Suspense Is Only Good For Movies

I’ve written so many posts about how our local policies have been far from friendly to renewable energy (RE) developers like myself. But these days, it seems that the regulatory environment has even gone worse.

There is uncertainty in the sector given that our Energy Regulatory Commission (ERC) is caught in a messy situation after the Ombudsman suspended the four ERC commissioners last December.

Just this week, the Court of Appeals has issued a 60-day Temporary Restraining Order (TRO) on the suspension.  But then again, as the order suggests, it is just temporary stay order. What happens after 60 days? Also, will the resolutions approved by the suspended commissioners during the 60-day TRO period be deemed legal?

But the complication does not end with the suspension order and the TRO. There is a bill filed in the Lower House seeking the abolition of the ERC. It was sponsored by no less than the Speaker of the House, Pantaleon Alvarez.

The House Bill 5020 not only seeks to abolish the commission but is also pushing for the creation of a new quasi-judicial regulatory body, the Board of Energy as ERC’s replacement.  The new board will be an attached unit of the Department of Energy (DOE)  and will be composed of a Chairperson and two members appointed by the President upon the recommendation of the Energy Secretary.

All these developments are worrying since the ERC while being far from being an ideal regulator even before the chaos brought by the suspension, at least provided some comfort to the sector that somehow issues will eventually get resolved. So, is it essential to abolish the commission and replace it with a new one? A new entity might not be the answer to problems already hounding the ERC, especially if it is attached to the Department of Energy (DOE). It is not implausible to think that the DOE can come up with policies which, contrary to its opinion, may not be good for consumers in the long-run. So, it is essential that ERC, or its equivalent, must remain independent of the Executive Branch.

The bigger issue here is REGULATORY CAPTURE. And here, I am not even implying covert attempt to control the ERC. Because the deregulation and privatization were not ideally done, there are pockets of monopolies and monopsonies that make it difficult for the ERC to make sound decisions that benefit the Filipino consumers. Because of all these, the ERC is sometimes constrained to follow “jurisprudence” and those with vested interests will not question the commission’s decisions. Creativity and innovation in rule-making for the benefit of the Filipino consumer are gone.

For example, as I have explained previously, the commission had the incorrect appreciation and application of the Capital Asset Pricing Model in the tariff setting for cost recovery in power contracts. From the very beginning I have always questioned the use of the CAPM – a classic situation of the emperor not having clothes. The CAPM is NOT appropriate for the Philippines. We do not have a well-developed equity market. Our economy is controlled by a few families, thus obliterating the classic economic model of “perfect competition.”

Since all the cases in the past have been decided on this economic model, how can the ERC reverse itself without putting in jeopardy its previous decisions? Can you imagine the amount of money that may have to be REFUNDED to the consumers if someone can prove in court that the CAPM was wrongly used in the past,? Billions!

Unfortunately, the suspense on the fate of the ERC will not only affect RE developers but everyone in the sector, and ultimately, the Filipinos. At this point,  power sector players are probably holding their breaths, waiting for the next scene in the ERC saga. In the meantime, local power producers will be having a hard time obtaining loans and getting their power sales agreements (PSAs) approved, which might result in massive rotating blackouts as new capacities are stalled.

Newly minted ERC chairperson Agnes Devanadera has warned that the suspension would paralyze the power sector, could result in massive blackouts as the commission cannot act on P1.59 billion worth of PSAs.

Similarly,  BDO Capital & Investment Corp. president Eduardo Francisco stressed that lending to the industry might be affected by the Ombudsman’s order. Banks are likely to postpone approval of loans given the absence of off-take contracts. “We can give conditional approval, but usually conditions to lend are based on the ERC approved contracts. There will be an impact on lending,” he was quoted by The Philippine Star.

We do like suspense, but only if we are watching films or TV series.The uncertainty on ERC’s operations has no place in the real world. Hopefully, the mess in the ERC gets resolved quickly.

Let us keep in mind that the current administration is pushing for sustainable economic development, including the building of more public infrastructure in the next couple of years.  Our goal of putting up more bridges, airports, and roads cannot be achieved if we have an almost paralyzed or inefficiently functioning regulator in the Energy sector.


















Inaction vs. Action: The Cost of Choosing “Cheap”

Quite a number of articles I have written on this blog discussed the portfolio theory, which essentially debunks the myth that choosing traditional forms of energy are more economical.  As I have been saying, our penchant for choosing the energy source based on current market prices or what we term as the least cost method for energy planning, may, in fact, be more costly in the long run.

However, what I have written focused on the cost of building the power plants and energy generation. There is one aspect that makes traditional sources of energy more costly for everyone: the impact on the environment.

Perhaps, it is still unclear to many what the relationship between climate change and the use or non-use of traditional sources of energy. To put things in better perspective, we should illustrate why we must choose renewable energy with the following numbers:

According to the report ‘Energy Darwinism: Why a Low Carbon Future Doesn’t Have to Cost the Earth’, published by Citi, the power sector contributes roughly two-thirds of the total greenhouse gas emissions. On the other hand, other sectors such as land use, agriculture, and forestry, as well as other industrial processes combined only contribute a third of the overall greenhouse gas emissions.

To make matters worse, 90 percent of the greenhouse emissions of the energy sector are carbon dioxide emissions or CO2 since most greenhouse emissions are C02.  However, 65 percent of CO2 emissions from the sector are from fossil fuels and other industrial processes.

Given the above figures, surely, we can no longer say that the fossil fuel powered plants are the cheaper options.

Fortunately, the report of the third largest bank in the US also includes an analysis of the cost implications of continuing with the world’s current heavy reliance on fossil fuel versus the cost of changing the energy mix to include more renewable energy.

What Citi did in its report is to analyze two scenarios: the cost of inaction and action. Under the inaction scenario, the world will continue its energy consumption patterns that are heavily reliant on fossil fuels. Under this assumption, there would be a slight pick-up in renewable energy investment, but the penetration rate of RE will stay at 6% by 2040 and fossil fuels will compose of two-thirds of the power mix. This scenario also assumes zero investments in energy efficiency, which will result in a compound annual growth rate (CAGR) of 2.4% of electricity generation from 2015 to 2040.

On the other hand, the Action scenario assumes that the energy mix favors renewable energy as solar and wind will contribute 22% of the energy mix while fossil fuels are reduced to 28%. The penetration rate of RE also increases to 34% from a mere 6% in 2012.

Is there a difference in costs of the Action and Inaction scenarios? The report says yes, one scenario costs more than the other. Contrary to popular belief, though, the cost of taking the Action scenario is cheaper than the Inaction scenario: the business as usual energy mix is at $192 trillion while the low carbon option will only cost $190.2 trillion from 2015 to 2040.  Citi notes that the falling costs of renewable energy coupled with less dependence on fuel usage account for the cheaper costs of the Action scenario. The report stressed that “Yes, we have to invest more in the early years, but we potentially save later, not to mention the liabilities of climate change that we potentially avoid.”



Cost of Action vs Inaction. Source: Citi Research

What would it cost the world if we choose the Inaction route?


A report written by Lord Stern with the title “The Economics of Climate Change” in 2006 warned us of the possible overall costs of failing to act on the risks of climate change. The report, widely known as the Stern Review, concluded that losses from effects of climate change would be five percent of the world’s gross domestic product (GDP) per year between ‘now and forever.’ It could even be as high as 11% when we include other effects on the environment and health, which, unfortunately, are hard to quantify.

There are also other research papers that tackled the potential losses in GDP due to damages from climate change. The Citi research noted that a temperature increase of 2.5°C could result in loss of 0.9 to 2.5 % of the world’s GDP.  A loss of 0.7% to 2.5 % of the GDP is roughly % $44 trillion, the report said.

Aside from losses because of climate change, there are also losses in GDP due to heavy reliance on traditional sources of energy.  In a study, Professor Shimon Awerbuch noted that the oil price spikes in the years 2000 to 2004 cost the European Union €700 billion. The prominent advocate of portfolio theory in energy planning further noted that the world would avoid losses of $95 to $176 billion for at least an addition of 10 percent renewable energy in the mix.

The findings of these reports may vary in their calculations, but it is clear that it’s time to do away with thinking only of short-term prices in energy planning. What we should do is plan our energy needs with the future in mind since our penchant for looking at the current and short term costs are and will cost us more. And unfortunately, the costs are not purely monetary

We favored what we thought was cheap. Sadly, what we thought would save us money is making us pay more. The Citi report summed the situation best “A simple reason why atmospheric concentrations of greenhouse gases has grown is that they have been put there as a result of our using historically the cheapest, easiest, or most readily available solutions to a requirement, such as energy. To look at it another way, adopting a lower carbon path is (at least superficially) more expensive, otherwise all things being equal we would logically have gone for a cleaner option.”


Energy Darwinism: Why a Low Carbon Future Doesn’t Have to Cost the Earth by Citi

The Role of Renewables in Enhancing Energy Diversity and Security: Portfolio Approaches by Shimon Awerbuch