TOWARD INCLUSIVE AND SUSTAINABLE ENERGY DEVELOPMENT: ISSUES AND CHALLENGES EPDP Conference 2016 Sarah Lynne Daway and Lotis Quiao
The Need for Inclusive and Sustainable Energy Development
Aspects of Inclusive and Sustainable Energy Development
Key Issues and Challenges
Climate Change, Renewability, and Efficiency
Other Key Challenges
Towards “Filipino 2040”
UPecon Foundation Cover photos from: www.supremeco.com www.biztekmojo.com galleryhip.com www.mainframegroup.net www.feed.org.ph www.cnbc.com TOWARD INCLUSIVE AND SUSTAINABLE ENERGY DEVELOPMENT: ISSUES AND CHALLENGES EPDP Conference 2016
Sarah Lynne Daway and Lotis Quiao*
*Sarah Lynne Daway is a research fellow at the Energy Policy and Development Program and an assistant professor at the University of the Philippines Diliman
Lotis Quiao is a consultant at the Energy Policy and Development Program
This study is made possible by the generous support of the American People through the United States Agency for International Development (USAID) under the Energy Policy and Development Program (EPDP). EPDP is a four-year program implemented by the UPecon Foundation, Inc. The contents or opinions expressed in this paper are the authors’ sole responsibility and do not necessarily reflect the views of USAID or the United States Government or the UPecon Foundation, Inc. Any errors of commission or omission are the authors’ and should not be attributed to any of the above. 2016 EPDP PROGRAM COMMITTEE
Dr. Majah-Leah Ravago Research Fellow [email protected] The Energy Policy Dr. James Roumasset Research Fellow Development Program [email protected] (EPDP) hosted a two-day international conference Dr. Raul Fabella Research Fellow entitled, “Toward [email protected] Inclusive and Sustainable Energy Development” Prof. Ruperto Alonzo to provide a venue for Research Fellow [email protected] the airing of ideas and concerns. Dr. Rolando Danao Research Fellow [email protected] It is the primary aim of this note to be an honest Dr. Dennis Mapa broker of the issues Research Fellow [email protected] and challenges that were presented at the Dr. Ujjayant Chakravorty conference. Research Fellow [email protected]
Dr. Nori Tarui University of Hawaii-Manoa Associate Professor [email protected] EPDP Conference 2016 Toward Inclusive and Sustainable Energy Development
RATIONALE Energy remains a crucial element of economic growth and development. It is a key input to economic production. Energy provides power, heat for industrial processes, and transportation that are critical to competitive and well-functioning economies. On the other hand, energy supply disruptions, such as the electricity shortage experienced by the Philippines in the 1990s, take a heavy toll and alter the trajectory of a country’s economic growth.
As the Philippines adopts the framework of inclusive growth provided in the Philippine Development Plan of 2011-2016, one of the main development policy frameworks is boosting the competitiveness of our industries. Inclusive growth means a sustained high growth that generates mass employment and reduces poverty. Clearly, the energy sector plays a pivotal role in achieving inclusive growth. Further, energy is highly interwoven with other key development concerns, including food security, water, resource management, and the environment.
Due to perceived future energy scarcity and its impact on the country’s economic growth, the country’s need for evidence-based public policy on energy is both compelling and urgent. As several challenges continue to beleaguer the energy sector, the international conference brought energy issues to the forefront of policy and academic discussions in the Philippines.
More than 250 policymakers, industry leaders, practitioners, experts, academics, and other stakeholders gathered in this 2-day event that re-surfaced and articulated policy and research issues in energy. Various attendant issues such as pricing, electricity markets, energy resources mix, project financing, sustainable development, policy infrastructure within and amongst regulatory and policymaking institutions, vagaries of climate and other uncertainties, and energy security were among the many highlights in this international discourse.
OBJECTIVES The chief objective of the conference was to develop and promote knowledge, research, and best practices that can be used by policy makers, academics and other stakeholders in designing and implementing efficient energy programs with the ultimate aim of delivering more cost-effective, sustainable, environmentally-sound, and reliable service.
While the primary participants of the conference were policymakers, academics, practitioners, and stakeholders based in the Philippines, the conference also attracted participants from various parts of the world.
It is hoped that institutional policy development will be guided by the articulations emanating from the discussions on the various thematic and issue papers. The Need for Inclusive and Sustainable Energy Development
It is a generally accepted truth that a modern society that seeks to promote the common good must want of an inclusive and sustainable energy development strategy. Energy is both an indispensable commodity in modern living and a necessary factor in the well-functioning of all modern production sectors: agriculture, services, and most especially, industry. Former Socioeconomic Planning Secretary Arsenio Balisacan declared that the proper infrastructure support, especially for inclusive and sustainable energy, is key to the Philippines’ bid for a higher and more inclusive long-run Dr. Susan Brems, USAID Mission Director, wished the participants a growth trajectory that generates wide-ranging fruitful learning experience during her opening remarks. employment, reduces abject poverty, and will catapult the country into the high-income range priority areas to inform and aid the formulation by 2040. At the same time, there is also the of coherent, evidence-based, and results- country’s commitment to the 21st Conference oriented energy policies and strategies. Indeed, of Parties (COP21) to contribute to the global it was two days well spent in such erudite and reduction of greenhouse gas (GHG) emissions to expert company, where various imperative avert the consequent climate-change disasters, issues related to inclusive and sustainable primarily through the increased utilization of energy development, such as electricity markets renewables and the more efficient use of energy. and pricing, energy resources mix, project financing, policy infrastructure within and The Herculean task of urgently and among regulatory and policymaking institutions, appropriately addressing the issues and climate change and other uncertainties, were challenges in the energy sector requires brought to light. a concerted effort amongst the different stakeholders. In recognition of this compelling It is the primary aim of this note to be an need, the Energy Policy Development Program honest broker of the issues and challenges that (EPDP) hosted a two-day international were presented at the conference. But first, it is conference entitled, “Toward Inclusive and incumbent upon us to unpack what is meant by Sustainable Energy Development” to provide “inclusive and sustainable energy development” a venue for the airing of ideas and concerns in the Philippine context and in line with the of the brightest experts from the academe, conference presentations and succeeding government, private sector, and other discussions. We then move on to identify the stakeholders in the energy sector both from key priority issues and challenges that must the Philippines and abroad. The goal of the be addressed in devising an inclusive and conference is to collaboratively identify key sustainable energy development strategy.
“Proper infrastructure support is key to the Philippines’ bid for a higher and more inclusive long-run growth trajectory that generates wide-ranging employment, reduces abject poverty, and will catapult the country into the high-income range by 2040.”
2 Aspects of Inclusive and Sustainable Energy Development
Inclusive energy development entails the aspects of affordability and availability of energy to all sectors of society, including the poor and far-flung areas. Sustainable energy development mainly involves the aspects of reliability, sufficiency, and “A favorable combination of efficiency – that hinge on reliability and optimal fuel mix – of energy. This implies continuously sound energy policies and meeting the instantaneous consumption demand for energy in the short-term and meeting the regulations is a condition growing energy needs of a developing economy sine qua non for inclusive in the long-term. As such, an inclusive and sustainable power supply will involve scrupulous and sustainable energy forward-looking technical planning and demand forecasting to motivate fitting and timely development.” investments in the energy sector.2
Given the complexities and rigor involved in the delivery of the aforementioned technical aspects of energy, a favorable combination of sound of Hawaii Manoa and EPDP program advisor energy policies and regulations is a condition said, “Too many objectives spoil the broth.” It sine qua non for inclusive and sustainable is thus not our aim to tackle all the issues that energy development. Sound energy policies were raised, as such an endeavor would be and regulations should also work to ensure the intractable. We only lay out the key issues that smooth functioning of the electricity market were raised in the plenary, panel, and parallel by delineating and enforcing the parameters of sessions during the two-day energy conference. competition that would afford a level playing field These key issues, broadly speaking, pertain amongst the different stakeholders, and ensure to: 1) energy generation; 2) energy demand; good coordination of decisions and investments 3) energy policies; 4) climate-change policies by providing the proper incentives, possibly, in and implications on energy utilization and terms of non-distortive tariffs and/or subsidies, development; and 5) other key priority areas and at the same time, allow enough flexibility raised in the discussions and open fora. to adapt to technological advancements and the corresponding implications on demand and Energy Generation supply, towards the ultimate goal of promoting the common good. Meticulous care and attention The bulk of the issues raised in the conference must be taken in the formulation of energy policies pertain to aspects of energy generation, which and regulations, as unintended consequences include the entire supply chain of generation, and implementation failures can sabotage the transmission, and distribution. Philippine operations of even the most appropriate and energy supply is fraught with issues regarding the most advanced energy technologies and its affordability, availability, reliability, and infrastructure. sufficiency – aspects that are part and parcel of energy inclusivity and sustainability. The aspect Key Issues and Challenges of renewability will be presented under “Climate Change, Renewability, and Efficiency.” As Dr. James Roumasset of the University
1Ravago and Roumasset [40] argue that “sustainable energy policy” should not be interpreted to embrace renewability. This is based on Borenstein (2012), who says that renewability is a derivative objective based on emission control, infant industry argument, and a few other ultimate goals, most of which are themselves misconceived. Echoing Acemoglu, he further says that renewable subsidies are not appropriate for any of those goals and wind up with some noxious unintended consequences. 2Dr. James Roumasset commented that `sustainable’ has myriad definitions, some of which might even have welfare-reducing implications. One should thus refer to the concerns underlying sustainability, such as system interdependence and intergenerational equity, noting that the traditional welfare concepts need to be interpreted broadly to include these. 3 Affordability “Energy poverty” indeed, as Ravago, Punongbayan, Brucal, and Roumasset Philippine electricity prices [42] found that across countries, are, on average, one of the the trajectory of manufacturing, highest in the ASEAN region: which is a key engine of productivity for instance, while one kWh growth, employment, and poverty is priced at only about $0.19 reduction, is sensitive to varying in Singapore, a kWh costs levels of electricity prices. Premature $0.24 in the Philippines. The deindustrialization that occurs when disparity is even more dismal manufacturing development peaks when compared with fast- at lower employment shares and at growing Vietnam, which only earlier stages of development, can be charges $0.09 per kWh3. Even explained in part by the prevalence after taking out the taxes and of high electricity prices that raise subsidies, USAID CEnergy the cost of doing business in the reports that Philippine energy Philippines relative to other countries rates remain 30% higher than “Philippine in the region. Moreover, they find those of Indonesia, Malaysia, that in the Philippines, the shares and Thailand. Such a relatively electricity of manufacturing to regional output higher cost of electricity decline with the average regional serves not only as a deterrent prices are, electricity prices. As such, energy to further growth-enhancing affordability strikes at the very heart of investments in manufacturing, on average, energy inclusivity. as it raises the cost of doing business in the country, but one of the Dr. Raul Fabella, National Scientist, also as a barrier to energy Professor Emeritus at the University of inclusiveness for the poorer highest in the Philippines (UP) and EPDP Fellow, sectors of society and thus, a reminded us of Del Mundo’s (2014) devastating blow to consumer the ASEAN findings regarding contributors to high welfare in general. In fact, energy prices: 1) taxes and subsidies; compared to the rest of the region.” 2) low generation capacity per capita ASEAN, the Philippines has the due to the very low reserves and lack lowest per capita residential of new Greenfield investments in the consumption of electricity Energy Power Industry Reform Act of (JICA-IEEJ, 2013), yet per capita 2001 (EPIRA); 3) suboptimal fuel mix; spending on power consumption 4) feed-in-tariffs (FIT) and missionary is the highest at around charges; 5) governance failures in 3% of per capita household the form of red tape, unnecessarily expenditure in the Philippines, cumbersome licensing requirements, while it only ranges from 1.4% local-central government impasses, to 1.9% in Japan and in other etc.; and 6) market failures due to the ASEAN countries (JICA-IEEJ, existence and possible abuse of market 2013). This is a phenomenon power and the possible transfer-pricing that Prof. Rowaldo Del Mundo of schemes from generation companies the Power Systems Simulation (GenCos) all the way down to embedded Laboratory of the Electrical or affiliated distribution utilities (DUs). and Electronics Engineering We discuss each contributor in more Institute of the University of detail below. the Philippines Diliman dubs as Philippine “energy poverty.” 1. Taxes. The value added tax (VAT) has been widely recognized
3 Tariff rates are for 2011. 4 as instrumental in improving the country’s fiscal position by broadening the tax base. But VAT has also been cited as one of the factors that contribute to high electricity prices in the Philippines. Dr. Ramon Clarete of the University of the Philippines (UP) and EPDP
looked at the relative contribution of VAT Photo from www.lamudi.com.ph to electricity prices and discussed possible implications of removing the VAT. Indeed, bills have been filed that sought the removal of electricity from the VAT system, citing high electricity tariffs as deterrents to investment as they increase the cost of doing business in the Philippines. Clarete will compare the benefits of VAT removal accruing to power producers and consumers to the losses endowments and goals, a market-driven incurred by taxpayers. energy technology transition from non- 2. Low generation capacity per capita. Del renewables to renewables becomes feasible Mundo ascribed this to the less-than-efficient with minimal subsidies. legacy power plants that were procured 5. Cumbersome bureaucracy. Cumbersome under the IPP contracts, which were long- bureaucracy has greatly increased the cost term, expensive contracts, with take-or-pay of doing business in the power sector, and, provisions guaranteed by the NPC, leaving the in turn, continues to discourage investments NPC with a huge debt burden that weakened in generation, according to Clarete. This its ability to supply the increasing electricity was clearly illustrated in the study of demand of the country. Dr. Adoracion Navarro, of the Philippine 3. Suboptimal fuel mix. This might be largely Institute for Development Studies (PIDS), due to the fact that as of December 2014, and Dr. Laarni Escresa of UP and EPDP, that the Department of Energy estimates that examined the economics and politics of expensive imported coal and oil dominate power plant approvals. They observed that the fuel mix, making up 38% and 13% of the the lengthy process of securing permits to country’s dependable capacity, respectively. implement a power plant project has been These imported fossil fuels are paid at full limiting the generation of additional capacity, international prices. Indigenous natural gas thereby contributing to high electricity prices. contributed to 18% of dependable capacity; Securing a permit usually takes three to five the price of which is pegged to international years and requires more than 160 clearances. prices. Renewable energy accounted for the In addition, understanding and learning the remainder of the total dependable capacity. difficult permitting process takes time and Although renewable resources are abundant, experience, and may present a challenge to inadequate investment has limited the the entry of new firms. generation capacity from renewables. 6. Lack of competition in generation. 4. FITs and missionary charges. Roumasset Fabella pointed out that while EPIRA recommended replacing subsidies with contains provisions for a competitive emission taxes (according to domestic generation market, there has been little damages) plus facilitation through or no competition among generation infrastructure and adaptive research, in order companies (GenCos) in some regions. to have a market-driven transition. Likewise, This can be partially attributed to the Ricardo Barcelona, Research Director absence or limitations of transmission grid and Chairperson of Energy and Social interconnections, which have effectively Development of the IESE Business School fragmented the electricity market. This argued that by leaving firms to respond allows GenCos to exercise local market power strategically according to their resource in determining Power Supply Agreements
5 (PSAs) with small distribution grid. The latter aspiration is units (DUs). Thus, generation cost referred to as “missionary might be a pass-on to DUs, who electrification,” which Section might not have the incentive to 70 of EPIRA defines as the resist high generation costs or “provision of basic electricity procure from lowest-cost suppliers. services to unviable areas with Indeed, Fabella estimated that the ultimate aim of bringing the generation charge makes up the operations in the areas about 47.48% of the cost per kWh to viability levels.” Missionary to Meralco’s residential customers electrification was devolved (based on rates for April 2015).4 to the NPC through its Small Power Utilities Group (NPC- According to Del Mundo, the solution SPUG). Gladys Cruz-Sta. Rita, to lowering electricity prices in the President and CEO of NPC, Philippines involves: reported that as of June 2015, missionary electrification has About 5,041 1. Long-term power supply benefited 832,398 households, households contracting for new generation largely using renewable capacity (10 to 25 years) to avoid resource technologies to reduce benefit from the high-priced privatized legacy the dependence on imported electrification power plants and IPP contracts of fossil fuels. National Power Corporation (NPC) due to and allow GenCos to seek the least- One crucial question then cost resources. is whether it would be more increases in 2. Short-term contracting for the cost-effective to connect per capita existing legacy power plants (1 to 5 these far-flung areas to the years). grid, micro-grids, nano-grids, expenditure, 3. Implementing a competitive or solar home systems in women’s selection process (CSP) for these missionary areas. Dr. generation. The experience in Ernesto Pernia of the UP employment in Central Luzon shows that a GenCo remarked on the seeming bias will have an incentive to make of the National Electrification terms of hours a competitive offer due to its Administration (NEA) for either of paid work, options to select the type, size, site, grid connections or extensions technology provider, EPC contractor, of off-grid distribution networks. and in terms fuel supplier, and lenders. CSPs will Given how far the missionary of the school be discussed at length under the areas are, this approach is subheading, “Energy Policies and likely to incur unnecessarily attendance Regulations.” high social costs relative to, say, supporting the installation rate for pupils Availability or provision of distributed ages 6 to 11. solar home systems. Secretary If electricity is regarded as a Zenaida Monsada assured basic need in modern society, then the panel that the next NEA availability of supply should not only Annual Report will reflect refer to the capacity of the system the advances in solar home to meet the current demands of systems. Moreover, the DOE households already connected to the is implementing a partnership grid, but also of households in poorer, project with the European Union more remote areas that are currently this year called, “Access to not connected to the main transmission Sustainable Energy Program,”
5There is also a lack of retail competition that is likely further driving up the price of electricity, as discussed in Ravago and Roumasset [40]. 6 which will implement 30-kW solar home systems and community-based mini grids.
Economic effects. The inadequate availability of electricity is a barrier to employment, productivity “The optimal enhancement, and poverty reduction. Using the 2nd round Pantawid Pamilyang Pilipino Program choice of fuel mix Impact Evaluation dataset, Mapa, Ravago, Albis, and del Mundo [31] showed that about 5,041 households benefit from electrification due to that involves the increases in per capita expenditure, women’s employment in terms of hours of paid work, and temporary utilization in terms of the school attendance rate for pupils ages 6 to 11. The welfare impacts of extending of less-costly resources electricity to the rural poor are promising. Chakravorty, Emerick, and Ravago (EPDP and, at the same time, Working Paper No. 2016-04, 2016) found that the benefits from extending electrification to around take environmental 4,000 barangays may arise largely due to the accumulation of electricity-dependent assets, concerns into such as televisions and washing machines. account.”
Europe are only 0.3 per year and 0.1 day per year, respectively. He further estimated that an LOLE of one day per year translates to a required capacity reserve of 28.7% given a system peak demand of the Luzon grid of around 7,600 MW. His calculations raise some red flags: the Luzon grid will be operating with less than 30% reserve from 2016 to 2018, while the Visayas grid will be operating with less than 30% reserve all the way to 2020. The good news is that the Mindanao power crisis is expected to be solved in 2016, when reserves will start increasing from around 80%, with dependable capacity comprising Reliability almost 50% hydro. However, this substantial dependence on hydro in Mindanao does not bode Power supply reliability hinges on supply well in terms of fuel diversity, which is another stability, and as such, is of prime importance for key factor in ensuring reliability of supply. industrial growth and development. One measure of power reliability is the loss-of-load expectation Optimal Fuel Mix. Closely tied to the concept of (LOLE) or alternatively referred to us LOLP. In energy quality, and thus, reliability, is the optimal layman’s terms, LOLE is the expected number of choice of fuel mix that involves the harnessing days in a year that there would be brownouts or and utilization of the available sources of blackouts due to power plant outages. Prof. Del energy – renewables and non-renewables alike, Mundo estimated that LOLE in the Philippines to bring about a welfare-enhancing reduction is about one day in a year, a number quite high in the price of electricity and, at the same time, considering that the LOLE estimates for US and take environmental concerns into account. In
7 connection to this, the paper co-authored by Dr. Majah Ravago (Program Director of EPDP), Dr. Raul Fabella, Prof. Ruperto Alonzo, Dr. Rolando Danao (EPDP Fellows and UP faculty members) and Dr. Dennis Mapa (EPDP Fellow and UP School of Statistics Dean) showed that the optimal fuel mix should be adaptable to exploit the opportunities brought about by less costly resources, at the same time, takes into account health and environmental costs. Photo from newsinfo.inquirer.net Security
Transmission constraints. In terms of sufficiency of energy supply, both in the short term and in the long term, Eric Francia of AC Energy identified transmission grid constraints as the crucial constraint both for existing non- renewable and new renewable energy projects. Indeed, Atty. Angela Consuelo Ibay of World Wide grid implications of the Philippine energy supply- Fund for Nature, Philippines (WWF-Philippines) demand outlook for 2015-2030. To the extent also hinted at this transmission problem, citing that the Distribution Development Plan (DDP) the key findings of a study on power supply in scenario is followed, the Luzon grid will need an Palawan: given a contracted supply of 55 MW additional capacity of 4,985 MW by 2030. The and a peak demand of only 34-38 MW, Palawan Visayas grid will need an additional 1,256 MW, has more than enough reserves. The study thus while the Mindanao grid will require an additional concluded that any occurrence of blackout can be 910 MW by 2030. attributed to either transmission or distribution constraints or breach of contract by the IPPs. Redi Remoroza of the National Grid Corporation of the Philippines (NGCP) reported the plans of Moreover, Mendoza, Nerves, and Roumasset the NGCP to strengthen and extend the Luzon, [32] hypothesized that in cases where the optimal Visayas, and Mindanao grids, and integrate fuel mix (e.g., increasing hydro to help meet peak renewables into the transmission system. The demand) differs from the actual practice, the master plan includes: (1) for the Luzon grid: discrepancy is likely to derive from market power, strengthening the transmission backbone and contracting issues, transmission constraints developing new substations for Metro Manila or transmission charges being above marginal to meet the long-term requirements of the transmission costs. A transmission development country’s load center, and establishing looping plan is one instrument to improve the efficiency configurations for the 500 kV backbone of the power system. A successful transmission to enhance reliability and to accommodate development plan should: (1) address barriers generator connections; (2) for the Visayas such as right-of-way (ROW) issues and restrictive grid: establishing a Cebu-Negros-Panay 230-kV regulatory approval parameters, such as transmission backbone to further strengthen requiring generators to “advance” transmission the existing grid and to support generation line construction; and (2) address issues related development; and (3) for the Mindanao grid: to “greening the grid”--the extent to which energizing the Mindanao backbone to 230 integration of new renewable energy projects and kV, and establishing the Visayas-Mindanao stability issues related to both intermittent and interconnection to unify the Philippine grid and higher penetration of renewable energy sources to support generation development. In terms are warranted. of “greening the grid,” Remoroza further cited the limited transmission line capacities, the Secretary Monsada of the DOE reported the aggressive timeline of power plant proponents,
8 and the variability of variable particularly in the Visayas? renewable energy (VRE) sources as While the First-Gen gas- the main operational challenges of the fired plants in Batangas NGCP. For instance, although there is are fulfilling bilateral a huge potential excess generation contracts with Meralco, the capacity of coal, wind, and solar energy other Batangas plants are from Panay and Negros, additional not similarly constrained submarine cable capacity, which is and do not sell to Veco. not yet readily available, is required to Is this mainly because of export to neighboring Cebu. As a way of transmission charges, or moving forward, Remoroza suggested: other constraints? (1) continued close coordination 2. As the use of renewable between the DOE and renewable sources such as wind and energy (RE) developers to harmonize “In terms solar are expanded, their and optimize generation-transmission of security incremental levelized planning; (2) the resolution of existing avoided costs (LACE) will issues regarding the availability of energy fall and their levelized costs and scheduling of reserves before supply, both (LCOE) will rise, suggesting integrating higher levels of VRE; and (3) a well-defined internal the support of USAID’s RE Integration in the short optimum even without Study for the DOE. subsidies. Accordingly, the term and in first priority of expansion The prospects for strengthening the long term, of these renewables may be the Luzon-Visayas interconnection in more distant importing- and adding the Mindanao-Visayas transmission areas (e.g. Ilocos Norte and connection is a possible solution to grid Negros) where transmission the medium- and long-term instability costs and corresponding and insufficiency of power supply, constraints LACE values are relatively especially in Mindanao, were featured high. Note, however, that in a couple of discussions. The paper by are identified when an area switches from Mendoza, Nerves, and Roumasset [32] as the crucial being an importer to an is still at early stages, but has great exporter, transmission costs potential to inform both the technical, constraint switch from an avoided economic, and policy aspects of the both for cost (benefit) to part of the generation-transmission link. The study levelized cost, making it aims to develop a model to determine existing non- harder for such projects to the optimal combination of generation renewable pass a benefit-cost analysis. and transmission investments for the 3. The choice of which Luzon, Visayas, and Mindanao grids and new generation and transmission to: (1) enhance the reliability and facilities to expand to meet affordability of power supply over space renewable increased demand will and time, and (2) improve consumer energy depend on a comparison of welfare. At this stage, the study offers the avoided social cost and some illustrative hypothesis and projects.” the levelized social cost. questions to be more formally tackled Accordingly, one can ask by the model: under what conditions either coal or gas generation 1. Can system costs be lowered by would be the lower social allocating a greater share of the cost investment as opposed combined-cycle gas turbines (CCGT) to hydro and renewables, to their comparative advantage such as wind or solar. in meeting peak-period demands, 4. What would be the
9 economic cost of expanding wind commitment to COP21. and/or solar generation beyond their socially-optimal levels to meet, In the near-term, at least, for instance, a 50% renewable Del Mundo and Francia expect energy standard? dependable capacity to exceed expected consumption at Natural gas infrastructure Secretary current prices. According to Monsada cited the need to develop DOE data, the total dependable strategic infrastructure for receiving, capacity of 15.6 GW is broken storage, transmission, and distribution down as follows: 34% coal- of natural gas to be able to promote based, 19% hydro-based, 18% its use beyond that of a power source. natural gas, 17% oil-based, Indeed, natural gas can serve as a 10% geothermal, and 2% other major alternative fuel for the industry, “Energy renewables, such as solar and transport, and residential sectors. demand wind. Mindanao is expected A major issue involving this is the to double its capacity by currently on-hold BatMan project, forecasting 2018. However, this has to be which is a Public-Private Partnership managed and be accompanied (PPP) P10.53-billion endeavoring to is crucial in by a growing demand from connect the Batangas and Manila planning manufacturing and industry. natural gas pipelines. Thus, an important research area concerns the investments While it should not be best use of natural gas resources of the to enhance the business of the DOE to Philippines and policies for exploration “plan” the energy future of and development. Another urgent existing and the Philippines given that question raised during the open forum, EPIRA’s primary goal is to which was left unanswered, was: “What to build more make generation and retailing happens after Malampaya runs out?” capacity to competitive, facilitating Quo vadimus then? development by providing the meet the energy sector outlook on a Energy Demand increasing timely basis is necessary. In this endeavor, Dr. Rolando Danao In this subsection, we focus on the energy needs and Dr. Geoffrey Ducanes of energy demand facets of forecasting of a growing EPDP and UP developed a and aggregation. Demand efficiency, model for forecasting long- which is in line with the Philippines’ population term aggregate electricity commitment to COP21 will be discussed and of ever- consumption in the Philippines. under “Climate Change, Renewability, They employed an error- and Efficiency.” expanding correction model (ECM), wherein electricity demand is Demand Forecasting technological related to economic and climatic and industrial variables. Their preliminary Energy demand forecasting is crucial results showed that electricity in planning investments to enhance opportunities.” demand is largely determined existing and to build more capacity by GDP and the prevailing to meet the increasing energy needs temperature, while electricity of a growing population and of ever- price did not come out as a expanding technological and industrial significant determinant–possibly opportunities. Efficiency in energy due to the fact that pre-EPIRA use is also high in the list of the DOE’s electricity demand had been agenda. Secretary Monsada stressed largely supply-constrained and that it is, in fact, part of the Philippines’ determined. Prospectively,
10 the model can be employed to forecast future due to the scope and scale economies that are demand for electricity given different scenarios inherent in certain segments of the electricity involving Philippine growth prospects and market. In turn, good market design is necessarily climatic change. framed and enforced by appropriate energy policies and regulations to enable the market to function, and function well. Indeed, the international empirical evidence suggests that the proper market design features–in terms of locational marginal pricing, multi-settlement markets,5 and financial trading–have increased productive efficiency; while local market power mitigation mechanisms,6 fixed-price forward contracting,7 transmission planning process, symmetric treatment of load and generation, and prospective regulatory processes have worked to limit the extent of unilateral market power or enhance competition in the energy market.
Power Sector Reform Experience Demand Aggregation Power sector reform is a long, complicated In small geographic or market areas, GenCos process. A number of factors will determine its would only be interested to bid in an auction if success, one of which is the quality of institutions the fees they can charge and demand are large in place. A number of studies support this; they enough. DUs, however, are often quite small and found evidence of good institutions–in the form fragmented, making them vulnerable to high of good policies and regulations–being positively generation fees associated with market captures. correlated with a successful reform program. In his experience with electric cooperatives Good institutions are important in the efficient in Central Luzon and Mindanao, Del Mundo management of the sector and in building an recounted how demand aggregation enabled enabling environment for private investments. small DUs to achieve both market power and The discussions during the conference cited size economies. Accordingly, Fabella expects that striking gaps that need to be addressed in order to demand aggregation, which empowers DUs by improve the performance of the sector and realize enabling them to organize into a formidable bloc, the positive results envisioned by the framers of can result in lower tariffs even in captive markets. EPIRA. The following discussion focuses on these He further cited the cases of Amreco in Mindanao institutional bottlenecks. and Cleca in Luzon, where the uncontracted demands of several small DUs were aggregated Discussions during the conference on current and successfully put up for bids with the help of policy issues many times referred to the power NGOs. crisis in the early 1990s when the country experienced daily power outages that lasted for Energy Policies and Regulation 8 to 12 hours. The gravity of the crisis triggered major reforms that eventually set the direction According to Dr. Frank Wolak of Stanford of the country’s power sector. Alonzo described University, good (energy) market design should how the government managed the crisis through not only increase productive efficiency, but also the promulgation of two important laws: RA 7648 limit the ability and incentives of GenCos and and RA 9136. RA 7648 of 1993 entitled: “An Act retailers to exercise unilateral market power Prescribing Urgent Related Measures Necessary
6In discussing multi-settlement markets, Wolak used the electricity market of the United States of America as an example, which operates both a day-ahead forward market and real- time spot market. 7As an example of a local market power mitigation mechanism, Wolak cited putting a price cap on the amount that a generation unit owner can offer into the short-term markets. This is practiced in the USA and in Australia. 8Fixed price forward contracting is characterized by contracts that obligate sellers to deliver to buyers a fixed quantity of electricity at a fixed date in the future at an agreed-upon price. 11 and Proper to Effectively Address the Electric by the vision of providing “Energy Access for Power Crisis and for Other Purposes” was the More”, which means mainstreaming electricity government’s immediate response to the crisis. access of the majority of the population. The The law allowed the NPC, then a state-owned policy framework is anchored on three pillars of monopoly, to enter into fast-track power project reforms: (1) ensure energy security; (2) achieve contracts with independent power producers optimal energy price; and (3) develop sustainable (IPPs). IPP contracts were long-term, expensive energy system. The Philippine Energy Plan contracts, with take-or-pay provisions guaranteed 2012-2030, Power Development Plan 2009- by the NPC. While this initiative augmented power 2030, and transmission and distribution plans supply, it left the NPC with a huge debt burden detail the policies and strategies for the sector. that weakened its ability to meet the increasing Roumasset observed that electricity policy power needs of the country. The succeeding in the Philippines is encumbered by multiple unfavorable regional economic situation, known as objectives, including renewability, sustainability, the “Asian Financial Crisis,” further worsened the affordability, inclusivity, and efficiency. In many NPC’s financial standing. instances, achieving one undermines the pursuit of the other. For example, providing subsidies to promote renewability may come at the expense of production efficiency (i.e., because marginal benefit does not equate to marginal cost) and affordability. Such case has been observed in “Good institutions are the Philippines and in other places like Denmark, USA (California, Hawaii), Germany, and Spain. important in the efficient Utilization of indigenous energy resources and reducing import dependency lowers welfare, management of the as can be shown with public economics. When sector and in building an objectives contradict, Roumasset urged policy makers to always go back to the unifying goal enabling environment for of promoting the common good, as specified in the Philippine constitution. The succeeding private investments.” discussion focuses on the more salient policy and regulation objectives raised during the discussions: promoting competition and ensuring coordination.
In 2001, the government enacted the RA Promoting Competition 9136 or the Electric Power Industry Reform Act (EPIRA) to provide a long-term solution to the As mentioned above, the EPIRA was intended poor performance of the sector. The law mainly to promote competition, to achieve efficient and advocates for greater competition and private transparent generation and retail markets, and sector involvement in the power industry to to consequently improve the affordability of improve the availability of supply of electricity electricity supply. The spirit of EPIRA, according to and bring down tariff rates. It specifically provides Fabella, is captured by the maxim: “Let the market for the unbundling of the electricity sector; do its magic!” Wolak emphasized the importance privatization of assets of the NPC; absorption of of an appropriate market design that maximizes NPC’s losses by the government; privatization consumer benefits while maintaining the financial and deregulation of the generation market; and viability of the sector. Electricity markets are most creation of the wholesale electricity spot market, susceptible to the exercise of market power, given retail competition, and open access. Fourteen the characteristics of the product. He stressed years after the promulgation of the EPIRA, its that the design of the market should mitigate effectivity and success remain subjects of debate. the risks arising from local market power. Some government regulation will always be necessary to The power sector policy landscape is guided manage the potential abuse of market power.
12 Power supply agreements. The EPIRA competition. This idea came envisions a competitive generation up even prior to 2013, but it system. So far, however, both Del Mundo was only during the year when and Fabella observed that this is more the ERC prepared a resolution of an aspiration than a reality: there has mandating PSA contracts been little competition among GenCos, to go through a competitive who continue to enjoy local market selection process (CSP). This, power in some regions. Local market however, remained unsigned. power arises because of factors like In June 2015, the DOE signed transmission network configuration the Department Circular 2015- and geographic distribution of demand, 06-0008 that requires all according to Wolak. Indeed, Fabella PSA contracts to go through pointed out that the lack of competition an auction; aggregation and among GenCos can be attributed auction of uncontracted to the absence of transmission grid demand of small DUs; interconnections, which creates a mandatory participation of fragmented electricity market divided DUs (but optional for GenCos); into: Luzon, Visayas, and Mindanao. He “EPIRA was one contract template; posited that this market feature allowed intended and one CSP transactions GenCos to not only enjoy local market manager. The implementation power, but to also dictate the terms of to promote of the initiative proved to be Power Supply Agreements (PSA) with competition, problematic. In October 2015, small distribution units (DUs). the DOE and the ERC signed to achieve Joint Resolution 1 giving the PSAs are a tricky business. According efficient and latter the responsibility to to Fabella, the unique nature of implement the CSP for PSAs as electricity as a commodity lends itself to transparent soon as possible. the existence of contracting problems generation associated with the following factors: In theory, CSP should be • Due to the lumpiness of the and retail easier to enforce and subject investments involved, contracts are markets, to fewer problems involving mostly long-term and thus, subject regulatory capture and to many random shocks in terms of and to difficulties in determining technology, feedstock prices, etc. consequently “fair and prudent prices” than • Electricity is costly to store and existing regulatory remedies demand for it fluctuates widely, improve the implemented by ERC. CSP can posing a challenge for demand- affordability potentially ease the regulatory supply coordination. burden of the ERC. The role • Electricity, as a commodity, is of electricity of the ERC will be limited to complex: contracts then have to verifying and approving the specify volume, price, duration, supply.” market test employed, such as delivery dates, risk-sharing, and auctions, unlike at present when reliability, as there is a high cost of it has to deal with the unwieldy supply failures. accounting methods involving evaluation, verification, and Competitive Selection Process. possible price comparisons of Fabella enthusiastically discussed a all PSAs. CSP can also be more potential market power mitigation flexible in terms of modalities measure—market testing of PSA for market testing. There are contracts— aimed at least-cost numerous system architectures procurement, while at the same time such as those in Brazil, Chile, ensuring transparency and promoting and New England that allow
13 The speakers and moderators of the EPDP Conference 2016 held on January 12-13, Sec. Arsenio Balisacan (NEDA) and Sec. 2016 at the New World Hotel. Zenaida Monsada (DOE) addressed questions from the participants during the open forum. (Standing L-R: Dr. Shunsuke Managi (Kyushu University), Dr. Sarah Daway (UP & EPDP), Dr. Bulent Acma (Anadolu University), Dr. Ernesto Pernia (UP), Dr. James Roumasset (UH & EPDP), Dr. Dante Canlas (UP & PNOC), Prof. Ruperto Alonzo (UP & EPDP), Dr. Emmanuel Esguerra (NEDA), Dr. Raul Fabella (UP & EPDP), Dr. Kyle Emerick (Tufts U. & EPDP), Dr. Laarni Escresa (UP & EPDP), Mr. Gil Dy-Liacco (USAID), Dr. Dennis Mapa (UP & EPDP), Dr. Rolando Danao (UP & EPDP) Sitting L-R: Atty. Raphael Lotilla (former DOE Sec), Dr. Orville Solon (UP), Sec. Arsenio Balisacan (NEDA), Sec. Zenaida Monsada (DOE), Hon. Reynaldo Umali ( JCPC), Dr. Majah-Leah Ravago (UP & EPDP), Dr. Mark Rosegrant (IFPRI), Mr. Romeo Bernardo (Lazaro Bernardo Tiu & Associates).
Prof. Shunsuke Managi of Kyushu University being interviewed after his presentation on “Energy Pricing Impacts in Technology, Industry, and Consumers”.
After a dynamic parallel session, the chair and the presenters paused for a group photo Top photo L-R: Manuel Albis, Dr. James Roumasset, Miah Pormon, Dr. Ernesto Pernia UPecon Chair, Dr. Orville Solon, thanks the Bottom photo L-R: Dr. Kyle Emerick, Dr. Dennis Mapa, Mr. Gil Dy-Liacco, Dr. Arijit Das speakers and participants of the 2-day conference.
14 EPDP Program Director, Dr. Majah-Leah Private sector stakeholders talked about the “Perspectives on the Prospectives of the Power Sector” Ravago, presented one of the EPDP studies in (L-R: Lawrence Fernandez (Meralco), Redi Allan Remoroza, (NGCP), Gladys Sta. Rita (NPC), the parallel sessions. Eric Francia (AC Energy), Robinson Descanzo (PEMC).
Dr. Mark Rosegrant of the International Food Policy Research Institute Hon. Reynaldo Umali of the Joint Congressional Power (IFPRI) discussed the tradeoffs and policies of energy, water, and food under Commission discusses the role of Congress in the promotion climate change. of a responsive regulatory environment in the energy sector.
The 2-day conference gathered over 250 participants representing the government, The hardworking team behind the EPDP Conference 2016. academe, and private sector.
15 either mandatory or optional participation, In 2006, the Philippine government established either centralized or decentralized jurisdictions, the Wholesale Electricity Spot Market (WESM) to etc. Moreover, there are numerous auction serve as a platform for bulk trading of electricity. phenotypes from which to choose. WESM is a real-time, bid-based market where prices are determined on an hourly basis, using Fabella posited that aside from addressing the locational pricing system. This pricing existing and potential abuse of local market mechanism considers both supply bids and power, the CSP also tries to solve other market demand offers at a certain node, and in addition, failures, such as: the incremental cost of supplying electricity at 1. High tariffs imposed by GenCos on captive that node. Only uncontracted energy and energy markets in some locales due to possibly either imbalances are entered into the WESM. The rest weak competition or collusion, allowing them of the quantity is transacted through bilateral to dictate the PSA and delivery terms to contracts between a generator and a distributor. small, fragmented DUs. 2. Moral hazard among DUs, who might have neither the incentive to haggle for a lower generation charge nor procure from lowest- cost suppliers. 3. Moral hazard among DUs that have embedded or affiliated GenCos. Photo from www.rappler.com 4. Coordination failure among small and fragmented DUs that are unable to aggregate demand to bid in an auction that might possibly lead to lower tariffs even for captive markets. 5. Contracting problems due to capacity building constraints involved in power generation, such as high fixed costs, long gap WESM plays a crucial role in ushering in EPIRA’s between gestation to delivery of four years core objectives of promoting transparency and or more, problems with long-term financing, fair competition for all market participants, such as the unavailability of equity financing according to Robinson Descanzo, Vice President that might altogether prevent the project for Corporate Planning and Communications of from taking off. the Philippine Electric Market Corporation (PEMC). 6. Unfactored negative externalities in the Moreover, WESM assists in policy development pricing of PSAs. by providing market data, analysis, and policy recommendations. Included in WESM’s list of At this time, the DOE has yet to release the prospective market and system developments complete mechanics of the CSP. Meanwhile, the that are in the pipeline until 2019 are: ERC issued Resolution No. 13 in October 2015 › Enhancing the WESM design and operations, allowing the DUs to adopt any accepted form such as shortening of the dispatch interval, of CSP. For this, Dr. Fabella recommended the removal of minimum-price constraints, simplest market testing architecture for CSP that mandatory integration of DUs in the sub- will be easy to implement and fool-proof against transmission network, automatic correction regulatory capture schemes. of pricing errors, and imposition of offer price and cap; Wholesale market mechanisms. Wolak › Creating a reserve market for the trading of highlighted international evidence that forward ancillary services market to maintain power wholesale market mechanisms improve system stability; productive efficiency. Studies showed that › Integrating variable renewable energy (VRE) restructured wholesale markets in the US have resources through the implementation of the lower labor and non-fuel expenses, plant-level must-dispatch and FIT all guidelines, and the average heat-rate, and average price spreads. creation of an RE certificates market;
16 › Implementing fully the provisions of Retail to avoid a significant part of the price volatility risk Competition and Open Access of 2013 (RCOA); involved in transacting in the spot market. › Developing and enhancing the system to support market development in the form The forward market can facilitate greater of a new market management system, an competition by limiting the market power of integrated platform to manage the integrated spot traders. It is expected that most of the wholesale and retail registration, metering transactions can go through a well-functioning and settlement processes, and an electricity forward market, leaving the spot market to handle market database and reporting platform; just the short-term imbalances. Moreover, a › Advancing through research and forward market can work towards both reducing development the following prospective market transactions costs involved in the absence of a developments: forward contract and providing a transparent • Establishment of an electricity market in forward price that can be used for setting Mindanao; regulated retail prices with many regulated • Financial transmission rights; retailers. Retail market competitiveness can also • Aggregation of demand of end-users; and be specifically enhanced, according to Wolak, as • Electricity market derivatives such as purely financial players can enter the retail market forwards, swaps, options, and electricity through energy purchase from this market. exchange involving the trading of standard electricity contracts for future electricity The recent experience of Singapore, Wolak consumption. recounted, attests to how a standardized market for fixed-price forward energy contracts Regarding the last point, Wolak suggested that can encourage more competition in both the without WESM being extended to include forward wholesale and retail markets. An important markets (or a standardized market for fixed-price international lesson is that “all workably forward contracts for energy being developed), competitive wholesale markets trade virtually the goal of limiting market power will not be reached.
Retail competition. The next step for the electricity market was the implementation of the RCOA in 2013. The RCOA allows eligible “In theory, CSP should be consumers to choose from which retail supplier easier to enforce and subject to purchase electricity. Presently, contestable consumers are those who have consumed an to fewer problems involving average of at least 1 MW for the past 12 months. According to Atty. Floresinda Digal of the ERC, the regulatory capture and threshold consumption will eventually be reduced. The ERC is currently working on the finalization difficulties in determining and promulgation of the rules for issuance of “fair and prudent prices” licenses, contestability market, and mandatory migration to a competitive retail market. than existing regulatory
Forward markets. Wolak advocated the remedies implemented by development of a multi-settlement market that includes a transparent day-ahead forward market ERC. CSP can potentially and a real-time imbalance market for electricity ease the regulatory burden in the Philippines. The advantages of a forward market include risk management, market power of the ERC.” mitigation, and investment coordination. In terms of risk management, the existence of a forward market would enable both suppliers and demanders
17 zero net energy in day-ahead and real-time country’s investment climate. Dr. Joy Abrenica, markets,” as evidenced by the wholesale market of UP, explained that most provisions in the meltdowns in California, New Zealand, Colombia, PCA are inspired by the EPIRA. The PCA will the United Kingdom, etc., which were the result of strengthen anti-competitive measures already “trading too much net energy in [the] short-term put in place, so that cases like bid collusion and market[s]” (Wolak, 2003). In turn, the key to a price manipulation will be handled fairly and competitive wholesale market is the existence of effectively. an “active and liquid forward market for energy.”
Moreover, in the long run, a reliable forward market can act as a coordinator of capacity- building and -enhancing investments, resulting in greater reliability and sufficiency of energy supply (Ausubel and Cramton, 2010). Retailers can also be required to purchase these contracts at different time horizons to delivery in order to ensure long-term resource adequacy, as is the practice Photo from article.wn.com throughout Latin America, according to Wolak.
So the exact design and implementation of such a forward market will require careful planning to avoid costly unintended consequences. Indeed, WESM is already on the right track, with an existing research agenda on electricity derivatives Improving Coordination that include a forward market. The institutional structure of the power sector Independent market operator. This is 15 years involves the DOE as the policy-making body; the overdue, according to Secretary Monsada. ERC as the sector regulator; the Power Sector Questions regarding the exact meaning Assets and Liabilities Management Corporation of “independent” abound: does it mean as the agency in charge of the privatization independent of government or independent of of the NPC’s assets; the NPC for missionary the industry? At the moment, PEMC, which is still electrification; and the NEA for the establishment in charge of WESM, stands as the independent and regulation of rural cooperatives. In addition, market operator. Its board is chaired by the the National Economic Development Agency DOE Secretary and membered by different (NEDA) is involved in the overall economic stakeholders in the energy sector–generation, development planning and policy coordination. transmission, distribution, electric cooperatives, The NEDA prepares the national development and three purely independent members who plan, which serves as the guiding document for are not involved in the energy sector. However, the energy sector. The Congress also plays a Secretary Monsada mentioned the case of Chile, role, primarily through the Joint Congressional wherein the independent market operator did not Power Commission (JCPC). As explained by include government, and ran into huge problems Hon. Reynaldo Umali, JCPC’s two important in terms of high energy prices. On the other responsibilities are: to review and evaluate hand, independent market operators in other the performance of industry participants, and countries (e.g., New Zealand and Singapore) have determine gaps in the EPIRA and recommend apparently not had similar problems. corresponding legislative or executive measures.
Philippine Competition Act. In July 2015, the Atty. Raphael Perpetuo Lotilla, former government passed the Philippine Competition DOE Secretary, pointed out that improving Act (PCA) to “enhance economic efficiency and coordination among agencies involved will greatly promote free and fair competition,” ultimately, contribute to a more efficient and effective to protect consumer welfare and improve the management of the sector. He specifically
18 emphasized the need for DOE and other localities in the country. ERC to work more closely together. Supporting Lotilla’s point, Fabella Ravago et al. [43] in their cited a good and recent case of an “Filipino 2040” paper, also effective coordination effort between underscores the importance the DOE and the ERC, which resulted of close coordination between in the recent issuance of the Joint the ERC and the newly minted Resolution No. 1 on the implementation Philippine Competition of mandatory competitive selection Commission (PCC) to prevent process in contracting power supply. “forum shopping” and ensure To continue such cooperation, that no industry participant Lotilla suggested institutionalizing is able to possess substantial “The close coordination arrangements between market power. the two agencies. He further coordination recommended using the planning Overburdened regulator. process as a venue for discussions on Alonzo and Lotilla pointed between policy directions among agencies and out that the ERC has been ERC entities involved in the sector. overburdened with a plethora of functions assigned by virtue of and the Lotilla further elaborated that the EPIRA. As presented by Digal newly minted coordination among agencies is of the ERC, the several functions especially vital at the planning of the ERC include issuance Philippine phase. The NEDA should consider and monitoring of licenses, the sub-sector plans in the approval of pricing mechanisms, Competition Philippine Development Plan. Power- monitoring of the operations Commission related GOCCs and transmission of the WESM and the retail concessionaires should also be market, regulation of rate and (PCC) is involved in the planning process. services of NGCP, and review important to Coordination should also involve the and approval of bilateral power local government units and the host supply contracts. Effective prevent community for a better understanding price regulation requires rather of the needs and the dynamics at the extensive modeling to separate “forum local level. The experience of Palawan what costs are from what they shopping” proved how transparency and synergy should be. To the extent that among the DOE, the local government, ERC is overburdened relative and ensure and other stakeholders, through to its capacity, this function will that no the formation of the Joint Energy inevitably be compromised. In Development Advisory Group (JEDAG), addition, the ERC develops the industry has helped to reduce power outages, feed-in tariff system, framework according to Ibay. She reported that a for the green energy option, participant is technical working group was created and interconnection standards able to possess to formulate a comprehensive power and pricing for net metering. development plan for the island. The capacity of the ERC to substantial The DOE and UP extended technical perform its functions has been market assistance in the areas of demand limited by inadequate financial forecasting, power supply planning, and technical resources. power.” and energy resource assessment. Lotilla suggested that financial Stakeholders were also engaged constraints can be managed during consultative meetings to gather by either seeking for increased suggestions and support for the direct budgetary support from development program. This initiative the state, or by aiming for self- was hailed as a planning model for sustainability through fees, or
19 both. He further proposed that the ERC consider his study, looked at the comparative contribution outsourcing high-level and low-level services as a to the price of electricity of the VAT and the cost cost-effective option. On addressing the technical of doing business in the electricity industry. This capacity constraint, he suggested conducting research will hopefully be integrated with the regular training programs for the members of the discussion above regarding why power prices ERC staff. in the Philippines are so high. The proposal in Congress to declare power plant projects as projects of national significance is welcome news shared by Umali. This will hopefully expedite the approval process and reduce the cost of building power plants in the Philippines.
Climate Change, Renewability, and Efficiency
With the resounding battle cry for turning the tide against global warming threats to both food and energy security, the call for reducing the use of pollutants such as greenhouse gas emissions from burning fossil fuels, and increasing the use of renewables such as solar, wind, hydro, biomass, and geothermal has become more piercing of late. Along with other countries, the Philippines made commitments in the 21st Conference of Parties (COP21) in Paris to reduce greenhouse- gas emissions (GHGs) conditionally by 70% below forecasted business-as-usual levels in 2030 (as clarified by Secretary Monsada). Accordingly, the government–DOE, in particular–has been actively promoting the use of renewables and related technology. As suggested in the paper by Ravago and Roumasset, the government should play a
Photo from www.gov.ph facilitating role rather than distorting the market with large subsidies. As the cost of renewable Cumbersome bureaucracy. As discussed earlier, technologies continue to fall, levelized and unwieldy bureaucracy has undermined the avoided costs of renewable technologies are likely competitiveness of the sector, and has limited the to warrant a gradual transition towards renewable participation of private investments, particularly energy once the external costs of non-renewable in generation. The study by Navarro and Escresa generation are factored in. looked into the approval process for a hydro power plant. The three- to five-year process that Renewability requires 160 clearances (multiplied by more than ten signatures per clearance, as per Lotilla!) is The EPIRA and the Renewable Energy Act of undoubtedly a cause for concern. Delays in the 2008 provide for the utilization of RE to reduce approval process vary depending on the location energy imports and to promote “environmental and the type of technology. The authors argued sustainability”. In line with this, the DOE set a that the number of permits and the delays in target of 30% share of RE-based capacity to total approval are reflective of the quality of regulatory installed capacity. According to 2015 data, the governance in the sector. Moreover, even if country has already exceeded the target, with necessary permits have been obtained, resistance renewable energy accounting for 31.33% of the from the local community may halt a plant’s total installed capacity. Moreover, RE accounted construction. This was cited by Clarete who, in
20 for 24% of total power generation (mainly from A more efficient policy involves internalizing the geothermal and hydro sources) for the period social cost of carbon and other pollutants with January to June 2015; and for 39.9% of the emission taxes (according the carbon, sulfur, and country’s total primary energy mix in 2014. nitrous-oxide contents of emissions) along with a suite of policies that facilitate the transition to However, the shares of renewables are declining lower social-cost renewables, e.g., infrastructure with the estimated capacities under construction, for managing supply-side intermittencies. and this might pose a problem for a 30% renewables target. As of December 2015, Francia Roumasset suggested that with the distortion of AC Energy reported, capacity construction is that subsidies create, FIT is an inferior option for underway to increase total capacity by more than promoting RE and proposed imposing a carbon 5GW, which is 75% coal-based, 15% natural gas- tax instead, as well as a suite of policies that based but only 10% renewables-based. Thus, at facilitate renewable energy by market-enabling least for the near foreseeable future, fossil fuels instead of market-distorting. To dramatize the can be expected to dominate in the fuel mix. potential distorting effect of FIT subsidies, Ravago and Roumasset [40] estimated in their The purported increase in the use of RE for paper that if FIT were to be expanded to meet electricity generation is a consequence of a 100% renewable requirement, the waste or the policy and regulatory mechanisms that shrinkage of the economic system could be as the government has put in place, primarily the much as one trillion pesos per year. Feed-In Tariff (FIT) system, Renewable Portfolio Standard, Renewable Energy Market, Green Option, and Net Metering. The first was the most controversial during the conference.
The ERC is tasked with the roles of: (1) “As the cost of renewable developing the FIT system; (2) developing technologies continue to fall, the interconnection standards and pricing methodology for net metering; and (3) levelized and avoided costs establishing the regulatory framework for the of renewable technologies are green energy option. In what follows, we discuss the nature and issues related to the first two in likely to warrant a gradual greater detail. transition towards renewable FIT system. Implemented in 2012, the FIT energy once the external costs system is an initiative towards creating an enabling environment for private investments of non-renewable generation in RE. The FIT is the fixed price of electricity are factored in.” generated from wind, solar, ocean, run-of-river hydropower, and biomass. It is fixed for a period of not less than 12 years and financed through FIT-Allowance (FIT-All) collected from all on-grid consumers. Purchase agreements with RE plants As an alternative to the FIT system, Lotilla are long-term; the duration is typically 10 to 25 suggested the implementation of renewable years. The salient issue with FIT is its impact energy portfolio standards. As such standards on electricity prices. Roumasset noted that FIT would limit how much DUs would be able to subsidies decrease wholesale prices but increase source from RE resources, he expects that these retail prices. The current FIT system gives RE would create less distortions by addressing the priority dispatch over traditional electricity. In RE generation-transmission coordination problem cases where subsidized renewables displace that is rampant under FIT. socially-cheaper resources, the subsidies lead to a decline in economic welfare. There are forecasts that RE investments will
21 intensify with the initiatives in place. called net-metering. Prof. Remoroza of the NGCP noted that the Robert Verzola claimed that by potential increase in generation from “inserting various technical and RE in the country requires additional financial barriers to entry, and transmission capacity. So that smart by redefining net-metering to grid technologies (which allow utilities allow different charging rates to monitor and manage the amount of for incoming and outgoing electricity delivered to the grid) would power,” DUs may be retarding enable more seamless integration PV adoption. of distributed renewable generation in the system. He suggested that an At this point, we enumerate additional submarine cable to link some of the pressing questions Negros and Cebu is also needed to that pertain to the prospects utilize huge potential excess solar for renewables in the country, generation capacity from Panay and and thus, need to be urgently Negros. However, Remoroza added that addressed by policy: the variability of solar and wind energy “According could require additional reserves. • How should FIT policies be to 2015 amended for the upcoming Other countries’ experiences reveal data, the round? that GDP and oil prices influence the • In light of both affordability level of investments in RE. Using data country and environmental concerns, from 12 countries, a study by Rohin are current renewable Anhal found that a negative shock in has already subsidies too small or too GDP leads to lower RE investments in exceeded large? most countries. Interestingly, the study • What mixture of policies concluded that an increase in oil prices the target, and strategies would spur results in lower RE investments. The technological investments explanation is that higher oil prices with in renewables and at what dampen GDP, which in turn hinders economic costs? growth in RE investments. renewable energy Efficiency Net metering. Solar photovoltaic (PV) panels have become increasingly accounting Efficient energy demand affordable and convenient, as a source management involves pricing of electricity, particularly, in areas that for 31.33% power in accordance with its are too far to be connected to the grid. marginal cost and helping As a renewable energy source, it is of the total users to adjust consumption favored for its indefinite renewability installed accordingly. Improved energy and the relative ease with which it can efficiency can also play a be deployed by small-scale energy capacity.” key role in the reduction consumers, such as households and of greenhouse gas (GHG) small and medium enterprises, since emissions. This then calls it does not require massive set-up for better coordination of costs. Added to these advantages is energy policies and programs the prospect of being able to “export that would possibly include generation surplus” to the grid. In this promoting the use of energy- setup, the generator will be “charged efficient technologies, such as only for his net electricity consumption smart grids and alternative fuel- and [will be] credited for any overall powered vehicles. contribution to the grid” (RE Act of 2008, Chapter 1, Section 4). This is International experience. Dr.
22 Mark Rosegrant, Director of the Environment and Production Technology Division of the International Food Policy Research Institute (IFPRI) and Dr. Shunsuke Managi, Distinguished Professor of Technology and Policy and Director of the Urban Institute of Kyushu University shared some global trends, challenges, and policy implications for energy, water, and food security
as offshoots of climate change. Photo from news.panasonic.com
In September 2015, the UN adopted the Sustainable Development Goals (SDG) of providing access to food, nutrition, safe water, and modern energy for all, as well as strong environmental protection, specifically through reductions in GHG emissions. This is fitting in light of a disquieting scenario painted by Rosegrant: that of rapid population at risk of water stress in Sub-Saharan Africa growth in certain geographical areas like due to lower withdrawals and groundwater use. Africa, accompanied by a rapid demographic • To the extent that the reduction in fossil fuel shift from rural to urban and slow decline in use due to energy taxes mitigates climate malnourishment accompanied by an alarming change effects, energy taxes will significantly increase in obesity, which, accompanied by improve food security. global warming forecasts due to the expected continuance of the dominance of fossil fuel use, Other Key Challenges will certainly put a considerable strain on both food and energy security. Indeed, the forecast In this subsection, we briefly discuss the other is a 30% decline in global yield projections in key challenges that were raised in the discussions 2050 due to climate change. and in the open fora.
In view of the fact that tradeoffs potentially Regulating new technology. The break- exist between the mentioned SDGs and their neck speed at which new energy-dependent related targets and indicators, Rosegrant technology (e.g. high-speed machinery and develops a computable general equilibrium model equipment) is introduced requires new policies that evaluates the impact of energy (carbon) and regulations. In his presentation of some new taxes on food security and water scarcity in developments in technology and their potentials alternative scenarios that run up to 2050. His for revolutionizing the energy market, Lawrence main results have some policy implications for Fernandez, Vice President of Meralco, challenged the Philippines: energy regulators to take this as an opportunity • Revenue recycling aside, higher fossil fuel to develop new policies and regulations that prices due to a fossil fuel tax reduce household would be both responsive and adaptable. incomes, particularly in countries that are net exporters of fossil fuels or net importers of ASEAN integration. The main challenge to refined petrol. interconnectedness, according to Secretary • Energy taxes cause slightly lower food Monsada, is that the rest of ASEAN is landlocked demand and supply as a result of higher and with interconnection agreements, whereas agricultural chemical prices and reduced the Philippines is off-continent and archipelagic, groundwater pumping, leading to little or no creating major impediments to interconnection. change in food prices and food security. This effective geographical isolation of the • Expansion of biofuel production significantly country’s energy market prevents it from taking increases the number of food insecure people. advantage of being interconnected with other • Higher energy prices reduce the population ASEAN countries and puts Philippine growth and
23 Photo from en.wikipedia.org
development at a disadvantage vis-à-vis that of its landlocked ASEAN neighbors.
Towards “Filipino 2040”
It is but fitting to end this summary with the vision articulated in Ravago, Fabella, Alonzo, Danao, and Mapa’s “Filipino 2040 Energy: Power Security and Competitiveness” [43]. The authors “ The key is to find envision a strong-growth scenario, characterized by an average annual GDP growth rate of 7%, a way to promote which should propel the economy towards the high-income range by 2040. By focusing on the renewables without generation sector, they illustrate how policy reforms on fuel mix can potentially reduce the detracting from blended generation charge. A policy that favors temporary utilization of lesser-cost resource the main goals of can potentially reduce the blended generation charge by 1.37%. The current policy stance of lowering energy the government of maintaining 30% renewable can be very costly, where prices are projected prices and increasing to go up by 4.65%. Accordingly, following the alternative policy is more likely to be welfare- improving than a policy regime, in which the fuel reliability and access mix is prescribed by government policy. for the ultimate goal of Together with the fact that the Philippines already has a 33% share of renewables– employing energy as a particularly of hydro and geothermal–and one of the smallest carbon footprints in the fuel for sustainable and ASEAN region, it seems that the Philippines has more than enough policy space to go with the inclusive growth.” alternative least-cost. Accordingly, renewability should be advanced primarily as a vehicle for promoting the common good. The key is to find a way to promote renewables without detracting from the main goals of lowering energy prices and increasing reliability and access for the ultimate goal of employing energy as a fuel for sustainable and inclusive growth.
24 BIBLIOGRAPHY
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26 34. Navarro, A. and L. Escresa. Forthcoming. 42. Ravago, M., J.C. Punongbayan, A. Brucal and The Economics and Politics of Power Plant J. Roumasset. Forthcoming. The Role of Power Approvals in the Philippines. United States Prices in Structural Transformation: Evidence Agency for International Development and from the Philippines. United States Agency UPecon Foundation: Quezon City. for International Development and UPecon Foundation: Quezon City. 35. Oplas, B. 2016. Climate Change and the Need for Cheap and Stable Energy Sources. 43. Ravago, M., R. Fabella, R. Alonzo, R. Danao, A Presentation at the EPDP Conference 2016: and D. Mapa. 2016. Filipino 2040 Energy: Toward Inclusive and Sustainable Energy Power Security and Competitiveness. Development. Makati. 12-13 January. EPDP Working Paper 2016-01. Retrieved from http://www.upecon.org.ph/epdp/wp-content/ 36. Pangalangan, F. 2016. Beyond Band- uploads/2016/03/DP2016-01-Filipino-2040- Aid Solutions and Emergency Powers: The Energy_Power-Security-and-Competitiveness.pdf Need for a Long-Term Energy Security Plan United States Agency for International Francesco Pangalangan. A Presentation at the Development and UPecon Foundation: EPDP Conference 2016: Toward Inclusive and Quezon City. Sustainable Energy Development. Makati. 12-13 January. 44. Remoroza, R.A. 2016. Transmission Plans and Renewable Energy Integration to the Grid. 37. Pormon, M. Forthcoming. Welfare Effects of A Presentation at the EPDP Conference 2016: Electricity Shortage: The Case of the Philippines. Toward Inclusive and Sustainable Energy University of the Philippines: Quezon City. Development. Makati. 12-13 January.
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27 49. Umali, R. 2016. The Role of Congress in the Pursuit and Promotion of a More Responsive Regulatory Environment in the Philippines’ Energy Development. A Presentation at the EPDP Conference 2016: Toward Inclusive and Sustainable Energy Development. Makati. 12-13 January.
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52. Wolak, F. 2016. Design and Regulation of Electricity Markets: International Perspectives. A Presentation at the EPDP Conference 2016: Toward Inclusive and Sustainable Energy Development. Makati. 12-13 January. Editorial Staff
Reviewers: Dr. Majah-Leah V. Ravago, EPDP Program Director Dr. James A. Roumasset, EPDP Program Advisor Dr. Rolando Danao, EPDP Capacity-Building Advisor
Managing Editor: J.Kathleen P. Magadia
Copy Editor: Mari-An C. Santos
Design & Layout: Mems Gamad
28 ABOUT EPDP
The ENERGY POLICY AND DEVELOPMENT PROGRAM (EPDP) is a four-pronged program for research, policy development and advisory, capacitybuilding, and communication launched in November 2014.
It aims to help strengthen the capacity of the Philippine government to formulate coherent and evidence-based policies and strategies for the EPDP Team Photo by Mari-An Santos cost-effective use of energy resources in order to achieve environmentally-sound energy development. FOUR COMPONENTS EPDP’s products and services are used as input by the National Economic and Development Authority (NEDA), Department of Energy (DOE), other government agencies, the academe, and the POLICY DEVELOPMENT private sector. EPDP is funded RESEARCH AND ADVISORY by the United States Agency Develop and use theories, Use input from research to for International Development gathers evidence in the generate evidence-based (USAID) and implemented by the Philippines and other countries analysis and technical advice on UPecon Foundation,Inc. to support energy-related energy policies discussion and policy-making EPDP is a research initiative that informs policy–and decision- making in the energy sector. It also informs private sector business strategies for cost- effective, sustainable, and broad- based growth and economic development. CAPACITY BUILDING COMMUNICATION Builds support for Conducts trainings, learning environmentally-sound energy programs, and fora to increase development and communicates the capacity of government, researches, policies, and academe, and the private capacity-building programs sector to manage energyrelated through fora, dialogues, online programs and issues and print media
29 Legislative Energy-Related Public Sector Branch Legislation Implementing and Regulatory Cost-effective and Agencies Environmentally- sound Energy NEDA Energy Policies and Plans DOE • MTPDP • Philippine Energy Plan Private Sector
Sustainable and Broad-Based Economic Development Policy • Competitive Energy Sector Capacity Building
Communications Energy Research EPDP Program Management & Research Fellows
EPDP Program Director: RESEARCH AGENDA Dr. Majah-Leah Ravago, UP EPDP Program Advisor: Dr. James Roumasset, UH Research is a critical pillar of EPDP. The program supports EPDP Component Advisors: a mix of basic, operational, Prof. Ruperto Alonzo, UP and applied research on energy Dr. Rolando Danao, UP to ensure the development of Dr. Dennis Mapa, UP new knowledge and the use of existing knowledge. Fellows: Dr. Raul Fabella, UP The key priority research areas Dr. Ujjayant Chakravorty, include: improving competition in Tufts U. the electricity market, review and Atty. Raphael Lotilla, provide inputs to the crafting of former DOE Sec. energy policies and regulations, Dr. Ramon Clarete, UP exploring optimal pathways for Dr. Kyle Emerick, Tufts U. energy resource use and utilization, Dr. Geoffrey Ducanes, UP improving access to electricity, and Dr. Maria Nimfa Mendoza, UP studying regional energy market integration in Asia and other regions. Dr. Allan Nerves, UP Dr. Laarni Escresa, UP Dr. Sarah Daway, UP
30
The United States Agency for International Development (USAID) is the lead U.S. Government agency that works to end extreme global poverty and enable resilient, democratic societies to realize their potential. In the Philippines, USAID partners with the national government to create a more stable, prosperous, and well-governed nation.
For more information visit: www.usaid.gov/philippines
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