In a case that could determine the trajectory of Zimbabwe’s energy future, the country’s leading independent power producer (IPP) has launched international arbitration proceedings against the country’s state-owned utility, to resolve a US dollar payment default that has brought critical national energy projects to a standstill.
Proceedings brought by Pungwe B Power Station, a hydroelectric power scheme, against Zimbabwe Electricity Transmission and Distribution Co (ZETDC) were in mid-June under the dispute resolution service of the International Chamber of Commerce (ICC) in Johannesburg, and a decision is expected soon.
The dispute is over the currency of payment. While Pungwe B has argued that its power purchase agreement with ZETDC is denominated in US dollars and should be paid in US dollars, the utility is resisting this interpretation of the contract, and has fallen into arrears with US dollar payments due to Pungwe B.
According to the World Bank, only 41% of Zimbabwe’s population has access to electricity. The country faces a persistent shortfall in energy to meet peak demand, and relies on imports from Mozambique and SA — the latter of which delivers 200MW to the neighbouring country despite experiencing economically devastating energy shortages of its own.
Nyangani Renewable Energy (NRE), the developer of Pungwe B and the main IPP in Zimbabwe, has been operating in Zimbabwe since 2007 when it was formed to improve access to electricity to the resident population of the Honde Valley, which is now a net exporter of electricity to Manicaland and regularly keeps the lights on in Mutare.
NRE says IPPs are a key part of the solution to Zimbabwe’s energy shortages but investor-friendly policies are crucial to secure funding.
“Effectively, we are the canary in the mineshaft,” Ian McKersie, NRE MD, told Business Day. “When we stop singing, you know there’s a problem. And we’ve stopped singing because we are no longer able to service our loans according to the original agreements that we made with government.”
NRE said an estimated eight renewable energy projects with at least 100MW capacity have not reached financial close and proceeded to the construction phase as a result of this issue. The future of these IPP projects is now contingent on the arbitration decision.
While Pungwe B’s investment is recovered through a tariff, as is laid out in very clear and transparent policy and procedure. In recent years it is Zimbabwe’s monetary policies that have meant that NRE has been unable to freely convert its US dollar earnings into US dollars. “We have to go through a foreign-exchange market, which is controlled totally by the government of Zimbabwe. So it’s not transparent and it sometimes works,” McKersie said. “Currently, the delay is 10 weeks, between putting your bid in to pay, let’s say, a loan and actually receiving the money. If you get it, you might get it in part, or it might get turned down.” This is something investors will not accept, he said. “They simply will not put their returns at that risk.”
While McKersie said ZETDC is contractually obliged to pay the IPP in US dollars, he suspected the government is not permitting it to use those funds, preferring to use them for the country’s imports.
In terms of Pungwe B’s agreement with the Zimbabwean utility, disputes of this nature are to be heard under ICC rules in Johannesburg, “simply because we’re not sure we get a fair hearing in Zimbabwe”, McKersie said.
The two parties have already agreed to abide by the decision of the three-member arbitration panel. Should the decision be in Pungwe B’s favour, the IPP will approach the high court in Zimbabwe to make the decision an order of the court.
If ZETDC does not honour its contractual obligations, NRE believes it is likely that no new developer will have confidence in the utility as a reliable counterparty and further IPP development will prove impossible.
Should the dispute be resolved in Pungwe B’s favour, McKersie said this would revive NRE’s access to funds to develop further independent projects in Zimbabwe. It would also revive other power projects. “There’s been lots of talk about 50MW, 100MW and even 200MW projects in Zimbabwe, but nothing is happening because of these issues.”
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