What Lack of Competition Means

A recent World Bank report says that more competition in the power, transportation, telecommunication can boost economic growth in the Philippines.

According to the study, “Fostering Competition in the Philippines: The Challenge of Restrictive Regulation,” the above-mentioned sectors are crucial in improving job generation and services in the country. Unfortunately, there is limited competition in these sectors.  

When compared to other countries, the Philippines’ economy is more concentrated due to the higher proportion of oligopoly, duopoly, and oligopoly in the market, the report added.  The author of the report and World Bank senior economist, Graciela Miralles Murciego stressed that such market structures have hampered productivity growth in the sectors: “The entry of politically connected companies limited productivity.”

The study also emphasized that restrictive regulations and restrictions such as complex regulatory procedures and barriers to trade and investments including foreign equity investments have constrained the growth of the economy. This in turns led to the high prices of services. It also cited that the limitations on foreign direct investment have stunted the development of infrastructure in the energy sector.

The World Bank is not alone in pointing out that more competition is needed in the energy sector. For example, the Massachusetts Institute of Technology released a paper, Utility of the Future by Massachusetts Institute of Technology, which concluded that “the structure of the electricity industry should be carefully re-evaluated to minimize conflict. It is critical to establish a level playing field for the competitive provision of electricity services by traditional generators, network providers, and distributed energy resources.” The report may not be talking about the Philippines directly, but it nevertheless echoes the sentiments of the World Bank.

The MIT study added that there is a need to review electricity markets especially since new technologies can be integrated into the power system. “Wholesale market design should be improved to better integrate distributed resources, reward greater flexibility, and create a level playing field for all technologies.”

I have been vocal about the needed reforms by the power sector so Filipinos can enjoy lower electricity rates. Our rules are skewed to favor the few. 

Take for example the lack of competition in service areas. Currently, another power player is barred from offering its services in an area that is already being served by a distributor. This, in turn, creates a monopoly. And as our economic professor will tell us, monopolistic practices will always put consumers at a disadvantage.

It also does not help that we are not allowing more foreign investments in the power sector. As the World Bank Report stressed, limitations on foreign direct investments have curtailed the growth of energy infrastructure. This is especially true for renewable energy development. 

We have to remember that renewable sources need to be explored (as in the case of geothermal) and plants have to be constructed. These undertakings require new technologies and equipment. Foreign investors can provide these two while we limit the foreign investors’ ownership on the natural resources if they are allowed to do so. This is the best way forward if we are serious in shifting to greater use of cleaner and sustainable energy sources.

Unfortunately, our 1987 constitution limits foreign participation in many industries including power. These provisions, however, are already outdated and needs to be revised. Former National Economic Development Authority chief, Cielito Habito emphasized this need aptly when he said, “The hope is we will be willing to amend economic provisions of the constitution because that is what really is holding us back. It is outdated. Many of the restrictions in foreign advertising, mass media, education, are really out of date. Given the technology in recent years, those rationales don’t apply anymore to the information age.”

Time and time again we are reminded by various experts on the many virtues of competition in various areas including the power sector. But these reminders seem to fall on deaf ears. The Philippines still has one of the highest power rates in Asia, and we all have to thank our regulators and policymakers for that.

References:

https://www.philstar.com/business/2019/03/05/1898614/greater-competition-power-telco-transport-boosts-growth-world-bank#UcJx07M8WylEry0k.99

http://www.bworldonline.com/constitutional-amendments-needed-boost-fdi/

Good and Sad Headlines

 

re germany

Renewable Energy dominated the power mix of Germany in 2018. Photo c/o Time.com

The New Year started with news of record highs for the renewable energy sector.

In Germany, renewable energy dominated the power mix for 2018. A study by Bruno Burger of the Fraunhofer Institute for Solar Energy Systems showed that Germany is on its way to becoming less dependent on fossil fuel as renewable energy accounted for 40 percent of the country’s electricity production in 2018 while 38 percent came from coal. This is the first time renewables has overtaken coal as Germany’s primary power source. Wind power also became the second biggest power source.

Similarly, a  new record high in renewable energy use was also recorded last year by the United Kingdom (UK).

According to climate research and news site, Carbon Brief, growth in renewable energy use in the UK rose to 33 percent, a record-breaking figure. On the other hand, fossil fuel use dropped to 46 percent, the lowest ever recorded as many coal power plant closed last year. The UK has earlier pledged to phase out all coal plants by 2025.

These two countries’ achievements only show that indeed a shift to cleaner forms of energy is possible.

Unfortunately, the Philippines has not been making headlines for its use of renewable power.

On the contrary, recent headlines about the energy sector talks about the increase in power rates due to the second tranche of the Tax Reform for Acceleration and Inclusion or TRAIN law.

The second installment of the law equals an additional excise tax of Php2.00 per liter of diesel and gasoline an added 12 percent value for 2019. The total increase per liter of diesel will be Php2.24. Last year, Php 2.50 taxes were levied on diesel and bunker fuel.

Naturally, the new taxes will have a domino effect on consumer prices, transport fares, and yes, power rates.

No, I am not questioning the merits of our new taxation scheme. I leave that to tax experts and economists. What I am merely pointing out is that the new taxes also increase power rates because of the Philippines’ dependence on traditional sources of power.

Estimates by The Independent Electricity Market Operator of the Philippines (IEMOP) show that the second tranche of TRAIN law will raise electricity prices by P0.1111 per kilowatt hour (kWh). By 2020 or on the third installment, the increase would be P0.1311 per kWh. The first phase already raised electricity prices by P0.0904 per kWh. These estimates according to IEMOP are based on the assumptions of Manila Electric Co. (Meralco) related to its sourcing energy mix.

Naturally, the power rates will increase if fuel prices in the world market increase, too. In the words of IEMOP President Francis Saturnino Juan, “So, these are the incremental amounts, but of course if the price of fuel itself will increase, then that will add to this incremental increase in 2019 and 2020 because of the staggered increase in the implementation of the law,” he said.

The issue of increasing power prices is a separate one from that of volatility. Volatility itself causes over-all costs to rise because of uncertainty. Because we are dependent on global markets, necessarily we are exposed to global price swings.

We could have spared the Filipinos from this additional burden if we increased the share of renewable power in our power mix a long time ago. Why pay more for expensive sources of energy when we could have just harnessed our natural resources well? This is especially true for off-grid islands that are powered on diesel-fired generators. We have to keep in mind that 80 percent of the operating cost of power generation in isolated islands are spent on diesel. And with added taxes on petroleum products, we can expect higher prices of power generation for the off-grid areas.

That’s just the problem with our reliance on traditional sources of energy and the government’s lack of appreciation for renewables — it leaves Filipinos vulnerable to a variety of factors. Sadly, it is the consumers that suffer when there is no political will to push for a greater share of renewable energy.

References:

https://businessmirror.com.ph/after-hurdling-2018s-regulatory-crisis-power-industry-players-are-ready-for-year-of-the-pig/

https://www.independent.co.uk/environment/renewable-energy-germany-coal-power-environment-green-solar-wind-a8711176.html

https://www.ft.com/content/ea2feb40-0e8e-11e9-a3aa-118c761d2745

My New Year Wishes

This holiday is the time to reflect on the past year as well hope and pray for a better one. So, while wearing my renewable energy developer hat, let me share my new year wish list.

Top on my agenda for 2018 is the resolution of the ERC issue. Just last month four commissioners were suspended, which left the energy sector in limbo. This means that the sector is left paralyzed and this does not augur well for the New Year. 

Legal experts tell me that the basis for their suspension is skating on a very thin ice. And many are concluding that the move reeks of political vendetta. If these are true, then it is a development that does not bode well for our country. This undermines the very integrity of the regulatory framework and will bring about uncertainties on the security of investments in the sector. And this, obviously, will spell disaster for the entire economy. 

Equally important is for the players in the sector to realize important role of renewable energy (RE) on the economy. Yes, environmental sustainability is a crucial aspect, but using RE has a more significant benefit for households and businesses: the minimization of risk and lowering of power cost. This approach goes beyond the “least-cost” traditional view of energy planning. With the state of geopolitics, energy security and lowering of prices should be on the top agenda of the regulators today. Renewable energy has to be a priority. 

Related to risk minimization is the diversification of energy supply. Coal cannot and should not be relied upon solely for our energy needs. Natural gas has an important role to play in the country. Today, we source over 2,500 MW of our power needs from natural gas.  We cannot expect coal to replace that capacity when Malampaya runs out in seven years; Coal just does not have the physical characteristics intrinsic to natural gas. It is time to seriously consider how to develop Liquefied Natural Gas (LNG). Unfortunately, a monopsony like MERALCO is not easily swayed to buy such a massive capacity of LNG. It is imperative for our government to be more creative in finding ways to introduce LNG into the country.

The proposal to have an Independent Market Operator (IMO) is long overdue. However, aside from the IMO, we should also have an Independent System Operator (ISO) to ensure complete independence in the dispatch and operations of the power network.

 Finally, the world will be going towards a phase of distributed generation and smart grids. The government must prepare for this by providing robust telecommunication and internet infrastructure since the current internet speed in the country is just unacceptable. Our telecom and internet should be vastly improved.

 Happy New Year, everyone!

A Growing Consensus

There is a growing consensus among energy players and experts around the world that the best path forward to a sustainable energy and clean energy is to combine renewable energy with natural gas. Unless an alternative type of fuel is found, or until battery storage (or similar technologies) become economically feasible, this may be the case.

For one, Royal Dutch Shell, Europe’s biggest energy company is investing heavily in liquefied natural gas (LNG) plants and developing a market for it. Shell currently has various LNG projects scattered in practically every continent.

Now why the massive investment on LNG? According to Maarten Wetselaar, Royal Dutch Shell Plc’s director of integrated gas and new energies, its because “We are deeply convinced that the end-point energy mix that provides cheap, or at least affordable, reliable and clean energy to everybody will consist of renewable power, biofuels, and natural gas.”

He added that that the company will go full speed with investments projects that can produce the cheapest LNG.

As early as 2012, Shell’s CEO, Peter Voser already announced that the firm would invest some $20 billion in the natural gas around the world in the next three years.

Shell isn’t alone in its belief that renewables should be combined with natural gas.

Craig Ivey, president of US Energy firm, Consolidated Edison Inc, stressed that the US shift to RE like wind and solar is feasible if there is greater reliance on natural gas. Consolidated Edison Inc. provides electric service to some 3.3 million customers and gas service to roughly 1.1 million customers in New York City and Westchester County in the US

Ivey added that REs could account for half of New York’s energy needs by 2030 only with the help of natural gas.

But energy company officials are not the only ones to have this conclusion. A study published recently by the National Bureau of Economic Research concluded that natural gas power plants that can fire up quickly must be used to meet the cut emissions and energy stable supply.

Author’s of the study, “Bridging The Gap: Do Fast Reacting Fossil Technologies Facilitate Renewable Energy Diffusion?” stressed that “Renewables and fast-reacting fossil technologies appear as highly complementary and that they should be jointly installed to meet the goals of cutting emissions and ensuring a stable supply.”

I have to agree with these experts as adding more natural gas helps in ensuring a stable energy supply through diversification.

 

Shell LNG

Adding more natural gas to the power mix is key to achieving energy diversification. Photo c/o https://www.green4sea.com

 

According to Andy Stirling, a Professor of Science & Technology Policy at the University of Sussex, there are three basic properties when it comes to diversification: variety, balance and disparity.

In the context of energy systems planning, variety is about the number of energy supply options available. And having more variety of energy types means that there is greater diversity in the system.

On the other hand, balance pertains to the reliance on each option available where the system is considered as more diverse if there is more balance across energy choices while disparity refers to the differences in each option. There is more diversity in the energy supply system when options are more disparate.

This is why we need to make use of various energy types for our energy mix.So far, we depend heavily on coal to meet our ancillary needs. According to the Department of Energy, last year, coal accounted for 48 percent of our energy needs while some 22 percent came from natural gas.

Obviously, our energy supply is far from diverse given the numbers above. This is why we need to develop and increase the share of natural gas in our energy mix. We can lower our reliance on coal, and use more natural gas for our ancillary need as we add more renewable energy mix.

Keep in mind that both wind and solar power are intermittent. Thus, we need to beef up on our ancillary services to maintain the correct direction and flow of power as well as to address the imbalance between the supply and demand on the grid. And for that we can utilize more LNG rather than always turning to traditional power sources for our ancillary needs.

After all, there are advantages in using natural gas. For one, natural gas is three times more useful compared to conventional power. It is highly efficient as around 90 percent of natural gas produced can be converted to useful energy.

Natural gas is less harmful to the environment, too since its main component, methane, results in lesser carbon emission. LNG’s carbon dioxide emissions are 30 percent less than oil and 45 percent lower than other conventional fuels.

Plus, the death print of natural is less than coal according to energy expert James Conca who defined death print as “the number of people killed by one kind of energy or another per kilowatt hour (kWh) produced”. Natural gas death print is 4,000 significantly less than coal’s 100,000.

We have so much to gain by developing our LNG to replace coal-fired plants in the country. Adding more LNG will make our energy supply system become more diverse while helping us achieve our goal of helping the world become a less polluted place.

In the long-term, however, maybe indigenous, sustainable and therefore renewable energy may be the way to go.

References:

http://www.reuters.com/article/usa-property-coned-energy-idUSL1N1IY1DK

https://www.cnbc.com/id/49841864

fuel.https://www.bloomberg.com/news/articles/2017-09-06/shell-seeks-to-boost-lng-demand-as-canada-in-mix-for-new-plant

https://www.washingtonpost.com/news/energy-environment/wp/2016/08/11/turns-out-wind-and-solar-have-a-secret-friend-natural-gas/?utm_term=.dbf4c1935ceb

https://www.doe.gov.ph/electric-power/2016-philippine-power-situation-report

Diversity and Sustainable Energy Transitions: Multicriteria Diversity Analysis of Electricity Portfolios By Andy Stirling

 

We Pay Higher With A Weaker Peso

pexels-photo-164560

The Philippine Peso has been falling against the greenback in the last few weeks. Tagged by Bloomberg as Asia’s worst performing currency, our currency has lost 1.6 percent this year. Bloomberg also noted that the Philippine peso is also the worst performer among emerging markets, only next to the Argentina Peso.

Both forecasts by DBS Bank and Bloomberg also predict that the exchange rate would be P52 to a dollar by year-end, In fact, according to DBS Bank, the weak peso could continue until middle of next year.

The weakening of the peso is a result of various factors. Unfortunately, a shrinking peso against the dollar is detrimental to normal Filipinos if we are talking about their power rates. The falling peso could spell doom for many Filipinos, mainly because the lower peso would increase power prices.

As I have pointed out in previous posts, our Power Sales Agreements or PSAs have the provision for the pass-on costs where the consumers pay for the foreign exchange and fossil fuel upward price adjustments. To put it simply, the consumers will pay for the weak peso in their electric bills.

Remember December last year where the biggest power distributor announced a P0.1011 per kilowatt-hour (kWh) increase because of the upward adjustment in the generation charge caused by the significant weakening of the peso against the dollar. A news report then noted that the peso slid down to P49.73 in November from P46.59 to a dollar from August of the same year. That’s almost a three peso difference in three months, which resulted in the increased electricity bill. We have to keep in mind that the largest DU in the country sources its electricity from independent power producers, which, unfortunately, have 90 percent of their billings in dollar denomination.

As I have discussed in detail, our energy planners have favored the ‘floating’ PSAs rather than fixed ones, thinking that it is cheaper. To simplify, these floating PSAs are not necessarily more inexpensive as there are unknowns specifically fossil fuel global price spikes and falling value of the peso against the dollar. These unknowns are, sadly, inevitable.

As with our experience last year in the above example, a weaker peso resulted in higher power prices. So, we cannot say that floating PSAs are cheaper because, in the end, the poor consumers will shell out more money when the inevitable happens.

This is why we need the fixed priced contracts. Under fixed priced contracts, consumers will pay the same amount for a specified period, let us say, 25 years, for their electricity. Fixed price contracts eliminate the need for users to pay for the pass-on costs or to simplify, pay for higher power charges when the peso falls against the dollar or when prices of coal or oil in the international market increases. I’m sure our consumers would appreciate knowing how much they would be paying for their energy consumption on a monthly basis rather than be surprised when their electric bills come.

Let us see the economic sense in having fixed price contracts for the sake of the end consumers. Rather than just fret on how a weak peso could hurt us, let us make the adjustments needed to ease the burden for the Filipinos who will shoulder the cost of the falling peso when they for pay their electricity. Surely, Filipinos have other uses for their hard-earned money.

REVIEWING CAPM: How to Truly Bring Down Power Rates in the Philippines

I recently came across and found the time to re-read a material written by renowned Energy scholar,the late Simon Awerbuch. I first encountered Awerbuch’s readings a few years ago. That article made me really reflect and understand why our consumer on the street, Juan de la Cruz, is probably getting a bad deal in his electricity prices.

In the material, Awerbuch discussed the Capital Asset Pricing Model (CAPM), and the importance of reviewing the traditional methods used in estimating electricity costs.  He asserted that traditional energy planning fails to consider the risk of price volatility of fossil fuels, which, unfortunately, has a negative correlation with the economy.

We use CAPM in our tariff setting. In my view,  the concept is misused. The reading made me think that if only our energy planners and regulators take the time to understand the concept and make the changes needed, then we will surely have lower power rates

For a long time, we in the power sector have been using the “least cost” approach to analyze which sources of power are cheapest or the most economical to use in the system.  We do this by comparing technologies where we conclude that certain fuel sources are “cheaper” than others. To exacerbate this further, we then go on and regulate what can be passed on to consumers based on the returns we want to give to investors rather than what consumers want nor deserve.

And for the Nth time, I say, we got this all wrong.  This is the reason why we find it extremely difficult to bring down power rates.

We need to look at our Power Sales Agreement or PSAs to understand what we are doing wrong. Reduction of energy cost is simple: regardless of the technology, introducing fixed-price long-term contracts will REDUCE power rates.

To understand the need to introduce fixed-price-long term contract, we first need to review the use of what I call the ‘floating’ power sales agreement.

Generally, PSAs have provisions to “pass through” or “pass on” foreign exchange and fuel prices to the end consumers. It is my contention that once we minimize PSAs with “pass through” or “pass on” rates and replace them with fixed price long-term contracts, we can truly bring down power prices.  Otherwise, as my good friend says, these “pass on” contracts will have to be, in the Visayan language, “pas-an” (to be carried) by the consumers.

In my other articles, I have always asked the question: which is cheaper, a floating PSA that is currently priced at P5.00/kWh or a fixed price PSA that is fixed at P5.10/kWh for 25 years? The traditional analysis will say it is the floating P5.00/kWh.  In fact, the way “rate impact” studies are done, most utilities calculate only the first year tariff and weigh the implications of that tariff when added to the current average tariff of the entire energy mix. The traditional analysis will conclude that, indeed, a floating P5.00/kWh is cheaper than a fixed P5.10/kWh.

Unfortunately, such analysis does not consider the possibility that the floating PSA can reach P10.00/kWh the following year should the value of the peso fall against foreign denominations or prices of fuel or coal significantly increase.

Choosing the ‘floating’ price is counter intuitive. Any businessman or even a housewife would rather pay a known fixed price because, from a budgeting perspective, it is far more convenient.  And more importantly, it is actually, conceptually cheaper. It is cheaper because the cost to hedge either the fuel or forex risk will have to be added on the P5.00/kWh if one is to adjust the cost of a floating PSA to reflect current prices of fuel or value of peso against a foreign denomination. And that is assuming there is such a hedge for 20 years.

But why is this penchant for choosing the floating PSAs embedded in our regulatory framework? For this, we can point to the calculation of the Weighted Average Cost of Capital (WACC) when computing for the Return on Equity (ROE) in the determination of the appropriate tariff for a particular PSA. Our regulators use the CAPM for tariff setting, but unfortunately, use an incorrect value for the beta in the computation. Our regulators assume that the beta has a positive value, which signifies that the return to the generator is positively correlated to the economy.

This indeed is a faulty assumption especially if used in the tariff setting for fossil-powered plants. On the contrary, studies have shown that oil price volatility has a negative relationship on macroeconomic activities. Awerbuch, simplified it best: financial betas of fossil prices must also be negative.

The above point leads me to the bigger, and more important question: why is the rate setting evaluated from the point of view of the generator? Since the consumer is taking the forex and fuel risks anyway, shouldn’t the consumer’s perspective be taken instead?  Shouldn’t we use the beta for consumers for a floating PSA instead of the beta of the generator?

First of all, we need to look at who bears the risk of having a volatile price.  How is Juan de la Cruz compensated for taking on this risk? This question is not even being asked right now.  This has to be asked because, in reality, Juan de la Cruz will end up subsidizing the generators if we insist on assuming a positive of the beta of the floating PSAs.

Given that we are calculating the required ROE in the WACC using a flawed “beta,” then the generators are getting a ROE far greater than they deserve. This leaves Juan de la Cruz in a sorry state.

BUT if we take on the perspective of the consumer, then the entire story changes.

If we want to compensate Juan de la Cruz for taking the volatility risk, then we must consider the financial evaluation of the floating PSAs. Otherwise, the traditional assessment will show that Juan de la Cruz is getting a “cheaper” floating PSA. However, this is a fallacy.  The proof of which can be seen from a mathematical calculation using the CAPM.

Comparison

Take a look at the table above.  Clearly, the floating PSA is riskier for the consumer than the fixed PSA because, again, the consumer bears the cost of the forex and fuel risk. Or to put it simply, the consumers pay more for the fuel and forex upward adjustments.

Now we have to ask: how much is Juan de la Cruz really paying for each type of contract?

A static price comparison obviously is wrong. One cannot compare one price alone, let us say a P5.0/kWh for a floating PSA versus P5.10 for a 20-year fixed-price contract.  We MUST take into consideration the WHOLE contract period.

It is however, IMPOSSIBLE to predict the future prices of fuel and the foreign exchange.  And one cannot possibly put the future prices inside the contract.  This is the reason why these volatile costs are “pass through” or “pass on.”  It is the consumers who will pay for the adjustments above the P5.0/kWh.

This begs the question of how to account for this uncertainty in the evaluation of cost for Juan de la Cruz.

The fixed PSA, on the other hand, is easy to figure out: it is fixed.

So, how can one evaluate what the real cost is for Juan de la Cruz? Common sense will tell you, the fixed price – as long as it is priced correctly – will be always be advantageous to Juan de la Cruz, all other things being equal.

Mathematically it can also be proven.  We still use the CAPM– the very same formula that is being used to determine the appropriateness of the tariff–except that this time, we use the CAPM from the point of view of Juan de la Cruz rather than the one of the generator.

CAPM

The formula above says the discount rate of any asset is equal to the risk-free rate plus a premium.  This premium is represented by the market return (MR) adjusted for the sensitivity of the asset to the return of the market.  Generally, in modern finance, the market return (MR) is defined as the return of the entire stock exchange, and the beta is the correlation coefficient of a particular stock against the return of the market.

If a stock’s price goes up or down with the market, then we say that stock is POSITIVELY correlated with the market.  The beta then will be a POSITIVE number.  If the stock’s price goes up when the market goes down and vice versa, then we say that stock is NEGATIVELY correlated with the market.  Then that beta will be a NEGATIVE NUMBER. If a stock price stays constant regardless of the behavior of the market, then we can say it has NO CORRELATION with the market. Then the beta will be ZERO.

Let us now apply the concept in evaluating the floating PSA versus the fixed PSA.

Let’s start with the easy one – the fixed price.

Since the price of the PSA is fixed (in real terms), then we can say it has NO CORRELATION with the movements in the fuel price or forex.  Or to put it simply from a consumer’s perspective—the consumer will pay the same price regardless of the fuel prices or forex. So, the beta will be ZERO, which means the discount rate we should use will be the risk-free rate. Let me go back to this number later when we do the analysis.

How do we handle the case of the “pass on” or floating PSAs?

Volatile prices, in general, will be NEGATIVELY correlated to the market, so the beta is a negative number. A simpler analogy is this: if the price of fuel or the cost of forex goes up, the value of the PSA goes down (becomes more expensive.) On the other hand, if the cost of fuel or forex goes down, the value of the PSA goes up (becomes less expensive). Clearly, there is a NEGATIVE correlation between a volatile PSA and the market.

Applying this logic to the CAPM, one will see that the discount rate for the fixed PSA will always be higher than the discount rate for the volatile or floating PSA (mathematical proof available upon request.) The reason is simple. In the case of the fixed price contract, we discount the price at the risk-free rate.

On the other hand, in the case of the floating contract, we discount the price at a rate LOWER than the risk-free rate.  Discounting at this lower discount rate will result in a higher price than one that is discounted at the higher discount rate.  That the mathematical truth.

How do we translate this to Juan de la Cruz?

This simply means, ceteris paribus, a fixed price contract will ALWAYS be lower than a floating volatile contract. And any analysis that does not take this into consideration is doing a disservice to the consumers. This also means that putting a fixed price contract into a utility’s energy mix will lead to LOWER power rates.

There is no magic in the CAPM formula. After all, anyone with some basic knowledge of calculus and finance can calculate using that formula. The major shift here is this: we should use the discount rate relevant to Juan de la Cruz rather than to the generator. It is the consumer taking the fuel and forex risks.  Hence, he must be compensated for taking on that risk. Using the generator’s beta (most likely greater than 1) to evaluate the PSA is wrong because the one paying the tariff is Juan dela Cruz and not the generator.

I am not saying that we should totally ignore floating PSAs. Floating PSAs generally are associated with fossil fuel-based contracts. I think the late Prof Awerbuch hit the nail on the head with his article. As he pointed out, “The CAPM analysis highlights some important implications of the negative correlation between energy prices and the economy, suggesting a broader conceptualization of energy security that reflects the deleterious economic effects of fossil volatility. These effects can be measured and reduced by incorporating technologies such as wind, geothermal and PV, whose underlying costs are uncorrelated to fossil prices. Fossil price risk can be mitigated only through such diversification.”

Unless this shift is made, Juan de la Cruz will always be screwed. It will be the consumer who will “pas-an” the generator because of the “pass on” nature of the volatile PSA.

Time to change.

Job Generation in Renewables

Going green, in this case, going for more renewable energy sources to dominate our energy mix has its rewards. Coal, as we have been discussing, is harmful to our environment, as well as health. Sourcing energy from renewables would lead to savings from medical expenses.

Aside from the environment and health-related benefits, there is one advantage of going renewables, an outcome that can help the lives of impoverished families And this is the focus of GreenPeace Philippines report, “Green is Gold: How Renewable Energy can save us money and generate jobs.” Renewable energy development generates employment. The report cited the example of Europe where the renewable energy sector employs some 650,000 individuals. The RE sector in Germany alone has roughly 370,000 jobs. Data from the German Renewable Energies Agencies stressed that there are more employment available in solar energy than nuclear and coal energy combined. Likewise, in Spain, its RE industry has already provided close to 89,000 direct jobs.

In its report, GreenPeace stressed that solar power could generate the highest number of employment. Research by the University of California, Berkeley pointed out that “photovoltaic technology produces more jobs per unit of electricity than any other energy source. Most of the jobs are in construction and installation of solar facilities and can’t be outsourced to other countries.” A good example would be the solar power business in Japan, where some 9,800 jobs were generated after completing the installation of a total of 360 MWp (megawatt peak) of PV power.

And it’s not just solar power that can provide employment. The study also showed that other RE sources could provide a great number of employment, too.  For example, a typical wind farm generating 250 MW can generate 1079 direct jobs–jobs in the manufacturing, construction, maintenance and operation of power plants– during the installation phase alone. Naturally, indirect jobs are created as well.

On the other hand, job generation figures of geothermal power are impressive, too.  A Philippine company that generates some 1,189 MW of geothermal power has directly hired more than 2,500 individuals.

At Emerging Power Inc. or EPI, we also employ locals in our various power plants including indigenous people. Our Mindoro power plant has employed some Mangyans while there are hundreds of Aetas working with us in the Subic solar plant. So far, we have roughly 400 individuals working with us, and this figure is likely to increase over time as we build more renewable energy projects.

2016-feb-jsi_site-2-1

Workers at EPI’s solar plant in Subic.

Aside from giving them employment, EPI also provides them with the opportunity to go back to school through our CSR programs.  For example, our Alternative Learning Program sponsors individuals to go back to school regardless of their age. In fact, one of our recent high school graduates is a 47-year old Mangyan, who unfortunately had to quit school in the past due to poverty.

Clearly, growing our RE sector will help address the country’s unemployment problems especially when renewables provide more employment than coal-fired plants. A study by the University of Massachusetts, The Economic Benefits of Investing in Clean Energy in the US, noted that about 2.5 million new jobs are to be created when investments on clean energy reach a total of $150 billion. Concluding their report, the researchers added that “clean-energy investments generate roughly three times more jobs than an equivalent amount of money spent on carbon-based fuels.”

Again, I am not against coal power plants per se. In fact, I had helped built some them when I was with NAPOCOR. But times are different, and we need to make some changes to address the needs of our country and the earth.

We have to remember that we are a country that benefits from abundant natural resources. For one, we are the second largest producer of geothermal energy in the world. Plus, the Philippines has a long and hot summer, as well.  According to the National Renewable Energy Labor NREL, the Philippines has the potential of generating an average of 161.7 watts per sq. m., being one of the sunniest countries on the planet.

No doubt that we are set to gain more economically if we harness our resources properly. Building more power plants from renewables could help lower our unemployment rate which stands at 19.7% as of July this year.  RE doesn’t only help save the planet; it also helps improve the lives of so many through the creation of jobs.

References:

“Green is Gold: How renewable energy can save us money and generate jobs”. Greenpeace

Note: Data including geothermal, wind employment & NREL figures, cited UCLA Berkeley, University of Massachusetts & German Renewable Energies studies and definition of direct employment are included in the Greenpeace report.

Labor Force Survey. PSA. https://psa.gov.ph/statistics/survey/labor-force