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Cablegate: No End in Sight to Zimbabwe's Electric Power Woes

VZCZCXRO6353
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0998/01 3061043
ZNR UUUUU ZZH
P 021043Z NOV 07
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 2095
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1757
RUEHAR/AMEMBASSY ACCRA 1633
RUEHDS/AMEMBASSY ADDIS ABABA 1764
RUEHBY/AMEMBASSY CANBERRA 1041
RUEHDK/AMEMBASSY DAKAR 1390
RUEHKM/AMEMBASSY KAMPALA 1821
RUEHNR/AMEMBASSY NAIROBI 4249
RUEHGV/USMISSION GENEVA 0887
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC//DHO-7//
RUCPDOC/DEPT OF COMMERCE WASHDC
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK//DOOC/ECMO/CC/DAO/DOB/DOI//
RUEPGBA/CDR USEUCOM INTEL VAIHINGEN GE//ECJ23-CH/ECJ5M//

UNCLAS SECTION 01 OF 04 HARARE 000998

SIPDIS

SENSITIVE
SIPDIS

AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS

E.O. 12958: N/A
TAGS: ENRG EMIN ECON ETRD PREL PGOV ZI
SUBJECT: NO END IN SIGHT TO ZIMBABWE'S ELECTRIC POWER WOES

-------
Summary
-------

1. (SBU) Electric power demand in Zimbabwe far outweighs
Zimbabwe Electricity Supply Authority's (ZESA) capacity to
supply, and low and erratic coal supplies from Hwange
Colliery exacerbate the problem. The GOZ will not allow ZESA
to raise its tariffs, among the lowest in the world, to a
level that will recover the cost of production, transmission
and distribution, plus provide for capital investment and
repairs. Foreign currency shortages have pushed ZESA deeply
into arrears with regional utilities, further reducing
supply. Plagued in addition by vandalism and the loss of
skilled staff, ZESA is pursuing stop gap measures to step up
domestic power production, earn foreign currency, and secure
power supplies from Mozambique for major exporters who can
pay in foreign currency. In the meantime, rolling power
outages cripple the rest of industry and frustrate consumers.
Without a friendly business climate and substantial
investment in additional capacity, there is no end in sight
for Zimbabwe,s power woes. End Summary

----------------------------------
Acute Power Supply/Demand Mismatch
----------------------------------

2. (SBU) ZESA CEO Benjamin Rafemoyo told us that demand for
electricity in Zimbabwe is about 1,850 MW in summer, rising
to 2,200 MW in winter or to 2,800 MW when including
suppressed demand. Although Zimbabwe,s power demand is
declining as the economy shrinks, it still ranks second in
the region after South Africa. On the supply side, even if
all of Zimbabwe's power plants operated at full capacity,
Zimbabwe would still have a power shortfall ranging between
25 and 57 percent of demand.

3. (SBU) Zimbabwe has five electric power plants: the Hwange
thermal power plant with installed capacity of 780 MW, the
Kariba South hydroelectric plant with 750 MW capacity, and
three smaller coal-powered thermal plants in Harare, Bulawayo
and Munyati with a combined capacity of 170 MW. While the
total installed capacity of the five plants is 1,700 MW,
actual generation fell to less than half that amount--830
MW--in October. Historically, the demand/supply gap was
easily filled by power imports from SNEL (Societe Nationale
d'Electricite) in the DRC, Eskom in South Africa and HCB
(Hydroelectrica de Cahora Bassa) in Mozambique. However,
supply from the region has dropped to a trickle due primarily
to South Africa,s own supply/demand mismatch and ZESA,s
hard currency arrears to regional utilities.
------------------------
Crumbling Infrastructure
------------------------

4. (SBU) In a meeting with econoff on October 16, Rafemoyo
said there had been no significant investment in Zimbabwe's
electric power industry since the late 1990s and the average
age of power plant equipment was 45-50 years. Obsolete
equipment was being "patched up" to prolong its life and the
Hwange power plant had been producing only about 100 MW of
its 780 MW capacity in October, primarily due to lack of
coal. Hwange Colliery, like the power plant it supplies two
kilometers away, is vexed with old and unreliable equipment,
resulting in low and erratic supplies of coal. In recent
months, for example, the mine,s dragline excavator had been

HARARE 00000998 002 OF 004


out of commission for three weeks, its primary and secondary
crushers had failed for days, and the conveyor system to the
power plant had suffered a 1 1/2 km long tear.

--------------------------------------------- -----
The Supply Backbone ) Low-Cost Hydroelectric Power
--------------------------------------------- -----

5. (U) Rafemoyo said the backbone of the domestic power
industry had shifted in recent years from Hwange to the
low-priced and reliable power of the Kariba hydroelectric
plant on the Zambezi river on Zimbabwe's northern border.
Zimbabwe's Kariba South plant is operating at close to 98
percent capacity and producing 730 MW. It is, of course,
highly dependent on Lake Kariba,s water level; the waters
rose this past year but not enough to run Kariba South,s six
generators at full throttle.

--------------------------------------------- --------
No Output from the Harare, Bulawayo or Munyati Plants
--------------------------------------------- --------

6. (SBU) Diminished and erratic coal output from Hwange
Colliery has also contributed to the effective shutdown of
Zimbabwe,s three thermal power stations at Munyati, Bulawayo
and Harare. Paul Markham, Rio Zim,s technical director,
told econ specialist on October 22 that the three plants were
designed for higher calorific-value beneficiated coal from
Hwange Colliery which was now unavailable. Consequently,
none of the three small plants had produced any power for
months, although they continued to carry the overhead cost of
a full labor force. Even if the coal were available,
National Railways of Zimbabwe (NRZ) did not have reliable
locomotives, wagons and signaling equipment to transport it
to the power plants in a cost effective manner, according to
Markham.

-------------------------------------
Uneconomic Tariffs ) ZESA's Albatross
-------------------------------------

7. (SBU) The GOZ has not allowed ZESA to raise tariffs to a
cost-recovery level; consequently Zimbabwe's electric bills
are among the cheapest in the world. Learnmore Nechitoro,
economist at the Zimbabwe Electricity Regulatory Commission
(ZERC), related to econoff on October 24 that ZESA had sought
a 560 percent tariff increase in early 2006 and received ZERC
and Cabinet approval, only to have Reserve Bank of Zimbabwe
(RBZ) Governor Gono intercede and block the increase on the
grounds that it would be inflationary. Cabinet eventually
approved the increase but spread out over a year. ZABG bank
senior economist David Mupamhadzi commented to us on October
30 that hyperinflation would inevitably erode modest
incremental increases in tariffs, as happened last year, and
the public utility needed a large price hike.

8. (SBU) Nechitoro pointed out that electricity made up an
average of only 12-15 percent of total production cost across
industries; cost-recovery tariffs therefore would not
increase prices commensurately. He said the current blended
tariff of about Z$1,300/kwh (tariffs range from about
Z$380/kwh for Kariba's power to Z$18,000/kwh for the Harare
plant) covered only about one-fifth or one-sixth of the cost
of power generation, transmission and distribution.
Appearing before the Parliamentary Portfolio Committee on
Mines, Environment and Tourism on October 18, ZERC

HARARE 00000998 003 OF 004


Commissioner General and Chairperson Dr. Mavis Chidzonga
called for a 316 percent increase in ZESA's tariffs, but
Nechitoro remarked that the figure was two months old and
already overtaken by inflation.

9. (SBU) In discussing Zimbabwe's unviable electricity
tariffs, Alison Chikova, Chief Engineer at Southern African
Power Pool (SAPP) in Harare pointed out to us on October 17
that ZESA,s rate of return in the period April 2006 to March
2007 was negative 48 percent and its net income was negative
US$ 1.77 billion. He emphasized the need for competitive
tariffs in Zimbabwe. Rafemoyo acknowledged that Zimbabwe
needed private investors, especially in greenfield projects,
and pointed out that the Electricity Amendment Act Number 3
of 2003 provided for the establishment of independent power
producers (IPP), but the return to investors as measured by
tariffs had to be attractive.

--------------------------------------------- -----------
Woes from Arrears to Vandalism, Brain Drain, Tight Terms
--------------------------------------------- -----------

10. (SBU) Rafemoyo said ZESA was no longer importing power
from Eskom (as recently as June it was importing 50 MW) and
it was netting off its debt with fees for the transmission of
HCB power from Mozambique to South Africa. ZESA's remaining
debt to Eskom was inconsequential (less than US$1,000).
Zambia did not export power to Zimbabwe. SNEL supplied about
50 MW (down from 100 in June) to Zimbabwe, but vandalism and
other problems along the very long transmission line made for
erratic supply. As of October 16, ZESA was US$1.5 million in
arrears to SNEL, according to Rafemoyo.

11. (SBU) HCB is Zimbabwe's most dependable foreign supplier.
The company has a contractual obligation to supply 50 MW but
could supply as much as 300 MW. Rafemoyo said ZESA was under
intense pressure to pay the government of Portugal about
US$29 million in ring-fenced arrears prior to year end when
Portugal transfers 85 percent of its ownership of HCB to the
government of Mozambique. Several days after our discussion
with Rafemoyo, the press reported that ZESA had made a
payment of US$20 million to HCB. Nechitoro explained that
recent trends in regional power agreements toward shorter
terms (6-12 months, as opposed to about 3 years), higher
prices, and non-firm rather than firm supply commitments
adversely affected Zimbabwe's ability to tap into regional
power.

12. (SBU) ZESA is also increasingly plagued by theft of its
power lines for copper and of oil from transformers.
Nechitoro lamented that scarce resources earmarked for
expansion projects were being channeled more frequently to
replacing vandalized equipment. Furthermore, Rafemoyo
admitted that ZESA was hard put to retain its engineers and
skilled labor force under poor working conditions and low
salaries. He jested that ZESA's invoices were as ridiculous
as its pay slips.

13. (SBU) As a result of power shortfalls and breakdowns, for
the past half year Zimbabwe has been suffering rolling power
outages that have gone well beyond ZESA's announced load
shedding schedule. The outages have reduced industrial
production, especially in the mining sector, constrained
retail trade and had a devastating effect on the production
of irrigated winter wheat. Andrew Ferreira, president of the
Zimbabwe Tobacco Association, told us on October 30 that

HARARE 00000998 004 OF 004


growers of irrigated tobacco, which went into the ground on
September 1, were struggling to water their crop under
unpredictable power supplies.

-------------------------------------
Looking Ahead ) ZESA Pins Its Hopes(.
-------------------------------------

14. (U) Rafemoyo recounted with particular pride the
electricity purchasing agreement that ZESA entered into with
NamPower in April 2007. The Namibian utility is funding the
sequential refurbishment of four of Hwange's six units which
will increase Hwange's capacity by 400 MW by October 2008.
Beginning in January 2008, when the first refurbished unit is
scheduled to go back on line, NamPower will draw guaranteed
50 MW from the plant, rising to 150 MW over a five year
period.

15. (U) The ZESA CEO said that an agreement reached between
ZESA and the Chamber of Mines in September would unlock an
additional 200 MW from HCB. It allowed large mining
companies to pay for power with their export earnings in
exchange for uninterrupted power supply. Implemented on
October 1, 2007, he said the deal would also provide some
surplus power to the grid by late October.

16. (SBU) ZERC has approved four IPPs, none of which,
however, contributes significantly to the national grid.
ZESA is seeking investment partners - to date without success
- for the expansion of Kariba South by 300 MW; for a major
hydroelectric power plant in the Zambezi's Batoka gorge
(vigorously opposed by conservationists and the local tourist
industry); for expansion of the Hwange plant by 600 MW; and
for development of coal-bed methane in Lupane (Matebele North
province). Rio Zim is in discussions with investors about
construction of the long envisioned 2000 MW Gokwe North power
plant in Midlands, to be supplied by its Sengwa coal mine.
Rio Zim's Markham told us the cost (nearly US$5 billion
including improvements to the mine) had more than doubled
since the project was first mooted in 1997.

17. (SBU) ZESA Enterprises has a supply-credit arrangement
with China in which loans are secured by contract-grown
tobacco. Rafemoyo said the deal had yielded less foreign
exchange than anticipated (US$3.5-4 million this year, US$8
million in 2006 and US$10 million in 2005), but had helped
ZESA secure equipment and service debt.

-------
Comment
-------

18. (SBU) Without viable tariffs, secure property rights,
and substantial investment in additional capacity, no
combination of stop gap measures will put an end to the
rolling power outages that are vexing consumers and industry
alike and sending broad swathes of residential and industrial
Harare ever more frequently into darkness. Allowing major
exporters to pay for power imports in foreign currency is a
first step toward acknowledging the need for viable tariffs,
but it is a typically piecemeal approach to economic reform.
As competition with South Africa for power in the regional
market quickens, the prospects for meeting Zimbabwe's power
needs under the present economic policies are dimming, along
with the lights.
DHANANI

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