revisiting the role of ppps in the power sector results ... 9_0.pdf · regional dummies analytical...

Revisiting the Role of PPPs in the Power Sector

Results from the ESW tasked managed byMaria Vagliasindi,

Lead Economist, Energy Anchor,World Bank

Prepared for the Workshop held on 9 June 2011,World Bank,

Washington DC

Outline

1. Background

2. Analytical Approach and Data

3. Determinants of PPPs

4. Emerging results

5. Policy Implications

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60

80

100

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1995 2000 2005 2009 2010

Electricity projects with private participation in developing countries by quarter, 1995–2010 Q1

1st Q 2nd Q 3rd Q 4th Q

Asian crisis

Russian

crisis

Argentine

and Brazilian

crisis

Global

financial

crisis

Background: Overview of the global financial crisis

& comparison with past financial crises

• Reduced energy demand

• Deterioration in revenue collection and

reduced access to finance

• Gov’t response to crisis

• Pre-existing financing challenges

How does the financial crisis affect the financing gaps?

• Impact of the financial crisis on BAU emissions

• Estimates of mitigation related additional

investment in energy sector

• Adaptation

How do climate change considerations affect investment needs?

• In period of crisis

• For climate change mitigation

• Phasing out energy subsidies

Sources of financing

Background: Climate Change Implications

The adoption of the Kyoto Protocol marked the start of a period of strong

exponential growth in mainstream renewable energy investment

internationally, only slowed downed by the global financial crisis.

Source: Bloomberg New Energy Finance

Background (ctd)

The feed-in tariff policy has already been implemented in about 80

states and countries around the world, more than half of which are

developing economies

Source: REN2011

Background (ctd)

There has been an exponential growth in the number of autonomous

regulators among developing countries from less than 10 in 1995 to

about 60 in 2008

Cumulative number of autonomous regulators

World oil crude prices, annual trends in real terms (1861-2010)

Background (ctd)

Boom/bust price shocks have been a feature of oil history

Our research presents the new global evidence on the key determinants of PPP investment in electricity) based on a panel data analysis for 105 developing countries including 16 years from 1993 to 2008.

This research aims at determining the evidence of the effectiveness of sectoral support mechanisms such as feed-in tariffs for attracting private investment in renewables and regulatory governance in T&D. We divide the determinants of PPPs into (sectoral and economy-wide) governance variables and short and long run drivers, represented respectively by financial crises and climate change variables. We also control for macroeconomic and regional variables.

Analytical Approach and Data

1) PROBIT ANALYSIS

Introduction of private sector investment in electricity (Generation, Transmission &Distribution)

of which Investment in Generation only

of which Investment in Renewables only

of which Investment in T&D

of which Investment in D only

of which Investment in T only

2) HECKMAN

Total private (committed) investment in electricity (Generation, Transmission &Distribution)

of which Investment in Generation only

of which Investment in Renewables

of which Investment in T&D


EXPLANATORY VARIABLES

SHORT TERM AND LONG TERM FUNDAMENTALS

SECTORAL GOVERNANCE VARIABLES

Introduction of feed-in tariffs (for generation)

ECONOMY WIDE GOVERNANCE VARIABLES

Price of Oil, Kyoto Protocol

ENVIRONMENTAL SUSTAINABILITY

Control of Corruption, Degree of Political Competition

MACROECONOMIC CONTROLS

GDP per capita, Population

FINANCIAL CRISES

East Asian and Latin American Crisis

REGIONAL CONTROL

Regional dummies


Trends in PPP Investment over time

World Bank/PPIAF Private Participation in Infrastructure (PPI) Database

The trends over time in PPP investment among developing countries

confirms the exponential growth recorded at a global level following the

adoption of the Kyoto Protocol and the introduction of support schemes,

particularly feed-in tariffs. The past financial crises, notably the East Asian and

Russian crises in 1997-1998, as well as the most recent Latin American crisis in

2001, negatively affected PPP investments

Empirical Hypotheses

Hypothesis 1.GEN (T&D) The likelihood of attracting private investors to

provide electricity from renewables (T&D) is higher in countries where support

mechanisms, including feed-in tariff, (regulatory agencies)have been put in

place. The level of investment in renewable-based energy (T&D)is expected to

be higher in countries using such incentives (introducing regulatory agencies).

Hypothesis 2 The likelihood of attracting private investors to provide electricity

from renewable-based energy is higher in countries characterized by higher

standards of economy-wide governance and a higher degree of political

competition.

Hypothesis 1.b Countries that have attracted more private investment in

transmission are also better prepared to integrate renewables in their system

and hence more likely to attract higher investment in renewables.

Hypothesis 3 Countries facing severe financial crises are less likely to attract

new PPPs and to receive PPP investment from existing PPPs in the years

immediately following the crises.

Hypothesis 4 Countries characterized by higher income and size of the

market are more likely to attract PPPs and a higher volume of investment.

Hypothesis 5 (GEN) Developing countries are more likely to attract and

retain more investment in years following the entry into force of the Kyoto

Protocol due to the rise of climate change up in the political agenda.

Hypothesis 5 (GEN, T&D) Developing countries that have attracted more

private investment in transmission are better prepared to integrate

renewables in their system and hence more likely to attract higher

investments in renewables (& viceversa).

Empirical Hypotheses (ctd)

GEN REN T&D T D


Introduction of feed-in tariffs +*** + ***

Electricity regulation + *** + *** + ***


Control of Corruption wgi_cc + *** + ***

Degree of democracy Polity2 + *** + *** + *** + ***

MACROECONOMIC CONTROL

GDP

ln_GDP+** + + + +

Population

ln_Pop+ *** + *** + *** + *** + ***

LONG RUN CLIMATE CHANGE

PPP Investment in Transmission + *** + ***

PPP Investment in Renewables + *** + *** + ***

Price of Oil _ *** + ***

Kyoto Protocol + *** + ***

Price of Oil*Kyoto Protocol + ***

Summary of Analytical Evidence (Probit)

TOT GEN REN FF T&D


Introduction of feed-in tariffs FIT + *** +***

Regulation + ***


Control of Corruption wgi_cc

Degree of democracy Polity2


GDP + ** + ** + ***

Population

ln_Pop+ *** + *** + ***

LONG RUN ENVIRONMENTAL SUSTAINABILITY

PPP Investment in Transmission + ***

PPP Investment in Renewables + ***

Price of Oil _ ** + *** --**

Kyoto Protocol + *** + *** -***

Price of Oil*Kyoto Protocol + ***

Summary of Analytical Evidence (Heckman)

Two step (1) Two step (2) (3) (4)

GOVERNANCE VARIABLES


Introduction of feed-in tariffs FIT

First step in red

0.519**

(0.276)

0.297*

(0.171)

0.653*

(0.298)

0.624

(0.298)

PPP Transmission Investment First stage in red

0.003***

(0.001)

PPP Investment in Transmission and Distribution (ln)

0.105*

(0.058)

0.111**

(0.054)


Control of Corruption wgi_ccFirst step in red

0.419*

(0.244)

0.351***

(0.101)

Degree of democracy Polity2First step in red

0.016***

(0.010)

0.013

(0.010)


GDP per capitaln_GDP/cap

0.817***

(0.250)

0.651***

(0.243)

0.751***

(0.213)

0.661***

(0.215)

Populationln_Pop

0.337***

(0.079)

0.255***

(0.084)

0.276***

(0.084)

0.210**

(0.090)

Key Determinants of the PPP Investment in Electricity Renewable based Generation

LONG RUN CLIMATE CHANGE

Kyoto Protocold_Kyoto

0.683**(0.304)

0.749***(0.301)

0.589**(0.318)

0.669**(0.318)

REGIONAL CONTROL

Regional dummies Yes No Yes Yes

Constant-7.745**

(3.361)-4.790(3.191)

-6.518***(2.559)

-4.443***(2.664)

N 726 726 164 164

Censored N 566 566

Wald χ2 61.61*** 62.41*** 65.23*** 70.92***

Within R2 11.43 12.59

Between R2 46.25 49.15

Overall R2 29.76 31.67

Key Determinants of the PPP Investment in Electricity Renewable based Generation (ctd)

Key Results

Better control of corruption and higher degree of political competition are crucial in attracting the entry of private investors, but they do not affect the extent of investment in the presence of substantial sharing of risks between the public and private sector..

Investment in renewable-based energy has been significantly affected by the signing of the Kyoto Protocol.

The sectoral support scheme, provided by feed-in tariffs (regulation), instead, affect both the entry and the level of investment in renewable-based energy, though they became much less significant (insignificant) when it comes to determine the amount of investment.

The market for renewable-based energy is strongly driven by supportive

policies. Support policies serve not only to attract the entry of private investor but

also to determine the level of investment.

In contrast, broader economy-wide governance factors, including control for

corruption and degree of political competition, are considered by private investor

mainly for taking the decision to enter into renewable-based generation.

Private investors in renewable-based energy also require technical and

regulatory certainty about the availability of renewable-ready transmission

resources, if they are to finance investments.

Private investors entering the market looks more at the size of the market

rather than the income level, whereas when determining the level of investment

they assess both the size and “affordability” level.

Short run financial crises also affect more the decision to enter the renewable

market rather than the level of investment, proving the resilience of renewable-

based energy to such shocks.

Policy Implications

Changes in the level and composition of investment can be particularly drastic if

a move toward low carbon solutions is implemented through an increasing

proportion of renewable energy..

Investments in renewable energy typically have higher upfront capital costs than

conventional power generation, but lower operational costs (wind and solar, for

example, do not have a fuel cost or fuel price volatility to manage).

The higher costs and risk mean that companies particularly in the private sector

will not be willing to undertake investments in renewable generation, unless they

are required to or offered economic and financial incentives to do so. The price

support mechanisms need to be structured in such a way as to reward the most

efficient renewable energy suppliers and to give them an incentive to reduce costs as

rapidly as possible

Policies that support renewable energy use either price or quantity setting

instruments. Of the different options to support renewable energy, feed-in tariffs

is increasingly seen as the “policy of choice” to attract private investment in

renewable energy. Under a feed-in tariff scheme, electric utilities are obliged to

purchase renewable energy through long term contracts that guarantee access to the

grid, at an enhanced price (the so called feed-in tariff).

Case studies: a focus on RE Support mechanisms

It is difficult to strike the right level of feed-in tariff.

Low feed-in tariff may not trigger enough investment inrenewable-based energy.

High feed-in tariffs, though, also have a negative effect on costreductions as they induce generators to choose high-cost sites andprovide fewer incentives for cost cuts. This illustrates theimportance of designing an efficient energy support system, whichnot only promotes diffusion but also provides continuousincentives for cost-reducing innovations.

• The rapid expansion of the Spanish solar PV and subsequentintervention to contract the market in 2008 (capping overall marketsize, alongside a 30% cut in the tariff) has been attributed as muchto tariff design as to unsustainably high levels of tarifss.

• In contrast, Germany prescribed stepped tariff reductions(degressions) and has produced steadier growth.

Case studies: a focus on RE Support mechanisms

-Decree 1002 introduced auctions as way of incorporating RE to the electricity grid.

-Penetration of 5 % of RE

-Price is passed-through to consumers

-Incentives:

1) Preferential treatment to access the grid

2) Tariff stability: the investor is guaranteed a fixed price during the 20 years of the length

of the contract

HYDRO50%

BIOMASS, SOLAR, WIND50%

Required capacity 1st auction

70%

19%

7% 4%

Quotas 1st auction

HYDRO BIOMASS

Auction in Peru

-Not all the quotas were covered, as a

results the regulator made a 2nd call (only

45 % of the total was covered)

- From an efficient perspective, the auction

was successful as final prices were lower

than the price fixed by the regulator

- Average price was twice the price of

electricity generated from conventional

sources

MINIMUM

PRICE

OFFERED

MAXIMUM

OFFERED PRICE

AVERAGE

OFFERED PRICE

BASELINE PRICE

FIXED BY THE

REGULATOR

% OF OFFERED

PRICES

BIOMASS (Ctv

US$/kWh)5.2 11 6.35 12 -47%

WIND (Ctv

US$/kWh)6.55 8.7 8.04 11 -27%

SOLAR (Ctv

US$/kWh)21.5 22.5 22.11 26.9 -18%

HYDRO (Ctv

US$/kWh)5.5 7 6.03 7.4 -18%

Auction in Peru

FEED-IN TARIFFS (PROINFA) - discontinued

Designed to contract 3,300 MW of wind, biomass, and small hydro until 2006

Each RE has a different tariff and quota of 1,100 MW

Energy is purchased by ELETROBRAS through a 20 years contract; the company resells the

energy to all consumers in proportion to actual consumption

DISCOUNTS:

Discounts on transmission and distribution for non-regulated consumers who purchased RE

Discounts are authorized by the regulator; they’ve been in the order of 50 %

Discounts are economically more attractive for some types of small scale developers than

auctions (auctions result in low prices)

Criticism: it introduces a market distortion due to the fact that the incremental cost is

subsidized by regulated consumers. Beneficiaries are generators and free consumers

AUCTIONS

Technology and project specific auctions

Reserve energy auctions: increase reserve margin and ensures security supply

Brazil: Support Mechanisms for RE

PROINFA RESERVE ENERGY AUCTION

MW GWh US$/MWh MW GWh/year US$/MWh

WIND 1423 3740 154 1800 6596 80

SMALL HYDRO 1191 6260 96 - -

BIOELECTRICITY 779 2662 77 2379 4800 84

PROINFA RESERVE ENERGY

AUCTIONS

TOTAL CAPACITY (MW) 3,393 5,179

TOTAL ENERGY (GWh/year) 12,661 11,397

AVERAGE COST (US$/MWh) 109 80

TOTAL COST (million US$/year) 1,381 911

NET IMPACT ON TARIFFS

(US$/MWh)3.8 1.6

IMPACT ON COSTS

Source: Barroso, 2011.

Brazil: Auction vis-a-vis feed-in tariffs

Brazil: Auction vis-a-vis feed-in tariffs (ctd)

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MW

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Wind energy generation in Mexico

OPEN SEASON

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Wind generation in Brazil

Source: EPE, 2011.Source: EPE, 2011.

Exponential growth in wind

Feed in Tariff could be depicted as a RPI-X regulation instrument, which

seems to work well if project developers have a well-defined task and

interact in competitive markets such that their profit evolution can be easily

observed in order to set future Feed in Tariffs.

If sites with differing levels of wind penetration are to be developed, then

a resource-based differentiation of the tariff prevents owners of high

wind sites from capturing large scarcity rents.

Private investors in renewable-based energy also require technical and

regulatory certainty about the availability of renewable-ready

transmission resources, if they are to finance investments. The traditional

reactive model of transmission regulation that has been used in the past,

where transmission has been developed on a first-come, first-served is not

conducive for renewable-based energy, as it introduces extensive regulatory

and technical uncertainty about whether adequate transmission will be

available once the resource is generated, and transmission distances for

renewable-based energy can be large.

Conclusions and policy implications

Thank you!

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