43559 v3 Appendix 2 An indicative list of secondary legislation to complement the Draft Law 1 of the Republic of Belarus on Non-Traditional and Renewable Energy Resources • “White Paper on Renewable Energy Policy,� providing the precise objectives, quantitative targets, policy instruments, and expected economic and environmental outcomes from the policy. • Law introducing state financial support to investments in renewable energy (RE). The law could include the following measures: (i) an RE fund, (ii) tax credits, (iii) guaranteed topping-up tariffs, and (iv) support for research, development, and demonstration (R&D&D). • Law providing independent power producers (IPPs) of RE and surplus producers with the right to be connected to the grid and to sell to the single buyer, and defining who pays for the costs of connection, metering, and so forth, as well as upgrading of the distribution grid (when required). • Changes to the Electricity Law, empowering the government to impose obligatory use of wood fuels in specified types of plants for heat and power supply. • New land use regulations favoring accelerated development of fast-growing wood fuel forests on degraded lands (including clarification of ownership or long-term user rights to the land). • Laws and ordinances delegating the implementing powers for specific interventions to specific authorities. • Regulations defining procedures for expedient and coordinated approval of RE projects (construction, land use, and so forth). • Regulations introducing simplified procedures for environmental impact assessments for specified types of RE generators. • Regulation imposing reporting requirements on RE generators. • Circulars defining how the level of subsidy support is to be calculated. • Circular defining the formula for calculating pricing surplus heat from RE-based heat production, which is sold to district heating systems. 1 The World Bank has provided comments on the Draft Law of the Republic of Belarus on Non-Traditional and Renewable Energy Resources. The Law has not been passed as of June 30, 2006. Options and rational for financial support to renewable energy technologies (RETs) Overall, there are seven types of RET subsidies, each driven by a specific motivation: 1) Subsidies given to RETs to compensate for price distortions in the energy market, which prevent economically viable RETs from competing on equal footing with conventional power supply (for example, subsidized natural gas prices in thermal power). 2) Subsidies to RETs to compensate for the noninclusion of external costs in the financial cost of production of conventional power (such as environmental costs or macroeconomic costs of fuel price risks). 3) Subsidies to RETs to compensate for weaknesses in the financial markets, which prevent RETs from getting access to debt finance on competitive terms with conventional power plants. 4) “Market jump-starting� subsidies to RETs with a mass market potential (household photovoltaic systems), which create the minimum demand needed to motivate entrepreneurs to invest in an effective marketing and service infrastructure for the RET. 5) “Learning curve� subsidies to RETs with a strong potential for technological progress (such as wind energy and photovoltaic systems). These subsidies help create sufficient market demand to motivate manufacturers of RET to invest considerable amounts in R&D. This investment brings down each year the cost of production of new generations of the RET. Subsidies, which increase consumer demand for new RETs, thus expand the market directly in the short term, and, by accelerating the rate of cost reductions in the subsidized RET, also in the long term. 6) “Sustainable development� subsidies to RET. These subsidies allow RETs with an economic cost of production higher than conventional power production (according to conventional economic cost analysis) to gain market share. Because conventional power production uses finite resources and contributes to global warming, it is not considered to be sustainable. 7) “Picking the winner� subsidies for R&D&D in potentially promising RETs that are at the pilot stage of development. Portfolio of financial support instruments The portfolio of financial support instruments used to increase the market share of RE-generated energy is summarized in the matrix below. The rows identifies four potential financing sources for subsidies to RE: (i) subsidies financed by the public budget (ii) subsidies raised through electricity invoices (iii) subsidized export credits for RETs and soft loans from development banks (iv) payments for greenhouse gas reductions from use of RE The columns point out three potential subsidy targets: (i) subsidies to investments (ii) subsidies to output (iii) subsidies to the cost of operation All strategies for increasing the share of RE in national energy supply involve the use of subsidies to some degree, and all use a portfolio of subsidy instruments to promote the defined goal. Most subsidy instruments in the table are complementary to each other, and the few that are direct alternatives can be modified to coexist. Therefore, there is a wide range of subsidy combinations. The “ideal� subsidy package depends on its political expediency, the scope and scale of potential RE supply in the country, and the power market philosophy of the government. Portfolio of Subsidy Instruments for RE Financing Subsidy targets mechanisms Cost of investment Price of output Operating costs • Direct capital subsidies • Topping-up premiums to • Subsidies for the marketing of • Soft loans producers green electricity • VAT exemption • Production tax credit Public budget • Import duty exemption • Topping-up premiums to consumers financed • Accelerated depreciation • VAT/excise duty exemptions instruments • Tax holidays on income • Public green electricity • Subsidies to exporters of RET purchases equipment • Subsidies for R&D&D • Grid reinforcement (deep • Premium feed-in-tariffs for RET • Wheeling tariff below the true connection costs) paid by utilities electricity opportunity cost of utility Electricity invoice • Part of (shallow) connection costs • Renewable portfolio standards • Balancing costs charged to paid by utilities with or without RECs consumers not to generators financed • R&D&D of power utilities on (renewable energy certificates) • Use-of-system charges fixed instruments interfaces between windfarms and • Eco-taxes on alternative fuels below cost regional/national power system • Voluntary green consumer • Subsidized administration of premium tariffs green invoicing Subsidized export • Soft loans for RE investments credits to RETs • Grants for project preparation • CO2 certificate Greenhouse gas • CER-/JI revenue/kWh (certified payments emission reduction units under joint implementation projects)