OPINION: Lowest ever energy bids and leveling the playing field

Originally published in Business World

By Sara Jane Ahmed

MANILA Electric Co. (Meralco) recently received the lowest ever bid to build new wind capacity in the Philippines at P3.50 per kilowatt-hour (kWh).

Solar is even cheaper than wind. The lowest price for solar received by Meralco so far has been P2.9887 per kWh for a 50-MW capacity plant.

Given that our consumers pay the highest costs in the region for electricity, the emergence of low cost renewable energy in the Philippines is excellent news for all of us who worry about our bills every month.

But the news could also be a lot better, because the lack of fair competition in our market is stifling our ability to access more of this clean cheap power. Removing some of the road blocks would make a big difference for us all.

In the face of rapidly declining costs and technological advances in renewable energy, liquefied natural gas (LNG), energy efficiency and storage, there is a need to enable greater use of cheaper domestic alternatives to imported coal and diesel.

A new report from a leading global financial advisory and asset management firm, Lazard, concludes building new wind and solar farms costs less in an increasing number of markets than continuing to run current coal or nuclear plants.

This is indeed happening in the Philippines, as shown by last month’s offer to Meralco of P3.50 per kWh for 20 years to supply 150 megawatts (MW) from a proposed wind project in Rizal province. And this price is open to competition, meaning it could drop further.

What’s more, the prices of solar and wind are rapidly declining every year due to increased scale and improvements in technology, and neither of these trends are expected to level out any time soon. Since last year, the cost of energy for both utility-scale solar and onshore wind technologies globally are already down by 6%.

Meanwhile, the price of coal has doubled over the past two years leaving a $2-billion annual hole in the Filipino budget due to current need to import 21 million tons of coal a year from the likes of Indonesia and Australia.

When coal is expensive and renewables are cheap, there’s only one sensible path to take.

Significant variable renewable energy capacity negates the need for more coal and diesel; a reality that makes the Aquino administration plan to build 10,423 MW of coal ill-advised.

The current coal pipeline would lock in costs immediately double that of renewable energy, bringing with it currency and cost inflation over time to consumers, meaning expensive, rising and volatile electricity prices. Solar and wind are already also a remarkable seven times cheaper than diesel.

The question is: how can we enable greater competition to directly benefit consumers?

The most obvious method is to open up the energy plans to greater competition. Setting up an open and transparent bidding process using auction systems would mean the lowest bids translate into new energy projects.

This is turn would mean cheaper energy prices. Open and transparent price bids should also be used in power projects under the Renewable Portfolio Standard (RPS) and feed-in-tariff (FiT).

However, we still need to level the playing field.

Coal and diesel generators are sheltered from increasing import prices because of the automatic pass-through to consumers and industry. We can use greater competition by allowing coal and diesel generators to compete based on how much they are willing to step back from the traditional automatic cost pass-through model and shoulder more fuel-price and currency risk. Many such deals in India now have power generators agreeing to limit fuel-price pass-throughs to 30% instead of 100%.

In some cases, power generator proposals are also being presented now with fuel hedge contracts, which reduce exposure to fuel-cost volatility. Such contracts are already widely used by airlines, cruise lines, and trucking companies, and can certainly be tapped by the electric power industry too.

It’s at this stage that fossil fuel companies tend to raise the issue of reliability as a barrier to change. Solar and wind can’t provide baseload goes the usual line.

But that’s simply not the case.

Instead of continuing to rely on expensive import coal fired power, wind can cover day and night-time demand. Pumped storage is available for the peak demand periods, which in any case would be lower due to solar power reducing demand in the all-important noon-period.

Excessive reliance on imported coal is one of the main reasons the Philippines has the highest electricity price in ASEAN. The Philippines would be much better off improving energy security by diversifying its electricity grid and accelerating deployment of domestic renewables, reducing thermal fuel imports, driving deflation and encouraging more sustainable economic growth.

Natural gas, solar, wind, run of river hydro, geothermal and biogas are attractive, viable domestic options that can be combined to create a cheaper, more diverse and secure energy system in this country.

And the time to act is now, before we start to build a new generation of coal plants which will lock us into at least three more decades of expensive polluting power.


Sara Jane Ahmed is an Energy Finance Analyst of the Institute for Energy Economics and Financial Analysis