Policies for Renewable Energy in Developing Countries

Q&A, December 2010

Last month, the Heinrich Boell Foundation and WRI convened a group of international experts to discuss policies and incentives for increasing the use of renewable energy in the developing world. WRI’s Davida Wood and Lutz Weischer discuss the key lessons learned at the workshop and their work on helping developing countries make the transition to renewable energy.

What are some of the key renewable energy success stories in developing countries?

Lutz: There are many success stories, as many developing countries have scaled up renewable power in recent years. Of course, China gets a lot of attention, but the trend is much broader than that. The Renewables 2010 Global Status Report counts 45 developing countries with renewable energy targets and 42 with some sort of promotion policy.

One approach that has worked well in many countries is the so-called “feed-in-tariff,” which is a guarantee that renewable energy producers will be able to sell the electricity they generate at a price set in advance by the government. To date, there are 78 countries, states, and provinces that have passed feed-in-tariffs for renewable energy, including a rising number of developing countries. These include major emerging economies such as China and India, as well as smaller countries such as Tanzania and Thailand. In all of them, the feed-in-tariffs have led to more investment in renewable energy generation and an increased share of renewables in the electricity mix.

Davida: In India, electricity regulators at the state level have a mandate to set feed-in tariffs for a range of renewable energy technologies. Some of these state regulators have been very active and have succeeded in attracting considerable investment. For example, in the state of Gujarat, the regulatory commission set a tariff in January 2010 for photovoltaic solar power. Power purchase agreements for 500 megawatts (MW) were signed in just six months, backed up by financial guarantees.

But there are other approaches. In Brazil, after experimenting with various incentive schemes for increasing investments in renewable energy, the National Agency for Electrical Energy held the country’s first wind-only power auction in December 2009. More than 1800 MW of wind power was contracted for.

Lutz: One thing I’d like to add on India is that this has also been a success story for industry development and employment. India’s use of policies to create stable demand for wind power has led to development of a successful manufacturing base, making India the fifth largest wind power market in the world. An Indian company, Suzlon, which began in 1995 with just 25 people, is now the third largest wind turbine manufacturer in the world, employing over 16,000 people globally.

What are the barriers to increased development of renewable energy in the developing world?

Lutz: The number one barrier to renewable energy scale-up in the developing world is cost. Access to modern forms of electricity is crucial for both basic improvements in quality of life and for being able to develop a robust, modern economy. But most people in developing countries simply cannot afford the cost of electricity with increased renewables. They need policies that drive down the costs and increase the deployment of these technologies. Until clean power technologies reach full price parity with fossil fuels, even the best policies will come at an additional cost that can’t be borne by poor ratepayers in developing countries. That’s why international support is needed. For an international donor like the World Bank that’s committed to increasing energy access, you will get more renewable energy if instead of investing in individual wind farms, you invest in the policy environment that makes people want to build wind farms.

Davida: An important element for this approach is access to data and methodologies. While feed-in-tariffs are widely adopted, regulators do not have sufficient access to information about the costs of renewable energy, and are dependent on project developers to provide these figures. At a forum convened by WRI and Prayas Energy Group, a commissioner from the Indian state of Gujarat I mentioned previously described the process by which his state’s tariff had arrived: a combination of technical inputs, public consultations, and artful guesswork. Participants at the renewable energy policy workshop we recently held at WRI also stressed that access to methodologies, benchmarking data and performance metrics, and techniques of competitive bidding are badly needed to support development of renewable energy resources. Independent oversight from civil society is a key ingredient here.

Lutz: That’s right; feed-in-tariffs can be quite successful, but they’re only successful if you’re doing a good job in setting your rates. If you set rates too low, you get no deployment, but if you only rely on information from developers, you end up setting your rate too high and providing windfall profits. Even if there’s good policy in place, developing countries often don’t have the domestic investment capital for these projects. So, you need an international mechanism that mobilizes finance and investment for these projects at affordable interest rates.

Davida: Furthermore, from a planning perspective, much more could be done to design off-grid renewable energy systems–in rural areas for example–that take advantage of the synergies between different forms of renewable energy. For energy on the grid, building capacity on integrated resource planning is key to integrating renewable and conventional energy sources.

Lutz: Yes, that’s true; the challenge of managing a national grid with multiple intermittent sources of energy is greatest in developing countries. You need engineers who are able to install renewable energy technologies, maintain them, and manage the grid.

Finally, some countries simply have not been able to replicate these success stories because they don’t know about them, or don’t know how to implement them in their own countries. So, one priority is facilitating the exchange between countries that have policies and those that don’t.

What is WRI doing to help overcome these barriers?

Lutz: We’re working with the World Bank on reforming their energy strategy, so that in the future, renewables will play a larger role in the Bank’s portfolio. We are also helping to disseminate information on successful policies, for example by convening a renewable energy policy workshop together with the Heinrich Boell Foundation North America. The workshop brought together 20 experts from developing countries that have implemented these policies or are currently considering them.

In the context of the United Nations climate change negotiations, we are advocating for a technology mechanism that will support capacity building and knowledge sharing on regulatory and policy incentives for renewables. We’re also working with negotiators in parallel processes such as the Clean Energy Ministerial and bilateral initiatives. In the coming months, we’ll also be working closely with major emerging economies to develop low-carbon development strategies for their power sector.

Davida: WRI’s Electricity Governance Initiative [EGI] is a joint project of WRI and Prayas Energy Group that works with civil society organizations in developing countries to analyze policy and regulatory decision-making processes. We are increasingly turning our attention to renewable energy. We have convened three forums that have brought regulators and civil society together to share experiences. Prayas has written a seminal paper on attempts to promote clean energy in five Indian states that holds lessons relevant to other countries. And our partners in South Africa and Thailand have used EGI methodology to intervene in national planning processes.

What’s next for this issue? What signs of progress should we look for in the near future?

Lutz: One thing we should look for is an increase in the number of countries that use these policies. There are also international moves in the works. Deutsche Bank has proposed a global feed-in-tariff mechanism. It will be interesting to see how that develops. The revised World Bank energy strategy will come out in 2011, and will hopefully give more weight to renewable energy. We should also look towards the technology mechanism that came out of the climate conference in Cancun, which will create a network of experts and clean technology centers that will help share experiences and build capacity. I’m also optimistic that the Clean Energy Ministerial next year in the United Arab Emirates will produce some more ambitious initiatives on renewable energy.

Davida: There are a lot of promising signs to look for: countries developing a better understanding of best practices in clean energy regulation. These include standardized power purchase agreements; increased transparency of the methodologies used to assess resource capacity, costs, and performance (which will benefit both governments and civil society organizations); harmonization of renewable and conventional energy policy and planning. Most of all, though, the way you’ll know that these policies are working is when you see falling prices and improved reliability for electricity from renewable sources. Ultimately, that’s the real test of these policies.