The RE Feed-In Tariff Dream that Turned Into a Nightmare for Consumers

Posted on: May 24, 2017

David Celestra Tan, MSK
18 May 2017

How is it that whenever the government is doing something supposedly good in power, the electric consumers get screwed in the end?

Just like the rest of the world, the Philippines had this wonderful dream for a clean energy existence by promoting renewable energy instead of fossil fuel. It is part of the global concern for “climate change”. It even passed a special law called the Renewable Energy Law of 2008 seeking the encouragement of investments in solar, wind, mini-hydro, biomass, and ocean energy authored by Senator Migs Zubiri.

The law provided for tax free importation of equipment, income tax holiday for first seven years, guaranteed purchase of output, and only 10% income tax after that. On top of all these the law provided for a subsidy program called Feed-In Tariff and created a special government agency called National Renewable Energy Board (NREB) to oversee the implementation of the RE Law. It’s a wonderful dream!

Now 10 years after, it has turned into a nightmare specially solar. From a rightfully cautious target of only 50mw for solar that was asking for P19.00 per kwh subsidized rate (compared to generation rate average of P5.50 per kwh and P12.00 per kwh for bunker c plants) it ballooned to 500mw with an additional 400mw claiming entitlement to subsidies.

In July 2012, the ERC approved for the First wave of FIT the rates of P9.68 per kwh for Solar, P8.53 for wind, P6.63 for Biomass, and P5.90 for run of river mini-hydro. The initial FIT ALL rate was P0.0406 per kwh as a universal charge. In March 2015 the ERC approved a 2nd round for Solar now for an additional 450mw at a reduced rate of P8.69 per kwh. And the FIT All rate was increased to P0.12 per kwh.

Feed-In Tariff (FIT) is what the government pays the RE plants for their energy output. That energy is sold to the WESM market at whatever is the market price. Whatever is unrecovered is the loss or subsidy which is passed on to the all electricity users nationwide.

Based on the figures of Transco, the designated administrator of the FIT program, the total subsidy for 2017 would be approximately P14.9 billion a year based on national energy sales of 68 billion kwh a year and a subsidy of P0.22 per kwh chargeable to all users. So far ERC had approved about P0.18 per kwh.

On kwh subsidy basis P0.22 per kwh seems small. What consumers do not realize is the per kwh subsidy for solar power is actually P3.19 per kwh in Luzon and P4.16 per kwh in the Visayas. And those are based on the reduced FIT2. In FIT1 the subsidy for solar is P4.50 per kwh in Luzon and P5.40 per kwh in the Visayas. That is almost double the cost of coal power! Should clean energy cost this much for the consumers? Or should clean energy be solar instead of large hydro and geothermal?

The FIT program is a disaster for the consumers as much for the amount of subsidy as the confused way it was implemented. It is a comedy of errors by the DOE and NREB. Those of us observing things unfold, kept on hoping there was method to the madness.

Mad Scramble for Opportunities

The RE Law was passed in 2008 during the term of Energy Secretary Angelo Reyes. Within a span of six months the DOE issued 400 Service Contracts for these RE projects, the first step for subsidy entitlement. There were rules but it did not appear that the DOE even established qualification standards. Everyone and his uncle who are vaguely connected with some awareness of the FIT program got their own RE project mostly solar. Others speculated on wind, biomass, and mini-hydro.

When the Aquino Administration came into power, his Energy Secretaries, First Rene Almendras and then Jericho Petilla were in a quandary on what to do with the FIT program and those RE Service Contracts handed out by the previous Secretary.

A technocrat, Almendras established sensible installation targets of 200mw for wind, 250mw for hydro power, 250mw for biomass, and only 50mw for solar. Almendras did not stay long though at the DOE.

When Leyte Gov. Carlos Jericho Petilla, also a technocrat, took over the DOE, one thing they realized is that not many of the 400 RE developers really have made much progress. Most of them apparently were just speculators and amateur power developers looking to cash in. The Renewable energy program had not achieved much. Petilla’s DOE came up with a method called “first come first served”. A sort of deliver or be cancelled approach. Bowing to solar lobby pressure Petilla also increased the target to 500mw because of the claimed need to increased power supply to the country. Yes he chose solar…and later lobbied hard for P2 billion worth of rental generators. Further madness ensued. It was another gold rush! Solar developers raced against each other to beat the March 2016 deadline to get the lucrative FIT rates.

Many, including MSK, called for the DOE to hold auctions or biddings since there are so many solar developers interested in investing. Yet for some reason they kept on doling out service contracts at those generous FIT rates. Just giving money away. One well connected guy got 3 solar service contracts and sold 2 of them in Northern Negros to foreign investors and a local conglomerate. Guy got rich quick.

Remember that while all this is going on in the Philippines, bid rates for solar projects had been dropping in many parts of the world. Latin America and the Middle East. $0.04 per kwh compared to the $0.19 per kwh that the Filipinos are doling out. I mean that’s almost 500% of international rates. Yet the DOE chose to ignore these reports. Just doesn’t make sense.

While solar technology was pioneered and developed by Germany, it was the manufacturing juggernaut that is China that brought down the cost of solar panels by as much as 80% which consequently brought down the cost of solar projects. Except in the Philippines where the solar lobby up to today and the NREB are still pushing for subsidies I kid you not.

The DOE did not even pay attention to where those solar projects are being installed. Many large developers went to the island of Negros where large tracts of land can be leased making the race to DOE target completion of March 15, 2016 achievable. Except no one thought about the transmission line limits of the Negros Island. Asked later, even the NGCP only meekly called the attention of the DOE to the lack of transmission capacity on the island apparently for fear that they will instead be accused of failing to do their job of developing the transmission grid.

Negros Island only has 300mw in electricity demand. Most of its power needs are supplied by base load coal power plants from Cebu and Panay. Also by geothermal from Leyte and Dumaguete. For the 300mw of solar projects installed on Negros island to be absorbed by the grid, they will need to be exported to Cebu and Luzon. But it cannot be done became there is no transmission capacity. Solar power in the afternoon stayed in Negros causing an oversupply that sent the WESM price (the market price for RE FIT) tumbling to P1.50 to P2.50 per kwh in the afternoon hours. Additionally those intermittent solar drop in output by as much as 60% when cloud cover passes thus requiring grid operator NGCP to secure instantaneous replacement power from Luzon to stabilize the system. That 100mw of ready ancillary service is expensive and passed on to the consumers.

The Negros solar dilemma hit the consumers’ pockets three ways. First they are already paying for the P4.00 per kwh subsidy for every kwh of solar energy, the FIT recovery also drops due to the lower market price in the grid where FIT is supposed to recover some of the revenue. Then the cost of the ancillary services to cure the intermittence of solar are passed on to the consumers via the NGCP transmission charge.

Solutions to High Fit subsidies and the stranded solar projects

The DOE under new Secretay Cusi had declared that there will be no more third wave of FIT for solar. Bless his heart. The NREB for its part is now talking about coming up with a subsidy scheme for the so called 360mw of “stranded solar projects” that did not get in the second wave of FIT.

Why is the government still talking about subsidizing solar? The reason for the Feed In Tariff subsidy program for renewable energy is to encourage investments. To kind of kickstart the RE program. But when investors have already come and there are more suppliers than the country can afford to subsidize, it is time to make everyone compete for the country’s RE business. Why is the DOE so averse to holding biddings for solar projects? Why are they insisting on doling out subsidies that are passed on to the consumers? The fiscal incentives offered by the RE Law of 2008 is enough.

Why not hold an auction among those 360mw of stranded solar projects? Let us establish the avoided cost of power as coal at P5.00 per kwh. Add 12% VAT and that would be P5.60 per kwh.

Let all these solar projects bid with the P5.60 ($0.114 per kwh) as the maximum rate. Then we get clean energy without any subsidy. Note that $0.114 per kwh is still more than double the bidded rates in the Middle East which was $0.04 per kwh.

At $0.114 avoided cost solar developers should be able to afford the investment in storage battery to manage the intermittence of solar and to extend its service to the evening peak hours.

What to do with the 50mw of solar in the First Wave enjoying $0.20 per kwh and those who worked fast and are well connected to get into the 500mw second round at $0.177 per kwh?

Let us accelerate the digression rate. Those who built their plants in 2015 and 2016 already caught the low cost solar panels and should be able to afford the lower rates. If not why not force them to add storage batteries so the consumers do not pay for ancillary services to regulate their output.

We also may need to review the role of the National Renewable Energy Board (NREB). As a government office they should work for the interest of consumers instead of acting as a lobby group for RE. Maybe the DOE’s REMB (Renewble Energy Management Board) is also part of the problem. Maybe there is a need to clarify for whom their bells must toll and that is for the Filipino consumers.

The RE and FIT program is another case of knowing that we wanted to provide FIT subsidies to encourage RE development but forgetting in the end why we are doing it. We wanted to develop clean energy but if the investors are already here, there is no need to subsidize. Instead make them compete for our business. We don’t need those who are here only because they can make a killing.

In case you are not noticing, the Universal Charges combined are the fastest increasing component of our electric bill. FIT-All will soon be P0.22 and can eventually be P0.35 per kwh. On top of the UC-ME that is now P0.19 and the UC stranded cost of PSALM, consumers are getting screwed further.

It is not too late to get out of this FIT nightmare and get back on track towards our clean energy dreams. Towards that why not subsidize and incentivize large hydro and geothermal instead. Review the grid competitive Biomass and mini-hydro. Those dreams are still worth dreaming.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.


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