Energy Transformation is What We Need

Sydney is powered by 100% renewable energy. Photo c/o https://www.energymatters.com

There’s been some good news on the renewable energy sector in recent months.

For one,  the City of Sydney, the biggest city in Australia, recently announced that is now powered by 100% renewable energy. This means that all public operations such as sports facilities, street lights, buildings, and the historic town hall in the city that’s home to 250,000 residents are running on clean energy starting July 1. The feat was made possible by a power purchase agreement (PPA) valued at $60 million, saving the city roughly half a million dollars annually over the next 10 years.

 Plus, there’s the United Kingdom (UK), which was able to generate almost half of its power needs from renewables in the first quarter of the year. The UK government data showed that renewable power made up 47% of the country’s electricity in the first three months of the year, breaking the previous set quarterly record of 39% in 2019. The substantial increase in the total renewable output of the UK was primarily driven by growth in power generated by wind farms and solar panels.

And RE sector’s record in the UK is likely to be broken in the coming years with the government’s plan for “a massive expansion of renewables as part of the UK’s green economic recovery” says Rebecca Williams, policy manager of RenwableUK, a non-profit renewable energy trade association.

Meanwhile, in the Philippines, the National Renewable Energy Board (NREB), recently reported that the renewable energy share in the power supply mix keeps on “dwindling.”

In 2015, renewable’s contribution to the supply generation mix was around 25%. RE’s share was even lower for 2016, 2017, and 2018 at 24.21%, 24.57%, and 23.38%, respectively. According to NREB Chairman Monalisa Dimalanta, renewable power’s share in 2019 was even lower at 21%.

In contrast, coal dominated the power mix, recording its highest share in 2018 at 52.05%.

As for the total installed capacity, the Philippines still is far from its target. Dimalanta notes that in 2019, RE capacity was only 5,000 megawatts (MW), more than 10,000 MW short of the 15,304 MW target by 2030.

But perhaps renewables contribution to the Philippines ’ power mix would be better in the following years. Hopefully, the government and the energy planners so engrossed in the faulty appreciation of the least cost method in power planning will finally appreciate what renewable power has to offer.

The COVID-19 has, after all, exposed the vulnerability of our energy sector. For a while, I was worried that Indonesia, the Philippines’ largest source of coal, would close its borders, thus putting our energy source at risk. Even the Energy Secretary has acknowledged that the coronavirus pandemic highlighted the need to ensure energy security by developing our indigenous resources.

Thankfully, the Indonesian government did not close its borders and stop the export of coal. But this pandemic should teach us valuable lessons, pushing us closer to clean energy transition. There’s a strong case for doing so given that experts have been saying that now is the best time to ramp up renewable energy development both locally and around the world.

For example, a policy paper, titled “Can COVID-19 spark an energy transition in the Philippines?” noted that this pandemic has provided an opportunity for the Philippines to pursue the development of more RE source more aggressively given that the lower coal generation due to the drop in power demand. 

The paper penned by Ateneo de Manila University economics department Associate Professor Majah-Leah Ravago and The University of Hawaii, Manoa economics department Professor Emeritus James Roumasset noted that “the rather dramatic fall in coal-fired generation may afford an opportunity for the Philippines to meet their renewable targets without resorting to costly subsidies.” 

The study noted that power demand dropped by 30% nationwide with coal generation decreasing from 56 to 48 %. On the other hand, generated energy from renewables remained the same with biomass and solar power generation rising slightly during our enhanced community quarantine.

Now is the best time, too to invest more in renewable energy projects says the International Renewable Energy Agency (IRENA) in its report “The Post-COVID Recovery.” It noted that the renewable energy sector has proven to be more resilient than other parts of the energy sector given the high shares of renewables continue to operate effectively. “Renewables have proven to be the most resilient energy sources throughout the current crisis. This evidence should allow governments to take immediate investment decisions and policy responses to overcome the crisis,” said Francesco La Camera, Director-General of IRENA.

The IRENA report added that accelerating the energy transition will bring substantial socio-economic benefits, specifically job creation. Aligning immediate stimulus action for the next three years, particularly from 2021 to 2023 and scaling up public and private energy spending to USD 4.5 trillion annually would boost the world economy by an additional 1.3 percent. 

This level of investment would also create 19 million more energy transition-related employment by 2030. Jobs in renewables power would grow to almost 30 million in 2030 from about 12 million in 2017. The study stressed that every one million dollars invested in renewables can provide three times more jobs than in fossil fuels.

I, along with other experts, have been arguing that the COVID-19 pandemic and the economic recession should not deter us from pursuing our clean energy transition goals. Like the experts quoted above, there’s an opportunity and a greater need for us to accelerate our shift to renewable energy.

A fast clean energy transition would reap enormous benefits for all and help in the global economic recovery. It also means ensuring energy security in the Philippines. And in the words of the IRENA President, “Now is the time to invest in a better future. Government policies and investment choices can create the necessary momentum to enact systemic change and deliver the energy transformation away from fossil fuels.”

Will the Power Sector Survive a Recession?

The COVID-19 pandemic is more than just a health crisis. It is also an economic one given that the lockdowns and restrictions have resulted in the loss of jobs and livelihood of people.

In the Philippines, the long enhanced community quarantine (ECQ) paralyzed the economy and caused a sharp economic contraction for the second quarter at 16.5%. According to Acting Secretary of the National Economic Development Authority (NEDA), Karl Kendrick Chua, 8.8 million jobs were lost between January until April “because of the very strict quarantine.” The country’s average unemployment rate in 2020 to date is at 11%, 6% up from the normal 5%.

Unfortunately, it is the masses, the rank-and-file employees, and the micro, small, and medium enterprises (MSMEs) that are particularly affected by the economic recession. A survey from Publicus Asia revealed that 78% of survey respondents said at least a member of their family who earns Php9,500 to Php 19,040,00 per month and 65% of those earning between Php19,040 to Php 38,080 have lost their jobs due to the ECQ.

In terms of businesses, only 22.1% is on full operation according to the Department of Trade and Industry (DTI). Around26% are closed and 52% are only partially operating. Professor Eric Soriano, a World Bank Consultant, in a webinar with the Philippine Chamber of Commerce and Industry (PCCI) said that it is the MSMEs that have been the hardest hit. The MSMEs contribute 40% of the GDP and employ 70% of the workforce.

The magnitude of the job losses and business closures means that many poor and low-income families are having a hard time making ends meet, and have barely enough to eat. With no source of income, how will they afford to pay their utility bills?

In the United States, the report from the National Rural Electric Cooperative Association (NRECA) showed that U.S. electric cooperatives could take a financial hit of approximately $10 billion through 2022. “As GDP growth falls below pre-COVID-19 projections, electric co-op electricity sales are projected to decline,” NRECA noted.

The group said that high rates of utility bill delinquency along with service disconnection moratoria in some states and the surge in unemployment is making it difficult for electric coops to continue providing services. “Lost revenue can severely constrain the ability of certain electric co-ops to meet the needs of their community,” the NRECA said in a letter addressed to lawmakers.

Local utility companies are facing the same challenges. Many utility companies for months now are experiencing a significant drop in their collection rates and surviving with considerably less cashflow. Eventually, these companies will have no option but to discontinue their services for those who cannot pay. So, how will utilities survive?

Perhaps we should look at our government’s response to address the impacts of high unemployment rates and business closure.

The International Labor Organization (ILO), in its policy paper entitled “COVID-19 and the world of work: Impact and policy responses” stressed that epidemics and economic crisis tend to have disproportionate impact on some segments of the population, exacerbating the worsening wealth inequality.

ILO said government policy responses should have two immediate goals: Health protection measures and economic support on both the demand and supply side.

The organization noted that stimulating the economy and labor demand through economic and employment policies to stabilize economic activity, through active fiscal policies and particularly social protection measures is necessary. Governments must protect employment and incomes for enterprises and workers negatively impacted by the indirect effects

Yes, one might argue that we have the Bayanihan To Heal as One Act One signed into law last March that provided cash aid to displaced workers. Plus, we have the newly signed Bayanihan Act II with a Php 140 billion allotment to help revive the economy and fight COVID-19.

However, are those enough? Some experts agree that the Bayanihan Act is too small and too late. 

University of the Philippines (UP) economics professor and former NEDA chief Solita Monsod pointed out that the first Bayanihan law is only equivalent to 1.93 percent of the gross domestic product (GDP) a measly amount when compared to other countries that are allocating funds equal to 5 to 21 percent of the GDP. She stressed that “But my God, Bayanihan 2 if you add it all together, is only 0.7 percent of GDP.” 

The UP economist said that the government fears that the debt figure will balloon and the credit ratings will suffer is a misguided fiscal conservatism. “We spent 1.3 percent (of GDP) in the first half and got nowhere. You think we’ll get somewhere by spending only 0.7 percent?” she added.

JC Punongbayan, a teaching fellow at the UP School of Economics echoed the thoughts of Monsod. “Good though its intentions are, Bayanihan 2 is too small. It’s not nearly enough to shore up our embattled economy.”

He pointed out that only Php 6 billion are being allotted for the Department of Social Welfare and Development’s various aid programs including emergency subsidies for poor households but only households in granular lockdowns will receive cash aid.

Punongbayan said that that economic managers are banking on the multiplier effects wherein a peso spent on business loans for companies can generate Php8 to 10 in economic activity, which is why the government thinks it does not need to shell out much more to revive the economy. However, he noted that there is no government study to back up this claim.

Both economists agree that the bill does little to help already struggling Filipino families. And in the words of Monsod, “The people, especially the poor, are always the last priority. The first priority, I tell you, seems to be the credit rating of the country,” she added.

I am no economist but I do know that joblessness during the pandemic brings economic hardships to low-income families and that it is the government’s job to provide aid to them. Economists have been giving their opinions on the meager amount allotted to help Filipinos and revive the economy, which the government must pay attention to.

From a utility standpoint, loss of jobs and business closures definitely have a negative impact not only on the collection of utilities since the consumers’ ability to pay for basic utilities will also erode over time. When the population no longer can pay basic utilities, how can these utilities survive? 

The answer to the above question is beyond the power sector of which I belong to. This is exactly why I included the economists’ thoughts on our government’s response to the health and economic crisis. But let me point out that utility companies are suffering too when consumers do not have enough in their pockets to pay for their basic needs. NRECA CEO, Jim Matheson said it best “The economic health of electric co-ops is directly tied to the wellbeing of their local communities.”

Thus, we need to find a way to help the Filipinos struggling to pay for food and other basic needs. And as Matheson stressed, “As the economic impact of this pandemic spreads, electric co-ops will be increasingly challenged as they work to keep the lights on for hospitals, grocery stores, and millions of new home offices.” In the end, power companies, which are essential in economic development and nation building might also be left with nothing.

References:

https://rappler.com/voices/thought-leaders/analysis-bayanihan-2-here-yet-too-small-late

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/nreca-says-us-electric-co-ops-may-take-10b-financial-hit-from-covid-19-58152700

NCR COVID-19 Survey 3: ECQ job loss affects 69% of households surveyed

Ditching the Notion of Least Cost

In a previous post, I have raised the possibility of Indonesia, our biggest source of coal, closing its ports because of the COVID-19 pandemic. Fortunately, this didn’t happen as we would have major problems given that we source 90 percent of our coal from Indonesia.

But this doesn’t mean that we should refrain from overhauling our energy sector. After all, this pandemic has exposed vulnerabilities in our energy sector especially since we are a fossil-reliant power country.

A study by the Institute For Energy Economics and Financial Analysis (IEFAA) discussed how the COVID-19 pandemic has revealed the weaknesses of the power sector. 

The report entitled “Philippines Power Sector Can Reach Resilience by 2021” stressed that our energy market, which relies heavily on fossil fuels because our energy planners prefer the least cost method, has not delivered on its promise of being the cheapest cost of energy. On the contrary, our reliance on large scale fossil fuel plants with guaranteed contracts have resulted in grid inflexibility, and price instability.

The researchers noted that the sector for so long has focused almost exclusively on mobilizing capital for large volumes of baseload capacity that runs on imported fuel. Unfortunately, coal plants are inherently inflexible, and in the Philippines 80% of baseload coal plants are inflexible.

The lockdown, the IEFAA said, has exposed the downside of the guaranteed contracts with coal plants.

According to the authors, with the depressed demand for power, coal plants are turning to their mid-merit load factors, which have a higher per kilowatt-hour rate. This is all thanks to our power sales agreements (PSAs) that ensure capital recovery for coal plants. 

The study pointed out that our PSAs have provision for capacity payments, which is the payment to ensure that the coal investor can recover their capital “it is designed to ensure IPPs can recover their capital costs and repay their loans on a timely basis. This means that neither the financial sector nor the power sector is liable for the risk they take, as these are passed on to end-users who are ill-equipped to manage such risk.”

And with the depressed demand for power, coal plants are turning to their mid-merit load factors, which in turn increases the cost per kilowatt-hour. Thus, Filipino consumers have to pay more for every kilowatt-hour, thanks to the pass-on cost provisions of the PSAs.

By just how much will consumers have to shoulder for these capacity payments? According to the study, if there is a 10% decline in energy sales volume for 2020 and if power comes from fossil plant with the usual PSA with the capacity payments clause, then end-users will have to fork out PHP9.679 billion (USD 193.573 million) in 2020. Now, that’s a lot.

All this could have been avoided if we had fixed-term contracts where our consumers will pay the same price regardless of the power demand. As I have been saying in the past, these pass-on provisions burden the consumers. I have been proposing for fixed-price contracts to protect consumers. This is the same recommendation of IEEFA of making fixed cost procurement.

Looking at our PSAs will help us understand what we are doing wrong in the energy sector. Having fixed-price long terms contracts will reduce our power rates regardless of technology. And as I have pointed out in previous blog posts, our PSAs are similar to asking Juan deal Cruz to shoulder the risks through the pass on costs, because our energy planners have a faulty appreciation of the least cost. But in reality and as IEEFA has stressed, big-scale fossil fuel plants have not delivered the least cost system but rather caused price instability.

Our least-cost approach has been faulty as we only base our decisions on the cheapest energy to generate by comparing technologies and choosing which sources are ‘cheaper’ than others. We exacerbate the problem by regulating the costs that can be passed on to Juan deal Cruz according to the returns we feel are owed to the investors rather than what consumers deserve.

The IEEFA study emphasized that the COVID-19 pandemic has highlighted the need for the market to turn to more flexible dispatch strategies especially because of the dramatic drop in demand during the lockdown months. It is recommending for the Department of Energy to start pushing for grid flexibility, modular system, a moratorium on new inflexible power, and for the Energy Regulatory Commission (ERC) to remove pass-through cost provisions and carve out curtailments for inflexible plants.

I would add further to these recommendations. As the government orders the immediate development of indigenous sources, our procurement rules should also change as the present rules for evaluating PSAs do not differentiate indigenous and imported energy. Thus, ERC should require distribution utilities to testify during procurement that there are no indigenous resources in the franchise area or that there are no offers from indigenous power producers.

It makes a lot of sense to recommend grid flexibility, modular dispatch, and grid upgrades via the inclusion of more renewable energy. This is nothing new. Renewable energy, after all, offers flexibility to a power system as they are capable of rapid start-up and dispatching adjustable capacity.

Plus, the prices of renewable technologies have been falling in the last few years. IEEFA noted that “The deflationary price trajectory of renewable electricity generation and storage triumphs over the cost of generating and moving electricity from a large fossil-fueled power plant.”  We can also have a fixed price for power sourced from indigenous materials. 

The IEEFA said it best when it noted that “Power sector planners assumed that a large system lock-in such as coal would lead to the least-cost system. Unfortunately, this lock-in for countries that import coal has led to inflexibility, price instability, and high prices.” And as we rebuild our economy, let us build better by addressing the ills in the energy sector. We can start by ditching the notion of least cost where we forget about the risks and only look at the upfront cost.

It bodes well for us to make a swifter transition to renewables. Unfortunately, the COVID-19 pandemic has paralyzed most economic activities. By now we should be working double hard to revive our economy. We can start by addressing the high power rates in our country by replacing traditional sources of power with renewable energy to support businesses as they recover. The construction of renewable power plants will also provide more jobs for Filipinos, too.

A New Normal for Power Distribution Companies: Less Face-to-Face with Customers but More Digital Engagement

In my previous blog entries, I have talked about Utilities of the 21st century, discussing how competition among energy players should flourish and how we should move to distributed energy systems. This was before the COVID-19 pandemic happened.

When I entered the power distribution business, my main priority was to provide a customer-centric service, which means ensuring stable energy supply and finding ways to help electricity rates become more affordable. 

According to an article, COVID-19: How Energy & Utility Companies Can Soften the Blow, most Energy and Utility companies usually have set contingency plans in place to address the impact of natural disasters. But no company is fully prepared for the coronavirus. And I agree since this pandemic is a new challenge in the power distribution business as we must craft strategies to ensure our customers and employee’s safety in light of the coronavirus.

The same article said that several measures must be undertaken by energy firms to address the impact of the pandemic. These measures include increasing the digital contact center footprint where companies should beef up on their customer services to allow real-time and two way interactions. Other recommended strategies are offering digital payments and leveraging social media to proactively tackle customer concerns.

Fortunately for us at the power distribution company I’m working with, we already have invested our efforts and resources in technological solutions that will make the lives of our customers easier even before COVID-19. 

In our case, before COVID-19, many customers would pay their power bills in our offices. We have recently added more payment partners. Our recent addition is Xenpay, allowing customers to pay their bills in the sari-sari stores, which minimizes the risk of exposure to the virus given that there’s a sari-sari store practically in every corner in the Philippines. We also have our digital payment channel through G-Cash. Now customers can conveniently settle their bills at the comfort of their homes.

As the article said, there’s a need to ramp up a company’s digital contact center footprint. For us, this means changing customer engagement from face-to-face interactions to social media. This is necessary given experts’ prediction that a vaccine for the coronavirus won’t be available for the next 18 to 24 months. In the meantime, distribution firms should find ways to minimize the need for our customers to go to our offices for official business.

For years now, companies are using social media to reach out to their customers more. But corporate social media accounts should do more than re-post news or carry announcements. While these are useful to customers, social media account should add more value. These days, power distributors must leverage social media more especially since studies show that people are spending more time in their social media accounts while confined at home. A Consumer Welfare Office that engages with consumers via Facebook messaging is useful.

medium.com

By this time, energy and utility firms should be working on additional digital assets to lessen face-to-face interactions with customers in light of the coronavirus pandemic. Photo c/o medium.com

By this time, energy and utility firms should be working on adding to their digital assets that will be utilized for mass knowledge dissemination, necessary to empower our customers. Using customer analytics to proactively identify and address customers’ concerns coursed through social media is a must these days.

Our company is working on an app that will let customers report power outages via social media, which in turn will alert our line-men in real-time, thanks to their GPS-enabled radios. This will allow our linemen to respond quickly to outages.

Relying on social media to minimize in-person interactions makes sense in this digital world. More so for the Philippines since according to a report on social media and digital trends, Filipinos spend an average of nine hours and 45 minutes online per day, making us the most active social media users around the world. This annual study by the creative agency, entitled, entitled Digital 2020, revealed that Filipinos spend an average of three hours and 53 minutes daily on social media.

The energy distribution sector is undergoing a massive transformation, thanks to technology. Before COVID-19, we were absorbed with cutting system losses, studying decentralizing power distribution systems, and technological solutions that will disrupt the sector. Now, we must also prepare for the new normal, a consumer-centric service delivery with limited personal interactions between consumers and power distribution company employees. Fortunately, we have the tools and human resources ready for digital engagement.

 

Opportunities for the RE Sector In The Time of COVID-19

Global renewable energy capacity increased by 176 gigawatts (GW) last year, reaching a total of 2,537 GW. According to the International Renewable Energy (IRENA), renewables accounted for 72% of all power expansions last year with solar and wind power providing 90% of the growth.

These numbers were promising and it looked like renewable energy’s growth trajectory was likely to continue in 2020. But this all changed with the COVID-19 pandemic.

Just like with many industries, renewable power is taking a hit with the construction of new power plants being halted due to the imposed lockdown around the world. There’s also the growing fear that the pandemic will likely affect clean energy investments negatively given the depressed prices of fossil fuels in the market.

But experts also warn that it’s too early to predict the extent of the impact of the Coronavirus on energy markets. They also stressed that there are opportunities for clean power to flourish in spite of the global economic slowdown caused by stay-at-home orders or lockdown, or what we call the Enhanced Community Quarantine in the Philippines.

The Global Head and Managing Director, Cleantech Coverage of Standard Charter, Sujay Shah points out that 70% of the world’s energy investments are driven by governments. With the stimulus packages being offered by governments, a total of USD7 trillion and counting, provide a “once in a generation opportunity for all industry participants including developers, investors, and financiers to shape this spending to accelerate the energy transition and low-carbon agenda.”

There are also opportunities, too for Southeast Asia (SEA) renewable energy market, which has one of the fastest energy growth rates in the world with a yearly 6% growth according to the International Energy Agency (IEA). SEA’s power demand has grown by 80 % since 2000.

Daine Loh, power and renewable analyst for Fitch Solutions as quoted by a Channel News Asia article says that there is a downside risk to the completion of new large scale-thermal and hydropower projects over the medium term, which will probably result in delays or cancellation of government-funded RE projects.

But she also stresses that the weakened power demand for this year due to the slowdown in economic activities could reduce pressures to peak demand outputs, thus freeing up some policy space for government to pursue their energy transition plans. “(It) may put pressure on governments to amend regulations to boost private sector investment in renewables in an effort to support growth in the market over the longer term.”

It also helps that getting financing for traditional power sources has been difficult in recent years. Loh says financial pressures could further weaken investments in fossil fuel power projects and give momentum for RE project financing.

Speaking of financing, access to capital is likely to be cheaper, too with interest rates dropping. The cost of borrowing for capital-intensive RE projects could be attractive.

The RE sector could benefit from the rebuilding of economies since increased construction activities would provide more jobs. As the economy recovers, countries will also have higher energy demand, and governments anticipating this demand may turn to renewable power that can provide more affordable power rates say Krib Sitathani, a project manager with the United Nations Development Programme in Thailand. “There is also the possibility that many governments to take this opportunity to manage their risks to stabilize their energy costs through increasing renewable energy production to not only stabilize their power production but also to ensure a more predictable cost,” he said.

For the Philippines, one of the possible negative scenario of the COVID-19 crisis is that Indonesia, where we source 90% of our coal closes down all its ports. We are okay as of today because there’s a drop in demand.  So I presume we have a lot of coal inventory already in the Philippines. But if this crisis worsens and Indonesia will have to close all its ports, then we are in for an insurmountable problem. 

Weforum.org

The RE sector could benefit from the rebuilding of economies as increased construction activities would provide jobs. Photo c/o http://www.weforum.org

 

To mitigate this threat, our government should order the immediate development of indigenous sources of energy: solar, wind, and geothermal.  To do this, the power sales procurement rules should be amended. Ultimately this is where the development of RE will have to depend unless the government adopts more draconian measures like requiring a much higher percentage of RE in all the portfolios of the distribution utilities. 

The current rules in evaluating PSAs do not differentiate between indigenous and imported energy.  Technically, this should be differentiated because from a risk perspective these are two different types of energy sources.  However, the current evaluation rules and, in fact, the evaluation skills of the utilities will not allow this differentiation. 

To enforce this policy, the Energy Regulatory Commission (ERC) should require utilities procuring power to testify that there are no indigenous resources within its immediate vicinity, or franchise area, or that it has not received any offers from indigenous energy source within the country. This testimony must be made in public and under oath, which will then be submitted together with the application for PA for the signed PSA. This means that utilities must bid or negotiate with indigenous sources of energy providers before doing any procurement from imported-energy sources.

The implication of this policy will be the development of indigenous energy of the country thus reducing risks of non-supply such what we are facing today.  The traditional economic analysis of imported versus local (if it is cheaper to import, import) can no longer stand the scrutiny of today’s reality.

The COVID-19 pandemic is causing so much uncertainty for the whole world. For us, in the renewable energy sector, we can take comfort that the world sees the value in investing in clean energy and that many governments know that RE is the way forward to providing affordable and reliable power. Thus, while there may temporary setbacks due to the virus in 2020, as with almost all industries, there remains high optimism for the long-term growth of the RE sector.

References:

https://www.channelnewsasia.com/news/asia/covid19-southeast-asia-renewable-energy-nuclear-asean-12617520

https://www.sc.com/en/trade-beyond-borders/covid-19-clean-energy-challenges-and-opportunities/

https://www.cnbc.com/2020/04/06/the-coronavirus-is-hitting-renewable-energy-supply-chains-factories.html