GIZ Desk Study

Renewable energy in the Philippines:

Costly or competitive?
Facts and explanations on the price of renewable energies
for electricity production
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Hendrik Meller, Jens Marquardt

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F. Mara Mendoza

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June 2013
Renewable energy in the Philippines:
Costly or competitive?
Facts and explanations on the price of renewable energies
for electricity production
Table of Contents
ACRONYMS AND ABBREVIATIONS 4
Summary: Key economic arguments for renewable energy 5
1. introduction: The costs for renewable energy in the philippines 6
2. structure of the study 7
3. discussing the argument renewable energies are too expensive 8
3.1 External costs make fossil fuels more expensive than renewables 8
3.2 Fossil fuels have significant negative health impacts (social costs) 9
3.3. Renewable energies have minor ecological impacts (environmental benefits) 9
3.4 Due to the merit order effect, renewables reduce the overall electricity price 9
3.5 The renewable energy sector has become a global job engine 9
3.6 The context of the Philippines 10
4. discussing the argument re cannot compete with fossil fuels 11
4.1 Renewable energies already dominate investments in the electricty sector 11
4.2 Levelized costs show that renewables will become or already are competitive 11
4.3 There are no fuel costs for renewable energies, but fuel costs for coal increase 12
4.4 Renewables can reduce the import of fossil fuels to increase self-sufficiency 13
4.5 Renewables show a price advantage especially on small islands 13
4.6 The context of the Philippines 14
5. conclusions 16
references 17

Acronyms and abbreviations

BMU Ministry for the Environment, MWh Megawatt hour
Nature Conservation & Nuclear NPC-SPUG National Power Corporation-
Safety (Germany) Small Power Utilities Group
DOE Department of Energy NREL National Renewable Energy
(Philippines) Laboratory
EIA U.S. Energy Information PHP Philippine peso
Administration PV Photovoltaic
EPIMB Electric Power Industry RE Renewable energy
Management Bureau REN21 Renewable Energy Policy
FiT Feed-in tariff Network for the 21st Century
GHG Greenhouse gas SRU German Advisory Council
GIZ German International Cooperation on the Environment
GWh Gigawatt hour UCME Universal charge for
IEA International Energy Agency missionary electrification
IMF International Monetary Fund USAID United States Agency for
IPCC Intergovernmental Panel on International Development
Climate Change WESM Wholesale electricity
IRENA International Renewable Energy Agency spot market
kWh Kilowatt hour WWF World Wide Fund for Nature
LCOE Levelized costs of energy
MEDP Missionary Electrification
Development Plan
Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

Taking the portfolio as a whole, RE technologies should no longer be

considered only as high-cost, immature options, but potentially as a
valuable component of any secure and sustainable energy economy,
providing energy at low cost with high price stability.
International Energy Agency (IEA 2011, p. 17)

Summary: Key economic arguments for renewable energy

According to international studies (lz & Beerepoot 2010; USAID 2007), the Philippines has a vast potential
for renewable energies (REs) and could become a front-runner in the region for further RE development.
Yet, RE projects still face a niche existence as they are perceived as expensive and not competitive. This study
takes a closer look at these concerns. These are the key arguments:

1. External costs make fossil fuels more expensive than RE (Section 3.1), because of significant
negative health (Section 3.2) and environmental impacts (Section 3.3). Overall external costs
(climate change, health, etc.) from fossil fuels are as high as 927 US cent/kWh. These costs are not
reflected in the electricity price but need to be paid by the society in the Philippines and elsewhere
in the world. Air pollution costs the Philippine economy USD 1.5 billion annually. Five thousand
annual premature deaths may be due to respiratory and cardiovascular diseases from exposure to
pollution in Manila alone.

2. Due to the merit order effect, renewables reduce the overall electricity price (Section 3.4). The
more REs are in the market, the lower the short-run marginal costs that determine the price at the
wholesale electricity stock market (WESM). A simulation for 170 MW of RE in the Philippines
revealed that the merit order effect led to a price reduction worth about PHP 3.7 billion in 2011.

3. The planned feed-in tariff (FiT) will add about PHP 5.4 to a 300-kWh electricity bill. If the
planned FiT regime for 750 MW of RE becomes effective, it will add only PHP 0.02 per kWh to
the electricity bill. A household consuming 300 kWh monthly would only need to pay an additional
PHP 5.4 per month.

4. The RE sector has become a global job engine (Section 3.5) and a major market for investments
(Section 4.1). REs account for almost half of the new electricity capacity installed all over the world.
In 2011, USD 257 billion have been invested into RE capacity. Globally, five million jobs depend on
RE.

5. Levelized costs show that renewables become or already are competitive (Sections 4.2 / 4.3). Fuel
costs for coal have more than doubled since 2010 and are expected to increase in the future. Renewables
have zero fuel costs; further cost reductions are expected due to learning curves: Photovoltaic (PV)
will decrease from 28 US cents/kWh to 19 US cents/kWh in 2015 and up to 9 US cents/kWh in the
long run. Onshore wind is expected to fall to 6.5 US cents/kWh in 2020. Levelized costs for wind,
biomass, geothermal and hydro are already competitive with fossil fuels.

6. Renewables can reduce the import of fossil fuels to increase self-sufficiency (Section 4.4). Prices
for coal have more than doubled since 1990 and are expected to further increase. Almost 99% of the
Philippines coal import comes from Indonesia, which is a factor for high energy insecurity. Taking an
average prize of USD 57.64 per short ton coal leads to USD 768 million for imported coal in 2012.

7. RE can reduce prices and power subsidies in off-grid areas (Section 4.5). Average island electricity
prices are higher than for mainland grids. This makes RE competitive for mini grids. In the Philippines,
30% of all households are not connected to the grid. For these unviable areas, renewables are a
cost-competitive alternative to costly diesel generators. The difference between true costs of diesel
generation and actual electricity selling rates needs to be bridged by a universal charge for missionary
electrification (UCME), paid by every electricity consumer. The UCME leads to estimated costs of
PHP 7.68 billion in 2013, or 11.85 centavos per kWh. True diesel power generation costs in off-grid
areas are between 13 and 20 centavos, and can even reach 28 centavos in some areas.

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 Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

1 Introduction: The costs for renewable energy in the Philippines

Many factors enter the picture when you want to calculate the price for energy sources: the electricity system,
future infrastructure needs, level of demand, future fossil fuel prices, interest rates, policies, carbon prices
and more. All this needs to be considered when talking about future electricity systems. Renewable energies
are often regarded to be too expensive and not competitive with conventional fuels to cover electricity
demands especially in a developing country like the Philippines. This study will have a closer look at the
costs of RE generation with a special focus on the context of the Philippines.

Table 1. Key figures of the electricity sector in the Philippines

Total power consumption 56.84 billion kWh (2010)
CO2 emissions from power 81.15 million Mt (2011)
Household electrification 70.18% (2011)
Share of installed electricity capacity (April 2012) 30% coal, 19% oil-based, 22% hydro, 18% natural gas, 11%
geothermal, 1% biomass, 0% wind and solar
Total burning of coal for 2009 power generation 4.4 MTOE of coal (2009)
Total power self-sufficiency 68.11% (2011)
Coal imported 12,090,482 metric tons (98.4% from Indonesia)
Energy Plan 2030 Most increases predicted for coal
RE target for 2030 15,304 MW
Average retail electricity tariff USD 0.20 (about PHP 8.33) per kWh (2012; Meralco)

The situation of the Philippines electricity sector can be described as complex and tight: Although a variety
of government authorities regulate the energy sector, a process of privatization is ongoing. At the same time,
parts of the Philippines (especially Mindanao) suffer from energy scarcity and blackouts due to constant
growth on the demand side. Renewable energies could change this situation but face a number of barriers
that prevent them from further deployment and development.

The share of renewable energy accounts for 28% of the total power generation. Although geothermal and
hydro power plants are almost solely responsible for this share, the other renewable energy sources such as
wind, solar and biomass are either underrepresented or non-existing. To date, the existing on-grid wind and
solar capacities are the 33-MW Bangui Bay Wind Power Project in llocos Norte and the 1-MW CEPALCO
Solar Power Plant in Cagayan de Oro. The implementation of an RE Law from 2008 is underway but often
challenged by arguments against RE concerning their supposed high costs, uncompetitive nature and their
unreliability. Moreover, the relatively high share of RE in the electricity mix might decrease in the future
as committed and indicative coal power projects in Luzon, Visayas and Mindanao will add a total capacity
of almost 5 GW to the installed capacity until 2020 compared to 1.4 GW of RE at the same time (DOE
2012b).

REs are often considered to be too expensive and not reliable enough for basic energy supply. These are
critical arguments especially in a country like the Philippines, where electricity costs are already among the
highest in Southeast Asia (Suryadi 2011). Power rates in Manila are even the highest all over Asia (Tempo
Online 2012). This study aims to provide a more holistic approach for calculating the costs of RE and
compare their competitiveness with conventional fuel sources. The following argumentation outlines how
renewables can decrease electricity costs, contribute to a reliable energy supply and increase energy self-
sufficiency.

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Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

Structure of the study 2

Arguments against the promotion of RE sources are diverse ranging from economic immaturity to the
destruction of the countryside. This study will focus on two major economic concerns:

Section 3: Renewable energies are too expensive. It is a common perception that renewables are
highly expensive technologies, increase the price of electricity and need further investments in the
energy system. Section 3 will therefore take a holistic approach on the price of RE sources and discuss
further benefits from RE deployment.

Section 4: Renewable energies cannot compete with fossil fuels. It is often said that many RE
sources are still at a stage of early development. They cannot compete with fossil fuels and need to be
highly subsidized. Furthermore, they cannot provide reliable energy. Is this really the case? Section 4
will look closer at the competitiveness of renewables and their contribution to energy security.

Both sections will take a global perspective on these arguments before information will be put into the
context of the Philippines. Final conclusions will be drawn at the end of this study (Section 5).

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 Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

3 Discussing the argument renewable energies are too expensive

It is true that RE technologies require relatively high upfront investments compared to conventional fossil
fuel technologies. It is also true that financial mechanisms like a FiT for RE can increase the overall electricity
costs for consumers. However, this argumentation falls short in a variety of factors that should be included
when talking about the costs and benefits of renewable energies.

3.1 External costs make fossil fuels more expensive than renewables

Any calculation on the costs of electricity should not be limited to the pure production cost for 1 kWh but
needs to be a comprehensive costbenefit analysis that also includes social and environmental benefits from
RE (and vice versa, the cost from fossil fuels).

A report from the International Monetary Fund (IMF 2013) estimates that overall global fossil fuel
subsidies amount to about USD 1.9 trillion annually due to direct subsidies
and externalities. A life cycle-based study (Kiss & Petkovi 2012) focusing
on airborne emissions revealed that fossil fuels exhibit the highest average
external costs (18.3 US cents/kWh for lignite, 10.24 US cents/kWh for hard
coal), whereas RE sources are far below these numbers (0.6 US cents/kWh
for wind, 0.34 US cents/kWh for PV and 0.05 US cents/kWh for hydro).1

Paul R. Epstein et al. (2011) take a whole variety of externalities from coal
into account (government subsidies, greenhouse gas (GHG) emissions, air
pollution, loss of biodiversity, decreased property value, acid rain, etc.) and
concluded that the total cost of these externalities ranges from 9 to 27 US cents/kWh of electricity, with a
median of 18 US cents/kWh. Table 2 shows external costs for different energy sources (Central European
conditions).

Table 2. External costs for energy sources

External costs PV PV Hydro Wind Wind Geo- Solar Lignite Coal Nat. gas
(US cents/ (2000) (2003) 300 kW 1.5 MW 2.5 MW thermal thermal = 40% = 43% = 58%
kWh) on off

Climate 0.86 0.48 0.11 0.09 0.08 0.33 0.11 9.3 7.4 3.4
change1
Health 0.43 0.25 0.075 0.09 0.04 0.15 0.11 0.63 0.46 0.21
Material 0.011 0.008 0.001 0.001 0.001 0.004 0.002 0.019 0.016 0.006
damages
Agricultural 0.006 0.004 0.002 0.002 0.0005 0.002 0.001 0.013 0.011 0.005
losses
Ecosystems2
Sum 1.3 0.74 0.19 0.18 0.12 0.49 0.22 >9.9 >7.9 >3.6
1 Valuation of climate change is based on 90 USD/t CO2 social costs of carbon.
2 Green: no significant impacts / costs worth mentioning; red: impacts /costs will arise that cannot be neglected.
Data from Krewitt & Schlomann (2006).

1 Figures have been converted from Euro into USD based on an exchange rate of 1.28 (April 3, 2013).

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Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

3.2 Fossil fuels have significant negative health impacts (social costs)

Coal may be the cheapest fossil fuel on the market, but its market price does not include social costs.

The Dutch Research Institute CE

Delft calculated that damages
attributable to the coal chain of
custody amount to roughly EUR
360 billion in 2007 attributed to
climate change, human health impacts from air pollution and fatalities due to major mining accidents.
Another study (Preiss et al. 2013) revealed that polluting fine particles from German coal power plants
account for about 3.100 early fatalities annually. These additional costs do not show up on the electricity
bill but have to be paid by society. For example, air pollution costs are not factored in what we pay for fossil
fuel-generated electricity. A Harvard study estimates that full
costs of coal are about $500 billion per year in the US alone.
The paper also breaks down what these external costs from
coal would add to the cost of coal-fired electricity, which
would be roughly 927 cents per kilowatt hour.

3.3 Renewable energies have minor ecological impacts (environmental benefits)

As mentioned earlier, climate change can be a major cost factor for fossil fuels. REs are very effective in
lowering emissions from the electricity sector. Although fossil fuel combustion has contributed to 56.6%
of anthropogenic GHG emissions (in 2004), RE sources have a very low carbon intensity. Their emissions
per unit of energy output equal typically 110% of the emissions from fossil fuels (IPCC 2012, p. 170).
A comparative study on coal, natural gas and PV reveals that CO2 emissions from PV are only 1.83.8%
compared to coal (Olson et al. 2012).

3.4 Due to the merit order effect, renewables reduce the overall electricity price

The merit order ranks available sources of

energy in ascending order of their short-
run marginal costs of production. Those
with the lowest marginal costs will be the
first ones to be bought. As renewables
have very low marginal costs with no fuel
costs at all, they push relatively expensive
electricity sources out of the market
and reduce the costs associated with
the wholesale electricity spot market
(WESM) merit order system, where the
Figure 1. Merit order effect at the electricity spot market price is determined by the most expensive
seller at any given time. The more RE is
traded on the electricity spot market, the
more it will decrease the overall price per kWh electricity at least in theory. In Germany alone, EUR 20
billion were saved between 2006 and 2011 due to the merit order effect (Reuster & Kchler 2013).

3.5 The renewable energy sector has become a global job engine

Renewable energies have not only a positive impact on the electricity market, but also stimulate innovation,
investments and employment. Recent estimates indicate that about five million people around the world
work either directly or indirectly in the RE industries.

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 Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

3.6 The context of the Philippines

External costs from fossil fuels: Direct health costs from coal are hard to measure. However, coal-fired power
plants emit large quantities of toxic air pollutants such as lead and arsenic, or sulfuric acid, and are one of
the largest sources of man-made mercury pollution. The Philippine Environment Monitor estimates that air
pollution costs the Philippine economy USD 1.5 billion annually. The Philippines spends over USD 400 million
in direct costs annually (0.6% of GDP) on health expenses caused by pollution. The World Bank estimates
that 5,000 annual premature deaths comprising 12% of all deaths in Metro Manila (the highest of any city
in the Philippines) may be due to respiratory and cardiovascular diseases from exposure to pollution (Posadas
& Maniego 2012). With regard to the environment, coal-fired plants contribute to water scarcity and destroy
marine ecosystems due to dumping hot water into the ocean. Last but not least, climate change fueled by coal-
fired plants is already damaging the economy of the Philippines (Greenpeace 2012, p. 18).

Savings from the merit order effect: For the merit order effect in the Philippines, an economic dispatch engine
was developed by the Melbourne Institute of Energy to simulate an RE market against actual price and demand
data. Renewable generation (35 MW in the Visayas, 135 MW in Luzon) was simulated in the model to
determine its impact on the market. Overall, the simulation suggests that the merit order effect was equivalent
to a reduction worth approximately PHP 3.7 billion in 2011. This value represents a substantial offset against
any cost of support mechanisms (such as FiT) used to deploy renewables. Depending on the level of support, the
merit order effect may even deliver a net saving to consumers (Greenpeace 2012).

Additional cost due to the feed-in tariff: Among other support mechanisms for renewables, the 2008 RE Law
set the basis for a FiT regime. In 2012, the final rates were approved by the Energy Regulatory Commission
(ERC Philippines 2012) as shown in Table 3. The DOE furthermore has set a target of 750 MW for the installed
capacity that will be eligible for the first FiT regime. Consequently, the overall impact of the FiT will be as low
as 2 centavos per kWh based on an estimated annual generation of 3,186,441 MWh and an average electricity
rate of PHP 6.33 / kWh (as of July 2012). The additional rate from the FiT for the power producer will be the
difference between the electricity rate and ERCs approved FiT rates. Table 3 also shows the FiT impact for the
planned 750-MW additional RE capacity as well as for 2 GW and 5 GW of potential RE capacity.

Table 3. Renewable energy capacity feed-in tariff

Feed-in tariff rate ERC approved Targets for Capacity factor FiT rate impact FiT rate impact FiT rate impact
impact rate 2016 for 750 MW for 2,250 MW1 for 3,750 MW2
PHP MW PHP / kWh
Run-of-river hydro 5.90 250 0.47 -0.006 -0.017 -0.028
Biomass 6.63 250 0.72 0.006 0.018 0.030
Wind 8.53 200 0.275 0.013 0.040 0.031
Solar 9.68 50 0.22 0.004 0.012 0.020
TOTAL 750 0.018 0.053 0.089
These calculations are based on the following assumptions: variable average grid rate = PHP 6.33 / kWh; total annual demand based on
PDP data (projection by 2016) = 78,837.210 GWh; degression rates not applied.
1 This number is divided into 750 MW hydro, 750 MW biomass, 600 MW wind and 150 MW solar.
2 This number is divided into 1,250 MW hydro, 1,250 MW biomass, 1,000 MW wind and 250 MW solar.

Table 3 illustrates that if the current FiT regime becomes effective, it will add less than 2 centavos to the electricity
bill. For a household with a monthly consumption of 300 kWh, this would result in additional monthly costs
of PHP 5.4. Tripling the targets or even multiplying it by five would lead to additional costs of 5 or 9 centavos
/ kWh. These numbers would result in additional monthly costs of PHP 15.9 or PHP 26.7 centavos for a 300-
kWh consumption.

RE as a job engine: With regard to jobs, REs have the potential to create a significant number of jobs. For the
Philippines, Greenpeace presents a calculation based on interviews:

Solar entrepreneurs explained that for each 10 MW plant in the country [Philippines], they hire 1000 people during
construction for 6 months, and 100 people full time. A representative 8 MW run of river hydro plant employs 1000
people during construction and 30 people in permanent full time jobs. [] One geothermal company alone already
hired 2,582 employees []. Seven proposed biomass projects could generate roughly 78,000 jobs to construct power
plants. (Greenpeace 2012, p. 59)

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Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

Discussing the argument RE cannot compete

with fossil fuels 4
It is true that newly installed RE technologies are behind conventional fuels in terms of competitiveness
considering their pure capital costs. However, global trends show an increasing RE market and prices going
down due to learning curves and policy support.

4.1 Renewable energies already dominate investments in the electricity sector

Renewables account for almost 50% of all newly installed electricity capacity all over the world. From 2008
to 2009, 140 out of 300 GW
of newly installed electricity-
generating power came from
RE (IPCC 2012). In 2012
alone, USD 244 billion have
been invested into new RE
capacity. Almost half of all
investments have been made
in developing or emerging
economies. At the end of
2012, the total installed RE
capacity exceeded 480 GW
(a growth of 21.5% within
one year), not including
hydro, that accounts for the
additional 990 GW. Also, in
2012, 45 GW of wind and
30 GW of solar capacity have Figure 2. Global investments and installed capacity of RE sources
been newly installed (REN21 (data from REN21 2013)
2013). Table 4 shows that
various sources see a sustainable long-term market development for RE-installed electricity capacity.

Table 4. Sources for RE-installed capacity

(Expected) installed capacity Hydro1 Wind Solar PV CSP Biomass Geothermal Ocean
(in GW)
2006 capacity (REN21) 74 8 0.4 45 9.5 0.3
2011 capacity (REN21) 990 283 100 2.6 83 11.7 0.5
2030 (IEA WEO 2012) 1,580 920 490 40 210 40 10
2030 (IEA ETP) 1,640 1,400 700 140 340 50 20
2030 (Greenpeace 2012) 1,350 2,900 1,750 700 60 170 180
1 Hydropower 2011 excludes pure pumped hydro capacity; a comparable figure for 2006 is not available.
Data from REN21 2012, p. 53; REN21 2013.

The IPCC (2012) concludes that as much as 43% of global energy demands could be met with RE by 2030
and up to 77% by 2050. Other plans even work out how to cover 100% of energy demand with RE globally
or for specific countries (Jacobson & Delucchi 2011; SRU 2011; WWF 2011).

4.2 Levelized costs show that renewables will become or already are competitive

Levelized costs of energy (LCOE) are costs for generating electricity for a particular system. It is a systematic
economic cost assessment including all the costs over its lifetime: initial investment, operations and
maintenance, cost of fuel, cost of capital (NREL 2013). Table 5 shows the LCOE for conventional and
renewable sources.

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 Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

These numbers reveal that REs are already or will become in the foreseeable future competitive.

Table 5. Levelized costs of energy for conventional and renewable sources

LCOE (in US Coal Nat. gas Nuclear Wind Solar PV Biomass Geothermal Hydro
cents/kWh) (onshore) power
2008-2012 data 1-12 2-7 4-12 4-11 15-54 1-17 4-14 2-12
2030 estimations 5-9 5-11 4-6 3-7 6-31 4-10 3-13 2-9
2050 estimations 4-9 6-10 4-6 3-7 5-31 5-10 3-10 2-9
Data from US DOE & NREL 2013.

Various scenarios show a significant decrease in electricity production costs from RE. Learning curves for
PV (Hernndez-Moro & Martnez-Duart 2013) and wind (IPCC 2012) demonstrate a strong price decline.
To give an example of the amount of price reduction: The average price for one Watt of electricity from PV
has fallen from USD 65 in 1976 to USD 1.4 in 2010 (Nuccitelli 2011).

Left: Electricity production costs for the case of Germany (Kost

et al. 2012).
Right: Selected experience curves for the price of silicon PV
modules and onshore wind power plants per unit of capacity
(IPCC 2012, p. 15).

Figure 3. Electricity production costs and price experience curves

According to a Bloomberg New Energy Finance working paper (Baziliana et al. 2012), PV module prices
have fallen by 75% between 2010 and 2012, making solar power already competitive with daytime retail
power prices in a number of countries. Joachim Nitsch et al. (2012) calculate that electricity production
costs for solar PV will decrease from currently 28 US cents/kWh to 19 US cents/kWh in 2015 and up to 9
US cents/kWh in the long run. Onshore wind is expected to fall to 6.5 US cents/kWh in 2020 and offshore
wind to 9 cents/kWh. Further RE cost reductions are most likely (IPCC 2012).

4.3 There are no fuel costs for renewable energies, but fuel costs for coal increase

The key aspects determining the costs of RE systems are their investment cost and local conditions (solar
irradiation, maintenance, etc.). This is different for conventional power plants: Their electricity generation
costs have become dominated by fuel costs, which are expected to increase. Once installed, RE sources
will generate no costs for fuels like it is the case for coal or oil. This makes them independent from future
energy price increases and guarantees a long-term investment. Furthermore, it makes indicative mid-term
generating costs of new power plants from gas, coal and wind competitive at about USD 4045 per MWh
(IEA 2004, p. 195). As fuel costs account for about USD 20 (coal) to USD 30 (gas) per MWh, renewables
have even higher long-term advantages. RE minimizes fossil fuel-driven price inflation, thus stabilizing the
economy and protecting it from fluctuation. This is especially true for coal- or oil-importing countries like
the Philippines.

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Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

4.4 Renewables can reduce the import of fossil fuels to increase self-sufficiency

Future cost developments are much easier to predict

for renewables, because they mainly depend on the
technologys maturity, its further development and
site-specific conditions, but they do not depend on
fuel costs. As the price for coal has increased and
is predicted to further increase, renewables can
substitute expensive fossil fuel imports in countries
that have no or only little domestic resources. A
calculation for Germany shows that the country
saved 2.9 billion Euro worth of imported fossil
energy in the electricity sector alone through
the use of renewables (BMU 2012). Further RE
promotion has therefore the potential of decoupling
costs from price fluctuation and increasing fossil
Figure 4. Price development for fossil fuels
fuel prices. This improvement of price stability is
1990-2011 (data from BP 2012; EIA 2012)
especially important for developing countries.

4.5 Renewables show a price advantage especially on small islands

Some RE technologies are broadly competitive with current market energy prices. Others can provide
competitive energy services under certain circumstances e.g. for islands and off-grid areas. REs have the
potential to generate energy in a decentralized mode from many small sources close to the consumer. They
can be advantageous for regions lacking centralized energy access and contribute to alleviating energy
poverty (IRENA 2012). Island states can benefit from RE:

as their reliance on diesel-fired generation is not only expensive [high oil prices and low average efficiency], but also
threaten the islands energy and economic security. [] Renewable power generation options represent a competitive solution
for meeting demand growth, particularly for remote off-grid electrification and for outer islands, where diesel costs are high
and logistical problems (e.g. infrequent shipping schedules, inadequate port facilities, long lead times for parts, etc.) make
renewables particularly attractive and economic (IRENA 2012).

To guarantee stable and reliable supply, hybrid systems can also be useful, where solar or another RE source
can be paired with wind and/or other sources of energy.

Figure 5. Levelized costs of RE power generation technologies and typical island electricity price
PT = parabolic trough, ST = solar tower, BFB/CFB = bubbling fluidized bed / circulating fluidized bed, AD = anaerobic digester, CHP =
combined heat and power (IRENA 2012).

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 Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

4.6 The context of the Philippines

Future investments: Globally, REs dominate newly installed electricity capacity and will gain the majority
of future investments in the electricity sector. As the Philippines is identified with high potentials for
RE sources (lz & Beerepoot 2010; USAID 2007) the country could become a regional front-runner.
However, political commitment and incentives are needed to facilitate investments. Table 6 shows the
technical available and installed capacity of RE in the Philippines.

Table 6. Available and installed capacity of RE in the Philippines

Hydropower Wind Solar PV Geothermal
Technical potential 13,097 MW 7,404 MW 5.1 kWh/m /day;
2
2,600 MW
298,170 km2 area
Installed capacity 3,491 MW 33 MW 1 MW 1,783 MW
Data from DOE 2013b; Lidula et al. 2007.

RE cost competitiveness: Levelized costs and learning curves experiences and scenarios from the OECD
countries are quite applicable to the Philippines due to the high electricity generation costs in the country.
Table 7 shows that the data for the Philippines indicate that most REs might have higher capital costs
than fossil fuels but mostly lower generation costs.

Table 7. RE costs in the Philippines

Coal Bunker C Natural gas Geothermal Small hydro Wind Solar PV1
(oil)
Capital cost 1,000-2,000 1,000-2,000 750 >2,000 1,800-2,000 2,000 5,300
(USD / kW)
Generation cost 6.7 13.9 6.1 7.7 6.4 7.8 28 (7)2
(US cents / kWh)
1 Data based on the CEPALCO 1-MW PV showcase project.
2 The 28 US cents / kWh is the selling rate required by CEPALCO only to recover its USD 1 million equity. As the PV substitutes CE-
PALCOs hydro generation during daytime, the output is sold at the selling rate for hydro of 7 US cents/kWh.
Data from USAID 2007, p. 19.

Increasing fuel costs for coal: 30% of the electricity demand in the Philippines is covered by coal it is
the major source for electricity supply. Despite the countrys rising coal production in 2012 (8.153 million
metric tons), coal imports (12.090 million metric tons) are much higher than domestic production, of
which 98.4% come from Indonesia (DOE 2013). Taking a coal price of USD 57.64 per short ton as shown
in Section 4.4, costs for the amount of coal imports in 2012 would be roughly USD 768 million per year.
Although the Indonesian government has dropped plans to restrict coal exports or impose taxes on coal
shipments, these scenarios are still likely in the future. Indonesias need for coal will increase strongly, so
exports will need to be controlled, said Indonesias Energy and Minerals Minister Jero Wacik in June 2012
(Reuters 2012). Not only direct fuel coal prices will affect the cost for electricity in the Philippines. Dennis
Posadas and Pete Maniego demonstrate how the global coal price affects the Philippines energy market:

When the P7.40 per kWh rate was approved for Panay Energy Development in June 2011, the price of coal at that time
was $53 per metric ton. As of January 2012, the Newcastle coal price index reached $116 per metric ton. [] Remember the
Pass-Through Cost Provision in the Power Purchase or Electricity Supply Agreement? The rule-of-thumb is that every $10
per metric ton increase in coal price would result in a P0.21 per kWh increase in power rate. The increase in coal prices of
$63 would translate to the new adjusted rate of P 8.70 per kWh. (Posadas & Maniego 2012)

In addition to that, oil-fired plants already need to compensate for the unavailability of coal. Even electricity
companies like Meralco explain how this practice leads to higher electricity prices and justified increasing
prices in 2012 with the reliance on more expensive, oil-fired plants to compensate for the unavailability
of some coal and gas fired power plants that were on outage [] (Remo 2012). On the other hand, the

14
Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

Philippines saved over USD 7 billion through the displacement of imported fuels with geothermal power since
1977. In 2005, the DOE estimated financial benefits of more than USD 1 billion from the use of RE in a
pricing study (Greenpeace 2012, p. 57).

Subsidies for diesel generation in off-grid areas: Due to its geography, the archipelago of the Philippines
have a vast potential for small island electrification with the help of RE applications. The Missionary
Electrification Development Plan (MEDP) for the Philippines (DOE 2012a) reveals that electricity prices on
small islands have to be subsidized: The average true cost generation rate in 14 National Power Corporation-
Small Power Utilities Group (NPC-SPUG) first wave areas (8.42 pesos/kWh) is almost 50% higher compared
to the subsidized generation rate (5.645 pesos/kWh). Because these high costs are mainly due to diesel fuel
prices whereas REs have no costs for fuel or fuel transportation, it makes RE competitive on small islands.
In the Philippines, the NPC-SPUG is responsible for electrifying off-grid areas that are not viable for private
sector participation and enhance missionary electrification. Most of these areas receive their power from diesel
generation that needs to be heavily subsidized due to high true power generation costs. Figure 6 provides
an overview on true diesel generation, predictions for 2020 and effective selling rates in NPC-SPUG areas,
showing that true costs are not reflected in prices.

Genera. Costs True Costs Selling Predict

Area 2012 2012 2012 Rate 2012 2020 1
MWh* Th PHP** PHP/KWh***
1 Basco
5,378 75,555 14,04 6,59 34,27
BATANES
2 Lubuagan
722 11,942 16,52 5,76 40,10
KALINGA
3 Polilio 2
5,511 76,720 13,92 6,59 33,50
QUEZON
4 Palumbanes
20 439 21,56 6,59 48,92
CATANDUANES 3
5 Cabra 4
47 937 19,80 5,75 42,11
MINDORO
6 Alad
106 2,976 28,03 6,59 67,90
ROMBLON 5
7 Caluya 6
1,433 27,066 18,89 6,84 41,94
LEYTE
8 Camotes 9 7
9,277 142,436 15,35 6,07 37,25
CEBU 8
9 El Nido
5,397 80,599 14,93 6,59 37,79
PALAWAN
10 Siquijor 10
18,206 281,932 15,49 6,07 n.a.
SIQUIJOR
11 Talicud 11
662 11,175 16,87 6,27 40,32
DAVAO D. NOR.
12 Basilan 12
33,817 463,126 13,70 6,58 32,21
BASILAN
13 Manuk Mankaw 13
168 2,950 17,60 6,27 40,23
TAWI TAWI
Figure 6. Overview on diesel generation, predictions for 2020 and selling rates in NPC-SPUG areas
* Rounded to MWh; ** rounded to Th PHP; *** rounded to two decimal figures.
Source: http://www.spug.ph/MEP2012-2021.asp (May 9, 2013).

The difference between the true costs of diesel generation and the actual electricity selling rate needs to be
bridged by a subsidy that is known as the UCME. The UCME needs to be paid by every electricity consumer.
According to the MEDP of the DOE (2012a), the total UCME leads to estimated costs of PHP 7.68 billion
in 2013, or about 11.85 centavos per kWh.

These numbers are expected to increase to PHP 12.57 billion in total or 19.41 centavos per kWh in 2016.
These numbers alone demonstrate a high competitiveness of renewable energies or hybrid generation systems
in off-grid areas compared to fossil fuels due to high costs for diesel generation in these areas.

15
 Renewable energy in the Philippines: Costly or competitive? Desk Study | June 2013

5 Conclusions

This short study has demonstrated that there is much more to say about the price of RE than too expensive
or not competitive. Putting together the pieces of this cost analysis and the key economic arguments
outlined in the beginning, we can draw the following conclusions:

Cost comparisons of electricity sources should take not only the pure production cost into account,
but also include direct and indirect fuel and technology subsidies, environmental costs and fossil
fuel price risks. The IEA (2012) estimated that global subsidies to fossil fuels exceeded USD 520
billion in 2010, compared to USD 90 billion in policy support for RE.

Due to increasing fuel prices for coal and gas, on the one hand, and decreasing technology prices
for RE (learning curves), on the other hand, REs have especially mid- and long-term benefits not
only for the environment and the society, but also economically. This should be kept in mind not
only for future energy planning, but also for current decision-making. Every new coal power plant
that is built today determines electricity supply for the next 3040 years.

Some RE technologies like hydro or geothermal are already broadly competitive with current
market energy prices especially in the Philippines, where costs for geothermal or hydro can
be even lower than for fossil fuels. Others can provide competitive energy services under certain
conditions like for small island off-grid areas. However, policy measures and support mechanisms
are still required to ensure rapid deployment of many RE sources (IPCC 2012, p. 796). These can
be justified with the wide range of benefits outlined above as well as from a sustainable future
energy planning point of view.

Like many other developing countries in Southeast Asia, the Philippines shows a tremendous process of
constant economic growth accompanied by even faster growing energy demand, environmental degradation
and energy scarcity. RE can highly contribute
to the fulfilment of the Philippines Energy
Reform Agenda (ensure energy security,
achieve optimal energy pricing and develop
a sustainable energy system) as well as to
the countrys future energy needs. Although
some technologies like hydro or geothermal
are already broadly cost-competitive, other
RE sources still encounter economic barriers.
These should be overcome with strong political
commitment and policy support mechanisms
that, among others, attach a price signal to
ecological, social and macroeconomic benefits Figure 7. The role of policy to influence RE
from RE to reflect real prices and to progress competitiveness (adapted from IEA 2011, p. 17)
down the learning curve.

Having developed geothermal power and having established a strong geothermal sector in the past, the
Philippines has already made impressive efforts to provide clean and reliable energy while increasing energy
independence. Today, technologies are available to go further and make use of the vast resources of wind
and sun, as well as ocean and biomass in the Philippines rather than relying on increasing energy imports
for coal and gas.

16
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