Monday, May 2, 2011

Renewable energy -- reality check

Posted on January 30, 2011 08:37:59 PM
Introspective -- By Romeo Bernardo

Renewable energy -- reality check

The Philippine Renewable Energy Law passed in 2008 has been applauded by environmental groups, renewable energy firms, and official donor institutions keen to play a role in addressing global warming. We who pay taxes and high energy bills need to be a little more wary.

My attention was caught by a news article reporting a billion-dollar renewable energy loan program being negotiated between the Asian Development Bank, other official co-financiers, and the Philippine government. The news item said that "most of the $ 1 billion loan will be focused on supporting solar, wind and biomass power projects". I hope this is inaccurate, and that most of the funding goes to sound components of the program like raising consumer awareness on energy efficiency and regulation for energy-efficient equipment and appliances, instead of subsidizing inefficient technologies.

The hard reality is that the technology for these three sources is far from mature as seen in their exceedingly high price: solar costs P25 per kWh, biomass and wind around P 10. This compares very poorly with the current grid rate of P4.50 per kWh -- anywhere from two to five times true cost now.

So who will carry the high cost of these immature technologies? Answer: Feed In Tariffs (FIT). An add-on, a tax if you will, to the average cost of power in the grid for everybody. The law obliges the power industry participants to source electricity from generation at a guaranteed price applicable for a given period of time but no less than 12 years, supposedly to accelerate the development specifically of emerging RE resources. This cost to the public is on top of the tax gives the Renewable Energy Law provides developers, including income tax holidays for seven years, duty-free importation of renewable energy machinery, equipment, material for 10 years, special realty tax rates, etc.

The FIT provisions seem to have been adopted from laws in developed European countries, meant to subsidize emerging technologies by burying it in the general public’s power bill. The FIT number floating around in discussions for the Philippines is 15 centavos add-on per kwh used by each consumer. This amount may seem small, until one considers that this is an add-on to one of the highest per-kWh costs of power in the region, arising from our archipelagic geography and legacy/stranded costs.

Moreover, this 15 centavos translates into a P10-billion ANNUAL subsidy, hardly the best use of money for a country that has huge social and basic infrastructure requirements. For perspective, the World Bank/ADB-supported conditional cash transfer program for this year which will bring millions and generations of people out of poverty by keeping children in school, only adds P20 billion to the budget. (It is as if a poor minimum wage earner in 1990 became early buyer of first-generation mobile phone for P50,000 and signed up a P 5,000-a month contract for a dozen years .)

The direction discussions seem to be headed is to define a guaranteed FIT and quota for each particular RE resource, or worse, for each particular RE supplier. As the FIT can be as high as five times current per-kWh power cost, such customized arrangements for each resource or supplier will clearly be prone to rent-seeking. To prevent this, ERC should set a single low FIT open for all RE, one only slightly higher than the current average cost of power. If they price too high, the mistake hounds us for 20 years or however long the subsidy lasts. On the other hand, the only consequence of pricing low is that there won’t be enough takers. That should not be a problem at all as the ERC can fine-tune the pricing the following year. Since RE is not expected to be part of baseload, the lack of takers should have no consequence on power supply. Besides, the cost of these technologies will surely decline over time and more efficient technologies will still emerge -- so no advantage in rushing.

These solar and wind technologies are already being subsidized by those who can afford them --taxpayers and consumers in developed countries helping their firms in these emergent technologies -- in many cases, though, with deep regret. Spain, in a fiscal and financial bind, is reportedly taking steps to nullify uneconomic long-term contracts with solar power providers.

Australia too is shifting spending from RE to more pressing flood damage rehabilitation. (There is an important lesson here for the business and government in doing PPPs -- in the long run, sound economics is the best, arguably, the only, guarantee for contract compliance.)

If we don’t support solar, wind, and biomass, are we failing to do our proper share in carbon emission reduction? No we are not. The Philippines contributes a miniscule of carbon emission given our low income and level of industrialization. Moreover, we can hold our head high on our current RE resource mix. In contrast to the global average of under 10%, fully 42% of our generated power already comes from green, RE sources: geothermal and hydro. Our Department of Energy is right to focus on the basic problem of ensuring affordable and secure supply of electricity -- and calling for caution in embracing these fashionable, but for now, costly, distractions.

Romeo Bernardo was Finance undersecretary in the Aquino 1 and Ramos administrations. He is the Vice Chair of the Foundation for Economic Freedom, Inc. and a board director of the Institute for Development and Econometric Analysis.

1 comment:

  1. Romy is correct here. The RE law is simply a huge racket by the RE firms lobby, like former DOE Sec. Vince Perez' wind power companies. If those RE power plants are really needed by the public, then they don't need legislation to coerce the public to purchase from those expensive power plants. I quoted portions of Romy's paper and expanded my critique of man-made warming scam here,