Paying less for more - How auctions can transform the Philippines power sector

During President Rodrigo Duterte’s fourth State of the Nation Address, he called for the expedited development of renewable energy to reduce dependence on imported fossil fuels such as coal: “We recognize the urgent need to ensure the sustainability and availability of resources and the development of alternative ones. In this regard, I trust that (Energy) Secretary Cusi shall fast-track also the development of renewable energy sources, and reduce dependence on the traditional energy sources such as coal.” It is clear that Secretary Cusi is mobilizing the Department of Energy to heed the President’s call for low-cost renewable energy.

The Green Energy Tariff Program (GETP), to be introduced this year targets 2000 megawatts (MW) of new installed capacity, an investment value equivalent to USD2 billion (generation only, excluding transmission and distribution and storage). This program is timely, considering that this past June, the Luzon grid was placed under red alert, the most urgent warning of a potential power shortage; signalling available capacity was 10,962MW while peak demand reached 11,134MW. New energy supply installation is taking longer than expected1. Moreover, the Philippines has the third most expensive electricity in Asia, behind only Singapore and Japan, so a more competitive framework to reduce prices is crucial to future competitiveness.

The GETP draft circular indicates that the policy will be designed around a price cap and a renewable energy auction administered by the Department of Energy and a Green Energy Allocation Committee appointed by the Secretary of Energy. This is a good step in the right direction; the Department of Energy can achieve better pricing by refining its competitive auctions framework to address the competition shortcomings of previous policies. It would create a system that promotes competition and flexibility, while being resource efficient, and complementing the planned transmission line expansion to enable grid access. Just as important, it would improve the bankability of the GETP, permitting it to go beyond its initial design to facilitate compliance with the Renewable Portfolio Standard (RPS) requirements.

India, Brazil, Chile and Peru have all shown that competitive auctions can make it possible to surpass new capacity targets, providing lower-than-forecasted prices to consumers and industry. Now renewable energy procurement policy is at a turning point in Southeast Asia with the low prices achieved Cambodia’s recent auction, the magnitude of Malaysia’s ongoing large-scale solar rounds, and Vietnam’s decision to pivot away from feed-in-tariffs (FiT) toward auctions.

These recent successes support the view that the most effective strategy for GETP would be to implement geographic and resource-specific auctions to maximize price competition and resource efficiency across the archipelago. The system would also benefit from the introduction of targeted submarkets for the 2,000MW of planned renewable energy capacity. In addition to grid-connected distributed energy resources (DER), the strategy would enable auctions for island electrification, off-grid electrification, and renewable energy parks, positioning the Philippines to benefit from the best new technology.

Global capital could come from China’s Belt and Road Initiative and clean energy funding programs initiated by the Asian Infrastructure Investment Bank (AIIB) and the Asian Development Bank (ADB). Philippine banks such as BDO Unibank Inc are also well positioned to take the lead in green financing. They are well placed to support initiatives such as the USD 2.0 billion, 2000MW first phase of the GETP. If the Philippines Government can use this program to align with sector best practices, we estimate that the Green Energy Tariff Program could be a catalyst for USD 20 billion of renewable energy and energy efficiency investment over the next 10 years. This finding is supported by research from the National Renewable Energy Laboratory (NREL) of the United States, which indicates that the Philippines could support a variable renewable energy (wind and solar) power generation mix of more than 50% by 2030.