Grid Connection of Solar PV Technical and Economical Assessment of Net-Metering in Kenya

Transcription

1 Grid Connection of Solar PV Technical and Economical Assessment of Net-Metering in Kenya

2 Authors Georg Hille et al. Michael Franz (ed.) December 2011 Editor Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH On behalf of the German Federal Ministry of Economics and Technology (BMWi) Contact Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Potsdamer Platz 10, Berlin, Germany Fax: +49 (0) Web: Web: This report is part of the Project Development Programme (PDP) East Africa. PDP East Africa is implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) on behalf of the German Federal Ministry of Economics and Technology (BMWi) under the Export Initiative Renewable Energies. More information about the PDP and about renewable energy markets in East Africa: This publication, including all its information, is protected by copyright. GIZ cannot be liable for any material or immaterial damages caused directly indirectly by the use or disuse of parts. Any use that is not expressly permitted under copyright legislation requires the prior consent of GIZ. All contents were created with the utmost care and in good faith. GIZ assumes no responsibility for the accuracy, timeliness, completeness or quality of the information provided.

3 Content I. NET METERING IN KENYA OUR RESULTS AT A GLANCE 1 II. RECOMMENDATIONS 2 III. METHODOLOGY 6 PART I: ANALYSIS OF THE ECONOMICS OF SOLAR PV IN KENYA 8 1. BACKGROUND AND CONTEXT 8 a. The Kenyan context 9 i. The Solar Resource... 9 ii. Status of the Kenyan Solar Market iii. Existing grid-connected PV plants iv. The Kenyan Electricity Market - relevant customer tariff categories b. What is Net Metering 17 c. Net Metering or Feed-in-Tariffs 19 d. Solar PV system price development ECONOMIC EVALUATION 23 a. Introduction 23 b. Reference case and input data 25 i. Reference case assumptions ii. PV generation cost assumptions c. Consumer perspective: economic viability of PV power generation 30 i. Investment today ii. Investment in future / Investment based on future cost d. Economic implications at system level 36 e. Optional compensation through net-metering-fee a theoretical model 38 f. Other economic implications 40 g. A possible market development for grid connected PV 41

4 3. INTERNATIONAL EXPERIENCES IN NET-METERING 42 a. United States 42 b. Denmark 43 c. Mexico 44 d. Brazil 45 e. Morocco 45 f. Best practices 46 PART II: TECHNICAL ISSUES OF SOLAR PV GRID INTERCONNECTION INTRODUCTION COMPATIBILITY WITH THE KENYA GRID CODE SOLAR PV AND THE GERMAN/EUROPEAN ELECTRICITY SUPPLY NETWORK RELEVANT TECHNICAL ISSUES OF DISTRIBUTED PV GENERATION APPLICABLE ASPECTS OF THE GERMAN LV GUIDELINE FUTURE OPTIONS 61 REFERENCES 63

5 List of Tables Table 1: Kenya Solar Market: > 1.2 MWp/a [16] Table 2: Current tariff structure Table 3: Examples for impact of level of consumption on energy charge payment Table 4: Electricity tariff charges and levies Table 5: Relevant tariff groups and actual end-user prices Table 6: Characteristics, strengths and weaknesses of net-metering versus Feed-in Tariffs FIT Table 7: Prices for PV in Germany and Kenya in 10/ Table 9: Definition of the most relevant consumer cases for net metering, Table 10: PV input data and possible variations Table 11: Economic input data and possible variations Table 12: Possible scenarios and input data variations Table 13: Current costs for PV Left side for Nairobi radiation conditions (Kisumu) versus average of recent electricity tariff (10/2011) Table 15: Profit or losses by net-metering at system level Table 16: Avoided cost at system level in a mature PV market under net-metering Table 17: Example how to calculate the surcharge/additional fee on the annual consumers bill Table 18: Cost/benefit of Net Metering for the GoK Table 19: Customers per relevant KPLC tariff groups Table 20: Assessment of possible PV market development Table 8: Set values and reaction time of protection relays List of Figures Figure 1: Global Horizontal Solar Radiation in Kenya... 9 Figure 2: Electricity production and real production for the 60 kwp system for September 2011 ( 12 Figure 3: Principle of PV electricity production and daily demand Figure 4: PV system price decrease in Germany Figure 5: Learning Curve for PV and future cost development projection Figure 11: Sensitivity analysis of a small grid-connected PV plant Figure 12: Comparison of PV cost with increasing tariffs for Nairobi Figure 13: Comparison of PV cost with increasing tariffs for Kisumu Figure 14: Comparison and analysis of LCOE for a) customer categories, b) sites/ irradiation regimes, c) exchange rates Figure 6: Development of PV installations in Germany Figure 7: Principle scheme of current flow over LV transformer and voltage gradient at distributed generation Figure 8: Active power reduction of renewable-based generating units in the case of over-frequency (from [12]) Figure 9: Example of a cos φ (P)-characteristic. This is the recommended default curve Figure 10: Operation voltage-time bands for DG on the MV grid

6 Currency 1 EUR = 133 KES / 120 KES Measurement W Watt Wp Watt peak Wh Watt hour kw Kilowatt kwp Kilowatt peak kwh Kilowatt hour MW Megawatt MWp Megawatt peak MWh Megawatt hour GW Gigawatt GWp Gigawatt peak GWh Gigawatt hour

7 List of Acronyms BMZ Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung ENTSOE European common control area Euro EIRR Equity internal rate of return PIRR Project internal rate of return EPC equipment purchase contract ERC Energy Regulatory Commission ESCO energy services company FIT Feed-in-Tariffs FNN Forum network technology / network operation in the Association of Electrical, Electronic and Information Technologies VDE, Germany GDP gross domestic product BIP GoK Government of Kenya IFI International Financing Institutions IPP independent power producer IRR internal rate of return KES Kenyan Shilling KPLC Kenya Power and Lighting Company Limited PPI power project implementation LCOE Levelised costs of electricity LCP least cost planning LEAP the Long range Energy Alternatives Planning System MoE Ministry of Energy of Kenya REAP Regional energy advisory platform East Africa O&M operation and maintenance SPV Special purpose vehicles WASP The Wien Automatic Simulation Planning Package

8 I. Net Metering in Kenya Our Results at a Glance , ,000 year is the duration for formulating and implementing a net-metering regulation, assuming fast and well-informed Government of Kenya (GoK) decision until end 2011, the first 30,000 MWh could be fed-in by end of year 2012! EURO / Wp prices have meanwhile been reached in EU sales for high end modules in 2011-Q4, down from about 1,4 /Wp in early This sharp decline makes PV in Kenya competitive! The medium term estimates for further cost reductions is 10% p.a.! times better than Germany: the yield ( harvested energy fed into the grid per installed nameplate power of generator) is about 1.5 times higher than Germany and about 1.1 times higher than that of the sunniest EU FIT markets. years maximum until net metering will become the cheapest solution based on LCOE comparison - for the consumer classes DC (> 1500 kwh/month), SC and CI1. GoK should pave the way for net metering now, so that these projects can gear up. recently installed lighting projects (UNEP and SOS Children s Village) prove that grid-connected PV works and performs well in Kenya, if it is planned and installed properly with high-end components. The quality standards for products and services of these two projects are equivalent to those recommended in the technical and economical analysis presented here. billion KES p.a. avoided fuel cost and a correspondingly lower fuel cost charge could be realized if 100 MWp of solar PV would be installed. This estimate is based on the assumption that PV under net-metering would replace the energy & fuel charges paid to the three most expensive thermal power plants KES/kWh could be the maximum for a net-metering fee to compensate additional administration expenditures for the utility Kenya Power. This fee should be paid once with the annual bill. However, net metering will not reduce KPLC profit! Hz can be technically controlled and actively supported by modern inverters. Modern solar PV technology can play an active role in voltage control and should not to be seen longer as an additive power resource. With improving weather forecast, PV becomes a dispatchable power resource with a very low default rate. MWp installed solar PV under net-metering is realistically feasible within a relatively short timeframe, assuming that only a small fraction of the consumers in the relevant consumer classes (DC, SC, CI1) of between 1% and 3% invest in solar PV under netmetering. However, we recommend starting with 75MWpas soon as possible, and then scale up quickly to allow benchmarking of development partner interventions, international PV manufacturer costs and system performance in Africa. EURO investment costs per kwp are attainable today for 50 kwp plants with highend components. Total turnkey PV generator costs of 2 /Wp are possible for Q in Kenya, due to the oversupply and resulting drop in EPC prices worldwide. possible PV investors are clients to KPLC in the tariff groups DC (with more than 1500 kwh/consumption), SC and CI1. They are willing to invest. The potential is 210 MWp and above. GoK should balance upfront costs with benefits such as saving the hydro reserves, bringing the national energy mix closer to the efficient frontier of optimal risk-return combinations, creating national employment, abating greenhouse gases, and improving the LV grid, in particular in cities and at the end of weak lines.

9 II. Recommendations This report is about the potential for net metering to help support the electric grid and to help grow the solar electric (PV) market in Kenya. Net metering is an incentive policy practice which allows owners of small electric renewable energy systems (i.e. solar, wind, biogas, etc) to feed excess power produced by their energy systems into the grid. Consumers, who purchase energy systems themselves, receive credit from the utility at a retail rate for the portion of electricity they feed on to the grid. At the end of a billing period, they are able to deduct this retail credit from their overall bill. As a policy practice, net metering has been widely used in the US, Canada, Europe and Australia to provide a low cost and unbureaucratic incentive for consumers who desire solar PV systems. A net metering policy would be a low cost and low risk way to introduce grid connected solar PV (as well as small scale wind and biogas) into Kenya. It would allow residential, commercial and industrial consumers to invest in small renewable energy systems on a competitive, free-market based approach that would be administered by parastatals such as the ERC and KPLC. Such a policy would allow Kenya to continue its leadership of East Africa s commercial solar energy development. The team makes the following recommendations for the development of net-metering in Kenya: A. Policy aspects B. General regulatory aspects A1. PV is only financially competitive today (10/2011) under specific circumstances, due to the high costs of financing for both equity and debt capital, and due to the adverse development of the exchange rate. In addition, PV could contribute to greening the power sector, and to improved grid stability. With further price drops being a certainty, GoK should pave the way now for net metering to prepare the market within the very near future. A2. Currently PV is exempted from VAT (16%). We recommend maintaining the current situation for at least 2 years until a net metering market is established. A3. GoK could start with a 1000 roof-program, by installing a second meter on the PV plant and herewith monitoring the system performance to gain experiences. A4. Policy should encourage owners of suitable existing off-grid systems to connect their systems to the grid under net-metering, once the grid reaches their area and a net-metering policy is in place. B1. Allow all customer classes to do net metering B2. Allow all renewable energy sources to be tapped through net metering B3. Do not arbitrarily limit net metering as a percent of the utility s peak demand.

10 C. Economic aspects D. Procedural aspects C1. Allow KPLC an annual net-metering fee depending from the size of the PV system to cover the lost profits (i.e. annual payment to KPLC corresponding with the total amount of net-metered electricity) C2. Allow monthly carryover of excess electricity at the utility s full retail rate but prevent annual payments of the utility to the consumer C3. Set fair fees that are proportional to a project s size. D1. In order to ensure quality and safety of PV systems connected to the grid under net-metering, a qualified and competent entity should be in charge of approving and inspecting all installed systems through a standardized, transparent and efficient procedure. Preferably, this entity could be KPLC, under supervision of ERC. D2. Ensure that policies are transparent, uniform, detailed and public; and that regulation sets out the required minimum without over-regulating the market D3. The approval process for net-metering projects should also be fully transparent and fully standardized D4. Applications should be processed quickly, decisions should occur within a few days D5. Customer / investor documentation must be comprehensive and accessible. It is therefore recommended that the documentation for net-metering projects is fully standardized D6. Categorize applications by degree of complexity and adopt plug-andplay rules for residential- scale systems and expedited procedures for larger systems. D7. A problem reported in a US-study 1 was the billing systems and a lack of proper documentation from the customer. The billing needs to accommodate net-metered customers and adjustments may be required. D8. Ideal procedure to commission a PV plant on net metering (equivalent to German procedure) Up to a certain rated power no permission or LV grid affirmation from KPLC is required Either KPLC or a technician with a certificate from KPLC may exclusively commission the plant The investor / tariff consumer has to prepare a proper documented commissioning protocol provided by ERC KPLC will consider this consumer as net metering consumer once the ERC commissioning protocol is given 1 [14]

11 E. Technical aspects E1. Kenya could adapt to standards recently set up in Germany. The report doesn t want to copy solutions; however other European countries are now harmonizing their PV-guidelines according to the German standards described here. E2. We suggest adding a section to the Kenyan Grid Code for inverter based generators, or generators connected to the LV grid. This would clarify the requirements for potential Independent Power Producers. E3. Modern inverters comply with the Kenyan Grid Code. These PV inverters - meeting the 2012 German requirements - can perform active filtering by injecting compensating current harmonics, reactive power control, voltage level control, phase symmetry control, reduce losses at the transmission and the distribution grid, support the grid during disturbances (Fault-Ride-Through Capability), balance of nonsymmetric loads. We recommend allowing only PV inverters to the Kenyan grid fulfilling all these requirements. E4. In the short term, respectively for low PV capacities, PV can be directly used through net metering without any adverse impact on the power system. On mid-term basis settings for frequency bands and over frequency behaviour should be adapted to the general network settings such as 45 Hz for disconnection. E5. Prohibit requirements for extraneous devices, such as redundant disconnect switches, and do not require additional insurance. E6. Apply existing technical standards, tapping international experience 2 F. Capacity development aspects G. Technical risk mitigation F1. Key personnel responsible for distribution networks should be trained to be aware of grid supporting potential of the new inverters and to use it for the benefit in their specific grid situation. F2. A developing PV market requires strong available capacity for services. Therefore, capacity building of technicians on design and installation of grid-connected PV systems is strongly recommended. G1. In order to guarantee economic returns for investors, power generation as projected for the utility and minimal grid stability hazards, it is of utmost importance to proscribe high quality installation and service standards for the grid-connected PV systems. 2 It is worth noting that about 315,000 PV plants larger than 100 kwp will be upgraded In Germany in 2012 to the new technical requirements. In the vast majority of cases, the installer only has to update the software or change the parameter settings of the solar inverters. This means, that even later re-adjustment of technical standards does not automatically mean a replacement of expensive components of PV systems.

12 G2. High quality should also extend to comprehensive warranty, quality assurance and after-sale-service mechanisms. G3. The quality control of the installed systems should be ensured through a procedure as described above, under supervision of ERC G4. Consumer education should also be factored in, and undertaken by mandated bodies such as the sectoral associations, as an important instrument to achieve good quality in the installed systems and their operation.

13 III. Methodology The objective of this report is to provide quality technical and economical advisory on parameters and feasibility for grid connection of solar photovoltaic systems through net-metering in Kenya. In short, it is designed to answer the question: Is net metering technically, economically and socially feasible as an incentive policy in Kenya? The report is subdivided into an economical and a technical part. All required data has been collected in a fruitful cooperation of the author, GIZ staff and local stakeholders, including Ministry of Energy, Kenya Power (KPLC) and ERC. Data from the existing power plant structure and electric network as well as future extension plans were provided by KPLC and ERC mainly. While it is desirable to allow investment into renewable energy power generation on the grid, grid stability remains of paramount importance. Furthermore, the economic viability of the grid operations, as well as potential economic implications of investments under a net-metering regime has to be considered. The main questions for the introduction of grid-connected PV are thus: Do many decentralized small scale PV installations interfere with the grid? Is the (low voltage) grid stability disturbed by the fluctuating generation? Can PV actively contribute to system services and security? Does net metering avoid costs at customer level? What is the impact of net metering on KPLC revenues? This report aims at utilizing data generated by the aforementioned pilot projects, data obtained from relevant sources in Kenya (e.g. the grid operator), as well as data from other (international sources) to shed light on these issues. In doing so, the assignment is feeding directly into a larger assignment by GoK, with funding support from the World Bank, on a review of regulatory options for Small Scale Power Generation from Renewable Energy Sources. The targeted activities and outcomes of the analysis and assessment included: Data access and collection Discussion with partners from MoE, ERC and KPLC Technical and economical data analysis Provide report and presentation materials Recommendations for intervention Methodological considerations for the economic analysis comprise: - To determine the advisability of a large scale grid connected PV market in Kenya, discounted cash-flows have to be calculated and analyzed. For the (relatively straightforward but somewhat extensive) PV cash-flow modelling (as done regularly for all

14 types of project finance), three essential elements have to be determined: (i) discount factor, (ii) cost and (iii) benefits. - For task iii we chose to largely mirror the calculation performed regularly by the dispatcher, in order to determine the operational benefits of PV. - They key to estimating the operational benefits of PV-plants integrated into the Kenyan power system/grid is the optimal, least-cost multi-period commitment and dispatch of available plants both in the absence and the presence of PV-loads, subject to load balances and other operational constraints (spinning reserves, minimum maximum loads, volume of dischargeable water). - From this perspective, the PV-benefits to the system amount to avoided costs defined as the difference between system minimum [operational] costs without PV and system minimum [operational] costs in the presence of PV-loads. - Accordingly, the specific PV benefits (KES/MWh) are given by the ratio of PV-benefits (KES) to PV-loads (MW) injected. - In the LCPDP , the optimum dispatch schedule yielding a cost minimum is calculated through the Wien Automatic Simulation Planning Package (WASP). This study could not use this or other software models such as MATHEMATICA (it is a simplexbased de-commitment algorithm) due to time and budget restrictions. To simplify this here we have used the merit order ranking of the existing power plants and defined the incremental fuel costs as the average of the three most expensive power plants. The report is based on the experiences in the world s largest PV-market - Germany. It gives recommendations based on the 25 year development of PV in Germany and Europe. Given that net-metering has also been successfully implemented in many other countries around the world, this report includes a chapter on lessons learned from other countries with experience in netmetering, or where net-metering regulation is currently being formulated. While it is evident, that solutions have to be tailored to the Kenyan context, it is still possible to derive lessons and conclusions from abroad. The author firmly believes that the solutions for the German and European context are also suitable for Kenya. The report uses models that the author with his team has developed over 20 years of studying and implementing solar PV projects in European electricity markets.

15 Part I: Analysis of the Economics of Solar PV in Kenya 1. Background and Context This chapter looks at the context of solar energy in Kenya, existing electricity tariff and policy structures, the overall concept of net metering (and how it relates to Feed In Tariff incentives), and how net metering programs can positively affect solar electricity prices. Solar electricity is not new to Kenya. The Kenyan power sector is characterized by a rapidly growing demand, large geographical imbalances in power demand and supply, and accelerating private sector involvement. The Government is investing in exploration of geothermal energy. In addition, substantial potential exists for exploiting domestic potential of other renewable energy sources, not least solar power. Interest in solar energy is rapidly increasing. In fact, Kenya and Germany are alike in that they were among the first countries in the world to install hundreds of thousands of solar electric systems for households. The primary difference is that in Kenya, all of the PV systems were off-grid solar home systems (averaging under 50 Wp) while in Germany virtually all of the installed systems were grid-connected (averaging over 4 kwp). Kenya has an active market for solar equipment; however, there has been no systematic effort on the part of the industry or Government to bring solar on to the grid --- which is where over 95% of the global market for PV is today. The experiences of two pilot net-metering systems in Mombasa and Nairobi are explored in this chapter. Thus far, the systems have performed well and there have been no major problems in their interactions with the KPLC grid. Through the detailed study of electricity tariff categories and rate structures, this chapter provides a basis for establishing whether indeed net metering is feasible in Kenya and if it is which consumer categories hold the most promise for net-metering policy arrangements. Finally, this chapter introduces the topic of net metering and the relevant opportunities and difficulties that might arise from its introduction. It explores the difference between net metering and feed in tariff as policy tools and it examines how these policy tools can actively grow solar markets.

16 a. The Kenyan context i. The Solar Resource Kenya is located near the equator and has a great potential for solar power. The average radiation is 4-6 kwh/m2/day. However, despite its relatively high solar resources, there are significant local and seasonal variations in solar energy distribution. For example, Nairobi experiences high seasonal fluctuations, with periods of relatively high radiation between December and February and low periods between June and September. On the other hand, Kisumu has a very good solar radiation throughout the year. It is important that solar consumers are aware of solar resources in their area and on the long-term implications of these resources on their purchase. In this report, we have chosen to model Nairobi and Kisumu as two sites representing the conditions in most of the country. Location Longitude / Latitude kwh/m²*d Nairobi 36.9E / -1.3N 5,01 Mombasa 39.6E / -4.0N 5,48 Kisumu 34.8E / -0.1N 6,48 Figure 1: Global Horizontal Solar Radiation in Kenya 3 3 Source: RETScreen 4, graph from SWERA

17 ii. Status of the Kenyan Solar Market The population is currently 41 Million with an annual growth of 2.5%. The electrification rate ranges between % at national level, with a rural electrification rate of only 5-10%. The electricity demand is growing by 5-8% p.a. Off-grid commercial and institutional PV markets play an important role in pre-electrification of areas not reached by the Kenya power grid. PV demand created in this market has created a base market of several MW PV sales per year. However, the potential for PV in grid-connect applications may be much greater than off-grid applications and it offers a dynamic new stage of growth for the solar industry. However, these relatively new markets for larger, commercial on- or off-grid applications are yet to begin to develop. Solar PV Technology Estimated installed capacity Estimated kwp installed / year (2008) Degree of Competition Off-grid HH electrification & small scale commercial Off-grid systems (incl. institutional and pumping) >6-8MWp >700kW Extremely competitive, many players >1.5MWp >250kW Dominated by wholesaler / agent partnerships Telecom >300kWp >100kWp Emergent Tourism >50kWp N/A Emergent On-grid 560 kwp N/A Emergent Table 1: Kenya Solar Market: > 1.2 MWp/a [16] The current market structure is characterized by the following elements: Technicians play a key role in the market, some operating as re-sellers and as sales agents. Established importers (±8) represent international PV companies, sell through distributors. Opportunistic importers import PV modules & distribute to retailers of electric goods and shops. Sales agents target geographic and niche markets that they develop on behalf of the wholesaler. High-end niche companies operate in NGO, UN and increasingly tourism and telecommunication markets [16]. While the market for solar home systems mostly comprises over-the-counter trade, the market segment for electrification of social institutions is driven almost exclusively by public procurement.

18 Recently, through MoE, REA and KPLC, there has been a trend in the face of growing concerns about fuel costs of hybridization of off-grid diesel-based power generation with solar energy Key challenges for the Kenyan PV market include a lack of technical capacity on the planning and installation level to move beyond the traditional market segments, quality issues in terms of products and services in the market, and a relatively weak (however improving) regulatory framework with a view to both quality standards as well as incentives and regulations for private sector investment in solar energy. Specifically with regards to the regulatory framework, it is worth noting that the Government has zero-rated import duty and removed Value Added Tax (VAT) on renewable energy, equipment and accessories, including solar energy. Furthermore, a feed-in tariff for solar energy exists, albeit at a relatively low level. Other than that, no specific incentives or regulatory instruments tailored towards facilitating investment in solar energy are in place. iii. Existing grid-connected PV plants In the course of 2011, two lighthouse projects have been installed by private developers: A. United Nations Environment Programme (UNEP) 515 kw UNEP s rooftop solar plant (515 kwp) was designed to supply power mainly within the UN compound in Nairobi. All the electricity produced by the system is absorbed by the large load of the UN agencies. However, during weekends and on public holidays, there is a potential for feeding excess electricity into the national grid. Key facts: kwp installed - Grid connection, but no feeding-in - Commercial procurement by UNEP - Realized by: Energiebau Solarstromsysteme GmbH - Components: o Modules: Schott Solar, Kaneka o Inverters: SMA Solar Systems

19 B. SOS Children s Village Mombasa 60 kwp The investment at SOS Children s village Nairobi aimed at both Greening the SOS Children s Village as well as at reducing the power bill. The project was designed from the onset in anticipation of a net-metering or similar regime. The system produces a significant amount of excess power during day time peak production. Key facts: - 60 kwp system - Grid connection, feeding-in at peak production - Commercial procurement by SOS CV - Realized by: Asantys Systems GmbH, African Solar Designs (ASD) Ltd. - Components: o Modules: Centrosolar AG, o Inverters SMA Solar Systems Figure 2: Electricity production and real production for the 60 kwp system for September 2011 ( Both systems were installed in It is therefore not possible to derive strong statements about plant performance, e.g. by comparing actual performance against projected / rated performance. However, the plants have demonstrated so far that from technical point of view, grid connection is absolutely feasible, and that no harmful effects arise. The investors in the two pilot projects, alongside other sector players, have requested the Ministry of Energy and ERC to consider the net-metering option. Against the background of these requests, MoE and ERC in turn requested GIZ to provide technical inputs, which materialized in the shape of this study.

20 iv. The Kenyan Electricity Market - relevant customer tariff categories The tariffs for the electricity supply by Kenya Power and Lighting Company Limited (KPLC) are set by the Energy Regulatory Commission (ERC). The current tariffs have been set in July 2008 and are still valid. Furthermore, ERC regulates taxes, third party levies and other cost items which are charged by KPLC to the consumers. This also includes adjustment formulae which are use to adapt the tariffs to fuel costs and other economic developments. Under net-metering, the effective tariff for investors is the retail tariff rate, since power purchased from the utility is substituted with self-generated electricity. Therefore, this sub-chapter analyses the power tariff structure in Kenya and identifies relevant customer categories. A. Identification of relevant customer categories The general structure of the electricity tariff is shown in the following table B [18; p. 3 ff] Tariff Type of Customer Supply Voltage (V) Consumption (kwh/month) Fixed Charge (KES/month) Energy Charge (KES/kWh) Demand Charge (KES/ kva/ month) DC SC Domestic Consumers Small Commercial 240 or , Over 1, or 415 Up to 15, CI1 Commercial/ 415, 3 phase Over 15, CI2 Industrial 11,000 2, CI3 33,000 / 40,000 2, CI4 66,000 4, CI5 132,000 11, IT SL Interruptible off-peak supplies Street Lighting 240 or 415 Up to 15, Table 2: Current tariff structure The benefits of net metering are the avoided incremental energy costs which are related to the consumption of units (kwh). Consequently, the fixed charge, households and small business customers have to pay are not relevant to net metering or energy saving.

21 The higher the energy charge is, the more attractive is net-metering might be. Tariffs for customers with a very small or a very high consumption (metered by the company at higher voltage) are not relevant for net-metering due to lower energy charges. For the DC tariff, low consumption of 0-50 units per month (2 KES/kWh) or per month (8.1 KES/kWh will not lead to a competitive situation for PV applications. Similarly will the tariffs CI2-5, due to the very low energy charges, not result in economic viability for PV for the foreseeable future. Consequently, in the scenarios presented in chapter 6 this consumer group is not considered. Thus, the following groups are of particular interest, and in the following termed as relevant for the purposes of this analysis: Domestic (DC) for >1500 kwh / month Small Commercial Consumers(SC) Commercial and Industrial Consumers (CI) for supply voltage of 415 V (CI1) Since the DC tariff group is structured in such a way that the level of consumption greatly impacts on the actual energy charge payment, it has to be analyzed in greater details, using two examples: DC customer X DC customer Y Electricity consumption per year in kwh Electricity consumption per month in kwh PV-production for a 5 kwp plant per year in kwh 26, ,142 8,334 6,855 6,855 Resulting demand customer in kwh 13,145 93,145 Avoided incremental cost (KES/kWh) 11,15 16,66 Table 3: Examples for impact of level of consumption on energy charge payment Customer X could, for example, represent a household with air-conditioning. Customer Y would be an extreme case, assuming a very high consumption for a large estate with security lighting, air conditioning and many other electricity appliances. For the following calculations (see chapter 6) an average of KES/kWh as the more conservative value was chosen.

22 B. Analysis of charges and levies In addition to the tariffs set by ERC, all customers have to pay additional taxes and third party levies: Fuel Cost Charge The Fuel Cost Charge reflects the fuel costs for the thermal power plants. It is calculated every month and charged to the customers as an add-on per kwh. 4 The Fuel Cost Charge is mainly dependent on following factors: - Fraction of the electricity which is produced by thermal power plants. This fraction is mostly dependent on the possibility to use the existing hydro power plants. During drought years there is less generation from hydro power (which has lower variable costs) and more generation from the more expensive thermal power plants and hence the fuel cost charge is higher. - Efficiency factor of the thermal power plants in use. - Price for fuel for the thermal power plants, i.e. oil and gas price, at a later stage once coal fired power stations are operational this will also include the coal price Foreign Exchange Rate Fluctuation Adjustment 5 Inflation Adjustment Taxes and Levies A number of factors influencing the cost of power generation are affected by fluctuation in foreign exchange rates, for example loan repayments for some electricity projects which have been financed and need to be paid back by foreign currency. End-user electricity prices are therefore liable to an adjustment factor for foreign exchange rate fluctuation, which reflects the exchange rate of hard currencies against the Kenya Shilling. At the end of every six month period starting from 1st July, 2008, electricity prices may be subject to an inflation adjustment. Consumers have to pay other taxes, levies or duties including: - VAT at 12% charged to the fixed charge, the demand charge, the forex adjustment and to the fuel cost charge. - Rural Electrification Programme (REP) levy at 5% of revenue from Unit sales. - Energy Regulatory Commission (ERC) levy at 3 KES cents/kwh. Table 4: Electricity tariff charges and levies 4 The method is describe in detail in the Energy Act No.12 of 2006, page 5 ff

23 C. Actual end-user prices for relevant tariff groups The following table 5 shows the relevant (as described above) tariffs and all applicable taxes and levies: Case 1 Case 2 Case 3 Domestic (DC) > 1500 kwh/month Small Commercial (SC) Commercial and Industrial Customers (CI1) KES/kWh KES/kWh KES/kWh Basic consumption tariff 11,15 8,96 5,75 Fuel cost adjustment 5 7,30 7,30 7,30 Forex: Foreign exchange adjustments 1,23 1,23 1,23 Inflation adjustment 0,13 0,13 0,13 Total without ERC and REP 19,81 17,62 14,41 Total without ERC and REP incl. VAT 22,19 19,73 16,14 (ERC) levy 0,03 0,03 0,03 REP levy 0,56 0,45 0,29 Total 22,78 20,21 16,46 Table 5: Relevant tariff groups and actual end-user prices For the fuel cost adjustment, this report assumes mean values over 6 months (April September) in 2011 below the values at the time of the compilation of this report, but higher than the minimum observed after good hydrological conditions. While it is the declared objective of the government to reduce the electricity costs, consultation with stakeholders during the compilation of this report revealed that an actual decrease of costs in current prices is not likely. The Least Cost Power Development Plant states that comparing the future average energy generation cost (11.8USc/kWh in medium scenario) to current average generation cost (9.3USc/kWh) shows that a 27% increase in the generation cost should be anticipated. However the current generation cost is low due to the fact most of the costs had been paid for by the government by the time the current generation tariff to KenGen was determined, therefore the current average generation tariff doesn t represent the actual cost 5 [23];current data see

24 of generation. The increase can also be attributed to the high reserve margin of 25% adopted by the expansion plan, which should ensure an adequate quality of supply in the future years, provided that the planned power plants are implemented in due time. 6 Should there be a delay in power plant implementation, it is likely that the resulting shortfall will continue to be bridged by relatively expensive thermal power generation. We therefore believe that the assumptions of end-user electricity prices as well as the assumed annual tariff increase presented below are realistic. b. What is Net Metering Net-metering, in essence, allows small scale renewable energy power producers to bank or store their electricity in times of over-production (e.g. for solar energy during peak production in the day) in the national grid, and to balance out their grid consumption with this banked or stored electricity during other times (e.g. during night, morning and evening hours). Load / Production Excess solar PV Production ( stored in the grid) Grid consumption (of stored solar power Direct solar PV consumption Grid consumption (of stored solar power) 00:00 08:00 12:00 20:00 24:00 Time Figure 3: Principle of PV electricity production and daily demand 6 Least Cost Power Development Plan , p. 142

25 In theory, such a system is associated with a range of advantages: Generation of additional power in the national grid, without the need for investment by the utilities or conventional IPP s Promotion of small scale investments, value addition and market development No direct payment by the grid operator (as opposed to a FiT) Consumer savings on power bills Of course there is also a number of open questions, e.g. with regards to Technical feasibility of grid connection and impact on grid stability Revenue loss for the grid operator and potential compensation mechanisms Other direct and indirect benefits for the grid operator A simplified example for net-metering involves a single, 1960s-standard electro-mechanical meter. Now imagine that a residential customer, Charles McSolar, added a rooftop photovoltaic (PV) system (also known as a solar-electric system) to his home, on his side of this meter. Charles wakes up early for his job; on most days, he is out of the house before sunrise. In these dark morning hours, Charles makes his coffee and breakfast while watching the morning news on TV. The electric meter spins forward as Charles is consuming electricity from the grid. Determined not to waste electricity, Charles shuts off all of his appliances as he heads off to work. Charles s solar panels now start churning out electricity as the sun rises electricity Charles sends back to the overstressed grid. His meter now spins in reverse. When Charles returns at night to cook dinner and relax in front of the TV, the meter spins forward again as he consumes more electricity than his system generates. The result? Charles s bill will show only his net consumption of electricity from the grid. Whether it is a sunny month or a month in which Charles s electricity use is low, any excess electricity his system generates is rolled over to his next bill, just as he might rollover excess cell phone minutes 1

26 c. Net Metering or Feed-in-Tariffs The success story of grid connected PV is largely based on Feed-in-Tariffs (FiT). More than 20 countries have opted towards that option. Net-metering is a different regulatory instrument, which will open up a different market segment with different project types and regulatory requirements. Even before FiTs were widely introduced, net-metering was actively practiced by PV installers in many countries including Germany. Net-metering continues to be a driver of emergent PV industries where Governments do not support consumer FiTs (i.e. in many US states). In the following, both instruments are briefly characterized and pros and cons are presented. Key characteristics (best practice) Feed-in tariff FIT Key elements: - Fixed-price system, i.e. the producer tariff is specified in a legally binding document - Tariff specified over a long timeframe, usually years - The tariff should be high enough to deliver return on investment typical to the national market but not too high to devastate local resources, attract free riders, or impose unfair burdens on customers - The tariffs (i.e. the difference costs, which are usually positive due to the higher renewable energy power generation costs) should not come from the national budget but come as a surcharge from all electricity consumers. - Standardized and simplified procedure for investors to access the FiT - Regular review of the FiT levels - May include annual legally fixed decrease of the FIT-levels, depending on the technology learning curve Net metering Key elements - Flexible producer price, i.e. the electricity end-user tariff - No actual payment of grid operator to the investor investors collect their revenue through substituting power purchase from the utility with self-generated power - No difference cost apply, thus no need to finance from end-users or taxpayers - Commissioning procedure is very similar to that of a FiT-project (e.g. in terms of grid access / connection) Strengths Optional / best practice elements: - Fixed tariff contains an inflation factor (in case of countries with general inflation rates above 2% p.a.) - Strong security of investment, both for project developers as well as for financiers - Everyone can invest, including the utilities themselves - Can be tailored and refined in order to channel investment into desired subsectors and project types - Very easy to set-up and implement - Minimal administrative effort for the utility - Can also tap the market segments for power generation below the project sizes suitable to the FiT, and thereby leverage otherwise wasted natural / domestic resources - No actual payments by the utility

27 Weaknesses - Perception of FiT as a subsidy, even if it designed as a surcharge to all consumers - Extra metering is required, which should be registered by remote sensing monthly (otherwise there must be monthly downpayments and annual control) - Relatively complex regulatory instrument, requiring close management in order to effectively leverage investment while avoiding market distortions and little risk of deceptive practices. - Not fair to all consumer classes - higher incentive and economic attractiveness for consumers with higher tariffs - Does not provide very strong security of investment due to the (at least theoretical) possibility of fluctuating end-user tariffs Table 6: Characteristics, strengths and weaknesses of net-metering versus Feed-in Tariffs FIT d. Solar PV system price development PV is the renewable technology with the most dynamic development in the last years. The mass production of its key component the module is the driving force. The module costs are causing up to 70% of the total system costs in large green-field installations, on roof-tops the share differs depending from size and system design 7. It is strongly advised for any study to update costs of PV and related prices frequently. PV prices have to be updated very recently as the costs are decreasing rapidly is a year of tremendous price decreases in the 2 nd half. The following figure shows that system prices in Germany have halved over the last 5 years. The German market accounts for approx. 40% of the world s grid-connected market. Moreover, Germany is a well established competitive market with well established legal boundary conditions and a dense network of craftsmen, installers, wholesalers and manufacturers. Therefore, prices for grid connected plan are lower than in most other PV markets in the world. 7 Historically, PV prices in Kenya have been much higher than European prices because they are off-grid and include battery storage. The prices shown above are for grid-connected PV systems and do not include battery storage at all. It is important to note that PV prices have been dropping dramatically, while battery prices have remained stable.

28 Figure 4: PV system price decrease in Germany 8 For Kenya pricing and investment cost information have been verified with the solar companies who are collaborating with GIZ on this issue. The following table shows a comparison of Germany and Kenya. PV size in kwp DE: spec. price in /kwp Spec. price in KES/kWp Spec. price in Ken incl. VAT Table 7: Prices for PV in Germany and Kenya in 10/2011 The continuous increase of manufacturing capacities for wafers, cells, and modules will continue the pressure on the worldwide market. PV remains still a buyer and not a seller market. 8 [25] 9 This price for a full installed turnkey system reflects the authors own and direct experience in project development. 10 Same as before, however including VAT.

29 Figure 5: Learning Curve for PV and future cost development projection 11 Note that the Q2 price developments are NOT learning curve effects but a market adjustment due to the recent burst of the EU FIT bubble. Knowing this (and the actual production costs of PV manufacturers) helps to pick the right time to start net metering in Kenya! 12 However, as a project developer with 12 operational solar parks in Germany, the author denies the argument often used to wait until a certain cost threshold of cost is achieved. A lesson learned is that long-term learning curves do not reflect local prices at any time. The author decides any investment based on current prices and market conditions. 11 Roland Berger: Adolescence of an Industry (INSERT PROPER SOURCE) 12 [24]

30 2. Economic evaluation The Kenyan Government is focused on increasing energy access to larger segments of the population. Because of relatively low incomes, increased access requires that all introduced energy systems are economically viable and do not add a burden to electricity ratepayers, who already are forced to pay high prices for electricity. As such, new technology investments, including solar, must in the long term reduce the burden on the rate payer. Thus cost is the major issue in introduction of electricity generation technologies. This chapter analyses the economic viability of net metered PV systems for three categories of electricity consumers and in two different solar regimes (Nairobi and Kisumu). It examines investment in PV systems from the consumer perspective --- identifying lifetime cost issues that are important to commercial and individual consumers. The chapter also examines the implications of wide-spread net metering on KPLC, and whether net-metering would impact on KPLC financial performance. It also explores potential fee structures that KPLC might use to cover the extra costs incurred by a net metering program. In summary, the analysis finds that, with current trends, net metering will be economically attractive by 2014, especially in sunnier parts of the country. (The recent fluctuations in the Kenya shilling against the Euro could make net metering profitable even sooner). The analysis also finds that, with the foreseeable PV market of up to 100 MWp, the cash flow implications for KPLC are not significant, and that there are likely to be overall economic benefits, including carbon trading and reduction of fuel use by generators, which could lead to financial gains by the company. a. Introduction PV power plants are in essence front-loaded investments with no fuel cost and therefore insignificant O&M costs. To determine the advisability of a scale PV plant in Kenya, discounted cash flows have to be calculated and analyzed. For the (relatively straightforward but somewhat extensive) PV cash flow modelling (as done regularly for all types of project finance), three essential elements have to be determined: (i) discount factor, (ii) cost and (iii) benefits. For task i and ii above, the team s experience is combined with several standard methods and software. To achieve realistic modelling, the key is to choose parameters that fit the Kenyan case well. For task iii the determination of PV benefits a multitude of publications exists which provide murky calculations and questionable quantifications. We have therefore chosen a different route, mirroring largely the calculation performed regularly by the dispatcher, in order to determine the operational benefits of PV. Therefore, the levelised costs of electricity (LCOE) of solar PV are