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.

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Coal power and climate alarmism

* This is my article in TV5’s news portal last July 16, 2012.
http://www.interaksyon.com/article/37648/fat-free-economics-coal-climate-and-government

Coal is a cheap energy source for developing economies like the Philippines. We cannot develop fast enough, create more jobs fast enough, if we are groping in the dark with frequent power outages like what we experienced in the early 1990s. Or if a big portion of household and company expenditures are spent on high power rates.

During a Platts forum last week, one of the speakers, Ismael Ocampo of the Department of Energy, presented the following data:

Sources of power generation in the Philippines, percent of total.

Source: Ocampo, Ismael, “Overview of the Philippine Coal Mining Industry”, July 11, 2012.

Total power generation in 2009 was 61,943 gigawatt-hours and in 2010, 67,743 GWh, for a 9.4 percent growth. Notice the big jump in the share of coal from 2009 to 2010, and the decline in natural gas, geothermal and hydro.

This shift is also shown in the increase in local oil consumption, by a million metric tons per year on average. Both local production and importation were also rising.

Coal supply and demand in the Philippines, 2007 to 2011, in million MT

Source: Ocampo, Ismael

What drives this rather fast shift to coal? A second speaker, Cecilia Quiambao who is associate editor of Platts for coal, provided some answers. She showed these charts:

Global coal prices, December 2009 to May 2012.

Prices were increasing in 2010 with peak points at around $130 per ton in January 2011 for the Richards Bay (S. Africa), then mild decent for the rest of 2011, going down to around $98 per ton by May 2012.

Now is the time to further industrialize and modernize with declining global coal and other energy prices. This trend is supported by other developments, as Quiambao illustrated:

– US coal export capacity could reach 270 million MT in 2016, according to UBS. US coal producers can flood the international market once pricing becomes attractive to 270 million MT from the current 158 million MT, increasing the disruptive nature of US suppliers on the seaborne market.

– Bain & Co. said cheap shale gas is set to dethrone coal as the preferred source of power generation in the US in the long term as it is widely available and cost effective. The availability of cheap shale gas in the US and its wide use for power generation has led coal producers to export more to Europe and Asia at cheaper prices.

– Korea South East Power received offers for at least 1.3 million MT of coal in its two recent spot tenders for a combined 260,000 MT.

Thus, supply is five times the amount demanded in the case of Kosep. It is a buyer’s market, thanks largely to the further development of shale gas in the US and other rich economies.

Coal is not an “evil” energy source that is said to contribute to “man-made warming” as portrayed by the UN, Al Gore and some environmental groups like Greenpeace and World Wildlife Fund. Climate change is mainly natural, warming-cooling-warming-cooling in multi-decadal cycles, regardless of how many billions or trillions of tons of coal is burned worldwide each year. So while global warming was true, global cooling was also true, and is happening now.

See below the trend in global air temperature (UAH and RSS satellite data), average for northern hemisphere, tropics, southern hemisphere, and carbon dioxide (CO2) concentration in the atmosphere:

Air temperature vs. CO2 concentration, 1979 to May 2012

Source: Friends of Science, http://friendsofscience.org/

From January 2002 to May 2012, as CO2 kept rising to nearly 400 parts per million, global temperature was declining or cooling by 0.04 degrees centrigrade per decade. “Causality” between more CO2 and “more global warming” is not seen or happening. What we normally experience here in the Philippines and other countries in the tropics is more rain and more flooding, not less, little or no drought, not more. And these are indicators of cooling, not warming.

Recently, certain groups like the National Renewable Energy Board – a new bureaucracy created by the Renewable Energy Act of 2008 (Republic Act 9513) – are proposing to impose a carbon tax on non-renewable energy sources, like $1 per ton of imported coal. This is a rent-seeking move by the NREB and other lobbyists to demonize and make an affordable energy become more expensive. Renewables, like wind and solar power, will become “less costly” as they distort upward the prices of the non-renewables and impose an indirect tax to subsidize the renewables.

This indirect tax is called the feed in tariff scheme. Energy consumers – you and me – will pay FIT for the mandatory use of those expensive power sources. This will make our already high electricity bills more expensive. We have the highest electricity cost for industrial users in Asia: $0.18 per kilowatt-hour in 2010 as against $0.15 in Japan and Singapore, down to only $0.06 in Indonesia and Korea. Check out International Energy Agency, IMD World Competitiveness Online as well as Welfare Economics, Philippine Institutional Issues.

The role of government is to allow enterprises to seek cheaper and reliable power sources, and not play cronyism by taxing some power sources while subsidizing others. For now, coal will become cheaper as many industrialized economies shift to shale gas, and coal producers from those countries will sell lower to developing countries like the Philippines.

This is good news and will jibe with the high growth scenario of the government. Climate alarmism and renewable energy cronyism should not be allowed to distort this new development.

Boo Chanco on the RE law cronyism

* Originally posted on June 02, 2011.

I seldom read newspapers, much less their columnists. I read more a few blogs that I follow everyday, especially science blogs pertaining to climate science, then the facebook updates of my friends, including the news articles that they recommend. Then I read some of those articles or opinions.

The renewable energy (RE) racket “to save the planet” is still on-going. Mind you, they plan to steal from us around P9 billion (roughly US$ 207 million at current P43.3/$ exchange rate) every year for the next 20 years. It’s not a new tax that will go to the government. Rather, it’s an add-on cost that we energy consumers in the Philippines will have to pay extra to the already high electricity prices, to subsidize those expensive solar and wind farms.

Luckily, there are a few local newspaper columnists who have written about the RE racket. Like FEF Fellows Romy Bernardo of BusinessWorld, and Boo Chanco of the Philippine Star.

Last May 27, 2011, Boo Chanco wrote in the Philippine Star:

Renewable energy

Here is something to think about for us electricity consumers, already burdened by one of the highest electricity rates in the world. We are being asked to subsidize the cost of electricity produced by solar, wind and other so-called renewables through the mechanism of the so-called feed in tariff or FIT.

Unless we speak up, we will be forced to shell out some P9 billion every year for FIT for 20 long years… even after technology has made those renewables economically competitive. Of that amount, 50 percent goes to solar and wind, even if they will only account for 20 percent of the RE generated power under the FIT program.

There are those who say we have such a small carbon footprint and because we use significant amounts of geothermal and hydro, our electricity generation mix is already at least 32 percent renewable compared to the US which is under 10 percent. That means the Philippines is already contributing three times as much RE as the US on a country basis.

So why subsidize these fashionable RE technologies now? Why can’t we just wait for the more technologically advanced and financially capable developed countries to shepherd these technologies along until no subsidy will be required? Ironically, these developed countries are cutting back on their RE subsidies lately, notably in Europe.

I understand that even the National Grid will have to shell out substantial capex. It has to cope with all these small power sources going on and off the grid all the time without destabilizing the system. Guess who pays for the National Grid investments?…

Today, Boo wrote again on the RE subsidy racket.

Solar + Wind = Hot Air

… Indeed, solar is still a technology undergoing development. Eventually, it should be commercially viable or competitive with conventional energy. Right now, the only way to make it viable is to subsidize it. It is the same thing with wind. They call that subsidy feed-in-tariff (FiT), a fancy term for the amount they want to add to our electricity bills supposedly to encourage more use of this type of renewable energy.

Some local economists have raised an alarm about going overboard on this FiT in our mindless haste to be seen as fashionably earth loving. The manufacturers of solar and wind energy equipment have successfully lobbied Congress into passing a law that mandates the granting of this subsidy. It also mandates the inclusion of RE into our electricity mix. Because our legislators were only after PR mileage to be seen as being ecologically correct, the law gave no regard to cost implications for our consumers and our industries.

Romy Bernardo, a Ramos era undersecretary of finance, is critical of the P9 billion annual cost of FiT (times 20 years or P180 billion). Of this, 50 per- cent goes to solar and wind, even if they will only account for 20 percent of the RE generated power under the FiT program. “Let’s decide what the public can afford,” Bernardo urges. “It certainly cannot be the P7 to P9 billion PER YEAR over a contract period of 20 years, given the already high cost of power.”

Bernardo is correct. Even the RE developers acknowledge that today’s RE prices are expected to come down. One executive working on the solar initiatives of a local conglomerate told their stockholders meeting just this week that it will take three to five years to reach grid parity based on global studies.

The solar industry is growing so fast, he said, and economies of scale are kicking in. “In the Philippines, projection is by 2015 to 2017, we should reach grid parity.” So why not wait? And why give them subsidy for 20 years when the technology is at grid parity in five? The initial price setting should only be made applicable for the next three or five years. After that, we should review again.

Even if we end up with less RE because we have been too cautious, it would be worse to err on the side of paying too much, locking in the mistake for 20 long years. We already have, in any case, at 34 percent, more RE capacity installed as a percentage of total electricity generated than the US and most European countries. We can afford to wait for the technologies to mature and come down in price.

The Foundation for Economic Freedom (FEF), a public advocacy group espousing market-oriented reform for good governance, has taken the position that “Renewable Energy subsidies must be transparent, limited and technology neutral.” The FEF believes the Feed-in-Tariffs to be issued by the Energy Regulatory Commission (ERC) must provide for an absolute peso cap on the total amount of subsidies that the public will be made to bear, capped both on an annual basis and for the life of the project.

The FEF also wants to make sure that the amount of public subsidy for RE projects should be explicitly disclosed and shown to be commensurate to the social benefit that the public is expected to derive from this program. The outlay should be transparently evaluated based on “value for money” to the public.

The FEF also urged the ERC to consider the ability of the public to shoulder additional levies on a per kWh cost of power. As FEF president Toti Chikiamco puts it, “it’s not only household consumers who will suffer but industry too. It will reduce the competitiveness of Philippine industry, already burdened with one of the highest power rates in the region and a strong peso.”

The FEF economists also think we should buy the cheapest RE available before we buy the more expensive technology. They point out that based on the numbers of the National Renewable Energy Board (NREB), it appears that we can subsidize 11 kwh of hydro for the same amount needed to subsidize 1 kwh of solar. The subsidy equivalent for biomass is 6 kwh for 1 kwh of solar.

Actually, even abroad, the economics of solar and wind are being questioned. In an article on MarketWatch, where I borrowed the headline for this column today, market trader Jim Chanos famed for shorting Enron, argues that wind and solar are “not capable” of real cost-effective ways of meeting energy demands. “Wind and solar are not efficient.”

This is not to say that technologies such as Solar Photo Voltaic have no place in our energy mix at this time. The FEF paper admits solar may be the best, or the only substitute, in some areas, for expensive diesel-fired plants serving off-grid customers.

When solar or wind are used to augment off-grid diesel installations, the avoided costs (or the cost of diesel fuel that would have been used) and the avoided emissions are higher, so the required incremental subsidy is less. And no additional reserves or transmission facilities that add to our power costs are needed. In fact, solar technology is already used in a significant number of rural electrification projects all over the country….

Renewable Energy Act of 2008 and Vince Perez

* Originally posted on May 27, 2011.

The Renewable Energy Act of 2008 or simply the RE law (RA 9513) is proving more as another corrupt law that creates another form of energy cronyism in the country. At least two provisions of the law, the Renewable Portfolio Standards (RPS) and Feed in Tariff (FIT) ensure that the RE power producers have assured income, assured profit, for up to two decades once they start producing power, by forcing us energy consumers to pay them high power rates.

Aside from those take-it-at-this-high-power rate provision, the law also provides a lot of give aways and freebies to developers and suppliers of RE power plants. Exemptions from income tax, from import tax, from VAT, accelerated depreciation, low realty tax, etc.

And aside from those companies not paying certain taxes, legally, they will also get cash incentives (transfers?) and financial assistance from us taxpayers. Hit us with even higher power rates, then hit us further with more taxes going to their companies and pockets. What else can you ask for?

I posted an earlier paper by Romy Bernardo, a BusinessWorld columnist, of this discussion series. Romy also criticized the FIT system.

Another business columnist and a Fellow of the Foundation for Economic Freedom (FEF), Boo Chanco, criticized the FIT. He wrote in Renewable energy, The Philippine Star, May 27, 2011.

Here is something to think about for us electricity consumers, already burdened by one of the highest electricity rates in the world. We are being asked to subsidize the cost of electricity produced by solar, wind and other so-called renewables through the mechanism of the so-called feed in tariff or FIT.

Unless we speak up, we will be forced to shell out some P9 billion every year for FIT for 20 long years… even after technology has made those renewables economically competitive. Of that amount, 50 percent goes to solar and wind, even if they will only account for 20 percent of the RE generated power under the FIT program.

There are those who say we have such a small carbon footprint and because we use significant amounts of geothermal and hydro, our electricity generation mix is already at least 32 percent renewable compared to the US which is under 10 percent. That means the Philippines is already contributing three times as much RE as the US on a country basis.

So why subsidize these fashionable RE technologies now? Why can’t we just wait for the more technologically advanced and financially capable developed countries to shepherd these technologies along until no subsidy will be required? Ironically, these developed countries are cutting back on their RE subsidies lately, notably in Europe….

There is one person whose shadow stands tall in the crafting of the RE law and its implementation: fellow UPSE alumni, former Department of Energy Secretary (2001 to 2005), Vincent “Vince” Perez.
In one of his presentations as DOE Secretary then, he showed this in his 38-slides presentation, The Philippine Energy Sector, October 2004. Wind power was close to his heart then.

In June 2009, as a private citizen and businessman, he presented this paper at the ADB during a climate and energy conference there. He mentioned 3 of his concurrent positions then — with Merritt, Alternergy and the World Wilflife Fund (WWF). Two companies in the wind energy business, and heading a huge environmental NGO that is pushing hard for RE like wind power.

I checked today Merritt Partners’ website, he remains as its Chairman.

Two notable things here. One, he was the head of two RE companies, Merritt and Alternergy, that will benefit from the cronyism  of the RE law. Second, he is the head of a big environmental NGO, the WWF, that put constant pressure to policy makers to stick to the cronyism of the law.

Government should get out of playing favoritism and cronyism among energy producers. If things are indeed “free and renewable” with the RE power plants, then they should not be given any subsidy. But that is not the case. Those RE plants like wind and solar are NOT really free and renewable. The cost of putting  up just one huge tower for a wind turbine should cost six digits already.