Feed-in tariffs – Design options and case studies for developing countries

Leonardo Webinar 26 January 2012

Dr. des. David Jacobs

Director Renewable Energy, IFOK GmbH

Course on Regulation and Sustainable Energy in Developing Countries – Session 4

www.leonardo-energy.org/course-regulation-and-sustainable-energy-developing-countries

Agenda

FIT design and case studies:

Feed-in tariff calculation

FIT financing

Capacity caps

Local content rules

3

FIT Countries 2010

Countries with state FIT policy

Countries with national FIT policy

Source: REN21, Renewables 2010 Global Status Report

Basic feed-in tariff design

• Purchase obligation

• “Independent” from power demand

• Fixed tariff payment based on the actual power generation costs

• Price setting will be discussed in session 4

• Long duration of tariff payment

Tariff calculation

Tariff calculation methodology

Early FITs (1970-1990s): Avoided costs

Benchmark: cost for conventionally produced electricity

Tariff level is only “right” coincidentally (under- or over-compensation)

• E.g. Nicaragua, Tanzania

Tariff calculation methodology

• Tariff calculation based on technology specific generation costs

+ “reasonable” rates of return

• Don’t use “avoided costs” as point of reference

• Cost factors:

• Investment costs (material and capital costs); Grid-related and administrative costs (including grid connection, costs for licensing procedure; Operation and maintenance costs; Fuels costs (biomass and biogas)

Rate setting process

Different jurisdictions use different methodologies for setting FIT rates.

Recent research reviewed several models for rate setting, results indicate:

• Most jurisdictions use similar approaches (even if inputs and assumptions vary):

Discounted Cash Flow (DCF), after-tax analysis– Discounts to present value the estimated annual cash

flows to equity investors

Building a feed-in tariff rate calculator

Goal is to reach an appropriate rate that is high enough to spur renewable energy development while at the same time not so high as to provide windfall profits to project owners.

Tradeoffs exist:• Ease of use vs. complexity• High-level representation vs. detailed analysis• Granularity vs. time investment

Tariff calculation methodology

• Targeted IRR (Internal rate of return)

• In the EU, feed-in tariffs target at an internal rate of return of 5-9 percent (certain jurisdictions use return on equity)

• In developing countries, the targeted IRR usually needs to be higher (10-20 percent)

• Public investment (monopolist, often without profit interest); or private IPPs (profitability important)?

• Similar profitability for renewable energy projects needed as for convention energy market

Equity IRR expectation in developing countries

Figure 4: Equity IRR expectation in developing countries:

0%

5%

10%

15%

20%

25%

Infrastructure

investment

(developed

world)

Technology

risk (missing

track record)

Political risk Reg. Risk, soft

political risk,

transparency,

legal

framework

Counterparty

risk

Currency

safety cushion

Infrastructure

investment

(developing

world)

Source. Fulton et al. 2011

Tariff calculation methodology

• Assumed capital structure

• Ratio of debt and equity (80 to 20 in Netherlands; 70 to 30 in Ontario (Canada))

• Germany; different debt-equity ratio depending on each technology (reflecting their risk profile)

• South Africa: 70:30

• Higher equity share in other developing countries?

• Interest rate for the debt? (international and national analysis needed)

• Generally, debt term (duration) equals duration of feed-in tariff payment (average of 20 years)

Tariff calculation methodology

• Tax treatment

• Pre-tax calculation (taking advantages and disadvantages from national taxation scheme into account)

Post-tax: Germany, because not significant available tax benefits, and because tax liabilities vary across ownership and investor types and are difficult to generalize – also used in Malaysia Accelerated depreciation factored in (e.g. India)

Tariff calculation methodology

• Treatment of inflation (indexation)

• Necessary because of long-term tariff payment (especially in developing countries with high inflation rates)

• Usually applied to the investment share that is related to O&M costs

Tariff calculation – South Africa (2009 vs. 2011)

Tariff calculation assumptions – Malaysia (2010)

Source: Kettha 2010

Tariff calculation in Germany: Input data for wind energy

• Medium transparency in Germany

Provision ofcapital

Equity share: 25% Return on equity (100% -location): 12%

Share of debt: 75 % Interest on debt: 5 % , or 5,5 %

Time period in question 20 years

Inflation rate 2% p.a.

Specific investment costs 60 and 80 % - location: 1.756 €/kW

100 % location: 1,463 €/kW

120% aand 150 % - location: 1, 336 €/kW

Annual costs of operation Year 1-10: 2.19 ct/kWh

Year 11-20: 2.49 ct/kWh

Source: BMU 2011

Tools for tariff calculation

RET Screen http://www.retscreen.net/

CREST model from NREL https://financere.nrel.gov/finance/content/CREST-model

Adoptation to national context is required (e.g. tax burdens andinvestment incentives)

Tools for tariff calculation – CREST from NREL (inputs)

Tools for tariff calculation – CREST from NREL (cash flow)

FIT financing

Financing mechanism - Germany

Financing mechanism in liberalized electricity markets

Financing trough “burden sharing” between all electricity consumers

Differences in emerging economies and developing countries

Subsidiesfor

conventionalpower

No interna-lization ofnegative

external costs

Artificially lowelectricity

prices = high cost difference

withrenewables

• low electricity costs

• little acceptance of electricity price increases

Combined financing – Taiwan

Source: David Jacobs

• Add additional financing to the national FIT fund (levy on producers fromconventional electricity)

• Increase the retail electricity price by a certain share (after general electionsnext year)

Conventional electricity producers

Retail price increase

Renewable Energy Fund (FIT Fund)

Payment for producers under the feed-in tariff

scheme

Money

Money

Money

FIT financing in Malaysia – limited electricity price increase

Source: Kettha 2010

FIT Fund in Malaysia

FIT financing cost in Germany (additional costs per kWh)

Source: BMU 2011

International FIT financing? – The future of international climate talks?

GET FIT financing flows

Source: DBCCA, "GET FIT", April 2010

Capacity caps

Capacity cap

• Capacity cap might be necessary to control costs (limited number of project)

• To control installed capacity (in line with central planning in monopolized electricity markets)

• E.g. tariff payment for first 400 MW wind energy, first 100 MW geothermal, and first 50 MW solar PV

• In this case: Project size should also be limited

• Application process needs to be regulated (“first-come, first-served”)

• Online application to avoid fraude? – Malaysia

Source: Mendonca et al. 2009

Capped feed-in tariff in Kenya (2009)

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• Tariff payment for 15 years

• Rate setting based on generation costs

• Support of least cost RES technologies

Technology Mainland Price ($/kWh) Capacity cap

Wind $0.09 150 MWBiomass (firm and non-firm)

$0.045-0.07

200 MW

Hydro (firm and non firm)

$0.06-0.12

150 MW

Capped feed-in tariff in Ecuador

32

• Tariff payment for 12 years

• Rate setting based on generation costs

• Cap: 2% of installed capacity

Technology Mainland Price ($/kWh)

Wind $0.09Photovoltaic $0.52Biomass and biogas $0.10Geothermal $0.09Small-hydro up to 5 MW $0.06Small-hydro 5 MW-10 MW $0.05

Annual Quota on RE Capacity in Malaysia (MW)

Year Biomass Biogas Mini-Hydro Solar PV Solid WasteTotal per Annum

2011 110 20 60 9 20 219

2012 40 15 50 11 30 146

2013 50 15 60 13 40 178

2014 60 25 60 15 50 210

2015 70 25 60 17 60 232

2016 80 25 60 19 40 224

2017 90 30 50 21 40 231

2018 100 30 40 24 30 224

2019 100 30 30 28 30 218

2020 100 25 20 33 20 198

: : : :

2030 280 2 282

: : : :

2040 850 2 852

: : : :

2050 1,350 2 1,352

Source: MBIPV 2010

Annual Quota on RE Capacity in Malaysia (MW)

Source: MBIPV 2010

Capacity cap

• Disadvantages:

• “Stop-and-go” investment cycles – difficulty to establish a national industry (similar to tender)

• Unsustainable market development

Local content requirement

Local content requirement

• Several countries have introduced local content requirements in national support mechanisms, i.e. obligations to produce a certain share of renewable energy equipment locally/nationally (e.g. Spain, China, India, Argentina - Chubut, Ontario - Canada, Malaysia, Italy)

• These requirements can be implemented in national feed-in tariff mechanisms

• Establish a national renewable energy industry

• Take advantage of positive macro-economic effects

Source: Mendonca et al. 2009

Local content requirement Chubut

• Province in Argentina:

• Wind energy law 2005, Article 4, states:

• „... to enjoy this benefit, the wind mills installed have to comply with a timeline detailed further below of including components made or assembled in the Province of Chubut:a) As from 1 January 1999: 10%b) As from 1 January 2001: 30%c) As from 1 January 2003: 60%d) As from 1 January 2005: 80%e) As from 1 January 2007: 100%“

• Outcome: low incentive and rigid timeline impended wind power development in Argentina

Local content requirement Ontario

• Local content wind: 25%; 50% in 2012

• Local content solar: 40-50%; 60% in 2011

Local content requirement Ontario

• Complex definitions needed (Ontario): Solar PV

Designated Activity Qualifying

Percentage

Silicon that has been used as input to solar photovoltaic cells manufactured in an Ontario refinery.

10%

Silicon ingots and wafer, where silicon ingots have been cast in Ontario and wafers have been cut from the casting by a saw in Ontario.

12%

The crystalline silicon solar photovoltaic cells, where there active photovoltaic layer(s) have been formed in Ontario.

10%

Local content requirement Ontario

Solar photovoltaic modules (i.e. Panels), where the electrical connections between the solar cells have been made in Ontario and the solar photovoltaic module materials have been encapsulated in Ontario.

13%

Inverter, where the assembly, final wiring and testing has been done in Ontario.

9%

Mounting systems, where the structural components of the fixed or moving mounting systems have been entirely machined or formed or cast in Ontario. ….

9%

Wiring and electrical hardware that is not part of other Designated Activities (i.e. items 1, 2, 3 and 5 of this table) sourced from an Ontario Supplier.

10%

All on-site and off-site labour and services. For greater certainty, this Designated Activity shall apply in respect of all Contract Facilities.

27%

Total 100%

Local content requirement

• Problem: potential confliction with international trade rules (WTO)

• Malaysia: Adder for nationally produced equipment:

Malaysian tariff structure for solar PV

Source: Kettha 2010

International “worst” practice

International “worst” practise

• Low tariff = no tariff (e.g. Argentina: Premium tariff payment of 0.37 €cent/kWh for wind energy)

• Assessment report can help to correct tariff level

• Unnecessary high tariffs

• PV in Spain; PV in Czech Republic

• High rates of return; attracts speculation; unsustainable market

growth

• Short payment durations (annual changes)

• Germany until 1999; Spain until 2004, some Indian provinces

•Size specific tariffs (huge differences in tariff levels)

• Spain

Books on FIT design

The Evolution of FITs in Germany, Spain and France http://www.ashgate.com/default.aspx?page=637&title_id=11456&edition_id=1496

0&calcTitle=1

The feed-in tariff handbook

http://www.earthscan.co.uk/?tabid=92822

Online policy advice: How to design good feed-in tariffs?

Online policy advice:

Make your own FIT law

www.futurepolicy.org

Thank you for your attention!!!

Dr. des. David Jacobs I Director Renewable Energy IFOK GmbH

Reinhardtstraße 58

10117 Berlin

Tel.: +49 30 536077-27

E-Mail: david.jacobs@ifok.de

David.jacobs@gmx.de

www.ifok.de

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