• Low fossil fuel prices and renewable energy development

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    MIKE WOOTTON

    MIKE WOOTTON

    This is bit of light relief from election commentary. If anybody is wondering why a substantial increase in renewable energy is slow to come in the Philippines despite a renewable energy law from 2008 and an apparent government policy, let me try to give a few insights.

    It is considerably easier and quicker from a regulatory perspective to put up a coal- or oil- fired plant than it is to put up a renewable energy facility.

    It is cheaper to construct a coal- or oil-fired plant than the equivalent sized renewable energy facility.

    Other than large hydro or geothermal, renewable energy technology at its current stage of development simply cannot provide single facility capacities of >500MW.

    The price of coal has fallen from $120/tonne in 2012 to about $55/tonne now. The price of oil has dropped from over $100/bbl in 2012 to about $35/bbl now.

    As for natural gas in the form of LNG the Japanese import price has declined from $17-20/MMBtu in 2012 to about $4-5.00 now—a fact which is once again spurring LNG importation thinking in the Philippines.

    Thanks to geopolitical factors, fossil fuel prices are falling considerably and they may just stay lower than their previous, very expensive, levels.

    To develop a small, say, 20MW off-grid diesel power plant will cost about $10 million [less if the developer uses second-hand equipment as many do]and will take less than a year. In off-grid areas the developer is safeguarded against volatility of the fuel market as this cost is subsidized by the electricity consumers of the Philippines as a whole. To develop a 20MW wind facility would cost about $50 million, solar $40 million, or small hydro $80 million [which would take five or six years to develop]. Despite the higher development costs of renewables, the costs to the consumer due to the free fuel will be less than the cost of fossil fuel-led power. Easy to achieve when fossil fuel prices are high, not so easy when they are low.

    If the cost of fossil fuel drops, or even stays at current levels, then there will be increasing pressure to lower renewable tariffs and this, in a world where there are far more difficult government approvals to obtain than in the case for fossil fuelled power. Renewable developers need a service contract with government in order to utilize national natural resources and they need a 25-year contract term in order to get a reasonable return on their investment. Siting of their facilities is dictated by nature making the distance to market, which is not something that can be simply chosen. A fossil fuelled facility just needs a plot of land and a sales contract with the buyer probably for a relatively short term of 10-15 years.

    The developer risk with renewables is far greater than it is with fossil fuel, yet the regulatory hurdles are also far greater.

    Development of renewables in the Philippines will reduce carbon emissions, it will reduce exposure to volatile international fuel markets—coal, oil and LNG all have to be imported and it is environmentally benign.

    In the Philippines, the development of power generation is unfortunately the exclusive preserve of the private sector and that means investors, and investors generally want low-risk investments with maximum returns. Renewable development is high risk, big capital outlays, in respect of which the return has to be assured, which itself is risked further if downward pressure is put on the acceptability of generation costs. The regulatory environment is challenging and the political environment uncertain.

    Undoubtedly an increase in renewable power at the expense of fossil fuelled power must be right for the Philippines and accords with the international agreements that seek to reduce fossil fuel emissions. Better if the Philippines can reduce its dependence on foreign imports—imports of coal between 2000 and 2012 doubled and will go on increasing at a high rate to feed the 25 new coal plants under development. Current coal imports are at about 18 million tonnes a year, which at current prices represent imports of about $1 billion or 1.5 percent of all imports.

    So renewable energy development needs help. The help needed is not so much in increasing tariffs but in reducing the risks to renewables investment and development, which means making the sector less risky, easing the nightmare of securing permits, in which a single permit can take several years to obtain and by introducing a bit of a single-point responsibility reducing the number of players who are able to interfere with any development. The risk profile is such that it becomes not a question of getting a fat tariff. Rather, it is about the certainty of the ability to gain a return. There is a point at which no matter how high the tariff or the fiscal incentives, the downside political and regulatory risk would make the investment unattractive.

    The new threat of low fossil fuel prices is something that those in favour of renewables development in the Philippines have to take seriously. Renewables development needs to be better understood, it is a totally different game than that for fossil fuel development and if government really wants to encourage it, which it should as it is obviously good for the economy, as well as the environment, then government needs to get single-point control over all the various agencies who have to issue their separate permissions.

    Mike can be contacted at mawootton@gmail.com.

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