Licenses, concessions and PPAs
One of the most important areas of mini-grid regulation is the granting of licences, permits and concessions. Separate licences may be required by mini-grids for the generation, distribution and supply of electricity. For larger projects connected to the national grid, power purchase agreements may be relevant for selling surplus electricity to the grid.
Licences and permits are important because they grant mini-grids the right to exist and lay out the rights and obligations of the licence holder to carry out different electricity activities. They need to provide sufficient protection to the mini-grid, in combination with other regulations, to make it attractive to investors.
Many African governments have written power permitting rules for large-scale projects that are too long and costly for smaller, more rapidly deployed mini-grids. Clear, simple and streamlined permitting processes are required for mini-grids to reduce the administrative burden on private investors and regulators alike. The responsibilities of different regulatory agencies should be well defined to avoid overlap and potential confusion. The application and licensing fees should be set at reasonable levels that are commensurate with the small size of mini-grids.
Streamlining can be achieved by programmatic and tiered permitting, and by combining licences and permits for generation, distribution and electricity supply. Programmatic permitting refers to standardised permitting processes for projects that have similar technical characteristics, e.g. technology, size, and geographical location.
Tiered permitting refers to different permitting requirements for different sizes of project. For example, governments may exempt renewable energy projects smaller than 100 kW from the normal licensing processes and just require them to complete a simplified registration procedure. This approach might accelerate the development of smaller projects.
Consideration needs to be given to the length of the licences and the issue of licence transfers. Given the uncertainty around mini-grid business models, it is important that the licences (or concessions) are long enough that investors have a reasonable chance of getting a return on their investments. Investors are likely to be deterred if they cannot transfer a licence to a potential buyer. Potential lenders may also want to have the right to step in when a project underperforms and transfer its licence to a new operator.
In addition to licences, other permitting documents that may be required include certificates of incorporation, land lease or ownership documents, construction permits, environmental and social impact assessments, health and safety certificates, water use rights (for hydro projects) and rights of way. Titles to land are often unclear, and getting way leaves can take time.
Arrival of main grid
The potential encroachment of the national grid into areas served by mini-grids is one of the main risks for mini-grid investors. Mini-grid permits and licences should provide adequate legal protection for private investors and have appropriate financial compensation mechanisms for mini-grid owners. They should compensate owners for the cost of privately financed assets and any lost revenues, allowing them to make a fair return on their investment.
Governments should also provide guidance on how the mini-grids might eventually be integrated into the national grid. There are a number of commercial models that would facilitate this integration:
- Distributor model – The mini-grid buys wholesale electricity from the national grid and supplies retail electricity to local customers;
- Generator model – The mini-grid sells electricity to the national grid or another off-taker, but stops selling to local customers. It sells the distribution assets to the national grid or another public entity;
- Distributor/generator model – The mini-grid converts from an isolated mini-grid to an operator of a distribution network integrated with the national grid. It buys wholesale electricity from the national grid and supplies retail electricity to local customers. It maintains the existing generator and may add a few new ones, and provides backup for the main grid and retail customers;
- Buyout model – The developer sells either the whole mini-grid (both distribution and generation) or just the distribution, transferring the generation equipment to another site.
Some African governments have chosen to award concession contracts to private entities, granting them the exclusive right to implement and operate mini-grids for a specified period of time in a specified geographic service area. This kind of contract usually obliges the private entity to invest a certain amount of private funds and/or connect a certain number of people within a fixed time period. Concessions are usually awarded through a competitive bidding process to deliver the lowest overall cost for the highest number of connections.
Power purchase agreements
Power purchase agreements are long-term off-take agreements that outline the legal rights and obligations of the seller and buyer of electricity, including tariffs and offtake arrangements. They are needed when independent power producers, including mini-grids, sell in bulk to the national grid or another distribution grid operator or large industrial anchor client. They are relevant for those mini-grids that are connected to the national grid and plan to sell (excess) electricity to the grid or buy electricity from the grid.
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