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.