In the electricity industry, it is a normal practice to have long term agreements, often between 15-25 years between power companies. This is because to build power infrastructure an investor needs a huge capital outlay which is 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 buyer 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 new mine owners that they would have power continually to support the long-term investments typically associated with mining.
The Bulk Supply Agreement (BSA) also protected ZESCO’s interest, because at that time the DRC was selling power very cheaply in the region because the region had a huge surplus. Since the CEC network has historically been connected to the DRC network, there was always going to be a possibility that CEC could opt to buy power from there. This would have meant that the nation’s investments in power generation (Kariba, Kafue Gorge and Victoria Falls power stations) would be put in jeopardy as the mines have been the biggest consumer of power. Hence, the country felt it was necessary to insert a clause in this long-term agreement between ZESCO and CEC which compelled CEC to source power from suppliers other than ZESCO ONLY IF it exhausted the 700MW ZESCO allocation. This was a necessary condition to protect the national interest. During the early years of the BSA, the power that DRC sold cheaply in the region was typically a third of the BSA tariff. At that time, after satisfying the local market ZESCO had a surplus of up to 900MW and could only export this surplus at tariffs that matched its competitors.
So, it is clear that the BSA protected the interests of both parties. This should also clarify the misconception that CEC did not develop its own power stations but instead depended on ZESCO, but this is a story for another day.