Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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Arguments for Solar Energy Now

           There are rather very powerful arguments against investing in solar power now.  The most immediate need in the electricity industry is to bring the cost of power as soon as possible. The high cost of electricity is usually one of the most frequent reasons cited for the lack of manufacturing investments in the Philippines.  There are more time-tested and less costly ways of expanding the supply of energy:  geothermal, hydro, biomass, gas, and most of all clean coal.  Solar is still too expensive and subsidizing it has a high opportunity cost.  There is also the argument that future technology can significantly reduce the cost of solar.  That is why it is more prudent to wait and let other more developed countries shoulder the cost of developing the technology.  I tend to side with those who assign the highest priority now to bringing down the cost of electricity as soon as possible both for the welfare of consumers and to attract larger investments in power-intensive manufacturing industries.  We cannot give up on manufacturing and rely exclusively on services.  Because of our highly productive manpower, improved industrial peace, and strategic geographical location, we can compete with China, Indonesia, and Vietnam, among others, in attracting manufacturing investments in the next ten years.

          For a wider discussion of the renewable energy issue, however, I would like to give a fair hearing to those who are advocating for an earlier implementation of solar energy projects in the Philippines.  That is why I would like to present the side of the Philippine Solar Power Alliance who wrote to the Honorable Senator Sergio Osmena III, Co-Chairman of the Joint Congressional Commission on Power, detailing the arguments for a more aggressive entry into solar power.  Their main points are summarized as follows:

          1.  Consumers should look at the FIT-All Effect, not the FIT rates.  The FIT-All Effect will not be a burden to them.

          2.  Using realistic Avoided Cost results to a much lower FIT-All Effect.

          3.  Each Renewable Energy (RE) technology has its strengths and limitations which justify a balanced portfolio approach for RE adoption.

          4.  Implementing solar now can avert an energy crisis, promote economic development and help alleviate poverty.

          The PSPA argues that the FIT rate for solar, which is 17.95 pesos per kilowatt-hour (kWh) is different from the FIT-All Effect, which is the impact on retail rates, and which ultimately impacts the consumers.  According to PSPA, the FIT-All Effect stands at only 1.14 centavos per kWh for solar over three years.  The FIT-All Effect is calculated by subtracting the "Avoided Cost", or the determined average price at which electric utilities purchase the output of existing power plants, from the proposed FIT rates and then multiplying the result by the projected electrical output (in kilowatt-hours) of the total RE to be installed (called "installation Targets" by the DOE and NREB).  This is then divided by the total national electrical consumption.

          According to PSPA, a much lower FIT-All effect would result from the use of realistic "avoided cost."   This more realistic avoided cost should reflect the average WESM prices, the assumed generation cost in pesos per kWh of a new base load coal-fired plant and the assumed generation cost of a bunker-fired oil plant (peaking-power plant).  The position paper maintained that the FIT-all effect of 10.50 centavos (at P4.50 Avoided Cost of the NREB) is much smaller compared to the recent DU increase of more than 20 centavos in one month in the National Capital Region (NCR) or the more than 50 centavos increase in Mindanao in one year.  In addition, this FIT-All effect will provide additional capacity and displace very expensive peaking power, thereby reducing electricity prices in the future.

          PSPA submits that having a balanced RE portfolio now is the key to energy security.  Here, I am reminded of the daring that the late Energy Minister Geronimo Velasco showed when, during the martial law regime of former President Ferdinand Marcos, he launched the country into the unknown territory of geo-thermal energy.  Thanks to his foresight, the Philippines is now the second highest producer of geothermal energy in the world and is already transferring its own technology to such countries as Chile and Indonesia.  There could be an equally strong argument for exercising sufficient daring in getting into solar today.  The PSPA enumerates the benefits of investing in solar now and not tomorrow:

        1. Immediate deployment:  Solar power plants can be fully commissioned in 6 months, which means they can avert the power shortages currently afflicting Mindanao and some islands in the Visayas.  The recent natural disasters that hit these southern islands could worsen these shortages.

     2.  Positive impact on the grid:  Because solar power is embedded and decentralized, it improves voltage regulation, reduces system losses, and avoids costly transmission lines.  This feature is especially relevant to the remote areas of Mindanao.

     3.  No "raw material" vulnerabilities:  Sunlight will remain available, abundant and free in contrast to rivers which can be subject to drought or biomass waste whose supply and prices are uncertain.

      4.  No geographical limits:  Solar power plants can be installed in any place that receives sunlight--practically the entire Archipelago.  This is in contrast with hydro, ocean, wind and biomass which have geographical limitations and are site-specific.

        5.  Savings to the consumers:  Solar can contribute at least P2.00 in savings on transmission costs and peaking power savings per kWh produced.

      6.  Dispersed nature of installations:  Because of the dispersed nature of solar PV installations, it is the only RE technology that allows households and small consumers to produce  and sell their own electricity, thereby achieving energy security and spurring entrepreneurship among consumers.

          The PSPA paper also addresses the issue of waiting for the costs of solar panels to go down.  It points out that historically costs of solar panels declined as a result of fierce competition among suppliers to meet fast rising demand worldwide, a demand that has been created and sustained through FITs and other market-enabling mechanisms provided by the government.  If there is no demand, obviously there will be no incentive to expand supply and thus, prices will not go down.  It should also be pointed out that panel prices only constitute 60% of the total system cost.  The "Balance of Systems" needs to be locally produced to eventually lower costs.  The only way that this will happen is to create local production.

          Furthermore, interest in solar production is no longer academic.  There are important investors who are seriously considering and who have actually started putting up solar plants.  Delaying solar installations will make the Philippines lose out on roughly US$200 million or more than 8 billion pesos, which could readily increase to US$800 billion or more than 34 billion pesos.  These investments will have significant multiplier effects on the economy with the creation of upstream and downstream industries and the generation of much needed employment for thousands of Filipinos.  For comments, my email address is bernardo.villegas@uap.asia.