PRESENTING THE PRIVATE SECTOR S VIEW Optimising incentives to

PRESENTING THE PRIVATE SECTOR’S VIEW Optimising incentives to spur investment in renewable energy in the MENA region Key findings from the Meeting of the MENA-OECD Energy Task. Force Presentation to the Euro-Mediterranean Energy Forum Barcelona, 24 th and 25 th October 2011 7 th NOTE: Work in progress; draft for comment MENA-OECD Energy Task Force - MENA-OECD Investment Programme 18/03/2018 1

The MENA-OECD Investment programme The OECD: ü The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. The OECD works with governments to understand what drives economic, social and environmental change. ü The OECD measures productivity and global flows of trade and investment. It analyses and compares data to predict future trends. ü The OECD sets international standards on a wide range of things, from agriculture and tax to the safety of chemicals. The MENA- OECD Investment programme: ü Established in 2005 at the request of participating 19 Middle East and North Africa (MENA) governments. ü It aims to assist the MENA region in implementing business climate policies to foster investment, growth and employment in the region. 18/03/2018 2

The MENA-OECD Energy Task Force Background ü Created in 2010 ; 50 members ü Brings together: private sector representatives in the energy sector in both MENA and OECD region, energy experts from the OECD and IEA Role: ü Identifying key constraints for private investment in renewable energies in MENA ü Using OECD tools and expertise to propose solutions representing the private sector’s point of view. Objectives: ü Spurring growth of renewable energies through private sector investment in MENA ü Enabling a public-private dialogue on renewable energy ü Creating a win-win strategy for both the public and the private sector on the development of renewable energy 18/03/2018 3

Definition of investment incentives Ø OECD definition: “Government measures directed to the private sector and designed to influence the size, location or industry of an investment project by affecting its relative cost or by altering the risks attached to it through inducements that are not available to comparable domestic investors” Ø The Energy Task Force has reached the consensus that the optimal investment incentives must have the following characteristics: ü Efficiency ● Drives the investment decision; attracts the kind of investment targeted ü Least costly for the State ● The most cost effective solution for the State ü Snowball effect. ● Generates follow-on investment and possible benefits for the local economy 18/03/2018 4

Renewable energy projects – common risks Investing in renewable energy entails a certain number of risks for the investor owing to the novelty of the technology and the competition from traditional energy sources. Among these are: Ø Lack of profitability Ø High investment risks Ø Client risks Ø Political and regulatory risk Ø Market risks Ø Technical risks associated with novel technology Ø Access to finance These risks form significant barriers to investment 18/03/2018 5

Investment incentives – removing barriers to investment Ø Objectives: ü take advantage of the private sector's financing capacity ü reduce the cost to the state budget ü increase the share of renewable energies in the national electricity mix Ø MENA governments hope to benefit from the positive externalities associated with renewable energy. ü environmental ü technology transfers ü Increased competitiveness of the domestic energy sector ü improved trade balance for oil importers ü increase in local skilled jobs Ø The State thus seeks solutions to a number of issues through removing key barriers to investment. Ø The private investor is to be the ultimate beneficiary of the incentives. 18/03/2018 6

Investment incentives – typology Regulatory incentives ü Policies improving the business environment – in general or targeted at specific sectors ü Liberalisation of a market, regulatory exemptions granted to specific sectors, etc. Ø Regulatory incentives generally do not entail major public expenses. Financial incentives ü Aim at correcting market imperfections and reducing transaction costs for investors ü Soft loans, loan guarantees, capital subsidies, premium and grants. Ø Financial incentives generally require public funds or funds from a foreign or supranational entity. Tax incentives ü Easing of the tax burden on the investing companies or their employees. ü Different sorts of tax exemptions on items such as import levies, sales tax, value-added -tax and so on. Ø The government manages these incentives to balance the impact on the public budget with the stimulus effect. 18/03/2018 7

Disadvantages of investment incentives Ø The Energy Task Force is aware that investment incentives potentially can lead to waste of public resources Ø if a wrong investment method is chosen or Ø does not lead to productive private sector practices. Ø This may occur from the way a given policy action influences future “rules of the game”. Ø The OECD publication "Checklist for Foreign Direct Investment Incentives Policies" lists the following types of unintended wastefulness resulting from investment incentives: • Ineffectiveness • Inefficiency • Opportunity costs • Deadweight loss • Triggering competition • Adverse selection 18/03/2018 8

Stock-taking of cash-flow incentives used in the MENA region 18/03/2018 9

An overview of cash-flow incentives ü Cash-flow incentives are incentives that aim to support the investor’s profitability and cash-flow during the life-time of the project. ü In MENA, the Energy Task Force has identified the following as the most commonly used: 1. Net metering 2. Power purchase agreements, augmented by competitive bidding 3. Feed-in Tariffs 4. Carbon pricing/Clean Development Mechanism 18/03/2018 10

1. Net metering Ø Consumers produce their own electricity from renewable energy sources and sell the surplus to the national grid for higher tariffs. § A meter measures the difference between the energy produced and the energy consumed by the industry – determines the price difference. § Applicable to both large scale and small scale projects. ü Advantage: § A higher share of renewable energy in the national energy mix § The benefit: subsidising only the excess energy produced 18/03/2018 11

2. Power purchase agreements with competitive bidding ü Higher tariffs are combined with a competitive bidding process to minimise subsidies ü Leads to advances in technological innovation, cost reduction, and competitiveness. ü The competitive bidding process allows the public authorities to assess the private sectors' offers based on three main evaluation criteria: 1. quality of the project, 2. cost of the electricity produced and 3. benefits on the local economy (i. e. percentage of domestic content, local job created) ü Advantage: ü Stimulates competition and improves the competitiveness of renewable energies while allowing the government to choose the best offer. ü Under the power purchase agreement, the national electricity agency agrees to purchase the electricity produced by the selected company at a fixed price, above the market price of electricity. ü Note: for the process to work, the right conditions ensuring fair competition and transparent bidding process are necessary (OECD principles). 18/03/2018 12

3. Feed-in Tariffs ü Feed-in tariffs (Fi. T) are seen as one of the most efficient incentive mechanism for private investment in renewables. addressing the key private investment issues while avoiding waste of public resources. ü Feed-in tariffs include regulatory and financial incentives : Ø guaranteed grid access Ø long-term (15 -25 years) contracts for the electricity produced with the authorities and renewable generators Ø fixed purchase prices based on the cost of renewable energy generation and tending towards grid parity Ø fixed price is paid to renewable generators for each MWh produced and supplied to the grid 18/03/2018 13

Feed-in Tariffs (continued) Ø Prices are set by the government and reflect the cost of the technology. Ø The fact that prices are cost-based is a key efficiency factor of this mechanism given that this enables diverse projects (wind, solar, etc. ) to be developed, and allows investors to obtain a reasonable return on renewable energy investments. Ø As a result, the price is set at a level higher than the spot price of electricity. Ø Support given to producers corresponds to the difference between the feed-in tariff and the market price for electricity at the point of delivery ü Efficiency of the mechanism depends on a correct assessment of the cost of the project and on keeping the payment levels in line with actual generation costs over time. ü Note: • Scientific studies for each type of renewable energy sources should be carried out regularly and the tariffs should gradually fall over time as technology changes, improved energy savings, and smart grids lead to cost reductions. 18/03/2018 14

4. Carbon pricing Ø Carbon pricing or so-called “Green certificates” consists of § pricing environmental damage through tradable permits and taxes (=internalising the cost) § issuing certificates of “renewable energy source” and obliging suppliers to buy them. Ø Certificates are traded separately from the energy produced – they relate to emission-reduction projects selling emission reduction credits equivalent to the amount of the reduced Green House Gas emissions of the project. Ø Advantage: § Green certificates can be an efficient policy instrument to encourage private investment into the renewable energy based on a market economy principles. 18/03/2018 15

Carbon pricing (continued) Ø Clean Development Mechanism (CDM; Kyoto Protocol) – an example of a way to internalise environmental costs through carbon pricing Ø Provision of a market for Green certificates (=Carbon Emission Reduction) to encourage emerging markets to implement projects that contribute to the reduction of GHG Ø Allows for the mobilisation of additional funding for clean projects Ø How it works: Ø CDM associates to emission-reduction projects in emerging markets with certified emissions credits, each equivalent to one tonne of CO 2. The countries are then allowed to sell them worldwide. When the country grants the ownership of the credits to the private investor involved in the renewable energy project, they provide an additional financial incentive to the private sector. Ø Advantage: Ø Tradable carbon credits alone are generally not powerful enough to entice investors into the renewable energy sector, but combined with other incentives, it can help attracting private investors particularly large emitters and private sector project, without implying additional public funding as underlined by the OECD's work on Green Growth. Ø Note that: this measure is only efficient for large projects (>1 MW) 18/03/2018 16

Overview of existing incentives for renewable energy projects in the MENA region (according to latest available data – please see appendix for more details on incentives in individual countries) Public competitive bidding Training Reduction in incentives sales taxes or VAT; Customs taxes (project) Tunisia UAE (2012) Jordan Morocco Net Tradable Capital Investment Metering CDM subsidies, tax credit grants and premium Algeria Egypt Feed -in Tariffs 18/03/2018 17

2. General recommendations for investment incentives 18/03/2018 18

General recommendations for investment incentives General conditions for enhancing the efficiency of investment incentives Ø Investment incentives should be clear and predictable, with transparent and easily available rules (OECD Investment Declaration). Ø Investment incentives should be uniform and non-discriminatory. Ø Investment incentives should never be permanent. They should only remain in place as long as the technology is not competitive. Ø Incentives should be continuously monitored to ensure they address the main barriers encountered by the investor. Ø Competitive bidding practices should be used wherever possible. 18/03/2018 19

3. Recommendations specific to renewable energies 18/03/2018 20

Main conclusions on investment incentives In the course of its discussion, the members of the Energy Task Force found that: Ø Cash-flow incentives work better than one-off incentives in the power-generation sector, particularly from the investor’s point of view. Ø Governments can take advantage of the incentive arrangements to set up competitive bidding processes for major projects. Ø Competitive bidding will incentivise companies to make an assessment of the incentive arrangements and help mobilise financial support. Note the following observations on risk: Ø Feed-in Tariffs place the technology risk on the supplier Ø The competitive bidding process puts the risk on the client 18/03/2018 21

Key recommendations to improve incentives for renewable energy investments When implementing renewable energy incentives, authorities should ü Allow independent electricity producers ü Set up independent energy regulators ü Consider renewable energy generation at different sizes and scales The authorities need to take into account: ü The size of the project/access to finance: • Incentives which facilitate access to finance (soft loans, loan guarantee, etc. . ) can lift a key barrier for large projects • For small projects, time is crucial for profitability; as a result incentives that accelerate administrative procedures and prior work is key to unlock investments ü The available expertise and knowledge of the technology: • Develop expertise on available technologies • Support local R&D through tax exemptions – in France they have proven to be effective • Encourage R&D into ways that available technology needs to be adapted to local conditions (e. g. combating dust particles in solar panels; Kuwait). • Encourage capacity building to have strong, stable counterparts for the private investors • Participate in international co-operation; such as Morocco joining the Implementing Agreement on Concentrated Solar Power (2011) of the International Energy Agency. 18/03/2018 22

Ø Investors need to assess the attractiveness of the investment incentive in the context of the regulatory framework of each country. Ø Renewable energy investment incentives need to be carefully tailored to each country’s characteristics. Ø For oil exporters: Ø Conventional incentives/grid parity is not feasible owing to low-price structure, therefore oil exporters need to look for special incentives, like setting up competitive bids for public funding. Ø These have huge power generation needs and hence need to attract more investment into new power generation (case of Algeria) Ø For oil importers: Ø Depending on the electricity tariff structure, the incentives need to be adapted to the investment they want to attract. Ø Morocco, Tunisia, and Jordan; do not find it politically easy to raise the cost of electricity but they need to diversify their power generation structure/energy mix. Ø Hence there is no “one-size-fits-all” solution: all actors in the electricity sector need to work together and find common solutions. Ø The Energy Task Force anticipates that this could create problems with local utilities.

Appendix Inventory of the main existing incentive schemes in selected MENA countries 18/03/2018 24

Egypt – Incentives • 10 international tenders for private sector to produce 250 MW of wind energy power for a total of 2500 MW capacity of renewable energy. Under Build-Own-Operate Transfer (BOT) agreements, the private investors carry the cost of the project, construct, operate and own the wind plant and are required to sell the energy to the National Electricity Company. • The selection of competitive bids Ø Phase 1: prequalification of the renewable energy projects based on the experience and the financial status of the investors. During this one-year period, precise wind measurements, soil testing and assessment of projects' the environmental impact are undertaken. Ø Phase 2 : launch of wind projects. In May 2009, a short list of investors submitted their prequalification documents for the first competitive bid for 250 MW wind farm based on the Build. Own-Operate transfer scheme. Competitive tenders for wind projects will be launched regularly until 2017 to achieve the energy target by 2020. • The New Renewable Energy Authority (NREA) is the single point of interface to deal with requests for private production of renewable energy. Information about incentives is public: • Power Purchase Agreement: the Egyptian Electricity Transmission Company guarantees to buy the electricity for a 20 -25 years period at a tariff set on a case-by-case basis between the grid operator and the power producer. The Central Bank of Egypt guarantees the state obligations. • Green Certificate: Investors receive the carbon credit associated with the project and can trade them on the international market. • Tax incentives: All renewable energy equipment and spare parts are exempted from the customs duties and sales taxes. • Access to the grid • Land allocation on favourable terms

Egypt – Advantages and Drawbacks of incentives on offer Effects on the private sector in Egypt Advantages Drawbacks Clear incentives scheme easily available to investors which stimulate competition Many guarantees reducing substantially the risks related to this project and encouraging companies to propose a smaller tariff under a power purchase agreement Given the high political risks in Egypt related to the Arab spring, supranational guarantees for financial obligation of the national electricity company, help reducing this risk for the investor Effects on the economy in Egypt Plus Minus Encourage technology transfer Encourage local manufacturing: Companies with a higher share of local component are favoured in the selection process. A portion of the tariff covering operation and maintenance costs is settled in local currency. Optimisation of public expenses: the principal expenses item is the tariff power purchase agreement. The other supports are either temporary or indirect costs (loss of tax revenue or technical assistance) Lack of measures to incentive companies to hire local human forces Customs taxes exemptions should be applied only to non locally available components Need to ensure the efficiency of public assistance directed to investor Moderate risk of moral hazard regarding customs and VAT taxes exemptions Moderate risk of adverse selection

Feed-in Tariffs: Egypt • Egypt plans to implement feed-in tariffs by 2012 for small and medium project with maximum capacities of 50 MW for a total renewable energy generation of 2500 MW. The objectives of this mechanism is first to support local private sector and SMEs while maximising the impact on local economy. Second it encourages energy intensive industries to produce their own energy at a competitive price and reduce their carbon footprint. The feed-in tariffs are expected include the following incentives: • Incentive tariff: varies depending on the cost of the renewable energy technology and the energy producing capacity of the area. • Guaranteed tariff: Egyptian Electricity Transmission Company guarantees to buy renewable electricity from selected participants for 15 years. • Access to the grid: Under the feed-in tariffs, the Egyptian Electricity Transmission Company ensured access to the grid to the participants. • Access to land: The Egyptian Electricity Transmission Companies has already allocated desert lands to renewable energy projects under the feed-in tariffs. The land is provided to the selected participants. • Financial guarantee: The Central Bank of Egypt guarantees all financial obligation contracted by the Egyptian Electricity Transmission Company. • Green Certificate: Investors receive the carbon credit associated with the project and can trade them on the international market. • Tax incentives: All renewable energy equipment and spare parts are exempt from the customs duties and sales taxes.

Morocco • Power plants with ratings above 10 MW can be built and operated by private enterprises, on condition that the project was subject to open tendering and power produced is sold to the Office National de l'Electricité (ONE) that is responsible for the procurement and management of wind plants. • The following incentives exist for the private sector: • Participation of 20% in the operating expenses; 5% in investments and 20% in the employees training cost: contribution to the cost of the training when hired and in-service training. • The competitive bidding contracts apply to both solar and wind power capacity. Companies are also incentivised to use local equipment either through bidding requirement or through a preference for proposal with a higher share of local equipment. • Further incentives include: • Power Purchase Agreement: The tariff is negotiable between the operator and the distributor or is already fixed. The agreement is generally set up for 20 - 25 years and ownership of the renewable energy electricity plant is generally transferred entirely to ONE afterward. • Access to the national grid. • Grants of 10% on capital expenditure with a ceiling of 200, 000 DH. • Carbon credit: The company owns the carbon credits associated to the project. • Access to land: ONE assists the company in selecting the site, receiving the permits and authorisation for the land. • Access to finance: ONE, as well as the Société d'Investissements Energétiques (SIE) and the Energetic Development Fund (FDE) (both financed by sovereign funds) can take an equity contribution to the project. It can also provide soft loan or loan guarantees • Tax-free zones: According to the area, the project can be exonerated of taxes and VAT. The Kyoto pole is a tax-free zone if the area is dedicated to energy efficiency and renewable energies.

Effects on the private sector in Morocco Strengths Weaknesses Strong incentives scheme which encourage private sector participation Multiple financial supports from authorities that help reducing substantially the costs related to the project. Incentives scheme encouraging participation of medium enterprises through the possible equity participation of various entities. participation of Uncertainties regarding available incentives for each project may reduce competition to few investors. Few incentives targeting the risks of the project leading to a higher discount rate and a high proposed tariff under the power purchase agreement Effects on the economy in Morocco Strengths Weaknesses Encourage companies to hire and train local human resources Encourage local manufacturing: Energy companies are encouraged to build and to use local manufacturing components The competition process encourages moderate public expenses in the long term by encouraging a smaller tariff under the power purchase agreement. There are many incentives that constitute direct financial support to reduce costs and increase revenues. Such schemes lead to: Higher opportunity costs Higher risk of inefficiency: If there were more measures, such as government guarantees, targeting investor risks, public expenses could be reduced. Higher risk of deadweight loss: By offering several subsidies for the same projects, investors are more tempted to require the same financial support in the future for other projects.

Net metering: Morocco • The Energi. Pro programme is similar to the Feed-in tariffs schemes but it applies only to companies producing their own electricity. In September 2006, ONE launched the Energi. Pro programme, which allowed to energy intensive industrial groups to produce their own electricity through renewable energy resources for up to 50 MW of installed capacity. • Incentive tariff: ONE purchase all energy produced in excess of the company's energy consumption at an incentive tariff by ONE. This fixed tariff was originally equivalent to 20% more of the peak tariff applied by ONE. • Guaranteed tariff: ONE guarantees to purchase the excess electricity produced by the company for up to 25 years. In return the company is obliged to sell its excess of electricity to ONE. • Administrative facilitation • Access to land • Access to grid • Under some circumstances, the company can be allowed to sell the electricity surplus to local and foreign consumers particularly to Europe, via the national electric network. • Green Certificate: the company is entitled to the carbon credit related to the project. • Benefits: Ø Companies face a known, clear regulatory framework in which to plan their investments. Ø Companies are encouraged to reduce their electricity consumption in order to be able to sell more electricity to ONE. Ø The state achieves increased share of renewable energy without significant subsidy given that the subsidised tariff is only applied to the energy produced in excess of the company' consumption.

Small renewable energy units: Morocco • 10% of funds from national rural electrification programme were allocated to photovoltaic home solar systems, well suited to the geographical location of the homes in remote mountainous areas. At the end of the programme in 2010, ONE originally planned that 250, 000 houses would have access to electricity using photovoltaic equipment. So far, around 60, 000 systems have been installed with a total capacity of some 4 MW. ONE offered two purchase options in partnership with the private sector to encourage citizens to adopt photovoltaic solar homes including : • Provision of a service: ONE commissioned a private company close to the beneficiaries to install the PV systems and to provide after-sales service and debt collection. • Fee-for-service partnership: The private operator is in charge of implementing the solar program, managing the technical and financial aspects of the program, performing maintenance on the installed systems, replacing equipment and collecting users’ fees in twenty-four Moroccan provinces. Customers pay an initial connection fee and a monthly service fee. In order to have this project profitable for the company, the ONE set up the following incentives: • Equipment grant: the ONE's equipment grant covers 66% of the equipment costs enabling electrical service at affordable rates: the connection fees of rural solar customers reduced by 40% which bring them closer to the urban electricity rates. • Administrative assistance • The programme was successful in its objective as the electrification rate estimated between 15 and 20% in 1996 is now estimated at 98% and has allowed to a certain extend to encourage the use of renewable energy. However, the subsidies and cost related to such programme are significant. In Morocco most of it has been financed by international donors including the European Investment bank, the Japan Bank for International Cooperation, the Inter-American Development Bank, the Kuwaiti fund and the Agence Française de Développement. For the partner energy company the benefits are to improve its public image and deepen its relations with the authorities before all, rather than to receive a substantial margin.

Feed-in Tariffs: Algeria • The Decree on the Diversification of Power Generating Costs introduced feed-in tariffs to support the private production of electricity through renewable energy sources covering hydropower, wind power, geothermal and solar power and electricity from waste utilisation. The state bears the usage costs. • Incentive tariff: The premium tariff granted to private production of renewable energy. A specific incentive tariff scheme is proposed for combined utilisation of solar energy and natural gas based on the contribution of the renewable energy to the total electricity generated by the plant. For instance renewable energy produced under such system are granted an incentive tariff of 200% of the current price of electricity if it accounts for 25% or more of the total electricity produced by the plant. If it accounts for 20% to 25%, the incentive tariff is of 180%. The rationale for using this mechanism is that the authorities find it one of the most effective ways of making use of renewable energies. • Guaranteed tariff: The authorities guarantee to buy the quota of renewable energy. • Access to the electrical grid: The costs of extension of the electricity network to connect the electricity production are shared as follows: Ø The cost of the study for the connection of the site to the national grid is bear by the electricity generating company. The connection cost to electricity network is borne by the network operator. Ø Priority on the market: The excess of electricity produced by the electricity generating company can be distributed through the national grid and is prioritised on the market. • Drawbacks: Ø Lack of clarity regarding the length of the contract, Lack of flexibility of the incentive tariff

Net Metering: Tunisia • The Tunisian on Energy Efficiency allows companies in the industry, agriculture and services to produce renewable energy electricity for their own consumption and sell the excess of electricity produced to public utility Société Tunisienne de l'Electricité et du Gas (STEG). The law includes the following incentives: Ø Incentive tariff: The company is allowed to sell its excess of energy production up to 30% of its annual electricity production to STEG at an incentive purchase price validated by the Regulatory Authority. Ø Guarantees: The purchase price is reviewed annually by the Ministry of Industry, Energy and Small and Medium enterprises. Ø Access to grid: STEG guarantees to private producers access to the electric grid at an incentive price • Those investments also benefits from other incentives specified in the Investment Code of Tunisia including: • Reduction of customs duties to the minimum rate of 10% (from general rate of 18%) and exemption from VAT for imported equipment of renewable energies, for which no similar equipment is locally manufactured. • Exemption from taxes equivalent to customs duties and under a VAT of 10% for locally manufactured equipment. • Grant for demonstration project: A premium of 50% of the global cost for demonstration project with a ceiling of DTN 1000000 is available for private project of renewable energy • Investment grant: Investors in renewable energy are eligible to a premium of 70% of the intangible investments up to DTN 70000; a premium of 20% for tangible investment with a ceiling of 100000 DTN for small energy consumer; with a ceiling of DTN 200000 for energy intensive industries.

Acknowledgements MENA – OECD Taskforce would like to thank the following persons for their contribution to the presentation Christopher Segar, IEA Pol Arranz Piera, TTA Setsuko Wakabayashi, NEDO Yukitoshi Yamazaki, Sumitomo Metals Andrew Moorfield, Lloyds Banking Group Jean-Charles Arrago, Total Marc Darras, GDF-Suez Olivier Soupa, Schlumberger 18/03/2018 34

Contacts Ania Thiemann Senior economist/Project manager MENA-OECD Investment Programme Private Sector Development Division, OECD Ania. Thiemann@oecd. org Nathalie Sulmont Junior Policy Analyst MENA-OECD Investment Programme Private Sector Development Division, OECD Nathalie. Sulmont@oecd. org 18/03/2018 35