Final report The cost of power outages to Zambia’s manufacturing firms Imaduddin Ahmed Michelle Baddeley D’Maris Coffman Jim Meikle Graham Sianjase June 2019 When citing this paper, please use the title and the following reference number: F-41408-ZMB-1 Contents Summary .................................................................................................................................................................................... 3 Acknowledgements ................................................................................................................................................................... 4 1. Background ...................................................................................................................................................................... 5 2. Impact of power outages in the literature ....................................................................................................................... 8 2.1 More recent literature on Zambia’s recent outages ..................................................................................................... 13 3. Objectives / hypotheses ................................................................................................................................................. 17 4. Methodology for assessing the impact of power outages on Zambia’s manufacturing firms ....................................... 18 4.1 Theoretical approaches ................................................................................................................................................. 18 4.2 Research design ............................................................................................................................................................ 18 4.2.1 Sampling frame ..................................................................................................................................................... 19 4.2.2 Sampling achieved................................................................................................................................................. 19 5. Results of our surveys and interpretations .................................................................................................................... 21 5.1 General characteristics of our sample........................................................................................................................... 21 5.2 Periods of worst outages .............................................................................................................................................. 22 5.2.1 Years of worst production outages and extent of production losses .................................................................... 22 5.2.2 When firms purchased their oldest generator still in use ..................................................................................... 23 5.2.3 Months of worst electricity reliability in general .................................................................................................. 23 5.3 Damages incurred from Zesco’s outages ...................................................................................................................... 23 5.4 Damage mitigation strategies ....................................................................................................................................... 23 5.5 Marginal cost of outages ............................................................................................................................................... 24 5.5.1 Marginal cost of outages inferred from willingness to pay for more reliable energy ........................................... 24 5.5.2 Marginal cost of outages inferred from firms’ use of self-generation .................................................................. 27 5.6 Production delays prevented by self-generation .......................................................................................................... 29 5.7 Predictors of a firm’s likelihood to invest in and intensity use of self-generation ........................................................ 30 5.7.1 Predictors of a firm’s scale of investment in self-generation ................................................................................ 32 5.7.2 Predictors of a firm’s likelihood to use self-generation ........................................................................................ 33 5.8 Special energy provision for important clients ............................................................................................................. 35 5.9 Willingness to sell energy back to the grid .................................................................................................................... 35 5.10 Pattern of Zesco energy consumption ........................................................................................................................ 36 6. Discussion....................................................................................................................................................................... 37 6.1 Periods of worst outages ...................................................................................................................................... 37 6.1.1 Years of worst production outages and extent of production losses .................................................................... 37 6.1.2 Months of worst electricity reliability in general .................................................................................................. 37 6.2 Damages incurred from Zesco’s outages ...................................................................................................................... 38 6.3 Mitigation strategies and their efficacy ........................................................................................................................ 38 6.4 Marginal cost of outages ............................................................................................................................................... 39 6.4.1 Self-generation patterns ....................................................................................................................................... 40 6.4.2 Predictors of a firm’s likelihood to invest in and intensity use of self-generation ................................................ 40 6.5 Pattern of Zesco energy consumption .......................................................................................................................... 44 7. Conclusions and policy recommendations........................................................................................................................... 44 References ............................................................................................................................................................................... 47 Annex 1– Last iteration of questionnaire used, July 2018 ....................................................................................................... 50 1 Annex 2– Research implementation, challenges, sources of data and key informants ........................................................... 55 Annex 2.1 Building and incentivising a field team .......................................................................................................... 55 Annex 2.2 Iterations of questions we asked, and the learning process of asking the right questions ........................... 55 Annex 2.3 Weaknesses of the survey ............................................................................................................................. 55 Annex 2.4 Challenges faced in interviewing firms .......................................................................................................... 55 Annex 2.5 Challenges exogenous to the questionnaire itself ........................................................................................ 56 Annex 2.6 Triangulation and contextualisation: conversations with key informants .................................................... 56 Table 1: Manufacturing’s share of electricity consumption dropped from 2015 to 2017 in Zambia. Excerpted from Energy Regulation Board of Zambia, 2016, p. 9, 2017b, p. 9, 2018, p. 36 ............................................................................................. 5 Table 2 Annual reports of listed Zambian manufacturers mentioning the power outages ....................................................... 5 Table 3 Chen and Vella’s table (1994) of Taiwanese industries’ multiplier effects on the rest of the economy using in-put- output analysis (top 10 industries most relevant to Zambia) .................................................................................................. 12 Table 4 Zesco revised its tariffs twice upwards in 2017. Source: Zesco.co.zm (Zesco Ltd, 2017a) accessed as of 29 October, 2018. It appears that 'current' was the tariff prior to 15 May, 2017 ....................................................................................... 16 Table 5 Years of manufacturing experience in our sample of manufacturing firms ................................................................ 21 Table 6 2016 saw even worse production losses than 2015, with surviving firms reporting losses on the higher spectrum of 16-30%. Even in 2018, firms were on average reporting production losses of 1-15% ............................................................