The session 4 gives an in-depth view on the concrete implementation of feed-in tariff laws, with the presentation of case studies of successful and less effective feed-in tariff laws and also an overview of on-going implementation of feed-in tariff laws, presenting notably the examples of Germany, Spain, France, the UK, Malaysia, Kenya, Mauritius, Ecuador, Ontario (Canada), Vermont (US), etc.

1. Feed-in tariffs – Design options and case studies for
developing countries
Leonardo Webinar 26 January 2012
Dr. des. David Jacobs
Director Renewable Energy, IFOK GmbH
Course on Regulation and Sustainable Energy in Developing Countries – Session 4
www.leonardo-energy.org/course-regulation-and-sustainable-energy-developing-
countries

2. Agenda
FIT design and case studies:
Feed-in tariff calculation
FIT financing
Capacity caps
Local content rules

3. FIT Countries 2010
Countries with state FIT policy
Countries with national FIT policy
Source: REN21, Renewables 2010 Global Status Report
3

4. Basic feed-in tariff design
• Purchase obligation
• “Independent” from power demand
• Fixed tariff payment based on the actual power generation costs
• Price setting will be discussed in session 4
• Long duration of tariff payment

5. Tariff calculation

6. Tariff calculation methodology
Early FITs (1970-1990s): Avoided costs
Benchmark: cost for conventionally produced electricity
Tariff level is only “right” coincidentally (under- or over-compensation)
• E.g. Nicaragua, Tanzania

7. Tariff calculation methodology
• Tariff calculation based on technology specific generation costs
+ “reasonable” rates of return
• Don’t use “avoided costs” as point of reference
• Cost factors:
• Investment costs (material and capital costs); Grid-
related and administrative costs (including grid
connection, costs for licensing procedure; Operation
and maintenance costs; Fuels costs (biomass and
biogas)

8. Rate setting process
Different jurisdictions use different methodologies for setting FIT rates.
Recent research reviewed several models for rate setting, results
indicate:
• Most jurisdictions use similar approaches (even if inputs and
assumptions vary):
 Discounted Cash Flow (DCF), after-tax analysis
– Discounts to present value the estimated annual cash
flows to equity investors

9. Building a feed-in tariff rate calculator
Goal is to reach an appropriate rate that is high enough to spur
renewable energy development while at the same time not so high as
to provide windfall profits to project owners.
Tradeoffs exist:
• Ease of use vs. complexity
• High-level representation vs. detailed analysis
• Granularity vs. time investment

10. Tariff calculation methodology
• Targeted IRR (Internal rate of return)
• In the EU, feed-in tariffs target at an internal rate of
return of 5-9 percent (certain jurisdictions use return on
equity)
• In developing countries, the targeted IRR usually
needs to be higher (10-20 percent)
• Public investment (monopolist, often without profit
interest); or private IPPs (profitability important)?
• Similar profitability for renewable energy projects
needed as for convention energy market

11. Figure 4: Equity IRR expectation in developing countries:
Equity IRR expectation in developing countries
25%
20%
15%
10%
5%
0%
Infrastructure Technology Political risk Reg. Risk, soft Counterparty Currency Infrastructure
investment risk (missing political risk, risk safety cushion investment
(developed track record) transparency, (developing
world) legal world)
framework
Source. Fulton et al. 2011

12. Tariff calculation methodology
• Assumed capital structure
• Ratio of debt and equity (80 to 20 in Netherlands; 70 to 30 in
Ontario (Canada))
• Germany; different debt-equity ratio depending on each
technology (reflecting their risk profile)
• South Africa: 70:30
• Higher equity share in other developing countries?
• Interest rate for the debt? (international and national analysis
needed)
• Generally, debt term (duration) equals duration of feed-in tariff
payment (average of 20 years)

13. Tariff calculation methodology
• Tax treatment
• Pre-tax calculation (taking advantages and disadvantages from
national taxation scheme into account)
 Post-tax: Germany, because not significant available tax benefits,
and because tax liabilities vary across ownership and investor types
and are difficult to generalize – also used in Malaysia
 Accelerated depreciation factored in (e.g. India)

14. Tariff calculation methodology
• Treatment of inflation (indexation)
• Necessary because of long-term tariff payment (especially in
developing countries with high inflation rates)
• Usually applied to the investment share that is related to
O&M costs

15. Tariff calculation – South Africa (2009 vs. 2011)

16. Tariff calculation assumptions – Malaysia (2010)
Source: Kettha 2010

17. Tariff calculation in Germany: Input data for wind energy
• Medium transparency in Germany
Provision of Equity share: 25% Return on equity (100% -location): 12%
capital Share of debt: 75 % Interest on debt: 5 % , or 5,5 %
Time period in question 20 years
Inflation rate 2% p.a.
Specific investment costs 60 and 80 % - location: 1.756 €/kW
100 % location: 1,463 €/kW
120% aand 150 % - location: 1, 336 €/kW
Annual costs of operation Year 1-10: 2.19 ct/kWh
Year 11-20: 2.49 ct/kWh
Source: BMU 2011

18. Tools for tariff calculation
RET Screen http://www.retscreen.net/
CREST model from NREL
https://financere.nrel.gov/finance/content/CREST-model
Adoptation to national context is required (e.g. tax burdens and
investment incentives)

19. Tools for tariff calculation – CREST from NREL (inputs)

20. Tools for tariff calculation – CREST from NREL (cash flow)

21. FIT financing

22. Financing mechanism - Germany
Financing mechanism in liberalized electricity markets
Financing trough “burden sharing” between all electricity consumers

23. Differences in emerging economies and developing countries
• low electricity costs
• little acceptance of electricity price increases
Artificially low
Subsidies No interna- electricity
for lization of prices = high
conventional negative cost difference
power external costs with
renewables

24. Combined financing – Taiwan
• Add additional financing to the national FIT fund (levy on producers from
conventional electricity)
• Increase the retail electricity price by a certain share (after general elections
next year)
Conventional
Money
electricity producers
Payment for producers
Renewable Energy Fund under the feed-in tariff
Money
(FIT Fund) scheme
Retail price increase
Money
Source: David Jacobs

25. FIT financing in Malaysia – limited electricity price
increase
Source: Kettha 2010

26. FIT Fund in Malaysia

27. FIT financing cost in Germany (additional costs per kWh)
Source: BMU 2011

28. International FIT financing?
– The future of international climate talks?
G TF fin c gflo s
E IT an in w
S u e: D C A "G TF ", A 2010
o rc B C , E IT pril

29. Capacity caps

30. Capacity cap
• Capacity cap might be necessary to control costs (limited number
of project)
• To control installed capacity (in line with central planning in
monopolized electricity markets)
• E.g. tariff payment for first 400 MW wind energy, first 100 MW
geothermal, and first 50 MW solar PV
• In this case: Project size should also be limited
• Application process needs to be regulated (“first-come, first-
served”)
• Online application to avoid fraude? – Malaysia
Source: Mendonca et al. 2009

31. Capped feed-in tariff in Kenya (2009)
• Tariff payment for 15 years
• Rate setting based on generation costs
• Support of least cost RES technologies
Mainland Price
Technology Capacity cap
($/kWh)
Wind $0.09 150 MW
Biomass (firm and non- $0.045- 200 MW
firm) 0.07
Hydro (firm and non $0.06- 150 MW
firm) 0.12
31

32. Capped feed-in tariff in Ecuador
• Tariff payment for 12 years
• Rate setting based on generation costs
• Cap: 2% of installed capacity
Technology Mainland Price ($/kWh)
Wind $0.09
Photovoltaic $0.52
Biomass and biogas $0.10
Geothermal $0.09
Small-hydro up to 5 MW $0.06
Small-hydro 5 MW-10 MW $0.05
32

33. Annual Quota on RE Capacity in Malaysia (MW)
Total per
Year Biomass Biogas Mini-Hydro Solar PV Solid Waste Annum
2011 110 20 60 9 20 219
2012 40 15 50 11 30 146
2013 50 15 60 13 40 178
2014 60 25 60 15 50 210
2015 70 25 60 17 60 232
2016 80 25 60 19 40 224
2017 90 30 50 21 40 231
2018 100 30 40 24 30 224
2019 100 30 30 28 30 218
2020 100 25 20 33 20 198
: : : :
2030 280 2 282
: : : :
2040 850 2 852
: : : :
2050 1,350 2 1,352
Source: MBIPV 2010

34. Annual Quota on RE Capacity in Malaysia (MW)
Source: MBIPV 2010

35. Capacity cap
• Disadvantages:
• “Stop-and-go” investment cycles – difficulty to establish a national
industry (similar to tender)
• Unsustainable market development

36. Local content
requirement

37. Local content requirement
• Several countries have introduced local content requirements in
national support mechanisms, i.e. obligations to produce a certain
share of renewable energy equipment locally/nationally (e.g. Spain,
China, India, Argentina - Chubut, Ontario - Canada, Malaysia, Italy)
• These requirements can be implemented in national feed-in tariff
mechanisms
• Establish a national renewable energy industry
• Take advantage of positive macro-economic effects
Source: Mendonca et al. 2009

38. Local content requirement Chubut
• Province in Argentina:
• Wind energy law 2005, Article 4, states:
• „... to enjoy this benefit, the wind mills installed have to comply with a timeline detailed
further below of including components made or assembled in the Province of Chubut:
a) As from 1 January 1999: 10%
b) As from 1 January 2001: 30%
c) As from 1 January 2003: 60%
d) As from 1 January 2005: 80%
e) As from 1 January 2007: 100%“
• Outcome: low incentive and rigid timeline impended wind power
development in Argentina

39. Local content requirement Ontario
• Local content wind: 25%; 50% in 2012
• Local content solar: 40-50%; 60% in 2011

40. Local content requirement Ontario
• Complex definitions needed (Ontario): Solar PV
Designated Activity Qualifying
Percentage
Silicon that has been used as input to solar 10%
photovoltaic cells manufactured in an Ontario
refinery.
Silicon ingots and wafer, where silicon ingots 12%
have been cast in Ontario and wafers have been
cut from the casting by a saw in Ontario.
The crystalline silicon solar photovoltaic cells, 10%
where there active photovoltaic layer(s) have
been formed in Ontario.

41. Local content requirement Ontario
Solar photovoltaic modules (i.e. Panels), where 13%
the electrical connections between the solar
cells have been made in Ontario and the solar
photovoltaic module materials have been
encapsulated in Ontario.
Inverter, where the assembly, final wiring and 9%
testing has been done in Ontario.
Mounting systems, where the structural 9%
components of the fixed or moving mounting
systems have been entirely machined or
formed or cast in Ontario. ….
Wiring and electrical hardware that is not part 10%
of other Designated Activities (i.e. items 1, 2, 3
and 5 of this table) sourced from an Ontario
Supplier.
All on-site and off-site labour and services. For 27%
greater certainty, this Designated Activity shall
apply in respect of all Contract Facilities.
Total 100%

42. Local content requirement
• Problem: potential confliction with international trade rules (WTO)
• Malaysia: Adder for nationally produced equipment:

43. Malaysian tariff structure for solar PV
Source: Kettha 2010

44. International “worst”
practice

45. International “worst” practise
• Low tariff = no tariff (e.g. Argentina: Premium tariff payment of 0.37
€cent/kWh for wind energy)
• Assessment report can help to correct tariff level
• Unnecessary high tariffs
• PV in Spain; PV in Czech Republic
• High rates of return; attracts speculation; unsustainable market
growth
• Short payment durations (annual changes)
• Germany until 1999; Spain until 2004, some Indian provinces
•Size specific tariffs (huge differences in tariff levels)
• Spain

46. Books on FIT design
The Evolution of FITs in
Germany, Spain and France
http://www.ashgate.com/default.aspx?pa
ge=637&title_id=11456&edition_id=1496
0&calcTitle=1
The feed-in tariff
handbook
http://www.earthscan.co.uk/?tabi
d=92822

47. Online policy advice: How to design good feed-in tariffs?
Online policy advice:
Make your own FIT law
www.futurepolicy.org

48. Thank you for your attention!!!
Dr. des. David Jacobs I Director Renewable Energy
IFOK GmbH
Reinhardtstraße 58
10117 Berlin
Tel.: +49 30 536077-27
E-Mail: david.jacobs@ifok.de
David.jacobs@gmx.de
www.ifok.de
© 2010, IFOK GmbH
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