Part 3: Analyzing the Dominican Republic’s Public Financial Incentives to Promote Renewable Energies
This series of blogs explores current mechanisms in place to finance renewable energies in the Dominican Republic. Be sure not to miss Part 1 on the Dominican Republic’s clean energy entrepreneurs, and Part 2 on the Dominican Republic’s comprehensive legal framework regulating renewable energy technologies.
Worldwide, growth in renewable energy has consistently been a policy-driven process. The design of supportive policies, as well as their effective implementation, has been critical in countries that were successful in developing a favorable investment climate for renewables.
Development of renewable energies in the Dominican Republic is incentivized by a comprehensive set of regulations
In the Dominican Republic, a whole corpus of domestic laws recognizing the necessity to transition the energy sector to cleaner fuels has been instituted during the past decade, culminating in 2007 with the publication of Law 57-07 and its appending regulation, which sets a solid legal foundation to incentivize renewable energy technologies development, including cost reductions policies such as tax exemptions, loans, capital subsidies, and a Feed-in-Tariff (FiT).
Yet some major barriers remain, hindering sustained growth in the renewable energy sector. The first is the length and unpredictability of administrative procedures to obtain a concession and benefit from the tax credits and tax exemptions laid out in Law 57-07. Business stakeholders have noted, however, that the process has improved considerably in recent years. A second major barrier is uncertainty regarding implementation and regulation of the FiT laid out in Law 57-07, particularly for solar development. Other barriers include a lack of capital availability, the absence of long-term, concessional commercial loans, the difficulty in accessing international financing for renewable energy and energy efficiency, and a lack of knowledge and awareness of financing opportunities and conditions of international climate finance institutions.
Some of these barriers could be effectively addressed simply through better execution of the existing laws and regulations described below.
|Type of incentive||Details|
|Import tax||100% tax exemption on the import of equipment, machinery, necessary to the production of renewable energies, as well as transformation equipment, transmission, and interconnection of electrical energy to the grid|
|Tax on the Transfer of Industrialized Goods and Services (ITBIS)||100% exemption on the ITBIS for projects based on renewable energies, a value-added tax applicable to the transfer and importation of most goods and services|
|Income tax||Generators are exempted of the tax derived from income from the generation and sale of electricity from renewable sources.
Installers are exempted from the tax on income derived from installation of equipment with a minimum of 35% of the value to be produced in the Dominican Republic. The exemption applies for 10 years, and up to 2020.
|Low interest rate on external financing||Payment of interest rate for external financing for renewable energy projects is limited to 5%|
|Tax credit for self generators||An exemption on the income of the owner of renewable energies technologies equipment for up to 75% of the equipment’s costs.|
|Low interest loans for community projects||Grants and very concessional loans to finance up to 75% of the cost of the equipment. Small scale installation (<500kW) developed by communities or social organizations|
|Feed-in-Tariff (FiT)||Mandates a price to be paid for power produced from renewable energy resources. The Dominican FiT fixes a premium payment on top of the wholesale electricity price for a period of 10 years and up to 2018|
|Net metering (not included in 57-07, August 2011)||Wind and solar small residential self-producers with a capacity of no more than 25 kW, and commercial self-producers with a capacity of no more than 1 MW can deduct their energy outflows from metered energy inflows|
Financial incentives for renewable energy development in the Dominican Republic,
Source Law 57-07, compiled by Worldwatch Institute
THE SUCCESS OF TAX EXEMPTION MEASURES
To introduce renewable energies in a nascent market, lowering import taxes for these technologies is an effective way of reducing investments costs. Law 57-07 sets forth a broad range of tax incentives to support wind (<50 megawatts (MW) per project), small hydro (<5 MW per project), solar photovoltaic and solar thermal (< 120 MW per project), biomass (<80 MW per project), biofuels, and oceanic technologies.
The rapid increase in the amount of exemptions granted shows the investors’ rising interest in the government’s incentives program. From 2008 to 2010, applications for tax exemptions rose steadily and more than tripled in 2010, reaching 231 that year. Applications for self-generation projects constituted 83 percent of the total number of applications for tax exemption in 2010. However, 95 percent of the total value of import tax exemptions granted in 2010 was allocated to equipment for utility-scale wind parks. This shows an increase in the import of equipment for residential and commercial projects, usually solar and small wind systems, but also of larger industrial and utility scale projects such as the 33.5 MW wind farm in Los Cocos and Quilvio Cabrera, which is to be operational mid-October.
NET METERING: GOOD NEWS FOR SELF-GENERATORS
CNE and CDEEE recently jointly drafted a regulation on net metering, published on June 29th, 2011. It applies to small residential self-producers with a capacity of no more than 25 kilowatts (kW) and to commercial self-producers with a capacity of no more than 1 MW, for the time being limited to only wind and solar technologies. Eligible producers receive credits for grid electricity equal to the excess power they send back into the grid, at the retail rate in place in December 2011. Success in implementing the net metering scheme would provide valuable financial support for self-producing residential and commercial users.
THE FEED IN TARIFF’S DIFFICULT START
Law 57-07 also establishes a ten-year FiT for grid-connected renewable energy installations for both utilities and self-generators, fixing a premium payment on top of the wholesale electricity price. The rates for solar energy published in the regulation are on the higher end of international benchmarks for solar rates. Because of the FiT’s high rates, the release of the FiT rate information in 2008 attracted many investors and increased the Dominican Republic’s image as a favorable renewable energy investment environment.
|Country||System Type||KW||Rate (US $) in 2011 (Jan-June), *Except DR: 2008|
|US Ontario (Ontario Power Authority)||Rooftop||<10||0.80|
Selected FiT rates for Solar PV
Source Global Feed-in-tariff tracker, PV News, Vol.30, August 2011
However, by August 2011, none of the FiT payments have yet been carried out, as the Corporación Dominicana de Empresas Electricas Estatales (CDEEE), a state-owned holding company in charge of hydroelectric generation and controlling power transmission and distribution, has not implemented the tariff. Contrary to FiT experiences in other countries like Germany, distribution companies in the Dominican Republic have only a limited ability to pass on the price premium to consumers. Distribution losses in the Dominican Republic have historically been relatively high: in 2008, the World Bank estimated distribution and transmission losses to count for 11% of the total power output. Sustained poor service quality and relatively high prices have induced theft through illegal connections and non-payment of electricity bills. Data by the state holding CDEEE regrouping the Dominican Republic’s public utilities shows that in January 2008, only 66.3% of the power purchased by the distribution companies was paid for by consumers. Amongst these consumers, few are “typical payers” of the full electricity price, as many are also heavily subsidized by the government. To help incentivize the development of renewable energies despite these conditions, Law 112-00 established a national Fund to develop renewable energies and more recently, law 57-07 allocated some of the Fund’s resources to help utilities pay for the FiT. Sourcing its revenues from a 5% levy on the country’s fossil fuels imports, the Fund would to finance projects for the promotion of alternative, renewable or clean energy and energy savings. However, this fund has not yet been created.
The Fund will be the topic of the final part of this blog series, stay tuned!