Session 6 focuses on tender/auctioning. In spite of its "stop and go" nature, tender mechanisms could be more adapted to the support of certain renewable energy technologies than more complex schemes. They might be as well more suitable for some particular developing countries. This session tackles also the issue of fiscal incentives and tax breaks, which can prove to be very effective to support renewable energy technologies. This session provides a number of examples taken from industrial, emerging and developing countries.

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

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

3. 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

4. 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 role
www.mc-group.com

5. 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

6. 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 generation
www.mc-group.com

7. 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

8. 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

9. 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 mechanisms
www.mc-group.com

10. 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 options
www.mc-group.com

11. 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
alone
www.mc-group.com

12. 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 rate
www.mc-group.com

13. 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 auction
www.mc-group.com

14. 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 requirement
www.mc-group.com

15. 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 bids
www.mc-group.com

16. 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 solar
www.mc-group.com

17. 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
supply
www.mc-group.com

18. 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 rates
www.mc-group.com

19. 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

20. 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 rate
www.mc-group.com

21. 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 termination
www.mc-group.com

22. 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 costs
www.mc-group.com

23. 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 grants
www.mc-group.com

24. 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 India
www.mc-group.com

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

26. 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 programs
www.mc-group.com

27. 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 requirement
www.mc-group.com

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

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

30. 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 financing
www.mc-group.com

31. 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 market
www.mc-group.com

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