Market Facilitation Activities

Market facilitation activities are public investments to implement the rules, regulations and procedures that help to facilitate or accelerate renewable energy project development.  The most important of these activities are:

		Small Power Producers Programs have been implemented in several developing countries to streamline the development process for small renewable energy power projects.  The programs will often include the development and implementation of standardized power purchase agreements, tariff setting procedures, interconnection regulations, and technical standards.
		Standardized Power Purchase Agreements are a form contract that defines the legal terms and condition for the sale of power, the roles and responsibilities of the parties to the PPA, interconnection and transmission provisions, tariff and rules for price adjustments, operating requirements and restrictions, and dispute resolution.
		Tariff Setting Procedures are needed to provide long-term predictability for project finance or equity investment.
		Interconnection regulations are needed that create sound and uniform interconnection standards and reduce interconnection hurdles and costs.
		Infrastructure supports are a variety of policies to build and maintain “market infrastructure,” including design standards, accelerated siting and permitting, equipment standards, and contractor education and licensing.
		Public awareness, information and training about renewable energy and the environmental impacts of energy generation is required, especially in developing countries.
		Government procurement  policies can help to promote commercial development of renewable energy by requiring that government agencies purchase renewable electricity and renewable energy systems.

Small Power Producer Programs

Five innovative nations in Asia have been among the first in developing small power producer (SPP) programs to promote renewable energy development in-country. These programs have been very successful in promoting a substantial number of renewable energy projects.  In just a few years following their implementation, 4 percent of power supply in India and Thailand comes from SPP renewable energy projects.¹

The SPP programs in these five Asian nations had key similarities, such as: 

• All were motivated by the need for long-term increases in power generation capacity,
• Each country has significant renewable energy resource potential,
• Each country had IPP developers seeking to develop renewable energy projects,
• Each program employed either deliberately or de facto a standardized PPA, and
• Each employed an avoided cost concept (albeit a different approach) to establish the SPP tariff structure.

Several important lessons for SPP program design and policy were revealed by analyzing these programs:

• A policy-driven framework for structured SPP project development is necessary. A system of law, regulation, and utility interface must exist to facilitate orderly SPP development.
• A transparent process is required to build confidence among developers, investors and lenders.
• An SPP program can be initiated and sustained either by an open offer to execute PPAs, or by an ordered and time-limited solicitation process.
• An open offer allows a constant rolling development of SPPs, much like the original PURPA design in the United States.
• An ordered solicitation can inject competitive bidding which, if correctly administered, results in bid price reduction and competition for the best projects and sites.
• The single state buyer of power in most of the electric sectors can more robustly and efficiently promote renewable SPPs, either by (a) a program for purchase of all SPP power at its full value (avoided cost) to the wholesale system, or (b) the introduction of some combination of third-party retail sales, net metering–energy banking, or third-party wheeling.
• Utilities must interconnect with SPPs according to open and transparent procedures.
• In systems experiencing current and projected shortages of power, payment of long-term full avoided cost (capacity and energy) for renewable energy and small power development can accelerate their deployment.
• In many SPP programs, additional subsidies or incentives, reflecting fuel diversity and environmental advantages, are utilized to assist higher-cost renewable energy and smaller SPP projects.
• SPP tariff structures designed to include capacity payments that pay only for each delivered KWh provide the maximum incentive to the SPP for dedicated performance and delivery of power at peak periods, while not invoking any coercive penalties against the SPP for failure to perform to a set standard.

Standard Power Purchase Agreements

Between 1993 and 2003, five nations in Asia implemented small power producer (SPP) programs to promote renewable energy development in their countries² .

Each of these programs has used a standardized PPA—some have deliberately created it, whereas others have used a utility PPA that has been implemented unilaterally as a standardized contract format. The PPAs are analyzed as to:

• Basic structure
• Elements of power sale and metering
• Allocation of various risk parameters among the parties to the PPA
• Interconnection and transmission provisions
• Tariff and price design for the power sale transaction
• Parameters of SPP operation and breadth of obligation
• Dispute resolution

In each of the countries with a designed rather than de facto standardized PPA, consultants recommended a design and legal draft for the PPA. In each instance, they recommended a structure that relied on prior successful experience in the United States and other Asian countries.

The table below displays salient comparative elements of program design and implementation in five of the programs surveyed.

Comparative Program Overview

Note that two of the five programs subsidize renewable energy SPPs. Thailand does so by providing a project-specific subsidy through a competitive solicitation process. Andhra Pradesh does so by providing a tariff in excess of true avoided cost for renewable energy SPPs.

Three of the programs use an open offer approach in which there is an outstanding PPA offer for SPPs to accept.    The other two countries more carefully rationed the PPA opportunities by utilizing a controlled solicitation of bids from prospective SPPs to award PPAs.   In this situation, the SPP makes an offer or bid to the utility, which the utility may or may not accept.

The table below displays salient comparative elements of PPA design and contractual entitlement in five of the programs surveyed.   Note the differing and evolving policies in different programs on direct SPP retail third-party sales, self-wheeling and net metering or energy banking.

Comparative PPA Elements

None of these five Asian programs currently allows direct third-party retail sales of power by the SPP.   It was previously allowed in several Indian states, but discontinued because it was too threatening to the utilities.

Tariff Setting Procedures

Procedures for establishing, maintaining and changing tariffs need to be transparent, consistent and fair if small power producers, especially producers of renewable energy systems, are to flourish.   Various approaches to developing and adjusting tariffs are illustrated for the five Asian SPP programs.

There are some interesting common elements on tariff design. Indexation to foreign exchange rates was contemplated in most instances, but ultimately not implemented.  (Thailand’s capacity payment is an exception).  In some Indian states, the tariff is indexed to inflation to keep value in international currency amid local inflation.

Other countries unilaterally review and may adjust the tariff at a prescribed time. The purpose of this adjustment is to reflect changes in the energy component of the tariff, which changes both as marginal fuel costs change, as well as when foreign currency rates change and the marginal fuel is an imported commodity for the country. Although important, this periodic adjustment does not provide long-term predictability for project finance or equity investment.

The table below displays salient comparative elements of the PPA tariffs in the SPP programs.

Comparative Tariff Elements

Note that the avoided cost concept and a standardized PPA are generally utilized. This is consistent with the still-in-place PURPA requirements in the United States. Avoided cost is generally deemed the equitable point where the utility system gets power at its opportunity cost of alternative power supply.

Retail consumers also are indifferent between utility supply and SPP supply if the avoided cost is paid for this power on a wholesale basis. However, not every program pays the long-term avoided cost for long-term firm power commitments. Although some programs differentiate long- and short-term avoided costs depending on the firm or non-firm structure of the PPA, some countries only pay short-term energy-only avoided cost regardless of the nature of the PPA obligation.

Some programs have varied or capped the avoided cost concept. The Indian state programs cap the tariff at 90 percent of the industrial retail tariff; the Sri Lankan program caps the tariff paid to non-dispatchable providers. All programs periodically adjust the tariff. This is necessary, at the least, to reflect changes in marginal costs of fuel, a significant element of avoided energy cost. Some programs have indexed their tariffs to foreign exchange, such as the Thai program for avoided capacity; most adjust their tariffs periodically, based on different criteria.

Interconnection regulations

Most renewable energy promotional policies require utilities to interconnect to existing utility lines.  However, some utilities may insist on unreasonable interconnection standards, or they may charge high prices for transmission access.   Lack of reasonable interconnection standards can significantly increase the development costs for new renewable energy power plants.    Therefore, sound but appropriate interconnection standards are needed along with a transparent and reasonable method to determine access charges.

Safety and power-quality risk from non-utility generation is a legitimate concern of utilities, but a utility may tend to set interconnection requirements that go beyond what is necessary or practical for small producers.  Interconnection regulations worked out in a cooperative manner by government, developers, utilities and experts can provide more reasonable but still technically sound requirements.  

In addition, because some renewable energy resources like windy sites and biomass fuels may be located far from population centers, construction of new transmission lines may be needed to fully develop those sites.  Interconnection rules can also help determine what portion of the investment in new transmission lines should be provided by the renewable energy producers and the utility.

Infrastructure supports

A variety of policies are used to build and maintain “market infrastructure,” including policies for design standards, accelerated siting and permitting, equipment standards, and contractor education and licensing.

Additionally, policies to induce renewable technology manufactures to site locally, and direct sales of renewable systems to customers at concessionary rates facilitate market development.

• Construction and design policies. Construction and design standards include building-code standards for PV installations, design standards evaluated on life-cycle cost basis, and performance requirements. Policy examples include Tucson, Arizona, which requires that commercial facilities achieve a 50% reduction in energy usage over 1995 Model Energy Code, and Florida, which requires that all new educational facilities include passive solar design.
• Site prospecting, review and permitting. Federal and state programs reduce barriers to renewable energy development through resource, transmission, zoning, and permitting assessments. This particularly helped early promotion of wind energy projects in California. On a national scale the Utility Wind Resource Assessment Program funds a number of supporting activities, including up to 50% of the cost of wind resource assessments. India also has a large wind assessment program, with over 600 stations in 25 states providing information to project developers on the best sites for development.
• Equipment standards and contractor certification. A variety of equipment-related standards and certification measures have been applied to ensure uniform quality of equipment and installation, increasing the likelihood of positive returns from renewable energy installations. Contractor licensing requirements ensure that contractors have the necessary experience and knowledge to properly install systems. Equipment certifications ensure that equipment meets certain minimum standards of performance or safety.
• Industrial recruitment. Industrial recruitment policies use financial incentives such as tax credits, grants, and government procurement commitments to attract renewable energy equipment manufacturers to locate in a particular area. These incentives are designed to create local jobs, strengthening the local economy and tax base, and improving the economics of local renewable development initiatives.
• Direct equipment sales. These programs allow the consumer to buy or lease renewable energy systems directly from electric provider at below-retail rates. Some programs provide a capital buydown. Examples include Arizona, which provides a buydown of $2/peak-watt for PV, and California’s SMUD, which offers a 50% buydown plus 10-year financed loans and net metering.

Public awareness, information and training

General education to raise public awareness about renewable energy and the environmental impacts of energy generation is required, especially in developing countries.  Capacity building is generally required to support the development of effective programs for raising public awareness, especially with the key stakeholders.  The public outreach is typically done via websites and printed materials.

Government Procurement

Government procurement policies can help to promote sustained and orderly commercial development of renewable energy by encouraging or requiring that government agencies purchase renewable electricity and renewable energy systems. 

Governmental purchasing requirements and guidelines can reduce uncertainty and spur market development through long-term contracts, pre-approved purchasing agreements, and volume purchases.