Distributed power, localized benefits: how decentralization of energy approvals in Africa can unlock industrial sectors

Distributed Energy Resources (DERs) – energy generation and storage technologies that can provide power where it is required – present a huge opportunity to unlock localized economic benefits in Africa. Whilst DERs can be grid-connected or behind-the-meter, their power is channeled to specific sites or functions.

In recent decades, governments in Africa have gradually moved to liberalize energy sectors to improve service delivery. Whilst many previously bundled, state-owned utilities have opened private participation in the generation subsector, fewer have privatized other parts of the electricity supply chain. Private distribution is authorized in eight countries in Africa, private transmission in four, and only three countries (Gabon, Cote d’Ivoire, and Zambia) have private sector operators across generation, transmission, and distribution.

African energy sector planning and policy are still largely the purview of national governments, and licensing regimes and processes are mostly overseen by national energy regulators (which have varying degrees of independence). Federal Ministries, Departments, and Agencies have the overall authority to approve DER licenses or issue project approvals, and state and local authorities only work with DER providers on local construction or physical planning permits.

However, through our work originating, financing, and developing DER projects for industry across Africa, CrossBoundary Energy (CBE) has noted an emerging trend of decentralizing energy regulation in three key African markets: Nigeria, Kenya, and the Democratic Republic of the Congo (DRC). How has devolution of control occurred in each of these markets, what are some potential challenges arising from the decentralization of energy regulation, and how can local authorities maximize its benefits?

On March 17th, 2023, sections of the 1999 constitution of the Federal Republic of Nigeria were amended. Following the constitutional amendment, a new Electricity Act was signed into law on June 9th, 2023. The constitutional amendment grants Nigerian states new legislative powers to establish markets for the generation, transmission, system operation, distribution, and supply of electricity within their respective territories.

Against the backdrop of a struggling nationwide electricity system, this amendment empowers states to set the terms for private sector participation in energy systems. Once states have implemented their own Electricity Laws and regulatory frameworks, they are allowed by the Nigerian Electricity Regulatory Commission (NERC) to regulate electricity provision within their states.

It remains to be seen how many states will take advantage of this expanded authority. As of today, five of 36 Nigerian states have fully implemented energy legislative and regulatory frameworks: Imo, Enugu, Ekiti, Ondo, and Oyo.

While progress has been relatively slow, the private sector can now consider each of Nigeria’s states as potential individual regulatory jurisdictions. Though this shift has the potential to create policy and regulatory uncertainty in the immediate term (see Case Study 1), in time, states will be empowered to direct how the private sector can support improved distributed energy access.

Case study 1: double licensing causing project delays in Nigeria

The transfer of regulatory powers from the national energy regulator, NERC, to individual states has already presented challenges for private-sector DER providers. There appears to be ambiguity regarding the ultimate authority over DER project licensing, leading to a ‘double licensing’ scenario for some projects.

For example, CBE developed an onsite solar project for a key industrial firm in Nigeria. The state where the facility is located had not yet implemented its own legislative or regulatory framework, and as such, NERC remained the authority to grant generation licenses for DER projects.

However, the state requested that CBE apply for a generation license directly from its Ministry of Energy, as the local energy regulator had not been established. The state’s license application requirements, statutory fees, and timelines had not yet been established or shared for public consultation, yet the state withheld approval for a construction permit of the DER facility on condition that a generation license from itself was secured, despite CBE already having secured a generation license from NERC.

This intervention caused significant delays to the project and illustrated the uncertainty that devolution of power can cause for investors and developers of DER projects in Nigeria. CBE advocates for sector-wide guidelines on the transfer of regulatory powers to individual states, including what approvals developers must secure at both the national and state levels. States should also be encouraged to engage with the private sector on the laws and licensing frameworks that will be applied to DERs for industrial clients.

Kenya has not gone as far as Nigeria in decentralizing energy licensing and regulations, but the Physical and Land Use Planning Act, 2019, confers authority to local governments or counties, allowing them to formulate procedures and standards that govern energy activities within their territory. Direct oversight of project design integrity occurs at the county level.

The Energy (Electricity Licensing) Regulations, 2012, govern DER Power Purchase Agreements (PPAs). DER providers are required to first obtain No-Objection Certificates and physical planning approvals from the relevant county. They can then apply for a generation license from the national energy regulator, the Energy & Petroleum Regulatory Authority (EPRA). Obtaining the pre-requisite county approvals informs EPRA of a project’s compliance level and any requirement for further technical study.

CBE found significant differences in how counties in Kenya handle and charge for physical planning approvals. The permit fees charged by counties are considered revenue-raising measures and are decreed under each county’s finance law. As such, before imposing any tax or revenue-raising measure, the Public Finance Management Act, 2012 (PFMA) requires County Governments to seek the views of the Cabinet Secretary at the National Government’s Ministry of Lands & Physical Planning and the Commission on Revenue Allocation, and public participation is mandated before passing county tax laws.

It is unclear whether all counties are following this process. Public participation exercises are also not routinely being carried out on specific fees to be applied to renewable energy projects. Several Kenyan counties have not yet ratified physical planning fees for DER projects and are instead imposing ad-hoc charges. This has resulted in some counties requesting inflated fees and developers being uncertain about what fees will be required for these projects.

CrossBoundary Energy saw an opportunity to harmonize the fees applied to DER projects across Kenya’s respective counties:

Case Study 2: Harmonizing physical planning fees across Kenya’s Counties

CBE, in partnership with the Electricity Sector Association of Kenya (ESAK), worked to develop a physical planning fee methodology. We identified several barriers to implementing a harmonized approach, including:

• The high cost of conducting a nationwide study and stakeholder engagement, as required by law
• The need for all county assemblies to pass finance bills enacting a proposed fee methodology in line with other counties

In response, CBE proposed a physical planning fee methodology that replaced square meters with kilowatt (kW) to determine the licensing costs for DER projects, sizing electrical systems by output and not by physical size. CBE also proposed a lower statutory fee rate to encourage electricity consumers to adopt renewable energy, aligning county laws with national objectives for power generation.

CBE presented the proposed fee methodology to ESAK in the second quarter of 2024. The fee methodology was submitted to the Kenya Senate as part of an ongoing policy development roundtable meeting aimed at finalizing the Physical Planning Bill, 2017.

The DRC offers another example of partial decentralization of regulation and oversight of DER projects. Decarbonizing Africa’s mining sector, particularly in the DRC, involves transitioning to renewable energy sources to reduce the sector’s significant carbon footprint. Few mines are connected to the national grid, and the government is seeking to localize the benefits of the mining sector, including through local content and local participation.

The Electricity Act of 2014 in the DRC introduced substantial changes to the regulatory framework for energy projects, particularly affecting DERs. The requirement for DER projects with generation capacities greater than 51kW to obtain authorization from provincial governors at the final stage of licensing shifted decision-making authority from the national energy regulator (ARE) to local authorities.

Case study 3: provincial governor approval in the DRC – opportunity or obstacle?

Obtaining approvals from local authorities may offer opportunities for responsive and regionally focused energy development. DER providers will likely be encouraged to engage with Provincial Governors around the local benefits of their projects, including community development, as part of the licensing process.

This decentralization of authority could also pose a challenge to consistent regulatory standards: DER providers may be subject to different requirements imposed in different DRC provinces. As statutory requirements have not yet been established for the granting of final approval, DER providers lack clarity on respective application requirements and timelines for securing final approval for generation licenses. This could lead to delays in the provision of reliable, affordable distributed energy to DRC’s mines.

CrossBoundary Energy wrote about how the Government and national energy regulator can support DER providers to ensure a streamlined process, even with the involvement of local governors in the DER licensing process.

The measures taken in Nigeria, Kenya, and the DRC give state and local authorities power to dictate the role DERs can play within their local energy systems. This is a huge opportunity. Unreliable and expensive power is a binding constraint on commercial and industrial activity across the continent and in each of these countries, and DERs inherently deliver their energy services straight to the locality where they are built. Favorable DER regulations could allow local authorities to become national leaders in attracting private-sector investment and energize the industrial powerhouses of their communities. Shoring up distributed manufacturing can create jobs and support local economic growth.

In addition to the wider economic benefit, the deployment of DERs can also have a direct financial benefit for local authorities. Through the establishment of fair DER licensing fees, local state authorities can directly raise revenue that can be used to support administrative functions or community-based projects. Local authorities must establish clear and predictable fees, ideally through statutory frameworks, to reap the gains. As our second case study demonstrates, an even playing field is needed for effective DER project delivery.

Countries that seek to restrict or centralize the deployment of DERs normally do so to control perceived risks like oversupply, grid defection, and national utility insolvency. Local authorities do not hold this vested interest in the same way, and this frees them to fully consider the benefits of opening their local systems to DERs. Local regulators can focus on developing innovative regulatory mechanisms that reduce the administrative burden for DER developers and enhance local energy provision. Some opportunities include:

• Improving DER licensing regimes that were previously overseen and controlled by national regulators or institutions. Local authorities may explore ways to streamline the approval processes for DERs, such as replacing individual generation licensing for portfolio projects with established developers that meet specific requirements
• Leveraging DER providers to supply excess power to local communities and community development programs
• Working with DER providers to invest in and reinforce local electricity distribution infrastructure by providing a clear regulatory framework on how this may be accomplished in conjunction with local utilities

Conclusion

The decentralization of energy regulation emerging in the DRC, Nigeria, and Kenya provides an exciting opportunity for local industrial growth. DERs offer easily deployable, flexible power generation that can address modern energy challenges and deliver significant benefits for the local jurisdictions that embrace their potential.

To maximize these benefits, local regulatory capacity and capability need to be developed and new regulations must be formulated in partnership with the private sector. The following principles may provide a guide on how best to make decentralization of DER regulation work for local governments, DER providers, and the local industrial players they look to serve:

Decentralization of DER Regulation: how to make it work

1. Federal authorities should provide clarity over which powers will be devolved to local authorities and when – DER providers need to know the rules and authorities they are subject to
2. Local authorities should engage with all stakeholders when formulating new regulatory frameworks, especially the private sector – new policies can be transformational, but they must balance the interests of all parties
3. Local authorities should publish specific guidelines for their application process, timelines, and associated fees. This gives DER providers certainty and ensures projects do not get delayed due to unforeseen licensing delays
4. Local authorities should ensure their local regulators have the capability to assess and license projects. Once an investable regulatory framework has been developed, the regulator must have the resources and expertise to regulate it