Monday, October 3, 2016

Investment planning for energy-agriculture nexus

15th WREC (World Renewable Energy Congress) took place at the Jakarta International Convention Center in Indonesia on 19-23 September alongside the Indonesia Renewable Energy and Energy Conservation Summit 2016. It was attended by 457 participants, comprising Indonesians and foreigners from 68 countries. As many as 122 scientific papers on renewable energy are presented at the congress. Some of them are discussing energy-agriculture nexus through bioenergy, geothermal and solar. Participants from Indonesia gained knowledge and network about business, policy and technological developments in the energy-agriculture sector, from from overseas businessmen and experts in the congress.

Renewable energy interventions in an agriculture-food enterprise include the introduction of renewable energy technologies or of energy efficiency measures, which can result in improvement in energy intensity. Each step of agriculture value chain presents different challenges to ensure that the relevant energy services are provided efficiently, cost effectively and minimizing the reliance on the fossil fuel market. Applying the value chain approach, it becomes evident how the value of food products tend to increase as more processing occurs and more inputs (energy, water, packaging materials) are consumed. The energy interventions considered span from solar-power irrigation systems to cooling and cold storage facilities, and from the use of residues for energy production to geothermal energy for food processing. These concepts were explored in the WREC.

The congress was conducted by World Renewable Energy Network in conjunction with Energy and Mineral Resources Ministry. The summit emphasized the government’s pathway to revising the paradigm in relation to the use of renewable energy, from viewing this type of energy as a mere alternative to existing fossil-based energy, to seeing it as a key component of the country’s energy mix. However, most of the government’s subsidies still go to fossil fuels, which are bad for the environment and are non-renewable. These subsidies must be shifted to finance the development of renewable energy sources.

Aside of subsidies, there are several financing tools for funding renewable energies in the agricultural sector, such as microfinance, soft loans and loan guarantees, grants, venture capital and  private equity, and their various combinations through public-private-community partnerships. Some local and international microfinance institutions, as well as banks have showed their interest to finance clean energy projects. The WREC became a milestone and assistance in finding investors and preparation of projects for investment.

In principle, clean energy projects are distinguished between on-grid and off-grid systems. Grid-tied energy systems can use the grid as back-up in cases of temporary unavailability of the renewable energy source. Besides, with feed-in tariff exists, income from the energy project can be generated by supplying electricity to the grid. For instance, gasification technology is one possibility to convert biomass to power, heat and biofuels. A possible feedstock for a gasifier can be agro waste, e.g. rice husks.

Off-grid systems are decentralized energy systems that are not connected to the national grid. They present a huge potential especially for not yet electrified remote areas in developing countries, and can supply individual households or whole communities. Common renewable off-grid systems are solar home systems, biogas plants, solar water heaters, small-scale wind power and micro-hydro power plants.

The clean energy investment must be contextualized into an economic, institutional, social and technical framework to identify relevant barriers and constraints. The first step is the identification and description of both the benchmark scenario and the investment scenario. For instance, an irrigation system can be powered by a diesel pump (benchmark scenario) or by a solar photovoltaic (PV) powered pump (post-energy intervention scenario). The financial analysis of an investment in the PV pump would require the comparison between the two scenarios.

Then second step is the identification of the investment’s outcomes, including the capital and operating costs and the monetized benefits. Because costs and benefits do not occur at the same time – with costs generally preceding and exceeding benefits during the first years of the project – the comparison requires discounting techniques.

The third step is the determination of the project’s incremental net flows, which results from comparing costs and benefits of the project with costs and benefits of the benchmark scenario. With these elements, it is possible to calculate the financial project profitability indicators. The next steps are converting market prices into economic/shadow prices; removing transfer payments (e.g. taxes and subsidies) and quantifying positive and negative externalities to calculate the economic flows. Afterwards, it is better to perform Sensitivity Analysis in order to deal with the main risks and uncertainties that could affect the proposed project.

For a first impression of the profitability of a project, one needs to sum up all relevant factors that make up the total revenue and the total cost, and compare the results. By applying the methods of capital budgeting, more reliable result can be achieved.

In case of biogas and solar, the economic viability of a small-scale biogas plants depends on the availability of organic material, the type of end product and its market demand. The revenue is composed by sales of the end products and the avoided payments for formerly used fuels. The initial investment constitutes the main part of the total cost. Meanwhile, the profitability of a solar dryer depends mainly on the demand and market value for dried fruits and vegetables. For the costs it has to consider the initial investment and additional cost items during operation.

Once the investment done, governments and other stakeholders still need to assess and improve the other framework conditions. Collaboration among governments, the business sector, scholars and global experts is suitable approach to explore innovation and accelerate clean energy development for green growth.

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