Market and Policy Outlook for Renewable Energy in Europe and the CIS

Market and Policy Outlook for Renewable Energy in Europe and the CIS

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Investment_UNDP_COVER 05/05/14 10:44 Page 1

Market and Policy Outlookfor Renewable Energyin Europe and the CIS

UNDP partners with people at all levels of society to help build nations that canwithstand crisis, and drive and sustain the kind of growth that improves the quality oflife for everyone. On the ground in more than 170 countries and territories, we offerglobal perspective and local insight to help empower lives and build resilient nations.

May �014

copyright © united nations development Programme.all rights reserved.

this publication does not necessarily reflect the official views or policies of theunited nations, includingundP, or unMember States, nor do the boundaries andnames shown on maps imply official endorsement by the united nations.

Author: christoph S. Henrich

UNDP reviewers and contributors: Martin krause, John o’brien, danielacarrington, Marina olshanskaya and oliverwaissbein.

Citation: united nations development Programme (undP), �014: Market andPolicy outlook for renewable energy in europe and the ciS

ISBN: 978-9�-9509�-87-7

Editor: tomwoodhatch

Cover Page Photo Credits: undP europe and the ciS flickr Photo gallery(Montenegro, croatia, albania, kazakhstan, bosnia and Herzegovina, uzbekistan)

Design: Valeur s.r.o.

Acknowledgments: the author would like to thank Johno’brien for his valued technical guidanceand continual support. this report and associated research benefited from additional input froma wide range of experts and country-level colleagues who helped to improve the quality andaccuracy of the collected information. thanks go to: Mirela kamberi, aram ter-Zakaryan, georgiarzumanyan, diana Harutyunyan, chingiz Mammadov, alexandre J. grebenkov, igar tchoulba,Sanjin avdic, Sandra Vlasic, Zoran kordic, nino antadze, Vakhtang berishvili, Stanislav kim, rassulrakhimov, daniar ibragimov, anita kodzoman, nicolae Zaharia, nadja Vetters, Jelena Janjusevic,nargizakhon usmanova, katalin Zaim, rovshen nurmuhamedov, olena ovchynnikova, SergeiVolkov and rano baykhanova.

� Market and Policy outlook for renewable energy in euroPe and tHe ciS


Table of Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

List of Figures and Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1. Current Situation and Potential of Renewable Energy in the Region . . . . . . . . . . . . . . . . . 15

1.1 deployed renewable energy capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.� renewable energy Potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

1.� renewable energy legislation and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �0

1.�.1 decreasing technology costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ��

1.�.� Public de-risking instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ��

1.�.� direct financial incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �4

1.4 renewable energy deployment and growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �8

2. Barriers to Renewable Energy Investment in the Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

�.1 Market Prospects and government Policies to Stimulate investment . . . . . . . . . . . . . . . . ��

�.� Market distortions and access to the energy Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �5

�.� concessions, Permits and licences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �7

�.4 access to the electricity grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �9

�.5 technology and Supply chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �9

�.6 cost of information and limited experience with renewable energy . . . . . . . . . . . . . . . . 40

�.7 capital Scarcity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

�.8 inadequate transmission infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4�

�.9 Political instability and country risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4�

3. Best Countries for Renewable Energy Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

4. De-risking Renewable Energy Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

�Market and Policy outlook for renewable energy in euroPe and tHe ciS

renewable energy holds tremendous potential for increased deploy-ment in the europe & ciS region despite the fact that currently only asmall percentage of energy is supplied by renewable sources of energy.in recent years numerous new laws, regulations, policies and incentiveshavebeenput in place to encourage increased investment in renewableenergy. key drivers behind the push for increased renewable energy inthe europe&ciS region include concerns about energy security and cli-mate change and realization of commercial opportunities. the costs ofrenewable energy technologies have substantially decreased over thepast few years opening up commercial opportunities for private enter-prises and investors. Many countries in the regionwant to reduce theirdependency ondomestic and imported fossil fuels such as coal, gas, andoil. renewable energy offers excellent opportunities towards supply diversification and energy in-dependence. in addition, increased investments in renewable energy offer substantial opportunitiesfor reducing greenhouse gas emissions.

investments in renewable energy in the europe & ciS region can be facilitated by de-risking the pol-icy and regulatory environment and removing institutional, financing and informational barriers . Suc-cessful de-risking leads to increased confidence and higher internal rates of return for investors. chal-lenges related to scarcity of capital and the inability of project developers to obtain financing aresignificantly reduced once de-risking has taken place. well designed renewable energy incentiveschemes, policies andmeasures increase the uptake of renewable energy. a level playing field for re-newable energy and increased investment in renewable energy technologies also requires reductionof subsidies on fossil fuels which have been an enormous barrier, not just in this region but globally.

this report provides a market and policy analysis and outlook for renewable energy for the europe&ciS region. it describes and explains the linkages between policy development and renewable en-ergy deployment and examines the barriers to and opportunities for increased investments in re-newable energy.we hope that this report will contribute to a better understanding of the renewableenergymarket in the europe & ciS region; ultimately leading to increased investments in the sector.

Martin KrauseundP, Senior global energy Policy advisor &

energy and environment Practice leader for europe and ciS

4 Market and Policy outlook for renewable energy in euroPe and tHe ciS

Foreword

List of Figures and Tables

Figures

figure 1: cornerstone instruments and the risk and reward Structure of a renewable energyProject

figure �: lower and upper bound lcoe and feed-in tariffs for reS in Slovenia, ukraineand turkey

figure �: europe and the commonwealth of independent States region

figure 4: absolute installed renewable energy capacity in Mw per country

figure 5: Share of renewable energy to total installed electricity capacity (%)

figure 6: total installed renewable electricity capacity in Mw in the region (green) and therest of theworld (blue)

figure 7: technical renewable energy Potential in gw installed Power capacity by technologyand country

figure 8: yearly average Horizontal Surface radiation by country in kw-h/m²

figure 9: the impact of financing costs onwind and gas Power generation costs in devel-oped and developing countries

figure 10: technology Specific feed-in tariffs for renewable energy technologies by countryin €/Mw-h

figure 11: cornerstone instruments and the risk and reward Structure of a renewableenergy Project

figure 1�: deployed biomass, Solar PV andwind Power capacity in Mw, �005 and �01�

figure 1�: legally binding Share of renewable energy Sources in gross final energyconsumption by �0�0

figure 14: lower and upper bound lcoe and feed-in tariffs for reS in Slovenia, ukraineand turkey

figure 15: lcoe for awind Power Project before and after de-risking

5Market and Policy outlook for renewable energy in euroPe and tHe ciS


Tables

table 1: capital cost and o&M cost estimates by technology in the u.S.a., �01�

table �: Some countries with the Most favourable renewable energy Promotion Policies

table �: country risk indicator by country

table 4: feed-in tariff and feed-in Premium for renewable energy technologies in Slovenia

table 5: feed-in tariff for renewable energy technologies in ukraine

table 6: feed-in tariffs for renewable energy technologies in turkey

table 7: risk categories and their tailored Public de-risking instruments

Annex

table 8: implemented renewable energy related Policies

table 9: world bank indicators

table 10: opportunities to finance renewable energy Projects in the region

table 11: renewable energy investment opportunities in the region

table 1�: assumptions for lcoe calculations

Acronyms

adb asian development bank

acn anti-corruption network for eastern europe and central asia

ccgt combined cycle gas turbine

ebrd european bank for reconstruction and development

ec energy community

eciS europe and commonwealth of independent States

ecS energy charter Secretariat

edb eurasian development bank

eMra turkish energy Market regulatory authority

eu european union

fbiH federation of bosnia and Herzegovina

fit feed-in tariff

fyroM former yugoslav republic of Macedonia

gef global environment facility

gw gigawatt

iea international energy agency

iPcc intergovernmental Panel on climate change

kw kilowatt

kw-h kilowatt Hour

lcoe levelized cost of electricity

lcr local content requirement

Mw Megawatt

Mw-h Megawatt Hour

nPV net Present Value

oecd organisation for economic co-operation and development

o&M operation andMaintenance

PV Photovoltaic

re renewable energy

reS renewable energy Source

roi return on investment

rS republic Srpska

SHPP Small Hydropower Plants

SMe Small and Medium-sized enterprise

trcc tradable renewable enery credits

wacc weighted average cost of capital


in the coming years, theworldwide deploymentof renewable energy technologieswill increase.the international energyagency (iea) estimatesthat, by �0�5, power from renewable energy(re)1 will account for almost half of the increasein the global power generation, ofwhich almosthalf will be from wind and solar photovoltaic(PV) sources (ieab, �01�). the share of re in theglobal power generation reached 480gw in �01� and annual re investmentamounted to $�14 billion in �01� (ren�1, �01� and fS & uneP, �014). this isover seven times more than in �004,when investment amounted to $�0 bil-lion (ren �1, �005). in �01�, renewable energytechnologies represented 4�.6 percent of thenew installed electricity power capacity (fS &uneP, �014). a combination of recently imple-mented re promotion schemes with increasedconcerns over energy security, energy demandand climate change, as well as a sharp fall in retechnology costs, has driven this development.unique geopolitical features give countries ineurope and thecommonwealth of independent

States (eciS)� specific incentives to further de-velop diversified energy mixes including re-newable technologies. the combination of verycold winters, inadequate and outdated trans-mission infrastructure and numerous energysupply shortages makes energy a key determi-nant of socioeconomic development across the

region. High dependency on imported tradi-tional fossil fuels such as oil, coal and gas, andconcerns over energy security, focuses atten-tion on further expansion of renewable energysources (reS) in the region. removal of fossilfuel subsidies will help to reduce the depend-ency on fossil fuels. additionally, there is tremen-dous potential to exploit renewable resources,

such as wind, solar PV, biomass and small hy-dropower for electricity generation. for exam-ple, with almost �000 kw-h/m�, turkmenistan,kyrgyzstan, tajikistan and uzbekistan have thehighest annual average horizontal solar surfaceradiation in the region. despite that potential,the region’s share of renewable electricity powercapacity in �01�, excluding large hydro power,was only �.7 percent. excluding all hydro powercapacity as a reS, in �01� the region only con-

tributed around 16 gw to the world-wide non-hydro renewable electricitypower capacity. this represents a globalshare of �.� percent. the deployment ofre capacity over the last decade, partic-

ularly solar PV and wind, is unequally distrib-uted among the countries of the region. in con-trast to existing re promotion schemes inmanyof the region’s countries, only some countries in-creased their re power capacities. this reportseeks to analyse the major barriers and relatedrisks that inhibit re investment anddeployment


Executive Summary

1 Please note that this includes large hydropower and nuclear power. In this report, both forms of energy productionare not defined as renewable energy sources and are therefore excluded.

2 For the purpose of this report, the ECIS region consists of: Russian Federation, Ukraine, Moldova, Belarus, Kazakhstan,Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan, Armenia, Georgia, Azerbaijan, Turkey, Albania, Serbia, Former Yu-goslav Republic of Macedonia, Montenegro, Bosnia and Herzegovina, Croatia, Slovenia, Slovakia, Czech Republic,Poland, Hungary, Latvia, Lithuania, Estonia, Romania and Bulgaria.

In 2013, global investment in renewableenergy was more than seven times higher

than in 2004.

In 2012, renewable energy made up3.7 percent of the region’s power capacity.

in the region. it also highlights which countrieshave hadmost successwith different types of re-newable energy, highlighting their policies andinstitutional set up as a means of creating linksbetween policies, financing and overall renew-able energy deployment.

CoherencebetweenRenewableEnergyLegislationandDeployment

compared to traditional energy sources, repowerplants usually require a relatively highup-front investment while having significant loweroperation costs during their lifetime. the lev-elized cost of electricity (lcoe) is a concept tocompare all costs of a power plant during itseconomic life by including instalment, mainte-nance and financing costs andnormalizing themover the total net electricity generated (Schwabeet al., �011). in some countries, thelcoe for specific renewable technolo-gies is already cost competitive com-pared to fossil fuel technologies (waiss-bein et al., �01�). However, since repower plants are exposed to high up-front investment the high cost of eq-uity anddebt for reprojects in general,and in developing countries in particular, im-pacts project profitability negatively and has asignificant bearing on the competiveness of reprojects compared to fossil fuel alternatives.

to increase the competitiveness of re, somegovernments have implemented or are imple-menting various re promotion schemes, essen-tially through three different mechanisms:

decreasing re technology costs to lower in-stalment costs;decreasing financing costs of re powerplants; andincreasing the reward for re generation tocompensate for higher costs.

decreasing technology costs canbe achievedbyinvesting in technological progress and releas-

ing economies of scales due to expansion oftechnology deployment and increased compe-tition. considering that expanding uncompeti-tive technologies requires expensive incentivesformarket players in the first place, a decrease intechnology costs is not a realistic alternative forcountries with scarce public means. likewise,technology advances in somedeveloped coun-tries have already been reducing technologycosts substantially.

an alternative to reducing technology costs arepolicy de-risking instruments. these act to ad-dress the underlying risks, which are the rootcause of the high cost of financing. Policy de-risking instruments lower risks directly and con-tribute to a reduction of required capital costs.renewable energy targets and prioritized ac-cess of re to the electricity grid are the mostcommon policy de-risking instrument imple-mented in the region.

unlikepolicyde-risking, financial de-riskingdoesnot tackle the risk itself, but rather transfers it to athirdparty, for exampledevelopmentbanks. lowinterest loansand loanguaranteesare the region’smost common financial de-risking instrument.

finally, policymakers have implemented vari-ous financial invective schemes to increase thereward of produced renewable electricity in or-der to compensate for remaining incrementalcosts. tax rebates, equity grants, quota systems,feed-in tariffs, feed-in premiums and tender andauction systems represent the most frequentlyadopted re incentive schemes in the region.

Policy instrumentsmaybe combined to addressvarious risks and barriers at the same time (fig-ure 1), which is referred to as cornerstone in-strument (waissbein et al., �01�).


Compared to traditional energy sources,RE power plants usually require a relatively

high upfront investment while havingsignificant lower operation costs during

their lifetime.

analysing re deployment rates in the regionover the last decade reveals that countries thathave recently adopted or do not have re pro-motion schemes have not recorded substantialgrowth in reS in the last few years.with the ex-ception of ukraine and turkey, only europeanunion member states have increased their recapacity considerably. whereas eu memberstates, turkey and ukraine showed an impres-sive growth of non-hydro reS between �005and �01�, amounting to almost 15 gw, lessthan �0 Mw was deployed over the same pe-riod in the rest of the region. this implies thataggressive re incentive schemes may havebeen a necessary condition for re deployment.

However, they do not automatically explaindifferences in reS utilization.

RenewableEnergyRelatedandRegion-SpecificInvestmentBarriers

instead of attributing the cause to a lack, or in-sufficient design, of re incentive schemes, theanalysis shows that the problem is embedded incountry-specific risks and barriers, which are re-sponsible for increasing technology and financ-ing costs impeding private sector engagementin re investment.

Market prospect andgovernments policiesto simulate investmenta lack of re targets in some centralasian countries is a signal to potential


Source: Adapted from Glemarec (2011) and Waissbein et al. (2013)

Figure 1:cornerstone instruments and the risk and reward Structure of a renewable energy Project

feasiblerenewable

energy project

financial incentive:feed-in tariff,if higher than

the electricity price,increases reward

Policy de-risking:Prioritized acces to the electricity grid decreases risk related to planning insecurities

financial de-risking:Power purchase obligations ensure risk transfer from project developer to utility

unfeasiblerenewable

energy project

returnoninvestment

risk of investment

Aggressive RE incentive schemes mayhave been a necessary condition for REdeployment, but they do not automaticallyexplain differences in RES utilization.

investors of relatively low commitment to re de-ployment. Somegovernments in central europehave imposed retroactive changes to existingpromotion schemes. according to iea, retroac-tive policy changes are considered amajor bar-rier to re investment, because they increase in-security, reduce predictability for the investorand therefore damage the investment climate(ieaa, �01�).

Market distortionsSome countries in central asia possess largenon-renewable energy resources, for exampleoil and gas. cheap access to fossil fuels providesa disincentive to investing in renewable energy.Subsidized retail electricity prices are often toolow to make re competitive.

Access to the electricitymarketinmarketswhere state sectormonopolies act asa single vertically integrated energy companyresponsible for generation, transmission andenergy supply difficulties in accessing the mar-ket is impeding private sector participation.

Concessions, permits and licencescomplicated, bureaucratic and oblique licenceandpermit processes increase transaction costs,delay returns anddiscourage investment.trans-parency in granting licences is essential in at-tracting private investors. if government deci-sions are unpredictable, investors face a higherexposure to additional risks related to planninginsecurities.

Access to the electricity gridas with licence granting, uncertainties and bu-reaucratic red tape relating to grid connectionnegatively influences re financing and installa-tions costs in some countries.

Technology and supply chainincomplete or poorly developed re supplychains and local infrastructure may preventre deployment, particularly when re incen-tives are combined with the requirement touse locally-produced equipment in re instal-lations.

Cost of information and limitedexperience with REfinancial advisors’ lack of access to quality in-formation increases transaction costs, and fea-sibility studies of wind speed or water flow arecost and time intensive.

Capital scarcitya lack of equity and debt hampers investmentand entrepreneurial activities. this problem in-creases a project’s risk. increased riskmeans thatdebt holders usually require higher shares ofequity.

Inadequate andoutdated transmissioninfrastructureMany countries in the region suffer from old andoutdatedelectricity transmission infrastructure.thiscauses energy shortages, electricity cut-offs andhighdistribution losses.thevulnerabilityof trans-missiongrids forcespolicymakers tocapadditionalelectricity capacity,which isoften required for ad-ditional re installations.

Political instability and country riskrisk related to political insecurities is priced in byequity anddebt holders. all countries covered inthe report are exposed to high political risks,according to oecd’s country risk indicator.

De-RiskingRenewableEnergy Investment

typically, all of the risks and barriers mentionedabove can be addressed by public and financialde-risking instruments. for example, effectivepublic de-risking instruments are reliable re de-ployment strategies and targets, giving investorsplanning security. effective policy not public de-riskingmeasures functionalongside financial de-risking instruments as loan guarantees or soft(zero-interest) loans transferring remaining risks todevelopment banks and providing developerswith easier access to finance. correspondingly,this can lower the lcoe significantly and eitherprovides opportunities to lower existing incen-tivepromotionorhelps toproducesatisfactory re-


turns for investors.thishas important im-plications for re deployment in the re-gion.due to increasedenergyprices andsignificant policy reforms, energy afford-ability is already amajor constraint in theregion.during the lastdecade, the regionhas experienced a trend of raised house-hold electricity tariffs that threatens its socioeco-nomic development (world bank, �01�). giventhat re incentive schemes either burden scarcepublic means or are correlated with increasedhouseholdelectricityprices, rewardschemescom-pensating investors for theirhigher risks shouldbeintroduced only after the de-riskingmeasures. inaddition, fossil fuel subsidies,which are intendedtoprotect customers fromrisingenergyprices, are

not sustainable and threaten government budg-ets significantly if international energyprices rise.fossil fuel subsidies alsoprevent re frombecom-ingacompetitiveand, ifwell-designed, amoreaf-fordable alternative. globally, several re projectshave started in the recent past, demonstratingthat under certain conditions re power plantscan already generate electricity at a lower costthan fossil fuel alternatives evenwithout promo-tion subsidies (fS &uneP, �014).

1� Market and Policy outlook for renewable energy in euroPe and tHe ciS

3 Please refer to Annex Table 12 showing the underlying assumptions of the conservative and optimistic LCOE scenario.

Source: Own calculations

technology biomass Solar PV wind Small Hydro

Country Slovenia Ukraine Turkey Ukraine

lower bound lcoe ��.5� 90.09 51.77 1�.58

upper bound lcoe �18.�8 51�.01 176.9 66.81

feed-in tariff ��4.�5 �48.9 79.5� 116.1

500

400

�00

�00

100

0

biomass Solar PV wind Small Hydro

after-taxlcoe(eur/Mw-h)

Figure 2: lower and upper bound lcoe and feed-in tariffs for reS in Slovenia, ukraine and turkey�

Under certain conditions RE power plantscan already generate electricity at lower

costs compared to fossil fuel alternativeseven without promotion subsidies.

considering these risks and investment barri-ers, themost favourable countries for re invest-ment in the region are currently Slovenia,turkeyandukraine. Slovenia’s andukraine’s feed-in tar-iffs outperform the upper bound lcoe for bio-mass and small hydropower respectively, evenwhen high financing and installations costs aretaken into account. the upper bound lcoe forsolar PV in ukraine assumes a low capacity fac-tor of just 10percent.yet plant sites located in ar-eas yieldingmore than 1,�00 load hours wouldcreate enough return to decrease the lcoe forsolar power under the current fit in ukraine,even when financing and instalment costs arehigh. finally, turkey has proven in recent yearsthat the current tariff is enough to satisfy in-vestor requirements. in combinationwith a gov-ernment target of deploying �0 gw wind ca-pacity by �0��, this produces to a relativelystable and favourable investment climate.

Conclusion

despite tremendous repotential, increasing en-ergy security concerns, and frequently adoptedfavourable re promotion schemes, only a fewcountries in the eciS region showed consider-able deployment of renewable technologies inrecent years. rather than attributing this to inef-fectiveness or an absence of re incentiveschemes, the analysis shows that the reasons forlow re deployment are related to multiple in-vestment barriers and country-specific risks. theresulting high costs to finance re projects (asbank interest rates aremuch higherin this region than, for example, ineuropeor theunitedStatesofamer-ica) is one reason for low re deploy-ment rates in the region. govern-ments have historically focused onreward-based incentive schemes toincrease the profitability of re investment. How-ever, re incentive schemes either burden scarcepublic budgets or increase household electricityprices. in the eciS region, affordable energy is akeydeterminantof socioeconomicdevelopment.due to its location and climatic conditions, poor

and rural populations areparticularly susceptibleto energy poverty, a major impediment to sus-tainable andhumandevelopment. increaseden-ergyprices are, therefore, of concern topoor andvulnerable households and businesses. rewardschemes compensating investors for their higherrisks are consequently a secondary alternativefor the region.

alternatively, electricity generation costs can beaddressed using public de-risking instrumentsby either lowering policy risks or transferring fi-nancial investment risks. rather than increas-ing the financial reward, those instruments canhelp to reduce the substantial financing costs.thismay also offer a potentially attractive alter-native to fossil fuel subsidies, which are not sus-tainable and burden government budgets sig-nificantly if international energy prices rise.improved efficiency and lower technology costsmean that increasing numbers of onshorewindand solar PV power plants can now financiallyout-compete fossil fuel alternatives even with-out subsidies; this is in caseswhere plants canbebuilt in favourable geographical conditions forwind and sunshine load factors, as well asfavourable financial conditions and low costs ofcapital (fS & uneP, �014). However dependingon individual countries’ energy markets, evenafter effective de-risking direct financial incen-tives to make re investment competitive com-pared to other forms of energy generationmaystill be required. financial instruments should di-rectly address country-specific needs and im-pediments. the analysis shows thatmany coun-

tries experience difficulty in obtaining capitalparticularly equity. Hence, after effectively ad-dressing risks and barriers, equity grantmecha-nisms can help to close the equity gap, establishentrepreneurial activity and rewards for poten-tially remaining incremental costs.

1�Market and Policy outlook for renewable energy in euroPe and tHe ciS

Rather than increasing the financial reward,public de-risking instruments can help

to reduce the substantial financing costsof RE projects.

despite the existing investment barriers, there isa rather positive trend for improved re invest-ment conditions in the region. the technical repotential is substantial and thegeopolitical situa-tion in terms of energy security provides incen-tives formanycountries to increase their ownen-ergy supply in themidterm. Somecountrieshaveadoptedor revised their re schemes andexperts

anticipate increasedre investmentin the coming years. other coun-tries show low deployment rates,

but some large projects are under developmentand specific investment barriers are starting tobeaddressed.thecombinationof favourablege-ographical conditions, constantly decreasing retechnologycosts and increasedawarenessmakesre technologies ever more attractive over tradi-tional ways of energy generation. this is likely tolead tomore re deployment in the region.


Financial instruments should directly addresscountry-specific needs and impediments.

1.1 DeployedRenewableEnergyCapacity

there is currently around�0,�00Mw installed repower generation capacity in europe and thecommonwealth of independent States (eciS)which is the region analyzed in this report.4 fig-ure 4 shows the absolute installed re power ca-pacity inMegawatt (Mw).turkey, which has the

region’s largest re capacity, sources its re poweralmost solely fromwind and small hydropowerplants (SHPP). after turkey, six european union(eu) member states have the highest absolutere deployment. in Poland, romania and Hun-gary, this ismostly from largewind andbiomassinstallations. in the czech republic andbulgaria,solar PV capacity represents the largest renew-able energy source.


1. Current Situation and Potentialof Renewable Energy in the Region

4 This report defines RE as “electricity generation from biomass, solar PV, wind and small hydropower installations”.There is no internationally agreed definition of small hydropower (IEAa, 2012). This report defines SHPPs as “powerplants not exceeding an installed capacity of 10 MW”. Large hydropower plants, if not particularly mentioned, wereexcluded as a renewable energy source due to its doubtful impact on sustainability and biodiversity. Geothermalpower, commonly included as a RES, was also excluded, because of its current relatively low deployment rate in theregion, the limited availability of resource assessments and relatively high installments costs. Only five countries(Russia, Estonia, Turkey, Hungary and Croatia) currently use geothermal sources for power production andinstallation costs amount up to $5,500 per 1 kW power capacity (Renewable Facts, 2013 and IRENA, 2013). Inaddition, it is environmentally critical that geothermal exploitation by drilling boreholes may release radioactivewaste, primarily radium-226 and radium-228 (EPA, 2012).

5 The boundaries and names shown and the designations used on this map do not imply official endorsement oracceptance by the United Nations.

Source: Own creation

Figure 3: europe and the commonwealth of independent States region5

ruSSian federation

ruSSian fed.

kaZakHStan

uZbekiStan

turkMeniStan

georgia

aZerbaiJanarMenia

turkey

belaruS

roMania

bulgariaMoldoVa

fyr ofMacedonia

Montenegro

boSnia& HerZ.

SloVakiacZecH reP.

croatia

Poland

latVia

eStonia

kyrgyZStan

taJikiStan

HungarySloVenia

ukraine

litHuania

Serbia

albania

ukraine is the only country outsidethe eu apart from turkey with a ca-pacity of above 500 Mw in re in-stallations, mainly due to significantinvestment in wind energy and solarpower. in �01�, Montenegro, turkmenistan,azerbaijan and Moldova had less than 10 Mwinstalled re capacity. to increase comparabilityof re instalments between countries, the rela-tive re share of the total installed electricity ca-pacity should be used. figure 5 shows thatazerbaijan and russia have the lowest share ofre deployment compared to total installed ca-pacity. russia’s ranking fell from amiddle posi-tion in absolute re installation to the secondlast rank with just 0.1 percent re in total elec-tricity generation capacity. changes in rank-ing occur also among the top performers inre power deployment. bulgaria and czech re-public show the highest relative re share withboth over 15 percent. all of the nine countries

with the highest relative share of re capacityare eu member states. turkey, with a share ofaround 7 percent in renewable capacity, de-creased from the first rank in terms of absolutere capacity to the 10th rank when consideringrelative installed capacity.

on average, �.7 percent of the installed elec-tricity capacity in the region originates fromreS. figure 6 compares the region to the rest oftheworld.worldwide, only 15.6 gigawatts (gw)(�.� percent) of the non-hydro re capacity is in-stalled in the eciS region. including large hydroas a reS, the region’s share increases to 8.5 per-cent of the world’s total installed re capacity.this is due to the significant installations of

large hydropower plants in the region.for example, albania’s and tajikistan’sshare of installed re capacity increasesto over 90 percent when taking largehydropower into account. and the re-

16

currentSituationandPotentialofrenewable

energyin

tHeregion

Market and Policy outlook for renewable energy in euroPe and tHe ciS

Sources: Own creation

Figure 4: absolute installed renewable energy capacity in Mw per country

4000

�000

�000

1000

0

turkey

Poland

czechrepublic

romania

bulgaria

Hungary

Slovakia

ukraine

uzbekistan

Slovenia

lithuania

estonia

russia

croatia

armenia

tajikistan

kazakhstan

latvia

Macedonia

bosnia&Herzegovina

georgia

albania

kyrgyztan

Serbia

belarus

Montenegro

turkmenistan

azerbaijan

Moldova

In the region some 3.7 percent, or around20 GW installed capacity,comes from renewable energy sources.

Turkey has the region’s largest RE capacityand sources most of its RE power from wind

and small hydropower plants.

gion’s overall re share increases from �.7 per-cent to �0.7 percent if large hydropower is takeninto account. nevertheless, due to a uniquegeopolitical context, recent decades have

shown a trend of energy diversification awayfrom large hydropower. the combination ofvery cold winters, inadequate and outdatedtransmission infrastructure and numerous en-

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Figure 5: Share of renewable energy to total installed electricity capacity (%)

�0

15

10

5

0

bulgaria

czechrepublic

romania

Slovenia

Poland

Slovakia

estonia

Hungary

lithuania

turkey

armenia

croatia

Macedonia

latvia

uzbekistan

albania

tajikistan

bosnia&Herzegovina

ukraine

kyrgyztan

georgia

Montenegro

Moldova

kazakhstan

Serbia

belarus

turkmenistan

russia

azerbaijan

Sources: Ren21 (2013) and own creation

Figure 6: total installed renewable electricity capacity in Mw in the region (green) and the restof theworld (blue)

1�5,000

1,�44,600

includingSmall and largeHydropower

15,600

464,400

excludingSmall and largeHydropower

ergy supply shortages, makesthe provision of reliable energya key determinant of socioeco-nomic development across theregion. High dependency onoften imported traditional fossil fuels as oil, coaland gas, and increased concerns over energysecurity, make a compelling case for expansionof reS. in 1980, total re capacity amounted toover 70 gw stemming solely from large hy-dropower (eiab, �01�). by �01�, the total bio-mass, wind and solar PV electricity capacity inthe region was over 15 gw.

1.2RenewableEnergyPotential

figure 7demonstrates therepotential, ingw, oftechnical deployable re power capacity.6 tech-nical Potential is defined by the iPcc (�007) asthe amount of re that is potentially obtainablewhen already demonstrated technologies orpractices are fully implemented. because of itssize, russia has over 50 gwpossible exploitablebiomass potential. Poland andukraine are next,both with over �0 gw. However, except forPoland, the countries with the highest potentialdonothaveanyor very little biomass capacity in-stalled. Poland and kazakhstan have by far the

greatest potential for wind energy. Poland,turkey and ukraine, three countries with highpotential, have started exploiting that potentialin recent years. However, kazakhstan, belarusand russia have not yet unlocked theirwind en-

ergy potential. when measuring the technicalpotential of wind energy, long-term averagewind speed is the crucial factor influencing theperformance of a wind power plant’s electricityoutput. for example, the wind atlas of kaza-khstan,whichwas developedwith support fromundP-gef, defines a value of long-term windspeed less than 6 metres/second as poor, andhigher than 9 metres/second as exceptional(kea, �011).

russia andtajikistan have the greatest potentialfor small hydropower exploitation. all countrieswith large SHPP potential already exploit thisreS. except for turkey, however, none of thehigh potential is exploited in capacities ex-ceeding 1 gw. russia also exceeds other coun-tries in technical solar PV potential.7 turkey andkazakhstan followwith over �,500gwpotentialsolar installations. again, the threemost prom-ising countries for solar applications have verylittle or no solar technologies installed. usingpower capacity as an indicator of technical so-lar potential might bemisleading, though. the

power capacity of a plant assumes per-fect conditions in terms of sunshinehours, the‘fuel’of solar PV installations.therefore, the numbers in figure 7 dif-ferentiate only in the landmass that istechnically suitable for solar powerplants and do not indicate how muchelectricity can be produced, because

solar radiation is exposed to large region spe-cific variations. this, in turn, affects the electric-ity output and the return of the solar powerplant. in other words, a 1Mw solar power plantwill produce more electricity in turkey than in

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6 Please note that Figure 7 includes only countries with a technical potential larger than 1 GW (for biomass and SHPP),larger than 10 GW (for wind), and the 15 countries with the highest technical potential (for solar PV).

7 Note due to illustrative reasons the technical solar PV potential for the Russian Federation is cut at 5,000 GW. Howeverit is ca. 22,000 GW.

Poland, Turkey and Ukraine, threecountries with high wind power potential,have started exploiting that potentialin recent years.

Climate, geography, outdated infrastructure anddependency on fossil fuels make a compelling

case for renewable energy in the ECIS region.

Poland, where the average radiation is lower.figure 8 shows average yearly horizontal sur-face radiation per country measured in kw-h/m². the figure demonstrates that solarpotential is especially high in centralasia, caucasus and southern europe,whereas northern europe, for examplethe baltic countries, appears to have less

potential. it should be noted, though, that av-erage valuesmay bemisleading in general, be-cause solar resources are exposed to site-spe-

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Sources: Own creation8

Figure 7: technical renewable energy Potential in gw installed Power capacity per technologyand country

40.00

�0.00

�0.00

10.00

–

russia

tajikistan

turkey

kazakhstan

Serbia

albania

georgia

ukraine

kyrgyzstan

uzbekistan

turkmenistan

romania

Poland

60.00

40.00

�0.00

800.00

600.00

400.00

�00.00

–

russia

Poland

ukraine

turkey

romania

Slovakia

Serbia

czechrepublic

bulgaria

estonia

belarus

Hungary

georgia

azerbaijan

croatia

lithuania

Poland

kazakhstan

turkey

belarus

russia

ukraine

czechrepublic

romania

turkmenistan

biomass

Solar Small Hydro Power

wind

5,000.00

4,000.00

�,000.00

�,000.00

1,000.00

–

russia

turkey

kazakhstan

ukraine

turkmenistan

uzbekistan

Poland

belarus

kyrgyzstan

romania

tajikistan

azarbaijan

bulgaria

georgia

Hungary

The three most promising countries forsolar applications have little or no solar

technologies installed.

8 The technical solar potential is estimated by using Hoogwijk & Graus (2008) and Hoogwijk (2004) average land usefactors for centralized solar PV installations and JRC’s (2011) assumption that 1 KW installed capacity requiresa surface of 6.6 m². This equalizes an average conversion efficiency factor of ca. 16 percent.

cific factors, for example microclimates, whichshow a wide discrepancy in the potential ca-pacity output (irena, �01�).

1.3RenewableEnergyLegislationandPolicies

compared to traditional energy sources, repower plants usually require a relatively highupfront investment, but have significant loweroperation costs during their lifetimes (waiss-bein et al., �01�). table 1 shows capital costsand operation and maintenance (o&M) costsfor different electricity generating tech-nologies in the united States of america.

for example, gas power plants in theunited States of america can reach cap-ital costs under $1,000 per kw installedcapacity. but fixed o&M costs can

amount up to $�� per kwand variable o&M costs up to$16 per kw-h (eia, �01�b).this is significantly higher

than for re power plants, which showonlymar-ginal fixed and no variable o&M costs (eia,�01�b). it is interesting that according to irena(�01�), SHPPs in europe and central asia havesignificant lower instalment costs (ca. 500 –�,�00 $/kw) compared to other regions, for ex-ample in the european union (ca. 1,400 to6,600 $/kw). to enable cost comparability be-tween the different technologies, all costs of apower plant during its economic life, includinginstalment, maintenance and financing costs,are normalized over the total net electricitygenerated (Schwabe et al. �011, waissbein etal., �01�). this concept is called the levelized

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Figure 8: yearly average Horizontal Surface radiation per country in kw-h/m²

�000

1500

1000

500

0

turkmenistan

uzbekistan

tajikistan

kyrgyzstan

bosnia&Herzegovina

armenia

azerbaijan

Montenegro

georgia

bulgaria

kazakhstan

albania

russianfederation

Serbia

fyrofMacedonia

croatia

turkey

Hungary

romania

ukraine

Slovenia

Moldova

czechrepublic

Poland

belarus

Slovakia

lithuania

estonia

latvia

Solar energy potential is particularly highin Central Asia, Caucasus and southern Europe.

The LCOE compares electricitygenerating technologies by taking into

account all costs of a power plant duringits economic life and normalizing themover the total net electricity generated.

cost of electricity (lcoe).10 figure 9 shows thelcoe for a wind and gas power plant in the de-veloped and developingworld. considering theentire life time of a plant, the figure shows thatin a developed country wind power plants arealmost cost competitive compared to gaspower plants. However, in developing coun-tries the lcoe of a wind farm is significantlyhigher than for the gas power plant. this is dueto the impact of the high upfront investment onthe financing costs. in the developing countryscenario, the relatively high in-stalment costs for re projectsimpact project profitability neg-atively due to a higher cost ofequity and debt. generally, re projects oftenhave higher financing costs due to concernson how the grid will manage intermittent resupply (waissbein et al., �01�). debt holdersusually require a higher share of equity thehigher they perceive the risk of the underlyinginvestment. due to the seniority nature of debt

in the case of default, the cost of equity is higherthan the cost of debt, thus increasing financingcosts. the problem is exacerbated in low in-come countries, which often have higher costsof equity and debt than developed countries.irena (�01�) estimates the reasonableweighted average cost of capital (wacc)11 forre projects in africa at between 15 percent and�0 percent. this is significantly higher than thewacc for re projects in oecd countries, whereit typically ranges between 6 percent and 1�

percent. consequently, capital-intense invest-ment in developing countries is relatively un-attractive, which – because of the long termcharacter of re investments – may have a sig-nificant impact on the competiveness of reprojects compared to fossil fuel technologies(waissbein et al., �01�).

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technology capital cost$/kw9

fixed o & M$/kw

Variable o & M$/kw-h

coal �,9�4 - 6,599 �1.18 - 80.5� 4.47 - 9.51

gas 917 - �,095 7.04 - �1.79 �.�7 - 15.45

biomass 4,114 - 8,180 105.6� -�56.07 5.�6 -17.49

geothermal 4,�6� - 6,�4� 100 -1�� 0

Hydro �,9�6 - 5,�88 14,1� - 18.00 0

onshorewind �,�1� �9.55 0

offshorewind 6,��0 74 0

Solar PV �,87� - 4,18� �4.69 - �4.75 0

9 Please note that financing cost, for example fees or interest during construction, are not included in the table.10 There is no generally applicable definition for LCOE. In this paper the LCOE is calculated from the perspective of a

private financial investor. Hence the LCOE is defined as “the production-dependent income required to achieve a zeronet present value (NPV) of the equity share of the investment outlay, and the sum of all years’ discounted after-taxcash flows” by using the nominal after-tax return on equity as a discount rate (Schwabe et al., 2011).

11 The WACC is defined as the sum of cost of equity and debt, of which each is weighted by its particular share on totalcapital. It therefore reflects the opportunity cost of all capital, debt and equity, which is invested in a project or enterprise.

Table 1: capital cost and o&M cost estimates by technology in the u.S.a., �01�

Source: Adapted from EIA (2013b)

Developing countries usually have higher costsof equity and debt than developed countries.

as shown in figure 9, the competitiveness of retechnologies can be increased through threemechanisms:

decreasing re technology costs to lower in-stalment costs;decreasing financing costs of re powerplants; andincreasing the reward for re generation tocompensate for higher costs.

1.3.1DecreasingTechnologyCosts

decreasing technology costs canbe achievedbyinvesting in technological progress and releas-ing economies of scale, cost decreasesdue to increased technology deploy-ment and market effects, for exampleincreasedcompetition.yet this approachis rather cost intense considering that

expanding uncompetitive technologies requiresincentives for market players in the first place.Historically, some leading developed countrieswith sufficient means enforced widespread in-centive schemes to create a technology push,which led to a substantial fall in the technologycosts of some re technologies (lilliestam et al.,�01�). in germany, for instance, the financial in-centives for solar PV electricity during the lastdecade triggeredmassive solarPVexpansion.themarket for solar modules increased, which re-leasedeconomiesof scaleand investment in tech-nological advancement. as a result, the averageretail price for solar modules in germany fell an-nuallyby15percent fromalmost €5/watt in�006to below €�/watt in �01� (fraunhofer iSe, �014).

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Source: Adapted from Waissbein et al. (2013)

Figure 9: the impact of financing costs onwind and gas Power generation costs in developedand developing countries

wind(onshore)

gas(ccgt)

Pre-taxlcoe(uSd

cents/Mw-h)

developed country

cost of equity = 10%cost of debt = 5%

1.8

0.9

1.1

�.9

�.�

�.4

0.8

�.9

1

0.9

�.9

0.7

4.5

0.7

0.60.� 0.�

wind(onshore)

gas(ccgt)

developed country

cost of equity = 18%cost of debt = 10%

financing costs (equity) financing costs (debt)operating costs (including fuel costs) investment costs/depreclation

In Germany, incentive-driven technologyreduced prices of solar modules by over

60 percent between 2006 and 2013.

but germany’s re promotion was financed byhigherelectricitybills for retail customers. in�01�,an average german household paid almost �0percent or €0.05�/kw-h of the retail electricityprice (0.�9 eur/kw-h) for re incentives (fraun-hofer iSe, �014). 1� in the eciS region, affordableenergy is a key determinant of so-cioeconomicdevelopment.due to itslocationandclimatic conditions, poorand rural populations are particularlysusceptible toenergypoverty, amajorimpediment to sustainable and hu-man development. for this reason, a decrease intechnology costs by widespread and cost-inten-sive incentive schemes isnot a realistic alternativefor countries in the region. Similarly, technologypushes by some developed countries decreasedtechnologycosts substantially. between�009and�014, thelcoeofonshorewindworldwide fell bysome 15 percent, and by around 5� percent forcrystalline silicon PV systems. Shrinking technol-ogy costs brought a fall in the total investment insolar PV worldwide in �01�. from �01� to �01�,total investment in solar PV fell by �� per cent to$104billion, butmore new solar PV capacitywasinstalledworldwide in�01� (�9gw) than in�01�(�1 gw) (fS &uneP, �014).

1.3.2PublicDe-risking Instruments

rather than decreasing technology costs, thelcoeof re projects can also be addressed by re-ducing the financing costs. financing costs canbe decreased by

reducing the risk category itself throughpol-icy de-risking; ortransferring the risk from an investor to athird party, referred to as financial de-risking.

Policy De-risking Instruments serve as a toolto address the root of high financing costs, theunderlying risks. Hence policy de-risking instru-ments lower risks directly and contribute to a re-duction of required capital costs. indeed, policyde-risking usually requires some time to reveal

a positive effect. However, by directly addressingthe risk, it is considered to sustainably reducethe lcoe. the two most commonly imple-mented policy de-risking instruments in the re-gion are:

Renewable Energy Targets

with re policy targets, government commit toreaching a specific share of re during a deter-mined time-frame. if a government commits toa specific target of re utilization, investors mayinterpret this as the ambitionof thegovernmentto pursue an energy strategy that encouragesthe use of reS. this increases planning security,which usually reduces the risk of an underlyinginvestment. therefore, re targets may help toreduce risks related to planning insecurity andthe cost of capital. of �9 countries in the region,�� have pledged specific re targets.1�

Priority Access to theGrid

if investors perceive uncertainty regarding elec-tricity grid connection, they have to price theprobability of a failing grid connection in theircost of capital. therefore, policymakersmay pri-oritize re installations in grid connection over

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12 It should be noted that the main incentive instrument for RE in Germany, a feed-in tariff, is often blamed for theincreased retail electricity prices. But this is only partly correct. The RE reallocation charge for customers increased by€0.063/kW-h from 2000 until 2013, compared to the retail electricity price which increased by €0.14/kW-h in thesame period. Moreover, the merit-order effect of RE squeezed wholesale electricity price traded at the stockexchange. Yet utilities have not passed price decreases on the stock exchange, induced by increased renewableelectricity generation, to the end customers (Fraunhofer ISE, 2014).

13 For a detailed overview of RE targets in the region, please refer to chapter 2.1.or to Annex, Table 8.

Policy de-risking instruments serve as a toolto address the underlying risks and causes

of high financing costs.

other power plants. this increases the probabil-ity of receiving a connection to the electricitygrid and lowers the cost of capital. 16 countriesin the region prioritize re in access to the elec-tricity grid.14

as opposed to policy de-risking, financial de-riskingdoes not imply tackling the risk itself, buttransfers it to a third party, for example to a de-velopment bank. financial de-risking instru-

ments are not considered sustainable, becausethe underlying risks are not actually eliminated.but they function relatively quickly and effec-tively. the following financial de-risking instru-ments are the most commonly available in theregion.

Low Interest Loans

low interest loans are loans claiming an un-commonly small amount of interest and are in-dicated to reduce a project’s cost of debt. theyserve to increase the investment attractivenessof projects or branches where investment, dueto high interests, would not occur otherwise.development banks, such as the eurasian de-velopment bank (edb) or thecroatian bank for reconstructionand development, offer low in-terest loans for re projects. a va-riety of international financial in-stitutions offer loans tomarket conditions for reinvestment. the european bank for reconstruc-tion anddevelopment’s (ebrd) Sustainable en-ergy facilities provide financing through local in-termediary banks to re developers in belarus,bulgaria, armenia, kyrgyzstan,Moldova, Poland,romania, russia, Slovakia, turkey, ukraine andthe western balkans (ebrd, �01�). the green

growth fund provides direct and indirect fi-nancing through financial intermediaries forsmall scale re projects usually not larger than€50million (ggf, �01�).15

LoanGuarantees

with a loan guarantee, a third party assures alender that it will cover the credit taker’s debt infull, or partially in the case of default. this re-

duces thedefault risk of the credittaker and therefore the cost ofcapital. the advantages of loanguarantees are that they provideborrowers with easier access to

finance. Similar to low interest loans, loan guar-antees serve to increase investment attractive-ness. However, cash payments by thewarrantoronly occur in the case of default. for example,ebrd offers loan guarantees in almost everycountry of the region.

1.3.3DirectFinancial Incentives

even in a low risk environment, the lcoe maynot be reduced sufficiently to make re invest-ment profitable. the lcoe reflects all costs overthe economic life of a power plant from the per-spective of a private investor. Put differently, itreflects theminimumelectricity price that is re-quired to be obtained, assuming several vari-

ables such as the cost of equity and debt or pro-duction estimates, to achieve a zeronet PresentValue (nPV) investment. this means that, in anidealworld, with all estimatedparameters beingperfectly forecasted, a power plant that is eligi-ble to obtain the lcoe per produced electricityunit over the predicted lifetime, would just cre-ate asmuch return on equity as required by the

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14 For a detailed overview in grid access and country examples, please refer to chapter 2.4 and Annex, Table 8.15 For a detailed overview of financing opportunities, please refer to Annex, Table 10.

Financial de-risking instruments do not tacklethe risk itself, but transfer it to a third party.

Direct financial incentives increase rewards tocompensate for remaining incremental costs.

equity holder to execute the investment. due tothe concept’s construction, cost of equity anddebt are positively related to the lcoe. a highcost of capital increases the lcoe, and vice versa.if debt and/or equity holders require very highreturns, due to high perceived risks for example,policymakers may increase the reward to com-pensate for remaining incremental costs. thefollowing direct financial incentives for re proj-ects are the most common in eciS.

Tax Rebates

tax rebates are direct financial incentives thatreduce the tax liability that would otherwiseapply to project developers. generally, they canbe based on project costs or project outputs(uneP, �01�). for example tajikistan’s customand tax codex ensures exemption from cus-toms’ duties and Vat for imported materialsand equipment aswell as exemption fromprofittax, land tax, capital facility tax and social tax foremployees during the construction process.Moreover, independent SHPPs are exempt fromthe water royalty tax (republic of tajikistan).Some countries in the region have generallylow tax regimes designed to incentivize invest-ment. for example, Moldova charges 1� per-cent corporate income tax, while that figure is10 percent in former yugoslav republic ofMacedonia (fyroM).

Grants

grants are direct financial in-centives usually in the formof cash payments providedto the project developer atthe beginning of the project. grants are gen-erally available in only nine countries in the re-gion: kyrgyzstan, Moldova, estonia, romania,bulgaria, czech republic, Slovakia, Hungaryand Slovenia.16 Some are available for investorsin general, others are related to re investment.

for example, ebrd’s kyrgyz Sustainable en-ergy financing facility provides up to 15 per-cent of its loans for re projects as a grant(kyrSeff, �01�).17 grants do not only serve asa financial incentive, but also help to reduce fi-nancing costs. grants provide project devel-opers with ‘free’ equity. this lowers the cost ofequity and, due to the cheap increase of theequity share, the cost of debt.

Quota Systems

in quota regulations, an authoritative bodyobliges electricity generators to produce afixed amount of renewable electricity annu-ally. in order to give electricity generators theopportunity to ‘outsource’ their re obligation,quota obligations are often combined withtradable renewable energy credits (trec),usually issued intrec/Mw-h (uneP, �01�). con-sequently, electricity generators can either pro-duce renewable electricity themselves, or buycertificates from re power plants. oneMw-h ofrenewable electricity generates two cash in-flows for re plant operators: the obtained priceon the produced electricity and, additionally,the price for onetrec. Prices for trecs are usu-ally determined on a market. However, stateauthorities often define minimum and maxi-mum price boundaries to limit volatility. ro-mania, Poland and albania are the only coun-tries in the region that have a quota systemimplemented. in romania, the re quota in-

creases every year. it started at 14 percent in�01� and will increase to �0 percent in �0�0(republic of romania, �008). in Poland, thequota amounted to 1� percent in �01� andwill increase to �0 percent by �0�1 (reslegal,�01�). in albania, the law on Power Sector re-

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16 For a detailed overview of available grants please refer to chapter 2.7 and Annex, Tables 8 and 10.17 Annex, Table 10, provides all financing opportunities (including grants) in detail.

Grants not only serve as a direct financialincentive, but lower the costs of equity and debt.

quires energy producers with an installed ca-pacity higher than 50 Mw to produce a quotaof at least � percent of their annual electricityoutput from reS. However, since the adoptionof the law no new thermal power plant hasbeen commissioned and therefore the law hasnot yet been implemented in practice.

Feed-in Tariffs and Feed-in Premiums

this report defines feed-in tariffs (fit) as fixedcash per kw-h payments determined by anadministrative body and generally availablefor eligible energy producers. a feed-in pre-mium (premium) is a cash payment per kw-h

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Figure 10: technology Specific feed-in tariffs for renewable energy technology per countryin € / Mw-h18

400

�00

�00

100

0

ukraine

fbiH

belarus

latvia

croatia

Serbia

lithuania rS

turkey

fyrofMacedonia

Montenegro

Slovenia

czechrepublic

Hungary

Slovakia

Solar�00

150

100

50

0

ukraine

croatia

czechrepublic

belarus

Serbia

latvia

fyrofMacedonia

Hungary

Slovakia

Slovenia

Montenegro rS

lithuania

turkey

albania

fbiH

armenia

azerbaijan

Small Hydro Power

�50

�00

150

100

50

0

Slovenia

croatia

fyrofMacedonia

Montenegro

czechrepublic

latvia

belarus

Serbia

Slovakia

ukraine rS

Hungary

turkey

lithuania

armenia

fbiH

biomass150

100

50

0

belarus

latvia

Hungary

ukraine

Montenegro

croatia

Slovenia

Serbia

fyrofMacedonia rS

lithuania

czechrepublic

turkey

Slovakia

armenia

fbiH

azerbaijan

wind

18 Please note that this figure has only limited comparability. The levels of respective FiTs reflect the highest possibleamount that can be received for the specific RE technology. Each country has various differences in the conceptualdesign of FiTs, for example different amounts for different plant sizes.

based on an underlying value (usually theelectricity price) and is subject to variations.Premiums are also determined by an admin-istrative body and are generally available foreligible energy producers. fits only providedirect financial incentives if the determinedelectricity price exceeds the tariff for electric-ity obtained on themarket or by the regulator.However, ignoring the tariff level, they offer astable return of cashflow. So a fit may also re-flect a hedge against the risk of price fluctua-tion, which usually has a positive effect onthe cost of capital. fits are the most com-monly adopted re policy instrument in theworld, and are implemented by 99 countries(ren�1, �01�). the picture in the region is sim-ilar, since almost all countries in the regionhave adopted a fit legislation.19 a premiumscheme is implemented in estonia. Somecountries also offer eligible electricity pro-ducers the choice between fits and premi-ums, for example the Serbian entity in bosniaand Herzegovina, republic Srpska, or Sloveniaand the czech republic.

in addition to technology-specific fits, proj-ect-specific fits see the tariff separately ne-gotiated between the project developer andthe regulating authority for each project.kazakhstan, kyrgyzstan, tajikistan, uzbekistan,Moldova and georgia (only for SHP) have proj-ect-specific fit implemented. in georgia, therenewable energy State Program offers hy-dropower plants of up to 100 Mw power pur-chase obligations with the transmission op-erator for 10 years with a tariff negotiatedwith the georgian national energy regula-tory commission (ecS, �01�). a drawback offits is that they require steady institutions

and represent a costly long-term state commitment. asa result, policymakers maynot have control over re de-ployment rates. in addition,

high deployment may need substantial in-vestment in the electricity grid.

Tender andAuction System

in a tender or auction system, project devel-opers bid for the right to sell electricity at adefined price over a determined period oftime (uneP, �01�). in other words, tenders andauctions differ from fits and premiums in thedetermination of the electricity price. in a ten-der process, the price is defined by the lowestbidder. instead of determining the price ad-ministratively, lithuania requires wind, bio-mass, hydro and solar project developers toparticipate in a tender-based auction systemif the plant capacity exceeds 10 kw (reslegal,�01�). auctions and tenders are often usedto control the quantity of installed power ca-pacity and reduce policy costs by using mar-ket-integrated incentives (fS & uneP, �01�). in�01�, russia approved a capacity-based ten-der scheme. the first capacity tender tookplace in September �01� and around 100 Mwof wind projects and 400 Mw of solar projectswere auctioned. in �015, Poland plans to re-place its current quota system with a com-petitive auction system.

Cornerstone Instruments

when various policy instruments are com-bined to address underlying risks and barriersat the same time, they are referred to as a cor-nerstone instrument. for example, fits are fre-quently combined with priority access to theelectricity grid and power purchase agree-ments. the latter are requirements of energyutilities to purchase the produced electricity

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19 Russian Federation, Turkmenistan, Estonia, Romania and Poland have not adopted a FiT legislation.

Feed-in tariffs are fixed cash per kW-h payments,while a feed-in premium is a cash paymentper kW-h based on an underlying value.

by eligible power producers. in this case, therisk of volatile electricity prices is transferredto the utilities, representing a financial de-risking instrument. the fixed cash payments,if they exceed the market electricity price,

provide developers with direct financial in-centives. Priority grid access reduces policyrelated risk (waissbein et al., �01�).

table � shows countrieswith favourable re pro-motion polices, including incentive schemes aswell as policy and financial de-risking instru-ments. chapter 1.4 considerswhether the adop-tion of re incentive schemes have led to re de-ployment.

1.4RenewableEnergyDeploymentandGrowth

to elaborate further on the coherence betweenre incentive schemes and re deployment rates,

this chapter compares re deploymentlevels between �005 and �01�, becausemost re incentive schemes have beenadopted since �005. figure 1� showsthe levels of re deployment in �005 and�01�. in addition, a black line representsthe year in which a particular re incen-

tive schemewas implemented. for example, be-tween �005 and �008 Poland’s biomass capac-ity grewonly by around 40Mw. in �008, Polandadopted a quota scheme promoting electricityproduced from biomass installations. as a re-sult, capacity grew in just four years to almost 1gw in �01�. Similar trends can be seen in czechrepublic, Hungary and Slovakia. all countriesshowing a significant biomass deployment be-tween �005 and �01� are eumember states.

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When policy instruments are combinedto address underlying risks and barriersat the same time, they are knownas a cornerstone instrument.

Source: Adapted from Glemarec (2011) and Waissbein et al. (2013)

Figure 11:cornerstone instruments and the risk and reward Structure of a renewable energy Project

feasiblerenewable

energy project

financial incentive:feed-in tariff,if higher than

the electricity price,increases reward

Policy de-risking:Prioritized acces to the electricity grid decreases risk related to planning insecurities

financial de-risking:Power purchase obligations ensure risk transfer from project developer to utility

unfeasiblerenewable

energy project

returnoninvestment

risk of investment

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20 For a detailed overview of RE promotion schemes please refer to Annex, Table 8.

country Policy de-risking instruments financial de-riskinginstruments

direct financial incentives

Belarus Prioritized access to theelectricity grid

Public loans and loanguarantees available

the highest fit for wind and oneof the highest fit for solar PVand SHP power plants in theregion;

tax rebates on re investmentavailable;

complimentary access to theelectricity grid

Croatia committed to a binding re sharevia eu directive �009/�8/ec

Public loans, lowinterest loans and loanguarantees available

one of the highest fit in theregion for solar PV, SHP andbiomass power plants

Bosniaand Herze-govina

committed to a binding re sharevia eu directive �009/�8/ec;

Priority grid access for re powerplants in republic Srpska (rS)and the federation of bosnia andHerzegovina (fbiH)


fit legislation adopted in bothentities:

in fbiH, the fit is the secondhighest for small scale solar PVinstallations in the region;

feed-in premium in rS;

tax rebates available

Ukraine committed to a binding re sharevia eu directive �009/�8/ec


the highest fit for solar PV andSHPP;

tax rebates on re investmentavailable

Turkey committed to a re target;

Priority grid access for re powerplants


fit legislation adopted

Bulgaria committed to a binding re sharevia eu directive �009/�8/ec

Public loansand loan guaranteesavailable

fit adopted;

eu grants available

Serbia committed to a binding re sharevia eu directive �009/�8/ec;



fit adopted;


Romania committed to a binding re sharevia eu directive �009/�8/ec;


Public loans, lowinterest loans and loanguarantees available

Quota with tradable trec inplace;

eu grants available;


Table 2: Some countries with the Most favourable renewable energy Promotion Policies�0

Source: Own creation

in contrast, croatia’s biomass capacity grew byonly 1.76Mwsince �007, despite favourable reincentive schemes. due to the relatively highinstalment costs, the coherence between re in-centive schemes and deployment is evenstronger for solar PV power plants. for example,for a �0 kw roof top solar power plant commis-

sioned in �006 in germany, an average lcoe ofslightly under €0.5/kw-hwas estimated (bMub,�007). this was significantly higher than the re-tail electricity price of €0.18/kw-h for an averagegermanhousehold (bdew, �01�). investment insolar PVwas only profitablewith a significant reincentive scheme, for example a fit with a re-

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Figure 12:deployed biomass, Solar PV andwind Power capacity in Mw �005 and �01��1


1000

800

600

400

�00

0

Poland

czechrepublic

Hungary

Slovakia

lithuania

romania

�500

�000

1500

1000

500

0

czechrepublic

bulgaria

Slovakia

ukraine

Slovenia

biomass �005 biomass �01� Solar PV �005 Solar PV �01�

�500

�000

1500

1000

500

0

Poland

turkey

romania

bulgaria

Hungary

ukraine

estonia

czechrepublic

lithuania

croatia

latvia

wind capacity �005 wind capacity �01�

21 Only countries with installed biomass capacity exceeding 5 MW and with solar PV/wind capacity exceeding 200 MWrespectively are presented in this figure.

muneration equalizing the lcoe. the black linewhich represents the year inwhich the incentivescheme was implemented is not visible. that isbecause czech republic, bulgaria, Slovakia andukraine had no solar PV capacities in �005 or inthe respective year, when the re incentive pol-icy was introduced. czech republic adopted afit in �006 resulting in over � gw installed solarcapacity by �01�. ukraine adopted a fit in �009.almost 400 Mw installed solar PV capacity hasbeen deployed since then. in contrast, the fed-eration of bosnia and Herzegovina (fbiH) hasone of the highest fit for small scale solar PV in-stallations and showsoneof the highest solar ra-diation potentials (figure 8), but there has beenno significant solar PV deploymentto date. the findings are similar forwind capacity development be-tween �005 and �01�. Poland,turkey and romania implementedits re incentive schemes in �008��

and deployed almost �gwofwind capacity be-tween �008 and �01�. ukraine and croatia’swind energy sectors grew by ca. �00 Mw sinceincentives were introduced in �009. between�011 and �01�, ukraine’s private sector con-tributed 75 percent of the installedwind capac-ity delivered by the state in the previous decade(ecSd, �01�). but belarus stagnated in terms ofwind power plant deployment over the sametime period despite offering the highest fits forwind energy in the region.

it shouldbenoted that some countries have lowdeployment rates to date, but some large proj-ects are currently under development. examplesinclude the development of the 110 Mw Pir-shakul wind farm and �5Mwabsheron solar PVPark in albania, and a pilot 50 Mw wind powerplant in formeryugoslav republic ofMacedonia(ecSa, �01�&Seecn, �01�). others have recentlyadopted or revised their re incentive schemes.for example Serbia adoptedanewrepromotion

in �01�. experts estimate that the adoption offitswill likely lead to an increase in investment inre in the coming years (ewea, �01�). Similarly,the government of kazakhstan adopted a newre law in �01�, replacing project-specific withtechnology-specific fits (republic of kazakhstan,�01�). the time-consuming characteristic of anre project makes the comparison of re invest-ment with power generation deployment diffi-cult. for example, ukraine showed$�.8 billionreinvestment in �01�, almost three times asmuchas in �011. this was largely due to the financingof ca. 1 gwof SHPPs and phase one of the $1�6millionbotievowind farm (fS&uneP, �01�).thiswill be reflected in deployed power capacity in

the coming years. Similarly, turkey showed $1.�million investment in re, mostly in wind farms(fS&uneP, �01�). in �01�, uzbekistan ($�00mil-lion)made the fifth largest investment in re andkazakhstan ($100) million the eighth largest innon-oecdasia, excludingchina and india (fS &uneP, �014). However, investment-constructiondelays cannot be theonly explanation for lowreutilization rates despite implemented re incen-tive schemes. this chapter examines several keyfindings.

re deployment does not inherently seem to betied to the selection of a specific incentivescheme, andparticularly not to fits. Poland, oneof the few countries in the region that has aquota scheme implemented, showedby far thegreatest absolute growth in wind and biomasscapacity deployment. albania’s expiring sup-port scheme,which is only applicable for SHPPsand has a concession-based competitive ten-der process, led to commissioning of 90Mw in-

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22 Turkey adopted the first version of the Law on Utilization of RES for the Purpose of Generating Electrical Energyin 2005. However, only in 2008 was the law was amended by the introduction of FiTs. In 2010, Turkey revised andincreased its FiT promotion scheme, which remains applicable to the present (IEA & IRENA, 2014).

All countries which experienced a significantincrease in RE capacity did so having

recently introduced incentive schemes.

stalled SHPP capacity between �010 and �011(republic of albania et al., �01�). it is estimatedthat by the end of �01�, $�56 million has beeninvested into albanian SHPPs (ifc, �01�). How-ever, and due largely to high technology costs,there is evidence that re incentive schemeshave been necessary to compensate for rela-

tively high lcoes. russia adopted its capacityscheme in June �01�. the overall capital invest-ment in clean energy between �000 and �011amounted to (only) $895million. with thisamount, russia ranked second last of all ��clean energy Ministerial countries (deutschebank, �01�). although incentives might havebeen necessary to launch re deployment, theydo not explain all differences in reS utilization.in some countries, seemingly favourable legis-lation did not lead to enhanced re power ca-pacity. a good example to illustrate, that focus-ing solely on incentive schemes might ignorethe depth of the problem is found in a compar-ison ofturkey andazerbaijan. turkey’s installedwind capacity grew by almost � gw between�008 and �01� (wwea, �01�). but azerbaijan’s

wind power capacity increased by �Mwduringthe sameperiod. turkey’s fit forwind power in-stallations is $7�/Mw-h, excluding potentiallyobtainable bonuses for local content inclusion.it is therefore higher thanazerbaijan’s fit, whichis $57/Mw-h (ecSb, �01� & government ofturkey, �011). at a first glance, it seems obvious

to argue that azerbaijan’s fit providesan inadequate reward for investing inre. but in �01� theturkish averagemar-ket electricity price ($77/ Mw-h) ex-ceeded the fit obtained for electricitygenerated by a wind power plant (ort-

ner, �014). this implies that in �01� the fit inturkey did not provide a direct financial incen-tive compared to electricity sold through theelectricity market. taking into account turkey’ssignificant deployment rate, it still seemed to beat least as high as the lcoe for wind power inturkey and therefore enough to cover the re-quired roi of investors in the turkish wind en-ergy market. azerbaijan’s fit for wind energy isjust too low to cover the lcoe for wind powergeneration in azerbaijan. but that does not au-tomatically imply that it is necessary to increaseazerbaijan’s tariff to the level ofturkey’s. it rathersuggests a focus on the cost drivers of the lcoe,in particular financing costs from higher per-ceived risks, to reduceazerbaijan’s lcoe towardsthe level of the current fit.

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Historically, evidence suggests that REincentive schemes have been necessaryto compensate for relatively high LCOEs.

2.1MarketProspectsandGovernmentPoliciesto Stimulate Investment

together with the eu member states coveredin this report, energy community (ec) mem-ber countries albania, bosnia and Herzegov-ina, croatia, former yugoslav republic ofMacedonia, Moldova, Montenegro, Serbia andukraine agreed on the implementation of eudirective �009/�8/ec and committed to abinding share of reS in gross energy con-sumption by �0�0 (ec, �01�). turkey commit-ted to a �0 percent reS in power generationby �0��, �0,000 Mw of installed wind and

�,000 Mw of solar PV capacity (Melikoglu,�01�). russia aims that 4.5 percent of pro-duced and consumed energy should be pro-duced by re power plants by �0�0 (Ministry ofenergy of the russian federation, �009). therussian energy forecasting agency estimatesthat reaching this target would require 14.7gw of total new installed re capacity (ifc,�011). belarus plans that local fuels and reshall have a share of not less than �� percentin energy production by �0�0 (ecSc, �01�).However, those targets are often rather vagueformulated. also, a renunciation of the targetmay be easier than for countries that agreedto eu directive �009/�8/ec.

��Market and Policy outlook for renewable energy in euroPe and tHe ciS

2. Barriers to Renewable EnergyInvestment in the Region

Sources: Adapted from EC (2012)

Figure 13: legally binding Share of renewable energy Sources in gross final energy consumptionby �0�0

50%

40%

�0%

�0%

10%

0

bosnia&Herzegovina

latvia

albania

Montenegro

fyrofMacedonia

Serbia

estonia

lithuania

Slovenia

romania

croatia

Moldova

bulgaria

Poland

Hungary

czechrepublic

Slovakia

ukraine

40% 40% �8%

��%�8% �7%

�5% �5% �5% �4%�0% 17% 16%

15% 15% 14% 14%11%

countries with no re targets show the weakestcommitment to a reliable re development strat-egy. kyrgyzstan’s national energy Programme,for example, officially recognizes environmentalprotection in the energy sector and the promo-

tion of a new tariff policy. However, no specifictargets have been set by the government (kyr-gyz republic, �008). the government’s commit-ment to promoting reS therefore remains un-clear for investors. commitments ofgovernments toward re deployment are notonly communicated through re targets. in gen-eral, legislation security is crucial, since retroac-tive legislation changes harm the government-investor trust relationship substantially in thelong term. uzbekistan, for example, ensures leg-islation security for foreign investors over 10years (undP et al., �01�). unfortunately, somecountries have enforced retroactive changes inre legislation. due to re promotion cost con-cerns, romania’s energy regulator anre sus-pended the issuance of two trecs for solarpower plants (until March �017), onecertificate for wind (until december�018) and one certificate for SHPplants (until March �017) for plantscommissionedbefore 1 January �014(rwea, �01�). the government ofczech republic revised its re law in �01�.the re-vised lawno longer offered tax incentives, but atax for solar installations commissioned be-tween January �009 anddecember �010 on therevenues of fit (�6 percent) and premium (�8percent) between �011 and �01�, (czech re-

public, �01�).�� this so-called solar tax led to thecollapse of the czech solar PV market and al-most no additional solar PV deployment tookplace in �011. that compares with almost 1.5gw additional installed capacity in �010 (eu-

robserv’er, �01�). Similar to theczech republic, its neighbour,the unexpected boom of Slova-kia’s solar PV market led to an

adaption of legislation by decreasing the tariffeligibility of solar installations (dojčanová, �011).Many re investors are taking legal action againstthese retroactive changes. in bulgaria, theSupreme administrative court overruled thegrid usage fee, which forced solar PV powerplants commissioned between �010 and �01�retroactively to pay back up to �9 percent ofthe fit to the grid operator. around €76millioncollected by the grid and distribution operatorshad to be paid back to the plant operators(reslegal, �01�).�4

even if retroactive changes are overruled, theemerging planning insecurity as a result of leg-islation changes is expected to damage the in-vestment climate in the long term. according to

the iea, policy uncertainties are considered tobethe main barrier to re investment (ieaa, �01�).together with reductions in technology costs,policy support concerns represented themajorreason for the 14 percent drop in �01� from�01� of worldwide investment in renewable

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23 In 2013, the tax regime was extended with a lower tax rate, 10 percent on the FiT and 11 percent on the premium.According to the last amendment by the Czech Parliament to the RE law (Regulation No. 310/2013) only plantscommissioned until 31 December 2013 (except SHP) can receive the FiT. Wind, geothermal or biomass power plantswith a maximum capacity of 100 kW and that hold a building permit issued before the amendment entered intoforce (2 October 2013), are eligible for support, but only if the plants will be commissioned before 31 December 2015.

24 However, in late 2013 the Bulgarian parliament adopted 20 percent fee on the revenue of wind and solarinstallations in 2014 following a proposal by the Budget Commission (Reuters, 2013). Bulgaria’s State Energy andWater Regulatory Commission currently proves the introduction of a new fee on transmission grid access for windand solar power plants that are eligible to receive the FiT.

Countries with no RE targets show the weakestcommitment to a reliable RE strategy.

Policy uncertainty is the main barrierto investment in RE and was a major reasonfor the drop in worldwide investment in RE.

power (fS & uneP, �014). the long-term natureof project realization and amortization dispro-portionally exposes re investors to risks relatedto planning insecurities. despite a diminishingeffect on re capacity deployment rates, one ap-proach to avoid retroactive changes is the im-plementation of deployment caps. govern-ments may have incentives to slow down orlimit newre instalments due to cost concerns orgrid capacities. for example, thegovernment offormeryugoslav republic ofMacedonia cappedthe overall installed capacity of privileged pro-ducers that are eligible to receive a fit (govern-ment of Macedonia, �010). the croatian trans-

mission System operator HeP-oPS limited theinstalled capacity of new wind power plants at�60 Mw (krajacic et al., �01�). estonia discon-tinued its premium forwind power plantswhena total electricity production of 600 gw-h/ isreached. it is important to state that the exis-tence of caps do not necessarily hinder invest-ment. in latvia, which also implemented outputcaps, the fit caused a massive growth in com-missioned wind power plants, which increasedby almost 11� percent in �01� (wwea, �01�).�5

on the other hand, caps tend to inhibit invest-ment and re deployment, particularlywhen theinvestment environment is favourable. inturkey,single solar installations are capped to a maxi-mum of 50 Mw and the total installed solar ca-pacity in the country was limited to 600 Mwuntil the end of �01�. according to turkishnewspapers, in the first half of �01�, 500 com-panies had submittedproposals of 9,000Mwso-lar PV capacity to the energyMarket regulatoryauthority (eMra).this is 15 times asmuch as thecap of 600 Mw set by eMra for �01�. regionaltop performers in terms of re deployment rates,

such as czech republic, bulgaria and romania,changed their promotion schemes retroactivelyaftermassive growth in re generating capacity.that has caused ongoing damage to their localremarkets. countrieswith previously lower de-ployment rates, due to inherently capped de-ployment rates,may be able to avoid retroactivechanges. this could imply that countries withhistorically high re deployment rates andretroactive legislation changes will stagnate interms of re deployment,whereas countrieswithhistorically lower re installation growth rates –due to implemented caps and profound de-ployment plans – may expand re capacities

more sustainable over the comingyears. to increase the planning securityof investors, retroactive legislationchanges should be avoided. re promo-tion schemes can include detailed de-ployment plans, caps or a determined

gradual decrease of promotion over a longerperiod of time which takes grid capacities andcost increases into account.

2.2MarketDistortionsandAccessto theEnergyMarket

Market distortions and access to the electricitymarket remain challenges in some countries.Market distortions, for example subsidies forproduced electricity from technologies otherthan reS, are a particular problem in countrieswith large non-renewable energy resources, forexample oil, coal and gas, and where electricityprices are traditionally cheap and not cost re-flective. if the costs are directly transferred toelectricity consumers, re incentive schemes en-tail an unpopular increase of retail electricityprices. as a result, governments are often reluc-tant to promote re. according to the iea, globalfossil fuel subsidies are five times larger thanthe level ofworldwide re incentives (ieab, �01�).in �010, turkmenistan had the fourth largest

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25 Despite deployment caps, Latvia’s FiT is on hold until 1 January 2016 for new installations and no electricity licencesare granted for new installations (ResLegal, 2013).

Retroactive changes in legislation shouldbe avoided if investors’ planning securityis to be assured.

proven gas reserves in the world (world bank,�014). natural gas is almost the only source forpower generation. retail electricity tariffs arevery low, not cost reflective and subsidized. de-spite enormous potential in solar PV particu-larly, low tariffs in combinationwith amissing restrategy result in a low share of re in the coun-try’s overall installed electricity capacity of 0.18percent. aundP study for kyrgyzstan (�011) es-timated the generation costs of renewable elec-tricity per kw-h at $0.19 for SHHP, $0.�0 forwindand biomass, and $0.�� for solar power. but be-cause ofmassive subsidization, the current elec-tricity tariff of $0.1/kw-h is way below re gen-eration costs and not cost reflective (oJScelektricheskie Stantsii, �01�). due to the abun-dance of natural gas and oil resources, uzbek-istan’s energy sector is heavily dependent onnon-renewable resources. despite considerabletechnical re potential, the dependence on non-reS in combination with very low energy tariffsprevents energy diversification (eshchanov et

al., �01�). the high upfront capital investmentrequired for re projects and the absence of alegislative support scheme make re in uzbek-istan unfavourable compared to investments inoil or gas (undP, �007). countries that subsidizefossil fuels to protect consumers from rising en-ergy prices distort re competiveness and pre-vent investment in re technologies, which couldbe a farmore affordable alternative (Schmidt etal., �01�). waissbein et al. (�01�) showed that –contrary to the commonview that repromotionschemes increase energybills – public de-riskingmeasures can actually contribute to reducingenergy bills. countries with high fossil fuel sub-sidies implicitly burden households through taxbudgets used on unnecessary high energy ex-penses. removal of fossil fuel subsidies and a re-allocation of the originating savings in the taxbudget in combination with public de-riskingmeasures for re technologies can actually have

a reducing – and, therefore, beneficial – effect onlow incomehousehold’s energy bills (waissbeinet al., �01�).

investors may hesitate to invest in countrieswhere access to the energy market is difficult.Some countries are still in the progress of liber-alizing their energymarket. in formeryugoslavrepublic of Macedonia, the state-owned JointStock company elM is the country’s largest en-ergy electricity generator, operating a total ca-pacity of 800Mw in thermal and seven HPPs of5�0Mw. in kyrgyzstan, state-owned energycompanyoJSc elektricheskie Stantsii is still themajor electricity generator producing 98 per-cent of kyrgyzstan’s electricity (oJSc elektrich-eskie Stantsii, �01�). in turkmenistan, the elec-tricitymarket ismanagedbyvertically-integratedand state-ownedturkmenenergo, which ownsand operates the grid. turkmenenergo alsogenerates the electricity and distributes theelectricity to the end customers. in azerbaijan,

the vertically-integrated and state-owned azerenerji owns most of thepower generation capacity. in uzbek-istan, the vertically-integrated state-owned electricity company uzbeken-ergo generates 97 percent of the

country’s electricity. the remaining � percent isthe entire installed small hydropower capacity,which is operated by state-owned uzsuven-ergo. in tajikistan, the state-owned electricitycompany, bargi tajik, owns most of the elec-tricity generation capacity. However, bothuzbekistan and tajikistan are currently liberal-izing their energymarkets. tajikistan adopted aprogramme for the construction of SHHPs, andseveral mini and small hydropower plants witha total capacity of 47 Mw were commissionedin �010 and �011. Some are privately ownedand operated (undPc, �01�). to attract privateinvestment, countries should continue liberal-izing their energymarkets and facilitate privateaccess to historically state-owned energy mar-kets. if incremental costs of re production re-main after the implementation of de-risking in-struments, countrieswithmonopolisticorganizedenergy sectors could consider implementing a

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Removal of fossil fuel subsidies and publicde-risking measures can help to reduceconsumers’ energy bills.

quota regulation scheme, requiring the statemo-nopoly toproduceacertain amountof reS. com-pared toafit,which requires a liberalizedmarket,this could help to effectively deploy reS by en-suring control over the deployment rate, costsand alignment with grid capacities.

2.3Concessions,PermitsandLicences

in some countries, the licence and permitprocesses are complicated, bureaucratic andun-transparent and it can take up to several years toobtain all licences and permits to construct and

operate an re plant. in croatia, it takes three tofour years to obtain all necessary licences andpermits for the construction of a wind powerplant (ewea, �01�). this is significant higherthan in other eu countries, for example in aus-tria or italy where 19 months of administrativeprocedures for awindpark is the average (ewea,�010). bureaucratic permits and licensing pro-cedures are not only time-consuming, but alsocost-intensive. for example the capital costbreakdown of amayo wind power plant showsthat around �percent of the total installed costsor almost $� million are borne by licence andpermit related expenditures(irena, �01�). this can increasetransaction costs, delay returnsand discourage investment. informer yugoslav republic ofMacedonia, the bureaucratic andcomplex obtaining of construc-

tion, land use and electricity generation per-mits might be a reason for the country’s rela-tively weak performance in terms of re deploy-ment in recent years (Mijakowski & Mijakowski,�01�). in romania, around 85 permits and li-cences have to be obtained to construct awindpower plant (ewea, �01�). generally, the com-mission of re power plants requires a number oflicences and permits. in a first step, several li-cences related to the right to construct thepower plant have to be obtained. these can in-clude environmental and biodiversity impactassignments, location and land usage permits,aswell as construction permits. in a second step,operational permits such as the right for elec-

tricity generation or qualificationsconnected to the promotionscheme (often referred as qualifiedproducer certificates) have tobeob-tained.�6 Supplementary low trans-parency in the licence grantingprocess impedes re investment. en-ergy companies in the region have

for a long time enjoyed the advantages of state-ownedmonopolies.the lack of competition andthe closeness to decision-makers in the statepromoted a lack of transparency in energy pol-icymaking. However, transparency in licencegranting is essential if private investors are to beattracted. if a government’s decisions are un-predictable, investors face greater exposure toadditional risk related to planning insecurities.therefore, at the start of an re project, investorsface high uncertainty whether and under whatconditions licences and permits may be ob-tained. the world bank’s dealing with con-

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Complicated, bureaucratic anduntransparent licence and permit processescan increase transaction costs, delay returnsand discourage investment.

Transparency in licence granting is essential ifprivate investors are to be attracted. If a

government’s decisions are unpredictable,investors face greater exposure to additional

risk related to planning insecurities.

26 This is just a short list of generally required licences. Countries in the region differ in the amount and type of licencesrequired. For example, Turkish SHPP developers also need the permission of the State Hydraulic Works for theconstruction of a SHPP (Government of Turkey, 2002).

struction Permits indicator quantifies the num-ber of procedures required to build a fictivewarehouse, the time required to fulfil those pro-cedures and the costs associated with the pro-

cedures (ifc &world bank, �014)�7. countries incentral asia particularly (regional average rank1�8.5), in the western balkans (regional aver-age rank 145), russia (rank 178) and azerbaijan(rank 180) suffer fromcomplex, time-consumingand cost-intensive construction permitprocesses (ifc &world bank, �014).

other countries,meanwhile, have improved theirindicator ranking significantly. So far anddespitefavourable re legislation, investors in ukrainehave experienced difficulties in obtaining thenecessary permits and licences to construct re-newable energy power plants, to produce elec-tricity and to receive the status of aneligible producer under the fit.toob-tain the necessary permits, severalfederal and regional authorities haveto be involved. the jurisdiction of au-thorities often overlaps. ewea (�01�)states that after all necessary licencesrelated to land use are obtained it takes anothertwo years to obtain the remaining licences andpermits before the constructionof awindpowerplant can start. yet ukraine climbed an impres-sive 145 places in �01� to 45th position in �014(ifc &world bank, �014). Montenegro also roseby 69 places over the same period. georgia hasimproved its business climate significantly overthe last decade. in theworld bank’s ease of do-ing business index, the country is ranked ineighth positionworldwide.�8 the number of for-

eign investors grew by over 400 percent be-tween �004 and �010 (MeSd, �01�). togetherwith armenia (6) andMacedonia (7), georgia (8)is also highly placed in theworld bank’s‘Starting

a business’ indicator�9, which meas-ures how long and how cost inten-sive it is to get a local company es-tablished.�0 a major improvement ingeorgia’s business reforms has been

the streamliningof its permission and tenderingprocesses, yielding to a clear set of procedures forpotential SHP developers. the commission of aSHPP requires only three licences: a land lease orpurchase licences obtained from local authori-ties, awater usagepermit issuedby theMinistryof environment Protection, and a constructionpermit issued by the Ministry of economy andSustainable development. georgian SHPPs ofup to 1�Mw installed capacity are exempt froma licence for power generation. other countrieshave also simplifiedre-relatedpermissiongrant-ingprocesses by exempting redevelopers fromotherwise obligatory licences. Serbia exempts

power plants of less than 1 Mw and bulgariathose of less than 5 Mw from the obligation toobtain an electricity generation licence. alsosome countries have improved their anti-cor-ruption legislation�1 in recent years. others haveongoing accession negotiations with the euro-pean union, which include membership re-quirements in governance and anti-corruption(european commission, �01�).�� the eu assimi-lation and accession process will likely increasetransparency and governance in the future. for

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27 Annex, Table 9 shows the ‘Dealing with Construction Permits’ indicator for all countries in the region. The indicatorsmight be good proxies to display cost intensity and time-intensity of the construction of a RE power plant.However, it should be noted that IFC and the World Bank assume the construction of a warehouse for this indicator.

28 Annex, Table 9 shows World Bank’s ‘Ease of Doing Business’ indicator for all countries in the region.29 Annex, Table 9 shows World Bank’s ‘Starting a Business indicator for all countries in the region.30 The ECIS regional average in the World Bank’s ‘Starting a Business’ is 66.36 (IFC & World Bank, 2014).

Some countries have improved their permitprocessing mechanisms.

Shorter – and therefore cheaper –permission processes and licence

exemptions reduce not just financing costs,but the costs of RE energy instalment too.

example, in �01�croatia, the youngest eumem-ber state, recorded the highest fdi inflow in thewestern balkans and the business environmentis likely to further improve (unctad, �01�).

increased transparency in combination withstreamlined and simplified re permissionprocesses are effective public de-risking meas-ures that reduce risks related to permissiongranting processes. Shorter – and thereforecheaper – permission processes and licenceexemptions reduce not only financing butalso re energy instalment costs. this partic-ularly benefits small re developerswith low cap-ital resourcesandrelativelyhigh informationcosts.

2.4Access to theElectricityGrid

aswith licence granting, uncertainties and risksregarding electricity grid access negatively in-fluence financing costs. with a lack of trans-parency in the grid access process, investorsface higher exposure to additional risk related toplanning insecurities. for example, wind farmdevelopers in Poland and romania face highuncertainties regarding grid connection. be-tween �009 and �010, around 1,�00 grid con-nection applicationswith a cumulative installedcapacity of almost 10 gw were refused by theauthorities (ewea, �01�). in turkey, local envi-ronmental regulations and the determinationof transmission fees face challenges in terms oftransparency (ewea, �01�).

increasing the likelihood of grid connection –and therefore reducing uncertainty – can beachieved by prioritizing re over other forms of

electricity generation when applying for gridconnection. 16 countries in the region, for ex-ample turkey, lithuania, Serbia and bosnia &Herzegovina, prioritize re developers when ap-plying for access to the grid.�� in addition to pol-icy de-riskingmeasures, authorities can provideredeveloperswithdirect incentives, for examplecomplimentary access to the grid. in nine coun-

tries, developers enjoy complimentary grid ac-cess.�4 the combination of enhanced utilizationof policy de-risking measures (prioritization ingrid access and improved transparency)with di-rect financial incentives (complementary gridaccess) is likely to improve the bankability of reprojects in developing countries significantly.

2.5TechnologyandSupplyChain

an incomplete or poorly developed supplychain can increase financing and instalmentcosts, which can lead to investment reluctance.Poor local infrastructure – roads, for example –could hamper the transport of hardware to theproject location. Some countries in the regionrequire re developers to use a certain percent-age of locally produced hardware in their reprojects. in russia’s new capacity scheme, com-missioned from �014 onwards, wind projectshave to contain �5 percent (65 percent from�016), solar projects 50 percent (70 percent from�016) and small hydropower projects �0 per-cent (65 percent from �018) locally produced

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31 An example is OECD’s Anti-Corruption Network for Eastern Europe and Central Asia (ACN) initiative, which supportsits members in efforts to fight corruption via the implementation and enforcement of anti-corruption reforms andlaws. Some member states made significant progress in implementing anti-corrupting polices, by criminalizingcorruption. For example, Georgia has reduced its levels of corruption significantly in recent years (OECDb, 2013).Also, Kazakhstan adopted two important anti-corruption laws changing liability provisions for corruption offencesas a result of the initiative (OECD, 2011).

32 Turkey and Montenegro currently have negotiations ongoing, Serbia and Former Yugoslav Republic of Macedoniaare candidate countries with no current negotiations.

33 Annex, Table 8 lists all countries with RE prioritization in grid connection.34 Annex, Table 8 lists all countries offering complementary grid access.

In nine countries, RE developers enjoycomplimentary grid access.

equipment. after the first tender in September�01�, some critics noted that the relatively smallamount of auctioned wind capacities was trig-gered by local content requirements (lcrs). es-pecially when the local re industry is still underdevelopment and inexperienced or spare partsare rare to get, investorsmay react reluctantly tolcrs. However, lcrs may also create benefits.turkey promotes the use of locally producedequipment via a higher tariff for five years, which

can be received if producers install domesticequipment in their reS facilities. this can bebeneficial for foreign investors, because capitalinvestment in $/Mw installed capacity for SHPPsinturkey is significant smaller than in the rest ofthe world, which leads to a payback period ofless than three years (kucukali & baris, �009).�5

therefore, the smart construction of lcrs is cru-cial to prevent investment reluctance and tosuccessfully foster the participation of the localeconomy in the development of a re market,thus benefiting from more jobs, improved in-frastructure and increasedhumandevelopment.

2.6Costof InformationandLimitedExperiencewithRenewableEnergy

High information costs are amajor barrier to reinvestment. a recent survey revealed that oneof themajor investment barriers to sustainable

investment�6 is financial advisors’ lack of accessto quality information and research (gatewaysto impact, �01�). Project developers also faceinformation barriers. Pre-feasibility and feasi-bility studies on wind speed or water flow arecost- and time-intensive. in Moldova, the ab-sence of small andmedium size private invest-ment in renewable energies has been duelargely to local banks’ unfamiliarity with in-vestment in re (ecS, �011).

However, some countriesstarted to tackle information-related investment barriers.�7

to reduce information costs forpotential investors, georgia’sMinistry of energy published amanual for SHP developersand a list of possible SHPP

grounds open for investmentwith detailed pre-feasibility studies (norsk et al., �01�). in a jointproject, the Serbian Ministry of energy andundP have published investor guides explain-ing the licences and permits required for the in-vestment process in small hydro, wind, solar,geothermal, or biomass power plants (undPa,�01�). in kazakhstan, a wind atlas is availableand provides interested investors with detaileddata about wind resources in the country. in ajoint project between undP and the kazakhelectricity association, pre-feasibility studies areoffered for potential wind farm investment proj-ects. in formeryugoslav republic ofMacedonia,investors have access to detailed rulebooks de-scribing what to consider when constructing are power plant and how to obtain the fit. in-struments addressing information barriers pro-vide several positive effects on re investment.on the one hand, existing pre-feasibility studiessave developers and investors time andmoneyin the project development phase which re-

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Smart construction of LCRs is crucial to preventinvestment reluctance and to successfully fosterthe participation of the local economy in thedevelopment of a RE market, so that it benefitsfrom more jobs, improved infrastructure andincreased human development.

35 By assuming a capacity factor of 0.4, a max. available tariff of $96/MW-h and investment costs of $8,454/kW.36 This study defines sustainable investment as “investment strategy that seeks to fulfill a positive return on investment

in combination with a positive environmental and social impact including investment in companies which workwith renewable energy”.

37 Annex, Table 11 provides a list of countries that offer RE investment opportunities and other instruments aiming tolower information-related investment barriers.

duces instalment costs. but on the other hand,governments that tender specific re sites reducepolicy-related riskdue to anenhancedcredibilityin commitment to re deployment. in combina-tion with industry–finance conferences or train-ingandworkshopsonproject feasibility, this low-ers financing costs (waissbein et al., �01�).

2.7Capital Scarcity

Many countries in the eciS region face a lack ofavailable equity in comparison to oecd coun-tries. this problem increases with the risk of aproject, since debt holders usually requirehigher shares of equity with increased projectrisk. the lack of equity hampers investment andentrepreneurial activities in general. Howevereven if equity is available, it is likely that projectdevelopers need a considerable amount of debtto finance the project, due to the high up-front capital required for re power plantinvestments. as well as project- and com-pany-specific differences in obtainingcredit, there are differences in local com-panies’ ability to obtain credit in the eciS coun-tries. the ifc and world bank’s getting creditindicator is quantified by combining indi-cators measuring whether certain features offacilitating lending exist, and the coverage,scope and accessibility of credit information thatis available.�8 the region’s average ranking forthis indicator is 48.4. Some countries performbetter, for example Poland, Montenegro andMacedonia (all with a ranking of �), while othersare weaker, such as tajikistan (159) and uzbek-istan (1�0) (ifc & world bank, �014). anotherdebt-related indicator, the lending interest

rate, is the average interest rate of thepri-vate sector, which is obtained for short-andmedium-term financing frombanks.

it is normally differentiated according to the ob-jectives of financing and the solvency of bor-rowers (world bank, �014). a higher lending in-terest rate increases the cost of capital and,therefore, the financing costs. the average lend-ing interest rate for the region is 7.� percent,which is higher than for example in the unitedStates of america (�.� percent) or in the unitedkingdom (0.5 percent) (world bank, �014)�9. inparticular, ukraine (18.4 percent), tajikistan (�5.�percent), georgia (��.1 percent) and belarus(19.5 percent) have high lending interest rates.in theworld bank risk Premium on lending in-dicator,tajikistan (�0.� percent), azerbaijan (15.9percent) and georgia (15.� percent) have high-risk premiums on lending (world bank, �014)40.in other words, companies operating in tajik-istan or georgia that want to obtain debt fi-nancing from local banks pay, on average,higher risk premiums and consequently interest

rates than in lithuania (�.� percent) or Mon-tenegro (4.8 percent) (world bank, �014). reproject bankability therefore suffers as a result ofhigher interest rates and financing costs.

to address debt scarcity, the most effective so-lution in the short term is financial de-risking, inwhich development banks take over some ofthe additional risks. this encourages banks toprovide loans and reduces the cost of capital.a number of development banks and interna-tional financial institutions in the regionoffer riskdecreasing instruments, such as soft loans or

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High interest rates and financing costsnegatively affect a project’s bankability.

38 Annex, Table 9 provides the ‘Getting Credit’ ranking for each country.39 No data was available for Poland, Kazakhstan, Turkmenistan, Uzbekistan and Turkey; Also, according to the World

Bank (2014), the calculation differs by country which limits the comparability.40 The World Bank defined the risk premium on lending as “the interest rate charged by banks on loans to private sector

customers minus the „risk free“ treasury bill interest rate at which short-term government securities are issued ortraded in the market” (World Bank, 2014).

Some countries have started to addressinformation-related investment barriers

loan guarantees. international developmentbanks, for example the ebrd, ebrd’s Sustain-able energy financing facilities, the eurasiandevelopment bank (edb), the asian develop-ment bank (adb) and the international financecorporation offer public loans and loan guar-antees.41 in some countries, national funds havebeen implemented to provide re developerswith financing. examples include the german-armenian-fund in armenia and Moldova’s en-

ergy efficiency fund. but despite obviously ben-eficial impacts on project economics, the loanand guarantee programmes only address debtscarcity. generally, debt holders require a spe-cific amount of equity financing to provide cred-itors with a loan. for example, the westernbalkan Sustainable energy direct financing fa-cility requires a sufficient amount of equity toprovide re developers with loans (webSedff,�014). early equity grants in the project devel-opment phase are an effective instrument totackle equity scarcity. However, only in ninecountries of the region investment grants areavailable, of which seven are located in the eu.in kyrgyzstan and Moldova, the only non-eucountries with re grants available, the localebrd Sustainable energy financing facilities,kyrSeff andMoSeff, offer grants to re investors.due to equity scarcity, the absence of grantmechanisms in certain countriesmay have pre-vented investment in re energy. fits or tax re-bates start unfolding their beneficial effect inthe ex-post construction phase. However, theseinstruments are rather ineffectivewhen there isinherently no equity available. yet closing theequity gap by providing grants does not auto-matically increase the amount of incentives thatare already available. instead, it means shiftingsomeof the often available ex-post constructionre incentive schemes, such as fits or tax re-

bates, ahead of the construction phase by of-fering grants. in romania, where re developersare supportedby amix of a quota andtrecs, theenergy regulator anre evaluates the number ofcertificates granted on a case-to case basis, inthe event that grants or other subsidieswere dis-tributed for the construction of the re powerplant. oneother advantage of grants is that theynot only serve as a financial incentive beforethe start of the project, but also help to reduce

financing costs. grants provideproject developerswith‘free’(or, atleast, cheaper) equity. this lowersthe cost of equity. Moreover, an

increase in the equity share usually lowers thecost of debt. even if not provided as a grant, de-velopment agencies can reduce financing costsby providing equity stakes in the early projectdevelopment phase. an example is ifc’s in-fraVentures programme, which equips privateand bankable infrastructure projects with earlyequity and assistance to close the equity gap(ifc, �014). both equity stakes and grants mayalso have a positive effect on the historicallylow small-scale re investment in the region. al-though in �01�ukraine had the 10th highest as-set financing in reworldwide, no country in thisreport is represented in the top 10 for invest-ment in re capacity smaller than 1 Mw (fS &uneP, �01�).

2.8 InadequateTransmissionInfrastructure

Many countries in the region suffer from oldand outdated electricity transmission infra-structure, causing energy shortages, electricitycut-offs and high distribution losses. the con-flict during the 1990s in thewestern balkans de-stroyed parts of the transmission infrastructureand cut off entire villages from the electricitygrid, a situation that continues to the presentday. in uzbekistan, 50 percent of the population

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41 Annex, Table 10 provides an overview of national and international financial institutions providing loans, loanguarantees and grants for RE.

Grants not only serve as a financial incentive,but reduce financing costs.

lives in rural areas and experience significantproblems with electricity shortages and cut-offs due to high distribution losses, illegal en-ergy tapping and the generally poor conditionof infrastructure in remote areas. thismay be anopportunity for off-grid re solutions. accept-ance and interest by the rural population in reis high, as a recent study by eshchanov et al.(�01�) demonstrates. Moreover, governmentscould introduce a legal basis for electricity ex-port. if prudently designed, electricity exportcan provide numerous benefits to countrieswith scarce capital. with help from the con-tracting party, exporting countries are able tosecure capital to deploy re installations. coun-tries lacking an adequate transmission infra-structure can use the income earned on ex-

ported electricity by reinvesting it in the localinfrastructure. and as soon as the export agree-ment expires, the re plant produces electricityat low cost. development and infrastructurebanks can assist with financial de-risking andthrough the provision of public loans. for ex-ample, to provide greater flexibility and reducethe costs of the �0 percent re target in the eu,reS-directive �009/�8/ec allows for electricitygeneration cooperation mechanism betweeneu and neighbouring countries. the €100 mil-lion lastva-Pljevlja transmission line betweenMontenegro and italy is currently under devel-opment. the transmission line aims to connectseveral hydropower plants and a wind farm inMontenegro to the italian grid. ebrd assisted inthis by financing of €65 million in april �01�(Seecn, �01�). in georgia, ex-cept for the three wintermonths, SHPP developers areallowed to export electricitywithout an export licence. in

winter, thegovernment of geor-gia offers a power purchaseguarantee to ensure domesticenergy supply (MeSd, �01�).

2.9Political InstabilityandCountryRisk

according to theoecd, country risk is the risk ofcapital transfer and convertibility or the risk ofa force majeure. transfer and convertibility riskmeasures the likelihood of governments im-posing capital or currency exchange controls.Forcemajeure includeswar, expropriations, rev-olutions, natural disasters etc. (oecda, �01�). in-vestors perceive these risks and price it in theirminimum roi.

in countries with stable institutions, a posi-tive track record as well as lower regulatoryand currency devaluation risk makes for lower

cost of capital, a lowerroi and positive projecteconomics. in countrieswhere political uncer-

tainty is high, higher perceived risk will bepriced in by equity and debt holders, therebyincreasing financing costs (irena, �01�). oecdquantifies country risk on an indicator from 0to 7 (table �). the region does not performwell and has a regional average rating ofaround 5. belarus, ukraine and Moldova (allwith a ranking of 7), central asia (6.�),westernbalkans (5.8) and caucasus (5.7) all have highcountry risk rankings. risks related to politicaland country-specific circumstance can be ad-dressed through financial de-risking by de-velopment banks offering risk-sharing prod-ucts. examples include a political riskinsurance that covers expropriation, politicalviolence and currency restrictions (waissbeinet al., �01�).

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If prudently designed, electricity export can providenumerous benefits to countries with scarce capital.

Old and outdated infrastructure is a problemin the region causing energy shortages,electricity cut-offs and high distribution losses.

Political risk insurances can transfer risks relatedto political and country-specific circumstance

to development banks.

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country ranking country ranking

kazakhstan 5 albania 6

kyrgyzstan 7 bosnia and Herzegovina 7

tajikistan 7 croatia 5

turkmenistan 6 Montenegro 6

uzbekistan 6 Serbia 6

belarus 7 former yugoslav republic of Macedonia 5

ukraine 7 turkey 4

Moldova 7 armenia 6

russian federation � azerbaijan 5

bulgaria 4 georgia 6

romania 4 latvia 4

lithuania �

Table 3: country risk indicator by country

Source: OECDa (2013)42

42 Please note, for Czech Republic, Estonia, Hungary, Poland, Slovakia and Slovenia, data were not available.

considering and evaluating the barriers andrisks, figure 14 offers an overview of the mostfavourable countries in the region for re invest-ment. when calculating the lcoe for biomassand small hydropower, the fits of Slovenia andukraine cover the generation costs in both theoptimistic and in the conservative scenarios.

this is a serious advantage for investors, be-cause the calculations of the lower and upperbound lcoe assume different amounts of in-stallation costs, o&M costs, load hours and fi-nancing costs.4� So evenwhen assuming aweakload factor, high installation and financing costs,biomass and small hydro investments remain


3. Best Countries for RenewableEnergy Investment

43 Please refer to Annex, Table 12, which shows the underlying assumptions on the conservative and optimistic LCOEscenarios.

Source: Own calculations

technology biomass Solar PV wind Small Hydro

Country Slovenia Ukraine Turkey Ukraine

lower bound lcoe ��.5� 90.09 51.77 1�.58

upper bound lcoe �18.�8 51�.01 176.9 66.81

feed-in tariff ��4.�5 �58.9 79.5� 116.1

500

400

�00

�00

100

0

biomass Solar PV wind Small Hydro


Figure 14: lower and upper bound lcoe and feed-in tariffs for reS in Slovenia, ukraine andturkey

profitable in both Slovenia and ukraine. for so-lar PV, the range between conservative and op-timistic lcoe is wider, largely because of hugediscrepancies in the assumptions of the capac-ity factor. the upper bound lcoe assumes a ca-pacity factor of 10 percent, resulting in 876 loadhours. figure 8 shows that the annual averagesolar radiation in ukraine amounts to around1,�00 kw-h per square metre. yet solar PV siteswith a capacity factor of 15 percent reduces thelcoe in the conservative scenario, keeping allother variables constant, to €�46 per Mw-h,which is lower than the current fit in ukraine.

despitenothaving thehighest fit forwind in theregion, turkey has in recent years demonstratedthat the deployment of wind power plants fulfils

investor requirements. Since theturkish govern-ment plans tomassively expand its wind capaci-ty to�0gwby�0��, it is currently theregion’smostattractive country for wind energy investment.

Biomass – Slovenia

Slovenia promotes renewable electricity with acombination of fit and premium. the tariff forbiomass installations smaller than 1 Mw in-stalled capacity is the highest in the region. themaximumeligibility period for the fit is 15 yearsand applies only to plants with an installed ca-pacity of less than 5 Mw. However, re powerplants up to 1�5 Mwmay apply for a premium.in addition to the repromotionpolicy, other fac-tors can also benefit potential re investors. as aeu member, Slovenia has a legally-binding tar-get of �5 percent share of reS in gross final en-ergy consumption by �0�0 (republic of Slove-nia, �010). Since 1 July �007, its energy markethas been fully liberalized and re developers

have prioritized access tothe grid. Slovenia offerspossible tax exemption forforeign investment of upto 40 percent of the

amount invested. the corporate tax rate is rela-tively low at 17 percent, and this is expected tobe reduced further in �015 to 15 percent (investSlovenia, �01�). Several loans and grants for reS

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44 The tariffs for solar PV reflect the October 2013 tariffs. Tariffs for solar power plants are subject to monthly recalcula-tion due to applied degression.

eligibletechnologies

additional constraint installed capacity tariff grantedin €/Mw-h

wind < 5 Mw 95.�8

Solar44 building integrated/other

building integrated/other

building integrated/other

< 50 kw

< 1 Mw

< 5 Mw

1��.57/115.16

11�.10/106.1

9�.01/85.54

Hydro < 50 kw

< 1 Mw

< 5 Mw

105.47

9�.61

8�.�4

biomass at least 90 percent of the productsused must be from wood

< 50 kw

< 1 Mw

< 5 Mw

case-by-case

��4.�5

167.4�

Table 4: feed-in tariff and feed-in Premium for renewable energy technologies in Slovenia

Source: Government of the Republic of Slovenia (2012)

Slovenia offers attractive RE incentives particularlyfor investment in biomass power plants.

investment are available, for example eko Sklad,the environmental fund of the republic ofSlovenia, which awards low-interest loans to re-newable energy projects through tendering.

the lending interest rate in �011was amoder-ate 5.5 percent and the country is a member ofthe euro zone. in ��rd position, Slovenia rankstwice as high as the regional average in theworld bank’s ease of doing business indicator(ifc &world bank, �014).

Solar PV and Small Hydropower – Ukraine

theoverall averagesolar radiationpresented infig-ure 8 ranksukraine in the bottom third of the re-gion.However, some regions inukraine showex-cellent potential for solar PV instalments. naS(�01�)estimates that8,600,000Mw-h/yrelectricitycouldbeproduced (technical potential) by smallhydropower installations. the government pro-motesrewithafit.ukraineoffers theregion’shigh-est fit for solar PV installations over a broad

scaleof installations sizes.the tariff forSHPPs isalsothe largest in the region.thefitpayments arede-fined in detail until 1 January �0�0, ensuringplanning security for long-term investments. al-though not a member of the euro zone andmonthly fit revisions according the current ex-change rate (uaH/€), there is a guaranteed‘min-imum floor’, ensuring limited currency exchangerisk.with thedecisionof the ecMinisterial coun-cil to adoptdirective 96/9�/ec, ukraine agreed alegallybindingre targetof11percent shareofreSin gross final energy consumption by �0�0 (ec,�01�). energygeneration is fully liberalized. in ad-dition to thefit, thereare several tax incentivesonprojects related tore. for instance, there is noVaton imported equipment and materials for con-structionofreplants.taxes for landwith installedrenewable energy production are loweredby �5percent of the standard rate for land.

in �01�, lcrs for re power plants were imple-mented. although there are potential negativeeffects, these do have future potential benefits.

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eligibletechnologies installed capacity

green tariffs in € / Mw-h

until�1March�01�

1 april �01�to

�1 dec �014

01 Jan �015to

�1 dec �019

01 Jan �0�0to

�1 dec �0�4

01 Jan �0�5to

�1 dec �0�9

wind <600 kw

>600 kw <� Mw

>� Mw

64.6

75.4

11�.1

64.6

75.4

113.1

58.�

67.9

101.8

51.7

60.�

90.5

45.�

5�.8

79.�

biomass 1��.9 123.9 111.5 99.1 86.7

biogas - 123.9 111.5 99.1 86.7

Solar(groundMounted)

465.� 339.3 �05.� �71.4 ��7.5

Solar(on roofs orfacadesof buildings)

<10 kw

<100 kw

>100 kw

-

4�6.5

445.9

358.6

358.6

348.9

��.8

��.8

�14.1

�86.9

�86.9

�79.�

�51

�51

�44.�

Hydro Micro

Mini

Small

116.�

116.�

116.�

193.9

155.1

116.1

174.5

1�9.6

104.7

155.1

1�4.1

9�.1

1�5.7

108.6

81.4

Table 5: feed-in tariffs for renewable energy technologies in ukraine

Source: Imepower (2013)

lcrs are likely to develop ukraine’s re supplymarket and domestically produced equipmentmay be produced cheaper, which lowers instal-ment costs. in the world bank’s ease of doingbusiness indicator, ukraine improved its rank by�8 places to 11�th position. inthe sub-indicator, dealingwith construction Permits, itimproved its ranking from186th position in �01� to 41stin �014, a very impressive in-crease of 145 places (ifc &world bank, �014). it is likely that the previousuntransparent and complexpermissiongrantingprocess for re power plants will be improved inthe coming years. the country suffers fromhighcountry risk (7), as shown in table �, and cur-rently faces its most serious geopolitical chal-lenge in recent history. the exposure to forcemajeure is relatively high and investors are cur-rently inclined towithhold investment. externalpressures aside, ukraine now stands at a cross-roads to fundamentally transform its political,economic and societal interactions. ukraine’s ca-pacity to foster strong and responsive domesticinstitutions will define the country’s ability toadjust to the changing environment and to rein-venting its socioeconomicmodel.

Wind – Turkey

theturkishgovernment adopted a fit availablefor 10 years from the commissioningof theplant.

although not the region’s highest fit for windpower, turkey’s re promotion scheme hasbeen successful and satisfactory for investorrequirements with more than 1 gw of de-ployed wind capacity between �010 and

�01�. in addition, voluntary lcrs benefit redevelopers in two ways. they increase themaximum possible tariff and may decreasethe instalment costs due to lower capital in-vestment in terms of $/Mw. the fit is deter-mined in $/Mw-h, which limits currency con-version exposure. turkey targets a share of �0percent of reS in power generation by �0��.in particular, the government aims to reach�0,000 Mw of installed wind and �,000 Mw ofinstalled solar PV capacity by �0�� (Melikoglu,�01�). energy generation is subject to licens-ing and re power plants must obtain a reScertificate from the energy Market regulatoryauthority (eMra). re power plants with an in-stalled capacity of less than 500 kw are ex-empt from obtaining a reS certificate (resle-gal, �01�). the transmission company teiaS isobliged to prioritize access to the grid for reelectricity generators (government of turkey,�00�).

48

beStcountrieSfo

rrenewable

energyinVeStMent


Turkey has successfully promoted RE to investorsand has, in recent years, demonstrated thatthe deployment of wind power plants fulfils

investor requirements.

eligible technologies tariff applied $/Mw-h Max. tariff possible if domesticequipment is included in $/ Mw-h

wind 7� 110

Hydro 7� 96

biomass 1�� 151

Solar PV 1�� 00

Table 6: feed-in tariffs for renewable energy technologies in turkey

Source: Government of Turkey (2011)

typically, all the above risks and barriers can beaddressedby either policy or financial de-riskinginstruments. figure 15 shows the theoreticalpotential to increase re competitiveness bypublic de-risking instruments. if it is possible tointroducemeasures that de-risk the cost of debtto 6percent and the cost of equity to 1�percent,the lcoe falls by almost €10 perMw-h to €65.9�perMw-h, assuming that all other input factors

remain constant. armenia’s promotion schemeexemplifies the significance of de-risking.the fitfor wind power plants in armenia amounts to€61.�1/Mw-h (r�e�, �014).45 this is the thirdlowest fit in the region for wind power genera-tion. Since only little wind capacity was de-ployed by �01�, it could be argued that this tar-iff is too low to incentivize investment in windpower plants.


4. De-risking Renewable EnergyInvestment

45 Based on the €/AMD exchange rate on 1 March 2014.46 This graph is based on assumptions regarding electricity production and the cost of capital, which, if changed, do have

a high impact on the outcome of the calculation. For the calculation of the pre and post de-risking LCOE, the financialtool developed by Waissbein et al. (2013) has been used. Total investment costs as well as the O&M expenses are averagevalues for Eastern and Central Europe derived from IRENA (2013). As a tax rate, the corporate income tax for Armenia hasbeen used (PWC, 2011). A capacity factor of 0.34 – or 3,000 load hours – has been assumed. Although this graph is basedon assumptions and serves to illustrate the de-risking potential, Waissbein et al. (2013) showed that effective de-riskingcan actually have a positive impact on investor perception of risk leading to a fall in the cost of capital.

Source: Waissbein et al. (2013), IRENA (2013), PWC (2011) and own calculations

Figure 15: lcoe for awind Power Project before and after de-risking46

lcoe beforede-risking

lcoe afterde-risking

76.77

65.9�


incrementalcosts

assumptions

Plant Size: 1Mwdebt / equity: 70% / �0%total investment: 1,980 uSd / kwo&M expenses: 1.5 uS cents / kw-htime Period: 15 yearstax rate: �0%depreciation: 95%

cost of capital

beforede-risking

debt: 8%equity: 18%

afterde-risking

debt: 6%equity: 1�%

assuming the costs of equity and debt for re in-vestment in armenia are 18 percent and 8 per-cent respectively, wind electricity generation isnot economically viable. the lcoe of €76.77 perMw-h is higher than the current fit. butwith theimplementation of de-riskingmeasures, the tar-iff would be almost sufficient for re investmentwith remaining incremental costs of around€4.60. without de-risking measures, the fit

would need to be increased to around €77/Mw-h to cover the incremental costs between lcoeand fit.this example therefore shows that evenif some incremental costs do remain betweenfit and lcoe, the required increase will be be-low theotherwise necessary increase thatwouldbe required without de-risking.

these findings have important implications forthe region’s human development. due to in-creased energy prices and significant reforms,energy affordability is already amajor constraint.during the last decade, the region has experi-enced a trend of rising household electricity tar-iffs threatening its socioeconomicdevelopment (world bank, �01�).given that re incentive schemes ei-ther burden scarce publicmeans orare correlated with an increasedhousehold electricity price, govern-ments are reluctant to increase electricity pricesinducedbyre reward schemes that compensateinvestors for their higher risks. fossil fuel subsi-dies, which are ultimately intended to protectend customers from rising energy prices, arenot sustainable and significantly threaten gov-ernment budgets if international energy pricesrise. as a result, they prevent re frombecominga competitive and, if well designed, even a po-tentially more affordable substitution for fossilfuels. undP supports countries in the region inall three forms of public instruments, oftenwithan integrated approach. in belarus, a undP and

gef project, removing barriers to wind Powerdevelopment, supports institutional capacitybuilding, technical wind resource assessments,and training for local o&M responsibilities. incombinationwith de-risking strategies, the proj-ect aims to negotiate fits for wind power de-velopers, which are lower than they would bewithout the de-risking elements. in azerbaijan,undP and a state company, area, launched the

Promoting the development of re-newable energy in azerbaijan project.this continued until the end of �01�and supported azerbaijan in the con-struction of a pilot SHPP, by identifyingthe most efficient types of reS and by

drafting the law on renewable energy in azer-baijan (undPb, �01�). a undP project in croa-tia illustrated that countries with inadequateelectricity infrastructure may want to focus onoff-grid renewable energy solutions for remoteareas due to cost effectiveness over expensive togrid expansion or rehabilitation (undPb, �01�).to address capital scarcity ingeorgia, undP andgef worked with german development bankkfw todevelop and launch a re revolving fund,whichwas capitalizedwith €5million. the fundsuccessfully invested in the first two privatelyowned small hydropower projects in georgia.undP and gef are currently developing a bio-

mass financing mechanism together with in-vestment grant mechanisms for pilot biomassprojects. in addition, the project envisages rais-ing public awareness on the production anduse of biomass fuels (undPa, �01�). in the re-ducing barriers to accelerate the developmentof biomassMarkets in Serbia project, undP Ser-bia and ebrddeveloped an equity grantmech-anism that helps to fill the equity gap. undPand gef albania developed a draft albanianrenewable energy Plan and supported thepreparation and adoption of a new law on re-newable energy with the introduction of fits

50

de-riSkingrenewable

energyinVeStMent


Public de-risking reduces the LCOEsignificantly, assuming that all other inputfactors remain constant.

UNDP supports countries in the region in allthree forms of public instruments, often with

an integrated approach.

51

de-riSkingrenewable

energyinVeStMent


investmentbarrier

description

Policyde-riskinginstruments

financialde-riskinginstruments

examplesofPublicde-risking

instrumentsintheregion

Mar

ketp

rosp

ects

and

gove

rnm

entp

olic

ies

tost

imul

ate

inve

stm

ent

uncertaintiesintheenergy

marketregardinggovernment

commitm

entstoreliablypursue

aredeploymentstrategy.

establishlongterm

retargets

establishlongterm

deployment

plans

ratherthanadopting

retroactivelegislationchanges,

deploymentcapsshouldbe

implem

entedfrom

theoutset

18countriesadoptedretargets

viaeu

directive�009/�8/ec

ukrainecombineditsfitwitha

gradualdecreaseinprom

otion

overalongperiodoftim

e

turkeysignalscrediblere

deploymentstrategybycapping

annualmaximalinstalledre

capacitymakingitmore

probablethatretroactive

legislationchangescanbe

avoided

Mar

ketd

isto

rtio

nsan

dac

cess

toth

een

ergy

mar

ket

fossilfuelsubsidespreventreto

becomeacompetitiveenergy

substituteandtraditionally

monopolisticorganizedenergy

marketsexacerbateprivatesector

involvem

entintheenergy

market.

establishaharmonized,well

regulatedandunbundled

energymarket

reform

fossilfuelsubsidies

uzbekistanandtajikistan

startedtoliberalizetheirenergy

markets

Conc

essi

ons,

perm

its

and

licen

ces

inabilitytoefficientlyand

transparentlyfacilitatererelated

licences,permitsandconcessions

increasetransactioncostsand

reduceplanningsecurityand

thereforefinancingcosts.

Streamlinerepermission

processbyreducingtheprocess

steps

establishm

entofaninstitutional

bodywithclearaccountability

enforcetransparent

mechanismsandfraud

avoidancemechanisms

georgiastreamlinedits

permissiongrantingprocessfor

SHPPs

georgiaandkazakhstan

implem

entedanti-corrupting

policesfollowingoecd’sacn

initiative

Tabl

e7:riskcategoriesandtheirtailoredPublicde-riskinginstruments

5�

de-riSkingrenewable

energyinVeStMent


investmentbarrier

description





Acc

ess

toth

eel

ectr

icit

ygr

iduntransparentandbureaucratic

processesforelectricitygrid

accessincreasesplanning

insecuritiesandtherefore

financingcosts.

developagridcodeassuring

gridaccessforreorprioritizere

overtraditionalformsofpower

generation

ninecountriesintheregion

prioritizereingridaccess

Tech

nolo

gyan

dsu

pply

chai

nanincompleteorpoorly

developedsupplychaincan

increasefinancingandinstalment

costs,whichmayleadto

investmentreluctanceespecially

thenwhencountriesrequirere

developerstouseacertain

percentageoflocallyproduced

hardwareintheirreprojects.

localcapacitybuildingby

industryconferencesor

universityprograms

Smartconstructionoflcrsto

participatelocaleconomyinre

expansionwithoutpreventing

reinvestment

turkeyprom

otestheuseof

locallyproducedequipm

entvia

ahighertariff

for5yearswhich

canbereceivedifproducers

installdom

esticequipm

entin

theirreSfacilities

Cost

ofin

form

atio

nan

dlim

ited

expe

rien

cew

ith

rene

wab

leen

ergy

investors,banksanddevelopers

facealackofqualityinformation

andtrackrecordofreinthe

region.

governm

entscanofferspecific

investmentsuiteswithpre-

feasibilitystudiestolower

informationcostsandsignal

credibleredeployment

potentiallyloweringfinancing

costs

Providehelpforforeignand

localinvestorsthrough

investmentguidelines,

dialogues,conferences,

workshopsandtrainings

georgia,Serbia,kazakhstanand

Macedoniaofferdeveloper

manualsandpre-feasibility

studiestodecreaseinformation

relatedcosts

georgiaoffersspecificsmall

hydropowerplantssites

includingpre-feasibilitystudies

whichareopentoinvestment

5�

de-riSkingrenewable

energyinVeStMent


investmentbarrier

description





Capi

talS

carc

ity

countriesintheregionsuffer

from

agenerallackoflocaland

internationalcapital(debtand

equity).

financialsectorpolicyreforms

forexamplefavourabletolong-

term

infrastructure,including

projectfinance

investmentgrantslowerthe

costofequity,increases

probabilitytoobtaindebt

financingundercheaper

conditionsandhencedecreases

financingcosts

loanguarantees,soft(zero-

interest)loansandother

financialproductsby

developm

entbanksassist

projectdeveloperstogain

accesstocapitalandtherisk

transferlowersfinancingcosts

in9countriestherearere

relatedequitygrantsavailable.

romaniacombinesgrant

mechanismswithreduced

quotaprom

otion

Inad

equa

tetr

ansm

issi

onin

fras

truc

ture

Manycountriesintheregion

sufferfromoldandoutdated

electricitytransmission

infrastructure,causingenergy

shortages,electricitycut-offsand

highdistributionlosses.

Providelegalbasisfor

decentralizedrural

electrificationwhereconnection

totheelectricitygridisamore

costlyalternative

createlegalbasisforelectricity

export


interest)loansandother

financialproductsby

developm

entbanksassist

transmissioncompaniestogain

accesstocapitalandtherisk

transferlowersfinancingcosts

georgiaoffersSHPdevelopers

toexportelectricity;

Montenegrocurrentlybuildsa

transmissionlinetoitaly

ebrd

assistbyprovidingpublic

fundingforthetransmissionline

inMontenegro

Polit

ical

inst

abili

tyan

dco

untr

yri

skcountriesintheregionsuffer

from

country-specificrisksasthe

riskofcapitaltransferand

convertibilityortheriskofaforce

majeure.


interest)loansandpoliticalrisk

insurancesbydevelopm

ent

banksassistprojectdevelopers

togainaccesstocapitalandthe

risktransferlowersfinancing

costs

anumberofdevelopment

banksandinternationalfinancial

institutionsofferloans,

guaranteesandgrantprograms

Sour

ce:O

wn

crea

tion

and power purchase obligations of up to 15years. the undP and gef project, PromotingreS, workedwith the government ofMontene-gro to develop the energy law and other re-lated bylaws regulating the rights and obliga-

tions of entitled reS producers, including theintroduction of power purchase obligationsvalid for 1� years in combination with fit (gov-ernment of Montenegro, �011). Since �008, 1�concessionswith a total installed capacity of 97Mw for SHPP, and twowind power concessionswith a total installed capacity of 96 Mw, havebeen granted to investors (Vener, �01�). as aresult of this project, in �01� the Ministry ofeconomy of Montenegro opened a call for ten-ders for seven concessions for the exploitation ofwater resources (Ministry of economy of Mon-

tenegro, �01�).47to address barriers arising frominvestor’s lack of information, the Serbian Min-istry of energy, development and environmentProtection, together with undP, published in-vestor guides for re technologies.theguides ex-

plain in detail the steps in-volved in the constructionprocess for small hydro, wind,solar, geothermal, or biomass

power plants (undPa, �01�). and undP andgef’s kazakhstan – wind Power Market devel-opment initiative produced a wind atlas con-taining detailed wind assessments.

alongside undP efforts, many countries in theregion have started tackling barriers to re en-ergy investment. table 7 summarizes the in-vestment barriers, their public de-risking in-strument counterparts, plus examples fromcountries in the region that have started to ad-dress their risk and investment barriers.

54

de-riSkingrenewable

energyinVeStMent


47 More information about current SHPP tenders is available at: www.mek.gov.me/en/library/tenderi

Many countries in the region are now addressingbarriers to RE investment.

despite the region’s tremendous re potential,increasing energy security concerns and fre-quently adopted favourable re promotionschemes, only a few eciS countries have de-ployed renewable technologies to a significantextent in recent years. rather than attributingthis to ineffectiveness or an absence of re in-centive schemes, the analyses demonstratesthat the reasons for low re deployment are re-lated tomultiple investment barriers that oftencorrespond with country-specific risks. the re-sulting high costs for financing re projectsmight be the reason for low re deploymentrates in the region. Historically, governmentshave focused on reward-based incentiveschemes to increase the profitability of re in-vestment. but re incentive schemes either bur-den scarce public budgets or increase house-hold electricity prices. in the eciS region,affordable energy is a key determinant of so-cioeconomic development. Poor and rural pop-ulations are particularly vulnerable to energypoverty, a major impediment to sustainableand human development. increased energyprices are, therefore, of concern to poor andvulnerable households and businesses. rewardschemes compensating investors for theirhigher risks are consequently a secondary al-ternative for the region.

alternatively, electricity generation costs couldbe lowered through public de-risking instru-ments, by either lowering policy risks or trans-ferring financial investment risks. rather thanincreasing the financial reward, those instru-ments can help to reduce the financing costs re-lated to the substantial up-front investment.this alsomay offer a potentially attractive alter-native to fossil fuel subsidies, which are not sus-tainable and burden government budgets sig-nificantly if international energy prices rise.improved efficiency and lower technology costs

mean that increasing numbers of onshorewindand solar PV power plants can now financiallyout-compete fossil fuel alternatives even with-out subsidies; this is in caseswhere plants canbebuilt in favourable geographical conditions forwind and sunshine load factors, as well asfavourable financial conditions and low costs ofcapital (fS & uneP, �014). However dependingon the energy market in each country, even af-ter effective de-risking, direct financial incen-tives to make re investment competitive com-pared to other forms of energy generationmight still be required. financial instrumentsshould directly address country-specific needsand obstacles. the analysis shows that in manycountries there are difficulties in obtaining cap-ital particularly equity. Hence, after effectivelyaddressing risks andbarriers, equity grantmech-anisms can help to close the equity gap, to es-tablish entrepreneurial activity and reward forpotentially remaining incremental costs.

despite existing investment barriers, there isa positive trend for improved re investmentconditions in the region. the technical re po-tential is huge and the geopolitical situation interms of energy security concerns provides in-centives for many countries to increase theirown energy supply in the mid-term. Somecountries have recently adopted or revisedtheir re schemes and experts anticipate an in-crease in re investment in the coming years.other countries show lower deployment rates,but a number of large projects are being de-veloped and investment barriers are being ad-dressed. the combination of favourable geo-graphical conditions, continued reductions inre technology costs and increased awarenessmake re technologies ever more attractive incomparison to traditional ways of energy gen-eration. this is likely to lead to more re de-ployment in the region.


Conclusion

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6�Market and Policy outlook for renewable energy in euroPe and tHe ciS

Annex


48 Please note: Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Georgia (only for SHP) and Moldova have project-specific FiT implemented. Azerbaijan offers FiT only for wind and SHP. The premium in Bosnia accounts only forinstallations in the Republic Srpska, Hungary offers the tender only for wind. In Georgia, complimentary grid access isonly available for SHPPs. Lithuania offers complimentary grid access only for installations smaller than 30 KW. InPoland, Slovakia and Hungary grid access has to be paid partially by the plant operator. The FiT for Latvia is on holduntil 2016 and no new electricity licenses are granted. In the Czech Republic, except for small hydropower, the FiTand the premium apply only for installations that do not exceed 100 KW and are put into operation before the end of2015 and hold a building permit issued before 02 October 2013.




country

kazakhstan X X X X X X X

kyrgyzstan X X X X X

tajikistan X X X X X

turkmenistan

uzbekistan X X X

albania X X X X X

Serbia X X X X X

croatia X X X X

bosnia & Herzegovina X X X X X

Montenegro X X X

fyr Macedonia X X X

turkey X X X X

belarus X X X X X

Moldova X X X X X X

russia X X X

ukraine X X X

armenia X X X

Table 8: implemented renewable energy related Policies48

renewable

energytargets

Prioritygrid

access

lowinterest

loans

loan

guarantees

taxrebates

grants

Quota

trec

fit

Prem

ium

tenderand

auction

complem

entary

grid

access





country

azerbaijan X X X

georgia X X X

estonia X X X X

latvia X X X X X

lithuania X X X X X X X X

romania X X X X X X X X

bulgaria X X X X X

Poland X X X X X X

czech republic X X X X X X X

Slovakia X X X X X X X

Hungary X X X X X X X X

Slovenia X X X X X X X X


renewable

energytargets

Prioritygrid

access

lowinterest

loans

loan

guarantees

taxrebates

grants

Quota

trec

fit

Prem

ium

tenderand

auction

complem

entary

grid

access

country

kazakhstan 50 5� �0 145 68 - -

kyrgyzstan 68 70 1� 66 1� 1�.8 6.6

tajikistan 14� 141 87 184 159 �5.� �0.�

turkmenistan - - - - - - -

uzbekistan 146 156 �1 159 1�0 - -

Table 9:world bank indicators

dealingwith

constructionPermits

Startingabusiness

easeofdoing

business�01�

easeofdoing

business�014

gettingcredit

lendinginterest

rate(%)

riskPrem

ium(%)


country

albania 90 8� 76 189 1� 10.9 5.7

Serbia 9� 87 45 18� 4� 1�.� 5.1

croatia 89 88 80 15� 4� 9.5 -

bosnia & Herzegovina 1�1 1�0 174 175 7� 6.9 -

Montenegro 44 50 69 106 � 9.6 4.8

fyr of Macedonia �5 �6 7 6� � 8.5 -

turkey 69 7� 9� 148 86 - -

belarus 6� 64 15 �0 109 19.5 -

Moldova 78 86 81 174 1� 1�.4 -

russia 9� 111 88 178 109 9.1 -

ukraine 11� 140 47 41 1� 18.4 -

armenia �7 40 6 79 4� 17.� 7.4

azerbaijan 70 71 10 180 55 18.� 15.9

georgia 8 9 8 � � ��.1 15.�

estonia �� 1 61 �8 4� 5.7 -

latvia �4 �4 57 79 � 5.5 5

lithuania 17 �5 11 �9 �8 6.6 �.�

romania 7� 7� 60 1�6 1� 11.� 5.1

bulgaria 58 57 65 118 �8 9.7 9.4

Poland 45 48 116 88 � - -

czech republic 75 68 146 86 55 5.4 4.8

Slovakia 49 4� 108 5� 4� 5.8 -

Hungary 54 5� 59 47 55 9 �.1

Slovenia �� 1 �8 59 109 5.9 -

dealingwith

constructionPermits

Startingabusiness

easeofdoing

business�01�

easeofdoing

business�014

gettingcredit

lendinginterest

rate(%)

riskPrem

ium(%)

Source: World Bank (2014)


institution countriesavailable

terms of financing website

national financing institutions and funds (including erbd’s Sustainable energy financing facilities)

KazREFF kazakhstan ebrd prepares to launch kazreff, which shouldprovide development support and debt financeto renewable energy projects meeting therequired commercial, technical andenvironmental standards.

–

KyrSEFF kyrgyzstan Has means of $�0 million. it provides loans up to$�00,000 and grants of up to �0 percent of theloan for private companies in renewable energy.

www.kyrseff.kg/en/

WeBSEDFF albania, Serbia,croatia, bosniaand Herzegov-ina, Montene-gro, fyr ofMacedonia

locally SMes with a sound financial andeconomic structure and sufficient means ofequity capital can apply towestern balkanSustainable energy direct financing facility fordirect loans of between €� million and €6 million.

www.websedff.com

WEBSEFF Serbia, bosniaandHerzegovina,fyr ofMacedonia

western balkans Sustainable energy financingfacility provides loans of between €� million and€5 million via local banks for private corporation’sinvestments in energy efficiency or renewableenergy projects. loans can cover 100 percent ofthe investment costs.

www.webseff.com/

TurSEFF turkey credit lines are provided by ebrd over eligiblecommercial banks to financially viable privateturkish SMes. a maximum loan of €5 million forrenewable energy projects including technicalassistance can be obtained.

www.turseff.org/

BelSEFF belarus a $50 million credit line is available for private aswell as public belarusian companies investing inre projects which have a positive nPV over a 10-year period by using an 8 percent discount rate inhard currency cash flows.

www.belseff.by/en

EnergyEfficiencyFund

Moldova the main objective of the fund is to attract andmanage financial resources for funding andimplementing projects in the field of energyefficiency and renewable energy by providinggrants, loans and technical assistance for eligiblerenewable and energy efficiency projects.

www.fee.md/

MoSEFF Moldova Private Moldavian firms can receive €�5,000 to€�,000,000 in loans for reS projects. between 5percent and �0 percent of the loan can be givenas a grant.

www.moseff.org/index.php?id=1&l=1

HBOR croatia croatian development bank offers loans forpublic and private entities investing in energyefficiency and renewable energy projects. aminimum loan is €1�,000 and loans can cover upto 75 percent of the estimated investment valuewithout Vat.

www.hbor.hr/hrvatski

Table 10:opportunities to finance renewable energy Projects in the region




Fund forEnvironmental Protectionand EnergyEfficiency

croatia awards interest-free loans to all legal and naturalpersons in croatia for renewable energy projectsthrough tendering processes. the amount andspecific conditions vary for each tender.

www.fzoeu.hr/hrv/index.asp

RuSEFF russia finances up to rub �00million (c.€7million) fromfunds of the ebrd is available for privately owned,russian companies targeting an irr of 10 percent.

www.ruseff.com/

USELF ukraine Provides loans up to $�million from ebrd and freetechnical advice for privately-owned companiesseeking to invest in renewable energy projects.

www.ukeep.org/

UKEEP ukraine Provides loans starting from €1 million and freetechnical advice for small and medium projects inrenewable energy.

www.uself.com.ua/

ArmSEFF armenia Private armenian companies investing inrenewable energy projects which are financialviable can apply for loans.

www.armseff.org/

RoSEFF romania reS projects of SMes can receive loans of up toeur 1 million and grants of up to 15 percent(max. €150,000) of investment costs.

www.seff.ro/

PolSEFF Poland eligible for a loan of up to 100 percent of theinvestment costs are private Polish SMesinvesting in re projects which generate aminimum of �kw-h per €1 invested annually.

www.polseff.org/

BEERECL bulgaria local enterprises can benefit from ebrd loansfor small scale reS projects up to €�.5 millionand grants (excluding PV) up to 15 percent ofthe received loan. eligible are SHPPs up to 10Mw, wind power plants up to 5 Mw, biomasspower plants up to 10 Mw and solar PV powerplants up to 1Mw.

http://beerecl.com

SLOVSEFF Slovakia Projects in the renovation or construction ofSHPP (up to 10 Mw), wind, solar heat systems,biomass, biogas and geothermal power plantprojects with a minimum irr of 10 percent maybe eligible to receive technical advice, funds upto eur �.5 million and a grant (up to 15 percentof the loan) through partner intermediaries, e.g.Slovenská sporiteľňa or tatra banka.

ww.slovseff.eu/

BEECIF bulgaria SMes can receive loans for re projects up to �0percent through partnerships intermediaries(e.g. allianz bank bularia, dSk bank) and grantsup to 50 percent (max. � million bgn) of totaleligible costs.

www.beeciff.org/

EERSF bulgaria the energy efficiency and renewable Sourcesfund provides loans and guarantees for bulgarianmunicipalities, private persons and corporationsinvesting in energy efficiency, but also projectsutilizing reS.

www.bgeef.com




German-ArmenianFund (GAF)

armenia a €40million loanwas concluded between kfwbank and central bank of armenia to promote theutilization of renewable energies and in particularSHPPs, by enhancing the access to loans for privateentrepreneurs and private enterprises.

www.gaf.am

EnvironmentalInvestmentCentre

estonia Supports investments in wind energy or cHPprojects with capital from co� quota sales.

www.kik.ee/en

RuralDevelopmentFoundation

estonia offers loans and guarantees in projects investingin the economic development in rural areas.

www.mes.ee/en

LatvianEnvironmentInvestmentFund

latvia gives loans if the project provides environmentalimprovement and is financially sound.

www.lvif.gov.lv

EuropeanInvestmentFund

latvia gives loans to SMes via ciP and JereMie initiativethrough intermediate banks.

www.eif.org/what_we_do/where/lv/

EnvironmentalInvestmentFund (LEIF)

lithuania Supports re investment projects in the forms ofinterest subsidies and soft loans. there are twocalls per year, which are published in the mediaand on the leif website.

www.laaif.lt/

Fund for theSpecialProgrammefor ClimateChangeMitigation

lithuania offers loans for applicants not engaged ineconomic and commercial activities €1,447,�70and for applicants engaged in economic andcommercial activities €199,7��. the Ministry ofenvironment and the applicant have to sign afinance agreement and applications have to besent to leif.

www.laaif.lt/

ERDF Hungary Via the operational Programme environment andenergy small re developers (geothermal, biogas,wind up to 50 kw, solar up to 500 kw, SHPP up to� Mw and biomass up to �0 Mw) can apply to thenational development agency to be selected fora subsidy of up to 70 percent of the total eligiblecosts or maximum Huf 1500 million(approximately €5.07 million) or a loan ofmaximum Huf 800 million (approximately €�.6million) at a reduced interest rate of 0.5 percent.

www.nfu.hu/

Eko sklad Slovenia the environmental fund of the republic ofSlovenia awards low-interest loans to renewableenergy projects via tendering. currently the fundcalls for applications to subsidize thereconstruction and renovation of renewableenergy plants. eligible investors are private andpublic legal and natural persons in Slovenia witha maximum loan of €�4 million for municipalities,enterprises and other legal entities (15 yearscredit period) and €5 million for residents (10years’ credit period).

www.ekosklad.si/




SubsidyScheme of theMinistry forInfrastructure

Slovenia theMinistry for infrastructure and Spatial Planningof the republic of Slovenia awards subsidies via atendering process to companies that invest inenergy efficiency, renewable energy and cHPprojects covering amaximumof 50 percent of theeligible costs of an investment project.

www.mzip.gov.si/

regional operating financing institutions

Green GrowthFund

albania,armenia,azerbaijan,Serbia, croatia,bosnia andHerzegovina,Montenegro, fyrofMacedonia,turkey, Moldova,ukraine, georgia

Provides direct and indirect (through financialintermediaries) financing for small scale renewableenergy projects usually not larger than €50million.

www.ggf.lu/

NEFCO russia, ukraine complements financing from other interestedparties and/or financial institutions for eligibleprojects having a nordic company or institution asbusiness partner.

www.nefco.org/

EurasianDevelopmentBank

kazakhstankyrgyzstan,tajikistan, russia,belarus, armenia

Prioritizes investment in power generatingrenewable energy projects by providing debt from$�0million to $100million.

http://eabr.org/e/

AsianDevelopmentBank

armenia,azerbaijan,georgia,kazakhstankyrgyzstan,tajikistan,turkmenistan,uzbekistan

asian development bank finances private or publicorganizations with clear development impacts(covering, among others, climate change andenvironmental sustainability) as well as a soundrate of return.

www.adb.org/

InternationalFinanceCorporation

all Provides loans and equity to eligible private,technically sound and profitable projects either viadirect capital or financial intermediaries.

www.ifc.org/

EBRD all Provides equity, loans and guarantees in projectsfrom one to 15 years.

www.ebrd.com/pages/workingwithus/projects.shtml

EU MeanseifeibStructural funds

Hungary,Slovenia, Serbia,Montenegro, fyrofMacedonia,turkey, estonia,latvia, lithuania,romania,bulgaria, Poland,czech republic

loans and guarantees via commercial banks asintermediaries and private equity/venture capital isavailable.

http://europa.eu/youreurope/business/finance-support/access-to-finance/

Sources: Own Creation


country activity website

Serbia the Ministry of energy, development and environmentProtection together with undP published investor guidesfor renewable energy technologies. the guides explain indetail the construction process of small hydro, wind, solar,geothermal, or biomass power plants as for example thelicences and permits required for plant commissioning orwhich authorities are involved.

www.undp.org/content/serbia/en/home/presscenter/articles/�01�/0�/�7/guides-for-investors-in-renewable-energy-in-serbia/

georgia user manual for the commissioning of SHP power plants isavailable explaining potential developers finance,negotiation and permit processes.

http://smallhydrogeorgia.org/en/

georgia interactive map illustrating potentially exploitable SHPsites.

www.energy.gov.ge/en/4756

georgia list of available and potentially exploitable SHP sitesincluding Pre-feasibility Studies.

www.energy.gov.ge/en/4756

kazakhstan wind atlas illustrating and measuring the wind potential ofthe entire country.

www.atlas.windenergy.kz

kazakhstan Potentially available wind farm investment projects withpre-feasibility studies.

www.windenergy.kz/eng/pages/ereymentau_investment_projects.html

fyrof Macedonia

investors have resources to detailed rulebooks on reS, onreS for electricity generation, and on the Method ofobtaining Status of Preferred generator of electricity,generated from reS.

www.mek.gov.me/en/library/pravilnici

azerbaijan azpromo, the state owned investment agency ofazerbaijan, offers a list of available re investment projects.

www.azpromo.az/uploads/structure/files/renewablepercent�0energy_51f6�f05d4ce0.pdf

bulgaria invest in bulgaria, the state owned investment agency ofbulgaria, offers a list of available re investment projects.

www.investbg.government.bg/en/projects/environment-and-res-56.html

Slovenia invest in Slovenia offers a list of available re investmentprojects.

www.investslovenia.org/investment-opportunities/select_category/19/

Table 11: renewable energy investment opportunities in the region



technology

lcoein

$/Mw-h

Plant

capacity

inMw

capacity

factor

cost

ofequity

costofdebt

instalment

costs

in$/kw

o&Mcosts

forplant

in$/year

tax

duration

inyears

turkey:windoptimisticlcoe

71.6�

10.��

1�%

6%1,�50

�8,0��.00

�0%

10

turkey:conservativelcoe

�44.71

10.�

18%

8%�,500

5�,560.00

�0%

10

Slovenia:biomassoptimistic

lcoe

��.5�

10.95

1�%

6%�,000

57�,696.40

17%

15

Slovenia:biomass

conservativelcoe

�01.94

10.4

18%

8%7,000

968,849.60

17%

15

ukraine:SolarPVoptimistic

lcoe

1�4.6�

10.�5

1�%

6%�,000

�4,690.00

19%

15

ukraine:SolarPV

conservativelcoe

709.65

10.1

18%

8%4,000

�4,750.00

19%

15

ukraine:SmallHydro

optimisticlcoe

18.78

10.55

1�%

6%500

5,000.00

19%

15

ukraine:SmallHydro

conservativelcoe

9�.4�

10.4

18%

8%�,000

80,000.00

19%

15

Tabl

e12

:assum

ptionsforlcoecalculations

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€.

Market and Policy Outlook for Renewable Energy in Europe and the CIS

UN

ITE

D N

AT

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S D

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EL

OP

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PR

OG

RA

MM

E


UNDP Europe and the CISBratislava Regional CentreGrosslingova 35

811 09 Bratislava

Slovak Republic

Tel.: +421 2 5933 7111

Fax: +421 2 5933 7450

http://europeandcis.undp.org


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Market and Policy Outlook for Renewable Energy in Europe and the CIS