The Fitch ratings upgrade is welcome, but...

Bangui wind turbines. From Flickr

Before this Administration drum-beaters capitalize on the recent upgrade of the Philippines by Fitch ratings agency to investment grade by blowing its own horn to prop up its candidates this coming elections, it is better for it to go on a Lenten retreat and reflect it's (upgrade) ramifications.

Specifically, Fitch gave credit to Arroyo's--not the present--administration for laying the economic foundations into what we have now.
That's a sobering thought.

Perhaps, the most  prescient reaction to the upgrade is that of William Pesek in his piece he wrote yesterday for Bloomberg. In it he said that the "sick man of Asia" has the unique ability to disappoint even the most hardened optimists. And for good reasons. While he lauded Aquino's administration for its drive for more transparency in governance by punishing his predecessor and ousting a former chief justice, putting a cap on runaway overpopulation and addressing chronic tax evasion, he wondered aloud,"where does Aquino go from here?"

Specifically, he is worried if Aquino's successor would have a divergent view on reforms that could unravel what has been achieved so far. But it won't require a new president with different ideas to nullify the ratings upgrade.

It only requires that we fail to manage and improve our the basic infrastructures  that are hounding economic progress.

Just yesterday, my flight to Manila was delayed due what was euphemistically called "air traffic congestion" which actually demonstrates the inadequacy of our transportation systems.  The creation of modern international airports and improvement of existing ones have been have been priority projects at the start of this Administration, but none seemed to have taken off. Even what looked like a simple project such as the expansion of the Mactan international airport has been bogged down by changes in the bidding procedures and likely political posturing.

Major road  and transportation projects which are the pillars of the much-touted public-private partnership (PPP) program have not even broken ground. What happened to the Daang-Hari interconnection, the extension of our light rail transport system and the planned ports?

The other pillar that needs to be strengthened is the power sector. Here, the Administration deserves a grade of at most a "C", for going into the motion of trying to.

Consider for example, the feed-in tariff (FIT) system which ought to jump-start the use of renewable energy sources such as wind and solar by guaranteeing a reasonable price of power generated by renewable energy companies.  The renewable energy law was passed in 2008 but the feed-in tariff mechanism was only released July of last year or four years later, and only solar projects of between one and 3 MW would hopefully stand to benefit starting next year, according to Mario Marasigan, the energy department's renewable energy bureau chief revealed in an interview with reporters a few days ago.

Forget about those for geothermal and wind; that would be three to five years away, he added. The government has not even approved any of the hundred or so projects that have been submitted for consideration under the renewable energy act.

Marasigan's lame excuse for the snail-paced roll-out is that the government was introducing a completely new energy financing scheme and this took time to get right.

Don't be kidding.

The feed-in tariff scheme has been around for so long and this has been credited for the ballooning of renewable energy projects in major countries such as the United States and Germany since the 1990s. We have been articulating for a speedy resolution of the scheme a long time ago in several posts such as this one.

In the meantime, halfway through the term of the present administration, no significant capacity has been added to the power grid.

Let's come back to what Pesek warns: "Every five years or so, markets get all excited about change in the Philippines only to regret it. That makes it a fool's errand to predict turning points in this most erratic of Asian economies."

He might be proved correct.

And the early Easter gift by Fitch might turn up to be an egg.

Is wind energy poised to take off in the Philippines?

Recent pronouncements by various investor groups seem to indicate that wind energy use for power generation in the country is about to blow hard.

Three groups have recently submitted proposals to the Department of Energy (DOE) to undertake wind power projects in various parts of the country. These are: Energy Development Corporation (PSE: EDC) with proposed projects in Burgos, Ilocos Norte; Northern Luzon UPC Asia Corp. in Pagudpud, Ilocos Norte; while PetroEnergy Resources Corp. (PSE: PERC) has identified sites in Sual, Pangasinan, and Nabas, Aklan.

The proposals of these companies have pre-qualified according to the requirements of the DOE, according to Energy Assistant Secretary Mario Marasigan. The DOE is ready to give them the green light to go ahead with the projects.

Waiting in the wings include the local unit of Korea Electric Power Corp. (KEPCO) which plans to undertake renewable energy projects like wind and hydropower with the government-owned Philippine National Oil Co.-Renewable Corp. (PNOC-RC); and Trans-Asia Oil and Energy Corporation (PSE: TA) of the PHINMA group which is reported to have conducted preliminary studies.

The three committed wind projects could generate up to 200-MW of power, according to Marasigan, but this amount is but a fraction of the often-quoted 76,600 MW of wind potential the country could offer.

The growing interest in wind energy could be partly attributed to the passage of the Renewable Energy Act of 2008 which offers fiscal incentives such as income tax-holidays, tax-free importation of capital equipment, and tax-free carbon credits to RE projects. But what could accelerate the growth of such projects are the non-fiscal incentives such as the renewable portfolio standards (RPS) which require electricity distributors to source a percentage of their requirement from RE sources, and feed-in tariff scheme which tries to level the playing field in the power sector for the RE producers against traditional (fossil-fuel) generators.

These two last incentives have been credited with the explosive growth of wind energy particularly in the Unites States, Germany and Spain. However, our own similar policies have not really been given due clarification from responsible agencies of the government. Until, and only when, the implementing rules and regulations for these incentives are sufficiently clear will these companies fast-track their projects.

Northwind Development Corp., the developer and operator of the 33-MW wind farm at Bangui Bay, Ilocos Norte, has shown that given favorable circumstances, a wind project can be viable under local conditions. Aside from supplying 40% of the power needs of Ilocos Norte Electric Cooperative, the wind farm has boosted local tourism with its majestic turbines appearing in postcard pictures posted in Flickr and other websites.

But these wind energy projects can only really take-off given a push of a tail wind in the form of a clear renewable portfolio standards and an attractive feed-in tariff scheme.

The wind blows stronger in the north

Recently, the Northwind Power Development Corp., operator of the Bangui Bay wind farm in Ilocos Norte, has announced that it has completed the expansion of its project to 33 MW. Initially, the project started in 2005 with a capacity of 24.75 MW. The wind source provides 40% of the requirement of the local distributor, the Ilocos Norte Electric Cooperative (INEC).

On top of this, the Company will also put up a new 40-MW wind farm project in Aparri, Cagayan this year which costs up to $95 million. This was announced by Northwind chairman Fernando Dumlao who also said that the expansion program will be undertaken by a recently created subsidiary.

“We are pursuing our expansion plans because wind is a renewable form of energy and it is very timely because of the passage of the Renewable Energy Bill,” he said.

We can only heap praises for Northwind for undertaking this initiative to develop aggressively clean energy sources despite the lack of implementing rules and regulations (IRR) in the newly passed Renewable Energy (RE) Law.

As it is, a wind development such as the Bangui Bay project cannot hope to compete with traditional sources such as coal or natural gas-fired power plants without incentives such as those embodied in the RE Law. The project only came to fruition because it was registered under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Under the mechanism, the project has been able to generate so-called carbon or emission reduction (ER) credits which can be traded in a carbon market. The carbon credits represent the amount of avoided carbon dioxide emissions--which totals 356,000 tons over the project life of 10 years--if it were a fossil-fuel based project.

It helps that financing was provided by essentially zero-interest loan from the Danish Development Agency (DANIDA) which contributed to the viability of the project. The covenant of course requires that the project source its wind turbines from Danish manufacturers. Other projects won’t likely have these incentives.

For the case of Bangui Bay project, the ERs generated are purchased by the Prototype Carbon Fund (PCF), a consortium of six governments and 17 private companies, which authorizes the World Bank, as Trustee, to purchase ERs in behalf of the fund. Because the prices of the tradable certificates which represent the ERs generated have escalated rapidly since the start of the project, the Fund (and its investors) would already have profited much from the project. These profits should have gone directly to Northwind and its investors if the ER credits were directly traded by them.

But the CDM has a sunset clause; which means that one could only avail of its benefits within a time span, which I believe, will end in 2012. Beyond that, the project will be on its own, financially.

It would be too risky to put money to a clean energy project where its viability comes solely from the CDM, or through generous governmental loans, as in the case of Bangui Bay. This is where the RE Law should come into the picture.

Two of the major provisions of the RE Law (excepting the usual financial incentives such as tax breaks) that should impact greatly to wind (and solar) energy projects are: the renewable portfolio standards (RPS) wherein electricity distributors are compelled to source a percentage of their supply from renewable energy, and feed-in tariff, which puts a premium on the electricity price from renewable sources.

It is important that the detailed provisions of the RPS would now be established so that a potential developer could now input the effect on the viability of the project. One cannot just pluck a “nice” percentage number out of thin air; the concerns of all the stakeholders—energy producer, distributor, consumers and even the local government units—must be taken into account by those who are tasked to write the provisions.

Determining the feed-in tariff is not straightforward. An in-depth study needs to be made to come up with an amount acceptable to all stakeholders. At present, the tariff paid by INEC to Northwind is set by an electricity supply agreement (ESA). The feed-in tariff is on top of this price.

The Bangui Bay project, being the first wind farm to be established in the country, should be considered the prototype of similar renewable energy projects in the future. It has provided the necessary numbers and insights which could fine tune the new RE Law.

With the trailblazing work of Northwind and the RE Law, we have high hopes that wind power would blow stronger not only in the North but throughout the archipelago as well.

Renewing calls for renewable energy bill passage: Part 1

By J R Ruaya

Lost in the din of the clamor for lower electricity rates and soaring oil prices which have already reached $130 a barrel is a piece of legislation which could alter the whole energy scenario in the years to come, but is unfortunately slowly gathering dust in the halls of Congress: the renewable energy (RE) bill.

Dubbed Senate Bill No. 2046, or “AN ACT PROMOTING AND ENHANCING THE DEVELOPMENT, UTILIZATION AND COMMERCIALIZATION OF RENEWABLE ENERGY RESOURCES”, it seeks to provide a coherent policy framework of the development of renewable energy sources of the country. It is actually a consolidation of some 18 bills and resolutions which have been filed during the past several years, but which have not been acted upon by our legislators.

It has been certified by President Gloria Macapagal-Arroyo as urgent and listed by the Legislative-Executive Development Advisory Council (LEDAC) as one of the 28 priority bills which need to be passed by Congress. At the moment, it is only being considered for approval at the Senate committee level.

If this is indeed, an important piece of legislation, why is it that it has not received ample attention due to it? Considering its various incarnations, the bill has been pending in Congress since 1997 at least.

To be sure, the bill is non-populist, does not have grandstanding value as a probe like the NBN-ZTE deal, and its deliberations do not invite a live media coverage. Even before it could take off, some militant groups are already denouncing it, due to the fear it may aggravate electricity prices woes.

Environmental advocates on the other hand, warmly embrace it. For example, the group calling itself the Renewable Energy (RE)Coalition, a broad-based advocate for clean energy sources, has been at the forefront in the lobbying for its passage.

Other environmental groups, in an ironic twist, have taken the cudgels for the bill's passage, but on the same breath, bitterly oppose geothermal power development. Such an ambiguity in position could be partially traced to inadequate appreciation of the bill's provisions.

Incentives offerred

Catherine Maceda, head convenor of the RE Coalition, noted that in a much publicized survey, 77% of investors puts the highest priority to a predictable regulatory regime before they cough up investment money, while capital constraints fare poorly at only 10%. She went on to suggest that a coherent renewable energy policy such as that embodied in the bill is what is needed to jumpstart the development of significant amount of energy from renewable sources.

So, the renewable energy bill is the answer?

The bill offers a mixture of fiscal and non-fiscal incentives for developers of renewable energy sources. The fiscal incentives offered to risk-taking investors include (1) an income tax holiday, (2) preferential real estate tax rates, (3) exemption from import duties for capital equipment and (4) a reduction of government shares from royalties, among others.

For non fiscal incentives, the bill introduces a number of features which by themselves, are unfamiliar to most people, even to stakeholders in the energy industry. These are:

(1) the Renewable Portfolio Standards (RPS) which is a market based policy that requires electricity suppliers to source a certain portion of their supply from RE;(2) the Renewable Energy Market (REM) where RE power can be traded, purchased or sold, as part of the infrastructure support to facilitate compliance with the RPS mandate. It is envisioned to be a module of, linked to and be a function of the Wholesale Electricity Spot Market (WESM)(3) the Green Energy Option (GEO), which gives consumers the choice to use RE. In essence, it is claimed the Green Energy Option accelerates the open access concept under the Electric Power Industry Reform Act (EPIRA) of 2001.

(4) the Net Metering arrangement, allows distribution grid users who may produce RE powerand be appropriately credited with its contribution to the grid;

(5) The Minimum RE Generation Mandate for power generators in off-grid areas, which is expected to widen access to energy services to the rural constituents

Institutional support

Government and institutional support are embodied in the general provisions which create the following:

(1) the National Renewable Energy Board (NREB) which has the following functions:

(a) Evaluate and recommend to the DOE the mandated RPS and minimum RE generation capacities in offgrid areas, as it deems appropriate;

(b) Recommend specific actions to facilitate the implementation of the National Renewable Energy Program (NREP to be executed by the DOE and other appropriate agencies of government;

(c) Monitor and review the implementation of the NWP, including compliance with the RPS and minimum RE generation capacities in off-grid areas;

(d) Oversee and monitor the utilization of the Renewable Energy Trust Fund created pursuant to Section 19 of this Act and administered by the DOE;

(2) the Renewable Energy Trust Fund, which has the following functions and objectives:

a) Finance the research, development, demonstration, and promotion of the widespread and productive use of RE systems for power and non-power applications;

(b) Support the development and operation of new RE resources t improve the competitiveness in the market;

(c) Conduct nationwide resource and market assessment studies for the power and non-power applications of renewable energy systems;

(c) Propagate RE knowledge by accrediting, tapping, training, and providing benefits to institutions, entities and organizations which can extend the promotion and dissemination of RE benefits to the national and local levels; and

(d) Fund such other activities necessary or incidental to the attainment of the objectives of this Act.

Will it work?

With the basic provisions spelled out, one has the impression that the bill is saying a mouthful, but may signify nothing tangible. The bill obviously borrowed concepts mainly from the developed world, but the first question is, are we ready for these? Have we thought out the consequences once these policies are adopted? Is the current industry structure ready for any of these policies?

There is nothing wrong with adopting best practices from other nations; in fact, by doing so, one avoids the pitfalls of groping in the dark.

The fundamental premise for any of these concepts to work is an open, free and competitive energy and electricity market, which obviously we do not have. Seven long years after the passage of the EPIRA law, we still do not have a truly competitive wholesale electricity spot market. The one which is pretending to be is only confined in Luzon, and has been mired in controversies such as price-fixing.

The privatization of generating assets falls short of targets. The winning concessionaire for the transmission grid still lacks a legislative franchise to operate. Except for major cities, the electricity distribution network is still in the hands of inefficient, highly subsidized electricity cooperatives which are more often than not, under the whims and caprices of local politicians and moguls. Will these be covered, say, by the renewable portfolio standards?

The bill is even hazy on such very fundamental definition as what constitutes renewable energy sources? Large-scale hydro and mini- or micro-hydro are obviously renewables, but would these be treated equally? How about rooftop solar photovoltaics and grid-connected solar arrays? What about geothermal? Would all the laws governing geothermal development be superseded by the bill once it becomes law (it ought to be, by the rule of law)?

If the objective of the bill is only to have a motherhood statement policy, like the Constitution, fine. But for the bill to attract significant amount of investment in renewables, it sorely needs auxilliary laws which are clear and unambiguous. In various states of the U.S. and in countries of the European Union, each of the concepts lumped into the bill, such as RPS, Green Option, net metering, etc., is usualy contained in a separate piece of legislation, each with its detailed rules of engagement.

A more fundamental question is: are any, a combination, or all of these policies enough to jumpstart RE development?

Conspicuously absent is a feed-in tariff policy which requires only low cost deployment, but that has single-handedly pushed the explosive growth of wind and solar power in the European Union. Belatedly, the United States and Canada is playing catch up with several states like Michigan, Minnesota and Illinois in the U. S. and Ontario in Canada, rushing up their feed-in tariff policies only in the last few months.

Interestingly, Northwind, the developer of the wind farm at Bangui Bay, Ilocos Norte suggests a feed-in tariff specifically for wind projects to support the emerging source, but has only been met with blank stares.

Better than nothing?

As crafted, we have a bill noble in intentions but lacking much in substance. Shall we push for its passage, despite its flaws?

Microsoft, the software giant, has the propensity of releasing imperfect products only to correct flaws in mid stream. Would we follow the same tack?

At the moment, the best argument for its passage is, at least we would have a framework policy on which to build up the detailed structure later.

But, if you pass it, would they (investors) come?

Would the bill when signed into law actually pushes the energy industry into a more open and competitive market, or would we wait for an open and competitive market before acting on the bill?

Despite a perceived noise to the contrary in the mainstream media, there have been not much sober, analytical and methodological discussion on the merits and weaknesses of the bill. I am not aware of any scientific-based concept or white paper probing the implications of any of the aforementioned provisions in the Philippine context. What is passed on as discussion in the media is mostly histrionics for or against it.

This corner hopes to contribute to the discussion in future posts.