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REPORTS

09 Nov 2020

Electricity Regulatory Index 2020

Tags
Energy Access
Regulatory and Governance
ERI 2020

The African Development Bank has concluded the third edition of its Electricity Regulatory Index (ERI) for Africa. Based on an annual survey of policymakers and electricity regulators across Africa, the index measures progress in electricity regulatory environments. It allows African countries to compare their electricity regulation environments with international best practice and make improvements where necessary.

Facilitating access to electricity is of high importance to Africa’s development. It is one of the Bank’s five priority areas. As such, monitoring progress in electricity regulatory environments is critical.

The ERI 2020 survey covered 36 African nations. The maiden edition in 2018 covered 15 countries. The report is prepared with two main objectives:

  • Diagnosing and identifying key gaps in electricity sector regulations
  • Helping African regulators benchmark their performance and progress against their peers elsewhere on the continent and against international best practice.

The ERI consists of three sub-indices.

  • The Regulatory Governance Index assesses how well the regulatory framework supports electricity sector reform, promotes efficiency, and meets desired economic, financial, environmental, and social objectives. It is concerned with the existence and content of electricity regulations.
  • The Regulatory Substance Index assesses how well the regulatory framework is implemented in practice.
  • The Regulatory Outcome Index assesses the outcomes of regulatory processes from the perspective of regulated entities and power consumers. It offers insights into how the actions of regulators have affected the performance of the sector.

Methodology

The data used to calculate ERI scores for each participating country were collected through bespoke survey questionnaires distributed to their electricity sector regulators, power utility companies, and power consumers. In some instances, power consumers were represented by national chambers of commerce and manufacturers’ associations. Questions were designed to provide nuanced insights into the effectiveness of electricity sector regulation, and to best isolate and identify regulatory gaps.

Findings

The report’s key findings were as follows:

  • The majority (69%) of the countries surveyed have regulatory mechanisms in place to facilitate electricity access.
  • In 21 of the 36 countries surveyed, it was found that the utility is not involved in funding rural electrification. Rather the government, NGO’s and consumers do this.
  • In 90% of the countries surveyed, the executive holds the power to appoint board members and heads of regulatory institutions who report to them. This removes the core of the decision-making independence from regulators, who are subjected to subtle and direct political pressure to skew key regulatory decisions towards the political inclination of the government in power.
  • While most countries have legislations to deal with conflict of interest for commissioners and heads of the regulatory institutions while in office, few have adequate mechanisms to regulate situations where such personnel move to regulated entities right after their term of office as regulators. This raises ethical issues and affects the integrity of regulatory decisions.
  • Political authorities were found to have significant influence on the finances of regulatory authorities. In many instances, some of the laws that established the regulatory institution do not clearly indicate sources of funds for the institution.
  • The independence of the regulator is desirable only to the extent that the regulator is accountable to stakeholders. Only five countries have specialized bodies that can adjudicate over regulatory issues brought by aggrieved regulated entities.
  • Regulatory development in tariff frameworks and processes is weak. About 53% of the regulators surveyed still operate without a well-documented tariff methodology. Of those who have tariff methodologies, many of these methodologies do not have procedures and schedules for reviewing tariffs, indexation and automatic tariff adjustment mechanisms. In 30 of the 36 countries, regulators confirmed that tariffs are not cost-reflective, with utilities receiving government subsidies and deferring required investments in the network.
  • Quality of service (QoS) regulatory frameworks are weak. Twenty (or 55%) of the countries surveyed have not developed any country-level QoS regulations. The utility companies have generally been left to use their discretion on limits of indices. Neither incentives nor penalties are being implemented to drive the utilities to ensure adequate supply reliability.
  • In strengthening institutional capacity, some regulators have demonstrated remarkable staff capacity improvement in such areas as engineering, economics, finance, and modelling. This is especially in the one year since ERI 2019 was produced.
  • Only nine of the 36 countries surveyed obtained an above average score for developing energy efficiency. This shows the low level of development of regulations in this area.
  • Soft initiatives are playing an increasing role to complement the hard infrastructure interventions like regional grids, which are needed to facilitate electricity trade across borders. The soft interventions include establishing and building capacity among independent regulators to develop harmonized and robust regulatory frameworks.

Recommendations

The report makes various recommendations, including the following:

  • Amending some regulatory acts to provide for longer, fixed-term non-renewable terms of office for commissioners of between five to seven years. This will allow for an arm’s length relationship with government and limit opportunities for executive interference without questioning the executive’s constitutional powers to make appointments to public institutions.
  • To ensure financial independence, all regulatory agencies should be funded independent of direct government budgetary funds. Regulatory Authorities need to explore more sustainable source of funding for their operations.
  • To strengthen the accountability of the regulator, the primary legislation of regulators should be amended, or appropriate secondary legislations enacted to back the setting up of a third-tier adjudication body or specialized tribunal to provide an independent route for regulated entities to contest regulatory decisions when aggrieved.
  • Regulators should develop appropriate tariff methodologies outlining procedures and schedules for major and minor tariff reviews. This will improve the predictability of regulatory decisions and actions and guide investors to make long term plans .
  • In countries where QoS regulations have not been developed, the regulator should take immediate steps to develop comprehensive QoS, covering all aspects of reliability indices.
  • To ensure sustainable capacity development, regulatory staff should be kept abreast of ever-changing trends in the dynamic energy sector Regulators should undertake comprehensive skills or capacity needs assessments and develop a consistent training program to match it. Remuneration of Regulatory staff should be at par or above that of regulated entities in order to avoid losing these highly skilled staff to other sector institutions.
  • Increasing access to electricity, especially in rural areas, can best be achieved by optimising renewable energy solutions especially off-grid systems. It would therefore be prudent to establish incentive policies to develop renewable energy. Ensuring energy efficiency is also important.
  • Regional regulators should facilitate the establishment of regulatory bodies in countries within their region where they do not exist and institute a sustainable mechanism to ensure building capacities of these regulators.

Covid-19 Considerations

Because of the Covid-19 pandemic and attendant lockdowns and office closures, the questionnaires for ERI 2020 were completed online.  While this is not the optimum solution, the respondents and the Bank were able to complete the process in all 36 countries, though at a slower pace than would normally have been the case.

Download the report below.