Malawi Energy Concept Paper

THE GOVERNMENT OF
THE UNITED STATES OF AMERICA

MILLENNIUM CHALLENGE CORPORATION
Compact Program for the Government of the

Republic of Malawi
(2011 – 2016)
Concept Paper for the Energy Sector
Millennium Challenge Account – Malawi Country Office Secretariat
P. O. Box 31513
Lilongwe
Malawi
“Poverty Reduction through Economic Growth”

TABLE OF CONTENTS
ABBREVIATIONS AND ACRONYMS ............................................................................................................... iii
UNITS OF MEASURE ..................................................................................................................................... iv
CURRENCY EQUIVALENTS ............................................................................................................................. v
LIST OF FIGURES ........................................................................................................................................... vi
LIST OF TABLES ............................................................................................................................................ vii
LIST OF ANNEXES ....................................................................................................................................... viii
1 SUMMARY OF THE INVESTMENT CASE ................................................................................................ 1
1.1 Electricity Demand and Supply Projections ................................................................................. 2
2 INVESTMENT OBJECTIVE AND OUTCOMES .......................................................................................... 4
2.1 Program Logic for the Investment Program ................................................................................ 4
2.2 Investment Outcome 1 – Increased Availability of Quality and Reliable Power ......................... 5
2.3 Investment Outcome 2 – Increased access to power for Un-served users ................................. 7
2.4 Investment Outcome 3 – Improved and Effectively Managed Power Sector for Improved
Service Delivery ........................................................................................................................................ 8
2.5 Investment Outcome 4 - Improved National Resource Management in Priority Catchments to

Sustain Power Sector Investments ......................................................................................................... 10
3 USE OF INVESTMENT FUNDS.............................................................................................................. 13
4 PROJECT BENEFITS AND BENEFICIARIES ............................................................................................ 15
4.1 Beneficiary Analysis ................................................................................................................... 15
4.2 Key Assumptions Underlying Estimates of Incremental Costs and Benefits ............................. 16
4.3 Summary of Overall ENPV and EIRR for Energy Investments.................................................... 17
4.4 Target beneficiaries ................................................................................................................... 17
5 SUPPORTING TECHNICAL INFORMATION .......................................................................................... 27
i
5.1 Sector Description ..................................................................................................................... 27
5.2 Recent, On-Going or Expected Investments ............................................................................. 29
6 ENVIRONMENTAL, SOCIAL & INVESTMENT SUSTAINABILITY RISKS .................................................. 33
6.1 Environmental Impact Assessment Regulatory Framework ..................................................... 33
6.2 Environmental and Social Risks ................................................................................................. 33
6.3 Risks to Investment Sustainability ............................................................................................. 35
7 IMPLEMENTATION PLANS, MONITORING & EVALUATION ................................................................ 41
7.1 Implementation Plan ................................................................................................................. 41
7.2 Monitoring & Evaluation ........................................................................................................... 42
8 BIBLIOGRAPHY.................................................................................................................................... 44
9 ANNEXES ............................................................................................................................................ 45
ii
ABBREVIATIONS AND ACRONYMS
ADB African Development Bank
AICD Africa Infrastructure Country Diagnostic study
CFL Compact Fluorescent Light-Bulb
COUE Cost Of Un-Served Energy
DFID Department for International Development (UK Government)
DoEA Department of Energy Affairs
DRRM Diagnostic Review of Revenue Management project
DSM Demand-Side Management
EAPP East African Power Pool
EIRR Economic Internal Rate of Return
ENPV Economic Net Present Value
ESCOM Electricity Supply Corporation of Malawi
EIA Environmental Impact Assessment
ESIA Environmental and Social Impact Assessment
ESMAP Energy Sector Management Assistance Program
GDP Gross Domestic Product
GoM Government of Malawi
HH Household
HV High voltage
IPP Independent Power Producer
JICA Japanese International Cooperation Agency
LRMC Long-Run Marginal Cost
MAREP Malawi Rural Electrification Program
MGDS Malawi Growth and Development Strategy
MCA Millennium Challenge Account
MCA-M Millennium Challenge Account - Malawi
MCC Millennium Challenge Corporation
MERA Malawi Energy Regulatory Authority
MV&LV Medium-Voltage and Low-Voltage
NECO National Electricity Council
NGO Non Governmental Organization
NRM Natural Resources Management
NSO National Statistical Office
PCC Project Coordination Committee
PMU Project Management Unit
PPIAF Public-Private Infrastructure Advisory Facility
PPP Public Private Partnership
PV Photovoltaic
PwC PriceWaterhouseCoopers
SADC Southern Africa Development Community
SAPP Southern African Power Pool
SCADA Supervisory Control and Data Acquisition
T&D Transmission and Distribution
TC Trading Center
WTP Willingness-To-Pay
iii
UNITS OF MEASURE
GWh Gigawatt hour (1 million kWh)
kWh Kilowatt hour
kW Kilowatt
km Kilometer
kV Kilovolt
kVA Kilovolt ampere
Klh Kilolumens hour
MJ Megajoule
MWh Megawatt hour (1 thousand kWh)
MW Megawatt (1 thousand kW)
iv
CURRENCY EQUIVALENTS
US$1.00 = 140 Malawi Kwacha (MK) (January 2009)
v
LIST OF FIGURES
Figure 1: Energy Sector Program Logic Diagram ............................................................................ 5
Figure 2: MCA-M Implementation Structure for the Energy Project ........................................... 41
Figure 3: MCA – Malawi Energy Sector Program Logic................................................................. 43
vi
LIST OF TABLES
Table 1: Summary of Total Estimated Costs for Project Outcomes ............................................... 3
Table 2: Preliminary Cost Estimates for Priority Investments in Malawi’s Energy Sector ........... 13
Table 3: Calculated ENPV and EIRR for Energy Sector Projects .................................................... 17
Table 4: Increase in Income of Households Being Electrified ....................................................... 19
vii
LIST OF ANNEXES
Annex 1: Output of the Stakeholder Problem Tree Analysis ...................................................................... 45
Annex 2: Map of Malawi Showing Existing ESCOM Grid ............................................................................ 47
Annex 3: Transmission Projects .................................................................................................................. 48
Annex 4: Enabling Frameworks, Sustainability and Capacity Building ....................................................... 49
Annex 5: Inventory of Existing Preparatory Work ...................................................................................... 51
Annex 6: Assumptions and Parameters used in the Evaluations................................................................ 59
Annex 7: Description of Economic Rate of Return Calculation................................................................... 61
Annex 8: Poverty Rates by District .............................................................................................................. 66
Annex 9: Principle Beneficiaries and Benefit Impact Areas ........................................................................ 67
Annex 10: Proportion of Income generating tasks and average weekly hours worked ............................. 68
Annex 11: Gender and Rural Electrification: A Case from Bangladesh....................................................... 69
Annex 12: Distribution of Households by Main Fuel Source Used for Cooking and Lighting ..................... 70
Annex 13: Sectors and Sub-Sectors in Malawi and Income Distribution.................................................... 71
Annex 14: Land and Population Distribution across Regions and Farm Households ................................. 73
Annex 15: Main Public Facilities and Business Entities in Trading Centers ................................................ 74
Annex 16: Electricity Rate of Entities in Electrified Trading Centers in 2003 ............................................. 75
Annex 17: Assumptions Environmental Savings on Charcoal ..................................................................... 76
Annex 18: Supporting Data for Benefits of Electrification .......................................................................... 77
Annex 19: Income Generating Benefits of Electrification ........................................................................... 79
Annex 20: Regions Affected per Project ..................................................................................................... 80
Annex 21: Map of regions affected by Energy and Transport Projects ...................................................... 81
Annex 22: Scope of Assignment ESCOM Creditworthiness Improvement ................................................. 83
Annex 23: Line Route for the 220kV and 132kV Lines ................................................................................ 85
Annex 24: Extract from ESCOM’s Draft Integrated Strategic Plan for 2009-2013 ...................................... 86
Annex 25: Implementation Timeline .......................................................................................................... 88
Annex 26: Generation Indicators and Targets ............................................................................................ 89
Annex 27: Transmission and Distribution Indicators and Targets .............................................................. 90
viii
1 SUMMARY OF THE INVESTMENT CASE
In December 2007 having met a number of economic, social and political indicators, Malawi
became eligible to apply for a substantial one-off investment from the Millennium Challenge
Corporation (MCC). The MCC’s overarching requirement of the Government of Malawi to be
awarded this investment is that it must be used to unlock economic growth and therefore
reduce poverty in the most effective and efficient way available, delivering demonstrable
results. Faced with this unique opportunity, the Millennium Challenge Account – Malawi (MCA-
M) has followed a rigorous process of analyzing the underlying constraints to economic growth
and in extensive consultation with stakeholders MCA-M has identified two key sectors
warranting this investment; energy and transport.
The conclusion of the constraints analysis conducted by the MCA-M team is that the key to
unlocking Malawi’s economic growth is to improve the competitiveness of Malawi’s exports,
namely agricultural and manufactured products. This conclusion is widely supported by the
Government of Malawi’s Growth and Development Strategy (MDGS) and other development
partners such as the World Bank, African Development Bank and Department for International
Development.
Whilst there are many underlying constraints to enhancing the competitiveness of Malawi’s
exports, the investment case for the energy sector is compelling because poor power
infrastructure is substantially limiting diversification of non-traditional exports and investments
in manufacturing. Malawi’s insufficient, unreliable and poor quality power supply has a
substantial effect on return on investment1, adding cost and operational risk onto producers of
exports which places Malawi as the country with the highest sales losses due to power outages
and requires more than 40% of businesses to rely on costly-generators. This is a burden to
existing businesses, compounding other disadvantages2 of doing business in Malawi but also
reduces the attractiveness of Malawi to external, new sources of investment.
Low generation capacity, unreliable transmission and distribution network coverage, lack of
investment capacity and natural resources degradation are all to blame for the high frequency
of power outages in Malawi and for the very low levels of coverage3. Without significant
investment, poor performance within the power sector is set to deteriorate further as
forecasted peak demand from 2010 continues to outstrip current installed generation capacity.
1
Economic losses relating to power outages are likely to be equivalent to 2-3% of Malawi‟s GDP
2
Such as the geographical disadvantage of being land-locked, macro-economic challenges such as currency
fluctuations, cost and accessibility of finance, poor transport infrastructure and lack of skills for industry
3
Currently at 7.6% of the entire population
1
1.1 Electricity Demand and Supply Projections
Since 2001, energy demand in Malawi has increased rapidly. The number of consumers has
increased by 41% with an average increase in total energy consumption of 18.5%. The actual
installed capacity for the power system in 2007 was 285 MW of which 255 MW was available to
its customers. According to the base scenario of the power demand forecast carried out in
January 2007, generation capacity is expected to increase to 347.6 MW by 2010 due to
increased supply from Kapichira II and major rehabilitation works. On the other hand, the
projected demand indicates that Malawi will require 324.8 MW by 2010; 478 MW by 2015; and
757.4 MW by 2020.
Malawi is planning considerable investments in generation capacity in order to increase current

supply. Firstly, the Malawi Government is increasing power generation by adding 64MW of
installed capacity through the Kapichira II project which is expected to be completed by
2013/14. The Government of Malawi is yet to pass the Interconnection Bill which will allow
Malawi to tap about 300MW of power from Cabora - Bassa Dam which is expected to be part of
the grid system by 2011. In addition, the Government of Malawi in collaboration with the
African Development Bank and the government of Tanzania on plans to construct multipurpose
dams along the Songwe River Basin including hydropower plants with an installed capacity of
342MW. The project will be financed by the African Development Bank and is a ten (10) year
project between the Government of Malawi and the Government of Tanzania.
Finally, the ADB has agreed to fund the feasibility studies on Lower Fufu falls and the
implementation of the project, which is expected to be implemented in 2016, would add an
installed capacity of 144MW. In total, Malawi is expecting, between 2011 and 2021, about
850MW of installed capacity from all these investments.
More reliable transmission and distribution systems are required alongside such investments in
generation in order to efficiently use the potential installed investments that Malawi is
anticipating. In conclusion it is proposed that the request for investment from the MCC is used
to increase access to more reliable power in Malawi for economic use. A total investment
requirement of US$246.8 million has been proposed in the power sector that will target the
following outcomes:
2
Table 1: Summary of Total Estimated Costs for Project Outcomes
Outcome 1: Improved Availability of Reliable & Quality Power $99,200,000
Outcome 2: Increased Access to Power for Un-served Users $63,440,000
Outcome 3: Improved and Effectively Managed Power Sector for Improved Service Delivery $23,200,000
Outcome 4: Improved Natural Resources Management of Catchment Areas around Energy Projects $4,000,000
Sub Total $189,840,000

Physical Contingency (20%) $37,968,000
Price Contingency (5%) $9,492,000
Engineering and Construction Supervision Costs (5%) $9,492,000
Total Project Costs $246,792,000
The proposed overall investment has an attractive ERR of 18.1% and demonstrable positive
impacts on both the poor and businesses of US$75.0 million, with beneficiaries ranging from
smallholder farmers, to small business owners, and users of social infrastructure (such as
schools and hospitals). Crucially, existing businesses will benefit from improved access to power
that will enhance their competitiveness on the global market by reducing generator costs and
improving their operational performance. In addition, new investment opportunities from
existing and new sources will become more attractive encouraging private sector growth that in
turn will drive new economic growth, increase incomes and ultimately reduce poverty in the
country.
3
2 INVESTMENT OBJECTIVE AND OUTCOMES
2.1 Program Logic for the Investment Program
The long-term compact goal for Malawi is to promote economic growth and reduce poverty
through increasing competitiveness of agricultural and manufactured products. This goal is in
line with the Malawi Growth and Development Strategy (MGDS) and the Millennium Challenge
Corporation (MCC) goals.
The constraints to economic growth were systematically analyzed by the MCA-M team using
the HRV approach and are documented in the accompanying Malawi Constraints Analysis to
Economic Growth report. The MCA-M’s report also compliments other reports4 analyzing the
energy sector in Malawi. This constraints analysis was followed up with sector-specific
stakeholder consultations to identify a mutually exclusive, collectively exhaustive list of
problems5 that together are the root cause of insufficient and poor quality power in Malawi.
These underlying problems were then grouped in a logical framework against which desired
high level sector outcomes were defined to overcome each of these problems, supported by a
series of project-driven outputs. The result of this preparatory work helped to establish the
Compact Goal for Malawi and to set the energy sector objective for the MCC investment.
The sector objective is to ensure increased access to more reliable power for producers and
consumers for economic use. The impact of such interventions will reduce energy costs for
users as well as the number of outages and load-shedding.
At the microeconomic level, increased access to reliable power is expected to increase

productivity of farming, mining and tourism due to increased reliability, quality and connectivity
especially for farmers and businesses. These improvements in power supply will in turn reduce
poverty by increasing the productivity of rural farming, agro-processing and other economic
activities thereby increasing returns to farmers and businesses and increasing disposal incomes
and hence improving livelihoods and food security.
The improved returns in farming and businesses will also promote investments in new
businesses allowing diversification of agricultural and manufacturing exports leading to job
creation. As a result, the macro effect of the MCC investment in the energy sector will be an
increase in the value and volume of production contributing to an increased GDP/ capita.
4
The Energy Constraints Chapter of the Malawi Country Economic Memorandum (draft) prepared by DFID and the
Energy Constraints Chapter of the World Bank Country Economic Memorandum (draft)
5
See Energy Problem Tree in Annex 1
4
Figure 1: Energy Sector Program Logic Diagram
COMPACT GOAL
Economic growth through increased competitiveness of agricultural and
manufactured products
ENERGY COMPONENT OBJECTIVE

Increased accessiblity to more reliable and quality power supply
OUTCOME 1 OUTCOME 2 OUTCOME 4

OUTCOME 3
Increased availability of Increased access to quality Improved Natural Resources
Improved and effectively
quality and reliable power and reliable power supply to Management in priority
managed power sector for
supply unserved users catchmens to sustain power
improved service delivery
sector investiments
OUTPUT OUTPUT
OUTPUTS
OUTPUTS - Strengthened capacity for -Strengthened capacity to
- Rehabilitated power
MERA and Department of formulate and enforce NRM
station - Rehabitated distribution Energy legislation.
- Rehabilitated system in the southern,
central and northern regions - Creating an enabling - Revised and harmonised NRM
transmission and distribution
of Malawi environment for the policies.
systems
establishement of PPPs - improved weed and silt
- Improved weed and
- Improved financial management systems.
siltation management - Electrification for rural and sustainability and -improved livelihoods through
- Demand-side peri-urban areas in Malawi operational efficiency of sustainable NRM business
management activities ESCOM enterprises
Source: MCA-M
The total investment is expected to deliver four key outcomes (described below). The
individual projects that will deliver each outcome are described in Section 3, and the
beneficiaries are described in detail in Section 0. Additional background information describing
the energy sector in Malawi is provided in Section 5.
2.2 Investment Outcome 1 – Increased Availability of Quality and Reliable

Power
The largest part of the investment fund requested for the energy sector is to be used to address
the core problem of unreliable, insufficient and poor quality power. The other outcomes
address the long-term sustainability of the sector and the extension of power to un-served
areas. The investment to increase availability of quality and reliable power will deliver the
following outputs: -
5
a). Rehabilitated power stations – US$17.4 million;
b). Demand-side management activities to reduce peak demand growth – US$1.9
million;
c). Rehabilitated Transmission system – US$67.8 million;
d). Weed and siltation management (linking to Outcome 4) – US$7.1 million; and
e). Improvement in protection, control and data acquisition – US$4.7 million.
2.2.1 Rehabilitated Power Stations
A shortage of funds caused by low end-user tariffs for electricity and dependence on central
budgets or international financing institutions has prevented ESCOM investing adequate funds
into the refurbishment and preventive maintenance needed to reduce the poor performance of
the existing hydropower plants such as Nkula ‘A’ hydropower plant which is now over 40 years
old and is overdue for refurbishment. Refurbishment of the existing power stations has been
further hampered by the insufficient reserve capacity at these power stations, which prevents
the power plants being taken out of service. The lack of generation capacity will be relieved to
some extent by the planned investment in Kapichira-II hydropower plant (64MW) financed by
the Government of Malawi, the interconnection of Malawi’s electricity grid with Mozambique
funded by the WB (300MW), the Songwe River Basin project (342MW) and the Lower Fufu Falls
HPP project (144MW). However demand is growing rapidly and is projected to reach 325 MW,
478 MW and 757 MW for years 2010, 2015 and 2020 respectively. Given the expected load
growth, Malawi will be better equipped to meet growing demand requirements for energy.
2.2.2 Demand Side Management
A gap between the demand for and supply of electricity at peak times will be inevitable until
Kapichira-II and the Mozambique interconnector are commissioned which is unlikely to be
earlier than the end of 2012 or early 2013. Demand-side management measures could be
introduced that would delay the need for investment in new generation and transmission
capacity - this would be valuable even after Kapichira-II and the interconnector are
commissioned. Such measures would include the installation of maximum demand meters as
well as implementation of feeder metering.
2.2.3 Rehabilitated Transmission and Distribution System
Overloaded transmission and distribution networks result in unreliable electricity supply

leading to regular interruptions and voltage fluctuations that damage consumers’ (households
and businesses) electricity equipment. In order to reduce forced power outages and meet
reasonable standards for quality of supply that will encourage investment, ESCOM needs to
upgrade transmission substations that are currently or will soon become overloaded. This will
6
also prepare the system for future increases in generation capacity which is projected to
increase significantly to over 800MW in the next five to ten years due to upgrading of the
existing power plants or the building of new ones. In addition to improving power system
reliability and reduce losses, improvements are urgently required in protection and supervisory
control and data acquisition systems (SCADA) for the electricity transmission network. The
SCADA system will also facilitate speedy system switching operations.
Furthermore the northern part of Malawi is currently served by a single 132 kV transmission
line that leads to poor supply reliability and cannot supply all of the existing demand in the
region. The capacity of the transmission network to the north needs to be increased in order to
increase supply reliability, which will also facilitate the transfer of power to the south via load
centers at Lilongwe and Blantyre when the hydropower plants in the north are developed 6 and
from a joint hydropower project at Songwe on the border with Tanzania.
2.2.4 Weed and Siltation Management
Inadequate funds for preventative maintenance at the existing hydropower plants have been
exacerbated by the build up of siltation, weed infestation and debris in the Shire River that can
damage the turbines if allowed to pass the screens. These issues raise the need for a more
holistic approach to natural resource management to tackle the root causes of the resource
degradation (described in Outcome 4) as well as short to medium term measures to improve
operational effectiveness of the current plants.
The above outputs for Outcome 1 are expected to cost a total of US$99.2 million and success
will be measured against reducing power outages that result from generation deficits and
reducing transmission and distribution outages.
2.3 Investment Outcome 2 – Increased access to power for Un-served users
According to the Integrated Household Survey (2004-2005), less than 6% of households were
supplied with electricity and inevitably most of these were in urban centers 7. For the 85% of
people who live in rural areas, only 2% of households were electrified. The Government of
Malawi has set a goal to increase the electrification rate to 10% by 2010; 20% by 2015 and 30%
by 2020. Currently, ESCOM does not have sufficient funds to extend the network to supply un-
served areas with economic potential of electricity, which also rules out neighboring areas with
small businesses or smallholder farmers that could benefit from electricity. In order to increase
access to power for un-served users, investment is required to deliver the following outcomes: -
6
Particularly the Lower Fufu hydropower plant
7
National Statistical Office, Integrated Household Survey 2004-05.
7
a). Rehabilitated northern, central and southern distribution system - US$42.0 million;
and
b). Electrification for rural and peri-urban areas – US$21.4 million.
2.3.1 Rehabilitated Northern, Central and Southern Distribution System
ESCOM urgently needs to rehabilitate the distribution networks to improve distribution system
reliability and to accommodate electricity demand growth and increased access in the short,
medium and long term.
2.3.2 Electrification for Rural and Peri-Urban Areas
Transmission line extensions or strengthening works are proposed to supply areas with existing
or proposed large consumers as well as other consumers. The extension of the transmission
lines will prepare for extending the distribution networks so that access to the electricity grid
can be extended to new users. These projects will benefit the macro-and local economy, create
local employment and reduce the use of diesel generation by the large consumers.
The above outputs for Outcome 2 are expected to cost a total of US$63.4 million and success
will be measured in terms of providing electricity to an additional 20% of households by 2025
(i.e., bringing the total to 30% by 2025) including a 5.7% increase in access by rural households.
2.4 Investment Outcome 3 – Improved and Effectively Managed Power Sector

for Improved Service Delivery
Shortages of funds to finance new investment and maintain the power sector assets have
arisen partly from inadequate tariff levels and partly from ESCOM’s high losses, poor revenue
collection and high debt servicing costs. Whilst a new sustainable tariff is in the process of being
introduced, public sector funds to invest in new power generation are limited and will continue
to be limited. In order to protect and sustain MCC, GOM and other donor investments in the
sector as well as to encourage new sources of investment to build longer term generation
capacity, the project is required to deliver the following outcomes: -
a). MERA and Department of Energy Affairs (DoEA) capacity strengthened - US$3.2 million;
b). Enabling environment for PPPs - US$12.0 million;
c). Improved financial sustainability of ESCOM - US$4.0 million; and
d). Improved operational efficiency of ESCOM - US$4.0 million.
8
2.4.1 MERA and DoEA Capacity Strengthened
The legal, regulatory, and policy frameworks are important to attracting future investment in
power generation in order to avoid a recurrence of load shedding. The relevant primary laws
(covering electricity, energy and rural electrification) came into force in 2008 and secondary
legislation has been drafted with technical assistance provided to the former National
Electricity Council (NECO)8. However, the DoEA needs to complete the legal framework
governing coal and renewable energy supply.
In addition to further strengthen the capacity of these organizations, both MERA and DoEA
require investment in IT-systems to improve efficiency in storing and sharing regulations, codes,
guidelines, decisions and general sector information. Furthermore, websites are required for
both organizations to share general sector information with all key stakeholders such as
potential IPPs, ESCOM and private users. In particular, the DoEA website will require
information on renewable energy and coal.
MERA has recently recruited staff and depending on the skills and experience of the new
recruits, training will be required9. DoEA staff will also require new training on implementation
of the new legislation.
2.4.2 Enabling Environment for PPPs Created
Government has begun to implement a framework that advocates the financing of future
power generating capacity by the private sector either alone or in partnership with the public
sector. Such investment is necessary to avoid power shortages re-emerging in the future. In
fact, the next major hydropower project at Lower Fufu is planned to be developed using, in
part, private finance.
A legal and regulatory framework to enable private participation efficiency has been created
but the framework is not yet adequate to attract private investment.
2.4.3 Improved Financial Sustainability and Operational Efficiency of ESCOM
ESCOM needs to be placed on a financially sustainable footing to allow it to self-finance and to

borrow to invest in on-going maintenance and improvement measures. This will allow ESCOM
to be creditworthy as a signatory for new power purchase agreements with IPPs or power
8
Regulations, codes and model licenses and agreements were developed by consultants to MERA‟s predecessor
organization, the National Electricity Council.
9
Training will be required in: 1) regulatory oversight (economic, technical and legal), 2) financial regulation, and 3)
environmental management
9
plants funded and operated under public-private partnership arrangements. In recent years,
ESCOM has been able to cover its operating and interest costs only as a result of loans from
international financing institutions being written off or deferred10. ESCOM has also been
hampered by poor collection performance that has resulted in inadequate cash flows to meet
debt service obligations11. At the current tariffs which are about US$0.043, ESCOM is unable to
finance new investment or service debts relating to new investment.
As a corrective measure, ESCOM has submitted an application for a tariff increase to MERA
which will allow ESCOM to become sustainable and fund future investments. Pending MERA’s
formal approval the increase in tariffs should become effective on 1st July 200912. The MCC
investment is intended to be used to fund the large-scale installation of prepayment meters,
substantially reducing commercial losses and improving cash flow. It is proposed that
consumers with prepayment meters will be charged a lower tariff.
The above outputs designed to achieve Outcome 3 are expected to cost a total of US$23.2
million. It should be noted that the sustainability of ESCOM and the long-term sustainability of
the MCC investment requested depends on the new tariff increases being implemented. It is
also assumed that these tariffs are sufficient and that MERA has the ability to approve further
increases if necessary.
2.5 Investment Outcome 4 - Improved National Resource Management in

Priority Catchments to Sustain Power Sector Investments
Many catchment areas in Malawi are experiencing varying levels of environmental degradation
problems which are contributing considerably to diminished hydro-generation capacity
resulting in unreliable and poor quality power supply in the country. Annex 1 outlines (see NRM
problem tree for the energy sector) some of these problems and key to them is inappropriate
land use and management practices in catchment areas, particularly in the Shire river
catchment where ESCOM hydro-power generation facilities are located. Other problems
include weak enforcement of NRM legislation, conflicting NRM policies, lack of alternative and
affordable sources of energy, population pressure and lack of coherence in the institutional
arrangements to effectively coordinate and implement NRM programs. All these problems
promote deforestation, soil erosion and sedimentation resulting in unreliable and poor power
generation.
10
Part of the Highly Indebted Poor Countries debt forgiveness initiative.
11
In FY06 ESCOM was unable to meet its debt service obligations on 21% of its direct loans nor to the Government
for on-lent loans.
12
Consult Annex 6 for more in detailed information
10
Although specific interventions shall be determined after the catchment management study, it
is envisaged that required investment should include the following:
2.5.1 Revised and Harmonized NRM Policies
A number of Natural Resources Management (NRM) sector policies have been developed and
are being implemented in Malawi to promote sustainable development through the sound
management of the country’s natural resources. These include the forestry, fisheries, water,
land use and management, national parks and wildlife and energy policies. However, it has now
been realized that there are significant gaps, duplications, errors and omissions, conflicts and
inconsistencies between some of these policies. These irregularities make implementation and
enforcement efforts on the policies very difficult necessitating regular reviews and
harmonization.
2.5.2 Strengthened Capacity to Formulate and Enforce NRM Legislation
Weak enforcement of NRM legislation is leading to unsustainable use and management of

natural resources in many areas in Malawi. For example, degradation of many catchment areas
and river banks could be attributed to weak enforcement of relevant sections of the forestry,
land use and water legislations.
2.5.3 Improved Weed and Silt Management Systems
The increasing amount of weed infestation and siltation being experienced in many streams
and rivers in Malawi is associated with the inappropriate land use and management practices in
catchment areas. ESCOM spends large amounts of money to dredge silt from its reservoirs and
repair damages to turbines in the power plants caused by siltation.
2.5.4 Improved Livelihoods through Sustainable NRM Business Enterprise
Over dependence on natural resources as a source of income is linked to the rapid degradation
of environment and natural resources base in Malawi. Promotion of sustainable economic
diversification through income generation activities and public-private sector partnership
technologies will reduce pressure on natural resources.
2.5.5 Improved Institutional Coordination and Extension Services for NRM
Due to ineffective institutional capacity, there are conflicting objectives and lack of coherence
in the institutional arrangements to effectively coordinate natural resources management
programs among government institutions that impact on natural resources management. These
11
include Agriculture, Lands and Natural Resources, Energy and Mines, Irrigation and Water
Development and National Parks and Wildlife. There is an urgent need for government to
facilitate the establishment of a key institution to take the lead in the management and
enforcement of environment and natural resources management programs including.
The outputs designed to achieve outcome 4 are expected to cost a large sum of money and will
require the contribution of many development partners. MCC contribution to this amount will
initially be US$4.0 million.
12
3 USE OF INVESTMENT FUNDS
The list of projects required to achieve each of the sector outcomes described above and
deliver the overall sector objective of “increasing access to reliable power for economic use”
are listed below. To provide an overview of the investment case we have provided a cost
estimate per project and have also provided a snapshot of the economic viability of the projects
by outcome. Preliminary cost estimates for priority investments in the energy sector amount to
US$246.8 million for all project outcomes.
A description of the assumptions used to calculate the economic rate of return and other
supporting justification is contained in Section 0 and the relevant Annexes. Section 0 also
contains a detailed description of the wider benefits and beneficiaries. Background information
on the sector concerning each of the projects is described in Section 5 and the relevant
Annexes.
Table 2: Preliminary Cost Estimates for Priority Investments in Malawi’s Energy Sector
Cost Item Estimated Cost (US$)
Outcome 1: Improved Availability of Reliable & Quality Power
Output 1: Rehabilitated Power Stations
Rehabilitation of Nkula 'A' and 'B' power plants $17,360,000
Sub Total $17,360,000
Output 2: Demand Side Management Activities to Reduce Peak Demand Growth
Installation of Maximum Demand Meters $160,000
Implementation of Feeder Metering $1,760,000
Sub Total $1,920,000
Output 3: Rehabilitated Transmission and Distribution Systems
Fundi's Cross Substation in Mulanje - 12.5 MVA transformer $400,000
Area 48 Substation in Lilongwe - second 12MVA transformer $400,000
Chigumula Substation in Blantyre-second 15 MVA transformer $480,000
Chinyama Substation in Kasungu - 15 MVA transformer $480,000
Upgrade Chintheche - Mzuzu (Luwinga) line from 66kv to 132 kV - 87km (including transformation: 132/33kV) $8,240,000
Lilongwe - Mzuzu 220 kV line – 400 km $52,000,000
Luwinga - Bwengu 132kV line - 80km $5,840,000
Sub Total
$67,840,000
Output 4: Weed and Siltation Management
Additional Harvester for Liwonde Barrage $320,000
Dredger for silt Management at Kapichira Power Station $3,600,000
Dredger for silt Management at Tedzani Power Station $2,400,000
Trash diversion for Nkula, Tedzani and Kapichira Head ponds $800,000
Output 5: Improvement in protection, control and data acquisition
Upgrade the protection system $1,920,000
Upgrade the transmission SCADA System $2,720,000
Procurement and Installation of distribution SCADA system $320,000
13
Cost Item Estimated Cost (US$)
Total on Outcome 1 $99,200,000
Outcome 2: Increased Access to Power for Un-served Users
Output 1: Rehabilitated Distribution System
Rehabilitation of the southern electricity supply system $12,960,000
Rehabilitation of the central electricity supply system $13,280,000
Rehabilitation of the northern electricity supply system $15,040,000
Computer based mapping of distribution network assets $720,000
Sub Total $42,000,000
Output 2: Electrification for Rural & Peri-Urban Areas
Network Extension in Peri Urban Areas $7,840,000
Network Extension in Rural Areas - Implementation of MAREP Phase VII $13,600,000
Sub Total $21,440,000
Outcome 3: Improved and Effectively Managed Power Sector for Improved Service Delivery
Strengthening of MERA's regulatory capacity $2,000,000
Strengthening of DoEA's technical capacity $1,200,000
Updating the (1998) Power System Development Plan, feasibility studies and alternative source identification $12,000,000
Implementation of Financial Sustainability Plan for ESCOM $4,000,000
Improving ESCOM's operational efficiency $4,000,000
Sub Total $23,200,000
Outcome 4: Improved Natural Resources Management of Catchment Areas around Energy Projects
Site specific outputs shall be determined after the Catchment Management Study $4,000,000
Subtotal on Outcome 1, 2, 3 & 4 $189,840,000
Physical Contingency (20%) $37,968,000
Price Contingency (5%) $9,492,000
Engineering and Construction Supervision Costs (5%) $9,492,000
Total Project Estimated Costs $246,792,000
14
4 PROJECT BENEFITS AND BENEFICIARIES
4.1 Beneficiary Analysis
This section provides a summary of the intended beneficiaries for the power projects largely
from distribution projects. The power project will extend connections to new peri-urban and
rural trading centers which were identified by the Malawi Rural Electrification Program
(MAREP). The MAREP investment plan being proposed under the MCC targets fifty four (54)
trading centers to be electrified out of the twenty seven (27) districts in Malawi 13. In total, the
target is to increase access to electricity from the current 7.6% to 30% by 2025 and to 45% by
2040 (the expected project investment return period)14.
The lack of reliable electricity available for businesses has resulted in a number of firms and
some households using generators to substitute for the unreliable power supply from ESCOM.
The MCA-M constraint analysis found that about 50% of Malawian firms use generators and the
average sales losses from power outages is now around 10% of total sales. In addition,
unreliable energy and connections to rural areas impacts largely on the environment as people
substitute electricity for charcoal use, fuelwood and use of kerosene for lighting and cooking.
This has created a devastating problem in Malawi from deforestation that is heavily affecting
catchment areas to large environmental problems resulting in loss of good arable land for
cultivation.
Recent visits by both MCC and MCA Malawi staff have found that the streams of benefits even
from off-grid energy solutions have resulted in significant reduction in the use of alternative
sources of energy such as charcoal, fuelwood and kerosene. It is currently estimated that of the
total energy consumption levels in Malawi, about 89% is through biomass consumption
(charcoal and fuelwood), 7% through petroleum, 2% through coal and 2% through electricity 15.
Currently, household energy consumption makes about 80% of ESCOM’s customer base
seconded by the industrial sector with 19%16.
The beneficiary streams will, therefore, assess benefits based on the following:
a). Environmental benefits;

b). Business impacts;
13
The MAREP VII targets three (3) trading centers per district.
14
For detailed analysis of beneficiary projections see beneficiary calculations for Energy developed by MCA-M.
15
See Malawi energy consumption by source and sector (figure 1.1), p.10, in Dean Girdis and Mangesh Hoskote,
2005
16
See ESCOM website customer database on www.escommw.mw
15
c). Annual gross power benefits; and
d). Annual costs of operation savings.
4.2 Key Assumptions Underlying Estimates of Incremental Costs and Benefits

4.2.1 ENVIRONMENTAL BENEFITS
The lack of reliable electricity in Malawi proliferate the use of charcoal, fuelwood and kerosene
which have significant environmental and social effects. Hydro power generation is globally
recognized as the cheapest form of energy and has an assumed efficiency of 65%. Arpaillange
(1996) estimates the assumed energy efficiency of fuelwood, charcoal and kerosene to be 15%,
25% and 35%, respectively. This shows that a lot of energy is lost when the three sources of
energy are used. Furthermore, the price paid by individuals on the three energy alternatives is
higher than the price paid for hydro powered electricity.
MCA Malawi updated Arpaillange (1996) cost estimates on the price of useful energy for
fuelwood, charcoal and kerosene which have been used to quantify both social and
environmental benefits accrued to the project. The key assumptions employed are as follows:
(a) Using Arpaillange (1996) methodology, the assumed market price for useful energy for
fuelwood, charcoal and kerosene are US$0.16/kWh, US$0.11/kWh, and US$0.35/kWh,
respectively. He also assumes that the average annual energy consumption by urban
households for fuelwood, charcoal and kerosene are 2,115 kg/year, 393 kg/year and 30
liters/year, respectively.
(b) Given information in (a) above, annual quantities consumed given assumed efficiencies
for each household are 1,410 kWh/year for fuelwood, 983 kWh/year for charcoal and
105 kWh/year for kerosene.
(c) The distribution of households by main fuel source used for cooking and lighting are
given in annex 12.
4.2.2 ANNUAL GROSS POWER BENEFITS AND BUSINESS IMPACTS
The poor state of power infrastructure in Malawi poses a major constraint on returns to
investments. This has resulted into limited diversification of non-traditional exports and
manufacturing output and investment. Median sales losses due to power outages in Malawi on
average are 10% of total sales. Furthermore, as a result of unreliable electricity, about 50% of
firms have generators which are a major cost contributor to each firm’s operations expenses.
At the national level, MCA Malawi assumes the following:
16
(a) The accrued benefits once the project is initiated will increase value added on all
manufacturing products by approximately the loss in sales of 10%.
(b) There will be a decreased consumption of diesel for generators based on current market
prices.
4.2.3 ANNUAL COST OF OPERATION SAVINGS
Transmission losses, operations and maintenance costs are significantly high in the electricity
sector and the cost for producing electricity is currently at MK11/kWh (or US$0.08/kWh)
compared to the current market sales price for electricity at US$0.043/kWh. It is expected that
the revenue diagnostic study and the financial plan and least cost expansion study will
recommend ways of improving operations at ESCOM and reduce the cost of supply. Though the
actual savings will be calculated once the studies are completed, MCA Malawi assumes that the
cost of supply will be reduced by 50% over the project period.
4.3 Summary of Overall ENPV and EIRR for Energy Investments
The calculation of economic returns based on economic net present value (ENPV) and
economic internal rate of return (EIRR) are assessed using a 12.5% hurdle rate for Malawi. The
table below shows a summary of the ENPV and EIRR for the energy interventions:
Table 3: Calculated ENPV and EIRR for Energy Sector Projects

Certainty Equivalent
Project Type
100% 90% 85% 75%
Calculated ENPV (12.5%) $75,038,749 $55,292,060 $45,418,716 $25,672,027
Energy
EIRR 18.1% 16.8% 16.1% 14.6%
The overall investments show that the ENPV will be US$75.0 million with an EIRR of 18.1%.
Additional details regarding the particular impact on the specific groups of beneficiaries are
described below where we have also provided preliminary estimates on the impact of the MCC
investments on domestic households and non-domestic users of electricity.
4.4 Target beneficiaries

4.4.1 Benefits to Domestic Users
The principle beneficiaries and respective benefits of the Concept Project are divided into
domestic and non-domestic users of electricity. The backlog of benefits is through the
environmental impacts such as the use of charcoal and fuelwood which pose a threat to
Malawi’s natural resources. About 89% of Malawi’s population use charcoal and fuelwood for
cooking and kerosene and candles for lighting. It is expected that the increase in electricity use
will reduce the use of biomass energy for household use. In addition, less power outages and
17
less voltage fluctuations will enable electricity use to become more reliable for business use
thereby reducing the dependence on generators and use of petrol or diesel as the prices of
such commodities is becoming unpredictable and expensive on the global market.
The projects to be implemented will increase the number of electrified households and the
income of households affected by the implementation, but this differs by region. Other benefits
are more indirect and therefore less measurable17. By implementing the concept projects
potentially more than 52,600 households will be electrified due to the increased capacity in
generation, transmission and distribution of electricity. This would be an increase of more than
45% with regard to the number of domestic connections in 2007. Possible risks include
untimely installation of additional generation capacity, technical capacity of ESCOM and the
cost of connection for households.
All regions in Malawi will be affected by implementation of the projects. In each region an
additional 4 to 5% of the households can be supplied by the ESCOM grid that is fairly evenly
spread. The urban areas will notice the immediate impact of the project since most of the
beneficiaries are already connected to the grid. Through implementation of the project the
electrification rate of Malawi can potentially be increased to 45% of the population by the end
of the estimated project period on assumption that new hydropower plants are installed when
appropriate.
Within a residence electricity is mostly used for lighting, television, ironing, refrigeration,
household appliances and cooking. Radios in non-electrified households mostly run on
batteries. Outside the dwelling, households could benefit from using electricity in business and
public entities connected to the grid.
It is expected that income of households will increase by generating more income from existing
activities (see table 4) and by generating income from new activities due to an increased ability
to expand their businesses. The increase in income based on a ‘customer surplus’ calculation is
19-22%, and based on an ‘electricity attribution to income’ calculation 5-15% (See table 4 for
the impact on income of households, Annex 6 for explanation of the calculation and Annex 14
for a table of the base income generation data used by region).18
17
See Annex 7 for household characteristics and population and Annex 8 for poverty rates
18
According to the study “Household Energy Use in Malawi” in 2006 the consumer surplus for electrification of a
rural household is US$0.17-0.21/kWh (44-45 US$ per year at a consumption of 260 kWh/year) on the conservative
assumption that the area under the lighting demand curve is only 5% of the area under a straight-line approximation
18
Table 4: Increase in Income of Households Being Electrified
Peri-Urban
Rural Household Urban Household
Household
(US$) (US$)
(US$)
Actual
Consumption Costs per year 17 114 211
Connection Costs 175 175 175
Willingness to Pay
Consumption per year 154 325 496
Connection and In-House Wiring 53 112 660
Surplus
Consumption per year 137 211 285
Connection and In-House Wiring -122 -63 485
Annual Income
Actual 281 593 905
Customer surplus per year 62 103 174
Increase in income per year 43 31 48
Customer surplus (%actual income) 22% 17% 19%
Electricity attribution to income (%actual income) 15% 5% 5%
As the connection costs are equal for the poor and non-poor, the poor face an impediment to
connect to the electricity grid to a greater extent than the non-poor. It is therefore proposed
that additional connection should be accompanied with a cost reduction of electricity
connection to the poor. In this case the subsidy should be made explicit, in both the
Government of Malawi and ESCOM’s books, it should be well-targeted; performance based,
and should not impact on ESCOM’s sustainability or creditworthiness.
4.4.2 Benefits to Non-Domestic Users
As already-connected business and public entities will experience fewer power outages, shorter
power outages and less voltage fluctuations, they will be more efficient in their use of
electricity and will avoid using generators. On average this will result in 10% increase in total
sales value both for formal and informal firms.19 Firms with a generator are 60% more
productive than those without and 50% of the enterprises in Malawi have generators. A
company will also run a lower risk of withdrawing from the sector in Malawi due to power
outages and poor power quality. The number of medium and small enterprises withdrawn can
be decreased by 0.12% if reliable electricity can be provided for those enterprises at risk. 20
Improving the availability and reliability of power supply will also attract more investors in
Malawi who operate energy-intensive processes such as uranium diggers, heavy sand
extractors, textile manufacturers and dairies. With more reliable and low-cost electricity,
19
The median estimate for losses in production due to power outages and surges from the public grid in 2004 was
10 percent of the total sales value (both for formal and informal firms). Among firms with generators, the average
firm loses 0.5% of the median sales per year.
20
Malawi Medium and Small Enterprise Survey, 2000
19
manufacturing costs are reduced which in turn should reduce the pressure on salaries and
wages and hence should also positively benefit staff income levels.
Below we have explored the impact of the MCC investment on certain key business sectors in
Malawi. Special attention is given to trading centers since they afford the rural population
easiest access to the national grid.21
4.4.2.1 Agriculture
More than 5% of the Malawian population live on an urban farm of which 30% are poor and
almost 85% live on a rural farm of which almost 44% are poor (Welfare Monitoring Survey,
2007). Knowing that more than 90% of the urban population and less than 1% of the rural
people have access to electricity we might assume that more people on urban farms would
immediately benefit from reliable electricity than people on rural farms.
Contemporary irrigation methods use electricity to transport the water. Malawi has an
irrigation22 potential of about 162,000 hectares, but only a little over 2% of the total arable land
is presently under irrigation23. Almost none of the agricultural households use modern methods
of irrigation24. The government has the plan of rehabilitating existing schemes and developing
new ones, for a projected irrigated area of 70,000 hectares by 201125.
Large-scale farms are in general highly dependent on the supply of electricity as they are often
engaged in high-value crop production, most notably that of tobacco, tea, coffee and
sugarcane. The poverty rate at a large-scale farm is 30.6% and the per capita expenditure
US$204, whereas the poverty rate is 61.0% and the per capita expenditure US$122 for small-
scale rural farmers. Large-scale farms could benefit by increased reliability of the power supply
and so avoiding use of generators26.
21
See Annex 15 for an overview of (sub-) sectors and income distribution for small and medium enterprises
22
The GoM has recognized that irrigation and water development is key to the country‟s future success, due to its
direct linkages with agriculture and energy. Irrigation will contribute towards reducing overdependence on rain-fed
agriculture, while proper conservation of water will also contribute towards the generation of electricity.
23
FAO (Food and Agriculture Organization of the United Nations), 2007
24
Integrated Household Survey 2004-2005
25
In China a 1% increase in irrigation is associated with a 0.41% rise in agricultural output per worker, resulting in a
1.13% drop in poverty incidence. (Growth, Inequality, and Poverty in Rural China: The Role of Public Investments,
S. Fan et al., 2002)
26
A sugar estate indicated that it needs to irrigate 24 hours a day in order to get the desired crop quality and a tea
estate in Malawi indicated losses of almost US$20 million a year due to power interruptions.
20
4.4.2.2 Industry
The mining, textile and dairy industries are important sub-sectors with electricity sensitive
processes. The country has known mineral deposits of apatite, aquamarine, bauxite, corundum,
glass sand, granite, graphite, kaolin, kyanite, monzanite, phosphate, pyrite, salt, tourmaline,
uranium, and vermiculite. Resources of oil or natural gas are not known.27 Currently 3,246
formal employers are working in this sector and two important mining projects are starting
developing: the multi-million dollar Kayelekera Uranium Project28 and the Tengani Heavy
Mineral Sands Project. Although industrial minerals deposits are generally not of immediate
interest to international companies, local companies should seriously consider developing these
mineral deposits, which are mostly suitable for exploitation through small-scale mining for local
industries. Reliable electricity supply is an important requirement to attract investors and the
concept paper lays the foundations for this.
The current level of investment in the clothing and textile sector in Malawi is estimated to be in
the region of around US$5 million. For the textile sub-sector in particular, the investment levels
are so low that it is not possible for this sector to produce all the fabric types demanded by the
garment sub-sector. The informal garment sector provides employment to around 30,000
people country-wide. The formal garment and textile sector employs between 10,000 and
11,000 people.
The dairy industry faces a limited return due to among other things low productivity. Since the
milk processing requires a constant temperature for its storage facilities, reliable electricity
supply is critical to this industry. Five dairy processing plants, situated in the major cities of
Blantyre, Lilongwe and Mzuzu, dominate the sector. In the formal sector, there are some 4,000
dairy farmers producing around 6,500 tons of milk. The sector is mainly reliant upon
smallholders with just a few large-scale farms.
4.4.2.3 Trading Centers
An electrified trading center is mostly impacted by power outages and poor power quality. By
implementing the concept project 94% of the maize mills, 54% of the business centers and 43%
27
Ministry of Energy and Mining, 1997
28
Investor Paladin Africa requested 100% reliable electricity supply of ESCOM, which ESCOM could not
guarantee, and is using now diesel generators. Besides, there is no country in the world that can supply 100%
reliable electricity.
21
of the public facilities in the electrified trading centers will benefit from having more reliable
electricity supply from the national grid, but this differs per region (see Annex 15 and 16).29
4.4.3 Other Secondary Benefits

4.4.3.1 Health Benefits
Because of the complex relations between health, lifestyle, environment and infrastructure, it is
difficult to quantify the impact of the concept project on the health of the individuals affected.
A study on electrification in Bangladesh30 reported that the average annual healthcare
expenditure by the electrified households was 44% higher than their non-electrified
counterparts. The annual health care expenses for the females of electrified villages were 85%
higher than those in the households of the non-electrified villages and 104% higher than those
in the non-electrified households of electrified villages.31 It is not known whether this can be
attributed to the fact that the households already have higher incomes as evidenced by the
ability to afford electricity or whether it is due to increased media awareness through TV and
radio access.
Reliable availability of electricity could also benefit the quality of health services and lower
costs by extending opening hours and significantly strengthening the cold chain for vaccines 32.
In addition, worker absenteeism in both health clinics and schools can be reduced by improving
living conditions and morale. However, no study has been undertaken in Malawi to quantify the
impact.
4.4.3.2 Supporting Education
Educational benefits associated with electrification have also been documented. Reading is in
general easier with electricity compared to paraffin lamps.33 Television might take reading time
away, but electrification increases the reading time of both adults and children in the
household once the adult and/or child decides to read. Once individuals chose to read or study,
electricity was also found to increase the time the children spent studying by 77 minutes and
29
See Annex 15 for an overview of the main public facilities and business entities (including maize mills) in
Trading Centers
30
Economic and Social Impact Evaluation Study of the Rural Electrification Program in Bangladesh, 2002,
NRECA International Ltd. Partners with the Rural Electrification Board of Bangladesh and USAID for the Rural
Power for Poverty Reduction (RPPR) Program
31
The previous MAREP programs were not accompanied by impact evaluations
32
In the medical field, "paraffin refrigerators" (fuelled with kerosene) are used for storing vaccine. However,
kerosene is sold for high prices in the market, and several clinics have been installed with independent power
sources to preserve vaccine.
33
Kerosene lamps provide 10-50 times less light than an incandescent lamp, depending on the type of bulb.
22
the time adults spent reading by 27 minutes per electrified household per day, compared with
non-electrified households.34
Electrification of a secondary school in Malawi could increase the rate for passage of qualifying
examinations for advance to higher grades and graduation from on average 30% to 80%.35,36
Primary schools are less dependent on electricity as secondary schools assuming that primary
schools are using fewer electric appliances and most of them are closed during the afternoon
and evenings.37 Assuming that schools offering higher education already use electricity they will
benefit from increased reliability of electricity supply and if using own generators during a
power outage from avoided use of alternative energy sources. In areas where there are off grid
energy solutions such as the solar-hybrid energy systems, students in secondary schools nearby
are able to read for two to three hours in the evening and able to offer other subjects such as
basic computer applications.
4.4.3.3 Improving Women’s Socio-Economic Status
Electrification can also contribute to the positive development on women’s socio-economic

status. Possible benefits of having electricity are the women’s mobility, more free time from
chores, knowledge about gender inequality issues, household work plan according to
convenience, changes in attitude in terms of reducing healthcare disparities, increase in overall
years of schooling for both boys and girls, preference to send girls to schools, and awareness of
legal issues. Women in electrified households are involved more in household level income-
generation activities and tend to reallocate time to remunerative employment. These
qualitative assumptions are supported by a quantitative analysis of the impact of rural
electrification on the changing socio-economic status of women in Bangladesh (see Annex 11).
4.4.3.4 Reducing Environmental Harm
4.4.3.4.1 Charcoal, Fuelwood and Kerosene Use
Almost half the charcoal in Malawi comes from forest reserves, 10% from national parks and
almost 40% from customary land. Households mainly use firewood and charcoal for cooking,
and paraffin for lighting as alternative energy source for electricity.38 About 98% of rural
households, 64% of households in Lilongwe and 42% in other cities use firewood for cooking.
34
Based on data from Demographic and Health Survey for 11 countries, Independent Evaluation Group, World
Bank
35
Master Plan Study on Rural Electrification in Malawi, 2003
36
This most certainly cannot be attributed to electric lights alone. Obviously, those schools with lights are better in
lots of dimensions, including probably the preparedness of students attending them.
37
On the other hand, 25% of the pupils in primary school experience facilities at school in bad condition (source:
Welfare Monitoring Survey 2007, National Statistical Office)
38
See Annex 12 for percentage distribution of households by main source of fuels used for cooking and lighting
23
With the MCC investment implemented and if people use electric stoves when connected we
expect a 3% decrease on charcoal equivalent forest area cleared.39 At a consumer-level, urban
consumers with access and means can be expected to substitute the more convenient and
modern electricity for fuelwood and charcoal as a primary cooking fuel.40
Assuming a household without electricity uses 2,115kg of fuelwood and a household with
electricity uses 393kg of charcoal per annum41 then the consumption of charcoal can be
reduced significantly once a household gets connected to the grid.42 On average, urban
households using paraffin for lighting and not for other purposes saves 30 liters of paraffin
(kerosene) per year once it uses electricity for lighting, and a rural household 14 liters per year.
If a household would use electricity instead of firewood it could save about US$105 a year for
charcoal use and US$226 a year for fuelwood43. On the other hand a household needs to
purchase a small electric stove if it starts using electricity for cooking, estimated at a cost of
US$18-36 per stove with a warranty of one year.
On the negative side, since the number of charcoal producers will be decreased the self-
employment will be impacted negatively, equivalent to a reduction of 0.48% of the number of
small-scale producers, 0.8% of the medium-scale producers or 0.6% of the large-scale
producers. These producers will need to find alternative sources of income; however with
increased access to electricity the opportunities to engage in other activities are expected to
increase.
Selling of charcoal has increased significantly in recent years, estimated at an average of 230
thousand tons/year, up from 140 thousand tons/year in the 1990s. Charcoal production is
wasteful as traditional kilns are only 10% efficient and therefore a large volume of wood is
required to make a small quantity charcoal. Only a small percentage (20-30%) of the economic
chain benefits the producer, the rest enters the informal economy of middlemen and retailers,
and as a result, government loses out on tax earnings. There is need to promote alternative and
affordable sources of energy in order to reduce the increasing environmental damage caused
by charcoal making and trading.
39
See Annex 17 for assumptions
40
Household Energy Use in Malawi, 2006
41
Based on data from the study “Charcoal: The Reality; A Study of Charcoal Consumption, Trade and Production
in Malawi” submitted to the Forest Governance Learning Group, 2007
42
At a price of US$ 0.17 per kg equivalent to a yearly saving of more than US$10. According to the study
“Household Energy Use in Malawi, 2006” a household spends approximately US$105 per year on charcoal.
43
Calculations are based on Arpaillange (1996) base consumption estimates.
24
4.4.3.4.2 Weed Infestation
Malawi is spending considerable amount of money to address the problem of weed infestation
in many rivers and other water bodies. The problem has seriously affected hydro-power
generation plans where ESCOM is spending approximately US$550,000 annually to manage the
weeds. There is inadequate information on the nature and dynamics of the weeds and
therefore Government has initiated a comprehensive national study to allow for realistic,
practical and long term solution to the problem.
Through the study, an integrated weed management plan will be produced for all the
catchments in the country and this will be a framework for future national programs to address
the weed problems. However, it will probably take many years before the study is completed as
government has not yet identified funds for the study. The catchment management study to be
supported by MCC includes a weed study component at micro catchment level which will come
up with urgent solutions affecting the power generation. The results of the study will be
incorporated in the proposed national study when it is completed.
4.4.3.4.3 Siltation
In 1994, the cost of environmental degradation in Malawi was approximately USD 245 million,
an estimated 11.5 % of GDP. Today, given that environmental conditions have deteriorated
further, the cost is probably higher. Siltation from cultivated areas is compounded by
inappropriate farming practices and inadequate extension messages. This calls for extensive
reform in the protection and management of land use systems and improvement in the
enforcement of environment and natural resources management laws and extension services in
some parts of the country particularly in environmentally sensitive catchment areas to address
the problem of rapid environmental degradation.
4.4.3.4.4 Public Awareness
This is an important element in the promotion of sustainable land use and management
practices in catchment areas to reduce environmental damage. Special training in Community
Based Natural Resources Management and other conservation technical skills should be
provided, through academic institutions and NGOs, to farmers and other service providers.
There is also need to sensitize the general public on available alternative energy sources
(energy efficient stoves, solar panels, briquettes, etc).
25
4.4.4 Rural Areas
Investments in the energy sector will immediately have an impact on the existing customers in
the rural area already having connection to the national grid as well as new customers which
will benefit from having electricity for the first time. Most connections in rural areas are
residential. These customers will experience fewer power outages and improved power quality,
resulting in fewer interruptions in using lighting and electric devices and less burn-outs of
electric devices.
26
5 SUPPORTING TECHNICAL INFORMATION
5.1 Sector Description
An inventory of the existing studies from which this paper has drawn for background
information is listed in Annex 5. In the following section key information about Malawi’s energy
sector is summarized so that the request for investment from the MCC can be put into context
within the wider energy sector in Malawi and more broadly within Southern Africa.
ESCOM is a state-owned national power company that currently owns and operates Malawi’s
major power plants, the national transmission grid and distribution network, and supplies
electricity to final consumers. Currently ESCOM has an installed generating capacity of 285 MW
connected to the national transmission grid. The interconnected grid, comprising of 132 kV and
66 kV transmission lines, is supplied from three main hydropower plants at Tedzani (93 MW,
commissioned in 1972 with an extension in 1995), Nkula A and B (124 MW, commissioned in
1966 with an extension in 1981) and Kapichira Falls I (64 MW, commissioned in 2000). A 15 MW
gas turbine in Blantyre, commissioned in 1972, was designed for back-up but is no longer
available and will be retired shortly. The main hydropower schemes are all located on the Shire
River whose source is Lake Malawi.
ESCOM’s transmission network is currently isolated from neighboring countries (other than
small cross-border distribution) but is a member of the Southern Africa Power Pool (SAPP).
Because of its physical isolation, it is not currently able to trade electricity. However, when the
planned 220 kV interconnector with Mozambique having a potential capacity of distributing
300MW is commissioned (see below), Malawi will become an operating member of SAPP and
will initially purchase 100MW of power from its neighbor from the Hydro Cabora-Bassa (HCB)
power complex to meet the existing demand. In the longer term, connection to SAPP allows the
possibility of both exports as well as imports under long-term contracts or short-term trading to
fill immediate shortages. Importantly, the possibility of imports (without necessarily the
imports themselves) helps reduce the risks associated with dependence on a single river – the
Shire – as the source of almost all of Malawi’s power generation.
To the north, Malawi’s power grid is isolated from that of Tanzania, but the proposed Songwe
multi-purpose dams with an installed capacity of 342MW hydropower plant offers the
possibility of a second interconnection with Tanzania and later the East Africa Power Pool
(EAPP) when Tanzania joins EAPP44.
44
It is currently estimated that the installed capacity on the EAPP along the Congo River is approximately
3,000MW.
27
In 2003, the Government of Malawi approved a Power Sector Reform Strategy (PSRS) and
subsequently enacted three legislative documents (relevant to this Concept Project) that were
approved by Parliament in 2004 vis-à-vis: the Energy Regulation Act, the Electricity Act and the
Rural Electrification Act.
The legislation required the creation and licensing of a transmission company, one or more
generation companies, and one or more distribution companies. The transmission company
was also to be the single buyer of electricity from the generators and the seller of electricity to
the distribution companies. The legislation also created the Malawi Energy Regulatory
Authority (MERA) to replace the existing National Electricity Council (NECO). There was some
delay in taking the step required to bring the legislation into force but this step was finally
taken in 2008 though the Electricity Act was not fully enacted45.
In preparation for the new law, ESCOM has created generation, transmission and distribution
business units under a holding company structure (though not established as companies). The
company is divided into the three business units, two holding company divisions and the office
of the Chief Executive Officer.
The PSRS envisioned that new power generation capacity would be developed by the private
sector as independent power producers (IPPs) contracted by the transmission company. The
new law requires that tendering for the capacity required by the transmission company be
supervised by MERA.
PriceWaterhouseCoopers (PwC), on behalf of the Privatization Commission 46 reviewed the PSRS

in 2007 and recommended the creation of an ESCOM holding company with three separate
generation, transmission and distribution subsidiaries, and with the transmission company
initially responsible for the buying and selling function. PwC also made recommendations
relating to private participation in ESCOM.
The role of policy making in the energy sector is the responsibility of the Ministry of Energy
through the Department of Energy Affairs (DoEA). DoEA is also responsible for implementing
Malawi’s rural electrification program and off-grid renewable energy programs. Several
components of the Concept Project are designed to assist in implementing the policy approved
in the PSRS and enshrined in the legislation, including:
a). Developing the framework that will attract private investors in IPPs;
45
The captioned sections are Part II, section 4 and all of Parts IV and V
46
ESI: ESCOM PSP Review and Validation Report, PwC for the Privatisation Commission, November 2007.
28
b). Developing the framework to regulate the power sector, including private generators
and public-private partnerships (PPPs); and
c). Preparing a least-cost investment plan to identify which power plants should be
developed and contracted by the transmission company as well as identifying
necessary transmission investments.
5.2 Recent, On-Going or Expected Investments
As part of its day-to-day activities, ESCOM routinely undertakes investments in transmission

and distribution and connection of households in both urban and peri-urban areas. Rural
electrification is the responsibility of the Ministry of Energy and Mines. The investments listed
below are larger scale projects undertaken by ESCOM or projects undertaken by DoEA or other
Government bodies.
5.2.1 Refurbishment of Hydro-Power Plants
ESCOM has undertaken the rehabilitation of three units at Nkula B and this was self-financed by
ESCOM. Rehabilitation of Nkula A and further work on the other two units at Nkula B is planned
when there is sufficient spare capacity on the system (i.e., when Kapichira-II is commissioned)
to allow the plant to be taken out of service. This rehabilitation is included in the Concept
Project.
The Tedzani I & II hydropower stations have been out of operation since December 2001 and
are currently undergoing complete refurbishment including rewinding of the stators, the
reconditioning the turbines and auxiliary equipment, rehabilitation of intake structures and
introduction of a SCADA system. Most of the work is completed and this is expected to be fully
complete by around the end of February 2009. The refurbishment will have restored to service
the 40 MW of capacity that was not available since 2001. This project costs US$16.5 million and
was undertaken on a trade-financed basis that took several years to arrange, and encountered
a number of challenges along the way.
Further investment is required in trash screens, dredging and weed-control equipment in order
to prevent future damage of the type that led to the refurbishment of the existing hydropower
plants and led to capacity deficits. These additional investments are included in the Concept
Project.
5.2.2 Kapichira-II
The Kapichira-I hydropower plant, commissioned in 2000, currently has 2 x 32 MW units but the
civil works were designed to allow an additional 2 x 32 MW units to give a total capacity for the
29
four machines of 128 MW. Kapichira-II is expected to cost US$52.8 million including the
associated construction of 30km of 132kV transmission line from Kapichira to Blantyre West
Substation and substation equipment to evacuate the additional power47. Funding for
Kapichira-II was approved by the Government of Malawi from the Development Fund.
Completion of Kapichira-II is crucial to the strategy of relieving the constraints described in

Section 1, but it is not sufficient by itself to relieve constraints on the supply of reliable
electricity to existing consumers and to widen access to new consumers. Investments in
generation must be combined with the investments in transmission and distribution that are
included in the Concept Project in order to achieve the intended goals. As discussed in Section
6, we note that failure to complete Kapichira-II would jeopardize the success of the Concept
Project in improving the reliability and availability of electricity in Malawi.
Consideration was given by the Government of Malawi to the involvement of the private sector
in developing Kapichira-II but given the physical characteristics of the Kapichira site and the
many facilities used in common by Kapichira I and II, private sector participation was not
considered feasible or necessary.
5.2.3 Interconnection with Mozambique
A 220 kV interconnector with Mozambique is planned with financing by the World Bank. This
will run from the existing Matambo substation in the Tete Province of northern Mozambique to
a new substation at Phombeya located in Malawi’s Balaka District, north of Blantyre. The line
will have a maximum capacity of approximately 300 MW but initially it is expected to provide
an initial minimum capacity of 50 MW when it is commissioned in 2012 and will allow exports
when Malawi has excess capacity. The total capital cost of the interconnector is estimated at
US$109 million of which approximately US$60 million is for the Malawian portion of the line
including associated investments to improve infrastructure to support electricity trading, as
well as technical support. The World Bank’s Board approved the loan in 2007. An
Interconnection Bill to approve the project is currently before Parliament and is expected to be
approved before 31 August 2009.
We note that, as with Kapichira-I, the additional capacity provided by the Mozambique
interconnector by 2012 will be crucial to the success of the Concept Project in improving the
reliability and availability of electricity in Malawi. Despite investments in transmission and
distribution, if there is insufficient generating capacity then power supply will be inadequate
and load shedding will continue.
47
World Bank estimates US$60-65 million.
30
5.2.4 Rural Electrification - MAREP
MAREP - Malawi Rural Electrification Program - started in 1980 and since 1995 has been
implemented by DoEA. Four phases of MAREP have been fully implemented and, as of January
2009, a fifth is almost complete. The program involves extensions to transmission and
distribution lines to administrative centers, trading centers and tobacco growing areas.
MAREP IV was completed in May 2007 and extended grid access to 97 trading centers
countrywide (more than originally targeted). The total cost was MK 680 million (US$4.8 million),
of which MK 188 million (US$1.3 million) was provided by the Japanese Government under
debt relief grant aid. The balance was financed from local resources through a levy on
petroleum product sales (the fuel levy).
MAREP V benefits 27 trading centers at a cost of MK899 million (US$6.3 million). The Malawi
Government provided MK84 million from the Development Fund, MK404 million from the fuel
levy and MK215 million from a MERA establishment fund. The Japanese Government is
providing the balance of MK196 million through the Japanese Non-Project Counter Value funds.
MAREP V was expected to be completed in October 2008 but has been delayed by the heavy
rains. At the time of preparing the Concept Paper in January 2009, it had almost been
completed.
MAREP VI will electrify a further 54 trading centers. The trading centers to be electrified have
been identified based on the 2003 Rural Electrification Master plan study (see Section 3) and
field teams were sent out in January 2009 to prepare feasibility studies and design the schemes.
These studies are expected to be completed within two months. MAREP VI will be funded in
part from the fuel levy and, it is hoped, continued support from the Japanese Government. The
cost will be estimated after the feasibility and design studies have been completed but this
phase is expected to cost approximately MK 2,400 million (US$16.5 million). The cost per
trading center for MAREP VI (and for MAREP VII below) is considerably higher than previous
phases because the earlier phases had targeted the easier-to-reach trading centers.
A MAREP VII project will continue the program of electrification described in the 2003 Master
plan and targets to electrify 81 trading centers.
5.2.5 NRM Projects
The projects listed below are at different levels of formulation or implementation and will
contribute significantly to poverty reduction and environment and natural resources
protection.
31
 Agriculture Sector Program: Supported by the World Bank and others, includes
Sustainable Land Management and agriculture policy reforms in food security
 Mainstreaming Sustainable Land Management and Climate Change Adaptation in the
Shire River Basin: supported by UNDP, focuses on integrated watershed management
and community based natural resources management to reduce land degradation.
 Community Based SLM for small holders; a World Bank supported initiative in the
Agriculture Sector Program (under CAADP) to improve land management
 Nyika Plateau Community Conservation-UNDP/GEF; targets sustainable management of
the Nyika Plateau ecosystem.
 Mulanje Mountain Conservation Trust (MMCT)-an endowment fund looking after the
conservation of the biodiversity of mount Mulanje.
 Malawi Environmental Endowment Trust (MEET)-offers grants for community project in
environment and natural resources.
 COMPASS - A USAID financed civil society and local government initiative promoting
environment as economic goods for community based natural resources management
and development.
 Promotion of alternative sources of Energy-supported by the Malawi Government aims
at promoting the utilization of various market ready viable alternative sources of
energy to substitute firewood and charcoal.
 Community Environmental Micro-projects-supported by USAID under the NATURE
program and implemented by the Ministry of Local Government through the
department of Environmental Affairs, promoted community based environment and
natural resources projects.
32
6 ENVIRONMENTAL, SOCIAL & INVESTMENT
SUSTAINABILITY RISKS
6.1 Environmental Impact Assessment Regulatory Framework
The Malawi government adopted both the Environmental Policy and Environmental
Management act in 1996 to provide guidance and set standards for the development of sector
policies in environment and to promote the sustainable use and management of the
environment and the conservation of natural resources.
Among other provisions, the Act established the Department of Environmental Affairs as the
government watchdog to coordinate implementation of environment and natural resources
programs in Malawi through the National Council for the Environment (NCE) and the Technical
Committee on the Environment (TCE). The Council is composed of sector representatives and
acts as the advisory body to the Minister while the Technical Committee gives technical advice
and information to enable the NCE to give informed advice to the responsible Minister.
The Act also provided for the EIA process which requires that potential environmental
consequences of major development projects be identified and considered before project
activities are undertaken. To facilitate this process, EIA guidelines were prepared and adopted
in Malawi in 1997.
The Environmental Policy was revised in 2004 and provides for the establishment of an
autonomous Environmental Protection Agency (EPA) because there are limitations for the
Department of Environmental Affairs to compel fellow departments to comply with relevant
NRM policies and legislation. The EPA will have adequate political visibility and authority to
compel compliance and enforcement with applicable NRM laws and policies. The
Environmental Management Act has been revised and provides a legal framework for the
establishment of the Environmental Protection Agency. It is now awaiting parliamentary
approval.
6.2 Environmental and Social Risks
With one or two exceptions, the Concept Projects do not have significant detrimental
environmental or social impacts. All the projects in the power sector were thoroughly screened
to determine if environmental and social impact assessments were conducted or required for
new projects. The outcome of this screening process was as follows:
33
6.2.1 Generation Systems Improvement Projects
The procurement of the additional weed harvester for the Liwonde Barrage will require the
identification and acquisition of suitable sites for the disposal and sustainable management of
harvested weeds. An Environmental Management Plan will be required to provide guidelines
for this and the development of the guidelines will be part of the Catchment management
Study
The procurement of the dredgers for siltation management will also require the development
of an Environmental Management Plan, which will provide guidelines for the disposal and
sustainable management of the silt.
6.2.2 Transmission Projects
The development of the new substations and looping of existing lines at new sites in Blantyre
and Lilongwe will not require Environmental and Social Impact studies as these will be
established in existing ESCOM sites. Issues to do with any possible encroachments will be
resolved using the existing mechanisms and responsible authorities.
The construction of new transmission lines and upgrading of existing lines will require
environmental impact assessments as the lines will pass through ecosystems with varying
biodiversity and land use practices. All the proposed lines pass through uninhabited areas and
will not involve the resettlement of people.
6.2.3 Distribution Projects
Peri-urban electricity access will involve the installation and retrofitting of equipment on
existing distribution substations and overhead lines within existing servitudes. No adverse
environmental and social impacts are expected.
6.2.4 Projects Requiring Environmental Impact Assessments
a). The Lilongwe – Mzuzu 220 kV transmission line extension that may potentially pass
through ecologically sensitive areas and human settlements requiring resettlement
action plans.
b). Relatively short 132 kV and 66 kV transmission line extensions may also potentially pass
through forested areas and environmental impact assessments may be required.
c). Whilst weed management, siltation management and trash diversion works on the
Shire River are relatively small-scale activities, may have environmental impacts and
environmental assessments should be undertaken.
34
d). Rehabilitated Transmission and Distribution Systems projects will require
Environmental and Social Impact Assessments
e). Some of the projects covering Electrification for Rural and Peri-Urban Areas will require
Environmental and Social Impact Assessments.
6.3 Risks to Investment Sustainability
This section identifies risks to the sustainability of the MCC investment and describes measures
planned or needed to ensure that the benefits from the Concept Project can be sustained
beyond the period of MCC financing.
6.3.1 Complementary Measures to Increase Generation Capacity
The success of the Concept Project depends crucially on the completion of Kapichira-II to
increase Malawi’s available capacity by 64 MW and the commissioning of the interconnector
with Mozambique to allow the import of a further 300 MW of power. The Ministry of Finance
has approved funding for Kapichira-II and the plant is expected to be completed within two
years by the end of 2011. Work on the Mozambique interconnector is pending formal approval
by Parliament of the Interconnector Bill and once approved is expected to be completed by
2012.
Furthermore, the Government of Malawi financed the preparation of preliminary feasibility

studies and designs for some of the projects on the Songwe River in the 2008/09 financial year
which is currently being implemented under the Ministry of Irrigation and Water Development.
The river has a potential of constructing a hydropower plant with an installed capacity of
342MW which will benefit Malawi and Tanzania in the longer term. It is expected that the
source of funds for this project could be committed from the African Development Bank. The
African Development Bank will also finance the full feasibility studies for the Lower Fufu Hydro
Power Plant which has a design capacity of 144MW. This HPP is expected to be installed within
the MCC impact period.
In addition, the project will depend on other investments being promoted by the MCC project
through the construction of mini-hydro power plants of 5MW of installed capacity and
promoting existing energy initiatives by local private companies such as the molasses-power
plant developed by the two Sugar companies in Malawi which have an installed capacity of
14MW each.
35
6.3.2 Sector Reforms
In 2003, the Government of Malawi approved a power sector reform strategy (PSRS) and
subsequently enacted legislation that was approved by Parliament in 2004 and which came into
force in 2008. This required the creation and licensing of a transmission company, one or more
generation companies, and one or more distribution companies. The transmission company
was also to be the single buyer of electricity from the generators and the seller of electricity to
the distribution companies. The legislation also created the independent regulator – the
Malawi Energy Regulatory Authority (MERA) to replace the existing National Electricity Council
(NECO).
The PSRS envisioned that new power generation capacity would be developed by the private
sector as independent power producers (IPPs) contracted by the transmission company. The
new law requires that tendering for the capacity required by the transmission company be
supervised by MERA.
ESCOM is currently operating as a holding division with three separate generation, transmission
and distribution divisions, and with the transmission division initially responsible for the buying
and selling function. A study prepared for the Privatization Commission by
PriceWaterhouseCoopers recommended that private sector be invited for participation in
ESCOM as a holding company with subsidiary generation (existing power plants), transmission
and distribution companies, and with new power plants being developed by independent
power producers. Continuation of Government’s reform strategies is important for the
sustainability of the Concept Project.
6.3.3 Watershed Management
The problems of siltation and weed infestation affecting ESCOM’s existing hydropower plants
on the Shire River, have potentially have arisen from poor protection of the catchment areas
in the Lake Malawi and Shire river systems, resulting in poor and unsustainable power
availability. These problems are widely linked to changing land use and management practices
in the catchment areas (see annex 21: map of Malawi showing major catchment areas).
It should, however, be noted that improved catchment management policy entails recognizing
that environment and natural resources protection requires political will, stakeholder
commitment and adequate resources. In addition, it must be recognized that the desired
poverty impacts may not be achieved in the shortest possible time. This investment will,
therefore, need to be complimented by activities that enable the establishment of
demand/productive uses, rural uptake and ability to pay. Catchment protection and improved
land use management practices will thus have major benefits to hydropower plants in Malawi
36
and will improve generation capacity, power availability and reduce the need for dredging and
other river management practices that are currently necessary to ensure the continuous
operations of the power generation plants.
6.3.4 Operations & Maintenance – Financial
Financial resources have, in the past, been inadequate to ensure proper maintenance of
generation and transmission assets and this has led to problems of poor generation availability
and reliability that the Concept Project is seeking to address through investment in
rehabilitation of hydropower plants and control of sedimentation, weed growth and debris in
the river. Inadequate financial resources have also led to low levels of investment in
transmission and distribution, leading to overloaded equipment, low supply reliability and poor
quality supply.
Plans are underway to improve the financial viability and sustainability of ESCOM through the
Financial Sustainability Study and the Diagnostic Review of Revenue Management Study48. The
recommendations of these studies will be implemented through the Concept Project and will
help ensure ESCOM’s viability and the financial sustainability of the power sector. Issues
affecting the company’s financial position that will be addressed by the two studies include:
a). High losses in transmitting and distributing electricity (losses of over 19%);
b). Devaluation of local currency;
c). High leverage;
d). Inadequate capital investment;
e). Poor collection performance (average debtor days ratio of 184, representing a value of
about US$30.5 million); and
f). Poor business culture.
While ESCOM’s accounts for the past four years show that ESCOM has covered its operating
costs, including depreciation, bad debt provision and interest costs, from its tariff revenue, this
has partly been achieved because debts on-lent from Government have been deferred49 or
converted to equity. This will be unsustainable. At the current tariffs, ESCOM would be unable
to finance new investment or service debts relating to new investment.
To ensure operation and maintenance of the projects can be sustained after implementation,
ESCOM needs to cover its operating costs and attract financing. This in turn requires that tariff
levels be regulated to ensure financial viability while, at the same time, ensuring that costs are
48
Request for Proposals for Consultancy Services for Development and Monitoring of ESCOM Financial
Sustainability Plan, final version March 2008
49
Relating to the Highly Indebted Poor Countries initiative.
37
kept to the minimum necessary level. The newly established independent regulatory authority
– MERA – has an important role to play in this regard50. ESCOM has also taken short term cost
cutting and administrative measures including, among others, employees’ expenses, hiring of
vehicles, revenue collection and procurement.
ESCOM submitted an application for a tariff increase in January 2009 and public hearings were
held in early February. A decision is expected to be taken on the application in July. The tariff
application proposed a multi-year tariff formula covering the years 2009 to 2013 thereby
helping secure adequate levels of revenues for ESCOM over that period.
6.3.5 Operation & Maintenance - Institutional
Staff in ESCOM’s generation business unit have long experience of operating hydropower plants
but have been hampered by problems in financing measures to reduce the risks to turbines and
generators caused by trash and sediment. The measures in the Concept Project should relieve
these problems. Improved revenues when the new regulatory framework becomes operational,
combined with the financial improvements described in Section 6.1, should ensure that
financial constraints do not hamper proper maintenance practices in future so that operational
improvements will be sustainable.
Similarly, financial improvements will facilitate investments in the transmission network,

reducing overloading transformers and lines and ensuring a transmission network that
maintains a reasonable level of reliability and reduces technical losses. MERA is currently
drawing up licenses for generation, transmission, distribution, import and export. The licenses
follow the by-laws of the electricity act and aim at setting standards for the various
performance areas51. In case a licensee fails to meet the performance standards, MERA may
levy penalties on the licensee or terminate the license.
6.3.6 Tariffs and User Fees
ESCOM is a vertically integrated power company though generation will be open to private
sector participation for all future power plants after Kapichira-II. The services provided by
ESCOM are financed through regulated tariffs charged to electricity consumers. Both the level
of the tariffs and the tariff structure are, under the Energy Regulation Act which came into force
in 2008, regulated by MERA.
50
ESCOM‟s application for a new, cost-reflective tariff is being processed by MERA and a decision on approval
will be made by 1st July 2009. See ESCOM‟s website (www.escommw.com) for ESCOM‟s tariff application.
51
Performance areas identified include installation permits, supply and quality of service, safety code rules, wiring,
customer service and tariffs and charges
38
Over the past four years to fiscal year 2007, ESCOM covered its operating costs (including
depreciation and bad debts) and interest costs from its tariff which is currently about
US$0.043/kWh but this was achieved largely because loans from international financing
institutions were written off or deferred. At the current tariffs, ESCOM would be unable to
finance new investment or service debts relating to new investment. In the fiscal year 2006,
ESCOM was able to pay only 79% of debt service obligations to lenders that had extended
direct loans to the company, but it has been unable to meet its debt service obligations on the
remainder of direct loans and to the Government for on-lent loans.
ESCOM submitted an application for a tariff increase to MERA in January 2009 and public
hearings were held in February 2009. The application requested an average tariff increase of
54% over a period between 2009 and 2013. This level of increase is consistent with an
assessment conducted by PwC for the Privatization Commission52 which suggested that tariffs
needed to increase to approximately US$0.065/kWh in order to allow ESCOM to attract
financing of future investments.
An increase in tariffs is considered crucial to avoid a recurrence of load shedding when the
Concept Project investments end. This increase will prepare ESCOM to add more generation
capacity including the Lower Fufu HPP.
6.3.7 Legal and Regulatory Issues
The energy sector laws passed by Parliament in 2004 were ‘gazetted’ by the Ministry of Energy
and Mines in 2007, thereby making part of these laws effective. The legislation, and the Power
Sector Reform Strategy that preceded it, were intended to create a framework that would:
a). Improve technical and economic efficiency (including improvement in the reliability
of electricity supply and reduction in load shedding, improvement in the
maintenance of power plants, and reduction in waiting lists for new connections).
b). Improve commercial performance. This includes placing ESCOM in a position where it
can finance substantially more investments from its own balance sheet and
improvements in commercial (non-technical) losses and reductions in outstanding
debtors.
c). Take advantage of power trading opportunities under SAPP allowing Malawi to be
either an exporter or importer of electricity.
d). Make electricity accessible to a large proportion of the population.
e). Protect the environment.
52
ESCOM PSP Strategy Review and Validation, February 2008.
39
The independent sector regulator (MERA) was formally established in 2008 and has recently
recruited staff. MERA will provide important comfort to potential investors in power generation
(e.g., Lower Fufu hydropower scheme) that tariffs to end users will be sufficient to ensure that
the buyer (ESCOM’s transmission business) will be financially viable and able to make
payments. MERA will also ensure that electricity tariffs allow sufficient revenues for ESCOM’s
business units to adequately maintain, refurbish, and reinforce their equipment in order to
avoid problems of load shedding and poor electricity supply quality.
While the MAREP program is funded by grants and rural grids are transferred to ESCOM on
completion, the costs to ESCOM are similar to (or lower than) those of households in urban or
peri-urban areas. But if ESCOM is to seriously expand access to the national grid then additional
costs will be incurred. The regulatory framework would also allow ESCOM to recover the costs
associated with such a program.
40
7 IMPLEMENTATION PLANS, MONITORING &
EVALUATION
7.1 Implementation Plan
The implementation arrangements for the Concept Project are described in this section,
including the project implementation structure, an assessment of the capacity of relevant
implementing entities, relevant experience of the implementing entities, the implementation
timeline, and plans for longer-term project activities53.
Figure 2: MCA-M Implementation Structure for the Energy Project
The implementation of the project shall follow guidelines set by the MCC. The project has made
provision for the procurement of Consultancy Servicers to undertake studies to finalize the
project details and prepare tender documents. The project implementation units of ESCOM and
53
See Annex 27 for timelines at the project level.
41
MCA-M shall work hand-in-hand under a joint Project Steering Committee during construction.
ESCOM has expressed its wish to supervise the construction and commissioning of the project.
ESCOM shall appoint a Project Director with approval from MCC to supervise the construction
of the project. The Environmental Specialists from MCA-M and ESCOM shall oversee the
management of the Environmental and Social impacts identified during the study phase.
A Procurement specialist shall be appointed by MCC and seconded to MCA-M to verify that
materials supplied for the project are of expected quality and comply with the bill of quantities
and specifications. A Financial Specialist shall also be appointed by MCC and seconded to MCA-
M. The Financial Specialist shall verify all invoices submitted by contractors and authorize them
for payment before submission to MCA-M. MCA-M shall transmit the original to MCC with copy
to Government for payment. The Contractors will be paid directly from the Bank chosen by
MCC for disbursements.
7.2 Monitoring & Evaluation
The impact of the program on the beneficiaries will be monitored during, and at the end of, the
program. This section describes the outcomes and outputs of the projects and how these will
be measured. During the phase of due diligence and program refinement a full monitoring and
evaluation plan will be developed.
As described in Section 2, the program logic describes how the individual projects and outputs
relate to the sector outcomes, the sector objective and the overall compact goal. In order to
measure and evaluate the impact of the MCC investment indicators will be identified and base-
lined in the next phase. The indicators are derived from the Program Logic diagram and the
targets from impact analysis on beneficiaries.54 In Annex 26 the definitions, units of
measurement, the entity responsible for providing indicator data, the data collection
instrument, and the baseline and target values are shown for generation and, in Annex 27, for
transmission and distribution.
MCA-M shall work hand in hand under a joint Project Steering Committee during construction.
Supervision of construction and commissioning will be carried out by ESCOM. ESCOM shall
appoint a Project Director with approval from MCC to supervise the construction of the project.
Monitoring and evaluation (M&E) information is contained in a quarterly progress report and in
indicator tracking tables. The progress report includes information on both M&E management
issues and program results, including implementation issues such as setting up necessary
databases, hiring of M&E staff, as well as key program results and milestones. The indicator
54
See Annex 26 and 27 for the indicators applying to the generation, transmission and distribution projects
42
tracking table reports specific results against projected targets, explaining significant deviations
from the targets. In addition to the reports, MCA-M will submit an annual supplement to the
quarterly report due at the end of each US Fiscal Year (September 30). The report should
provide a comprehensive overview of progress toward achieving compact goals and objectives
over the preceding year. As needed, the M&E plan outlines the process and timing for
contributing monitoring and evaluation content to these reports. All reports will be publicly
available.
Input for the reports will be given by ESCOM and NSO, whereas the quality of the data will be
overseen by an M&E specialist operating independently of ESCOM and NSO.
Figure 3: MCA – Malawi Energy Sector Program Logic
COMPACT GOAL
Economic growth through increased competitiveness of agricultural
and manufactured products
ENERGY COMPONENT OBJECTIVE

Increased accessiblity to more reliable and quality power supply
OUTCOME 1 OUTCOME 4
OUTCOME 2 OUTCOME 3
Increased availability of Improved Natural
Increased access to quality Improved and effectively Resources Management in
quality and reliable power and reliable power supply managed power sector for priority catchmens to
supply to unserved users improved service delivery sustain power sector
investiments
OUTPUT OUTPUT
OUTPUTS
OUTPUTS - Strengthened capacity -Strengthened capacity to
- Rehabilitated power
- Rehabitated distribution for MERA and Department formulate and enforce NRM
station
system in the southern, of Energy legislation.
- Rehabilitated central and northern - Creating an enabling - Revised and harmonised
transmission and regions of Malawi environment for the NRM policies.
distribution systems
establishement of PPPs - improved weed and silt
- Improved weed and
- Electrification for rural - Improved financial management systems.
siltation management
and peri-urban areas in sustainability and -improved livelihoods
- Demand-side Malawi operational efficiency of through sustainable NRM
management activities ESCOM business enterprises
Source: MCA-M
43
8 BIBLIOGRAPHY
Girdis, D. and Hoskote, M. (2005), ‘Malawi: Rural Energy and Institutional Development,’
Washington D. C.: The International Bank for Reconstruction and Development
Malawi Government, „Electricity Act’, National Assembly, 2001
Malawi Government, „Energy Regulation Act, National Assembly, 2004
Malawi Government, „Establishment and Implementation of Multi-Sector Regulatory

Authorities: Draft Final Report,‟ submitted to the Privatization Commission, September
2006
Malawi Government (2005), ‘Integrated Household Survey 2004-2005,’ Zomba: National

Statistical Office
Malawi Government, „Malawi Growth and Development Strategy: From Poverty to Prosperity,
2006-2011,‟
Malawi Government, „National Energy Policy’, 2001
Malawi Government (2007), ‘Welfare Monitoring Survey,’ Zomba: National Statistical Office
Malawi Government (2008), ‘2008 Population and Housing Census: Preliminary Report,’ Zomba:
National Statistical Office
PriceWaterhouseCoopers, PB Power, Sacranie Gow and Company, DentonWildeSapte, and

Economic Consulting Associates (2007), ‘ESI: ESCOM PSP Strategy Review and
Validation,’ submitted to the Privatization Commission of Malawi
44
9 ANNEXES
Annex 1: Output of the Stakeholder Problem Tree Analysis

Power Problem Tree - Summary Level
Insufficient,
unreliable and
poor quality
power supply
Unreliable
Insufficient Lack of
Low generation transmission &
transmission & investment
capacity distribution
distribution capacity
network coverage
Current C Updated and Executed
T&D run with C Public funding
Unexploited new generation is implemented Upgraded secured for private sector
power sources capacity commercial
power sector technology new generation investment in
constrained orientation
master plan capacity IPPs
B Invest in Reform tariff
Incentives Independently C Equipment
Connect to additional gen. structure to
SAPP capacity e.g. aligned with operating replaced at end
reflect full
Kapichera performance entity of useful life
cost recovery
Fully explore Replace Implement Gov approves
alternative equipment at Procurement PPP bill & PPP
Improved mgt methods to
power sources end of life & capacity strategy
capacity reduce
e.g. hydro stock reserves improved implemented
vandalism
A Diversified
Projects prep’d Undertake Investment
& promoted preventative geographic environment is
incl. feasibility maintenance locations of stable and
studies power supply consistent
Enforce sust.
land & resource
use to reduce
siltation
Reform tariff
structure to
reflect full
cost recovery
Feasibility study on new sources of Rehabilitate Strengthen T&D network
A B C
power e.g. Lower FuFu Kapichira in priority areas
Natural Resources Management Problem Tree for the Energy Sector – Summary Level
Hydro-Generation
Capacity Diminished
Reduced Water flow
Excessive Siltation in
Waterways, Dams,
Rivers, etc.
Intensive & damaging Water resevoir capacity Excessive aquatic

Deforestation
landuse pattern sevely diminished weeds/trash
tbdOther Chemical,
Lack of enforcement of Expansion of agric. land Lack of efficient
Increasing settlements Conflicting policies Poor farming practices Charcoal production Biological, Mechanical
regulations and settlement harvesting equipment
measures tbd measures
Increasing energy needs Urbanization & lack of

Inadequate extensin Lack of alternative
Population pressure especially charcoal and alternative energy
services livelihoods (cash)
firewood sources
Annex 2: Map of Malawi Showing Existing ESCOM Grid
Annex 3: Transmission Projects
The following transmission investments are identified as urgent:
a). Procurement and installation of switchgear for second 25MVA 132/66kV transformer at
Blantyre West Substation (US$ 0.4M: supply and installation of equipment)
b). Procurement and installation of a 20MVA 66/33kV transformer for Chichiri Substation in
Blantyre (US$ 0.6M: supply and installation of equipment),
c). Procurement and installation of a 12.5MVA 66/33kV transformer for Fundi’s Cross
Substation in Mulanje (US$ 0.5M: civil works and supply of equipment),
d). Construction of a new 220kV line from Lilongwe to Bwengu substation (US$65.0 million)
e). Construction of a new 220/132/66/33kV substation in Lilongwe (US$ 3.5M),
f). Procurement and installation of a second 12.5MVA 66/11kV transformer for Area 48
Substation in Lilongwe (US$ 0.5M: civil works, supply and installation of equipment),
g). Procurement and installation of a second 12.5MVA 66/33kV transformer for Telegraph Hill
Substation in Mzuzu (US$ 0.5M: civil works, supply and installation of equipment),
h). Construction of a new 132/66/33kV Substation in Blantyre (US$ 3.8 M),
i). Procurement and installation of a second 7.5MVA 66/33kV transformer for Chinyama
Substation in Kasungu (US$ 0.5M: civil works, supply and installation of equipment).
j). Upgrade Chintheche - Mzuzu line from 66kV to 132kV (US$7.28 M: civil works, supply and
Installation of equipment)
k). Upgrade Telegraph Hill – Bwengu line from 66kV to 132kV (US$3.04 M: civil works, supply
and Installation of equipment)
48
Annex 4: Enabling Frameworks, Sustainability and Capacity Building
The sub-component targeting the creation of a framework that will attract private participation
in generation and that will, in turn, help ensure the sustainability of the improvements brought
about by the Concept Project are described below.
Develop an IPP Framework
Develop guidelines and procedures, to be followed for the selection and evaluation of IPP
projects. These could include for example, the development of competitive bidding process for
each request for IPPs. The procedures could include:
a). Bidding vs. negotiated contracts;

b). Details on the exact process and timing; -
c). Reporting requirements;
d). Selection Process; and/or Requirements related to the environmental impact and the
social consequences of proposed project.
e). Develop key model agreements for IPPs based on existing documents in use in other
countries including:
i) Power Purchase Agreement;
ii) Fuel Supply Agreement;
iii) Construction Agreement;
iv) Implementation Agreement; and
v) Operation and Maintenance Agreement
Feasibility Studies on Potential Hydropower Sites in Malawi
Malawi has a hydropower generation potential of 1, 000 MW. The total developed capacity is
only 285 MW. Most of the potential sites have not been developed to feasibility and bankable
stage. It has therefore been difficult if not impossible to sell such projects to prospective private
investors as many investors do not want to invest their money in feasibility studies. MERA has
been given the responsibility of facilitating the development of the potential sites to full
feasibility and bankable stage and to package them for immediate implementation. To fulfill
this mandate MERA will need support in the following areas:
General Regulatory Training
Regulation is a relatively new concept and therefore capacity building and development is
cardinal to enable the regulatory staff to discharge their mandate effectively. MERA will require
49
financial support to develop and implement a systematic capacity building and training
program. In addition to the training program, more practical means of capacity building are
envisaged such as partnerships, exchange / study visits, and staff attachments.
Establish a Regulatory Information System and Procurement of Relevant Software
Availability of quality information to facilitate the regulation of the energy sector in Malawi is
very essential. Lack of information on energy matters prevents informed decision making by
various stakeholders and potential investors. The Licensees are also required to provide the
Authority with the necessary information based on the provision of their licenses. This
information enables the regulator to monitor the licensees’ compliance with the license
conditions. The information provided through licensee reporting systems will also be used by
MERA to generate public information to be used by consumers and other stakeholders.
MERA will need support to develop an Information Management System for regulatory
purposes cutting across different sectors of regulation. This will involve the development of the
following;
a). Electronic form/formats and templates in excel spread sheets for licensing data for
Electricity, Petroleum, Coal, Gas and Renewable Energy;
b). Electronic form/formats and templates for calculating unit energy prices for Electricity,
Petroleum, Coal, Gas and Renewable Energy;
c). Reports and form/formats for sending and receiving information to and from the energy
users, energy producers, other stakeholders and the general public; and
d). Staff training on the operation and management of the information system will be
necessary and there will also be need to procure the requisite software that will support
the Information Management System.
Procurement of Regulatory Tools
MERA is also mandated to carry out inspections and compliance monitoring to make sure that
operators are complying with the required quality and supply standards in the energy sector.
MERA is also mandated to investigate accidents and quality of supply complaints. MERA will
therefore need to procure the necessary tools to carry out this function without having to rely
on the industry to provide such tools as this would compromise MERA position on the matters
under investigation.
50
Annex 5: Inventory of Existing Preparatory Work
The following Section provides an inventory of existing studies already undertaken and gives a
brief summary of each.
1. SECTOR STUDIES AND PLANS
The Malawi Country Economic Memorandum: Energy Constraints Chapter is under preparation
by the UK Government’s Department for International Development (DFID) and the World
Bank. The report considers the extent to which energy is a constraint to growth in Malawi and
analyses a series of options for tackling Malawi’s energy constraints and recommends 15
specific measures covering policy, investment and programs. Most of these measures are
incorporated into the Concept Project.
The Power Sector Reform Strategy (PSRS) described in Section 2.1 was prepared by a committee
chaired by the Department of Energy Affairs and approved by the Government of Malawi in
2003. This recommended the unbundling of ESCOM, private sector participation in new
generation projects and the creation of a new regulator – MERA.
Supporting the implementation of the PSRS and the subsequent legislation, a series of projects
were undertaken on behalf of the National Electricity Council (NECO, the forerunner of MERA),
the Privatization Commission and ESCOM:
Asset Revaluation Study (ESCOM), for the Privatization Commission, by Scott Wilson, May 2004
& Regulatory Advisory Services, for NECO, by Shaw Group, February 2004
The above projects were to prepare for the formal establishment of MERA and included the
development of model contracts, regulations, licenses, codes and organization charts for the
regulatory authority.
Though only indirectly related to the energy sector, the Privatization Commission also engaged
consultants to prepare a study on the Development of Policy, Legal, and Institutional
Framework for the Public-Private Partnership Program in Malawi. This was prepared by the
Institute for Public-Private Partnerships in March 2007. This, together with related work by the
World Bank, identified constraints to investor interest in Malawi and other southern African
countries and found that more businesses regarded Malawi’s poor electricity supply as a major
constraint to investment than in any other country in the region.
51
In relation to rural electrification, a Master plan Study on Rural Electrification in Malawi was
prepared on behalf of the Ministry of Natural Resources and Environmental Affairs and DoEA
with funding by the Japanese International Cooperation Agency (JICA) in 2003. The Master plan
proposed the electrification of 249 trading centers in 11 more phases (beginning with Phase IV)
at a cost of US$49 million. A Follow-up Study for the Master plan Study on Rural Electrification
in Malawi was issued in 2004. The follow-up made institutional and organizational
recommendations and made recommendations on demand forecasting and prioritization of
trading centers to be electrified.
A study entitled Malawi: Rural Energy and Institutional Development was prepared by the
World Bank’s ESMAP55 in April 2005 which focused particularly on the institutional
arrangements for rural electrification and recommended among other things: the creation of a
regulatory and institutional framework within which private sector initiatives and large-scale
rural electrification could proceed in a financially viable manner; the establishment of a
mechanism for the provision of technical assistance, promotion, and support in cases where
off-grid rural electrification is to be executed by the private sector; and the creation of a
mechanism for the co-financing of rural electrification by which funds are channeled to the
beneficiaries through local, private sector banks.
2. ECONOMIC STUDIES
Economic studies to estimate the cost and benefits of the projects are summarized below.
Within this sub-section we also include least-cost analyses that demonstrate that the proposed
investments are the least-cost means of providing a service (in this case one of electricity
generation, transmission and distribution). We also mention below other related studies that
do not estimate economic costs and benefits but have some bearing on the project.
a. Economic Analyses of Proposed Investments
Analyses have been undertaken by ESCOM, with support from the MCA-M team, to estimate
the economic return on some of the individual components of the generation, transmission and
distribution projects included in the Concept Project. These are described in Section 4 of this
Concept Paper and reproduced in Annex 6. These analyses implicitly identify the current
baseline (i.e. demand that would not be met without the project). The analyses do not
specifically identify beneficiaries, but information on potential beneficiaries is supplied in
Section 4 of this Concept Paper. The ERRs for other projects are as much as 17.7%. The analysis
is examined further in Section 4 of this Concept Paper.
55
Energy Sector Management Assistance Program
52
b. Least-Cost Power System Development Plans
A Power System Development and Operation study was completed by Consultants to ESCOM
(Lahmeyer/Knight Piesold) in December 1998 and is the most recent comprehensive analysis of
Malawi’s least-cost generation and transmission investment needs. This verified that Kapichira-
II and the interconnector with Mozambique are the least-cost supply options to meet demand
growth. This study is, however, now dated and a new least-cost investment plan is required to
verify the most appropriate investment in generation to supply the interconnected grid and to
extend or reinforce the national grid56.
In 2004, Stone & Webster completed an Integrated Resource Planning study on behalf of NECO.
This provided a partial update of the 1998 Power System Development and Operation study
(Lahmeyer/Knight Piesold) and considered demand-side measures as well as generation
investments. It also considered the impact of uncertainties when making investment decisions.
The report did not consider transmission investments, other than the interconnection with
Mozambique, and, while hydropower plants were considered, the recommended investment
plan did not identify the sequence of least-cost hydropower plants (other than Kapichira-II and
upgrades to the existing hydropower plants).
c. Other Economic Studies
In January 2009, ESCOM submitted an application to MERA for a tariff adjustment covering the
period June 2009 to July 2013 and this documents their revenue requirements and proposed
revisions to tariffs.
An Electricity Tariff Study was prepared for ESCOM by PB Power and completed in January
2005. The analysis was based on marginal costs and the report recommended an increase in
tariffs for residential consumers and a decrease in tariffs for other users (but the
recommendations were not implemented). The marginal cost values identified in this study
have been used in the economic analysis of the Concept Project.
3. SUPPORTING TECHNICAL DATA
Technical data on generation and transmission is contained in the 1998 Lahmeyer/Knight

Piesold Power System Development and Operation study described above. More up to date
data on generation is provided in the 2004 Integrated Resource Planning Study prepared for
NECO, also described above.
56
Such a study is proposed to be undertaken for MERA/ESCOM as part of the Concept Project. Though MERA is
responsible for verifying the need for generation capacity, ESCOM continues to be responsible for transmission
investment.
53
A brief assessment of the failures of the hydropower plants, including problems relating to
sedimentation and inundation of the power plants, is contained in a report prepared by
PriceWaterhouseCoopers for the Privatization Commission - ESCOM PSP Strategy Review and
Validation, February 2008.
4. PRELIMINARY STUDIES
a. Studies of Generation, Transmission and Distribution
Preliminary assessments of the technical and economic viability of the Concept Project
components that relate to ESCOM were prepared by ESCOM for MCA-M in December 2008 (see
Section 3.2).
A Pre-feasibility study for the Lower Fufu hydropower project was prepared for ESCOM by
Norconsult in March 1996. Full feasibility studies and designs will be financed by the African
Development Bank.
A Generation Rehabilitation Project Proposal was prepared by ESCOM for the ESCOM Board in
December 2005. This identified the requirements for rehabilitation of its hydropower plants
and measures to reduce sediment, trash and weeds reaching the power station intakes.
Transmission investment requirements are evaluated by ESCOM’s system studies team based
on demand projections and load flow and other studies conducted using PSS/E software to
estimate the utilization of transmission lines and substation transformers. ESCOM’s technical
staff identifies existing or predicted overloading of equipment and submits proposals for critical
upgrades to ESCOM management who, in turn, submit their recommendations and detailed
budgets annually to be approved by the ESCOM Board. The studies are not formally published
but are documented.
5. CAPACITY BUILDING IN ESCOM
The requirements for capacity building in ESCOM will be determined by the Financial
Sustainability Study and the Diagnostic Review of Revenue Management (DRRM) Study (See
Section 12).
54
6. FULL FEASIBILITY STUDIES
Songwe River Multi-Purpose Dam Project
Feasibility Study for the Stabilization of the Course of the Songwe River - This was a joint project
between Malawi and Tanzania. The study was prepared in November 2003 by NORPLAN in
association with COWI, DHI and WPES. Though the Songwe flood control, irrigation and
hydropower scheme is not part of the Concept Project, it impacts on the Concept Project to the
extent that the Lilongwe-Mzuzu transmission line reinforcement is designed, in part, to allow
power from the Songwe power plant to flow to the load centers in Lilongwe and Blantyre. In
the 2008/09 financial year, the Government of Malawi, through the Ministry of Irrigation and
Water Development, financed pre-feasibility studies and it is expected that the full feasibility
studies and construction activities will be financed by the African Development Bank.
Concept Project
The preliminary studies prepared by ESCOM and described in Section 4 will be adequate for the
smaller transmission and generation projects. A feasibility study is proposed for the Lower Fufu
hydropower project (see Section 12). A full feasibility study will be required for the proposed
220 kV Lilongwe-Kasungu-Mzuzu transmission line. More detailed design studies and project
descriptions will need to be prepared for the mid-size transmission projects and the large scale
distribution projects.
7. DETAILED BUDGETS
The budget for the components of the Concept Project is provided in Section 1.4 with an initial
20% physical contingency and 5% price contingency. A more detailed breakdown is not
available at the present time.
8. ENVIRONMENTAL AND SOCIAL IMPACT ANALYSIS
Kapichira Hydropower Scheme
A full environmental impact assessment (EIA) was undertaken for Kapichira covering the
potential impacts of both Phase I of the project (commissioned in 2000) and Phase II which is to
be developed under separate funding. At the request of the European Investment Bank, who
was considering lending funds for Kapichira-II, an Environmental Audit (rather than a full EIA)
was prepared.
55
Lower Fufu Hydropower Project
We understand that the feasibility study for the Lower Fufu hydropower project will include an
environmental and social impact assessment (ESIA) to address physical, ecological and other
relevant problems.
Concept Project
We understand that ESIAs have not been undertaken for the components of the Concept
Project. ESIAs will be required the 220 kV Lilongwe-Kasungu-Mzuzu transmission line which
may pass through a forested area in the Northern Region. ESIAs may also be required for the
generation projects on the Shire River to control weed infestation and siltation; though the size
of the projects is small, the environmental impact may need to be reviewed.
Lower level ESIAs may be required for new transmission substations which will involve the use
of land for transmission lines. These lines may run through environmentally sensitive areas and
could require clearance of vegetation in a corridor along the route of the line.
9. RESETTLEMENT ACTION PLANS
Transmission lines are likely to need at least a Resettlement Action Plans to be developed to
determine any need for resettlement.
10. GENDER ANALYSIS
The Government of Malawi through the MGDS recognizes the role gender plays in the
development of a country. The current policy is to ensure that the participation of women in
key decision making positions increases to an average of 50%. The Department of Human
Resources Management and Development (DHRMD) has developed guidelines on gender
mainstreaming that will facilitate gender activities in the public sector. The aim of the
guidelines is to accelerate the process of mainstreaming gender in human resources
considering its crucial role in Malawi’s development process. However, no studies have been
undertaken to assess the extent of gender participation. A gender analysis study will need to be
carried. The GoM will submit a request for MCC funding under 609(g) for a study on the impact
of the concept projects on gender issues.
11. PUBLIC CONSULTATIONS
During the stakeholder consultations, over 1000 people were reached through various means.
The MCA-M Core team held meetings and consultations across all three regions of the country,
56
targeting a cross section of stakeholders, including women, civil society, private sector, religious
leaders, rural communities and public sector officials.
During these consultations, the Core Team described the work that has been undertaken,
including the constraints analysis, and engaged stakeholders in discussions to identify their
perceived constraints to economic growth and poverty reduction in the country. Invariably, the
following were identified as the major constraints:
a) Lack of access to power – communities, particularly rural women, were able to make the
connection between access to reliable power and access to economic empowerment
opportunities
b) Access to adequate and sufficient education infrastructure
c) Access to reliable water for domestic and industrial use
d) Access to reliable transport networks to increase their access to markets.
With respect to power, rural communities, particularly women, were quick to point out that
their economic development would be enhanced as they would be able to among other things
access services such as electrified maize mills, mechanized irrigated agriculture, improved
health services, and for the youth, electricity would enable them to access educational
opportunities.
12. PLANS FOR ADDITIONAL STUDIES TO DEVELOP THE CONCEPT PROJECT
The requirements for capacity building in ESCOM will be determined by the Financial
Sustainability Study and the Diagnostic Review of Revenue Management (DRRM) Study. The
former is to be undertaken with funding from the Public Private Infrastructure Advisory Facility
(PPIAF), which was approved in January 2009.
A feasibility study for the Lower Fufu hydropower plant is to be undertaken by MERA. Funding
from the African Development Bank has been agreed but not formally confirmed. The Terms of
Reference for the feasibility study for this scheme include the associated transmission
connection to the existing grid and this will provide useful information on the future
transmission network in the North and the justification for reinforcing the transmission network
to the North.
An update of the least-cost power sector Master plan study is required. A Terms of Reference
has been drafted for the updated study57 and the GoM has asked MCC for funding under
57
The TORs for the Least Costs Power Sector Study are attached in annex XX
57
609(g). ESCOM will need to prepare additional load flow studies taking into account the
additional generation capacity and transmission and distribution project components.
Catchment Study
Improved natural resources management of priority micro-catchments offers the best practical
option to sustain power sector investments in areas where power projects are located in
Malawi. Realizing the dynamic nature of the catchments, this could best be achieved through a
comprehensive study and analysis of biophysical baseline data, social-economic and human
influences in the catchment areas. This will allow for an integrated and more holistic approach
to the NRM problems leading to the development and implementation of site specific
interventions in the priority catchments.
One or two micro-catchments shall be selected in the Shire river catchment area and drivers,
problems, effects and impacts of unsustainable management practices shall be determined.
The final recommendations and conclusions of the study shall be the basis for restoration,
monitoring and sustainable management of natural resources in the shire river catchment area
in which projects supported by MCC shall be implemented.
58
Annex 6: Assumptions and Parameters used in the Evaluations
1. Discount Rate
The analyses use constant 2008 prices and, for net present value calculations, a real economic
discount rate of 12.5% is employed. The latter is consistent with the calculations made by MCC.
Sensitivity analyses consider discount rates of 12% and 15%. The net-present value of the
energy project at a 12.5% discount rate is estimated at $75.0 million with an EIRR of 18.1%.
2. Electricity Tariffs and Connection Charges
ESCOM’s electricity tariff currently averages US$0.043/kWh. The revenues provided by this
tariff, after adjustment for losses, cover ESCOM’s operating costs and service some of its debts
but is inadequate to provide surpluses to self-finance a portion of future investments or to
satisfy lenders that it can cover future debt service obligations. ESCOM submitted an
application for a tariff increase to MERA in January 2009 and public hearings were held in 9-11
February 2009. The application requested an average tariff increase of 54% over a period
between 2009 and 2013. This level of increase is consistent with an assessment conducted by
PwC for the Privatization Commission58 which suggested that tariffs needed to increase to
approximately US$0.065/kWh in order to allow ESCOM to attract financing of future
investments and this value is used in the analysis below. Standard charges levied by ESCOM for
connection of households were raised in September 2008 from MK 9,900 (US$69) to MK 25,000
(US$175).
3. Willingness-to-Pay and Consumer Surplus
The projects that widen access to electricity in rural or peri-urban areas consider consumer
surplus (willingness-to-pay (WTP) for electricity less the cost of electricity) as well as possible
impacts on income and economic development (see below). However, consistent with MCC
guidelines which do not recommend the use of consumer surplus, the analyses show net
present values (NPVs) and economic rates of return (ERRs) both with and without consumer
surplus.
WTP for electricity was estimated based on a survey of rural households and the results
presented in background reports produced for the 2003 Master plan Study on Rural
Electrification in Malawi by JICA. This analysis showed a WTP of MK 1,838/month or
US$12.9/month (once connection had been made)59 or US$154.2/year. With average
58
ESCOM PSP Strategy Review and Validation, February 2008.
59
Equivalent to MK 85/kWh or US$0.59/kWh at today‟s exchange rates.
59
consumption of 260 kWh per year and the current tariff of US$0.043/kWh, this implies a cost of
US$11.2 per year and consumption surplus of US$143 per year. If the tariff increases to
US$0.065/kWh, as discussed above, then the consumption surplus falls slightly to US$137 per
year (though willingness-to-pay is unaffected).
The 2003 survey also asked households to indicate their willingness to pay for a connection and
wiring costs necessary to receive electricity. This revealed a WTP value of MK 7,577
(US$53/connection or equivalent of US$6 per year60) which is below the current standard cost
of connection charged by ESCOM of MK 25,000 (US$175), equivalent to US$18.5 per year at a
10% discount rate61. If the true connection cost does indeed average MK 25,000 then this
would easily be recovered by consumers through the consumption surplus at the current tariff
of US$0.043/kWh and the combined net consumption and connection surplus would be US$130
per new customer per year. If the tariff is increased to US$0.065/kWh, as appears to be
necessary, then the combined net consumption and connection surplus would be US$124 per
new customer per year. Similar calculations of WTP for consumption of businesses were
estimated in the 2003 survey, at MK 3,110 (equivalent to US$ 22 at today’s exchange rate) per
month.
To our knowledge, no recent studies have been undertaken of WTP for peri-urban or urban
households in Malawi. The analysis below assumes that WTP in peri-urban households is
proportional to average household income in peri-urban households relative to income in rural
households (peri-urban average income is not known but is assumed to be intermediate
between incomes in urban and rural households62). Similarly, the WTP for connection in peri-
urban households is assumed to be proportional to income. These assumptions, combined with
a tariff of US$0.065/kWh give a net consumption and connection surplus for peri-urban
households of US$198 per new customer per year.
60
Assumed 30 year life of the connection.
61
Assumed 30 year life of the connection.
62
Average rural income is MK 40,241/year and average urban income is MK 129,407/year.
60
Annex 7: Description of Economic Rate of Return Calculation
1. Impact on Income
The electrification of households should give the more resourceful households increased
opportunities for income earning through a range of activities including, for example, retailing
chilled foods or drinks, entertainment and processing agricultural products. Examples of income
generating activities resulting from electrification are provided in Annex 21. This direct and
immediate impact of electrification on connected households should be captured in the WTP
calculations described above63. However, there will also be indirect impacts on the local
economy and income earning potential of households in the electrified trading center whether
or not the households are connected, and there will even be economic development benefits to
villages in the district to the extent that there is increased trade, employment opportunities
and income in the trading centers. These impacts on non-electrified households will not be
captured in the WTP values.
There are no estimates of the economic development impacts of rural electrification in Malawi
but econometric studies have been undertaken in Bangladesh64. Households in the electrified
villages were found to have higher average incomes than households in non-electrified villages
but this cannot be interpreted as electrification causing the higher average income (because
villages with higher incomes will tend to be electrified first). However, the authors estimate the
percentage of annual income that can be “attributed” to electricity or, in other words, the
impact of electrification on average income. The results are:
Group Impact on income

Electrified households 16.4%
Non-electrified households in electrified villages 12.0%
Households in non-electrified villages 3.6%
These values were used in the analysis of rural electrification benefits for Malawi. The analysis
assumes that half of electricity sold to rural communities is to residential consumers. The
analysis further assumes that for every household in the electrified community there are a
further five households in neighboring villages that benefit indirectly through economic
development generated by the electrification (i.e., benefit from a 3.6% increase in average
income).
63
i.e., the benefits of electrification will be “internalized”.
64
Economic and Social Impact Evaluation Study of the Rural Electrification Program in Bangladesh, 2002,
NRECA International Ltd. Partners with the Rural Electrification Board of Bangladesh and USAID for the Rural
Power for Poverty Reduction (RPPR) Program.
61
Peri-urban households without electricity are, by definition, already in the vicinity of areas that
are electrified and they will already have benefited to some extent from the indirect benefits of
electrification. We assume that these households benefit to the same extent as an electrified
household compared with a non-electrified household in a rural village. The impact on income
of electrifying peri-urban households is therefore (16.4% - 12.5%) = 4.4%.
2. Marginal Costs
When estimating the benefits of increased supply of electricity derived from investment in
generation, transmission or distribution, the costs or cost savings associated with the other
components of the supply chain must be captured. Thus, an investment in transmission that
reduces transmission losses will avoid generation costs (i.e., will avoid costs upstream of the
transmission line). Similarly, an investment to supply on-grid rural households will incur not
only the direct distribution investment costs but also costs of generation and transmission to
supply electricity to those rural households.
Marginal costs used in this Concept Paper have been based on those calculated in the 2005
Electricity Tariff Study prepared for ESCOM by PB Power. This gives marginal costs of generation
at US$0.013/kWh and marginal costs of transmission at US$0.012/kWh. Marginal costs of
distribution are not provided but, based on typical ratios of generation, transmission and
distribution costs; the analysis has assumed a value of US$0.04/kWh.
3. Cost of Un-served Energy (Value of Improved Reliability)
The benefits of improving reliability of electricity supply are measured in terms of the cost of
un-served energy (COUE) or the value of lost load. The cost of interrupting electricity supply (or
the value of avoiding interruptions) is high because it causes disruptions to normal business and
in some circumstances can lead to the loss of a complete batch of production or to damage to
equipment. A COUE value of US$0.2 per kWh not supplied was used in ESCOM’s 1998 Power
System Development and Operation study but the 2004 Electricity Tariff Study proposed instead
a value of US$0.83/kWh. The same value was used in the 2004 Integrated Resource Planning
study.
A background paper65 to the Africa Infrastructure Country Diagnostic (AICD) study noted that
the economic cost of interruptions to power supply in Africa averages 2.1% of GDP but in
Uganda and Tanzania, which are similar to Malawi, though with more reliable power supply,
the economic costs are 3.3% and 4.0% of GDP respectively. If the lost output in Malawi were
65
Background Paper 6, May 2008, Underpowered: The State of the Power Sector in Sub-Saharan Africa
62
only 2.5% of GDP and load shedding is between 5% and 10% of energy sold then the economic
cost would be equivalent to between US$0.6/kWh and US$1.2/kWh.
The World Bank’s 2007 Project Appraisal Document for the Mozambique-Malawi Transmission
Interconnection Project suggested, however, that because load shedding had become acute in
Malawi and most electricity users had adopted back-up generation to provide power during
ESCOM outages, a cap on the COUE should be the cost of generation from diesel power plants.
While the cost to industry of an unpredicted power outage could be US$1.45/kWh, the cost of
back-up generation would be only US$0.16/kWh and the World Bank suggested a weighted
average COUE of US$0.22/kWh. This value has been used in the analysis.
4. Generation
Investments in generation are designed to improve the reliability and availability of the power
plants and extend the life of the plants. These investments include weed management, silt
management and trash diversion barriers at all of the hydropower plants and rehabilitation of
Nkula ‘A’ and ‘B’. Nkula ‘A’ was commissioned in 1966/67 and is now over forty years old but,
with rehabilitation, particularly of the electro-mechanical equipment, has the potential to last
another 25-30 years or more. The benefits of improved availability are captured initially in
reduced load shedding (and the reduced cost of un-served energy) and, later, when Kapichira-II
and the Mozambique interconnector are commissioned, in terms of avoided costs of new
generation (measured as the long-run marginal cost of generation). The benefits of life
extension are similarly captured in terms of avoided costs of new generation.
5. Transmission Reliability Improvements
A number of sub-components of the Concept Project are aimed at transmission reliability

improvements including investments in transformer upgrades, switchgear, protection systems,
new substations, and a SCADA system for the transmission network. The investment cost totals
US$16.2 million. These investments are designed to increase system reliability but the benefit is
measured in the economic analysis as the electricity supply that could not otherwise be
supplied and valued at the assumed electricity tariff (US$0.065/kWh). This undervalues the
benefits of the investments (i.e., the benefit of reliability could be measured based on the cost
of un-served energy which has a much higher value) but the ERRs are large even without taking
account of the cost of un-served energy.
The economic analysis is based on a typical investment in this group – a 20MVA 66/33kV
transformer for a substation at Chichiri in Blantyre and costing US$600,000.
63
Transmission Extensions
Three sub-components of the Concept Project will extend the 66 kV transmission network or
upgrade from a 66 kV line to a 132 kV line in order to serve areas with large new loads as well
as existing, smaller, businesses that currently use diesel generators. The extensions will also
allow supply to the residential communities in these areas. The total cost of these investments
is US$12.9 million. The economic benefits in this analysis are the revenues to ESCOM and,
additionally, the avoided diesel fuel costs.
Further, the 220 kV Lilongwe-Kasungu-Mzuzu transmission line would, as with the above
transmission line extensions improve the reliability of supply and allow ESCOM to serve large
new and existing loads in the Northern Region (displacing diesel generation).
The benefits of this transmission line do not lie simply in the increased and improved supply to
the north. The transmission line is necessary to allow the power from the proposed 144 MW
Lower Fufu hydropower scheme to flow south to the load centers in Lilongwe and Blantyre.
Load in the north is relatively low and it is currently served by plants in the south. When the
Lower Fufu plant and the transmission line are built, the direction of flow of power will be from
north to the south. The north will export the surplus to the south emphasizing the importance
of the 220 kV Lilongwe-Mzuzu line. It is also necessary to allow power from the Songwe
multipurpose dam, including the 144 MW hydropower plants, to flow south. It would also allow
the possibility of trade between Malawi and Tanzania and connect a member of the Southern
Africa Power Pool to a potential member of the East Africa Power Pool (EAPP).
The benefits of building the 220 kV transmission line to allow the development of Lower Fufu
hydropower plant should be calculated as the total power system costs over a 20 or 25 year
planning horizon of a scenario with Lower Fufu less the total power system costs over a similar
horizon of a scenario without Lower Fufu but with the cost of the next best hydropower
alternative (including the associated transmission costs of that alternative). Information that
would allow this calculation will be available from the proposed update to the Power System
Development Plan (see Section 4.2.1). The study may require 12 months once it begins.
6. Distribution Reliability Improvement
Distribution rehabilitation has been divided into three sub-components each focusing on
Malawi’s three regions – North, Central and South. The total cost of these sub-components is
US$42.0 million (excluding physical and price contingency and Construction supervision costs).
The benefits are estimated as the incremental sales that the investments allow and effectively
assume that without the distribution refurbishments, supply to consumers could not be
expanded above the current levels. This is, perhaps, a pessimistic assumption in the short term
64
but in the mid- to long-term, without these investments, the ability to supply consumers would
probably fall (rather than remain constant) and the assumption is then perhaps conservative.
No additional allowance has been made in the analysis for consumer surplus.
7. Pre-Payment Meters
The widespread introduction of pre-payment meters is intended to improve ESCOM’s revenue

collection performance and cash flow. This is a financial benefit to ESCOM and means that
consumers must pay for electricity in advance rather than, as at present, in arrears (up to 11
months after consumption). This investment is not amenable to economic analysis66 but is
nevertheless justified in order to allow improvements in revenue collection and ensure the
sustainability of the improvements introduced through the Concept Project.
8. Demand-Side Measures
Demand-side measures are particularly valuable in the short-term until Kapichira II and the
Mozambique interconnector are commissioned and while there continues to be load shedding,
but will also be important in the medium- and long-term to delay investment in generation and
transmission capacity. The investment cost in DSM measures is estimated at US$1.92 million
including the installation of maximum demand meters and implementation of feeder metering.
ESCOM estimates that the introduction of time-of-use tariffs will reduce peak demand by
19 MW in 2009. The investment in meters to allow time-of-use tariffs is only US$160,000 and is
therefore also clearly justified in economic terms.
66
It transfers the cost of credit from ESCOM to the consumer. To the extent that the cost of borrowing is higher for
the consumer than for ESCOM, it could be argued that the measure has a negative net economic impact, but this is a
relatively trivial impact.
65
Annex 8: Poverty Rates by District67
Total (%) Urban (%) Rural (%)
Poor Ultra-poor Poor Ultra-poor Poor Ultra-poor
District of residence*
Chitipa 57 25 57 25
Karonga 47 19 47 19
Nkhata Bay 54 23 54 23
Rumphi 42 16 42 16
Mzimba/Mzuzu City 37 13 15 4 40 14
Kasungu 26 7 26 7
Nkhotakota 31 9 31 9
Ntchisi 29 7 29 7
Dowa 44 15 44 15
Salima 39 12 39 12
Lilongwe/Lilongwe City 23 6 10 2 31 8
Mchinji 41 13 41 13
Dedza 44 14 44 14
Ntcheu 42 14 42 14
Mangochi 48 19 48 19
Machinga 62 30 62 30
Zomba/Zomba City 47 19 23 8 50 20
Chiradzulu 49 20 49 20
Blantyre/Blantyre City 21 8 9 2 43 18
Mwanza 39 14 39 14
Thyolo 48 19 48 19
Mulanje 58 28 58 28
Phalombe 46 18 46 18
Chikwawa 51 23 51 23
Nsanje 60 27 60 27
Balaka 49 21 49 21
Source: Welfare Monitoring Survey 2007, National statistical office
* Likoma Island was not included in the IHS2, which serves as the basis for the poverty estimates
67
See Annex 2 for location of districts on map of Malawi
66
Annex 9: Principle Beneficiaries and Benefit Impact Areas68
68
This list is not necessarily exhaustive
67
Annex 10: Proportion of Income generating tasks and average weekly hours
worked
Proportion of persons aged 15 years and above doing income generating tasks and average weekly hours worked
among these persons (Integrated Households Survey 2004-2005)
hours/week Urban Rural Northern Central Southern
HH agricultural or fishing activities 2.5 14.9 15.9 14.5 12.0
Non-agricultural and non-fishing HH business 7.1 3.1 2.6 3.1 4.1
Casual, part time or piece work 1.8 2.0 1.3 2.2 2.0
Wage, salary commission or any payment in kind 13.0 2.9 2.0 2.5 5.7
Total average hours worked 24.3 22.9 21.8 22.3 23.8
68
Annex 11: Gender and Rural Electrification: A Case from Bangladesh69
Indicator(s) HE WE-EV WE-NEV
a) Percentage of women’s involvement in handicraft and sewing work at night
Poor
Rich 13.8 - 8.8
b)Average number of women involved in IGA 14.6 - 4.2
Poor
Reported
All households 1.19 - 1.18
Rich 0.3 - 0.34
Reported
All households 1 - 1.75
c) Percentage of women's reporting about decision making independence 0.12 - 0.58
(freedom) to spend their earnings 22.8 20.9 14.8
d) Percentage of women who reported wage discrimination
e) Credit facilities 29.8 57.7 51.4
Average amount of credit taken by women (in taka)
Percentage of women taken credit more than taka 20, 21,863 16,343 15,070
f) Savings of women 21.5 20 18
Percentage of women’s reporting about own savings
Percentage of women can enjoy independence in using 39.8 38.0 36.1
savings 79 62 68
g) Women’s mobility
Overall women’s mobility score
Gap to achieve full freedom in mobility 0.488 0.459 0.419
h) Percentage of women reported always consultation on major family decisions 0.512 0.541 0.581
i) Participation in decision-making process 50 34 38
Overall decision-making participation score
Gap between ideal and actual situation
j) Percentage reporting about treatment by quack 0.72 0.58 0.58
Boys 0.28 0.42 0.42
Girls
k) Knowledge of gender equality issues 38 49 50
Women's knowledge score of gender equality issues 42 39 53
Knowledge Gap of gender equality issues
l) Empowerment score 0.80 0.56 0.48
Overall women’s empowerment score 0.662 0.533 0.499 0.20 0.44 0.52
Gap between ideal and actual situation 0.338
0.662 0.533 0.499
0.338 0.467 0.501
Note: HE = household with electricity; WE = Women Empowerment; EV = Electrified; NEV = Non-Electrified
69
Gender and Rural Electrification: A Case from Bangladesh, S. Halim, 2005
69
Annex 12: Distribution of Households by Main Fuel Source Used for Cooking
and Lighting70
Cooking (%)
Proportion Crop
Place of
using Firewood Paraffin Electricity Charcoal residue, Other Total
residence
solid fuel saw dust
Urban 87.3 37.9 1.2 11.5 48.2 0.5 0.7 100
Rural 99.6 97.0 0.0 0.4 1.2 1.2 0.2 100
Lighting (%)
Place of
Firewood Grass Paraffin Electricity Candles Other Total
residence
Urban 1.2 0.7 56.0 32.7 9.2 0.2 100
Rural 4.2 4.5 88.3 1.9 0.6 0.5 100
70
Integrated Household Survey 2004-2005, National Statistical Office
70
Annex 13: Sectors and Sub-Sectors in Malawi71 and Income Distribution72
Agricultural sub-sectors Industrial sub-sectors Service sub-sectors
Cereals 18 Mining 27 Agricultural trade and

1 Maize 19 Food processing transport services
1 Rice 20 Beverages & tobacco 28 Non-agricultural trade
2 Other cereals73 21 Textiles & clothing and transport services
22 Wood & paper products78 29 Hotels & catering
3 Root crops74 23 Chemicals & rubber products 30 Communication
24 Machinery, equipment and other services
Pulses & nuts manufacturing79 31 Financial & business
4 Pulses & oils75 25 Construction services
5 Groundnuts 26 Electricity & water 32 Real estate services
33 Community & other
Horticulture private services
7 Vegetables 34 Government
8 Fruits administration
35 Health services
High-value export 36 Education services
oriented crops
9 Tobacco
10 Cotton
11 Sugarcane
12 Tea
13 Other crops76
Livestock
14 Poultry
15 Other livestock77
16 Fisheries
17 Forestry
71
Source: A 2004 Social Accounting Matrix for Malawi, IFPRI, Washington D.C., 2008, Thurlow
72
Malawi Micro and Small Enterprises Survey, 2000
73
inclusive sorghum, millet
74
inclusive cassava, sweet potatoes, Irish potatoes
75
inclusive mixed beans, soybeans
76
inclusive sunflower seeds, paprika
77
inclusive cattle, goats, sheep and pigs
78
inclusive furniture
79
inclusive vehicles
71
Less than MK2,000- MK5,000- MK10,000- MK20,000- Over MK50000
MK2,000 MK5,000 MK10,000 MK20,000 MK50,000
Crops 25.6 24.4 25.7 18.1 6.1
Livestock 45.4 8.2 16.4 14.7 15.3
Forestry 16.8 14.9 32.0 21.4 10.3 4.5
Fishing 27.9 1.2 1.6 8.8 14.0 46.6
Mining 32.7 19.5 19.5 28.4
Manufacturing 23.4 8.2 15.5 16.6 20.4 16.0
Construction 33.1 11.2 9.2 9.2 37.3
Commerce and 32.7 3.9 7.1 11.4 15.6 29.5
Trade, Hotels
Transport 35.0 6.4 8.0 6.1 44.5
Services 30.5 8.7 11.4 15.0 20.4 13.0
Total 28.5 4.7 12.99 15.63 17.39 20.76
Annex 14: Land and Population Distribution across Regions and Farm Households80
National Urban Rural
Small Med. Large
Farm Non- Rural farm households in each region Non- (<0.75 (0.75- (>3
farm Karonga Mzuzu Kasungu Salima Lilongwe Machinga Blantyre Ngabu farm ha) 3 ha) ha)
Population (1000) 12,173 654 727 358 814 1,282 661 2,523 2,033 1,972 693 458 3,731 6,240 363
Number households 2,694 133 189 71 163 246 143 537 465 474 137 134 942 1,241 54
Small-scale (<0.75ha) 30 44 69 72 203 237 217 70
Household size 4.5 4.9 3.8 5 5 5.2 4.6 4.7 4.4 4.2 5 3.4 4 5 6.7
Per capita exp. (US$) 150.8 286.2 308.6 116.7 132 152.8 130.9 145.4 110.3 125.3 101 185.8 121.6 130.1 203.7
Poverty rate (%) 52.4 30 21.2 62.8 55 43 56.3 47 67.7 61.4 70.6 37.5 61 55.6 30.6
Share of poor (%) 100 3.1 2.4 3.5 7 8.7 5.8 18.6 21.6 19 7.7 2.7 35.7 54.4 1.7
Harvest area (1000 ha) 3,050 174 - 81 295 525 128 591 482 599 175 - 647 1,792 437
Average farm land (ha) 1.13 1.31 - 1.13 1.8 2.13 0.89 1.1 1.04 1.26 1.28 - 0.69 1.44 8.02
Maize 0.57 0.99 - 0.54 0.8 1.08 0.41 0.59 0.58 0.5 0.66 - 0.36 0.7 3.67
Other cereals 0.05 0.01 - 0.1 0.06 0.01 0.04 0.03 0.06 0.09 0.22 - 0.04 0.08 0.09
Root 0.12 - - 0.28 0.36 0.2 0.18 0.09 0.1 0.17 - - 0.09 0.18 0.36
Pulses & nuts 0.26 0.23 - 0.12 0.34 0.56 0.05 0.29 0.2 0.4 0.17 - 0.16 0.36 1.17
Horticulture 0.03 0.03 - 0.05 0.07 0.06 0.02 0.04 0.03 0.03 0.03 - 0.02 0.05 0.13
Tobacco 0.05 0.04 - - 0.17 0.22 - 0.05 0.03 0.01 - - - 0.03 1.79
Other export crops 0.04 0.02 - 0.04 0.01 0.01 0.2 0.01 0.04 0.05 0.2 - 0.01 0.05 0.81
Crop yields (mt/ha)

Maize 1.13 1.00 - 1.17 1.3 1.37 1.33 1.24 0.96 0.93 0.79 - 1.07 1.14 1.27
Rice 1.17 1.24 - 1.64 1.83 1.09 1.51 1.86 0.76 0.74 1.09 - 1.12 1.17 1.61
Sorghum & millet 0.58 - - 0.77 0.57 0.57 0.68 0.64 0.44 - 0.59 0.58 0.59
Cassava 5.50 - - 5.64 6.8 5.46 5.41 6.83 3.55 4.89 - - 5.25 5.54 6.07
Groundnuts 0.75 0.75 - - 0.75 0.81 1.03 0.88 0.57 0.49 - - 0.68 0.76 0.78
80
Agricultural Growth and Investment Options for Poverty Reduction in Malawi, 2008
Annex 15: Main Public Facilities and Business Entities in Trading Centers81
Public Facilities Business Entities

a) Secondary School a) Markets
b) Primary School b) Retail Shops-Grocery
c) Hospital c) Retails-Others
d) Health Center d) Wholesale Shops
e) Under Five Clinic e) Maize Mills
f) Maternity f) Furniture Workshops
g) Orphanage g) Tinsmiths
h) Police Station h) Restaurants
i) Police Unit i) Rest Houses
j) Immigration Office/ Border Post j) Bottle Stores/ Bars
k) Post Office/Post Agency k) Workshops for Car Repairs/ Garages
l) Radio Station l) Battery Charge Stations
m) Church m) Barber Shops/ Beauty Shops
n) Mosque n) Banks
o) Community Halls/Recreation Centre
p) Court
q) Government Offices
r) Local Community/Cooperative Offices
s) Non-Government Organization Offices
81
Source: Master Plan Study on Rural Electrification in Malawi, 2003
Annex 16: Electricity Rate of Entities in Electrified Trading Centers in 200382
Public Facility Business Entity Maize Mill
Existing in TC
Existing in TC
Existing in TC
Elec. Rate
Elec. Rate
Elec. Rate
Electrified
Electrified
Electrified
Region
Northern 88 31 35% 261 124 48% 14 13 93%
Central 47 22 47% 125 62 50% 12 11 92%
Southern 102 50 49% 483 283 59% 42 40 95%
Total 237 103 43% 869 469 54% 68 64 94%
82
Source: Master Plan Study on Rural Electrification in Malawi, 2003
75
Annex 17: Assumptions Environmental Savings on Charcoal83
Assumption Average
Household expenditure without electricity (tons/year) 0.18
Household expenditure with electricity (tons/year) 0.12
Household saving if electrified (kg) 58.9
Household saving if electrified (US$) 10.3
Saving on expenditure with concept project (tons/year) 7,125
Current number of small scale producers 7,041
Current number of medium scale producers 1,950
Current number of large scale producers 338
Production small scale producers (tons/year) 96,000
Production medium scale producers (tons/year) 58,000
Production large scale producers (tons/year) 77,000
Size of standard bag (kg) 38
Cost per standard bag (MK) 950
Price per kg (MK) 25
Current charcoal equivalent forest area cleared (ha/year) 15,088
Savings on charcoal equivalent forest area cleared with concept project (ha) 3%
Charcoal contribution to deforestation 33%
Malawi’s annual deforestation rate (ha) 52,000
Malawi's decrease in annual deforestation rate with concept project (ha) 465
Decrease number of small scale producers 0.48%
Decrease number of medium scale producers 0.80%
Decrease number of large scale producers 0.60%
83
Based on data from the study “Charcoal: The Reality; A Study of Charcoal Consumption, Trade and Production
in Malawi” submitted to the Forest Governance Learning Group, 2007
76
Annex 18: Supporting Data for Benefits of Electrification84
Some findings of a study of Barnes (1988) support the fact that households benefit from getting
connection to the electricity grid.
o In Colombia electrification led to increased use of appliances, leading to increased

productive hours, resulting in staying up later at night (20 minutes more than non-
electrified households)
o In India electrification led to increased working hours (because cooking was delayed to
the evening), increased productivity of women (making handicrafts using night light),
increased reading time for children and adults and increased fan use
o In India electrification led to replacement of traditional methods of irrigation by
electrical pump sets in electrified villages, resulting in increased agricultural
productivity
o In India electrification led to the setting up of a larger number of shops in the village
and engendered a structural shift in employment to the tertiary sector. In individual
establishments, electrification seems to lead to larger firm size, more items sold, longer
working hours, higher income, and higher incomes per employee
In addition, lighting can lead to more leisure for men and children but also longer workdays,
especially for woman.
FUNDAP carried out promotion activities on benefits of electrification and uses of electrical
machinery and gave loans to small businesses supported by technical assistance, targeting
those that would not otherwise have access to credit (creating a likely downward bias
compared to control). The results suggest higher electricity usage among loan beneficiaries and
a consequent positive impact on income (Shonder and Wilbanks 1996).
According Chaudhury and Hammer (2003) in Bangladesh the proportion of households in the
community with electricity has a strong positive impact on the likelihood of living in the
community, which in turn reduces absenteeism.
Econometric modeling indicates that the availability of electricity had a positive impact on rural-
urban migration, though not on the crude birth rate at village level, couples’ income, female
labor force participation, fertility, mortality, and migration at the household level (Piampiti and
others 1982).
84
The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits – An IEG Impact
Evaluation, The World Bank, 2008
77
Kiosk owners in Indonesia reported sales increases as a result of getting electricity, as they
could extend their product ranges to include wiring material, light bulbs, and kerosene cookers
(some electricity consumers have substituted firewood for kerosene previously used for
lighting). The most prevalent productive use of electricity was ice production in freezers used
for ice lollies and ice cubes (Meier 2001).
Productive uses of electricity were found within various sectors, with the largest percentage in
the services sector. At the household level 26 percent of households with home enterprise
increased income following electrification, as opposed to 4 percent without electrification
(Brodman 1982).
Staffing of doctors and nurses was better at the electrified health stations than unelectrified
(12:0.1) (Piampiti and others, 1982).
In Botswana electrification has meant decreased water supply interruptions and there has been
significant growth in small-scale activities such as dairy farming, horticulture, and pig raising
over 10 years. Besides, there are new education centres and schools and suitable
accommodation for staff who teach agricultural skills, hygiene by medical staff, and other
education staff. (Ramasedi 1992).
In most areas with electrification in Kenya, diesel motors have been replaced by electric ones,
which are cheaper and more efficient. Besides, there are new and improved health and
education centres operated on cheaper and more efficient electricity, rather than diesel
(Walubengo and Onyango 1992).
In Zambia the range of electrically operated coffee processing equipment has increased Bebeka
Coffee Plantation’s production by 35–40 percent over 10 years (Mariam 1992).
Street lighting led to fewer attacks at night in Peru (Valencia and others 1990)
78
Annex 19: Income Generating Benefits of Electrification
The following diagram indicates the indirect impacts of rural electrification on income
generating activities. This is taken from maximizing the Productive Uses of Electricity to
Increase the Impact of Rural Electriﬁcation Programs (ESMAP, April 2008).
79
Annex 20: Regions Affected per Project
80
Annex 21: Map of regions affected by Energy and Transport Projects
MALAWI: LOCATION OF PTENTIAL PROJECTS IN THE TRANSPORT AND ENERGY SECTOR
Karonga - Kayelekera
[ Chitipa
%
[ Karonga
%
#
Y
Kayerekere
Chilumba
#
Y
Bwengu - Rumphi
Rumphi
[
%
#
Y Bwengu
Mzuzu
{
x Nkhata Bay
[
%
Mzimba #
Y Chintheche
[
%
[
%
Ngara
N
[
%
[ Kasungu
%
Nkhotakota
Monkey Bay - Cape McLear road

#
Y Mponela
To Lusaka [
% Salima
<
Mchinji
[
% [
%
Cape Maclea
{
x Chipoka
#
Y #
Y
#
Y
Lilongwe #Linthipe
Monkey Bay
Y
#
Y
[ Dedza
%
Lobi Y# [
%
Mangochi
Lake
Lirangwe - Machinga road
Malombe
Ntcheu %
[
Lake Chiuta
[ Balaka
%
<
#
Y To Nakala
Towns Y#
#
Y Machinga Nayuchi
{x City Nkaya%[
#
Y
Phombeya Zomba
[
% District Headquart Nkhula [
%
Nkula {
x Lake Chilwa
# #
Y
Y
# Main Centre [
%
Y Lirangwe
Mwanza #
Y #
Y
[
% MPAMA
Tedzani Tedzani x{ [
%
Transportation Projects Blantyre
[
% #
Y [
%
Road rehabilitation [
%
Kapichira
Railway line
#
#Y
Y Chiromo bridge
Energy Projects
Power transmission lines

[ Nsanje
%
Power generation plants <

To Beira
Lakes
50 0 50 100 150 Kilometers
81
Map Showing NRM Catchment Areas in Malawi
MALAWI: MAJOR CATCHMENT AREAS
[ Chitipa
%
[ Karonga
%
#
Y
Kayerekere
#
Y
Chilumba
Rumphi
[
%
#
Y Bwengu
Mzuzu
{
x Nkhata Bay
[
%
#
Y Chintheche
Nkhata Bay
Mzimba%
[
[
%
Lak e Malawi
Ngara
[
%
[ Kasungu
%
Nkhotakota
N
1
#
Y Mponela
[
%
To Lusaka Salima
<
Mchinji
[
% [
%
Cape Maclea
{
x #
Y #
Y
ChipokaChipoka#
Y
Lilongwe Monkey Bay
#Linthipe
Y
#
Y
[ Dedza
%
Lobi Y# [ Mangochi
%
Lak e
4
Malombe
Ntcheu %
[ Lak e Chiuta
[
% Liwonde
<
#
Y To Nakala
#
Y
Nayuchi
Nkaya Y# [
%
Phombeya Y#
Towns [
% { Zomba
x Lake Chilwa
#
Y #
Y Lirangwe
{ City
x Mwanza
[
%
#
Y #
Y
[
%
3
[
% District Headquart
Y# Main Centre
{
x Blantyre [
%
2 #
[
% Y [
%
[
%
Roads
Railway line
Rivers
Lakes #
#Y
Y Chiromo
Catchments Chiromo
Lake Malawi [ Nsanje
%
Lake Chiuta
Lake Chilwa <
Sire River To Beira
50 0 50 100 150 Kilometers
82
Annex 22: Scope of Assignment ESCOM Creditworthiness Improvement
1. Review ESCOM financial model, investment plan, previous ESCOM Financial Action Plan,
recent audit reports, analysis of accounts receivable and other information available on the
commercial, financial and technical performance of ESCOM.
2. Review with ESCOM the work done to date on analysis of accounts receivable and the
effectiveness of the actions currently underway, to identify the key issues underlying the
problem. Undertake an “age analysis” of the main receivables in terms of groups of
customers such as government, residential customers, etc. As a result:-
a). Discuss appropriate next steps on revenue improvement (prior to commencement of
the revenue improvement study).
b). Review the accounting policy for bad and doubtful debts and propose any necessary
revisions.
c). To the extent that non-payment by residential consumers is contributing to the
problem, the consultant should discuss the extent to which non-payment is an
affordability issue and discuss any possible improvements to make the lifeline tariff for
basic electricity needs more effective.
d). To the extent that non- or late-payment by Government entities is contributing to the
problem, the consultant should propose actions to address this issue.
3. Analyze and review the ESCOM the ‘technical and non-technical losses’ problem and
identify the key sources of the problem. The analysis shall include recommendation of
measures that can be realistically be implemented by ESCOM in the short, medium and long
term to bring its total losses to acceptable levels for utilities similar to that of ESCOM. In
this regard reference to previous loss reduction study conducted by Kennedy & Donkin early
1990 and subsequent work by ESCOM, is essential.
4. Undertake an analysis of “key operational policies” which impact on ESCOM`s overall
Operational and Capital Budget and use this information as input into house-keeping
measures that would reduce Budgetary waste.
5. Review the situation in terms of overdue debt servicing on loans to ESCOM from the
Government. Lay out the steps required to conclude the restructuring that has been agreed
between ESCOM and the Ministry of Finance and proposed any further actions that may be
necessary. Also review the situation on overdue debt service on direct loans to ESCOM, and
if appropriate prepare a plan for rescheduling the payment of this overdue debt service
6. Analyze the issue of exchange rate shocks and propose a mechanism such that if any
limitations are imposed on the automatic adjustment mechanism to avoid tariff shocks,
ESCOM would be financially compensated by the Government
7. Assess the effectiveness of the automatic tariff adjustment mechanism, aimed at adjusting
tariffs to account for exchange rate and inflation. Propose measures to increase the
effectiveness.
83
8. In close collaboration with ESCOM, prepare a detailed financial model and Financial
Sustainability Plan, including consideration of efficiency improvements (e.g. loss reduction,
reduced accounts receivables), and the factors noted above, and tariff adjustments as
appropriate that will enable ESCOM to meet the Government’s financial sustainability
objectives for ESCOM. The plan should include sensitivity analysis and contingency
measures in case some aspects are not implemented as planned. In developing the plan,
the consultant should solicit input from key stakeholders, including donors and IFIs active in
Malawi’s energy sector.
9. Develop an implementation schedule with numerical targets and clear mechanisms and
responsibilities for reporting and monitoring implementation of the agreed plan.
10. Assist in building ownership and buy-in for the plan through active participation in one or
more workshops, organized by Ministry of Finance, and including key stakeholders, at which
the plan will be presented.
84
Annex 23: Line Route for the 220kV and 132kV Lines
85
Annex 24: Extract from ESCOM’s Draft Integrated Strategic Plan for 2009-2013
CORPORATE ISSUES AND GOALS
1) Poor Customer Service & Delivery

o Improved effectiveness in service delivery
o Improved reliability, security & restoration of supply
 No contingency or backup
2) Poor Commercial and Financial Performance
o Improved revenue management
o Improved cash-flow management
o Improved business culture
o Implementation of Capital Management Process
o Reduced exchange rate risks
o Cost reflective tariffs
o Improved expenditure control
o Reduced back-log
o Appropriate technologies applied
o Provide supply contracts and tailor-made tariffs
3) Low Energy Market Share
o Improved customer relations
o Application of appropriate technologies.
o Increased industrial customer base
o More flexible new connection conditions
4) Inadequate Business Focus
o Full ownership of business
o Established Business Information System
o Fully implemented performance management process(PMP) and related rewards
o Compliance with Legislation
5) Weak Management of Human Resources
o Improved management skills
o Improved human resource capacity
o Plan for the effect of HIV/AIDS maintained
o Increased Environmental Risks
o Formulation of Contingency plans for adverse weather conditions
o Improved and enhanced management of aquatic weeds and trash/debris
o Acquisition and enforcement of way leaves
o Improved management of siltation
o Management of trash and aquatic weed
86
o Increased Security Risks
o Reduced vandalism and thefts
o Eliminate unauthorized connections
o Inadequate Communication and Networking with Stakeholders
o Improved communication and networking
o Poor Safety Record
o Improved safety record
o Compliance with appropriate legislation
o Compliance with procedures
o Increased safety awareness
o Enforced safety code
6) Poor Business Culture
7) Improved business culture
o ESCOM Perceived as Corrupt
o Compliance with the Anti-Corruption Act
o Improved transparency
o Improved resource management
o Improved remuneration
8) Improved information flow
87
Annex 25: Implementation Timeline
88
Annex 26: Generation Indicators and Targets
Source/ Year 5
Unit of Data Collection
Indicator Definition Responsible Target
Measurement Instrument
Entity Value
Defines the performance
(MWbefore / MWafter
General generation increase of all current power
*100%) / Generation
performance generation stations due to ESCOM 10%
[generation selling contracts
increased weed, silt, dredger and trash
station]
management
Defines the performance of
Nkula A and B Nkula A and B power
generation generation performance due to MWgenerated / Generation
ESCOM 95%
performance rehabilitation and MWinstalled * 100% selling contracts
increased modernization, and weed, silt,
dredger and trash management
89
Annex 27: Transmission and Distribution Indicators and Targets
Source/ Data Year 5
Unit of
Indicator Definition Responsible Collection Target
Measurement
Entity Instrument Value
Peak demand Defines the decrease of the SCADA
ΔMWpeak ESCOM -47.9
decreased peak consumption System
Defines the increase in ratio of
ΔMWhconsumption / SCADA
Load factor increased average consumption per hour ESCOM 1.7%
ΔMWpeak System
to the peak consumption
Defines the energy unserved
Energy unserved SCADA
due to load shedding and forced ΔGWhunserved / year ESCOM -5.616
decreased System
outages
Defines the number of line faults
#[line faults]>3min /
Line faults decreased >3 minutes per 100 km per SCADA
100 km / month / ESCOM 0.5
(permanent) month for each line affected by System
line
the concept project
Defines the number of all line
#[line faults]<3min /
Line faults decreased faults per 100 km per month for SCADA
100 km / month / ESCOM 10.0
(all) each line affected by the concept System
line
project
Defines the number of
Transformer outages transformer outages per month #outages / month / SCADA
ESCOM 10.0
decreased for each transformer affected by transformer System
the concept project
Defines the duration of line
hours / 100 km /
Line forced outage forced outage per 100 km per SCADA
month /line ESCOM 1.0
duration decreased month for each line affected by System
/outageforced
the concept project
Defines the duration of a
Transformer forced hours / 100 km /
transformer outage per month SCADA
outage duration month / transformer ESCOM 0.5
for each transformer affected by System
decreased /outageforced
the concept project
Defines the part of the time all
SCADA system hoursavailable / SCADA
functions of the SCADA system ESCOM 99%
availability hoursyear * 100% System
are working
Defines the decrease in
(ΔGWh[technical loss] /
technical losses of the energy SCADA
Technical losses GWhpurchased /year) * ESCOM -5%
purchased from generation per System
100%
year
Defines the improvement in
Δ(#[devices burnt- Region-
Power quality power quality supplied due to
out] / NSO specific -50%
improved strengthening the transmission
customer)*100% survey
network
Defines the increase in number
Number of new Region-
of new connections per annum #[new connections]
connections per NSO specific 20,000
due to extending the / year
annum increased survey
transmission network
90

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Malawi Energy Concept Paper

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THE GOVERNMENT OF

THE UNITED STATES OF AMERICA

Compact Program for the Government of the

Concept Paper for the Energy Sector

Millennium Challenge Account – Malawi Country Office Secretariat

“Poverty Reduction through Economic Growth”

ABBREVIATIONS AND ACRONYMS ............................................................................................................... iii

UNITS OF MEASURE ..................................................................................................................................... iv

CURRENCY EQUIVALENTS ............................................................................................................................. v

LIST OF FIGURES ........................................................................................................................................... vi

LIST OF TABLES ............................................................................................................................................ vii

LIST OF ANNEXES ....................................................................................................................................... viii

1 SUMMARY OF THE INVESTMENT CASE ................................................................................................ 1

1.1 Electricity Demand and Supply Projections ................................................................................. 2

2 INVESTMENT OBJECTIVE AND OUTCOMES .......................................................................................... 4

2.1 Program Logic for the Investment Program ................................................................................ 4

2.5 Investment Outcome 4 - Improved National Resource Management in Priority Catchments to

3 USE OF INVESTMENT FUNDS.............................................................................................................. 13

4 PROJECT BENEFITS AND BENEFICIARIES ............................................................................................ 15

4.1 Beneficiary Analysis ................................................................................................................... 15

4.3 Summary of Overall ENPV and EIRR for Energy Investments.................................................... 17

4.4 Target beneficiaries ................................................................................................................... 17

5 SUPPORTING TECHNICAL INFORMATION .......................................................................................... 27

5.2 Recent, On-Going or Expected Investments ............................................................................. 29

6 ENVIRONMENTAL, SOCIAL & INVESTMENT SUSTAINABILITY RISKS .................................................. 33

6.1 Environmental Impact Assessment Regulatory Framework ..................................................... 33

6.2 Environmental and Social Risks ................................................................................................. 33

6.3 Risks to Investment Sustainability ............................................................................................. 35

7 IMPLEMENTATION PLANS, MONITORING & EVALUATION ................................................................ 41

7.1 Implementation Plan ................................................................................................................. 41

7.2 Monitoring & Evaluation ........................................................................................................... 42

US$1.00 = 140 Malawi Kwacha (MK) (January 2009)

Figure 2: MCA-M Implementation Structure for the Energy Project ........................................... 41

Figure 3: MCA – Malawi Energy Sector Program Logic................................................................. 43

Table 4: Increase in Income of Households Being Electrified ....................................................... 19

Malawi is planning considerable investments in generation capacity in order to increase current

Sub Total $189,840,000

2.1 Program Logic for the Investment Program

At the microeconomic level, increased access to reliable power is expected to increase

ENERGY COMPONENT OBJECTIVE

OUTCOME 1 OUTCOME 2 OUTCOME 4

2.2 Investment Outcome 1 – Increased Availability of Quality and Reliable

2.2.1 Rehabilitated Power Stations

2.2.2 Demand Side Management

2.2.3 Rehabilitated Transmission and Distribution System

Overloaded transmission and distribution networks result in unreliable electricity supply

2.2.4 Weed and Siltation Management

2.3 Investment Outcome 2 – Increased access to power for Un-served users

2.3.1 Rehabilitated Northern, Central and Southern Distribution System

2.3.2 Electrification for Rural and Peri-Urban Areas

2.4 Investment Outcome 3 – Improved and Effectively Managed Power Sector

2.4.2 Enabling Environment for PPPs Created

2.4.3 Improved Financial Sustainability and Operational Efficiency of ESCOM

ESCOM needs to be placed on a financially sustainable footing to allow it to self-finance and to

2.5 Investment Outcome 4 - Improved National Resource Management in

2.5.1 Revised and Harmonized NRM Policies

2.5.2 Strengthened Capacity to Formulate and Enforce NRM Legislation

Weak enforcement of NRM legislation is leading to unsustainable use and management of

2.5.3 Improved Weed and Silt Management Systems

2.5.4 Improved Livelihoods through Sustainable NRM Business Enterprise

2.5.5 Improved Institutional Coordination and Extension Services for NRM

4.1 Beneficiary Analysis

a). Environmental benefits;

4.2 Key Assumptions Underlying Estimates of Incremental Costs and Benefits