As we are witnessing more and more tender announcements for Power Purchase Agreements (PPAs), news about the qualification rounds following the tender or negotiations by the Ethiopia Electric Power (EEP, a state enterprise that offtakes the energy generated by IPPs) to purchase electric power from private investors leads us to ask what the legal basis is for all of these?

So far, the private sector's involvement in the energy sector has been limited to Engineering, Procurement and Construction (EPC) contracts. And it was just recently (on 19 December 2017), that the legal provisions regarding PPAs and IPPs came into practical applicability when the first PPA was signed between Corbetti Geothermal PLC and EEP for the Corbetti geothermal power project.

It is was through the Investment (Amendment) Proclamation No. 373/2003 that the possibility for private investors to engage in the generation of electricity was clearly provided for the first time in Ethiopia. In 2003, the Amendment Proclamation names the Ethiopian Energy Authority (the former Ethiopian Electric Agency) as the responsible government organ for issuing, renewing and cancelling investment permits for generation, transmission and supply of electrical energy. Accordingly, private actors were not only permitted to engage in generation of electricity but also off-grid transmission and supply of electricity. However, the state-owned enterprise (SOE) still holds exclusive rights with regards to the transmission, distribution and supply of electricity through the integrated national grid system (Investment Proclamation No. 280/2002).

The partial liberalization of the energy sector by the investment laws was further supplemented by unbundling efforts of the government taken in 2013. Until 2013, all components of the electricity supply (generation, transmission, distribution and supply) were integrated into a single SOE (Ethiopia Electric Power Corporation, EEPC). However, in 2013 EEPC's mandate was transferred into two SOEs. EEP was established to undertake generation and transmission of electricity, and Ethiopia Electric Utility (EEU) was established to undertake distribution and supply of electricity. In the same year, the Energy Proclamation No. 810/2013 (the Energy Proclamation) introduced a legal framework for generation of electricity by Independent Power Producers (IPPs) and PPAs, which will be entered between the IPPs and offtake.

However, it was in 2016 that practical efforts to introduce utility PPA for the supply of high voltage electric power to the national grid by IPPs were taken. Until 2016, only EEU (and not EEP) was mandated to buy electric power. However, as a result of the mandate of EEU (owning and operating the distribution network and supply of electricity to consumers), there was no legal framework to supply high voltage electricity to the national grid through the transmission networks. But with the enactment of EEP establishment Council of Ministers (Amendment) Regulation No. 381/2016, EEP was authorized to purchase electric power on transmission lines of above 66 kilovolts.

The Energy Proclamation obliges the transmission and distribution network owners (EEP and EEU) to give access to other license holders with payment of a prescribed fee. This protection to IPPs is very important in the country's current situation, where the electricity market is not fully unbundled and the sole transmission network owner/operator (EEP) is also engaged in the generation of electricity. The enactment of such third-party access rule can be a guarantee to IPPs that the transmission network owner will provide connection to all generation facilities without unduly favoring generation facilities which are owned and operated by it.

When one thinks of PPAs, the second but equally, if not more, important contract which comes into the picture is Implementation Agreement (IA). Under Ethiopia's current legal framework, an approval to build and operate electric generation plant is not granted by the signing of IAs. This is because the government organ which enters into IA is not the same as the organ which is empowered to approve PPAs. Once the IPP has made the decision to invest in Ethiopia and once it reaches an agreement with the EEP on the terms of the PPA, the approval of the Ethiopian Energy Authority should be obtained. Whereas, in the current practice, IAs are signed between the IPPs, EEP and the Government of Ethiopia (acting through The Ministry of Water, Irrigation and Electricity and The Ministry of Finance and Economic Cooperation). Though there is no clear legal requirement for IAs, they currently provide important guarantees to IPPs such as tax holiday, exemption from import duty and generation payment guarantees by the government in case of default by the offtaker (EEP).

And finally, after the signing of the PPA and IA, the IPP is required to obtain different permits before beginning operations, or even before commencing construction of the facility. Principal registration certificate, land permits, Investment Permit and an Electricity generation license are among the main permits which should be obtained by the IPP.

The article was also published on the MLA Website on 24 January 2018 and you can click here to access the article. It is reproduced with permission of MLA.

Mehrteab Leul & Associates Law Office is a member of the DLA Piper Africa Group, an alliance of leading independent law firms working together in association with DLA Piper across Africa.