Electricity Tariffs

More Haste Less Speed: Controlling The Escalating Costs of Feed In Tariff (“FiT”) Programs in Africa

 

 

In April 2015, the authorities in Ghana announced reductions in the capacity of solar photovoltaic (“PV”) projects that may qualify for financial support under its FiT Program. If implemented, the installed capacity of a PV project that is connected to the main Ghana Grid Company’s transmission network will go down from 150MW to 20MW. The capacity of a project connected to the Electricity Corporation of Ghana’s distribution network will go down from 150MW to 10MW.  Ostensibly, this measure will enable the authorities to ascertain the impact of the country’s first large 150MW PV project on the grid system. Clearly, this is an attempt to contain the escalating costs of the program due to the oversubscription. (PV Tech, 2015).

Similarly, in October 2016, the Kenyan Energy Regulatory Commission announced that it was following South Africa’s example by replacing its existing FiT Program with a competitive auction process. Likewise, earlier in July 2015, the Ugandan Government removed its guaranteed pricing support for PV projects under Phase 2 of its Renewable Energy FiT Program and replaced it with an auction process to accurately sync payments with project costs decreases. (PV Magazine).

Interestingly, these developments in Ghana, Kenya, Uganda and South Africa are not new. In the latter part of the 20th century, trailblazing programs in Spain and other countries faced similar birthing pains of unanticipated over subscription costs. The Spanish authorities had to enact legislation to scale back its monetary support. (Kreycik et al., 2011).

While the escalating cost of implementing FiT program is a cause of concern, the knee-jerk manner by which it is being scaled back in these early adopting countries may undermine investor confidence in the sector. If cutbacks are needed, a nuanced approach instead of drastic rollbacks should be the preferable policy option as this article will demonstrate.

Worldwide, FiT looms large in comparison with other public policy tools used to incentivize the deployment of renewable technologies. The other tools such as Renewable Portfolio Standards are regulatory quotas set by jurisdictions to mandate their power generators or load serving entities to generate a portion of their power from renewable energy sources. Tax credits, subsidies, rebates and accelerated asset depreciation methods are further policy options that inject direct government monetary support into the renewable energy sector.  (REN 21 Renewables 2011 Global Status Report on FiTs, 2011).

Based on long-term contracts between 15 to 20 years, FiT provide guaranteed access to the grid together with payments to developers based on the cost of energy (Kreycik et al., 2011). These guaranteed payments are either structured to cover the cost of the electricity or electricity bundled with Renewable Energy Certificates (RECs). RECs are the environmental attributes of the power produced from the renewable energy source. They are typically sold or traded separately from the electricity itself. (The United States Environmental Protection Agency, 2006)

FiT has been the key driver of renewable energy development in Europe in the past thirty years. Closely tracking the experience in Europe, most African countries have conceptually embraced FiT programs as the most prominent policy option to spur the development of renewable energy (Meyer-Renschhausen, 2010).  Conceptually, African FiT programs are cost based programs that prudently attempt to strike a balance between cost control and market stability.

Compared with the other widely used policy options, FiTs have proven more resilient in spurring renewable energy development and development. The fixed priced scheme stabilizes electricity prices and creates investment certainty for developers and investors. Data from early adopters in Europe like Germany and Spain also demonstrate that a well-designed FiT policy and structure can positively impact job creation and economic growth. (Cory et al., 2006)

However, if it is ill implemented, FiT programs can lead to escalating policy costs. It can also result in burdensome ratepayer costs. Concerns over its escalating costs require refined containment measures to enable policy makers to exert more control over implementation outcomes. Thus, frantic midstream changes or ad hoc cost control measures can send uncertain price signals to the market. Three widely used FiTs cost containment mechanisms are:

i Caps
ii. Payment-Level Adjustments and
iii. Auction-Based/Competitive Bidding

Although caps, as implemented in Ghana have proven elsewhere to provide a predictable limit on program costs, it may limit developers’ access to the market. (Kreycik et al., 2011). Additionally, project size caps can limit the economies of scale or proportionate savings in costs that is gained by an increased level of production that is essential for renewables to thrive in the long term. (Kreycik et., al, 2011). Also, if they are implemented in isolation, caps may not be adequate to balance the competing need to contain costs and the imperative of sustaining investor interest in the market.

Consequently, instead of blanket caps targeted at either capacity, program cost or energy production, nuanced approaches may be more durable and less disruptive. For instance, instead, a sudden reduction in capacity limits, streamlining the application procedure through a Queuing Process (first come, first served) may have ameliorating effects. In adopting a Queuing Process, a set number of applications could be accepted on a cycle or periodic basis. If there is oversubscription in a capacity level than what is assigned for that period, a transparent selection and the unserved capacity could be rolled over into the next procurement cycle. This process may prevent the queue from filling up for years in advance and also build assurance that the most prepared projects will receive contracts (Gainesville, Florida Regional Utilities FiT Program).

Demonstrably, payment level adjustments to control incremental and total policy costs may be even more efficient in providing market signals about future payment levels. It can also encourage innovation resulting in further technology cost reductions (United States National Energy Laboratory on Feed in Tariffs, 2016). Again, if they are comprehensively tailored with detailed parameters addressing real time adjustments (up or down) and specific annual degression (a mechanism for ratcheting down tariffs over time due to future costs reduction) they might control price expectations much better.

As evidenced in Kenya and South Africa, auctions or other competitive bidding systems are essentially, a replacement policy to FiTs, not improvements to it. However, these measures can successfully be implemented in conjunction with FITs. In 2008, China, for instance began using an annual competitive bidding process to set regional competitive benchmark electricity prices. Energy contracts that set these parameters operated essentially as FITs. (Ming and Ximei, 2013)

In sum, I will caution against the frantic and abrupt rollback of FIT programs. African countries should not join the FiT bandwagon without properly assessing its supporting financial resources. They should also build into their programs flexible mechanisms if they need to scale back the program due to escalating costs.