A bad FIT
Introspective -- By Romeo L. Bernardo
Business World/ May 9, 2011
There have been numerous publicity releases from advocates and developers of renewable energy projects in connection with the forthcoming release of the Feed-in-Tariff (FIT) recommendations by the National Renewable Energy Board (NREB). From here, it will be subject to public hearings by the Energy Regulatory Commission.
Allow me to share a statement, below, of the Foundation for Economic Freedom on this issue: "Make Renewable Energy subsidies transparent, limited and technology neutral." The FEF is a public advocacy group espousing market-oriented reform for good governance and consumer access.
It counts among its fellows, eminent economists and former senior government officials such as PM Cesar Virata, Felipe Medalla, Bobby de Ocampo, Mahar Mangahas, Gerry Sicat, Anton Periquet, Peter Wallace, Simon Paterno, Arsenio Balisacan, Ernest Leung, Gary Teves, and my three fellow columnists under this Introspective column banner -- Cayetano Paderanga (on leave), Raul Fabella, and Calixto Chikiamco.
Quote. In the matter of implementing the Renewable Energy Act of 2008 (R.A. 9513), the Foundation for Economic Freedom (FEF) believes the Feed-in-Tariffs to be issued by the Energy Regulatory Commission must provide for an absolute peso cap on the total amount of subsidies that the public will be made to bear. These subsidies must be capped both on an annual basis and for the life of the project.
The amount of public subsidy for Renewable Energy (RE) projects, which could run to several tens of billions of pesos per discussions at the National Renewable Energy Board, should be explicitly disclosed and shown to be commensurate to the social benefit that the public is expected to derive from this program. As is done for all public expenditures, the outlay should be transparently evaluated based on "value for money" to the public. It should likewise consider the ability of the public to shoulder additional levies on a per kWh cost of power. The Philippines already suffers from one of the highest power rates in the world. We should not unnecessarily add to the already heavy burdens of our electricity consumers and businesses.
Moreover, the FEF believes that the selection of projects that have recourse to such subsidies should be based on lowest cost Renewable Energy projects first, regardless of technology. We believe this is the best use of resources for the country as it will require the least amount of subsidies per kilowatt-hour generated, which in turn can support higher installation targets and greater quantities of environment-friendly energy for a given cost to the consumer.
We estimate the subsidies required for the two most expensive RE technologies, Solar and Wind, could otherwise pay for 5 times as much energy from the next cheaper source, which is Biomass, or 8 times as much energy from the cheapest, which is Run-of-River hydro, of the RE technologies eligible for the Feed-In Tariffs. When you add the cost of additional reserves and transmission facilities needed to support these RE projects, the case for judicious allocation of the FIT subsidies becomes even more compelling.
While this approach may initially discourage diversity of RE sources, the potential to produce more Renewable Energy at affordable costs should be the overriding policy direction. In any case, the projected energy from these more expensive technologies is not of a magnitude that would impact the energy mix, just the energy cost. Postponing some of the more expensive technologies, instead of locking in the high costs now for 20 years, will allow the Filipino people to benefit from the expected improvements in both the efficiency and costs of these technologies. The Philippines already has renewable energy generation capacity equivalent to almost 34% of its total installed capacity, well ahead of most other countries in the world. We can move further ahead by focusing our limited resources on the more affordable renewable energy projects at this time.
This is not to say that technologies such as Solar PV have no place in our energy mix at this time. They may be the best, or only, substitute, in some areas, for expensive diesel-fired plants serving off-grid customers. When they are used to augment off-grid diesel installations, the avoided costs (and emissions) are higher, so the required incremental subsidy is less. And no additional reserves or transmission facilities are needed. In fact, solar technology is already used in a significant number of rural electrification projects all over the country.
We support the Renewable Energy Act of 2008 and believe our future hinges on the sustainable use of resources. But when the public has to bear the costs, let us ensure the resources are used judiciously. End.
Postscript. The recommended FIT program will likely add 13 centavos per kWh to everyone’s bill, amounting to P 9 billion annually, or P 180 billion for the twenty year proposed contract period. That could buy an awful lot of school buildings, highways, houses for the homeless, etc., all of which provide very clear benefits to the public.
On the other hand, what is it exactly that the envisioned FIT program is supposed to buy us? It is unclear. Is it to lower our carbon emissions in order to help arrest global warming? Our carbon footprint is a rounding error vs. the large and more industrialized countries, and our RE component, at 30 to 40 pc of installed capacity, is already five times the global average.
If despite these, we want to do more carbon emission reduction, why choose such an inefficient RE technology like solar for on-grid whose subsidy cost for carbon reduction is six times bio-mass, and eleven times hydro?
Instead of adopting the NREB recommendations, the ERC can rule that just like any government procurement, RE projects should be selected using an auction process, thus minimizing costs and/or maximizing benefits. Or ERC can set a universal FIT level only fractionally higher than current cost of power-say no more than 30 pc higher (vs. in excess of 300 pc premium for solar) and approving all projects meeting that hurdle, irrespective of technology. Our ERC will save our people tens of billions of pesos of needless higher electricity expense over the next 20 years. By doing this, it can also relieve pressure on electricity rates so that universal charges under the EPIRA can be promptly implemented, and thus provide our national treasury funding for needed social and infra spending -- instead of giving these money away to foreign suppliers of immature and inefficient technologies.
Mr. Romeo Bernardo is a board member of The Institute for Development and Econometric Analysis, Inc, (IDEA). He was Finance undersecretary during the Aquino and Ramos administrations. He also currently serves as the Vice Chairman of the Foundation for Economic Freedom, Inc.