Perpetual Motion Machines

Here's my column on the delaying tactics of the Foundation for Economic Freedom on the ERC proceedings on the feed-in-tariffs

http://www.bworldonline.com/content.php?section=Opinion&title=Renewable-energy-vs-motion-machines&id=43891

Reds vs Econ freedom fighters

Here's my latest essay in Business World:

http://aer.ph/?category_name=yellow-pad

I guess I could never opt out of any constructive dialog.

Four in Recital

Four in Recital

Catherine Belle, Marga Abejo, Cristina H. Lozano, and Jenny de Vera perform classical pieces in a recital, 6 p.m., October 15, Elizabeth Yu Gokongwei Hall, UP School of Economics, Diliman.

Presented by UPSE, Cebu Luthiers Education Foundation (Clef), and Guitar Friends

Admission is free. Cocktails follow.

NREB Surprises

Because the rapture fell through, I had the chance to be enraptured by the presentations of NREB officials during the recent hearing of the Joint Congressional Power Commission (JCPC).

For one thing, NREB vice chair Ernie Pantangco pulled a surprise by presenting a balanced and thoughtful view on renewables and climate change. The conventional wisdom is that because the Philippines contributes less than half a percent of global GHG emissions, it wouldn't pay for us to even try. But Pantangco did a counterfactual. He had a table supposing that if all countries similarly situated did nothing, that would be a large potential loss. That was really insightful.

For another, Pantangco also showed another table adjusting RE costs to make these comparable to some Asian countries by using the financial risk premia applicable to the Philippines. These were not so high, after all. Thanks Ernie.

Statement to Congressional Panel

Statement of the Philippine Association of Small Hydro Developers
Before the Joint Congressional Power Commission
on the Status of Implementation of Republic Act 9513
(The Renewable Energy Act of 2008) June 2, 2011

Your honors, we thank you for this opportunity to share with you our concerns on the implementation of Republic Act 9513, especially the feed-in-tariff system. Without ado I will now articulate briefly our concerns on the subject.

First, we are apprehensive that certain quarters have been over-emphasizing the likely tariff impact of the FIT system, and grossing over the benefits of accelerated RE development in the Philippine power sector. We fear that this might cause further delay in the approval of the FIT petition lodged by the National Renewable Energy Board before the Energy Regulatory Commission.

We believe that our legislators were fully aware that the RA 9513, meant to level the field for renewable vis-à-vis conventional fossil generation, with all its unpriced negative effects---local, regional, and global pollution---would impose a monetary cost on consumers that should be more than offset by the incremental benefits: improved health through cleaner air, reduction in GHG emissions, and decreased price volatility.

While we fully understand the concern of the Department of Energy over high electricity tariffs, we feel that its fears of the incremental cost of renewables is misplaced. It should instead help the public understand that the many of the externalities arising from conventional generation are not accounted for in private decisions and that the RE Act simply seeks to address this market failure.

Further, we also believe that calculations of the incremental cost from the FIT system do not take into account the likely upward movement in the prices of conventional fuels and thus the tariff impact of FIT is grossly exaggerated.

Second, while we commend the NREB, especially its chairperson, for its heroic efforts in implementing the FIT system, with a limited or almost non-existent budget, we are duty-bound to point out some fundamental flaws in the rates determination process in which we have participated:

· The provision in the ERC’s FIT implementing rules calling for the adoption of a ‘representative’ project to arrive at a FIT rate especially for small-scale hydro, does not make economic sense. This is because costs are very site-specific and there is a wide statistical distribution of costs. Thus, using average cost is not consistent with a notional installation target.

The rational way to determine the FIT rate in such a case is to first determine desired capacity level for each technology. Once this is done, the price level is automatically determined from a stacking of specific resources or sites starting with the least costly. In this way there is no redundancy or inconsistency. The cost level is simply the one consistent with the capacity target.

· We are perplexed by the adoption by the NREB of an internal rate of return for RE projects of 18% in its spreadsheet model. We know for a fact that the ERC has allowed IRRs greater than this for coal contracts for distribution utilities. Note that the standard practice is for coal plant operators to pass on fuel price risks to off-takers (and thus to final consumers). But a small hydro operator’s revenues will depend on amount of rainfall in a given period. In short, hydro investments are by nature riskier.

· We also have to confess that we don’t know and understand how the DOE arrived at the installation targets. What we do know and understand is that the FIT rate sought for hydro (P6.15/kwh) is not consistent with the installation target for small hydro.

Lastly, your honors, as this hearing is in aid of legislation, we would like to bring to your attention the outmoded lending procedures of the government’s development banks in regard to loans for RE developers. These still refuse to disburse loan proceeds in the absence of power sales agreements notwithstanding the fact the they know the FIT system guarantees RE developers future revenue streams.

In the coming days, we are willing to submit more detailed proposals on how to improve the RE Act and its implementing rules. Thank you.

FiT on Wrong Foot (1c)

Ramon Abaya
CEPALCO

I keep hearing the same old complaint from all and sundry that REs will raise the rates to the retailers; while this is perfectly correct, it is beside the point and completely misses the purpose behind the RE Law; which is to encourage the use of clean energy while minimizing their effects on retail rates. RE Law would not have been passed, after so many frustrating years, if the country didn't think it was worth our while to help clean the environment while staving off a crippling power shortage.

That same Law imposes the obligation on policymakers and regulators to make sure the rates do not go out of control. ERC by the way is the final arbiter on rates, including FiTs, under the RE Law; I suggest that we give them the benefit of doubt that they have the competence to dispatch their job well and the wisdom and the experience to tread the delicate balancing act between the customer and the investor. Do we trust them enough to do the job of evaluating FiTs NOW? I wonder. (If we feel we need to second guess the regulators, then I think the argument stops here at this moment; what is the point of all these exercises?)

Solar for instance takes less than a year to install, while the more conventional ones will take much, much longer. To me, it is perfectly clear that REs can help solve the more immediate problem of power shortages; and yet one keeps hearing the old refrain that the rates will go up. Of course they will, even if we put up more polluting plants; hey, this is supposed to be self-evident!

Well, do we want to have enough power or not? Is the lack of power a lot cheaper than rolling out REs? Everyone knows the devastating economic effects of a power lack. I will let the reader make that decision, since he is after all an electricity consumer too! He is in fact the ultimate decider on this issue. Not the developer, not the bureaucrat, the regulator, the utility, the policy maker, none of them will really matter.

FiTs on Wrong Foot (1b)

Avoiding (the debate on) avoided costs

In recent consultations with RE developers before officers of the NREB, at least two experts brought up the issue of costs avoided with the installation of renewables.

‘Irrelevant!’ Almendras’s bright guy on the board exclaimed.
Irrelevant? What planet is this guy from anyway? What for and how are the tariff impacts of RE installations supposed to be calculated?

In another exchange, he was forced to backtrack after he asserted that conventional generation and RE technologies faced the same fuel risks. You see, coal and diesel energy supply agreements have provisions that pass fuel risks to consumers.
On the other hand, RE developers –operators, once they sign on to FiTs, are at the mercy or vagaries of nature:

• For wind, no one knows where the wind blows when;
• For biomass, fuel availability is risky;
• For solar, when the sun shines it shines. When it doesn’t bring no umbrella;
• For run-of-river hydro, ask cooperatives with installed capacity how they service debt during droughts;

Note also that none of these technologies have a record of commercial success in the Phiilipines and that is why they need a temporary but catapulting push.

Any banker will tell you that for the same expected return, projects with higher variability in IRR require a risk premium. Isn’t that conventional wisdom? Unfortunately, the conventional generation guys are unconventional and illogical when it suits their interests.

FiTs on Wrong Foot (1a)

Albert Dalusung III, an old and respected hand in the Philippine energy sector, was chosen as chair of the technical working group (TWG) on FiTs under the National Renewable Energy Board or NREB. It is surprising that he has been sidelined in the process of FiT rate deliberations. Under the inGlorious administration, Pete Maniego (a lawyer who practiced engineering for 40 years) occupied the post and took the lead role. Now Bert sits merely as a resource person valiantly but objectively espousing the cause of the RE developers.

Why is the elected RE representative to the NREB the one lording it over the alleged consultations along with the NREB chairman and another bright guy who purportedly is the energy secretary’s alter ego on the issue?

Whose interests are being safeguarded by the NREB? I dare say this is a legitimate question.

FiTs on Wrong Foot (1)

The Philippine renewable energy program is at an impasse. Here is the first part of a series where I---as an independent energy economist--- attempt to explain why RE developers in the country feel betrayed by the energy cluster of the Aquino administration.

I’ve been hard-pressed to find the correct description of Energy Secretary Jose Rene Almendras’s approach to renewable energy, especially as regards the implementation of the RE Act of 2008, especially the feed-in-tariff system. Now I have a tentative one: damage control.

Right after Almendras was appointed to his post, he was immediately confronted with the power shortage in Mindanao and the Visayas, and the lack of reserves in Luzon. In addition, he also took to heart the problem of generally high electricity tariffs. He’s been a quick study and I think effective in addressing the shortages.

It is on the second matter where I have serious doubts about his tack. Initial reports (hearsay, you might say) had it that he was alarmed by the potential tariff impacts of the RE law and was lukewarm to renewables allegedly because it was a pet bill of the inGlorious administration (so what?). Then came confirmation: officials of the National Renewable Energy Board (NREB) revealed that the energy secretary did not want a tariff impact from the higher costs of emerging renewables qualified under the feed-in-tariff system (FiTs) to be greater than P0.15 per kilowatt-hour. Where this number came from only the good secretary and his bright boys know but I’m sure not from any rigorous benefit-cost analysis.

(I do recall there were attempts, in the dying days of the inGlorious administration, to railroad the process of establishing the FiTs so that this would be part of its legacy, and perhaps to favor some cronies. But this is a separate issue. To address the problem of potential rent-seeking, the Department of Energy can and should make the award of RE service contracts transparent and competitive).

This is why we think the good secretary started on the wrong foot on FiTs: the RE Act is premised on leveling the field for renewables against conventional power generation, whose negative externalities (local air pollution, climate impacts, price volatility induced by external market forces) are not reflected in their market prices. The latter being the case, the economic consequence is clear: there is too much conventional generation and too little from renewables for the mix to be optimal.

Our legislators could have chosen to tax conventional power sources to account for the said externalities, but this would have raised strenuous objections. Instead they chose the more politically palatable: giving incentives to renewables which some label as ‘subsidies.’ I would assert that these really aren’t subsidies, but there’s no escaping the fact that these would be reflected in ratepayer bills. In exchange, ratepayers are supposed to enjoy cleaner air, be more responsive to the problems of climate change and ensure sustainability for their descendants. In addition, they would have purchased a hedge in case fossil fuel prices skyrocket in the future (as they are increasingly volatile upwards now).

In short, the energy secretary is optimizing the wrong objective function. He just wants to minimize the tariff impacts of the RE Act (at all costs?) when the real problem is maximizing the net social benefit from the introduction of more renewables. Framed this way, it is also clear that the renewables program can be overdone and impose unnecessary burdens on ratepayers. Finding an ‘optimum’ is always difficult in the face of data challenges and uncertainties, but to shy away from this problem is irresponsible. Furthermore, to simply attempt to minimize the tariff impacts of renewables---and address the problem with a narrow, bureaucratic accountant’s view---is an insult to the intelligence of ratepayers, who would be willing to pay more as long as the program is explained properly by a visionary, transparent, and democratic leadership.

True, RE developers are motivated by profit and not altruism. But RE policy in fact attempts to ensure that this profit motive is not contrary to social desiderata. And they certainly shouldn’t be treated as pigs lining up before the trough of potential ratepayer largesse.