This article is the third 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.

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Energy consumption per inhabitant in Mozambique is very low, essentially relying on biomass, due to the absence of satisfactory supply. Oil products and electrical energy are mostly destined for industrial use and transport.

 

Wood and its derivatives are the most common energy source used by households, especially in the countryside. The availability of this fuel is diminishing fast in certain zones due to over-exploitation, obliging women and children to cover greater distances to gather it.

 

In addition, biomass’s low calorific yield increases the cost of using it per calorie consumed. Poor conditions of combustion result not only in poor heat yield but also constitute a health hazard, contributing notably to indoor pollution, a source of serious respiratory disease.

 

According to the most recent data, half the total African population currently lack access to electricity. Around 920 million people are deprived of clean cooking and could double by 2025.

 

Meeting Africa’s rising energy demand means more than doubling energy investment this decade. This requires over USD 200 billion per year from 2026 to 2030, with two-thirds going to clean energy. [Energy Outlook 2023 IEA]

 

Bringing access to electricity and clean cooking for all Africans requires investment of USD 25 billion per year – a relatively small part of the total – and equivalent to just 1% of current global energy investment.

 

Industrialization will also drive Africa’s energy demand, with the continent’s manufacturing output projected to grow by more than 6 percent each year until at least 2025 [Global Energy Perspective 2022, McKinsey Energy Insights].

 

 

Despite Mozambique´s vast population, the country demonstrates several areas of low density combined with the preponderance of rural inhabitants. This poses a major constraint for the development of electricity infrastructures, which turn very costly limiting economies of scale.

 

Nevertheless, meeting their needs with cost-efficient, sustainable energy sources will be vital to the Mozambique socioeconomic development, as well as to achieving the goals of the Paris Agreement.

 

Energy is indeed a key enabler of wealth and inclusive growth, which entails an old dilemma: economic growth requires access to energy, but energy supply also requires investments.

 

So how to address Mozambique’s growing energy needs and fight energy poverty, while simultaneously transitioning to sustainable energy production?

 

The opportunity costs of the lack of access to energy are enormous and comprise poor agricultural, health and educational outcomes, and missed business opportunities. However, with the right strategy Mozambique shall overcome this major obstacle and collateral effects.

 

The potential of mini- and micro-grids was already explored in the past articles and include increased local economic activity, added value to products and services, job creation, and enhanced gender equality.

 

Demand for electricity from small industry and businesses is a key success factor. Indeed, productive users are an important part of enhancing the economic and social development impacts of micro-grids and rural electrification programs more broadly.

 

Without linkage to and support for these users, micro-grids are likely to struggle to increase local commercial uptake of electricity or reach the critical level of sales necessary to secure their financial viability.

 

Under the structural EU “Efficiency First” energy policy principle, priority is given to demand-side resources whenever they are more cost effective from a social perspective than investments in energy infrastructure in meeting the objectives.

 

This decision principle is systematically applied at any level to energy-related investment planning.

 

While assessing sustainability, economic growth, and energy capital expenditure investments for the design of policies and contractual mechanisms, some promising alternatives may be found to address Mozambique needs, fight energy poverty and promote energy efficiency.

 

One of the mechanisms available for this end is the so-called Energy Savings Performance Contracting (ESPC) industry, which is already common on African markets, especially the Guaranteed Savings model.

 

In a nutshell, the ESPC approach provides a budget-neutral mechanism to pay for today’s energy upgrades with tomorrow's energy savings — without tapping into capital budgets.

 

Under this scheme, the Energy Performance Contractor (EPC) commits to install the required equipment, provide a performance guarantee, and establish the terms of any upfront or ongoing payments, which are intended to be less than the financial savings secured by the project.

The two most common contractual mechanisms are referred to as a (1) shared savings or (2) guaranteed savings model. 

 

Depending on the customer’s preference and access to equity, the customer, the Energy Services Companies (ESCO), or a combination of the two can be responsible for securing finance for the project. A direct loan agreement with a third-party lender is also an option for both parties.

 

Several factors contribute to choosing one contractual model over the other. However, where an ESCO might not have lending ability, they may resort to the guaranteed savings model, where the customer is responsible for financing the project.

 

Under Energy Performance Contract Guaranteed Savings mode, the ESCO guarantees savings on the client’s energy bill.

 

The ESCO takes on the technical risk, while the customer obtains a bank loan or uses their own equity to pay contractually determined fees to the ESCO and the bank and keeps the difference. 

 

Through the Energy Performance Contract Shared Savings model, the ESCO shall provide financing, as well as project development and implementation costs, with the energy savings shared between the ESCO and the client over the contract period.

 

In this situation, the ESCO is assuming both the technical and the credit risk of the costumer, which can be of value to the costumer as it avoids the need for upfront capital costs, with ongoing payments to the ESCO based on the savings obtained. The project would therefore be off-balance sheet.

 

Moreover, in response to an uncertainty associated with the performance of efficiency measures which inhibit third-party energy efficiency financing, Energy Savings Insurances (ESI) have emerged to reduce the risk of an energy efficiency project.

 

ESI´s are offered by a small number of financial institutions, private companies, and insurance companies, being particularly useful for ESCOs or smaller enterprises with poor credit or who lack the means to secure third party financing. 

 

Scaling up ESI would require more providers to enter the market, increasing competition and availability, which also largely requires widespread understanding of energy efficiency projects risks among insurers.

 

Typically, there are two types of insurance packages offered by insurers: technical and credit.

 

Under the technical package, the insurance provider covers the ESCO or technology provider if promised energy savings are not achieved, assuming the technical risk associated with efficiency projects. In the credit package, the insurance provider assumes the credit risk of a project, thereby ensuring that repayments owing to the ESCO can continue to be made, in the case of customer credit default.

 

Finally, State and local governments can implement ESPC projects in their own facilities, as well as promote and support ESPC projects through ESPC programs. Governmental entities may also be created to serve the public sector, develop the capacity of private ESCOs, and facilitate project financing.

 

ESPC programs designed to engage clients with ESCOs may increase the project implementation rate and aggregate projects, driving down transaction costs through standardization.

 

They may also include training to project managers, who must be knowledgeable about the state of the industry, aware of financing options and capable of measurement and verification of energy savings.

 

ESPC is a promising tool to increase the implementation creation of long‐term and sustainable energy efficiency projects, entailing energy efficient equipment’s upgrades, capital improvements and leverage, energy cost savings, reduction of operating costs and future utility rate increase risks, as well tackling deferred maintenance issues.

 

As such, the transition toward a greener energy mix presents a significant opportunity to develop its ESPC industry in Mozambique and investors seeking to play a meaningful role in supporting the move to renewables and driving development in the region.

 

This industry may be further leveraged relying on micropayments services, regardless of the internet access and mobile phone ownership limitations.

 

A path enabling both local economic development and energy efficiency is possible.

 

Mozambique should actively push its agenda and use all available financial and contractual mechanisms for universal access to energy and poverty reduction.

 

 

João Lupi, Senior Associate at Abreu Advogados

 

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References

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• International Energy Agency (2022). Energy Outlook 2023

• Global Energy Perspective 2022, McKinsey Energy Insights

• Energy-Efficiency Opportunities in Sub-Saharan Africa Scaling Up Renewable Energy (SURE), (2022), United States Agency for International Development

• Wenjie Zhang and Hongping Yuan (2019). Promoting Energy Performance Contracting for Achieving Urban Sustainability: What is the Research Trend?, ORCID

• Commission Recommendation (EU) 2021/1749, on Energy Efficiency First: from principles to practice — Guidelines and examples for its implementation in decision-making in the energy sector and beyond, of 28 September 2021, Official Journal of the European Union, L 350/9

• Energy Poverty in Africa, OECD Development Centre, Policy Insights Insights No. 8

• Electrification on Small and Micro-Enterprises in Sub-Saharan Africa. Eschborn, Germany: EUEI PDF.