Starting and running a solar lamp retail business in a developing country like Kenya is no small feat. Kenya lacks strong transportation infrastructure for product distribution, and the bureaucratic red tape is not only tedious but can be opaque to foreigners. Meanwhile, the customers who need and want solar portable lamps most are those who can least afford it.

Solar portable lamp companies, such as Little Sun, must navigate informal economies and limited distribution infrastructure to market and sell their products to customers who benefit from the environmental, social, and health improvements that these lamps can provide. (Source: Little Sun)

But although Kenya’s economy lacks many of the market and political institutions that facilitate business operations in the industrialized world, there is significant potential for businesses to support rapid economic growth and generate social impact. A variety of successful solar portable lamp businesses have reframed Kenya’s lack of institutions (let’s call them institutional voids) as opportunities for economic growth.

In 2010, two Harvard Business School professors published the book Winning in Emerging Markets: A Roadmap for Strategy and Execution, highlighting the opportunities and challenges of operating a business in a developing country. They also released a toolkit for identifying and dealing with a country’s institutional voids, raising the following questions that are pertinent to running a solar portable lamp company in Kenya:

1. Do large retail chains exist in the country? Do they reach all consumers or only wealthy/urban ones?
2. Do consumers use credit cards, or does cash dominate transactions? Can consumers get credit to make purchases?
3. Is there a deep network of suppliers? How strong are the logistics and transportation infrastructures?

Successful solar portable lamp companies in Kenya are using a variety of strategies to address these challenges and to mitigate, avoid, and leverage the institutional voids that would otherwise deter or limit business operations. 

Overcoming retail barriers

In Kenya, as in most developing countries, the customers who most demand solar portable lamps are rural residents who are underserved by the traditional power grid. Because transporting and distributing products in rural areas is more costly and rural consumers have limited access to urban retail outlets, there is a general lack of formal retail products in these areas. Consequently, rural customers’ demands are predominantly met by independent sellers operating through channels in the informal retail sector.

To reach a rural customer base, a solar portable lamp company must learn to navigate Kenya’s informal retail channels. One company, Greenlight Planet, does this by outsourcing its physical logistics chain. The company relies on partnerships with social enterprises, standard retail companies, nongovernmental groups, and government institutions to distribute products to users through already existing informal channels.

“The physical logistics chain in Africa is more like one with the sales chain, where our partners buy our products in bulk and then also deliver them to local retailers, [microfinance institution] branches, etc,” says Laurens Friso, Global Partnership Advisor for Greenlight Planet in East Africa. “It’s not organized from our perspective.”

The outsourcing of the physical logistics chain allows Greenlight Planet to avoid the institutional void created by a lack of a formal retail market for solar lamps in rural Kenya.

Overcoming credit barriers

Credit is limited in rural areas of Kenya, and solar lamp customers do not have access to the traditional financing available to wealthier, urban customers and enterprises. In 2009, only 6.2 percent of rural Kenyans purchased goods on credit, but the volume of transaction services over the past three years has increased dramatically because of M-Pesa. M-Pesa is an informal and revolutionary mobile banking system that allows users to pay bills, transfer money, and purchase air time using mobile phones.

Because credit is limited in rural areas and mobile phone use and banking is accessible, a successful solar company must either develop a) a product that is affordable without credit, or b) an M-PESA-type financing scheme that improves the customer base’s willingness to pay for the product.

Little Sun, a solar company that sells a small solar task lamp of the same name, has succeeded on the affordability front. With a wholesale price of 790 Kenyan shillings (US$9) and a retail price of 990 Kenyan shillings ($12), the Little Sun is one of the simpler and cheaper products on the market. It has a light output of 25 lumens (equivalent to about a $7 flashlight) and is used primarily to light small areas for studying or eating, although it has no mobile phone charging compatibility.

By designing a low-cost but efficient product, Little Sun has overcome the institutional void repreented by the lack of credit by creating an affordable product for rural consumers.

Overcoming infrastructure barriers

In 2010, the World Bank Development Research Group compared the infrastructure levels of different developing countries using a set of four aggregate indicators and ranking them on a scale from 0 to 1. In terms of hard infrastructure, Kenya ranked 0.35 for Physical Infrastructure and 0.43 for Information and Communications Technology (ICT). In terms of soft infrastructure, it ranked a very low 0.18 for its Business Environment and 0.55 for its Border and Transport Efficiency.

According to these indicators, Kenya’s lack of trade infrastructure severely hampers supply chains. Successful solar lamp companies can navigate this challenge by developing partnerships with local organizations and companies that have a clearer sense of the barriers and how to negotiate them, thereby minimizing cost and time inefficiencies.

One Degree Solar has done exactly that. By developing a customer service practice based on short message service (SMS) with an in-country partner, the company has improved the accountability of the customer service product market. Customers are able to text One Degree Solar headquarters when they need help with their products. Through an in-country partnership, One Degree Solar was able to leverage the rural penetration of ICT in Kenya to mitigate the lack of trade infrastructure and its impact on the solar lamp supply chain.

The above examples of ways to overcome common institutional voids create a clear picture of the business potential in Kenya and other emerging markets. Through innovative customer service practices, cost-effective product designs, and partnership with local companies and organizations, solar portable lamp companies are not only navigating institutional voids, but using them to create discrete market niches for and brand trust in their products. Given the status of energy access in Kenya and other developing countries, there is incredible opportunity for generating both revenue and social impact.

Claire Remington is an intern with the Climate & Energy Program at Worldwatch Institute. 

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Having just returned from my second clean energy finance summit this year, I was relieved to find that despite the rumors, the renewable energy industries aren’t dying—indeed they’re booming.

Source: Michael Liebreich BNEF Summit Keynote, 23 April 2013

In 2012, according to Bloomberg New Energy Finance, $269 billion flowed into the clean energy sector worldwide—a big number by any standard.  Total global investment in renewable generating capacity now lags total investment in coal, oil, and gas generation combined by only 25 percent. With that much money you could purchase Google or Microsoft outright.

While clean energy investment in 2012 was down 11 percent from 2011, it is still 44 percent above the 2009 figure and 230 percent higher than it was in 2005.  Moreover, virtually all of the decline stems from the sharply falling prices for solar and wind equipment—a trend that in the long run will accelerate growth. While clean energy growth has understandably slowed from the extraordinary double-digit rates of the past decade, this remains one of the world’s largest and most dynamic industrial sectors.

The one dark cloud that hovered over both conferences (the Cleantech Investor Summit in Palm Springs and the Bloomberg New Energy Finance Summit in New York) was the United States, where declining government support and the uncertainty generated by a dysfunctional Congress led to a sharp decline in financing in 2012.  While the falling investment figures do presage a slowdown inU.S. clean energy growth in the next two years, it is still notable that theU.S. added more renewable capacity than any other single country last year.

Excluding theUnited States, global investment in renewable energy would have increased significantly in 2012. China, for example, is continuing to power global markets, with investment up a robust 20 percent to $65 billion in 2012.Chinais also playing a big role in driving down the cost of renewables while spurring robust growth in other emerging market countries such asIndiaandSouth Africa.

Japan’s clean energy investment was meanwhile up a remarkable 75 percent in 2012, driven by the government’s response to the post-Fukushima collapse of the country’s nuclear industry. And while Germany’s investment declined last year, renewable power generation continued to soar, reaching 24 percent of electricity production, up from 4 percent in 2000.

So, despite all the recent media focus on the rise of shale gas and unconventional oil inNorth America, the bigger energy story is a global one: New technologies and hundreds of billions of dollars of investment capital are steadily laying the foundation for a low-carbon global economy.

Chris Flavin is President Emeritus at Worldwatch Institute. 

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Globally, new investment in renewable energy fell 11 percent in 2012. But in Latin America and the Caribbean (not including Brazil), it grew at a remarkable rate of 127 percent, totaling USD$4.6 billion. This was the opening context for the 3rd Annual Renewable Energy Finance Forum for Latin America and the Caribbean (REFF-LAC), held this week in Miami, Florida. The yearly event, coordinated by Euromoney Energy Events, the American Council on Renewable Energy (ACORE) and the Latin America and Caribbean Council on Renewable Energy (LAC-CORE), aims to connect developers and investors who can continue fostering the strong investment climate for renewables that is happening in the region.

LAC-CORE president, Carlos St. James, speaking at the 3rd Annual REFF-LAC conference. (Photo credit: Mark Konold)

Presenters included project developers, financiers, and government officials, all of whom had experiences to share about what’s working in the region. In some places, like Chile and Peru, project tendering is working to advance renewable energy deployment. In the Caribbean, mechanisms such as net metering and feed-in tariffs are still the preferred approach to fostering renewables development. Many presenters stressed that the key to continued success in the region is the political will that creates an environment conducive to successful renewable energy investment. They also highlighted how projects become more attractive the less they have to rely on subsidies or other support mechanisms.

Worldwatch, based on its extensive work in the Caribbean and Central America, was asked to provide insight at the conference on which technologies are working well in various countries. I had a chance to show that in both regions, renewable energy technologies are working wherever there is a resource to match—provided that a suitable environment for investment and project success exists. Large-scale hydropower plays a very large role in the electricity generation of most Central American countries, sometimes as much as 35 percent or more. And although renewables comprise only 8 percent of current electricity generation in the Caribbean, there is room for significant improvement, especially as geothermal resources are explored in places like Nevis and Grenada.

Dspite strong solar, wind, and biomass resources, however, governments are still trying to meet sharply rising energy demand with increased fossil fuel-fired generation. For example, even though the Dominican Republic recently celebrated the opening of the second phase of its Los Cocos wind farm and has made significant progress in securing a developer for a 30 MW solar plant in Monte Plata, the country recently announced plans for a new coal-fired power plant 10 times the size of the solar plant. A second coal plant is to follow in the near future, both of which are being built to replace soon-to-be-retired diesel-fired generation. Carbon War Room President José María Figueres summarized this approach as, “taking us into the 21st century using energy technology that has run out of steam 200 years after the invention of the first steam engine.”

Worldwatch has already demonstrated that a very favorable solar resource exists in the Dominican Republic, and the costs of solar equipment worldwide continue to fall. Yet large-scale investment continues to elude the D.R. Unreasonable payback limits (seven years), shifting incentives for renewable energy, and poor government finances help contribute to a poor investment climate.

To maintain the region’s positive momentum, countries should be taking a cue from Aruba. On the second day of the conference, Jocelyne Croes, Minister Plenipotentiary for Aruba and Representative for the Government of Aruba at the Dutch Embassy in the United States, described Aruba’s recent partnership with Carbon War Room to transition the island to 100 percent renewable energy. Wind, solar, and ocean resources will play a central role in shifting the fossil fuel-dependent economy to one that is no longer affected by fluctuating oil prices or degradation of the natural environment, and that enjoys the economic benefits of increased investment and a technically trained workforce.

Aruba’s effort illustrates what ACORE President Vice-Admiral Dennis V. McGinn (USN-Retired) calls “a triple bottom line” of energy, economic, and environmental security, and is exactly the kind of bold, forward-thinking that Latin American and Caribbean countries should be adopting to successfully address their growing energy needs. It‘s also the kind of signal that investors look for as they try to bring innovative renewable energy solutions to market.

As with the first two REFF-LAC conferences, this week’s event was a great chance to survey progress made and to match investors with opportunities in Latin America and the Caribbean. LAC-CORE president Carlos St. James compared the renewable energy world to walking in a fog. Sometimes that fog lifts and you see the landscape as it is and in which direction you are going to go. REFF-LAC is that break in the fog and provided all participants with that necessary glimpse to keep moving in the right direction.

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Across the developing world, retailers are selling solar-powered portable lamps that can meet basic lighting demands, reduce dependence on expensive and inefficient kerosene lighting, and contribute to important development goals like energy access and improved literacy rates.

Solar portable lamp companies must find innovative ways of restoring consumer confidence in their products after a flood of cheap, faulty models created a distrust of the technology (Source: OneDegreeSolar).

Small solar portable lamp companies are learning how to navigate the relatively unstructured business environments of developing countries, but a lack of consumer confidence in the unfamiliar technology is a serious deterrent to scalability. Confidence has been eroded further by the presence of low-quality lamps that mimic higher-quality products. To increase sales and improve both the social and environmental impact of solar portable lamps, companies must develop a dependable product and brand that is appealing to customers both familiar and unfamiliar with solar technology.

Gaurav Manchanda, an Indian-born entrepreneur and founder of One Degree Solar, found a new way to restore consumer confidence in a low-cost lamp that meets the standards of the Lighting Africa project. He developed a short messaging service (SMS) technology that both provides customer service and allows the company to monitor the social and environmental impacts of every lamp sold.

The use of mobile phone technology has skyrocketed in East Africa, and Manchanda’s development of a customer service practice that utilizes this unique market characteristic allows his product to penetrate markets previously characterized by uncertainty. Manchanda’s interest in tracking the social and environmental impact is based on his background in development work, but is also reflective of this market as a whole. Companies that operate in the solar portable lamp market are typically social enterprises interested in the triple bottom line of economic profit, social impact, and environmental health.

Manchanda realized that high-quality customer service is a competitive advantage and a way to generate confidence in relatively new and unfamiliar products among customers with very little purchasing power. With the help of an in-country partner, he developed an SMS platform hosted by Safaricom and Airtel that allows his company to send bulk text messages to purchasers of One Degree Solar products.

Retailers and resellers are trained to collect the serial and phone numbers of a customer’s mobile device, which are automatically transmitted to the One Degree Solar headquarters in Nairobi. One Degree Solar sends out SMS surveys on the first day of purchase and one month later, asking questions such as, “Do you need any help with your product?” and “How much money did you spend on kerosene last week?” The high-quality customer service improves consumer confidence and sales for several reasons: 1) the connection to manufacturers and repair persons in regions otherwise characterized by isolation is invaluable, 2) the reliability and benefits of the SMS service spreads by word of mouth, and 3) the service provides an assurance of the product’s dependability and long-term performance.

Manchanda’s prior work experiences with the Clinton Foundation and the Ministry of Health in Liberia involved the use of Palm Pilots to collect data from rural health clinics and hospitals. The project revealed to him the importance of data collection, as well as the relationship between data quality and the quality of the reporter. He explained:

“There are going to be situations where respondents have an inclination to give an answer you want to hear, and this can be the case in aid and development projects, especially when leading questions are asked. We’re getting our responses from a paying customer and not a beneficiary or recipient, and we think our numbers are going to be more accurate as a result. That sense of ownership is critical for us and for development as a whole.”

For solar portable companies to grow, it is essential that they share information with private and public investors to demonstrate their social impact and the potential returns on investment. Although it’s easy for solar portable lamp companies to say that their products have impact— decreased expenditure on kerosene lighting, improved literacy rates and productivity due to increased hours of lighting, and health benefits—it can be more difficult to quantify and prove that impact.

One Degree Solar’s customer service SMSs allow the company to communicate directly with customers. For example, the company can ask how the product is being used and monitor kerosene usage and expenditures over time (and then calculate subsequent health improvements attributed to decreased kerosene usage).

In addition to tracking kerosene expenditure over time, Manchanda anticipates further survey questions that investigate improved literacy rates:

“We imagine that a few months after customers buy the system, we’ll start asking questions about whether they have any children and what the children are reading. We’re hoping that with the data we collect, we can approach an Education Minister and say, ‘We have all of these families with lighting at home in x regions who have children in a given age group, and they don’t have anything to read at home.’ Sharing that information with NGOs that give books would make the work we all do more cost effective and impactful.”

Even though information sharing is a priority, One Degree Solar is still a business striving to out-do competitors. One Degree Solar provides a high-quality customer service because it’s good for business.

Manchanda says, “We do pay money per message, we do pay for staff time for developing the service, for training our resellers, and those expenses could be seen as money we could save and put to something else, but we’re spending the money and resources on developing customer service that we would appreciate in the West.”

One Degree Solar’s investment in developing an innovative customer service practice provides the foundation for the company’s scalability by 1) generating information and data for future investors, and 2) improving the marketability of a solar portable lamp in a young consumer product market.

Over the next few years, consumer product markets are expected to evolve rapidly in developing countries. Energy customers will develop higher demands, and companies will compete to provide higher-quality products and services for less, improving energy access and meeting development goals.

Do you know of other social entrepreneurs who have changed market landscapes in developing countries through innovative business models? Please feel free to share in the comments section below!

Claire Remington is an intern with the Climate & Energy program at Worldwatch Institute. 

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In March 2013, the National Energy Administration (NEA) of China issued a Notice to urge development of wind-to-heat projects in northern China. This practice aims to reduce the waste of wind power and cut emissions from the coal-fired central heating system. Experiments have been carried out and the approach is going to be scaled up, but further innovations are needed to really shake the dominance of coal.

The niche for large-scale wind-to-heat

Figure 1. China’s installed wind power generation capacity, and average operation hours of the turbines from different sources (click image to enlarge graph).

According to the Chinese Wind Energy Association (CWEA), China’s total installed capacity of wind power jumped to 75.3 gigawatt (GW) by the end of 2012, while the annual installed capacity was 13 GW, nearly 27percent lower than that of 2011 (See Figure 1). This may reflect bottlenecks, such as growing wind curtailment, faced by the industry.

Since 2010, the operating hours of wind turbines have been decreasing (See Figure 1). Combined with growing generation capacity, wind curtailment in 2012 reached 20,000 gigawatt hours(GWh), nearly doubled the curtailed production of 2011.

Jilin Province is a region with one of the highest curtailment rates. Winter nights see high wind speed but low electricity demand, and the local grid’s flexibility for peak electricity management is limited. As a result, wind farms in Jilin Province, which have a total generation capacity of 3.3 GW, were generating for only 1,420 hours in 2012. This was much lower than the industry-adopted economic minimum of 1,900 hours.

Meanwhile, burdens created by coal-burning are becoming less bearable. It is estimated that 70 percent of residential area in northern China has central heating systems. Half of this heat comes from heat-power cogeneration (which is mainly coal-fired), and the other half comes from the direct combustion of fossil fuels. These coal-intensive approaches consume 160 million tons of coal equivalent each year, which translates to 108.8 million tons of carbon emissions.

The atmospheric pollutants generated from burning coal threaten human health, especially during winters when the demand for heating is at the highest. Adding insult to (literal) injury, many coal-fired heating stations are constantly losing money because the price for heat is relatively low. According to China National Renewable Energy Center (CNREC), if the profit of wind power companies could be increased by reducing wind curtailment, it would be possible to compensate for the loss in power generation and heating services.

Utilizing curtailed wind for heating could therefore mitigate some pollution impacts and be economically beneficial. As Mr. Lishan Shi, Deputy General of the New and Renewable Energy Department under NEA, said, “wind-to-heat is a key that can open two locks”.

From pilot projects to scaling up

Wind-to-heat pilot projects have been carried out by major power companies in the Inner Mongolia and the Northeastern regions. In 2011, Datang Group, one of China’s “Big Five” state-owned power companies, launched an experimental project in Taonan, a county-level city in Baicheng, Jilin Province (See Figure 2).

Figure 2. Map of Baicheng, Jilin Province, showing the city of Taonan (Source: Google Maps)

The project coupled the Datang Taonan Heating Stations with the Datang Jilin Xiangyang Wind Farm. During the off-peak hours in the heating season, electricity generated from the 200 megawatt (MW) of wind capacity is used to heat the water in nine heat storage boilers (each is designed to hold 150 tons of water), which then provide heat to 163,000 m² of residential area, or roughly 1,630 households. The 27 GWh of wind power saved at Taonan from curtailment and converted to heat during one season is equivalent to 9,000 tons of coal equivalent, which means an emission reduction of 5,000 tons of carbon dioxide and 150 tons of sulfur dioxide.

Encouraged by the preliminary results, the NEA plans to scale up the success in Baicheng by assigning wind-to-heat projects to all the major wind power companies in the region. If all of the wind power generation capacity in Jilin Province (3,997 MW by the end of 2012) could be connected to adjacent heating systems and operate in a similar way, the would-be-curtailed wind could reduce coal consumption by 160,000 tons per heating season (a period of about four to six months).

Implementation and beyond

To utilize the off-peak wind power in a larger scale, supporting policies need to catch up with the political will. Holistic planning is necessary to allow the penetration of wind power to fit into local situations. For example, the demonstrated approach requires extensive coordination between wind farms and coal-fired heating stations, and the pricing of wind-powered heating (as well as the compensation mechanism mentioned earlier) is key to wind power companies, heating stations, and customers.

It is also important to note that wind-to-heat, without further technology improvement and innovative policies, can hardly divert China from massive coal consumption. With the current approach, even with all installed wind capacities in northeastern and northern China (eight provinces including Inner Mongolia) combined, wind-to-heat would only able to reduce coal consumption by 20 million tons per season, a mere 1.2 percent of the total annual demand for coal-powered heating in the country. For the time being, China will need to explore other alternatives to existing heating infrastructures and the utilization of curtailed wind in order to reduce coal consumption in the heating sector.

Encouraging wind-to-heat is a step forward, highlighting the diversified approach China is taking to reduce coal consumption. With more projects to follow, the country seems to be exploring all available approaches to overcome barriers to the growth of the renewable energy sector and the progress towards more sustainable lifestyles.

Wanqing Zhou is an intern with the China Program at Worldwatch Institute. 

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Germany has seen success with solar power, despite having about the equivalent solar resource of Alaska. The U.S. contains vast solar resources, but could use more federal policies to utilize this renewable resource. Trans-Atlantic collaboration could boost the transition to sustainable energy systems on both sides of the Pond. (Source: German-American Chambers of Commerce)

The U.S. and Germany are obligated, as two of the largest economies and historic emitters of greenhouse gas emissions in the world, to lead the global transition to cleaner power systems. Their success or failure in transforming energy systems has immense global signaling effects. Closer cooperation in this innovative sector could revamp a faltering historic partnership.

Germany’s chosen path to a clean energy future is ambitious and unprecedented amongst industrialized countries. The government passed a series of measures in 2011 to simultaneously move away from fossil fuels and phase out nuclear power. Renewable energy is to become the backbone of the country’s energy system – at least 60 percent of the nation’s primary energy consumption and 80 percent of electricity are to come from renewables in 2050. Meanwhile, the last nuclear reactor is to be shut down in 2022.

The country is already a leader in renewable energies. Few countries have a greater installed per capita capacity of renewables, excluding hydropower, than does Germany. Moreover, the government also envisions energy efficiency to be a key component in enabling the clean energy transition. Germany aims to reduce primary energy consumption by 50 percent by 2050 and increase energy productivity, or the GDP produced per unit of energy, by 2.1 percent per year.

The U.S. trails German ambition and lacks a federal clean energy strategy, but is nonetheless one of the most important and dynamic renewable energy markets in the world. As of the end of 2011, the U.S. led the world in installed biomass and geothermal power capacity, ranked second in total installed renewable power as well as wind power capacity, third in hydropower, and fifth in solar photovoltaic (PV) capacity. While total emissions in the U.S. have historically been higher than most other countries, no other country has seen a larger drop in energy-related greenhouse gas emissions over the past five years. Shifts from coal to natural gas in the power sector, as well as fuel efficiency improvements in the transportation sector, are the main reason for this reduction, but growing investments in renewable energies also contributed to this positive trend.

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In the first two months of 2013, there were zero requests to register  Clean Development Mechanism (CDM) projects in the world under the United Nations Framework Convention on Climate Change (UNFCCC), compared to 280 requests in January and February 2012. CDM is one of the three flexible mechanisms defined in the Kyoto Protocol that provides for emissions reduction projects with Certified Emission Reduction (CER) units, essentially credits that can be traded in emissions trading schemes. Developed countries can fulfill their commitments to reduce emissions by buying CERs from developing countries, which, in turn, achieve sustainable development by building emissions reduction projects.

The CDM provides a solution for financing low carbon projects in developing countries, as CDM projects can derive revenue from two sources: operational revenue, such as selling electricity or decomposition product, and selling the CERs from the project to Annex I (industrialized) countries under the Kyoto Protocol. For example, a wind power plant can sell its generated electricity to domestic grid companies while gaining extra income from selling CERs after achieving a certain amount of CO₂ emission reductions.

However, as shown by the lack of new CDM projects, the mechanism is failing. Due to oversupply of CERs, the price for each unit is falling rapidly. Two years ago, the CER price was above €12/ton of carbon dioxide equivalent (tCO2e) (US$15.46/tCO2e). At present, it is less than €0.5/tCO2e (US$0.64/tCO2e) (See Figure 1).

China is especially hard hit as it dominates the CDM market with the largest investment of CDM projects in the world ($220 billion, or 61.8 percent of total registered CDM projects globally). These Chinese CDM projects have supplied 738 million CERs, or 61.2 percent of all 1,200 million CERs issued from 2005 to present.

For many projects that provide emissions reductions in China, the CDM mechanism is a critical financing component, on top of an important driver of emissions reductions. Take, for example, the Shaanxi Fanshigou Wind Power Plant, which would only gain a 6.82 percent investment return by selling electricity to grid companies; a return that would be too low to attract investors given the average investment return in the wind power industry in China is 8 percent. However, with a CER price of €12/tCO2e (US$13.50/tCO2e), the income from selling CERs can increase the return to 9.53 percent (40 percent higher), making the project much more appealing to investors.

The income from selling CERs is even more important to trifluoromethane (HFC-23) decomposition projects. HFC-23 is a by-product of chlorodifluoromethane (HCFC-22), which is widely used as refrigerant. Due to its high global warming potential (11,700 times that of CO₂), HFC-23 CDM projects contributed nearly 10 percent of  total CO₂ emission reductions achieved by all China-based CDM projects while accounting for less than 0.5 percent of all CDM projects in the country.

These projects barely make a profit by selling decomposition product to other companies. The return on these projects mostly comes from selling CERs and is so sensitive to CER price that CDM developers around the world would not estimate investment returns in their project description documents when registering their projects under the UNFCCC. However, given the massive global warming potential of the compound, the emissions reductions achieved by these projects are crucial.

Under the current low CER price, Chinese CDM projects are having a hard time maintaining their businesses. According to Thomson Reuters Point Carbon, CER credit buyers are demanding price renegotiation or even terminating their contracts with Chinese CDM projects because the agreed upon price was much higher when they enrolled. More than ¥40 billion (US$6.44 billion) worth of CDM projects in China face default and carbon assets deflation. Credit Suisse, an investment bank, has downgraded China Longyuan Power Group, one of the biggest clean energy companies in the country, to “Neutral” due to low CER prices and the oversupply of CER in the European Union (EU) CDM market.

Excess supply is a major reason behind the low carbon price today. As more and more projects were registered with the UNFCCC, the number of CERs issued increased dramatically. Under basic economic theory, there are two options for dealing with oversupply and boosting the carbon price to restore a healthy market: reducing supply and (or) increasing demand.

The EU Commission decided to target supply as a short-term solution, by postponing the auctioning of 900 million allowances from the years 2013-2015 until 2019-2020. However, increasing demand will be the solution for the long-run, as the EU Commission plans to increase its greenhouse gas emissions reduction target and retire some allowances permanently.  CERs are also expected to be accepted in more carbon markets in the future; a full two-way link between the Australian emissions trading scheme and the EU Emissions Trading System is set to start no later than July 2018.

China itself is another emerging carbon market. Although the Chinese carbon market will not link to other markets in the near future, it will issue Chinese Certified Emission Reduction (CCER). Projects in China scheduled for CER could be transferred into CCER, thus reducing supply of CERs and helping to boost CER prices in the world market. In 2011, China’s National Development and Reform Commission (NDRC) initiated pilot programs for carbon emissions trading in two provinces and five municipal cities, with five of the programs having already published their implementation plans. GreenStream, a Nordic carbon asset management company, has executed emission reduction purchase agreements for approximately 1.2 million CCERs and plans to increase the portfolio ten-fold during 2013.

NDRC and the Chinese State Council have issued a number of important policies to strengthen planning and guidance on addressing climate change and promoting low-carbon development. Under the support of national policy, China’s carbon emission trading markets may have a bright future; China’s domestic carbon markets has the potential to absorb 600 million CER credits annually in the future, which should be enough to help initiate domestic emission trading.. There are many uncertainties on the UNFCCC end which would hopefully be cleared in the coming years of climate negotiation.

Lihuan Zhou is an intern with the China Program at Worldwatch Institute. 

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Sometimes it looks as if the Parties to the UN Framework Convention on Climate Change have bet large amounts of money against themselves on the success of climate negotiations.

"Are we done yet?” Poland has hardly been an enthusiastic actor in UNFCCC negotiations (Source: IISD.ca)

Countries are now engaged in an excruciatingly slow race to reach an agreement by 2015, which would for the first time commit both the developed and the developing world under “a protocol, another legal instrument or an agreed outcome with legal force” (ah, the beauty of UNFCCC language…), in order to meet the goal of 2 degrees warming by the end of the century, the “safe” limit that was agreed upon at the 2009 Copenhagen summit.

Given what’s at stake, and the inefficiencies inherent to the UN process, you’d think that the world’s nations would make sure that not a minute is lost in the talks. And yet, after a Qatari Presidency that left everyone with the vivid memory of conference chairman Abdullah bin Hamad al-Attiyah literally hammering out a last-minute deal, Poland has been designated to host the 19th annual Conference of the Parties (COP19) next October.

It may not be obvious, at first sight, why Poland hosting the climate talks seems like a step backwards. After all, the ambitions around COP19 are not to come up with a global agreement, but rather to make substantial advances on pressing issues in preparation of the Durban Platform deadline, fixed for 2015 (and a very likely French Presidency). But it helps to remember that the last COP on the road to the rather underachieving Copenhagen Conference in 2009 took place in Poznań, which could say something about the capacity of a Polish COP Presidency to pave the way for ambitious deal-making. These fears, of course, are not enough to dismiss Poland as a valuable host. What weighs heavier is that the country does have a history of blocking progress in climate negotiations, particularly at the European Union level.

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On March 15, Suntech Power Holdings Co., one of China’s largest solar photovoltaic (PV) manufacturers, failed to pay its US$541 million convertible debt, causing its stock price to bottom out. (See Figure 1.) Three days later, eight Chinese banks filed a petition asking for the company’s main operating subsidiary, Wuxi Suntech, to be declared insolvent and proceed to restructuring. With Wuxi Suntech owing the banks 7.1 billion RMB (US$1.14 billion), the company was forced to declare bankruptcy on March 20.

Figure 1: Stock price of Suntech Power Holdings Co. (Unit: USD) (Source: Google Finance)

There was discussion about whether the Chinese central government would rescue the former star of China’s solar sector, but the National Development and Reform Commission (NDRC), abiding with its new policies for renewable energy, said the government “wouldn’t and shouldn’t intervene.”

This put the municipal government of Wuxi, in China’s Jiangsu Province, in a dilemma. On the one hand, Suntech had become a model enterprise showcasing Wuxi’s sustainable development success; it would be extremely difficult for the local government to let it go. In 2012, a proposal from Suntech Power to shut down Wuxi Suntech had distressed the local government so much that the municipality made an effort to save the company, securing an additional 200 million RMB ($32.2 million) loan from the Bank of China.

But this time around, having lost the creditworthiness to receive strong support from state banks, government bailout options were limited. Wuxi Guolian Development Group, a financial company controlled by the municipal government, was expected to take over Wuxi Suntech. On March 20, a former senior executive of Guolian was assigned to be the new president of Suntech Power. This marked the official entry of local government into the restructuring process for the suffering Chinese solar company.

Suntech’s distress was not a surprise to many observers. The president of Canadian Solar, a leading PV manufacturer in China, said that Suntech’s earlier business scandals had prepared the industry for the company’s bankruptcy. And the president of Yingli Green Energy, another top PV manufacturer in China, observed that the entire industry had been struggling.

Founded in 2001 by Dr. Zhengrong Shi, Wuxi Suntech grew rapidly during the golden period of solar PV development in China. Suntech Power was formed in 2005 and was the first Chinese solar company to go public on the New York Stock Exchange (NYSE). In the ensuing two years, the company’s profit rocketed from $30 million to $170 million, making Suntech the largest solar company in China and the fourth largest in the world.

So what led to Suntech’s rapid fall? Key factors include the global economic backdrop, the company’s own management problems, and an over-heated solar industry.

Figure 2: Suntech’s total net revenue gained from different regions (2005–11)

In late 2011, the United States and the European Union—the two largest markets for China’s PV products––successively applied anti-dumping measures against China to protect their own domestic PV manufacturers. Suntech, like other Chinese PV manufacturers, was heavily dependent on exports (see Figure 2), and faced significant challenges as a result of these adjustments to international trade rules.

Suntech’s own operational strategy was not healthy, either. China uses a tax rebate policy to incentivize exports, providing a 17 percent tax rebate for PV modules being sent out of the country. Taking advantage of the policy, Suntech had received an estimated $1.9 billion in refunds over the past seven years, according to data from the company’s 2007 and 2011 Annual Reports. Suntech had been increasingly relying on these tax refunds: in 2011, the estimated rebate it received was 22 percent higher than the company’s gross profit. (See Figure 3.)

Figure 3: Comparison between Suntech’s gross profit and tax rebate values (2005–11)

Weak management of accounts also threatened the company’s capital chain. In 2011, the accounts receivable from investees of the Global Solar Fund (GSF, a problematic subsidiary of Suntech that was once subjected to a fraud investigation) reached $19.5 million, 58 percent of the total annual sales to GSF investees.

These factors rendered Suntech’s operation unsustainable. If the tax benefit dropped due to either policy change or reduced exports, the company would not be able to support itself, nor continue to operate under the huge debt it was bearing.

Moreover, Suntech’s misjudgment of the market had more than once resulted in huge losses. Examples of reckless market behavior included buying silicon polycrystal at unreasonably high prices and choosing to pursue expansion even after the market limit had been reached. Business scandals such as related-party transactions with Shi’s private companies, tax evasion, and possible tax fraud, as well as a public letter of complaint against the senior staff, further exposed the mismanagement inside the company.

Beyond these internal problems, Suntech found little support from regulatory policies. The rampant pursuit of GDP growth among local governments in China was a primary contributor to the overproduction of solar PV products in the country. In the midst of the large-scale curtailment in domestic PV production in 2011, the Wuxi government still encouraged Suntech to keep expanding, providing land and requesting that the company build another factory requiring 50,000 employees. Such practices, fueled by cheap credit from state banks, made Suntech’s failure almost inevitable.

Suntech is only one example of struggling PV manufacturing in China. LDK Solar, a company of similar scale, was caught in the same curtailment. However, through support from local government and foreign investors, the selling of subsidiaries, and better debt management, LDK is recovering.

The story of Suntech’s failure is complicated, but it reflects the urgent need for China’s solar industry to reorganize.  As the demand for PV products shifts from a handful of European countries to other emerging markets, fluctuations in the market have taught PV manufacturers to manage risk more carefully. Right now, an industry-wide consolidation is in process, not only in China, but also elsewhere in the world, including in the United States. As the market cuts out the least efficient firms, as with Suntech, a healthier and more mature solar industry will emerge.

Wanqing Zhou is an intern with the China program at Worldwatch Institute. Haibing Ma is the China Program Manager at Worldwatch Institute.

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The English version of this blog is available here.

Por Cinthya Alfaro Zúñiga

Al ser costarricense y becario de investigación para Worldwatch Institute/INCAE, me brindó mucha satisfacción asistir al 21 Foro Regional de la Alianza en Energía y Ambiente con Centroamérica(AEA) que tuvo lugar en Costa Rica a principios del mes de marzo. El objetivo principal de la AEA es brindar financiamiento para proyectos de energía renovable, sin embargo también busca desarrollar capacidades al explorar diversos temas como las diferentes tecnologías energéticas, las políticas requeridas para una implementación exitosa y los obstáculos y oportunidades regionales por medio de diálogo entre las partes involucradas.

Worldwatch e INCAE presentan la primera fase del proyecto “El Futuro de la Energía Renovable en Centroamérica” en Costa Rica en Marzo.

Bajo el título de “Biogás y Eficiencia Energética en Centroamérica”, el más reciente Foro reunió a un grupo de 200 expertos, desarrolladores de proyectos, representantes gubernamentales, financistas y el público en general. Los ponentes se refirieron a temas como la contribución a la reducción de emisiones de carbono por parte de las políticas de eficiencia energética y de la energía renovable. Otros tópicos importantes incluyen el estado de la eficiencia energética y del biogás en Centroamérica, así como un recorrido por los proyectos de la AEA en ambos temas.

La actividad de tres días contó con ponentes de la Agencia de Cooperación Alemana (GIZ), el Instituto Costarricense de Electricidad (ICE), la Comisión Económica para América Latina y el Caribe (CEPAL), el Banco Centroamericano de Integración Económica (BCIE), y el Worldwatch Institute, entre otros.

Por parte de Worldwatch Institute, el Presidente Emérito Christopher Flavin hizo una presentación sobre el estado global de la energía renovable, y el Director de Clima y Energía Alexander Ochs resumió los resultados de la primera fase del proyecto Worldwatch Institute/INCAE “El Futuro de la Energía Renovable en Centroamérica”, que aplica la metodología de Hoja de Ruta para la Energía Renovable del Instituto a la región. La Dra. Ana María Majano, Directora Adjunta del Centro Latinoamericano para la Competitividad y el Desarrollo Sostenible del INCAE Business School, acompañó a Ochs al ser INCAE el socio local principal para la implementación del proyecto.

Este es un momento importante para el proyecto centroamericano Worldwatch/INCAE, pues su primera fase está por terminar. Durante el año pasado,  a través de extensa investigación, entrevistas, visitas a los diferentes países y talleres de consulta, nuestro equipo ha explorado la situación energética actual en Centroamérica, enfocándose en el estado actual y en futuros potenciales de las tecnologías de energía renovable. El proyecto analizó las oportunidades socioeconómicas relacionadas con la energía renovable, evaluó las barreras y facilitadores financieros y de inversión, y desarrolló recomendaciones de políticas para acelerar soluciones energéticas que sean socialmente, económicamente y ambientalmente sostenibles.

Ambos Ochs y Majano presentaron casos de éxito así como las limitantes para el acierto futuro del sector de energía renovable en Centroamérica. Actualmente la región se apoya fuertemente en grandes hidroeléctricas para la generación eléctrica y en el uso de biomasa tradicional para cocinar, y su dependencia en combustibles fósiles crece para poder satisfacer sus necesidades de transporte y energéticas en general. La región centroamericana también es líder mundial en la generación eléctrica geotérmica, sin embargo tiene un potencial significativo sin explorar en geotermia, eólico, solar, biomasa y pequeñas hidroeléctricas.

El estudio de Worldwatch/INCAE encontró que una planeación integrada es necesaria en el sector energético de la región, ambos entre países y entre tecnologías. Encontró, además, que actores claves del sector necesitan coordinar sus actividades y compartir información. El reporte también identificó la necesidad de llevar a cabo análisis de costo nivelado de la energía (LCOE en inglés) para poder comparar con precisión los costos financieros, ambientales y sociales de las diferentes tecnologías de generación eléctrica.

Dr. Ana María Majano, Directora Adjunta Centro Latinoamericano para la Competitividad y el Desarrollo Sostenible (CLACDS), acompañó en la presentación como socio local principal para la implementación del proyecto.

Este reporte contiene un amplio análisis sobre el estado actual de los combustibles convencionales y de la energía renovable en Centroamérica, así como el potencial de cada uno. El panorama más amplio de este análisis indica que el periodo de 1990 a 2011, la generación eléctrica (que representa un 12% del consumo energético final de la región) incrementó de menos de 15,000 gigawatt-hora (GWh) a más de 40,000 GWh. La región actualmente genera un 62% de electricidad por medio de energía renovable, mucho menos del inicial 91% en 1990. El aumento en generación a base de combustibles fósiles ha crecido dramáticamente de un 9% en 1990 a un 38% en el 2011.

El estudio continúa con un detallado análisis del potencial de las diferentes tecnologías. Por ejemplo, los fotovoltaicos están sub-utilizados. Únicamente hay dos plantas de escala-comercial en operación, en Nicaragua y Costa Rica, y aún no son competitivas en términos de costos con otras tecnologías de generación.

El reporte explora las oportunidades socioeconómicas que ofrecen las renovables, teniendo una clara ventaja sobre los combustibles fósiles al considerar externalidades como los costos en salud e impactos del clima, entre otros. Dado que la región requerirá de 6,300 megawatts (MW) – 7,300 MW de capacidad instalada adicional para el 2020, estas oportunidades socioeconómicas deben ser consideradas en los procesos de toma de decisiones.

Los hallazgos también incluyen información importante respecto a las inversiones realizadas en energía renovable, así como las necesidades financieras futuras del sector. Por ejemplo, si la región ha de cumplir su Estrategia Energética Sustentable Centroamericana 2020 – estrategia convenida por los Directores de Energía, los Directores de Hidrocarburos y los Ministros de Energía de la región en el 2007 para asegurar la calidad, cantidad y diversidad de fuentes para el abastecimiento energético – para el final de ese año, aproximadamente de $12 – $18 mil millones deben ser invertidos. Esto será influenciado mayormente por el clima general de inversión del país. El reporte también analiza los mecanismos de apoyo existentes para la energía renovable de varias fuentes, tales como públicas y de financiamiento de clima.

A lo largo del reporte hay ejemplos de casos de éxito y mejores prácticas, ya sean iniciativas rurales solares en Nicaragua y micro finanza verde en Honduras. El documento termina con recomendaciones dirigidas a impulsar la energía renovable en la región, así como las prioridades identificadas durante la fase inicial del proyecto para Centroamérica.

La primera prioridad es ampliar el acceso a la energía para aquellas comunidades marginadas por medio de energía renovable distribuida y el uso sustentable de leña. La segunda prioridad es revertir el crecimiento en electricidad generada con combustibles fósiles y satisfacer la demanda energética futura en áreas conectadas a la red con energía renovable y eficiencia energética.

¿Cuál es, entonces, el camino por delante? Durante la segunda fase del proyecto (2013-2014), Worldwatch e INCAE desarrollarán Hojas de Ruta de Acciones para la Energía Sustentable para la región. Estas explorarán la electrificación, uso sustentable de la leña y la disminución del crecimiento en el consumo de combustibles fósiles por medio de fuentes renovables de pequeña y grande escala. La tercera fase (2014-2015) constará de entrenamiento y ejercicios de aprendizaje uno a uno. Aunque el “Futuro de la Energía Renovable en Centroamérica” es ambicioso y falta camino por recorrer, el resultado se espera que sea transformador para la región.

Cinthya Alfaro Zúñiga es becario de investigación para Worldwatch Institute/INCAE en el proyecto “El Futuro de la Energía Renovable en Centroamérica”.

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