THE 3RD GAMBIA NATIONAL FORUM: POLICY ON SMALL SCALE REGULATION

Tanzania Case Study: Achievements and Challenges

Msafiri Mtepa, Manager Financial Analysis and Modeling, Energy and Water Utilities Regulatory Authority

18th – 19th June, 2014 Banjul, The Gambia.

CONTENTS

1. BACKGROUND 2. ELECTRICITY SUPPLY INDUSTRY 3. SPPs FRAMEWORK IN 4. OBJECTIVES OF SPPs FRAMEWORK 5. SPPs DEVELOPMENT STEPS 6. PROJECT APPROVAL PROCESSES 7. REGULATORY TOOLS FOR SPPs 8. ACHIEVEMENTS 9. CHALLENGES 10.CONCLUDING REMARKS 2 BACKGROUND

Establishment of EWURA  Was established in 2001 by EWURA Act (Cap. 414).  It became Operational in June 2006.  EWURA undertakes both Economic and Technical regulation of the Regulated Sectors:  Electricity   Water  Ensures quality of regulated services.

3 ELECTRICITY SUPPLY INDUSTRY

 The Tanzanian ESI is vertically integrated  System Total Installed Capacity is 1,609.67MW (grid-connected capacity is 1,527.74MW and Isolated grid is 81.93MW)  Total available Capacity – 974.74MW (Main grid 920.97MW and Isolated grid is 53.77MW)  Some IPPs (Songas, IPTL), EPPs (Aggreko, Symbion) and SPPs (Mwenga, TANWAT, TPC) sell power to TANESCO’s grid;

4 Grid-connected Plants

 Installed capacity - 1,527.74 MW  Availability capacity – 920.97 MW)  Generation Mix (Grid)

26.50 2%

438.4 Hydro 29% Hydro 561.84 37% Natural Gas Natural Gas HFO/IDO HFO/IDO SPPs SPPs

33% 501.00

5 Isolated Grid

 There are 21 Isolated mini-grids  19 (IDO – 56.43MW); 2 (Natural gas – 25.5MW)  Installed capacity - 81.93MW  Available capacity – 53.8 MW

20,000 Installed (kW) Available (kW) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - … Kilwa Mafia Ngara Liwale Kasulu Masasi Ikwiriri Mbinga Mtwara Songea Bukoba Kigoma Ludewa Mpanda Kibondo Tunduru Loliondo Somanga Sumbawa Namtumbo Biharamulo 6 SMALL POWER PROJECTS FRAMEWORK

7 SPPs FRAMEWORK IN TANZANIA Energy Policy, Cap 131 and Cap 414  The National Energy Policy of 2003 promotes renewable energy sources and encourages private sector participation;  Energy Policy Statement No. 36  Establish norms, codes of practice, guidelines and standards for renewable energy technologies, to facilitate the creation of an enabling environment for sustainable development of renewable energy sources  Section 39(2) of the Electricity Act 2008 (Cap 131) requires EWURA to pursue a light-handed approach to regulating small renewable energy projects; 8 SPPs FRAMEWORK…

 Pursuant to Section 17 of EWURA Act, Cap 414:  In September 2008, EWURA approved Standardized Small Power Purchase Agreements (SPPAs) for main and mini-grids  In September 2008, EWURA approved Standardized Tariff Calculation Methodology (STM) for the main grid and applicable tariff;  In June 2009, the Authority approved a Standardised Tariff Methodology and applicable tariff for sale of electricity to mini-grids.  Approval of SPPAs and STMs are aimed at promoting the development of renewable energy resources in Tanzania. 9 SPPs FRAMEWORK…Cont.

What is an SPP

An SPP is defined as a power plant that uses a renewable energy source, either directly or through of heat and electricity, with an export capacity of between 100kW and 10MW.

10 FRAMEWORK…cont

Characteristics of SPPs  The main characteristics of SPPs in Tanzania are:  Technology: must be renewable source (hydro, , cogeneration, solar, wind, biogas etc)  Size: export capacity of 100kW - 10MW to Distribution Network Operator (DNO) – TANESCO  Dispatch: nondispatchable (must take), no ‘take or pay’ obligations;  Connection: ‘Distributed generators’

 Main grid;

 Isolated grid. 11

FRAMEWORK…cont

Types / Cases of SPPs

Connected Connected to Main Grid to Mini-Grid Selling Wholesale to Case 1 Case 2 DNO Selling retail (directly to Case 3 Case 4 final customers)

Case 1 – Tariff is based on main grid avoided cost of the DNO Case 2 – Tariff is based on mini-grid avoided cost of the DNO Case 3 and 4 – The developer must submit to EWURA an application for a costs-based tariff

12 OBJECTIVES OF SPP FRAMEWORK

 To facilitate rural electrification by mobilising renewable energy resources.  Reduce transaction and administrative costs and possible delays resulting from conventional bidding processes and negotiations.  Negotiated tariffs requires more time and money  Needs analysis of the project costs to establish reasonability and prudence.  Streamline the process of developing SPPs in Tanzania by removing the need for negotiation and regulatory review of tariffs.

13

Objectives…cont.

 Encourage private investments in power generation;  Environmental benefits – help to reduce deforestation as more people are connected to clean sources of energy

14 SPPs DEVELOPMENT STEPS

 Project identification  Land acquisition  Securing rights to resource  Acquiring necessary consents and licenses  Financing  Construction  Testing and commissioning; and  Operation and reporting

15

PROJECT APPROVAL PROCESSES

Land title or lease

Resource Rights (e.g. water rights from River Basin Water Office)

Letter of Intent (LOI) with DNO (Tanesco) Sequence is important to Business license, tax registration, etc. avoid competing claims on project sites Building Permit

Environmental and Social Clearance (NEMC)

SPPA

EWURA license 16

APPROVAL PROCESSES…cont

LOI request to TANESCO

1. Name and Address 2. Locations 3. Fuel type (hydro, biomass, wind, gas, etc.) 4. Power capacity (MW), planned power export (MW), annual energy generation (GWh). 5. Copy of title deed, lease agreement 6. Rights to resource

17 REGULATORY TOOLS FOR SPPs

 Regulatory tools consist of the following:  Acts: Cap. 414 and Cap. 131;  Energy Policy of 2003;  A Standardised Power Purchase Agreement (SPPA)  A Standardised Tariff Methodology (STM);

 FITs for SPPs connected to the Main grid

 FIT for SPPs connected to the Isolated grid  The Electricity (Development of Small Power Projects) Rules, 2014  Guidelines – guide developers on steps necessary to acquire necessary permits and clearances to develop and operate an SPP 18

Standardised Power Purchase Agreement (SPPA)  SPPA spells out standard contract terms for all SPPs selling electricity to a DNO – TANESCO;  It sets out risk allocations and technical supply standards;  There are two kinds of SPPAs  SPPA for SPPs connected to the Main Grid;  SPPA for SPPs connected to the Isolated Grid;  Key elements of the SPPA are:  Contract term - up to 25 years  Pre-determined Feed-in Tariff (FIT)

19 SPPA…cont.

 Characteristics of SPPAs  Terms and conditions are not negotiable - they are standardised for all SPPs to eliminate the imbalance in bargaining power that face SPPs  Short, not detailed – complemented by rules  According to Tenenbaum, B et.al, there are mainly two reasons for Standardisation of PPAs  Due to the structure of the industry (i.e. monopolistic), SPPs will have little power to negotiable a reasonable deal with the DNO;  Limited administrative capacity of the national regulator to review project specific PPAs. 20

Standardised Tariff Methodologies

 Used for the determination of pre-determined tariffs;  They are based on avoided cost principle:  SPPs that can supply power cheaply than it cost TANESCO should be able to make reasonable profits;  TANESCO’s avoided cost is dependent on connection point and seasonality:  Connection point

 SPPs connected to Isolated grid: The off-grid FIT is higher due to generation, transmission and distribution costs that TANESCO would incur 21

STM…cont

 SPPs connected to Main grid: The tariff is lower due to generation mix in the grid;  Seasonality – tariff are adjusted to reflect the cost of generation in a particular season:

 Dry season: more expensive – high tariff;

 Wet season: more hydro - low tariff.  There are two Methodologies:  STM for SPPs connected to the Main Grid;  STM for SPPs connected to the Isolated Grid;  Applicable FITs to SPPs are approved by EWURA on annual basis.

22 STM for Case 1 SPPs – selling wholesale to main grid C + C C = lrmc srmc case1 2

 Where

 Clrmc is the long run marginal cost as defined by Tanesco’s Power System Master Plan; and

 Csrmc is the projected cost of thermal generation in the next year.  The computation takes into account:  Transmission losses – bonus to SPPs  Three year rolling average – to minimise price shocks  Seasonality – dry and wet seasons  Price floor & caps 23 SPPT - Main Grid 16 14 12 10 8 6 USc/kWh 4 2 0 2008 2009 2010 2011 2012 2013 2014* Standardised 7.80 8.05 8.53 8.95 10.05 10.88 12.37 Dry Season 9.36 9.66 10.24 10.74 12.06 13.06 14.85 Wet Season 7.02 7.25 7.68 8.05 9.05 9.80 11.14

*Proposed 24 Tariff Case 2: selling wholesale to a mini-grid C + C C = lrmcGrid srmcMini case2 2

 Where

 ClrmcGrid = long run marginal cost for grid- power (adjusted for losses)

 CsrmcMini = incremental cost of mini-grid power (levelized cost of electricity from a new mini-grid diesel generator).  No seasonality adjustments

 Floor and Cap prices 25

SPPT - Isolated Grid 32

31

30

29

USc/kWh 28

27

26 2009 2010 2011 2012 2013 2014* Standardised 28.05 28.54 28.08 31.66 30.53 30.27

*Proposed 26 Price Floor and Ceiling

 The methodology provides limited protection to developers and DNOs;  Both the price floor and the price ceiling are set at during the year of signing an SPPA.  The price ceiling is set at 1.5 times the price floor.  This price ceiling is indexed to inflation, using the five-year moving average of the annual change in the consumer price index built up since the signing of the SPP.

27 ACHIEVEMENTS

1. Policies, Legislation and Institutional Framework  Energy sector reforms by the Government - aimed at attracting private sector investment  National Energy Policy, 2003;  EWURA Act, Cap. 414 - establishment of SPP Programme;  Electricity Act, Cap. 131;  Rural Energy Act, 2005 – establishment of REA and Rural Energy Fund;  Public Private Partnership Act, 2010;

28 ACHIEVEMENTS…cont

2. Attraction of Private Sector Participation In Renewable Energy - outcomes:  11 SPPAs (with a total export capacity of 40.34MW) have been signed. Of these, 4 SPPs (with a total capacity of 16MW) are operational;  12 LOIs with a total export capacity of 49.5MW have been signed;  Several projects are online to be implemented

29 Signed SPPA by Dec, 2013

EXPORT SPPA COD/ S/N SPP NAME TECHNOLOGY LOCATION LOI DATE CAP. (MW) DATE EXPECTED 1 TANWAT - Njombe Biomass 1.5 Grid connec. - 17.09.2009 15.06.2010 2 TPC - Moshi Biomass 9.0 Grid connec. - 06.10.2009 13.09.2010 3 Mwenga - Mufindi Hydro 4.0 Grid connec. - 19.01.2010 21.09.2012 4 Ngombeni - Mafia Island Biomass 1.5 Off Grid - 19.01.2010 Feb-14 5 Symb-KMRI Tunduru Biomass 0.3 Off Grid 28.10.2011 17.07.2012 Jul-14 6 Symb-KMRI Kigoma Biomass 3.3 Off Grid 15.05.2012 31.12.2012 Dec-14 7 St. Agnes Chipole - Songea Hydro 7.5 Off Grid 05.07.2011 11.01.2013 Jan-15 8 NextGen Solawazi - Kigoma Solar 2.0 Off Grid 19.09.2012 16.01.2013 Jan-15 9 AHEPO - Mbinga Hydro 1.0 Off Grid 22.09.2010 25.02.2013 Feb-15 10 EA Power Ltd - Tukuyu Hydro 10.0 Grid connec. 07.02.2011 25.02.2013 Feb-15 11 Darakuta - Manyara Hydro 0.24 Grid connec. 10.01.2012 16.11.2013 Nov-15 TOTAL CAPACITY 40.34

30 Signed LOIs by Dec, 2013

S/N SPP NAME TECHNOLOGY SELL CAP. MAX LOCATION LOI DATE REMARKS (MW) 1 Mapembasi - Njombe Hydro 10.0 Grid connec. 25.06.2010 SPPA signing in process 2 Kikuletwa II Kilimanjaro Hydro 7.0 Grid connec. 28.10.2011 3 Mofajus - Mpanda Hydro 1.2 Off Grid 27.04.2012 4 Tangulf - Nakatuta Hydro 10.0 Grid connec. 15.11.2012 LOI extended for 6 months 5 Windpower - Mpanda Solar PV 1.0 Off Grid 21.11.2012 LOI extended for 6 months 6 Nkwilo Hydro - Sumbawanga Hydro 2.9 Off Grid 12.02.2013 7 Ilundo Community - Tukuyu Hydro 0.4 Grid connec. 11.03.2013 8 Maguta Hydro - Kilolo Hydro 2.5 Grid connec. 23.10.2013 9 Luganga Hydro - Iringa Rural Hydro 2.8 Grid connec. 23.10.2013 10 Luswisi Hydro - Ileje, Mbeya Hydro 4.7 Grid connec. 23.10.2013 11 Yovi Hydro - Kilosa Hydro 2.0 Grid connec. 31.12.2013 12 Ilungu ward hydro - Mbeya Hydro 5.0 Grid connec. 31.12.2013 TOTAL CAPACITY 49.5

31 CHALLENGES

CHALLENGE / S/N DESCRIPTION MITIGATION BARRIER 1 Lack of long-term Private sector faces difficulties in • Provision of long-term financing financing securing long-term financing due to -IDA, through REA, availed credit to business risks local commercial banks for on- lending to SPPs. • Provision of subsidies by REA - for feasibility studies - Performance grants for generation and connection 2 Inadequacy/low FITs are based on avoided cost of • EWURA is establishing technology tariff for some the DNO, TANESCO. It is based on specific FITs. A consultant, Nexant, technologies the principle that "one size fits all". is finalising technology-specific Some technologies, including solar FITs for s o l a r, wind, biomass and and wind, are expensive to the mini hydro. extent that the FITs are lower to attract investments in such technologies 3 Delay or Sometimes cash flow problems face • Approve cost reflective tariffs for nonpayment by the the DNO to the extent of its failure the DNO. DNO. to honour its maturing obligations. • Provide subsidies to the DNO to 32 mitigate its accumulated debts. Challenged…cont. 4 High project and Revenues earned by SPPs in early • Provision of "top-up" subsidies to operational costs years of operation cannot meet its cover excessive costs far above the during the early project related costs (maturing loan approved FITs years of operation. obligations) and operational costs. • Introduce two-phase FITs (higher tariff in early years and lower tariff after honouring loan obligations. 5 Concerns by SPP When an Isolated grid is connected • DNO to provide a plan/forecast developers on to the main grid, the applicable tariff when an isolated grid will be applicable tariff will be that charged on main grid. connected to the main grid to enable when the isolated SPP developers assess the financial grid is connected to viabilities of their projects. the main grid 6 Technical barrier for The cost of interconnecting an SPP to • REA provided grants/subsidies for interconnection to the DNO's network is borne by the interconnection to some projects. the DNO's network. developer. Some networks require upgrades to be able to synchronise. Depending on the cost of interconnection, the SPP's profit is diluted. 7 Lack of technical Lack of technical expertise could lead • Provision of capacity building to SPP expertise to higher project costs. Developers developers is essential. could be wrongly advised and commit • Provision of technical guidance to funds on poor project/activity developers is needed. 33 CONCLUDING REMARKS

 RE are essential for rural electrification;  RE face technical, financial and socio-economic challenges;  Streamlined and rather innovative policies are required to ensure their development;  Policies backed up with Regulatory interventions are necessary should renewable energy bear the required fruits in the near term.

34 Website: www.ewura.go.tz

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