Unlocking the potential of Mozambique energy sector

This article is the second of a series of four, to be launched throughout the year, in a partnership between JLA Advogados and Abreu Advogados especially dedicated to energy matters in Mozambique.

Throughout this year we will explore Mozambique's current market, opportunities in the energy sector to Mozambique, the effect of increased activity in the energy sector on economic growth, policy answers to the needs of Mozambique's peoples and businesses, and pathways for Mozambique to assume a leadership position in the energy sector in Africa, fulfilling its potential.

Energy is the engine that powers economies. Power shortages undermine economic growth, investments and employment creation.

It is estimated that power shortages cost annually from 2 to 4 percent of Africa GDP.

Recent data shows that over 645 million Africans lack access to electricity, while power consumption per capita in sub-Saharan Africa is the lowest of all continents (The New Deal on Energy for Africa 2016 – 2025).

On its turn, the causes of death of population and under-performance of children are primarily related with this context. Around 600,000 Africans die annually due to indoor air pollution associated with the use of fuel wood for cooking, mostly women and children, while over 90 percent of Africa’s primary schools lack electricity.

A sad paradox, considering Africa is rich in energy resources.

Mozambique is no exception. It cannot power its homes and businesses unless it unlocks this huge renewable energy potential and combines it with conventional energy.

Among several factors that limit the scale and speed at which energy is generated and distributed in the country, the lack of sufficient innovative and appropriate financing of bankable projects its definitively one of the highest.

Renewable energy project deployments are gaining market acceleration. As capital-intensive Projects, they largely depend on financial support.

Lenders and investors are keen to understand the risk-return approach. The willingness of banks and project developers to fund renewable energy development will largely depend on projects bankability. The assessment of measurable economic specifics and risk-return parameters needs to emphasize confidence in the Project success.

Whenever risks are not duly allocated during a project’s conceptualization phase, the ultimate consequence is the inability to find investors and lenders.

There is plenty of appetite and private capital available to fill the financial gap in the country, especially when considering the much larger universe of private investors in addition to institutional investors.

However, bankability concerns continue to constrain the further deployment of capital in energy projects across the country. These concerns relate mostly to governance, political, regulatory, environmental, climate and social risks.

To ensure that the opportunities that the Mozambique has to offer are maximized, the efforts of the Government of Mozambique to reduce such risks will be crucial.

As investors move from interest to action and enter the Mozambique energy market, their approach, will be defined in light of the regulatory landscape and instruments available that can ensure that the investments are viable and reduce risks.

Despite the notable growth and consolidation of energy sector favorable policies over the least years, Mozambique capacities may be further enhanced through new energy policies, regulations, incentive systems, as well as the increase of corporate governance, transparency, and accountability.

Mobilizing additional capital and scale of energy financing requires innovative mechanisms, while encouraging public and private stakeholders to develop bankable projects and enable conditions for financial flows.

To fill the gap in the energy sector and associated infrastructure, the government of Mozambique will need continued support from the private sector.

Financial incentives and subsidies may encourage investments by ensuring that the generated electricity cost achieves attractive rates of return and provide much-needed economies of scale, as shall the scheduling of public tenders, ensuring predictability to the efforts and investments of interested promoters.

As highlighted on the first article of this series of four, micro-grids vertically integrated and the green hydrogen and derivatives sector may be the vectors which show higher potential when considering the placement of public incentives and supports.

Attracting domestic and international capital for innovative financing in Africa’s Energy sector and supporting African countries in strengthening energy policies, regulation, and sector governance, is among the principles underlying it the New Deal on Energy for Africa, established by the African Development Bank.

It´s 2023 African Economic Outlook (“AEO”) was dedicated to mobilizing private sector finance for climate and green growth in Africa.

According to the AEO 2023, it is estimated that private sector funding will need to grow by 36% annually by 2030 to close the continent's climate finance gap, valued at an average of US$213.4 billion per year, analysis based on in the latest Nationally Determined Contributions submitted by African countries.

It is also highlighted that climate finance needs on the African continent are forecast at US$2.8 billion between 2020 and 2030, that is, US$250 billion per year. As such, it is of the essence to mobilize alternative sources of financing, which should come from both public and private sources.

In a context where more and more regulatory policies are emerging worldwide that assign duties to financial institutions to finance sustainable development, Mozambique may also adopt policies in this regard.

Therefore, it will be necessary for Mozambique to encourage financial institutions to redirect capital flows towards sustainable investments, to ensure the necessary financing for the climate transition and sustainable and inclusive growth. In addition, transparency and a long-term vision of economic and financial activities should be promoted.

Nevertheless, increasing Mozambique´s attractiveness to investors in the country is already a national priority to its government.

It shall very soon enter into force Law n.º 8/2023, of June 9 which establishes the legal regime applicable to national and foreign Private Investments eligible to enjoy tax and non-tax guarantees and incentives, repealing the regime that set-out the national investment paradigm since 1993.

The review carried out aimed to privilege and ensure greater participation and guarantee of treatment of private initiative investments, both of national and foreign origin, highlights the need to ensure respect for the guarantees granted to investors, as well as the commitments and international investment agreements assumed by the country.

Among many positive measures, it should be noted that one of the main regulatory entities on this matter was suppressed, while the public interest was establishing as the only legally accepted foundation when determining expropriations, imposing non-protection between national and foreign investors and the right to fair compensation corresponding to the real market value of the expropriated investments.

In addition, this law introduces the principle of Fair and Equal Treatment, preventing further control and arbitrary procedures aimed at ensuring payment of compensation due in the event of lack of agreement by the State as to the amount to be paid.

Indeed, and although not applicable to certain investments made or to be made under specific legislation, the Private Investment Law provides for long claimed innovations, among which, non-discrimination and equal treatment between national and foreign investors, the reinforcement of guarantees and measures to protect property rights and other property rights of investors.

From a sectoral perspective, the recent revision of the Electricity Law in 2022, which revoked the previous law of 1997, and the 2019 National Electrification Strategy are also good examples of some of the steps taken towards a more attractive regulatory landscape on the energy sector.

On the other hand, the Renewable Energy Code defines the set of technical requirements for connection to the network of Renewable Energy Plants, the set of principles for verifying conformity throughout its lifespan and the technical conditions and principles to be respected under the point of view of the Management of the National Electricity System of Mozambique.

This Code will be fundamental for the goals of sustainable development, energy transition, efficiency, and reliability of the National Electricity System in that country.

Is shall also facilitate the integration of generation from renewable sources, while guaranteeing the quality and safety of the National Electric Grid, the harmonious expansion of the Electricity Sector of Mozambique, the reinforcement of Mozambique's role in the electricity system of Southern Africa and the 'Southern African Power Pool' (SAPP) and private investments in the sector.

There are some important reforms under way that should make a very positive contribution to attracting capital, such as the review of the electricity strategy and of the Private-public partnerships law.

The Government of Mozambique will also need to harmonize several legal regimes in force with the new paradigm set-out on the private investment law, given its cross-sectorial scope, namely the Land Law, the Labor Law and the Regulation of Mechanisms and Procedures for Hiring Citizens of Foreign Nationality, among others.

There is no room for complacency. A period of legal, regulatory, and political stability still needs to accompany recent changes to ensure that it moves forward properly.

Now is the time for private investors to renew their regional strategies, taking a risk in building their local capacities to ensure they benefit from the opportunities the country has to offer.

João Lupi, Senior Associate at Abreu Advogados

References

African Development Bank (2023). African Economic Outlook.
African Development Bank. Strategic priority High5 - ‘Acender e Energizar África”.
Booth, S. e. (2018). Productive use of energy in African micro-grids: Technical and business considerations. National Renewable Energy Laboratory.
Chalk and EUEI-PDF. (2013). Productive Use of Energy - PRODUSE. Measuring Impacts of Electrification on Small and Micro-Enterprises in Sub-Saharan Africa. Eschborn, Germany: EUEI PDF.
International Energy Agency (2022). Global Hydrogen Review.
IRENA (2022). Energy Profile, Mozambique. IRENA.
World Bank Group (2023). Global Photovoltaic Power Potential, Country Factsheet, Mozambique. World Bank Group.
The Bank Group’s Strategy for The New Deal on Energy for Africa 2016 – 2025