RENEWABLE ENERY & BIOMASS COGENERATION TRAINING – KENYA BY LEWIS B. MHANGO

Energy Sector Legal Framework ENERGY FRAMEWORK LAWS SECTOR-WIDE ENERGY INDUSTRY REGULATOR Electricity Act Coal Act Liquid Fuels and Gas Act RETs Act RE Act Regulatory By-laws Economic Regulation (Pricing) Technical SpecificationsLegal (Licensing, Environmental Impact, Promotion)

 In the short term, the existing generation assets will be owned and operated by a publicly owned company, the National Electricity Generation Company (NEGEC). In the medium term, an Adviser will be engaged to review the operations and ownership of the NEGEC and offer advice on the next stages of the reform process;  IPPs shall be allowed to develop and own generating capacity under build, own and operate (BOOs) and other arrangements, and operate the same as a private concern in a competitive but regulated market;  The development of new capacity, including co-generation, by major industrial plants (especially in the Sugar Industry), will be encouraged and a tariff will be developed to encourage sales of energy and capacity to the transmission operator.

 New energy trading opportunities are now available under SAPP & EAPP through which countries in the region, like Malawi, can export their excess power and import in time of need.  As a consequence governments in the region should consider their participation in the power pool markets a matter of strategic importance in exploiting import and export trading opportunities.  In the interests of national security, the extent of supply met through imports should be subject to prudent limits depending on the number of interconnections and the risks associated with each.

 Malawi has considered various options for its restructuring and ownership.  Based on its review, Malawi is convinced that transmission (66kV and above) is a natural monopoly and should therefore be maintained as one entity with assets owned by the public and operated under a long-term concession by a Transmission/ Dispatch Company.  The functions of the Transmission/Dispatch Company will among other things include managing Power Purchase Agreements (PPAs) with Generation and Distribution Companies.

 Reforms are expected to attract new Independent Power Producers (IPPs) and Independent Power Distributors (IPDs) who will participate in the ESI as competitors. In order to encourage competition and ensure that demand is met at least cost, the new energy laws permits third party access to the grid.  A cost reflecting and non-discriminatory tariff will be developed to encourage IPPs, private generators including cogeneration, small hydro power generators and others to sell energy to the Transmission/Dispatch Company. This tariff will be subject to review and approval by the Energy Regulatory Authority in case of Malawi - MERA.  According to the Reform Strategy in Malawi, in the short-term, direct sales by generators to specified large consumers will not be permitted but, in the medium- term, when the market has grown adequately, a Transaction Adviser will examine the possibility of such contracts.  However it is envisaged that cogeneration and small hydro power generators near sugar factories and tea estates respectively, will be allowed to sale power to the factory for purposes of enhancing generation capacity in the country.

 Malawi has considered various options in reforming the distribution network such as service contracts, leasing, concessioning and asset transfer. Malawi is convinced that the private sector must play a major role in distributing and selling electricity if the objectives set for the new ESI are to be met. The following opportunities have arisen from the reforms:  Due to the small size of the distribution network, and political sensitivities around the ESI, Malawi has decided to retain, in the short term, the existing distribution network as a single entity, but to transfer its management to a private operator under a long-term concession of no more than 20 years. The concessionaire will operate under specific investment obligations and targets for new connections country wide.  The Distribution Company will buy electricity from the Transmission/Dispatch Operator under a bulk supply tariff, which will be reviewed and approved by the regulator.  IPDs will be allowed to develop and operate own distribution networks in specific geographical locations under exclusive geographical license from MERA and enter into PPAs with the Transmission/Dispatch Company.  In the long run, the Transaction Adviser will advise on the horizontal separation of the existing concessioned distribution network to allow the participation of multiple distribution companies but in distinct geographical markets. However, common ownership of these distribution companies will be limited in order to spur effective competition by comparison.

 The small size of the power sector in many countries in the region like Malawi  Political sensitivities around the ESI for most governments in the region.  Regulatory issues regarding appropriate tariffs to attract private sector participation (especially during election years).  The global financial crisis affecting private investors in the power sector - need for local investors

 Malawi was included on the AFREPREN study to look at cogeneration potential in the region.  The results helped to inform the country about the large potential that exist in the two sugar mills.  Malawi is now ready to participate in the regional cogeneration project and can generate more than 20MW from cogeneration & supply to the grid.  Sugar mills have started refurbishing their boiler systems to improve their efficiency in readiness of the opportunities that the power sector reforms have brought.

 According to the Electricity Act No. 23 of 2004, gazetted in January 2008, Under Section 52 power sector operators are allowed to obtain a license as follows:  Section 4. and sub section (1) of the Electricity (Licensing) Regulations 2008 states that  “An application for the issue, renewal, amendment or transfer of a licence shall be made in form EA1 for generation, form EA2 for transmission, import or export and form EA3 for distribution and shall be accompanied by the appropriate application fee as per regulation 2 hereof”.

 Based on these approved new Energy Laws, GoM employed Price Water House Coopers as transaction advisers for Private Sector Participation in the ESI.  According to the report by the transaction advisor on how to proceed with the power sector reforms, the proposal is to establish a holding company to be named ESCOM Holdings which should own three subsidiaries in form of  ESCOM Generation  ESCOM Transmission and  ESCOM Distribution  This arrangement would enable Malawi to implement the new Energy Laws without having to amend them.