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If private-sector investment in renewable energy resources development proves either essential or desirable to meet a country’s urban or rural electric-sector policy goals, the next step is to identify the hurdles to be overcome.

Policy strategists may prudently follow three lines of inquiry:

· Does the domestic economic, legal and regulatory regime create an appropriate environment to attract private investment?

· Does the domestic economic, legal and regulatory regime create a “level playing field” for the renewable technologies?

· Does the domestic economic, legal and regulatory regime impede or enable the development characteristics unique to each of the renewable resources

How does the policy maker bridge hurdles to renewable energy development?

At the same time as hurdles are identified, the policy strategist will need to identify mechanisms which may address the impediments identified, and thereby enable the achievement of renewable energy policy objectives in establishing a national competitive environment and a level playing field for energy development.

The issue of a “level playing field” - meaning an environment in which every private-sector player has an equal opportunity to succeed and in which no artificial barrier affects the results - is best analyzed on an individual country basis. In every country the electricity sub-sector is shaped by the resources, economics and history unique to that country.

In general, new technologies are seldom on an equal footing with established technologies; subsidized technologies have an advantage over unsubsidized technologies; and technologies with front-end-loaded capital costs are disadvantaged in an economic regime with a short-term pricing structure. Nevertheless, the policy strategists in each country will need to examine the status quo - the existing state of the electricity industry on the day of the inquiry - to determine whether, and to what extent, barriers exist which unfairly favor investments in oil, gas and coal over investments in the renewables.

The impediments to grid-connected renewable generation and the potential mechanisms to bridge those impediments can be illustrated by comparing the unbundled, competitive electricity market model and the more traditional government utility model. In the case of the unbundled, competitive market, an unlevel playing field may be created if short-term pricing is mandated, and in the case of the state-owned, vertical utility, an unlevel playing field may be created if the bidding system is biased (or slanted) in favor of the conventional fuels.

What are the impediments to renewables in a market system?

The privatization of utility systems has brought a degree of market discipline and economic reality to the electricity business of many nations and has fostered conditions generally conducive to private investment. However, the shift to a short-term market for wholesale electricity may hamper development of new renewable energy generation projects in previously undeveloped resource areas except in those countries that have implemented special policies to offset this result.

Projects that depend oh short-term markets for all or most of their revenues are known as “merchant plants”. Merchant plants are built with the understanding that they have not specifically identified buyers to purchase their output at fixed prices over a long-term (typically 15-20 years). Instead, they sell into the short-term market and receive whatever price the market dictates for that particular week, day, hour or half hour.

An electricity market that offers only short-term prices constitutes an inhospitable climate for building new, renewable energy projects. In the absence of long-term capacity expansion planning, the dynamics of the short-term market cause a country’s electric capacity expansion to be based on short-term economic principles. Experience has shown that under these conditions new capacity needs will be met by thermal projects having the lowest capital costs and the shortest lead times for construction. The problem is not that renewable on-grid generation cannot be competitive in such a market, rather that financial markets are resistant to financing capital-intensive facilities unless there is some assurance of a revenue flow that returns principal and interest.

In a short-term market, governments may have to build a bridge to encourage the development of renewable energy projects that deliver long-term benefits.

A short-term market assigns absolutely no value to the fact that a renewable energy generation will essentially be free once its debt has been retired. Consequently, renewable energy generation is vulnerable to the short-term market price choice of a gas-fired combustion turbine despite its high fuel cost and short life.

Developers of inexpensive thermal plants can survive in a purely short-term market environment because:

· thermal plants typically recover their operating cost since a major portion of their cost is fuel related, and since short-term markets tend to track fuel prices;

· the lower debt load on their projects leaves them with a far lower financial exposure to a prolonged slump in market prices; new fossil plants with low per kilowatt capital costs are likely to recover those costs before fuel prices rise to a level that affects their viability; and

· the very short construction lead times of thermal plants provides timing flexibility, permitting them to take advantage of market trends - however, this timing flexibility is also an attribute of some types of renewable resource facilities, such as wind and solar facilities.

Renewable energy generation will essentially be free once its debt has been retired.

In a short-term market system, a major barrier to the acquisition of new renewable resource generation is the lack of buyer (utilities, distribution companies, etc.) motivation. Short-term electricity prices are based on electricity generated by existing plants, the capital costs of which are already absorbed. The initial electricity prices offered by new plants coming on line will invariably exceed the current short-term price for electricity. It is therefore difficult to envision how a short-term market system will enable new generating capacity unless the wholesale buyers in the system project electricity prices for completing generation over a term of years, and contract for energy for that long-term period. Electricity from new renewable generation facilities will frequently be higher than any current short-term market price, but will be competitive (cost-effective) if long-term contracts are considered.

To date, lenders have not been willing to provide debt capital for renewable energy merchant plant projects dependent on short-term markets in countries whose newly established markets have yet to achieve a solid track record. Since lenders require that renewable projects demonstrate steady, predictable cash flows to meet debt-service requirements over a long-term period, the significant price risk created by unpredictable, fluctuating short-term prices effectively preclude financing under present market conditions.

What mechanisms attract private-sector development and bridge the impediments to the development of renewables?

In assessing the impediments to attracting private-sector investment to the power sector, the energy strategist needs to be mindful of the dynamics which occur when a country shifts from using sovereign credits for new infrastructure facilities to using private debt and capital on a project-specific basis. Grid-connected generation projects are capital intensive, easily running into the tens of hundreds of millions of dollars to construct. Few developers can underwrite individual generation projects that cost hundreds of millions.

Private-sector developers, no matter how well capitalized, do not have the credit capacity to underwrite the debt on a portfolio of projects whose total capital cost can run into the billions of dollars. Accordingly, third-party debt is essential to most private-sector financing for electricity generation.

Remove legal barriers which may prevent the private sector from developing, owning, and operating power generating plants.

The project financing format shifts a lender’s credit analysis from the project sponsor to the project itself. To be deemed a creditworthy investment by potential lenders, a private-sector project must meet three basic criteria:

· revenue flows from the project must be deemed likely to meet pro forma expectations;

· interruptions to revenue flows must be deemed a manageable risk; and

· unanticipated external costs that may deplete available revenues must be deemed sufficiently remote.

Consequently, the energy strategist will need to identify those elements in a country’s economic, legal and regulatory environment which may not be conducive to long-term investment in such projects.
· Does the government exercise restraint in making adjustments in government policies of private investors?

· Does the legal environment contain explicit governmental authority for the types of public-private transactions contemplated?

Enact renewable resource laws designed to promote private-sector development.

In this context, the policy strategist may identify the impediments to private-sector investment by inquiring whether, and to what extent, the legal rights and obligations of the domestic economic, legal and regulatory environment impede, enable, or encourage project financing. To bridge the impediments so identified, the policy strategist may construct an incentive package. To identify appropriate incentives, the energy strategist may profitably initiate a three-fold inquiry:

· Identify existing and potential incentives which may apply broadly to all private investors in any infrastructure project;

· identify incentives which may apply exclusively to private investors in renewable energy power generation; and

· identify incentives which may apply to unique situations of a specific renewable resource.

As a final measure, the strategist may consult with potential developers and financiers to evaluate incentives.

The needs of both the public and private sectors merit scrutiny. The more significant considerations include the following:

· Authority to generate electricity. Private-sector investors need the authority to engage in a given public activity (e.g., electric generation) together with, independent of, or on behalf of, the government.

· Authority to select private parties. Public entities need the authority both to select the private party which will perform the “public” activity of providing generation as well as to enter into legally binding relationships designed to produce a firm, reliable stream of payments to support project financing.

· Exemption from taxes. In recognition of their environmental and other benefits, one can make a good case for substantially lowering taxes and duties for renewable energy technologies, while taxing conventional energy industries’ supplies in accordance with standard principles of tax policy. Experts have also long argued in favor of imposing corporate and sales taxes on electricity on the grounds that it is a fairly price-inelastic product.

· Foreign loans and contracts. Foreign investors need the right to remit, at the prevailing exchange rate at the time of the remittance, such sums required for the payment of interest and principal on foreign loans and obligations arising from contracts.

· Freedom from expropriation. Foreign investors need legal certainty that property represented by investments shall not be expropriated except in the interest of national welfare and upon prompt payment of just and adequate compensation.

· Judicial stability. Lending institutions sometimes require a judicial stability agreement to the effect that the tax regimes and the foreign exchange regimes valid at the granting of a concession will remain unchanged during the lifetime of the concession.

· Reduction or Elimination of Import Duties. Much of the equipment for renewable generation must be imported into host countries. High capital import duties and tariffs distort the market, artificially raising the price of renewable technologies, and discouraging their adoption. Temporary waivers may remove this impediment and allow renewable technologies to compete on an equitable basis. Such waivers may be justified either on the basis that renewables are a “pioneer” (or start-up) industry or on the basis that payment of such duties and tariffs by a generating company will ultimately be passed on either to the rural poor or to the government.

· Remittance of earnings. Foreign investors need the right to remit earnings from foreign investments in the currency in which the investments were made and at the prevailing exchange rate at the time of remittance.

· Repatriation of investments. Foreign investors need the right to repatriate the entire proceeds of the liquidation of their investments in the currency in which the investments were made and at the prevailing exchange rates at the time of repatriation.

· Requisition of investment prohibited. Foreign investors need legal certainty that property represented by investments shall not be requisitioned except in time of war or national emergency and only for the duration thereof. In the event of such requisition, provisions need to be made to ensure that just compensation shall be determined and paid either at the time of requisition or immediately after the cessation of the state of war or national emergency.

Determine under which circumstances to treat all indigenous resources equally, and under which circumstances to differentiate between resources which are part of a mature industry and those which are presently undeveloped.

What are the affects of subsidies on renewable energy development?

Policy strategists will need to consider whether, and to what extent, government intervention is appropriate.

In a short-term market electricity system that effectively precludes projects with long-term benefits, the government may have to build a bridge to achieve policy objectives favoring environmentally benign renewable energy projects that deliver such long-term benefits.

Renewable energy projects face serious obstacles in areas in which government policies and subsidies artificially lower the price of conventional generation fuels and focus on short-term economics. In making energy choices, some governments have opted for carbon-based systems such as oil or diesel units, using economic analyses that either fail to take into account the long-term benefits of renewables or to account for the impact of continuing government fuel subsidies when making these investments. Policy makers electing to encourage renewable energy systems as part of an energy mix will be more certain of attaining their objective if they strive for decisions based on a comprehensive and long-term comparison of the costs and benefits of all alternatives.

Develop a policy of strengthening the development of indigenous resources to attain energy self-sufficiency.

Some governments have sought to promote the provision of affordable modem energy services in rural areas by subsidizing particular forms of energy. Although well intentioned, such policies, if not designed appropriately, have often proved to be counterproductive for the following reasons:

· Such policies work against consumers making least-cost choices, and in doing so, can undermine investors’ efforts to provide alternate energy forms.

· Widespread recourse to unnecessary subsidies has frequently proved to be fiscally unsustainable. When coupled with price restrictions, subsidies eventually limit energy companies’ investment programs.

· Subsidies can discourage efficient energy use.

In some extreme cases, country legal regimes have simultaneously subsidized imported diesel fuel and imposed high import duties on renewable technology equipment. Such trade barriers result in making renewable energy systems uncompetitive with fossil-fueled generators. In these circumstances, energy planners are motivated to continue to purchase diesel generators regardless of whether they prove to be much more costly, unreliable, and environmentally damaging in the long run.

Countries electing to operate primarily through short-term or spot markets will need carefully to tailor policies if they wish to expand their base of renewable energy projects successfully.

In much of the world, perhaps the most fundamental consideration developing a strategy for new electricity generation is whether to finance new generation projects on a project basis or a sovereign-credit basis. Although traditional sovereign-lending activity has diminished in recent years, it is nevertheless incumbent on government policy makers to ask the critical question: Is government-financed generation infrastructure a better model than government-financed loans based on sovereign credit? The following chart illustrates barriers to alternative energy technologies.

Barriers to Alternative Energy Technologies

Barriers to Alternative Energy Technologies

· Technology Awareness
- Lack of up-to-date info on the costs, benefits, applications of Renewable Energy
· Financing/Risk Perception
- Perceived Risk
- High Capital (Low Operations and Maintenance)
- Non-Recourse Financing
- High Relative Overhead Cost
- Inflation Rates
- Currency Convertability
- Pre-Investment Funding
· Policy
- Not a level playing field
- Subsidies for traditional fuels
- Tariff Barriers for Renewable Energy
· Institutional
- Don’t have in-country organizations/networks in place to identify, develop and follow through on projects from concept to implementation to Operations and Maintenance.
· Requirements for Accelerating Utilization
- User Understanding and Acceptance
- Appropriate Financial and Legal Structures
- Equitable Policy Environment
- Better Resource Characterization

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