REToolkit_issues_note.pdf

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Issues Note of the REToolkit
REToolkit: A Resource for Renewable Energy Development
JUNE 30 2008
T ABLE OF C ONTENTS
RATIONALE
Overview………………………………………………………………………8
Status of Renewable Energy…………………………………………………8
Benefits of Renewable Energy……………………………………………….10
Climate change mitigation and adaptation benefits …………………………..11
Environmental and health benefits…………………………………………….11
Energy Security benefits………………………………………………………12
Renewable Energy as least cost generation option……………………………12
Grid…………………………………………………………………………………..13
Mini Grid………………………………………………………………………….…13
Stand Alone………………………………………………………………………….14
Comparing the Cost Effectiveness of Grid Extension vs. Mini Grid…………14
Renewable Energy as a development enabler…………………………………15
RE and the Millennium Development Goals…………………………………….16
Role of RE in rural electrification……………………………………………..18
Barriers to Renewable Energy ……………………………………………...20
Economic Barriers…………………………………………………………...21
Overcoming Economic Barriers to Renewable Energy……………………22
Economic Valuation of Renewable Energy……………………………………22
Economic Advantages of Renewable Energy………………………………….24
Grid……………………………………………………………………………………24
Mini Grid…………………………………………………………………………….26
Stand Alone………………………………………………………………………….26
The Carbon Market…………………………………………………………27
Carbon Financing……………………………………………………………...28
The Clean Development Mechanism………………………………………….29
CDM Process………………………………………………………………………..29
CDM Costs and Benefits………………………………………………………….32
Other Funding for Renewable Energy……………………………………...33
Annex A: Electricity Costs of Renewable Energy Generation Technologies
Annex B: Bilateral and Multilateral Development Banks and Agencies
GRID-CONNECTED RE SYSTEMS
Overview………………………………………………………………………40
Barriers ……………………………………………………………………….40
Cost and Pricing barriers……………………………………………………….40
Subsidies for conventional fuels and electricity…………………………………40
Not accounting environmental costs and benefits………………………………41
Not quantifying future fuel price risks…………………………………………..41
Legal and Regulatory barriers…………………………………………………41
Lack of legal framework for IPPs…………………………………………………41
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Lack of transmission access……………………………………………………….42
Lack of incentive for regulated utilities………………………………………….42
Unfavorable pricing rules………………………………………………………..42
Excessive permitting requirements and siting restrictions…………………..43
Financial and Institutional barriers…………………………………………..43
Higher investment costs…………………………………………………………. 43
Lack of access to capital…………………………………………………………43
Perceived high technology risks………………………………………………..43
Lack of technical or commercial skills and information……………………44
High transaction costs…………………………………………………………..44
Overcoming Barriers ……………………………………………………..44
Economic Instruments………………………………………………………45
Improving Energy Subsidies………………………………………………….…45
Economic valuation analysis of renewable energy…………………………..46
Mean variance portfolio analysis……………………………………………… 46
Creating an Enabling Legal and Regulatory Environment………………….47
Electricity market deregulation ………………………………………………..48
Regulated utilities……………………………………………………………...48
Independent power producers………………………………………………..51
Small Power Producer Programs …………………………………………..52
Cooperatives…………………………………………………………………...53
Standard power purchase agreements………………………………………..54
Tariff setting procedures………………………………………………………..56
Interconnection regulations…………………………………………………….58
Promotional Policies: Accelerating renewable energy markets……………. .58
National Targets………………………………………………………………….59
Mandated Market Policies……………………………………………………...61
Price setting (PURPA, Electricity feed-in law, net metering)……………62
Quantity setting (RPS) …………………………………………………….…66
Competitive Bidding or Concessions……………………………………….67
Comparison of market mandates…………………………………………….68
Requirements for successful mandated market policies …………………70
Financial Incentive Policies……………………………………………………71
Grants…………………………………………………………………………..71
Loans and loan guarantees………………………………………………….72
Tax credits …………………………………………………………………….73
Market Facilitation Activities………………………………………………….75
Infrastructure support………………………………………………………..76
Public awareness, information and training………………………………77
Government procurement …………………………………………………..77
Public Funds for market facilitation activities……………………………78
Public investment (System Benefits Charges)…………………………….79
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Institutional and Financial Tools……………………………………………80
Financing mechanisms………………………………………………………….81
Equity Financing…………………………………………………………………81
Debt Financing …………………………………………………………..81
Risk mitigation……………………………………………………………………85
Technology and operational risks…………………………………………..85
Contractual risks………………………………………………………………87
WBG risk mitigation tools……………………………………………………89
Case Studies………………………………………………………………..91
California Renewable Energy Incentive Program
China Wind Concession Bidding
Mini-Grid RE Systems
Overview…………………………………………………………………….94
Barriers……………………………………………………………………...95
Legal and Regulatory………………………………………………………...95
Policies that impede establishment of cost recovery tariffs………………….95
Limited knowledge of regulatory framework for mini grid………………..…95
Lack of support for cooperatives and private sector…………………………95
Financial and Economic……………………………………………………..96
High investment and transaction costs…………………………………………96
Inability to access capital/financing……………………………………………96
Uncertain resource supply projections………………………………………...96
Lack of subsidies/incentives that support RE mini grid systems……………96
Market and Business Risks………………………………………………….96
Low customer ability to pay………………………………………………….….96
Uncertain customer demand …………………………………………………...96
Lack of technical skills………………………………………………………….. 96
Insufficient community involvement/responsibility…………………………..96
Overcoming Barriers ……………………………………………………...97
Legal and Policy Instruments………………………………………………..97
Legal Principles for mini-grid regulatory framework………………………..98
Private sector participation…………………………………………………..98
Subsidy mechanisms………………………………………………………………99
Principles of subsidy mechanisms……………………………………….….99
Types of subsidy mechanisms ………………………………………………..100
Output based aid subsidies for producers…………………………………..101
Subsidies for customers……………………………………………………….103
Tariff Structure…………………………………………………………………..103
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Principles of cost recovery and cost based tariffs………………………..104
Tariff structures for RE mini grids……………………………………….104
Tariff Types………………………………………………………………….106
Differential customer tariffs………………………………………………107
Tariff collection mechanisms……………………………………………..108
Customer ability to pay……………………………………………………108
Concessions and Competitive Bidding……………………………………...109
Economic Instruments…………………………………………………….111
Determining least cost optimum mini grid system…………………………111
Market Facilitation Instruments…………………………………………..112
Ownership and management options……………………………………….112
Business Models……………………………………………………………….113
Utility model……………………………………………………………..114
Community based organization model………………………………..114
Private sector model…………………………………………………….115
Hybrid model…………………………………………………………….116
Financing mechanisms……………………………………………………….118
Seed capital………………………………………………………………118
Bank financing…………………………………………………………..119
Balance sheet finances………………………………………………120
Non-resource financing…………………………………………….121
Standardized finance mechanisms…………………………….…..121
Leveraging local financing…………………………………….…..122
Risk management…………………………………………………….…..122
Renewable energy finance initiative…………………………………..123
Carbon Financing……………………………………………………….123
Capacity building and institutional strengthening………………….124
Stand Alone Systems
Overview………………………………………………………………….126
Barriers……………………………………………………………….......127
Legal and Regulatory…………………………………………………......127
Lack of level playing field and inclusive renewable energy policy……… 127
Lack of industry-wide technical standards ………………………….……..127
Cost and Pricing……………………………………………………….…..127
High initial costs of systems for end users and service providers….……127
Lack of access to finance……………………………………………….……..127
Market Performance……………………………………………………….127
Lacking delivery infrastructure ………………………………………….…..127
Need to scale up capacity building ………………………………………….127
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