Understanding Tanzania's energy sector

Several renewable energy resources, such as geothermal, solar, wind, biomass, and mini-hydropower, are extensive in Tanzania. The nation's energy market is dominated by the state-owned organization called Tanzania Electricity Supply Company Limited (TANESCO), which does generation and transmission/distribution throughout the country. With growing demand in the energy sector mainly from industrial, extractive operations, and domestic uses, there is a great opportunity for investment in the energy sector.

Snapshot of the key laws governing the energy sector

• Electricity Act 2008; 
• Electricity (Generation, Transmission and Distribution) Rules, 2023;
• Electricity (Supply Services) Rules, 2019;
• Electricity (Procurement of Power Projects and Approval of Power Purchase Agreements) Rules, 2019
• Electricity (Development of Small Power Projects) Rules, 2020; 
• Electricity (Standardised Small Power Projects Tariff) Order of 2019;
• Energy and Water Utilities Regulatory Authority Act, 2002; 
• Environmental Management Act, 2004;
• Rural Energy Act, 2005; and
• Public Private Partner.

The Public-Private Partnership (PPP) and applicability in energy projects

The Government of Tanzania recognises the role of the private sector in bringing about socio-economic development through investments, and this is realised by having Public-Private Partnership (PPP) frameworks, especially in the agriculture, transport, health, and energy sectors and is considered viable means to effectively address constraints of financing, management, and maintenance of public goods and services, and this ensures efficiency, effectiveness, accountability, quality and outreach of services. To make the framework effective, the Government enacted a law as explained below to ensure the effectiveness of the said framework.

The Public-Private Partnership Act Cap 103 of 2019 (PPP Act), among other things, the Act applies in mainland Tanzania to provide for the institutional framework for the implementation of public-private partnership agreements between the public sector and private sector entities, to set rules, guidelines, and procedures governing public-private partnership procurement, development and implementation of public-private partnerships.

Highlights of PPP Act in energy projects

• PPP model can be used on solicited or unsolicited projects.
• Preparation and submission of concept note is applicable to the proponent of the project.
• Unsolicited projects can be exempted from competitive bidding if (among others): 
  • the private proponent does not require government guarantee or any form of financial support from the government; and
  • private proponent commits to bear cost of undertaking a feasibility study. 
• Equity is issued to TANESCO

Licenses for generation, transmission/distribution and supply of power in Tanzania

According to Section 8 of the Electricity Act, unless the person has been exempted by EWURA or the activity is exempt under subsection (3) or (4) of Section 18 of the Act, anyone wishing to engage in generation, transmission, distribution, supply, system operation, cross-border trade in electricity, physical and financial trade in electricity, or electrical installation activities must apply to EWURA for a licence under Section 5 of the Act.

According to Section 37 of the Electricity (Development of Small Power Projects) Rules 2020, which was published on July 3rd, 2020, Small Power Producers, Small Power Distributors, and Very Small Power Producers are prohibited from starting a commercial operation until the project has received the necessary licenses or registrations from EWURA. 

Alternatives to government guarantees in energy projects

Power projects can be financed through a variety of methods, including loans and equity. Also, investors or proponents of such projects require guarantees to ensure that their invoices are paid. Accordingly, in most instances, Government guarantees are needed for power projects to fulfill the offtake payment commitments. Nonetheless, private parties are urged to finance and organise projects solely based on their commercial advantages, as Government guarantees for power projects, particularly under the PPP model are hard to come by. In light of the challenges associated with obtaining Government guarantees, alternative liquidity options must be considered which include the following:

• Letters of Credit (LC): LCs from banks that need a specific number of months for PPA repayment (and debt service).  For the parties, LCs are a rather costly option.
• Government letters of support: These might be included in the liquidity support package, even if they aren't as reliable as a Government guarantee.
• Escrow Accounts: One option is escrow accounts that hold funds as security for non-payment.  
• DFI partial risk guarantees: As a component of their offerings, DFIs provide partial risk guarantees.
• Put-call option agreements: This can ensure that the developer/investor is guaranteed payment of its investment before exit arising from a breach of PPA e.g. failure to settle invoices.