Stage 0: Centralized Control – Constructing Africa’s Green Economy Requires New Building Blocks

As outlined in our introduction of this series, Constructing Africa’s Green Economy Requires New Building Blocks, CrossBoundary Energy is sharing an Africa-centric framework for regulators and energy sector leaders to examine each other’s experiences of integrating distributed energy resources (DER) into a future-facing energy sector. We’ve organized this into stages of DER policy evolution to provide a view of the options available to energy sector leaders and utilities. We feel these stages form the basis of new strategies to integrate DERs into electricity markets.

In this part, we explore Stage 0: Centralized Control. You can now find Stage 1, Stage 2, and Stage 3, as well as download the full white paper.

Stage 0: Centralized Control

Definition of this stage

Several African markets currently lack the regulatory environment to take much advantage of the benefits of DER technology. At this Stage, the State sees its paramount objective to be controlling for the risks that it believes could be created or heightened with the introduction of distributed energy resources. In some markets, cheap hydropower or gas is readily available, so businesses do not suffer from restricted access to affordable energy.

In CrossBoundary Energy’s experience, however, modern renewable DERs are mostly absent from a market because governments have explicitly blocked them. Seeking definitive mitigation against the risks of oversupply, grid defection, and central grid insolvency, the State denies easy access to affordable, renewable DERs. Where energy supply power remains unreliable, customers still revert to DERs for on-site generation needs. However, instead of renewable on-site generation, they are restricted to expensive and polluting diesel generators. Investor interest in alternatives is discouraged by policy emphasis on central control of all power resources.

Countries at Stage 0 are most likely governed by a command-and-control form of regulation. UNIDO defines this form of energy regulation as being drawn up “in response to specific areas of concern (and) often in a short time frame.” As UNIDO notes, regulation is rarely drafted and enacted as a result of deep economic analysis or comprehensive market studies. Instead, as they grapple with the multitude of challenges facing centralized energy utilities, policymakers restrict the growth of DER projects.

Moreover, there is often limited engagement between private sector actors and the policymakers, who therefore often have limited appreciation of the potential sector benefits of DERs. The response to curtail DERs is on one hand understandable, given the competing interests governments are striving to balance. Unfortunately, it rarely solves the challenges facing centralized utilities, and therefore the utility death spiral continues. In the long term, the downside of blocking DERs—industry losing out on clean, reliable energy—outweighs any upside.

Selected case studies for this stage

Recommendations for policymakers and regulators

To advance to the next Stage of integration of DERs into the wholesale electricity market, we recommend that regulators clearly prioritize establishing a dedicated DER policy. They should also work closely with Ministries and utilities to ensure downstream buy-in for the policy.

Overall, progress towards development of discrete regulation for distributed energy resources in Africa is progressing, as is outlined in the 2022 African Development Bank (AfDB) Electricity Regulatory Index (ERI). The latest ERI report found that a clear licensing framework for decentralized systems has been established in all but one of the countries in the 2022 sample. Gabon is the sole exception to this continent-wide progress.

It is also worth noting that in 28 of 42 markets analyzed by the ERI, the licensing framework was established by an independent regulatory agency. Many of these frameworks, however, are focused on licensing of mini-grids and solar home systems. More work is needed on national frameworks for licensing larger-scale DERs.

When approached by developers seeking to deploy DERs, regulators without DER-specific rules to guide them often default to laws and regulations that have been established and designed to govern utility-scale projects. Historically, utility-scale generation has been the first sub-sector of the electricity landscape to open to private sector participation. These regulations are however typically inappropriate for DERs. They are often onerous, requiring lengthy and cumbersome licensing. In some cases, participation or concession fee requirements designed for utility-scale projects undermine the viability of smaller-scale DER projects.

We believe that distinct regulation is needed given DERs typically differ from utility-scale projects in the following important ways:

Private contracts which providers are competing for. Unlike utility-scale projects, the contracting parties for DERs are typically two commercial, private entities. Given no domestic customers are party to the contract, there is no need for the State to act on their behalf by overseeing public tenders. Equally private commercial entities should be free to choose what they pay for their electricity, and competition between providers of DER solutions will automatically drive tariffs down. Instead of approving tariffs, the State and regulators should ensure that rules foster and enable competition, creating a level playing field for multiple DER providers to operate within the market. This will allow customers the freedom to choose solutions suited to their specific energy needs.

No use of public infrastructure. Similarly, DERs do not typically make use of public infrastructure or land. Developers typically deploy solutions on the customer’s premises and renewable energy solutions connect directly to their facility. Financial reimbursement to the State or utility is therefore not appropriate as no public infrastructure is utilized. In the case that DERs do connect to, or supply energy to, the national grid, standard interconnection processes should apply. These requirements and specificities should not be the focus of this Stage however, where a dedicated DER policy first needs to be introduced.

Minimal grid impact at lower penetration levels. Grid impact studies show that while behind-the-meter renewable energy solutions do have an impact on the grid in terms of availability of power to cover any intermittency, this effect is minimal for individual behind-the-meter plants at lower penetration levels. Impacts will however be amplified on parts of a network where there is high DER penetration or larger DER plants, especially if no storage solutions accompany the intermittent renewable energy plants. We will cover these challenges later in this series.

Given the distinct nature of DERs, regulators should consider the following aspects in establishing bespoke regulation and policy:

While neither Senegal nor Mozambique have yet established dedicated DER policies, work is underway to provide a targeted policy framework for these solutions. Through these efforts, these two markets will hopefully progress toward the next Stage of DER market integration.

In conclusion, to secure the benefits from DERs, energy sector leaders and regulators must acknowledge the existence of DERs as a potentially complementary part of the energy system. Allowing commercial and industrial customers to go their own way with self-generation is simply permitting the status quo. Whilst new technologies can introduce complications, by excluding them, regulators will only allow existing problems to fester. At this point, what we recommend is explicit recognition of DERs as a separately regulated class of energy resources.

In the next installment of this series, Constructing Africa’s Green Economy Requires New Building Blocks, we will break down Stage 1: Cautious Co-existence.