This chapter focuses on the public sector and the tools at its disposal to decrease the risk perception in the clean energy sector in sub-Saharan Africa, encompassing policies, regulations and specific initiatives. It particularly targets policy-makers across the region, as well as development institutions supporting government agencies.

It presents various initiatives that can be undertaken by public authorities with the objective of improving the overall context as well as providing clarity and direction for project developers and capital providers. It ranges from national energy planning, governance and administrative procedures, to international cooperation and rural agencies.

Moreover, emphasis is put on the role of power utility companies and the necessary reforms that may foster clean energy access for populations. In addition, the chapter focuses on schemes and mechanisms that can strengthen the competitivity and attractiveness of clean energy access solutions, including fiscal incentives, tariff setting, subsidies and priority sector lending.

Finally, this section ends with a presentation of the potential obstacles to the implementation of the public policies and initiatives previously described, and explores some lines of thought to mitigate them.

In industrialised as well as developing economies, private capital is predominantly commercially oriented, meaning that investors seek to cover their costs and receive financial returns corresponding to the risks taken. In many sectors, financing needs are fulfilled following this principle, and public resources and actions are therefore not necessary. However, issues of under-investment and slow dissemination are acute for clean energy initiatives located in sub-Saharan Africa. Accordingly, the public sector can act as a catalyst through appropriate policies, mechanisms and initiatives, in order to create a propitious investment climate and mobilise private capital at scale for clean energy access.

Over the years, energy policies have expanded across all regions of the globe due to different factors, including the drive towards decarbonization, the implementation of intermittent renewable energies and cross-border power markets (Pérez-Arriaga, 2017). Similarly, several public initiatives aimed at supporting the deployment and encouraging the financing of clean energy access solutions have emerged across the African continent. Even though they are not necessarily sufficient by themselves, those public actions are essential and represent a first step towards the building of an enabling investment environment.

The role of the public sector is complex and requires long-term political commitment, leadership as well as effective planning to drive forward a process of reforms and ensure adequate resource allocation. Regarding the clean energy sector, the current landscape usually tends to be fragmented and let often some barriers unaddressed (Res4Africa, 2020). In particular, deployed instruments and mechanisms frequently cover only certain phases of project life cycles, generally early development stages, and focus mainly on medium- and large power generation plants. Thus, there is a need to fill this gap and advance a comprehensive and end-to-end strategy able to tackle the clean energy access challenge in the region.

4.1 The Importance of Energy Policies

Capital providers and project developers, commercially oriented or not, preferentially allocate their resources towards countries that present a stable and auspicious business environment (Concern Worldwide, 2020). The principle is equally valid for the energy sector. Comprehensible roadmaps and sound policies are thus necessary to reduce risk perception, provide valuable insights and clarity to key stakeholders as well as tailored incentives which correct market failures.

Energy policies seek to back political commitment and advance national goals. Their general objective is to create a favourable and predictable legislative and regulatory framework, as well as provide adequate incentives to support the development of the sector, including the access to clean energy. They are part of a global strategy aimed at tackling either project-specific and country-level concerns faced by stakeholders and overcoming barriers related to different areas of the energy industry (i.e. resources, distribution, consumption, access, etc.). They shall create confidence as well as stimulate growth and competitiveness of dedicated initiatives. Energy policies are therefore particularly important in sub-Saharan African contexts, usually perceived as risky environments.

To achieve those objectives, energy policies may include different elements, ranging from national planning and capacity building to sector-specific, cross-cutting and finance policies. They should reflect socioeconomic and cultural conditions, be inclusive and customised to local circumstances (i.e. energy needs, resource potential, affordability, etc.). Indeed, each country has its own specific environment, and thus, a one-size-fits-all solution will not necessarily lead to the expected outcomes.

Finally, this approach has to be dynamic to allow a reflection of the evolution of the society and the business environment, as well as consider implementation challenges. Moreover, the presence of credible institutions that have the necessary autonomy to implement and enforce regulation as well as establish clear procedures is another indispensable element to build a reliable and stable policy framework.

4.2 National Energy Planning

The very first step to ensure the proper development of adequate energy policies is the elaboration of a national energy master plan. The latter has to be adapted to the overall context as well as maturity of the targeted markets. It acts as an aspirational guidance, demonstrating political commitment and providing critical signals to relevant stakeholders. It aims at informing and communicating the overall energy objectives of a particular country and describing the global strategy to reach them within an appropriate timeframe. Therefore, it has to be publicly available, clear and transparent, as well as reliable and coherent. In addition, it should specify the energy resources and technologies expected to be used in order to meet national goals, giving project developers and capital providers key information about the different opportunities within the state.

The design of a national energy strategy requires a holistic approach, encompassing economic, environmental, social, political and technical aspects. Therefore, it should go beyond the single energy sector and also reflect related factors such as the interrelationship between affordability, quality of supply and accessibility as well as the sustainability of technology and resource options. Moreover, energy planning has to be dynamic, thus responding to demographic considerations and energy demand forecasting. It might also indicate the financial resources needed to achieve the expected results.

Traditionally, many national energy strategies across sub-Saharan Africa have focused on centralised power networks and the share of renewable energy resources within their respective territories. Nevertheless, off-grid systems as well as clean cooking solutions are fundamental parts of national development and energy access objectives. They must be included in national energy master plans to inform project developers and capital providers about government’s intentions and opportunities within those sectors. Furthermore, rural settings, where a substantial percentage of the populations live without access to clean energy, are often not included in national energy roadmaps. Indeed, less than 30% of sub-Saharan African countries have stated specific rural electrification objectives (Attia and Shirley, 2018).

Once the national energy plan is clearly settled, the main challenge consists in translating the overall strategy into concrete actions as well as legally binding policies and regulations. Moreover, a public entity needs to be in charge of tracking and monitoring energy data and statistics and integrates the required changes to achieve national targets in due time if necessary.

4.3 Public Sector Initiatives

In addition to national energy strategies, public authorities can put in place targeted initiatives that address specific barriers hindering the financing of clean energy initiatives in their country. They may focus on project-related risks as well as country-level concerns.

4.3.1 Governance and Management Practices

According to the Corruption Perceptions Index, sub-Saharan Africa is the world lowest-scoring region, which draws a bleak picture of the overall situation (Transparency International, 2020). Indeed, there is an urgent need to address governance issues in the continent and removes the undue influence corruption exerts on political systems. In this context, economic development is impeded, democracy is weakened and social divisions as well as inequalities appear.

The current status erodes trust in public entities and reduces the willingness of the civil society and the private sector to respond to specific policies, affecting the expected outcomes of a wide range of public actions depending on behavioural patterns and cooperation.

Sound governance practices are fundamental for citizens, companies and investors, as they foster the creation of an enabling investment and business climate as well as increase efficiency of public institutions. In addition, they may improve the overall performance of state-owned enterprises, including their financial management, thus preventing large economic losses and enhancing their creditworthiness.

Accordingly, many African countries need to restore confidence in government bodies and strengthen public governance to properly respond to economic, social and environmental challenges as well as fulfil energy access objectives. To that end, anti-corruption reforms have to be set up to create accountable and effective institutions. This entails the use of modern tools and management systems as well as dedicated professionals committed to the development of an inclusive economy. Moreover, public finances and activities may be disclosed to increase transparency and provide relevant information to domestic and international stakeholders.

Finally, government resources should be used in a responsible manner in order to address the energy access challenge. National and local authorities have to align their actions with their energy targets and shift away from counterproductive policies such as fossil fuel subsidies.Footnote 1

4.3.2 Market Information

In many African countries, relevant information directly or indirectly linked to the energy sector are sometimes unclear and fragmented, making it difficult for project developers and capital providers to understand the challenges and opportunities behind clean energy solutions.

Governments could collect and disclose valuable data such as population density, income levels, energy potential, current state of infrastructures and energy consumption. Similarly, the presence of potential anchor consumers like specific industries or productive loads (i.e. telecom towers, health centres, mines) as well as information about existing and future policies and incentives is valuable insights.

In addition, the monitoring of economic, social and environmental performances of clean energy-related projects may help assess dedicated policies and regulations as well as special-purpose programs. Moreover, it fosters the building of a solid track record, thus raising the interest of potential private investors.

Public authorities need to understand what is the most relevant information for core stakeholders in the clean energy sector as well as develop specific methodologies to collect and share appropriate data, with the objective to increase transparency and engage the necessary players in the continent.

4.3.3 Standards of Quality

Energy assets and devices not only need to be affordable and environmentally friendly. They also have to be reliable and respond to consumers’ expectations. Meeting requirements is important to build trust and thereby support the deployment of clean energy solutions. In addition, quality and reliability are becoming key differentiating factors in the energy industry, especially in the off-grid and clean cooking sectors where competition is increasing.

Public authorities can support the selling and use of high-quality products in their own country in different ways:

  • Labels and certifications

The adoption of standards and the establishment of quality assurance frameworks for technologies (i.e. labels, certifications, warranties) are interesting tools to increase confidence and protect end-users.

  • Fiscal and financial incentives

Moreover, governments can promote certain products and services through the implementation of targeted measures such as tax reduction or exemption for high-quality products, and the prohibition to sell low-quality ones.

Several sub-Saharan African states have implemented policies for products meeting high-quality standards, by reducing or eliminating import tariffs. Furthermore, some African countries like Liberia and Ethiopia provide public financing incentives for quality-verified products (Lighting Africa, 2020a).

  • Compliance

Similarly, public entities can ensure compliance with specific rules for equipment to be qualified for utilisation as well as for business partners to carry out activities in their territory. Under those circumstances, governments are supporting the deployment of high-quality solutions and business activities, increasing confidence and decreasing the social acceptance risk.

Those specific regulations can be applied not only at national but also regional level, thus reducing complexity and allowing standardisation in a broader geographic zone. As an example, the Lighting Africa Initiative, an innovation of the World Bank Group, developed a series of quality standards and testing methods for solar devises (ibid.). The latter have been adopted by several African governments and are required by the UNFCCC in order to qualify for carbon finance mechanisms like the Clean Development Mechanism.Footnote 2

4.3.4 Administrative Procedures

Bureaucracy and administrative burden can seriously impede the development and implementation of clean energy access solutions in sub-Saharan Africa. Administrative procedures should be transparent, accessible and, when possible, simplified in order to provide a clear framework to all stakeholders and to increase the efficiency of financial transactions.

4.3.4.1 Standardisation

Standardisation consists in implementing technical standards common to an entire sector, ideally based on a stakeholder consensus. It is already widely used in certain industries, such as banking and insurance. By allowing comparability and reducing complexity, standardisation can facilitate due diligence processes and reduce transaction costs, thus improving attractiveness and accessibility of investment opportunities.

In the clean energy sector, certain documentation relative to public tendering, tariff setting, ownership structures, feasibility studies, performance reporting and impact assessment could be standardised and made publicly available to simplify procedures. Similarly, it may facilitate understanding as well as ease project evaluation and approval.

In addition, standardisation plays an important role in structured finance. It fosters the aggregation of projects as well as allows securitization, thereby broadening the investor pool for small- and medium-scale initiatives.Footnote 3

Yet, governments should not be tempted by over simplification. As a matter of fact, excessive standardisation may not reflect the different contexts and remove the necessary flexibility to ensure long-term efficiency.

4.3.4.2 Clear and Streamlined Regulatory Requirements

It is possible to reduce undue complexity in the clean energy sector by streamlining regulatory frameworks and diminishing excessive bureaucracy, easing the deployment and administration of clean energy projects and reducing their development costs. Furthermore, it would bring clarity for project developers, investors and public actors.

The quantity of documents required for formal registration and obtaining permits, licenses and concessions is sometimes very constraining in terms of time and costs. Yet, it is part of the development and management of a project or a company. Consequently, those procedures have to be accessible and complemented by general guidelines in order to decrease barriers to market entry and potentially reduce delays. Moreover, the overall process may be carried out in a one-stop-shop aimed at providing administrative support, improving the efficiency and effectiveness of bureaucratic procedures.

As previously mentioned, certain investment opportunities in the clean energy sector are more dependent to regulations and administrative burden than others. By providing provisional concessions and licenses guaranteeing exclusivity for a defined time period, public authorities mitigate project development risks for mini-grids and power generation plants. Similarly, legal requirements in the power industry can be less constraining up to a maximum installed capacity.

As an example, Brazil lessened the costs of rural electrification by establishing specific standards that are less complex and onerous to reach than those in urban zones (Pérez-Arriaga, 2017). In South Africa, the Renewable Energy Independent Power Producer Procurement programme (REIPP) has been designed to stimulate the renewable industry in the country, by standardising and streamlining requirements for bidders (IPP Projects, 2020). The terms, which include tariff setting and socioeconomic objectives, balance national energy objectives with technical and commercial constraints. They aim at ensuring competitiveness, transparency and fairness, as well as providing clarity for potential bidders.

However, it is crucial to reach an adequate trade-off between affordable, accessible exigences and the quality of market participants. By over-streamlining procedures and requirements, the public sector may be subjected to the entrance of less reliable players in the market, negatively altering the perception of the civil society and diminishing the likelihood of reaching energy access objectives.

4.3.5 Pipeline Facilities

Finding high-quality projects with the required risk-return profiles is often mentioned as an important hurdle for investors. This is partly due to a lack of initiatives that meet investment criteria as well as capacity constraints among project developers. Yet, missing information regarding investment-ready initiatives exacerbates this issue. If pipelineFootnote 4 is not evident to investors, they would most likely be reluctant to invest time and money in search of attractive investment opportunities.

To address this specific challenge, pipeline facilities can be created to ease the identification of promising initiatives and advance them towards financial closure. Simultaneously, project developers can realise a mapping of potential sources of capital, domestic and international and enter in contact with regional experts.

The general objective is to increase information and knowledge sharing within a sector, attract adequate investors and bridge the financing gap. By constituting virtual or physical spaces where the supply and demand of capital are brought together, it enhances market transparency and liquidity as well as improves visibility. Those facilities may provide relevant information about projects, potential financing sources and risk mitigation mechanisms, as well as guidelines for regulatory procedures.

IRENA created an online platform named Sustainable Energy Marketplace,Footnote 5 aimed at connecting project developers with potential financial and business partners, as well as providing data on markets, specific regulations and relevant incentives. It has the objective to accelerate the energy transition via a facilitated access to funding. This marketplace allows users to search projects by geographical region and investment criteria, thus easing investment screening for capital providers. Similar endeavours could be created in sub-Saharan Africa, with a particular focus on clean energy access solutions.

However, it is important to create high-quality and investment-ready projects before looking for capital, in order to avoid being driven by the supply side. It stimulates the development of attractive value propositions responding to the specific needs and targets of a country, thus spurring a proactive engagement with capital providers by creating a demand for resources. For this reason, the public sphere may also provide technical assistance to develop a strong project pipeline.

4.3.6 Capacity Building

Transforming an idea into a solid and viable business model is not an easy task. It requires specific skills, technical capacities and resources. Entrepreneurs need to be updated on regulations governing their respective areas of activity and act in compliance with local requirements. Moreover, the ability to attract a strong team and adequate investors depends on the preparation and presentation of high-quality proposals.

Project development programs can support the development of promising initiatives by providing capacity building to project developers and managers, with the aim of maximisation the creation of value and increasing confidence among potential investors. The objective is to strengthen capacities within enterprises and set up investment-ready projects with bright perspectives and sound proposals, able to raise the interest of capital providers. It therefore mitigates the project development and operational risks.

Those specific programs focus on project-level challenges and intend to develop entrepreneurial skills through dedicated workshops. They aim at sharing best practices and providing the necessary tools for different development stages of energy-related initiatives, from project preparation activities to scale-up processes. In addition, it helps project developers understand their market and the context in which they evolve (i.e. site identification, stakeholder management, supply–demand dynamics, policies and regulations, resources availability, technical studies, risks and barriers, supply chain, possible partnerships, social and environmental considerations). Finally, they support the preparation of specific documents required during a fundraising process and provide advisory services regarding financial structuring and due diligence processes.

Project development programs can cover numerous and diverse topics. They should be designed to address specific needs of participants and use local and regional expertise when possible. Some may provide technical assistance along with grant funding for initial activities such as resource assessments, market analysis, technical studies and pilot projects.

Capacity building programs can be conducted directly by government agencies, with the advantages of getting information on the main challenges of the industry, aligning the programs with national objectives and positioning the public sphere as a key knowledge broker. However, the public sector needs resources, experience and skilled workforce to do so. Therefore, multilateral agencies and/or private actors can support the development and management of those initiatives. Either way, they offer the possibility to develop and present high-quality projects, attractive for capital providers.

Several programs have been created to support developers in preparing infrastructure projects, including InfraCo Africa, the World Bank’s Global Environmental Facility and the African Capacity Building Foundation (AfDB, 2013). However, few initiatives exist with a particular focus on the off-grid sector and clean cooking companies.

4.3.7 Awareness Campaigns

The general perception of a sector has the potential to strongly influence its growth. If negative, it may become an important barrier that needs to be addressed. Awareness campaigns can target this issue, focusing on different groups of stakeholders, including end-users, policymakers and capital providers.

4.3.7.1 End-Users

Even though proposed alternatives may be economically, socially and environmentally advantageous, it can be very challenging to encourage behavioural change when related to common practices. As previously underlined, resistance to change is particularly high in the clean cooking sector. Moreover, the deployment and financing of energy-related projects might be undermined by social oppositions and disinterest resulting from a lack of information-sharing regarding their existence and potential benefits.

By targeting end-users and local residents, awareness campaigns have the potential to reduce the social acceptance risk. With the objective to provide the necessary information to properly assess the features of a product or a service, they encourage the adoption of clean energy solutions and drive their growth. They also facilitate dialogue among parties to lessen the NIMBY syndrome. To increase their effectiveness, awareness campaigns need to be adapted to their audiences and may be combined with pilot projects and demonstrations.

As an example, Lighting Africa, an initiative of the World Bank Group, started consumer education programs back in 2007 in Ghana and Kenya (Lighting Africa, 2020b). At that time, awareness regarding solar lighting products was very low. Since then, targeted campaigns have been the cornerstone of stand-alone systems sales growth in the continent, underscoring the importance of those programs. The initiative has also developed a series of radio-spots and TV ads, in order to reach remote locations.

4.3.7.2 The Public Sphere

Awareness campaigns can be designed for the public sphere with the aim of increasing political commitment and encouraging the creation of regulatory frameworks supporting the implementation of clean energy solutions.

4.3.7.3 Capital Providers

Awareness campaign may also be directed towards capital providers, especially financial institutions lacking experience in investing in clean energy activities. They aim at raising their interest and strengthening their understanding of the sector, by presenting challenges and opportunities as well as specific policies and regulations directly linked to the industry. Moreover, they have the objective to foster the use of available financial structures and mechanisms aimed at enhancing risk management and facilitating capital allocation.

Effective awareness campaigns require expertise and knowledge of the targeted sector and local context, but financial constraints can be an important issue. Therefore, some governments are sponsored and/or supported by external organisations, such as multilateral agencies and non-governmental organisations, in order to help them achieve the expected outcomes.

4.3.8 Rural Energy Agencies

Rural zones in sub-Saharan Africa are sometimes hard to reach and may receive less attention compared to urban areas. To reverse this trend, improve standards of livings and reduce rural exodus, the creation of decentralised public agencies can facilitate access to electricity and the implementation clean cooking solutions in those settings, as well as foster rural development.

By representing public authorities, rural agencies allow the completion of certain procedures linked to the energy industry. Rural players have directly access to public services, avoiding long response time and reducing transaction costs. In addition, those agencies ease the identification of specific challenges and opportunities as well as the coordination of rural energy strategies thanks to their physical presence.

Rural energy agencies manage licensing, permitting and other regulatory requirements (IRENA, 2016). They are also aimed at providing market indicators (i.e. socioeconomic and demographic data, energy access status, energy consumption and demand, resource availability, etc.) as well as relevant information relative to administrative proceedings (i.e. specific fees, public auctions, administrative procedures, etc.) (ibid.). Furthermore, capacity building programs and pipeline facilities can be directly organised in rural zones, without the need for travelling long distances.

The mandates of rural energy agencies can vary and change over time. Some focus only on the off-grid sector up to a certain amount of installed capacity, while others cover the entire energy industry. In addition, certain rural agencies may also manage financial and fiscal schemes.

In Mali for instance, the Agency for Rural Electrification, AMADER, manages financial incentives and has awarded over $500,000 of subsidies for mini-grid deployment since 2005 (USAID, 2018). Since its creation in 2000, rural electrification in the country has risen from 1% to around 25% in 2018 (SEforAll, 2020).

4.3.9 Grid Arrival and Access to the National Grid

4.3.9.1 Grid Arrival

Grid expansion is part of the solution to tackle energy poverty. However, it represents a major risk for mini-grid developers and investors. Indeed, grid arrival can strongly affect revenue streams and thereby endanger financial viability of mini-grids if not fully amortised. Fixed assets may even become stranded since the national grid is usually a cheaper option for power provision.

Consequently, regulation must address this risk with clarity and define in advance the consequences of a subsequent grid arrival. To that end, different options, not necessarily mutually exclusive, are available to the public sector:

  • Grid expansion and electrification plan

First, a comprehensive grid expansion plan and electrification roadmap, including their respective time frames, should be publicly available. It allows to assess the potential of the targeted areas for mini-grids and support dialogue and cooperation between project developers and public authorities.

  • Specific licences

Secondly, the government may grant land concessions and licenses, providing mini-grid developers with the confidence that the national grid will not reach those areas during the agreed period.

  • Compensation schemes

Thirdly, the definition of legally binding compensation schemes offers project developers and investors a clear vision of the financial repercussions linked to grid arrival. Yet, they must be arranged in advance and based on a comprehensive and predefined calculation methodology (for instance based on depreciation). Those schemes may even include the selling of fixed assets to the distribution company under specific terms.

  • Connection to the centralised system

Another possibility is the continuation of operations within the grid service area. This implies technical adherence for interconnection and administration in order to transform a decentralised system into a small power producer and/or distributer for the national power utility.

4.3.9.2 Access to the National Grid

An important factor for power generation plants is to ensure access to the national grid. Therefore, clear regulatory mechanisms aimed at promoting the uptake of clean energy resources in national grids are necessary.

They can take the form of specific concessions or mandated grid accesses, giving power producers using clean energies facilitated access to the main grid. In addition, public authorities may charge reduced transmission fees applied to clean and renewable energy resources.

4.4 Utility Reform

The electricity landscape is evolving, and many African countries will most likely pass from centralised to decentralised systems, causing different challenges and opportunities for power utilities. Disruptive technologies like smart grids and distributed generation, as well as the integration of renewable energy resources, are imposing new thinking and approaches in the sector. Driven by innovations in digitalisation and information systems as well as decreasing technological costs, electricity markets are changing, imposing fundamental transformations in grid structures.

As previously reported, sub-Saharan African energy infrastructures are usually aging and badly maintained. Moreover, they let significant part of the population unconnected, whereas grid expansion remains the most cost-effective solution to achieve universal electrification in many cases. On top of that, the region is witnessing an increase in power demand, potentially implying new installed capacity to be managed by power utilities (IEA, 2019).

Measures aimed at improving governance and management in public power utilities are key to properly face those changes, while ensuring financial viability as well as high-quality and affordable services for customers. The adequate workforce is required to design and implement essential institutional modifications as well as manage the assets and capital necessary to ensure proper operation. Apart from maximising the efficiency of power transmission and distribution within a territory, investors’ trust will also be reinforced.

African countries vary widely in their openness to the private sector and independent power producers (Res4Africa, 2020). Private players have entered the power generation market, owning, operating and financing plants in several countries across the continent. Yet, the domination of state-owned utilities with a vertically integrated supply chain is also frequent. Accordingly, the participation of private entities in transmission and distribution has been so far very limited in the region (ibid.). This system lacks the necessary flexibility to facilitate market access to private players and increases the risk of political interference. Moreover, many public utilities show financial difficulties and poor creditworthiness, often due to poor billing and payment collection systems as well as non-cost recovery tariffs. This may in part explain the reluctance of private actors in entering the power supply chain in many sub-Saharan African countries.

The 1990s have seen the implementation of reforms targeting the challenges of the African electricity sector. They aimed at improving operation efficiency, stimulating financial stability of power utilities and attracting private actors (WB, 2019). Broadly speaking, they promoted vertical disintegration,Footnote 6 predictable and cost-reflective tariffs and a market open to private players in order to increase competition and foster innovation. Moreover, they included the establishment of independent regulators, avoiding potential influences from the public sphere and interferences with political processes. If successful, this approach should enhance resource efficiency, meet energy needs at least cost and catalyse private capital.

Those points may still be relevant today and have proven successful in countries presenting specific prerequisites: high electrification levels, well-functioning operations and stable political frameworks (IISD, 2019). However, they have not been sufficient to achieve clean energy access objectives and attract the private sector in many others, especially sub-Sahara African countries. Furthermore, certain countries in the developing world have adopted reforms selectively, resulting in hybrid models including elements of a market-oriented economy coexisting with a continued state dominance (ibid.).

Accordingly, complementary policies are needed, tailored to each country context, designed for particular political realities and guided by specific objectives. Here again, there is no one-size-fits-all solution applicable throughout the region, but rather a pluralism and complementarity of context-based approaches, that need to consider social, environmental and economic factors, understand the dynamics of the political economy as well as stakeholders’ needs. In addition, utility reforms must be aligned with national energy objectives and targets. Moreover, corporate management practices have to be implemented in order to improve operations efficiency and financial performance.

Finally, the energy access challenge must be included in utility reforms. Power utilities have a substantial role to play to reach universal access to clean energy in the region. Indeed, the current evolution of the power sector has to consider not only the provision of a reliable and sustainable service, but also ensure an affordable access to electricity to every African citizen. At the same time, financial viability is crucial to improve creditworthiness of public power utilities. Therefore, specific business models need to be developed, able to satisfy energy needs of the entire population and the sustainability of state-owned companies.

More details regarding power utilities and available solutions to tackle the clean energy access challenge across sub-Saharan Africa are provided in the “Business model adaptation” chapter.

4.5 Tariff Setting

Tariff setting is part of a comprehensive national energy strategy and aims at supporting the development of mini-grids and centralised power systems. Those two concerned sectors have different costs structures that need to be considered.

A tariff-setting process is politically sensitive since it needs to deal with social acceptability and affordability, while providing adequate financial returns to investors and enabling the formation of the necessary reserves. Therefore, tariff setting has a strong influence on the mobilisation of private capital and requires a constant monitoring of the market as well as consultation of all relevant stakeholders. Moreover, tariffs should be stable, reliable and predictable in order to provide sufficient clarity to market participants.

4.5.1 Mini-Grids

Together with connection fees and possible subsidies, electricity tariffs represent the revenue streams for a mini-grid project, being thereby strongly dependent on electricity demand and customer affordability.

It is not necessary to set one single tariffs for all mini-grids within a country or a region. They can differ according to several factors, like the installed capacity, the energy resource(s) used, the targeted population, the ownership structure and the existence of financial support. However, tariffs need to match the context in which the mini-grid is deployed and provide the necessary incentives to all market participants.

A proper methodology includes the involvement and the cooperation between public authorities, end-consumers and project managers, during the development and implementation of mini-grids. Indeed, those core stakeholders have different objectives that need to be aligned. Community-owned and operated mini-grids generally aim at reaching break-even, while private developers seek profitable business models, ensuring adequate financial returns. Simultaneously, both attempt to provide reliable power to end-consumers at an acceptable and affordable tariff. At the same time, regulators and policymakers seek to meet electrification objectives and implement tariff-setting processes perceived as fair by all other stakeholders.

4.5.1.1 Unregulated Tariffs

In the mini-grid sector, tariffs can be unregulated, thus reducing administrative duties for regulators. Usually, public authorities fix a maximum installed capacity under which selling prices are set by project developers. Accordingly, it may tempt the private sector to develop mini-grids that are exempted from tariff regulation, in order to avoid regulatory uncertainties and administrative burden.

Through unregulated tariffs, project developers serving not only households but also productive uses, may apply higher rates to commercial and/or better-off customers, supposing more solid financial situations. Those cross-subsidies allow to offer lower tariffs for low-income individuals, thus reducing the social acceptance and customer risks.

However, end-users are usually not aware of the costs associated with the development and management of a mini-grid system. Such situation offers the possibility for project developers to capitalise in asymmetry of information and introduces abusive tariffs. In addition, some mini-grid developers may find themselves in monopolistic conditions in certain territories where they experience insufficient competition and should therefore exert a monopolistic power.

In order to protect served communities, regulators may impose tariff caps, linked to technologies used, system sizes and/or targeted customers, as well as based on a clear calculation methodology. Moreover, some countries provide end-users with the opportunity to ask for a regulatory review if a significant part of the connected community considers tariffs as excessive.

4.5.1.2 Regulated Tariffs

When tariffs are regulated, various options exist for regulators. Automatically, the involvement of public entities in tariff setting limits flexibility. Yet, it should provide clarity for the private sector and protection for mini-grid customers.

  • Uniform national tariffs

In this case, a single national tariff is applied for electricity, without distinction between on- and off-grid systems. Generally perceived as fair, this solution is politically preferable and decreases administrative burden. It may represent a good option for publicly owned installations.

However, uniform tariffs are in most cases too low to cover all costsFootnote 7 associated with mini-grids (CES, 2018). Indeed, centralised systems benefit from substantial economies of scale and are usually deployed in less remote areas. In addition, cost structures among mini-grids may widely vary depending on their location as well as the technologies and energy resources used.

Said situation implies the need to bridge those gaps in order to attract the private sector. A first option is the introduction of tariff subsidies and/or capital subsidiesFootnote 8 to improve financial positions of mini-grids. By allowing the application of lower tariffs, those financial incentives also increase the addressable market. A second possibility is the application of a national tariff slightly higher to allow cross-subsidisation across the country, yet affordability might become an issue in certain territories.

  • Cost-reflective tariffs

Public authorities can set tariffs that cover costs as well as allow mini-grid developers and investors to receive a reasonable financial return. This solution provides incentives to the private sector, since it intends to ensure the financial profitability of the project. Nevertheless, this mechanism could seem unfair as mini-grid customers would pay higher rates than those connected to the national grid.

In addition, regulators require specific information to propose appropriate cost-reflective tariffs in each context. Therefore, project developers benefit from information asymmetry that may be used strategically. In order to decrease this concern, public entities may involve mini-grid developers in the tariff setting process and/or fix tariff caps depending on the technologies used and incentives received. Moreover, tariffs can also be proposed by developers and approved or not by regulators.

  • Public mini-grid auctions

Like power generation plants, auction schemes can be used for the deployment of mini-grid systems. Thanks to the introduction of competitive mechanisms, those processes may attract high-quality players bidding final tariffs that usually reflect their costs, thus decreasing information asymmetry. Nevertheless, public auctions require an adequate preparation and management in order to achieve the expected objectives. More details regarding public auctions and tendering processes are provided in the next subsection.

4.5.2 National Grid

Like for the mini-grid sector, public regulators may set tariffs for electricity provided by the national grid, seeking to offer acceptable electricity prices for end-consumers while maintaining financial viability of centralised systems.

4.5.2.1 Feed-In-Tariffs (FIT)

This book considers full FIT,Footnote 9 namely a market-independent mechanismFootnote 10 that guarantees fixed prices set by the government for the power generated over a specific period of time. They can be set in local currency as well as partially or completely in hard currency, implying that part of the currency risk is assumed by the public sector.

FITs allow public authorities to send out a strong signal regarding long-term policy goals. Moreover, they stabilise the business environment by lessening uncertainty for power producers regarding future revenue streams. Some FITs can even consider technological advancements and decrease over time, thus reducing pressure on public finance. Indeed, support schemes such as FITs should be flexible enough to respond to failing production and technological costs. As technologies and markets mature, FITs may be gradually removed and replaced by feed in premiums or other support instruments that incentivise power producers to respond to market developments and innovations. As such, financial supports for clean and renewable energies should be limited to what is necessary, with the aim of strengthening their competitiveness in the market.

However, FITs require the collection of reliable information in order to properly set tariff rates. In addition, through FITs public authorities embrace a long-term process, including a potentially heavy financial burden. In the case the government is not able to fulfil its contractual obligations and retroactively asks for a FIT cut, the private sector’ trust will be strongly eroded. Such risk materialised in Europe, where Germany, Spain and Czech Republic suddenly corrected their FIT levels or introduce additional taxes to compensate for overgenerous tariff designs, leading to loss of investor confidence in ongoing policies and regulations (UNEP FI, 2012).

4.5.2.2 Public Tenders/Reverse Auctions

Tenders or reverse auctions are procurement mechanisms soliciting bids from private actors for the realisation of specific projects. In the energy sector, this market-led approach is often applied to the development of power generation plants. Nevertheless, it may also be used to achieve certain outcomes linked to energy targets through off-grid systems.

The selection criteria are not necessarily focused only on financial factors. Indeed, they may also include social, environmental and economic aspects. By doing so, public authorities seek to share the benefits of privatisation with local communities, protect cultural identities and the natural environment, as well as facilitate social acceptance. Moreover, private bidders sometimes have to fit specific requirements aimed at catalysing local economic development (i.e. local employment, manufacturing and financing).

Like FITs, public tenders are not based on the spot market. They aim at stabilising the business environment and providing a long-term policy signal. Therefore, they decrease volatility and improve transparency, thus facilitating financial forecasting and long-term planning for project developers, investors and the public sector. In addition, public tenders let private actors propose electricity tariffs, thus decreasing information asymmetry. Moreover, through specific requirements, they give national authorities the opportunity to diversify the technological mix and physical locations, in order to improve energy security and geographic dispersion.

Nevertheless, corruption within governments may disrupt the process and break its competitive nature. Furthermore, public tenders’ success strongly depends on external factors linked the overall country situationFootnote 11 and the energy resources potential, which may affect participation and outcome. Accordingly, they should be accompanied by additional measures.

In addition, public tenders are complex and expensive processes. Their development and implementation necessitate specific expertise within the public sphere. Strict prequalification criteria (prefeasibility studies, environmental and social impact assessment, land and grid concessions, permits and licenses obtained, financial closure reached or letter of intent) can be required to ensure high-quality projects. Indeed, lack of sufficient prerequisites may lead to speculative bidding,Footnote 12 delays and even non-completion. However, burdensome requirements and administrative procedures as well as insufficient government guarantees may prevent the participation of high-quality, small and/or new players. Therefore, public authorities need to find the right equilibrium.

4.6 International Cooperation and Partnerships

International cooperation and communication among countries can support transboundary issues resolution and facilitate the conduct of rational diplomacy, thus increasing the probability to reach mutually beneficial agreements.

Early 2020, concerns over the construction and reservoir filling of a dam based in Ethiopia lead to a difficult geopolitical situation involving Egypt, Ethiopia and Sudan, attracting international attention amid rising fears of an armed conflict. Negotiations over the speed of the reservoir filling raised tensions. Concerns were expressed in regard to Ethiopian energy security and the downstream effects on Egyptian and Sudanese water access. The next step in this dispute is for the African Union to review progresses made and propose a way forward to encourage transboundary talks in order to avoid further diplomatic escalation (Meseret, 2020). This specific case shows the importance of international negotiations, even though the final resolution is still undefined at the time this book is being written.

International cooperation can also increase investors’ confidence. In August 2020, the French group Total signed an agreement with the government of Mozambique to protect the installations of a gas exploitation project in the north of the country, a territory facing political turmoil at that time (AFP, 2020a). Such cooperation efforts may reduce certain investment risks linked to macroeconomic and political situations.

Similarly, cooperation and partnerships can help implement projects at a sub-national level, support technological and knowledge transfers and foster financial transactions between countries, for the benefit of the whole region. For instance, regional power pools present several benefits but need transboundary dialogue and collaboration to be implemented.

4.6.1 Regional Power Pools

Many end-users in Africa face electricity tariffs among the highest worldwide, due to high generation costs driven by stark imbalances in power supply and demand, poor utility performance and sometimes constraints on private and independent power producers (IPPs) (Attia, 2019). This situation makes cost recovery difficult, thus blocking investments in grid maintenance, upgrade and expansion.

Regional power pools can help improve the overall performance of centralised systems, by facilitating the balance between supply deficits faced by a majority of countries in sub-Saharan Africa and over-generation issues happening in few territories. Moreover, power pools offer massive potential saving opportunities in CAPEX and OPEX thanks to infrastructure linkage and economies of scale. They also improve the reliability of power systems and decrease the risk of power blackouts. Furthermore, regional power pools ease the integration of renewable energy resources in their network, allowing a full exploitation across borders and reducing concerns linked to intermittency.

Accordingly, regional power pools allow utilities to provide high-quality services at affordable tariffs for end-users, while at the same time reducing the power off-taker and curtailment risks (Deloitte, 2017). In addition, power utilities may be better positioned to modernise and expand the national grid.

Consequently, the formation of regional markets may help meet energy access targets in sub-Saharan Africa as well as decrease the reliance on fossil fuels for importing countries. Furthermore, regional market pools provide the opportunity to improve the overall business climate and decrease risk perception of potential private investors.

In order to strengthen and expand cross-border electricity markets, intergovernmental cooperation, coordination and planning are required to harmonise regulatory frameworks among countries and build the necessary transmission and distribution infrastructures.

Currently, there are five active regional power pools in the continent:

  • The Southern African Power Pool (SAPP)

  • The East African Power Pool (EAPP)

  • The West African Power Pool (WAPP)

  • The Central African Power Pool (CAPP)

  • The Maghreb Electricity Committee (COMELEC)

4.7 Fiscal Incentives

Fiscal incentives are designed to induce behaviour changes by reducing or exempting tax burdens for certain sectors or market participants. Through their use, governments support the development of the targeted activities or the purchase of specific goods and services. Fiscal incentives do not involve a direct spending, but rather imply the use of public resources in terms of tax revenues forgone.

Favourable tax regimes can be directly granted to projects and organisations fostering the access to clean energy, thus improving net incomes and/or cash-flow positions. They can take the form of abatement or exemption of income taxes, VAT and/or custom duties, as well as accelerated depreciation of assets.

In addition, public authorities can encourage activities indirectly linked to energy access through fiscal incentives, such as mobile money transactions or research and development. Similarly, tax credit can be offered to capital providers investing in clean energy technologies as well as purchasers of specific products and consumers of targeted services.

For instance, Zimbabwe has introduced different fiscal incentives, used to support clean energy projects (IEA, 2016). Import duty exemptions are given for solar panels, while investments in renewable energy benefit from a ten-year income tax holiday.

4.8 Subsidies

A subsidy is a financial incentive providing a price signal, given to support the development of a sector and unlock its market potential. Even if they do not directly address a specific investment risk, subsidies improve competitiveness and may therefore attract private capital and project developers.

The selection of subsidy schemes strongly depends on market characteristics, public objectives, financial structures of targeted organisations as well as end-users’ affordability. They can take several forms and intervene at different development stages.

4.8.1 Subsidies in the Clean Energy Sector

In the energy sector, subsidies may target a firm or a project (supply-side subsidy), thus strengthening their financial performance and competitiveness. They can also be directed towards individuals and households (demand-side subsidy), either directly or through financial intermediaries like microfinance institutions (MFIs) ensuring distribution to end-users. Both can be complementary.

Subsidies are an important tool in order to attract private capital and scale-up commercial operations, as they improve financial viability of the targeted sector. They might be needed when clean energy solutions are not cost-competitive relative to existing alternatives. Furthermore, affordable access to clean energy for the poorest segments of the population sometimes requires some forms of financial support. Therefore, subsidies may be used to decrease energy-related expenses for low-income customers.

Subsidies schemes can target energy asset prices, fuel payments (when applicable) as well as electricity tariffs. They may also focus on connection fees related to the national grid and mini-grid systems, ideally after an independent verification of working installation and proof of use of service through billing records.

However, subsidies represent a substantial financial burden for the public sector. The government needs the ability to support the associated costs. Accordingly, they are not an ideal tool for an economy which is already facing financial constraints and has difficulties in fulfilling associated obligations.

In addition, universal subsidies are more beneficial to citizens with higher incomes and financial means as they generally consume larger quantities of energy. Indeed, an estimated 45% of fossil fuel subsidies in Africa benefit the richest 20% of the population, while on the other hand only 7% of these subsidies goes to the poorest 20% (Wesseh et al., 2016). A lower final price may even lead to over-consumption by better-off households, thus using public resources without effectively achieving the intended objectives. Moreover, subsidies may create technology lock-in and cause fuel scarcity if they focus on a specific energy device without considering the whole range of solutions to tackle the clean energy access challenge.

Accordingly, subsidy schemes must be carefully designed and monitored in order to ensure that they achieve the expected results and are pass on to the targeted end-users. To increase the likelihood of success of subsidy schemes, governments have to focus on specific outcomes within a particular sector and not on preselected technologies. They can efficiently reach poor households without access to clean energy by heavily subsidising basic consumption (targeted subsidies), thus avoiding an inefficient use of public resources.

Phasing-out of clean energy subsidies should occur when the targeted sectors are competitive enough and can strive without financial incentives, as well as when every household has sufficient financial resources to cover energy-related costs. Nevertheless, this process can be politically difficult. Therefore, the right timing as well as proper communication is crucial.

4.8.2 Subsidy Reform

Several countries across Africa provide financial incentives, such as fossil fuels subsidies, that negatively affect the deployment of clean energy solutions and create market distortion. In 2017, fossil fuel subsidies, direct and indirect, reached $400 billion globally (Bridle et al., 2018). They allow carbon-intensive technologies to stay in place and hinder the deployment of cleaner ones. This considerable amount of public money could be in part shifted away from fossil fuels in order to support access to clean energy, thus aligning subsidy schemes with energy targets and policies. In addition, a properly designed subsidy reform could help to achieve other important social and environmental targets, such as GHG emissions reduction, increase in the share of renewables and prevention of health issues linked to air pollution. Finally, it decreases the reliance on fossil fuels and the exposure to volatile energy markets.

Considering the negative externalities generated by fossil fuels, the rationale for subsidy reforms may be evident, yet implementation can be complex. First, fossil energies are strongly linked with economic growth, especially in exporting countries, causing opposition from certain groups with vested interests and potentially strong political influence. Second, the removal of fossil fuel subsidies would imply a sizable impact on households and industries counting of them, particularly in the poorest segments of the populations that use a large share of their revenues in energy needs. Finally, behavioural patterns may also influence the expected outcomes of public policies.

In view of the important role of energy in the economy, governments need a holistic approach to overcome those implementation barriers. Subsidy reforms have to be aligned with public energy strategies and complemented by additional measures to protect and compensate low-income households for any negative impact of a rise in fossil fuel prices. A proper evaluation of the direct and indirect consequences of a fossil fuel subsidy removal is necessary to obtain a comprehensive understanding of the economic and social implications, especially for poor communities (move from universal to targeted subsidies). In any case, the phasing-out of subsidies is generally a complex and difficult process for many governments.

Many sub-Saharan African countries are sometimes forced to remove financial supports in order to allocate public money in other critical sectors of the economy or because of dwindling revenues. In 2008, the Ethiopian government removed an annual $800 million subsidy on all fuels (CI-ACA, 2019), using the money to ease the spiralling costs of food items, caused by a combination of drought and high global food prices (Reuters, 2008). Similarly, the coronavirus pandemic and the resulting economic slump pushed the Nigerian government to end fuel subsidies, affecting many households and economic sectors (AFP, 2020b). In the same period of time, electricity tariffs almost doubled, generating anger among the population.

Both examples show the complexity behind subsidy reforms in developing and emerging economies. Indeed, limited public budgets restrain flexibility. Moreover, compensation schemes are crucially needed to avoid adverse consequences on the poorest segments of the population. Consequently, multilateral agencies and development banks have an important role to play in the implementation of subsidy reforms.

4.9 Priority Sector Lending

This finance policy is a sector-based mechanism aimed at giving a shape to the economy and ensuring that sufficient funding supply flows into specific segments considered as important for a territory.

It consists of predefined lending levels in certain domains of activities that specific financial institutions have to reach. It can be boosted with preferential lending conditions (lower interest rates, longer grace periods and/or tenors). Priority sector lending implies that targeted financial institutions support particular objectives set by the government and contribute to the sustainable development of the country. In addition, it aims to promote social equity and facilitate investments in less developed sectors and/or regions.

Nevertheless, opponents to this finance policy claim that it causes market distortion and becomes an economic burden for subjected financial institutions, by limiting investments in other sectors and diverting funds from potentially profitable industries (Udit, 2016). Moreover, some financial institutions may lack expertise in the priority sectors, seeing therefore their operations and possible expansion affected.

However, complementary solutions exist to decrease those negative perceptions. First, the bankability of projects and companies active in the priority sectors can be improved through additional supportive mechanisms. Second, regulation may be adapted to the specificities of financial entities, considering their experiences and geographic presence.

Back in 2015, the Reserve Bank of India introduced renewable energy resources into its priority sector lending (PSL) policy, with the objective to incentivize investments in this segment of its economy. The program is mandatory for national banks and foreign banks with operation in India, and it includes preferential interest rates for the targeted sectors. Moreover, a trading scheme allowing to exchange PSL certificates in order to reach predefined targets was created by the government. In case of non-compliance, banks have to provide capital to a special-purpose investment vehicle, the Rural Infrastructure Development Fund.

4.10 Obstacles and Opportunities for a Fast and Comprehensive Implementation—The Political Economy of Policy Implementation

Public policies are government interventions that should represent the values and vision of a territory and respond to specific concerns. They state a plan of actions to achieve future objectives, therefore implying changes that may cause confusion, resistance and frustration.

Their formulation and implementation are two key steps of the policy life cycle that face different challenges. The development of a good policy does not necessarily ensure the achievement of the expected outcomes. Indeed, the application within a certain context can be influenced by various external factors and stakeholders, as well as different interpretations. In addition, it is strongly dependant to political commitment and public governance.

In order to avoid implementation gaps, potential barriers need to be identified, analysed and mitigated. The following factors are obstacles that could influence the effective implementation of a public policy, implying distancing, leading to resistance and even sabotage (Omoniyi, 2018):

  • Weak institutional capacities

  • Improper planning and management, lack of proper direction

  • Inability to involve all relevant stakeholders, public and private, resulting in policies perceived as unfavourable and externally imposed without consultation

  • Lack of consideration of specific factors linked to the local context

  • Financial constraints and unavailability of necessary resources (material, human)

  • Bureaucratic bottlenecks

  • Lack of political will, corruption and political patronage

  • Vested interests and political opposition

To avoid an implementation gap, public authorities first need to have legitimation. To do so, they should take all the necessary means to decrease corruption, create confidence and improve transparency. The government has to prove its commitment and sensitiveness to the underlying challenges and its will to respond to the population’s needs. Moreover, an effective energy policy implementation requires coherence and synergies with national objectives and strategic planification in order to reduce confusion and guide priorities.

Moreover, the goal-setting process has to be realistic and adapted to the local context, the targeted challenges and the available resources. It is not necessary to elaborate energy policies for an entire country. However, they should target specific requirements and objectives, while considering prevailing peculiarities, circumstances and aspirations.

In addition, public entities have to ensure a proper understanding and interpretation of the overall process through adequate communication at all stages of the policy life cycle. Targeted issues and proposed responses need to be clearly explained, including solid arguments to justify specific choices.

Equally important is the necessity to involve all relevant stakeholders, from problem identification and policy formulation to implementation, monitoring and evaluation. This requires organisation and coordination, but allows the public sector to spark a debate, exchange information and increase engagement and cooperation. It aims at creating a consultative and participatory approach and closing the gap between policy conception and implementation.

Furthermore, the public sector needs to consider the interest of internal and external parties as well as their ability to influence the implementation of an energy policy, in order to avoid tension between opposing stakeholders. Dialogue should be encouraged to take into account all situations and consequences for various stakeholders.

Finally, a constant monitoring and assessment of the impact and progresses made is necessary, allowing the introduction of the required modifications and increasing the likelihood of success. Pilot and temporary measures may be implemented in order to get regular feedbacks and improve commitment of different stakeholders.

Here again, multilateral agencies can support national and local governments in the implementation of energy policies, providing technical assistance and advisory services to improve capabilities and increase policy efficiency.