THE ELECTRICITY SECTOR IN MOZAMBIQUE

AN ANALYSIS OF THE POWER CRISIS AND ITS IMPACT ON THE BUSINESS

ENVIRONMENT

FEBUARY 2015

This publication was produced for review by the United States Agency for International
Development. It was prepared by DAI.
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AN ANALYSIS OF THE POWER
CRISIS AND ITS IMPACT ON
THE BUSINESS ENVIRONMENT

FEBUARY 2015

Program Title: Support Program for Economic andEnterprise Development

(SPEED)

Sponsoring USAID Office: USAID/Mozambique

Contract Number: EDH-I-00-05-00004-00/13

Contractor: DAI and Nathan Associates

Authors: Amílcar Cipriano / Colin Waugh / Mathikizana Matos

Date of Publication: February 2015

The authors’ views expressed in this publication do not necessarily reflect the views of the United
States Agency for International Development or the United States Government.
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CONTENTS
AN ANALYSIS OF THE POWER CRISIS AND ITS IMPACT ON THE
BUSINESS ENVIRONMENT .............................................................. 3

CONTENTS ....................................................................................... 4

ABREVIATION AND ACRONYMS .................................................... 5

EXECUTIVE SUMMARY .................................................................... 7
1. INTRODUCTION ................................................................................ 8
2. OBJECTIVES AND METHODOLOGY ............................................... 8
3. STATEMENT OF THE PROBLEM .............................................................. 9
4. AN OVERVIEW OF MOZAMBIQUE’S ENERGY SECTOR .............. 10
5. INDEPENDENT POWER PRODUCERS .................................................... 11
6. ELECTRICITY SUPPLY - GENERATION .................................................. 12
7. TRANSMISSION NETWORK .................................................................. 16
8. INTERNATIONAL EXPERIENCE..................................................... 19
9. DISCUSSION AND ANALYSIS ........................................................ 25
11. CONCLUSIONS AND RECOMMENDATIONS ................................. 29
 ABREVIATION AND ACRONYMS

AGGREKO Temporary Power Generation Company

CMH Companhia Moçambicana de Hidrocarbonetos

CNELEC Conselho Nacional de Electricidade (National Electricity Council)

CPI Centro de Promoção de Investimentos (investment Promotion Centre)

CTM Central Térmica de Maputo

CTRG Central Termica de Ressano Garcia

Discos Distribution Companies

EDM.EP Electricidade de Moçambique Empresa Publica

EEP Eastern Electricity Project

ENMO Energia de Moçambique

ENH Empresa Nacional de Hidrocarbonetos

ESKOM Electricity Supply Commission

EU European Union

FUNAE Fundo de Energia

Gencos Generation Companies

GoM Government of Mozambique

GSAs Gas Supply Aggrements

GWh Gigawatt hour

HCB Hidroeléctrica de Cahora Bassa

HMNK Hydroelectric of Mphanda Nkuwa SA

HVAC High Voltage Alternating Current

HVDC High Voltage Direct Current

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INP Instituto Nacional de Petrólio

IPP Independent Power Producer

kV Kilovolts

KWh Kilowatt hour

MGC Matola Gas Company

MOTRACO Companhia Moçambicana de Transmissão

MOZAL Aluminium Smelter

MPUP Master Plan Updated Project

MW Megawatts

NERC Nigerian Electricity Regulatory Commission

PETROMOC Petróleos de Moçambique

PPA Power Purchase Agreement

PPP Private Public Partnership

REN Redes Energéticas Nacionais

SAPP Southern African Power Pool

SEB Swaziland Electricity Board

SHER Sociedade Hidroélectrica Revue

SMAE Serviços Municipalizados de Águas e Energia
SME Serviços Municipalizados de Energia

STE Sistema Nacional de Transporte de Energia

TEM Transitional Electricity Market
WESTCOR Western Power Corridor
EXECUTIVE SUMMARY
Although Mozambique is fortunate to have substantial untapped natural energy resources
including hydro-power, coal, natural gas, bio-fuels and petroleum, in recent years a failure of
planning to provide adequate power for the rapid economic growth which the country is now
realizing has today resulted in a situation where many areas experience regular blackouts, and
others face the prospect of load-shedding for years into the future.

Government policy has focused on prioritizing the extension of the national grid to rural,
economically disadvantaged citizens with the limited resources that have been made available
to the national energy utility Electricidade de Moçambique (EDM). This policy objective
succeeded by January 2012 in achieving a total number of 1,024,000 connected customers in
all regions and provinces of the country. At the same time construction of extensive new power
transmission infrastructure was realized, reaching across more than 5360 km with transmission
capacity of about 5500 MVA across the national territory.

However, the grid extension effort has left the country with a critically under-maintained legacy
network with scant backup provisions and a high degree of reliance on a single energy source,
namely hydro power. Natural disaster and operating failures have led to total blackouts for
periods of weeks in each of the past two years, with substantial losses to the national economy.
In addition, Mozambique suffers from administrative, transmission and distribution losses
totaling 27% of power generated which further exacerbate the country’s increasingly acute
energy shortage.

A situation ripe for investment in generation and distribution by private operators, alone or in
conjunction with public entities has been compromised by inappropriate tariff structures and a
slow process of legal and regulatory reform that has failed to keep up with the pace of demand
growth. The tariff subsidy extended to all customers irrespective of their location entails EDM
operating at a loss, a situation compounded by the increasingly frequent requirement to
purchase expensive power from a small number of independent power producers (IPPs) or from
foreign sources. While several projects are underway or pending approval, there exists an
urgent need to accelerate the construction of additional and alternative sources of power and
the necessary transmission infrastructures to deliver power to load centers with cost effective
rates.

Mozambique’s accelerated development zones could be catalysts for an intensified generation

effort but require more flexible interpretation of existing incentive regulations to bring forth the
necessary supply. Policies aimed at unbundling integrated national power utilities, introduced in
other sub-Saharan economies have helped bring forth resources and added a dynamism to
national power sectors which their governments had previously failed to provide, although not all
such initiatives may be suitable in the Mozambican context. The lack of a developed domestic
capital market for potential investors and limited access to overseas finance adds further to the
urgent need for government to act.

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 1. INTRODUCTION
Mozambique is a fortunate country from the perspective of its significant untapped natural
energy resources (hydro-power, coal, natural gas, bio-fuels and petroleum), sufficient to assist
in meeting energy shortages in neighboring countries of the region.

The bulk power potential represented by known hydropower resources is estimated at 12,000
MW, while resources of offshore gas and coal reserves are estimated at 277 trillion cubic feet
and more than 20 trillion tons respectively. Proven onshore natural gas reserves of ± 3.5 trillion
cubic feet (Pande, Temane, Buzi) and considerable biomass and biofuels potential exist with the
country’s more than 30 million hectares of unused arable land, while wind, solar and tidal power
potential are still under evaluation.

The power sector thus plays a vital role in the economy of Mozambique and is increasingly
becoming as a key component of national production as well as an economic input indicative of
the progress of a people.

During the last 10 years the sector has seen remarkable changes with rising electricity supply
gaining momentum with expansion and intensification through specific policies and clear targets
from the government, for both on and off grid electrification programs.

The Ministry of Energy and Mineral Resources (until January 2015 two separate ministries) is
the central organ of the state which according to the mission, vision and tasks set by the
government, it guides, plans, promotes and controls the inventory and use of energy resources
and the development and expansion of the network supply and distribution of electricity, natural
gas and petroleum products.

By January 2012 EDM had attained a total number of 1,024,000 connected customers. Despite
the fact that 78% of new connections are through installation of pre-paid meters, new
connections have extended into the poorer households, an important policy objective.

2. OBJECTIVES AND METHODOLOGY

The specific objectives of the study are to:

1. Raise public awareness of the continuing national energy deficit and its implications for
Mozambique’s business environment;
2. Contribute to the discourse around the role of State in the Electricity Sector and the need
to stimulate public and private investment in the downstream energy supply;
3. Stimulate activities and suggest measures in order to allow Mozambique to create the
necessary capacity to meet growing demand ahead of the rapid development phase in
the country’s developing natural resources sector.
 3. STATEMENT OF THE PROBLEM
Mozambique has a considerable number of investment opportunities in its productive sectors,
which makes it an attractive destination for potential investors from all over the world.
Nevertheless the lack of sufficient generation, transmission and distribution infrastructure in the
electricity sector is currently impeding growth.

In the private sector, the main concern is the inability of EDM to meet electricity demand both in
terms of availability as well as reliability of power supply, limiting operational and productive
capacity and thus forcing investors to provide their own, universally more expensive sources of
reliable power outside the national grid, thereby elevating the cost of investment.

During the same decade when broad national electrification was being improved, industrial
development began to emerge but with no significant new accompanying investment in
generation and transmission to respond to industry’s growing demands. As a consequence,
what in 2008 was officially referred to as a capacity surplus [by EDM] became quickly a
disturbing capacity deficit that forced the national utility EDM, to contract outside for the
provision of expensive energy during peak hours and start load shedding procedures in some
areas in the north (Nacala) and center (Beira) of the country, during four peak demand hours
per day [EDM].

EDM´s available generation capacity at present comes from the contributions of Corumana,
Mavuzi, Chicamba and the HCB hydro power stations, totaling roughly 565 MW. Since 2011,
load has exceeded this capacity, giving rise to a new era, characterized by excess power import
from the SAPP to satisfy the country’s increasing electricity demand. In 2013 available
generation capacity was 614 MW including imports of 95MW.

The system peak load in EDM was 709 MW in June 2013 with an energy consumption of
approximately 4,538 GWh, within EDM’s Northern, Central and Southern grid. According to the
load forecast generated in the Master Plan Update 2012-2027, an average growth of 12.5 % is
expected over the coming years.

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TABLE1: MOZAMBICAN NATIONAL ELECTRIC POWER NETWORK: MEDIUM
LOAD FORECAST

Considering the rapid load growth being registered in the country, there exists an urgent
need on a short, medium and long-term basis to promote the construction of additional
and alternative sources of power and the creation of transmission infrastructures to
deliver power to load centers with cost effective rates.

EDM sustains technical and administrative losses that amount to 27% of total budget further
contributing to its financial problems. These result either through power delivered but unbilled or
through thefts (revenue losses) or transmission losses in sections of the network due to lack of
reinforcement and maintenance to match growth in load. EDM’s stated aim is to reduce losses
by 50%, relative to consumption until 2024.

According to the Electricity Master Plan, considering current electricity tariff levels, a substantial
increase is required (to about $0.13-14 kWh) to support the development of a new generation of
user and the substantial transmission system investments that are necessary to meet the
growth and eliminate current limitations on the system.

4. AN OVERVIEW OF MOZAMBIQUE’S ENERGY SECTOR

The Energy Sector, comprising all forms of primary and transformed energy sources involves a
number of stakeholders that includes:

 The Council of Ministers with responsibility for setting policies, strategies and
regulatory tools to enable the development of natural resources for economic
benefits in association with environmental responsibility.

 The Ministry of Energy and Mineral Resources, supervising the electricity portfolio
including New and Renewable Energies (NREs) and also in charge of oil and refined
oil products (liquid fuels), natural gas, and coal among other mineral resources;

 CNELEC (Conselho Nacional de Electricidade), the electricity independent regulator.

Its scope is under revision with the aim of broadening and strengthening its role. It is
expected that the outcome will be an overall energy sector Independent Regulator
whose scope will be extended to the distribution of natural gas and liquid fuels.
  EDM EP, a state-owned and vertically integrated utility that is responsible for the
generation, procurement, transmission, distribution and sale of electricity. A great
portion of the rural and peri-urban electrification program via grid extension is being
implemented and sustained by the utility.

 Hidroeléctrica de Cahora Bassa (HCB), an IPP owned by The Mozambican state

(85%), Companhia Eléctrica do Zambeze (CEZA – 7.5%) and Redes Energéticas
Mozambique Nacionais (REN) of Portugal (7.5%) respectively. HCB owns and
operates a hydro power plant with an installed capacity of 2075 MW with a long-term
Power Purchase Agreement (PPA) with ESKOM of South Africa, EDM as well as
ZESA of Zimbabwe to whom it supplies power via an HVAC line owned by EDM.

 Mozambique Transmission Company – MOTRACO was created as a joint venture

transmission company between Eskom, EDM and Swaziland Electricity Board (SEB)
with the status of a partnership between public and private entities, with each
company owning 1/3 of the shares. In essence MOTRACO operates and maintains
the 400 kV network system based on the network’s 400 KV transmission parallel
lines.

 FUNAE, established as a public institution in charge of developing, producing and

making use of different forms of low cost power production and distribution for off-
grid rural electrification. It promotes the conservation, rational and sustainable
management of power resources.

 INP (Instituto Nacional do Petroleo) sharing a regulatory role in the Oil and Natural
Gas Subsectors with the Ministry of Energy and Mineral Resources.

ENH (Empresa Nacional de Hidrocarbonetos), a state owned company for the

development (extraction, transformation and distribution) of hydrocarbon resources.
It was established in 1981 as a state company changing to a Public Company in
1997.

 CMH (Companhia Mocambicana de Hidrocarbonetos); a private company in the

natural gas sector with a number of projects with SASOL, a South African
concessionaire of the onshore gas deposits in Temane and Pande, Inhambane.

 Independent Power Producers

The development of IPPs is underway in the power generation sector

At present Aggreko (100 MW) consisting of multiple prefabricated units operates in a

short term contract, while the developments Ressano Garcia Central Termica
(CTRG), Nkondezi, Moatize, Vale and others are in varying stages of progress with
their respective plans.
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  PETROMOC, responsible for the commercialization of refined oil fuel

 MGC (Matola Gas Company), a company distributing gas to industries and

transports in the Matola and Maputo areas.

FIGURE 1. INSTITUTIONAL AND REGULATORY FRAMEWORK OF THE ELECTRICITY INDUSTRY, 2014

5. ELECTRICITY SUPPLY - GENERATION

During the year 2013 the total supply of electricity generated in the country excluding
consumption by the MOZAL aluminum smelter was 4,538 GWh of which 4,084 GWh was
purchased from Cahora Bassa, 251 GWh from own generation, 95 GWh from Thermal IPP and
108.2 GWh from imports, the latter representing 2% of the total.

Although only less than a quarter of its technically feasible potential has been developed,
hydropower has been the main source of electricity supply in Mozambique thus far, with as
much as 95% of total generation.
 FIG.2 - ENERGY MIX IN 2013 [EDM]

Fig.3 illustrates the evolution of the electricity matrix since 1955 to 2012. It can be noted that
during 1955 to 1973 demand was met by the contribution of thermal generation respectively in
the south region (CTM supplying Maputo and Matola areas), the contribution of hydro schemes
in the center (supplying Chimoio and Beira with a link for emergency supplies to the town of
Mutare in Zimbabwe) and scattered diesel generators all over the country.

Commercial operation of HCB started in 1975 contributing significantly to the load diagram up to
1981, until the transmission infrastructure suffered from severe sabotages, thus giving renewed
urgency to call for imported energy for Maputo, while generation from coal continued to
decrease thanks to ageing, inefficient equipment and logistics problems during the civil war.

After the signature of the Rome Accords peace agreement in 1992, and major reconstruction
works on the HVDC link between Songo and Apollo, HCB’s

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 FIG. 3 - ELECTRICITY SUPPLY BY FUEL/SOURCE [EDM]

contribution to the country’s energy needs restarted and it soon became the most important
power supplier nationwide complemented by two small hydro schemes belonging to EDM.

Only in 2012 came the construction at Gigawatt Park/AGGREKO in the Ressano Garcia area of
an emergency containerized power plant installation of 107MW (phase I) and 130 MW (phase II)
MW. The facility is fueled by natural gas under a PPA with NamPower, ESKOM and EDM
(15+17 MW).

At the same site, Central Térmica de Ressano Garcia (CTRG), a 175 MW power plant using
combustion engines will be launched into the grid under a PPA with EDM in the first quarter of
2015. CTRG is a result of a joint venture between SASOL (that owns similar plants in South
Africa) and EDM.

Also during the first quarter of 2015 EDM plans to launch the process of selection of an
Engineering, Procurement and Construction (EPC) contractor for the construction of one 100
MW gas fired plant located at the Central Térmica Maputo (CTM) site, financed by the Japan
International Cooperation Agency (JICA). In parallel a project to convert diesel to natural gas
generation is on-going, where two gas turbines BBC (32MW) and ALSTHOM (25 MW) at the
same location are being negotiated with a foreign contractor. The gas supply to the new 100
MW power plant will provide commercial anchors, hence turning feasible the ongoing plans for
domestic gas distribution in the Maputo and Marracuene areas.
Following small scale domestic gas distribution undertaken by the Empresa Nacional de
Hidrocarbonetos (ENH) in the Vilanculos area, a major project for distributing natural gas in
Maputo and Marracuene into households is being implemented by a consortium established
between ENH and KOGAS, a South Korean Company.

As it can be seen above, natural gas is about to play a significant role within the current energy
crisis as a short term response to meeting demand and to addressing the limits of the
transmission network in the south region, as a result of:

 Gas availability both from royalty quota and commercial

 Very urgent need of electricity
 Speedy erection
 Operational flexibility and standard technology

Although Electricidade de Mocambique is the entity with responsibility for generation,

transmission and distribution of electricity it has fallen short in the task of unlocking the country’s
potential for generation. Even before 1997 when EDM held the monopoly of the electricity
business in the market only Lucheringo (0,680 MW) and Cuamba (1 MW) mini-hydro plants and
Corumana hydro plant (16 MW) were developed from greenfield. Temane gas power plant (11
MW) is a result of ENMO’s failure to provide power to Vilanculos in 2003 and has been
expanded as the load grows. Almost no resources were allocated by EDM during this period for
backup power plants.

The current scenario where a rate of increase in peak demand of around 12,5% per annum
since 2009, reaching 709 MW in 2013 is obliging the utility to source additional power either
from imports (ESKOM at a cost of $0.25/Kwh) or IPPs (AGGREKO at a cost of $0.15/KWh)
against the PPA with HCB at a cost of $0.036/ Kwh [EDM] will certainly motivate Electricidade
de Mocambique to look for innovative ways to cope with the crisis.

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 FIG.4 - PEAK DEMAND TREND

In addition to the significant increase in demand, there is insufficient capacity to support the load
increase and an ageing and poorly maintained network – resulting in 27% of losses – has begun
to impose severe load transfer limits. As a result, the Centre and Centre-North networks are
now under load shedding schemes during peak hours resulting in loss of production in the
industry.

Emergency power needs in Nacala forced the national utility to reintroduce generation from
traditional fuel into EDM’s power portfolio, a practice that had been considered outmoded. To
this end, it announced the lease of an 18 MW temporary facility to cope with peak demand
[www.edm.co.mz]. This highly undesirable but unavoidable scenario is one which might easily
have to be repeated in other cities and towns.

6. TRANSMISSION NETWORK
Projects under Implementation

Recognizing that as demand grows, transmission and distribution systems become exhausted
with severe economic and social impact, a number of network reinforcements are under
implementation or committed for implementation in the short term while others were identified as
Priority Projects 2012-2018 within the scope of the Electricity Master Plan. From the ongoing
network reinforcement activities the following are worthy of mention:

 Chicamba and Mavuzi Power plants rehabilitation

 Reinforcement of several substations in the Northern grid
 New 275 KV line from Ressano Garcia to Macia
 New 400 KV from Caia to Namialo
 Upgrading of distribution networks
Projects under Proposal

To complement this effort of strengthening the system, the planning Directorate of EDM
[Electricity Master Plan] identified the following project proposals (still requiring feasibility
studies) as of priority and to be implemented within a time frame of 5 years. Some of these
projects are at operational stage while others have to be confirmed via a feasibility study:

Northern Region:

 Rehabilitation of Central Northern Substations and Reinforcement of Nampula city

network
 Reinforcement of Pemba City network
 Reinforcement of Nacala city network
 Construction of the Nampula – Angoche line

Central Region

 Construction of 220 KV Dondo–Manga line and Reinforcement

of the Sofala network
 Rehabilitation and reinforcement of Tete network
 Rehabilitation of Chimoio city network
 Rehabilitation of 11KV Network at Quelimane

Southern Region

 New Beluluane 275/66 Kv Substation project

 Rehabilitation of Infulene Substation
 Reinforcement of the Boane Matola Gare Network
 Rehabilitation of the CTM 66Kv SWGR
 Spare 400/275 KV Substation
 Maputo Infulene 275 KV line

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 FIG 5 - MOZAMBIQUE’S ELECTRICAL NETWORK [EDM]

The current status of grid extension to rural areas and intensification in peri-urban areas
enabled the connection of all provincial capitals by 2007 and 120 district capitals in 2014
increasing the population with access of on grid electricity to 26% in 2013.
 7. INTERNATIONAL EXPERIENCE

Other countries in Sub Saharan Africa and beyond have faced similar power crises at
corresponding critical take off moments in their development and from their experience there is
a rich body of examples both positive and negative, as well as lessons learned, which
Mozambique can draw on today. The section below gives an overview of recent international
experience.

Kenya

In Kenya, a Master Plan for the entire economy has been developed, known as “Kenya Vision
2030” and within it is contained a very definite strategy for the power sector. Currently with an
electricity generation capacity similar to Mozambique’s at around 1700MW, but a population
almost twice our size, Kenya nevertheless has largely avoided the systemic power shortages
that are at this stage endemic in many parts of Mozambique.

Although population growth is above 3% annually, to date per capita power demand has until
recently not risen significantly; nevertheless, within the Kenya national energy plan, it is aimed
to approximately triple generation capacity in just over three years in a strategy that national
utility KenGen’s chief executive Simon Ngure describes as avoiding a “load following” strategy,
but rather anticipating, planning and building for more rapid future growth.

To that end Kenya has embarked on a multi-faceted programme of capacity expansion, that
initially relies on industry having to resort to expensive temporary power solutions but which is
intended to result, over the medium term in an annual reduction in average retail and industrial
consumer rates from the currently near-prohibitive average tariff of around $0.18/kWH.

The capacity expansion goal is to be achieved through expansion of a mix of sources, including
new coal-fired generation plants, some expansion in the current unreliable domestic
hydroelectric power resource, and including a joint venture to allow access to neighbouring
Ethiopia’s much larger hydro resources via the Eastern Electricity Project (EEP), and from a
bold pioneering expansion in geo-thermal power generation – a source which is one of the most
expensive options to build in terms of initial capital outlay but which then yields some of the
cheapest electricity available once operational.

Sourcing the necessary finance and creating a suitable climate for investment, both public and
private, for the future power sector investment needs of the country are critical elements in
Kenya’s route to capacity expansion. By comparison with other countries in the East Africa
19
region, including Mozambique, Kenya is fortunate to have a relatively mature indigenous
financial sector including active domestic equity and debt markets, with links to capital markets
internationally as well as sources of public and multilateral finance.

In 2010 KenGen embarked on a partial privatization program which led to the sale of 30% of the
company’s shares to the public. In a radical structuring of the sector, transmission, generation
and distribution were unbundled, with IPPs participating most actively in generation while
transmission and distribution were devolved into through the development of the Private Sector
Power Generation Support Program, funded in part by the World Bank. Kenya now has seven
IPPs up and running and contributing some 20% of total national generation capacity. In 2013
the IPP sector played a major role in bringing an additional 668 MW on stream into the national
grid through development of new generation projects.

Due to the rapid connection of urban and commercial consumers to the grid, Kenya Energy
Regulatory Commission (ERC) now estimates a growth in national demand of some 11%
annually. However, according to Kenya Power, the national power distribution entity, the cost of
connecting an additional consumer has gone up from $823 to $1,176 due to the huge capital
needed to invest in new transmission infrastructure.

Importantly, however, despite the large capital investment needed to improve and extend
transmission infrastructure, which remains in the hands of the Kenya Electricity Transmission
Company, generation capacity has been expanded greatly with the partial devolution of
operations to the private sector, while the very different financing needs and long term
investment time horizons of the transmission sector are not holding back delivery of additional
power supply in the shorter term due to competition for scarce resources within the same entity.

Nigeria

The power generation shortfall in Nigeria at the outset of the country’s recent privatization
process can be described as nothing short of catastrophic, with an estimated 5GW or less being
delivered to a country of 170 million inhabitants via the national grid, as against a global
average of approximately 1 GW per million inhabitants. In addition it was estimated that as of
2013 an additional 25GW was being generated in the country by captive industrial sources and
by commercial users independently of the national grid.

In terms of its resources and indeed its massive power shortfall at the time of the plan’s
implementation, the similarity with the Mozambican situation can be seen at least in nature if not
in scale. While the Kenyan Vision 2030 strategy seeks to avoid load following, seeking instead
to plan for future needs, the Nigerian situation more resembles our own in the sense that long
term planning is not sufficient, while still necessary, as the shortfalls inhibiting growth,
employment and human development are already present and pressing and requiring urgent
solutions today.

Financed initially by the country’s local banking sector and private investors, by the end of 2013
a total of five out of the existing six power generation companies (gencos) had been privatized
and 10 out of the 11 distribution companies (discos) had also been sold off into private
ownership. The clear mandate given to the new operators was to focus on delivery of capacity
to the grid intended for the residential customer, with industry regarded as the second priority
given its ability to source captive power, as well as likely political considerations going into the
country’s 2015 elections.

In addition, Nigeria secured a contract for the upgrade of the transmission infrastructure of its
national power grid, at the same time signing a three-year contract with Manitoba Hydro
International to operate its power transmission network for a three-year period.

Investment required in new transmission equipment was estimated at $2.4 bn. much of which
was raised locally, giving the banking system considerable exposure to Nigeria’s reforming
power sector. Further funding was sought from foreign institutions, which proved more
challenging due to problems at the regulatory level as well as the obstacle of local currency
volatility – gencos and discos earnings in naira would have to be used to service debt normally
denominated in dollars.

The scale of the funding required later proved too great for an already overstretched Nigerian
banking sector, and recourse to Development Finance Institutions became the preferred option,
where funding availability was however also limited.

Another serious issue encountered has been the mismatch of appropriate funding tenor
availability with the needs of the sector: whereas power asset investments often involve
purchases of equipment with a life of 20 years or more, the availability of funding in the Nigerian
market rarely goes beyond loans of a few years maturity, further complicating funding for
operators.

The government announced a transitional regime for tariffs and off take arrangements which
was to be brought in after an initial phase, to provide security of revenues and contract
enforceability for operators under a Transitional Electricity Market (TEM).

21
TABLE 2: POWER GENERATION PER CAPITA, VARIOUS COUNTRIES, ROUNDED
TO 0.1 GW

Country/ 2011 Total Electricity Population 2011 Electricity

Region Installed Capacity (GW). (m.) per Cap. (GW)

Africa 137.7 1,000.0 0.1

Brazil 119.1 202.7 0.6

Egypt 27.8 87.0 0.3

Ethiopia 2.1 96.6 0.0

Europe 1,024.3 509.4 2.0

France 130.4 66.3 2.0

India 237.9 1,236.3 0.2

Kenya 1.7 44.6 0.1

Mozambique 2.2 24.6 0.2

Nigeria 5.9 177.2 0.0

Russia 231.6 142.5 1.6

South Africa 44.3 48.4 0.9

Turkey 57.0 81.6 0.7

United Kingdom 93.2 63.7 1.5

United States 1,052.9 318.8 3.3

Average -- -- 1.1

Revenue collection nevertheless proved more challenging than initially expected, with a shortfall
of paying customers, amid widespread bribery of technical staff allowing customers access to
non-metered electricity supply.

After considerable delay, in late 2014, TEM was announced by the Nigerian Electricity
Regulatory Commission (NERC), establishing PPAs and Gas Supply Agreements (GSAs)
between gencos and their customers within a regulated market structure.

The system has continued to encounter problems however, not only in financing but also in the
delivery of power across the country’s woefully inadequate infrastructure. One issue that
contributed was the deferral of capital spending plans and maintenance activities by formerly
state operating entities in the transmission sector ahead of the asset sales, leaving the quality
and operability of infrastructure impaired at handover.

The highly profitable diesel supply and individual generator companies played a part in delaying
the transition as well, unwilling to cooperate fully in the dismemberment of the large and long-
standing market for their products.

An additional issue has been the pricing and availability of gas for generation. At present, the
tariff is too low to bring forth the investment needed privately to secure supply for generation.
While Nigeria has access to plentiful natural gas, much of it is not in the areas where generation
has to take place, necessitating costly pipeline investment.

23
The impaired and inadequate transmission infrastructure is a further problem, with upgrading
failing to keep pace with new generation despite the demands of the end user and the ability in
principle to pay for supply. This results in so-called ‘stranded’ generation, serious problem in
many countries and one which in Nigeria has already reached an estimated 1500 MW of
generation, across a network which can ill afford to see power wasted through lack of
deliverability.

Nevertheless, new gas supply projects are coming on stream in the near future, encouraged by
the government’s commitment to dedicate a 75% share of production to the power generation
sector.

Angola

Angola, the second largest oil producer in Sub Saharan Africa after Nigeria, is beset with
infrastructure deficiencies across the board, much of which, in common with Mozambique, is the
legacy of an extended period of civil warfare in the late twentieth century. Despite concerted
efforts in recent years to rectify the situation, power shortages compound the overall
infrastructure and logistics environment impeding progress in all areas of the Angolan economy.

The macroeconomic and business environment also has similarities with Mozambique’s with a
volatile current account exacerbated by dependence on oil revenues as well as a concentration
of trading partners internationally, with the EU and Portugal in particular playing a major part.
According to the World Bank Angola ranks 181 out of 189 countries for overall ease of doing
business, while Angola’s power sector can be considered as one of the least efficient in Africa.
Access to electricity, which is generated two-thirds from hydroelectric plants and the remainder
from thermal plants is challenging.

Nevertheless, the government’s investment program includes expenditure of USD18bn over the
2009-16 period to expand hydroelectric and thermal generating capacity to 7,000 MW and to
extend the country’s transmission network. Longer term, plans exist to link Angola’s national
grid to the Southern African Power Pool (SAPP) and the Inga III project, part of the DRC’s
Western Power Corridor (WESTCOR).

Mozambique’s recent experience and current challenges cannot be directly compared with
developments in its regional African peers outlined above, as differences in resources available
as well as priorities for the future exist. Two of the three, Nigeria and Angola, are major
hydrocarbon producers, while Kenya, with a relatively mature and diversified economy by
regional standards is also in the process of developing offshore oil and gas potential.

Thus, while similarities to Mozambique exist in all three of these countries, measures taken thus
far by governments to address critical power deficits have varied enormously. Willingness to
relinquish economic management to domestic and international private sector actors, the
chosen route in Kenya and Nigeria, has by no means been embraced, to the same extent, as
yet, in Mozambique and Angola.
Nevertheless, there is an increasing realization by all that efficiencies are to be gained in the
unbundling of functions, notably of splitting off generation operations as well as distribution to
the consumer, while transmission network development and maintenance, due to the nature of
the investments involved, for the most part has been an area where all governments have
sought to retain maximum possible control.

In general, Mozambique comes to this process at a relatively late stage compared to the
regional partners surveyed above, whether in respect of policy implementation or in the maturity
of the major sectors of the economy which the national power capacity will need to service.
Overall, as far as policy formulation can benefit from the outcomes realized by others and in as
much as lessons can be learned from outside, some common elements are valuable in
recommending a way forward in the Mozambican environment.

8. DISCUSSION AND ANALYSIS

Intermittent and inadequate supply of electricity impacts the industrial sector in particular since
production has to be interrupted if no (expensive) alternative sources are located.

Generation devolved closer to the regions of consumption is surely a valid approach to

achieving a less vulnerable electricity supply system. The existing potential and the growing
demand should naturally fuel entrepreneurship in the development of new sources of supply.
Why is this not happening?

A retarded reform process evidenced by e.g. the revision of the electricity law which started in
2011 and is not yet completed and the grid code which is still to be approved are factors
negatively impacting investor interest. These shortcomings can be seen as an institutional lack
of commitment to sector reform

The oil and gas law should be a useful tool in governing this emerging sector. Business Monitor
International was recently cited by Jornal o Pais as having said that excessive “resources
nationalism” would refrain investors’ enthusiasm due to its clearly stating that a quarter of all
production of oil and gas products has to be used to spur domestic industries and consumption.

In our view, while the intention of the law is to ensure direct benefits to the country from these
resources, what will actually determine the amount of oil and gas for domestic use will be the
internal market itself and its ability to perform.

To date 27 MGJ +9 MGJ (royalty) is available from SASOL’s production at Temane for the
national market. According to Law 21/2014, 45 MGJ out of 183 MGJ/a produced by SASOL are
readily available at a price to be defined by the government (art. 35 nr 2).

25
 9.Electricity cost of supply versus tariff charged
The policy of universal standardized price access to electricity means an increased overall unit
cost of supply with no corresponding positive impact on revenue as the majority of new
consumers lie below the social tariff level. As per Energy Policy Directives electricity suppliers
are expected to commit to serve the customer with high quality and low cost electricity to ensure
the human right to development which is not achievable without access to sustainable energy.
The differentiation in tariff is set by consumer categories and by consumption levels rather than
the cost of supplying power.

As in any business the cost of production and unit sales price determines performance. In
Mozambique every citizen has the right to enjoy the benefits of electricity at the same rate no
matter his location. Irrespective of the fact that the same principle is not applied to e.g. sea food
or indeed liquid fuels for that matter, it is an acceptable philosophy that avoids the arbitrary
approach.

PPP Investments
The Government of Mozambique, mindful of its lead role in enabling economic activity, has
approved a number of investment incentives and set up a facilitating institutional framework to
operationalize this objective. Government bodies were set up with CPI in investment promotion,
and Gazeda, the Office for Economic Free Trade Areas with Accelerated
Development, designed to promote rapid development clusters with preferential fiscal regimes
and strategically located across the country. Beluluane Industrial Free Trade Area, the location
of the aluminum smelter Mozal, together with the Special Economic Zones of Nacala, Beira, and
Mocuba in Zambezia are examples of areas enjoying a number of incentives with the aim of
promoting the industrial production of goods both for export and domestic consumption.

Normally the special economic zones are confined to pre-determined geographic locations.

As inter-institutional planning is still a challenge for economic management in the country, often
the electricity (and water) suppliers for example are not present at the negotiating table nor
involved in the licensing process. The result is regular project backlogs due to the lack of those
institutions’ inputs.

Specifically, to ensure availability of power and thus viability of the accelerated development
zones, the lead institutions should estimate needs in electricity (and water) in the early planning
stages by involving the utilities.

Following this stage the utility should choose the best possible way to supply the special zone
via a designated source that would be developed under the same incentives as if it were located
within the limits of that specific special zone including the transmission component.
Instead of subsidizing consumption of power, incentives would effectively subsidize the
generation of power to promote the productive use of electricity at an affordable rate reflected
in the final price of goods.

FIG 6. - GENERATION PROJECTS (HYDRO & THERMAL) BY LOCATION

Thermal Power burning Natural gas will play a capital role in the south (Maputo and Ressano
Garcia areas) as it can be seen in the next table illustrating some generation projects under
implementation:

27
 TABLE 3 - GENERATION PROJECTS UNDER IMPLEMENTATION
Generation Projects under implementation
(at different development stages)
Expected Commissioning year
2015 2016 2017 2018 2019
Project Fuel
(MW) (MW) (MW) (MW) (MW)
CTRG Gas 175
Kuvaninga Gas 40
Electrotec Gas 100
Gigawatt Gas 100
Moatize Coal 50
ENI Gas 75
Benga Coal 300
CTM Gas 100
Nkondedzi Coal 300
Total/ year 215 200 125 400 300
Total Cumul 215 415 540 940 1240

Such an approach would act as an enabler for projects such as Lurio (Hydro 120 MW + water to
Nacala Special Economic Zone), gas power plants at Ressano Garcia, and Massingir Hydro for
the Beluluane Industrial Free Zone; Tsate and Mwenezi (Hydro 60 MW at Revue basin for the
Manga Special Economic Zone at Beira), Mutelela (60 MW) or Malema (60 MW) hydro projects
for the Mocuba Special Economic Zone.

The full adoption of the incentive mechanisms already in place could motivate developers in a
more expeditious way than through the PPA route and a cost reflective tariff might be ensured
on long term basis.

Several power projects in the coal mining areas at Tete are now on hold awaiting roll out of the
STE project while neighbouring Malawi starves for electricity and even the new railway linking
Moatize to Nacala could have been realized through electric traction by using the electricity
produced from abundant thermal coal available locally.

This sort of arrangement would result in the following immediate advantages:

 Energy matrix diversification

 Network stabilization due to the existence of several generation connections to the
grid
 System flexibility and avoid high levels of vulnerability as shown in Fig.7
 Improve the available clean electricity for exportation, thus contributing to mitigate
regional carbon footprint.
FIG. 7 - ELECTRICITY SUPPLY DEPENDENT ON SINGLE SOURCE OR NEAR-SINGLE SOURCE [EDM]

10. CONCLUSIONS AND RECOMMENDATIONS

Electricity consumption growth in urban, peri-urban and rural residences, industries and other
commercial enterprises are key contributors to a country’s socio-economic growth. Availability of
electricity will be a catalyst for industrial growth, employment, productivity and development of
related business and commerce. Agro–industries will be important catalysts in the rural areas
associated with productivity and income dynamics, informal and formal goods and service
suppliers to the large industries. Industries will continue evolving and new business will be
attracted to set up in Mozambique.

The analysis presented above and the discussion which follows, together with the benefit of
comparable experiences of regional peers, demonstrate that creating an environment that
investors can feel comfortable with, whether through appropriate levels of unbundling of state-
owned assets or otherwise, setting workable cost-reflective tariffs, outsourcing of management
in the short term while developing local skills for the long term, are all priorities to be addressed
in policy formulation.

At the same time, raising performance and ensuring maintenance of existing assets, controlling
costs while monitoring distribution and ensuring better contract enforcement are elements
29
where improved implementation has featured in the above countries’ experience. Each of these
components is common to Mozambique’s situation and need to be addressed within future
overall power sector strategy.

Unbundling of upstream and downstream operations

How can energy stakeholders best promote successful large-scale change in the electricity and
electrification business? Unbundling of operations at the generation and distribution levels have
been clearly shown to offer superior alternatives in comparable situations and have yet to be
given free rein to flourish in the Mozambican context.

In order to mitigate the continuing crisis situations in a short term basis, this study recommends
interventions in three distinctive areas: generation by opting for alternative sources of power,
transmission infrastructures to deliver the power thus eliminating bottlenecks and distribution by
introducing a rational use of power (including demand side management).

Although operators are still shy of the Mozambican market, private initiatives are appearing at
the upstream level. Several generation projects promoted by private entities are in the pipeline.
At the transmission level the sole exception of non-public intervention is the Motraco case which
is nevertheless a valuable precedent and a clear sign that the transmission monopoly assigned
to EDM by law can be bypassed in the face of strong imperatives. What then should happen at
the downstream level?

Energy together with people, need to be recognized as key ingredients for development.
Therefore, the Ministry of Economy and Finance through CPI, GAZEDA and other institutions
must design clear action-oriented programs toward the goal of transforming Mozambique into a
regional energy giant.

A complete Master Plan for gas including a specific program of transforming Gas to Power is
highly recommended. To promote distributed generation for network stabilization, lower the
vulnerability of long distance loads and enhance local content of distributed power special
geographical incentives should be mapped

PPP Mini-Grids

To ensure efficient distribution of electricity at a local level it seems that the establishment of
local private-public distribution entities (“mini-grids”) to service the network within clear terms of
reference and targets for new connections would help.
The profit made by such entities would mirror and substitute savings in costs currently incurred
by EDM’s operating inefficiencies. Such on-grid to mini-grid transmission would be achieved by
buying bulk electricity from EDM to be distributed to consumers. To maintain standards all
expansion projects – normally subsidized by the government and partners – would be
implemented by EDM. In theory however, future local generation e.g. from domestic solar units
could also be re-sold back into the network as could any surplus generation from the mini-grid
be re-sold to the national grid.

How best to define, regulate and manage such private-public mini-grids?

In a pilot stage every distribution load up to e.g. 10 MW could be considered. Appropriate

management e.g. retired skilled employees from EDM or from other comparable experience
internationally should be motivated to take over such entrepreneurship in partnership with
municipalities. Pre-paid metering - still managed by the utility - could be maximized to collect
revenue and transparently share costs and revenues.

The relationship between electricity (water or gas) suppliers with municipalities is a natural one
as urban planning and development require in one way or another the cooperation of those
entities. As a historical reference, before independence the electricity supplier to Maputo city
was SMAE (Servicos Municipalizados de Agua e Electricidade) an entity that sourced its bulk
electricity from Sonefe, the company that owned and operated a coal-fired power plant.

Similarly, the company that distributed electricity in Beira was named after SME (Servicos
Municipalizados de Electricidade), which in turn bought its power from SHER (Sociedade
Hidrolectrica do Revue) a private company that erected the Mavuzi and Chicamba power
stations. Across the other provincial capitals both generation and distribution were also run by
the municipalities or local administrations.

Furthermore, across the border in South Africa, Citi Power is the electricity provider for
Johannesburg, not ESKOM. There is thus a wealth of examples both domestically and
internationally for the exploitation of such private-public structures to maximise supply and
reduce cost of local transmission and distribution.

Some years ago EDM initiated a process named “Separacao de Contas” by creating business
centres which were to clearly specify the requirements for every operational activity while
identifying inefficiencies as accurately as possible. If fully implemented, such projects could lead
to more municipalized electricity distribution through private business participation, leaving
public entities available to focus their upstream capabilities in excelling at generation, sourcing
and provision of electric to power the economy.

Such an unbundling of EDM’s generation, transmission and distribution is presented as the way
forward to greater efficiency together with leaner operational structures requiring effective,
skilled and committed manpower.

31
The load forecast produced in the MPUP dictates an exponential growth that will be reflected
within the country in a short, medium and long term basis, mainly as a result of the GoM’s
ambitious electrification program and of the large appetite from local/international investors
willing to develop large commercial/industrial activities to accommodate the recent coal mining
and natural gas exploration.

Therefore if no major interventions are made in the Electricity Industry in Mozambique, bearing
in mind the current power shortage, the load growth will have negative consequences creating
two major impacts:

- Possible rolling blackouts as supply fell behind demand which will force the utility to run with
load shedding schedules, similarly to Eskom’s 2007 event; and
- Retardation of the country’s socio-economic growth due to unreliable and non-security of
supply

Demand side management

It is recommended that EDM exerts efforts to change consumer behavior in demand of

electricity through a variety of methods including financial incentives and improving awareness
of supply constraints to aid load use optimization, as a short term solution.

This can be performed by allocating load (especially industrial sector load) from the evening
peak hours to be consumed at off-peak hours. The advantage of this approach is to improve the
use of available capacity in the power system and to save or postpone further investments until
resources become available.

Demand Side Management awareness education can be implemented in the following areas:

 Interruptible Supply; during emergency hours contracting large customers should cut
their consumption.
 Energy Efficiency: means of reducing customers’ total consumption at all times. e.g.
low energy lamps, solar power geysers, etc.
 Strategic allocation of load in the system: measures to encourage additional load in
the system during off-peak hours. e.g. agriculture irrigation, etc.
 “No go” this method is to deny/retard introduction of new loads into the system, a
technical approach resulting from the unavailability of power capacity to meet with
demand. Note however that this procedure contradicts the development goals of the
GoM.
 APPENDIX: LEGAL FRAMEWORK

The table below shows the legal framework that governs Investments, Special Industrial Zone
establishment and the power sector in general.

TABLE 3. LEGAL FRAMEWORK GOVERNING INVESTMENTS, SPECIAL

INDUSTRIAL ZONES AND THE POWER SECTOR.

Legal instrument Subject Observation

Law 3/1993 Investments law

Decree 43/2009 Regulation of the Investment law

Decree 4/2009 Code of Fiscal Benefits

Decree 56/2009 Regulation on Fiscal Benefits Act

Minis. Diploma Regulation on Custom Regime on

14/2002 the free Industrial Area

Decree 75/99 Labor regime for the Industrial Free

Zones

Decree 75/2007 Organization chart for the Special

Economic Zones Office

Decree 28/1995 Creates EDM - EP from EDM EE

created in 1977

Law 21/1997 Approves Electricity Law and Under revision

creates CNELEC (MoE)

Decree 24/1997 Creates FUNAE to spur off grid

access to modern energy

Decree 8/2000 Regulates the Electricity Law

Decree 25/2000 By laws of CNELEC

Decree 3/2001 Crude oil law

Decree 42/2005 Rules for industrial Electrical

installations. (Gen, Tran. Distrn.)

Decree 43/2005 Nominates EDM as the RNT

concessionaire

Decree 44/2005 Natural gas

33
 Resolution Approves Energy policy
5/1998

Resolution Approves Energy34 strategy

10/2009

Decree 1/2010 Tariff for electricity used in

agriculture

Law 15/2011 Private, Public Partnership

Decree 12/2012 Regulation of the PPP law

Law 21/2014 Oil and Gas Law

Laws 15/2011 (The PPP law and its regulation), 21/97 (Electricity Law, still under revision) and
21/2014 (Oil and Gas Law) may, in association with the existing investment regulations and the
special economic zones, be the key to establishing an unified incentive framework for the power
sector integrated at all levels of the economy and cost in a manner consistent with maximizing
overall benefits to society as well as long term development needs.

The recently approved law governing oil and gas activities (Law 21/2014) is challenging to the
country as whole as it has to draft ways to maximize the use of the 25% of all produced gas in
the domestic market.

The Electricity law - 21/97- is under ongoing review apparently to strengthen and enhance the
role of the regulatory entity CNELEC certainly including natural gas and liquid fuels distribution
in its scope and to improve sector efficiency to encourage greater private investments.

The authors’ views expressed in this publication do not necessarily reflect the views of the United
States Agency for International Development or the United States Government.