What is the basis for the Bulk Supply Agreement and in what spirit was it initially developed?

Modified on Tue, 17 Jan, 2023 at 7:09 AM

In the electricity industry, it is normal practice to have long term agreements between power companies, often ranging from 15-25 years. This is because an investor needs a huge capital outlay to build power infrastructure, which capital is almost always borrowed from lenders (both commercial and development banks) and the repayment for these loans is over a long period, typically 10-15 years. Therefore, the lenders want to be sure that the borrower will be able to pay back the loan, and a long term agreement between the generator of power and the buyer, or the developer of the infrastructure and the user, is necessary to give the lenders comfort that the loan will be repaid. In fact, as everybody in the sector knows, the practice is that lenders demand and scrutinise copies of the power supply agreements and if necessary, will insist on changes to their tenure in order to match the loan period. Of course, it is critical that the buyer is credible and able to settle his bills over the duration of both the PSAs and loan agreements.

The same principle applies when a power company is acquired, as was the case with CEC when it was acquired from the Government in 1997. There was need for the new owners to be assured that CEC would be able to buy power from ZESCO over a long period of time as an insurance that the assets they had just acquired (CEC) would not be made redundant by ZESCO bypassing them. In addition, since CEC was to sign power supply agreements with the newly privatised mines, a long-term agreement was necessary to give comfort to the new mine owners that they would have power continually to support the long term investments typically associated with mining.

The Bulk Supply Agreement (BSA) is the name given to the agreement governing the commercial relationship between CEC and ZESCO. It embodies the terms, conditions and other relevant necessities of the services that the two companies enjoy from each other. The BSA protects the interests of both ZESCO and CEC and, therefore, of the nation. In 1997 when the first BSA was entered, there was a deliberate interest to assure ZESCO of a local market for its power, because at that time the DRC was selling power very cheaply in the region, which had a huge surplus. The historical connection of the CEC network to the DRC network was seen as leaving open a possibility for CEC to opt to buy power from the DRC; which would have jeorpadized the nation’s investments in power generation (Kariba, Kafue Gorge and Victoria Falls power stations) considering that CEC’s customers, the mines, are the country’s biggest consumers of power. Hence, a clause was inserted in this long term agreement, compelling CEC to source power only from ZESCO. The exception was only if CEC exhausted the allocated limit (of 700MW then). This was a necessary condition to protect the national interest because at the time, the tariff of the DRC power sold in the region was a third of the BSA tariff and, after satisfying the local market, ZESCO remained with a surplus of up to 900MW which it could only export at tariffs that matched its competitors.

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