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AUCTIONS AND FISCAL INCENTIVES

WEBINAR 23 FEBRUARY 2012

Chad LaurentSenior Consultant - MCG's General Counsel

Course on Regulation and Sustainable Energy in Developing Countries –Session 6

www.leonardo-energy.org/course-regulation-and-sustainable-energy-developing-countries

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AGENDA

• Auctions

• Net Metering

• Tax and Other Fiscal Incentives

• Local Content Policies

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WHAT IS AN AUCTION?

• How many winners?

• How many rounds of bidding?

• How is a winner picked?

• Are bidders able to see other bidders’ bids?

• Live or “offline” (sealed)

• What does the “winner” win?– Contract?– Right to negotiate contract?

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TENDER/AUCTIONING MECHANISMS

• Usually government issues a call for tender/bid for:

• Total investment cost of a single project (investment

focused)

• Or the cost per unit of electricity (generation focused)– For example: 100 MW onshore wind energy or 40 MW of PV

• Non-price elements can play a role

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TENDER/AUCTIONING MECHANISMS

• Under single winner, the bidder with the lowest price “wins” a contract and has the exclusive right to renewable electricity generation under that contract.• Usually a long-term contract

• There can also be multiple winners

• Winning price could be available to

multiple developers

• Multiple rounds until desired capacity is

awarded.

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TENDER – INTERNATIONAL EXPERIENCE

• Have been used in Ireland, England, France, Denmark,

• Currently a handful of US states are using some form of

auction mechanism for renewables (as well as for GHG

emissions and REC trading)

• China, Brazil, Argentina, Mexico, Morocco, Egypt, Uruguay

have recently held auctions for renewable generation

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AUCTIONS – ADVANTAGES?

• “Market-based”

• “Easier and cheaper” to administer?

• High degree of cost-efficiency because lowest bidder is

chosen (theoretically)

• Policymakers can require additional non-price elements

(regional distribution, etc).

• Potential to selects for developers who are capable of

actually getting projects “in the ground.”

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AUCTIONS – DISADVANTAGES?

• Low effectiveness because of low bids, collusion, few participants/bidders, speculative bidding

• Stop-and-go development cycles – insecurity for industry

• High rates of contract failure

• Difficulty of establishing a national industry (UK experience) because of import of cheapest technologies

• Intense price competition favors large players (utilities) or public companies (without profit interests)

• FiTs are “easier and cheaper” to administer?

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AUCTION RESULTS

• Limited empirical evidence to-date of their success,

especially with regard to which type of auction

mechanism to use

• Comparatively few projects actually in the ground

because of auctions versus FiTs or other policies

• No examples of market transformation of renewables via

auction mechanisms

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CONTRACT FAILURE

• 20-30% contract failure rates should be considered the

minimum and in some cases failure rates are much higher

(examples in following slides)

• To mitigate contract failure rates consider:– Pre-conditions

– Submission fees

– Requests for qualifications

– Queuing rules

– Milestone payments and deposit

– Performance guarantees

– Project buy-out options

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UK

• During the 1990s, gov. supported utility-scale renewables

primarily through multiple rounds of competitive tenders

for long-term contracts.

• Result was an overall success rate of 50% on a project

basis and 33% on a capacity basis.

• No penalties, speculative bidding, focused on low cost

alone

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IRELAND

• Competitive bidding for long-term (15-year) contracts

• Between 1995 and 2003, there were six rounds of AER

tenders.

• 22% success rate – 78% failure rate

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FRANCE

• Series of competitive tenders for long-term contracts

started in 1996

• 32% success rate – 68% failure rate

• Moved to a FiT, now moving back to an auction

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SOUTH AFRICA

• Was moving forward with a FiT but FiT was

cancelled in favor of central procurement.

• Capacity cap by technology– Onshore wind (1.85 GW), PV (1.45 GW), CSP (200 MW), biomass

(12.5 MW), biogas (12.5 MW), landfill gas (25 MW), small hydro (75 MW)

• Strong interest with 270 respondents, 40% of the

capacity was auctioned, projects must be online by 2016

• Black Economic Empowerment requirement

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BRAZIL

• Large-scale auction for renewable and non-renewable technologies

• Contract is with private distribution utility

• Administered by government agency

• 3 auctions per year

• Auctions have attracted international companies and developers

• Resulted in low price bids– 42% lower than previous FiT (PROINFA)– However, wind turbine prices have dropped dramatically between

auctions and PROINFA contracts.

• Potentially high risk of contract failure due to low price quotes and analysis of assumed capacity factors and IRRs in the bids

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CHINA

• Between 2003-2007 competitive auction for wind

projects

• Lowest bidder did not always win—bids near the average

bid price were successful

• Significant wind capacity was built—12.2 GW

• Success may be unique to centralized government

structure

• Now switching to a FiT for wind and solar

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POTENTIAL LESSONS LEARNED?

• Use a continuity of calls for tender in order to create sustainable market growth (avoid stop-and-go cycles)

• Auctioned capacity should not be too low (transaction costs) or too high (strategic bidding)

• Establish an appropriate penalty for non-compliance (to avoid unreasonably low bids), however, high penalties can result in non-payment of debt service

• Consider technology-specific tenders if you want diverse supply

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NET METERING

• Historically applied for small scale promotion of renewables

• Meter is able to turn “backwards”, measuring electricity

provided to the grid

• Electricity fed into the grid is credited to bill either at retail or

wholesale rates

• Applied in US states, Australian provinces, Japan, Mexico,

Guatemala, Philippines, Pakistan

• Attractive in markets with “time of use” electricity rates

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US NET METERING MAP

State policy

Voluntary utility program(s) only

www.dsireusa.org / February 2012

* State policy applies to certain utility types only (e.g., investor-owned utilities)

WA: 100

OR: 25/2,000*co-ops & munis:

10/25

CA: 1,000*

MT: 50*

NV: 1,000*

UT: 25/2,000*

AZ: no limit*

ND: 100*

NM: 80,000*

WY: 25*

HI: 100KIUC: 50

CO: no limitco-ops & munis: 10/25

OK: 100*

MN: 40

LA: 25/300

AR: 25/300

MI: 150*WI: 20*

MO: 100

IA: 500*

IN: 1,000*

IL: 40*

FL: 2,000

KY: 30*

OH: no limit*

GA: 10/100

WV: 25/50/500/2,000

NC: 1,000*

VT: 20/250/2,200

VA: 20/500*

NH: 1,000MA:

60/1,000/2,000/10,000*RI: 5,000*

CT: 2,000*

NY: 10/25/500/1,000/2,000*

PA: 50/3,000/5,000*

NJ: no limit*

DE: 25/100/2,000co-ops & munis: 25/100/500

MD: 2,000

DC: 1,000

NE: 25

KS: 25/200*

ME: 660co-ops & munis: 100

PR: 25/1,000

AK: 25*

43 states + DC & PR have adopted a net

metering policy

DC

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OTHER NET METERING POLICIES

• Mexico– Solar PV only

– 30kW limit

• Philippines– No capacity limit in the regulations

– Utilities required to allow net metering

– Utility owns the RECs from net metered systems

• Pakistan– 1 MW cap

– Credit at the retail rate

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NET METERING – PROS AND CONS

Pros

• Promotes on-site generation/distributed generation

• Awareness of energy consumption is increased

Cons

• Limited to on-site load• Size of the market• Only sites suitable for generation• Landlord/tenant issues

• Risk of load fluctuations and changes in rate classification

• Not a contract and thus risk of program changes or termination

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TAX INCENTIVES

• Exemption for import tax for renewable energy equipment (mostly at

an early stage of market development)

• Accelerated depreciation (e.g. write of total cost in first years of

operation)

• Sales tax, property tax and corporate tax incentives or exemptions

• Tax credits

– Production tax credit: annual tax credit based on the amount of

electricity generated

– Investment tax credits: tax credits granted as a percentage of total

investment costs

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USA EXAMPLE

• Investment tax credit of 30% and production tax credit of

2.2 cents/kWh for the first 10 years of a project

• Serves to limit the type of investors in projects to those

than can take advantage of the tax benefits (investors

with “tax appetite”)

• Some analysis suggests that these tax incentive programs

cost the government more than grants

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INDIA

• Generous tax incentives– 80% accelerated depreciation allowed in the first

year

• Seen as a bridge to ratepayer recovery in

order to apply burden of costs not just on

ratepayers.

• Requirement that pv modules and cells be

manufactured in India

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CUMULATIVE INSTALLED WIND CAPACITY - INDIA

Source: Global Wind Energy Council, Indian Wind Energy Outlook 2011, April 2011

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LENDING PROGRAMS

1. Loan funds that provide access to capital to those

who otherwise might not have access

2. Low interest loan fund from government or loans

with better terms (e.g. longer tenors)

3. Interest rate buy-down programs

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LOCAL CONTENT RULES

• Several versions– Local equipment content requirement

– Local tax benefits or government grants

– Local content bonus payment

– Lower interest rate for local projects

– Local ownership requirement

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ONTARIO

• Domestic content rules– 50% wind

– 60% solar

• WTO and NAFTA challenge

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NOVA SCOTIA

• COMFIT (community

feed-in tariff)

• Local ownership

requirement

• Included indigenous

population/First

Nation provisions

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BRAZIL

• A stipulation prohibiting the import

of wind turbines with nominal

capacity below 1.5 MW

• BNDES provides lower interest loans

to local developers

• Result has been an increase in the

local supply chain in order to be

eligible for BNDES financing

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CHINA

• 70% Wind local content requirement until 2009, when

eliminated due to pressure from the US government

• Tax and investment support for local PV manufacturing

industry.– Recent SolarWorld challenge before US trade commission

alleging “dumping” of panels in US solar pv market

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THANK YOU

Presenter:Chad Laurent, Esq.

Senior Consultant and General Counsel

Contact:T: +1 617.209.1986

chad.laurent@mc-group.com