Day 1 Renewable Energy (RE) Policy Evaluation 1

Economical, Technological and Environmental Impact Assessment of National Regulations
and Incentives for Renewable Energy and Energy Efficiency
A project financed by the Ministry of Foreign Affairs of Denmark

RE & EE National Policies Evaluation Workshop
Cairo, December 19 – 20, 2010

Renewable Energy (RE) Policy Evaluation

Page 1 Cairo – RE & EE Policy Evaluation December 19 - 20, 2010


Overview of the presentation

• RE Projects - Concentration on stand-alone projects
• Market oriented policy tools for RE investments
• Market failures and impediments
• RE Taxonomy - Correction and Compensation
• Economic and financial assessment
• Case study – Wind energy
• Financial and transaction costs
• Discussion of RE policy instruments
• RE policy instruments in RCREEE countries



RE Projects - Concentration on stand-alone projects

• Stand-alone RE projects (wind or solar projects)
• Electricity supply oriented
• General approach - IPP under a PPP scheme
• Private (nationa and foreign investers)
• Commercial financing

Special attention under EE policy instruments
• Direct RE use (behind the meter)



RE Technologies - Market Oriented Policy Tools

• Reliance on private investors
• Reliable regulatory environment
– concession contracts and PPA
• Attractive and satisfactory remuneration of equity capital
• Commercial financing conditions
• Acceptance of conditions in international capital markets
• Risk management arrangements / Governmental guarantees
• Acceptance of the need of additional incentives
– subsidies – feed-in-tariffs
• Incentive environmment
• Competition for the market – not in the market



RE Technologies - Market Failures and Impediments

• Distorted energy prices
• Undefined legal and institutional framework
• External costs of conventional technologies not
considered
• Poor access to technical information / high
transaction costs
• Agent-principal problems
• Budgetary constraints and excessive risk aversion
• Poor skills of investment appraisal



Correction and Compensation

Policy instruments are intended to correct or compensate for market
failures:

• Correcting measure try to correct the perception of costs in the
market, so that the decisions of the market participants lead to a
result that is close to the economic optimum.

• Compensating measures accept that there is a market failure that
cannot be corrected. Therefore, the government introduces
measures to change (or regulate) decision making.

Corrective measures least disturb the working of market processes so
all the advantages of the competitive system are maintained.*



Taxonomy for RE

RE policy measures and instruments to achieve the “second best”:

• Corrective Measures
• Targets and strategy
• Legal reform – renewable energy law
• Institutional reform – specialised agencies
• RE obligation
• Information campaigns
• Industrial policy

• Compensating methods
• Financial incentives (Capital support - subsidies)
• Feed-in tariffs (Operating support)
• CDM Finance


*

Economic and Financial Assessment

• Need of Economic and financial assessments
– Respecting the project development cycle
• Opportunity study
• Pre-feasibility study
• Feasibility study
– Identification of costs and benefits
– Definition of the surrounding conditions

• General approach of analysis
– Economic assessment – perspective of the country
– Financial assessment – perspective of the investor / operator



Egypt - Wind Energy: Context

• Successful Government Programme (NREA)

• Scale-up Policy Options in Egypt – Regulatory framework
– Feed-in tariff
– Competitive bidding

• Key-factors for the economic feasibility of the wind energy option
– Cost of alternative electricity supply
– Cost of capital - IPP investors‘ return in investment requirements
• Conventional IPP projects: 10%
• Innovative IPP wind projects: 20%
– Carbon credits



Egypt - Wind Energy: Steps of the Case Study

• Wind energy option
• Key-data
• Unit costs for wind electricity generation
• Natural gas option
• Forecast of crude oil prices
• Derived forecast for international LNG prices
• Key-data natural gas
• Unit costs for natural gas based electricity generation
• Results of the assessment
• Sensitivity tests
• Gas price and IPP return requirements
• Impacts of carbon credits



Key Data for Wind Energy – Unit costs wind energy



Short-term: ‘Gas prices - US LNG Prices



Long-term: Forecasts of crude prices to 2030 (DOE/EIA)



Long-term: Derived forecast of international LNG prices



Unit costs: Natural gas alternative



Comparison of Unit costs



Result of the Assessment



Sensititiy Test: Gas Prices 2010 / Required Return for IPP Wind

Criteria: Economic NPV – US-cent / kWh

Base case: 8.5 USD/MMBTU in 2010 and 20% RoE Wind



Sensitivity Test: Impact of Carbon Credits




Sensitivity Test – Impact of Carbon Credits




Egypt - Wind Energy: Importance of IPP Equity Remuneration (RoE)

12.00
Unit costs (US-cent / kWh)

10.00

8.00 Country&contract risk
Technology risk (4%)
6.00
Return on equity (RoE 6%)
4.00 Capex&Opex (RoE 0%)

2.00

0.00
10% 12% 14% 16% 18% 20%
Return on Equity (RoE)



Institutional and Legal Framework

• Removal of uncertainties and risk perception
– Reduction financial costs
• Clear regulatory environment
• Transparent concession awarding
• Reliable and long-term standardized contracts
(concessions, operation licenses, power-purchase
agreement PPA)
• Removal of transactions costs
– Technology transaction costs
– Regulatory transaction costs
– Financing transaction costs
– Investment and operation transaction costs



RE Policy Instruments

• Enabling measures
– Strategy and targets
(1) Work has begun;
– Legal reform (2) Instrument is operational;
– RE Agency (3) Positive impacts have been obtained

• Instruments
– Financial incentives (capital support)
– Financial incentives (operating support)
– CDM finance
– Standards and labels
– Dissemination of information
– Industrial policy



RE instruments used in RCREEE countries

Enabling Framework Instruments and Interventions

Countries Operating CDM Industrial
Strategy and Financial Standards &
Legal Reform Agency Information
Targets Incentives support Finance Labels Policy

ALG         
EGY         
JOR         
LEB         
LIB         
MOR         
PAL         
SYR         
TUN         
YEM         


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