Provision of Technical Support/Services for an Economical

A project financed by the Ministry of Foreign Affairs of Denmark

Provision of Technical Support/Services for an Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

Country Report Yemen

January 2010, revised April 2010

Norsk-Data-Str. 1 Döppersberg 19 61352 Bad Homburg, Germany 42103 Wuppertal, Germany Tel: +49-6172-9460-103, Fax. +49-6172-9460-20 Tel: +49-202-2492-0, Fax: +49-202-2492-108 eMail: [email protected] eMail: [email protected] http://www.mvv-decon.com http://www.wupperinst.org

Table of Contents Page

1. Project Synopsis 1

2. Summary of Energy Situation in Yemen 2

3. Comparison of Yemeni Practice with International Practice in Energy Efficiency 4 3.1 Strategy 4 3.2 Legal Reform 6 3.3 Price Reform 6 3.4 An Agency 8 3.5 Standards and / or Labels 9 3.6 Financial Incentives 10 3.7 Obligations 11 3.8 Audits and the Promotion of ESCOs 12 3.9 Transport and Spatial Planning 12 3.10 Dissemination of Information 13 4. Comparison of Yemeni Practice with International Practice in Renewable Energy 14 4.1 Targets and Strategy 14 4.2 Legal Reform 16 4.3 An Agency 18 4.4 Standards and /or Labels 19 4.5 Financial Incentives (Capital Support) 19 4.6 Feed-in Tariffs and Obligations 20 4.7 CDM Finance 21 4.8 Information 22 4.9 Industrial Policy 22 5. Case Studies 24 5.1 Case Study 1 - Efficient Lighting in Public Buildings 24 5.1.1 Background and Context 24 5.1.1.1 Programme of Activities 24 5.1.1.2 The Lighting market in Yemen 25 5.1.1.3 Scope of the Case Study 25 5.1.2 Evidence-based Policy Making 25 5.1.2.1 Alternative Forms of Intervention 26 5.1.2.2 Base Case 27 5.1.2.3 Impacts 27 5.1.2.4 Consultation 27 5.1.2.5 Compliance 28 5.1.3 Theory-based Evaluation 28 5.1.3.1 Methodology 28 5.1.3.2 Indicators 28 5.1.3.3 Behavioural Matrix 28 5.1.4 Cost-Benefit Assessment 33 5.1.4.1 Methodology Applied and Data Basis 33 5.1.4.2 Electricity Supply Cost 35 5.1.4.3 Emission Factors 40

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table of Contents Page

5.1.4.4 Financial Analysis 1 - Individual Investor 40 5.1.4.5 Financial Analysis 2 - Electricity Company / Programme Manager PEC 41 5.1.4.6 Economic Analysis 44 5.1.4.7 Sensitivity Test - Impact of the CERs Value 44 5.1.5 Conclusion 46 5.1.5.1 Methodology 46 5.1.5.2 Cost-Benefit Analysis 46 5.1.5.3 Programme of Action (PoA) as a Policy Instrument 46 5.2 Case Study 2 - Off-Grid PV for Rural Electrification 47 5.2.1 Background and Context 47 5.2.2 Evidence-based Policy Making 47 5.2.2.1 Alternative forms of intervention 48 5.2.2.2 Base Case 48 5.2.2.3 Impacts 48 5.2.2.4 Consultation 49 5.2.2.5 Compliance 49 5.2.3 Theory-based Evaluation 49 5.2.3.1 Methodology 49 5.2.3.2 Indicators 50 5.2.3.3 Behavioural Matrix 50 5.2.4 Cost-Benefit Assessment 53 5.2.4.1 Methodology Applied 53 5.2.4.2 Assumptions and Data Base 54 5.2.4.3 Cost Comparison Photovoltaic vs. Gasoline Diesel Generators 54 5.2.4.4 Subsidy Level for Decentralised Electricity Supply 55 5.2.5 Conclusion 58 5.2.5.1 Methodology 58 5.2.5.2 Results of the Analysis 58 6. Institutional Reform in Yemen – Some Possibilities 59 6.1 Reform of the Pricing System 59 6.2 Communication Structures among Institutional Bodies 60 6.3 Establish reliable Energy Statistics 60 6.4 Create basic Legal Framework for PPP 60 6.5 Broaden University Education 60 6.6 Support the Way to an independent Efficiency and Renewable Energies Authority 61 6.7 Establishment of Standards, Labels and Audit Schemes 61 6.8 Create a domestic Industry for Efficient Appliances 62 6.9 Foster Approaches in the Transport Sector 62 6.10 Renewable Energy Target and general Legal Approaches 63 6.11 Realise Projects and Initiatives 63

List of Figures

Figure 1: US LNG Prices Figure 2: Forecasts of Crude Prices to 2030 (DOE/IEA) Figure 3: Derived Forecast of International LNG Prices

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Figure 4: Marginal cost of electricity from gas Figure 5: Marginal Opportunity Costs including Emergency Generation Figure 6: Emission Factors in grams of CO2 equivalent per kWh Figure 7. Policy Cycle. Figure 8: Yemen’s Primary Energy Mix, 2006 Figure 9: Historical Primary Energy Consumption in Yemen, 1980-2006 Figure 10: Historical Crude Oil Production in Yemen, 1990-2008 Figure 11: Yemen’s Infrastructure for Oil Transportation Figure 12: Historical Net Electricity Generation and Consumption in Yemen, 1980-2006 Figure 13: Electricity Consumption by Sector in Yemen Figure 14: Primary and Final Energy Intensity in Yemen in Comparison to EU-27 and MENA Figure 15: Benefits of DSM/EE Measures Proposed in the Action Plan of the World Bank Project

List of Annexes

Annex 1: Mission Report Annex 2: List of Stakeholders Annex 3: Seminar Programme Annex 4: Presentation on Methodology Annex 5: Preview on Information Workshop Annex 6: Energy Situation in Yemen

List of Tables

Table 1 Estimated savings from energy efficiency in the electricity sector Table 2 Five year programme for DSM / EE Table 3 Prices for petroleum products in Riyal and Euros Table 4 Electricity tariff for 2008 and 2009 Table 5: Behavioural Matrix for a PoA on efficient lighting Table 6: Cost-Benefit Analysis - General Data Table 7: Cost-Benefit Analysis - Electronic Ballast Table 8: Data for the Programme of Activity (PoA) Table 9: Financial Analysis 1 - Individual Investment Table 10: Financial Analysis 2 - Electricity Company / Programme Manager PEC Table 11: Variation of the CERs / Carbon Credit Value Table 12: Economic Analysis of the Programme Table 13: Behavioural matrix for instruments to support off-grid PV for rural electrification Table 14: Basic Data for the Analysis Table 15: Direct Cost Comparison - PV vs. Gasoline Generator Table 16: Determination of Subsidy Level 1 - Decentralised Electricity Supply (PV vs. Gasoline

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Generator) Table 17: Determination of Subsidy Level 1 - Decentralised Electricity Supply (PV vs. Gasoline Generator) Table 18: General Information about Yemen in 2008 Table 19: Diesel prices in Rial/l for different consumer types, 2009. Table 20: Grid-Based Renewable Energy Technical Potential in Yemen

List of Acronyms

AFD Agence Francaise de Development BRT Bus Rapid Transit CCGT Combined Cycle Gas Turbine CDM Clean Development Mechanism CER Certified Emission Reduction CFL Compact Fluorescent Lamp CNG Compressed Natural Gas CPA CDM Programme Activity CSP Concentrated Solar Power CTF Clean Technology Fund DANIDA Danish International Development Agency DSM Demand Side Management DNA Designated National Authority EBPM Evidence Based Policy Making EE Energy Efficiency EHV Extra high voltage EIA Energy Information Agency EPC Energy Performance Contract ESCO Energy Service Company EU European Union g gram GEF Global Environment Fund GHG Green House Gas GJ Giga Joule GWh Giga Watt hours HV High Voltage IBRD International Bank for Reconstruction and Development (Worldbank) IDA International Development Agency IEA International Energy Agency IISD International Institute for Sustainable Development IPP Independent Power Producer JICA Japanese International Cooperation Agency kWh kilo Watt hours LEED Leadership in Environmental and Energy Design LNG Liquefied Natural Gas LPG Liquefied Petroleum Gas LRT Light Rail Transit LSP Letter of Sector Policy

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

LV Low Voltage MED-EMIP Euro-Mediterranean Energy Market Integration Project MED-ENEC Euro-Med Project on Energy Efficiency in the Construction Sector MENA Middle East and North Africa MMBTU Million British Thermal Units MEPS Minimum Energy Performance Standards MV Medium Voltage MW Megawatt NET PV Net Present Value NGO Non-Governmental Organisation OCGT open cycle gas turbine OECD Organisation for Economic Cooperation and Development PEC Public Electricity Company PIN Project Idea Note PoA Programme of Activities PPA Power Purchase Agreement PSA Production Sharing Agreement RCREEE Regional Centre for Renewable Energy and Energy Efficiency RE Renewable Energy SWH Solar Water Heater TBE Theory Based Evaluation toe tons of oil equivalent UNDP United Nation Development Program USAID United States Agency for International Development

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

1. Project Synopsis

The "Regional Centre for Renewable Energies and Energy Efficiency (RCREEE)" was formally established June 25, 2008 through the signing of the "Cairo Declaration of Intentions on Establishment of a Regional Centre for Renewable Energies and Energy Efficiency (RCREEE)" by representatives of its member states: Algeria, Egypt, Jordan, Lebanon, Libya, Morocco, Palestine, Syria, Tunisia and Yemen. The overall objective of RCREEE is, through its interventions, to achieve: a) rapid implementation of cost-effective policies and instruments for the increased penetration of renewable energy (RE) and energy efficiency (EE) technologies and practices in member countries; and b) increased market shares of companies and plants located in MENA-countries on the markets for technologies and services related to RE and EE in the MENA and EU regions.

For the first five years of operation, RCREEE receives financial support from the Governments of Egypt, Germany and Denmark. The European Commission (EC) supports RCREEE through two regional programs: "MED-EMIP" and Phase II of "MED-ENEC". Member countries will contribute financially by increasingly co-financing the costs of the participation of national officials in RCREEE seminars and workshops.

The present project is the first project support to RCREEE from the Danish Government. It is part of RCREEE's overall effort of providing member state administrations with better information and new planning tools and processes. It supports RECREEE in the development of a website which offers access to a complete subject-ordered list of member state RE&EE laws and regulations, reviewed policy documents, selected background and evaluation reports deemed to represent state-of-the art high quality analytical work as well as discussion blogs on topics deemed to be of general interest for RCREEE governments.

In parallel and supporting the above activities, the project has gathered the pertinent information on EE and RE in each member country and made them available through the RCREEE website in an organised manner. Likewise the methodology on evidence based policy development and theory based policy evaluation was discussed and extended in each country and their relevance and applicability il- lustrated through case studies. On the basis of the country reports, a regional report was prepared to allow policy makers and decision makers in all RCREEE member countries to see the status of their EE and RE policies in a comprehensive regional context.

The activities were carried out by the project core team of four international experts assisted in each country by a national specialist. Workshops were held by the national specialists at the end of the project using the material and the methodological case studies developed throughout the project. The national and regional reports were revised to take into account the comments received.

The Yemen was visited by the project team during 9 to 14 October 2009.

The following sections in this report reflect the impressions gained by the project team through the discussions held during the course of the mission and all the information that has been available to the team. The main purpose of this country paper is to stimulate new thought on EE and RE policy development in the Yemen.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

2. Summary of Energy Situation in Yemen

The Republic of Yemen’s energy supply is depending to 99% on oil products and to 1% on waste (and renewables). This is about to change, as new power generation capacity is planned on natural gas basis. Crude oil is produced domestically to significant amounts, but production is in steep decline. Natural gas production shows a different trend: it is still at the very beginning with total proven reserves of 11 tcf (310 bn m 3). The largest share is reserved for exports as LNG. The rest is intended to be used as fuel for domestic power plants and – if further reserves are discovered – other in sectors, e.g. the cement industry.

Total generation capacity of the Yemeni electricity system is 1 GW; 700-800 MW are state-owned, the rest is operated mainly by a British company that sells electricity at high prices to the Public Electricity Company PEC. The urbanisation share is low in Yemen resulting in very decentralised population pat- terns, making centralised power grids over the whole country impossible. This is a setting that favours small-scale renewable energy technologies together with energy efficient appliances.

The major actors in the Yemeni energy system to date are the Ministry of Oil and Mineral Resources (fossil fuels), the Ministry of Electricity and Energy (currently also responsible for renewables), the Na- tional Petroleum Company, the Public Electricity Company PEC (selling electricity to consumers), the Ministry of Planning (responsible for budgetary procedures as energy prices) and the Rural Electrifica- tion Authority. There is a lack of communication and transparency among different actors in the Yem- eni decision making process, starting with the provision of basic knowledge for decision makers.

Extensive restructuring is underway, initiated partly by pressure from international donors: PEC will be split up into separate companies for generation, transport and distribution of electricity; Renewable energies and energy efficiency responsibilities will be concentrated in an independent authority; separate institutional bodies have been given responsibility for rural electrification and on-grid development.

The Yemeni energy sector – electricity generation and grids, renewables, efficiency – is very strongly donor-driven, which makes long-term budgetary planning difficult. In its Power Sector Development Strategy Note of 1997, updated in 2006, the Government of Yemen (GOY) committed to a nationwide rural electrification (RE) programme. In order to ensure that future investments in RE and renewable energy were sustainable, the GOY requested financing from the IDA for the development of a comprehensive RE strategy and associated RE programmme. Preparatory market assessment studies and capacity building measures were initiated through a GEF-funded Rural Electrification and Renew- able Energy Development Project (REREDP) which was co-financed by other donors and the GOY. Based on the REREDP studies, a Rural Electrification Policy Statement (REPS) was approved by the Cabinet in July 2008.

The National Rural Electrification Strategy study identified 27 service territories in twelve governorates for rural electric service expansion and integration into the national grid. A merit based priority ranking for the development of these service territories was prepared and an investment programme of about US$259 million defined. The program will result in increased access for over 520,000 new rural households that will increase access from the current level of about 20% to about 46% of rural households and benefit more than 3.5 million people. Rural Electrification for the remaining seven governorates is not considered to be viable through grid extension and, will have to depend on development of renewable energy.

The Worldbank also supports a project on the modernisation of the Yemeni power grid including some DSM measures. In Al-Mokha a wind power farm of 60 MW capacity is planned. Total wind power po- Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

tential is estimated to be 34 GW.

The Yemeni government decided on a 15% renewable electricity target by 2025. This is a realistic time frame and such a target is also compatible with the future electricity system requirements and capabilities (regarding loss reduction and overall stability).

Energy prices are subsidised heavily in all sectors. This impedes end-consumers' approaches of energy efficiency on a cost-effective basis in the Yemeni energy system. Reduction of subsidies is discussed in Yemen, but not taken seriously into consideration currently. The Yemeni government could generate high revenues by reducing subsidies and introducing efficiency, as more crude oil could be exported and sold at high international prices.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

3. Comparison of Yemeni Practice with International Practice in Energy Effi- ciency

This section attempts to compare the present status of energy efficiency with international practice.Public policy intervenes to correct market failures, in the case of energy efficiency the most common failures are: distorted energy prices, external costs, poor access to technical information, agent- principal problems, budgetary constraints and excessive risk aversion, poor skills of investment ap- praisal. Policy instruments are intended to correct or compensate for these distortions.The most common among these instruments can be categorised as:

Corrective Measures Price Reform Institutional and legal reform Labelling Dissemination of information Research, development and demonstration Financial incentives Support for energy service companies (ESCOs)

Compensating Measures Standards Mandatory measures (e.g. compulsory audits and management obligations) Corporate agreements Efficiency obligations Transport and spatial planning

Normally these instruments should be combined within an overall strategy that sets out objectives and targets and defines the combinations of instruments that are expected to achieve the targets.

The following discussion reflects this taxonomy.

3.1 Strategy

Strategy sets out objectives and targets and defines the combinations of policy instruments that are expected to achieve the targets.

The World Bank has financed a study on how to implement energy efficiency in the electricity sector 1. The study makes many recommendations that are compiled into a three year Action Plan, but the material is of a rather general nature, with little specific suggestion on how to develop and implement policy instruments. There is a detailed prescription for institutional reform. The study estimates the savings that might be achieved over the three years, but avoids setting numerical targets. The estimated savings from the programme are shown in Table 1.

1 Yemen: Energy Efficiency Institutional Framework & 3 Year DSM/EE Action Plan, Prepared for the World Bank, by Energysolve International, March 2009

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 1 Estimated savings from energy efficiency in the electricity sector Year Demand (MW) Energy (GWh) Emissions of GHGs (1000t CO2 equiv. ) Without DSM/EE With DSM/EE Without DSM/EE 2010/11 1387 1337 9539 9396 8065 7945 2011/12 1435 1315 10493 10141 8872 8574 2012/13 1501 1283 11542 10895 9759 9212

The estimated saving in peak demand of 218 MW represents a saving of about 15% in electrical generating capacity. The savings of 647 GWH of energy represents a 5.6% saving and the saving of GHG is similar. These are ambitious estimates, but could well be achievable with determination and appropriate action.

The report proposes a future 5 year programme of donor support that is reproduced in the table. We cannot confirm donor agreement to these topics and we do not necessarily endorse the programme in detail, but in broad terms it is an appropriate set of activities.

Table 2 Five year programme for DSM / EE World Bank GEF UNESCWA Institutional structure develop- Detailed audits Household sector pilot projects: ment CFL/linear fluorescent/solar water heater DSM/EE action plan Capacity building of DSM/EE Long term awareness authority Tariff revision S&L program design and im- Improved metering plementation Initial awareness: large con- Establish a data base Pf correction of distribution sub- sumers; utility staff; project de- stations velopers; financiers Load research Establish test facilities to sup- Rural sector loss reduction port S&L: lamps/fans/ac/water heaters Energy audit training & walk- Further assistance to sustain Street lighting improvements through audits DSM/EE initiatives (Indus/Gov/Hotel) Identify CDM links and Integrated resource planning promote investments ESCO activity development + Financial assistance ESCO pilot projects: revolving fund + guarantee fund

In June 2009 the GOY approved the national strategy for RE & EE which targets a 15% increase of EE in the power sector by 2025. However, the baseline of this target requires further specification. Furthermore, the target is yet to be framed with effective and efficient policy measures for efficiency improvements.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

3.2 Legal Reform

The proper implementation of energy efficiency requires an energy efficiency law that justifies the purpose of the activity, establishes a clear focus in government, assigns the responsibilities of actors, and makes provision for an agency and specific instruments.

The following list contains the most frequently occurring provisions in such laws:

• Recognising energy efficiency as an appropriate subject of legislation and regulation • Identifying and communicating in a policy document or national plan the principles of energy efficiency policy • Identifying through technical analysis the potential for saving and prioritizing the sectors with highest potential • Defining policy interventions to promote energy efficiency e. g. fiscal and financial incentives, tradable certificates, and regulations • Drafting of legislation to implement policy interventions • Setting penalties for default • Creating institutional structures to promote energy efficiency • Assigning staff in proper numbers and with proper qualifications to the institutions and ensuring adequate finance for the institutions • Drafting national programmes for short and long-term management of energy efficiency • Assigning responsibility to promote energy efficiency at national, regional and municipal levels • Monitoring and evaluating progress

There is no energy efficiency law in Yemen and as far as we know there is no immediate intention to develop one. The DSM strategy does not touch upon this issue.

A law may not be essential, but it would greatly clarify intentions and create a sound legal basis for essential policy instruments, including an implementing agency, financial incentives, labels and standards.

3.3 Price Reform

It is well established that energy demand is price sensitive, especially demand for electricity. The most reliable results come from industrialised countries. Price reform will save large quantities of energy, especially in the long-run and can make a substantial reduction in GHG emissions from countries with distorted prices. Subsidies put a large strain on public accounts and weaken foreign trade balances. They also tend to devastate the state-owned enterprises that are normally a victim of the practice.

Prices for energy are fixed by Presidential Decree on the recommendation of the Cabinet. They are subsidised to varying extents, with the largest subsidies assigned to electricity for households and diesel fuel. Diesel fuel is politically sensitive because it affects the cost of transport and food, because many farmers use diesel for water pumping.

There are several prices for diesel fuel; it is sold at 17 Riyal / litre to the power system and at 35 Riyal per litre to the local transport market; there are other prices for cement factories and other users. The price of kerosene is also fixed at 35 Riyal per litre. Gasoline is sold at 60 Riyal / litre and Heavy Fuel Oil, which is consumed only by PEC, is 25 Riyal / litre. The refining industry in Yemen imports diesel and gasoline, but exports heavy fuel oil and naphtha.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

There is no clear, standardised mechanism for price reform and prices are often fixed for long periods; those for petroleum products have been unchanged since 2005. Increases in the retail prices of petroleum products in that year by 70% - 100% led to serious public protest. Reducing the subsidies is one of ten published priorities for the National Plan over the next two years and in February 2010 there was a further increase. The exchange rate at present is 300 Riyal for 1 €, so the above prices translate roughly as shown in Table 1.

Table 3 Prices for petroleum products in Riyal and Euros Riyal / litre Euro cents / litre Diesel (electricity) 17 6 Diesel (transport) 39 13 Gasoline 65 22 Kerosene 35 12 Heavy Fuel Oil 25-32 8-10

Subsidies to petroleum prices in 2007 are estimated at $4 billion, or more than 10% of GDP. The value of the subsidies fluctuates according to the international level of prices, which defines the opportunity cost, but is on a secular increase as access to energy extends.

Nor do the subsidies benefit the poor. The Household Energy Supply and Use study conducted in Yemen by the World Bank and UNDP in 2005 showed that 57% of the direct subsidy on diesel that is directly used by households is captured by the two top income deciles. The LPG subsidy is also poorly targeted: 5% is captured by the poorest decile, but 16% by the top income decile. The kerosene subsidy is the most targeted, with the bottom decile capturing some 13% as against 7% captured by the top decile. This reflects that fact that most kerosene is mainly used by the poor for cooking and lighting. The household study concluded that reform is required not merely in the reduction of subsidies, but in improving their transparency, and in instituting a permanent system that automatically adjusts prices in line with world market trends.

One option for compensating for impacts on the poor is by direct financial transfers. The Social Wel- fare Fund (SWF) is the main targeted social assistance programme in Yemen. According to the World Bank/UNDP study its mechanisms are highly imperfect; 4.7% of the target group received SWF transfers and 57% of those benefiting were not in the target group. The design of better social protection mechanisms is a policy measure that might complement price reform.

Another consequence of subsidised prices is smuggling. Prices are lower than the prices in surround- ing countries; products are therefore smuggled over the land borders and across the very long sea border. This is a loss to the Yemeni economy, but it is probable that the smuggler’s profit is spent in the Yemeni economy. Therefore, the net economic loss to Yemen is the share of the rent that goes to the buyer in the neighbouring country; the main effect is a transfer payment from the government to the smuggler.

Electricity prices are subsidised in two ways. First, PEC receives fuel inputs at prices well below international prices; this is an implicit subsidy that does not appear in the state accounts. Second, the revenues from sales of electricity are insufficient to cover the costs of production even at the subsidised prices and this deficit is compensated by an explicit financial transfer from the state that appears in the budget.

Prices for electricity to final consumers are shown in the Table for 2008 and 2009. The main difference is the substantial increase in 2009 for commercial customers; these consumers now cover the average

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

costs of supply. The customers in the lowest tariff categories pay about 1.3 euro cent / kWh, which is well below the costs of production. The highest charges, for hotels and large commercial enterprises, are equal to about 10 euro cents / kWh, which is probably about the opportunity cost of generation from the gas turbines. The actual marginal cost on the Yemeni system, ignoring the value of load shed, is about 16 – 20 euro cent / kWh. This is derived from the cost of the electric power from the emergency power generation, i.e. 10 USc/kWh for the leasing of the generating sets and about 20 USc/kWh for the opportunity cost of the diesel used in the engines.

Table 4 Electricity tariff for 2008 and 2009 Categories Riyal / kWh 2008 2009 Urban households 0 - 200 kWh 4 4 201 - 350 kWh 7 7 351 - 700 kWh 10 10 >700 kWh 17 17 Rural households 0 - 100 kWh 7 7 >100 kWh 17 17 Small commercial 17 18 Large commercial 17 30 Hotels 17 30 Agriculture 17 18 Large industry 15 30 Cement factories 15 30 Public water pumping 15 30 Government 18 30 Urban mosques 0 - 200 kWh 4 4 201 - 350 kWh 7 7 351 - 700 kWh 10 10 >700 kWh 17 17 Rural mosques 0 - 100 kWh 7 7 >100 kWh 17 17

Again, these subsidies are regressive. The truly poor who are not grid-connected receive nothing. Yemen has the lowest access to electricity in the region; only 40% of the population compared to the regional average of about 85%. Of the rural population (72% of the total), only 23% have access to electricity, compared with 85% of the urban population (28% of the total). Of the rural population with access to electricity, only one-half are connected to the national grid system and the rest have some access from other sources, typically a diesel generator that operates only a few hours in the evening. The subsidies therefore favour the grid-connected predominantly urban class.

3.4 An Agency

Many countries have found it useful to establish a specialised institution to prepare initiatives, draft regulations, monitor progress, ensure compliance, administer funds and perform other administrative activities. It will not necessarily be the only institution with powers in the area. If fiscal incentives are adopted then these will be managed through the office responsible for taxation, but there will still be a need to confirm the technical acceptability of the investment. Compliance with standards for equipment and boilers will normally be performed by special corps of inspectors already engaged in standards work. The regulator would normally enforce any specific obligation on electricity networks.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Despite the need to involve existing institutions, it is often considered useful to create a specialised agency. This agency would typically have the following responsibilities.

• Developing and disseminating targeted information to specific categories of users • Organising training; liaison with universities and professional bodies • Developing energy efficiency standards • Conduct of surveys; analysis of data and maintenance of database • Conducting or managing programmes of certification and labelling • Liaising with other state institutions (e.g. Taxation offices and inspectorates) • Administering energy efficiency funds • Specifying mandatory audits; certifying and/or licensing energy auditors • Designing short-term and long-term energy efficiency programmes • Monitoring, evaluating and reporting on the implementation state activities and private initiatives • Designing and proposing new interventions as opportunities are identified

Legislation would probably be needed to establish such an agency and to specify its duties.

Energy efficiency is at present the responsibility of a Department within the Ministry of Electricity and Energy. The study on DSM and EE undertaken for the World Bank proposes a transition to a separate Authority for DSM and Energy Efficiency, and a similar Authority for Renewable Energy.

As we understand the internal Ministry structures, such a transition would first involve the creation of a sector for energy efficiency (and possibly renewable energy) and then subsequently an Authority. There is resistance in government to the proliferation of Authorities and there is some benefit in combining responsibilities for energy efficiency and renewable energy.

Most countries have found that the assignment of responsibility to an energy efficiency agency is an important step. It is necessary to have an independent voice combating the dominance of the energy suppliers and pressing for appropriate regulation and reform. The Yemen has a strategy for energy efficiency, outlined above, but it has no clear policy as is evident from the discussion of policy instruments below. An agency can help transform the strategy into operational policy.

3.5 Standards and / or Labels

The obligation on manufacturers and importers of equipment to label goods or to meet specified standards is a policy measure introduced to overcome the market failure caused by asymmetric information. Potential users of equipment, faced with a choice of designs, may not have the skills and information to understand the consequences of their choice. They may be tempted to choose low-cost equipment with high energy consumption in preference to higher price options that perform better. Manufac- turers may not have an incentive to provide this information if they think that their comparative market advantages do not include greater efficiency than competitors. Labelling and standards are not exclusive; goods can be obliged to meet a certain minimum standards and then labelled according to their performance when it exceeds the standard. Labelling and standards both require testing facilities and protocols; both require rigorous and competent enforcement.

There are no performance standards or labels for electrical appliances in the Yemen. The Standards Institute is responsible for setting and monitoring standards, but it appears that at present it does not have the testing facilities satisfactorily to monitor basic electrical properties and safety. It is in the process of developing such facilities.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

There is no domestic manufacture of appliances; most are imported from China and, in the absence of controls, importers and overseas manufacturers will be tempted to dispose of low-grade and even de- fective stock. The quality and performance of such appliances must be very doubtful. Many fake branded goods are also imported.

It is important that standards be established and monitored. The absence of local manufacture in this instance can be an advantage as it means goods can be tested at the point of entry, which is much easier than at the point of sale. Some private agents already operate an informal system for detecting and seizing fake goods at the port. Technical assistance is desirable to support a proper system of standards and it should take into account the progress that has been made elsewhere in the region. Ideally it should be a part of a larger project to develop a range of instruments for energy efficiency.

Standards for buildings are an important special case because:

• The rate of new building in developing countries is far higher than anywhere else in the world • Buildings are large consumers of energy • Buildings last for decades and will determine energy use for a very long time • Large improvements in the energy efficiency of buildings can be achieved at low cost • Developers will not normally make those improvements because of various chronic market failures • The principal-agent dilemma is especially acute

The Ministry of Public Works has published and is responsible for enforcing the building code. In practice it appears that compliance is weak. In any case, there is no treatment of the thermal performance of buildings in the code. Control, at least of large air conditioned buildings that are now becoming more common, especially in Aden is needed. Other countries in the region have made good progress in developing codes for thermal efficiency. Technical assistance to help transfer this practice is highly desirable.

3.6 Financial Incentives

Financial incentives can be separated into economic and fiscal incentives. Economic incentives are aimed at encouraging investment in energy efficient equipment and processes by reducing the investment cost directly and fiscal incentives are those actions that reduce the cost indirectly through the taxation system. Economic incentives can be further divided into investment subsidies and concessional finance. Investment subsidies change the perceived cost of an investment and concessional finance changes the financing conditions. Fiscal incentives differ from other financial incentives in several ways. They do not need to be funded directly; they are funded indirectly in that they represent a loss of revenue to the state budget. Generally they are available to all who qualify according to the terms of the exemption; there is no application and award process. For this reason they are sometimes preferred as being less susceptible to corruption and to political manipulation. They can be managed through the normal tax compliance regime. In middle income countries this approach is generally only practical with companies.

A last instrument that might be included under this heading is feed-in tariffs for cogeneration. If the feed-in tariff is above the opportunity cost of electricity then the instrument does really constitute an incentive. The incentive is funded by other consumers of electricity unless a special compensation is paid from the state budget to the network. If the feed-in tariff is above the marginal cost of electricity at subsidised fuel prices, but below the opportunity cost then it is simply a regulation to correct the mo-

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

nopoly purchasing power of the network and the distorted fuel prices.

A variety of fiscal incentives is proposed under the World Bank DSM / EE programme. These include capital subsidies for solar water heating, incentives for the purchase of energy efficient equipment (through tax benefits, low interest loans, accelerated depreciation) and loan guarantees for larger investments.

Evidently incentives require funding and the only practical source is from low interest loans and grants from donors. Rather than a miscellaneous collection of incentives operated by different entities it is preferable to have incentives implemented by an energy efficiency fund with clear rules of procedure and transparent management. Such an arrangement might quite probably be attractive to donors.

3.7 Obligations

Another approach, which may be combined with incentives, is to oblige companies to undertake energy efficiency by mandatory measures. These can be multiple and include obligations to:

• To carry out audits at regular intervals • To report to central government database and possibly to communicate audit results to the public • To report energy consumption, saving measures and implemented measures • To propose action plans to implement the energy savings measures identified in audits • To carry out certain specified measures • To appoint an energy manager • Mandatory certification of auditors • Mandatory comparison of operation and investment to reference values (norms, benchmark- ing)

Some, or all, of these requirements may be confined to large users and made conditional on crossing a defined threshold of energy use.

Obligations can be mandatory or voluntary. Two main sets of voluntary agreements have been introduced. The first set comprises agreements between government and representative bodies of appliance manufacturers to reach specified improvements in the performance of appliances; the approach has also been extended to vehicles. The second set comprises agreements with individual industries to improve their own on-site energy performance. Industry can have various motivations to participate in these agreements. Appliance manufacturers may expect to persuade government to supplement their efforts with instruments aimed at stimulating purchases by consumers. It may in some instances be a mechanism to forestall regulation. This latter reason may also encourage participation in agreements to reduce energy use in industrial processes. Such agreements, although voluntary, may also be a condition for financial incentives.

In liberalised markets an alternative to promoting energy efficiency through state financial incentives and funds is to place an obligations placed on suppliers. In this scheme a supplier or distribution network manager scheme is placed under an obligation to demonstrate programs that save specified amounts of energy related to their total supply volume. The supplier or network operator then builds the costs into his cost-base; he then has the usual interest of a commercial company in keeping his cost-base as small as possible. The requirement is enforced by the regulator; failure to comply may be penalized in proportion to the deficit between the target savings for the supplier and the amount achieved. Savings do not have to be made within the supplier’s own area; they can be in fuel oil, coal

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

or transport fuels. Such schemes can be complemented by “white certificates”. In this arrangement, suppliers are obliged to demonstrate they either accomplished energy savings directly or have bought certificates from others who can show they have made savings.

No such obligations exist in Yemen at present and given the present state of PEC it may well not be timely to introduce them.

3.8 Audits and the Promotion of ESCOs

The original of an Energy Service Companies or ESCO is that an entity other than the energy supplier should identify, design, finance, supervise and commission projects for a client, to be compensated by a share of the energy savings achieved over a defined period. The partition of savings is determined by a special contract known as an energy performance contract (EPC). Actual practice varies widely; some ESCOs will finance the project, others will organise finance. Implementation is not easy and there are relatively few successful examples. The name ESCO is sometimes also given to companies that just provide consulting services, but do not enter into an EPC. It is important to be clear what is meant, as the latter is a much easier exercise than the former.

No audit campaign on industry and large buildings ever seems to have been conducted in Yemen. The World Bank financed study on energy efficiency estimated that a 20% saving from industry is theoretically possible. It recommended that the MEE encourage private sector participation in energy services to exploit this potential, based on ESCO models, but did not give any real proposal for how to stimulate and finance such activities in the Yemen.

3.9 Transport and Spatial Planning

More than half of the global population now live in cities and according to UN Habitat, by 2030, it will be 60 percent. Cities consume enormous amounts of energy and they have great inertia; road systems and land-use decided now will influence energy use for a hundred years. In urban metropolitan areas, transport creates a third at least of total greenhouse gas emissions. Promotion of public transport options and careful design of cities is critical for reducing emissions in cities.

Most petroleum products (70%) are used for transport. Because of the subsidy to diesel many gasoline engines have been converted to burn diesel. The conversions have many problems, not least the inadequate air supply and the consequent poor combustion that is inefficient and polluting.

In 2002, the import duty on cars was reduced from 130% to 5% in order to combat dual problems of very old cars on the road and massive smuggling from neighbouring countries. This in turn caused a massive explosion in car ownership. Import restrictions on old cars were imposed in 2003; it is forbid- den to import cars that are more than 5 years old. Many users prefer large four wheel drive cars because of the mountainous terrain and the poor roads.

Some testing centres have been established in the five largest governates and relicensing if cars older than two years is now conditional on an annual inspection. The tests include emission controls. The number of centres is well below what is required to handle all the vehicles in Yemen and the compliance rate is estimated at around 34%, but it is a good start and should be sustained.

Public transport is not well organised. Most trips within cities are made using small private buses and taxis. Large buses are used only between governates. Rationalisation of routes could reduce energy Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

use,

A transport strategy has recently been submitted to the Cabinet by the Ministry of Transport and it is expected to be approved in November 2009. The main objective is to reduce congestion rather than to improve efficiency or to protect the environment. Some measures have already been taken; brides have been built at busy intersections and some one-way streets have been created.

The extent of land use planning varies across the country. In Aden there is an effective zoning of development according to a 10 year plan; much of the land is government owned. In Sanaa, land is pri- vately owned and there is almost no control of development either legally or practically.

3.10 Dissemination of Information

Access to knowledge is costly and may impede an individual or company from undertaking activities in energy efficiency. It is a legitimate role of government to generate and disseminate knowledge as a public good. We interpret the term knowledge in this context very widely to include data, technical guidance, research and demonstration.

The dissemination of information to users is normally a simple and cost-effective measure that can be undertaken by government. Much information has been produced in the past few decades by donor agencies that could be relevant to Yemen. There seems to be no campaign or systematic effort to in- form users how to reduce consumption. The low tariffs tend to discourage energy efficiency and un- dermine the case for public information and awareness programmes.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

4. Comparison of Yemeni Practice with International Practice in Renewable Energy

This section attempts to compare the present status of renewable energy policy in Yemen with international practice.

Public policy intervenes to correct market failures. In the case of renewable energy, the most common failures are somewhat similar to those identified previously for energy efficiency, but with a different emphasis. Distorted energy prices, unrecognised external costs, poor access to technical information all play a part. There is however a significant difference. Many measures of energy efficiency are cost effective, but prevented by distortions of the conventional market. This is also true of some renewable options, such as solar water heating. Many renewable energy technologies are not cost-effective even if the distortions of the conventional market are removed. They are justified by the external costs that they avoid, especially the external costs of GHG emissions. This means that they must be financially subsidised to financial incentives of one sort or another are critical to renewable policy.

In addition to these general market failures there can be specific market failures for electricity generated from renewable energy that is fed into a national grid as electricity. Excessive and unjustified costs of connection to the grid, inability to connect, disputes over responsibility for payment – these can impede renewable deployment.

Policy instruments are intended to correct or compensate for these various distortions.

4.1 Targets and Strategy

Strategy sets out objectives and targets and defines the combinations of policy instruments that are expected to achieve the targets.

The current national Power Sector Strategy Note developed by the Ministry of Electricity and Energy does not consider the contribution that renewable energy might make to the national strategy for the power sector. On the other hand a detailed strategy for renewable energy has been proposed by Lahmeyer International to the Ministry of Electricity and Energy with quite ambitious targets.

The study by Lahmeyer recognises the high rate of growth in the demand for electricity, which it projected in its high growth scenario to imply a peak demand of 3,181 MW in 2025. This compares to a peak demand of less than 1,000 MW in 2008. Against this strong growth in demand, the strategy as- serts that there is only a limited potential for the use domestic natural gas in power generation. The analysis assumes that the proven reserves of gas that are not committed for export could only sustain electricity generation of about 1,150 MW for 25 years. The uncommitted proven and probable reserves it was calculated could support 1,750 MW. This implies a substantial shortfall in capacity in 2025 of about 1,200 to 2,000 MW of power. Already Sanaa and Yemen in general experience frequent load shedding; this is due in part to the delays in Commissioning the gas-fired plant at Marib and difficulties in completing a major transmission line.

The Lahmeyer study dismisses diesel generation as being too costly and generation from natural gas, because it estimates there will not be gas available after export commitments have been met. This is by no means clear; there is some 1.8 Tcf of gas uncommitted in existing fields and reasonable prospectivity elsewhere in the country. It is an important uncertainty that could strongly influence the development of wind power.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Assessments of the wind power potential were made in the Lahmeyer study. Assuming that only 40 percent of the potential could be used because of shading losses, settlement and exclusion areas, and considering only areas with capacity factors higher than 25 percent, the total technical potential was determined at 15,200. Taking into account the best sites with capacity factors above 35 percent, the technical potential was estimated at14,200 MW providing about 42,300 GWh of electricity per year 2.

The most economically attractive areas are those with capacity factors of around 40 percent and full load hours of more than 3500 hours per year. This corresponds to more than 2,500 MW of installed capacity with an average yearly electricity generation of around 8300 GWh. Most of these economically attractive areas are situated in the coastal plains of Hodeidah (southern part), Taiz, Lahej, Aden and Abyan. Wind power development is also favourable in these areas due their proximity to the national grid.

There is some geothermal potential to the South of Sanaa; this was mapped in a preliminary survey in the 1980s. The survey identified 90 hot spring areas, the most promising of which is located at Dhamar, reasonably close to the national grid. This resource is thought to be sufficient to support a 50 MW geothermal plant and could be developed it is estimated at a cost between 11 and 12 c/kWh. The ultimate resource cannot be estimated without exploratory drilling, but could be between 250 – 500 MW. An MoU was signed with an Icelandic company to develop a 10 MW plant on the site, but the company went bankrupt during the financial crisis. Exploratory drilling is now being financed by UNEP and will start soon using Italian consultants; it is planned to drill some 1,000 – 1,500 metres. The Ice- landic Bureau of Geology is still involved, but has transferred its work to another field. The study of Lahmeyer estimated that 2,900 MW of power might be available from geothermal sources.

Around 10 MW of electric power could theoretically be produced from the current rate of municipal solid waste MSW production in the main cities of Yemen. If the restriction is imposed to consider only cities that generate more than 100 thousand tons of solid waste per year the figure falls to around 8 MW. Of this 6 MW could be obtained from landfill sites in the four largest cities of Sana’a, Aden, Ho- deidah and Taiz and is most likely to be cost-effective.

The renewable energy strategy presents three scenarios for the penetration of renewable energy in the grid:

• High market penetration scenario – 20% of generation mix in 2025 (equivalent to 3467 GWh). This is obtained from 600 MW of wind power, 6 MW of landfill gas and 200 MW of geothermal energy • Reference scenario – 15 % of generation mix in 2025 (equivalent to 2600 GWh). This is obtained from 400 MW of wind power, 6 MW of landfill gas and 160 MW of geothermal energy • Low market penetration scenario – 10% of generation mix in 2025 (equivalent to 1733 GWh). In this case only around 200 MW of wind power capacity and only 50% of the landfill gas economic potential, 3 MW, is developed and 125 MW of geothermal energy

As noted earlier, these targets conflict to some extent with the contents of the national Power Genera- tion Expansion Plan which gives a high preference to natural gas. Much of the power generated at present in Yemen is from diesel oil at a very high opportunity cost to the economy; the opportunity cost of generation from the 250 MW of emergency generation leased from an American supplier is probably close to 20 euro cents / kWh. The commissioning of the open cycle gas-turbine in Marib starting from 2009 will increases the share of natural gas in the generation fuel mix. The Ma’abar natural gas-

2 Wind Energy Resource Assessment, July 2006, Lahmeyer for the Ministry of Electricity, The Republic Of Yemen Renewable Energy Strategy And Action Plan Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

based power plant expected to come on stream in 2013 and the retirement of oil-based plants will further increase the share of gas and further gas plants are planned for Aden. In sum, 2,858 MW of gas turbine plants is planned to be commissioned between 2007 and 2025.

The strategy paper of Lahmeyer also identified solar water heating as an important supply option and proposed three scenarios for penetration by 2025:

• High penetration scenario – 60% of market potential (300,000 units) • Baseline scenario – 40 % of market potential (200,000 units) • Low penetration scenario – 20% of market potential (100,000 units)

The government of Yemen is currently engaged in developing a policy for renewable energy in line with the strategy proposed in the Lahmeyer study. The main obstacle identified by government is funding. Guidelines for the allocation of national resources are established by the Ministry of Planning in a Five Year Plan. The Ministry of Finance prepares a parallel mid-term expenditure statement that generally reveals a substantial gap between expenditures and revenues; ODA is sought to fill the gap. Funds are allocated by the Ministry of Finance in an annual financial plan according to the availability of ODA. State revenues are only just sufficient to cover basic services such as health and education; salaries for public officials cover 70% of revenues. Investment in infrastructure depends almost entirely on soft loans and grants from donors. The problem is compounded by an inefficient use of the funds allocated by donors; the disbursement rate is low and there are many delays. Often the risk of making no decision is seen as less than the risk of making a decision that may later be criticised. In such circumstances it is hard for the GoY to implement a high capital cost programme such as is required by renewable energy unless ODA is assigned specifically to that programme. Programmes for renewable energy are therefore inevitably donor-driven.

The main strategic objective of the policy now in formulation is to develop natural resources at reasonable cost. The basic approach is to develop pilot projects with donor funding as a demonstration of technical and economic feasibility by which to attract the private sector.

4.2 Legal Reform

The main legal elements in a policy to promote renewable technologies are a clear targeted strategy or road map, a specialised agency to implement public activities and a support system specifically aimed at allocating the extra costs of the technology.

In March 2009 new Electricity Law was issued; it appears to have been a requirement of the World Bank for disbursement of its loans to the sector and took three years to approve. The law sets out to improve the management of the power sector and to facilitate investment by private capital. It also contains some general support for renewable energy, although there are no specific provisions. One of the stated objectives of the law is to encourage environmentally friendly power production including renewable energy and relying on it as a sustainable source of energy. Among the tasks of the Ministry is “encouraging and developing the use of renewable energy resources in the generation of electrical power”.

The law creates a regulatory office to be known as the Electricity Sector Regulatory Board; it specifies the respective duties of the Ministry and the Board. Policy, the issue and licences and almost all deci- sions of consequence except tariffs remain within the Ministry. The Regulatory Board is chaired by the Minister and has four full-time members; it sets the tariffs for businesses across the electric system and monitors the compliance of the industry with regulations. Tariffs are supposed to reflect costs, al-

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

low a reasonable rate of return and respect social factors; they are published in a Prime Ministerial Decree after approval by the Cabinet.

Licences are required for generation, transmission and distribution, but not unbundling of the system is required. The Board must ensure that the transmission system is open to participants in the sector in a manner that preserves the economical interests, and continuity and efficiency of the service.

The law also provides for a new authority called the "Rural Electrification Authority" that is established under the supervision of the Minister, but which enjoys financial and administrative independence and be legally competency to make agreements and enter into loans. The function of the Authority is to implement the national plan for rural electrification. Among the many considerations that should guide its work is “cooperating with other related entities concerned with studying conventional electric power sources, new and renewable resources, determining current and future needs of power for the population of rural areas, determining the best ways to meet those needs and selecting the best available energy resource alternatives”.

Implicit in the law is the corporatization and commercialization of the Public Electricity Corporation and the creation of separate entities for generation, transmission, distribution, and rural electrification. The reform is expected to take three years.

Despite these provisions the law is not clear on the legal basis for public-private partnerships (PPP). In general, investment in the Yemen is governed by the Investment Law No. 22 of 2002, this is generally seen as offering only weak security for private investment; in the World Bank Doing Business Report 2010 the Yemen was ranked 132 out of 183 countries in terms of protecting investors. It appears that there is substantial private interest in the proposed new gas fired plant at Ma’abar, but the government has not given clear signals on how this partnership can proceed. It is clear that government has not the funds to make these investments on its own account, so an investment law governing PPPs appears to be a priority.

The Lahmeyer study on which the renewable energy strategy is based also proposed a law on renewable energy and provides a draft. The objectives of the proposed draft law are to:

• promote the use of renewable energy • encourage private-sector investment in renewable energy • diversify energy sources • reduce emissions of environmental pollutants and greenhouse gases • develop national capacities related to renewable energy.

Articles 5 – 7 of the draft legislation establish a legal basis for the identification, conservation and utili- zation of renewable energy resource areas. It is proposed to create a registry of renewable energy lo- cations based on resource maps and measurements, to be known as the Renewable Energy Re- source Land Use List. Restrictions would then be imposed on the development of these lands with compensation being paid to the owners if necessary. Land use plans for renewable energy would be based on this list and measures introduced to prevent loss or degradation of important sites.

Articles 8 – 11 establish the principles that should govern the development of renewable energy resources and the certification of electricity generated from renewable energy resources. The law would authorise the Ministry of Electricity and Energy to issue public tenders for the development of sites on the land use list with preference for low cost sites located close to existing transmission. The tenders should inter alia maximise local content. The Article 9 provides for the receipt of unsolicited proposals and specifies how they should be treated. Article 10 allows the government to create public sector par-

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

ticipants in development. Article 11 provides for the issue of Renewable Energy Source Certificates. Any development in receipt of such certificates becomes a Qualified Renewable Energy Facility (QREF).

Articles 12 and 13 create a duty on the public electricity system to purchase electricity from qualified generators and to give such sources preference in dispatch. The principles determining the tariffs at which electricity is to be sold are set out in Article 14. The tariff would normally be determined by the freely negotiated power purchase agreement, but in the event of dispute arbitration can be sought from the Electricity Sector Regulation Board, established by the Electricity Law.

The principles governing the creation and allocation of investment incentives are specified in Articles 17-20. The law permits funds from international donors to be used to subsidise several parts of the investment chain, including capital investments, project preparation studies, capacity building activities and partial payment of the incremental costs of electrical energy produced by such Qualified Renew- able Energy Facility. Article 20 envisages the possibility of a renewable energy fund with contributions from the Government of Yemen, private and institutional investors, international donors or multilateral agencies that could also contribute finance for any of the above.

Other Articles specify that government may participate in the equity of producers and that any Certified Emission Reduction Credits issued to the project under the CDM are to be used to reduce the tariff at which renewable electricity is sold. Article 21 requires that the cost of connecting a Qualified Renew- able Energy Facility to the Grid shall be paid by the Public Electricity Corporation or its successor. Ar- ticles 22 and 23 create the legal possibility for a feed-in tariff should this be thought desirable.

It is expected that the main articles of this draft law will be incorporated into a revised energy law.

4.3 An Agency

A specialised institution to make research, prepare initiatives, draft regulations, monitor progress, ensure compliance, administer funds and perform other administrative activities can be useful in promoting renewable technologies.

The main institution involved in the development of renewable energy policy in Yemen at present is the General Department for Renewable Energy of the Ministry of Electricity and Energy. The main responsibility for implementation comes under the Public Electricity Corporation (PEC) and is discharged through the Public Authority of Rural Electrification (PARE) and the Renewable Energy Department that comes under it. The PARE is responsible for rural electrification in general (mainly grid extension) and its agency, the Renewable Energy Department covers off-grid renewable rural electrification.

The analytical papers underpinning the renewable energy strategy claimed that the separation of policy and implementation was not well defined, with PEC engaging in policy-like matter and the Ministry implementing demonstration schemes. It also found that the staffing was insufficient to support the various activities required to implement a substantial programme. However, the draft law contained within the report does not address these issues.

It is certainly true that the formulation of policy in the area should rest with the Ministry. There is much to be said for creating an independent authority for implementing policy. It allows the implementation to proceed with some protection from continual political interference that obscures objectives and hin- ders progress. It is often the case that responsibility for energy efficiency and for renewable energy rest with the same body. Such an authority may in the first instance be a developer of wind projects and sell on an IPP-like basis to the transmission company. At some point, as the technology is recog- Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

nised as commercial, the ownership function should be separated from the regulatory and research functions.

This is a model that the GoY may wish to consider. We understand that there is some resistance in government to the creation of implementing authorities outside of the normal ministerial structure. The Rural Electrification Authority was only created at the insistence of the donors for the rural electrification programme. Nevertheless, such agencies elsewhere have been successful; NREA in Egypt is a good example.

4.4 Standards and /or Labels

Standards would be inappropriate for large developments in renewable energy. Commercial developers are well equipped to decide for themselves on efficient and effective specifications. There is a good case for standards for small appliances such as solar heaters.

There are no such standards in the Yemen.

4.5 Financial Incentives (Capital Support)

Many financial incentives have been used in different countries to promote renewable energy. Support can either be offered to investment or to operation. Investment support for renewables is general de- livered through the same type of instruments that are used to support investment in energy efficiency, e.g. capital grants, tax exemptions, soft loans and loan guarantees. In the case of grid connected renewables it is possible also to offer support to operation either by allowing the electricity to be sold at inflated tariffs or by obliging certain parties to purchase specified volumes. These instruments are to some extent exclusive and are discussed together in the next section.

Some general incentives to investment are contained within the Investment Law 22 of 2002 that provides for exemptions from customs duties for imports that contribute to the creation of fixed assets and for a limited volume of spare parts and imports required for maintenance. The Law also provides for a variety of exemptions from taxes, including a tax holiday on profits. However, private funding for renewable energy in Yemen has not been forthcoming and all developments to date have been financed by the government and by donors.

The most advanced wind project in Yemen is the proposed development at Al Mokha; this is a promising site on the Red Sea with an average wind speed of 7.4 m/sec at a height of 40m. Preparation of the requisite feasibility studies and a model power purchase agreement was initiated under the RE- REDP. Subsequently the World Bank agreed a sovereign loan for the implementation of a wind farm of approximately 60 MW generation capacity, to be connected to the PEC grid. The plant is to be wholly owned by a Special Purpose Company (SPC), to be created as a subsidiary of PEC. As the success of the first wind project is critical the wind turbine manufacturer will operate the wind farm, at least during the first five years, and train local engineers and technicians during this period working within the SPC.

The commercial transactions pertaining to sales of electricity would simulate an IPP; the SPC will sell electricity to PEC on a PPA. Eventually the subsidiary might be sold. The overall aim is to demonstrate the sustained financial and economic viability of wind farms in the area; it is expected that successful operation of the pilot scheme will generate interest in the future development of wind energy along the Red Sea Yemeni coast. Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

It was originally envisaged that the funding would be offered by the International Development Asso- ciation (20 million US$), the AFD (50 million US$), the beneficiary (10 million US$) and the Islamic Development Bank (15 million US$). Subsequently, the French Ministry of Finance withdrew from the project. The funding for the wind farm is therefore not entirely secure. If built, the farm should qualify for additional financing from carbon funds and preliminary preparations to register the project have been made. The carbon finance funds would be used to reduce the government contributions to the project, and also lessen the tariffs required for cost recovery.

A large rural electrification programme has now been authorised, (the Rural Energy Access Project) funded jointly by the World Bank, the AFD and the Islamic Development Bank. The creation of the new Authority and the new Electricity Law were conditions of that loan. The overall project will cost $117 million; this will be financed mostly by concessional loans, of which $37.6 million equivalent will be in local currency, but also including $25 million as a grant from the World Bank.

Where grid access is not economically viable, the project envisages small Solar Home Systems (SHS). The cost per kWh equivalent will depend on the usage of the SHS, including the types of application and the amount of use. Levelised costs for the systems proposed were estimated at $0.81/kWh, $0.71/kWh and $0.94/kWh for 20 Wp, 50 Wp and 100 Wp systems respectively. The levelised costs increase with system size, because the sophistication of the systems envisaged increases also. These costs suggest that the SHS’s are more expensive than a community-based diesel generator. Justification is based in the environmental benefits and the longer term sustainability of energy supply.

It is interesting that a small market for such solar kits exists at present without subsidy. In rural areas, private individuals and some mosques in are prepared to pay for 100W or 200W photovoltaic installations with batteries and lamps costing from $800 to $2,000. Several small private companies are sup- plying this market. No financial incentives are offered to such installations. It would be feasible in principle to allow relief of tax on such equipment; import duties at present amount to 10% on batteries and 5% on other equipment; VAT is levied at 10% and other axes at 3%. It might be fair to permit exemption for photovoltaic installations for rural electrification given the extremely high subsidies enjoyed by grid-connected consumers.

JICA has a semi pilot project of power generation by using a 300 Wp photovoltaic system to generate power for Al-Wahda Hospital in Aden The intent is to demonstrate the viability of PV and to use the installation for capacity building; the main priority of JICA in Yemen is capacity building.

Solar water heating has not penetrated far in Yemen. The very low electricity tariffs are an obvious obstacle. In 2003/4 there was an effort by local manufacturers to persuade government to provide loans and repayment through the electricity bill, but it failed. There are some practical obstacles. Most hous- ing is in apartment blocks and residents cannot install solar water heating without the permission of the owner. The systems are often not efficient in the use of water, because it may be necessary to run 40 litres of water before the temperature reaches an acceptable level and water in Yemen is scarce and expensive.

Despite these difficulties the technology should be very attractive at national level and instruments should be devised to support market penetration.

4.6 Feed-in Tariffs and Obligations

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Grid connected renewable energy is rarely cost-effective in its own right. It must be subsidised if it is to be developed by private industry. There are two main ways of delivering the subsidy. One is by offering higher prices than those available commercially; the other is by creating a second valuable good that represents the value of the fact that the energy is generated from renewables. The second scheme is operated by issuing certificates that certify the renewable origin and then obliging an identified group (normally suppliers) to buy them. This creates a market and therefore a price.

The offer of higher tariffs may be created by tendering a concession, it being understood that the concession will be granted however the price achieved compares to market prices for electricity. This stands in continuity with traditional processes of tendering large plants to IPPs; it allows secondary criteria, such as percentage domestic content, to be added to the evaluation criteria. It has recently been adopted by Denmark for large developments. Higher tariffs made also be operated by a feed-in tariff that is made available to any generator. Certificate based schemes define a quantity of renewable electricity to be produced and market forces identify a price that is unknown at the outset; feed-in tariffs fix a price to be paid for renewable electricity, but it is unknown what volume will be offered.

No feed-in tariff exists at present in Yemen, but the draft renewable law makes provision for such an instrument if it is deemed useful. Article 22 of the draft permits government, at its discretion, to establish such a feed-in tariff applicable to Qualified Renewable Energy Facility. The law authorises the Electricity Sector Regulation Board to specify details of such tariffs and the procedures to be followed in a separate regulation. Article 23 permits the Board to pass regulations providing for net metering of electricity generated by small-scale Renewable Energy Facilities or self-generators and to require reduced wheeling rates for electricity produced by a Qualified Renewable Energy Facility, if necessary.

The GoY has not apparently studied the prospects for feed-in tariffs in any detail. There is some in- consistency between a feed-in tariff, that is essentially designed to appeal to unsolicited private investment, and the donor-driven, high-risk environment with which renewable policy must actually cope.

There has been a proposal by a private Yemeni company to construct a 100 kW peak photovoltaic grid-connected plant in Sanaa as a demonstration of the performance of the technology and to demonstrate its economic potential. This plant would be financed through an advantageous PPA, essentially a feed-in tariff, though not publically offered. It has been difficult to agree a price. The idea may have some merit, but if the government were to proceed with this it would seem sensible to tender the request.

4.7 CDM Finance

The Clean Development Mechanism offers operating support to projects through the provision of a market for the certificates of Carbon Emission Reduction. This is a complex project cycle, but can be useful for large projects.

The Designated National Authority (DNA) for Yemen is the Environmental Protection Agency (EPA). There is at present no registered CDM project. Preliminary work has been done on the Al Mokha wind farm to register it for the CDM and provided that the project goes ahead it will most likely succeed. Other projects are in the development stage. Landfill gas recovery from the four large cities has been examined as an option, but is not yet approved because the finance for the development is not available. Other possibilities are a gas flaring project proposed by Total, an energy efficiency project with the cement factory and a programme to switch lighting units from magnetic to electronic ballasts. Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

4.8 Information

It is a legitimate role of government to generate and disseminate knowledge as a public good. The main need in this respect is for data on the renewable resource. It makes no sense for every developer to make their own measurements of solar and wind data. The need is especially acute for wind as the extent of the resource varies locally.

There are twenty meteorological monitoring sites across the country all equipped to monitor wind and solar radiation. These have been constructed for meteorological purposes and have only limited value for selection of sites for commercial development of renewable energy.

A wind resource calculation using three-dimensional meso-scale atmospheric model KLIMM was carried out within the Wind Resource Assessment and Demonstration Project implemented by Lahmeyer. This was based on satellite data and data from the Civil Aviation and Meteorological Authority of Yemen. The available meteorological wind observation data were also incorporated into the resource calculation together with detailed wind measurements on two western sites. The output from this exercise was a country-wide wind resource map with a spatial resolution of 1 km x 1 km. For the western and southern mountain strip, and the Kamran Island a 250 m x 250 m map was also produced.

This work should be followed up by the Ministry. Additional measurement stations should be installed in priority areas. Investors are likely to insist on their own measurements and it is in the interests of the Yemen that they do this, but good pre-existing data will certainly encourage investors to examine prospects in the country more seriously.

4.9 Industrial Policy

It is important that countries develop their own capacity to manufacture and / or assemble renewable technologies in parallel with the investment process. This can be done by targeted research, by grants to appropriate industries and by local manufacturing obligations in tendering.

There is some discussion of a PV assembly line in the Aden free-zone that would supply Yemen and the countries on the African continent, but there already exist assembly lines in Saudi Arabia and in the UAE. It is hard to see where the comparative advantage of Yemen would lie as its domestic market is still small and it does not at present possess the necessary skills.

The emphasis of policy for off-grid photovoltaic systems is to develop delivery channels of PVs to rural areas and to support the process through fostering microfinance and service providers. The aim is to deliver PVs to 15,000 homes in the first instance, thereafter the market may develop spontaneously and possibly the idea of local manufacture could be re-examined.

There is more to be said for stimulating the local market to produce solar water heaters. The skills are available in Yemen and the protection offered by the lower value added to weight ratio and the cus- tomer-specific installation would be an advantage. Two local manufacturers spontaneously entered the market in 2001 without pre-existing government incentives. However, they seem to have had no internal marketing plans and expected support from government. They proposed to PEC that the electricity utility should sell systems to final users and recover the costs through the electricity bill. The Electricity Law in force at the time apparently did not permit such a measure so no such scheme ma

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5. Case Studies

The purpose of this chapter is to demonstrate the processes of evidence-based policy making (EBPM) and theory-based evaluation (TBE). These techniques are well-known in the literature and have been widely applied, but not generally to technical areas of policy such as energy efficiency and renewable energy. There is potential for application in these areas because the methodologies provide a systematic basis for analysis and debate among stakeholders around a common and clear statement of the policy intervention that can be maintained and improved throughout the project cycle from formulation, through implementation, monitoring and evaluation.

The basic expression of this methodology is the behavioural model that underlies our understanding of the reaction of stakeholders to the policy instrument.

5.1 Case Study 1 - Efficient Lighting in Public Buildings

5.1.1 Background and Context

The example that we choose in this case for illustration is the analysis of a Programme of Activities in efficient lighting.

5.1.1.1 Programme of Activities

In 2007 the CDM approach was enlarged to allow Programmes of Activities (PoAs) to be registered. A PoA is a programme of many emission reduction activities; by aggregating the combined emission reductions of different participants it allows technologies and projects that would be too small for the traditional approach to be viable. The PoA approach also reduces the CDM-related transaction costs that would otherwise be impractically high for small and dispersed projects.

A PoA comprises several CDM Programme Activities (CPAs). A CPA is a single measure, or a set of measures, to reduce GHG emissions applied within a designated area. The overall size of a PoA is unknown at the start of the PoA implementation. Different CPAs can be included under a PoA either at the time of registration or during implementation.

The difference between baseline emissions and project emissions constitutes the emissions reductions that can be claimed under CDM. The crediting period for CPAs can be either seven years, renewable twice, or ten years non-renewable. An advantage of PoAs is that the baseline for the programme is determined at the beginning in the project design document (PDD) for the Programme of Activities. This background draws heavily on the explanatory book for PoA developed by KfW within the CDM/JI Initiative of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) 3.

The PoA coordinator must have a good network of contacts with target users and service providers and must be able to assure an adequate monitoring of activities. For the programme of efficient lighting proposed here the PoA coordinator might be a Ministry or the PEC, a commercial bank, or possibly even an equipment supplier. The analysis in this case study assumes that the PoA coordinator is the PEC because we propose that the costs of the ballasts be recovered through the electricity bill and

3 PoA Blueprint Book: Guidebook for PoA coordinators, CDM/JI, German Federal Ministry for the Environment, Nature Con- servation and Nuclear Safety (BMU) Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

this can only be done by the PEC. The PEC is in any case well placed to implement and monitor the programme.

5.1.1.2 The Lighting market in Yemen

The market is characterised by a variety of lighting equipment. Incandescent bulbs are still common in households; some T10 fluorescent tubes are still to be found in the market. The offer of CFLs and other more efficient lighting devices is often corrupted by cheap poor quality goods that are hard for consumers to distinguish from good quality products. Fakes of major brands are also common.

The more efficient tubes and electronic ballasts are generally sold into the commercial market, where electricity prices are reasonably high (10 euro cents / kWh), lighting hours are quite long, there is some basic technical competence, awareness is high and finance for investments with rapid pay- backs is not generally a problem.

PEC has considered disseminating information about CFLs on the back of the bills sent to consumers, but eventually abandoned the idea because of the many poor quality goods on the market and its concerns that consumers would not necessarily benefit and would hold PEC responsible for faulty purchases. There could well be a case for a PoA that would ensure the delivery of good quality products into sensible applications.

A promising market is lighting in government buildings. There are many government offices throughout the country; PEC registers over 12,000 consumers in the government sector. If on average these offices have 25 fluorescent lamps each, then there could be some 300,000 lamps. This market is favourable, because in general it will not have the budget to make the conversion on its own account and it is subject to instruction at the political level. Penetration should therefore be 100% without free- riders.

The main objective of the activity would be to promote the widespread adoption of such ballasts in all areas where they are cost-effective, notably in commercial premises.

5.1.1.3 Scope of the Case Study

This case study considers the possibility of providing financial incentives to various groups of consumers to adopt electronic ballasts and then examines the prospects of combining these with a PoA under the CDM.

5.1.2 Evidence-based Policy Making

The procedure that we have proposed to implement evidence-based policy making comprises the following steps.

1. Alternative forms of intervention need to be reviewed and short-listed. Evidence of the success or failure of similar instruments in developed and developing countries needs to be studied with special emphasis on the conditions that created success and failure 2. There must always be a base-case against which alternatives are screened. Alternatives should include all available instruments. 3. All the relevant potential impacts need to be identified and where possible, quantified 4. Impacts should be assessed in consultation with the subjects of policy

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5. The cost of compliance needs to be assessed. Consideration should be given to how these costs can be minimized. It is necessary to consider who pays the compliance costs ; there are generally alternatives with different implications for equity. The procedures for compliance need to be worked out as does the procedure for monitoring impacts. 6. Indicators need to be established of what is expected from the policy measures. These indicators should cover outputs, outcomes and impacts. Intermediate indicators are important in helping understand how policies work, how measures interact and how they can be improved 7. Quantitative analysis of impacts is essential. The analytical method most commonly used is economic cost-benefit analysis . 8. Cost-benefit analysis should take into account opportunity costs of energy and external environmental costs. 9. Multi-criteria analysis maybe a useful support to decision making; sensitivity analysis is one expression of this idea

The first five steps are discussed in this section; the formulation of indicators is discussed in the section on theory-based evaluation and the last three steps are demonstrated in the section on economic cost-benefit assessment.

5.1.2.1 Alternative Forms of Intervention

Enhanced penetration of electronic ballasts could be fostered through several instruments:

• Minimum Energy Performance Standards (MEPS) could be introduced that would exclude other options from the market • Electricity utilities could be obliged to convert a specified number of installations to electronic ballasts each year • Financial incentives could be offered to consumers to adopt voluntarily the more efficient solution • Offices could be converted at the expense of a third party and the repayments made through the electricity bill in instalments calculated to be less than the savings

We consider these possibilities in turn.

The introduction of MEPS would require a great deal of preliminary work, the construction of testing laboratories and the creation and training of an inspectorate to ensure compliance. It would force upon poorer consumers with low lighting hours, paying at present highly subsidised tariff, an economic investment. It is a perfectly valid instrument that may in due course be justified, but it is not a measure that can be made quickly or easily.

Imposition of an obligation on the electricity utility would probably not work in the national interest. The PEC would have an incentive to convert the consumers paying the lowest tariffs, because in that way the utility minimises its loss of revenues. As it is shedding load, it can resell the electricity to other consumers that on average will provide greater revenues. Its costs are unchanged and so the interest of the utility in revenue maximisation is served. The interest of the economy in general is that the electronic ballasts should save the maximum of energy possible and this would be difficult to achieve through an obligation laid upon the utility.

Programmes targeted to users with long lighting hours per year will provide the most benefit for the economy in general. As long as the underlying investment is cost-effective at a national level, the use of financial incentives to bring about the transition is not a loss to the economy, but simply a transfer of resources among different parts. As long as the economy as a whole benefits from the activity, it is possible in theory to reward non-participant groups in some manner and to ensure that there are no regressive impacts. Whether this is actually achieved will depend on how the incremental revenues to

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

the state are spent. The option however is unlikely to succeed in the target group of government offices, because they are likely to experience tight budgetary constraints and will be reluctant to make the conversion even faced with substantial financial incentives.

The last option, whereby a third party pays the conversion and then recovers its costs through the electricity bill is the most practical. Only PEC is really in a position to implement this option. This is the variant that we retain for analysis.

5.1.2.2 Base Case

The base case we assume to be a case where no intervention is made and government buildings make no effort to adopt efficient ballasts. We consider this plausible, because government offices are generally subject to fairly severe financial constraints and are unlikely spontaneously to convert old magnetic ballasts to new electronic versions.

5.1.2.3 Impacts

In order to claim for CERs from a programme of lighting improvements, the energy savings have to be calculated. The key parameters include: the number of appliances replaced; the power rating of the ballasts removed; the power rating of the new ballasts and the daily lighting hours. The energy savings are multiplied by the grid emission factor to calculate the emission reductions by the programme.

There are two methodological approaches to determining savings: by monitoring and evaluation or by deemed savings approach. The main difference is the extent of monitoring; the former requires that a sample of appliances has to be monitored to estimate the average daily lighting usage. The details of methodologies are given in the PoA Blueprint Book and in the references therein. For the purposes of this simple case study we assume simply an average operation of 8 hours per day or 2500 hours per year. This is not unreasonable for government buildings in continuous use.

5.1.2.4 Consultation

Agents for international manufacturers of lighting equipment are likely to procure the equipment. Con- sultation is necessary to determine what prices may be achieved in large scale tenders, whether they are willing to engage in such a programme and on what terms. It would also be useful to combine the activity with more widespread awareness and information campaigns which would benefits these agents and to which they should be prepared to contribute in money or in kind.

Monitoring of the programme will be essential to verify claims of numbers installed and the circumstances. An appropriate monitoring body should be identified and the costs and modalities of their participation need to be agreed.

Consultation is also desirable with international agencies that are familiar with the details of the methodologies available and that are familiar with the likely size of the programme costs. These costs can be considerable and can be too much for small projects to bear. They include the development of a PoA Design Document and CPA Design Document with the monitoring plan; the validation of the documents through a Designated Operational Entity and record keeping.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5.1.2.5 Compliance

Compliance in the normal sense is unlikely to be a problem. Evidently the claims of agents and in- stallers must be monitored by the programme coordinator for internal purposes, but this is not difficult or costly.

More problematic is that compliance with the terms and requirements of the CDM will have to be demonstrated annually. Monitoring should be conducted by or supervised by the PoA coordinator. The daily lighting usage is to be monitored at sample installations which are chosen by a properly stratified procedure and provided with meters. If the PoA is the PEC, as seems probable, then the inspector can read the daily lighting usage meters and check whether the ballasts are still working at the same time as he makes the normal meter reading.

Preliminary sample surveys of target establishments are advisable to confirm the number, nature and efficiency of the lighting units and the typical hours of use.

5.1.3 Theory-based Evaluation

5.1.3.1 Methodology

Evaluation of a project depends upon an underlying belief in how actors will be affected by the policy and how they will respond. We call this belief a “behavioural model”. We specify the behavioural model as a causal sequence in which the successive steps of policy implementation are shown in the first column and then in subsequent columns are listed various indicators, risks and assumptions. The successive steps of the policy may or may not specify recognisable behavioural assumptions; it depends very much on the type of policy investigated.

The behavioural model is a formal description of the process of implementation, the concerns to be raised at each stage and the measures that are to be adopted to make everything is working as expected. It provides a structure for the analytical steps and indicates the evidence that should be sought at each stage to support assertions or on which to found analysis. It allows the issues that might affect implementation to be identified and it allows different stakeholders to debate around a clear and concrete representation of the policy. In later stages it serves as the basis for monitoring and evaluation.

5.1.3.2 Indicators

Indicators need to be established of what is expected from the policy measures. These indicators should cover outputs, outcomes and impacts. Intermediate indicators are important in helping understand how policies work, how measures interact and how they can be improved

5.1.3.3 Behavioural Matrix

We specify the behavioural model as a form of logical framework in which the successive steps of policy implementation are shown in the first column and then in subsequent columns are listed various indicators, risks and assumptions. The successive steps of the policy may or may not specify recognisable behavioural assumptions; it depends very much on the type of policy investigated.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

The indicators that we adopt are measures of input, output, outcome and impact. By these terms we mean the following:

• Inputs are the financial, human, technical or organizational resources used in the endeavour, • Outputs are objectively verifiable indicators that demonstrate the progress made in implementing the measures, • Outcomes are the immediate effects on the regulated subject, • Impacts are direct measurements of the improvements that the programme is designed to bring about.

The behavioural model that we propose is shown in Table 5. In this case most of the matrix is mechanical rather than behavioural; the behavioural elements enter into the process towards the end as market transformation begins.

The risks identified can often lead to the definition of new flanking policies. For example, if other consumers are unaware of the good performance and cost-effectiveness of the pilot programme then it will have no impact on their behaviour. It is necessary to accompany the pilot programme with a general awareness programme to other potential demonstrating the superior technical and financial performance and the practicality as shown by the PoA.

Similarly, as the market is transformed so fakes and poor quality goods are likely to appear. This is not a risk with the main programme because the PoA will procure ballasts only from reputable source. As other consumers begin to adopt the more efficient ballasts, for example smaller commercial facilities also paying a high tariff, they may be tempted to buy inferior goods at lower prices with all the subsequent problems of poor performance and short life-time that then discredit the technology in general. The solution to this is to introduce parallel policies of labelling and standard s along with verification of compliance to prevent these goods reaching the market.

It will also be evident that the potential market is limited by the tariff structure. Only the specific groups paying on the high tariff levels will find the concept attractive and only then if they use lights for long periods each day. Tariff reform would extend the market significantly.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 5: Behavioural Matrix for a PoA on efficient lighting

Indicators Behavioural Risks Assumptions model Input Output Outcome Impact • Design of busi- • Official time • Viable business ness model and consultant model (Y/N) fees ($) • Development of • Official time • Adequately pre- • DNA does not documentation and consultant pared documenta- approve - and approval by fees ($) tion (Y/N) unlikely DNA Validation of the • Fee to DOE ($) • Validated pro- • DoE does not documents ject (Y/N) validate; through a DOE documentation inadequate • Registration • Registration • Registered pro- • Project meets fee, ($) ject (Y/N) requirements of CDM and PoA • Procurement • Initial payment • Substitution on • Reduction in • Ballasts not • Proper consul- and installation by PoA ($); target sites (#) volume and available in tation will avoid of ballasts cost of genera- time or at ex- this risk tion (#,$) pected price • Identification of • Fee to monitor- • Meters installed monitoring sites ing body and on chosen sites and installation cost of meters (#) of meters ($) • Old ballasts de- • Official time • Ballasts de- • Leakage of bal- stroyed under and fee to stroyed (#) lasts to second verification monitoring hand market body ($) • Receipt of • Revenues to PoA • Government of- revenues from ($) fices do not the adjusted bill pay bills

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Indicators Behavioural Risks Assumptions model Input Output Outcome Impact • Processing of • Fee to monitor- • Monitoring report • Savings and • Delays in re- monitoring data ing body and with verified out- impacts prop- porting lead to and preparation cost of meters comes and sav- erly quantified delayed receipt (#) of report ($) ings (Y/N) of CERs • Communication • Fee to DOE ($) • Authorisation of • with DOE re- issuance (Y/N) garding monitoring reports • Receipt of • Revenue to the • Uncertain fu- CERs PoA ($) ture value of CERs • Other users • Reduction in • Other users are adopt technol- volume and unaware of the ogy cost of electric- demonstration ity generation in government (#,$) buildings • Price of electricity for some users is to low • Higher demand • Prices of ballasts • Sales increase • Reduction in causes lower fall and availability (#) volume and prices (econo- rises (#) cost of electric- mies of scale) ity generation (#,$) • New entrants in • Prices of ballasts • Sales increase • Reduction in • Low quality market fall and availability (#) volume and products and rises (#) cost of electric- fakes enter market ity generation (#,$)

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Indicators Behavioural Risks Assumptions model Input Output Outcome Impact • CO2 emissions • Volume of CO2 • and energy use emission reduc- falls; overall fi- tion (mt). nancial benefit • Value of carbon to country emission reductions ($). • Net cost of project ($).

Note on symbols: • $ indicates indicator is measured in financial terms • # indicates indicator is measured in numbers • Y/N indicates indicators is a yes or no observation • ? indicates indicator that cannot be quantified, but can be assesses qualitatively

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5.1.4 Cost-Benefit Assessment

Quantitative analysis of impacts is essential. The analytical method most commonly used is economic cost-benefit analysis . This cost-benefits analysis takes into account two perspectives to assess an investment:

• Financial analysis - point of view of the investor: This analysis has to evaluate if the envisaged investments are of commercial interest for the private or the public investors under the given market conditions (including the aspect of taxes or subsidies). The present case study considers two entities for this analysis: - Facility operator: The analysis relates the cost for the electronic ballast to the reduced costs for electricity. - Electricity company (PEC ): The electricity company will be confronted with lower electricity sales, but also with lower generation requirements.

• Economic analysis - point of view of Yemen economy : This analysis evaluates if the envisaged investment is beneficial for Yemen economy. Cost-benefit analysis should take into account opportunity costs of energy and external environmental costs, particularly of the avoided emissions of carbon. The analysis has to determine the benefits for the national economy and the resources used have to be valued by determining the benefit these resources' would have generated in alternative uses (opportunity cost principle).

The cost-benefit assessment is done considering the following steps:

• Specification of the electronic ballast project and key-parameter and data for the Programme of Ac- tivity, • Determination of the avoided cost for electricity generation, • Financial analysis: - Analysis of the individual investment decision, - Analysis of the impacts upon PEC as electricity company and as Programme Manager, • Economic analysis, • Sensitivity analysis.

5.1.4.1 Methodology Applied and Data Basis

The electricity that is saved by installing electronic ballasts, or any other measure of energy efficiency, would otherwise be generated from natural gas, i.e. the benefits of the electronic ballasts are the avoided cost of additional natural gas based electricity generation. The economic assessment of electronic ballasts obliges us to consider what value to Yemen of the resources used for electricity generated from natural gas (opportunity costs). It appears that the marginal technology for gas will be open cycle gas turbines (OCGTs), because the inland sites for power production have no water for cooling. Combined cycles will presumably be built at the coast, but the open cycles will be despatched later and are therefore the marginal source of power.

The key parameters for the assessment are:

• The costs and performance of electronic ballasts and the expectations of the market, • The costs for PEC of managing the PoA and the modalities of the programme, • Investment costs for OCGT and performance data, • Value of natural gas for Yemen (opportunity costs),

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

• Return on capital requirements of independent power producers (IPP) for OCGT developers.

Table 6: Cost-Benefit Analysis - General Data

Lighting Market and Technological Performance

The data for the electronic ballast used in the analysis is shown in the following table. It can be seen that the investment is very attractive, the simple pay-back period is 2.4 years.

Table 7: Cost-Benefit Analysis - Electronic Ballast

Data for the Programme of Activities (PoW)

Regarding the Electronic Ballast Programme we make the assumption shown in the following table.

The Programme will consist in an installation of 300,000 electronic ballasts in about 12,000 buildings/offices. The total annual electricity saving will be 4,200 MWh and the total investment cost would be 300 million Ryal. The Programme will be implemented over a period of 3 years.

We assume that the participants have the conversion made for free and then pay the cost through 7 equal annual payments on the electricity bill.

For Programme preparation and registering about 40 million Ryal will be required, the annual monitoring cost are estimated to be in the order of 2 million Ryal. Considering a value the Certified Emission Reductions (CERs) of 10.0 US $ / t CO2

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 8: Data for the Programme of Activity (PoA)

5.1.4.2 Electricity Supply Cost

The economic assessment of electronic ballasts obliges us to consider what value to Yemen of the resources used for electricity generated from natural gas (opportunity costs). It appears that the marginal technology for gas will be open cycle gas turbines (OCGTs), because the inland sites for power production have no water for cooling. Combined cycles will presumably be built at the coast, but the open cycles will be despatched later and are therefore the marginal source of power.

The investment cost we take as $600 per kW and the thermal efficiency we assume to be 45%. The key parameters for the assessment are (1) Investment costs for OCGT and performance data, (2) Value of natural gas for Yemen (opportunity costs) and (3) Return on capital requirements of independent power producers (IPP) for OCGT developers.

For the required return on capital we assume that the investment in new OCGT units is considered as a reliable business, whereas the political risk in Yemen is substantial. We therefore take a required return on investment of 20%. This could be lower if the plant were built on a turnkey basis with soft loans, but in principle, according to the Electricity Law, new plants should be constructed as IPPs.

Cost of Electricity Generation - Opportunity Cost for Natural Gas

Recent Price Development for Natural Gas

Yemen has the opportunity to export gas, the opportunity costs is thus the net value of export, more specifically it is the net value of export as liquefied natural gas (LNG). Prices are volatile as can be seen from Figure 1 that shows the spot prices at Henry Hub. Contract prices are less volatile, but are not transparent.

The cost for liquefaction has to be taken into account to determine the opportunity cost of Yemen's natural gas.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Price Forecast Based on Crude Oil Prices

The US Department of Energy/Energy Information Agency has produced long-term forecasts of crude and petroleum product prices to 2030 (EIA, 2009). This is an authoritative source; it may not be right, but a great deal of effort and analysis has gone into its creation and it is a reasonable source to adopt.

Source WTRG Economics

Figure 1: US LNG Prices

The Figure 2following Figure 2 shows the forecasts of crude prices in real and nominal terms to 2030.

It is statistically clear that fuel prices are strongly correlated over the medium term. We use a formula to describe a plausible relationship between LNG prices and crude oil prices. This formula is derived from regression studies of the price of LNG in the Mediterranean basin. We recognise its limitations and we accept that the nature of the long-term correlation between gas and crude is not clear, but it offers a starting point to forecast LNG prices.

The formula we use is:

y = 0.0805 x + 2.852

Where, y = LNG price in $/MMBTU and x = price of crude in $/tonne

This procedure gives a central case for LNG as shown in Figure 4-3. (Note: 1 MMBTU = 1.05 GJ).

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

200 180 160 140 120 Crude Oil (weighted 100 average) 2007 US$/bbl $/bbl 80 " nominal prices 60 40 20 0 2010 2015 2020 2025 2030

Figure 2: Forecasts of Crude Prices to 2030 (DOE/IEA)

We propose to use real 2007 prices for the cost benefit analysis to avoid having to link the power purchase agreement to inflation.

20 18 16 14 12 LNG 2007 US$ / 10 MMBTU

$/MMBTU 8 " nominal $/MMBTU 6 4 2 0 2010 2015 2020 2025 2030

Figure 3: Derived Forecast of International LNG Prices

Netbacks

The financing of LNG trains is complex. We make a very simple calculation here as a basis for further reflection.

Prices for LNG trains vary considerably according to the state of the market. According to the IEA in 2003, a single LNG chain involves investment of around $5 billion for a typical 6.6 million tonne two- train project, (IEA, 2003). Assuming price escalation to 2009, this indicates a value of about $6.5 billion, or roughly $1000 per 1 t/yr. Discounting at 15% over 20 years gives an annual payment of $160 /

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

t / yr, or a contribution of $200 / tonne to the price of LNG.

The calorific value of natural gas is about 44 MMBTU / tonne, so the contribution of capital to the long run marginal cost of LNG is around $3.6 / MMBTU.

Losses of gas in processing (as fuel) are about 8%, say $0.3/MMBTU (this is based on the opportunity cost of gas so implies iteration). The cost of transport to a European market and the cost of transport of natural gas to the burner tip in the power station we have not estimated and we consider that the net sum of these will be small compared to the uncertainties elsewhere in the calculation.

On this basis, if Yemen were faced with the choice of building a new LNG export train or burning the gas in a power station, the opportunity cost of gas would be the international market price less about $4 / MMBTU, ~= $3.6 + $0.3. We note that this calculation is in close agreement with similar calcula- tions made for the California Energy Commission in 2007 4.

Opportunity Cost of Electricity from Natural Gas

Lighting makes a significant contribution to peak demand for electricity. If electricity is saved in lighting then generally the savings will be experienced on plant running fairly low down the merit order. It is impossible to gauge the exact impact without load studies and despatching models, but we assume an open cycle gas turbine operating 4000 hours per year. Discounting the cost of the turbine ($600 / kW) at 20% over 25 years gives an annual payment of $120/kW. Assuming 4000 hours of operation this yields a contribution of capital to the unit cost of 3c/kWh.

The Figure 4 shows how the opportunity cost of electricity can be constructed from the opportunity cost of gas. The opportunity cost of gas is indicated in c / kWh in the bottom line. The next line up shows the opportunity cost of the fuel burnt to make one unit of electricity. The next line adds in the capital contribution as calculated above and the last line adds a further 5 c / kWh as a nominal estimate of T&D costs and losses.

4 The Outlook for Global Trade In Liquefied Natural Gas: Projections To The Year 2020, for the California Energy Com- mission, by Jensen Associates, August 2007

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

20 18 16 OC of gas 14 12 OC of elec (fuel only) 10

c / kWh /c 8 OC of elec (fuel + 6 capital) 4 OC of elec (fuel + capital + T&D) 2 0 2010 2015 2020 2025 2030

Figure 4: Marginal cost of electricity from gas

Opportunity Costs over the Short Term

The above analysis assumes that gas-fired plant can be built immediately to match demand. In fact at the moment the Yemen suffers severe load shedding and relies on emergency generation from diesel. The cost of the diesel generation is very high. We understand that the leasing costs of the plant are 10 c/kWh. The plants receive diesel for free, but the opportunity cost of the diesel is high, close to 20 c/ kWh. The opportunity cost of this generation is therefore about 30 c/kWh.

There is also an opportunity cost to the shedding of load. The value of the lost load must exceed 30 c / kWh, otherwise the emergency generation would make no sense. The marginal value of electricity saved at the moment is therefore somewhere between 30 c/kWh and a larger number that we cannot estimate. For the sake of the case study we assume that the marginal opportunity cost at present is 30 c/kWh and that load shedding and emergency generation will cease in 2015, so the marginal opportunity cost of electricity will have something like the form shown in Figure 5, where we have postulated a gradual transition from the cost of emergency generation to the opportunity cost of gas-fired generation.

The construction of new gas-fired plants will certainly reduce the opportunity cost of electricity to Yemen, but it will still be much higher than present tariffs. It is therefore still essential to make strenu- ous efforts in price reform and energy efficiency.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

c / kWh / c 20

10 2010 2015 2020 2025 2030

Figure 5: Marginal Opportunity Costs including Emergency Generation

5.1.4.3 Emission Factors

As the main fuel for power generation shifts from diesel to natural gas the emission factors from the power system will also change.

The following figure shows our estimates of how this might progress as the transition occurs.

1000

800

600

400 g / kWh g 200

0 2010 2015 2020 2025 2030

Figure 6: Emission Factors in grams of CO2 equivalent per kWh

5.1.4.4 Financial Analysis 1 - Individual Investor

Under the given electricity prices in Yemen of 30 Ryal / kWh (see Table 6) the installation of electronic ballasts is a very profitable investment and should be recommended. The simple pay-back period is 2.4 years, considering annual operation of only 2000 h. The levelised costs / specific electricity saving costs are 18.01 Ryal / kWh.

The assessment of an investment in one ballast is given in Table 9. It is assumed that the ballast is in-

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

stalled in the middle of year 1 and immediately electricity savings can be considered (50% of the annual values). The life-time of a ballast (considering 2,000 hours of use) is 12 years. The financial internal rate of return is 52.5 %.

For the Programme it is assumed that PEC provides the ballast free of charge, and costs are recovered with an annual increase of the electricity bill of 219 Ryals (PEC charges an interest of 18%). The ballast will generate immediately a net benefit. An IRR cannot be determined because there is no initial investment. The participating user would gain over the 12 years 998 Ryals, without any own payments.

5.1.4.5 Financial Analysis 2 - Electricity Company / Programme Manager PEC

The decision situation for the electricity company as the programme manager is quite complex because a number of aspects has to be taken into account. The Programme would not be in the interest of PEC, with an IRR of 2.5%, far lower than the commercial required return of 20% (see Table 10).

The programme costs for the electricity company / programme manager are:

• The reduction in electricity sales and therefore also in revenues. Because the market proposed is the commercial market, where prices for electricity are quite high, the loss of revenue to PEC from reduced sales is considerable. • The programme costs - The investment will be financed with loans, but for this loan the debt service has to be considered, - The programme preparation and registration costs of 20 million and the annual monitoring costs of 2 million Ryal.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 9: Financial Analysis 1 - Individual Investment

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 10: Financial Analysis 2 - Electricity Company / Programme Manager PEC

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

The Programme's benefits are:

• The avoided generation costs - in this case the gas based generation opportunity costs are considered, • The payments from the ballast-user, • The sale of the CERs.

5.1.4.6 Economic Analysis

The cost-benefit analysis for this case study will be completed with an assessment under the perspective of Yemen national economy. This analysis is shown in

• Programme costs: The costs will be again the programme costs. The investment costs will be again covered by loans. The programme registration and monitoring has to be covered in addition. • Programme benefits: The programme benefits will be the avoided generation costs and the sale of the CERs abroad.

As it can be seen in Table 12 the programme would be very beneficial for the economy of Yemen, with the installation of the electronic ballast the cost burden of the electricity system could be significantly reduced.

5.1.4.7 Sensitivity Test - Impact of the CERs Value

The analysis above showed that the Programme of Activity is not of interest because the high programme costs (registration and monitoring) are not justified by the value of the CERs / carbon credits. The question arises if higher values for the CERs would improve the situation. Table 11 shows the impacts of varying the value for CERs. In addition, the case without the programme registration is shown.

Table 11: Variation of the CERs / Carbon Credit Value

This sensitivity analysis shows that higher CERs value would improve the situation, but would not change the situation for the electricity company PEC. Without the generation PEC might be interested, especially the slight margin on the interest rates makes the programme of interest for PEC.

To recover the high PoA costs at a CER price of 10 US $ / t CO2, at least a programme of 800,000 units has to be considered. Of importance is the number of units, not so important is the price level of the CERs.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 12: Economic Analysis of the Programme

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5.1.5 Conclusion

5.1.5.1 Methodology

The case study demonstrates the advantages of developing deconstructed versions of policy prescrip- tions as an aid to analysis and to stimulate focused debate among stakeholders.

In the case of the programme of action described here, the deconstruction helps to reveal the nature and extent of the assumptions that must be made adequately to assess the impact. This helps to frame the definition of the policy instrument and the cost-benefit analysis.

5.1.5.2 Cost-Benefit Analysis

The cost benefit analysis showed that the installation of electronic ballast would be highly beneficial for the electricity user and for the national economy as the analysis in the previous sections showed. The analysis was forward-looking comparing the use of electronic ballast with the construction of a new OCGT unit.

• Direct electricity user: The electronic ballast reduce the electricity cost, the simply pay-back period is 2.4 years, and considering the whole life-time of the ballasts, the return on investment amounts to 52.5 %. To overcome the market barriers, a promotion programme would be nonetheless necessary to overcome the reluctance of the electricity consumers and the lack of rational assessment of electricity saving options. • Electricity company PEC as Programme Manager: For the electricity company the programme would not be of interest because the tariff is higher than the assumed costs of electricity generation. In addition, the high cost for programme preparation, registration and monitoring are not justified by revenue generated through the sale of CERs / carbon credits. The electricity company could be motivated to launch programme by offering a commercial margin, as it was done in the case study with a 4% margin on the pre-financing conditions. • Impact upon the Yemen economy: The use of electronic ballasts would have a favourable impact upon the national economy because the costs of the electricity system could be reduced.

5.1.5.3 Programme of Action (PoA) as a Policy Instrument

Summarising the analysis it can be said:

• The installation of electronic ballasts would be highly beneficial for the electricity consumers and the national economy. • For the electricity company the programme would imply some losses, which have to be off-set by additional commercial benefits. • The assumed conditions for the Programme of Action (PoA) show that the Programme would not be of interest. Instead of 300,000 units at least 800,000 units have to be installed.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5.2 Case Study 2 - Off-Grid PV for Rural Electrification

5.2.1 Background and Context

The example that we choose in this case for illustration is the analysis of instruments to support off- grid PV for rural electrification

Status of Off-Grid PV for Rural Electrification in Yemen

Much of Yemen is far from the grid and will not be grid-connected in the foreseeable future. It is desirable both in the interests of social solidarity and political stability that remote communities have access to electricity at acceptable costs.

Scope of the Case Study

The objectives of the case study are to examine a range of policy instruments that might support this sustainable process and to analyse selected instruments in detail.

5.2.2 Evidence-based Policy Making

The procedure that we have proposed to implement evidence-based policy making comprises the following steps.

1. Alternative forms of intervention need to be reviewed and short-listed. Evidence of the success or failure of similar instruments in developed and developing countries needs to be studied with special emphasis on the conditions that created success and failure 2. There must always be a base-case against which alternatives are screened. Alternatives should include all available instruments. 3. All the relevant potential impacts need to be identified and where possible, quantified 4. Impacts should be assessed in consultation with the subjects of policy 5. The cost of compliance needs to be assessed. Consideration should be given to how these costs can be minimized. It is necessary to consider who pays the compliance costs ; there are generally alternatives with different implications for equity. The procedures for compliance need to be worked out as does the procedure for monitoring impacts.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

6. Indicators need to be established of what is expected from the policy measures. These indicators should cover outputs, outcomes and impacts. Intermediate indicators are important in helping understand how policies work, how measures interact and how they can be improved 7. Quantitative analysis of impacts is essential. The analytical method most commonly used is economic cost-benefit analysis . 8. Cost-benefit analysis should take into account opportunity costs of energy and external environmental costs. 9. Multi-criteria analysis maybe a useful support to decision making; sensitivity analysis is one expression of this idea

5.2.2.1 Alternative forms of intervention

One can imagine several possibilities for achieving the specified objective. These include:

1. Distribution of highly subsidised PV systems to selected communities by a state entity; 2. Offer of subsidies to any purchaser; 3. Soft loans to individuals repayable over a period – possibly linked to a revolving fund.

The difficulty with options 1 and 2 is that the implicit discount rates of poor people are often extremely high and therefore they are unlikely to invest in capital intensive projects. Another characteristic common to both options is that they require constant replenishment of funds from state resources or donor funds and do not meet the test of sustainability. Option 1 suffers from the additional problem in that it is discriminatory in favour of the selected communities. Option 3 in principle suffers none of these ob- jections. It is non-discriminatory; if based on a revolving fund then it may be sustainable and does not require constant additional funds.

We examine therefore Option 3, but also Option 2, because although it fails the sustainability test it is close to the present intentions and therefore the comparison is interesting. We can simplify this comparison by representing the two options as a single option that comprises a partial grant and a partial loan. The objective of the analysis is to calculate the costs of the alternatives to the state and to the purchaser and to identify what specific conditions in either case might work.

5.2.2.2 Base Case

There is a choice of base case. We can compare PV rural electrification to a case where there is no electricity available; this is difficult as it requires estimating the consumer surplus in various applications which cannot be reliably assessed. The alternative is to assume that the value of electricity is self-evident and to compare its provision through small engines or by PV. We adopt the latter.

5.2.2.3 Impacts

The impacts will be a reduction in CO 2 emissions. The parameters governing this extent of the reduction are problematic. Although we make our assessments against a base line represented by small engines, it is not at all clear that this would be the case in practice. If the alternative were kerosene for lighting then it is possible that the CO 2 emissions would be comparable to those from small engines,

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

but a reliable judgement on this would require considerable research.

In either case an assessment of CO 2 savings would require knowledge of the number of systems installed; their power rating and the electricity generated. It seems unlikely, given all the uncertainties that such a programme could be registered under the CDM and as shown in other case studies the costs of registering programmes of small activities may well outweigh the benefits.

We therefore make no credit to the programme for CO2 emissions, although we do make an assessment of their size, assuming an alternative of small engines.

There will be an impact on the economy of the individual / community. If no electricity is otherwise available this may be significant; if electricity is available from other sources then the economic impact will depend on the extent of the cost saving.

5.2.2.4 Consultation

Consultation with suppliers of photovoltaic systems is necessary to determine: what prices may be achieved in large scale tenders; whether there are obstacles to procurement or installation and how they can be overcome; whether they are willing to engage in such a programme and on what terms.

Consultation is also desirable with other Ministries operating in rural areas. It may be that extension workers from health, education and agricultural services can help with basic advice on simple maintenance and can supply information about the programme and support applications. This would avoid an expensive duplication of machinery for delivering advice and support.

5.2.2.5 Compliance

The main compliance problem will be in ensuring that the money is used to buy photovoltaic equipment and in recovering the payments. The systems will be installed by agents and their records must be checked and verified by random checks on the ground. Penalties must be applied for fraud.

Obtaining could be difficult; it might be helped by the participation of a commercial bank to manage the fund. In principle the solution is to take back the photovoltaic system, but this could be difficult in practice and it may have been sold on to a different owner. The problem can be serious, because if there is one delinquent participant in a community and he is not penalised then the practice of non-payment will spread.

This is a real risk; from an economic perspective it is simply a transfer payment from the state to the delinquent participant and it is not a welfare loss, but it would destroy the sustainability of the revolving fund. We incorporate into the analysis a loss of 20% of revenues, but note that performance in this re- gard would need to be constantly monitored.

5.2.3 Theory-based Evaluation

5.2.3.1 Methodology

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

first column and then in subsequent columns are listed various indicators, risks and assumptions. The successive steps of the policy may or may not specify recognisable behavioural assumptions; it depends very much on the type of policy investigated.

5.2.3.2 Indicators

5.2.3.3 Behavioural Matrix

The risks identified can often lead to the definition of new flanking policies. For example, if other consumers are unaware of the instrument then it will have no impact on their behaviour. It is necessary to accompany the programme with a sensitisation of potential users and this could be done using existing extension workers in health, education and agriculture.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 13: Behavioural matrix for instruments to support off-grid PV for rural electrification

Indicators Behavioural model Input Output Outcome Impact Risks Assumptions Assessment of Official time ($) Viable estimate of ini- Preliminary sensi- market and feasi- tial market; concept tisation of suppliers bility study paper (Y/N) (?)

Building support in Preliminary sensi- Other Ministries will other Ministries tisation of cooper- assist; needs per- ating Ministries (?) suasion of health, educational, agricultural benefits Creation of revolv- Official time ($) Agreed fund and pro- ing fund and ap- cedures (Y/N) proval of instrument Tender for agent to Official time ($) Tenders made (#) No competent manage fund Contract agreed agent is interested (Y/N) Tender for and Official time ($) Firm tenders for Tenders will be at purchase of Expenditure ($) required volume at prices above ac- equipment acceptable price ceptable limit (Y/N)

Contracts agreed Official time ($) Systems available Expenditure ($) (#) Awareness cam- Official time ($) Applications to No market interest Other Ministries will paign in appropri- Fund (#) assist on the ground; ate regions see above

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Indicators Behavioural model Input Output Outcome Impact Risks Assumptions Applications re- Official time ($) Systems installed Development viewed, evaluated (#) gains and CO2 and approved savings (#) Repayments Revenue to fund Fee to agent ($) Repayments will sought ($) be hard to recover New cycle of re- Official time ($) New systems in- Development Bad loans and ad- volving Fund as stalled (#) gains and CO2 ministration costs will repayments are savings (#) not deplete Fund received

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5.2.4 Cost-Benefit Assessment

5.2.4.1 Methodology Applied

The cost-benefit assessment of photovoltaic systems (PV) compared to small engines obliges us to consider what value to give to the opportunity cost to Yemen of the fuel used in the engines. This is the benefit of the fuel to the national economy if it were not used in the application considered. In this case the opportunity cost is the fob export price or cif import price (depending on whether Yemen is a net importer of exporter of the fuel in question) plus the cost of delivering it to the site, which would also be avoided if it were not used.

We could use either diesel or gasoline engines as a reference. Our policy instrument is aimed at individuals who would presumably use gasoline engines, despite the higher cost of the fuel, because diesel sets are too large and expensive for individual use. On the other hand, from a state perspective, if a village were to be electrified as an island, it would be done using a diesel engine. For consistency, we assume the fuel is gasoline because this is more consistent with individual households.

The key parameters for the assessment are:

• Typical load to be met, • Costs and performance of photovoltaic and battery systems, • Investment costs for gasoline engines, • Opportunity costs of gasoline,

In chapter 5.2.2.1 we discussed three forms of achieving a wide-spread use of PV equipment in rural areas. The three policy instruments considered are:

• Distribution of highly subsidised equipment, • Direct subsidies to purchases of PV equipment, • Soft loans to individuals repayable over a period.

The following application of the cost benefit analysis tool lays emphasis upon the first two options by discussing in general terms the required subsidy level. The difference between these two options is marginal and is more determined by the most appropriate institutional framework and the overall approach of the rural electrification programme. This issue is not considered in the following analysis. As it will be shown, the third option of soft loans will not be sufficient to provide adequate incentives - there has to be always a very important subsidy element.

The subsidy issue is discussed under three different perspectives:

• Least-cost electricity supply - this level of analysis determines what would be the best option of decentralised electricity supply in rural areas. For this analysis an economic discount rate of 12% is considered which reflects the scarcity of government funds in Yemen.

• Commercial market conditions - this level of analysis assumes the situation of normal business un- dertakings with free access to the credit market. For this analysis a market discount rate of 8% is used, which is the lending rate for solvent clients.

• Individual preferences of low-income groups in rural areas - this level considers the decision situation of low-income families in rural areas and determines the conditions which have to be fulfilled that they would participated in rural PV electrification programme. For this analysis a personal discount rate of 30% is considered, this reflects the fact that the families have difficulties to save

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

money and are forced to use their revenues to cover the daily costs.

5.2.4.2 Assumptions and Data Base

We assume that the total load for an average house from lighting, TV and fans is 600 Wh per day and that this can be supplied from a system of 200 W peak costing $1,000. We note that a system of this size in the Yemen presently will cost $2,000, but this is high compared to international prices ($1,000 / kW peak) and we believe that with bulk procurement and a much larger market size the cost could be halved.

It is assumed that 10% of the total investment costs cover the cost of the batteries and that these batteries have a life-time of 5 years.

The cost of a small gasoline engine is around $500 and the opportunity cost of gasoline, i.e the value in international trade is at present around $600 / tonne. This we take as the cost in our reference scenario, but it could easily rise much higher and we take $1,000 / tonne as a high price scenario.

Table 14: Basic Data for the Analysis

5.2.4.3 Cost Comparison Photovoltaic vs. Gasoline Diesel Generators

The first step of the cost-benefit analysis is the direct comparison of PV solar systems with gasoline generators. The analysis is shown in Table15. For the two technology options the unit costs (levelised costs over a period of 15 years) are determined.

It can be seen that the PV alternative is more expensive than the gasoline generators. For the above

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

mentioned decision situations the results are as follows:

• Commercial market conditions (discount rate 8%): For a well-off family with the possibility to finance the investment with a bank-loan, the PV unit costs would be 0.65 US$/kWh compared with the lower costs of the gasoline generator with 0.54 US$/kWh

• Least-cost electricity supply (discount rate of 12%): Under a least-cost electricity supply strategy the gasoline option would be less costly, 0.77 US$/kWh for the PV systems compared with 0.59 US$/kWh.

• Individual preferences of low-income groups in rural areas: For low income families the high investment for the PV systems are leading to perceived high costs (due to the high time preference expressed in the high discount rate) for the PV systems of 1.25 US$/kWh, compared with 0.83 US$/kWh for the gasoline generators.

5.2.4.4 Subsidy Level for Decentralised Electricity Supply

The next step of the analysis is to determine the required subsidy level, this question is analysed in two steps:

• Required subsidies to make the PV systems competitive with the gasoline generators (see Table 16). • Required subsidies to offer to the rural families electricity at the same costs as the urban families (see Table 17)

Competitive Decentralised Electricity Systems

The analysis presented in Table 16 determines the subsidy level for PV systems so that the unit costs are reduced to the level of the gasoline generators. The subsidy is considered for the initial investments and the batteries. The result is described below:

• Under normal market conditions the required subsidy level is 23%. • With a discount rate of 12% - least-cost analysis - the subsidy for PV systems would be 28%. • To offer incentives to low income families the required subsidy level would be 38%.

Nation-wide Equal Access to Electricity

In Table 17 it is assumed that the electricity tariff is 0.15 US$/kWh and the required subsidy level for PV systems is determined to offer electricity at the same costs.

• The subsidy level reaches 97% under normal market conditions. • Considering the cases of a least-cost analysis with a discount rate of 12% the subsidy for PV systems would be 98%. • If the situation of low income families is considered the subsidy level would amount to 99%.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 15: Direct Cost Comparison - PV vs. Gasoline Generator

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Table 16: Determination of Subsidy Level 1 - Decentralised Electricity Supply (PV vs. Gasoline Generator)

Table 17: Determination of Subsidy Level 1 - Decentralised Electricity Supply (PV vs. Gasoline Generator)

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

5.2.5 Conclusion

5.2.5.1 Methodology

The case study demonstrates the advantages of developing deconstructed versions of policy prescrip- tions as an aid to analysis and to stimulate focused debate among stakeholders.

In the case of photovoltaics, the deconstruction helps to reveal the nature and extent of the financial assistance that must be made to make the first projects commercial. This coherent perception helps to frame the definition of the policy instrument and the cost-benefit analysis.

5.2.5.2 Results of the Analysis

The analysis shows that relatively modest subsidies might be sufficient to make solar photovoltaic generation competitive with diesel generation at present market conditions.

Quite significant subsidies would be necessary if the objective is to offer decentralised electricity access to the rural population. But this would be the case also for other electricity supply possibilities.

A decision to proceed under these circumstances would probably need to be taken as part of a large- scale effort to develop a photo-voltaic industry in the Yemen with a guaranteed sale of the assembled units into the rural electrification market.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

6. Institutional Reform in Yemen – Some Possibilities

The policy cycle is shown in Figure 2. There are institutional needs at all stages of this cycle. Decision making proceeds through the general processes available in the executive and legislative branches of government. Normally policy briefs will originate from the executive and be elaborated by Ministerial departments often with analytical support from agencies of government and paid consultants and in consultation with other stakeholders. Primary legislation is debated and finally sanctioned by the leg- islature. In many countries Ministerial Decrees are used to elaborate on primary legislation.

Foresight formulate Evidence

reformulate Theory Implement

Model

Indicators

evaluate monitor

Figure 7. Policy Cycle.

This structure needs to be properly serviced with evidence and analysis if it is to work well. There is a need for an institution, or perhaps several, to gather and maintain evidence and to carry out analytical work that feeds into the formulation of policy and later guides the monitoring and evaluation and re- formulation of policy. Foresight studies are a part of the evidence that should be considered in policy formulation and these should take into account the evolution of global trends and policies in energy and the environment, but also of trends beyond these disciplinary frontiers.

Implementation of policy may be conducted by Ministerial departments or nominated agencies. In developed countries, implementation is often assigned to specialist agencies. In developing countries it is more common that policy is implemented by the Ministry. Implementation will often be demanding of resources, this may be the case for some market based instruments as well as the majority of regulations.

6.1 Reform of the Pricing System

Energy – electricity, transport fuels, natural gas – is subsidised in Yemen in all sectors to varying de- grees (for details see Appendix). This pricing system causes very high economic losses for the country. Currently there is no discussion on concise models to increase prices to a cost-covering level or even to international standards. However, subsidisation has been recognised by governmental bodies as being one of the major energy and macro-economic problems. During half day seminar conducted by the project team in October 2009 it was a consensus among participants that models to combat economic losses by subsidies should be developed and that a general price reform is necessary. The

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

60 open question still remains how such a completely new approach could be implemented.

At the time being, changes in prices have to be approved by the cabinet. However, the procedure/mechanism of recommendations for new prices and especially how these prices should be calculated is not transparent. A first step for a reform of the pricing system is a study the World Bank currently compiles on tariffs in Yemen.

The situation for overall budget planning is comparably intransparent. Annually estimations of government revenues are made by the Ministry of Planning. However, these revenues contain a large share of international donor sources (e.g. World Bank loans) and are therefore not accurately assess- able in mid-term perspective. Expenses of the government have to be calculated as well. These two sides – revenues and expenses – show considerable incoherence which leads to unreliable government budgets. In this setting, long-term agendas for sustainable price policies are difficult to implement.

6.2 Communication Structures among Institutional Bodies

Most of the relevant institutional bodies that are (or can become) relevant for renewable energy (RE) and energy efficiency (EF) are already existing in Yemen or are in the process of creation. This is a valuable starting point. However, the project team found that in some cases communication structures are not working sufficiently well to guarantee efficient coordination of large-scale, system-relevant projects. An inter-institutional communication system not only requires the institutional bodies themselves – being the nodes of the net – but also the establishment of communication structures – the threads that link the nodes. Communication could be facilitated, for example, by establishing an inter- ministerial renewable energy and energy efficiency committee with regular meetings to coordinate and streamline government activities on these fields.

6.3 Establish reliable Energy Statistics

Statistics are the foundation of policy making. This is especially important in the case of future energy supply and demand structures: what is the shape of a reference development path, how are consumer groups structured, how is energy consumption distributed among these groups? To answer these and other relevant questions, sound energy statistics need to be compiled. An in-depth statistical system is currently not fully established in Yemen and in the medium-term it is an ambitious task to establish one, even with the assistance of international donors; but it is worthwhile to tackle this challenge.

6.4 Create basic Legal Framework for PPP

Currently Yemen does not have a sufficient legal framework for PPP, which handicaps economic development to some degree. Public-private partnership in electricity supply is not adequately handled by the very general provisions of the existing Investment Law. It is recommended to concentrate on this topic in the near future, as it creates the basis for a sound and secure investment climate in Yemen.

6.5 Broaden University Education

Some approaches have been made to integrate energy efficiency and renewable energy topics to the syllabi of mechanical engineering at Sana’a University. This is a promising start. It is recommended to

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

61 introduce further topics and spread them to other universities: • Combination of engineering and economics: create sound knowledge on the energy economic background of technology choices • Sustainable development of energy systems: aspects of economic and energy system development are more and more depending on global contexts like long-term energy supply and climate change. Future generations of engineers and decision-makers need knowledge about these inter- dependencies of national and global challenges, particularly in terms of long-term stable development. Not only engineers are currently in lack of such interlinked competence, but also econo- mists, architects and scientists from other branches.

Syllabi that cover the above mentioned topics could be established with international scientific cooperation. Different teaching and education models could be combined, starting with courses of about one week duration as supplementary elements to traditional curricula. After the sound planning of alternative courses of study, teaching could be accomplished by Yemeni and foreign experts. This would also enhance the integration of Yemeni experts, teachers and students into the international scientific community through conference visits etc.

6.6 Support the Way to an independent Efficiency and Renewable Energies Author- ity

The importance of energy efficiency and renewable energies has been recognised in Yemen. EF and RE are viewed as generating positive effects on security of energy supply, stabilisation of electricity grids, climate change and the creation of sustainable job opportunities for the country.

Currently both topics are in the responsibility of a specialised department within the Ministry of Elec- tricity and Energy (MEE). It is planned to establish an independent RE-EF-authority in a two-step approach: • Step 1: Still under the auspices of the MEE the RE-EF-department will be transformed to a “sector” (larger organisational unit than a department) • Step 2: Creation of an independent authority. The project team strongly supports this approach and recommends that this process be accelerated and accompanied with international support.

The establishment of an RE-EF-Authority and the restructuring of the Public Electricity Company PEC (unbundling into three authorities for power generation, distribution and transmission) are essential elements on the way to favourable institutional conditions for the introduction of renewable energies to the Yemeni energy system. For more information see above section on Comparison of Yemeni practice with international practice in energy efficiency.

6.7 Establishment of Standards, Labels and Audit Schemes

The project team is unaware of any efficiency standards and other practical approaches to foster efficiency in Yemen. Instead energy consumption is rising with about 8 percent per year. Capital extensive approaches and schemes should be fostered in the form of a policy package: • efficiency standards combined with labelling for household appliances • efficiency standards in industry • awareness campaigns for the broad public a • capacity building programmes for key decision-makers in industry and administration, including technical trainings, international best practice examples and information on international funding opportunities for efficiency measures,

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

• auditing programmes for buildings, especially public buildings like hospitals or administration buildings • Demand-Side Management (DSM) measures

The Yemeni Organisation for Standardisation already applies different standards, e.g. the ILC Stan- dard for electrical appliances. Own standards are currently not defined, but international standards selected that fit the Yemeni situation. The institutional settings are suitable to integrate the formulation of efficiency standards into the ongoing work of the Standardisation Organisation. It is recommended to accelerate this process with international technical assistance.

Building codes were introduced in Yemen, but they don’t cover energy efficiency aspects. This should be changed. Codes for the building sector are a very complex set of regulations to cover many types of buildings. If domestic expertise to handle this task should not be available, international expertise could be helpful.

As an outcome of the Energy Efficiency and DMS study and as a first step towards the implementation of the national strategy for RE and EE, the MOEE prepared together with the World Bank a detailed project proposal for a medium-size GEF project “Removing Barriers to Energy Efficiency Improve- ments in the Republic of Yemen”. The project has been approved by GEF in January 2010. MOEE will apply for a large scale GEF EE project in 2011, once the new budget of the GEF fund has been established and allocated.

6.8 Create a domestic Industry for Efficient Appliances

The definition of standards is partly linked to a domestic industry and domestic products to which these standards can be applied. Currently there is no such industry existing in Yemen. The Ministry of Planning should assess in detail (maybe with technical support from international organisations) which incentives to create a domestic industry for the production of energy efficient appliances should be set. Many reasons and benefits make such an effort rewarding: • Yemen is surrounded by population-rich Arab countries with growing markets for electric appliances, therefore high growth rates of the industry might be realised • Job creation effects of such an industry would ease some of Yemen’s economic challenges, mainly high unemployment rate and low domestic added value • An industry for efficient appliances could create valuable feedback effects with education and training at universities (e.g. co-education at universities and in industry companies)

6.9 Foster Approaches in the Transport Sector

In recent years the Yemeni government has taken a first step towards a more efficient transport system: it passed a prohibition for the import of old (i.e. mostly less fuel efficient) cars. Apart from this promising approach there are no other measures in the transport sector to tackle the problems of air pollution, traffic congestion and rising fuel consumption. These problems derive from mainly two sources:

1) fuel-inefficient vehicles are numerous on Yemeni roads 2) there is no coherent transport planning approach

As a first step a detailed traffic flow analysis can reveal weak spots in Yemen’s large cities. Subse- quently the introduction of traffic control systems (synchronised traffic light systems, ordered traffic guidance and others) could help to structure the current traffic flow. This is particularly important as

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

63 the number of vehicles is growing, therefore increasing the need of advanced traffic flow guidance. There is no public transport system in Yemen yet. In large cities such approaches are essential instruments to control growing traffic, especially commuting.

Average life-time of passenger cars and other vehicles is long in Yemen. Therefore inefficient vehicles remain in the transport system for long time. In other countries, e.g. Iran, premiums were paid to scrape old cars. Another (and less costly) solution could be compulsory scrapping of cars of certain age. Efficiency standards are not fitting the current Yemeni situation as this could possibly cause unaf- fordable costs to consumers; furthermore it would be very difficult to introduce such standards at all, as can be seen from the case of emission standards within the European Union in previous years.

6.10 Renewable Energy Target and general Legal Approaches

Various very promising initiatives are underway in Yemen to foster renewable energies. The Yemeni government decided on a 15% renewable electricity target by 2025. This is a realistic time frame and such a target is also compatible with the future electricity system requirements and capabilities (regarding loss reduction and overall stability). However, this progress is capital intensive. Technical problems with the grid derive from all levels: generation capacity (bringing sufficient capacity on-grid in time), transmission (reduction of technical losses) and distribution (reduction of technical and non- technical losses, reliable metering). Currently a project by World Bank is dealing with these problems.

Yemen passed an energy law in 2009 unbundling the electricity sector and allowing participation of private enterprises. This is a step towards becoming more attractive for solvent investors in the future. In a subsequent step a law on renewable energies should be passed. Such law typically contains some kind of incentive to invest into renewable generation capacities, e.g. a feed-in tariff. However, it has to be studied in detail whether a feed-in structure (or other types of incentive models) can be made compatible with the donor-driven infrastructure development of Yemen.

6.11 Realise Projects and Initiatives

Wind power. A wind potential atlas has been compiled in Yemen, indicating around 34 Gigawatts of exploitable wind power potential. Yemen thus is one of the most important countries for wind power in the Arab region. A more detailed investigation of the potential is needed. From a practical perspective it is necessary to increase the number of sites, the levels at which wind speeds are recorded and the period of monitoring. The existing wind atlas is based only on 2 site measurements at 40 m for one year (Hodeihah and Mohka) and satellite data. It is not a fully comprehensive wind atlas, but a meso-scale atlas.

Currently one large-scale wind power project is in the advanced planning phase: the 60 MW project in Al-Mokha. Strong efforts should be made to realise this promising project, as valuable experiences could be gained on technical issues, system integration and funding levels.

Solar water heating. Two companies in Yemen produced solar water heaters (SWH) during the period 2002-2005, but because of insufficient marketing concepts they went insolvent. Solar water heating devices are low-tech. Therefore it would be possible to generate jobs among low-skilled workers in Yemen by creating a domestic industry. Domestic demand for SWH could be controlled by either introducing building codes that make a certain renewable energy supply share (in this case SWH) obligatory, by raising energy prices that reduce pay-back times of SWH or by supporting the sale of SWH by paying premiums per device to the consumer. The latter two options could also be combined. Financing of premiums could be accomplished with a certain share of international donors.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

The starting phase of such large-scale dissemination and penetration of SWH would have the typical project structure of international technical assistance and of the international donor sphere. But after this initial phase the deep penetration of SWH can only be accomplished in sustainable manner by a far-reaching price reform, as high prices of fossil fuelled alternatives (electricity, diesel generators) are a powerful means to make consumers care for renewable energy devices. The essential indicators to concentrate on are the pay-back time of initial investment and the creation of knowledge among the public about these pay-back times as well as maintenance of SWH equipment.

Photovoltaics. Yemen’s rural electrification programme will introduce SHS (Solar Home Systems) on PV basis to off-grid. The project team recommends to concentrate on a very high share of local content. In the first project phase, local content will probably be low, as technical assistance will dominate the implementation process. However, local stakeholders – consumers, maintenance staff, suppliers etc. – should be integrated very strongly in the following phases. This bears the opportunity to establish sustainable domestic and local expertise in PV technologies which could be the first step towards establishing a local industry.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Annex 1

Mission Report

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Mission Report

The country mission was successfully completed in the time span of October 9 to 14, 2009. The mission programme had been prepared with very good support from the Yemeni representative in RCREEE's Board of Trustees.

The mission programme was as follows:

Date Programme Item 9 Oct. internal team meeting with local Consultant 10 Oct. Meeting with Geological Survey Board 10 Oct. Meeting with Ministry of Oils and Minerals 10 Oct. Meeting with Renewable Energy Society 10 Oct. Meeting with World Bank 10 Oct. Meeting with AFD 10 Oct. Meeting with GTZ 10 Oct Meeting with Dome Trading & Contracting Co. 11 Oct. Meeting with Ministry of Electricity and Energy 11 Oct. Meeting with Public Electricity Company 11 Oct. Meeting with Yemen Gas Company 11 Oct. Meeting with Al-Murrani Centre for PV Systems 12 Oct. Meeting with Environmental Protection Authority 12 Oct. Meeting with Ministry of Planning 12 Oct. Meeting with Sana'a University 12 Oct. Meeing with Ministry of Interior 12 Oct. Meeting with JICA 12 Oct. Meeting with Al Zubairi & Bro. 13 Oct. Half day Seminar 14 Oct. internal project team meeting

More stakeholders participated in the half day seminar. A list of stakeholders is attached in the following Annex 2. Some 25 persons attended the seminar and engaged in lively discussions.

The seminar was held at the Mercure Sana'a Hotel. In accordance with the country tradition it was initiated by a prayer offered by Dr. Mohamed Alijadoumi, University of Sana'a. The seminar was opened by Eng. Adel Dhumran. Deputy Minister Assistant of Electricity and Energy. The seminar had three main objectives (1) to promote RCREEE in Yemen, (2) to discuss with stakeholders the findings of the mission and (3) to introduce the participants to the ideas of Evidence Based Policy Making and Theory Based Policy Evaluation by giving a detailed presentation on that topic (Annex 4) and by presenting case studies illuminating the methodology (Chapter 5 above). Finally the seminar was used to give a preview on the national information workshop on EE and RE policy development. The presentation is attached in Annex 5.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Annex 2

List of Stakeholders

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

List of Stakeholders

Organisation Contact Per- Position email son Ministry of Elec- Eng. Moham- General Director, Re- [email protected] tricity & Energy med H. Al newable Energy De- Sha-abi partment Ministry of Elec- Wagdi Aman Chairman, Private [email protected] tricity & Energy Power Unit Ministry of Elec- Eng. Gamil Al- Director of Deputy [email protected] tricity & Energy Agbhani Minister Office Ministry of Elec- Adel Abdul- Gneral Director for tricity & Energy ghani Planning and Infor- mation PEC Abdulaziz Deputy General Noman Manager for Genera- tion and Transmis- sion Ministry of Elec- Gamil A. Project Manager [email protected] tricity & Energy Thobet Wind Farm Ministry of Plan- Eng. Hisham Vice Minister [email protected] ning & Interna- Sharaf Abdalla tional Cooperation Ministry of Oil & Eng. Abdul- Deptuty Minister [email protected] Minerals malik M. Aama Ministry of Oil & Dr. Ismail N. Chairman, Geological [email protected] Minerals Al-Ganad Survey & Mineral Re- sources Board Ministry of Oil and Dr. Nageep M. Deputy Executive [email protected] Minerals Aloj Managing Director, Yemen Gas Com- pany Yemen Petroleum Awadh Ahmed Executive Deputy Di- [email protected] Company Humran rector General Yemen Petroleum Abdullatif A. Director, Commercal [email protected] Company Mutahar Affairs Unit Yemen Gas Com- Abdulazis Sul- Environmental Man- [email protected] pany tan ager Yemen Gas Com- Fouad Al Manager of LNG Pro- [email protected] pany Dhobai ject Ministry of Water Ameen Mo- Deputy Gernal Direc- [email protected] and Environment hammed Al tor of Planning, Envi- Hmadi ronment Protection Authority Yemen Standardi- Eng. Ahmed General Director [email protected] zation, Metrology A. Y. Al- & Quality Control Bashah Org. Civil Avaiation & Dr. Abdo A. Assistand Deputy [email protected]

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Meteorological Almakaleh Chairman for Meteor- Authority ology Sana'a University Dr. Tawfik Ali Assistant Professor, [email protected] Abdullatif Mechanical engineering Department, En- ergy and Environ- ment Sana'a University Dr. Eng. Mo- Energy-Environment- [email protected] hammed A. Training- Al-Shaghadari Consultations Dome Trading & Abdulaziz M. General Manager [email protected] Contracting Co. Da'er Ltd. Dome Trading & Abdulsalam Head of Trading & [email protected] Contracting Co. Althari Procurement Ltd. M.A.Alzubairi & Mohammed Sana'a Branch Man- [email protected] Bro. M. Al-Zubairi ager GTZ Dr. Thomas Director, GTZ Office [email protected] Engelhardt Sana'a Agence Francaise Christian Country Director for [email protected] de Développe- Flamant Yemen ment Ministry of Elec- Dr. Andreas Advisor for Renew- [email protected] tricity & Energy Zoellner able Energies (CIM) Ministry of Elec- Eng. Dirk Advisor for GIS [email protected] tricity & Energy Weiß JICA Megumi Shuto Project Formulation [email protected] Adviser JICA Mohammed Administrative & [email protected] Al-Riashi Techncal Cooperai- ton Assistant

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Annex 3

Seminar Programme

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark

Methodology and Policy for Energy Efficiency and Renewable Energies Half-day Seminar - Yemen, 13 October 2009, 9:00 - 13:00

Objective of the Seminar: The seminar serves the objective of the project to support RCREEE’s overall effort of providing member state administrations with better information and new planning tools and processes. The seminar will give an introduction to evidence based policy development and theory based policy evaluation for Energy Efficiency and Renewable Energy and the seminar will be used to discuss some preliminary findings in Yemen.

The seminar will have the following structure:

1. Welcome, by Representative of the Ministry of Electricity and Energy

2. Introduction to the Project and to the Seminar, by the project team leader, Florian Sauter- Servaes

3. Methodology: Evidence based Policy Making and Theory based Evaluation, by Nigel Lucas

4. Status of EE and RE Policies and their Development in Yemen, by Abdusallam Mansoor Al Janad and Nikolaus Supersberger

5. Preview on Information Workshop, December 2009, by Martin Ehrlich

6. General Discussion to be continued over lunch

Annex 4

Presentation on Methodology

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark

Evidence based policy making and theory based evaluation Nigel Lucas

Page 1 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark

Sana’a must be seen, however long the journey,

though the hardy camel droop, leg-worn on the way.

Page 2 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Contents

• Evidence based policy making • Theory based evaluation • The linkages – Theory – Indicators • How we will adapt it

Page 3 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Evidence Based Policy Making?

• What is Evidence Based Policy Making? • Why do we need it? What have we been doing before - making it up? • What is evidence?

Page 4 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark What is Evidence Based Policy Making?

Many different definitions, but what it really means is just:

“An approach to policy development and implementation which uses rigorous techniques to develop and maintain a robust evidence base from which to develop policy options”.

All policies are based on evidence - the questions are: •Is the evidence reliable? •Are the processes by which evidence is turned into policy fit for their purpose?

Page 5 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Why do we need it?

•Policy often driven by prejudice or short-term political pressure •Foreign consultants and agencies often prescribe remedies from home with little thought whether they are appropriate. Mimicry is not policy. •Agencies have their own agendas and visions that may conflict among themselves and with those of government •Countries need well-resourced, in-house capabilities to analyse and evaluate policy and more transparent processes

Page 6 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark What is evidence?

• Evidence is any information that can be used to turn policy objectives into feasible and effective policy instruments • An evidence-based approach should show continuity between foresight, strategy, policy, and implementation • Can distinguish three main components: • hard data (facts, trends, survey information) • analytical reasoning that processes data to illuminate problems • stakeholder opinion on an issue or set of issues.

Page 7 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Good evidence is necessary, but not sufficient

There are policy processes that:

Use it well Use it poorly

Use good information

Use poor information

Need evidence and process

Page 8 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark The process of evidence-based policy making (I)

•Alternative forms of intervention need to be reviewed and short- listed. Evidence of the success or failure of similar instruments in developed and developing countries needs to be studied with special emphasis on the conditions that created success and failure •There must always be a base-case against which alternatives are screened. Alternatives should include all available instruments. •All the relevant potential impacts need to be identified and where possible, quantified •Indicators need to be established of what is expected from the policy measures. These indicators should cover outputs, outcomes and impacts •Intermediate indicators are important in helping understand how policies work, how measures interact and how they can be improved

Page 9 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark The process of evidence-based policy making (II)

•Impacts should be assessed in consultation with the subjects of policy •The cost of compliance needs to be assessed. Consideration should be given to how these costs can be minimized. •It is necessary to consider who pays the compliance costs; there are generally alternatives with different implications for equity. •The procedures for compliance need to be worked out and for monitoring impacts. •Quantitative analysis of impacts is essential. The analytical method most commonly used is economic cost-benefit analysis. •Cost-benefit analysis should take into account opportunity costs of energy and external environmental costs

Page 10 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark What is Theory-Based Evaluation?

 Theory-Based evaluation focuses on analysis of the theoretical or logical sequence by which a policy intervention is expected to bring about its desired effects.  For instance, a theory-based evaluation might ask about the steps that are implicit between a policy initiative (e.g. introduction of minimum energy performance standards for electrical appliances) and the policy outcome (reducing energy and GHGs). The Figure represents the implicit theory of policy makers:

Introduction Consumer is Manufacturers Market is Energy use of MEPS empowered to are transformed and CO2 make a better incentivised to and inefficient emissions judgement and make more devices fall; change efficient become Domestic behaviour models obsolete manufacture strengthened

 The concept is similar to the logical framework for project evaluation, but because it depends on an explicit behavioural model it can handle not linear logical structures

Page 11 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark

Alternative theories

Introduction Consumers are Manufacturers Market is Energy use of MEPS indifferent to are obliged to swamped by and CO2 energy use – make more poor quality emissions buy only on efficient smuggled rise; price models goods domestic manufacture falls

 Failure to be clear about the causal sequence by which a policy is expected to work can result in poor and even contrary outcomes  Theory Based evaluation does not prevent us constructing a bad model but tells us what indicators we should examine to make sure things are going well

Page 12 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Indicators

Indicators need to be established of what is expected from the policy measures. This is vital for evaluation.

Indicators should cover: •inputs, i.e. the financial, human, technical or organizational resources used in the endeavour •outputs, (objectively verifiable indicators that demonstrate the progress made in implementing the measures, e.g. the creation of a minimum energy performance standard), •outcomes (immediate effects on the regulated subject, e.g. the offer of new products and retooling of production lines) and •impacts (direct measurements of the improvements that the programme is designed to bring about, e.g. more efficient products and lower energy use).

Page 13 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Indicators and the theoretical models (Labels and standards)

Indicators Causal sequence Risks Assumptions Input Output Outcome Impact  Consumer Inadequate  Standards Development of surveys show accompanying published and Manufacturers standards and  Administrative consumers and measures; supporting have confidence in supporting time and effort manufacturers consumers measures in regulatory system measures change unaware or place expectations unaffected Manufacturers  Strengthened  Range of new  New investment incentivised to manufacturing products and production make more capacity - determined by measures ($) efficient models inspection survey Consumers choose  Consumers  Administrative Low cost non- better devices; do  More purchase better time and effort compliant goods not seek non- discriminating quality products in ensuring excluded from compliant cheaper purchases – consumer and compliance ($) market goods market surveys  Lifetime cost decreases  Better capital  Electricity stock in consumption Electricity  Consumer households – decreases consumption normally pays household  CO2 emissions lowered more ($) surveys; market decrease studies  Manufacturing base strengthened

Page 14 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Theory and the policy cycle

Foresight formulate Evidence

reformulate Theory Implement

Model

Indicators

evaluate monitor

Page 15 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Policies for EE • Corrective Measures – Price Reform – Institutional and legal reform – Labelling – Dissemination of information – Research, development and demonstration – Financial incentives – Support for energy service companies (ESCOs) • Compensating Measures – Standards – Mandatory measures (e.g. compulsory audits and management obligations) – Corporate agreements – Efficiency obligations – Transport and spatial planning

Page 16 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Policies for RE

• Targets and strategy • Legal reform • Institutional reform • Standards and /or labels • Financial incentives (Capital support) • Feed-in tariffs and obligations (Operating support) • CDM Finance • Information • Industrial policy

Page 17 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark A toolbox for policy formulation

1. Introduction 2. Objectives and requirements for RE&EE support schemes 3. Overview of the toolbox a. Evidence-based policy making b. Theory-based evaluation c. Cost-benefit analysis 4. Case studies a. Introduction b. Regulatory framework for renewables c. Incentive schemes for solar water heaters? d. Finance through the CDM (landfill) e. Market transformation strategy for renewables (pv) f. Energy efficiency obligations g. Energy efficiency fund h. Energy audits? i. ESCOs j. Labels and standards k. Public awareness campaigns? 5. Combining instruments a. Legislation b. Agency c. National strategy 6. Technical assistance

Page 18 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark The price of carbon

• 0$/tonne • 2$/tonne • 10$/tonne • 50$/tonne

• 0$/tonne $0 / kW • 2$/tonne $34 / kW • 10$/tonne $170 / kW • 50$/tonne $850 /kW

Page 19 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Who pays and how?

• Energy efficiency is win-win. No real issue – it is a sensible target of public policy intervention. Lower costs; benefits to state and company.

• Renewable energy; it is not so clear. In many instances; definitely more costly than alternatives.

• Why should Yemen pay the difference?

• If not Yemen then who and how? CDM? Policies and Measures (PAMs)

• Without clarity on who should be and is willing to accept the additional cost , it is hard to have entirely coherent renewable policy

Page 20 Sana’a: Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark

Many thanks for your attention

Page 21 Sana’a: Seminar on Methodology and Policy, 13 October 2009

Annex 5

Preview on Information Workshop

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark

Preview of the Information Workshop - December 2009 -

Martin Ehrlich

Page 1 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Objective of the Impact Assessment Project

• To achieve: – Rapid implementation of cost-effective policies and instruments – Accelerated deployment of cost effective RE & EE technologies – Through: • Increased penetration of „evidence based“ policy formulation and „theory based“ policy evaluation • Specific objectives of the project: – Comparative analysis of EE & RE policies – Provision of impact assessments of EE & RE policy and promotion instruments in RCREEE countries – Strengthening of the methodological basis for policy formulation – Provision of recommendations for adjustments of the policy making process

Page 2 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Objective of the Training Component

• Presentation of the methodological basis: – Evidence based policy making and planning procedures – Theory based evaluation and procedures for application in practice • Country specific conclusions • Recommendations regarding the policy making process • Presentation of Case Studies – Case Study on EE promotion – Case Study on RE promotion

Page 3 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Audience for the Training Event

• 1st day: Senior decision makers • Presentation of the Impact Assessment Project • Key elements of the methodology • Recommendation of the country assessment

• 2nd & 3rd day: Policy analysts and RE & EE experts • Detailed presentation of the synthesis report and country assessments • Discussion of case studies with presentation of the methodological basis

Page 4 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Modules of the Training Event

Morning Session Afternoon Session

 Presentation of the National Regulations and Incentives Project 1st  Presentation of International Practice  Key principles of evidenced based day  Result of the Country Review policy making and theory based evaluation

 Presentation of the Country Report  Presentation of International – Methodological basis for policy Practice in the Synthesis Report preparation 2nd – International practice – Assessment of the policy making day – Assessment of RCREEE practices process – Energy planning and political Country specific conclusions and consultation process recommendations Case study on Energy Efficiency Case study on Renewable Energy  Selected EE policy instrument  Selected RE policy instrument 3rd  Theoretical framework  Theoretical framework day  Results of the case study  Results of the case study  Country specific conditions  Country specific conditions

Page 5 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Programme for Senior Policy Decision Makers

• Presentation of the Impact Assessment Project • Scope of the project and organisation • Value of international comparative analysis • Key elements of the methodological basis for policy preparation and assessment • Need for a methodological basis • Benefits of a sound methodological basis • Short and long term requirements • Presentation of international practice • Policy making process • Policy implementation and impact assessment • Result of the country review • EE and RE policy making process • Policy implementation • Observations and recommendations

Page 6 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Programme for Policy Analysts and Consultants

• Presentation on methodological basis (international practice and practice in RCREEE countries) • Evidence based policy formulation • Theory policy evaluation Including: Economic evaluation of policy instruments / Integration of climate policy benefits in RE & EE policy analysis • Presentation of case studies (including the discussion of case studies prepared by participants) • Presentation of selected policy instrument • Required theoretical framework and selected approach • Result of the case study • Comment on country-specific conditions and challenges

Page 7 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009 Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for Renewable Energy and Energy Efficiency

A project financed by the Ministry of Foreign Affairs of Denmark Information Regarding the Available Project Results

• Key-documents for RCREEE countries • Country Reports with the assessment of EE & RE policies and instruments • Synthesis Report • Contacts within the RCREEE countries for networking and professional contacts • Case Studies on evidence based policy preparation and and theory based policy evaluation

Page 8 Yemen, Half-day Seminar on Methodology and Policy, 13 October 2009

Annex 6

Energy Situation in Yemen

In 1990, the Yemen Arab Republic (YAR) and People’s Democratic Republic of Yemen (PDRY) merged to create Republic of Yemen (ROY). The unification has led to dramatic political and economical reforms in Yemen but also to a number of serious set backs for the national economy. Yemen still belongs to the poorest countries of the world with a per capita GDP of US-$2001 770 PPP and is the poorest country in the MENA region. For comparison: Sudan has a per capita GDP of US-$2001 1610, Morocco of US-$2001 3700 and the poorest country Sierra Leone US-$2001 480. Table 18: General Information about Yemen in 2008

Pop ulation GDP GDP Energy Net e n- Total Elec. CO 2 (million) (billion (PPP) production ergy Primary Cons. emissions

$2000 ) (billion (Mtoe) imports Energy (TWh/a) (b) (mil-

$2000 ) (Mtoe) Supply lion ton- (Mtoe) nes of

CO 2) 22.4 12.4 19.4 16.5 -8.8 7.2 4.5 20.6 (a) Gross production + imports – exports – transmission/distribution losses

(b) CO 2 emissions from fuel combustion only. Emissions are calculated using the IEA's energy balances and the Revised 1996 IPCC Guidelines.

Besides a lack of economic development, Yemen is projected to face a rapid population growth in the coming decades. The energy sector plays a decisive role as population growth requires an extension of energy supply in order to avoid social tensions and massive emigration.

1. Yemen’s Energy Mix The energy supply of Yemen heavily depends on fossil fuels. Fig 8 shows that 99% of all energy demand is contributed by oil and merely 1% by renewable energy. The total primary energy supply is 7.1 Mtoe. Figure 9 shows the historic development of the per capita total primary energy consumption for the years 1980 until 2006 in tonnes of oil equivalent.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Figure 8: Yemen’s Primary Energy Mix, 2006 The trend indicates increasing demand for energy per capita since 1993. Primary energy consumption reached a low point during the civil war in 1994. Yemen’s 2006 per capita primary energy demand is still low compared to other countries in the MENA region, such as Syria (1.0 toe/cap), Jordan (1.4 toe/cap) or Lebanon (1.3 toe/cap).

Figure 9: Historical Primary Energy Consumption in Yemen, 1980-2006

2. Oil Yemen’s General Corporation for Oil & Gas/Mineral Resources is an affiliation of several state-owned subsidiaries, which are responsible for managing the industry contracts and relations with private op- erators. All branches report to the Ministry of Oil and Mineral Resources (MOMR) which is responsible for the national oil policy. However, contracts with foreign oil companies still require parliamentary approval.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Yemen is a small non-OPEC oil producer, trying to attract foreign investment. According to the BP 2009 Statistical Review of World Energy, the country’s proven crude oil reserves accumulated to 2.7 billion barrels in 2008. In 2007, Yemen's total crude oil production was 319,000 barrels per day, down from 441,000 bpd in 2001. According to Yemen's Petroleum Exploration and Production Authority (PEPA), this is due to the declining production at Masila and Marib, the country's two largest fields. In 2008, oil production further declined by 6% compared to 2007 to 298,000 barrels per day.

Figure 10: Historical Crude Oil Production in Yemen, 1990-2008

The national government estimates that the country holds around 9 billion barrels of oil reserves, mainly due to the fact that offshore fields have not yet been explored. The government hopes to boost oil production to 500,000 barrels per day in the next few years and to this end carried out an offshore licensing round in 2007. However, oil production in Yemen heavily depends on private foreign companies.

Fig. 11 sketches Yemen’s pipeline network for transporting crude oil produced in three central areas. The oil-producing regions are connected to three shipping terminals.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Figure 11: Yemen’s Infrastructure for Oil Transportation

Yemen currently has a crude oil refining capacity of 110,000 barrels per day from two refineries. The Yemeni government is planning to upgrade the refining capacity in the near future. Currently 120,000 barrels of oil products are consumed daily in Yemen, therefore refined products have te be imported. Among other plans about 50,000 barrels per day of refining capacity is expected to come online in 2010 from a joint venture announced between India’s Reliance Industries and Hood Oil. The refinery is planned in Ras Issa on the Red Sea coast.Pricing structures are complex in Yemen. In general three different rates for petroleum products exist, rates for • international companies • international oil and gas drilling companies • national market.

Diesel for the national market costs about 35 Rial per litre (ca. 11 EUR-ct), gasoline 60 Rial/l, premium gasoline 120 Rial/l and kerosene 35 Rial/l. However, diesel prices are further differentiated between different consumer groups: Diesel for electricity generation (17 Rial/l), for trucks, for cement factories and for other factories. All these prices for domestic consumers are strongly subsidised (compare Ta- ble 19). There is currently no long-term goal to increase prices.

Table 19: Diesel prices in Rial/l for different consumer types, 2009. Consumer type Domestic price International price Difference / subsidy Foreign company 112.75 112.75 0 Commercial and industry 70 42.75 Private households 35 77.75 Electricity production 17 95.75

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

3. Natural Gas Total natural gas reserves (including associated gas and others) is estimated to be 11 tcf in Yemen (310 bn m3 with conversion factor of 1 m3 = 35.31 cf). 9.2 tcf are supposed to get exported as LNG over the coming 25 years. Domestic consumption is forecasted to be 1.5 tcf in the same time frame for power production. There might be about 7 tcf of additional natural gas reserves, and some of this gas would then be used in the transport sector, for cement factories and power production.

Presently there is no joint planning of the power and gas sectors. But a joint committee has been established and it is expected to start work soon. It is targeted to have a single plan for gas and power development.

In former years the natural gas sector has lagged due to weak investment and marketing prospects. Since international companies increased their investments in the Yemeni natural gas sector for exploration and production, the LNG sector got a strong push.

Total-led Yemen Liquified Natural Gas (YLNG) possesses the production rights of more than 50% of Yemen’s natural gas reserves for export. First shipping transfers are expected by the end of 2009 from the LNG plant in Balhaf. This project consists of a 20-mile pipeline connecting the gas processing facilities in the Marib’s field to the liquefaction facilities and an LNG plant with an overall capacity of 6.7 million tons per year. The plant shall export approximately two-thirds of its production to the U.S. and the remainder to Asia.

4. Electricity: Status and Outlook Yemen’s power sector is managed by the state owned Public Electricity Corporation (PEC) which is responsible for 70% of the country’s electricity generation as well as the national power grid. The remaining generating capacity is operated mainly by the British company Agricom which receives very high prices for electricity.The Ministry of Electricity and Energy (MEE) is the policy making body and de facto regulator of the electric power industry in Yemen.

In 2006, Yemen’s installed power generating capacity totalled 1.1 GW compared to 0.8 GW in 2000. Power generation capacity needs to be further expanded in order to catch up with the rapidly growing power demand entailing from urbanisation and population growth. According to the International En- ergy Agency, electricity demand increases at an annual rate of 7%. Fig. 12 illustrates the historical growth of Yemeni net electricity generation and electricity consumption from 1981 to 2005.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Figure 12: Historical Net Electricity Generation and Consumption in Yemen, 1980-2006

The Yemeni power sector is suffering from supply shortages especially during summertime. High electricity losses in the national power grid are a severe problem in Yemen. In 2003, power losses accumulated to approximately 23%, ranking Yemen second in the MENA region. Electricity demand is mainly driven by urban households, constituting 58% of total demand.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

Figure 13: Electricity Consumption by Sector in Yemen In the past years the Yemeni government has considered many different ways to deal with regular electricity shortages. This included the restructuring of the PEC and an integration of the power sector through small-scale privatization of power plants to create independent power producers (IPPs). Fur- thermore, the government fosters the introduction of gas-fired power plants to free up oil for exports. Currently one power plant – Marib I – has been finalized but didn’t start operation yet. The reason is that natural gas supply from Yemeni gas fields is not functioning sufficiently. Marib II and Marib III are further natural gas power plant projects that are supposed to contribute about 340 MW of generation capacity each. Siemens started to build Marib I in March 2005. In November 2007, the Saudi Arabian government agreed to provide a US$ 101 million grant for this project. So far, much of Yemen's electricity infrastructure improvements have been funded by multilateral development organizations.

In 2006, the World Bank approved a $50 million loan to help finance the “Power Sector Project”. The project’s objectives include relieving power constraints, enhancing electricity supply efficiency and strengthening corporate governance in the electricity sector. It concentrates also on demand side management. At the same time, the World Bank started to design a masterplan for energy which envisages the installation of 2,500-3,000 MW total power generation capacity by 2025.

Electricity prices are strongly subsidised in Yemen. For details see section Comparison of Yemeni practice with international practice in energy efficiency.

5. Renewable Energy In 2008, Lahmeyer International quantified the potential of different renewable energy resources in Yemen. The study distinguishes between theoretical and technical potentials. Theoretical potentials represent the physical, meteorological or biochemical energy available in a certain region and at a cer-

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

tain time or period. The technical potential is divided into gross technical and practicable potentials. The former is defined as the achievable potential using known technologies taking into account different technical factors (e.g. recovery factor of the resource, efficiency of the applied technology). Practi- cal potentials take also into account grid accessibility.

Table 20: Grid-Based Renewable Energy Technical Potential in Yemen Resource Theoretical Potential Technical Potential (MW) Gross (MW) Practicable (MW) Wind 308,722 123,429 34,286 Geothermal 304,000 29,000 2,900 Solar electric (CSP) 2,446,000 1,426,000 18,600 Biomass (Landfill Gas) 10 8 6 Hydropower Existing Dams 1 - - Major Wadis 12-31 11-30 - Solar thermal

Domestic Solar Water MW thermal MW thermal MW thermal Heaters (SWH) 3,014 278 278

Table 20 indicates that solar power has by far the largest technical gross potential in Yemen but ranks second in terms of practical technical potential as many potential plant sites are located more than 50 km away from the electricity grid. This implies that infrastructure investments are needed in order to realise Yemen’s solar power potential. Coastal areas – from AL Hodeidah, down to Lahj and towards Abyan – have a high potentals for wind power. However, it is estimated that about 60% of the theoretical potential could not be used due to shading losses, settlement and other exclusion areas. For quan- tifying the technical wind power potential, the potential within 50 km distance from existing 33 kV and 132 kV networks was estimated. The volcanic areas of Dhamar Governorate have a high geothermal power density. Tawilah sandstone layer in Sana’a, Al Hodeidah and Taiz governorates are the most promising regions for geothermal energy development.

The national government and international donating organisations have set up different initiatives and targets to promote renewable energy in Yemen. Based on the reference scenario of Lahmeyer’s study, the government has approved a renewable electricity expansion target of 15% by 2025. The mentioned renewable expansion targets are accompanied by the following technology projects: • Wind power: The World Bank in cooperation with other international organisations and the Yemeni government plan to publish a tender for a wind farm in Al-Mocha. The wind farm will have a capacity of 60 MW. • Currently a very large project funded by the Islamic Development Bank IDB, Worldbank and other donors is in its starting phase: rural electricification via PV. Total volume is projected to be around 300 million US$ of which 120 million US$ are guaranteed yet. • Geothermal energy: Yemen’s geothermal resources are currently being assessed in different projects. Geothermal pilot projects are run by the German Federal Institute for Geosciences and Natural Resources (BGR) and the United Nations Environment Programme (UNEP). Fur- thermore, the GEF (Global Environment Facility) trust fund will provide the Yemeni government with US$ 1 million to establish a geothermal research project. The aim of this project is to reduce the costs and perceived risks associated with geothermal power development and investigate the best available site in the Dhamar-Rada’a field at the Al Lisi Mountain. • Capacity building: Decision-makers and the public are educated on renewable energy through workshops, seminars and awareness programmes. These efforts, however, are rather small- scale and at an early stage. Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

• Other projects: Photovoltaics are used as a power source for different purposes in Yemen, including telecommunication transmission (supply of microwave stations in the mountains with almost 1,200 panels in total), television transmission (19 stations with a peak load of 14,800 MW), water pumping in rural areas (projects by GTZ and others), domestic applications in rural areas (solar water heating), schools and hospitals. However, the expansion of PV and other renewable energy technologies is inhibited by several barriers. High investment risks, unreliable institutional framework conditions, technical barriers and a lack of access to capital and financial institutions make an implementation of renewable energy projects difficult.

In addition, subsidised electricity prices are a heavy burden for the deployment of renewable energy technologies. In 2008, subsidies for domestic petroleum consumption were estimated at US$3.5 billion or about 11% of the GDP. This includes both explicit subsidies which cover the difference between cost of generation and selling price, as well as implicit subsidies in the form of investment cost and fuel cost subsidies.

6. Energy Efficiency Fig. 14 illustrates the primary energy intensity and the final energy intensity in Yemen from 1980 to 2007 in comparison to the regional average of the MENA region and the EU-27. Yemeni energy intensity is rather high due to the low efficiency of industrial processes and end-use appliances. Further- more, electricity losses during transmission and distribution are a major cause for high national energy intensity (see above).

Figure 14: Primary and Final Energy Intensity in Yemen in Comparison to EU-27 and MENA The Yemeni government has approved a strategy to improve energy efficiency by 15% until 2025 towards a baseline development. However, the baseline of this target requires further specification. Fur- thermore, the target is yet to be framed with effective and efficient policy measures for efficiency improvements. So far, Yemen has not adopted efficiency standards, labels or building codes. Interna- tional donors in cooperation with the government are conducting different programmes to foster energy efficiency:

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

• Improvement of the national power grid: Aiming at reducing electricity losses, the Islamic Development Bank, World Bank and other donors are funding a project which shall modernise and extend the Yemeni electricity grid. • Demand-side management: The government is considering energy efficiency and demand- side management (DSM) measures to overcome energy shortages. In 2009, EnergySolve In- ternational Ltd. completed a report funded by the World Bank which developed an institutional structure for the effective implementation of demand-side management and energy efficiency measures in Yemen. See section Comparison of Yemeni practice with international practice in energy efficiency for details

Fig. 15 illustrates the impact of the outlined measures on power demand, peak load and greenhouse gas emissions.

Figure 15: Benefits of DSM/EE Measures Proposed in the Action Plan of the World Bank Pro- ject

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc

References Ali M. Al-Ashwal (2005) , “All Renewable Energy Applications in Yemen are Best Practice“ in: IS- ESCO Science and Technology Vision, Volume 1, p. 45-50. Availabe online: http://www.isesco.org.ma/ISESCO_Technology_Vision/NUM01/Ali%20M.%20Al- Ashwal/Ali%20M.%20Al-Ashwal.pdf , accessed online: 10.05.2009. Alice R. Buchalter (2008) , “COUNTRY PROFILE: YEMEN”, Library of Congress. Availabe online: http://memory.loc.gov/frd/cs/profiles/Yemen.pdf , accessed 10.05.2009. Bernard Jamet et.al. (2008) , „YEMEN MSP Project” GEF trust fund. Availale online: www.gefweb.org/uploadedfiles/Yemen_Geothermal_Dev_Proj.pdf , accessed online 10.04.2009. British Petroleum (2009) , “Statistical Review of World Energy June 2009“, British Petroleum. Avail- able online: http://www.bp.com/productlanding.do?categoryId=6929&contentId=7044622 , accessed: 09.13.2009. DLR (2005) , “Concentrating Solar power for the Mediterranean Region,“ German Aerospace Center. Available online: www.dlr.de/tt/med-csp , accessed 09.10.2009. EIA (2009): Yemen Energy Profile. Available online: http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=YM , accessed: 22.10.2009 ESMAP (2009) , “Tapping a Hidden Resource, Energy Efficiency in the Middle East and North Africa,“ Energy Sector Management Assistant Program. Available online: http://siteresources.worldbank.org/INTMNAREGTOPENERGY/Resources/EE_MENA_09.pdf , accessed 09.15.2009. ESMAP (2008) , “Opportunities for Mitigating the Environmental Impact of Energy Use in the Middle East and North Africa Region.“ Energy Sector Management Assistant Program. Available online: http://www- wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/06/27/000334955_200806270 60212/Rendered/PDF/444520ESM0BOX31onpaperMENA01PUBLIC1.pdf , accessed 09.16.2009. EnergySolve International Ltd. (2009), Yemen Energy Efficiency Institutional Framework and 3 Year DSM/EE Action Plan. Prepared for the World Bank. IEA (2005), “World Energy Outlook 2005,“ International Energy Agency, Paris. Available online: http://www.iea.org/textbase/nppdf/free/2005/weo2005.pdf , accessed 09.09.2009. IEA (2006) , “World Energy Statistics 2006“, International Energy Agency, Paris. Available online: http://www.iea.org/Textbase/stats/balancetable.asp?COUNTRY_CODE=LY , accessed 09.10.2009. IEA (2009) , “World Key Energy Statistics 2009“, International Energy Agency, Paris. Available online: http://www.indiaenvironmentportal.org.in/content/key-world-energy-statistics-2009 , accessed: 09.22.2009. Lahmeyer International (2008) , Ministry of Electricity and Energy The Republic of Yemen. Renew- able Energy Strategy and Action Plan, Sana’a. Oil & Gas Directory - Middle East (2009) , “Yemen Research profile”. Available online: http://oilandgasdirectory.com/2009/research/Yemen.pdf , accessed: 10.03.2009. Schindler et. al. (2008) , “Zukunft der weltweiten Erdölversorgung “, Berlin. Available online: http://lbst.de/ressources/docs2008/2008-05-21_EWG_Erdoelstudie_D.pdf , accessed: 10.01.2009. World Energy Council (2008) , Energy Efficiency Policies Around the World: Review and Evaluation. Energy Efficiency Indicators. Available online: http://www.worldenergy.org/publications/energy_efficiency_policies_around_the_world_review_and_e valuation/1230.asp , accessed: 22.10.2009.

Economical, Technological and Environmental Impact Assessment of National Regulations and Incentives for RE and EE: Country Report Yemen Yemen.doc