FiTs on Wrong Foot

Mr. Logarta works with electric cooperatives/utilities, multilaterals, and RE developers as an energy and environment economist. This piece was published in the March 28, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.

 

The Philippine renewable energy (RE) program is at a crossroads. RE developers are increasingly feeling frustrated, even betrayed, by the Aquino administration. Fortunately, developments last March 25, 2011 in the National Renewable Energy Board (NREB) on the feed-in-tariff system (FiTs), has brought some hope.  The FiTs will have a lasting impact on the country’s energy mix, and how it addresses air pollution, climate impacts, and volatile and rising costs in the power sector.

The FiTs is one of the crucial provisions in the Renewable Energy Act of 2008, meant to accelerate RE development by providing incentives for the development of installed capacity of emerging renewable energy—namely solar, wind, ocean energy, biomass, and run-of-river hydro.  The FiTs intends to mitigate demand-side risks in the face of inherent production variability (some call this intermittency—but the relevant distinction to my mind is dispatchability)— by ensuring purchase by all grid-connected consumers at a guaranteed long-term fixed price.

The grapevine had been abuzz with reports that Energy Secretary Rene Almendras was lukewarm to the RE law because of its possible impacts on tariffs. (I’ve been hard-pressed to find the correct description of his approach to renewable energy. Some said damage control, because he was just trying to cushion the possible impact of the law on tariffs. It was also alleged that some in Pnoy’s circle saw the RE law as a pet bill of the InGlorious administration. So what?)

Attempts were made to railroad the promulgation of FiTs tariffs so that this would be part of the InGlorious legacy, and perhaps to favor some friends. In fact, I was alarmed by the fantastic numbers bruited about just before the 2010 elections. But this is a separate issue. To address the problem of potential rent-seeking, the Department of Energy (DoE) can and should make the award of RE service contracts more transparent and competitive.

Right after the good secretary was appointed, he was faced with outages in Mindanao and the Visayas, and the lack of reserves in Luzon. He also took to heart the problem of high tariffs. He’s been a quick study and I think effective in addressing the outages and other major problems.

It is on tariffs where I have serious doubts about his tack. High tariffs are an artifact of the old regulatory regime that the Electric Power Sector Reform Act (Epira) sought to address. With all its weaknesses, the full potential of this reform has yet to materialize.

Last March 25, 2011, the secretary clarified that he recognized the independence of the NREB and that the final FiT rates would be decided by the Energy Regulatory Commission as provided by law. However, in the past few months, certain officials of the NREB have given the impression that the DoE had given “marching orders” for FiT rates based on certain maximum tariff impacts, namely, that the incremental cost should not be greater than P0.15 per kwhr.  How this impression became accepted wisdom deserves investigation.

We thought then that the 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 an optimal mix.

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 are not really subsidies, but the fact is, these would be reflected in ratepayer bills (as would have taxes on conventional generation). In exchange, ratepayers are supposed to enjoy cleaner air, be more responsive to the problems of climate change and ensure sustainability for their descendants. Also, 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 DoE would be optimizing the wrong objective function, minimizing the tariff impacts of the RE Act, 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 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 myopic and irresponsible.

Furthermore, to simply 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.

There are other methodological challenges in the adoption of FiTs rates. But starting with the correct premise should be the first step.

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

The RE developers have been described as “greedy” by certain entrenched interests in the power sector. This sounds like the pot not giving the kettle the benefit of the doubt.

The discussion by energy undersecretary Jay Layug on sources of alternative energy—costs, investments and profitability; historical fuel sources; trends and projections of energy supply and demand; the energy sector’s contribution to environmental pollution and degradation—before  before the Philippine Futuristics Society on March 31 should be interesting. For details visit http://futuristicsph.webs.com/.

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