Vertically Integrated with Private Participation.
MERA was established by an act of parliament, the Energy Regulation Act, No. 20 of 2004 as modified in 2016. As an institution established by the Law, MERA enjoys enhanced credibility, which has a positive impact on investor and consumer confidence.
Clarity of Roles and Objectives
MERA’s regulatory functions are set out clearly in the primary legislation that established the authority. Secondary legislations detail the obligations of regulated utilities, licence conditions and other related regulatory instruments.
MERA maintains a high level “arms-length” relationship with government. Although the President of Malawi appoints five members to the eight-member board, the appointments need confirmation by the Public Appointments Committee of Parliament. Tenure is from two to four years (renewable once), but the law requires that 50% of the members be maintained to ensure continuity. The MERA board has institutional representation, as specified by law. The two ex-officio members namely, the Principal Secretary of Energy and the Director of Energy Affairs of the Ministry of Energy serve on the board. The CEO or a member of the board may be removed from office for incompetence and misconduct but only after an inquiry and endorsement by the Public Appointments Committee.
MERA maintains a substantial level of independence from stakeholders. Although the Act prohibits the CEO or any commissioner from holding other offices in the government or private sector within the energy sector during their tenure, there are no provisions in the regulatory law that prohibit the appointment of the CEO or commissioners if any of them has previously held a position in the regulated utility company. This thus limits the degree of independence from stakeholders. However, the law prohibits the CEO and commissioners from accepting employment in the regulated utility company after the end of their terms in office. A cooling-off period of two to three years is required before they can accept such employment.
MERA maintains a high level of independence in its decision making. Notwithstanding the strict requirement to consult other stakeholders on some decisions, including approvals, MERA is the final decision maker on tariffs, on issuing and amending licenses and resolution of disputes between utilities and their customers. The regulator is not required to seek approval from the executive before making regulatory decisions and the executive arm of government cannot overturn decisions of the regulator. This enhances investor confidence on the independence of the regulator. MERA is required to consult the public and stakeholders on regulatory decisions and can receive guidance from the government regarding appeals on regulatory decisions.
MERA is funded from a combination of fees levied on regulated utilities, license fees and government budget allocation. However, they are rated low with respect to financial independence as the Ministry of Finance approves the level of fees and annual budget of MERA. The majority of the authority’s permanent staff is recruited through a competitive process. However, the government and regulatory board decide on the regulatory authority’s staff salary level. The salary scale is lower than that of utilities and this could affect the ability of MERA to attract and retain competent staff.
MERA rates substantial in accountability. The regulator is not required by law to answer requests from or attend hearings organized by parliamentary committees but has a legal obligation to produce annual reports on its activities, which it presents to the sector minister. Regulated utilities may challenge the regulatory decisions of the authority through the normal judicial system. This may be lengthy and could be frustrating for investors.
Transparency of Decisions
MERA has a high level of transparency. The public has access to key regulatory documents such as license application procedures, acts, and the tariff methodology, all published on the authority's webpage. All regulatory decisions taken by the regulatory agency are accessible to the public and the rationale/reasons behind are also published as specified by law.
MERA rates high on predictability. MERA has a documented Tariff Methodology which was adopted in 2015, which sets out procedures for major tariff reviews. Timelines for tariff reviews are contained in the Electricity Bylaws 2012. Key regulatory documents such as licenses, contracts and authorisations may be modified by mutual agreement between parties to the regulatory instrument or by regulatory decision.
The level of development of the regulatory framework with regard to participation is substantial. Stakeholder consultation is a requirement of the Electricity Act 2004 and MERA involves regulated utility companies, consumers and other stakeholders in its decision-making process through public hearings and ad-hoc meetings. It considers stakeholder inputs during the consultation process in making regulatory decisions. However, it neither publishes these stakeholder comments nor provides feedback on them.
Open Access to Information
The level of development of the regulatory framework on open access to information is substantial. MERA has a public website www.mera.mw ,where it makes available to the public, all the necessary important regulatory documents, such as primary and secondary legislation, the tariff methodology, grid code, and quality of service regulations.
Economic Regulation – Tariff Setting
There is a low level of development of the economic regulation framework. MERA has developed a well-documented tariff setting methodology. It includes a schedule for major tariff reviews and a written formula that prescribes how end-user tariff levels are to be set. The utility is required to seek approval from the regulator prior to making major investments. End-user tariff-setting regulations avoid passing on inefficient costs to customers. However, there is no model regulatory accounting framework that the utility could use for tariff applications. There are no regulatory mechanisms to compensate generators for the provision of firm capacity or ancillary services and utilities are also not compensated for the costs of stranded assets. MERA has carried out a recent (less than 5 years) study on the cost of service, which shows that the current tariff level is not cost-reflective. A lifeline block and cross-subsidy are tariff policy mechanisms that have been adopted to make tariffs affordable to support low-income consumers but the utility does not receive direct subsidy payments from government.
Technical Regulation – Quality of Service
The level of development of the regulatory framework on technical regulation is low. The Electricity Bylaws 2012 has provisions for the regulation of technical performance, quality of service performance - such as Systems Average Interruption Duration Index (SAIDI) and Systems Average Interruption Frequency Index (SAIFI) - and technical requirements for grid connection. Fines are imposed if SAIDI and SAIFI exceed the regulatory limits. A National Grid Code has been finalised in May 2018 but there is no corresponding Distribution Grid Code. MERA collects important performance indicators, including economic performance, operational service delivery, compliance with legal obligations by the regulated utility. The regulator does not publish performance assessment reports on the regulated utility companies but discusses the report with the utilities. There are no monitoring protocols that the regulator employs to address findings in the performance analysis and this could result in regulatory gaps.
The level of development of the licensing framework is high. It covers both grid-connected and off-grid systems and guides potential investors interested in entering the market.
MERA is rated low on institutional capacity development because it has less than adequate numbers of highly skilled staff to deal with key aspects of its regulatory functions. This includes the areas of economic and tariff analysis and utility performance analysis.
Renewable Energy Development
There is a low level of regulatory development for renewable energy. The electricity regulator is in charge of renewable energy regulation and the Energy Affairs Directorate of the Ministry of Energy is responsible for the formulation, development and implementation of renewable energy strategy. There is no specific legislation on renewable energy, however the country has a developed the Renewable Energy Strategy (2018) which guides renewable energy development, covering both utility-scale and off-grid options. MERA has not yet developed technology-specific model power purchase agreements or tariffs that is based on different renewable energy technologies. The grid code guarantees access to the grid for renewable energy generation plants but it is not given priority for dispatch.
Mid-Grid and Off-Grid Systems
There is a substantial level of development of the regulatory framework for mini-grids and stand-alone systems – both grid-connected and off-grid. The Regulatory Mini Grids Framework (2019) provides clear arrangements in terms of technical and quality standards and incentives are in place to facilitate mini-grid and off-grid systems. There are quality standards for stand-alone systems and a licensing or certification scheme under which installers are licensed or certified to ensure high technical standards and safety of installations is in place. Connection codes are available and private mini-grid operators can sell electricity into the national grid. Small mini-grid systems are exempted from licensing and there is a national programme to support the development of stand-alone systems. Malawi should consider registering all mini-grid systems irrespective of whether they require licences, to support data collection and planning.
Energy Efficiency Development
There is a low level of development of the energy efficiency (EE) framework in Malawi, as there is neither a regulatory framework nor legislation on energy efficiency in the country. No energy efficiency targets have been set at the national level to improve the scale and scope of energy efficiency adoption although there is an action plan to reduce network losses. MERA is in charge of energy efficiency regulation and implementation of EE strategies is under the responsibility of the Ministry. MEPS and labelling are reported to have been developed for rrefrigerators, HVAC equipment and industrial electric motors.
Financial Performance and Competitiveness
The level of regulatory development for the financial performance and competitiveness of the utility from the perspective of the utility is medium. A Cost of Service Study has been carried out by the regulator within the last five years and the results has been implemented but the utility is able to collect less than 75% of the average end-user tariff. The actual rate of bill collection is 71-99% and the regulatory authority has formulated a schedule/timetable for reviewing the end-user tariffs with losses of 10-20% factored in. A loss reduction target of 16% by 2022 has been agreed with the regulator and a strategy which is targeted at lowering the total system losses to within the 16.0% target is being implemented. The downside is that no regulatory mechanism has been put in place to deal with electricity theft although the utility has a revenue protection strategy in place.
Quality of Service Delivery (Commercial and Technical)
There is low level of regulatory development on quality-of-service delivery because although the regulator has developed a Quality of Service Regulations to guide operations of the utility and important indices such as SAIDI and SAIFI are regulatory requirements, fines prescribed in the regulations are yet to be enforced. The indices are however discussed between the utility and regulator.
Facilitating Electricity Access
There is a substantial level of regulatory development in facilitating access to electricity. The National Electrification Strategy (2019) outlines key national priorities to facilitate electrification, both on and off grid. The country has a long-standing initiative to increase access to electricity in rural areas, Malawi Rural Electrification Programme (MAREP) , operates under the Rural Electrification Act of 2004 which has also established the Rural Electrification Fund. The utility contributes about 4.5% of its gross electricity revenue towards rural electrification. There are specific regulatory mechanisms in place aimed at enhancing access to electricity.
The regulatory law should be amended, or secondary legislations developed to make provision for the following:
- Prohibition of the appointment of commissioners who were previously staff of a regulated company.
- Parliament to approve the level of the annual regulatory fees and levies charged by the regulator (as opposed to Ministry of Finance).
- Average level of salaries of regulator staff to be at least equal to those of regulated utilities.
- Regulator to report directly to parliament (as opposed to sector ministry).
Malawi should establish a specialist independent expert body or specialist energy tribunal outside the usual court system as an independent route for aggrieved regulated entities to contest regulatory decisions. This may require amendment of the Regulatory Act or by enactment of a secondary legislation to make provision for this establishment.
A network connection policy should be developed as part of the tariff methodology or as a separate document to address related issues of commercial access to the grid.
The regulator must develop a distribution grid code
- The regulator should expedite the establishment of a renewable energy law to implement the renewable energy component of the Energy Policy 2018.
- There is urgent need to undertake a renewable energy assessment to inform policy and regulatory decisions and develop technology-specific model contracts for different renewable energy technologies or different tariffs for different technologies and sizes of generation plant.
An agency must be established to implement Energy Efficiency Programs and develop a national energy efficiency action plan
The regulator should collaborate with the utility to conduct a consumer satisfaction survey at least every two years. This would systematically track the level of quality-of-service delivery by the utility and identify potential areas for improvement.