Energising islands in the age of transition
by: Swetha RaviKumar Bhagwat & Samson Yemane Hadush
Islands’ dilemma on the road to energy transition
The article focuses on the Indian Ocean islands of Mauritius, Seychelles, Madagascar and Comoros and is presenting findings based on the authors' engagements with the island nations.
The world energy transition is happening, and it is sustainable! The developed world is changing old infrastructures to state-of-the-art ones; while the developing world is leapfrogging and transitioning to modern infrastructure from the get-go. In this big picture, where do the island nations stand on the road to sustainable energy transition? Islands have been playing catch up and at times slowly, although they are most prone by inaction. What is impeding the transition?
Islands have particularities. They are geographically isolated, small in size and heavily dependent on imported fuel, all combined leading to high energy prices. Although most islands have high renewable energy resources potential, the uptake of this has been challenging due to lack of political will, right policy and regulatory framework, technical expertise or know how, economies of scale, and human capacity. Consequently, islands have a perception of high risk thereby deterring investments. An anomaly in the Indian Ocean islands is Madagascar, which is roughly the size of mainland France with the population of Australia.
So what are the island nations energy systems powering?
Island nation’s economies are usually capped based on the resources available on the islands and the nature of activities adopted by their people. In the case of Indian Ocean islands, the activities are limited to tourism, fishing, food processing and in some (rare) cases, heavy industries. Given the constraint of human capital or land availability, islands are not poised to compete with large-scale production from the mainland. So the emphasis is shifting to a more service-based industry rather than focusing on producing goods. In cases where the islands are linked to a larger economy, the situation is slightly different as the larger mainland economy bears some of the burdens of the islands.
The powering up challenge
Traditionally, in the Indian Ocean region, the islands have heavily relied on fossil fuels such as HFOs and LFOs. Taking inspiration from the global traction to clean energy pathways, the islands have also set up ambitious renewable energy targets for themselves.
In the uptake of renewables, the primary challenge is to accurately assess the resource potential of the various renewable energy resources to optimise the energy mix. In the case of Mauritius, the emphasis is on solar and bagasse based technologies, while in Seychelles it is solar and wind, in Madagascar it is hydro and solar, and in Comoros, it is mostly geothermal and solar.
The second challenge is the integration of renewables into the grid. Since the island nation’s power systems are small, they can only host a limited amount of variable renewable energy. Given this constraint, islands may use other fossil fuels such as gas or coal as intermediate transition pathways to offer flexibility and balancing.
The third challenge is the cross-subsidisation of tariffs. Usually, commercial customers bear most of the infrastructure costs, followed by residential and then industrial. In the shift to renewables and with the use of decentralised solutions, the commercial customers are the first to become auto-consumers. Given the limited population of the islands and the fact that a limited number of people bear all sector taxes, the cost avoided by auto-consumers is often shifted onto the other energy users, who usually don’t have the means to react.
The fourth challenge is the institutional setting. Energy policy is developed by the energy ministry, and on some islands, they also have dedicated governmental units to take care of renewables or electrification mandates. Regulation of the energy sector via a dedicated regulatory body is in its infancy and regulators are still trying to establish their role. In all the islands the energy utility is a state-owned vertically integrated monopoly. Given the size of the market, how competent are these authorities in performing their duties, and are the number of institutions aiding or hindering the energy transition? Amidst this, how can the private sector participate in the island nation’s energy markets?
Another dimension to note is that each island has a different starting point. While Mauritius and Seychelles are well established in terms of their power infrastructures, their pertinent issue is the integration of renewable energy. In the case of Madagascar and Comoros, the challenge is first to provide electricity access and then ensure clean & reliable electricity access. Despite all the constraints these islands face, they are uniquely positioned to adapt and adopt new solutions such as smart grids, electric vehicles and energy storage options.
So what’s next?
Under the framework of the Indian Ocean Commission (IOC), the islands of Mauritius, Seychelles, Reunion, Madagascar and Comoros are regionally cooperating to learn best practices on the road towards the energy transition. As islands are usually under-represented in the global dialogue, regional cooperation will further strengthen their voice and help facilitate trans-ocean learnings. To foster regional cooperation, the IOC had its first ‘Regional Forum on Sustainable Energy’ in Mauritius from May 28–30, 2018.
The Florence School of Regulation (FSR) is collaborating with the IOC to facilitate knowledge sharing on energy sector regulation, particularly on the integration of renewables and energy access. FSR has been working with the islands since 2017 on capacity building programs via our training, research and policy dialogue initiatives.
Will Islands get the electrification formula right?
Islands with limited access to electricity face a dual energy challenge. On the one hand, they have set renewable energy targets to help them transition to a cleaner energy system. On the other hand, a large number of their population still lacks electricity access. Although these islands have targets to increase both the electrification rate and the share of renewables in their energy mix, achieving one target does not necessarily lead to the achievement of the other. Will the islands manage to hit two birds with one stone?
In what follows, we present five dimensions that can be considered by the islands to get the electrification formula right.
Get the definition of electricity access right
Electrification is not only about providing connection but also about ensuring firm and reliable access. That is, the consumer should have the right to use electricity at any time, for any use at an affordable price. Take the case of Comoros. According to the world bank energy database, the country has achieved electrification rate of 80% while, in reality, roughly around 65% of the population is actually connected to the grid. Furthermore, as shown in the figure below, the electricity consumption per capita remains very low. This is mainly due to the low reliability of electricity supply (often concentrated in and around the capital region), hindering the productive use of electricity. Similarly, Madagascar faces these challenges with the added burden of electrifying 85% of its population.
If islands limit the definition of electricity access, they automatically restrict the scope of what they would like to achieve regarding their electrification mandates, thereby limiting solutions that could be adopted, especially if one is transitioning to a cleaner energy system.
Adequately assess the demand
Proper assessment of demand is key for electrification planning and its execution. Currently, both Madagascar and Comoros lack coherent data on the usage level and pattern of the population that is not serviced by the utility, and the extent to which serviced customers rely on backup generation. This can distort the optimal mix of different modes of electrification and lead to inefficient planning and investments, especially if proper forecasting is not undertaken. Many electrification solutions risk being obsolete if they are designed to satisfy the current needs of the society without anticipating the evolution and economic development of the target community. Therefore, islands must adopt suitable assessment tools and develop expertise to collect, manage and maintain energy data to get a clear indication of the capacity requirement and to plan for it.
Synergise policies and embed electrification in the development plan
Achieving renewable energy targets does not guarantee the realisation of universal electricity access. The priority can imply how scarce funding of the government and development partners is allocated. If increasing the share of renewables is prioritised, islands may channel investments and incentives only to the grid-connected system, while fewer resources are directed towards increasing grid connection. Therefore, setting the right policy blend is vital to avoid risks of leaving part of the population unelectrified.
Furthermore, electricity alone cannot kick-start local growth, although it is definitely a stepping stone towards improving the living standard of societies. Hence, it is crucial to embed electrification in the national and local development plans that include other necessary infrastructures such as water, transport, health and education. This can help improve the low connection rates and weak productive utilisation of electricity that are currently evident on these islands, as well as boost the local economy.
Set the right legal and institutional framework
Energy policy documents should not only present targets but also provide a plan on how they can be achieved. To do so, the islands must first clearly define roles of all relevant institutions including ministries, regulators, utilities and other energy agencies. Currently, the power system in Madagascar and Comoros is characterised by ineffective regulatory frameworks and
underperforming state-owned vertically integrated utilities that are facing revenue deficits. This coupled with political instability, and lack of strong political commitment, threatens the realisation of both the renewable energy and electrification targets. In this regard, Madagascar has recently introduced a new energy policy and a legal framework that provides the regulator with a more active role in providing oversight on the activities of the Malagasy energy sector by coordinating all stakeholders.
Listen to our interview
with Ketakandriana Rabemananjara, Director (Legal) of Office de Régulation de l’Electricité, Madagascar
Moreover, since electrification on the islands will involve both grid extension and off-grid systems, it is essential to revisit the role and responsibility of rural electrification agencies like the Agency for Rural Electrification (ADER) in Madagascar. This includes coordinating their off-grid planning and investment strategies with that of the utility which is generally responsible for grid extensions.
Provide effective market and regulatory incentives
Given the high upfront cost of investments in energy infrastructure, a cost-sharing arrangement is often necessary. Under such arrangements, the government and development partners usually finance a portion of these costs. However, these subsidies are not always targeted towards those who need them most; i.e., low-income customers who cannot afford to pay for the connection. The fact that tariffs are set politically also adds to the challenge of electrification. Politically set low electricity tariffs adversely affect the performance of the utility. As a result, the utility may not have the commercial incentive to expand its grid and connect more customers. For example, in Comoros where there is a good network infrastructure coverage (around 80%) and good population density, the utility as well as private participants can speed up the connections with the right incentives. Particularly, in grid enhancement at the distribution end.
Therefore, it is recommended to have an efficient subsidy design and allocation; reasonable tariff levels preferably set by an independent regulatory body; and service obligation contracts for utilities to connect new customers. Doing so can also provide market incentives for private investors who can play an important role in ensuring rapid and effective implementation of the renewable and electrification mandates.
In a nutshell, if the islands get the electrification formula right, they will be able to attract the right participants and the right investments to flow and thereby get their economic development engines running.
How are islands promoting and integrating renewables?
The transition to a clean energy system on the Indian Ocean islands is not only driven by the climate change agenda but also by their ambition to gain energy independence. The energy system of these islands is characterised by a heavy dependence on imported fuel, as shown in figure 1 below. This can have negative implications on the competitiveness of industries and the overall economic performance of the islands. The adoption of renewables is therefore seen as a solution to improve and maintain their respective energy security. For instance, Seychelles has been entirely dependent on imported fuel until around 1.354 MW solar PV systems, and 6 MW of wind power were added to the energy mix, representing 2.1% of the energy production, which reduced the fuel oil import by around 2 million litres in 2016.
The adoption of renewables and choice of technology also faces some roadblocks. These include lack of scale advantage to make renewables competitive, the limited hosting capacity of the grid, limited available land area, and environmental restrictions which are often linked to the visual impact of renewable technologies like wind farms.
Yet within this context, various renewable support instruments have been introduced to promote renewables and integrate them into the power system.
Promotion of renewables
Some of the policy instruments that have been introduced on the Indian ocean islands include setting renewable portfolio standards (i.e. renewable targets), tax incentives, feed-in-tariff schemes, net metering and in some cases setting up a renewable energy fund. The table below shows the types of policy instruments that have been introduced on the IOC.
Tax incentives for renewable energy projects have been introduced in Seychelles and Madagascar. In Madagascar, renewable energy investors can benefit from a reduction in their corporate income tax, VAT exemptions, and an accelerated depreciation rate of 30% for investment in renewable energy equipment. While in Seychelles, imported renewable energy-related goods are exempted from a goods and services tax.
A renewable energy fund, collected through a carbon tax on fossil fuel, was introduced in Mauritius in 2009, named the ‘Maurice Ile Durable (MID)’ fund. It was designed to finance necessary renewables as well as efficiency projects. The fund phased out in 2015.
Some pricing instruments such as the net metering and feed-in tariff have also been introduced. Mauritius and Seychelles have introduced the net-metering program in 2013 and 2015, respectively. In Seychelles, it was introduced to promote the use of renewable energy in both residential and commercial sectors. In Mauritius, it was designed to enable around 2000 small customers, especially households, to interconnect their renewable energy installations into the grid at zero cost for backup service and energy storage. The total net capacity to be integrated via this scheme is approximately 7 MW. The scheme was also extended to medium scale customers, with the intended capacity addition of 10 MW.
The feed-in tariff scheme (FIT) has been introduced only in Mauritius, targeting investments in small-scale distributed generation by private producers. The goal was to mobilise 2 MW of power, which was later increased to 3 MW. It was open to any renewable technology, and the tariffs were fixed for 15 years. Yet to qualify for this tariff a producer must have a self-consumption rate of at least one-third of the total energy amount produced by its installation. The application to this scheme was closed in 2012, as the 3 MW target was achieved. Afterwards, the utility (Central Electricity Board (CEB)) decided to extend the project to new categories of subscribers, public, educational, charitable and religious institutions for a total capacity of 2MW.
Some of these instruments have been designed and implemented by the utility, notably the feed-in tariff and net metering schemes in Mauritius. A recent scheme implemented by the CEB is the ‘Home Solar Project’, which targets vulnerable customers by providing them with electrification using the BOO (Build Own Operate) model. The CEB will take full responsibility for setting up and managing the renewable energy system on rooftops, in return for which the consumer will be charged a fixed price that would be both affordable and reliable. If this scheme is successful, the utility plans to extend it to other consumer classes.
Grid integration of renewables
While the instruments have been implemented to promote renewables and increase their share in the energy mix, the island economies have also undertaken some grid integration studies, and grid codes have been introduced to guide the connection of distributed renewable energy resources. On most of these islands, the system is operated on an N-2 reliability criterion, (instead of N-1) which requires a higher cost of integrating intermittent generation into the system. As a result, the current grid of Seychelles can only host a maximum of 8% intermittent renewable energy.
Listen to our interview with L. Sam (Public Utilities Corporation, Seychelles):
Furthermore, the new dynamics of the system with more distributed generation has forced the islands to revisit their grid codes and in some cases introduce new codes to manage their grids better; particularly in Seychelles, Mauritius and Madagascar. The regulator is also playing an active role in the designing of these grid codes.
Energy sector regulation on the Indian Ocean islands
This section zooms into the regulatory system of the Indian Ocean islands. Specifically, we will look at how the regulatory body is set up, what it is mandated to do, what challenges it is currently facing and its role on the road to energy transition.
Who is the regulator?
In the Indian Ocean islands, only Madagascar, Seychelles and (recently) Mauritius have regulatory bodies that overlook their energy sector.
Madagascar was one of the first islands to have a regulatory body, namely the Office de Régulation de l’électricité (ORE). It was established in 1999 by law as a public administrative body responsible for the control of the electricity sector, with legal and financial autonomy. It is composed of the electricity council, which is the decision-making body, and the executive secretariat, composed of the administrative and technical body. As per the new regulation ‘Code de l’Electricité’, promulgated on April 10, 2018, ORE will be rebranded, and renamed as “Autorité de Régulation de l’Electricité” (ARELEC).
In July 2009, the Seychelles Energy Commission (SEC) was established for the oversight and planning of the Government’s approach on energy issues, and has also been responsible for coordinating the implementation of the National Energy Policy. In 2012, a new energy act was enacted in which the SEC has retained the mandate to implement the National Energy Policy and gained the additional responsibility of acting as the electricity regulator of the country.
In Mauritius, the Utility Regulatory Authority (URA) has been set up in 2016 in accordance with URA act 2004 to regulate utility services, namely electricity, water and wastewater. The objective of the authority is to ensure the sustainability and viability of the utility services, protect the interest of both existing and future customers, promote efficiency in both operations and capital investments in respect of utility services, and promote competition to prevent unfair and anti-competitive practices. The URA is a multi-utility regulator which makes it unique in the region. In the context of islands which are small in size and have limited scale advantage, it is a relevant consideration to examine if a multi-utility regulator is more efficient than a single sector regulator.
What does the regulator do?
Regulators vary in terms of their roles and responsibilities (see figure below). The common tasks performed by all three regulators are licensing and electricity tariff design. However, while the Malagasy regulator determines and sets the electricity tariff, the Seychelles energy commission only sets the procedure for setting and reviewing tariffs, while in Mauritius it regulates the tariff set by a licensee.
The regulators in Madagascar and Mauritius are mandated to regulate the quality of services, promote competition, and mediate and settle disputes. Developing the national energy plan is also the task of the regulators in Madagascar and Seychelles. Unlike the other regulators, the Seychelles regulator is mandated to promote renewable energy and energy efficiency, create public awareness, promote research and development, collect and maintain energy data. The SEC inherited these tasks from the time before the commission assumed the role of the regulator in 2012.
What challenges do the regulators face?
Regulators on the Indian Ocean islands face challenges including high government interference, limited capability to regulated utilities, lack of oversight of off-grid developments and electrification.
The lack of regulatory independence is manifested in different ways. For instance, the SEC sources its funds from the National Assembly, the money accrued from its operations, and other sources like loans, donations or grants. Yet the commission must submit a business plan to the ministry responsible for energy and get approval. This could compromise the administrative and financial autonomy of the commission. Seychelles is revisiting its regulatory and legal framework to adapt to the changing needs and dynamics in the energy sector.
Listen to our interview with T. Imaduwa, CEO of Seychelles Energy Commission
The limited capability of the regulatory body hinders its effectiveness in introducing and maintaining strong regulatory measures that improve the performance of the sector. Particularly, measures that can ensure the efficiency and financial health of the regulated utility. This calls for more capacity building.
The lack of oversight on off-grid developments and electrification is one of the regulatory gaps that we notice in the current set up, particularly in countries like Madagascar where 85% of the population does not have access to electricity. There is no clear mandate given to the regulator, be it to promote electrification or renewables and to ensure the effectiveness of the utility to expand its coverage by introducing various incentive schemes.
For more details on renewable energy best practices on these islands, read our upcoming report to be launched in October 2018.
This essay was originally published as a series of fully referenced blog posts on the FSR website which can be read here.
