Investing in the Zimbabwe electricity sector

Ten things to know
June 01, 2016

Why consider Zimbabwe?

The landlocked country of Zimbabwe has a population of 14.2 million and a gross domestic product (GDP) of 13.49 million United States dollars. 40.5 per cent of Zimbabweans have access to energy, a relatively high figure against Sub- Saharan Africa’s electrification rate of 32 per cent.

Zimbabwe’s record breaking hyperinflation was resolved in 2009 by switching to a multi-currency regime. Since 2009, relations with international financial institutions have normalised. The World Bank has created a Multi-Donor Trust Fund and the International Monetary Fund (IMF) has restored Zimbabwe’s voting rights. The IMF and Zimbabwe successfully completed a staff monitored program in 2014. The IMF concluded that Zimbabwean authorities have made progress in implementing their macroeconomic and structural reform programs.

Zimbabwe experienced substantial economic growth from 2010-2012, with a recorded GDP growth of more than 10 per cent of GDP per year. Growth has slowed since, despite the favourable impact of low oil prices on the import dependent country. Reasons for decreased growth include the contraction of the mining and manufacturing sectors. The mining sector has suffered from the reduced price of diamonds, gold and platinum. A lack of financing and strong competition from cheaper imports has hampered the manufacturing sector. The lack of reliable power to the manufacturing sector in Zimbabwe has further hampered the development of that sector. The aforementioned developments are offset by the performance of the agriculture sector, which grew 23 per cent in 2014. However, the World Bank estimates that growth of the agriculture sector may slow down due to climatic issues and insufficient financing.

Despite Zimbabwe being an energy resource-rich country, as further set out below, 90 per cent of rural households have no electricity. Droughts, coal shortages, low tariffs and high demand all contribute to poor availability of electricity at peak load times. Consequently, Zimbabwe was ranked 131 of 144 for quality of electricity supply on the World Economic Forum Global Competitiveness Report 2014-2015. 

The total installed capacity of Zimbabwe is around 2,000 megawatts (MW). Fossil fuels – mainly coal – account for 62.1 per cent of installed capacity (2011). The percentage of installed hydropower capacity is approximately 37.9 per cent (2011). The most significant power plants are Kariba South hydroelectric power station (currently 750 MW) and Hwange coal-fired power station (currently 920 MW).

The labour force of Zimbabwe is skilled and hardworking with a regionally high literacy rate of 90 per cent. There is a lot of available human capital in Zimbabwe – 80 per cent of the workforce is not employed in the formal sector. Labour costs are comparatively high in Zimbabwe.

Structure of the energy sector

The branch of government responsible for the energy
sector is the Ministry of Energy and Power Development.
Its function is to develop an effective legislative framework so as to facilitate operations of the energy sector.

The Zimbabwe Energy Regulatory Authority (ZERA) was formed in 2011 under the Energy Regulatory Authority Act of 2011 for the purpose of regulating the procurement, production, transportation, transmission, distributing and importing of energy. Its predecessor, the Zimbabwe Electricity Regulatory Commission, was disbanded. Issuing and revoking licences for the generation of energy is ZERA’s responsibility.

The Electricity Act unbundled the Zimbabwe Electricity Supply Authority (ZESA), creating independent successor companies responsible for the generation, transmission and distribution of energy. Zimbabwe Power Company (Private) Limited (ZPC) operates and manages five power stations. Zimbabwe Electricity Transmission and Distribution Company (Private) Limited (ZETDC) operates the transmission and distribution network, and conducts trade in the South African Power Pool. ZESA Holdings (Private) Limited is the holding company and is severely indebted – outstanding debts amounted to US$ 775 million at the start of 2015.

The Rural Energy Agency (REA) is an autonomous body with the mandate of facilitating rapid and equitable electrification in rural Zimbabwe. It derives its powers from The Rural Electrification Fund Act (2002). Methods include working with the private sector, financing projects through the Rural Energy Fund and providing technical assistance to project developers and rural communities. Zimbabwe’s Rural Electrification Programme has seen more than 5000 rural institutions, farms, villages, borehole, dam points and irrigation schemes electrified.

Independent power projects

National demand for electricity is 2,200 MW, yet Zimbabwe is currently only able to generate 1,200-1,400MW and is reliant on regional interconnectors for the balance. Encouragement of private sector participation is being increasingly recognised as the way forward. The Electricity Act liberalised the energy market, allowing independent power producers to participate in power generation. Transmission and distribution is fully operated by ZETDC
as the only licence holder.

ZERA has licensed over 20 independent power projects (IPPs), which could potentially generate 5,000MW upon completion. That said, most licence holders have not yet reached commercial operations – according to Zimbabwe’s Energy and Power Development secretary, only eight are currently operational. IPP technology types which are operational currently include small-scale hydropower and biomass energy.

Governmental approval for IPPs

The regulatory authority ZERA can issue a generating licence, authorising the licensee to own and operate a generating station. The licensed generator can supply
energy to anyone with a transmission and distribution licence, or with the approval of ZERA, straight to a
consumer. The licence is not transferrable and requires
the payment of a prescribed fee to ZERA.

According to the Environmental Management Act 2002 and the Environmental Impact Assessment and Ecosystems Protection Regulations 2007, parties wishing to undertake projects must first obtain a certificate from the Environmental Management Agency (EMA). The developer is required to submit a prospectus regarding the project and the Environmental Impact Assessment (EIA). If the EMA is satisfied that the outlined EIA will be sufficient, the developer may proceed with the EIA. The EIA includes a description of the project, evaluation of environmental impacts and methods used to mitigate impacts. Fees are payable to EMA.

Zimbabwe’s water authority (ZINWA) will raise charges in respect of a non-consumptive use of water.

The Zimbabwe Investment Authority (ZIA) is the country’s investment promotion body set up to promote foreign direct investment, local investment and the government’s decentralisation policy. According to the ZIA Act, any non-resident person wishing to invest in Zimbabwe must first obtain an investment licence from the ZIA and the investment must be undertaken in accordance with the terms of that licence. Individuals or corporates which are not resident in Zimbabwe are not permitted to hold shares in a Zimbabwean company without approval from the Zimbabwe Investment Authority or the Reserve Bank (as applicable). 

To date each power project has been considered on its facts.

Incentives for foreign investors

The Government of Zimbabwe (GoZ) will not always offer an implementation agreement as this will depend on the nature and importance of the project to the GoZ. The GoZ is permitted to issue guarantees within parameters prescribed by the Public Debt Management Act.

Tax exemptions and investor incentives are available from the ZIA for developers investing in Zimbabwe, but these must be carefully negotiated and sufficiently hardwired into the project documents, and detailed in subsidiary legislation, to ensure that they are enforceable. Tax holidays on corporation tax may be negotiable. Customs duty exemption on imports of plant and equipment are available with the reservation that they do not cover consumables or VAT. Withholding tax is payable at ten per cent on dividends and fees. No withholding tax is payable on interest payments to third party funders; however Zimbabwe has a double tax treaty in place with certain jurisdictions, including Mauritius. National project status was originally reserved for projects with government shareholding, but has latterly been available for the private sector as well. Full repatriation of invested capital is allowed subject to the investment having been properly approved prior to commencement.

Renewable energy

In addition to economic and institutional objectives, the National Energy Policy of 2012 aims to develop the use of renewable energy technologies (RET) to complement the use of conventional energy sources. Listed policy measures include adopting a GoZ driven renewable energy technologies programme and instituting funding mechanisms such as Clean Development Mechanisms and micro credit institutions for RETs. Incentives for investment in renewable energy are also listed, such as subsidies and tax concessions. ZERA has developed a Renewable Energy Feed-in-Tariff scheme which is yet to be implemented. Zimbabwe’s current economic blueprint, the Zimbabwe Agenda for Socio-Economic Sustainable Transformation (2013) ZIMASSET aims to increase the use of alternative energy sources.

Hydro
The technically feasible potential of hydropower of Zimbabwe amounts to 17,500 gigawatt hours/year.
Of this, about 19 per cent has been exploited.

Kariba South on the Zambezi River is the largest hydropower plant in Zimbabwe. Kariba South is being expanded by the addition of two further 150MW units, so resulting in an aggregate 1,050MW installed capacity. The operating company and owner of the plant, ZPC’s wholly-owned subsidiary Kariba Hydro Power Company (Private) Limited, has entered into power purchase agreements with ZETDC and with Nampower to secure the long term offtake from the expanded power plant. ZPC is contributing US$35 million through equity and the debt package includes a US$320 million sovereign loan to GoZ from the Export-Import Bank of China and structurally subordinated commercial and development bank financing. The landmark expansion project reached financial close in November 2014 and is scheduled to be complete by 2018. 

Upstream of Kariba, construction of the US$4 billion Batoka hydropower station is anticipated to commence in 2016. The station is expected to add 800MW to the installed capacity of both Zimbabwe and Zambia. Pungwe B, a 15MW hydro power plant near the Mozambique border, has been completed ahead of schedule and now supplies energy to the grid. Eight small scale hydro projects have been installed in Zimbabwe, with capacities varying from 3kw to 700kW. 

Biomass and biofuel
The full potential for co-generation of steam and electricity using bagasse is not currently being fully exploited in Zimbabwe. Electricity generating sugar producers Hippo Valley and Triangle Limited export their surplus power to the grid. In addition, over 200 biogas plants convert animal waste into electricity, most of which have been installed by the Department of Energy. There is also potential in Zimbabwe for biomass-fired power using wood feedstock from Zimbabwe’s timber plantations, subject to developers securing a robust supply chain.

Solar 
Zimbabwe has enormous potential for solar power, averaging 2100 kWh per square metre per year, and 3000h of sunshine per year. Solar power is currently mainly utilised in service centres such as schools and hospitals in rural areas. Various IPPs have shown interest in this technology. Oursun Energy, subsidiary of Swiss company the Meeco group, has been granted national project status for a US$400 million solar power venture. Multiple 5MW installations are expected to be constructed during a five year period, resulting in a total of 230MW. Solar powered base stations for charging electronic devices have been installed nationwide by the national telecommunications company NetOne.

Fossil fuels

Coal
Zimbabwe has 26 billion tonnes of coal reserves, of which 501 million tonnes are recoverable. Zimbabwe’s total coal production has decreased from over five-million tonnes in the mid-1990s to 3.6 million tonnes in 2013. The country is a net exporter of coal, although trade is mainly limited to neighbouring countries. GoZ has initiated a policy to explore untapped reserves of coal in the country.

The newest and largest of the power stations owned by ZPC is Hwange power station (920MW, commissioned 1987). ZERA has licensed ZPC to expand Hwange’s capacity by 600MW. Sino-Hydro, a Chinese contractor, has been awarded the US$1.5 billion project, although the project’s funding has not yet been secured. Smaller coal-fired power stations include Harare (50MW), Bulawayo (90MW) and Munyati (100MW). 

GoZ has also announced that it is developing the Gwayi power station (300MW). It has been reported that on-site clearance work has been completed, and the project is scheduled to be completed in 2018. China Africa Sunlight Energy, the Zimbabwean/Chinese joint venture IPP, has reportedly signed a provisional power purchase agreement with ZETDC. 

Gas
Zimbabwe does not currently produce, import or export any natural gas. However, recent exploration by the Industrial Development Corporation has discovered that there are large reserves of coal bed methane (CBM) in the Hwange-Lupane basins of western Zimbabwe. The estimated amount of CBM is over 23 billion cubic feet per square mile, or 27 trillion cubic feet.

Oil
Zimbabwe does not produce any oil, instead fully relying on imports – 674 thousand tonnes of oil products are imported annually. GoZ had attempted to mitigate import reliance by enforcing mandatory blending of petroleum with 15 per cent ethanol. The project has been somewhat unsuccessful due to seasonal shortages of ethanol. As consequence, the percentage blend requirement has varied dependent on the volume of ethanol available.

Regional interconnection and integration

ZESA imports up to 40 per cent of its power requirements from Eskom (South Africa), Cahora-Bassa (Mozambique) and SNEL (the Democratic Republic of Congo) through the Southern Africa Power Pool. The SAPP is currently developing a 400kV transmission system, MoZiSA, over 935 kilometres through Mozambique, Zimbabwe and South Africa, which will result in increased power trading in the Southern African region and provide further capacity for current congested transmission lines. MoZiSA is sponsored by the member countries’ national power utilities, Electricidade de Mocambique, Zesa Holdings (Private) Limited and Eskom, and is anticipated to take approximately two years to complete.

Zimbabwe is regionally integrated, enabling it to be part of a wide, harmonised and more competitive market. The country is a member state of the South African Development Community (SADC) Free Trade Area and the Common Market for Eastern and Southern Africa (COMESA) Customs Union. COMESA and SADC have now joined with the East African Community to create the COMESA-EAC-SADC Tripartite. The Tripartite is envisioned to enhance trade facilitation, assist in the development of joint infrastructure projects and establish a Tripartite Free Trade Area. 

Dispute resolution

In accordance with Chapter 8 of the 2013 Constitution, Zimbabwe has an independent judicial system. There are no specialised commercial courts. Judgements of foreign courts may provide the basis for obtaining judgement in Zimbabwe and some judgements of foreign courts may be recognised in Zimbabwe, as stated in the Civil Matters (Mutual Assistance) Act Chapter 8:02, with various reservations. 

Zimbabwe is a signatory to the following treaties: the International Convention on Settlement of Investment Disputes (ICSID), the New York Convention on the enforcement of Foreign Arbitral Awards and the United Nations Convention on International Trade Law (UNCITRAL). Accordingly, foreign arbitration awards are enforceable in Zimbabwe. The country is a member of the Multilateral Investment Guarantee Agency, and signatory to multiple bilateral investment treaties. 

Typical security package 

The security available to a project financier includes:

  • a registered mortgage bond over the land on which the project is constructed
  • a registered notarial bond over the moveable assets of the project company
  • a cession of the income receivable from the sale of the power generated supported by cession of the account to which such payments are made
  • a pledge of the shares in the project company
  • cession of insurance and other contracts.

 

Contacts

If you would like further information please contact:
Norton Rose Fulbright

Laura Kiwelu
Senior Associate, Dar es Salaam
Tel +255 76 470 0905
laura.kiwelu@nortonrosefulbright.com

Richard Metcalf
Partner, London
Tel +44 20 7444 3482
richard.metcalf@nortonrosefulbright.com

Steven Gamble
Director, Johannesburg
Tel +27 82 330 5689
steven.gamble@nortonrosefulbright.com

Inside Africa would like to thank our guest contributing author Sue Brighton of Gill, Godlonton & Gerrans for her contribution.