Contributed By Wintertons
In Zimbabwe, the Ministry of Energy and Power Development is responsible for the power industry. Its major function is to develop an effective legislative framework for the energy sector.
The Zimbabwe Energy Regulatory Authority (“ZERA”) is responsible for the direct regulation of the power industry, and was established in 2011 by the Energy Regulatory Authority Act [Chapter 13:23] ("the ERA Act”). ZERA took over the responsibilities of the Electricity Regulatory Commission, which was established under the Electricity Act [Chapter 13:19] (“the Electricity Act”) and was previously responsible for the regulation of the electricity sector in Zimbabwe.
The generation, transmission, distribution and supply of power is principally regulated by the Electricity Act, as read together with the ERA Act. The regulations under the Electricity Act for the licensing of the power generation, transmission, distribution and supply of electricity were passed in 2008 as the Electricity (Licensing) Regulations 2008, published as Statutory Instrument 103/2008. They were further amended by Statutory Instrument 55/2015 (“the Licensing Regulations”).
To ensure the provision of electricity in rural areas, the government set up the Rural Electrification Fund Act [Chapter 13.20] (“the REF Act”), with the aim of facilitating the rapid and equitable electrification of rural areas. A government agency called the Rural Electrification Agency (“REA”) was established under the REF Act, and its operations are funded through the Rural Electrification Fund ("REF"). REA is responsible for the construction of the grid network infrastructure in rural areas, and the Zimbabwe Electricity Transmission and Distribution Company (Private) Limited (“ZETDC”) collects the levy and operates and maintains the developed infrastructure.
At present, the generation, transmission, distribution and supply of power in Zimbabwe is principally done by a wholly government-owned parastatal called ZESA Holdings Limited, whose operations are conducted through subsidiary companies with distinct but interlinked responsibilities. The Zimbabwe Power Company (Private) Limited ("ZPC”) owns the power generation assets and is responsible for the generation of power. ZETDC owns the assets for the distribution, transmission and supply functions. ZESA Enterprises is responsible for providing support functions to the power generation, transmission and distribution entities.
The industry includes investor-owned registered Independent Power Producers (“IPPs”), with a total of 60 IPPs being licensed to date to carry out generation activities. Only 15 are operational, with the majority of them operating on a small scale contributing a total of 131.2 MW of energy supply to the national grid by June 2019. Some of the IPPs are off grid and generate power for own use. A number of the licensed IPPs are at various stages of development.
The major applicable legislation is as follows:
ZESA Holdings Limited and its two subsidiaries, ZPC and ZETDC, own and operate the generation, transmission and distribution facilities in Zimbabwe. REA is responsible for the development of the power infrastructure in rural areas.
Investor-owned companies that own and operate generation facilities include Kupinga Renewal Energy, Green Fuel, Riverside Solar Power Station (Pvt) Ltd, Distributed Power Africa and UK-based PGI Group Limited, which owns the Nyamingura Mini Hydro Station, Dura Power Station, Pungwe A Power Station, Pungwe B Power Station, Pungwe C Power Station, Hauna Power Station and Riverside Power Station through its various subsidiaries. There are other companies that produce power for their own consumption, including Nottingham Estate (1.5 MW), Hippo Valley Estates (33 MW) and Triangle Estates (45 MW).
The Zimbabwe Investment Authority (“ZIA”) is the country’s investment promotion body, set up to promote foreign direct investment, local investment and the government’s decentralisation policy. According to the Zimbabwe Investment Authority Act [Chapter 14:30] (“the ZIA Act”), any person wishing to invest in Zimbabwe may obtain an investment licence from the ZIA, and the investment must be undertaken in accordance with the terms of that licence. Non-residents are not permitted to hold shares in a company without approval from the Reserve Bank.
Until March 2018, the Indigenisation and Economic Empowerment Act [Chapter 14:33] restricted foreign shareholding in local companies to a maximum of 49%, with locals holding 51%. This was changed with effect from 14 March 2018, with the passage of the Finance Act 1/2018, which amended the Indigenisation and Economic Empowerment Act by removing the 51% indigenous shareholding requirement in local companies. This is now reserved for entities or businesses involved in the extraction of diamonds or platinum; there is no limit on foreign shareholding in entities involved in the power industry.
The power industry is accorded the same investment protections as other sectors of the economy. The Constitution of Zimbabwe protects private property and prohibits the expropriation of property without compensation. Section 71 of the Constitution of Zimbabwe provides that every person has the right in any part of Zimbabwe to acquire, hold, occupy, use, transfer, hypothecate, lease or dispose of all forms of property, either individually or in association with others. The compulsory acquisition of property is only allowed where the law permitting it is of general application, and where the deprivation is necessary in the interest of defence, public safety, public order, public morality, public health or town and country planning, or to develop or use that or any other property for purposes that are beneficial to the community. The person affected is required to be given reasonable notice by the acquiring authority, to be paid fair and adequate compensation before the property is acquired or within a reasonable time after the acquisition, and, if the acquisition is contested, to apply to a competent court before the acquisition of the property or no later than 30 days after the acquisition for an order confirming the acquisition. Additionally, any person whose property is acquired is entitled to apply to a competent court for the determination of matters relating to the acquisition, including the amount of compensation to which they are entitled. These rights do not apply where agricultural land is involved, in which case agricultural land compensation is provided for improvements only.
Zimbabwe has also signed bilateral investment promotion and protection agreements ("BIPPA") with several countries for the reciprocal protection of investments. Additional protections are also available under these agreements. The specific protections vary from country to country.
Access to domestic courts is guaranteed under the Constitution of Zimbabwe. Additionally, Zimbabwe adopted (with amendments) the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law on 21 June 1985, to give effect to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted in New York on 10 June 1958. Accordingly, foreign investors are free to resort to international arbitration, and awards from such arbitration proceedings are recognised and enforced in Zimbabwe.
Zimbabwe also ratified the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which was incorporated into Zimbabwean Law by the Arbitration (International Investment Disputes) Act [Chapter 7:03]. This deals specifically with investment disputes. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards requires courts of contracting states to give effect to private agreements to arbitrate, and to recognise and enforce arbitration awards made in the contracting countries. In terms of Article 3 of the Convention, each contracting state shall recognise arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon.
Various tax incentives can be negotiated and granted by the government, including exemptions on duty on the importation of capital goods. It is possible to negotiate for the project to be granted National Project Status so as to qualify for various exemptions on duties on the importation of capital goods into the country.
Licences are not transferable, and ZERA is required to approve any mergers or acquisitions of assets. The sale of power industry assets or businesses, or other transactions, would be subject to control by the Competition and Tariff Commission ("CTC"), which was established by the Competition Act [Chapter 14:28] (“the Competition Act”) and requires that all notifiable mergers that are at or above the notifiable merger threshold are approved by it. A merger is defined in the Competition Act as “the direct or indirect acquisition or establishment of a controlling interest by one or more persons in the whole or part of the business of a competitor, supplier, customer or other person whether that controlling interest is achieved as a result of —
(a) the purchase or lease of the shares or assets of a competitor, supplier, customer or other person;
(b) the amalgamation or combination with a competitor, supplier, customer or other person; or
(c) any means other than as specified in paragraph (a) or (b).”
A notifiable merger refers to a merger or proposed merger with a value at or above the prescribed threshold of USD1,200,000 in either the combined annual turnover of the acquiring firm and the target firm, or the combined assets in Zimbabwe of the acquiring firm and the target firm.
The process typically involves notifying CTC of the proposed merger and paying the fees required, which are based on the combined annual turnover or combined value of the assets in Zimbabwe of the merging parties, whichever is greater, subject to a minimum of USD10,000 and a maximum of USD50,000. The process can take up to 90 days. If the approval is granted, CTC may impose any conditions it deems fit to ensure that competition is enhanced. These may include directives to dispose of certain services provided or the disposal of certain assets over a given period of time.
ZERA is mandated to regulate the entire energy sector in Zimbabwe in a fair, transparent, efficient and cost-effective manner for the benefit of the consumers and energy suppliers. ZERA derives its mandate from the ERA Act, as read together with the Electricity Act, and regulations made thereunder.
In addition to the role of ZERA in ensuring the reliability of the electric system and the adequacy of supply to satisfy the demand for electricity, Zimbabwe is part of the Southern African Power Pool (“SAPP”), whose headquarters are in Zimbabwe. SAPP has 12 member countries represented by their respective electric power utilities, organised through the Southern African Development Committee (“SADC”), and provides a forum for the development of robust, efficient, reliable and stable interconnected electrical systems in the Southern African region. It is also responsible for the co-ordination and enforcement of common regional standards regarding the quality of supply, measurement and monitoring of system performance.
Section 4 of the Electricity Act creates and empowers ZERA to regulate the procurement, production, transportation, transmission, distribution, importation and exportation of energy derived from any energy source (renewable or non-renewable energy), as defined in section 4 of the ERA Act. ZERA’s functions include:
In September 2018, the Minister of Energy and Power Development published the Electricity (Public Safety) Regulations, 2018 to impose safety standards on players in the electricity industry, to protect the public. Among other things, owners of generation and transmission infrastructure are required to ensure that their assets are electrically safe, to develop and implement asset design, procurement, operation and maintenance plans to eliminate the electrical risk, to carry out periodic inspections and maintenance of electrical infrastructure, including the testing of protection equipment, and to carry public liability insurance.
A major change in the law was the publication in June 2018 of the Electricity (Net Metering) Regulations, 2018 (published as Statutory Instrument 86/2018), which establish a framework in terms of which electricity is generated by a participant and delivered to an electricity distribution licensee’s local distribution facility and may be used to offset electric energy provided by the electricity distribution licensee to the participant during an applicable billing period.
In September 2018, Regulations dealing with public safety were published, as explained above.
There has also been a major policy shift, with the government announcing in February 2019 that it would merge all ZESA group companies into a single integrated company as part of its public sector enterprise reform programme. The Electricity Act would be amended to take account of the new structure, while a consultant is being sought to advise the government on the best structure for the merged utility. This is a reversal of policies that started in 1997 and was fully implemented by the amendments made to the Electricity Act in 2003 and 2005. It is also a shift away from plans set out in the Energy Policy of 2012, which aimed to create a wholesale market for electricity with further deregulation at some future date.
The Minister of Energy and Power Development announced a policy whereby IPPs that have received a licence but have failed to implement their projects would lose their licences. This policy appears to have been motivated by an acute power shortage, and would require changes to the current legal framework.
The major issue at the moment for many international investors in the power sector is the issue of the capacity of the national utility to pay for the electricity sold to it in a currency that enables the investor to recover its investment. With an acute shortage of foreign currency in the country, repayment of external obligations is a challenge. Most IPPs have failed to reach financial close due to this consideration. There is, however, a critical shortage of electricity at the moment due to reduced capacity at the major hydropower station at Kariba due to low water levels.