Vertically Integrated with Private Participation
The Mozambique Energy Regulatory Authority (ARENE) was established by Law 11/2017 of 8 September 2017, passed by the Parliament of Mozambique. ARENE’s establishment by an act of Parliament enhances its credibility, and this impacts positively on investor and consumer confidence.
Clarity of Roles
ARENE’s regulatory functions are set out clearly in the primary legislation. Secondary legislations and contracts detail the obligations of regulated entities. This eliminates overlaps and ambiguities in roles and obligations of regulated entities.
ARENE maintains a substantial arm’s length relationship with the government. The ARENE Act does not require institutional representation on the board but the the Chairman who is also the CEO is appointed by the Government while the other board members are appointed by the Minister responsible by energy for a term of 5-7 years renewable once. The position of an executive chairman is contrary to normal regulatory authority practice and has the potential of promoting autocracy and undermining accountability and credibility of ARENE.
There is a low level of independence from stakeholders. The law does not prohibit the appointment of persons to the board or CEO position if they have previously held positions in a regulated entity. They are not also prohibited from accepting employment in a regulated utility after the end of their tenure. This could create conflict of interest. The regulatory law prohibits the chief executive and board members from holding other office in the government or private sector within the energy sector during their respective tenures.
ARENE is rated substantial on independence in its decision making. It is the final decision maker on tariffs but shares the licensing decision-making authority as well as the resolution of disputes with the sector ministry. This tends to undermine the decision-making independence of the authority and negates the provision that the executive arm of government cannot overturn regulatory decisions of the authority.
The regulator rates medium in financial independence because although it is funded from fees levied on regulated utilities, it requires approval by the Ministry of Finance rather than Parliament on the level of fees. This reduces the financial independence of the regulator. ARENE approves its own budget and salary levels and has control over its budget allocations.
ARENE has a low level of regulatory development with regard to accountability. There is no legislative requirement for the regulator to answer requests from or attend hearings organized by parliamentary committees. The authority reports to the Ministry of Energy on sectorial issues and to the Ministry of Finance on financial issues. Annual reports are disseminated for information purposes. Formal reporting to Parliament on both issues through annual reports will provide an independent one-stop shop for reporting and scrutiny of performance. Regulated utilities may contest the regulatory decisions of the regulators but only through the existing judicial system, which could be lengthy and cumbersome.
ARENE has a substantial level of development with regard to transparency. The public has immediate access to key regulatory documents such as license application procedures, acts, and tariff methodology. Not all major regulatory decisions taken by the regulatory agency are accessible to the public however the rationale behind the published information is also published as required by law.
The level of development of the regulatory framework regarding predictability of regulatory decisions and actions is rated substantial. A new tariff methodology, which contains schedules for tariff reviews, has been adopted in 2021. It contains a predictable mechanism used by the regulator to disallow costs considered unreasonably incurred by the utility. ARENE – in consultation with regulated firms, other stakeholders and government – can change the tariff methodology and such key regulatory documents as licenses, contracts and authorizations. In line with normal regulatory practice, procedures and timelines for securing licences have been published to guide applicants.
There is a medium level of regulatory development in participation. The law does not specify stakeholder consultation, but the regulator involves regulated utility companies, consumers and other industry players. It publishes comments received during consultations and reflects stakeholders input in regulatory decision making. These regulatory actions enhance investor confidence in the sector.
Open Access to Information
ARENE rates high on open access to information. Its public website www.arene.org.mz contains all the necessary information that a regulator must provide to stakeholders, including the general public.
Economic Regulation -Tariff Setting
There is a low level of regulatory development in tariff setting. ARENE has adopted a well-documented tariff methodology which includes a formula for tariff determination, a schedule for major tariff reviews and a mechanism for tariff indexation but the methodology is new and is yet to be deployed. To ensure that unreasonably incurred costs are not passed through the tariffs to consumers, the methodology requires the utility to seek approval before making major investments.
A model regulatory accounting framework is yet to be developed or deployed. A cross-subsidy scheme in place protects low-income consumers but takes from the productive sector, which could increase the cost of doing business in Mozambique. The government provides direct subsidy payments to utility companies.
Technical Regulation – Quality of Service
The level of development of the regulatory framework with respect to quality-of-service is substantial. ARENE reports that it has recently developed quality of service regulations, which include requirements on time for utility company to respond to customer request for new connection, response time to customer complaints, time taken for reconnection after payment is made, time given to correct over-billing, the Systems Average Interruption Duration Index (SAIDI) and the Systems Average Interruption Frequency Index (SAIFI). ARENE imposes fines on utility companies that fail to meet quality of service standards in relation to customer service requirements. ARENE collects data on economic performance of the regulated sector, legal obligations of the regulated utilities, and financial performance, including the cost of operating the regulated utilities. The regulator can compel the regulated entities to provide information, but it has not carried out or published a comprehensive analysis on the utility’s commercial quality performance. Key regulatory documents like the National Transmission Grid Code and a distribution grid code for the inter-connected power system are lacking.
The level of development of the licensing framework is rated high. The framework inherited from the Ministry of Mineral Resources and Energy which covered only grid connected systems has been upgraded to include off-grid and smaller systems. A separate, simplified and light-handed licence framework and procedure for off-grid and small sized systems has been developed.
Institutional Capacity is rated low. The capacity of ARENE to undertake financial analysis, economic modelling, and financial modelling and to deal with legal issues around regulations is inadequate.
Renewable Energy Development
The level of development of a renewable energy (RE) framework is rated high. Mozambique has carried out a renewable energy assessment leading to the publication of a Renewable Energy Atlas of Mozambique, to inform the public on the commercial development of the RE resource. The Energy Fund - FUNAE is responsible for the formulation, development and implementation of the renewable energy strategy.
The Network Connection Policy and Licensing Framework, developed by the Ministry of Mineral Resources and Energy, allow the private sector to participate in grid-connected renewable energy investments and guarantees access to the grid for RE. Although technology specific PPAs for different RE technologies have not been developed, the regulator has developed different tariffs, the On-grid tariff methodology and off grid tariff regulation, for different technologies and sizes of generation plants. The regulations provide a deliverable model that ensure fair compensation or management contract in case of grid arrival to a renewable mini-grid. Electricity generated from renewable energy sources and based on least cost is given priority for dispatch.
Mini-Grid and Off-Grid Systems
There is substantial level of regulatory development for mini-grid and stand-alone systems – both grid-connected and off-grid, in terms of plans, technical and quality standards and incentives. A licensing or certification scheme is in place, under which installers are licensed or certified which will ensure high technical standards and safety of installations. There is an integrated plan that sets out a least-cost electrification pathway, and which, includes grid, mini-grid, and off-grid systems. This plan demarcates areas for each system but lacks clarity on arrangements for the transfer of asset ownership and/or ongoing operations and maintenance when the national grid encompasses a privately owned mini-grid system. Installers of home systems do not require certification to operate.
Energy Efficiency Development
There is medium level of development in the regulatory framework for energy efficiency (EE) development. A National Energy Efficiency Action Plan has been adopted in 2021. The EU Energy Resource Centre provides financing for the implementation of EE projects. MEPS have been adopted for Refrigerators, HVAC, electric motors and lighting equipment. ARENE is responsible for energy efficiency regulation and the sector Ministry is responsible for policy and strategy formulation. There are no fiscal or financing mechanisms for the development and implementation of energy efficiency projects. Minimum energy performance standards (MEPS) and a labelling scheme need to be expanded to cover other major household appliances.
Financial Performance and Competitiveness
There is a low level of regulatory development for financial performance and competitiveness of the utility. The utility has carried out a cost-of-service study, within the past 5 years but it has not been approved by the regulator. This affects tariff determination and undermines the financial integrity of the utility. The fact that the regulator has not approved power purchase agreements (PPAs) between the distribution utility and sellers before signature and price adjustment clauses in the PPAs is an issue and can seriously undermine investor confidence in the sector. The regulatory authority has not formulated a transparent procedure or schedule for reviewing end-user tariffs. With losses of over 30%, the absence of a loss reduction target and tariff determination mechanism agreed with the regulator, is likely to reduce transparency in the sector and exacerbate the losses. The utility has developed its own mechanism to deal with electricity theft and it includes a penalty procedure that the company uses to charge those who steal electricity, but this is not enough to deter theft. The absence of a predictable mechanism developed by the regulator to disallow costs considered unreasonably incurred by the utility as a result of non-transparent procurement practices by the utility could result in unreasonable tariffs. The penalty method used by the utility to deter theft could be challenged in court unless it receives regulatory backing from the regulator.
Quality of Service Delivery (Commercial and Technical)
There is a low level of regulatory development in quality-of-service delivery. Although there is a quality of service regulation and important indicators like SAIDI and SAIFI are regulatory requirements, there are no ceilings set for these indicators and regulator does not discuss reports on them when prepared by the Utility. Consequently there are no sanctions on the utility irrespective of the SAIFI and SAIDI values recorded.
Facilitating Electricity Access
There is a low level of regulatory development in facilitating electricity access. Although there is a regulatory mechanism aimed at providing access to electricity, there appears to be poor coordination and implementation of the policy on access to electricity. Government provides funds for electrification but the investment is not recovered through the tariffs. It is important to consider the need for the utility to recover the investment made by the government, non-governmental organizations (NGOs) and consumers, or the cost incurred by the utility in tariffs.
Presented below is a list of areas with critical gaps and recommendations for improvement.
Amendments should be made to existing regulatory laws or new regulations passed:
- To cede approval of the level of fees and levies charged by the regulator to Parliament;
- Limit the involvement of the executive to policy and long-term strategies;
- Prohibit the appointment as commissioners of persons who were previously staff of a regulated company ;
- To make the regulator report directly to parliament ;
- To make the authority soley responsible for determining the salary levels of regulatory staff to ensure that average level of salaries of regulator staff is at least equal to those of utilities.
ARENE should :
- Conduct regular cost of service studies;
- Should ensure that all the key essential features of the Tariff methodology are implemented, especially schedules for tariff reviews.
- Develop a network connection policy as part of the tariff methodology or as a separate document to address related issues of commercial access to the grid.
- Develop and deploy a regulatory accounting framework to ensure regulatory accountability.
The regulator should:
- Finalise, publish and deploy the distribution and grid codes. This will guide technical access and transmission operations.
- Carry out assessment on the quality-of- service performance of the utility ;
- Enforce financial sanctions on utility for exceeding ceilings for SAIFI and SAIDI and other Quality of Service parameters.
The regulator should develop a consistent and comprehensive capacity building program to ensure adequate capacity of staff in areas of tariff setting and utility performance analysis.
The regulator should develop model technology-specific power purchase agreements for all renewable energy technologies to guide investors and utilities in concluding their negotiations. The regulator should develop and apply technical standards for stand-alone systems.
Policy and legislation for energy efficiency must be developed and implemented, with minimum energy performance standards (MEPS) and labels developed for common electrical appliances.
The regulator should conduct a cost-of-service survey and regularly update it to establish the true cost of service for tariff setting. In addition, the regulator should collaborate with the utility to develop a loss reduction target and action plan with incentives and penalties to systematically reduce system losses.
Quality of service regulations that set a ceiling on key quality of service indicators like SAIDI and SAIFI should be developed and enforced. In addition, 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.