Viking Logarta is a partner in Asian Energy Advisors and advises electric cooperatives, other distribution utilities, and RE developers. This piece was published in the October 3, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.
The protagonists.The renewable energy developers (Red Caucus) and the Foundation for Economic Freedom (FEF). The Reds are actually Greens and the economic freedom \fighters encompass blue and red in terms of economic philosophy/ideology.
The issue. The protagonists have been battling in the public space over the feed-in-tariff (FIT) system mandated by the Renewable Energy Act of 2008, the provisions of which have not yet been fully implemented. The proposed first set of FIT rates has been submitted by the National Renewable Energy Board (NREB) before the Energy Regulatory Commission (ERC). The hearings have been delayed because of some technicalities. The ERC has ruled in favor of the freedom fighters who sought that the proceedings be changed from one of rule-making to one of rate-making, requiring more rigorous hearings and notification procedures. The scheduled pre-trial and evidentiary hearings set for 29–September 2011 were cancelled because of notification issues.
The inspiration. At the instance of former UP School of Economics Dean Raul Fabella, the Reds and some old hands of economic policy making in the country recently had dinner to seek common ground on the issue. Prof. Fabella in turn is inspired by classical guitar music in his ears, and he played the sage. A few weeks ago he had asked me with an open mind what the fuzz was all about after each of two classical guitar concerts (Steven Lin’s at the UP College of Music and Joseph Mirandilla’s at the UP School of Economics).
The old hands were represented by former finance undersecretaries Romeo Bernardo and Ernest Leung—otherwise known as Dr. No (no to unnecessary burdens on taxpayers); economics critic-at-large Toti Chikiamko; and FEF lawyer Ricardo Balatbat III.
The renewable energy (RE) developers were represented by Sly Natividad of run-of-river hydro, Albert Dalusung III of the biomass alliance, Poch Ambrosio for wind power, and Tetchi Capellan of solar.
The premises and starting point. Prof. Fabella guided the discussions, acknowledging that the parties are presumed to have the best interests of the country at heart. But beyond the motherhood [statements] are the specific models and it seems the parties have been starting from radically different ones.
The old hands are concerned about the overall impact on both ratepayers and taxpayers. The developers admit this is a legitimate concern. However, the developers took exception to the incremental cost estimates of the FIT saying the numbers being bruited about in the press are off by a wide margin:
- When the ERC finally approves the rates, especially for solar power, this could and would be lower than the rate proposed by the National Renewable Energy Board (NREB), according to Capellan; Capellan also pointed out that solar rates should not be compared to base load rates because solar power is usually available during peak and intermediate portions of the load curve. So compare green apples to black apples.
- The baseline rate over which the incremental cost is reckoned is also fundamentally flawed. Look at the costs of coal generation, existing and prospective, Dalusung said;
- Furthermore, according to Dalusung, the installation targets on which the incremental costs are estimated are unrealistic. It would be optimistic to say that 50 percent of these projects can actually materialize within three years—the time horizon for the first set of FIT rates.
The developers lament (especially for biomass and RoR hydro) that the IRR target (17–18 percent) is not far from what the ERC uses for coal and other conventional plants, whose contracts with off-takers assure them of capital and fuel cost recovery. In contrast, hydro and biomass operators do not get to recover capital on schedule if water flows are less than expected or if feedstock suddenly becomes scarce.
In regard to misconceptions that the FIT rates are an incentive in addition to all sorts of tax holidays and import duties, the developers said the model used to calculate the proposed FIT rates already incorporate these advantages, with a targeted internal rate of return, so the FIT rate already embodies the incentive package in its entirety, except for the value of carbon credits which are really iffy.
I, for one, have advocated that the Department of Energy, if it can be shown that it is the FIT system that catapults qualified RE projects into financial viability, should make representations with the proper international bodies to collect the values for the carbon credits on behalf of ratepayers.
Foremost in the minds of the Reds is the threat by the old hands to question the constitutionality of the FIT provision of the RE Act before the High Court. The sage said he would rather have the differences resolved or narrowed through dialog on economic principles instead of through lawyers.
It was agreed that the dialogue would continue. The developers will provide the old hands with the spreadsheet model used by the NREB to calculate the proposed FIT rates. Dr. No reserves the right to say yes or no to the assumptions. After all, according to Prof. Fabella, assumptions are open to rigorous fact-checking.
I hope the meeting of minds continues, before the Red Sea parts again because of global warming, or the red wine turns sour because of intellectual dishonesty, whichever comes first.