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

The Pros and Cons of a MinPoCor

Recently, there are initiatives to push for the refiling of house bills, which seeks for the creation of Mindanao Power Corporation or MinPoCor, according to a Businessworld report. The new entity will be a government owned and controlled agency (GOCC) that will manage the Agus and Pulangi hydropower plants.
The report cited the interim head of the Mindanao Power Monitoring Committee (MPMC), Glenn Jay Reston saying that the MinPoCor “will help maintain affordable electricity rates in Mindanao and assure that the revenues earned will also be reinvested in the island.”
The House of Representatives of the last Congress passed a consolidated bill on the establishment of the MinPocor. However, the said bill failed to pass the scrutiny in Senate. Under the bill filed in the lower house, MinPoCor will operate as a stand-alone GOCC and will raise funds to operate and maintain the remaining power assets of the government in the region.
Now that the discussion on the MinPoCor has been revived, let us ask the following questions: Is it beneficial to create such a GOCC? What are the pros and cons of having the Mindanao power corporation?
On the one hand, having MinPoCor will address the power crisis in the island. It will be an entity that will focus on the needs of Mindanao’s energy sector. After all, the appalling power situation in the region is a result of the long neglect of the national government through poorly crafted government policies.
To stress this point, a report from the Asian Correspondent said that in 2009, the Philippine Chamber of Commerce and Industry already stressed that the island was in need of additional 100 Megawatts to keep up with the economic activities in the region. Plus, business and industry leaders were already asking the national government to address the need for additional capacity as estimates show that Mindanao will likely suffer from power shortages by 2011 if no new capacity were to be installed.
However, the previous administration failed to heed the calls for the additional base load capacity. It was no surprise then that a full blown power crisis interrupted in 2012, with the island suffering from at least 8-hour rotating black outs.
Given the above slow response of the national government to focus on the power situation in Mindanao, it might be in the best interest of Mindanawons to have an entity that concentrates on the power situation in the region.
However, there is also a downside to the creation of MinPoCor.
Being a GOCC, it is still a government entity and will suffer the same problems of a government monopoly, as well as bureaucratic issues.
The possible lack of funding for MinPoCor could create bigger problems as it could delay the much-needed repairs and rehabilitation of the hydro complexes in the region.
The essence of EPIRA is to privatize the government-owned energy assets. The government, after all, has limited funds for the maintenance and operation of assets. This said, it is probably better for the private sector with deeper pockets to take the commercial, operational and constructions risks of operating and maintaining the power plants. Otherwise, the government will need to borrow additional funds and pay for the interest of borrowing money.
There are various ways of going about the privatization of the hydro plants. In my opinion, the Power Sector Assets and Liabilities Management or PSALM could enter into a 25-year power supply agreements before bidding out the hydro plants. This is to ensure that low prices are kept low despite the privatization for the benefit of NAPOCOR’s existing clients including distribution utilities and industries directly sourcing their power from the said plants. Of course, this will be much more complicated given the implementation of the Competitive Selection Process or CSP but still can be done if the government acts on it.
Additionally, Pete Ilagan, President of the National Association of Electricity Consumers for Reforms Inc has suggested privatization through “cooperativization” where cooperatives will own the assets. According to Ilagan, this will ensure that consumers welfare prevails over the interest of big businesses.
We also have to consider that the creation of a new entity always comes with challenges. For one, the efficiency of a GOCC is questionable. GOCCs work under a framework of a democratic government where there is a separation of powers. A democratic government is, almost by definition, designed to be inefficient – there are strict rules on checks and balances. So, if one desires to have an “efficient” company, going through the GOCC way may not be the answer.
However, one can separate the ownership of an asset like the Mindanao power plants and the management of these plants. As government way of running things is based on a democratic framework– it does not have the discipline of profitability and efficiency that private capital will require. So, therefore, there is a way to compromise: the government can keep the ownership of the assets, but the management, including future investments, can be done by the private sector.
Before opening the management to the private sector, the government can enter into long-term power contracts with all existing customers. The government can, for example, fix the current power rate and maybe index to CPI for the next 25 years. This will ensure two things: the government asset will not compete with private generators and second, low power rates from these hydropower plants are assured for the next 25 years.
The private sector entity that comes in will then face the challenge of improving the efficiency of the assets by rehabilitating them and improving operations and maintenance to have an upside on their investment.
So, this is the challenge of a MinPoCor: have the discipline that the private sector (and consumers) require but operate within a framework of a democratic government. Otherwise, there will be no change in the cost structure nor ability to maintain these plants. It is essential to form a management team for the MinPoCor that is not only knowledgeable and transparent but also can approximate or surpass private sector management efficiency. Otherwise, the reforms needed to push the national government to pay attention to the power problems of Mindanao will remain unsolved due to the problems within the organization.
This is not to say the GOCCs cannot be run efficiently. I have seen some GOCCs and government agencies that are at par with the standards set even for private sector companies. These GOCCs are often those that have had the luck of having someone with a vision of running the GOCC effectively. However, these are few and far in between. As a whole and in the long run, the need to adhere to the principle of separation of powers will wear down on efficient management set in place by different administrations.
So, are the hydro complexes better off in the hands of a GOCC? While some may say the jury is still out, others disagree outright.
According to UP economist, Gerardo Sicat, there are several studies showing the success of privatizing hydropower plants:
“There is growing evidence that the privatization of the hydroelectric power plants in the whole country is working well. With the government being relieved from the task of operating the generating plants, gains in efficiency and in service delivery improvements have become noticeable among the privatized plants.”
So, just how beneficial is the creation of the Mindanao Power Corporation? It’s also advantageous to have an entity that is dedicated to the needs of the island. But on the other hand, the possible lack of funding and management problems may exacerbate the woes of Mindanao’s power sector further. There is a way out – the government can keep the assets and maybe even transfer these assets to MinPoCor.
In summary, one need not privatize the ownership of an asset – it is the management of these assets that may need private sector discipline. Further, to ensure a fair level of power rates, the government can enter into long-term power sales contracts with all current consumers of Mindanao. If the management of these assets is privatized, the private investors should have the incentive to invest in the rehabilitation of the power plants so that its efficiency is enhanced thus giving the investors the upside that they are looking for.
In the end, everyone wins: the Mindanao consumers are happy because their low rates are assured for the next 25 year and the government and the local governments should be happy because the assets are not privatized. The MinPoCor proponents can even lobby to have these assets transferred to MinPoCor. Plus, the private sector is happy because a chance to invest in the power sector is open to them.

References:

http://www.econ.upd.edu.ph/perse/?p=913

http://www.bworldonline.com/content.php?section=Economy&title=mindanao-power-corp.-backers-push-for-law-ahead-of-agus-pulangi-privatization&id=135866

http://www.philstar.com/nation/2015/05/27/1459319/bill-creating-mindanao-power-corp.-passes-house-joint-committee

Energy Book by Myrna Velasco

http://opinion.inquirer.net/83960/better-way-to-privatization

 

 

Not All Talk

No doubt that climate change is attracting attention from various sectors—the church, governments, private firms and successful individuals.

And Climate Change is taking center stage once more as with the case of the US Presidential Elections. Based on the report of New York Times, the topic of climate change is the focus of the US presidential elections, unlike previous ones where the topic was rarely discussed. The Democrats with its party nominee Hillary Clinton is pushing for taxes on carbon pollution and Bernie Sanders who lost to Clinton for the Democrats’ nomination said that “this election is about climate change.”  The report also quoted the president of the League of Conservation Voters, Gene Karpinski saying “The elevated conversation about climate change in this election is truly historic,” adding that “In 2012, no one asked about it, and the candidates didn’t talk about it.”

Awareness, too, about climate change, is apparent among consumers. Cone Communications, a US-based public relations firm reported that consumers list climate change as the top complex CSR topic that they can both define and explain.  Related topics such biodegradable, renewable resources and greenhouse emissions, follow climate change as topics that consumers can extensively discuss.

However, climate change is not merely a subject of conversation since actions match the discourse with many familiar big brands leading the way to cleaner energy consumption. We have seen large firms increase their commitment to using renewable energy through signed purchase power agreements to 3.23 GW in 2015, tripling their commitment from 1.18 the previous year. And 2016 is off to a good start since companies have already committed to 0.59 GW of RE as of July 15 according to Business Renewables Center.  Not surprising since influential global businesses and their leaders are united in pushing 100 percent use of renewable electricity by the private sector, which accounts for roughly half of the globe’s power consumption.

For example, a global initiative of influential businesses called RE100 and committed to using more renewable energy in businesses was launched in 2014.  Big brands such as Google, Hewlett-Packard, Coca Cola, H&M, Goldman Sachs Group, Johnson & Johnson and Astra Zeneca, to name a few are part of this initiative. Google, the biggest corporate consumer of renewable energy has committed to buying 2.2 gigawatts of RE and investing some $2.5 billion for renewable energy development projects. It intends to use 100 percent renewable energy for its operations in the future.

Last year, the world’s billionaires, including Mark Zuckerberg of Facebook, Microsoft founder Bill Gates and Virgin’s Group Richard Branson, among others, launched the Breakthrough Energy Coalition. The coalition that’s composed of more than 25 investors will fund clean energy companies in their infancy stage as its members agree that: “The world needs widely available energy that is reliable, affordable and does not produce carbon. The only way to accomplish that goal is by developing new tools to power the world.”

mission-innovation

Business leaders and politicians share the same stage at the launch of Mission Innovation. photo c/o The Guardian

 

Along with the launch of the Breakthrough Energy Coalition is the birth of Mission Innovation, a union of the European Union and 20 other countries that intend to double state-funded research initiatives on clean energy. Mission Innovation’s goal is simple: “Accelerate the pace of clean energy innovation to achieve performance breakthroughs and cost reductions to provide widely affordable and reliable clean energy solutions that will revolutionize energy systems throughout the world over the next two decades and beyond.”

Clearly, climate change is a problem that everyone is eager to address. And there is hope that we can head towards a greener and cleaner future with the actions of our leaders from various sectors.

References:

 

http://www.nytimes.com/2016/08/02/us/politics/climate-change-divide-bursts-to-forefront-in-presidential-campaign.html

http://www.iea.org/publications/freepublications/publication/KeyRenewablesTrends.pdf

http://www.bloomberg.com/news/articles/2016-04-07/google-to-provide-seed-funding-for-renewable-energy-in-asia

http://www.conecomm.com/research-blog/2015-cone-communications-ebiquity-global-csr-study

http://www.businessrenewables.org/corporate-transactions/

https://www.theguardian.com/environment/2015/nov/30/bill-gates-breakthrough-energy-coalition-mark-zuckerberg-facebook-microsoft-amazon

http://www.breakthroughenergycoalition.com

http://mission-innovation.net

http://there100.org/re100

http://blog.rmi.org/blog_2016_08_31_community_scale_solar_can_power_corporations_too

 

 

The Rise of Renewables

 

To be clear, I have no fundamental problems with fossil fuel-based power plants.  In fact, I have built a number of them.  My current focus on renewables stems from the belief that in the long-term, it will be economically more sound for our country and for our planet. My approach is based on a need to look at energy planning that takes on risk as a major parameter. From this perspective, a portfolio approach with renewables as a major part of the country’s energy portfolio will be good for business in particular, and the well-being of our countrymen in general.

Just last year, Pope Francis released a landmark encyclical that warns of the dangers we face for refusing to take care of our environment. The Pontiff also stressed the need for renewable energy development to address the growing concerns about the environment.

Similarly, the COP 21, the largest single gathering of world leaders produced what was considered as the most important agreement of nations in combatting climate change: to hold the increase in the global average temperature to below 2 centigrade above pre-industrial levels. An important agreement since achieving such will result in mitigating the rising atmospheric temperature to help prevent driving poor nations further into poverty.

Perhaps, the greater awareness and the campaigns made by known personalities such as the Pope and our world leaders about climate change and its consequences helped spur the growth of the renewable energy sector. But just how significant the growth of the RE sector will be?

A report by McKinsey solutions showed that energy demand will change significantly in the next 35 years as it is likely to grow only by 0.7 percent annually.  Electricity is seen to account for majority of the energy demand among all energy types and we are likely to see a shift to cleaner energy technologies with coal expected to peak by year 2025, while demand for oil flattens.

Similarly, a recent study conducted by Bloomberg New Energy Finance showed that two-thirds of the total investments in the power sector will be spent on renewable energy development from 2016 to 2040. According to the report, roughly $7.8 trillion are likely to be invested in renewable, an amount significantly higher than the expected $ 1.2 trillion to be invested in coal plants.  Of the $7.8 trillion, wind energy will account for $3.1 trillion, solar for $3.4 trillion and hydro roughly $911 billion.

We are already seeing the rise of the renewable energy sector as early as last year. After all, 2015 was a record year for global investments in renewable energy according to the report, Global Trends in Renewable Energy Investment 2016 published by Frankfurt School of Finance & Management. The report revealed that globally, investments in renewable power capacity in 2015 reached $265.8 billion, almost double than the investments in fossil power of $130 billion.  Plus, developing countries have overtaken developed nations in renewable energy investments. Developing countries, after all, have invested a total of $156 billion last year, which is higher than the $130 billion spent by advanced countries in their RE sector.

As a Renewable Energy developer, it is heart-warming to see that RE development globally are advancing significantly, and that most countries are now taking serious efforts in developing their green resources to replace coal as the main power source.

In our country, the government, too, are somehow making efforts to develop the RE sector. Just recently, a report of the Inquirer said that the Climate Change Commission (CCC) has announced that it has started what it called a “comprehensive review” of the Philippines’ energy policy. The DENR and DOE, along with NEDA are part of the review committee. This undertaking is expected to result in reshaping the power plans of the country, putting RE sources in the forefront to coal. According to the Commission, the review will take roughly six months to complete and a new development framework on energy development will be produced.  Plus, Secretary Emmanuel de Guzman, vice chair of the CCC said that the end goal is to “lay the ground toward clearer procedures away from coal and on the faster way to enhance RE.”

I say that this is a good step in paving the way for more renewable energy development in the country. However, it is also my fervent wish that this review is also accompanied by other reforms in the sector including the lifting on foreign restriction for investments, and other regulatory issues hounding the RE sector, which I have already discussed thoroughly in this blog. It is my hope that this review and major reforms in the sector take place soonest to help the growth of the renewable energy sector.

Encouraging Developments

A recent report by the International Energy Agency showed that some 6.5 million deaths yearly are linked to air pollution. The same report noted that the premature deaths attributed to outdoor air pollution would probably increase to 4.5 million from 3 million by the year 2040 with much of the deaths concentrated in Asia. After all, according to the World Health Organization, roughly six out of seven million people who die yearly due to air pollution are in Asia. And these numbers are likely to increase if no real efforts are made to curb emissions.

Sounds gloomy, right? However, all is not lost as the report also stressed that the dreary scenario above could be changed if total energy investments are to be increased by seven percent until 2040.  Increasing investments in energy will mean a decline in premature deaths from outdoor air pollution by 1.7 million in 2040.  Deaths from household pollution would fall by 1.6 million annually, too.

Will we see an increase in investments significant enough to alter the number of deaths linked to air pollution? Similarly, can we also reduce our carbon footprint globally and hold the global average temperature to below 2 centigrade as agreed by our leaders in last year’s COP 21 meeting?

Maybe. But it is worth noting that many are taking environmental problems seriously. What we see these days are prominent people who are urging us all to sit up and find solutions to the growing problem of climate change. Last year, the Pontiff spoke out about the environment. This was also followed by the world leaders in COP21 who reaffirmed the previous commitment of allotting $100 billion yearly by 2020 to fund climate-related efforts, and to keep the global average temperature to mitigate the risks of rising atmospheric level. Even Oscar best actor Leonardo DiCarpio spoke emotionally about our environment in his acceptance speech.

Just recently, the three North American leaders agreed to a trilateral energy and climate plan during the recently concluded Tres Amigos summit. Presidents Barrack Obama of the US and Enrique Nieto of Mexico and Canadian Prime Minister Justin Trudeau committed to increasing the power coming from clean energy sources to 50 percent from the current goal of 37 percent by the year 2025. The trilateral agreement also includes the three countries agreeing to increase the goal of reducing methane emission from 40 to 45 percent as well as to commit to the research and development of clean technology initiatives and their commercialization.

Even farmers are now being encouraged to adopt climate-smart farming methods through the Climate-Smart Lending Platform. This platform has the intention of making credit cheaper and easier for small-scale farmers to protect their crops from weather disturbances while adopting climate-friendly practices. The goal of the initiative is to entice farmers to sustain their climate-smart agriculture practices.

rice fields negros philstar

Dry rice fields in Negros due to El Niño. Photo c/o Philstar/AP

Similarly, in Mexico, an Energy Savings Insurance Initiative was launched by the Inter-American Development Bank where small and medium-sized businesses in the agro- investing sector can buy insurance for their energy-efficiency upgrades for a small amount. These SMEs can benefit from buying such insurance since they will spend less on power should their upgrades work. If not, these firms can obtain an insurance pay-out. This initiative is set to be replicated in other Latin and Caribbean nations soon.

Locally, our Climate Change Commission has already started its review on how we can attain our commitment to helping the world reduce our carbon footprint. This initiative involves other departments including the Energy Department in reviewing our Energy Plan to promote the development and use of more renewable energy sources.

All these initiatives are music to my ears, as well as for others who wish to help address the world’s environmental problems. May these agreements and efforts undertaken by different countries and their leaders bear much fruit so that the next generation can enjoy God’s gift of nature.  After all, in the words of Pope Francis “The effects of the present imbalance (in the environment) can only be reduced by our decisive action, here and now.”

Bill Gates and Leonardo DiCarpio are on the Same Page


Photos c/o theguardian.com & mirror.co.uk

Two prominent men, one the World’s Richest according to Forbes and the other, one of the highest paid Hollywood actor and the most recent recipient of Oscar’s best actor award, have something in common. Bill Gates and Leonardo DiCarpio are campaigning hard to save the world from climate change.

Gates in his annual letter, stressed that it has been more than a century since Thomas Edison, invented the light bulb and yet, a big chunk of the world’s seven billion population live without electricity.  In the sub-Saharan Africa alone, 70 percent live in the dark while there are roughly 300 million people in India without electricity.

And it is his wish to see the poorest of the poor have access to power, saying that they would be driven further into poverty and likely to suffer the most with the effects of climate change.

Of course, we already see the points of Gates. In our country, the poorest of the poor are the farmers and the fishermen. Data from the Philippine Statistics Authority shows that the fishermen and farmers in 2012 posted the highest poverty incidence of 39.2% and 38.3% respectively. These fisher folks and farmers are the ones who use kerosene lamps at home, too.

And unfortunately, the farmers are also the ones suffering from this round of El Nino, The Department of Agriculture has recently reported that damage to crop due to the drought already reached P4 billion.

However, Gates, a known philanthropist, does more than lament the lack of electrification in parts of the world and the possible effects of climate change on the poor. After learning that the world must eliminate carbon emission at the end of the century, he did the math and came up with an equation to drive carbon dioxide to zero.

CO2= P x S x E x C

CO2—carbon dioxide

P—world’s population

S—services used by each person

E—energy needed to produce the services

C—carbon dioxide produced by the E

According to Gates, the way to zero CO2 is to have a zero on any of the variables. Unfortunately, one cannot have zero for services and energy needed to provide the services. This means that our greatest chance of producing zero carbon dioxide is to have a value of zero for C.

What does Gates propose to do to keep C at zero?

His proposed solution is to find ways for solar and wind energy to provide energy 24/7.  But he also recognized that this is quite challenging since so far, the solution to having these power supply constant is battery storage, which unfortunately now remains expensive and could increase the cost of electricity as much as three times.

Now, how does he think we can harness the wind and solar energy that can power for 24 hours?  This is where he issued an energy challenge, asking for solutions on how wind and solar energy can be made available at any time of the day at low prices.  In fact, he has already funded the research for this.

Just how optimistic is Bill Gates that we can find a solution to this problem? Very optimistic as he said: “within the next 15 years—and especially if young people get involved—I expect the world will discover a clean energy breakthrough that will save our planet and power our world.”

And he is probably right. There have been significant progress in technology.  For example, recently, Amber Kinetics introduced its multi-hour flywheel battery storage solution, which acts as a reservoir for kinetic energy. The high-speed rotation of its steel rotors lets the system store power that can be drawn out as needed.  This cutting edge battery solutions is very handy these days.

On the other hand, recently awarded Leonardo DiCarpio made waves in his Oscar speech as he campaigned for us to take climate change seriously.  According to DiCarpio, “Climate change is real, it is happening right now. It is the most urgent threat facing our entire species, and we need to work collectively together and stop procrastinating.”

DiCarpio, after all, is a staunch green advocate. His foundation is giving away some $15 million in grants to various organizations involved in finding innovative ways to save the environment. Plus, he is also a United Nations envoy on climate change and has recently inked a deal with Netflix to produce non-fiction documentary and docu-series on the environment.

That’s the world’s richest and one of the best Hollywood actors who are putting their money to save the environment and telling us to do the same. Plus, there’s also Pope Francis with his landmark encyclical on the environment and climate change. Now, who else do we need to tell us that it’s time to roll up our sleeves and get ready to work and shift to renewable energy before we start taking more action?