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RENEWABLE ENERGY POLICIES-III

By
Dr. Shanty Chacko
THE RISKS OF NOT MEETING ESTABLISHED CLIMATE GOALS AND
THE OPPORTUNITY FOR SUSTAINABLE SOLUTIONS
• The IPCC Special Report on Global Warming of 1.5°C (SR1.5), released on 8
October 2018, estimates that human activities have already caused approximately
1.0°C of global warming above preindustrial levels.
• Unless significant countermeasures are taken, global warming would not be
limited to/stabilize at 1.5°C between 2030 and 2052 (IPCC, 2018).
• Figure below illustrates the five integrative reasons for concern (RFCs) and
provides a framework for summarizing key impacts and risks across sectors and
regions.
• Pathways limiting global warming to 1.5°C require rapid and extensive
transitions in all sectors (i.e., energy, agriculture, urban infrastructure and
buildings, transportation, and industrial systems).
• These system transitions are unique in terms of scale and more pronounced in
terms of speed.
• As such, they require cross-sector emissions reductions, a wide portfolio of
mitigation options and a significant increase in investments.
• Efforts to limit warming to 1.5°C are closely linked to sustainable development,
which balances social well-being, economic prosperity and environmental
protection.
• Rapidly shifting the world away from the consumption of fossil fuels causing
climate change toward cleaner, renewable forms of energy is key if the world is to
reach the agreed-upon climate goals.
• Reducing energy-related CO2 emissions is the heart of the energy transition.
• Because many governments have strengthened efforts to reduce national
emissions in recent years, projected energy-related CO2 emissions in the
IRENA REmap Reference case1 between 2015 and 2050 have declined from
a projected 1 380 Gigatons (Gt) based on 2017 analysis to 1 230 Gt based on
2018 analysis – an 11% drop.
• However, this improvement is not yet reflected in current CO2 emissions,
which unfortunately actually grew by around 1.4% in 2017 (IEA, 2018).
• To set the world on a pathway towards meeting the aims of the Paris
Agreement, energy-related CO2 emissions would need to be scaled back by
at least an additional 400 Gt by 2050 compared to the Reference Case.
• In other words, annual emissions would need to be reduced by around 3.5%
per year from now until 2050 and continue afterwards
•Changes should take into account and be in line with three key pillars for the
reduction of climate change and closing the sustainability gap, namely:
1. increasing the share of renewables in the energy matrix
2. reducing global energy demand through energy efficiency
3. increasing the electrification pathway for all end-use sectors.
• Closing the climate change and sustainability gaps will involve exploring possible
alternative pathways, tailored to a nation’s specific needs and capabilities.
• In this context, decentralized energy resources (DER) offer several environmental
and sustainability opportunities, including reductions in the carbon intensity of
energy use, improvements in resource efficiency, increased energy security and
increased flexibility in the creation of business opportunities.
• The decentralization of energy supply also offers a concrete opportunity for the
empowerment of regions, cities, communities and other local entities.
FINANCIAL ANALYSIS
•All investments should be subject to a systematic process of capital appraisal with
two goals in mind:
 Provide a basis for selection or rejection of projects by ranking them in order of
profitability or social and environmental benefits; and
Ensure that investments are not made in projects that earn less than the cost of
capital (generally expressed as a minimum rate of return).
• The first step in any economic evaluation is to project the cash flow.
• The cash flow of a project is the difference between the money generated
(revenue) and ongoing costs (expenses) of the project.
• The definition of cash flow is different from accounting profit.
• The cash flow, for instance, ignores depreciation and the interest charges, since
they are accounted for in other ways.
•Cost-benefit analysis (CBA) comprises, not one, but a set of analytical tools used
to assess the financial and economic viability of a proposed investment.
•Some of the analytical tools that can be used include:
 Benefit-Cost Ratio
Net Present Value (or Discounted Cash Flow)
Internal Rate of Return
Least Cost Planning
Payback Period
Sensitivity Analysis
• The benefit-cost ratio (BCR) is the ratio between discounted total benefits and
costs. Thus, if discounted total benefits are 120 and discounted total costs are 100
the benefit-cost ratio is 1.2: 1.
•For a project to be acceptable, the ratio must have a value of 1 or greater.
•Among mutually exclusive projects, the rule is to choose the project with the
highest benefit-cost ratio.
•The disadvantages of the BCR is that it is especially sensitive to the choice of the
discount rate, and can provide incorrect analysis if the size or scale of the various
projects being compared is great.
• The net present value (NPV) approach (also referred to as discounted cash flow
approach) uses the time value of money to convert a stream of annual cash flow
generated by a project to a single value at a chosen discount rate.
• This approach also allows one to incorporate income tax implications and other
cash flows that may vary from year to year.
• The discounted cash flow or net present value method takes a spread of cash flow
over a period of time and discounts the cash flow to yield the cumulative present
value.
• When comparing alternative investment opportunities, the NPV is a useful tool
• As might be expected, when comparing alternative investments, the project with the
highest cumulative NPV is the most attractive one.
• The only serious limitation with this approach is that it should not be used to compare
projects with unequal time spans.
•The Internal Rate of Return (IRR) and the net present value approach are very similar.
As outlined, the NPV determines today’s values of future cash flow at a given discount rate.
•On the contrary, in the IRR approach one seeks to determine that discount rate (or interest
rate) at which the cumulative net present value of the project is equal to zero.
•This means that the cumulative NPV of all project costs would exactly equal the cumulative
NPV of all project benefits if both are discounted at the internal rate of return.
• In the private sector, this computed financial internal rate of return (FIRR) is compared to
the company’s actual cost of capital.
• If the FIRR exceeds the company’s cost of capital, the project is considered to be
financially attractive.
•The higher the IRR compared to the cost of capital, the more attractive the project.

•On the other hand, if the IRR is less than the company’s cost of capital, then the
project is not considered to be financially attractive.
• For projects financed in whole or in part by the public sector, the discounted cash
flow may need to be adjusted to account for social benefits or economic distortions
such as taxes and subsidies, economic premium for foreign exchange earnings that
accrue from the project or employment benefits.
• The resulting statistic would be the economic internal rate of return (EIRR) and
would be compared with the country’s social opportunity cost of capital.
• If the EIRR exceeds the social opportunity cost of capital the project would
provide economic benefits to the society.
•Payback Period is the easiest and most basic measure of financial attractiveness of
a project is the simple payback period.
•The payback period reflects the length of time required for a project’s cumulative
revenues to return its investment through the annual (non-discounted) cash flow.
• A more attractive investment is one with a shorter payback period.
• In development settings, however, there is little reason to assume that projects
with short pay back periods are superior investments.
• Also, the criterion has a bias against long gestation projects such as renewable
energy.
•The Least-Cost Analysis method is used to determine the most efficient way (the
least cost) of performing a given task to reach a specified objective or set of benefits
measured in terms other than money.
• For example, the objective might be to supply a fixed quantity of potable drinking
water to a village.
•The examination of alternatives might entail wind pumping, run-of-river offtake,
impoundment, etc.
• One would calculate all costs, capital and recurrent, to achieve the objective,
apply economic adjustments and discount the resulting stream of costs for each
alternative examined.
• The one with the lowest NPV would be the one most efficient (least cost).
• Sensitivity Analysis refers to the testing of key variables in the cash flow pro-
forma to determine the sensitivity of the project’s NPV to changes in these
variables.
• For example, in a renewable energy project proposal, one may increase fuel costs
or fuel transport costs, remove import restrictions on solar panels, lower labor
costs, increase land acquisition by different rates to determine the corresponding
impact on the NPV.
• It is useful to test a variable in the cash flow pro-forma that appears to offer
significant risk or probability of occurring.
• The analysis becomes another useful tool when combined with others to improve
the decision- making process.
Benefit-Cost Ratio is Discounted Benefit/Discounted Cost or 132/100 = 1.32:1.0
Net Present Value is Discounted Benefit less Discounted Cost or 132 - 100 = $32
Discounted Cash Flow is the Discounted Net Benefit or $32
Internal Rate of Return is that Discount Rate when the Discounted Cash Flow = 0
which is 23%
Payback Period occurs early in year 3 when benefits begin to exceed $100.
• Multi-criteria analysis -While each tool is sufficient to provide data needed to
make efficient decisions, multi-criteria analysis (combining one or more tools
with other project data and benefits) can be helpful in evaluating future financial
performance.
• For example, other criteria might include the distribution of benefits, ease and
speed of implementation and replicability that might be combined with one of the
quantifiable tools illustrated above.
RENEWABLE PORTFOLIO STANDARDS AND GOALS (or targets)
•Renewable Portfolio Standards (RPS) require that a specified percentage of the
electricity utilities sell comes from renewable resources.
•States have created these standards to diversify their energy resources, promote
domestic energy production and encourage economic development.
•These policies can play an integral role in state efforts to diversify their energy
mix, promote economic development and reduce emissions.
•Roughly half of the growth in U.S. renewable energy generation since the
beginning of the 2000s can be attributed to state renewable energy requirements.
•It’s worth noting that several states have expanded their policies to incorporate
additional resources in recent years.

• There is now a distinction between a “Renewable Portfolio Standard” (RPS)
and what some states have labeled as a “Clean Energy Standard” (CES).
• The difference between a RPS and a CES comes down to how a particular
state defines what is a “renewable” versus a “clean” source of energy.
• Clean energy typically refers to sources of energy that have zero carbon
emissions.
• Biomass, which is an eligible resource under many state RPS policies, is
considered “renewable” despite producing carbon emissions.
• In most cases, a CES policy will include an RPS as part of the requirement.
• For example, California enacted its CES in 2018, which requires the state’s
utilities to generate 100% clean electricity by 2045.
• As part of the CES, the state RPS was increased to require 60% of electricity
must come from renewable sources by 2030.
• Following that date and benchmark, the remaining 40% of the CES can be met by
any qualifying clean energy resource.
• Most often, these are defined as any resource that is carbon-free or carbon-
neutral.
• State renewable portfolio standard policies vary widely on several elements
including RPS targets, the entities they include, the resources eligible to meet
requirements and cost caps.
• In many states, standards are measured by the percentage of retail electric sales.
• Eligible resources under an RPS vary state-by-state but often include wind, solar,
biomass, geothermal and some hydroelectric facilities—depending on the size
and vintage.
• States determine eligible resources based on their existing energy generation mix
and the potential for renewable energy development in their states.
• To promote a diversified resource mix and encourage deployment of certain
technologies, states have established carve-outs and renewable energy credit
multipliers within their RPS for specific energy technologies, such as offshore
wind or rooftop solar.
• Carve-outs require a certain percentage of the overall renewable energy
requirement to be met with a specific technology, while credit multipliers award
additional renewable energy credits for electricity produced by certain
technologies.
LIFE CYCLE ANALYSIS OR ASSESSMENT
• One of the most common methodologies for quantifying sustainability is life cycle
assessment (LCA).
• An LCA is a systematic analysis of environmental impact over the course of the
entire life cycle of a product, material, process, or other measurable activity.
• LCA models the environmental implications of the many interacting systems that
make up industrial production.
• When accurately performed, it can provide valuable data that decision-makers can
use in support of sustainability initiatives.
COST OF SUPPLY TECHNOLOGY VERSUS ENERGY EFFICIENCY
• When energy efficiency results in reduced consumption, it can reduce prices.
• This is the case especially if energy efficiency activities are sufficiently
widespread and of a large enough scale, for example fuel economy standards for
vehicles.
• Economic models use price elasticities to represent how people and businesses
respond to changes in the price of energy and goods.
• Policy makers need to be aware of the key price elasticities and assumptions
included in a model, as these can be important determinants of macroeconomic
analysis results.
• The duration of energy price changes strongly influences behavior, especially if
revenues and return to capital changes – reducing the incentives to invest in or to
replace stock.
• Several studies show that the long-term effects of higher energy prices or taxes
may exceed the short-term effects by a factor of 3 to 4.
• Consumers of these services are less likely to respond to short-term changes in
price.
• Improving efficiency within the energy supply sector can help energy providers
deliver better service for their customers while reducing their own operating costs,
improving profit margins and mitigating risk.
• Utilities that encourage energy efficiency amongst their customers can generate
significant cost savings for themselves through avoided infrastructural investment
in energy generation and transmission and distribution infrastructure through
delaying or deferring costly system upgrades.
• Other benefits include improved system reliability and dampened price volatility
in wholesale markets.
• Providers can also benefit indirectly through benefits that accrue for customers
from improved affordability of energy services, which in turn can reduce arrears
and associated administrative costs for utilities.
• To maximize the benefits of energy efficiency, utilities can adopt programmes that
reduce energy consumption and target load reduction and load shifting and can
include the provision of advice to customers on relevant energy efficiency
measures or assistance with accessing financial incentives.
• Other initiatives could include the bulk procurement and/or the distribution and
installation of energy efficiency products.
• Encouraging the use of information and communication technology (ICT) tools
on the end-user side can support the shift towards more efficient use of energy for
both energy providers and their customers, enabling consumers to more actively
control their energy use and energy providers to better monitor, aggregate and
control end-use loads.

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