Malawi - Second Power Project

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 174-A-MAI MALAWI APPRAISAL OF SECOND POWER PROJECT ELECTRICITY SUPPLY COMMISSION OF MALAWI August 6, 1973 East Africa Projects Department Public Utilities Division This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQJIVAI,ENTS 1 US$ 82 Tambala 1 Malawi Kwacha (PIK) = 100 Tambala 2 Malawi Kwacha = One Pound Sterling ,1 Malawi Kwacha = US$1.22 at time of appraisal (Febniary 1973) 1,000,000 Malawi Kwacha US$1,220,000 ABBREVIATIONS AND ACRONUSF kW = Kilowatt = 1000 W4atts mW = Megawatt = 1000 Kilowatts kTWh = Kilowvatt hour = 1000 'Tatt hours GWh = Gigawatt hour 1,000,000 Kilowatt hours kV = Kilovolt = 1000 Volts Btu = British Thermal Unit cusecs = Cubic feet per second sq mi = Square mile ft = 'eet r.p.m. = Revolutions per rninute ESCOYI = Electricity Supply Commission of Malawi SUCOI4A = Sugar Corporation of N;alawi CDC = Commonwealth Development Corporation UK = United Kingdom ADB = African Development Bank TNDEBANK = Industrial Development Bank of Malawi FISCAL YEAR January 1 to Deceinber 31  MALAWI APPRAISAL OF SECOND POWER PROJECT ELECTRICITY SUPPLY COMMISSION OF MALAWI TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .......... .................... i-ii 1. INTRODUCTION ......................................... 1 Background ........................................ 1 2. GENERAL ECONOMY AND THE POWER SECTOR ................. 2 The Country and the Economy . . 2 Energy Resources ..................... 3 The Power Sector ..................... 3 Existing Facilities of ESCOM ................. . 5 Future Development .................., 5 3. THE PROJECT ....................... 6 Description .... , 6 Estimated Cost .............. . 7 Financing ..7........... 7 Basis for Estimates ................... 8 Status of Engineering and Construction ............... 8 Procurement ........ 9 Disbursements 0 .... ..***9*9**** 9 Ecological Aspects ... . ....9 Irrigation Aspects .. .. ..... 9 4. JUSTIFICATION OF THE PROJECT .10 Comparison of Alternatives . .10 Rate of Return on Investment. 11 Gas Turbine .............. 11 This report was prepared by Messrs. A.E. Bailey, E. Bolte and E. Greenwood.  Table of Contents (Contd.) Page No. 5. BENEFICIARY - ELECTRICITY SUPPLY COMMISSION OF M4ALAWI .. ................................... 12 Legislation .......... 12 Organization and Management ..... ............... 13 Training ........... ............................ 14 6. FINANCIAL ...................................... 15 Financial Position and Past Earnings .... ....... 15 Tariffs ......... ............................... 16 Proposed Financing Plan ....................... 17 Future Operating Results and Financial Position. 19 Accounts and Audit ............................. 20 7. AGREEMENTS REACHED AND RECOMMENDATIONS ......... 20  ANMEXES 1. Actual and Estimated GWh Generated and Sold, Installed and Firm Capacity, Saystem Maxim= Demand and Load Factor (Southern Region and Lilongwe) 2. Actual and Estimated Sales of GWh by Categories - Interconnected System (Southern Region and Lilongwe) 3. Chart - Interconnected System Capacity and Demand 4. Ex:isting Eiant ( Southern Region and Lilongwe ) 5. )Detailed Description of Tedzani Stage II 6. Project Cost Estimates 7. Construction Program 8. Estimated Schedule of Disbursements from IDA Credit 9. Comparison of Project with Thermal Alternative 10. Methods and Assimptions made to Determine the Return on the Investment and Justification for the 12-MW Gas Turbine 11* Irncome Statements 12. Cash Flow Projections 13. Balance Sheets 14. Notes and Assumptions for the 2inancial Statements 15. Loans at December 31, 1972 16. Economic Analysis of ESCOM's Tariffs MAP  MALAWI APPRAISAL OF SECOND POWER PROJECT ELECTRICITY SUPPLY COMMISSION OF MALAWI SUMMARY AND CONCLUSIONS i. This report appraises a Project which consists of Stage II of the Electricity Supply Commission of Malawi's (ESCOM) Tedzani Falls hydroelectric development and a 12-MW gas turbine generating unit to be installed at Blantyre. The estimated cost of the Project is US$14.3 million, excluding interest dur- i.ng construction, and the Government of Malawi has requested the assistance of the Association and the Commonwealth Development Corporation (CDC) ifn fi- nancing thLe foreign exchange costs and part of the local costs. An IDA Credit of US$7.5 million to finance the foreign exchange cost of the hydro station and a tariff study, and a CDC loan to finance the foreign exchange cost of the gas turbine and engineering and administration plus 50% of local costs are proposed. The Credit would be IDA's second to the power sector in Malawi. ii. The first Credit (178-MAI) financed the offshore cost of Stage I of the Tedzani Falls hydroelectric development and a 3-M4W diesel generating unit. This project had substantial cost overruns, due in the first place to an excess cf about MK 1 million over the original estimates when the main civil contract was placed and, later, to additional work caused by faults in the rock formation which were revealed during the course of construction of the head race conduit, the desilting chamber and the power station. The overruns were financed by CDC and INDEBANK (Industrial Development Bank of Malawi) loans aggregating MK 1.6 million. The project went into commercial operation in May 1973 approximately four months behind the target completion date. iii. The Project consists of a hydroelectric power station containing two 10-MW generating sets as an extension to an existing hydroelectric power station and the construction of a barrage to increase the output of the exist- ing 16-MW power station by a further 4-MW. It also includes associated trans- mission equipment and a 12-MW gas turbine which is required to overcome power shortages in the immediate future and for peaking and standby purposes. iv. The Project is essential to meet the growth in demand and is the least cost method of doing so. It has been compared with an alternative gas turbine installation whtich wold be located at Blantyre. The analysis gave an equalizing discount rate of abot t 2X. and a sensitivity analysis showed that an increase of 10% in the capita. costs of the Project combined with a 10% lower rate of load growth than that forecast reduced the equalizing discount rate to little over 8%. The probability of this happening is es- timated at less than 10%. Compared with the alternative the hydro project will mean a larger use of unskilled labor in a situation where unemployment is widespread and a saving of foreign exchange. The rate of return on the investment is about 15%.  - ii - v. Demand for electrical energy in Malawi has been growing at an aver- age rate of about 14% per annum and this rate of growth is expected to con- tinue for 1973, gradually falling to 10% per annum by 1977. Additional ca- pacity will be required by 1975, when the gas turbine would be commissioned. vi. Procurement, for contracts to be financed from the proposed Credit, would be by international competitive bidding. CDC has advised tnlat pro- curement of the 12-MW gas turbine could also be by international competitive bidding. vii. Effectiveness of the CDC loan will be contingent upon effective- ness of the IDA Credit. viii. The Project is not likely to cause any ecological problems but a reconnaissance study would examine the possibility of ecological change arising from the Project and determine the actions which should be taken to mitigate undesirable effects. ix. A recently completed UNDP study indicates that likely abstraction of water for irrigation from the Middle and Upper Shire River would have no detrimental effect on the Project, but it would eventually reduce the power potential of the river unless action is taken to increase the minimum flow by increasing the storage in Lake Malawi. x. ESCOM is well managed although the quality of its senior and managerial staff has been adversely affected by high turnover. It has a well thought out training program and it, perhaps optimistically, hopes to replace all existing expatriate staff with Malawi nationals by 1980. xi. ESCOM's earnings over the last few years have grown substantially and the rate of return on net fixed assets in service has increased from 10% in 1969 to 14% in 1972. ESCOM is expected to substantially increase its capital assets in the future and, to maintain a sound cash position and capital structure, its financial objectives will include a minimum rate of return of 10% and a 25% contribution from internal cash generation towards its capital expenditures between 1973 and 1977. To achieve these objectives an increase in the average tariff of about 9% may be required in 1975. A tariff study to determine any required changes in both the level and struc- ture of tariffs is to be carried out. xii. It has been agreed that the Government will onlend the proceeds of the proposed Credit at 7-1/2% interest over a term of 24 years with a grace period of 4 years. It has been confirmed that the proposed CDC loan would also be at 7-1/2% interest rate over a period of 23 years with a 3-1/2 year grace period. xiii. The Project would be suitable for an IDA Credit of US$7.5 million.  MALAWI APPRAISAL OF SECOND POWER PROJECT ELECTRICITY SUPPLY COMMISSION OF MALAWI 1. INTRODUCTION 1.01 This report appraises the Electricity Supply Commission of Maalawi's (ESCOM) Tedzani Stage II hydroelectric power development (24-MW), and a 12-MW gas turbine generating unit to be installed at Blantyre. The estimated cost of the Project is MK11.7 million (US$14.3 million), excluding interest during construction with a foreign currency component of MK8.2 million (US$.O.C mi $ lion). The Government of Malawi has asked the International Development As- sociation (IDA) and the Commonwealth Development Corporation (CDC) to fin- ance the foreign exchange and, in view of ESCOM's tight financial position, it has also asked CDC to finarnce 50% of the local costs. 1.02 This will be the second credit for power to the Government of Malawi, Credit 178-HAI having been made in 1970 for US$5.25 million to finance the foreign exchange component of Tedzani Stage I hydroelectric development (16-MW) together with a 3-MW diesel generating unit. The Project also included the related 66-kV transmission system and some distribution extensions and im- provements, the foreign components of which were financed by a loan of US$3 million equivalent from the African Development Bank (ADB). 1.03 Construction of the project has proceeded satisfactorily although there have been serious cost overruns. An initial increase in the cost of civil works was due to bids containing a much larger sum for establishment costs than allowed by the consultants who had based their estimates on actual costs for the Nkula hydro project completed some two years earlier, Costs later escalated still further because of unexpectedly bad rock conditions along the route of the headrace conduit, the silt chamber and the power station excavation, which suggests inadequate pre-project sub-surface explora- tion. CDC subsequently made a loan of MK 1.0 million to cover the initial cost overrun and a further loan of MK 0.6 million has been made jointly by CDC and INDEBANK (Industrial Development Bank of Malawi) to cover the later cost overrun to complete the work. The project has now been completed and the hydroelectric power station with a capacity of 16 MW went into commercial operation in May, 1973, some four months behind schedule. Background 1 .04 There are a number of potential hydro sites on the Middle Shire River and the first stage of one of these sites (Nkula Falls) was developed in 1966 with the construction of a 24-MW power station. CDC assisted in fi- nancing this project.  2- 1.05 The Government of Malawi commissioned Messrs. Kennedy and Donkirn and Messrs. Watermeyer, Legge, Piesold and Uhlmann, both of the United Kingdom, in late 1966 to prepare a ranking report to determine if it would be more economic to further develop the Nkula Falls site or to develop one of the other hydro sites. This study recommended the development of the hydro- electric potential at Tedzani. 1.06 The Stage I project was appraised in May 1968 but construction of the project was postponed pending a clearer picture of the general economic and financial situation of Malawi. The project was reappraised in August 1969 and the US$5.25 million IDA Credit (see paragraph 1.02) was made in February 1970. Because of the delay, it was necessary to include provision in the project for a 3-MW diesel generating unit to avoid a power shortage before completion of the Tedzani Stage I hydroelectric development. 1.07 The Government of Malawi commissioned the same consultants early in 1972 to carry out a further study of the hydro potential of the Middle Shire River and this was followed by a further instruction in August 1972 to carry out another ranking study to determine the next hydroelectric de- velopment to follow Tedzani Stage I. Their report concluded that Stage II of the Tedzani hydroelectric project is the next logical development, and that 10-MW generating units are the correct size for this development. it concluded that a 12-MW gas turbine unit would be required by 1975 to meet the projected power demand before the Tedzani Stage II could be commissioned (early 1977). 1.08 This report is based on the findings of an appraisal by Messrs. A.E. Bailey, E. Bolte and E. Greenwood who visited Malawi in February 1973 and on information provided by ESCOM, Messrs. Watermeyer, Legge, Piesold and Uhlmanan and Kennedy and Donkin, ESCOM's consultants for the Project. 2. GENERAL ECONOMY AND THE POWER SECTOR The Country and the Economy 2.01 Malawi is a land-locked country in south eastern Africa, border%d by Zambia, Tanzania and Mozambique. About one quarter of the ccuntry is cover(ed by lakes, the largest being Lake Malawi with an area of some 11,500 sq mi. Total land area is about 36,000 sq mi., which consists largely of plateau about 4,800 ft above sea level; the mountainous north rises to 8,000 ft and the extreme south is only 600 ft above sea level. With a population of about 4.7 million growing at about 2.6% per year, Malawi is one or the most dlensely populated countries in Africa. The population is concentrated in the Southern Region, with 169 persons per sq mi. in 1966, compared with 109 and 49 in the Central and Northern Regions.  - 3- 2.02 Since independence in 1964, GDP at constant prices has grown at a comparatively high rate of 6% per year; the GDP per capita of US$90 is, how- ever, still one of the lowest in the world. The manufacturing sector has grown to 13% of GDP from 8% in 1964, while the share of agriculture has de- clined from 58% to about 52%. The agricultural sector still produces a live- lihood for about 90% of the population and it supplies more than 90% of the exports (mainly tobacco, tea, and groundnuts). High growth of investments and domestic savings (25% and 14% per year), played an important role in the favorablet development of Malawis economy. On the basis of past performance and present potential, an accelerated growth of the economy of about 7% per year might be possible, with the manufacturing and service sectors, including electricity, growing at a higher rate than the economy as a whole. Energy Resources 2.03 The only known fossil fuels in Malawi suitable for thermal genera- tion are coal deposits in a remote area of the Northern Region. The develop- ment of these deposits is, at present, uneconomic due to their distance from the main centers of population and rain head. Good quality coal is imported free of du,t, from the Wankie coal field in Rhodesia at a cost delivered of about US$G054I per million Btu. Fuel oil is not imported in bulk because there is little demand for it; diesel fuel in Blantyre now costs about US$1.48 per million Btu. 2.04 Geothermal power potential exists in the north of the country but extensive investigations have still to be carried out before a real apprecia- tion of the potential can be obtained. There is also the possibility of im- ported power from the Cabora Bassa development in Mozambique but this is un- likely to be economically feasible for some years due to the distance and the small demand in Malawi. 2.05 There is some hydroelectric potential in the north of the country which has yet to be investigated, but the principal large potential source of power in Malawi is the Shire River which flows out of Lake Malawi through the southern part of the country to join the Zambezi in Mozambique (see map). Lake MalaLwi is a large natural reservoir and the Shire River, which carries the overf low from the Southern end of the lake, falls about 1 ,260 ft in a Iistance of 50 miles between Kholombidzo Falls and Kapachira Falls. The total power potential in this stretch of river has been estimated at 415 MW with a productive capacity of some 3,600 GWh at 100% load factor. The Power Sector 2.06 ESCOM is responsible for public electricity supplies. The market for power increased at an average annual rate of 15% during the period 1967- 1972, compared with an average rate of 25% per annum during the previous three year period. Statistics for 1967 and 1972 together with the forecast position for 1975 and 1980 are summarized below; details are given in Annexes 1 through 3. Annual growth of sales ranged from a high of 21% in 1968 to a low of 8% in 1971, increasing to 20% in 1972; for 1969 through 1972 it averaged 14% annually.  ESCOM's Sales of kWh and Related Data Actual Forecast 1967 1972 1975 1980 Electricity generated (GWh) 85 173 262 401 Electricity sales (GWh) 77 158 226 365 Electricity generated per capita (kWh) 19 37 49 69 Maximum demand (MW) 15 32 46 75 Installed capacity (MW) 36 39 67 91 Annual system load factor % 65 60 64 60 Proportion of sales - Residential (Low Density) % 20 17 15 15 Residential (High Density) % 1 1 2 2 Commercial % 18 17 15 14 Industrial % 60 63 66 67 Other % 1 2 2 2 Annual growth of sales % 25 20 12 10 Losses as % of units generated 9.5 9 9 9 2.07 Industry, which takes more than 60% of ESCOM's output, expanded rapidly until 1968, after which growth settled down to an annual rate of about 15%. Industrial load can be expected to continue to expand more rapidly than the other categories of load and a 14% rate of growth is fore- cast through 1973, falling gradually to 10% by 1977. 2.08 Electricity consumption in the Commercial sector increased during the past six years at a rate of 14% per year. This high rate is not expected to continue in the future and a drop in demand growth to roughly 9% has been proj,ected. 2.09 Low Density Residential consumers, who are mainly higher ranking government officials and Europeans living in Blantyre, Zomba and Lilongwe will continue to have a lower growth rate of demand than the average. Their part in total consumption should drop further from 17% in 1972 to 15% in 1975 and 1980. 2.10 High Density Residential consumers, who live in low rent houses, supplied to them by the government in the larger towns of Malawi, had the highest annual rate of growth in demand of all consumer groups between 1967 and 1972, ranging between 35% in 1971 and 48% in 1970. In spite of this high rate of growth, High Density Residential consumers still comprise only 2% of total consumption and about 4% of the non-industrial electricity sales, while they represent about 40% of all electricity consumers. Depending on the program of the government to supply cheap housing to low income groups, the number of High Density Residential consumers is expected to continue its steep rise. On the other hand, this group has a low consumption level per connection and it is anticipated, therefore, that the annual growth of sales to the High Density Residential consumer group will gradually drop to about 10% by 1977.  2.11 Generating plant operated under private license aggregates some 4,500 kW, of which some 1,600 kW is operated as standby to ESCOM's supply. The remaining 2,900 kW consists of units, mainly between 25 kW and 150 kW capacity, located at isolated tea estates. Existing zacilities of ESCOM 2.12 ESCOM's principal generating facilities are located in the South- ern Region, which accounts for about 90% of the kWh sold. A small, self- contained undertaking, comprising some 700 kW of diesel plant, is operated at Mzuzu in the Northern Region. Generating plant operated in the south by ESCOM (shown in detail in Annex 4) consists of: Interconnected System Hydro 40.6 MW Steam 7.0 MW Diesel 8.3 MW Total 55.9 MW 2.13 The Tedzani Stage I hydroelectric installation (16-W) which went i-nto commercial operation in Mfay of this year, is included in the above total. This power station, together with the 24-MW Nkula Falls hydroelectric power station, are the largest installations. A 66-kV transmission line inter- connects these power stations with Blantyre and a 66-kV line has now been extended to Lilongwe, the new capital, in the Central Region (see Map). The 66-kV system has also been extended to supply the irrigation and factory load of ESCOM's largest consumer, the Sugar Corporation of Malawi (SUCOMA). 2.14 Zomba and the tea growing areas in the south are supplied at 33 kV. Distribution voltages are 11 kV and 415/240 V. The supply is reliable and losses, in the neighborhood of 9%, are low. Future Development 2.15 ESCOM has prepared a 10-year capital development program for the period 1973 through 1982 for the expansion of its generation, transmission and distribution facilities. The program provides for total expenditures during this period of some MK50 million, the major part of which will be spent on the generation development program (including the Project) and associated transmission. 2.16 ESCOM's generation development program provides, in addition to the Project, a further 12-MW standby gas turbine generating unit by 1979/80 to replace 12-MW of steam and diesel plant due for retirement by that time. The latter comprises all the thermal plant presently connected to the interconnected system, iwith the exception of the recently installed 3-MW diesel unit which will remain at Lilongwe for standby purposes.  - 6 - 2.17 The program provides for the construction of a ' 32-kV transmission liine from Nkula to Lilongwe to meet the anticipated growth of demand in that area, and the next hydroelectric power station, assumed to be Nkula Stage II, for commissioning by 1981/82. Provision is also included for a small hydro- electric power station and associated transmission to be installed at Nazam7ba in the Northern Region to provide power for a proposed pulp industry. 2.118 The distribution development in the 10-year capital developaent program provides for expenditures of about MK2.8 million on extending the 33-kV system to new areas and streng1thening supplies to existing areas to meet the increasing demand. Additionally, provision is included for expend- itures of about MKO.4 million annually on routine development of ESCOM's lower voltage networks. 3. THE PROJECT Description 3,0i The Project comprises part of ESCOM s generation development program for the 5-year period FY 1973 through FY 1977, It consists of: (a) the construction of a barrage over the submerged weir constructed in Tedzani Stage I, thereby increasing the output of Stage I from 16 MW to 20 MW; (b) the construction of a 20-MW hydroelectric power station as an extension of the existing Stage I power station; (c) the addition of a 12-MW gas turbine unit, initially to avoid a power shortage in 1975176 and subsequently for operation as a standby and peaking unit; and (d) a tariff study. 3.02 Items (a) and (b) above are described in detail in Annex 5. 3.03 A major factor influencing the need for the 12-MW gas turbine is an increase in the demand (from 6.7 MW in 1973 to 12.2 MW in 1975) forecast by SUCOMA. The reliability of tnis forecast demand and the practic- ability of securing revenues to cover the annual charges on the plant by amending SUCOA's present supply agreement, with provision for minimum annual revenues throughout the life of the agreement, based on SUCOMA's forecast demands, were discussed with ESCOM and the Government during negotiations. ESCOM explained that the forecast 5-year agreement was signed as recently as September 1972 and to ask for an amendment of the nature described would involve a reciprocal concession on the part of ESCOM. Since both ESCOM and the Government, following  -7- recent discussion with SUCOMA, are convinced that its forecasts will be substantially achieved, such an amendment, far from securing ESCOM's revenues, could well result in a loss of revenue. The Association accepted the assurances of ESCOM and the Government in this matter. Estimated Cost 3.04 The estimated cost of the Project is MK11.7 million (US$14.3 million), with a foreign currency component of MK8.2 million (US$10 million), excluding duties and interest during construction. For the construction of Tedzani Stage 1, Government waived duties for all imported goods and services It was confirmed at negotiations that Government will in like manner waive all duties relating to goods and services financed by the proposed IDA Credit: and CDC loan. The estimated costs of the Project's principal features are shown in the following table, and in more detail in Annex 6. Local Foreign Total Local Foreign Total -rflM million US$ million----- Barrage 0.50 0.62 1.12 0.62 0.75 1.37 Civil Works 1.43 1.74 3.17 1.74 2.13 3.87 Plant (Electrical and Mechanical) 0.36 2.28 2.64 0.44 2.78 3.22 Gas Turbine 0,12 1.10 1.22 0,15 1.34 1.49 Sub-total 2.41 5.74 8.15 2.95 7.00 9095 ContinLgencies (Physical) 0.33 0,71 1.04 0.40 0.87 1.27 Contingencies (Price) 0.26 1.02 1,28 0.32 1,24 1,56 Engineering and Admin- istration /1 0,52 0.70 1.22 0.63 0,86 1.49 Total 3.52 8.17 11,69 4,30 9,97 14.27 Exchange rate used at date of appraisal (February 1973) - MK = US$1.22 /1 Ilncludes the cost of a tariff study estimated at MX40,000. Financing 3,05 The proposed IDA Credit which would be used to finance the foreign exchange cost of Stage II of the Tedzani Falls hydroelectric development and the cost of a tariff study, would be US$7.5 million. The balance of the foreign exchange costs, comprising the offshore costs of the 12-MW gas terbine, in- stallation and engineering and administration, plus 50% of the local costs,  ..''_iIZ_.+' 5i . ti n <USS$ 4 mill would be financed f'rom a CDC _- c'bt _ran a>'r_1 ec3 < asv_e an &moarLt of up to Y