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.
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