By Paula Valencia
April 22, 2022
Whether consciously or unconsciously, there is a big bias toward fossil fuel technologies in the Philippines, which hinders the country’s energy transition. This bias is exemplified in current policies, regulations, and practices both in the private and public spheres.
First is the automatic pass-through provision. In the early ‘90s, the country went through a power crisis with regular rotating power outages across the country. To address this issue, the government allowed the automatic pass-through of fuel cost and foreign exchange rate fluctuations to the consumers as part of the Power Service Agreements (PSAs) to attract investors to build power plants.
The automatic pass-through provision made power generated from technologies that require fuel more bankable because the risks of price fluctuations are passed down to the consumers. Because of this, the “playing field” is no longer equal for all technologies, especially for renewable energy because they do not require fuel to generate electricity.
According to the top commercial banks in the country, even if they know the benefits of renewable energy, they cannot easily turn their backs on fossil fuel technologies because the automatic pass-through provision de-risks the investors from price volatility. Therefore, even if developers want to install renewable energy, financial institutions still find fossil fuel projects more profitable.
Second is the over-reliance on, and preference for, baseload technology— plants that operate continuously to meet the minimum level of power demand but not designed to respond to peak demands or emergencies. As the demand for power increases, more power plants are installed. However, since most projects financed are coal-fired power plants, they also add more baseload to the power mix which makes the grid inflexible. We indeed need more power, but it does not mean that we should only add baseload technologies.
The country’s power demand varies greatly, especially during peak hours (11 a.m. to 2 p.m.) at around 9.4GW, which is around 2.2GW higher than the lowest requirement (4 a.m.) at 7.2GW. Therefore, there is a lot of need for intermittent and peaking power sources like hydro, wind, and solar, respectively. However, because of preference to install more baseload power, intermittent and peaking sources are not as integrated in the grid to help address the demand requirements.
The inflexible grid has also proven to be problematic when the country experienced power outages last year due to thinning reserves because of scheduled and unscheduled maintenance of the baseload power plants. Because of their big capacity, shutting them down will entail that a larger amount of power will not be available for that specific period of time. Installing more intermittent and peaking power sources will promote grid flexibility, which will make the grid less vulnerable in case of shutdowns.
Finally, the current contracting practice only takes into consideration the present price of electricity without taking into consideration the price volatility of fuel and foreign exchange. Therefore, even if the contract won because they had the lowest price at the time of bidding, the price could eventually change over time because of changes in the global market. And due to the automatic pass-through provision, the consumers will have to carry the burden of more expensive power as developers and distribution utilities pass the risk. On the other hand, prices of electricity from renewables are fixed because of higher capital expenditures.
There are many other factors that could influence the country’s path toward energy transition but leveling the playing field for all types of technology will ultimately tip the scale toward renewable energy.
ABOUT ELEVENTH HOUR
This article was originally published on The Climate Reality Project Philippines’ weekly column for the Manila Bulletin called Eleventh Hour.
This column serves a digital space to discuss our organization’s work on supporting the country’s just transition into a clean, affordable, and self-sufficient energy system; advancing sustainable urban mobility to highlight the issues of equity and democracy; and raising public awareness about the need to phase out single-use plastics. It also serves as a platform for Pinoy Climate Reality Leaders to share your stories, promote your climate initiatives, and provide critical insights to issues that matter to climate action, environmental protection, and sustainable development.