Renewable Energy Target Se0ng and Support Schemes REGIONAL ENERGY CONGRESS RENEWABLE ENERGY DAY - 24 AUGUST 2017

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1 Renewable Energy Target Se0ng and Support Schemes REGIONAL ENERGY CONGRESS RENEWABLE ENERGY DAY - 24 AUGUST 2017

2 Targets in the global renewable energy landscape 173 countries have at least one type of renewable energy target up from 43 in 2005 Source: IRENA (2015), Renewable Energy Target Se>ng. 2

3 The design of RE targets varies widely GW Fixed amount (GW, GWh) or Share of electricity demand (%) Total primary energy supply (TPES) vs. Total final energy consumpzon (TFEC) As of mid-2016, 67 countries had targets for renewable power installed capacity and/or electricity generahon. Belize: 85% electricity generahon by 2017 Costa Rica: 100% by 2030 Guatemala: 80% by 2030 and 100% by 2050 Honduras: 60% by 2022, 80% by 2038 and 100% by 2050 Nicaragua: 90% by As of mid-2016, 21 countries had targets as a share of TPES, 41 countries had targets as a share of TFEC, while 4 countries had set targets for both. Shi? to targets defined in TFEC rather than in TPES Focus on the actual energy consumphon, not primary energy inputs used. Guatemala: 80% of final energy from renewables by 2026 Panama: 18.3% of primary energy from renewables by Source: REN21, Global Status Report 2017.

4 The design of RE targets varies widely By Sector: Electricity, HeaZng, Transport While renewable electricity targets are the most widespread type, heazng/cooling and transport targets have increased significantly over the last decade. As of mid-2016, 47 countries with heazng/cooling targets, 70 countries with transport targets and 170 countries with electricity targets Source: REN21, Global Status Report Technology-neutral or Technology-specific Support specific deployment, when they are most suitable in terms of resource availability matching peak demand. Sustain the development of the local value chain of selected technologies. Support the diversificazon of the energy mix to increase energy security. 4

5 The design of RE targets varies widely Long-term or Short-term Long-term targets provide a key signal to stakeholders about the long-term opportunihes. Short- to medium-term targets (e.g., three to five years) enable more effechve implementahon and rapid learning from the policy process and can coincide with investment and electoral cycles. The periodic nature of five-year planning allows for a high level of flexibility and adjustment as the targets are reviewed and adjusted regularly. Some countries have set both. Mandatory or AspiraZonal The majority of targets today remain non-binding due to difficulty that governments face in implemenhng self-enforcement mechanisms. Legally binding targets reassure investors as they are less vulnerable to changes in the polihcal climate. They require compliance and enforcement mechanisms and an insztuzonal structure to monitor and enforce them.

6 Key functions of RE targets throughout the policy-making cycle To explore policy formulazon Develops the informazon base by gathering data Complements/validates informazon through consultazon Reveals gaps in knowledge Increases the transparency of policy making SZmulates debate, raises awareness and acceptance To guide and mozvate policy implementazon Provides clear direczon of policy to stakeholders Signals polizcal commitment MoZvates stakeholders to take aczon Anchors strategic priorizes and scenarios Fosters accountability To regulate policy evaluazon Supplies concrete milestones for evaluazon and adjustments Shows deficiencies in current operazons Provides opportunizes to take aczon to correct deviazons Exposes data needs and discrepancies

7 Key lessons for setting effective RE targets EffecHve targets are connected to high-level nahonal priorihes and backed by strong polihcal commitment Stakeholder engagement strengthens ownership and feasibility of targets Targets ideally combine a long-term vision anchored in short-term concrete milestones to maintain momentum Metrics of renewable energy targets have important implicahons for implementahon and monitoring Making targets mandatory maders Who is obligated and how also mader Striking the right balance between ambihon and realism is vital to the success of targets Targets alone are not enough. They need to be accompanied by a clear strategy and backed by specific policies and measures.

8 Types of renewable energy policies and measures 8

9 Trends in renewable energy support policies Number of countries with renewable energy policies, by type FIT RPO AUCTIONS Implemented auctions and a feed-in tariff simultaneously Used feed-in tariffs to set price cap for auctions Used auctions to set feed-in tariffs 9

10 FITs Strengths and weaknesses - Keeping pace with rapidly decreasing costs FITs PV FIT degression mechanism in Germany, the U.K. and France Limits the risks for investors also in emerging technologies Strengths Facilitates the entry of new players in the market O?en funded by consumers and not exposed to public budget cuts Long term security drives technological development Weaknesses Costly with high deployment rates and GeneraHon is not exposed to electricity market prices Tariff sehng and tariff adjustment process is challenging and complex Source: IRENA (2014), AdapIng renewable energy policies to dynamic market condiions 10

11 FIPs Strengths and weaknesses - Keeping pace with rapidly decreasing costs FIPs Fixed premiums encourage generators to react to market signals Fixed or floating premium Strengths Sliding premiums or capped fixed premiums minimise the support cost Limit risk for investors, especially premiums with floor Flexible designs and well suited for liberalised electricity markets Weaknesses Fixed premiums without floor create risk for investors Premium sehng and adjustment process is challenging and complex 11

12 Auctions Strengths and weaknesses - Keeping pace with rapidly decreasing costs AucHons 70 Number of countries that have adopted auchons Flexibility in the design according to condihons and objechves 60 Strengths Permit real price discovery Provide greater certainty regarding prices and quanhhes Enable commitments and transparency 10 Weaknesses Are associated with relahvely high transachon costs for both developer and auchoneer Risk of underbuilding and delays Based on REN21 Global Status Report (2005 to 2016) 12

13 Renewable Energy Auctions Recent highlights 13

14 RE Auctions in Latin America Panama FIRST AUCTION 158 MW Wind at ~USD /MWh SECOND AUCTION 125 MW Wind at ~USD 96.69/MWh THIRD AUCTION 90 GWh Solar at ~USD 87.25/MWh Honduras 256 MW Hydro at ~USD 99.74/MWh 16 MW Biomass at ~USD /MWh 35 MW Geo at ~USD 99.75/MWh Guatemala FIRST AUCTION 55 MW Solar at ~USD 133.9/MWh 46 MW Hydro at ~USD 104.1/MWh 16 MW Biomass at ~USD 113.5/MWh 101 MW Wind at ~USD 130/MWh SECOND AUCTION Costa Rica 5 MW Hydro at ~USD 116.9/MWh 100 MW Wind at ~USD 83.5/MWh 250 MW at ~USD 109/MWh El Salvador FIRST AUCTION 94 MW Solar at ~USD 116/MWh SECOND AUCTION 120 MW Solar at ~USD 50/MWh 50 MW Wind at ~USD 98.78/MWh 14

15 Price trends: solar PV auctions 15

16 Price trends: onshore wind auctions 16

17 Price trends: onshore wind auctions A sharp decrease in Mexico Investor confidence and learning curve Economic signals for project locahon Locational signals and offered capacity in each location: first vs. second Mexican auction Source: based on Strategy &,

18 Price trends: onshore wind auctions Fluctua4ng prices in Brazil Project lead Hmes Intensified compehhon Availability of concessional financing DepreciaHon of the local currency AucHon design 18 Source: based on ANEEL, 2016

19 Factors that impact the price 19

20 Factors that impact the price Country-speciFic conditions: Cost of finance (access to finance, ease of doing business) Cost of labor, cost of land, etc. Renewable energy resource availability Countryspecific condihons Investor confidence & learning curve Policies supporhng renewables Price resulhng from an auchon AucHon design Solar prices in France and Germany: actual results vs. adjusted result Source: based on data from BNEF,

21 Factors that impact the price Investor confidence and learning curve: Credibility of off-taker and guarantees Periodicity of auchons (as part of a long-term plan) Confidence from past auchons Lessons learnt from past auchons (auchoneer and bidders) Reuse of documents/studies from past rounds Countryspecific condihons Investor confidence & learning curve Policies supporhng renewables Price resulhng from an auchon AucHon design Energy payment and termination guarantees in Argentina s RenovAR programme Source: MINEM,

22 Factors that impact the price Policies and measures for RE development NaHonal plans and targets Fiscal incenhves (tax credits, exemphons etc.) Grid access and priority dispatch Socio-economic benefits Countryspecific condihons Investor confidence & learning curve Policies supporhng renewables Price resulhng from an auchon AucHon design 22

23 Factors that impact the price The design of the auction considering trade-offs: Ensuring project delivery and price Fulfilling development goals and price Encouraging small/new players and price Countryspecific condihons Investor confidence & learning curve Policies supporhng renewables Price resulhng from an auchon AucHon design Choice of the auchoned volume and the way it is shared between different technologies and project sizes AucHon demand Winner selechon How the informahon is collected and the winner is selected Minimum requirements for parhcipants in the auchon QualificaHon requirements Sellers liabilihes Specific rules to ensure high implementahon rate of awarded projects in a Hmely manner 23 IRENA and CEM, 2015

24 Key considerations in designing and implementing auctions Trade-offs in Auction Demand Technology development and cost-efficiency Introducing a technology in the electricity mix (technology-specific) IdenHfying most cost-efficient technology (technology-neutral) Schedule of regular auchon or standalone Increasing market confidence with a fixed schedule AdjusHng designs or ensuring fast supply through standalone auchons Guarantees to increase off-take credibility Increasing investor confidence with government guarantees Passing the risks on to the consumers 24

25 Key considerations in designing and implementing auctions Trade-offs in QualiFication Requirements Permihng and documentahon Demanding to ensure Hmely project complehon and delivery TransacHon costs result in higher prices Extensive track record and financial capability Demanding to ensure project delivery as per the bid Limits parhcipahon to tradihonal and large players Ensuring global socio-economic development goals AmbiHous to maximize domeshc benefits Higher prices on the short term 25

26 Key considerations in designing and implementing auctions Trade-offs in Winner Selection Winner selechon criteria Based on price only results in cost-efficiency Based on other objechves (locahon, benefits, etc.) can result in higher price Ceiling price Lower ceiling price can ensure low prices SubopHmal and can lead to rejechon of reasonable bids Project size No limits on the size can lead to low prices through economies of scale Size limits diversify poroolio of generators and reduce risks 26

27 Key considerations in designing and implementing auctions Trade-offs in Sellers Liabilities Currency, inflahon and produchon risks Limit developer risks to reduce prices Risks would be passed on to the off-taker Compliance rules Reduced to encourage parhcipahon and increase compehhon Risks of underbidding and delays 27

28 The way forward in planning and designing auctions Understanding the reasons behind the low prices is important to make informed policy choices. AucHons may undereshmate the true costs of renewable energy (e.g. balancing costs) or lead to overly aggressive bidding. Risks of underbuilding and delays can be reduced with solid contracts and penalhes. Stringent compliance rules may deter the parhcipahon of small and new players. The extent to which the results are affected depends on choices regarding the design elements and how well adapted they are to the country s specific context (economic situahon, maturity of the power market and level of deployment). The complex and dynamic environment of renewable energy auchons mohvates constant innovahon in the mechanisms design. The value of renewable energy goes well beyond the energy services it provides. Therefore, trade-offs between cost compehhveness and other development objechves (such as jobs, industry development) should be carefully examined.

29 Thank you!

30 Price trends: solar PV auctions Downward trends in South Africa Investor confidence and learning curve Design of the auchon ExisHng domeshc solar industry Auction Design Volume AucHoned Ceiling price Local content requirements and achievements in South Africa AucHon demand Source: SubmiKer, Montmasson-Clair, and Das Nair (2015). 30

31 Price trends: solar PV auctions Ups and downs in India AucHons are decentralized (nahonal and state level) with diverse condihons DomesHc content requirements in some state auchons RelaHvely higher prices compared with Peru, the United States and South Africa India s actual and adjusted solar prices, The effect of inflation indexing on contract price Sources: Based on BNEF (2016); Bridge to India (2017); Elizondo-Azuela et al. (2014); MNRE (2010) and MNRE (2012). 31

32 Price trends: solar PV auctions Lower prices in the United States Investment tax credit, the federal solar tax credit, reduces the cost of installahon by about 30%. US solar prices: actual vs. estimated effective prices, February 2013-May 2016 Source: based on data from Shahan,

33 Price trends: solar PV auctions Price results in the United Arab Emirates Abundant solar resources and favorable economic condihons Ownership structure AucHon design (project size, project specificity, grid connechon) Remunera4on profile in Abu Dhabi Energy delivered from June to September counts for 1.6 Hmes as much as energy delivered from October to May Therefore, the bids do not reflect the actual remunerahon of the project. 33 Source: based on data from BNEF, 2016.