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«VOICE OF FUTURE GENERATIONS FIt For renewAbles? Design options for the Green Climate Fund to support renewable energy feed-in tariffs in developing ...»

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FIt For renewAbles?

Design options for the

Green Climate Fund to support

renewable energy feed-in tariffs

in developing countries


Axel Michaelowa, Stephan Hoch

with contributions from Stefan Schurig and Sonja Butzengeiger

September 2013

Key MessAGes

The Green Climate Fund is becoming a key UNFCCC climate finance institution, which

aims to make a “significant and ambitious contribution” to global mitigation efforts.

Renewable energy Feed-in Tariffs (REFIT) have been highly effective in many countries, and provide a proven example of a results-based climate finance instrument, if tuned carefully over time to be sustainable.

A Renewable Energy FIT Facility or Fund at the GCF Private Sector Facility would be an ideal institutional home to implement REFITs at scale in developing countries.

A prompt start of pilot activities should be implemented to build experience, including on how to measure, report and verify mitigation impacts of REFITs as supported Nationally Appropriate Mitigation Actions (NAMA) by developing countries.

ACKnowleDGeMents This policy paper has been prepared with funding from the World Future Council.

ACronyMs ADC Advanced developing country BMF Business model framework CDM Clean Development Mechanism CER Certified Emission Reduction CIF Climate Investment Funds CMP Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol COP Conference of the Parties CSP Concentrated solar power DECC Department of Energy and Climate Change DNA Designated National Authority DOE Designated Operational Entity EB (CDM) Executive Board ESMAP Energy Sector Management Assistance Programme GCF Green Climate Fund GDP Gross Domestic Product GEF Global Environment Facility GHG Greenhouse gas GRF GCF REFIT Facility GW Gigawatt IGES Institute of Global Environmental Strategies IMF International Monetary Fund IIE International Implementing Entity IPCC Intergovernmental Panel on Climate Change KfW German Development Bank (Kreditanstalt für Wiederaufbau) kWh Kilowatt hour LDC Least Developed Country MIC Middle income country MFE Multilateral funding entity MRV Measurement, Reporting and Verification MWh Megawatt hour NAMA Nationally Appropriate Mitigation Action NMM New Market Mechanism NFE National Funding Entity NIE National Implementing Entity PIN Project Information Note PoA Programme of Activities PSF Private Sector Facility PV (Solar) Photovoltaic REFIT Renewable Energy Feed-in Tariff QA/QC Quality Assurance and Quality Control SB Standardized Baseline SREP Scaling-Renewable Energy Programme SDR Special DrawingRights tCO2 Tonne of carbon dioxide UNFCCC United Nations Framework Convention on Climate Change ForeworD

From Anders wijkman and stefan schurig:

The climate scientists unfortunately leave no doubt. The 5th Assessment Report of the International Panel on Climate Change of the United Nations (IPCC) launched in September 2013 states: “Warming of the climate system is unequivocal and since the 1950s, many of the observed changes are unprecedented over decades to millennia.

The atmosphere and ocean have warmed, the amounts of snow and ice have diminished, sea level has risen, and the concentrations of greenhouse gases have increased.”1 It is common knowledge that developing countries are most vulnerable to the devastating impacts of climate change already taking place in many parts of the world. However, it is equally important to mention that addressing the causes of human-induced climate change, chief among them the combustion of fossil fuels, would also risk making poverty reduction more difficult – and expensive – for low-income countries, not least in Africa.

Investments in alternatives to fossil fuels may still appear to be more expensive too many observers, at least seen in a short-term perspective.

This being said, developments in both renewables and energy efficiency technologies have been very promising in the recent past. Over time, the costs for solar, wind and efficient biomass have been reduced significantly. This means that there are great opportunities to accelerate the economic development of many developing countries along a green trajectory. Transforming the energy infrastructure towards low-carbon technologies in both industrialized and developing countries is a critical component of the climate change action program that is absolutely necessary to prevent dangerous climate change.

With this report the WFC offers a timely and concrete contribution to the emerging design and architecture of the Green Climate Fund (GCF). The objective of the GCF is to ”promote a paradigm shift towards low-emission and climate-resilient development pathways by providing support to developing countries to limit or reduce their greenhouse gas emissions and to adapt to the impacts of climate change.” 2The suggestions in this report are perfectly designed to meet this objective.

This report offers institutional design options – renewable energy feed-in tariffs - that would allow rapid implementation of renewable energy technologies in developing countries.

A key element is that funding support through the feed-in tariffs would only be distributed against performance, i.e once the renewable energy technology provides electric power to the communities in need.

Anders wijkman is a member of the World Future Council, co-president of the Club of Rome, former president of Globe EU and has been active on environmental and development issues for many years. As a member of the European Parliament (1999–2009) he focused on issues related to climate change, environment, development cooperation and humanitarian affairs. He is a former assistant secretary general of the United Nations and policy director of the UN Development Program. Wijkman is a member of the Royal Swedish Academy of Sciences.

stefan schurig is Director Climate Energy at the World Future Council. He initiated the international policy campaign on renewable energy and the worldwide promotion of ‘Feed-in tariffs’ policies. In 2004 he was appointed member of the REALISE Forum, an international platform on renewable energy policies led by the European Commission.

Schurig authored and co-authored numerous publications on climate and energy issues including the concept-proposal for a Renewable Energy Policy Fund (2009). He works as a direct advisor for governments and parliamentarians around the globe.

1 IPCC WGI AR5 SPM-36 27 September 20132 www.gcffund.net

suMMAry Transforming the energy infrastructure towards low-carbon technologies in both industrialized and developing countries is a critical part of the global greenhouse gas mitigation efforts that are necessary to limit dangerous climate change. Renewable Energy Feed-in tariffs (REFIT) have been crucial policy instruments to rapidly expand renewable electricity generation in Europe, and have been taken up in a rapidly increasing number of countries outside Europe in the last years. This policy paper argues that the Green Climate Fund (GCF) should become a key UNFCCC vehicle to support further diffusion of REFITs in developing countries to a level that mobilizes the hundreds of gigawatts of renewable energies required for a 2° C stabilization scenario. The GCF aims at making a “significant and ambitious contribution” to these efforts, guided by the principles of the UNFCCC.

As the GCF is currently still emerging, we offer institutional design options that would allow facilitating rapid implementation, provided there is a sufficient capitalization.

REFITs are fully consistent with the spirit of results-based financing and could be embedded within the GCF’s Private Sector Facility (PSF). For an effective, efficient, flexible and scalable design, several important aspects require consideration. It is key to decide on the criteria for the support of REFITs ex ante, i.e. a tariff level that does not lead to overfunding, precise definitions of eligible technologies that prevent an exaggerated level of rent-seeking, a sufficient duration of REFIT payments in order to investments, availability of grid or mini-grid access and guarantees of payment from the off-taker, as well as credibility of the institution disbursing the REFIT. These criteria need to be differentiated in order to address different country circumstances. A critical question is how the modalities of a REFIT mechanism can be made compatible with (enhanced) direct access models to the GCF. A REFIT Committee could decide on applications from governments, but is likely to need evaluation support by independent expert reviewers or auditors.

Even in a medium-sized country, a REFIT can trigger very large renewable energy investments of gigawatt (GW) scale, and thus the cost differential to conventional energy could reach several hundred million per year. Therefore, it is crucial to differentiate the share of cost differential covered by the GCF according to country groups. LDCs could be entitled to coverage of the full differential, whereas the covered share would decline in middle income countries and advanced developing countries, respectively. The institutional setting would have to enable a transparent, but rapid adjustment of the REFIT support payment over time to prevent inefficiencies of REFIT support seen in several European systems.

Given that progress in the operationalization of the GCF currently is slow, a trust fund for a pilot phase of REFIT support could be set up quickly by a progressive group of donor governments in order to allow a rapid start. A trust fund of 1 billion could finance 1-3 GW of renewables (see section 5). The trust fund should be designed with the clear aim of serving as a pilot phase for a REFIT funding window of the PSF.

tAble oF Contents Acronyms



1. IntroDuCtIon AnD hIstory oF the IDeA oF A GlobAl reFIt FunD

2. stAtus quo oF the GCF

2.1 Access

2.2 Financing instruments

2.3. Results-based Financing

2.4 Private Sector Facility

2.5 Critical issues

3. Key eleMents oF reFIts AnD eFFeCtIve polICy InteGrAtIon

3.1 Design of REFITs

3.2 Precedents and lessons for GCF-supported REFITs from other policy instruments

4. ConCept For FIt support by the GCF reFIt FACIlIty.............14

4.1 Criteria for support of FITs in order to prevent overfunding

4.2 Evaluation of the key parameters of FITs by the GRF

5. whAt CAn be ApproprIAte next steps?

6. reFerenCes

1. IntroDuCtIon AnD hIstory oF the IDeA oF A GlobAl reFIt FunD In light of the magnitude of the challenge of financing mitigation and adaptation efforts in the developing world, a critical challenge is how to ensure that financial flows to developing countries achieve the envisaged outcome cost-effectively.

Internationally, renewable energy feed-in tariffs (REFITs) have proven to be an effective means to rapidly increase the generation of renewable electricity; they have clearly outcompeted renewable quota trading systems, tender programmes or direct investment subsidies.

REFITs have spread beyond industrialized countries and were applied by 65 countries and 27 states worldwide (GCF 2013d: 2) worldwide as of 2012. Therefore, REFITs have been instrumental to advance progress in renewable energy technology development, by enabling economy of scale effects to bring costs down more rapidly than even optimists had anticipated. Becker and Fischer’s (2013) assessment of China, India and South Africa shows, however, that these large countries have preferred auction-based tariffs instead of classical FITs. Still, as long as there is a minimum level of confidence in government institutions, the strong advantage of REFITs compared to other renewables support policies is to provide investment security given that the tariff usually is made available for 10-20 years and there is a guarantee that the power produced will actually be taken by the grid operator and remunerated. This then induces financial institutions to provide loans to renewable power producers and leads to the emergence of a renewable electricity “ecosystem”. This certainty is a critical aspect of the effectiveness of REFITs due to the long periods of time that are typically needed for energy production infrastructure development.

In many countries, REFITs are generally financed by a supplement to the electricity tariff of final users. This means that the end-users subsidize the additional cost of the REFIT as in many countries energy-intensive industry has been exempt in order to safeguard competitiveness. There has not been relevant opposition to this system, except in Germany where the surcharge has become so high that it now constitutes a significant share of the end user electricity cost. If available, however, this surcharge could also be replaced with other sources of funding.

Therefore, regarding efficiency of the policy scheme, the key challenge for REFITs is to avoid “overfunding” which could result if the electricity generation costs of renewable technologies fall while the REFIT is not adjusted in a timely manner. Such situations have occurred in the context of solar PV in Germany, Italy and Spain. Overfunding led to a massive expansion of renewable capacities. A simultaneous decrease in wholesale electricity prices and excessive exemptions for industry increased the consumer-financed cost differential, which raised concerns about energy costs. Policy-makers then overreacted, slashing REFITs to levels at which even the most efficient companies could not build renewable energy capacities.

As the availability of domestic finance is often a key barrier to rolling out REFITs in developing countries, there have been several attempts to introduce an international support scheme for REFITs. In 2009, the World Future Council was among the first to propose a “Renewable Energy Policy Fund”, which would allow for replicating the positive experiences with REFITs in developing countries, financed from a range of innovative sources, including Special Drawing Rights of the International Monetary Fund (IMF) (WFC 2009).

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