MENA-OECD Energy Task Force - MENA-OECD Investment Programme PRESENTING THE PRIVATE SECTOR’S VIEW Investment incentives to spur investment in renewable energy in the MENA region 8th Meeting of the MENA-OECD Energy TaskForce March 9 2012 NOTE: Work in progress; draft for comment MENA-OECD Energy Task Force - MENA-OECD Investment Programme 07/11/2018

Renewable energy projects – common risks Investing in renewable energy entails a certain number of risks for the investor owing to the novelty of the technology and the competition from traditional energy sources. Among these are: Lack of profitability High investment risks Client risks Political and regulatory risk Market risks Technical risks associated with novel technology Access to finance These risks form significant barriers to investment 07/11/2018 2

Investment incentives – removing barriers to investment Objectives: take advantage of the private sector's financing capacity reduce the cost to the state budget increase the share of renewable energies in the national electricity mix MENA governments hope to benefit from the positive externalities associated with renewable energy. environmental technology transfers Increased competitiveness of the domestic energy sector improved trade balance for oil importers increase in local skilled jobs The State thus seeks solutions to a number of issues through removing key barriers to investment. The private investor is to be the ultimate beneficiary of the incentives. 07/11/2018 3

Investment incentives – typology Regulatory incentives Policies improving the business environment – in general or targeted at specific sectors Liberalisation of a market, regulatory exemptions granted to specific sectors, etc. Regulatory incentives generally do not entail major public expenses. Financial incentives Aim at correcting market imperfections and reducing transaction costs for investors Soft loans, loan guarantees, capital subsidies, premium and grants. Financial incentives generally require public funds or funds from a foreign or supranational entity. Tax incentives Easing of the tax burden on the investing companies or their employees. Different sorts of tax exemptions on items such as import levies, sales tax, value-added-tax and so on. The government manages these incentives to balance the impact on the public budget with the stimulus effect. 07/11/2018 4

Disadvantages of investment incentives The Energy Task Force is aware that investment incentives potentially can lead to waste of public resources if a wrong investment method is chosen or does not lead to productive private sector practices. This may occur from the way a given policy action influences future “rules of the game”. The OECD publication "Checklist for Foreign Direct Investment Incentives Policies" lists the following types of unintended wastefulness resulting from investment incentives: Ineffectiveness Inefficiency Opportunity costs Deadweight loss Triggering competition Adverse selection 07/11/2018 5

Stock-taking of cash-flow incentives used in the MENA region 07/11/2018

An overview of cash-flow incentives Cash-flow incentives are incentives that aim to support the investor’s profitability and cash-flow during the life-time of the project. In MENA, the Energy Task Force has identified the following as the most commonly used: Net metering Power purchase agreements, augmented by competitive bidding Feed-in Tariffs Carbon pricing/Clean Development Mechanism 07/11/2018 7

Overview of existing incentives for renewable energy projects in the MENA region (according to latest available data – please see appendix for more details on incentives in individual countries) Public competitive bidding Feed -in Tariffs Net Metering Tradable CDM Capital subsidies, grants and premium Investment tax credit Training incentives Reduction in sales taxes or VAT; Customs taxes Algeria  Egypt (2012) Jordan Morocco (project) Tunisia UAE 07/11/2018 8

2. General recommendations for investment incentives 07/11/2018

General recommendations for investment incentives General conditions for enhancing the efficiency of investment incentives Investment incentives should be clear and predictable, with transparent and easily available rules (OECD Investment Declaration). Investment incentives should be uniform and non-discriminatory . Investment incentives should never be permanent. They should only remain in place as long as the technology is not competitive. Incentives should be continuously monitored to ensure they address the main barriers encountered by the investor. Competitive bidding practices should be used wherever possible. 07/11/2018 10

3. Recommendations specific to renewable energies 07/11/2018

Main conclusions on investment incentives In the course of its discussion, the members of the Energy Task Force found that: Cash-flow incentives work better than one-off incentives in the power-generation sector, particularly from the investor’s point of view. Governments can take advantage of the incentive arrangements to set up competitive bidding processes for major projects. Competitive bidding will incentivise companies to make an assessment of the incentive arrangements and help mobilise financial support. Note the following observations on risk: Feed-in Tariffs place the technology risk on the supplier The competitive bidding process puts the risk on the client 07/11/2018

Key recommendations to improve incentives for renewable energy investments When implementing renewable energy incentives, authorities should Allow independent electricity producers Set up independent energy regulators Consider renewable energy generation at different sizes and scales The authorities need to take into account: The size of the project/access to finance: Incentives which facilitate access to finance (soft loans, loan guarantee, etc..) can lift a key barrier for large projects For small projects, time is crucial for profitability; as a result incentives that accelerate administrative procedures and prior work is key to unlock investments The available expertise and knowledge of the technology: Develop expertise on available technologies Support local R&D through tax exemptions – in France they have proven to be effective Encourage R&D into ways that available technology needs to be adapted to local conditions (e.g. combating dust particles in solar panels; Kuwait). Encourage capacity building to have strong, stable counterparts for the private investors Participate in international co-operation; such as Morocco joining the Implementing Agreement on Concentrated Solar Power (2011) of the International Energy Agency. 07/11/2018

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

Acknowledgements MENA – OECD Taskforce would like to thank the following persons for their contribution to the presentation Christopher Segar, IEA Pol Arranz Piera, TTA Setsuko Wakabayashi, NEDO Yukitoshi Yamazaki, Sumitomo Metals Andrew Moorfield, Lloyds Banking Group Jean-Charles Arrago, Total Marc Darras, GDF-Suez Olivier Soupa, Schlumberger 07/11/2018 15

Contacts Ania Thiemann Senior economist/Project manager MENA-OECD Investment Programme Private Sector Development Division, OECD Ania.Thiemann@oecd.org 07/11/2018