VZCZCXRO1893
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0688/01 3551312
ZNR UUUUU ZZH
R 211312Z DEC 09
FM AMEMBASSY LILONGWE
TO RUEHSD/SECSTATE WASHDC 0122
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0431
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 02 LILONGWE 000688 
 
SENSITIVE 
SIPDIS 
 
LONDON FOR AF WATCHER PETER LORD 
 
E.O. 12958: N/A 
TAGS: EAID ENRG PREL MI
SUBJECT: MALAWI RE-EXAMINES ELECTRICITY CONNECTION WITH 
MOZAMBIQUE 
 
LILONGWE 00000688  001.2 OF 002 
 
 
Summary 
------- 
 
¶1. (SBU) Malawi's Parliament deferred approval of a proposed 
connection of the national electrical grid to the Southern 
African Power Pool (SAPP).  An already approved World Bank 
loan to finance the infrastructure is due to expire on 
December 31, 2009.  Lack of reliable electrical power has 
been identified as a major constraint to development in 
Malawi, where installed capacity is already below peak 
demand. The proposed interconnector would improve access and 
reliability and provide Malawi's hydro-dependent system with 
insurance against drought.  The interconnector project, 
however, is complex and involves multiple agreements and 
uncertain costs.  Until now the project has received little 
scrutiny and it has been poorly explained to the public and 
parliament.  While committee hearings clarified many issues, 
the review occurred days before the World Bank deadline.  The 
GOM has requested an extension of the deadline, which World 
Bank officials told us has a 50/50 chance of approval.  It 
appears likely that Parliament will pass the bill when it 
returns in January, but it is not certain that the President 
will sign it.  End summary. 
 
Interconnector Bill Referred to Committee 
----------------------------------------- 
 
¶2. (U) On December 4, Parliament referred to committee a bill 
to approve construction of an electricity connection between 
Malawi and Mozambique.  Brought to the floor unexpectedly by 
Minister of Finance Ken Kandodo, the bill received broad 
support for the principle of the connection, but serious 
concerns about costs led to its referral to committee.  It is 
now anticipated that the bill will be reintroduced for a vote 
during the Parliament's next sitting to begin in January. 
 
¶3. (SBU) The interconnector project includes World Bank 
credit financing, approved in 2007.  The Bank has twice 
extended the time to access the credit, with the current 
deadline falling on December 31, 2009.  The GOM has requested 
a further extension of the deadline until the next sitting of 
the Parliament, but World Bank officials told us on December 
21 that the chance for approval of the extension is only 
50/50. 
 
¶4. (U) Parliament's Budget and Finance Committee held 
hearings on the bill in early December, meeting with 
representatives from the relevant ministries, the Electricity 
Supply Company of Malawi (ESCOM), Malawi's Millennium 
Challenge Account team, and civil society. Reports from the 
hearings indicate it is likely the committee will recommend 
approval of the bill. 
 
Why an Interconnector? 
---------------------- 
 
¶5. (U) Malawi's electrical grid is entirely self-contained, 
with no links to foreign power sources. The system currently 
has an installed generation capacity roughly 27 megawatts 
below its peak demand.  This leaves no margin for equipment 
to be taken off-line for maintenance or repair. 
Load-shedding is an every-day occurrence.  With a national 
access rate of only 7 percent, Malawi has one of the lowest 
levels of electrification in the world.  Lack of access to 
reliable power has been identified as a major constraint to 
Malawi's economic development.  With no new capacity expected 
to come on line until 2015, a connection to the Southern 
Africa Power Pool (SAPP) would allow Malawi to buy 
electricity to meet increasing demand and to fill gaps when 
generation equipment is being serviced.  It would also enable 
Malawi to sell power to other countries during off-peak hours 
or if additional generation capacity is developed. 
 
¶6. (U) Malawi's current unreliable power situation 
discourages new investment.  It also costs current Malawian 
businesses that are forced to compensate for unreliable power 
with back-up diesel generators.  At current oil prices the 
cost of diesel generation is nearly four times the estimated 
cost of power through an interconnector, with the demand for 
fuel involved contributing to already severe pressures on 
Malawi's available foreign exchange. 
 
¶7. (U) With 98 percent of Malawi's electricity generated from 
hydropower facilities on the Shire River, the interconnection 
with the SAPP would also serve as insurance against drought. 
From 1994 to 2002 the water flow in the river was 50 percent 
below long term averages, and from 1917 to 1935 the Shire 
 
LILONGWE 00000688  002.2 OF 002 
 
 
stopped flowing entirely. 
 
A Complex Project, With Unknown Costs 
------------------------------------- 
 
¶8. (U) The interconnector project includes three agreements: 
separate World Bank loans to Malawi (USD 48 million) and 
Mozambique (USD 45 million) to finance construction of the 
infrastructure, and a bilateral agreement between electrical 
utilities in the two countries.  All of the agreements relate 
to the infrastructure only.  There is currently no power 
purchase agreement, and any power that Malawi imports would 
need to be negotiated separately. 
 
¶9. (U) One provision of the bilateral agreement that raised 
concern is the requirement that Malawi pay roughly USD 
529,000 per month in fees to Mozambique.  According to the 
World Bank, these "wheeling charges" (electricity carrying 
charges), constitute cost-recovery for Mozambique's share of 
the infrastructure investment.  While renegotiation of the 
agreement is possible if both parties agree, the Malawians 
current concern is that the "wheeling charges," if paid for 
the length of the 20-year agreement, would far exceed 
Mozambique's loan obligation. 
 
¶10. (U) We expect these charges would be nearly canceled out 
by fees charged to Mozambique once a projected extension of 
the line to northern Mozambique is completed.  This 
extension, however, has not yet been formally negotiated, nor 
has the level of any such "reverse wheeling charges." 
Furthermore, even if the extension proceeds with no problems, 
there is likely to be a two- to three-year gap after the 
first phase is complete during which Malawi would need to pay 
charges before it can collect any from Mozambique. 
 
¶11. (SBU) World Bank officials told that the GOM specifically 
chose not to include a power purchase agreement in the 
project.  The lack of an agreement generates more cost 
uncertainty because Malawi would pay spot prices that are 
subject to unpredictable fluctuations or increases and it 
would be vulnerable to uncertain power availability.  If 
power from Mozambique's Cahora Bassa facility (the natural 
first option) is fully committed to other customers at the 
time, Malawi would need to buy from elsewhere in the pool, 
potentially two or three countries away, increasing wheeling 
charges substantially. 
 
Comment 
------- 
 
¶12. (SBU) Up against the World Bank deadline, Parliament and 
the Malawian public have raised serious questions over the 
Malawi-Mozambique interconnector.  We believe these concerns 
are manageable, either with better explanation or some 
further negotiation of the bilateral agreement.  Malawi's 
power issues demand urgent attention, and the link with the 
Southern Africa Power Pool is the best alternative.  While it 
appears possible that the World Bank will approve the 
extension, and likely Parliament will approve the project, 
the President's support remains far less certain. 
BODDE