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Peter Meier Feed-in-tariff for Vietnam and Srilanka

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Source: http://siteresources.worldbank.org/INTENERGY2/Resources/4114191-1328286035673/D1_Peter_Meier.pdf

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Peter Meier Feed-in-tariff for Vietnam and Srilanka

  1. 1. Sri Lanka and Vietnam: Lessons of the Renewable Energy Tariff Experience January 2012 Peter Meier pe.meier@alumni.ethz.ch 1
  2. 2. • VIETNAM • avoided cost tariff introduced 1st January 2009, together with a standardised PPA (to replace ad hoc project specific tariffs based on 12% return). Avoided cost based on gas CCGT (most expensive project has gas price linked to the Singapore fuel oil price). 30MW size threshold. • RE projects supported by World Bank Renewable Energy Project, which provides finance (on-lending through participating banks) • Avoided cost tariff encourages daily peaking small hydro projects with a seasonally and time-of-day differentiated tariff (high remuneration for dry season peak energy). • 2011 tariff provided around 1000 VND/kWh for a well-designed daily peaking project (5 UScents/kWh). Feasible when using Chinese equipment. 2
  3. 3. VIETNAM • Unlike China, where local environmental damage costs from coal power generation are high, in Vietnam these are low (and exposures to PM-10, NOX SOx are dominated by emissions from urban transportation, and the widespread domestic use of coal briquettes). • As of 31 December 2010, 77 projects (734MW) have signed SPPAs under the ACT, of which 30 (256MW) are already in operation, and 47 are under development or in construction. All are small hydro. • In the first six months of 2011, an additional 11 projects (92.3) MW signed an SPPA. During this time, another 50 projects converted from the old negotiated PPAs to the ACT. 3
  4. 4. MAIN ISSUE: TRANSMISSION INTEGRATION PROBLEMS Example: • Lai Chau province in the Northwest: in 2020, local peak load 100MW, proposals for small hydro projects 320MW. • Need extensive 115kV to evacuate power to the 220/500kV grid • Recent study shows average cost around 50-70$/kW. • Power companies in cashflow problems (associated with equalisation mechanism to maintain uniform retail tariffs); in theory SHP generation purchases costs are pass-through, but not 110kV costs. 4
  5. 5. LAI CHAU TRANSMISSION SYSTEM PLAN 5
  6. 6. ISSUES LEADING TO INTRODUCTION OF FEED-IN TARIFF • Avoided cost tariff too low for wind and biomass projects • First windfarm built with Fuhrlaender turbines, without a PPA, temporary agreement provided 4 UScents/kWh. Exactly how this project was financed is unclear. • Pressure from GTZ and US turbine manufacturers led to issuance of a feed-in tariff for wind in June 2011 – but set at a low rate of 7.8 UScents/kWh (only the big Chinese developers say this is reasonable!) 6
  7. 7. PROBLEMS WITH WINDPOWER IN VIETNAM • Modest wind regime • Monsoonal climate, high seasonal variation • Low capacity value (compared to daily peaking small hydro) • Little reliable data in public domain (though World Bank has funded some good wind speed monitoring at three sites) • High incremental costs • Reality is that wind projects are high up on the supply curve, and a very expensive way to reduce GHG emissions in the sector (especially compared to DSM, small or large hydro, and distribution system rehabilitation). 7
  8. 8. PROBLEMS WITH WINDPOWER IN VIETNAM • Best sites on the coast – either densely populated, or in areas where there are large titanium and other mineral reserves. • A contest between mining interests and wind power developers is unlikely to end in favor of wind power! • There exists no reasonable economic rationale for wind power development. 8
  9. 9. PROBLEMS WITH WINDPOWER IN VIETNAM • Much greater seasonal variation in monsoonal climates than in Europe. 9
  10. 10. CAPACITY VALUE OF SHP V WIND average dispatch in each tariff block 12 MW Nam Mu small hydro 12 MW wind 10
  11. 11. RE IGH SEASONAL VARIATIONS H SUPPLY CURVE (FROM RENEWABLE ENERGY MASTERPLAN) SHP WIND TARIFF BIOMASS RE SUPPLYCURVE X10 Global cost=PSOC+VCARBON PG VCARBON X9 PSOC Social Cost PSOC =PECON+VL.ENV X8 VL.ENV X6 PECON X7 Avoided cost at economic prices PFIN X3 X4 X5 Avoided cost tariff X2 X1 QBAU QFIN QECON QSOC QG GWh REMOVE INSTITUTIONAL BARRIERS TARIFF REFORM PREFERENTIAL PRICE CARBON FINANCE 11
  12. 12. RE SUPPLY CURVE (FROM RENEWABLE ENERGY MASTERPLAN) 12
  13. 13. COST ESTIMATES • little reliable wind speed data is publicly available • best recent data from MoI/WorldBank project (AWS) Phan Thiet average annual wind speed @80metre height annual load factor UScents/kWh Phan Rang 6.28 6.32 6.46 metres/second average levelised cost Plei Ku [ ] 28.4-34.1% 23.8-30.2% 13-15 14-18 30.5-36% 12-14 (1) Exchange rate: 1US$= VND 20,600 • Similar conclusions from GTZ study • Wind needs at least 10-12 UScents/kWh (says GTZ, AWS) • Actual feed-in tariff of 7.8 UScents/kWh 13
  14. 14. RECOVERY OF INCREMENTAL COSTS • The Renewable Energy Masterplan argued for an electricity levy of VND 10-25/kWh (0.05-0.12 UScents/kWh) to fund incremental costs (to get to 5% of generation by 2025) • Rejected by the Prime Minister’s office! • Average wholesale generation price in 2011 is 4.7 UScents. • The basis for 7.8UScents/kWh is unclear. The incremental cost will be split 1UScent/kWh by the Vietnam Environmental Protection Fund, 2.1 UScent/kWh by EVN (Electricity of Vietnam, currently being unbundled) • MoIT now wants to develop feed-in tariffs for biomass. 14
  15. 15. SRI LANKA • Avoided cost tariff introduced in 1996, together with SPPA • Tariff set by autodiesel oil-fired thermal plant 12 UScents/kWh 10 8 6 4 2 1 996 1 9 98 2 000 2 002 2004 2 006 2 008 15
  16. 16. AVOIDED COST TARIFF • As in Vietnam, very successful – 173 MW small hydro (<10MW) in 73 projects financed by World Bank project. 16
  17. 17. WHY FIT? • As in Vietnam, avoided cost tariff enabled no wind projects • Small hydro developers so successful, established a powerful lobby pressing for FIT even for small hydro (with the first coal finally under construction, fears that avoided costs would decrease!) • Complicated FIT structure introduced in 2007 for new SPPS beyond 2008. Two tariff options, a flat rate levelised tariff and a frontloaded 3-tier tariff that provides for higher remuneration in the early years (to assist better debt service cover ratios during the early years of debt repayment). 17
  18. 18. HIGHEST WIND-FEEDIN TARIFF 14.53 22.02 12.77 4.30 6.64 12.69 10.21 9.82 8.50 17.91 China (Taiwan) 6.65 6.79 7.16 5.56 11.04 7.01 11.03 8.33 6.67 8.40 8.98 11.59 7.01 16.33 6.50 6.74 7.11 10.46 16.00 3.89 10.48 67.33 45.63 37.96 Germany USA (Minnesota state) Great Britain (England+Scotland+ Wales) Canada (Ontario province) India (Madhya pradesh) India (Karnataka) India (Tamilnadu) India (Andhara Pradesh) Tanzania South Korea Malaysia Uganda 13.32 5.11 8.06 8.39 4.87 7.11 19.97 18.24 13.69 20.70 4.74 11.37 9.85 34.65 39.96 30.99 47.30 Technology-neutral tariff: 8.26 Mini-hydro Wind Biomass Solar PV Agricultural & Industrial W aste Municipal Waste Waste Heat Recovery Biogas Landfill Gas Geothermal Energy Thailand Sri Lanka Renewable Energy Feed-in Tariffs paid in Different Countries (in equivalent LKR/kWh) 12.18 17.94 11.53 75.75 8.21 9.84 8.21 29.99 10.11 8.94 9.49 9.38 2.34 18.08 19.97 SLR/kWh=17.5 UScents/kWh 1$US=113 SLR 18
  19. 19. SEASONAL VARIATION 19
  20. 20. CURRENT STATUS OF WINDPOWER Three 10MW windfarms commissioned Following poor outcome of World Bank financed 3MW demonstration project in Hambantota (only 15% load factor, when appraisal said 27%), much better results: One wind farm achieved a 28.5% LF in first 12 months of operation (FS design was 31.5%) 35MW Jaffna project not feasible (no grid) remaining 47MW should be done by 2013-2014 20
  21. 21. IMPLEMENTATION PROBLEMS • Mechanism provided for CEB’s incremental costs to be passed to the Sustainable Energy Authority. • Incremental costs were assumed to be averaged into low cost small hydro power projects when their PPAs expired – but average costs of the portfolio were underestimated. • But in 2010 unpaid bills for the incremental costs accumulated at CEB because SEA had not funds. • In 2011, costs were allowed to be passed through to consumers as an interim measure, but Minister ordered a stop to new wind project permits. • FIT implementation poor. PUC issued a consultation paper for a new tariff, but no tariff order resulted. • FIT implementation has now passed back to the Ministry. 21
  22. 22. PROSPECTS IN SRI LANKA • Probability of achieving the 10% RE target, despite one of the highest FIT in the world: very small • Major problem is absorbtion of must-run power: World Bank funded a study; Consultant concluded both coal and wind could be de-loaded, and that 620 MW of wind could be absorbed by 2020. CEB rejected this recommendation. • Independent experts think at most 100MW can be absorbed (given other hydro additions with zero variable fuel cost). • Basic problem: 10% 2015 RE target completely arbitrary, no supply curve basis. 22
  23. 23. Implications for design of World Bank RE projects • RE on-lending finance facilities should include provisions for financing incremental network costs (especially at the 115kV level), not just generating projects • For feedin tariffs to be successful, the mechanism for recovery of incremental costs needs to be credible. Using established funds with only ad hoc revenue streams (like the Vietnam Environmental Protection Fund) is unlikely to be credible. • Throughout Asia, there is pressure for better transparency in distribution company accounts and in retail tariffs. Attempts to bury incremental costs in utility accounts will unlikely be sustainable. 23
  24. 24. Implications for design of World Bank RE projects • An independent regulator is a necessary requirement for a successful RE tariff. Whether feed-in tariff or avoided cost, independent oversight is necessary. (But PUC experience in Sri Lanka is disappointing). • The World Bank should support whatever is the least cost way of achieving low-carbon power sector expansion strategy, not wind power for wind power’s sake (especially in countries with modest wind regimes). Vietnam has an unusually high energy/GDP ratio, with great potential for improvements in industrial energy efficiency. • If GoVN is prepared to pay 1,600 VND/kWh (7.8 UScents) for wind energy, then why not also for biomass & small hydro? If one must provide subsidy for RE, why let the principal beneficiary be Chinese & European wind turbine manufacturers, rather than Vietnamese rice farmers? 24
  25. 25. Implications for design of World Bank RE projects • There exists no economically rational case for technology specific feed-in tariffs, much less for load factor differentiated tariffs (good sites get lower tariff than bad sites). Only Tanzania has a technology neutral feed-in Tariff! • A rational basis for supporting renewable energy is the avoided social cost of thermal generation (i.e. including any local environmental externality costs), set as a price cap for a competitive, technology-neutral annual solicitation for forward delivery contracts consistent with national targets. • FITs work only if there is sufficient public support for the politicians not to have to hide the incremental costs. Lack of transparency will work for a while, but large scale take-up of RE will not occur. 25

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