Yves Lepage and Laure Weymuller of Orrick Herrington & Sutcliffe and Henri Epessé of ENEO discuss the reform of Cameroon’s power sector and the industry’s future outlook

Historically, Cameroon’s power sector has been one of the most advanced in Sub-Saharan Africa. Cameroon was one of the first countries in the region to create an environment designed to attract private participation throughout the sector. Today, it is one of the few countries with functioning independent power producers (IPPs) and a partially-privatised production, transmission and distribution sector, with one of the highest electrification rates (55% against about 25% across Sub-Saharan Africa) and one of the highest new connection rates in Africa (60,000 to 80,000 new connections are built each year by the distribution company ENEO).

However, the sector continues to face a number of pressing issues, including replacing aging and constructing new assets to meet increasing demand, projected to be in the rate of 7.5% per year, for the next 10 years. This will in turn require large investments in the sector from a number of sources, including long-term international debt, equity contributions and internal cash flows from the players in the sector. Seeking to address these issues and attract foreign investment, in 2011, Cameroon decided to reform the electricity sector with the adoption of new legislation to govern the sector, Law No. 2011/022 dated December 14, 2011 (the 2011 Law). The purpose of this article is to review this reform and its implementation.

Cameroon’s electricity sector

The electricity sector in Cameroon has a number of important authorities and participants.

The Ministry of Water and Energy

The Ministry of Water and Energy is in charge of planning strategies, supervising the sector, including preparing long-term investment plans for IPPs and transmission lines, and granting the main titles necessary to operate in the power sector (concession, licenses and authorisations).

Agence de Régulation du Secteur de l’Electricité (ARSEL)

ARSEL, the agency in charge of supervising the sector, pronounces penalties, approves the annual tariff to be paid by final consumers, and analyses any new investments in the sector by studying applications for concessions, licences and authorisations before they are granted by the Ministry of Water and Energy, which has authority over ARSEL.

ENEO

ENEO (formerly AES SONEL) is the historical electricity operator, which operates under production, transmission and distribution concession contracts and an electricity sales licence. It was partially privatised in 2001, with the Government still holding 44% of the company and AES, and then Actis as of 2014, 56%.

ENEO is still the largest electricity producer in Cameroon, with a total installed capacity of 999MW (the maximum authorised under the production concession agreement), consisting of 39 power plants, 13 interconnected to the network and 26 isolated gas-fired power plants.

ENEO is still in charge of water management, an important activity, with hydroelectricity accounting for 74% of Cameroon’s total electricity production.

Transmission activities are still carried out by ENEO under its transmission concession agreement, but these activities are to be transferred to a new state-owned entity in accordance with the 2011 Law. The transmission network is made of three distinct grids, the Southern interconnected grid (the largest which includes the Yaoundé and Douala areas) and the smaller Northern and Eastern interconnected grids.

Distribution activities are performed by ENEO exclusively and no distribution unbundling is anticipated at this stage. Therefore, ENEO is the sole entity authorised to sell electricity to the public. However, independent producers have the right to sell electricity to eligible clients (mainly industrial companies).

Electricity Development Corporation (EDC)

EDC is a state-owned entity in charge of managing the public assets in the electricity sector. Its mission will be critical for the power sector in the near future. Cameroon hydroelectricity is currently mainly generated by a series of hydroelectric plants and reservoirs on the Sanaga River. Until 2016, three reservoirs located on tributaries of the Sanaga River and operated by ENEO were contributing to limit the low hydrology during the dry season.

A fourth reservoir, developed and built by the government with the support of the World Bank, Lom Pangar, is currently under commission. The four reservoirs of the Sanaga River are planned to be operated by EDC later this year.

Independent power producers (IPPs)

In 2009, the Government awarded Dibamba Power Development Company (DPDC) and Kribi Power Development Company (KPDC), special purpose vehicles initially owned by AES (ENEO’s former shareholder) and the state, 20-year rights to build and operate the 88MW Dibamba HFO-fired (commissioned in 2009) and 216MW Kribi natural gas-fired (commissioned in 2013) power plants and associated transmission lines. DPDC and KPDC were eventually separated from ENEO and are now owned by the Government (44%) and a private shareholder (56%). IPPs are now fully integrated in the market and an increasing number of private investors are interested in Cameroon’s electricity development potential.

The 2011 reform

The 2011 Law includes the following major changes to the Cameroonian power sector structure.

Production

The 2011 Law introduced several important changes to the former regulatory framework of electricity production.

  • Water storage and management

The 2011 Law modified the legal framework applicable to the management of water storage facilities and water management aimed at electricity production. The management of water storage facilities are now carried out under concession agreements, which define the operation and management conditions. As mentioned above, the state-owned entity EDC will be in charge of water storage activities on the Sanaga River in the near future. The law defines the main two management principles: optimising water resources and granting non-discriminatory access to users. A decree to be published will define the detailed conditions of water management activities.

The management of water resources is of utmost importance on large rivers like the Sanaga, where the main historical hydroelectric facilities operate (the Edéa plant and the 384MW Songloulou plant, the largest in the country) and where at least three major hydroelectric projects are being developed (including the 420MW Nachtigal project, developed by a consortium including EDF, IFC and the state). Both current and future power producers need to have security and visibility of the upstream and downstream water levels, both of which can have effects on the performance of their plants.

  • Renewable energy

The 2011 Law created a special regime aimed at developing renewable energy, including solar, wind and hydroelectric energy below 5MW and biomass. It provides that the state shall define tax and customs benefits applicable to goods and services used for the operation of renewable energy and that renewable energy producers shall be granted guaranteed access to the transmission or distribution network. If renewable energy is part of rural electrification, it benefits from the mandatory purchase of excess supply by the TSO (transmission system operator) or local distributors.

  • Industrial Producers

The 2011 Law includes new provisions aimed at facilitating electricity production for industrial purposes, notably by providing simplified granting conditions for strategic industrial projects and a favorable real estate and financial regime (including the possibility to create securities on such concessions and the related rights and obligations). The regime only applies to generation and transmission facilities exclusively dedicated to an industrial site or project.

  • Procurement conditions

The 2011 Law clarifies the procurement conditions for production, transport and distribution projects. The previous law and decree did not include a clear general obligation to resort to bidding procedure for new production, transmission and distribution capacities, except for distribution companies wishing to extend their production capacity for exclusive activities (i.e., transmission, distribution and sale to all users except eligible clients). As such, IPPs seemed not to be subject to a bidding procedure.

The 2011 Law and an implementing decree dated September 24, 2012 enacted the principle of competitive bidding and generalised it to all segments of the electricity market (including IPPs). By exception, direct procurement without public tender is permitted (i) if necessary and in conditions set out in the decree of September 24, 2012: (a) emergency, or (b) commitments of the state prior to the decree publication; (ii) for strategic industrial projects, subject to certain conditions; and (iii) for rural electrification projects.

Transmission

The 2011 Law also introduced significant changes in the transmission sector. In the past, it had appeared that in order to further attract private investments in Cameroon, significant progress had to be made in electricity transmission, leading to the decision to unbundle the country’s transmission assets.

The 2011 Law only provides for the creation of a transmission system operator as a public company. As such, the Government made a clear decision not to immediately introduce private investment in the transmission sector but to renationalise it first. This may prove prudent as the transmission infrastructure is aging and needs heavy repair and development works to be financed by international institutions, such as the World Bank.

Finally, one should note that the transmission system operator will be in charge of operating the transmission network ‘throughout the national territory’ according to the law, which leads to the belief that no horizontal unbundling is being contemplated at present and that transmission will remain a monopoly.

ENEO’s historic role in the electricity market is consequently significantly changing from a vertically integrated company to a producer alongside others, which will still be the sole distributor but no longer in charge of transmission.

Distribution and access to electricity

The 2011 Law also included some changes to how electricity is distributed.In terms of access to electricity, the law includes a specific chapter on rural electrification. The production, distribution and sale of electricity that is produced from decentralised and very small hydroelectric facilities are subject to a simple authorisation by ARSEL, with no bidding obligation. This clearly shows that the Government intends to develop small sources of electricity. In that framework, ENEO is currently developing several mini-hydro programmes, with small private investors which efficiently make up for the lack of the distribution network and extend access to electricity in some specific areas of Cameroon.

The law also includes specific provisions relating to electricity tariffs. The general tariff regulatory framework remains the same as in the 1998 law, but the 2011 Law provides for some useful clarifications. It now clearly states that all tariffs shall be approved by the administration in charge of electricity upon binding recommendation of ARSEL or directly by ARSEL. As was the case under the former law, tariffs are based on a cost-plus structure. They shall enable operators to make a normal rate on return in normal conditions. As for tariffs applicable between an eligible client and an electricity producer or seller, the 2011 Law clarifies that tariffs are freely defined in power purchase agreements, provided that the costs structure shall be submitted to ARSEL ‘at the latest 30 days after their entry into force’, and that ‘each producer shall first submit its costs allocation formula used to define tariffs to ARSEL for approval’.

As such, all tariffs, whether those charged to end users or those applicable between IPPs and off-takers, shall be (i) approved by ARSEL prior to their entry into force and (ii) based on actual costs. These clarifications contribute to creating more transparency in setting up tariffs and the implementation of the pass-through principle.

The 2011 Law strengthened this regulatory framework by creating corresponding sanctions. Penalties range from 50% to 20% for irregularities relating to declared costs. Furthermore, in case of non-compliance with the provisions of the law, a penalty ‘corresponding to the loss of profit of the national community or the overpayment of the operator, plus a 20% to 100% increase’ may be imposed on operators.

Implementing the 2011 reform

Following the adoption of the 2011 Law, the Government has been working closely with the partners of the sector and the World Bank to implement the reform, including the unbundling of the transmission network and the transfer of the water management.

Transfer of the transmission lines

As mentioned above, ENEO continues to manage the transmission lines until the negotiated termination of its concession, the payment of indemnities, if any, and the transfer of the assets and personnel to the new transmission company. As a first step, a new transmission company, SONATREL, was formed in October 2015 and its first chairman and CEO were appointed. The government has been preparing a new transmission concession that should be executed before the end of the year.

The unbundling will require a careful and somewhat lengthy implementation. Numerous issues need to be addressed: the transfer of ENEO personnel to SONATREL and the consequences for the status and remuneration of the employees; the assurance that SONATREL will have the management capabilities and the technical knowledge to allow the network to function in an efficient manner; the execution of an agreement between SONATREL and ENEO regulating the transmission activities and addressing issues such as an allocation of liabilities in case of transmission failure or force majeure, maintenance obligation; and, the fixation of the transmission fee by ENEO, and its consequences on the tariff applicable to the customer.

The transmission unbundling also raises the necessity of having a national grid code promulgated, providing for the technical and commercial connection and dispatch conditions.

In addition, the government will need to start raising large amounts of financing to address the investment requirements of the transmission sector, which are estimated today at approximately XAF700 billion (more than €1 billion) over the next 10 years.

Water storage and management

As mentioned, hydroelectricity accounts for 74% of Cameroon’s total production. This number should increase in the next 20 years with the completion of several hydro projects, such as Nachtigal (420MW), Sondong (900MW) or Makay (400MW).

Water reservoirs on the Sanaga River will be transferred to EDC in 2016. The transfer of the management of reservoirs remains under discussion.

Finally, the state must define the rules to govern the allocation of rights and responsibilities among the users of water resources. The state must also define the principles that allocate the hydrological risk among various stakeholders of the water sector and the mechanisms for mitigating these risks. For the sake of transparency, water management should be ensured by an independent body, which could be divided between a committee – setting out long-term guidelines – and a technical body – implementing these guidelines on a day-to-day basis.

Generally speaking, the rules governing (i) access to, and the use of, the transmission network by electricity producers, (ii) the allocation of rights and responsibilities between users of water resources and (iii) water flow management, should be set out in publicly available documents, which could take the form of a grid code, a water management code and an electricity market code, for instance.

The quick implementation of the reform and definition of such rules are all the more important since large hydropower projects are currently under development. While investors need to have reasonable security on the institutional and legal framework that will be applicable to their projects, the state should seek not to provide ad hoc regimes. However, in order to grant an equal treatment to all current and future projects and pending enactment of the relevant codes, the state should try and anticipate the rules that will be reflected in the electricity reform implementation as much as possible.

Looking forward

The implementation of the electricity reform has been slow, due mainly to the fact that the 2011 Law provides only general principles and was not accompanied by detailed implementation guidelines. It should be noted that the incorporation of SONATREL clearly demonstrates the political will of the government to implement reform, and it has been working with key players and advisors to achieve this. But the breadth of reform, and its effect on the whole system, is such that additional work is required by the government.

Beyond electricity reform implementation, the sector should continue to evolve along two main lines: developing the production capacity and extending access to electricity.

Due to Cameroon’s immense hydroelectric potential (the second in Sub-Saharan Africa), the government mainly intends to increase production through new hydropower projects. These may, however, face challenges, with the success of these projects depending on the developers’ ability to offer reasonable tariffs despite generally high construction costs. All stakeholders of the hydroelectric sector will also need to find a satisfactory way to mitigate the hydrological risk, in particular the very low production capacity during the dry season, which ENEO, as off-taker, cannot assume alone.

In terms of access to electricity, new investments will need to be made to the transmission and distribution networks.

After the incorporation of SONATREL, the implementation of a legal regime for the transmission network with a new grid code, and the definition of the role of ENEO and SONATREL during the transition period will be a prerequisite to any international financings necessary for the large capital investments in the transmission sector. As far as distribution is concerned, the modernisation and reliability of the distribution grid is at the core of ENEO’s strategy. In addition to new investments, the company is working on solutions like prepayment systems, which have proved efficient in other Sub-Saharan countries, to improve its billing collection rate. Last but not least, the extension of electricity access will depend on the ability to make tariffs gradually cost-reflective to enable operators to recover their charges and continue investing, while remaining affordable to end consumers. Before subsidies can be entirely eliminated, in-between solutions could be investigated to make subsidies more focused on low-revenue people, like different tariff levels depending on household income level, as was put in place in Uganda and Kenya, and seems to have proved efficient.

The key for success will be the ability of electricity stakeholders to meet all of these interdependent challenges along parallel agendas.

 

 

Laure Weymuller
Orrick Herrington & Sutcliffe
Partner

Laure Weymuller is an energy and infrastructure lawyer in Orrick’s Paris office. She has a significant experience in Africa, where she advises mainly on energy and infrastructure projects, notably power plants (gas and hydro) and oil and gas projects.

Yves Lepage
Orrick Herrington & Sutcliffe
Partner

Yves Lepage is an energy and infrastructure lawyer in Orrick’s Paris office. He serves as deputy head of the global energy and infrastructure group of the firm and has 30 years’ experience in PPP, international infrastructure and power industry projects. He regularly advises operators in the public and private sectors, government entities and financial institutions on operations in Europe, Africa and Latin America.

Lepage has been regularly traveling to Cameroon for more than eight years, where he has been involved in many of the country’s major energy and infrastructure projects.

Henri Epessé
ENEO
Technical advisor for legal and strategic matters
Douala

Henri Epessé is technical advisor for legal and strategic matters (conseiller techniques affaires juridiques et stratégiques) at ENEO, Cameroon’s historical electricity company, after having served as ENEO’s general counsel for 11 years. Before joining ENEO, Henri worked as a lawyer at Herbert Smith Freehills in Paris and before then at Ernst & Young.