regulatory and financing mechanisms for scaling-up energy...

World Bank/IFC

Workshop

Incentives to Deploy Renewable Energy & Energy Efficiency

Regulatory and Financing Mechanisms for

Scaling-up Energy Efficiency

Dilip R. LimayeSRC Global Inc.

World Bank and IFC Workshop:

Appropriate Incentives to Deploy Renewable Energy

and Energy Efficiency

2World Bank/IFC

Workshop


Introduction

Barriers to EE

Regulatory and Financing Mechanisms

Acquisition of EE Resources

Approaches for EE Resource Acquisition

Examples of EE Resource AcquisitionU.S.

Portugal

South Africa

Concluding Remarks

Presentation Outline

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Workshop


Importance of Energy Efficiency

Energy EfficiencyMost Cost-Effective

Solution

Mitigating

Climate Change

Impacts

Economic

DevelopmentWithout

Compromising

Reducing the

Energy

Supply/Demand Gap

Enhancing

Energy

Security

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Role of Energy Efficiency in Mitigating

Climate Change

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Workshop


Barriers to Energy Efficiency

Policy/Regulatory

Barriers

End-User

Barriers

Barriers Related to

Equipment &

Service Providers

Institutional

Barriers

Financing

Barriers

Low or subsidized

energy prices

High cost of energy-

efficient products

Limited development of

EE services marketSmall project size

Distorted fiscal and

regulatory policies

Consumer preferences

for non-EE attributes

High project

development and

transaction costs

High transaction costs

Rigid procurement and

budgeting proceduresSplit incentives

Limited risk management

skills

Emphasis on increasing

energy supplies; not on

reducing consumption

Limited availability of

funds

Limitations of public

financing

Low management

priority on EE

Limited access to equity

capital

Lack of confidence in EE

improvements to deliver

savings

High perceived risks

Ad hoc planningLimited technical

knowledge of EE

Lack of credibility with

consumers and financial

institutions

Lack of "champions" for

promoting EE

Lack of interest on the part

of banks and financial

institutions

Limited data availability

and quality

Lack of internal funds

for EE investmentslimited M&V capacity

Limited knowledge and

understanding of EE by

consumers

Limited development of

targeted financial

products for EE

Lack of formal institutional

framework for developing

and implementing energy

efficiency strategies,

policies and programs

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Workshop


Policy Instruments

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Workshop


Regulatory Initiatives for EE

Integrated Reource Planning

Innovative Tariffs

EE Portfolio Obligations

Public Benefit Funds

Energy Efficiency Utilities

Utility Shareholder Incentives

EE Resource Acquisition

Decoupling Utility Revenues & Profits

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Workshop


Financing Mechanisms for EEP

ub

lic-

Pri

va

te

Part

ner

ship

s

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Workshop


Public-Private Partnerships

Public-Private Partnerships (PPPs) are mechanisms

that use public policies, regulations or financing to

leverage private sector financing for EE projects

Key Characteristics of PPPs:

A contractual relationship (or agreement) between a

public entity and a private organization

Fair allocation of risk between the public and private

partner to encourage the private partner to mobilize

financing

Mobilization of increased private sector project

financing for EE

Payments to the private sector for delivering services to

the public sector.

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Workshop


Acquisition of Energy Efficiency

Resources

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Workshop


What is EE Resource Acquisition

Mechanism to reduce energy consumption

and peak load, and improve utility system

efficiency

Through implementation of energy efficiency

program/projects by customers, ESCOs,

NGOs, equipment manufacturers & suppliers,

or other private sector parties

Payments made to them by the utility or

other agency for the resulting energy and

load reductions

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Workshop


Why EE Resource Acquisition?

Treats energy efficiency as a valuable resource analogous to

conventional power, IPPs, and RE (“level playing field”) –

Builds the “Energy Efficiency Power Plant (EPP)”

Scales up EE project implementation by providing

customers and ESCOs an incentive similar to payments

made to IPPs or renewables

Economically efficient as the payments are based on

resource value

Facilitates leveraging of commercial financing

Minimizes resource risk by paying only for delivered performance verified by a credible organization

Most of the technical and financial risk for the project is borne by the project developers.

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Workshop


Approaches for EE Resource Acquisition

EE Acquisition Options

Competitive Bidding Standard Offer

• Utility issues RFP to acquire

KW and KWh savings

• Selection done though

evaluation of technology,

proposed M&V and Rs/KW and

Rs/KWh rate structure

• Payment terms usually linked to

verified savings

• Implementers may get different

$/KW and $/KWh rates

• Utility pre-determines price

that is affordable to pay

implementers

• Provides standardized M&V

protocols for certain classes of

programs

• Payment terms usually linked

to verified savings

• Implementing organizations

get same $/KW and $/KWh

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Workshop


Competitive Bidding

Implemented by Utility or designated Agency

Issue a competitive Request for Proposals (RFP) seeking delivery of resources

Eligible bidders include all organizations interested in implementing projects

Bidders define facilities, technologies, end uses, implementing strategies/mechanisms, M&V protocols

Bidders also define the proposed payments from the utility

Select the most attractive and beneficial proposals using pre-defined criteria approved by the regulator

Payments may vary substantially among bidders

Payments made after verification of savings

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Standard Offer

Determine the amount to be paid (“Standard Offer”) for energy and demand savings per kW and kWh (by season and time period)

Specify standardized M&V protocols

Eligible bidders include all organizations interested in implementing EE projects

Bidders define facilities, technologies, end uses, implementing strategies/mechanisms

All implementers receive the same payment per kW or kWh

Payments are made for verified savings based on the Standard Offer

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Workshop


Standard Offer ProcessProject Sponsor Utility of Implementing Agency

Identify project and negotiate with

customer

Issue Request for Applications

Submit initial application Approve initial application

based on defined criteria

Finalize measures and prepare

M&V plan

Request final application and

M&V plan

Submit final application Approve or reject final application

Implement project Sign Standard Offer agreement

Submit installation report (IR) Approve or reject IR

Conduct M&V activities Make installation payment

Submit savings report (SR) Approve or reject SR

Receive Standard Offer payment Make Standard Offer payment

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Workshop


U.S. Experience

Early programs in 1990s:

Public Service Company of Colorado (Competitive

bidding)

Public Service Electric and Gas of New Jersey

(Standard Offer)

Recent program examples:

New York

Texas

California

Payments for Standard Offers well below

long-term generation costs and RE costs

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Workshop


The Early Programs

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Texas Standard Offer Program

Senate Bill 7 established State energy efficiency goals

Implemented by Public Utility Commission of Texas

All utilities have to meet 10% reduction in annual growth in system demand through EE programs

Establish rules for sponsor, project and measure eligibility

Encourage private sector delivery of EE products and services

Achieve energy and cost savings to customer

Stimulate strong participation form EE service providers

Create a simple streamlined process for participation and M&V

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Workshop


EE Resource Acquisition in Portugal

Regulatory Authority (ERSE) launched the Plan for

the Promotion of the Electrical Energy Consumption

Efficiency (PPEC)

Program solicits reductions in end-use electricity

consumption through market tenders for EE

Resulted in bids five times the budget, providing

strong competition among proponents of EE projects

Evaluation criteria include for economic cost-

effectiveness, environmental benefits and other goals

Long term funding commitment provided by regulator

& national climate change program

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South Africa’s Standard Offer Program

Rationale – Existing EE/DSM process was not working.

DSM group was understaffed and overburdened.

Eskom evaluation process was very cumbersome,

slow, and non-transparent.

Evaluation criteria appeared to be unclear and

inconsistently applied.

Substantial misunderstanding, poor communication,

and insufficient feedback.

Too much time spent on details of the energy savings

calculations and costs of the EE/DSM measures.

Eskom’s contract negotiation process was very

complex, time-consuming, and adversarial.

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Workshop


Advantages of South Africa SOP

Streamline approval process and implementation

Facilitate ESCOs to generate projects

Simplify contracts between ESKOM and ESCOs

Reduce burden on ESKOM staff of for evaluation of the technical & cost elements

Allocate project risk to ESCOs.

Payments based on delivered performance

Facilitate commercial financing of ESCOs

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Workshop


Implementing SOP in South Africa

Ministerial Order and DOE Policy Statement on

EE/DSM

Designated SOP as the mechanism for EE/DSM

Long-term implementation by S.A. National

Energy Development Institute (SANEDI)

Near-term action by Development Bank of South

Africa

ESKOM pilot programs – Standard Offer and

Standard Products – launched in 2011

Eskom toolkits for the SOP and SPP

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Workshop


Concluding Remarks

SOP is analogous to RE Feed-in Tariffs (FIT)

Can result in EE resource delivery at a lower cost

than RE or conventional generation

For developing countries

SOPs can be implemented in parallel with FITs

SOPs simpler to implement than competitive

bidding for EE resources

Need strong regulatory agencies

Utilities may not be the best implementing agents

– independent agency or trust may be designated

M&V capacity building is critical

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Workshop


What Can WB do to Promote the SOP Concept?

Educate regulators to treat EE on a “level

playing field” with RE

Provide detailed information and case studies to

regulators on the SOP approach and its benefits

Build regulatory capacity to develop and

implement SOP rules and regulations

Adapt protocols (such as IPMVP for measurement

and verification, build capacity of independent

M&V organizations, and develop an accreditation

scheme for M&V agents

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Workshop


Suggested Action Items

Prepare a strategy paper on the Standard Offer

Program (SOP) concept, applications and results, with

case studies of major programs

Organize international workshop with regulators to

discuss the SOP and its potential applications

Engage stakeholder such as energy users, NGOs,

ESCOs, manufacturers/suppliers of EE equipment,

etc., in a dialog on the SOP approach

Implement a pilot SOP in one or more of the member

countries with a progressive and aggressive regulator

World Bank/IFC

Workshop


Thank you

Dilip R. Limaye

SRC Global Inc.

[email protected]

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