Forbidding renewables rules

This piece was published in the March 26, 2012 edition of the BusinessWorld, pages S1/4 to S1/5.


The Energy Regulatory Commission (ERC) hearings on the first set of feed-in tariffs for emerging renewables officially ended March 20, but significant obstacles to accelerated development remain.  Thus, at the concluding phase of this long-delayed process, RE (renewable energy) developers are again in a quandary, with recent developments:

Energy Secretary Rene Almendras has endorsed for “the perusal” of the ERC a letter from Senator Serge Osmeña, chair of the Senate committee on energy and co-chair of the Joint Congressional Power Commission, that advocates the use of a competitive bidding process to meet certain installation targets for renewables.

Secondly, we received word that if the good senator is not satisfied with the decision of the ERC on the FiT rates, he himself would bring the matter up to the Supreme Court and seek a temporary restraining order (TRO) on its implementation.

Thirdly, the Department of Finance has crafted a proposal for the rationalization of fiscal incentives given to many business sectors—long overdue I would say—that also takes away those for renewable energy developers.

But I will elaborate only on the first development. I can understand the Senator’s concern over the lack of transparency and competition in the award of RE service contracts, but this is already being addressed by the Department of Energy (DoE). It is also true that many RE service contracts awardees are not serious developers but are just waiting for the right moment to “sell” the associated rights without ever having infused serious equity. This is why the DoE has been reviewing the service contracts and cancelling many of these.

This is how an auction to achieve a targeted capacity Q for year Y would work. Q is announced for a particular emerging technology and bidders would bid a cost per kilowatt-hour. We stack the offered capacities up to Q, and all the bidders within Q are to be paid according to their bids.

But for this to work, all the required information to estimate the economic value of each of the RE resources should already be known, but even then, remaining challenges would still be daunting. There are still many existing barriers to entry, among them the uncertainty in financing and permitting. (The National Power Corporation in the past had to provide the feasibility studies for hydro BOT (Build-operate-transfer) projects because of the prohibitive costs). This is why the FiT is targeted solely at emerging renewables that do not yet have a record of commercial success in the country. In areas where an auction system has been implemented, most winning bids never went to successful implementation.

This is also why Britain, Ireland, China and some countries in South America that initially flirted with a bidding system eventually abandoned it and turned to feed-in-tariffs. The feed-in-tariff system is now being implemented by among many others, China, India, Malaysia, Indonesia, Malaysia, Pakistan, Sri Lanka and Thailand among the developing countries, and the USA, UK, Italy, Japan, Germany and Spain in the developed world.

It cannot be denied that in any system where there is a uniform price given to all suppliers regardless of their resource characteristics and internal efficiencies, some would have “excess profits” and some would just manage to recover costs. (This is currently the way the wholesale spot market for electricity would work, except that producers cannot get financing without an assured stream of revenues afforded by bilateral contracts).

The concern for “excess profits” is also why the National Renewable Energy Board took a long time assessing the data provided by the developers and other sources and why the hearings at the ERC took a long time to finish.

Senator Osmeña’s letter to Senator Amendras also adverted to DoE Circular DC 2009-07-0011 that provides for a transparent and competitive system of awarding RE service/operating contracts. I would like to add that for natural resources such as hydro that have large variability in economic value, the DoE can eventually try to capture resource rents through other regulatory means.

The senator further asserts that the ERC could adopt a bidding process to set the FiT rates. We are sad to say that a bidding process is not compatible with a FiT system and is an entirely different animal, conceptually and legally. This is also the consensus among RE developers and many in the executive branch.

We do not yet know how the ERC will handle Senator Osmena’s letter, but the executive director was quoted as saying the body is still taking it under advisement. But I suspect that the legal minds in the ERC know too that a bidding process is a different process altogether and would require a disastrous amendment to the Renewable Energy Act.

Finally, just a short note to address the feared tariff impact consumers may have to bear because of the FiT system. My colleague in the Renewable Energy Developers Center (RedC) Alberto Dalusung has recently run the numbers and he concludes that the effect of installed emerging renewables would be something like 1.3 centavos/kwhr in mid-2014 because of two things; developers , especially hydro, will be unable to achieve the targets given its FiT rate, and second, the avoided cost  (from the mix of conventional) continues to increase.

Friends from the Foundation for Economic Freedom and from among RE developers will have a chance to resume the debate on the issues at 6 pm on March 30 at the UP School of Economics main auditorium during the special classical guitar concert of Marga Abejo, String Theory, where her book for kids learning the guitar, of the same title, will also be launched.

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