Transforming On-Grid Renewable Energy Markets

7/27/2019 Transforming On-Grid Renewable Energy Markets

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Transorming OnGridRenewable Energy Markets

A Review o UNDP-GEF Support or Feedin Taris and

Related Price and MarketAccess Instruments


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UNDP partners with people at all levels o society to help build nations that can withstand crisisand drive and sustain the kind o growth that improves the quality o lie or everyone. On the groundin 177 countries and territories we oer global perspective and local insight to help empower lives andbuild resilient nations.www.undp.org.

As a Global Environment Facility (GEF) Implementing Agency since 1991 UNDP supports countries inachieving their national and global environment goals. UNDP-GEFs Energy Inrastructure Transportand Technology (EITT) team ocuses on clean and aordable energy development; low emissionclimate-resilient urban and transport inrastructure; and access to new nancing mechanisms.

The GEF unites 182 countries in partnership with international institutions non-governmentalorganizations (NGOs) and the private sector to address global environmental issues whilesupporting national sustainable development initiatives. Today the GEF is the largest public under

o projects to improve the global environment. An independently operating inancial organizationthe GEF provides grants or projects related to biodiversity climate change international waters landdegradation the ozone layer and persistent organic pollutants. Since 1991 GEF has achieveda strong track record with developing countries and countries with economies in transitionproviding $9.2 billion in grants and leveraging $40 billion in co-inancing or over 2700 projectsin over 168 countries. www.thege.org

United Nations Development Programme304 East 45th Street 9th FloorrNew York NY 10017 USAwww.undp.org

Project Coordinator: Marcel Alers (UNDP-GEF)

Authors: Yannick Glemarec (UNDP-GEF) Wilson Rickerson (Meister Consultants Group Inc.) andOliver Waissbein (UNDP-GEF)

Contributors: Lucas Black (Mauritius case study) Marina Olshanksaya (Kazakhstan case study)Oliver Page (Uruguay case study) Robert Kelly Tobias S. Schmidt Hande Bayraktar Benoit LebotJohn OBrien Manuel Soriano Malini Goel Patrick Gilmartin Summer Jackson and Melissa Hernandez.

Acknowledgments: UNDP-GEF would like to acknowledge the important contribution o WilsonRickerson (Meister Consultants Group Inc.) whose initial report analysing the activities and outcomeso UNDP-GEFs renewable energy project portolio ormed the basis o this document.

Editor: Eileen Travers

Design: Camilo J. Salomn ([email protected] www.benedictodesign.com)


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DEFINITIONS

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1

Figures, Tables and Boxes 2

Acronyms 3

Foreword 4

Executive Summary 6

Introduction 14

I. Creating Enabling Environments or Renewable Energy 191.1 UNDP Four-Step Methodology 22

1.2 Barriers, Risks and Public Instruments 23

1.2.1 Barriers as the Root Causes of Risk 23

1.2.2 A Barrier and Risk Framework for Renewable Energy 25

1.2.3 Policy and Financial Approaches to Derisking 28

II. Supporting Renewable Energy: Feedin Taris 31

and Related Price and MarketAccess Instruments

2.1 Renewable Energy Policy Trends 31

2.2 UNDP-GEF Portfolio Survey Methodology 33

2.3 UNDP-GEF Renewable Energy Projects Overview 33

III. UNDPGEF Project Case Studies 41

3.1 Uruguay 41

3.2 Mauritius 48

3.3 Kazakhstan 53

IV. Discussion 61

Conclusion 64

Annexes 66

A. FiT design options and considerations 66

B. FiT designs assisted by UNDP-GEF projects 68

C. UNDP-GEF projects analyzed in this study 76

D. References 77

Table o Contents

Transorming On-Grid Renewable Energy Markets


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Contents

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2

Executive Summary

Figure 1: Shiting the risk-reward prole o renewable energy projects

Figure 2: UNDP-GEF projects involving FiTs and related price and market-access instruments

Introduction

Figure 3: Countries with UNDP-GEF renewable energy projects (19922012)

Section 1

Figure 4: Investments in renewable energy in China India and in Arica and theMiddle East

Figure 5: Shiting o the risk-reward prole o renewable energy projects

Figure 6: Conceptual drivers o risk or renewable energy investment

Figure 7: Primary impacts o policy and nancial derisking instruments on risk

Table 1: Five key stakeholder groups or a renewable energy barrier assessment

Table 2: A barrier and risk ramework or on-grid renewable energy investment

Section 2

Figure 8: Number o developing and developed countries with FiT policiesFigure 9: UNDP-GEF projects with a ocus on FiTs and related price and market-access

instruments

Box 1: UNDP-GEF assistance or the Renewable Energy Law in China

Section 3

Figure 10: Energy generation mix in Uruguay

Figure 11: Total spending by instrument or the Renewable Energy Market Transormation

Project in Uruguay

Figure 12: Total spending by instrument or the Renewable Energy Market Transormation

Project in MauritiusFigure 13: Total spending by instrument or the Renewable Energy Market Transormation

Project in Kazakhstan

Figures Tables and Boxes


Figures Tables and Boxes


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3

BoS Balance o system

CREIA Chinese Renewable Energy Industries Association

DINAMA Direccin Nacional de Medio Ambiente

EITT EEG Energy Inrastructure Transport and Technology team

FIT Feed-in tari

GDP Gross Domestic Product

GHG Greenhouse gas

GEF Global Environment Facility

GET FIT Global Energy Transer Feed-in TarisGW Gigawatt

HA Hectare

IEA International Energy Agency

IRR Internal rate o return

IPP Independent power producer

KEGOC Kazakhstan Electricity Grid Operating Company

KW Kilowatt

KWH Kilowatthour

LCOE Levelized cost o electricity

MEMR Ministry o Energy and Mineral Resources (Kazakhstan)

MINT Ministry o Industry and New Technologies (Kazakhstan)MW Megawatt

MWH Megawatthour

OECD Organisation or Economic Co-operation and Development

OPEC Organization o the Petroleum Exporting Countries

PPA Power purchase agreement

PV Photovoltaic

RE Renewable energy

REL Renewable Energy Law (China)

RES Law on Support o Usage o Renewable Energy Sources (Kazakhstan)

TATEK Taldykurgan National Energy Company (Kazakhstan)UDELAR Universidad de la Repblica (Uruguay)

UN DESA United Nations Department o Economic and Social Aairs

UNDP United Nations Development Programme

UNEP United Nations Environment Programme

UNFCCC United Nations Framework Convention on Climate Change

UTE Usinas y Trasmisiones Elctricas (Uruguay)

UWEP Uruguay Wind Energy Programme

WACC Weighted average cost o capital

Acronyms


Acronyms


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Transforming On-Grid Renewable Energy Markets4

Foreword

Foreword

Approximately 2.7 billion people do nothave access to reliable energy services and1.5 billion do not have access to electricity.The number o people without access toelectricity in sub-Saharan Arica is expected toincrease by 10% rom 585 million in 2009 to645 million in 2030 under a business-as-usual

scenario as the rate o connections will notbe able to keep pace with population growth.Globally over 1 billion people will remain

without access to electricity by 2030. At the same time global greenhouse gas emissions are soaring. Inthe absence o a signiicant reduction in global emissions rom current levels between now and 2050global temperatures could rise by 4C and possibly 6C by 2100.

UN Secretary-General Ban Ki-moon is leading a global initiative on Sustainable Energy or All to mobilizeaction rom all sectors o society in support o three interlinked objectives to be achieved by 2030:providing universal access to modern energy services; doubling the global rate o improvement inenergy eiciency; and doubling the share o renewable energy in the global energy mix. Makingsustainable energy or all a reality and de-carbonising the world economy in time to avoidunmanageable climate change will require a radical transormation o todays energy systems. According

to the Global Energy Assessment (IIASA 2012) global investment in energy eiciency and low carbonenergy generation such as renewable energy currently amounting to approximately $ 1.3 trillion per

year will need to increase by 50 to 100% compared to present levels to meet these challenges overthe coming decades.

The sums involved in this shit to a low-carbon economy are daunting but not impossible to achieve. Globalcapital markets representing US $ 178 trillion in inancial assets have the size and depth to rise to theinvestment challenge. Rather than a problem o capital generation the key challenge is to redirectexisting and planned capital lows rom traditional high-carbon investments to ones that are low-carbonand climate resilient.

A variety o renewable energy technologies are available and increasingly cost-competitive with traditionalossil uel based sources. Most renewable energy projects can generate attractive returns but typically acehurdles due to lock-in o conventional energies and substantial inormation institutional technologicalbehavioral and nancial barriers in most markets. Thus clean energy nance is not only about nance butalso about externalities and how public policies can help internalize these externalities. To this endthe Global Environment Facility (GEF) has played a critical role or two decades in piloting public andmarket-based instruments to shit investments rom ossil uels to more climate-riendly alternatives and

in establishing enabling policy environments or their large scale adoption.


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Transforming On-Grid Renewable Energy Markets 5

Foreword

As a GEF ounding implementing agency UNDP has worked on over 230 GEF-supported clean energyprojects in close to 100 developing countries since 1992. About 100 o these projects in 80 countries haveocused on renewable energy supported by approximately US $ 293 million in GEF unds and leveraging US$1.48 billion in associated co-nancing rom national governments international organizations the privatesector and non-governmental organizations.

As part o UNDP eorts to codiy and share lessons learnt rom these initiatives this report addresseshow scarce public resources can be used to catalyze larger private nancial ows or renewable energy.It provides an overview o UNDP-GEFs extensive work supporting development o national renewableenergy policies such as eed-in taris. In these activities UNDP-GEF assists developing countries to assess

key risks and barriers to technology diusion and then to identiy a mix o policy and nancial de-riskingmeasures to remove these barriers and drive investment. This approach is illustrated through three casestudies in Uruguay Mauritius and Kazakhstan. This report is complemented by a companion publicationpresenting an innovative UNDP nancial modeling tool to assist policymakers in appraising dierentpublic instruments to promote clean energy.

As we look to the uture UNDP and GEF remain committed to removing barriers to investment in renewableenergy developing innovative policy and nancial mechanisms and engaging the private sector in buildingan inclusive and low-carbon uture.

Rebeca Grynspan Naoko Ishii

Associate Administrator CEO and ChairpersonUnited Nations Development Programm Global Environment Facility


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Executive Summary

SHIFTING THE RISK-REWARD PROFILE OF RENEWABLE

ENERGY INVESTMENTThe need to rapidly transition to more sustainable energy sources is clear. However there remain majorbarriers to scaling up renewable energy particularly in developing countries. Policymakers in developingcountries ace enormous challenges in the areas o education health social services ood and humansecurity disaster management and basic inrastructure; and are wary o potentially more expensive energy

technologies. Attracting private capital can also be a challenge since energy investors are concerned aboutthe risks associated with capital-intensive and long-term investments in developing economies. Utilities andelectricity supply-chain actors tend to shy away rom unproven technologies or businesses perceived tocarry an above-average degree o risk. Consumers may also resist the prospect o tax or tari increases andquestion the reliability o new energy technologies.

A key challenge or policymakers is to create the conditions to make renewable energy attractiveto investors and utilities without jeopardizing the attainment o other equally important developmentgoals or placing an inequitable share o the cost burdenon ratepayers. In order to achieve theseobjectives policymakers in developing countries have been exploring a broad spectrum o dierentpolicies incentives and support mechanisms. The common objective o these public instrumentsis toimprove the risk-reward prole o renewable energy technologies either through reducing risks (andhence lowering the cost o capital) or increasing rewards (or example by providing premium prices

tax credits etc.).

When it comes to promoting renewable energy investment through risk reduction policymakers canutilize a range o dierent public measures. Broadly these can be grouped into policy and nancial deriskinginstruments:

Policy derisking instruments seek to remove the underlying barriers that are the root causes o risks.As the name implies these instruments utilize policy and programmatic interventions to mitigaterisk and include or example support or policy design institutional capacity building inormation

campaigns and training programmes among others.

Financial derisking instruments do not seek to directly address the underlying barriers but insteadtranser the risks that investors ace to public actors such as development banks. These instrumentscan include or example loan guarantees political risk insurance and public co-investments.

Recognizing that all risks cannot be eliminated through policy derisking or transerred through nancialderisking eorts to reduce risks can be complemented by additional nancial incentives to compensateor any residual above-average risks and costs.

Figure 1 provides a conceptual illustration o the approach. It illustrates a shit rom a commerciallyunattractive investment opportunity (right) to a commercially attractive one (top centre). This is achievedthorough two actions: rst reducing the risk o the activity or example through a regulatory policy suchas guaranteed access to the grid or independent power producers (IPPs); and second increasing the return on

investment or example by creating nancial incentives such as a premium price or renewable energy.

Executive Summary

A key challenge

or policy makers

is to create the

conditions to make

renewable energy

attractive to

investors and

utilities withoutjeopardizing the

attainment o other

equally important

development goals.


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Executive Summary

When necessary FiTs can also include an above-market price in order to increase the return on investment.Thus FiTs are both a policy derisking instrument (market access to the grid and must-take requirements) anda nancial derisking instrument (guaranteed price over a period o 15 to 25 years) that can also act whenneeded as a nancial incentive instrument (through a price premium) shiting the entire risk-reward proleo a renewable energy investment.

Since they address both price and market-access barriers which can be critical impediments to cleanenergy investment FiTs are oten the cornerstone instrument in renewable energy market transormationeorts around which complementary derisking instruments and nancial incentives are deployed. As o early2012 there were over 66 countries with FiTs in the world. 1 Alternative cornerstone instruments that can

be structured to address price and market-access barriers in a manner similar to FiTs include tenders andquotas/renewable portolio standards.

UNDP-GEF MARKET TRANSFORMATION PROJECTSSince 1992 UNDP support and nancing rom the GEF have resulted in the implementation o over 230 cleanenergy projects in close to 100 developing countries and involvement in a number o eorts to establish FiTs

and related price and market-access instruments.

UNDP-GEF market transormation projects enhance the capacity o policymakers to identiy an appropriatemix o public instruments to use scarce public unds to catalyse much larger private investment ows or clean

energy development. Risk reduction is at the core o UNDP-GEF projects to promote renewable energy. The

UNDP and GEF approach to reducing risk involves creating an enabling environment under which elementssuch as a national policy ramework or energy markets nancing channels administrative procedures anddomestic technical expertise are strengthened and aligned to support renewable energy deployment.Recognizing that all risks cannot be eliminated through policy derisking measures UNDP oten partners withnational regional and multilateral banks to provide complementary nancial derisking (loan guaranteesinsurance etc.). UNDP-GEF eorts also include advising governments on possible sources o innovativenance to provide additional nancial incentives when required to compensate or any above-averageresidual risks.

This 20-year track record has created a unique base o institutional knowledge on transorming renewableenergy markets in developing countries. As part o a continuous eort to share lessons learned romUNDP-GEF clean energy projects and to identiy good practices this report analyzes support to FiTs and

related price and market-access instruments in 15 countries (See Figure 2.). Three countries were selectedor in-depth case studies: Uruguay Mauritius and Kazakhstan. These three countries were chosen becausethey are diverse in geography and renewable energy resources as well as in energy market and investmentconditions. The three projects employed comprehensive market transormation approaches aiming toreduce renewable energy investment risks through providing a long-term price and guaranteed access tothe electricity market. Uruguay chose to develop an auction programme or large renewable energy systemsand a variation o a FiT/net metering hybrid or small- and micro-scale renewable energy systems. Mauritiusdeveloped a standard oer contract that is a hybrid between a FiT and net metering. Kazakhstan developeda FiT that establishes a dierent rate or each renewable energy generation project.

1 REN21 2012

UNDP-GEF market

transormation

projects enhancethe capacity o

policy makers

to identiy an

appropriate mix o

public instruments.


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Executive Summary

URUGUAYAt the time the UNDP-GEF project began in 2007 Uruguay relied primarily on hydropower and ossil uelsto meet its domestic electricity demand. The $7 million project rom 2007 to 2012 (GEF grant: $1 million;co-nancing: $6 million) was designed around policy derisking measures to address a range o energymarket institutional technology connectivity and nancial sector barriers. The project also originallyincluded a plan to establish a 5 MW demonstration wind energy project by 2012. Uruguay has nowexceeded this goal with 40 MW o wind energy installed. In addition based on the policies developedwith the support o the UNDP-GEF project Uruguay has to date awarded contracts or an additional880 MW o wind energy and Usinas y Trasmisiones Elctricas (UTE) has announced it expects that 1 GW

o wind will be online by the end o 2015 (i.e. approximately one quarter o total current national electricityconsumption). This anticipated investment demonstrates that modest public unding ocused on establishingan enabling policy environment can prove highly eective at catalyzing large nancial ows or renewableenergy development.

UruguaySupported the development of a renewable energy

auction for large generation, a FiT for micro and small

RE sources, and the installation of a 20 MW demonstrationwind farm.

South AfricaSupported the development of

a price oor agreement for wind

energy, and used data to informdevelopment of national FiT policy.

MauritiusDeveloped and launched a grid

code and small-scale independent

power producers (SIPP) and adistributed generation FiT scheme.

MalaysiaStrengthened the building

integrated PV industry and

supported the developmentand passage of a FIT law.

PhilippinesFacilitated the passage of theRenewable Energy Law, issuance

of its Implementing Rules and

Regulations, and establishmentof a FiT

ChinaSupported national policy on

biogas, wind and village power,including the development of the

2005 Renewable Energy Law.

ThailandSupported revision of Very Small

Power Producer policy and thedevelopment of biomass pilot

projects.

Tajikistan

Supporting the drafting, adoptionand implementation of a FiT and

related by-laws for small hydropower.

KazakhstanSupported the drafting andadoption of the Law on Renewable

Energy Sources and developeda wind atlas.

KyrgyzstanFacilitating implementation of 2008

Law on Renewable Energy, includingdesign and adoption of taris and

associated regulations

BrazilStrengthened the ability of the sugarcane

industry to utilize bagasse for powergeneration, including support for

amendments to the renewableenergy law.

TunisiaEstablishing a regulatory framework for

private renewable energy concessionsand accompanying taris.

MontenegroFormulated a new FiT law andassociated by-laws, and strengthened

the small hydro industry.

ArmeniaSupported the developmentof a national FiT for renewable

energy and for combinedheat-and-power systems

that supply district heatingnetworks.

Figure 2: UNDPGEF projects involving FiTs and related price and marketaccess instruments

Source: UNDP-GEF.


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Executive Summary

Uruguays high projected investment leverage ratio (i.e. the cost o public instruments comparedto the amount o capital consequently deployed) illustrates that policy derisking instruments are animportant oundation o any programme that uses public unds to transorm renewable energy markets.Policy derisking approaches address the underlying systemic conditions behind elevated levels oinvestment risk and can thus provide high leverage in terms o risk reduction per dollar o undingunder the right energy market and investment conditions. Uruguay demonstrates that derisking canbe sufcient to make wind energy competitive in countries with strong renewable energy resources

and a good investment climate and provides an example o an environment where additional incentivesin the orm o a high FiT payment do not appear to be necessary to catalyse investment.

MAURITIUSTwo back-to-back UNDP-GEF projects regarding FiTs to promote photovoltaic (PV) solar energy andwind/PV energy have been deployed in Mauritius. The rst $12.5 million project (GEF grant: $0.9 million;co-nancing $11.6 million) under implementation rom 2007 to 2013 supports the development o a FiTor up to 5 MW o renewable energy systems smaller than 50 kW. A complementary $21 million project(GEF grant: $2 million; co-nancing: $19 million) rom 2011 to 2015 supports the deployment o PVsystems over 50 kW in size through additional FiT policy support and also includes initial unding ordirect incentive payments under the FiT. A key objective o the second PV project is to support the Maurice

le Durable (Mauritius Sustainable Island) strategic vision launched by the Prime Minister in 2007. Fossiluels have come to dominate the countrys electricity sector and coal oil and natural gas now comprise

79 percent o its generation portolio. The goals o Maurice le Durable include responding to climatechange and achieving energy independence by obtaining 35 percent o national electricity romrenewable sources by 2025 (up rom 21 percent currently).

The FiT policy or systems smaller than 50 kW has been a success attracting over 400 applications orresidential and commercial systems (totalling 3.8 MW o capacity overwhelmingly or PV systems) andover 80 applications rom public education charity and religious organizations (totalling approximately1 MW o capacity). Close to 1MW o capacity has already been installed and commissioned. This bodeswell or the second project which promotes the development o a FiT with proposed payment levelso approximately $0.37/kWh or systems over 50kW. Generators are able to receive the retail price oelectricity which is approximately $0.20/kWh and hence the price premium would be $0.17/kWh.

Looking ahead a key challenge will be to secure a credit-worthy source o unds to support this incentive

payment. The FiT or PV systems smaller than 50 kW had been supported by a tax on ossil uel generationbut the revenues rom these taxes are not sufcient to additionally support the development o systemslarger than 50 kW. While it is hoped that additional international and national climate nance can bemobilized to support the price premium or systems over 50 KW based on the direct incentive payment

model piloted by the UNDP-GEF project the capitalization o the incentive und remains the mainchallenge to the sustainability and expansion o renewable energy generation in Mauritius in themedium term.

Policy derisking

instruments are

an important

oundation o any

programme that

uses public unds to

transorm renewable

energy markets.


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Executive Summary

The experience in Mauritius shows that combining strong political will with a successul policy deriskingstrategy might not be sufcient to catalyse private investment in the absence o additional nancialincentives in small markets. In order to urther reduce the cost dierential o solar PV and other renewableenergy technologies a range o local technology and management options such as streamliningthe development process and reducing the balance o system (BoS)2 costs could be pursued by utureinitiatives. However the uture o decentralized renewable energy systems in Mauritius will hinge oncontinued technical and nancial support rom both the national Government and the international

community in the near- to medium-term.

KAZAKHSTANKazakhstan has abundant renewable energy resources that with the exception o hydropower have not

thus ar been utilized. Fossil uels dominate the current electricity portolio with a total share o about70 percent. However Kazakhstans voluntary commitment to the Kyoto Protocol will require urtherdevelopment o the countrys renewable energy potential. The goal o the $7.6 million UNDP-GEF project(GEF grant: $2.9 million; co-nancing $4.7 million) under implementation rom 2004-2011 has been toacilitate the development o the wind energy market in Kazakhstan. A resource assessment carried outby the project has estimated the potential wind resource in the country to be in the region o 929 billion kWhper annum or 354 GW o installed capacity. This is over 10 times the projected power-generating capacityneeded or Kazakhstan by 2030.

The UNDP-GEF project has made substantial progress in laying the groundwork or a wind energy market

in Kazakhstan. It has led to the ofcial adoption o a national wind energy target o 2000 MW by 2030.A Kazakhstan Wind Atlas as well as detailed wind resource assessment or 15 potential wind arm siteshave been developed and are reely available to potential investors online. Technical commercial and

environmental studies have been undertaken to demonstrate that there are no insurmountable obstaclesto wind energy development in Kazakhstan. In particular the grid study has estimated that meeting the2030 target will not require any additional investment in transmission grid upgrade and enlargement.

One o the initial goals o the project was to support the installation o a 5 MW wind energy demonstration

project. This proved ineasible due to the need to address regulatory gaps that emerged during the energymarkets transition rom a ormer state monopoly model to a more liberalized structure. The project evolvedto ocus more heavily on regulatory development and other policy derisking instruments and supportedthe development and adoption o the Law on Renewable Energy Sources and corresponding by-laws. The

Law established guaranteed interconnection purchase and priority dispatch requirements or renewablegenerators and a standardized power purchase agreement (PPA).

Wind development has now begun in Kazakhstan with the rst 1.5 MW commercial wind projectcommissioned in December 2011 with plans to expand the project to 10 MW by 2014. Another 45 MW windarm is currently under construction and there are several other wind projects that are at advanced stageso development.

2 In a PV system the term balance o system (BoS) encompasses all components o the PV system other than the panels. This includes structuresenclosures wiring switches support racks charge controllers batteries and inverters. These components requently account or hal o thesystem cost and most o the system maintenance.

Combining stro

political will with

a successul policy

derisking strategy

might not be

sufcient to cataly

private investmen

in the absence o

additional nanci

incentives in sma

markets.


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Executive Summary

However cost concerns are likely to remain a major impediment to developing wind energy in Kazakhstan.Given the investment conditions in Kazakhstan (available commercial loans have high interest rates and shorttenors) and limited wind energy market growth to date it has been estimated that a FiT with a payment levelo $0.15/kWh would be necessary to attract investors. However this FiTis about three times the current retailelectricity price ($0.05/kWh). Although this retail price is articially low a FiT o $0.15/kWh is unlikely to bepolitically sustainable or a major scale-up o wind energy.

The experience in Kazakhstan illustrates the importance o derisking wind power investment to lowernancing costs and o phasing out ossil uel price subsidies in order to minimize the price premium requiredto make renewable energy attractive. Additional policy derisking eorts will most likely be required beore

the ull potential o wind energy can be realized in Kazakhstan.

FINDINGSUruguays experience demonstrates that relatively limited technical advisory support can be sufcient toestablish an attractive clean energy investment environment. The case study in Mauritius a relatively smallmarket illustrates that a successul policy derisking strategy may need to be supplemented by additionalnancial incentives. Market transormation eorts in Kazakhstan show that a generous price premiummay not be enough to catalyse wind energy investment at scale in the absence o urther systemicderisking eorts.

The dierent outcomes o renewable energy market transormation strategies in these three countries

reinorce the observation that every country requires a customized and nationally-appropriate approachto removing barriers and reducing investment risk. Although the precise approach to deploying public

sector resources will vary rom country to country there appear to be certain common principles thathave been shown to be eective in attracting sustainable ows o private capital to the clean energysector without placing an inequitable share o the cost burden on taxpayers or ratepayers.

The experience rom the UNDP supported portolio nanced by GEF to date shows that a FiT does not

guarantee renewable energy scale-up. FiTs and related price and market-access instruments can onlydeal with a subset o the challenges acing energy sector market transormation. For example FiTs cannotaddress potentially severe issues such as high electricity losses a lack o transmission inrastructuresitting difculties ossil uel and electricity subsidies among others. In order to achieve renewableenergy scale-up it is oten necessary to combine appropriate FiT design with a suite o targeted policy

and nancial derisking instruments in order to remove all key market barriers.

Policy-driven projects can take a long time and may need to be developed incrementally. The pre-existingenergy market and technical regulations ound in developing countries were ormulated to accommodateossil-uel power generating technologies. A transition to the new market structures and technical modalitiesallowing or independent renewable power production is a signicant undertaking and may require acountry to manage several signicant paradigm shits simultaneously. This means that FiTs and related priceand market-access instruments may need to be continually and iteratively adjusted. As such it is important

to realize that policy development supported by UNDP and nanced by GEF and other internationalorganizations may necessarily represent steps along the way rather than ully nished products.

The experience

in Kazakhstan

illustrates theimportance o

derisking wind

power investment

and o phasing out

ossil uel price

subsidies to

minimize the price

premium required

to make renewable

energy attractive.

A FiT does not

guarantee renewable

energy scale-up.

FiTs can only deal

with a subset o the

challenges acingenergy sector market

transormation.


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Executive Summary

Experience with UNDP-GEF eorts has also shown that renewable energy market transormation projectscan generate multiple development wins: boosting economic growth strengthening market institutionsreducing poverty creating new jobs improving local environment and heath conditions and mitigatingglobal environmental risks. For example public measures supporting a FiT regime can oten act as achange catalyst or better governance. An ancillary benet o a policy derisking approach is that it canbe instrumental in prying open an oten closed energy market and enabling a public discussion obarriers as well as the solutions to remove these barriers.

However eorts to scale-up renewable energy do not automatically produce multiple gains. Designingeective public measures to address all the key barriers to renewable energy and to optimize broader

development benets requires engineering and nancial expertise deep knowledge o the local economyand physical conditions and a good understanding o successul international practices. No instrumentor policy portolio is inherently superior to another. Each public intervention will need to be regulatoryreviewed to take into account evolving market conditions. A key nding o this report is that developingcapacity in these areas and enabling a public discussion on barriers is a pre-condition or both a sustainabletransormation o renewable energy markets and the achievement o broader development benets.

CONCLUSIONSAn overall conclusion rom the review o the UNDP-GEF portolio o FiT-based renewable energy market

transormation projects is that investing in policy derisking instruments oten in tandem with nancialderisking instruments appears to be cost-eective when measured against paying higher nancial

incentives to compensate investors or above-average risks . Rather than using scarce public undsto pay higher electricity taris it can be advantageous to rst reduce and manage the risks associatedwith underlying institutional technological and inancial barriers and thereby sustainably change theundamental risk-reward trade-o o renewable energy projects in a given country.

A corollary to this overall conclusion is that or any particular developing country there is nopre-set additional cost associated with new renewable energy capacity relative to the cost that would beassociated with conventional ossil uel energy. The need to provide incentive payments as well as therequired amount o these payments can vary rom location to location depending on the geographyrenewable resource endowment country inrastructure existing energy mix present and uture marketsizes selected technology options and energy market structure.

The incremental cost o renewable energy will be deeply inluenced by the policy and businessenvironment and the ability o policymakers to address renewable energy barriers and generatedevelopment co-benets. As a result decisions on public interventions can ultimately lead to signicant

dierences in the cost o a rapid transition to more sustainable energy sources and the distribution othis cost among stakeholders.

In order to better understand and more accurately communicate the impact o public instruments newways to quantiy derisking interventions should be explored. To this end a companion publication to this

study titled Derisking Clean Energy Investment builds on the lessons learned in this report and lays outa methodology or assessing the impact o derisking instruments based on a bottom-up quantitativeapproach. This type o approach can contribute to more inormed decision making and can thereore helpto mitigate the risk o under or over-investment in a given set o public instruments.

Rather than

using scarce

public undsto pay higher

electricity

taris it can be

advantageous

to rst reduce

and manage

investment risks.


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Introduction

The need to rapidly transition to more sustainable energy sources is clear. The prices o ossil uels areprojected to rise (IEA 2011b) the need to provide electricity to the 1.5 billion people that currently lack itwill require signicant new energy resources (Legros et al. 2009) and there is a narrow 7-10 year windowremaining during which the energy sector must be decarbonized in order to avoid catastrophic climatechange scenarios (Glemarec 2011).3

The move to a low-carbon energy system will require a massive and worldwide scale-up in nancing.National budgets are limited however and public unds will need to be deployed catalytically in order tochannel much larger private nancial ows into sustainable energy investments. A key challenge is howto optimize the mix o public measures in any given country. There are hundreds o sustainable energy

public instruments as well as a wide range o international resources that can be deployed in dierentcombinations. A major question or policymakers is how these instruments can be combined and sequencedto optimally derisk and incentivize the investment environment without placing an inequitable share o thecost burden on tax payers or rate payers.

UNDP has supported a portolio o renewable energy deployment projects inanced by GEF

internationally or 20 years and has a wealth o experience relating to how dierent instruments have beenused in tandem. This paper reviews the UNDP-GEF project portolio in order to explore how nationalpolicies and international support have been combined in dierent countries. The ndings o this reviewwill be used to inorm subsequent quantitative eorts that examine the question o policy optimizationin greater depth.

Since 1992 UNDP-GEF has implemented over 230 sustainable energy projects in close to 100 developingcountries. O these projects over 100 projects in 80 countries have ocused specically on renewableenergy(Figure 3). These renewable energy projects have deployed approximately $293 million in GEFunds and $1.48 billion in associated co-nancing rom national governments international organizationsthe private sector and NGOs.

A 20-year track record o UNDP-GEF sustainable energy projects and long-standing relationships withpartner countries have created a unique base o institutional knowledge regarding the energy challenge indeveloping countries. In an eort to share lessons learned rom its sustainable energy projects and identiybest practices UNDP and the GEF have published a series o reports that ocus on its project portolio.These have included reports ocusing on the creation o sustainable district heating systems (Legro &

Ballard-Tremeer 2005) energy eiciency deployment in buildings (Schwarz 2009) and strategies topromote wind power (Schwarz 2008) among others.

UNDP-GEF has also drawn on its experiences to engage in broader discussions on how sustainable energycan be scaled-up globally. It is clear that public sector resources will need to be utilized to leverage

private sector capital to inance sustainable energy at scale. UNDP has convened a series o discussionsbetween international organizations and commercial nancial institutions such as Deutsche Bank in order

Introduction

3 To achieve decarbonization the 2007 UNDP Human Development Report recommends that developed countries cut GHG emissions by atleast 80 percent by 2050 with 2030 percent cuts by 2020. For major emitters among developing countries it recommends aiming or anemission trajectory that would peak in 2020 with 20 percent cuts by 2050.

Public unds

will need to

be deployed

catalytically in orderto channel much

larger private

nancial ows into

sustainable energy

investments.


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Introduction

to explore how public and private nancing can most eectively be deployed in parallel. One key outcomeo this collaboration has been the GET FiT Plus study5 which outlines approaches to using internationalresources to support renewable energy on a sector-wide rather than on a project-by-project basis. GETFiT Plus presents an overview o policy derisking instruments - or example policy design and institutional

strengthening - and analyzes the strengths and limitations o inancial derisking instruments such asguarantees risk insurance and concessional loans (DB Climate Change Advisors & UNDP 2011).

Figure 3: Countries with UNDPGEF renewable energy projects 199220124

Source: UNDP/GEF

4 Not pictured: Antigua and Barbuda the Bahamas Barbados Belize British Virgin Islands Cuba Dominica Grenada Guyana Jamaica St Kittsand Nevis St Lucia St Vincent and the Grenadines Suriname Trinidad and Tobago and Turks and Caicos. Cook Islands Fiji Kiribati LesothoMaldives Marshall Islands Mauritius Nauru Palau Samoa S eychelles Solomon Islands and Timor-Leste Tonga Tuvalu and Vanuatu

5 GET FiT- the Global Energy Transer Feed-in Taris programme - is designed to support both renewable energy scale-up and energy accessin the developing world through the creation o new international public-private partnerships (DB Climate Change Advisors 2010). The GETFIT concept was initially developed in response to a request rom the United Nations Secretary Generals Advisory Group on Energy andClimate Change. A subsequent study GET FIT Plus expanded on the GET FIT concept by integrating eedback and input rom a broad rangeo international organizations and development agencies.


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Introduction

These studies revealed that international approaches to renewable energy scale-up are becoming moresophisticated and innovative. They also revealed however that there is more work to be done in orderto optimize the use o public sector unds to support renewable energy in developing countries. This reportis part o a series that examines how public instruments can be selected and combined to promote large-scale investment. The goal o this report is to highlight lessons learned rom UNDP supported globalportolio o GEF inanced projects to demonstrate how international resources can be used to supportnational policy rameworks. A companion publication Derisking Clean Energy Investment presents an

innovative UNDP inancial modeling tool to assist policymakers in appraising dierent public instrumentsto promote clean energy.

This report is structured as ollows:

Section 1 contains a high-level description o UNDP-GEFs approach to assisting developing countries tocreate enabling environments or renewable energy investment;

Section 2 provides an overview o UNDP-GEF work assisting the development o national renewableenergy policies such as FiTs;

Section 3 presents case studies o projects in Uruguay Mauritius and Kazakhstan;

Section 4 describes the key ndings o the review o UNDP-GEF project portolio and case studies.


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Introduction


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1.1 UNDP Four-Step Methodology 1.2 Barriers Risks and Public Instruments

1.2.1 Barriers as the Roo Causes o Risk

1.2.2 A Barrier and Risk Framework or Renewable Energy

1.2.3 Policy and Financial Approaches to Derisking

Creating Enabling Environments or Renewable EnergySection 1


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Transorming On-Grid Renewable Energy Markets 19

1In 2011 close to $90 billion was invested in renewable energy in developing countries or approximately35 percent o the $257 billion invested globally in the renewable energy sector (Frankurt School-UNEP &BNEF 2012). Although signicant this level o investment will not be sufcient to achieve the large-scaleenergy transition that the United Nations Framework Convention on Climate Change (UNFCCC) (and other

organizations) have concluded will be necessary to achieve climate stabilization. UN DESA or example hasestimated that it would cost up to $250$270 billion per year to shit developing countries to 20 percentrenewable energy by 2025 (DeMartino & Le Blanc 2010). According to the Global Energy Assessment

(IIASA 2012) global investment in energy efciency and low carbon energy generation will need to increaseto between $1.7$2.2 trillion per year compared to present levels o about $1.3 trillion over the comingdecades to meet the combined challenges o energy access energy security and climate change.

In addition to increasing investment volumes there is also a need to support investment in a broader rangeo countries. The $90 billion invested in 2011 or example was heavily concentrated in major marketssuch as China and India. Figure 4 compares investments in China India and Arica and the Middle East.Each area is home to more than a billion people but investment in China has in recent years signicantlyoutpaced the other two. Also while investment in India rose sharply in 2011 investments in Arica and theMiddle East actually trended downward. In order to sustain and accelerate renewable market growth across

all emerging economies signicant public nancial resources rom both national and international actorswill be required.

Creating Enabling Environments

or Renewable Energy

Section 1: Creating Enabling Environments or Renewable Energy

6 This gure includes hydropower rom 1 MW to 50 MW in size.

Source: Frankfurt School-UNEP & BNEF, 2012.

In additionto increasing

investment

volumes there

is also a need

to support

investment in

a broader range

o countries.

USD

BILLIONS

0

10

20

30

40

50

60 China

India

Middle East

and Africa

20112010200920082007200620052004

Figure 4: Investments in renewable energy in China, India, and Arica and the Middle East $ billions6


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National and international support or renewable energy in developing countries has increased steadilyover recent years. The amount o nance provided by multilateral and national development banks orrenewable energy or example increased rom $4 billion to $17 billion between 2007 and 2011. Theseamounts however are a small proportion o what is currently invested and what will be required in theuture. The key question or policymakers is how limited public resources can most eectively be deployed inorder to leverage the maximum amount o private sector investment.

Many renewable energy and energy efciency projects can generate attractive returns but typically requiresubstantial upront investment to do so. The shit rom ossil uel-based energy technologies to renewableenergy technologies invariably involves higher upront capital costs oset by lower uel and operating

costs. The initial capital costs usually account or over 75 percent o the total costs o a renewable energyinvestment. As such clean energy project developers typically need to secure large amounts o nancewell in advance o the start o operations.

Naturally many investors are wary o long-term and capital-intensive projects particularly when theyinvolve the deployment o unamiliar technologies in potentially unstable economies. When evaluating

opportunities that involve high perceived or actual risks investors typically ask or higher returns on equityor higher interest rates on debt with shorter loan tenors as compensation. As renewable energy investmentis particularly sensitive to the cost o nancing this perception o above-average risk can lead to the rejectionby investors o potentially high-perorming renewable energy projects.

Risk reduction is at the core o UNDP-GEF projects to promote renewable energy. UNDP-GEFs approach

to reducing risk involves creating an enabling environment under which elements such as the nationalpolicy ramework or energy markets inancing channels administrative procedures and domestictechnical expertise are strengthened and aligned to support renewable energy deployment. Recognizingthat all risks cannot be eliminated through public interventions risk reduction measures can becomplemented by additional inancial incentives to compensate or residual costs or risks.

Figure 5 provides a conceptual illustration o the approach. The gure illustrates a shit rom a commerciallyunattractive investment opportunity (right) to a commercially attractive one (top). This is achievedthrough two actions: rst reducing the risk o the activity or example through a regulatory policy suchas guaranteed access to the grid or independent power producers; and second increasing the return oninvestment or example by creating nancial incentives such as a premium price or renewable energy.

The methodology or creating an enabling environment is described in more detail below.


When evaluating

opportunities that

involve high

perceived or actual

risks investors

typically ask or

higher returns. thisperception

o above-average

risk can lead to the

rejection o

potentially

high-perorming

renewable energy

projects.


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Recognizing tha

all risks cannot be

eliminated throug

public interventio

risk reduction

measures can be

complemented

by additional

nancial incentive

to compensate

or residual costs

or risks.

FINANCIAL

RETURN

RISK OF INVESTMENT

Infeasible

renewable

energy project

Price premium

Feasible

renewable

energy project

Guaranteed access to the grid

Figure 5: Shiting o the riskreward prole o renewable energy projects

Source: Glemarec, 2011.


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1.1 UNDPS FOUR-STEP METHODOLOGYThe creation o an eective enabling environment or renewable energy requires deploying public

instruments that remove barriers manage risks and build momentum or sector-wide markettransormation. I not appropriately sequenced and structured such interventions can ail to achievemeaningul results. UNDP has outlined a our-step methodology or identiying and selecting an optimalinstrument mix in several recent publications (Glemarec 2011; UNDP 2011). These steps include:

Step 1. Identiy priority renewable energy technology options. The most important actor indetermining market transormation success is the alignment o proposed activities with

national resources priorities and needs. During this step policymaker objectives and prioritiesare identied and assisted by resource mapping activities in order to identiy technologiesto be targeted or support.

Step 2. Assess underlying barriers to technology diusion. An understanding o underlying barriersand risks is a prerequisite or developing sound sustainable energy strategies. When assessingunderlying barriers and risks it is important to take multiple stakeholder perspectives intoaccount. Sustainable energy market development typically involves several main groups ostakeholders: investors end-consumers policymakers utilities and the supply chain (i.e. localmanuacturers assemblers shops and maintenance technicians) (Wrlen 2011). This is discussedin greater detail in Section 1.2.1 below.

Step 3. Determine an appropriate public instrument mix. An appropriate combination o public

instruments will be needed to address the barriers identied in Step 2 (Glemarec 2011). Thiscan include cornerstone instruments such as FiTs and renewable energy quotas as well as

a broad range o complementary instruments such as streamlined permitting standardizedinterconnection research and development initiatives loan guarantees public co-investmentspolitical insurance etc. The strategy or combining and introducing these dierent measuresmust be thoughtully developed and sequenced.

Step 4. Select unding options or the public instruments. The ourth and nal step is to identiyand access appropriate international and domestic unding sources to support the selectedinstrument mix. The landscape or international climate and energy unding is highly complexand dynamic. New unding opportunities have been announced annually during the pastseveral years even as the structure and availability o existing unding streams has continued

to evolve. National governments can seek assistance rom international partners to navigatethis climate nance landscape.

Although it is standard practice that UNDP-GEF projects include elements o all o these steps ratherthan ocusing on just one o the our steps the assessment o underlying barriers and risks - andthe development o appropriate public instruments to address them - are oten at the core o theUNDP-GEF projects.


The assessment o

underlying barriers

and risks - and

the development

o appropriate

public instruments

to address

them - are oten

at the core o the

UNDP-GEF projects.


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1.2 BARRIERS, RISKS AND PUBLIC INSTRUMENTSRenewable energy investors encounter a range o dierent barriers and associated risks. In some

developing countries severe barriers and risks may prevent almost any private sector investment rombeing made. In other countries there may still be investment but with signicantly increased capitalcosts (and thereore lower returns to power producers) and a limited number o active capital providers.

This Section explores the role o barriers as the root causes o risks describes a barrier and risk rameworkor renewable energy and explains how public derisking instruments can target specic barriers and riskseither through policy and/or nancial derisking.

1.2.1 Barriers as the Root Causes o Risk

In order to accurately assess the barriers and risks to renewable energy investment it is important tohave a clear conceptual understanding o their interrelationship. As set out in Figure 6 barriers can beunderstood as the drivers or the root causes o risks. For example an independent power producerconsidering a renewable energy investment may ace barriers such as market distortions and externalitiesoverlapping institutional responsibilities limited local supply o skills lack o technical standardslimitations in a utilitys credit quality or domestic political instability among others.

Conceptually the existence o these barriers raises the probability that negative events aecting therenewable energy activities may occur such as disruptions to construction or operations. I a negative

event does occur this translates to a nancial impact or the independent power producer such as highercapital costs and/or a loss o revenues. Risk can thereore be dened as the product o the probability o

a negative event occurring and the potential nancial impacts o such a negative event should it occur.For example lack o clear responsibilities o dierent agencies or renewable energy project licensing(the barrier) can lead to long delays in construction and commissioning (the negative event) whichin turn results in higher transaction costs and delayed revenues (the nancial impact).


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Given the critical role o accurately identiying barriers it is important that barrier assessments becomprehensive. As touched on earlier renewable energy activities typically involve ve commonstakeholder groups: investors end-consumers policymakers utilities and the supply chain. Each o thesestakeholder groups can encounter a number o barriers that prevent them rom using or supporting therenewable energy technology. Similarly each renewable energy barrier can touch on several stakeholdergroups. In short this means that addressing the barriers related to one stakeholder group cannot alonetransorm a market. Likewise the support o a single stakeholder group is a necessary but not sufcient

condition or scaling-up a given technology.

Mobilizing private sector investment is at the heart o scaling-up renewable energy thereore barrier

assessments are typically perormed rom the viewpoint o investors and project developers. In order toavoid limiting the barrier assessment it is important that the our other key stakeholder groups are alsotaken into consideration. For example only addressing the barriers which aect investors will have littleimpact in the absence o strong consumer demand local technology skills and a supportive regulatoryenvironment. Taking multiple stakeholders into account opens the door to assessing the ull spectrumo underlying barriers.


Figure 6: Conceptual drivers o risk or renewable energy investment

Conceptual ramework or risks Practical example: licensing risk

Drivers o risk Drivers o risk

Existence obarriers ininvestmentenvironment

Barrier: Lacko clearresponsibilityo dierentagencies orrenewableenergyapprovals

Result inincreasedprobability onegative eventsaectingrenewableenergy plant

Probability

o negative

event:

Uncertaintyand delaysdue to poorlyadministeredlicensing

Negativeevents resultin fnancialimpact orinvestors

Financial

impact:

Transactioncosts; delayedrevenues;under- or noinvestment

Components o risk Components o risk

Source: Waissbein et al., 2012.

Renewable energy

activities typically

involve ve

common stakeholder

groups: investors

end-consumers

policymakers

utilities and the

supply chain.


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Table 1: Five key stakeholder groups or a renewable energy barrier assessment

STAKEHOLDER GROUP DESCRIPTION/EXAMPLE BARRIERS

Project developers and investors Project developers and investors (equity and debt) in renewable energy mayencounter barriers such as a lack o track record on the perormance o renewableenergy technologies uncertainties on the outlook or the local energy market anduncertainties related to political instability

Consumers/endusers Consumers encounter a range o barriers associated with the consumption orenewable energy including a lack o awareness about renewable energy and thepotential or alternatives uncertainties that come rom black-outs or brown-outsor mismanaged grids or a lack o unds to aord cleaner energy technologies

Policymakers This may include individuals charged with creating the rules and regulations thatgovern the energy industry such as legislators and regulators. Policymakers mayencounter barriers such as a lack o political or institutional incentives to supportrenewable energy limited knowledge about the range o potential policies andtheir tradeos and the prospect o prohibitively high policy costs

Utilities Utilities include the entities that generate transmit and/or distribute electricity.Utilities may encounter barriers such as a lack o experience in planning andmanaging intermittent renewable energy generation a lack o knowledge aboutrenewable energy technologies and their track record and economic conicts ointerest (depending on the ownership model)

Supply chain This includes companies that manuacture distribute install and maintain renewableenergy technologies. Supply chain stakeholders may encounter barriers such asa lack o expertise in sustainable energy technologies the availability o moreprotable business opportunities in which to invest and a lack o demand orrenewable energy equipment

1.2.2 A Barrier and Risk Framework or Renewable Energy

Once identied underlying barriers can be analyzed and mapped against a set o risk categories.UNDP-GEF has developed such a barrier and risk ramework or on-grid renewable energy investmentwhich draws rom multi-stakeholder barrier assessments that it has perormed in the eld. Table 2 belowsummarizes this ramework dening 21 underlying barriers stakeholder groups typically aected bythese barriers and a set o 9 resulting risk categories.

The nine risk categories or on-grid renewable energy are: energy market risk institutional risk socialacceptance risk resource and technology risk connectivity risk counterparty risk nancial sector risk

political risk and macroeconomic risk. These risk categories can provide a helpul ramework or decisionmakers in renewable energy. As set out earlier in Figure 6 in Section 1.2.1 risk is conceptually a richer

measure than an underlying barrier as risk not only captures the probability o a negative event occurring(driven by the underlying barrier) but also the nancial impact o that negative event should it occur.In addition risk categories typically embody the eects o several related underlying barriers.

Further inormation on how to conduct a barrier-to-risk mapping exercise can be ound in Derisking CleanEnergy Investment (Waissbein et al. 2012). This companion publication also describes how barrier and riskrameworks can subsequently be used to perorm systematic analyses o the relationship between barriersrisk public instruments and clean energy investment.



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Table 2: A barrier and risk ramework or ongrid renewable energy investment


BARRIERS

PRIMARYVIEWPOINT

MULTI-STAKEHOLDER VIEWPOINTAGGREGATE

BARRIERSRISK

CATEGORYRISK

DEFINITIONIPP/INVESTORS

PUBLIC/END USER

POLICY-MAKERS

UTILITY/GRID

SUPPLYCHAIN

Market outlook: lack o oruncertainty regardinggovernmental renewableenergy strategy and targets

1. Energymarket risk

Risk arising romlimitations anduncertainties in the

energy market and/orsuboptimal regulationsto address theselimitations and promoterenewable energymarkets

Market access and prices:

limitations related to energy marketliberalization; uncertainty related topriority dispatch the competitivelandscape and price outlook; lack owell-designed regulations processesand standard contracts (e.g. PPAs)

Market distortions and externalities:high ossil uel subsidies

Overlapping/lack o clearunctional responsibility o dierentauthorities or renewable energyproject approvals

2. Institutional

risk

Risk arising rom thepublic sectors inabilityto efciently andtransparently administerrenewable energy-related regulations orexample in licensing.

High levels o corruption;No clear recourse mechanisms.

Lack o awareness on renewableenergy amongst end users localresidents and policy makers

3. Social

acceptancerisk

Risks arising romlack o awareness andresistence to renewableenergy in communitiesand end-users

Social and political resistancerelated to renewable energy NIMBYconcerns special interest groups

For resource assessment and supply:inaccuracies in early-stage assessmento renewable energy resource;where applicable (e.g. bioenergy)uncertainties related to uture supplyand cost o resource

4. Resource andTechnologyRisk

Risks arising rom useo the renewableenergy resource andtechnology (resourceassessment; constructioand operational use;hardware purchaseand manuacturing)

For planning, construction, operationsand maintenance: uncertaintiesrelated to securing land; suboptimalplant design; lack o local rmsoering construction maintenanceservices; lack o skilled andexperienced local sta; limitationsin civic inrastructure (roads etc.)

For the purchase and, i applicable,local manuacture o hardware:purchaser's lack o inormationon quality reliability and cost ohardware; lack o local industrialpresence and experience withhardware including skilled andexperienced local workorce

Source: Waissbein et al., 2012. LEGEND: High Eect Medium Eect Low Eect


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BARRIERS

PRIMARYVIEWPOINT

MULTI-STAKEHOLDER VIEWPOINTAGGREGATE

BARRIERSRISK

CATEGORYRISK

DEFINITIONIPP/INVESTORS

PUBLIC/END USER

POLICY-MAKERS

UTILITY/GRID

SUPPLYCHAIN

Lack o standards or theintegration o intermittentde-centralized renewableenergy sources into the grid

5. Connectivityrisk

Risks arising rom

limitations in gridinrastructure andtransmissions in theparticular country.

Limited experience o utility/grid

operator with intermittent sourcese.g. grid stability grid management

Lack o readily available transmissionlines rom the renewable energysource to load centers; reliance ondistribution company/governmentor timely completion and O&M orequired transmission inrastructure

Limitations in utility,s credit qualityand payment track record. Limitationsin the utilitys operational trackrecord or outlook management orcorporate governance

6. Counterparty

(PPA payment)risk

Risks arising rom theutilitys poor creditquality and an IPPsreliance on payments

Capital scarcity: Limited generalavailability o local or international

capital (equity and/or debt) in theparticular country

7. Financialsector risk

Risks arising rom animmature local nanciasector or renewableenergy and romgeneral scarcity oinvestor capital (debtand equity) in theparticular country

Immaturity o local nancialsector: Lack o inormationassessment skills and track recordor renewable energy projectsamongst investor community;lack o network eects (investorsinvestment opportunities) oundin established markets

Uncertainty or impediments dueto war terrorism and/or civildisturbance

8. Politicalrisk

Risks arising romcountry-specicgovernance andlegal characteristics

Uncertainty due to high politicalinstability; poor governance; poor

rule o law and institutions

Uncertainty or impediments dueto government policy (currencyrestrictions corporate taxes)

Uncertainty due to volatile localcurrency; unavorable currencyexchange rate movements

9. Macro-

economicrisk

Risks arising rom thecountrys macroeconomperormance

Uncertainty around inationinterest rate outlook due toan unstable macroeconomicenvironment

Source: Waissbein et al., 2012. LEGEND: High Eect Medium Eect Low Eect


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1.2.3 Policy and Financial Approaches to Derisking

Once a multi-stakeholder barrier assessment has been conducted national policymakers and theirinternational partners can utilize a range o dierent mechanisms to address these underlying barriersand risks. This will typically involve identiying a central cornerstone instrument such as a FiT aroundwhich a range o complementary derisking instruments can be deployed. Broadly these risk reduction

instruments can be grouped into policy and nancial derisking measures

Policy derisking instruments address and attempt to remove the underlying barriers that are the rootcauses o risks. As the name implies these mechanisms utilize policy and programmatic interventions

to mitigate risk. Policy derisking instruments include or example support or policy design institutionalstrengthening technical grid integration studies capacity building or policy makers investors utilitiesand assemblers and inormation campaigns among others. The goal o policy derisking is to ensure thateach instrument is customized to address specic renewable energy investment barriers. As mentionedearlier unclear and overlapping institutional responsibilities related to renewable energy permitting canincrease transaction costs delay revenues and discourage investment. Rather than paying high taris tosupport project development under such conditions a policy derisking approach might involve workingwith governments to reduce cost and risk to developers by: streamlining the permitting and licensingprocess clariying and standardizing institutional responsibilities reducing the number o process steps

and providing capacity building to programme administrators.

Financial derisking instruments do not seek to directly address the underlying barrier but insteadunction by transerring the risks that investors ace to public actors such as development banks.

These instruments can include guarantees hedging instruments political risk insurance and publicco-investments. Dierent nancial derisking instruments can be employed but the instruments availablemay be limited depending on the specic risks that need to be addressed the countries and donororganizations involved and the magnitude o the risks. In addition to transerring risks nancial deriskinginstruments can also indirectly address certain underlying barriers through learning-by-doing andtrack-record eects. A ull discussion o nancial derisking mechanisms is beyond the scope o this reportbut several recent research eorts including UNDP and Deutsche Banks GET FiT Plus publication haveattempted to catalogue and compare dierent mechanisms (DB Climate Change Advisors & UNDP 2011;Global Climate Network 2010; Mostert et al. 2010).

Figure 7 illustrates conceptually how policy and nancial derisking instruments address risk in a dierentmanner. Policy derisking instruments directly address the risk driver (or root cause) by reducing the

existence o the barrier and hence the barriers likelihood o inducing negative events. Financial deriskinginstruments directly address the second component o risk the nancial impact by transerring some or

all o any nancial impact should it occur to the public sector or other public/private structures.

Policy derisking

instruments attempt

to remove theunderlying barriers

that are the root

causes o risks...

...while nancial

derisking instrumentsseek to transer the

risks that investors

ace to public

actors.


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Policy derisking instruments will oten need to be used in tandem with nancial derisking instrumentswhich can be applied to transer some risks that policy-based instruments cannot initially resolve. Forexample policy derisking instruments may address many o the underlying barriers in a given countrybut may not be undamentally able to address concerns associated with political instability. As a resultnancial derisking instruments such as loan guarantees and political risk insurance may be necessary in

order to enable the deployment o private capital. Both classes o derisking instruments thereore have akey role to play in promoting renewable energy in developing countries. Careul consideration must givento their sequencing. In some cases a rst set o policy reorms might be required or nancial deriskinginstruments to eectively transer risks and attract investment. Similarly the availability o risk transer

instruments might be a prerequisite to urther deepen policy change.


Figure 7: Primary impacts o policy and nancial derisking instruments on risk

Source: Waissbein et al., 2012.

Policy derisking instruments

act to reduce barriersFinancial derisking

instruments act to transer

risk (impact) to another actor

Drivers o risk

Existence obarriers ininvestmentenvironment

Result inincreased

probability onegative eventsaectingrenewableenergy plant

Negative

events resultin fnancialimpact orinvestors

Components o risk


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2.1 Renewable Energy Policy Trends 2.2 UNDP-GEF Portolio Survey Methodology 2.3 UNDP-GEF Renewable Energy Projects Overview

Supporting Renewable Energy: Feedin Taris and Related Price and MarketAccess InstrumentsSection 2


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Transorming On-Grid Renewable Energy Markets 31

2This section reviews UNDP-GEFs experience assisting countries in deploying public instruments to createenabling environments or renewable energy.

2.1 RENEWABLE ENERGY POLICY TRENDSThe pace o renewable energy policy development has accelerated dramatically in developing countriesduring recent years. According to REN21 or example the total number o countries with renewable energytargets has increased rom 45 in 2005 to 118 in 2012. The large majority o these targets (86) have beenset by developing country governments during the past ve years in order to achieve a broad range odierent national goals such as: meeting projected generation capacity shortalls moving away romoil as an energy source attracting private and oreign investment into the power sector establishingnew industries to capture economic development opportunities managing the risk o energy supply

disruptions (or example drought in countries that depend heavily on hydropower) and responding

to national and international carbon reduction goals (REN21 2012).

In order to achieve these objectives policymakers in developing countries have been exploring a broad

spectrum o public instruments. A wide diversity o public instruments exists and UNDP-GEF has compileda catalogue o 150 distinct measures in its Catalysing Climate Finance report (Glemarec 2012). O thesehowever there are three cornerstone instruments that have driven the commercial roll-out o renewableenergy globally: eed-in taris tenders and quotas/renewable portolio standards.

These cornerstone instruments providing renewable energy generators with a long-term price or powerand allowing them guaranteed access to the electricity grid have rapidly diused internationally. Suchpublic instruments are oten reerred to as eed-in taris because they enable generators to eed their powerinto the electricity system whereas previously they may have been prevented rom doing so by utilities andgrid operators.

This report does not utilize a more detailed denition o FiTs because the diversity o instrument designsaround the world makes precision difcult7. Annex A contains a discussion o FiT denitions and a tablethat contrasts the designs o several instruments that UNDP-GEF projects have supported.

Supporting Renewable Energy:

Feed-in Taris and RelatedPrice and Market-AccessInstruments

Section 2: Supporting Renewable Energy: Feed-in Taris and Related Price and Market-Access Instruments

7 This study ocuses on FiTs in order to have a common point o comparison but reers requently to FiTs and related price and market-accessinstruments in acknowledgment o the act that there are ew clear dividing lines between FiTs and other instruments such as quotas/renewable portolio standards and tenders that mark where FiTs begin and other instruments end. Ultimately the goal o thisreportis not to highlight the strengths and weaknesses o dierent policy types but rather to show how public derisking activities have beenstructured in response to requests or assistance with national renewable energy policy and market development.

Three cornersto

instruments have

driven the comme

roll-out o renewa

energy globally:

eed-in taris tend

and quotas/renew

portolio standard


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FiT diusion similar to the spread o renewable energy targets has been most rapid among developingcountries during recent years. As o early 2012 there are over 66 countries with FiTs in the world. Themajority o these are developing countries and the number o developing countries with FiTs inplace continues to expand. In early 2012 or example Indonesia introduced new FiTs or biomass andwaste-to-energy plants8 while Rwanda introduced FiTs or small hydropower.9 As can be seen in Figure 8below the spread o FiTs in developing countries is a relatively new phenomenon that has occurred duringthe past decade. Prior to 2004 the majority o global FiT development was concentrated within developed

countries and specically within the European Union. Since 2004 however the number o developingcountries with FiTs has quadrupled rom 10 to 40. While this trend has created signicant opportunitiesor best practice exchange between developing countries it has also increased demand or public

derisking instruments to support FiT rameworks.

To date there have been numerous studies o FiTs in Europe but there have been ew studies whichocus primarily on FiTs in developing countries.10 One o the goals o this Section is to review UNDP-GEFsexperience in supporting FiT-based regimes and examine the conditions under which UNDP supportand GEF nancing have provided assistance in this area. In addition to ocusing on FiT designs thisreport ocuses on the broader suite o public derisking instruments that UNDP-GEF projects havedeployed to enhance dierent countr ies enabling environments or renewable energy development.


0

10

20

30

40

50

60

70

80

Developing countries Developed countries

20122011201020092008200720062005200420032002200120001999199819971996199519941993199219911990

Figure 8: Number o developing and developed countries with FiT policies

Source: REN21, 2012; UNDP research.

8 Ministry o Energy and Mineral Resources Regulation 4/2012.9 Rwanda Utilities Regul atory Agency Regulations No001/Energy/RURA/2012 o 09/02/2012 on Rwanda Renewable Energy Feed In Tari.10 A notable exception has been the recent eed-in tari law draters guide or policymakers in developing countries which was published by

UNEP (Rickerson et al. 2012).


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UNDP support and GEF nancing have assisted clean energy projects in almost all o the developingcountries that currently have FiTs. In some cases UNDP-GEF projects have been directly involved inthe design and implementation o the FiTs and related price and market-access instruments. In othercases UNDP-GEF projects have not been directly involved in FiT development but have helped createan enabling environment through complementary derisking instruments acting in conjunction withthe FiT.

2.2 UNDP-GEF PORTFOLIO SURVEY METHODOLOGY

In order to develop this section o the report the ull project portolio o UNDP-GEFs EnergyInrastructure Technology and Transport (EITT) group was reviewed and the sustainable energyprojects that have incorporated support or FiTs and related price and market-access instruments

were identied. A geographically diverse subset o these countries was then selected or additionalanalysis in order to illustrate UNDPs experience and involvement with FiTs.

A review o relevant documents and websites or projects in ourteen countries was conducted as wereinterviews with UNDP-GEF regional technical advisers national project managers and in-country experts.

Details o each project were gathered including project size timeline objectives barriers addressedderisking instruments utilized and project outcomes. For each project independent evaluationsperormed or UNDP-GEF o whether the projects achieved their stated outcomes and outputs werereviewed. This project survey was then used to draw broad lessons learned about the barriers acedin these countries and the nature o the derisking instruments deployed under UNDP-GEF projects.

From UNDP-GEF portolio o FiT projects three countries were selected or deeper analysis in orderto compile illustrative case studies that explore lessons learned rom UNDP-GEFs FiT experience ingreater detail: Uruguay Mauritius and Kazakhstan. The policy structures o the case study countrieswere also characterized using a standard set o design categories contained in Annex A. 11

2.3 UNDP-GEF RENEWABLE ENERGY PROJECTS OVERVIEWFigure 9 shows the locations o the 15 UNDP-GEF projects across 14 countries surveyed in this study andprovides a high-level summary o how the projects supported national policy development. Details on theFiT design used in each o these projects can be ound in Annex B. As can be seen in the gure the projectsare geographically widely distributed and include both large economies such as China and Brazil and

smaller economies such as Montenegro and Mauritius. For the projects analyzed UNDP-GEF deployed$54 million o GEF resources or policy and nancial derisking support which was accompanied by an


11 Design categories were based on categories utilized in UNEPs law draters guide (Rickerson et al. 2012).


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additional $370 million in co-nancing - representing a project co-nancing leverage ratio or internationalclimate nance o seven to one12. The activities undertaken within each project vary widely and the casestudies in Section 3 describe in greater detail the dierent ways that GEF resources have been deployed.Several broad observations can however be made about the project portolio:

Barriers and risks. The particular set o barriers and risks identied in each country were unique buta lack o stakeholder technical capacity and insufcient inormation were common to almost all o theUNDP-GEF projects. Inormation and capacity barriers or example had introduced risks related to energymarket policy and regulation in many o the countries in the study. Some countries had not developed arenewable energy policy ramework because there was a lack o domestic expertise in renewable energy

policy design. Other countries had passed legislation to create a broad policy ramework but had notestablished the associated by-laws or payment levels needed to enable the policy to unction. Eveni FiTs and related price and market-access instruments were on the books so to speak they did notnecessarily work. The potential disconnect between what has been established as ofcial policy anddomestic capability to enorce the policy can be a critical regulatory risk that is oten overlooked bybroad surveys o renewable energy measures.

FiTs as cornerstone instruments. The common aspect across each o the UNDP-GEF projects wasthe central role o FiTs or related price and market-access instruments as the cornerstone renewableenergy instrument. The degree type and evolution o UNDP-GEF support however varied rom projectto project. In some projects such as in Tajikistan Tunisia and Mauritius the drating o FiT regulationsand by-laws in partnership with the Government was acknowledged as a central ocus o the project.

In other projects such as in Kazakhstan and in Malaysia the ocus on the FiT emerged during the courseo the project in response to evolving national priorities but was not emphasized in initial project

design. The activities in support o the FiTs included comparative surveys o international policiesdeveloping quantitative nancial

Documents

Transforming On-Grid Renewable Energy Markets