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2. UNTAPPED Richard Spencer, World Bank POTENTIAL, YES: BUT WHAT WILL TURN THE SPIGOT?’ General

2. UNTAPPED

Richard Spencer, World Bank

POTENTIAL,

YES: BUT WHAT

WILL

TURN

THE SPIGOT?’

World Bank POTENTIAL, YES: BUT WHAT WILL TURN THE SPIGOT?’ General remarks: Technology costs have come

General remarks: Technology costs have come down hugely and wind is now knocking at

the door of coal, nuclear and even gas as the least-cost energy source in developed countries. From his experience in the UK he is aware of wind farms that have put in bids under NFFO at about 3 US cents/kWh and he imagines this is a benchmark for many projects in the US. Yet in

many of the World Bank’s client countries, which have good

regimes, costs are much higher, installed capacity is low, and the prospects gloomy. In his analysis, he will use illustrations from those countries in which he has, or is working on wind energy investment projects with their clients. These are principally in Cape Verde, China, Egypt,

and Morocco.

and in some cases outstanding wind

2.1 Sector Structure

in some cases outstanding wind 2 . 1 Sector Structure Electricity is a sector which is

Electricity

is a sector which is still emerging from dominance with most of their clients in

state-owned monopoly utilities, where generation, transmission and distribution is bundled together. Many electricity sectors are undergoing reform and restructuring but progress is uneven. Some countries are further down the path of reform than others. There are few, if any truly open electricity markets where a generator can set up shop to sell electricity. Often utilities resist moves to include renewables in their generation mix: immaturity of the technology, small

size of the projects, and fears for system stability are the most frequently cited reasons. At best, generators may have the option to respond to set-piece requests for proposals to supply electricity either under EPC or BOO/BOOT/BOT arrangements that are published by electricity utility or government authorities. Quite often it is difficult to separate one from the other, given closeness of the policy, and the regulatory and operational framework in many countries. Some of the bids have resulted in strong competition and quite low prices; but (i) they do not represent a proper market since they are called at a time, frequency, site, and size of the utility’s choosing and (ii) they are not sustainable over the long term because BOO/BOOT/BOT arrangements are not compatible with the development of wholesale electricity markets.

with the development of wholesale electricity markets. 2 . 2 Financial vs. Economic Valuations An economic

2.2

Financial

vs. Economic

Valuations

markets. 2 . 2 Financial vs. Economic Valuations An economic analysis often reveals that wind-power is

An economic

analysis often reveals that wind-power

is competitive

with

conventional

power. But such an analysis strips out distortions such as input fuel subsidies, taxes, and cross subsidies between different classes of consumer and uses the opportunity cost of capital as the discount rate; it also includes valuations for environmental externalities associated with burning

fossil fuels. On the other hand, a ‘real world’ project, which has to obtain financing, does not and

has to compete with those distortions. Moreover, financing availability and conditions

for wind

projects, especially when they are new in the market, are often more stringent

than for

conventional power. Thus what often seems economically attractive can be financially difficult to put into practice.

0-7803-7322-7/02/$17.00 (C) 2002 IEEE

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2.3 The Wind

Industry

Has Not Always

Helped Itself

The wind industry has been quick to identify those countries where there is a good wind

regime and what they see as a good market opportunity. Many of these opportunities are in

countries, that receive official

their own governments to support demonstration wind farms under aid budgets. While this can be useful if technical demonstrations are required, it does little to stimulate development of a market and the entire ‘market infrastructure’ that is needed to make it competitive. This is not just

the ability to manufacture equipment locally - starting with towers and working up. It includes all the ‘software’ that is needed to do good wind projects - knowledgeable and experienced consultants, engineers, financiers, sub contractors, ancillary equipment suppliers, service staff and so on. Unless one builds these up in the country or at least regionally, the demonstration projects lead nowhere. Another follows normally one demonstration - with all the bilateral donors competing with one another. In China, nearly all the 360 MW installed wind capacity is bilaterally funded projects.

development

assistance. The industry has been able to persuade

2.4 So What Is the Answer?

The primary concern should be to build sustainable long term markets, in which wind can compete on a level playing field, with the private sector undertaking most, if not all the construction, financing, operation and maintenance of Wind Farms with their output being sold into the wholesale electricity market. That is what the Bank is increasingly focusing on- a long way from old-fashioned lending for big lumps of infrastructure. They do this by working on policy and regulatory issues relating to renewables. Of particular recent importance are the introducjion of ‘mandated market schemes’ (Renwables Portfolio Standards, Systems Benefit Charge and Feed-in Tariffs) accompanied market development measures to help support the growth of the market infrastructure.

Richard Spencer is a senior energy specialist with the Energy and Water Department of the World Bank. He is working on a variety of lending and technical assistance projects, mainly in the Middle East and North Africa and China. Since joining the Bank, he has spent most of his time working on energy efficiency and renewable energy projects and the Bank is now probably

the largest financier of renewable energy in the developing world.

Department, he produced the Bank’s recent strategy Fuel for Thought: An Environmental Strategyfor the Energy Sector. Before taking up his position in the Bank, he was a manager at the UK’s Energy Technology Support Unit, responsible for the UK government’s renewable energy R&D and deployment program. Biography Pending

Jointly with the Environment

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