MININFRA: Energizing Rwanda: A regulated energy market

Since 1999 the Rwandan Energy market became liberalized. This was enshrined by law no. 18/99 of 30/08/1999 which modifies law-decree no. 18/76 of 20/04/1976 setting up the public enterprise for production, transport and distribution of electricity, water and gas (Electrogaz). Under the new legislation, the national power utility no longer enjoyed the monopoly for generation, transmission and distribution of electricity. Moreover the responsibilities for water will be unbundled from that for electricity. The new legal framework is intended to promote private sector involvement in the energy market, in order to achieve the sector policy goals, in line with the National Energy Policy adopted in 2004. As outlined in greater details in previous articles of this series, the energy sector in Rwanda is facing a dual challenge: very low levels in energy consumption combined with insignificant electricity access for both the industrial and residential customers. In fact, until recently, hardly no investment was made in increasing the energy supply, upgrading and maintaining the network infrastructure. With the vision 2020, Rwanda is ambitiously planning to become a middle income country with a GDP of USD 900 per capita per year by 2020 from the current USD 240. To nourish that economic growth, it is planned to increase the electricity access rate up to 35 % by 2020. Rwanda and the regulation of the energy market Experiences from all over the world strongly suggest that electricity access targets can be achieved only if the private sector takes a leading role in developing the sector. Huge investments in infrastructure and management required cannot be met by the Government or Development Partners alone. It is imperative that the private sector (in particular independent power developers), enter the energy market. In line with this objective, the Government of Rwanda is keen to creating a conducive environment for private energy businesses, anchored on a conducive legal and regulatory framework. A significant step towards this goal is the draft Gas and Electricity Law and Regulations, recently approved by Cabinet, and currently under scrutiny by Parliament. Following is a short summary of the proposed legislation. Summary of the Draft Gas Law The Law provides a flexible legal framework designed to enable the Government of Rwanda: (1) to accelerate development of Lake Kivu gas for electrification projects; (2) to attract private investment into the gas sector; (3) to ensure a fair and competitive gas marketplace, where consumer rights are protected; and (4) to minimize governmental investment in the gas sector where possible, thereby freeing government assets for other social needs. Consistent with the experience of many other countries, the Government of Rwanda determined that these goals could best be met in a competitive marketplace with private sector participation. The framework of the law enables, but does not set firm deadlines for introduction of the competitive marketplace. The law establishes a clear roadmap for market liberalization, and appoints an independent economic regulator (RURA, hereinafter the “Regulatory Authority”) to administer the Law with authority to oversee market opening and safeguard the rights of consumers. The law anticipates creation of a national gas utility (NGU) and enables NGU operations to be unbundled into separate operational subsidiaries in the future, if any functions beyond transmission or distribution are assumed by the NGU during the gas sector development stage. The law will allow immediate private investment in production facilities, to enable development of Lake Kivu and other natural gas facilities. In the near term, the Regulatory Authority is empowered to apply economic regulatory tools (e.g. licenses and tariffs) to encourage the commercialization of the NGU. Improved utility operations will, in turn, enable grid expansion, better gas services, and hopefully, lower gas prices. The Law clearly provides that a gas operator is authorized to recover its true costs of operations in the tariff, in order to protect the commercial viability of the company. Summary of the Draft Electricity Law The Law provides a flexible legal framework designed to enable the Government of Rwanda: (1) to accelerate development and expansion of the electricity grid and rural electrification projects; (2) to attract private investment into the electricity sector; (3) to ensure a fair and competitive electricity marketplace, where consumer rights are protected; and (4) to create the framework for transition to commercialization of the National Power Utility in order to ensure that the company will operate as efficiently as possible, leaving open the question of whether all or a portion of the company should remain in State ownership. Consistent with the experience of many other countries, the Government of Rwanda determined that these goals could best be met in a competitive marketplace with private sector participation. The framework of the law enables, but does not set firm deadlines, for introduction of the competitive marketplace and unbundling of the national power utility into separate legal subsidiaries for operational functions of production, transmission, distribution, supply, and international trade. The Law establishes a clear roadmap for market liberalization, and appoints an independent economic regulator (RURA, hereinafter “the Regulatory Authority”) to administer the Law with authority to oversee market opening and safeguard the rights of consumers. But the law reserves the right of the Government of Rwanda to directly control the decision on restructuring of the National Power Utility into operational subsidiaries. This restructuring is helpful in order to support the development of a strong and efficient utility, with clear cost center accounting. It also provides a useful foundation for possible privatization of production, supply or other functions at some point in the future, if desired by the Government of Rwanda. This balanced approach allows market opening to proceed, but given that the National Power Utility will continue operations as a state-owned vertically integrated, legacy provider, it is not likely that market opening will proceed beyond an early stage wholesale market, with large consumers purchasing from independent power producers, in those areas served by the National Power Utility. However, private sector investment can be encouraged in production, and possibly in rural electrification efforts in non-national power utility areas, pending future privatization decisions. In the near term, the Regulatory Authority is empowered to apply economic regulatory tools (e.g. licenses and tariffs) to encourage the commercialization of the National Power Utility. Improved utility operations will, in turn, enable grid expansion, better electricity services, and hopefully, lower electricity costs. The Law clearly provides that the National Power Utility is authorized to recover its true costs of operations in the tariff, in order to protect the commercial viability of the company. The Law also provides that the Regulatory Authority should consult with the Ministry at the start of tariff proceedings in order to understand the likely level of available tariff subsidy, an important factor in developing appropriate tariffs for regulated electricity services. This approach is designed to blend the best regulatory practices for independent regulators with the pragmatic needs of the Government of Rwanda for close and harmonious working partnerships of its energy sector agencies, including the Ministry, the national power utility and the Regulatory Authority, in order to produce the best electric service at the lowest consumer cost. The Law also addresses the pressing need for rural electrification through expansion of the purpose and uses of the current Telecommunications Law Universal Access Fund to cover electrification needs, as well as streamlined license procedures for rural electrification projects, and waivers of license requirements for certain national energy agency funded projects. The Universal Access Fund can be financed by multiple funding sources, including international donor funds and assessments on current electricity users. The Universal Access Fund may be used for multiple sector projects, such as electrification, telecommunications and internet access for high value educational or commercial clusters. This program offers an excellent opportunity for cooperative international partnerships to provide innovative financing and technical solutions to the needs of Rwanda’s rural citizens. Rwanda Utilities Regulatory Agency: a key player in regulating the energy market In order to ensure full enforceability of the legal framework, an effective regulatory authority is needed. The Rwanda Utilities Regulatory Agency (RURA) was established in 2001, as a multi-sector regulatory body dealing with public utilities, namely: Telecommunications, Electricity, Water, Sanitation, Gas and Transportation. In view of a fair competition in the electricity sector, RURA works at arms length with all stakeholders such as policy makers, energy service providers and consumers. Its objective is to ensure availability, reliability and affordability of electric power, in a viable and environmentally sustainable manner. Since its establishement, RURA was instrumental in negotiations of various transactions in the electricity sector, together with other Government institutions. A good example is negotiations of Electrogaz Management Contract (October 2003), as well as negotiations of Gas Concession Agreements and Power Purchase Agreements for Lake Kivu methane gas-to-power projects. This was followed by the setting up of electricity tariffs (December 2004, November 2005 and November 2006) and issuance of provisional licenses to private micro hydro power plant developers across the country. Licensing procedures are essential as a regulation tool especially for public-private partnerships in electricity infrastructure projects such as the ‘Private Sector Participation in Micro Hydro’ partly funded through Dutch cooperation. A key success factor for such deals is the ability for involved parties to implement sound tariff and contractual arrangements. In the case of the above project, Power Purchase Agreements have been concluded with Electrogaz, allowing electricity generated to be fed in the national grid; an alternative option will consist in developing off- grid power plants in remote areas. The Government of Rwanda is involved in the electricity trade with neighboring countries through the interconnected regional network. Therefore, regional hydroelectric projects (such as on the Rusizi River shared with the Democratic Republic of Congo and Burundi, and on the Rusumo River shared with Tanzania and Burundi) also dictate a specific institutional and regulatory framework to address the specific expectations of both countries involved. In this context, a Memorandum of Understanding was signed with the Electricity Control Board of Namibia (ECN) in 2006; in addition RURA played a key role in efforts to establish the Regional Association of Energy Regulators (RAERESA) within the COMESA region in October 2007. Moreover RURA has also been involved in the formalization of the Association of Energy Regulators in East Africa. This will pave the way for Rwanda to join the African Forum for Energy Regulators – AFUR. The future looks bright for the Rwandan energy sector. A real regulated energy market will undoubtedly allow the Government to focus on areas such as transmission and distribution, while progressively disengaging in electricity supply, much more attractive for private sector partners. A total of 250MW of private methane gas-to-power projects is under negotiation, in addition to generation from hydro and geothermal resources. This will not only supply Rwanda, but will enable the country to export excess power in the region as well. We are on the way to lighting Rwanda!