The light and shade on Vanuatu’s “Sun Tax”

A recent article published in the Daily Post after a press release from the Utilities Regulatory Authority (URA) has sparked a heated debate over the proposal to instore a fixed charge for the self-generation of electricity with solar powered systems utilizing the power grid as a backup. This is initially for customers managed by VUI but may be extended further.

This paper, commissioned by the VCCI, aims to provide some light and underline the existing grey areas to be addressed, as well as identifying key questions.

A few clarifications on the existing proposal and scope

Following a discussion with the URA’s team, we can ascertain the following:

• At this stage the proposal only concerns the customers of VUI who are using solar power systems to generate their own electricity with a back-up from the power grid when the sun is not sufficient. Consultations are planned for Port Vila after the Easter break.
• A grid connected system is defined as a system where the wiring connecting the solar powered system supplying the home / business’s electrical appliances is also connected to the power grid through a circuit breaker, switch or automated sensor positioned after the power meter and allowing to switch back to grid power supply when the sun is not enough.
• The “solar charge” designed by the URA and set at Vt 45.26/kWh to cover the fixed costs faced by the Power Company (Utility) to maintain a stable grid and supply intermittently when the sun is not sufficient will apply on the kilowatt-hour (kWh) generated by the solar system, the same unit of energy used to bill power consumption, not to the fixed fee applying to the “size” of the meter (amperage) or based on the size of the solar power system.

In other words,

• Users in Port Vila and elsewhere are not immediately concerned and will be consulted before any decision is made.
• Any solar powered system operating independently from the grid (with its own wiring and batteries or a generator as a back-up) will not be affected.
• The grid charge will only bill on units of energy (KWh) generated by the solar powered system, independently from its size or the meter’s amperage.

Should we be concerned and why?

Yes, despite these clarifications and the best efforts by the URA team to justify the Regulator’s decision and recent amendments passed by the Government to enable the “solar charge”, a few key matters remain unclear and debatable.

Billing.

The main issue here resides in the way the solar charge will be measured and calculated. In theory it applies to the kWh generated by a grid connected system (GCS) and the bill will be a combination of kWh used from the Utility at the normal rate, and the kWh generated by the GCS charged at the solar charge rate. The key difference between the power used from the Utility which is billed based on usage and the solar charge billed on GCS generation arises from the fact that when all the kWh coming through the meter from the utility are measured and used by the customer, the kWh generated by the GCS are only used if an appliance is turned on at the same time. GCSs are designed to cover power needs and based on a peak load (your biggest consumption possible when everything is turned on in the house).

It is then very frequent that the GCS generates more power than required. This raises the issue of users being billed for unused kWh. This is unfair. In an extreme scenario, this could even lead to consumers having higher bills than if they were purely on the grid, due to the perceived requirement to pay for all energy generated, regardless of if it is used or not.

Billing will also require improved technology and increased investment. It is unclear who is paying for this.

Also, though it has been labeled as solar charge, it is fair to assume that it covers any type of intermittent power generation technology connected to the grid and not just solar, another point to clarify.

Network stability and actual fixed costs faced by the utility.

The main issue faced by the utility when GCS are installed and used is to maintain an equivalent generation capacity to cope with times when the sun is not available, and the customer is using power from the grid as a back-up. With existing GCSr, the customer bill is diminished by the amount of kWh self-generated and used and the revenue for the utility is less meanwhile it must maintain the grid and sufficient generation capacity when the GCS cannot supply all the power required. This situation seems unfair to the utility and likely to worsen as the number of GCS increases. It is however not new, and studies have been commanded by the UNELCO and donors to assess the actual capacity of the grid as to how much intermittent power can be absorbed before it becomes problematic to stabilize the grid and an estimated 40% seemed to be the consensus.

This is why existing GCS have been operating with the approval of the utilities, UNELCO even set a cap in the size of each installation with a maximum of 26kW power to mitigate the impact and delay the time by which the 40% limit will be reached and further investments are required.

The key here is that the solar charge is being proposed in anticipation of issues that have not materialized yet and raises the question of whether it should apply to existing installations or only to additional installations which will create network instability when the physical limits of the power grid are reached.

Variations of the legal framework and impact on financing and investment decisions for renewable energies.

Investments made by the customers for existing GCS were decided and designed based on the existing legal framework where the solar charge does not apply. Loans were contracted and repayment pace and rate are factoring current levels of savings. In other words, if a customer applying for a loan has no arrears with the utility at the time of its application, it shows a payment capacity equivalent to its average monthly power bill, and the savings realized thanks to the GCS once it is operating are used as a safe basis to repay the loan, with an average repayment time of 2 to 3 years. Now with the implementation of the solar charge, this repayment time will increase since the savings realized will be smaller. Future customers will have to make their informed decisions about whether to invest or not based on the revised legal framework and could be discouraged if the repayment time is too long.

For existing customers, the financing of their GCS is already committed with monthly payments to the lending entity, and investments were decided based on the existing legal framework. With the current proposal for Santo, their repayment capacity is being altered arbitrarily and they are at risk of defaulting with the lender since the savings used to set their monthly repayment are cut by over 60%.

A similar reasoning applies to the suppliers of GCS whose existing stocks of material are mobilizing a substantial financing capacity which would not have the same rotation speed and profitability after the solar charge is implemented. This raises issues on whether the solar charge should apply to all existing systems uniformly as suggested or apply only to those fully amortized with a grace period for those still being repaid or limited to future investments. And for the suppliers of GCS and solar equipment, whether a compensation should be considered for the risk that the solar charge has materialized and the impact it will have on their sales and cashflow, or if the Government is willingly putting half a dozen of businesses at risk when they contributed to enable reaching the Nationally Determined Contribution (NDCs) and Millenium Development Goals (MDGs) acted and committed by the Government to fight global warming.

Acknowledging these issues, the solar charge might also impact the timing by when Vanuatu reaches its target of 100% renewable energy sources sending a strong signal and disincentive for private and businesses to participate. The decision to enforce the solar charge as currently proposed for VUI in Santo on existing GCSs despite knowing the financial burden it would put on households and businesses still repaying their investments would send a strong signal that the Vanuatu should not be trusted as a supportive investing environment for rules applying may change overnight and shut businesses as collateral damages.

Impact over the cross-subsidy mechanism.

Under the existing tariffs charged for electricity, the framework was designed to make large customers contribute to a higher portion of the costs of the utility and allow for small users under 60kWh of monthly consumption to benefit from a subsidized tariff. This was designed to support access to essential services and fulfil development targets of access to grid power in urban areas. With GCS requiring an expensive upfront investment and access to banking services, existing systems were essentially installed by the larger customers, hence lowering their contribution to the cross-subsidy. Questions arise as to the sustainability of the cross-subsidy mechanism and which of the targets matters the most between access and climate challenges.

The escalating cost of electricity and lack of Government contribution boost private investments in renewable energies.

Where the will to contribute to a greener and more sustainable world is undeniable and one of the main reasons for early investors into GCS, the high cost of energy in Vanuatu is part of the equation and one of the triggers that motivated most customers to switch to GCS solutions to stabilize their billed which were escalating. Considering the cross-subsidy mechanisms and subsequent grid instability that will result from many customers switching on GCS, one might see it as a self-centered decision and depict such customers as anti-players. With the costs inherent to operations of the utility, access to energy services by a large number, and grid stabilization which are referred to by the URA and Government justifying the solar charge, it is legitimate to also have a closer look at the actual contribution from the Government in balancing the equation between access to power for the modest customers and going green for the planet and benefit all.

One of the main taxes applying to the generation of electricity using diesel is the excise tax that is being charged by the Government at a rate of 15vt per liter. Attempts were made by the URA to remove the tax and recent reviews suggested dropping it to 10vt but this has not been enforced. In addition, for every kWh billed by the utility, the Government charges the VAT at 15% in a uniform way across all customer categories without distinction, a bitter-sweet observation when large customers are asked to flex the arms and make the heavy lifting to support the smaller ones. In terms of cross-subsidy contribution, the Government’s power consumption is being charged at a different rate which does not contribute to the equation.

Though we all understand that the Government needs incomes to support its operation, one may think that the monies collected through the taxes are being used to develop large infrastructures, support the grid stabilization and expansion, or add green energy capacity, but here again most investments are made by international donors and part of the budget spent by the National Green Energy Fund for access to electricity off-grid is also contributed by the grid customers through their bills. The same applies to a major part of the URA’s annual budget which is billed as URA surcharge on every power and water bill.

The Vanuatu Government has made big commitments through its NDCs and MDGs, recently re-affirmed its intention to going 100% renewable by 2030, but feeds largely form diesel and electricity generation, asks from the large power consumers to make the heavy lifting without contributing much into changing the game itself, and is responsible for a large part of the high cost of energy triggering the current situation. This situation is quite contradictory and the key question here is whether the solar charge is the best answer to the current issue when Vanuatu is facing high inflation and escalating cost of power and solutions exists and are affordable to large customers to go completely off-grid?

The possible solutions which could be debated further.

About the way forward to integrate GCS and manage grid stability, stimulate investments in renewable energies and contribute to the NDCs and MDGs, from a customer standpoint it seems that only one approach has been rushed forward and other possible options obliterated. The current proposal rather feels arbitrary, an attempt to stop a situation that is going wild for the Government failed to implement smart policies to stimulate investments in renewable energies while monitoring their contribution to the grid (penetration) to back it up with the relevant investments for stability, and now faces escalating energy prices which could have been mitigated with a larger proportion of renewable. An upcoming consultation in Port Vila may provide additional clarifications meanwhile it seems appropriate to highlight alternatives for consideration and fuel the debate.

Net metering, Dual metering, and Feed-in tariff.

The current proposal for VUI customers has squashed-out the possibility for customers to send electricity generated by their GCS back into the greed “feeding-in”. Whether it is the excess of power generated “Net metering” or all of it, sold to the utility at a lower feeding rate “feed-in tariff (FIT)” or for free to balance grid stability related costs, these solutions which are common in most countries and implemented by our neighbors in Fiji have not found their way yet in Vanuatu. “Feed-in Tariffs (FITs) are the most widely used policy in the world for accelerating renewable energy deployment, accounting for a greater share of renewable energy development than either tax incentives or other policies”[1].

Feeding electricity back to the grid would require dual metering to measure the power used from the utility and the power fed back by the client for a net billing of units which would solve the issue of billing unused kWh of power generated by a GCS as the current proposal suggests. Approval of new meters is a simple procedure to be dealt with between the utility and the Regulator and a modest investment considering the future benefits which could be borne by the customer as part of its installation costs. And with the implementation of FITs or Net metering, investors are provided with a guaranteed tariff or saving over a period which provides clarity and security of income to afford the installation’s repayment.

Increased Governmental support to electricity tariff, grid stability and clean energy.

When Fiji has implemented feed-in tariffs as early as 2014 and driven the development of its renewable energy with efficient policies and incentives, Vanuatu has taken the opposite stance and now faces several challenges. The Government’s chronic underinvestment is the result of limited financing capacity and a hesitancy to make decisions for long-term sustainability. The cost of energy is one of the main drivers for investing in GCS and now would be a good timing to implement a combination of tax incentives and targeted investments to increase the contribution to the energy sector and support commercial and industrial activities which are driving employment and value addition on one hand, and the purchasing power of the domestic customers on the other. In simple terms, it’s ok to spend a large budget to make energy more affordable because it acts as a lever for net positive economic outcomes and a larger taxable base through Value Added Tax (VAT).

Examples of efficient policies which were adopted overseas and could be implemented include tax incentives such as a cut in the excise tax collected on the fuel used for the generation of electricity which currently stands at Vt 15/liter, and a 0% VAT applying on the first 60 kWh (tranche 1 of the tariff) across all customer categories. To assist the half-dozen of importers and suppliers of renewable energy solutions and mitigate the risk of introducing a solar charge, the National Green Energy Fund (NGEF) which work mostly focused on off-grid areas so far, could step into the equation and provide capital assistance. The critical role played by the private sector in terms of investment in renewable energies and achieving the SDG #7 shall not be undermined by the Government and a lack of adequate policies and incentives.

Private investment into large utility operated solar farms.

“The use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development, could be instrumental in addressing these financing challenges and mobilizing private sector participation and capital at scale.”

Acknowledging the physical limitation of the grid and the complexity to deal with many GCSs as a key challenge to the energy transition, and the role that the private sector can play in terms of financing and use of renewable energy, a solution could be for the utilities to open tenders for the private financing of large renewable energy power plants. Such an approach would be fully integrated and managed by the utility in its investment plan and mitigate the impact on the grid while allowing those who are keen to invest in renewable energies to finance capital cost to the utility providing a lower rate is charged for their electricity. With the utility financing itself through its customers, the financing cost and capacity would be optimized to unlock the energy transition.

What are the next steps?

The heated reactions to the announcement of the “solar charge” only reflect the lack of visibility and adequate policies accompanying a much-needed energy transition. For sustainability or economic reasons, the need to turn on clean energy is undeniable, and such is the role that the private sector and domestic customers will play.

The intention of this opinion paper was to clarify the existing proposal, assess its limits and highlight grey areas, and be a source of proposition for the future consultation and debate to take place before damages are done to existing customers, those who invested in GCSs, the suppliers of green energy solutions and the sustainability of operation for the utilities.

The next logical steps are:

• A consultation run by the URA and the DOE in Port Vila to assess the issues raised, come up with economically sound solutions and make recommendations for adequate policies.
• An economic impact analysis comparing different possible scenarios and combinations of solutions and incentives must be conducted for a tangible outcome.
• Last, time has come for a review of the National Energy Road Map (NERM) which is outdated, un-realistic considering the economic conjecture, and does not capture how the energy transition will be financed.

Meanwhile VUI is conducting a three-month trial on the solar charge and valuable lessons will be learned, the URA is to confirm a date after the Easter break for consultations in Port Vila. The Vanuatu Chamber of Commerce and its councilors will relay further information about the upcoming consultations and encourage everyone to participate in the debate to achieve the most efficient solutions and materialize positive outcomes for our economy.

[1] According to Renewable Energy Policy Network for the 21st Century (REN21),