COMMON MARKET FOR EASTERN AND SOUTHERN AFRICA Feed in Tariff Guidelines Zambia Lusaka August 7 to 11 2017
Feed in tariff Guidelines I. Objectives of the Feed In Tariff Guideline II. Feed In Tariffs Policy Background 2.1 Feed In Tariffs Policy Definition 2.2 History of FIT Policy 2.3 FIT Policy Experiences in COMESA III. Institutional Arrangements IV. Drafting FIT Policy V. Design Options for Renewable Energy Feed-In-Tariffs VI. Hybrid Systems 2
Objectives of the Feed In Tariff Guideline I. Objectives of the Feed In Tariff Guideline to provide the COMESA member States with harmonized guidelines that would facilitate Feed in Tariff harmonization in the COMESA region in an efforts to ensure that private sector investors are faced with similar feed in tariff regime. is to provide outline contents expected in a Feed in Tariff regime, which countries can then adopt and/or customize, therefore, harmonizing the FIT regime in the spirit of regional integration, feed in tariff programs accounts for a greater share of RE development than either tax incentives or renewable portfolio standard policies, in the COMESA region, FIT are still in their infancy. Four Member States have promulgated a FIT policy; three Member States are at an advanced stage of developing a FIT policy, 3
Objectives of the Feed In Tariff Guideline II. Feed In Tariffs Policy Background A feed-in tariff is an energy supply policy focused on supporting the development of new renewable energy technologies by offering long-term purchase agreements for the sale of Eergy. Put a legal obligation on utilities and energy companies to purchase electricity from renewable energy producers at a favorable price per unit, and this price is usually guaranteed over a certain time period. The most effective schemes are guaranteed for a period of around 20 years 4
Feed In Tariffs Policy Background A feed-in tariff generally provides certainty for a producer on: (a) guaranteed access to the grid, (b) long-term PPAs, and (c) an energy price that is effectively subsidized. The energy price is usually established by the sector regulator through evaluation of; (i) the capital costs and operations and maintenance costs that a reasonably efficient producer would incur in connection with the development, construction, operation and maintenance of a power plant that is based on a particular RE technology, and (ii) the capital structure that a producer should be able to achieve. 5
Feed In Tariffs Policy Background Regulators periodically revise the feed-in tariffs that are applicable to new projects, with the objective of; reducing the feed-in tariff to capture lower capital costs and other costs savings that have resulted from the more wide spread adoption of that particular technology. Feed-in tariffs are generally structured in a manner that is consistent with the tariffs Structures for Non-Dis patch able Technologies, i.e energy only Tariff rates are usually determined for each renewable technology in order to take account of their differing generation costs, and to ensure profitability. 6
Feed In Tariffs Policy Background The guaranteed access to the grid, favorable rate per unit and the tariff term guarantee, installation of renewable energy systems a worthwhile and secure investment for the producers, manufacturers, investors and suppliers, Successful feed-in-tariff policies typically include three provisions: i) guaranteed access to the grid, ii)stable long-term purchase agreements(usually 15-20 years), and iii) payment level based on cost of RE energy 7
Feed In Tariffs Policy Background cont History of FIT Policy ; The first FIT policy was promulgated in USA through the Public Utility Regulatory Policy Act of November 1978, PURPA required utilities to buy electricity from qualifying facilities at rates that were based on utilities avoided costs, The first national feed-in tariff legislation in Europe was adopted in Germany s Electricity Feed-in Law of December 1990, As of January 1, 1991, utilities in Germany were required by law to buy electricity from non-utility RE generators at a fixed percentage of the retail electricity, with obligation to buy from 65-90 % depending on capacity, A 5MW cap per project was imposed for selected technologies, Denmark and Spain followed suit with similar provisions in 1992 and 1997, respectively, Hammeburg, Freising, and Aachen, in a significant development, began offering FIT prices based on the actual costs of RE generation, primarily to encourage solar PV; this approach was soon adopted by other cities in German 8
Feed In Tariffs Policy Background cont This method was in contrast to an avoided cost or value-based approach to tariff calculation, or one in which the prices were tied to the prevailing retail price, This cost-based framework enabled efficiently run projects to be profitably operated, and this design feature continues to be identified as one of the most important elements of successful FIT policies, April 2000, the German Parliament adopted the Renewable Energy Sources Act This legislation signaled a number of important developments: i. FIT prices were decoupled from electricity prices at the national level; ii. Utilities were allowed to participate, whereas previous policies were confined to non-utilities; iii. RE sources were granted priority access to the grid; iv. FIT payments for wind power became differentiated by; the quality of the resource at different locations; and v. FIT prices became methodologically based on the costs of generation for all technology types. 9
Feed In Tariffs Policy Background cont The German approach was soon followed by many other countries. This has led to a higher degree of differentiation in tariff amounts based technology type, project size, project location and quality of resource. Tariff differentiation enables the development of a broader range of technology types, In 2007, Spain introduced an innovative sliding premium option. This design offers a variable FIT, payment or premium above the spot market price, which effectively ensures that project revenues will remain within a range sufficient to ensure profitability, Feed in tariff experience in Africa: KENYA, MAURITIUS, UGANDA, RWANDA Lessons learned? 10
Feed In Tariffs Policy Background cont III. Institutional Arrangements; Government & Parliament Establishing a FIT through detailed legislation, for example, may provide greater investor certainty because the law may be viewed as more difficult to change than a policy enacted as a result of an executive branch or regulatory agency initiative, Regulatory bodies The regulatory body is responsible for the policy details. This involves developing methodologies, approaches and mechanisms necessary to implement the feed-in-tariff law and policy, The calculation and publishing of the FIT is the responsibility of the Regulator, Their role also extends to assisting developers in issues such as clarifying the policy, reviewing PPA, licensing and ensuring that the policy is achieving the intended results. 11
NATINAL UTILITIES; Institutional Arrangements An obligation by the national utility to purchase RE as per the tariffs published by the FIT LAW. Independent Power Producers ; Provides revenue certainty to developers and acts as an investment enabler by making projects bankable, The success of the FIT policy is measured by the number of new IPPs commissioned Financing Options for FIT; The extra cost to be spread across the utility s customer base, Investment subsidies where the financial burden falls upon the taxpayer 12
Drafting feed in tariff policy IV. DRAFTING FEED IN TARIFF POLICY; key elements that FIT policy should consider: Priority purchase obligation, ensures producers that each unit of renewable energy produced can be sold Determine technologies and plants to be covered, Determination of good tariff rates, challenging task Profitability must be certain excess profitability must also be avoided Where possible bidding is the best option of price discovery Guarantying the tariff over a specified period of time, A time limit should be fixed in order to reduce the overall costs of the FIT system. ensures the profitability of production, and the security of investment for producers, manufacturers, investors and suppliers Finding an effective way of financing the FIT Policy; Cost sharing or through a fund Reduce tariff rate periodically; Encourages innovation and deployment of better performing technologies 13
Design Options for Renewable Energy Feed-In-Tariffs V. Design Options for Renewable Energy Feed-In-Tariffs; Eligible Technologies; a whole basket of RET, rather than focusing on the 1-2 that are currently most effective ; Member States may rather opt for least cost RET only Eligible Plants; By plant size; Plant location; and whether new or old plant. Old RET plants need not get same treatment 14
Design Options for Renewable Energy Feed-In-Tariffs Financing Mechanism; i) co-funding from international climate change, ii) additional taxes on fossils, and ii) subsidies for low-income households Tariff calculation Methodology; A balance is required between the consumer s needs for lower tariffs and investor s needs for a good return on investment, three common approaches to the tariff methodology: a) the avoided cost approach, which sets tariffs based on existing prices, b) rate of return (cost based) approach, and c) benchmarking, which sets the tariff based on cost of generation plus a return compatible with the risk 15
Design Options for Renewable Energy Feed-In-Tariffs cont Technology specific tariff; Technology specific support is necessary because of the large difference in generation costs amongst renewable energy technologies, Size specific Tariff An analysis of standard products of a certain technology in a given country will help set the standard tariff, Different sizes of RE plants generally have different unit generation costs, What about location and resource specificity? Duration of tariff payment;. common period is 15-20 years. By that time, there may be technology changes and probable cheaper RET generation costs as innovation creeps in, Policy makers must also consider whether the investor may opt out of the REFIT scheme during the guaranteed period when the conventional generation costs become more attractive. The investor could be allowed to switch between the guaranteed payment under REFIT and participation on the spot market 16
Design Options for Renewable Energy Feed-In-Tariffs Purchase obligation; The second most important elements of FIT assures investment security by maintaining cash flow. No cut backs in the event of demand decline because of the priority status Priority grid access; vertically integrated utilities ought to favor their generation first This threatens eligible RET based IPPS therefore grid access needs policy intervention, Cost sharing methodology for Grid access; Setting Targets; program or project caps; Policy adjustments; Incremental adjustments to account for technological cost reduction or overall change of the economy, inflation etc Comprehensive adjustments; Policy goals, objectives, eligibility, program or project caps, duration of support etc. 17
VI. Hybrid systems Hybrid systems Auctions and competitive bidding systems are technically an alternative policy to FITs; Auctions and bidding can be applied in conjunction with FITs in a variety of ways, such as helping to set payment levels; Case china and southafrica 18
summery Feed in tariff programs has been instrumental in addressing not only sect oral development objectives such as power generation capabilities but beyond this macro economic issues such as export market development in RE technologies and employment. Experience in COMESA indicates the emphasis is more of power sector /generation/ development than industry development. Few countries who opted for such program managed to acquire net additional investment in the sector. Has been a learning experience and has helped in testing the established government system including regulatory system and contributed to the recalibration of these systems as well. The need to reconsider the prevailing thinking is become self evident in the wake of development and powerful procurement options such as Auctioning. COMESA guide line on competitive procumbent should the next agenda RE Portfolio committee of RARESA has been thinking about this for some time and will soon engage itself in the development of this guide line 19
THE END THANK YOU FOR YOUR ATTENTION QUESTIONS? 20