 1 below. Table 1 ESMAP: Mozambique Country Program, Calendar 1994-1995 (US$'000) Task 1994 1995 TOTAL Electric Power Tariffs 250 168.1 418.1 Priorities for Electrification 150 279.4 429.4 InstitutionaVRegulatory Framework 200 184.2 384.2 Coal Trials TOTALS  Introduction 1.1 The economic situation of Mozambique is critical, as it has been since the early 1980s, when the command economy broke down and the security situation deteriorated to the point of practically paralyzing most productive activities. Around the time Mozambique joined the World Bank, ESMAP prepared (1984) and then carried out (1985) an exhaustive assessment of the country's energy sector (Mozambique: Issues and Options in the Energy Sector, ESMAPfWorld Bank, 1987). Since then, the World Bank has carried out two operations in the energy sector. ESMAP has been relatively inactive in Mozambique except for a study of the Pande Natural Gas Project (currently in green cover), which may lead to an IDA lending operation, and a brief study on the use of electricity in 1990. 1.2 Mozambique is an economy in which public sector expenditures reach about 60 percent of GDP and are financed about equally by revenues and external grants. Until recently, and despite strong external support, the overall public sector incurred deficits (10 to 12 percent of GDP) that, when monetized, caused high levels of inflation (exceeding 100 percent annually). This inflation and the associated depreciation of the exchange rate have caused financial problems for the energy sector companies, among others. Both deficits and inflation have been declining since 1987 or so, following the adoption of an adjustment program by Mozambique, and the public sector is now in rough balance at about 60 percent of GDP. This will make it easier to maintain more stable pricing and taxation policies generally and in the energy sector in particular. 1.3 In the sociopolitical sphere, a cease-fire and peace agreement were signed in 1992 that have brought an end to the warfare and destruction of the past 8 to 10 years. The "peace process" is to lead to demobilization of rival forces, elections, and formation of a new government. This process is being supervised by UN-mandated officials and a peace keeping force of 7,000 to 8,000 UN soldiers. Thus, the time is appropriate for addressing some longer-term issues in the energy sector, a key to reconstruction and economic development. 1.4 Hoping to take advantage of peacetime opportunities, the Ministry of Industry and Energy ( M E ) requested ESMAP assistance in November 1992. The focus of the assistance would be analysis of several important issues in the energy sector: 2 ESMAP Country Paper, Mozambique The basis for power tariflsetting in Mozambique both under the present situation and under various hypothetical time frames of resumption of supply to South Africa of Cahora Bassa power. This must be understood in the context of serious questions about the ability of Mozambican power users to pay full costs of service and of apparently justified questions of regional equity. The need for and the most economic options for electrihing (or reelectrifying) small towns and villages, principally district (or in some cases, provincial) capitals, within a prioritized program of national infrastructure reconstruction. On further discussion with sector managers, this task really requires an analysis of priorities in electrification, whether new or rehabilitated, and intimate coordination wi'th the Priority Districts Program or its successor, currently in preparation. The constraints and limitations imposed by the present institutional structure, which is impeding the Department of Energy (DOE) of the MZE and Electricity of Mozambique (EDM) from effectively carrying forward the immense tasks of reconstruction and development. Foremost among the tasks is providing Mozambique with a reliable, economic supply of energy now that peace is returning and people are settling down to the serious business of resuming orderly, productive lives in search of increasing welfare. Seeking to break the institutional impasse, a group within EDM and DOE has formed to start a process of reflection on how best to organize, legally and institutionally, the activities relating to energy (especially electric power) supply. NORAD has extended some assistance to this group, but additional assistance, especially through access to other countries' experiences, is clearly welcome, and MIE and EDM have requested ESMAP/World Bank participation. This task could be started, possibly, when the other two are well advanced. 1.5 In addition, MIE has asked the World Bank division responsible for energy sector projects in Mozambique (AF61E) to enlist ESMAP to manage an experiment on using coal for cooking in the city of Tete (near the Moatize coal mining area). This pilot project is financed under the ongoing Urban Household Energy Project. (Note, however, that ESMAP staff cannot be funded under the Project, and a mechanism tq fund the staff would need to be found possibly through donor funds or the World Bank's administrative budget. ESMAP would consider carrying out this task under either of these forms of funding.)  Detailed Project Descriptions Electricity Tariff Study 2.1 The purpose of the study is to derive a tariff structure that reflects as closely as possible the costs of meeting demand for electricity. The assumption is that the supply from Cahora Bassa to the Southern system is resumed between the years 1997 and 2000, thus significantly decreasing the costs of supply and the foreign exchange implications, subject to the constraints imposed by the revenue requirements of EDM and by any income distribution objectives (e.g., setting an explicit subsidization policy for poorer consumers or consumers in isolated systems) that tariffs might be required to serve. Analysis of Cost Structure 2.2 The cost analysis portion of the activity would characterize the main categories of consumers and the costs they impose on the system according to their consumption patterns and load factors. It would involve review of the recent (1991) power market study, encompassing its assumptions, power demand figures, and proposed scenarios. It is recommended to use energy consumption data as a basis for power demand projections. Review would also take place of any existing rehabilitation, expansion, and investment programs of EDM concerning generation, transmission, and distribution facilities. The task would also review and update, if justified, unit cost figures used in those programs. 2.3 Several additional subtasks are also required. The first would be calculation of the long-run marginal cost (LRMC) or the average incremental costs (AICs) for the three interconnected systems and for the main isolated systems. Furthermore, marginal costs should be identified at the generation, transmission, and distribution levels and discriminated by system and by voltage level. Calculations should cover at least eight years, starting from 1994, and should assume two different time frames for the resumption of supplies from Cahora Bassa (e.g., 1997 and 2000). 2.4 In the last part of the subtask, the mission would analyze alternative ways of allocating EDM's share of Cahora Bassa power between the Northern and Southern 4 ESMAP Country Paper, Mozambique systems and their potential consequences on schedules and costs of generation expansion and on marginal costs. According to current agreements, energy supplied by Hidroelectrica de Cahora Bassa (HCB) would have a lower cost at Tete (Northern system) than at Maputo (Southern). The discrimination of marginal costs by system would provide the rationale for choosing between the alternatives of nationwide tariffs (the present practice) or opting for establishing regional ones. Existing Tariffs 2.5 This subtask would involve examining the existing tariff structure and rates and comparing them with the structure of marginal costs of supply derived from the analysis just described. Once firm supply from Cahora Bassa to the Republic of South Africa (RSA)--and thus to Southern Mozambique-resumes, the cost structure of the supply will have a much lower relative charge for energy than in the current ESCOM bulk tariff. Such a structure should be reflected in the new tariffs. Particular attention should also be paid to the types of metering in use (and to the availability or lack of load limiters), since this determines what types of tariffs are feasible. New Tariff Proposals 2.6 The focus here is to make a first set of proposals for adjusting or changing the current tariff system in accordance with the alternative schedules for Cahora Bassa availability. Proposals are likely to point toward a rate decrease (in real terms) but they should ensure that EDM is able to recover its costs (operating costs, depreciation on revalued assets, and interest on loans) and to maintain a minimal level of contributions to new investments. It is thus possible that an appropriate option would be to maintain the current average rate level, albeit with a different structure. 2.7 A second aspect of the subtask would be to evaluate subsidization alternatives (internal cross-subsidies within each class of user versus external subsidies). Subsidization, if justified, should be made explicit. Also involved would be the design of measures to identify the target groups (or systems) and to maintain control in such a way that some consumers do not receive special treatment. 2.8 The last portion of this segment of the activity would be to frame the specific tariff schedule proposals with procedures for adjusting their levels according to price index increases and exchange rate fluctuations. Prices and their indexation should be consistent between the bulk level and the retail level in order to avoid problems with Rand-based bulk tariffs and Metical-based consumer rates. Implementation of New Tariffs 2.9 The purpose of the task is to design a smooth transition from the present tariff system to the one based on long-run marginal costs and on the availability of Cahora Bassa power. Consultants should give careful consideration to the problem of transition  Detailed Project Descriptions 5 and to the remaining uncertainties to avoid false expectations of cheap electricity and to avoid any further impairment of the already poor financial situation of EDM. 2.10 The activity would involve preparation, in close consultation with EDM's management, of a plan for implementing the new structure in steps. Some of the windfall profits obtained through access to a much cheaper generating source could be used for acquiring and installing load limiters for domestic and other low-voltage consumers and of more complex meters (allowing time-of-day, energy, and demand metering) for industrial consumers. In the same context, new systems of meter reading and billing also could be introduced. 2.1 1 The final portion of the study would assist the government in implementing a methodology for updating cost of service studies using a marginal cost approach. The project also would help train staff from EDM and the Ministry of Industry and Energy in this type of analysis. Staff Resources 2.12 The manpower required for the study would include a tariff specialist (who would also act as coordinator), a power economist, and a financial analyst. The magnitude of the study would depend on the quality and quantity of data available. EDM does not have enough qualified staff to provide significant assistance, although it should follow the execution of the study carefully and closely. 2.13 Rough estimates of cost and time are about US$400,000. It would take about six months to carry out the study, which would require approximately 20 stafflmonths, including participation by the government of Mozambique and local consultants. Priorities for Electrification in National Reconstruction The National Reconstruction Plan 2.14 The government of Mozambique has been preparing the Plano de Reconstrucao National, or National Reconstruction Plan (NRP). Preliminary work started even before the signing of the peace agreement, in October 1992, and the final version was to have been finished by April 1993. Its implementation is supposed to last three years. Its main objective is to restore social and economic activities in the areas most affected by the war, with particular concern for rural areas. The government estimates that 4.6 million people were affected directly by war and drought. Of that number, about 2.5 million have migrated to urban areas (cities and suburbs), and 1.5 million are refugees in neighboring countries. The improvement of security conditions in the rural areas is expected to bring back part of that population, but the timing and volume of such movements are unpredictable, and a high percentage of the displaced rural population is likely to stay close to its new urban environment. 2.15 The current (March 1993) draft of the NRP identifies the following priority goals: (a) humanitarian help, (b) supply of seeds and agricultural implements, (c) reopening and 6 ESMAP Country Paper, Mozambique rehabilitation of roads, (d) water supply, (e) basic health services, (f) reinforcing the management capability and equipment of public administration at the municipal level, (g) restoring of commercial activities, and (h) creation of employment. The type of activities to emphasize will differ according to the region. In areas most affected by the war, the priority will be the resettling and reintegration of populations; where war damages were small, investments in rehabilitation and development may already be possible. Electricity Supply 2.16 Electricity supply is not mentioned explicitly in the NRP, even though energy supply is vital to restore commercial and industrial activities and to move toward sustained economic growth in the medium-to-longer-tern. Reliable energy supply is also vital for the normal operation of public administration and basic health services. This need was the main reason behind the concern of the MIE to extend electrification to most of the nearly 110 district capitals (capitais de distrito) and behind its request for external assistance. However, the extension of electrification should be put in perspective, given the scarcity of financial resources of the government and the utility, the lack of managerial capabilities of both EDM (at the regional level) and the provincial authorities, and the priority objectives and sectors identified in the NRP at the regional level. 2.17 The most important of the district capitals are already electrified, but in many, the generation facilities and distribution networks are either out of service or damaged. Acts of sabotage have disrupted electricity supply severely, not only by damaging transmission lines-affecting load centers connected to any of the interconnected systems-but also by severing road communications, thus hindering fuel transportation (and increasing its costs) to isolated systems. The magnitude of the general reconstruction tasks and the scarcity of resources suggests that the best strategy is to focus investment in the short term on rehabilitation, repair, and resumed maintenance of existing facilities, relegating new electrifications to the medium term. Actions in Progress: Available Studies 2.18 Several rehabilitation and network extension actions are already under way with external financing. Various reinforcements or rehabilitations of the networks in Maputo, Beira, Nampula, Xai-Xai, and Nacala are under execution. Furthermore, several power studies were conducted through Norwegian technical assistance to Mozambique. The most recent, concluded in December 1992, discussed alternative supply possibilities to the Northern and Central systems and to the main isolated load centers in those regions as well as to Inhambane, in the Southern region. 2.19 This study was supposed to identify the least-cost supply options to each of the following eight load centers: Pemba, Ancuabe, Montepuez, Angoche, GuruC, Cuamba, and Lichinga, all in the Northern region, and Inhambane, in the Southern region. Yet the study clearly states that no local distribution network was taken into account, as there was  Detailed Project Descriptions 7 no detailed information on the location of consumers within each area. Hence, the predicted loads were assumed to be concentrated at existing supply points. 2.20 The options investigated for power supply are not necessarily least-cost alternatives. Electricity supplies from local autoproducers could be more cost effective for some areas. Evaluation of the actual costs was outside the formal scope of the study, but the study reports that Ancuabe and Montepuez are supplied by local autoproducers, although the age, capacity, and operating conditions of the units are unknown. It also mentions that Gurue once had a generating capacity of 4 MW; here again information on existing capacity is missing. The study also did not include cost-benefit evaluations, comparing investment costs with revenues from sales to consumers (which would imply a preliminary appraisal of the possible tariff rates). 2.21 The study draws on the conclusions of a power market study, also by Norconsult, covering the period 1993-2010 and presented in January 1992. This study forecasts consumption for the 16 "Operational Areas" of EDM, excludmg any isolated load centers not already included in EDM statistics. This means that if a plan is required for other towns, which have a small distribution network but no consumption at present, such towns would need to be treated separately in the load forecasts. Main Issues: Priorities for Action 2.22 The main issues arising from the above considerations are as follows: a. Peacetime conditions are still unstable; several million people are displaced, and the timing of any redistribution of population is uncertain. b. Resumption of industrial and commercial activity is desired but uncertain; electricity demand forecasts must reflect this situation. c. Electricity supply was largely disrupted by the war; the current operating conditions of generation and distribution facilities outside the main cities of the interconnected systems are unknown. d. Financial, managerial, and technical constraints prevent EDM and the government from handling many power projects simultaneously. 2.23 It is probable that more district capitals will be candidates for electrification and rehabilitation than there are funds to assign to that task. Consequently, MIE should set up a series of screens and priority criteria to select the sites. Emphasis should be put on the financial implications of site selection, adjusted by socioeconomic considerations. The Ministry should be concerned primarily with cities where a power supply infrastructure is already in place and hence should relegate electrification of other cities to a later stage. If necessary, priorities to extend the network within the first group of cities should be assigned in accordance with the following criteria: a. Coordination with priorities and choices of the NRP. 8 ESMAP Country Paper, Mozambique b. High potential productive and commercial uses; ease of supply (whether near a plant or transmission line). c. Most densely populated areas; potential household demand (i.e., areas with high demand with potential for revenue enhancement). Institutional Issues 2.24 Institutional aspects must also be addressed. EDM could be freed from the administrative burden of serving small isolated systems by developing institutional alternatives to centralized public sector management such as decentralized power systems owned by municipalities, cooperatives, or private investors. This approach is currently impossible, as the present legal structure of the electricity industry in Mozambique prevents power from being sold by the private sector. EDM and the Ministry, with foreign help, are taking preliminary steps to change the law, but the substantial modifications needed to make private capital a true participant in power supply should not be underestimated or expected very soon. 2.25 On technical and financial grounds, moving away from a public utility also meets difficulties. Frequently EDM is requested by provincial or municipal authorities to provide maintenance or extend service, because the local authorities claim not to have the necessary financial and technical resources. Those services are generally not paid for, however, and such a situation clearly could not continue with privately owned utilities or, for that matter, with an EDM held accountable for its performance. 2.26 The institutional review should pay attention to the financial, managerial, and technical requirements of decentralized solutions to power supply. Assuming that enough funds can be mobilized for investment in rehabilitation, other financial arrangements and concessionary financing might be necessary to cover operating expenses or to finance consumer connection costs. To guarantee proper management, operation, and maintenance of the system after its rehabilitation, the possibility should be explored of creating a consortium between the municipality (Conselho Executivo) and a technical partner that would provide the technical know-how. Rehabilitation Program: Demand Assessment 2.27 A reliable estimate of the technical and financial requirements of such a program will require a detailed survey of the current conditions of the systems, their rehabilitation requirements, and the costs involved. These tasks could be undertaken by a team of two specialists, one for diesel power plants and the other for distribution networks. EDM and regional authorities would assign some counterpart staff to work with and be trained by these foreign specialists. The survey would cover all generating facilities, public or private, and would examine their adequacy to meet any part of the demand. It would also investigate whether any private industries might be interested in entering into the electricity supply business.  Detailed Project Descriptions 9 2.28 This survey should be complemented by a rough market study or demand assessment, identifying existing main commercial, industrial, and administrative consumers and their potential for growth and assessing residential loads. Operational guidelines prepared by the NRP for data collection on inhabitants and infrastructures (by district, by sector, and by responsible institution) could be adapted for the power systems survey. In each town, a preliminary estimate of the electricity costs to the consumer and of average household income and expenditures would be useful for forecasting residential loads more accurately. 2.29 The raw data collected through the local surveys would be assembled and processed for a global evaluation and selection, considering technical, economic, and financial constraints. This screening of projects would be performed by a different expert. Working with staff from the EDM headquarters, the expert would help to develop a forward-looking rehabilitation program The approach would involve the following tasks: a. Review economic activities and load forecasts. b. Review existing and required generation facilities. c. Identify detailed technical studies required. d. Evaluate management and operating capabilities. e. Make a detailed costing of the program. f. Estimate an average cost of supply. g. Propose alternative financial and institutional arrangements. 2.30 Parts of this task (e.g., demand forecasts for some load centers) would need to be conducted in close coordination with the tariff study. Institutional Restructuring and Reform of the Legal and Regulatory Framework of the Energy Sector 2.31 This task aims at assisting Mozambique in making an informed choice regarding energy sector legislation and regulatory frameworks. Many countries are researching or experimenting with new legislation and regulatory systems. Many of the systems also are similar in their most important elements. The government of Mozambique has already discussed and debated some of these examples via the assistance of Norwegian experts. Basic ideas presented include separating the inherently public role of regulator from the potentially commercial role of owner-operator of entities such as power utilities and oil and gas companies. Much of the preliminary work on oil and gas deregulation is being conducted through the Pande Gas Project preparation (which is currently the object of a Project Preparation Facility [PPF] advance from IDA) and under the IDA-financed Household Energy Project. Similarly, the work conducted with NORAD funding so far has centered on the power subsector. If a successful ESMAP-managed task is to emerge, it must therefore take into account the ongoing work by coordinating closely with the other agencies active in this area. 10 ESMAP Country Paper, Mozambique 2.32 The main elements of this restructuring task could be as follows : a. Assistance in drafting legislation especially for electric power. It should be recognized, however, that lack of capital, experience, and knowledge in the Mozambican private sector about energy operations means that the immediate impact of the new law should not be expected to be spectacular. b. Presentation of alternative regulatory frameworks. The alternatives are not many. Hence, they should be reviewed for the sake of completeness. However, the capabilities of Mozambican public bodies to gather and analyze detailed data and translate them into regulations are limited, and only the simplest forms of regulation (which can also be most effective) should be considered as potential candidates for adoption. Thus, for example, rate of return regulation, which is an elaborate cost plus system, would not have a high probability of adoption. c. Assistance in setting up and training the regulatory agency. This would require some on-the-job training, possibly through helping the regulatory agency perform its first tasks. Pilot Study of Coal as a Household Cooking Fuel 2.33 A pilot project for using coal as a household cooking fuel in Maputo was financed under the Household Energy Credit. Appropriate stoves were designed and disseminated, and technical assistance was provided to both stove makers and users. The coal seemed to be well accepted by households. Unfortunately, however, a resurgence of war in Southern Mozambique interrupted the supply of coal (from the Republic of South Africa), and definitive conclusions thus could not be reached on the feasibility and acceptance of coal for household cooking. 2.34 The proposed new pilot project would build on the knowledge acquired in the Maputo trial. The main objective of the new pilot would be to set up a system of supply and distribution of coal and appropriate appliances and see whether it is commercially viable. The pilot project would be carried out in the city of Tete, which is close to the coal mines at Moatize, and would thus be less vulnerable to interruption of supply. The task would require about 35 staff weeks and cost about $107,000. Detailed Data 2.35 Detailed budget data are presented in Tables 2.1 through 2.4 below. These preliminary calculation represent best estimates at this stage and are presented with the understanding that the task manager may well need to make some adjustments. 2.36 Two annexes attached to this report also provide detailed data. Annex I describes the tariff situation in early 1993, and Annex I1 presents information on terms and conditions of supply of Cahora Bassa power to EDM.  Detailed Project Descriptions 11 Table 2.1 Budget for Electric Power Tariff Study Budget Total budget categorq. Item s/W US$ 10. Personnel 11.01 ESMAP Staff 11.50 International Consultants' Fees 11.60 International Consultants' Travel Administrative Support Official Travel Mission Costs (Bank Staff) Local Consultants 20. Subcontracts 21.00 International 22.00 Local 30. Training 32.00 Workshops/SeminarsfTC 40. Equipment O 4 1. O Expendable Equipment 42.00 Nonexpendable Equipment 43.00 Premises 50. Miscellaneous 5 1. O O Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries 99.00 Subtotal 159.0 Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank 179.0 Subtotal for External Funding (bl 99+ 159) 199.0 World Bank contribution 999.0 TOTAL ACTIVITY COST Note: Estimated Additional Local Participation Required 12 ESMAP Country Paper, Mozambique Table 2.2 Budget for Electrification Priorities Study Budget Total budpet category Item s/W US$ Personnel 11.01 ESMAP Staff 11.50 International Consultants' Fees 11.60 International Consultants' Travel 13.01 Administrative Support 15.00 Official Travel 16.00 Mission Costs (Bank Staff) 17.00 Local Consultants Subcontracts 21.00 International 22.00 Local Training 32.00 Workshops/Seminars/TC Equipment 4 1.OO Expendable Equipment 42.00 Nonexpendable Equipment 43.00 Premises Miscellaneous 51.00 Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries Subtotal Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank Subtotal for external funding (bl99+ 159) World Bank contribution TOTAL ACTIVITY COST Note: Estimated Additional Local Participation Required: 20  Detailed Project Descriptions 13 Table 2.3 Budget for Study of Regulatory and Institutional Framework of the Energy Sector -- - - Budget categoly Item 10. Personnel 11.01 ESMAP Staff 11.50 International Consultants' Fees 11.60 International Consultants' Travel Administrative Support Official Travel Mission Costs (Bank Staff) Local Consultants 20. Subcontracts 21 . O O International 22.00 Local 30. Training 32.00 Workshops/Seminars/TC 40. Equipment 4 1. O O Expendable Equipment 42.00 Nonexpendable Equipment 43.00 Premises 50. Miscellaneous 51.00 Operations & Maintenance 52.00 Reporting Costs 53.00 Sundries 99.00 Subtotal 159.0 Agencies' Support Costs (ASC) 159.1 UNDP 159.2 World Bank 179.0 Subtotal for External Funding (bl99+ 159) 199.0 World Bank contribution 999.0 TOTAL ACTIVITY COST 70 - - Note: Estimated Additional Local Participation Required: 14 ESMAP Countrv Pa~er. Mozambiaue Table 2.4 Budget for Pilot Project of Using Coal for Cooking Budget Total budpet category Item s/W US$ 10. Personnel ESMAP Staff International Consultants' Fees International Consultants' Travel Administrative Support Official Travel Mission Costs (Bank Staff) Local Consultants 20. Subcontracts 2 1.oo International 22.00 Local 30. Training 32.00 40. Equipment 41.00 Expendable Equipment 42.00 Nonexpendable Equipment Premises 50. Miscellaneous 5 1.OO Operations & Maintenance 52.00 Reporting Costs Sundries 99.00 Subtotal 95,000 Agencies' Support Costs (ASC) UNDP 159.2 World Bank 179.0 Subtotal for External Funding (bl99+ 159) 107,350 199.0 World Bank Contribution (under household energy loan, financing for all project inputs except staff) 999.0 TOTAL ACTIVITY COST 23 Note: Estimated Additional Local Participation Required: 10  Annex I Electricity Tariffs and Utility Finances Current Tariff Structure Al. 1 EDM's tariff structure and levels were modified in January 1992 as an outcome of a specific tariff study. Tariffs are uniform across the country, a situation that does not reflect the differences in cost between the interconnected systems-Northem, Central, and Southern---on the one hand and the isolated systems on the other. Costs are clearly higher in the isolated systems, which are supplied from small, expensive thermal units. Even between the interconnected systems the rates, which were proposed as identical for the sake of simplicity, deserve revision, as that proposal did not account for the possible different expansion (or rehabilitation) investment requirements in each of system. A1.2 Current tariffs try to reflect the economic cost of meeting demand by incorporating a maximum demand charge and an energy charge, by defining the main tariff categories according to the voltage level of supply and by including a charge for reactive energy. The structure also provides for the following refinements: a. Automatic indexation according to internal inflation (consumer price index) and depreciation of the Metical versus the Rand. b. Three options for MV and HV consumers, who can choose the rates according to their expected monthly duration of subscribed demand. c. Time-of-day tariffs that differentiate between "full-load and "low-load" periods. With appropriate meters (whose additional costs are borne by the clients), demand charges can be based on demand measured only during "full-load" periods, the time interval between 7.00 a.m. and 9.00 p.m. (i.e., 14 hours per day). A1.3 Rate increases of 50 percent were applied in October 1, 1992, and a new increase of 30 percent was scheduled for May 1, 1993. The 50 percent increase was roughly in line with the exchange rate devaluation relative to the Rand between January and October 1992, but it aroused a strong reaction from the consumers, leading to increasing arrears in payment. The current (March 1993) tariffs are given in Table A l . 1 At the LV level the difference in energy charges between the domestic and the general categories remains. That ratio was 2.4 in April 1989 and is now 1.6 In the "general" category there are roughly 20,000 consumers versus about 110,000 in the "domestic" category, whereas the average annual specific consumption is 6,500 kWh/year and 2,400 kWh/year, respectively. Despite the much smaller number of consumers in the general category, the revenues collected by EDM from this class are between 75 percent and 80 percent of those collected from domestic consumers. The collection of higher revenues is the main justification for maintaining different energy charges that otherwise would not be 16 ESMAP Country Paper, Mozambique explained by LRMC calculations. Table 2.2 shows the rates and number of domestic consumers (as of December 1992). Table Al.l EDM's Tariffs as of March 1993 (US$1 = MT3,OOO) Demand Energy Demand Energy chargea charge charge charge Type of consumer (MTkVNmonth) (MTkWh) (US$/kVNmonth) (USekWh) Low voltage General 6,000 - 12,630 242 2.00 - 4..21 8.1 Domestic 6,000 -12,630 151 2.00 -4.21 5.O Medium voltage Short utilization (su) 13,590 183 4.53 6.1 Intermediate utiliz. (iu) 16,610 125 5.54 4.2 Long utilization (lu) 19,630 92 6.54 3.1 High voltage Short utilization (su) 13,590 172 4.53 5.7 Intermediate utiliz. (iu) 16,610 116 5.54 3.9 Long utilization (lu) 19,630 89 6.54 3.0 Source: EDM. aThe demand charge is graded according to the rating of a load limiter and the charge varies with the rating. As there are no load limiters installed, demand charges are assigned according to monthly consumption.  Annex I 17 Table A1.2 EDM's Tariffs and Number of Domestic Consumers as of December 1992 Monthly Monthly Assigned demand Number Class consumption demand charge of 9% no. (kWWmonth) (kVA) (MTAVA) consumers of total 1 0- 30 1.1 1,545 45,000 36.3 9 2476 - 2970 19.8 12,631 - 0.1 Total 124.020 100.0 Source: EDM. aAssigned demand 2 19.8 kVA A1.4. As shown in Table A1.2, some 36 percent of the domestic consumers fall under the "social" tariff, corresponding to a monthly consumption below 30 k w h and 60 percent of the consumers are in the lowest class (1.1 kVA) of subscribed demand. The number of classes is in line with the common ratings of meters, but apart from the social tariff there is no strong argument to differentiate the demand charge, in MTkVA, for the various classes. The demand charge is high compared with the energy charge: for an average consumer of classes 2 or 3 (1.1 or 2.2 kVA of subscribed demand), the demand charge is equivalent to the cost of 40 kwh (in Portugal, for example, the break-even is 20 kwh). This structure reflects the predominance of the demand costs over energy costs, typical of hydro systems, which is also in line with the bulk supply tariff of ESCOM applied to supplies to the Southern system. Cross-Subsidization A1.5 Consumers in isolated systems are cross-subsidized by consumers in interconnected systems. However, the total volume of subsidy is small, as the percentage of energy involved is much smaller than the percentage of consumers (see Table A1.3). 18 ESMAP Country Paper, Mozambique Table A1.3 Interconnected and Isolated Systems: Number of Consumers and Annual Consumption, 1991 - - Number of consumers Annual consumption (GWh) Low voltage Low voltage Domestic General Medium Domestic General Medium Type of connection tariff tariff voltage tar.# tariff voltage Interconnected systems - 98,134 17,467 862 248.4 120.5 307.4 Isolated systems 9,075 1,699 24 9.3 5.5 3.6 Total Mozambique 107,209 19,166 886 257.7 126.0 311.0 96 of isolated 8.5 8.9 2.8 3.6 4.3 1.2 Source: EDM. A1.6 At the low-voltage (LV) level, about 9 percent of the consumers are subsidized by the remaining 91 percent. However, the subsidized volume of energy is only 4 percent of the billed energy in LV. At the medium-voltage (MV) level, the figures are negligible. This situation is likely to change once peacetime levels of economic activity are restored in the countryside; recent studies suggest that several isolated systems might be connected to the main grid in the medium term. As the timing is highly uncertain, a tariff review could slowly differentiate the rates and provide "signals" in line with their specific operating costs. The review should anticipate future interconnection, but it should also remain open to the possibility that institutional changes might allow other entities to operate these systems before the interconnection ultimately takes place and that in the meantime these operators would require adequate revenues. A1.7 In all the systems, household use is subsidized at the expense of commercial and small industrial users. This kind of cross-subsidy is probably appropriate for low-volume and low-income residential consumers, but it is inappropriate for those using electricity extensively. This is particularly relevant to large cities such as Maputo, Beira, and Narnpula, where the average annual household consumption in 1991 reached 3,100 kwh, 2,200 k w h and 1,800 kwh, respectively. These levels of consumption approach those of industrialized, developed countries, so that a generalized subsidy is not justified. The lack of justification of a subsidy is reinforced by the likelihood that a number of "domestic" consumers are actually small family businesses. Medium Voltage Tariff Options A1.8 At the end of 1992 there were about 900 HV and MV consumers (only 0.7 percent of the total clients of EDM), but these were responsible for nearly 45 percent of the utility's total consumption. The clients are mostly supplied at MV (1 1 kV and 33 kV); a  Annex I 19 small number are supplied at 66 kV. HV and MV consumers may choose from three tariff options according to the expected load factor (duration of utilization) of the subscribed demand: short-, intermediate-, and. long-utilization rates. The three options have the same structure but differ by the ratios between the demand and energy charges, as shown in Table A I. 1. Moving from short utilizations to long utilizations brings an increase in the demand charge and a decrease in the energy charge. This structure is identical to those prevailing in Portugal and France. Still, it is doubtful whether such options, as currently designed, are interesting for the consumers and the utility and whether they are adequate to the characteristics of the main generating systems and to the import bulk supply tariffs of ESCOM or Hidroelectrica de Cahora Bassa (HCB). A1.9 Experience shows that consumers with lower load factors (of their subscribed demand) are likely to concentrate their consumption on peak-load periods, whereas those with higher load factors spread their consumption more evenly between peak- and low- load periods. Statistical analysis also shows that the duration of utilization H (hourslyear) of the subscribed demand is the relevant parameter to assess the responsibility of a consumer on the expansion of generating capacity. It is thus possible to plot the marginal cost of supply, per unit of demand (kW), as an increasing function of H but with decreasing derivatives. The function is not a practical way of setting tariffs, so it is commonly approached by a set of three or four linear options with a binomial structure: a demand charge and an energy charge. The energy charge comprises the fuel costs and a part (variable with H) of the fixed capacity charges. Briefly stated, that is the rationale behind the options in the tariff structure of EDM. EDM's and Bulk Supply Tariffs A1.10 The actual supply conditions to EDM may not justify the current structure. Demand increases are met either by ESCOM or by HCB, both with a huge capacity compared with EDM's requirements. There is no "capacity shortage" risk (and therefore no "reliability cost" in the usual sense) but only a cost of the marginal demand unit, which is the same over the whole year. As long as those supplies are economically more attractive than an internal expansion, EDM has no leverage to influence demand and energy charges. In the case of ESCOM and HCB bulk supply tariffs, the above mentioned "function7' varies linearly with H, so that the three options are probably an unnecessary complexity. A comparison between EDM's tariffs, ESCOM's current bulk tariff (1992), HCB's current tariff in Tete (Northern system; 1992), and HCB's tariff for Mozambique entitlement at Komatipoort (Southern system) shows significant differences. These are presented in Table A1.4. 20 ESMAP Country Paper, Mozambique Table A1.4 Comparison of EDM's Tariffs and Bulk Supply Tariffs as of December 1992 Demandcharge Energychurge Entity (MTkW/month) (MTkWh) Observations EDM Low voltage 6,000-12,630 15 1 or 242" Domestic and General Low voltage 19,630 109.0 Demand > 19.8 kVA L Medium voltage 19,630 92.0 Long utilizations High voltage 19,630 89.0 Long utilizations HCB Tete (Northem)b Komatipoort (Southem) 10.080 7.0 Source: EDM. Exchange Rate: 1 Rand = 1,000 MT. asupplied to the Southern System (Maputo area). b~ormula subject to confirmation. Figures subject to confirmation. Only available after repair of DC line to RSA. y energy corresponding to a load factor higher than 0.8; otherwise equal to 0. d ~ n l for Al. 11 The current tariff structure is also difficult to understand for the consumers, and the intersection between one "best" option and the next occurs at rather low load factors (durations) of subscribed demand. For MV consumers and on an annual basis, the best options are as follows: a. Short utilization tariff for H 5 625 hours (load factor 7.1 percent) b. Intermediate utilization tariff for 625 < H < 1,100 hours c. Long utilization tariff for H 2 1 100 hours (load factor 12.5 percent) Most consumers are likely to opt for the "long" tariff without risk of being overcharged; the intermediate option is of no practical use. Energy Production Issues for Future Tariffs A1.12 Generation in the Northern and Central systems is mainly of hydro origin: Cahora-Bassa, in the Northern system, and Mavuzi and Chicamba in the Central system. In the Southern system, imports from RSA amounted to 438 GWh in 1992, or 87 percent of total energy available. Energy production by source is given in Table A 1.5.  Annex I 21 Table A1.5 EDM's Energy Production/Acquisition by Source, 1989-1992 (GWh) Source 1989 1990 1991 1992 Generation Hydro 154.5 152.7 177.9 174.0 Thermal 187.7 169.4 148.0 93.5 Total generation 342.2 322.1 325.9 267.5 Imports from RSA 307.0 321.6 373.1 437.6 Acquisition from HCB 92.5 94.2 98.7 95.0 Exports (-) - - (9.3) Total energy available 741.7 737.9 797.7 790.8 Source: EDM Annual Statistical Reports. A1.13 The type of generation or the contract formulas essentially tie the costs of production or acquisition to monthly maximum demand; the energy component has a significant weight only in the bulk tariff bill of RSA and only for high load factors: "demand charges are higher than "energy" charges up to a load factor of 67 percent. A1.14 Once a firm supply from Cahora Bassa to RSA is resumed and the grid of ESCOM used for wheeling energy to the Southern system, the imbalance between demand and energy charges will increase. Demand charges gain more relative weight, and average energy costs will substantially decrease (see Table A1.4). The timing of such resumption is uncertain (it will not be before three or four years), and it is unwise to adjust tariffs before rehabilitation of the line actually starts. The financial situation of EDM must also improve, even though tariff increases seem unlikely to cover the main causes of the losses-that is, exchange rate losses and financial charges. In the meantime, a study should be made of possible transition paths between the current tariffs and the structure appropriate after restoring Cahora B assa supply. This study should review the demand projections established for the Southern system and take into account the transmission and distribution investment programs. A1.15 Because maximum demand will play an even more important role in the total supply costs, it is worth preparing the consumer installation to allow for a tariff structure able to charge consumers according to their demand responsibility. A first step would be fitting the meter ratings to the subscribed demand of consumers. A second, more important, step (particularly at the LV level) would be the generalized installation of load limiters. Although the demand charge in the current tariff structure is graded according to the rating of load limiters, not a single one is installed. The period until the full rehabilitation of Cahora Bassa could be used to launch a program to install load limiters. The installation of about 100,000 units could cost about US$6 million. This sum appears modest if it opens the way to implementation of a more suitable tariff structure and to a greater ability to manage demand.  Annex II Tariff Charges for Cahora Bassa Supplies A2.1 HidroelCctrica de Cahora Bassa (HCB) is currently (March 1993) supplying energy to the Electricidade de Mocambique (EDM) Northern system under an agreement signed between both parties on 28 May 1983. Energy is supplied and measured at Matambo substation, situated at about 20 km from Tete and 120 km from the plant. Once the High Voltage Direct Current (HVDC) link between Cahora Bassa and Apollo substation, in the Republic of South Africa (RSA), is put back in service, HCB will resume supplies to EDM's Southern system through ESCOM's network. The maximum demand from Cahora Bassa to which EDM is entitled depends on where it is received- in the Northern system, at Tete, or in the Southern system, at Komatipoort, through ESCOM's network. The tariff structure and applicable rates are also different. Supplies from HCB to the Northern System at Matambo A2.2 The tariff formula for supplies to the Northern (and Central) system dates back to 1983. The formula is as fo1lows:l where F= Amount of monthly invoice, in the official Mozambique currency, at the exchange rate prevailing on the last day of the metering period. P= Maximum agreed demand. h= Number of hours of the month. p1= Price of firm power referred to in clause 11 (a) of the supply contract between CB and ESCOM. W= Energy metered during the month at Matambo. p2 = Price for the metered energy that exceeds 80 percent of the energy that might be supplied with the agreed power and according to clause 11 (b) of the supply contract. A2.3 The first component of the formula corresponds to a demand charge; the energy charge is subsumed in the demand charge. The second component is an energy charge for the energy supplied in addition to the amount subsumed in the agreed demand (i.e., for energy exceeding a load factor of 0.8). The second component is made equal to 0 if negative (if W < 0.8 P h), which means that for up to 80 percent of the maximum energy 1. Figures were confirmed by HCB delegation, in Lisbon, in May 1993. 23 24 ESMAP Country Paper, Mozambique available at the agreed demand, all kilowatt hours are billed only through a demand charge.2 A2.4 The prevailing rates in March 1993 were as follows: pi = 0.5 Rand cents/kWh. p2 = 0.1667 Rand cents/kWh. A2.5 At an exchange rate of US$l = 3 Rand, the above charges are as follows: A2.6 Taking into account an average month of 720 hours, the implicit demand charge is thus 2.88 RandkWImonth (0.96 US$/kW/month) A2.7 The average cost per kilowatt hour decreases when the load factor increases, reaching 0.5 Rand cents/kWh (0.1667 US $/kwh)for a load factor of 80 percent, which is an extremely low value by world standards. Supplies from CB to the Southern System, through ESCOM A2.8 For supplies to the Southern system at Komatipoort (RSA), through the network of ESCOM, EDM will pay HCB according to the following formula:3 where F= Amount of monthly invoice in the official Mozambique currency. P = Maximum demand (kW) agreed to be delivered each year by HCB to EDM, at Komatipoort. h= Number of hours of the month. pi = Price of fm power referred to in clause 11 (1) (a) of the supply contract between HCB and ESCOM. W= Energy metered during the month at the point of supply. p2 = Price of power referred to in clause 11 (1) (b) of the supply contract between HCB and ESCOM. 2. Load factors change from month to month, leading to different monthly unit costs. Calculations should be made on a monthly basis and not on an annual basis. 3 . Annex "B"to the "Trilateral Agreement."  Annex I1 25 A2.9 No special conditions apply to the component (P h - W), contrary to what happens for supplies at Matarnbo, so that the formula may be rewritten as: F= 1.05Ph(pl-p2)+1.05Wp2. A2.10 According to EDM information, p2 = (1/3)pl, so that F = 1.05 P h (213) p i + 1.05 W (113) p l . or, calling "a" the load factor, so that a = WI (P h), A2.11 The relative shares of demand and energy charges in the total monthly invoice are the following: demand charge: 242 + a). energy charge: al(2 + a). A2.12 The highest relative share of the energy charge is 33.3 percent, for a = 1. A2.13 According to EDM and HCB information supplied to the mission in March 1993, figures negotiated in 1984 in clause ll(1) of the supply contract between HCB and ESCOM were: p1 = 0.75 Rand centslkwh. p2 = 0.25 Rand centslkwh. A2.14 On top of those charges, ESCOM was supposed to pay a "reliability premium" to HCB in the amount of: rl = 0.35 Rand centslkwh, for firm power r2 + 0.12 Rand centslkwh, for nonfirm power. A2.15 From the total reliability premium payable by ESCOM, HCB would return 28.6 percent to the government of Mozambique (not to EDM). The same unit rates, p i and p2, would apply to sales to EDM. In this case, no reference is made to a reliability premium, but it is stated that if the application to EDM of the formula produces a revenue to HCB lower than the one HCB would have received from ESCOM for the same amount of power, EDM would undertake to pay the difference to HCB. A2.16 In 1989, the unit prices in the formula were renegotiated, and ESCOM agreed to an increase to be applied as soon as the HVDC line was put back in service and lasting, roughly, up to the year 2004, when a further review would take place. Although there is still room for discussion concerning the exact terms of the tariff to be charged to EDM, it may be safely assumed that in the worst case (from EDM's point of view) the figures will be as follows: p1= 2 Rand centslkwh. p2 = 0.667 Rand centslkwh. 26 ESMAP Country Paper, Mozambique converted into Mozambican currency at the prevailing exchange rate. At an exchange rate of US$1 = 3 Rand, the above charges are equivalent to : p2 = 0.222 US $/kwh. The formula is thus equivalent to the following demand and energy charges: demand charge: 10.08 RandMImonth (3.36 US$/kW/month) energy change: 0.7 Rand cents/kWh (0.233 US $/kwh) A2.17 The total costs for the supplied energy are payable in Mozambican currency. In addition to those costs, EDM should pay, monthly, to ESCOM, in Rands, an amount A (transmission charges) and an amount b (standby charges). The figures are currently as follows: Transmission charge: A = 30 000 Randlmonth. Standby charge: b= 0.5 RandIkW of agreed demand. Even for low agreed demands (e.g., 50 MW) the two supplements together do not increase the monthly bill by more than 10 percent. The standby charge is roughly 5 percent of the demand charge.