By Thibaut Mourgues
COP28 urged Governments to step up private sector engagement in sustainable infrastructure, and particular in infrastructure. The infrastructure financing gap standing at USD 15 trillion by 2040 according to OECD is so huge that public finance alone will stay short of the requirements. In this context, ensuring a conducive environment for private sector investment is of utmost importance. As for the power sector, probably the most important one in the dynamics of the energy transition, legislative and regulatory framework is often overlooked as a key component of the investment ecosystem. In many developing countries, electricity laws date back to over 20 years, reflecting the priorities of the time and not suited to the present requirements.
In this article based on the legal upgrade advisory work I have conducted in several African countries over the last few years, I address the main components of a modern framework for power sector.
I. A strong and independent regulatory authority
As a general rule, the independence of the regulatory authority is inseparable from the opening up of the market. This involves moving from a logic of control by the political power to a market logic in which operators and consumers must have the certainty of being treated fairly and impartially. In a context of increased recourse to private investment for the development of the sector and of coexistence between public and private operators, investors prefer an environment dominated by the rule of law rather than political preference, especially since in most cases the public operator will continue to play a dominant role in the foreseeable future (the political power may be tempted to prioritize the interests of the public operator over the private sector).
The role of regulation of a competitive market with monopolistic components, as is the case with the electricity market, is therefore to maintain a certain equidistance from the three main categories of market players: operators and investors, consumers/users and the State. The role of the regulator is extremely important for this purpose, as it has to watch over the interests of these three key groups. Each group may have interests that are potentially in conflict with those of the other groups. The balance and primacy of these interests, as well as the settlement of disputes if they arise, must therefore be applied in a neutral and appropriate manner.
Of course, the role of regulation does not exclude the role of guidance by the political power, which must be able to put in place a long-term vision for the development of the market based on the general interest. However, the reforms that may be necessary for this purpose should not have the effect of destabilizing the regulatory authority.
To guarantee the independence of the regulatory authority, several prerequisites are essential:
- Role and powers of the authority defined on the basis of clear principles, rules and procedures;
- Own resources from the payment of a secure, stable and adequate fee;
- Transparent, clear and impartial recruitment process for members of the commission;
- Neutral and fair control to promote and protect competition and private investment.
II. Third party access to the transmission network
The right of third parties to access the electricity transmission network is a key concept in opening up the market to competition. This involves giving electricity producers, their customers and authorized intermediaries the possibility of using the electricity transmission network owned and operated by other entities. This right is symmetrical with an obligation to contract and carry out the operation for the entity that manages the network. This right of access is fundamental in relation to electricity supply contracts established in favor of eligible customers. Indeed, in the absence of a right of access to the network for third parties, the notion of an eligible customer could remain purely abstract without the physical possibility of changing supplier.
Given the high costs involved in building a transmission or distribution network, these are often referred to as natural monopolies. In some cases, it may also be a legal monopoly, where the law grants a monopoly on transmission or distribution to an operator.
The challenge of regulating third-party access to the network is to determine how to regulate the market and promote competition without harming the legitimate interests of the network owners and operators.
In the European context, non-discriminatory access to electricity transmission and distribution networks has been central to the opening up of markets since the late 1990s.
A network operator attempting to discriminate between market players, for example by granting preferential connection conditions (time, price, etc.) to a supplier, would thus hinder the access of alternative suppliers to the energy market and would lead to a distortion of competition detrimental to the end consumer.
Non-discrimination is also necessary for consumers to have confidence in the transparency of the market. If a distribution network operator unduly favors the energy supplier of the group to which it belongs in any way whatsoever (whether in terms of price but also of quality of service, speed of intervention, etc.), the end customer will no longer benefit from the competition and its expected benefits will be los
III. Clear procurement rules
The objectives of the title award procedures are essentially to ensure equality of operators and to avoid any form of arbitrariness in decisions in order to guarantee an efficient, competitive and transparent market. This will reassure potential candidates and attract new players to the market. Prerequisites may include:
- Demonstrating the fair treatment of applications, by explaining the conditions and criteria retained for the award of titles in order to guarantee the step-by-step monitoring of the process, without surprises or misunderstandings;
- Specifying the deadlines for the stages of the procedure, both for the candidate and for the contracting authority, so that investors can plan their activities in full knowledge of the facts;
- Specifying for each project the conditions that must be met, the criteria taken into account by the administration, and the content of the files that must be provided;
- Ensuring that calls for tender comply with best international practices;
- Clearly establishing the roles and missions of the authorities involved in the procedure.
The Ministry of Energy must provide strong leadership to support the effectiveness of the procedures in force in the electricity sector in favor of the private sector. This can be done in particular by:
- Drawing up and disseminating a procedural manual (beyond a simple investor guide) in the energy sector which specifies the steps, the actors and their roles, as well as the conditions to be met, the evaluation criteria and the corresponding deadlines;
- The establishment by the Ministry of a regular framework for information, communication and management of the procedures in force;
- Strengthening the capacities of the public personnel involved, particularly those in the energy sector, at each stage of the procedures.
IV. Dispute settlement rules
Dispute settlement procedures must be predictable, clear, transparent and fair in order to inspire confidence in market participants.
Indeed, each operator on the market has the right to know exactly who and how disputes are managed, between operators or between operator and customer, what their remedies are and how sanctions are applied, even in the case of mini-grids.
Moreover, in a regional market, with players potentially located in different countries, it is necessary to define precisely which authority (and therefore which regulatory framework) is responsible for settling complaints and disputes. Coordination between national regulators and the regional regulator is essential in this respect and a clear coordination mechanism must be established.
It requires to establish rules relating to:
- Coordination between national and regional regulatory authorities in the event of cross-border exchanges;
- Clarification of the role of the regulator in the event of disputes outside the interconnected network;
- Dispute settlement procedures that meet the criteria set out above, with a specialized body within the regulator (in the first instance) and a code of procedure.
V. Separation of activities
The separation of the activities of vertically integrated operators has been recognized since the 1990s as a prerequisite for opening up regulated markets to competition. This is particularly true in the electricity markets, which in many countries have been entrusted by the public authorities to state-owned companies in a monopoly position. The opening up and liberalization of these markets has therefore required the implementation of preparatory and support measures, the first of which is the separation of the operators' activities.
In the electricity sector, there are essentially production, transmission, dispatching, distribution and marketing activities. These activities are carried out on markets that can be monopolistic, regulated or open to competition.
As a general rule, the independence of the Transmission system operator (TSO) has several objectives:
- To prevent a network operator from granting preferential conditions to its own production compared to the competition;
- To ensure similar access conditions to the networks for all operators (absence of cross-subsidization, taking into account all costs in pricing, and non-discrimination);
- To avoid favoring an integrated operator that would make undue profits on monopoly activities, allowing it to compete unfairly with other operators.
To guarantee the independence of the TSO, several models are possible, presented below from the most elementary separation (accounting separation) to the most accentuated separation (legal separation):
- Accounting separation within the integrated operator. It allows the calculation of the costs related to the transmission function in order to avoid discriminatory cost transfers in favour of the transmission operator, which is an essential condition for objective pricing. Accounting separation requires determining the tariffs and remuneration of future concessionaires, defining the financial flows between activities and determining the principles of remuneration for the different activities in the sector;
- Functional separation. Decision-making within the TSO is carried out at the TSO level without external interference;
- Legal separation. It is based on the creation of separate companies specialized by activity, if necessary with a different shareholding (patrimonial separation).
VI. Market liberalization : eligible clients
The notion of eligible customer is essential for the development of a competitive national market open to the regional market. It allows the largest customers to enter into electricity supply agreements with the supplier of their choice, which may therefore not be the incumbent operator. This derogation from the principle of the monopoly formerly held by the public operator represents a first step towards market liberalization.
In this context, the notion of eligible customer is indeed fundamental, for several reasons:
- This status allows large consumers to escape the regulated tariff to enter into a competitive relationship with their electricity supplier. This allows them to lower their costs or, at the very least, to obtain a better quality of service. This results in a better competitiveness for these players, which benefits the national economy. Access to reliable and affordable energy is also a decisive factor for investment decisions. The national economy can therefore hope, in the medium term, for an increase in the volume of domestic and international investments thanks to the implementation of the eligible customer status;
- The incumbent operator enters into competition with new players, which pushes it to improve its performance and lower its production costs by using clean and inexpensive energy sources, if it wants to remain competitive;
- The State has objective references to evaluate the performance of the incumbent operator and therefore to calibrate as well as possible the operating or capital subsidies that may be necessary, and to set realistic objectives within the framework of program or company agreements;
- The gradual introduction of eligible customers will allow other customers to be connected and therefore could also contribute to better meet demand and increase the energy access rate;
VII. Promotion of renewable energy
The development of renewable energies requires a specific legal framework: investment and financing framework, technical aspects of the development of the dissemination of renewable energies, specific investment incentives and financing mechanisms for sustainable and renewable energies, including tax breaks and subsidies, regulations on purchase tariffs, private sector participation and a fund dedicated to renewable energies.
One of the fundamental points is to give priority to the injection of variable renewable energies into the grid. This ensures that in the event of competition between thermal and renewable generation, the latter will be used as a priority.
Furthermore, in order to encourage renewable energies in the context of isolated networks and mini-grids, it is necessary to establish clear procedures and regulations for the construction and operation of isolated networks and mini-grids based on off-grid renewable energies.
Technical aspects of the development of the dissemination of renewable energies include developing standards and regulations for the installation and operation of renewable energy technologies, as well as ensuring that the grid is able to accommodate the variable nature of renewable energy generation.
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Each country should check whether the current power sector legislative framework could be improved under the type of analysis synthetized above. In case upgrade is required, the whole process can be conducted with expert support in a few months and lead to increased investors confidence helping to reach the objectives of the energy transition.