Making a success of Renewable Energy in Developing Countries

The World Resources Institute has identified common principles that promote the growth of renewable energy use in developing countries.

Their conclusions are based on a study of generation-incentive schemes, policies and regulations, financing mechanisms, and technical aspects in 12 countries across 3 continents, published in the report ‘Grounding Green Power’. Developing countries will need to be at the forefront of the transformation of the world’s generation from fossil fuels to renewable sources. Around 80% of all new generation capacity will be added in developing countries in the next 20 years.

There is no ‘one size fits all’ solution for the promotion of renewable energy generation in countries such as Brazil and the Philippines, India, Thailand and Tanzania, says Lutz Weitzer of the WRI.

The WRI report looked at the pros and cons of the main incentive systems: individual power purchase agreements that specify how energy will be generated as well as the price and other conditions; feed-in tariff support; renewable portfolio standards; and competitive bidding systems, where a competent renewable energy project developer requiring least subsidy wins the contract.

One broad lesson is that paying incentives for generation is more likely to succeed than paying subsidies for installation.

“Across the countries we looked at, feed-in tariffs have been the most successful approach,” says Weitzer. Getting the price right at the beginning, based on an assessment of the technology, market conditions, and resource availability, is critical for the success of a feed-in tariff. Feed-in tariffs are most effective if they are set at a technology-specific rate that reflects the cost of generation.

However, they have also been successful in poorer countries where the tariff is calculated on a ‘cost avoided’ basis. The renewable generator receives a feed-in tariff plus the money the utility ‘avoided’ paying, had it produced the power itself from a fossil fuel. That ‘cost avoided’ figure varies with market changes.

Success was even greater if feed-in tariffs were part of a package, says Weischer. In Thailand and India, for instance, capital was made available specifically for renewable energy projects either direct from government agencies or funnelled from government through private banks.

Win-win

The right support regime can create win-win opportunities in even the poorest countries. In Tanzania a tiny percentage of the population are connected to the grid. Black-outs are a major problem. Support for small-scale hydro and biomass projects helps with balance and capacity issues. The renewable energy generators are paid what it would have cost the utilities to generate the electricity, which is less than the cost of electricity supplied by standby diesel generators.

Other incentives can be effective in the right circumstances. Competitive bidding allows easy price-setting and eliminates windfall profits by developers, but there is a risk that developers bid at prices so low that projects never get built or are not viable to operate. Individual power purchase agreements allow governments to experiment with one-off generation plants, but they don’t provide a transparent and certain environment that will encourage broader investment in renewables.

Weischer acknowledges that the WRI report leans towards smaller scale renewable energy technologies that promote social equality and fairness over technologies, such as large hydro, that may deliver greater economic benefits. There are good reasons to be cautious about technologies such as large hydro, says Weischer, which can have major unwanted environmental impacts.

He also argues that projects with broad support from local people are more likely to succeed. “Things that look good on paper, or that have economic and environmental benefits on paper, can be incredibly difficult to implement and sustain in developing countries if you don’t have an element of transparency, accountability and civil social participation,” says Weischer.

Support from the public creates greater certainty that the policy will survive any political regime change. Project developers and investors need a sufficient level of confidence that whatever renewable energy policy is announced, it will stay in place. “That is why in the report we highlight the need for countries to have very clear and widely publicized long term national goals for renewable energy development, says Weischer.

There is evidence since the publication of the report that governments in developing countries are adding flexibility to their regulations, according to Weischer.

“A government doesn’t want to be in a situation where the price of solar drops by 40% and it is still paying the same subsidy,” he says. Some countries, such as the Philippines and Malaysia are implementing the kind of pre-announced regression schedules used in Germany, where gradual reductions in subsidy are published in advance. The system gives investors the certainty they need to plan, while governments reduce their incentives in line with falling developer costs.

Despite the report’s insistence that renewable energy targets are a crucial first step towards successful renewable energy promotion, one of the report’s success stories had no renewable energy targets at all. Thailand’s government provides tariff support to small and micro power generation via its Small Power Producer and Very Small Power Producer regulations, enacted in 1992 and in 2002. Almost 4,400 mini and micro power purchase agreements have been signed, adding over 1,300 MW of renewable energy generation capacity to the grid.

Planning based on the full cost of different options is a major help to the promotion and integration of new renewable energy generation, says Weischer. In developing countries the grid infrastructure is often weak and its development needs careful handling. In a climate where public resources are short, sufficient funds need to be identified for subsidies or generation-based incentives. Scaling up of renewable energy can benefit from the bundling of renewable energy projects into clusters and prioritizing geographic areas for new transmission planning.

Not every successful policy got it completely right first time. Thailand, for instance, had a problem with speculators purchasing PPAs to resell to genuine developers at a profit. The regulations had to be redrafted to eliminate this.

The biggest barrier to the development of effective renewable energy promotion policies are fossil fuel subsidies, says Weischer. Subsidized fossil fuels create a need for even greater subsidies for renewable energy and they don’t make economic.

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