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.

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?

Energy Planning and the Portfolio Theory

We have discussed how the risk of an individual stock may be theoretically measured using the Capital Asset Pricing Model (CAPM), which  theorizes that investors will buy a stock for as long as its return is proportionately priced to that of the entire market, and why the model doesn’t work for a country like ours.

But there is another finance theory that requires putting different stocks together to maximize the returns: the portfolio theory. As I will discuss here, this concept can be used for energy planning.  Although the literature is still scant in this field, some studies have already shown that a portfolio approach to energy planning will result to better and more robust outcomes for the economy.

What is the portfolio theory in simple terms?

An investor who puts two different stocks together in a portfolio, with each stock having its own risk-adjusted return will yield a total return that change in accordance to the behavior of the individual stocks.

For example if the portfolio has two assets–Asset A, which is considered  risk free, but only yields one percent per annum, and Asset B, which is considered high-risk, but yields 36 percent returns per annum. Asset A is priced at P50,000 apiece while asset B is priced at P1,000 per piece.  We assume that the investor has enough money to buy any of the two assets. What would an investor choose?

  • Asset A— yield= 1% p.a.; P50,000/piece; Risk-free
  • Asset B—yield= 36% p.a.; P1,000/piece; High-risk

There is no straightforward answer. It depends on the risk appetite of the investor is. If the investor is conservative, then Asset A may be the wiser choice.  If the investor is a risk-taker, then Asset B would be a perfect investment.

The world, in fact, does not have only two assets, which allows an investor to choose from a whole spectrum. And the choices do not have to be just one asset in that spectrum.  The investor can put the money in different assets or in slices of each of these assets, allowing the investor to diversify both risk and investments. .

This is the portfolio theory developed by Nobel Prize winner, Harry Markowitz, which says that risks can be minimized at any level of expected return if the investor mixes assets in a portfolio, combining high and low or zero- risk assets.

An investor should look at the best combination of stocks in a portfolio rather than invest all of the money in one. In the example earlier, an investor who combined Assets A and B in one portfolio would have maximized the return since the less risky asset enhances the returns of the portfolio. The investor puts together the assets in proportions that will make him comfortable with the associated risk for each asset.

If there is a combination that will either give a higher return with the same risk, then investors will go after that asset or group of assets. Conversely, if there is an asset or portfolio of assets that will give the same return but for a lower risk, then investors will all flock to buy that asset or portfolio. Thus in an ideal world, there will eventually be an equilibrium, where all these assets are properly priced in what is known as an efficient portfolio frontier. It has some calculus in determining this frontier, but for us laymen, it is sufficient to imagine that such a set can exist.

How do we relate this to energy planning?

I have argued that the application of “least cost” planning method is insufficient and inadequate in today’s environment.  For some reason, the probabilities for “Black Swan” events seem higher, and, therefore, any good planner must always consider risks in the planning framework.  Unfortunately, the current method of planning takes into consideration the probabilities and excludes measuring risk.

This is why a hydropower plant that costs; let us say US$4M per megawatt to build is considered more expensive than a US$2M per megawatt coal-fired plant. Yet, especially for the Philippines, the price of coal cannot be predicted.  The price of water is easy: zero.

So, which one is cheaper for the Philippines — the coal-fired power plant or the hydropower plant?

Now the answer is not straightforward anymore. If we can live with unpredictable prices, we can live with the coal-fired power plant.  On the other hand, if price stability is important to us, then the hydropower plant is the better choice.  I am, of course, assuming away technical differences like plant factors and issues like carbon emission and hydrology.

At the risk of oversimplifying the analysis, I am saying that the choice between a coal-fired power plant and a hydropower one boils down to how much we want to be at risk to global prices.  It is a choice between a risk-free asset (the hydropower one) and the riskier coal-fired power plant.

Just like the financial asset, the answer might be to combine the coal-fired power plant and the hydropower one, depending on how much risk we want to take.  And this decision is one that is difficult to process in a democracy or in a deregulated sector.

This is why the current “least cost” approach of electricity system planners is deficient and no longer applicable to today’s reality. Most planners would choose coal-fired power plants over the renewable energy power plants like hydro or wind since the coal ones would be considered as “least cost.”This “cost”, however, does not consider the risks involved.

What are the risks involved of being highly dependent on fossil-based power generation?

According to the Energy Information Agency (EIA), there has been an increasing demand in fossil fuels for the last 30 years and estimates show that oil can possibly last up to the next 20 years given the rise in consumption. Fossil fuels, after all, are natural resources, which are non-renewable.  And as the law of supply and demand says, fossil fuel prices are likely to shoot up in the next decades when supply slows down while demand increases. Although the prices are down today, no one can really predict when the next up-tick will be.

Similar data found in the BP Statistical Review of World Energy published in June 2014 echoed the claims of EIA.  For 2013, both consumption and production increased for all fuel types except for nuclear power. However, consumption outpaced production for the top three fuel types—natural gas, coal and oil.

WORLD CONSUMPTION OF FUEL (2013)

Fuel Type World Consumption Increase World Production Increase
Oil 1.4% 0.6%
Natural Gas 1.4% 1.1%
Coal 3% 0.8%

Source: BP Statistical Review of World Energy 2014

World consumption for oil increased by 1.4% in 2013, but oil production only grew by 0.6%. Similarly, the global consumption of natural gas accelerated by 1.4%, but production only increased by 1.1%.  Coal, which was the most consumed fossil fuel type in 2013, posted a growth of 3%, but world production only grew by 0.8%, the slowest production growth since 2002.

Clearly, using the favored fossil fuels is risky since prices are highly volatile. And if price stability is what we want, then reliance on fossil fuels is the wrong way to go.

The Energy Regulatory Commission (ERC) of the Philippines currently uses the CAPM as the basis of determining the appropriate tariff of EACH power plant. Right away, one can sense the problems with this approach: a) the CAPM does not work in non-efficient economies; b) even if it does, how does one calculate the betas; there are not enough companies to represent the “market” and c) the regulatory body should be looking at an efficient PORTFOLIO rather than individual assets if the country is to gain from the application of the CAPM as a regulatory basis for tariff setting.

These regulatory issues will be discussed some other time.

The point I would like to make here is: power planning in this country should be looking at the risks associated with costs rather than on costs alone. Otherwise, our country might lose its chance for real economic growth. Faulty energy planning, after all, also means throwing away our single most important resource: our natural resources.

The Power Crisis in the 90s

Last year, Energy Secretary Jericho Petilla announced the looming power shortage of roughly 800 megawatts, which would take place during the summer months. This prompted the Energy Secretary to ask the president to seek emergency powers from the Congress. Under the Energy Power Industry Reform Act or EPIRA, the president can search for additional power supply with the authority of the Congress.

The Energy Department is also beefing up on its interruptible load program, asking private entities to use generators during peak hours to free up the load on the grid.

The impending power crisis and the request for emergency powers have revived talks of repealing the EPIRA, which was enacted in 2001 by the Arroyo administration–an offshoot of the policies crafted during the term of President Fidel Ramos.

The expected power shortage is nowhere near what we experienced in the 1990s, and yet, it renews debates about the country’s power supply situation, as well as other issues concerning energy.

The same questions about the power sector are being asked once more such as is it time to scrap EPIRA law? Has EPIRA achieved its objective of de-regulating the industry to promote a more competitive market that drives energy costs down? Was the Ramos administration correct in its handling of the power crisis in the 1990s or his policies resulted in higher electricity rates and lack of supply? These are some of the topics that are once again under discussion.

As such, I wish to share some of my thoughts by providing background and information about the energy sector– insights on the power sector. The articles are not meant to join the mounting criticisms on the government’s failure to provide a stable energy supply. Rather, the articles in this blog will provide insights on the complicated sector that is energy.

What went on before – Mindanao Against Darkness (MAD)

It is best to start the discussions by looking back at what happened in the 1990s when rotating black outs was a staple.

At the height of the power crisis in 1990s, Filipinos –especially those who live in Luzon– experienced around eight to ten hours of rotating brown outs daily. Even before the Luzon crisis, however, what got me into the power sector was the Mindanao power crisis of 1990-1991. At that time, El Niño brought in a long drought that effectively brought down the Agus Complex’s normal capacity from slightly over 700 MW to as low as 300 MW. With a peak capacity at that time of around 800 MW, this resulted to a debilitating 10-12 hour power outages in Mindanao.

NPC at that time had no immediate solution to the problem in Mindanao. So we organized various groups first in Cagayan de Oro and eventually throughout Mindanao to help address the power crisis. We launched a movement called “Mindanao Against Darkness” or

MAD, a play on the popular late evening show of Martin Nievera called “Martin After Dark”.

Our two major programs then were: a) Voluntary Load Shedding Program; and b) Trading of electricity using self-generation. The load shedding program was launched to encourage businesses to voluntarily run their generators during the day so that NPC can conserve the water in Lake Lanao during the evening. This way, residences could have power thus giving young families a chance to have their children prepare and study for school.

The first electricity “trade” in the country was probably between Philippine Sinter Corporation located in the PHIVIDEC Industrial Estate in Misamis Oriental, the city of General Santos, through their electric cooperative, SOCOTECO II. At that time, we asked companies with excess generation to share the energy with utilities that were willing to pay the marginal cost of generating that power. We then asked NPC to allow the “transmission” of that power for free (the concept of “wheeling rates” were foreign then.)

The Cory administration recognized these MAD initiatives and eventually expanded the programs to other cities in Mindanao. The idea and concept of a Mindanao Power Corporation were already brought up and presented to the NPC Board then, as well as to the Cabinet. This proposal was seen as the long-term solution for Mindanao – to finally get away from the clutches of “Imperial Manila.

Little did we know then, that the looming power crisis in Luzon beginning 1991 was going to be as bad and probably even worse than the Mindanao power crisis.

Photo from Philstar.com

Photo from Philstar.com

The Luzon Power Crisis

The Bataan Nuclear Power plant with a generating capacity of 620 megawatts (MW), which was about to start operations was mothballed by President Corazon Aquino due to allegations of corruption in the construction of the said plant. The safety issue – which NPC denied existed at that time – became an issue because the Chernobyl accident of April 1986 happened at that time when the new Cory administration had just taken over. With the leadership of the energy sector decapitated (the department of Energy had been abolished), there was no senior government decision-maker who could stand up to support the opening of the BNPP.

Likewise, the Calaca Coal fire plants were not allowed to be built because the new-found democracy under the Cory administration had to listen to the complaints of various interest groups especially environmental NGOs. The ensuing delay in the construction of the new coal-fired power plants forced the NPC to run its aging power plants. These two major decisions of President Cory Aquino’s cabinet subsequently gave NPC no choice but to postpone the needed maintenance of other existing power plants.

And the inevitable happened—the plants broke down and could not continue their operations. Unfortunately, the Aquino administration failed to provide alternative sources of power. The result was a big power supply deficit resulting in a full blown power crisis

Ironically, the only reason the outages in Metro Manila were not longer than 12 hours was the fact that the economy had stalled as a result of the coup de e’tats that marked the last years of Cory’s term. From a GNP growth of around 6.7% in 1988, this dropped to around 5.7% in 1989 and plummeted to a mere 3% in 1990.

How bad was the power shortage? The Luzon grid, for example, only had an available capacity of 2,300 to 3,100 MW, far less than the installed capacity of 4,321 megawatts. Likewise in Mindanao, the installed capacity was 1053 megawatts, but the available capacity was 600 less than the installed capacity of 1053.

The debt of NPC was growing, too. Between 1987 and 1990 the organization’s revenue losses totaled to P418.63 million. It has accumulated losses of 2.4 billion pesos in 1990 to 1991, which meant that it cannot self-finance and generate enough profits—to cover the demand for investment.

There was a reason for these accumulated losses of NPC. Prior to Cory’s administration, NPC’s tariff was linked to the dollar, as well as other foreign currencies based on its borrowings. Since NPC did not have any regulator, it could, in theory, borrow all the fund funds it needed for as long as the tariff currency mix reflected that of its debt mix.

For some reason (most likely political), NPC delinked its tariff to the dollar and other foreign currencies. Almost immediately after, the peso devalued against the dollar. From 1988 to 1990, the peso devalued something like 25%. The cost of fuel went up from US$18/barrel in 1989 to almost US$32/barrel by 1990 (before falling again) causing a double whammy – it increased costs and devalued the peso. And for the first time in its history, the NPC lost money in 1990 and1991.

The Ramos Administration then was faced with two major challenges. First, there was not enough power; and second, NPC finances were shattered. These twin problems limited severely the options that the Ramos Administration could explore.

Of course, the power shortages had its effect in the country’s economy. According to estimates of the Asian Development Bank, the power crisis from 1989 to 1990 led to a decrease of 6% in the country’s gross domestic product. After all, the unstable power supply caused havoc among industrial centers with some cutting down their days of operations or worse temporarily closing down.

It was then incumbent upon President Ramos to introduce reforms and provide immediate relief to the Filipinos by finding a solution to the power crisis and address the financial woes of the NPC.

Ramos, in his first state of the nation address asked the Congress to grant him emergency powers to address the power crisis. This was highly contested by some members of the congress who claimed that emergency powers are mere tools for more corruption. But due to the political will of President Ramos, the Congress passed the Republic Act No. 7468, or the Electric Power Crisis

Act of 1993 (also known as the Power Crisis Act) by April of the same year. This allowed the executive branch to enter negotiated contracts to fast track the construction, repair, rehabilitation, improvement or maintenance of power plants, projects and facilities.

The Power Crisis Act also mandated the Philippine Amusement and Gaming Corporation or PAGCOR to provide 10 percent of its annual gross earnings to NPC for five years as a form of subsidy.

Aside from this piece of legislation, there was another factor that helped solve the power crisis quickly–the personal attention provided by President Ramos. He intervened when needed particularly in cases where politics were getting into the way of solving the energy problem. President Ramos’ attentiveness helped in speeding up the power projects, which was crucial in lessening the rotating brown outs within six months time.

The Ramos administration also expanded the Build Operate Transfer law, which shortened the procurement process to entice private sector participation (which we will discuss in a later article.)This gave birth to a considerable number of Independent Power Producers (IPP).

Around $6 billion in investments were generated from the IPPs, thus producing a total of 4,800 megawatts. By 1998, there was already a total of 11,988 MW available for the country broken down as follows:

  • 8,619 megawatts in Luzon;
  • 1,554 megawatts in the Visayas and
  • 1,552 megawatts in Mindanao

54 percent of the total generating capacity came from NPC and the rest from the IPPs.

Likewise, the amendments to the BOT law resulted in seven power projects, providing a total of 900 megawatts of power.

Under the amended BOT law, private entities can enter into several types of contract namely:

  • Build-operate- transfer, Build-operate-own (BOO)
  • Build-transfer-operate (BTO)
  • Build-rehabilitate- operate-transfer (BROT)
  • Rehabilitate- operate-maintain (ROM)
  • Rehabilitate- operate-lease (ROL)

Under all these schemes, the private sector takes care of the planning, design, construction and maintenance of the power facilities. On the other hand, the government through the National Power Corporation pays the private proponents for a guaranteed off-take of electricity for the specified cooperation period. There were also other programs implemented to address the power shortage.

The Ramos administration created the Voluntary Load Programs where around 1600 business entities arranged their production shift to adjust with the available times with power.

Additionally, the NPC worked on attaining self-sufficiency in power by diversifying the fuel mix of the NPC-owned generation plants, resulting in the exploration and development of the Camago-Malampaya field off northwest of Palawan and promotion of renewable energy – solar, biogas and geothermal.

The Ramos administration also crafted a 30- year energy plan the ELECTRIC POWER INDUSTRY CODE, which, unfortunately, was not passed by the Congress due to lack of time.

References:

Cayabyab, M. http://newsinfo.inquirer.net/639878/luzon-visayas-may-face-800mw-power-shortage-in-2015
Aldaba, R. , Regulatory Policies and Reforms in the Power and Downstream Oil Industries 2004
FVR column in Manila Bulletin
Energy Guidebook by Myrna Velasco
The Energy Report by KPMG 2013-2014. http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/energy-report-philippines.pdf