4.3.2. MG Operation and Tariffs

The socioeconomic conditions in both communities pose critical challenges for the operation of the MGs which have been outlined in the previous section. Low energy affordability and high-income fluctuation throughout the year directly impact the revenue and cash flow of both MGs.

The implementation of the energy tariff system in both locations was independent of the Zambian regulatory MG framework which was introduced a few years after the commissioning of the MGs and which now requires cost-reflectiveness in the MG sector. Before the commissioning of Mpanta MG, members of the community discussed the options of a pre-paid metering system and a fixed fee. During the consultation processes, few members raised concerns with regards to trust in a pre-paid system and a vote among community members revealed a decision towards a fixed fee which was introduced, based on the size and type of the connected properties. After an introduction period in Mpanta

which allowed free connections, basic fees of around \$5 for the connection and \$1.5 for wiring were introduced and the managemen<sup>t</sup> including revenue collection was handed over to the Kafita Cooperative Society (KCS) while REA retains ownership of the plant which operates on an interim generation and distribution license issued by the Energy Regulation Board (ERB). The introduction of the connection fee caused complaints and irritation among the Mpanta community. The perception among the community was that the project was brought by the governmen<sup>t</sup> as a gran<sup>t</sup> without the requirement for end-users to pay. Additionally, the transition from free to prepaid connections was not well communicated to the community [41].

While Sinda MG also applies a monthly fixed rate, the tariffs are uniform at ZMW 150 (\$6.5) per customer per month translating into ZMW 5 (\$0.21) per day and are significantly higher than in Mpanta where households pay a monthly fixed fee of between ZMW 30 (\$1.3) to ZMW 70 (\$3.1). Consequently, the majority of respondents surveyed in Sinda reported difficulties in paying for the electricity and less available income than before getting electrified as Figures 12 and 13 in the previous section illustrated. The fixed load in Sinda per household is limited to 300 W and the average customer consumption in 2018 has been estimated at 55 kWh per month but is probably lower due to outages. The tariff system in Sinda has created complaints especially among low-consuming customers as consumers operating a single electric bulb for example are paying the same price as customers running more appliances including fridges, etc. leaving them with a feeling that clients with low consumption were subsidising those with higher energy consumption. Table 4 provides an overview of the tariff structures in both locations and also reflects the currency fluctuation of the tariffs charged in Zambian Kwacha compared to the US-Dollar.


**Table 4.** Tariff structures Mpanta and Sinda.

Tariff structure Mpanta MG as of 2016 [41]; Sinda MG (UNZA data 2018/2019).

In Mpanta, 450 users were initially connected for free in 2013. As of 2020, more than 260 of these users had been disconnected as they were unable to pay the monthly fixed fee. In addition to these figures, over 60 users were disconnected for various reasons including due to the collapse of their traditionally built, grass-thatched houses during a heavy rainy season while 4 users were removed for illegal connection. As a consequence, more than 50% of the households in Mpanta still rely on pollutant fuels for lighting and over 95% for cooking. During the operation, community complaints emerged at scale about miscommunication regarding the tariff scheme when households were initially connected

or a lack of notification of affected customers about an imminent disconnection when they were unable to pay [41].

While the Sinda MG operates through a pre-paid metered systems which allow for some efficiency of revenue collection, the tariff collection is not efficient in Mpanta as local site visits revealed. As of 2020, the average estimated total monthly collection was only about ZMW 6000 to 8000 which translates into \$300 to 400 applying an average exchange rate of \$1 = ZMW 20 for 2020 or an annual average total of around ZMW 84,000 (or \$4200). These inefficiencies in tariff collection are partially caused by local managemen<sup>t</sup> problems but are also rooted in high levels of customer dissatisfaction due to reported power outages, restricted system capacity and limited understanding of the operation of the system [41]. The current OPEX for Mpanta MG according to REA is ZMW 108,000 for the two staff salaries. However, there are other costs like office space, materials and equipment, vehicles and travel which are not included here. Hence, the total annual costs are more likely to be around ZMW 300,000 which is calculated without component replacement costs according to a UNZA assessment in 2019. Consequently, the annual OPEX exceeds the collected revenue by around ZMW 24,000 (\$1200) in terms of staff costs or ZMW 216,000 or \$10,000 based on 2019 currency values. Although these values are only rough estimations as this type of data collection has been proven challenging and may fluctuate over time, the plant is currently generating a significant annual deficit. These costs are currently covered to large extent by the Zambian Rural Electrification Authority (REA) that subsidizes the minigrid. The OPEX deficit is even higher when replacement costs for system components such as charge controllers, inverters or batteries are becoming part of the equation as they are a substantial component of OPEX calculation. Table 5 presents an approach to calculate the current assumed OPEX for Mpanta MG based on information provided by the operators and market-price estimation for the components installed which however can vary. The cost estimation of the current system is enhanced by an optimisation scenario which shall be discussed in the following section.


**Table 5.** Current and optimised OPEX for Mpanta MG.

Although the OPEX costs for the Mpanta mini-grid are very high and mainly driven by a battery bank that is designed to provide two days of energy back-up supply when fully charged as well as high overhead costs, the analytical approach illustrates the importance of a thorough evaluation during energy project development to determine realistic OPEX costs and energy tariffs within the local socio-economic context which defines the sustainability of an off-grid system. It must be noted at this point that the calculation presented does

not contain any cost of capital as the project was 100% grant-funded. The analysis also illustrates the interdependency between technical—financial—and community-context parameters and highlights the necessity of holistic project planning approaches that account for these interdependencies.

In addition to that, the calculation of OPEX, tariff and revenue reveal the impact of the significant currency depreciation of the Zambian Kwacha vs. the US-Dollar over the last years, a problem that most African countries encounter. This poses a serious problem jeopardising the sustainability of future investments in the whole industry as imports for components and spare parts as well as the cost of capital payments are usually made in US-Dollar while local revenues are generated in local currency.

The OPEX for the Sinda MG shown in Table 6 reveals significant differences in the cost per kWh to the Mpanta MG. But like in Mpanta, the analysis discloses a financial sustainability gap of around \$0.04 per kWh based on an assumed energy retail price of around \$0.26 per kWh and OPEX costs of 0.30 kWh. Taking into account both CAPEX and OPEX, this gap widens to \$0.57 per kWh under a scenario that is assuming a price of \$0.83 per kWh LCOE based on the gran<sup>t</sup> and debt funding ratio. The annual revenue in year one has been estimated at around \$11,000 which results in an annual loss of approximately \$5100 with regard to OPEX only. These figures do not include currency depreciation of around 20% per annum between 2018 and 2021.


**Table 6.** Overview estimated OPEX costs of Sinda Mini-Grid, 2018 [74].

\* 30 kW × 1747 kWh/kW/a = 52,410 kWh.
