Erb Energy Sector Report 2007

ENERGY
REGULATION
BOARD
MISSION STATEMENT
To regulate the Energy Sector in a transparent,

effective and efficient manner that safeguards
the interests of all stakeholders
REGISTERED OFFICES
Head Office Copperbelt Office

8th Floor, Premium House Plot 332, Independence Avenue
Nasser Road P.O. Box 22281
P.O. Box 37631 Kitwe
Lusaka 10101, Zambia Zambia
Tel: +260-211-236002 Tel: +260 212 220944
Fax: +260-211-236003 Fax: +260 212 220945
E-mail: erb@erb.org.zm E-mail: erb@erb.org.zm
Website: www.erb.org.zm
ENERGY
REGULATION
BOARD
ENERGY SECTOR REPORT 2007
FOREWORD
The Energy Regulation Board (ERB) presents the second publication of the Energy Sector Report. This
report reviews the performance of the sector in 2007 and provides an outlook of the energy industry.
Most of the information presented is collected from the regulated entities and other Government agencies.
The energy sector continues to experience various challenges; key among these are the electricity
power deficit and unprecedented high and volatile oil prices, coupled with the lack of national strategic
petroleum reserves to guarantee security of supply. These challenges pose a serious threat to economic
growth, which is heavily dependent on energy services and products.
It is clear that without concerted efforts to address these challenges, Zambia’s economic growth will
be compromised. It is therefore imperative that strategic decisions are made to address these challenges
in the energy sector.
Possible solutions include additional investment in existing energy infrastructure, the consideration of
alternative sources of energy such as bio-fuels, development of off-grid mini hydro projects and enhanced
use of solar energy, among other initiatives.
The ERB hopes that the annual sector reports are useful and provide relevant information on the
performance of the energy sector. The ERB eagerly welcomes your valuable comments to enable us
improve on the scope and quality of future reports. For more information on other publications by the
ERB, kindly visit our website: www.erb.org.zm or call at our offices in Lusaka and Kitwe.
Silvester Hibajene
EXECUTIVE DIRECTOR
i
ENERGY REGULATION BOARD
CONTENTS
INTRODUCTION ....................................................................................................................................1
Developments in the Global and Regional Energy Markets .............................................................1
ELECTRICITY SECTOR.........................................................................................................................4
1.0 MAJOR DEVELOPMENTS IN 2007 ...............................................................................................4
1.1 Planned investments in Power Projects .....................................................................................4
1.2 Prepayment Metering Project .....................................................................................................7
2.0 PERFORMANCE OF THE ELECTRICITY SUB-SECTOR IN 2007...............................................7

2.1 ZESCO LTD .................................................................................................................................7
2.2 Power Consumption by Economic Sector ...............................................................................10
2.3 Load Shedding..........................................................................................................................12
2.4 Copperbelt Energy Corporation Plc (CEC) ..............................................................................12
2.5 Lunsemfwa Hydro Power Company (LHPC) ............................................................................12
2.6 Grid Code and Open Access Regime ......................................................................................13
2.7 Rural Electrification Programme ...............................................................................................13
2.8 Power Rehabilitation Project Status..........................................................................................13
3.0 ELECTRICITY PRICING .............................................................................................................14

3.1 Cost of Service Study (CoS) .....................................................................................................14
3.2 Multi-Year Tariff (MYT) Theory and Practice .............................................................................15
3.3 The 2007 ZESCO Tariff Application And Decision....................................................................16
3.4 Developments in the Southern African Power Pool (SAPP).....................................................18
3.5 Challenges and Outlook ...........................................................................................................18
PETROLEUM SUB SECTOR ...............................................................................................................20

4.0 DEVELOPMENTS IN THE DOWNSTREAM PETROLEUM INDUSTRY......................................20
4.1 New investment in INDENI Petroleum Refinery........................................................................20
4.2 Feedstock Procurement............................................................................................................20
4.3 Management of the Ndola Fuel Terminal (NFT) .......................................................................22
4.4 Distribution of petroleum products ...........................................................................................22
4.5 The Move towards Cleaner Fuels - The Case of Unleaded Petrol ...........................................24
5.0 PETROLEUM PRICING – DEVELOPMENTS IN 2007 ................................................................24

5.1 Fuel pricing in Zambia - the move from IPP to Cost Plus.........................................................24
5.2 Petroleum industry margins ......................................................................................................25
5.3 Domestic prices in 2007... ........................................................................................................26
5.4 Strategic Reserves Fund – the "stabilisation" role of the SRF ..................................................27
6.0 NATIONAL CONSUMPTION ......................................................................................................28

6.1 Diesel Consumption..................................................................................................................28
6.2 Petrol Consumption ..................................................................................................................30
6.3 Kerosene Consumption ............................................................................................................31
6.4 Jet A1 Consumption .................................................................................................................33
6.5 Liquefied Petroleum Gas (LPG) ................................................................................................33
6.6 Heavy Petroleum Products .......................................................................................................34
6.7 Minimum Petroleum Stocks ......................................................................................................34
6.8 Quality of Fuel on the Zambian Market.....................................................................................35
7.0 OTHER FORMS OF ENERGY ......................................................................................................36

7.1 Maamba Collieries Limited........................................................................................................36
7.2 Update on Developments in the Biofuels Industry ...................................................................37
8.0 PETROLEUM PROSPECTS FOR 2008 AND BEYOND..............................................................38

ii
LIST OF FIGURES
Figure A: Oman Crude Prices ...............................................................................................................2

Figure B: WTI Crude Prices ...................................................................................................................2
Figure 1: Demand Forecasts for Zambia ..............................................................................................4
Figure 2: Generation sent-out in MWh..................................................................................................8
Figure 3: Generation sent-out from Mini-Hydro Plants.........................................................................9
Figure 4: Power Consumption by Sector............................................................................................11
Figure 5: Trends in Feedstock Imports ...............................................................................................21
Figure 6: Structure of the Downstream Petroleum Industry ...............................................................22
Figure 7: OMC Market Shares as at 31st December 2007 - Fuels .....................................................23
Figure 8: OMC Market Shares as at 31st December 2007 - Lubricants.............................................23
Figure 9: Regional Fuel Prices as at 31st December 2007 ................................................................25
Figure 10: 2007 Average Lusaka Pump Prices.....................................................................................26
Figure 11: Inter bank Exchange Rates..................................................................................................27
Figure 12: Trend in Diesel Consumption over the past 3 Years ...........................................................29
Figure 13: Diesel Consumption by Sector for 2007 .............................................................................29
Figure 14: Trend in Petrol Consumption over the past 3 Years ............................................................30
Figure 15: Petrol Consumption by Sector in 2007................................................................................31
Figure 16: Trend in Kerosene Consumption over the past 3 Years......................................................31
Figure 17: Kerosene Consumption by Sector in 2007 .........................................................................32
Figure 18: Trend in Jet A1 Consumption for the past 3 Years ..............................................................33
Figure 19: Production and Sales Statistics for Maamba Collieries ......................................................36
Figure 20: Oman Crude Price 2007 and 2008 .............................38
LIST OF TABLES
Table 1: Generation from Mini-Hydro stations in 2007........................................................................8
Table 2: Diesel generation in 2007 in MWh.........................................................................................9
Table 3: Imports and Exports ............................................................................................................10
Table 4: Consumption by Sector.......................................................................................................11
Table 5: Cost of Service one-off Step-Up to Cost Reflective levels (in US cents) ............................14
Table 6: Proposed against Approved Multi-year Tariff Adjustment rates (Tariffs in US cents/kwh)..17
Table 7: Margins in the Retail Petroleum Sector ...............................................................................26
Table 8: Strategic Reserves Cost-Line in the Price of Fuel, 2007 .....................................................28
Table 9: National Consumption of White Petroleum Products in Litres ............................................28
Table 10: Diesel Consumption by Sector............................................................................................30
Table 11: Petrol Sales in Litres ............................................................................................................30
Table 12: Kerosene Sales in Litres ......................................................................................................32
Table 13: Kerosene Sales in Percentages...........................................................................................32
Table 14: Heavy Petroleum Products .................................34
LIST OF APPENDICES
Appendix 1: Electricity Summary Statistics ............................................................................................39
Appendix 2: Proposed & Approved Tariff Schedule for 2007 ................................................................40
Appendix 3: Computation of Performance Benchmarks ........................................................................41
Appendix 4: Cost Plus Pricing Model and Pump Price build up ............................................................43
Appendix 5: 2007 Petrol Prices on the International Markets ................................................................44
Appendix 6: 2007 Diesel Prices on the International Markets ...............................................................44
Appendix 7: 2007 Jet A1/Kerosene Prices on the International Markets ..............................................45
Appendix 8: 2007 Wholesale Prices ...................................45
iii
ABBREVIATIONS
Bbl – Barrels
BUTT – Bulk User Transmission Tariff
CEC – Copperbelt Energy Corporation
CIDZ – Chambishi Industrial Development Zone
CNMC – China Non-Ferrous Metals Group Corporation
CoS – Cost of Service
DAM – Day Ahead Market
ERB – Energy Regulation Board
GDP – Gross Domestic Product
GWh – Giga-watt hour (1,000,MWh)
HFO – Heavy Fuel Oil
IFC – International Finance Corporation
KFG – Kafue Gorge
km – kilo metre
KNB – Kariba North Bank
kV – Kilo Volt (1,000 volts)
kVA – kilo Volt amperes (1,000 amps)
Kw – Kilo Watt
KWh – Kilo Watt Hour (1,000wh)
IPG – Independent Petroleum Group
IPP – Import Parity Pricing
IPP – Independent Power Producer
ITC – Independent Transmission Companies
LHPC – Lunsemfwa Hydro Power Company
LFO – Light Fuel Oil
LPG – Liquefied Petroleum Gas
MD – Maximum Demand
MEWD – Ministry of Energy and Water Development
MoFNP – Ministry of Finance and National Planning
MT – Metric Tonne
MVA – Mega Volt Amperes
MW – Mega Watts
MWh – Mega watt hour (1000Kwh)
MYT – Multi Year Tariff
M3 – Cubic Metre (1,000 litres)
NFT – Ndola Fuel Termina
OMC – Oil Marketing Company
OPEC – Oil Producing and Exporting Countries
PRP – Power Rehabilitation Project
REA – Rural Electrification Authority
RERA – Regional Electricity Regulators Association
SADC – Southern African Development Community
SAPP – Southern African Power Pool
STEM – Short Term Energy Market
ToU – Time of Use
ZCCM – Zambia Consolidated Copper Mines
ZESA – Zimbabwe Electricity Supply Authority
ZNOC – Zambia National Oil Company (in liquidation)
iv
INTRODUCTION
The energy sub sector has been regulated for the past decade since the commencement of the Energy
Regulation Board (ERB) operations in August 1997. Over the ten years the industry has undergone
institutional, legal and structural changes that sought to align the sector to better meet the evolving
challenges in the domestic, regional and international environments.
Although the Government’s catalytic role in the energy sector continue to remain important, experiences
over the last decade clearly demonstrate that further strengthening and continuous improvements in
private sector participation through appropriate public policy, legal, regulatory and financial incentives
are imperative to attract further investments into the energy sector.
In the electricity sector, the ERB in 2007 adopted a new incentive-based regulatory methodology that
encourages the regulated utility to improve its performance through Key Performance Indicators (KPIs)
that, in turn, form the basis upon which subsequent tariff adjustments are based. Following the ZESCO
Cost of Service Study completion in 2006, the ERB (through the 2007 Multi-Year Tariff Decision) has
started the four year transition towards cost reflective tariffs that will allow the company to recover both
its prudent costs and earn a reasonable return that will make it possible to undertake the necessary
additional infrastructure expansion and maintenance programmes.
In line with the Government’s new Energy Policy’s objective of attracting more private investments, the
ERB is expanding its regulatory scope and methodology to create a stable, predictable and credible
regulatory environment that promotes Independent Power Producers (IPPs) and other off-grid power
developers.
In the petroleum sub-sector, improvements in the security of supply were expected following the structural
changes that took place in the domestic petroleum supply chain.
This Report highlights the developments in the energy sector during 2007 with specific focus on economic
regulation, pricing, supply, investment, industry structure and competition. It also discusses the prospects
and outlook for 2008 and beyond.
The Report is divided in two main sections, that is the Electricity Sub-sector and the Petroleum and
Other energy forms.
Developments in the Global and Regional Energy Markets
Developments in global oil prices during 2007 recorded unprecedented increases. Figures A and B
show the monthly average price movements for both West Texas Intermediate (WTI) benchmark grade
and Oman Crude for 2006 and 2007. For the period January to August 2007, the average prices for both
crudes was either below (WTI) or very close (Oman) to that for the corresponding month in 2006. From
August 2007 onwards, the prices sky rocketed from about US$70/barrel to about US$90 by the end of
the year.
1
Figure A: Oman Crude Prices
US$/ BBL
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
2005 39.22 41.24 47.36 48.46 46.57 52.14 53.69 58.14 58.88 55.32 52.70 54.41
2006 59.39 58.73 59.54 65.87 66.78 66.56 70.39 70.04 61.24 57.75 57.75 59.39
2007 52.27 56.12 59.56 64.4 65.09 66.47 70.81 67.88 73.31 77.94 86.95 86.67
Such an unprecedented price increase has been attributed to a combination of the following factors:
• The weakness of the US dollar against other currencies that has forced many financial market dealers
to switch to commodities for hedging purposes.
• The continued production constraints in both OPEC and non-OPEC oil producers. For the first time,
Russia’s oil production registered declines.
• The ever increasing demand from China, India and other developing countries due to the rapid
economic growth.
• Continued geo-political tensions – for example, the rebel attacks on oil facilities in Nigeria; and Iran’s
stand-off with the West concerning her nuclear program.
Figure B: WTI Crude Prices
100
90
80
US$/ BBL
70
60
50
JAN FEB MAR APR MAY JUL JUL AUG SEP OCT NOV DEC
2006 65.5 61.58 62.92 69.73 71.01 70.88 74.47 73.25 64.01 58.82 59.16 62.42
2007 54.52 59.28 60.57 63.94 63.47 67.49 74.24 72.52 80.14 86.00 94.63 91.79
2
With regard to the electrical power situation in the SADC region, SAPP’s prediction that the region was
to face power shortages from 2007 onwards materialized. The reasons for this regional electricity
shortage are as follows:
• Demand outstripped supply largely on account of high economic growth that has averaged about
5% in most SADC national economies over the last five years as well as rural electrification projects
in many of these countries.
• Inadequate investment in new capacity (for both generation and transmission) within the region.
Even for existing capacity, low investments in rehabilitation works has resulted in availability of
46,391 MW out of the installed capacity of 54,742 MW.
Given the central role of energy goods and services in the development process, the foregoing challenging
developments in the global oil and regional electricity markets provide the context in which the 2007
developments in Zambia’s energy sector have been discussed in this report. In a nutshell, this report
demonstrates some of the domestic challenges and opportunities such global and regional developments
present to the Zambian economy.
3
ELECTRICITY SECTOR
The Zambian power system is made up of four companies which are ZESCO Ltd, Copperbelt Energy
Corporation Plc, Lunsemfwa Hydro Power Company and the newly commissioned Zengamina mini-
Hydro Power Station.
The total installed generation capacity stands at 1,750 MW and of this 1,200 MW is currently available
on the Zambian grid. The peak demand in the country is about 1,450 MW resulting in a deficit of 250
MW (2007 figures).
The demand profile and forecast for Zambia (Figure 1) shows that demand will begin to outstrip supply
from mid 2008 and onwards.
Figure 1: Demand Forecasts for Zambia
Demand
The winter peak demand is 1,450 MW while the summer peak demand is 1,400 (2007 figures) and imports
during peak demand period amounts to 200 MW. The annual demand growth rate for power in Zambia is 3-
4 percent per year.
Demand Forecasts for Zambia

3000
2500
2000
MW
1500
1000
500
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Years
Demand Installed Capacity
Source: Adopted from ZESCO Profile 2007 publication
1.0 MAJOR DEVELOPMENTS IN 2007

1.1 Planned investments in Power Projects
The Electricity sub-sector has experienced continued growth in electricity demand over the past five
years. This has primarily been driven by the strong growth in mining, industrial and domestic demand.
These developments in power demand have rapidly put pressure on existing generation capacity that
has been constrained by the ongoing power rehabilitation project resulting in power shortages that have
led to increased load shedding. The power rehabilitation project is expected to increase total generation
capacity by 210 MW at completion to 1,960 MW from the current 1,750 MW.
4
As a long term measure that is aimed at mitigating the power shortages being experienced not only in
Zambia but in the whole of Southern Africa, a number of projects have been embarked upon to increase
generation capacity. Some background work has been done on some of these projects (Itezhi-Itezhi,
Kariba North Bank and Kafue Lower) where some infrastructure already exists. This could expedite the
implementation of the three projects.
These power projects are highlighted hereunder.
Itezhi-Tezhi Hydro Power Project
In January 2007 ZESCO and TATA Africa Holdings launched a partnership agreement for the construction
of the Itezhi-Tezhi power station on the Kafue River worth US$190 million and a transmission line worth
US$80 million. This is a joint venture project.
Construction works were projected to commence in early 2009 and would take five years to complete.
However, since the MoU was signed between ZESCO and TATA, there have not been any practical
developments on the ground.
Kariba North Bank Power Station Extension (KNB)
The scope of works at KNB is to increase the capacity of the power station by adding two units of 180
MW each to the existing four. The new machines are to be integrated into the existing infrastructure.
ZESCO concluded financing arrangements with China Export and Import Bank for the financing of the
KNB-Extension power project. The project is expected to take four years to be commissioned in 2012
at a capital cost of US$ 312 million.
A Construction agreement was signed at end of 2007 and will be undertaken by Sino-Hydro of China.
Kafue Gorge Lower Power Station
The other project to be developed is the Kafue Gorge Lower Power Station being spearheaded by the
Ministry of Energy and Water Development. The advantage of this project is that the required holding
dam will be small in addition to the fact that the area earmarked for development is uninhabited making
minimal environmental impact. Commencement of development of the project is awaiting the selection
of the developer earmarked for mid 2009.
Kafue Gorge Lower project is expected to be commissioned by 2014 at a capital cost of over US$1.5
billion with generation capacity of 750 MW.
The project is planned to be undertaken on a public - private partnership basis and International Finance
Corporation (IFC) is currently structuring the project before bids are invited from prospective developers.
Power Supply Projects to the Mines
ZESCO and CEC have continued to play a critical role in the development of the mining sector through
the construction of transmission lines and the supply of power to the mines.
In 2007 ZESCO entered into an agreement to supply power to Albidon nickel mine in Mazabuka. Under
this agreement, ZESCO undertakes to supply the mine its total power requirement of 7.5 MVA via a
25km 33 kV line from Kafue town. The total project costs are estimated at US$2.2 million and Albidon
Zambia Ltd made a capital contribution of US$1.6 million.
ZESCO also completed the construction of a 72 km, 330 kV transmission line to Lumwana Mine in
Solwezi. The project was completed in October 2007.
5
Besides the Bulk Power Supply Agreement with CEC plc (supplying the Copperbelt mines), there are
other mines with already existing agreements with ZESCO Ltd such as the Kansanshi mine in Solwezi
supplied through the 330 kV line, and Bwana Mkubwa mine supplied at 66 kV.
The implications of these new mining loads is that they are putting stress on existing generation capacity
given that the mines have firm power agreements with ZESCO and CEC.
Lunzua Power Corporation
During the year, the Kalungwishi power project was awarded to Lunzua Power Corporation as a preferred
developer of the project by Government. An inter Ministerial committee was also appointed to commence
the project Implementation Agreement negotiations. The project site is in Mpulungu in the Northern
Province of Zambia.
The project involves the construction of a 210 MW generation plant at cost of about US$780 million of
which US$590 million is the estimated cost of the plant and the balance of US$190 million is for the
associated transmission lines. The project is scheduled for completion by 2014.
CNMC Industrial Zone Development (CIZD)
The Zambian Government and the Government of the Peoples’ Republic of China signed a Memorandum
of Understanding to establish the Chambishi Multi Facility Economic Zone on the Copperbelt in 2006.
The economic zone is expected to attract investment in the order of up to US$850 million
CIZD was established to operate and manage the economic zone. The Company has applied for a license
to distribute power within the zone. A bulk power supply agreement was entered into between ZESCO
and CIZD to supply power up to a maximum demand of 110 MVA. The zone will comprise a number of
commercial businesses including cable and textile manufacturing as well as the new Chambishi Copper
smelter plant.
Transformer Plant in Zambia – EL-Sewedy Cables Ltd
As part of its strategy to reduce costs in transformer procurement, ZESCO entered into a partnership
with El-Sewedy Cables of Egypt in 2007 to establish a plant in Zambia for the production of meters and
distribution transformers of up to 5 Mega Volt Ampere (MVA).
The total investment cost of this project is US$ 8.4 million. El -Sewedy Cables will own 60%, whilst ZESCO
Ltd, Zambia State Insurance Corporation, ZCCM Investment Holdings and the National Pensions Authority
will own 40% of the new venture.
The new plant in Zambia will have an initial production capacity of 1,200 transformers per annum. The
plant operations are expected to commence by mid-2008.
Zengamina Hydro Power Station
Zengamina Power station (an Independent Power Producer) was commissioned in July 2007 and has
a generation capacity of 750 kilowatts. It is an off-grid power station with its own distribution and supply
system. The mini-hydro is located on the Zambezi River near Kalene Mission about 110 km from
Mwinilunga in the North-Western province of Zambia.
The Company is owned by the North-Western Zambia Development Trust which has 90% shareholding
and Mr Charles Rea with a 10% minority shareholding.
The total project cost was about US$2.9 million and was mostly funded through donations from well
wishers and a capital grant amounting to US$25,000 from the Rural Electrification Authority.
The company serves three customer categories namely residential, commercial and services. Tariffs
6
range from US$0.08/kWh to US$0.11/kWh. The Bulk User Tariff Threshold (BUTT) is pegged at
US$0.30/kWh; i.e. representing a 75% of avoided cost on diesel expenses for large scale consumers
like Celtel Zambia and Hillwood farm. With this development diesel users are estimated to save about
US$0.10/kWh when they switch to hydro power.
The site at which the new hydro plant has been developed has a potential capacity of about 2 MW. It
was expected that 80 customers would be connected by the end of 2007. However, on account of
difficulties in securing an appropriate transformer, supply to customers is expected to commence in
2008.
The project has a target customer profile that includes the mission hospital, government clinics, schools,
churches, farms, millers, small commercial and light industries, and households.
1.2 Prepayment Metering Project
To reduce distribution losses and improve revenue collection, ZESCO continued with the prepayment
meter installation project that was commenced in 2006 in the first phase of the project. By the end of
phase one of the project in December 2007 a total of 23,000 prepayment meters were installed. The
second phase to commence in 2008 is targeted at the installation of an additional 60,000 meters planned
to be completed within the year.
2.0 PERFORMANCE OF THE ELECTRICITY SUB-SECTOR

IN 2007
The performance of the electricity sub-sector in 2007 continued to grow in response to the increased
economic activities taking place in the country. The major power consuming economic sectors of mining,
quarrying, manufacturing, services, finance and property as well as trade continued to show strong
growth exerting more pressure on the limited system generation capacity constrained by the PRP works.
2.1 ZESCO LTD
ZESCO is a vertically integrated utility involved in generation, transmission, distribution and supply. The
company has an installed generation capacity of 1,640 MW, with Kafue Gorge 900 MW, Kariba North
Bank 600 MW, Victoria Falls 108 MW, small hydros 24 MW, and thermal power 8 MW. Generation is
predominantly hydro at 99% while the remainder is thermal. ZESCO has transmission and distribution
networks throughout the country.
2.1.1 Generation from Major Hydro-Power Stations
Generation from major hydro-power stations of Kariba North Bank, Kafue Gorge and Victoria Falls
recorded 9,570,230 MWh in 2007 compared to 9,611,531 MWh in 2006 representing a marginal reduction
of 0.43%.
Individually the major hydro stations performed as follows:
• Kariba North Bank Power Station: Recorded a 19% decrease in generation sent out in 2007
compared to generation sent out in 2006.
• Kafue Gorge Power Station: Recorded a 26% increase in generation sent out in 2007 compared
to generation sent out in 2006.
• Victoria Falls Power Station: Recorded a 5% reduction in generation sent out compared to 2006.
The changes were mostly as a result of maintenance and uprating works under the PRP.
7
Figure 2: Generation sent-out in MWh
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
KFG KNB VICTORIA
FALLS
Year 2007 Year 2006
Source: ZESCO, 2007
2.1.2 Generation from Mini-Hydro Power Stations
Generation from mini-hydro stations increased to 60,857 MWh in 2007 from 57,752 MWh in 2006
representing an increase of 5% as shown in Table 1 below.
Table 1: Generation from Mini-Hydro stations in 2007
Hydro-Plant Installed 2006 2007 %

MWh Capacity Change
Lusiwasi 12 MW 27,384 30,120 10%

Musonda Falls 5 MW 16,084 14,988 -7%
Chishimba Falls 6 MW 11,459 13,501 18%
Lunzua 0.75 MW 2,825 2,248 -20%
Total 23.75 MW 57,752 60,857 5%
Source: ZESCO Statistics, 2007
However, on individual performance, analysis shows that Chishimba Falls hydro power plant recorded
a significant increase in generation of 18% while Lusiwasi recorded a 10% increase in 2007 over the 2006
figures. Lunzua and Musonda Falls experienced operational problems and both recorded reductions in
generation of 20% and 7% respectively.
Figure 3 shows a graphical presentation of the plants’ performance in 2007 compared to 2006.
8
Figure 3: Generation sent-out from Mini-Hydro Plants in MWh
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
Lusiwasi Musonda Falls Chishimba Falls Lunzua
Year 2007 Year 2006
2.1.3 Thermal Generation in 2007
ZESCO’s total installed capacity for thermal generators is 8 MW. With the continued rise in the prices
of crude oil on the international market, the off-grid thermal generation stations faced yet another
challenging year to provide a sustainable service in rural areas.
All the diesel generation plants in the country recorded decreases in energy sent out except for Luangwa
that recorded a growth of 44% in energy sent out. Total generation from thermal stations declined by
10% from 13,069 MWh in 2006 to 11,733 MWh in 2007. This reduction could be attributed to the high
cost of diesel and the frequent break-down of equipment.
Table 2 below gives a detailed analysis of generation from diesel stations from around the country:
Table 2: Diesel generation in 2007 in MWh
Diesel station Installed Capacity 2006 2007 % Change
Kabompo 1.5 2,759 2,078 -25%

Chavuma 0.7 701 597 -15%
Zambezi 0.8 2,201 2,159 -2%
Mwinilunga 1.4 2,469 2,169 -12%
Lukulu 0.5 1109 1,050 -5%
Luangwa 0.7 783 1,128 44%
Kaputa 0.4 1,167 1,007 -14%
Mufumbwe 0.3 1,036 705 -32%
Chama 0.2 836 840 0.48%
Total 6.8 13,069 11,733 -10%
9
Major machine outages were experienced in July 2007 at Mufumbwe and Kabompo diesel power stations
resulting in total generation loss for that month. To prevent such incidences ZESCO undertook to have
at least two machines per station and have one mobile machine that could quickly be deployed to any
area under emergency conditions.
At Mufumbwe the machine could only run for 16 hours a day instead of 24 hours (consuming about
1,200 to 1,500 litres of fuel) due to fuel constraints.
In Mwinilunga only one of the two machines was running due to technical faults resulting in a noticeable
reduction in generation sent out for the year.
2.1.4 ZESCO Transmission and Distribution Losses
During the period under review, ZESCO recorded transmission losses averaging about 3.4% while
distribution losses averaged 24.7%. This was a modest improvement when compared to 3.47%
transmission losses and 25.16% distribution losses in 2006.
2.1.5 ZESCO Power Exports and Imports
Due to the power deficit that is being experienced in the country and the sub-region, ZESCO currently
only exports excess off-peak and low voltage power.
The exports during the year 2007 were to ZESA of Zimbabwe and Eskom of South Africa between 22
hours and 06 hours for high voltage power. However, low voltage exports to border towns in Botswana,
Democratic Republic of Congo, Namibia, Tanzania, and Zimbabwe were continuous. ZESCO exports
were 337,678 MWh in 2007 compared to 287,772 MWh in 2006 representing an increase of about 17.3%.
Imports on the other hand were 232,953 MWh and 54,409 MWh in 2007 and 2006 respectively representing
an increase of 328%. Imports of power were made from the Short-Term Energy Market (STEM) and/or
from the Day-Ahead Market (DAM) of the SAPP trading arrangement.
Table 3: Imports and Exports
Years Imports MWh Exports MWh

2006 54,409 287,772
2007 232,953 337,678
Change 328% 17.3%
2.2 Power Consumption by Economic Sector
Although ZESCO has continued to connect new customers for all categories to the grid, the total numbers
of active customers have significantly fluctuated from year to year.
Table 4 shows ZESCO’s customers by sector.
10
Table 4: Consumption by Sector
Economic Sector Number of Customers KWh Consumed % Contribution
Agriculture 1,294 187,630,119 2.4

Construction 89 4,898,561 0.2
Energy & Water 264 59,326,589 0.7
Finance & Property 4,648 208,426,318 2.9
Others 5,693 197,965,211 2.3
Manufacturing 1,411 504,337,112 5.8
Mining/Quarrying 75 4,735,782,658 58.8
Services (Residential) 277,043 1,983,326,433 22.7
Trade 9,249 166,883,491 2.1
Transport 273 17,687,978 2.1
Total 300,039 8,055,347,632 100C
Source: ERB computations from ZESCO 2007 statistics
At 58.5% of total consumption, the mining sector is the largest single consumer category for electricity.
This is followed by residential customers who account for 22.7% of total consumption. The two consumer
categories account for 81.5% of total consumption. We show later in the report that these two consumer
categories, tariffs are important in ZESCO’s viability.
Further, Figure 4 provides a pie-chart indicating power consumption by sector in 2007.
Figure 4: Power Consumption by Sector
Construction 0.2% 0.7%

Energy & Water
Agriculture 2.4% 2.9% Finance & Property
Transport 2.1%
Trade 2.1% 2.3% Other
5.8% Manufacturing
Services 22.7%
Mining 58.8%
Source: ERB Computations 2007
Power consumption by the mines was 4,735,783 MWh in 2007 compared to 4,390,061MWh in 2006,
representing a 7% increase. CEC supplies 86% of total mining load while ZESCO accounts for the
remaining 14%.
11
2.3 Load Shedding
The Power Rehabilitation Project for ZESCO’s generation infrastructure continued throughout 2007
resulting in some machines being taken out for refurbishment and uprating.
On account of this and the poor state of the related infrastructure, the country began to experience
extended load shedding due to the power deficit at peak times. Furthermore, the increased economic
activities in the country that are energy intensive have also placed increased pressure on existing
generation and transmission capacity. As a result of this, ZESCO engaged major power consumers such
as the mines to reduce their power consumption by about 5% to 21% of the declared demand. Residential
consumers were also subjected to load shedding during peak periods1.
2.4 Copperbelt Energy Corporation Plc (CEC)
CEC is a privately owned company involved in generation, transmission, distribution and supply. CEC’s
transmission (220/33KV lines) and distribution network consists of 835 kilometres of overhead lines and
36 high voltage substations. The current carrying capacity of the network is in excess 700 MW.
CEC purchases the bulk of its power from ZESCO through a 20 year Bulk Supply Agreement (BSA)
entered into in 1997. The BSA allows CEC to buy power up to 750 MW at an agreed price. The maximum
demand for CEC in 2007 was 560 MW.
CEC serves the region by operating an interconnector with the Democratic Republic of Congo (DRC),
which facilitates the wheeling of power from DRC to Zambia, Zimbabwe and South Africa. CEC also
wheels power on behalf of ZESCO to its customers on the Copperbelt.
Some of CEC’s mining customers include Mopani, Konkola, Luanshya, Chambishi, Chibuluma and NFC
Africa Mining Plc.
During the year under review, ZESCO through Government initiated discussions to renegotiate mining
tariffs with CEC. The tariffs are below cost reflective levels as estimated from the Cost of Service study
completed in 2007. By the end of the year, negotiations were not yet concluded.
With the mines consuming about 58.5% of total electricity, a prolonged below cost tariff regime has
adverse impact on ZESCO’s financial viability, even when all other consumers were to pay at cost reflective
level.
The key operational figures for CEC are highlighted below:

i) Transmission losses were 2.34% in 2007 compared to 2.04% in 2006;
ii) Net energy sent out from CEC’s own generation facilities was 951 MWh in 2007 compared to 1,648
MWh in 2006;
iii) Amount of electricity transmitted was 5,592 GWh in 2007 compared to 5,483 GWh in 2006;
iv) Amount of electricity sold was 3,939,797,287 KWh in 2007 compared to 3,517,704,332 KWh in 2006
representing an increase of 12%; and
v) Number of customers has remained fixed at 8 in 2007 as in 2006.
CEC generates 80 MW from its gas-turbine alternators mostly for emergency purposes.
2.5 Lunsemfwa Hydro Power Company (LHPC)
LHPC is an Independent Power Producer (IPP) which owns and operates two (2) hydro-power stations
1 From January 2008, load shedding has since intensified in the wake of the national power blackout that occurred
on 19th and 21st January 2008.
12
namely Lunsemfwa and Mulungushi with installed capacities of 18 MW and 20 MW respectively. LHPC
sells more than 90% of its production to ZESCO while the balance is supplied to Chiman Manganese
plant and Sable Zinc Company, both located in Kabwe.
Generation sent out from Lunsemfwa Hydro in 2007 was recorded at 264,500 MWh showing an increase
of 39% from 161,170 MWh in 2006. This could be attributed to one repaired generator that was brought
back on stream during the year.
2.6 Grid Code and Open Access Regime
The Zambian Grid Code (ZGC) outlines the operating procedures and principles governing relationships
among users of the transmission system. These include electricity generation companies, transmission
line owners, distributors, and large customers. The Grid Code specifies day to day procedures for both
planning and operational purposes.
The code is designed to permit the development, maintenance and operation of an efficient, co-ordinated
and economic transmission system to facilitate competition in the generation and delivery of electricity,
thereby ensuring the transfer of efficiency gains to customers.
The grid code was approved by the ERB Board in January 2007 and was submitted to the Ministry of
Energy and Water Development for policy guidance. It is envisaged that the grid code will be implemented
by early 2009.
2.7 Rural Electrification Programme
The Rural Electrification Authority (REA) has continued with its rural electrification projects. A SIDA
supported consultancy is assisting REA in becoming fully operational. This project component includes
developing transparent and effective capital subsidy schemes, project selection criteria based on
economic and financial principles, eligibility criteria and principles for the Rural Electrification Fund (REF)
appraisals of project proposals. The REF will provide capital grants to project developers to extend the
grid in rural areas while ZESCO will increase connections within its grid networks in peri-urban areas.
A Rural Electrification Master plan was concluded in 2007 with the support of Japanese International
Cooperation Agency (JICA).
2.8 Power Rehabilitation Project Status
The PRP’s overall objective is aimed at improving ZESCO’s efficiency, quality and reliability of electricity
supply and extend the life of its assets. The works involve two major components:
1) Generation and transmission infrastructure rehabilitation; and

2) Distribution infrastructure including power lines repairs and replacements as well as sub-station
reinforcements.
The PRP commenced in 1998 and was scheduled to be completed by 2002. The initial cost was about
US$ 210 million but increased to US$ 317 million due to changes in the scope of works from rehabilitation
to include up rating. The other reasons for the delay included technical problems, late delivery of some
repair components and delayed payments. However, works on transmission, distribution, institutional
capacity building and environmental management have been completed. The overall project completion
date is now set for September 2009.
13
3.0 ELECTRICITY PRICING
3.1 Cost of Service Study (CoS)
In the quest to improve operations and profitability at ZESCO, Government in 2003 commercialized the
utility as opposed to privatization.
Commercialization of ZESCO’s operations presented significant challenges to ZESCO as well as to the

ERB. IPA Energy Consulting was engaged in 2005 with the assistance of the World Bank and SIDA, to
undertake institutional strengthening of the two institutions.
Under the Terms of Reference of this Project, IPA Energy Consulting conducted a Cost of Service Study
from July 2005 with the final report released in March 2007. The purpose of conducting the Cost of
Service Study was to determine a utility’s full costs of providing electricity for various categories of
customers, at different points in the supply chain and within different geographical areas. A utility’s full
cost of service includes its efficient operating costs plus an appropriate return on the assets necessary
to produce, deliver and sell electricity to its customers and meet growing demand through prudent
investments.
The Cost of Service study means setting ZESCO’s tariff level high enough to cover the costs necessary
to meet its obligations to provide service at acceptable standards, meet its debt obligations, and to
generate enough surplus (profits).
The results from the Cost of Service study revealed that the electricity tariffs are sub-economic for all
customer categories, and if the tariffs were to be cost reflective then the tariffs had to be increased by
the levels indicated in table 5.
Table 5: Cost of Service one-off Step-Up to Cost Reflective levels (in US cents)
Customer Category Base Tariffs Cost of Service Cost Reflective

2006/7 Step-Up Levels
Mining 2.34 28.50% 3.01

Residential 3.05 147.60% 7.55
Large Power 2.07 46.30% 3.03
Small Power 3.14 17.40% 3.68
Commercial 5.87 2.40% 6.01
Services 3.97 6.30 4.23
Exports 2.87 14.00% 3.27
Average 2.66 45.40% 3.87
It is critical to note that the tariffs have to be increased gradually over a number of years, before reaching
economic levels due to the significant impact that a sudden increment would have had on the consumers
and on the economy in general.
Other salient recommendations, arising from the Cost of Service study included the following:
i. The adoption of the multi-year tariff framework as opposed to the one-off tariff determination that
was prevailing at the time. It was proposed that a period of three years be adopted as both the ERB
and ZESCO adjust to the new price control methodology. This recommendation has been adopted.
ZESCO’s 2007 tariff review application was based on this framework.
ii. The adoption of quarterly reporting schedule on performance statistics. It further recommended a
set of measurable performance indicators related to visibly improving customer service to form part
of its tariff path strategy. This was in view of the fact that the ERB and ZESCO had for a long time
been locked in unproductive dialogue about “the numbers” and tariff levels without either organization
14
having an adequate database or proper analytical tools to inform their debate. This recommendation
has since been adopted.
iii. The Report noted that the under pricing of mining contracts places a huge burden on the Residential
consumers who have to pay about 30% more than their fair share of revenue requirements. The
Ministry of Energy and Water Development, ERB and ZESCO would therefore have to work together
to rebase the mining tariffs as well as ensure that all future contracts are cost-reflective. ZESCO is
currently negotiating with CEC, on the revision of mining tariffs to cost reflective levels.
iv. The study results showed that the planned new large hydro plants are basically needed to serve
the new mining, industrial and the export market. The implication is that the ERB should consider
ring-fencing the cost associated with these new projects in order to protect domestic consumers
who should not bear the costs through future tariff adjustments. This aspect was addressed through
the pricing model.
It is also critical to note that investors can only be attracted to the power sector if the tariffs are raised
to economic levels; this is particularly important given the power deficit which is obtaining in the country
and in the region as a whole.
3.2 Multi-Year Tariff (MYT) Theory and Practice
Following the Cost of Service study undertaken for ZESCO by IPA Energy and Water Consulting of UK,
the ERB has adopted a regulatory methodology reform process. This means a change in tariff setting
methodology principles from the traditional ‘’one-off tariff determination’’ Revenue Requirement (RR)
methodology to a multi-year incentive based and performance benchmark regulatory methodology.
The aim of the regulatory reform process is to provide utilities with incentives to improve their investment
and operating efficiency and to ensure that consumers benefit from the efficiency gains. International
experience of regulatory reforms in the electricity sector has shown that there is a transition to adoption
of incentive based regulation methodologies as an alternative to the traditional rate-of-return (ROR) or
cost-of-service (COS) regulation of utilities. Regulators have adopted a variety of approaches to incentive
regulation.
Incentive regulation schemes commonly use benchmarking as a tool, which is broadly defined as the…’’
comparison of some measure of actual performance against a reference or benchmark performance.’’
According to the previous system of tariff determination, the utility is required to submit an annual filing
(or as the need arises) of expected revenues from operating expenses and planned capital expenditure
projects. The ERB has to either approve the tariff proposed by ZESCO or provide an alternative tariff
based on data, assumptions and justifications provided by ZESCO. The system of annual tariff
determination is too rigid, un-innovative and does not provide incentives to the regulated company to
improve its performance nor does it compensate the company for factors beyond its control.
With the new methodology the objectives of regulation are:

• Innovation: innovation in the context of a MYT framework means encouraging the utility to find
effective ways to cut costs and designing incentives to develop new and creative service offerings.
• Improving customer service and satisfaction: this generally requires the MYT principles to be
accompanied with a reward/penalty provision to encourage compliance.
Furthermore, a multi-year tariff methodology ensures simplification of the regulatory process by laying
down a tariff path for a defined future time period that is known, unambiguous and understood by all
stakeholders who are then able to plan accordingly.
The design of regulatory as a part of the MYT exercise will help promote efficiency.
15
A key component of the MYT methodology is the KPIs that are embedded in the tariff order which have
to be achieved by the utility in order to earn the subsequent tariff increases.
3.3 The 2007 ZESCO Tariff Application and Decision
In September 2007 ZESCO applied for a tariff review of an average increase of 60% for all customers.
This was in addition to the other application for the revision of other charges, fees and penalties that had
not been adjusted for a long time.
3.3.1 Key Drivers of the ZESCO Tariff Application
The key drivers of ZESCO application for an average tariff increase of 60% were as follows:
i) All planned Capital expenditure projects were envisaged to be 90% debt financed
ii) Rising costs of generation, transmission, distribution and supply equipment on the international
market such as copper and oil
iii) Huge and rising costs of electricity imports
iv) Planned customer base expansion projects
v) Cumulative inflation over the years that was not matched by increases in tariff levels
vi) The Cost of Service study results that indicated that the tariffs were far below cost
As a Regulator, the ERB has a mandate to take into consideration the utility’s justifications for a tariff
application as well as the other stakeholders’ submissions. In this regard key adjustments were made
to the assumptions made by the utility in arriving at the requested tariff increase. These adjustments were
as follows:
Loan Interest
In the application ZESCO assumed that 90% of new capital projects would be funded through loans
while only 10% would come from internal resources. This assumption would have increased the gearing
ratio of the company as debt would increase at dis-proportionate rates to equity. The ERB observed that
debt should not exceed 70:30 debt equity ratio. Hence adjustments were made to the loan funding
proportions from 90% to 70%.
The ERB also reviewed all interest rates on existing domestic loans as ZESCO had used a uniform figure
of 23% on all local loans. It was noted that the current domestic loan interest rates were below 23%. The
actual interest rates appearing in the ZESCO loan schedule were therefore used.
Staff Costs
In the financial year ended March 31st 2007, labour costs were the biggest component of costs which
contributed 49% to total operating costs. The proportion of labour costs to the total budget was way
beyond acceptable international levels which is about 30%. The ERB noted that there was an urgent
need for ZESCO to begin reducing its labour costs. In that regard adjustments were made to projected
labour costs’ contribution to total projected operating costs to 40% for 2008, 35% for 2009 and 30% for
2010 after excluding extraordinary costs like electricity imports, loan interest rates and taxation.
Imports
In view of the projected electricity shortages, ZESCO had projected that they would need to import the
following volumes; – 627 MW in 2009 and 823 MW in 2010. However it was observed that the Southern
African region was expected to face a power shortage from 2008 due to increased economic activities
in the region which did not match investment in generation infrastructure. It was established as a fact
that ZESCO did not have the requisite transmission capacity to bring in the projected imports. An
adjustment to the projected cost of the imports was therefore made to reflect a more realistic level taking
into account the fact that most of the imports were to be made during peak times.
16
Table 6: Proposed against Approved Multi-year Tariff Adjustment rates (The Tariffs in US cents/kWh
are in brackets)
Customer Category 2008 2009 2010
RESIDENTIAL
Zesco Proposed 45% (6.43) 37% (7.99) 29% (9.65)
ERB Approved 26.8% (5.59) 16.6% (6.25) 11.9% (6.57)
COMMERCIAL
Zesco Proposed 50% (7.46) 10% (7.87) 10% (8.05)
ERB Approved 1.3% (5.16) 0.3% (5.18) 0.3% (5.40)
SERVICES
Zesco Proposed 49% (5.61) 22% (6.48) 21% (7.07)
ERB Approved 6.8% (3.97) 1.9% (4.05) 1.9% (4.33)
SMALL POWER (MD1 &MD2)

Zesco Proposed 45% (5.02) 42% (6.02) 26% (6.78)
ERB Approved 16.2% (3.44) 5.5% (3.59) 4.5% (3.80)
LARGE POWER (MD3 & MD4)

Zesco Proposed 75% (4.29) 55% (5.30) 29% (6.42)
ERB Approved 27.5% (3.22) 16.6% (3.29) 2.2% (3.50)
Source: ERB December 2007 tariff decision and Zesco Tariff Application
After the above major adjustments and other minor ones not highlighted here the ERB approved the
tariff increase by the magnitudes as shown in table 6. Further details of ZESCO’s application showing
the tariffs applied for per KWh and per customer categories are presented in the appendix.
The 2007 tariff application also resulted in changes in the Tariff structure:
• Prepaid; the metered tariff category forms part of the new tariff schedules
• R1 R2 and R3 reductions/changes; R1 band was reduced from 300 kW to 100 kW, while the R2
band now caters for consumption between 101 kW to 400 kW and the highest consumption band
now is for 401 consumption and above
• MD Customer category has been capped at 25 MVA
• Introduction of the ToU tariff; the other change is the introduction of time-of-use tariffs for
consumption between 22:00hrs to 06:00hrs in the morning. The customers who enroll for this facility
will now enjoy 50% discounts on capacity charges and 25% discounts on energy charges, for these
hours.
The new tariff schedule after the adjustments and Board approval of the new tariffs effective 1st January
2007 are presented in Appendix 2.
3.3.2 Key performance benchmarks in the 2007 tariff decision
ERB and ZESCO agreed to several performance benchmarks to improve ZESCO’s quality of service
and improve efficiency. Some of these performance benchmarks include:
(i) Metering all customers by 2010 from present level of only 30% of metered customers,
(ii) Reduce waiting period of new applicants for electricity connection from present 57 days waiting
period to 30 days,
(iii) Reduce debtor days from present level of 180 days to 60 days by 2010,
17
(iv) Reduce labour cost from present level of 48% of total operating cost to 30% by 2010,
(v) Increase staff productivity from present level of 61 customers per employee to 100 customers per
employee by 2010,
(vi) Reduce outage hours per customer per month from present level of 32 hours to 5 hours by 2010,
(vii) Reduce transmission and distribution losses from present level of 3.68% and 22.9% to 3% and 14%
respectively by 2010.
Comprehensive definitions of the Key Performance Indicators (KPIs) are shown in the appendix.
3.4 Developments in the Southern African Power Pool (SAPP)
During the year under review, SAPP had a combined total installed capacity of 54,200 MW of which
45,700 MW was available against peak demand of 43,755 MW. A total of 1,440 MW was added to the
SAPP system coming from South Africa and Tanzania.
Having established the Short-term Energy Market in April 2001 and the commencement of the establishment
of a competitive electricity market in January 2004, SAPP has embarked on a new market to take the
form of a Day-Ahead Market (DAM). The DAM trading platform was delivered and installed by Nordpool
at SAPP Coordination Centre offices in Harare in February 2007.
A new Inter-Utility Memorandum of Understanding (IUMOU) was signed on April 25, 2007 which will
enable other players in the sub-region such as Independent Power Producers (IPPs) and Independent
Transmission Companies (ITCs) to join the SAPP and participate in all activities of the SAPP.
Also in April 2007 the SAPP and RERA signed a cooperation Memorandum of Understanding to work
together in capacity building, harmonisation and exchange of information on their respective projects
and actions.
3.4.1 Regional Inter-connections
The Zambian power system is connected to the regional interconnected system via two 330 kV transmission
tie-lines to Zimbabwe, and one 220 kV line to the Congo power system. A new interconnection to
Nampower is almost complete due for commissioning in 2008. The US$12 million worth 220 kV power
line from Victoria Falls to Sesheke project represents an upgrade to the existing 66 kV to "boost" electricity
supplies between Zambia and Namibia. The project is a joint development between ZESCO and Nampower
of Namibia.
The regional inter-connected system is operated under the auspices of the Southern African Power Pool
(SAPP), which falls under SADC. There are twelve (12) member utilities of SAPP of which nine are
interconnected, including ZESCO. The SAPP objectives are to coordinate the planning and operation
of member systems and to promote energy trading among members in the region.
The total capacity of ZESCO’s interconnections is 1,710 MW.
3.5 Challenges and Outlook
The electricity power industry plays a central role in facilitating accelerated economic growth in Zambia.
However, the outlook for the sub-sector looks challenging:
• Power shortages: Currently Zambia is experiencing power shortages in the range of about 250 MW
during peak times. Sticking to the PRP work completion schedule poses a challenge for ZESCO.
This means the country will be subjected to load shedding until the rehabilitation works are completed.
18
The sustainability of the economic achievements made over the years are therefore threatened by
the power outages.
It should be noted that the additional capacity that would result from the PRP will only provide
temporary relief because the demand growth is projected to out-strip installed capacity in the next
two years.
• New Investments in generation; Additional challenges lie in promoting and encouraging the private
sector to invest in the generation capacity. A key issue in developing these projects will be to obtain
the required financing above $1.5 billion and whether ZESCO or Government should embark on
the projects alone or adopt a private-partnership approach.
• Transition to cost reflective tariff levels; ERB has made it conditional under the multi-year tariff
framework for subsequent tariff adjustments to be based on actual KPIs scores. The 2007 baseline
analysis suggests that ZESCO will have a major challenge in meeting the KPIs.
The Power Utility Company also faces a big challenge in renegotiating cost reflective electricity tariffs
with CEC and the mining companies.
• ZESCO’s performance; Monitoring and improving the performance of ZESCO under the new multi-
year tariff methodology poses challenges for the regulator, the company itself and the stakeholders
alike. This is even more so that the subsequent tariff adjustments are linked to achieving KPIs. How
the Regulator assesses the utility’s performance vis-à-vis what the utility perceives as factors beyond
its control creates grounds for disagreement.
Despite the foregoing the electricity sub-sector holds great potential for improvement and for providing
the necessary driving force for enhanced economic development. The demand for power is increasing
creating great potential for private investment in the sector with the transition towards cost reflective
tariffs and the implementation of the open access regime.
19
PETROLEUM SUB SECTOR
4.0 DEVELOPMENTS IN THE DOWNSTREAM

PETROLEUM INDUSTRY
4.1 New investment in INDENI Petroleum Refinery
In 2005, Zambia experienced prolonged and serious petroleum products shortages due to two unplanned
shutdowns of the INDENI Petroleum Refinery Company Limited (INDENI). In its wake, the President of
the Republic of Zambia appointed a Cabinet Committee to investigate the crisis. The objective of the
Cabinet Committee was to come up with mitigation measures to resolve the fuel crisis as well as find a
lasting solution regarding sustainable refinery operations. The Committee instituted an independent
forensic audit that was carried out in 2006.
The audit covered technical operations, financial management and legal issues. Following its completion,
the Cabinet Committee made two key recommendations:
(a) urgent recapitalization of the Refinery for rehabilitation, and
(b) revision of the shareholding structure of the refinery so as to invite a third equity partner.
A total of US$65 million was required for the recapitalization of the Refinery. The Government and Total
as shareholders agreed to provide US$46.5 million and the balance of US$18.5 million was expected
to be provided by a third equity partner. However no tangible progress had been made on the issue of
the third equity partner.
By the end of 2007, both shareholders had paid up US$22.5 million each and rehabilitation works had
been carried out in 2006 and 2007. The works mainly consisted of equipment and piping replacement,
repair of the flare system and heat exchangers, and installation of diesel powered electricity generators.2
As a result of these works, the reliability of the Refinery has improved.
The last phase of the rehabilitation includes upgrading of the refinery control system, more equipment
replacement and repair of the furnaces.
INDENI Refinery in 2007
In 2007, the refinery had numerous unplanned shutdowns, five of which were due to the non-availability
of feedstock. Towards the end of the Total Outre Mer (TOM) feedstock supply arrangement for INDENI,
the supply became erratic. After the Government took over the responsibility of feedstock procurement,
transitional delays further aggravated the feedstock supply situation resulting in product shortages on
the market (July-September 2007).
Consequently, measures were put in place to ensure that the country was supplied with petroleum
products. Oil Marketing Companies (OMCs) were requested to import finished petroleum products to
meet the nation’s fuel requirements. Overall, the refinery was shut down for a total of 113 days in 2007
compared to 119 days in 2006. The shutdowns in 2007 were mainly driven by the shortage of feedstock
whereas in 2006 shutdowns were mostly attributable to technical problems.
4.2 Feedstock Procurement
In the second half of 2007, there were some major developments in the feedstock management system:
2 The installation of the diesel powered generators has adversely affected refinery economics and in the medium term,
INDENI will revert to mains firm power.
20
• In July 2007, the Government took over from Total the responsibility of supplying feedstock. Since
November 2003 when Total Outre Mer took over the operations of ENI/Agip in Zambia, Total was
the sole importer of feedstock for Zambia.
While long term feedstock supply arrangements were being prepared, the Government issued a
360,000 metric tonnes interim feedstock selective tender to six companies. However, the bids were
found to be non-responsive and the Government then decided to single source Gallic Oil to supply
150,000 metric tonnes of feedstock. Finance Bank Zambia Ltd was appointed to finance the first
60,000 MT for cargo that began to be processed by INDENI from early October 2007.
As a result of these delays in the procurement arrangements, the country experienced some product
shortages on the market.
• Later Gallic Oil transferred its contractual obligations to Lukoil Trading and Supply Company (Litasco)
who supplied the next consignment of 60,000 MT of feedstock. The cargo which arrived in November
2007 was directly financed by the Government. By December 2007 when the last consignment of
90,000 MT of feedstock was being delivered, the erratic feedstock supply fears had eased.
• In October 2007, Government issued a long term feedstock tender. In December 2007, negotiations
with Independent Petroleum Group (IPG) of Kuwait (the preferred bidder) were concluded for the
supply of 1,440,000 MT of feedstock for a period of 2 years.
• In October 20073, the Government appointed TAZAMA Pipelines Limited as its agent to manage
the procurement of feedstock on its behalf. As such, TAZAMA assumed the added responsibility
of wholesale marketing petroleum products to the rest of the petroleum market whilst
continuing with its core business of pipeline transportation.
• INDENI refinery reverted to its core activity of feedstock processing and its main source of income
is the processing fee that is determined by the ERB.
Despite the delays experienced in the supply of feedstock arising from this change in the procurement
arrangements, the amount of feedstock the country received increased by 11.3 % from 2006 as illustrated
below.
Figure 5: Trends in Feedstock Imports
500,000
450,000
400,000
350,000
300,000
250,000
TONNES
200,000
150,000
100,000
50,000
0
2001 2002 2003 2004 2005 2006 2007
ANNUAL TOTALS 22,6408.34 33,0237.15 41,4653.37 47,8338.81 417,663.28 403,759.73 449,430.47
3 The Agency agreement between Government and TAZAMA was finally signed in December 2007. However, TAZAMA
had already begun operating as Government’s agent when the first cargo arrived in October 2007.
21
4.3 Management of the Ndola Fuel Terminal (NFT)
Following the liquidation of Zambia National Oil Company (ZNOC) in 2002, INDENI refinery was responsible
for the running of the NFT and the wholesale marketing of fuel to the OMCs. However, in December 2006,
the Government appointed TAZAMA to take over the operation and management of the NFT. Furthermore,
TAZAMA was issued a wholesale marketing license in January 2007 for the bulk supply of finished
products to the market.
The cost of managing the NFT is covered by a throughput fee that is determined by the ERB which is
subject to periodic reviews. This ensures that the full costs of operating the terminal are met and reasonable
recapitalization costs are provided for.
Following these changes, INDENI Refinery reverted to its core activity of feedstock processing.
The new structure of the petroleum sub-sector is demonstrated in figure 6.
Figure 6: Structure of the Downstream Petroleum Industry
Petroleum Importer
Feedstock (GRZ / TAZAMA)
Tazama Pipeline
(Pumping fee)
INDENI
( (
REFINERY
Wholesaler
(Processing fee)
NFT (TAZAMA) OMCs
(TAZAMA)
(Throughput fee)
4.4 Distribution of petroleum products
At the beginning of 2007, there were 19 licensed companies in the distribution of petroleum products.
In the course of the year, five more OMCs entered the market:
i. Amchile Import and Export Limited,
ii. Anegi Oils Limited,
iii. Mount Meru,
iv. Spring Energy Corporation Limited, and
v. ZADDAX Oil Trading Limited.
This increased the total number of licensed undertakings in the distribution of finished petroleum products
from 19 to 23. This number excludes Goldstream Oil Ltd whose license was recommended for revocation
following their failure to operate since they were licensed in 2005. In addition, Zambezi Oil & Transport
(ZOT) had its licence temporarily suspended in the month of August 2007 due to non-remittance of
strategic reserves fees. However, the suspension was lifted following their compliance.
22
As demonstrated by Figure 7, the increase in the number of new entrants did not change the market
structure. The market structure continued to be dominated by three players, i.e. BP, Total and Chevron,
who account for about 75% of the market (with BP at 37.6%, Total 29.6% and Chevron 8.2%).
Figure 7: OMC Market Shares as at 31st December 2007 – Fuels
ZOT 0.92% AGRO-FUEL 0.52%

ZADDAX 0.03% BOC GASES 0.0003%
TOTAL 29.62%
BP 37.64%
PETROTECH
0.43%
SUBAN 2.12%
SPECTRA 3.45% SPRING
SGC 1.54% ENERGY 0.11%%
PETRODA 0.81% CHEVRON 8.22%
PEGASUS 1.42% ENGEN 4.01%

CONTINENTAL 0.42%
ODY’S 1.17% MAG 1.57% GULF OIL 0.21%
KOBIL 5.76% KAFCO 0.03%
Source: ERB
The structure of the Jet A1 market continued to be dominated by BP accounting for 50% and Total 48%;
with the other 2% taken by Spectra Oil Corporation.
BP and Mobil jointly own the Jet A1 infrastructure at the Lusaka International airport. According to the
contract entered into, if one partner withdrew, the other party had the pre-emptive right to purchase the
other’s 50% share in the airport infrastructure. Following the take over of Mobil by Total in 2006, BP
exercised their right of acquisition on the facility. However, the Competition Commission ruled against
BP on this matter, i.e. wanted more OMCs/competition in the Jet A1 market.
The Lubricant market continued to be characterised by a large number of unlicensed operators. This
poses a challenge regarding the accuracy of the data for this sub sector. BP continues to be the leader
in this market followed by Spectra Oil, Total and Chevron.
Figure 8: OMC Market Shares as at 31st December 2007 – Lubricants
AUTOWORLD
TOTAL 12.82% 0 .80%
SUBAN 0.12% BP 46.13%

12 .82%
SPECTRA 18.31%
18.31%
SINDY 0.15%
KOBIL
1.84%
GAME STORES 0 .02%

ENGEN 4.64%% CHEVRON
DANA 5 .85% 9 .43%
Source: ERB
23
4.5 The Move towards Cleaner Fuels – The Case of Unleaded Petrol
Throughout the world, lead has since the 1920's been used as a petrol additive to improve the quality
of fuel and prevent the engine from "knocking". Petrol containing lead is commonly referred to as leaded
petrol.
There has been a world-wide move to phase out leaded petrol given its effects on human health and the
environment. In its place, unleaded petrol and lead replacement petrol (LRP) have been introduced.
LRP is a transitional measure to the full use of non-metal containing petrol.
During the third quarter of 2007, the Government issued a ministerial pronouncement on the phase-out
of leaded petrol in Zambia. The statement highlighted the following areas:
• The refinery would cease the production of leaded petrol on October 31, 2007; and
• The country would migrate to full use of unleaded petrol from March 31, 2008.
Following the announcement, the ERB was tasked to manage the phase-out of leaded petrol in the
country. This resulted in the constitution of a Technical Committee on the Management of the Phase-out
of Leaded Petrol, whose task included amongst others, the development of a strategy for the implementation
of unleaded petrol and the development of communication strategies and public awareness campaigns.
By the end of December 2007, Indeni had ceased the production of leaded petrol and was only producing
unleaded petrol and LRP. In addition, appropriate communication strategies had been identified and a
draft campaign message completed.
5.0 PETROLEUM PRICING – DEVELOPMENTS IN 2007
5.1 Fuel pricing in Zambia - the move from IPP to Cost Plus
Reliable and affordable energy supply is important for the development of any country. The challenge
for regulators is ensuring that prices are not only affordable to the consumer, but also cost-reflective to
allow service providers earn a just and reasonable return on their investments, thus enabling them to
provide an optimal service.
In 2007, the ERB continued to determine the wholesale prices for Petrol, Diesel, Kerosene and Jet A1
using the Import Parity Pricing (IPP) mechanism that was introduced in June 2004. It works on the premise
of how much it would cost to import finished petroleum products into Zambia. The prices used are as
quoted by oil price reporting agencies such as Platts and Argus.
The methodology was reviewed periodically to ensure that the cost elements in the formula are adjusted
to reflect changing costs in the market. From inception, the IPP has been reviewed three times, in July
2005, January 2006, and in May 2007.
The high price of petroleum products in Zambia (as depicted in Figure 9) continued to trigger significant
debate that led to the ERB holding a public hearing in May 2007. Some of the issues arising from this
hearing were as follows:
• the monthly fuel price adjustments were too frequent and had an adverse impact on cash flow
planning;
• the use of the rail/road mode in the IPP formula was unjustifiable given that the petroleum feedstock
was transported through the pipeline; and
• the tax structure of petroleum products was too high.
24
Figure 9: Regional Fuel Prices as at 31st December 2007
Source: ERB
After considering all these factors, including the structural changes in the roles of the operators in the
petroleum industry, it was decided to revert to the Cost-Plus pricing methodology.
The Cost-Plus methodology ensures that the feedstock importation and processing costs are recovered
in the final price of petroleum products. The model relies on information provided by the importer, the
most important document being the feedstock invoice, and other known standard costs in the supply
chain. IPP’s main appeal was to force efficiency in the supply chain. On the other hand, the main
drawback of the cost-plus methodology is that inefficiencies are inbuilt in the price structure.
This model is not new to the sector as it was in use prior to the change-over to IPP.
The Cost-plus formula was implemented in early 2008. Appendix 4 highlights the key cost lines in the
formula.
5.2 Petroleum industry margins
The ERB determines the benchmark downstream industry margins. In March 2007, revised margins
became effective after the margins review process was finalized by the ERB.
Prior to the 2006 review, the margins were last reviewed in 2000. The margins were set by benchmarking
with other countries in the region. This review was prompted by the need:
• to have a standard method of computing these margins; and

• for margins that covered operational costs in light of the appreciation of the kwacha against the US
dollar.
The old margins were quoted in US dollars at USc6/litre, USc4/litre, and USc 2.6/litre for OMCs, dealers
and transporters respectively.
The revised margins were computed using the Return on Capital Employed (ROCE) method. For this
purpose, ROCE of 20% was applied and determined by benchmarking against global results of the
leading OMCs and stakeholder interviews. The review focused only on the downstream retail business
related to the distribution of petrol, diesel and kerosene.
25
The revised margins are listed in table 7 below:
Table 7: Margins in the Retail Petroleum Sector
Old* New Change

K/L K/L %
OMC 256 345 26

DEALER 171 229 25
TRANSPORTER4 111 148 25
*Note: The Bank of Zambia average monthly inter-bank exchange rate for the month ending March 2007
of K4,270 to US$1 was applied.
5.3 Domestic prices in 2007
On the world market, the volatile oil prices continued their relentless rise with oil prices almost hitting
the US$100/bbl mark5 during the year. The year began with crude prices at US$61.05/bbl closing in at
US$97.92/bbl in December 20076 . The high oil prices were mainly on account of static production
capacity that was accentuated by rising demand being driven by China and India.
On the domestic front, the price increases were gradual on account of increased Government support
through subsidies.7
Figure 10 shows the trend in pump prices for petrol, diesel, and kerosene during 2007.
Figure 10: 2007 Average Lusaka Pump Prices
7,500
7,000
6,500
6,000
5,500
K/L
5,000
4,500
4,000
3,500
3,000
Jan 07 Feb 07 Mar 7 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sept 07 Oct 07 Nov 07 Dec 07
PREMIUM 6,104 5,939 5,887 6,448 6,756 6,756 6,756 6,756 7,191 7,191 7,191 7,191
DIESEL 5,336 5,204 5,157 5,562 5,559 5,559 5,559 5,559 6,004 6,004 6,004 6,004
KEROSENE 4,328 4,145 4,066 4,341 4,341 4,341 4,341 4,341 4,385 4,385 4,384 4,385
Source: ERB
4 The Transporters margin relates to the distance between Ndola and Lusaka of 321 kilometres. Therefore this varies
depending on the destination and distance.
5 On 21st November 2007, oil prices on the New York Mercantile Exchange hit US$99.29/bbl.
6 Refer to Appendix 5 to 7 for petroleum products price trends in 2007 on the international markets.
7 Refer to Appendix 8 for trends in wholesale prices.
26
With INDENI shutdown from July 2007, the country had to rely on imported products by the OMCs.
These however, proved more costly due to the shortage of certain products in the region and the high
freight costs hence the spike in prices recorded in September 2007. The prices for the last quarter of
2007 would have been higher but for Government’s intervention through subsidies which maintained
the prices at the September levels.
The Kwacha appreciated by 8.5% against the US dollar (see Figure 11) from January to December 2007.
This also cushioned domestic price increases despite the high international oil prices.
Figure 11: Inter bank Exchange Rates 2007
4,500
4,300
4,100
3,900
K/ US$
3,700
3,500
3,000
3,100
JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC
2006 EX. KWACHA TO US$1 3,395 3,311 3,316 3,225 3,216 3,499 356 3,897 4,069 3,847 3,997 4,142
2007 EX. KWACHA TO US$1 4,205 4,259 4,270 4,171 4,028 3,900 3,838 4,024 3,976 3,848 3,784 3,845
Source: Bank of Zambia
5.4 Strategic Reserves Fund – the “stabilisation” role of the SRF
Arising from the fuel supply disruptions, the SRF was set up in December 2005 and the ERB was
mandated to collect and manage these funds on behalf of the Government. The Fund’s objectives
were:
i) The acquisition and holding of petroleum stocks equivalent to 30 days national consumption to be
classified as National Petroleum Strategic Reserves (NPSR) for use in times of emergencies;
ii) The rehabilitation of storage facilities at the Ndola Fuel Terminal; and
iii) Stabilisation of petroleum prices (i.e. Petrol, Diesel, Kerosene and Jet A1).
The SRF resources are collected through a cost line in the price of fuel. The ERB determines an
appropriate cost-line to be included in the price of Petrol, Diesel, Kerosene, and Jet A1. At the end of
2007, the SRF cost-line in the price of Petrol was K100/litre, nil (K0/litre) for Diesel, and K76/litre on
Kerosene. The value of the cost-line has also been changing during the year as it is also adjusted to
assist with price stabilization as reflected in Table 8:
27
Table 8: Strategic Reserves Cost-Line in the Price of Fuel, 2007
MONTH PETROL DIESEL KEROSENE JET A1

K/L K/L K/L K/L
January 152 100 152 152

February 249 203 76 152
March 249 203 76 152
April 249 203 76 152
May 249 203 76 152
June 249 203 76 152
July 249 - 76 152
August 249 - 76 152
September 100 - 76 -
October 100 - 76 -
November 100 - 76 -
December 100 - 76 -
Source: ERB
The primary objective of price stabilization is to insulate consumers from sharp increases in global oil
prices so as to stabilize domestic final product prices. Fuel continues to be the major driving force for
industrial, mining and agricultural processes and its cost forms an essential component in the cost of
production.
In 2007, collections of about K77.1 billion were made and of this amount, K68 billion was paid to INDENI
and OMCs for price subsidization.
6.0 NATIONAL CONSUMPTION
During the year 2007, the total consumption of white petroleum products (excluding LPG) increased by
14.5% from 555.8 million litres to 636.4 million litres.
Table 9: National Consumption of White Petroleum Products in Litres
PRODUCT 2006 2007 % Change
DIESEL 357,224,708 419,083,233 17.3%

PETROL 150,408,823 165,040,279 9.7%
KEROSENE 11,024,391 12,238,076 11.0%
JET A1 35,940,976 38,539,258 7.2%
AVGAS 1,249,468 1,521,062 21.7%
LPG* 2,311 2,072 -10.4%
*Note: LPG is in tonnes
Source: ERB
There was a general increase in the levels of Diesel, Petrol, Kerosene, Jet A1 and Avgas consumed from
2006 to 2007. However, LPG volumes declined by 10.4% during the same period.
6.1 Diesel Consumption
In 2007, there was a marked increase in diesel consumption. The sales increased from 357 million litres
in 2006 to 419 million litres in 2007 representing an increase of 17.3%.
28
Figure 12: Trend in Diesel Consumption over the past 3 Years
500,000,000
400,000,000
L
I 300,000,000
T
R 200,000,000
E
S 100,000,000
-
2005 2006 2007
DIESEL (L) 329,232,383 357,224,708 419,083,233
Source: ERB
As illustrated in Figure 13, 50% of the diesel consumed was used for transport services, 29% by the
Mining sector and 6% in Agriculture.
Figure 13: Diesel Consumption by Sector for 2007
Aviation
Electricity 2% 1%
Other 3% Government
1%
Construction 3%
Transport
Manufacturing
50%
5%
Agriculture
6%
Mining
29%
Source: ERB
Mining activity continued to be robust during the year although the industry faced a setback from
industrial action and widespread flooding after a heavy rainy season. Nonetheless demand for diesel
remained upbeat and increased by 26% from the previous year. Kansanshi and Lumwana Mines in the
North-Western Province accounted for much of this increase as Kansanshi increased its production
levels in 2007 while Lumwana Mine made steady progress towards optimization. The mines are expected
to continue registering increases in consumption of diesel in the near future.
The other sectors that registered a notable increase in consumption include the Manufacturing sector
which recorded an 85% increase and Transport registered a 13% increase (see table 11).
29
Table 10: Diesel Consumption by Sector
2007 VOLUME 2006 VOLUME %

(m3) (m3) CHANGE
Transport 210,604 185,665 13%

Mining 120,521 95,883 26%
Agriculture 23,114 25,096 -8%
Manufacturing 21,204 11,477 85%
Construction 14,080 14,796 -5%
Other 21,314 14,471 47%
Electricity 8,245 9,839 -16%
TOTAL 419,083 357,227
Source: ERB
6.2 Petrol Consumption
There was a 9.7% increase in consumption of petrol8 from 150 million litres in 2006 to 165 million litres
in 2007 as shown in table 11 below.
Table 11: Petrol Sales in Litres
PETROL 2006 2007 % CHANGE
RETAIL 138,705,401 152,569,336 10.0%

COMMERCIAL 11,703,422 12,470,943 6.6%
TOTAL 150,408,823 165,040,279 9.7%
Source: ERB
Both retail and commercial sales increased in 2007. Retail sales refer to petrol sales made through
service stations while Commercial sales refer to bulk sales made to bulk customers.
This increase in consumption is largely attributed to the continued importation of motor vehicles. The
vehicle population continued to increase with the importation of 31,539 vehicles in 2007.
Figure 14: Trend in Petrol Consumption over the past 3 Years
200,000,000
L 150,000,000
I
T 100,000,000
R
E 50,000,000
S
-
2005 2006 2007
COMMERCIAL (L) 14,768,725 11,703,422 12,470,943
RETAIL (L) 137,035,700 138,705,400 152,569,330
Source: ERB
8 In this section, petrol refers to both unleaded petrol and leaded petrol.
30
Figure 15: Petrol Consumption by Sector in 2007
Manufacturing 1.7% Mining 0.7%

Government,1.0%
Other 2.4%
Electricity 0.5%
Agriculture 0.5%
Construction 0.05%
Transport 93.2%
Source: ERB
6.3 Kerosene Consumption
Domestic Kerosene is used by households for lighting and cooking, whilst industrial kerosene is used
in Agriculture and in other industrial processes. There was an 11% increase in Kerosene consumption
from 11 million litres in 2006 to 12.2 million in 2007.
Figure 16: Trend in Kerosene Consumption over the past 3 Years
15,000,000
L
I 10,000,000
T
R
5,000,000
E
S
-
2005 2006 2007
COMMERCIAL (L) 3,465,366 2,914,729 3,297,363
RETAIL (L) 7,777,958 8,109,662 8,940,713
Source: ERB
31
Both the retail and commercial sectors registered notable double digit growth figures in consumption
in 2007. The retail sector accounted for about 73% of total consumption. Consumption of kerosene is
expected to rise in 2008 given concerns of security of electricity supply as demand is expected to outstrip
supply by early 2008.
Table 12: Kerosene Sales in Litres
2006 2007 % CHANGE
RETAIL 8,109,662 8,940,713 10.2%

COMMERCIAL 2,914,729 3,297,363 13.1%
11,024,391 12,238,076 11.0%
Source: ERB
Table 13: Kerosene Sales in Percentages
2006 2007
RETAIL 74% 73%

COMMERCIAL 26% 27%
100% 100%
Figure 17: Kerosene Consumption by Sector in 2007
Other 16.6% Agriculture 3.1%

Transport 1.3%%
Mining 1.6%
Construction 0.30%
Manufacturing 3.7%
Government 0.1% Retail 73.2%
Source: ERB
32
6.4 Jet A1 Consumption
National consumption of Jet A1 increased by 7% to 38.5 million litres from 35.9 million litres in 2006.
Figure 18: Trend in Jet A1 Consumption for the past 3 Years
40,000,000
L
I
20,000,000
T
R
E
S -
2005 2006 2007
JET A1 (L) 32,087,933 35,940,976 38,539,258
% CHANGE 12% 7%
Source: ERB
The increase in consumption of Jet A1 in 2007 can be attributed to both national and regional factors.
On the national front, the aviation industry continued to perform well as leading local airlines such as
Zambian Airways continued to experience growth and expansion. The airline increased its passenger
loads and number of flights following additions to its fleet.
Price instability and concerns regarding the availability of Jet A1 in some countries within the region
also played a major role in driving national consumption in 2007. For example, South Africa recorded
a significant rise in demand for Jet A1 which led to a situation where local airlines were given preference
over international airlines. Therefore, the international airlines had to search for other markets within
the region. Markets, such as Zimbabwe, were not very attractive due to the high prices owing to
hyperinflation and exchange-rate instability. As a result of these factors, there was an increase in the
volumes of Jet A1 sold due to the increase in the number of drop-in customers uplifting Jet A1 from the
Zambian market.
6.5 Liquefied Petroleum Gas (LPG)
BOC Gases is the largest player in the LPG market and commands about 97% of the volumes traded.
Consumption in LPG reduced by 10.4% from 2,311 tonnes in 2006 to 2,072 tonnes in 2007. LPG
continues to be widely used in the hospitality industry for cooking.
There are various challenges surrounding the LPG industry that affect its availability and therefore have
an impact on the consumption levels. In 2007, following the shutdown of INDENI, product availability
was affected and the country had to rely on imports.
One other factor affecting supply is the quality of LPG produced at the Refinery. On occasion, the LPG
from INDENI does not conform to the set specifications for the Zambian market and as such the grade
produced (Butane) is exported to East Africa and not sold on the local market.
33
6.6 Heavy Petroleum Products
The mines are currently the major consumers of Heavy Fuel Oil (HFO) in the country while Light Fuel
Oil (LFO) and Bitumen are used in other industries for various processes. The decline in consumption
of HFO may be as a result of concerns that the mines had expressed about the price of the product.
These concerns led to substitution effects, where the mines consumed less of HFO because of high
prices and consumed close substitutes such as coal and/or electricity.
LFO also suffered a major substitution effect on the supply side as many suppliers opted to substitute
it with used oil from the mines as it was easier to secure than LFO. Bitumen consumption remained
stable over the same period. Currently, Zambia does not produce any Bitumen as the Bitumen plant
at INDENI Refinery is closed and the country relies on imports.
Table 14: Heavy Petroleum Products
2006 2007 % CHANGE
HFO (TN) 70,999 65,433 -7.8%

LFO (TN) 470 201 -57.2%
BITUMEN (TN) 43,000 43,350 0.8%
Source: ERB
6.7 Minimum Petroleum Stocks
Following the fuel crisis experienced in 2005, security of supply of petroleum products was greatly
affected. In a quest to avoid the recurrence of a similar situation, and to ensure nationwide availability
of petroleum products, the Energy Regulation (Minimum Petroleum Stocks) Regulation, 2005, Statutory
Instrument No. 90 of 2005 was promulgated.
The Statutory Instrument (SI) places an obligation on a holder of a licence to distribute petroleum products
to maintain minimum working stock. Section 2 of the SI defines minimum stock as
“Volume of petroleum products adequate to meet the demand for petroleum products by consumers,
over a period of fifteen days, calculated on the basis of a licensee’s market share”. The minimum stock
to be maintained is determined by the Board based on the market share of each OMC.
Any OMC that fails to maintain 15 days stock in accordance with its market share commits an offence
and is liable, upon conviction, to a fine of ten thousand penalty units. In addition to this, the ERB may
recommend to the Minister for the revocation of the licence.
The Regulation allows the Board, upon the request of an OMC, to permit a draw down of the 15 days’
stock minimum petroleum products when circumstances arise which necessitate such draw down.
However, the OMC is required to rebuild these stocks once the circumstances which necessitated the
draw down come to an end. These stocks are not part of the national strategic stocks which are supposed
to be maintained by the Government.
During the period under review, the ERB continued to monitor the OMCs’ compliance with the requirement
to maintain 15 days’ working stocks of petroleum products as stipulated in the SI. The results of these
inspections showed that a number of OMCs were non-compliant.
Consequently, criminal proceedings were commenced against OMCs that failed to maintain 15 days’
stock of petroleum products as stipulated by the SI. In this regard, seven OMCs were taken to court.
As at the end of 2007, only one case had been concluded and the concerned OMC has since paid the
fine. The rest of the matters are still pending in the courts of law.
34
6.8 Quality of Fuel on the Zambian Market
In line with the ERB’s mission ‘To regulate the Energy Sector in a transparent effective and efficient manner
that safeguards the interests of all stakeholders’ , the ERB undertakes sampling of petroleum products
throughout the petroleum subsector as an avenue for protecting fuel consumers.
During the year ending December 2007, a total number of four hundred and thirty-six (436) fuel samples
were collected from the provincial sampling inspections and sent to Alfred H. Knight’s laboratory in Kitwe
for quality testing. Both diesel and petrol showed an average failure rate of 55%. The average failure rate
for unleaded petrol was 50%, while all the kerosene samples failed the test. Most samples failed on
parameters such as lead content, end boiling point and Reid vapour pressure.
Further, the ERB carried out a random sampling of Copperbelt retail sites in November 2007. Whilst diesel
and kerosene recorded a compliance of 88% and 100%, respectively, the results for leaded petrol and
unleaded petrol ranged between 75-78% failure to comply with specifications.
Enforcement action was carried out and a number of OMCs were summoned for hearings before the
ERB during the course of the year. OMCs were reminded of their duty to ensure product quality compliance
as stipulated in their respective Retail Licence Conditions.
35
OTHER FORMS OF ENERGY
7.0 COAL
7.1 Maamba Collieries Limited
The ERB regulates the marketing of coal. Coal is an important source of energy in mining, chemicals,
cement and brewery industries and in electricity generation. However, the Zambian market has faced
scarcity in supply due to problems at Maamba Collieries Ltd. Collum Coal Mines is the other coal producer
in the country.
Maamba was the biggest and main supplier of coal in Zambia until the company started facing operational
challenges mainly as a consequence of its poor financial position and undercapitalization. Some attempts
were made to privatize it earlier, but the deals did not materialise. In July 2007, operations were paralyzed
at the mine when equipment was seized due to failure to honour a debt owed to a UK based company.
These problems have led to a reduction in coal sales at the mine by about 79%, as can be seen from
figure 19 below.
In a bid to revamp operations at the coal mine, Government decided to transfer the company to the
ZCCM Investments Holding Plc (ZCCM-IH). ZCCM-IH is expected to recapitalize and rehabilitate the
mine with the assistance of an equity partner. In addition, negotiations were held with creditors in order
to discount the amounts owed to them. A scheme of arrangement was presented in the High Court and
an order approved where Maamba paid 25% of outstanding debts as at 30th August 2007 and the
balance written off.
Figure 19: Production and Sales Statistics for Maamba Collieries
160,000
140,000
120,000
TONNES
100,000
80,000
60,000
40,000
20,000
0
2004 2005 2006 2007
EXPORTS 11,018 10,018 5,906 169
DOMESTIC SALES 108,297 140,425 57,862 13,346
Source: Maamba Collieries
It is reported that Maamba has an estimated coal reserve base of 78 million tonnes which if exploited
to the full, could be a vital input for resolving the country’s current energy crisis.
36
7.2 Update on Developments in the Biofuels Industry
The private sector has been very active and has continued to develop the biofuels industry through the
cultivation of various energy feedstock crops. In addition, the first commercial pilot processing plant
was set up in the industrial area of Lusaka for the processing of biodiesel.
Government has incorporated issues on biofuels in the new draft National Energy Policy to foster the
development of the sector.
The ERB concluded the promulgation of product quality standards for Biodiesel and Bioethanol which
would govern the allowable specifications of the two products on the Zambian market. These standards
will be launched in 2008.
37
8.0 PETROLEUM PROSPECTS FOR 2008 AND BEYOND
Petroleum products are a major input in the production of goods and services and their quality, availability
and affordability are very important for any economy. As demonstrated in this report, the prospects for
petroleum industry in Zambia look challenging:
• Petroleum exploration: Despite the discovery of possible oil and gas reserves in the North-Western
part of the country, a lot remains to be done in finalizing legal and institutional arrangements in
order to facilitate the commencement of exploration works.
• Ageing infrastructure: Both the INDENI petroleum refinery and TAZAMA pipelines are over 35
years old and were designed for a much smaller economy. Without urgent investments in their
rehabilitations/expansions, disruptions in fuel supplies that cause huge dislocations to the economy
will continue. Other alternative supply options will need to be explored and effected.
• Petroleum prices: Prices in Zambia continue to be the highest in the region. The Government’s
efforts to subsidize prices have proved too costly in the wake of the relentless increases in international
oil prices. Crude prices in 2008 are significantly much higher than those for 2007 as shown in Figure
20 below.
Figure 20: Oman Crude Price 2007 and 2008
135
125
115
105
95
85
US$/ BBL
75
65
55
45
35
JAN FEB MAR APR MAY JUN
2007 52.27 56.12 59.56 64.40 65.09 66.47
2008 88.65 91.19 97.76 104.46 119.58 128.53
Source: ERB
Apart from the high basic product cost, the other factor that explains Zambia’s high prices compared
to her SADC neighbours is the ad-valorem tax regime applied on petroleum products. At the end of
2007, excise duty and road levy were at 60% of the wholesale price on Petrol, 30% on Diesel and 15%
on Kerosene.
Petroleum Products availability: Much of the country, especially rural areas, have no service stations
and this has given rise to the problem of illegal fuel vending. This un-served demand will continue to
limit Zambia’s growth prospects.
38
APPENDIX
Appendix 1: Electricity Summary Statistics

Month Generation Exports (Mwh) Imports (Mwh)
Jan 834,943 90,865 -

Feb 717,903 47,278 7,675
Mar 785,367 16,290 24,572
Apr 766,170 28,100 12,520
May 823,542 56,950 16,040
Jun 806,200 10,120 35,150
Jul 822,461 4,715 60,955
Aug 846,436 2,690 29,490
Sept 829,469 12,505 13,450
Oct 853,551 21,305 9,580
Nov 861,597 39,580 2,440
Dec 792,908 7,300 21,080
Total 9,740,547 337,698 232,952
39
Appendix 2: Proposed & Approved Tariff schedule for 2007
CATEGORY Old Tariffs ZESCO proposed ERB adjusted

Tariffs (ZMK) Tariff (ZMK)
1. UNMETERED RESIDENTIAL
L1 – Consumption up (K/Month) 4,911 7,121 Nil
to 2 Amps
L2 – Consumption between Energy Charge/Month 17,770 25,767 Nil
2 - 15 Amps
2. METERED RESIDENTIAL (capacity 15 kVA)

R1 – Consumption Energy charge/KWh) 70 102 77
up to 300KWh
R2 – Consumption between Energy charge/KWh) 100 145 127
301 & 700 KWh
R3 – Consumption Energy charge/KWh) 163 236 207
above 700 KWh
Pre-paid Tariff Energy charge/KWh 111 161 141
Fixed Monthly Charge 5,845 8,475 7,411
3. COMMERCIAL TARIFFS (capacity 15kVA)

C Energy charge/KWh) 163 245 184
4. SOCIAL SERVICES
Schools, Hospitals, Energy charge K/KWh 135 201 144
Orphanages, churches,
water pumping & Fixed Monthly Charge 23,382 34,839 24,971.98
street lighting
5. MAXIMUM DEMAND TARIFFS

MD1– Capacity between MD charge/kVA/Month 6,943 11,803 8,068
16 - 300 kVA Energy charge /KWh 100 170 116
MD2 – Capacity MD charge/kVA/Month 12,990 22,083 15,094,380

301 to 2000 kVA
Energy charge /KWh 85 145 99
MD3 – Capacity 2001 MD charge/kVA/Month 19,587 34,277 24,973

to 7500kVA Energy charge /KWh 63 110 80
MD4 – Capacity above MD charge/kVA/Month 19,696 34,468 25,112

7500kVA Energy charge /KWh 52 91 66
MD Time of Use MD charge/kVA/Month MD category, MD category,

25% discount on 25% discount on
Capacity charge Capacity charge
Energy charge /KWh MD category, MD category,
50% discount on 50% discount on
energy charge energy charge
Fixed Monthly Charge Applicable Applicable
fixed charge fixed charge
Source: ERB tariff schedules
The above tariffs are exclusive of Government excise duty and VAT
40
Appendix 3: Computation of Performance Benchmarks
1. CUSTOMER METERING
v Backlog metering: Prorate backlog stock as at 31 December 2007/12 quarters (i.e. January
2008-December 2010)
v New connections: number metered/new connections per quarter
2. CASH MANAGEMENT
v Trade Receivables/Turnover in relevant period being assessed) X 365 days
v Total payables/Turnover in relevant period being assessed) X 365 days
v Amount collected as % of total billing (i.e. collection rate of over 100% should signify a 100%
collection for all current billings and an increasing reduction in outstanding debt)
3. STAFF PRODUCTIVITY (%)

v Total Number of Customers / Total Number of employees (Permanent +Temporary)
v Total Labour costs as % of Total Operating costs
4. QUALITY OF SERVICE
v (Sum of the product of length in minutes of each interruption and number of affected
customers)/Total number of customers
v (Sum of the product of the number of interruptions and the number of customers affected by
each power cut)/ Total number of customers.
SAIFI= (Total No. of Customer Interruption/Total No. of Customers served)/Year
SAIDI= Sum(Customer Interruption durations/Total No. of Customers served) in hrs/Year
CAIDI= Sum(Customer Interruption durations/Total No. of Customers served)/Hr
ASAI= Customer Hrs service availability/Customer Hrs service demand
5. SYSTEM LOSSES
System Losses= KWh billed as % of KWh distributed to end users
Defined as Transmission losses (40% weight); distribution losses (60% weight).
NOTES
The key areas for which performance indicators are being developed will be understood to mean
and include the following;
1) Customer Metering; In percentages (%) and absolute numbers – This is the percentage of or
number of total customers who have a meter to measure their electricity consumption. Metering
maybe in terms of credit meters or prepaid meters.
• % number of customers metered
v Measures progress on goal of metering
2) Cash Management; (Includes receivables, payables and stock management) - measures how
a company utilises its cash.
• Receivables as % of Turnover
v Indicates amount of working capital tied up
• Payables as % of Turnover
v Indicates inability to pay suppliers (i.e. threat to security of supply)
3) Staff Productivity
It is noted that Staff productivity may be measured from different perspectives and at different
levels of the electricity supply chain. However, for the purposes of the KPIs it will be understood
to mean:
• Total Number of Customers/Total Number of Employees (Full time + Temporary employees)
v Measures staff productivity at corporate level
∑ • Total Labour Costs as % of Total Operating costs
41
4) Quality of Service
• System Average Interruption Duration Index (SAIDI) – This gives an indication of how
many minutes were lost by the average customer in a year. The definition of SAIDI is the
sum of the product of the length in minutes of each interruption and the number of customers
affected by the power cut. This is then divided by the total number of customers.
• System Average Interruption Frequency Index (SAIFI) – This gives an indication of the
average amount of interruptions experienced by a customer in a year. This is the sum of
the product of the number of interruptions and the number of customers affected by each
power cut. This is then divided by the total number of customers.
• Customer Average Interruption Duration Index (CAIDI) – A measure of how long an

average interruption lasts, measures utility response time to system contingencies
• Average Service Availability Index (ASAI) – customer weighted average of the system
and provides same information as SAIDI
• Customer Minutes Lost
v Measures system reliability
5) System losses (split into Transmission and Distribution losses)

System losses refer to the total losses including technical and non-technical losses.
• Measures unmetered consumption and non-technical losses,
v KWh billed as % of KWh distributed to end users
42
Appendix 4: Key cost lines in cost plus pricing model
1 Cost of petroleum feedstock * (Cost-Insurance-Freight)
2 Ocean loss 0.3%
3 Wharfage 1.25%
4 Handling fees US$0.20/mt
5 TIPER fees US$0.75/mt
6 Finance Charges 1.30%
7 Collateral Manager US$1/mt
8 Tazama Storage fee US$2/mt
9 Pumping fee US$39/mt
10 TAZAMA loss 0.85%
11 Crude Oil Import Duty 5%
12 Agency fee US$15/mt
13 Refinery fee US$66/mt
14 Refinery loss 10%
15 Terminal loss on finished petroleum products (0.30% & 0.50%)
16 Total cost ex-TERMINAL (US$)
*This cost varies and is dependent on the price of crude on the international market.
To determine the wholesale price of petroleum products, the total cost under line 16 is apportioned
amongst the refined petroleum products based on the quantity produced.
PUMP PRICE BUILD UP
1 WHOLESALE PRICE TO OMC a

2 Terminal Fee K25/litre b
3 Road Levy 15% c
4 Excise Duty 45% on Petrol
& 15% on Diesel and
Kerosene d
5 Ex Refinery Gate K/Litre e=(a+b+c+d)
6 Transport Margin K148/litre f
7 OMC Margin K345/litre g
8 TOTAL (Excl VAT) h=(e+f+g)
9 Dealer Margin K229/litre j
10 PRICE TO DEALER k=(h+j)
11 ERB Fees 0.70% m
12 Strategic Reserves Fund K/litre n
13 Price before VAT p=(k+m+n)
14 Value Added Tax (VAT) 17.5% q
15 BENCHMARK PUMP PRICE K/litre r=(p+q)
43
Appendix 5: 2007 Petrol Prices on the International Markets
120.00
100.00
80.00
$/bbl
60.00
40.00
20.00
JAN FEB MAR APRIL MAY JUNE JULY AUGUST SEPT OCT NOV DEC
MEDITERRANEAN ($/bbl) 57.80 64.17 73.46 83.67 90.23 87.23 86.23 79.56 83.65 86.42 97.91 95.02
SINGAPORE ($/bbl) 61.59 66.80 76.62 83.49 88.77 84.79 85.35 77.15 82.50 88.71 100.29 98.40
ARABIAN GULF ($/bbl) 57.93 64.04 73.80 80.71 84.79 81.01 81.45 73.87 79.40 85.85 97.40 93.85
Appendix 6: 2007 Diesel Prices on the International Markets

120.00
100.00
80.00
$/bbl 60.00
40.00
20.00
-
SINGAPORE ($/bbl) 67.20 71.14 74.25 81.15 82.53 82.94 86.66 84.09 91.85 96.55 108.70 107.60
ARABIAN GULF ($/bbl) 64.19 68.46 71.08 78.28 79.67 80.05 84.65 81.20 88.92 93.51 105.40 103.20
44
Appendix 7: 2007 Jet A1/Kerosene Prices on the International Markets
120.00
100.00
80.00
$/bbl 60.00
40.00
20.00
-
SINGAPORE ($/bbl) 69.90 71.77 75.02 80.91 82.14 83.75 87.09 84.28 90.44 96.62 112.77 108.31
ARABIAN GULF ($/bbl) 66.76 69.27 72.24 78.02 79.36 81.19 84.43 81.4 87.89 94.29 110.34 104.89
Appendix 8: 2007 Wholesale Prices
3500
3000
2500
2000
K/L
1500
1000
500
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
PETROL K/ Litre 2,610 2,457 2,457 2,755 2,925 2,925 2,925 2,925 3,229 3,229 3,229 3,229
DIESEL K/ Litre 2,752 2,637 2,637 2,885 2,885 2,885 3,040 3,040 3,305 3,305 3,305 3,305
KEROSENE K/ Litre 2,918 2,745 2,745 2,945 2,945 2,945 2,945 2,945 3,067 3,067 3,067 3,067
JET A1 K/ Litre 2,729 2,729 2,729 2,880 2,964 2,964 2,964 2,964 3,171 3,171 3,171 3,171
45

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ENERGY

To regulate the Energy Sector in a transparent,

Head Office Copperbelt Office

ENERGY SECTOR REPORT 2007

2.0 PERFORMANCE OF THE ELECTRICITY SUB-SECTOR IN 2007...............................................7

3.0 ELECTRICITY PRICING .............................................................................................................14

PETROLEUM SUB SECTOR ...............................................................................................................20

5.0 PETROLEUM PRICING – DEVELOPMENTS IN 2007 ................................................................24

6.0 NATIONAL CONSUMPTION ......................................................................................................28

7.0 OTHER FORMS OF ENERGY ......................................................................................................36

8.0 PETROLEUM PROSPECTS FOR 2008 AND BEYOND..............................................................38

Figure A: Oman Crude Prices ...............................................................................................................2

Developments in the Global and Regional Energy Markets

Figure A: Oman Crude Prices

Figure 1: Demand Forecasts for Zambia

Demand Forecasts for Zambia

Demand Installed Capacity

Source: Adopted from ZESCO Profile 2007 publication

1.0 MAJOR DEVELOPMENTS IN 2007

These power projects are highlighted hereunder.

Itezhi-Tezhi Hydro Power Project

Kariba North Bank Power Station Extension (KNB)

Kafue Gorge Lower Power Station

Power Supply Projects to the Mines

Lunzua Power Corporation

CNMC Industrial Zone Development (CIZD)

Transformer Plant in Zambia – EL-Sewedy Cables Ltd

Zengamina Hydro Power Station

1.2 Prepayment Metering Project

2.0 PERFORMANCE OF THE ELECTRICITY SUB-SECTOR

2.1 ZESCO LTD

2.1.1 Generation from Major Hydro-Power Stations

Individually the major hydro stations performed as follows:

Figure 2: Generation sent-out in MWh

Year 2007 Year 2006

Source: ZESCO, 2007

2.1.2 Generation from Mini-Hydro Power Stations

Table 1: Generation from Mini-Hydro stations in 2007

Hydro-Plant Installed 2006 2007 %

Lusiwasi 12 MW 27,384 30,120 10%

Year 2007 Year 2006

Source: ZESCO Statistics, 2007

2.1.3 Thermal Generation in 2007

Table 2: Diesel generation in 2007 in MWh

Diesel station Installed Capacity 2006 2007 % Change

Kabompo 1.5 2,759 2,078 -25%

2.1.4 ZESCO Transmission and Distribution Losses

2.1.5 ZESCO Power Exports and Imports

Table 3: Imports and Exports

Years Imports MWh Exports MWh

2.2 Power Consumption by Economic Sector

Table 4 shows ZESCO’s customers by sector.

Economic Sector Number of Customers KWh Consumed % Contribution

Agriculture 1,294 187,630,119 2.4

Further, Figure 4 provides a pie-chart indicating power consumption by sector in 2007.

Figure 4: Power Consumption by Sector

Construction 0.2% 0.7%

Source: ERB Computations 2007

2.3 Load Shedding