Regulatory and policy options to encourage development of ...

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SUSTAINABLE ENERGY REGULATION AND POLICYMAKING TRAINING MANUALpage 9.12Marandu and Kayo, 2004). Appropriate policy and financial incentives such asenactment of lower entry requirements, tax holidays and lighter regulation of initialpublic offers (IPOs) can encourage local private investment in a privatizedelectricity industry. The ideal entry point, as in the case of Zimbabwe and Mauritius,is likely to be in renewable energy systems such as small hydro and wind energysources as well as through local cogeneration in agro-based industries.Providing subsidies to renewable energy-based power systemsAlthough developing renewable energy-based power systems in rural areas canregister poor returns on investment, linking decentralized renewable energypower plants to rural electrification provides local benefits and increases the sustainabilityof such projects. However, adding the rural electrification componentincreases capital costs and also lowers the overall load factor of the power plantby increasing demand during peak hours and using small amounts of power duringthe rest of the day. In order to provide a reasonable return on investment,the capital cost of rural electrification needs to be covered in part or fully by subsidiesin the form of grants by the government sourced from rural electrificationfunds or from donors.A number of governments (primarily Uganda but also Kenya and Tanzania) in theregion have put in place grants for private companies that expand rural electrificationservices, particularly those using renewables for electricity generation.The Ugandan government under its Energy for Rural Transformation (ERT)Programme will pay the additional cost accrued to the private power developerfor providing rural electrification. One example of this is the West Nile RuralElectrification Company, which in April 2003 was awarded the concession of theWest Nile region. This company is investing in a 3.5 MW small hydro project withpartial grant support from the ERT. Three other energy service companies (ESCOs)in Uganda are investing in new generation capacity on similar terms.Review question1. Name at least five regulatory/support mechanisms that can encouragerenewable energy development in the African power sector in the short term.
MODULE 9: RENEWABLE ENERGY: REGULATORY AND POLICY OPTIONSpage 9.135.2. Medium to long-term regulatory/supportmechanismsThese support mechanisms are largely implemented in the developed world.Some of them require sophisticated implementation strategies and, in somecases, enactment of new laws or significant changes to the Electricity Act. Asmentioned earlier, with the exception of South Africa and possibly Mauritius, fewsub-Saharan African (SSA) countries have implemented these regulatory/supportoptions. In many SSA countries, the sophisticated regulatory and legal prerequisitesthat are required are yet to be put in place.Feed-in tariffsFeed-in tariffs offer either a minimum guaranteed price for output or a premiumon the market price for output. In either case, electricity utilities are obliged toallow generators to connect to the grid, and to buy all of a project’s output at apre-defined price.Key features: The scheme can be open-ended, or can be put in place for a specified numberof years. The tariff schemes can be banded for different technologies, with less developedtechnologies receiving higher prices for their output. The level of the tariff can be set by assessing several factors such as:The avoided cost to the utility of building its own new plant;The end price to the consumer;A more explicit political decision about the level of tariff necessary to stimulaterenewable deployment. The costs of the tariff can be covered by a levy per kWh on consumers, or ontaxpayers, or both. Tariff levels can be set to decline over the years, reflecting the potential fordeclining technology costs.The level of the tariff tends to be set for several years at a time, often throughlegislation, meaning that there is a high degree of certainty for investors on thereturns available, and a high level of confidence about the duration of thescheme. Schemes offering a minimum guaranteed price tend to provide more certaintyfor investors than those which offer a premium on the market price, thisbeing due to the higher degree of predictability that this affords.
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