A New Directive for Mini-Grid Development
A summary of the newly enacted Mini-Grid Directive and its implication for project developers.
After years of anticipation, the Ethiopian Energy Authority (EEA) approved the Mini-Grid Directive No. 268/2020 (“Directive”) that will regulate the development and operation of mini-grids in Ethiopia. Mini grids have proven to be an effective solution to deliver faster and alternative energy solutions for remote communities around the world. They have been used to harness solar, wind, hydro, biomass, biogas and a hybrid technology, either operating autonomously or as interconnected with the national grid. In Ethiopia, development and private sector participation in the off-grid sector has remained very low despite an enabling policy framework. The Ethiopian National Electrification Program (NEP), launched in 2017 and updated in 2019, envisioned to achieve 100% universal electrification for Ethiopia by the year 2025. NEP aims to meet this objective through both on-grid (65%) and off-grid (35%) solutions. However, lack of regulatory framework guiding licensing procedures and tariff determinations meant an ad-hoc and protracted process at the EEA hampering private investment in off-grid energy. The Directive, with detailed rules on licensing, tariff regulations and grid connectivity, is expected to ease the regulatory challenges and allow quicker deployment of mini grids in the country. The Directive is a supplementary legislation to the Energy Regulation No. 447/2019 (Energy Regulation) and the Energy Proclamation No. 810/2013. (“Energy Proclamation”).
Licensing
Under the Directive, anyone seeking to engage in the development of mini-grid electricity must obtain a license from the EEA. A mini grid technology includes any electricity generation and distribution system (a set of electricity generators and energy storage systems) that is not connected to the national grid but interconnected to its own distribution network and supplying electricity to a localized group of customers. The maximum capacity a mini-grid system can have is 10MW. The license types are divided into a generation license and/or a distribution and sale license. A generation license permits the licensee to sell directly to a distribution network based on a tariff approved by the EEA. Whereas a distribution and sale license allows the licensee to buy bulk electricity, operate a distribution network and sell directly to customers. If a developer wishes to provide an end-to-end electricity services to customers, the Directive offers a consolidated process in which both generation and distribution/sale license will be granted under a single integrated license. Depending on the installed electricity capacity, the Directive provides three license categories:
- Class I: less or equal to 50KW
- Class II: 50KW – 200KW and
- Class III: 200KW – 10MW
A license is site specific. While a single license may apply for more than one site, a separate license must be obtained for separate market activity. The Directive does not provide a license duration period for each class. It appears that the license duration will be determined on a case-by-case basis at the time of license issuance.
Site Reservation and Community Engagement
Prior to obtaining a license, private developers may request to reserve sites exclusively for a period of 12 months. This offers a temporary exclusivity for developers to reserve a location until the project feasibility is completed. However, developers must design specific milestones they intend to achieve during the reserved period and submit their plan to the EEA. Failure to meet the milestones will result in automatic expiry of the exclusive right. The Directive requires that developers seeking to reserve distribution and sale licenses must consult the community, represented by at least 10 members, and secure approval from at least 75% of the members. Community engagement is a prerequisite for all license applications.
Tariff Determination
The Directive provides that tariff principles are based on the financial viability of the project and customer affordability. Financial viability considerations include capital expenditure, operational expenditure, fuel costs and reasonable return on investment (ROI). Grants and subsides cannot be factored in the tariff calculations. Tariffs include two components a) a fixed/connection charge and b) a retail charge. The retail tariffs are calculated combining the costs for mini-grid generation and the costs for mini-grid distribution and sale. The mini-grid developer may propose a consumption-based tariff denominated in birr/kwh or a flat rate charged per customer group. A qualified cross subsidy may also be provided in the tariff proposal.
Tariff Cross-Subsidies
The Directive recognizes three forms of cross-subsidies that can be integrated into the tariff proposal.
- A commercial customer cross-subsidizing a domestic class (subsidy recipient)
- High volume customers within a residential class cross-subsidizing low volume or lifeline customers
- A high density or low cost areas subsidizing low density or high cost areas through the use of uniform pricing.
Tariff Approval
All tariffs must be approved by the EEA. Developers are expected to negotiate and agree on the proposed tariffs with the electrified community prior to submitting the tariff to the EEA. A community contractual agreement, approved by the relevant local authority, must be submitted to the EEA as part of the license application. EEA reviews the proposed tariffs and where it finds it compliant with the Directive, issues a license within 10 days of application for Class I and Class II, and within 60 days of application for Class III.
Tariff Review
As provided under the Energy Regulation, off-grid tariffs are subject to review by the EEA every four years. Tariffs approved during initial licensing are due for review within four years. Earlier tariff reviews may be requested by the licensee or the EEA. The EEA will take a maximum of 60 days to examine tariff review requests. The review process will include a public hearing, tariff review and recommendation, publication and information dissemination.
Special Requirements
Depending on the type of technology that is being deployed, the Directive imposes special permits to be obtained by the licensee from other government agencies. For instance, applications for a hydro mini-grid license above 50KW are required to obtain prior consent from the Ministry of Water, Irrigation and Energy.
Safety, Reliability and Environmental Protection
Application for a mini-grid generation or distribution license must be accompanied by an environmental clearance certificate and an environmental impact assessment study approved by the Environment, Forest and Climate Change Commission.
Technical Standards
Project developers are required to generate at least 50% of total generation of the mini-grid assets from renewable sources. The Directive stipulates specific technical standards that developers must conform with including the design, procurement and installation of mini-grids. Detailed rules and technical standards on solar PV modules, hydro generators, inverters, batteries, combination boxes, safety and protection devices, monitoring equipment, distribution system, metering and vending system are provided in the Directive.
Sale and Transfer
Only safe and useable projects that are able to deliver services may be sold or transferred. The transfer must not cause harm to customers. The buyer is required to demonstrate its ability to operate the mini-grid facility and obtain the approval of the EEA prior to effecting the transfer.
Grid Encroachment
Pursuant to the NEP, the strategy for universal access ultimately aims to ensure grid connectivity for all households. Off-grid technologies are considered interim solutions for remote communities until grid accessibility is achieved. To protect the investment of off-grid investors when the grid arrives, the Energy Regulation and the Directive offer two exit options for the investors in the event the national grid connectivity is expanded to reach an off-grid licensed area. First, the grid licensee and off-grid licensee could agree for the off-grid system to be absorbed into the national grid upon settlement of a reasonable compensation. Alternatively, the Directive provides that the off-grid licensee could continue to operate its project by converting its status to bulk supplier of energy to the grid licensee based on a Power Purchase Agreement (PPA) to be approved by the EEA.
Compensation
Where the grid arrives and the mini-grid is absorbed, the grid and off-grid licensees are expected to negotiate and agree on the amount of compensation to be paid to the off-grid licensee. If there is no agreement, the EEA will arbitrate on the amount due to the off-grid licensee. In determining a “reasonable compensation”, the EEA will take into consideration the book value of the assets to be handed over to the grid licensee and the last 12 months of revenue generated from the off-grid site. Decision of the EEA on the compensation amount will be binding on both parties.
Complaints Handling
Licensees are required to form a complaint handling system to receive and resolve customer complaints and submit a copy to the EEA. The system should include a commitment to resolve complaints within a maximum of 10 days. The EEA will receive complaints from customers where the customers are unsatisfied with the licensee’s response or where the licensee fails to respond to the customer complaints.
Reflections
The enactment of the Directive, though long overdue, is an encouraging development. A robust regulatory landscape plays a key role in addressing key investment risks such as those related to licensing, tariff setting and main grid arrival. These improve the attractiveness of the sector by reducing transaction costs and risks during project development phase.
While the ambitious target of universal electrification by the year 2025 is unlikely to be achieved, the Directive will likely attract more investment into off-grid sector. The lack of a license duration for the mini-grid license is an important gap that must be addressed by way of an amendment to the Directive. In the context of the NEP strategy of expanding the national grid to all households, off-grid licenses are expected to operate only until the national grid arrives. Thus, clear rules on the maximum duration for a mini-grid license is critical for an investor’s risk assessment, financial modelling and ROI calculations. In addition, the Directive lacks rules and clear guidance on the obligation of the project developer to decommission (dismantle the project assets) at the end of the project lifetime.
Lastly, while the mini-grid generation and distribution/sale license is fully open for foreigners to invest, foreign developers seeking to deploy innovative end to end solutions may be restricted by existing prohibition in the investment laws. The investment law does not allow foreigners to engage in financial services and retail/wholesale trading. Thus, full packaged services such as Pay as You Go (PAYGO) services which are common in other countries may not be integrated with a mini-grid system unless local intermediaries are engaged. This creates the risk of running a fragmented supply chain and multiple intermediaries likely increasing the cost of services and tariff on end users.