Primer on Feed-In Tariff System

The Feed In Tariff (FIT) system is an implementation of the Renewable Energy Act of 2008, which aims to promote the development of RE in the Philippines by giving developers and investors fiscal incentives. In this paper, we will be discussing how the FIT system works and place its alleged benefits and costs in the context of Philippine social realities.

Renewable Energy Situationer

In electric generation, our renewable energy (RE) matrix is composed of five sources: hydro, geothermal, wind, solar, and biomass. Of the five, wind, solar, and biomass are considered as "new" renewable energy sources. Plants utilizing these new RE have the lowest environmental impact and are virtually self-sustaining. Nevertheless, geothermal and hydro account for the lion's share of our RE supply. Both sources use mature technologies and have relatively stable output, making them perfect for base load generation. However environmental impacts then to be significantly higher. Dams used in hydroelectric generation can displace communities and ecosystems. The output of dams are severely affected by drought and scaling. Geothermal plants release toxic fumes as a by-product of the steam extraction process. Removal of large quantities of fluids from the underground can cause land surface subsidence. Reinjection processes, which partly alleviates the subsidence problem, can however cause seismic disturbances.1

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Power Generation by Fuel Source

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Figure 1. Total electric generation (in GWh) of different sources from 2001 to 2013. Natural Gas is increasingly becoming one of our main sources of electricity. Source: DOE

For over a decade in the electric generation sector, we've seen a steady decrease in our reliance on oil based fuels. A large chunk of our electric power now comes from natural gas and coal. In terms of "new" RE, biomass has the highest output. Wind and biomass have experienced fast growth in the past three years while solar output remains stagnant.

RE Energy Potential

There are over 10,000 km2 of potential sites in the Philippines with good to excellent wind resource potential. The US National Renewable Energy Laboratory (NREL) estimates that about 70,000 MW of installed capacity can be built in the country, generating some 195,000 GWh per year.2 Taking into account conversion efficiencies of real turbines, then a more realistic expectation is 58,500 GWh/year, which nevertheless can supply 77% of our present demand.

NREL estimates that the Philippines has the potential to generate 5.1 kWh/m2-day of photovoltaic power. In other words, if a person has a one square meter solar panel, it would generate 5 kWh in a day. Using a 15% conversion efficiency and assuming that the sun is only reliable for 10 months in a year, then to meet all our yearly electrical demand we need 32,800 ha or just a measly 0.1% of the country's land area.3

A 1999 energy survey of APEC countries has revealed that about 17Mt of biomass (rice hulls, coconut shells, coconut ) was produced in the country. This is equivalent to 2.6 Mt gasoline, sufficient to replace 24% of its crude oil imports and 63% of the country's gasoline consumption in 2000.4

Six years since the passage of the Renewable Energy Act, we have witnessed a large increase in biomass and wind power. Growth in solar on the other hand, has been slow. Development seems to center on "safer" more conventional RE technologies, with hydropower accounting for 66% of all RE projects approved by the DOE since the RE law was passed. All in all these projects have a combined installed capacity of 2,500 MW.

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Power from New Renewables

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Figure 2. Gross Power Generation of Solar, Wind, & Biomass Plants. Source: DOE

FIT-ALL Mechanism

Under FIT, a portion of the electricity produced by an RE plant is bought at above market rates, with the added cost being distributed among all grid connected customers. The Energy Regulatory Commission sets a specific rate (in Php/kWh) for each type of energy source/technology. The rates automatically decrease in value every year as the government expects RE developers to improve their technology in other to make RE cost-effective. RE developers are guaranteed to be paid in the FIT rates for at least 20 years.

RE Developers still sell their electricity to WESM at prevailing market rates. The difference between prevailing market rates and the guaranteed FIT rates is called the FIT Differential (FD). FD is distributed among all grid customers. It's the principal cost of the FIT charge in one's monthly bill. Consumer payments to the FIT charge are collected in a fund called the FIT Allowance (FIT-ALL). On October 10 2014, Transco was given authority to start collecting a FIT charge of P0.04057/kWh in the January 2015 billing of all electric consumers.

RE Developers not connected to WESM are paid in an amount called the Actual Cost Recovery Revenue (ACRR). The ACRR is simply the average electric rate of a distribution utility. It is akin to the generation charge in one's electric bill. The concerned DU collects both an ACRR and FIT charge from its customers.

Aside from the guarantee of above market prices, RE developers also enjoy: exemption from income taxes for seven years, duty-free importation of equipment, VAT-free purchases for supplies, equipment, properties, and services bought, and tax-free carbon credit sales.

Figure 3. Components of the FIT Charge. Aside from the Fit Differential, Transco also charges consumers for the buffer fund (WCA) and the costs incurred in managing the FIT system. National Forecast Sales is simply the total (predicted) electric demand. Source: Transco

Collection Agent

Transco serves as the administrator of the FIT-ALL fund and is responsible for the collection and disbursement of the the fund. Assisting Transco in the collection of FIT from grid customers are the collection agents (CA). Billing of the different types of grid customers is undertaken by different entities: Distribution Utilities and Retail Electric Suppliers collect from their customers, NGCP collects from directly connected customers, and PEMC handles payments from WESM Participants. These collection agents remit the paid amount by their end-customers in full to Transco. Failure to pay will result in fines for the erring CA. In cases where the CA fails to remit full payment, Transco will use the Working Capital Allowance (WCA) budget of the FIT-ALL fund. The cost of this buffer fund is included in the FIT Charge.

The RE developer submits a statement of account to Transco around 20 days after the end of the customer’s billing period. The full amount is then remitted to Transco around 50 days after the end of the corresponding billing month. Transco then transfers the payment to the RE developer on the same day.

Impacts

Costs to ConsumersInitial calculations seem to suggest that the impact of FIT is minimal. The Php

0.04/kWh5 FIT levy will raise the current transmission charge for households to Php 1.0174/kWh. For a regular household with 200 kWh, this would mean an Php 8.00 increase in the total monthly bill. However looking at the context reveals that such increase, no matter how minimal is an unjust burden for consumers. Electricity rates in the country are already the highest in South East Asia, even when taking into account the effect of differing taxes, subsidies, and currencies.6 Wages here are below the ASEAN average (and are far below the government’s own living wage) yet income taxes are one of the highest. Fifty-percent of Filipinos identify themselves as poor.7 It's callous for the government to pass the differential cost of FIT to the general public.

Figure 4. Schedule for FIT charge collection and remittance. Source: Transco

Source/Technology

Rate Degression (to be applied starting 2014)

Wind 8.53 0.5% per year

Biomass 6.63 0.5% per year

Solar 9.68 6% per year

Hydro 5.9 0.5% per year

Table 1. FIT rates for different technologies. Source: ERC Table 1. FIT rates for different technologies. Source: ERC Table 1. FIT rates for different technologies. Source: ERC

Costs to the EconomyWith regards to the economy, this FIT charge can result in higher utility costs for our already embattled local manufacturing sector. There is also the possibility of a domino effect, wherein businesses will pass their FIT charge to their customers. Based on AGHAM's estimate, the steel rebar industry alone will face an additional Php 51 million increase in its annual electrical expenses. They can pass on the cost to their customers (real estate developers) who will most likely then pass the cost to home buyers. If the two LRT lines were to pass on the FIT cost to passengers, then fare tickets will rise by at least a centavo.

The FIT system does not also take into consideration small RE-players, which includes households, LGU's, state colleges and universities, and retail business

establishments. These small RE players have higher efficiencies than RE utilities due to the fact that they source and consume their energy on-site (e.g. rooftop solar panels). Removing transmission and distribution cost have been shown to make RE (especially solar) competitive with coal.

Transco has decided to push through with the collection of FIT charges in spite of the fact that many approved RE projects have yet to built. In effect the public is being ask to pay the government for RE projects that are yet to materialise. Estimates peg the total revenue from FIT charges at a tune of Php Php 2.7 billion a year.8 The government has clarified that RE developers will not receive any payment from the FIT-All fund until they are able to deliver power to the grid. Nevertheless the buffer nature of the fund turns it into a sovereign guarantee for developers, effectively allocating the project risks to the general public.

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Comparison of Power Rates

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Figure 5. Power Rates between selected ASEAN Countries. The effect of taxes, subsidies, and purchasing power parity between countries have been accounted for. Source: UP CIDS

Country PPP-Adjusted Monthly Minimum

Wage (in $)Malaysia 614.29Thailand 516.70Indonesia 255.76Philippines 231.42Laos 207.64Vietnam 201.99Cambodia 82.46Myanmar 46Table 2. Monthly wages of different ASEAN countries. Even with the highest power rates in South East Asia, Filipinos have to contend with a mediocre wage. Source: Aseanbriefing.com, World Bank

Table 2. Monthly wages of different ASEAN countries. Even with the highest power rates in South East Asia, Filipinos have to contend with a mediocre wage. Source: Aseanbriefing.com, World Bank

Alternatives to Pass Through

AGHAM believes that the responsibility for providing clean energy is a government mandate.

With the increasing danger posed by climate change, lowering our greenhouse gas emissions becomes ever more important. Financial incentives for the development of renewable energy projects is a step in the right direction. However specific characteristics of our power industry makes the pass through aspect of FIT-All.

Multiple studies estimate that with proper reforms, we could see a 20% to 30% reduction in our power bills, and these are only for the generation charge. If the recent allegation of NGCP profiteering is addressed then a further Php 100 could be slashed from the monthly bill of a 300 kWh household. If such large decreases in power rates were to happen, then an slight increase due to feed-in tariff might be justifiable.

For the present case, there are alternative sources of funding. The most obvious is the Malampaya energy fund, which has been allocated by law for energy related projects. Renewable energy facilities require significant investment but the environmental and social returns more than make up for the fiscal burden. Additionally, following the polluter pays principle, Greenhouse gas (GHG) emitting plants (including coal fired plants, etc.) can be given additional taxes. The levy should approximate the negative externalized cost of such "dirty" sources. These carbon taxes can act as a signal to investors to exploit other cleaner forms of power.

Alternatively as a stop-gap measure, the country's utility scale RE requirements can auctioned off in a Swiss challenge system, similar to what is being done by electric cooperatives with bilateral contracts.

Present FIT mechanisms favor only big developers. An incentive scheme for households and other small developers should be implemented in order to take advantage of the cost competitiveness and higher efficiencies of RE consumption at source. This will also help in the rural electrification project as it turns vulnerable communities into RE producers.

References

Energy Regulatory Commission, “Case no. 2014-109RC,” 8 June 2015 <http://www.erc.gov.ph/Files/Render/issuance/6277>.

Energy Regulatory Commission, “A Resolution Adopting Guidelines on the collection of the Feed-In Tariff Allowance (FiT-ALL) and the disbursement of the FiT-ALL Fund,”8 June 2015 <http://www.transco.ph/downloads/fitall/ERC-Resolution-No.24-Series-of-2013-FIT-All-Collection-and-Disbursement-Guidelines.pdf>.

TRANSCO, “Feed-In Tariff Allowance (FIT-ALL)/ ACRR Collection and Remittance,” (Slide presentation, February 13, 2015).

Naomi Klein, “This Changes Everything: Capitalism vs. the Climate” (New York: Simon & Schuster, 2014).

Wholesale Electricity Spot Market, “WESM Lecture Series on FiT Allowance and Must Dispatch,” (Slide presentation, February 13, 2015).

Endnotes

1 M. M. El Wakil, “Powerplant Technology” (New York: McGraw-Hill Education, 1985).

2 D. Elliott, M. Schwartz, R. George, S. Haymes, D. Heimiller, G. Scott, “Wind Energy Resource Atlas of the Philippines” (Golden, Colorado: National Renewable Energy Laboratory, February 2001).

3Roberto Verzola, "Crossing Over: The energy transition to renewable electricity" (Pasig: Friedrich-Ebert-Stiftung – Philippine Office, 2015) p7.

4 Anelia Milbrandt, Ralph Overend, “Survey of Biomass Resource Assessments and Assessment Capabilities in APEC Economies” (Asia Pacific Economic Cooperation, 2008).

5 Ritchie Horario, "Power rates to go up this month," The Manila Times, 10 February 2015, 8 June 2015 <http://www.manilatimes.net/power-rates-to-go-up-this-month/162127/>.

6 Rowel Del Mundo, “Understanding and Reducing Power Rates in the Philippines” (UP Center for Integrative and Development Studies, Slide presentation, April 16, 2015), 17 April 2015, 21 April 2015 <http://cids.up.edu.ph/lecture-2015/>.

7 Helen Flores, "50% of Pinoys rate themselves poor," Philippine Star, 13 May 2008, 8 June 2015 <http://www.philstar.com/headlines/61851/50-pinoys-rate-themselves-poor>.

8 Juzel L. Danganan, "Meralco to add renewable energy charge of 4 centavos per kWh this February," Interaksyon, 4 February 2015, 8 June 2015 <http://www.interaksyon.com/business/104351/meralco-to-add-renewable-energy-charge-of-4-centavos-per-kwh-this-february>.

Appendix: Calculations and Estimates

FIT costs in industryAn electric arc steel furnace consumes around 425 kWh to melt a ton of steel.9 The Philippines consumes around 3 million tons of rebar steel for construction as stated by Steel Asia, the largest steel company in the country.10 Assuming that all rebar steel companies use electric arc furnaces, then the Php 0.04/kWh FIT charge will translate to a Php 51 million/year additional expense. This is only the increase in melting expenses. It doesn’t include rising utility costs from other energy intensive processes in rebar production.

Wages ComparisonComparing wages between countries is not a straightforward process owing to the fact that in some countries there are multiple wage tiers (ex. regional wage boards in the Philippines). Also due to currency differences and differing costs of living, a more useful comparison is not the face value of the wage but what the wage earner can buy with it. Which is why adjusting for PPP can give a useful estimation. Data from a private entity (aseanbriefing.org) was used to calculate the monthly minimum wages.11 Where multiple (e.g. regional) minimum wages exist, the lowest was chosen. In order to adjust for purchasing power, conversion factors from the World Bank were used.12 A 20 day work month was also assumed.

Data collated by the Department of Labor and Employment was also used to compute the daily minimum wages. Different rankings were generated from the two data sets. Ultimately data from aseanbreifing.com was used because it’s more complete (DOLE data did not have Myanmar) and it reported lower wages for the Philippines than DOLE.

Country Daily Nominal Minimum Wage

(in $)

2013 Exchange Rate

PPP Conversion Factor

PPP Adjusted Minimum Wage

Thailand 9.19 32.6315 13.06 22.961982006126Malaysia 7.18 3.7138 1.59 16.770493081761Philippines 5.82 44.8270 19.37 13.468928239546Cambodia 4.18 4,078.6900 1,562.92 10.90837931564Vietnam 3.28 21,857.9000 8,561.60 8.373891795926Indonesia 2.79 13,123.4000 4,384.43 8.3509797168617Laos 1.40 8,292.6200 3,121.10 3.7197359905162Source: DOLESource: DOLESource: DOLESource: DOLESource: DOLE

Country Monthly Minimum

Wage (in $)

2013 Exchange

Rate

PPP Conversion

Factor

PPP Adjusted Minimum

WageMalaysia 263 3.7138 1.59 614.29522013Thailand 206.8 32.6315 13.06 516.70705972Indonesia 85.45 13,123.4000 4,384.43 255.76746122Philippines 100 44.8270 19.37 231.42488384Laos 78.15 8,292.6200 3,121.10 207.6409769Vietnam 79.12 21,857.9000 8,561.60 201.99460942Cambodia 31.60 4,078.6900 1,562.92 82.465259898Myanmar 46 3.7138 285.17 0.599063015Source: aseanbriefing.orgSource: aseanbriefing.orgSource: aseanbriefing.orgSource: aseanbriefing.orgSource: aseanbriefing.org

9 http://www.heattreatconsortium.com/metalsadvisor/iron_and_steel/process_descriptions/raw_metals_preparation/steelmaking/electric_arc_furnace/electric_arc_furnace_energy_consumption.htm

10 http://www.steelasia.com/news-saup.htm

11 http://www.aseanbriefing.com/news/2013/04/16/minimum-wage-levels-across-asean.html

12 http://data.worldbank.org/indicator/PA.NUS.PRVT.PP