National Approaches to Electrification – Legal Basis
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Legal Basis: The basis on which organisations are legally entitled to sell electricity
Concession
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Definition |
An exclusive right (monopoly) granted by government to sell electricity or standalone systems A concession may:
Concessions are usually granted to attract private investment by guaranteeing the investor protection from competition, or to protect public investment. |
Interactions with other NAE Categories
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Technology
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Grid systems and larger grid-connected mini-grids / distribution systems and isolated mini-grids almost always require concessions (because of the substantial investment required). As a result, the right to transmit and sell electricity is often reserved to the national grid company and/or mini-grid/distribution system operator (at least within the area they reach). For smaller mini-grids, with lower, shorter-term capital investment, a license (which grants a non-exclusive right to sell electricity) may be seen as more appropriate, and mini-grids below a certain size are often unregulated. A key question for private mini-grid investors will be what happens when the main grid arrives? Grid extension into a mini-grid concession area within the concession period may be prohibited, or there may be explicit provision for compensation and transfer of assets to grid ownership. Grid and mini-grid concessions thus often interrelate (with each preventing or having explicit provision for extending into the other’s area). | |
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Delivery Model
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Public delivery models are frequently combined with what are effectively concessions, though the monopoly may be created by, for instance, reserving the right to sell electricity to a national utility company, and may not therefore be labelled as a concession. Oversight and control may then be through organisational hierarchy rather than any explicit regulatory framework. Concessions are used to attract private participation in private and public-private models and may be the means through which public-private models are established. | |
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Price/Tariff Regulation
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Where a concession is granted prices will almost certainly be regulated both to enable private investors to estimate revenues over the concession period and to protect users and ensure that the concessionaire is not over-exploiting their monopoly position. This regulation may be through the terms of the concession itself, rather than through a wider framework. Prices may be set on either a uniform or an individual basis. | |
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Finance
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A concession is a means of attracting private finance, by offering the investor higher levels of sales (in the absence of competition) and lower risk in predicting those sales. It may also be used to protect public investment in infrastructure such as grid systems, and as a means of channelling public financial support into electricity provision. | |
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Non-Financial Interventions
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National energy planning is key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the regulatory model employed. Institutional restructuring (eg of the national utility company) and regulatory reform may be needed to enable concessions to be established and capacity building or technical assistance may be required if the key actors lack the capacity to undertake this regulatory reform or design concession arrangements. Awareness raising and demand promotion amongst users and service providers, as well as training (capacity building) to develop the skilled workforce needed by concessionaires can be beneficial alongside financial forms of public support. |
Advantages and Disadvantages
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The key advantage of a concession is that, by removing the potential for others to sell within the concession area, it allows demand to be captured by a single supplier, giving them economies of scale, and makes it easier to forecast volume of sales and so easier for investors to forecast future revenues (whereas license-based price/tariff regulation only reduces price uncertainty). As well as attracting more private finance this may reduce required return on investment and hence finance costs, but it also removes the benefits of competition once the concession has been granted and so places heavier demand on regulation to protect users, though potential providers may be required to compete for the concession through a tender process. Concession approaches can be rigid, and require significant capacity within regulatory authorities to design approaches which attract private finance while avoiding over-exploitation of users. Concessions also, by their nature, create boundaries and so push investors towards project finance and thinking by limiting their ability to expand their business beyond pre-set borders or to continue it beyond the end of a concession period. For capital-intensive infrastructure-based means of electrification (grid and mini-grids), however, a concession may just represent recognition of a natural monopoly and the need for explicit arrangements for arrival of the grid, and it is for these that a concession is most likely to be appropriate. |
Further Information and Guidance
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Relevant Case Studies
License
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Definition |
A non-exclusive permission granted by government (or regulator) to sell electricity or standalone systems. Licenses are employed to enable regulatory authorities to control who provides electricity or electricity goods, to ensure that they meet quality and safety standards and to allow price controls. At the same time licensing is a means of making clear that electricity providers are entitled to sell – without which private financiers may be reluctant to invest. A license may:
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Interactions with other NAE Categories
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Technology
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Gridsystems and larger grid-connected mini-grids / distribution systems are usually licensed through a concession arrangement as, often, are larger isolated mini-grids. For smaller mini-grids, with lower and shorter-term capital investment, a licensing regime (with its non-exclusive right to sell electricity) may be more appropriate, with greater flexibility and a generally less demanding process balancing lack of protection from competition for the investor, while still providing the means to protect users through price/tariff regulation and setting technical and safety standards. (mini-grids below a certain size, are often unregulated, as the administrative burden (and costs) of regulation are seen as disproportionate to the protection it would provide to investors and users, and the right to operate instead being granted through a general derogation from licensing). Without a concession, a key question for private mini-grid licensees will be what happens when the main grid arrives, and it may be beneficial to establish a compensation regime in the event of grid extension, to encourage private mini-grid investment in the interim. Standalone system providers are rarely subject to licensing (beyond general business licensing requirements) though they may be required to meet certain standards in order to access subsidies and tax exemptions. In part this reflects both policy-makers’ and businesses’ perception that as product retailers rather than infrastructure providers or sellers of electricity itself they do not require licensing. Also, without long-term fixed capital investment, private companies have not needed the protection of a concession or license to attract private capital (and would regard it simply as a regulatory burden). With standalone system providers increasingly | |
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Delivery Model
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Licensing may be regarded as unnecessary with a public delivery model, since one arm of the state is granting a license to another, though it can act as a mechanism for establishing independent and transparent oversight. With private and public-private delivery models, licensing is used to explicitly establish the right for the licensee to sell electricity (or a technology used to provide electricity) as the basis for attracting private participation and protecting users through standards and price controls. | |
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Price/Tariff Regulation |
One of the purposes of licensing is to provide the vehicle and framework for price/tariff regulation, with license withdrawal being the sanction for failure to comply with price/tariff regulation. Prices may be set on either a uniform or an individual basis. | |
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Finance
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The right to sell conveyed by a license is the most fundamental requirement for attracting private finance. A licensing regime may also provide a transparent regulatory framework to attract private investment (see below), and may be linked to access to grants, subsidies, tax exemptions and guarantees. | |
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Non-Financial Interventions
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National energy planning is key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the regulatory model employed. Regulatory reform is the path to establishing any licensing framework, including quality and technical standards, and capacity building or technical assistance may be required if the key actors lack the capacity to undertake this regulatory reform. Awareness raising and demand promotion amongst users and service providers, as well as training (capacity building) to develop the skilled workforce needed by licensed electricity businesses can be beneficial alongside financial forms of public support. |
Advantages and Disadvantages
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The key advantage of licensing electricity providers is that it provides the means to impose technical and quality standards and price controls, and thereby protect users, in return for the explicit right to operate. The clarity provided by a well-designed and managed licensing arrangement can serve to attract electricity providers, particularly if long-term capital investment is involved. If licensing is complex, bureaucratic and time-consuming, or imposes disproportionate costs, it may instead delay projects and discourage potential providers, which is the main disadvantage of licensing. |
Further Information and Guidance
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Relevant Case Studies
Unregulated
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Definition |
A regime under which anyone may sell electricity and/or standalone systems without any license or other permission, beyond that required for any business to operate, and without any regulatory control of electricity tariffs or standalone system prices. An unregulated regime may:
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Interactions with other NAE Categories
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Technology
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Grid systems and larger grid-connected mini-grids / distribution systems and isolated mini-grids are generally subject to some form of regulation to set technical and quality standards and allow for price/tariff regulation to protect users. Mini-grids below a certain size are often unregulated, as the administrative burden (and costs) of regulation are seen as disproportionate to the protection it would provide to investors and users, with the right to operate instead being granted through a general derogation from licensing. | |
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Delivery Model
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Public delivery model based electrification may be unregulated where, as in the early stages of Vietnam’s electrification, multiple public institutions provide electricity to users, without central direction or oversight. (Though public electricity providers will often be controlled through the state organisational structure, and even in the context of a public delivery model a regulatory framework can act as a mechanism for establishing independent and transparent oversight.) Private and public-private delivery models which use infra-structure based means of providing electricity (ie mini-grids) are generally subject to regulation in order to protect users under what is often effectively a monopoly even if no formal concession has been granted. Only where the means of electricity provision is very dispersed, as with very small mini-grids or standalone systems, is it usually regarded as appropriate to leave private or public-private electricity providers unregulated. | |
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Finance
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Grants and subsidies will often be linked to some form of regulation to ensure proper use of funds, and cross-subsidies between electricity providers are generally impracticable outside a regulatory framework. Some more indirect forms of public financial support, such as import tax exemptions, may be viable in the absence of regulation. An unregulated market may be considered unnecessary to attract private finance provided that the right to sell is clear, the privately-financed provider is not looking for protection from other providers (eg gridextension), and there is no concern that later introduction of price/tariff regulation might threaten returns on investment (ie generally where long-termed fixed capital investment is not required) – for instance where there are multiple solar lantern suppliers. In a primarily privately financed context, with limited public financial support, payments from users are needed to fund operations and provide return on investment. | |
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Non-Financial Interventions
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National energy planning is key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the regulatory model employed. If regulation is deemed unnecessary, regulatory reform is unlikely to be required (unless this necessitates removal of existing regulations) and this would appear to imply little need for capacity building or technical assistance to policy makers and regulators. However, lack of regulation is itself a regulatory choice and its implications must be understood if unforeseen and unwanted consequences are to be avoided. Though forms of public financial support are limited without regulation, non-financial support such as awareness raising and demand promotion amongst users and service providers, making market information available, and providing training to develop the skilled workforce needed by businesses can support market growth. |
Advantages and Disadvantages (Including Level of Electricity Provided)
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The main advantage of unregulated electricity provision is the absence of bureaucracy, costs and delays and the opportunity this provides to businesses to move swiftly and innovate, and hence to accelerate electricity access provision. It also avoids the burden on state institutions of designing and managing a regulatory system. The major disadvantage is lack of clarity and protection from competition (including grid extension) for private investors and businesses, while users will rely solely on market competition for protection from over-pricing and poor quality and even unsafe products and services. |
Further Information and Guidance
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Relevant Case Studies
References
Authors
Authors: Mary Willcox, Dean Cooper
Acknowledgements
The Review was prepared by Mary Willcox and Dean Cooper of Practical Action Consulting working with Hadley Taylor, Silvia Cabriolu-Poddu and Christina Stuart of the EU Energy Initiative Partnership Dialogue Facility (EUEIPDF) and Michael Koeberlein and Caspar Priesemann of the Energising Development Programme (EnDev). It is based on a literature review, stakeholder consultations. The categorization framework in the review tool is based on the EUEI/PDF / Practical Action publication "Building Energy Access Markets - A Value Chain Analysis of Key Energy Market Systems".
A wider range of stakeholders were consulted during its preparation and we would particularly like to thank the following for their valuable contributions and insights: - Jeff Felten, AfDB - Marcus Wiemann and other members, ARE - Guilherme Collares Pereira, EdP - David Otieno Ochieng, EUEI-PDF - Silvia Luisa Escudero Santos Ascarza, EUEI-PDF - Nico Peterschmidt, Inensus - John Tkacik, REEEP - Khorommbi Bongwe, South Africa: Department of Energy - Rashid Ali Abdallah, African Union Commission - Nicola Bugatti, ECREEE - Getahun Moges Kifle, Ethiopian Energy Authority - Mario Merchan Andres, EUEI-PDF - Tatjana Walter-Breidenstein, EUEI-PDF - Rebecca Symington, Mlinda Foundation - Marcel Raats, RVO.NL - Nico Tyabji, Sunfunder -
Any feedback would be very welcome. If you have any comments or enquires please contact: mary.willcox@practicalaction.org.uk, benjamin.attigah@euei-pdf.org, or caspar.priesemann@giz.de.
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