TODAY’S STUDY: WHERE NEW ENERGY IN INDIA CAN GO
Public–Private Roundtables at the Fourth Clean Energy Ministerial
June 2013 (India Clean Energy Ministerial)
The Clean Energy Ministerial (CEM) is a high-level global forum to share best practices and promote policies and programs that advance clean energy technologies and accelerate the transition to a global clean energy economy. The CEM works to increase energy efficiency, expand clean energy supply, and enhance clean energy access worldwide. To achieve these goals, the CEM pursues a three-part strategy that includes high-level policy dialogue, technical cooperation, and engagement with the private sector and other stakeholders.
Each year, energy ministers and other high-level delegates from the 23 participating CEM governments come together to discuss clean energy, review clean energy progress, and identify tangible next steps to accelerate the clean energy transition…
At CEM4, six public-private roundtables addressed key clean energy topics:
1. Solar PV: Reducing Soft Costs
2. Clean Vehicle Adoption
3. Power Systems in Emerging Economies
4. Renewables Policy and Finance
5. Energy Management Systems
6. Mini-Grid Development…
Roundtable 1…Solar PV: Reducing Soft Costs…
The objective of this roundtable was to identify effective approaches to drive down the non-hardware costs, or “soft costs,” of solar photovoltaic (PV) technology and thereby accelerate deployment. Discussion focused on public- and private-sector roles, some of the new and innovative business models and tools that are being used in the sector, and the potential for international collaboration..
Overview and Background
Large-scale public and private investments in the research, development, and demonstration of solar PV technology have sharply reduced the costs of PV system hardware over the last few decades. According to Bloomberg New Energy Finance, solar PV module prices have fallen 80% since 2008 and 20% in 2012 alone.
The non-hardware costs of installation, or “soft costs,” have not seen the same dramatic declines, and they now account for a substantial portion of the total installed cost. With the decline in hardware costs expected to slow over the next few years, addressing soft costs will be essential to ensure continued reductions in the total installed cost and associated acceleration in deployment of solar PV systems.
For the purposes of this roundtable, four main categories of soft costs were identified for solar PV systems:
ƒ Overhead and financing: Includes the capital costs of loans, insurance, and the expense of preparing legal agreements such as purchased power agreements and requests for proposals.
ƒ Customer acquisition: Includes the preparation of information to persuade businesses and homeowners of the value of installing PV systems, marketing and advertising to disseminate such information, sales calls and site visits, and contract signature and payment.
ƒ Installation labor: Includes the installation of PV systems and connecting them to the grid, plus followup operation and maintenance once the systems are in service.
ƒ Permitting: Includes the time for permits, inspection, and interconnections; labor and other expenses to apply for permits; and utility interconnection expenses.
Soft costs can account for 40%–50% of the total installed cost of a system and can typically add $1–$3 to the cost per watt of capacity. There are, however, significant variations in soft costs among different countries.
For example, soft costs in the United States are up to five times higher than those in Germany. As Figure 1 illustrates, a number of factors account for this difference.
Countries that have experienced more balanced reductions in both hardware and soft costs have some commonalities. The markets are competitive, there is a skilled labor force, there is generally good information available, and there are well-designed policies with incentives that are aligned with market needs.
There are several significant barriers to reducing PV soft costs:
Financing: It is difficult to access affordable financing with reasonable effort. Banks that may not be familiar with PV technology may charge higher-than-usual rates for system loans. The loan application process may also be complex, contributing to overhead costs for installing PV systems.
Market structure and size: Business markets for PV in residential and commercial buildings are fragmented and limited in scale, making it more difficult to provide training and utilize skilled PV installers efficiently.
This contributes to a higher installation cost per watt of capacity and presents difficulties in reducing that cost. The small, fragmented market also means that a relatively large effort, per unit of capacity, is required to obtain necessary permits. A wide variety of zoning, construction, and safety permits are often required by different federal, provincial, and local jurisdictions, raising the labor costs associated with the permitting process.
Standardization: Today’s PV panels are somewhat complex—in part due to the lack of a simple and standardized design—which also leads to higher installation labor costs.
Public awareness: Public awareness of PV options and benefits is also limited in many locations. In smaller markets, it may not be as cost-effective to provide information and advertise, which contributes to a relatively high cost of customer acquisition.
Roundtable participants suggested several steps that public and private stakeholders could take to address the identified barriers and reduce PV soft costs:
Financing: Innovative financing schemes such as rooftop leasing could lower costs and provide other benefits.
Under rooftop leasing, a company invests in solar PV equipment and installs the equipment on leased roof space. The company sells the power generated by the panels to the building owner at a competitive rate.
Any excess power can be sold through net metering programs. This approach could be endorsed by regulators and managed on a large scale by solar PV management firms. Such schemes could reduce customer acquisition costs, spread permitting costs over a larger base, and spur development of a specialized and more efficient labor force that reduces installation labor costs.
Market structure and size: National, provincial, and municipal governments could implement various regulations to build market scale and reduce PV soft costs, including requ
iring net metering of generated electricity, allowing payment of feed-in tariffs to building owners, and requiring low net energy use in new buildings.
Standardization: Photovoltaic system manufacturers could contribute to the reduction of permitting and labor costs by sharing information and creating more standardized, easy-to-install roof panels.
Public awareness: Public education programs, with inputs from manufacturers, could reduce customer acquisition costs by better informing building owners about the potential payback from PV investments.
City-level promotion: Municipalities could promote the construction of, or retrofit to, low-net-energy buildings. International collaboration: There are opportunities for international collaboration on many of these possible solutions. For example, Clean Energy Ministerial participating governments and PV manufacturers might cooperate to reduce installation labor costs by developing innovative training schemes and by standardizing PV panels that are easier to install. In addition, international standards organizations and PV manufacturers could collaborate on educational efforts to promote the costs and benefits of high-quality PV systems for building owners.
The roundtable participants made several key recommendations for reducing solar PV soft costs:
ƒ Build economies of scale and facilitate learning curves that reduce PV soft costs.
ƒ Foster the right financing ecosystem to drive down the costs of capital for PV systems, including providing information to financial institutions about the real risks, costs, and benefits.
ƒ Establish a consistent and predictable policy framework to build market confidence.
ƒ Further analyze and identify additional areas for cutting soft costs and share the data.
ƒ Streamline administrative procedures, with a “onestop-shop” approach to permits.
ƒ Standardize technology testing and certification and set reliable minimum standards.
ƒ Build capacity for proper installation of PV systems in the construction trades.
ƒ Bundle projects and cooperate on research and development to mitigate risks and share the costs of learning.
Roundtable 2…Clean Vehicle Adoption…
Roundtable 3…Power Systems in Emerging Economies…
Roundtable 4…Renewables Policy and Finance…
This roundtable sought to identify policies and regulatory mechanisms to mobilize larger capital flows into renewable energy. The discussion explored the impact of policy uncertainty, policies that can aid policy makers and the finance community, major risk factors, measures to ramp up the availability of low-cost debt from domestic lenders, the role of multilaterals, and measures to increase capital flows from institutional investors.
Overview and Background
New investments in clean energy (which excludes large hydropower but includes energy-smart technologies that enable more efficient use of electricity and fuels) declined 11% worldwide in 2012 to $269 billion, according to Bloomberg New Energy Finance (BNEF) (Figure 4).
The fall was partly due to regulatory uncertainty in big markets such as the United States, India, Spain, and Italy. In some cases, fiscal austerity led to the rollback of renewable energy subsidies, leaving investors and project developers facing uncertainty and higher risk. Sharply lower prices for solar and wind equipment also contributed to the lower investment volume, although they have also allowed for more capacity to be installed per dollar of funding.
Policy makers are challenged to provide investors with stable and transparent policies or, where that is not possible, flexible policies that address fiscal challenges while still offering sufficient incentive to encourage investment. In emerging economies, policy makers must address these challenges while making the huge investments required to build out their energy infrastructures.
Within this context, policy makers face the dual issues of scope and urgency; BNEF estimates that clean energy investments must increase two to three times in order for carbon dioxide emissions to peak by 2020 and then start to decline.
The roundtable participants identified a number of barriers that impact renewable energy financing:
Policy uncertainty: The possibility of governments cutting back previously promised incentives or performing unannounced reviews has created uncertainty regarding the future cash flows of renewable energy projects.
Communication during policy formulation: The private sector is generally not included when policies are being formulated. This lack of involvement and communication tends to create a lack of trust in the resulting policy due to perceived risks or uncertainties that impede investment.
Access to low-cost debt: The cost of debt has a major bearing on the levelized cost of electricity generation from renewables and restricts deployment in countries with high interest rates. In addition, low participation from certain categories of investors, such as tension and sovereign wealth funds, and a lack of focus on innovative mechanisms could impede future growth in financing.
Integrated planning: When policy targets are set for specific sectors such as wind or solar, integrated planning is sometimes neglected, which can result in transmission system unavailability, grid instability, and payment delays. This can result in significant negative consequences. In certain states or provinces within emerging markets, grid curtailment1 is a growing concern, particularly where renewables compose more than 10% of installed generation capacity. This curtailment may significantly impact the profitability of a project.
Public acceptance: Clean energy deployment can also face resistance from local communities that may believe clean energy is more costly than conventional energy or may disrupt their way of living. This can cause delays and increase risk, thereby increasing the costs or stranded assets.
Information access: Overall, a lack of information- and experience-sharing between various public and private entities on policy, technology, and financing may also lead to policies that negatively affect investments.
A number of potential solutions were identified to address the barriers:
Policy uncertainty: Governments could reduce uncertainty about future actions by defining predetermined policy review periods. The enforcement of regulations such as renewable purchase obligations needs to go hand-in-hand with the creation of incentives.
Communication during policy formulation: To improve communication during policy formulation, policy makers could invite feedback and incorporate suggestions from key stakeholders such as power generators, government-owned or -regulated power offtakers, large private power buyers, financial regulators, equipment providers, the insurance industry, institutional investors, and public communities. This more integrated approach would then create a better understanding and acceptance of the policy.
Access to low-cost debt: Facilitating a lower cost of capital could have a significant impact on clean energy deployment. However, the provision of low-cost debt from government institutions was not considered a viable long-term solution because it could create inefficiencies in business models, fundraising activities, and project execution. Local commercial banks have the potential to significantly increase access to low-cost debt. Increasing their experience and expertise and expanding capacity through training programs is crucial.
Investment flows in clean energy could also be increased by leveraging the involvement of multilateral financial institutions and institutional investors such as pension and sovereign wealth funds. Green bonds, crowdsourcing, charitable giving, and vendor financing are also mechanisms that could be better promoted. In some countries, governments have created sectoral lending limits or carve-outs for banks. In such cases, defining a specific proportion for clean energy could increase monetary flows to the sector.
Integrated planning: Integrated planning frameworks and increased coordination between various governmental ministries and departments are needed to address issues such as transmission system constraints.
The frameworks should also target the reduction of soft costs, including items such as permitting and clearance fees. Facilitating investments in upgrades to the power transmission network, smart grid solutions, and research and development of storage technologies is also critical to increasing the penetration of renewables.
Public acceptance: Increasing public awareness of the rapidly declining cost of clean energy technologies as well as their life cycle environmental benefits could increase acceptance.
Information access: Governments can play an important role in establishing long-term and flexible support structures to incentivize the deployment of renewable energy technologies. Steps such as organizing resorces, increasing data availability, and developing analysis tools will help accelerate the use of best practices.
Considering how critical financing is to ramping up the deployment of renewable energy, an increased focus on financing was recommended within the Clean Energy Ministerial’s framework. Specifically, ministers asked for a report on clean energy finance to be delivered at the fifth Clean Energy Ministerial. This report could cover the status of clean energy financing, best practices from various countries about policies or incentives that spurred investments, and potential areas for future work. The work stream would comprise various public- and privatesector stakeholders as well as nongovernmental and international organizations, bringing together experts with relevant work experience within the financing area.
Roundtable 5…Energy Management Systems…
Roundtable 6…Mini-Grid Development…