Perspectives for Distributed Generation with Renewable Energy in Latin America and the Caribbean

7/31/2019 Perspectives for Distributed Generation with Renewable Energy in Latin America and the Caribbean

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Perspectives for

Distributed Generationwith Renewable Energy inLatin America and theCaribbeanAnalysis of Case Studies forJamaica, Barbados, Mexico,

and Chile

Christiaan Gischler andNils Janson

Inter-AmericanDevelopment Bank

Capital Markets andFinancial InstitutionsDivision

DISCUSSION PAPER

No. IDB-DP-208

November 2011


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Perspectives for DistributedGeneration with Renewable Energyin Latin America and the Caribbean

Analysis of Case Studies for Jamaica, Barbados,Mexico, and Chile

Christiaan Gischler andNils Janson

Inter-American Development Bank

2011


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http://www.iadb.org

The Inter-American Development Bank Discussion Papers and Presentations are documents prepared byboth Bank and non-Bank personnel as supporting materials for events and are often produced on an

expedited publication schedule without formal editing or review. The information and opinions presentedin these publi cati ons are entirely those of the author(s), and no endorsement by the Inter-AmericanDevelopment Bank, its Board of Executive Directors, or the countries they represent is expressed or

implied.

This paper may be freely reproduced.


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PerspectivesforDistributedGeneration

withRenewableEnergyinLatinAmericaandtheCaribbean

Analysi sof CaseStud ies for Jamaica ,Barbados ,Mexico ,andChi le

ChristiaanGischlerandNilsJanson

PresentedattheFifthAmericasCompetivenessForumforthe

Inter-AmericanDevelopmentBankandCompeteCaribbean

SantoDomingo,DominicanRepublic,October57,2011


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DistributedGenerationwithRenewableEnergyChristiaanGischlerandNilsJansonPage2

TableofContents

Abstract........................................................................................................................................................4

Introduction:OutliningScope,Definition,andRationale............................................................................9

Scope of the Analysis: Renewables, Emerging Markets in LAC, Competitiveness, and Economic

Growth.....................................................................................................................................................9

DefiningDistributedGenerationBasedonItsLocationintheNetwork..................................................9

RationaleforRenewableDGinEmergingEconomies:ReducingElectricityCostsandOtherBenefits.11

CurrentStatus............................................................................................................................................13

HowMuchDGAreCountriesWorldwideDoing?HowMuchIsRenewable?..........................................13

Denmark:TheExperienceoftheWorldsMostAdvancedDGMarket..................................................15

AnalyzingtheDGExperienceofFourLACCountries..................................................................................16

Jamaica...................................................................................................................................................17

Context:AVerticallyIntegratedSystemwithHighCostsandPricesofElectricity............................17

ViabilityofRenewableDG:GoodOptionsatCommercialScale,NotYetatSmallScale...................18

Framework for Renewable DG: Feed-In Tariff at Avoided Cost for Small Renewable DG;

CompetitionandLeastCostPlanningforAlltheRest........................................................................20

Analysis:ASoundFrameworkthatCouldBeImprovedforSmall-ScaleRenewableDG....................21

Barbados................................................................................................................................................22

Context:AVerticallyIntegratedSystemwithHighCostsandPricesofElectricity............................22

ViabilityofRenewableDG:GoodOptionsonaCommercialandSmallScaleThankstoConcessional

Financing............................................................................................................................................23

FrameworkforRenewableDG:BarbadostowardaSustainableEnergyFramework........................24

Analysis:SoundSustainableEnergyFrameworkforCommercial-andSmall-scaleRenewableDG.........25

Mexico....................................................................................................................................................26

Context:ASingle-BuyerMarketwithLowCostsandPricesofElectricity..........................................26

ViabilityofRenewableDG:GoodOptionsatCommercialScale,NoneatSmallScale.......................28

FrameworkforRenewableDG:EvolvingfromFinancialtoEconomicLeastCost..............................29

Analysis:ViableDGIsAlreadyHappening,ButtheFutureIsUnclear................................................30

Chile.......................................................................................................................................................32


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Context:ACompetitiveElectricityMarketwithRelativelyHighElectricityPrices.............................32

ViabilityofRenewableDG:GoodOptionsonCommercialScale,NoneonSmallScale.....................34

FrameworkforRenewableDG:ComprehensiveFrameworkforCommercial-ScaleDG,Stillinthe

WorksforSmall-ScaleDG...................................................................................................................35

Analysis: A Mix of Competition, Targets, and Incentives for Commercial Scale; An Unclear

FrameworkforSmallScale.................................................................................................................36

SummaryAnalysisofRenewableDGinJamaica,Barbados,Mexico,andChile........................................38

Recommendations:HowtoPromoteCompetitiveDG..............................................................................40

DefineDGClearlyandAppropriately,BasedonSystemSize.................................................................40

EnsurePowerSystemsAreDevelopedBasedonLeastCostGeneration..............................................41

NeutralizeThreatstoEfficientDG..........................................................................................................43

CombatInertiawithObligationsandIncentives................................................................................43

MakeItEasyandSafetoConnecttotheGridwithaGridCode........................................................44

UseStreamlined,StandardizedPermittingandPlanningApproaches..............................................45

ConsiderPayingMoreforPowerMayIncreaseCompetitivenessandGrowth.....................................45

AvoidtheTrapofPayingTooMuch.......................................................................................................48

References.................................................................................................................................................49


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AbstractThispaperdealswithhowtopromotedistributedgeneration(DG)donewithrenewableenergy(RE)in

emergingmarketsofLatinAmericaandtheCaribbean(LAC) ,withthepurposeofincreasingcompeti-

tiveness andachieving sustainableeconomic growth.The paper definesDG aselectricity generation

thatisconnectedtothedistributionnetwork.ThisdefinitionimpliesthatDGisi)grid-connected,not

off-gridgeneration;ii)locatedatcustomerpremisesorclosetotheloadbeingserved;andiii)imple-

mentedonasmallerscalethanthatofutility-scaleplantsconnectedtoatransmissiongrid.

Thepaperarguesthatthekey rationaleforpromotingrenewableDGinLACistoreducethecostof

electricityforacountryasawhole.Bydoingso,renewableDGalsodirectlycontributestocompetitive-

nessandeconomicgrowth.However,renewableDGalsoprovidesmanyotherbenefitsthatmayrepre-

sent viable rationalesfor countries topromoteit: reducing globalenvironmentalexternalities (green-

housegas[GHG]emissions);reducinglocalenvironmentalandsocialexternalities;supportingdevelop-

ment ofanewgreen industry; increasingenergy security; reducing system losses andunnecessary

generationcapacity;increasingaccesstoenergy;anddevelopingagreenbrand.Incertaincircumstanc-

es,theseotherrationalesmaycreateneteconomicbenefitsforacountry,andmayjustifypayingsome

premiumonelectricitycosts.

Thepaper examines fourcase studies in theCaribbean (Jamaica andBarbados) andLatin America

(MexicoandChile)toassesswhatthesecountriesareorarenotdoing,andwhy,inpromotingrenewa-

bleDG.Thesecasesarealsoassessedinthelightoftheexperienceof Denmark,whichhastheworlds

highestshareofDG (over50percentofelectricitygeneration),mostlydonewithwindandcogenera-

tion.Denmarksexperiencesuggeststhat,ifasocietyiswillingtopayapremiumforitselectricity,itcanreachahighpenetrationofrenewableDG,thusreducingGHGs,increasingenergysecurity,andeven

fosteringsuccessfulREequipmentmanufacturingforthelocalandglobalmarket.

ThepaperfindsthatallLACcountriesconsideredhavesomeviableoptionsforrenewableDGplantson

acommercialscale(plantswiththemainpurposeofsellingacontinuousflowofelectricity:particularly

small hydro, biomass cogeneration,wind, andbiogas).Renewable DG implementedona small scale

(plantswiththemainpurposeofgeneratingforself-consumptionandsellingexcesselectricity,particu-

larly solar photovoltaic [PV]) is viable in countrieswith very high costs of electricitygeneration,and

whereconcessionalfinancingis available (suchasBarbados).In othercountries,however, small-scale

renewableDGiscurrentlynotviable.

Generally,thefourcountriesconsideredhavealreadydeveloped(orareonthewaytodeveloping)their

viable renewable DGpotential ona commercial scale, thougheach in a differentwaydepending on

marketstructure.InJamaica,theutilityisregulatedbasedonleastcostplanningandaregimeforthird

partygenerationhasbeencreated.BarbadosrecentlyapprovedanREPolicy fora SustainableEnergy

Framework. InMexico, there are auctions fornew generation. Finally, Chile established limitedand

technology-neutraltargetsthatcanbemetwiththemostcost-effectivetechnologies.


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Thefourcountriesarealsoshowingcautioninhowtheyallownon-viablerenewableDGonasmallscale

tocontributetotheirenergymix.BarbadosoffersapilotRenewableEnergyRider(RER)thatpaysavoid-

edcost.JamaicaprovidesaStandardOfferContract(SOC)thatpaysavoidedcostplusalimitedpremiumfortheeconomicbenefitsofRE.Mexicoisimplementingitsfirstgrid-connectedsmallREsystemswith

netmeteringbasedonnewmodelcontracts.Meanwhile,Mexicoisdevelopingamethodologytoesti-

matetheneteconomicbenefitsofdecidinghowmuchREshouldbedevelopedinthefutureandwhat

pricesshouldbepaidforit.Chileisconsideringnetmeteringprogramsbutstillhasnotdecidedtheex-

acttermsforthem.Nocountry,inanycase,hassetratesforsmall-scaledistributedREatlevelsthatwill

ensurethefinancialviabilityof systemsthatarenoteconomicallyviable.In this,emergingmarketsof

LAChaveshownwisdom,thoughtfulness, andrestraint, especiallywhencomparedtoothermoreag-

gressiveapproachesadoptedinEuropeandNorthAmerica.

Basedontheencouragingexperienceof thecountriesexamined,thispapermakesfiverecommenda-tionsonhowtopromotecost-effectivedistributedREthatcancontributetothecompetitivenessand

growthofemergingmarketsinLAC.

1. DefineDGclearlyandappropriately,basedonsystemsize.Thefirststep ineffectivepolicymakingis settingcountry-specificboundaries regarding theobjec-

tivesofthepolicy.Forclarity,DGshouldbedefinedbasedonitsinterconnectionwiththedistribu-

tionnetwork.Additionaldefinitionsofcapacityortechnologytypecanbeprovidedforfurtherclari-

ficationifdesired,butwouldnot,ontheirown,clearlydefineDG.

2. Ensurethatpowersystemsaredevelopedbasedonleastcostgeneration.Leastcostplanningshouldbethecornerstoneofanypolicybecauseallcountrieshaveoptionsfor

distributedREthatareleastcostbutnotallarebeingimplemented.Ensuringthatalloptionsthat

makesense ineachcountryareidentified,assessed,and implementedwillhelpsetprioritiescor-

rectly,startingwiththewin-winoptions.Thiscanbedone

Forcommercial-scalerenewableDG,througheffectiveregulationandmarketdesign.Invertical-lyintegratedmarkets(suchasJamaicaandBarbados),effectiveregulationmeans:

an obligation on theutility to demonstrate that itsgeneration expansion plans are leastcost,andadutyonregulatorstocheckandenforcethatobligation;

anobligationontheutilitytopurchasefromthirdpartieswhenthecostislower.Inliberalizedmarkets(suchasMexicoandChile),effectivemarketdesignmeans:

non-discriminatorytreatmentofREinsellingenergyandcapacity; auctionstoawardadditionalcapacityand/orenergyatleastcost.

Forsmall-scalerenewableDG,throughwell-designedfeed-intariffs.Thispaperdefinesfeed-intariffsnotassubsidies,butsimplyasstandingofferstopurchasepoweratsomepredetermined


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price,forapredeterminedperiodoftime,andsubjecttocertaintechnicalrequirements.Well-

designedfeed-intariffs:

setthepriceatnomorethanactualavoidedcost; setthetermatleastequaltotheusefullifetimeofsystems; prefernetbillingtonetmetering(toseparatelymeasureandbilltheelectricityboughtbya

customerandexcesselectricitysoldbyacustomer);

capindividualandtotaleligibility.3. NeutralizethreatstoefficientDG.

Justbecauseleastcostgenerationmakessenseisnoguaranteethatitwillhappen.Inpractice,even

excellentprojectsmaybethreatenedbyinertia,inadequategridrules,andcumbersomepermitting

andplanningprocessesthatincreasetransactioncosts.

Effectivepolicywillanticipatethesethreats,andpreemptthem:

Amixofobligationsandincentivescanhelpcombatinertia : explicitobligationstoconsiderreasonableREoptionsinleastcostplanning; obligationsonutilitiestopurchasepowerfromthirdparties(independentpowerproducers

[IPPs])whenthisisatsomemarginbelowtheiravoidedcost;

limitedREportfoliostandardsthataretechnologyneutralandgradualinimplementation; cost recovery tariffmechanisms that ensuresuppliers canrecover theefficiently incurred

capitalcostsofdevelopingRE.

GridcodescanbeupdatedtomakeiteasyandsafetoconnecttothegridwithrenewableDG.Theyshouldincludetechnicalandoperatingstandards,reasonablerestrictions,andfairpricesto

chargeforgriduse.

Streamlined, standardizedpermitting andplanningapproaches canreducetransactioncostsandensurethatviableprojectsaredevelopedinreasonabletime:

one-stop-shopsforobtainingallrequiredpermits; technology-specificprocessesforenvironmentalandconstructionpermits; pre-establishedcontentsofEnvironmentalImpactAssessments; technology-specificstandardsforallowedimpacts; cut-offsizesforrenewableDGthatcanbeinstalledwithoutpermits.

4. Considerifpayingmoreforpowermayincreasecompetitivenessandgrowth.Aftereverythingisinplaceforwin-winoptionstotakeplace,countriesshouldexamineifthereare

anycircumstanceswherepayingapremiumisjustifiedonacostbenefitbasis.Economicconsidera-

tionsareimportant.Doespayingapremiumactuallycreateneteconomicbenefitstothecountry?

Thatis,areeconomicbenefitsgreaterthaneconomiccosts?Politicalconsiderationsarejustasim-

portant.Willvotersacceptpayingmore?Willtheyreelectpoliticianswhomakethemdoso?


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Payingapremiumforelectricitymaybejustified,forexample,inthefollowingcases:

Toincreasesystemresilienceandenergysecurity.Thereshouldbeaprudentdiversificationofwhichprimarysourcesofenergyareused,andwhichlocationsthesesourcesareobtainedfrom.

Alternativetoolsforenergysecurity(forwardcontracts)shouldalsobeconsidered.

Todevelopagreeneconomyandcreategreenjobs.Creatinganewgreeneconomyandgreenjobs isoftenusedasanargumenttosubsidizemanufacturingorservicesbutissubject torisks.

Tomitigatethoserisks,countriesshouldconsiderhelpinganewgreeneconomydeveloponlyif

thereisa strongpotentialdomesticmarketforthattechnology,andthecountryhas(orcould

develop in the future) the industrial capabilities required tomanufacture or service certain

technologies.

To reduce local and global environmental externalities. If a government decides that it isworthwhilepayingmoretomaketheenvironmentmoresustainable,itshouldattheveryleast

treatlocalandglobalenvironmentalexternalitiesdifferently:

Domesticconsumerswouldcapture thefullbenefitsofreducing localenvironmentalandhealthexternalities ;therefore,itmaybearguedthattheyshouldpaytheentirecost;

However, domestic consumers would only obtain a fraction of the benefits of reducingglobal environmental externalities (GHGs); therefore, governmentsof emerging markets

shouldbecarefulbeforedecidingthattheircitizenspaytheentirecostofreducingGHGs.

Win-winoptionsthatreduceGHGswhilealsosavingthecountrymoneyshouldbepromot-

edfirst.Otheroptionshaveanadditionalcostthatfromaglobalperspectivemaybejusti-

fiedandmayrepresentanefficientsolution.Emergingmarketsshouldseekconcessionalfi-

nancingandgrantsfrominternationalorganizations,orindustrializedcountries,todevelop

those projects.While theClean DevelopmentMechanism (CDM) is struggling,Nationally

AppropriateMitigationMeasures(NAMAs)areemergingasanewframework.

Topromoteacountrysbranding.Sustainableproductsmaybesoldatapremium;sustainabletourismdestinationsmay likewisebemarketedat apremium.However,thatpremiumshould

notbebornebythepopulationofanemergingmarket.

Toincreaseaccesstoenergy ,thusreducingenergypovertyandincreasingsocialinclusion. Thedeterminationofwhat premium is justified is likely toprove difficult andcontroversial.

Governmentsshouldtacklethisonastep-by-stepprocessthat: First,involveskeypublicandprivatestakeholders,anddetermineswhich itemsdeservea

premiumornot;

Second,developsamethodologyfordeterminingthepremiumtobepaid; Third,assesseseconomiccostsandbenefitstothecountry.


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5. AvoidthetrapofpayingtoomuchEvenwhena countrydecides thatpaying a premium isworthwhile, the premium should not be

looselysetandcustomersshouldnotenduppayingtoomuch.Threekeywaystoavoidthistrapare:

Tocreatedisaggregated,cost-reflectivetariffstructures.ThepremiumshouldbeaddedtothetariffcomponentthatisaffectedbythebenefitcreatedbydistributedRE.Forthistohappen,

theremustbedifferentcomponents fordifferentservices:provisionof energy,connectionto

thedistributiongrid,andprovisionofbackupandstand-bycapacity.Forexample,asolarPVsys-

tem(withoutbattery)maysaveonenergy(fuelcosts)butwillnotsaveonthoseotherservices.

Toalwayssettotalcapsonfeed-intariffprograms .Thefactthatsomepremiummaybejusti-fiedshouldnotmeanunlimitedeligibilityforfeed-intariffs.Otherwise,thepremiummayaffect

the quality of service and create unpredictable and unsustainable costs that ultimately are

bornebycustomers.Acountryshoulddecidewhattotalquantityisjustifiedtoprovidethede-

siredlevelofacertainbenefit.

Toalwaysprefernetbillingtonetmetering.Netmeteringisequivalenttosettingfeed-intariffsattheretailrate(i.e.,thecommercialtariff).Thatisthesameratethatshoulddecreaseinorder

toincreasecompetitivenessandcreatesustainableeconomicgrowth.Byimplementingnetbill-

ing,acountrywouldusebidirectionalmeterstoapplyacost-benefitjustifiedpremiumtoelec-

tricitysoldbygenerators,butnomorethanthat.

ThispaperbenefitedfromtheeditorialinputofSheilaMahoney.


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Introduction:OutliningScope,Definition,andRationaleThisintroduction defines thescopeof theanalysisof distributedgenerationof renewable energy to

increasecompetitivenessandachievesustainableeconomicgrowthinemergingmarketsofLAC.Then,it

definesDGbasedoninterconnectionwiththedistributionnetwork.Finally,itpresentsthekeyration-

alesforimplementingrenewableDGinemergingeconomies.

ScopeoftheAnalysis:Renewables,EmergingMarketsinLAC,

Competitiveness,andEconomicGrowthThispaperfocusesonDGthatis

DonewithRE technologiesthatareappropriate forDG(wind,smallhydro,solar, industryco-generation,biomasscogeneration,biogas,landfillgastoenergy,wastetoenergy);

DoneinemergingmarketsoftheLACregion ; Donewiththepurposeofincreasingcompetitivenessandachievingeconomicgrowth .

ThemainfocusofthispaperisonrenewableDGinanaccommodationstageofdevelopment:astagewhere

renewableDGisaccommodatedintothecurrentmarketwiththerightpricesignals,[and]centralizedcontrol

ofthenetworkremainsinplace(IEA,2002).Thatis,thispapertriestoidentifyasaprioritytheimmediate

opportunitiestoimplementrenewableDGinexistingsystemsofLACcountries,wherethelargestshareof

electricityisprovidedbycentralizedgeneration.Inthefuture,as technologicalprogressandcostreductions

increasetheeconomicviabilityofmorerenewableDGoptions,andasnetworksneedtobereplaced,coun-triescouldmovetowardthefollowingtwostagesofDGdevelopment(IEA,2002):

Adecentralizationstage(whichonlyDenmarkhasreached,withDGrepresentingover50per-centofgeneration),whereserviceisoptimizedbydecentralizedprovidersusingsharedcommu-

nicationsystems,butlocaldistributioncompaniesstillretaincontrolofthenetwork.

Adispersalstage(whichcurrentlynocountryhasreached),whereDGwouldmeetelectricitydemandwithlimitedrecoursetocentralizedpowergeneration,andcoordinationbetweenlocal

systemswouldbeinplaceratherthancontrolofoneentiresystem.

DefiningDistributedGenerationBasedonItsLocationintheNetwork

There isno universallyaccepteddefinitionofDG.Variousdefinitionshavebeenformulatedbasedon

location in thenetwork, type of technology, installed capacity, environmental impact,or ownership.

Except for thefirst (locationin thenetwork), none of these definitions canadequately capturethe

rangeofplantsthatcanbesubsumedundertheheadingofDG,nordotheyprovideasatisfyingdescrip-

tionoftheircommoncharacteristic(BauknechtandBrunekreeft,2008).


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Table 1 alsoshows typical renewableDG technologies andapproximatesize ofplants foreach type.

GiventhedefinitionofDG adopted,however,technology typesandinstalledcapacityarelikely tobe

differentdependingoneachspecificcontext.

RationaleforRenewableDGinEmergingEconomies:

ReducingElectricityCostsandOtherBenefits

BeforelookingatwhatspecificcountriesinLACaredoingregardingrenewableDG,thissectionmakesa

fewworkinghypothesesastowhytheymayormaynotbeimplementingit.

OnekeyrationaleforimplementingrenewableDGin emergingmarketsmaybetoreducethecostof

electricitytocustomers.Especiallyincountriesthatdependonexpensiveimportedfossilfuels(suchas

Caribbeancountries),renewableDGmayrepresentanattractivealternativetogenerateelectricityata

cheapercostusingdomesticnatural resources.Reducing thecostof electricityto customers requiresrenewableDGthatiseconomicallyviable ,definedasrenewableDGthatreducesthecostofelectricity

supplytothecountryasawhole.

Reducingthecostofelectricitytothecountryasawholemeansthatthecostofgeneratingonekilowatt-

hour(kWh)requiredbyaDGplantmustbelowerthanthecostrequiredbyutility-scaleplants.REtech-

nologiesthatsupply firmpower(i.e.,power that isprovidedwithout interruption and that can bedis-

patchedasbaseload)shouldbecomparedwiththeall-incostofgenerationofconventionalplants(i.e.,a

costthatincludesbothfixedexpenditureincapitalandvariableexpenditureinoperationsandmainte-

nance).RE technologiesthatprovidenon-firmpower(suchaswind,whichprovidesintermittentpower)

shouldonlybecomparedwiththevariablecomponentsofthecostofgenerationofconventionalplants

(becausewhenanon-firmREplantisbuilt,firmcapacityisstillnecessaryforbackupandstand-by).

Reducingthecostofelectricitytothecountryasawholealsomeansthatall,andnotjustsome,cus-

tomersmustenjoyareducedcostofelectricity.Inparticular,householdsorbusinessesthatdevelop

renewable DGplants should not enjoy a benefit in reduction of electricity costs at the expense of

householdsorbusinessesthatdonot.Forexample,incountrieswheretariffsarehigh,solarPVsystems

arenoteconomicallyviable(theycostmorethanotheravailablegenerationoptions),buttheymaybe

commerciallyviable(theycostlessthantheretailtariffandthereforesavemoneytothosewhoimple-

mentthem).IftheretailelectricityrateispaidforexcesselectricitythatcustomerswithasolarPVsys-

temsellbacktothegrid,thosecustomerswillsavemoneyontheirbill.However,othercustomerswho

donotinstalla renewable DGsystemmayactually have topayhigherbillsbecause the system asawholeisbuyingsomeofitselectricityatahigherpricecomparedtoothercheaperalternatives.

RenewableDGprovidesotherbenefitsthatmayrepresentvalidrationalesforcountriestopromoteit.

However,pursuingsomeofthemrequirescautionbecausetheymayendupincreasingcoststoacoun-

tryasawhole.Thefollowingaretheprimaryotherbenefits(andreasonswhytheyshouldbepursued

withcaution):


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Reducing global carbon dioxide (CO2) emissions. Renewable DG technologies displace GHGemissions.However,onlyeconomicallyviableREdoessowhilealso reducingelectricitycosts.

When governmentsplanand implementNationallyAppropriateMitigationActions(NAMAs),1

theymaypromotewin-winREoptionsthatabateGHGswhilealsosavingthecountrymoney,as

suggestedby theUnitedNationsFramework ConventiononClimateChange(UNFCCC): eco-

nomicandsocialdevelopmentandpovertyeradicationarethefirstandoverridingprioritiesof

thedeveloping countryParties(UNFCCC,1992).However, theymayalsobetempted topro-

moteREthatincreasesnetcoststothecountry.

Reducing local environmental and social externalities. Renewable DG avoids emitting sub-stancesthat pollutethelocal airand environment. Italsoposes fewer sitingproblems, even

compared tolarge-scalerenewableplantsthatrequiredisplacingpeople,suchas largehydro.

Countriescancapturetheentirebenefitof reducinglocalexternalities(thisisnotthecasefor

globalexternalities).

Helpinganewgreenindustrydevelop.ImplementingDGtopromotedomesticmanufacturing,installation,andmaintenanceofREequipmentmaycreateneteconomicbenefitswhenthedo-

mesticmarketislargeenoughandtherearesufficientindustrialcapabilities.However,creating

anobligatorymarketforDG,orsubsidizingprivatecompaniesthatmanufactureREequipment,

riskscreatingmoreeconomiccoststhanbenefits,particularlywhenmanufacturingunexpected-

lylocatestoothercountries.ThecaseofSpain(Bloomberg,2010)2isemblematicofhowanex-

cessivefeed-intariffprogrambackfired.TherecentcaseofsolarPVmanufacturersintheUnited

States(WashingtonPost,2011)thatwentbankrupt,leavingtaxpayerstobearthecostofgov-

ernment loan guarantees, illustrates the risks of excessive financial support to domestic RE

manufacturing.

Increasingenergysecurity.IncreasingtheshareofgenerationthatreliesonprimaryREsourcesavailabledomesticallyreducesdependencyonimportedfossilfuelsandenhancestheresilience

ofthepowersystemtoexternaldisruptions.However,manyrenewableDGtechnologies(such

aswindandsolarenergy)canonlysupplynon-firmpowerandrequirefirmpowerforbackup

andstandby.NotallcountrieshaveREsourcesthatcanprovidebaseloadpoweratacompeti-

tivecost(suchashydro,whichMexicohas,butBarbadosdoesnot).Also,theremaybeways

otherthanREtoachieveenergysecurityinacost-effectiveway,throughaprudentdiversifica-

tionofthegenerationmix(includingbothREandconventionaloptions),developmentofinfra-

1NationallyAppropriateMitigationActionswerecreatedbytheBaliActionPlan(2007)withintheUnitedNations

FrameworkConventiononClimateChange.Theyarevoluntaryprojectsorprogramstoreducegreenhousegasesthat

governmentsofdevelopingcountries(ornon-AnnexIcountriesoftheUNFCCC)undertakeinawaythatisconsistent

withthecountryseconomicandsocialdevelopment.NAMAsmay alsobe financiallysupportedby industrialized

countries(orAnnexIcountriesoftheUNFCCC)orinternationalorganizations.2In2007,alawcreatedaFeed-InTariffatUS44perkWhfor25yearsforsolarPV(10timesthe2007average

wholesalepriceofUS4),withoutsettinganycap.Thetargetwastoobtain400MWofsolarpowerby2010and

promotethedomesticmanufacturingindustry.Theresultswere3,500MW installedby 2008and126billionin

obligationstoover50,000solarentrepreneurswhooftenboughtequipmentabroad.


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Figure1.ShareofDGasaPercentageofTotalGeneration(%)

0%

10%

20%

30%

40%

50%

60%

Denmark

Finland

Netherlands

Latvia

CzechRep.

Hungary

Germany

Turkey

Slovakia

Poland

Japan

Portugal

Austria

India

Canada

SouthAfrica

Estonia

World

Chile

China

SouthKorea

Lithuania

Mexico

Uruguay

Luxembourg

Greece

Spain

BelgiumItaly

UnitedKingdom

Sweden

Slovenia

Indonesia

Uganda

Australia

France

Colombia

UnitedStates

Thailand

Brazil

Ireland

Argentina

Jamaica

Barbados

MixofREand

conventionalgenerationREgeneration

Sources: Jamaica:MinistryofEnergyandMining,2008.3

Barbados:CIRP,2007;BL&P,2010b.4

Othercountries:authorselaborationof:WorldAllianceforDecentralizedEnergy(WADE),2006.

Inparticular,Figure1showsthat:

ChileandMexicoaretheLatinAmericancountrieswiththehighestshareofDG(about10per-centand8percentof totalgeneration,respectively);however,thisisamixofREandconven-

tionalgeneration.

Jamaicahasabout1.7percent,consideringonlybiomasscogenerationandafewsolarPVsys-tems.

Barbadoshasabout1.5percent,consideringonlybiomasscogenerationandafewsolarPVsys-tems.

5

3Bagassecogeneration estimatedat1.4percent basedon23MWofplantandan assumed30percentcapacity

factor;andsolarPVestimatedatapproximately0.3percentbasedonearlyimplementationoftheStandardOffer

Contract.4Biomasscogenerationestimatedat1.2percentandsolarPVestimatedat approximately 0.3percentbasedon

earlyimplementationoftheRenewableEnergyRider.5It should be noted that penetration of solarwater heaters (SWH) is high in Barbados, and the systems are

domesticallymanufacturedbyasuccessfullocalindustry.Solarwaterheatersarenotdealtwithinthispapergiven

theydonotgenerateelectricityandthereforedonotfallwithinthescopeasdefinedforthispaper.However,they

candisplaceelectricityboughtfromthegridandareaverycost-effectivesolutionforheatingwater.


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Figure1alsoshowsthatDenmarkhasreachedanadvancedstageinDG,withover50percentofgener-

ation(WADE,2006).AbriefsummaryofDenmarksexperience,whichrepresentsthestateoftheartin

DGtoday,mayhelpputthingsincontextwhileanalyzingtheexperienceofthefourLACcountriesinrenewableDG.

Denmark:TheExperienceoftheWorldsMostAdvancedDGMarket

Figure2.EvolutionofElectricityGenerationbyTypeinDenmark,1980-2009(PJ)

Note:Large-scaleunitsreferstocoal,gas,andoilgeneration.

AutoproducersreferstowindandCHPforself-consumptiononly.

Source: DanishEnergyAgency,2011

DenmarksDGismostlyrepresentedbywindenergyandindustrycogeneration(withasmallershareof

hydro)andwasdevelopedbetweentheearly1980sandtodaybyamixofcompulsorytargetsandsubsi-

diesforRE.AccommodationandthendecentralizationofDGforsupplyingpowerstartedinthe1980s.In

1985,Denmark votedout nuclear power. Decentralization (1980s todate) came aftera centralization

phase(1950sthrough1970s),whichhadreversedadecentralizedtraditionthatsincetheearly20thcentu-

ryhadseensmall-andlarge-scalepowersupplysystemscoexist(RavenandVanderVleuten,2006).

AseriesoffourenergyplansaimedtomakeDenmarkmoreself-sufficientinprimaryenergyresourcesand

moreresilienttoexternalshocksofthekindthattookplaceinthe1970s.Inparticular,thesecondenergy

plan(1981)mandatedthatwindsupply8.5percentofdemandbytheyear2000.Thethirdenergyplan

(1990) mandated that power generators reduce emissions of CO2 (20 percent), sulfur dioxide (SO2,

60percent),andnitrogenoxide(NOx,50percent)bytheyear2000comparedto1988.Thefourthener-

gyplan(1996)mandatedafurtherreductionofCO2(50percent)by2030comparedto1998.Theplans

alsoimposedtaxesongenerationproducingemissionsofCO2andsulfur(DanishEnergyAgency,2011).

AlawtopromoteREcreatedacomplexstructureoffeed-intariffsbytechnology,withratesuptoabout

US$0.11perkWhforwindandsolarPV,andUS$0.13perkWhforbiogas(SRESLegal,2010;RetsInfor-


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mation,2010).6Theseratesarehigherthantheavoidedcostsofcoalandgas-firedgeneration,which

areestimatedataboutUS$0.04andUS$0.07perkWh,respectively(EWEA,2001).

Feed-intariffsofotherEuropeancountriesreachhigherlevels.Germanysforwindandsmallhydroare

about US$0.13 per kWh and for solar PV US$0.43 per kWh (FederalMinistry for the Environment,

NatureConservation,andNuclearSafety,2009). SpainsforsolarPV in2007wasUS$0.44.Denmarks

residentialtariffsarethehighestintheEuropeanUnion(0.25-0.29perkWh,followedbyGermanyat

0.25-0.26perkWh).Denmarksindustrialtariffsareinthemiddlerange:0.10perkWh,whichishigh-

erthanFranceat0.07perkWh,butlowerthanItalyat0.14perkWhorGermanyat0.13perkWh

(EuropeanUnion,2011).

Denmarks experiencesuggests that, if a societyis willing topaya premiumfor itselectricity, it can

reachahighpenetrationofrenewableDG,reducingGHGs,increasingenergysecurity,andevenfoster-

ingsuccessfulREequipmentmanufacturingforthe localandglobalmarket,like inthecaseofVestas,

whichbeganbuildingwindturbinesin1979(Vestas,2011).

AnalyzingtheDGExperienceofFourLACCountriesThissectionlooksattheexperienceinDG(particularlywithRE)ofJamaica,Barbados,Mexico,andChile.

Eachcasestudyisstructuredasfollows:

1. Abriefdescriptionofthecountryspowersectorcontext.2. AnestimateoftheeconomicandcommercialviabilityofrenewableDGoptions.AdistributedRE

technologyisconsideredeconomicallyviablewhenitsgenerationcost(US$perkWh)is lower

thanthatofcentralizedconventionalgeneration,andthereforecanreduceacountrysoverall

costofelectricitysupply.AdistributedREtechnologyisconsideredcommerciallyviablewhenits

generationcostislowerthanthetariffandthereforecansavemoneyforcustomersthatim-

plementit.

Unlessprovidedbyothersources,generationcostsforREareestimatedasfollows:

Generationcosts(US$perkWh) =AnnualizedcapitalandO&Mcosts(US$)

Annualenergyoutput(kWhperyear)

whereannualizedcapitalandoperationandmaintenance(O&M)costsarecalculatedoverasys-

temsusefullifetime(20years,unlessotherwisespecified),givenacertaindiscountrate(similar

toamortgagepayment),andannualenergyoutputiscalculatedbymultiplyinginstalledcapaci-

tyinkilowatt(kW)by8,760hoursperyearbyanestimatedcapacityfactor(percent).

6 Note that theserates decreaseafter a certainnumber ofyears.Forexample,that for solarPVdecreases by

33percent(toDKK0.40,orUS$0.07perkWh)afterthefirst10yearsandforthesubsequent10years.


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Costsofconventionalgeneration,whichprovidethebenchmarkforassessingtheviabilityofRE

generation,aregrossedupforsystemlossesineachcountry,consideringthatdistributedRE

couldavoidthoselosses.TheappropriatebenchmarkforfirmREtechnologiesistheall-incostofconventionalgeneration(includingcapitalandfixedO&Mcosts)becausethesetechnologiescan

replacebaseloadpower.Fornon-firmorintermittentREtechnologies,theappropriatebench-

markisjustthevariableportion(fuel,andvariableO&M)becausethesetechnologiescannot

replacebaseloadpower.

3. AdescriptionofthepolicyandregulatoryframeworkforREandforDG.4. Ananalysisofstrengthsandweaknessesofeachcountryspolicyandregulatoryframeworkfor

renewableDG.

JamaicaSmall-scale renewable DG in Jamaica isprovidedwith a reasonable feed-in tariff programbasedonavoidedcost, limitedeligibility, andgoodmetering arrangements. This programcouldbe furtherim-

provedbyextendingthetermofthefeed-intarifftosystemlifetime(from5to20years)andcalculating

avoidedcost inawaythat recognizesREs potential contribution.OtherRE is implementedat utility

scaleonacompetitive,leastcostbasis.

Context:AVerticallyIntegratedSystemwithHighCostsandPricesofElectricity

JamaicaPublicServicesCompany,Limited(JPS) isaverticallyintegratedpowercompanywithexclusive

rightstotransmit,distribute,andsupplyelectricityinJamaica(OfficeofUtilitiesRegulation[OUR],2001).

GenerationisprovidedforthemostpartbyplantsownedbyJPSitself(625MW,includingsteam,gastur-

bines,combinedcycleturbines,diesel,hydroplants,andwind,allconnectedtothetransmissionnetwork).

TherestofgenerationisprovidedinpartbyIPPsthroughpowerpurchaseagreements(PPAs)forcapacity

and energy (191MW of steam, medium speed diesel, and slow speed diesel plants) or only energy

(20.7MWwind farm,connectedtothetransmissionnetwork) (OUR,2010a).In addition,grid-connected

sugar companieshaveabout23MWof plant (mostlyburningbagasse),and other industries andhotels

haveanother18MWofthermalcapacity(MinistryofEnergyandMining,2008).

TheOfficeofUtilitiesRegulation,amulti-sectorregulatoryagency,regulatesthepublicsupplyofelec-

tricity(OUR,2000).TheOURestablishespoliciesandproceduresforleastcostexpansionplanning(OUR,

2006),directlypreparesleastcostexpansionplans,andmanagesandadministersprocurementofnew

generationfromIPPs(OUR,2010a). 7

Jamaicaselectricitygenerationismainlyoil-based ,asshowninFigure3.Hydroandwindprovideabout

3.7and1.3percentofelectricity,respectively(OUR,2010a).

7Based on an agreement (2007) between the Government of Jamaica and Marubeni, the then-majority

shareholderofJPS(80percent,withtheremaining20percentownedbytheGovernment).Marubenisoldhalfof

itssharestoAbuDhabiNationalEnergyCompanyin2009.


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Figure3.ElectricityGenerationinJamaicabySource,2010

Oil,93.7%

Hydro,3.6%

Biomass,

1.4%

Wind,1.3%

Sources:OUR,2010a.Forbiomasscogeneration:MinistryofEnergyandMining,2008.8

Jamaicaselectricity generation costs are high,mainly asa result ofthehigh costofimported fossil

fuels.In2011,theshort-runavoidedcostofconventionalgenerationwasestimatedataboutUS$0.24

perkWh(US$0.22perkWhifonlyconsideringthevariableportionofthat)9(Castalia,2011).TheOUR

estimatesthat,thankstothefuturecommissioningofplantrunningonLNG,Jamaicaslong-runavoided

costcouldfalltojustUS$0.093perkWh(OUR,2010b).Grossedupforsystemlosses(ashighas23.7

percentin2009[OUR,2010a]),thesebenchmarkswouldbecomeUS$0.33,US$0.31,andUS$0.13per

kWh,respectively.

ElectricitytariffsinJamaicaarealsohigh,estimatedatUS$0.39perkWhforresidentialandsmallcom-

mercialcustomers(Castalia,2011;OUR,2011).

10

HightariffsareaseriousconcerninJamaicabecausetheyaffectthelifeofresidentsaswellasthecompetitivenessofJamaican-basedbusinesses.

ViabilityofRenewableDG:GoodOptionsatCommercialScale,NotYetatSmallScale

Figure4comparesthecostofgenerationofRE technologies thatcanbedevelopedoncommercialor

small-scaleDG (horizontalbars)with costs of generationof conventionaltechnologies (vertical lines,

whitelabels)andcurrenttariffs(verticalline,greylabel).

8Basedon23MWinstalled(MinistryofEnergyandMining,2008)andassuminga30percentcapacityfactor.

9Averagemarginalcostofgenerationoftheexistingsystem(US$0.22perkWh,weightedaverageofoil-firedsteam

plantandcombinedcycleplant)pluscapitalcostofdeferredcapacity(US$0.02perkWh,basedonanaturalgas

combinedcycleplant).10Tariff levels are estimated basedon the new tariffs (2011) and adjusted using the fuel and IPP charge and

exchange rate adjustment for April 2011, given a base exchange rate of US$1:J$86, actual exchange rate of

US$1:US$85.7,atargetheatrateof10,470kJ/kWh,andtargetlossesof17.5percent.


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Figure4.ViabilityofRenewableDGinJamaica(US$perkWh)

0.63

0.52

0.48

0.41

0.38

0.15

0.15

0.12

- 0.10 0.20 0.30 0.40 0.50 0.60 0.70

HighEfficiencySolarPV(fixed,2kW)


ThinFilmSolarPV(fixed,2kW)

SmallWind(10kW)


Wind(Commercial)

Landfillgastoenergy(1.3MW)

BagasseCogeneration(Commercial)Currenttariff

(residential,small

commercial):US$0.39

OUR est. long-runavoidedcost(20yr) +15%premium

+23.7%losses:US$0.13

Est. short-runavoided

cost(non-firm)+15%

premium+23.7%losses:

US$0.31

Est. short-runavoidedcost

(firm)+15%premium+23.7%

losses:US$0.33

US$/kWh

Source:Castalia,2011.11Losses23.7%,premiumforRE15%:OUR,2010a.

Generationcostsofconventionaltechnologiesaregrossedupby15percent,asdeterminedbytheOURforexternalbenefits,sometimesintangible,havingtodowithfuelsupplydiversityandenvironmental

advantagesoftheseapplicationovertheirconventionalcounterparts(OUR,2010a);aswellasforsys-

temlossesof23.7percent(asnotedabove).Figure4showsthat:

Commercial-scaleREiseconomicallyviable.Bagassecogeneration,landfillgastoenergy,andcommercial-scalewindcouldgenerateelectricityatacostthatislowerthanthecurrentcon-

ventionalgenerationbenchmark.SmallhydroisaviableREoptioninJamaica,butitisconnect-

edtothetransmissionnetwork;also,mostavailablehydroresourcesarealreadyused.

Small-scaleREisnoteconomicallyviable(butsomeisalmostcommerciallyviable) .SolarPVop-tionsallgenerateelectricityatahighercostthantheestimatedshort-runavoidedcost;however,itispossiblethatthecheapestandmostefficientsolarPVsystemsmaygenerateatapricethatis

slightlylessthantheretailtariff.Thesesystemscouldbecommerciallyviable,meaningtheywould

11Key assumptions: bagasse cogeneration (60MW, 85percent capacity factor, US$3,000/kW installed cost,

12percentdiscountrate);landfillgastoenergy(1.3MW,80percentcapacityfactor,US$3,800/kWinstalledcost,

12percentdiscountrate);wind(2MWturbines,30percentcapacityfactor,US$2,640/kWinstalledcost,12percent

discountrate); smallwind (10kW,30percentcapacityfactor,US$6,000/kWinstalled, 15percentdiscountrate);

solarPV(2-50kW,19-21percentcapacityfactors,US$4,000-6,000/kWinstalled,15percentdiscountrate).


23/55


savemoneytothoseimplementingthem.Tobeeconomicallyviable,thecapitalcostofsolarPV

wouldneedtodecreasetoaboutUS$3,200perkWinstalled,orconcessionalfinancingshouldbe

madeavailable(11percent interestrate).Smallwindis alsoalmost commerciallyviable.Tobeeconomically viable, its capital cost would need to decrease from about US$6,000 to about

US$4,000perkWinstalled(orobtainsimilarconcessionalfinancing).

FrameworkforRenewableDG:Feed-InTariffatAvoidedCostforSmallRenewableDG;

CompetitionandLeastCostPlanningforAlltheRest

ThereisnoofficialdefinitionofDGinJamaica.Basedontheauthorsexperienceinthecountry,DGis

generallyconsideredtobeplantsotherthanthoseatcentrallocationsofJPSorIPPs.Smallhydroplants

ownedbyJPS(whichgeneratedabout3.7percentof2010electricity)areconsidereddistributedgenera-

tion.TheWigtonWindFarmisconsideredutilityscale.However,basedonthispapersdefinition,none

of these plants are connected to JPSs distribution system. The OUR defines transmission as either

138kVor69kVlines,whilethedistributionsystemoperatesat24kV,13.8kV,and12kV (OUR,2010a).

Therefore,aplantthatinlargersystemscouldbedevelopedascommercial-scaleDGisdevelopedas

utilityscaleinJamaicaanddirectlyconnectedtothe69/138kVlines.

NewplantiscommissionedbasedonleastcostexpansionplanspreparedbytheOUR.TheOURruns

competitive auctions for tranches of newcapacity above 15MW; for additions between100kW and

15MW,therecanbedirectnegotiationofaPPAwithJPS.Capacityfromcogenerationplants(suchasa

diesel-powered cogeneration from JamaicaBroilers Group [OUR, 2010a]) canbe contractedwithout

competitivebiddingregardlessofsize(OUR,2005).

Theonlyplantsconnectedtothedistributionsystemarethoseofsugarcompanies,otherindustries,and

hotels,allfor self-generation.TheseplantsarenotpartoftheOURsleastcostplanning(althoughco-

generationbybauxitecompaniesisbeingcontemplatedasanoptionforsatisfyingaproportionofthe

capacityrequirementfortheelectricitysector[OUR,2010a]).

Forsystemsupto100kW,aStandardOfferContractisavailablefromJPS.TheSOCsmainfeaturesareas

follows(JPS,2011):

Term:5years Eligibility:caponindividualsystems(maximuminstalledcapacity100kW),aswellasontotal

systemseligible(3percentofpeakdemand) Feed-intariffrate:long-runavoidedcostasestimatedbytheOUR(US$0.093perkWh),plusthe

15percentpremium,foratotalofUS$0.11perkWh

Meteringarrangement: netbilling.Net billing separatelymeasureselectricitybought by theloadwheretheDGsystemis connected,andelectricitygeneratedandsoldby theDGsystem,

andbillseachflowofelectricityseparately,applyingtheretailtarifftoelectricitypurchased,and

anothertariff(inJamaica,basedonavoidedcostplusapremium)toelectricitysold.


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Analysis:ASoundFrameworkthatCouldBeImprovedforSmall-ScaleRenewableDG

Jamaicaselectricityframeworkisgenerallyorientedtowardreducingelectricitycosts,whichareoneof

thekey economic concerns in thecountry.Newpowergeneration in Jamaicais developedbasedonleastcost(whetherlargeorsmallscale);andleastcostgenerationisdirectlyenforcedbytheOUR.Via-

blehydro,biomasscogeneration,andwindprojectshavebeenimplementedthisway,andmostlyinter-

connectedtothetransmissionsystem.

TheSOCframeworkhasanumberofstrengths:

Itcaps individualand totaleligibility. Thismakes quantities ofDG,and especially their cost,predictableandlimitstheshareofintermittentgenerationonthegridtopreservequalityand

reliabilityofservice.Withoutatotalcap,therecouldbeoperationalproblemsastheshareofin-

termittentgenerationincreaseswithoutthenetworkbeingpreparedtointegrateit.Therecould

alsobefinancialproblemsasJPScommitstobuyingtoomuchelectricity.Customerscouldend

uppayingmoreiftherewerenocapbecauseJPSwouldrecoverthecostofanunlimitedpro-

gramthatprocuresunnecessarygeneration.

Itisbasedonavoidedcostplusalimitedpremium.Thefeed-intariffgrantedisequaltotheOURs estimate of Jamaicas long-run avoided cost plus a 15percentpremiumthat theOUR

considerseconomicallyjustified.Thefeed-intariffisnotsetatalevelthatwouldrecovertheen-

tiregenerationcostofsystemslikesolarPV.Suchalevelwouldbearoundormuchaboveretail

rates,increasingcoststothecountry(itwouldusemorecostlygenerationoptions).

Itworksonnetbilling.Thisallowselectricitygeneratedbysmallproducerstobepaidforatnomorethanthecostthatwouldberequiredbyutility-scaleproducers.Thisway,thecountryasa

wholeisguaranteedleastcostpower.Iftherewerenetmetering(whichjustspinsameterback-

ward),JPSwouldhavetosupplysomeofthesystemselectricityattheretailrate,whichismuch

higherthanthecostitcouldgenerateatusingconventionalplants.Customerswouldhavetobear

theadditionalcost,exacerbatingtheeffectofexpensivepoweronhouseholdsandbusinesses.

JamaicasSOCcouldbeimprovedinacoupleofways:

Byrevisingtheavoidedcostcalculation.UsingtheOURslong-runavoidedcost(US$0.093perkWh)doesnotaccuratelyestimatecurrentcoststhatsmall-scalerenewableDGcouldavoidbe-

causethelower-costnaturalgasplantsusedforthatestimatehaveyettobebuilt.Also,thecri-

teriafordetermininga15percentpremiumforREareunclear. Byextendingtheterm.Fiveyearsismuchlessthanthetypicallifetimeofasmall-scaleREsys-

tem,suchassolarPV.Thiscreatesuncertaintyofrecoveringeventhatsmallportionofthese

systemscost.Italsoincreasestransactioncostsbecauseitputsinplaceanagreementtopro-

videenergyforamuchshorterperiodthanwhatcouldbedoneifthefulllifetimeofsystems

wereconsidered.


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Consideringthesepossibilities,eligiblesupplierscouldbegiventwooptions:

Afeed-intariffatthelong-runavoidedcostbutforaperiodof20years; Afeed-intariffatthecurrentshort-runavoidedcostforafewyears(e.g.,three)andthenreset

atactualavoidedcostonanannualbasisuntil20years.

Barbados

ThankstoconcessionalfinancingprovidedbythegovernmentwiththesupportoftheInter-AmericanDe-

velopmentBank(IDB),somesmall-scalerenewableDGwithsolarPVisalreadyviableinBarbados.The

electricutilityhasrecentlystartedofferingapilotRenewableEnergyRideratavoidedcost,withlimited

eligibility,andnetbilling.Thereareviableoptionsforcommercial-scalerenewableDG,buttheyaremore

likelytobeimplementedatutilityscaleinBarbados.AlsowithsupportfromtheIDB,thegovernmentis

workingwiththeregulatorandtheelectricutilitytoputintoplaceaSustainableEnergyFramework(SEF)sothatviableoptionsmaybeimplementedbasedonleastcostplanningbyeithertheutilityor(foralim-

itedamountofopportunities,suchasbiomasscogenerationandwaste-to-energy)IPPs.

Context:AVerticallyIntegratedSystemwithHighCostsandPricesofElectricity

BarbadosLight&Power(BL&P)isthecountryssoleelectricityprovider.Itisaverticallyintegratedelec-

tricutilityresponsibleforthegeneration,supply,anddistributionofelectricity.IPPsarenotprohibited,

butnolicensehasbeenissued.TheSEFincludesaproposedlegalreformthatwouldmakeiteasierfor

IPPstoobtainalicense:aministerialorderwouldberequiredinsteadofanActofParliament.12

BL&PisregulatedbytheFairTradingCommission(FTC),anindependentgovernmententity.Inaddition

toutilityregulation,theFTCisresponsibleforcompetitionlawandgeneralconsumerprotection.

BL&Pgeneratesallelectricityfromfossilfuels,asshowninFigure5(BL&P,2010a);however,itisplan-

ninga10MW(utility-scale)windfarminSaintLucy.Thereisalsoasmallshareofbiomasscogeneration

forself-consumption(IDB,2010).Barbadosimportsalmostallitsfossilfuels;ithasoilreserves,butcon-

sumestentimeswhatitproduces.

Generationcosts andtariffs arehigh, like Jamaicas,andsimilarly area concernfor households and

businesses.BasedonastudyconductedfortheIDBandtheGovernmentofBarbadosin2010,assuming

oilpricesofUS$100perbarrel,theestimatedavoidedvariablecostofgenerationofdiesel-fueledplants

(grossedupforsystemlossesof6.6percent)isUS$0.21perkWh,whiletheestimatedlong-runmarginalcostoflow-speeddieselplantsisaboutUS$0.19perkWh(IDB,2010).Theresidentialtariffisestimated

ataboutUS$0.31perkWh;thecommercialtariffisestimatedatUS$0.27perkWh(IDB,2010).

12ThelicensegrantedtoBL&PbytheElectricLight&PowerAct(ELPA,1907)isnotexclusive,butBL&Pistheonly

entitylicensed.TheELPArequiresanActofParliamenttoauthorizeothercommercialsuppliers,thoughnolicense

isneededforself-supplyandsaleofexcessgeneration.


26/55


Figure5.ElectricityGenerationinBarbadosbySource,2009

Heavyfuel

oil,84.0%

Diesel,15.0%

Biomass,

1.0%

Source:BL&P,2010a.Forbiomass:CIRP,2007.

ViabilityofRenewableDG:

GoodOptionsonaCommercialandSmallScaleThankstoConcessionalFinancing

Figure6comparescostsofgenerationforrenewabletechnologies(horizontalbars)withthoseofcon-

ventionaltechnologies(verticallines,whitelabels)andtariffs(verticallines,greylabels).

Figure6.ViabilityofRenewableDGinBarbados(US$perkWh)

0.34

0.33

0.27

0.26

0.20

0.18

0.11

- 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40

SmallWind(10kW)





MunicipalSolidWastetoEnergy(13500

kW)

BiomassCogeneration(2000kW)

Currenttariff

(residential):

US$0.31

Currenttariff

(commercial):

US$0.27

Est. GasTurbinesFuelCost(non-firm)+6.6%losses:US$0.21

Est. long-runavoidedcostof

generation:US$0.19

US$/kWh

Note:Discountrates:5%forsmall-scaleDG;12%forcommercial-scaleDGandconventionalgeneration.

Source:IDB,2010.


27/55


28/55


Regardingsmall-scalerenewableDG,BL&Phasalsobeenproactiveinexploringhowitcouldcontribute

tosavingfuelcosts.Since2010,BL&PhasprovidedapilotRERthatallowscustomerstodevelopgrid-

connectedsmallPVandwind(BL&P,2010b).TheFTCsapprovaloftheRER(whichhappenedwithinBL&Pslatestratecase,in2010)representedanotherstepincreatingBarbadosSEF.TheRERsmain

featuresareasfollows(BL&P,2010b):

Term:2years Eligibility: cap on individual systems (maximum installed capacity 5kW for small customers,

50kWforlargecustomers),aswellasontotalsystemseligible(1.6MW,approximately1percent

ofpeakdemand,or200systems,whicheveroccursfirst)

Feed-intariffrate:short-runavoidedcostofgeneration,withafloor(US$0.16or1.8timesthefuelclauseadjustment[whichcoversfuelcosts],whicheverishighest)

Meteringarrangement:netbilling,usingbidirectionalmeterstoseparatelymeasureandbilltheelectricityboughtandsold

Figure7illustratesthefunctioningofBarbadosRER.JamaicasSOChasthesamefunctioning,although

withdifferentrates,asexplainedabove.

Figure7.FunctioningofBarbadosStandardOfferContract

Retail tariff (res.):US$0.31/kWh

RER tariff:US$0.16/kWh

Source:Authorselaboration.

Analysis:SoundSustainableEnergyFrameworkforCommercial-andSmall-scaleRenewableDG

REoptionsthatcouldbeimplementedasDGinlargersystemsarelikelytobeimplementedatutility

scaleinBarbados,eitherbyBL&Por(foralimitedamountofopportunities,givenmarketsize)byIPPs.

Thankstothejointeffortsofthegovernment,theFTC,BL&P,andtheIDB,theframeworkforimple-

mentingutility-scaleREisbeingeffectivelycreatedbasedonleastcostplanningtoincludeviableRE.

TheRERiswelldesignedinthat(likeforJamaica)individualandtotalcapacityiscapped,therateissetat

avoidedcost(withasophisticatedcalculationbyBL&P,whichcomparestime-of-daygenerationbyPVand


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wind,aswellasthedispatchingofitsownplantsbasedontheloadcurve),andnetbillingisthemetering

arrangement.TherecentlyapprovedREpolicycallsforfurtherimprovementinthisframeworkby:

ExtendingthetermoftheRER:Twoyearsistooshortcomparedtotheusefullifetimeofsys-tems(evenshorterthanJamaicasfiveyearsfortheSOC).

Developingadisaggregated,cost-reflectivetariffstructure :InBarbados,manyelectricitytariffsarebundledtogetherinonerate(US$perkWh)fordifferentservices:supplyofenergy,butalso

connectionto thedistributiongrid,andprovisionof back-upandstand-bycapacity forhaving

electricityevenwhenintermittentdistributedREisnotgenerating.SomesolarPVsystemsare

alreadycommerciallyviable(costinglessthanthetariff)althoughnoteconomicallyviable(cost-

ingmorethanavoidedcostofgeneration).Therefore,thecurrenttariffstructuremaygivecus-

tomers(inparticular,residentialones)anincentivetoself-generate,forexamplewithsolarPV,

toavoidpayingthetariff.However,bynotpayingthattariff(whichincludesalsoservicesother

thansupplyofenergy)theywouldbeenjoyingservicesprovidedbytheutility,withoutactually

payingforthem.Thiswouldultimatelymakeothercustomerswithoutasystempaythecostfor

thoseotherservices.

SincetheRERisbeingofferedonapilotbasis,thereisanopportunitytoimproveitonceitisreplicated,

buildingonexistingstrengthsoftheoriginalpilotprogramdesignandtakingintoconsiderationanyles-

sonslearned.

Mexico

DGhasbeenusedinMexicosincethe1990s,whenreformswereintroducedtoallowprivateparticipa-tioningeneration.Onacommercialscale,severalrenewableDGoptionsarealreadyeconomicallyand

commerciallyviable.Theyhavebeenplannedandeffectivelydevelopedbasedonleastcost,asmandat-

edbyMexicanlawforanynewgeneration.Ontheotherhand,small-scalerenewableDG iscurrently

notviableinMexico,anditsimplementationfornowislimitedtoafewpilotinitiatives.Since2008,

MexicohasbeencreatingaframeworkthatsetstargetsforREandmandates,amongotherthings,that

neteconomicbenefitsofREbeconsideredwhenplanninghowmuchREplanttodevelopandhowmuch

topayforit.Theframeworkiscurrentlyevolving,anditremainstobeseenhowneteconomicbenefits

willbeassessedwhensettingfutureREtargets.

Context:ASingle-BuyerMarketwithLowCostsandPricesofElectricity

Power generation, transmission,and distributionin Mexicoaredominated by the FederalElectricity

Commission(CFE,orComisinFederaldeElectricidad),whichactsasasinglebuyerfor IPPs.Thestate-

ownedcompanyLuzyFuerzadelCentro(LyFC)initiallyoperatedinthecentralregionofMexicobutwas

takenoverbyCFEin2009.Currently,CFEhasamonopolyfortransmissionanddistribution;however,

reformsweremadetoincentivizeprivateparticipationingeneration(includingIPPsandcogeneration).

CFEnowincludesIPPsinitsexpansionplanning,andmostnewcapacityhasbeeninstalledthroughPPAs

withIPPs(SENER,2010a).


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ThemainagenciesinchargeofenergypolicyandregulationinMexicoaretheMinistryofEnergy(SENER,

orSecretaradeEnerga),theEnergyRegulatoryCommission(CRE,orComisinReguladoradeEnerga),

andtheMinistryofFinance(SCHP,orSecretaradeHaciendayCrditoPblico).Theirresponsibilitiesareasfollows:

SENER:Nationalenergyplanningandpolicymaking CRE:Regulating IPP participation in theelectricity sector,establishing paymentsfor contracts

betweenREgeneratorsandCFE,andissuingpermitsforIPPstooperate

SCHP:SettingelectricitytariffsbasedonproposalsbyCFEandCREFossilfuelsarethepredominantsourceofpowergenerationinMexico,accountingfor81percentin

2009:mainlynaturalgas,oil,andcoal,asshowninFigure8.Renewablesrepresentedabout14percent

oftotalgenerationinthesameyear(mainlyhydro,followedbygeothermalandwind).CFEaccountsfor

about64percentofinstalledcapacity(totalof60.4GWfortheentirecountry)and59percentoftotal

generation (total of 268.2TWh). IPPs account for 29 percent of total electricity generation, and

19percent of the total installed capacity of the National Electricity System (SEN, Sistema Elctrico

Nacional).Self-generationandcogenerationaccountfortherest(SENER,2010a).

Figure8.MexicoPowerGenerationbyTechnology,2009

Nat.Gas,

51.8%

Oil,16.7%

Coal,12.4%

Hydro,11.2%

Nuclear,

4.5%

Geothermal,

2.5%

Diesel,0.5% Wind,0.4%

Source:SENER,2010a.

ElectricitygenerationcostsinMexicoarelow.AccordingtoCFEfigures,thelevelizedcostsofthemain

powergenerationtechnologies(combined-cyclegasandsupercriticalcoal)areapproximatelyUS$0.08

andUS$0.06perkWh,respectively.Thelevelizedcostofgenerationoflargescalehydropowerisabout

US$0.09perkWh(Johnsonetal.,2009).Grossedupforlosses(17.9percent;SENER,2010a),thesecon-

ventionalbenchmarksforrenewableDGareUS$0.09andUS$0.07perkWh,respectively.


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Table2.AverageElectricityTariffsinMexico(2010)

Categories Rates(US$,2010)

Residential 0.09Mediumenterprise 0.11

Largeindustrial 0.09

Commercial 0.20

Services 0.14

Note:exchangerateUS$0.08perMXP.

Source:SENER,2010a.

Electricitytariffsarealsorelativelylow,especiallyforcustomersintheresidential,largeindustrial,and

medium enterprise categories, as shown in Table 2. Commercial tariff categories face higher rates,

whichmayhindertheircompetitiveness.

ViabilityofRenewableDG:GoodOptionsatCommercialScale,NoneatSmallScale

Figure9illustratestheeconomicandfinancialviabilityofcommercial-andsmall-scalerenewableDG

projectsinMexico.

Figure9.ViabilityofRenewableDGinMexico(US$perkWh)

0.53

0.36

0.35

0.09

0.08

0.075

0.07

0.07

0.06

- 0.10 0.20 0.30 0.40 0.50 0.60

SolarPV(7.5kW)

SolarPV(50kW)

Wind(small)

SmallHydro

BiomassCogeneration

Wind(1.5MWturbine)

Wind(large)

Industrycogeneration

Biogas

CombinedCycleGasTurbine+

17.9% losses:US$0.09

US$/kWh

SupercriticalCoal+

17.9%losses:US$0.07

Avgtariff(commercial):

US$0.20

Avgtariff(residential,largeindustrial):US$0.09

Note:Smallwind:assumedUS$6,000/kW,30%capacityfactor,12%discountrate.

Source:ForFossilFuelTechnologies,Biogas,IndustryCogeneration,Wind(large),BiomassCogeneration,andSmallHydro:

Johnsonetal.,2009.ForSolarPV:informationfromMexicansystemproviders.13For1.5MWwindturbine:IDB,2011b.

14

13US$6,000(7.5kW)andUS$4,000(50kW)perkWinstalled,18percentcapacityfactor,12percentdiscountrate.

14US$960/kW,35percentcapacityfactor,25years,6percentdiscountrateprovidedbyIDBconcessionalfinancing.


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Figure9showsthat:

Commercial-scalerenewableDGismostlyviable,althoughwindneedsconcessionalfinancing,grants,orcarbonfinance.

Biogas,industrycogeneration,biomasscogeneration,andsmallhydro(firmtechnologies)arecompetitivewitheithercoalorcombinedcyclegasturbines(CCGT)whengrossedupfor

17.9percentlosses.Biogasmightalsobedevelopedonasmallscaleinsomecases,although

itslevelizedcostwouldprobablybehigher.

Largewindischeaperthantheall-incostofCCGTs,butsinceitisanon-firmtechnology,itwouldprobablyjustbecompetitivewithCCGTsvariablecostofgeneration.Windprojects

inMexicohavereliedoncarbonfinanceandgrantstocoverthegapinviabilitywithconven-

tionalgeneration.

1.5MWwindturbinesmanufacturedlocallyinMexicowithsupportfromtheIDB(IDB,2011b),andobtainingconcessionalfinancingfromtheIDB(aslowas5percent),couldalsobeviable.

Small-scalesolarPVandwindarenotviable.SmallwindandsolarPVarenoteconomicallyorcommerciallyviablesincetheirgenerationcostsareabovethecostsofnaturalgasgeneration

andtheresidential,largeindustrial,andcommercialtariff.Accordingtoauthorslocalsources,

capacityfactorsfor solarPV are lower insomeregionsofMexico (18 percent)compared to

Caribbeancountries(upto21percent).CostsofsolarPVwouldneedtodecreasedramatically,

orefficiencyincreasedramatically,forthistechnologytobeviable.SolarPVwouldnotbeviable

evencostingUS$2,000perkWinstalledandreachingcapacityfactorsof23percent.Onlycon-

cessionalfinancingatratessimilartothoseofferedbytheIDBforwindcouldmakeitviable.

FrameworkforRenewableDG:EvolvingfromFinancialtoEconomicLeastCost

Traditionally,Mexicohasplannedandimplementednewgenerationbasedonfinancialleastcost.How-

ever,recentlawsandregulationshavebeguncreatinganewframeworkwithtargetsforRE,callingfor

economiccostsandbenefitstobeconsideredaswell.Thisframeworkisstillbeingdefined,asexplained

indetailbelow.

ThePublicServiceElectricityLaw(LeydelServicioPblicodeEnergaElctrica)of1975(article36-BIS),

which is the main law governing the sector,mandates that public electricity provision be least cost

(JustiaMexico,1975).CFEisresponsibleforelaboratingandexecutingtheleastcostexpansionplan,and

SENERreviewsit.

MexicosNationalEnergyStrategyof2010establishesthattheparticipationofcleanenergytechnolo-

giesincreasetorepresent35percentoftotalgenerationcapacityby2025(SENER,2010c).

TheLawonRenewableEnergyDevelopmentandFinancingforEnergyTransitionLaw(LAERFTE,orLey

deAprovechamientodeEnergasRenovablesyelFinanciamientodelaTransicinEnergtica),otherwise


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knownastheRELaw,wasapprovedinNovember2008(CmaradeDiputados,2008).TheRELawsets

outthefollowinginstitutionalresponsibilities:

SENER is todevelopa specialprogram forRE anda methodologyto includeRE inexpansionplansconsideringtheirneteconomicbenefits.

CREistodefinemaximumandminimumpricestobepaidtoREgenerators. CFEisrequiredtoreceivereasonableexcesselectricity,consistentwiththeoperatingandeco-

nomicconditionsofsystem.

TheregulationoftheRELaw(SENER,2009a)specifiesthatneteconomicbenefitsbeconsideredwhen

compilinganREinventory(whichSENERisinchargeof),aswellaswhendecidingwhatpricesshouldbe

paidforREgeneration(whichCREisinchargeof).

TocomplywithrequirementsoftheRELaw,CREandSENERhaveissuedthefollowing: Modelcontractsforinterconnectionofsmall-andmedium-scaleREpreparedbyCREandpub-

lishedbySENER(SENER,2010b).TheresolutiondefinesDGasgenerationthatisconnectedto

the SEN (i.e., not off-grid) but not directly interconnected to the transmission network

(i.e.,connectedtothedistributionnetwork).

AspecialprogramforREissuedbySENER(SENER,2009b).ThisprogramsetstargetsforREinte-grationby2012.ItstatesthatREshouldcontribute7.6percentofinstalledcapacity,and4.5to

6.6percentofgeneration.Thebreakdownofthetargetincludeswind,smallhydro,cogenera-

tion,biogas,andgeothermal;however,solarisnotincluded.Also,therearenospecifictargets

forDG(justamentionofitsroleinelectrifying2,500communities).

Analysis:ViableDGIsAlreadyHappening,ButtheFutureIsUnclear

Commercial-scaleDGiswelladvancedinMexicobasedontheregulatoryenvironmentestablishedinthe

early1990s.Althoughcommercial-scaleDGhasaneffectiveframeworkalready,itcouldchangeovertime.

Todeveloplarge-scaleREgenerationinMexico,CFEholdscompetitiveauctionstoprocureREfromIPPs.

CFEhas been purchasingpower throughauctions since theearly1990s.The same processand rules

havebeenused forconventional andrenewable generation.All IPPsmust obtainoperations licenses

fromCRE.PPAsaresignedbetweenCFEandtheIPP.Becauseofthemandatetopurchaseleastcost

power,whichissetbylaw,CFEhasusedconcessionalfinancing(i.e.,loansatabelow-marketratepro-

videdbyinternational organizations)orcarbonfinance (i.e.,carboncredits) tooffsetany incremental

costsofRE;inparticular,tocovertheviabilitygapforwindprojects.

However,the2008RELawandits2009Regulationmandatethattheneteconomicbenefitsbeconsid-

eredwhenevaluatingREprojects,bothwithrespecttoquantitiestobeincludedinaninventoryandto

pricesthatshouldbepaidforREgeneration.ThefirstnationalREintegrationtargetssetaftertheRE

LawarebasedonprojectsalreadyconsideredbyCFEinits2008expansionplan.Theyarefortechnolo-

gies that arealreadyviable (small hydro, cogeneration, biogas,wind, andgeothermal).SENER is still


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workingonamethodologytodeterminetheneteconomicbenefitsofREtosetupdatedtargetsafter

2012.Likewise,CREisworkingtoestablishapricecapandfloor,andspecificREquantitiestoincorpo-

rateintofuturebiddingdocumentsforREgeneration,basedonneteconomicbenefits.

ThefinalresultofSENERsandCREsworkremainstobeseen.Whilemanyinprinciplemayagreethat

REcreatessomeeconomicbenefits,itmaybemoredifficulttoagreeonthedetails:

Whicheconomicbenefitsshouldbeincludedinthemethodologyforplanningandimplement-ingnewgeneration?Inparticular,shouldonlylocaloralsoglobalexternalitiesbeconsidered?If

globalexternalitieswerealsoconsidered,shouldMexicopay toavoidthemgiventhecountry

wouldgetonlya fractionofanybenefit?Orshouldtheinternationalcommunitypay,as ithas

forexampleforwind?

Howshouldeconomiccostsandbenefitsbevalued?Valuationwillinvolveestimatingaper-kWhvalueforbenefitssuchasenergysecurityandreducedhealthproblemsfromlocalemissionsof

particulatematter.Someeconomiccostsandbenefits(especiallywhendealingwithhumanlife

andfuturegenerations)maybemoreproblematictovalue.

Meanwhile,internationalorganizationssuchastheIDBaresupportingthelocalmanufacturingofwind

turbines,whicharemarginallyviableinthecountry.Capacityfactorsforwindareveryhighinthecoun-

try;sohighthattheyhaveledtoproblemsforturbinesatsomesites.Mexicohasalargepotentialmar-

ketforwindandthenecessaryindustrialcapacitytoserveit.Technicalassistanceandconcessionalfi-

nanceforthistechnologyseemjustifiedtohelpitmakethefinaltechnicalandeconomicprogressit

needstocontributetoMexicoscleanenergymatrixinaneconomicallyviableway(IDB,2011b).

TheMexicangovernmenthasalsomade progress ona framework forsmall-scaleDG;however, this

frameworkisstillinitspilotstageandevolving.UsingCREsmodelcontracts,CFEcanenterintointer-

connectionagreements that provide feed-intariffsat retail rates using a netmetering arrangement.

ThesecontractsareapplicableforallREsystemsthathaveacapacityupto500kWandthatareinter-

connectedtothedistributionnetworkatvoltagesup to69kV(SENER,2010b).Thereis nocaponthe

overalleligibilityforthisprogram(totalnumberofsystems,totalinstalledcapacity).

Thefirstexampleofgrid-connectedsmall-scaleDGusinga feed-intariffinMexicoisCFEsGridInter-

connectedPhotovoltaicNeighborhoodPrograminMexicali (BajaCalifornia).Thisprojectwas imple-

mentedthroughanagreementbetweenCFEandtheStateGovernmentofBajaCalifornia.Itentailsin-

stalling220affordablehouses,equippedwith solarPVmodules forself-generationandsaleof excess

electricitytothegrid(aswellasefficientappliancesandenergysavinglights).Eachhouseholdsystemis

equippedwithbidirectionalmeterstomeasureseparatelytheelectricitysoldtoandboughtfromCFE.In

spiteofusingbidirectionalmeters,bothflowsarebilledattheretailrate,asinnetmetering(Comisin

EstataldeEnerga,2011).


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CFEsprogramrepresentsapositivestepinthatitallowscustomersthatareself-generatingtosellex-

cesselectricitytothegridanditinvolvesafeed-intariffthatisnotsetatthelevelthatwouldmakesolar

PVfinanciallyviable(atleastUS$0.36perkWh,ormore,asshowninFigure9).Sincefornowthispro-gramcoversanegligibleportionofgeneration,itsimplementationhasalimitedimpactbothinopera-

tionalandfinancialterms,butcanprovideusefulinformationforreplicationonalargerscale.Whenthis

happens,thisprogramshouldbeimprovedby:

Providinganoverallcaponeligibility, consistentwithupdatedtargetsforREbasedon theirneteconomicbenefits.Thiswillallowknowinginadvancehowmuchintermittentcapacitywill

beonthenetworkandhowmuchitwillcost.

Usingnetbillingtopayapricethatiseconomicallyjustifiedbasedontheneteconomicbene-fitsthatwillbedecided .Thebidirectionalmetersthatareinstalledalreadyallowthis.Netbilling

will showcustomerswithaneligiblePVsystemthattheybuyelectricityattheretailpricebut

thattheysellitatavoidedcosttoavoidimposingadditionalcosts(overandaboveanythatthe

governmentmaydecideareeconomicallyjustifiedforthecountry)oncustomerswithoutaPV

system.TheMexicaliprojecthighlights50percent insavingsonbillsofeligiblecustomersbut

doesnotclarifythatothercustomerswillultimatelypayforthoseadditionalcosts,withoutthis

additionalcosthavingbeenassessedaseconomicallyjustified.

Chile

Sincethe1980s,Chilehasopeneditsmarkettoprivatepowergeneration,which,inturn,hasfacilitated

DGdevelopment.However,littleDGhasactuallybeendonewithRE.RenewableDGisonlyviableona

commercialscale,butitistooexpensiveonasmallscale.Since2004,thegovernmenthasbeencreatingaframeworktopromoterenewableDGonacommercialscalewithamixofincentives,targets,and

competition.Theframeworkforsmall-scalerenewableDGisstillintheworks,withsomeuncertainties.

Context:ACompetitiveElectricityMarketwithRelativelyHighElectricityPrices

TheChileanelectricitysectorisa competitivemarket.Generation,transmission,anddistributionwere

unbundledinthe1980s.Theprivatizationprocesswascompletedbytheendofthe1990sandisregard-

edto have improvedtheperformanceoftheelectricitysector.Generatorscanselltheirelectricityto

distribution companies, unregulated clients, or on the spot market. The Sistema Interconectadodel

NorteGrande(SING)and theSistemaInterconectadoCentral(SIC)arethe twolargestinterconnected

systems.DistributioncompaniesinChileoperateunderpublicserviceconcessionsandareresponsibleforprovidingservicewithintheirareasatregulatedtariffs(CNE/GTZ,2009).

The main electricity sector entities inChileare theNational Energy Commission (CNE, orComisin

NacionaldeEnerga),partoftheMinistryofEnergy;theSuperintendentofElectricityandFuels(SEC,or

Superintendencia de Electricidad y Combustibles); and Load Economic Dispatch Centers (CNE/GTZ,

2009).Thefollowingarethemainresponsibilitiesofeachagency.


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CNE:Developandcoordinateenergysectorplans,policies,andnorms.Advise theMinistryofEconomyonsettingregulateddistributiontariffs.

SEC:Supervisecompliancewithenergysectorlaws,regulations,andtechnicalstandards. LoadEconomicDispatchCenters:Coordinateoperationofgeneratorsandtransmissionlinesin

eachelectricsystem.

Chiledependson hydropowerandimportedfossilfuels for itselectricitygeneration,asshowninFig-

ure10.Givenits limiteddomesticfossilfuelresources,Chileimports58percentofitsprimaryenergy

sources(oil,coal,andgas).Becauseofdisruptionsin fuel supply fromArgentinaandseveredroughts

from2008to2009,Chileswitchedfromnaturalgastooil,coal,andLNG(buildingtwonewterminals).

Currently,Chileisexpandingitscoalpowercapacity(CNE/GTZ,2009;CNE,2008b).

Longrunelectricitygenerationcosts areestimatedatUS$0.05,US$0.06,andUS$0.08perkWhforcoal,

naturalgas,anddieselgeneration,respectively(PNUD/ENDESACO,2010).Grossedupforlosses,which

arelowinChile(havingdecreasedfrom21percentin1992to8percentin2007;IEA,2009),onlythe

dieselbenchmarkincreasesjustslightly(toUS$0.09perkWh).ThespotpriceintheSICinMarch2011,

however,wasUS$0.20perkWh(US$0.22perkWhgrossedupforlosses;SYSTEP,2011).

ChilehasthesecondhighestelectricitytariffsinthesouthernconeafterUruguay.In2011,residential

electricitytariffswereaboutUS$0.18perkWh.IndustrialtariffswereapproximatelyUS$0.12perkWh,

whicharealsohighfortheLatinAmericanregion(comparedtoArgentinaorPeru)andcouldhavenega-

tiveimplicationsforthecompetivenessofindustriesinChile(Montamat,2011).TheaveragetariffinSIC

andSINGinMay2011wasUS$0.11perkWh(SYSTEP,2011).

Figure10.ChilePowerGenerationbyTechnology

Hydro-

Reservoir,

25.0%

Oil,21.0%

Hydro-Runof

River,16.0%

Coal,16.0%

Nat.Gas,10.0%

Petcoke,10.0%

MSW,1.0% Diesel,1.0%

Source:CNE/GTZ,2009.


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ViabilityofRenewableDG:GoodOptionsonCommercialScale,NoneonSmallScale

Figure11showstheeconomicandfinancialviabilityofcommercial-andsmall-scaleDGrenewableener-

gyprojectsinChile.

Figure11.ViabilityofRenewableDGinChile(US$perkWh)

0.51

0.47

0.40

0.38

0.31

0.07

0.04

0.04

- 0.10 0.20 0.30 0.40 0.50 0.60

SmallWind(10kW)

SolarPV(PuntaArenas)

SolarPV(Concepcion)

SolarPV(Santiago)

SolarPV(Antofagasta)

CommercialWind(10MW)

BiomassCogen(20MW)

SmallHydro(9MW)

US$/kWh

Coal +8%losses(US$0.05)

NaturalGas +8%losses(US$0.06)

Diesel+8%losses(US$0.09)

Short-runmarginalcost

(spot),SIC+8%losses:

US$0.22

Averagetariff,SICandSING

(US$0.11)

Sources:Forcommercialwind,biomasscogen,smallhydro,coal,naturalgas,anddiesel:PNUD/ENDESACO,2010.

Forsmall-scalewind:AlmonacidandNahuelhua,2009.ForsolarPV:Rudnick,2010;NREL,2011(10%discountrate). 15

FortariffsandspotpriceinSIC:SYSTEP,2011.

Figure11showsthat:

Smallhydroandbiomasscogenerationareviableonacommercialscale. Costsarebelowthoseofconventionalcoal.

Commercial-scalewindisalmostviable.Comparedwiththevariablecostofnaturalgas,com-mercial-scalewindisnotviable.Comparedwithdiesel,however,commercial-scalewindcould

justbeviableifthevariableportionofthedieselbenchmarkwereconsidered.

SolarPVisnotviable.CostsofgenerationofsolarPVareestimatedtobebetweenUS$0.31andUS$0.47perkWhbasedofcapitalcostsofaboutUS$4,000perkW(Rudnick,2010).GivenChiles

geography,capacityfactorsareverydifferentdependingonthelatitudeatwhicha solarPVsys-

temisinstalled.UsingthePVWattstooloftheNationalRenewableEnergyLaboratory(NREL),ca-

pacityfactorsrangebetween19percentinAntofagastainthenorthofChiletoabout15percent

15Capitalcosts of 3,000 (US$4,000)per kW installed. Capacity factorsof 19percent (Antofagasta), 15percent

(SantiagoandConcepcin),and12percent(PuntaArenas).


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Ontheotherhand,notallrulesandprocessesforsmall-scalerenewableDGshouldnecessarilybepro-

videdbylaw.Draftbillsmighthaveabetterchanceofprogressingifthey:

Statethattheirobjectiveistocontributetogreaterenergysecurity,whichisconsistentwithCNEsEnergyPolicy(CNE,2008a),byallowingtheuseofallelectricitygenerated,eventhatfrom

smallsystemsthatuseREsources.

Statethattherateshouldbedetermined: basedontheactualavoidedcost; using bidirectional meters to avoid increasing power bills of households and companies

alike,whilelettingthemsellanyelectricitytheydonotuseandgetpaidafairpriceforthat;

foraperiodequaltotheusefullifetimeofsystems. Stateindividualandoverallcapsforeligibilitytoobtaincertaintyonquantitiesandcostsofthe

program.

Statethatregulationswouldspecifythedetailedtermsofthenetmeteringprogramandotherdocumentswouldspecifytechnicalrequirements.


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SummaryAnalysisofRenewableDGinJamaica,Barbados,

Mexico,andChileTable3summarizesthestrengths,weaknesses,opportunities,andthreats(SWOT)ofthefourcountriesframeworksforrenewableDG.

Table3.SWOTAnalysisofRenewableDGinJamaica,Barbados,Mexico,andChile

Strengths Weaknesses

Jamaica,Barbados,Chile,andMexicoarealreadyde-

velopingwhatisviablewithoutimposingadditional

subsidieslikeindustrializedcountries.

Leastcostgeneration isensuredinJamaica,Chile,and

Mexico(withdifferentsectorstructures),andeffective-lyimplementedinBarbadosbyutility(includingRE).

Jamaica,Barbados,andMexicoallowexcesselectricity

fromsmall-scaleREtobesold.

JamaicaandBarbadosoffernetbilling,feed-intariffsat

avoidedcost,andatotalcaponeligibility.

Jamaicaoffersapremiumforrecognizingeconomic

benefitsofRE.

JamaicaandBarbadosoffertermsforSOCandRER

thataretooshortforsmall-scalerenewableDG.

Jamaicasavoidedcostcalculationistoolow,asitdoes

notrecognizethefullcontributionofRE.

Barbadostariffstructuremayofferinefficientincen-

tivesforsmall-scaleRE.

Therearenototalcapsforsmall-scalerenewableDG

eligibleforfeed-intariffsinMexicoorinChilesdraft

bills.

Mexicooffers(andChileisconsidering)netmetering

insteadofnetbilling.

ItisnotpossibletosellexcessRE inChile.

Opportunities Threats

Currentoptionsexisttoreducecoststhroughcommer-cial-scaleREinallcountries.

Additionalviableoptionsshouldarise ascapitalcosts

decreaseforsmall-scaleRE(suchassolarPV).

TherecentlyapprovedREpolicyinBarbadosmandates

leastcostgenerationwithRE,integrationofIPPs,longer

termforRER,andimprovedtariffstructure.

MexicoiscompletinganREframework:methodology

oneconomicbenefitsofRE,modelcontractsandme-

teringarrangementsforsmall-scaleRE,newtargets.

Chileisdevelopingaframeworkforsmall-scaleRE to

sellexcesselectricitytothegrid(netmeteringbills).

Inertia:Peopleonlydowhattheyalreadyknow,unlesstheyareinducedtochange.

Inabilitytoconnecttothegridtosellpower :Gridrules

arenotdesignedtoaccommodateDG.

Burdensomeplanningandpermitting,andhightrans-

actioncosts:Newprojectsposeunknownproblems

forfirsttime.

Inspiteofsomeweaknesses,theoverallpicture isencouraging.Generally, thefourcountrieshaveal-

readydeveloped(orareonthewaytodoingso)viablerenewableDGonacommercialscale,indifferent

waysdependingonmarketstructure.Thefourcountriesarealsoshowingcautioninhowtheyallow

non-viablerenewableDGonasmallscaletocontributetotheirenergymix:Barbadospaysavoidedcost;

Jamaicapaysalimitedpremiumforeconomicbenefits;Mexicoisconsideringonlyrecognizingneteco-


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nomicbenefits;andChilehasstillnotdecidedwhethertheyshouldcontributeatall.Nocountryhasset

feed-intariffsatalevelthatwillensurethefinancialviabilityofprojectsthatarenoteconomicallyvia-

ble. In this, emerging markets of LAC have shownwisdom, thoughtfulness, and restraint, especiallycomparedtomoreaggressiveapproachesadoptedinEuropeandNorthAmerica.

Table3alsointroducesthefollowingopportunitiesforrenewableDG:

Currentoptionsalreadyexisttoreducecoststhroughcommercial-scaleREinallcountries.Be-foreregrettingthatnon-viableoptionsarenotbeingpromoted(subsidized)enough,stakehold-

ersinthese(andothersimilar)countriesshouldmakeeveryefforttomakesureallviableones

areassessedanddeveloped.

Inthefuture,additionaloptionsmayariseascapitalcostsareexpectedtodecreasefor small-scaleRE.Astheysetupframeworkstopromotecost-effectiveREonanyscale,countriesshould

plan ahead toallowany option that becomes viable tobeeffectively assessed, built, and dis-

patched.

ThetablealsopresentsthefollowingthreatstorenewableDG:

Inertia.Justbecausesomethingmakesenseisnoguaranteethatitwillhappen.People(andes-peciallyinstitutions)oftentendtoonlydowhattheyalreadyknow,unlesstheyarepersuaded

(e.g., througheffectivepubliceducation, awareness, andcapacity building) or required todo

somethingdifferent.Forexample,atraditionalutilitymayinterpretaregulatoryobligationtodo

leastcostplanningasjustincludingconventionalgenerationoptions.Atraditionalregulatormay

just check that the utility considers that spectrum of options, not realizing that other non-

conventional(RE)optionsmaybecompetitivealready.FortunatelyforBarbados,BL&Pisdoing

leastcostplanning,includingviableREoptionsonsmallandlargescale,evenwithoutbeingre-

quiredtodoso.Othercountriesmaybelessfortunate.

Inabilitytoconnecttothegridtosellpower .Sometimes(likeinChile)therearenorulesthatallowhouseholdsandbusinessestosellexcesscapacityofthei

Perspectives for Distributed Generation with Renewable Energy in Latin America and the Caribbean

Documents