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A new tailored scheme for the support of renewable energies in developing countries
ARTICLE IN PRESS Energy Policy 37 (2009) 2037–2041
Contents lists available at ScienceDirect
Energy Policy journal homepage: www.elsevier.com/locate/enpol
Communication
A new tailored scheme for the support of renewable energies in developing countries Magda Moner-Girona Renewable Energies Unit, Joint Research Centre, European Commission, Ispra, Italy
a r t i c l e in fo
abstract
Article history: Received 29 September 2008 Accepted 21 November 2008
Historically the promotion of renewable energy technologies in isolated areas has involved international donors or governments subsidising the initial capital investment. This paper proposes an alternative support mechanism for remote villages based on the generation of renewable electricity. This communication presents an evaluation of the Renewable Energy Premium Tariff (RPT) scheme, a locally adapted variation of the Feed-in Tariff tailored for decentralised grids of developing countries. The RPT scheme stimulates the deployment of renewable energy technologies by paying for renewable electricity generated. A good-quality performance is secured since the support is given based on the electricity produced by renewables, not for the initial capital investment. The mechanism has been designed to provide a cost-effective scheme for the introduction of renewable energy technologies to remote villages, to provide sustainable and affordable electricity to local users, to make renewable energy projects attractive to policy-makers, and concurrently decrease financial risk to attract private sector investment. & 2008 Elsevier Ltd. All rights reserved.
Keywords: Renewable energies Developing countries Rural electrification
1. Introduction It is now widely accepted that for many rural communities an alternative to grid-connected power is required. Moreover, rural electrification implementers often give priority to minimising initial cost and maximising the number of beneficiaries, which results in reducing renewable energy technology opportunities. Nevertheless, renewable options are becoming more popular due to the steady increase of fuel prices, the elevated operating and maintenance costs, and the acoustic and environmental polluted nature of diesel generators (IED, 2007; Vallve´ et al., 2001a; ARE, 2007). In the case of scattered population, stand-alone photovoltaic systems have been confirmed as an appropriate option for bringing electricity to isolated households (Vallve´ et al., 2001b; IEA PVPS Task III, 2004; Nieuwenhout et al., 2001). Alternatively, in off-grid rural villages where the households are clustered together and when the location is far away from the grid, gridextension is not an economically viable option while mini-grids are a competitive alternative. A mini-grid integrates hybrid systems in a small electricity distribution system combining renewable sources and diesel generators. Hybrid systems capture the best features of each energy resource and provide ‘‘gridquality’’ electricity with a power range between several kW to several hundred kilowatts. Indeed, under the specific conditions of non-scattered population, centralised hybrid mini-grids represent Tel.: +39 0332 785408; fax: +39 0332 789992.
E-mail addresses: [email protected], [email protected]. 0301-4215/$ - see front matter & 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2008.11.024
a suitable replacement for stand-alone diesel mini-grid systems, providing a more advantageous solution for isolated areas increasing the continuity of electricity services and decreasing the dependency on fossil fuel supply. Market support mechanisms are required to stimulate the deployment of most renewable energy technologies becoming already competitive with existing energy technology options for off-grid areas. In the case of grid-connected systems, the combination renewable electricity generation support scheme, Feed-in Tariff (FiT), with appropriate financial schemes has been a successful mechanism to increase the deployment of renewables in the country’s electricity grid (Mendonc- a, 2007). The Renewable Energy Premium Tariff (RPT) introduces a locally-adapted variation of the FiT scheme (paying for renewable electricity generated) to encourage the production of renewable electricity in mini-grids of isolated areas in developing countries.
2. The renewable energy premium tariff The Renewable Energy Premium Tariff scheme has been specifically planned to be operated in mini-grids employing renewable energy technologies. The central idea is that the premium of the RPT scheme awards the renewable electricity produced. This fact, together with the reduced operation and maintenance costs of renewable energy technologies, will help to offset the high capital costs associated with most of renewable energy projects.
ARTICLE IN PRESS 2038
M. Moner-Girona / Energy Policy 37 (2009) 2037–2041
Besides the ownership of the electricity generator, the tariff setting is a critical issue. Currently, a wide variety of tariff modes of charging for electricity is used in the developing world, and few of them already use the grid-connected Feed-in Tariff scheme (Bristow, 2007). In the Feed-in Tariff scheme for grid-connected systems the Feed-in Tariff values are set by being revenue neutral to the government, with the difference between cost and prices paid implicitly by all utility consumers (Hoffman, 2006). In the case of developing countries, due to the lack of financial possibilities from most of the rural users, a key factor for the success of the RPT support scheme is to define the financial flows involved to compensate the difference between electricity costs and prices paid and to identify which entity should bear the cost of incentives for the renewable energy production. Actually, most of the already existing stand-alone diesel mini-grids are partially or totally subsidised by local governments with the intrinsic disadvantage of fuel costs and maintenance. 3. RPT scheme under different regulatory and institutional frameworks The suitability of several RPT alternatives among different energy legal and institutional frameworks and different types of ownership
REGULATORY AGENCY IPP RENEWABLE PURCHASE AGREEMENT LOCAL ENERGY UTILITY
VILLAGE ELECTRICITY MANAGER
CONSUMERS AT REGULATED TARIFF
END-USERS
Fig. 1. Independent power production regulatory framework under the RPT scheme for off-grid electrification support (red-slashed arrows represent legal and regulatory framework and blue-continuous arrows represent the regulated purchase agreements).
REGULATING AUTHORITY Tariff Control Centre RENEWABLE ELECTRICITY PREMIUM TARIFF /kWh generated by RE
are examined with the intention of facilitating decision-makers to exploit local renewable energy sources under the Renewable Energy Premium Tariff scheme. The results are presented not as precise predictions, but as an indication of the actors involved in the incentive scheme and the cash flows involved.
3.1. RPT scheme involving an independent power producer In this case, the local government provides to independent power producers, IPPs (Woodhouse, 2005), an RPT scheme including a renewable energy purchase agreement. Then, the rural electrification agency, regulatory agency, or an equivalent governmental institution, offers the legal and regulatory RPT frameworks for IPPs to install solar, wind, biomass, small hydropower, and geothermal power generation technologies connected to a minigrid (Fig. 1). The tasks of the Regulatory Agency in rural energy-service concession include establishing the RPT premium tariff and guaranteeing the values for up to 20 years, to supervise the power-purchase and service agreements, and to monitor the energy-concessions. Under this regime, when the IPP owns the renewable energy facilities, the local energy utility owns the mini-grid and purchases from the IPPs the electricity produced. The local energy utility operates according to various requirements from the regulator and the customers, and the regulatory body creates the policy umbrella to support the RPT (Fig. 2). For the financial flows (see figure above) the rural electrification agency provides through the local energy utility the RPT premium tariff to the IPP per kWh produced by renewable energies. The IPP sells renewable electricity to the local energy utility under the renewable purchase agreement with the fixed premium values for renewable electricity production. The rural electrification agency determines and covers the total amount of RPT generated per year through the local energy utility, the IPP has to report to the agency, and then the rural electrification agency makes a technical analysis of the report and determines the amount of RPT that will be given to the IPP. Moreover, the IPP has the responsibility of installation, operation, and maintenance of the connected system. In most isolated areas, the real electricity costs are not affordable for the majority of remote customers.
GOVERNMENT ELECTRICITY AUTHORITY
SERVICE & MAINTENANCE
RPT Premium for RE electricity END-USER IPP Invoice IPP to Utility RE electricity purchased
REGULATED USER TARIFF /kWh UTILITY/COMMUNITY MANAGEMENT
Fig. 2. RPT scheme when an IPP is involved (the blue arrows represent the money flows and the red-slashed arrows the maintenance services).
ARTICLE IN PRESS M. Moner-Girona / Energy Policy 37 (2009) 2037–2041
RENEWABLE PREMIUM TARIFF /kWh generated by renewables
2039
LOCAL ENERGY DEVELOPMENT AGENCY
REGULATORY AGENCY
RPT utility
LOCAL ENERGY UTILITY Benefit= RPT + user - utility-cost
IPP Benefit= utility - cost
user
LEGAL & REGULATORY RPT FRAMEWORK RESCO RURAL ENERGY SERVICE RENEWABLE PURCHASE & SERVICE AGREEMENTS
END-USER TARIFF Fig. 3. RPT financial flows when an IPP is involved (the arrows represent the cash flows).
Therefore, the local energy utility charges below the production cost to the end-users at the nationally/regionally regulated consumer tariffs. Customers in return expect a certain quality to the delivery, as well as affordable prices. Financing the necessary additional sums enables numerous customers to be able to afford access to electricity and allows the Independent Power Producer owner of the renewable energy technologies a guaranteed value during all the RPT period established. In the case of cooperative ownership (i.e. municipalities), the company is owned by the customers and, therefore, does not require any specific profit (Fig. 3). More than 25 Developing Countries now have regulatory frameworks that allow IPPs to generate and sell power to utilities under power-purchase agreements (Martinot et al., 2002). In these countries, the adaptations of the purchase agreement to an RPT renewable energy purchase agreement, where the production of renewable electricity gets a supplementary value, can take place in a straightforward process.
VILLAGE ELECTRICITY MANAGER USERS AT REGULATED TARIFF END-USERS
Fig. 4. Framework for an energy-service concessions under RPT scheme for offgrid rural electrification. Arrows indicate regulated purchase agreements.
3.2. RPT mechanism under an energy-service concession The affordability of electricity can be extended to a greater number of consumers when the energy service company offers electricity to a village-scale mini-grid under the RPT mechanism, rather than grid extensions. Under this legal arrangement, the government offers a concession in which the rural energy service company is competitively selected to provide off-grid electrification exclusively to designated rural areas with the obligation to serve all who request an electricity service (Miller and Martinot, 2001) and getting a premium for renewable electricity delivered. Under the RPT scheme terms of the concession for the renewable energy provider may last up to 20 years (Fig. 4). The local energy development agency establishes the RPT premium tariff and guarantees the values for up to 20 years. The local electricity utility, or Renewable Energy Service Companies (RESCO) for Rural Electrification, (Cabraal et al., 1996) deals with the electricity generation and distribution in the mini-grid. The RESCO retains the ownership of the mini-grid producing electricity by hybrid systems and is responsible for installing the electricity measuring devices for controlling the amount of electricity generated by renewable energies (with a simple design with two-direction measurements) (Fig. 5). In the situation where the local government cannot cover the premium value per kW h of renewable electricity delivered, then funds can be obtained from a multilateral donor (left reddish in the diagram). The development partners might enhance their support undertaking the necessary reforms for a coherent, transparent, and attractive investment framework (Fig. 6).
Fig. 5. Energy-service concessions under RPT scheme for off-grid rural electrification promoting the use of renewable energy technologies. The blue arrows represent the money flows and the red-slashed arrows the maintenance services.
Depending on the local political framework, additional financial instruments and incentives might be applied: (i) Capital subsidies: the RESCO might receive yearly payments (decreasing annually) to cover a percentage of the capital cost. (ii) Production subsidies: the RESCO might receive overheads to cover a percentage of the capital cost depending on production generated. (iii) Government guaranteed loans—the government acts as an intermediary between the agency and the financial institutions as a guarantee of the loan.
4. Financial assessment and economic analysis A quantitative economic analysis is necessary to obtain an indication of which renewable electricity premium values make the renewable energy mini-grid financially viable and the involved cash flows under the RPT scheme.
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M. Moner-Girona / Energy Policy 37 (2009) 2037–2041
RPT
RPT user
user
user
Fig. 6. RPT financial flows for a village scale mini-grid under a regulated energy-service concession. The money flows are represented by the arrows.
Year 0
4
8
12
16
20
Cumulative Discounted Cash Flow ( )
0
-100,000
-200,000
-300,000
-400,000
Genset ( ) Hybrid System ( )
-500,000 Fig. 7. Comparison of the cumulative cash flows (corresponding to the initial capital, replacement, fuel, and operating cost) between the hybrid system and diesel-stand-alone systems.
Data relating to the costs (capital and operational) of each technology have been acquired from the technical reports of the project analysed (IED, 2007; Geipel et al., 2006; Vallve´ et al., 2001a). The optimisation of the hybrid system configuration and the characterisation of the costs of the electricity generated by the different mini-grid configurations have been calculated by using several software tools (HOMER; PVGIS; RETSCREEN) and owndesign spreadsheets combined with actual data of the projects (Fig. 7). The quantitative economic analyses include financial indicators such as the simple payback time, Internal Rate of Return (IRR) and Net Present Value (NPV). The results are indicative to identify the range of the premium values that make the RPT scheme viable under a specific framework. In the NPV analysis, a 6% discount rate has been used to determine today’s values of future RPT cash flow. When comparing alternative investments in hybrid mini-grids, the project with the highest cumulative NPV is the most attractive from the energy investor perspective. The IRR approach determines the discount rate at which the cumulative NPV of the hybrid mini-grids is equal to zero. This means that the cumulative NPV of the costs of the mini-grid running equals the cumulative NPV of all hybrid minigrids benefits under the RPT scheme, if both are discounted at the IRR. The NPV and IRR have been calculated for a range of renewable electricity premium values (RPT values from 0.1 to 1.5h/kW h), using the cost and revenue streams over a 20-year period (Fig. 8). The analysis determines the minimum renewable electricity premium value that makes the project financially
Fig. 8. RPT analysis: NPV values (h) corresponding to each RPT value (h/kW h) considered with their respective IRR (%). The reddish shadow area represents the border for profitable and non-profitable approach.
viable (NPV40) and the value of RPT to obtain a non-profit outcome (NPV ¼ 0) (Solano-Peralta, 2008). The financial analysis under the RPT scheme with optimised values results in positive NPV and with IRR between 8% and 15%, which simply means a significant 8–15% return. The minimum RPT value required for a non-profit approach with NPV ¼ 0 and interest rate of 6% is between 0.3 and 0.5 h/kW h and for a profit approach the RPT values range from 0.7 to 1.5 h/kW h.1 The results are used to compare the mini-grid with and without the RPT support mechanism in terms of total costs and the average incentive costs relative to the end-user price for electricity. The results indicate that in the particular case of applying the optimised RPT values, the RPT mechanism can provide the least costs to the community over a 20-year period (Fig. 9).
5. Conclusions The ‘‘Renewable Energy Premium Tariff’’ scheme offers a new alternative to support the spread of renewable energy technologies in rural electrification programmes. Under the umbrella of 1 When using a diesel-alone system and under the same electricity demand the subsidies needed to cover the difference between end-user prices and real-cost average from 0.7 to 0.3 h/kW h.
ARTICLE IN PRESS M. Moner-Girona / Energy Policy 37 (2009) 2037–2041
Cumulative Cash Flow ( )
240,000
RPT =
0.6 /kWh
RPT =
2041
0.3 /kWh
160,000
80,000
0 0
2
4
6
8
10 Year
12
14
16
18
20
2
4
6
8
10 Year
12
14
16
18
20
-80,000
-160,000 Fig. 9. Cash flows for (a) highly profitable approach, RPT 0.60 h/kW h and (b) neutral approach, RPT 0.45 h/kW h.
the RPT support scheme, optimally designed mini-grids powered by renewable energy can provide the energy supply for small communities at positive net present cost even in the case of high initial investment cost associated with renewable energy technologies. The design of this new support scheme aims at bringing electricity to an affordable price to the users from isolated areas, and at the same time making renewable energy projects attractive to implementers, attracting private sector investment by decreasing the financial risk and to guaranteeing the recovery of invested capital. To achieve these goals, governmental administrations and utilities have to commit providing the framework for creating the necessary policy and regulatory changes, for instance, providing the guaranteed RPT electricity values. This article provides insights indicating to decision-makers the range of RPT values that make an investment for renewable technology in an isolated minigrid financially neutral or profitable. It integrates evaluations of the incentives outlining to the government and policymakers whether RPT incentives are sufficient to attract investments. The evaluation includes ownership, and management of the scheme and operation and maintenance issues. It should be noted that renewable energy mini-grid projects often keep money in the local area, and boost the local economy through the provision of jobs in the local area. The NPV and IRR calculations consider only the directly quantifiable costs and benefits; consequently, the calculations do not take into account indirect economic benefits such as the employment of local people in installing and maintaining the technologies. Consideration of these benefits may act to improve the financial viability of small-scale schemes. Taking into consideration the user’s needs and creating productive uses will improve the economic, social, and environmental situation of isolated villages. The RPT scheme will bring to isolated areas a way to reduce the environmental and health external costs of fossil-fuel-based electricity, will limit the consumption of fossil fuels bringing much lower operation and maintenance costs, and a higher energy security and energy flexibility through promoting the use of local resources. Finally, to demonstrate that the RPT scheme is an effective mechanism for the introduction of renewable energy technologies in rural electrification programmes, it is necessary to succeed with a few pilot cases under different operational frameworks.
Acknowledgments This article sets out the main findings of the discussions carried out by the WG4-Developing Countries Group of the European
Photovoltaic Technology Platform. WG4 is mainly composed of experts in the field of photovoltaics and is currently developing a number of activities to enhance the role of photovoltaics within developing countries. The EU PV Platform-WG4 Report (MonerGirona, 2008) gathers specific analyses of different pilot cases. The author would like to acknowledge Sandor Szabo (JRC), Xavier Vallve´ (TTA), and Mauricio Solano–Peralta (U. Utrecht) for their valuable comments, contribution, and suggestions. References ARE, 2007. Hybrid power systems based on renewable energies: a suitable and cost-competitive solution for rural electrification, 2007, Alliance for Rural electrification position paper. Bristow, D., 2007. The developing world. In: Mendonc- a, M. (Ed.), Feed-in Tariffs—Accelerating the Deployment of renewable energy. World Future Council, Earthscan, London, pp. 76–86. Cabraal, A., Cosgrove-Davies, M., Schaeffer, L., 1996. Best practices for photovoltaic household electrification programs lessons from experiences in selected countries. World Bank Technical Paper, number 324. Geipel, R., Isfort, P., Landau, M., Schmid, J., Schweizer-Ries, P., Strauß, P., Vandenbergh, M., 2006. Experience with the electrification of a Gambian village. In: Proceedings of the 21st European PV Solar Energy Conference, Dresden. HOMER Optimization Model for Distributed Power. /www.nrel.gov/homer/S. IEA PVPS Task III, 2004. Stand-alone PV systems in developing countries. Survey of National and International Standards, Guidelines and QA Procedures and for Stand-alone PV Systems. IED, 2007. Internal paper, PV Injection in isolated diesel grids, 2007. Hoffman, W., 2006. PV solar electricity industry: market growth and perspective. Solar Energy Materials and Solar Cells 90, 3285–3311. Martinot, E., Chaurey, A., Lew, D., Moreira, J., Wamukonya, N., 2002. Renewable energy market in developing countries. Annual Review of Energy and the Environment 27, 309–348. Mendonc- a, M., 2007. The Developing World, Feed-in Tariffs—Accelerating the Deployment of Renewable Energy. World Future Council, Earthscan, London. Miller, S., Martinot, E., 2001. The global environment facility: financing and regulatory support for clean energy. Natural Resources and Environment 15 (3), 164–167. Moner-Girona, M., 2008. A new scheme for the promotion of renewable energies in developing countries, WG4-EU PV Platform, JRC Scientific and Technical reports, European Commission, Luxembourg. Nieuwenhout, F.D., van Dijk, A., van Dijk, V.A.P., Hirsch, D., Lasschuit, P.E., 2001. Experience with solar home systems in developing countries: a review. Progress in Photovoltaics: Research and Applications 9, 455–474. PVGIS for Europe, Africa and Mediterranean basis. /http://re.jrc.ec.europa.eu/pvgisS. RETSCREEN, Clean Energy Project Analysis Software. /www.retscreen.net/S. Solano-Peralta, M., 2008. ‘‘Tropicalisation’’ of feed-in tariffs: a preliminary study on the renewable premium tariff, Thesis Report: NWS-S-2008-21, Utrecht University. Vallve´, X., Gafas, G., Vosseler, I., Mitja´, A, Torra, C., 2001a. Key parameters for quality analysis of multi-user solar hybrid grids—17th European Photovoltaic Solar Energy Conference. Vallve´, X., Gafas, G., Arias, C., Mendoza, J.J., Torra, C., 2001b. Electricity costs of PVhybrid vs. diesel in microgrids for village power—17th European Photovoltaic Solar Energy Conference. Woodhouse, E.J., 2005. The experience with independent power projects in developing countries, Interim Report Center for Environmental Science and Policy, Stanford University.
Contents lists available at ScienceDirect
Energy Policy journal homepage: www.elsevier.com/locate/enpol
Communication
A new tailored scheme for the support of renewable energies in developing countries Magda Moner-Girona Renewable Energies Unit, Joint Research Centre, European Commission, Ispra, Italy
a r t i c l e in fo
abstract
Article history: Received 29 September 2008 Accepted 21 November 2008
Historically the promotion of renewable energy technologies in isolated areas has involved international donors or governments subsidising the initial capital investment. This paper proposes an alternative support mechanism for remote villages based on the generation of renewable electricity. This communication presents an evaluation of the Renewable Energy Premium Tariff (RPT) scheme, a locally adapted variation of the Feed-in Tariff tailored for decentralised grids of developing countries. The RPT scheme stimulates the deployment of renewable energy technologies by paying for renewable electricity generated. A good-quality performance is secured since the support is given based on the electricity produced by renewables, not for the initial capital investment. The mechanism has been designed to provide a cost-effective scheme for the introduction of renewable energy technologies to remote villages, to provide sustainable and affordable electricity to local users, to make renewable energy projects attractive to policy-makers, and concurrently decrease financial risk to attract private sector investment. & 2008 Elsevier Ltd. All rights reserved.
Keywords: Renewable energies Developing countries Rural electrification
1. Introduction It is now widely accepted that for many rural communities an alternative to grid-connected power is required. Moreover, rural electrification implementers often give priority to minimising initial cost and maximising the number of beneficiaries, which results in reducing renewable energy technology opportunities. Nevertheless, renewable options are becoming more popular due to the steady increase of fuel prices, the elevated operating and maintenance costs, and the acoustic and environmental polluted nature of diesel generators (IED, 2007; Vallve´ et al., 2001a; ARE, 2007). In the case of scattered population, stand-alone photovoltaic systems have been confirmed as an appropriate option for bringing electricity to isolated households (Vallve´ et al., 2001b; IEA PVPS Task III, 2004; Nieuwenhout et al., 2001). Alternatively, in off-grid rural villages where the households are clustered together and when the location is far away from the grid, gridextension is not an economically viable option while mini-grids are a competitive alternative. A mini-grid integrates hybrid systems in a small electricity distribution system combining renewable sources and diesel generators. Hybrid systems capture the best features of each energy resource and provide ‘‘gridquality’’ electricity with a power range between several kW to several hundred kilowatts. Indeed, under the specific conditions of non-scattered population, centralised hybrid mini-grids represent Tel.: +39 0332 785408; fax: +39 0332 789992.
E-mail addresses: [email protected], [email protected]. 0301-4215/$ - see front matter & 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2008.11.024
a suitable replacement for stand-alone diesel mini-grid systems, providing a more advantageous solution for isolated areas increasing the continuity of electricity services and decreasing the dependency on fossil fuel supply. Market support mechanisms are required to stimulate the deployment of most renewable energy technologies becoming already competitive with existing energy technology options for off-grid areas. In the case of grid-connected systems, the combination renewable electricity generation support scheme, Feed-in Tariff (FiT), with appropriate financial schemes has been a successful mechanism to increase the deployment of renewables in the country’s electricity grid (Mendonc- a, 2007). The Renewable Energy Premium Tariff (RPT) introduces a locally-adapted variation of the FiT scheme (paying for renewable electricity generated) to encourage the production of renewable electricity in mini-grids of isolated areas in developing countries.
2. The renewable energy premium tariff The Renewable Energy Premium Tariff scheme has been specifically planned to be operated in mini-grids employing renewable energy technologies. The central idea is that the premium of the RPT scheme awards the renewable electricity produced. This fact, together with the reduced operation and maintenance costs of renewable energy technologies, will help to offset the high capital costs associated with most of renewable energy projects.
ARTICLE IN PRESS 2038
M. Moner-Girona / Energy Policy 37 (2009) 2037–2041
Besides the ownership of the electricity generator, the tariff setting is a critical issue. Currently, a wide variety of tariff modes of charging for electricity is used in the developing world, and few of them already use the grid-connected Feed-in Tariff scheme (Bristow, 2007). In the Feed-in Tariff scheme for grid-connected systems the Feed-in Tariff values are set by being revenue neutral to the government, with the difference between cost and prices paid implicitly by all utility consumers (Hoffman, 2006). In the case of developing countries, due to the lack of financial possibilities from most of the rural users, a key factor for the success of the RPT support scheme is to define the financial flows involved to compensate the difference between electricity costs and prices paid and to identify which entity should bear the cost of incentives for the renewable energy production. Actually, most of the already existing stand-alone diesel mini-grids are partially or totally subsidised by local governments with the intrinsic disadvantage of fuel costs and maintenance. 3. RPT scheme under different regulatory and institutional frameworks The suitability of several RPT alternatives among different energy legal and institutional frameworks and different types of ownership
REGULATORY AGENCY IPP RENEWABLE PURCHASE AGREEMENT LOCAL ENERGY UTILITY
VILLAGE ELECTRICITY MANAGER
CONSUMERS AT REGULATED TARIFF
END-USERS
Fig. 1. Independent power production regulatory framework under the RPT scheme for off-grid electrification support (red-slashed arrows represent legal and regulatory framework and blue-continuous arrows represent the regulated purchase agreements).
REGULATING AUTHORITY Tariff Control Centre RENEWABLE ELECTRICITY PREMIUM TARIFF /kWh generated by RE
are examined with the intention of facilitating decision-makers to exploit local renewable energy sources under the Renewable Energy Premium Tariff scheme. The results are presented not as precise predictions, but as an indication of the actors involved in the incentive scheme and the cash flows involved.
3.1. RPT scheme involving an independent power producer In this case, the local government provides to independent power producers, IPPs (Woodhouse, 2005), an RPT scheme including a renewable energy purchase agreement. Then, the rural electrification agency, regulatory agency, or an equivalent governmental institution, offers the legal and regulatory RPT frameworks for IPPs to install solar, wind, biomass, small hydropower, and geothermal power generation technologies connected to a minigrid (Fig. 1). The tasks of the Regulatory Agency in rural energy-service concession include establishing the RPT premium tariff and guaranteeing the values for up to 20 years, to supervise the power-purchase and service agreements, and to monitor the energy-concessions. Under this regime, when the IPP owns the renewable energy facilities, the local energy utility owns the mini-grid and purchases from the IPPs the electricity produced. The local energy utility operates according to various requirements from the regulator and the customers, and the regulatory body creates the policy umbrella to support the RPT (Fig. 2). For the financial flows (see figure above) the rural electrification agency provides through the local energy utility the RPT premium tariff to the IPP per kWh produced by renewable energies. The IPP sells renewable electricity to the local energy utility under the renewable purchase agreement with the fixed premium values for renewable electricity production. The rural electrification agency determines and covers the total amount of RPT generated per year through the local energy utility, the IPP has to report to the agency, and then the rural electrification agency makes a technical analysis of the report and determines the amount of RPT that will be given to the IPP. Moreover, the IPP has the responsibility of installation, operation, and maintenance of the connected system. In most isolated areas, the real electricity costs are not affordable for the majority of remote customers.
GOVERNMENT ELECTRICITY AUTHORITY
SERVICE & MAINTENANCE
RPT Premium for RE electricity END-USER IPP Invoice IPP to Utility RE electricity purchased
REGULATED USER TARIFF /kWh UTILITY/COMMUNITY MANAGEMENT
Fig. 2. RPT scheme when an IPP is involved (the blue arrows represent the money flows and the red-slashed arrows the maintenance services).
ARTICLE IN PRESS M. Moner-Girona / Energy Policy 37 (2009) 2037–2041
RENEWABLE PREMIUM TARIFF /kWh generated by renewables
2039
LOCAL ENERGY DEVELOPMENT AGENCY
REGULATORY AGENCY
RPT utility
LOCAL ENERGY UTILITY Benefit= RPT + user - utility-cost
IPP Benefit= utility - cost
user
LEGAL & REGULATORY RPT FRAMEWORK RESCO RURAL ENERGY SERVICE RENEWABLE PURCHASE & SERVICE AGREEMENTS
END-USER TARIFF Fig. 3. RPT financial flows when an IPP is involved (the arrows represent the cash flows).
Therefore, the local energy utility charges below the production cost to the end-users at the nationally/regionally regulated consumer tariffs. Customers in return expect a certain quality to the delivery, as well as affordable prices. Financing the necessary additional sums enables numerous customers to be able to afford access to electricity and allows the Independent Power Producer owner of the renewable energy technologies a guaranteed value during all the RPT period established. In the case of cooperative ownership (i.e. municipalities), the company is owned by the customers and, therefore, does not require any specific profit (Fig. 3). More than 25 Developing Countries now have regulatory frameworks that allow IPPs to generate and sell power to utilities under power-purchase agreements (Martinot et al., 2002). In these countries, the adaptations of the purchase agreement to an RPT renewable energy purchase agreement, where the production of renewable electricity gets a supplementary value, can take place in a straightforward process.
VILLAGE ELECTRICITY MANAGER USERS AT REGULATED TARIFF END-USERS
Fig. 4. Framework for an energy-service concessions under RPT scheme for offgrid rural electrification. Arrows indicate regulated purchase agreements.
3.2. RPT mechanism under an energy-service concession The affordability of electricity can be extended to a greater number of consumers when the energy service company offers electricity to a village-scale mini-grid under the RPT mechanism, rather than grid extensions. Under this legal arrangement, the government offers a concession in which the rural energy service company is competitively selected to provide off-grid electrification exclusively to designated rural areas with the obligation to serve all who request an electricity service (Miller and Martinot, 2001) and getting a premium for renewable electricity delivered. Under the RPT scheme terms of the concession for the renewable energy provider may last up to 20 years (Fig. 4). The local energy development agency establishes the RPT premium tariff and guarantees the values for up to 20 years. The local electricity utility, or Renewable Energy Service Companies (RESCO) for Rural Electrification, (Cabraal et al., 1996) deals with the electricity generation and distribution in the mini-grid. The RESCO retains the ownership of the mini-grid producing electricity by hybrid systems and is responsible for installing the electricity measuring devices for controlling the amount of electricity generated by renewable energies (with a simple design with two-direction measurements) (Fig. 5). In the situation where the local government cannot cover the premium value per kW h of renewable electricity delivered, then funds can be obtained from a multilateral donor (left reddish in the diagram). The development partners might enhance their support undertaking the necessary reforms for a coherent, transparent, and attractive investment framework (Fig. 6).
Fig. 5. Energy-service concessions under RPT scheme for off-grid rural electrification promoting the use of renewable energy technologies. The blue arrows represent the money flows and the red-slashed arrows the maintenance services.
Depending on the local political framework, additional financial instruments and incentives might be applied: (i) Capital subsidies: the RESCO might receive yearly payments (decreasing annually) to cover a percentage of the capital cost. (ii) Production subsidies: the RESCO might receive overheads to cover a percentage of the capital cost depending on production generated. (iii) Government guaranteed loans—the government acts as an intermediary between the agency and the financial institutions as a guarantee of the loan.
4. Financial assessment and economic analysis A quantitative economic analysis is necessary to obtain an indication of which renewable electricity premium values make the renewable energy mini-grid financially viable and the involved cash flows under the RPT scheme.
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Fig. 6. RPT financial flows for a village scale mini-grid under a regulated energy-service concession. The money flows are represented by the arrows.
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-500,000 Fig. 7. Comparison of the cumulative cash flows (corresponding to the initial capital, replacement, fuel, and operating cost) between the hybrid system and diesel-stand-alone systems.
Data relating to the costs (capital and operational) of each technology have been acquired from the technical reports of the project analysed (IED, 2007; Geipel et al., 2006; Vallve´ et al., 2001a). The optimisation of the hybrid system configuration and the characterisation of the costs of the electricity generated by the different mini-grid configurations have been calculated by using several software tools (HOMER; PVGIS; RETSCREEN) and owndesign spreadsheets combined with actual data of the projects (Fig. 7). The quantitative economic analyses include financial indicators such as the simple payback time, Internal Rate of Return (IRR) and Net Present Value (NPV). The results are indicative to identify the range of the premium values that make the RPT scheme viable under a specific framework. In the NPV analysis, a 6% discount rate has been used to determine today’s values of future RPT cash flow. When comparing alternative investments in hybrid mini-grids, the project with the highest cumulative NPV is the most attractive from the energy investor perspective. The IRR approach determines the discount rate at which the cumulative NPV of the hybrid mini-grids is equal to zero. This means that the cumulative NPV of the costs of the mini-grid running equals the cumulative NPV of all hybrid minigrids benefits under the RPT scheme, if both are discounted at the IRR. The NPV and IRR have been calculated for a range of renewable electricity premium values (RPT values from 0.1 to 1.5h/kW h), using the cost and revenue streams over a 20-year period (Fig. 8). The analysis determines the minimum renewable electricity premium value that makes the project financially
Fig. 8. RPT analysis: NPV values (h) corresponding to each RPT value (h/kW h) considered with their respective IRR (%). The reddish shadow area represents the border for profitable and non-profitable approach.
viable (NPV40) and the value of RPT to obtain a non-profit outcome (NPV ¼ 0) (Solano-Peralta, 2008). The financial analysis under the RPT scheme with optimised values results in positive NPV and with IRR between 8% and 15%, which simply means a significant 8–15% return. The minimum RPT value required for a non-profit approach with NPV ¼ 0 and interest rate of 6% is between 0.3 and 0.5 h/kW h and for a profit approach the RPT values range from 0.7 to 1.5 h/kW h.1 The results are used to compare the mini-grid with and without the RPT support mechanism in terms of total costs and the average incentive costs relative to the end-user price for electricity. The results indicate that in the particular case of applying the optimised RPT values, the RPT mechanism can provide the least costs to the community over a 20-year period (Fig. 9).
5. Conclusions The ‘‘Renewable Energy Premium Tariff’’ scheme offers a new alternative to support the spread of renewable energy technologies in rural electrification programmes. Under the umbrella of 1 When using a diesel-alone system and under the same electricity demand the subsidies needed to cover the difference between end-user prices and real-cost average from 0.7 to 0.3 h/kW h.
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the RPT support scheme, optimally designed mini-grids powered by renewable energy can provide the energy supply for small communities at positive net present cost even in the case of high initial investment cost associated with renewable energy technologies. The design of this new support scheme aims at bringing electricity to an affordable price to the users from isolated areas, and at the same time making renewable energy projects attractive to implementers, attracting private sector investment by decreasing the financial risk and to guaranteeing the recovery of invested capital. To achieve these goals, governmental administrations and utilities have to commit providing the framework for creating the necessary policy and regulatory changes, for instance, providing the guaranteed RPT electricity values. This article provides insights indicating to decision-makers the range of RPT values that make an investment for renewable technology in an isolated minigrid financially neutral or profitable. It integrates evaluations of the incentives outlining to the government and policymakers whether RPT incentives are sufficient to attract investments. The evaluation includes ownership, and management of the scheme and operation and maintenance issues. It should be noted that renewable energy mini-grid projects often keep money in the local area, and boost the local economy through the provision of jobs in the local area. The NPV and IRR calculations consider only the directly quantifiable costs and benefits; consequently, the calculations do not take into account indirect economic benefits such as the employment of local people in installing and maintaining the technologies. Consideration of these benefits may act to improve the financial viability of small-scale schemes. Taking into consideration the user’s needs and creating productive uses will improve the economic, social, and environmental situation of isolated villages. The RPT scheme will bring to isolated areas a way to reduce the environmental and health external costs of fossil-fuel-based electricity, will limit the consumption of fossil fuels bringing much lower operation and maintenance costs, and a higher energy security and energy flexibility through promoting the use of local resources. Finally, to demonstrate that the RPT scheme is an effective mechanism for the introduction of renewable energy technologies in rural electrification programmes, it is necessary to succeed with a few pilot cases under different operational frameworks.
Acknowledgments This article sets out the main findings of the discussions carried out by the WG4-Developing Countries Group of the European
Photovoltaic Technology Platform. WG4 is mainly composed of experts in the field of photovoltaics and is currently developing a number of activities to enhance the role of photovoltaics within developing countries. The EU PV Platform-WG4 Report (MonerGirona, 2008) gathers specific analyses of different pilot cases. The author would like to acknowledge Sandor Szabo (JRC), Xavier Vallve´ (TTA), and Mauricio Solano–Peralta (U. Utrecht) for their valuable comments, contribution, and suggestions. References ARE, 2007. Hybrid power systems based on renewable energies: a suitable and cost-competitive solution for rural electrification, 2007, Alliance for Rural electrification position paper. Bristow, D., 2007. The developing world. In: Mendonc- a, M. (Ed.), Feed-in Tariffs—Accelerating the Deployment of renewable energy. World Future Council, Earthscan, London, pp. 76–86. Cabraal, A., Cosgrove-Davies, M., Schaeffer, L., 1996. Best practices for photovoltaic household electrification programs lessons from experiences in selected countries. World Bank Technical Paper, number 324. Geipel, R., Isfort, P., Landau, M., Schmid, J., Schweizer-Ries, P., Strauß, P., Vandenbergh, M., 2006. Experience with the electrification of a Gambian village. In: Proceedings of the 21st European PV Solar Energy Conference, Dresden. HOMER Optimization Model for Distributed Power. /www.nrel.gov/homer/S. IEA PVPS Task III, 2004. Stand-alone PV systems in developing countries. Survey of National and International Standards, Guidelines and QA Procedures and for Stand-alone PV Systems. IED, 2007. Internal paper, PV Injection in isolated diesel grids, 2007. Hoffman, W., 2006. PV solar electricity industry: market growth and perspective. Solar Energy Materials and Solar Cells 90, 3285–3311. Martinot, E., Chaurey, A., Lew, D., Moreira, J., Wamukonya, N., 2002. Renewable energy market in developing countries. Annual Review of Energy and the Environment 27, 309–348. Mendonc- a, M., 2007. The Developing World, Feed-in Tariffs—Accelerating the Deployment of Renewable Energy. World Future Council, Earthscan, London. Miller, S., Martinot, E., 2001. The global environment facility: financing and regulatory support for clean energy. Natural Resources and Environment 15 (3), 164–167. Moner-Girona, M., 2008. A new scheme for the promotion of renewable energies in developing countries, WG4-EU PV Platform, JRC Scientific and Technical reports, European Commission, Luxembourg. Nieuwenhout, F.D., van Dijk, A., van Dijk, V.A.P., Hirsch, D., Lasschuit, P.E., 2001. Experience with solar home systems in developing countries: a review. Progress in Photovoltaics: Research and Applications 9, 455–474. PVGIS for Europe, Africa and Mediterranean basis. /http://re.jrc.ec.europa.eu/pvgisS. RETSCREEN, Clean Energy Project Analysis Software. /www.retscreen.net/S. Solano-Peralta, M., 2008. ‘‘Tropicalisation’’ of feed-in tariffs: a preliminary study on the renewable premium tariff, Thesis Report: NWS-S-2008-21, Utrecht University. Vallve´, X., Gafas, G., Vosseler, I., Mitja´, A, Torra, C., 2001a. Key parameters for quality analysis of multi-user solar hybrid grids—17th European Photovoltaic Solar Energy Conference. Vallve´, X., Gafas, G., Arias, C., Mendoza, J.J., Torra, C., 2001b. Electricity costs of PVhybrid vs. diesel in microgrids for village power—17th European Photovoltaic Solar Energy Conference. Woodhouse, E.J., 2005. The experience with independent power projects in developing countries, Interim Report Center for Environmental Science and Policy, Stanford University.