Opening tip for current and future license holders in the industry
The Zimbabwe power utility, ZESA Holdings statistics recorded that about 90 licences have been issued to independent power producers (IPPs), but only 20 projects have shown progress to date. In contradistinction, demand for power is expected to rise to 2 370MW by year end, 2 711MW next year, 3 407MW in 2024 and 3 943MW in 2025.
The failure of some current licence holders to kick-start projects have prompted policy makers and the Energy ministry to consider introducing legislation that sets timelines on implementation of renewable energy projects. Given the prevailing incapacity of most IPPs to take pro-active steps towards their 40% set threshold in contributing to national energy supply, the regulatory body (ZERA) has considered tightening its requirements for granting licences.
The law on license cancellation
License cancellation for IPPs is in terms of the law. Section 51(2) (c) ;(d) of the Electricity Act [Chapter 13:19] provides for terms and conditions for issuing licenses and the cancellation of same when there is non-compliance. Failure to commence project due to lack of funding is one of the key mischief for a potential delisting of an IPP. ZERA’s recent pronouncement means that the regulatory body looks to tighten the terms and conditions set out in the licenses beyond the reach of many potential sector investors.
The proposed measures will include investor capacity assessment in the form of a banking feasibility study and Environmental Impact Assessment certificate. Prior to these conditions, the regulatory body only needed business proposals and environmental prospectus which were cheaper to acquire. It is therefore prudent for defaulting license holders in the sector to promptly commence their projects and avoid losing their licence in the near future.
While the ZERA Energy Guidelines, 2021 ensures a much easier entry into the sector, the recently pronounced measures will lead to stringent requirements before an IPP is granted a licence. The sector is slowly becoming a high capital intensive enterprise albeit with a huge investor potential and profit maximisation.
Potential legal hurdles for IPPs if the stringent measures are implemented
If the ZERA’ proposed measures to ensure commitment towards energy production by IPPs are implemented, the sector will suffer a huge competitive blow. The move which seeks to accommodate only high capital players with a broad financial base is likely to stifle competitiveness in the sector. There is a high chance that capital assessment akin to mining ventures can be applied in the energy sector to the detriment of small IPPs. The backdrop surrounding this measure is that, small players will be elbowed out, leaving the public consumers at the mercy of the big players. The latter are usually characterised by exorbitant pricing of electrical services and uncompetitive behaviour. It is therefore prudent for the government to consider some of the negative consequences that may accrue while in the process of pushing investor commitment to national goals.
If the Ministry of Energy eventually introduces legislation to ensure compliance with project development, the outcome will negatively impact on most local players with little capital to put into energy projects. The tougher review of requirements for IPPs to be granted a license will mean that the sector becomes an expensive venture for start-ups and most local players. Thus, there is urgent need for current, struggling IPPs to consider brokering funding deals in order to apply for a national project status. This will ensure that the government aids in their efforts to contribute significantly through minimising IPPs costs when importing goods for project implementation.
Pointers towards competitive bidding
In consonance with other countries in the region where there is a competitive bidding process for sector investors, ZERA is also considering replacing unsolicited bids so as to grant licenses only to ‘serious’ IPPs. This will present cut-throat competition to the small players and hence a closed sector investment platform. In addition, energy sector development is most likely to shift beyond reach of many locals. In South Africa under the Independent Power Producer Procurement Programme (IPPPP), sector investors have enjoyed cheaper energy production costs through government intervention. It stands to be observed if roping in this approach will yield more positives than negatives.
Viable prospects for sector investors
The global call for climate change adaptation in Africa has brought with it infinite opportunities for investors in the field of power distribution. Following the exponential rural to urban migration across the continental divide, the demand for energy has also significantly tripled in Zimbabwe. Consequently, the quest to meet the increasing demand for energy by both the rural and urban markets calls for investment in the sector. On the other end, the global call for climate action during the recent COP26 on Climate Change directly signalled the future inevitable dispensation with the region’s major source of fuel – coal.
Foreign investors such as China through the International Commercial Bank of China and the Chinese Minsheng Banking Corporation have since withdrawn from their earlier undertaking to fund the proposed USD$3 billion coal plant project at Sengwa. This was just but one of the so many carbon emitting projects that the Asian country withdrew from funding within the region.
In the wake of the above mentioned backdrops in sourcing out foreign investment for the energy sector, the country is in dire need of serious investors with a huge financial base. Given the global call to dispense with fossil fuels, the energy sector is one of the most promising sectors that private capital should consider in their mid to long-term investments plans in Zimbabwe and Africa at large.
This article is for information purposes only. For a comprehensive legal consultancy, engage your trusted lawyers.
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