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Republic of Trinidad and Tobago to develop Feed-in Tariff Policy and Legal Instruments
FINAL REPORT October 25th, 2012 Prepared for the Ministry of Energy and Energy Affairs of Trinidad and Tobago Prepared by Wilson H. Rickerson
Contact: Wilson Rickerson Meister Consultants Group, Inc. (MCG) 98 N. Washington St, Suite 302 Boston, MA 02114 +1 617 934 1676 firstname.lastname@example.org Contributors: Christina Becker-Birck, MCG Chad Laurent, Esq., MCG Toby Couture, IFOK GmbH Wazeer Aleem Ian Ivey, MCG 2|P age
This study describes a potential renewable energy policy design for Trinidad and Tobago (T&T). The study explores feed-in tariff (FIT) policy design as it relates to T&T’ specific policy objectives and s national conditions. This Section provides an overview of T&T’ policy goals and a general discussion of s FIT policy. Section 2 includes a detailed explanation of feed-in tariff design issues and recommended policy designs.
1.1. POLICY OBJECTIVES
Trinidad and Tobago is currently exploring the introduction of grid-connected renewable energy resources in order to support several key policy objectives: • Long-term energy security. T&T’ economy is heavily dependent on its domestic energy resources. s T&T’ natural gas resources have enabled it to enjoy the lowest electricity prices in the Caribbean s region and to establish a balance of payments surplus in trade (T&T Central Statistical Office, 2012). Energy accounted for TT$9.1 billion in domestic revenue in 2010, up from TT$7.8 billion in 2009, and accounted for 82.5% of total exports. Oil production peaked in T&T in 1978, however, and there are approximately nine years of proven natural gas reserves left at current production levels (McHalffey, 2010). Although it is likely that additional natural gas fields will be discovered and moved into production, T&T is beginning to explore renewable energy development in the near-term in order to hedge the risk of natural gas production declining. Renewable energy can also displace the need to use natural gas for electricity generation and free it up for use in higher value uses in downstream industries. Climate change and environmental protection. T&T has signed the Kyoto Protocol, and T&T policymakers have framed the need to reduce greenhouse gas emissions from the energy sector as a moral issue. The emphasis on the environmental benefits of renewable energy has been a consistent theme of T&T’ policy documents for more than a decade. The Ministry of Energy and s Energy Industries’Energy Policy Green Paper (1998), for example, identified renewable energy as a priority and noted that the environmental externalities of fossil fuel generators are not appropriately reflected in current energy prices. The Renewable Energy Committee’ Framework for s Development of a Renewable Energy Policy for Trinidad and Tobago (2011), as well as Draft Green Paper on Energy Policy for Trinidad and Tobago (2012) both identify greenhouse gas reduction as an explicit policy objective and cite climate change mitigation as a justification for renewable energy development. A commitment to renewable energy would enable T&T to address national environmental concerns and to play a leadership role in the region. Further diversification of the economy. Although T&T has successfully transitioned its economy from one dependent on agriculture (e.g. cocoa and sugar cane) to one driven by energy commodities and downstream natural gas industries, the future of extractive industries in T&T is uncertain. The T&T Vision 2020 study noted that global demand for natural gas would only be outpaced by demand for non-hydro renewable energy sources (Vision 2020 Energy Sub-Committee, 2006). Renewable energy market growth has rapidly accelerated during the past several years, with 3|P age
global investments expanding from $61 billion in 2005 when the Vision 2020 study was underway, to $257 billion in 2011 (Frankfrut School-UNEP & BNEF, 2012). T&T has successfully positioned itself to be an exporter of not only natural gas, but of energy service expertise, and T&T could develop a similar position with renewable energy for the Latin American and Caribbean region (and beyond) as markets continue to expand. Recent research has already focused on these opportunities - the University of Trinidad and Tobago, for example, has been exploring the potential for T&T to cultivate a domestic photovoltaic manufacturing industry (e.g., Alexander et al., 2006).
1.2. FEED-IN TARIFFS INTERNATIONALLY
In order support renewable energy market growth, T&T is considering several different policy options, including renewable portfolio standards, net metering, open access, and feed-in tariffs (FIT) (Renewable Energy Committee, 2011). These policy concepts were introduced by the Renewable Energy Committee, and received positive feedback during the National Energy Policy Consultations of 2010-2011. The goal of this report is to propose a potential FIT design that takes T&T’ policy objectives and national s context into account. As of 2012, 118 countries had enacted renewable energy targets, up from 45 in 2005 (REN21, 2012. FITs were the most prevalent national renewable energy policy in the world used to meet these targets, with FITs in place in close to 70 countries (REN21, 2012). FITs have supported the majority of non-hydro renewable energy around the world, including 60% of global wind (i.e. 140 GW) and 75% of global PV (i.e. 52 GW). FITs have been adopted by a broad range of countries, ranging from large developed economies such as Germany and Japan, to small, emerging economies such as Mauritius and Rwanda. A recent trend has been the adoption of FIT policies by petroleum producing countries, such as Indonesia and Malaysia. In 2012, Saudi Arabia also announced that it was developing a large-scale FIT program to help procure 54.1 GW of renewables, including 41 GW of solar energy, by 2030 (Al-Gain, 2012). A table of petroleum producing countries that have enacted renewable energy targets and FIT policies is included below. Their oil and gas production, as well as that of T&T, is also included as a reference. Country Saudi Arabia Indonesia Malaysia Kazakhstan Trinidad & Tobago Renewable Electricity Target 54.1 GW by 2030 (i.e. > 40% by 2030) 15% by 2025 5% by 2015 3% by 2020 N/A Status of FIT Pending 2013i est. 2012 est. 2011 est. 2009 N/A Natural gas (M3/year) 83,940,000,000 82,800,000,000 58,600,000,000 35,610,000,000 42,380,000,000 Oil (Bbl/day) 9,540,000 1,423,000 693,700 1,540,000 151,600
Despite the rapid diffusion of FIT policies internationally, no two FIT policies are the same. Each country has customized its FIT design to match its specific national objectives and conditions. In designing a FIT for T&T, it is important to recognize T&T’ unique position as both a small island democracy and an oil s and gas producing nation. 4|P age
In order to structure the proposed feed-in tariff design, this study uses a framework published by the United Nations Environment Programme’ (UNEP) in a report entitled, Feed-in Tariffs as a Policy s Instrument for Promoting Renewable Energies and Green Economies in Developing Countries. The UNEP report is intended to serve as a guide for policy makers and law drafters that are designing FIT policies. The report walks through close to 20 different design decisions related to feed-in tariffs, and discusses their tradeoffs with regard to key considerations such as policy cost, investor security, price stabilization, energy access, etc. The report also includes sample language drawn from existing FIT laws and policies around the world to serve as benchmarks. The UNEP report was developed with feedback from international policy experts, including a workshop in 2012 in Europe attended by staff from the T&T Ministry of Energy and Energy Affairs (MEEA). UNEP and the Government of the Republic of Trinidad and Tobago (GORTT) subsequently entered into an agreement to support the development of a proposed FIT policy in T&T utilizing the guide. Under the agreement, an initial workshop with MEEA staff was held in Port of Spain in July, 2012, in which key policy objectives and design considerations were confirmed. Initial policy design recommendations were then presented to stakeholders during a subsequent workshop in September, 2012. Feedback from the second workshop was used to craft a set of final policy recommendations, which are summarized in this report. The recommendations were developed taking into account the objectives outlined in Section 1.1. Based on input from MEEA and other stakeholders, several additional considerations and guiding principles were also taken into account during the policy design process: • • T&T’ retail electricity rates are low, whereas renewable electricity will require above market s payments in order to be built. Following the completion of the TGU natural gas plant, T&T will have excess generating capacity through at least 2015. The need for new generating capacity is therefore not a near-term driver for renewable electricity development. T&T currently does not have a process to allow small-scale electricity generators to interconnect with the distribution grid. The goal of renewable electricity policy for the near-term should be to demonstrate the viability of grid connected power and to enable a broad range of Trinibagonian citizens and institutions to participate in power generation and ownership. Ownership of renewable energy generation by citizens and small businesses will help to reinforce the MEEA’ recently launched renewable energy s communication strategy, which emphasizes greater participation in the energy system under the brand, My Energy My Responsibility. 5|P age
Taking these considerations into account, it was agreed that the FIT policy developed under this project should be viewed as a pilot to support smaller-scale, distributed generation in order to provide opportunities for new ownership models and to provide the utility (Trinidad and Tobago Electricity Commission, or “the Commission”) with an opportunity to gain experience with third party-owned systems connected to the distribution grid. The lack of established technical and administrative procedures for renewable energy can serve as a significant barrier to market growth. By supporting renewable energy development on a pilot basis in the near-term, these procedures can be put in place and T&T can better position itself for future renewable energy market expansion should energy security concerns, or other factors, require it. The goals of the pilot are therefore not only to support renewable energy market growth, but also to build domestic institutional and technical capacity related to renewable energy development. These considerations guide the proposed design described in Section 2.
2. PROPOSED POLICY DESIGN
This section introduces a proposed FIT policy design for T&T using the framework developed by UNEP as a reference point. The Section is structured to include short discussions of each policy design issue, which include: • • • • A definition of the issue An overview of the key tradeoffs Policy recommendations Identification of implementation considerations
2.1. INTEGRATION WITH POLICY TARGETS
As discussed in Section 1.2, close to 120 countries have established specific targets for renewable energy around the world, including ~10 Caribbean nations. Some of these targets are binding, whereas others are statements of goals or intent. When designing feed-in tariff policy, an initial question is how and whether the policy is explicitly linked to the target, or whether there is no explicit linkage. Germany’ FIT s policy, for example, is identified in its energy law as the mechanism by which the country will meet its mandatory targets of 35% electricity by 2020 and 80% renewable electricity by 2050 Tradeoffs • Explicitly linking a FIT policy to a national target – particularly if the target is binding and backed by an enforcement mechanism for compliance -- supports investor security because it represents a formal government commitment (DB Climate Change Advisors, 2009, 2011). Linking the FIT to the national target can create additional administrative complexity, however, because policy makers must then track progress toward the target using registries, periodic reporting, or other mechanisms.
Recommendation It is recommended that T&T eventually integrate its FIT with a binding policy target in order to support investor security. The administrative complexity of needing to track progress toward the policy target under the FIT would not be a significant incremental administrative burden above what will already be incurred through basic FIT program management, and will also provide T&T with a useful tool to monitor and manage the growth of its renewable energy markets. Implementation considerations The Renewable Energy Committee recommended that a Renewable Portfolio Standard (RPS)1 be developed, which would include a target requiring increased production of renewable energy. T&T does
It should be noted that an RPS and the FIT are not mutually exclusive policies. FITs can be utilized as a mechanism to meet RPS targets, as has been done in jurisdictions such as the US states of Hawaii and California.
not yet have a formal renewable energy policy target, however. A renewable energy penetration factor of 5% of total installed capacity (i.e. 80 MW) has been judged to be “practical” but a lower target of 5% of peak demand – i.e. 60 MW – has been recommend (Ministry of Planning and the Economy, 2012; Renewable Energy Committee, 2011). As discussed in Section 1.3 above, a goal of this proposed policy is to create a pilot program to gain experience with distributed renewable energy deployment, rather than to achieve a specific national policy target. A national target is therefore not a prerequisite for the proposed FIT policy and the FIT can be developed first and integrated with the policy target at a later date once it has been set.
Eligibility defines the type of generation that can participate in the FIT policy. Internationally, eligibility definitions vary from policies that focus on only one type of project to policies that are open to all project types. This Section discusses options for FIT eligibility in T&T based on size, technology, interconnection point, and ownership.
2.2.1. TECHNOLOGY ELIGIBILITY
• • The key policy decision related to technology eligibility is whether to restrict the type of technologies that can participate in the policy and if so, how. T&T’ renewable energy resource has not yet been formally or comprehensively assessed, but wind s has been identified as a priority resource for development and T&T also has an abundant solar resource. It is recommended that eligibility for the pilot FIT be limited to wind and solar photovoltaic (PV) generators. Other promising technologies, such as waste-to-energy and landfill gas can either be supported by other policy mechanisms or can be integrated into the FIT policy at a later date. T&T could consider integrating a broad definition of renewable energy into the Trinidad and Tobago Electricity Commission Act in the definitions Section (Part I, Section 2), which would identify the energy resources that are considered “renewable.” The definitions contained in the Glossary of the Renewable Energy Committee’ framework document would be a good starting point. The pilot FIT s should be defined in law as limited to wind and PV, with a reference to the broader renewable energy definition.
2.2.2. SIZE ELIGIBILITY
• • The policy decisions related to size eligibility are whether to restrict size, and if so, whether to apply a size cap and/or to apply a size floor. Generally, larger projects are likely to be more cost effective because of economies of scale, but are less likely to be domestically owned and financed, whereas smaller projects tend to be more expensive (i.e. on a $/watt basis), but more likely to be domestically owned and financed. Given the pilot nature of the project, it is recommended that eligibility for PV and wind be capped at 100 kW. Keeping the project size small will enable a broad range of local investors and owners to participate in the pilot, and will prevent the pilot policy from being dominated by 1-2 large projects. 8|P age
Larger projects could be accommodated in subsequent rounds of the FIT -- this is the approach that has been adopted by countries such as Mauritius, which moved from a pilot FIT for generation under 50 kW to a FIT for generation above 50 kW in size. Larger projects could also be procured through alternative policy mechanisms, such as competitive tenders. This has been the approach, for example, taken in Nova Scotia under which smaller, community-scale projects are supported by a FIT and utility-scale projects are procured through competitive tender. It is also recommended that a size floor of 0.5 kW be included in the policy.
2.2.3. GRID CONNECTION ELIGIBILITY
• The policy decisions related to grid connection eligibility are whether to limit interconnection to connection to a certain voltage level (e.g. the transmission or distribution grid) and/or whether to focus only on on-grid or mini-grid interconnections. Distribution grid interconnections can be less costly and complex than transmission system interconnections. However, limiting the program to distribution grid interconnection limits the size of both the program and the size of individual systems. Given the pilot nature of the proposed policy, it is recommended that grid interconnection be restricted to the distribution grid in order to limit project complexity and cost. This limitation is also consistent with the project size eligibility limitations discussed above. Projects of 100 kW and below in size are typically not interconnected at the transmission level.
2.2.4. OWNERSHIP ELIGIBILITY
• The policy decisions related to ownership eligibility are whether to allow all project types to participate, or whether to limit project eligibility only to projects that are owned by, e.g., public, private or community-based entities. Similar to the size eligibility distinction discussed above, limiting ownership to structures that are locally owned and financed (e.g. community-based systems) will create greater opportunities to capture local economic benefits. However, such systems may be more expensive to develop and may raise overall policy costs. A related consideration is whether to enable incumbent utilities (i.e. the Commission) to participate in the policy. Enabling utility participation may “crowd out” independent power producers (IPPs). One of the goals of the proposed policy is to enable domestic entities that previously have not participated in the energy industry to have the opportunity to invest in, and capture benefits from, power generation. It is recommended that eligibility be limited to private residents and businesses, schools and educational facilities, as well as those entities eligible to access the Green Fund.
2.2.5. IMPLEMENTATION CONSIDERATIONS
As discussed above, new legislative language would likely need to be drafted specifying the eligibility for the FIT program. Language such as the following could be considered:
“In order to qualify for the feed-in tariff, eligible renewable electricity generation facilities must use wind energy or solar photovoltaic technologies that are 100 kW of installed capacity or smaller in size and that are interconnected to the distribution network. Eligible renewable electricity generation facilities must be owned by residents, private businesses, schools, educational facilities, or entities eligible to access the Green Fund.
2.3 TARIFF DIFFERENTIATION
The issue of tariff differentiation is closely related to, but distinct from, the issue of eligibility. While eligibility refers to the types of projects that can participate in the FIT policy, differentiation refers to whether specific types of projects receive specific FIT rates. FITs can be differentiated by, for example, technology type, project size, resource quality, ownership type, and/or location. The alternative is to have only one FIT rate available to all project types.
Tradeoffs • Undifferentiated tariffs utilize a “one size fits all” approach under which all technologies receive one rate. Such “technology-neutral” approaches are administratively simple, but cannot be tailored to achieve specific policy goals. Differentiated tariffs can achieve greater portfolio diversity by supporting a range of specific generation types. Tariffs can be differentiated to support local economic development by targeting small or community-owned systems, but there may be tradeoffs with regard to policy cost since smaller systems may be more expensive.
Recommendation It is recommended that the FIT rate be differentiated by technology, with separate rates for wind and for PV generators. With regard to size differentiation, there are clear economies of scale in wind and solar generation, meaning that larger systems typically cost less to install and finance and therefore require a lower $/kWh payment. A recent report for T&T, for example, estimated that a 2 kW PV system would require a US$0.28/kWh payment over 20 years, whereas a 50 kW system would require a $0.22/kWh payment (Castalia, 2011).2 Appendix I discusses size differentiation in greater detail and provides an overview of how other jurisdictions have differentiated by system size. Given the fact that size eligibility is already limited to 100 kW, it is recommended that PV be differentiated by systems 10 kW and below and 11-100 kW. It is recommended that wind similarly be differentiated by 10 kW and below and 11-100 kW. Given the fact that wind generators in T&T are also eligible for a wear and tear allowance on 150% on the costs to acquire their equipment, there might also be an argument to differentiate the tariff by whether or not the owner is able to take advantage of this benefit. In other
It should be noted that PV prices have declined dramatically during the past two years and the levelised cost of energy for PV in T&T is likely significantly lower.
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words, non-profits might get a higher rate than taxable entities in order to reflect the fact that nonprofits cannot monetize the wear and tear allowance. The issue of the FIT’ interaction with other s incentives and policies is discussed in more detail in Section 2.18. Implementation considerations Some laws specify the rates that will be paid under the FIT in the legislative language itself, whereas other FIT policies direct the relevant regulatory body to set and approve the rates (Gifford, Grace, & Rickerson, 2011). This choice depends on both the regulatory structure of the country in question, as well as the legislative strategy of the policymakers. Rather than specifying a specific rate in the legislation, legislation for a FIT in T&T could direct the Regulated Industries Commission (RIC) to set differentiated rates using a set of guidelines. Potential language for achieving this is discussed in Section 2.4 below. Historically, T&TEC has been responsible for negotiating the rate paid to IPPs under PPAs on a case-by-case basis. During a policy workshop in September, 2012, however, stakeholders agreed that RIC might be the most appropriate entity to set the FIT rates. This is consistent with the approach adopted in North American jurisdictions such as Hawaii, Nova Scotia, and Vermont where the regulator has set the FIT rates after being authorized to do so.
2.4. SETTING THE RATE
The issue of how to set the FIT rate is closely related to the issue of tariff differentiation. There is a range of different approaches to setting the feed-in tariff rate, but they can be grouped broadly into cost-based and value-based approaches. Cost-based approaches establish the FIT payments according to the cost of renewable energy generation, plus a targeted return. Value-based approaches establish the rate based on the value of the energy delivered to the system, which can be pegged to avoided cost, retail prices, or other benchmarks. Cost-based approaches are often associated with differentiated tariffs – with a specific cost-based rate developed for each type of targeted project, whereas value-based approaches are often associated with undifferentiated tariffs (i.e. one avoided cost rate available to all eligible generators). Tradeoffs
• Cost-based rates support investor security since they are more likely to deliver the returns that investors require to develop projects. Value-based rates are less targeted and will support development only if the set value corresponds with the levels required by investors. Internationally, the large majority of FIT policies are cost-based. Value-based policies are in the minority and have also been effective only in a small subset of jurisdictions (Elizondo-Azuela & Barroso, 2011). Cost-based rates are also decoupled from fossil fuel prices and can therefore serve as a hedge against fossil fuel price increases over time, whereas value-based rates that are pegged to fossil fuel prices or avoided cost may not be able to serve as a hedge.
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In its policy document, the Renewable Energy Committee references a value-based FIT by saying that the FIT could be based on “a calculated percent of the retail price or its ‘ avoided cost.’ Both the retail ” price and avoided cost of power in T&T, however, are currently low and would not likely be able to be used as a basis for supporting renewable energy. The current average retail rate, for example, is only US$0.05/kWh. When adjusted upward to account for the opportunity cost of natural gas sold to the electricity sector and to account for full cost recovery for T&TEC, the retail rate would only be US$0.09/kWh (Castalia, 2011). This rate would be too low to support most renewable energy technologies without significant additional incentives. It is therefore recommended that T&T set rates based on the generation costs of each technology, with separate rates for each project size as discussed in 2.3. Since the required renewable energy rates would need to be higher than both the avoided cost and retail electricity rates in T&T, the pilot program should be capped to limit ratepayer impact. Caps are discussed in greater detail in Section 2.17. Implementation considerations As discussed above, RIC would likely need to be directed to set the rates, given certain guidelines. The following language could be considered: “The Regulated Industries Commission shall proceed to set, no later than [insert date], the rate to be paid to eligible renewable electricity generation facilities. The Commission shall set a fixed-price rate for each of the following classes of generation facility: i. Wind 10 kW ii. Wind 11 kW – 100 kW iii. PV 10 kW iv. PV 11 kW to 100 kW The rate set for each class of generation facility shall reflect the cost of generation, including the costs to interconnect to the grid and fees for the use of electrical lines, plus a reasonable return. The rate shall be set at a level sufficient to support the development and commissioning of generation facilities within each class.”
2.5. PAYMENT DURATION
Payment duration refers to the number of years that the generator receives the FIT payment. Tradeoffs • Tariff payments that are based on a project’ generation cost, as recommended in Section 2.4, are s designed to provide generators with a target return. Generation cost-based rates with longer-term payment durations enable the $/kWh payment to be lower since the cost of the system is levelised 12 | P a g e
over a longer period of time. Shorter-term contracts, by contrast, require higher payments in order to achieve the same return in a shorter period of time. From a ratepayer perspective, however, this higher payment amount is offset by the shorter period of time that the FIT must be paid (NYSERDA, 2012). Short-term payments may enable investors to recoup their investors in a shorter amount of time, but this could also enable developers to “walk away” from projects and cease to operate and maintain them before the end of the projects’service lives.
Recommendation A survey of current IPP contracts in T&T reveals that most power purchase agreement contracts are 30 years long. These include the contracts for Trinity, Point Lisas Units 13 and 14, and the new TGU plant. The Power Gen plant has a 15-year contract, but a 15-year extension is currently being sought. It is recommended that the payment duration for PV and wind FITs be 20 years, rather than 30 years. A 20year payment duration is recommended as a good balance between existing practice, ratepayer impact, and the creation of incentives to maintain system performance. Twenty year payment durations have also emerged as a standard across many jurisdictions internationally. Implementation considerations The following language could be considered for establishing payment duration: “Eligible renewable electricity generators shall be entitled to the applicable FIT payments for a period of twenty (20) years.” The language may also need to specify that T&TEC must grant a licence agreement for the supply of energy for twenty years.
2.6. PAYMENT STRUCTURE
The issue of payment structure relates primarily to whether the payment rate itself will be fixed over time or whether it may vary with, e.g., market prices. In countries such as Spain and the Czech Republic, for example, generators have had the option to choose a premium payment that floats on top of the wholesale electricity price, rather than a fixed price payment (Couture & Gagnon, 2010). Tradeoffs • Variable payment structures are primarily in place in countries where wholesale electricity competition has been introduced and policymakers are attempting to encourage generators to participate in the market, instead of generators selling power under long-term contracts. Payments that vary over time can undermine investor security because they reduce revenue certainty. This can raise the cost of capital and raise the overall policy cost. 13 | P a g e
Recommendation Since T&T does not currently have a competitive wholesale market, there is little value in adopting a variable payment structure. It is recommended that T&T instead utilize a fixed price tariff payment. Implementation considerations Language regarding a fixed price rate has already been included within the language on setting the rate in Section 2.4.
Increases in inflation reduce the real value of project revenues. If the FIT is intended to provide investors with a target rate of return, for example, then policy makers should take inflation into account in order to help ensure that investors’ expected returns are realized. Renewable energy projects are capital intensive, which means that a large percentage of a project‘ cost occurs at the s beginning of a project‘ life. These costs are not exposed to inflation risk. Instead, inflation can s impact the costs that a project incurs over time, such as operations and maintenance expenses, fuel purchases, land lease payments, insurance, etc. The inflation rate in T&T during recent years has remained consistently above 7% as can be seen in the Figure below. Trinidad and Tobago Inflation Rate (Period Average)
14 12 10 8 6 4 2 0 2006 2007 2008 2009 2010
Source: (Trindad and Tobago Central Statistical Office & Central Bank of Trinidad & Tobago, 2012) A key policy choice is whether and how to adjust FIT payments to take inflation into account. Some countries do not adjust their payment levels at all, some adjust a portion (e.g. 20%) of the tariffs for inflation on an annual basis, and some adjust the entirety of the payment to inflation. Tradeoffs
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Adjusting the FIT payment for inflation can significantly increase investor security and lower capital costs, particularly for projects that incur significant O&M expenditures. Adjusting FIT payments for inflation, however, shift the risk that inflation will adversely impact project economics to ratepayers, which can increase ratepayer impact.
Recommendation Current IPP contracts are escalated using an inflation rate linked to the US Consumer Price Index (CPI). It is recommended that FIT PPAs also be inflation adjusted in order to be consistent with existing practice. However, T&T may wish to consider crafting specific indexations for wind and PV, such that the percentage of the rate that is indexed reflects the percentage of total project costs that derive from operating and maintenance costs.3 Implementation considerations “The FIT rates will be adjusted by way of indexation annually by the annual increase, if any, in the US consumer price index.”
2.8. COST RECOVERY
Since the price paid to renewable generation will be higher than the current cost of generating electricity in T&T, there will need to be a mechanism by which the additional costs of the policy can be recovered. The existence of a credible, transparent and sustainable cost recovery mechanism is a prerequisite for FIT policy success. Some jurisdictions recover policy costs through an additional surcharge on ratepayers, whereas others recover policy costs through the government budget (i.e. from taxpayers) or through the imposition of new taxes. Both Taiwan and Mauritius, for example, pay for their FIT policy costs utilizing a tax on conventional generation (e.g. fossil fuels and nuclear).
Tradeoffs The tradeoffs in the choice of cost recovery mechanism relate primarily to where burden of cost recovery is placed – i.e. on ratepayers, taxpayers, or elsewhere. Recommendation For the pilot FIT, it is recommended that a portion of the Green Fund be allocated to support the pilot FIT program. The Green Fund is capitalized through a tax on corporate gross sales and receipts and had accumulated TT$1.4 billion (US$220 million) by 2008. Access to the Green Fund is limited to certain eligible entities and transaction costs to accessing the funds have historically been high.
In Uganda, for example, O&M costs are calculated as 5.03% and 6.34% of total project costs for PV and wind, respectively. These percentages are then used to determine the amount that the FIT rate is inflation adjusted each year (Electricity Regulatory Authority, 2010).
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Renewable energy is technically eligible for the Green Fund, but there have been no renewable energy projects supported by the Fund to date. As an illustrative example, 4 MW of small wind or small PV installations (e.g. 2-10 kW) would equate to an incremental cost of US$1.5-US$2 million annually based on figures developed for T&T in a recent IDB report (Castalia, 2011). Using these figures, it would require US$30-$40 million – or approximately 13%-18% of the current Green Fund -- to fund the projects over the entire 20-year payment period. Implementation considerations In order to utilize a portion of the Green Fund to support the FIT policy, it may be necessary to amend Part XIV of the Miscellaneous Taxes Act, which relates to the Green Fund.
2.9. INTERCONNECTION GUARANTEE
Interconnection refers to the technical requirements and legal procedures whereby an electric generator interfaces with the electricity grid. A lack of standardized and transparent interconnection protocols for independent power producers has been identified as one of the key barriers to renewable energy development internationally. In the absence of clear rules and requirements for interconnection, utilities can block or otherwise delay viable renewable energy projects. In order to address interconnection concerns, many FIT policies contain provisions for guaranteed interconnection.
Guaranteed interconnection is interpreted differently in different countries. In Germany, for example, renewable energy generators have a right to be interconnected by the utility and the utility cannot refuse generators on the basis of technical or reliability concerns. Instead, utilities are obligated to make improvements to the grid to accommodate the renewable energy generators. Germany’ policy could s not be readily replicated in T&T because it allows an unlimited amount of capacity to come online from projects of any size. Tradeoffs • • An interconnection guarantee supports investor security because it reduces the risk that a project will begin development, but will be unable to secure a connection to the grid. An open-ended interconnection guarantee would likely be difficult in an isolated island grid.
Recommendation It is recommended that interconnection be guaranteed for the generators that participate in the pilot FIT. The systems are comparatively small in size and should be able to be rapidly evaluated and integrated into the T&T grid at relatively low cost and without significant reliability concerns. The project size cap (Section 2.2.2) and the overall program cap (Section 2.17) will also limit the risk that the guaranteed interconnection provision will result in “run away” grid upgrade costs. If PV or wind project development becomes “clustered” in certain regions on the distribution grid, for instance, policymakers 16 | P a g e
could incorporate further measures to limit excess intermittent supply on distribution feeders where applicable. However, this likely would not pose a problem in the near-term, and may not emerge as an issue at all, due to the growing loads on the distribution grid and the ready availability of natural gasfired supply. Implementation strategy T&T does not currently have standard procedures for small generators to interconnect to the grid. It will be necessary for T&TEC to develop and promulgate a set of standard interconnection regulations, particularly if language guaranteeing interconnection (such as the below) were to be passed into law. Many countries have published grid codes for small distributed renewable energy generation that could be used as a template or benchmark. The Interstate Renewable Energy Council in the US, for example, has published a set of model interconnection standards and many states have adopted elements of this model as a best practice (IREC, 2010; Varnado & Sheehan, 2009; Wiedman et al., 2011). T&TEC has already partially laid the foundation for interconnection protocols through the development of technical standards for off-grid systems and the development of renewable energy wiring guidelines for electrical inspectors. “The Commission shall immediately interconnect eligible renewable electricity generators that have been approved by the Commission, that have received a licence, and that conform to the required technical standards.”
2.10. INTERCONNECTION COSTS
A key question related to interconnection is whether the costs of interconnection will be borne by the generator or by the utility. The costs of grid interconnection can include both the costs associated with connecting a specific generator to the transmission or distribution system (e.g. interconnection studies, onsite equipment, etc.), as well as the costs to modify or upgrade the grid in order to accommodate the additional generation (e.g. when a three-phase generator seeks to connect in an area of one-phase distribution service). Tradeoffs • Shifting interconnection and upgrade costs from the generator to the utility reduces system uncertainties and increases investor security. • Shifting interconnection costs away from the generator, however, also removes the incentive for developers to optimally site generation at points on the system where interconnection would be the lowest cost. Recommendation It is anticipated that the interconnection costs for the project sizes contemplated under this proposed policy (i.e. under 100 kW) should be fairly uniform and should not require dedicated interconnection 17 | P a g e
requirements studies for each project. It is also assumed that these systems will be located reasonably close to the distribution system and will require minimal or no system upgrades. It is recommended that a standard interconnection cost be built into the assumptions used to calculate the FIT rate. The cost of any necessary grid upgrades, however, should be borne by T&TEC. It is anticipated that such costs will be minimal and also limited by the individual project cap as well as the program size cap (Section 2.2.2). Implementation considerations Language related to building the cost of interconnection into the rate calculation can be found in Section 2.4. Language related to the grid upgrade cost allocation can be found below.
“The costs associated with upgrading the grid that result from the need to accommodate eligible renewable electricity generators from renewable energy sources shall be borne by the Commission.”
2.11. PURCHASE AND DISPATCH REQUIREMENTS
FIT policies can require utilities to purchase power from interconnected generators and dispatch the power into the transmission and distribution grid. Guaranteed purchase and priority dispatch provisions, in combination with interconnection guarantees and guidelines, are designed to ensure that generators are not blocked from gaining access to the grid. Tradeoffs • Guaranteeing that 100% of the power produced by the renewable energy generator will be purchased if the plant is built supports investor security. • An open-ended purchase guarantee, such as the one that exists for most generators in Germany, would likely be in appropriate for island nations since power cannot be exported to other jurisdictions. In areas with limited load, purchase guarantees may need to be combined with overall capacity caps. Recommendation The current IPP contracts in T&T are “take or pay” contracts, which mean that T&TEC must pay for generated power, even if they decline to take it. It is recommended that the FIT power purchase agreements also incorporate a take or pay provision in order to be consistent with existing practice. Several sections of the T&TEC Act relate to how an IPP becomes eligible to sell power to T&TEC. Part IV, of the Act specifies that T&TEC has the authority to approve electricity generators (Section 31(3C)), that T&TEC may purchase electricity from them with the consent of the Minister (Section 31(2)(ac)), and that that T&TEC may enter into a license agreement with an approved generator ((Section 34A(2)). It is recommended that these sections be amended to specify that generators participating in the FIT pilot must automatically be granted approval with consent of the Minister, and a licence, provided that they conform to the proper technical and safety standards and do not pose a threat to the security and reliability of system operation. Implementation considerations 18 | P a g e
The following sample language would relate to a guaranteed purchase provision:
“ Commission shall immediately approve and enter into a licence agreement to The
purchase, transmit and distribute the entire available quantity of electricity from eligible renewable electricity generators.” With regard to the take or pay clause, this language is not currently specified in the T&TEC Act and it is assumed that such contractual details would be established through regulatory, rather than legislative, channels.
2.12. AMOUNT PURCHASED
The amount purchased refers to whether 100% of the power is bought by the utility or whether some of the power can be, or must be, consumed onsite. The majority of international FITs specify that 100% of the power should be purchased, rather than used to offset onsite demand. Some FITs, such as the PV FIT in the Cayman Islands and FITs in several Australian states, however, specify that the FIT rate applies only to excess generation that is not consumed onsite. Tradeoffs • Onsite consumption reduces investor security because it creates revenue uncertainty related to potential changes in the retail electricity rate (i.e. the rate at which the electricity is valued) and changes in the volume consumed onsite. Selling 100% of the power into the grid at the FIT rate creates greater revenue certainty and increases investor security. Onsite consumption reduces the amount of power purchased from the grid and therefore creates revenue loss for the utility. Purchasing 100% of the power may be more attractive to utilities because the power purchase does not represent lost retail sales.
Recommendation It is recommended that T&T require that 100% of the power be purchased under the FIT, rather than enabling or requiring part of the power to be consumed onsite. Implementation considerations The amount purchased can be specified in the same language that deals with the guaranteed purchase requirement (Section 2.11).
2.13. PURCHASING ENTITY
Internationally, different jurisdictions have taken different approaches to designating an entity to purchase the power and other commodities under feed-in tariffs. Vermont in the US, for example, has 19 | P a g e
established an independent entity to purchase the power, which it then sells into the wholesale electricity markets. In other jurisdictions with unbundled power sectors, such as Germany, the transmission system operators are responsible for purchasing electricity from FIT generators. In T&T, it is assumed that T&TEC will be the purchasing entity, just as it is with other IPPs.
2.14. COMMODITIES PURCHASED
FITs are primarily considered a vehicle for purchasing electricity. Depending on the national (and international) policy environment, the generation of renewable electricity may also be associated with additional commodities, such as renewable energy credits (RECs), greenhouse gas emissions credits (e.g. Certified Emissions Reductions), air emission credits, or thermal energy (for combined heat-and-power plants). The key choice for policy makers is whether to allow generators to retain the right to certain commodities or to require that the rights to all commodities transfer with the purchase. Tradeoffs • • Enabling generators to retain rights to other commodities could enable them to sell them into other markets and earn additional revenue streams. If the FIT rate is insufficient to meet the generators’returns, the sales of additional commodities may help make the project viable. If the FIT rate is sufficient to meet returns, the sale of additional commodities would generate excess profits.
Recommendation It is recommended that all commodities transfer to T&TEC with the purchase in order to limit the potential for excess profits. At present, there are no domestic markets for environmental commodities in T&T. There are international greenhouse gas emissions, markets, however, and it is recommended that generators be required to transfer the right to international commodities, such as Certified Emissions Reductions (CERs) or other international greenhouse gas reduction credits. A rough estimation of the total carbon emission reductions that 10 MW of renewable energy capacity would produce in T&T is included in Appendix II. Implementation considerations
“ shall be the condition of the FIT that the rights to the carbon credits, and other It environmental attributes, associated with a generator that accepts the FIT are owned by T&TEC.”
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2.15. CONTRACT ISSUES
A bankable contract, or power purchase agreement (PPA), is usually a prerequisite for successful renewable energy development. The key questions related to contracts for policy makers are whether to require one, and whether to make it standardized or negotiable. Tradeoffs • • • FITs that are based on a contract between an off-taker and a generator create investor security. Policies that do not utilize a contract may make it difficult for projects to secure financing. Policies that require standardized contracts – instead of negotiated contracts – increase investor security by reducing transaction costs and development risk.
Recommendation It is recommended that a short and standard power purchase contract or agreement be developed for use in the FIT program. This will reduce the administrative burden for T&TEC and will also reduce the transaction time and cost of the small-scale power producers participating in the FIT policy. Implementation considerations T&T does not currently have a standard contract for generators, but many jurisdictions utilize standard contracts which could be used as templates or benchmarks for T&T. Although many of the specific details should not be specified in the law, the law could specify that a standard contract be utilized: “ The Commission shall purchase electricity from eligible renewable electricity generators through a standard contract at rates denominated in US dollars, set forth in the power purchase agreement.”
2.16. PAYMENT CURRENCY
The FIT payment currency becomes a consideration if projects must conduct transactions in foreign currency, such as securing international loans or purchasing foreign equipment and/or fuel. A key question for policy makers is whether to require that the contracts be denominated in, or indexed to, foreign currency. Tradeoffs
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Projects that are exposed to significant foreign exchange risk may be unable to attract commercial financing if the payment is not indexed to or denominated in hard currency. Denominating the contract in hard currency shifts the exchange rate risk from the investor to the ratepayers, taxpayers, or other entities that pay for incremental policy costs.
Recommendation Current IPP contracts in T&T are denominated in US$ and indexed to the US CPI. It is recommended that FIT PPAs also be denominated in US$ in order to be consistent with existing practice. Implementation considerations The issue of denomination can be dealt with in parallel with other contractual issues, as illustrated in the sample language used in Section 2.15.
2.17. TRIGGERS AND ADJUSTMENTS
Policy makers need to build adjustment mechanisms into FIT policies in order to ensure that their policy objectives continue to be met as market conditions change over time. There are a number of different approaches to policy adjustment currently in practice, including automatic decreases in FIT rates (i.e. degression), the introduction of annual or overall hard caps, periodic reviews, etc. These adjustment mechanisms can be utilized to give policy makers greater control over market growth, policy cost, the impact of renewables on grid stability, etc. For the purposes of this paper, we categorize the mechanisms used for FIT adjustments as: • Triggers. Triggers are thresholds that initiate an adjustment when crossed. Triggers can include: the passage of a specified period of time (e.g. 1 year), achievement of certain capacity (MW) or generation (MWh) levels, or total policy cost. Adjustments. Adjustments are the policy changes that occur when a trigger is reached. These can include an automatic adjustment (such as a decrease or increase in the rate), a hard stop, or the initiation of a policy review. Reviews. Reviews are formal regulatory analyses to determine if any adjustments are required and if so, what kind.
Tradeoffs • •
An uncapped and unadjusted FIT clearly requires the lowest amount of regulatory oversight and maximizes investor security, but market growth cannot be controlled. Steady decreases in rates over time put downward pressure on rates, which lowers the cost impact, whereas hard caps provide policy makers with certainty about policy volume and policy cost.
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Overly frequent and/or non-transparent adjustments, however, increase development risk and reduce investor security.
Recommendation It is recommended that T&T institute a capacity threshold of 10 MW, which would trigger a hard cap and on the policy when reached. It is recommended that there not be specific technology “carve outs” – in other words, it should be possible for all 10 MW to be either wind or PV systems. This cap would enable a significant number of small-scale systems to be built, but would contain overall program costs. It is recommended that the 10 MW threshold also trigger a program review in order to evaluate whether the program should be continued, adjusted, or curtailed.
“ The Commission shall offer to purchase electricity from new eligible renewable electricity generators under the FIT until the cumulative plant capacity of new eligible generators equals or exceeds 10 MW. Once 10 MW of capacity is installed, the FIT policy shall be reviewed in order to determine if it should be extended beyond 10 MW and, if so, whether it should be amended.”
2.18. INTERACTION WITH OTHER INCENTIVES
Some countries utilize the FIT as their only renewable energy policy incentive. Other countries have more complex renewable energy policy landscapes in which the FIT functions in parallel with other incentives. The primary policy choices are whether to enable generators to take advantage of other policy incentives and, if so, whether the FIT rates are calculated taking the potential benefit from other incentives into account. Tradeoffs The tradeoffs associated with this policy issue are similar to those related to the treatment of the commodities purchased (Section 2.14) because generators that claim additional incentives will capture excess profits if the rates they receive are already sufficient to meet their return expectations. Recommendation There are currently few readily accessible incentives for wind or photovoltaic generators in T&T that a FIT might interact with, aside from a recently established wear and tear allowance for wind generators (Dookeran, 2010). It is recommended that the value of the accelerated depreciation schedule be taken into account when determining the FIT rate paid to those generators such that the FIT rate is reduced based on the value of the wear and tear allowance. Implementation strategy Language that could be considered to adjust the FIT rates is included below:
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“The FIT rate received by an eligible renewable electricity generator shall be adjusted to reflect any additional incentives or subsidies received by the generator in order to ensure that the generator does not capture a return on investment higher than would otherwise be captured under the FIT rate.”
Together, the recommendations included in this report form the basis for a draft FIT policy in Trinidad and Tobago. A set of preliminary recommendations were shared with stakeholders from various government ministries and state-owned companies in September 2012. This document reflects feedback from this and other consultation sessions. The table below summarizes the recommendations discussed in this report.
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Section 2.1 2.2.1 2.2.2 2.2.3 2.2.4 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18
Title Integration with Policy Targets Technology Eligibility Size Eligibility Grid Connection Eligibility Ownership Eligibility Tariff Differentiation Setting the Rate Payment Duration Payment Structure Inflation Cost Recovery Interconnection Guarantee Interconnection Costs Purchase and Dispatch Requirements Amount Purchased Purchasing Entity Commodities Purchased Contract Issues Payment Current Triggers and Adjustments Interaction with Other Incentives
Preliminary Recommendation Integrate with target once target is developed Wind and PV 100 kW and smaller Distribution grid connection only Private individuals, businesses, schools and education facilities, and entities eligible for access to the Green Fund Differentiate by technology and by size Based on generation cost 20 years Fixed payment Adjust for inflation, based on existing practice Recover costs from the Green Fund Guarantee interconnection for generators participating in pilot Interconnection costs should be assumed in the rate setting; T&TEC should fund required grid upgrades Guaranteed purchase with a take or pay provision 100% of electricity should be purchased T&TEC All commodities transfer to T&TEC Standard PPAs should be developed and offered Denominated in US$, consistent with existing PPAs 10 MW threshold triggers a hard cap and a review Value of wear and tear allowance should be subtracted from rate calculations
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APPENDIX I – TARIFF DIFFERENTIATION
This Appendix contains a summary of cost break points for wind and PV generators in order to identify the impact of economies of scale and also to benchmark T&T’ proposed project size differentiation. s Figure 1 below contains results from a database of wind installed costs, drawing on data from the United States and Canada. The Figure below plots US$/MW of installed cost against installed capacity (in MW). The data on small wind turbines was gathered from published literature, as well as from datasets gathered during the FIT rate setting processes in Nova Scotia, Rhode Island, and Vermont. The data on larger wind systems was gathered by the Lawrence Berkeley National Laboratory. As be seen in the graph, there is a marked difference in installed costs between 15 kW and 100 kW systems, and again between 100 kW and 5 MW systems.
7000 6000 2010 US$/MW 5000 4000 3000 2000 1000 0 0.015 0.1 <5 5.0 - 20.0 20.0 50.0 50.0 - 100 100 - 200 > 200 3000 6000
System Size (MW)
Figure 1: Installed cost of wind projects by size (Wiser & Bolinger, 2012; Zhang, 2012)
Figure 2 shows how different jurisdictions have differentiated their FITs for small wind by size. Some jurisdictions, such as Hawaii, have only one size tranche (i.e. 100 kW and below). Others, such as Britain, have three size tranches in order to reflect the fact that micro-scale wind (e.g. 1 kW and below) receives its own support level.
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100 90 Eligible system size (kW) 80 70 60 50 40 30 20 10 0 Tranche 3 Tranche 2 Tranche 1
Figure 2. Small Wind Tranches in different Jurisdictions
Figure 3 below contains results from a database of PV installed costs, drawing on data from the United States. As can be seen in the graph, the cost differences between PV systems of different sizes are not as stark as they are for wind, but there are still economies of scale which should be recognized and accounted for.
12000 10000 8000 US$/KW 6000 4000 2000 0
Figure 2: Installed cost of solar projects by size (Barbose, Darghouth, Wiser, & Seel, 2011)
Finally, Figure 4 shows how several jurisdictions have differentiated small PV using different FIT size categories for systems under 100 kW. 27 | P a g e
100 90 80 70 60 50 40 30 20 10 0 Britain France Taiwan (Roof) Hawaii Mauritius
Eligible system size (kW)
Tranche 4 Tranche 3 Tranche 2 Tranche 1
Figure 4: PV Tranches in Different Jurisdictions 100kW
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APPENDIX II – BENEFITS FROM 10 MW OF RE
In order to calculate the benefits of renewable energy generation, the RETScreen International Clean Energy Project Analysis Software was used to analyze scenarios of 10 MW of wind generation and 10 MW of PV generation. The capacity factor for wind was assumed to be 26% and the capacity factor for PV was assumed to be 19% (Castalia, 2011). The results included in the table below were calculated assuming the electricity generation mix from 2010 (84% from simple cycle natural gas turbines, 16% from the combined cycle plant at Penal), and assuming 25% efficiency for simple cycle turbines and 32% efficiency for the combined cycle turbine. Additionally, system losses of 6.8% were assumed. Technology Wind PV Capacity Factor 26% 19% Electricity Output (MWh) 22,776 16,644 Tons of CO2 reduced 16,885 12,339 Cars and light trucks not used 3,100 2,260
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Renewable Energy Committee. (2011). Framework for development of a renewable energy policy for Trinidad and Tobago. Port of Spain, Trinidad and Tobago: Ministry of Energy and Energy Affairs. Trindad and Tobago Central Statistical Office, & Central Bank of Trinidad & Tobago. (2012). The balance of payments of Trinidad and Tobago 2010. Port of Spain, Trinidad and Tobago. Varnado, L., & Sheehan, M. (2009). Connecting to the grid: A guide to distributed generation interconnection issues ( 6th Edition). Raleigh, NC: North Carolina Solar Center and the Interstate Renewable Energy Council. Vision 2020 Energy Sub-Committee. (2006). Report of the Energy Sub-Committee for Vision 2020. Port of Spain, Trinidad and Tobago. Wiedman, J., Culley, T., Chapman, S., Jackson, R., Varnado, L., & Rose, J. (2011). Freeing the grid: Best practices in state net metering policies and interconnection procedures (2011 ed.). San Francisco, CA and New York, NY: The Vote Solar Initiative and Network for New Energy Choices. Wiser, R., & Bolinger, M. (2012). 2011 wind technologies market report ( LBNL-5559E). Berkeley, CA: Lawrence Berkeley National Laboratory. Zhang, P. (2012). Small wind world report summary 2012. Bonn, Germany: World Wind Energy Association.
Saudi Arabia is planning to purchase renewable energy through a competitive procurement and then switch to a feed-in tariff with rates set using the results of the competitive procurement process.
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