NAE Case Study: Tanzania, Mini-Grids Regulatory Framework

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Description

Tanzania has become widely-recognised for successfully establishing an enabling and light-handed regulatory framework for mini-grids.  This has included  provision for grid connection, and definition of Feed-in Tariffs.  It has involved the introduction of a structure that covers licensing, tariff regulation and technical standards.  But licenses for private mini-grids are required only for projects that exceed one megawatt (MW). Smaller projects are allowed to register their businesses, which does not require the approval of the regulator, but makes the regulator and other government agencies aware of the enterprise and its activities. The acceptable tariff level is based upon TANESCO's (the electricity utility) avoided costs.  This provides the basis for Standardized Power Purchase (SPP) rates, which target generators connected to the national grid and the distribution systems of integrated or isolated mini-grids. When the SPP Agreement covers the delivery of electricity directly to new customers, the provider is allowed to propose its own end-user tariffs, which are allowed to exceed TANESCO standard tariff rates. The Rural Energy Agency (REA) provides a $500 grant to the power supplier in for each connection away from the main grid.

Context

The total installed power capacity in Tanzania adds up to 1185 MW, which is supplied mainly by hydro followed by gas and oil power sources.  The level of electricity consumption was 105kWh/capita (2014).  Demand is increasing rapidly due to productive investments (particularly industry and mining) and increasing consumption by connected users and newly connected households.  Electricity access for the country's 47m people increased from 7% in 2011 to 40% in 2016 due to several factors including the Government's new "Big Results Now" (BRN) initiative that targets the acceleration of electrification, additional financing to the Rural Energy Fund (REF) using a petroleum levy,  and Government subsidies to reduce the connection fees for the final consumer.  However, the connection rate in rural areas remains low (11% in 2014).  In 2014, TANESCO operated 20 diesel-based mini-grids for remote communities (some interconnected to bordering countries); 13 other rural villages received electricity from small-hydro mini-grids provided by faith-based institutions.  The Power System Master Plan (PSMP) of 2012 expects the country to reach 75% electricity access by 2035 (though, more recently, the Government has expressed its aim to electrify all villages by 2021). Installed capacity is projected to increase seven-fold to meet demand. Tanzania has good and underexploited resources of hydropower, geothermal, solar and wind, which the Government is committed to harnessing. After the first two phases of the national Rural Electrification Programme (by June 2016), 4,395 villages in Tanzania were connected to electricity, representing 36% of the 12,268 villages in mainland Tanzania.  In its 3rd phase, the project aims to electrify more than 7,873 villages in rural Tanzania over the next 5 years.  This involves electrification through grid extension, and through off-grid solutions. (The government has set an objective of increasing access to electricity by off-grid and mini-grid electrification schemes. Official estimates suggest that half the country could be served most cost-effectively by off-grid power, and that mini-grids could benefit around nine million people)

Objectives

The goal of the Tanzanian Government is to electrify all currently unserved villages by 2021.  (There were 7,500 such villages at the time of this announcement by the Rural Energy Agency in 2016).  A budget of over 1 trillion Tanzanian Shillings (US$450m) has been allocated for this initiative.  According to Energy and Minerals Minister, Professor Sospeter Muhongo (in December 2016), 543.3bn/- out of the 1trn/- budget will be sourced internally with the remaining amount coming from donors.

Legal Basis

Tanzania’s legislative framework for SPPs was created in 2003 under the Energy and Water Utilities Regulatory Authority Act. This provided the basis for construction of the mini-grid regulatory framework, which was further supported by the Rural Energy Act in 2005, and the Electricity Act in 2008.  The 2003 Act created the Energy and Water Utility Regulation Authority (EWURA) as a multi-sectoral regulator. EWURA has established small power purchase agreements (SPPAs) and created a standardized tariff methodology (SPPT). EWURA has created different SPPAs and SPPTs for SPPs connected to the main grid and existing isolated mini-grids.

Institutions, Roles and Responsibilities

  • Ministry of Energy and Minerals (MEM): responsible for electrification policy, and the implementing agent of the rural electrification expansion project financed by the World Bank
  • Rural Energy Agency (REA): operational since October 2007, the REA has provided subsidies to co-finance grid extension projects implemented by TANESCO, developed an enabling regulatory framework for SPP, including standardized power purchase agreements (SPPAs) and tariffs, and supported private sector–led rural electrification activities with performance grants (US$500 per connection) and a credit line for rural/renewable energy development that provides long-term financing through local commercial banks.
  • Tanzania Electricity Supply Company (TANESCO):  the national utility that acts as off-taker for power produced from grid-connected mini-grids
  • Energy and Water Regulation Authority (EWURA):  undertakes regulation related to energy and water.  Tasks include  determining the SPPA tariff and supervising power-purchase and service agreements, issuing licenses, and guaranteeing to preserve the floor prices for 15 years.

Interventions

Tanzania is a particularly relevant case for examining the off-grid FiT (feed-in tariff) scheme in Sub-Saharan Africa because of its broad institutional efforts to support renewable energy. In 2009 a standardized Power Purchase Agreement (PPA) was introduced and, in 2010, Tanzania adopted a standard tariff methodology.  The PPA provides the legal basis to interconnect renewable energy generators into both the national grid or into isolated mini-grids, and to export excess power (up to 10 MW) to the national utility.  This regulatory framework addresses licencing and tariff approval for decentralised grids; it combines standardised power purchase agreements, annual tariff adjustment and technology specific tariffs.  The tariff calculations begin with EWURA revising annual data from TANESCO, results are then reviewed by a working group and submitted to the EWURA board for approval. Projects <1MW are exempt from any license requirement.  The Small Power Producer owner builds, owns and operates the system, and either sells electricity direct to customers or to TANESCO (or both). REA provides the US$500 subsidy per connection with funding from the World Bank. 

Impacts Achieved

Tanzania has been ranked among the top 10 countries in the world for establishing sustainable business models for renewable energy-based mini-grids.  By 2016, after six years of the regulation being enforced, there were 15 standard PPAs signed with SPPs, of which 8 in were already in operation.  The PPAs amounted to 40.1 MW, comprising biomass (15.6 MW), solar (2 MW) and hydropower plants (22.5 MW).  Several of these were for isolated mini-grids, including 2 solar projects (3 MW), 3 biomass plants (5.1 MW) and 4 hydropower projects (total 12.6 MW) and 3 more are in the pipeline (2 hydropower of 4.1 MW and 1 solar of 1 MW).  In addition, there were 32 other SPP projects under development. This shows the increasing numbers of rural energy providers that are being established based on the supportive regulation.  For example, in 2016, JUMEME Rural Power Supply Ltd. initiated a project that uses solar hybrid mini-grids to electrify more than 100,000 people and 2,340 small businesses in Tanzania’s rural centres; by 2022, JUMEME aims to implement around 300 mini-grids and supply high-quality and reliable electricity to 1 million customers across Tanzania.

Lessons Learned

There is a risk that, if isolated mini-grids become connected to the grid, then the electricity price falls - the utility and related stakeholders need to be aware so that this can be effectively managed.  Experience has shown delays with payment from TANESCO for the power supplied to the grid - acceptable payment periods must be regulated to ensure that SPPs can operate effectively.  Some of the common barriers in Tanzania are high interest rates and SPPs’ difficulties in acquiring land and water rights;  based on this experience, the inclusion of land ownership and water rights is recommended for any future national energy policy.  Another lesson from the project has been the benefit of multiple source funding for projects, such as mixed grants and loans.  It has also been recognised that there the incentive to develop mini-grid projects is constrained due to the uncertainty of grid expansion.

Effectiveness

The estimated costs of electricity generated by an off-grid PV mini-grid in Tanzania range from 0.30 US$/kWh to 0.65 US$/kWh, though for 90% of the country, this would be less than 0.45 US$/kWh. (This does not account for costs related to the specific location project, such as expenses for licensing procedures, shipping, local taxes,  handling, installation, and logistics since these are highly dependent on the local conditions).  So  REA pays $500 per connection and the project developer funds the balance of the capital cost, and operating and maintenance expenses, which are recovered through user tariffs that will usually be less than 0.45US$/kWh.  The level of energy access provided will ideally be at tier 5, equivalent to a reliable grid-connect service.  However, uncertain local conditions (stemming from unreliable supply chains, constrained operator capabilities and frequent natural hazards in rural areas) often lead to interruptions (for main grid customers as well as mini-grids) that mean, in practice, tier 4 access is more likely.  This has therefore provided an affordable source of energy for remote communities (with electricity generated at lower cost than alternative energy supplies for consumers in rural areas - for example, the cost of power from diesel gensets ranges from 0.40 to 2 US$/kWh in addition to specific location costs ).  The national grid-electricity tariff is subsidized by the government, leading to an estimated loss of US$0.42 per kWh generated. TANESCO is therefore saving money when investing in PV mini-grids for the promotion of rural electrification.  This shows that the approach adopted towards mini-grids regulation in Tanzania has offered good value-for-money.

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 -


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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.

Download the Tool as a Power Point: https://energypedia.info/images/a/aa/National_Approaches_to_Electrification_-_Review_of_Options.pptx

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