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«Acknowledgements Supervision and coordination: Martina Otto, Head of Policy Unit, Djaheezah Subratty, Programme Officer, and Alexander Koch, ...»

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Supervision and coordination:

Martina Otto, Head of Policy Unit, Djaheezah Subratty, Programme Officer, and Alexander Koch,

Associate Programme Officer of the Energy Branch, UNEP Division of Technology, Industry and

Economics (DTIE); Cristina Zucca, Programme Officer and Haddy Guisse, Associate Programme

Officer, MEAs Implementation Support Branch, UNEP Division of Environmental Law and

Conventions (DELC).

Lead Author: Wilson Rickerson Contributing Authors : Chad Laurent, David Jacobs, Christina Dietrich and Christina Hanley Reviewers and Review Workshop Participants Asoka Abeygunawardana, Energy Forum / Advisor to Minister of Power and Energy, Sri Lanka Thembani Bukula, National Energy Regulator of South Africa Sushanta K. Chatterjee, Central Energy Regulatory Commission, India Toby D. Couture, E3 Analytics Gabriela Elizondo-Azuela, World Bank Pete Maniego, National Renewable Energy Board, Philippines Anastas Mbawala, Energy and Water Utilities Regulatory Authority, Tanzania Miguel Mendonça, MBM Investigations Juan Roberto Paredes, Inter-American Development Bank Osvaldo Soliano Pereira, Central Energy Regulatory Commission and Universidade Salvador Randy Ramadhar Singh, Ministry of Energy and Energy Affairs, Trinidad & Tobago Mauricio Solano-Peralta, Trama TecnoAmbiental (TTA) Xavier Vallvé, Trama TecnoAmbiental (TTA) Lutz Weischer, World Resources Institute Thanks to : Mark Radka, Chief, Energy Branch, UNEP-DTIE and Arkadiy Levintanus, Chief, MEAs Implementation Support Branch, UNEP-DELC for their support ; Eric Usher, Energy Branch, and Derek Eaton, Benjamin Simmons and Moustapha Kamal Gueye of the Economics and Trade Branch, UNEP-DTIE for their inputs and comments.

Copyright @ United Nations Environment Programme, 2012 This technical paper may be reproduced in whole or in part and in any form for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgement of the source is made. UNEP would appreciate receiving a copy of any publication that uses this paper as a source. No use of this technical paper may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the United Nations Environment Programme.

Cover: Photo Shutterstock, Design : courtesy of Expression Graphique Disclaimer The designations employed and the presentation of the material in this technical paper do not imply the expression of any opinion whatsoever on the part of the United Nations Environment Programme concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries.

Moreover, the views expressed do not necessarily represent the decision or the stated policy of the United Nations Environment Programme, nor does citing or trade names or commercial processes constitute endorsement.

i|P age Table of Contents List of Figures

List of Tables

List of Text Boxes

List of Acronyms

Executive Summary

1. Introduction

1.1. The overarching framework

1.2. Feed-in tariffs in developing countries

1.3. Policy Considerations and Constraints

1.4. Report structure

2. Policy Instruments to Scale Up Renewables: FIT Policy Overview and Major Design Elements

2.1 Renewable energy policies

2.2.1 Rebates and grants

2.2.2 Tax credits

2.2.3 Renewable Portfolio Standards and Quota Systems

2.2.4 Competitive tenders and auctions

2.2.5 Tradable Renewable Energy Credits

2.2.6 Net metering

2.2.7 Competing or combining policies?

2.2 General FIT requirements

3. Law Drafters’ Guide: Design Options and Considerations for Adapting Feed-in Tariffs to the Developing Country Context

3.1 Methodology

3.2 Developing FITs through Law & Regulation

Feed-In Tariff Design Issues & Options and Law Drafter’s Guide

3.3 3.3.1 Integration with policy targets

ii | P a g e 3.3.2 Policy objectives in law

3.3.3 Eligibility

3.3.4 Tariff differentiation

3.3.5 Setting the FIT rate

3.3.6 Payment Duration

3.3.7 Payment Structure

3.3.8 Inflation

3.3.9 Cost recovery

3.3.10 Interconnection Guarantee

3.3.11 Interconnection Costs

3.3.12 Purchase and Dispatch Requirements

3.3.13 Amount Purchased

3.3.14 Purchasin Entity

3.3.15 Commodities Purchased

3.3.16 Triggers and Adjustments

3.3.17 Contract Issues

3.3.18 Payment Currency

3.3.19 Interaction with other incentives

3.4 Rate Setting Methodology

4. Funding feed-in tariffs

4.1 FITs may not require cost recovery

4.2 Cost recovery options

4.3 Lowering the required FIT rates

4.3.1 Raising the price of fossil fuel electricity

4.3.2 Introduce policies that lower the generation cost of renewable energy........ 82

4.4. International funding options

4.4.1 Existing international funds

4.4.2 Emerging trends in international climate finance

4.4.3 The emergence of innovative models

4.4.4 Discussion

–  –  –

6. Next Steps

REFERENCES…………………………………………………………………………………..97 List of Figures Figure 1. Countries with policy targets for renewable electricity

Figure 2. Global installed capacity by incentive type

Figure 3. FIT policy development pathways

Figure 4. Oil spot price (unweighted) (US dollars per barrel)

Figure 5. Sources and costs of risk for infrastructure investments

List of Tables Table 1.1 Developing countries with FIT policies

Table 2.1 FIT Policy Elements

Table 3.1 Example FIT design issue & policy considerations chart

Table 3.2 High-level summary of FIT design issues and policy considerations

List of Text Boxes

Text Box 1. Expansion of Renewables ………

Text Box 2. Local content………………………………………………………………………16 Text Box 3.

Feed-in tariffs & power market structure………………………………………….20

–  –  –

v|P age Executive Summary During the last decade, to respond to energy-related challenges such as climate change, air pollution, volatile fossil fuel prices, and a growing demand for electricity, countries have multiplied recourse to renewable energy policy making. In 2011, there were 73 countries around the world that had implemented policy targets for renewable electricity at the federal or regional levels. The most prevalent national renewable energy policy in the world is the feed-in tariff (FIT). As of early 2011, 50 countries had some form of FIT in place, with more than half of these being in developing countries.

This report is intended as a resource for policy makers in developing countries to make informed policy decisions about the ―whether,‖ ―when‖ and ―how‖ of FITs and to support nationally appropriate policy measures to scale up renewable energy. The report is also intended to improve the understanding of the potential benefits and challenges for developing countries to design FITs as well as the factors influencing their success, more in depth from the policy and legal foci, whilst also analysing the funding and capacity implications. Throughout the report, FITs are construed as interacting with national energy and non-energy policies in a dynamic manner.

Through a general overview of FIT policies and design elements, the report draws broad and qualitative comparisons between FITs and other policy instruments available for scaling up renewables. It then reviews FIT design issues and options, relevant policy considerations, and text from existing laws as references in the form of a Law Drafters‘ Guide. The report also discusses strategies for funding a FIT policy, utilizing both domestic and international resources.

In addition, the report examines the human, technological, regulatory and institutional capacity that must be in place in order to successfully implement a FIT.

Policy making involves inherent trade-offs and is dynamic. Policy makers are continually combining distinct policies in new and innovative ways. The continual evolution of renewable energy policies has led increasingly to blended policies that share many of the same design elements. Different countries have implemented the same policies in different ways and most countries have updated their policies over time. Initially viewed as being mutually exclusive, countries now use opportunities to merge or combine FIT policies with other renewable policies.

When developing FITs, policy makers need to evaluate how FITs interact with existing or proposed policies - both how FITs might create synergies with other policies and how their interaction may create unintended consequences. This report analyses FITs as a ―package‖ of different regulatory and incentive policies, thus addressing the ‗feed-in‘ elements and not just only the ‗tariff‘. These packages can be combined in a variety of different ways, depending on policy makers‘ goals and constraints. For the purposes of this report, the unifying features of

–  –  –

The major interactions of the design issues and policy considerations are summarised in the following table, with the checks indicating which design issues are most relevant to which policy considerations, and vice versa.

–  –  –

Once FIT policies are developed and formulated, various jurisdictions adopt either legal or non-legal pathways to support policy implementation. This decision will depend on a number of factors, such as political system, legal tradition, governmental structure, legislative process, vii | P a g e market structure, etc. Depending on such factors, policy makers may choose different routes to developing FIT laws: legal pathways such as (i) a detailed FIT law, (ii) a combination of high level mandate law with a regulatory body in charge of policy details, or non-legal pathways such as under a general energy law. There are pros and cons to each of these approaches. Establishing a FIT through detailed legislation, for example, may provide greater investor certainty because the law may be viewed as more difficult to change than a policy enacted as a result of an executive branch or regulatory agency initiative. On the other hand, developing and passing FIT legislation may be a lengthier and more challenging process than if a government agency develops and promulgates FIT regulations.

One of the key design options of FITs is tariff differentiation, which specifies the FIT rates that each renewable energy technology will receive. The issue of tariff differentiation can impact a broad range of policy considerations, including policy costs, energy access, administrative complexity, economic development, and diversification of the electricity mix. Another important design option is tariff setting, where the payment basis has a bearing on renewable energy development, policy costs, price stability, electricity portfolio diversity, and regulatory and administrative oversight, and policy costs have to be balanced with investor costs.

Concerning FIT payment duration, generation cost-based rates are higher and shorter, latter having the potential to remove the incentive for projects to continue operating over their entire lifetimes. Cost-based rates involve longer contracts with correspondingly lower rates, and increase the potential for price stabilization impacts. From the ratepayer perspective, short-term contracts cost less over time, but longer-term payment can generate immediate savings. Policy makers should be aware of these two potential effects and how they balance. FITs can serve as a hedge against volatile fossil fuel prices and dampen electricity price spikes. A well-designed FIT may not attract investment if the policy funding source is not judged to be viable over the longterm.

Policy cost is a critical issue for renewable energy law drafters, especially in developing countries. FITs have a reputation for being inherently ―expensive‖ policies, largely as a result of the large volume of renewable energy capacity that has been built in Europe under FITs. Many developing countries lack the resources to pursue generation projects that will significantly increase ratepayer or taxpayer burdens. As noted throughout this report, countries can adopt (and have adopted) radically different FIT designs to reflect their different policy goals and national circumstances. FIT policies can be designed to limit ratepayer impact and do not necessarily need to be ―expensive‖ from the point of view of ratepayers.

Funding issues related to FITs comprise two main aspects, firstly funding the ‗higher‘ cost of renewables and secondly lowering the generation costs of renewables. By reforming fossil fuel subsidies, countries can redirect those subsidies to support low-income households to withstand

–  –  –

Current international funding infrastructure has historically not been flexible enough to support national FITs in a broad and programmatic way. Financing streams which could help lower the FITs costs include technically those which provide support throughout the planning and implementation phases of renewable energy projects, such as the GEF or forthcoming climate funding or NAMAs.

Cost recovery remains a critical issue for law makers in developing countries. Factors such as a country‘s policy objectives, available renewable resources, national circumstances, and existing generation portfolio will shape policy design and to a large extent determine the costs that the policy will incur. Policy makers need to determine the most appropriate way to balance the potential costs of the policy against their capability to absorb them domestically.

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