THE “SIMPLE” SOLUTION FOR LOAD SHEDDING – Chishala

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The current mess at ZESCO with load shedding and all the politically induced problems there can be solved if courageous people can bite the bullet and make the right choices. I don’t know why we are beating about the bush and trying to complicate things.

 

The very simple answer to load shedding is to increase prices of electricity. More precisely, to stop government price controls in the energy sector by completely removing the power of the Energy Regulation Board (ERB) to approve changes in prices of electricity and leaving pricing completely and totally to market forces.

 

It baffles me why governments the world over think they can defy the most fundamental law of economics (Demand and Supply) by controlling prices. Economics 101 says that the price of goods and services fluctuate in order to bring demand and supply into an equilibrium. Tampering with the equilibrium by keeping prices artificially low causes shortages.

 

There is load shedding in Zambia because the price of electricity in Zambia is too cheap, relative to the demand for it, with supply not significantly increasing. There are too many households who can afford it and this high demand should ordinarily cause prices to rise until some households reduce their usage or else stop using it altogether, such that demand drops and eventually the supply becomes enough for those that can afford the higher price. But the government has fixed the price too low through ERB so there is not enough electricity to go round, hence load shedding.

 

The results are there for all to see. Industries have reduced production by up to 30% in some cases. No more heavy industries like mining or manufacturing are likely to open or expand in this scenario. They will be forced to scale back at some point. People and companies who could have been more productive are forced to periodically halt production and at night people end up sleeping. The result is reduced economic growth for the foreseeable future and ironically, a reduction in the ability to take electricity to more people in Zambia.

 

A rise in electricity prices and reduction of demand will mean industries and businesses will have enough electricity to produce and the economy can still grow. This would in turn lead to more investment in the electricity sector since the high prices would attract new players who want to make a killing. Ultimately, the increased competition would causes prices to fall and quality of service to increase.

 

Now, things in reality are not so clear cut because a reduction in demand for electricity also has consequences for productivity in other areas of the economy. For example, if the poorer households are consuming less electicity because they cannot afford the increased prices, they will be less productive, buy fewer goods and services and pay less taxes. They shall contribute less to the economy.

 

A rise in electricity prices will also mean prices of many goods and services will increase, including the price of copper produced in Zambia. Workers will begin demanding higher salaries and the result is increased inflationary pressures. Zambian copper exports will become less attractive which means less foreign exchange earnings and a weaker more unstable Kwacha. This is likely to translate into reduced government revenue.

 

We are in big trouble without a dramatic increase in electricity production, which is the ultimate solution. Keeping the status quo is bad, but increasing prices is also bad. I think the latter is a lesser evil and it will enable more investments in the energy sector to meet the current huge demand. It will also make alternative energy solutions like solar or gas more viable because the pricing will become comparable to power from the grid.

 

The current model of price controls is not sustainable because shortages are always worse than high prices. During the terrible UNIP days in the late 80s, you could not find essential commodities in the shops like sugar or soap, not matter how much money you had. Then in the MMD period after 1991, everything was available in the shops. All you had to do was make more money and this was a far better situation than the alternative.

 

Moreover, keeping electricity prices artificially low means there is effectively a subsidy from government which of course comes out of taxes. Subsidies are not sustainable in the long run. They are a waste of public resources which can be put to better more efficient use.

 

 

ZESCO needs to be split up into Generation, Distribution and Retail. The three companies should be privatized so that the new owners have an incentive to be more efficient and more responsive. Anyone should be able to start an electricity company and rent the grid from ZESCO Distribution to supply their clients after buying power from generation companies.

 

ZESCO Distribution being a separate independent company should not favour anyone thus ensuring good competition. It can operate under a law that prohibits it from favouring any electricity company in terms of pricing or any other practices that would give an unearned advantage to anyone.

 

Some Zambians fear privatization but I believe the case of Zamtel should put most arguments to rest. It was a huge mess, making millions of Dollars in annual losses under government until 2010 when it was sold to LAPGreen who turned it around in just a year. The monopoly of Zamtel was killed and prices of phone calls reduced. The successful privatization of Zamtel can be replicated in ZESCO. Zamtel was nationalized by the PF government in 2012 and has never made a profit since then.

 

Let me end with a slightly paraphrased quote from Albert Einstein.

 

“Insanity is repeatedly doing the same thing while expecting different results each time”.

 

By Michael Chishala

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