Chapter 6. Policy Measures and Programs
6.4 RE Deployment Support Policies
6.4.1 Feed-in-Tariff (FiT)
6.4.1.1 Background
Despite technological development and the facilitation of financing, the modern RE industry in most countries and regions is inferior to the conventional energy industry in terms of economic feasibility. This is the most significant barrier to expanding modern RE such as solar PV and wind power. Consequently, many countries endeavor to ensure the economic feasibility of RE business and provide various types of incentives to attract active participation by the private sector. Among such incentives, Feed-in-Tariff (FiT) is considered the most effective in the early stage of RE deployment.
FiT is a system that aims to ensure the economic feasibility of RE business by compensating the differences between the conventional energy prices, or energy wholesale prices, and RE production costs. It compensates for differences in prices either through subsidies from the government or government-owned organizations or by imposing levies or taxes on energy consumers. The financial burden on the government resulting from compensation for the price differences is passed on, directly or indirectly, to energy consumers or the public. However, it must be borne in mind that RE deployment could enhance social welfare by improving the quality of life and reducing environmental pollution.
6.4.1.2 Objectives
The objective of this program is to introduce a FiT system that would contribute to reassuring private entities of the economic feasibility of RE projects. Generally, the financial resources for FiT derive from the government budget or income form electricity fee; however, whether the price difference is covered indirectly through taxes or directly through electric charges, the implementation of FiT will place a financial burden on the people of Cameroon. Considering that the government lacks financial resources and that electric rates are high in the country, the burden posed by both approaches is too heavy to be implemented in the short term. Therefore, it is necessary to design a system that enables RE to be introduced while reducing the burden on the people.
6.4.1.3 Approach
6.4.1.3.1 Project Content
Stage 1: GET-FiT
The Global Energy Transfer Feed-in-Tariff (GET-FiT) is the program that developed countries support LDC’s deployment of RE by granting funds for introduction and operation of FiT. Currently, the pilot project of this program is being implemented in Uganda, successfully. Norway, Germany and the United Kingdom provides fund for GET FiT to Uganda.
The government of Cameroon can apply for implementation of this program to relevant foreign financial institutions, and apply for funds for the program to developed countries, whose energy companies are actively engaged in business in Cameroon. Cameroon is partially guaranteed of a FiT premium from foreign sponsors, which the government matches, thereby shouldering a part of the burden. RE IPP sells electric power at a price contracted in advance with a transmission and distribution company. The consumers of electricity supplied from RE are compensated for the difference between its wholesale and contract price with premiums funded by the government and foreign sponsors.
[Figure 6-21] GET – FiT Program
Source: DB Climate Change Advisors (2010) Global Energy Transfer Feed-in Tariffs for Developing Countries
GET-FiT is based on support packages offered to LDCs by mainly Germany with its financial institutions, such as KfW (Loan for Reconstruction) and Deutsche Bank, and participation of European countries and the EU. Accordingly, assuring them of the resolve of the government of Cameroon to expand RE deployment and actively participate in the fight against climate change could open up more business opportunities in the local RE sector in future.
Stage 2: Pre-FiT (PPA)
Pre-FiT refers to guaranteeing the profitability of RE power producers through a power purchase agreement (PPA)22 between the RE power producer and power distributor, and operator. Designing FiT is complicated and must be done prudently. Trial and error can be reduced by closely examining feasibility of introduction of this program.
Pre-FiT program can be executed regardless of implementation of the GET-FiT program, and are introduced in the form of a tender to prevent RE power producers from making excessive profits (wind fall).
The bid-based PPA contract is a RE deployment policy actively pursued by LDCs, such as South American countries that enables them to deploy RE cost effectively.
As for Pre-FiT, while a PPA contract is concluded with a power distributor, an RE IPP is selected through a bid in a reverse tender, in which a reference price, determined by the government considering costs, acts as a price ceiling. Decisions must be taken separately on PPA application and contract procedures, businesses subject to application, and how to attract and handle international investors.
Stage 3: Tender-based FiT
The FiT system should be implemented in earnest after sufficiently securing track records through a Pre- Fit system. The system should be based on the tender-based FiT recently introduced in many countries because of its strong point in ensuring stable revenue to RE power producers while minimizing their excessive profits (wind fall).
First, on large-scale development projects, a tender-based FiT is an expansion of the PPA-based Pre-FiT to a national scale. A notice inviting tenders is issued after setting the tender scale and initial bidding price at regular intervals (usually 1 year or 1 quarter). Power producers participate in the tender, and the government selects applicants in the order of projects that offered the lowest price until reaching the announced amount.
The selected power producer builds RE facilities within a specified period and sells power on the wholesale market.
Detailed management plans must be determined separately, such as related technology, evaluation
criteria,23 guaranteed period of power purchase24, participation qualifications, and premium payment.
Designing and operating a tender system will be supervised by either the CREA or the CREDS if established, or by the AER if either alternatives are not established.
The supervising agency issues an evaluation report on tender results every year, and the government revises the bidding scale, initial bid price, and participation qualifications in the case that a winning bid is higher than or the competition rate is lower than expectations.
The FiT system should be operated without tender for small RE projects. This constitutes measures to protect domestic power producers with small RE projects. The initial FiT reference price is set based on the results of the Pre-FiT operations, and is adjusted annually based on the auction results for large-scale RE projects.
The CREA or the CREDS announces the FiT reference price and purchase volume for the following year in the second half of each year.
6.4.1.3.2 Roadmap
FiT should be operated in phases, depending on the maturity of the market and capacity of the government. The initial phases constitute the GET-FiT program and the Pre-FiT program to lay the foundations of FiT, gradually progressing to auction-based FiT in the medium to long term.
❙Table 6-18❙ FiT roadmap
2017 2018 2019 2020 2025 2030~
Design GET-FiT Preparation for
GET-FiT Introduction of
GET-FiT
Design Pre-FiT Pre-FiT pilot
project Pre-FiT introduction FiT-Auction
design Introduction of
FiT-Auction
23 Evaluation methods range from a simple price bid to those that reflect environmental and technological aspects and a project site is determined either by private interests or the government.
24 In general, 112–20 years.
6.4.1.3.3 Financing strategies
GET-FiT
Conclude a “GET-FiT Cameroon” contract with KfW and Deutsche Bank, secure public financial resources from developed countries, such as Germany, France, the UK, and the EU, and based on these, attract private financial resources.
Pre-FiT
A special fund should be established for implementing Pre-FiT and used to compensate the power distributor for losses. The power distributor is an operator that purchases RE power from a RE power producer through a PPA contract.
FiT
Like Pre-FiT, a special fund must be established to implement FiT. The funds can be raised by levying charges on electricity sales at a certain rate and using the income to compensate RE power producers for a difference between the bid and wholesale prices.
6.4.1.3.4 Cases on FiT program in other countries
GET-FiT
25In 2010, the Deutsche Bank devised a GET-FiT program to improve initial financial support system for RE business in LDCs at the request of the UN Advisory Group on Energy and Climate Change. The Deutsche Bank in cooperation with the KfW performed a feasibility study on a GET-FiT pilot project in Uganda, and officially launched the project in May 2013 upon its validation.
The project execution is overseen by the Uganda Electricity Regulatory Authority, Uganda government, and KfW, and financial resources are provided by Norway, Germany, the UK, and the EU. The World Bank participates through partial risk guarantee. The pledged total public financial resources amount to approximately 91 million Euro, and private financial resources of 520 million US dollars are expected to be attracted. The leverage ratio between the public and private financial resources is approximately 1:5.
The GET-FiT program is implemented through cooperation with the Uganda government. The government (Electricity Regulatory Authority and Uganda Electricity Generation Corporation Ltd.) enters
into contracts with individual business operators and provides subsidies according to the power purchase contract with the financial resources of the GET-FiT program.
In 2012, Trinity International LLP, which was selected and has been employed as a GET- FiT project consultant, was able to reduce the legal costs of private companies and the public sector by providing advice to the Ugandan government, Electricity Regulatory Authority, and Uganda Electricity Generation Corporation Ltd., and by standardizing contracts. Furthermore, a guarantee was offered through the Partial Risk Guarantee Facility of the World Bank, and support for capability building for modeling related to RE subsidies (FiT) was offered to the Electricity Regulatory Authority.
Pre-FiT and Tender-based FiT
South Korea introduced “a Guideline for Electricity Trading, including New RE Generation on the Islands” to replace the diesel generators used on the islands with RE generators. The guideline regulates the electricity trade procedure and other necessary items between new RE generators and electricity sellers for trading electricity in the island areas.
Electricity generators can trade the produced electricity with electricity sellers through a separate electricity trade contract outside the electricity market. By setting the electricity trade contract period for 20 years from the beginning day of the electricity trade in principle, the profit of the RE generators is guaranteed. The electricity seller will pay separately for capacity payment and electricity charge.
Peru started auctioning small hydropower, solar PV, wind power, biomass, and geothermal since 2009.
The auction is conducted based on the ceiling price set by the electricity regulatory authority of Peru, OSINERGMIN, and the government could lower the cost of RE generation through the auction by 11% for small hydropower, 14% for wind power, and 46% for solar PV during 2010~2011 (Jeon U-yeong, 2015, An analysis of Central and South America’s renewable energy market trends, entry barriers, and ways to overcome. World Energy Market Insight 15~24, Analysis of Current Issues.)
In Egypt, the Egyptian Electricity Transmission Company (EETC) proposes bidding for RE generation business to the private sector, and the RE generator enters into a long-term PPA contract with the EETC.
Russia announced its RE PPA program in 2013, with plans to expand the proportion of RE generation through a 2.7 billion US dollar fund.