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  • 1. Climate & energy PaPer SerieS 2011grounding green PowerBottom-uP PerSPeCtiveS on Smart renewaBleenergy PoliCy in develoPing CountrieSlutz weiSCher, davida wood, athena BalleSteroS, Xing Fu-BertauX
  • 2. © 2011 The German Marshall Fund of the United States. All rights reserved.No part of this publication may be reproduced or transmitted in any form or by any means without permission in writingfrom the German Marshall Fund of the United States (GMF). Please direct inquiries to:The German Marshall Fund of the United States1744 R Street, NWWashington, DC 20009T 1 202 683 2650F 1 202 265 1662E info@gmfus.orgThis publication can be downloaded for free at http://www.gmfus.org/publications/index.cfm. Limited printcopies are also available. To request a copy, send an e-mail to info@gmfus.org.gmF Paper SeriesThe GMF Paper Series presents research on a variety of transatlantic topics by staff, fellows, and partners of the GermanMarshall Fund of the United States. The views expressed here are those of the author and do not necessarily represent theviews of GMF. Comments from readers are welcome; reply to the mailing address above or by e-mail to info@gmfus.org.wri working PapersWorld Resources Institute Working Papers contain preliminary research, analysis, findings, and recommendations. They arecirculated to stimulate timely discussion and critical feedback and to influence ongoing debate on emerging issues. Mostworking papers are eventually published in another form and their content may be revised.about gmFThe German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grantmaking institu-tion dedicated to promoting better understanding and cooperation between North America and Europe on transatlanticand global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by conven-ing leaders and members of the policy and business communities, by contributing research and analysis on transatlan-tic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. Inaddition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germanyas a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In ad-dition to its headquarters in Washington, DC, GMF has six offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, andBucharest. GMF also has smaller representations in Bratislava, Turin, and Stockholm.about wriThe World Resources Institute (WRI) is an environmental think tank that goes beyond research to create practical ways toprotect the Earth and improve people’s lives.about hBFThe Heinrich Böll Foundation is affiliated with the German Green Party. As part of the Green political movement it hasdeveloped worldwide as a response to the traditional politics of socialism, liberalism, and conservatism. The main tenets areecology and sustainability, democracy and human rights, self-determination and justice. HBF places particular emphasison gender democracy, meaning social emancipation and equal rights for women and men. As a green think tank and aninternational policy network, the Heinrich Böll Foundation is active in ecology, democracy and human rights worldwidewith 30 offices across the globe.transatlantic Climate Bridge initiativeThis paper would not have been possible without funding from the Transatlantic Climate Bridge, an initiative of the GermanMinistry for Foreign Affairs to connect and support those working to address the challenges of climate change, energysecurity, and economic growth at the local, the state, and the federal level in the United States and Germany.On the cover: (Left) A man works on power line from a microhydro power source to E Wi Jo village in Thailand. (Right)Tanzanian engineers and policymakers visit a solar farm in central Thailand built using Thai-made solar panels. Photos byChris Greacen.
  • 3. Grounding Green Power Bottom-up perspectives on smart renewable energy policy in developing countries Climate & Energy Policy Paper Series May 2011 Lutz Weischer, Davida Wood, Athena Ballesteros, Xing Fu-Bertaux1Executive Summary 1Acronyms 4Introduction 5Context and Concepts 7Planning and Developing a Strategy 14Designing Generation-Based Incentives 19Creating an Enabling Policy and Regulatory Framework 34Providing Attractive Financing Options 38Building the Necessary Technical Environment 40Recommendations 42Annex: Overview of Case Study Countries 451 Lutz Weischer is a research analyst with the World Resources Institute’s Climate and Energy Program As part of theInternational Technology Policy team, his work focuses on making international cooperation more effective in developing,deploying and improving the technologies needed to address climate change Davida Wood is a project manager with theElectricity Governance Initiative at WRI Athena Ballesteros leads WRI’s International Financial Flows and the Environ-ment project, which works to improve the environmental and social decision making and performance of public financialInstitutions Xing Fu-Bertaux contributed to this paper in her capacity as a researcher in WRI’s Institutions and GovernanceProgram, where she worked on the International Financial Flows and the Environment project
  • 4. AcknowledgmentsThe authors would like to thank the many the challenges of climate change, energy security,colleagues who helped us write this working paper and economic growth at the local, the state, andLetha Tawney provided valuable input on the the federal level in the United States and Germanysections on innovation and transmission as well The authors would like to thank Arne Jungjohannas the overall paper Clifford Polycarp provided at HBF and Thomas Kleine-Brockhoff, Thomasvaluable input on international public finance for Legge, Nigel Purvis, and Tessa Paganini at GMFrenewables as well as the entire paper James Brad- for their advice and support for the project Finally,bury, Edward Cameron, Jenna Goodward, Ruth the authors would like to thank the participants inGreenspan Bell, Jennifer Morgan, Janet Rangana- the November workshop for sharing informationthan, Neelam Singh, Shally Venugopal, and Jacob on their countries’ experiences with us, in partic-Werksman all provided comments and advice that ular Asoka Abeygunawardana, Odon de Buen,greatly improved the paper Polly Ghazi and Maggie Ranjit Deshmukh, Chris Greacen, Mark Hankins,Baron provided editorial support The research and Christina Hanley, Jasper Inventor, Suman Kumar,writing of this paper were made possible by funding Pete Maniego, Anastas Mbawala, Osvaldo Solianogenerously provided by The German Marshall Fund Pereira, Mustapha Taoumi, Hilton Trollip, Fabbyof the United States and the Heinrich Boell Founda- Tumiwa, and Neerja Upadhyaya While all of thetion North America The paper was made possible above reviewers and partners were very generousby funding from the “Transatlantic Climate Bridge,” with their time and advice, the authors alone arean initiative launched by the German government responsible for the content of this working paperto connect and support those working to address
  • 5. Executive SummaryDEVELOPING COUNTRIES IN THE RENEWABLE which outlines a climate friendly pathway forENERGY TRANSFORMATION meeting global energy demands 3 Case study countries:In order to meet the intensifying climate challenge, Transforming the energy system on this scale will Brazilthe global energy system must undergo a funda- require significantly increased support from devel-mental transformation, with a rapid increase of India oped countries, channeled through both bilateralrenewable energy worldwide 1 Developing coun- assistance and multilateral institutions, as well as Indonesiatries are at the forefront of this challenge, since they philanthropic initiatives Our conclusions, derivedare expected to add around 80 percent of all new Kenya from a series of case studies and a comprehensiveelectric generation capacity worldwide in the next Mexico review of existing literature, suggest that donorstwo decades 2 should deploy financial support more effectively by MoroccoThe deployment of energy from renewable sources moving beyond a project-by-project approach to one that creates the right environment for invest- Mozambiqueis accelerating in developing countries, and alreadyaccounts for a higher percentage of electricity ments in scaled-up, nationwide deployment South Africageneration than in the developed world In 2008, Sri Lanka This working paper seeks to assist in this process,non-OECD nations generated 21 percent of their by identifying key components of smart renewable Philippineselectricity from renewable sources including energy policy in developing countries, focusing onlarge-scale hydroelectric power (compared with 17 Tanzania the power sector It also provides recommendationspercent in OECD countries), according to Inter- for maximizing the effectiveness of international Thailandnational Energy Agency (IEA) statistics However, support for deployment of renewable energies,this figure must more than double by 2035, to 46 drawn from these on-the-ground experiences inpercent, in order to meet the IEA’s “450 scenario,” developing countries ABOUT THIS WORKING PAPER Chapter 1 introduces the approach and method- ology taken in this paper and describes the key concepts we address The second chapter discusses what developing countries are already doing to1 The International Energy Agency’s “450” scenario describes a deploy renewable energy sources, and how theypathway to stabilize atmospheric greenhouse gas concentrationsat 450 parts per million of CO2-equivalent, which would result can be supported in scaling up such efforts It alsoin a 50 percent chance of limiting global average temperature introduces a set of principles of smart renewablerise to 2 degrees Celsius above pre-industrial levels (see IPCC,Climate Change 2007: Impacts, Adaptation and Vulnerability. energy policy to propel such a transformation,Contribution of Working Group II to the Fourth Assessment developed by the World Resources Institute TheseReport of the Intergovernmental Panel on Climate Change(Cambridge, UK: Cambridge University Press, 2007), 801) are based on insights drawn from case studies ofIn this scenario, global electricity generation from renewable existing renewable energy policies in 12 countriessources would have to increase by 285 percent between 2008 and2035 See International Energy Agency, World Energy Outlook in Africa, Asia, and Latin America (see sidebar) as2010 (Paris, France: IEA, 2010), 620-21, 652-53 well as from existing literature2 The International Energy Agency estimates that around 80percent of global electric capacity additions between 2008 and 3 This point will be further elaborated in chapter 2 In the IEA’s2035 will take place in non-OECD countries, i e in a group that “450” scenario (see footnote 1), the share of renewable energyis rougly the same as the developing world See International in electricity generation would have to increase from 17 percentEnergy Agency, World Energy Outlook 2010 (Paris, France: IEA, in 2008 to 44 percent in 2035 in OECD countries and from 212010), 620-21, 652-53 percent to 46 percent in non-OECD countries Grounding Green Power 1
  • 6. The following five chapters each examine one key • Planning can grow more sophisticated aselement of smart renewable energy policy, discuss deployment expands; for serious scaling up oflessons learned, and identify needs for interna- renewable energy, long-term planning will betional support These cover planning and strategy necessary(Chapter 3), well-designed generation-based incen-tives (Chapter 4), an enabling policy and regula- • Planning decisions need to be based on atory framework (Chapter 5), attractive financing realistic and transparent assessment of the fullconditions (Chapter 6), and the necessary technical cost of different optionsenvironment (Chapter 7) Our findings and recom- • The planning process benefits frommendations are summarized in Chapter 8 transparency, accountability, and stakeholderBelow we define our principles of smart renewable participationenergy policy and then highlight our key find- Designing generation-based incentives (Chapter 4):ings and recommendations for each of the five keyelements of such a policy • Policymakers need to choose an appropriate incentive for their context It is important thatPRINCIPLES OF SMART RENEWABLE incentives reward actual power production, notENERGY POLICY just installationWe define smart renewable energy policy as the set • In many situations, a feed-in-tariff (FiT) is theof rules, regulations, and government actions that most appropriate generation-based incentivelead to an increased share of renewables in total to encourage private investment in renewableelectricity consumption in line with a country’s devel- energyopment objectives. Smart renewable energy policyencourages private investment, achieves its objec- • Competitive bidding can result in lower pricestives in a cost-effective way, promotes continuous and be an appropriate incentive mechanism forinnovation, and is designed through transparent, large-scale projectsaccountable, and participatory processes • Governments can increase the cost- effectiveness of renewable energy support bySMART RENEWABLE ENERGY POLICY ON THE reducing fossil fuel subsidiesGROUNDSuccessful approaches to renewable energy policy • It is important that incentives reward actualand support vary by country, but there are some power production, not just installationcommon themes and recommendations emerging • Deciding how to fund an incentive mechanismfrom the experiences made in case study countries raises political and equity challenges that mayanalyzed in this paper International support can be more easily navigated with help from thebring the lessons from these experiences to more principles of transparency, accountability,countries and scale up existing successes The participation, and capacitylessons learned from the case studies are as follows:Planning and developing a strategy (Chapter 3): • A price premium that decreases over time can drive performance improvement and cost • Official renewable energy targets are a crucial reductions first step2 The German Marshall Fund of the United States
  • 7. • Getting the price right at the beginning, based Building the necessary technical environment on an assessment of the technology, market (Chapter 7) conditions, and resource availability, is critical • Developing, installing, operating, and for the success of a FiT maintaining renewable energy projects all require specific technical know-how • FiTs are most effective if they are set at a technology-specific rate that reflects the cost • The unique challenges renewables pose for the of generation However, in order to save scarce grid infrastructure in terms of transmission resources, they are also sometimes set at a price and intermittency need to be addressed that only reflects the cost avoided by the utility that didn’t have to produce the power itself • Scaling up of renewable energy can benefit from the bundling of renewable energy projects • Caps can be used to control the cost of an into clusters and prioritizing geographic areas incentive mechanism for new transmission planning • Combining different generation-based INTERNATIONAL SUPPORT FOR SMART incentives can also help control the cost of RENEWABLE POLICY: RECOMMENDATIONS renewable energy policy Governments in the United States, Europe, and • Incentives need to be designed in a way that other developed countries, through bilateral limits speculation by imposing penalties or assistance and multilateral institutions, can support canceling permits if no generation projects are the transformative renewable energy scale-up in built developing countries This will require the devel- opment of country-specific support packages andCreating an enabling policy and regulatory frame-work (Chapter 5) mixing and matching of a range of finance sources and tools The balance of evidence presented in this • Any generation-based incentive needs to be paper suggests that such support packages should part of a broader set of power-sector rules and include: regulations 1 Technical assistance, capacity development, • Institutions and procedures for transparent, and institution building to help developing accountable, and participatory decision- countries develop strategies, targets, and poli- making can lead to better and more cost- cies; effective decisions 2 Grant-based international public financing for • Processes should allow for periodic review and generation-based incentives to cover additional changes to the generation-based incentives if cost; necessary 3 Subsidized capital and risk mitigation toProviding attractive financing options (Chapter 6) address incremental investment needs and • Preferential financing options complement higher costs of capital; and generation-based incentives by reducing investors’ risks and addressing the high upfront 4 Technical capacity building capital needs Grounding Green Power 3
  • 8. We hope this guide will assist both developingcountry governments in designing smart renewableenergy policy, and bilateral donors and multilateralinstitutions in supporting the scaling up of renew-able energy in the power sectors of developingeconomiesAcronymsAPERC Andhra Pradesh Electricity Regulatory IREDA Indian Renewable Development Agency Commission IRP Integrated Resource PlanBNDES Brazil National Development Bank kWh kilowatt per hourCDM Clean Development Mechanism NAMA Nationally Appropriate MitigationCERC Central Electricity Regulatory Action Commission NARUC National Association of RegulatoryCIFs Climate Investment Funds Utility CommissionersCTF Clean Technology Fund MNRE Indian Ministry of New and RenewableDBCCA Deutsche Bank Climate Change Energy Advisors MW MegawattDfID UK Department for International OECD Organization for Economic Development Co-operation and DevelopmentDTI The Department of Trade and Industry (OECD)EGI Electricity Governance Initiative PIIE Peterson Institute for InternationalEPPO Energy Planning and Policy Office, Thai Economics Ministry of Energy PPA Individual Power Purchase AgreementESMAP World Bank’s Energy Sector PROSOL UNEP Program Solaire Management Assistance Program PV PhotovoltaicEU European Union RE Renewable EnergyFiT Feed in Tariff REC Renewable Energy CertificatesGEF Global Environment Facility REED Rural Energy Enterprise DevelopmentGERC Gujarat State Electricity Commission RPS Renewable Portfolio StandardGHG Green House Gas SPP Small Power ProducerGNI Gross National Income UN United NationsGW Gigawatt UNEP United Nations EnvironmentHPPF Healthy Public Policy Foundation ProgrammeIAEA International Atomic Energy Agency UNFCCC United Nations Framework ConventionIEA International Energy Agency on Climate ChangeIPCC Intergovernmental Panel on Climate VSPP Very Small Power Producer Change WRI World Resources Institute4 The German Marshall Fund of the United States
  • 9. 1 IntroductionThe purpose of this working paper is to identify America convened in November 2010 At thissome key components of smart renewable energy workshop, renewable energy experts from 12 Case study countries:policy in developing countries, based on on-the- African, Latin American, and Asian countries (seeground experiences The paper aims to draw Box 2) discussed their experiences with renew- Brazilrecommendations from the analysis of these key able energy policies and considered how they Indiacomponents on how international support for might be supported internationally Countries anddeployment of renewable energies can be made experts were selected with the goal to achieve a Indonesiamost effective This paper starts from the premise balance between different regions, different country Kenyathat donors and international institutions need to conditions (in terms of size and level of economic Mexicomove beyond the traditional project-by-project development) and different backgrounds (regula-approach to a smart renewable energy policy tors, academics, civil society) The case studies Moroccoapproach that creates the right environment for presented at this workshop are listed in the Annex Mozambiqueinvestments in scaled-up deployment of renewable and summaries can be accessed online at www wrienergy org/developing-country-renewables South Africa Sri LankaWe define smart renewable energy policy as the set Using lessons learned from our sample of countryof rules, regulations, and government actions that case studies, and building upon the wealth of Philippineslead to an increased share of renewables in total knowledge contained within the broad literature on Tanzaniaelectricity consumption in line with a country’s devel- renewable energy policy, the paper provides recom-opment objectives. Smart renewable energy policy mendations to bilateral and multilateral donors as Thailandencourages private investment, achieves its objec- well as international climate finance and technologytives in a cost-effective way, promotes continuous institutions on how to support smart renewableinnovation, and is developed in transparent, energy policies in client countries Policymakers inaccountable, and participatory processes developing countries can also directly apply many of the lessons identified in this paper As a nextThe analysis presented in this paper builds on step building on this research, it would be usefulongoing World Resources Institute (WRI) research to provide estimates on the needed investment toon climate finance, electricity sector governance, implement the approach suggested in this paperrenewable energy policy, international technology and to break these down by support phase, country,cooperation, and innovation 4 The recommenda- level of ambition in terms of renewables expansion,tions draw heavily on insights from a workshop etc This question is, however, beyond the scope ofWRI and the Heinrich Boell Foundation North this paper4 This paper is the result of a collaboration between several WRI We focus on the electricity sector and do notprojects The Two Degrees of Innovation project works with consider energy for transport, heating, or industrialresearchers, engineers, policymakers, and other practitionersto create the conditions for global innovation in clean energy, processes For the purpose of this paper, we definefrom research to deployment, see http://www wri org/project/ renewable energy as electricity produced frominnovation The Electricity Governance Initiative, a joint projectof WRI and Prayas Energy Group, works with sector decision- solar and wind power, tidal and wave power, smallmakers and civil society to promote transparency, accountability, hydro power, geothermal power, and biomass 5 Weand public participation in the electricity sector, see http://wwwwri org/project/electricity-governance The International Finan- concentrate on the developing world, where thecial Flows and the Environment Project works to improve theenvironmental and social decision making and performance ofpublic and private International Financial Institutions, see http:// 5 Unless otherwise noted, we do not include large hydropowerwww wri org/project/international-financial-flows as a renewable energy source in this paper Grounding Green Power 5
  • 10. greatest growth in the energy sector is taking place, was published both to inform ongoing discus-even though similar transformations are essential sions about the most effective use of developmentin the developed world 6 The term “developing and climate finance and to expose our thinking tocountry” is used with due respect and caution The a broader audience The authors intend to refineauthors recognize that this term does not reflect a the framework presented in this paper further anduniform taxonomy and carries with it certain defi- welcome feedback and suggestionsnitional and conceptual baggage 7 Chapter 2 explains key concepts and describes theThe countries typically classified as being “devel- context for renewable energy policy globally Theoping” are highly diverse and the cases analyzed next five chapters each look at one key elementreflect some of that diversity This paper does not of smart renewable energy policy, discuss lessonsattempt to propose a model that would work in all learned, and identify needs for internationalcountries, but rather recognizes that all successful support These components are planning andpolicies will have to be context- and country- strategy (Chapter 3), well-designed generation-specific The authors do attempt to identify some based incentives (Chapter 4), an enabling policylessons learned from the analysis of successes and and regulatory framework (Chapter 5), attractivebarriers in specific countries that could inform financing conditions (Chapter 6), and the necessarypolicy choices and international support in other technical environment (Chapter 7) The findingscountries and recommendations are summarized in Chapter 8The research presented in this working paper buildson a first analysis of a limited number of casesand should be regarded as preliminary This paper6 As will be elaborated in the next chapter, the InternationalEnergy Agency estimates that around 80 percent of globalelectric capacity additions between 2008 and 2035 will takeplace in non-OECD countries, i e in the developing world SeeInternational Energy Agency, World Energy Outlook 2010 (Paris,France: IEA, 2010), 620-21, 652-537 According to the United Nations Statistical Division, there isno established convention for the designation of “developed”and “developing” countries in the United Nations system Incommon practice, Japan in Asia; Canada and the United Statesin northern America; Australia and New Zealand in Oceania;and the countries of Europe are considered “developed” regionsThe World Bank tends to avoid using the term “developingcountries” in its classification and prefers instead a four tierscheme divided into income groups These are low income coun-tries (GNI per capita of US$995 or less); lower middle incomecountries (GNI per capita of $996 - $3,945); upper middleincome countries (GNI per capita of $3,946 - $12,195); and highincome countries (GNI per capita of $12,196 or more) The Bankclassifies all low- and middle-income countries as developingbut notes, “The use of the term is convenient; it is not intendedto imply that all economies in the group are experiencing similardevelopment or that other economies have reached a preferredor final stage of development Classification by income doesnot necessarily reflect development status ” (Source: WorldBank Country Classification - http://data worldbank org/about/country-classifications )6 The German Marshall Fund of the United States
  • 11. 2 Context and ConceptsDEVELOPING COUNTRIES IN THE GLOBAL While decision-makers in developing countriesENERGY TRANSITION recognize the contribution renewable energy canThe overwhelming majority of new electric capacity make to combating global climate change, theyto be added in the next two to three decades will be primarily pursue it for domestic reasons, in thein developing countries The International Energy context of national sustainable development strat-Agency (IEA) has calculated three scenarios for the egies 12 Renewable energy provides countries andworld’s energy future; all three show that around people with a range of benefits in a way that simply80 percent of global electric capacity additions expanding the traditional fossil fuel-based powerbetween 2008 and 2035 are expected to take place supply cannot achieve These benefits include:in non-OECD countries, a group of countries • increased energy access,roughly equivalent with the developing world (seeTable 1) The capacity to be added in non-OECD • economic development and job creation,countries over this period represents more than theentire capacity installed in OECD countries today 8 • reduced local pollution and improved health,At the same time, the global energy system is in the • increased energy supply security, andmiddle of a transition from a dependence on fossil • insulation from increasingly volatilefuels towards the use of more renewable sources In international fuel prices that are a strain on2009, renewables accounted for 47 percent of new tight public budgets and countries’ balances ofpower generation capacity worldwide 9 Developing paymentscountries play an important role in this transition,as illustrated by the many capacity targets, strate- For example, the support for small renewablegies, and policies they have implemented in recent energy producers in Thailand is driven by ayears to support renewable energy generation 10 number of policy objectives, including “fosteringMore than half of the existing renewable power rural economic development” and “reducing fossilcapacity is now in developing countries 11 fuel imports ” In Tanzania, the policy objectives are described as “addressing challenges related to low8 Authors’ calculations, based on International Energy Agency, generation capacity, expensive emergency genera-World Energy Outlook 2010 (Paris, France: IEA, 2010), 620-21, tion, blackouts, and low rural electrification ”13 The652-53 Indian Ministry of New and Renewable Energy9 See REN21, Renewables 2010 Global Status Report (Paris: provides the following rationale for pursuingREN21 Secretariat, 2010), 53 The calculation is based on datafrom the IEA, IAEA, and REN21 Measured in dollars, the renewable energy: “India’s need for secure, afford-investment in new renewable energy generation capacity even able, and environmentally sustainable energy hassurpassed fossil-fuel investment for the second year in a row in2009, see United Nations Environment Programme and Bloom-berg New Energy Finance, Global Trends in Sustainable Energy 12 REN21, GSR 2010. Nigel Purvis, Jumpstarting Global GreenInvestment 2010. Analysis of Trends and Issues in the Financing Growth: International Climate Strategies in the New Transatlanticof Renewable Energy and Energy Efficiency. (United Nations Context, GMF Climate & Energy Paper Series (Washington, DC:Environment Programme, 2010), 12-13 Both estimates include The German Marshall Fund of the United States, Novemberlarge hydro 2010), http://www gmfus org/cs/publications/publication_ view?publication id=136910 For an overview on existing policies in developing countries,see REN21, Renewables 2010 Global Status Report (Paris: REN21 13 Chris Greacen and Anastas Mbawala, Country Case Studies:Secretariat, 2010), http://www ren21 net/Portals/97/documents/ Thailand & Tanzania. Feed-in-Tariffs and Small Power ProducerGSR/REN21_GSR_2010_full_revised%20Sept2010 pdf Regulations (Washington, DC: World Resources Institute, November 22, 2010), http://www wri org/developing-country-11 Ibid , 4 renewables Grounding Green Power 7
  • 12. Figure 1: Projected Growth in Global Electricity Capacity, 2008-2035 Non-OECD Countries OECD Countries Renewables Nuclear Fossil Fuels All Electricity Sources Current Policy Scenario New Policy Scenario 450 Scenario Distribution of new capacity expected based on Distribution of new capacity expected based on Distribution of new capacity needed in order to policies and measures already formally adopted current policies and new policy commitments that stabilize global atmospheric greenhouse gas and implemented. have already been announced. levels at 450 ppm of carbon dioxide equivalent. 19% (804 GW) 23% 22% 24% (946 GW) (851 GW) (950 GW) 38% 3% (1476 GW) (135 GW) 57% 11% (2190 GW) (454 GW) 36% 55% (1389 GW) (2271 GW) 8% 4% (293 GW) (178 GW) Source: International Energy Agency, World Energy Outlook 2010become one of the principal economic and develop- “medium-term energy security,” and catalyzing thement challenges for the country It is also clear that “conditions for green growth ”15while energy conservation and energy-efficiencyhave an important role to play in the national Nevertheless, this transition is not happening at theenergy strategy, renewable energy will become a speed and scale necessary to stabilize global averagekey part of the solutions and is likely to play an temperature rise at manageable levels There is wideincreasingly important role for augmentation of scientific consensus, recognized by all countries atgrid power, providing energy access, reducing the UN climate conference in Cancun in December,consumption of fossil fuels, and helping India 2010, that warming must at least be held to apursue its low carbon developmental pathway”14 maximum of 2 degrees Celsius above pre-industrialIn South Africa, the Department for Trade and levels in order to avoid unacceptable climate changeIndustry and the Department for Public Enter- risks 16 However, while it can be assumed thatprises are considering ambitious renewable energy the current greenhouse gas reduction pledges ofinitiatives within the government’s Industrial developed and developing countries submitted toPolicy Action Plan The initiative is driven by the the United Nations under the Copenhagen Accorddesire to realize a number of economic benefits: reflect most of today’s renewable energy goals,“Industrial development … in the industrial value these pledges would likely set the world on a pathchain supplying the [renewables] industry,” “exportcompetitiveness,” “regional renewables develop-ment … to be a regional hub and catalyst for thedevelopment of renewables in sub-Saharan Africa,” 15 DTI, Unlocking South Africa’s Green Growth Potential. The South African Renewables Initiative, Update Briefing (Pretoria: The Department of Trade and Industry, December 2010), 914 MNRE, Renewable Energy in India: Progress, Vision, and 16 United Nations Framework Convention on Climate Change,Strategy (New Delhi, India: Ministry of New and Renewable The Cancun Agreements: Outcome of the Work of the Ad HocEnergy, Government of India, 2010), 11, http://www mnre gov Working Group on Long-term Cooperative Action under thein/pdf/mnre-paper-direc2010-25102010 pdf Convention, Decision 1/CP 16, paragraph 48 The German Marshall Fund of the United States
  • 13. towards global warming of somewhere between 2 5 A NEW ROLE FOR INTERNATIONAL SUPPORTand 5 degrees Celsius 17 Though developing countries have many reasons to pursue renewable energies in their own right, theyThe IEA’s forecasts show that, without new policies, will need international support to transition to amore than two thirds of the new electric capacity low-carbon economy 19 The cost of this transitionin developing countries would be powered by and other barriers, such as a lack of capacity, makefossil fuels (the IEA’s “Current Policies” scenario, it unlikely that the transition to more renewablesee Table 1) The scenarios also underline that a energy will happen quickly enough and at the scalegradual transition to more renewables is under required to limit global temperature rise to twoway in the developing world, but that it happens degrees above pre-industrial levels, absent interna-too slowly to reach the globally agreed climate tional supportgoal The “New Policy” scenario, which assumes allrecently announced pledges, targets, and policies Through multilateral institutions and bilateral— many of which are contingent on international assistance, the United States, European nations,support — are implemented in a stringent way, and other developed countries can help makeshows a marked increase in renewables compared the transformation possible International publicto “Current Policies ” However, a large gap remains financing already plays an important role incompared to the even more ambitious “450” catalyzing renewable energy deployment andscenario, which describes a pathway needed to diffusion in developing countries The multilateralstabilize atmospheric greenhouse gas concentration development banks, the bilateral aid agencies, theat a level of 450 parts per million CO2 equivalent Global Environment Facility, and, more recently,necessary to make the 2-degree target attainable In the Clean Technology Fund, have been the mainthe latter scenario, the fossil fuel share would only sources During the period 1997-2005, bilateral andbe 15 percent, while renewables would account for multilateral agencies were collectively investing onthree quarters of new capacity 18 average $1 4 billion a year in renewable energy in developing countries 20Many successful examples of good policies andpractices to promote renewables already exist in Currently, the international community isdeveloping countries This presents the question of designing new mechanisms to manage climatewhether the seeds for the global energy transfor- finance and to improve international technologymation are already contained within these experi- cooperation while developed country governmentsences and whether it is possible to identify lessons are considering their strategic funding decisionslearned and needs for additional support, so that over the next years This presents a unique oppor-these success stories can be scaled up and adapted tunity to move to the next phase of renewablefor other countries energy support This next phase could build on the experiences and momentum in developing countries to focus on building capacity and reliable frameworks — the package of measures we call17 M den Elzen et al , The Emissions Gap Report: Are the Copen-hagen Accord pledges sufficient to limit global warming to 2 deg. Cor 1.5 deg. C? A preliminary assessment (United Nations Environ- 19 Purvis, Green Growth.ment Programme, 2010), 48-50 20 D Tirpak and H Adams, “Bilateral and multilateral financial Authors’ calculations, based on International Energy Agency,18 assistance for the energy sector of developing countries,” ClimateWorld Energy Outlook 2010, 620-21, 652-53 Policy 8, no 2 (2008): 135–151 Grounding Green Power 9
  • 14. smart renewable energy policy — rather than a tional cost to make a large-scale global transforma-simple project-by-project approach tion away from fossil fuels possibleCompared to just financing an individual wind However, international funding for developmentfarm, financing the conditions that incentivize and climate change mitigation is also limited Well-building and operating wind farms will have a designed and comprehensive renewable energymore transformative impact 21 Predictable frame- policy can help reduce the cost gap, for exampleworks will also allow developing countries to better by removing fossil-fuel subsidies or by helping tocapture the economic benefits associated with set adequate support levels that are not unneces-increased renewable energy generation, because sarily generous 24 In this way, smart renewablethey attract more investor interest and larger parts energy policy can help ensure that public funds —of the value chain, which in turn leads to more jobs both from within a developing country and fromin manufacturing, for example 22 international sources — are used in an effective and efficient way By encouraging innovation, smartOne major barrier to renewable energy deploy- renewable energy policy also has the potential toment in developing countries is the higher cost of bring down the cost of renewable energy tech-these technologies when compared to conventional nologies, so they can become a financially viablefossil fuels In those countries that have success- mainstream solutionfully deployed renewable energies beyond indi-vidual projects, this cost gap has been addressed Donor countries can expect some tangible benefitsby public policy 23 In most developing countries, for their own economies from such an investmentwhere domestic financial resources are limited and Smart renewable energy policy in developingeconomic development is the overriding priority, countries can create export markets for renewableit is difficult to mobilize financial support from energy technology produced in donor countriesdomestic sources alone; therefore donor funds However, it should not be expected that developingwould likely be needed to cover some of the addi- countries will import all of the necessary equipment in the long run The real long-term benefit should be expected from the creation of global markets21 The literature shows that all countries where renewables and the additional opportunities for innovation that(excluding large hydro) have reached a significant marketshare have had renewable energy policy frameworks in place emerge when more countries deploy renewablesSee REN21, GSR 2010; J F Kirkegaard, T Hanemann, and L The addition of large additional capacities providesWeischer, It Should Be a Breeze: Harnessing the Potential ofOpen Trade and Investment Flows in the Wind Energy Industry, a chance to quickly test new designs or approaches,PIIE WRI Working Paper (Washington, DC: Peterson Institute to develop better manufacturing, operations, andfor International Economics and World Resources Institute,December 2009); J F Kirkegaard et al , Toward a Sunny Future? maintenance processes, and iteratively improveGlobal Integration in the Solar PV Industry, PIIE WRI Working both the technologies and the energy systems ofPaper (Washington, DC: Peterson Institute for International which they are a partEconomics and World Resources Institute, May 2010)22 WRI research on the global wind and solar PV industry It can be expected that costs will decrease andhas indicated that countries with policies creating large andpredictable demand have been able to capture larger portions performance improve as a result The size of theof the value chain and create more domestic jobs as opposed to market in which firms, including those from donorcountries with unstable, on-off demand See Kirkegaard, Hane- countries, can participate will grow The lowermann, and Weischer, It Should Be a Breeze, and Kirkegaard et al ,Toward a Sunny Future? 24 We return to these two key elements of smart renewable23 REN21, GSR 2010 energy policy below, in chapter 410 The German Marshall Fund of the United States
  • 15. costs of renewable energy technologies would also 2. Smart renewable energy policy is basedbenefit donor countries in that it would lower the on clearly defined objectives. Workshopcosts of their own domestic emissions reductions 25 participants highlighted that smart policy begins with a clear definition of the end inPRINCIPLES OF SMART RENEWABLE ENERGY mind As discussed in the case studies below,POLICY objectives are most often defined in terms ofWe define smart renewable energy policy as the set added power generation, but can also includeof rules, regulations, and government actions that technology development, energy access, orlead to an increased share of renewables in total elec- economic development goals A clear articula-tricity consumption in line with a country’s develop- tion of policy objectives can help ensure thatment objectives. smart renewable energy policy contributes to a country’s broader development aspirationsMany developing countries have already experi-mented with renewable energy policies that go 3. Smart renewable energy policy encour-beyond a project-by-project-approach, building ages private investment. There was broadthe framework that creates the right conditions for agreement among the workshop participants,transformative deployment at scale Based on the supported by the existing literature on renew-experiences made in the 12 case study countries able energy policy, that policies will have athat were represented at the Renewable Energy more transformational impact if they leveragePolicy Workshop and in the existing literature, private investment by promoting attractive andsome key principles of smart renewable energy predictable market conditions The conditionspolicy can be identified These key principles are investors look for have been characterized asbriefly introduced below The next chapters will “loud, long, and legal”:then discuss how these principles are applied in • “Loud — incentives need to be sufficientpractice to make a difference to the bottom line and 1. Smart renewable energy policy is a compre- improve the bankability of projects; hensive package. Developing country experts • Long — sustained for a duration that reflects participating in the workshop stressed that it the financing horizons of a project or deal; is not sufficient to just set a renewable energy and deployment goal or add an incentive mecha- nism Rather, smart renewable energy policy needs to take into account the broader context renewables operate in Smart renewable energy policy strives to create an enabling environ- ment including power sector regulations, investment and financing conditions, suit- able electric grid infrastructure, and technical capacity25 On the benefits of growing global markets for renewableenergy technologies, see Kirkegaard, Hanemann, and Weischer,It Should Be a Breeze, and Kirkegaard et al , Toward a SunnyFuture? Grounding Green Power 11
  • 16. Box 1 Transparency, Accountability, Participation and Capacity (TAP-C) The Electricity Governance Initiative (EGI), a joint project of WRI and Prayas Energy Group, has developed a governance framework organized around the TAP-C principles — transparency, account- ability, stakeholder participation, and capacity — that should guide the development of robust policy and planning processes, transparent procedures for the selection of projects and setting of prices, and clear performance metrics for monitoring and evaluation Transparency and access to information: the process of revealing actions and information so that outsiders can scrutinize them Attributes of transparency include comprehensiveness, timeliness, and availability Participation: input from diverse stakeholders to help decision-makers consider different issues, perspectives, and options when defining a problem Forms of participation include technical review processes and public hearings Accountability and redress mechanisms: the extent to which there is clarity about the role of various institutions in sector decision-making, there is a systematic monitoring of sector operations and processes, the basis for decisions is clear or justified, and legal systems are in place to uphold stake- holders interests Capacity: the capacity of government and official institutions to act autonomously and independently, the institutional ability to provide access to decision-making processes, as well as the capacity of civil society (particularly NGOs and the media) to analyze issues and participate effectively 1 1 Adapted from “The Electricity Governance Toolkit: Benchmarking Best Practice and Promoting Accountabilty in the Electricity Sector” June 2007 EGI is a joint project of WRI and Prayas Energy Group • Legal — a legally established regulatory 4. Smart renewable energy policy is cost-effec- framework, based around binding targets tive. It was stressed by workshop participants or implementation mechanisms, to build that public money needs to be spent in such a confidence that the regime is stable, and way to ensure that investments — backed by can provide the basis for long-life capital- ratepayers, taxpayers, or foreign donors — are intensive investments ”26 efficiently meeting policy objectives Because objectives could include, for example, driving26 The “loud, long, and legal” framework was developed by long-term price reductions or supportinga group experienced renewable energy financiers of invited technologies at different stages of development,to provide input on “good policy” for renewable energy forthe Ministerial-level International Conference on Renewable this principle does not necessarily translate toEnergies in Germany in 2004 See Kirsty Hamilton, Unlocking maximum deployment at minimal cost, but itFinance for Clean Energy: The Need for “Investment Grade” Policy,Energy, Environment, and Development Programme Paper calls for careful policy design to avoid oversub-(London: Chatham House, December 2009), 8 Deutsche Bank sidizationClimate Change Advisors has proposed a similar set of criteria,summarized as “transparency, longevity and certainty” See DBClimate Change Advisors, Paying for Renewable Energy: TLC at 5. Smart renewable energy policy encouragesthe Right Price. Achieving Scale through Efficient Policy Design innovation. Experts at the workshop agreed(New York: Deutsche Bank Group, December 2009), 1512 The German Marshall Fund of the United States
  • 17. on the need for financial support for renewable 6. Smart renewable energy policy is designed energy to be temporary, provided as long as through transparent, accountable, and these technologies are not yet competitive with participatory processes. As will be discussed fossil fuel options There is broad agreement in more detail below, workshop participants in the literature that further reductions in cost conveyed examples where a lack of open, and improvements in performance, reliability, transparent, and accountable decision-making and safety of renewable energy technolo- processes has led to less effective and less gies will be needed so these technologies can efficient policy implementation Conversely, become a mainstream option replacing more following basic principles of good electricity emissions-intensive alternatives Therefore, sector governance has often enabled better investments along the entire innovation chain decisions These principles are transparency, are needed to create conditions that are favor- accountability, stakeholder participation, and able to the rapid emergence and diffusion of capacity (TAP-C, see Box 1) new ideas and practices for zero-carbon power generation: in research and development, demonstration, deployment, and diffusion 27 While it is often assumed that innovation mainly happens in the research and develop- ment phase, workshop participants stressed the need for innovation beyond the lab, i e throughout the life cycle of the products, across the entire supply chain, and throughout the energy system Our cases studies reveal how innovation beyond the lab can be stimulated by regulatory incentives that drive cost-effective- ness and performance enhancement27 Shane Tomlinson, Pelin Zorlu, and Claire Langley, Innovationand Technology Transfer: Framework for a Global Climate Deal(E3G and Chatham House, November 2008), http://www e3gorg/programmes/climate-articles/e3g-report-launch-innovation-and-technology-transfer-framework-for-a-global/ Grounding Green Power 13
  • 18. 3 Planning and Developing a StrategyThe following five chapters each look at one area Table 1: Renewable Energy Targets and Paymentof smart renewable energy policy and discuss Mechanisms in Different Countrieslessons drawn from the case studies that show Country Targethow the principles identified above are imple-mented on the ground Each chapter identifies Brazil Nonekey lessons, each followed by examples from 15% RE by 2020; 41 GW by 2017, 72 Indiathe case studies In a second step, each chapter GW by 2022discusses how donors and international institu- 5% geothermal, 5% biofuels, and 5% Indonesiations can support broader application of these other RE by 2025lessons Kenya None Mexico 6 6% RE by 2012LESSONS LEARNED: SUCCESSFUL POLICY Morocco 2 GW solar and 2 GW wind by 2020NEEDS A PLAN 100 MW wind, 125 MW smallIn order to expand deployment of renewables, Mozambique hydro, 3 bagasse plants, 79,000 smallinvestors, and technology, providers need to have PV systems etcsufficient confidence that there will be a market South Africa 10,000 MW RE by 2013The first steps to providing that predictability areplanning processes to define and regularly update Sri Lanka 10% non-conventional RE by 2015a vision for the future of electric power genera- Philippines Additional 6,972 MW by 2030tion, transmission, and distribution in a given Tanzania Nonecountry, including an explicit role for renewables Thailand NoneOfficial renewable energy targets are a crucial Source: Presentations given at renewable energy policy workshop,first step. Targets reflect an understanding of the see http://www wri org/developing-country-renewables Notes: Targets for the Philippines are preliminary Targets for India arefuture role that different sources of renewable suggested by the federal government, but ultimate implementationenergy generation will play alongside efficiency lies with the Statesand conventional generation in the context of a instance India 29 Other countries, such as Indonesia,country’s available resources and capacities Done set the target share for individual technologies 30correctly, targets can provide investors with higher Yet another approach is to define targets in termsvisibility by underlining the political commitments of absolute additional capacity For example, theto renewable energy deployment Many developing Philippines are currently considering a target ofcountries have set renewable energy targets (see increasing their renewable energy capacity byTable 1) 28 adding 6,972 megawatts (MW) between 2010Some countries have chosen to define a renew- and 2030 This can again be broken down byable energy share in the overall power mix, for technology, for example in the case of the Phil- 29 Suman Kumar, “Country Case Study: India” (presented at the Renewable Energy Policy Workshop, WRI, Washington, DC, November 22, 2010), http://www wri org/developing-country-28 It should be noted that some workshop participants expressed renewablesconcern that the technical basis for these targets is not clear,making it difficult to know whether the targets are statement 30 Fabby Tumiwa and Imelda Rambitan, Scaling Up Renew-of political ambition or reference to resource capacity and able Energy Investments. Lessons form the Best Practice Modelseconomic feasibility In general, more transparency about the in Indonesia (Washington, DC: Bank Information Center, Julyassumptions underlying targets was called for 2010)14 The German Marshall Fund of the United States
  • 19. ippines, 1,420 MW of geothermal, 985 MW of other, emissions-intensive sources Thai NGOswind, 4,167 MW of hydro, 200 MW of biomass, worked successfully to have VSPP sources included80 MW of solar, and 120 MW of ocean energy as a supply option in Thailand’s national powerRather than just emphasizing raw numbers, the development plans beginning in 2007 32goals are communicated by stressing that achievingthe numbers will make the Philippines the top In January 2010, the South African governmentgeothermal producer globally and the top wind began the development of an Integrated Resourceproducer in Southeast Asia 31 Plan (IRP 2010) that will include objectives for renewable energy development for the next 20Planning can grow more sophisticated as deploy- years The South-African IRP is an example ofment expands; for serious scale up of renewable a comprehensive approach considering demandenergy, long-term planning will be necessary. projections, resource availability, and the cost andFor individual contracts awarded to a first round benefits of different sources of energy, both on theof small projects or for early stage FiT programs, a supply and demand side 33detailed strategy that outlines the respective sharesof different renewable energy technologies and Planning decisions need to be based on a trans-their integration with the national energy system parent and sound assessment of the full cost ofmay not be imperative In the short run, encour- different options. Leveling the playing field foraging the development of easy-to-realize projects clean energy requires new methodologies for deter-and developing first experiences is tempting for mining cost, so that the benefits, risks, and hiddengovernments and investors alike But even on costs of all energy sources are assessed realisticallya small scale, some planning will increase the and openly in any planning process This means,probability of success of individual projects — for for instance, that supply-side risks such as risingexample to ensure that land and water resources, fuel costs and currency fluctuations need to beas well as access to the grid, are available In the considered alongside the risks and higher upfrontlong run, integrated resource planning is needed costs of renewable energy Other examples includeto articulate the relationship between ambitious the costs of transmission lines for large hydro andrenewable energy goals and the broader electricity potential price increases for fuel transportationsystem for coal and oil, which are not always included in upfront cost estimates At the same time, currentThailand has implemented successful programs for business models provide strong incentives to over-small power producers (SPP) and very small power estimate future demand, often resulting in excessproducers (VSPP) that allow for the bottom-updevelopment of renewable energy sources and theirconnection to the grid, even though there was nodetailed plan to integrate these new small proj-ects Integrating SPP/VSPP sources into planningbecame more important as their numbers grew and 32 Greacen and Mbawala, Country Case Studies: Thailand &they developed the potential to actually displace Tanzania. Feed-in-Tariffs and Small Power Producer Regulations. 33 Hilton Trollip, Status of renewable energy implementation in31 Pete H Maniego, “Country Case Study: Philippines” South Africa with a focus on the REFIT and the role of Multi-(presented at the Renewable Energy Policy Workshop, WRI, lateral Development Banks (Washington, DC: World ResourcesWashington, DC, November 22, 2010), http://www wri org/ Institute, November 22, 2010), http://www wri org/developing-developing-country-renewables country-renewables Grounding Green Power 15
  • 20. capacity 34 Integrated resource planning tools are arrangements in the relevant ministries and state-useful to optimize the resource mix for realistic owned enterprises 35levels of demand They will also help ensure thatessential infrastructure is available and send clear The planning process benefits from transpar-signals about market size to investors ency, accountability, and stakeholder participa- tion. Public engagement is necessary to determineEven after the decision was made to include small how to share both the benefits and impacts of arenewable energy projects in the Thai power transformed energy system A transparent, multi-development plans, Thailand is still far from fully criteria planning framework can help evaluate thesetapping its renewable energy potential In part, the tradeoffs, including job creation and environmentaladoption of new software that would assess the impacts Often, the planning process tends to behidden costs and risks of conventional fuels (fossil, shaped by vested interests, as powerful incumbentbig hydro, and nuclear) would help to level the suppliers defend their relationships with utilitiesplaying field for new renewable energy and government officials It is not uncommon that board members of state-owned utilities are seniorBut progress will require more than new computer government officials, producing conflicts of interestprograms The overlapping governance struc- and sometimes corruption in some countriestures of ministries and state-owned enterprisesproduce conflicts of interest that make it easier Civil society has a significant role to play infor entrenched interests and utilities to resist the demanding transparency for the assumptions thatdisplacement of conventional power sources While underpin planning decisions (including assump-the VSP program was successful as a low profile, tions about cost, risk, and demand) and thelocal approach, scaling up will require a shift in composition of advisory boards Civil society inputincentives for incumbent political and utility offi- should also inform the planning process Beyondcials as well as for investors in new technologies organizations with expertise in energy modeling, groups organized around air pollution, consumerDrawing on the TAP-C concepts, Thai NGOs advocacy, and open government have an interest inhave developed an “alternative” power develop- opening up planning processes to public scrutinyment planning framework that advocates newmodeling and forecasting methodologies as wellas more a transparent decision-making processWith increased public scrutiny of power planning, 35 Thai NGOs developed a multi-stakeholder advisorythey hope to prompt a restructuring of governance committee to select 14 indicators of good governance from the Electricity Governance Initiative’s toolkit to apply to the Thai planning process These indicators were the basis of an assess- ment that linked weak governance to faulty decision-making, and ultimately to the need for improved transparency and processes for public input Better decision-making processes ultimately resulted in the inclusion of VSPP as a supply option The alternate power development plan prepared by Thai civil34 “Thailand’s Electricity Reforms: Privatization of Benefits society argues that a combination of demand-side management,and Socialization of Costs and Risks,” Chuenchom Sangarasri co-generation and renewable energy, and other sector efficien-Greacen and Chris Greacen, Pacific Affairs Volume 77, no 3, cies could reduce the projected need for new thermal powerFall 2004 Andrew Marquard, The Origins and Development of plants significantly: from 54,005MW to 8,535MW PresentationSouth African Energy Policy, University of Cape Town, Jan 2006 by Suphakit Nuntavarakorn, Healthy Public Policy Foundation,p 168 Also echoed in the comments of former Chairman of the at the 14th Annual Anticorruption Conference, Bangkok 2010:Eskom Board Bobby Godsell to the National Press Club of Cape http://electricitygovernance wri org/news/2010/12/egi-14th-in-Town on Feb 26 2010 ternational-anti-corruption-conference16 The German Marshall Fund of the United States
  • 21. In January 2010, the South African government power producer (VSPP) generation as a supplybegan the development of an Integrated Resource option in the Thai Power Development Plan wasPlan (IRP 2010) that will include objectives for partially a result of NGO engagement The groupsrenewable energy development for the next 20 saw incorporating renewables and energy efficiencyyears IRP 2010 increased the transparency around as a supply option in the energy planning as a waypreviously closed electricity planning process and to cut down substantially on expensive and envi-allowed for more robust public engagement Civil ronmentally damaging thermal power plants Thesociety observers have pointed out the benefits of alternate power development plan prepared by Thaiintegrating industrial planning with national energy civil society argues that a combination of demand-systems planning However, they have also identi- side management, cogeneration, and renewablefied areas where the IRP methodology needs to be energy and other sector efficiencies could reduceimproved to allow for a proper determination of the the projected need for new thermal power plantscosts and benefits of the renewable energy tech- significantly, from 54,005 MW to 8,535 MW 37nologies in relation to conventional sources Forexample, the economic benefits to be gained from INTERNATIONAL SUPPORT: CAPACITYthe development of local renewable energy equip- DEVELOPMENT, INSTITUTION-BUILDING, ANDment manufacturing are not explicitly referred to in TECHNICAL ASSISTANCE FOR SOUND POWER-IRP 2010 SECTOR PLANNING International donors can provide technical assis-In South Africa, the government structures in tance and capacity building to assist countries incharge of developing renewable energy strate- developing plans and strategies for their energygies are in place, but they often lack the necessary sector For example, the Global Environmentcapacity and influence within the government to Facility (GEF) supported a project in South Africaensure implementation According to civil society in 2007 that provided knowledge, hard data, andobservers, the approach of regulators in the depart-ment of energy, which is mandated with renew- analysis for developing the country’s Integrated Resource Plan targets for renewable energies 38able energy development, remains dominated by Similarly, international partnerships such as thepowerful conventional energy (coal and nuclear) Renewable Energy and Energy Efficiency Partner-and related expertise and capacity The participa- ship have supported governments in Ghana andtion of civil society groups in planning processes Mozambique to applying planning and decision-meant that voices more favorable to the develop-ment of renewable energies were included in theplanning process 36Civil society organizations in Thailand have also 37 Presentation by Suphakit Nuntavarakorn, Healthy Publichad some success in improving the decision- Policy Foundation, at the 14th Annual Anticorruption Confer-making process Thai NGOs have worked to ence, Bangkok 2010: http://electricitygovernance wri org/ news/2010/12/egi-14th-international-anti-corruption-confer-improve both the procedural and substantive enceaspects of the planning process, drawing on the 38 Trollip, Status of Renewable Energy Implementation in SouthTAP-C framework The inclusion of very small Africa with a Focus on the REFIT and the Role of Multi-Lateral Development Banks, 2010; Smita Nakhooda and Athena Ball-36 Trollip, Status of renewable energy implementation in South esteros, Investing in Sustainable Energy Futures. MultilateralAfrica with a focus on the REFIT and the role of Multi-lateral Development Banks’ Investments in Energy Policy, WRI ReportDevelopment Banks. (Washington, DC: World Resources Institute, 2010) Grounding Green Power 17
  • 22. making tools such as GIS to analyze renewablesources and data, and tariff-setting tools 39In recent years, the World Bank’s Energy SectorManagement Assistance Program (ESMAP) hasintroduced a set of mechanisms, including trainingand technical assistance, to support low-incomecountries’ to develop plans to diversify their energysupply and switch to zero- and low-carbon tech-nology options 40In addition to providing technical expertise, tools,and data, donors might consider providing moresupport for the institutions and processes thatare necessary for good plans and strategies Asdiscussed above transparent, accountable, andtransparent processes organized by regulatory insti-tutions that have the necessary capacity are crucialDonors might also consider building the capacity ofcivil society groups so they can play a more activerole in planning processes39 http://www reeep org/file_upload/7217_tmpphpwumA8F pdf40 World Bank, http://www esmap org/esmap/overview18 The German Marshall Fund of the United States
  • 23. 4 Designing Generation-Based IncentivesSELECTING A GENERATION-BASED INCENTIVE hour they would need to operate a project and notTargets and integrated planning are not enough to for an upfront subsidy 41build a market for power from renewable sources Policymakers can choose between several types ofPolicymakers need to translate their targets and generation-based incentives that are summarizedplans into actual investor interest by setting incen- in Table 2, along with some of their key advantagestives Policymakers need to consider several tools at and drawbackstheir disposal to create a favorable market environ-ment for renewable power As our case studies and These mechanisms, whether they are applied inexperiences elsewhere show, a generation-based developed or developing countries, often lead toincentive mechanism is one key component in the price increases for the electricity consumer, as utili-broader mix of policy and regulatory instruments ties pass along the added costs Alternatively, theGeneration-based incentives will be discussed in incremental costs may be covered fully or partiallythis chapter, before we return to the broader policy out of a public budget This can make these mecha-environment in Chapter 5 nisms difficult to implement in countries suffering public budget constraints, and particularly hardPolicymakers need to choose an appropriate to justify in developing countries where addingincentive for their context. It is important that generation capacity at the lowest cost possible isincentives reward actual power production, not often the overriding policy priorityjust installation. One crucial component of smartrenewable energy policy in both developed and However, 18 developing countries currently havedeveloping countries is mechanisms to guar- a FiT, 5 have some form of renewable RPS, andantee payment to renewable energy producers for 11 use competitive bidding to procure renewabletheir electricity, in order to make their projects energy Table 3 summarizes the incentive mecha-commercially viable These payments are usually nisms used in our case study countriesat a premium above market rates for conventionalsources It is preferable to choose an incentive that In many situations, feed-in-tariffs are the mostrewards each kilowatt hour produced, because appropriate generation-based incentives tosubsidizing the upfront capital cost of an installa- encourage private investment in renewabletion only can lead to projects being built without energy. The FiT is the most widely used incen-much attention given to optimizing their perfor- tive mechanism globally Seventy-five percent ofmance, including through regular maintenance, or global solar photovoltaic capacity and 45 percenteven connecting them to the grid of global wind capacity were supported by FiTs in 2008 42 A review of different incentive mechanismsAll of the incentives studied in this working paper in the developed world by Deutsche Bank Climatethat have been successful in triggering additional Change Advisors found advanced FiT schemes torenewable energy installations are based on actual be the most appropriate mechanism to providepower produced This is the case for the FiTs the transparency, longevity, and certainty at thein India, the Philippines, South Africa, and Sri price that investors are looking for It is also seenLanka as well as the small power producer (SPP)programs in Thailand and Tanzania It is also true 41 See the presentations and case studies form the Renewablefor the auctions in Brazil and India, where power Energy Policy Workshop, available at http://www wri org/devel- oping-country-renewablesproducers bid for the guaranteed price per kilowatt 42 REN21, GSR 2010, 23 Grounding Green Power 19
  • 24. Table 2: Generation-Based Incentives for Renewable Energy Incentive mechanism definition Advantages DisadvantagesIndividual Power Purchase Agreement (PPA) • Allows a country to • Less effective gain first experiences in encouragingA PPA is a contract between an electricity generator with renewable investments, as there(often an independent power producer, IPP) and a buyer energies and build is less transparency(grid operator, utility, state, retail electricity supplier), capacity and certainty aboutspecifying conditions at which the electricity will be the conditionsbought: start date, price, measuring methodology,financing terms 1Feed-in Tariff (FiT) • Provides high level of • Difficult to determine certainty to investors appropriate rate; mustThe government pre-defines a guaranteed rate that a be set high enoughpower producer will be paid through a standard PPA for • Most widely used to make projectsevery kilowatt hour of renewable energy fed into the grid policy instrument viable and attractiveUtilities are legally required to connect any qualifying globally to scale up to investors, yet lowproducer of renewable electricity and purchase the renewables enough to avoid over-electricity at the set rate In best-practice FiTs, the rate is subsidizingusually differentiated by technology, based on the tech-nology-specific generation cost plus a reasonable profit,guaranteed over a long time horizon, and decreases overtime, but there have been other modelsRenewable Portfolio Standard (RPS) • Avoids difficult rate • Provides less certainty setting, as premium to investorsThe government sets a target to achieve a certain share is determined by theof renewable energy, which utilities can meet by their • Unless differentiated marketown generation, signing PPAs, or, in many systems, by by technology, willpurchasing Renewable Energy Certificates (REC) In a only favor the leastREC system, renewable power producers sell their power expensive projectat normal market prices, but on top of that earn credits type and technologyfor each unit of renewable energy produced, which from among thosecan then be sold for a premium Those entities that are eligible (e g largecovered by the RPS buy the certificates as a way to prove onshore wind farmscompliance with the mandate may be developed to the exclusion ofcontinued next page more expensive solar generation)20 The German Marshall Fund of the United States
  • 25. Table 2: Generation-Based Incentives for Renewable Energy (continued) Incentive mechanism definition Advantages Disadvantages Competitive Bidding • Auction allow easy • Developers might price-setting and bid at prices so low In a system of Competitive Bidding, a pre-defined project eliminates windfall that some projects or a certain amount of renewable power purchase is profits might not be viable bid off to developers Whoever meets all the criteria and never get built or at the lowest price is awarded the contract to develop cease operation the project and feed the renewable power into the grid Source: Literature Review 2 1 It should be noted that an explicit or implicit PPA underlies all of the mechanisms below Utilities or regulators can negotiate a price in PPAs for individual projects or use a standard PPA, or determine the price following one of the other incentive mecha- nisms listed in the table 2 Our literature review on different generation-based incentives included REN21, GSR 2010; K S Cory, T Couture, and C Kreycik, Feed-in Tariff Policy: Design, Implementation, and RPS Policy Interactions, Technical Report NREL/TP-6A2-45549 (Golden, CO: National Renewable Energy Laboratory, 2009); IEA PVPS (International Energy Agency Photovoltaic Power Systems Program) 2009 Promotional Drivers for Grid-Connected PV Paris: International Energy Agency; Haas R 2001 Review Report on Promotion Strategies for Electricity from Renewable Energy Sources in EU Countries Brussels: European Commis- sion; Hoff, T E 2006 Photovoltaic Incentive Design Handbook. Napa, CA: Clean Power Research; Lewis J I , Wiser R H (2007) Fostering a Renewable Energy Technology Industry: An International Comparison of Wind Industry Policy Support Mecha- nisms Energy Policy 2007;35(3):1844–57; Ragwitz, M , Held, A , Resch, G , Faber, T , Haas, R , Huber, C , Morthorst, P E , Jensen, S G , Coenraads, R , Voogt, M , Reece, G , Konstantinaviciute, I , Heyder, B , 2007 Assessment and optimization of renewable energy support schemes in the European electricity market, OPTRES Final Report, Karlsruhe; Morthorst, P E , Auer, H , Garrad, A , and Blanco, I (2009) The Economics of Wind Power Wind Energy: The Facts – Part Three Available at http://www wind- energy-the-facts org/documents/download/Chapter3 pdfas a strength of FiTs that they can set technology- project developers Empirical evidence from thespecific support levels in line with the respective EU suggests that deployment in countries using atechnology’s development stage and encourage FiT has been faster and, surprisingly, the premiumdistributed generation, as they set standard terms paid per kWh under FiT systems was lower thanthat make it easy for very small producers to benefit the price of certificates in RPS systems 44 However,from the incentive 43 if policymakers decide to establish an RPS mecha- nism, Deutsche Bank Climate Change AdvisersIf technology diversity and distributed generation also found that many of the positive features ofare not primary policy goals — rather, policy- an advanced FiT could be reflected in an RPS bymakers aim to achieve maximum levels of renew- the establishment of floor prices and standardable energy deployment at the lowest cost — then contracts 45an RPS may be the most appropriate mechanismHowever, experience in developed countries hasshown that relying on a dynamic REC market todetermine renewable energy premiums increases 44 Morthorst, P E , Auer, H , Garrad, A , and Blanco, I (2009)uncertainty, which can increase investment risk The Economics of Wind Power. Wind Energy: The Facts – Partand, therefore, lead to higher lending rates for Three. Available at http://www wind-energy-the-facts org/docu- ments/download/Chapter3 pdf 45 DB Climate Change Advisors, Paying for Renewable Energy:43 DB Climate Change Advisors, Paying for Renewable Energy: TLC at the Right Price. Achieving Scale through Efficient PolicyTLC at the Right Price. Achieving Scale through Efficient Policy Design. There are also options for integrating FiTs into RPSDesign. schemes, see Cory, Couture, and Kreycik, Feed-in Tariff Policy. Grounding Green Power 21
  • 26. Table 3: Generation-Based Incentive Mechanisms to broad participation and they can in Different Countries successfully attract private invest- ment in developing countries The Competititve Country FiT RPS most frequently raised concerns Bidding about FiTs were the difficulty to set Brazil No No Yes the appropriate rates and the poten- India Yes Yes Yes tial impacts on rate payers Below, Indonesia Yes No No we discuss options to mitigate these Kenya Yes No No risks Mexico No No No Competitive bidding can result Morocco No No Yes in lower prices and be an appro- Under priate incentive mechanism for Mozambique No No development large-scale projects. By its nature, South Africa Yes No No competitive bidding is more appro- Sri Lanka Yes No No priate for large scale projects, as opposed to smaller scale distributed Philippines Yes Yes No projects Using competitive bidding, Tanzania Yes No No some emerging countries have been Thailand Yes No No able to award contracts at very low Source: Presentations given at renewable energy policy workshop, see http://www prices, compared to a FiT regime wri org/developing-country-renewables There is, however, a risk that project developers bid at prices that theyFiTs are also the most prevalent mechanism among cannot afford in the long term andour case study countries, as they have been used in projects do not get built or cease operation prema-some form by India, Kenya, South Africa, Sri Lanka, turelyTanzania, and Thailand (see Table 3) and are beingconsidered by additional developing countries, In Brazil, wind-only auctions have been successfulfor example in Nigeria and Mozambique At the 46 in the context of the global financial crisis, whenRenewable Energy Policy Workshop in November sluggish global demand and the resulting over-2010, many expert participants from the case study supply of wind turbines brought capital costs downcountries expressed a preference for FiTs, because and these savings could be reflected in the competi-they are an easy-to-understand system that is open tive bidding process The result was a viable price that was lower than the previously fixed prices The average rate of 7 7 U S cents/kWh paid for wind46 See DB Climate Change Advisors, GET FiT Program: GlobalEnergy Transfer Feed-in Tariffs for Developing Countries, p 53-57 power as a result of the last round of auctions infor a detailed overview of the features of feed-in-tariffs in Kenya, August 2010 was less than half the tariffs currentlySri Lanka, South Africa, Thailand, and Tanzania The Nige-rian Electricity Regulatory Commission issued a Request for paid (14 6 to 16 7 cents) for wind projects devel-Proposals with support from the United States Trade and Devel- oped under Brazil’s earlier fixed-price schemeopment Agency to develop a framework for independent powerproducers that would include a set tariff and standard PPA forrenewable energy projects, see “Nigeria – Renewable Energy But if increased global demand for wind equipmentIPP Framework,” Solicitation Number 2010-11022A, available were to lead to higher capital costs in the future,at https://www fbo gov/spg/TDA/TDA1/TDA1/2010-11022A/listing html, accessed March 26, 2011 Brazil may not find such attractive pricing in future22 The German Marshall Fund of the United States
  • 27. tenders It remains to be seen if the wind projects as they are the most widely used form of perfor-developed as a result of the auction can realize a mance-based incentivesreturn on investment, given that they assumedvery optimistic capacity factors For example, while Governments can increase the cost-effectivenessthe observed capacity factor for projects installed of renewable energy support by reducing fossilunder Brazil’s former incentive scheme (PROINFA) fuel subsidies. As a complement to the measureswas 0 255 in the state of Rio Grande do Norte in discussed below, governments should consider2009, capacity factors between 0 451 and 0 490 increasing the cost-effectiveness of renewablewere assumed in the auctions If wind projects energy policies The clearest way to do this is toare successfully operated at the rates that won the level the playing field with fossil fuels, by reducingauctions, wind would be fully competitive with fossil fuel subsidiesfossil fuel generation in Brazil 47 Two central objectives of smart renewable energyIn China, there have been many cases of developers policy are 1) to bring the cost of renewable energiesbidding at prices that were too low, so devel- down in the long run, so they can compete withopers went out of business before projects could fossil fuels, and 2) to begin developing the sectorbe completed China has struggled with under- by covering the cost gap in the short run Yet, thisbidding and the resulting failed wind farms in its competition in energy markets is distorted by theauction system and has recently established a FiT large subsidies provided to fossil fuelsfor onshore wind that is nearly double the price at The exact amount of those subsidies is not fullywhich some auction prices were settled at 48 known The IEA estimates that direct fossil fuel consumption subsidies totaled $312 billion world-LESSONS LEARNED: wide in 2009 49 Because indirect subsidies are soGENERATION-BASED INCENTIVES CAN difficult to calculate, we have no good figures forBE MADE MORE COST-EFFECTIVE the actual total of all direct and indirect fossil fuelRenewable energy incentives rely on ratepayers, subsidies is much harder to calculate Nevertheless,taxpayers, or international donors for their funding the subset the IEA looked at equals seven timesAs such, they need to be as cost-effective as possible the amount spent on all forms of renewable energyboth in the short run, by efficiently meeting its support in 2009 50objectives of increasing deployment, and in thelong run by driving cost reductions If a generation- These subsidies create a number of problems,based incentive is financially supported by an including putting a double burden on publicinternational donor, that institution will have a 49 International Energy Agency, Organisation for Economicclear interest in ensuring that the mechanism was Co-operation and Development, and World Bank, The Scopeset at the right rate and designed in a cost-effective of Fossil-Fuel Subsidies in 2009 and a Roadmap for Phasing Out Fossil Fuel Subsidies, IAE, OECD, and World Bank Joint Reportway Below, we discuss some options to enhance Prepared for the G-20 Summit, Seoul (Paris, Washington, DC,the cost-effectiveness of performance based incen- November 11, 2010)tives Many of the options identified focus on FiTs, 50 Alex Morales, “Fossil Fuel Subsidies Are 12 Times Support for Renewables, Study Shows,” July 29, 2010, http://www bloomberg47 Soliano Pereira, Status of Brazilian Renewable Energy Policy. com/news/2010-07-29/fossil-fuel-subsidies-are-12-times- support-for-renewables-study-shows html Note that this article48 Junfeng Li, Pengfei Shi, and Hu Gao, 2010 China Wind Power claims that fossil fuel subsidies are even 12 times higher, becauseOutlook (Beijing: Chinese Renewable Energy Industries Associa- it is based on IEA data for 2008 Fossil fuel support decreased intion, Global Wind Energy Council, Greenpeace, October 2010) 2009; the ratio therefore decreased to 1:7 Grounding Green Power 23
  • 28. budgets in countries that begin to implement able energy producers through a generation-basedrenewable energy policies First, the subsidies incentive, someone has to pay that premium It canthemselves cost large amounts of money Second, either be passed through to electricity consumers,they reduce the competitive viability of renew- be paid out of the public budget, i e by taxpayers,ables, so that more money needs to be spent on or funded through some combination of thesesupport to help renewable energies compete Smart approaches International public finance could alsorenewable energy policy therefore also needs to pay parts of the premium, as discussed above Theconsider reductions in fossil fuel subsidies Renew- distributive impacts of different options need toables would become more competitive and public be carefully considered This issue is particularlyfunding would become available for renewable important in developing countries, where there is aenergy support instead risk that electricity tariff increases will prevent the poor from accessing basic energy services As theHowever, as with many energy policy decisions, experiences with increasing tariffs to recover coststhe distribution impacts need to be carefully in the 1990s have shown, there is a potential forconsidered While many studies have shown that social unrest if the expansion of renewable energythe bulk of fossil fuel subsidies disproportionally is financed through rate increases The distributivefavor the upper middle classes, some are effectively impacts on the poor can be mitigated, for example,targeted at providing for the basic energy needs by using inclining block rates where the premium isof the poor 51 According to research by the Global passed through only in the higher block tiers, andSubsidies Initiative, fossil fuel subsidies reform therefore only to consumers with a higher levels ofwill be more successful if it takes these impacts electricity consumption 53into account and, among other things, “includescomplementary policies that offset any undesired In the case study countries, a number of designsecondary impacts (such as welfare support for options have been used to avoid negative impactsthe poor, programs to help industries restructure, on the poor As we will discuss in Chapter 5, trans-or longer-term strategies to diversify the national parent and accountable procedures for determiningenergy supply), develops a communications the premium and the mechanisms to fund can helpstrategy to assure stakeholders that their interests achieve outcomes that are accepted as equitableare being respected, and creates mechanisms toensure transparency regarding subsidies and the When Brazil was using a generation-based incen-reform process ”52 tive similar to a capped FiT, prior to its current bidding approach, the program was financed byDeciding how to fund an incentive mechanism a levy only on those consumers with a monthlyraises political and equity challenges that may be consumption above 80 kilowatt hours 54more easily navigated with help from the TAP-Cprinciples. When a premium is provided to renew- In the Indian state of Maharashtra, it was found that the impacts on household budgets were much lower51 International Energy Agency, Organisation for EconomicCo-operation and Development, and World Bank, The Scope 53 Navroz Dubash, Power politics: equity and environmentof Fossil-Fuel Subsidies in 2009 and a Roadmap for Phasing Out in electricity reform, WRI Report (Washington DC: WorldFossil Fuel Subsidies. Resources Institute, 2002); Smita Nakhooda, Shantanu Dixit, and Navroz K Dubash, Empowering people: a governance analysis of52 Tara Laan, Christopher Beaton, and Bertille Presta, Strategies electricity, WRI Report (Washington D C , Pune, India: Worldfor reforming fossil-fuel subsidies. Practical lessons from Ghana, Resources Institute, Prayas Energy Group, 2007)France, and Senegal (Winnipeg, Manitoba: International Institutefor Sustainable Development, 2010), 8 54 Soliano Pereira, Status of Brazilian Renewable Energy Policy.24 The German Marshall Fund of the United States
  • 29. Table 4: Wind project developers cost submissions before the Electricity A price Regulatory Commission in the Indian state of Andhra Pradesh premium that decreases Client Submission Date Cost per MW over time (in million Rs) can drive Gujarat Alkalies and Chemicals Ltd. March 2007 51 4 performance Chennai Port Trust April 2007 53 6 improve- Rajasthan State Mines & Minerals Ltd April 2007 51 6 ment and ONGC Gujarat June 2007 60 8 cost reduc- Bharat Electronics Ltd June 2007 74 5 tions. The ultimate goal Source: InWEA of renewableif the premium for renewable energy was recov- energy policyered through the electricity tariff for industrial is to make these energy sources cost competitivecustomers rather than the household tariff 55 with conventional energy sources Therefore, the level of premium offered to new projects shouldIn Thailand, customers who consume less that decrease over time For example, in Germany and90kWh per month have a “lifeline” rate and receive California, the FiT payment locked in for a projectelectricity free of charge Price impacts are distrib- placed into service this year will be lower than theuted amongst the remainder of the consumers, FiT offered to projects installed last year 57 Thisequally, on a per Kwh basis The Thai Ministry of declining premium seeks to take advantage of theEnergy’s Energy Planning and Policy Office (EPPO) expected learning, market changes, and technolog-analyzed the impact of the VSPP & SPP adder-on ical development that increased deployment bringsrate payers as follows: If the decline is transparently set far in advance, then it can serve to provide valuable investment • $0 00233/kWh for years 2010–2011 foresight, while helping to drive improvements in • $0 00894/kWh for years 2012–2016 cost and performance — rather than only passively capturing improvements However, the further out • $0 00710/kWh for years 2017–2022 a schedule is set, the greater the risks of over-subsi- dization or underpayment 58 So far, there are noThus far, heavy impacts, particularly on the poor, examples of such decline schedules set in advancehave been avoided in Thailand However, lifeline in the developing world, but as FiTs become moresubsidy programs (such as the one in Thailand) popular, policymakers can consider them to reduceaccumulate debt, which will eventually have to be the cost of the program and drive innovationrepaid, probably through tariff increases 56 57 For the German rate schedule, see BMU, 2009 EEG Payment Provisions (Berlin: Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, August 16, 2008), http://www erneuerbare-energien de/files/english/pdf/application/pdf/55 Narasima Rao, Distributional Impacts of Climate Change Miti- eeg_verguetungsregelungen_en pdf For the Californian rategation in the Electricity Sector: Case Study of Maharashtra, India, schedule, see California Public Utilities Commision, “Feed-inDissertation Working Paper (Stanford, CA: Stanford University, Tariff Price,” Feed-in-Tariff Price, n d , http://www cpuc ca gov/2010) PUC/energy/Renewables/Feed-in+Tariff+Price htm56 Authors’ personal communication with Chris Greacen and 58 For a discussion of pre-defined declining rates and theirChuenchom Sangarasri Greacen of Palang Thai, March 2011 effects, see Kirkegaard et al , Toward a Sunny Future?, 13-14 Grounding Green Power 25
  • 30. Getting the price right at the beginning, based on than that set by the state regulatory commissionan assessment of the technology, market condi- in Gujarat Yet Gujarat was successful in attractingtions, and resource availability, is critical for the 500MW of solar capacity at the lower price (seesuccess of a FiT. A particular challenge of FiTs is Table 6) 61getting the price right, so that there is less need forlater budgetary infusions or consumer price hikes FiTs are most effective if they are set at a rate thatlater on reflects the cost of generation of the specific renew- able energy technology. In order to save scarceAt the Clean Energy, Good Governance, and resources, they can also be set at a price that onlyRegulation Forum co-convened by WRI, Idasa, and reflects the utility’s avoided cost, but this will limit thePrayas Energy Group (Prayas)59 in Cape Town in FiT’s impact. Incentives should reflect the objectivesMay 2010, regulators from South Africa, India, and defined in a country’s strategy or planning docu-Mexico discussed their need for access to databases ments — if the objective is to increase the share ofon resource availability and technology perfor- a certain technology, then the support should bemance that can help them to set feed-in tariffs at technology specificthe right level and duration In Thailand and Tanzania, Small Power ProducerIn India, the state regulatory commissions rely on (SPP) regulations provide streamlined arrange-the cost information submitted by various project ments for grid interconnection, as well as standard-developers when setting FiT levels However, in ized power purchase agreements These practicesmany cases, this information varies widely, in spite allow small renewable energy and cogenerationof limited variability in the equipment providers facilities to connect and sell electricity to the gridTable 4 shows the capital costs submitted by five Tanzanian rates are based purely on the utility’sdifferent wind project developers to the Andhra avoided cost and have led to the development ofPradesh Electricity Regulatory Commission predominantly biomass and some small hydro(APERC) within a time period of four months The plants On the other hand, Thailand pays a tech-highest submitted cost is 45 percent higher than nology-specific rate and has seen the developmentthe lowest submitted cost This example highlights of a more diverse set of technologiesthe information asymmetry that the electricityregulatory commissions need to grapple with while In Tanzania, the tariff paid to SPPs is based onsetting FiTs 60 avoided cost of generation of the utility Tanzania has frequent power shortages, especially whenSimilarly, the Central Electricity Regulatory there is drought, due to its high dependence onCommission (CERC), as well as several other State hydroelectric generation To help meet demand,Electricity Regulatory Commissions in India, has the Tanzanian utility purchased generation capacityrecently announced FiTs for solar PV In 2010, and associated energy through emergency procure-the FiT set by the CERC was 18 percent higher ments, or from thermal plants that use expensive fossil fuel For SPPs connected to the main grid,59 Prayas is an independent research advocacy institute based inthe state of Maharashtra, India Idasa is an African democracy the tariff is lower than emergency energy costs, butinstitute based in Cape Town, South Africa sufficient for biomass to be profitable Only about 260 Ranjit Deshmukh, Renewable Electricity and Governance – percent of the rural population of Tanzania has gridCases from India (Washington, DC: World Resources Institute,November 22, 2010), http://www wri org/developing-country-renewables 61 Ibid26 The German Marshall Fund of the United States
  • 31. Table 5: Renewable energy online or with PPAs signed under the Thai VSPP and SPP programs, as of October 2010 VSPP (MW) SPP (MW) Total (MW) PPA signed Generating PPA signed Generating PPA signed Generating Solar 2,020 16 90 - 2,110 16 Biogas 85 69 - - 85 69 Biomass 2,108 710 70 583 2,178 1,293 Municipal 95 32 - - 95 32 Waste Mini/micro 6 1 - - 6 1 hydro Wind 67 0 - - 67 0 Total 4,381 830 160 583 4,104 1,364electricity Some of the larger towns are served by size Additional per-kWh subsidies are provided11 diesel mini-grids owned by the national utility for projects that offset diesel-powered electricIn this case, the SPP tariffs are set slightly lower generation in remote areas, and to offset politicalthan what the utility has to pay for diesel genera- risk in southern provinces that have suffered intion, but high enough to be attractive to small recent years from violent conflict The feed-inbiomass and micro-hydro developers Already, adder is provided for seven to ten years dependingPPAs for four power plants have been signed, on technology type Prior to the feed-in adder,including power plants powered by wood waste, there was very little VSPP generation on-line evencoconut husks, micro-hydropower, and bagasse though the VSPP program was in operation sincefrom sugar processing plants The current tariff is 2002 Because the program used to be based onnot based on generation cost for renewable energy avoided cost, nearly all projects were larger biomasstechnologies and is too low to develop projects projects, using bagasse, paddy husk, or wood chipsother than biomass and hydro 62 The technology-specific feed-in adder has created technology diversity in the pipeline 64Thailand’s SPP and Very Small Power Producer(VSPP) regulations came into effect in 1992 Caps can be used to control the cost of an incen-and 2002 respectively and have been successful tive mechanism. FiTs in developing countries arein adding over 1,300 MW of renewable energy very often capped The caps do not necessarilygeneration capacity (See Table 5) 63 Since December reflect optimal levels of deployment, in terms2006, the programs also guarantee a FiT subsidy of cost or of grid stability, but rather reflect theon top of avoided costs, called the “feed-in adder,” limited available financial resources Caps alsodifferentiated by technology type and by generator reduce the level of investor certainty; without knowing whether a project they consider will fall62 Greacen and Mbawala, Country Case Studies: Thailand &Tanzania. Feed-in-Tariffs and Small Power Producer Regulations. under the cap or end up outside of the cap, inves-63 The Very Small Power Producer (VSPP) program applies togenerators up to 10 MW of electricity export The Small Power 64 Greacen and Mbawala, Country Case Studies: Thailand &Producer (SPP) applies to generators from 10 MW to 90 MW Tanzania. Feed-in-Tariffs and Small Power Producer Regulations. Grounding Green Power 27
  • 32. Table 6: Different rates for solar PV in India under FiTs and competitive bidding in Gujarat and at the national level Commission Date Levelized Cost Levelized Cost per Discrepancy per kWh (US$) kWh (US$) with without tax tax benefits benefits Gujarat State Electricity Commission January 2010 - 0 28 - (GERC) — solar PV FiT Central Regulatory 18 percent higher Commission (CERC) — March 2010 0 40 0 33 than GERC solar FiT Central Regulatory 32 percent Commission (CERC) lower than FiT November 2010 0 27 (average) - — competitive bidding set by the same NSM Commissiontors cannot calculate their projected revenues If much project developer interest that a FiT mightadditional public resources became available, for become difficult to manage and to fundexample from donor contributions, existing cappedFiTs could be scaled up by either increasing or It is quite common for REC trading to co-existcompletely removing the cap with FiTs, giving power producers the flexibility to choose the system that they believe will be moreCaps on overall capacity to be supported are in profitable Such a model exists in India and isplace, for instance, in India and the Philippines; caps currently under consideration in the Philippines 65on the maximum allowable project size are used In the Philippines, it has also been suggested thatin, for instance, Sri Lanka, Thailand, Tanzania, and REC trading be used only for those renewableIndia for its National Solar Mission energy sources that are not covered by the FiT, such as geothermalCombining different generation-based incen-tives can also help control the cost of renewable After a FiT generated more project developerenergy policy. There might be good reasons to use interest than necessary to reach solar energydifferent generation-based incentives for different targets, India used a bidding mechanism to mitigatetechnologies and project types For example, a the cost of renewable energy expansion As partFiT might be most useful to encourage broad of the National Solar Mission, a capacity target ofapplication of certain technologies through many 500 MW was defined for the first round of projectsdistributed projects But a country might at the that were to be approved at the solar FiT rate set bysame time use RPS or competitive bidding for other the CERC Due to the large response from projecttechnologies, for example if its strategy for a certain developers, the CERC pursued a reverse auctiontechnology aims for a small number of larger scaleprojects or if certain types of projects generate so 65 Kumar, “Country Case Study: India ”28 The German Marshall Fund of the United States
  • 33. mechanism and procured bids at 32 percent lower INTERNATIONAL SUPPORT: CAPACITY-BUILDINGthan the FiT they had previously set (see Table 6) 66 AND INTERNATIONAL PUBLIC FINANCE TO ADDRESS INCREMENTAL COSTS WITHIncentives need to be designed in a way that PREDICTABLE GENERATION-BASED INCENTIVESlimits speculation by imposing penalties or As policy environments, incentive mechanisms,canceling permits if no generation projects are and markets for renewable energies in developingbuilt. Mechanisms where the number of those that countries evolve, so will the role of internationalcan benefit from an incentive are limited can lead public finance If donors move towards supportingto speculation and limit the success of a program smart renewable energy policies, they will have toFor example if the total amount of capacity to consider ways to support performance-based incen-be supported is limited and potential producers tives This would involve both capacity buildingneed a permit to qualify, some companies or and technical assistance for the design of perfor-individuals might apply for permits without the mance-based incentives as well as funding for theintention to actually develop projects and rather additional cost of the incentive itself As more andspeculate on the rising value of the permit If this more experience with the design and implementa-happens, licenses might be blocked and less than tion of a FiT exists in the developing world, South-the intended capacity actually be installed Well- South exchange may be an appropriate mechanismdesigned rules can help limit speculation, for to build capacity in additional countries (see Boxexample by imposing financial penalties if projects 2)do not begin operations within a specified time-frame Providing international public funding for the additional cost of an incentive mechanism wouldIn Thailand, some companies applied for power involve significant amounts of finance over longpurchase agreements under the VSPP program periods of time It would be a new approach forwithout any intent to develop generation projects donors, but one that could have a transformativeInstead they acquired PPAs in the most attractive impact for scaling up renewable energies in thelocation only to sell them to project developers developing worldThis created uncertainty about the impacts on thegrid and on ratepayers This problem was later Mechanisms that provide investors with a guaran-addressed by a change in the regulations A bid teed market for more expensive solutions — suchbond for projects over 100 kW is now required, and as the generation-based incentives discussed in thisprojects must produce power within one year of paper — can be very effective in driving innovationthe scheduled date of commissioning to receive the or the transformation of a sector The High Leveltechnology-specific feed-in-tariff premium Other- Advisory Group for Long Term Financing createdwise they forfeit the bond 67 by the UN Secretary General found that such advanced markets commitment mechanisms are efficient tools to attract private capital by ensuring investors of a minimum market demand and a guaranteed return upfront 68 Several organizations66 Deshmukh, Renewable Electricity and Governance – Cases have proposed to link FiTs in developing countriesfrom India.67 Greacen and Mbawala, Country Case Studies: Thailand & 68 High Level Advisory Group for Long Term Financing, ReportTanzania. Feed-in-Tariffs and Small Power Producer Regulations. of the Working Group 7, p 21 Grounding Green Power 29
  • 34. Box 2: South-South exchange of experiences between Thailand and Tanzania1 There has been a South-South exchange of ideas and experiences between Thailand and Tanzania, focused on the Thai experience with small and very small power producer (SPP/VSPP) programs This has helped Tanzania develop its own SPP regulations appropriate for its context There are a lot of similarities among the power sectors of Thailand and Tanzania — in finance, in applicable technolo- gies, in institutional arrangements, and in power sector priorities SPP legal documents from developed countries with a more litigious legal culture, such as the United States, are often cumbersome docu- ments that try to anticipate and cover every possible situation that might arise Being able to access SPP legal documents developed in other developing countries has allowed Tanzania to develop regulations that address key issues and are more nimble In March 2010, the World Bank helped provide funding to bring a Tanzanian delegation to Thailand for a week to meet with counterparts on details of the Thai VSPP program The delegation was comprised of Tanzanian Ministry of Energy officials, utility engineers, representatives from the country’s regula- tory authority, financers, and project developers The engineers got to ask technical questions of Thai counterparts, while regulatory officials got to see what challenges and responses have emerged in regulatory oversight of SPPs A project developer of a biogas facility in Tanzania was able to learn from field technicians working at a cassava biogas plant north of Bangkok, and learned of new sources for equipment Financers and Ministry of Energy officials learned how small ($1 6 million) low-interest loans from a tranche of government money managed by commercial banks helps jumpstart the lending process by commercial lenders An exchange like this not only helps renewable energy in Tanzania Within Thailand — and especially within the Thai utility that hosted the tour — the profile of the VSPP program was highlighted and raised in stature Thai utility people now recognize that their VSPP program and FiT is an international success As a follow up, three Thai utility officials have been hired to assist Tanzania’s national utility in setting up an “SPP cell” to provide efficient and focused support for SPPs that wish to connect to the national grid — Chris Greacen, Palang Thai 1 For a more detailed version, see Chris Greacen, South-South Policy Transfer: Thailand & Tanzania (Washington, DC: World Resources Institute, November 22, 2010), http://www wri org/developing-country-renewablesto a global support mechanism The rationale is carbon and development benefits, ratepayers orthat, as investors are reluctant to invest in renew- taxpayers in developing countries are not able toable energy in developing countries because they shoulder the full cost of the mechanism An inter-perceive the risk as too high, a FiT could be a tool national public finance mechanism would thereforehelp lower those risks However, while ambitious provide all or some of the price premium One ofFiTs can be an important component of smart the most elaborate proposals, the GET FiT concept,renewable energy policy and could lead to rapid was developed by Deutsche Bank Climate Changedeployment of renewable energies with all its Advisors (see Box 3)30 The German Marshall Fund of the United States
  • 35. Box 3: The GET FiT ProgramThe Global Energy Transfer Feed-in Tariffs Program (GET FiT) was first conceived by Deutsche BankClimate Change Advisors (DBCCA) in January 2010 in response to an invitation from the UnitedNations Secretary General’s Advisory Group on Energy and Climate Change (AGECC) to present newconcepts on how to drive renewable energy investment in the developing world 1 DBCCA respondedwith GET FiT, a proposal to create new international public-private partnerships to support bothrenewable energy scale-up and energy accessThe GET FiT concept builds upon previous global feed-in tariff proposals and interviews with 160experts to incorporate a bottom-up, private sector perspective on renewable energy finance anddevelopment risks 2 It does this by exploring the barriers to program implementation in detail, and byhighlighting the instruments available that could efficiently spur development of renewable energyThe GET FiT envisions include three types of support: 1) a source of public finance from differentsources for renewable energy incentives, 2) risk mitigation strategies such as international guaranteesand insurance, and 3) coordinated technical assistance to address non-financial barriers and create anenabling environment for project developmentSince renewable energy policies need to be adapted to the local developing country context, GET FiT proposes three programs Targeted GET to support different policy GET FiT Solution FiT Support models beyond feed-in tariffs Provide supporting payments for above-market (Figure 2) Advanced premiums for renewably produced energy through Feed-in Tariffs advanced feed-in tariff designs that target on-grid, In each of the three cases, commercialized, renewable resources GET FiT would contribute Lighthouse Use power purchase agreements as a pre-FiT public sector funds to share Power Purchase regulatory mechanism in countries that face grid the above-market costs of Agreements integration constraints, or for technologies that renewable electricity with (PPAs) have a limited in-country track record partner countries, while Adapt FiT design principles to create perfor- utilities would commit to Mini-grids for mance-based incentives for decentralized multi- Off-Grid Appli- user energy generation, especially mini-grids, in purchasing electricity from cations generators at market price rural areas with limited grid infrastructure This stabilization of revenueFigure 2: Project types addressed under GET FiT.3 streams could attract signifi-1 For the full proposal, see DB Climate Change Advisors, GET FiT Program: Global Energy Transfer Feed-in Tariffs for DevelopingCountries, available online at www dbcca com2 GET FiT builds upon proposals such as those developed by: Ad Hoc Working Group on Long-term Cooperative Action, Euro-pean Commission Joint Research Centre, UN Department of Economic and Social Affairs, European Renewable Energy Counciland Greenpeace, World Future Council, World Wind Energy Association, International Renewable Energy Alliance, and ProjectCatalyst3 DB Climate Change Advisors, GET FiT Plus: De-Risking Clean Energy Business Models in a Developing Country Context, Forth-coming Report (New York: Deutsche Bank Group, 2011) Grounding Green Power 31
  • 36. Box 3: The GET FiT Program (continued) cant amounts of private sector capital from both domestic and international sources to build renewable energy projects 3 In addition to providing direct financial incentives, the GET FiT concept identifies a series of guarantees and mitigation strategies to address financial risks beyond those that derive from policy structure Whether supporting national feed-in tariffs or other policies, GET FiT envisions a customized, rather than prescriptive approach to supporting renewable energy In each case, public sector resources such as incentive funds, guarantees and technical assistance would be mobilized as appropriate to support new renewable generation The GET FiT concept is intended as a template which could be flexibly adapted to specific national contexts and could be launched on a bilateral, regional, or global basis — Christina Hanley, Meister Consultants Group 3 For a detailed chart of the payment and guarantee structure, see: DBCCA (2010), GET FiT, p 18While no international funds or programs to The creation of specialized trust funds withinfinance FiTs exist to date, there are a few existing the multilateral development banks dedicated tomechanisms donors could learn from The Clean support climate change initiatives present someDevelopment Mechanism (CDM), a carbon-market valuable lessons on how provision of conces-mechanism created under the Kyoto Protocol, sional finance could help facilitate deploymentoffers an example of a performance-based funding of low-carbon technologies The Climate Invest-source that rewards the private sector for taking ment Funds (CIFs) are one of the most cited “liverisks and provides it with a return (in this case, the experiments” undertaken by governments to helpdifference between the cost of generating offset developing countries “bridge the gap betweencredits and the prevailing market price) 69 Carbon conventional dirty and clean technology” Theseoffset development has stimulated private-sector $6 3 billion funds were established in January 2008investment for renewable energies in developing to operate until 2012, and are channeled throughcountries In 2009, investments in renewable ener- the World Bank and other multilateral develop-gies (wind, biomass, and hydropower) counted for ment banks Their creation was prompted by a23 percent of the CDM market 70 joint commitment from the governments of the United Kingdom, the United States, and Japan As69 High Level Advisory Group for Long Term Financing, Reportof the Working Group 8 of May 2011, 14 donor governments have pledged funds to the CIF The bulk of these funds ($4 7670 World Bank, State and Trends of the Carbon Market, 2010;High Level Advisory Group for Long Term Financing, billion) are dedicated to support the deployment ofReport of the Working Group 8, p 20 It should be noted that clean energy technologies and make transforma-assessing the “additionality” of emissions reductions — and thusthe performance of any given CDM project— has been a big tive reductions in greenhouse gas (GHG) emissionhurdle for CDM project developers A number of proposals to trajectories in developing countries 71reform the CDM put forward models based on sectoral perfor-mance rather than individual projects performance, for examplesectoral crediting performance, where credits are created if theoverall sectoral performance exceeds an agreed performanceIn this case, the additionality assessment would be improved by 71 Polycarp, C et al Learning from the Climate Investment Funds,adopting standardized approaches to baseline-setting instead of World Resources Institute, November 2010, http://www wri org/a project-by-project basis as is the case now stories/2010/11/learning-climate-investment-funds32 The German Marshall Fund of the United States
  • 37. Through one of the CIFs, the Clean Technology need some form of international support to be ableFund (CTF), countries obtained support to develop to do so 73clean investment plans that contain the majoropportunities for greenhouse gas reductions in In such cases, the cost of the program would bedifferent sectors and detail those requiring interna- shared between a developing country that paystional support Many of these plans outline possible the cost of the more modest original program andoptions for structuring financial support so that donor funds that would support scale-up in one ofgrant-based and/or highly concessional financing the following ways:mechanisms could be blended with private sector • FiT restricted to certain technologies  donorinvestments to help buy down the high-cost of funds to add more technologiesspecific technologies and the costs associated withrenewable energy policies (such as a national FiT • FiT rates based on utilities’ avoided costprogram) in a developing country  donor funds to shift to rates based on technology-specific generation costIn addition, the World Bank’s ESMAP has alsointroduced a set of innovative financing mecha- • Cap on the capacity supported by a FiT nisms, as well as training and technical assistance donor funds to increase or remove capto support low-income countries’ ambition andplans to diversify energy supply and switch to 73 Greacen and Mbawala, Country Case Studies: Thailand &zero-carbon technology options 72 In less developed Tanzania. Feed-in-Tariffs and Small Power Producer Regulations.markets in Africa for example such mechanismscould help finance the upfront cost of a nationalFiT programProviding additional funding to existing FiTschemes in the developing world could be anattractive way for donors to leverage their fundsfor maximum impact FiTs in the developing worldmay differ from what is considered best practicein the developed world, where noncapped, tech-nology-specific, generation cost–based FiTs providevery high certainty for investors Because of limitedtechnical and financial resources, developing coun-tries often have to limit the ambition of their FiTprogramsFor example, the current Tanzanian SPP tariff isnot based on generation cost for renewable energytechnologies and thus appears too low to developprojects other than biomass and hydro Tanzania isconsidering adopting technology-based rates in itsSPP program in the near future, but would likely72 World Bank, http://www esmap org/esmap/overview Grounding Green Power 33
  • 38. 5 Creating an Enabling Policy and Regulatory FrameworkLESSONS LEARNED: In Thailand, the SPP/VSPP program includes inter-SMART RENEWABLE ENERGY POLICY NEEDS connection rules They stipulate that utilities maySTRONG INSTITUTIONS, SOUND PROCESSES, only reject applications if the applicant’s facility isAND WELL-DESIGNED REGULATIONS not in compliance with published technical guide-Simply providing a generation-based incentive lines This is seen as an important factor in theto cover the incremental cost of renewables as success of the program, because it has provided acompared to fossil fuels is not sufficient to spur predictable and easy to navigate way for small inde-renewable energy deployment A broader set of pendent power producers to ensure their electricityrules and regulations governing power production will be bought by the utility 75and grid operation are needed Determining where exactly renewable energyIn a previous report, WRI has developed a frame- projects will be located can benefit from consulta-work for enabling sustainable energy investment tion with affected communities Experiences withthat summarizes the different elements policy- community opposition in Mexico demonstrates thatmakers need to consider when designing energy advance planning for wind farms, early communitypolicy 74 Based on an examination of policies, regu- involvement, and the provision of tangible locallations, and institutional capacities in the electricity benefits has avoided project delays and politicalsector that direct both public and private invest- tension 76ment in sustainable energy options, the elements Institutions and procedures for transparent,proposed in the framework are intended to help accountable, and participatory decision-makingany country consider the options for how best to can lead to better decisions and improve publicprovide electricity services in light of intertwined support for renewable energy programs. Goodeconomic, social and environmental considerations governance is a critical aspect of smart renewable(see Box 4) energy policy When policymakers and regulatorsAny generation-based incentive needs to be part design and implement policies, they are faced withof a broader set of power sector rules and regula- many questions For example, when establishing ations. For example, interconnection rules may generation-based incentive, they may ask: Whichestablish a legal requirement for grid operators to technologies and types of projects should beconnect new renewable energy projects to the grid encouraged? What is the capacity target? Which isThis is crucial because a generation-based incentive the most appropriate mechanism? Which selec-may guarantee a power producer a certain price tion criteria are to be applied in order to determineif he feeds power into the grid, but that is of little eligible projects? If a FiT is used, how can thehelp if the project cannot get connected Another appropriate rate be determined? Who pays?example is the necessity of established and regular The availability of good data and access to knowl-avenues for community engagement and free, edge and experiences made in other countries canprior, and informed consent when siting renewable help regulators make decisions In addition, ourenergy projects case studies reveal that transparent, accountable, 75 Greacen and Mbawala, Country Case Studies: Thailand & Tanzania. Feed-in-Tariffs and Small Power Producer Regulations.74 Nakhooda and Ballesteros, Investing in Sustainable EnergyFutures. Multilateral Development Banks’ Investments in Energy 76 Peter Banner, La Ventosa Mexico Wind Case Study (Wash-Policy ington, DC: USAID, September 2009)34 The German Marshall Fund of the United States
  • 39. Box 4: WRI’s 11 Point Framework on Enabling Investments in Sustainable Energy Policies & Regulations • Long-term integrated energy planning • Policies and regulations encouraging energy efficiency • Policies and regulations promoting renewable energy • Access to electricity for the poor • Pricing structures encouraging efficiency and reducing consumption • Subsidy reforms to reveal true costs of fossil fuels and promote the viability of sustainable energy options Institutional Capacity & Governance • Executive agencies’ capacity for sustainable electricity • Regulatory agencies’ capacity to oversee implementation of sustainable electricity policy • Utilities’ capacity to promote energy efficiency and renewables • Transparency of policy, planning, and regulatory processes for electricity • Stakeholders’ engagement in policy, planning, and regulatory processesand participatory processes are needed to find satis- ized According to an international survey by thefactory answers to the many questions related to U S National Association of Regulatory Utilitysmart renewable energy policy design Commissioners, there are two main reasons for this First, civil society organizations often lack theAs the comparison of FiTs for solar PV and wind necessary capacity, resources and data access topower in India above has illustrated, there is a risk engage in the regulatory process in a meaningfulthat support levels are set higher than need be, way Second, they perceive the regulatory process asbecause regulators are dependent on project devel- driven by investor needs and therefore lose inter-opers for information about costs and do not have est 77the capacity to cross-check them Civil society orga-nizations have played an important role in reducing There have been some examples demonstrating theinformation asymmetry about the cost of renewable value of civil society participation in our case studyenergy and in increasing the percentage of renew- countries With additional support for capacityable energy in long-term power development plans development and institution building, these couldYet the potential of civil society to participate in 77 NARUC, “The Role of Consumer Organizations in Electricitydecision-making processes about the price and Sector Policies and Issues: Results of NARUC’s Global Survey,”impact of renewable energy is far from real- 2006 Fifty-two organizations in 38 countries responded to the NARUC Global Survey Grounding Green Power 35
  • 40. be replicated in other contexts Analysis produced the role of civil society participation, creating theby the Healthy Public Policy Foundation (HPPF), perception of regulatory capture For most civilPalang Thai, and other NGOs in Thailand have society organizations, the focus on investor issuesbeen instrumental in the decision to include the has meant that the regulatory process is of littleoutput from the VSPP program in the national value to them Thus begins a cycle of nonengage-power development plan These groups are ment, for when civil society organizations stay awaycontinuing to press for more energy efficiency to be from regulatory proceedings, the perception thatincluded as a supply option as well 78 the process has been captured by project developers is reinforced, and has the potential to build popularIn South Africa, Idasa, Green Connection, Sustain- suspicion of renewable energy generation ratherable Energy Africa, and other NGOs have similarly than a constituency that demands more ambitionopened up the process for integrated resourceplanning to public consultation, creating space for a Processes should allow for periodic review andlarger range of perspectives in an industry domi- changes to the generation-based incentives ifnated by coal interests 79 necessary. Institutional capacity and procedures for monitoring, evaluation, and enforcement will bePrayas’ study “Clean Energy Regulation and Civil crucialSociety in India” documents the poor publicresponse to the renewable energy tariff orders The wide divergence of tariff levels under similarissued by Indian state regulatory commissions 80 circumstances in India points to the need for aThe study, which reviewed regulatory proceedings robust regulatory process for technical review Forand conducted stakeholder interviews in five Indian instance, Prayas’ comparative analyses of wind,states, concluded that there are two main reasons solar, and biomass in different Indian states havefor this First, the lack of reliable data about renew- been helpful in providing insights into problems ofable energy, including resource availability, costs, information asymmetry As the policy environmentand performance means that only a handful of matures and the information asymmetry is recti-technically sophisticated civil society organizations fied, Prayas hopes periodic reviews will result inare able to properly analyze regulatory decisions more cost effective policies 81and the data that underpin them, and this workdepends on the availability of adequate resources INTERNATIONAL SUPPORT: BUILDING POLICY,The second reason is that regulatory bodies tend REGULATORY, AND INSTITUTIONAL CAPACITYto focus on investor issues and do not recognize While historically, the bilateral and multilateral institutions have focused on reforming the elec-78 Presentation by Suphakit Nuntavarakorn, Healthy Public tricity sector to improve competitiveness andPolicy Foundation, at the 14th Annual Anticorruption Confer- encourage private investments more broadly, theyence, Bangkok 2010: http://electricitygovernance wri org/news/2010/12/egi-14th-international-anti-corruption-confer- have recently started to pay greater attention toence creating enabling environments specifically for79 Trollip, Status of Renewable Energy Implementation in SouthAfrica with a Focus on the REFIT and the Role of Multi-LateralDevelopment Banks80 Prayas Energy Group, “Clean Energy Regulation and CivilSociety in India: Need and Challenges to Effective Participation,” 81 Prayas Energy Group, “Clean Energy Regulation and CivilOctober 2010 , http://electricitygovernance wri org/files/egi/ Society in India: Need and Challenges to Effective Participation,”Clean_energy_regulation_csos_india_peg_oct10 pdf October 201036 The German Marshall Fund of the United States
  • 41. promoting private investment in cleaner energy found that there remains a need for more supportalternatives, including renewable energy 82 to create enabling environments, including the institutions and policies that will encourage furtherSome of the international financial institutions are private investments in renewable energy technolo-responding to the need for effective enabling envi- gies This also includes support for civil societyronments For example, the Global Environment organizations to participate in and contribute to theFacility (GEF) supported a project in South Africa policymaking and planning processesin 2007 to assist with drafting laws, regulation, andregulatory instruments for promoting renewable Although multilateral development banks areenergy, including an exploration of the level of already supporting a few enabling activities, theFiTs necessary to encourage private investment in study found that, for example, out of the 79 devel-renewable energy 83 opment policy loans made by the World Bank, the Inter-American Development Bank, and AsianSimilarly, in Central America, the Inter-American Development Bank between 2006 and 2008, onlyDevelopment Bank has provided technical assis- eight projects addressed seven to ten elements oftance support for Guatemala, Costa Rica, Panama, the 11-point framework for enabling sustainableand others to develop policy and regulatory energy investments (see Box 4) 87measures, while the Asian Development Bank hassupported similar activities in Pakistan, Samoa, More support in this area could also includeand India 84 Bilateral agencies have also supported support for civil society organizations to partici-similar activities, such as the French Develop- pate in and contribute to the policymaking andment Agency’s support for energy sector reform to planning processes In order for public constituen-promote renewable energies in Mauritania 85 cies for renewable energy to be built, additional resources would need to be provided for deeper andIn recent years, the World Bank’s ESMAP has intro- broader participation Access to analytic resourcesduced a set of innovative mechanisms, including would deepen the pool of civil society organiza-training and technical assistance, to support low- tions with technical capacity Those groups couldincome countries’ to develop plans to diversify their also be resourced to reach out to a broader rangeenergy supply and switch to zero- and low-carbon of organizations to build a network of civil societytechnology options 86 organizations whose interests in clean and equitably priced energy could be represented There is a need,Nevertheless, in 2010, a WRI study of supportprovided by the multilateral development banks then, for institution building to enable regulatory commissions and other government departments to properly support civil society participation and to82 Dubash, Power Politics: Equity and Environment in ElectricityReform; Nakhooda, Dixit, and Dubash, Empowering People: A increase the capacity of civil society to participateGovernance Analysis of Electricity.83 Trollip 2010; Nakhooda and Ballesteros, 201084 Nakhooda and Ballesteros, 201085 http://www ubifrance fr/electricite-energies-renouv-elables-nucleaire/001B1005261A+mauritanie-20-m-eur-de-l-afd-pour-la-reforme-du-secteur-de-l-electricitehtml?SourceSiteMap=119086 World Bank, http://www esmap org/esmap/overview 87 Nakhooda, Ballesteros Grounding Green Power 37
  • 42. 6 Providing Attractive Financing OptionsLESSONS LEARNED: this financing Over time, IREDA has demonstratedBETTER FINANCING CONDITIONS ARE CRUCIAL the financial viability of renewable energy projectsPreferential financing options complement gener- in India, which has encouraged the commercialation-based incentives by reducing investors’ risks banking sector to increase financing of new renew-and addressing the high upfront capital needs able energy projects 89The countries that have been most successful in In Brazil, the National Development Bankdeploying renewable energy both in the developed (BNDES) offers special financing conditions forand the developing world have not only imple- renewable energy projects, under the conditionmented a mechanism to cover the incremental cost that they use 60 percent of domestically producedof renewable energy, but have also taken other steps equipment 90to increase the financial viability of projects Thesesteps can include tax incentives as well as easy INTERNATIONAL SUPPORT:access to capital at preferential conditions SUBSIDIZED CAPITAL AND RISK MITIGATION TOThese two approaches are interrelated: The lower ADDRESS INCREMENTAL INVESTMENT NEEDSthe cost of capital, the less the gap to be covered by AND HIGHER COSTS OF CAPITALa generation-based incentive As discussed above, Going beyond the creation of enabling environ-it would be unwise to encourage renewable energy ments, donors need to use the assistance theydeployment by subsidizing capital cost alone, as this bring to directly address the financial barriers thatwould shift the incentive away from the key objec- currently inhibit the scaling-up of investmentstive of actual power production Therefore, the two in renewable energy technologies Such barriersapproaches must be carefully balanced to comple- include incremental costs due to the higher lifetimement each other costs of projects, incremental investment needs due to higher upfront costs on capital investments, andIn Thailand, in addition to the SPP/VSPP higher costs of capital due to risk perceptionsprograms, the government loaned 4 billion baht($133 million) to 13 commercial banks at 0 5 Various models have been attempted to addresspercent interest under the condition that the capital some of these risks, including the provision ofwas used to provide loans of up to 50 million baht direct subsidies or subsidized capital, the combi-($1 6 million) to small power projects at preferen- nation of different sources of finance to developtial 4 percent interest rates 88 attractive financial packages, and the use of refi- nancing mechanisms for financial intermediariesThe Indian Renewable Development Agency(IREDA) has provided long-term credit of up to For example, the Rural Energy Enterprise Devel-70-80 percent of the project cost This is offered opment (REED)91 program, a UN Environmentto project sponsors with competitive interest rates Programme (UNEP) initiative, provides seedand has contributed to the nearly one-third of capital in the form of low-interest loans directly toIndia’s renewable power generating capacity over 89 Mostert, W and Lindlein, P Financing Renewable Energy,two decades IREDA was able to tap the domestic December 2005, Kreditanstalt fuer Wiederaufbau (KfW)capital markets by issuing bonds in order to provide Entwicklungsbank 90 Soliano Pereira, Status of Brazilian Renewable Energy Policy.88 Greacen and Mbawala, Country Case Studies: Thailand & 91 UNEP REED Programme http://www unep fr/en/hilites/Tanzania. Feed-in-Tariffs and Small Power Producer Regulations. thematic_sites/reed htm38 The German Marshall Fund of the United States
  • 43. the private sector on a project-by-project basis 92 domestic financial institutions can play an impor-Such loans help to lower the cost of capital to the tant role in scaling-up investments in renewableproject, improve returns, and thereby improve the energy technologiesviability of the project However this approach doesnot address projects that face incremental costs Another interesting example of blending tools to create attractive financing packages is the Philip-Some programs have combined grants with subsi- pines’ approach to financing wind power The Phil-dized capital For example, the Indian Renewable ippine Renewable Energy Board cites the combinedDevelopment Agency (IREDA) has combined financing package offered by local banks combinedconcessional credit lines from international devel- with international support as key to successfullyopment agencies such as the Asian Development kick-starting the first on-grid wind farm in theBank, KfW, and the World Bank, with grants from country Under this scheme, local banks providedthe Global Environment Facility to provide long- upfront investment support to the project’s devel-term credit of up to 70-80 percent of the project opers, which had more than 50 percent domesticcosts 93 shareholders This then paved the way for the rest of the funding to come through from the DanishIREDA was able to tap the domestic capital International Development Agency, the Philippinesmarkets by issuing bonds in order to provide this Export Import Credit Agency, the Korean Exportfinancing Accessing domestic capital by lever- Import Bank, and the Japan Bank for Internationalaging commercial financial intermediaries can be Cooperation 96 Similarly, the International Financeeven more effective In Vietnam, for example, the Corporation has started a program in the Philip-World Bank refinanced 80 percent of the loans pines to support domestic banks in financingprovided by three commercial banks to eligible renewable energy projects by providing technicalsmall-scale renewable energy projects, thereby and financial support including credit lines andencouraging commercial lending to projects 94 partial guarantees of up to 50 percent of the loanUNEP similarly used financial intermediaries in principal 97Programme Solaire from 2004 to 2007 (PROSOL),a loan program in Tunisia to lower the financing 96 Pete H Maniego, “Country Case Study: Philippines”costs of solar hot water systems 95 PROSOL helped (presented at the Renewable Energy Policy Workshop, WRI, Washington, DC, November 22, 2010)to develop a market for solar heating by providingfinancial support and capacity to national finan- 97 http://www chathamhouse org uk/files/16504_0410pp_ hamilton pdfcial institutions rather than capital subsidies toproducers This helped ensure the sustainability ofthe PROSOL program with continued lending fromthe participating banks Thus, reducing the risks for92 Climate Finance Options, UNEP Renewable Energy Entre-prise Development (REED) http://www climatefinanceoptionsorg/cfo/node/4593 Mostert, W and Lindlein, P Financing Renewable Energy,December 2005, Kreditanstalt fuer Wiederaufbau (KfW)Entwicklungsbank94 Wang et al , 201095 Financing a Climate for Change, UNEP 2008 Grounding Green Power 39
  • 44. 7 Building the Necessary Technical EnvironmentLESSONS LEARNED: Second, renewable energy is often intermittent orTECHNICAL CAPACITY AND INFRASTRUCTURE variable The amount of electricity produced byARE NECESSARY some renewable energy sources is dependent on theDeveloping, installing, operating, and maintaining weather and time of day A responsible provider ofrenewable energy projects requires specific capaci- electricity must assure that electricity is available onties Skilled engineers are needed for the planning, demand This requires the grid operators to changeinstallation, and operations phase as well as for how they manage supply and demand on the gridmanaging transmission and distribution systems The amount of electricity produced by renewableon the electric grid Projects also need the equip- energy sources is dependent on the weather andment and trained personnel to generate and process time of day Managing the grid requires the griddata on resource availability and project economics operator to finely balance the supply of electricityService providers, from banks to construction against the demand for electricity constantly Tradi-companies, are also necessary to develop and install tionally, this is accomplished by adapting supply toprojects meet demand When consumers arrive home from work at the end of their day and turn on their airA domestic industry that is able to supply some conditioners, the grid operator brings more supplycomponents and adopt the equipment to local onto the grid nearly instantaneously Fluctuatingcircumstances will have to emerge To some extent, supply that cannot be controlled is a new paradigmthe necessary technical capacity can grow with for most grid operators While regions with largethe renewable energy sector, but a minimum level renewable energy capacity have learned to optimizeneeds to be present to establish a stable foundation its use through sophisticated weather and electricityTargeted training and education programs as well demand forecasts, advanced technology, and newas support for clean-energy start-ups can help build dispatching policies, these changes present a signifi-this capacity cant learning curve for grid operatorsThe unique challenges renewables pose for grid Bundling of renewable energy projects intoinfrastructure in terms of transmission and inter- clusters can help transmission planners prioritizemittency need to be addressed. Renewable energy geographic areas for building new grid capacity.has two characteristics that make it challenging for To help match investments in new transmis-grid operators First, renewable energy is location- sion capacity with the most promising areas forbound: It is often abundant in places remote from scaled-up renewable energy development, projectconsumer population centers Yet current trans- bundling offers an efficient policy tool, which ismission infrastructures have been developed with also appealing to prospective investors The processconventional fuels like coal in mind, which can be of prioritizing regions requires a well-designedtransported to generating facilities relatively close planning process, with the engagement of theto these population centers Scaled-up deployment private sector and other stakeholders, to under-of renewable energy requires a robust transmission stand resource requirements and to appropriatelyinfrastructure, designed to interconnect demand allocate transmission costscenters to regions with good renewable energyresources Special rules must be imposed to manage In Mexico, an “open season” mechanism for privatethis particular kind of energy flow generation of wind in Oaxaca facilitated an efficient means of collaboration and burden-sharing among developers and with the national utility The state of40 The German Marshall Fund of the United States
  • 45. Oaxaca has very strong wind energy resources, with organized for 200 “master trainers,” who in turnan estimated potential of 10,000 MW and plans trained 1,500 service engineers and local systemto build more than 2,000 MW in wind projects operators in China 100However, the transmission infrastructure in thestate is insufficient to connect new wind capacity Providing support to grid companies is also essen-to the demand centers elsewhere in Mexico The tial to build their capacities to address issues uniquepublic utility could not finance the necessary grid to renewable energy technologies, such as intermit-expansion with public funds alone The open tency In another technical assistance program atseason was an elaborate bidding mechanism to the operational level, the Asian Development Bankdetermine how much wind power capacity was to is providing support to the State Grid Corporationbe developed and transported by a new transmis- of China to develop a smart grid roadmap, tech-sion line It allowed the public utility to commit to nical standards for renewable energy connectivitybuilding new transmission infrastructure and the to the grid, the upgrade of wind power forecastingproject developers to commit to using that infra- systems, and training and study tours 101structure and paying around 80 percent of its cost 98 100 German Technical Cooperation, “Wind power research andINTERNATIONAL SUPPORT: training center project,” http://www gtz de/en/weltweit/asien- pazifik/china/8641 htmlTECHNICAL CAPACITY BUILDING AT THEOPERATIONAL LEVEL http://www adb org/Documents/TARs/PRC/43053-01-PRC- 101 TAR pdfBeyond providing support to create the enablingenvironments and investments to overcome thefinancial barriers, donors also have a role to playin supporting feasibility studies and other assess-ments at the project level, and enabling knowledgetransfer and technical capacity building at theoperational levelIn Colombia, Cuba, and Peru, for example, theU K Department for International Developmentdeveloped a step-by-step manual for villagers oper-ating micro-hydro, solar, biogas, and wind systemsto enable them to develop basic skills to resolveon-site problems 99 In another program fundedby GTZ, DfID’s German equivalent, a trainingprogram for renewable energy in rural areas was98 Francisco J Barnes, “An Open Season Scheme to DevelopTransmission Interconnection Investments for LargeWind Farms in Mexico” (Washington, DC, April 1, 2009),http://siteresources worldbank org/INTENERGY/Resources/335544-1232567547944/5755469-1239633250635/Francisco_J_Barnes pdf99 http://www dfid gov uk/r4d/PDF/Outputs/R8018Technical-report pdf Grounding Green Power 41
  • 46. 8 RecommendationsThis working paper has analyzed case studies of will require the development of country-specificdeveloping countries using smart renewable energy support packages and mixing and matching of apolicy to address the financial, technological range of finance sources and tools The balance ofand policy barriers scaling up renewable energy the evidence collected in this paper suggests thatSuccessful approaches vary by country, but there support should move beyond a project-by-projectare some common themes: focus and shift to country-wide and sector-based programming addressing all of the elements of • Smart renewable energy policy creates markets smart renewable energy policy by setting targets and using predictable, cost- effective, generation-based incentives that This support will have to include: reward performance and innovation 1. Technical assistance, capacity development, • Smart renewable energy policy is developed, and institution building to help developing adapted, and implemented through decision- countries develop strategies, targets, and making processes that are transparent, policies. This should include: accountable, and participatory • An investment in policymakers’ and • Smart renewable energy policy also ensures regulators’ capacity and technical know- the necessary technical capacity, financing how, so they can draft the plans, laws, conditions, and infrastructure are in place to and regulations that are needed for a support the growing deployment transformative shift to more renewable energy;While the policy mix should always be context-and country-specific, the conclusions drawn from • An investment in regulatory institutionsthe case studies in this paper are useful for several and transparent, accountable, andaudiences Policymakers and regulators in devel- participatory decision-making processes;oping countries should take these lessons learnedinto account when designing their own policies • Capacity building for civil societyand when formulating their needs and demands for organizations to effectively participate ininternational support Civil society and the private planning and regulatory processes, in ordersector in developing countries should promote the to make renewable energy policy morekey principles and components of smart renewable effective and efficient; andenergy policy Donors and international institutions • Support beyond one-off technical assistanceshould focus their support on the design and imple- projects, because the ongoing stakeholdermentation of policies that reflect the principles of engagement and regular review that issmart renewable energy policy crucial might be best supported throughThis paper has identified areas where governments long-term partnershipsin the United States, Europe, and other developed 2. Grant-based international public financingcountries, through their bilateral support and for generation-based incentives to covermultilateral institutions, as well as philanthropic additional cost. This form of support isorganizations can support transformative renew- currently underdeveloped yet will be crucialable energy scale-up in developing countries This42 The German Marshall Fund of the United States
  • 47. to achieve the shift from project-by-project to exists to produce equipment and adopt it to programmatic support local circumstances, to develop, install, main- tain, and operate renewable energy projects • Countries that already have renewable and to manage the transmission infrastructure energy policies and generation-based that is needed for grid-connected projects incentives in place represent an opportunity for donors to realize additional benefits Various institutions can play a role in providing this relatively easily For example, in a country support: that already has a modest, capped FiT in place, the existing cap could be increased • Bilateral development agencies, as part or removed or the group of eligible of their broader development assistance technologies could be broadened strategies — in their existing electricity sector work, specific bilateral climate change-related • Bilateral or multilateral donors should initiatives, or through new clean technology begin pilot initiatives to test this approach, initiatives — can provide support in all four likely with smaller countries that have areas identified above Technical assistance, already demonstrated a commitment to capacity building programs, and facilitation renewable energy first of South-South exchange can help address the first and fourth area Larger financial • In the long run, a multilateral fund might support will be needed for the second and be the most appropriate source of the third area Bilateral donors can develop pilots long-term, large-scale funding that would for innovative support packages These pilots be needed to support generation-based can serve as proof of concept and inform larger incentives in a number of developing multilateral initiatives countries • Multilateral development banks such as the3. Subsidized capital and risk mitigation to World Bank and other regional development address incremental investment needs and banks, bilateral financial institutions, and higher costs of capital. Donors have some export-credit agencies have a role to play experience with the provision of this form of in reducing investment risk Multilateral assistance and should continue to provide it, in development banks have a long history order to lower the risk of investments in smart of engagement in the electricity sector of renewable energy development developing countries and therefore can play an important role in reducing these risks via • Grant-based mechanisms, including public capital and ensuring strong support for the provision of subsidized capital, or policy, regulation and institutional capacity concessional finance should be blended integrated into country assistance strategies with commercial loans as well as capital and program and policy loans on the debt and equity front to facilitate large-scale programmatic renewable energy • Existing multilateral climate funds as well programs as new ones such as the Green Climate Fund, once operational, could provide the needed4. Technical capacity building. Donors should support for smart renewable energy policy help ensure the necessary technical capacity Grounding Green Power 43
  • 48. as part of country-wide low-carbon plans (known as NAMAs) or sectoral initiatives For maximum impact, they should address all of the four areas identified above• International technology cooperation through institutions such as the International Renewable Energy Agency or the emerging UNFCCC technology mechanism can play an important role by facilitating knowledge sharing, South-South exchanges, and capacity building44 The German Marshall Fund of the United States
  • 49. 9 Annex: Overview of Case Study Countries Country Expert Focus Material Online Workshop materials are available online at http://www wri org/developing-country-renewablesBrazil Osvaldo Soliano Pereira (Univer- Policy mix/different genera- Presentation, Country sity of Salvador, Brazilian Center tion-based incentives Case Study for Energy and Climate Change)India Ranjit Deshmukh (Prayas Energy Policy mix/different mecha- Country Presentation, Group), Suman Kumar (Confed- nisms; governance; energy Governance Presentation, eration of Indian Industry), access Governance Case Study Neerja Upadhyaya (Madhya Pradesh Rural Livelihoods Project)Indonesia Fabby Tumiwa (Institute for Governance, role of multilat- Presentation, Best Practice Essential Services Reform) eral development banks Case StudiesKenya Mark Hankins (consultant) Energy access; FiT readiness Presentation; Regional Case Study (Solar in Africa)Mexico Odon de Buen (consultant) FiT readiness PresentationMorocco Mustapha Taoumi (IRENA) Regional case study; South- Presentation, Regional South cooperation; Interna- Case Study (Middle East tional support and North Africa)Mozambique Osvaldo Soliano Pereira (advisor Challenges in an LDC with Presentation to the National Electiricity low electrification rate; South- Council) South cooperation with BrazilSouth Africa Hilton Trollip (Idasa) Governance; role of multilat- Presentation; Country eral development banks Case Study; Background on REFITSri Lanka Asoka Abeygunawardana (Energy Policy mix/different mecha- Presentation; Country Forum, Advisor to the Energy nisms Case Study Minister)Philippines Pete Maniego (Renewable Energy Policy mix/different mecha- Presentation Board); Jasper Inventor (Green- nisms peace)Tanzania Anastas Mbawala Policy mix/different mecha- Country Presentation; nisms; South-South coopera- South-South Cooperation tion with Thailand Presentation; Country Case StudyThailand Chris Greacen Policy mix/different mecha- Country Presentation; nisms; South-South coopera- South-South Cooperation tion with Tanzania Presentation; Country Case Study; South-South Cooperation Case Study Grounding Green Power 45
  • 50. OfficesWashington • Berlin • Paris • Brussels Belgrade • Ankara • Bucharest www.gmfus.org