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Renewable Energy World Asia 2013

Bangkok, Thailand

Prabaljit Sarkar

Five Myths of Renewable Energy: Experience from

Indonesia

www.castlerockasia.com

Introduction

• Renewable energy (RE) can provide many benefits.

• Many countries have therefore adopted specific incentive policies and regulatory mechanisms to encourage RE.

• Experience with the effectiveness of these mechanisms now available.

• This presentation discusses Five Myths of RE policy & regulation drawing on experience in Indonesia.

• Views are solely of the presenter.

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Myth # 1: FiT will accelerate renewable energy

development

FiT Policy has some notable challenges

• Policy makers and tariff setters often do not have sufficient information to determine the benchmarking cost of renewable electricity

– Low FIT does not accelerate RE development.

– Generous FIT leads to “rent seeking” and inefficient investment.

• FiT needs differentiation. But differentiation also leads to complexity in implementation

• Most notably, FIT does not decrease developer’s up-front costs

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FiT does not change the risk perception of RE investment. Favourable regulatory environment does.

PHOTOVOLTAIC

Site Specificity

Administrative Complexity

Low With a given region,

resource availability is largely site-independent

Moderate Resource availability is site-dependent but can

be readily measured

High Resource availability is site-

dependent and requires extensive investigation /

exploration

Low Few licensing

requirements; may not require PPA; Simple

interconnection

Moderate Some licensing

requirements; standard PPA; interconnection

High Many licensing

requirements; tendering required; bespoke PPA; robust interconnection

requirements

GEOTHERMAL

HYDROPOWER

BIOMASS/BIOGAS

Depends on characteristics of the RE technology

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Myth # 2: FiT is cost-effective to promote renewable energy development

FiT Policy requires long-term financial commitment

• FiT requires a long-term financial commitment

– creates economic pressure

• Government must have a “handle" on managing the cost

– Weigh cost against benefits

• FiT may need periodic revision

– at the cost of policy uncertainty

• Policy focus may shift from production cost basis to value basis – 'Value of Solar' debate in US

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Locking in large amounts of solar PV in long-term contracts with FiT

could be considered cost-inefficient

Source: http://www.solstats.com/blog/solar-energy/solar-panel-prices-drop-by-half-over-the-last-5-years/

Pricing the Sun!

Source: http://www.economist.com/news/21566414-alternative-energy-will-no-longer-be-alternative-sunny-uplands

The cost of photovoltaic cells need to generate solar power falls 20% with each doubling of global capacity

– Dubbed as the "Swanson Effect”. It is parallel to "Moore's Law" that the number of transistors on an integrated circuit doubles roughly every two years

There are technological developments proved in the laboratory, but not yet moved into the factory - which indicates Swanson’s

effect still has many years to run!

How cost effective is FiT in Indonesia?

• Implementation of Permen 22/2012 could result in up to US$ 1 billion additional annual subsidy to PLN by 2020

– This analysis is based on comparison of generation at geothermal FiT to avoided cost of conventional coal-fired generation -

200

400

600

800

1,000

1,200

2012 2013 2014 2015 2016 2017 2018 2019 U

SD, m

illio

n

Year

Incremental Annual Subsidy Paid to PLN

Similarly, if we include FiT for other renewables, combined cost burden for all renewables will be far more

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Myth # 3: Long–term FiT generates reliable

revenue anticipation and so makes renewable projects bankable

DuPont Chart for IRR and DSCR

Will FiT that generates sufficient cash flow ensure bankability?

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DSCR and related parameters constitute only the quantitative dimension of bankability. Qualitative dimensions are as important as economic dimensions, if not more.

1. Track record of Developers & Investors

• Do they have experience of developing and owning similar project?

• Do they have ability to tide over crisis?

2. Quality of Operational Arrangement

• What is the warranty period for the equipments?

• What are the guarantee terms for commissioning?

• How is the strength of brand of the equipments?

• Who will provide the after sales service and spares?

3. Regulatory Certainty

• How certain is the taxation regime, policy direction?

• Is any change of electricity market structure likely?

4. Revenue Certainty

• Is offtaker credit worthy?

• How reliable are the renewable resources?

• What is the degree of the currency risk?

1. Track record of Developers and Investors

2. Quality of Operational

Arrangement

3. Regulatory Certainty

4. Revenue Certainty

Spider Matrix of Four Quality Parameters of Bankability

Project A Project B Project C Project D

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Myth # 4: State Utility is the right vehicle to take promotional and implementing role for renewable.

How effectively State utility can play the promotional role?

• State utility may have conflict of interest if it is entrusted most of the policy implementation work

– Standards PPA drafted by state utilities are often one sided and not protective of IPP interests

• A RPS may allow the state utility to pass all of its costs on to consumers through its “cost-plus” structure or to tax payers through subsidy as in Indonesia

• A state utility’s RPS obligation may allow indirectly to avoid any competition in procuring renewable energy, with ratepayers may be forced to pick up the cost even if it is high

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Successful renewable policy implementation requires an empowered electricity regulatory body able to ensure market transactions are fair, able to monitor

compliance and even levy fines against non-compliant utilities

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Myth # 5: A kWh of renewable power provides the

same value as a kWh of fossil-fuelled power

How do we see value of a kWh supplied?

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Value Criteria Illustrations

Meeting firm capacity needs

If peak demand is in the evening, PV generation does not meet system needs

Deferral benefits of capital expenditures

Off-grid RE defer the cost of grid connection; solar power with net metering may increases cost of grid maintenance.

Location

A RE plant will be more valuable in a remote island than in a large power system

Sustainability RE provides additional value – in terms of environmental benefits and energy security

One way, RE will have some additional value, but will also have lower value in other way. Avoided economic cost is the best approach to assess value of RE

generation

Value based approach to pricing compared to other approaches

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Value-based FiT explicitly recognizes the value of RE generation

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Thank you The presenter can be reached at the following email and contact address: prabaljit.sarkar@castlerockasia.com Castlerock Consulting 1 Fullerton Road, #02-01 One Fullerton Singapore 049213 Tel: +65 6832 5171 Fax: +65 6408 3801