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Analysis of renewable energy incentives in the Latin America and Caribbean

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DOI: 10.1016/j.enpol.2012.09.024

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Energy Policy 60 (2013) 601–610

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Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Analysis of renewable energy incentives in the Latin America and

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

H I G H L I G H T S

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

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

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

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

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

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

Table 1
LAC renewable energy targets.

LAC countries Renewable energy target

Argentina 8% of electricity demand by 2016

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

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

their own formal renewable energy targets by legislation or decree

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

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

Table 2
Design and low-risk options for FITs.

Design issue Options Low-risk option

Interconnection and purchase  Guaranteed interconnection All, where applicable

requirements  Priority interconnection
 Guaranteed purchase
 Priority dispatch

Contracts  No contracts Standard contracts

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

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

Rate setting basis  Generation cost-based Generation cost-based

 Value-based (e.g. avoided costs)

Payment structure  Fixed price schedule Fixed price schedule

 Premium payment
 Spot market gap payment

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

Amount purchased  100% 100%

 Partial purchase (e.g. only net
excess)

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

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

through a synthesis of existing literature (Corfee et al., 2010;
DBCCA, 2009; Rickerson et al., 2011) and through interviews with
commercial lenders and other renewable energy financiers. There
have been multiple efforts to create in-depth catalogs of feed-in
tariff designs and best practices in recent years (Couture et al.,
2010; DBCCA, 2009; Grace et al., 2008; Klein et al., 2008;
Mendonc- a et al., 2009). Best practice benchmarking is a useful
tool, but it is difficult to use best practices to broadly define FIT
policy regimes. Each country has adapted its FIT to reflect its
specific policy goals and constraints. As a result, there is atleast
one exception that can be found for every FIT ‘‘rule’’. This
variation makes it difficult to establish the boundaries of FIT
design. Moreover, FITs are complex policy packages that can
combine both regulatory measures (e.g. interconnection guaran-
tees) and incentives (e.g. $/kWh payments). It is challenging to
define FITs because of the range of regulatory and financing
options that may be considered. This section uses investment
risk as a lens through which to compare and categorize FIT
designs. In addition to providing a useful tool for framing policy
design trade-offs, a focus on investment risk is relevant given the
recent credit crisis and given the need to mobilize financial
resources to meet power sector investment needs in the LAC
region (Byer et al., 2009) and globally (DBCCA, 2010; IIGCC, 2010).
Table 2,2 lists the design options available for each parameter
and suggests the option that is the lowest risk from an investor
perspective. Each option and its risk implications are discussed in
the following section. This framework builds on similar
approaches proposed by DBCCA (2009), the California Energy
Commission (Corfee et al., 2010) and others. It should be noted
that the table does not include aspects of the design that may be
critical to market participants, but do not have an impact on
investor perspective such as technology eligibility (which tech-
nologies can take part in the FIT) and rate differentiation
(whether each technology gets its own rate, etc.). The table also
does not take into account factors that may impact risk, but that
2
From an investor’s perspective, short term contracts which allow to recover
all costs in a short period of time would be the lowest risk option. This is especially
true in developing countries with substantial political risk. However, the shorter
the tariff payment period, the higher the tariff payment has to be. Implementing
very high tariffs for a few years of power plant operation is politically difficult. In
addition, policy makers tend to prefer longer term contracts in order to assure that
power producers continue producing powers over the full economic lifetime of the
power plant. In other words, longer term contracts will incentivize proper plant
maintenance and operation.
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604 D. Jacobs et al. / Energy Policy 60 (2013) 601–610
are not directly part of the FIT policy design, such as whether the
purchaser of the renewable electricity is creditworthy, etc.
2.1. Interconnection, purchase, and dispatch requirements
An important component of FIT policy is the rules that govern
how power generators connect to and actually ‘‘feed’’ electricity
into the grid. Design can include some or all of the following:
 Guaranteed interconnection. Independent power producers
(IPPs) are guaranteed the right to interconnect to the trans-
mission and/or distribution grid where feasible. Guaranteed
interconnection is often accompanied by standardized and
transparent interconnection rules.
 Priority interconnection. In cases where there is a lengthy queue
of new energy capacity that is awaiting interconnection
approval, new renewable generation moves to the front of
the line.
 Guaranteed purchase. The utility (or other entity such as a
transmission system operators or government agency) is
required to purchase 100% of a generator’s output. This can
be paired with rules to prevent curtailment or to specify
compensation for curtailed production (Rogers et al., 2010).
 Priority dispatch. Depending on market structure, generators
must obtain dispatch and transmission service in addition to
securing a customer (i.e. electricity purchaser) and intercon-
nection. Priority dispatch means that renewable generators are
dispatched ahead of non-renewable generation.
Risk impact: Guaranteed and priority interconnection lowers
development risk by reducing uncertainty surrounding the
amount of time required for project completion. Guaranteed
purchase requirements eliminate the risk that a project might
not be able to secure a power purchase agreement. Rules ensuring
no curtailment, or financial compensation for curtailment,
decrease revenue variability and overall project risk. Priority
dispatch reduces the risk that a generator might not be able to
secure transmission capacity.
2.2. Standard contract
Most FITs typically involve a contract between the purchaser
and generator. A standard contract ensures that the terms and
conditions of the power purchase are transparent and known in
advance. Without standard contracts in place, each project must
negotiate contract terms on a case-by-case basis. Contract nego-
tiations can cause significant project delays and may also result in
failures to reach agreement.
Risk impact: Contracts are typically a prerequisite for securing
financing. Standard contracts, with limited flexibility for project-
specific needs, reduce the legal risk associated with contract
negotiation.
2.3. Contract length
Long-term contracts are an important feature of FIT design.
Internationally, FIT contract terms of 15–20 years are typical
(Klein et al., 2008; SEMI PV Group, 2009), although there are
exceptions on both sides of this range.
Risk impact: Long-term contracts reduce the exposure of
project revenues to electricity price volatility, are often a require-
ment for attracting financing, and can also reduce the levelised
cost of energy (de Jager and Rathmann, 2008; Rickerson et al.,
2012). Contracts that are similar in length to the expected project
service life also reduce the risk of having to re-contract after the
policy period ends. A possible exception to this rule is biomass
plants with short-term fuel supply contract, because incentive
payments that extend beyond fuel contracts may not account for
the generator’s fuel price risk.
2.4. Rate setting basis
FIT rates are typically set using either a cost-based or value-
based approach. Cost-based approaches take into account the
generation price of a given technology plus a reasonable profit.
Value-based calculations are set based on measures of value such
as the avoided costs of conventional power generation and/or the
societal benefit created by renewable generation (e.g. the envir-
onmental value, the value of the generator to the grid3, etc.).
Risk impact: Calculating FIT rates based on generation cost is
more likely to result in an incentive that will provide a reasonable
rate of return to investors. Value-based approaches will attract
financing only if the final rate happens to coincide with the rate
required for investment.
2.5. Payment structure
FIT incentives are performance-based (i.e. $/kWh) and are cash
payments (i.e. rather than tax credits). Different countries have
taken different approaches to structuring the payment itself: a
schedule of fixed payments, a premium paid on top of the
wholesale market price, and payments for the difference between
a guaranteed rate and the wholesale spot market price (some-
times called a ‘‘spot market gap model’’) (Couture and Gagnon,
2010). The premium and spot market gap models have been
implemented most notably in countries that have competitive
wholesale electricity markets.4 A well functioning and liquid
wholesale market requires an adequate number of buyers and
sellers trading electricity. Long-term contracts for electricity
(such as fixed payment FIT structures) insulate generators from
the need to participate in the market. The goal of the premium
and spot market payment structure models has been to encou-
rage FIT-supported generators to participate in the market while
at the same time providing generators with incentive payments.
Risk impact: From an investment perspective, a fixed price
payment schedule is preferred because it provides certain reven-
ues over time and its simplicity and transparency make it easy for
investors to evaluate and assess.
2.6. Commodities purchased
FITs are primarily considered a vehicle for purchasing elec-
tricity. Depending on the national (and international) policy
environment, however, renewable electricity can be associated
with additional commodities, such as renewable energy credits,
thermal energy, emissions abatement credits, capacity, and/or
ancillary services (Grace et al., 2008). FITs can specify whether
some or all commodities transfer to the purchaser.
Risk impact: FIT rates that assume generators will sell other
commodities (e.g. carbon credits) separately expose generators to
the risks associated with concluding multiple transactions with
multiple counterparties. From an investor perspective, it is pre-
ferable that all commodities be bundled under one contract and
purchased for a rate that provides a reasonable return.
3
For example, the feed-in tariff in Portugal is set based on the avoided cost of
electricity from conventional generators, the value of environmental costs (based
on CO2) avoided by renewable generation, and the value of the losses avoided in
the transmission and distribution grid by the renewable generators (Heer and
Langniß, 2007).
4
Spain, for example, has used in the past both, a fixed and a premium
structure, whereas the Netherlands used a spot market gap structure.
 Author's personal copy
D. Jacobs et al. / Energy Policy 60 (2013) 601–610
2.7. Amount purchased
FITs typically purchase 100% of a generator’s output for both
centralized and onsite generators. During the past few years,
however, several FITs have been established to purchase of only a
portion of an onsite generators’ output. In some cases (e.g. Japan
prior to 2012 and some states in Australia), the FIT applies only to
the generation produced above onsite consumption. In other
cases (e.g. California), the generator can choose whether to enroll
in a 100% purchase program, or whether to only sell net genera-
tion (Rickerson et al., 2008). This has led policy to distinguish
between ‘‘gross’’ FITs, under which 100% of electricity is pur-
chased from onsite generators, and ‘‘net’’ FITs under which only
excess electricity is purchased.
Risk impact: Gross FITs are preferable to net FITs from an
investor perspective. The portion of electricity consumed onsite
under a net FIT is riskier to finance than the portion sold for
several reasons:
 Onsite energy consumption is typically not secured by a
contract.
 The host facility may not be as creditworthy as the FIT
purchaser (e.g. a utility).
 The rate at which the onsite consumption is credited to the
generator is typically based on electricity market prices, rather
than fixed over time. If electricity rates fluctuate, or if the host
facility’s rate classification changes, this can adversely impact
project revenues.
It is also challenging to evaluate the amount of power that will
be consumed onsite and how much will be exported, since this
can vary with facility output and with onsite load, and this creates
additional uncertainty.
2.8. Adjusting the policy
The available FIT rate can be adjusted for future contracts to
reflect changing market conditions in several ways. Examples
include adjustments to the available rate after periodic review
(e.g. biannually), automatic adjustments after a set time period
(e.g. 5% decline each year), automatic adjustments after a certain
amount of capacity has applied for the incentive (e.g. 5% rate
decline after the first 100 MW), or automatic adjustments in
reaction to market growth (e.g. 5% rate decrease if more capacity
is added in one year than projected) (Jacobs and Pfeiffer, 2009).
Risk impact: The approach to policy adjustment has significant
implications for investor security (Lüthi and Wüstenhagen, 2009;
Ölz and Beerepoot, 2010). In order to minimize perceived policy
risk and the chilling effect that adjustments can have on invest-
ment, it is important that:
 the adjustments apply to future contracts only,
 the timing (or triggers) of adjustments be known in advance,
 the adjusted rates continue to reflect market conditions to the
extent possible in order to ensure a reasonable return, and
 the adjustments do not occur too frequently.
2.9. Caps and queuing
Some FITs include caps in order to contain potential ratepayer
impacts, and in recognition of transmission constraints, etc. Caps
can be set using different metrics, such as the amount of total
capacity or total generation supported under the policy, or the
maximum acceptable ratepayer impact. In cases where it is likely
that demand for the FIT incentive will exceed the cap, it may also
605
be necessary to establish queuing procedures to govern how
generators can get in and out ‘‘of line’’ for the incentive.5
Risk impact: From an investment perspective, an uncapped FIT
is the lowest risk option. Caps introduce uncertainty and devel-
opment risk for generators. If caps are put in place, the mechan-
isms governing them should be transparent and stable. Capacity
caps can be more transparent than generation or ratepayer
impact caps since they can be tracked on an ongoing basis using
a project registry or similar mechanism. Progress towards gen-
eration and ratepayer impact caps, by contrast, can only be
determined through hindsight (e.g. retrospectively at the end of
a year). Queuing regulations, like caps, should also be as trans-
parent, clearly defined, and stable as possible in order to max-
imize investor confidence in the system.
3. Comparing FIT legislation in LAC countries with
low-risk design
Seven LAC countries have experience with FIT implementation.
This section profiles only FIT policies for on-grid resources,
namely those in Argentina, the Dominican Republic, Ecuador,
Honduras and Nicaragua. Brazil used a FIT only in the first half of
the 2000s (PROINFA, see e.g. Dutra and Szklo, 2007; Kissel and
Krauter, 2006), but has since transitioned to an auction system.
Peru recently implemented a FIT, but only for off-grid renewable
energy resources.6 Neither of these countries will be discussed in
this article. This section provides an overview of the relevant
pieces of national renewable energy legislation, evaluates the
effectiveness of national support and compares the FIT policy in
each country to the low risk FIT design described above. The
analysis is then summarized in Table 8 at the end of the Section.
3.1. Argentina
3.1.1. FIT design
Argentina has supported renewable electricity since 1998
through its National Wind and Solar Energy Rules (Régimen
Nacional de Energı́a Eólica y Solar).7 The law included a premium
payment for renewable generators set 40% above the wholesale
market price. This law was replaced with the current FIT law in
2006 with the passage of its National Regime of Support of
Renewable Energy Sources for Electricity Generation (Régimen
de Fomento Nacional para el uso de fuentes renovables de energı́a
destinada a la producción de energı́a eléctrica).8 Certain provinces
in Argentina, including Santa Cruz and Chubut, offer additional
tariff payments. Although the FIT was passed in 2006, it was not
implemented until May 2009 with the National Decree 5620/
2009.
The current FIT supports wind, solar, geothermal, hydro,
biomass and biogas generators up to 30 MW in size. Eligible
generators can receive a fixed premium payment on top of the
wholesale electricity price for 15 years. The tariffs are differen-
tiated according to PV and non-PV generators. Non-PV generators
can receive a premium payment of $0.004/kWh (Arg$ 0.015/
kWh), whereas PV generators can receive $0.242/kWh (Arg$
0.90/kWh) (Table 3). Significantly, the tariff levels are defined as
maximum payments, rather than minimum payments. In the case
5
Queuing is beyond the scope of this article and contains its own sets of
design issues, such as milestone requirements, wait list structure, administrative
fees, security deposits, management responsibility, etc.
6
Peru does not use a FIT to develop grid-connected renewable energy
systems; instead, it has used an auction since 2009. The national legislature
implemented a FIT for off-grid renewable energy systems in August 2010.
7
This policy is also known as Law no. 25, 019.
8
This law is also known as Law 26, 190.
 Author's personal copy
606 D. Jacobs et al. / Energy Policy 60 (2013) 601–610
Table 3
Tariffs for renewable electricity in Argentina.
Technology Max incentive
rate ($/kWh)
All renewable energy technologies $0.004/kWh
(except solar PV) (Arg$0.015/kWh)
Solar PV $0.242/kWh
(Arg$0.90/kWh)
of solar PV, for instance, a payment level of ‘‘up to’’ $0.242/kWh
(Arg$ 0.90/kWh) is guaranteed. Therefore, the legislation creates
the risk that project developers will have to negotiate contracts
on a case-by-case basis. The FIT premiums are to be paid through
a national fund, which will be managed by the Federal Council of
Electricity (Fondo Fiduciario de Energias Renovables). The fund is to
be financed via a surcharge per megawatt-hour sold nationally.
3.1.2. FIT evaluation
Argentina’s FIT includes certain low-risk components, such as
a long-term payment guarantee. The policy diverges from the
design described above (Table 2) in several ways: the incentive is
a premium on top of the wholesale electricity price, rather than a
fixed price payment, the prices appear not to be generation cost-
based, and prices are too low (even given Argentina’s strong
winds) to provide a reasonable return. Theoretically, the max-
imum tariff of $0.24/kWh for solar PV should be in the range of
the actual power generation costs. However, apparently this
maximum tariff has not yet been granted to any PV power
producers.
In 2008, the spot price on the wholesale electricity market was
$57.2/MWh (Arg$180/MWh) and $52.4/MWh (Arg$165/MWh) in
2009. Adding an additional $3.8/MWh (Arg$15/MWh) to these
rates does not make projects financially viable—recent wind bids
under a parallel auction scheme, for example, have been in the
range of $120-$158/MWh (Arg$466-614/MWh). The total $61.00/
MWh (Arg$240.54/MWh) FIT rate9 would cover only half of these
bids. In addition, there is no standard contract since the tariffs are
set as a maximum level, rather than a minimum guarantee.
Finally, the legislation does not include special provisions regard-
ing grid connection or dispatch.
3.2. Dominican Republic
3.2.1. FIT design
In 2007, the Dominican Republic passed the Law no. 57.07 of
Incentive to Renewable Energies and its Special Regimes (Ley no.
57.07 de Incentivo a las Energias Renovables y Regı́menes Especiales)
to support renewable energy generation. The goals of the law are
to reduce oil imports, diversify the country’s generation portfolio,
and attract private investment. The regulatory framework for the
law was established under Decree no. 202-08 in 2008. The law
sets forth FITs, tax incentives and financing programs to support
wind (o50 MW), small hydro ( o5 MW), PV, solar thermal,
biomass (co)generation ( o80 MW), biomass, biofuels, and ocean
energy systems.
The law and Decree establish a 10-year FIT that includes a
premium payment on top of the wholesale electricity price. Under
the Decree, the payment increased by 4% in 2009 and 2010, and
adjusts according to the US Consumer Price Index (CPI) through to
2018. From 2018 to 2027, the available rate will adjust according
to the US CPI minus one percentage point.
9 11
Calculated based upon 2009 wholesale electricity spot market price ($52.4/
MWh) plus the $3.8/MWh add on.
Table 4
Prices and technologies recognized by Dominican Republic’s FIT.
Technology Price ($/kWh)
Wind generator $0.13
Wind self-generation $0.05
Biomass electricity generator $0.12
Biomass electricity for self-generation $0.05
Municipal solid waste electricity generator $0.09
Photovoltaic generator 425 kW $0.54
Photovoltaic self-generation 425 kW $0.10
Photovoltaic generator o 25 kW $0.60
Photovoltaic self-generation o25 kW $0.10
Small-hydro generator $0.07
Small-hydro self-generation $0.05
The incentive levels (defined in US$ but to be paid in
Dominican pesos, RD$) are differentiated by technology, by
whether the system output is sold into the grid or consumed on
site, and by system size in the case of PV installations (see
Table 4). Tariffs for solar thermal electricity generation have yet
to be defined.
Decree 208-08 allocates public funds created by a 5% tax
imposed to fossil fuels under the Law on Hydrocarbons no. 112-00
to pay for the FIT incentives. The fund is administered by the
National Energy Commission (CNE—Comision Nacional de Energı́a).
Generators are required to contribute 1% of their sales to be split
between the CNE (80%) and to the Electricity Superintendant
(SIE—Superintendencia de Electricidad) (20%).
In order to be eligible for the FIT, developers must secure a
concession to develop the project.10 Development concessions are
granted up to 40 years and allow the developer to receive priority
grid interconnection and priority dispatch through the transmis-
sion or distribution company. Generators must negotiate a power
purchase agreement with the Dominican Corporation of Electric
State Enterprises (CDEEE—Corporación Dominicana de Empresas
Eléctricas Estatales) on a case-by-case basis.
3.2.2. FIT evaluation
Concessions in 2012 have been granted to almost 40 projects
(wind and solar mainly), but none have signed PPAs. So far only
one 33MW project (Los Cocos wind project in 2011) has been
built and recieved negotiated FIT but the value is not disclosed.
The Dominican Republic FIT shares some characteristics with the
low-risk design, including long-term contracts, generation cost-
based rates, priority interconnection and priority dispatch. The
FIT diverges from the low-risk design in that contracts must be
negotiated on a case by case basis, and payments are awarded as a
premium on top of wholesale rates.
3.3. Ecuador
3.3.1. FIT design
Ecuador established its original FIT in 2002 through CONELEC’s
regulation 003/02.11 The regulation was subsequently modified in
10
The regulation specifies the procedures, whereby project developers will
obtain an initial concession allowing them to carry out feasibility studies without
the obligation of delivering power to the wholesale market. The CNE will limit the
maximum installed capacity for initial concessions once 80% of the national target
has been achieved. After obtaining an initial concession, the developer must
provide CNE with the documentation required under Decree 208-08 (design,
environmental, technical, etc. as defined per technology) to secure a final
concession.
The first feed-in tariff provided PV, wind, geothermal, and biomass
generators with a 10-year incentive payment.
 Author's personal copy
D. Jacobs et al. / Energy Policy 60 (2013) 601–610
2004 (Regulation 004/04) and again in 2006 (Regulation 009/06).12
The Ecuadorian FIT provides support for PV, hydro, wind, geother-
mal, and biomass.
There is a project size limit of 10 MW for small-hydro projects
and 15 MW for other generators. The FIT guarantees payments
for 12 years. The FIT rates are differentiated according to the
technology used and, in the case of hydro power, based on the
size of power plants. As Table 5 shows, Regulation 009/06 grants
differentiated tariffs based on where renewable power plants are
located on the mainland or on the Galápagos Islands. Tariff
payments are guaranteed in US dollars. The high degree of tariff
differentiation by technology reflects generation cost-based rate
setting approaches.
3.3.2. FIT evaluation
Current FIT policy in Ecuador contains many low-risk design
options. Tariffs are guaranteed in US$ and therefore currency risk
has been reduced. However, the market for renewable energy
projects has been growing very slowly over the last couple of
years. To date, the FIT has only been used in three bagasse-fed
generation facilities and one wind farm operating in the
Galapagos.
Investment in renewable energy has remained low partially
due to complicated tariff payment mechanisms, and because the
FIT is a regulation and is not codified in an official decree or law.
There are also no guaranteed interconnection rules or standard
offer contract for IPPs in Ecuador.
Currently, the government is reviewing its electricity sector
and FIT policy. Ecuador’s new 2008 constitution mandates the
creation of a new electricity law to replace the 1996 Electricity
Sector Law (LRSE), which created a wholesale electricity market.
A wide range of issues are under discussion, including whether
certain sectors of the electricity market should again be nationa-
lized. This has made investors uncertain as to whether previously
made contracts will be honored, how the feed-in tariff will be
structured and what role of IPPs will play in the future. Establish-
ing the FIT under law and providing clarity on the future of
renewable energy policy would increase investment security
significantly. However, other measures to reduce risk may need
to be taken given Ecuador’s poor credit rating relative to other
LAC countries (Rogers, 2010).
3.4. Honduras
3.4.1. FIT design
The current legal framework for the Honduran electricity
system was established in 1994 by the new electricity law
158-94. The policy enabled third-party access to the grid and
initiated (at least in theory) the unbundling of the National
Electricity Company (ENEE—Empresa Nacional de Energı́a Eléc-
trica). The law also set up the National Energy Commission
(Comisión Nacional de Energı́a) to regulate the Honduran power
market. Decrees supporting the promotion of renewable
energy sources were issued in 1998 (Decrees 85-98 and
267-98)13 and the current FIT was created in 2007 as part of the
Law 70-2007, the Law on the promotion of electricity from
12
The 2004 amendment increased the tariff levels, extended the payment to
12 years, and includes incentives for both small hydro projects and for off-grid
installations. The 2006 amendment increased the tariff paid for photovoltaic
electricity.
13
Those Decrees included tax exemptions for renewable energy producers
and guaranteed the purchase of renewable electricity in line with the short-term
avoided costs of the Honduran electricity system. Additionally, the Decrees offered
a 10% premium above the avoided costs for renewable generators smaller than
50 MW.
607
Table 5
Tariff differentiation by Ecuador’s FIT (Regulation 09/06).
Technology Mainland Galápagos islands
price ($/kWh) price ($/kWh)
Wind $0.09 $0.12
Photovoltaic $0.52 $0.57
Biomass and biogas $0.10 $0.11
Geothermal $0.09 $0.10
Small-hydro up to 5 MW $0.06 $0.06
Small-hydro 5–10 MW $0.05 $0.06
Table 6
Renewable electricity tariff for Honduras.
Technology Incentive rate ($/kWh)
All renewable energy technologies $0.11 (HNL 1.99)
renewable energy sources (Ley de promoción a la generación de
energı́a eléctrica con recursos renovables).
Law 70-2007 supports solar, wind, geothermal, tidal, hydro,
biomass, biogas and municipal waste generation by enabling
several power purchase options. Generators can sell their power
directly to large-scale consumers, they can participate in a
national auction for renewable power, and they can also sell their
power to ENEE under a FIT. Under the third option, ENEE is
obliged to purchase all renewable power. However, Article 3 of
Law 70-2007 states that EENE is only obliged to sign a purchase
agreement if the project is in line with the National Extension
Plan of the Interconnected Electricity System (Plan de Expansión
del Sistema Interconectado Nacional). According to the plan for the
period from 2008 to 2022, 30.9 MW of new mini hydro capacity
are expected in 2010, 100 MW of wind energy and 110 MW of
biomass in 2011, 20 MW of hydro in 2014, 358 MW of hydro in
2015 and 173 MW of new hydro in 2016. Consequently, this
linkage to the national extension plan creates a de facto cap on
capacity supported by the FIT (ENEE, 2008). Generators up to
50 MW in size can receive a 20-year FIT contract, whereas larger-
scale power plants can sign contracts with durations of up to
30 years.
Over the course of the FIT, power producers are guaranteed an
undifferentiated tariff called the Minimum Base Price (Precio Base
Mı́nimo), which is published annually by the government. The base
price can never be lower than the level published in 2007. For the
first 15 years of operation, power producers receive a premium
payment of 10% of this base price on top of the avoided costs. The
base price is indexed to the inflation rate in the US CPI. However, the
maximum annual increase is fixed at 1.5%. As of 2010, the tariff
payment amounted to $0.1078/kWh ($0.9796/kWh for the short-
term avoided costs plus a 10% premium) Table 6.14
After 15 years of operation, the remuneration will be lowered
to the short-term, avoided costs of the Honduran electricity
system. The Decree of 2007 created a national fund for the
promotion of renewable energy projects (Fondo de desarrollo de
generación eléctrica con fuentes de energı́a renovable) in order to
finance the costs of the FIT. The law required ENEE to draft a
standard contract for independent renewable electricity produ-
cers. The law also offers priority dispatch for renewable energy
sources and clearly defines grid connection procedures. The law
includes a number of additional tax exemptions for renewable
electricity producers, including import tax for equipment, rev-
enue tax and sales tax.
14
See http://congreso.gob.hn/pacto/1285.
 Author's personal copy
608 D. Jacobs et al. / Energy Policy 60 (2013) 601–610
3.4.2. FIT evaluation
The Honduran FIT law of 2007 offers a comparatively high
degree of investment security. A large number of technologies are
eligible for tariff payment and the law includes detailed provi-
sions regulating grid connection. The law also guarantees priority
dispatch and obliges the utility to draft a standard contract. Tariff
payments are guaranteed for 20–30 years. Although tariff pay-
ment is based on the avoided costs of conventional electricity, the
tariff payment as of 2010 could be attractive to certain types of
generators. However, there is no evidence that the FIT has so far
triggered investment in new renewable electricity capacity.
3.5. Nicaragua
3.5.1. FIT design
The current FIT legislation, the Law for the promotion of
electricity production from renewable energy sources (Law 532–
Ley para la Promoción de Generación Eléctrica con Fuentes Renova-
bles)–was passed in April 2005. It is based on the 1998 Electricity
Industry Law (Ley de la Industria Eléctrica), which regulates the
role of independent power producers, and builds off of Decree
12-2004 which targets the promotion of wind and hydropower.
The FIT targets both new installations and support for existing
generators. Eligible technologies include hydro, wind, solar,
geothermal, biomass, and other (unspecified) technologies. Bio-
mass includes agricultural products, energy crops, forest waste
and industrial and municipal waste. Similar to Honduras, projects
can only qualify for the FIT if they are consistent with the national
capacity expansion plan. The National Generation Expansion Plan
(Plan de Expansión de Generación) foresees a newly installed
renewable electricity capacity of 920 MW for the period 2011 to
2025 (Morales, 2010). Renewable power producers can either sell
their power via bi-lateral contracts with the distribution system
operator or on the spot market. In the case of bi-lateral contracts,
the minimum contract duration is 10 years. Generators that
choose to sell into the spot market are guaranteed a price that
ranges from $0.05/kWh to $0.06/kWh. The Supervisor of Energy
(Intendencia de Energı́a) has the authority to modify the floor and
ceiling prices for the spot market as necessary (Table 7).
The legislation also includes certain technical requirements,
such as the provision of back-up capacity (spinning reserve), and
a requirement that wind generators prove that their operation
will not conflict with system stability. The law also exempts
renewable energy generation from the import tax on equipment,
from the value-added tax, and other taxes. The law also clarifies
that power producers can receive additional revenue from selling
Clean Development Mechanism (CDM) certificates.
3.5.2. FIT evaluation
Law 532 includes a large number of eligible technologies and
establishes predefined tariffs for selling electricity in the national
spot market. However, the tariff is undifferentiated and is based
on the avoided costs for conventional generation. Due to the
relatively low tariff level, the law has not encouraged investment
in new renewable electricity capacity thus far. Moreover, the law
does not include any special provisions for grid connection of
renewable energy power plants nor does it offer standard con-
tracts for renewable power producers. Finally, tariffs are not
adjusted to any pre-defined methodology (Table 8).
Table 7
Renewable electricity tariff for Nicaragua.
Technology Incentive rate ($/kWh)
All renewable energy technologies $0.05–$0.06
4. Conclusion
The analysis conducted in this article represents a first step in
characterizing and comparing feed-in tariff policies in the LAC
region. The comparison of five LAC countries reveals certain
policy similarities. First, most include a wide range of eligible
technologies under their national support schemes. Second, most
guarantee a tariff payment over a long period of time (10–30
years). Many of the LAC FITs also include special provisions for
interconnection and purchase requirements. All countries guar-
antee 100% purchase of the produced electricity. However, the
Dominican Republic also offers the possibility to directly consume
the renewable electricity without feeding it into the grid. In this
case, a substantially lower tariff is granted. These features of FITs
in the LAC region match the ‘‘low-risk’’ design discussed in
Section 2.
The comparison reveals, however, that none of the policies
fully match the low-risk design to the extent that some European
policies (e.g. Germany) do. Identifying where the design diverges
from the low-risk benchmark can identify opportunities to
strengthen the policies. For example, several of the FIT policies
in LAC countries have led to limited renewable energy develop-
ment because the rates are based on avoided cost (and therefore
are too low). Setting low rates based on avoided cost is consistent
with the goal of limiting ratepayer exposure to renewable
energy policy costs, but it also restricts investment in new
capacity. In the past, high prices for IPP contracts have
attracted criticism internationally and have sometimes created
political pressure that has resulted in attempts at contract
renegotiation or abrogation (Woodhouse, 2006). Establishing
low-risk policies that can attract investment may need to be
balanced with competing national policy objectives (e.g. rate-
payer cost or grid constraints).
Finally, the analysis reveals that FIT policy design may not be
the primary constraint to renewable energy market growth. None
of the current LAC FIT policies have resulted in a significant
market response. In some cases, this is primarily attributable to
the fact that the FIT policy has not been designed in a way that
will attract investment. In other cases, there has been little
renewable energy growth, despite the fact that the FIT offers
potentially attractive generation cost-based rates and contract
terms (e.g. Dominican Republic and Ecuador). In these cases, it is
primary factors external to the feed-in tariff, such as political risk,
regulatory risk, counterparty risk, and/or currency risk that
have constrained the market. When analyzing feed-in tariff
policies and their effectiveness, it is therefore necessary to
distinguish between the policy itself and the broader enabling
environment.
Another key question for FIT design is whether the FIT policy
costs will be recovered from the ratepayer, the taxpayer, or from
other sources. Arguments exist in support of either option.
Recovering the costs from the ratepayer is consistent with the
‘‘polluter pays’’ principle, and is also thought to be more reliably
collected over the long-term than annual government appropria-
tions. Recovering the costs from taxpayers places less of a
burden on internationally competitive and electricity-intensive
industries, and it may be easier to adjust governmental
budgets (e.g. through subsidy or tax reforms) than to adjust
electricity rates. However, the taxpayer approach is much
more sensitive to political changes where new governments
might be tempted to reduce the support for renewable energy
sources in order to reduce the general budget. These issues are
ultimately a matter of policy strategy for the country in question.
If the recovery of above-market rates is a politically viable
option, some LAC countries may elect to pursue ratepayer
recovery, whereas others may seek to create new public funds,
 Author's personal copy

D. Jacobs et al. / Energy Policy 60 (2013) 601–610 609

Table 8
Existing FIT design in LAC countries.

LAC countries Argentina Dom. Rep. Ecuador Honduras Nicaragua

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

such as through new taxes or through the reform of fossil fuel or
electricity subsidies.15
In sum, using an investment perspective, rather than a generic
best practices perspective, can be useful tool to evaluate different
FIT policies’ design and characteristics. In the future, this frame-
work can be further refined and applied to other regions of the
world in order to provide a more granular understanding of FIT
policy diffusion, the objectives and constraints which may govern
policy design, and the potential of different policies to effectively
drive investment in new low-carbon energy capacity.
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