Renewable energies in the Middle East and North Africa: Policies to support private investment

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Presented at the Annual Meeting of the MENA-OECD Working Group on Investment Policies and Promotion

Presented at the Annual Meeting of the MENA-OECD Working Group on Investment Policies and Promotion

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  • 1. Policies to support private investment in renewable energy in the Middle East and North Africa MENA-OECD Task Force on Energy and Infrastructure Ania Thiemann Project Manager and Lead Economist, MENA-OECD Investment Programme Presentation to Working Group 1 on Investment Policy and Promotion 20 March 2013, OECD, Paris
  • 2. Presentation overview 1. Arguments in favour of investing in renewable energy 2. Barriers to investment in renewable energy 3. Inventory of support measures 4. Main recommendations from the Task Force to MENA governments 2
  • 4. 4 Why invest in renewable energy in the MENA region? Energy demand is expected to continue to rise in MENA above the world average by around 3% a year from 2010 to 2030 • Energy consumption has risen on average by 5.2% a year since 2000 • Demand for electricity is further spurred by a growing population, increasing at a regional average of around 2% a year. The MENA region has one of the highest solar and wind energy potentials in the world • Concentrated solar power (CSP) plants could generate 100 times the combined electricity consumption of the MENA region and Europe together (IEA estimates). • Large-scale wind farms potentially on the Atlantic and Red Sea coasts and some parts of the Sahara Desert - the wind speed in these areas exceed 6.9 meters/second. An alternative long-term energy strategy • Reduces oil dependency of resource- poor countries • Improves energy security • Improves net balances for net oil-importers
  • 5. 5 A different way of meeting policy challenges Renewable energy projects generate much-needed jobs... • Solar photovoltaic plants use on average seven times more labour than coal-fired plants for like to like production of megawatt hours. • Wind power uses 1.83 times more labour than natural gas. • Jobs in local manufacturing activities (design and fabrication, and in R&D of renewable energy technology components). ... and contribute to inclusive growth by: • Increasing women’s economic empowerment; • Encouraging the transfer of skills and technology from foreign investors; • Bringing electricity to rural and under-developed areas.
  • 7. Among these are:  High cost and the associated lack of profitability  High infrastructure risks (grid access, but also more basic infrastructure)  Client risks (RE contracts are long term, typically 20-25 years)  Political and regulatory risk  Market risks  Technical risks associated with novel technology  Access to finance  Competition from local energy producers/incumbents  Domestic energy subsidies (fuel and power) Investing in renewable energy entails a certain number of risks for the investor owing to the novelty of the technology and the competition from traditional energy sources in MENA. Renewable energy projects – common risks and barriers 7
  • 8. Numerous risk factors imply that Renewable Energy Projects fall within the category of investment where the OECD identifies the need for “carefully targeted and time-bound incentives” Investing in renewable energy entails a certain number of risks for the investor owing to the novelty of the technology and the competition from traditional energy sources. Renewable energy projects – common risks and barriers 8
  • 10. 10 Financial incentives • Aim at correcting market imperfections and reducing transaction costs for investors. • Soft loans, loan guarantees, capital subsidies, premiums and grants. • Financial incentives generally require public funds or funds from a foreign or supranational entity. Regulatory incentives • Policies improving the business environment – in general or targeted at specific sectors • Liberalisation of a market, regulatory exemptions granted to specific sectors, etc. • Regulatory incentives generally do not entail major public expenses. Four categories of investment incentives identified
  • 11. 11 Fiscal incentives • Easing of the tax burden on the investing companies or their employees. • Different sorts of tax exemptions on items such as import levies, sales tax, value-added-tax and so on. • The government manages these incentives to balance the impact on the public budget with the stimulus effect. Market-based incentives • Encouraging market actors to use or produce a share of electricity from renewable energy sources by offering commodities such Tradable Green Certificates or Carbon Credits Four categories of investment incentives identified
  • 12. 12 Inventory of existing support mechanisms in selected MENA economies Public competitive bidding Feed -in Tariffs Net Metering Tradable CDM Capital subsidies, grants and premium Investment tax credit Training incentives Reduction in sales taxes or VAT; Customs taxes Algeria Egypt (projected for 2012) Jordan Morocco Tunisia UAE
  • 13. From the investors’ point of view • Lack of clarity regarding available incentives undermines private sector participation and competition • Absence of adequate regulatory frameworks and well-targeted support measures • In many cases, no or little support for renewable energy • Absence of long-term guarantees or off-take agreements • Market distortion (subsidies, price regulation) From the governments’ point of view • Overlapping incentives increase risk of wasting public resources • Current incentives do not encourage private sector to hire and train local staff • Need to create business linkages with local SMEs • Need to stimulate innovation 13 Weakness of current policies in the MENA region
  • 15. Framework conditions that favour investment • Investment regimes should be clear and transparent • Governments should establish an adequate legal framework for the energy sector and adopt a national energy strategy. • Governments should deregulate the sector and allow independent electricity producers. Set up independent energy regulators, and establish a renewable energy agency. • National grids should be upgraded and enhanced to allow for the uptake of energy from a number of different and varying sources • Renewable energy producers should have favourable access to the grid 15 Create an enabling environment
  • 16. Favourable framework conditions, cont’d • A national energy strategy should  set targets for the share of renewable energy in the domestic energy mix;  establish clear energy production and consumption targets; and  consider renewable energy generation at different sizes and scales. 16
  • 17. 17 Selecting the right incentive scheme(s) General conditions to minimise wasting public resources • Incentive schemes should be: • Predictable and clear with transparent and easily available rules; • Uniform and non-discriminatory; • Transitional until technologies become competitive; and • Neither too high nor too low. Focus on additionality • Efficiency: to drive the investment decision. • Least costly for the state: to reduce moral hazard and information asymmetries. • Snowball effect: to generate follow-on investment.
  • 18. Selecting the right incentive scheme, cont’d To optimise the energy incentive, consider: • Size of the project/access to finance  Accelerate administrative procedures  Ease access to finance and risk sharing instruments • Type of investor/firm (start-ups vs. mature firms) • Technological capacity of the domestic sector  Encourage R&D and innovation  Support locally manufactured components  Train and prioritise the use of the local workforce • Country-specific risks (oil exporters vs. oil importers) 18
  • 19. Best-in-class: investors’ choice 19 An effective incentive scheme: key features • Cash-flow incentives work better than one-off financial incentives provided at the start-up phase of the investment. • Long-term agreement between the investor and the state providing visibility and predictability for the private investor • Large plants: A power purchasing agreement or a long-term off- take agreement/Feed-in Tariff, combined with a power purchase agreement • Plant-level generation for energy intensive industries: Net metering associated with political risk insurance • Individual level: flexibility of structures; importance of infrastructure, state support and political will Adapt the scheme to the type of project
  • 20. How to embed renewable energy for the future Guidelines for policy makers -- monitoring and evaluation  Monitor, evaluate and review the schemes regularly.  Set up a public centre of expertise to limit the risk of adverse selection.  Establish a clear framework for policy evaluation of incentives.  Establish a schedule for revision of incentives ahead of their inception.  Ensure rules are known.  Maintain dialogue with investors.  Revise incentives as technology and markets evolve. 20
  • 21. Thank you for your attention. Contacts Ania Thiemann Rayann Koudaih 21