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3.2.1. Innovative financing for renewable energy development 3.2.1.1. Overall summary Background and objectives

Energy demand and consumption have increased alongside economic development in the Asia-Pacific region, resulting in a large gap between demand and supply. The total APEC final energy consumption is projected to increase to 5,948 Mtoe (million tonnes of oil equivalent) in 2020, from 3,760 Mtoe in 1999. This represents a rise of 58.2 percent or an annual growth rate of 2.2 percent1. Within the current technological paradigm, this will have major environmental implications, especially in relation to climate change and global warming, unless new and sustainable sources of energy are developed. In addition, there are an estimated 2 billion people lacking access to modern energy services world-wide, of which 1.2 billion live in Asia. For many of the non-electrified rural areas, decentralised energy systems have proved more financially viable than connection to the grid. Developing new and sustainable sources of energy provide an opportunity to meet the future growth in energy consumption, provide electricity to those who presently lack it while at the same time preventing further environmental degradation. Renewable energy sources present a huge potential for contributing to the provision of clean energy, but also raise a range of challenges related to technology, resource availability and high investment and capital costs.

Meeting the challenge of large scale commercialisation of renewable energy (RE) products and

services will require 1) mitigating the initial high costs of RE systems; 2) improving competitiveness against traditional fossil fuels including the removal or redirection of subsidies; 3) ensuring access to affordable consumer financing; 4) enhancing access to credit for the RE industry; and 5) ensuring sustainability without public aid and subsidy. This research has explored innovative modes of delivery in four areas of financing likely to be the primary sources for financing the development and commercialisation of RE in the mid-long term period: government finance, international funding mechanisms (including clean climate initiatives), private sector finance (including financing through energy service companies), and micro-credit and community-based financing. Research activities in FY 2003

In line with the research framework designed in the first year of the project, activities in the second year consisted of: Collection of good practices in new technologies

Further field studies were conducted and innovative practices in the financing of renewable energy were collected grouped into the four categories of financing. While the technology covered during the first year was limited to grid-connected wind power applications and decentralised solar power applications, activities in the second year were expanded so as to collect innovative practices in the areas of grid-connected biomass, integrated water heating systems and landfill gas.

Finalisation of the framework for strategic policy options

The framework for strategic policy options was further developed and discussed at research team meetings (see section on SPO for details).

1 Asia-Pacific Energy Research Centre (2002) APEC Energy Demand and Supply Outlook 2002, Asia-Pacific Energy Research Centre, Institute of Energy Economics, Tokyo: Japan. Available at: http://www.ieej.or.jp/aperc/pdf/APEC-EDSO2002.pdf

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Research team meetings A mid-term research team meeting was held in New Delhi, India in July 2003, hosted by the

Energy and Resources Institute, and a further meeting was held in Bangkok in November 2003, in conjunction with the first RISPO plenary workshop. Finally, a research team meeting was held in February 2004 in Japan, in conjunction with the second RISPO Plenary Workshop. Publication of research findings and presentation at international conferences

On the basis of the research outputs of the first year, a number of activities were initiated in order to disseminate the research findings so far. This included writing and publishing a research note entitled “Financing Renewable Energy in India: A Review of Mechanisms in Wind and Solar Applications” in the International Review of Environmental Strategies by research team members from IGES and TERI. Another paper titled “Developments with Photovoltaic Research and Applications in India” was presented by research team members from India at the 14th International Photovoltaic Science and Engineering Conference in Bangkok, in January 2004.

Contribution to the policy-making process

Research team members from the Energy Research Institute, China prepared and made arrangements for the “European Union - China High Level Conference on Renewable Energy Policy and Project Financing”, held on April 6, 2004 in Beijing, China. Members also participated in development activities of the China wind power and small hydro program under the Clean Development Mechanism (CDM), as well as preparing the draft of the “Renewable Energy Promotion Law of the People’s Republic of China”. Good practices

Seventeen good practices have been collected from China and India, in collaboration with the Energy Research Institute of China and The Energy and Resources Institute of India. The practices cover various innovative financing mechanisms including: mechanisms that combine government

and community financing (India); development of a market-oriented institutional and financial model for decentralised solar systems (India); wind-power development through combination of the Clean Development Mechanism CDM and public sector financing (India); scaling-up of renewable village power through governmental finance and bidding based on market regulation (China); experience of the first CDM project in renewable energy financing in China (China); financing the utilisation of landfill gas through economic incentives (China); commercialisation of solar hot water systems through a ‘financial intermediary (FI) scheme’ (India); market development for solar lanterns in a post-subsidy regime (India); developing a sustainable financial

model for solar pumping systems (India). Economic instruments, awareness raising, partnerships, technologies, design, planning and management were among critical instruments in these successful practices.

Solar water pumping in Chandigarh, India Photo by Gueye Kamal, IGES

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Strategic Policy Options

Based on the provisional framework developed in the first year, work continued towards finalising the SPO framework following the life-cycle approach. The results of the policy and literature review, and the collection and analysis of good practices indicate that there is a relation of interdependence between the deployment of RE products and technologies and their market demand with regard to financing. The availability of financing for research and development as well as for manufacturing is crucial for reducing the high costs of the systems. Similarly, adequate consumer finance enhances affordability and stimulates further demand, which in turn leads to further development of the RE industry. Given this inter-linkage between industry and market growth on the one hand and price reduction on the other, the challenge of financing is addressed under a life-cycle approach (LCA), which examines financing mechanisms during the stages of: 1) research and development; 2) demonstration; 3) early commercialisation; and 4) demand-driven commercialisation.

- Government finance - International funding

mechanisms - Private-sector finance - Micro-credit and community-

based finance

Early commercialisation

Demand-driven

Research and development

Demonstration

Figure 3-1. Life Cycle Approach

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Framework

The framework and proposal of strategic policy options were developed to provide research-based answers to the following questions:

1. Which particular types of barriers are best addressed by governments, international financing mechanisms, private finance and micro-credit/community-based financing respectively?

2. Who can best address the financial requirements at each specific stage of the LCA? 3. To what extent is the role of the different financing instruments technology-specific (i.e.

does this vary between solar, wind, biomass etc.)? 4. What would be the optimal combination of financing sources for the respective

technologies? 5. How can policy options be replicated in other countries?

The following key principles were identified as driving forces behind sustainable financing

strategy: Financing should be an instrument that drives market development. Financing mechanisms should not be a one-time delivery initiative but should involve a

package of services for acquisition and maintenance of RE products. Financing should increasingly move away from subsidy-driven schemes and rely on private

finance and market-driven demand.

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Table 3-1. Framework of Strategies and Strategic Policy Options Strategy Strategic Policy Options

(Source of finance) Financing Instruments (Modality of delivery)

R&D funds/development funds Optimal use of government funds Technology Commercialisation/incubation

funds

Incubation funds/venture capital

Joint venture and technology transfer

Attracting International development funding mechanisms Collaborative R&D

Increasing financing by public/private financing institutions

Risk capital and technology finance

SSuuppppoorrtt ffoorr tteecchhnnoollooggyy aanndd pprroodduucctt ddeevveellooppmmeenntt.. ((RReesseeaarrcchh,, DDeevveellooppmmeenntt aanndd DDeemmoonnssttrraattiioonn ssttaaggee))

Enhancing private sector financing

Corporate-funded R&D Combining subsidy with loans in the ownership model Competitive biding for minimum subsidy Redirecting subsidies away from fossil fuel based energy Environmental cost of fossil fuel projects

Greening of GDP

Optimum use of government funds

Increasing share of RE Refinancing: Two-step loans Buying down interest rate of commercial lending

Attracting international funding mechanisms Creating Special Purpose Vehicles for Clean

climate mechanisms (CDM, FCP, carbon trading)

Renewable portfolio lending Increasing financing by private/public financial institutions Market-based institutional finance

Micro-credit and self help group-based financing Carbon Cess, Preferential tariff, Concession tariff / Tariff rebate

Leveraging consumer financing

Community-based green funds

Development of energy service companies Fee for service model Vendor credits Leasing

IImmpprroovviinngg tthhee ccoommppeettiittiivveenneessss ooff rreenneewwaabbllee eenneerrggyy mmaarrkkeettss.. ((CCoommmmeerrcciiaalliissaattiioonn ssttaaggee))

Enhancing private sector financing

Renewable energy processing zones (concessions, tax holidays etc.)

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Preliminary proposal

Research on the basis of the life cycle approach led to the identification of two key strategies that aim to 1) support technology and product deployment (at the research, development and demonstration stages) and 2) improve the competitiveness of RE markets (at the commercialisation stage). Based on these strategies, five strategic policy options have been developed. The indication from the policy options identified is that innovation was related more closely to innovative modes of delivery than to new sources and mechanisms of financing. Accordingly, the strategic policy options (SPO) place emphasis on modes of delivery (financing instruments) that involve new combinations of different sources of finance, optimising the aggregate effect in reducing the financing barrier. In other words, each SPO incorporates a combination of financing instruments. There are five SPOs presented in detail under the country sections: • Optimum use of government funds • International funding mechanisms • Increasing financing by private/public financial institutions • Leveraging consumer financing • Enhancing private sector financing Research plan in FY 2004 SPO development - Completion of country-specific SPO (August 2004) - Developing SPO applicable to Asian countries (September – December 2004) - Completion of SPO and draft final report (December 2004) - Review of draft final report (January 2005) - Finalisation of SPO and final report (February 2005) SPO review meetings - Review meeting, China (August 2004) - Review meeting, India (September 2004) Dissemination of research results - Renewable energy workshop, India (April 2004) - Renewable energy workshop, China (April 2004) - Policy paper on SPO (February 2005)

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Research collaborators Energy Research Institute (ERI), China Ms. Hu Xiulian Ms. Jingli Shi Dr. Kejung Jiang The Energy and Resources Institute (TERI), India Ms. Akanksha Chaurey Mr.Yuvaraj Dinesh Babu Mr. Shirish Garud Institute for Global Environmental Strategies (IGES), Japan Dr. Gueye Kamal

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3.2.1.2. Summary of research progress in selected countries A. China Summary of research progress in FY 2003 Literature, information and policy survey

A review was conducted of the various publications released by the government, research and financial institutions, public and private companies including renewable energy users and manufacturers; internet sites, international collaborative projects etc. Site visit, group discussion, expert meetings and telephone interviews

Wind energy site-visits were conducted in order to meet with the major wind manufacturers and user groups; expert meetings were organised with various representatives of financial institutions; and solar energy site-visits were conducted in order to interact with the supplier’s network of dealers and technicians, individual households, and rural banks. Research team meeting and electronic discussion

The first meeting of the research team on March 27-28, 2003 in Bangkok, Thailand, the second on July 22-23, 2003 in New Delhi, India, the third on November 22-23, 2003 in Bangkok, Thailand, and the fourth on February 10-12, 2004 in Japan, were held to review the research framework, identify financing mechanisms potentially innovative in the collection of good practices, and adopt the basic framework for Strategic Policy Options. Follow up activities were conducted through electronic discussions. Activities related to the project

Members of the team prepared and made arrangements for the “EU-China High Level Conference on Renewable Energy Policy and Project Financing”, held on April 6, 2004 in Beijing. Members also participated in development activities of the China wind power and small hydro CDM program, as well as drafting “the Renewable Energy Promotion Law of the People’s Republic of China (Draft version) Background information in China Renewable energy resources potentials in China

According to the initial assessment, China has great potential for renewable energy resources development, including wind power, hydro energy, solar and biomass. According to the estimates made by the China Academy of Meteorology, exploitable on-shore wind power is about 253 GW, and offshore wind power is 750 GW, totalling 1 TW. According to the results of re-investigation released from the latest hydro resources, exploitable small hydro resource is 125 GW, and 65% of this is located in the western region. According to this estimation, the amount of solar radiation received at the ground surface is about 170 billion tce each year in China. Solar energy is potentially highly valuable in most of areas of China. Driving force behind the development of renewable energy in China

20 thousand villages and more than 800 rural households, over 30 million rural people, as yet have no access to electric power in China, and 50% of domestic energy use still relies on non-commercial energy in China’s rural areas. This not only influences the quality of living in rural areas, but also has a great impact on the environment. Therefore, China urgently needs to improve its energy structure that is dominated by coal use, and increase energy efficiency and benefits. Environmental protection and GHGs emission mitigation will influence sustainable development in China. Commercialisation, industrialisation and market-oriented development of renewable energy will definitely provide an opportunity for China to create a new economic growth area.

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Current status of renewable energy industry With advances in science and technology, China's renewable energy industry has witnessed

steady growth. In some technologies, most notably solar water heating, China has a well-established industry with decent sized export markets, and a number of other technologies are rapidly moving towards commercialisation. Chinese advances in renewable energy technologies include: – development of practical and commercialised units – basic design/manufacturing capacity for modern and large-scale units – establishment of national testing centres – training of technical personnel – new innovative technologies for development and application – continuous improvement of equipment performance, which is approaching international

standards for many technologies

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Table 3-2 . Current status of China's renewable energy technologies Maturity and Development Phase Types of Technologies

R&D Demonstration Early-commercialisation

Demand-driven commercialisation

Solar water heater •

Passive solar house •

Solar stove •

Solar drier •

Solar cell •

Grid connected wind turbines •

Small and mini wind turbines •

Geothermal power generation •

Geothermal heating •

Traditional bioenergy technology •

Small methane tank •

Large-medium methane technology •

Municipal organic waste power generation •

Biomass gasification •

Other modern bioenergy technologies •

Wave power generation •

Tidal power generation •

Ocean thermal energy conservation •

New hydrogen manufacturing technology •

Hydrogen storage techniques •

Small hydropower •

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China’s Current Policies on Renewable Energy National legislation, policies and programmes

The Government of China has made a substantial effort to develop renewable energy. The primary energy policies published by the central government are as follows (Policies, laws and regulations associated with renewable energy in China are detailed in Appendix A): (1) People's Republic of China (PRC) Law on Electricity

This was China's first energy-related law. The legislation states that the state encourages and supports renewable energy and clean energy based power generation; promotes the development of hydropower resources in rural areas, including construction of medium and small-sized hydropower stations; and encourages and supports rural power supply including solar, wind, geothermal and biomass energies. (2) Energy Conservation Law

The 1998 Law on Energy Conservation described the important strategic role and position of energy efficiency and renewable energy in bringing about emission reductions and environmental improvement. The legislation requires government at each level to enhance the rural energy supply, including the development and utilisation of biogas, solar energy, wind, hydro and geothermal energies. (3) Regulation on Grid-connected Wind Power Generation Management

Promulgated in 1994, the Regulation on Grid-connected Wind Power Generation Management is one of the most concrete regulations focusing on renewable energy. This document stipulates that wind power shall be allowed access to the nearby grid and that the network shall purchase all output. The wind power tariff shall be determined based on the cost (both principal and interest repayment) plus a reasonable profit. The incremental cost of wind power above the average electricity tariff should be shared by the whole grid. (4) Ninth Five-Year-Plan and 2010 Objectives for National Social and Economic Development

In the 9th five-year-plan for China's national economic and social development, the energy development strategy was defined as “centred around coal based electric power with enhanced survey and development of petroleum and natural gas resources” The policy also stressed the necessity of developing small hydro power, wind energy, solar energy, geothermal energy and biomass energy compatible with local conditions. (5) Notification on Further Support for Renewable Energy Development

In 1999, the former SDPC and Ministry of Science and Technology issued the Notification on Further Support for Renewable Energy Development. This document presents a series of concrete economic incentive policies for promoting renewable energy. (6) National programmes

The "Riding the Wind Program" was initiated by the former SDPC in 1996. The programme selected domestic WTG manufacturers through a bidding process, and formed joint venture enterprises with foreign companies for production. A joint venture company Xi'an NORDEX Wind Turbine Co. Ltd. was established with Xi'an Aero-Engine (XAE) and NORDEX of Germany, where manufacturing technology of 600kW WTG was imported. Another joint venture company Y1TUO-MADE (Luoyang) Wind Turbine Ct). Ltd. was established by China YITUO Group Co. Ltd. and MADE Technologies Renewable, S.A. Spain, where manufacturing technology of 660kW WTG was imported. Both companies have the capability of batch production and their products have been installed in wind farms, totalling more than 20.

The "National Debt Wind Power Program" of the former State Economy & Trade Commission

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(SETC) has been in place since 1998. The program uses national debt with favourable condition of interest subsidy to build wind farms, and the planned total installed capacity will be 73MW. It is expected to accelerate the development of domestic wind power equipment manufacture. The China Classification Society (CCS) is preparing to establish a type certification scheme for locally manufactured WTGs, to implement tests and measurements according to international standards.

The "Brightness Program", sponsored by the former SDPC from 1996 onwards, aims to provide electricity to off-grid villages and households in the western part of China, 23 million people in total. The first phase of this program (projects in Inner-Mongolia, Gansu and Tibet) was completed in 2000. The Central Government intends to invest RMB 2 billion in the next few years to supply PV power to the off-grid villages in western China. The program will drive the PV market forward. (7) Strategic planning for renewable energy development in 2020

Part way through 2003, the National Development and Reform Commission (NDRC) initiated the formulation of Strategic planning for renewable energy development in 2020, to promote renewable energy technology development in China and keep up with world trends. The strategy is based on renewable energy resources and technology characteristics in China to meet the social and economic development requirement, and it draws on foreign experience and lessons learned. The strategy presents the objectives, layout and policy measures for renewable energy development in China in the next 20 years, guiding the path of development and construction of key projects in the renewable energy field. Economic incentives (1) Tax exception and reduction

Customs Tariff Relief. With the gradual opening of Chinese markets, customs duties for many imports have been reduced, and duties on renewable energy equipment are lower than the average. For example, customs duty is not applied to imported wind turbines. Ironically, this damages the overall objective of promoting local manufacturing considering wind turbine components are subject to a three-percent customs tax. This policy provides an incentive to import complete turbine units from abroad and not to use as much local equipment as possible. Since local equipment is cheaper, the overall effect is to raise the cost of wind generation equipment unnecessarily. (2) VAT reduction

Value Added Tax Relief. At present, most renewable energy products are taxed at the full value added tax (VAT) level. The two exceptions are the VAT on biogas at 13 percent (current standard VAT is 17%) and that on small hydropower generation at 6 percent. (3) Income tax reduction

Income Tax Relief. China’s income tax system has greatly improved in recent years. At present, the standard income tax paid by enterprises is 33 percent. Local authorities collect income tax from local enterprises, and some regions, such as Inner Mongolia and Xinjiang, have developed preferential policies to support the development of renewable energy. (4) Pricing

Discount price. Local authorities have various measures for pricing certain renewable energy applications. For example, Shanghai authorities have defined a higher price for biogas based cooking gas at Rmb 1.20 Yuan/m3 while other provinces such as Sichuan and Guandong have offered discount prices for the cement used in biogas tank construction.

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(5) Discounted loan interest rate Discount loans. In 1987, the Chinese Government created discount loans specifically for rural

energy development. These loans support biogas projects, solar thermal applications and wind power generation technology. In 1996 the fund totalled Rmb 130 million. The government offered a 50 percent discount on regular commercial bank loan interest. In addition, the government has made a limited number of low interest loans available for small hydro projects.

In 1999, the State Council, SDPC, and the Ministry of Science and Technology issued the

Notification on Further Supporting the Development of Renewable Energy. The statement stressed that renewable power projects would enjoy priority in state bank loans. The National Development Bank is the lead institution providing such loans and encourages the involvement of other commercial banks. The SDPC assists the developer in acquiring bank loans for projects above 3MW. These types of loans are subject to an interest rate reduction of two percent below the commercial rate, a discount subsidised by the national or local government. (6) Subsidy

Subsidies. The central authorities’ subsidies for renewable energy are usually offered for research or development and there are also some local subsidies for solar energy and wind power. Subsidies paid to investors are used in China for investing in the construction of local small hydropower stations. Consumer subsidy is also a widely used incentive. In addition to its extensive application in extending solar energy equipment and mini wind generators, these subsidies are used widely for efficient firewood stoves and other biomass energy technologies. The objective is to spur on the expansion of production capacity and thus reach the goal of cost reduction.

As an example of local policy, the Shanghai municipal government allocated a financial appropriation of Rmb 10 million yuan for a fund dedicated to the promotion of biogas projects using a market mechanism based on demand growth. Some local authorities such as those in Liaoning and Dalian provided an Rmb 700 yuan subsidy for farmers using methane to heat greenhouses or nurseries. This is in addition to low interest loans of up to Rmb 2, 000 yuan for each system.

Research and development policy (1) Proving funds for renewable energy R&D

Funding from the central authorities for research, development and demonstration are made for the following purposes:

– Providing administrative expenses and research budgets for scientific research institutions.

– Supporting major scientific studies and related training: as shown by the incomplete statistics,

the total budget used in the 9th five-year-plan period for this purpose exceeded Rmb 100 million yuan.

– Offering project subsidies: in the early 1990s, for example, the central authorities invested Rmb 7 million in the construction 4 PV stations in Tibet as a demonstration project.

– Providing assistance in the planning process: for example, in 1996, the State Planning Commission, State Science and Technology Commission and State Economic Commission jointly published “Development Outlines for China's Energy and Renewable Energy Development in 1996-2010."

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(2) Supporting renewable energy technology demonstration In line with the energy, environment and sustainable development strategy, the government of

China pays much attention to the development and demonstration of renewable energy technologies. For example, two demonstrations on solar cooling were completed in the state R&D Program for 9th Five-year-plan. – The Shangdong project

This integrated solar system was built in Rushan, Shangdong in 1999. It functions as a cooling, heating and hot water system for a gymnasium with a space of 1000m2. This system has 2160 pieces of heat-pipe evacuated tubular collector with a net absorber area of 364m2 and is equipped with a LiBr absorption chiller. Typically in summer the system provides 1777.4M J/day of refrigeration capacity with a COP of around 0.5, while in winter it supplies 2175.3MJ/day of heat. Beside the cooling and heating system, it supplies 32000 litres of hot water. – The Guangdong project

This integrated system was constructed in Jiangmen, Guangdong in 1996. It serves as a cooling system for one floor of a plaza (600m2) and heats 30 tons of hot water for the whole building. The system is equipped with 500 m2 of flat plate collectors and a 100kW LiBr absorption chiller with COP around 0.44. Priority areas for developing the renewable energy and development goal in China

Materials from the relevant government agencies and reports from research institutes have shown that the priority areas of renewable energy development in the coming 20 years will be renewable energy power generation, renewable energy gas supply, renewable energy heat supply, liquefied fuel from renewable energy and new energy technology (fuel cells and hydrogen energy).

The key areas for development of renewable energy power generation include small hydro power, wind power, solar power and biomass power. The total installation capacity of renewable energy power generation will reach about 600 TW in 2010, accounting for about 10% of the national total. Amongst these, small hydro will hold a share of 80%, wind power 7% and solar and biomass power 31% . In 2020, the total installation capacity of renewable energy power generation will reach about 1150 TW, about 12% of national total. Small hydro will hold a share of 65%, wind power 17% and solar and biomass power 18% .

Heating supplied by renewable energy (heating supplied by solar heaters and geothermal energy) will replace 22 Mtce (million tonnes of coal equivalent) energy by 2010, which will increase to 45 Mtce of renewable energy by 2020. Liquefied fuels made from renewable energy (bio-ethyl alcohol, bio-oil) will replace 11.43 Mtce or 8 Mtoe (million tonnes of oil equivalent) by 2020. Barriers and issues of renewable energy development in China

In general, renewable energy in China suffers from a lack of a well-articulated policy framework and an independent industry that can attract investment capital. Though there certainly is progress, most renewable technologies would benefit from a comprehensive set of policies, tailored to address the phase of development of the individual technology. There are numerous renewable energy technologies in different stages of development in China, and therefore there are various barriers and problems. The following is a summary of the barriers common to all technology fields, and Annex 2 gives a detailed analysis of wind power. – The role of renewable energy in the national energy development general strategy is weak,

showing a lack of long-term objectives, development planning and concrete implementation measures. The omission of renewable energy utilisation in national energy statistics effects energy policymaking.

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– There are no supporting policies or incentive mechanisms formulated by the legislative requirements. The existing policies are not integrated, lacking power, stability and consistency.

– There are no effective supporting investment and financing mechanisms available. Many

renewable projects are funded by the government, and international assistance or large scale commercial development is not possible.

– There is lack of input in R&D and industrialisation. An integrated renewable technology

industry base and quality control system including standards and certifications have not yet been established. Technology and equipment still rely on imports.

– There is lack of resource surveys, assessments and management systems. Resource surveys fail

to provide detailed information for project planning and development, therefore increasing the investment risks.

– There is lack of a scientific, accurate and complete assessment system. As a result, the

environmental and social benefits of renewable energy are undocumented and renewable technologies are disadvantaged in market competition.

– Common barriers to the financing for renewable energy are: high up-front capital costs and low

affordability of renewable energy (RE) products and technologies by consumers; inadequate accessibility to credit by RE industry and consumers; and subsidies for fossil fuels that hinder the RE market development and reduce competitiveness

Paths to be taken to solve the problem of financial capital needed to develop renewable energy in China – Establish a fund guarantee system for renewable energy construction, involving the government,

social benefits organisations, renewable energy special capital and renewable energy development funds.

– The main solutions to solving the problem of gaining the financial capital needed for renewable

energy development are to combine: state guidance investment with social multi-channel investment; poverty shake-off with ecologic protection project, in which state investment plays the leading role; state investment with subsidiaries, such as those based on total investment, giving 5% financial support for small hydro power, and 1% financial support for wind power. The state should be responsible for investment in wind power resource exploration and assessment, project planning, and standards and regulations formulation. As for waste biomass utilisation project, the government should subsidise 3% of the total investment.

– Cultivate the space needed for renewable energy development. Before 2010, policies of

government bidding, MMS and law binding power purchase price should be adopted, and after 2010, a competitive renewable energy market should be developed gradually.

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Good practices identified

In this research, the current focus in renewable energy technologies are solar and wind energy . According to the analysis of existing policies in China, the research group prepared a draft list of good practices, which was submitted for discussion at the working meeting held on July 22- 23, 2003 in New Delhi, India. Based on the results of this discussion, the research group determined a list of the first four good practices that have been conducted. These were:

Demonstration of a wind power concession policy to reduce the large-scale wind power price.

Location; Dongfeng Wind Farm, Jiangsu Province, China, and Huilai Wind Farm, Guangdong Province, China.

Establishment of a Renewable Energy Service Company (RESCOs) for the Renewable Village

Power System. Location; Bulunkou Xiang, Xinjiang Province, China.

Utilising Landfill Gas for Power Generation. Location; ShuiGe Landfill Site, Nanjing City, Jiangsu Province, China.

Solar Water Heater Integrated Building. Location; Qingdao, Shandong Province, China.

a. Demonstration of wind power concession policy to reduce the large-scale wind power price Location: Dongfeng Wind Farm, Jiangsu Province, China, and Huilai Wind Farm, Guangdong Province, China Background: Research into Wind Power Concession Policies has been conducted in China for several years. Chinese wind power has also developed rapidly in recent years, reaching 468MW by the end of 2002, which was three times that of 1997. At present, the major problems facing wind power in China are the Power Purchase Agreement and Wind Power Price. In order to stimulate the development of wind power, the National Development and Reform Commission initiated the Wind Power Concession Policy in 2003. Objective: The objectives of the demonstration of wind power concession are: (i) to provide guarantees to the wind farm developer when signing a long-term Power Purchase Agreement with the power-grid company; (ii) to reduce the wind power price through international bidding. Activity: The Energy Bureau of National Development and Reform Commission is in charge of the demonstration of the wind power concession policy. Two sites were selected in Jiangsu and Guangdong and international bidding was adopted. The first bidding was conducted by the Jiangsu Planning Commission and Guangdong Planning Commission. A total of 11 international and national wind farm developers were involved in the bidding. Ultimately, the Huarui Corp. won the Jiangsu Dongfeng project, and Guangdong Yuedian Electric Power Corp. won the Guangdong Huilai project. The results of the bidding were that,

The wind farm concession period is 25 years During these 25 years, the power-grid company must purchase all wind power from the wind

farms The power price of the first 30000 hours is determined by the bidding; for the Jiangsu project,

0.436yuan/kWh, for the Guangdong project, 0.51yuan/kWh

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Impact: The price of wind power is greatly reduced through the wind concession policy and bidding. The wind power price of the former projects in Jiangsu and Guangdong was over 0.6yuan/kWh (some projects even reached 1yuan/kWh). Potential for application: These two projects comprised the first wind power concession policy demonstration. The National Development and reform Commission is planning for later groups of wind power projects. b. Establishing Renewable Energy Service Companies (RESCOs) for the Renewable Village Power System Location: Bulunkou Xiang, Xinjiang Province of China Background: The Renewable Village Power system is important in solving the residential power supply problem in remote areas. The UNDP/GEF Capacity Building project of rapid Development of Renewable Energy Commercialisation in China supported the establishment of several renewable village power systems for demonstration, including the Bulunkou project, located in Xinjiang province. Apart from providing financial support for investment in the renewable village power system, the UNDP project also supports the set up of RESCOs for the maintenance and operation of the village power system. Objective: To help establish RESCOs. Activity: The UNDP project provided US$600,000 for the initial investment in the Bulukou system. The systems comprised 5 sub-systems. The total installed capacity is 60kW of wind turbines, and 8kW PV and 120kVA diesel generators. The local government provided 1.6 million RMB yuan of investment. A RESCO was registered in the beginning of year 2003, and the company took charge of the system operations in March 2003. The price of power charged to farmers, government buildings and business buildings are 1yuan/kWh, 1.2yuan/kWh and 1.5yuan/kWh respectively. The money collected covers the operation costs at present, including salaries and small maintenance costs. But for maintenance work such as battery changing that necessitates a great deal of money, the income from power cost collection is not sufficient. Impact: This RESCO is the first true RESCO in China, and the company provides the service to keep the village power system in normal operation. Potential for application: In 2002-2003, the National Development and reform Commission implemented the Song-Dian-Dao-Xiang project, to equip 800 villages in remote areas with PV and PV hybrid village power system. But the difficulty of keeping these systems in normal operation in the next 10-15 years is a problem faced by the National Development and Reform Commission. RESCO will be the ideal choice. c. Utilising Landfill Gas for Power Generation Location: ShuiGe Landfill Site, Nanjing City, Jiangsu Province, China Background & Activity: The UNDP/GEF project, “Promoting the Methane Recovery and Utilisation from Mixed Municipal Refuse of Chinese Landfill Sites” was initiated in 1997, One major activity of the project is to construct landfill gas utilisation systems in three Chinese cities. Shuige Landfill Site of Nanjing city is one of the demonstration sites. The landfill sites were owned by local government, but through bidding, the local government and

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project management office selected an Australian company to take charge of the construction and operation of the landfill gas utilisation system. The local government also helped with negotiations between the Australian company and the local power-grid company. The Power Purchase Agreement was signed in 2001 and the system began operation in 2002. This project was successful in selecting a private company (international) to operate the system, rather than intending the owner of the landfill site to manage the system. d. Solar Water Heater Integrated Building Location: Tianjin or Qingdao (to be determined) Background & Activity: The solar water heater is the single technology in the renewable energy field at the full commercialisation stage in China. In some cities such as Kunming, development is progressing quite well, but in others, especially in tourist-attractive cities such as Dalian, installation was forbidden by the local regulations, which considered solar water heaters to badly influence the appearance of buildings. In recent years, the concept of the solar water heater integrated building was proposed, and a number of solar water heater manufacturers have cooperated with construction companies to install the new solar water heater in solar buildings. A UNF project titled “Improvement and Expansion of Solar Water Heating Technology in China” was implemented in year 2002, and both Tianjin and Qingdao are sites for demonstration. The case study will examine one of the demonstration sites, however as members of the research group have not yet visited the sites, the site for our case study is yet to be decided. Strategic Policy Options developed

Increasing financing by private/public financial institutions

The perception of high risk and high transaction costs of renewable energy transactions, combined with limited affordability by low income consumers are common barriers to commercial banking playing a significant role in financing access to RE products and services. The policy options envisaged aim to: increase the renewable portfolio in total bank lending; increase government intervention that establishes new financial institutions operating on preferential market terms; and introduce mechanisms to reduce the interest rate for commercial lending.

In China, the establishment of a renewable energy development fund has been studied and discussed amongst the relevant governmental departments for some time. The fund will be set up by the government, with the objective of providing funds specifically for the development and utilisation of renewable energy. The renewable energy development fund will use funding from the following sources:

– Sale surcharge of electric power and fuel: in accordance with the target of renewable energy development, the government will calculate the level of surcharge to be imposed on the sale price.

– Financial allocation from China’s central government – Benefits from fund – Grants and others

Once established, the fund will be used for the following purposes: – Subsidies for power tariff gap of renewable generation connecting with the grid – Subsidies for investment and operation costs of off-grid power systems in remote areas – Subsidies for price gap of bio-liquid fuel – Subsidies for renewable energy technology application in rural areas – Subsidies for technology research & development, introduction, demonstration projects – Outreach, education, training, international cooperation and exchange.

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A special account for the renewable energy development fund will be established to be located in China’s central financial agency. The government agencies responsible for energy management will develop an annual budget so as to realise the target of “a special fund for a special purpose”. On examination and approval of the subsidies for renewable generation and bio-liquid fuel by the government departments concerned, the enterprises can deduct this directly from the sale surcharge on behalf of the relevant agencies. Suggestions on research plan in Year 3 April: – “EU-China High Level Conference on Renewable Energy policy and Project Financing” in

Beijing. – Study of SPO analysis evaluation model methodology May – June – Develop SPOs – Participate in the renewable energy international conference to be held in Born, Germany – Compile SPO background report – Study of model analysis scenarios August – October – Apply the model to the development of scenarios analysis – Prepare initial SPOs national report September – December – Review and discussion of SPOs national initial report – Meeting of capacity building January – February – Complete and revise SPOs national report – Finalise SPO report

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B. India Summary of research activities in FY 2003

Year 2 of the IFRED sub-theme focussed on four activities:

1. Finalising the framework for SPOs 2. Writing the research note/background paper 3. Presenting the research outcome at an International Conference 4. Collecting four more GPIs

Based on the provisional framework developed in year 1 of the sub-theme, work continued

towards finalising the SPO framework following the life-cycle approach. The results of the policy and literature review, and the first four GPIs indicated that there is a relation of interdependence between the deployment of RE products and technologies and their market demand with regard to financing. The availability of financing for research and development as well as for manufacturing is crucial for reducing the high costs of the systems. Similarly, adequate consumer finance enhances affordability and stimulates further demand, which in turn leads to further development of the RE industry.

Given this inter-linkage between industry and market growth on the one hand and price

reduction on the other, the challenge of financing is addressed under a life-cycle approach, which examines financing mechanisms during the stages of: 1) research and development; 2) demonstration; 3) early commercialisation; and 4) demand-driven commercialisation. The above framework was finalised through the following steps:

- Team meeting in Delhi, India in August 2003, attended by IGES, ERI and TERI - Electronic discussion and e-mails - Group meeting during RISPO research meeting in Bangkok in November 2003, attended by

IGES, ERI, Department of Energy, Fiji and TERI - Group meeting during 2nd RISPO plenary workshop in Hayama, Japan in February 2004,

attended by IGES, ERI, Department of Energy, Fiji and TERI - Writing the research note/background paper

Based on the research completed in Year 1, a research note “Financing Renewable Energy in India: A Review of Mechanisms in Wind and Solar Applications” was written by the team members from IGES and TERI. This note, after undergoing the peer review process, is now being published in the International Review of Environmental Strategies.

Collecting four more GPIs The following four GPIs were collected in Year 2. They are summarised in section 4 of this

report: - Developing a sustainable financing model for SPV pumping - 7.8 MW biomass grid connected power - CDM project - Market development for Solar lantern in a post-subsidy regime - Commercialisation of Solar hot water systems Presenting the research outcome at an International Conference

Based on the research of Year 1, a paper entitled “Developments with Photovoltaic Research and Applications in India” was presented at the 14th International PV Science and Engineering Conference in Bangkok, in January 2004.

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Background information in India As of March 2003, the achievements in grid connected wind energy systems and Solar PV stand

at 1807 MW and 121 MWp respectively. Further, the government is keen to increase the share of RE in the country’s installed power generation capacity by an additional 10,000 MW by the year 2012. A draft of the RE policy statement has been submitted by MNES for approval. Within the long-term vision, this Policy Statement seeks to set out the major application areas and near term targets for the period up to the end of the Eleventh Five Year Plan, the year 2012. One of the major application areas is the village electrification of 18,000 remote villages. In another initiative, the Ministry of Power (MoP) has set up a mission called REST – Rural Electrification Supply Technology Mission— whose basic objective is to accelerate the completion of all villages progressively by the year 2012 using local RE sources and decentralised technologies (as of March 31st 2003, 72715 villages were yet to be electrified). Such target oriented programmes and the introduction of the Electricity Act 2003 (EA 2003), which came into effect on June 2nd 2003 are expected to facilitate the development of the RE market in India.

The Electricity Act 2003 contains several provisions favourable to RE power, including rural

electrification. It provides for local generation and distribution of electricity by Panchayats (legally elected village level governing bodies), rural franchisees, NGOs and user associations by involving local communities in managing electricity distribution. Under the open access scheme expected to be in place by mid 2004, the Independent Power Producers (IPP) can establish RE power plants for captive use, third party sale, power trading companies and for own transmission and distribution both in rural and urban areas. The act also directs the Central Government to prepare national electricity and tariff policies including RE based power. The most important feature of the act is that it empowers state electricity regulators to promote RE specifically by purchasing electricity from RE sources from distribution licensees. This is considered to be a major boost in the promotion of the RE sector in India. In other words, once it is implemented, the utilities in the state will be given a target for RE based power, a certain percentage as specified by the regulator. In this liberalised electricity market, the financing mix for RE is likely to change as new financing institutions and mechanisms are developed. Good practices identified

This section gives a summary of the four good practices reviewed in this report

a. Developing a sustainable financing model for solar pumping systems

The scheme was designed to promote the use of solar photovoltaic pumping systems as an alternative to diesel powered pump sets. This was to reduce diesel consumption, which in turn can reduce environmental pollution and hardship faced by farmers in fetching diesel from far of places.

The scheme has been one of the most successful schemes in the renewable energy sector in the

country. Under the scheme so far 1700 pumps have been installed in the state of Punjab in the last three years. The total number of pumps installed in the country stands at 5113. It is estimated that an individual farmer is able to save INR 40000 to 60,000.00 in diesel expenses per year. Additionally, employment is generated in the state since each manufacturer provides service facilities at the district level. An appropriate financial scheme is the critical tool for the success of this project. The innovative approach of combining soft loans, user contribution, government assistance in terms of capital subsidy and users contribution and enhancing the advantage of depreciation tax benefit to the beneficiary is key to success of the scheme. A judicious mix of these financial instruments resulted in a net contribution of beneficiary to Rs. 55,000.00, which is close to the investment required for a conventional diesel pump set. Thus the main barrier, high capital investment, was removed.

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b. Market development for Solar Photovoltaic lantern in post-subsidy regime

Solar Lanterns were first developed in India almost a decade ago to provide a cost effective, affordable solution to meet the challenge of providing adequate light to the rural population of India. Solar lanterns were first developed to replace the candles, kerosene lights and hurricane lanterns commonly used by villagers. Besides this, portable light is used in agricultural fields during irrigation, harvesting, during fishing at night, and for many other activities. The portable solar lantern is an ideal solution for these applications. The Ministry of Non Conventional Energy Sources, Government of India, initially developed the specifications for lantern that can give adequate illumination for 4 hours per day. In the initial stages of development, the lantern cost was approximately, Rs 5500, a subsidy of Rs 3500 was available from the central government and some states provided additional subsidy. The lantern programme became quite successful and 441481 lanterns were distributed by 31st March 2003. The main barrier identified was the limited funding available for subsidy. Market feedback from users gave new ideas for product development and marketing to manufacturers. However, MNES approved just one lantern design under the subsidy scheme. The limited funds available for subsidy and the high price of non-subsidised lanterns when compared with the subsidised lanterns, was identified as a major barrier to the large-scale penetration of lanterns into the Indian market. A number of manufacturers identified the market potential and developed various new designs. The cost of these smaller design models was reduced to Rs.1500. In the year 2003, the subsidy for solar lanterns was removed on the understanding that the product was now mature and capable of being sold in the open market on its own merits. In the post-subsidy regime, manufacturers developed various innovative schemes such as the salary deduction scheme to enhance the market for the new product. c. Commercialisation of Solar hot water systems through financial intermediary scheme

The objective of this case study was to assess the effectiveness and impact of an innovative financing instrument, namely ‘financial intermediary scheme’, on the solar thermal market. The use of solar water heating systems has increased rapidly in the domestic market in India, particularly in the state of Maharashtra, in the last few years. The typical solar water heating system consists of a solar collector, insulated storage tank, cold water supply tank and insulated piping. The collectors are manufactured and certified as per Indian standards (IS12933) and there are 58 approved manufacturers in the country. The total installed capacity in the state of Maharashtra is above 3.5 Millions lit per day (70,000 Sq m. area). The Ministry of Non Conventional Energy Sources (MNES) removed the direct capital subsidy on solar water heating systems in 1993 and the demand for solar water heating systems subsequently decreased. MNES then introduced two schemes: i) direct soft loan through nationalised banks and, ii) soft loan scheme through financial intermediaries. The financial intermediaries (FI) can be any company meeting the criteria of eligibility for channelling the credit from IREDA to the customer. This approach opened new markets for manufacturers who themselves became financial intermediaries or created links between themselves and the financial institutions participating in the scheme. This study was carried out to assess the impact of the scheme on the market and manufacturers.

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d. Biomass power development by the private sector - a combination of international funding mechanism and public sector financing

The 7.8 MW biomass power plant in Rajasthan is one of the six projects short listed by the Government of The Netherlands under their Carbon Emission Reduction Units Procurement Tender (CERUPT). This is the first biomass power project to be commissioned under the CDM in India. The project utilises mustard stalk as a major biomass fuel for generating steam for power generation, which is abundantly available in the vicinity of the site. A portion of the electricity generated is sold to the State grid, namely Rajasthan State Electricity Board (RSEB). Kalpataru Energy Venture Private Ltd., has implemented this project near the village of Kawai in the Bharatpur District, in the state of Rajasthan in India, based on CDM. The CDM project Design Document (PDD) is presently under validation by the Accredited Operational Entity (AOE). The total investment in the project is USD 7 Million and the expected revenue from CERs is USD 1.3 million over 10 years, with a total CERs generation of 0.3 million over 10 years. The project achieved financial closure from a nationalised bank, namely the Oriental Bank of Commerce. The project also envisages an advance payment from CERs revenue totalling 50 % of the total revenue from CERs on a discounted basis.

The combustion technology used is totally indigenous, whereas the turbine is imported from Japan. The power generated is sold to the state utility, namely the Rajasthan Vidyut Prasaran Nigam (RVPN). The Power Wheeling and Banking Agreement (WBA) has also been signed with RVPN and the Vidyut Vitran Nigams (VVNs) for the sale of power to third parties. The electricity generated will replace the mixture of lignite and coal-based power generation. The project generates substantial direct employment and contributes to the economic development of the region. Strategic Policy Options developed a. Optimum use of government funds

There is a clear indication that public finance, either through subsidy, fiscal incentives or other forms of governmental financial support, is crucial in the initial stages of technology and market development. In both developing (India’s RE programme) and developed countries (Japan’s Sunshine project), government support in terms of technology development funds, performance linked incentives etc. have helped the growth of the RE sector. However, at the commercialisation stage, sustainable market development is illusionary so long as it depends solely on subsidy. Nevertheless, the removal of subsidy can only be envisaged in terms of gradual policy change. This involves a competitive approach to the provision of subsidy with the objective of optimal use, as well as a stable and long-term commitment to selective subsidy to ensure long-term private investment commitments, and a combination of subsidy with loan ownership models. The approach taken under this SPO includes: a) the choice of government funding at the demonstration stage, subsidy support at the market initiation stage and soft loans at the commercialisation stage, b) the use of a fee-for-service model that matches the user ‘s financial capacity with the level of services provided and the effective use of various developmental funding in setting up the utility. Related good practices

Market development of Solar lanterns in post-subsidy regime Developing a sustainable financial model for solar pumping systems Commercialisation of Solar hot water systems through the ‘financial intermediary (FI)

scheme’ implemented by MNES/IREDA Solar PV minigrids in Sunderbans- a combination of government and community financing Public sector financing for wind power development

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b. International funding mechanisms

Bilateral and multilateral financing sources have played a major role as incubation funds for RE development. However, the traditional method of one-time delivery of aid either through direct financing or provision of equipment has serious limitations. This strategy option identifies new forms of delivery of external aid within the national policy framework, taking into consideration barriers that can best be addressed by external aid and international funding mechanisms, such as the Global Environment Facility and the clean climate initiatives. The analytical work under the SPO has focused on the Clean Development Mechanism (CDM) taking into consideration international developments in the CDM process as well as those at the national level in India. At the international level, the modalities and procedures (M&P) for operationalising CDM have progressed satisfactorily. This has been accompanied by similar progress at the national level, in terms of establishing the DNA (Designated National Authority), a number of project design documents in response to CDM tenders, scores of capacity building events, country CDM studies etc., In India, the DNA, established in December 2003, had cleared around 17 projects as of February 2004 out of a total submission of 47 projects. The CDM project development has peaked in India and there are more than 100 PINs (Project Information Notes) currently seeking sources for development PDDs (Project Design Documents). Under various donors of the CDM capacity-building programme in India (8 so far) and in response to various CDM tenders, a total of around 50 PDDs are in various stages of completion, while many other PDDs have already been completed. These donors and tendering countries include GTZ, CIDA, The World Bank, Sweden, The Netherlands, the Prototype Carbon Fund, Austria, Foreign Commonwealth Office, U.K. Additionally, at least 75 PDDs are at various stage of completion under private sector initiatives,. Most of the PDDs are being developed in the energy sector, with renewable energy the most frequent. Related good practices

Wind power development by the private sector - a combination of international funding mechanism and public sector financing

Biomass power development by the private sector - a combination of international funding mechanism and public sector financing

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Suggestions on research plan in Year 3 April: – Renewable energy conference in New Delhi – Revising good practices May – June – Developing SPOs – Drafting background papers August – October – Prepare initial SPOs national report September – December – Organising two workshops to disseminate the research findings January – February – Revising SPOs national report – Finalise SPO report

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3.2.1.3. Good Practices collected in FY 2003

1. Commercialisation of Solar hot water systems through financial intermediary scheme, India.

2. Developing a sustainable financing model for solar pumping systems, India.

3. Market development for Solar Photovoltaic lantern in post-subsidy regime, India.

4. Biomass power development by the private sector - a combination of international funding mechanism and public sector financing, India.

5. Demonstration of wind power concession policy to reduce the large-scale wind power price, China.

6. Encouraging Various Finance Sources for the Utilisation of Landfill Gas Through Economic Incentive Policies, China

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Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO)

Good Practices Inventory

Commercialisation of Solar hot water systems through ‘financial intermediary (FI) scheme’ implemented by MNES/IREDA

Keywords: Solar water heating systems, Financial Intermediary (FI) scheme, IREDA, MNES Strategy: Innovative financing for renewable energy development Environmental areas: Urban environment Critical instruments: Economic instruments, Organisational arrangements Country: India Location: State of Maharashtra, India Participants: Solar thermal manufacturers, Indian Renewable Energy Development Agency (IREDA), Individual customers, Ministry of Non-Conventional Energy Sources (MNES) Duration: 1995-onwards Funding: Community, IREDA and private financial institutes

Background: The use of solar water heating systems is increasing rapidly in domestic market in India and particularly in the state of Maharashtra in last few years. The typical solar water heating system consists of a solar collector, insulated storage tank, cold water supply tank and insulated piping. The collectors are manufactured and certified as per Indian standards (IS12933). There are 58 approved manufacturers in the country. Total installed capacity in the state of Maharashtra is above 3.5 Millions lit per day (70,000 Sq m. area). The Ministry of Non Conventional Energy Sources (MNES) removed the direct capital subsidy on solar water heating systems in 1993. Subsequently the demand for solar water heating systems reduced. MNES then introduced two schemes- i) direct soft loan through nationalised banks and, ii) soft loan scheme through financial intermediaries. The financial intermediaries (FI) can be any company meeting the criteria of eligibility for channelling the credit from IREDA to the customer. This approach opened new markets for manufacturers who themselves became financial intermediaries or who tied up with financial institutions for participating in the scheme. This study was carried out to assess the impact of the scheme on market and on manufacturers.

Objectives: The objective of this case study was to assess the effectiveness and impact of the innovative financing instrument namely ‘financial intermediary scheme’ on the solar thermal market

Description of the activity: The scheme of soft loan through financial intermediaries was formulated to open the market for solar water heating systems. It was observed that there is a huge market potential for solar water heating systems as the technology is proven and accepted by the market. However, the main barriers were i) limited funds available under subsidy schemes and, ii) lengthy and time consuming procedures to get the subsidy sanctioned. The soft loan through intermediaries removed these two barriers effectively. Under the scheme, financial intermediary can get a line of credit approved from IREDA for providing loans to customers based on the projected sales. The loan is available for onward financing the customer for purchase of solar water heating systems. The FI can avail loan at an interest rate of 2.5 % per annum and can extend loan to consumer at an interest rate of up to 5% (spread of 2.5%). the loan is available upto 80% of the system cost. The FI is responsible for the recovery of the loan amount from the customer and is also responsible to return the loan to IREDA, which provided the finance. The funds are revolving type and FI based on its business plan can avail further loans. Any legal company that can satisfy eligibility criteria and terms and conditions of the loan scheme can become the FI. The

Summary of the Practice

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scheme was specifically designed to help individual customers and customers of domestic hot water systems.

Overview Economic instruments, in particular the combination of various financing instruments, and an organisational arrangement whereby a one-stop service takes care of product delivery, financing and after sales services were critical to the success of the scheme.

Economic instruments Choice of government funding at demonstration stage, subsidy support at market initiation stage and

soft loan at commercialisation stage The product has seen the support of various financing instruments at different stages of its life-cycle. The sector has witnessed a tremendous growth even after the removal of subsidy, indicating that appropriate financing instruments at appropriate developmental stage help the sector grow.

Organisational arrangements One-stop service regarding product, finance and after-sales service.

The financing intermediary scheme provided means for financing proven renewable energy technology on wider scale. It helped consumers to get guaranteed service from one point. It also increased the consumer confidence in manufacturer, product and after sales service. The scheme also helped increasing the credibility of the products since the supplier/ manufacturing company offered loan too.

The scheme helped manufacturer to provide financial assistance to prospective customer directly. This improved the market as customers from small towns, rural and semi urban areas could also take loan easily. Same supplier providing loan, also gave the customer a confidence about his credibility, as well as quality and durability of the product. This improved the market response and trust in technology. The sales for solar water heating system are rising steadily and total installed capacity is now well over 0.7 million Sq. m as on March 2003. Following graph shows the year wise installations.

Source - MNES annual reports from 1988 to 2000

1. Appropriate financial schemes are a must to cater to the needs of the consumers for proven RE technologies that are on the verge of commercialisation.

Impacts

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Critical Instruments

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2. Adequate availability of working capital and funds for providing loan helps during early commercialisation. Shortage of funds for loan scheme, subsidy etc. act as barrier for people to run away from RE technology.

3. Timely change in policies responding to changing market needs both in term of finance and product up-gradation is important.

4. The capital investment in the case of solar water heating system is 4 times more than that for the conventional electric geyser however; the savings in electricity consumption are equal to or in some cases, more than the monthly repayment of the loan. However, as market increased, the manufacturers, particularly small and medium ones with their limited resources faced difficulty in providing guarantees required for loan security. Also, their locked up capital in loan for five years became barriers. However, by that time the bank loan schemes came in to place in a big way and thus the transaction was smoother. The customer now has choice of loan schemes or for cheaper price for 100% down payment purchase.

The success of the intermediary finance scheme implemented through manufacturers and other eligible agencies can be effectively used for other products and technologies in other countries. In the case of solar hot water system alone, apart from domestic sector, the process heat requirements in the small and medium enterprises can economically be met by this technology. Mr. Shirish Garud, Fellow, The Energy and Resources Institute (TERI) Darbari Seth Block, Habitat Place, Lodhi Road, New Delhi 110003, India. shirishg@teri.res.in Ph 0091-11-24682111 Fax 0091-11-24682144 Case reviewer: Shirish Garud, Fellow, The Energy and Resources Institute (TERI), E-mail: shirishg@teri.res.in Information date: 20 March 2004

Potential for Application

Contact

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Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO)

Good Practices Inventory

DEVELOPING A SUSTAINABLE FINACIAL MODEL FOR SOLAR PUMPING SYSTEMS

Keywords: Solar photovoltaic, Solar water pumping, Soft loan, Subsidy, IREDA Strategy: Innovative financing for renewable energy development Environmental areas: Water resource management, Rural Environment Critical instruments: Economic instruments, Awareness capacity building Country: India Location: State of Punjab, India Participants: Punjab Energy Development Agency, PV industry, Individual farmers (Village community), local enterprise, Indian Renewable Energy Development Agency (IREDA), Ministry of Non-Conventional Energy Sources (MNES) Duration: 1999-onwards Funding: Central subsidy, sate subsidy, community, IREDA, private financial institutions

Background: Punjab is the largest surplus state in food grains in India. The state is also called as the ‘food bowl’ of India. Located in North West of the country, Punjab has an area of 50362 Sq. km comprising of plain and fertile land. At present, over 84% of the total geographical area of the state is under cultivation. The state has four major rivers and a vast network of canals and tube wells for irrigation purpose. As per State government Statistics, in 1997-98 the state had a total of 9,75,000 tube wells out of which 7,50,000 are having electrical pumps and 1,25,000 are powered by diesel generators. Due to the shortage of electricity, many tube wells, which are powered by electricity, have alternative diesel powered pumps installed with it. The water table available in most parts of the state is @ 5 m. Solar Photovoltaic based water pumping systems, though found suitable, are beyond the reach of the farmers. The solar PV pumping project of MNES/IREDA as implemented in the state of Punjab, has introduced innovations in original scheme to not only match the technology services to the needs of the farmers, but also to make these services affordable to them.

Objectives: The scheme was designed to promote the use of solar photovoltaic pumping systems as an alternative to diesel powered pump sets. This was to reduce the diesel consumption, which in turn can reduce the environmental pollution and hardship of farmers who have difficulties in fetching diesel from far off places.

Description of the activity: Under the Solar Photovoltaic Water Pumping Programme of the MNES, the Punjab Energy Development Agency (PEDA) has completed installation of 500 solar pumps in Punjab for agricultural uses. When the subsidy scheme for solar photovoltaic pumping was launched in India, only 900 Wp (1 Hp) system at roughly Rs. 200,000 with 50% capital subsidy on the complete system was approved. There were few takers of this scheme in Punjab as the 1 Hp system was not sufficient to meet irrigation requirement of the farmers, and the expected contribution from the farmer (Rs. 100,000) was very high. Realising that the farmers needed a minimum 2 Hp (1800 W) capacity pump and a suitable finance scheme (as this pump costs Rs. 350,000), the Punjab State Government through its agency- Punjab Energy Development Agency (PEDA) took following initiatives:

Summary of the Practice

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1. Got the 1800 W (2 Hp) capacity solar photovoltaic pumping system approved by the MNES for

distribution under the scheme 2. Helped manufacturers to tie up with financial institutions to take soft loan from IREDA and

offer pumps under lease-finance scheme. (In this scheme, the financial institution takes advantage of the financial incentive in terms of 100% accelerated depreciation in the first year available under Income tax rules and passes on this incentive to the user by offering him a one-time lump-sum payment instead of the regular rentals)

3. Offered state’s contribution to pay half of the one-time lump-sum charges to the financial institution on behalf of the farmer, thereby reducing his payment burden further.

The above steps brought down the farmer’s share from Rs. 175,000 to Rs. 35,000. The 1800 Wp - 2 Hp system is capable of delivering about 140,000 litres water every day from a depth of about 6 – 7 meters. This quantity of water is considered adequate for irrigating about 5 –8 acres land holding for most of the crops. PEDA made initial identification of villages suitable for installation of solar pumps. To identify the beneficiaries, newspaper advertisements were given. The applicants were asked to apply along with proof about ownership of at least 5-acre land holding in their name, information about water table and deposit Rs. 10,000 with PEDA. After scrutiny of the applications, the IREDA approved and empanelled suppliers were asked to visit the short listed sites for a detailed survey for final site selection. There after the solar pumps were installed. Five suppliers participated under the programme. Each supplier was allocated sites in clusters. They were required to open at least one service center in Punjab. Solar pumps have been supplied with a five-year maintenance contract. The solar pumps have been installed under the lease-finance arrangement, where the leasing company has secured a soft loan (at low interest rates and long repayment periods) from IREDA. This company, who is the owner of the system, has leased the system to the farmer. The company has availed of the income tax benefits under the accelerated depreciation allowed by the Government of India on renewable energy systems. These benefits have been passed on to the farmer in the form of an option to pay reduced lease rentals as one time upfront lump-sum amount. PEDA provides further subsidy on this lump-sum amount. As a result of this arrangement, farmer pays only Rs. 35,000 towards the pumping system; the remaining amount of lease charges is paid by PEDA. Field reports indicate that farmers are happy with the solar pumps. The successful implementation of this project in Punjab has encouraged other states like Haryana, Uttar Pradesh, Gujarat, Bihar, Andhra Pradesh etc. to propose implementation of similar projects in respective states. This scheme was launched in financial year 2000-2001.

Overview The combination of various economic instruments with publicity and awareness campaigns were the main factors that contributed to the success of the programme.

Economic instruments Appropriate financing scheme is the critical tool for the success of this project. The innovative approach of combining soft loan, user contribution, government assistance in terms of capital subsidy and users’ contribution and enhancing the advantage of depreciation tax benefit is key to success of the scheme. Judicious mix of these financial instruments resulted in the net contribution of beneficiary to Rs. 35,000 which is close to the investment required in conventional diesel pump set. Thus main barrier of high capital investment was removed.

Awareness capacity building A publicity and awareness campaign through electronic, print media and exhibitions is a regular feature of the programme. Through radio programmes in Hindi and other regional languages, awareness was created about the SPV water pumping systems. To encourage publicity by the manufacturers, a scheme

Critical Instruments

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for reimbursement of 50% of the cost of publicity on specific items, subject to a limit of Rs.1,00,000 per supplier was continued. IREDA published brochures in Hindi, English and several regional languages. The SPV water pumping systems were displayed in exhibitions and farmer fairs. Training programmes on the operation & maintenance and water management aspects of PV water pumping systems were also continuing for actual users, local technicians and mechanics. State Nodal agencies have also started conducting training and awareness programme for existing / prospective users of pumping systems. The scheme has been one of the most successful schemes in the renewable energy sector in the country. Under the scheme so far 1700 pumps have been installed in the state in last three years. Total pumps installed in the country are 5113. It is estimated that each farmer is able to save Rs. 40,000 to 60,000 in diesel expenses per year. Apart from this there is employment generation in the state since each manufacturer has service facilities at district level. Selection of products that satisfy need of the users is important factor in promoting Renewable Energy based schemes. Mere availability of subsidy for 900W pump capacity pump was not sufficient to develop market as the pump capacity was not sufficient. Pump of 1800W capacity suited well for many applications and hence the project became popular. Similar schemes are now approved for other states like Haryana, Andhra Pradesh, Uttar Pradesh, Gujarat etc. Location-specific factors such as the availability of ground water are essential elements for the successful implementation of these schemes. Mr. Shirish Garud, Fellow, The Energy and Resources Institute (TERI) Darbari Seth Block, Habitat Place, Lodhi Road, New Delhi 110003, India. shirishg@teri.res.in Ph 0091-11-24682111 Fax 0091-11-24682144 Dr. Gueye Kamal, Policy Researcher, Long-term Perspectives and Policy Integration Project Institute for Global Environmental Strategies (IGES) 2108-11 Kamiyamaguchi, Hayama, Kanagawa 240-0115, Japan kamal@iges.or.jp TEL: +81-46-855-3863/3861 FAX: +81-46-855-3809

Impacts

Lessons Learned

Potential for Application

Contact

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Case reviewer: Mr. Shirish Garud, Fellow, The Energy and Resources Institute (TERI), E-mail: shirishg@teri.res.in Dr. Gueye Kamal, Policy Researcher, Institute for Global Environmental Strategies (IGES), E-mail: kamal@iges.or.jp Information date: 20 March 2004

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Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO)

Good Practices Inventory

Market development for solar lantern in post-subsidy regime

Keywords: Solar photovoltaic lantern, Soft loan, Subsidy, Salary deduction scheme Strategy: Innovative financing for renewable energy development Environmental areas: Climate change, Rural Environment Critical instruments: Organisational arrangements, Technologies Country: India Location: State of Andhra Pradesh Participants: Management and employees of Andhra Pradesh State Road Transport Corporation (APSRTC), PV industry Duration: 2003-onwards Funding: Employee salary scheme, user contribution, soft loan

Background: Solar Lanterns were first developed in India almost a decade back to provide cost effective and affordable solution to meet the challenge of providing adequate light to the rural population of India. According to the latest data released by the Ministry of Power, Government of India, there are 161982648 un- electrified households in India. Providing gird-connected electricity to these remote and thinly spread households all across the country is a mammoth task. The solar lantern was first developed as replacement of candles, kerosene lights and hurricane lanterns, which are commonly used by villagers. In addition this, portable light is also required in agricultural fields during irrigation, harvesting, during fishing at night, and many other activities. The solar portable lantern is an ideal solution for these applications. Ministry of Non Conventional Energy Sources, Government of India initially developed the specifications for lantern that can give adequate illumination for 4 hr per day. When developed first, the lantern cost was approximately, Rs 5500 and subsidy of Rs 3500 was available from Central Government and some states provided additional subsidy in initial phase. The lantern programme became quite successful and 441481 lanterns were distributed till 31St March 2003. The main barrier identified was the limited funds available for the subsidy. The market feed back from users of solar lantern gave new ideas for product development and marketing to manufacturers. However, MNES had only one approved design for lantern under subsidy scheme. The barrier of limited funds available for subsidy and high price for non-subsidised lantern as compared to subsidised lantern was identified as barrier for large-scale penetration of lanterns in Indian market. Various manufacturers identified the market potential and they developed various new designs. The cost of these smaller design models came down to Rs.1500. However, these were not available on subsidy and to reduce the down payment from consumers, the manufacturers developed various innovative schemes that are discussed in this case study. In the year 2003, the subsidy from solar lanterns was removed with an understanding that the product is now matured and is capable of being sold in the open market upon its own merits.

Objectives: To develop the market for solar lantern in the post-subsidy regime. The product is being promoted as an alternative to kerosene lanterns and lights in rural environment and as emergency lights during power cuts in urban environment.

Description of the activity: Few manufacturers devised following innovative schemes for promotion of sale of solar lanterns without the aid of capital subsidy

Summary of the Practice

59

1. Salary deduction scheme – This scheme is being implemented in the state of Andhra Pradesh of India, through its state owned road transport company (A P State Road Transport Corporation.). The corporation has more than 1.28 million employees. Most of these are from rural part of the state and have ancestral houses or joint families in villages. The solar lanterns are provided to them through salary deduction scheme. The lanterns are typically costing Rs. 2000- 3500 but available on one/ two year equated monthly payments. The employees of organisation for example APSRTC can buy lanterns for their family, relatives or even as gift for friends. The employer by way of memorumndum of understanding ensures the repayment to the manufacturer. The manufacturer is also compelled to give proper service during and after the loan period as a part of the contract.

2. Second scheme used was to offer gifts with lantern. Utility items like camera, watches were offered as gift along with lantern. Normally, the gift item is available form manufacturer at lower price after deducting taxes, and dealer margin etc. However, for the consumer, the cost of the gift item is high thereby giving him feeling of value for money and additional benefit.

Overview Institutional arrangements for direct marketing and technological innovations in design of the product helped in opening up of commercial market for solar lanterns.

Organisational arrangements The salary deduction scheme of the APSRTC is an innovative institutional arrangement where the employer provides one-stop service to its employees for sales, credit and after sales service of a consumer. It is a win-win situation for all because the supplier of the products deals with one corporate consumer instead of many small consumers thereby reducing his transaction costs. The consumer reduces his risk perception of investing in a relatively new product by being “one among many” buyers. Similarly, the gift scheme has also stimulated the purchase of lanterns

Technologies While the lantern was being sold under the subsidy scheme, there was only one government approved design that was available for purchase. Technological innovations, not only in product design but also in its performance have now been introduced that are helping in stimulating non-subsidised market.

Each solar lantern that is designed to operate for 4 hrs every day for 300 days in a year is capable of avoiding the use of 1200 hrs of kerosene lamp. The most commonly used kerosene device in rural India has a specific consumption of 0.025 litres per hr. Accordingly, each solar lantern will save 30 litres of kerosene in one year, thereby mitigating 73.5 kg CO2 annually (emission intensity of 2.45 kg CO2 per litre of kerosene burning).

Different attributes of the product has been found to be useful both for rural and urban population. As the only source of improved lighting; its portability (making it useful for outdoor as well as indoor use) and better illumination as compared to kerosene lamps is found useful for rural population. Urban population find it useful as an emergency light in the event of power cut.

Impacts

Critical Instruments

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1. Solar Lanterns are one of the most useful appliances not only for rural but also for urban areas. 2. The monitoring of subsidies on such small and portable products is difficult. 3. As long as subsidy is available, marketing of these devices is limited by the limited availability

of funds. True potential is not realised. 4. Direct marketing and variety in sizes and specifications helped in large -scale marketing of

these products. 5. Innovatively designed financing schemes like salary deduction schemes are found to be

effective. The novel institutional arrangement of selling the product through salary deduction scheme has a large potential for application as it increases the affordability of the product and access to the credit by many potential consumers. Following the example of APSRTC, other organisations like state owned collieries have also opted for the scheme. The scheme has been replicated by Singarouni Collieries. Various manufacturers plan direct sales of lantern using similar financial instruments. One major manufacturer of lead acid batteries in India has already started marketing solar lanterns on large scale (projected sales of @ 35000 lanterns in first year). The scheme should be effective in other developing countries. Mr. Shirish Garud, Fellow, The Energy and Resources Institute (TERI) Darbari Seth Block, Habitat Place, Lodhi Road, New Delhi 110003, India. shirishg@teri.res.in Ph 0091-11-24682111 Fax 0091-11-24682144 Information date: 20th March 2004

http://www.mnes.nic.in/frame.htm?majorprog.htm Case reviewer: Mr. Shirish Garud, Fellow, The Energy and Resources Institute (TERI) E-mail:

shirishg@teri.res.in Information date: 20 March 2004

Lessons Learned

Potential for Application

Contact

References

61

Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO)

Good Practices Inventory

Title: Biomass power development by the private sector - a combination of international funding mechanism and public sector financing

Keywords: Biomass, CDM, IREDA, MNES, public sector financing, UNFCCC, CERUPT Strategy: Innovative financing for renewable energy development Environmental areas: Climate change/ Ecosystem and biodiversity conservation Critical instruments: Economic instruments/ Institutional arrangements/ Partnerships /Awareness-Capacity building Country: India Location: Rajasthan, India Participants: Kalpataru Energy Venture Private Limited (KEVPL) , Kalpataru Power Transmission Limited promoted by Kalpataru group, Ministry of Non-Conventional Energy Courses (MNES), Ministry of Environment & Forest (MOEF), Indian Renewable Energy Development Agency Ltd., (IREDA), Senter, The Dutch Government Duration: 2003 - Commissioned Funding: Public sector financing institution and Dutch government funding

Background: Direct combustion of biomass has been recognised as an important route for generation of substantial quantities of grid-quality power by utilising vast amounts of agricultural & agro-industrial residues and forest wastes, which are being wasted or are being sub-optimally utilised in the country. Development of technologies for efficient utilise this major resource and their management need to be emphasized to meet the demands of domestic as well as industrial sectors. Biomass offers an effective solution to the energy crisis. It offers good scope for supplementing the fossil fuel energy, as the technology available for biomass utilization for energy generation is well established and indigenised. Presently, implementation of biomass power projects is being carried out on a fast track basis in India. Specifically, implementation of biomass power projects has taken a big leap in the state of Andhra Pradesh. Potential biomass availability, favorable policy environment and quick action by the industrial business groups in the state of Andhra Pradesh has resulted in a sanctioned capacity of more than 400 MW and installed capacity of more than 150 MW as on March 2004. Several of these projects were funded by Indian Renewable Energy Development Agency Ltd., (IREDA), a public sector financing company. Other than Andhra Pradesh, few projects have been commissioned in the states of Tamil Nadu, Chattisgarh, Punjab, Karnataka, Haryana, Maharashtra, Gujarat and Rajasthan. While the total capacity of the projects commissioned in Andhra Pradesh stands at 150.25 MW as on March 2004, the combined installed capacity of projects in the remaining states is only to the tune of 63 MW. A 7.8 MW biomass power plant in Rajasthan is one of the six projects short listed by the Government of The Netherlands under their Carbon Emission Reduction Units Procurement Tender (CERUPT). This is the first biomass power project that has been commissioned under the CDM in India. The project utilises mustard stalk as a major biomass fuel for generating the steam for power generation, which is abundantly available in the vicinity of the site. The electricity generated will be sold partly to the State grid namely Rajasthan State Electricity Board (RSEB). The combustion technology used is totally indigenous whereas the turbine is imported from Japan. The power generated is sold to the state utility, namely the Rajasthan Vidyut Prasaran Nigam (RVPN). The Power Wheeling and Banking Agreement (WBA) has also been signed with RVPN and the Vidyut Vitran Nigams (VVNs) for sale of power to third parties also. The generated electricity will replace a

Summary of the Practice

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mixture of lignite and coal-based power generation. The project generates substantial direct employment and contributes to the economic development of the region. Clean Development Mechanism (CDM) is one of the three flexibility mechanisms under Kyoto Protocol (KP), 1997 that involves developing countries to assist developed countries in mitigating the latter’s green house gas (GHG) emissions and achieve sustainable development in developing countries. The portfolio of proposed GHG abatement projects holds renewable energy (RE) as one of the most promising sector; reasons well known, viz., clean energy generation and promoting sustainable development. This suits very well with the mandate of CDM as formulated by United Nations Framework Convention on Climate Change (UNFCCC) under KP. The Dutch government towards reducing their binding emission reduction (ER) targets (6 %) decided to purchase CERs limited to 50% of their ER target through Kyoto Protocol mechanism viz., joint implementation (JI), emission trading and CDM. It initiated a public procurement tender during November 2001, namely, CERUPT through Senter, the Dutch government approved tendering authority, for purchasing emission reductions units to the tune of 3 million CERs, from CDM projects in developing countries. From India, twelve CDM projects (all from renewable energy sector) were submitted under this CERUPT, endorsed by Indian government during January 2002. Six projects from India have been short listed by Senter for detailed evaluation and the project portfolio consists of 3 wind energy projects, one wind-biomass hybrid project and two biomass power projects. Senter completed the detailed evaluation of all these six CDM projects and announced the final selection of five projects during March 2003. Out of the 2 biomass power projects, the 7.8 MW grid connected biomass power project has been submitted by KVEPL. The project was commissioned and synchronised with the grid during July 2003. The project with a capital cost of USD 7 million, will generate 0.30 million CERs over a period of 10 years. The expected revenue from CERs alone is USD 1.3 million for 10 years. The project achieved financial closure from a nationalized bank, namely Oriental Bank of Commerce.

Objectives: Avail of the financial benefits from international funding mechanism for biomass power project that

can leverage the project equity, improve the project financial viability, assist developed countries in meeting their emission reduction targets and achieve sustainable development in developing country.

Help to improve the rural power availability and reduce transmission and distribution losses in the rural part of the grid.

Combine the international funding mechanism and public sector financing judiciously to achieve better financial performance

Develop business plan and marketing strategies in biomass power sector for the future two plants in the pipeline, based on the outcome of the CDM exercise.

Description of the activity:

Kalpataru Energy Venture Private Ltd., has implemented a 7.8 MW grid connected biomass power project, near the village of Kawai in the Bharatpur District, in the state of Rajasthan in India, based on CDM. The Dutch government has selected this project under their public procurement tender, CERUPT. The CDM project Design Document (PDD) is presently under validation by the Accredited Operational Entity (AOE). The total investment in the project is USD 7 Million. The expected revenue from CERs is USD 1.3 million for 10 years with a total CERs generation of 0.3 million over 10 years. The project achieved financial closure from a nationalized bank, namely Oriental Bank of Commerce. The project also envisages an advance payment from CERs revenue to the tune of 50 % of the total revenue from CERs on discounted basis. The project employs a multifuel direct combustion technology with an extraction cum condensing turbine for power generation. The power plan scheme thus houses a single Boiler with all its auxiliary systems and an extraction cum condensing turbo generator with all its auxiliary systems and high voltage systems for the export of the power to the grid and the remaining balance of plant items to

63

complete the Power plant. The boiler has been supplied by Thermax Ltd, with outlet steam parameters of steam generation of 35 TPH1 , pressure of 67 ata and temperature of 490oC. The turbine has been procured from Shin Nippon Machinery of Japan, supplied and constructed by TDPS India. The turbo generator installed capacity is 7.8 MW with single uncontrolled extractions. The plant is also houses other balance of plant systems like the fuel handling system, Ash handling system, raw water system, cooling water system, reverse osmosis water system, compressed Air system, and HV systems, etc., for its successful operation. The scheme is configured to optimize the power generation, with one stage of feed water heating. The extraction of steam and its usage in the De-aerator for the Feed water heating improves the efficiency of the plant. The boiler consumes 7.276 TPH of mustard husk or any other appropriate quantum of bio-mass for the generation of 31.589 TPH of steam. The entire steam generated in the boiler is fed to the single extraction condensing turbo generator. The power generation in the turbo generator will be at 11 kV level. The turbo generator will be operating in parallel with the RVPN Grid. Out of the gross generation of power at the Generator terminals the in-plant power requirements will be met by stepping down the power in a step-down transformer and the balance of the generated power will be exported to the Grid. The exportable power will be stepped upto 33 kV and will be connected to the nearby substation of RVPN. Adequate space and transformer capacities are available at the sub-station, for receiving the exportable quantum of power from the Power plant. KVEPL is looking forward towards implementation of two more such projects based on CDM as the advance payment supplements the equity, improves the cash flow, partially cover the risk towards the delayed payment by the utility and or the annual escalation assumed in the power tariff. It stimulates the promoter to address the sustainable development issues concerning the local population where the project is proposed to be implemented. Further the promoter participates in the learning by doing exercise which will assist them in developing similar proposals with innovative financial project elements.

CDM provides mutual benefits for the developed and developing countries. Besides their respective benefits, it adds to the present impetus to the development of the wind sector, significantly contributing to GHG reductions.

Increased participation by the private companies in implementing CDM based biomass power

projects. This results in increased local employment to a greater extent, major employment benefits in biomass handling.

As an overall impact it provides opportunity for the developed countries to meet their ER targets in

a cost-effective way and the developing countries to adequately address the sustainable development issues viz., local employment, positive environment impact and implementing state-of-art technologies.

Implementation of biomass power plants are based on adequate availability of biomass which are

available in almost all geographical locations in India. MNES has recently completed the biomass survey in most of the potential areas in the country under their National Biomass Resource Assessment Programme (NBRAP).

Biomass power systems are similar to conventional thermal power systems but biomass is a CO2

neutral and thus environmentally benign, limiting green house effect. It also results in reduction in emission of sulfur and other pollutants associated with the use of fossil fuels, there by improving

1 Tons of steam generated per hour

Impacts

64

local environment conditions. Hence such projects are promoted by MNES by providing subsidies and other fiscal incentives.

Biomass power projects provide increased employment and stimulation of agriculture and rural

employment, e.g. in co-operation between farmers, industry and local authorities in supply of biomass to power plants.

Biomass power projects require low capital investment implying a higher cost stability and thus

lower financial risks, requires low gestation and hence quicker payback period, with energy produced cheaper than commercial sources of energy.

Working capital is a crucial factor for establishing adequate storage of biomass to ensure smooth

operation of the project. Projects within the radius of 50 km may access the same source of biomass leading to increase in the cost of biomass and shortage of biomass. MNES is more concerned about the sustainability of the biomass such as biomass from energy plantations, which may ensure continuous operation of the projects.

Biomass power projects should be designed with multifuel firing capability to adapt to the biomass available during the given season. This ensures continuous operation of power plant with better PLF.

The state level authorized agency should mandate promoters implementing biomass power projects

to register the project with them for any further clearances. This will ensure that these projects are implemented with adequate distance apart and have independent biomass command radius. However this may be viewed from the perspective of the capacity of the already sanctioned project and biomass required for that existing project.

Technical development of multifuel firing biomass power systems is required, focussing attention

to environment criteria as well as reduced costs, improved reliability and ease of operation.

Adequate funding and training in equipment maintenance and safe operation must also be a central part of biomass power development.

All the large scale power plants would have to be essentially grid connected to ensure optimum

capacity utilisation. Therefore, unless policy related to pricing, third party sale, establishment of infrastructure facilities etc are established throughout the state, much headway is not likely to be made.

Biomass power projects promoters should be facilitated to have access to degraded forest land and

community/government wasteland, through appropriate leasing mechanisms for growing energy plantations.

Increased co-ordination between developed and developing countries leading to enhanced business

environment with added benefit of environmental sustainability at local and global level

Developing expertise in developing countries in exploiting the best financing options available at both the national and international level. Successful implementation of projects will showcase the use of the best combination of innovative financing instruments.

Host Governments (developing countries) can prioritise the sustainable development objectives in

the energy and environment sectors where potential CDM projects exists

Lessons Learned

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Implementation of biomass power projects is witnessed in most of the states in the country after

rapid installations of such projects in the state of Andhra Pradesh. The states of Karnataka, Maharashtra, Tamil Nadu, and Rajasthan are now in the process of implementing more grid connected power projects based on biomass.

Biomass power projects which are already commissioned based on single fuel are modifying their

boilers to combust a variety of other biomass.

Multifuel firing boilers are forming an integral part of most of the biomass power plants under implementation in the country. The country possesses state-of-the-art technologies as regards multifuel firing boilers and several manufacturers are offering technically and financially competitive systems.

The manufactures are continuously in the process of testing new and untested biomass and

developing suitable combustion systems. Investors also gain confidence after carrying out combustion trials of the proposed biomass if they are new and untested.

Most of the developing countries could rigorously pursue exploitation of such international funding

mechanisms for improving the socio-economic growth of their country.

Overview Implementation of biomass power projects by utilising international funding mechanism and combining it judiciously with the national funding instruments, results not only in improving the global environment scenario but also improves the economic growth while promoting sustainable development. The technology development (R&D for indigenisation), timely institutional co-ordination and wide awareness &capacity building programme will further add to the success of such combined financing instruments for increased penetration of biomass power sector in India and other developing countries.

Economic instrument • Additional revenue stream by selling CERs will improve the financial viability of the biomass power

project. This revenue can mitigate the risk of fluctuating biomass prices every season. • Availability of advance payment for CERs credits will improve the project equity and attract funding

from national financing institutions. • Availability of loan at rate of interest less than the market rates, long term loan with moratorium,

innovative financing schemes for different project categories and different project promoters. Fiscal & financial benefits viz., 80 % depreciation, excise duty exemption, sales tax exemption, etc.,

Technology

• Availability of state-of-art technologies indigenously

Institutional arrangements • Existing co-ordination among technical institutions, state utilities, state energy development agencies,

financing institutions and consulting organisations will assist promoting CDM based biomass power projects.

• Display of best co-ordinated effort among MoEF, MNES and the stakeholders in the biomass sector. • Well-defined guidelines, simplified endorsement process, for CDM projects by MoEF and MNES shall

attract more private investments which has been recently formalised by establishing Designated National Authority.

Potential for Application

Critical Instruments

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Awareness/Capacity building • CDM related information dissemination to be merged with the existing awareness and capacity building

programme. State energy development agencies and state utilities can achieve results in following this combined awareness exercise.

• Workshops, training programme, technical seminars, business meets, national and international conferences, stakeholders meets, performance evaluation exercise etc., should disseminate CDM aspects along with the developments in the biomass sector and encourage more private investment in the sector..

• The print and electronic media also played a major role in propagating the CDM potential and its associated benefits along with promoting the biomass power sector among private companies and the international community.

Director, Kalpataru Power Transmission Limited 111, Maker Chambers IV, Nariman Point, Mumbai – 400021, India Phone : +91 22 2884780 Fax : +91 22 2041548 Email : ajaymunot@kalpataru.com

Programme Manager, Carboncredits.nl Juliana van Stolberglaan 3, Postbus 93144, 2509 AC Den Haag Phone : +31 70 37 35 000 Fax : +31 70 37 35 100 Email :a.korthuis@senter.nl Website : www.carboncredits.nl Case reviewer: N Yuvaraj Dinesh Babu, Area Convenor, Research Associate, Centre for Global Environment Research, The Energy and Resources Institute (TERI), E-mail: ydbabu@teri.res.in Information date: March 30, 2004

Indian Renewable Energy Development Agency Limited (IREDA) <http://iredaltd.com> Senter. <http:// www.senter.nl> The Energy and Resources Institute (TERI) <http://www.teriin.org> United Nations Framework Convention of Climate Change (UNFCCC) Clean Development

Mechanism (CDM) <http://cdm.unfccc.int/>

Contact

References

67

Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO)

Good Practices Inventory Title: Demonstration of Wind Power Concession Policy to Reduce the Large-scale Wind Power Price

Keywords: Wind Power, Concession, Price Strategy: Innovative financing for renewable energy development Environmental areas: Climate change Critical instruments: Regulatory instruments, Economic instruments Country: P.R.China Location: Jiangsu Province and Guangdong Province Participants: State Development and Reform Commission Duration: 25 years, from 2006 to 2031 Funding: Private investors

Background The large scale wind power began to be developed in the 1980s in China, and the accumulated installation capacity reached 493MW by the end of 2003. Since year 1997, large wind power has developed rapidly, and the newly installed capacity for each year was 50-100MW (see table 1). It could be said that Chinese wind farm is in the stage of demonstration or initial commercialization. However, the step for wind farms’ development after year 2000 is not as fast as that from 1997-2000. The main reason is the high price of wind power. In January 1999, the former State Development Planning Commission and the Ministry of Science and Technology issued “The Notice on the Issues for Further Supporting the Development of Renewable Energy”, which stimulated clearly the principle of wind power price policy, i.e. repay capital with interest plus reasonable profits. This policy, on the one hand gave assurance of profit to wind farm developers, but on the other hand resulted in a high wind power price and could not stimulate a reduction in the cost of wind power. Moreover, because high wind power price as such is not a sufficient condition for market development, the wind power market is developing steadily but slowly. Table 1 Installed capacity of wind power in China Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003MW 4.1 4.9 14.5 17.1 26.3 37.6 56.6 166.6 223.5 267.9 344.3 399.3 468 493 The main issues of large wind power development in China that need to be considered currently are to enlarge the market and to introduce competition mechanisms for the commercialization of wind power, with the objectives of reducing and making cost-effective wind power. Generally speaking, a new mechanism for the commercialization of wind power is needed in China. Accordingly, a new tool of Wind Power Concession was proposed by the Chinese government. The Wind Power Concession policy was made taking reference of concession of other industrial fields, including oil and natural gas, BOT coal power plant etc. Under the new policy, the government gives wind farm developers a special period which may last dozens years to develop and operate the wind farms, and during that special period, power grid company must purchase the wind power based on a fixed wind power price, to guarantee a profit for wind farm developers. The wind power price and its adjustment are determined through bidding. In one word, the wind power concession is to introduce the entire competition in the investment, construction and operation of wind farms.

Objectives The Wind Power Concession aims: • To increase the wind turbine capacity. The characteristic of concession is to reduce the power price

through the construction of large scale wind farms.

Summary of the Practice

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• To ensure that all wind power generated by concession projects is purchased by the power grid companies, so as to protect the benefit of national and international investors and encourage more investment in wind farms.

• To provide steady market for the facility suppliers through the establishment of large wind farms, attract advanced technologies in China and promote domestic production of wind power facilities.

• To reduce the investment cost, the wind power cost and wind power price through bidding

Description of the activity The research work of Wind Power Concession Policy has been conducted in China for several years. Figure 1 shows the relations among several parts of concession policy. Through the concession agreement, the government provides the right of wind farm operation to commercial companies, and according to long-term PPA, the commercial companies sell wind power to the power grid companies, which then sell to end-users. As the cost of wind power is higher than the average power purchase price of the whole power grid, the difference will be shared by the all end-users ultimately. Therefore the concession policy includes the Concession Agreement, the PPA and Power Price Difference Sharing. The commercial companies who get the right for wind farm construction and operation are selected through bidding (who bid lowest power price). The National Development and Reform Commission (NDRC) started demonstration of the Wind Power Concession Policy in the year 2003. Two wind farms - Guangdong Huilai Wind Farm and Jiangsu Rudong Wind Farm - were selected as projects for the first demonstration phase. In January 2003, NDRC accepted the proposal from the two wind farms, with tenders from Guangdong Provincial Planning Commission and Jiangsu Provincial Planning Commission. The major conditions included, • wind power capacity is 100MW for each wind farm, and the period for concession policy is 25

years • the capacity of each wind turbines should be no less than 600kW, and the ratio of domestic facility

should be no less than 50% • the power price should be based on the bidding price, for the former 30000 hours, wind power price

is the bidding price, and after that, wind power price will be based on the market power price • the wind power price is the most important parameter for the bidding In the RFP, it was also stated that, • Local provincial planning commissions will sign the agreement for concession with the contractors. • Local power grid companies will sign the Power Purchase Agreement with the contractors during

the period of concession • Local power grid companies are in charge of installing the facilities of connecting the wind farm

and power grid, and purchase all wind power based on the bidding price. The difference of the price will be shared by the end-users of local power grid.

• The contractors should be in charge of the investment, the construction and operation of the wind farm. The wind farms must begin operation within three years after opening bidding.

RFPs were published on April 1, 2003, and in total nine companies submitted 11 proposals before the deadline on August 31, 2003, in which five for Guandong Huilai project and six for Jiangsu Rudong project. On September 15, 2003, NDRC published the notifications for these two projects. Guangdong Yuedian Electric Power Corp. won the project of Guangdong Huilai project, with the bidding power

End-users Wind resource

Contractor Power grid companies

Concession agreement sharing

PPA

Wind power

government

Wind power

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price of 501 Chinese RMB yuan/MWh (about US$60.6/MWh), and the Huarui Investment Corp. won Jiangsu Rudong project, with the bidding power price of 436 Chinese RMB yuan/MWh (about US$52.8/MWh).

Overview

The Chinese government selected the developers of the first group of two large scale wind farm projects using the wind power concession policy, as demonstration. Related procedure was set up and the wind power prices were determined through bidding.

Regulatory instruments The wind power concession policy was formulated, taking the reference of concession in other fields like the oil and natural gas exploitation and BOT power plant. The concession in oil and natural gas exploitation field is to reduce the big risk of uncertainty of oil and natural gas resource. The wind farm’s development also has the problem of uncertainty of wind energy resource. The involvement of the government in wind energy resource testing and other preparation works contributes to reducing the risk of project developers. Like BOT power projects, open bidding procedure is used in the selection of project developers. The project developers need to get the approval for the construction and operation of wind farms through competition, and as a result get the profit from sale of power to the power grid.

Economic instruments One key point of the wind power concession policy is to reach a rational wind power price. As mentioned above, for former wind projects, the power price was determined by the rule of “repay capital with interest plus reasonable profits”, resulting in very high power price (even over 1000RMB yuan/MWh). Thus if the wind farm developers are not from power grid companies, the power grid companies are not willing to sign PPA with the wind farms. Through the international bidding, the wind power price was significantly reduced and combined with other regulations of wind concession policy system (including PPA and price difference sharing by the end-users), the wind farm developers could get rational profits and the power-grid companies no longer are burdened with the price difference between wind power and conventional power.

• As the two wind farms are in construction now, the impact which has been observed already is the

decrease of the wind power price. The wind power price of former wind power projects in Jiangsu and Guangdong was over 600yuan/MWh (some projects even reached 1000yuan/MWh). Because the wind power price reduces, the power grid and the end-users can absorb more wind power capacity and quantity. As a result resistance to new wind power entering the power market will decrease, and wind power market will enlarge soon.

• Promotion of domestic production of wind turbines and other facilities. Under the condition of fixed wind power price according to the bidding document and PPA, the wind farm developers will try to reduce the wind power cost, and they may consider selecting cost-competitive domestic products. With the enlarging of large scale wind power capacity, the local industry of wind turbine will be promoted greatly.

• As the developers are in charge of the construction, management and operation of the wind farms, there is an incentive for introducing high international standards in the operation of wind farms.

• International bidding procedure was used for the demonstration of wind power concession policy,

and was found to be effective for reducing wind power price. The concession policy reduces the risk of investors. International bidding can attract international investors and capital for wind

Impacts

Lessons Learned

Critical Instruments

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farms’ development in China. Before the demonstration of concession policy, almost all wind projects with international investors were international cooperation projects. However, in these two demonstration projects, several international investors were involved in the bidding.

• It must be noticed that the procedure for implementing the concession policy is not simple, especially in the demonstration stage. Some detailed methods need to be improved, and there was also a cost for whole procedure. So the implementation of concession policy is currently only for large scale projects, for example each of two projects is with capacity of 100MW. Related research works are being conducted, and it is suggested by the experts that, at present, the projects for wind power concession demonstration should be with the capacity of at least 50MW.

These two projects were the first group of wind power concession policy demonstration. The National Development and reform Commission is making a plan for the next group of wind power projects, and it is planned to build 10 wind farms with the method of wind power concession policy in next 3-5 years. It could be applied not only in other countries for the development of wind farms, but also the development of other renewable energy projects with similar characteristics, such as large-scale geothermal power plant, large-scale bioenergy power plant etc. Center for Renewable Energy Development, Energy Research Institute B1416, Guohong Mansion, A11 Muxidi Beili, Xicheng District, Beijing, 100038, China Tel:+86-10-63908466, Fax: +86-10-63908465 Email: shjingli@163bj.com Case reviewer: 1. Research Group of Wind Power Concession Comprehensive Policy, Policy Framework and Implementation Methodology of Wind Power Concession, July 2003 2. Liang Zhipeng, Introduction of Demonstration Projects of National Wind Power Concession Policy, October 2003 Case reviewer: Ms. Shi Jingli, Associated Professor, Center for Renewable Energy Development, Energy Research Institute, email:shjingli@163bj.com Information date: Jan. 5, 2004

Potential for Application

Contact

References

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Asia-Pacific Environmental Innovation Strategies (APEIS) Research on Innovative and Strategic Policy Options (RISPO)

Good Practices Inventory Title: Encouraging Various Finance Sources for the Utilization of Landfill Gas Through Economic

Incentive Policies

Keywords: Landfill Gas, Power Price Strategy: Innovative financing for renewable energy development Environmental areas: Climate change Critical instruments: Economic instruments, Partnerships, Regulatory instruments Country: P.R.China Location: Nanjing city of Jiangsu Province Participants: Nanjing Local Government, Nanjing Shuige Landfill Site, Nanjing Cleanway Co., Ltd. Duration: 15 years, from 2002 to 2017 Funding: 31.723 million RMB yuan (about 3.84 million US$)

Background Municipal solid Waste (MSW) has become a major public nuisance. With rapid economic development and continuously improved urbanization levels and consumption standards, the amount of MSW is increasing day by day, and the disposal of MSW has become an important factor influencing environmental protection, city construction, residents’ life and sustainable development. A large amount of residential waste is being dumped, which has negative environmental consequences: coverage of large amount of land resources, soil pollution, water pollution, air and atmospheric pollution, spread of diseases and impacts on sanitation and health. Since 1995, the annual output of residential MSW is over 100 million tons in China. By the end of 1995, there were over 1000 landfills in the large and middle sized cities in China, in which about 90% were dumps. In the year 2003, still 70% of the landfill sites were dumps. The traditional MSW disposal will bring underground water resource pollution and air and atmosphere pollution besides other conventional pollution. At the same time, a great amount of landfill gas which mainly consists of methane will be produced which is an important green house gases (GHGs), and the potential green house effect of the equivalent amount of methane is 21 times of that of carbon dioxide. Therefore, in order to control GHG emissions, it is necessary to consider the recovery and utilization of the landfill gas when establishing the sanitary refuse disposal system, which has great benefits for GHGs mitigation and regional and global climate change. In 1995, the Chinese government and United Nations Development Program (UNDP) applied for a technical assistance project of “China: Promoting Methane Recovery and Utilization from Mixed Municipal Refuse Landfill Site” from Global Environment Facility(GEF), with the objectives of implementing pilot projects of landfill gas utilization in three cities, analyzing the basic framework of municipal refuse management and the developing trendy of refuse resuscitation technologies, developing the national action plan for landfill gas recovery and utilization, conducting the capacity building of landfill gas recovery and utilization, and achieving the global environmental objective of GHGs mitigation through the implementation of landfill gas recovery and utilization projects. The State Environmental Protection Administration (SEPA) is the national implementing agency for this project. The project started in 1997 and was planned to be completed in 2001. However, it was delayed because of national capital and other reasons and eventually ended successfully in 2003. Nanjing Shuige Landfill Site is one of the three pilot projects for the utilization of landfill gas. The landfill gas would be used for power generation and the power would be sold to the power-grid company. The landfill site began to be used in 2004, and will end for MSW landfill in 2015. It could dispose 1200 tons MSW per day generated by about 1.2 million municipal residents. GEF would

Summary of the Practice

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provide 0.82 million US$ for the construction of landfill gas collection wells and tubes and related facilities. The local government would provide the capital or look for other funds to finance the project.

Objectives • To attract various sources of finance for the utilization of landfill gas, especially from the private

sector, through the rational power price • To introduce advanced technologies and facilities for landfill gas utilization in China • To introduce advanced management experiences and the personnel, and train the local personnel • To provide a demo of institutional arrangement for other landfill sites in China for utilization of

landfill gas

Description of the activity The Nanjing local government set up a project management office for the coordination of the pilot project. From 1997 to 1999, the on-site test was conducted and a research and design group did the feasibility study based on the on-site result. In the second half of 1999, Nanjing local government and Jingsu provincial government approved the feasibility study report. After that, the Nanjing local government began to look for financing as well as selection of the technical partner and pilot project cooperation partners. As the owner of Nanjing Shuige Landfill Site, the Nanjing local government, and the Nanjing local government had the ability to arrange for local capital (about US$3 million) to support the pilot project. According to the on-site test results and results from software analysis, the Nanjing local government arranged national experts to calculate a rational power price for 15 years’ power generation based on the project’s FIRR of 15%. Taking the reference of the expected power price and considering the technical, construction and operation experiences of landfill gas utilization projects, the Nanjing local government and the project management office selected an Australian company, Australian Cleanway Company, to be in charge of building and operation of the landfill gas utilization system. Australian Cleanway Company provided 2.4 million US$ for the pilot project directly, which were used for the purchase and installation of equipment of power plant, pre-treatment system and transformation system etc.. Moreover, the Nanjing local government financed the remaining 0.6 million US$, which was used for the infrastructure of power plant including the construction of office, land and road. The local government also helped in the negotiation between the Austrian Cleanway Company and the local power-grid company based on the expected power price from the feasibility study. The Power Purchase Agreement (PPA) was signed in year 2001, with the power price 20% higher than the average power price of local power grid for 15 years. The gap of the power price will be covered by the Nanjing local government through the power grid company. Australian Cleanway Company began the construction of landfill gas for power generation engineering and set up Nanjing Cleanway Co., Ltd. in year 2001. Nanjing Cleanway Co. was also involved in building the power plant. In May 2002, the project began the test run and since 2003, the power plant began normal operation. The Shuige Landfill Site provides the landfill gas to power plant freely. Nanjing Cleanway Co. is fully in charge of the operation and management of the power plant. Currently, the capacity of the power plant is 1.25MW, and could provide the electric power for 5000 families.

Overview

The successful point of this project is to attract a private investor with extensive experience in landfill gas utilization field to invest and construct the pilot project and operate the system, through the favorable power price policy and PPA, rather than the owner of landfill site, namely the local government, manages the system by itself.

Economic instruments

In this project, the PPA and favorable power price is a key point to attract the investors. The expected power price was calculated based on the output of fuel, namely the landfill gas, and considering a 15%

Critical Instruments

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FIRR of project, which was the basis for the negotiation for PPA and power price. PPA which lasts 15 years gave the investor a rational profit. Furthermore, funds from GEF and local government finance played an important role. The GEF fund, as a seed fund, encouraged the local MSW management agencies to implement the landfill gas for power generation project, and reduced the need of investment from the private sector. Local government finance encouraged other sectors to invest in the landfill gas utilization project, and also contributed to reducing the initial investment.

Partnerships One major characteristic of the pilot project is setting up a good partnership among several sectors. In China, over 95% landfill sites are state owned, and generally, the local government are the owners. For Nanjing Shuige landfill site, it is owned by a Najing local governmental agency, namely Nanjing Municipal Appearance Commission. The Nanjing local government has the ability to implement the GEF pilot project in the technical, financial and personnel aspects. However, if the way that the local finance invests the project with GEF fund entirely is adopted, it is not based on the market mechanism, then the problems of how to be sure the power connecting to the power grid and what the power price is will appear. However, evidently, a power price which to be sure the pilot project as a profitable project could not be reached. Although the government provide the initial investment, who will pay the money for later operation and maintain of the pilot project. At present, for this pilot project, the market mechanism is introduced, the construction, management and operation of landfill gas for power generation is undertaken by the enterprise, and the government is only in charge of monitoring the construction and operation and coordination among the power plant, the landfill site and power grid company. Therefore, in one way, the project attracted the funds from private sector, and in the other way, the project could be operated sustainable.

Regulatory instruments

The national and local regulations for the MSW management are also factors for the success of the pilot project. For example, the GB (National Standard) of environmental pollution control of MSW landfill published in 1998 stipulates that all new-built landfill sites must be with the facilities of landfill gas collection, recovery and disposal. Although it was built in 1994, Nanjing Shuige Landfill Site was willing to provide its landfill gas freely to other sector for resource utilization, and this regulation is one of factors. Another factor is that the recovery and utilization of landfill gas could avoid the danger of gas exploitation, and improve the surrounding environment quality, and improve human health.

• Nanjing Shuige landfill gas for power generation is one of demonstration projects with support of

GEF. About 5.2 cubic meters landfill gas can be used annually and as a result 1850 tons of methane can be mitigated. The social benefits include avoidance of bad smell of landfill site and surrounding areas, and reduction of the risk of explosions. Through this project, the awareness of landfill gas utilization for governmental officials was improved.

• The advanced technologies and facilities for landfill gas utilization were introduced. This project used the Australian technical and main facilities, as Chinese technology and equipment production are not mature. Meanwhile, advanced management experiences were also introduced. The Nanjing Cleanway is a foreign invested company, but over half of its employees are local, and this project give them a good chance to improve their ability for the management and operation of landfill gas power plant.

Impacts

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The success of the pilot project is benefit from following points, • The cooperation of related sectors, including the government (providing long-term incentive policy

and formulate the effective regulations, and monitoring the project operation), the landfill site (providing the fuel for power plant), the private investor, and power grid company etc.

• Determine the expected power price according to rational investment payback rate: 15% IRR • Select a good enterprise to build and operate the power plant • Sign long-term PPA according to the negotiated power price It must be seen that the economic level of a city will have definitive influence for landfill gas utilization project. Although the local finance did not provide the initial investment for the project directly, actually, the gap between the landfill gas power price and average power grid price will be burdened by the local finance. So for such project, if without enough international fund or central government support, the local government must have enough economic strength or the local residential living level has reached a related high level already.

This project set up a good mechanism for enlarging the finance source for landfill gas utilization projects. Meanwhile, the involvement of private enterprise also made the operation of the project based on market rules. In China, there are over 1000 MSW disposal sites at present, and about 30% are large and middle scale landfill sites, with large potential of utilization of landfill gas for power generation or supply heat. After the success of the 3 pilot projects supported by GEF, the SEPA made a national action plan for the utilization of landfill gas. In next 5-10 years, it is planed to select 10 to 20 cities for the large scale demonstration of landfill gas recovery and utilization, and 20 to 40 pilot landfill sites will be built in these cities, in order to provide enough data and samples for the government to formulate and implement corresponding policies. It is planned to innovate 20-30 traditional landfill sites, change those landfill sites having not landfill gas recovery equipment into having modern landfill gas recovery equipment, adopting the successful mechanism from Nanjing Shuige project and developing the landfill gas in commercial mode. Moreover, it also planned to build 10 modern landfill sites and landfill gas recovery and utilization equipment to realize the commercial operation in landfill gas utilization. At that time, it is expected that the annual amount of landfill gas utilization will reach 7.5 billion cubic meters, and the installed capacity of power generation will be 100-150 MW. About 180 million US$ investment is needed. Therefore Nanjing Shuige project gave one of good mode for financing such projects. Furthermore, this financing mode and operation mechanism also can be used in other fields with have similar characteristics (the power cost is higher than that of coal power but with good environmental benefits), and these fields include wind power, PV power, bioenergy power etc.. The approach is also useful for other countries as reference for financing renewable energy projects. Center for Renewable Energy Development, Energy Research Institute B1416, Guohong Mansion, A11 Muxidi Beili, Xicheng District, Beijing, 100038, China Tel:+86-10-63908466, Fax: +86-10-63908465 Email: shjingli@163bj.com

Lessons Learned

Potential for Application

Contact

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Case reviewer:

1. Nanjing GEF project Management Office, Case Study of UNDP/GEF Pilot Project of Nanjing Shuige Landfill Gas Recovery and Utilization, August 2003 2. State Environment Protection Administration, National Action Plan for Recovery and Utilization of Landfill Gas, October 2002 3. Shi Jingli, Song Yanqin, Middle and Long-term New Energy Development Strategy: Biomass Energy, June 2003 Case reviewer: Ms. Shi Jingli, Associated Professor, Center for Renewable Energy Development, Energy Research Institute, email:shjingli@163bj.com Information date: Jan. 21, 2004

References

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3.2.1.4. Strategic Policy Options developed in FY 2003

1. Optimum use of government funds

2. International funding mechanisms

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First Draft Asia-Pacific Environmental Innovation Strategies (APEIS)

Research on Innovative and Strategic Policy Options (RISPO) Strategic Policy Options

I. Title of sub-theme Innovative financing for renewable energy development II. Title of strategy To improve the competitiveness of renewable energy markets III. Title of strategic policy option Optimal use of government funds IV. Brief description of the policy option

- Objectives:

• Efficient and effective utilization of funds available from the government at different stages of the RE development

- Environmental Areas:

• Climate change

- Applicable geographic area and socio-economic conditions: • Developing countries facing large gap between supply and demand of

electricity. Remote rural population of developing countries - Stakeholders:

by whom: Central and state governments, R&D institution, RE Industry, RE users for whom: Central and state governments, R&D institution, RE Industry, RE users

- Time span:

- Expected impacts:

• Energy security of developing countries

V. Background

RE is still considered an evolving sector; some products are matured while some are underway.

Similarly, some applications are commercially viable, while others need several support mechanisms.

In both developing (India’s RE programme) and developed countries (Japan’s Sunshine project),

government support in terms of technology development funds, performance linked incentives etc.

have helped the growth of RE sector.

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VI. Critical instruments Economic instrument: Combination of financing instruments from various sources a) Choice of government funding at demonstration stage, subsidy support at market initiation stage and soft loan at commercialization stage, b) Fee-for-service model that matches the paying capacity of the user to the level of services provided and an effective use of various developmental funding for setting up the utility.

Technology: Customisation of technology a) Technology and its service customised to the user need Institutional arrangements: One-step-service entrepreneurial model a) Incentivising manufacturers to provide one-stop service regarding product, finance and after-sales service, b) Entrepreneurial model with a unique umbrella brand for decentralised energy delivery services

Partnerships: Public-private partnership a) unique case of public-private-local-community partnership with well defined roles and responsibilities VII. Impacts of the policy option

a. Achievement As on March 2004, the achievements in grid connected wind energy systems and in Solar PV

stand at 2117 MW and xxx MWp respectively. Further, the government is keen on increasing

the share of RE in country’s installed power generation capacity by an additional 10,000 MW

by the year 2012. A draft of the RE policy statement has been submitted by MNES for approval.

Within the long-term vision, this Policy Statement seeks to set out the major application areas

and near term targets for the period up to the end of the Eleventh Five Year Plan, in the year

2012. One of the major application areas is the village electrification of remote 18,000 villages.

In another initiative, the Ministry of Power (MoP) has set up a mission called REST – Rural

Electrification Supply Technology Mission whose basic objective it to accelerate completion of

all villages progressively by the year 2012 through local RE sources and decentralised

technologies. Such target oriented programmes and the introduction of the Electricity Act 2003

(EA 2003), which has come into being on June 2nd 2003 are expected to facilitate the RE

market development in India. b. Impacts on the driving forces for environmental degradations c. Impacts on the environment and socio-economic conditions

VIII.Evaluation of the policy option - Analysis A –

a. Sustainability (whether the impacts can be sustained for a long period):

b. Equity:

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c. Efficiency:

d. Effectiveness:

e. Relevance:

IX. Implementation Issues X. Applicability and limitation This policy option will work in those developing countries that have the commitment to develop RE

at their highest decision making level. Further, it is important to have an effective institutional

structure that involves all tiers in the governments, industry and the civil society in order to utilize

the funds efficiently. XI. Related Good Practices - Market development for Solar Photovoltaic lantern in post-subsidy regime, India.

- Developing a sustainable financing model for solar pumping systems, India.

- Commercialisation of Solar hot water systems through financial intermediary scheme, India.

- Solar PV minigrids in Sunderbans- a combination of government and community financing, India

- Public sector financing for wind power development, India XII. Related Analytical Background Paper(s) (- Analysis B -) References

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First Draft Asia-Pacific Environmental Innovation Strategies (APEIS)

Research on Innovative and Strategic Policy Options (RISPO) Strategic Policy Options

I. Title of sub-theme: Innovative financing for renewable energy development II. Title of strategy: To improve the competitiveness of renewable energy markets III. Title of strategic policy option: International funding mechanisms IV. Brief description of the policy option

- Objectives:

• To utilise existing international funding mechanisms for funding RE projects in developing countries

- Environmental Areas:

• Climate change

- Applicable geographic area and socio-economic conditions: • Developing countries having vast renewable energy potential and conducive

framework in tapping international funds and projects with high sustainable development benefits

- Stakeholders:

by whom: International donors (including private, bilateral and multilateral), Central and state governments, RE Industry, RE users

for whom: International donors (including private, bilateral and multilateral), Central and state governments, RE Industry, RE users

- Time span:

- Expected impacts: • Improved local and global environment and enhanced clean energy options

for developing countries

V. Background Most of the international funding mechanisms focusing energy sector, always promote use of clean and green energy technologies. Such mechanisms have repeatedly endorsed implementation of RE technologies to achieve high social benefits and hence support

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sustainable development. Global Environment Facility (GEF) and Clean Development Mechanism are a couple of international funding options encouraging implementation of RE technologies upfront.

While GEF is a barrier removal funding mechanism promoting clean and green energy, Clean Development Mechanism, (CDM) is a purely a market based mechanism. CDM provides the RE private sector with various investment options for maximizing the benefits of revenues from it. CDM provides mutual benefits for the developed and developing countries viz., meeting the emission reduction targets and sustainable development, respectively. Besides their respective benefits, it adds to the present impetus to the development of the grid and off-grid RE technologies, significantly contributing to GHG reductions. VI. Critical instruments Economic instrument: Capital and investment risk mitigation a) The type and quantum of international funding available influences the degree of viability of the RE project. In case of CDM, the revenue can be in the form of equity, annual cash flow, subsidized loan, partly repaid loan etc., b) Advance payments for future delivery of emission reductions for CDM projects, smoothens the financial closure of such capital intensive RE projects; c) CDM revenue on annual cash flow basis to some extent may also mitigate the non-payment risk by state utilities for purchase of power from such CDM RE projects.

Technology: Technology transfer a) The end result may also include a successful transfer of technology though the process is highly time consuming and complicated. This is due to the reason that CDM is period driven and the pace of the technology transfer has to match the same; b) Typical investment options associated in case of technology transfer.

Institutional arrangements: Efficient national implementing institutions a) Establishment and efficient operation of Designated National Authority mandated for spearheading the host country CDM approval process and taking care of all the issues challenging the participation of the private sector; b) Need for high end institutions to impart training for enhancing the capacity and skills of local consultants/service providers to meet the needs of the project promoters; c) Need for increased participation of local / national financial institutions in appraising the projects, taking into account the carbon risks.

VII. Impacts of the policy option

a. Achievement At the international level, the modalities and the procedures (M&P) for operationalising the CDM has progressed satisfactorily. This has matched with similar progress at the

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national level in terms of establishing the DNA (Designated National Authority), number of project design documents in response to CDM tenders, scores of capacity building events, country CDM studies etc., In India, the DNA has been established since December 2003 which has cleared around 17 projects as on February 2004 against receipt of 47 projects. The CDM project development has peaked in India and there are more than 100 PINs (Project Information Notes) floating around seeking source for development PDDs (Project Design Documents). Under various donors CDM capacity-building programme in India (so far 8) and in response to various CDM tenders, a total of around of 50 PDDs are under various stage of completion including few completed PDDs. These donors and tendering countries include GTZ, CIDA, The World Bank, Sweden, The Netherlands, Prototype Carbon Fund, Austria, Foreign Common wealth Office, U.K. On the private sector initiatives, at least 75 PDDs are under various stage of completion. Most of the PDDs are developed in the energy sector, renewable energy dominating in terms of number of PDDs.

Remarkable achievements have been recorded in the renewables in India since its initiation in early eighties. The cumulative installed capacity of all grid connected RE projects in the sectors of wind, biomass, small hydro and waste to energy is to the tune of 2900 MW, as on March 2003.The installed capacity of grid connected wind energy systems alone is 2117 MW as on 31st January 2004. Further, the government is keen on increasing the share of RE in country’s installed power generation capacity by an additional 10,000 MW by the year 2012. A draft of the RE policy statement has been submitted by MNES for approval. Within the long-term vision, this Policy Statement seeks to set out the major application areas and near term targets for the period up to the end of the Eleventh Five Year Plan, in the year 2012. One of the major application areas is the village electrification of remote 18,000 villages by 2012. In another initiative, the Ministry of Power (MoP) has set up a mission called REST – Rural Electrification Supply Technology Mission whose basic objective it to accelerate completion of all villages progressively by the year 2012 through local RE sources and decentralised technologies. Such target oriented programmes and the introduction of the Electricity Act 2003 (EA 2003), which has come into being on June 2nd 2003 are expected to facilitate the RE market development in India. The M&P of the CDM pose challenges to develop CDM projects in the RE sector where national policies and legislations exist in promoting RE. However several options are currently being worked out and tested to synchronize the efforts of the developing countries in promoting RE by utilizing several funding opportunities and CDM may be considered as one among them. b. Impacts on the driving forces for environmental degradations c. Impacts on the environment and socio-economic conditions

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VIII.Evaluation of the policy option - Analysis A –

a. Sustainability (whether the impacts can be sustained for a long period):

b. Equity:

c. Efficiency:

d. Effectiveness:

e. Relevance:

IX. Implementation Issues X. Applicability and limitation This policy option will work in those developing countries that have the commitment to develop RE at their highest decision making level. Further, it is important to have an effective institutional structure that involves all tiers in the governments, industry and the civil society in order to participate in CDM, tap the funds and utilize those funds efficiently. XI. Related Good Practices - Wind power development by the private sector - a combination of international funding mechanism and public sector financing, India - Biomass power development by the private sector - a combination of international funding mechanism and public sector financing, India XII. Related Analytical Background Paper(s) References