The long-awaited reform of Mozambique’s electricity law has reached the statute books this winter in Maputo (summer if you’re in the Northern Hemisphere), with the enactment of Law 12/2022 of 11 July (the New Electricity Law). It is early to know how impactful the changes it brings will be. Its detractors may say that the law perpetuates a state-centred model, in view of the continuation of the requirement to obtain a public concession in order to develop power plants. One would argue, however, that there is more to it than meets the eye, including as regards this requirement for a public concession. In particular, the changes to the award process for generation facilities using primary energy sources that do not form part of so-called “public domain” resources have the potential to unlock projects.
In this article, we outline the Mozambican power sector legal framework as provided by the New Electricity Law and discuss the key novelties it brings when compared to the 1997 former electricity law it has replaced.
Overview of sector legal framework under the New Electricity Law
In Mozambique, the production, storage, transportation, distribution, sale, import and export of electricity are all regulated activities. The regulation of the sector is split between the government and an independent regulator, the Autoridade Reguladora de Energia or simply ARENE. Moreover, the government is given by law an active role in investment in and management of the sector. This includes a mandate to hold participations in any ventures that use state assets. However, the government is also statutorily mandated to foster the participation of private investors in the sector, through public-private partnerships and public concessions.
To carry out any of the above-mentioned regulated activities, a public concession is required. In principle, the award of a concession requires a public tender, although certain exceptions apply (more on this below). The concession is then documented by way of an agreement between the government and the developer that will set out terms on things like duration, tariffs, performance targets, force majeure, expropriation, government step-in, local content and corporate social responsibility.
Some of the implications of the concession regime are specified in the New Electricity Law (as they were already in the former one). These include (1) mandatory supply obligations, (2) regulation of sale prices, (3) government reversion rights at the term of the concession, or (4) restrictions on transfers. Others however are not so obvious. For example, the fact that a concession agreement is deemed an administrative contract makes it subject to government prerogatives on matters such as issuance of instructions in relation to the manner of performance, or unilateral modification of contractual terms on public interest grounds. Also, it brings power generation projects firmly into the remit of the so-called Mega Projects Law (ie, Law 15/2011 of 10 August), with all that this entails in terms of profit sharing and local participation requirements.
Obtaining a concession does not preclude the need for other permits. As such, even after having succeeded in entering into a concession agreement, private investors will need to obtain a wide array of technical, environmental and social, investment and land approvals.
What’s new in the New Electricity Law?
Direct award of concessions for projects not using public domain assets
There are a limited number of new exceptions to the principle that concessions can only be awarded by public tender. Among such exceptions the one arguably eliciting the most interest from private sector players is the one for “the production of electrical power from assets that do not form part of the public domain”. In Lusophone legal systems, the “public domain” is something akin to the crown estate in the UK. Some commentators were quick to see here a permission to grant by direct award concessions in relation to solar and wind projects. Unfortunately, we are not so sure about this. Because, unlike in other Lusophone countries, since the 2004 constitutional amendment Mozambique has included in the list of resources forming part of the “public domain” any “energy potential” (see Article 98.2(f) of Mozambique’s Constitution). Arguably, this means that in Mozambique the sun is free for tanning, but if one wants to harness it to generate electricity, then that’s using a resource that belongs to the state, regardless of whether this occurs on privately owned or leased land (ie, subject to a “DUAT”). It will be interesting to see if the Mozambican government adopts a different interpretation but, for now, we believe the working assumption should be that even for renewables a public tender remains necessary.
Interestingly, what this permission seems to open the door for is the direct award of concessions for power generation from fossil fuels. Chiefly in the case of Mozambique, this means natural gas. Because whilst the natural gas in the subsoil forms part of the “public domain”, once the molecules have passed the wellhead that is no longer the case. Also, natural gas can be shipped from overseas. So, it seems that the New Electricity Law has just made it easier for new gas-to-power projects to spring up in the country.
Keeping pace with the evolution in battery storage, the New Electricity Law added power storage to the catalogue of regulated activities that are subject to a concession. Somewhat unhelpfully, references to storage were not consistently added across the statute. For example, whilst Article 10.3 specifies that it requires a concession, Article 11, which regulates applications for concessions, omits any reference to storage. This leaves open the question of whether a standalone concession for battery storage is possible in Mozambique or whether any storage needs to be associated with a generation or transmission concession. This will hopefully be clarified in the specific regulations on storage systems that the government is mandated to issue under Article 21 of the New Electricity Law.
Captive power generation
The possibility to develop captive power generation projects is an area where it is hard to say if the New Electricity Law has come to liberalise or restrict projects. Previously, there was no reference to captive power generation, although there was express permission for self-generation which was exempt from obtaining a concession.
The New Electricity Law has retained the permission and concession exemption for self-generation. However, when regulating specifically captive power generation, it opted for (1) not exempting it from the need to obtain a public concession or even the requirement for such concession to be awarded by public tender, and (2) restricting the ability to have captive power generation to situations where the local utility is not in a position to make the necessary investments to supply power or is unable to offer commercial terms that make the investment viable (it being somewhat unclear whether these are cumulative or alternative requirements).
Extension of term
Probably one of the most interesting novelties of the New Electricity Law is that it no longer provides that extensions of concessions are subject to public tender. Previously, this was expressly required. The omission from the New Electricity Law does not appear haphazard. To note that regardless of this change, any extensions will continue to require agreement between the government and the private investors.
With the New Electricity Law, private investors are slightly more limited in their ability to negotiate the terms of submission to arbitration under concession agreements. Up until now, the relevant legislation (in this case Decree 8/200 of 5 May, which for the time being remains in force) simply provided that the government could agree to arbitration as a means of dispute resolution. With the New Electricity Law, on the one hand arbitration becomes the mandatory dispute resolution mechanism for projects involving foreign investment, and on the other hand such arbitration must have its seat in Mozambique, be carried out in Portuguese and be subject to UNCITRAL or ICC rules.
It is early to say what impact the New Electricity Law will have on the power sector of Mozambique. The update to the previous 1997 legislation has some immediate welcome effects, such as updating terms of art and including express references to novel technologies. As for the more substantive changes, it is difficult to say what the overall effect will be. Hopefully it will help unlock new projects, as new generation and transmission capacity is needed in the country and the wider Southern Africa region.
Read the original publication at Herbert Smith Freehills.