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Bank Study: How Policy Incentives Make Concentrating Solar Power Cost-effective

August 30, 2011

Legend has it that Archimedes used “heat rays” created by mirrors deflecting sunlight to set fire to Roman ships that laid siege on Syracuse in 212 BC. Some doubt that this actually happened, but Archimedes’ idea of tapping the sun’s energy is now more relevant than ever. In July 2010, the Italian utility Enel opened a five-megawatt concentrating solar power (CSP) plant just outside Syracuse, Sicily. This new plant, named Archimede, is one of many new solar power plants that have come on line around the world in recent years.

Nataliya KulichenkoIn all three cases we studied — India, Morocco and South Africa — we found that concessional loan terms and interest rates achieved the largest reduction effect on the levelized cost of electricity. || 
Nataliya Kulichenko, Senior Energy Specialist, The World Bank

The CSP market is growing fast. Renewable Energy World reported recently that about 17.54 gigawatts (GW) of CSP projects are under development worldwide. The U.S. is leading with about 8.67 GW of already installed or planned solar capacity, while Spain ranks second with 4.46 GW, and China third with 2.5 GW. Bringing these new plants online will mean a 15-fold increase in currently existing worldwide capacity of 1.17 GW. These figures combine both concentrating solar thermal power (CST) and concentrating photo-voltaics (CPV). Although the numbers change almost monthly in this rapidly-evolving sector, more than three quarters of this energy is on the CST side.

Even if solar energy is natural, renewable and clean, tapping it depends on deploying these innovative technologies in a cost-effective way. This, in turn, depends on designing the right policy incentives.

Many developing countries in North Africa, the Middle East, Southern Africa and South Asia have just the right conditions for CSP, namely deserts. Given these countries’ interest in developing their solar energy resource, two experts with the World Bank’s Energy Team set themselves the task of coming up with policy analysis and advice that would stimulate cost-effective CST scale-up in such countries.

In their report, Regulatory and Financial Incentives for Scaling Up Concentrating Solar Power in Developing Countries, the experts, Nataliya Kulichenko and Jens Wirth, drew on policy experience with CST in developed countries, focusing on Spain and the U.S. in particular.

Key messages that emerged from their research:

  • Analysis suggests that concessional financing is needed to reduce the upfront cost of the first concentrating solar thermal power plants established in most developing countries.

  • Effective incentive policies are those that deliver the lowest possible societal cost of CST. For developing countries that are new entrants in the CST market, a combination of reverse auctions with feed-in tariffs could be a suitable incentive model.

  • Setting up policy incentives for establishing local manufacturing of some of CST components, and local provision of key services, such as operation and maintenance, is critical to reduce the CST deployment cost.

“Our purpose in this study was to learn from the experience of several countries how they reduced the cost of CST energy,” said Nataliya Kulichenko. “In all three cases we studied —India, Morocco and South Africa — we found that concessional loan terms and interest rates achieved the largest reduction effect on the levelized cost of electricity. That is convincing evidence that concessional financing is just about essential to make CST cost-effective, especially at the startup stage.”
Kulichenko also pointed to India’s experience with reverse auctions in combination with feed-in tariffs, as an effective way of stimulating private sector developers to enter new CST markets.

The report cites local manufacturing of CST components and local delivery of CST-related services as one of the key elements in reducing the technology costs. It also outlines the potential of developing such local capacity in the Middle East and North Africa, and South Africa.

Finally, the Bank study reviews the performance of procurement practices, including tendering models, bid selection criteria and the structuring of power-purchase agreements.

The study was financed by the Energy Sector Management Assistance Program.

More Information:

Contributed by Christopher Neal, Senior Communications Officer, Transport, Water and Information and Communication Technology

Last updated: 2011-08-12

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