Review of the Directive to Regulate Captive Energy Supply 

The Ethiopian Energy Authority (“EEA”) approved Directive No. 836/2021 (“Directive”) to regulate the supply of power for non-commercial purposes. (also informally known as Captive power supply). This would, for the first time, authorize self-generation and supply of energy independent from state utility providers. The Directive complements the Mini-Grid directive which recently introduced a regulatory regime for the development and operation of off-grid energy projects. 

A captive energy is a power plant that supplies electricity to only one consumer such as large-scale manufacturing or mining facility. Given the high demand for power in large industries, national utilities often do not have the capacity to supply power on a stable and reliable basis. In most cases, industries rely on expensive back-up diesel generators to meet their demands. Thus, captive power supply, typically using renewable energy sources, is particularly attractive as it gives high control over the supply, reliability, and cost of energy. In Africa, there is a growing trend by commercial and industrial settings to move away from the conventional centralized power supply to a more decentralized/localized generation of energy for self-use. Kenya, for instance, has over 40MW installed power exclusively for captive use.  

This note provides a review of the key provisions of the new Directive considering the regulatory experiences of other jurisdictions in Africa.    

Certification: Under the Ethiopian Energy Proclamation, no person may generate, distribute or transmit electricity without obtaining a license from the EEA. Further, the proclamation provides that those seeking to generate electricity for non-commercial purposes should submit notice to the EEA and prove that environmental and safety standards are met. The Directive aims and provides details in the implementation of the procedures for “notification” by establishing a regime of certification. To qualify for certification, the energy produced must be more than 200KW. Those producing electricity below 200KW are exempt from mandatory certification. While the minimum generation threshold is known, a maximum threshold has not been provided in the Directive. In other countries, the threshold normally extends up-to 10MW (with the exception of South Africa which recently increased the exemption threshold to 100MW). A cross-reference to the Mini-Grid directive indicates that a 10MW maximum capacity would likely apply. However, this should not be speculative and express legal provision as to the maximum self-generation capacity is needed to establish legal certainty.

Eligibility for Certification: The Directive allows the generation, transmission and distribution of electricity strictly for non-commercial use. Commercial sale or exports are prohibited. Non-Commercial electricity providers are defined as “those who generate, transmit or distribute electrical power supply for non-commercial or for any other interest which does not involve sales or export to another party.” The circular definition does not provide much insight as to the scope of application. For instance, it is not clear whether the non-commercial electricity provider could be a third party or independent power service provider. The reference to “non-commercial” implies that the consumer also acts as the generator, perhaps engaging third party actors only as contractors.  On the other hand, the Directive refers to “developers” (Article 10) and “Operation and Maintenance” contractors (Article 13) indicating potential third-party service providers. To avoid limiting the scope of its applicability, albeit for self-use, it is important that ‘non- commercial electricity providers’ be broadly and appropriately defined in the Directive. If indeed Independent Power Producers (IPPs) are included in the scope of application, the Directive should further stipulate the recognized business or contractual model that the IPP or captive owner may use to generate the power. Countries such as Senegal for instance, allow independent power producers (IPPs) to apply for license and supply “large consumers”. Further, in other countries, IPPs use two kinds of models to provide captive energy power. An “ownership business model” under which a developer or equipment supplier (lessor) retains ownership of the power plant and equipment but provides the equipment to the end user for a contracted period in exchange for regular payments.  A second model is a “service business model” in which a plant is built and operated by an Energy Service Company (ESCO) supplying energy efficiency services (often using renewable technologies such as solar rooftops) to the end-user. The end-user pays an agreed fee that can be adjusted based on the performance of the plant or on the cost savings for the end user against a predefined baseline. Although not tested in practice, ESCOs are recognized under the Ethiopian Energy Proclamation and Regulation and may be used for captive use. However, express recognition and detailed provisions in the Directive would offer legal clarity and predictability on the use of ESCO for captive consumers. 

Technology Type: The Directive refers to a generic “electrical power supply” without specifying the acceptable type of generation technologies that the service provider must deploy. It may, however, be indirectly inferred from other provisions of the Directive that technologies such as hydro, solar, wind, geothermal and biomass are recognized. (see below on certificate duration periods).  

Conditions for Certification:   The right to obtain the certificate for captive supply is not automatic. Article 5(2) of the Directive provides that the certification is conditional on the EEA’s confirmation that the applicant is unable to meet its power demand on a competitive basis or it is unable to find better energy source from local suppliers. This pre-condition is uncommon in other jurisdictions as the assumption for the need to self-generate is the inability to source cheaper and reliable electricity from the utility.  Furthermore, the scope of the terms “better supply” and “competitive basis” should be qualified stating the likely circumstances that will give rise to same.  Ordinarily, certification process is meant to be easier than a formal licensing procedure, often only requiring notice to the regulator. EEA’s broad discretionary role and its layers of involvement in the certification impacts quicker deployment of renewables for self-generation and consumption of power. 

Application Procedure: Applicants for certification may opt for separate or consolidated certificates having generation, transmission, and distribution components. A separate certification process appears to mirror the licensing procedures for mini-grids and grid-related energy supply. However, from the standpoint of the self-use value chain and the nature of “captive” energy, a consolidated certification for all three components is more appropriate and less administratively cumbersome. Furthermore, the Directive provides a list of documentary proofs that must be submitted with an application for certificate. These include; a social and environmental impact assessment and an environmental clearance authorization from the appropriate organ; technical and feasibility study, an operations and maintenance (O & M) plan, a land lease agreement, land use and planning permit from the appropriate local administration. For those using geothermal and hydro technology, additional permits for drilling and development are required to be submitted. Applicants should also indicate whether they intend to self-operate the power facility or engage the services of third-party O & M providers. Those opting for self-operation should demonstrate the capabilities to do so. Whereas those engaging external O & M contractors are required to provide information evidencing the expertise and experience of the O & M operator including testimonies from two previous clients. 

These certification requirements echo the requirements for mini-grid and utility scale generation licenses. The Directive appears to derogate from the intention of the Energy Proclamation which only provided for “notification” to the EEA in order to monitor compliance with environmental and safety standards. However, onerous conditions and documentary requirements resembling formal licensing procedures defeat the purpose of light regulation for self-use. In other African countries, certification involves a simple and much relaxed application process with less time and transactional costs. 

Certification Duration and Fees: Consistent with the energy generation licenses duration and fees, self-use certificates may be obtained on the following basis. 

The Directive provides separate certificate period for generation, transmission and distribution(T & D) services. It is not clear what the duration period would be for a Consolidated license and whether the certification fees would be a combination of both. The duration period for the certificates indicates longer tenure than what is seen in other countries (eg., Sierra Leon self-use permit lasts for 5 years). This is likely to encourage and promote long-term energy access.  License fees are Ethiopian Birr (ETB) 2,500 whereas renewal fees are 1668 ETB. 

Compliance Requirements: The construction and operation of the power plants must meet minimum industry and environmental standards. Compliance reports must be submitted to the EEA every two years. If any accidents or damage to the environment occurs during the construction or operation of the plant, the service provider is required to notify the EEA within 24 hours. Further, non-commercial operators are required to keep records and submit periodic reports to the EEA. 

In conclusion, the Directive is an encouraging step to allow and regulate self-consumption of energy and fills a critical gap in the industry. However, a lot remains in terms of comprehensiveness and clarity of the legal provisions. In addition to some of the grey areas highlighted in the preceding paragraphs, the Directive fails to address whether the self-generation network system may be connected to the grid transmission or distribution system or whether it is capable of parallel operation with the grid. Furthermore, whether the private generator can use the existing grid, and whether a grid connection agreement/wheeling agreement whereby the utility will charge the generator for the use of its grid, remains unclear. 

Additionally, the Directive’s restriction on third party supply means that any surplus energy produced by the non-commercial provider may not be shared with local communities, or to other licensed power producers or sold back to the utility. This is a key gap considering the energy access challenges faced by populations across the country, especially in remote communities with no grid access.  

Finally, the Directive lacks provisions on the procedures for the suspension, termination, and cancellation of certificates. While Article 18 provides that ‘failure to comply with the provisions of the Directive” will lead to cancellation of the certification, important details on timelines and rights to appeal are lacking. These will affect legal predictability and regulatory certainty that are needed to encourage private investment.