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Renewable energy in Mozambique

Africa Connected: Issue 3

Currently, 82% of Mozambique’s power generation capacity comes from hydro sources. But the country has a vast diversity of energy resources, of which approximately 88% are renewable, representing an aggregate potential of more than 23,026 GW – sufficient capacity to both meet domestic demand and export to neighboring countries.

The country’s 2009 New and Renewable Energy Development Policy aims to promote the use and exploitation of renewable energy resources to both accelerate access to modern forms of energy and create a favorable investment platform.

The regulatory framework

In the Mozambican legal system, there is no specific legislation on the licensing of power projects from renewable energies, and so they are governed by the general electricity legislation, such as the Electricity Law and Concession Awarding Regulations, which mandate a government-issued concession contract regardless of the generation capacity of the project.

Prior to initiating a project, a renewable power project’s sponsor must obtain authorization from the minister of mineral resources and energy to carry out technical studies and any other research related to the project as a precondition for the award of a concession. The only exemption from this requirement is where the project concerns the production of electricity for private consumption (i.e. where it is not supplied to third parties).

As a general statutory rule, concession contracts are granted through a competitive public tender. Depending on the generation capacity of the proposed project, the public tender takes place at either a local government (district) or municipal level, with the Council of Ministers taking responsibility for projects with a capacity of 100 MW or more.

Public tenders are managed by the recently established Energy Regulatory Authority (ARENE), which will, among other things, assess the impact of the project in the internal market so as not to affect the free competition. ARENE will also ensure that project sponsors and developers comply with power generation legislation.

Mozambique’s Megaprojects Law provides for an exception to the public tender rule, and allows for a direct award, subject to certain conditions, one of which is prior authorization from the Council of Ministers.

Direct awards have been used in two recent renewable energy projects: the Metoro solar power plant in Cabo Delgado, and the Mocuba solar project in Zambézia. In fact, most power projects are granted through direct awards.

Despite this, the government proposes to use the public tender process as a way of sourcing renewable projects. In October 2017, the minister of mineral resources and energy launched a project aimed at designing an auction mechanism for renewables. The first auction is due in 2020.

Challenges and reforms

Some of the key challenges to the successful implementation of power projects are:

  • the need for a government-issued concession contract, the requirements for which are the same regardless of the project’s generation capacity;
  • protracted concession and PPA negotiations and a lack of timely responses from the relevant authorities;
  • issues of currency (in)convertibility;
  • the inability of the Mozambique government to provide credit A+ guarantees requested by lenders; and
  • the government deciding not to grant certain guarantees, such as a political risk guarantee, that would render the project bankable.

There is a need for simplified procedures for the awarding of concessions or even the licensing of renewable energy projects. The current procedural mechanism under the Electricity Law is being reviewed, and we submit that the government should simplify things and establish a straightforward and quick contracting regime for renewable projects.

Recently, the government has launched several initiatives and supported new platforms for the creation of a safe, sustainable and favorable investment environment for renewables, including:

  • the enactment of the Tariff Regime for New and Renewable Energies, which sets the tariff mechanism for such projects with a generation capacity below 10 MW, specifies eligibility requirements, and provides the option of sharing gains resulting from the carbon credits with energy producers;
  • the development and publication of the Mozambique Renewable Energy Atlas, a comprehensive guide to the renewable energy sector at a national level, and to the market conditions and the challenges that potential investors may encounter;
  • the review and improvement of the existing electricity sector legal framework, and the development of an appropriate legal framework for the renewable energy sector; and
  • the creation of financial, fiscal and other incentives for the implementation of renewable energy projects, including:
    • fiscal incentives based on the prices and tariffs for the new and renewable energy supply systems;
    • provision of subsidized financing for renewable energy projects through public funds and low-interest loans or government loan guarantees;
    • exemption from customs duties and the payment of VAT of any kind on any plants or equipment classified in class K of the customs tariff, and corresponding parts and accessories related to such plants and equipment;
    • tax incentives destined to promote the domestic production of equipment under a special investment regime, such as an industrial free zone; and
    • the reduction of corporate income tax during the first 15 years of the lifetime of a project, with a reduction of up to 80% in the first five fiscal years.

Another issue is the fact that all electricity produced in Mozambique is sold to one single offtaker: Electricidade de Moçambique, the state-owned power company. This has a negative effect on tariff negotiations – not only because of the monopoly, but also because the company manages the national grid, which makes it difficult to negotiate market-related tariffs.