EFFECTIVE REGULATORY REGIMES AS A REQUIREMENT FOR RENEWABLE ENERGY DEVELOPMENT. Zambia Lusaka August 7 to

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1 EFFECTIVE REGULATORY REGIMES AS A REQUIREMENT FOR RENEWABLE ENERGY DEVELOPMENT Zambia Lusaka August 7 to

2 1 Introduction Contents 2 Design Issues for Regulatory Support Mechanisms 3 Renewable Energy Promotion Policies; Price Setting and Quantity Forcing, and Cost Reduction Policies 4 Public Investments and Market Facilitation; Public Benefit Funds, Infrastructure Policies, Government Procurement 5 Power Sector Restructuring Policies; Removal of Price Regulation on Generation Self Generation by End Users, Privatization or Commercialization of Utilities Unbundling Generation, Transmission and Distribution, Competitive Retail Power Markets 6 Barriers to Renewable Energy Costs and Pricing; Legal and Regulatory; Market Issues 2

3 Objectives; Introduction Harmonized frameworks in COMESA member states, Facilitate regulatory regimes to ensure that private investors are fairly attracted to invest in the COMESA region, Effectiveness as the potential of the regulatory regime to: overcome barriers for renewable energy sources; promote sustainable development; and, lead to political action beyond the projects in the host country. 3

4 Introduction cont There is a wide range of policies that have been developed throughout the world to promote renewable energy (RE) why special policy for energy? How does the idea of energy policy evolve? The Genesis of energy policy: For most of the past century, however, energy resources seemed to be infinite, for all practical purposes; Little concern was expressed about the danger of exhausting the world's supplies of coal, oil, and, its major energy resources; (a book by the Club Rome limits to growth 1972?) Turning point oil embargo of the 1970s; This oil embargo forced major oil users for the first time the danger of having insufficient petroleum products to meet their basic energy needs; Strong marriage between civilization and traditional sources of energy; biomass gas, coal, Other economic policies not broad enough to contain especially issues associated with energy, 4

5 Policy concerns; Introduction cont What is the extent of energy self-sufficiency for the nation Where future energy sources will derive How future energy will be planned and consumed (e.g. among sectors), What fraction of the population will be able to endure energy poverty What are the goals for future energy intensity, ratio of energy consumed to GDP What is the standard for distribution reliability What environmental externalities are acceptable and are forecast, What stable and clean energy sources to pursue as a foundation to sustainable development, What form of "portable energy" is relevant and feasible in a given economy How will energy efficient hardware be encouraged How can the national policy drive; province, state and municipal functions What specific mechanisms (strategy) (e.g. taxes, incentives, manufacturing standards) are in place to implement the total policy How can energy supply Industries can move out of monopoly and be competitive? Power sector reform? Derived from policy reform? How this has translated in to action? USA LATIN AMEICA, Europe, Asian countries, African countries 5

6 Introduction cont Though we have mature policies which are tested, more experience with RE energy policies is still emerging, More experience is needed to understand the impact of some of the policies and approaches, Some policies are still in progressive development This guidelines focuses on the policies that have had a higher degree of success in other parts of the world and could be practically adopted within the COMESA region 6

7 Introduction cont The guidelines raise the main issues: that have to be considered when designing an effective regulatory regime; and that will lead to the development of renewable energy facilities, 7

8 II. Design Issues for Regulatory Support Mechanisms Many renewable energy technologies are relatively new, and still developing though some have reached to maturity; Although costs of some technologies (especially wind & solar) have fallen dramatically, they still need financial support to compete with the established, conventional generation technologies; These problems are exacerbated by the fact that there is not a level playing field in the treatment of conventional and renewable energy technologies; This inequality notably includes the failure to take account of the costs of risks (higher oil prices and drought-related hydropower crises) associated with conventional generating technologies when costing generation; PORTUGAL Conventional generators benefit from the failure to take these risks into account; Is it policy failure? 8

9 Design Issues for Regulatory.. cont KEY REGULATORY RISKS FACED BY INVESTORS RISKS 1. Weak, inadequate and not independent regulatory frameworks : Mitigation measures; a) Legislation prevents arbitrary dismissal of regulators; b) Regulators are appointed on the basis of professional competence and integrity; c) The Parliament or for example the Council of Ministers is somehow involved in the appointment procedure; d) During mandate, the regulators enjoy functional independence; e) The regulatory authority is entitled to adopt their own personnel policy, management rules, ensuring competitive salaries; f) The regulatory authority also enjoys budgetary independence from government budget to hire personnel of high professional skills and access to information and expertise; g) Rules prevents a regulator from having (no) actual or potential personal interests in the regulated industry or in politics 9

10 RISKS Design Issues for Regulatory Support cont 2. Right of government to override regulatory decisions Mitigation measures; a. Regulators are expected to be an arm of Government policy, which inevitably brings them into the political arena; but its role is to regulate the industry, taking into consideration government policy; c. Strong framework to avoid government overriding regulators economic regulation decisions, and to maintain independent economic decision concerning the industry; and how this may be addressed? d. Boost the confidence of the private sector on the ability of the economic regulator to make decisions based on their mandates and regulatory methodologies particularly of tariffs and pricing. 10

11 RISKS Design Issues for Regulatory Support cont 3. Lack of clarity about power of the Regulator Mitigation measures a. The responsibilities of the Regulator must be clearly stated in the Law Establishing the Regulator; b. The supporting Regulations by Government, if provided for, must elaborate on powers that are clear and not ambiguous in the founding Legislation; and c. Stable (predictable) legal framework not subject to frequent changes. Cost of capital?? 11

12 Design Issues for Regulatory Support cont Risks: 4. Regulator without necessary minimum skills, capacity and competence, leadership is critical Mitigation measures: a. This was a common problem in Africa because Independent Regulation was a new and local universities and other training institutions would not offer most of the critical courses for economic regulation however this is now changing; b. Regulator should provide for training and continuous education either in partnership with local and international teaching and research institutions; c. Also, the salaries of the Regulator must be comparable to the regulated entity to minimize turnover; d. If the Regulator relies on government subvention (grant), its often difficult to meet capacity requirements of the regulated entity due to budgetary constraints. 12

13 Risks Design Issues for Regulatory Support cont 5. Unpredictable and unilateral regulatory decisions undermining project and investment returns, Mitigation measures The Regulator must have a published methodology and public hearing process on all key decisions they make, This must be available in the website and should not be subject to arbitrary change and must be a product of extensive open public consultation, All tariff decisions must be based on the publish tariff making methodology. The parameters used must be open to expert scrutiny. 13

14 Design Issues for Regulatory Support cont Risks 6. Playing field tilted in favour of dominant industry player (most often a state owned enterprise) Mitigation measures The energy policy determines if the long-term objective is to open the investment to the private sector, Methods to facilitate the participation of the private sector has to be taken by the Regulator, taking a long-term view on how to introduce?interim cross subsidy (to abate the effects of commercial financing), This should be based in the long-term need to introduce new and more expensive power to provide for future energy requirements and replacement of ageing infrastructure, The existing utility must ring-fence the cost of new generation and this must be compared with private sector cost of new generation by the regulator, Also, competitive bidding could be used in choosing new generation capacity providers. 14

15 Design Issues for Regulatory Support cont The important factors for Policymakers and Regulators to take into account when evaluating different regulatory support mechanisms: Whether the mechanism is an effective means of meeting any target set for renewable energy; Whether the mechanism will encourage new renewable energy business, or whether it just encourages the installation of new RE capacity; How will the mechanism interact with other energy policy measures such as R&D programmes or investment support schemes (where such programmes/schemes exist)?; Will it be sufficiently flexible to take technological developments and cost reduction into account in the future, so avoiding the potential for developers to make windfall profits?; Will these (RE development) costs be spread fairly across business, individual consumers and government? Will it offer the potential for commercial or technical opportunities, for example,the development of a domestic manufacturing industry?; Whether it will encourage a range of renewable energy technologies, or whether it will concentrate only on one; Whether it will encourage new entry into electricity generation; Whether the scheme will be transparent for all users; and Whether it will allow exports/imports of power. 15

16 3. Renewable Energy Promotion Policies Price Setting Policies and Quantity Forcing PoliciesPrice setting policies; Feed in tariff; aim to support the market development of renewable energy technologies, specifically for electricity generation, (industry development) put a legal obligation on utilities and energy companies to purchase electricity from renewable energy producers at a favorable/predetermined/ price per unit, price is usually guaranteed over a certain time period some for about 20 years rates are usually determined for each renewable technology in order to take account of their differing generation costs, FIT rate set by a particular government for solar, wind or geothermal may vary depending on the costs associated with each of these technologies and the preferred size incentives and its objectives, guaranteed access to the grid, favorable rate per unit and the tariff term guarantee, mean that FITs make the installation of renewable energy systems a worthwhile and secure investment for the producers, manufacturers, investors and suppliers, extra cost of the favorable tariff rate is usually passed on from suppliers to consumers, and shared among all energy consumers by way of a premium on the per-kwh end user-price. 16

17 Quantity setting policy Renewable Energy Promotion cont Renewable Portfolio Standards (RPS) is a regulation that requires the increased production of energy from RE sources, such as wind, solar, biomass, and geothermal; RPS mechanism generally places an obligation on electricity suply companies to produce a specified fraction of their electricity from renewable energy sources; Certified renewable energy generators earn certificates for every unit of electricity they produce and can sell these along with their electricity to supply companies; Supply companies then pass the certificates to some form of regulatory body to demonstrate their compliance with their regulatory obligations, Because it is a market mandate, the RPS relies almost entirely on the private market for its implementation; and RPS programs tend to allow more price competition between different types of renewable energy, 17

18 Renewable Energy Promotion..cont Competitive procurement; Government (host utilities) issues a call for tenders to install a certain capacity of renewable energy based electricity, Project developers participating in the auction submit a bid with a price per unit of electricity, The government (host utilities) evaluates the offers on the basis of the price and other criteria and signs a power purchasing agreement with the successful bidder, despite some difficulties in implementation in the past, have become a popular policy tool in recent years, Auction schemes have benefited from the rapidly decreasing costs of renewable energy technologies, the increased number of project developers, their international exposure and know-how, and the considerable policy-design experience acquired over the last decade, Based on national energy plans as well as the size and maturity of the renewable energy market, the design of auction schemes will reflect each country s priorities in terms of technology, volume and loca tion, Technology specific auctions allow for the promotion of certain technologies and diversification of the portfolio, In addition to selecting the technology, auctions can be site-specific. The identification of sites with ideal resources and secured grid connection potentially reduces risks to investors, 18

19 Renewable Energy Promotion cont Cost Reduction Policies Reduce capital costs up-front (through subsidies or rebates); Reduce capital costs after purchase (via tax relief); Pros & cons? Offset costs through a stream of payments based on power production (via production of tax credits); Provide concessionary loans and other financial assistance; and, Reduce capital and installation costs through economies of bulk procurement,(market aggregation) 19

20 4. Public Investment and market facilitation o Public Benefit Funds; o per kwh levy on electric power consumption; o paying for the difference between the cost of renewable and traditional generating facilities, o reducing the cost of loans for renewable facilities, o providing energy efficiency services, o funding public education on energy efficiency issues, o providing low-income energy assistance ; and o supporting research and development. Infrastructure Policies; design standards, accelerated sitting permit, equipment standards, and contractor education and licensing Government Procurement: for a sustained and commercial development of RE; development of appropriate market infrastructure 20

21 5. Power Sector Restructuring Policies; Power Sector Restructuring Policies Has a profound effect on electric power technologies, costs, prices, institutions and regulatory framework, Restructuring trends are changing the traditional mission and mandates of electricity utilities, Affects environmental, social, and political conditions, 5.1; Removal of Price Regulation on Generation; The trend is inclined towards moving away from utility monopolies to competition; Distribution and large industrial customers consequently have more choices in obtaining wholesale power; Markets often begin with independent power producers (IPPs) frameworks; Wholesale power markets allow IPPs to by-pass the biases of traditional utilities against renewable energy; Emergence of short-term power contracts and spot markets favour generation technologies with higher variable cost and lower capital costs, like fossil fuels, rather than capital intensive but low operating cost technologies like renewable, 21

22 Public Investment and market cont 5.2; Self Generation by End Users, power producers may be end users themselves rather than just dedicated generation companies; With the advent of IPP frameworks, utility buy back schemes (including net metering), Gas has become a fuel of choice for self-producers because of the short lead times, low fuel and maintenance costs, and modular scale technology. Co-generation in traditional sugar companies 5.3; Privatization or Commercialization of Utilities, - History government ownership; - Commercialization /corporatization though not perfect; - Privatization; new sources of finance equity and debt market - Could focus more on cost reduction and less on public benefit - Independent regulation and policy environment matters most 5.4; Unbundling Generation, Transmission and Distribution, - Unbundling could encourage self generation - Open access policies (market design) that go along with unbundling also promote selfgeneration using renewable energy, - However capacity (availability charge) negatively impact RE energy solar & wind & may need policy intervention non dispatchable technology 22

23 Barriers to Renewable Energy 5.5; Competitive Retail Power Markets Competitive retail power markets have allowed the emergence of the socalled green power suppliers: usually at a premium such supply market need other policy support as well 6 Barriers to Renewable Energy Costs and Pricing Subsidies for Competing Fuels High Initial Capital Costs Difficulty of Fuel Price Risk Assessment Transaction Costs Environmental Externalities Legal and Regulatory Lack of a Legal Framework for Independent Power Producers Transmission Access Utility Interconnection Requirement 23

24 Barriers to Renewable Energy - Market Issues - Lack of Access to Credit - Technology Performance Uncertainty and Risk Perception - Lack of Technical and Commerce Skills and Information 24

25 Summery 1. Policy definition after a policy dialogue for energy sector With emphasis on RE technology; a. resource development; resource based incentive b. market development; competition for the market or competition in the market c. industry development; local content and economic linkage effect 2. Effective regulation is a proxy to competition and one of the necessary conditions for sector development; 3. Regulatory independence and competency is a requirement for effective regulation; 4. Regulation has to be effective to boost confidence of the industry & developers at large; the customers of energy services and the general public; 5. Continuous development of the industry is possible if effectively backed by the vibrant and functioning regulatory system, 6. A regulatory system must be able to grow along with the development of the industry, in theory a head of the system 25

26 THE END THANK YOU FOR YOUR ATTENTION QUSTIONS? 26