Box 2.3Mitigating Political Risks in Renewables: A MIGA caseIn 2000, an energy company was awarded a build-own-operate contract for a geothermal power plant in Africa,with rights to develop additional geothermal fields and expand capacity. <strong>The</strong> company signed a 20-year powerpurchase agreement with the national power utility, a parastatal. <strong>The</strong> average base generation tariff was slightlyhigher than the average cost for domestically produced electricity but lower than the cost <strong>of</strong> imported hydropowerfrom neighboring countries. <strong>The</strong> country has long suffered from power shortages, and in 2000, only 10 percent<strong>of</strong> the population had access to electricity.Major risks for the investor included currency transfer restrictions, government breach <strong>of</strong> obligations underthe power purchase agreement, and civil disturbances. MIGA provided the company (a repeat client) coverageagainst currency transfer restrictions, war and civil disturbance, and expropriation. Expropriation coverage insuresbroadly not only against the risk <strong>of</strong> outright seizure but also against breach <strong>of</strong> contract and other forms <strong>of</strong> de factoexpropriation.Shortly after MIGA issued the guarantee for Phase 1 <strong>of</strong> the project, the government attempted to renegotiatethe tariffs because the <strong>of</strong>f-taker’s power purchase price from the company, as agreed under the power purchaseagreement, was higher than the tariff it charged to end users. <strong>The</strong> government also refused to honor some <strong>of</strong> itscontractual obligations under the power purchase agreement. <strong>The</strong> dispute resulted in additional costs and delayedcompletion <strong>of</strong> the first phase <strong>of</strong> the project.MIGA worked with both parties over five years and played a crucial part in reaching a resolution. <strong>The</strong> <strong>World</strong> <strong>Bank</strong>’slong involvement in the sector—it had financed two adjacent geothermal plants—provided a foundation for thesediscussions. <strong>The</strong> disputes were resolved when the utility agreed to honor the existing power purchase agreementwithout price renegotiation. <strong>The</strong> investor considered MIGA’s guarantee as critical for the implementation <strong>of</strong> Phase1 <strong>of</strong> the project and, on resolving the dispute, obtained additional MIGA political risk insurance to cover expansion<strong>of</strong> the geothermal plant’s installed capacity.Source: IEG-MIGA.Over 2003–08, guarantees for grid-connected renewableenergy were $541 million, about 15 percent <strong>of</strong> WBGcommitments for grid-renewable energy. During this period,MIGA issued six guarantees for renewable energy projects.By far the largest guarantee was for the 1-GW Nam Thuen2 hydropower project in Lao PDR, which benefited from$91 million in MIGA political risk insurance and $50 millionin an IDA partial risk guarantee. <strong>The</strong>se guarantees were essentialfor the participation <strong>of</strong> private lenders in the $1 billionloan consortium, which also included public agencies.Is there scope for greatly expanded use <strong>of</strong> the <strong>World</strong> <strong>Bank</strong>’spartial risk guarantees or MIGA’s political risk insurancein promoting renewable energy? IEG’s evaluation <strong>of</strong> WBGguarantees found that guarantees had been underutilizedand that high processing and transaction costs and—inMIGA’s case—eligibility restrictions on the type <strong>of</strong> risks thatcan be covered limited the WBG’s ability to expand guarantees.With a change in the MIGA Convention, MIGA’scoverage is now expanded, but its institutional constraintswould still need to be overcome.For the <strong>World</strong> <strong>Bank</strong>, supporting national guarantee facilitiesis one approach. 10 <strong>The</strong> <strong>World</strong> <strong>Bank</strong> could, for instance,help countries assess the fiscally prudent opportunities forfeed-in tariffs or renewable portfolio standards and supportguarantees for countries with sustainable plans.Guarantees have benefits, but add to the cost <strong>of</strong> finance.It may be possible to use carbon finance to <strong>of</strong>fset some<strong>of</strong> this cost. As noted, at current carbon prices, annualrevenues from carbon credit sales provides little helpwith debt finance and little impetus for investment. Muchgreater leverage could be achieved, however, if carbonsales revenue were used to finance guarantee or insurancepayments, which in turn permitted lenders to <strong>of</strong>fer longerloan durations.Promote renewable energy -friendly pricing regulationA renewable energy plant’s ROE is very sensitive to pricing<strong>of</strong> power. Appendix figure A.3 shows the ROE for three differentplants, evaluated at a range <strong>of</strong> different tariffs. As inthe case <strong>of</strong> carbon revenue, higher tariffs have a bigger effecton plants with higher capacity utilization, other thingsbeing equal. Under the assumptions shown, wind doesnot become commercially attractive until tariffs exceed10 cents/kWh.<strong>The</strong> returns to a renewable energy plant arevery sensitive to power tariffs.Countries have purely domestic rationales for paying a premiumfor renewable energy, including local pollution reduction,insurance against fuel price shocks (Hertzmark 2007),22 | Climate Change and the <strong>World</strong> <strong>Bank</strong> Group
and industrial policy. An increasing number <strong>of</strong> countries,both developed and developing, have adopted policies thataward premium prices to generators <strong>of</strong> renewable power,for instance, through feed-in tariffs. By early 2009, 43 developingand transition countries or subnational regionshad adopted feed-in tariffs for renewable (REEEP 2009).However, pricing policies are <strong>of</strong>ten unfavorable to renewableenergy. Fossil fuel subsidies and artificially lowelectricity tariffs place renewable energy at a disadvantage.(<strong>World</strong> <strong>Bank</strong> responses, in promoting rationalized fueland electricity pricing, were described in Phase I <strong>of</strong> thisevaluation.)In many countries, small power producers, including hydropowerand biomass plants, face unclear or discriminatoryregulations on access to the grid. Producers may facedaunting years-long negotiations with utilities. In contrast,utilities face difficulties in accommodating intermittent,nondispatchable power sources.Starting in the 1990s, the <strong>World</strong> <strong>Bank</strong> assisted a number<strong>of</strong> Asian countries in drawing up and implementing smallpower purchase agreements that reduced transaction costsand risks for independent small power producers whileproviding incentives to serve peak loads. Ferry and Cabraal(2006) describe the experience in India, Sri Lanka, andThailand as being generally successful, with less success inIndonesia and Vietnam. IEG’s tally <strong>of</strong> the timing <strong>of</strong> smallpower investments (figure A.4) supports a catalytic role inAndhra Pradesh (India), Sri Lanka, and Thailand (wherethe emphasis was on small combined-cycle gas turbineplants); additional factors may be at work in Tamil Nadu,India.Several WBG client countries have drafted or implementedrenewable energy legislation. <strong>The</strong>se legislative and regulatoryinitiatives were complex, country-driven processes<strong>of</strong>ten involving many external counterparts, so attribution<strong>of</strong> impact is difficult. Nonetheless, it appears that relativelylow-cost analytic assistance and capacity building from the<strong>World</strong> <strong>Bank</strong> has helped countries craft domestically acceptablepolicies to promote renewable energy. In many cases,receptivity to this advice is heightened by associated investments.However, counterparts view the <strong>World</strong> <strong>Bank</strong> as atrustworthy source <strong>of</strong> advice and analysis.Relatively low-cost analytic assistance andcapacity building have helped countriescraft policies to promote renewable energy.This was true in China, where there is a history <strong>of</strong> analyticwork dating back to the early 1990s. <strong>World</strong> <strong>Bank</strong>-fundedseminars, study tours, and analyses helped lay out the designchoices for renewable energy pricing and funding,contributing to the renewable energy law <strong>of</strong> 2006. <strong>The</strong> lawenabled a systemwide levy to fund renewable energy, triggeringgrowth <strong>of</strong> wind power capacity from 3 GW in 2006to 26 GW at the end <strong>of</strong> 2009.Dialogue in Mexico, together with demonstration windprojects, contributed to a renewable energy law that overcomesprevious policy biases against renewable power. GEFfunding was used to simulate a feed-in tariff, allowing construction<strong>of</strong> the first independent wind power producer.A sequence <strong>of</strong> dialogue and lending in Morocco culminatedin a 2010 renewable energy law, but implementingregulations are not in place. In Egypt, there has been inputinto a proposed new electricity law.Financing such advisory work can bedifficult within the <strong>Bank</strong>’s administrativebudget.Financing this high-leverage advisory work can be difficultwithin the <strong>Bank</strong>’s administrative budget, even thoughthe costs are relatively low. Some clients, such as Brazil,have borrowed for technical assistance. <strong>The</strong> <strong>World</strong> <strong>Bank</strong>’sMexico team has developed a strategy <strong>of</strong> concentratinglending in a single large <strong>Development</strong> Policy Loan andusing the (proportional) preparation budget. Elsewhere,teams have relied on donor funding through ASTAE,ESMAP, and GEF. ASTAE provided important inputs inChina.An unusual IFC foray into policy was unsuccessful. AlthoughIFC routinely provides advice to governments onissues related to utility contracting and privatization, aGEF-funded advisory project in the Russian Federationsought to provide broad regulatory advice to complementan IFC wind farm investment. Even under the proposedrules, however, wind prices were not competitive with existing,subsidized fossil-fuel energy prices. <strong>The</strong> project wasnot implemented, and wind power capacity in Russia stoodat just 16.5 MW at the end <strong>of</strong> 2009.On-Grid Renewable Energy: HydropowerHydropower is by far the largest source <strong>of</strong> renewable energyand according to most predictions will retain that positionfor decades to come. Hydropower with storage reservoirs isthe main form <strong>of</strong> renewable energy that can provide reliablebaseload power.Hydropower has been controversial because <strong>of</strong> its potentialfor environmental and social damage. <strong>The</strong>se risks are greaterfor storage dams, which have sizable reservoirs, than forrun-<strong>of</strong>-river facilities, which have little or no reservoir storage.Risks and damages can be mitigated by consideration<strong>of</strong> siting; for instance, there may be less risk in favoringRenewable Energy | 23
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Phase II: The Challenge of Low-Carb
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CLIMATE CHANGE AND THE WORLD BANK G
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Table of ContentsAbbreviations . .
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Table 5.1Carbon Funds at the World
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demonstration initiative. The Commu
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Appendix ARenewable Energy Tables a
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Table A.4Grid-Based Biomass/Biogass
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Figure A.4A. Hydro/biomass capacity
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Table C.2Completed Low-Carbon Energ
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TAble C.4Reviewed energy efficiency
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Appendix JRecent WBG Developments i
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Hartshorn, G., P. Ferraro, and B. S
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IEG PublicationsAnalyzing the Effec