Course on Regulation and Sustainable Energy in Developing Countries - Session 6

AUCTIONS AND FISCAL INCENTIVES WEBINAR 23 FEBRUARY 2012 Chad Laurent Senior Consultant - MCGs General Counsel Course on Regulation and Sustainable Energy in Developing Countries – Session 6 www.leonardo-energy.org/course-regulation-and-sustainable-energy- developing-countrieswww.mc-group.com

AGENDA • Auctions • Net Metering • Tax and Other Fiscal Incentives • Local Content Policieswww.mc-group.com

WHAT IS AN AUCTION? • How many winners? • How many rounds of bidding? • How is a winner picked? • Are bidders able to see other bidders’ bids? • Live or “offline” (sealed) • What does the “winner” win? – Contract? – Right to negotiate contract?www.mc-group.com

TENDER/AUCTIONING MECHANISMS • Usually government issues a call for tender/bid for: • Total investment cost of a single project (investment focused) • Or the cost per unit of electricity (generation focused) – For example: 100 MW onshore wind energy or 40 MW of PV • Non-price elements can play a rolewww.mc-group.com

TENDER/AUCTIONING MECHANISMS • Under single winner, the bidder with the lowest price “wins” a contract and has the exclusive right to renewable electricity generation under that contract. • Usually a long-term contract • There can also be multiple winners • Winning price could be available to multiple developers • Multiple rounds until desired capacity is awarded.www.mc-group.com

TENDER – INTERNATIONAL EXPERIENCE • Have been used in Ireland, England, France, Denmark, • Currently a handful of US states are using some form of auction mechanism for renewables (as well as for GHG emissions and REC trading) • China, Brazil, Argentina, Mexico, Morocco, Egypt, Uruguay have recently held auctions for renewable generationwww.mc-group.com

AUCTIONS – ADVANTAGES? • “Market-based” • “Easier and cheaper” to administer? • High degree of cost-efficiency because lowest bidder is chosen (theoretically) • Policymakers can require additional non-price elements (regional distribution, etc). • Potential to selects for developers who are capable of actually getting projects “in the ground.”www.mc-group.com

AUCTIONS – DISADVANTAGES? • Low effectiveness because of low bids, collusion, few participants/bidders, speculative bidding • Stop-and-go development cycles – insecurity for industry • High rates of contract failure • Difficulty of establishing a national industry (UK experience) because of import of cheapest technologies • Intense price competition favors large players (utilities) or public companies (without profit interests) • FiTs are “easier and cheaper” to administer?www.mc-group.com

AUCTION RESULTS • Limited empirical evidence to-date of their success, especially with regard to which type of auction mechanism to use • Comparatively few projects actually in the ground because of auctions versus FiTs or other policies • No examples of market transformation of renewables via auction mechanismswww.mc-group.com

CONTRACT FAILURE • 20-30% contract failure rates should be considered the minimum and in some cases failure rates are much higher (examples in following slides) • To mitigate contract failure rates consider: – Pre-conditions – Submission fees – Requests for qualifications – Queuing rules – Milestone payments and deposit – Performance guarantees – Project buy-out optionswww.mc-group.com

UK • During the 1990s, gov. supported utility-scale renewables primarily through multiple rounds of competitive tenders for long-term contracts. • Result was an overall success rate of 50% on a project basis and 33% on a capacity basis. • No penalties, speculative bidding, focused on low cost alonewww.mc-group.com

IRELAND • Competitive bidding for long-term (15-year) contracts • Between 1995 and 2003, there were six rounds of AER tenders. • 22% success rate – 78% failure ratewww.mc-group.com

FRANCE • Series of competitive tenders for long-term contracts started in 1996 • 32% success rate – 68% failure rate • Moved to a FiT, now moving back to an auctionwww.mc-group.com

SOUTH AFRICA • Was moving forward with a FiT but FiT was cancelled in favor of central procurement. • Capacity cap by technology – Onshore wind (1.85 GW), PV (1.45 GW), CSP (200 MW), biomass (12.5 MW), biogas (12.5 MW), landfill gas (25 MW), small hydro (75 MW) • Strong interest with 270 respondents, 40% of the capacity was auctioned, projects must be online by 2016 • Black Economic Empowerment requirementwww.mc-group.com

BRAZIL • Large-scale auction for renewable and non-renewable technologies • Contract is with private distribution utility • Administered by government agency • 3 auctions per year • Auctions have attracted international companies and developers • Resulted in low price bids– 42% lower than previous FiT (PROINFA) – However, wind turbine prices have dropped dramatically between auctions and PROINFA contracts. • Potentially high risk of contract failure due to low price quotes and analysis of assumed capacity factors and IRRs in the bidswww.mc-group.com

CHINA • Between 2003-2007 competitive auction for wind projects • Lowest bidder did not always win—bids near the average bid price were successful • Significant wind capacity was built—12.2 GW • Success may be unique to centralized government structure • Now switching to a FiT for wind and solarwww.mc-group.com

POTENTIAL LESSONS LEARNED? • Use a continuity of calls for tender in order to create sustainable market growth (avoid stop-and-go cycles) • Auctioned capacity should not be too low (transaction costs) or too high (strategic bidding) • Establish an appropriate penalty for non-compliance (to avoid unreasonably low bids), however, high penalties can result in non-payment of debt service • Consider technology-specific tenders if you want diverse supplywww.mc-group.com

NET METERING • Historically applied for small scale promotion of renewables • Meter is able to turn “backwards”, measuring electricity provided to the grid • Electricity fed into the grid is credited to bill either at retail or wholesale rates • Applied in US states, Australian provinces, Japan, Mexico, Guatemala, Philippines, Pakistan • Attractive in markets with “time of use” electricity rateswww.mc-group.com

US NET METERING MAP www.dsireusa.org / February 2012 ME: 660 WA: 100 co-ops & munis: 100 VT: 20/250/2,200 MT: 50* ND: 100* NH: 1,000 OR: 25/2,000* MN: 40 MA: co-ops & munis: 60/1,000/2,000/10,000* 10/25 WI: 20* RI: 5,000* MI: 150* WY: 25* CT: 2,000* IA: NY: 10/25/500/1,000/2,000* NV: 1,000* NE: 25 OH: no 500* IL: 40* limit* PA: 50/3,000/5,000* UT: 25/2,000* CA: 1,000* IN: NJ: no limit* KS: 25/200* CO: no limit 1,000* VA: 20/500* MO: 100 KY: 30* DC DE: 25/100/2,000 co-ops & munis: 10/25 co-ops & munis: 25/100/500 NC: 1,000* AZ: no limit* OK: 100* MD: 2,000 AR: 25/300 WV: NM: 80,000* 25/50/500/2,000 GA: 10/100 DC: 1,000 AK: 25* LA: 25/300 FL: 2,000 43 states HI: 100 + DC & PR have State policy KIUC: 50 adopted a net PR: 25/1,000 metering policy Voluntary utility program(s) only * State policy applies to certain utility types only (e.g., investor-owned utilities)www.mc-group.com

OTHER NET METERING POLICIES • Mexico – Solar PV only – 30kW limit • Philippines – No capacity limit in the regulations – Utilities required to allow net metering – Utility owns the RECs from net metered systems • Pakistan – 1 MW cap – Credit at the retail ratewww.mc-group.com

NET METERING – PROS AND CONS Pros • Promotes on-site generation/distributed generation • Awareness of energy consumption is increased Cons • Limited to on-site load • Size of the market • Only sites suitable for generation • Landlord/tenant issues • Risk of load fluctuations and changes in rate classification • Not a contract and thus risk of program changes or terminationwww.mc-group.com

TAX INCENTIVES • Exemption for import tax for renewable energy equipment (mostly at an early stage of market development) • Accelerated depreciation (e.g. write of total cost in first years of operation) • Sales tax, property tax and corporate tax incentives or exemptions • Tax credits – Production tax credit: annual tax credit based on the amount of electricity generated – Investment tax credits: tax credits granted as a percentage of total investment costswww.mc-group.com

USA EXAMPLE • Investment tax credit of 30% and production tax credit of 2.2 cents/kWh for the first 10 years of a project • Serves to limit the type of investors in projects to those than can take advantage of the tax benefits (investors with “tax appetite”) • Some analysis suggests that these tax incentive programs cost the government more than grantswww.mc-group.com

INDIA • Generous tax incentives – 80% accelerated depreciation allowed in the first year • Seen as a bridge to ratepayer recovery in order to apply burden of costs not just on ratepayers. • Requirement that pv modules and cells be manufactured in Indiawww.mc-group.com

CUMULATIVE INSTALLED WIND CAPACITY - INDIA Source: Global Wind Energy Council, Indian Wind Energy Outlook 2011, April 2011www.mc-group.com

LENDING PROGRAMS 1. Loan funds that provide access to capital to those who otherwise might not have access 2. Low interest loan fund from government or loans with better terms (e.g. longer tenors) 3. Interest rate buy-down programswww.mc-group.com

LOCAL CONTENT RULES • Several versions – Local equipment content requirement – Local tax benefits or government grants – Local content bonus payment – Lower interest rate for local projects – Local ownership requirementwww.mc-group.com

ONTARIO • Domestic content rules – 50% wind – 60% solar • WTO and NAFTA challengewww.mc-group.com

NOVA SCOTIA • COMFIT (community feed-in tariff) • Local ownership requirement • Included indigenous population/First Nation provisionswww.mc-group.com

BRAZIL • A stipulation prohibiting the import of wind turbines with nominal capacity below 1.5 MW • BNDES provides lower interest loans to local developers • Result has been an increase in the local supply chain in order to be eligible for BNDES financingwww.mc-group.com

CHINA • 70% Wind local content requirement until 2009, when eliminated due to pressure from the US government • Tax and investment support for local PV manufacturing industry. – Recent SolarWorld challenge before US trade commission alleging “dumping” of panels in US solar pv marketwww.mc-group.com

THANK YOUPresenter: Contact:Chad Laurent, Esq. T: +1 617.209.1986Senior Consultant and General Counsel chad.laurent@mc-group.comwww.mc-group.com

Course on Regulation and Sustainable Energy in Developing Countries - Session 6

by Leonardo ENERGY

Accessibility

Categories

Upload Details

Usage Rights

2 Embeds 256

Statistics

Course on Regulation and Sustainable Energy in Developing Countries - Session 6 Presentation Transcript

http://www.leonardo-energy.org	254
http://leonardo-energy.org	2