Enhancing the Renewable Energy Transition in Zambia

ENHANCING THE RENEWABLE ENERGY TRANSITION IN ZAMBIA

POSITION PAPERS November 2018

Contents

Position Paper 1 4 Position Paper 2 A feasible roadmap to integrate non-dispatchable renewable energy in the national electric system of Sub-Saharan region 12 Position Paper 3 Best practices for successful auction program: Connecting public sector and investors in emerging RE markets 22 Position Paper 4 Managing local content requirements in renewable energy projects 34 Position Paper 5 Renewable energies, sustainability, and human development: a multifaced relation 44 Position Paper 6 48 Position Paper 7 Managing environmental & social risks to achieve bankability for renewable energy projects in Africa 60 Position Paper 8 Decentralized renewable energy solutions to foster economic development 70 Position Paper 9 RES and energy storage: new opportunities for emerging markets 94 Position Paper 10 Innovation and Africa: an opportunity not to be missed 116 Position Paper 11 Construction models for renewable plants in Africa: 122

Position Paper 12 Leading capacity development: a key driver for the streamlining of ODA funding for renewable in Africa 128 Country pro�ile Zambia

This paper has been prepared by:

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Cristian P. Lanfranconi*, Arera - Andrea Renzulli, Poyry - Daniele Paladini, RES4Africa !

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!!!!!! ! !!!!! Zambia at a glance defeated by the Patriotic Front at the egislative !!!!!!! !!!!! ! election. Today, Zambia is governed by Presi- !!!!!!! !!!!! The Republic of Zambia is a landlocked country dent Edgar Lungu who won the election in !!!!!! ! in Southern Africa region surrounded by 8 2016. !!!! !! :!!!!!!!! countries: Democratic Republic of Congo to the According to the World Bank, Zambia is a re- ! !! north; Tan!!!!!!!zania to the north-east; Malawi to source-rich, lower-middle-income country: !! !!! the east;!!!!!! Mozambique; Zimbabwe; Botswana!!; Zambia’s Human Development Index (HDI) and Nam!!!!!!!!ibia to the south; and Angola to the value !!!!!!!!!!for 2015 is 0.579 - in the mid-range of wes!!!!!!!!!t. With a population of almost 17 million HDI !!!!!!!!rankings - positioning the country at 139 people !!!and with a territory of 752,614!! km2 out !!!!!!!!of 188 countries and territories. In 2017 (three times !!!!!!the size of the United Kingdom) Gross !!!!!!Domestic Product (GDP) was US$25.8 Zambia!! represents the geographical center of billion, !!!!!!!!!equal to a per capita income of around the Southern Africa region. US$1,509.!!!!!! The country has made signi icant @!! !!!! socio-economic!!!!!! progress over the past two Zambia has maintained peace and political sta- � !!! !!!! decades !!!!!!and achieved important average GDP bility from its independence in 1964. 2011 growth !!!!!!!of 7.4% between 2004 and 2014. signed !!!!!!!a peaceful political transition with the !!!!! However, !!!!!since mid-2015, economic growth Movement for Multiparty Democracy (MMD) has slowed considerably to 2.9 percent. Na- ! ! ! ! ! ! !! !! !!!! %%%%%%%%%%%%%%%%%%%%%%%%%%%%%tional economic performances are strongly re- %%%%%% lated with the price of copper considering that *The opinions expressed in this document are those of the author. They do not necessarily represent views or oﬃcial positions of ARERA and do not com copper mining is the most important activity mit% ARERA to any course of action in the future. ! !

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and accounts for around 85% of country’s ex- The rapid and sustained growth achieved from ports. In 2015 Zambia faced a critical eco- the early 2000s to 2014 has been insufficiently nomic crisis due to the concomitance of the inclusive and despite the doubling of GDP Zam- lowering of the price of copper and a strong bia continues to deal with high unemployment energy crisis caused by a shortfall of rain. rates as well as low revenues of its population. Today the situation has stabilized and macro- As a result, poverty remains widespread and economic outlooks for next years are positive! it’s an urgent priority for the country’s current and optimistic. development strategy.

!! !!! !!!!!! !!!!!! ! !!!!! ! !! !!!!!!! !!!!! !!!!!!! ! ! !!!!! !!!!!!! !! !!!!!! ! !!!!! !!! !!!! !!!!!!!! !! !!!! !!!!!!!!! !!!!!! !!!!!!! !! !! !!! !! !!! ! ! e !

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!! ! Zambia’s Energy Governance

Increasing access to energy is a key priority of the national development strategy and the gov- One of the main aspects the government of ernment has set electrification targets at 90 % Zambia is trying to address to improve life-con- for urban areas and 51 % for rural zones by ditions of its population is increasing access to 2030. However, at the current pace, these tar- energy across the country. Access to power in gets are not expected to be achieved. Zambia, especially in rural areas, is dramati- cally low. The overall national electricity access !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! The electricity supply industry in Zambia is rate, defined1 as connection rate to the grid, is dominated by the vertically integrated utility around 31 %: 67 % in urban areas, and only company ZESCO Limited (ZESCO). The utility is 1 Project Work – Zambia, Lanfranconi, ARERA, 2018 close! to 4% in rural areas. wholly state-owned through the Industrial De- velopment Corporation (IDC), the holding company! for the majority of state-owned enterprises in Zambia. ZESCO owns and oper- !!!!!! !! !!!!!!!! !!!!!!! !!! !!!! !!! !!! !!! !!! !!!!!!!! !!!!!!!!!! !!!!!!!! !!!!!!!! !!!!! !!!!!!! !! !!!!!! !!!!!!!!!!!!!!! !! ! !!!!!! !!!!!!!!! !!!!!! ! !!!!!! ! ! !! !!!! ! !!!! ates over 90 % of the generation, transmission, crease access to electricity and achieve 2030 and distribution assets in the country and sup- targets. plies electricity to all grid-connected consumers, with the exception of some mining Zambia iden grid extension as being the consumers in the Copperbelt Province, which main strategy to expand access to rural areas ti�ies are served by the Copperbelt Energy Corpora- as highlighted in the 2008 in the REMP. It con- tion (CEC), a private company that purchases sists of the following items: bulk power from ZESCO for onward supply to the mines.

The electricity sector is overseen by the Min- Rur to 2030; istry of Energy (MoE), which provides policy guidance. • Financialal Electri�ication Plan for Rur Plan up

The independent Energy Regulation Board • Policy Recommendatalio nsElectri�ication; for Accelerat ion (ERB) created in 1995 under the Energy Regu- and Dissemination of Rur lation Act to balance the needs of the con- • sumers with the need of the undertakings is al Electri�ication; responsible for licensing, tariff setting, and Development of Comprehensive Rural Elec- quality of supply and service standards for all rogram. • segments of the energy sector (including fuel tri�ication P and electricity) in accordance with the provisions of the 1995 Energy Regulation Act as amended in 2003. ERB sets electricity tariffs REA started to implement rural for all consumers with the exception of the projects in 2006. The Rural n Mas- electri�ication mining industry and other large consumers, ter Plan (REMP) is the main strategic guideline Electri�icatio which are set through long-term power pur- of rural projects. A total amount chase agreements (PPAs). of US $1.1 billion (equivalent to US $50 million electri�ication The Rural Elect ation Authority (REA) is re- annually) is required for achieving REMP tar- sponsible for in rural areas and gets. manages the Ruralri�ic Fund (REF), both establishedelectri�ication by the Rural Electr ation Zambia is also interconnected with the neigh- Act No. 20 of 2003. Electri�ication bouring countries by the Southern African i�ic Power Pool (SAPP). The organization created The rural target is based on the in 1995 is playing a key role for the energy sec- of Rural Growth Centers (RGCs) tor of Southern African region. The SAPP has electri�ication through grid extensions, mini-hydro, and solar twelve country members (Angola, Botswana, electri�ication installations as outlined in the Rural Democratic Republic of Congo, Lesotho, cation Master Plan (REMP) of 2008. Malawi, Mozambique, Namibia, South Africa, Electri�i- Swaziland, Tanzania and Zambia) represented Since 2004, REA has been the government’s Special Purpose Vehicle (SPV) for managing the by their utility company. Its aim is to optimize required resources for the rural the use of available energy sources in the re- programme. REA’s primary aim is to provide gion and enhance energy exchange between electricity infrastructure to theelectri�ication rural areas countries by promoting an interconnected reusing appropriate technologies in order to in- gional power market.net !!

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! Electricity Generation and Demand ! !!!

2015/2016 rainy seasons, which resulted in low water levels for the hydro power plants. Zambia’s generation mix is largely driven by hydro power, which accounts for 84.5 percent As reported also by ERB; “the dominance of hy- (2,388.3 MW) of total national installed capac- dropower generation puts the country at risk ity. Coal generation accounts for 10.6 percent due to changes in climatic conditions; such as (300 MW) of the national capacity, followed by global warming leading to insufficient rainfall diesel at 3.1 percent (88.6 MW), while Heavy and drought. These challenges pose a risk of in- Fuel Oil (HFO) accounted for 1.8 percent (50 adequate water resources available for hy- MW) and solar photovoltaic (PV) for less than dropower generation. Unfortunately, this risk 0.1 percent (0.06 MW). In 2016, electricity output decreased by 13.0 percent, to 11,696 GWh graduated into reality in 2016 as the conse- from 13,440 GWh recorded in 2015, signaling quence of insufficient water resources mani- the starting point of an energy crisis in the fested in load-shedding averaging eight (8) country. The decrease in electricity output has hours! a day and,!!!!! in an increase in power im- been the consequence of the shortfall of rainfall ports!!!!!!!! by 178.26 percent, to 2,184 GWh, from experienced!!!!!!! during the 2014/2015 and 785.2 GWh,! in 2015.” !!!!!! !!!!!! !!!!!!!! !!!!! !!!!!! !!!!!!!! !!!!!! ! !!!!!!! !!!!!!! !!!!!!! !!!!!!! !!!!!!!! !! !!!! !!!!!!! ! ! ! ! !!!! !! !!!!!!!!! !!!!!!! !! !!! !!!!!!! !! !!! !!!!!!!!! !!!!!!!!!! e !!!!!! !!!!!!! !!! !!!!! !!!!! ! !"#$% ' 1'!)&*+"&'2340%'*!!!&%50,'6,%$/,$%0' !

ZESCO exports and imports electricity through output. Meanwhile, electricity imports in- the Southern African Power Pool (SAPP) and creased exponentially by 178.3 % to 2,184.9 the bilateral market. A significant decrease in2 GWh in 2016 from 785.2 GWh recorded in electricity exports of 32.5%, to 794.1 GWh in 2015 because of the reduction in the utility’s 2016 from 1,175.9 GWh was recorded in 2015. generation capacity. The decrease in exports was ascribed to a re- !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!2 ductionEnergy Sector in Report, the utility’s2016. Energy hydroRegulation power Board (2017) generation The drought seasons of 2015 and 2016 clearly modified Zambia’s future energy scenarios. ! After a long period of a positive balance of import-export of energy, in 2015 for the first time

! !!! ! !!!! ! !!!!!! !!! !! !!!!!! ! !!!!!!!!! !!!!!!! !!!!!!! !!!!!!!! !!!!! !! !!!!!!!! !!!!!!! !!!!!!!! ! !!!!!! !!!!! ! !!!!!! ! ! !! !!!!! !!!!!!!! @!!!!!! Zambia beca!!!!!!!!me a net importer of energy and Zambia! ! energy’s ! demand ! !is clearly dominated ! ! !! in 2016! the ! import ! rate !! grew even more. by0 !the !mining sector ! that contributes!!! for 49% to the inter!!!!!!!!nal consumption. Other industrial Following this energy crisis the country accel- activities cover 20% of the local demand and Z!!!!!! !!!!!! erated the development of new renewable en- !! !!! residential activities account only for around ergy generations to reduce the dependence of ! ! ! ! ! ! !! !! !!!! 23% as show re 3. the whole electric system to hydro power !!!!!!! ! plants. ed in the �igu ! ! !!

Share of energy consumption

Export

Commercial and Social

Industrial

Residential

Mining

0% 10% 20% 30% 40% 50% 60%

!!!!!!! "! !!!!! !!!!!!! !!!!!! According!!!!!!! to ERB, in 2016 national electricity The !!!!!!!!electricity sector in Zambia faces numer- consumption decreased by 5.2 %, to 10,857.5 ous ch!!!!!!!!allenges and its poor reliability and qual- GWhK from 11,449.9!!!!! GWh in 2015. ity of supply,!!!!!! combined with the low levels of !!!!!!! access to electricity!!!!!! services, have a Nevertheless!!!!!!, electricity demand is expected to adverse!!!!!!! impact on the national economy. In re- increase strongly!!!!!! in the coming years. Consid- sponse to pow! er shortag!!es, ms hsigni�icantave been ering the tudy for Power System Development forced to inv!!!!!est in self-generation solutions, Master Plan in Zambia (2010): �ir !!!!!! mostly! diesel-fuel ! generat ! !ion, ! resulting!! in sig- !!!!!!! n ant additional costs and increasing of GHG in the base case electricity demand will !!!!!! emissions."!!!!! reach 2800 MW by 2020 and 4066 MW by i�ic !!!!!! ! !!!!! • 2030 (average annual growth rate 4.3 % To support a pathway to sustainable economic !!!! ! !!!!!!! until 2030), development, Zambia will need an nt and !!!!!!! In the low scenario electricity demand will dynamic!!!!!! energy system. For this reason, ZESCO !!!!!! reach 2670 MW by 2020 and 3544 MW by foresees to upg! rade existing tr!!!ansmef�icieission in- • 2030 (averag!!!!!e annual growth 3.7% until frastruc! tures and !!!!!develop new transmission 2030), !!!! ! capacity!!!!!!!! to ensure stability for the new power In the high scenario!!!!!!! electricity demand will plants!!!!!!!! that are currently being built. In addi- reach 3300!!!!!! MW by 2020 and 5.406 MW by tion to these!!!!!!! projects, the country has planned • 2030 (averag!!!!!!!!e annual growth rate 5.7 % a further!!!!! expansion of the national grid to the until 2030). north-western province to new mining areas

! and developing new interconnectors with meters per second with an annual average neighbouring countries to increase power of 2.5 m/s. trade with Southern African Power Pool (SAPP). In recent years, the country showed strong political commitment in developing its national Zambia is also planning to add new generation renewable energy sector, becoming a best-in capacity in 2019. At least 120 MW will be class example in developing an attractive in- added onto the grid through IPPs signed be- vestment framework for renewable energy pri- tween ZESCO and IPP such as Enel Green vate investors with a smart approach in Power, NEOEN, CEC, First Solar and IMPALA. from international programs to help public institutions building successful renew- bene�itingable energy policy. It is worth acknowledging the initiative born under the GetFit program Renewable Energy in Zambia sponsored by KFW and the Scaling Solar pro- resources and new projects gram sponsored by IFC. Today in Zambia renewable energy sources GET FiT is designed to assist the Zambian Gov- (excluding hydro) cover less than 1% of the en- ernment in the implementation of its REFiT ergy mix. The historical role of hydropower Strategy. In line with this strategy, GET FiT generation slowed down the development of Zambia aims to procure 200 megawatts (MW) others RE sources but the energy crisis of of renewable energy projects. GET FiT sup- 2015/2016 pushed the government to diver- ports small- to medium-scale Independent sify the generation mix. Non-programmable re- Power Producer (IPP) projects up to 20 MW, in newable energy will play a key role in the line with the REFiT Strategy. country in the years to come. Zambia’s renew- The GET FiT Program consists of three in- able energy sources are widespread into the struments: country: • Hydropower resources are estimated The GET FiT Premium Payment Mechanism around 6,000MW; • (top up per kWh), The country has an average 2000/3000 • hours of sunshine per year with an irradia- A Guarantee Facility to secure against off- • tion of 5.5 kWh/m2/day an average; taker and political risks, as well as Forest and agricultural waste have huge en- • ergy potential estimated at approximately A Private Financing Mechanism that will • 2.15 million tons and 498 MW, respectively; offer debt and equity at competitive rates. Geothermal energy potential can also be • considered relevant, with Zambia having More in detail, GET FiT consists of several re- • more than 80 hot springs, of which 35 were lated components designed to help create an rated highly in terms of surface tempera- attractive environment for private investors ture, low rate, and proximity to power and systematically support Zambian govern- lines, indicating ease of access and relative ment and ZESCO efforts to meet the objective energy� potential. To date, these springs have of providing affordable and stable power to the not yet been tapped for industrial or energy Zambian population. provision purposes. Wind energy potential is more limited. The International Finance Corporation (IFC), Wind data collected at 10 meters above the together with Zambia’s Industrial Develop- • ground indicate speeds between 0.1 to 3.5 ment Corporation (IDC), has conducted an international tender, for two utility scale solar such as the World Bank and KfW, and the IPPs power projects of up to 50 MW each. The pro- already active in the country. This process will gram called Scaling Solar initially attracted 48 result in a drastic decrease of the cost of energy developers, of which 11 were pr for in Zambia, making affordable and competitive the subsequent bidding process. 7 bidders sub- access to energy an achievable result in the mitted nal proposals. NEOEN equali�iedS.A.S. / First years to come. Solar Inc. (50 MW) and Enel Green Power S.p.A. (34 MW)�i were the two winning bids at tariffs of 6.02 $/kWh and 7.84$/kWh respectively. These proposed tariffs will remain xed for 25 years thanks to a xed-tariff PPA signed between the winner of the tender and�i the single buyer, ZESCO. Scal�iing solar is providing the winning bids with a package of competitive nancing and insurance products to ensure rapid nancial close post-tender as well as�i- public land, risk management and credit enhancement�i products to lower costs, which is the reason that the price is lower than the expected commercial rate for�inancing Zambia3.

Conclusion

As previously highlighted, the government of Zambia is working hard to reduce the number of people that still lack access to energy. Re- newable energy will play a key role in the country’s social and economic development and the government should continue on the path of exploiting its huge renewables potential. Renew- able energy will sustain not only the development of Zambia’s national economy but will also enhance the energy security of the whole southern energy market thanks to new interconnections and the sharing of valuable resources among the bordering countries. All relevant energy actors of Zambia’s power sector, such as the Ministry of Energy, ZESCO, ERB, IDC and REA, have to continue in ameliorating the investment framework for renewables to attract more private investors in partnership with the international nancing institutions,

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3 Project Work – Zambia, Lanfranconi, ARERA, 2018

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Introduction%%%%%%%

! % is due to several convergent socio-economic factors: In the past few years, the implementation of greenfield energy projects fuelled by RES over- 1 Availability of RES resource worldwide. took newly installed projects powered by fossil fuels and it is expected that the growth of RES 2 Technology improvements, with the conse- will rise steeply in coming years. The quential drastic reduction of RES costs, such ! that they are close to achieving competitive- progressive transition from fossil fuels to RES ness against other sources of power gener-

%%%%%%%%% %%%%%%%% %% %%%%%% %% %%%%%% % %%%%%% ation at global level. the cost of renewable technology in comparison to traditional energy and other 3 Environmental and climate change con- competing technologies, or to non-eco- cerns. nomic barriers such as:

Governments of both OECD and developing i Regulatory uncertainty – e.g. constitutional countries have taken measures to increase the protection of investments, retrospective deployment of renewable energy technologies, change in the law; mainly in order to: ii Institutional and administrative barriers – 1 Improve energy security, providing for e.g. complex, too long or unclear permitting enough capacity to satisfy electricity de- procedures; mand; iii Market barriers – e.g. inconsistent pricing 2 stimulate economic development associ- structures disadvantaging renewables, sub- ated with innovation and high-tech manu- sidies to fossil fuels; facturing and/or with rural sectors, and iv Public acceptance and environmental bar- 3 protect the environment and climate from riers - linked to complex planning regula- the impact of the use of fossil fuels. tion and “not on my back-yard” syndrome.

The adoption by Governments of a clear policy d) Last but not least in this non-exhaustive list, towards renewable technologies and a stable establishing the most suitable procurement and clear regulatory framework is one of the framework for renewable energy, which key macro-enablers to ensure the de-risking of may involve adopting a support scheme that private and public investments in renewable takes into account the overall regulatory projects and therefore, foster the deployment RESand support economic schemes environment. of renewable energy technologies.

This entails the following: a) setting out targets for the production of electricity from renewable sources, and Hallmarks of successful support schemes are: planning the future generational capacity; a) relatively simple and not excessively bur- b) regulating access to the transmission and densome for local administrations; distribution networks to minimize infrastructure barriers – granting for instance pri- b) contributed with priority of access to the ority of access/priority of despatch to RES - grid/priority of dispatch over generation and ensure that the power grid supports from fossil fuels; enough flexibility to integrate intermittent c) be robust enough so to create a renewables, while providing for back-up ca- developer/investors market; pacity when needed; d) backed by policy and regulatory signals mit- c) giving the right consideration to various igating the change in law; barriers that may hinder the development of renewable energy. Particular reference is e) long term visibility. made to techno-economic barriers such as 3

1 FIT

The most widely adopted support schemes eled by renewables. The remuneration that have involved feed-in tariff mechanisms ( ), renewable energy producers receive from the tradable renewable energy (or “green”) certifi- sale of the RECs represents the incentive. To cates and auctions. Support schemes based on ensure the scheme works, sanctions are im- tax credit for generators and/or investors have posed to market participants that are unable also been adopted in certain jurisdictions, to comply with this obligation in a particular mainly in the USA. year.

Under a FIT scheme, the tariff project is guar- Unlike FIT-based schemes, under this scheme anteed a certain price per KWh of energy fed the determination of the price of the REC’s, is into the grid, usually for a period of 15-20 driven by the market. years. The scheme may be set such that the tariff is the duly remuneration for the producer Auctions are another market-driven instru- (effectively a “set price” for the electricity) or a ment, more widespread in Sub-saharan Africa “premium” paid on top of the electricity price than REC. Participants to an auction submit that the generator receives from the energy bids on the basis of price and sometimes other sales on the market (Feed-in premium). The components which may be specified by the en- premium may in turn be fixed or vary depend- tity running the action (economic developing on the market price such that the sum of ment, job creation, local content,…). the premium and the market price does not ex- ceed a fixed threshold. In several cases countries interested in RES developments begun with FIT policies and after FiTs are often adopted during the early stages a few years switched to auctions, which are in- of RE development in a certain country. Indeed, herently more sustainable in the long run from FIT allows for a fast development process, pro- a financial point of view, and also tend to en- vided the latter is clearly mapped, controlled sure that the most efficient and technologically and transparent. However, FIT schemes have advancedCase study: players Zambia enter in the market. proved relatively unsuccessful in a number of countries and are not always suitable for large- scale projects or certain technologies. Certainly FITs are expensive for Governments and Tax payers, and their main drawback aspect is that Zambia has somehow a hybrid combination of they are not easily and timely adaptable to the policies. The country did not follow the com- decreasing cost of the technologies that they mon path of “first-Fit, then-auctions”. are meant to support; this is the main reason why FIT schemes have often been hit by retro- Its renewable energy policy implementation spective changes in law aimed at reducing the started in 2015 with the Scaling Solar, a partic- tariffs (es. Spain and Italy). ular case of “supported” auctions.

Support schemes that contemplate the use of The Scaling Solar Program is a World Bank tradable renewable energy certificates (REC) Group program that supports governments are based on the obligation imposed onto across Sub-Saharan Africa to roll-out utility- generators (or traders) of electricity to obtain scale PV power plants. a fixed quota of the electricity from RES installations. To comply with this obligation, IDC – the Industrial Development Corporation generators or traders may use RECs, that are in Zambia - appointed the International Fi- issued and sold by owners of power plants fu- nance Corporation IFC Advisory to assist it in

1 structuring and implementing an open and In 2014 Zambia had also started developing a competitive Tender Process to select a suitable REFiT policy, which envisaged a feed-in-tariff developer for Projects under the Scaling Solar. for renewable energy projects. However the REFiT was never implemented, and was even- The Scaling Solar Program has been designed tually replaced by the Get-Fit. The Get-Fit is a for fast implementation. It uses fully developed hybrid program aiming at commissioning new template legal documentation which have been solar PV projects through auctions, whilst a market tested for acceptability to investor and proper financing parties and adapted to the specific requirements of the Projects. Documentation in- FiT would be used for other renewable tech- clude: nologies. The program’s goal is commissioning 200 MW of renewable energies through IPPs A Power Purchase Agreement (PPA), under projects between 1 and 20 MW. Round 1, which the Project Company will, subject to a set launched in April 2018, will be a competitive of operational performance standards set out in auction for up to 100 MW of solar PV. Final the PPA, sell all of the electrical energy generated Enablingawarding isconditions expected byfor end an 2018.efficient RES in- by the Project to ZESCO ( the state-owned utility tegration in Sub-Saharan power markets company), reflecting the pricing and other de- tails included in the Winning Bidder’s proposal. The PPA is for 25 years with fixed tariff.

• A Government Support Agreement (GSA) with the Government of Zambia, under As of today, achieving high penetration of re- which the latter will undertake to provide newable energy is no more a question of costs. certain protections to the Project Company; Renewable auctions have demonstrated worldwide their ability to optimize the cost of new • A template Direct Agreement, for any fi- RES capacities. Nevertheless, the setting of nanced bids; and clear political ambitions and a favourable market framework, in terms of procurements rules • A template legal opinion to be given by the and supporting schemes for RES, are not suffi- Attorney General, Zambia’s chief legal offi- cient to secure the efficient development of re- cer, in favour of the Seller, and, if applicable, newables. its Lenders. System operators and power sector ruling in- • These documents will be supplemented by stitutions are showing increasing concerns for a Land Agreement between each Project renewables system integration and power sys- Company and IDC, as well as an Investment tem flexibility. Addressing those issues is fun- Promotion and Protection agreement with damental to ensure an effective renewable the Zambia Development Agency (the penetration and fully exploit the benefits of “IPPA”). growing shares of RES.

With such supporting structure, the Round 1 of The intermittent nature of solar and wind ener- the Scaling Solar Programme was able to select gies can challenge the stability of power systems two winners for a total of 81 MW. Round 2 and international experiences show that a not began in Feb 2017, targeting 500 MW; so far, properly managed development of non-pro- the prequalification for the first 200 MW has grammable renewables (VRE) could result in: been completed. • Grid frequency and voltage disruptions;

1 Increase in flexible back-up capacity needs As an example, in Europe most of solar PV ca- due to production forecasts errors; pacity was previously connected to the • Medium and Low voltage grids, making harder Grid congestions surge and curtailment. for the TSO to control them remotely and increasing the need for back-up capacity and the Moreover,• increasing the shares of VRE impacts cost for keeping the system balanced. That’s on the operations of the conventional power why a “fit and forget” approach, where new generation fleet by reducing their contestable VRE plants get connected regardless of the market, endangering their economic sustain- need for grid reinforcement, is doomed to fail- ability. ure and should be avoided.

The severity of those impacts depends firstly Moreover, the fast-growing energy demand from the penetration degree of VRE into na- and the need to accelerate energy access to the 1 tional power system , but it is also bounded to whole population offer a great opportunity to the intrinsic characteristics of national power Sub-Saharan countries to increase VRE pene- systems in terms of: tration while reducing the challenges of VRE to system stability, especially at the first stages of Structural factors (size of the market, de- renewables development. mand evolution, capacity mix, grid develop- • ment, regional market integration); A cost-effective and reliable integration of increasing shares of VRE is possible by enhanc- Market design and Regulation (governance ing power system resiliency, avoiding the framework, power market structure, system • commissioning of new synchronous (fossil-fu- operating rules). eled) generators or regulatory barriers to hinder RES development. The increase of power Being characterized by limited power genera- system resilience could namely be achieved by tion installed capacity, underperforming power intervening on three different aspects, not mu- grids and immature regulatory frameworks, tually exclusive but rather cumulative: Sub-Saharan countries could face those challenges sooner than most advanced power mar- a) Improving grid operations; kets. b) Enhancing system flexibility; Nevertheless, those countries could rely on the available international experiences in order to c) Reviewing ancillary services regulation. adapt their market structures for the forthcom- ing changes brought by renewables. Shaping from the beginning a market design “fit for a) Improving grid operation: defining a grid RES”, able to accommodate high shares of non- code fit for RES programmable renewables, is today a feasible task. As a result, Sub-Saharan countries have Grid codes (GC) are a central piece of the func- the opportunity to avoid the costly retrofits tioning of a power system, since they ensure a and reconfiguration that EU countries had to proper coordination of all its components. bear. They cover main aspects of system planning and operations: grid access rules, operating aspects, planning codes and market codes for power exchanges. 1 The IEA recognizes four phases of VRE integration, each one characterised by a progressive share of VRE in power generation mix resulting in incremental GCs are traditionally designed to regulate a impacts on the grid stability and on the existing generation fleet.

6 power system built on centralized syn- scheduling and deviation settlement for chronous, mostly fossil-fuel power plants con- non-programmable renewables - and re- nected to HV power grids with one-directional quire to adopt the necessary tools - in order power flows. They are rarely adapted to the dif- to increase forecasting capacities of NSOs. ferent conditions of a power system with increasing shares of VRE. The connection rules • Require the adoption of tools for monitor- defined for new RES plants have often been ing, control and simulation of RES. less binding than those for conventional gen- • Ensure the provision of a secure and reli- eration. In the early stage of VRE development, able communication system between gen- for instance, no fault ride through capability for erators and NSOs. voltage control is generally considered for renewables. However, this is not sustainable with b)• EnhancingDefine TSOs/DSOs system flexibility: coordination opening rules. to increasing RES penetration: connection rules new solutions must then be reviewed to avoid the risk of PV and wind farms disconnections at the occur- rence of huge frequency disruptions, with cas- cade effect leading eventually to large blackouts. Enhancing power system flexibility is the sec- Indeed, an appropriate drafting / revision of ond key aspect to increase system resilience, national GC has to be ensured and overseen by especially in markets where grids are already power sector ruling institutions, in line with stressed to the limit of their capabilities. By RES deployment. Key actions for National Sys- flexibility we mean the ability of the system to tem Operators (NSO) would be: adapt to continuous and rapid changes in loads and consumptions profiles, ensuring appropri- • Adjust grid access rules and grid cost allo- ate quality of energy supply by limiting conges- cation schemes in parallel with RES devel- tions and avoid curtailments. opment plans. As some grid portions do not have sufficient • Define a transparent and technology-neu- transport capability in hours of high load, a tral regulatory process for grid connection, large presence of intermittent RES generation to avoid costly retrofitting efforts to adapt could lead to grid bottlenecks. Power curtail- RES plants performances to the new con- ment is a most-used defensive measure of Net- nection rules. work System Operators to avoid, or solve, those events. Without an adequate grid planning, • Establish common Technical Performance RES curtailment ratio could be very high affect- Standards for connection and define techni- ing revenue streams of renewable generators cal requirements for non-programmable re- and, finally, resulting in a net loss of value for newables to suit specific system power consumers. requirements, as for: Strengthen network lines capability in line - communication system; with development of generation capacity is - remote control systems; fundamental. This could be done by construct- - power quality; ing new lines (new “poles and wires”), includ- - voltage and frequency ranges of operation; ing new cross-border interconnections, or by - frequency and voltage controls. improving the existing ones (cable replace- ment, substation reinforcement). • Establish a framework for forecasting,

1 ate the right price signals for flexibility in- 2 FREQUENCY CONTROL vestments. This is particularly evident in ad- BUSINESS MODEL DESCRIPTION.. vanced, fully liberalised, power markets where price signals drive investment decisions. In Sub-Saharan Africa, where most of power markets are organized under a single-buyer system managed by a vertically % integrated utility, regulation could play a prominent role in sustaining the develop- 3 SPINNING / NON SPINNING RESERVE ment of such %%%%%services aimed to reinforce BUSINESS MODEL DESCRIPTION.. system%%%% flexibility. %%%%%% %%% % c) Reviewing %%%%%ancillary services regulation: including non-programmable%%%%% renewables in the provision%%%% of ancillary services % %%%%%% Ancillary services pertain specifically to the Figure2. BESS with RES business models % % % %% need for network system operator to balance (Source: Enel Green Power and Pöyry) % % % %% % I demand with supply in real time, while main- %%%% taining grid frequency at its nominal value %%%%%%% %%%%%% % %%% without compromising grid stability. Ancillary Services (AS)% may include%%%% a number of differ- The whole system will benefit from those solu- %%%%% tions,• giving:%%%%% ent operations, such as: %% %% % To generators%%%%%% the possibility to optimize frequency support, market inefficiencies,%%%%%% letting VRE plants to %%%% • voltage support, • overcome the inherent% limitations in terms % %% of flexibility and dispatchability. • system%%%%%% restoration. %%%%% To Network Service%%%%% Operators the capabil- Various• %%%%%% types of reserves (primary, secondary ity of performing%%%%%%% grid services from VRE and%%%%%%% tertiary reserves2) ensure the provision of • plants, reducing%%%% the need of syncronous those services.%%%%%%% generation required%%%%%%% to balance the grid, and %%%%%% Before the introduction of proper AS regula- of matchin%%g the system needs% %% %%% tions, congestion are usually managed by net- % %%% %% injecting/withdrawing energy when it is re- work system% operators % % in real % time %% by applying % quired. %%%%%% • %%%%%% congestion charges. In such configuration, all entities upstream and downstream of the con- To end-users%%%%% the ability to enhance security • % %% gested corridor are impacted. of supply %%%% and eventually reduce energy • %%% • bills, reducing%%%%% polluting and costly back-up The implementation of a proper Ancillary Ser- %%%%%%% supply from the grid, particularly if they are vices• regulation% provides %% a mechanism for re- equipped with%%%%% solar rooftop home systems despatch of generation reserves before integrated with%%%% storage solutions, or sup- imposing congestion charges. plied by hybrid%%%%% mini-grids (VRE generation capacity %%coupled with BESS). %%A well-functioning power%%%% market should be able to cre- 2 The definition of primary, secondary and tertiary reserve varies from country to country.

19 Although! necessary,!!!!!!!! however, extending ! power ! Support the development of new flexible grids capability requires huge investments solutions, as storage and demand-re- ! from NSOs !!!!!!!!and could take ! many years. Other! • sponse. cost-effective solutions are available to enhance system flexibility, including: As shown in the table below, VRE are technically able to provide some services in order to %% %%% 4 % % % % % % % % Enhance power plant flexibility and the op- ensure the stability of the power system, with %%%%%%% timization of operating%%%%% reserves. different degrees of efficacy. • %% %% %%% 4 % %%%%%%%%% % % % % % % %%%%% %%%%%%%% % % % % %% %% %%%%%%%% Ancillary Considerations on the effectiveness of Upward Downward services the service % % % % % %% • Less precision, although negligible, in the provision of the service as a result of the variability of the primary resource. Primary reserve • For the "upward" mode, the risk is linked to actual availability depending on the aleatory nature of the primary source

Secondary reserve • Limited amount of secondary reserve band. • Less precision, although negligible, in the provision of the service as a result of the variability of the primary resource • For the "upward" mode, the risk is linked to actual availability depending on the aleatory nature of Tertiary reserve the primary source

• The supply only close to real time minimizes the Balancing risk related to the availability of primary source, both "to rise" and "to fall"

Voltage regulation No critical issues for the plants. by reactive power

Necessary to minimize the load shedding in order Remote switching to limit the possible "breakages"

Legend High Medium Low

Figure1." !!*Efficacy of ! system !!0.01'2!0'&3#,'0!4&/ services provided by ! non-programmable ! renewables! (Source:!! Pöyry analysis) !!*! ! !!0.01'2!0'&3#,'0!4&/ ! ! ! !! !

Battery electric%%%%% storage systems (BESS) cou- lowing a grid%%%%%%% event in order to bring back pled %%%%%with%%%%%%% RES maximise the possibility to inte- system%%%%%%% frequency%%%% within safe parameters. grate%%%%%%% VRE into%%%%%% power system, further enabling %%%% the provision of flexibility solutions, and secur- %%%%%%%%%%%% ing revenue streams for RES generators: %%%%%%%%%%%% 1 CURTAILMENT REDUCTION BUSINESS MODEL DESCRIPTION.. %%%%%%Recovery %of lost energy / revenue due to MW grid curtailment.% • % % % %% % %

Provision%%%% of% a % range % of ancillary %% services % % to Grid event TSO%%%% (frequency control and spinning/non Discharge %%%%%% • spinning• reserve) to help grid stability fol- Charge Time • %%%%%%%%%%% %%%%%% %%% % % % %%%% % %% % % % % % %% % 18

% % To encourage the market players to provide ing thus future retrofitting adjustments. More- these services, AS are procured by compensat- over, Sub-Saharan countries could benefit from ing the providers through a regulatory mecha- international experiences and define best reg- nism or through markets. Pricing is typically ulations in order to support the development given by the shadow price of the Ancillary Ser- of new flexible solutions, as storage, which will vices, i.e. the lost opportunity of the generator furthermore increase the ability of non-pro- forgone in energy market. Under most condi- grammable renewables to offer system ser- References: tions a generator that is supplying reserve, for vices. example, must reduce output and forgo a prof- itable energy sale in order to stand ready to respond to a contingency. Therefore, the price would be calculated as the cost of the marginal resource providing the ancillary service. Such Arrhenius Institute for Energy and Climate Pol- opportunity costs are best discovered through icy, “Incentives to Invest in Electricity Produc- the markets. tion from Renewable Energy under Different Support Schemes”, Discussion paper, 2008 Analysis of international experience reveals that the market design options for AS broadly IEA, “Renewable Energy: Policy Considerations differ based on techno economic considera- for Deploying Renewables”, Information Paper, tions (such as service definition, assessment of 2011 AS required for the system…), on different approaches for procurement of AS (who can par- GET FIT Zambia, Solar PV Tender up to 100 ticipate, how the service is charged,…) and also MW – Request for Qualification, April 2018 for market clearing and settlement mechanism. Nevertheless, the development of VRE world- TERNA, “New frontiers for grid management: wide is pushing many countries to adjust AS the TSO perspective”, RES4Africa Workshop on regulation to consider renewables in the pro- Non-dispatchable renewable energies integra- vision of system services and to better manage tion into the grid, Lusaka, September 2018 their intermittency. IEA, “Status of Power system Transformation In Sub-Saharan power markets a proper AS 2017 Report”, OECD/IEA, 2017 regulation is often absent. This provides a unique occasion to implement such regulation IEA, “Getting wind and Sun onto the Grid. A in a way that already include renewables avoid- manual for Policy Makers”, OECD/IEA, 2017

! !!!!!!!!! !

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22 Background Case Studies

• South Africa

Renewable energy (RE) markets have under- gone rapid developments in recent years. This change has been fuelled by the need to meet in- To promote renewables, South Africa explored creasing energy demands whilst moving to- the option of FIT (the REFIT programme) with wards more sustainable energy sources to a specific policy approved in 2009 but an oper- combat the effects of climate change and pro- ative procurement process was never imple- viding a wider range of energy access. mented and no power purchase agreements (PPA) were signed. After consultations with Previous models aimed at stimulating renew- possible investors, lawyers and financial insti- ables growth have involved feed-in tariff (FIT) tutions the government launched a refined al- mechanisms that offer attractive tariffs for the ternative in the way of the Renewable Energy integration of renewables into the energy mix. Independent Power Procurement Program Although the government’s support of RE (REIPPPP). The REIPPPP consists of a three- through the FIT was initially necessary to fight phase system with a capped capacity for each the competition with conventional technolo- bidding round and for each technology which gies and to accelerate the technological change leaves no room for a competition between in the field of energy production, the FIT technologies. The first phase is technical and schemes often yield slow growth results and financial qualification (pass/fail), the second have proved relatively unsuccessful in a num- phase is an evaluation of price and economic ber of countries. development criteria which results in Pre- ferred Bidders being invited to reach financial Governments, unable to afford the costs of sub- close before a pre-arranged common deadline sidizing the renewables markets, are relying on in the second phase. the private sector to deliver the investment required to drive renewables programmes. Reli- The program immediately attracted the atten- able frameworks are essential to ensuring tion of the global energy industry, particularly proper viability for private market participants because of the transparent evaluation criteria, to invest in the initiative. Many countries have the bankable suite of request for proposal experimented with ways to stimulate socio- (RFP) documents and the program’s size im- economic growth through the renewables sec- plying multiple bid winners and future tor. This is particularly prominent in prospects for the investors. developing countries, as the benefits of invest- Formed in 2011, it has seen the electricity ment in this industry can include increases in prices of wind power decreased by 46% and trade balance, industrial development and job solar by 71% and US$19 billion invested by the creation. However, a problem exists in encour- private sector by 2016South Africa’s RE target aging investments as there are large up-front for 2030 is 18,800MW (megawatts) and the costs required for renewables to be financially initiative secured a quarter of this after just successful. four years. The majority of the technology The use of auction programmes to procure RE share lies with wind and solar generation with infrastructure has become increasingly com- smaller amounts for concentrated solar, monplace because they provide a positive and biomass, biogas, landfill gas, and hydro. reliable framework for reducing energy tariffs, The structure of the REIPPPP is weighted 70% meeting RE targets whilst increasing invest- on pricing and 30% on job creation, local con- ments. tent, preferential procurement, rural develop- 3

2 ment and communities involvement, education • 1.2 million homes powered by electricity and the improvement of skills, enterprise and generated from renewables projects; and socio-economic development, etc., using the former to influence socio-economic growth, • 19,050 employment opportunities for South African citizens during the construc- particularly in local communities and in more1 remote areas where these kinds of opportuni- tion and operation phases of the 37 projects ties would usually be few and far between . under the umbrella of the programme. One of the main characteristics of this program In addition, the bid window function of the is that the awarded projects must include local REIPPPP has seen committed investments communities into their equity share. The ob- R192.6 billion from developments in the first servance of obligations related to the commit- four rounds of bidding, of which R53.2 billion ments on the above mentioned economic was from foreign investors and financers. As a development criteria are monitored by the result of the targets for local content some in- REIPPPP authorities through quarterly reports ternational production facilities set up local produced by the awarded bidders and in case production units and specialized skills were of failure to meet the commitments under the transferred from international to national PPA contracts are terminated. firms. Among the auction transaction documents, the The REIPPPP is also proving to be a significant Implementation Agreement, to be signed by help to the Broad Based Black Economic Em- the independent power producers (IPPs) and powerment (BB-BEE) policy, something which the Department of Energy (DOE), provides a is a strong contributor to the argument of sovereign guarantee of payment to the IPPs, by socio-economic benefits in South Africa. 47% requiring DOE to make good on the payments of the equity shareholding in the first four bid in the event of an Eskom (the monopolist state rounds belongs to South Africans – 7% above utility and sole off-taker) default. South Africa’s the stated target of 40%. rather strong international credit standing makes banks and investors quite comfortable The nature of the REIPPPP is allowing the about the sovereign country risk without re- country to move forward to clean energy tech- quiring specific insurance products. The devel- nologies that are also bringing a new wave of opers are expected to identify the sites and pay economic opportunities, not only boosting em- for early development costs at their own risk. ployment with regards to construction, but A registration fee is due at the outset of the also the continuing maintenance required over program and bid bonds has to be lodged. the life of RE plants.

A report from the Department of Energy about Worries over the future of the REIPPPP sup- the success of the REIPPPP (up to June 2015) posedly lie with the financial stability of claims the following figures: Eskom. This is a current and ongoing issue and the impasse created is affecting the presence in • 4,294 Gigawatthours of power generated; the country of the already established interna- • R4 billion more in financial benefit than its tional investors. The programme ran smoothly cost; for the first 3 rounds but the fourth and fourth 1 Foreign firms have set-up local factories that export internationally, with some point five rounds have seen several delays of the world’s leading PV module producers now active in South Africa. spanning nearly two years. These delays have particularly impacted the local manufacturing and training industries which responded to the local procurement requirements by establish-

2 ing state-of the-art facilities to supply, amongst process and the fully bankable transaction doc- other things, solar modules, inverters and wind uments included in the RFP package. More turbine towers. Almost all of these ventures specifically the investors’ confidence was fos- have now ceased to operate and a number of tered by the PPA provisions on the off-taker international investors and construction com- payment obligations and the credit support panies have reduced their presence in the mechanism based on the purchaser require- country or have left it. ment to maintain a liquidity of an amount equal to 6 months’ revenues. In addition to the •Recent Zambia support from the government has expe- above mentioned provisions, the introduction dited the backlog but projects are not expected of the Government Support Agreement bring- to reach financial close imminently. ing in a primary obligation for the Zambian Government to provide PPA credit support, if not in place, furtherly encouraged the bidders’ Many African countries looked at the South participation to the program. African case trying to replicate the initial suc- The first round of the tender, with the aim to cessful experience and certainly Zambia, with secure the development of two solar projects less than a quarter of the population having ac- of up to 50 MW each, initially attracted 48 de- cess to electricity, was one of them. velopers, of which 11 top tier bidders were In 2015, the Industrial Development Corpora- prequalified for the subsequent bidding pro- tion (IDC), an investment company wholly cess. Seven bidders submitted final proposals owned by the Zambian government, was di- and the winning tariffs were 60.15 rected by the government to target the pro- USD/MWh and 78.89 USD/MWh making Zam- curement of solar energy power in view of bia the Sub-Saharan Africa’s country with the the energy crisis Zambia was experiencing. It cheapest solar power at that time. was in this context that the Southern African Although the official awarding took place in country signed up to join Scaling Solar, a World May 2016, the process to achieve the financial Bank Group program designed to make it eas- closing of one of the two projects was finalized ier for African Governments to quickly procure in December 2017, whereas the second one is solar power and to minimize all financial trans- still on-going, leading to an inevitable post- action risks through competitive tendering and ponement of the scheduled commercial oper- pre-set financing and insurance products. IFC, ation date. the World Bank development institution, han- • Ethiopia dled the legal and regulatory analysis, the tech- Second Round of the Zambian Scaling Solar nical and economic studies for the selection of auction for up to 300 MW is currently on-going. the optimal size and location of the two solar plants.

The winner selection criteria were based exclu- Ethiopia is undertaking an important expan- sively on the minimum price offered for each sion of its power sector targeting to increase project and the same bidder didn’t have the the today installed capacity of 4 GW up to possibility to be awarded the 2 projects. 17GW by 2020. The country has abundant hydropower resources, and this technology ac- The execution of the first round of the program counts for more than 70% of generation. in Zambia proved the effectiveness of Scaling Nevertheless the government seeks to differ- Solar in reducing the lenders and bidders per- entiate the production technology considering, ceived risks thanks to the transparent award in addition to further hydroelectric power

2 Mexico

plants, other renewable sources to cover the • energy plan requirements. The Mexican Energy reform approved in 2013 and the secondary legislations adopted in Au- So far much of the development is driven by the government trough the company Ethiopian gust 2014 provided for a transformation of Electric Power (EEP), the state-owned power Mexico’s energy sector. producer, which is now trying to create an en- On the basis of the legislative changes it was vironment suitable for the participation of created a wholesale power market requiring IPPs. the acquisition of clean energy certificates by The first renewables auction in the country suppliers and users, in proportion to their an- was launched by EEP, advised by Nexant, in nual energy consumption, and a system of 2016 with the scope of assigning a 100 MW medium and long-term auctions, to be held at solar project located in a site selected by the least once a year. government. As in the South African case, the clear schedule The launch of the RFP initially attracted tens of and periodicity of auctions, in the context of a investors but only five international energy well-defined target for renewables (35% clean firms presented their offer. energy by 2024), gave investors clear indica- The final score was weighted 70% on proposed tions of the roadmap for the sector encourag- tariff, 20% on bidder’s and manufacturers’ ing investments. track record, 5% on local ownership and 5% Through the Long Term Auctions, market par- on local content. The entire auction duration was approximately 1 year with many post- ticipants offer to sell or buy a combination of ponements to the original submission date. three products: energy, capacity and Clean En- This was mostly due to the time needed to ad- ergy Certificates (CELs). Successful partici- dress the bidders concerns related to financing pants secure fully bankable PPA for the sale of difficulties to raise private investment with the one or more of these products at a fixed price initial RFP conditions. Among the main con- for either 15 years for energy and capacity or cerns raised by the bidders it is worth men- 20 years for CELs. Winner selection criteria tioning the absence of the sovereign are highly sophisticated, the winners are se- guarantees on off-taker payments and the ac- lected based on an optimisation model that cess to foreign currency which could be very maximises the economic surplus of the buyer. constrained as in Ethiopia the foreign reserves The process is designed for the possibility of it- are low and access go to priority sectors. eration, based on pre-defined criteria regard- The selection of the bidder was finally an- ing the economic return of the offers, but for nounced last October (winning tariff of 58.98 the first 3 auctions it was not applied. USD/MWh and the lowest 56.98 USD/MWh) and the power plant is expected to enter into Mexican auctions are not site-specific, and bid- operation in 2019. In addition to the first auc- ders are responsible for identifying suitable tion, the Ethiopian government launched a sec- project sites and producing the relevant docu- ond auction to assign the PPA of two solar mentation (resource assessment, grid connec- projects of 100MW each and joined the Scaling tion, etc.) and are being conducted three years Solar program for the development of 2 solar in advance of the time for delivering energy, so projects of 125MW each. The RFP is expected as to provide sufficient time for the develop- to be issued in January 2018. ment of projects. 6

2 ! !!!!!!!!! !

Another important characteristic of the Mexi- Entities could present purchase offers thanks can auction is the introduction of the nodal to the introduction of the Cámara de Compen- price adjustments designed to incentivise the sación, or the Clearing House, an entity acting construction of new projects in regions where as the counterparty in the Power Purchase the supply-demand balance is tight. The price Agreement for both sellers and buyers which adjustments are determined a few months be- assesses the financial credibility and adminis- fore the prequalification phase and in the first ters the Individual Guarantees and the Reserve and third auctions decisively affected the selec- Funds (the Safety Network) reducing the par- tion of winners. ties’ risk exposure. %%%%%%%% The first%%%%%%%% auction was run in 2016, 227 offers The 15-year duration of the energy and capac- %%%%%% from 69 bidders%%%% were submitted by local%% and ity contracts, which is shorter than the useful %%%% %% international% companies and 5.4 TWh/year of life of the plants represents a risk to investors % % %%%% % energy were assigned. In the second auction and makes the tender strongly affected by each %%% %% 8.9 TWh/year% were awarded% and the%%% minimum participant’s view on the Energy, CELs and price was %%%%one of the lowest clean energy%%% prices Firm Capacity forward curves as any products a % % % % % % % % % anywhere%% in the world and 30%%%% lower than the surplus can be traded in the Spot Market. %%%%%% average price%% from the first auction.%%%% The third %%%%%%% The Mexican auction represents one of the best auction%%%% saw the awarding of 5.5 TWh/year%% of %%%% %%% examples of effective and successful renew- energy%%%% and further remarkable reduction%% of Major best practices %% %%%%% ables auctioning program. the prices. %%%%%% %%%%%%%% @,&$%! ;*(.15! A<,&5! "/%%%%%%%(%,.1! "/(%,.1! "/(%,.1! %%% %% %% %%% %%% L%%%%%%%% >,1,3/3! B&,(*! To date, around 55 countries have imple- %%%%%%% %%%%%%%%% mented auction programs, some of these coun- %%% %%% 81*&2C!%%%%%%%% D! tries, however, lack the regulatory framework %%%%%% :8E$! %%%%%% to support the proper functioning. Among the %%% %%% %%%%%%% major best practices for a successful program %%%% % FG;HI>JJ

• capacity-oriented agreements, where the project developer needs to ensure only RE When designing an auction program it is nec- capacity; essary to select and combine different design • energy-oriented agreements, which imply elements in a way that is tailored to satisfy a commitment to deliver a given amount of the purposes of the auction, according to the RE; and country’s specific requirements and charac- • financial agreements, entailing greater risks teristics. for the developer because the generator One of the first elements of an auction is the may be exposed to fluctuations in the elec- choice of the auction demand: only in case the tricity spot market prices. country goal is the development of a specific technology, a technology-specific tender The choice among the abovementioned alter- should be selected. A technology-neutral auc- natives depends on the desired risk allocation tion shall always be favored if the aim is to min- between generators and consumers. imize the electricity costs and maximize the Furthermore, the bidding procedure may be competitiveness. satisfied by three different approaches: It is essential to determine the volume of products to be auctioned according to government Sealed-bid approach, where all bid information policies for RE development and in compliance is provided to the auctioneer beforehand; with the existing system’s technical capabilities Iterative approach, where the economical bid to absorb the renewable energy. This can be is provided gradually during the auction; done through a fixed volume method (the most Hybrid approach, where an iterative phase is common worldwide) or in a price-sensitive de- followed by a sealed bid phase.

2 In the case of sealed-bid mechanism, in order record or local ownership (Ethiopian case), the to ensure absolute transparency, the opening auctioneers shall very carefully select the 2.of Trade-offthe bid shall between be executed reducing at entrythe bidders’ barri- awarding criteria as every non-monetary prin- erspresence. and encouraging competition ciple may lead to an increase in the final energy price to be paid by the off-taker and in a more complex selection process. The auctioneers may also set a ceiling price above which bids are discarded but, in case this is not properly estimated, it could cause the 4. PPA remuneration awarding of a suboptimal amount of renewable Although the requirements for a careful selec- energy. tion of the bidders, through an extensive legal, financial and technical track record in the field, can limit the participation of new and/or small players, it is important to guarantee the timely Remuneration scheme and the type of contract achievement of the financial closing and the offered have a very high impact on the final en- projects’ completion. Similarly, the require- ergy tariff. The take-or-pay provision (whereby ment of a bid bond (i.e. an initial deposit to be the off-taker has the obligation of either taking lost in case the selected bidder withdraws the delivery of energy or paying a penalty) reduces offer) with a price high enough as to discour- the bidders and funders risk and shall be fa- age rash bids, may ensure reliability of bidders vored in order to ensure that no margin is in- and of their submitted offers as proven in the cluded in the final offers and the energy price Zambian Scaling Solar case. is the cheapest possible. In addition to bid bonds, rules related to pro- Another important factor is the tariff adjust- ject lead times, penalties for delays and the ment (to inflation, to exchange rate or a com- adoption of performance bonds (covering the bination). Some programs, such as the Zambian entire construction period) are applied in Scaling Solar, do not foresee any indexation to order to discourage any construction delay in the energy tariff, which remains flat for the en- the achievement of the commercial operation tire duration of the PPA, but consider exchange date and to assure that the committed perfor- rate adjustment of the tariff. In other cases full mances are met. or partial indexation to CPI is considered On the other hand, the assignment of liabilities (South African REIPPPP where instead no ad- to the transmission system operators (TSO) for justment to currency is foreseen). In the case delays in the construction of the grid or con- 3. Awarding selection criteria of the Mexican auction, on the contrary, the nection infrastructures owned by the TSO, con- bidder can choose the option providing for a tributes to the reduction of the investment risk. tariff partially adjusted for inflation and partially tied to the exchange rate for the US dollar. In those cases in which the offered tariffs are not corrected for inflation or foreign exchange With reference to the awarding selection pro- rates, taking into account the possibility of high cess, if the auctioneers aim to reach the lowest inflation rates over the PPA duration, the con- price, they shall opt for the lowest-price crite- tract’s value in real terms may be expected to rion. If instead it is in the country interests to substantially decrease and the bidder may de- focus on other selection criteria such as local cide to protect its investment return by in- content, local ownership, job creation, commu- creasing the tariff. nities involvement, etc. (South African case) or Contracts denominated in domestic currency such as bidders and manufacturers’ track- 9

2 5. Technical aspects of the auctioned projects and without exchange rate adjustments are also generally seen as an obstacle for international players and can increase the cost of debt, especially in emerging countries facing deval- In the auctions where the bidders are expected uation. The off-taker guarantee of conversion to identify the sites and autonomously develop to hard currency can reduce the risk percep- the projects it is essential for the auctioneers 4. Reduction of risks perception tion as long as there’s no risk of liquidity short- to assess the maturity of the permitting status, age. grid connection, land rights, etc. More specifically, written assurance from the transmission and/or distribution grid provider that the substations/lines to which the projects are in- The reduction of perception of risks may be tended to be connected have sufficient achieved guarantying fair and transparent capacity, may result in a higher project realiza- rules and obligations for all stakeholders. As tion rate while avoiding unnecessary delays in mentioned in the previous paragraph, policy the execution of the projects. makers should simplify administrative proce- When, instead, the projects size and location dures, set up an institutional and regulatory are demanded to the auction authorities, it is framework which ensures a predictable and very important to include in the bid package stable environment for investments and miti- detailed studies of the selected project sites gate the risks related to the financial market which will allow the participants to accurately (inflation and currency exchange). Moreover, evaluate the construction costs and related the reliability and creditworthiness of the off- technical risks without adding any contingency Advantages of a successful auction pro- taker, together with clear and balanced obliga- costs impacting the final proposed tariff. gram tions and guarantees of both seller and purchaser in a PPA, play an important role in • Credibility and financial attractiveness encouraging developers and lenders investments. Whilst in most mature electricity markets the government involvement can be minimized and the utilities are the contract off- takers without additional subsidies, in the countries where the off-taker cannot reason- The scale of auction programmes attracts in- ably offer credible guarantees, the government ternational investors and lenders and requires support could be essential (see Zambian and sovereign commitment. Therefore, the pro- Ethiopian case). A noteworthy example in term gramme itself is seen as the investment frame- of risk perception reduction can be also the work rather than as individual projects and Scaling Solar program. The support of an inter- thereby market risk (or at least the risk percep- national institution, such as the World Bank tion) is reduced because all parties involved Group, to the auction program can foster the share risks and work collectively to mitigate confidence of bidders and lenders as it hap- these. Depending on the intended duration of pened in the Zambian case. the programme, international parties tend to Finally, wherever possible, in order to promote •establish Flexibility local offices which may lead to fur- investments from international players, gov- ther commitment to the credibility of the coun- ernments and auction designers should limit try. restrictions on movements of capital and on repatriation of dividends and profits.

The flexible aspect of the design of auction programmes and their ability to be applied to a va- auction programmes can bring. riety of different purposes is a strong advantage. This can be useful when adapting such The job creation aspect has enormous poten- programmes to the specific needs and targets tial, with not only construction but also main- of the country implementing the programme. tenance of renewables infrastructure. The For example, an auction programme can be potential is highlighted by its benefits to local used for procuring capacity or energy that is communities where new infrastructure might tailored specifically to the market structure of be developed in places where these kinds of a country. Contracts can also be assigned and Referencesopportunities would usually be very limited. performed in a number of ways and can in- • Competition clude a number of criteria at both the qualification and evaluation phase.

Anton Eberhard, University of Cape Town, Joel Kolker, World Bank Institute, James Leigland, Auction programmes can increase competition Private Infrastructure Development Group, in the industry allowing the best, or lowest, South Africa’s Renewable Energy IPP Procure- price to be provided for a given product or ser- ment Program: Success Factors and Lessons vice. Fair and open competition enables autonomous development, which accurately IFC, First ‘Scaling Solar’ Auctions in Zambia reflects potential and can lead to the creation Yield Record Low Tariffs amid Electricity of new industry sectors, stimulate the mod- Shortages ernisation of infrastructure and create new Bloomberg New Energy Finance, Climatescope employment opportunities. This of course re- 2017 quires regulations that are adequate and effective; however it is a good demonstration of the IFC Financing Advances Record-Setting Scaling benefits of auction programmes. Solar Project in Zambia

The benefit of this is magnified by the nature IEA, Mexico capacity and power auctions sup- of the renewables market, which is generally a ported by clean energy certificates rapidly changing context that is hard to predict. This makes aspects such as costs, market size Carlos Del Razo, A snapshot of the Mexican • Social and Economic benefits and public awareness difficult to control clean energy obligations system through any fixed FIT schemes. José Maria Valenzuela and Isabel Studer, Cli- mate change policy and power sector reform in Mexico under the ‘golden age of gas’

One of the clearest advantages and strongest IRENA, Renewable Energy Auctions Analysing argument for auction programmes in the RE in- 2016 IRENA2016 dustry is the socio-economic aspects. Although this sits in the “second phase” part of the pro- IRENA and CEM (2015), Renewable Energy gramme, it still forms part of the overall advan- Auctions – A Guide to Design tage of implementing such systems as the former brings the latter. Education and skills, Prof. Anton Eberhard and Thomas Kåberger, welfare, management and planning, healthcare, ‘Renewable energy auctions in South Africa and infrastructure development and employ- outshine feed-in-tariffs’ (2016) Energy Science ment are examples of the commitments these & Engineering Journal 4(3) at 181-232. 1

3 / Energy Intelligence (24 March 2016) South Africa at 11, available at [accessed 10 December 2017]. all-you-need-to-know/> [accessed 10 Decem- ber 2017]. Lucy Butler and Karsten Neuhoff, ‘Comparison of feed-in-tariff, quota and auction mechanisms Department of Energy (2015) Renewable Energy to support wind power development’ (2008) IPP Procurement Programme (REIPPPP) for Renewable Energy 33(8) at 1854-1867.

Managing local content requirements in renewable Energy project

This paper has been prepared by:

! Byron Ascott-Evans,% McKinsey%% & Company

! Introduction mix to renewable energy given both their nat- ! ural endowment and broader climate change Many countries are endowed with natural re- objectives, signi icant investment will be resources,% some %%%of which are % non-renewable %%% %quired. %%%%%%%This investment presents an economic % % (e.g., oil, minerals) and renewable (e.g., sun- opportunity% for countries. As such, the impor- shine). To date, many examples exist of coun- tance of having a well-articulated and coherent tries using their non-renewable resources (see local! content policy will increase. Norway, Brazil, Qatar, South Africa, Australia) to propel,, themselves economically.,,,, Initially the ,,,,, resource,,,,, is exported in its raw form generating,,,,,,,,,,A common understanding export revenues,,,,,,,,,, (in generally strong curren- ,, cies) but has,,,,,,, resulting risks (e.g., revenues are Before proceeding,,,,,, it is important to be precise susceptible,,,,,,,,,,,,,,,,,, to global volatility). Over time, a on what is meant by local content as many def- country, shifts towards,,,,,,,,,,,, some form of local ben- initions exist and different terms are used (e.g., e iciation,,,,,,,,, to expand the extent of bene its (e.g., local participation,,,,,, indigenization, local sourc-,, higher export revenues due to value-add). At ,,,,,,,,,,ing). Simply, local content is,, the proportion,, of both stages, a supply chain is needed that can , ,,,,,,,,,,,,,,inputs to a product supplied from within a provide the necessary goods, services and util- country. To be more speci ic this covers goods, ,,,,,,,,, , ,,,,, ities. Given the magnitude of spend on goods, services and utilities. services and,,,,,,, utilities, there is a signi icant eco- ,, ,, nomic opportunity, , for a country by instituting , a local content policy. Goods

Although traditionally renewable energy isn’t Manufactured locally exported (unless as electricity), the stages of Value-add activities conducted in the coun- development are similar – use the resource to • try generate revenue; over time, develop an • ecosystem to expand the bene its. As many Pro it from sale of good retained in the African countries start shifting their energy ! country •

4 Services Complication

• Compensation to locals for services ren- To leverage these natural endowments re- dered quires a few things. First, goods, services and • Value-add activities conducted in the coun- utlities to build and operate these technologies. try Many of these are not produced and/or found domestically. Second, a policy outlining the • Profit from sale of service retained in the Utilities long-term energy needs of the country and the country proposed energy mix to deliver this (e.g., an integrated resource plan). This policy doesn’t always exist, or only in parts (e.g., across policy documents) leading to investment difficulties • Purchased locally (e.g., unclear which technologies, when, what • Value-add activities conducted in the coun- scale). Third, a government entity (or entities) try that is performing well (on agreed KPIs, healthy balance sheet) to co-ordinate all en- • Profit from sale of utility retained in the Anchoringcountry local content in a country’s ergy stakeholders (public and private sector) reality and execute on agreed commitments.

There are three further considerations. First, the current and targeted future rate of electrification (and the split between urban and As discussed before, renewable energy offers rural) given the resources and focus required significant economic opportunity. If a country to address gaps. Second, the quantity of renew- decides it wants to pursue renewable energy, able energy as there is a minimum threshold to any associated local content policy needs to be justify the existence of local content. Third, the anchored in a country’s overall energy policy Clearspeed objectiveto have local content as it takes time to so that it (i) accounts for the context and (ii) have the infrastructure, skills and know-how. has a clear objective. This will ensure that the Contextlocal content policy is specific, measurable, actionable, realistic and time-bound.

Situation Local content is one way to ensure a country captures the economic benefits of its renewable energy resources. There are others e.g., resource tax, local ownership requirements, job creation requirements. As such, a more specific Countries across the world are increasing re- objective is needed e.g., “create a centre of ex- newables share of their energy mix due to the cellence in x by leveraging existing competence climate benefits and increased affordability of the technologies. This holds across the African to achieve y and z”. There can be several objec- continent (see South Africa as a significant tives. However, they should be the highest pri- adopter) as countries start to leverage their ority objectives (based on agreed criteria) and natural endowments. not overlap (e.g., issues should be discrete). 5

3 Process to maximise local content benefits

• Goods: basic materials; low-medium complex equipment and parts; highly complex equipment and parts; and integrated plant equip- Once the rationale for a local content policy for ment and solutions renewable energy is clear, the focus becomes how • Services: manual and low skilled labour; mid- to design and then execute such a policy. There tier skilled labour; technical support services; are four steps to follow: stipulate expectations on business support services; and manage- local content; establish supporting regulations; ment/EPCM build local capabilities; and monitor progress and enforce rules. • Utilities: any good supplied by a utility (e.g., power, water, gas, fuel) Importantly, any local content policy should be designed and executed to minimize risk. Drawing Step 4 (see exhibits 5-7): create assessment for on lean startup thinking, that is determining the local content potential. To do this, need to con- minimum viable product on each step to test (i) sider demand and supply dimensions, sub-di- whether the policy works and (ii) how well. This mensions and scoring on each is critical because establishing a local content policy requires significant investment (e.g., time, • Demand (applies to both goods and services): money) and once started, is difficult to change. direct domestic demand; indirect domestic Further, if the first local content policy is unsuc- demand; and international/regional demand cessful (based on performance versus objective), • Supply it could not only jeopardize further local content Stipulatepolicy in renewables,expectations but on also local in content other energy - Goods: skills capacity; manufacturing capacity; technologies and industries. investment capacity; and regulatory capacity

- Services: skills capacity; people capacity; infrastructure capacity; and regulatory capacity

Step 1: choose renewable energy technologies Step 5: conduct an audit on demand and supply (e.g., solar PV, CSP, Wind) and average installed dimensions and sub-dimensions for goods and capacity (e.g., grid, mini-grid, home solution) services

Step 2 (see exhibits 1-2): per technology, break Step 6 (see exhibits 8-9): using input from audit, down capex and opex spend into industry recog- assess local content potential of each capex and nized components and sub-components. Using opex sub-component (using local content assess- Solar PV capex as an example ment) and roll this up to component and value pool. Using goods as an example • Components (examples): inverter; module; battery pack • Demand: determine at what level of aggrega- tion the demand is sufficient • Sub-components (deep-dive on inverter): power electronics; power supply; assembly; - Direct domestic demand: demand from renew- casing able energy industry

Step 3 (see exhibits 3-4): per technology, match - Indirect domestic demand: demand from other each capex and opex sub-component (and hence industries e.g., mining component) to the value pools – goods, services - International/regional demand: direct demand and utilities 6

3 from neighbouring countries ties from local sources

• Supply: determine the time horizon (e.g., 0-3 - Training plans, schedules, and skill-transfer pro- years) to deliver goods based on current sup- grammes for locals ply - Prohibit structuring of contracts that disfavor - Skills capacity: level of skill and expertise in the local companies (e.g., large bundled deals) economy • Step 3: start process to change existing regu- - Manufacturing capacity: capacity and experi- lations and enact new regulations ence of manufacturing facilities in the economy Build local capabilities - Investment capacity: extent of programmes and/or incentives to encourage investment Step 1: identify partners to address local capability gaps based on audit conducted previously. For - Regulatory capacity: extent of conducive regu- example latory environment (e.g., encouragement of entrepreneurship and commerce) • Consortiums for local sub-scale companies to pool resources • Step 7: agree on current local content require- • Clustered allied industries to create network Establishment and supporting evolution regulationsover time (including time to reach targets) of mobile labour • International renewable energy companies for direct knowledge and skill transfer, but also international training • Step 1: assess the opportunity cost of regula- Step 2: create a roadmap (highlighting priority 1, tory intervention 2, etc. gaps) to address local capability gaps - Ensure that local content policies aren’t so strict that they damage buyer competitiveness Step 3: execute on roadmap

- Ensure that local content policies aren’t so sup- • Track progress and highlight issues or suc- portive of local suppliers that they dis-incentivize cesses based on variance local companies to be competitive with multina- • Conduct root-cause analysis to understand tionals variance • Step 2: identify which existing regulations Monitor progress and enforce rules • Adjust roadmap based on root-cause analysis need to be changed (and how) and which need to be created. For example:

- Require companies to produce “local content” business plans that include the following • Step 1: create quantity and quality key per- - Statement of commitment to objectives and reg- formance indicators (KPIs) and agree targets. ulations of policy For example

- People and processes in place to communicate - Quantity (not exhaustive): local procurement as and monitor company’s local content policy a % of total procurement; total amount of spend on local suppliers; local supplier total sales; and - Contracting policy for goods, services and utili- total number of contracts awarded to local sup-

3 pliers • Challenges

- Quality (not exhaustive): cost variance between - Two-year (2016, 2017) freeze on projects led to contract unit price and international unit price; the development of a local renewable energy sup- percentage of orders made under annual or sev- ply chain not happening eral year contracts; percentage of orders in compliance with contract criteria; and percentage of - Four-year gap (2021-2024) in the future pro- orders delivered on time curement of wind energy could lead to no/lim- Oilited and investment gas – success: delaying Brazil the development of a • Step 2: develop standardized tools for compa- local renewable energy supply chain further nies to record, compute and track local content and progress versus KPI targets

• Step 3: establish • Reached 60% local content in five years - Certifiers who will audit companies local content credentials and progress versus KPI targets - Clear definition by regulator for local content using consistent and transparent methodology with targets that vary by sub-sector (targets applied in award of exploration blocks) - A regulator with enforcement authority to ensure that supporting regulations are adhered to - National regulatory body with clear methodol- Oilogy and for monitoring gas – challenge: local content Nigeria progress within - A body to co-ordinate and track all local content the oil and gas sector efforts

• Step 4: consolidate data into dashboards (that can be aggregated at various levels) and draw insights • No significant rise in local content for 10 years • Step 5: propose changes to policy design after implementing policy in 2000 and/or execution including how to do this and - Very generic local content policies e.g., all oper- Experiencethe time over from which other this countries should happen and industries ators are required to give preference to a local contractor Key success factors Renewable energy: South Africa - No detailed target setting and tracking in place

• Determine the extent of government’s in- • Successes volvement and communicate this

- The renewable energy independent power pro- - Government-enabled ducer programme (REIPPP) had a 70:30 split between price and economic development when o Any stakeholder (except government) is at the awarding bids centre and does the work to make local content happen - The economic development component was further broken down – local content was only o Government has a few tasks e.g., create 25% of the 30% allotted to economic develop- and/or debottleneck policy, provide funding, ment enforce rules

3 - Government-facilitated - Academia/research: universities; research institutes; training institutes • Industry is at the centre and does the work to make local content happen - Public: labour force; public at large

- Government has a few tasks over and above - Other external stakeholders: foreign investors; those in Government-enabled e.g., facilitate in- DFIs; donors; WTO dustry interactions, facilitate multiple stakeholder interactions (e.g., investors, government • Provide policy transparency and stick to it. For departments, universities) example - Government-led: government is at the centre - Explain rationale for local content target(s) and and does the work to make local content happen time frame • Identify key stakeholders early and engage continuously. For example - Don’t change local content target during and/or after a bid process - Ministry of Energy (co-ordinator if government- led policy) - Outline how policy can be challenged and/or re-

viewed and/or edited - Other government departments/regulators: ministry of finance; ministry of education; energy • Determine levelized cost of electricity (LCOE) regulator of renewable energy assuming various levels - Energy industry: upstream and downstream of local content vs. no local content and track players; industry organisations over time

- Other industries: clustered allied industries; • Adjust policy over time based on learnings basic supporting industries (according to outlined timelines and process) Exhibit 1

Exhibit 2

Exhibit 3

Exhibit 4

Exhibit 5

Exhibit 6

Exhibit 7

Exhibit 8

Exhibit 9

4 !

! ! ! %%%%%% Renewable energies, sustainability, and humandevelopment: a multifaced relation! % %%

This paper has been! prepared by: %%%%%% ! !

% %%% % %%% % %%%%%%% % % % %%! Antonella Santilli,% EGP % %% Abstract

Abstact: In a world that is marked on one hand, by massive inequities! in living conditions, and on ! the! other, by real threats to the prospects of human life in the future, access to affordable, reliable and! sustainable energy is deeply interlinked with human development. The renewable private % %%% % %%% % %%%%%%% % % sector can plays a real contribution in making the planet more sustainable, by integrating business % %%% % %%% %% %%%%%%% % % with sustainability, pro�it within ethics, so to switch from a linear logic to a circular one that not % only arrests the negative but also bring forward the frontiers! of new possibilities, and reverse the course. ! 000 000 000 00 0 00 0 000 0000000 000 000 000 00 00 0000 0 0 00 00 0 0 000 0 0000 000 00 0000 0 00 0 0 Sustainable0 energy 0 is 0key 0 for intergenera- 0 0tainable 0 0 economy. Following0 0 this 0 line of 0 tional00 welfare 0 0 0 0 0 0 0 00 0 0 0thought, 0 0 0 governments 00 0 worldwide 0 0 have 0 0 set 0 global targets for energy access in Sustainable 0 0 0 0 00 0 0 00 0 000 0 0 000 0 0 0000 0 0 0000 0 0 In a world that is marked on one hand, by mas- Development Goal 7, which aims to ensure sive 0inequities0 00 in living0 conditions, 0000 0 0 and 000on the 00“universal 000 000access 0000 to affordable, 00 reliable, 0000 sus- 00 other,0 by0 real 00 threats to the 0000 prospects of0 human 00tainable and 000 modern energy for 00 all” by 2030. 00 life in the future, access to affordable, reliable Indeed, this is one of the global goals Enel 0 0 and sustainable energy is deeply interlinked Group has taken a public commitment on, with human development. under the UN Global Compact. Today, with On! one side, access to energy is key for social twelve years to achieve to achieve this goal, al- and economic development, as it represents most one billion people still lack electricity, and the building blocks empowering individuals, 60% of them are located in Africa. communities and economies by providing lighting, heating, communications, and trans- On the other, integration of human progress ports. and environmental protection has emerged as This is why access to energy can be considered one of the central challenges faced by the mod- an instrumental right, enabling the pursuit of ern world. Recently, the last Intergovernmental other! fundamental human rights. Access to en- Panel on Climate Change (IPCC) report has ergy underpins many aspects of a healthy, sus- highlighted how limiting global warming to !

44 1.5°C will require extreme changes, including also future ones. In this sense, it is a crucial el- substantially increasing the percentage of elec- ement of sustainable development, defined as The role of private sector in sustainable de- tricity from renewables by mid-century. The non declining welfare over time. velopment study presents a wide array of possible scenarios that would draw down emissions and keep warming below 1.5°C, including a middle range one, which requires that renewables make up 70 to 85 percent of electricity by 2050. More- over, climate change will not hit all countries It becomes then evident then that the renew- alike. Low-income ones will be on the frontline able private sector can create impact, that goes of human-induced climate change over the beyond, or better said together, the opportu- next century, experiencing gradual sea-level nity to do business. rises, stronger cyclones, warmer days and Indeed, over the last years not only Govern- nights, more unpredictable rains, and larger ments, but also businesses have been increas- and longer heatwaves, according to the same ingly including sustainability in their goals, publication. In particular, East Africa can ex- starting from the assumption that, in order to pect to experience increased short rains, while change the world, a company must be com- West Africa should expect heavier monsoons. pelled to first change the way it operates in its Life in many developing country cities could local turf. become practically unbearable, given that The Enel Group was the world’s first utility to urban temperatures are already well above set the ambitious task of reaching carbon neu- those in surrounding countryside. Much higher trality by 2050. Enel is blazing the path of en- temperatures could reduce the length of the ergy transition as it bases its business growing period in some parts of Africa by up to strategy on three pillars: the development 20 percent, the report said. Indeed, the global of renewables, a push for digitalization and NGO Oxfam predicted that world hunger would the mitigation of climate change. So far, this worsen as climate change inevitably hurt crop journey has led Enel to generate close to production and disrupted incomes. They sug- 50% of its energy from zero-emission gested the number of people at risk of hunger sources. might climb by 10 percent to 20 percent by Moreover, the Group has implemented sustain- 2050, with daily per-capita calorie availability ability at the core of its business model, by in- falling across the world. cluding it in the industrial plan, as well as If access to energy is fundamental for socio- taking public commitments at the UN Global economic development, access to renewable Compact platform on SDG 4 (Quality educa- energy plays a fundamental role in guarantee- tion), 8 (Decent work and Economic growth) ing the future of it. Indeed, the transforma- and 13 (Climate Action), besides the above tional power of green energy – given also its mentioned SDG 7 (Access to clean, reliable, af- competitiveness - lies in the fact that it pro- fordable Energy). vides a much needed balanced answer to the Our results show that integrating sustainability energy trilemma linking energy security and has become a competitive advantage to build reliability, affordability and equity, and envi- our company’s prosperity, that of communities ronmental sustainability. Renewable energy hosting our assets, our suppliers and our technologies are better placed than ever to clients, and to continue meeting our long-term contribute to individual prosperity by deliver- business objectives along the way. ing reliable, affordable, and sustainable energy, If universal access to energy is to be truly considering not only today’s generations but achieved, we have to consider it as an oppor-

4 tunity to do business as well as to advance tenance, through the lenses of Creating Shared human rights. A central point here is that Value (CSV) approach. This framework states ethics is not to be separated from economics. that business opportunities can constitute at There is not profit on one side and moral duty the same time answer to societal needs, thus on the other. This is not charity, greenwashing reconciling the “doing well, by doing good”. A or cynicism using human rights to let the cap- set of CSV tools has been created so to assist ital grow, because there is a dependency rela- business developers, construction managers tion between the two: certainly sustainable and site supervisors (among others) to per- economic development – brought forward also form their work in a sustainable way. by renewable energies - can enhance human Moreover, if our impacts still need to be miti- rights achievement, but also the attainment of gated, in order to be not only green but also human rights can boost economic growth. For fully sustainable, we have created the so-called example, human development, in the form of Sustainable Pillars that are to be applied in our people being better educated, more healthy, offices, construction sites, plants. The starting less debilitated, and so on, is not only consti- point has been the thought that if we are sus- tutive of a better quality of life, but it also con- tainable in our workspaces, then we will be so tributes to a person’s productivity and her in all the actions we perform in those places. ability to make a larger contribution to the These standards apply the same framework: progress of material prosperity. measuring and ex ante mitigating impacts on However, it is important here to clearly distin- water, waste, emissions and people, and offset- guish the mean from the end. What has to be ting those that cannot yet be eliminated. The avoided is an inversion of objects and instru- first three categories need to be lowered, since ments that see human beings as merely the the plant/office design phase. To make things means of production and material prosperity, a bit clearer, once we have completed a socio- taking the latter to be the end of the causal economic environmental context analysis for analysis. The business price of not doing this, each site, we can understand what areas need is taking a short term vision that on the long to be prioritized. Depending on this context run will destroy, instead of creating, value. analysis, we do not believe in universal solu- Building on the apparently simple idea that our tions, we can for example install in desert con- business is not and end in itself, Enel Green struction sites water treatment systems Power (EGP) has asked itself if is being renew- allowing the reuse of grey waters. In order to able can be enough to be sustainable. This lower CO2 emissions, we can provide clean en- maybe trivial questions has triggered major ergy to our site camp though PV panels thus changes, transforming all internal processes in- drastically reducing diesel consumption. side the company, particularly in the business Conversely, the latter impact, the one on peo- value chain. In our opinion, the two concepts ple, need to be maximized, as it encompasses do not perfectly coincide. As stated above, it is all those actions aiming at training and em- true that renewable energies are a fundamen- ploying local people at our sites as well as tal part of the answer to the threat menacing strengthening the local supply chain. our future; however they still have environ- By turning sustainability into a business strat- mental, social, and cultural impacts, no matter egy, we commit ourselves to perform our job, how comparatively smaller they can be. our core business, that it developing, building This is the reason why we have started to re- and operating renewable plant, in the most think our basic value chain and underlying possible sustainable way. processes, i.e. business development, engineer- By doing this, we have proven wrong two false ing and construction and operations and main- myths on sustainability. The first sees it as

4 something episodic, like a touch of color. recognition of the other, then giving space to When we say sustainability, we are saying sys- other visions – visions that may be different tematic. The sustainable construction site, but not necessarily incompatible to those held plant and office models represent by a renewable company - is an integral part a systemic approach pervading all our spaces, of our dialogue with the people who host us. all our activities. This is the reason why for example in Aus- The second false myth considers sustainability tralia, visits to our solar farms are not con- just as an added cost. Actually, by recycling ducted – as we usually would have done so far water and avoiding diesel consumption we are - by our technicians, but by Nukunu people liv- saving money, even taking into consideration ing near our plant. Once we have acknowl- the investments for water and PV systems. edged the cultural dimension of the land for Aboriginal people, we have preferred that they We have concentrated on environmental and could guide visitors not only through the tech- social impacts of our plants, focusing on natu- nical aspects (on which we have provided ral ecosystems preservation, education and job training to them), but also to the spiritual ones creation. However, thanks to the continuous di- their land hosting our plants has got. More- alogue with local communities hosting our over, we have just published a photo on some plants, we are increasingly working also to- of the Indigenous communities we relate with wards cultural dimension. around the world. This publication combines As we have already seen, we develop, build and operate renewable energy plants, in the belief photos and texts dwelling into the meanings of that access to affordable, reliable and sustain- wind, sun, land and water (the energy sources able energy is not only our field of business but for us) have in their respective cultures. also a fundamental human right. However, By answering a simple question regarding the these energy plants are not isolated but they relation between renewable energies and sus- occupy spaces rich in natural, social and cul- tainability we have changed our way of doing tural dimensions. Land is never just a physical business, taking into the picture the far-reach- concept, and this is even truer for some cul- ing nexus among economic, environmental, so- tures. It can be a cultural space, where spiritu- cial and cultural dimensions. ality, traditions, history and rites are enrooted. Mary Wollstonecraft, the pioneering feminist Therefore, the place in which a plant is built is ``It is justice, not charity, that is wanting in the never neutral. If it is true that relationships world”, and private sector can play a role in among people can only exist when there is contributing to deliver it.

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Introduction !

/#00'),1%2#00#'314% 5'3)#0#'%5#+6'))1+ 7+,)('%/(+89::# tion, with their costs expected to further decrease in the next future. As a result, direct pub- The electricity sectors of south-central Africa lic support is becoming less fundamental for the countries, which have historically suffered from development of renewables globally.% Moreover, a lack of efficiency, are progressively taking the renewables, and in particular solar PV, are in- path of the transformation towards a more teresting options for allowing electricity access competitive, sustainable and affordable model. in remote areas. In fact, due to its scalability, This process is led mainly by two factors: first, solar PV, fits perfectly with different types of off- the need to increase power generation capacity grid solutions for the electrification of rural in order to sustain the growing demand and to areas, from households systems to larger hy- extend the electricity access to all; second, the brid systems combining solar energy with need to find new competitive and sustainable diesel generators or storage solutions. Those ways to ensure this growth. Renewable ener- factors explain the recent growth of RE in de- gies (RE) are at the core of this process, thanks veloping countries, which are progressively in- to the high renewable potential of those re- vesting in % such technologies:%%%% for example, gions. Renewable Technologies (wind, solar PV, Bolivia, Honduras,%%%%%% Senegal and Jordan are today geothermal)! are becoming more and more %%%% %% among the top-five%%%%% countries in terms of RE in- competitive with fossil fueled power genera- vestments in proportion to national GDP. %%% %% %%%%%% %%%%%% % 8 %%%%%%%% %%%%% %% %%,%%%%%% %% % %% 4 %%% %% %%%%%%% %%% % %%%%%%%% %%%%%% % %%%%%%% %%%%%% %%%%%%% %%%%%%%% %%%%%%%% %%%%%%%% %% %%%%% %%%% %% %%%%%% %%% %%% %%%%%%%%%% %%%%%% %%%%%% %%%%%% However, the large investments required to ness depends mostly on the costs of fuels and face the increasing energy demands have to is less exposed to the variability of project fi- deal with the limited public expenditure capa- nancing arrangements than renewables. bilities of such countries. Therefore, private in- Therefore, in a developing country where cost vestors can play a pivotal role becoming the of equity and debt is significantly higher, the real enabler of the energy transition in such ge- impact on the LCOE results much higher for a ographies. renewable plant putting at risk the competitiveness of RE and pushing them out from Because of their high renewable potentials and those markets. captive local demands, developing countries are progressively gathering private investors’ Since its beginning, RES4AFRICA has pointed interest. There, however, investors have to cope out that efficient and well-targeted de-risking with higher risks, which may undermine the strategies are key to enable RE development in bankability and profitability of their projects. south-central Africa countries. This paper goes In fact, the investment framework for renew- in the same direction and investigates the fi- ables is at its preliminary stages, particularly nancial risk environment in the south-central in south-central Africa region, and there is still Africa Region, mainly in Zambia, in order to il- space for improvements. lustrate the best practices and the efficient strategies that public authorities and private As far as today, for instance, financial risks in Financial risks analysis south-central Africa countries remain particu- investors could adopt to ensure the develop- larly high for private investors, which struggle ment of renewable in this region. to find good conditions from moneylenders. In particular, country risk evaluations of African states remain mostly negative due to the gen- Investment in renewable energies require sig- eral perception of local political and financial nificant upfront investments. From an in- instability. Unstable legislative and regulatory vestor’s perspective, this means in case of frameworks also contribute to raise the risk investments in developing countries they need perception of commercial money lenders. to have mitigations in place against different Moreover, the weaknesses of local financial risks. Investors usually prefer to have sixty to sector reduce the possibility to find easy access eighty percent of the investment financed to local banks. through project finance. From an investor perspective this situation re- Risk mitigation becomes paramount and the sults in higher risk price required from the use of financial de-risking instruments coupled money lenders, affecting the competitiveness with a sound policy can reduce the financial of the potential projects This situation be- overall costs of renewable energy investments comes even more impactful for renewable capacities with respect to conventional ones. In and help attract both debt and equity capital at fact, comparing the cost of generation (the so scale. Project risk can be of different nature: called Levelized Cost of Electricity, LCOE) of re- political and regulatory risks, credit and coun- newable and thermal plants, we notice that the terparty risks, operational risks (grid, transformer depends mostly on the investment mission and resource), financial risks costs while the latter is largely influenced by (currency, liquidity and funding). This chapter the costs of the fuel used for generation. will be focused on financial risks affecting the structuring phase and, commonly, divided into As a result, thermal power plants competitive- the following categories: 9

4 Counterparty Risks apital, multilateral nan institutions may pro loans for renewable energy proje ts in Long/short t availability • ceveloping �i Developce ment In- vide c • Interest rate ermrisks �inancing stitutions aim to leverage private investment fdor pr countries. that are to rFinance viabil- • Ex rate risks ity, have large potential evelopmental im- pa ts,ojects but are in closetors orcomme untriescial where • Currchange nvertibility mer banks are r d to invest e • ency coks to cper eptions of secex essive ricosk. By investing comtheir owncial resour in preluctant Developmentdu • In�lation ris Finan c al Institutionsc seek to mitigate these Counterparty Risks (Off-taker) risks an so giveces private ojects,investors the n - ci to invest. A number of instruments are One of the main issues to be r when employ d to a eve this: investment (locoan�is presenting a pr for is the analy- dence equity), risk mitigation (for example loan conside ed sis of r worthiness of the off-taker guarantedees), achivisory (to govern- oject �inancing terparty) of the PPA. For ensuring best ments),and pr preparation evelop- c edit minimizing (coun- risks d services r u ng inan al st, it is f ental and oject and d that�inancing the conditionsterparty has a �inancialr quality mentAnother services. type of mitigation be the use of andr ed rating),ci � normallyci co measur undam by external institutions as MIGA IDA Parent Risk Guar- r coun good c edit antee: could (c edit ed and Aating g agencies. nterparty nan health ensures MIGA is an international nan al institu- the possibility of giving the guaran- tion, an arm of the Worl Bank group w teesood, in couterms of payment�i cialays, termination • offers polit al risk insuran�i ci re it en- uses et , request eithernecessary by the nan ng guarantees helpingd investorshich to institutions or by the energydel pr prot t ic foreign ce and c d r t cla c ed �i ci ihancementnvestments against It is possible, that the terpartyoducers. is merec k ev di ec or having an rating. In this political and non-com- ase, it is n ssary to pcounrovi e the properlacking guar- IDA,cial another ris s armin d ofeloping the Wor countries; Bank Group antees, beinginsuf�icient possibly i of�icial by state institu- through its Partial Risk Guarantee, overs • ld tions,c assuringece the risk mitigationd in of an private or investors against the risk c unexp t ange in ssuedunterparty’s solven y. of a government (or government –owner case entity) flendersailing to perform its r ob- Long/shortec ed tcherm �inancingco availability c ligations with r to a private pr cont actual Normally the limit availability of proj- Given the nature ofespect the RES pr withojects. PPA is a key in investing in re- from Government x for a tenure of 20 to 25 newable energy, edesp ally in localeveloping years, the investors prefer haojectsving long-term ectun�inancetries where theobstacle RES investments are a t pr available�i ed through the Develop- time. This manifest itselfeci through lessd favorable ment Finan al Institutions for their invest- lenco ng terms su as high t, short tenor�irs ments.oject �inance variable rates along with rate guar- ci anteesdi from the equitych sponsorscos of the pr t. The right government p u help en- and corpo rage more long-term investment in pr - In or to improve the a to afforojecable tive a tivities, but theseolicies a tivitcoies ldshoul be cou oduc der ccess d c c d managed in a way that mitigates the need for terest rate swaps and futures. The main scope additional financing sources, as there is no is to reduce the uncertainty of changing rates guarantee that a shortage of liquidity can be affecting the value of their investments. For- compensated by drawing new debt during the ward contracts are agreements between two lifecycle of the investment. parties with one party paying the other to lock in an interest rate for an extended period of A shortage of liquidity can happen for bad time. This is a prudent move when interest management or, likely, for low counterparty rates are favorable. Of course, an adverse effect creditworthiness reasons. Moreover, in emerg- is the company cannot take advantage of fur- ing Countries, there is a real possibility that ther declines in interest rates. Interest rate revenues denominated in local currency can- swaps are agreements between two parties in not be converted into the functional currency which they agree to pay each other the differ- having convertibility complications. This issue ence between fixed interest rates and floating could be faced by entering into commercial interest rates. Basically, one party takes on the agreements providing revenues denominated interest rate risk and is compensated for doing or indexed in the functional currency. For the so. Futures are similar to forward contracts and reasons mentioned above, one of the most sig- interest rate swaps, except there is an interme- nificant financial risks is the liquidity risk, diary. This makes the arrangement more ex- which is the risk that a company, while solvent, pensive but there is less chance of one party would not be able to discharge its obligations failingForeign to exchange meet obligations. risk This is the most liq- in a timely manner or would only be able to do uid option for investors. so on unfavorable terms owing to situations of tension or systemic crises (credit crunches, sovereign debt crises, etc.) or changes in the perception of company riskiness by the market. The risk management policies should be Loans in foreign currency could appear more designed to maintain a level of liquidity suffi- attractive given that seemingly cheaper, long cient to meet the obligations over a specified term, fixed-rate have the potential to reduce time horizon without having recourse to addi- the cost of financing renewable energy invest- tional sources of financing as well as to main- ments significantly. When financing a renew- tain a prudential liquidity buffer sufficient to able energy project by a foreign loan, the meet unexpected obligations. In addition, in mismatch between the currency of debt obli- order to ensure the discharge of its medium gations and the Power Purchase Agreement (or and long-term commitments, the company tariff revenue), normally denominated in local should pursue a borrowing strategy that pro- currency, exposes the project to the risk of de- vides for a diversified structure of financing valuation of the local currency over time. The Interest rate risk sources to which it can turn and a balanced ma- devaluation could imply lower returns for the turity profile. project and, more important, the reduction of investments in the country due to currency risk.

The main source of exposure to interest rate Moreover, there could be also other currency risk is the variability of financial terms, in case risk coming from the following activities: of new debt, or the fluctuation in the interest • cash flows in respect of dividend from for- flows associated with floating-rate debt. In- eign subsidiaries or the purchase or sale of vestors can mitigate interest rate risk through equity investments financial contracts like forward contracts, in-

5 • financial liabilities assumed by developing Tax risk is the chance that the cash flows will company or the individual subsidiaries de- suffer unforeseen tax consequences, such as nominated in currencies other than the cur- additional tax payments, higher tax adminis- rency of account or functional currency of tration costs or lower deductibility of costs. Tax the company holding the liability risk can arise from existing tax laws, from fu- • financial assets/liabilities measured at fair ture changes in tax laws or from company prac- value tices. In emerging Countries, the tax risk is often linked to a political instability (political It is necessary to use a currency hedge with a risk). The basic principles of tax risk manage- third party provider to protect against cur- ment are seeking to address potential issues as rency risk. Hedging solutions, usually in form soon as possible and allocating the proper of financial derivatives on over the counter Change in Law clauses in the formulation of the markets, can be limited in availability but also PPAs.Bankability issues in project finance expensive in emerging countries, increasing the financial cost of debt and therefore offset- ting the initial benefit coming from cheaper foreign loans. Additionally, there are cases when counterparty risk and foreign exchange Securing financing for a renewable energy risk interact in a way that can make the hedg- project in a developing country depends on a ing transaction ineffective (wrong way risk): in careful analysis of the bankability issues that case of a severe currency shock, due to economic, financial or political reasons, the whole will be faced throughout the project, i.e., from financial system might be affected and local construction to operation. Although many banks could face difficulties in meeting their structured finance mechanisms and capital obligations under the derivative contracts. Gov- market instruments are available, the most ernments in emerging countries need to recog- common form of financing large scale renew- nize the role of currency hedging mechanisms able projects in a developing country remains Inflationcould play risk in andexpanding TAX risk renewable energy ca- project financing. A project is bankable if the pacity and contribute to develop currency mar- construction (or pre-completion) and the op- kets accordingly. erational (or post-completion) risks have been appropriately allocated to the various players, in form and substance satisfactory to the There are country-linked risks affecting the finan- lenders. To assess the bankability issues, cial performances, though they do not lay com- lenders take a comprehensive view of the con- pletely within the financial risk management tractual network to be implemented by the boundaries. Inflation risk (or Purchasing Power project company. Lenders focus not only on the risk) is the chance that the value of the cash flows content of contracts but also on how they in- from an investment will change in the future be- terplay (e.g., EPC and O&M), since many project cause of changes in purchasing power due to in- risks may not be fully mitigated within the flation. In emerging Countries, inflation can be scope of just one contract. high and increasing, with a significant volatility, which in turn could drive the volatility of the re- Every project has its own contractual struc- turns. The most effective way of mitigating this ture: the chart below shows a typical contract risk is indexing the revenues to inflation. framework for a renewable project.

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It is essential for a project sponsor to clearly identify the project risks after duly considering the peculiarities of the market where the project is to be developed (regulatory and political The EPC Contract is a turnkey agreement by environment, foreign exchange volatility, trans- which the project company allocates the con- mission infrastructure, etc.) and to correctly al- struction risks of the project to a third party, ! locating these risks in the contractual the EPC contractor. There are many contrac- framework to limit the lenders’ recourse to the tual structures that a project company may sponsor and limit the financing costs as much consider for the construction phase, which will as possible. This section analyses the main be influenced on a number of factors such as bankability issues – from a project finance per- timing, whether the project costs will be fi- spective – that need to be addressed in the key nanced by equity or through a debt financing, or whether the sponsor has the capability to contracts during the construction and opera- % tion phase and the impact on the financial perform part or all of the work. If the purpose structure%%%%%%%%% if not correctly mitigated or appro- of the facility%%%%% is to finance the project costs % priately allocated.%%%%%% For the purpose of this sec- rather than refinance%%%%%%% costs already paid by the tion, the analysis%% will be limited%%%% to the project%%%%%%%% sponsors, having only one EPC Contract Engineering,%%%%%% Procurement and Construction % is – from%%%%%%% a strictly legal perspective – the preferable way to transfer, in one integrated Contract and%%% the Power and Purchase Agree- % % %%%%%% package, all the risks that lenders want to see ment, which%%% by their nature are critical for the % % %%%%%% addressed before considering a project con- construction and%%%% operation phase of a renew- % %%%%%%% able project. tract actually bankable. The following table lists some of the key risks that EPC contracts aim to cover, together with possible mitigations, which may trigger recourse to the project sponsors, or higher financing costs, if not satisfactory to the lenders.

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• More conservative debt to equity ratio; The risk mitigation strategy may also result in • Shorter tenor of the debt; an increase of the overall costs of the financing • Need for a stand-by facility; arrangement of the project.

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! Introduction Bankable projects

With energy demands continuing to increase A project is considered bankable if lenders are across Africa, interest in power projects, par- willing to finance it. In the language of environ- ticularly renewables, remains high with inter- mental and social consultants, the bankability national developers and investors. Despite of a project is not only determined by its tech- Environmental, Social and Governance (ESG) nical and financial features but also from its en- risks being addressed much earlier on in the vironmental and social performance. project life-cycle than ever before, ESG risks Nowadays, it is getting more and more com- often delay and, in some cases, derail financing mon that when applying for financing from in- of projects. To successfully navigate this ternational financing institutions, export credit process and secure funds, it is essential that agencies and commercial banks, companies are projects demonstrate from an ESG perspective required to undergo an environmental and so- that they are ‘bankable’. cial due diligence in parallel to or following the assessment of other aspects (for example, of A project is considered ‘bankable’ when its ESG economic, financial or legal nature). The pur- risks are well understood and when effective pose of the due diligence is to identify and eval- measures and structures are in place to miti- uate potential environmental and social gate and/or manage these risks to an accept- impacts generated by the project and theits able level for financiers. compliance against applicable international and national laws and standards. The main in- The Environmental and Social Impact Assess- ternational standards that usually apply for ment (ESIA) is typically the first step develop- projects developed in Africa are: ers take in demonstrating how they have International Finance Corporation (IFC) Per- identified and will be managing ESG risks. formance Standards on Environmental and So- However, it is at this stage that many projects cial Sustainability (2012); fail because of the assumption that the ESIA Equator Principles (2013); needed by regulators to secure a permit European Bank for Reconstruction and Devel- through the national process will be largely opment (EBRD) Performance Requirements sufficient to meet lender needs. Apart from (2014); this, in many cases the ESIA is initiated too late European Investment Bank (EIB) Environmen- in the site selection or design process, often its tal and Social Standards (2014); and importance is not fully understood (it might be African Development Bank (AfDB) Operational considered as a mere formal requirement) and Safeguards (2014). thus it is less effective in addressing ESG risks appropriately. The purpose of the due diligence is to prevent project developers and financial institutions This position paper explores what ‘bankable’ is from being exposed to the following three from an ESG risk perspective, shows that these types of risks arising from their client’s poten- risks are also associated with the renewable tial environmental and social issues: energy sector in Africa, and discusses some credit risk: when a client is unable to repay proactive approaches to addressing ESG risks loan on account of environmental and social is- in a way that allows a project to be ‘bankable’ sues; and compete against the many other power liability risk: when a financial institution faces projects in Africa for financing. legal complications, fees, and/or fines in recti- fying environmental and social damage by virtue of taking possession of collateral; 1

6 reputational risk: when the negative aspects of pact through the reduction of greenhouse gas a project harm a financial institution’s image emissions and thus there is no requirement to — in the media, with the public, with the busi- ‘manage’ environmental and social risks. This ness and financial communities, and even with perception is misplaced as all renewable en- its own staff. ergy developments have some negative impacts that need to be mitigated, while several The correct implementation of these standards of the benefits can be enhanced. These impacts together with best practices have shown that are experienced locally through the construc- this can assist project developers and finan- tion and operation of the power plant and as- ciers in reducing liability and reputational risks sociated infrastructure, and impact both as well as economic risks caused by work stop- Are ESG risks real for renewable energy ecological and social aspects of the surround- pages resulting from social problems or envi- projects? ing local environment. Ignoring these impacts, ronmental accidents. or potential risks, can have dire consequences for the project.

Research in the extractive industry undertaken Environmental and social impacts and risks are by ERM (see Figures 1 and 2), clearly shows generally recognized as being relevant to the that environmental and social risks can directly extractive industry as well as for the develop- impact the implementation of a project mean- ment of infrastructure, with only minor rele- ing they have the potential to cause delays, sub- vance to renewable energy developments. sequent project overspending and potential Initial perceptions are often that renewables reputational risks to developers. Is this the case have a significant positive environmental im- for the renewable energy sector in Africa?

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! !!! !! !!! !!!! !!!!!!! !!!!!!! !!! !! !!!!!!!! !!!!!!!! !!!!!!!!!! !!!!!! !!! ! ! !!!!!!! !!!!!! !! To answer this question, one only needs to con- the project would not be completed due to civil sider two major renewable energy projects in disturbances over a 21-month period in the East Africa that have been profoundly im- local area of the project resulting in delays that pacted by environmental and social risks. The led to a depletion of funds, as well as court first is the Kinangop Wind Project, which was ultimately abandoned on 25 February 2016. cases and community hostilities. Another re- KWPL&90%! Ltd$; and10! its G&shareholders3$!)&AA&#!K*:K!%*3-!567!*33(03! announced that newable project in East Africa, this • • JK0%A,/! • • • M*#'! • • • 6&/,%!LN! • • • O;'%&! • • 433&)*,$0'! • *#8%,3$%()@ • $(%0 4%*!L3/:%&,! R',0%1/:!/)-I2*!(12)2.%1!*(0(&&:(.(The importance)&!52*!:/)-! 28of acting)(*0!/)-! early:/)-!30(*0! R*29(1&!%)-31(-!:/;23*!%)5:3M! N2%0(! one deemed a success,V% 2-%<(*0%&,!B%)!7/*&%13:/*!;%*-0!/)-!;/&0C!has not been immune to similar challenges. N2Whilst%0(!/)-!<%0 the Lake3/:! Turkana Wind Power ProjectR', is0%1/:!/ expected)-I2*!(12 to )2 inject.%1!*(0(&&:(.()&!52Acting early*! is:/)-!28)( the key to*0! success/)-!:/)-!3 when0(*0! it comes 310MW from its 365R', turbines0%1/:!/ into)-I2*!(12 the national)2.%1!*(0(&&:(.(to managing)&!52*!:/ ESG)-! risks28)( and*0!/ )-!impacts:/)-!30 in(*0! order to secure international'''''' finance for grid, the project has$/ been0&(!./)/+(.()&!B-%0720/:!25!8/0&(!7/)(:0C! held back for 6 months now by a controversy surrounding the ' R',0%1/:!/)-I2*!(12)2.%1!*(0(&&:(.()&!52*!:/)-!28)(*0!/)-!:/)-!30(*0! completion of a 400KV, 428 km line from its projects and ensure their smooth implementa- fields at LoyangalaniR* to29(1&! Suswa.%)-31(-!:/;23*!%)5:3M! tion. There are a number of actions project de- V%2-%<(*0%&,!B5*2.!&'(!-/.!/)-!%)3)-/&%2)!/*(/C!velopers should take from an ESG perspective Perform early screening of potential high-risk ?)<%*2).()&/:!5:28!/)-!5%0'(*%(0!to make financing as easy and fast as possible, These are just two recent examples where so- E&S issues. cial risks have either R',totally0%1/:!/ stopped)-I2*!(12 the project)2.%1!*(0(&&:(.(including:)&!52*!:/)-!28)(*0!/)-!:/)-!30(*0! or resulted in significantV%2-%<(*0%&,! delays. There are other examples! where ecological issues have This could be in the form of a ‘red !been the primary risk. For a renewable energy ! project to be considered bankable, ESG risks flags assessment’ or an early-stage due dili- !!!!!!!! !!!!! will need to be carefully gence. The table below illustrates the most !! !!!! !!!!!! identified and proactively managed throughout common high-risk ESG issues for various !!!!!!! !!!!!! the project life-cycle. power projects (note: this is not an exhaustive !!!!!!!! !! !!!!!! !!!!!!!! 3 !!!!! ! !!! ! !!!!!! ! ! !! !!!!! 6 !!!!!! !! !!!!!!!!!! ! ! !!! !! ! !!!!!! !!!!!!! !!!!!! !!!!!!! !!!!!!!! !!!! !! !!!!!!! !!!!!! ! !!!!! !!!!!!!! !! !!! !!!!! ! !!!!!! !!!!!!!! !!!!!!! !! ! ! !!!!!!! !!! !! ! !!!!! ! !!!!!!! ! ! !!!!!! !!!!!!!! !!!!!!!!! !! !! !!!!!!!! !! !!!!! !!! !! !! !!! ! list, as different projects will have different sen- start ideally at the beginning of the project de- sitivities). It is important to integrate the con- sign phase and, specifically for renewable en- sideration of potential environmental and ergy projects, before the identification of the social impacts into early site selection and de- site. Project stakeholders are various individu- sign decisions so that impacts can be avoided als, groups or communities who: or minimized where feasible. International best practice should be applied where applica- • will be affected or are likely to be affected, ble at the design phase (e.g. compliance with positively or negatively, and directly or indi- the World Bank EHS Guidelines). It is also im- rectly by the project (‘Project Affected Par- portant to note that international finance stan- ties’), particularly those directly and dards require developers to demonstrate in the adversely affected by project activities, in- ESIA how environmental and social consider- cluding those who are disadvantaged or vul- ations have been included in the alternatives nerable; or Engage early with potential lenders and govern- selection process (e.g. routing, siting, and tech- ment stakeholders. nology selection). • may have an interest in the project and/or the ability to influence its outcomes, either positively or negatively (‘other This dialogue helps avoid influential/interested groups’). unwanted surprises and is important to reas- sure lending institutions throughout the Project proponents should identify the differ- process that ESG risks are being robustly man- ent stakeholder groups to outline a continuous aged. This can also be an opportunity to dis- public information, consultation and commu- cuss and agree on realistic mitigation measures nication strategy. This strategy is generally where meeting specific international standards known as Stakeholder Engagement Strategy or may not be that straight forward. Liaising with Plan (depending on the project development governmental stakeholders early is advised to phase). At first, proponents should undertake discuss key differences between national re- a detailed stakeholder identification analysis quirements and lender requirements and to that specifies and enumerates which groups agree on an approach to bridge these gaps. are most affected by the project, how, and to There are a number of areas that often show what degree. The proponent will map the key key differences between these requirements, components, as follows: including the extent and nature of stakeholder engagement and compensation measures • project activities, both on site and the sur- Identify and engage early with key stakeholders. when dealing with physical or economic reset- rounding area, that may result in local envi- tlement. ronmental or social impacts; • impact zones (e.g. labor standards and employment, land use and acquisition, Stakeholder engagement is a key aspect for all soil/air/water pollution, etc.) for each com- bankable projects. Beyond the fact that it is a ponent; and requirement of all international standards and • directly affected, indirectly affected, and vul- often of some national environmental legisla- nerable groups in the impacted zones. tion, its actual implementation from the early phase of project development allows the proj- Following the preliminary stakeholder map- ect to gain the social license to operate and pre- ping, based on field surveys and desktop study, vent the outbreak of protests. The the proponent should verify this analysis identification of project stakeholders should through direct consultation with stakeholders

6 or credible and trustworthy representatives. hiring/procurement policies and community The project’s stakeholder engagement strategy investment programs. should be based on meaningful and culturally appropriate interaction and good faith dia- For renewable energy projects, the local hiring logue with interested parties. It should be com- aspect is an issue that must be handled care- mensurate with project impacts and fully to meet local expectations and possibly development phase. maximize the contribution of available local workforce. This is particularly important for When starting stakeholder engagement at the renewable energy projects, as the number of early stages of project development, develop- available jobs in the construction and opera- ad hoc ers have the possibility, among others, to reach tion phases is lower than envisioned by local an agreement for a suitable location which communities and generally largely based on minimizes social impacts and maximizes ben- skilled workers. In this regard, investment in efits, and to disclose correct and reliable infor- capacity building or community invest- mation on the project which can prevent the ment programs can successfully contribute to spreading of false beliefs and expectations (in maximize local opportunities and, ultimately, particular regarding employment). Engaging contribute to a positive reputation at local and early will help the project to develop trustful national level. A successful ESG management relationship with local communities and au- strategy focused on local and business context thorities and identify, from the very beginning, should be developed around achieving the fol- Identifying from the very beginning opportuni- local needs that could be addressed through a lowing targets: ties that can create additional value to affected sustainable community investment strategy. communities. • target local people categories that might contribute in the most effective way to building the project’s ‘social license to op- Bankability is achieved more rap- erate’; idly when a careful assessment of the local and • build capacities at local level that are recog- business context is performed in the earliest nized as beneficial in the Project context (ei- stage of the project. This allows a deeper un- ther with direct and indirect impacts); and derstanding of the local communities that the • depending on project size and characteris- business will be operating in and, subse- tics, consider a variety of capacity-building quently, an effective management of ESG risks options to ensure diversification of the local The importance of social issues and opportunities. The screening of opportu- workforce and supply chain. nities that can create additional value to the local community pushes the company to be proactive and meaningfully engage with local stakeholders as international standards require. This approach reduces the risk of poor People are seldom straightforward and this ESG performance and of subsequent delay in means that measuring social impacts is often achieving bankability status. For this reason, a complex, making the full understanding and number of project proponents have developed management of social risks prior to financial in recent years a thorough and strategic ap- close a real challenge. This is exacerbated by proach to the management of ESG risks, by de- the fact that social impacts are often excluded veloping a cross-functional coordination at the from consideration in many of the national company level and by focusing corporate poli- ESIA processes in Africa. As a result, unless a cies on external aspects such as local project proactively incorporates international

6 finance requirements early in the process, as are there any other users of the land who are previously advocated, significant additional dependent on the land to support their liveli- work on the assessment of social impacts is hoods? Note that this can include informal or often needed to supplement a national ESIA. To even illegal use of the land. further raise the stakes, as illustrated in the • any compensation will need to be in line table above, social issues can often present with international finance standards (e.g. some of the highest ESG risks to a project (e.g. IFC’s Performance Standard 5), so it is im- physical and economic resettlement, and com- portant to understand how the national munity conflict associated with physical envi- compensation process may differ. Note that ronmental changes to air quality, noise there may be a requirement to ‘top-up’ na- emissions and water supply). Social issues can tional compensation. make or break a development; on one hand, • if the land has been allocated to the project they can stop a project dead in its tracks, and by the government, this does not automati- Determine if the project has the potential to af- on the other hand, good social management cally mean that any government-led reset- fect any indigenous peoples. can de-risk a project and generate value in the tlement meets international requirements. eyes of potential investors.

Below are several ways in which project devel- If this is a possibil- Work to build trust with local communities at opers can de-risk projects for social issues and ity, the stakeholder engagement process, and the outset. avoid related delays in financing: indeed the social impact assessment, will trigger additional requirements under the IFC’s Performance Standards (IFC Performance Good stakeholder engagement Standard 7) and will introduce an added layer should start early, as explained in the former of complexity. Potential impacts on indigenous sections. Once trust with stakeholders is lost, peoples also pose an increased reputational it is difficult to regain. It should be noted that risk and NGOs are likely to focus their attention social impact assessments need to include the on the project. Engaging with indigenous peo- community’s consideration of perceived im- ples requires a deep understanding of their cul- pacts, since these can often pose a very real so- ture and livelihoods and must be led by cial risk to projects. The only way to identify appropriately qualified individuals that are It is essential to understand any potential im- Don’t underestimate the capacity or influence of these risks is by engaging stakeholders early in known and trusted by the affected communi- pacts on people’s livelihoods since these can pose local NGOs. the impact assessment process. ties. a high ESG risk and will require a significant amount of management. NGOs have access to project information, permits and licenses and can be adept If land take is required at identifying non-compliance. They can place for the development, the following should be considerable pressure on project developers, considered: thereby increasing the risk of reputational damage. Additionally, with the increased role • who are the current land owners and how of social media in society, international NGOs will they be impacted? often back local NGOs as part of targeted cam- • is land ownership clearly documented? paigns. This means that small, local NGOs often Note that in many parts of Africa this may receive guidance and resources from larger, in- not be the case (e.g. community/tribal own- ternational NGOs. Additionally, potential local ership of land). ESG issues are more likely to be communicated

6 to an international audience, thereby increas- support of external experts) but they re- Appoint the right Community Liaison Officer ing the reputational risks both for a developer main a mere formal exercise without actual (CLO). and their financiers. implementation. Site procedures and practice remain those generally applied by the developer on all sites and no personnel with This is a key decision in helping to man- specific environmental and social skills are age local project risks effectively. A local indi- deployed; and vidual with knowledge of international • project developers appoint specialists Ensure that a robust Environmental Social Man- standards/protocols and hands-on experience within their staff responsible for the due agement System (ESMS) will be in place for con- in stakeholder engagement is ideal for this role. diligence/compliance monitoring phase struction and operation. (specifically as company interface with lenders) as an additional task in addition to their normal workload without giving them From a social the right tools, support and authority to set perspective, it is essential that this system also up a project-specific environmental and so- includes procedures and resources to manage cial management system. social impacts, any labor working condition issues and community grievances on an on-going An effective environmental and social manage- basisThe importance for the life of of the full project. project commitment system aimed at mitigating environmen- ment to implementing ESG mitigation and tal and social risks should be endorsed by the enhancement measures project’s management team and become an integral part of the company procedures and day- to-day business operations. This implies that a dedicated organizational structure with adequate skills, resources, agreed upon strategy as well as a good monitoring system is necessary Experience has shown that in order to manage Related infrastructure to ensure good environmental and social im- ESG risks throughout the project life-cycle, a plementation and performance. company needs to commit to the appropriate level of human resources to implement the necessary risk mitigation measures during both the construction and operational phases The installation of supporting infrastructure of the project. Showing this commitment prior needed for a power development is something to the start of construction has become more that is often overlooked when conducting a na- important to project lenders and financiers, as tional ESIA. Common examples include trans- they require proof of qualified staff and appro- mission lines, substations, access roads and priate organizational management systems to pipelines. If these are essential to the project ensure implementation. and would not exist without the project, they are considered ‘associated facilities’ and need Two common situations have been observed in Conclusionto be considered as part of the scope for the in- bankable projects, especially in small to ternational ESIA, even if they are not directly medium scale projects, such as renewable en- funded by the project. ergy projects:

• a full set of environmental and social docu- Using the appropriate mechanisms to integrate ments is prepared in compliance with inter- ESG risks into the project life-cycle will allow national standards (usually with the

6 project developers to help de-risk their proj- ever, there are not enough ‘bankable’ projects. ects, making them ‘bankable’ from an ESG per- With so many spective. This will increase the likelihood of power projects in Africa competing to secure securing international financing and receiving financing, managing ESG risks properly can the funds more quickly. From previous forums make the difference between a successful de- that address power in Africa, it is evident that velopment and one that never gets off the there is plenty of money for investment; how- ground.

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! !!! ! The!! fundamental role of electrification! in economic development 0.*&'"(&('/

Three key arguments underpin the case for ac- !"#$%&'()*+%,*+#-+*.*&'"(&('/ cess to electricity as a critical enabler for socio- economic development:

(i) access to energy is of paramount relevance for the achievement of several of the United Nations’ Sustainable Develop- ment Goals (SDGs); 12&"*3,*+(2+*.*&'"(&('/+$*432$

(ii) “productive use of energy”, as opposed to “consumptive use of energy”, would en- %%%%%% able new income-generating activities for %%%% poor populations, igniting the activation of %%%%%%%the capital accumulation cycle; and %%%%%%%% (iii) lack of access to energy is a direct indica- % % tor of poverty based on living standard’s %%%%%%measurement criteria % %%% %%%% The links between access to energy (in particular %%%electricity supply) and poverty% reduction % %% through income1 generation can be presented as a step by step approach, as shown in the fol- Once recognized the key role of electricity in % %%%%% lowing figure : a household/business benefit- economic development, criteria must be set %% %%%% ing from electricity supply is only the first step •out Full in orderCost!!!! of to Energy comparatively assess alternative towards%%% the user/entrepreneur’s decision to % models for the design and implementation of Full Cost%%% of Energy make use of%%% it. But it is only the actual%%% use of energy systems. the power %%%%supply, and the step changes%% that such %%use of power allows to the user/enterprise (mostly in the form of productivity im- The approach pursues the provements),H%%%%%%%%% that enables income generation systematic consideration2 of all the elements and capital%%%%%% accumulation. The following figure determining the total cost of generating and is only an example% of interaction%% between elec- delivering electricity to the end users, mean- tricity supply and socio-economic developing all the direct and indirect costs associated % %%%%%%% ment. However, it provides a useful conceptual with power generation and delivery, including %%%%% %%%%%%%% framework for a systemic approach to investi- generation capacity, fuel costs, environmental time-to-market% %%%%% gate the benefits%%%%%% of access to energy. effects, Transmission & Distribution infrastruc- %%%% %% !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!%%%%%%%% ture investments, the cost of dispatching and !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!%%%%%% %%% % %% flexibility, the cost of redundancy as well as the ! %%%% % %% ! of the different alternatives. 1 Adaptation from PRODUSE,%%%%%%% The Impact of Electricity Access on Economic De- velopment: A Literature Review, page 6. 2 The Full Cost of Electricity, The University of Texas at Austin %% %%% ! %%%%%%%%%%%% % %%%% %%%%%%%% % %%%%% %%%%%%% %%%%%%% %%%%%% 1 % %%%%% % %%% %%%%%%% %%%% 7% %%% %% %%%%%%%% %%%%% %%%%% % %% %% % %%% % % %% %%%%%%% %% %%%%%%

%%% %%% %%%% %% %%%%%%%% %%%% %%% ! !!!!!!!!! !

energy sources, captured via mini-hydro, biomass, biogas, solar, wind and medium-en- thalpy geothermal plants. They are either connected to a single load, such as a home or a SME or, through localized bi-directional medium voltage (MV) and low voltage (LV) networks, to hy- multiple loads in the same area, giving rise to brid a mini-grid. Decentralized generation systems are modular and flexible, and can include multiple generation and storagedelivered elements (in configurations) in order to guarantee supply 24/7. %%%%% %% % %%%%% Historically, the full cost of a kilowatt- %% % %% %%%% hour was higher in distributed than in central- %%%%%% % ized systems. However, the rapid cost (%%%%%%% digression experienced by decentralized gen- )%%%%% • Centralized versus decentralized energy eration, storage and energy management tech- !! ! % %%%%% systems nologies (as well as the quantification of the !! %environmental effects of centralized%%% genera- %%%%%%%%%tion) have bridged such gap, particularly in %%%%%%%% inter alia% areas with low initial load density. Such cost %advantage, coupled with%%%%% rapid and flexible de- %livery, points%%%%%% to decentralized electricity sys- Adopting the Full Cost of Energy approach en- %%%%%%%%tems as the most efficient instrument to foster ables, , the comparison of two general access to electricity in areas of low load den- models to provide secure and sustainable ac- % %%% %sity. Furthermore,%%%%% in case of future connection cess to electricity: i) centralized power gener- to the main grid, sophisticated and resilient % %%%%% ation and ii) decentralized energy systems. mini-grids can play a fundamental role for the % %%%%% Distributed energy systems: the techno- The first model refers to the generation of elec- stabilization of the wider electric system. %logical state-of-the-art% tricity at large-scale centralized facilities, whose location is mainly determined by the ef- %%%%%%% ficient access to fuel and land availability. High % %%%%% % Voltage (HV) networks need to be designed % %%%%% and deployed in order to efficiently transport %% %% % Decentralized!!!! energy systems are not a new electricity from the centralized plants to the %%%% % concept: every day! diesel and gasoline! genera- load centres. Large conventional power sta- %%%%% %% tions, such%%%%%%% as coal, gas and nuclear plants, as tors provide electricity to millions of people % %%% % well as large% renewable%% facilities, such%%% as hy- and businesses where there is no grid or where %%%%% droelectric%%%%%% stations and utility-scale wind or the grid is unreliable. What has changed is the emergence of%%%%%%% a wide array of competitive, sus- solar power%%%%%% stations, are representative of the tainable%%%%%% and reliable technologies for renew- centralized% model. %%% % able energy%%%%%% generation and energy storage and %% Decentralized generation refers instead to a va- management.%%%%%% !riety of technologies to generate electricity at %%%%%%%% % %%%%% or near the end user(s). Decentralized energy Today, decentralized energy systems comprise %%%%% %%%%%%% systems are typically based on local renewable a variety of technological solutions for different %%%% %%% %%%%%%% %%%%%% % 2 %%% %%% %%%%%%% %%%% %%%% %%%%%%% 7 %%%%%% %%%% % %%%%%% % %%%%%%%% %%%%%%% %%%%%%% %% %%% %%%%%% %%%%%%% %%%%%% %%%% %% %%%%%%%% %%%%%%%% ! !!!!!!!!! !

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•applications Solar Home and Systems with different performances "/7'+%'1*$! )-$'/7'+%'1*$! <:',,*+1*$! in terms of%%%%%%%%% dispatchability, availability, etc. such %%%%%%% as: % %%% %%%%% %% %% - %%%%%%%%%- - %%%%% %%%% %% SHS (Solar Home% Systems) are stand-alone %%%%%%% photovoltaic systems in rural areas, not con- - - nected %to the grid, designed%%% to meet a house- %%%%%%%%% hold’s basic%%%% electricity needs. %% %%%%%- % %% %%%% BC9ACEF?CGH!D'%%*&-*$! SHS consist of%%%% solar modules connected to a% %% % %% solar charge%%%% controller, an inverter and a bat- "/7'+%'1*$!%%%%%)-$'/7'+%'1*$! <:',,*+1*$! % tery. The energy is stored into the battery bank %%%%%% and supplied to the load via a DC/DC or DC/AC conversion system. They feed low-power appli- % ances%%%%% such as lights, radios and small TVs for% - ?'25)(% - ;($2)#/2(,% - C'22()-% about three to%%%%%% five hours a day. 2(/"+0109 ,(&2"%0G% G#1(9/-/1(% %%%%%%%% F-% ,#$/"')F(% SHS are a key%%% instrument for basic access%% to en- - <03%/0$2% <03%(+()F-% ergy (and the creation of initial loads) but not - ,(+$#2-% a%%%%%%%% tool for productive uses of energy, given their - A1(/2)0,(% ! limited%%%%%%% power and autonomy. • Single-user hybrid/0))0 solutions$#0+% 1#B#2$%5$(G51% %%%%%%%% With cost as one of the biggest barriers for SHS !!!1#G(% uptake,%%%%%%%%%% optimizing the system size versus the energy %needs is crucial.%%%% %%%%%%% Single-user hybrid solutions (mostly for SMEs) While%%%%%%%%% in 2003 only a SHS of 20 Wp was eco-%% V#F"% V#F"% E0$29 nomically competitive with kerosene lamps, in combine i) one or more renewable-energy (+()F-% &)0,5/2#0+% (GG(/2#@(% 2015%%%%%%%%% this was true also for a 70-80 Wp kit. The sources, ii) normally a storage system to balance the,(+$ system#2-% and/0$2 time%H*52% shift renewable*'22()-% en- main contributor%%%%%%%% of such cost digression has <0+F%1#G(9 G'11#+FI% B'+'F(B( ergy production, iii) conventional back-up been%%%%%%%%% the decrease in the cost of the photo- /-/1(% M'G(2-% +2%$-$2(B% systems (usually diesel gensets) to ensure voltaic%%%%% modules. The cost of batteries has now V#F"% ,(@#/($% 0+%$B'11% 24/7 energy supply; iv) a BOS inclusive of in- also! entered a steep descending path, while the )05+,2)#&% +((,(,% $/'1(% cost of%%%%%%%%% the Balance-of-System (BOS – inclusive verter(s)(GG#/# (+and/-% an energy management system of inverter,%% cabling and structure)%%%% is expected to ensure stable supply and optimize power flows. to significantly%%%%% decrease with rising%% volumes. Such single-user systems can be grid-con- Much%%%%%%%%%% of the challenge in the diffusion of SHS nected (if so, they can source power from the hinges on the% successful optimization%%% of bat- grid when economically convenient and when tery lifetime.%%%%%%%%%% Battery can account for more than 50% of the total SHS costs, while having the the grid is considered sufficiently stable), but %%%% %%%% are designed not to rely on the grid, neither for least lifetime among the components. %%%%% %%%%%%%% energy supply, nor for voltage and frequency %%%%%% The%% key advantages, disadvantages%%%%% and relative stabilization. By contrast, they are thought as %%%%%%% challenges%%%%%%% of today’s two mainstream battery independent power generation systems, able %%%%%%% typologies are%%%%%%% set forth below: to provide 24/7 energy supply. %% %% %%%%% %%%%% 3 %%%%%%%%

7 A hybrid solution can be characterized on the vices require an AC-DC conversion stage for AC basis of the ratio between the capacity of re- grid connection. Such multiple conversion newable energy sources and the load to feed: stages reduce the overall efficiency and relia- low, medium and high renewable penetration bility of the systems. Hence a renewed interest require different architectures, different sizing Inclusivein exploring business DC grid model:systems. of energy storage systems and the use of differ- Productive uses of energy ent control functions.

Hybrid solutions combine the environmental •benefits Mini-grids and short time-to-market of renewable sources with a dispatchable, guaranteed, Fostering productive uses of energy is essential high-quality power supply. to ignite a virtuous circle of demand growth and increasing local availability to pay, which lays at the basis of mini-grid return on invest- Mini-grids can be defined as a set of generators ment. and loads within a limited defined area, operated in a coordinated way. Mini-grids can be In fact, despite choosing the most efficient gen- run as stand-alone localized electric systems, eration technology to provide electricity access capacity especially in rural areas, but can also be con- is necessary to support local development, it is nected to the wider electric system, in order to not sufficient to directly spur economic trans- efficiently exchange energy, balancing capabil- formation and sustained growth. Indeed, a sus- ities and cold reserve ( ), i.e. they can tainable business model shall be created in be integrated as single active elements in cen- order to couple electricity supply with other tralized power systems. Opportunitiessolutions and quality and positive inputs to impacts successfully related un- toleash mini-grid the community’s development inner capacity to de- Mini-grids cluster multiple loads and dis- velop and trigger a virtuous cycle. tributed generation systems via MV and/or LV by-directional localized networks. The elemen- tary building elements of the mini-grids can be pure loads (households, SMEs), prosumers Mini-grid implementation through the above (households or SMEs with their own hybrid so- mentioned sustainable business model has the lutions), community or commercial mini-grid- potential to generate widespread and transfor- level generation and/or storage facilities. A mational benefits, such as: mini-grid can be privately or community-managed, or else utility-managed. • Providing critical employment opportunities, particularly in the agricultural/agro- Presently, most micro-grids adopt conventional processing industry and Small/Medium AC grid systems. Since many renewable Enterprises (SMEs); sources generate DC voltages, converters are required to transfer power from these energy • Promoting growth of local economy and pri- sources to the AC grid system. For example, vate sector, thus presenting opportunities wind turbines require back-to-back power con- for investors as well; verters to synchronize and adjust the output frequency and voltage level with the AC grid • Enabling households to achieve a better system. In residential and rural segments, grid standard of living, which in turn would en- connected equipment such as computers and able them to be more productive and gener- battery chargers use DC power. Thus, these de- ate additional income also used to buy 4

7 efficient electric equipment (e.g. fans, food 2) Competitiveness of mini-grids with existing processors, refrigerators etc.) that will im- solutions, such as kerosene, Solar Home prove their quality of life; System;

• Catalyzing training & development of skilled 3) Desirability and attractiveness of electric- human resources as people acquire new ity-enabled behaviors, products and serv- competencies to run new businesses or to ices; take advantage of new employment oppor- 4) Business Acceleration, including the capa- tunities; bility of the electricity supply to power devices for productive use (e.g. sewing • Making the investment in electrification machines, milling machines) and increase sustainable, thanks to the growing local the economic productivity, the disposable consumption and to the increased commu- income and the ability to pay; nity ability to pay. 5) Sustainability of the business model or all However, the identification of the potential stakeholders, including local communities, uses of electricity that could ignite this virtuous investors and national governments. circle requires prior analysis and actions. In Potential uses of electricity to foster socio-eco- fact, local businesses development should be nomic development in rural areas might in- done during the whole lifecycle of the electrifi- clude, among others: electric pumps for cation project, since it helps both to design the irrigation and increased harvests of crops; infrastructure and to establish a sustainable electric mills replacing more expensive existing business model, which has to be tailored to the diesel powered mills; fridges and food proces- specific socio-economic characteristics of local sors (for fish, meat, dairies..), and power for communities. Such characteristics vary from small roadside business centers providing pho- place to place and there is no one-size-fits-all tocopying, fax machines, and internet. solution that will suit all villages. • Mini-grids have an impact on a wide range Such development should be performed in an of stakeholders in rural and peri-urban inclusive way, building the demand bottom-up, areas, including: as the involvement of local players is essential from an early stage to build trust between res- • Rural/local community households; idents, local businesses, the mini-grid devel- • Community schools, clinics, health centers, oper and operator. NGO offices, local government offices and other public buildings; The development model must consider the holistic system to be effective. For example, the • Farming/agri-food sector - for irrigation identification of solutions to include productive and food processing; use of electricity and electricity use needs to • Private sector and Small and Medium Enter- focus on different inputs, relationships, mech- prises (SMEs) as listed above; anisms, and dynamics at play, such as: • NGOs and the private sector as mini-grid de- 1) Supply-Demand of electricity, including as- velopers; pects such as the reflectiveness of electricity • Rural electrification agencies – which may tariff and the incurred costs for the electric- act as intermediaries between the mini- ity supply and the availability to pay for dif- grids and consumers (or may be by- passed ferent uses of electricity by them in some models).

7 For this reason, partnerships among organiza- proper way of addressing the electrification tions (private sector and NGO’s) and local play- challenge. ers with different fields of expertise are critical to address all the essential inputs concurrently The widespread assumption that rural electric- and to support a sustainable growth of eco- ity supply is to be considered a charity rather nomic activity that drives electricity consump- than a commercial activity is erroneous, as tion and that will support the main studies show that spending power in rural consumption anchors. An appropriate support areas is high compared with the long-run mar- system could help villages to channel local re- ginal cost of electricity supply. sources into economic growth. The private sector is willing to invest but their Italy, in particular, could provide a strong sup- generalized involvement is still challenging, be- port with technical expertise and supply of ad- cause of the lack of a regulatory framework vanced and robust machinery, which represent providing enough clarity on operational rules leadingBarriers sectors to further of Italian development economy. and on key critical issues, and for the absence of de-risking mechanisms. Permitting processes are still long and not streamlined, and too many authoritiesthree are involved in the electrification activity, creating overlapping re- sponsibilities or lack of responsibility. Decentralized solutions can play a central role in achieving universal electricity access, and 1.We Simplified can summarize permitting in and licensingcategories the represent today a proven, effective alternative proceduresmain building blocks of an effective framework to traditional grid expansion. to foster decentralized energy systems: Policy schemes adopting decentralized energy systems, should compare, at equivalent levels of supply reliability, with the Full Cost of En- ergy (also3 in terms of time-to-market) of serv- Governments should keep mini-grids permit- ing the same loads via a centralized electric ting process streamlined, providing a land reg- system and aim to offer the investor a fair risk- istry and a standard set of permits on adjusted remuneration. application form, inclusive of right of ways, environmental impact assessment, district au- Policy-makers have historically regarded rural thorizations, etc., enabling regulators to electrification with off-grid technologies as a quickly assess projects viability. Such permits philanthropic activity, giving priority, for indus- should be assessed in a reasonable - and well- trial development, to the expansion of existing known in advance - processing time, through a grids. Even though in the past years it has be- single window support channel (one-stop come clear that the development3 of off-grid shop). In addition, a combined generation, dis- projects does not prevent integrating them in tribution and supply license with an exclusive future centralized power systems , gaps in pol- right of supply should be provided for a deter- icy and regulation still persist. Therefore, it is mined period of time to avoid the risk of devel- necessary to define an enabling framework to opers paying the significant cost of project scale3 up the use of decentralized systems as a The benchmarking has to consider cost-reflective electricity tariffs, not tariffs preparation and then finding themselves sub- actually in place, that may be not cost reflective ject to competition from other developers. Permitting procedures should be linked to technical and safety standard requirements. Therefore, it is very important that countries

7 develop a regulating body able to define Tech- official Governments plan providing more cer- nical connection rules (Grid Codes), to be ful- tainty on grid extension in the medium/long 2.filled Flexible also by tariff mini-grid setting projects rules that, although term, that anyway should be reliable and not initially off-grid, might be integrated into the abruptly changed. main grid in the future. Moreover, clear exit options in case of main grid arrival must be set in advance, identifying duties and rights on involved parties (i.e. devel- Financial and economic aspects also play an oper, Distributor System Operator, Regulator), important role in promoting the development in order to provide to developers fair guaran- and safe operation of decentralized grids by tees on the return of their investment. private players. Government regulation can help to mitigate Flexible tariff setting rules and financing mech- this risk by mandating one of the following anisms have to be in place to ensure reasonable possible options: a) the mini-grid operator return to investors and affordable prices for could become a power generator, selling en- consumers. ergy to the main grid, through PPA with a guar- Tariffs for mini-grids need to be set independ- anteed tariff, and distribution assets purchased ently from the tariffs applied to main grid-con- by a DSO. b) the mini-grid operator could become a DSO, that purchases electricity from nected customers, that are generally highly em- main grid and resell it to customers (disposing subsidized by the Government. The tariff level bedded should be flexible enough and based on what of the legacy generation assets in the mini- will be affordable and acceptable to remote grid); c) a combination of power generator and users (for example, for farmers it will be easier DSO, with a specific regulatory regime for to pay electricity after harvest than in other generation. times of the year), balanced with the devel- According to the preferred choice done by the oper’s need to meet operating expenses, in- mini-grid operator, the DSO must have the ob- cluding depreciation, and deliver a fair return ligation to purchase the distribution portion of on investment. the mini-grid assets that represents the most Tariffs levels are therefore expected to provide capital intensive portion of the total invest- developers with a suitable financial return, ment, provided that the latter are technically while accounting for the need to deliver high compliant with the Grid Code. A crucial ele- quality service. Governments and development ment therefore is represented by the determi- partners can support lower mini-grids tariffs nation of the compensation value for the 3.by Clear providing “Exit grantoptions” subsidies in case that of main offset grid the distribution assets. That value must be based arrivalhigh initial capital costs and thereby reduce in- on the expected return of the investors at the vestment risks. time of the investment decision, and therefore on the future cash flows that he was expecting to receive for the time of operating of the projects. The most critical risk in the development of de- Anyway, the role of the Regulator in managing centralized solution is represented by the po- smoothly the exit option is crucial in order to tential arrival of the main grid before the time ensure the fairest solution in the interest of needed to recover the investment. consumers and mini grid operators. Such risk can be mitigated by the diffusion of While a consistent regulatory environment is a

7 requisite for decentralized energy systems to decentralized energy solutions represent the become a pillar of government’s electrification most efficient instrument to promote access to strategies, in certain areas and applications the electricity in areas of low load density or very private sector is showing the ability to inde- far from existing national grid. Fostering pro- pendently develop and fund the deployment of ductive uses of energy is essential to ignite a private mini-grids, mainly for captive and own virtuous cycle of demand growth built on an in- consumption. Such initiatives should not be clusive business model, however, the cycle discouraged in any way: communities and ! !!!!!!!!! !jump-start requires many different inputs. businesses that autonomously mobilize capital !to deploy sustainable and reliable decentral- Having a holistic point of view and strong part- ized energy systems are a valuable comple- nerships will be important to activate all the in- ment, not a threat, to centrally promoted puts simultaneously to achieve the most schemes. Fostering entrepreneurship is itself a efficient and sustainable business model, Conclusionsmajor contribution and call of forclean action energy technologies to economic development. which will be beneficial both for local communities and investors. Systematic know-how dissemination, a consistent regulatory framework for decentralized energy systems, and an open mind towards entrepreneurship in the energy The role of electrification in economic develop- sector are fundamental elements of an effective ment is fundamental. Innovative, sustainable energy policy for emerging economies.

;G!9:*!&*,*7'+(*!35!/*(*+%&',-.*/! $3,4%-3+$!53&!%:*!/*7*,386*+%!35!R'6#-'S$! 830*&!$*(%3&! ! %%%%%%%% % %%%% There are five%%%%%%% fundamental factors driving the load profile%% of residential%%% demand, exacer- relevance%% of decentralized%%%%% solutions for the de- %%%%%bating the challenge to cover peak demand% velopment%% of the power sector%%% in Zambia: %%%%%by modulating hydro production; % %%%%%%% %%%%%%% (i) limited potential load density outside (iv) abundant renewable energy potential (in urban centres%%%% and mining areas; particular%% solar and biomass, in addition to hydro). %(ii) consequently, the limited reach of the transmission grid; The prevalence of the mining sector in Zam- bia’s electricity demand has fundamentally in- (iii) need to enable primary sources with a dif- fluenced the development of its power system, % ferent seasonal profile than hydroelectric through the development of high-capacity production; transmission backbones serving mining areas and urban centers (whose growth is in turn (iv) a mismatch between the aggregated load highly correlated to the mining sector), and a profile, dominated by baseload demand %%% %%% limited %%%%%%%%reach of the main grid in other regions. from the mining sector, and the typical %%% %%% %%%%%%%%% % %%%%%% 8 %%%%%% % %% %%% 7 %%%%%% % %%%%% %% %%%%% % % %%% !! % %%%%%% %%%% ! %% %% %%% %%% %%%%%%% %% % % %%%%% % %%%% % % % %%%% %%%%%%% %%%%% % %%%% %% ! %%%%%% %%%%%%% %%%%%%%% % %%% %%%% % %%%%%% %%%%%%% % %% %% % %% %%%%% % %%%% %%%%%% %%%%%%% %%%% %%

% %%%%%% % % %% %% %%% % %%% %% %% %%% %%%%% % %%%%%% % % % % %%%%% %%% %%%%%% %%% %% Rapid urbanization is exacerbating such dy- economies. namics, further reducing potential load density in rural areas. Furthermore, historically low electricity tariff in Zambia, partly justified by the need to pre- This fundamental asymmetry makes an obvi- serve competitiveness of copper mining in a ous case for a decentralized energy approach land-locked country, set a challenging price to rural electrification, relying on affordable benchmark for decentralized solutions. solar technology (possibly complemented by biomass in agricultural areas generating mate- Accordingly, a balanced mix of policy tools is rial residues with energy potential) as main el- recommended to foster the deployment of de- ement of the primary mix, supported by centralized energy solutions. conventional back up capacity (powered by diesel or, where economically sustainable, bio- 1. A liberal framework for spontaneous pri- fuels) and storage capacity for balancing and vate microgrid realization: entrepreneurs intra-dayincubating energy management purposes. able to identify economically-sustainable In this framework, Solar Home Systems are load pockets should not be prevented to synergetic with a microgrid roll-out program, market unregulated schemes to villages and byPotential policyinitial framework load. communities;

2. A transparent framework for the deployment of regulated microgrids, along the guidelines set forth in this paper, with a The key challenge to the systematic implemen- clear identification of any subsidy element tation of microgrids in this environment is the required to secure remuneration of network typical trade-off between i) the need of a cost- infrastructure in a low load density environ- reflective tariff to remunerate the capital ex- ment (potentially with a digression scheme penditure in generation and local distribution for such specific tariff components as load infrastructure, and ii) the depressive effect of a grows). cost-effective tariff on initial load creation, required to ultimately justify the roll-out of a dis- 3. Favor for Solar Home Systems as a path to tribution infrastructure and foster network load creation.

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Main Acronyms utilized

!!! lated as the ratio between the net energy given

back from a storage and the energy consumed

• Battery Energy Storage System (BESS) to fill it up) typically ranges from 70 % to 85%.

• Compressed Air Energy Storage (CAES)

• Concentrating Solar Power (CSP) •• Distribution System Operator (DSO)

• Electric Vehicle (EV)

• Energy Management System (EMS) • Energy Storage System (ESS)

• Liquid Air Energy Storage (LAES) @6/A! B! C! +(6.,%676(! ('%./1&6<'%61,! 17! $%1&'/.A!

• Power Conversion System (PCS) /0>26#I%4:.C%RONSE!

• Pumped Hydro energy Storage (PHS) %%%%%%%% • Renewable Energy!! Source (RES) %%%%%%%% %%%%% • Thermal Energy Storage (TES) %%%%% Technology overview%%%%% • Transmission System Operator (TSO). • Compressed Air Energy Storage (CAES) % %%%% CAES technology is a mechanical storage in %%%% which energy in stored by compressing air at %% %% very high pressures. The compressed air is % %%% then released, preheated either with natural Energy storage%%%% is not a single technology, but gas (diabatic CAES) or with the heat stored rather refers%%%%% to a suite of diverse technologies,! duringround-trip compression efficiency (adiabatic CAES) and used able to provide different services. Due to the % %%%% to drive a turbine-generator system, to produce wide range of technologies, it is important to %%%%% electricity when required. begin by outlining the main characteristics of % %%%% the main typologies that may be deployed. The of these systems typ- %%%% ically ranges from 42% to 50% for diabatic Pumped Hydro energy%%%% Storage (PHS) CAES and aim at values around 60%-65% for PHS has been dominating energy storage for adiabatic configuration. %%%%% over a century and represent the vast majority Although the main CAES plant components, i.e. of current installed energy storage capacity compressor% and turbine,%%% are technologically%%% worldwide.%%%%%% The operating principle is simple%% mature%%%%% and are able to treat large amount%%% of air and efficient.%%%%%%% PHS stores and generates elec- to enable%%%% high power storage systems, the%%% en- tricity by moving water between two reser- %%%%% ergy %%%%%% capacity of CAES plant depend on the voirs at different elevations. Thus, a special %%%%%%% availability%%%%%%%% of large scale storage reservoirs for nature of the site is required, needing both ge- compressed% air. This makes%%%% CAES economically ographical height%%%%%%% and water availability. During interesting%%%% only if geological reservoirs,%%% such off-peak %%% periods an electric motor%%%% drives a as mines,%%%% aquifers or salt caverns, are available, pump or pump%%%% turbine, which pumps water round-trip efficiency while, aboveground pressure vessels tend to be from a lower%%%%% reservoir to a higher storage too expensive% for economic%%%% viability. basin. When% electricity is needed, the water is %%%%%%% %%% %%%% The geo/site dependency of CAES strongly lim- directed downwards through turbines. The %%%%%%% ited it deployment so far. Indeed, the only ex- %%%%%%%of these systems (calcu- %%% %% ! %%%%%% % %%%% 5 G%%%%% % %%%%%%% % %%%% % %%%% 9 %%%%%%% %% %%% %%%%%%%% %%%%%%%%% %%%%%%% %%% %% %%%%%%%% %% %%% %%% %%% %%%%%%%% %% %%%% %%%%%%% %%%%%% %%%%%%% %%%% %% %%%%%%% %%%%%%% % %%%% %%% %% %%%% %%%%%%% isting commercial plants are a 321 MW plant They store kinetic energy in rotating discs or in Huntorf, Germany, and a 110 MW plant lo- cylinders, suspended on magnetic bearings. cated in McIntosh, USA and a new 330 MW Their main advantage over other storage tech- project is under development in Northern Ire- nology is the absence of capacity degradation land. over lifetime and low maintenance costs. • Liquid air energy storage (LAES) Flywheels are normally suited for applications requiring high power for short periods, how- Sometimes referred to as Cryogenic Energy ever some suppliers are offering flywheels also Storage (CES), LAES is a promising storage al- up to 4 hours storage periods. ternative to CAES and PHS, currently at the demonstration stage. Air is compressed and Flywheels tend to be very small in their basic cooled down to liquefaction in a refrigeration modules, so that no large scale-effect on cost plant, using cheap, off-peak energy, and stored reduction is to be expected. in a relatively large insulated tank or vessel. The liquid air is then converted back to gas, ex- panded in volume, heated and used to drive a • Batteries turbine to generate electricity on demand. Whilst electrochemical devices have been used Thanks to the much lower volumes needed to for energy storage since the 19th century, up to store liquid air instead of gaseous air, LAES is some years ago they mostly found use so far in not prone to geological constraints or public small-scale applications, such as mobile power resistance and can be particularly suited to lo- sources, and in the automotive industry. cations where there is a source of low-grade In the last years, the growth of electric vehicles heat or cooling, such as an industrial process. and the need to integrate renewable power In case of stand-alone applications or use with- technologies such as solar and wind drived out sources of heat or cold, heat is stored dur- huge investments in the development of bating compression to be used in the expansion tery technologies, that nowadays represent the phase, reaching efficiencies up to around 60- most competitive set of technologies that are 65%. being introduced to support renewable integration into the electric grids worldwide. All main components of LAES plants are com- mercially available and suited for large scale In particular, the recent period clearly showed plants, while heat and cold storage systems as that Lithium based technologies are gaining well as the full plant integration has to be suc- majority of market share for Renewable Inte- cessfully validated. The absence of significant gration applications and for ancillary services capacity or efficiency degradation with cycling for grid support. This happened thanks both to appears one of the main advantages of LAES many impressive technological improvements versus lithium batteries, however LAES com- (i.e. lifetime, energy conversion efficiency, re- petitiveness will depend on capability to signif- sponse fastness) and a fast decreasing in costs, icantly decrease its costs in order to which have been in the range of 15 - 30% YoY compensate also for the relatively low (depending on the application) and lead to an roundtrip efficiencies. overall 80% price per kWh drop from 2010 to 2017. • Flywheels Many other possible battery chemistries alter- Though flywheels have been in existence for native to lithium-based ones are under devel- decades, they have only recently gained atten- opment or in initial commercialization phase, tion for large-scale stationary energy storage. and could suit specific applications in the fu-

9 ture. As an example, long term storage applica- • Hydrogen tions (8-10 hours or more), that will be needed Power to Gas (PtG or P2G) uses electricity to to manage the electricity networks with very create hydrogen by electrolysis. Hydrogen can highround-trip renewable efficiency permeation, will be a market be stored as gas under pressure or liquid at low suitable for flow batteries, provided that they temperatures. It can then be used to create manage to achieve significant cost reductions. electricity in conventional reciprocating en- The of batteries depend on gines, gas turbines or in fuel cells, though in the chosen chemistry and technology, ranging many cases it may be better to use the gas for from 75% (flow batteries) to 90% (best lithium industrial uses, space heating or transport. ion). For some batteries (NaS) efficiency is also Hydrogen is currently used today for applica- influenced by operational conditions as they tions that need no self discharge, like telecom need to be kept at high temperature even in tower UPS systems, and may well suite sea- standby mode. sonal storages coupled to fast responding bat- A key issue the battery industry is beginning to teries, in order to supply 100% annual energy deal with is how to manage battery circular consumptionsround-trip with efficiency renewables in remote economy, from raw materials (many are rare areas, i.e. areas where diesel cost is very high for the most diffused lithium based batteries) due to transportation. to end of life management. The of hydrogen-based In this framework, batteries from electric vehi- storage systems today is as low as 30 to 35%. cles which no longer meet the requirements of Some sources forecast that it could increase up this application may well still have a ‘second- to 50% with more efficient technologies, cur- use’ in static applications, as detailed later in a rently at an early development stage. dedicated chapter. • Synthetic Natural Gas (SNG) • Superconducting Magnetic Energy Storage Hydrogen can be converted into methane (SMES) (SNG). The main advantage in the context of SMES stores energy in the magnetic field of a energy storage is that the amount of hydrogen coil. The coil is superconducting in order to re- that can be tolerated in existing natural gas in- duce the electrical losses, and therefore re- frastructure is limited (of the order of 10% de- quires a cryogenic cooling system. The pending on technical characteristics of the response time is extremely fast, and the tech- infrastructure). There is no such restriction on nology is suited for short-term power applica- the amount of SNG that can be injected into ex- tions such as improving power quality. isting gas infrastructure. Methane, being a larger molecule, also has lower leakage losses • Supercapacitors than hydrogen. Supercapacitors are an established technology which stores much more energy per unit volume • Thermal Energy Storage (TES) or mass than traditional capacitors. The re- There are three fundamental forms of thermal sponse time is extremely fast. The costs per unit energy storage: of energy storage capacity are higher than for batteries, though supercapacitors can withstand • Sensible thermal storage - increase or de- much higher numbers of charge/discharge cy- crease of temperature of a storage medium, cles. Supercapacitors therefore are suitable for such as water, oil, rocks or concrete. very short-term power applications. • Latent thermal storage - phase transforma-

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%%%%%% %%!"(%D'#+%',M'+2 % % % % % %%%%%%% %%%%%%% %% %%%%% %%% %%% %%% %%!"()(% tion, e.g. molten salt, paraffin, or water/ice; #%%%%%%%%% • Thermochemical%%%%%%% storage - a reversible chemical reaction,%%5(2"'+(7%*( which is energy#%%% demanding in one%%%%%%% direction and energy yielding in % the reverse%%% direction (sorption and thermochemical), such as silica gel, zeolite, metal % hybrids, or zinc. Thermal storage%%%% can be used to produce elec- %%%%%%%%% tricity,%%% by producing steam for a conventional%%% @6/A! E F5&'%61,! ',-! 7&.G5.,(0! 17! 413.&! thermal power plant. However the heat can %%%%%%%% ! !!!!!!!!! ! %% %% $544;0A%%%%%%%%% also be used directly in industrial process or for ?U@ %%%%%% ! space or water heating; this clearly requires /0>%%26#I%4:.C%RONSC%A0$$0:5"<%+/!)%)%%96D#"C%RONR% less plant and%% avoids conversion%%%% losses, though the value of heat%%%%%%% is substantially lower than the value of electricity.%%% %%%%% %%%%% %% the magnitude of the charged or discharged %%%%% power. Typical energy applications include %%%%% peak shifting, energy arbitrage, etc. In contrast, %%%%%% power applications require fast injection and %%%%%% absorption of energy, but durations for such operation are usually shorter. Power applica- % %%%%% ! tions include frequency control, and ramp rate %%%%% control%8% for intermittent renewable generation. F %%%%%%% Electricity% storage applications can usually be %% %%%% viewed as either primarily energy or primarily 6/A! D! C! :'446,/! 17! $%1&'/.! %.(>,1;1/6.$! %1! % %%% %% power applications, and this categorization can 4.&71&8',(.!(>'&'(%.&6$%6($A! be applied to technologies as well, using the% /0>%%%%%%%%%26#I%4:.C%RONSC%A0$$0:5"<%/3#2"#2%#3%9$E%RONT! %%%%%%%% E2P ratio, also known as Discharge Time. If the E2P %%%%%%%ratio is about 0.5 h or less, the technology %%%%%% can%%%% deliver or absorb significant%%%% power over a %%%%%% %%%%%%%% short time,%%%% such as flywheels, supercapacitors%% %%!"(%D'#+%',M'+2 % % % % % %%%%%% or, nowadays,%%%%%% many types of Lithium batteries.% • %%%%%%% % If the E2P ration is about 4h or greater, the Note that thermal storage can also be used to %%%%% %% %%%%%%% technology can sustain energy delivery for a provide ‘cold’, and this is currently a growing %%%%%%%%%% %% %%%%% much longer period, like certain batteries, es- market for energy storage in the form of ice for %%%%%%% %%% %%% pecially flow batteries. In addition, two large- deferring air-conditioning loads. %%%%%% • %%% %% scale technologies (PHS and CAES) are capable #%%%%%%%%% The application of energy storage can roughly of providing significant levels of both power %%%%%%% be placed on a continuum of power and energy. and energy, however they usually should be categorized as technologies suiting energy ap- %%5(2"'+(7%*(#%%% In general, energy applications are defined as %%%%%%% those that need a continuous supply of energy % plications. Since each storage technology can serve a range of applications, other factors %%% over a considerable length of time. In this case, the total energy flow is more important than should also be considered for a detailed classi- % 8 %%%% %%%%%%%%% %%% %%% 9 ! %%%%%%%%!! !!! %% %% %%%%%%%%% %%%%%% %%%%%%%%%%% %% %%%% %%%%%%% %%% %%%%% %%%%% %% %%%%% %%%%% %%%%%% %%%%%% % %%%%% ! %%%%% %% %%%%%%% % %% %%%% % %%% %%N03(M()% 2 % % % % % % % % % % %%%%%%%% %%%%%%% %%%%%% %%%% %%%% %%%%%%%% %%%% %% %%%%%% %%%%%% % % %%%%% %% %%%%%%%%%% %%%%%%% %%%%%% Batteryfication, Costlike roundprojection trip efficiency, cycle and the production volumes. The cost of lithium- shelf life, and other physical limitations. ion battery for hybrid auto plug-in was dropped from about $ 1000kWh-1 in 2008 to $ 268kWh-1 in 2015, -73% in seven years, while the goal is to reach a cost of 125 $ kWh- 1 by 2022 (an additional - 58% in seven years). Cost information and projections for stationary Other studies estimate significant cost reduc- battery packs are less available than compara- tions: CE Delft estimates reductions from $ 600 ble information for automotive batteries due to kWh-1 in 2012 to $ 320 kWh-1 in 2020, up to less spread, production and scale economics. $ 210 kWh-1 in 2030. On this basis, a lithium- There are numerous storage systems available ion of about 324 kWh (i.e. useful for running an on the market to match domestic 3 kW power electric bus) could cost about $ 100,000 by Electric vehicle batteries get second-life plants. Costs are quite different comparing sys- 2020, with further reductions expected for with Energy Storage Systems (ESS) tems with same storage energy: nevertheless, 2030. it is important to specify that it is often not enough to compare the battery convenience by dividing their cost by nominal stocked capacity at full charge (i.e. $ per kWh capacity). Al- though this method may be useful for compar- The Electric Vehicle (EV) market has blow-up ing batteries of the same type by brand or in 2017. EVs sales are growing up rapidly and model, the same estimation can be inaccurate key performance indicator) consequently also the quantities of used bat- and misleading when comparing batteries with teries. Cost reduction in Li-ion batteries has en- different operating principles or, in the same abled this revolution. Car companies and type, with different chemistry. Please consider researchers are now studying how to reuse that this KPI ( can those exhausted batteries after they are used be also misleading with suppliers that, al- in EV. This is the common environmental criti- though are providing same technology cism of EVs, and an important issue about the (lithium, for example) have different perform- destination of these used batteries. ance based on their specific technical chacteri- Second-life is the term used for when a retired tiscs. In order to improve the estimation, a or used EV battery is converted for use in an more appropriate valuation method, i.e. Lev- energy storage project. This process includes elised Cost of Storage (LCOS), needs to be in- the following stages: retired batteries recovery, troduced. It is necessary to divide the performance evaluations, and batteries pack discounted total cost of the system (upfront reorganization, second use in energy storage and ongoing capex, yearly opex and charging system, and batteries disposal and cost to overcome the inefficiency of the system, recycling/reuse. etc.) for the discounted total amount of discharged energy throughput over the battery EU Regulations, require the makers of batteries lifetime. This parameter returns a value much to finance the costs of collecting, treating and closer to the real cost of energy storage in bat- recycling all collected batteries, are already en- teries. The total discharged energy throughput couraging tie ups between carmakers and re- can be calculated as the discounted integral of cyclers. The fundamental problem is that the the useful storable energy vs time (from Begin- cost of recycling a battery is around €1 per kilo, ning of Life to End Of Life). the value of the raw materials that can be re- claimed is only a third of that. Cost of recycling In fact, the costs vary not only depending on is the current barrier, and rather than be recy- the type of battery used but also depending on cled, it is useful to reuse it. The lack of recycling 9

9 capacity is a real problem and for this reason and wind are paving the way for increased lot of carmakers thinks the answer lies in storage, while regulation around grid stability reusing rather than recycling EV batteries. and renewable adoption has been extremely These batteries can still have up to 70%-80% inviting as well. of their capacity. Therefore, after broken down, There are markets around the used batteries tested and repackaged they are perfect for and it is still not clear what from that functions such as energy storage. trade. The batteries world is constantly innovating, bene�its Forecast from Bloomberg New Energy Finance and a second-life EV battery is an economical (BNEF) estimate volumes around 95 GWh of choice! . This incr!!!!!!easi!!ng Li-ion de ! mand will help ! to continue to lower energy storage costs. Cost available used Li-ion EV batteries in 2025 that reductions! from adjacent markets such as bat- exceeds the size of the current stationary stor- tery powered electronics like EVs and large age market, and probably 25 GWh will be scale renewable energy growth such as solar reused in stationary EES.

Fig. 4 - BNEF forecast of used battery availability and estimated volumes for a second-life in stationary energy storage 2016-2025 (GWh). Source: BNEF

AG%ll rechargeable %%%%%%batteries have a limited life. ing %%%%%%%EV batteries and then insttalling hem di- Li-ion %%%%%%%%batteries are common in EVs and its life rectly %%%%%%into a stationary system. is ab%%%%out 2000-3000 charge-discharge cycles. % Before beginning%%% its second life however each Li-ion batteries%%%%%%% designed for EVs need high en- indi!%%%%%%%vidual battery must be evaluated. To help ergy de%%%%%%%nsity to maximize range while minimiz- ensure%%%%%%% that EV batteries are safely deployed in ing weight. %%%%%%%%%At the end of its useful life these their new %%%%%%%applications, UL is developing the batteries%%%%%% don’t die completely. They just reduce safety standard%%%%%%% UL 1974 that will aims to pro- its c%%%%%%apacity making them unsuitable for EV vide users%%%%% with that a used EV bat- usage but they%%%%%%%% can maybe get a second-life as tery will fun%%%%%%ction effectively in a residential, stationary energy storage systems. commercial or utcon�idenceility-scale storage application. %%%%%%%%%%%%%% This second-life Li-ion battery is a complex and UL is developing the safety standard with input %% %%%%%%% sometimes expensive process. To reuse them from carmakers, electric utilities and academic !%%%%%%%%%%%%% in other applications is not as simple as remov- institutions. %%%%%% %%%%%%% %%%%%%%%% %%%%%% %%%%%% %%%%%% %%%%%%100 %%%%%% %%%%%%% %%%%%%%% %%%%%%%%%%%%% The battery must be manually removed from an assets, operational and dispatch rules, and the EV and the pack disassembled into individual technical requirements for interconnection to cells. Then, these cells must be tested to deter- the grid. Appropriate grid codes updated can mine the battery’s state of health, sending bat- considerably reduce potential adverse impacts teries without sufficient remaining capacity to be of grid-integrated variable RE. recycled. Even within the batteries suitable for During the last few years generation from Re- reuse, cells must be sorted by similar remaining newable Energy Sources (RESs) has grown capacity, or else the second-life system perform- considerably in European electrical networks. ance would suffer. These are labour and energy Transmission system operators are greatly intensive processes, but efforts in both academia concerned about the impact of RESs on the op- and industry are underway to reduce costs. In- erational security and efficiency of their net- troducing automation in the process will reduce works and more in general of the ENTSO-E time and labour costs, as will convince battery coupled interconnected system. Grid codes have been manufacturers to use easy design for disassem- with RES started to be revised in order to harmonize the bly. rules regarding the connection of RES power There are a number of invaluable partnerships plants, both directly to the grid and in on both the supply and demand sides of the configurations. A main issue concerns process. Fostering relationships early on in the frequency control: frequency is greatly affected development of ESS with original suppliers such by RESs intermittency and its deviations must as Li-ion battery manufacturers and policymak- be limited as much as possible in order to guar- ers is the key to a lean, reliable supply chain. antee a suitable level of power quality. To im- At the moment, there are some limitations to our prove frequency stability, in the future, Grid current understanding of the second-life battery codes could extend frequency control require- opportunity because few vehicles have reached ments also to RES units, whereas today they the end of their life; there isn’t a clear indication are applied only to conventional power plants. of how much remaining capacity can be expected As some Countries (Australia, Germany, Korea, from these batteries after typical use. EV manu- several US cases, just for example) are proving facturers by using more standard battery com- yet, energy storage systems can be a possible ponents could help to second-life users, and the solution to increase the flexibility and perform- design of the original EV battery can also mini- ance of RES power plants: they allow genera- mize the cost of converting it for stationary stor- tors to modulate their power injections age. Pricing for second-life batteries are already without wasting renewable energy. In this very compelling with prices of €100 - 150 per paper, the authors studied the suitability of ex- kWh available and as EVs ramp up increasing tending frequency control to RES units inte- numbers will come to the market. grating them with energy storage systems. In There are different alliances and joint ventures, particular, the paper focuses on the impact of deals and solutions with large EV automakers frequency control on the storage lifetime by an- Overviewadvancing second-lifeof the EU grid usage codes including to point Nissan, out alyzing the power charge/discharge in re- bestGeneral practices Motors, forDaimler, emerging BMW, countries and Renault. sponse to real frequency oscillations. Actually, Grid codes set the rules and technical requirements for power system and energy market operation. The different types of grid codes facilitate:

National grid codes are used to define the elec- • The operational flexibility; trical performance requirements of generating • Operational stability;

10 • Security and quality of supply; discussed, ESS still requires careful analysis of the costs and benefits issues in case of some • Well-functioning wholesale markets. technologies not so exploited so far. The introduction of ESS as a grid code requirement In order to counteract this kind of problems, should be done in order to give freedom of national and international authorities updated choice to the power plant owners or the grid their standards and grid codes regarding the operators as regards the technology that connection of active end users to distribution Harmonization of standards, grid codes and matches the desired application. networks, including both distributed genera- testing procedures tions and ESS. Changing and evolving grid codes are necessary for changing and evolving grid supply and demand. Grid codes traditionally focused on static reactive power control, power factor and dynamic The Electricity Directive of the European Union requirements such as low voltage ride through 2009/72/CE regulates the unbundling of capability. The codes are now evolving into Transmission System Operators (TSOs), Distri- more demanding requirements including dy- bution System Operators (DSOs) and the func- namic control of reactive power, voltage and tions of electricity generation and supply. As frequency at the point of connection, and energy storage is not mentioned in the power quality. To create these new functions, 2009/72/CE, the position of energy storage in each interconnection code and technical rule relation to the unbundling requirements is not must be analyzed for similarities and differ- clear. As a result, electricity storage is generally ences in data requirements, specified curve regarded as a generation system. The Directive shapes and default values. Lately, storage in- also specifies that a TSO cannot “directly or industry is always looking for a quick solution directly exercise control or exercise any right but it must take around one year for implemen- over any undertaking performing any of the tation plus another one for network code functions of generation or supply” of electricity. changes. The grid requirements and codes are Nevertheless, a new European package (Clean applicable in different area; though most of Energy Package) is currently being finalized, them were originally developed for generating which also defines a clearer framework for systems and only a subset of these include spe- storage integration into electricity markets. In cific function for ESS and Battery Energy Stor- particular, the new framework includes provi- age System (BESS). sions on ownership and management of storage facilities, setting boundaries on the role of Creating grid codes on the consumption side regulated entities, which can own, manage or will help improve the storage system develop- operate ESS only in case of a market failure. ment scheme. For Countries with stringent grid codes, electricity storage can ensure that re- A grid code serves the mission of defining the newable power generators meet the required physical connection point requirements to be conditions. In order to counteract this kind of followed by energy production equipment in problems, national and international authori- order to be connected to the grid; in addition a ties updated their standards and grid codes re- Regulatory framework defines the require- garding the connection of active end-users to ments for permanent connection and the rele- distribution networks, including both distrib- vant network parameters to be supported, in a uted generation and electrical ESS. way to secure system operation. The introduction of ESS as a grid code requirement should Regardless of all the potential positive benefits be done in order to give freedom of choice to

10 the power plant owners or the grid operators and advances in control systems networks. as regards the technology that matches the de- Regulatory aspects and harmonization of net- sired application. Grid codes and requirements work codes are needed on national and inter- must be aligned with the technical capability of national levels. Standards must help fully the participating technologies. Care must be deployment of inverter based capabilities to taken to ensure that new grid codes do not cre- mitigate voltage impacts on distribution sys- ate barriers for new entrants, and that over tems and provide useful services to support specified requirements do not lead to an over- bulk system reliability and performance. Struc- supply of services beyond what is actually re- tural and technical harmonization of grid codes quired. Developing national and international are needed to address standards for new standards for ESS are now essential and vital emerging technologies like as wind, solar, stor- for the cost effective generation of this alterna- age and so on; principally inverter based dis- tive power, and to the growth of grid-scale ESS. tributed resources. Cooperation between By using ESS it’s possible to feed power to the TSOs/DSOs and international organizations grid so that production need not be scaled up (such as IEC, IEEE, CENELC, ENTSO-E) is nec- and down repeatedly to adjust to changing de- essary and should be supported to improve mand levels. These systems also absorb the harmonization of grid codes. In many Coun- over generation from wind and solar power fa- tries and grid companies, different grid codes cilities and release that power when needed. have been recently approved with the scope of The goal of some organizations, alliances or defining the connection rules for passive laboratories is to accelerate harmonization of and/or active end-users, updating their general standards, grid codes and testing procedures grid codes, or developing separate standards to carry out interoperability, scalability, safety, documents such as requirements to meet the quality, availability, and affordability in energy demands of fast-growing wind, PV power gen- storage components and systems. ESS must be eration and ESS. intelligently plugged into the utility’s existing While there has been strong progress in EES in information and operations technology. With- California, similar advance has not been ob- out established standards, components and served in Europe represented by the UK, and systems will come with proprietary connec- Italy. Australia and United States have experi- tors, and the process of plugging them together enced progressive renewable penetration dur- becomes a laborious task repeated for each ing the past two decades and started yet in new project, which will add to project cost and enabling RES coupled with Storage equip- lead time. Hardware that makes up an ESS: bat- ments. Other Countries, that are experiencing teries, Power Conversion System (PCS), meter- great RES penetration, are not pushing a lot on ing system, and the Energy Management these kind of technologies so far. Environmen- System (EMS) can be intelligently plugged into tal concerns and political regulations, in paral- each other and the electrical system. One of the lel with available technology, are the main most important processes is standardize com- drivers for the change. Transmission power munication and connections, which will accel- networks are well interconnected, robust and erate interoperability and scalability of ESS. dimensioned with sufficient reactive power Also, reduce engineering costs, enabling a ro- margins and spinning reserve to be correctly bust energy storage market, and improve stan- balanced. In addition, well known operational dardization procedures for safety and and market rules exist. All EU Member States efficiency. National and international standards and other European countries have their own and updated grid codes should be developed to Energy laws and Network Codes. These are in reflect and to follow technology improvements

10 a constant process of European harmonization. published the European network codes or grid In general, there is no mention of energy stor- codes for electricity balancing based on ACER’s age in European electrical energy legislation or guidelines that include the possibility for en- regulations; exceptions are Germany, UK and ergy storage facilities to become balancing ser- Italy. In Europe, electricity storage is increas- vice providers. ingly recognised as being the vital tool to de- There are a number of recent EU codes that al- liver the low carbon energy system efficiently ready clearly make the distinction between and the European Commission are in the pro- generation and storage. In general, there is no cess of considering amendments to electricity mention of energy storage in European electri- market design. cal energy legislation or regulations. Excep- Some generic principles should guide the fu- tions are Germany, UK and Italy. ture investment framework for storage: The most recent versions of European stan- • There is a need for a European legal and dards report the recommendations for the con- regulatory framework regarding general nection of generating plants, CENELEC TS technical principles for storage; 50549-1 (LV) and CENELEC TS 50549-2 (MV) distribution networks, whereas CENELEC EN • Storage should compete on a level playing 50438 regulates LV micro generating plants field with other technologies, and the tariff with rated current under 16 A. structures should ensure neutrality of storage; The EU launched in October 2017, the EU Bat- tery Alliance (EBA) aimed to create a competi- • Storage devices should not be restricted to tive battery value chain in Europe with a single service, as this would not be eco- sustainable battery cells manufacturing at its nomically efficient; core, making Europe a global leader in sustainable battery production and use, in the context • The TSOs should have access to data for of the circular economy. Europe intends to pre- central and distributed storage facilities for vent a technological dependence on foreign system security for all timeframes, as well competitors and capitalize on the job, growth as DSOs for facilities on their grids. and investment potential of batteries. The initiative responds to the need of promoting bat- Progress has been made towards grid code tery production as a strategic imperative for harmonization in Europe, which has been a the clean energy transition and the competi- binding EU regulation since May 2016 and is in tiveness of its automotive sector. The EBA is a force under EU law. One of the elements re- cooperative platform that gathers the Euro- called in the 2009/72/CE is the initiation of the pean Commission, EU Member States, the Eu- Agency for the Cooperation of Energy Regula- ropean Investment Bank and key industrial tors (ACER), which has developed the Frame- stakeholders and innovation actors from the work guidelines on electricity balancing whole value chain. Within this framework, the directed at the TSOs. These guidelines do not EU intends to step-up research and innovation specify any technology for balancing the elec- support to advanced (e.g. Lithium-ion) and dis- tricity grid and leave the use of energy storage ruptive (e.g. solid state) technologies and to open. Also, closer definitions will be needed in support the sustainability of EU battery cell local jurisdictions for electricity storage to manufacturing industry with the lowest envi- meet exacting local regulatory requirements. ronmental footprint possible, for example by The European Network of Transmission Sys- using renewable energy in the production tem Operators for Electricity (ENTSO-E) has process. This objective should be notably im-

10 plemented through setting out requirements newable energy sources act (EEG) covers for safe and sustainable batteries production. storage of RE source and the transmission Various instruments are being considered to code explicitly mentions storage as an op- drive robust environmental and safety require- tion for the reserve/balancing power mar- ments that could be a trend-setter in global kets without mentioning other applications markets. To this end, full advantage should no- of electrical energy storage. tably be taken of the EU Batteries Directive, currently under review and the Eco-design Di- European network codes and market design rective framework, where opportunities to de- packages may be important for electricity stor- sign an innovative and future-proof regulation age in the UK. In the UK, storage is explicitly are being pursued. A prerequisite to the sus- mentioned in the Capacity Market (CM) regu- tainability of a European battery value chain, lations. National Grid (the local TSO) held in notably in the context of the circular economy, 2014 a first CM auction which was also open is to analyse in detail the key determinants for for energy storage facilities. In 2016 a service the production of safe and sustainable batter- concerning superfast response to grid fre- ies. This should also cover the entire value quency fluctuations - called Enhanced Fre- chain, from sustainable and responsible supply quency Response (EFR) - was tendered by of raw materials to production processes, sys- National Grid and finally entirely awarded to tem integration and recycling. 200 MW of BESS In Germany, the grid codes make no special re- In Italy, the ESS connected to the grid has to requirements on storage; however it shall meet spect the regulation for the connection of a both the requirements on load and on genera- generator to the transmission/distribution tion, depending on its operation mode. In this grid. Italian grid codes CEI 0-16 (MV) and CEI context, reference is made to the technical 0-21 (LV) indicate technical rules for the con- guidelines of the German Association of Energy nection of passive and active end-users to the and Water Industries (BDEW) and association network. Italy has stipulated that the TSO and for electrical, electronic & information tech- DSOs cannot build and operate batteries under nologies VDE on integration of distributed en- certain specific conditions are envisaged. At ergy resources and electrical energy storage. the moment, ESS connected to the grid have to The BDEW at 2014 has proposed definitions of respect the regulation for the connection of a energy storage: generator to the transmission/distribution grid (Italian decree law 93/11). Italian net- An energy storage facility is defined as a facility work regulator (AEEGSI) passed a decision on which receives energy with the objective of provisions related to the integration of ESS for storing it electrically, chemically, electrochem- electricity in the national electricity system ically, mechanically or thermally and making (574/2014/eel) defining network access rules it available again for use at a later time. for energy storage and tariff to be applied in • An electricity storage facility in the electric- the different ESS configuration (i.e. connected ity supply system is proposed to be defined to a consumption unit, or a generation unit, or as an energy storage facility which receives stand-alone). electrical energy from a general supply grid, However, the TSO shall justify, through a temporarily stores it and later feeds the re- cost/benefit analysis, that the ESS is the most leased energy back into a general supply efficient way to solve the problem identified grid. (e.g. compared to building a new line). In any • About market integration, the German re- case the TSO should not receive remuneration

10 higher than the (measurable) cost of alterna- As described above, ESS is a technology which tive solutions. The installation of RE, particu- can increase the reliability and resilience of the larly wind energy in the United States, has electrical grid, especially in the presence of un- often required reinforcement of the transmis- predictable energy sources such as wind and sion infrastructure. With regard to grid codes, solar. In particular, ESS based on electrochem- there are some special provisions for renew- ical batteries probably will continue to be the able developers to comply with Federal Energy case over the next decade due to their versatil- Regulatory Commission (FERC). ity, maturity and declining installation costs. A large diffusion of ESS, mainly based on electro- In USA, the 2017 edition of National Electrical chemical batteries, is expected to take place in Code (NEC) presents the latest comprehensive the next future on both MV and LV networks. regulations for electrical wiring, overcurrent Recently, the integration of a BESS is investi- protection, grounding, and installation of gated as an alternative solution instead of mod- equipment. Major additions reflect the contin- ulating the hydraulic power. uing growth in renewable power technology; these items include dc loads, ac loads in stand- Both distributed generation units and ESS are alone systems and battery storage systems. required to contribute to the network stability; at the same time, in order to improve fault ride In South America, the Middle East and Asia the through capabilities, extended operating networks continue to develop at the same time ranges have been introduced for voltage and that a large integration of renewables is taking frequency in the interface protection systems place, driven mainly by available technology, of local energy sources. more accessible electricity prices, and investors bringing in successful experiences The ESS exploitation at the end-user level, in from other countries. The challenges of inte- coexistence with distributed generations, is en- gration are: couraged by a variety of different advantages and opportunities, such as: • Stability issues due to limited margins of reactive power • The forecasted decreasing cost of storage systems with a future diffusion involving in- • Lack of interconnection with neighbouring creased production capacity. countries and limited spinning reserve • Economic advantages for active end-users, • Poor power quality levels due to low short- enabling the optimal self-consumption of circuit ratios locally produced energy, alternatively to in- centivizing mechanisms and so on. • Networks generally weaker in the areas away from the main cities • Levelling the distributed generation power production, both in terms of daily peak For many power network providers, keeping shaving function (PV generators, wind tur- up with the ever changing and increasingly de- bines, etc.). manding grid codes is a draw on resources. It takes time to keep up, and to interpret chang- • Opportunities in the participation of to an- ing or new grid codes, and to then extrapolate cillary services markets how those codes may affect the situation and what may need to change in order to remain • Local supply of end-users in the case of dis- compliant. Changing and evolving grid codes tribution network outage. are necessary for changing and evolving grid supply and demand. • Contribution in supplying the load peak

10 power, reducing the contractual value of ad- ployment of ESS solutions have been identified. mitted power absorption and consequently Barriers to enter the market and a lack of a a consistent portion of the end-user bill. level playing field between different technologies have been identified as the most critical four The increased penetration of RE requires stumbling blocks. Covering the main factors categories changes to the standards and grid codes to en- limiting mainstream acceptance of energy stor- sure that power grids remain reliable and ro- age solutions, the mainmarket barriers barriers prohibiting Barriersbust, through to effective the support energy on thestorage technologies ex- market entry for ESS can be divided into ploitationlike these ones. ,: - the first includes , which place limitations on ESStechnological usage and the barri- as- erssociated energy trading due to a lack of market designs and business models. Several studies have examined the barriers to - the second consists of legislative barriers energy storage in different Countries. These , which may limit widespread access to barriers lead to cost allocation issues, distorted ESS solutions. compensation mechanisms, lack of price signals and bureaucratic issues and delays. The - the third consists financial of barriers , regulation complexity is due to the large num- which are controlled by the current political ber of benefits that ESS provides to electric grid climate in each target country. as energy services, ancillary services, transmis- - the last consists of . Typi- sion infrastructure services, distribution in- cally, the difficulty of measuring and mone- frastructure services, and customer energy tizing the value provided by energy storage management services. Such a large number of in the market, often a consequence of the ESS benefits have provided a wide market chal- market barriers mentioned above. In partic- lenges, regulatory bodies and regulatory barri- ular ESS is a highly capital intensive invest- ers. ment that requires long term price signals The impact of regulatory bodies on markets, to lower the risk and cost of capital, such as services, technology and stakeholders varies long term remuneration schemes basedclassi- on considerably between Countries and/or Re- ficationpayments for the availability besides pay- gions. European Union has a significant regu- ments for the energy exchanged. latory role and many other authorities have an legislation standardiza- Another barrier can be identified in the impact on the regulation of energy markets. tion of energy storage technologies. Differ- Standard organizations naturally affect which ent markets have different classification kind of technology is being utilized. Barriers systems, and therefore, different compensation exist related to the and mechanisms. This variety adds a further bur- of electricity markets and the related tech- den to energy storage providers because they nologies. Legislation and standardization are have to make separate business cases for each ancillary distinct as legislation is set and maintained by market. Receiving proper revenue compensa- services governments while standards are issued by tion for energy storage providers in the lack of standardization bodies. This forms a quite a recognized remuneration scheme is problem- complex field which requires careful consider- atic, especially in regard to providing ation when developing new applications and . Different wholesale power markets business cases for ESS solutions. have different compensation mechanisms, Lately, several barriers to the large-scale de- many of which are far from providing just com-

10 pensation to providers. Certain technologies development is rapidly increasing in Africa. are much faster in responding to frequency Long-time forecasts clearly indicate that most regulation needs than others. In the absence of of new energy consumed in Africa will come prices for ancillary services, it could be difficult from RES, leading to a need of ESS in order to to evaluate a provider’s proposal that includes balance RES’ main weakness (that is notably ESS (parties in fact could not look to other intermittency). wholesale markets to estimate revenue In South Africa, in recent years, a significant ef- streams). fort has been applied for the deployment of By summarizing all described constraints, it re- RES: PV, wind, and in particular Concentrating sults clear that an effective inclusion of energy Solar Power (CSP) using molten salts as TES. storage in grids is bringing several challenges Around 1.6 GW of grid-tied EES has to date to regulators, some of them still to be over- been installed and 1.4 GW of this storage come. However, an increasing number of regu- comes from PHS. South Africa, due to the im- latory bodies (especially in the EU, in the US pressive growth rate of RES penetration in the and in Australia case) have found ways for stor- last decade, was expected to be the largest age inclusion in their grids The result in the last market for energy storage for hybrid systems, couple of years is an exponential growth of the integration of renewable generation being storage applications (also at an utility scale the key driver for energy storage. Some studies level with multi megawatt plants realised) with have estimated the possibility to increase pro- a significant part of the investments coming duction capacity with 25 GW of wind and solar also from the private sector. This indicates that by 2025, including the implementation of ESS a considerably improved regulatory frame- to improve power supply and to reduce the fre- Currentwork and EES clear scenario remuneration in African schemes regions have quent grid outages. There are also ideal appli- been put in place. cations for nano-grids and micro-grids (in particular mining sites, rural communities). BESS are expected to be included in remote power systems given the lack of grid connec- tivity and RES intermittency. On a larger scale Focusing on Africa’s region all the topics previ- however (utility scale), still there are no clear ously discussed have to be correlated with the plans in South Africa for large scale battery specific political and economic contest. Actu- storage coupled with PV (the only coupled ally in such a region the EES market is still lim- storage systems are those associated with CSP ited by the following barriers: plants). A first approach to utility BESS has • Limited renewable energy development; been taken in 2017 by identifying the existing Research and Innovation Centre of Eskom in • Limited local technical expertise and under- Johannesburg to be used to make comparisons developed grid infrastructure; between different energy storage technologies and solutions available on the market and by • Political and/or economic instability, and starting to install utility scale BESS for testing. access to affordable financing; The facility is undertaking tests on lithium- • Highly regulated, state-run energy markets; ion storage batteries and sodium nickel chloride battery technology, with plans to test • Low-cost fossil fuels. “another three technologies” in the near future. In October 2018 Eskom announced the inten- However, in the latest years, due to the con- tion to deploy a portfolio of 360 MW / 1440 stant decrease of RES costs, renewable energy MWh of BESS across 90 sites with size ranging

10 from 1 to 60 MW. However, there is a lack of 16 terawatt hours (TWh) of electricity an- alignment with state energy policy since the nually, costing $5 billion for fuel alone (or draft “Integrated Resource Plan 2018”, defin- over $0.31/kWh on average), showing that ing the required additional capacity mix in the Africans are willing and able to pay for elec- country up to 2030, does not anticipate the in- tricity. Combining solar PV with well sized stallation of any BESS. storage systems can yield significantly lower unit costs than diesel, without taking The conclusion is therefore twofold: on the one into account further cost reductions ex- hand it is clear that BESS will play an increas- pected in the coming years. ingly central role in the energy mix of South Africa. On the other hand, it isn’t yet clear • Energy experts estimate that South Africa whether its large development will be immedi- needs 4GW and 24 GWh of energy storage ate or could be delayed due to the need of capacity already, on top of the 1.3GW of the more awareness of decision makers over the Ingula pumped storage project. reliability of BESS systems and an even faster acceleration of the price drop of BESS systems. The same approach of South Africa is likely to Africa may benefit the most from energy stor- Opportunitybe taken by the for other energy African storage States in in Africa the com- age, compared to other regions, as it offers over ing future. other regions several advantages: • Excellent solar irradiation that suggests a wide use of this source in the future coupled with ESS; Current Africa’s weak power infrastructure • High reliance on costly diesel especially for and rapidly growing electricity demand create off grid applications and for grid connected a unique environment for a future mass-scale flexible generation (due to limited availabil- adoption of energy storage across a variety of ity of gas); use cases. In many ways, the African market presents a more compelling business case than • Around 600 million people that still do not even the US and Europe. In addition to grid have access to electricity; support and integration of renewables into the electricity system, current status of Africa’s • Easier project implementation (large space power grids creates an opportunity to supply available); power either cheaper than diesel (when coupled with PV) or to bring “round-the-clock” • “Savvy” energy consumers, open to new so- electricity to remote, unconnected locations lutions. (e.g. mines, rural villages). Energy storage will become also a key factor Bushveld estimates the addressable market for for customers in Africa where weak grids suffer utility scale energy storage in Africa to be 80- of frequent outages (in particular blackouts 90 gigawatt hours (GWh), or $20-30 billion. and fluctuations of frequency or voltage). The Key facts include: installation at a consumer’s connection point of a BESS will constitute a defensive efficient • Electricity demand in Africa will grow at tool against power outages in order to 4.5% p.a., with commercial and industrial smoothly guarantee the continuity of the in- customers making up 2/3 of total demand. dustrial production. In case of significant en- • Diesel generators in Africa produce around ergy price fluctuations during the day it will

10 !!! !!!!!!!!! !

! fast response !allow also to make savings on the energy pur- one in Ciminna’s substation in Sicily) were de- chasing costs. veloped. Several ESS systems were installed (about 8 in Sardinia and 6 in Sicily, about 1 MW Concerning on grid ESS, it is expected that they . power each), able to ensure time will be efficiently installed coupled with exist- re- and based on power intensive% technologies and ing RES pants. Whether a grid will be unable to serve frequency and power regulation commercial chemistries (lithium ion of differ- absorb the power instantly produced by the ent types, sodium-chloride and vanadium) The RES plant and frequent curtailments are likely %%%voltage regulation target of the installations was to provide happen during the plant lifetime, storage can , (support overcome the problem. Storage combined with % to low system inertia coming from traditional RES plants could also reduce the unbalancing generators), and to work caused by variability of RES power production, with integrated approach with TSO’s grid man- !this would contribute to grid stability and agement. In the picture below is shown an allow a higher!!!! penetration of RES in the energy overview of Codrongianos’ storage lab. mix. A proper dimensioning of BESSs in this caseStorage is strategical in developed in order markets to obtain the best economic performance of the RES+ESS plant.

%%%%%% %% % % Due to%%%% the geographical characteristics%%% as well %%%%% as the peculiar%%%% load-generators distribution%% %% %%%% (major%%%%%%%% industrial loads in the north, intensive %%%%% RES deployment in the south) Italy has been % %%%%%%% %%% one of the first country in the world to face the %% %%%%%% %%%%%%% issues of RES introduction and to deeply test %%%%%%%% % %%%% functions and potentiality of energy storage @6/A!R!!Q!I1-&1,/6',1$!6,$%';;'%61,! systems (ESS).% %%%%% %%%%%% /%Storage Lab %%%%%%% In the next!!!!! paragraphs, an overview of some of %%% %% %% the main ESS projects both on distribution and Energy storage!! for the Italian Transmis- siontransmission grid grid will be performed. %%% % %% experience also provided the pos- %%%% % sibility to deal with multiple technologies at %%%%%% the same time and their combined operation, % testing their advantages and limits under dif- %%% %%% energy inten- ferent operating conditions. Multiple skills to sive %%%%%%%%% Terna, the Italian% TSO, launched in 2011 a huge manage specific battery characteristics (ther- power%%%%%%%%% intensive program of ESS installations to address both mal management for lithium, high temperature %%%%%%%% congestions on HV grid (so called operation for sodium chloride, chemical as- %%%%%%power intensive projects) and safety of the electrical system pects for vanadium redox batteries) resulted to ( %%% projects).%%%%% be a milestone of the project. Electrical simpli- % %%%%%%%Storage Lab % fied models have been elaborated and tested In the context of projects, in % %%%%% for the various storage systems, leading to the order to increase the safety of the electrical capability of predicting ageing of a storage sys- %system of Italian major islands, two storage tem depending on chemistries and applica- laboratories (called s, one in Co- tions, making% the Italian TSO%%%% prepared to know drongianos’ HV/MV Substation in Sardinia and% which type%%%%% of storages (or aggregated group of% %%%%%%% 10 %%%%%% %%%%%%%% ! % % % % %%%% %%% 1 %%%%%% ! % %%%%%% %% %% %%%%%%% %% %%% % % %% %%%%% ^ % % % % %%% %%%%%%% %%%%%%%% %%%%%% %%%%%%% %%%%%%% %% %%% %%%%%%% %%%%% %%%%%%% %%%%%%% % %% %% % %%%%% %%%%%% %%%%%%%%% %%%%%%% %%%%%%%% %%%%%%% %%%%%%% %%%%%%%% !!! !!!!!!!!! !

!!!! !!!!!!!!! !

! ! sive ! % %

% % storages) will better fit to provide the specific projects are ongoing, with annual public energy intensive% Energy storage for the Italian grid services it will procure in the near future reportsDistribution of the results.grid in the electricity market.% ! !!!! !! As far as projects are con- ! !!!! cerned, a first step in the reduction of conges- !! tions on HV grid portions with high wind penetration required the installation in the One of the first Italian ESS project, developed Campania Region of three huge ESS (about 12 starting from 2012, promoted the improve- MW/80MWh each) based on sodium sulphate ment of distribution grid in Southern Italy re- technology (NAS), having the capability to gions with high RES penetration providing the store energy for enough hours to reduce 150kV possibility to test Energy Storage Systems in lines congestion as well as to support primary primary substations to: regulation, voltage regulation and increase ter- • reduce the variability of power flow due to tiary reserve. wind gusts or the passage of clouds; %%%%%%%% %% %%% % • Make the%%%%%% exchange of energy profiles be- %%%%%%%% %% %%% tween%%%% HV/MV substations%% and National % %%%%%% %%% %%% grid more predictable. %%%%%%%% %%%% %% %%% %%% %%%%%%% In the picture below, one of the three installa- %%%%%%%% % %%% %% tions foreseen in the project, the 2MW/1MWh %%%%%%% %%%%%%% ESS in%%%%%%%% Campi Salentina (LE) is shown. Three 40 % %%% %% %% %%%% feet container%%% were designed and equipped%% %%%%%%%!!! ! ! with%%%%%%%% proper auxiliaries to house batteries, PCS %% %%% %% %%%% %% %%%% (inverter),%%% EMS (Energy management system)%% @6/A!P!%%%%%%%Q!+('846%.;;'!6,$%';;'%61,! %%%%% % %% %%% and MV equipment%% to connect%%%% the storage to %%%%% %% %% %%%% %%%%%%% 20kV%%%%% grid. % %%%%%%% %%%% %% %%%%% %% %% %%%% %%%%% %%%%%%% %%%%%%%%%%%%% %%%%%%%% In the picture%%%%% above, a detail of the installation %%%%%%% %%%%%% in Scampitella. NAS battery modules are inside %%%%%%%% %% %%% dedicated buildings, each of them connected to %%%%%% %% % a PCS container. Additional four containers are %% %%% required for auxiliaries, control system, MV de- %%%%%%%%%% % vices. Since once heated up, sodium chloride %%%%%% batteries have to be kept continuously at high %%%%%%%% %%%%%%% temperature (300°) up to the end of life, the re- %%%%%% %%%%%% quired degree of redundancy on auxiliary feed- %%%%%%% %% %%% ing is 4. Scampitella SANC (Italian acronym for % %%%%%% @6/A![!C!I'846%%%%%%!+';.,%6,'!K\*L! non-conventional energy storage system) was %% %%% % %% %%%% connected directly to the HV grid by means of !!!!!!%%%%%% a dedicatedpower Substation intensive built on purpose.energy inten- Spe- %%%%%%% %%%%%%%% %% %%%% cific results of transmission grid ESS projects %% %% %% % The flexibility%%%%%%% of lithium -ion technology was %%%%%%%%are available on public reports. ! %%%%%% adopted%% to allow both energy (time shift, peak %% %%% % Both%% the %%%%%and the shaving…) and power (frequency and voltage ! ! %%%%%% %%%%%% %% %%%%% 1 ! %%%%%% %%%%%% %%%%%% %%%%%% 11 %%%% %%% %%%%%% %%%%%%%%% %%%% %%% %%% %%% %%%%%%%%% %%% %%% %%% %%% %% %%% %%% %%% %%%%%%% %% %%% % %%%%%%%% %%%%%%% %%%%% % % %%%%%%%% %%%%%%% !%%%%%%% %%%%% % % %%%%%%% %%%%%%% %%%%%%% % %%%%%%% !!! !!!!!!!!! !

!!!!

regulation…) operating conditions. A modular system lets EGP store the energy produced at structure based on 8 inverters allows high rate peak hours and put it on the Grid in the evening of availability. Proper and safe operating con- hours. The BESS is composed by 2MW/1MWh ditions are granted by a dedicated design of NaS battery, PCS (Power Conversion System) is HVAC system together with a smart control and a by-directional Inverter, LV/MV transformer supervision system that collecting input from with MV switchgear and a control system. The batteries and PCS allows the ESS to perform in Manufacturer is GE ENERGY. a safe and accurate way according to the input coming from grid operator. EGP added to the system an upper-level site controller, defined MASTER SCADA, in order to The multiple experiences that took place in the manage the PV plant and the BESS to act as a last 5 years on both Italian transmission and single energy production system in respect to %%%% %% distribution grid result to be a unique mile- the DSO. stone in% the deployment%%%% of new assets for grid evolution.%%%%%% Capabilities and issues of different Catania1%%%%%%%%% Storage can perform: storage%%%% technologies were tested%%% and are the %%%%%% % • Primary%%%% frequency regulation1a; %%% Renewablebasis%%%%%%% for a furtherintegration intensive and Off-grid deployment hybrid of %%%%%%% systemsstorage in%%%%%% a context of further renewables • Secondary and tertiary frequency regula- spread.%%%%%! !!!%% tion1b %%%%%%%%%%(reserve power); %%%%%%%!! •%%%%%%%% Power generation production time-shift2a, Pietragalla Storage %%%%%%%%% %and; %%%%% %%%% % %%%%%%% • peak shaving2a. • %% %%% EGP currently%%% has 4 plants integrating Energy %%%%%% Storage%% System. These are %%%%%currently in opera- ! !! Location: Italy%%% %% tion%%%%%%% and incorporate different configurations % ofCatania the proposed 1 Storage solution, including the use hy- % %%%%%%% Type:%%%%%% Grid-scale Wind+BESS %% brid Renewables generation systems. %%% %%%% In operation%%%%%% since 2015 %%%!! !! %%%% Pietragalla%%%%%%%%%%% is a 18MW WIND! plant, HV connected. The BESS is composed by 2MW/2MWh %% %%% %%%%%%% Location: Italy SAMSUNG Lithium battery, PCS is a by-direc- %%%%%%%% %% %% Type: Grid-scale PV Solar+BESS tional Inverter, LV/MV transformer with MV %%%%%%%% In operation since 2015 switchgear% and a control%%% system. The manufac- %% turer is SAMSUNG SDI. %% % As in Catania1,%%% EGP added a MASTER SCADA % controller in order%%% to manage the WIND plant and the BESS to act as a single energy produc- % % % tion system in respect to the TSO. %%%%%%% % %% %%%%%% Pietragalla%% Storage can perform: %% % % Primary frequency regulation; %%%%% ! %%%% % •% Secondary and% tertiary frequency (reserve ! %% power);%% %% Catania 1 is a 10MW PV plant, MV connected, operated at 8MW due to DSO transmission line •% Power generation%% production time-shift and lower capability. The installation of a storage peak shaving;%%%%%%% % %% %%%% %% %%% %% 2 %%%%% % %%% %% % %% 11 %%% %%% %%% %% % %% %%%%%%%% %%%%%%%% %%%%%%%%% % % % % % % %% !!! !!!!!!!!! !

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• Voltage regulation by absorption/delivery of the construction during Q4 2014, the activi- of reactive power. ties of monitoring and field testing are taking Further developments EGP is trialing in Pietra- place since the beginning of 2015 with plant galla Storage are: startup in April 2015.

While ensuring reliable energy supply to the • Island operation of portions of the net- village inhabitants, several possible models are • work1d %%%%(like mini-grid composed by a por- %%%%%%%% being introduced and tested in the microgrid, tion of the grid, the storage and the wind %%%%%%%%% starting from the installation of smart meters farm); %%% %%%%%%% %%% % for the active management of the energy re- • Participation in the black start of the power %%%%%%%%% %% sources. The project presents effective syner- system 1e(same as before, but especially gies%%% between innovation and sustainability%%% % % %% after a blackout); with relevant%%% positive impacts on%%% the local %% %% %%%% %%% • Spinning reserve 1f (provide synthetic iner- community, meanwhile, enabling a broadening % % % tia to contribute into grid frequency stabil- of on the%%%%%%%% field experience on such advanced %%%% ElectroSelf25 Dry cooler %%%%%%Heater & %% plants which are experiencingmodules fast growth, and ity); demineralizer Hydrogen purifier

%%%% are%%%%%%%% targeting emerging markets. Oxygen purifier • In addition% to standard%%%%% Grid Services, we % %%%%%% %%%%%%%%% want to also%%% develop a function for real-time % %%%% Ollagüe !! %%% Gas Inlets & %%%%%%%Outlets efficiency calculation for DC/DC and DC/AC %% %%%%%Cooling pumps & %%%%%%%%% % glycol tank %%%%%%%%%Qaux & Qcooling conversion. %%%%DC bus FF & gas detection %% %%%%%%%% system %%%%%%%% %%%%% Hydrogen % %%%%%%%%% %% %%% storage tank %%% %%%%%%20’’ hard top %%% %% %% container Location: Chile %%%% %%% %%%%%%% %%%%% Type: Microgrid% % % %%%%%%%%

Pressure %%%%%%%%%% reduction panel In operation since 2015 %%%%%%!!!!!!!!%% %%%% % %%%%% % %%%%%% %%%%% Fig. 10 – Cerro Pabellon Hybrid Storage %%% !! %%%%%% System% %%%% %%%%%%% %% %%%%% %%%% %% %%%%%%%%%%%%% %%%%%%%%%%%%%%% %%%%% %% % %%%%%%%% %%%%%% %%%%% % %%%%%%%% %%%%%% @6/A!`!Q!U;;'/_.! The!!!!!!!! plant is installed in Ollagüe, a small cut off %%%% mine village, 160km%%%%% from Calama, at the bor- %! % %%%%% der%%% of Bolivia. Ollague’s little% more than%% 200 in- % %%%%%%%% habitants% are mainly%%%%% devoted to their domestic%% ! % %%%% cattle,%%%%% and modest catering at the border. The% %%%%%%% village%%%%%% is not connected to the SING (Systema %%%%%%% Interconectado% del Norte Grande) and there An off-grid%%%%%% hybrid system has been built in the only existed a micro grid circuit powered by a desert of% Chile aiming% to supply energy to a 250 kW diesel generator, supplying electricity for no more than 16 hours a day (none is pro- high altitude village (3700 meters AMSL), lim- %%%%%%%%% !!! ! vided from 1 am to 8 am). The changes in tem- iting as much as possible the usage time of the %%%%%%%%%%%%% existing Diesel generator. After the completion perature are extreme, reaching a delta of 22°C %! % %%%%%%%%%%% %% % %% % % %%%%%%%%%%%%% ! % %%% 3 %%%%%%%%%%%%% %%%%%%%%%%%%%% 11 %%% %%% %%%%%%%%

%%%%%%%%% %%%%%%%% %%%%%%% % %%%%%% %%%%%%% %%%%%%%% %% %%% %%%%%%%% in a day time, with minimums of -20°C. designed to participate to the PCR1a (Primary The project is made up of a non-SING-con- Control Reserve) market. In addition, synergic nected hybrid off-grid plant, with PV solar and services with around 60 MW wind farms con- wind components, battery storage, and a nected to the same substation will be tested backup diesel generator. Additionally, some (e.g. unbalance minimization, curtailment re- thermodynamic cogenerating concentration duction, ….). systemsCerro Pabellon have been Hybrid connected storage to the system same com- mune of Ollagüe, providing hot water and elec- The first 2MW section is already in operation tricity to the school. from May 2018, while additional 20 MW will Wolisso PV+BESS be commissioned between December 2018 and January 2019. EGP recently completed the construction of an hybrid storage system (Hydrogen for long duration + fast Lithium Titanate battery for dynamic compensation). System is able to Location: Ethiopia provide 24 hours a day green energy and is Type: Integrated with CUAMM hospital completely diesel-free (even for back up, Under construction thanks to hydrogen storage), able to seamlessly connect to and disconnect from the grid, and CUAMM hospital in Wolisso is subject to containerized for fast “plug & play” deploy- around 6 to 8 electricity supply interruption ment. daily. This causes risks to pationt’s health as As a commercial application of Ollagüe and well as high costs for diesel use. Cerro Off-grid systems, Enel recently completed the supply of a microgrid with 2 system Enel Green Power is building up a photovoltaic consisting of 500kW / 1MWh ESS each to For- plant coupled to a lead acid battery system to mulaE plus grid monitoring and control de- guarantee 100% reliability of electricity supply vices, in order to improve green energy and significant reduction of diesel usage, with consumption of the Electric Race vehicles of consequent cost savings and lower environ- Cremzowthe series. BESSMoreover, EGP is currently working mental impact. on other initiatives involving BESS, among which: The plant is under construction and will be commissioned by November 2018, then do- nated to Wolisso hospital. Location: Germany Type: Integrated with wind park Training of local people for autonomous man- Under construction agement of the plant is also part of the project and will guarantee CUAMM autonomous oper- Batteries are sized 22MW/33.8 MWh. They are ation and management of the new plant.

11 !!! !!!!!!!!! !

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Comparison of major energy storage technologies by technical characteristics Table 1 Power rating Discharge time Cycles, or Self-discharge Energy density Power density Efficiency Response (MW) lifetime (Wh/l) (W/l) time

100 – 2500 4 – 16h 30 – 60 years ~ 0 0.2 – 2 0.1 – 0.2 70 – 85% 10 s – min Pumped Hydro 10 – 1000 2 – 30h 20 – 40 years ~ 0 2 – 6 0.2 – 0.6 40 – 70% min Compressed Air 0.001 – 20 sec – min 20000 – 1.3 – 100% 20 – 80 5000 70 – 95% < sec Flywheels 100000

0.1 – 100 1 min – 8h 1000 – 10000 0.1 – 0.3% 200 – 400 1300 – 10000 85 – 95% < sec Li-ion battery 0.001-100 1 min – 8h 6 – 40 years 0.1 – 0.3% 50 – 80 90 - 700 80 – 90% < sec Lead-acid battery 10 – 100 1 min – 8h 2500 – 4500 0.05 – 20% 150 – 300 120 – 160 70 – 90% < sec Sodium-sulphur battery 0.1 – 100 hours 12000 – 14000 0.2% 20 – 70 0.5 – 2 60 – 85% < sec Flow battery 0.1 – 1 ms – sec 100000 10 – 15% ~ 6 ~ 2600 80 – 95% < sec Superconducting Magnetic 0.01 – 1 ms – min 10000 – 20 – 40% 10 – 20 40000 - 120000 80 – 95% < sec Supercapacitor 100000

0.01 – 1000 min – week 5 – 30 years 0 – 4% 600 (200bar) 0.2 – 20 25 – 45% sec - min % Hydrogen 50 – 1000 hour – week 30 years Negligible 1800 (200bar) 0.2 – 2 25 – 50% sec - min Synthetic Natural Gas 1 – 150 hours 30 years n/a 70 – 210 n/a 80 – 90% min Molten Salt (latent thermal)

Excludes technologies with limited experience to date from multiple sources.

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! (FIR), provides a major opportunity for !"#$%&'&()%"'$%*((+%&)(&'transforming)(,%*-.% the continent and generating Africa faces a formidable unemployment chal- the needed jobs, without necessarily follow- lenge. Its demographic profile implies a major ing the structural change pattern experi- surge in the share of working-age population enced in South East Asia and Europe. in the next two decades, while overall popula- • Africa would not succeed to absorb a signif- tion will continue to grow rapidly. The issue on icant portion of the projected increase in its whether the continent’s current economic%%%%%%%%%%%% % labor supply, even if the employment in in- growth trends will be sufficient to absorb at dustry were to grow at an average rate least a significant portion of the projected labor 1 twice as high as that experienced by the supply increase has been amply discussed, /01(+#20%3'+#44'5% % Asian Tigers during the last 25 years.% Thus, with an overwhelming negative answer . This Africa cannot afford missing the opportuni- paper claims that innovation could constitute ties offered by the FIR, and should embrace, the key to exploiting the continent’s demo- not resist, the ongoing wave of technological graphic profile as an opportunity for economic innovation. Relying on old-fashioned indus- transformation. In particular, it aims at convey- trialization will nor deliver the needed jobs, ing two messages: Innovation%%%%% and the new global economy % even under most optimistic assumptions on !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! %%% %% %% industrial growth. •! The%%% new wave of technological% innovation,% the so-called%% Fourth Industrial%%%% Revolution : %% %%%% 1 See for instance Louise Fox, Alun Thomas, and Clairy Haines “Structural Trans- %%% formation %%%%%%in Employment and Productivity: What Can Africa Hope For?” IMF,% Departmental Papers%%%%%%% April 2017 There has been%%%% much talk about the Fourth In-% % %%%%% dustrial Revolution (FIR) and its impact on the ! %%%% global economy. The basic idea is that the new %%%%%%% %%%% wave of technological innovation would not %%%%%% %% %% % %%%%%%% 16 %%% %% %%%%%%% %%% % %%% %%% %% %% 1 %%%%% % %%%% %%%%% %% %%%

% %%%%%%% %%%%%%%%% %%%%% %% %% %% %%%%%%% %%%%%%% %%%% % %%%%% %%%%%%%% %% %%%% %%%%%%% only shift the production-possibility frontier has encountered major hurdles in France, Italy, through substantial gains in total factor pro- and most recently, Egypt, because of pressures ductivity, but would also2 radically alter con- from taxi drivers, who have managed to influ- sumption, communication, and social ence regulations in their favor. organization patterns . These oppositions have the potential to slow It is clear that the new wave of innovation has a down the pace of innovation. Their strength huge potential for improving productivity and and their likelihood to be effective in slowing living conditions. However, these benefits are un- down the innovation will crucially depend on: likely to materialize without causing major disruptions. Vast portions of the existing productive How large the sector that comes under threat capacity will become obsolete and many assets is relative to a country’s economy. will become stranded. For instance, driverless How young is a country’s workforce. The cars and their sharing are likely to make individ- younger the easier to adapt to the new skill re- ual car ownership obsolete, the way in which quirements.Innovation andOld dogsAfrica do not learn new tricks! typewriters disappeared quickly in the early 1980’s, or the production of cameras and fax machines did in the last decade. Similar changes are 3 likely to take place in other key sectors, such as energy with the demise of traditional grids in The notion that Africa is technological prone favor of mini generation-consumption grids, and has been already discussed in the literature . the financial sector, with the demise of traditional banking as the result of the adoption of The mobile-banking revolution, in particular block-chain technologies that can eliminate in- the fact that Africa appears the most mobile- formation asymmetries. banked continent in the world, seems to be behind this idea. There are no doubts mobile The process is unlikely to be smooth because banking is transforming the continent, by con- of its very nature and dimensions. It is difficult necting previously excluded Africans to the for- to imagine that the automotive industry will re- mal financial sector and making a difference in convert to the new consumption and produc- providing opportunities for market participation models in its totality. There will be tion even to people in most remote areas of the winners and losers. There will be a major im- continent. pact on employment levels and on the skills that will be required. Many workers will not be The continent is also seeing the onset and able to re-tool themselves toward the skills re- rapid expansion of, eHealth, edTech, agriTech, quired by the new production model. three solutions specifically adapted to the local needs related to some of the greatest chal- Clearly, the adoption of new technologies will lenges Africa faces: health, education and food face opposition. In fact, this has already been security. the case for driverless cars on security grounds, which is difficult to make sense of, if Drone technology already helps to deliver med- one thinks of how unsecure traditional cars ical goods and constitutes a possible solution are. The diffusion of Uber or Uber-like services to the medical infrastructure deficiency, for in- 2 See “The Fourth Industrial Revolution” by Klaus Schwab World Economic 3 See for instance the WEF report “The Future of Jobs and Skills in Africa: Forum 2015 Preparing the Region for the Fourth Industrial Revolution” May 2017.

11 ! !!!!!!!!! !

! stance, in Rwanda. This technology already pered by strict security requirements. Quanti- helps to maintain portions of the electric- tative evidence on this idea,4 together with an power grid that come under threat from the analytical framework, can be found on a recent tropical vegetation in Cote d’Ivoire. paper by Fanizza and Boly .Here, we use three graphs to illustrate the point. 5 Well-structured web-based classes make basic education now affordable not only in the urban First, the map below provide provide a sense slums but also in the remote areas of Kenya. of the extent to which innovation has spread around the continent. On-line platforms provide now customized advice on planting patterns and timing to many farmers in Nigeria. New technologies, such as block chain, in addition to limit information % asymmetries in financial markets, can have a favorable impact on governance and corrup- tion. Their use in managing public resources % would greatly increase accountability by virtually making transparent and openly accessible all government transactions. %%% %%%% • Even plain-vanilla digitalization of pay- %%%%% ments businesses and people make to gov- %%%% %%% ernment has proved to have a favorable %%%%%%%% impact on reducing the scope for corrup- tion. For instance in Tanzania it has already: %%% • Empowered its tourism sector by reducing There are encouraging signs in several coun- economic leakage from cash payments, such % tries, which have seen a significant numbers of as conservation-park entry fees, by over 40 technological hubs to emerge. Of course, the %%%% %% percent, supporting investment and em- picture for the continent is not uniform, and ployment. !! %%%%%%%% there are countries that have lagged behind %%%%%%% % • Cut bureaucratic inefficiencies, including re- and do not appear quite technology prone. %%%%%%% ducing import customs clearance times %%%% %%% from nine days to less than one day. %%%%%%% • Increased transparency between citizens %%%%% and governments in tax payments, by pro- %%%%%%% viding electronic proof of payments and %%%%%%% protecting people against fraud. %%%%%%% % %%% The literature appears to explain the some- %% %%%% % what unexpected “blossoming” of creative ap- %%%%% % 4 See “Innovation and Africa: Much to Gain, nothing to Lose!” by D. Fanizza plications of new-technologies in part of the and A. Boly, African%% Economic Consortium, June%%%%% 2018. 5!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! continent with a more flexible regulatory envi- http://www.visualcapitalist.com/africa-exploding-tech-startup-ecosystem%%%%%%%% ronment than in industrial countries, where for %%%%%%% instance the use of drones for delivering goods %%%%%%% or gathering economic-relevant data is ham- % !

8 %% %%%%% %% %%% 11 %%%%%%% ! %%%%%% % %%%%%%% % %%%%%

% %%%%%%%% %%%%%%%%% % % % %% ! !!!!!!!!! !

! Second, a comparison of the diffusion rates for Third, the graph below compares the diffusion Kenya’s mobile-payments (M-Pesa) and mobile of mobile phones in Africa to those for the all phones, and those of several historical innova- OECD countries. If the experienced trend since tions in the US. These two technologies have 2000 continues, already in 2021 the number of spread much faster than any other “transform- mobile connections in Africa would equal those ing innovations” have in the US. in OECD countries, and thereafter would it would become substantially higher. Of course, a caveat is needed, because there are no reasons why this trend should continue unabated over the years.!!""#"#$"#$%"#$%&"#$%&'"#$%&'("#$%&'(#"#$%&'(#)"#$%&'(#)*"#$%&'(#)*#"#$%&'(#)*#+"#$%&'(#)*#+*"#$%&'(#)*#+*,"#$%&'(#)*#+*,#"#$%&'(#)*#+*,#-"#$%&'(#)*#+*,#-("#$%&'(#)*#+*,#-(."#$%&'(#)*#+*,#-(.%"#$%&'(#)*#+*,#-(.%*"# $%&'(#)*#+*,#-(.%* /01&"(//0/01/01&/01&"/01&"(2 01&"(2'(#)*3+"#4*5678*2'(#)*32'(#)*3+2'(#)*3+"2'(#)*3+"#2'2'(#)*3+"#4*2'(#)*3+"#4*52'(#)*3+"#4*562'(#)*3+"#4*5672'(#)*3+"#4*56782'(#)2'(#)*2'(2'(#2'(#)*3+"#4(#)*3+"#4*5678* ##)##))9:";<*)9:";)9:";<)9:")9)9:9:";<*

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% (! '! &! % Third, the graph below compares the diffusion %! %$$)! %$$'! %$$*! %$"#! %$"(! %$%"! %$%+! %$))! %$)'! of mobile phones in Africa to those for the all $! %$$$! %$"%! %$%&! %$)$! OECD countries. If the experienced trend since 2000 continues, already in 2021 the number of %%% %%%% mobile connections in Africa would equal those ,-./!0123!425617!89:;<6=>62?@! %%%%% in OECD countries, and thereafter would it ,-./!0123!425617!89:;<6=>62?!A!B<2C7;>7D@! would become substantially higher. Of course, %%%% %%% a caveat is needed, because there are no rea- EF<6;G!0123!425617!89:;<6=>62?@! %% %%%%% %%%%%%%% sons why this trend should continue unabated EF<6;G!0123!425617!89:;<6=>62?!A!B<2C7;>7D@! %% %%% %%% over the years. %%%%%%% Second, a comparison%%%%%% of the diffusion rates for % Kenya’s mobile-payments%%%%%%% (M-Pesa) and mobile% phones, and those% of several historical%%%%% innova- %%%% %% tions in the US. These two technologies have %%%%%%%% Moreover, the fact that Africa has a relatively !! spread much faster than any other “transform- %%%%%%% % small “incumbent sector” (e.g. manufacturing), ing innovations” have in the US. %%%%%%% and a young population structure can make it a fertile ground for ongoing global wave of %%%% %%% technological innovation. Based on estimated %%%%%%% parameters from a cross-country panel data set %%%%% for mobile- phone technology Fanizza and Boly %%%%%%% (2018) have simulated the different impact %%%%%%% % that these two factors could have on the diffu- %%%%%%% % % sion rates in Africa and in the OECD countries. %%% The simulation shows that over time diffusion %% %%%% %%%% %% rates would increase substantially in Africa,% %%%%% % % %% %%%%%%%%%%%%% whereas these would decline for the OECD %% %%%%% %%%%%%%%%%%% % countries,% as shown by the graph below. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! %%%%%%% %%%%%%%% %%%%%%% %%%%%%%% %%%%%%% %%%% %%% %%%%%% % 9 !!!!!!% % %% %%%%%%% %%%%%%%%%%%%%% # %%%% % % %%%%% ! % %%%%% %%%%%%%% %%%%%%%11 %%%% % F%% %%%%% %%%%%%% %%%% % %% %%% %%%%%%% %% %%%%% %%%%%%% %%% ! %% %%%% %%%%%% % %%%%%% %%%%%%% %%%%%%%% % %%%%% %%%%%%%% %%%%%% % % %%%% %%%%%% % % %%%%%%%% %%%%%%%% %%%%%%%%% %% % % % % %% %%%% %% % %%%%%%%% %%%%%%% % % %%%%%%% %%%% %%% %%%%%%%% %%%% %%% %%%%%% !!!!!!% % %% %%%%%%% %% %%%% %%%% % %%%%% %%%%% %% %%%%%%%% %%%%%%% %%%% % %%%% % %%%%%%% %%%% % %%%%%%% %% %%%%% %%% %% %%%% %%%%%% %%%%%%%% %%%%%%%% %%%%%% % %%%% %%%%%% %%%%%%%% %% %

%%%% %%% %%%%%% %% %%%% %%%%% %% %%%% % Can Africa rely on traditional industry?

the base effect, because industrial employment levels in Africa are in fact quite low, whereas To illustrate how the “traditional” pattern of working-age population grows not only structural change would not succeed to ad- quickly, but also from a high initial level. dress Africa’s employment demand we use a simple simulation. We call “traditional” the pat- The message from this simulation is that the tern that sees economic development driven by continent cannot make it if it follows the Lewis- productivity gains in industry. These gains at- type bluebook for industry-led development. tract labor supply from agriculture boosting in- Of course, productivity improvements in indus- dustry employment, which in turn generates try are to be more than welcome, but the point productivity improvements in agriculture, is that the continent cannot deal with its em- which then allow further shifts in the work ployment challenge without expanding em- force from agriculture to industry. The pres- ployment in services and agriculture. ence of, however, a productivity gap in favor of Economy-wide productivity improvements are industry vis-a-vis agriculture (or services, for key! These need to happen in services, agricul- that matter) would allow sustaining a virtuous ture, and industry as well. Innovation provides circle that provides labor supply to industry as an opportunity to achieve the needed econ- needed, forcing productivity improvements in Conclusionomy-wide productivity improvements. agriculture as a by-product. This mechanism would allow transforming developing economies along6 the lines experienced by Eu- rope and South East Asia. This is the old basic

Lewis7 model. , which has been proposed as a vi- We have argued that Africa has virtually no al- able path for Africa by both J. Lin and D. Ro- ternative to embrace the new wave of techno- drick . logical innovations enthusiastically. Business as usual, even under the most optimistic as- We have built two scenarios based on the sumptions, would not help to reduce the ex- China’s experience. The first assumes a 6 per- pected yawning gap between labor supply and cent annual growth in industrial employment, demand in the continent. Our simulations sug- which is what China experienced during the gest industry cannot create the necessary jobs last 15 years. The second assumes twice as by itself, agriculture and services need to play much, 12 percent per year. both major roles. This conclusion has implica- tions for policy. First, governments should re- frain from protecting economic activities that Under the first scenario, it is clear the gap become under threat from innovation. Second, tween overall labor supply would actually policies should aim at creating an enabling en- broaden over time. However, even under the vironment for technological innovation, and quite optimistic second scenario, growth in in- avoiding channeling resources toward the pur- dustrial employment would not keep the pace suit of industrial dreams. The fact that ad- of labor supply, still raising the gap between vanced countries have gone through years of 62040Lewis, W. from Arthur (1954).2016. "Economic These Development dynamics with wouldUnlimited Suppliesreflect of heavy industrialization does not imply Africa Labor". The Manchester School. 7 See for instance J.Lin and A. Goldstein “Achieving an African Industrial Revo- should go through the same experience. There lution” Project Syndicate February 2017; and D. Rodrick “Growth without In- is no bluebook for economic development! In dustrialization?” Project Syndicate October 2017. fact, the continent could use new technologies to avoid both the social and environmental costs industrial based growth.

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%%%%%%% %%%%%%%%%% %%% %%%% %%%%%%% %%%%%%% %%% %% %%%%%%%% %%%%% % %%%%%%% %% %%%%%% positive impact on development through its ef- ment, and market operators. fect on the three components of the Human De- velopment Index: these are income, education In terms of the energy divide and growth of re- and health. newables, Africa has long been the subject of reports and market analysis that repeat the Income generation is by far the most studied same mantra: the continent has a unique po- impact indicator and there is evidence of a sig- tential and human resource capabilities, abun- nificant increase in both the consumption of dant resources, competitive technologies, and electricity and income levels of households. In business models that are increasingly refined. some cases, such as in South Africa, income African countries just need stable regulatory generation is linked to an increase in female frameworks to unlock investments and thus labour supply. As far as education is concerned, Benefitsgive rise to and a new risks era. of renewable energies the positive effects are to be found in the enrol- ment rates and the number of years of completed schooling, as well as facilitating the use of computers and in the general operation of schools. Health indicators derive from the re- Besides the obvious positive impacts on the en- duction of kerosene, and the availability of vironment and the economy, renewable energy electricity for health equipment (refrigerators offers three main key advantages. for medication, sterilizers etc.) and for infrastructure (hospitals, emergency camps, etc.). Firstly, renewable generation is typically less The availability of electricity can also benefit concentrated and more decentralized. More- other public services, as well as provide the en- over, the time required to build a power plant Renewableergy needed energies for mobile can communication be a solution sys- is shorter than for other conventional tech- tems, water pumping, etc. nologies. RE projects are inherently more scal- able than conventional projects, and can be sized for current demand, and if required ex- panded as demand grows. Furthermore, it does Electricity consumption in Africa is con- not need the same infrastructure requirements strained by limited supply and by poor trans- of conventional power projects, offering addi- mission and distribution infrastructure. tional flexibility for locating projects. Renewable Energy (RE) deployment, along Secondly, renewables can be easily installed with grid enhancement, energy storage and and maintained, and their deployment offers micro-grids, has the potential to accelerate opportunities in terms of job creation and in- Africa’s socioeconomic transformation, linking clusive economic development. Finally, an prosperity with quality of life and facilitating abundance of resources alongside technologi- the path towards sustainable growth. Bringing cal improvements, the subsequent reduction in energy to those without access, means opening costs and improvements in performance now local communities up to new possibilities in make renewables competitive with fossil fuel education, healthcare, gender equality, and em- generation. The IRENA report “The Socio-eco- ployment. Bringing clean energy can achieve nomic Benefits of Solar and Wind Energy” this while respecting the environment and ter- (2014) emphasises the importance of value ritory. Bringing clean and competitive energy creation in the renewable energy sector. A cen- means building a winning model where all as- tral question to the assessment of value cre- pects of sustainability can be integrated: re- ation in the RE sector is to what extent the newable plants on an industrial scale can value creation is being generated locally. This benefit the local communities, the environ- 3

12 depends on the maturity of the RE sector in the from initial business development to their op- country where the project is being realised, as eration and maintenance. well as the presence of an electricity distribution network. The planning, construction, grid Moreover, as large-scale renewable projects connection and operation phases are identified can occupy large areas of land, thereby restrict- as the main aspects that are able to bring doing or limiting land access and use, considera- mestic value. As for the manufacturing process tion of land use and its ownership is essential and supply-chain, this depends on the presence when initially selecting sites. Furthermore, site of such industries in country, and requires at selection can also determine the availability of least a certain degree of industrial capability in local workforce, the ability for the project to the country in order to generate local value cre- bring direct benefits to local communities, may ation. influence impact to local ecology, increase risk Policyof natural can hazards lower the etc. risks The IRENA report further elaborates on value creation in supporting the processes included in the value chain of RE project development, such as policy-making, financial services, education, research and development, and consult- In some African countries, environmental and ing. Strengthening these processes may enable social impacts have been taken into account at further value creation in the RE value chain, as policy level, in order to enhance the intrinsic well as other sectors. A focus on policy-making potential of renewable energy to support sus- is key to creating an enabling environment for tainable development. RE investments in a country. Hence, setting the right policies is considered a first step to facil- This is the case of South Africa, where renew- itate RE investments and can therefore boost able energy projects are obliged to make a real value creation at an early stage. contribution to local economic development in the immediate area of operation. The South Increasingly, environmental and social per- African Government developed a clear policy formance influences the bankability and viabil- on sustainable economic development within ity of renewable energy projects. the renewable energy sector. This policy, although cumbersome to those that are less en- Although renewable energy delivers better vironmentally and socially inclined, has lured performance in terms of environmental and so- a number of investors who have integrated sus- cial standards, their development may involve tainability and shared value into their business. some negative impacts that need to be miti- The obligations imposed by Government com- gated, whilst several of the benefits can be en- prise of seven pillars, which include amongst hanced. These impacts are experienced locally others: on both ecological and social aspects through the construction and operations phases of RE • Local equity ownership; projects. • Preferential procurement; The key factor in reducing the potential negative environmental and social impacts and • Local job creation; maximizing the potential benefits associated • Socio-economic Development (SED); and with RE projects, as well as ensuring technical • Enterprise Development (EnD). and economic viability lies in considering from the start, the entire lifecycle of RE projects, These components, if appropriately imple- 4

12 Creating Shared Value mented in partnership with local actors, not impact on the environment and on people’s only reduce environmental and social risks to lives becomes perceptible and is realised by the Whatthe company, the private but alsosector set can the do foundation for community. The objective of the sustainable (CSV) within the local construction site model is to anticipate impacts community. in advance based on the knowledge already ac- quired during the development phase and then effectively manage these through mitigation, measuring,! and!!!!!!! mitigate!! reviewing, under the ! Over the last years, a number of business for- principles of a circular economy. mula have arisen, starting to take into account ! the social and environmental aspects of a proj- In the case of Enel, four major impact cate- ect. In order for these models not to be just gories have been selected as more relevant to wishful thinking, or worst still green washing, this phase: water, waste, emission and people. social and environmental aspects need to be fully integrated into the entire business. In other words, sustainability needs to be linked to profits.

The goal of sustainability must indeed be to create value for all– the industry, civil society, Sustainable Development and the environment – and to conduct business Goals that leads to shared, widespread and lasting doing well by doing good Value. It’s no coincidence that the United Na- tions (UN’s )17 (SDGs) fully adopt this logic through We measure our impacts in order to mitigate “ ”. They advocate that or enhance them; for example, among our in- a truly sustainable business can help respond dicators are: to the needs of education, healthcare, and gen- model of der equality by promoting economic develop- Creating Shared Value • percentage of water reused ment, employment, and energy access for • percentage of waste recycled millions of people around the world. Many pri- %%%%%%% vate companies have adopted the • percentage of renewable energy used at the %% (CSV), making sustain- construction site/camp %%%% ability a fundamental driver for competitive- %%%%% ness. The sustainable construction site model • expenditure on local suppliers %%%% % is a practical, real, application of CSV which • percentage of local workers trained and em- % aims at reducing negative impacts on the local ployed % environment and communities, while maximiz- %%%%% • days of stoppage due to safety or social is- %%%%%% ing positive ones on value creation. %%%%%%%% sues ! % !!!! %%%%%%% In other words, by conceiving the deployment • safety indicators, and %% %%# % of renewable energy under a sustainable value %%%% • number of biodiversity projects. %%%%% creation model, further value for local develop- %%%% %%% ment can be unlocked. %%%%% Mitigation measures%%% are very context-specific.%% %% %% Construction is the phase when the presence Through a series of %%%%%analysis in the business de- of a large-scale RE project is most apparent, %% %% velopment phase we obtain a thorough under- %%%%%% %%% and is usually the most delicate phase, as the %%% %% %%% %%% %%%%% 5 % %%%%% % %% %%%% %%% %%%%%%% 12 %%% %%%% %% %%%%% %% %%% %%% % %% %% % %% %%%%%%%% % %%% %%%%%%%% • % %%%%% % % %%%% % %% % %%%%%%%% %• %%%% % % %% %%%%% %%% %%%%%%% %%%%%%% %%%%%% ! %%%%% % %% %%% %%%%%% % %%%%%% %%%%%%% %%%%%% %%%%%%% %%%%%%% %% %% %% % % % 7 % % %% %%% %% %%%%%%%% %% %%%%% %%%%%% %%%% %% %%%%%%%%%% D%%%% % %%%%%%%%% %% %% %% % %% ,%%% %%% %%%%%%%%% %%% %% Is sustainability an added cost? standing of socio-economic and environmental community expectations, as well as to identify contexts. We thereafter identify the actions to shared risks and values. be implemented at the construction sites to create value for both Enel Green Power and the community. Furthermore, in order to improve The sustainable construction site model can the sustainability and quality of projects in the certainly create value at a local level by sensibly design phase, feedback from other projects is decreasing consumption of resources, such as considered and implemented through technol- water, wood, rocks etc., reducing emissions, ogy improvements across-the-board. and providing the local population with infra- Some examples of mitigation measures in- structure, jobs, training and knowledge trans- clude: fer. It can thus can certainly enhance the capability of renewable energies to be a fly- • use of sustainable certified materials wheel to local development. • maximum reuse of all excavated ground and Furthermore, implementing sustainability as a rocks; core part of the business model reduces risks, • donation to the community of surplus potential delays, and supports financing. How- wood, iron and cardboard. ever, some may argue that such a model can do so only by adding costs, thus making the busi- • reuse of water from treatment of grey water ness at the end of the day less financially sus- • use of electric vehicles tainable. Our experience at Enel Green Power is that this is a misconception. Let us look in • construction site lighting powered by pho- practice at the sustainable construction site tovoltaic cells or mini wind-power plants model; how did this go? Here are just a few • renewable energy systems to meet the real examples. power demand of the on-site facilities By reusing wood from pallets, for example do- •improvements in local infrastructure nating them to a community, you avoid the • training of local workers and knowledge costs of disposal. You can invest this saving, de- transfer, and pending on the local needs, by training people • provision of on-site structures and services in eco-carpentry. And if there is the need, you for workers. can even buy this eco – furniture for your offices (they are good for the environment and the people but also they cost less than some in- A key part of a sustainable construction site is dustrial product delivered from miles away). effective and on-going engagement with the local community, to ensure a positive relation- When water is scarce, filtering and reusing ship is fostered and maintained. It is essential grey water to manage dust may be economi- that such engagement starts at the early stages cally more viable than buying and using tons of of the project development in order to manage clean water.

! !!!!!!!!! !

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% Background

Objectives of the paper focus on skills development in the public sector for better capitalizing on ODA. Despite the record installation of renewable power capacity worldwide, in 2016 the global new investment in renewables fell by 23% to US$241.6 billion (excluding large hydro) which Investments in the energy sector have been is the lowest total since 2013; in this context identified as a priority by many African Gov- the renewable energy investment in the devel- ernments, Regional Organizations as well as oping countries fell overall by 30% showing a the International Donors community. rate of decrease similar to the one registered As a result, numerous initiatives have been by China (32%) and Africa had in 2016 its low- launched with the common goal to support the est level of renewables investment since 2011, Continent in achieving a sustainable energy approximately US$7.7 billion, 32% lower than supply; this has led to an increasing need for 2015. Several are the reasons behind this drop exchange and coordination across the growing in the investments: number of initiatives and programs in the sector. • one of the most important reason is the lower average capital cost for renewable The main goal of the present paper is to spot projects starting construction in 2016, the existing barriers preventing the extension which was 13% lower than in 2015 for PV, of the renewable electricity coverage of the while for onshore wind the drop was 11.5% area and identify a high level set of recommen- and for offshore wind 10%; dations to facilitate the deployment of renew- • several projects in wind and solar were fi- able energy related ODA with the final aim of nanced in late 2015 and only commissioned improving the quality and stability of energy in 2016, in which case the investment asso- supply and therefore improve living conditions ciated with them were recorded in the ear- in the urban and remote areas, as well as fos- lier year and the GW addition in the later tering the ongoing efforts made by the National one; activities in some key markets have Governments of the Region and by the Interna- slowdown during the course of 2016 espe- tional players towards the sustainable eco- cially in Asia; nomic development and achievement of the ambitiousTrends in goalsEnergy set related by the United ODA in Nations Africa Mil- • several renewable energy markets in the lennium Development Goals. developing world produced record investment figures in 2015 but then saw sharp falls in 2016 in response to scheduled pauses, or delays, in their auction schedules Over the course of the last 15 years, ODA to the as for example in South Africa and Morocco. African energy sector has increased substantially and the energy sector accounted for ap- In addition to the above mentioned, Official De- proximately 10% of ODA in Africa. In the velopment Assistance (ODA) funding to devel- period multilateral donors provided nearly 60 oping countries, including African Ones, were % of energy ODA, while bilateral donors pro- in some cases not fully exploited due to major vided the remaining; the three largest multilat- barriers to the wider dissemination of renew- eral donors in the energy sector in Africa are able energy such as policy, regulation and in- the World Bank, the EU Institutions and the stitutional; as well as information and technical African Development Bank. capacity; this highlights scope for an increased

12 The bulk of multilateral lending is disbursed The largest sources of donor funding in the via loans and grants to individual national gov- African energy sector are the World Bank ernments. The EU institutions deliver their grants and concessional loans provided via the ODA via a mix of thematic and geographic pro- International Development Association (IDA) grams with direct as well as indirect imple- which represented almost 30 % of total energy mentation modalities, including in particular ODA over the period. blending instruments. The European Union was the second largest Similarly, the major bilateral donors channel a multilateral donor providing over 15 % of total large part of their ODA through a variety of ODA in the African energy sector; other major country-level delivery mechanisms such as the multilateral donors in the African energy sec- Agence Francaise de Développement (AFD), tor are the African Development Bank (AfDB) the Deutsche Geselleschaft für Internationale and the Arab Fund for Economic and Social De- Zusammenarbeit (GIZ) and the Japanese Inter- velopment (AFESD). national Cooperation Agency (JICA) which pro- The World Bank directs most of its ODA fund- vide grants, loans and technical assistance in ing in the energy sector to East and West Africa. direct form as well as concessional lending and North Africa dominates the energy ODA of EU other financial instruments channeled through institutions and the AFESD while the AfDB national development banks like the German channels most of its energy ODA to East Africa. Kreditanstalt fuer Wiederaufbau (KfW), or the Japanese Bank for International Cooperation. A list of the main ongoing initiatives supporting the deployment of renewable energy technolo- North Africa, home to 16% of the total popula- gies and the provision of access to sustainable tion on the continent and the only African re- energy supply in Africa is presented in the fol- gion with close to universal access to lowing table. electricity, and East Africa, where live the 23% of the African population of which more than Looking at the bilateral aid, France was the half lacking access to a stable electricity supply, largest donor followed by Germany and Japan; have received the largest volumes of energy together these three Countries accounted for sector ODA over the period, accounting for approximately 30 % of total ODA to the African more than half of total ODA. West Africa repre- energy sector and 57 % of bilateral aid; the sents the third largest destination (23.3%) and group of the ten largest bilateral donors fur- accounts for 30 % of the African population; thermore includes Norway, Kuwait, the United while Southern Africa and Central Africa, fol- States, Spain, the United Arab Emirates, United low by a wide margin. Kingdom and Korea.

1 High-level initiatives Africa Clean Energy Corridor Africa Renewable Energy Initiative (AREI) Africa Energy Leaders Group (AELG) Presidential Infrastructure Champion Initiative (PICI) Africa-EU Energy Partnership (AEEP) Program for Infrastructure Development in Africa (PIDA) Africa Power Vision SE4ALL (Africa Hub)

High-level initiatives with an operative program

Africa 50 New Deal on Energy for Africa Africa Renewable Energy Access Program (AFREA I & II) - ESMAP Power Africa ElectriFI Public Private Infrastructure Advisory Facility (PPIAF) Energies pour l’Afrique World Bank Guarantee Program Global Alliance for Clean Cookstoves

Operative programs and delivery mechanisms

ACP-EU Energy Facility GET FIT Uganda AFREA Gender and Energy Program Global Energy Efficiency and Renewable Energy Fund (GEEREF) Africa Clean Cooking Energy Solutions Initiative (ACCES) Green Mini-Grids Africa Regional Facility Africa Energy Guarantee Facility (AEGF) IRENA/ADFD Project Facility Africa Enterprise Challenge Fund (AECF) Lighting Africa Africa-EU Renewable Energy Cooperation Program (RECP) Mediterranean Solar Plan (MSP) African Development Bank Partial Risk Guarantee (PRG) NEPAD Bioenergy Programme for Africa Africa Renewable Energy Fund (AREF) NEPAD Continental Business Network (CBN) Biofuels Programme for Household and Transport Energy Use NEPAD Infrastructure Project Preparation Facility (NEPAD-IPPF) Carbon Initiative for Development (CI-Dev) PIDA Service Delivery Mechanism (SDM) Clean Technology Fund (CTF) Private Infrastructure Developlment Group EEP Africa - Energy and Environment Partnership Regional Energy Project for Poverty Reduction Energising Development (enDev) Regional Technical Assistance Program (RTAP) Energy Access Ventures Renewable Energy Performance Platform (REPP) Energy Africa Campaign Renewable for Poverty Reduction Program (REPoR) EREF ECOWAS Renewable Energy Facility Renewable Energy Solution for Africa (RES4Africa) EU-Africa Infrastructure Trust Fund (ITF) / Africa Investment Facility (AfiF) Scaling Solar EU Development Finance Institutions (EDFis) Private Sector Development Facility Strategic Climate Fund - Scaling Renewable Energy Program (SREP) EU Energy Partnership Dialogue Facility (EUEI PDF) Sustainable Development Investment Partnership (SDIP) European Union’s Technical Assistance Facility (TAF) Sustainable Energy Fund for Africa (SEFA) Geothermal Risk Mitigation Facility

1 In terms of beneficiaries, North Africa domi- World Bank Group and the United States, nates the energy portfolio of Spain, Germany, launched in 2010 the Solar and LED Energy Ac- the UAE and Kuwait. East Africa receives the cess Program (SLED) with the aim of bringing largest share of energy ODA from France and clean and high quality energy to the population Japan. Southern Africa is the region that re- without access to energy, at the same time al- ceives most energy sector ODA from the US, leviating poverty, improving health and reduc- Norway and Korea. The energy portfolio of the ing greenhouse gas emissions. UK concentrates on West Africa and Southern Africa. It is important to note that none of the The first initiative launched was “Lighting top 10 bilateral energy donors have a focus on Africa”, whose goal is to accelerate the develop- Central Africa. ment of the market of “off-grid” lighting products in rural, urban and peri-urban areas Italy was the eighth-largest donor country in without access to electricity in 10 Sub-Saharan 2016 overall, spending US$4.9 billion on net of- African countries. ficial development assistance which represents 0.26% of Italy’s gross national income (GNI) This initiative subsequently merged with oth- and an increase in ODA amount of more than ers into “Lighting Global”, the World Bank’s 90% since 2012 mainly driven by the rising platform that supports the international costs for hosting refugees in Italy; in parallel, growth of the off-grid solar market as a means however, funding for development programs of rapidly increasing access to energy from abroad also increased by 5% between 2015 those who do not have access to the electricity and 2016 as part of the Government’s effort to grid. use development cooperation to strengthen In 2015, an additional US$ 7.25 million was Italy’s international standing. In this context paid into the program by IMELS and in 2017, Italy recently overhauled its development co- in order to guarantee the impact of the pro- operation system, establishing its development gram in the long term, IMELS has decided to agency (AICS) and development finance insti- support the program with a further US$ 4 mil- tution (CDP) in January 2016. lion with the aim of supporting market innova- The creation of AICS and new development fi- tions, expanding the impact of emerging nance institution (CDP) is an opportunity to technologies as a basis for sustainable eco- shape Italy’s development agenda where the nomic development, improving the quality of Italian Ministry of Environment, Land and Sea life and reducing greenhouse gas emissions. In (IMELS) represents a key player with particu- addition the program have provided over 100 lar focus to climate change and clean energy; million people with modern services powered in particular, with specific reference to Africa, by solar energy, for home lighting and mobile within the scope of the CoP 22, IMELS signed phone charging, with an estimated 5 million specific agreements concerning environmental tons of greenhouse gases emission avoided cooperation activities with 5 African Countries which is equivalent of removing one million (Ethiopia, Djibouti, Rwanda, Democratic Re- cars from the road each year. public of the Congo and Sudan) and allocated More than 100 products have already been about € 11 million for projects aimed at imple- produced within the program, of which Light- menting the mitigation and adaptation targets ing Global certifies quality, with the aim of find- set by the countries through their own NDCs. ing efficient applications for solar energy in the Furthermore, IMELS, together with the Inter- households or for small economic activities national Finance Corporation (IFC) of the such as irrigation.

13 The Program also provides consulting services externally financed. Despite the recent devel- to companies and offers a wide range of serv- opment of several renewable energy policies in ices including: assistance in market access many developing countries, including African strategies, risk management and development ones the successful development and deploy- of innovative models, promotion of economies ment of any technology, especially relatively of scale, assistance in the distribution and sale new ones, such as renewable energy technol- ofBarriers products. to Renewable Energy Investment ogy, need several institutions covering the dif- in sub Saharan Africa ferent technical, economic to market aspects; this institutional capacity is not always available in most parts of Africa.

Moreover ancillary technical institutions for testing, operation and maintenance of tech- Although major technical and financial break- nologies have a limited presence in African throughs have been achieved internationally countries especially with reference to National with respect to renewable energy their contri- Systems of Innovation (NSI) which have proved bution to Africa’s energy problems remains Informationto be crucial andin increasing technical technologicalcapacity recep- minimal (excluding large Hydro). Major barri- tivity in most developed and emerging ers to the wider dissemination of renewable economies energy on the African continent will need to be overcome. These barriers can be categorized as follows: Ensuring secure sustainable commercial suc- • policy, regulation and institutional; cess of renewable energy depends on institutional and human capacities as well as business Policy,• information Regulation and & technicalInstitutional capacity; and market capabilities. • financial. A major technical barrier is the unavailability of accurate and well organized renewable energy resource data. The data on renewable energy, especially for solar and wind, are very Consistent policy and regulatory frameworks scanty and the poor technical skills in the con- are central to the successful dissemination of tinent affect the development of renewable renewable energy in technologies in sub Saha- technologies. Inadequate domestic technical ran Africa, but in general such frameworks are skills account for poor maintenance of im- absent in most of the African countries and ported systems and lack of provision of ade- where suitable policies for promoting renew- quate after-sales service. Hence, there is need able energy do exist, their impact is weakened for high and middle level technical manpower by a lack of enforcement mechanisms which in business development, manufacturing and makes very challenging for the private and in- overall management. The public sector also dustrial sector to operate effectively and ex- Financing and investments lacks adequate personnel to undertake effec- pand their renewable energy investments. tive monitoring and evaluation. Furthermore, the lack of policy focus on the renewable energy is the relatively low budgetary allocations at Country level for the promotion Scenarios developed by International Financ- of renewable energy in many African countries; ing Institutions such as the African Develop- the majority of energy projects are therefore ment Bank has estimated at approximately US$

13 550 billion the total investment required to en- policies with clear targets is crucial in facilitat- sure universal access to reliable and increasing investments in renewable energy and so ingly cleaner electric power in Africa by 2030 are also the adoption of policy instruments thus estimating an average investment of ap- such as public auctions and tenders, quotas, proximately US$ 30 billion per year; at present feed-in tariffs, capital subsidies or rebates, in- the total funding to the energy sector in Sub- vestment or other tax credits, tradable renew- Saharan African has averaged only about US$ able energy certificates, and public investment 2 billion every year showing the seriousness of loans. the challenges which shall be faced to mobilize financing for an effective deployment of the re- Several national and international policies have newable energy potential in the area. so far been tailored to promote the use of renewable energy technologies; it is clear that Moreover many economies in Africa are per- policy successes are likely to be achieved when forming badly and this only makes the situa- it is feasible&sustainable, customized on do- tion more difficult when seen in the context of mestic and regional context, involving&em- the ongoing food and financial crisis, high powering national stakeholders, adequately volatility in oil prices and climate change. funded by resources both capital and human, all in view of finalizing the implementation and Lacking of government support, the private integration. Based on these experiences, poli- sector remains a small player overall, and more cies to be considered for implementation at the prevalent in small-scale renewable energy sys- national level are: regulation measures (i.e., tems; whereas the bulk of the private sector fi- performance standards, equipment standards, nancing is “Foreign” and mostly linked with etc); subsidies and financial incentives (feed-in international financing institutions supporting tariffs, rebates, grants, loans, production incen- the local beneficiary governments. On the tives, government purchasing agreements, in- other side, it is registered a scarce support surance) that are targeted and have a clear from financial institutions such as insurance sunset clause; voluntary agreements (e.g. be- companies and broker institutions that assist tween government and private sector). At re- to reduce the very high transaction costs of gional and sub-regional levels, policy measures clean technologies in African countries. that have been successful and can be considered for development in Africa include focused In order to make ODA more effective, shared use emission targets and trading systems; tech- priority should therefore be put on to overcom- nology co-operation which can be supported ingRecommendations the barriers described above . by financial systems (ODA, FDI, commercial bank loans). In selecting appropriate policy options suitable to be supported by International Donors and Financing Institutions, it is impor- Major technical progress and policy develop- tant that these policy options are evaluated for ment along with financial and institutional in- their environmental impacts and cost effective- novations are needed to scale up the ness; distributional aspects; institutional feasi- production of renewable energy in Africa and bility; and suitability to the local context. In notably in Sub Saharan Africa where it should addition, renewable energy policy develop- be recognized that renewable energy roadmap ment should be well integrated into policies of technologies are at different stages of develop- other sectors, smaller-scale producers may ment and deployment. In this context, address- need special policies such as using dedicated ing part of the ODA to the support for setting funds or project bundling which can be interesting options also for powering social infra- 4

13 structure such as schools&vocational training, entirely new systems. Capacity development medical centres, hostels etc. should therefore make use of local knowledge, build upon existing values where possible and ODA could lead and guide the support of the have a timing and scope of interventionstailored de- development of regional, sub-regional and na- tosigned country to be circumstances consistent with the country’s ca- tional strategies to acquire renewable tech- pacity to implement change. nologies by increasing local R&D capacity, skills of technology adaptation and manufacturing Capacity development efforts must be capability. Furthermore, funds should stream- if they are to suc- line capacity for policies’ integration and effec- ceed, for example, have to take into account a tiveness aiming at fostering technology country’s existing structures and inter-linkages transfer. African countries can exploit new fi- (i.e. of the political and administrative layers – nancing options to improve investments in re- 3.central, regional, local, etc.) bearing in mind newable energy in the continent. Local sources that the entry point for capacity development of funding that should be included in public will vary country to country offer of shares by power utilities to implement The institutional, organisational and individ- specific projects, practicing of pensions funds Capacity development must ual levels of capacity development, including to leverage local bank financing for new proj- be viewed from a holistic or systemic per- managerial and technical aspects, should all be ects, use of emerging local bond markets. An spective, and not merely as a transfer overarching principle that must guide ODA dis- taken into account in programme design and tribution in the future is that capacity develop- implementation. ment is primarily endogenous to a country, 4. Donor support should be provided in a based on voluntary action and motivation. Ex- coherent, coordinated, and programmatic(e.g. ogenous aid initiatives can support capacity manner.of skills). development, but they are not a substitute for it. Capacity development efforts should therefore be rooted in the partner country’s goals Therefore, as to the content of capac- and strategies. A set of guiding principles for 1. Supporting country leadership ity development, the government’s own action ODA supported capacity development activi- plan should be the focal point for determining ties is summarized in the following points: support. Though donors may come with differ- should be ent areas of expertise within the overall pro- central to donor approaches. Capacity develop- gramme, their support should be ment is most likely to succeed when countries complementary rather than competitive or du- view it as serving their own self interests and plicative. Support should be phased over a are committed to taking the actions necessary multi-year horizon in order to take into ac- to implement it. In this case the role of donors count the long-term nature of capacity development. Likewise, interventions should be 2.therefore Capacity is to development facilitate rather design than direct and the se- 5. Extract key concepts from previous expe- programmed in a way that reflects how they fit quencingprocess of should turning fit broad specific goals country and strategies circum- riences instead of replicating whole sys- with the country’s development objectives. stancesinto an actionable plan. tems.

, rather than reflect standard or Effective capacity development attempts imported solutions. Effective capacity develop- to build on what is already in place, rather than ment starts with a premise of building upon replace whole systems. Building on existing ca- what already exists, rather than transplanting pacities, easy-to-handle instruments and pro-

13 cedures can be more easily implemented than the aim of providing effective support to Re- sophisticated ones. Some advanced concepts newableEntrepreneurship energy (and more and broadlyBusiness clean Acceler- tech- ation; 6.can be introduced gradually, but only by ex- nologies) deployment in Africa: tracting the elements that trainingare most individu- practical Innovation Finance Products; for the country. als remains an important component of • Market Development Mechanisms; capacity development. Though the focus is often on improving or- Legal and regulatory Framework ganisational performance, • Strengthening. • In other words, Entrepreneurship and Business Acceleration changes in procedures and policies need to be • 7.accompanied Effective capacity by extensive development on-the-job requires training wellto ensure functioning that the organisationsnew concepts can be implemented.

Entrepreneurship and business acceleration consisting of are actions designed to assist entrepreneurs in trained, motivated and committed staff. This turning ideas into sustainable businesses, or to requires not only organisational restructuring, scale up an existing initiative or business line. but also changes in personnel and a clear and This has traditionally taken the form of pro- reasoned allocation of project management grams involving consulting firms, business in- roles in the program as well as a good balance cubators or technical experts, in providing of local and international expertise in the im- direct training and capacity building to man- plementation team. agers and owners of entrepreneurial businesses, ranging from general financial and ODA Recipient Countries Government should managerial skills to targeted support for tech- stress on the need of Co-ordinated initiatives nical aspects of the business. Alternatively, with and among donors to avoid duplication of more recent types of programs aim to develop programs or completion among them, his leads collaborations and networks to assist clean to separate funding mechanisms and pressure technologies providers and firms using such to show results within relatively short time- technologies to share knowledge and experi- frames. Shifting to a need-driven approach ence thus reducing transaction costs for the within a co-ordinated donor context creates single company by pooling resources and po- the flexibility government needs to decide how tentially sharing R&D and intellectual property best to maximise donor support which opti- rights (IPR). mally includes establishing an institutionalised platform for both donors and partner coun- Collaborations between national governments, tries, in order to also deal with the design and the private sector and the international com- monitoring of the reform process. munity can also support the creation and sharing of technical knowledge, building upon In this context, in addition to the usual support existing entrepreneurial cultures; innovating for the development of legal and regulatory and delivering new models for financing and framework and for building capacity and rais- intellectual property sharing, and supporting ing awareness, the following four main areas of the demonstration of complex technologies support can be identified to be considered by with strategic value. Such international, public- ODA beneficiaries Countries Government and private, collaborations are able to achieve these other stakeholders target for programs with functions through education and capacity

13 building for companies, Business Clusters and higher financial risk assessments, and the agencies, and also through protections for in- longer supply chains inherent to the market tellectual property and the provision of eco- structure of many clean technology businesses. nomic resources and legal conditions required to enable commercial risk-taking. Building upon the above described basis, government-backed support for concessional or Finally, public and private agencies can also flexible loans creates the risk that the deploy- conduct a facilitating and mediating role be- ment of clean technologies becomes dependent tween entrepreneurs and their market clients. upon non-market financing; therefore, to miti- This role includes awareness raising activities, gate this risk, and facilitate a longer-term tran- information sharing and simple communica- sition to market-based financing, soft loans and tion of ideas and opportunities to clean tech- credit guarantees must be issued through com- nology providers and firms adopting these mercial banks which set their own financial technologies within their processes. Such ac- and technical criteria. Innovation finance can tivities constitute the intangible assets of also operate on the demand side. To this aim, human capacity necessary to make markets the most important instrument to promote work, beyond the more easily measured finan- growth in clean technology markets is technol- cial barriers. Here, governments, other stake- ogy-specific consumer credit which can over- holders, and companies can draw upon come the financial barriers surrounding high technical support and advice from a range of capital cost goods, such as off-grid renewable Innovationinternational Finance collaborations Products and networks to energy technologies (RETs). For example, a promote clean technology and small business high demand for solar water heaters (SWHs) in development. Tunisia was stimulated by making available low-cost commercial loans, offered specifically for SWHs. These technology-specific credit markets have enabled, and were enabled by, Innovation finance includes those instruments Market Development Mechanisms greater awareness and acceptance for SWHs, aimed at providing companies interested in lowering risk premiums. clean technologies with early stage financing and risk capital not available from traditional financing sources, such as seed capital, venture capital, soft loans and loan guarantees. A range of instruments aim to increase demand for the products of local SMEs and facilitate the In this framework, governments and investors overall growth of the clean technology market. can also provide funding to bolster private sec- The main purpose of demand-side instruments tor lending to firms interested in clean technol- is to reduce commercial uncertainties for busi- ogy on preferential terms, like lower interest nesses supplying clean technologies, thus re- rates, more flexible collateral and repayment ducing investment risk. Support for consumer conditions, or by providing loan guarantees. financing, as discussed earlier, is an important Such form of support could help firms access- mean to stimulate the growth of clean technol- ing to finance thus overcoming one of the most ogy markets at the household level. Addition- significant barriers to clean technology deploy- ally, several measures to stimulate industrial ment in emerging economies where the high demand for clean technology can be supported cost of capital and business financing for de- by governments with special focus on renew- ploying clean technologies often reflects a lack able energies such as feed in tariffs, renewable of awareness on behalf of local banks about the energy certificates. related opportunities, which translates into

13 The feed in tariffs are the most well-known in- donors in cooperation with local governments struments to strengthen market demand for to support its development. Examples of such grid-connected technologies in developed initiatives span from the Geothermal Risk Mit- countries. However, given that FITs operate as igation Facility (GRMF), promoted by the Ger- a cross subsidy, where the cost of tariff-sup- man and UK governments and the African ported renewable energy technology is divided Union, that provide grants for geothermal sur- among all grid-connected consumers, this par- face studies and drilling operations in the most ticular instrument becomes less economically promising geothermal prospects in Africa, to viable and relevant in lower-income countries the Scaling Solar program launched by World where levels of energy access remain low. Re- Bank/IFC to promote the development of solar newable energy certificates or obligations are energy with large-scale grid-connected solar government-imposed mandatory targets for plants via rapid, open and transparent tender utilities to generate a share of their power from processes. These successful initiatives renewables, that normally result in the creation of certificates which can be traded, pro- launched in recent years helped the develop- viding a market-based subsidy. ment of renewable energies in the continent and will keep supporting African countries in While RECs are a market mechanism, their the coming years in achieving a sustainable en- prices are largely influenced by the regulatory ergyReferences future. framework that creates them. Therefore, the penalties for non-compliance must be signifi- Map- cant, and base prices should be set high enough ping of Energy Initiatives and Programs in to ensure energy companies are incentivized to Africa, Final Report”, investConclusion in clean technologies. SE4ALL & Africa EU Energy“Financing Partnership, renewable “ energy Options for Developing Financing Instru- ments Using Public Funds”May 2016.

The World Bank et al. “Global The energy sector, and in particular the devel- Trends In Renewable Energy Investment 2017”. opment of renewable energies, has been often identified as a priority for growth in many African countries. Several initiatives have been Frankfurt School-UNEP Centre/BNEF, launched by international organizations and

13 The publication of these position papers was made possible thanks to the coordination efforts of RES4Africa’s team members: Marco Aresti, Assia Bellaroto, Dario D’Angelo, Saverio Frullani, Luca Marena, Daniele Paladini, Ana Rovzar, Roberto Vigotti. RES4MED&Africa Renewable Energy Solutions for the Mediterranean and Africa www.res4africa.org

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