How can policies encourage diesel displacement through renewable energy?

Short Answer

Using renewable energy to offset diesel fuel consumption can be a cost-effective, environmentally friendly strategy for mini-grids. Displacing diesel often reduces costs, and cost savings are likely to increase in years to come. The cost of renewable energy technologies, particularly solar panels, has decreased substantially. At the same time, the price of diesel fuel, which is persistently volatile, is increasing.

Despite the economic advantages of renewables, energy providers continue to operate diesel-only mini-grids for a variety of reasons. These factors include long-term use of and experience with diesel technology, lower upfront capital costs compared with renewables and lack of information on how to integrate renewable energy technologies into existing diesel systems.

Fortunately, governments and donors in many countries—such as Costa Rica, Maldives Senegal, Uganda and Ukraine—are taking measures to remove barriers to diesel displacement by decreasing the cost of capital, providing technical information and training to create mutually beneficial situations for utilities and mini-grid operators. These same measures also concurrently promote mini-grids based solely on renewable energy.

Key Measures to Promote Diesel Displacement
  • Decrease the Cost of Capital
    • Make low-interest loans available for renewable energy technologies that offset diesel generation.
    • Connect mini-grid developers with sources of friendly debt/equity and/or or grants that support renewable energy.
  • Provide Technical Information and Training
    • Use technical exchanges, site visits and seminars to share information about successful diesel-offset mini-grid projects.
    • Consolidate and share existing renewable energy resource maps using web-based or GIS-based platforms. Develop materials for unmapped areas.
    • Subsidize mini-grid optimization analysis. Employ trained experts to use mini-grid optimization software (such as Hybrid Optimization of Multiple Energy Resources [HOMER] or RETScreen) to optimize a project’s design to the specific context.
    • Facilitate training and certification for mini-grid installers.
  • Create Mutually Beneficial Situations for Utilities and Mini-grid Operators
    • Work with utilities to enable the private sector to provide renewable energy generation at tariffs lower than diesel costs.
    • Use regulatory practices that prioritize renewable energy over diesel fuel.
    • Work with utilities to reform budgeting processes to allow greater upfront capital expenditures that substantially decrease fuel costs over the long term.

Further Explanation of Key Points

Decrease the Cost of Capital

Since renewable energy generation equipment is more expensive than diesel generators, renewable projects require more capital upfront. Low-interest loans, friendly debt/equity and grants can provide investors the affordable capital they need.

Low-interest Loans

Loans with low interest rates enable developers to borrow money to cover the high upfront capital costs of renewable technologies. In the Philippines, for example, member-owned Romblon Electric Cooperative once supplied residents of Sibuyan Island with poor-quality diesel-generated power for only 12 hours a day. In 2009, the Development Bank of the Philippines awarded the cooperative a 15-year, low-interest loan of $3 million to commission a 900 kW mini-hydro plant. As of 2016, the mini-hydro plant was providing high-quality, 24-hour power at a lower tariff than what households had paid for diesel-powered electricity.

Donor programs can enable governments and banks to offer low-interest loans to mini-grid developers. The World Bank provides long-tenor, low-interest lines of credit for renewable energy to national banks, which in turn make low-interest credit with long repayment schedules available to commercial banks. The Inter-American Development Bank’s Green Credit Line provides a similar service, focusing on Latin America and the Caribbean.

Friendly Debt/Equity and Grants

Donors can also promote diesel displacement by providing grants and friendly debt/equity to renewable energy project developers. Friendly debt/equity is investment capital that aims to achieve positive social impacts, not just profits. Friendly debt or equity has long-time horizons and low expectations of financial returns.

In Alaska, the Kodiak Island renewable energy project used grants and low-interest loans (bonds) from the Alaska Energy Authority’s renewable energy fund to cover the high upfront costs of its wind energy installation. The utility, the Kodiak Electric Association, received $16 million in grants and $40 million in near-zero-interest renewable energy bonds. With this funding, the utility replaced diesel with wind power. As of 2017, renewable energy provided nearly 100 percent of the island’s electricity, and the utility saves $7 million in diesel fuel expenses annually.

Provide Technical Information and Training

Share Information

Utilities and mini-grid operators need credible information about the benefits of replacing diesel generation with renewable energy. Governments and donors can use technical exchanges, site visits and seminars to share information about successful projects. The mini-grid case studies in this toolkit can serve as a starting point. Local renewable energy associations and non-governmental organizations are excellent sources of information about existing renewable energy mini-grids; these entities can often provide contacts and introductions.

Asia’s Hydro Empowerment Network (HPNET), for example, convenes micro-hydropower mini-grid practitioners from around Southeast and South Asia to exchange information on technical and deployment-related topics. These exchanges have helped increase hydropower mini-grid deployment. After officials from Nepal’s utility participated in an HPNET workshop in Sri Lanka, for example, they removed restrictions that prevented mini-grids from connecting to Nepal’s national grid. As a result, Nepal’s utility has integrated more mini-grids into its central grid.

Share Maps of Renewable Energy Resources

For developers, identifying promising locations for projects can be costly. Governments can help mini-grid developers find the best communities for their projects by making information about renewable energy resources public. Helpful resources include detailed GIS-based maps of the country’s renewable energy resources and villages that want mini-grids. Village-level mapping should include information about large loads (like water pumps or mechanically driven agricultural equipment) currently served by diesel engines or generators. For micro-hydropower, GIS layers should include information about household locations, rainfall, topology and vegetation.

Several organizations are creating and providing detailed GIS-based information about renewable energy resources and project sites. Village Infrastructure Angels, for example, conducts mapping of households and optimized mini-grid distribution networks and provides this information to mini-grid operators. Similarly, the International Renewable Energy Agency’s (IRENA’s) Global Atlas for Renewable Energy provides data on solar, wind and other renewable energy resources for select countries.

Facilitate Training and Certification for Mini-grid Installers

Technicians in developing countries generally lack the knowledge and skills necessary to operate renewable energy technologies. To accelerate diesel displacement, donors and other organizations can create renewable energy training programs. For example, Arizona State University’s Vocational Training and Education for Clean Energy program, funded by USAID, trained micro-hydro operators in Liberia, solar technicians in Kenya and Sierra Leone and building inspectors for solar installations in Barbados. In Indonesia, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), the Association for Southeast Asian Nations (ASEAN) and Renewable Energy, Energy and Resource Efficiency, Promotion in International Cooperation have included training as an important part of their micro-hydro mini-grid programs. The three organizations formed the ASEAN Hydropower Competence Centre, which provides in-depth, hands-on technical training on a variety of micro-hydropower mini-grid engineering topics.

Subsidize Mini-grid Optimization Analysis

Governments and donors can increase investment in renewables by subsidizing optimization analyses for mini-grid projects. Mini-grid optimization analysis is a powerful tool that enables a developer to weigh the costs and benefits of different technologies.

In many cases, mini-grid operators choose diesel-only systems because they don’t know the financial benefits of renewable energy hybrid systems. Comparing financial variables like fuel, capital costs or interest rates across different systems can be difficult. An optimization analysis can help a community or potential developer understand the tradeoffs and make informed decisions. In successful programs, trained experts use HOMER or similar software to conduct credible, project-specific analyses. The Green Mini-Grid Help Desk’s Speak to an Expert service, provides technical and engineering support to developers.

Create Mutually Beneficial Situations for Utilities and Mini-grid Operators

Invite Private Energy Producers to Supply Renewable Energy to Diesel-powered Mini-grids

Involving the private sector in diesel displacement can create mutually beneficial scenarios for utilities and private power producers. When governments legalize private energy generation, private companies can install and operate renewable generators and sell electricity directly to utility-owned diesel mini-grids, offsetting a portion of the diesel fuel requirements. In these cases, the utility doesn’t have to buy or own the renewable energy generation equipment. The reduction in diesel fuel expenses more than compensates for the cost of purchasing electricity from the private supplier, and the utility’s cash flow doesn’t change much.

On Mafia Island in Tanzania, the national utility Tanzania Electric Supply Company Limited (TANESCO) saves money and offsets diesel use by purchasing electricity from the privately owned 1.5-MW Ngobeni biomass generator. During the day, TANESCO turns off its diesel generators and supplies biomass-based electricity. As of 2015, the utility paid Ngombeni $0.30 per kWh, while operating its diesel generators cost $0.50 per kWh.

In the Philippines, private-sector companies selected through a competitive process sign power supply agreements with electric cooperatives, with incentives for using renewable energy. The selected companies can then supply power to communities through mini-grids. To cover the difference between regulated customer tariffs and the true cost of generation, as of 2017 the Energy Regulatory Commission is considering a petition to provide cash incentives to renewable energy suppliers.

Specialized energy producers have come into the market specifically to offer to sell renewable energy to existing diesel generators. In East Africa, for example, Redavia Solar Rental leases solar panels to companies with existing diesel-powered generation, integrating solar into the electricity system to reduce diesel fuel consumption. Redavia promises that leased solar panels will generate a set number of kWh per year.

Even though these approaches benefit utilities financially, utilities rarely adopt them without regulatory pressure. The government’s regulatory authority must establish an overall framework for involving small power producers in electricity generation.

Help Utilities Reform Budgeting Processes

Displacing diesel fuel with renewable energy generally decreases a utility’s overall costs, but the standard budgeting process used by utilities makes it difficult to see these cost savings. Utilities and other energy providers use an annual fuel budgeting process that is often separate from the capital expenditures budget. Since renewable technologies are more expensive to purchase, managers of capital expenditures budgets wouldn’t consider them cost-effective. Lower annual fuel costs, however, would save the utility money over the long-term.

Regulatory authorities and development partners can help utilities reform budgeting processes to allow larger upfront capital expenditures that ultimately decrease fuel expenses. Staff in the utility’s finance department may be able to identify ways to allocate funds upfront for expenditures that will reduce fuel expenses over the long term.

Use Tariff Structures that Prioritize Renewable Energy

Governments can use tariff structures that give utilities incentives to pass on cost savings from renewable energy conversion to customers. For example, tariffs that encourage consumers of solar electricity to shift from evening to daytime consumption reduce the need for storage and diesel generator operation. Time of use tariffs, for example, charge higher rates in the evening and lower rates during daylight hours.

Resources

Frankfurt School, United Nations Environment Programme Collaborating Centre for Climate and Sustainable Energy Finance (2015). Renewable Energy in Hybrid Mini-Grids and Isolated Grids: Economic Benefits and Business Cases.
This report uses seven case studies of mini-grids in Colombia, Dominican Republic, Gambia, Indonesia, Kenya, Philippines and St. Vincent and Grenadines to assess opportunities for hybridization. The report concludes that, under certain conditions, hybridization could reduce generation costs at all seven sites. Under this scenario, solar photovoltaic generation would provide 31 to 40 percent of total electricity.

Yeneza, G. (2015). Development of Small Hydro Projects in the Philippines.
This presentation describes how Romblon Electric Cooperative in the Philippines successfully transitioned from diesel-powered electricity to micro- hydro.

Last updated: February 14, 2018

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