BRIEFER Electricity-Sector Opportunity in the Philippines – The Case for Wind- and Solar-Powered Small Island Grids

Access to cheap, secure, and reliable energy is a key factor in poverty alleviation and enterprise development. Developing small island grids is a key strategy to advance inclusive and modern development.

Power for the islands costs over 60 billion pesos in subsidies, the report states, despite only accounting for 6% of total energy demand and 0.49% of total generation. Replacing diesel generation with renewables in small islands can save the Philippines over 10 billion pesos (US $200 million) per year. The report finds also that investment opportunities in small island renewables are worth at least $1 billion to private developers in the country.

This paper describes how small islands in the Philippines need to modernize outdated imported diesel fuel power generation systems and how solar- and wind-powered grids on these islands can supply affordable, reliable, more efficient, more secure, and cleaner power.
Many Philippine small island grids served by diesel generators suffer from blackouts and unplanned power outages as a result of grid instability and inadequate generation capacity.

Key Takeaways:

  • Wind and solar-powered small island grids can reduce dependence on expensive imported fossil fuel generation, and can do so without compromising the availability of power and grid reliability.

  • Modern energy systems that hold great promise across the Philippines include the hybridization of existing diesel-powered generation with solar photovoltaics (PV), wind turbines, biomass gasification, small hydro installations, and battery energy systems.

  • Solar-powered electricity costs have fallen by 99% since 1976 and 90% since 2009, and the cost of wind-powered generation has fallen by 50% since 2009. This stands to drive the eventual domination of renewable energy in energy mixes.

  • Energy storage system expansion is occurring alongside fast-growing global uptake of solar and wind in a trend suggesting that 24/7 electricity availability from renewable energy sources may be achievable sooner on small island grids.

  • On small island grids in the Philippines where peak demand is fully met by diesel plants, and where the average cost of renewable energy is less than the variable costs of diesel generation, electricity produced by run-of-river hydro, biomass, solar, and wind is positioned to compete economically and to progressively displace imported-diesel-fired generation by way of hybridization initiatives.

  • A committed incremental approach can bring additional electricity-generation capacity at a lower cost than the fuel-displacement model, at a quicker pace, and with a greater element of permanence. This model suggests the possibility of 100% renewable-powered island grids in the not very distant future.

  • A key concern is potential stranded costs if cooperatives continue to procure diesel supply via long-term contracts.

That said, barriers exist to the modernization of small island electricity systems. Chief among them are outdated regulations, and the Philippines presents a prime example of how techno-economic change has outpaced government regulation.

  • Under current regulation, for example, no incentives exist for electric cooperatives to procure cheaper sources because whatever the outcome, savings accrue exclusively to the missionary fund and none to the franchise ratepayers. This is a classic case of moral hazard. This system tends to be biased against renewable generation because franchise managers would rather stick with diesel generation.

  • Furthermore, the tariff-setting system for island electric cooperatives under the ERC and National Electrification Administration (NEA) is based on cash adequacy for operation costs and capital expenditures. This means there is no incentive for electric cooperatives to even be more efficient or reduce costs. Private distribution utilities, on the other hand, benefit from a performance-based regulation, which leads to operational efficiency and efficient use of capital. Private distribution utilities are disincentivized from optimizing power procurement because of full pass-through of fuel costs on contracts that address demand from captive customers, most of which are residential.

  • Prudent reform would have the ERC and NEA set up and enforce policy to require electric cooperatives and private distribution utilities alike to optimize procurement. Such reform would reduce the cost of electricity by tightening competition between power generators. For fossil-fuel power generators, 80% of operating cost come from fuel. Optimizing procurement levels the playing field for renewable power generators and reduces the UCME cost for taxpayers by phasing out subsidies for imported diesel.

  • Regulators should seek to maximize a social welfare function to limit the rents that are borne by ratepayers and taxpayers. The ERC and NEA should amend their tariff-setting system to favor performance and thus award gains as a result of increased efficiency and lower costs. It is clear that from a technological standpoint, there is the capability to implement cheaper alternatives, but in terms of integrating that capability into government regulation, there has not been much progress.

  • Management of cooperatives also need to training in RE supply procurement because they have unfounded fears of running afoul of their diesel contract obligations.

  • The Department of Energy (DOE) should enjoin NPC-SPUG to speed up hybridization of its plants, and to install maximum renewable energy for incremental load and in new sites identified for electrification. Moreover, the NEA should direct electric cooperatives to be technology-neutral in the procurement of power.

Download the briefing paper