Stage 1: Cautious Co-existence – 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.

Previously, we discussed Stage 0: Centralized Control. In this part, we explore Stage 1: Cautious Co-existence. In subsequent parts, we will share Stages 1-3. 

Once policymakers start to create regulatory space for the emergence of distributed energy resources (DERs), new investors and DER providers are likely to enter the market. Their increased certainty in securing regulatory compliance is coupled with confidence that projects will meet their return expectations.

Amidst the growth in activity, industrial groups and associations begin to organize collectively to make clearer demands for the right to self-generate cheaper and cleaner energy. Consumers are motivated by the simple but unavoidable reality that centralized power is expensive and less reliable than private power. Industrialists dare to imagine a future without polluting, expensive diesel generators.

Building on a dedicated DER policy and/or regulation, at this Stage, the private sector starts advocating for nuancing and streamlining of licensing procedures. Leading DER providers begin pushing for lighter-touch requirements and shorter statutory timelines. Requests may arise for clarity on the roles and responsibilities of relevant ministries, departments and agencies involved in regulating DERs.

Actions by regulators and governments in shaping the emerging market become increasingly relevant at this stage. Representatives of the state-owned utilities may start to signal “grid defection” concerns, forcing policymakers to take first notice of DERs and the role they are playing—and could play—in the wider energy sector. Looking to capitalize on policymaker interest and growing offtaker demand, leading DER providers seek to further familiarize policymakers with their flagship projects.

In response, regulators and policymakers start to study the market closely. They begin for example to maintain registers of DERs through formal reporting procedures. New policies directed at DERs may start to appear in sector strategies and government communications. Governments and regulators are faced with a choice:

Do we continue to protect the interests of state-owned utilities, which are struggling to meet the demands of industry for cheaper, cleaner, and more reliable energy? Or do we start to open the gates for renewable, flexible on-site generation?

At this Stage, dedicated teams are often established within energy regulatory agencies to oversee the integration of DERs. In general, the mode of regulation at this stage—at least for the DER sector—can be categorized as incentive-based. The defining feature of incentive-based regulation is the use of rewards and penalties to induce desired goals, where the utility (or in this case private energy suppliers) are afforded discretion in the manner of achieving these goals. A well-known example from the global energy sector is regulators setting performance standards for distribution utilities and benchmarking companies based on connection downtime and safety standards.

Selected case studies for this stage

Recommendations for policymakers and regulators

A thought-proving paper by the US National Renewable Energy Laboratory (NREL, 2012) proposed a set of policy pathways for the scale up of DERs. The framework the NREL authors proposed helped to inspire this White Paper. Their paper describes this Stage as one in which the State is focusing on “removing legacy or institutional barriers to ease implementation of advanced technologies.” In CrossBoundary Energy’s experience, the most valuable way to remove such legacy and institutional barriers is by focusing on improvements to the licensing and reporting regime. The changes we believe which best help transition a market to Stage 2 are as follows:

• Ensuring that regulators—or the relevant Ministries, departments, and agencies of government—meet codified statutory timelines established in Stage 0. Regulation in practice reflects regulation on paper.
• Broadening or removing eligibility criteria. These rules are usually intended to slow the development of DER projects. Removing them signals progress towards Stage 2.
• Maintaining a level playing field in the payment of licensing fees, including at sub-national level (for example from physical planning offices in County Governments). Where interim permits are required from sub-national government bodies, formalizing alignment between federal and local legislation prior to implementation.
• Improving timelines for environmental permitting. This should be of particular focus when environmental permits are provided by federal Ministries.
• Ensuring that once projects are licensed and operational there is an established process for reporting on project performance.
• Developing and implementing an appropriately robust focus on health and safety:
  • • • Putting in place a process to monitor performance; and
      • Discrediting suppliers who are not providing a good service, to protect customers.
• Streamlining communication on any changes to standing licensing procedures by issuing formal sector notices. This ensures transparency and provides regulatory clarity.
• Exploring ways for licensing thresholds to reflect economic realities. For example, providing exemptions for smaller DER projects, to reduce the burden on the small businesses seeking reliable, affordable on-site generation. A declaration process can also replace licensing for smaller projects.
• Updating regulations and guidelines consistently, including to reflect any changes in primary legislation.

In Africa the licensing improvements that define this Stage must largely be undertaken first at the federal level. Nigeria is however providing an interesting opening for nascent State-level regulators to elaborate upon, refine, and improve national DER regulation. Nigeria’s 2023 Constitutional Amendment has given way for State-level electricity planning and regulation. This builds on federal progress in DER investment and development, driven by significant demand for cleaner, affordable power to replace thermal backup power for industry. States like Lagos and Oyo are furthest along in establishing priorities and plans for utility-scale generation transmission and distribution improvement and off-grid electrification. There is therefore an exciting opportunity for these States to lead the way in taking on board some of the Stage 2 recommendations of this paper. This would establish the foundation for further regulatory innovations.

Once these modifications have been made to the licensing regime—at either the federal level or in line with decentralisation—governments should focus on starting to gather relevant data on the DER sector to allow for subsequent market mechanisms to take shape. Regulators may consider digitizing the collection of relevant data, as Ghana’s Energy Commission (EC) is currently doing. The EC’s introduction of data logging equipment on selected solar PV installations will support the development of a nationwide database on renewable energy resources. These data-driven interventions by policymakers will also allow for a deeper understanding of the technical and commercial realities of DER deployment in Ghana’s energy market.

Another way in which regulators can gain data-driven insights is by holding consultations with leading DER providers. Through a transaction-focused approach, regulators can learn about how certain regulatory restrictions are impacting project viability. A good example is how the government of Egypt engaged CrossBoundary Energy and other developers to increase the threshold for applicability of a grid integration fee. We wrote about this process in detail here. It is a good example of how energy leaders can familiarize themselves with different types of DER projects and tailor policy accordingly to remove development barriers.

Overall, the “Cautious Co-Existence” Stage is marked by huge potential for a country’s businesses, as well as attractive returns for the international DER providers and investors who have the courage and experience to enter a nascent market. This Stage equally offers attractive returns and exciting opportunities for local DER providers helping to build the landscape around them, as they develop and commission first-mover projects.

It is also, however, a Stage that is prone to backslide. Countries that show signs of opening up to the potential of DERs can quickly begin to close again.

To move into the next Stage of “Directed Benefits”, and to stay there, government champions must boldly step forward and encourage their countries along the path of green industrialisation. Industry must continue to make their needs heard. DER providers must engage on regulatory reforms, rolling their sleeves up to help do the work where needed. Without dedicated commitment by all parties, the budding progress of this Stage can be undone all too easily by utility interference or policy inertia.

In the next installment of this series, Constructing Africa’s Green Economy Requires New Building Blocks, we will break down Stage 2: Directed Benefits.