March 16, 2018 Read More →

IEEFA Philippines: ‘Opportunities Now to Transform the Nation’s Energy Sector’

A ‘Least-Cost Mechanism’ Would Encourage Modernization

March 16, 2018 (IEEFA) — Rapidly declining costs and technological advances in renewable energy, liquefied natural gas (LNG), energy efficiency, and storage are creating an “enormous opportunity” for greater use of cheaper electricity-generation domestic alternatives to imported coal and diesel in the Philippines, concludes a new research brief published by the Institute for Energy Economics and Financial Analysis.

“As the Philippines plans for its future energy needs, it can and should take note of these developments and respond accordingly,” said Sarah Ahmed, an IEEFA energy finance analysts and author of the brief. “There are opportunities now to transform the nation’s energy sector into one built around sustainable resources while simultaneously cutting costs.”

Excessive reliance on imported coal is one of the main reasons the Philippines has the highest electricity prices in the Association of Southeast Asian Nations (ASEAN) region, Ahmed said.

“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,” she said.

The brief —“The Least-Cost Mechanism – Lower Philippine Electricity Prices Through Greater Competition” —sees current market structures as slowing the adoption of cleaner and increasingly cheaper electricity-generation resources.

“The Philippines government can inject more diversity and more energy security into the electricity system—while helping lower costs consumers— through a technology-neutral procurement and least-cost mechanism bidding process,” the brief states.

It outlines a step-by-step approach:

  1. The distribution utility issues a call for technology-neutral tenders to install a certain amount of electricity. Ceiling prices should not be disclosed to project developers that want to participate to ensure greater competition. Streamlined administrative procedures, with communication and transparency provided equally to all project developers, are essential.
  2. Participating project developers submit a price per unit of electricity at which they will build the project. Utilities can use one of two ways to entertain submissions:
  • Project developers simultaneously submit their price at which the electricity would be sold under a PPA. A third-party manager or the utility ranks and awards projects until the sum of the quantities that they offer covers the volume of energy being requested. This option has the benefit of simplicity, is easy to implement, fosters competition and avoids collusion. Post tender award disclosure of all final submissions also would improve transparency.
  • In the initial round, the third-party manager or the utility offers a price, and developers submit the amount of power they would be willing to provide at that price. The third-party manager or the utility then progressively lowers the offered price in successive rounds until the quantity submitted matches the quantity to be procured. This option is more difficult to implement but allows for fast price discovery as well as greater transparency.
  1. Each offer is screened by the utility for viability (including proof of financial capability, secured land, environmental license, grid connection, etc.) and then selected based on price, starting with the least-cost project, until the utility reaches its megawatt-hour (MWh) limit for that round. Each offer is subject to strong compliance rules (including penalties, submission bonds, project completion guarantees, etc.) that reduce the risk of under submissions, project delays, and project failure.
  2. Capacity remaining at the end of each round is added to the next round.
  3. Winning submissions are given a standard contract from the utility, which can then go through an expedited regulatory review process before the Energy Regulatory Commission (ERC).
  4. The ERC evaluates the contract based on the LCM price and other criteria the ERC deems relevant.

“IEEFA suggests that adopting a least-cost mechanism (LCM) would introduce greater competition into the generation sector,” Ahmed said. “Adopting the least-cost approach we describe here would benefit all involved.”

Full research brief: “The Least-Cost Mechanism – Lower Philippine Electricity Prices Through Greater Competition”


Media contacts:

Philippines — Sarah Ahmed sahmed@ieefa.org

U.S. — Karl Cates 917-439-8225 kcates@ieefa.org

ABOUT IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.

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