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.