Investors rethink renewable energy projects due to low tariffs

MANILA, Philippines – Renewable energy developers are reviewing the viability of their projects after the Energy Regulatory Commission (ERC) approved lower-than-expected feed-in tariff (FIT) rates.

While they are thankful to the ERC for finally approving the rates, they said these may not be enough to cover the high costs required to roll out their projects.

“We are very thankful to ERC for finally releasing the FIT. [But the rates are] significantly lower than what the industry applied for,” said Tetchie Capellan, founder of the Philippine Solar Power Alliance (PSPA).

Capellan said they will see in the coming year whether the rates will be enough to attract investments.

JJ Samuel Soriano, president of US-based solar energy firm Sunconnex, said: “We have to study what were the considerations of the ERC in coming up with the FIT for solar then we can assess if it will still be financially feasible to construct and operate.”

Gabino Ramon Mejia, PhilNewEnergy Inc project director, said the lower solar FIT will be very challenging especially to the small players. PhilNewEnergy is a joint venture between Ayala Corp and Mitsubishi Corp that is pursuing the construction of the P7-billion Darong solar power project in Davao del Sur.

“But if Department of Energy (DOE) will allow a higher capacity allocation, who knows it may still work,” Mejia said.

The ERC approved on Friday, July 27, the FITs for solar, wind, biomass and hydropower projects. It however postponed the fixing of FIT for ocean thermal energy conversion pending further study.

In calculating the FITs, the ERC accepted the methodology used by National Renewable Energy Board (NREB) that takes into account, among others, the cost of constructing and operating the plants for each renewable energy, the generation output or capacity factors of these plants, and the reasonable return on investment to be granted the developers of the plants.

Hike, then reduce, power prices

The imposition of the tariffs is expected to further increase the already high power prices in the Philippines before reducing them in the long term.

This is because the tariff system offers a guaranteed price at which renewable energy will be sold, and the costs will be passed on to consumers.

Renewable energy is more expensive than traditional sources like coal and oil.

However, the industry expects renewable energy to be cheaper over time for one reason: FITs are set, while coal and oil prices fluctuate and continue to go up.

“We express our appreciation for the ERC in keeping with mandate of the Electric Power Industry Reform Act by deliberating and issuing the FIT rates at the soonest possible time,” Department of Energy (DOE) Secretary Jose Rene Almendras said.

Almendras said they hope that all stakeholders will continue to contribute in efforts to set up a competitive and dynamic power market that will benefit the whole country.

Approved rates

The ERC approved the following renewable energy tariff rates:

• P9.68 per kilowatt-hour for solar,
• P8.53 per kWh for wind,
• P6.63 per kWh for biomass, and
• P5.90 per kWh for run-of-river hydro.

The rates are lower than what the NREB had proposed. The NREB’s proposed rates were:

• P17.95 per kWh for solar,
• P10.37 per kWh for wind,
• P7 per kWh for biomass, and
• P6.15 for run-of-river hydro.

The ERC explained it arrived at substantially lower rates, particularly for solar and wind, after it took into account the downward trend in the costs of putting up generation plants for these.

It said that for all renewable energy technologies, project costs, such as those for the switchyard and transformers, transmission interconnection and access/service road, were revised in line with the benchmarks of similar projects of the regulated utilities.

The ERC said it also adopted a lower equity internal rate of return of 16.44% in calculating the FITs, except for biomass, which was allowed a higher return of 17% to account for fuel risks.

The approved FITs will be subject to review and adjustment after an initial implementation period of 3 years or when the installation targets for each technology as set by the DOE have already been met.

The DOE approved a 3-year installation target of 250 megawatts for run-of river hydro, with anticipated investments of P891.25 million, 250 MW for biomass (P759.75 million), 50 MW for solar (P170 million), 200 MW for wind (P551.6 million) and 10 MW for ocean (P126.37 million). – Rappler.com