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.