International perspectives

A Struggle between Coal and Renewable Energy in the Philippines

The struggle between coal-fired and renewable energy plants in the Philippines is heated.

By Pete Maniego Jr, Chairman, National Renewable Energy Board, Philippines April 2016

After more than seven years since the passage of the Renewable Energy Law (RE Law) in 2008, the Philippines has finally gained momentum in the development of renewable energy resources. As of April 2016, more than 1,000 MW of renewable energy projects had been completed under the Feed-in Tariff System (FIT) of the RE Law.

Almost all of the 1,000 MW installed renewable energy capacities were completed within the last two-and-a-half years. In addition to installations under the FIT, approximately 2,500 kW have been installed under the net metering mechanism. During the construction and subsequent operations of the renewable energy plants, conservative estimates pegged the number of jobs created to around 100,000.

At first glance, it would appear that renewable energy is winning the battle against fossil fuel. However, the reality is closer to the opposite. New coal and natural gas plants built since the passage of the RE Law have much higher capacities, and have substantially reduced renewable energy’s share in the power mix.

At present, there are 17 operating coal plants with several expected to go online within the next several months. Greenpeace Philippines reported that another 29 plants are in the pipeline. In addition, there are five natural gas plants, two of which started their operations in April 2016. According to Mr. James Ooi, IHS Senior Director for Gas & Power in Asia Pacific ‒ “If coal projects are implemented as planned, Luzon’s coal generation share will be over 75% by 2030, and many coal plants will be uneconomic”. He observed that this will make the Philippines the country with the highest coal share in Asia. It would be a complete reversal for the country where the share of renewable energy reached a high of 44% in 1999, and that until now boasts of having the highest renewable energy share in Southeast Asia.

When the RE Law was passed in 2008, the share of renewable energy in the power mix and the installed capacity were both at almost 34%. As of December 2014, the share of renewable energy in the power mix in MWh was down to 25.6%, while the share of the total installed capacity in MW declined to 32.8%. If the rate that new fossil-fired power plants are being constructed continues, with capacities ranging from hundreds of MWs to GWs, the share of renewable energy will continue to decline in the coming years.

The Philippines has other apparent barriers to fossil fuel development. On top of the RE Law, the Philippines has one of the most stringent laws to control air pollution. The mandated standards under the Clean Air Act of 1999 are considered to be stricter than those of the United States. The Philippines had also committed to reduce its GHG emissions, conditionally, by 70% from business-as-usual under COP21 by 2030.

What then are the reasons why fossil-fired plants, especially coal, continue to be favored by the power sector over renewable energy?

The primary reason is that the Philippines has one of the highest electricity rates in the world. Thus, any incentives or measures perceived to increase the power rates will encounter strong resistance from end-users, civil society organizations and politicians. The drastic reduction in coal prices since last year delayed the much anticipated renewable energy to coal fuel parity.

Moreover, coal has many inherent advantages over renewable energy under the current regulatory regime. Under the current pricing regime that does not include externalities, such as health and environmental costs, the lowest cost power supply option will always be favored. Fossil-fuel plants are secure investments providing continuous revenue streams, since the proponents could avail themselves of automatic pass-through of their fuel costs to consumers. On the other hand, renewable energy projects are considered to be high risk investments as the resources fluctuate widely from year to year. Financing institutions are very familiar with coal plant development, and power companies are well-versed in their construction and operations. With respect to renewable energy projects, the Philippines has not yet gained sufficient experience in their development and operations and must rely heavily on foreign contractors. Thus, renewable energy project costs in the Philippines are much higher compared to Europe and the United States.

The proliferation of coal plants would also make the grid integration of variable renewable energy more difficult. Coal plants cannot be turned on and off to cope with intermittent renewable energy supply. The Electric Power Industry Management Bureau of the Department of Energy has projected that the coal plant generation will exceed the baseload demand in the Luzon, Visayan and Mindanao grids once the new coal plants are fully operational within the year. With their current low costs per kWh, the generation from these coal plants is already displacing geothermal and hydropower plants. Although the short term impact would be lower electricity rates, what would happen once fossil fuel prices inevitably rise to their former levels? Already, the exploration and development of many hydropower and geothermal plants are on-hold as they could not compete with coal.

What are approaches to counter the inherent advantages of coal-fired plants?

  1. A shift from centralized generation to distributed generation in the Philippines The Philippines consists of more than 7,100 islands; interconnecting even all the bigger islands would be prohibitive and not feasible. The interconnection of the major islands had not been accomplished; Mindanao is not connected to Luzon and Visayas yet. Many of the submarine cables need to be upgraded to handle both the increased supply and demand. With more than 20 typhoons visiting the Philippines per year, transmission lines are frequently damaged, causing long black-outs and requiring costly restorations. Moreover, the long transmission lines cannot be sufficiently guarded and are subject to vandalism and sabotage.
  2. A re-examination by the Energy Regulatory Commission of pass-through costs for fossil-fired plants Pass-through costs for fossil-fired plants shield against fuel price fluctuations and provide them an undue advantage over renewable energy sources. For big business, coal plants are virtual money machines with minimal risks and certain returns. The return on capital expenditures and operating expenses are guaranteed under power purchase agreements for 20 to 25 years. It is true that renewable energy plants are entitled to FITs. However, the developmental risks are much higher, the installations are subject to caps, and approval of new rates once the caps are exceeded could take six months to a year.
  3. Implementation of all other mechanisms under the RE Law such as the Renewable Portfolio Standards, Green Energy Option, Renewable Energy Market and Renewable Energy Trust Fund Renewable Portfolio Standards would mandate distribution utilities to augment their power supply with renewable energy sources. The Green Energy Option would enable end-users to demand clean energy as well as benefit from the exemption of renewable energy supply from value-added tax. The Renewable Energy Market would facilitate trading in Renewable Energy Certificates. The Renewable Energy Trust Fund would provide funds for research and development, training and information dissemination.
  4. Implementation of the provisions under the Clean Air Act and the Solid Waste Management Act The communities living around coal plants and garbage dumps have already suffered for too long from pollution-related health problems, environmental impacts and hazards. The responsible regulatory agencies and local government units must ensure that these plants and unsanitary landfills comply with all the standards under the law and severely penalize them for failure to do so.

Coal plants appear to be coming out ahead in their struggle against renewable energy sources. How could coal plants be prevented from sealing a victory?

The Philippines could follow the examples of Germany and other countries in pushing for a renewable energy transition, including closing old coal plants and preventing the construction of new ones. The Philippines would need to focus on renewable energy development in order to retain its leadership position in renewable energy utilization. The policy and objectives under the RE Law of 2008 were very clear: develop indigenous renewable energy sources to achieve energy independence and mitigate GHG emissions. The 70% GHG reduction committed by the Philippines under COP21 is achievable, but these policy directions and actions are needed if the Philippines’ targets are to become reality.