Positive and negative disruptions in the electricity market

* This is my article in BusinessWorld last Monday, May 28, 2018.

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Last week, May 22, a BusinessWorld report said “DoE forecast for peak power demand exceeded on May 17” referring to 10,688 MW peak demand in the Luzon grid on May 17 reported by the National Grid Corp. of the Philippines (NGCP) vs peak demand in 2017 of 10,054 MW.

The increase of 634 MW or 6.3% increase can be considered as positive disruption. Demand for electricity to power various economic activities by households and corporations including those with 24/7 operations remains high and they approximate GDP growth.

Reports of more renewable investments and installations, wind-solar especially, are not “disruptors” because in 2017 or nine years after the enactment of RE law of 2008, solar-wind contribution to total electricity generation in the Philippines constituted only a measly and near-negligible two percent (2%).

Reports also of more battery storage for intermittent wind-solar can neither be considered as a “disruptor” because those batteries do not produce electricity. If it is cloudy or raining then there is no extra solar power to store; if the wind does not blow then there is no extra wind power to store.

During the BusinessWorld Economic Forum 2018 last May 18 at Grand Hyatt BGC, among the speakers were Kristine Romano of McKinsey & Company, and Luis Miguel Aboitiz of Aboitiz Power Corporation. Ms. Romano partly mentioned that innovations in the energy sector is among the big disruptors in the world today. Mr. Aboitiz skirted discussing his sector and mentioned more about the challenges and opportunities of endless innovation and disruption in many sectors.

And we go back to renewables touted as disruptor to “save the planet” (save from what, rains and floods?) and there is one belief or myth that continues to persist — that the cost of wind-solar technology is declining quickly so the cost to generate electricity from them will decline too.

Intermittent or variable renewable energy sources (VREs) are given feed in tariff (FIT) or guaranteed price subsidies for 20 years, among many other perks, by the RE law of 2008 (RA 9513). What happened to this scheme?

First, the FIT rates given to RE developers keep rising yearly, despite the touted decline in the cost of wind-solar, and second, the estimated revenues per kWh is are highest for wind-solar and lowest for run of river (RoR) hydro (see table).

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Bangui Wind 1 and 2, built in 2005 then August 2008 or before the enactment of RE law in 2008, a bit anomalous, were also given special FIT rates: P6.63/kWh in 2015; P7.05 in 2016; P7.26 in 2017; and P7.53 in 2018.

Then also last week, May 21, the ERC has granted the rise in FIT-Allowance (FIT-All) in our monthly electricity bill from 18.30 centavos/kWh to 25.32 centavos /kWh starting June 2018 billing. This is to cover under-recoveries in 2017 alone.

And that explains the negative disruption in the Philippines electricity market. Energy coming from “free” solar and wind and “declining” technology cost actually result in even more expensive electricity.

This higher FIT-All rate includes only under-recoveries until 2017. Under-recoveries this year not included yet, so a higher rate of probably 33 centavos/kWh can be expected in late 2018.

The environmental and RE lobbyists succeeded in making cheaper coal become more expensive via higher coal tax of P50/ton in 2018, P100/ton in 2019, and P150/ton in 2020 under the TRAIN law. Taxes for oil used by power plants also went up as well and expanded VAT application to transmission charges.

Expensive electricity is wrong.

Adding more intermittent, brownout-friendly, and expensive VREs like wind-solar is wrong. Adding battery storage will reduce the intermittency but will definitely raise the cost to consumers further.

Government should take the side of consumers who desire cheaper, stable electricity. Government should stop its double standards in energy taxation, slapping higher excise tax for reliable oil and coal plants but exempting from excise tax the unreliable, unstable, intermittent VREs especially wind-solar.

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Solar insecurity, energy stability and affordability

* This is my column in BusinessWorld on February 26, 2018.

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“When PV Solar rely on up to 67% of revenues from subsidies, the state becomes a counter-party that is critical to sustaining the firm’s financial viability. Vagaries of politics imply constantly changing priorities, making for a fickle advocate.”

— Ricardo Barcelona,

author of Energy Investment: An Adaptive Approach to Profiting from Uncertainties (2017).

This is a lesson and reality that will be hard to appreciate for solar energy advocates and developers, that without politics, without forcing and coercing energy consumers to subsidize, directly or indirectly, solar, wind, and other renewables, their advocacy is a losing proposition.

Last Thursday, Feb. 22, I attended the Energy Policy Development Program (EPDP) lecture at the UP School of Economics (UPSE), my alma mater. The speaker was Mr. Leandro Leviste, president of Solar Philippines and his presentation was “Cheap Electricity for a First World Philippines: The 24/7 Solar-Storage Revolution.”

Mr. Leviste boldly declared in his presentation that “Solar is now the least cost for all peaking, mid-merit and baseload requirements, and will thus comprise the vast majority of additional power generation capacity from hereon in the Philippines.”

This is simply not true. If solar is indeed “least cost,” solar developers should have stopped asking for rising feed-in-tariff (FiT) or guaranteed high price for 20 years under the Renewable Energy (RE) law of 2008.

FIT rates for solar batch 1 (2015 entrants) were P9.68/kWh in 2015, P9.91 in 2016 and P10.26 in 2017. For solar batch 2 (2016 entrants), P8.69/kWh in 2016 and P8.89 in 2017. Solar and wind developers are feasting on billions of pesos of additional, expensive electricity slam-dunked on hapless consumers on top of the 11-12 different charges in their monthly electricity bill.

During the open forum, I asked Mr. Leviste two questions:

(1) Will you support the abolition of RE law of 2008 since your presentation shows plenty of improvements and cost reduction for solar, meaning they can survive without FiT, RPS, other subsidies and mandates?

(2) You advocate large-scale solar development in the Philippines, therefore you advocate large-scale deforestation of the country? You showed a big picture of your solar farm in Batangas, zero tree there, anti-green. Solar hates shades – from clouds and trees.

His response to #1 was Yes, we can abolish the RE law but we should also abolish the EPIRA law of 2001, the pass-through cost provisions. To question #2, he said that there are trees outside the solar farm and there are moves to plant crops under the solar panels.

Meaning his answer to #1 is No. On #2, precisely that trees are allowed only outside the solar farm because solar hates shades from trees. While many environmentalists including Sen. Loren Legarda repeatedly say “Plant trees to save the planet,” solar developers like Leandro Leviste are implicitly saying “remove and kill all trees (in solar farms) to save the planet.” The irony of green environmentalism.

The call for “green, environmentally-sustainable energy” is repeatedly echoed in the Philippines and other countries. And many of these advocates are unaware that in the annual report, “World Energy Trilemma Index” by the World Energy Council (WEC), the Philippines is #1 out of 125 countries for several years now in environmental sustainability.

WEC is a UN-accredited global energy body composed of 3,000+ organizations from 90+ countries (governments, private and state corporations, academe, etc) NGOs, other energy stakeholders). The Trilemma index is composed of three factors, briefly defined as:

Energy security: effective energy supply from domestic and external sources, reliability of infrastructure and ability of energy providers to meet current and future demand.

Energy equity: accessibility and affordability of energy supply across the population.

Environmental stability: achievement of energy efficiencies and development of energy supply from renewable and other low-carbon sources (see table).

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(The indicators represent economies as follows, from left to right: Singapore, Japan, Hong Kong, South Korea, Malaysia, Thailand, Indonesia, China, Vietnam, and India)

The Philippines is #1 out of 125 countries covered in Environmental Sustainability. There is high reliance on conventional renewables like big hydro and geothermal, plus newly added variable renewables. There is no need to aspire for rank #0.5 worldwide

Ranking 95th, we are low in energy equity because of our expensive electricity, which is 3rd highest in Asia, next to Japan and Hong Kong.

We place 63rd in energy security — in the middle — and we still need to add big conventional plants like coal to give us 24/7 stable, dispatchable energy to meet demand.

To conclude, these words from Ric Barcelona resonate:

 

“When subsidies are set as the costs differences, the ‘correct’ level is indeterminate. As power prices increase, renewables need lesser subsidies but nevertheless continue to collect. When this happens, consumers would coax regulators to claw back the subsidies because renewables are raking it in at consumers’ expense.”

Energy favoritism under TRAIN

* This is my column in BusinessWorld last December 19, 2017.

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The recently approved tax reform for acceleration and inclusion (TRAIN) by the Congressional Bicameral Committee exhibits a number of favoritism for some energy products and players while penalizing others. In particular, among the three fossil fuels, only petroleum products and coal received tax hike while natural gas was not mentioned and hence, not taxed.

In the VAT base expansion, expensive, unstable and intermittent renewable energy (RE) like wind-solar is again exempted (see table).

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Here are the possible implications:

  1. Since petroleum products are a public good, many goods and services will experience price hikes. Not only fares for jeepneys, buses, taxi, boats, and airplanes but also for agricultural products because most farmers now no longer use carabaos in tilling their farms, they use tractors, big and small; more farmers now also do not use human labor for harvesting rice, they use harvest + threshing combiner machines. Fishermen hardly use manual paddle boats, they use motorboats. Traders no longer use animals in transporting cargo, they use trucks.
  1. Since coal power contributes 48% of total electricity production nationwide (2016 data) despite having only 34% of total installed power capacity, electricity prices will further go up, slowly but surely. Most apologists of raising coal taxes cite the “minimal impact” on households consuming 200 kWh/month. This may be true but those households work in factories, malls and hotels, schools and universities, hospitals and residential condos, airports and seaports. These establishments consume hundreds or thousands of MWh per month, not kWh of electricity. The additional cost will be passed on to the consumers.
  1. Natural gas is also fossil fuel but it was never slapped with excise taxes. The Malampaya gas royalty is a tax on exploitation of a natural resource, the same way that the price of our imported petroleum and coal already include royalties. There is favoritism in exempting natural gas from excise tax. And there are some connections between some legislators and a known economist who pushed for high coal tax but silent on natural gas tax, with a big energy company whose main product is natural gas power generation.
  1. Exempting RE from VAT but retaining VAT for fossil fuels. These REs are enjoying favoritism three times. First, this exemption from a high 12% VAT. Second, they are given guaranteed high prices for 20 years via feed-in-tariff (FiT). Third, they are given priority or mandatory dispatch to the grid even if they are expensive. For instance, FiT for solar1 is P10+/kWh, FiT for wind1 is P9+/kWh, average coal price is P4/kWh, can go down to P1.50/kWh on off-demand hours like midnight.

Oplas-121917-768x402Soon, REs will be given a fourth privilege via the renewable portfolio standards (RPS), or minimum percentage of REs that electric cooperatives (ECs) and private distribution utilities (DUs) must purchase and distribute to households. REs then can price their electricity output high because these ECs and DUs have no choice, they will be penalized if they will not buy those expensive and intermittent REs.

Meanwhile, the DoF is often quoted as saying that “two million richest Filipino families consume 50% of oil products in the country.” This is one of the reasons why they pushed for high tax hike for oil products.

I have been intrigued by that repeated statement since last year and I am wondering what papers or studies justify this?

There are about 25 million Filipino families now. The DoF refers to the richest 2 million families, so the other 23 million middle class and poorer class Filipinos consume the other 50% of oil products.

The DoF is saying then that anytime in EDSA, NLEx, SLEx, roads in Visayas and Mindanao, etc. on average, about 50% of the cars, buses and trucks there transport the two million rich families and their goods? And that about half of domestic flights and the inter-island boat rides transport the richest two million families? This is absurd.

I think the DoF displayed dishonesty and deception in making that claim to further justify the high oil tax hikes. If such DoF claim has indeed objective basis, I am willing to apologize for this remark. For now, that statement is not backed up by solid numbers and hence, deceptive and opportunist.

Alex Magno on FIT and renewables

Reposting an article today by Alex Magno in Philippine Star.

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A businessman-friend sent me a message the other day, railing about how the P18 billion raised through Feed-in Tariffs (FIT) charged electricity consumers could have been used to build a chain of recharging stations in the metropolitan area. Instead, as intended by our corrupt policies, FIT collections went to political cronies who claim they are saving the environment by investing in renewable energy.

With a chain of recharging stations in place, we could leapfrog the jeepney modernization program to use electric, not just Euro-4 compliant, vehicles. The technology is there. The recharging stations are not.

The environmental impact of clearing out the dirty diesel engines and putting in electric vehicles will be dramatic. The death toll from polluted air should drop remarkably.

FIT collects billions from consumers, keeping our power price regime high therefore depleting our manufacturing. In 2015, total FIT collections amounted to P10.22 billion. In 2016, with adjustments in the FIT rate, total collections ballooned to P18.54 billion. Estimated FIT collections for 2017 is placed at P24.44 billion.

Not a single peso from FIT collections goes to improvement of infrastructure. All the billions shelled out by poor electricity consumers via FIT go to offsetting business risks and ensuring profits for those who set up renewable energy facilities. The cronies who benefit from this have pulled off a massive scam by wrapping their enterprise with the cloak of political correctness.

It is not too late to scuttle this scam. We have much to learn from the experience of Australia on this matter.

As demand nears supply, Australians now realize that renewable energy is not a dependable source. It cannot provide the baseload capacity an economy needs to achieve energy security. Subsidizing renewable energy merely raises electricity prices, undercutting an economy’s ability to compete.

Renewable energy is well and good if consumers are not forced to subside them. In our case, the subsidies are better used to modernize mass transport systems.

Our backward and inefficient public transport system is, after all, the biggest contributor to the degradation of air quality in the urban centers where most of our people now live.

The cult of political correctness has misled many environmental activists otherwise acting in good faith. They ended up justifying FIT subsidies and, at the behest of cronies, demonizing coal power generation. They gloss over the fact that new technologies for coal power generation have made the iconic black smokestacks a thing of the past.

Those who make profits without assuming business risks by using FIT had the gall to demand even higher rates of subsidies from consumers. Fortunately, Energy Secretary Al Cusi has a clearer grasp of things. He rejected demands to further raise FIT rates.

More growth needs more Megawatts

Reposting an article in Manila Standard last Monday by a friend, Orly Oxales of Stratbase-ADRi.

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More growth needs more megawatts
posted May 22, 2017 at 12:01 am by  Orlando Oxales

For many Filipinos, there is something visceral about electricity. We know that it is not free, that modern life has grown dependent on it, and that any fluctuations related to its price will affect the way we budget our routine household expenses.

This is why news of the Energy Regulatory Commission’s version of “dagdag-bawas” will hit a nerve in every consumer. News of a nearly P7-billion refund of over-recoveries by Meralco was quickly negated by the announcement of a consequent rate hike, thanks to an approved increase in Feed-in-Tariff rates.

Needless to say, the two issues have generated their own share of intrigues and controversies. The refund stems from over-recoveries incurred between 2014 and 2016. Meralco officials explained that “timing issues” gave rise to such over-recoveries, as the rate used to compute for the generation charge in a current billing month is based on the generation cost incurred in the previous one. This thus creates a lag.

Meanwhile, the increase in FIT rates, ostensibly to help boost the renewable energy sector, represents what some say are “very fast adjustments” from 4.06 centavos/kWh in 2015 to 12.40 in 2016 and eventually 26 centavos in mid-2017. Critics of the initiative have hit what they describe as excessive intervention from the government, not only in price control but also in the grid prioritization of otherwise intermittent and unstable energy sources.

For many, what this does, effectively, is sacrifice consumer interest and cheaper and stable electricity for corporate interest and “saving the planet,” via guaranteed pricing, a slew of fiscal incentives, and other privileges. Because of this skewed prioritization, some even describe it as anti-consumer.

There are also reports of so-called “Meralco midnight deals” between the ERC and Meralco-affiliated generation companies that allegedly allowed some 3,551 megawatts of negotiated power supply agreements with periods of 20 years to evade a mandated competitive bidding policy. Some lawmakers have hit the delayed implementation of this rule and hinted at a collusion, something that both parties have vehemently denied.

For its part, the ERC maintained that the extension was not meant to favor any particular utility or generation company. Some industry observers say the move is to “proactively” assure sustainable power supply; distribution utilities and electronic cooperatives from across the country have planned for such by entering into supply contracts with suppliers early on in order to not only  decrease exposure from uncertainties of the wholesale electricity spot market but, more importantly, to guarantee the supply requirements of their customers.

After all, some say, an initiative that aims to replace bilateral agreements with competitive bidding will not succeed due to a serious lack of power producers that can adequately supply the country’s growing demand for power. In short, the initiative doesn’t address the problem of supply, which the Duterte administration’s build-build- build mantra will also need to confront. That necessary surge will only be possible in a healthy market environment with enough energy players.

According to some forecasts, the Philippine economy has the capacity for robust long-term economic growth of about 4.5 to 5 percent per year over the 2016 to 2030 time horizon. But this level, pace, and consistency of growth will require an additional 7,000 megawatts of power generation capacity built over the next five years.

For this to materialize, there needs to be a concrete plan to improve from mere sufficiency to a surplus of energy supply. The Department of Energy’s power development plan aims to make this a reality. Aside from the invitation of foreign investors, local players are also bullishly gearing up for this scenario. This should appease industry, at least for now.

For consumers, the DOE Task Force to Lower the Cost of Electricity in its final report has already identified the main elements contributing to the cost of power along the chain, from generation, transmission, to distribution. Their recommendations include the rationalization of taxes and the removal of bureaucratic barriers to encourage more investments in power plants.

Thus, for both industry and consumers, the issue of supply seems to be the epicenter of our persistent power woes and should guide the rethinking of our energy policies.

Ever increasing burden of FiT

I am reposting this article today in BusinessWorld by a friend, Paco Pangalangan of Stratbase-ADRi.

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Just the other day, the Energy Regulatory Commission (ERC) announced the approval yet again of an increase in Feed-in-Tariff (FiT) rates to be collected from consumers.

Starting next month, the National Transmission Corp. (TransCo), which manages the FiT fund, will begin collecting an additional P0.0590 per kilowatt-hour in FiT rates, bringing the rate up to P0.1830 per kWh. The announced rate increase was conveniently tucked behind the news that Meralco customers would be seeing a reduction of 75 centavos per kWh as part of the distribution utility’s nearly P7-billion refund for over-recoveries. While this may cushion the blow of the increase in collections, the refund will last but three months, while the FiT rates will pretty much stay.

FiT, if you recall, was the centerpiece of the Renewable Energy (RE) Act when it was passed in 2008 (Republic Act 9513). The law, which aimed to accelerate RE development in the country, sought to incentivize RE developers by providing them with a guaranteed power rate for the electricity they produced, a long-term contract and priority connection to the grid. To fund the incentive, beginning in 2012 and until today, every electricity consumer pays a uniform FiT rate which is factored into the computation of your monthly power bill.

The allure of the guaranteed power rate over several years had developers scrambling to qualify for FiT when the first round of certifications were handed out. After two rounds, the Department of Energy (DoE) had already exceeded the target allocations for both solar and wind, and as an effect of the increased number of RE providers that were owed incentives, consumers have seen what some say are “very fast adjustments” in the FiT rates charged to them. Currently, consumers pay P0.1240 per kWh, up from just P.0406 in 2015. By the time the rate increase is introduced next month, however, the FiT rate would have increased by over 300% in under three years.

Despite the DoE exceeding the initial allocations for RE developers, and not to mention the impact of FiT rates on the monthly power bill of consumers, developers, particularly the solar developers that missed out on previous rounds, are clamoring for a third round of FiT.

Thankfully, upon taking the helm of the DoE last year, Sec. Alfonso Cusi quickly thumbed down the possibility of third round, saying that it would only add burden to consumers already paying high electricity rates.

Currently, the Philippines already has among the most expensive electricity prices, ranking third in the region, fourth in Asia Pacific and 16th worldwide. Aside from the high cost of electricity, the thinning reserves and lack of competition in the generation side of the industry remain challenges for the sector.

There is a clear need to create competition in the industry and bolster generation to meet the growing demands of our economy, but surely there must be a way to attract more investments into the power generation sector without having to dole out fiscal incentives that, in the long run, are lopsided against the consumer.

Why not revisit discussions in DoE, the Philippine Senate and House of Representatives to fast track the permitting and licensing of power projects by declaring them projects of national significance. Currently, the process of securing permits and licenses from the various national agencies and local government units remains drawn out, an issue for power developers for the longest time. All this red tape not only prolong the building of much needed power plants, the cumbersome process also wards off prospective investors as well.

Under the proposal of Sen. Sherwin Gatchalian, the chairman of the committee on Energy, power projects of national significance will be given priority by compelling permit-giving government agencies to work within a specific timeframe. Furthermore, a one-stop shop for energy-related projects to cut redundancy in filing documentary requirements could also be created. A policy such as this could also become the subject of an Executive Order from Malacañang; after all, fighting red tape is also a priority of the current administration. But whether done through EO or legislation, the policy should avoid passing the burden on to consumers by creating new incentives.

This policy may not immediately translate into the development of RE as envisioned in Republic Act 9513, but with RE technology continuing to become more and more affordable, it could soon displace traditional sources as baseload generators. When this happens, consumers should be able to benefit from these developments in technology. With FiT rates this won’t happen since they will continue to pay the fixed tariff dictated by the FiT mechanism while RE developers get to hoard its benefits.

This early, the ERC, as the industry regulator, should champion the rights of consumers, review the implementation of FiT, and disallow any proposed FiT rate increase. This stand against FiT and the burden it causes on consumers can further be supported by the DoE by formally rejecting a third FiT round and by supporting Congress in crafting a policy that can spur investment on the generation side.

Francisco Paco Pangalangan Secretary-General of CitizenWatch and an Energy Fellow with the Stratbase ADR Institute.

Why the FiT-All is a burden to consumers

* This is my article in BusinessWorld today.

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Last May 15, Transmission Corp. of the Philippines (Transco) presented at the Energy Regulatory Commission (ERC) its petition of Feed-in-Tariff Allowance (FiT-All) for 2017 of 26 centavos/kWh. Very fast adjustments from 4.06 centavos/kWh in 2015, rose to 12.40 centavos in 2016, and soon 26 centavos starting mid-2017, all “to save the planet.”

The ERC still has to conduct public hearings in Visayas and Mindanao until early June and likely to make an order by late June, to be reflected in our monthly electricity bills starting July 2017.

The feed-in-tariff (FiT) provision in the Renewable Energy (RE) Act of 2008 (RA 9513) is very anomalous on the following grounds: (1) guaranteed price locked in for 20 years despite technology improving very fast these days, (2) the FiT rates are rising (see table below) yearly due to inflation and forex adjustments, (3) FiT rates of P8+ to P10+ per kWh for wind-solar are way high compared to current Wholesale Electricity Spot Market (WESM) average prices of P2-P3/kWh, (4) current capacity installations for wind and solar are higher than what was allotted, and (5) even consumers in Mindanao who are not part of WESM, not connected to the Luzon-Visayas grids, are paying for this.

The total forecast cost revenue of FiT-eligible plants would be (in P Billion): 10.22 in 2012-2015, 18.54 in 2016, 24.44 in 2017, and 26.14 2018. The bulk of this will go to wind and solar plants.

(a) Wind: 6.32 in 2012-2015, 8.00 in 2016, 9.20 in 2017, 9.20 in 2018.
(b) Solar: 1.50 in 2012-2015, 5.88 in 2016, 7.03 in 2017, 7.00 in 2018
(c) Biomass: 1.86 (2012-2015), 3.95 (2016), 6.69 (2017), 6.79 (2018)
Hydro is small, only 1.52 in 2017 and 3.15 in 2018.
(Source: ERC, Case No. 2016-192 RC, Docketed April 27, 2017, Table 4)

Below are the beneficiaries of expensive electricity via FiT scheme by virtue of their hugeness and higher FiT rates.

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Many renewable firms were not able to snatch the limited FiT eligibility but they can still make money from expensive electricity via the renewable portfolio standards (RPS) provision of the RE law. The RPS coerces and forces distribution utilities (DUs) like electric cooperatives and Meralco to purchase a minimum percentage of their electricity supply from these expensive renewables, the price differential with cheaper conventional sources they will pass to the consumers. If DUs will not do this, they will be penalized and the cost of penalty they will still pass on to the consumers.

fitThe government should step back from price intervention and price control, grid prioritization of intermittent and unstable energy sources via legislation. Consumer interest of cheaper and stable electricity should be higher than corporate interest of guaranteed pricing for 20 years, lots of fiscal incentives and other privileges that are marks of cronyism. RA 9513 is anti-consumers, anti-industrialization and hence, it should be abolished soon.