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New Developments in Energy Regulations

The Council of Ministers recently adopted the Energy Regulation No. 447/2019 (“Energy Regulation”) repealing and replacing the Electricity Operations Regulation No. 49/1999. This follows the amendment of the Energy Proclamation No. 810/2013 in June 2018. In this issue of our legal update, we present the main aspects of the Energy Amendment Proclamation and Energy Regulation with particular emphasis on licensing and tariff regulation. This is particularly informative for private sector energy developers as Ethiopian embarks on a public private partnership (PPP) with power as one of the priority sectors for PPP investments.

  1. Legal Framework

The Energy sector in Ethiopia is regulated by the Energy Proclamation No. 810/2013 (as mended) and the Energy Regulation. On the other hand, the Investment Proclamation No. 769/2012 (as amended) and the Investment Regulation 270/2012 governs foreign direct investment in the generation of energy. While the power generation, both off and on-grid, is generally open for private sector investment, the transmission, distribution, import and export of electrical energy through the integrated national grid system is exclusively reserved for the government of Ethiopia. Independent power developers seeking to enter the Ethiopian power market are therefore subject to these legislations and the regulatory oversight of the Ethiopian Energy Authority (EEA).

  1. Summary of License Regulation
  • License requirement: any person that desires to engage in generation, transmission, distribution, sale, as well as importation or exportation of energy is required to obtain a license from EEA. All independent power producers must therefore obtain a generation license from the EEA to participate in the power sector.
  • Application for a Generation a License: pursuant to the Energy Regulation, any application for a generation must be addressed to the EEA containing information on the technical and financial capacity of the applicant, source of electricity, route map of the project site; total installed capacity of the project; the transmission grid or supply network details to which it may be connected; feasibility study of the project; source of funding, and proposed debt to equity ratio, proposed term of the license; power purchase agreement and an Environmental impact assessment clearance.
  • Grounds for issuing a license: The EEA will issue the license to the applicant upon verifying the applicant’s competence to construct and operate the electric supply system. Further, the EEA will take into account the following conditions to verify the applicant’s competence:
  1. compliance or any failure by the applicant to perform previous and current commercial or statutory obligations and the reasons in case of failure;
  2. confirmation that the applicant was not prosecuted and sentenced in relation to license issued previously for fraud or similar offence.
  • Project Commencement Period: under the Energy Amendment Proclamation, a generation license holder for geothermal and hydro power must commence operation of its project within 5 years of obtaining the generation license. Whereas a licensee engaged in the wind, solar, biomass, coal and natural gas energy must begin generating power within three years of licensing. The amendment proclamation extended the 12 month period that was provided under the Energy Proclamation.  If the licensee is unable to commence operations within the timeline provided by the law, it may apply for an extension, provided that the extension shall not exceed a maximum of two year period. Failure to begin operations within the maximum period will be a ground for revocation of the license by the EEA.
  • Generation License Validity Period: the Energy Regulation provides the maximum license period for power generation as follows:
  1. Hydro and geothermal power generation license – 25 years
  2. Wind, solar, bio-mass, urban waste, thermal and bio-gas – 20 years

The license period starts to count from the date that the EEA confirms commencement of energy operations. Provided that the licensee fulfills the conditions of the Energy Regulation, the above license validity period are eligible for renewal by the EEA.

  • Rights of Licensees: a generation license allows the licensee to, among others:
  1. collect revenues in accordance with approved tariffs;
  2. generate electricity from any energy sources;
  3. connect the generating plant stated in the license and sell electricity to the transmission system or supply network stated in the license;
  4. sell electricity through the spot market, if permitted under the license;
  5. supply energy and charge rates as set out in the approved power purchase agreement;
  • Obligation of Licensees: obligations of a generation license holder include;
  1. start activity within the time set and conditions specified in the license;
  2. provide quality electricity for the transmission grid or supply network;
  3. sell electricity only to the entity set out in its license;
  4.  comply with the technical condition of connection to the transmission grid or supply network stated in the license;
  5.  take appropriate measure on environmental effects of its activities under the license;
  6.  generate electricity and provide other important ancillary services based on the demand of the transmission or distribution and sale licensee;
  7.  maintain efficiency and reliability of the generation plant; and protect the public and employee safety
  8.  comply with the relevant grid and performance codes to achieve the targets contained in the grid and performance codes with time lines as may be set in agreement with the EEA
  • Transfer of Licenses: pursuant to article 14 of the Energy Regulation, any license holder may transfer its licenses to third parties upon confirmation by the EEA that the transferee has the required competency to fulfill the obligations of the license holder.
  • Regulatory and License Fees: the Energy Regulation includes a Schedule of regulatory and licensing fees that are applicable to license applicants and license holders. Accordingly, a regulatory service fee of Birr 0.117 per MWH of energy sold per year will be levied. In addition, an application fee depending on the amount of energy to be produced will be charged. The maximum energy generation license application fees that is applicable is ETB 6883.
  • Suspension of a License: the EEA may suspend or revoke a generation license on the following grounds:
  1. failure to maintain the basic service supply quality standard or safety standard issued by the EEA and inability to rectify the situation with in the time limit given by the EEA;
  2. failure to submit a complete report, submitting false report or failure to maintain proper documentation in accordance with the Energy Regulation
  3. intentionally obstructing or creating obstacle in the regulatory activities of the EEA
  4. transferring license to a third party without the consent of the EEA; or
  5. failure to submit a renewed power purchase agreement in accordance with the terms of the license.
  • Revocation of a License: under article 19 of the Energy Regulation, the EEA may revoke a generation license if the licensee:
  1. fails to rectify the issues that caused the suspension of the license;
  2. commits another problem for the second time within two years of the first suspension
  3. fails to renew the license within the time period provided under the law.
  4. liquidated or declared bankrupt
  1. Tariff Review and Recommendation
  • The Energy Proclamation mandates the EEA to review and recommend national grid related tariffs to the government. The EEA will review the tariffs as part of its mandate to examine and approve draft power purchase agreement. In reviewing and recommending grid related tariffs, the Energy Regulation provides that the EEA shall take the following into consideration:
  1. cost of fuel;
  2. cost of power purchase;
  3. the rate of inflation or deflation; and
  4. foreign currency fluctuation.
  • Furthermore, the EEA shall not show undue preference to any customer of electricity except on the basis of the following:
  1. customers load factor, power factor, voltage;
  2. total consumption of electricity during any specified period; or
  3. the geographical location, the nature of supply and the purpose for which the supply is required.

For more information on this update, please contact Mekdes Mezgebu

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