OVERVIEW
The "New Electrical Law" of Mozambique (Law 12/2022 of July 11), was enacted in 2022 as the principal law and consequently revoked the previous principal law passed in 1997. This new law was primarily enacted to adapt the legal framework of the electricity sector to the current social, technical, and financial dynamics, and to align with the objectives of sustainable development and the energy transition in line with the country's reality and global expectations. In addition, the objectives of the law seek to align with universal access to quality energy, efficiency, and reliability, via the deployment of all energy sources, with emphasis on renewables and the attendant reduction of the use of fossil-based sources for energy production.
Furthermore, the law regulates the activities of electricity production, transport, distribution, commercialization, and consumption of electric energy, including its import and export. It also provides for the management of the electricity sector, licensing and concession activities, and the application for tariffs, etc. The law contains twelve (12) chapters with sixty-three (63) Articles.
OBJECTIVE(S)
The primary objective of the law is to define the general organization of the electricity sector and the legal framework for electricity supply activities.[i]
KEY PROVISIONS
· Concessions
The electricity law of Mozambique aims to ensure private participation in the public electricity supply service through concessions that guarantee the right to use and exploit the energy potential, safeguarding national interests.[ii]
Generally, the concession model is one of the Public-Private Partnership models for infrastructure development that has been identified to encourage private sector participation in the development of public infrastructure.[iii] It also places an equal share of risk on private sector participants, attracts a high level of private investment and the potential for efficiency gains in all phases of project development alongside implementation with high technological innovations.[iv]
Nonetheless, there are areas that require careful and strategic considerations in its administration. Concession models are highly complex to implement and administer, as they may impose underlying fiscal costs to the government, in addition, negotiations between parties and closing a project deal may entail long lead times, and close regulatory oversight may be required. Furthermore, contingent liabilities to governments may be incurred in the medium and long term. Nevertheless, Mozambique has a Public-Private Partnership/Concession Law (Law No. 15/2011) in place which should provide some level of guidance to the applicable respective authorities and the private sector.
In making an application for a concession, the request is addressed to the Minister who oversees the area of energy and is processed by the Autoridade Reguladora de Energia (Energy Regulatory Authority), otherwise known as ARENE.[v] The application for a concession usually contains the applicant’s identification, the description of the objectives of the application and the duration of the concession. The authority has 180 days from the date of receipt of the application to authorize or refuse the grant of the concession. Notably, before a grant for concession can be authorized, certain criterion must be met, including the need for fairness and reasonability in the tariff and price setting formula to reflect investment, operation, and maintenance costs, subject however to the tariff regime defined by ARENE.[vi]
Tariff setting is an important aspect of establishing a thriving electricity industry. Economically, a prohibitively low tariff restricts significant investment for the operators or external investors and prohibits any realistic chance of improvement in quality and quantity of service.[vii] An unreasonably high tariff could also place a premium on electricity, thereby affecting affordability and energy access. Electricity tariff pricing regime has been the subject of several international arbitrations where it was argued that a change to the regulated pricing amounted to an expropriation of the investment due to the negative impacts on the investor’s investment.[viii] As such, having incorporated reasonability and fairness into the tariff setting formula, it is equally important to ensure that the tariff regime defined by ARENE make provision for periodic reviews to ensure that tariffs reflect the economic reality of the sector at every point in time.
· Energy Storage
The Law defines energy storage as the activity of converting electrical energy into stored energy, for subsequent supply to consumers, which can be carried out independently or integrated into a production, transmission, or distributed system. Article 21 provides that electrical energy storage can take place autonomously or integrated with energy supply activities to provide auxiliary services and contribute to the balance and quality of the system. The provision for autonomous and integrated energy storage is a laudable addition. However, further policy considerations need to be factored and addressed.
Battery Energy Storage Solutions (BESSs) as an energy storage solution can be implemented as a grid-balancing measure. It can be used autonomously, as a small-scale unit such as in an aggregated form, clustered, for example, in a virtual power plant in combination with other distributed energy resources.[ix] In the case of autonomous optimization, the storage systems are individually controlled on-site.[x] Autonomous control method has been shown to be a robust and cost-effective alternative to centrally controlled approaches.[xi] Technological innovations including battery control algorithms for grid balancing and cost optimization have been developed based on autonomous optimization resulting in a charged or discharged, or idle mode to enable optimal storage design and economic potential of BESSs.[xii] BESSs as grid-balancing measures (whether autonomously or integrated) in low-voltage distribution grids need to be controlled by local, grid-motivated, and consumer-motivated incentives (as their energy demand or renewable fed-in) to compensate for residential imbalances between demand and supply.[xiii] Thus, incentives covering these areas are appropriate for specific grid sections. BESSs balancing higher voltage grids need to be controlled by incentives that reflect more general conditions, such as supra-regional markets like the day-ahead stock market price for electricity.[xiv]
Lessons can be gleaned from the United Kingdom (UK), a country well advanced in battery energy storage systems with several investments in the industry. Recently, the UK announced its work to exempt solar PV, energy storage and other clean energy technologies from business rate[xv] rises from April 2023.[xvi] The UK is also working towards allowing bids to include generation projects collocated with energy storage for forthcoming tenders for large-scale renewables under the national Contracts for Difference (CfD) scheme for the first time.[xvii] These incentives are expected to create investment relief to encourage British businesses to adopt green technologies such as solar PV.
· Sale of Surplus Energy to the public network
The production facility for private use connected to the National Energy Network may sign a contract for the sale of surplus electricity produced and not consumed with the National Network Manager, under terms to be regulated.
The New Electricity Law makes it possible for the first time for any private use facility linked to the National Energy Network to enter a contract with the National Network Manager for the sale of excess electricity produced but not used, on terms to be regulated. The latter part of this provision displays an intention of the legislator to provide further regulations to guide the terms of sale of surplus electricity produced and not consumed with the National Network Manager. This could lead to a ‘wait and see approach’ by potential participants and consequently cause delays in the application and benefits of this provision. Therefore, it is recommended that the legislators or body(ies) designated for that purpose provide a supplementary law or regulation addressing the “regulation of terms” within a reasonable time.
· Mini Grids
The establishment of mini grids, involving production of electricity with an installed capacity equal to or less than 10MW are ineligible for a concession arrangement, under the provisions of the Law. Mechanisms for connecting to the National Electric Grid and compensation resulting from the expansion of the National Electric Network to the location where the mini grid is installed are defined by regulation. Mini grids are subject to a concession, albeit that certain flexibility is provided in the terms of the agreement and a concession fee exemption is also granted by the provisions of the law. The exclusion of a concession fee for mini grids could potentially act as an incentivizing factor to encourage private sector investments in mini-grid deployment. The use of mini grid generally permits the deployment of generation technologies that might not be feasible or economical at smaller scale.[xviii] As such, this provision provides for the economic participation of investors at a scale that allows for profitability with minimal regulation.
Furthermore, the law requires that a description of the locations where small grids can be constructed must be present and updated, according to the National Electricity System Manager. This provision allows for efficient energy planning in the country. It also ensures that small grids are widely spread and constructed in areas where they are needed as opposed to concentrated development in certain areas to the disadvantage of other communities.
· Renewable Energies
Mini-grid projects with integrated systems for hydroelectric use, simple or hybrid, with other sources of renewable energy, with an installed capacity of up to 5MW are exempt from paying concession fees.
The New Electricity Law specifically mentions the possibilities of hydropower production on a "simple or hybrid basis, with other renewable energy sources", opening the door to electricity production through hybrid systems. A hybrid hydro system possess multiple environmental benefits. For example, a comparative environmental and economic impact analysis was conducted in an off-grid farm in Southern Spain between a hybrid pump-as-turbine/solar pilot system (PAT-PV) and a traditional diesel generator, with the innovation of the seasonal energy supply preconditions.[xix] The results revealed lower climate change, fossil fuels, and dissipated water burdens over a 20-year lifespan, for the hybrid PAT-PV system, especially for fossil fuels (40-times lower).[xx]
· Acquired rights
The concession holder for the supply of energy existing on the date of entry into force of the law can maintain the rights and obligations contained in the respective concession contracts for the defined terms, without affecting the holder’s ability to observe the provisions of the new law. This translates to the effect that, without affecting the provisions of the new rules, the holders of concessions as of the New Electricity Law's effective date will continue to have the rights and obligations stipulated under the terms of their original agreements. This provision enables the preservation of the conditions (within the control of the regulatory bodies) that were in place at the time of initiating the investment. It provides some form of stabilization and protects investors against change of regulatory investment conditions that may be perceived as expropriatory in nature. It also protects the state of Mozambique against likely investor-state arbitration that typically ensue in such instances.
· Dispute resolution
Additionally, the law permits the State and the concessionaires to resolve issues concerning foreign direct investment through arbitration, similar to the provisions under the general investment protection regulations. The Washington Convention for the Settlement of Investment Disputes between States and Nationals of Other States (ICSID), including its supplemental mechanism, and the International Chamber of Commerce arbitration procedures are some of the listed arbitration options. The inclusion of Investor-State dispute resolution methods in the law could potentially be a huge incentivizing factor in foreign investment decisions. International flow of finance has a huge role to play in the development of electricity markets across sub-Saharan Africa. Foreign investors are one of such means of stimulating international financial flows. Foreign investors find comfort in a dispute resolution mechanism process that is separate from the judicial system of the country of investment. It provides a form of guarantee against discriminatory decisions and procedures in the settling of potential disputes. Therefore, this is a commendable addition to the new law.
RECOMMENDATIONS
Although the new Mozambican law is commendable in terms of its investment forward provisions, several recommendations for consideration include:
Regarding the sale of surplus energy, it is recommended that further clarity is provided. The law provides that production facility for private use connected to the National Energy Network may sign a contract for the sale of surplus electricity produced and not consumed with the National Network Manager, under terms to be regulated. There is a need to provide further guidance that defines surplus energy and the threshold that qualifies as surplus energy to enable the full maximization of this provision.
Energy Storage is a novel area of the electricity sector which has been recognized to provide a concrete means of improving energy efficiency while integrating renewables.[xxi] It is commendable that the concept of energy storage has been incorporated into the Electricity law of Mozambique. However, beyond ‘name dropping’ energy storage into the law, it is recommended that further detailed regulatory or policy framework that supports its utilization is developed.
Additionally, incentives targeted at enhancing autonomous and integrated grid balancing BESSs measures should be incorporated to such regulatory or policy framework to incentivise private sector participation in BESS. Incentives that have been incorporated in developed nations such as the UK should be considered while considering their impacts and adaptability to the Mozambican context.
Tariff consideration is pivotal to electricity sector investment decisions by potential investors. As such it is commendable that the law incorporates reasonability and fairness as essential elements of the tariff setting formula. Nonetheless, it is recommended that in the exercise of the tariff setting functions, ARENE should make provision for periodic reviews to ensure that stipulated tariffs reflect the economic reality of the sector at every point in time.
[i] Article 2
[ii] Article 4
[iii] United Nations: ESCAP, A Primer to Public Private Partnership in Infrastructure Development < https://www.unescap.org/ttdw/ppp/ppp_primer/2251_pros_and_cons_of_concessions.html >
[iv] ibid
[v] Article 11
[vi] Article 10
[vii] This Day, ‘The Law and Economics of Electricity and Petroleum Prices Increase’ (2022) < https://www.thisdaylive.com/index.php/2020/09/22/the-law-and-economics-of-electricity-and-petroleum-prices-increase/ >
[viii] Hydro Energy 1 S.a.r.l and Hydroxana Sweden AB v. Kingdom of Spain, ICSID Case No. ARB/15/42 AND AES Summit Generation Limited and AES Tisza Eromu Kft v. Republic of Hungary (II) ICSID Case No. ARB/07/22 < https://jusmundi.com/en/document/decision/en-aes-summit-generation-limited-and-aes-tisza-eromu-kft-v-republic-of-hungary-ii-decision-of-the-ad-hoc-committee-on-the-application-for-annulment-friday-29th-june-2012 >
[ix] Bernhard Faessler & Aleksander Bogunovic Jackobsen, ‘Autonomous Operation of Stationary Battery Energy Storage Systems – Optimal Storage Design and Economic Potential’ (MDPI, 2021) < https://mdpi-res.com/d_attachment/energies/energies-14-01333/article_deploy/energies-14-01333.pdf?version=1614596934 >
[x] ibid
[xi] ibid
[xii] ibid
[xiii] ibid
[xiv] ibid
[xv] Business rate charges are the charges levied on non-domestic properties to pay for local services.
[xvi] Liam Stoker & Molly Lempriere, ‘UK Government makes energy storage-friendly changes to commercial, industrial and utility-scale clean energy policies’ (2021) Energy Storage News < https://www.energy-storage.news/uk-government-makes-energy-storage-friendly-changes-to-commercial-industrial-and-utility-scale-clean-energy-policies/ >
[xvii] ibid
[xviii] Iian MacGill & Muriel Watt, ‘Economics of Solar PV Systems with Storage, in Main Grid and Mini Grid’ (2015) < https://www.sciencedirect.com/topics/engineering/mini-grids >
[xix] Merida Garcia & ors, ‘The environmental and economic benefits of a hybrid hydropower energy recovery and solar energy system (PAT-PV), under varying energy demands in the agricultural sector’ (Elsevier, 2021) < https://www.sciencedirect.com/science/article/pii/S095965262101297X >
[xx] ibid
[xxi] European Union, Energy Storage < https://energy.ec.europa.eu/topics/research-and-technology/energy-storage_en>