The sector is characterized by a low electricity access rate, estimated at 39.4% in 2023, well below the African average of 50.6%. In 2023, generation capacity remained low (828 MW), with a high cost per kWh (USD 0.20). Thermal power accounted for 55% of electricity generation, despite the country’s significant hydropower potential of around 7,800 MW, of which only 2% is tapped, solar power (2,000 kWh/m2/year) and wind power (2,000 MW). The electricity sub-sector faces constraints, the most important of which is the underperformance of the National Power Utility and Water Services Company (JIRAMA), which continues to accumulate debts to suppliers (around USD 240 million) and is dependent on state subsidies (USD 80 million/year). The Government is committed to turning the company around, with the hiring of a new international General Manager in 2024. The challenge is to improve governance in the sector and increase electricity generation through hydropower projects. Accordingly, the Government plans to build 350 mini-hydro power plants with a total capacity of 1,500 MW, and four hydropower infrastructure projects. The New Energy Policy (NPE 2015-2030) prioritizes renewable energy in the energy mix, which should reach 85% by 2030.

Source: Madagascar Country Strategy Paper 2022-2026, and AEP data

• Ministry of Water, Energy and Hydrocarbons Madagascar
• Jiro sy rano malagasy (JIRAMA)
• OFFICE DE REGULATION DE L'ELECTRICITE
• Agency for the Development of Renewable Energy

LAWS

• Law No. 98-032 on energy of 1999
• Loi 2017-020 du 10 Avril 2018
• Tableau comparatif des Lois 98 - 032 et 2017 -020.
• Loi 2002-001 du 7 octobre 2002 : Portant création du Fonds National de L'Electricité (F.N.E.)
• Loi 2015-039 du 9 décembre 2015 : sur le Partenariat Public Privé (P.P.P.)

DECREES

• Décret 2021-326 du 24 mars 2021
• Décret 2001-173 du 28 février 2001
• Décrets 2001-803 du 19 septembre 2001 et 2003-194 du 4 mars 2003
• Décret 2001-849 du 26 septembre 2001
• Décrets 2002-1550 du 3 décembre 2002 et 2003-510
• Décret 2003-804 du 16 juillet 2003
• Décret 2004-013 du 7 janvier 2004 :
• Décret 2004-687 du 5 juillet 2004
• Décret 2005-062 du 25 janvier 2005

ORDERS

• Arrêté N° 6678 / 2001
• Arrêté N° 86/88-MEM
• Arrêté N° 3910/2009-MdE
• Arrêté 2005-1055

PROCEDURES

• Contrôle de conformité des installations électriques – Procédures

Support Madagascar to improve the economic and technical power sector regulation capacity

Regional/country context and sector issues

Madagascar has one of the lowest electricity service ratios in the world, marked by a low access rate of 33.3%, loc access to clean cooking of 1.5% and a very high average cost per kWh (USD 0.26) with most of the island’s population using wood as a source of energy. Additionally, access to electricity is hampered by limited network coverage and expensive generation costs. Electricity generation is largely dependent upon fossil fuels and in 2019, in 2020, the Malagasy’s energy mix, 48% of the energy mix was from renewable energy. The country's power sector suffers from operational inefficiencies, financial constraints, non-cost reflective tariffs, isolated networks, deteriorating quality of power assets and expensive thermal fuel-based substitutes to fulfil the increasing demand. The national integrated utility is facing an overall cost of service of approximately EUR 26 cents/kWh, with thermal generation cost reaching EUR 30 cents/kWh. The end-user tariff is currently at EUR 14 cents/kWh. This gap has resulted in state subsidy needs for approximately 40% of the total operational costs. To address the above outlined challenges, the government of Madagascar launched a new Energy Policy 2015-2030 and has set a target of reaching 70% electricity access rate by 2030, an ambition which identified renewable energy mainly through hydroelectricity as the country’s priorities and private sector involvement as an avenue to do so without increasing the country already overwhelming debt. Several other reforms were undertaken in the sector in recent years, including the adoption of the 2018 Power Code and the implementation of the electricity tariff reform (optima[1]) in 2021. However, the sector's performance is strongly linked to that of the National Power Utility and Water Services Company (JIRAMA), which is the main operator in the power sub-sector. The predominance of thermal production with the use of fossil fuels (GO, HFO) and the unpaid arrears owed to energy suppliers, which has been in deficit for over a decade, are putting a strain on the company's financial situation and threaten its long-term stability. Measures such as contract renegotiation with suppliers and hybridization of thermal power plants have been carried out since 2019 to decentralize the energy sector and improve JIRAMA financial situation including a large transmission network project - the Power Transmission Network Reinforcement and Interconnection Project (PRIRTEM) financed by the Bank and other partners which is being implemented, other major hydropower projects (Sahofika, Volobe) that aimed at increasing production and developed through PPPs are experiencing significant delays. Contracts for the 205 MW Sahofika Project (expandable to 300 MW) were signed in November 2021.

The completion of the Sahofika project will contribute to a significant reduction in the cost per kWh, increase access and improve the financial position of JIRAMA. ARELEC's role in the current project is to improve key regulatory aspects that delay progress in the exploitation of operators active in the sector, including JIRAMA, and in the long term to reduce the prbable increase in its current debts.

Complementarity and coordination

In order to ensure maximum impact, the Bank has taken an all-encompassing approach in its support to the Malagasy power sector. Through the PARSE and the PACE programs, the Bank supported the power sector reforms and the restructuring of JIRAMA. The Bank also contributed to the reinforcement and extension of the national transmission networks through the PRIRTEM program which is key in enabling the increase in power generation capacity and integrating of large hydropower schemes - including the Sahofika HPP Project (205 MW) - into the grid. In addition, as MLA for the Sahofika HPP Project, the Bank was an anchor lender which approved a partial risk guarantee to the tune of USD 100 million in 2019 in the project and syndicated a dozen of DFIs and commercial banks to mobilize the additional EUR 651 million senior debt to backstop JIRAMA’s payment obligations. Another past intervention from the Bank to note includes US $1 million grant by SEFA approved to finance pre-investment activities for a hybrid renewable energy project in the Nosy Be Island to support feasibility studies for a combination of hydro, wind and solar technologies, and technical assistance to JIRAMA. Through this intervention, the Bank played a catalytic role and paved the way for private investors and other financiers to work towards delivering a sustainable energy solution with huge socio-economic impacts on the island.

The Bank is also carrying out two other operations this year involving the sector. On the one hand, a Support Program for Financial Management and Economic Competitiveness extending over 2 years (PAGFCE) amounting to 100 Units of Accounts (UAC), and in which a component is dedicated to improving the governance of the energy sector with as one of the main preliminary actions the establishment of the Electricity Regulatory Authority (ARELEC) in accordance with the provisions of the new law n°2017-020 of 20 April 2018 establishing the Electricity Code in Madagascar. ARELEC thus operational and established as an Independent Administrative Authority (AAI) will replace the Electricity Regulatory Office (ORE) which was established by the former law n° 98-032 of January 20, 1999; reforming the electricity sector, in order to facilitate the exercise of the Regulator's missions and to better establish its independence.  

Other main development partners active in the Malagasy power sector are World Bank (WB), the German International Cooperation, the French Development Agency (AFD), the European Investment Bank (EIB), the EU and the United Nations Development Programme. Their activities are coordinated through a consultation platform and outlined in the respective country strategy papers. In its capacity both as MLA in the Sahofika HPP Project and in other national power projects, the Bank has been engaging various multilateral and bilateral development partners namely BADEA, DBSA, EIB, OPIC, Proparco, AFC, FMO, CDC, DBSA, DEG, EAIF, EIB, OFID, TDB, and commercial banks to achieve its expected financing and project outcomes. These donors have been also participating as co-financiers in most of appraisal mission led by the Bank. The WB is another active player in the Malagasy power sector through its least cost electricity access development project that aim to increase the sector with 1.7 million new connections, through structure built under the PRIRTEM intervention area and another HPP (120 MW) marked as the country’ future generation park.

PROJECT DESCRIPTION

Project rationale

Robust and transparent regulatory regimes are crucial for creating an enabling environment that attracts private investment into the energy sectors of regional member countries. It facilitates the achievement of universal access to electricity in Africa as envisaged under the Light Up and Power Africa High 5 and underscored by the Bank’s New Deal on Energy for Africa (NDEA). Key challenges include (i) an unfavorable investment climate, (ii) low access to and high cost of public services including electricity, (iii) low quality of service and (iv) weak institutional capacities; with countries such as Madagascar making no exceptions as they largely share these constraints which tend to be further amplified as these regulators mature.

Launched in 2018, the Electricity Regulatory Index for Africa (ERI), assesses the regulatory frameworks of African countries; benchmarks their performance against international best practices, and makes recommendations to address challenges. Fundamental to the regulatory bottlenecks identified by the ERI is the inability of the regulators to effectively monitor utility performance the inability to analyze the activity of operators for quality-of-service regulation; inadequate institutional, legal, and regulatory frameworks, instruments and tool that impede stakeholders’ participation in the power regulation sector, insufficient staff capacity to carry out various regulatory functions. The Bank continues to forge strategic collaborations with development partners to support regional member countries (RMCs) to address key regulatory bottlenecks identified by the ERI in the respective countries. In this regards the Bank is currently implementing technical assistance projects in Ghana, Nigeria, Uganda, Tanzania, Liberia, Guinea, and Central Africa Republic, deploying Database Management Systems and institutional capacity building programs to develop tools and institute mechanisms for increasing the technical performance of regulators.

The project is linked to one of the two priority areas of the Bank's 2022-2026 Country Strategy Paper (CSP), which is the development of energy and transport infrastructure to support inclusive growth.

For Madagascar, this project should be seen in the context of the need to develop efficient institutional and market structures as part of the implementation of the new electricity code and it also emphasizes the need for key instruments and regulations in place to support increased energy demand, energy supply and quality of service regulation. The project creates a wealth of opportunities to address regulatory challenges such as the need to further strengthen aspects like quality-of-service regulation, licensing framework, development of commercial codes/regulations to the cater for increased consumer demands expected to emanate from additional transmission lines. Such challenges, if not well taken care of by the regulator will jeopardize the long-term success of the project outcomes.

Project objectives

This project seeks to support sector regulators in Madagascar which have been regular participants of the ERI through the Madagascar Regulator “Autorité de Régulation de l’Electricité” (ARELEC). More specifically, this Technical Assistance (TA) will strengthen its overall institutional, human, and operational efficiency, improve its quality of service, and enable its staff to better exert their monitoring and supervisory responsibility, while enhancing their relationship with stakeholders and guaranteeing that the conditions for financial viability of companies in the sector are met.

Project description

The project can be categorized as a technical assistance project that relates to the development of cost-of-service studies and tariff frameworks program[4] for Madagascar. It is a means to enhance efficiency of the regulator by providing the tools and instruments that will ensure the long-term success of the outcomes and goals of the PRIRTERM project through enhanced regulation of the sector. it shall also build the national capacity in terms of operation and commercial tools that guide the quality of service for profitable power trade. ARELEC possesses the needed technical and management experience to champion this project and shall therefore be the executing agency to lead and coordinate all project activities, as well as review the reports together with the concerned stakeholders, including JIRAMA, the national electricity and water utility.

Project Components and Activities

This project will comprise two main components (deliverables) as noted below:

Component 1: Cost of service study (CoSS) 

Currently, the regulator is not able to determine systematically and according to the rules of the art the cost of each of the different activities related to tariff setting or determination. A Cost-of-Service Study that identifies the costs incurred to serve each category of customers, plus fair margins at the level of generation, transmission, distribution, and retailing, will help the regulator to reinforce the overall economic regulation of the sector that has been struggling, as revealed by published ERI reports. The key areas in which the regulator needs support are the following:

• Review of previous studies / Identification of bottlenecks related to conducting the cost-of-service Study (ECS/CoSS) and tariff determination/settings
• Assistance and Capacity building for the regulator in evaluating service costs and determining tariffs.
• Provision, validation or development of models and regulatory tools (technical, economic, financial) necessary for the development of the component's activities, and adapted to the specificities of Madagascar
• Development, validation, or update of the methodology for determining regulated tariffs (considering the complex case of JIRAMA and the case of RE mini grids)
• Operationalization: Assistance on the application of the evaluation of the study of service costs at the level of the different segments of the electricity value chain (Production, Transport, Distribution and Marketing) on concrete cases in Madagascar (case of JIRAMA). 

These three activities above will be carried out in accordance with the provisions of the regulations in force, and in particular those of the draft decree currently being finalized (under the World Bank support), implementing the principles of tariff setting for regulated electricity tariffs, falling within as part of the review of the governing texts for the regulation of electricity sales prices in Madagascar.

Component 2: Quality of service regulations

In the Malagasy electricity sector, the quality of service is neither standardized nor codified, although it is one of the essential steps for a country to have a reliable, stable, and safe electricity system. The standards on the quality of service allow the regulation to better assess the Utilities, performances. Given the importance of the QoS standard, particularly with regards to meeting customer expectations for access to a suitable level of service, it is of paramount importance and constitutes an essential mandate of the regulator to ensure that effective QoS regulations are in place to protect consumers, incentivize the power company to improve its performance, and stipulate penalties and sanctions for non-compliance with a level of service given. The quality-of-service code that will be developed will ensure that the regulator is provided with a monitoring and compliance tool with quality of service (QoS) standards. Therefore, the key areas in which the regulator needs support are the following:

• Development of the Quality-of-Service Code for use in the Electricity sector.
• Capacity building on the application of quality-of-service regulations
• Exchange with regulatory counterparts from other countries concerning the development and application of the Quality-of-Service Code

Cross-cutting component: Project management, Monitoring and Evaluation – (budget is centralized at the program level). To coordinate project activities, validate project milestones and measure indicators and targets to ascertain progress, this component will also cover capacity building of the ARELEC project team including Senior Management on Results-Based Monitoring & Evaluation. This will result in the hiring of a Technical Assistant at the program level to support the following: i) day to day management of key project activities alongside other projects under the larger AESTAP program, ii) Monitoring and Evaluation workshop to review and validate the project milestones, measures, indicators, and targets and the iii) coordination of capacity building trainings on the project outcomes and Results-Based Monitoring & Evaluation.