2013
Sustainable Electricity for All:
Recommendations to the Global Sustainable Electricity Partnership
Table of Contents 3
Message from the Chair
4
Introduction
6
Overview: GSEP’s Commitment to Electricity Access and Recent Progress
8
State of Play: Opportune Time for Renewable Electricity Access Projects
14
A Novel Investment Fund Focused on Electricity Access in Developing Countries
16
Opportunity for the Standardization of PPAs
Recommendations to the Global Sustainable Electricity Partnership
1
Message f rom the Chair of the Global Sustainable Electricity Partnership James E. Rogers
Providing electricity for 20 percent of the world’s population that lives without it is an enormous challenge; however, it is a challenge that the Global Sustainable Electricity Partnership (GSEP) is uniquely positioned to address. With a membership of the world’s leading electricity companies, GSEP has been a driving force in the effort to promote sustainable electricity development since its founding in 1992. Over the past 21 years, it has demonstrated its commitment through sustainable energy development projects and human capacity building activities across five continents, a global scholarship program, and collaborations with international organizations and the public sector. This year’s theme, “Universal Access to Electricity”, builds on that commitment, and the UN Secretary-General’s Year of Sustainable Energy for All (SE4ALL), to identify the ways that GSEP, and the electric utility industry more broadly, can advance the work to meet the critical challenge of advancing universal energy access. This effort began at the Rio+20 conference in June 2012, where GSEP made concrete pledges to support the objectives of SE4ALL by: • Providing 50,000 solar lanterns to increase access to clean, off-grid electricity • Increasing the number of human capacity building workshops run by GSEP in developing and emerging countries • Expanding electricity access in southern Africa by providing financing for the development of Electrification Roadmaps Over the past year, a series of discussions and workshops were held with member companies and leading stakeholders in the renewable energy and energy access space to explore how GSEP can leverage its unique attributes to contribute further. From these discussions, two primary recommendations emerged: • Catalytic Global Investment Fund for Electricity Access Projects: A new, catalytic investment fund could increase access to lower-cost capital for electricity access projects by leveraging the unique expertise and technical competencies of member companies with outside capital. In doing so, it would combine the three elements that are critical to project success: capital, technology, and know-how. • Development of Standardized PPAs: PPAs are one of the most effective instruments for reducing market uncertainty and securing project financing. The development of a standardized PPA template that could be easily replicated, adjusted, and applied to a specific set of countries with similar regulatory or market dynamics could reduce transaction costs and be a game changer for electricity access projects. Both instruments offer a way to build on the special features of GSEP and its member companies, as well as the existing work that has been done on the issue of sustainable energy development – including the two recent reports produced by GSEP on effective public/private partnership models for accelerating global technology deployment. Most importantly, the instruments provide an opportunity to make a groundbreaking contribution to the efforts to expand electricity access. The global electric utility industry has an essential role to play in advancing universal energy access. It is our hope that this report represents a starting point for the discussion of what that approach is, and how GSEP and member companies can best contribute to one of most challenging, but important, issues in the world today.
James E. Rogers
Chairman, President and Chief Executive Officer, Duke Energy Chair 2012-2013, Global Sustainable Electricity Partnership
2
Sustainable Electricity for All
Recommendations to the Global Sustainable Electricity Partnership
3
Broad Goals Under SE4ALL and Work to Date
Introduction:
Building on the UN Secretary General’s Year of Sustainable Energy for All, GSEP has taken as its 2012-2013 theme “Universal Access to Electricity”, with the goal of defining how our organization, its members, and the utility industry broadly might best contribute to meeting this critical global challenge.
• Develop a Range of Standardized Power Purchase Agreements (PPAs) for Given Regulatory Environments, Recognizing There Are Project-Specifics – The development of standardized PPAs has been highlighted by stakeholders in the electricity access community as a potentially game-changing tool that would help reduce transaction costs and uncertainty associated with the project development process, and unlock access to lower-cost capital – and it is an area that GSEP is uniquely qualified to address. With a membership of the world’s leading electricity companies, GSEP has unrivaled technical expertise and experience with drafting, negotiating, and implementing PPAs, and could play a number of roles in helping to expedite the development of standardized contracts, including convening working groups among member companies to help facilitate template design. These roles offer GSEP the clearest opportunity to utilize the unique skill set of the organization and its member companies to fill critical gaps and make a significant impact to the SE4ALL initiative while helping to define GSEP’s actions over the next several years.
Launched in 2012, the UN Secretary-General’s Sustainable Energy For All (SE4ALL) initiative mobilizes action from all sectors of society in support of meeting three objectives by 2030: providing universal access to modern energy services; doubling the global rate of improvement in energy efficiency; and doubling the share of renewable energy in the global energy mix. The initiative focuses on catalyzing major new investments to speed the transformation of the world’s energy systems, recognizing that energy is essential for economic growth and increased social equity.
The development of standardized PPAs has been highlighted by stakeholders in the electricity access community as a potentially gamechanging tool
Over the past six months, a series of discussions have been held and in-depth research has been conducted to identify the most suitable role for GSEP in helping to expand electricity access. These discussions have included: • A survey of GSEP members on past projects and ideas for building on the strengths and special features of the organization • Interviews with a group of Education for Sustainable Energy Development (ESED) scholars on their experiences with electricity access projects in their home countries, and the challenges and role for GSEP • A Design Lab co-hosted at the Clinton Global Initiative with the UN on strategies and approaches to providing access to energy worldwide • A workshop co-hosted at The World Economic Forum on cross-sector partnerships and business models for expanding energy access • A roundtable discussion in Washington, DC with senior business leaders and investors on ways for GSEP to leverage private sector capital and expertise
4
Sustainable Electricity for All
Solar lamps have the potential to transform off- grid communities in developing countries.
Objective and Structure of Report Based on these discussions and the research into the work being done by other organizations in support of SE4ALL, it is clear that there is an opportunity for GSEP to leverage its unique attributes to make a potentially groundbreaking contribution to the efforts to expand electricity access. This report provides an overview of that opportunity.
Duke CEO James Rogers and Kandeh Yumkella, directorgeneral of the United Nations Industrial Development Organization (UNIDO), showcase a solar lamp at the Clinton Global Initiative Annual Meeting in September 2012.
It is organized into three sections: the first offers a review of GSEP’s contributions to date – past activities, the recent work on public private partnerships (PPPs), and the Berlin Commitments – and examines how that work ties into this year’s effort to help expand electricity access. The second section looks at the electricity access landscape, and lays out the opportunity for GSEP to make a unique contribution to help fill critical gaps. The third section lays out a path forward, exploring two specific potential roles for GSEP: • Global Sustainable Electricity Access Fund (GSEAF) – Electricity access projects in developing and emerging economies face the critical challenge of a lack of access to lower-cost capital, which investors are reluctant to provide because of the higher risks of these projects. GSEAF would address this issue by leveraging GSEP’s leadership to combine three components that are critical to the success of electricity access projects – capital, technology, and know-how. A fund management firm – to be determined by GSEP – would oversee the fund and GSEP and its members could play an integral role in the fund by offering technical advisory services to the projects as well as potentially investing directly in the fund. Recommendations to the Global Sustainable Electricity Partnership
5
GSEP’s Commitment to Electricity Access and Recent Progress
1. Overview:
• Importance of Private Sector Capital and Expertise - Survey respondents identified access to private sector capital, improved project design and implementation, and managerial experience among the most vital roles that the private sector can play in contributing to “the strongest partnerships for electricity technology deployment”
Level of agreement with ways the private sector can contribute to the strongest partnerships for electricity technology deployment
2012
Since its inception in 1992, GSEP has been an important player in the effort to address the challenge of electricity access in developing countries. Through its renewable energy projects and capacity building activities for off-grid communities, its scholarship program for students from developing countries addressing sustainable energy development, and its most recent efforts to promote PPPs and support UN’s SE4ALL initiative, GSEP has shown a commitment to leveraging the unique skills of its members to help solve the issue of electricity access. GSEP’s efforts this year represent a continuation of that commitment, and offer an opportunity to build on recent progress to meet the twin goals of a low-carbon future and universal access to energy.
This year’s work builds on the findings from these reports - specifically the importance of private sector capital and expertise, as well as power purchase agreements (PPAs), in promoting electricity technology deployment and infrastructure expansion:
% of respondents that agree/strongly agree instrument is important
Niraj Subedi
Access to Private Sector Capital* Managerial Experience† Improved Project Design and Implementation‡
2008-2009 recipient of the ESED Scholarship 0
10
20
30
40
50
60
70
80
90
100%
Source: 2012 Report on Strengthening Public-Private Partnerships to Accelerate Global Electricity Technology Deployment, GSEP/UN-Energy * private sector respondents † development bank and agency respondents ‡ public sector respondents
Past GSEP Projects and Activities GSEP’s projects, activities and network of scholars provide the organization with unique insights into the hurdles to electricity access projects as well as viable models of sustainable energy development:
• Capacity Building Activities - GSEP has also conducted workshops, seminars and technical training sessions to promote sustainable energy development. These activities have taken place in developing countries across five continents, and have covered issues such as financing and project assessment strategies, institutional and management strengthening, and regulatory issues in electricity markets. A number have focused exclusively on the challenges associated with off-grid electricity and rural electrification. These exercises enable GSEP members to apply their extensive knowledge to assist project developers and key stakeholders in expanding electricity access. 1
6
In 2011, GSEP, in partnership with UN-Energy, released the report Strengthening Public-Private Partnerships to Accelerate Global Electricity Technology Deployment that outlined nine recommendations, based on a survey of partnership promoters, practitioners and beneficiaries, for successful public-private partnerships in the deployment of low- and zero-emitting electricity technologies. In 2012, the second edition of the report was released, which offered the latest international research on what elements are necessary to strengthen public-private partnerships and ensure their success. With both reports, more than 100 major public and private actors, as well as development banks and agencies, were surveyed over the course of two years, giving insights into the role these partnerships have in advancing the global deployment of low-carbon electricity and helping increase access to cleaner electricity.
Nepal - Energy for Education Project http://www.globalelectricity.org/en/index.jsp?p=121&f=373.
Sustainable Electricity for All
Access to Private Sector Capital Managerial Experience Improved Project Design and Implementation 0
10
20
30
40
50
60
70
80
90
100%
Source: 2011 Report on Strengthening Public-Private Partnerships to Accelerate Global Electricity Technology Deployment, GSEP/UN-Energy
• The Critical Role of PPAs - Survey respondents identified PPAs as one of the most effective instruments for promoting low-carbon technologies, infrastructure expansion and the deployment of efficiency technologies.
Effectiveness in promoting low-carbon and zero-carbon technologies, infrustructure expansion (transmission, distribution, storage) and the deployment of efficient technologies
% of respondents that agree power purchase agreements are extremely effective/very effective Development Banks and Agencies Private Sector Public Sector 0
10
20
30
40
50
60
70
80
90
100%
Source: 2012 Report on Strengthening Public-Private Partnerships to Accelerate Global Electricity Technology Deployment, GSEP/UN-Energy
Effectiveness at promoting low-carbon and zero-carbon technologies, infrustructure expansion (transmission, distribution, storage) and the deployment of efficient technologies
2011
Berlin Commitments: to provide 50,000 solar lanterns, expand current capacity-building workshops, and fund the development of Electrification Roadmaps in southern Africa.
Recent GSEP Reports on Clean Technology Deployment
% of respondents that agree instrument is extremely effective/very effective
2012
• Renewable Energy Projects - GSEP has worked to implement innovative renewable energy projects in developing countries across four continents, including a number of projects that provided electricity to off-grid communities. GSEP’s role from the planning phase – negotiating agreements and determining legal and financial structures – to the design and deployment phase – technical assessments and energy systems installation – to the operations and maintenance phase – training and technical capacity – provides the organization with extensive knowledge of the operational and technical challenges of these projects as well as the requirements for their success.
• ESED Scholar Network - GSEP’s ESED scholars are active in the effort to advance the field of sustainable energy development in developing countries, and the scholar network is a powerful tool to share information and knowledge on the challenges associated with electricity access projects and opportunities for GSEP. One recent scholar, Niraj Subedi, used the work from his Masters thesis to propose a project that provides electricity to two remote off-grid schools in Nepal – a project that was completed in May 2013 by GSEP1. These scholars provide important on-the ground insights and lessons that GSEP can incorporate into its programs and activities.
2011
Level of agreement with potential ways the private sector can contribute to the strongest partnerships for electricity technology deployment
% of respondents that agree instrument is extremely effective/very effective (3 highest choices)
Niraj Subedi, a 2008-2009 recipient of the ESED Scholarship, utilized the work from his masters thesis on Nepalese energy policy to propose a sustainable energy project to GSEP that would bring power and lighting to an off-grid village development committee (VDC) in western Nepal. Initiated in December 2012, The Energy for Education project, led by Duke Energy, consists of a solar PV system at two local schools and the distribution of small solar home systems (SSHS) to residents in the surrounding Matela VDC. The solar PV systems provide lighting and access to modern education services, while the SSHS provide lighting at home, enabling students to complete homework at night. The project was inaugurated on April 16, 2013, and the Nepalese government’s Alternative Energy Promotion Center (AEPC), an invaluable partner in the effort, hopes that the project will serve as a model for using solar energy to improve the educational services in other regions of Nepal.
Power Purchase Agreement Local/National Investment Return on Investment 0
10
20
30
40
50
60
70
80
90
100%
Source: 2011 Report on Strengthening Public-Private Partnerships to Accelerate Global Electricity Technology Deployment, GSEP/UN-Energy
GSEP 2012 Summit and Berlin Commitments This year’s work also builds on progress made on the issue of energy access at the 2012 Berlin Summit and the three commitments GSEP made in support of the UN’s SE4ALL initiative, referred to as the Berlin Commitments: to provide 50,000 solar lanterns, expand current capacity-building workshops, and fund the development of Electrification Roadmaps in southern Africa. Recommendations to the Global Sustainable Electricity Partnership
7
2. State of Play:
Need for Rural El ectrification in Developing Countries Over 1.3 billion people, almost all of who live in developing countries, are without access to electricity worldwide.2 In many areas of developing countries, people currently rely on diesel, firewood, candles, kerosene, or an unreliable grid for their lighting and communications needs, income generating activities, and other services. Electrification brings a range of benefits to these communities, including reliable access to lighting, heating, cooking, refrigeration, and water pumping, which in turn affects critical health and livelihood outcomes and drives economic development.
According to a 2012 World Bank study on India3, household access to electricity increases household per capita income by nearly 38.6 percent. The study also found that household electrification increases school enrollment by about 6 percent for boys and 7.4 percent for girls. In addition, electricity in community facilities improves health by providing refrigeration to keep drugs and vaccines intact. As recently as 2007, 151 million vaccine doses were wasted in developing countries because of improper refrigeration.4 Despite these clear benefits, expanding electricity access remains a critical challenge. According to the IEA, based on current policies and future demographics, over 1 billion people will still lack access to electricity
Annual Investment in Electricity Access (in Billions USD) Annual Investment in Electricity Access Projected Available Funding Energy for All Case 2010-2030 0 5 10 15 20 25 30 35 40 45 50
Average Additional Annual Investment in Electricity Access Required by Region in the Energy for All Case India Other Developing Asia Sub-Saharan Africa Latin America 0 5 10 15 20 25 30 35 40 45 50
• Lack of Local Technical Capacity - A range of technical issues – from determining the appropriate combination of generation sources and components, to sizing the systems, to energy efficiency – are critical to the financial viability of electricity access projects in developing and emerging economies. However, many project developers and communities without electricity access in these markets face a lack of technical capacity to address and resolve these issues. In addition, the operations, maintenance and management experience of many developers is limited, and only available at extremely high costs. If these issues are resolved during the planning phases of a project, it can greatly extend the lifetime of the designed systems and improve affordability for end-users. For example, it is estimated with proper maintenance, the lifetime of a mini-grid can be more than 50 years, compared with the average lifetime of around 20-30 years.6
in 2030, of whom over 85 percent will live in rural areas – mostly in sub-Saharan Africa, India and other parts of developing Asia (excluding China).5 As public financing alone will not close this gap, the private sector is increasingly being called upon to finance sustainable solutions.
A. Hurdles to Expanding Electricity Access
• Uncertain Policy and Regulatory Landscape - The long-term, complex nature of investments in electricity access projects in developing and emerging economies requires a high level of policy certainty to help ensure consistent returns throughout the project lifespan. Unfortunately, the policy landscape in many of these markets is often volatile, which complicates project planning and restricts the ability of investors to project revenues. The same is true of the regulatory landscape, where immature institutions, multiple agency jurisdictions, and lengthy project approval, permitting, licensing, and land leasing requirements can add layers of uncertainty and quickly turn electricity access projects unprofitable. Long-term, stable, and transparent policies are needed to provide investors and developers with a clear sense of the government’s priorities and timetable for development, and coherent regulatory processes and structures are essential to expedite projects and remove the tremendous uncertainty associated with the planning and approval process.
There are a number of significant hurdles that need to be overcome to achieve universal electricity access. The hurdles below represent the most pressing areas commonly highlighted. As is evident in this list, the greatest hurdles to electricity access projects are seldom the technologies, but rather the financing and business models, sustainable operations and maintenance, and political and regulatory environments. • Cost of Capital, Access to Capital - For many electricity access projects in developing and emerging economies, there is a fundamental gap between the risk/return expectations of private sector investors and the risk/return profile of these projects. This perception of risk relative to the expected return on investment drives up the cost-of-capital for projects, making it difficult to obtain appropriately structured financing. Private sector investors who are able to offer lower costof-capital financing are often unwilling to take the risk of investing in electricity access projects in developing countries, while those who are willing to invest demand rates of return that make many
• Lack of Scalable Business Models - Low levels of economic activity and high levels of poverty, diffuse populations, limited existing infrastructure, and the lack of local distribution and supplier networks are among the unique issues in many
Source: World Energy Outlook 2011, IEA
2 3 4
5
8
“Energy for All. Financing Energy Access for the Poor”, OECD/IEA, 2012 . Khandker, Samad, Ali & Barnes. “Who Benefits Most from Rural Electrification? Evidence in India.”, The World Bank, 2012. Hayford, Kyla, Lois Privor-Dumm, and Orin Levine. “Improving Access to Essential Medicines through Public-Private Partnerships.” International Vaccine Access Center, 2011. The World Energy Outlook. “Measuring Progress Toward Energy For All.”, IEA, 2012.
Sustainable Electricity for All
communities without electricity that make creating replicable business models to address the issue of electricity access at scale a major challenge. While there is no shortage of innovative new business and project models that address these hurdles, there is a lack of available financing and capacity to scale up successful models or pilots.
investments uneconomical. In addition, many financial institutions – particularly local commercial banks and financial intermediaries who are key project decision makers – are unfamiliar with evaluating renewable energy projects or unequipped to handle the financing, making them hesitant to invest.
Opportune Time for Renewable Electricity Access Projects
B. Opportune Timing to Engage Recent technological advances and a growing number of initiatives dedicated to the issue of electricity access offer GSEP the opportunity to build on existing efforts to address the critical gaps that remain.
Bloomberg New Energy Finance Monocrystalline Cell Price (In USD/Watt) 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Jun. 2010
Dec. 2010
Jun. 2011
Dec. 2011
Jun. 2012
Dec. 2012
Source: Bloomberg
Technological Advances Improvements in renewables and utility technologies over the past decade, coupled with reduced manufacturing costs, have made it more cost-competitive to deploy clean and affordable renewable energy solutions to scale up electricity access. • Reduced Costs of Renewable Technology - The price of all major renewable energy technologies has fallen to be competitive with fossil-fuel sources, even without factoring in climate, health, and other benefits. Out of all renewables technologies, PV cells have seen the greatest plunge in price, with the price of $1.40 per watt at the end of 2010, to merely $0.45 per watt by the end of 2012, according to the Bloomberg New Energy Finance Monocrystalline Cell Price Index.7 Onshore wind turbine prices have followed a similar downward trajectory; prices for turbines to be delivered in the second half of 2012 were 11% lower than for devices delivered in the first half of 2010, according to the Bloomberg New Energy Finance Wind Turbine Price Index.8 Lower equipment costs for renewables technologies translates into more projects being commercially viable. For instance, the decline in solar
Demand for electricity in developing countries is increasingly being served by microgrids. For rural electrification especially, microgrids are moving into the mainstream of the power generation and distribution industry.
“Hybrid Mini-grids for Rural Electrification: Lessons Learned.” Alliance for Rural Electrification, 2011. BNEF Monocrystalline Cell Price. Bloomberg LP. April 15, 2013. 8 BNEF Wind Turbine Price Index. Bloomberg LP. April 15, 2013. 6 7
Recommendations to the Global Sustainable Electricity Partnership
9
Electricity Access by Country, % of Population without Access to Electricity (Excluding OECD and Transition Economies)
% of population without electricity >90
75–90
50–75
25–50
<25
not available
Source: World Energy Outlook (2009, 2012), IEA
Recent technological advances and a growing number of initiatives dedicated to the issue of electricity access offer GSEP the opportunity to build on existing efforts to address the critical gaps that remain.
10
Sustainable Electricity for All
Recommendations to the Global Sustainable Electricity Partnership
11
PV prices has been the single largest driver for remote micro-grids, since these generation and distribution systems are now cost-effective even without a subsidy in many markets.9
Bloomberg New Energy Finance Wind Turbine Price Index (EUR Million/MW) 1.08 1.06 1.04 1.02 1 0.98 0.96 0.94 0.92 0.9 0.88 Jun. 2010
Dec. 2010
Jun. 2011
Dec. 2011
Jun. 2012
Dec. 2012
Source: Bloomberg
• Wider Application of Micro-grid/Off-grid Technology Demand for electricity in developing countries is increasingly being served by micro-grids. For rural electrification especially, micro-grids are moving into the mainstream of the power generation and distribution industry. Micro-grid enabling technologies, including smart islanding inverters, advanced energy storage, internal forms of automated demand response (ADR), and other technologies are now serving the needs of energy producers, distribution utilities, and consumers in both developed and developing economies. With the exception of ADR, all of these enabling technology component sectors are growing, with the various forms of distributed generation (combined heat and power, fuel cells, solar PV, and distributed wind) demonstrating the most dramatic capacity and revenue growth. The largest investments in micro-grid enabling technologies have been made in combined heat and power technologies, fuel cells, solar PV, and various forms of distributed wind. Combined, these four technologies are expected to total more than 3,978 megawatts (MW) of new generation capacity valued at more than $12.7 billion in vendor revenues in 2018.10 As more investment flows into these sectors, advances in off-grid technologies will continue to drive down component costs, making electricity access
projects that use these technologies more costcompetitive. • Growing Attention to Energy Storage Technology One of the greatest barriers to the widespread adoption of micro-grids is an energy storage system. With current technology, batteries need to be replaced every three, five or seven years, which amounts to a significant capital cost. Currently, the default option for grid batteries is lead-acid, but new grid battery technologies such as lead-acid batteries with carbon electrodes, or ultrabatteries, with combination lead/carbon electrodes are becoming more cost competitive.11 On the consumer side of storage deployment, concerns about power-quality, peakshaving and grid-stability applications are creating demand for flow and lithium-ion batteries. Continued attention to and investment in energy storage is expected to yield further advances, helping bring down costs of this critical component in renewable electricity access projects.
• Few initiatives focus on scaling up innovative business models, and those that do face issues of size and structure, and have a broad investment scope There are a limited number of initiatives that are directly addressing the critical challenge of scaling up innovative business models for electricity access, and those that do, such as the Renewable Energy & Energy Efficiency Partnership (REEEP) and the Global Energy Efficiency and Renewable Energy Fund (GEEREF), face their own set of challenges. REEEP, for example, provides only a small amount of financing – its most recent funding cycle raised just over $5 million,14 which was distributed to 28 projects. GEEREF, while well capitalized, does not invest directly in projects, but is structured as a Fund-of-Funds, which prevents it from working directly with project developers to assist them in project execution.15 In addition, most of the investment initiatives have a broad scope; both REEEP and GEEREF invest in a range of renewable energy projects, and do not focus on one area, such as off-grid electricity projects.
• Growing Number of Electricity Access Initiatives, but Critical Gaps Remain - A number of initiatives are being undertaken to expand electricity access globally, many in support of SE4ALL’s broad objectives. These initiatives tend to focus on a diverse range of issues, including improving the policy and regulatory environment for renewables, lowering the cost of capital financing, developing local technical expertise and establishing competitive product markets. The recent push by these initiatives is helping to create a wave of momentum for efforts to expand electricity access; however, while many of these initiatives have admirable goals, they also face challenges that prevent them from effectively addressing key hurdles. • Many initiatives prioritize broad macro challenges, such as creating enabling environments, but few address specific mechanisms - There is a wide range of initiatives that address the issue of electricity access by focusing on creating an enabling ecosystem for electricity access projects. For instance, Energy+ targets the policy and regulatory environment of potential markets, with the goal of creating an environment where electricity access projects can be scaled up12; and the Energy Sector Management Assistance Program (ESMAP) provides advice to help establish regulatory and policy frameworks that are conducive to scaling up access to modern energy.13 However, there is less attention on implementing specific mechanisms that could help transform the markets for electricity access, such
• Few initiatives address hurdles by bundling capabilities, such as technical & operational capacity building and financing, into one package at scale - There are a variety of organizations that provide technical & operational capacity building and financing for electricity access projects. For instance the Global Village Energy Partnership (GVEP) provides technical assistance along with small loan guarantees and equity investments to electricity access projects. 16 However, there are few initiatives that combine technical and operation capacity building with financing at scale to reduce project risk.
C. Unique Role for GSEP With rapid advances in technology reducing the costs of commercial deployment of renewables projects, the growing attention of international organizations to the issue of electricity access, and the need to address key hurdles such as access to financing and scalable business models, it is apparent that there is an opportunity for GSEP to build on existing efforts to address the critical gaps that remain. In doing so, GSEP
can capitalize on its two unique advantages: • Utility-Driven Focus - GSEP’s members include some of the largest, and most experienced electricity companies in the world, whose collective operational knowledge of issues ranging from tariff structures to commercial distribution models is unmatched. Furthermore, a number of members have direct experience addressing the issue of electricity access in their home markets and could provide valuable insights on the role of utilities in tackling these issues. • Ability to Close the Capital Gap - The issue of access to financing is the one of the core challenges in expanding electricity access, as investors remain reluctant to commit capital to commercially risky, off-grid projects. The experience of GSEP members with these projects and technical knowledge of the various distributed generation and transmission & distribution technologies offers a unique way to overcome this capital gap by reducing the technical and operational risks and helping to ensure the commercial viability of projects.
9
14
REEEP “9th Funding Cycle” http://www.reeep.org/9th-funding-cycle.
15
Investment Scope, Global Energy Efficiency and Renewable Energy Fund, http://geeref.com/posts/display/8.
16
The Global Village Energy Partnership, http://www.gvepinternational.org/.
Sustainable Electricity for All
One of the greatest barriers to the widespread adoption of micro-grids is an energy storage system
GSEP has the opportunity to make a novel and significant contribution to the issue of electricity access by utilizing these strengths – the unrivaled operational knowledge and deep technical capabilities of its members – to help unlock private capital and scale innovative new business models. This could be done in a number of ways; the next section lays out two roles that offer GSEP the clearest opportunity.
10
Asmus, Peter “Developing Nations Look to Remote Microgrids for Energy Solutions” Navigant Research. December 23, 2011. Asumus, Peter, and Carol Stimmel “Microgrid Enabling Technologies.” Pike Research, October 2010. 11 Bullis, Kevin. “How Solar-Based Microgrids Could Bring Power to Millions.” MIT Technology Review, October 2010. 12 International Energy and Climate Initiative, Government of Norway. http://www.regjeringen.no/en/dep/ud/campaigns/energy_plus.html?id=672635. 13 Energy Sector Management Assistance Program, http://www.esmap.org/.
12
as issues with regulatory approval processes and standardized contracts.
Recommendations to the Global Sustainable Electricity Partnership
13
3 . A Novel Investment Fund
Focused on Electricity Access in Developing Countries
Origin of the Global Sustainable Electricity Access Fund (GSEAF) The idea for an investment fund was identified by participants in the private sector roundtable in Washington, DC as the single most effective tool to leverage GSEP members’ wealth of operational knowledge and technical expertise to address the issue of electricity access.
To ensure that GSEAF makes business grade investments, GSEP could provide GSEAF with technical advisory services to help evaluate potential projects.
Initial feasibility work has determined the broad parameters of a potential fund, as well as a range of potential partners – including several, such as the Overseas Private Investment Corporation (OPIC) and The World Bank, that have expressed a strong interest in supporting the fund by co-investing in projects or providing other tools, such as political risk insurance. The objective of this section is to describe the unique value of a potential fund and offer a blueprint and timeline for development, with the goal of finalizing details on alternative fund structures and a potential implementation plan to present to GSEP Members in June.
with local electric utility organizations that are known to GSEP members. Project financing could include debt from International Finance Institutions (IFIs) – such as the World Bank, IFC, EIB, EBRD, KfW, ADB, AfDB or IADB – and other organizations, such as OPIC. Early conversations with a number of these institutions have indicated a high level of support for GSEAF, with OPIC indicating it would be willing to assist in a number of ways, including by directly investing in the fund, providing debt for projects undertaken by the fund, and by providing political risk insurance for projects. There is also the potential for involvement of local lenders from the project markets.
A. The Unique Value of GSEAF
GSEAF’s investment portfolio could be comprised of projects that meet local needs for energy access, and could include wind, solar, hydro, geothermal, and biomass power generation projects; cogeneration and combined heat and power projects; village power micro-grid projects; and transmission line projects. GSEAF could bifurcate the investments based on expected returns. One part of the fund could focus on low-return projects, such as off-grid and village micro-grid projects, while the other part could focus on projects with higher expected returns, such as grid-connected projects completed in partnership with state-owned utilities.
GSEAF would be a catalyst fund, intended to stimulate the development of sustainable electrification projects by demonstrating the commercial viability of these projects, which at scale, could then attract the additional capital needed to fill the investment gap in these markets. GSEP’s leadership would distinguish the fund by combining three components that are critical to the success of electricity access projects in developing and emerging markets – capital, technology, and know-how. This novel approach would overcome the critical gap of access to capital by helping to de-risk investment in sustainable electricity projects and would promote sustainability and scalability by deeply integrating GSEP members into the investment strategy process and by demonstrating the commercial viability of projects that could address the issue of electricity access at scale.
B. Blueprint of Potential Structure of GSEAF and Role for GSEP GSEAF could co-invest in commercially viable electricity access projects in developing and emerging markets 14
Sustainable Electricity for All
• Input on Investment Strategy - To ensure that GSEAF makes business grade investments, GSEP could provide GSEAF with technical advisory services to help evaluate potential projects. With international field-proven expertise in the planning, management, design, operation, and maintenance of energy facilities, GSEP member companies are uniquely qualified to evaluate projects for the fund to ensure they are commercially viable. • Technical Capacity Building for Projects - Given GSEP’s broad experience undertaking electricity access projects and conducting technical training sessions and capacity building for electricity access projects and renewable energy systems, GSEP members could provide technical assistance to operate, install and monitor energy systems and scale management training for local project teams, as well as develop other solutions to take limited project managerial resources and maximize benefits.
C. Recommendations on Next Steps There is tremendous potential for GSEP to contribute to the issue of electricity access through GSEAF, as evidenced by the strong support of the business community and early positive feedback of several potential partners who have been briefed on the fund; however, ultimately the decision to participate is up to the GSEP members. A significant amount of feasibility work is underway to build on the blueprint that is outlined above, including the critical element of finding an institution in which to house the fund. The goal is to finalize details on alternative fund structures and an implementation plan for the June 2013 Annual Summit, at which time GSEP members would be able to review the details and vote on whether or not to pursue the fund. If the GSEP members decide to move ahead on the fund, this implementation plan could then be triggered.
A micro-hydro facility is being installed by GSEP in Cochico, a small community in Argentina. The facility will serve as a model for renewable energy projects in isolated communities.
As part of their leadership role in the fund, GSEP member utility companies could contribute by directly investing in the fund and by leveraging their operational knowledge and technical expertise to provide a range of advisory services. There are several forms these services could take, including helping to identify and screen projects in which the fund invests, providing technical assistance and training to project teams and providing on-site technical services during construction. Recommendations to the Global Sustainable Electricity Partnership
15
Case Study: Standardization of PPAs in Kenya
4 . Opportunity for the
Standardization of PPA’s
Development of a Range of Standardized Power Purchase Agreements
A recent effort by the Government of Kenya to promote PPA standardization represents a potential starting point for GSEP to engage on developing a standardized PPA for renewables electricity access projects in a specific region as well as a valuable model to inform GSEP’s internal efforts.
A second area where GSEP could leverage its unique attributes to contribute to expanding electricity access is the standardization of PPAs. The complex process of negotiating PPAs between private power producers and power buyers is a major hurdle to private sector investment in renewables projects in developing countries. Development of a neutral range of standardized PPAs, designed to fit a country or regional regulatory system and developed with local government and private stakeholders, would dramatically streamline the negotiation process, mitigate investors’ exposure to risks, and provide Independent Power Producers (IPPs) with greater access to lower-cost capital.
GSEP could assemble a working group comprised of GSEP members to determine the characteristics that enable replication of a standardized PPA across countries.
However, much of the work on standardized PPAs that has been done at the country level is limited in its scope of applicability. There have been few efforts to develop referable standardized models for a group of countries with similar characteristics. This gap represents a clear opportunity for GSEP to leverage its technical expertise and experience in drafting, negotiating and implementing PPAs to play a role in promoting the standardization of PPAs for electricity access projects.
producer and the power buyer – often a state utility – and facilitate project financing for IPPs. From the perspective of lenders and investors, a standardized PPA removes market uncertainty and allows for the development of standard models that can be used to create rating and risk assessment metrics, which increases efficiency and reduces transaction costs. As a result, IPPs are likely to see their position in local and international capital markets enhanced and have greater access to lower-cost capital.
A. Opportunity for the Standardization of PPAs
Existing Efforts and Limitations on Applicability
The Importance of PPA Standardization
A limited amount of work has been done at the country level to develop standardized PPAs. For instance, there have been efforts to standardize PPAs in Thailand, Sri Lanka, Indonesia, Vietnam, Pakistan, Namibia, Uganda, Tanzania, and Kenya. However, some standardized PPA models were designed too simplistically to be employed widely in practice,18 or failed to meet expectations of IPPs and lenders;19 in addition, many models have built-in constraints on the scope of application,20 limiting the extent to which they can be replicated in other countries. The World Bank has been active in promoting PPA standardization in developing countries; however, its direct involvement in designing standardized PPAs has been limited and the country examples of standardized PPAs it hosts on its online “Infrastructure
A long-term, contractually binding PPA is critical for IPP renewable energy projects in developing countries to secure investor confidence, as survey participants identified in the 2012 report on public-private partnerships, where “over three quarters of respondents stated that the use of [a] PPA is extremely to very effective in securing financing”.17 However, IPPs often have to spend a substantial amount of time, legal fees, and administrative costs in negotiating with various stakeholders before reaching a PPA that is accepted by all parties. The prolonged PPA negotiation process can deteriorate liquidity, erode profitability, and discourage private sector investment in these projects. An impartial, neutral standardized PPA could create a relatively level playing field between the private power
16
17
“Strengthening Public Private Partnerships to Accelerate Global Electricity Technology Deployment”, Global Sustainable Electricity Partnership http://www.e8casestudies.org/casestudies/docs/e8Report.pdf.
18
One example is the PPA template that was employed in Thailand in mid 1990s. See Ferry & Cabraal, “Power Purchase Agreements for Small Power Producers.” ESMAP Knowledge Exchange Series No.7, November 2006.
19
Mutambi, Benon, “How to Make Energy Financing A Reality in Uganda.” December 2012. http://era.or.ug/wp-content/uploads/2012/12/Africa_ EU-Partnership.pdf.
20
“Technical and Economic Study for Development of Small Scale Grid Connected Renewable Energy in Kenya.” Economic Consulting Associates Ltd., June 2012.
Sustainable Electricity for All
In December 2012, the Government of Kenya issued two drafts of standardized PPAs: one, a template for small renewable energy generators less than and equal to 10 MW, and the second, for renewable energy generators greater than 10 MW. Given the similarities in grid capacity between Kenya and other countries in the region, there is an opportunity for GSEP to build on the Kenyan PPA templates to help regionalize a set of standardized PPA models for East African countries. According to Murefu Barasa, a consultant at Camo Clean Energy in Kenya and a 2007 ESED scholar, “the size of the electricity system in Kenya is 1000 MW, and the other East African countries have similar capacity… [thus] most of these [Kenya] clauses would apply to the
other countries.”21 Pavel Oimeke, Director of Renewable Energy at the Energy Regulatory Commission of Kenya, estimated that “ around 80 to 90 percent of Kenya’s standardized PPA templates could be used in [other] East African countries.”22
to 10 MW, while the PPA template for generators above 10 MW leaves some leeway for negotiation. As a result, the PPA negotiation process for both large and small-scale generators has been streamlined to the greatest extent possible.
There is also an opportunity for GSEP to use the Kenya example to inform efforts to identify similar countries where GSEP could tailor a basic standardized PPA template. There are a number of features of the Kenya example that helped contribute to an efficient process – the total time between drafting to issuing the PPA templates was under nine months – that was greeted positively by the private sector. Some of those features include:
• A favorable policy and regulatory environment: The Government of Kenya is actively promoting renewables as a priority to advance electricity access. The established feed-in-tariff mechanism provides a tariff scheme across different technologies and project scales, simplifying the process of drafting standardized PPAs and allowing for further adjustment of tariff levels outside the framework of the PPA templates.
• Differentiating templates by project scale: Realizing that PPA provisions for large projects tend to be more complex than those for smaller projects, Kenya drafted two separate standardized PPA templates according to project scale. By doing this, they were able to draft a non-negotiable standardized PPA for generators up
Resource Center” explicitly state that they “should not be used as a model”23 to inform other efforts. Opportunity for GSEP to Address These Constraints GSEP could help expedite PPA standardization in developing countries by leveraging its members’ unique operational knowledge of the PPA process, and experience with renewable projects and capacity building initiatives, to produce a standardized template that could be easily replicated, adjusted, and applied to a specific set of countries that share similar characteristics. This template could include elements of a PPA that are more easily standardized, and leave out country or market specific issues that often delay PPA negotiations. With a basic PPA template in place for the group, the template could then be tailored to address specific regulatory or market dynamics in each country. GSEP would benefit from its unique position as an outside party with no direct relevant interests, making it more likely to win stakeholders’ trust on the quality and neutrality of the standardized template it develops.
• Support by state utility: The Kenya Power and Lighting Company (KPLC), the state utility that cited spending a significant amount on transaction costs while negotiating PPAs, was incentivized to support standardization.
B. Recommendations on Next Steps GSEP could assemble a working group comprised of GSEP members to determine the characteristics that enable replication of a standardized PPA across countries. This working group could include relevant participants from past GSEP projects and capacity building exercises, as well as ESED scholars and relevant stakeholders in the electricity access community. After a set of characteristics has been defined, GSEP could identify a group of countries that share these characteristics, and engage governments and various stakeholders in these countries – including representatives from local utilities, regulators, IPPs, distribution companies, commercial banks, and international financial institutions – to help develop the basic scope of elements that could be standardized across the group, and those that are specific to a country or market. GSEP could then work with these stakeholders to develop a basic standardized PPA template. GSEP could tailor the basic standardized PPA template to individual countries within the group or region, working closely with governments and stakeholders to ensure specific regulatory or market dynamics are addressed.
PPP in Infrastructure Resource Center, World Bank, http://ppp.worldbank.org/public-private-partnership/sector/energy/energy-power-agreements/ power-purchase-agreements#smaller. 22 Barasa, Murefu. Personal Interview. 27 February, 2013. 23 Oimeke, Pavel. Personal Interview. 26 February, 2013. 21
Recommendations to the Global Sustainable Electricity Partnership
17
Design by: www.kTDCreative.com
Global Sustainable Electricity Partnership General Secretariat 505 de Maisonneuve Blvd. W, Lobby Montreal QC H3A 3C2 CANADA Tel.: +1-514-392-8876 Fax: +1-514-392-8900 generalsecretariat@hydro.qc.ca
