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Analysis of renewable energy incentives in the Latin America and Caribbean

region: The feed-in tariff case

Article  in  Energy Policy · September 2013

DOI: 10.1016/j.enpol.2012.09.024


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7 authors, including:

David Jacobs Natacha C. Marzolf

Freie Universität Berlin Inter-American Development Bank, Washington DC


Juan Roberto Paredes Wilson Rickerson

Inter-American Development Bank Converge Strategies, LLC


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Energy Policy 60 (2013) 601–610

Contents lists available at SciVerse ScienceDirect

Energy Policy
journal homepage:

Analysis of renewable energy incentives in the Latin America and

Caribbean region: The feed-in tariff case
David Jacobs a,n, Natacha Marzolf b, Juan Roberto Paredes b, Wilson Rickerson d,
Hilary Flynn c, Christina Becker-Birck c, Mauricio Solano-Peralta e
IASS, Environmental Policy Research Centre, Freie Universität Berlin, Germany
Inter-American Development Bank, United States
Meister Consultants Group, United States
Lux Research, Meister Consultants Group, United States
Trama TecnoAmbiental, Spain/Costa Rica


c 12 LAC countries have implemented formal targets for renewable energy deployment.
c Argentina, Dominican Republic, Ecuador, Honduras, and Nicaragua, are using feed-in tariffs (FITs) to promote renewables.
c Low-risk FIT design of feed-in tariffs in the LAC region can be improved.

a r t i c l e i n f o abstract

Article history: Renewable energy is becoming a priority for Latin America and Caribbean (LAC) countries because of
Received 15 July 2011 energy challenges such as demand growth, high dependence on imported fossil fuels, and climate
Accepted 10 September 2012 change. As of 2010, 12 LAC countries have implemented formal targets for renewable energy
deployment. Some of the LAC countries, namely Argentina, Dominican Republic, Ecuador, Honduras,
Keywords: and Nicaragua, are using feed-in tariffs (FITs) to promote renewables. FITs are long-term, guaranteed
Feed-in tariffs purchase agreements for green electricity at a price that can provide project developers a reasonable
Investor perspective return on investment. FITs are increasingly popular because if designed well, they can mitigate investor
Latin America and the Caribbean risk in renewables. This article presents a low-risk FIT design and then uses this design to benchmark
the existing LAC region FITs.
& 2013 Elsevier Ltd. All rights reserved.

1. Introduction significant electricity price increases because 85% of its electric

power is generated with oil (KEMA, 2008). LAC countries will need
The Latin America and Caribbean (LAC) region faces a series to integrate a broader range of energy technologies into their
of interrelated energy challenges. First, the region will require a portfolios in order to improve energy security and mitigate the
significant amount of new electricity generation in order to impact of fossil fuel price spikes and other external shocks. Third,
meet demand growth and replace aging infrastructure. Between the region is vulnerable to the adverse impacts of climate change
2009 and 2015, the region is projected to need to install 60 and as a result, countries are actively pursuing mitigation and
gigawatts (GW) of new capacity (Byer et al., 2009). Second, many adaptation strategies. LAC countries will need to integrate low-
countries in the LAC region do not have well diversified energy carbon generation into their energy systems in order to reduce
portfolios and are exposed to fossil fuel price volatility, which in carbon emissions and to take advantage of the significant financial
turn could heavily affect national budgets trough existing pass- resources that could be made available through the international
through provisions in electricity supply contracts, and/or climate climate negotiations (ECLAC and IDB, 2010).
variability, including droughts, which effects those with heavy These energy challenges, among other drivers, have led to an
hydropower reliance. The Caribbean, for example, has seen increased interest in developing renewable energy (RE) in LAC
countries. In 2002, countries in the area committed to meeting 10%
of regional total energy from renewable resources by 2010 as part of
Corresponding author. Tel.: þ49 163 2339046.
the Latin American and Caribbean Initiative or Sustainable Develop-
E-mail addresses:, ment. Although this goal has been achieved and surpassed on a (D. Jacobs). regional basis (UNEP, 2008), numerous countries have also established

0301-4215/$ - see front matter & 2013 Elsevier Ltd. All rights reserved.
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602 D. Jacobs et al. / Energy Policy 60 (2013) 601–610

Table 1
LAC renewable energy targets.

LAC countries Renewable energy target

Argentina 8% of electricity demand by 2016

Brazil  13% of installed electricity capacity to come from NCRE by 2019
Chile 10% of electricity supply to come from NCRE by 2024
Colombia 3.5% participation of NCRE by 2014 in the national interconnected system (6.5% by 2020)
Costa Rica 100% of electricity by 2021 (including large hydro)
Ecuador (i) 80% of electricity from hydro (approx 40–50% currently)
(ii) 10% from non-large-hydro renewables by 2020
Jamaica 30% of energy by 2030
Mexico 7.6% of installed electricity capacity by 2012
Peru (i) 5% of electricity by 2013 (excluding large hydro)
(ii) a new objective is to be set every 5 years
St. Lucia 5% of electricity by 2013, 15% by 2015 and 30% by 2020
St. Vincent and Grenadines 30% electricity by 2015 and 60% by 2020
Uruguay (i) 50% of primary energy, including large hydro
(ii) 15% of electricity from NCRE by 2015

Source: Argentina: Boletı́n Oficial de la Republica Argentina (2006); Brazil: MME and EPE (2010); Chile: CNE and GTZ (2009); Colombia:
MME, República de Colombia (2010); Costa Rica: MINAET (2010); Ecuador: MEER (2010); Jamaica: MEM—Ministry of Energy and Mining
(2010); Mexico: SENER (2009); Peru: Congreso de la República de Perú (2008); St. Lucia: Ministry of Physical Development and the
Environment (2010); St. Vincent and Grenadines: Cabinet of St. Vincent and Grenadines (2010); Uruguay: MIEM (2008).

their own formal renewable energy targets by legislation or decree

(Table 1).1 A few LAC countries (Brazil, Ecuador, Peru and Uruguay)
specifically distinguish between renewable energy targets for conven-
tional sources and non-conventional renewable energy (NCRE).
A key question for policy-makers is how to best meet these targets
while also satisfying national policy objectives. There is a wide range of
different mechanisms that can be implemented in order to drive
renewable energy market growth. Internationally, the most prevalent
of these mechanisms is known as a feed-in tariff (FIT). By the end of
2012, this policy tool was implemented in close to 70 countries
(REN21, 2012); Sawin and Martinot, 2010. FITs are long-term, guar-
anteed purchase agreements for green electricity at a price that can
provide project developers a reasonable return on investment.
FITs have driven a significant proportion of global renewable Grid connected FIT
energy capacity. By the end of 2010, 64% of the world’s wind capacity
and 87% of the world’s PV capacity was estimated to have been
Off-grid FIT
installed under FITs (Rickerson et al., 2012; Mints, 2010). A number of
recent reports have also argued that FITs are not only more effective Grid connected and off-grid FIT
than other policies, but they are also more efficient in their ability to
produce renewable electricity at the lowest possible costs (EU
FIT removed
Commission, 2008; DBCCA, 2009; Ölz, 2008; Stern, 2006). The
effectiveness and efficiency of FITs are attributed to the high degree
of investment security that the policies can create. FITs have also been
highlighted for their ability to realize the benefits of renewable
energy development more rapidly than other policy types (EU
Commission, 2008; Ölz, 2008). These benefits, which have been
recorded in a range of recent studies include job growth (Deloitte,
2009a, bvan Mark et al., 2010), avoided environmental damage and Fig. 1. FIT policies in the LAC region.
fossil fuel imports (Van Mark, 2010), and wholesale price suppression
from the merit order effect (Ray et al., 2010). The value of the (2005), Argentina (2006), Honduras and the Dominican Republic
decrease in the wholesale market electricity price through the merit (2007) and Peru (2010) (see Fig. 1 below). There have not been
order effect in Germany was estimated to be up to h4 billion, many efforts to date to characterize and compare the design of FIT
compared to an incremental FIT policy cost of h4.7 billion in 2009. policies in the LAC region. This article provides an overview of FIT
Despite favorable geographic and economic conditions for policies in the LAC region and compares them. This article provide
renewable energy promotion in the Caribbean and Latin America, a snapshot of the FIT policy structures as they existed at the end
FITs have spread slowly in the region when compared to Europe. of 2010. More recent updates and policy changes will be exam-
Brazil was the first country to implement this policy in 2002 ined as part of future research.
(though it ended in 2010), followed by Ecuador (2002), Nicaragua

2. Methodology: Defining low-risk FIT designs
This list includes only countries that have established formal targets through
legislation or regulation, and does not include draft targets or goals that have been
announced, but are not formally a part of official policy. Each of the targets in This section presents a framework for defining and analyzing
Table 1 excludes large hydropower unless otherwise noted. FITs from an investor perspective. This framework was developed
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D. Jacobs et al. / Energy Policy 60 (2013) 601–610 603

Table 2
Design and low-risk options for FITs.

Design issue Options Low-risk option

Interconnection and purchase  Guaranteed interconnection All, where applicable

requirements  Priority interconnection
 Guaranteed purchase
 Priority dispatch

Contracts  No contracts Standard contracts

 Standard contracts
 Contracts negotiated on a case-by-
case basis

Contract length  Short-term (1–7) Long-term, matched to service life to extent possible
 Medium-term (8–14)
 Long-term (15–20)

Rate setting basis  Generation cost-based Generation cost-based

 Value-based (e.g. avoided costs)

Payment structure  Fixed price schedule Fixed price schedule

 Premium payment
 Spot market gap payment

Commodities purchased  Electricity Commodities bundled and purchased for a reasonable rate of return
 Emissions credits

Amount purchased  100% 100%

 Partial purchase (e.g. only net

Adjusting the payment  Periodic review Transparent, scheduled, and clearly defined adjustment mechanism
 Automatic adjustment after set
period of time
 Automatic adjustment triggered by
 Adjustment based on prior market

Caps and queuing  Cap on capacity No cap preferable. If cap in place, it should be transparent, clearly defined, and stable,
 Cap on generation with clear queuing procedures
 Cap on ratepayer impact
 No Cap

through a synthesis of existing literature (Corfee et al., 2010; Table 2,2 lists the design options available for each parameter
DBCCA, 2009; Rickerson et al., 2011) and through interviews with and suggests the option that is the lowest risk from an investor
commercial lenders and other renewable energy financiers. There perspective. Each option and its risk implications are discussed in
have been multiple efforts to create in-depth catalogs of feed-in the following section. This framework builds on similar
tariff designs and best practices in recent years (Couture et al., approaches proposed by DBCCA (2009), the California Energy
2010; DBCCA, 2009; Grace et al., 2008; Klein et al., 2008; Commission (Corfee et al., 2010) and others. It should be noted
Mendonc- a et al., 2009). Best practice benchmarking is a useful that the table does not include aspects of the design that may be
tool, but it is difficult to use best practices to broadly define FIT critical to market participants, but do not have an impact on
policy regimes. Each country has adapted its FIT to reflect its investor perspective such as technology eligibility (which tech-
specific policy goals and constraints. As a result, there is atleast nologies can take part in the FIT) and rate differentiation
one exception that can be found for every FIT ‘‘rule’’. This (whether each technology gets its own rate, etc.). The table also
variation makes it difficult to establish the boundaries of FIT does not take into account factors that may impact risk, but that
design. Moreover, FITs are complex policy packages that can
combine both regulatory measures (e.g. interconnection guaran-
tees) and incentives (e.g. $/kWh payments). It is challenging to
define FITs because of the range of regulatory and financing 2
From an investor’s perspective, short term contracts which allow to recover
options that may be considered. This section uses investment all costs in a short period of time would be the lowest risk option. This is especially
risk as a lens through which to compare and categorize FIT true in developing countries with substantial political risk. However, the shorter
designs. In addition to providing a useful tool for framing policy the tariff payment period, the higher the tariff payment has to be. Implementing
design trade-offs, a focus on investment risk is relevant given the very high tariffs for a few years of power plant operation is politically difficult. In
addition, policy makers tend to prefer longer term contracts in order to assure that
recent credit crisis and given the need to mobilize financial power producers continue producing powers over the full economic lifetime of the
resources to meet power sector investment needs in the LAC power plant. In other words, longer term contracts will incentivize proper plant
region (Byer et al., 2009) and globally (DBCCA, 2010; IIGCC, 2010). maintenance and operation.
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604 D. Jacobs et al. / Energy Policy 60 (2013) 601–610

are not directly part of the FIT policy design, such as whether the plants with short-term fuel supply contract, because incentive
purchaser of the renewable electricity is creditworthy, etc. payments that extend beyond fuel contracts may not account for
the generator’s fuel price risk.
2.1. Interconnection, purchase, and dispatch requirements
2.4. Rate setting basis
An important component of FIT policy is the rules that govern
how power generators connect to and actually ‘‘feed’’ electricity FIT rates are typically set using either a cost-based or value-
into the grid. Design can include some or all of the following: based approach. Cost-based approaches take into account the
generation price of a given technology plus a reasonable profit.
 Guaranteed interconnection. Independent power producers Value-based calculations are set based on measures of value such
(IPPs) are guaranteed the right to interconnect to the trans- as the avoided costs of conventional power generation and/or the
mission and/or distribution grid where feasible. Guaranteed societal benefit created by renewable generation (e.g. the envir-
interconnection is often accompanied by standardized and onmental value, the value of the generator to the grid3, etc.).
transparent interconnection rules. Risk impact: Calculating FIT rates based on generation cost is
 Priority interconnection. In cases where there is a lengthy queue more likely to result in an incentive that will provide a reasonable
of new energy capacity that is awaiting interconnection rate of return to investors. Value-based approaches will attract
approval, new renewable generation moves to the front of financing only if the final rate happens to coincide with the rate
the line. required for investment.
 Guaranteed purchase. The utility (or other entity such as a
transmission system operators or government agency) is 2.5. Payment structure
required to purchase 100% of a generator’s output. This can
be paired with rules to prevent curtailment or to specify FIT incentives are performance-based (i.e. $/kWh) and are cash
compensation for curtailed production (Rogers et al., 2010). payments (i.e. rather than tax credits). Different countries have
 Priority dispatch. Depending on market structure, generators taken different approaches to structuring the payment itself: a
must obtain dispatch and transmission service in addition to schedule of fixed payments, a premium paid on top of the
securing a customer (i.e. electricity purchaser) and intercon- wholesale market price, and payments for the difference between
nection. Priority dispatch means that renewable generators are a guaranteed rate and the wholesale spot market price (some-
dispatched ahead of non-renewable generation. times called a ‘‘spot market gap model’’) (Couture and Gagnon,
2010). The premium and spot market gap models have been
Risk impact: Guaranteed and priority interconnection lowers implemented most notably in countries that have competitive
development risk by reducing uncertainty surrounding the wholesale electricity markets.4 A well functioning and liquid
amount of time required for project completion. Guaranteed wholesale market requires an adequate number of buyers and
purchase requirements eliminate the risk that a project might sellers trading electricity. Long-term contracts for electricity
not be able to secure a power purchase agreement. Rules ensuring (such as fixed payment FIT structures) insulate generators from
no curtailment, or financial compensation for curtailment, the need to participate in the market. The goal of the premium
decrease revenue variability and overall project risk. Priority and spot market payment structure models has been to encou-
dispatch reduces the risk that a generator might not be able to rage FIT-supported generators to participate in the market while
secure transmission capacity. at the same time providing generators with incentive payments.
Risk impact: From an investment perspective, a fixed price
2.2. Standard contract payment schedule is preferred because it provides certain reven-
ues over time and its simplicity and transparency make it easy for
Most FITs typically involve a contract between the purchaser investors to evaluate and assess.
and generator. A standard contract ensures that the terms and
conditions of the power purchase are transparent and known in
2.6. Commodities purchased
advance. Without standard contracts in place, each project must
negotiate contract terms on a case-by-case basis. Contract nego-
FITs are primarily considered a vehicle for purchasing elec-
tiations can cause significant project delays and may also result in
tricity. Depending on the national (and international) policy
failures to reach agreement.
environment, however, renewable electricity can be associated
Risk impact: Contracts are typically a prerequisite for securing
with additional commodities, such as renewable energy credits,
financing. Standard contracts, with limited flexibility for project-
thermal energy, emissions abatement credits, capacity, and/or
specific needs, reduce the legal risk associated with contract
ancillary services (Grace et al., 2008). FITs can specify whether
some or all commodities transfer to the purchaser.
Risk impact: FIT rates that assume generators will sell other
2.3. Contract length
commodities (e.g. carbon credits) separately expose generators to
the risks associated with concluding multiple transactions with
Long-term contracts are an important feature of FIT design.
multiple counterparties. From an investor perspective, it is pre-
Internationally, FIT contract terms of 15–20 years are typical
ferable that all commodities be bundled under one contract and
(Klein et al., 2008; SEMI PV Group, 2009), although there are
purchased for a rate that provides a reasonable return.
exceptions on both sides of this range.
Risk impact: Long-term contracts reduce the exposure of
project revenues to electricity price volatility, are often a require- 3
For example, the feed-in tariff in Portugal is set based on the avoided cost of
ment for attracting financing, and can also reduce the levelised electricity from conventional generators, the value of environmental costs (based
cost of energy (de Jager and Rathmann, 2008; Rickerson et al., on CO2) avoided by renewable generation, and the value of the losses avoided in
the transmission and distribution grid by the renewable generators (Heer and
2012). Contracts that are similar in length to the expected project Langniß, 2007).
service life also reduce the risk of having to re-contract after the 4
Spain, for example, has used in the past both, a fixed and a premium
policy period ends. A possible exception to this rule is biomass structure, whereas the Netherlands used a spot market gap structure.
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D. Jacobs et al. / Energy Policy 60 (2013) 601–610 605

2.7. Amount purchased be necessary to establish queuing procedures to govern how

generators can get in and out ‘‘of line’’ for the incentive.5
FITs typically purchase 100% of a generator’s output for both Risk impact: From an investment perspective, an uncapped FIT
centralized and onsite generators. During the past few years, is the lowest risk option. Caps introduce uncertainty and devel-
however, several FITs have been established to purchase of only a opment risk for generators. If caps are put in place, the mechan-
portion of an onsite generators’ output. In some cases (e.g. Japan isms governing them should be transparent and stable. Capacity
prior to 2012 and some states in Australia), the FIT applies only to caps can be more transparent than generation or ratepayer
the generation produced above onsite consumption. In other impact caps since they can be tracked on an ongoing basis using
cases (e.g. California), the generator can choose whether to enroll a project registry or similar mechanism. Progress towards gen-
in a 100% purchase program, or whether to only sell net genera- eration and ratepayer impact caps, by contrast, can only be
tion (Rickerson et al., 2008). This has led policy to distinguish determined through hindsight (e.g. retrospectively at the end of
between ‘‘gross’’ FITs, under which 100% of electricity is pur- a year). Queuing regulations, like caps, should also be as trans-
chased from onsite generators, and ‘‘net’’ FITs under which only parent, clearly defined, and stable as possible in order to max-
excess electricity is purchased. imize investor confidence in the system.
Risk impact: Gross FITs are preferable to net FITs from an
investor perspective. The portion of electricity consumed onsite
under a net FIT is riskier to finance than the portion sold for 3. Comparing FIT legislation in LAC countries with
several reasons: low-risk design

 Onsite energy consumption is typically not secured by a Seven LAC countries have experience with FIT implementation.
contract. This section profiles only FIT policies for on-grid resources,
 The host facility may not be as creditworthy as the FIT namely those in Argentina, the Dominican Republic, Ecuador,
purchaser (e.g. a utility). Honduras and Nicaragua. Brazil used a FIT only in the first half of
 The rate at which the onsite consumption is credited to the the 2000s (PROINFA, see e.g. Dutra and Szklo, 2007; Kissel and
generator is typically based on electricity market prices, rather Krauter, 2006), but has since transitioned to an auction system.
than fixed over time. If electricity rates fluctuate, or if the host Peru recently implemented a FIT, but only for off-grid renewable
facility’s rate classification changes, this can adversely impact energy resources.6 Neither of these countries will be discussed in
project revenues. this article. This section provides an overview of the relevant
pieces of national renewable energy legislation, evaluates the
It is also challenging to evaluate the amount of power that will effectiveness of national support and compares the FIT policy in
be consumed onsite and how much will be exported, since this each country to the low risk FIT design described above. The
can vary with facility output and with onsite load, and this creates analysis is then summarized in Table 8 at the end of the Section.
additional uncertainty.
3.1. Argentina
2.8. Adjusting the policy
3.1.1. FIT design
The available FIT rate can be adjusted for future contracts to Argentina has supported renewable electricity since 1998
reflect changing market conditions in several ways. Examples through its National Wind and Solar Energy Rules (Régimen
include adjustments to the available rate after periodic review Nacional de Energı́a Eólica y Solar).7 The law included a premium
(e.g. biannually), automatic adjustments after a set time period payment for renewable generators set 40% above the wholesale
(e.g. 5% decline each year), automatic adjustments after a certain market price. This law was replaced with the current FIT law in
amount of capacity has applied for the incentive (e.g. 5% rate 2006 with the passage of its National Regime of Support of
decline after the first 100 MW), or automatic adjustments in Renewable Energy Sources for Electricity Generation (Régimen
reaction to market growth (e.g. 5% rate decrease if more capacity de Fomento Nacional para el uso de fuentes renovables de energı́a
is added in one year than projected) (Jacobs and Pfeiffer, 2009). destinada a la producción de energı́a eléctrica).8 Certain provinces
Risk impact: The approach to policy adjustment has significant in Argentina, including Santa Cruz and Chubut, offer additional
implications for investor security (Lüthi and Wüstenhagen, 2009; tariff payments. Although the FIT was passed in 2006, it was not
Ölz and Beerepoot, 2010). In order to minimize perceived policy implemented until May 2009 with the National Decree 5620/
risk and the chilling effect that adjustments can have on invest- 2009.
ment, it is important that: The current FIT supports wind, solar, geothermal, hydro,
biomass and biogas generators up to 30 MW in size. Eligible
 the adjustments apply to future contracts only, generators can receive a fixed premium payment on top of the
 the timing (or triggers) of adjustments be known in advance, wholesale electricity price for 15 years. The tariffs are differen-
 the adjusted rates continue to reflect market conditions to the tiated according to PV and non-PV generators. Non-PV generators
extent possible in order to ensure a reasonable return, and can receive a premium payment of $0.004/kWh (Arg$ 0.015/
 the adjustments do not occur too frequently. kWh), whereas PV generators can receive $0.242/kWh (Arg$
0.90/kWh) (Table 3). Significantly, the tariff levels are defined as
maximum payments, rather than minimum payments. In the case
2.9. Caps and queuing
Queuing is beyond the scope of this article and contains its own sets of
Some FITs include caps in order to contain potential ratepayer design issues, such as milestone requirements, wait list structure, administrative
impacts, and in recognition of transmission constraints, etc. Caps fees, security deposits, management responsibility, etc.
can be set using different metrics, such as the amount of total Peru does not use a FIT to develop grid-connected renewable energy
systems; instead, it has used an auction since 2009. The national legislature
capacity or total generation supported under the policy, or the implemented a FIT for off-grid renewable energy systems in August 2010.
maximum acceptable ratepayer impact. In cases where it is likely 7
This policy is also known as Law no. 25, 019.
that demand for the FIT incentive will exceed the cap, it may also 8
This law is also known as Law 26, 190.
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606 D. Jacobs et al. / Energy Policy 60 (2013) 601–610

Table 3 Table 4
Tariffs for renewable electricity in Argentina. Prices and technologies recognized by Dominican Republic’s FIT.

Technology Max incentive Technology Price ($/kWh)

rate ($/kWh)
Wind generator $0.13
All renewable energy technologies $0.004/kWh Wind self-generation $0.05
(except solar PV) (Arg$0.015/kWh) Biomass electricity generator $0.12
Solar PV $0.242/kWh Biomass electricity for self-generation $0.05
(Arg$0.90/kWh) Municipal solid waste electricity generator $0.09
Photovoltaic generator 425 kW $0.54
Photovoltaic self-generation 425 kW $0.10
of solar PV, for instance, a payment level of ‘‘up to’’ $0.242/kWh Photovoltaic generator o 25 kW $0.60
Photovoltaic self-generation o25 kW $0.10
(Arg$ 0.90/kWh) is guaranteed. Therefore, the legislation creates
Small-hydro generator $0.07
the risk that project developers will have to negotiate contracts Small-hydro self-generation $0.05
on a case-by-case basis. The FIT premiums are to be paid through
a national fund, which will be managed by the Federal Council of
Electricity (Fondo Fiduciario de Energias Renovables). The fund is to
be financed via a surcharge per megawatt-hour sold nationally.
The incentive levels (defined in US$ but to be paid in
3.1.2. FIT evaluation Dominican pesos, RD$) are differentiated by technology, by
Argentina’s FIT includes certain low-risk components, such as whether the system output is sold into the grid or consumed on
a long-term payment guarantee. The policy diverges from the site, and by system size in the case of PV installations (see
design described above (Table 2) in several ways: the incentive is Table 4). Tariffs for solar thermal electricity generation have yet
a premium on top of the wholesale electricity price, rather than a to be defined.
fixed price payment, the prices appear not to be generation cost- Decree 208-08 allocates public funds created by a 5% tax
based, and prices are too low (even given Argentina’s strong imposed to fossil fuels under the Law on Hydrocarbons no. 112-00
winds) to provide a reasonable return. Theoretically, the max- to pay for the FIT incentives. The fund is administered by the
imum tariff of $0.24/kWh for solar PV should be in the range of National Energy Commission (CNE—Comision Nacional de Energı́a).
the actual power generation costs. However, apparently this Generators are required to contribute 1% of their sales to be split
maximum tariff has not yet been granted to any PV power between the CNE (80%) and to the Electricity Superintendant
producers. (SIE—Superintendencia de Electricidad) (20%).
In 2008, the spot price on the wholesale electricity market was In order to be eligible for the FIT, developers must secure a
$57.2/MWh (Arg$180/MWh) and $52.4/MWh (Arg$165/MWh) in concession to develop the project.10 Development concessions are
2009. Adding an additional $3.8/MWh (Arg$15/MWh) to these granted up to 40 years and allow the developer to receive priority
rates does not make projects financially viable—recent wind bids grid interconnection and priority dispatch through the transmis-
under a parallel auction scheme, for example, have been in the sion or distribution company. Generators must negotiate a power
range of $120-$158/MWh (Arg$466-614/MWh). The total $61.00/ purchase agreement with the Dominican Corporation of Electric
MWh (Arg$240.54/MWh) FIT rate9 would cover only half of these State Enterprises (CDEEE—Corporación Dominicana de Empresas
bids. In addition, there is no standard contract since the tariffs are Eléctricas Estatales) on a case-by-case basis.
set as a maximum level, rather than a minimum guarantee.
Finally, the legislation does not include special provisions regard- 3.2.2. FIT evaluation
ing grid connection or dispatch. Concessions in 2012 have been granted to almost 40 projects
(wind and solar mainly), but none have signed PPAs. So far only
one 33MW project (Los Cocos wind project in 2011) has been
3.2. Dominican Republic
built and recieved negotiated FIT but the value is not disclosed.
The Dominican Republic FIT shares some characteristics with the
3.2.1. FIT design
low-risk design, including long-term contracts, generation cost-
In 2007, the Dominican Republic passed the Law no. 57.07 of
based rates, priority interconnection and priority dispatch. The
Incentive to Renewable Energies and its Special Regimes (Ley no.
FIT diverges from the low-risk design in that contracts must be
57.07 de Incentivo a las Energias Renovables y Regı́menes Especiales)
negotiated on a case by case basis, and payments are awarded as a
to support renewable energy generation. The goals of the law are
premium on top of wholesale rates.
to reduce oil imports, diversify the country’s generation portfolio,
and attract private investment. The regulatory framework for the
3.3. Ecuador
law was established under Decree no. 202-08 in 2008. The law
sets forth FITs, tax incentives and financing programs to support
3.3.1. FIT design
wind (o50 MW), small hydro ( o5 MW), PV, solar thermal,
Ecuador established its original FIT in 2002 through CONELEC’s
biomass (co)generation ( o80 MW), biomass, biofuels, and ocean
regulation 003/02.11 The regulation was subsequently modified in
energy systems.
The law and Decree establish a 10-year FIT that includes a
premium payment on top of the wholesale electricity price. Under The regulation specifies the procedures, whereby project developers will
the Decree, the payment increased by 4% in 2009 and 2010, and obtain an initial concession allowing them to carry out feasibility studies without
the obligation of delivering power to the wholesale market. The CNE will limit the
adjusts according to the US Consumer Price Index (CPI) through to
maximum installed capacity for initial concessions once 80% of the national target
2018. From 2018 to 2027, the available rate will adjust according has been achieved. After obtaining an initial concession, the developer must
to the US CPI minus one percentage point. provide CNE with the documentation required under Decree 208-08 (design,
environmental, technical, etc. as defined per technology) to secure a final
9 11
Calculated based upon 2009 wholesale electricity spot market price ($52.4/ The first feed-in tariff provided PV, wind, geothermal, and biomass
MWh) plus the $3.8/MWh add on. generators with a 10-year incentive payment.
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D. Jacobs et al. / Energy Policy 60 (2013) 601–610 607

2004 (Regulation 004/04) and again in 2006 (Regulation 009/06).12 Table 5

The Ecuadorian FIT provides support for PV, hydro, wind, geother- Tariff differentiation by Ecuador’s FIT (Regulation 09/06).
mal, and biomass.
Technology Mainland Galápagos islands
There is a project size limit of 10 MW for small-hydro projects price ($/kWh) price ($/kWh)
and 15 MW for other generators. The FIT guarantees payments
for 12 years. The FIT rates are differentiated according to the Wind $0.09 $0.12
technology used and, in the case of hydro power, based on the Photovoltaic $0.52 $0.57
Biomass and biogas $0.10 $0.11
size of power plants. As Table 5 shows, Regulation 009/06 grants Geothermal $0.09 $0.10
differentiated tariffs based on where renewable power plants are Small-hydro up to 5 MW $0.06 $0.06
located on the mainland or on the Galápagos Islands. Tariff Small-hydro 5–10 MW $0.05 $0.06
payments are guaranteed in US dollars. The high degree of tariff
differentiation by technology reflects generation cost-based rate
setting approaches. Table 6
Renewable electricity tariff for Honduras.

3.3.2. FIT evaluation Technology Incentive rate ($/kWh)

Current FIT policy in Ecuador contains many low-risk design
options. Tariffs are guaranteed in US$ and therefore currency risk All renewable energy technologies $0.11 (HNL 1.99)
has been reduced. However, the market for renewable energy
projects has been growing very slowly over the last couple of
renewable energy sources (Ley de promoción a la generación de
years. To date, the FIT has only been used in three bagasse-fed
energı́a eléctrica con recursos renovables).
generation facilities and one wind farm operating in the
Law 70-2007 supports solar, wind, geothermal, tidal, hydro,
biomass, biogas and municipal waste generation by enabling
Investment in renewable energy has remained low partially
several power purchase options. Generators can sell their power
due to complicated tariff payment mechanisms, and because the
directly to large-scale consumers, they can participate in a
FIT is a regulation and is not codified in an official decree or law.
national auction for renewable power, and they can also sell their
There are also no guaranteed interconnection rules or standard
power to ENEE under a FIT. Under the third option, ENEE is
offer contract for IPPs in Ecuador.
obliged to purchase all renewable power. However, Article 3 of
Currently, the government is reviewing its electricity sector
Law 70-2007 states that EENE is only obliged to sign a purchase
and FIT policy. Ecuador’s new 2008 constitution mandates the
agreement if the project is in line with the National Extension
creation of a new electricity law to replace the 1996 Electricity
Plan of the Interconnected Electricity System (Plan de Expansión
Sector Law (LRSE), which created a wholesale electricity market.
del Sistema Interconectado Nacional). According to the plan for the
A wide range of issues are under discussion, including whether
period from 2008 to 2022, 30.9 MW of new mini hydro capacity
certain sectors of the electricity market should again be nationa-
are expected in 2010, 100 MW of wind energy and 110 MW of
lized. This has made investors uncertain as to whether previously
biomass in 2011, 20 MW of hydro in 2014, 358 MW of hydro in
made contracts will be honored, how the feed-in tariff will be
2015 and 173 MW of new hydro in 2016. Consequently, this
structured and what role of IPPs will play in the future. Establish-
linkage to the national extension plan creates a de facto cap on
ing the FIT under law and providing clarity on the future of
capacity supported by the FIT (ENEE, 2008). Generators up to
renewable energy policy would increase investment security
50 MW in size can receive a 20-year FIT contract, whereas larger-
significantly. However, other measures to reduce risk may need
scale power plants can sign contracts with durations of up to
to be taken given Ecuador’s poor credit rating relative to other
30 years.
LAC countries (Rogers, 2010).
Over the course of the FIT, power producers are guaranteed an
undifferentiated tariff called the Minimum Base Price (Precio Base
3.4. Honduras Mı́nimo), which is published annually by the government. The base
price can never be lower than the level published in 2007. For the
3.4.1. FIT design first 15 years of operation, power producers receive a premium
The current legal framework for the Honduran electricity payment of 10% of this base price on top of the avoided costs. The
system was established in 1994 by the new electricity law base price is indexed to the inflation rate in the US CPI. However, the
158-94. The policy enabled third-party access to the grid and maximum annual increase is fixed at 1.5%. As of 2010, the tariff
initiated (at least in theory) the unbundling of the National payment amounted to $0.1078/kWh ($0.9796/kWh for the short-
Electricity Company (ENEE—Empresa Nacional de Energı́a Eléc- term avoided costs plus a 10% premium) Table 6.14
trica). The law also set up the National Energy Commission After 15 years of operation, the remuneration will be lowered
(Comisión Nacional de Energı́a) to regulate the Honduran power to the short-term, avoided costs of the Honduran electricity
market. Decrees supporting the promotion of renewable system. The Decree of 2007 created a national fund for the
energy sources were issued in 1998 (Decrees 85-98 and promotion of renewable energy projects (Fondo de desarrollo de
267-98)13 and the current FIT was created in 2007 as part of the generación eléctrica con fuentes de energı́a renovable) in order to
Law 70-2007, the Law on the promotion of electricity from finance the costs of the FIT. The law required ENEE to draft a
standard contract for independent renewable electricity produ-
12 cers. The law also offers priority dispatch for renewable energy
The 2004 amendment increased the tariff levels, extended the payment to
12 years, and includes incentives for both small hydro projects and for off-grid sources and clearly defines grid connection procedures. The law
installations. The 2006 amendment increased the tariff paid for photovoltaic includes a number of additional tax exemptions for renewable
electricity. electricity producers, including import tax for equipment, rev-
Those Decrees included tax exemptions for renewable energy producers enue tax and sales tax.
and guaranteed the purchase of renewable electricity in line with the short-term
avoided costs of the Honduran electricity system. Additionally, the Decrees offered
a 10% premium above the avoided costs for renewable generators smaller than
50 MW. See
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608 D. Jacobs et al. / Energy Policy 60 (2013) 601–610

3.4.2. FIT evaluation 4. Conclusion

The Honduran FIT law of 2007 offers a comparatively high
degree of investment security. A large number of technologies are The analysis conducted in this article represents a first step in
eligible for tariff payment and the law includes detailed provi- characterizing and comparing feed-in tariff policies in the LAC
sions regulating grid connection. The law also guarantees priority region. The comparison of five LAC countries reveals certain
dispatch and obliges the utility to draft a standard contract. Tariff policy similarities. First, most include a wide range of eligible
payments are guaranteed for 20–30 years. Although tariff pay- technologies under their national support schemes. Second, most
ment is based on the avoided costs of conventional electricity, the guarantee a tariff payment over a long period of time (10–30
tariff payment as of 2010 could be attractive to certain types of years). Many of the LAC FITs also include special provisions for
generators. However, there is no evidence that the FIT has so far interconnection and purchase requirements. All countries guar-
triggered investment in new renewable electricity capacity. antee 100% purchase of the produced electricity. However, the
Dominican Republic also offers the possibility to directly consume
3.5. Nicaragua the renewable electricity without feeding it into the grid. In this
case, a substantially lower tariff is granted. These features of FITs
3.5.1. FIT design in the LAC region match the ‘‘low-risk’’ design discussed in
The current FIT legislation, the Law for the promotion of Section 2.
electricity production from renewable energy sources (Law 532– The comparison reveals, however, that none of the policies
Ley para la Promoción de Generación Eléctrica con Fuentes Renova- fully match the low-risk design to the extent that some European
bles)–was passed in April 2005. It is based on the 1998 Electricity policies (e.g. Germany) do. Identifying where the design diverges
Industry Law (Ley de la Industria Eléctrica), which regulates the from the low-risk benchmark can identify opportunities to
role of independent power producers, and builds off of Decree strengthen the policies. For example, several of the FIT policies
12-2004 which targets the promotion of wind and hydropower. in LAC countries have led to limited renewable energy develop-
The FIT targets both new installations and support for existing ment because the rates are based on avoided cost (and therefore
generators. Eligible technologies include hydro, wind, solar, are too low). Setting low rates based on avoided cost is consistent
geothermal, biomass, and other (unspecified) technologies. Bio- with the goal of limiting ratepayer exposure to renewable
mass includes agricultural products, energy crops, forest waste energy policy costs, but it also restricts investment in new
and industrial and municipal waste. Similar to Honduras, projects capacity. In the past, high prices for IPP contracts have
can only qualify for the FIT if they are consistent with the national attracted criticism internationally and have sometimes created
capacity expansion plan. The National Generation Expansion Plan political pressure that has resulted in attempts at contract
(Plan de Expansión de Generación) foresees a newly installed renegotiation or abrogation (Woodhouse, 2006). Establishing
renewable electricity capacity of 920 MW for the period 2011 to low-risk policies that can attract investment may need to be
2025 (Morales, 2010). Renewable power producers can either sell balanced with competing national policy objectives (e.g. rate-
their power via bi-lateral contracts with the distribution system payer cost or grid constraints).
operator or on the spot market. In the case of bi-lateral contracts, Finally, the analysis reveals that FIT policy design may not be
the minimum contract duration is 10 years. Generators that the primary constraint to renewable energy market growth. None
choose to sell into the spot market are guaranteed a price that of the current LAC FIT policies have resulted in a significant
ranges from $0.05/kWh to $0.06/kWh. The Supervisor of Energy market response. In some cases, this is primarily attributable to
(Intendencia de Energı́a) has the authority to modify the floor and the fact that the FIT policy has not been designed in a way that
ceiling prices for the spot market as necessary (Table 7). will attract investment. In other cases, there has been little
The legislation also includes certain technical requirements, renewable energy growth, despite the fact that the FIT offers
such as the provision of back-up capacity (spinning reserve), and potentially attractive generation cost-based rates and contract
a requirement that wind generators prove that their operation terms (e.g. Dominican Republic and Ecuador). In these cases, it is
will not conflict with system stability. The law also exempts primary factors external to the feed-in tariff, such as political risk,
renewable energy generation from the import tax on equipment, regulatory risk, counterparty risk, and/or currency risk that
from the value-added tax, and other taxes. The law also clarifies have constrained the market. When analyzing feed-in tariff
that power producers can receive additional revenue from selling policies and their effectiveness, it is therefore necessary to
Clean Development Mechanism (CDM) certificates. distinguish between the policy itself and the broader enabling
3.5.2. FIT evaluation Another key question for FIT design is whether the FIT policy
Law 532 includes a large number of eligible technologies and costs will be recovered from the ratepayer, the taxpayer, or from
establishes predefined tariffs for selling electricity in the national other sources. Arguments exist in support of either option.
spot market. However, the tariff is undifferentiated and is based Recovering the costs from the ratepayer is consistent with the
on the avoided costs for conventional generation. Due to the ‘‘polluter pays’’ principle, and is also thought to be more reliably
relatively low tariff level, the law has not encouraged investment collected over the long-term than annual government appropria-
in new renewable electricity capacity thus far. Moreover, the law tions. Recovering the costs from taxpayers places less of a
does not include any special provisions for grid connection of burden on internationally competitive and electricity-intensive
renewable energy power plants nor does it offer standard con- industries, and it may be easier to adjust governmental
tracts for renewable power producers. Finally, tariffs are not budgets (e.g. through subsidy or tax reforms) than to adjust
adjusted to any pre-defined methodology (Table 8). electricity rates. However, the taxpayer approach is much
more sensitive to political changes where new governments
Table 7 might be tempted to reduce the support for renewable energy
Renewable electricity tariff for Nicaragua. sources in order to reduce the general budget. These issues are
ultimately a matter of policy strategy for the country in question.
Technology Incentive rate ($/kWh)
If the recovery of above-market rates is a politically viable
All renewable energy technologies $0.05–$0.06 option, some LAC countries may elect to pursue ratepayer
recovery, whereas others may seek to create new public funds,
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D. Jacobs et al. / Energy Policy 60 (2013) 601–610 609

Table 8
Existing FIT design in LAC countries.

LAC countries Argentina Dom. Rep. Ecuador Honduras Nicaragua

Eligible generators Wind, solar, geothermal, Wind, small-hydro, PV, biomass, Solar, wind, Solar, wind, geothermal, ocean Hydro, wind, solar,
hydro, biomass, and biofuels, tidal, geothermal, and geothermal current, hydro, biomass, biogas, geothermal, biomass, and
biogas solar thermal and biomass and municipal waste biogas
Provisions for No Yes No Yes No
interconnection and
Standard contract No No No No No
Contract length 15 years 10–40 years 12 years 20–30 years 10 years
Rate setting basis Avoided cost Generation cost-based Generation Avoided cost Avoided cost
Payment structure Premium FIT Premium FIT Fixed Fixed Market sales (predefined
tariff range)
Commodities Not defined Electricity Not defined Not defined Electricity, but no CO2
Amount purchased 100% 100% 100% 100% 100%
Adjusting payment None Annually No Yes (inflation indexation) No
Plant-size caps 30 MW 50 MW for wind, 5 MW for 15 MW No No
small-hydro, and 80 MW for
biomass cogeneration
System size caps 8% of electricity 15% of electricity generation Yes (2% of New capacity has to reflect the New capacity has to
generation from from RE by 2015 and 25% by installed national capacity expansion plan reflect the national
renewable energy 2025 capacity) capacity expansion plan

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