12 common questions answered – tariffs, agreements and power supply restriction

Why does CEC enter into long-term power supply agreements?

In the electricity industry, it is a normal practice to have long term agreements (known as power supply (PSA) or power purchase agreements (PPA), often ranging between 15-25 years. This is because an investor needs a significant capital outlay to build power infrastructure, which capital is usually borrowed from lenders (both commercial and development banks).

The repayment of these loans is over a long period, typically 10-15 years. Therefore, the lenders want to be sure that the borrower will be able to pay back the loan and a long-term agreement between the generator or supplier of the power and the buyer is necessary to give the lenders comfort that the loan will be repaid. In fact, as everybody in the sector knows, the practice is that lenders demand and scrutinise copies of the power supply agreements and, if necessary, will insist on changes to their tenure in order to match the loan period. Of course, it is critical that the buyer is credible and able to settle bills over the duration of both the PSA and loan agreement.

In the case of CEC, its mine customers require the comfort of reliable and continuous power supply to support their long-term investment decisions, typically associated with mining.

Power contracts protect the interests of both the supplier and the buyer (customer), not least in terms of committed offtake on the one hand and security of supply on the other.

Does CEC buy power from the national utility at uneconomic tariffs?

The tariff CEC pays for the power it sources from the national utility has periodically been revised upwards over the course of the supply agreement between the two. Contrary to claims that the tariff has remained low since 1997 and that retail customers pay more than the mines, and that CEC has received a disproportionate share of the mining power supply revenues.

Over the years, all stakeholders (mines, ZESCO, CEC, government) have come together with respect to achieving a mining tariff that is beneficial to the continued sustainability of both the power sector and the mines. Therefore, stakeholders successfully negotiated and implemented upward adjustment to mining tariffs of 35% and 28% in 2008 and 2011 respectively, guided by the Energy Regulation Board’s (ERB) Cost of Service Study of 2006. Another tariff increment was negotiated and agreed by stakeholders in 2017, achieving a uniform mines end-user tariff. Overall, between 2008 and 2017, the tariff increased by a factor exceeding 300%. These tariffs are not set by CEC but are an outcome of negotiation involving all relevant parties and regulated/approved by the Energy Regulation Board. The tariff structure has always been such that the larger share of CEC’s revenues from electricity sales to the mines is paid to its supplier, ZESCO. There is currently going on a Cost of Service Study to inform electricity pricing so that all electricity consumers at the various points in the value chain will pay tariffs that are expected to be cost-reflective. The study, being spearheaded by the regulator, is expected to be finalised by the end of 2020.

What is a power supply restriction?

A power supply restriction is the action taken by a power utility to limit the amount of power supplied to a customer, usually arising from the customer’s failure to meet its obligations/settle its bills within the contractual timeframe.

Does the law allow power supply restriction?

Yes, section 43 of the Electricity Act, 2019 states that where a person fails or refuses to pay a charge for electricity (bills) under a contract of supply (supply agreement) or engages in an act likely to affect the safety, reliability, security or correct record of electricity supplied, the licensee may discontinue the supply of electricity under a contract of supply and cut off or disconnect (in this case power supply restriction) any electric line or other equipment through which the electricity may be supplied.

What is the objective of restricting power supply?

The sole objective of restricting or reducing a customer’s power supply is to compel the defaulting customer to settle their debts and not to cause sabotage. As such, in the case of CEC’s mine customers, only the non-sensitive parts of the mine plant are targeted in a well-considered, planned process undertaken not arbitrarily but with the full involvement of the customer, ensuring the safety of personnel and equipment, and leaving the minimum amount of power required for purposes of safeguarding personnel and the mine’s assets.

What leads to a power supply restriction?

A power supply restriction is usually carried out when a customer fails to settle electricity bills within the settlement period specified in its supply agreement or contract of supply with the provider of the electricity.

How is a power supply restriction carried out?

A power supply restriction, as a measure of last resort, follows a meticulous and consultative process between the customer and the utility. A notice, within a stipulated time frame and pursuant to the supply agreement in place between the parties, is issued to the customer. If the customer fails to honour their obligation/pay the outstanding bill within the stated time frame/grace period, the utility engages the customer to discuss modalities of the restriction, a process intended to preserve the safety of the mine and people. Restriction means a reduction in the level or amount of power a customer normally receives; it does not mean a complete cutting off of supply. The customer is always left with sufficient power for purposes of safeguarding personnel and the mine’s assets.

What steps are taken to ensure safety during a power restriction?

Contractually, before restricting power to a customer, the technical teams of both the utility and the customer meet to agree on the restriction modalities to ensure that employees of the mine and its equipment at all times remain safe. A power supply restriction will not take place without the participation of the customer, as such, circuits/loads to be switched off are agreed by both parties.

An all-inclusive power restriction process ensures preservation of the safety of mine equipment and personnel. Restriction means a reduction in the level or amount of power a customer normally receives; it does not mean a complete cutting off of supply. The customer is always left with sufficient power for purposes of safeguarding personnel and the mine’s assets.

When a power supply restriction is effected, is the supplier obliged to continue providing emergency power to the customer?

The provision of emergency power supply is dependent on the level of the restriction in effect. Depending on the level of power restriction, a customer under restriction may receive emergency power.

When can a power supply restriction be lifted?

A power supply restriction is lifted when the customer satisfies the conditions set by the utility in the notice to restrict power supply given to the customer prior to the restriction being effected or by agreement of the parties on the terms and conditions under which the restriction may be lifted. This may include immediate settlement of the outstanding power bill(s) upon which the restriction was made and committing to an enforceable payment plan to liquidate the outstanding power bill(s).

Is CEC a “middleman”?

Picture this: does an oil marketing company need to own an oil field to sell fuel or should a supermarket grow maize for it to sell mealie meal?

Generation, transmission, distribution and supply make up the four main segments of any power sector value chain, and a player can operate in one or more of the segments. One need not necessarily operate in all segments of the chain. One can exclusively generate power as a power producer while another can operate as a transmission and distribution network, as in the case of CEC and North Western Energy Corporation. Each segment of the value chain requires capital investment, and specific expertise to build and operate the infrastructure while contributing to the whole power sector and its growth.

The modern electricity industry is tending towards utilities operating as separate entities in the various segments rather than as vertically integrated entities undertaking generation, transmission, distribution and supply. You see this in the developed economies of the world where it has almost achieved perfection. Closer to home in Zimbabwe, Malawi and Angola the power sector is partially unbundled to varying extents with generation on its own. In South Africa, a similar but more far-reaching process has begun and is projected to be completed in the next three years. With the examples of CEC, North Western Energy, Maamba, Lunsemfwa, Ndola Energy and many others in the making, one can only delay an inevitable process for that is how modern power systems are organised. The term middleman does not exist in the electricity value chain. At each stage, value is being added. CEC uses its infrastructure and adds value to the power it supplies its customers, ensuring it is fit for the customers’ requirements (delivered at the right voltage), for which it must be rightly compensated.

It is informative to note that one prerequisite for generation projects to take off in southern Africa as elsewhere is the availability of (reliable) transmission infrastructure to evacuate the power in bulk to the consumption centres. Power plants would never be been built if transmission lines were not available nearby and there was no off-taker (buyer). The Kariba dam complex itself and transmission lines to the Copperbelt were built in the 1950s mainly to service the needs of the mines on the Copperbelt. The reliable market provided by CEC’s predecessor through its well-developed infrastructure was sufficient to underpin the huge loans that the Federal government needed to source from international lenders to finance the complex and the associated bulk transmission lines to evacuate or move the power to the main load centre on the Copperbelt.

Is CEC profiteering from infrastructure it undeservedly owns?

The development of CEC’s infrastructure dates back many years to the early 1950s.

A consortium of mining companies on the Copperbelt formed the Rhodesia-Congo Border Power Corporation (now CEC) in the early 1950s as a privately-owned power utility. The Company has existed under different names (i.e. Rhodesia-Congo Border Power Corporation, Copperbelt Power Company and ZCCM Power Division during nationalisation from 1986). It was later in 1997 reverted to a private company, post ZCCM privatisation.