Reliable energy is a strategic priority for any mining operation, considering the work, heat and processing required to produce metals. In most mining countries, the mining sector consumes a significant share of the national energy output.
In Zambia, Africa’s second largest producer of copper, mining accounts for 51.1 percent of total power consumption. While the consumption share is significant, it echoes the relatively small national installed electricity capacity at 2,898.23 MW.
The country's electricity mix is dominated by hydropower at 96 percent. Further, the electricity sub-sector is dominated by Zesco Limited, a vertically integrated power utility responsible for generation, transmission, distribution and supply of electricity resulting in a single buyer market.
This has made power a matter of great debate and contention for the mining industry, including the recurring tariff disputes between the government and some of the mines
Due to the current challenges faced by Zesco, the government’s strategy for the electricity sub-sector is to shift the electricity market from a single buyer market to a multi buyer market, increase participants in the sector and ensure transparent allocation of risks, costs and revenues across all participants. Implementation of this strategy partly comes in the form of policy and regulatory changes.
Currently, after almost a generation, the Energy Regulation Act Chapter 436 of the laws of Zambia (Energy Act) and the Electricity Act Chapter 433 of the laws of Zambia (Electricity Act) are destined to be replaced with the proposed Energy Regulation Bill, 2019 (Energy Bill) and Electricity Bill, 2019 (Bills) respectively. The article highlights some of the key changes introduced by the Bills in relation to the mining sector.
Bilateral Tariffs and Approval of Agreements
The Electricity Bill includes a dedicated part on tariffs, and clearly distinguishes retail tariffs from non-retail tariff (ie bilateral tariffs in a power purchase agreement (PPA) or power supply agreement (PSA)). It also empowers the Energy Regulation Board (ERB) to fix the minimum bilateral tariff, either at the instance of the licensee or on its own motion, although the determination is not expected to affect PPAs or PSAs with a tariff equal to or above the minimum bilateral tariff. In practice, it is usual for bulk power purchasers such as mining companies to enter a PPA to secure reliable and efficient power supply and guarantee financial certainty, based on the inclusion of a tariff and an adjustment index in the PPA. However, the Electricity Bill may impact the foregoing freedom to contract, particularly with respect to the ERB’s power to determine the minimum bilateral tariff. This may be detrimental to both producers and offtakers, such as mining companies, who may have based their financial model on a contractually certain or ascertainable tariff.
Import and Export of Power
Under the Electricity Bill, importation and exportation of power has been extended to both enterprises and consumers wishing to purchase and/or sell power outside Zambia, subject to approval by the Minister of Energy. Nevertheless, where electricity is sold or purchased on a competitive spot market or is required for emergency purposes, the need for approval is dispensed with. This is intended to result in effective and efficient purchase of power in cases of market trade or emergency. This provision seeks to allocate and share some of the risk of purchasing power in cases of emergency to consumers, including mines and related businesses, which may require excess power which may not be available locally.
Access to the Grid
To facilitate access to the national grid, which is required for an effective implementation of a power trader, the Electricity Bill will require any person who seeks to access the grid network to apply to the Transmission Network Service Provide (TNSP) or Distribution Network Service Provider (DNSP) and access will be granted on the conditions set out in the license of the TNSP or DNSP, which include among other things, the fees that may be charged by a TNSP or DNSP for the use of the transmission or distribution network. This provides a window for mines that intend to import power from outside Zambia.
The application for access must be approved within 30 days and any person aggrieved with the decision of the TNSP or DNSP or objects to the conditions imposed for access may appeal to the ERB. A key point from this is that the ERB will be required to specify the charges which a TNSP or DNSP may impose for use of the transmission or distribution network. Therefore, if this charge is made available publicly, it will allow for better planning by potential users of system.
Intermediary Power Trader
The Bill introduces the concept of an intermediary power trader to attract independent power producers (IPPs). This offers an option to a market participant to rely on a creditworthy intermediary power trader who would sit between producers and suppliers of power to spread the market risk. Zesco, in this regard, is not expected to be the primary offtaker of all the power produced by IPPs.
Certainly, the energy sector is crucial to the country’s mining activities. To borrow the words of Alberto Salas, president of Chile’s National Mining Association, “Without electricity, there is no mining”. And, with some mines ramping production, the mining industry’s electricity needs are only expected to increase and the Bills, once enacted, could go a long way in addressing the various energy needs that have characterised the mining sector.
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