Efficient regulation will cushion utilities against shocks

Effective regulations can help utilities to successfully navigate the current economic turbulence and energy transition process, says Wale Shonibare, Director for Energy Financial Solutions, Policy and Regulation at the African Development Bank (AfDB).

The utilities sector, particularly the power industry, is saddled with numerous challenges including inefficient revenue collection or revenue losses and rising energy sector debt. For instance, as at the end of January 2023, Independent Power Producers were owed US$1.3billion due to the Electricity Company of Ghana’s inability to effectively collect revenues from electricity consumers and pay for the power it buys from producers.

However, to effectively overcome such inefficiencies and debts in the face of global economic shocks that remain a real threat to the future of utilities due to the supply chain’s globalised nature, he said regulators like the Public Utilities Regulatory Commission (PURC) – which has oversight over firms along the power generation, electricity distribution and transmission value chains, as well as water utilities – must pursue far-sighted and effective regulations which promote business sustainability.

He explained that prudent and strong regulations can lay sound foundations for players within the sector to be competitive, agile and profitable.

“The relevance of regulators and their role in sustaining the energy sector, particularly in difficult times, was underlined during the COVID-19 pandemic with its associated economic challenges. Regulators are to champion the building of resilience in the sector to withstand some of these shocks; and one sure way to do that is to take charge of the energy transition agenda. Strong regulatory support is required for a smooth energy transition.”

Mr. Shonibare spoke at the second regulatory conversation organised by the PURC in Accra on the topic ‘The regulator in an era of economic turbulence and the energy transition: Lessons from the past and a guide for the future’.

He emphasised the role of strong regulators and prudent regulations in helping Ghana and the African continent achieve a just and equitable energy transition while safeguarding companies, particularly those in the energy sector, against globally economic crises in order to secure the continent’s energy future.

Explaining further, he said: “Energy transition pathways are country-specific, and should be driven by country-specific policy and regulatory interventions. Countries should identify optimal pathways and reflect this in their energy transition plans, and not adopt a one model fit-for-all approach as happened in the ‘standard model for power sector reforms’.”

On the issue of tariffs, he said they should engender efficiency and innovation – and not be restrictive to the point of discouraging the adoption of new business models and technologies.

Meanwhile, owing to the upfront capital intensity of renewables and size of the challenge, he said the speed and success of transition depends on the mobilisation of adequate capital – which includes public and private sector investments, adding that the regulator’s role in creating the needed enabling environment remains critical to these transition pathways.

“Energy transition means more electrification as we move from fossil molecules to electrons. For this reason, investments in distribution and transmission networks have become very critical. So, as we promote universal access to electricity and build out last-mile grid connections, we must avoid asset mismatches that often lead to an increase in power system losses,” Mr. Shonibare admonished.

Need for independence

To improve on the regulatory governance framework, he called for an amendment to the law, Public Utilities Regulatory Act 1997 (Act 538), to prevent Commissioners or Executive Secretaries being appointed; or to reduce the level of financial influence from government on regulators.

“This can be achieved by amending laws to remove them from government budgets, and by assigning levies and fees with levels approved by parliament as the source of funds for the regulatory authority.

“We should also establish an independent governance structure for the regulatory authority in the sector, rather than attaching them to energy ministries. This will help to ensure the authority’s regulatory independence and mandate,” he advocated.