Discrediting the renewable energy critics

Posted at 01/22/2012 3:52 PM | Updated as of 01/22/2012 5:59 PM

 

(Editor's note: Below are Ramon Abaya’s last thoughts on the criticisms against the development of renewable energy in the country. The defender of renewable energy died on January 9, 2012.

Abaya was the chairman and chief executive of Cagayan Electric Power and Light Company, Inc.) 
 
 
ONE MORE TIME: HOW MUCH WILL YOU REALLY PAY FOR SOLAR? 17.95 , 15, 2.28, 1.14 or even less? In pesos or in centavos? Fixed, fluctuating or declining? The answers will surprise you.
 
It’s been on full throttle: a massive concerted campaign to discredit renewal technologies, particularly solar;  a clear demonizing effort at upending and pulling the rug under a Renewables law that took years in the making, and is yet to be carried out, after its passage of almost three years ago. The strategy is to fiercely latch on to feed in tariffs (FiTs), expressed in pesos per kwhr, while deliberately ignoring their retail impact, expressed in centavos. Then to stridently hammer at this thought to prove the technology is too expensive to adopt.
 
Feed-in Tariffs are cost-based, regulator-determined rates that each RE technology will charge each kwhr consumed for a specified period of time. Their aim is two-fold: to deploy clean energy while keeping their rate impact minimal; and to raise world demand higher, thereby forcing suppliers to further drop their costs, spawning a mutually reinforcing interaction between supply and demand. 
 
Solar PVs are clean, embedded, scalable in size to meet rising demand, can displace oil fired units during the day;  and are installable in months not years  - a unique trait that will help relieve, the fastest, without harming the environment and public health, the worsening power crisis in Mindanao, where reserves range from very little to none at all. Inadequacy in reserves means that peak and intermediate plants are immediately required. (The grid is currently suffering intermittent blackouts in spite of the rains, and no improvement is in sight)
 
The reader ought to know that some of the more determined critics are from companies that run coal-fired plants with plans to do a lot more coal. Some economists, while essentially in agreement with the coal lobby’s arguments, are concerned over the size and purpose of the so-called “subsidies”.  
 
Many refuse, for whatever reason, to make the imaginative leap from FiTs to their impact on customers, forcing the ordinary consumer to discover on his own what he will actually pay. He will pay not 17.95 pesos, but only a little above 2 centavos , or a little above 1 centavo, if the avoided cost of a competing technology is double the NREB’s figure. Yes, you heard right: in centavos!
 
I am an advocate of generation from renewable technologies, particularly from turning the sun’s irradiance into electricity. The reader ought to know where I am coming from - sort of which side of my bread is buttered. Others eager to weigh in are expected to bare any commercial connections, however tenuous.
 
One argument against renewables is that pollution is to large extent caused by the developed world and we as a developing country should not carry a disproportionate burden of cleaning our air and water. The solemn conclusion is that we have no moral duty to do so; surely, a sign of incredible hubris on the part of a poor country considered one of the most vulnerable to global warming – whose devastating effects are world-wide, mainly caused by fossil fuels burned for power and transportation. How do you stop these at the national border?
 
The debate on feed in tariffs foolishly ignores the insidious social costs of fossil fuels, dwelling narrowly on the upfront costs of renewables, and the subsidy that each kwhr must carry to promote the technology, under a FiT scheme. How much different are these from the subsidies the government will provide those who suffer from the weather anomalies caused by global warming? 
 
One difference is that unlike a subsidy from each kwhr consumed, a direct government expense hinges on the state of the country’s fiscal position. FiTs, in contrast, are subsidies from every customer – who virtually invests his share in his and the next generation’s future. They are not a fiscal incentive, affecting the government’s budget. 
 
FiTs are productivity based; each centavo raised hinges on each user’s consumption, thus incentivizing more production on the developer’s part; it is clearly the opposite of a take or pay scheme – whereby a minimum is paid regardless of consumption. Subsidies from the government hinge on tax rates and its collection performance. How stable and certain are those? How efficient has any government conducted its income transfers? Guess which system can potentially undermine the economy’s macro-economy, when deficits are exacerbated by imports with fluctuating prices outside of anyone’s control.
 
Solar hardly competes with base load plants running on coal; it competes with technologies that are available during the day, over and above base loads. For instance, compare solar's impact on retail rates with those of WESM. Are you concerned over the extraordinarily high prices of WESM at times and suspect that its skewed market structure and pricing mode may be a cause?  You may be right.  
 
Many small and widely distributed and embedded renewables, with priority dispatch under the Law, will help mitigate the inordinate abuse of that market power. Subsidies, in the form of a charge on every kwhr used everywhere, will dampen and help stabilize WESM rates, for the benefit of those in Luzon and Visayas. The logic is that REs, since they are must-run, will raise the supply offered in the spot market, bringing its clearing prices down, regardless of their original levels at every hour.
 
In Mindanao, where supply is tight, solar will displace oil fired units forced to run even at the start of day, turning what are otherwise suppliers of energy at high costs into replenishing reserves.  Compare  solar’s rate impact of only 2.28 centavos to the variable costs of running an oil fired plant, now hitting more than 9 pesos per kwhr. Solar’s addition to blended rates are 2.28 centavos, while that of oil is estimated to be about 3x higher. In either case, solar wins hands down.         
 
The coal lobby are in mortal fear of a technology that is not base-loaded and whose initial target of about 100 or so MW is puny compared to coal plants, rated in thousands of MW, that are now in operations, plus many more under consideration.
 
Talk about barking at the wrong tree; talk about basing one's argument on the wrong premise, so one can, in one's own inestimable self-regard, score points; talk about creating your own monster or bogeyman so you can knock it down.  You get the drift.
 
Under a feed-in tariff scheme, the subsidies are the difference between FiTs and the costs of units displaced (at 4.50 according to NREB). They are multiplied by solar's generation, before they are spread over the country's total consumption, resulting in what are known as retail  impacts -  the increase per kwhr that each customer pays.  
 
The volume produced (139 284 MWH) by solar – less than half a percent of total demand - is so small that when you blend it with total nationwide consumption (67,743,000 MWH), you turn the wholesale costs of 17.95 pesos to a mere 2.28 centavos at retail.
 
FiTs are not the same as FiT impacts;  FiTs are what developers get paid with, earning a return on investment of less than 10%, while impacts are what customers pay. FiTs are wholesale rates, while impacts are at retail. FiTs are in terms of kwhr produced; while impacts in kwhr consumed.  FiTs are the cost of production while impacts are the price of consumption. The contrasts are stark.  
 
And yet almost every sweeping, agonizing, hand-waving, sound bite you hear these days is focused on the 17.95; with the rate impact cavalierly set aside. Mark Twain wrote, “…..it is not what you don’t know that gets you into trouble, it is what you think you know for sure but just ain’t so that does.”
 
The rate impacts are like universal charges, which the EPIRA law, since its birth in 2001, has been imposing on every kwhr used for a wide variety of reasons: for missionary extensions, for covering NAPOCOR's humongous stranded debt, for stranded contract costs, etc.  
 
Universal charges for missionary extensions have varied from 2 to 9 centavos. There is no telling how these numbers will fluctuate in the future and at what level, but they will not remain fixed.  On the other hand, you can be sure that rate impacts will go down as avoided costs go up due to fuel costs’ secular rise and as total consumption rises; and FiTs for new projects will be brought down by technological advances.
 
Our experience in running oil fired units as standby in the past 16 years show that oil prices have been on a marked upward trend of about 9 % to 12% a year;  but who is to say what they will be next year, or 4 years from now. You can be sure they will go up in the long term. And yet one of the complaints against renewables is that their rates are fixed for 20 years! They will decline in real terms. Why is that a problem?
 
About 39 centavos per kwhr have been applied for by PSALM at ERC to cover the stranded debts and contract costs of the government; and these, if approved, are expected to run for some years.; down to a little above 3 centavos if spread over fifteen years.  Again, there is no telling that these will be the last of its kind, but you can be sure they will not be fixed.  We have not heard much complaint against these charges.
 
These subsidies pay for sunk costs, for the outrageous profligacies of the past; while in return for rate impacts, you get an increase in much-needed generating capacity!
 
You cannot repeat it often enough:  solar's impact on retail when 100mw shall have been reached within 3 years, is 2.28 centavos per kwhr. These are figures from NREB, the agency tasked by Law to determine and recommend them to ERC: solar’s retail impact is lower than those for wind (3.74), biomass (4.12) even if its FiTs are the highest. So, doesn’t that make solar among the cheapest? It sure looks that way to me.
 
But it is unfair that solar’s rate impact is lower than the others, reflecting a smaller allocation than is warranted, if a kwhr from wind or hydro or biomass is not any different from that of solar.  Is solar’s energy any less green than the others? A better allocation is to impose the same impact on all technologies, and then arrive at MW targets. A spread sheet model will show that solar will still have the smallest allotment.
 
This is what “technological neutrality” exemplifies– the intent and spirit of the RE Law that wants emerging technologies to be “accelerated” in development. The Law does not prioritize technologies on the basis of costs; so the near felicitous phrase of “plucking the low hanging fruit first” simply doesn’t apply and is probably illegal.
 
The FiT impacts are on an assumed avoided cost of 4.50 pesos per kwhr, the weighted costs from WESM. They should really be the marginal cost of units replaced by each technology. If you think 4.50 is too low with regard to solar, you are quite right.  
 
If the total cost of running an oil fired unit in today's prices is about P10.50 per kwhr, that brings the impact down to about 1 centavo per Kwhr, and the subsidy to less than 1.2 billion pesos initially for a 100 MW target – subsidies which are expected to come down as the rise in prices of fuels outstrip 50% of the country’s yearly CPI.  
 
But there are benefits:  the taxes and fees that 400 million US dollar investments will add to the national treasury; and the number of new jobs generated.  What about the benefits of clean air and a pristine environment, the dampening of extreme weather patterns, and the reduction in public health hazards?  While these are hard to value, they are known to economists as positive externalities; they are anything but trivial, and you ignore them at your and the future generation’s peril.
 
Future projects will carry lower FiTs due to what is known as “degression”, reflecting the steady drop in costs due to the fierce competition among suppliers to meet rising demand; while prices of oil and coal will continue to shoot up. The cost curves are expected to cross one another but it’s anyone’s guess when that will happen. You can make this happen sooner by adding to worldwide demand for solar now, however small your contribution. When that happens, solar shall have started to subsidize oil fired units, every time oil is used to meet daytime demand.
 
What about the suggestion that these subsidies are better spent on education, public health, or poverty alleviation? It is completely beside the point. The subsidy is taken from an industry, which just about touches every pocket in the economy, so each centavo collected must go to the development of renewables in the same industry. That is what the Law infers. If you can’t get these subsidies from some other means, why should you worry about their alternative uses?
 
The time to debate over the wisdom of subsidies from every kwhr consumed is long over; a feed in tariff scheme is prescribed in the Law, in case you haven’t read it. The interminable, festering discussion over renewables cannot go on because the debate was settled by the passage of the Law 3 years ago.  
 
Energy independence, the use of inexhaustible resources, economic growth without harming the environment:  these are some of the Law’s policy declarations. Are these goals still debatable?  We have listened long enough to the vast opinionated erudition of many from all sides. Isn’t it time to get past the nasty habit of shoot-from-the-hip, plucked-from-the-air, top-of-the-head theorizing or conjecturing without any supporting evidence; past the pricey biases of motor-mouthed media reps masquerading as news reporters? Isn’t it time to get on with the Law?