Regulatory and policy options to encourage development of ...

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SUSTAINABLE ENERGY REGULATION AND POLICYMAKING TRAINING MANUALpage 9.6costs for distributors. Distributors may reflect these increased operating costs inthe power purchase agreements (PPAs) they sign with generators, possibly at alevel, which is in excess of the real system costs of intermittency. This effectivelycreates penalties for producing intermittent power.Many of the issues ultimately relate to financial risks to investors: the financialrisks of building and operating new, relatively untested technologies in liberalizedsystems mean that investors may be wary of financing new projects wherethe return on their investments is uncertain. They will be unwilling to put moneyinto potentially risky renewable energy projects, if they have other less riskyinvestment opportunities. The key question for evaluating the different mechanismsfor supporting renewable energy technologies is therefore whether or notthey will create sufficient investor confidence to develop projects (see box 1 belowfor perspectives of risks from the private sector).Box 1.Private-sector perspective“The three most important ‘deal breakers’ to private investors have been found to be:Insufficient legal protection and framework for protection of investor rights.Lack of payment discipline and enforcement.Too few guarantees from governments or multilateral institutions.”Regulation in Africa – Investors and Operators Regulatory Concerns, Mr. T. Horvei, ChiefExecutive , SAD-ELEC (Pty) South Africa, Report of the Proceedings of the 2nd AnnualConference of the African Forum of Regulators (AFUR), March 2005Key regulatory risks experienced by investorsWeak and ever-changing regulatory frameworks.Right of government to override regulatory decisions.Lack of clarity about power of regulator.Regulator without necessary minimum skills, capacity and competence.Unilateral regulatory decisions undermining project and investment returns.Playing field tilted in favour of dominant industry player (most often a stateownedenterprise).(Extract from the AFUR discussion paper “Infrastructure Investment and Regulation inAfrica – Investors and Operators’ Regulatory Concerns” presented at the AFUR 2ndannual conference)
MODULE 9: RENEWABLE ENERGY: REGULATORY AND POLICY OPTIONSpage 9.74. DESIGN ISSUES FOR REGULATORY/SUPPORT MECHANISMSAs well as the need to encourage investor confidence, there are also other importantfactors for policymakers and regulators to take into account when evaluatingdifferent regulatory/support mechanisms. Some of these are summarizedbelow: Will the scheme be effective in reducing investment risks to enable the deploymentof renewable energy technologies, while encouraging investors? This isa fundamental requirement, although the advantages given to renewable technologiesshould not be disproportionately costly to consumers or taxpayers. Will these costs be spread fairly across business, individual consumers andgovernment? Whether the mechanism is an effective means of meeting any target set forrenewable energy generation. Whether the mechanism will encourage new renewable energy plants, orwhether it just encourages the installation of new capacity. How will the mechanism interact with other energy policy measures such asR&D programmes or investment support schemes (in the few African countrieswhere such programmes/schemes exist)? Will the mechanism encourage reducing prices for new technologies over time,through reducing or compensating for market failures or through technologicaldevelopment? Will it be sufficiently flexible to take technological developments and reducingcosts into account in the future, so avoiding the potential for developersto make windfall profits? 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, orwhether it will concentrate only on one. Whether it will encourage new entry into electricity generation. Whether the scheme will be transparent for all users. Whether it will allow exports/imports of power.The weight given to these design issues will obviously depend on the prioritiesand intentions of individual governments, and the final choice of mechanism willhave to take them all into account. For example, if costs to consumers are a centralconcern, policymakers may want to implement a competitive mechanism suchas the quota system. On the other hand, if achieving specific levels of output are
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