What are the elements of a regulatory framework for mini‑grids?

Speeches Shim

Short Answer

A strong regulatory framework can support policies that promote mini-grid development. As with larger-scale utilities, regulatory frameworks are necessary to ensure the sustainability of a mini-grid system and to protect consumer interests. A framework that allows sustained support for mini-grids helps create confidence among investors. In many cases, the long-term viability of a mini-grid developer’s business model depends on the extent to which regulations are clear, transparent, consistent, cost-reflective and enforceable.

Mini-grid regulations differ significantly from those of traditional utilities, because mini-grids operate on a smaller scale, have different engineering requirements and engage with different actors, such as renewable energy agencies. The regulation of mini-grids generally includes specific technical, quality and process standards that relate to mini-grid applications. In some cases, countries may not regulate or enforce rules on generation sources under a certain size/generation capacity. As of 2017, both Cameroon and Tanzania are exempted from regulation for mini-grids below 100 kW . In any case, it is the project developer’s responsibility to follow the law.

Using traditional, utility-oriented regulatory frameworks for mini-grids may lead to failure of the regulatory process and deter mini-grid development. The key to effective regulation is a flexible approach that is sensitive to the specific operational structure of mini-grids; embraces the potential contributions of individuals, communities, small power producers (SPPs) and local governments; and effectively engages those actors. This approach recognizes that complicated and costly requirements may deter innovative service models. To offset these concerns, regulators may adopt streamlined requirements or even outsource regulation to non-traditional actors such as community organizations.

Mini-grid regulation may focus on technology standards and compatibility, affordable and reliable service, environmental impacts, planning with an interconnection to the main grid, customer service and quality and contractual agreements. The regulatory process should incorporate procedural elements, which ensure that open public participation can inform the mini-grid operator, national utilities/grid operators (to which a mini-grid may be interconnected), consumers and other stakeholders.

Further Explanation of Key Points

Technical Standards

Technical standards ensure that mini-grid systems are properly designed, installed and operated to meet minimum safety and performance standards.

Types of Standards

Examples of technical standards include:

  • Generation equipment specifications—such as photovoltaic (PV), inverters and wind turbines—and construction codes to provide assurance that the equipment and construction is validated to operate in a specific area
  • Distribution grid specifications, including poles, transformers and cables
  • Operations and maintenance standards to address operational issues
  • Technical specifications for replacement requirements for interconnection to the central grid to protect against fires, lightning and surges

Economic Regulation

Economic regulations stipulate rules for setting tariffs when mini-grids sell power to consumers (retail tariffs) or the central grid (feed-in tariffs) or when they buy power from the central grid (backup tariffs). Regulations may also define the nature and type of subsidies that apply to mini-grid development and the conditions under which those tariffs will be served. Where plans exist for future interconnection of the mini-grid and the central grid, economic regulation may also determine who pays for that interconnection. If the central grid reaches a mini-grid, it is important to ensure there is a clear legal framework in place in order to secure investment. Clear, stable and effective economic regulations increase investor confidence in mini-grids.

Quality of Service

The quality of service provided by mini-grids may also be subject to regulation. Regulation of quality of service seeks to protect consumers, and it has three dimensions:

Regulation of Quality of Service
Product Regulation
Ensures that the electricity generated meets specific frequency and voltage levels
Service Regulation
Governs the reliability of supply as measured by the number of hours of availability or the frequency and duration of blackouts
Commercial Service Regulation
Defines how long it takes to get a connection and addresses how consumer grievances are handled

Environmental Regulation

Environmental considerations may include regulations to avoid deforestation for biomass-based mini-grids or disturbing endangered wildlife or migratory patterns, decommissioning infrastructure (such as ensuring proper recycling of PV cells and batteries or returning the site to its original condition) and accounting for the impact of mini-hydro developments on aquatic or catchment area life and quality and availability of water resources.

Contractual Agreements

Mini-grid development may require contractual agreements to govern relationships among actors. For example, if a mini-grid connects with the central grid and the mini-grid operator retains ownership of the system and generation assets, a power purchase agreement (PPA) should dictate the terms of power sale between the mini-grid developer and the utility. PPAs should clearly define the rights and responsibilities of the mini-grid operator and the buyer. PPAs that contain an even and fair distribution of risks are critical to attracting developers and helping developers secure financing. Standardized PPAs are encouraged, since they streamline the PPA tariff negotiations.

Another example of a contractual agreement is a service agreement between a mini-grid owner and the energy customer. Like a PPA, a service agreement can specify traditional regulatory parameters, such as tariffs and hours of required service, and can also serve as a form of “regulation by contract” at the local level.

Licenses

Licenses grant a mini-grid developer the right to construct, own and/or operate a system while providing continuity and transparency to the rregulator's oversight process. In many countries, licenses are issued by regulatory bodies when a mini-grid operator has demonstrated that a project is technically, legally and financially feasible. Overly complicated and rigid mini-grid licensing procedures could deter mini-grid development.

In Kenya, pico-grids (less than 1 MW) are exempted from a formal license and can operate with a permit in order to attract investment. In some cases, such as in the case of Powerhive in Kenya, the government bids out exclusive rural electrification service territories in concession agreements, some of which include mini-grid or off-grid components. There must be regulatory provisions, such as for compliance and performance of the licensee, to ensure that these concessions do not lead to the eventual creation of monopolies in the mini-grid market.

Regulatory Process

Rules may exist to monitor the regulatory process itself, including the procedural aspects of mini-grid development. These regulations establish processes for stakeholder engagement and communication, public/private consultations and timeframes for processing licenses.

Not all of these components may apply to an individual project. Decisions about which elements to include in mini-grid regulations are specific to each context and depend on the mini-grid technology used, the system size, the local market structure and possible plans for future grid interconnection.

Standardized Regulatory Instruments

Some aspects of mini-grid regulation may be standardized to facilitate mini-grid deployment. In Tanzania, for example, standardized PPAs for both grid-connected and off-grid systems have been developed to govern the sale of electricity between mini-grid operators and buyers. Tanzania also uses a standardized methodology for determining feed-in and backup tariffs. These standardized instruments eliminate the need to consider mini-grid projects on a case-by-case basis, thereby streamlining the deployment process.

Other Regulatory Considerations

In most countries, there may be other regulatory considerations that are not directly related to mini-grids but are relevant to business operations in general. These may include business-registration certificates, land-use permits, environmental permits, civil aviation authority permits, building permits and resource rights (such as water rights for the development of mini-hydro grids). If these requirements are not satisfied, licenses for the development of mini-grids may not be granted.

Resources

U.S. Department of Energy and National Renewable Energy Laboratory (2014). Mini-Grids Quality Assurance Framework, Fact Sheet and Webinar.
This framework enables isolated mini-grid developers to clearly and transparently determine the levels of electricity service they can feasibly provide for consumers, and it includes a monitoring mechanism to track whether or not agreed-upon service levels are being met. The framework is applicable to both alternating current (AC) and direct current (DC) mini-grids as well as to renewable, fossil and hybrid systems.

International Electrotechnical Commission (2006–2016). IEC Technical Specification Series 62257.
These standards are being developed to provide specifications for the technical and organizational aspects of mini-grid development. It should be noted, however, that these international standards, when fully developed, may not be well-suited to the technical and organizational capacities in developing countries. They may, however, serve as useful guides for the development of standards that are well-suited to the local context of mini-grid development. A 2012 IEC presentation provides further information about these standards.

National Association of Regulatory Utility Commissioners. Practical Guide to the Regulatory Treatment of Mini-Grids.
Developed in collaboration with USAID, this guide provides regulators with concrete guidance and practical tools for developing a clear, enabling regulatory framework for mini-grid development.

World Bank (2014). From the Bottom Up: How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa.
This report provides an in-depth review of the policy and regulatory considerations needed to plan and carry out sustainable mini-grid projects. It focuses specifically on Sub-Saharan Africa.