A Product of A Sure Path to Sustainable Solar Solar Deployment Guidelines September 2019 This report was researched and prepared by the World Bank with the contributions of its consul- tants Nodalis, Norton Rose Fulbright, and Capsim in partnership with the Agence Française de Développement (AFD), the International Renewable Energy Agency (IRENA) and the International Solar Alliance (ISA). The work was funded by the Energy Sector Management Assistance Program (ESMAP), a multi-donor trust funded program administered by the World Bank, and the Clean Technology Fund (CTF), one of two multi-donor trust funds among the Climate Investment Funds (CIF). Authors: World Bank (Sabine Cornieti and Nadia Taobane), Nodalis (Thomas Barbat, Martin Buchsenschutz, Théo Cladière and Laetitia Labaute), Norton Rose Fulbright (Benoit Denis, Amandine Delsaux and Anne Lapierre) and Capsim (Cécile Lafforgue and Ronan Besrest) with the contributions from AFD (Mathilde Bord-Laurans, Jérôme Gastaud and Arthur Honoré), ISA (Cécile Martin-Phipps), IRENA (Jeff Vincent), the Kreditanstalt für Wiederaufbau (KfW) (Daniel Etschmann and Wooslène Vanginé), European Investment Bank (EIB) (Bettina Abel, Bastiaan Verink and Svetla Stoeva), Clinton Foundation (Kyle Coulam, Sania Detweiler, Siana Teelucksingh, Alexis Tubb and Fiona Wilson) and World Bank Group staff and consultants (Juliette Besnard, Fernando de Sisternes, Zuzana Dobrotkova, Rida E Zahra Rizvi, Chandrasekar Govindarajalu, Besnik Hyseni, Tarek Keskes, James Knuckles, Jason Lee, Annabelle Libeau, Alexis Madelain, Charles Miller, Claire Nicolas, Dayae Oudghiri, Yi Xu and Yabei Zhang) Editor: Steven Kennedy Design: Visual Capitalist © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW | Washington DC 20433 202-473-1000 | www.worldbank.org This work is a product of the staff of the World Bank with external contributions. 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Washington, DC: World Bank.” 1 A Sure Path to Sustainable Solar A Sure Path to Sustainable Solar Solar Deployment Guidelines A Product of A Sure Path to Sustainable Solar Solar Deployment Guidelines September 2019 04 EXECUTIVE SUMMARY 03 PHASE2: SETTING TABLE OF CONTENTS A STRATEGY 01 4.1 Objectives 32 4.2 An enabling legal framework 34 INTRODUCTION 4.3 High-level risk analysis 39 1.1 Background and context 07 4.4 Selecting a deployment scheme 40 1.2 Developling a pipeline of bankable 09 4.5 Bidding framework 45 and sustainable solar projects 4.6 Maximizing socio-economic 50 1.3 Three-phase approach 10 benefits 4.7 Solar deployment program: 55 key results 02 DIAGNOSTIC TOOL 12 05 PHASE3: IMPLEMENTATION 5.1 Objectives 57 03 5.2 Preparing the technical aspects of a solar program 59 PHASE1: PLANNING 5.3 Public investments 62 3.1 Objectives 16 5.4 Procurement / selection of IPPs 64 3.2 Meeting existing and future 18 5.5 Construction and production 73 demand at the core of the planning phase 3.3 Linking demand to technical 21 06 solutions 3.4 Planning for a better integration 29 of future VRE projects CONCLUSION 75 3.5 Arriving at evidence-based 30 sustainable solar targets REFERENCES 78 2 A Sure Path to Sustainable Solar EXECUTIVE SUMMARY EXECUTIVE SUMMARY Achieving global goals for access to SRMI aims to support countries in developing energy and mitigation of climate change sustainable solar programs that will attract will require a quadrupling of present levels private investments and so reduce reliance on of solar photovoltaic (PV) generation in public finances. the developing world by 2025 to reach around 950 gigawatt (GW)1. Its unique approach offers development and climate financing for This represents an investment of more than technical assistance to help countries US$500 billion in new solar PV generation develop evidence-based solar targets, alone. To reach this objective, large amounts implement a sustainable solar program, and of private funding will have to be unlocked maintain robust procurement processes to complement the limited public financing with transaction advisors available. Yet most developing countries still lack a pipeline of bankable solar projects crit ic a l p u b l ic i nves t m e nt s to e n a b l e for consideration by the private sector. To integration of variable renewable energy develop one, countries must take a series of (VRE), finance solar park infrastructure, and key steps to tackle critical risks perceived by increase access to electricity the private sector while also minimizing risks risk mitigation instruments to cover residu- for the public sector. al risks perceived by private investors The World Bank– Energy Sector To complement the Initiative, the present guide M a n a g e m e n t A s s i s t a n ce Pr o g r a m was developed to lay out a path to privately (WB-ESMAP), in partnership with, Agence f inanced sustainable solar projects. SRMI Française de Développement (AFD), developed a three-phase approach to solar PV International Renewable Energy Agency deployment. In the Planning phase, technical (IRENA) and International Solar Alliance plans are made to enable the country to develop (ISA) developed the Solar Risk Mitigation informed solar targets. In the Strategy phase, a Initiative (SRMI or “the Initiative”) to sustainable national solar program is developed. address these challenges. In the Implementation phase, action is taken to execute the sustainable national solar program. This integrated approach enables, countries to capitalize on the deployment of solar genera- tion to fight climate change and support energy access but also promote energy security, keep pace with rapidly growing electricity demand, and foster socio-economic development. 1 According to the World Bank’s estimates, based on the International Energy Agency’s Sustainable Development Scenario. A Sure Path to Sustainable Solar 3 EXECTIVE SUMMARY EXECUTIVE SUMMARY Figure 1. SRMI a three-phase approach Analysis / Studies Outputs Outcomes PLANNING PHASE Least-cost Least-cost Least-cost transmission plan generation plan electrification plan VRE integration studies List of key grid Sustainable Sustainable upgrades for VRE grid-connected off-grid solar integration solar targets targets STRATEGY PHASE High-level bidding Solar deployment Public parties roles and framework targets and timeline responsibilities matrix Agreed government Deployment scheme Socio-economic support and legal selection benefits strategy changes needed Sustainable solar program IMPLEMENTATION PHASE Public party technical preparation Risk mitigation of phase 1 of program instrument in place Public investment if Final contractual any for solar parks arrangements Public investment Deloyment scheme Procurement ready in grid completed technically ready IPP selection procurement conducted VRE grid integration enabled Sustainable solar targets achieved 4 A Sure Path to Sustainable Solar EXECUTIVE SUMMARY The report details each step to be taken to The pipeline assessment estimates that more develop an effective program, highlighting than US$120 million in technical assistance— links between each step and other critical for the completion of least-cost generation, matters that should be considered along transmission and electrification plans; VRE the way to ensure an integrated approach. integration studies; and development of the solar program, with support for procurement The guidelines also include a diagnostic tool from transaction advisors—would be required that countries can use to benchmark their to enable all countries in this region to reach progress in fulf illing the conditions for a the implementation phase of such a program. sustainable solar program. For solar deployment to not become an issue To support the development of the Initiative, for the utilities, countries will have to build a market sounding was conducted, along with the infrastructure needed to integrate VRE consultations with governments and private into their existing power grid. Based on the investors. In parallel, a pipeline assessment pipeline assessment for Sub-Saharan Africa, was done to gauge the needs of countries for three out of four countries in the region have technical assistance, public investments, and a grid considered weak that cannot accommo- risk mitigation. date a solar PV penetration of more than 5–10 percent. The main conclusion of the pipeline assess- ment is that few countries have completed Enabling these grids to absorb the current solar the preliminary work necessary to mount a PV targets (more than 22 GW) will require public sustainable solar program. In Sub-Saharan investment of more than US$1billion in grid Africa, for example, 90 percent of the countries upgrades, dispatch upgrades, and storage— assessed for this report 2 do not meet all the but those steps would unlock over US$17 billion conditions for a sustainable solar program, of private investments. even if in most countries strong willingness to develop such programs is present. 2 A high-level pipeline assessment of the Sub-Saharan Africa region was conducted using data from various sources, including SEforAll, IEA, the World Bank, and the countries themselves. Sufficient data was available for 46 countries of the region. A Sure Path to Sustainable Solar 5 1 INTRODUCTION 1.1 BACKGROUND AND CONTEXT 1 INTRODUCTION A substantial deployment of solar and wind gener- Yet, why are there so few privately owned solar ation is needed to meet the Paris Agreement’s and wind projects in developing countries? What targets to mitigate climate change, to support do countries need to do to see a significant deploy- countries in reaching their energy security objec- ment of private investments in VRE, deployments tives, and to ensure energy access for all. that would be aligned with national needs while also being affordable? According to the World Bank’s estimates, based on the International Energy Agency’s (IE A) To answer those questions and provide concrete Sustainable Development Scenario, 950 gigawatts solutions, several institutions have joined forces (GW) of solar photovoltaic (PV) and 580 GW of wind to develop the Solar Risk Mitigation Initiative need to be installed in developing countries by (SRMI, or the Initiative). Focused on solar PV 2025.3 Those targets represent increases of 690 deployments and to be scaled up to wind, SRMI GW of solar PV and 330 GW of wind from today’s supports countries in designing sustainable current installed capacity—to be built within six programs that could leverage private invest- years and an investment of over US$500 billion in ments. The present document is the first part solar PV and US$400 billion in wind. of a set of Sustainable Solar Guidelines devel- oped under the Initiative. From the perspective Despite the steep reduction in power purchase of governments and state utilities, it presents agreement (PPA) prices for solar PV and wind, key steps to be taken to design and implement a together variable renewable energy ( VRE), sustainable solar roadmap in which private invest- deployments are lagging behind the rate and scale ments are leveraged through bankable, cost-op- needed to reach the Sustainable Development timized projects, and that will allow countries to Goals (SDGs) and the Paris Agreement. maximize the socio-economic benefits triggered by the solar projects implemented. To support faster deployment and reduce the burden on public fiscal resources, private invest- ments in solar and wind power generation will have to be leveraged. 3 Universal energy access (SDG 7), reduction of the severe health impacts of air pollution (part of SDG 3), and fighting climate change (SDG 13). A Sure Path to Sustainable Solar 7 1 SOLAR RISK MITIGATION INITIATIVE INTRODUCTION SRMI is an initiative of the WB-ESMAP in To overcome the challenges of scaling up solar PV partnership with, AFD, ISA and IRENA . It in developing countries, SRMI emphasizes three is supported by a Stakeholders Group that components to tackle risks that prevent or limit includes the African Development Bank (AfDB), solar scale up and to support the development of a the European Investment Bank (EIB), and the sustainable pipeline of bankable projects: Kreditanstalt für Wiederaufbau (Kf W). SRMI the enabling environment helps countries develop and implement their grid-connected and off-grid solar targets by the procurement process mitigating risks inherent (i) to solar deployment risk-mitigation coverage to cover residual risks and (ii) to attracting private capital. SRMI’s first products are (i) the Sustainable Solar This approach limits public investments Guidelines, of which this document is the first to critical aspects of VRE deployment and part (the second part will be in the format of a energy access. SRMI’s core approach will be user-friendly ,interactive document focusing on applied to wind energy in the second phase of utility-scale solar PV, as well as wind and off-grid the Guidelines. solar), and (ii) a Global e-Tendering Platform that will enable countries to launch a competitive SRMI’s unique approach offers development process to select independent power producers and climate financing for (IPPs) in a robust manner. technical assistance to help countries develop evidence-based solar targets, This secure and customizable platform is expected implement a sustainable solar program, and to increase the visibility of countries’ solar maintain robust procurement processes programs at an international level, enhancing (with transaction advisors) their attractiveness, increasing competition, and driving PPA prices down. Also, under development critic a l p u b lic invest m ent s to ena b l e are a risk assessment and mitigation platform, led integration of variable renewable energy by IRENA, to provide guidance on risk-mitigation (VRE), f inance solar park infrastructure instruments; and an integrated capacity build- (if applicable), and increase access to ing program, led by ISA, that will cover the solar electricity value chain from the design and procurement of risk mitigation instruments to cover residual bankable projects to their operation and mainte - risks perceived by private investors. nance (O&M). Enabling environment Sustainable pipeline of bankable projects Robust Risk mitigation procurement coverage For more information: https://www.worldbank.org/en/ topic/energy/brief/srmi 8 A Sure Path to Sustainable Solar 1.2 DEVELOPING A PIPELINE OF BANKABLE AND SUSTAINABLE 1 INTRODUCTION SOLAR PROJECTS At the core of SRMI is the limited pipeline of Although risks are inherent to each country and sustainable IPP-owned solar PV projects. The its context, most developing countries present aim of the document is to inform governments in common risks that can be grouped into two broad the development of an attractive yet sustainable categories: (i) risks occurring during the devel- program taking in account public and private opment phase, that is, prior to construction and sector’s perspectives. operation; and (ii) those that arise once the project begins to operate. Both types of risk are integrated In 2018, under SRMI, the World Bank commissioned into the IPPs and lenders’ cost of capital. a market sounding of the risk mitigation coverage D eve l o p m e nt r is k s e n co m p ass (i) g r i d of solar PV projects. Focused on IPPs, developers, risk, including connection risks; (ii) land investment funds, and private lenders, the market risk, including availability, permitting, and sounding confirmed that the critical issue faced by environmental and social aspects; (iii) legal IPPs is not the lack of robust risk-mitigation instru- risk, including the applicable regulatory, ments per se, but rather a combination of (i) insuffi- arbitration, and judicial frameworks; (iv) cient off-taker creditworthiness, (ii) inadequate legal procurement risk; and (v) integrity risk. and regulatory frameworks, (iii) weak procurement processes and capacity, (iv) risk of curtailment due Operational risks encompass (i) off-taker to grid integration constraints, and (v) land ownership credit risk (including the off-taker’s record issues (see Figure 2). of performance and timely payment) and risk of contract termination; (ii) the country’s power sector risk (including sector financial sustainability risk, reform risk, regulatory risk, and delay in the government’s construction Figure 2. Key Risks Identified by Private Investors work; (iii) market risk (including currency risk and interest rate risk; (iv) country and 21% 18% 19% 17% m a cro econ omic risk s; a n d (v) po l it ic a l risk (including risks of breach of contract; 50% expropriation; transfer restric tion and currency inconvertibility; and war and civil disturbance). 65% 55% 54% 65% In light of the results of the market sounding, countries seeking the benefits of leveraging 45% private investments can begin by conceiving a 26% 29% sustainable solar program at the national level, 14% 18% targeting critical development and operational 5% risks. A fair risk allocation between the private Off-taker Risk Legal Counterpart Grid Land and public stakeholders translated into clear (liquidity and Expertise termination) (Procurement) contractual arrangements will allow govern- ments to address those risks in a viable manner Less Critical Very Critical Extremely Critical and arrive at a more affordable tariff containing the lowest possible risk premium. Source: World Bank Market Sounding 2018. A Sure Path to Sustainable Solar 9 1 1.3 THREE-PHASE APPROACH INTRODUCTION The SRMI’s Sustainable Solar Guidelines present a Across the three phases, it is critical to consid- methodology to develop a sustainable pipeline of er the following key questions, central to the solar projects that can be privately financed. development of a sustainable solar program: Drawing on lessons learned from the successes and How much VRE can be integrated failures of national electricity policies and IPP selec- into the national grid? tion processes in developing countries, each step in the methodology is designed to ensure sustainability for the How much new generation, country through energy security and affordable electric- particularly solar capacity, is needed ity, and to reduce the risks perceived by IPPs and lenders. to meet estimated demand and over what time horizon? This document focuses on ground-mounted solar PV projects, while the second part of the Guidelines will Where is new VRE generation be extended to include wind and off-grid. The report needed, and where should it be assumes the point of view of the government/public injected into the grid? sector. As the specif ic role of ministries, utilities, and regulators are country specific, the public party What are the critical public is referred to as “the government” throughout the investments required for sustainable document, except when a given role is clearly set for the VRE deployment? utility or other specific actor. In addition, because the document assumes the perspective of the public sector, Who should invest in solar projects? it does not look at schemes in which the government is not involved, such as when the off-taker is a private How should private investors be entity. Application of such approaches should take into selected? account the specific circumstances of the country to devise tailor-made solutions building on the methodol- What is the best way to allocate and ogy described in this document. mitigate risks to ensure that projects are both bankable and affordable? The methodology can be divided into three phases. How can the socio-economic benefits of projects be maximized? The Planning phase focuses on technical What risk-mitigation instruments plans that enable the country to develop do private investors need to cover informed solar targets. residual risks? In the Strategy phase , the national solar program is developed around key steps to a sustainable implementation; those steps reflect the country’s specific needs for the careful selection of investors and an allo- cation of risk optimized for the country’s circumstances. The strategy is put into action during the Implementation phase. 10 A Sure Path to Sustainable Solar 2 2 DIAGNOSTIC TOOL DIAGNOSTIC TOOL 2 2 DIAGNOSTIC TOOL DIAGNOSTIC TOOL The diagnostic tool presents the key actions a country should consider to deploy solar power sustainably. The approach centers on developing a pipeline of projects capable of attracting private investment. The steps are developed from the perspective of public stakeholders, especially the Ministry of Energy and the state utility. Depending on the country, roles are assumed by different actors; therefore, the stakeholder assigned to each activity will need to be identified when the framework is implemented. These steps have various levels of criticality. Those marked with one star in the table below are moderately critical; those with two stars are highly critical. They should be viewed as a whole, with an appreciation of how they interact, as the results of one step can constitute or affect the input of another. (These interactions are examined in detail in the body of this report as well as presented in table 1.) Steps need not be developed in a strict sequence, as some can be conducted in parallel. It is imperative, however, to understand how a given step might fundamentally alter the entire program and its successful implementation. The main analytical inputs are presented in the tool; critical data inputs are not represented below but in the core of the document. Table 1. Diagnostic tool: An approach to solar deployment TYPE ELEMENTS APPROACH RANKING PHASE 1: PLANNING Input Off-grid demand Critical when access is low. The Multi-Tier * assessment Framework may be used to support the assessment. Plan Least-cost electrification plan ** OUTPUT SUSTAINABLE OFF-GRID SOLAR TARGETS Input Studies of integration of Perform load-flow analysis, grid-stability study, ** variable renewable energy and short-circuit and protection studies. Input High-level locational studies Perform load-flow analysis and gather * geospatial land/geography data. Plan Least-cost transmission/distribution ** (economic analysis iterated together with generation plan) OUTPUT LIST OF KEY GRID UPGRADES, including battery storage Input Domestic resource The global solar and wind atlas (online tool) * assessment may be used to assess country-specific sites. Input Grid-connected demand Integrate results of least-cost electrification plan. * assessment Input Grid flexibility assessment Clarify technical and commercial flexibility ** constraints such as the lack of a dispatch automatic control or take-or-pay agreements. Plan Least-cost generation plan (economic analysis iterated ** together with transmission plan and VRE integration analysis) OUTPUT SUSTAINABLE GRID-CONNECTED SOLAR TARGETS * moderately critical ** highly critical 12 A Sure Path to Sustainable Solar 2 DIAGNOSTIC TOOL TYPE ELEMENTS APPROACH RANKING PHASE 2: STRATEGY Input Sustainable grid-connected Set targets for the total competitive bidding ** from Ph1 solar targets from Phase 1 program as well as its phases based on results of least-cost generation plan. If the plan is not yet ready, the targets for the first phase can be based on a high-level grid analysis. Strategy Solar deployment targets and timeline ** Input Local development Assess socio-economic impact of the program. * assessment Input Industrial development Assess local industrial and labor capacities. * assessment Strategy Socio-economic development * Input Assessment of gaps in legal Ensure legal framework enables private ** framework generation and competitive selection. If legal gaps identified are not critical, the Program can be launched prior to the enactment of the legal changes. Strategy Public parties’ roles and responsibilities ** OUTPUT LEGAL CHANGES IDENTIFIED AND IMPLEMENTED reflecting legal gap assessment and responsibility matrix Input Public stakeholders’ risk From analysis of gaps in existing legal framework, ** perspective identify legal, financial, and political restrictions. Input Private sector Conduct consultations with the private * consultations sector to identify their perceived critical risks during development and operation of future solar PV projects in the given country. Input Private sector high-level Conduct analysis integrating the results ** risk analysis of the consultations. Input Project development Allocate development risks, integrating ** risk allocation perspectives of public stakeholders and private sector. Strategy Selection of deployment schemes ** Input Operational risk allocation Allocate operational risks, integrating ** perspectives of public stakeholders and private sector. Strategy High-level bidding framework ** OUTPUT AGREED GOVERNMENT SUPPORT AND RISKS TAKEN BY THE PUBLIC PARTY OUTPUT SUSTAINABLE SOLAR PROGRAM reflecting strategic considerations and key inputs /outputs from Phase 2 * moderately critical ** highly critical A Sure Path to Sustainable Solar 13 2 DIAGNOSTIC TOOL TYPE ELEMENTS APPROACH RANKING PHASE 3: IMPLEMENTATION Input List of grid-upgrade Compile list of grid and dispatch upgrades, and ** from Ph1 investments potential storage investments from Phase 1. OUTPUT PUBLIC INVESTMENT IN GRID COMPLETED AND GRID OPERATORS TRAINED OUTCOME VRE INTEGRATED WITH GRID Input Selection of deployment Select deployment scheme and include it ** from Ph2 scheme in solar program developed in Phase 2. Input Substation availability Required if substation-based competitive * assessment bidding approach is implemented. Assessment integrates load flow analysis and high-level land assessment. Input Feasibility study, land Required if solar park competitive * selection and acquisition, bidding approach is implemented. Study key public investments in identifies solar park investments to solar parks be financed by the public party. OUTPUT SCHEME READY FOR COMPETITIVE BIDDING Input Pre-bidding market sounding Integrate the results of the consultations ** conducted for the program-level. Informs the bidding process (including on the design of the pre-qualification criteria). Input Final risk allocation matrix Allocate risks, integrating the public ** stakeholder restrictions and private sector risk perspective as per market sounding conducted prior to bidding. Input Final bidding mechanism and Allocate risks, integrating perspectives ** procurement framework of public stakeholders and private sector as per the final risk allocation matrix. Input Final contractual Investment-ready contractual arrangements and ** arrangements and risk- risk-mitigation instruments, backed as needed mitigation instruments by state or development finance institutions. OUTPUT INDEPENDENT POWER PRODUCER (IPP) SELECTION (bidding conducted) Input Testing of plant(s) for Power plant built by IPP upon conclusion ** compliance with technical of power purchase agreement, in requirements, followed by compliance with technical standards acceptance and contractual requirements. OUTCOME SUSTAINABLE TARGETS ACHIEVED * moderately critical ** highly critical 14 A Sure Path to Sustainable Solar 3 3.2 MEETING EXISTING AND FUTURE DEMAND AT THE CORE OF THE PLANNING PHASE PHASE 1: PLANNING 3 3.1 OBJECTIVES PHASE 1: PLANNING The planning phase is critical. Governments looking to set solar targets for their A comprehensive set of medium-term plans energy sector must plan carefully to ensure that should cover the topics of electrification, gener- electricity is affordable, and consumers receive ation, and transmission/distribution, integrating the highest-quality service possible. To develop the results of technical analyses of VRE integra- sustainable solar targets, evidence-based techni- tion and the deployment of energy efficiency. cal plans and VRE integration studies need to Streamlined power development planning answer several key questions: allows governments increased ownership over the process of implementing policy, while limit- What is the off-grid and ing the risks of numerous bilateral negotiations grid-connected demand? with private developers. It also helps policy makers select the best strategies and projects. What generation capacity is needed to meet demand and From the perspective of IPPs, knowing that over what time horizon? a country has set long-term plans lowers What is the optimal capacity of VREs perceived risks of given the shape of the load curve? projects being cancelled How much VRE can be integrated grid integration issues leading to into the grid, considering technical power curtailment (since the effects and economic parameters? of VRE integration would have been To what extent can VRE integration carefully studied and prepared for) limits be enhanced with storage support or grid upgrading? What are the results of a cost-benefit analysis of these investments? Where are the optimal injection points for VRE? What grid and dispatch reinforcements are needed, and when, for successful VRE integration? 16 A Sure Path to Sustainable Solar The main outcomes of the planning phase include 3 3 PHASE medium-term off-grid and grid- PHASE connected sustainable solar targets Key Phase 1 outputs Plans Studies & Assessments Other data 1: PLANNING a list of grid and dispatch upgrades 1: PLANNING requiring public investment. Iterative process Figure 3. Key steps in the process of planning solar energy deployment Off-grid demand assessment Least-cost SUSTAINABLE Other data: electrification OFF-GRID SOLAR Size of target community plan TARGETS Population density Grid location Terrain geography Other data: Domestic Grid-connected Grid flexibility Generation and resource demand analysis transmission assessment assessment asset list Committed generation list Least-Cost High level VRE integration Generation location study studies Plan including including load flow geospatial data study, grid stability study, short-circuit and protection studies SUSTAINABLE Least cost LIST OF KEY SOLAR transmission GRID UPGRADE TARGETS distribution including battery with informed plan storage location Key Phase 1 outputs Plans A Sure Path to Sustainable Solar 17 Studies & Assessments Other data Iterative process 3 3.2 MEETING EXISTING AND FUTURE DEMAND AT THE CORE PHASE 1: PLANNING OF THE PLANNING PHASE Power development plans have one unifying objective: to meet existing and future demand. Therefore, the first critical question is, how much demand is there? Answering this, calls for a national-level assessment of grid-connected and off-grid demand. 3.2.1 OFF-GRID DEMAND In 2018, around 1 billion people were without off-grid energy usage and demand at all levels. access to electricity. Of these, 600 million people Gender-disaggregated data are crucial in devising were in Sub-Saharan Africa and 15 countries in that programs to improve women’s livelihoods through region had access rates below 25 percent. About access to electricity. Bottom-up consultations 350 million people in Asia also lacked access. In with consumers, local government agencies, civil the same year, 2.7 billion people worldwide lacked society organizations, entrepreneurs, and inves- access to clean cooking facilities worldwide, and tors can also play an important role in identifying relied on biomass, coal, or kerosene as their primary electricity access priorities among households, cooking fuel (IEA 2018). community services, and businesses. It is important to assess in as much detail as Under the MTF, energy access is measured based possible the electricity demand of those people on technology-neutral tiers (as per Figure 4), and not connected to a grid. This information will thresholds are defined based on whether energy help decide how to answer their demand in an supply meets requirements across a range of optimal manner, with the most affordable techni- attributes (SEforALL and World Bank 2015). cal solutions. Surveys provide data on energy-related spending, energy use, user preferences, consumers’ willing- Granular surveys, such as those of the Multi-Tier ness/ability to pay for electricity and cooking Framework (MTF), are critical in this regard (ESMAP solutions, and consumers’ satisfaction with their 2018). Assessments need to cover a represen- primary energy source. The results can be used tative sample of households, small and medium to analyze what is preventing people from gaining enterprises, agricultural, commercial, and indus- access to higher tiers of energy access. This gap trial usages, and public facilities (such as schools analysis can be a powerful tool for governments as and clinics) to generate a detailed picture of they make decisions regarding policy, regulation, and investment. 18 A Sure Path to Sustainable Solar Figure 4. Measuring energy access: Five tiers Improving attributes of energy supply leads to higher TIER 1 / TIER 2 / low load 2 3 very low load 50-199 W PHASE tiers of access PHASE1: 3-49 W 1:PLANNING TIER 0 PLANNING 0h Task lighting, phone Multipoint general lighting, charging, radio television, computer printer fan 4h 4h TIER 3 / medium load TIER 4 / high load TIER 5 / very high load 200-799 W 800-1,999 W 2,000 W or more Air cooler, refrigerator, Washing machine, iron, hair Air conditioner, space heater, freezer, food processor, dryer, toaster, microwave vacuum cleaner, water heater, 8h water pump, rice cooker 16h 23h electric cookstove Source: Adapted from the MTF, World Bank 2019. ASSESSING OFF-GRID ENERGY DEMAND FOR CLEAN COOKING AND OTHER PRODUCTIVE USES The Sustainable Energy for All (SEforALL) The development of productive uses and initiative, as aligned with the United Nations’ household appliances (such as phone charging, Sustainable Development Goals, aims to radios, TVs, fans, and refrigerators) needs to be achieve universal access to electricity and integrated into off-grid demand assessments as modern cooking energy systems by 2030. they are core to the decision to provide electric- ity through a grid connection or mini-grids or Cooking is the neglected productive appli- solar home systems (SHS). Indeed, demand for cation that also offers a rare opportunity to electricity from small industries and businesses capture an existing expenditure. Cooking is a key success factor for mini-grids. Because with electricity offers a transformative value of the typically low energy usage of household proposition for households, allowing for more customers, mini-grids are likely to struggle efficient and faster cooking times, adjustable to generate the critical revenue needed for heat levels, safer cooking, no dangerous indoor financial viability in the absence of electric- emissions (which are responsible for millions of ity-consuming household appliances. The deaths), as well as a cleaner cooking space. The revenues generated by households are often use of clean electric cookstoves and electric small because of low levels of elec tricity rice cookers can significantly increase a house- consumption. By fostering productive uses hold’s energy demand. This is a critical factor such as agriculture, fisheries, tourism, baking, for energy sector planners to take into account; sewing, hair dressing, and mining, operators can a change in cooking equipment that impacts increase their average electricity consumption overall household demand may also inform the and revenue from mini-grids, improving their optimal technical solution for energy provision. chances of long-term viability (NREL 2018). For more information, see https://www.esmap.org/node/71163 A Sure Path to Sustainable Solar 19 3 3.2.2 GRID-CONNECTED DEMAND PHASE 1: PLANNING The main parameters of a demand Plus, compiling load prof iles for different consumer assessment are: categories, and demand patterns across geographical regions and seasons, enable grid-connected demand socio-economic trends, such forecasts to be more accurate, including in their forecasts as population and economic of future daily and seasonal demand. activity forecasts (growth rates, sectoral dynamics, etc.) This is important when strategizing demand-supply the locations of grid-connected synchronization. Assessments also need to address and off-grid areas the demand expected from new connections to the grid. Ideally, this should be based on an electrification electricity needs for domestic plan that provides a clear timeline for new connections and productive uses as well as their associated demand. time horizons geographical distribution DEMAND ASSESSMENT IN A WORLD OF DISRUPTIVE TECHNOLOGY It is critical to consider how grid-connected higher shares of EVs and their demand for demand might be affected by efforts to charging will affect power grids will depend increase energy efficiency and individual greatly on the technologies and charging rooftop photovoltaic (PV) installation and modes used, and on charging patterns. EVs by efforts to accelerate the deployment of can affect the requirement for capacity at electric vehicles (EVs). Expansion of energy certain times and locations. For instance, efficiency can impact the volume of electric- uncontrolled charging can increase power ity requested by single customers and also systems’ peak-load and cause congestion alter demand. Similarly, efforts to deploy in the distribution grid. On the other hand, rooftop PV production—if scaled up to signif- electric mobility represents an opportunity for icant levels—can lead to peak production power system development, with the poten- occurring during the day, and no production tial to contribute to increased flexibility and during the evening when the sun is down (the to support the integration of higher shares of so-called duck curve phenomenon). variable renewable energy. In order to allow a full participation in grid services and enable Electric mobility represents a unique oppor- smart charging, an underlying infrastructure tunity to reap both environmental and of communication, control, power electronics, economic benef its. The extent to which and storage technologies is required. For more information, see http://documents.worldbank.org/curated/en/193791543856434540/ pdf/132636-EMADv4-web.pdf 20 A Sure Path to Sustainable Solar 3.3 LINKING DEMAND TO TECHNICAL SOLUTIONS 3 2 PHASE PHASE Once demand has been forecasted, the next step is to 1: PLANNING determine how best to meet it. What is the optimal generation solution for meeting this demand? 1: PLANNING That determination will take the form of separate least-cost plans for off-grid and grid-connected areas (Figure 5). Figure 5. From demand to plans GRID-CONNECTED Least-Cost Generation Generation and Transmission/ Energy Efficiency Distribution Plans EVALUATE DEMAND What is the current and How to meet forecasted total demand the demand? looking at on-grid and off-grid demand. OFF-GRID Least-Cost Micro/Mini-grids Electrification Plan Solar home systems (SHS) A Sure Path to Sustainable Solar 21 3 3.3.1 ELECTRIFICATION PLAN FOR OFF-GRID AREAS PHASE 1: PLANNING For off-grid areas, it is necessary The most appropriate technical solution is mainly selected to make an electrification plan that based on the size of the target community, its population defines which areas are most suit- density, distance to the national grid, complexity of terrain, able for connection to (i) the grid, and demand forecasts (Figure 6). Additional considerations (ii) micro/mini-grids (iii) SHSs. include the targeted MTF Tier of access, and the expected levels of public and private investment. Figure 6. Electrification options, by population density and energy intensity Population density MAIN GRID Urban areas SOLAR SOLAR HOME LANTERNS SYSTEMS CLEAN ENERGY Peri-urban/ MICRO/MINI-GRIDS dense rural (5-100KW) SOLAR Remore CLEAN ENERGY IRRIGATION rural NANOGRIDS (<5kw) areas Basic Medium Large Intensive Energy (lighting + phone (TVs, radios, fans) (fridges, small (large productive Intensity charging) productive uses) uses) Source: Hystra 2017 To develop integrated electrification plans, geospatial mapping and least-cost planning tools are key (see Figure 7 for an example). These can clarify the fastest and most cost-effective way to achieve universal access in a country. Figure 7. Example of a geospatial representation of an off-grid deployment plan in Burkina Faso Results for 2025 Grid extension Stand-alone-photovoltaic Mini-grid-photovoltaic Mini-grid-hydro 100% 50% 0% 2018 2025 2030 population connected Source: World Bank Global Electrification Plan (GEP) 2019. 22 A Sure Path to Sustainable Solar 3.3.2 GRID-CONNECTED GENERATION AND TRANSMISSION/DISTRIBUTION PLANS 3 PHASE 1: PLANNING To match grid-connected demand to an electric- as PLEXOS, Balmorel, Opt-GEN, and WASP to ity solution, two plans need to be prepared by the cite a few commercial examples. Note that other 2 government and/or the state utility: a least-cost non-commercial models may also be developed generation plan that determines a cost-opti- using optimization tools such as those provided by mized electricity mix that can meet demand at any GAMS, Python, and other programming languages. time), and a least-cost transmission/distribution Depending on which planning tool is used, solar, PHASE 1: PLANNING plan ( Figure 8 ). These capacity expansion models wind, and hydropower variability can be repre- simulate generation and transmission capac- sented in a more or less accurate manner. When ity investment, given assumptions about future deploying large amounts of VRE, it is critical for electricity demand, fuel prices, technology cost and sectoral planners to use the right planning tools and performance, and policy and regulations. ensure that there is enough capacity in the relevant utility or ministry to use them. The most advanced Both plans rely on simulations generated by tools allow policymakers to integrate external dedicated sof tware. The least-cost genera- environmental costs (such as GHG emissions) into tion plan requires specific planning tools, such a given scenario. Figure 8. Key inputs into generation and transmission / distribution plans Grid Flexibility Demand Committed Domestic Analysis Forecast Generation Resources Assessment of grid Assessment flexibility looking at Integrating the List of existing and Assessment of quality, technical and results of the committed availability and cost of commercial constraints electrification plan generation plants resources Least-cost transmission/ Least-cost distribution plan generation plan including upgrades in dispatch enabling larger VRE integration VRE integration and high-level locational study Some of the core inputs of these two plans are A demand forecast was discussed earlier, and (i) a grid flexibility analysis that will answer the the other three inputs are outlined below. Also, it question of how much VRE and how much solar should be noted that technical data on grid infra- PV capacity can be integrated into the grid , (ii) a structure (lines, substations, reactive power demand forecast that reflects the objectives set compensators, etc.) and information about operat- in the electrification plan, (iii) a list of committed ing rules are critical to consider when planning VRE and existing generation, and (iv) an assessment of integration. The least-cost generation plan, the national solar resource capacity. least-cost transmission plan, and VRE integration studies are conducted in parallel and affect each other’s results in an iterative process. A Sure Path to Sustainable Solar 23 2 PHASE 1: PLANNING 3 A. GRID FLEXIBILITY ANALYSIS PHASE 1: PLANNING The main challenges related to the Three issues must be considered when considering integration of solar PV into the grid are VRE penetration into a grid: its intermittent nature (which the capacity for the generation mix to meet demand at implies variable production) any hour of the year, considering VRE variability uncertain availability (although the economic optimum in terms of power system this can be estimated in operating costs, after considering both cost reduc- the short term based on tions thanks to VRE and the investment costs required meteorological forecasting) for deploying and integrating VRE that it can only produce power during the day the limitations of solar PV capacity to maintain grid stability, due to its variability and its limited capacity that it is not a rotating generator to contribute to the balancing of demand and genera- tion (World Bank 2019). Figure 9 shows how the degree of grid support required depends on the amount of solar electricity in the load, with percentages used for purposes of illustration. Plans are best customized to the specific location and country. Figure 9. Assessing the grid support required for various shares of solar energy load (%) % Fossil-fuel and hydro 100 electricity in total load % Solar electricity in total load % Electricity storage in total load 0 0 12 24 0 12 24 0 12 24 time (h) time (h) time (h) Solar electricity % in load Very low solar Low solar Medium solar 1% penetration 5% penetration 15% penetration Assessment of No major need for change Solar electricity sometimes Need storage or very flexible supply options in grid operation to ensure needs to be curtailed, grid resources (gas-fueled power) supply-demand balance operations need to adjust in the system and grid Grid assessment operation adjustments Optimal location + + of solar plants Support needed: Support needed Support needed allocate enough transmission, distribution, storage (batteries), flexible Changes in grid spinning reserve and dispatch investments supply, cross-border operation transmission 24 A Sure Path to Sustainable Solar 3 PHASE 1: PLANNING Evaluating dispatch capabilities and the limits of grid integration provides a picture of the grid as it is today and is key to determining VRE targets. These analyses estimate the level of VRE penetration possible based on tech- nical and commercial constraints, as a first input into the least-cost generation plan. It is important to note that VRE integration studies will be repeated in an iterative process as the least-cost generation plan is being revised. SIMULATING DISPATCH CAPABILITIES To evaluate the f lexibility of a grid, it is critical to assess its technical constraints, such as the lack of a Supervisory Control and Data Acquisition (SCADA) system or of automatic generation control (AGC), or the availability of a type of generation that is by nature not highly reactive. It is also import- ant to integrate commercial constraints, such as take-or-pay PPAs, grid code requirements for how much support a generator has to provide to the grid, and key performance indicators for utility-owned generators. These commercial constraints may inhibit the smooth integration of VRE. VRE INTEGRATION STUDIES Power flow studies and stability assessments are generated using power system analysis software such as PSS/E, DigSilent and Matlab and their results are assessed further as part of the economic analysis conducted for the least-cost expansion plans. Specifically, these determine (i) the solar PV capacity needed to guarantee grid stability (taking account of storage capac- ity, reserve needs, and ramping reserve requirements), (ii) new transmission/ distribution requirements (if the existing transmission system is not dimen- sioned to accommodate VRE in a given area), (iii) reactive power compensa- tion requirements to maintain voltage levels, (iv) operating characteristics of the planned system (such as the mix of generators, losses in the system, active and reactive power flows, transformer tap setting, and protective relay settings), and (v) system performance under emergency conditions (for example, the loss of a transmission line or a generator), given reserve needs and ramping reserve requirements (World Bank 2019). These analyses will also list the technical These may also include additional infrastructure upgrades needed to improve the dispatch to accommodate resiliency measures, particu- system and overall VRE integration, and larly in the context of climate change impacts, potential improvements on the commercial side such as hardening (reinforcement of poles or and to the grid code. The required least-cost under-grounding) and redundancy (construction of grid reinforcements are also outlined in the a secondary line) to prevent outages during a storm. transmission plan. A Sure Path to Sustainable Solar 25 3 3.1 TRADITIONAL VRE INTEGRATION STRATEGY DISRUPTED BY PHASE 1: PLANNING ACCELERATED REDUCTION IN BATTERY STORAGE PRICES Ta k i n g a d v a nt a g e of v a r i a b l e re n ew a b l e Demand response programs—that is, when the generation requires significant expansion and utility signals to identified customers demand modernization of electrical grids. Specif ic change requests to better match demand technologies and processes may be used to with their offer—can also be put in place to support the gradual transition of power systems enable better integration of VRE and grid into “VRE-friendly” grids that will significantly management. reduce integration costs in the long term. The penetration of VRE requires power system Also, regional integration and cross-border planning and grid management to adapt to the electricity trade could be very effective to particular characteristics of VRE. It also requires increase national grid better forecasting methods and stringent grid capacity to absorb VRE code requirements. Basic grid support services are now becoming relevant to all generators, reduce kWh cost by increasing the including VREs, which are connected to medium size of PV projects where solar and lower voltage levels (World Bank 2019). irradiation is the most favorable optimize the mix at the regional level, Grid reinforcements that will support VRE thus reducing the need for national integration (as per the least-cost transmission investments in grid reinforcements plan) include: Addition or replacement of lines and trans- As its costs continue to fall, battery storage formers for grid extension and capacity is also becoming core to VRE integration. enhancements (both for answering growing Importantly, it can provide support to the grid demand and for integrating VRE power). through frequency and voltage control. When associated with VRE plants, it can also mitigate Equipment for smoothing the voltage plan, some of the issues raised by the variability such as capacitor banks and other reactive and lack of dispatchability of VRE power. It power compensators, together with the can provide power reserves during transient flexible alternating current transmission events such as the lack of a generator, smooth system (FACT). production for example, when there is a cloud, Equipment for faster and more efficient and displace production to the evening/night. grid operation, such as monitoring sys- tems, demand and production forecasting systems, and automats for controlling gen- eration units and grid operations through automatic generation control with a strong SCADA system. For more information: see https://www.esmap.org/batterystorage 26 A Sure Path to Sustainable Solar 3 PHASE 1: PLANNING B. COMMITTED GENERATION A core input to the generation plan is a list of committed generation. It is important to be able to differentiate between power plants that are already under construction or have reached financial close and those that are only committed but have not reached financial close. The least-cost generation plan will enable the government to assess if committed plants are indeed least cost and necessary; this will support them in reviewing their commitments before the point at which canceling a plant becomes impossible. FOSSIL FUEL SUBSIDIES IN LEAST- COST GENERATION PLANS In recent years, governments around the world have been subsidizing fossil fuel production and consumption at a cost to taxpayers of up to US$1 trillion each year. While these subsi- dies try to make the fossil fuel industry more competitive and fossil energy more affordable, they also entail enormous socie- tal costs due to economic inefficiency, inequality, air pollution, and climate change. Fossil fuel subsidy reforms not only remove distorted incentives that undermine countries’ ability to make progress toward their goals but can also unlock significant domestic financing to facilitate and accelerate sustainable development efforts. When developing a plan to ensure that least-cost generation plans are not biased by subsidies of fossil fuels (should they exist), it is critical to use the real cost of fuels so as not to favor fuel-based generation in the plan. For more information, see https://openknowledge.worldbank.org/bitstream/handle/10986/28863/121266- WP-PUBLIC-10-11-2017-16-35-36-ESRAFReportOverviewNoteFINALdigital.pdf?sequence=4 A Sure Path to Sustainable Solar 27 3 C. DOMESTIC RESOURCE CAPACITY Figure 10. A solar resources map of Vietnam PHASE 1: PLANNING VRE resource levels are location specific, as illustrated in Figure 10. If the resource is highly specific to one region/zone, it is important to consider this in any plan, and in particular in the transmission upgrade plan. Open source geospatial data for solar and wind are avail- able online on the Energy Sector Management Assistance Program (ESMAP) website4. Geospatial data be combined with on-site meteorological data for more accuracy, which in turn will help solar projects be considered bankable by lenders. In locations where direct normal irradiation is high enough, concentrated solar power (CSP) is a good option to consider in the least-cost generation plan as it can produce dispatchable generation while still being renewable. The main steps presented in the document are the same for solar PV and CSP. Source: Global Solar Atlas Vietnam. CONCENTRATED SOLAR POWER: DISPATCHABLE RENEWABLE ENERGY CSP generate solar power by using mirrors or lenses to concentrate sunlight that is then converted into heat that can produce electricity through a steam turbine. Thanks to thermal storage, CSP can provide electricity during peak hours after sunset, matching critical needs for most of the utilities. For the past two years, CSP prices have gone down drastically and have become competitive with other dispatch- able plants in regions that have good direct normal irradiation, includ- ing with coal-based plants. CSP prices could be further optimized by combining CSP with storage to PV, maintaining a crucial dispatchability during several hours after sunset while reducing costs. CSP also has greater potential to contrib- ute to industrial development than PV. The main components of CSP plants (solar field, thermal storage and power block) can often rely on local industries (metallic and metallurgic, piping, glass and electric as well as electronic industries). 4 Open source geospatial data on wind are available online in the ESMAP Global Wind Atlas (https://globalwindatlas.info/), and data on solar energy are available in the Global Solar Atlas (https://globalsolaratlas.info/). 28 A Sure Path to Sustainable Solar 3.4 PLANNING FOR THE BETTER INTEGRATION OF 3 PHASE 1: PLANNING FUTURE VRE PROJECTS Once preliminary solar targets have been decided, it is important to identify the optimal injection points in the grid and to determine what power plants need to do to support the grid. 3.4.1 HIGH-LEVEL LOCATIONAL STUDY Figure 11. Example of a high-level locational study The domestic resource assessment combined with the results of the grid study and a land availability study, if needed, will clarify the optimal points of VRE MAP injection into the grid, minimizing grid reinforcement costs. The resulting high-level locational study (see Figure 11 for an example) allows multicriteria analysis of renewable energy resources (e.g., solar irradiation for solar generation), land availability, capacities of existing grid infrastructure (lines, substations) for power evacuation, the proximity of demand centers to supply, and social acceptability. A tool developed by the Berkeley Lab MapRE (https://mapre.lbl.gov/ ) enables countries to perform this analysis using available geospatial data. As part of the high-level locational study, co- location of solar PV with hydro generation could be considered. This combination has many advantages, such as maximizing the hydro plant’s infrastruc- ture and grid connection, minimizing the effects of seasonal variations in power production, supporting day time peak load, and reserving more hydropower for the evening peak. Source: MapRE for Vietnam, World Bank. The results of this high-level locational study inform The identified injection points are optimal at a transmission and distribution plans, and specifically given time but since investments will be staged, help to identify points where the grid infrastructure this approach is a short-term one and needs to be needs to be upgraded to integrate solar projects. revised regularly based on the construction of the new infrastructure. 3.4.2 GRID CODE The electrical grid needs to be considered in its of oscillations and the need for reactive power entirety, but the services provided by each genera- compensators or storage, and (iii) guaranteeing tion unit are crucial to ensure frequency and voltage the quality of electricity. stability. Defining clear grid service rules helps to cover several risks, both for grid operators and IPPs. As part of the grid code, standard procedures for Distributed grid services enhance operation flexibil- the connection phase of solar projects can be ity and grid stability by (i) minimizing the frequency added to minimize technical and planning risks and voltage drops on normal and fault transients both for independent power producers and grid due to power plants’ support, (ii) reducing the risk operators. A Sure Path to Sustainable Solar 29 3 2 3.5 ARRIVING AT EVIDENCE-BASED SUSTAINABLE SOLAR TARGETS PHASE PHASE1:1: PLANNING In conclusion, optimized solar PV capacity is determined through an PLANNING iterative process that involves a least-cost generation plan, VRE grid integration studies, and a high-level locational study. Analyses and simulations are repeated until the most critical constraint, technical or economic, is determined. Figure 12. Planning through an iterative process Maximum solar PV capacity due to stability limits and minimal primary Grid reserve in operation Least cost integration generation studies plan Maximum solar PV capacity according to economic optimization of the generation mix Transmission upgrades and potential storage investments revised according to VRE penetration targets Least cost transmission/ distribution plan From the government’s perspective, a robust generation plan informed by a VRE integration study and a high-level locational study can substantially mitigate the risk of curtailment. At the end of the planning stage, governments will have informed solar targets with an indication of where best to locate future projects as well as a list of key investments needed to improve their grid VRE integration capacity. 30 A Sure Path to Sustainable Solar 4 4.2 AN ENABLING LEGAL FRAMEWORK PHASE 2: SETTING A STRATEGY 4 4.1 OBJECTIVES PHASE 2: SETTING A STRATEGY Once the government knows what quantity This will outline how high-level risk is to be allocated of VRE can be injected into the grid, and has across various stakeholders, detail their roles and set solar targets and generation and trans- responsibilities, and set a timeline for deployment. It mission/distribution plans accordingly, the will also include plans for mitigating risk. For example, next questions are: the government may choose to support IPPs through sovereign guarantees, foreign exchange authoriza- How are solar targets to tions, or tax exemptions. These actions need to be be implemented? outlined at the strategy phase to avoid unnecessary delays down the road. If there is an aim to mobilize private investments in The mobilization of private capital for new genera- generation, as assumed here, tion enables countries to free some of their limited how will IPPs be selected and fiscal space. A carefully designed strategy will go far high-level risks allocated? toward maximizing the benefits of private involve- What are the roles and responsibilities ment. At this stage, the government needs to decide of public stakeholders? (i) the roles and responsibilities of the various parties, (ii) whether changes need to be made to the law, (iii) Does the current legal and what studies and activities need to be undertaken regulatory framework enable the to support the selection of efficient deployment efficient selection of IPPs? schemes, and (iv) what risks the government will inter- How can the socio-economic benefits nalize and what risk mitigation instruments it might of solar deployment be maximized? offer IPPs. To clarify these points before the selection of an IPP To answer these questions, the and the signing of a PPA can help speed up the IPP government needs to develop a selection process, reduce chances of procurement solar deployment strategy. failure, and provide a long-term vision for deploying solar projects. From the IPPs’ perspective, a clear government strategy reduces perceived risks due to a weak or inadequate legal framework and an unclear selection process. Deployment strategies that reduce the risk of curtailment and land issues are also critical to sustainable development of solar PV. 32 A Sure Path to Sustainable Solar 3 4 PHASE PHASE1: Figure 13. Designing a solar deployment strategy 2:PLANNING SETTING A STRATEGY 1 Phase 1 sustainable Solar deployment solar targets targets and timeline SUSTAINABLE SOLAR PROGRAM reflecting strategic Local development considerations assessment 2 Socio-economic benefits strategy Industrial development assessment 3 Existing legal LEGAL CHANGES framework gap IDENTIFIED & assessment IMPLEMENTED 4 Public parties roles & responsibilities matrix strategy Public stakeholders risk Project development Selection of 5 perspective risk allocation deployment schemes including country-specific including grid, land & such as solar parks & restrictions procurement risks substation based bidding Private sector market sounding Operational risk High-level 6 allocation bidding framework including political, including procurement & Private sector off-takers & currency risks contractual framework high-level risk analysis 7 AGREED GOVERNMENT SUPPORT Phase 1 input Key Phase 2 Outputs Strategy Studies & assessments (inputs) A Sure Path to Sustainable Solar 33 4 4.2 AN ENABLING LEGAL FRAMEWORK PHASE 2: SETTING A STRATEGY If a government decides to leverage private capital to finance its solar targets, there are two key questions to consider: Who will be responsible for what elements of the implementation process? and does the legal framework enable private generation in the energy market, and do so through a competitive selection process? In countries that lack a legal framework for IPPs and competitive bidding, this step must be prioritized. Even in those that have such a framework, it is an important assessment to better understand potential public restrictions. 4.2.1 ROLES AND RESPONSIBILITIES The roles and responsibilities of the public insti- Involving all key public stakeholders at the strategic tutions involved in the energy market and sector, level will ensure alignment with the solar program’s such as the ministry of energy, the state utility, the objectives and its endorsement while ensuring ministry of finance, the ministry of industry, the that resources (such as state support) are made renewable energy agency, and the regulator, as the available to implement the program as designed. case may be, must be specified and formalized at the It will also help prioritize cost-effective projects regulatory level to ensure that there is a clear path to supporting local and industrial development. Down deployment, with buy-in from all stakeholders. the road, involving key stakeholders at the opera- tional level will ensure that the program is aligned Responsible entities for the following key with relevant strategies deployed by various minis- functions need to be identified: tries in the country, enhancing potential synergies. Strong interministerial cooperation mechanisms Developing the solar deployment program are necessary to efficiently coordinate efforts Leading and supporting the between the projects’ stakeholders (state and local procurement and selection of an IPP administrative levels, IPPs, grid operators, off-tak- ers, etc.) and ensure timely delivery of project Signing the PPA outcomes (see the box below for a discussion of Setting and approving tariffs one such mechanism). Providing required support mechanisms In addition, ensuring strong ties between the utility Conducting technical studies and the procurement entity, if different, will help ensure that procured projects comply with utility Spearheading investments associated needs and plans in terms of technological, capacity, with deployment plans timing, and technical specifications. Implementing regulatory changes 34 A Sure Path to Sustainable Solar 4 PHASE 2: SETTING A STRATEGY AD HOC ORGANIZATIONAL SCHEMES Governments may adopt ad hoc organizational measures with a view to improving administrative efficiency. For example, they may create a dedicated body to coordinate efforts among ministries, administrations, and jurisdictions, or a specific public authority to lead the bidding process. A newly created entity, publicly owned but governed by private law such as in the case of Morocco’s Moroccan Agency for Sustainable Energy (MASEN), can potentially be able to apply a more flexible procurement scheme and hire more qualified human resources. Providing one focal point for bidders, and stream- lining the overall bidding process, will also reduce the timeline and associated costs. However, the creation of a new entity can also slow the imple- mentation process and reduce the already limited capacity of relevant agencies/ministries. A Sure Path to Sustainable Solar 35 4 4.2.2 SUPPORTING PRIVATE SECTOR PARTICIPATION PHASE 2: SETTING A STRATEGY Before 1990, private participation in the electric- In addition to enabling private generation in the ity sector of developing countries was limited to energy market through consistent legal provisions, Chile, where comprehensive reforms in the 1980s the overall legal framework should cover the follow- created a competitive private market. Today most ing points, as further detailed in these guidelines: countries have opened the generation segment of The establishment of effective dispute-reso - their energy markets to private participation. lution mechanisms at all stages of the tender (i.e., from the initial stages of procurement to To open power generation to private participa- project commissioning). Key aspects of the tion, specific regulations need to be enacted in bidding process (e.g., bid bonds) should be cov- such a way as to ensure full top-down normative ered by contractual arrangements with clear coherence, from the constitutional level to that of dispute-resolution mechanisms acceptable to local regulations, especially where state involve- all stakeholders. ment in the electricity value chain is significant (as in the case of state-owned monopolies). Passing Land access and plant ownership over a long corresponding reforms through laws and regula- period. tions issued at a ministerial level would ensure the Efficient mechanisms to enforce the security long-term stability of the regulatory framework, package offered to the lender under the plant and thus lower IPPs’ perceptions of risk. financing arrangements. Streamlined permitting processes. Adapted insurance regulations. Suitable foreign exchange regulations. Cl ea r t a x p rov isio ns a p p l i c a b l e to so l a r IPP-projects. The Regulatory Indicators for Sustainable Energy (RISE) were developed by the World Bank Group, ESMAP, and SEforAll, with support from the Climate Investment Funds. RISE allows countries to benchmark themselves through a score reflecting a snapshot of the country’s energy-sector policies and regulations. A set of indicators makes it possible to compare national policy and regulatory frame- works for sustainable energy, organized by the three pillars of sustainable energy: energy access, energy efficiency, and renewable energy. 36 A Sure Path to Sustainable Solar 4 PHASE 2: SETTING A STRATEGY RETHINKING POWER SECTOR REFORM The unbundling of power utilities, creation of independent regula- tors, achievement of cost-recovery pricing, and introduction of competition in power generation have been part of a standard set of policy prescriptions for power sector reforms. The World Bank’s flagship report Rethinking Power Sector Reform assesses the actual experience of power sector reform and how it diverges from the theoretical paradigm. Two of its findings are: Private sector participation in generation has been relatively successful despite enduring challenges in terms of planning, procurement, and risk sharing. In countries where the three areas were adequately addressed, governments successfully leveraged private investments for the greater benefit of society, procuring them through a transparent and competitive process. The technology disruptions currently underway are expected to have wide-ranging implications for the design of power sector reforms. The current wave of innovations, such as decentralized renewable energy, battery storage, and digitalization, contribute to the empowerment of consumers, who may become prosum- ers and thus hold utilities accountable for poor performance through grid defection. For more information, see https://www.esmap.org rethinking_power_sector_reform A Sure Path to Sustainable Solar 37 4 4.2.3 COMPETITIVE BIDDING PHASE 2: SETTING A STRATEGY Transparent and competitive bidding reduces a variety of risks and thus contributes to lower tariffs. Competitive processes should be rooted in sound legal grounds. However, the specifics of bidding mechanisms may require a ministerial decree. A high-level risk analysis will inform the selection of the optimal deployment scheme and overall bidding framework. SELECTION SCHEMES: COMPETITIVE SELECTION, FEED-IN-TARIFFS, OR BILATERAL NEGOTIATIONS Bilateral negotiations between a single private Internationally, FIT schemes have supported a developer and the government are not recom- nascent solar industry. However, now that the mended as they usually lead to higher prices market is in the hundreds of gigawatts range, and lengthy negotiations. competitive bidding is the most optimal way to increase competition and decrease prices. At To encourage competitive, privately the same time, if competition reduces tariffs, owned generation and to leverage private bids can become costly and time consuming capital, governments have two choices. for governments. Governments can reduce their cost of bids by developing a set of legal They can set the price of the power pur- contractual documents and procurement chase agreement up front by means of processes early on that can be used again in a feed-in-tariff (FIT), in which case the subsequent phases. quantity of power produced depends solely on each investor’s appetite. Through SRMI, a global e-tendering platform Conversely, they could set the quantity up will be made available to governments that do front and invite investors to compete on not already have an online platform dedicated the price (expressed per kWh) through a to the selection of IPP in the renewable energy competitive bidding scheme. sector. This global platform will increase the visibility of each of these competitive bidding processes while reducing the cost, as it will be made available to governments as a public good. The role of e-tendering platforms is presented in Phase 3: Implementation. 38 A Sure Path to Sustainable Solar 4.3 HIGH-LEVEL RISK ANALYSIS 4 PHASE 2: SETTING A STRATEGY Once the overall legal framework under which the IPP will be selected is assessed, it is necessary to ask what are the critical risks perceived by IPPs—that is, those risks that will affect their willingness to invest or their cost of capital? And what are the public stakeholder’s views on risks (including country-specific restrictions)? The identification, allocation, and mitigation Building a favorable environment for foreign of risk are critical inputs to a comprehensive investors, guaranteeing safe and attractive solar strategy. investment conditions, as well as allocating risk in a fair manner reduces the risk premium The private sector high-level risk assessment for IPPs, thus reducing the expectations of outlines: equity returns and improving lending terms. Indeed, these perceived risks are internalized each risk from the IPP’s perspective with a in the lending terms and the equity return pass or fail grade (if the risk is not fixed, the expectations. Integrating these risks in the IPP will not invest in the project) bidding framework of a country’s solar deploy- its overall impact on the cost of capital ment program and clearly allocating them from the equity and debt perspective, to between parties—and setting up associated be able to mobilize commercial financing risk mitigation instruments—is core to the in competitive conditions success of the program. Offering conditions enabling a project financing Understanding the risk-related views of public scheme, under which the lenders would have sector stakeholders, as well as any restrictions limited or no recourse, is critical to attract IPPs. that they may impose or by which they may be bound, is important in gauging the willingness or The private sector high-level risk assessment ability of a given country to assume a specific risk. combines investor surveys/consultations as well as market observations of finance costs A high-level risk analysis considers for different parties with and without risks. This development risks (before construction assessment enables countries to select which and operation) that impact the selection deployment schemes are the most suitable of the deployment scheme and informs their bidding framework so as to balance risks between the private sector and operational risks that inform the bidding the government, keeping in mind the trade-off framework between the PPA price and the risks govern- ments will take. A Sure Path to Sustainable Solar 39 4 4.4 SELECTING A DEPLOYMENT SCHEME PHASE 2: SETTING A STRATEGY Once the main risks are identified in the high-level risk analysis, the next question is: Which deployment scheme is the most optimal to cover the key development risks? 4.4.1 DEVELOPMENT RISKS IDENTIFIED Planners will need to adapt their deployment Figure 14. Project development risks strategy based on (i) the assessment of the Less Critical Very Critical Extremely Critical risks perceived by the private sector, (ii) the 14% 16% 7% 7% 7% country’s willingness to contribute to the development activities (such as mobilizing 64% 59% 80% 36% 50% the land for the project), and (iii) the country’s specific restrictions (legal, financial and polit- ical constraints). 57% Based on the results of the market sound- 43% ing presented in the introduction (outlined in Figure 14 ), the main risks specific to the 23% 25% project development phase are legal, grid, and 14% land risks, and, to a lesser extent, integrity and lack of transparency in procurement. Grid Land Legal Procurement Corruption Source: World Bank Market Sounding 2018. Table 2. Key risks to be addressed by deployment schemes GRID CONDITION KNOWLEDGE LAND OWNERSHIP RISK AND CURTAILMENT RISK Secured land rights are critical for long-term Limited knowledge of grid availability/ investment and financing. The main asset conditions leads to considered a security for the lender is the the IPP spending excessive time solar plant, whose ownership relies on legal trying to get information from the rights over the land, enabling the project government/utility to conduct a grid company the special purpose vehicle (SPV) to integration study for the specif ic hold the plant during the project agreements project (PPA and finance agreements). an incomplete grid integration study Depending on the land’s legal structure, that may not represent the reality of access to land can be through formal, infor- the grid mal, or customary systems. IPPs will assess If the project is based on this incomplete the country’s land tenure system to evalu- grid study, there is potentially a risk of ate the land security the system provides curtailment as the project would not to its project. If land cannot be secured in a have been based on sound technical and bankable manner, IPPs will usually not invest commercial constraints. It is a risk that in the country or will have expectations of will arise during operation but is linked very high equity returns. to the development phase as it depends where the project connects into the grid. 40 A Sure Path to Sustainable Solar 4.4.2 DEPLOYMENT SCHEME TYPES 4 Solar competitive bidding schemes are broadly grouped into two categories, PHASE 2: SETTING A STRATEGY “standard competitive bidding” and “solar park competitive bidding,” with the key difference being that the land is provided to the IPP as part of solar park schemes. Two types of standard competitive bidding are common for solar deployment: location-agnostic and substation-linked bidding, presented in Table 3. Each deploy- ment scheme tackles different risks perceived by IPPs. Table 3. Types of deployment schemes LOCATION-AGNOSTIC COMPETITIVE BIDDING The procurer tenders a pre-determined capacity/energy amount, with no constraints on location, allowing the developer to select the project location freely. Developers can select sites Developers may gravitate to according to their own the same region, causing grid criteria, enabling them to congestion as well as land scarcity target sites that are cheaper and speculation. Connecting such and easier to develop or independently selected sites may offer better resources. result in an increase in cost for the grid network that could have been avoided if better planned. The first solar competitive bidding schemes (e.g., in South Africa) were all loca- tion-agnostic. Most countries are now moving away from such competitive bidding schemes as they are experiencing major grid constraints. Feed-in tariffs are usually also location-agnostic and face the same grid constraints. SUBSTATION-LINKED COMPETITIVE BIDDING The government identifies substations with available megawatt capacity, and a certain megawatt capacity at each substation is opened for bidding. It helps optimize the use If the number of selected of existing transmission substations is too small, there capacity in the deployment of may be major competition for solar projects, reducing the land around the substation that potential cost to integrate would drive the PPA price up. them. It can proactively drive grid investments needed for new variable renewable energy generation. Mexico developed such a scheme that has been very successful in supporting a more controlled deployment of solar photovoltaic in the country. Germany’s premium and penalty scheme is a variation of this scheme. A Sure Path to Sustainable Solar 41 4 SOLAR PARK COMPETITIVE BIDDING The government identifies the site(s), conducts land clearance, and constructs PHASE 2: SETTING A STRATEGY infrastructure for the solar park that can range from the evacuation line to basic elements (such as the fence, roads, street lighting, etc.). Once the project is ready for competitive bidding, the bidding procedure begins and the winning IPP is responsible for the financing, construction, and operation of the solar project. The solar park significantly The implementing agency lowers development risks will need time and an up-front (particularly those associated budget to develop the solar park with acquiring land and facility before conducting an consents) and shortens the auction. There is a risk that the development timeline for the infrastructure expected from private sector, which results the government is not built in the in cost savings and thus lower agreed timeline with the winning PPA tariffs. IPP, leading to an extra cost to the government. It is important to integrate such potential delays in the assessment of what the government will build and what it will leave to the IPP (e.g., interconnection line). India and Morocco championed the public solar park scheme, leading to competi- tive PPA prices. The World Bank Group developed a scaling solar concept that has reduced up-front development risks. It was very successful in Zambia and Senegal. 4.4.3 SELECTING THE DEPLOYMENT SCHEME(S) Choosing the right deployment As per the results of the market scheme for the country depends sounding, IPPs prefer to mitigate on the results of a high-level risk the deployment risks with analysis, which is based on market solar parks soundings and discussions with private investors, to better assess grid information availability their perceived risks with regards to project development. 42 A Sure Path to Sustainable Solar 4 4 PHASE Figure 15. Land and grid risks: Key to the selection of the deployment scheme Deployment schemes PHASE Small-scale solar power units 1: PLANNING (up to a few hundreds of kW connected on the low voltage grid) Location-agnostic 2: SETTING A STRATEGY Unit power capacity to Power be installed capacity to Large Medium-scale Medium to be injected Substation-based large-scale into the (connected to substation substations) Low Number of projects Risk for securing land High, land rights are not well-known and land speculation is prevalent Small Large-scale Solar parks If the grid is identified in the high-level risk analysis land made available to the winning IPP should be as a key issue for IPPs, the government can free of people and the soil and other environmen- tal characteristics be aligned with the solar plant’s make grid information available to anyone requirements. Also, the right of way for the evacu- online so IPPs have a better sense of ation line should be made available to the IPP. In the where there will be the least curtailment event of severe land constraints, floating PV can risk under location-agnostic schemes be a viable option, and an increasingly popular one. develop a substation-based competitive bid Although the construction and equipment costs develop a solar park scheme are currently higher than for ground-mounted plants, these additional costs are partially offset However, from a grid integration perspective and to by increased energy production thanks to the optimize the existing infrastructure, location-ag- surrounding water’s cooling effects and also a nostic schemes are not recommended for projects general lack of dust. that are more than a few megawatts. Even for rooftop PV projects that are a few kilowatts (kW) it The selection of a deployment scheme or schemes is recommended to have some sort of control over needs to be explicit in a country’s solar deploy- the connection to ensure that the project will not ment program and decided up front as it entails damage the grid. work from the government’s perspective with regard to technical analysis or even investments, If land constraints , such as constraints in land as discussed in Phase 3: Implementation . The availability or the security of tenure, are identified assessment of the perceived development risk will in the high-level risk analysis, solar park schemes be translated into a development risk allocation should be favored by governments as a mitigation matrix supporting the selection of the optimal measure. Critical points in this case are that the scheme to be implemented in the country. A Sure Path to Sustainable Solar 43 4 4.1 OFF-GRID BUSINESS MODELS PHASE 2: SETTING A STRATEGY To reduce the size of the investment needed Three core questions arise with mini-grids: up front for electrification purposes as well as What happens when the grid arrives? How increase efficiency, private investments can be are retail tariffs regulated? And what are the part of the off-grid solution for mini-grids and quality of service and technical standards? SHSs. There is no standard business model for integrating private investment in electrifica - Mini-grid deployment needs to be well tion plans. Instead, the process depends on the thought through by the government, and strength of the state utility, the public financ- before procurement, to ensure that the ing available for electrification, the electrifi- program is sustainable and that the regula- cation timeline and rate, and the willingness/ tions in place enable the implementation of ability to pay of off-grid populations. the selected model. Mini-grid business models are numerous and SHS are a good electrification solution for can involve a lot of different partners. More low-consumption customers and in areas precisely, they can be financed fully by the where there is low population density. SHS public sector, under a public-private partner- deployment can be promoted in various ways. ship, or fully by the private sector. They can be For example, households may (i) buy their managed by the utility, by communities, by the own SHS directly without any operation and private sector, or by the private sector jointly maintenance, (ii) via a fee-for-service model with the public sector. Anchor customers, such where the ownership stays with the SHS as mining companies, can also be leveraged for provider, and (iii) via a lease-to-own model their creditworthiness and demand as part of a where the ownership gets transferred to the business model that would integrate the public household. off-taker and an IPP. The state utility can be part of the deploy- Each of these models has different challenges ment under the fee-for-service model (as in and the main constraint is usually the regula- Peru). The private sector can be leveraged tions prevalent in a country. The state utility and promoted by the government through usually has a monopoly over distribution and various schemes, such as results-based transmission and will relinquish an area only to f inancing (under which the government a fully private mini-grid or provide a concession pays the private party based on results and to a private mini-grid manager. competition between private stakeholders pushes down prices) and minimum subsidy tenders. For more information, see http://hdl.handle.net/10986/31926 44 A Sure Path to Sustainable Solar 4.5 BIDDING FRAMEWORK 4 PHASE 2: SETTING A STRATEGY Based on the results of the high-level risk analysis and simultaneous with deciding the appropriate deployment scheme, the main question to ask is: What are the main parameters of the bidding program under a fair risk allocation? The bidding framework is meant to provide the when the related procurement starts. It includes framework for procurement of the whole solar details of the bidding mechanisms, procurement program. It encompasses framework, and contractual arrangements that would be the basis for the specific contractual procurement-specific issues arrangements. However, depending on the country, contractual-specific issues sometimes these parameters need to be included up front in the regulations. These points are further Such parameters are integrated into countr y presented in Phase 3: Implementation. regulations, usually under a ministerial decree. A high-level plan for the allocation of procurement The more visible the upcoming bidding processes and contractual risks needs to be developed by the are to the market, the better. Whenever possible, government in partnership with the private sector governments should provide stakeholders with a to decide on the key elements of the framework. transparent and predictable schedule of upcom- ing tenders, including information on successive This bidding framework should be further detailed rounds, if applicable. and refined for a specific phase of a program/project 4.5.1 OPERATIONAL RISKS IDENTIFIED Each country will have different operation risks perceived by IPPs and will need to adapt its procurement and contractual framework to those results com- bined with the public stakeholders’ restrictions. Based on the results of the market sounding presented in the introduction and Figure 14, the main risks perceived during operation are off-taker (liquidity and termination), foreign exchange, breach of contract, currency inconvertibility, and, to a lesser extent, expropriation, political violence, and refinancing risks. Figure 16. Project operation risks 50% 22% 20% 23% 7% 9% 8% 50% 43% 38% 66% 55% 45% 45% 43% 48% 54% 25% 32% 12% 5% FX Risk Breach of Currency Expropriation Political Contract Inconvertibility Violence Less Critical Very Critical Extremely Critical Source: World Bank Market Sounding 2018. A Sure Path to Sustainable Solar 45 4 PHASE 2: SETTING A STRATEGY Table 4. Key risks to be addressed by the bidding framework OFF-TAKER RISK Under a project finance scheme with and contract default (breach of contract limited recourse or non-recourse to and contract termination) by the utility, shareholders, the bankability of a solar also called liquidity risk and termina- project is based on the capacity of the tion risk , has a large impact on the cost SPV to reimburse the loan, and hence of capital where a utility is financially on the capacity of the public off-taker to weak (as is the case in most developing make the electricity payments on time countries). to the SPV. The risk of payment delays POLITICAL RISK Core political risks perceived by IPPs are breach of contract risk (arbitral award transfer restriction and default, denial-of-recourse risk with currency inconvertibility risk arbitration that is not international) war and civil disturbance risk expropriation risk CURRENCY RISK Currency risks can impact solar markets IPP. However, during the operational a n d I PPs’ b a l a n ce s h e et s t h ro u g h phase of the plant (usually between 20 currency devaluation/foreign exchange to 25 years), the foreign exchange risk risk, risk of convertibility, and transfer is substantial in case of a mismatch of restrictions. currency flows. Foreign exchange risks can be easily Where the IPP revenues are in a local managed during the construction phase cu r re n c y a n d t h e re is a m is m atc h of the plant, as they apply only for a between the debt and equity currency, limited time. the risk of devaluation and of convert- ibility is high and could potentially lead If there is a difference between the to high costs for the IPP. Operation debt/equity currency and the currency expenditures (OPEX) are minor for solar of the construction contract , this risk PV projects and therefore a mismatch of is likely to be hedged and the associated currency will have a minimal impact. costs regarded as a one-off cost by the 46 A Sure Path to Sustainable Solar 4.5.2 PROCUREMENT FRAMEWORK 4 PHASE 2: SETTING A STRATEGY The procurement framework defines the bidding process require- ments for a procurer based on the country’s appetite for risk, and its commitment to integrating VRE in the energy mix and ensuring energy security for the country. The procurer has to be clearly identified up front, alongside two key elements: A. THE PAYMENT MECHANISM The payment mechanism is decided in the payment structure to the IPP in the PPA. Considering the variability of solar production, the payments are usually in the form of energy-based payments per megawatt-hour (MWh) and not in terms of MW (capacity). B. THE TARIFF STRUCTURE The tariff structure is a core decision from the request that the tariff be indexed to a hard currency government’s perspective in the risk allocation. It such as U.S. dollars or euros, as long-term afford- needs to be decided considering the results of the able hedging products are still rarely available. This high-level risk analysis and availability of adequate entails that the government would take the foreign financing in the local currency. The tariff can be in exchange risk. Alternatively, the main mitigant a foreign currency, indexed to a foreign currency, would be IPPs’ access to adequate local financing, indexed to inflation, or increasing every year at a matching loan flows and revenues. This would entail given rate. The choice of who takes the inflation the development of a strong lending market that risk and currency risk will potentially impact the PPA would propose appropriate terms and conditions tariff greatly and therefore needs to be decided in an under project financing with the right maturity. informed manner. As per the results of the market The selection of the tariff structure is important sounding presented in Figure 17, most IPPs would at the program level. The approval of the foreign exchange office or the ministry of finance may be required, depending on the applicable legal frame- Figure 17. Foreign exchange risk: mitigation work, in the event the tariff is indexed to another instruments currency. 82% 28% 31% 5% 5% Tariff Long-Term Matching Hedging Refinancing Indexed Financing PPA Flows Products in Local Currency Source: World Bank Market Sounding 2018. A Sure Path to Sustainable Solar 47 4 4.5.3 CONTRACTUAL FRAMEWORK: RISK ALLOCATION UNDER THE PHASE 2: SETTING A STRATEGY PROGRAM BIDDING FRAMEWORK Risk allocation between the procurer and the IPP in the PPA contract is a result of the trade-off between the price (that the procurer is willing to pay) and the risks (that the procurer is willing to take to improve bankability). The key risks that need to be tackled A. PPA TENURE at the program stage are: off-taker risk (payment and PPA tenure , best matched to the asset life, which is usually contract termination) between 20 and 25 years. The PPA tenure is key for IPPs to be able to access long-term non-recourse financing. As solar legal change risk as both can have projects have very small OPEX needs, the cost of the invest- long-term impacts on the country ment is up front, and therefore the tenor of the loan has a and require the involvement strong impact on the PPA price. of different public partiess T h e a l l oc at ion of t h e hig h -l eve l contractual risk informs which mitiga- B. GOVERNMENT SUPPORT tion instruments or provisions the government will provide to the IPP and Government support for changes in the law is key to what can be expected from the IPP. Key mitigate risks of legal and tax changes that IPPs cannot terms of the contractual framework to control. Governments can attach a letter of support to the be decided by the government at the PPA, committing that any change in law that would negatively program level and to support key risks impact the project’s operation and profitability would not be perceived by IPPs are as follows. applicable to it. Similarly, governments can agree to interna- tional arbitration to provide further assurance to lenders and IPPs in the event of termination or breach of contract. This is critical especially in countries where the justice system is not up to international standards. C. POLITICAL RISK Political risk can be mitigated by inserting, in the contractual documentation, a termination clause benefiting the IPP in the case of political force majeure events, which also provides for specific indemnities covering (notably) the IPP’s outstanding debt repayment obligations. Specific risk mitigation coverage can also be proposed for the IPP in particularly unstable host countries. 48 A Sure Path to Sustainable Solar D. OFF-TAKER PAYMENT RISK 4 Off-taker payment risk , as presented before, The payment guarantee covers the PPA payment PHASE 2: SETTING A STRATEGY is critical to IPPs when the utility is not consid- obligations from the off-taker to the SPV whereas ered creditworthy. It can be mitigated, as per the the loan guarantee covers default by the SPV on result of the market sounding presented in Figure loan repayment caused by default by the off-taker 18 , by an adequate payment security mechanism on PPA payments. to secure payments and/or a guarantee (sover- eign guarantee or development finance institu- Government backing of the obligations of the tion [DFI] guarantee). Similarly, termination and off-taker under the PPA with a bankable letter of breach of contract risks due to the utility default support is very often a key element of a successful can be reduced through provisions for termination contractual scheme relying on a balanced and fair payment (compensation for debt due, and equity risk allocation. These supports need to be agreed return and premium) and/or by an appropriate upon by the government and in particular the minis- guarantee (sovereign guarantee or DFI guarantee). try of finance prior to procurement. Figure 18. Liquidity and termination risks: mitigation instruments Utility liquidity risk: mitigation instruments Termination risk: mitigation instruments 64% 72% 65% 57% 33% 21% 24% Cash Sovereign Third Party Third Party Sovereign Political Risk Political Risk Coverage Collateral/ Guarantee Guarantee with Guarantee without Guarantee Coverage from Commercial Escrow a Sovereign a Sovereign from DFI Providers Account Guarantee Guarantee Source: World Bank Market Sounding 2018. IMPROVING OFF-TAKERS’ CREDITWORTHINESS Introducing private participation in generation In the short term, countries that have financially without first or at least simultaneously under- vulnerable utilities have no choice other than to taking deeper sectoral reforms is potentially provide some sort of mitigation support for this problematic. In many countries, off-takers risk, which is intrinsically a government matter. may not have a strong balance sheet or credit However, they need to also ensure that the PPA history. Off-takers’ weak financial performance price of any new generation is as low as possi- can often be linked with high investments in ble, so it does not further burden the utility’s electrification, high losses, implementation financial status. of non-indexed and non-cost-reflective retail electricity tariffs that do not meet the utili- In the medium term, governments need to ty’s revenue requirements, and the high cost support utilities to improve their services of electricity generation. Postponing tariff and collect payments, improve grid quality to adjustments, subsidy reforms, and policies reduce technical losses, better target their to reduce the cost of generation, losses, and fuel and electricity subsidies to the poorest inefficiencies affects the creditworthiness of segments of the population, and continuously the off-taker and usually leads to demands reduce their cost of generation. It is critical for for government guarantees for PPA, exposing countries to build a strong program to support taxpayers to substantial contingent liabilities. their utilities to reach sustainability. A Sure Path to Sustainable Solar 49 4 4.6 MAXIMIZING SOCIO-ECONOMIC BENEFITS PHASE 2: SETTING A STRATEGY The next question is how to maximize the Policymakers can also decide to integrate the impact program’s socio-economic benefits? on jobs when modeling their least-cost generation Sound planning with medium-term targets selection. For example, the bottom-up model Open will allow countries to maximize the socio- Source Energy MOdelling SYStem (OseMOSYS) has economic benefits triggered by the solar been used in Tunisia with an adds-on to model jobs projects implemented as part of a creation taking into account employment rates as a sustainable and integrated roadmap. socio-economic metric (Dhakouani A. 2017). Figure 19. Maximizing the socio-economic benefits of private participation PLANNING STRATEGY IMPLEMENTATION Provide visibility to the market Build capacity and Support employment of locally & internationally, including competitiveness of local players local workers, communities, women, and youth VRE targets and Gap analysis on skills implementation timeline and industries Assessment of local players Action plans to boost Public policies such as competitiveness of preferential treatments Mapping of existing local players and to and financial incentives for and new skills train on skills needed maximizing positive local Assessment of socio- development economics impact 50 A Sure Path to Sustainable Solar 4 PHASE 2: SETTING A STRATEGY SOCIO-ECONOMIC BENEFITS CAN BE SUPPORTED IN THE FOLLOWING WAYS. A. PROVIDE VISIBILITY LOCALLY AND INTERNATIONALLY. To support the development of The creation of a business cluster local industry, the government can coul d a lso h el p loc al p l ayers benefit from the deployed solar i n fo r m t h e m a r ket of t h e program, disseminate adequate programs’ features, including knowledge on the solar value local and industrial develop- chain, provide relevant training ment targets, and in coordination with professional take local suppliers through the training institutions, help local solar value chain to allow them companies gain visibility, and to identify relevant oppor- link them to international players tunities so they can position involved in the bidding processes, themselves as needed as the case may be. B. FACILITATE THE ASSESSMENT OF LOCAL OPPORTUNITIES. The government could conduct external studies in accordance with best practices to assess the potential of the local market in the solar value chain and share these studies with prequalified bidders to facilitate bidders’ investigation of local opportunities to partner/subcontract. Meetings between the prequalified bidders (and their main subcontrac- tors for engineering, procurement, and construction as well as operation and maintenance) with local players could be organized. A Sure Path to Sustainable Solar 51 4 C. MAXIMIZE BENEFITS FOR LOCAL COMMUNITIES. PHASE 2: SETTING A STRATEGY Carrying out a socio-economic study to For example, in South Africa, projec t s assess the needs of local communities would mandated under the Renewable Energy help in the design of tailor-made programs to Independent Power Producer Procurement meet these needs to the extent possible, in Programme are required to set aside a coordination with all the public stakeholders percentage of total project revenues for involved. While the government often under- socio-economic development to benef it stands community needs and how to meet local communities. This is the case of the them, it often lacks the means to finance Redstone 100MW CSP solar project, which the measures needed to address them. The commits to a 2.5 percent community trust. bidding process could include provisions Set up as a not-for-profit organization, the for the IPP to finance a small percentage trust will benefit local communities living of the capital expenditure (e.g., 1 percent) around the project site, particularly women that could be spent by governments on local (who are involved as trustees). Distributions development. received by the trust must be applied to specific community development programs, including health care, education, training, and development SOLAR PLANTS AND WOMEN’S EMPOWERMENT: AN EXAMPLE FROM MOROCCO As part of the Noor Ouarzazate solar PV Six years after its implementation, it project, since 2013, the IPP selected by already reports significant benefits for the government has implemented a full women that are part of the program. corporate social responsibility (CSR) A m o n g t h e resu lt s a re su bs t a nt ia l plan in collaboration with governmental increases in income and assets, knowl- entities. The objective of the CSR plan edge of livestock management, and is to improve livelihoods and economic knowledge of handicraft production. opportunities of the local communi- ties, with a particular focus on women. W+ certificates were used to monetize In order to reach this objective, the IPP the benef it s of ac tions suppor ting facilitated the creation of mixed agricul- women. Under this certif ication, the tural cooperatives and women-only project is monitored for the categories handicraft cooperatives, and provided “Income and Assets” and “‘Knowledge trainings related to livestock, agriculture, and Education.” The W+ certif icates and handicrafts. associated with these actions can be sold, generating incremental revenues for t h e wom e n to rei nves t i n t h ei r projects. For more information, see https://www.wplus.org/project/ livelihoods-project-in-ouarzazate-morocco-2/ 52 A Sure Path to Sustainable Solar D. MANAGE EXPECTATIONS TO ENSURE BETTER RESULTS. 4 PHASE 2: SETTING A STRATEGY A carefully designed communication and engagement plan would improve communication with local stakeholders and allow the government to better manage the expectations of key stakeholders. SYNERGIES BETWEEN MINING AND RENEWABLES FOR A SUCCESSFUL ENERGY TRANSITION The solar industry can present an opportunity for workers from the coal industry by offering improved payrolls for workers at all skill levels. Janitors in the coal industry could, for instance, increase their salaries by becoming low-skilled mechanical assemblers in the solar industry (Harvard Business Review 2017). A relatively minor investment in training would allow the vast majority of coal workers to switch to solar-related positions; many coal miners have skill sets, such as mechanical and electrical expertise, that are transferable to solar industry jobs. They could benefit from new jobs created in renewables in the context of a coal phase-out, with the support of the government to manage social impacts on workers and communities. An integrated framework for such a transition would address temporal, spatial, and educational aspects of the job matching process, as well as job losses within the energy sector and in other sectors of the economy. The Guqiao Solar Farm in China provides an example of such transition: it has been built on top of an abandoned coal mine in Anhui Province. This 150 MW solar farm retrains and employs some of the former coal miners (e.g., as solar panel assemblers) and provides them with a better salary while offering them a healthier work environment. A Sure Path to Sustainable Solar 53 4 E. ENHANCE THE POSITION OF LOCAL PLAYERS AND LOCAL JOBS ON THE VALUE CHAIN. PHASE 2: SETTING A STRATEGY The government might map local players and their skills, then identify how they might fill gaps on the solar value chain. Any theoretical assessment might be improved by benchmarking local players against preselected subcontractors by asking, for example, prequalified bidders to explain why they do not intend to preselect local subcontractors. This information will help the public stakeholders design a tailor-made program to enhance the position of local players on the value chain. From a sustainability perspec- tive, operation and maintenance jobs require specific attention as they constitute more than half of the jobs associated with a solar PV plant (IRENA 2017). SKILLS DIVERSIFICATION: OPPORTUNITIES IN OPERATION AND MAINTENANCE In the solar PV value chain, 56 percent of the human resources required are in O&M while manufacturing and procurement compose 22 percent of the total. The majority of laborers are construction workers and technicians. Developing new O&M skills requires, in addition to theoretical knowledge, “learning by doing.” To create a local champion, the government could designate a team of skilled people and include provisions in the bidding documents to second them to the O&M contractor. They would be able to get hands-on experience, scalable and replicable, at no cost to the government (as costs will be paid by the IPP and budgeted up front) and at no increased risk (they will be seconded and hence under the responsibility of the O&M contractor). Holding a minority stake in the O&M vehicle may allow the government to improve its knowledge of the O&M business with only a limited amount of money at stake. For more information, see https://www.irena.org/publications/2017/Jun/ Renewable-Energy-Benefits-Leveraging-Local-Capacity-for-Solar-PV 54 A Sure Path to Sustainable Solar 4.7 SOLAR DEPLOYMENT PROGRAM: KEY RESULTS 4 PHASE 2: SETTING A STRATEGY Based on the government’s strategy and a high-level risk assessment, a solar deployment program can be developed that outlines: clear roles and responsibilities the targets of the program divided of stakeholder in yearly or 18-month phases high-level risk allocation of the overall bidding framework development and operational including procurement and risks with associated mitigation contractual specific issues as instruments and key actions identified in the risk assessment. selected deployment scheme(s) Under the program, the government may also identify and plan specific action points to support socio-economic development, and key changes to be made to the legal framework to encourage and facilitate sustainable solar deployment. A Sure Path to Sustainable Solar 55 5 PHASE 3: IMPLEMENTATION 5.1 OBJECTIVES 5 PHASE 3: IMPLEMENTATION By the time a project’s implementation begins, a government’s solar targets have been set and a strategy to reach those targets has been agreed upon by all public parties and enacted. If that strategy involves private At this point, the public sector will operationalize the participation in solar energy pro- decisions made in the previous two phases. duction, then several questions By preparing a robust procurement process, combined must be addressed at the start of with appropriate technical analysis and f inancial the implementation phase: support, the public sector will foster affordable and What technical analyses and sustainable solar projects that address the energy investments must the public needs of the country while supporting its socioe- sector undertake before conomic development. By planning and anticipating in selecting an IPP? a coordinated manner the key actions of the various public entities involved, the government can prevent How can the process of IPP delays in the procurement process that otherwise selection be optimized? would affect the procuring authority’s credibility as well as bidders’ costs. What will the government’s role be in the operational From the IPPs’ perspective, the implementation of phase of an IPP-owned solar a robust, formal procurement scheme relying on project? bankable contracts and supported by adequate risk mitigation coverage, will reduce several key risks, namely (i) lack of procurement transparency and long negotiation timelines, (ii) financing and contractual risks, and (iii) off-taker and political risks. By the end of this phase, the nation’s solar targets will have been achieved by leveraging private investments in a fair and sustainable manner, while all risks from the public and private perspective will have been optimized. A Sure Path to Sustainable Solar 57 5 Figure 20. Key steps in the implementation phase 4 Phase 1 Grid upgrade investment list Public investment PHASE 1: PLANNING PHASE 3: IMPLEMENTATION in grid completed Phase 2 Sustainable solar program Deployment High-level bidding VRE GRID schemes framework INTEGRATION ENABLED If substation based Substation availability assessment including load flow and land availability If solar park Pre-bidding market sounding Feasibility study, including safeguards, grid & geotechnical Final risk allocation matrix Final bidding mechanism & Land selection & acquisition procurement framework Key public investments Final contractual arrangements & in solar park risk mitigation instruments Scheme ready for IPP Selection competitive bidding (bid conducted) Plant testing for compliance with technical requirements Phase 1 input Acceptance of the plant Phase 2 inputs Key Phase 3 outputs Outcomes SUSTAINABLE TARGETS ACHIEVED Assessments & frameworks 58 A Sure Path to Sustainable Solar 5.2 PREPARING THE TECHNICAL ASPECTS OF A SOLAR PROGRAM 5 PHASE 3: IMPLEMENTATION Before starting the procurement process, If the government decides on a location-agnostic the public authorities must identify what model, no technical steps need to be taken prior needs to be done, from a technical stand- to procurement, whereas for a substation-based point, to implement the chosen deployment model or solar park, it is necessary to prepare the scheme. grid and make the land available as well as other infrastructure, as the case may be. Figure 21. Roles of the public and private sector, by type of deployment scheme SOLAR PARK SUBSTATION-BASED LOCATION-AGNOSTIC Decision to launch a bid Public Party Public Party Transaction Phase for a given capacity Ranking of substations Private Party with associated capacity Transaction Phase Feasibility studies Land selection Private Party and acquisition SPV setup / permits clearance Transaction Phase Design & construction Public / Private Party Commissioning Private Party Operation Transfer of decommissioning 5.2.1 SUBSTATION-BASED MODEL: DETERMINING LOCATIONS AND CAPACITY A substation-based scheme requires an assess- without risk. The procurer should include this ment of which substations are the most appro- list in its request for proposals (RFPs), indicating priate for solar deployment from an integration the maximum capacity per substation in MW and point of view. The assessment integrates the the maximum capacity for the total auction. It is results of a loadflow analysis combined with recommended that the total capacity auctioned land assessment. It also considers the timeline be smaller than the cumulative maximum capac- set for transmission upgrades. ity per substation. This will ensure that the offer meets the demand while maximizing compe- Based on this assessment, it is possible to tition, reducing the risk of collusion between prepare a list of optimal substations and their private investors. If land around one substation associated capacity that can be integrated is very expensive, this substation will naturally be eliminated due to higher bids. A Sure Path to Sustainable Solar 59 5 5.2.2 SOLAR PARK: FEASIBILITY STUDY PHASE 3: IMPLEMENTATION If the government decides to develop a solar park, project may be auctioned in phases (e.g., for a 300 it must select a suitable piece of land around the MW solar park, only 150 MW might be auctioned identified substation, for the power plant and the during the first phase, and the rest 12 months right of way, after considering social and environ- later, in a second phase). A geospatial analysis of mental impacts. The solar park should be located the land around the substation can be conducted as close as possible to the substation and should to support the identification of different pieces of be sufficient for the total park size envisioned. The land to assess which is optimal. Figure 22. An example of geospatial analysis for solar park land identification As part of the feasibility study, and once the land has been Other studies (of dust, flood risk, seismic identified, several different analyses need to be conducted: activity, climate change impacts, and water availability) may be needed depend- A topography and geotechnical analysis to verify that ing on the location of the site. the soil and terrain are suitable for a solar plant. An environmental and social impact assessment Done in accordance with international (ESIA), combined, if needed, with a land acquisition standards and shared with prequalified and resettlement plan following international stan- bidders during the bidding process, dards such as the Equator Principles and the World these studies will provide useful data to Bank Social and Environmental Framework, as well as them and thus help reduce the costs of country-specific environmental and social regulations. the tender and lower the risk premium embedded in the proposed tariff. A site-specific grid interconnection study. A solar irradiation analysis using time series data, pos- sibly correlated with ground-based measurements for a refined assessment of the local solar resources. 60 A Sure Path to Sustainable Solar 5.2.3 PERMITS 5 PHASE 3: IMPLEMENTATION To reduce the perceived risk associated government, if possible, before procure- with acquiring permits in a given country, ment are the grid interconnection license under a solar park scheme, the government and the environmental and social permits. can get key permits for the project even Sometimes the project also needs to be before an IPP is selected. officially registered on a list of public-private partnerships. Depending on how permits are acquired, the government may choose to create a A list of the permits needed before the new SPV—that is, a company dedicated operational phase (such as a building permit) to the project and that may be trans - and their associated steps, as well as related ferred to the auction winner—or transfer authorizations and regulations, can be permits without such a vehicle. Permits developed and provided to bidders as part are country specific, and their criticality of an RFP. A fast track within relevant minis- needs to be assessed based on the risk tries/agencies could be set up to assist IPPs analysis conducted for the program. Two in obtaining these identified permits. key permits that should be acquired by the BIDDING SCHEME: SOLAR + BATTERY STORAGE In countries where grid flexibility has In California and Hawaii, in the United already been maximized and new solar States, projects combining solar power projects cannot be integrated without and battery storage are becoming the affecting the grid, or where the duck norm. In these cases, local govern- curve is prominent, battery storage ments prepare detailed technical speci- may be a solution. If utility-owned f ications (maximum ramped up and battery storage is the most advanta- down, percentage of generation to be geous, and where fiscal space is limited, dispatched during the evening peak the private sector could f inance the demand, quality of outputs, etc.) and battery storage provided to the grid. As provide these to all bidders so they are very few countries have ancillary service able to compare their offers. As battery markets, most privately-owned battery storage prices continue to fall, combined storage is combined with a solar project. solar and battery projects may soon become the standar. A Sure Path to Sustainable Solar 61 5 5.3 PUBLIC INVESTMENTS PHASE 3: IMPLEMENTATION Beyond the solar plant to be financed by private investors, the government must determine what additional investments are required for the efficient development of a solar PV program. 5.3.1 POSSIBLE PUBLIC INVESTMENTS IN SOLAR PARKS Done in a timely manner and in accor- Public sector commitments to set up strate- dance with best practices, public invest- gic infrastructure, such as the transmission ments in solar parks provide visibility to line, reduce the IPP’s risks but increase the the IPP (mitigating development risks) risks to the government if these commit- and optimize cost s (as cost s can be ments are not fulfilled. If the government pooled, building on synergies). Based on decides, for instance, to build the trans- the government decision whether to have mission line, it needs to be sure that the line one or many IPPs in a given solar park, the will be ready before the solar plant reaches public party may optimize its investments its testing phase. Otherwise, the public differently. off-taker will have to pay tariffs to the IPP for electricity that cannot be delivered until the situation is remedied. Table 5. Elements of solar parks for public investment consideration ELEMENTS OPTIMUM PART IN CHARGE Solar park land, including Public party procuring the solar identification of rights of way project—usually the state utility. and ownership Fencing Best if done by the public party to ensure that new settlements are not built after purchase and during procurement. Land technical If the site is complex and if there is more than one IPP preparation in the same park, it is best if the public party prepares the land, especially with regard to the earthworks. Connection line from If there is more than one IPP in the same park, this plant to substation would be best done by the public party. Otherwise, a secured right of way would be enough. Water supply and drains To be done by the public party if water supply and flooding pose risks and if several IPPs share the park. Weather station May be handled by the public party to optimize costs. Fire station May be handled by the public party to optimize costs. Main road May be handled by the public party to optimize costs. Street lighting May be handled by the public party to optimize costs. Internal access roads May be handled by the public party to optimize costs Source: Adapted from Bridge to India (2017). 62 A Sure Path to Sustainable Solar 5 PHASE 3: IMPLEMENTATION In the case of solar parks, the government usually retains ownership of the land, leasing it to the IPP through a bankable lease contract. Such an agreement should allow the IPP to own the solar plant erected on the land during the period of the PPA. A yearly solar park fee can be paid by the IPP to the government for leasing the land and other costs incurred, such as the transmission line and fencing. A commu- nity fund may also be integrated into this fee to support local development (e.g., in particular to foster the involvement of women and youth in local businesses benefiting from the new solar power). 5.3.2 GRID STRENGTHENING In parallel with the implementation of the solar deployment scheme, the public authorities should invest in the upgrades of the grid infrastructure that was planned under its least-cost transmission plan to support the integration of VRE and ensure a better quality of electricity service. These upgrades might include battery storage if the level of VRE penetration is already reaching the limits imposed by existing infrastructure. INNOVATIVE FINANCING The government (if it finances solar park infrastructure) or the private IPP financing the plant may choose to seek types of funding such as green financing (e.g., certified green bonds), concessional/climate financing, “responsible financing” (from socially responsible investors), and top-up financing, such as the sale of certificates associated with the project or related activities. The certificates might assign a value to the gas emissions avoided (as with carbon certificates) or attest to other attributes of renewable electricity production from the point of generation to the point of consumption (as with International Renewable Energy Certificates). A Sure Path to Sustainable Solar 63 5 5.4 PROCUREMENT /  SELECTION OF IPPs PHASE 3: IMPLEMENTATION Once the government has completed its analysis and decided what investments to make in a given scheme, the next question is how to select private investors . To select private investors to finance, The main parameters to consider when build, and operate a power plant for 25 developing a robust procurement are years, well-organized procurement and pre-bidding market sounding selection processes are needed. clear bidding mechanisms (encom- The main areas of expertise required during passing a strong bidding process, clear the selection process are as follows: qualification and winner selection crite- ria), and comprehensive and bankable legal and regulatory tender documentation technical and safeguards an agreed-upon procurement frame- financial considerations work (that would integrate, as the case may be, a ceiling tariff, competitive procurement. bidding capacity limits, and tariff index- ation) Usually the government will require support from transaction advisors for contractual arrangements and sup- assistance in this respect. There are porting mechanisms (encompassing consulting f irms that can support the the final risk allocation matrix, the dif- government, or development f inance ferent contracts reflecting the final risk institutions, such as the International allocation and the associated bonds, Finance Corporation under its Scaling letters of credit and guarantees, as the Solar Program. case may be). Standardized contracts for solar projects have been launched by IRENA and the Terrawatt Initiative under the Open Solar Contracts Initiative to streamline project development and finance processes for small and medium-sized, grid-connected solar PV projects. The contracts are currently available for review.5 ⁵ For more information: https://opensolarcontracts.org. 64 A Sure Path to Sustainable Solar 5 PHASE 3: IMPLEMENTATION 5.4.1 PRE-BIDDING: MARKET SOUNDING Using the overall program bidding framework and the high-level market sounding conducted when designing the program’s key features as a start- ing point, the government can consider conduct- ing a call for expressions of interest or a detailed market sounding to consider the details of the bidding mechanisms, procurement framework, and contractual arrangements. A thorough sound- ing allows the government to gauge the market’s appetite, to probe its risk-allocation mechanisms, and to collect useful insights that may be consid- ered when setting the pre-qualification criteria. Figure 23. Key steps in a market sounding MAIN OBJECTIVES ACTIONS TAKEN Inform the market Communication about the program to the principal about the program market players and sounding of their interest Better definition of Gathering the views of the market on the preliminary the program features structuring and the high level allocation of risks Better understanding of market practices Evaluation of the players expectations and constraints Preparation of the Assessment of the financial strength and technical prequalification phase capabilities of the players=> RfQ criteria sizesd to ensure broad competition while attracting top players Preparation of the Preparation of procurement rules and contractual request for proposals arrangements phase A Sure Path to Sustainable Solar 65 5 5.4.2 BIDDING MECHANISMS PHASE 3: IMPLEMENTATION The bidding mechanisms provide the structure of the bidding process, qualification criteria, winner selection procedure, and tender documentation. A. BIDDING PROCESS PREQUALIFICATION A prequalification phase is usually recommended to limit the number of bid - ders and to facilitate the management of the tendering process. In general, preselecting 8 to 12 bidders ensures both a good level of competition and easy management. Prequalification criteria have to be carefully chosen, so as to pre- select bidders with sufficient experience and financial capabilities. A request for qualifications is made available to all parties without restrictions. TECHNICAL AND FINANCIAL PROPOSALS AND REVERSE AUCTION Typically, the government requests from qualified IPPs, at the RFP stage, two proposals: one technical, the other financial. The technical evaluation uses a pass/fail approach to ascertain technical compliance. The lowest bids from tech- nically compliant IPPs are then considered. The lowest bid can be determined by using the lowest price proposed, or it can be set under a reverse auction. Iterative price discovery is usually not recommended in countries where competitive bid- ding is new, so as to avoid unrealistic expectations of competition and to ensure that the auction does not fail because of financially uninformed bidders. During the process, governments can share the draft contractual documents for comment and approval before IPPs submit their proposals. Advance sharing avoids long negotiations after IPP selection. BONDS Bid bonds enable procuring authorities to eliminate frivolous or low-quality offers and bidders from the selection process and ensure that the project will be completed. All bidders may be requested to provide an adequately sized bid bond upon submitting their proposal. Release of the bid bond may occur upon signing the project documents, upon submission of the project development guarantee, or upon rejection of the proposal. E-TENDERING PLATFORM The use of an e-tendering platform is recommended to ensure transparency and efficiency. Communication, document sharing, and submissions would be conducted on the platform (Figure 24), reducing the risks of complications during submission and increasing security while sharing documents. 66 A Sure Path to Sustainable Solar 5 PHASE 3: IMPLEMENTATION Figure 24. Key elements of the bidding process using an e-tendering platform 4 e-Tendering platform PHASE 1: PLANNING Country announces auction RFQ Offline DOCUMENTS Selection of qualified IPPs SUBMISSION BY IPP e-Tendering platform Qualified IPPs announced RFP Offline SUBMISSION OF Opening of technical and PROPOSALS BY IPPS financial proposals Selection of winning IPP e-Tendering platform Announcement of selection of IPP Offline PPA signature A Sure Path to Sustainable Solar 67 5 B. QUALIFICATION CRITERIA Qualif ication criteria involve a combination During the pre-qualification stage, the techni- PHASE 3: IMPLEMENTATION of bidders’ technical and financial capabilities cal and financial qualification criteria need to be measuring their experience, readiness, financial clearly stated in the request for qualifications closure experience, net worth, etc. Criteria may to avoid uncertainties that may lead to poten- vary based on the type of bidding model (namely, tial complaints. Similarly, technical and financial substation-based or solar park) and, impor- qualifications need to be clearly stated in the tantly, on the level of competition in the market RFP to ensure transparency and reduce poten- and its maturity. Preselecting the right stake- tial complaints over non-selection. The compo- holders is key, as the overall process is based on sition of consortia has to be clearly specified as this critical stage. The government will have to well, with the role of each party being explicitly deal with the winning consortium over the long defined. The participation of a local member term, relying on the selected IPP for designing, may be strongly encouraged or required under a financing, building, operating, and maintaining broader strategy to increase the participation of the solar plant during the lifetime of the PPA. local players in the solar program. Figure 25. Qualification criteria applicable to consortium members OTHER MEMBERS, LEAD MEMBER & TECHNICAL MEMBER & INCLUDING Financial Technical criteria criteria Technical criteria Case-by-case Eligibility & nonperformance criteria C. WINNER SELECTION The winner of the bid may be selected based: Selection of bidders through multiple crite- ria may lead to a higher tariff discovery in bids, solely on the criteria of price, affecting the financials of the procuring authority with the project awarded to the in case of incentives favoring non-competitive bidder with the lowest tariff measures (e.g., if local content is not based on a through a weighted average criteria competitive value chain). of the tariff discovered from bidding and other objectives such as economic development or local content requirements, that is, when they serve more than one policy objective 68 A Sure Path to Sustainable Solar D. TENDER DOCUMENTS 5 RFP documents typically include: This will ensure that the risk allocation is PHASE 3: IMPLEMENTATION clearly reflected in the documents as per instructions to bidders and forms the government’s decisions and will save a complete set of contractual bidders time and money. It will also limit agreements, which mainly consist the negotiation timeline on contracts post of the implementation agreement, award, as bidders would have had to accept PPA, connection agreement and solar the contracts when submitting their bids. park infrastructure contract (if any) all technical specifications for the construction and operation of the plant that the IPP shall apply. Additionally, the government can add Such a package will facilitate f inancing, the following documents to the RFP: raise bidders’ awareness of the risk mitiga- tion options available, and reduce the risk all technical documents such premium up front (which will be reflected in as those needed for the solar the proposed tariff). Where a solar park is to park (feasibility study, land be combined with prepackaged guarantees/ ownership documents, etc.) financing, bidders can mainly focus on the and for the substation-based technical aspects of their bids, offering the bidding (substation list) best value for money. This in turn will benefit a list of permits the government as it supports the efficiency of transactions. a fiscal appendix detailing the fiscal and custom framework and applicable regime for IPPs a local market assessment (see Phase 2: Strategy) as the case may be a term sheet of guarantees and staple financing proposed by development finance institutions in coordination with the government Any parameter affecting the tariff should consideration in their financial modelling and be clearly stated in the RFP to avoid negoti- avoid any misinterpretation. The financial ations after the submission of bids. A list model used for the financial selection could of assumptions (including tax treatment) also be shared with all bidders. may be shared with bidders to be taken into A Sure Path to Sustainable Solar 69 5 5.4.3 PROCUREMENT FRAMEWORK Three key aspects of the procurement framework need to be PHASE 3: IMPLEMENTATION agreed upon before launching the bid: A. A CEILING TARIFF Some countries share this information to ensure that the PPA price of the project is affordable for the country, but it may be interpreted as a price signal to the market, encouraging bidders to propose tariffs in the ceiling range and not be as competitive as it could have been. On the other side, if the ceiling tariff is too low the auction may be under-subscribed. B. COMPETITIVE BIDDING CAPACITY LIMITS This is the maximum capacity per IPP and is critical in developing a solar park framework to diversify the exposure to one player. When setting the maximum capacity per IPP, there is a trade-off between (i) achieving the economies of scale needed to build a bigger plant, which would allow a lower-cost PPA versus (ii) mitigating the public sector’s risk of the project not being built by the selected IPP. C. TARIFF INDEXATION Tariff indexation, as per the program-level bidding framework presented in Phase 2: Strategy. 5.4.4 CONTRACTUAL ARRANGEMENTS AND SUPPORTING MECHANISMS A. FINAL RISK ALLOCATION MATRIX The contractual arrangements set forth The key inputs to the contractual arrange- in the RFP need to address all key risks, ments are the PPA tenure, payment secu- with clear risk-allocation mechanisms rity mechanisms, provision for changes presented in the contract documents. in law, and termination clauses. Off-taker Before draf ting these document s, a arrangements may involve a take-or-pay detailed risk-allocation matrix outlining agreement with a stated number of hours these mechanisms should be finalized, per year for downtime for grid mainte- taking into account key takeaways from nance. Stringent insurance requirements the completed studies and from the should be included in the bidding docu- high-level risk allocation set during the ments to enable adequate coverage of program design phase. It should cover all force majeure events under insurance and the key risks identified, defining appro- to ensure that insurance premiums are priate mitigation approaches and pricing factored into the bid. residual risks whenever possible. 70 A Sure Path to Sustainable Solar B. CONTRACTUAL ARRANGEMENTS 5 Defining the contractual arrangements up front, and in line with PHASE 3: IMPLEMENTATION chosen risk-allocation mechanisms, is critical for the success of the bidding process. A typical contractual structure for IPP solar projects is represented in Figure 26. Figure 26. The typical contractual structure of an IPP-owned solar project Government Other Shareholder(s) Awarded Consortium Implementation agreement PPA + other agreement(s) PROJECT COMPANY Shareholders’ agreement Public Off-taker EPC Contract(s) O&M Contract Finance Documents EPC Contractor O&M Contractor Lenders Once selected, the awarded consortium (representing one or more IPPs) under one SPV will sign the PPA with the off-taker, setting the terms and conditions for the provision of electricity over the PPA tenure. It will also sign a connection agreement (if not covered under the permits already granted to the project and secured by the government) regarding the conditions required to connect the plant to the applicable substation and to inject the electricity produced in the grid. Other agreements may also be needed such as (i) a land lease agreement that allows the plant’s construction on bankable conditions aligned with project finance requirements, and (ii) a solar park agreement regarding various elements of the park’s infrastructure/services. An implementation agreement reflecting the support granted by the government to the project will be signed by the project company with the government. The strength of this critical agreement varies depending on whether it is a simple letter of comfort or a guarantee from the government to pay the amount due to the project company by the public off-taker in case of the off-taker’s default. The nature and scope of the support needed has to be assessed in light of various parameters, including the overall risk-allocation framework, the creditworthiness of the off-taker, the market practices in the country and its track record, etc. A Sure Path to Sustainable Solar 71 5 C. ASSOCIATED BONDS, LETTERS OF CREDIT, AND GUARANTEES PHASE 3: IMPLEMENTATION Bonds and letters of credit (LCs) backing the obligations of the IPP to the off-taker and the off-taker to the IPP throughout the process are critical risk mitigation instruments that incentivize the parties to comply with their obligations. Figure 27 illustrates the standard bonds and LCs required by the public off-taker to back the SPV’s contractual obligations throughout the process (amounts are indicative). These are in addition to the bid bond, which is replaced by the development bond upon the signing of the PPA. Figure 27. Power purchase agreement bonds PPA Signature Financial close/ Effectiveness ICOD FCOD DEVELOPT. CONSTRUCTION PERFORMANCE PPA BOND BOND BOND 10% SPV Equity 5% EPC Contract 5% EPC Contract The construction bond will back the obligation of the SPV to build on time and may be drawn to cover liquidated damages owed to the off-taker in the case of a delay (or costs in case of the project’s dismantlement, post rejection, as applicable). The performance bond will back the obligations of the SPV to perform as per the contractual arrangements and may be drawn on by the off-taker to cover liquidated damages applicable in the event of underperformance. From the off-taker to the IPP, an electricity payment LC backing the payment obligation of the public off-taker for a rolling six-month period is usually required when there is a perceived liquidity risk of the off-taker. In a context where the public off-taker has weak creditworthiness, the IPP will also need a support mechanism to back the payment obligation of the off-taker in case of the PPA’s termination. In such a case, the IPP will have to reimburse the outstanding debt to the lenders for which it will rely on the payment of the termination amount by the off-taker, enhanced by a guarantee as the case may be (figure 38). Figure 28. Illustration of guarantee structure Government Indemnity agreement Viable Risk Mitigation Coverage Government contractual support Payment guarantee Loan guarantee Public Off-taker PROJECT COMPANY Commercial Bank Payment for service Repayment of debt 72 A Sure Path to Sustainable Solar 5.5 CONSTRUCTION AND PRODUCTION 5 PHASE 3: IMPLEMENTATION After the IPPs are selected, the government needs to answer the following questions: Are the IPPs following the agreed timeline and technical requirements? How will assets be transferred at the end of the PPA? As part of the PPA, the IPP has been given At the end of the PPA tenure and if the PPA technical requirements for construction was under a build, operate, and transfer and O&M that the government needs to mode scheme, the project has to be trans- follow to ensure that the design is aligned ferred to the government. Concession with the grid and country requirements. and/or PPA agreements usually provide The utility involved will usually check, prior for the transfer of the power plant to to connection, that technical requirements either the contracting authority or the are being followed. off-taker. Some specific provisions and mechanisms need to be included in the During production it is key to provide PPA to ensure that the plant to be trans- informed produc tion forec ast s of 24 ferred meets pre-defined performance hours, 12 hours, and usually 1 hour and a criteria. However, a transfer made under few minutes to support the planning and the build, operate, and transfer schemes dispatch teams. The forecasting tools used is usually quite complex due to taxes and can be at the site or centralized. Usually decommissioning. countries have both site-specific forecast- ing provided by the IPP and centralized forecasting for all the variable renewable energy projects on their grids. A Sure Path to Sustainable Solar 73 6 CONCLUSION: SUSTAINABLE TARGETS ACHIEVED CONCLUSION CONCLUSION 6 CONCLUSION At the end of the implementation phase, a country will have a sustainable, affordable pipeline of solar projects financed by the private sector and supported by fair risk alloca- tion. The government can capitalize on its solar program to fight climate change, fulfill its nationally determined contributions, support its energy access agenda, and improve energy security while maximizing its socio-economic impacts. This document presents key steps the government needs to take to attract private invest- ments while ensuring that its own conditions and restrictions are met. Table 6 presents an example of a risk allocation matrix with associated mitigation instruments. Table 6. Solar deployment risk allocation matrix with associated mitigation instruments TOPIC OF CONCERN RESPONSIBILITY MITIGATION PROCESS RISKS The project’s Government Least-cost plans defined during the planning relevance to country phase. Clear technical specifications of the objectives project shared in the bidding process. Procurement Government Clear roles and responsibilities of stakeholders defined during the deployment strategy and supported by appropriate legal and regulatory framework. Secured electronic platform for competitive bidding. Selecting the right Government Market sounding for useful insights and the private sector players design of strong pre-qualification criteria to pre-select players capable of delivering the project on time and as per requirements. PROJECT RISKS Investment (equity) and financing (debt) Availability of IPP Bankable project with balanced and fair risk- financing in allocation enhanced as the case may be with competitive appropriate support mechanisms (e.g., a loan conditions guarantee, a liquidity facility). Debt service default IPP Roll-in letter of credit to the benefit of the IPP/the bank to mitigate liquidity risk in case the public off-taker delays payment to the IPP. Termination amount set in the PPA to cover at least the outstanding debt amount due by the IPP to the financing bank. Appropriate support mechanisms to back the payment of the termination amount (covered in the implementation agreement with the government and enhanced as the case may be by a guarantee). Repatriation of IPP Adequate legal and regulatory framework in place, distributions backed by the government in the implementation agreement and enhanced as the case may be by an appropriate guarantee. A Sure Path to Sustainable Solar 75 6 TOPIC OF CONCERN RESPONSIBILITY MITIGATION Construction CONCLUSION Environmental IPP Mobilization of land under solar park scheme by and social issues the government. Permitting IPP Appropriate legal framework and streamlined process set by the government, further mitigated under the solar park scheme. Delay in the IPP Liquidated damages applicable under the PPA construction to incentivize the IPP to comply with the of the plant contractual timeline. Solar park deployment scheme (this reduces this risk for the IPP, by mitigating the land access risk, but increases the risk for the government if solar park infrastructure is not ready on time). Rejection of the plant IPP Clear testing mechanism for the public off-taker to be able to reject a defaulting plant with appropriate bonding in place to incentivize the IPP to comply with its dismantlement obligations and as the case may be, to indemnify the public party for part of the costs incurred. Operation and maintenance Curtailment Government Take or pay provisions mitigating the revenue risk for the IPP triggered by a curtailment (not planned under maintenance). Technical preparation done up front by the government during the planning phase and public investments made for VRE integration (furthered by deployment under a substation or solar park scheme). Underperformance IPP Liquidated damages applicable under the of the plant PPA to incentivize the IPP to comply with the contractual performance. Termination of the PPA for the IPP default in case of underperformance above pre-defined thresholds. Termination Government In case of termination without dismantlement (with the government taking over the operation of the plant): Provisions included in the PPA to require adequate maintenance being done with testing mechanism and appropriate escrow arrangements to incentivize the IPP to comply with its maintenance obligations. 76 A Sure Path to Sustainable Solar TOPIC OF CONCERN RESPONSIBILITY MITIGATION 6 Cross-cutting risks CONCLUSION Foreign exchange risk IPP/ Government Revenue flows matching financing flows to the extent possible. PPA indexed to USD/EUR (to match the financing currency). Hedging mechanism to mitigate the residual foreign exchange risk. Change in law Government Compensation of the IPP for change in law included in the PPA, backed by the government in the implementation agreement and enhanced as the case may be by an appropriate guarantee. Force majeure IPP/Government Insurance to mitigate natural force majeure. Political force majeure events covered by the public off-taker in the PPA, backed by the government in the implementation agreement, and enhanced as the case may be by an appropriate guarantee. Early termination IPP In case of public off-taker default triggering of the PPA an early termination of the PPA: Termination amount to be paid by the public off-taker to the IPP sized to cover at least the outstanding debt amount due by the IPP to the financing bank and the IPP equity. Appropriate support mechanism to back the payment of the termination amount (covered in the implementation agreement with the government and enhanced as the case may be by a guarantee). A Sure Path to Sustainable Solar 77 REFERENCES REFERENCES Dhakouani A. 2017. Long-term optimization model of the Tunisian power system. https://www.sciencedirect.com/science/article/abs/pii/S0360544217316122 ESMAP. 2018. Multi-Tier Framework for Measuring Energy Access. ESMAP. 2019a. 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