VZCZCXRO0943
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0044/01 0140618
ZNR UUUUU ZZH
R 140618Z JAN 08
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 5310
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DOE WASHDC

UNCLAS SECTION 01 OF 02 LUSAKA 000044 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPARTMENT FOR AF/S 
COMMERCE FOR 4510/ITA/IEP/ANESA/OA 
 
E.O. 12958: N/A 
TAGS: ENRG EINV BTIO ZA
SUBJECT: Zambia Power Generation Update-Light at the End of the 
Tunnel? 
 
Ref: 07 Lusaka 903 
 
¶1. (SBU) Summary and introduction. Zambia's installed power 
generating capacity is 1640 megawatts (MW), and consists almost 
entirely of hydroelectric power.  Ongoing rehabilitation projects 
reduce actual generating capacity to 1200 MW for the near future, 
which is well below estimated peak demand of about 1600 MW for 2008. 
 As a result, increasing power outages are likely in 2008-2009.   By 
late 2009, thanks to rehabilitation and expansion projects, actual 
generating capacity should increase to 1850 MW.   New hydropower 
projects being developed by Chinese, Indian, and Canadian firms 
together with Zambian partners experienced past delays and currently 
are expected to be commissioned in 2012 and 2013.  The new projects 
should increase generating capacity to over 3000 MW and help Zambia 
be a net exporter in the region--but some projects might face 
possible delays.  End summary and introduction. 
 
Background: Plans to Keep Up With Demand -- Not Enough, Yet 
 
¶2. (SBU) Zambia's power generating capacity has not increased 
significantly in many years, but capacity-expanding efforts that 
started in the late 1990s should finally be paying off in upcoming 
years.  To improve national power generating capacity, in the late 
1990s, the Government of Zambia opted to take a "three-pronged" 
approach, Mr. Israel Phiri, Director of the Office for Promoting 
Private Power Investment (OPPPI) which was set up in 1999 in the 
Ministry of Energy and Water Development, told Emboffs.  The first 
tactic was for ZESCO to rehabilitate its major hydroelectric plants, 
which were not producing at full capacity due to a prolonged lack of 
maintenance.  The World Bank and other donors helped to support 
these efforts, which progressed slowly and were not completed by the 
targeted 2007 timeframe.  Rehabilitation of the 108 MW Victoria 
Falls hydro power station is already complete, while rehabilitation 
work is continuing at Kafue Gorge (900 MW installed capacity) and 
Kariba North Bank (600 MW installed capacity).  The work involves 
shutting down sections of each power station-300 MW at Kafue Gorge 
and 150 MW at Kariba-over a 13-month period.  The 450 MW shortfall 
means actual power production is well below installed capacity, and 
explains significant load shedding in the recent past.  Phiri 
expects the rehabilitation work to be completed by the end of 2008 
or in early 2009. 
 
¶3. (U) The GRZ's second approach was to "uprate" or expand the 
capacity of existing power stations.  Phiri said that at a cost of 
about USD 100 million, ZESCO is adding 90 MW of generating capacity 
at Kafue Gorge and 120 MW at Kariba North Bank, adding a total of 
210 MW to current power generating capacity.  The slow-moving 
expansion projects are now expected to be completed by 2009, and 
will bring Zambia's generating capacity to 1850 MW. 
 
¶4. (SBU) As of late 2007, ZESCO's actual power generation output 
stood at approximately 1200 MW, reflecting total installed capacity 
of 1640 MW, minus 450 MW that is shut down for rehabilitation. 
During periods when demand exceeds 1200 MW (ZESCO currently 
estimates that peak demand will be about 1600 MW or more -- the new 
Lumwana Copper Mine and Konkola Deep Copper Mine are expected to add 
120 MW and 150 MW of demand in 2008, respectively) and imported 
power from South Africa, Zimbabwe, or the Democratic Republic of 
Congo is not available, more "load-shedding," as power outages and 
brownouts are widely referred to here, appears inevitable. 
 
New Hydroelectric Power Projects in Development 
 
¶5. (SBU) The final focus of the GRZ's three-pronged approach was to 
develop entirely new projects, as public-private partnerships, to 
tap Zambia's enormous potential for hydro-electric power, estimated 
at between 6000 to 8000 MW.  The GRZ issued international tenders 
for three major hydropower projects, Kariba North Bank, Kafue Gorge 
and Itezhi-Tezhi, and shortlisted bidders in 2001.  U.S.-based AES 
was active in one of the shortlisted bidder consortia, but according 
to Mr. Phiri, in 2002 it pulled out of many sub-Saharan African 
projects, including in Zambia, after encountering problems with a 
project in Uganda. 
 
¶6. (SBU) After all three qualified bidder groups withdrew bids for 
the hydropower projects, the GRZ opted for other, non-competitive 
means to finalize the deals, in the interest of moving quickly, 
Phiri explained to Emboffs.  Some of the projects remained with 
OPPPI and others became the responsibility of ZESCO.  The GRZ used a 
2003 visit by President Mwanawasa to China to promote the projects, 
and China agreed to take on the Kariba North Bank Extension project 
(and for a while, the GRZ was discussing the Kafue Gorge Lower 
project with China as well).  A high-level delegation visiting from 
Iran in 2003 also indicated an interest and capability in 
hydro-electric, which resulted in a deal for the development of 
Itezhi-Tezhi.  However, in following years, Iran pressured the GRZ 
 
LUSAKA 00000044  002 OF 002 
 
 
to side with it on sensitive issues in the UN.  According to both 
Phiri and Aaron Nyirenda, Director for Power Generation Projects at 
ZESCO, the GRZ decided to pull out of the deal--when the project was 
at the pre-design stage and discussions on financing were already 
underway--so the Iranians would not use the project for political 
leverage.   ZESCO worked with the World Bank to hold a power sector 
investor workshop in May 2006, and numerous companies expressed an 
interest.  However, only India's Tata actively followed up, which 
resulted in a deal.  According to Nyirenda, ZESCO and Tata have set 
up a 50-50 percent joint venture company to oversee the project, 
with the GRZ receiving one "golden share."  The Itezhi-Tezhi 
hydropower project is valued at USD 150 million and is expected to 
produce 120 MW by 2012. 
 
¶7. (SBU) Following extensive feasibility studies and negotiations, 
in November 2007, ZESCO and China's Sinohydro signed a USD 243 
million contract for the engineering, procurement and construction 
of the Kariba North Bank Extension hydropower project of 360 MW, and 
in December, ZESCO finalized a concessional loan agreement with the 
Chinese Export-Import Bank, according to Nyirenda.  The project is 
supposed to begin in 2008 and be commissioned by 2012. 
 
¶8. (SBU) The GRZ had been in discussions with Sinohydro over 
development of the Kafue Gorge Lower project, Phiri told Emboffs, 
but after both sides failed to reach agreement, OPPPI started to 
work to re-tender the project with advice from the International 
Finance Corporation, which will help cover the costs of feasibility 
studies for an alternate project site, "Site Five," about six 
kilometers from the original site proposed.  The original project 
size, 600 MW of power generating capacity, could increase to as much 
as 750 MW at the new site, Phiri said.  He expects the next phase of 
feasibility studies to be carried out starting in March 2008.  OPPPI 
will be ready to solicit bids by the end of 2008.  OPPPI plans to 
award the project in 2009, with commissioning by 2013. 
 
¶9. (SBU) Phiri told Emboffs that the planned Kalungwishi hydropower 
project in Luapula Province involves two stations totaling 218 MW of 
power generating capacity as well as installation of 500 kilometers 
of transmission line to link to the national grid, in Kasama and 
Serenje.  OPPPI is still negotiating with the selected bidder, 
Lunzuwa Power Authority, which is a subsidiary of local firm Olympic 
Milling and aligned with a Canadian firm with solid hydroelectric 
experience, Knight-Piesold.  Assuming that final details can be 
agreed upon, the bidder will need to arrange financing for the 
project during 2008.  Phiri expects construction to begin in 2009 
and commissioning to take place in 2013. 
 
Looking Beyond Hydropower Resources -- Not Much To See 
 
¶10. (U) In order to diversify its sources of electric power, Phiri 
told Emboffs that OPPPI was exploring options for developing about 
500 MW of thermal power generating capacity, to come on line by 
2013, but had not reached any decisions yet.  Nyirenda noted that 
both diesel and coal powered turbines would be comparatively 
expensive to operate in Zambia, given the high cost of the 
feedstock.  (Note: In fact, ZESCO's Director of Engineering 
Development Alvin Monga also told the media in late December 2007 
that ZESCO would phase out the use of several small diesel 
generators that supply electricity in five districts, because of the 
high cost of fuel and operating losses from running the generators. 
End note.)  Neither our OPPPI nor ZESCO sources could foresee 
Zambia's turning to nuclear energy as an option for diversifying 
electricity supply. 
 
¶11. (SBU) Comment:  If completed on schedule, by 2013, the four new 
hydropower projects would add 1510 MW of power to the national grid, 
bringing Zambia's generating capacity to 3360 MW and enabling it to 
become a regional electricity exporter.  After years of delays, the 
Itezhi-Tezhi and Kariba North Bank Extension projects both appear to 
be on track and moving forward at a steady pace.  However, there 
might be challenges ahead for OPPPI as it proceeds with the massive 
Kafue Gorge Lower project.  It appears that senior levels of the 
Zambian government might have other ideas for the project -- the 
Executive Chairman of Copperbelt Energy Corporation told Emboffs in 
late December that CEC had teamed up with copper mining company 
Mopani, owned by Glencore, to propose developing the Kafue Gorge 
Lower project to senior GRZ officials, who were very receptive to 
the concept.  The GRZ might welcome the opportunity for a 
Zambian-controlled company to take on such a high-profile project, 
although side-stepping a competitive tender process could result in 
less attractive terms for the deal. 
 
KOPLOVSKY