metadata: authors: 0: author: Mani,Muthukumara S.
count: South Asia
docna: 0: docna: Assessing the investment climate for climate
            investments : a comparative framework for clean energy
            investments in South Asia in a global context
docty: Policy Research Working Paper
subtopic: Rural and Renewable Energy,Hydro Power,Energy Consumption,Energy Policies & Economics,Energy Conservation & Efficiency,Environment and Energy Efficiency,Energy Demand,Energy and Environment,Energy and Mining,Renewable Energy
teratopic: Energy,Macroeconomics and Economic Growth,Environment,Finance and Financial Sector Development
abstracts: cdata!: One of the strong messages that came out
            of the recent United Nations Climate Change conference in
            Durban was that the private sector has to play an important
            role if we are to globally move toward a low carbon, climate
            resilient -- or "climate compatible" -- future.
            However, private investment will only flow at the scale and
            pace necessary if it is supported by clear, credible, and
            long-term policy frameworks that shift the risk-reward
            balance in favor of less carbon-intensive investment. The
            private sector also needs information on where to invest in
            clean energy in emerging markets, and it needs policy
            support to lower investment risk. Barriers to low carbon
            investments often include unclear and inconsistent energy
            policies, monopoly structures for existing producers,
            stronger incentives for conventional energy than clean
            energy, and a domestic financial sector not experienced in
            new technologies. With the long-term goal of promoting and
            accelerating the implementation of climate mitigation
            technologies, this study aims to facilitate development of a
            policy framework for promoting sustainable investment
            climates for clean energy investments in South Asia and
            elsewhere. A key aspect of the study is also the pilot
            construction of the Climate Investment Readiness Index for
            several countries. The index is a tool to objectively
            evaluate the enabling environment for supporting private
            sector investment in select climate mitigation or low carbon technologies.
repnme: repnme: Assessing the investment climate for
            climate investments : a comparative framework for clean
            energy investments in South Asia in a global context
display_title: Assessing the investment climate for
            climate investments : a comparative framework for clean
            energy investments in South Asia in a global context
listing_relative_url: /research/2012/09/16773876/assessing-investment-climate-climate-investments-comparative-framework-clean-energy-investments-south-asia-global-context
topicv3: Renewable Energy m1326170 525,Energy and Extractives m1326595 507,Energy Efficiency m1326852 533,Power and Electricity Sector m1327094 515,Small Hydro Programs m1503275 3718
publishtoextweb_dt: 2012-09-27T00:00:00Z
historic_topic: Energy,Macroeconomics and Economic Growth,Environment,Finance and Financial Sector Development
no_of_pages: 40
author_keys: 0: author_key: 96748
model_extractions: WPS6211 Policy Research Working Paper 6211 Assessing the Investment Climate for Climate Investments A Comparative Framework for Clean Energy Investments in South Asia in a Global Context _Muthukumara Mani_ The World Bank South Asia Region Disaster Risk Management and Climate Change September 2012
Policy Research Working Paper 6211

# **Abstract**

One of the strong messages that came out of the recent United Nations Climate Change conference in Durban was that the private sector has to play an important role if we are to globally move toward a low carbon, climate resilient—or “climate compatible”—future. However, private investment will only flow at the scale and pace necessary if it is supported by clear, credible, and longterm policy frameworks that shift the risk-reward balance in favor of less carbon-intensive investment. The private sector also needs information on where to invest in clean energy in emerging markets, and it needs policy support to lower investment risk. Barriers to low carbon investments often include unclear and inconsistent energy policies, monopoly structures for existing producers, stronger incentives for conventional energy than clean energy, and a domestic financial sector not experienced in new technologies.

With the long-term goal of promoting and accelerating the implementation of climate mitigation technologies, this study aims to facilitate development of a policy framework for promoting sustainable investment climates for clean energy investments in South Asia and elsewhere. A key aspect of the study is also the pilot construction of the Climate Investment Readiness Index for several countries. The index is a tool to objectively evaluate the enabling environment for supporting private sector investment in select climate mitigation or low carbon technologies.

This paper is a product of the Disaster Risk Management and Climate Change, South Asia Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at mmani@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Assessing the Investment Climate for Climate Investments**

**A Comparative Framework for Clean Energy Investments in South Asia in a Global Context**

## **Muthukumara S. Mani**<sup>**12**</sup>

## **Key Words:   Climate Change, Renewable Energy, Energy Efficiency, Investment Climate, South Asia**

Sector Boards: Environment, Energy

## JEL Codes: Q43, Q48, Q54

> 1 Senior Environmental Economist, Disaster Risk Management and Climate Change, South Asia Sustainable Development Department. I would like to thank Mahesh Sugathan, R.V. Anuradha and Narasimhan Santhanam for their contributions and Vivien Foster, Kirk Hamilton, Sudeshna Ghosh Banerjee and Maria Vagliasindi for their excellent comments and suggestions. This paper is a summary of a broader study undertaken by the South Asia Sustainable Development Department on ―Assessing Investment Climate for Climate Investments: A Comparative Clean Energy Framework for South Asia in a global Context,‖ that will be disseminated separately. The financial support of USAID is gratefully acknowledged.

> 2 The author can be contacted at mmani@worldbank.org, World Bank-SASDC.
# **Assessing the Investment Climate for Climate Investments**

## **A Comparative Framework for Clean Energy Investments in South Asia in a Global Context**

# **1. Introduction**

Climate risk management is fundamental for preserving and enhancing development progress in many developing countries. Successful mitigation efforts by the global community will reduce the burden of adaptation. At the same time, adaptation to aggravating climate risks, and low-carbon growth options, are often directly linked to national development priorities such as energy efficiency (EE), renewable energy (RE), sustainable livelihoods, and environmental protection; as well as to business opportunities such as strengthening the resilience of infrastructure to climate variability.

The South Asia Region (SAR) is highly vulnerable to climate change, due in large part to the highest absolute number of people at risk and the highest incidence of poverty in the world. Climate threats are made all the more severe by a degrading resource base (e.g., damaged and depleted aquifers, degrading forests and soils). While vulnerability to climate change is high, the region has also recently emerged as a contributor to greenhouse gas emissions. Increased energy consumption, fueled by a relatively high economic growth, has been accompanied by rising greenhouse gas emissions (GHG). On average, emissions have risen at about 3.3 percent annually in the region since 1990 – more rapidly than in any other region except the Middle East.

With economic growth a priority in all SAR countries, climate action can result in multiple commercial, developmental, and environmental benefits. Lessons from the Clean Energy Investment Framework and many longstanding World Bank and International Finance Corporation (IFC) engagements show that the best entry points for client dialogue and program development on climate change arise from the synergies between development progress and opportunities to invest in EE, renewable energy, and other low-carbon projects. The scope for cost-effective, pro-development investments in EE and, increasingly, RE— especially against the background of impending energy crisis—is particularly broad. The Government of India, for example, is beginning to shift its economic growth strategy to include technology and management options that will reduce GHG generation while maintaining social and economic development objectives.

The magnitude of the resources needed to finance access to and implementation of environmentally sound technologies and processes, is such that the bulk must be provided through private sources, with donors and the public sector serving in a catalytic and/or facilitating role. The success of these efforts is highly dependent on countries establishing an enabling environment for private sector investment in climatefriendly technologies and services, and on the development of endogenous capacities to adopt, operate, and maintain these technologies. The private sector will be a key driver of the transition to climatefriendly technologies; and both foreign and domestic investors will base their decisions on their assessment of how risky or difficult it will be to make an investment in a given country using a given technology, and how these risks or difficulties will add to their costs.

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# **2. Barriers to Clean Energy Investments**

## _Generic Investment Barriers_

One overarching challenge to attracting private investment in clean technologies is a strong and believable government commitment to changing the trajectory of carbon emissions. Investors also look for political and macroeconomic stability, an educated workforce, adequate infrastructure (transportation, communications, energy), a functioning bureaucracy, rule of law, and a strong financial sector (Cosbey (2008)). Investors also need ready markets for their products and services. If a country restricts foreign investment in its power sector, this will likely affect investments in renewable power generation as well.

General economic and trade openness is also important to clean technology investors, who may depend, like investors in many other sectors, on supply chains for goods and services that are globally dispersed. Enabling power producers to access goods and services rapidly, at world market prices, will have an impact on the costs of investment and ultimately on energy costs. A World Bank study (World Bank, 2008) suggests that liberalizing trade can significantly increase the diffusion of clean technologies in developing countries.

While liberalization policies may help in gaining access to international technology, the success of technology diffusion in general depends on a range of other enabling factors, particularly the capacity to absorb and improve technologies in the host countries. Trade facilitation measures that help speed up the movement of goods at customs will also favorably impact the clean energy sectors. The presence of sound policies and institutions to promote competition and curb anti-competitive practices, while beneficial to private investment in general, particularly benefit renewable energy investors, as access to networks and the degree of buying power exercised by utilities are important for grid-connected power. Annex I presents some of the key technical and economic drivers of and constraints to private sector investment in the solar, wind, biomass, and small hydro sectors, based on worldwide experience.

## _Clean Energy-specific Investment Barriers_

There are also a number of barriers specific to clean energy investment. These may include market conditions such as prices for electricity and fossil fuels, or the presence of carbon and energy-related taxes. Market failure both in the innovation as well as diffusion sides to development, deployment and diffusion have been well-documented (See for instance Mallett, Sheridan and Sorrell,S.(2010), Barton (2007) and Kofoed-Wiuff, Sandholt and Marcus-Møller,C (2006)). Countries with binding GHG emissions targets and norms may provide a more favorable and predictable investment environment for RE and EE, as both will be required to meet emissions-related targets, particularly in rapidly growing economies.

However, a recent World Bank study (Avato and Coony, 2009) suggests renewed efforts in this area may face significant barriers that impact the ability to develop and deploy promising clean energy options such as (a) uncertain future value of CO2 emissions abatement; (b) provision of a public good being hampered by free-riding across space—countries that free-ride on the mitigation efforts of others; (c) the ―Valley of Death,‖ phenomenon which occurs when promising technologies languish between public and private sector research, development and demonstration (RD&D) efforts in innovation; (d) intellectual property 3
rights (IPRs) issues where the large RD&D investments needed for technical advances in certain clean energy technologies will be undermined by uncertain global IPR protection; (e) subsidies for conventional energy products at both the retail and production levels reduce to below-cost the price with which new energy technologies must compete; and (f) deployment of clean energy and energy efficient technologies is often hampered by trade barriers.

The types of such barriers will differ from country to country, a function of the many factors that shape national energy policies, including history, politics, and geography. The opportunities and obstacles will also vary significantly from country to country, and diagnostic studies could help to identify the full range of potential actions that are needed to help make clean energy investment more attractive to both domestic and foreign investors (Figure 1 provides an illustration of differences between generic investments barriers and those that are more specific to climate investments).

With the long-term goal of promoting and accelerating the implementation of climate mitigation technologies, this study aims to facilitate development of a policy framework for promoting sustainable investment climates for climate friendly investments in South Asia and elsewhere. The objective is twofold:

- Systematic evaluation and comparison of the enabling environments in SAR countries for supporting private sector investment in climate mitigation technologies.<sup>3</sup>

- Creation of a **climate investment readiness index (CIRI)** for South Asian countries and comparison with other countries globally.  CIRI is an attempt to benchmark countries in terms of their preparedness and maturity to move into the arena of climate-friendly investments. The CIRI goes beyond the more country-focused investment climate assessments and first such initiative that covers both renewable energy as well as energy efficiency.<sup>4</sup>

While the opportunities and obstacles will vary significantly from country to country, the new policy framework and CIRI will help country-level policymakers to identify the full range of actions needed to make clean energy investment more attractive to both domestic and foreign investors.

The index will also help these policymakers understand the institutional, regulatory, and legislative systems that need strengthening; how deficiencies in these systems may impede the flow of private investment in climate-friendly technologies; and the potential impact of various actions. The index will also aid countries in assessing their progress toward a low-energy/carbon growth path, and inform assistance and cooperative efforts.

> 3 While a number of other sectors such as transportation, agriculture, and forestry are also crucial from the perspective of attracting climate-friendly investments, the study focuses on the RE and EE sectors, because these are the sectors where private sector investment activity is particularly strong. Further investments in these sectors could also improve the investment climate for, e.g., clean transportation technologies such as electric vehicles.

> 4 There are other similar initiatives underway that attempt to capture/benchmark countries progress towards climate mitigation or clean energy policies and measures. Notable among them are IADB/Bloomberg‘s ClimateScope, American Council for an Energy-Efficient Economy (ACEE) report ranking countries on energy efficiency and World Energy Congress (WEC) Energy Policy Index, and EBRD‘s CLIM Index.

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**Figure 1.  Determinants of Climate Investments (Renewable Power and Energy Efficiency) vs. Other Investments**

# **GENERIC DETERMINANTS**

**_Climate Investments Power Investments Other Investments_ Overall Political and Macroeconomic Variables** Political and macroeconomic stability; Availability and quality of infrastructure; Ready markets and availability of skilled labor; Pro-competition regulation; Coordinated and streamlined licensing and permitting; Ease of entry and exit; Generally applicable tax holidays and incentives.

<!-- Start of picture text --> Energy-related Environmental Regulation<br>Energy taxes on fossil-fuels; CO2 tax ; Binding GHG emission targets.<br>Electricity and Energy Market Variables<br>Electricity market prices; provisions that allow entry of IPPs; Un-<br>bundling of transmission and distribution functions; Clear and<br>transparent rules for grid access; Provisions to facilitate grid access;<br>Ability to sell to more than one buyer (open access); Markets for<br>power trading.<br>PRIs specific to renewable<br>energy and energy efficiency<br>(including to reduce revenue<br>and cost risk) : RE targets, Feed-<br>in tariffs, RPOs, Energy-efficiency<br>standards, RE tax and fiscal<br>incentives and subsidies.<br>Facilitating operations in RE<br>and EE project cycle (speedy<br>and streamlined): Procedures<br>and agencies required for<br>clearances, access to finance.<br><!-- End of picture text --> 5
Further, the quantitative data and benchmarking provided by the index can help to stimulate policy debate, by exposing potential challenges and identifying where policymakers might look for lessons and good practices. These data also could provide a basis for analyzing how different policy approaches and reforms could contribute to broader desired outcomes in addition to climate mitigation, such as competitiveness, growth, and greater employment and incomes.

The framework for promoting climate investment will:

1. provide valuable information to help guide and target private sector investment in clean energy and energy efficiency in developing countries;

2. help developing country policymakers to better understand the key elements of their enabling environments, as well as barriers to investment that need to be addressed.

The study lays out the findings for SAR—India, Pakistan, Sri Lanka, Bangladesh, Nepal, and Maldives— including a review of the policy landscape (policies, regulations, and incentives) for renewable energy and energy efficiency in the countries as well as key issues and challenges highlighted during the consultations with private sector actors in the region. CIRI index scores for select South Asian countries, based on the presence or absence of these policies, regulations and incentives, are then compared with index scores for a mix of countries in Asia, Africa and Latin America. The comparison includes both high GHG-emitting countries and those that have proactively introduced policies, regulations and incentives for renewable energy and energy efficiency.

**3. An Overview of Policy, Regulatory and Institutional Frameworks and Private Perceptions for Climate Investments in South Asia**

The presence of a sound institutional and regulatory framework is a basic prerequisite for countries wishing to attract investment in RE. The lack of a level competitive playing field for private investment in sustainable energy typically implies that governments will need to intervene by means of sustainable energy policies, including financial incentives. Policies that help lower the cost for RE (including the cost of grid-related equipment and associated technologies) will increase the possibilities for scaling up deployment of sustainable energy. Similarly regulations, standards, and incentives that promote greater diffusion of energy-efficient products and construction practices in buildings will encourage greater deployment of energy-efficient products.

Comprehensive RE and EE regulatory frameworks are relatively new developments in the South Asian context, although there may have been specific policies and incentives governing individual sectors (such as wind in India since the mid-1980s). Their relatively recent introduction means that their implications for attracting investment will take some time to be understood. A number of laws and regulations also exist in draft form or are pending approval before the cabinet or parliament, particularly in Pakistan, Bangladesh, Nepal and Maldives, and further policies, regulations and incentives can be expected to evolve. Box 1 gives an overview of existing policies, regulations, incentives and institutions.

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**_Box 1:  An Overview of Policies, Regulations, Incentives and Institutions_**

|**Policies , Regulations**<br>**and Incentives**|**India**has the largest number of national-level policies, regulations and<br>incentives, covering all key RE sectors as well as EE. There are also a large<br>number of state-level schemes. India uses sophisticated policy instruments<br>such as RPOs and RECs for renewable energy; as well as a proposed market-<br>based mechanism, a perform, achieve, and trade (PAT) scheme for EE.<br>**Pakistan**has prescribed preferential tariffs for wind power, co-generation and<br>small hydro projects, but not for solar or grid-connected biomass.<br>**Sri Lanka**has preferential tariffs for for electricity produced from mini-<br>hydro, wind, biomass (dendro ), biomass (agriculture and industrial waste),<br>municipal waste, and waste heat recovery; however, the country as yet has no<br>such tariffs for solar production.<br>**Bangladesh, Nepal and Maldives**still do not have specific legislation for<br>either grid-connected RE or EE.|
|---|---|
|**Institutions (for RE)**|**India**has a dedicated Ministry for New and Renewable Energy (MNRE).<br>The**Indian**Renewable Energy Development Agency (IREDA) is the<br>financing arm of the MNRE, which secures funds to be provided as grants or<br>loans to end-users, manufacturers and entrepreneurs. Apart from MNRE,<br>other significant institutions include central and state electricity regulatory<br>commissions, which are responsible for tariff setting, sale and distribution of<br>electricity; National Load Dispatch Centres at the central level; state agencies<br>to regulate RECs; and power exchanges where these certificates are traded.<br>**Pakistan’s**Alternative Energy Development Board (AEDB), under the<br>Ministry of Water and Power, plays a similar role in RE development. The<br>other key RE institution is the National Electric Power Regulatory Authority<br>(NEPRA). Additionally, Pakistan has state-level agencies that support<br>implementation of RE policies either on their own or in collaboration with<br>AEDB. The Water and Power Development Authority (WAPDA) is in<br>charge of hydro power development.<br>**Sri Lanka**Sustainable Energy Authority (SLSEA), established pursuant to<br>the Sri Lanka Sustainable Energy Authority Act of 2007, functions as a part<br>of the Ministry of Power and Environment. It has the authority to issue<br>permits for on-grid and off-grid RE projects for the generation and supply of<br>power. The Public Utilities Commission of Sri Lanka (PUCSL) was<br>established by Act No. 35 of 2002 as a multi-sector regulator of certain<br>physical infrastructure industries in the country, and plays a key role in RE<br>development in Sri Lanka. The Ceylon Electricity Board (CEB) also plays an<br>important role, as the entitythat enters intopowerpurchase agreements with|

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||RE developers.<br>In**Bangladesh, Nepal and Maldives**units or departments dedicated to RE<br>policymaking or financing are still in the process of being established.<br>Bangladesh Power Development Board (BPDB), however, has been playing a<br>significant role in the commissioning of RE projects in the wind and solar<br>sectors.Also,the Infrastructure Development Company Limited (IDCOL),<br>licensed as a non-banking financial institution, has played a significant role in<br>bridging the financing gap for medium and large-scale infrastructure and RE<br>projects|
|---|---|
|**Institutions (for EE)**|**India’s**EE efforts are coordinate by the Bureau of Energy Efficiency (BEE).<br>**Pakistan’s**National Energy Conservation Centre (ENERCON) is responsible<br>for EE.<br>In**Sri Lanka, EE efforts are headed by the Sri Lanka Sustainable Energy**<br>**Authority.**<br>**Bangladesh, Nepal and Maldives**have no specific institutions to administer<br>EE initiatives. In Bangladesh, the Power Division, Ministry of Power, Energy<br>and Mineral Resources and Bangladesh Power Development Board (BPDB)<br>have been undertaking a series of measures designed to improve EE. In<br>Maldives, the draft Maldives Energy Bill 2010 proposes to establish a<br>National Energy Efficiency Division within the Energy Department for<br>promotion of EE measures.|

# **Private Sector Perceptions of the Existing Policy, Regulatory and Incentive Framework in South Asia**

The existence of regulatory frameworks and incentives for RE and EE may not, by itself, lead to perceptions of an attractive investment climate. In addition to broader macroeconomic variables such as infrastructure, the availability of skilled labor, and market size, the effective implementation of existing laws and regulations is also important. Regardless of what exists on paper, investors need to get a sense from those actually involved in the business of producing and selling renewable power about the issues and challenges they face in a country.

Outlined below are the results from consultations held with private sector stakeholders—firms active in RE generation; select vertically integrated firms active in both power generation and manufacturing; and manufacturers and distributors of RE equipment—in India, Pakistan, Bangladesh and Sri Lanka. Due to time constraints and the diversity of the sector, similar consultations were not carried out with distributors of EE equipment; this could be done as part of a future study.

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# **_Cross-cutting factors_**

The consultations revealed a broad range of critical factors—the ―ten Cs‖—that investors see as critical for doing climate business in every country. These are described below. Country-specific issues and challenges revealed by the consultations are discussed in the following section.

- **Clarity and Coherence.** Policies/laws on clean energy should be very clear and transparent as well as coherent.  They should send a strong signal about the country‘s intention to move toward cleaner/low carbon energy options.

- **Consistency.** Policies have to be consistently implemented across sectors and regions of a country. In a federal structure, for example, the national standard should guarantee a minimum level of RE development, with states being allowed to set more aggressive targets if needed.

- **Commitment and Credibility.** For policies to be credible, governments should signal a long- term commitment to the RE sector, backed by a comprehensive and transparent regulatory and tariff structure.

- **Clearances.** Investors are often discouraged by the number of clearances required to set up, for example, a wind or solar farm.  The approval process can be eased considerably by setting up a single-window clearance system or a no-objection based approval process for specific sectors.<sup>5</sup>

- **Capacity.** As countries ambitiously expand their clean energy portfolios, the capacity of agencies should be enhanced to ensure compliance with targets, policies and regulations.

- **Compliance.** Investors often are concerned about utilites‘ commitment to comply with PPAs. It is therefore important to establish transparent cost recovery rules and prudency tests for utility compliance with policies and contractual arrangements.  It also necessary to ensure utilities‘ compliance with any obligations they may have to purchase RE or RE certificates.

- **Coordination.** Coordination across the multitude of agencies involved in the clean energy sector (regulatory agencies, implementing agencies, utilities, distribution companies, etc.) is critical to ensure that clean energy policies are implemented consistently and efficiently.

- **Collateral.** Banks are often reluctant to finance clean energy projects because of concerns about the bankability of the PPAs, which are often related to utilities‘ compliance.  Until clean energy becomes as competitive as conventional energy, countries should consider specialized vehicles or institutions that could ensure adequate clean energy financing and help to mitigate risk.

- **Connectivity.** Access to the grid is an important criterion for investment in the renewable energy sector. Investors look for transparent rules, procedures and standards for grid connectivity for the energy they produce.

- **Cartography.** Since the quality and availability of RE (wind, solar, hydro, biomass) varies across locations, the accurate mapping of potential sites will have a bearing on returns to investment.

> 5 . Such a process would require officials to explicitly reject an application and provide written explanations for the reasons they did so; unless rejected, an application would automatically be considered approved. (See Unleashing the Potential of Renewable Energy in India, South Asia Energy Unit Sustainable Development Department and ESMAPThe World Bank, 2010.)

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# **_Country-specific factors_**

Many of the country-specific issues that emerged from the consultations can also be categorized under the ten Cs.

## **India**

**_Attractive project financing options and terms and conditions are required._** The availability of finance emerged as an important issue in India.  Smaller firms pointed to difficulties obtaining project-specific financing, while larger firms had the option of using balance-sheet financing (owing to their large capital base or assets held in non-RE related sectors).  According to some firm representatives, rates of interest and loan tenures (both important determinants of a project‘s IRR), could be better.  Given that most RE costs are upfront costs, the availability of financing mechanisms and options, including direct subsidies and grants that could alleviate such costs, are seen as desirable.  Also mentioned was the need to make the Clean Development Mechanism more easily accessible and less administratively cumbersome.

**_A federal system of governance creates opportunities as well as challenges._** Solar PV firms pointed to the diversity of taxes on solar equipment from state to state, some of which were considered burdensome. State-level enforcement of RPOs was also an issue, as were timely payments by state electricity boards. On the other hand, federalism has helped create space for regulatory autonomy, which has enabled some states to move faster than others in terms of providing investors with access to land and clearances.  The states of Rajasthan and Gujarat in India were noted for their efforts to facilitate investments in solar energy while the state of Himachal Pradesh was noted for its support of small hydro.

**_Access to both data and grids is vital._** Renewable power firms require access to grids to enable easy evacuation of power generated from all renewable sources.  A clear and predictable policy regarding grid access was seen as essential if firms are to meet their responsibilities to construct and maintain such facilities, as well as negotiate rights of way for transmission lines with third parties, when required.  For wind and solar, access to reliable data on wind speeds and solar radiation would enable firms to select locations that provide maximum return on investment.  Such data would also enable investors to more accurately estimate revenue streams, which is essential for obtaining project financing from commercial banks.

**_Technology costs are important, but so is performance._** Power generation firms place a great deal of importance on cost-effective technology, whether domestically produced or imported.  They also emphasize the need for stable and durable performance—a factor that is vital to calculating revenue streams and to winning the confidence of commercial banks still unsure about renewable technologies (primarily solar), which have not been widely tested under Indian conditions.

The investors also noted, in relation to wind, that the prevailing cap on generation-based incentives penalizes firms that use the most efficient technology, as they reach the cap sooner due to their higher productivity. Some suggested that incentives could be designed to benefit the most efficient and productive firms. There were also concerns about ensuring the quality of equipment. Power generation firms would like the freedom to procure the best and most cost-effective equipment globally. However, some domestic manufacturing firms expressed concern about unfair competition from certain countries, 10
and argued that given a bit of breathing space, Indian manufacturers could emerge as cost-effective producers of most RE technologies.

**_Transparency and good governance are essential but not always present._** Some firms alluded to nontransparency in the bidding and allotment process, and in issuing clearances and in loan disbursements. In certain cases, firms with no prior experience in delivering solar projects have been selected simply because they submitted the lowest bids.  Investors also see the need for greater clarity on the proposed value-added tax (VAT), since it has the potential to neutralize the tax benefits given to RE firms. Streamlining the onerous clearance process would also facilitate the reduction of improper practices.  On the issue of transparency, investors said they welcomed initiatives, such as the JNNSM, which provide open access to detailed data necessary for siting and estimation of revenues.  Easy access to land and the need for government to control speculative land grabbing emerged as an issue for some investors.  Certain states fared better than others in facilitating access to land for RE projects, with Gujarat being a notable example.

# **Sri Lanka**

The focus of the consultations in Sri Lanka was on net metering and the potential for grid-connected solar projects Grid-connected solar has been in place since 2007, through net metering, which is still at a nascent stage. The approach does not involve actual payments to a supplier into the grid. Instead, excess solar energy produced by a captive user can be fed into the grid, and the value is offset against the consumer‘s electricity bills.

**_Financing is essential for deployment of net metering_** _:_ Net metered projects are not eligible for RERED funding or grants.<sup>6</sup> Investors flagged this as a significant shortcoming, since borrowing from commercial banks carries a high interest rate.  They emphasized the need for incentives and subsidies for net metered projects.

**_Clarity, consistency and speedy clearances are required for effective operationalization of net metering._** Firms involved in the consultations pointed to a lack of clarity—and lack of commitment on the part of utilities—concerning the procedures for establishing net metering.  While one of the two transmission companies in Sri Lanka—the Ceylon Electricity Board—seems to have indicated that credits will be carried forward for 10 years, the second company—Lanka Electric Company (LECO)—has indicated that the credits will lapse after a shorter period. There also is no mechanism to allow for utilities to pay producers for accumulated credits. Further, the time required to obtain relevant permits and clearances is unnecessarily long.

**_Financing and policy predictability are both essential for the success of grid-connected solar parks._** There was a general perception that the Government‘s efforts to attract private sector investment through the establishment of solar parks would be ineffective without appropriate financing schemes and other incentives.  Many firms also suggested that the Government should not establish preferential tariffs, but

> 6 The Renewable Energy for Rural Economic Development (RERED) Project. It is a market based Project of the Government of Sri Lanka (GOSL) supported with financial assistance from the World Bank and Global Environment Facility, and implemented by DFCC Bank. The RERED Project aims to expand the commercial provision and utilization of renewable energy resources, with a focus on improving the quality of life in rural areas by using electricity as a means to further income generation and social service delivery. Source: <u>http://www.energyservices.lk/</u>

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that allowing tariffs to be negotiated between producers and the utilities would be more conducive to private investment.

# **Pakistan**

A number of private sector firms praised the efforts of the Government of Pakistan to create an attractive investment climate for RE producers. However, they called for more effective implementation of existing laws and regulations and greater transparency.

Many of the issues faced by Pakistani firms echo those in India and Sri Lanka, such as access to easy financing options and effective implementation of laws and regulations. However, one distinct issue that arose repeatedly during the consultations was that Pakistan‘s unstable political and security climate is driving away potential investors—despite one of the most attractive terms and conditions offered by any government in South Asia, notably a guaranteed rate of return of nearly 18 percent. Several firms called for some sort of international political and security risk guarantee mechanism to be provided by international institutions.

**_Existing laws need to be effectively implemented._** A major problem facing RE firms in Pakistan is the weak implementation of RE laws and regulations. For instance, while feed-in tariffs for various RE sources exist on paper, in actual practice, tariffs are set through a process of negotiations between the relevant authorities and power companies.

**_Administrative costs need to be reduced._** RE in Pakistan comes under the purview of a number of agencies.  In certain sectors such as small hydro, the entrepreneur has to obtain both provincial and federal-level clearances and the lack of efficient coordination among these agencies leads to delayed implementation and increases administrative burdens and costs for the entrepreneur. There was also a need for speedier, less political process of obtaining clearances.  Private sector groups have suggested the creation of a single agency—the Energy Administration Authority (EAA)—and this needs to be pursued.

**_Difficulties in obtaining finance._** Access to finance was also mentioned as very important, especially in sectors such as solar PV, where initial investment is high.  Many firms find it very difficult to obtain easy access to finance.  More concessional loans were suggested, particularly for smaller players.

**_Cost-effective access to both land and equipment is critically important._** Access to land remains a serious constraint to investment. Most land is controlled by the provincial governments, and none has a system in place for allocating land to the private sector at cost-effective rates. Private land is also quite expensive. Investors also noted the need for cost-effective access to equipment and inputs. For wind, as there is no manufacturing in Pakistan, customs duties are zero for wind equipment.  But for solar cells and modules, prevailing duties continue to be high—up to 50 percent—which raises investment costs for solar PV producers.  For biomass, opportunities to facilitate imports and technology transfer from India needs to be explored, with institutions such as the World Bank playing a facilitating role.

# **Bangladesh**

**_Clear and supportive policies are needed._** Firms in Bangladesh highlighted the need for a clear set of laws and enabling framework to realize effective deployment of RE. So far such clarity has been missing. There is, for instance, no law on net metering, which would encourage rooftop solar.  The Government recently issued an order making it mandatory for new residential and commercial establishments to install

12
solar panels as a condition for securing an electricity connection. While the aim is laudable, the initiative lacks supportive aspects, such as financial help for installation costs, which are likely to be more effective.

**_RE investors must keep in mind the agrarian nature of the country’s economy._** Most of the projects in Bangladesh are off-grid in nature, as the existing grid cannot meet rising energy demand. Given the largely agrarian and rural nature of the economy, RE opportunities are primarily in applications such as water pumping, which presently rely on expensive diesel generators, given the intermittent electricity supply.

**_Access to finance is still a difficult issue for small-scale projects._** Non-profit organizations are an important vehicle for RE technology diffusion in Bangladesh, given their involvement in micro-credit and the small-scale, off-grid nature of RE deployment in most of the country.  Commercial interest rates are typically in the range of 11-14 percent for RE projects, although the Government sometimes provides loans at lower rates for the purchase of capital equipment. Institutional actors such as Asian Development Bank and World Bank are active in efforts to expand RE deployment of RE, although it was noted that large institutional actors are interested mainly in large-scale projects.  A programmatic approach with clustering of similar projects was suggested so that smaller private sector players can benefit from these institutional efforts.

**_There is a need to establish and scale up local manufacturing and technological collaboration._** Some firms pointed to current efforts to manufacture the hardware required for RE deployment, such as batteries and charge controllers. Bangladesh would benefit from technology transfer and private sector collaboration with countries such as India, which are more advanced in this area. Indian companies are already actively involved in areas of RE technology deployment such as solar-powered mobile towers.

# **Nepal**

Given the relatively nascent and off-grid nature of solar, wind, and biomass in Nepal, consultations with the private sector focused on the small hydro sector. One issue that was interesting from a regional energy trade perspective is hydropower exports to India. Private sector firms generally felt that easier access to the Indian market would lead to the rapid scale-up of hydro sector investments in Nepal. Nepal could then import power from India during the dry season, and export surplus power during the wet season much more than the presently insignificant levels of trade, leading to a ̳win-win‘ situation for both countries. However, they were concerned that large hydro would benefit from this access much more than small hydro, given the high fixed costs (including transmission lines) of installations that could supply the Indian market.

**_Lack of transmission facilities_** is a serious constraint to investment in grid-connected small hydro projects.

**_Delayed clearances are often an issue_** due to lack of coordination among various government departments. The process is presently streamlined, for smaller projects of less than 50MW, for which only a simple environmental impact assessment (EIA) is needed, compared to the full range of environmental clearances required for larger projects.

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**_Capacity specifications can be a burden._** The Nepal Electricity Authority buys all the power produced by plants of less than 25MW, provided that they generate at full capacity at least 40 percent of time (i.e., Q40 plants). Firms expressed concern that during the wet season, unless the surplus power generated can be exported, it will be wasted, and producers will incur a loss.  Developers are also concerned that, in the absence of a larger market, the Q40 requirement means the plants cannot be designed to optimize costs.

**_Access to equipment and inputs_** for small hydro projects was perceived to be largely free of barriers. The zero VAT and one percent customs duty were considered attractive, as were the 7 to 10-year tax holidays. Only construction materials incur a duty, and the government could help small hydro firms by reducing or eliminating this as well.

# **4. Constructing a Climate Investment Readiness Index (CIRI)**

The study undertook a comparative assessment of the investment environment for grid-connected renewable energy and energy efficiency in a select group of South Asian and comparator countries. The objective was to determine whether these countries have policies, regulations, and incentives designed to attract investments in RE generation and EE, at least on paper, and how they rank when compared with each other.

The indicators selected were based on an extensive survey of literature on some of the main policies, regulations and incentives introduced by countries to attract private sector investment in RE, as well as enable greater diffusion of EE products and techniques as indicated in Section 3. The selected indicators are illustrated in Boxes 2 and 3. The lists are by no means exhaustive, but they do provide a fair indication of some of the key elements that a country needs to have in place to give a clear signal to private investors. For both RE and EE, two types of indicators were selected. The first comprised cross-cutting policies, regulations and incentives that would broadly affect the investment climate in renewables or EE. The second category included policies, regulations and incentives specific to a sector, such as solar PV or small hydro (for renewables) or lighting and appliances (for EE). For RE, each indicator was assigned a weight of 1, and the weighted score for each indicator was found by multiplying the score for presence or absence. Thus, in the presence of an indicator, the weighted CIRI score (WS) would be: (POLICIES, REGULATIONS AND INCENTIVES Score =1) X (Assigned Weight=1) == = 1 In the absence of an indicator, the weighted CIRI score (WS) would be: (POLICIES, REGULATIONS AND INCENTIVES Score =0) X (Assigned Weight=1) ==POLICIES, REGULATIONS AND INCENTIVES = 0 A slightly different approach to scoring has been followed for policies, regulations and incentives for EE. As one of the indicators—namely, mandatory minimum energy performance standards (MEPS) and labeling initiatives—is a function of the number of appliances covered by such initiatives, there is no maximum ceiling and no absolute total score. Mandatory standards are obviously much more important than voluntary standards for creating a climate that is conducive for the diffusion of EE appliances. If similar scores were given for both mandatory as well as voluntary standards, then country A, for instance, could enjoy a high total CIRI score if it had a large number of appliances covered by voluntary standards 14
and none under mandatory standards, whereas it may actually be country B that has a more attractive investment climate due to the presence of mandatory standards.

To reinforce the importance of mandatory standards for lighting, appliances, and building codes, mandatory labeling schemes or minimum energy performance standards are given a scoring weight of 2. Thus for the presence of a single mandatory standard in lighting, a country would receive a score of 1 and a weight of 2, giving it a weighted score of 2. If there are 7 mandatory standards, the country would get a score of 7 and a weighted score of 14. For the presence of voluntary standards in lighting, by contrast, a country would get a weighted score of 1 per standard, so that 1 standard would yield a score of 1, for example, and 7 standards would yield a weighted score of 7.

The resulting total score for each country has been taken as the CIRI consolidated score for EE sectors in the country. The consolidated score reflects the overall regulatory attractiveness of a country. However, it does not indicate the effective implementation of these policies, regulations and incentives, or how the private sector may view them; nor does it capture the geographical and sectoral scale or financial depth of individual EE schemes or projects that may exist in any country.

# **Renewable Energy**

For renewable energy, the decision was made to focus on grid-connected electric power generation, as this is the focus of activity in both developed and developing countries, and thus provides easier comparability. Certain indicators, such as RE targets and tax incentives on equipment purchases, are relevant for the expansion of both grid-connected and off-grid RE; but otherwise the two are quite different in terms of the policies, regulations and incentives that matter for attracting investment. The availability of equipment financing schemes and other consumer subsidies, in fact, matter much more in the case off-grid RE, since they are often targeted at poor communities in remote areas untouched by the electricity grid network.

**Box 2:  Key Indicators for Construction of CIRI RE**

|**c**|**Cross-cutting Indicators**|
|---|---|
|**1**|Existence of RE Policyand Law|
|| RE Policy|
|| RE Law|
|**2**|Existence of RE Target|
|**3**|RE Purchase/Offtake Obligation|
|**4**|Availability of Tradable Instruments for RE|
||**Sector Specific Indicators for Solar PV, Wind, Biomass and Small Hydro**|
|**1**|Preferential tariffs for Solar/Wind/Biomass/Small Hydro|
|**2**|Grants/Subsidies/Incentives related to capital/Investment Tax Credits|

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|**3**|Incentives Linked to Generation/Production tax-credits|
|---|---|
|**4**|Income Tax Holidays/Exemptions|
|**5**|Trade-related Incentives|
|| Customs DutyExemptions|
|| Absence of Local Content Requirements|
|**6**|Other Tax Exemptions (VAT, Excise etc)|

An examination of the presence or absence of these policies, regulations and incentives in South Asia reveals that India, as expected, scores high for the presence of both cross-cutting and sector-specific policies, regulations and incentives. Only in wind does Pakistan score above India, due to Pakistan‘s income tax holidays. India is the only country that has deployed tradable instruments to facilitate entities‘ obligation to purchase RE. Pakistan scores higher than Sri Lanka for the presence of policies, regulations and incentives in all sectors. **A higher CIRI score, however, does not mean that a country is attracting higher levels of investment or even that it offers a better climate for RE investors. It merely indicates that a country has put in place more policies, regulations and incentives to** **_attract_ investors.** Whether this contributes to creating a more attractive investment climate depends on a number of other factors, including effective implementation. As the findings from the private sector consultations reveal, many investors, particularly foreign firms, are still hesitant to invest in Pakistan owing to the prevailing political and security climate, despite the offer of very attractive terms and conditions. Hence, the binary nature of CIRI analysis reveals just one side of the story. As discussed earlier it needs to be complemented with surveys of private sector to get a complete picture.

The tables below indicate the existence or absence of policies, regulations and incentives for gridconnected RE investment in India, Pakistan and Sri Lanka. Scores are on a scale of 10 (which indicates the presence of key RE policies, regulations and incentives). The presence of an indicator gives a country a score of 1 and its absence a score of zero. Equal weights (carrying a value of 1) have been assumed for each indicator set. One can, in principle, change the weights of various categories to arrive at a revised scoring scheme. However, care must be taken to ensure that the weighting schemes are consistent with private sector perceptions of the policies, regulations and incentives. As noted earlier, Nepal, Bangladesh and Maldives have not been included in the scoring due to their emphasis on off-grid deployment and relatively underdeveloped state of grid-connected RE, as well as the absence of required policies, regulations and incentives.

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**Table 1a** **_: Cross-cutting Grid-Connected RE Policy, Regulation and Incentives: CIRI Scores for India, Pakistan and Sri Lanka_**

||**Cross-cutting Grid-Connected CIRI**<br>**Indicators**|**India**|**Pakistan**|**Sri Lanka**|
|---|---|---|---|---|
|**1**|**Existence of Law and Policy on Renewable**<br>**Energy**|**1**|**1**|**1**|
|_a_|_Existence of RE Policy_|_0.5_|_0.5_|_0.5_|
|_b_|_Existence of RE Law_|_0.5_|_0.5_|_0.5_|
|**2**|**Existence of RE Target**|**1**|**1**|**1**|
|**3**|**Obligation for Designated Entities to**<br>**Purchase/Off-take RE**|**1**|**1**|**1**|
|**4**|**Availability of Tradable Instruments for RE**<br>**Generation**|**1**|**0**|**0**|
||**Total**|**4**|**3**|**3**|

**Table 1b:** **_Solar PV-Grid-Connected RE Policy, Regulation and Incentives: CIRI Scores for India, Pakistan, and Sri Lanka_**

||**Grid-connected Solar PV CIRI Indicators**|**India**|**Pakistan**|**Sri Lanka**|
|---|---|---|---|---|
|**1**|**Availability of Designated Preferential Tariffs**<br>**for Solar PV Power**|**1**|**0**|**0**|
|**2**|**Grants, subsidies and incentives related to**<br>**capital/Investment tax credits**|**1**|**1**|0|
|**3**|**Incentives linked to generation/Production**<br>**tax-credits**|**1**|**0**|0|
|**4**|**Income-tax holidays/exemptions**|**1**|**1**|**1**|
|**5**|**Trade-related Incentives**|**0.5**|**1**|**1**|
||**-**_Customs-duty exemptions_ _(zero duty on major_<br>_components and equipment)_|_0.5_|_0.5_|_0.5_|
||**-**_Absence of ‘local-content’ requirements for_|_0_|_0.5_|_0.5_|

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||_power producers_|||
|---|---|---|---|
|**6**|**Other tax-exemptions (Sales, VAT, Energy**<br>**Tax etc)**|**1**|**1**<br>**0**|
||**Total**|**5.5**|**4**<br>**2**|

**Table 1c:** **_Onshore Wind-Grid-Connected RE Policy, Regulation and Incentives: CIRI Scores for India, Pakistan, and Sri Lanka_**

||**Onshore Wind**<br>**Grid-Connected CIRI Indicators**|**India**|**Pakistan**|**Sri Lanka**|
|---|---|---|---|---|
|**1**|**Availability of Designated Preferential Tariffs**<br>**for Onshore Wind Power**|**1**|**1**|**1**|
|**2**|**Grants, subsidies and incentives related to**<br>**capital/Investment tax credits**|**1**|**0**|0|
|**3**|**Incentives linked to generation/Production**<br>**tax-credits**|**1**|**1**|0|
|**4**|**Income-tax holidays/exemptions**|**0**|**1**|**1**|
|**5**|**Trade-related Incentives**|**0.5**|**1**|**1**|
||**-**_Customs-duty exemptions_ _(zero duty on major_<br>_components and equipment)_|_0_|_0.5_|_0.5_|
||**-**_Absence of ‘local-content’ requirements for_<br>_power producers_|_0.5_|_0.5_|_0.5_|
|**6**|**Other tax-exemptions (Sales, VAT, Energy**<br>**Tax etc)**|**1**|**1**|**1**|
||**Total**|**4.5**|**5**|**4**|

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**Table 1d:** **_Small-Hydro Grid-Connected RE Policy, Regulation and Incentives: CIRI Scores for India, Pakistan, and Sri Lanka_**

||**Small-hydro**<br>**Grid-Connected CIRI Indicators**|**India**|**Pakistan**|**Sri Lanka**<br>**weighted score**|
|---|---|---|---|---|
|**1**|**Availability of Designated Preferential Tariffs**<br>**for Small-hydro Power**|**1**|**1**|**1**|
|**2**|**Grants, subsidies and incentives related to**<br>**capital/Investment tax credits**|**1**|**0**|0|
|**3**|**Incentives linked to generation/Production**<br>**tax-credits**|**0**|**1**|0|
|**4**|**Income-tax holidays/exemptions**|**1**|**1**|**1**|
|**5**|**Trade-related Incentives**|**0.5**|**1**|**0.5**|
||**-**_Customs-duty exemptions_ _(zero duty on major_<br>_components and equipment)_|_0_|_0.5_|_0_|
||**-**_Absence of ‘local-content’ requirements for_<br>_power producers_|_0.5_|_0.5_|_0.5_|
|**6**|**Other tax-exemptions (Sales, VAT, Energy**<br>**Tax etc)**|**1**|**0**|**0**|
||**Total**|**4.5**|**4**|**2.5**|

**Table 1e:** **_Biomass Grid-Connected RE Policy, Regulation and Incentives:  CIRI Scores for India, Pakistan, and Sri Lanka_**

||**Biomass**<br>**Grid-Connected CIRI Indicators**|**India**|**Pakistan**|**Sri Lanka**|
|---|---|---|---|---|
|**1**|**Availability of Designated Preferential Tariffs**<br>**for Biomass Power**|**1**|**0**|**1**|
|**2**|**Grants, subsidies and incentives related to**<br>**capital/Investment tax credits**|**1**|**0**|0|
|**3**|**Incentives linked to generation/Production**<br>**tax-credits**|**0**|**0**|0|
|**4**|**Income-tax holidays/exemptions**|**1**|**1**|**1**|

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|**5**|**Trade-related Incentives**|**0.5**|**1**|**0.5**|
|---|---|---|---|---|
||**-**_Customs-duty exemptions_ _(zero duty on major_<br>_components and equipment)_|_0_|_0.5_|_0_|
||**-**_Absence of ‘local-content’ requirements for_<br>_power producers_|_0.5_|_0.5_|_0.5_|
|**6**|**Other tax-exemptions (Sales, VAT, Energy**<br>**Tax etc)**|**1**|**1**|**0**|
||**Total**|**4.5**|**3**|**2.5**|

Consultations with the private sector in South Asia, as well as existing literature on the subject, reveal that the two elements most critical for attracting private sector investment in RE are the _attractiveness_ and _stability_ of the power purchase tariff (i.e., a preferential tariff and the length of time for which it will be available, to allow for more stable returns). Perceptions of what constitutes an attractive tariff will vary from country to country, depending on local investment costs and conditions.

In addition to stability of the power purchase tariff, other critical elements include some assurance that the RE generated will be purchased, as well as accelerated depreciation and other investment-related incentives that reduce upfront investment costs. Policy stability is also necessary to make calculations of returns on investment more predictable. An unpredictable policy environment (where PRIs are altered or dropped without warning) will not be attractive to private investors. The CIRI score tables above do not attempt to measure the _degree of stability in policies, regulations and incentives,_ which can be gauged only through private sector interactions and detailed surveys in each country context. As a general rule, however, longer time-frames for maintaining policies, regulations and incentives (for preferential tariffs, firms often cite at least 20 years) is a good indicator of policy stability. As many countries in the developing world, including in South Asia have only recently started introducing policies, regulations and incentives, it may take a while before the degree of stability can be properly ascertained.

# **Comparative Analysis of Renewable Energy CIRI Scores for South Asia and Other Countries**

How does South Asia fare in terms of the presence of RE policies, regulations and incentives compared with countries outside the region? As it can be seen in Annex II, in sectors such as onshore wind, countries with a very good record in installed wind power capacity, such as China and India, come out with high scores. However, a number of European countries with a good wind power presence, such as Spain, UK and the Netherlands, score lower than, for example, the Philippines. This trend of traditionally dominant countries scoring lower than new comers is also seen in other RE sectors, such as solar PV. One obvious reason for this counterintuitive finding is that a number of countries have geographical advantages for certain RE resources such as solar and wind, as well as an attractive market in terms of population numbers with a certain purchasing power capacity. Countries that may not have these advantages or are new entrants may need to offer significant incentives to make it worthwhile for the private sector to establish a presence, until the market develops and the costs of RE deployment come down.

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In terms of the presence of cross-cutting framework elements, India is in the same category as Asian countries that have put in place overarching RE policies and laws, including China, Indonesia, Japan, Philippines, Indonesia and Kazakhstan, as well as the major economies of Europe, Australia, Mexico and South Africa. For solar and wind-specific policies, regulations and incentives, India and Pakistan‘s CIRI scores are comparable to those of China, Vietnam and Philippines in East Asia. India, in fact, scores higher than most countries in Europe, Latin America and Africa for solar-specific policies, regulations and incentives; and India, Pakistan and Sri Lanka all score higher than most European, Latin American and African countries as well as Australia for wind-specific policies, regulations and incentives.

These findings highlight the fact that countries with lower sector-specific CIRI scores may fall into either more mature markets (as in Europe) that need to rely on fewer incentives to attract wind investments; or else immature or very early-stage markets that have not yet developed investment incentives. Rapidly growing and emerging countries generally reflect higher sector-specific CIRI scores. A higher score can also reflect recognition by pro-active policymakers of the potential of renewables and their desire to attract investment as quickly as possible. The Philippines is a notable example in Asia. Consolidated solar PV and onshore wind index scores put the South Asian countries among the top league among countries from both Asia as and Western Europe. Russia and Ukraine fare rather poorly.

A similar picture is emerging for small hydro and biomass. India once again scores high for the presence of policies, regulations and incentives for both sectors, whereas Pakistan and particularly Sri Lanka reflect lower scores similar to those of a number of Latin American and many Asian countries. Japan surprisingly obtains low CIRI scores in many RE sectors more similar to Sri Lanka. Once again this reflects the fact that the Japanese market may not require certain types of incentives (perhaps owing to higher prevailing electricity prices). Reliance on cheaper alternative forms of energy such as oil and gas in Russia and nuclear in Japan may also have a role in explaining their lower CIRI scores, despite a higher level of wealth than many Asian and Latin American countries that score better. Two countries in the MENA region—Egypt and Iran—with an under-developed potential for RE development, both have low CIRI scores, indicating the need to develop a more robust policy, regulatory and incentive framework.

# **Energy Efficiency**

Unlike the scale of 10 used for scoring policies, regulations and incentives in RE, there is no perfect total score for EE. This is because in addition to scoring for the _presence_ of policies, regulations and incentives, countries are also scored based on the number of appliances covered by mandatory minimum energy performance standards and labeling, which carries a weight of 2. Such an approach means that country A with 10 mandatory standards and 20 voluntary ones gets a higher score than a country with 5 mandatory standards and 100 voluntary ones. From the perspective of deployment of EE appliances, there is a higher probability that mandatory standards will be implemented as compared to voluntary standards. Therefore it is appropriate to give a higher CIRI scores based on the number of appliances covered by mandatory standards and labeling schemes, but to keep the score and weight constant at 1 21
irrespective of how many appliances are covered by voluntary standards or labeling schemes (see Table 6f for the framework used for assessing EE policies, regulations and incentives).<sup>7</sup> The CIRI scores for EE reveal that, within the South Asian region, India is well ahead in terms of relevant policies, regulations and incentives as well as institutional structures for EE (See Annex III). India‘s high scores are largely due to a larger number of electric appliances being covered by mandatory energy performance standards, as well to the higher weights assigned to building codes. India has also introduced a trading scheme for EE credits—the first of its kind in South Asia. As EE initiatives get underway in other South Asian countries and more mandatory standards are introduced, the climate for diffusion of energy efficient appliances will certainly improve. However, India—due to the sheer size of its market, coupled with strong economic growth and its imperatives for energy conservation, energy security and greenhouse gas reductions—is likely to remain the most attractive market for energyefficient products in South Asia.

# **Comparative Analysis of Energy Efficiency CIRI Scores for South Asia and Other Countries**

The scores obtained in the case of EE policies, regulations and incentives in some ways provides a more robust and quantitative basis to assess where countries stand in terms of the environment to deploy energy-efficient products. This is because while the presence of voluntary standards and labeling initiatives are acknowledged with a nominal score, countries are really rewarded for the presence of mandatory standards and labeling initiatives (which carries a greater weight of 2). Further the more appliances that are covered by mandatory standards and labeling initiatives, the higher the CIRI score countries chalk up.

## **Box 3:  Key Indicators for Construction of CIRI EE**

||**Cross-cutting**|
|---|---|
|1|Existence of Law and Policy on EE|
|| Existence of EE Policy|
|| Existence of EE Law|
|2|Existence of EE Targets|
|3|Designated Implementing Institution/Department|
|4|Availability of Trading Schemes/Tradable Instruments for EE|
|5|Existence of Procurements for Energy-efficient products/Construction|

> 7 Information and numbers for lighting and electrical appliances have been obtained from the Collaborative Labelling and Appliance Standards Program (CLASP) at http://www.clasne.org/index.php. Ballast related standards and labels have been included under the category of  ̳Lighting.‘

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||**Lighting**|
|---|---|
|1|Existence of Voluntary Standards/Labeling Schemes for Lighting|
|2|Existence of Mandatory Minimum Energy Performance Standards for Lighting (Score equals<br>number of lighting appliances)|
|3|Existence of Mandatory Labeling Schemes for Lighting (Score equals number of lighting<br>appliances)|
|4|Subsidies/Incentive Programs available for EE Lighting|
||**Appliances**|
|1|Existence of Voluntary Standards/Labeling Schemes for Electric Appliances|
|2|Existence of Mandatory Minimum Energy Performance Standards for Electric Appliances<br>(Score equals number of appliances)|
|3|Existence of Mandatory Labeling Schemes for Electric Appliances (Score equals number of<br>appliances)|
||**Buildings**|
|1|Existence of Voluntary Green-building Codes|
|2|Existence of Mandatory Green-building Codes|
|3|Subsidies/Incentives Available for 'Green-Construction'|

The CIRI scores for EE broadly appear to correlate to levels of development, as reflected by the high scores of Japan and Australia and of emerging countries such as Brazil and Mexico in Latin America (Annex III). China scores particularly high, reflecting the realization among policymakers of the need to save energy, given the high energy intensity of it economy and increasing reliance on fossil fuel imports. While India has put in place a sound regulatory framework and certain sophisticated measures (such as tradable EE certificates), overall it scores much lower than China and other countries in Asia (Thailand and the Philippines) and Latin America (Brazil and Mexico) in terms of weighted EE policies, regulations and incentives. India‘s situation in EE is more comparable to Indonesia in Asia and Argentina in Latin America, and it performs better than Egypt, South Africa, Peru and even Malaysia. The main reason for India‘s lower EE CIRI score is the comparatively low number of lighting and electrical appliances covered by mandatory labeling schemes or minimum energy performance standards (MEPS In the cases of Pakistan and Sri Lanka, a low score for mandatory labeling, coupled with missing broader indicators such as EE targets and a lack of green building codes, explain why they score lower than India.

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# **5. Conclusion and Next Steps**

It is clear that investment in RE and EE will continue to expand, driven by government policies, regulations and incentives as well as underlying macro strengths. Policies, Regulations and Incentives will continue to exert influence over investment decisions. As costs of RE and EE technologies decline and renewable power becomes comparable in cost and reliability to power generated from fossil fuels, the need for additional incentives will decline. As this trend progresses, it will be useful to analyze the correlation between policies, regulations and incentives and investment flows into the RE and EE sectors. From a survey of the literature and of regulatory frameworks worldwide, there appears to be a broad set of policies, regulations and incentives that countries usually put in place. For RE, these include preferential tariffs, RE purchase obligations or portfolio standards, income and equipment tax breaks and incentives (for producers and/or consumers), as well as incentives linked to capital and/or generation cost. For EE, the main policies, regulations and incentives include minimum energy performance standards, voluntary and mandatory labeling schemes, and incentives or tax breaks for the sale and purchase of energy-efficient products. Countries may differ in the specific design of these policies, regulations and incentives, choosing those that may be most appropriate to prevailing conditions in the country.

As evident from South Asia, countries may also be at various levels of evolution with regard to the introduction of policies, regulations and incentives. Consultations with the private sector, however, have made it clear that in addition to macroeconomic indicators and the presence of policies, regulations and incentives, it is the attractiveness and effective implementation of these policies, regulations and incentives that do the most to attract private investment. Hence to effectively assess and compare various countries in terms of their investment climates, it becomes important to survey firms about their perceptions of those investment climates.

The next phase of the study, therefore, will go beyond the binary framework attempted here and seek to deepen its work in South Asia by launching formal private sector surveys, and also expand it to other key developing countries in Asia, Africa and Latin America. These formally structured surveys will go beyond broad informal consultations undertaken during the present phase and attempt to gather and objectively score private sector perceptions of attractiveness of the investment climate including those based on actual implementation-related indicators.

The CIRI will seek to be a living and constantly evolving tool. Based on feedback from experts and target audiences, the indices can, over time, ensure that the policy variable elements it measures are the ones that truly matter to clean energy and energy-efficiency investors.

## **Expected Outcomes and Measurement of the Study’s Effectiveness**

The success of every study lies in the outcomes and long-term impact that it has and the real effectiveness and value of the study will lie in the useful information and analysis it can provide for policy makers, private investors and development agencies.

The ―Assessing Investment Climate for Climate Investments‖ study provides a framework that seeks to enable the following outcomes: 24
**Transparency:** Provide factual information about existence of clean-energy and energy-efficiency laws in a country complemented by a qualitative assessment of the investment climate based on extensive consultations with the private sector as well.

**Reform:** An index-based benchmarking of countries complemented by the perception of their investment climates amongst the private sector will be useful in spurring reform in these countries particularly those that obtain weaker scores. Even countries with strong overall scores will be able to identify specific policy variables that may benefit from further reform.

**This could lead to better evaluation and understanding of what clean-energy and EE promotion policies may or may not work in different country-contexts** both by governments as well as donor agencies.

**Better targeting of external assistance:** The study results will be useful for tailoring country-specific technical assistance to improve investment climate in the clean-energy and EE sectors both from various departments within the Bank group as well as other aid-agencies. Further it is also expected that the results will influence the nature and direction of assistance that is channeled under the auspices of the UNFCCC through the Green Climate Fund and Technology Mechanism.

**Independent Verification:** The results could also be a useful way to independently verify National Nationally Appropriate Mitigation Action (NAMAs) that are related to clean-energy.

Indicators that reveal the achievement of these outcomes will be a useful way to assess the impact and success of the study. Over a period of time it may be possible to draw a correlation between individual and a collective group of CIRIs -their evolution and implementation and flows of private sector investments in RE and EE sectors in a country. The lessons from such an exercise may indeed prove invaluable. Measuring some of these impacts will also be an important aspect of assessing the overall effectiveness of the study.

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