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Policy Memo: Addressing Challenges in Reaching Financial Close for Renewable Energy Projects in Zimbabwe

Zimbabwe

In Brief

The Ministry of Energy and Power Development is uniquely positioned to address Zimbabwe's power challenges. As the entity responsible for regulatory authority and energy policy development, the Ministry can implement critical reforms to stabilize the energy sector, promote renewable energy, and enhance foreign investment. By collaborating with key stakeholders, such as Zimbabwe Electricity Supply Authority (ZESA) and Independent Power Producers (IPPs), the Ministry can align efforts with national energy objectives.


To: Permanent Secretary, Ministry of Energy and Power Development

From: Samuel Ngonidzashe Mutingwende

 

Problem Statement

1. Nature of the Problem

Zimbabwe's renewable energy sector is facing significant challenges in deploying new projects through private players (The World Bank, 2023). Independent Power Producers (IPPs) are unable to reach financial close or commence construction due to difficulties in accessing foreign currency required for remitting payments under Power Purchase Agreements (PPAs) and other foreign obligations (The World Bank, 2023).

2. Context and Scale of the Problem

The reintroduction of the Zimbabwean dollar (ZWL) in 2019 has created a mismatch between local revenue generation and the need for foreign currency to service PPAs and loans. This has placed immense strain on ZESA, leading to project delays and heightened investor uncertainty.

ZESA’s inability to generate sufficient foreign reserves exacerbates delays faced by IPPs, as they compete with critical sectors like healthcare for limited foreign currency allocations from the Reserve Bank of Zimbabwe (RBZ). This situation hampers investors, IPPs, and financial institutions, worsening power shortages and reducing Zimbabwe’s competitiveness in attracting foreign investment to the energy sector.

 

Recommendations

1. Adopt a USD Payment Policy for Electricity Transactions

Actionable Steps:

  • Mandate that all electricity payments, including those under PPAs, be made in USD.
  • ZESA, with support from the Ministry of Energy and Power Development, should enforce this policy and establish a transparent framework for IPPs, consumers, and financial institutions.
  • Extend the USD payment requirement to non-exporting residential and commercial consumers, who currently have the option to pay in any currency.

Impact:

This policy will ensure ZESA accumulates sufficient foreign currency to meet its obligations, restore investor confidence, and facilitate the financial close of renewable energy projects.

2. Time-Bound Implementation of the USD Payment Policy

Actionable Steps:

  • Implement the USD payment policy for a duration of 10–15 years, allowing foreign investors to recover their investments.
  • Conduct a mid-term review after five years to assess the policy's effectiveness and make necessary adjustments.

Impact:

A clear timeframe for returns will attract foreign investment while allowing the government to pursue long-term monetary policy objectives.

3. Legislative and Regulatory Support

Actionable Steps:

  • Advocate for legislative reforms to support the USD payment policy's implementation.
  • Engage stakeholders, including parliamentarians, industry associations, and civil society, to build consensus for the policy.

Impact:

Legislative backing will ensure the policy's durability and provide legal certainty for investors, fostering a more stable and attractive investment environment.

 

Implementation Strategy

1. Involved Parties

  • Ministry of Energy and Power Development: Lead the implementation and oversee stakeholder coordination.
  • ZESA: Implement the USD payment policy and manage fund collection and disbursement.
  • RBZ: Facilitate foreign currency allocations and ensure timely remittance of funds to IPPs.

2. Funding the Policy

Utilize existing foreign currency reserves and revenues generated through USD transactions to fund the policy.

3. Generating Support and Addressing Opposition

  • Stakeholder Engagement: Conduct consultations with industry associations, investors, and financial institutions to build consensus. Use data from successful sectors, such as petroleum, to demonstrate the policy’s potential benefits.
  • Public Awareness: Launch a communication campaign to inform the public about the policy’s goals and benefits, particularly in reducing power shortages and enhancing energy security.

 

Justification and Conclusion

The outlined recommendations address critical challenges within Zimbabwe’s energy sector, particularly those related to foreign currency remittances. Implementing a USD payment policy, streamlining foreign currency allocation, and securing legislative support will create a more predictable and appealing investment environment for renewable energy.

While concerns may arise about equitable electricity access, especially for low-income households, current load-shedding practices already deprive many of consistent power supply. Zimbabwe’s economy is heavily reliant on the USD, with over 80% of transactions conducted in foreign currency (World Economic Forum, 2024). A transition to USD payments for electricity is therefore practical and reflective of existing economic realities (ZIMCODD, 2023).

The government can subsidize electricity costs for low-income earners to mitigate affordability challenges, ensuring equitable access as the economy adjusts. By transitioning to USD payments, Zimbabwe can secure its energy future, reduce power shortages, and achieve greater economic stability.

 

Bibliography

The World Bank. (2023). Zimbabwe Economic Update - Electrifying Growth through Reliable and Universal Access - Issue 4. Washington, DC: The World Bank.

World Economic Forum. (2024, May 17). The ZiG: Zimbabwe rolls out world’s newest currency. Here’s what to know. Retrieved from World Economic Forum.

Zimbabwe Coalition on Debt and Development (ZIMCODD). (2023). Monthly Economic Review September 2023. Harare: ZIMCODD.