After Fukushima, quo vadis renewable energy?

by
Thursday, 4 August 2011

In the aftermath of the Japan nuclear crisis, investor confidence in renewables rose as the public and investors recoil from nuclear energy.  Public perception of events was likely to taint the reputation of nuclear power and significant investments in nuclear power are expected to be delayed or deferred.  The tragedy comes on top of the oil price rise because of industrialization in China and India, the BP disaster in the Gulf of Mexico, unrest in the Middle East and North Africa – all of which has made renewables more attractive.

But some doubted that the accident would benefit renewables. In her analysis, Scotiabank economist Patricia Mohr suggested the “more lasting impact of the incident at the Fukushima-Daiichi Nuclear Power plant…will be to trigger a re-examination of nuclear safety procedures and reactor technologies around the world and to slow the development of nuclear power.” Over the medium-term, Mohr anticipates some shift from nuclear energy to imported LNG in Japan and natural gas-fired power generation in the U.S. and parts of Europe, “Wind and solar power (alone) are not viable choices for large-scale ‘base-load’ electricity generation.”

Japan’s nuclear disaster will result in nuclear power as politically unacceptable and intensify the global race for fossil fuels with most future energy research and development going into nuclear safety.  European governments are stepping up efforts to assess nuclear safety and agreeing in principle to a series of “stress tests” for nuclear power stations. It is expected that nuclear power may be hit most by rising safety and insurance costs after Fukushima.

On 04 April 2011, the New York Times ran a story about the new pragmatism that is influencing energy policy. The report cited Richard Heinberg’s theory of “peak everything,” which suggests that the world is running short of vital assets like clean water, carbon-free air, some minerals, fish stocks and the cheap fossil fuels that have powered the world economy and helped rein in the price of food.  However, alternative energy sources, as well as renewable energy, are more expensive and would force the world into a more frugal future according to Heinberg.

The 2007-2035 Philippine Energy Plan of the Department of Energy (“DOE”) urged the reconsideration of a nuclear power program amidst rising oil prices. The Philippines has gained a new record, that of having the most expensive electricity in Asia as reported by the Manila Electric Company to the power and energy committee of the Philippine Chamber of Commerce and Industry (“PCCI”) on 03 February 2011. The study had shown that with an average retail rate of electricity of 18.1 US cents per kilowatt/hour, the Philippines has topped Japan whose rates were at 17.9 US cents per kilowatt/hour.  The high cost of electricity is because all costs from producing power to distribution and taxes are passed on to consumers in the absence of state subsidies.

DOE Secretary Rene Almendras earlier commissioned a study to assess the benefits of the Bataan Nuclear Power Plant (“BNPP”).  For Almendras, the biggest issue has always been seismic considerations with lessons from the disaster in Japan to be incorporated into any policy decision. While the disaster would not stop the ongoing DOE technical study, Malacañang insists it is standing pat on its decision to sideline the revival of the BNPP.

On the RE front, regulators grapple with commercial-viability issues affecting the sector, as wind and solar remain prohibitively expensive to produce. Environmental advocates and RE developers are pushing the government to expedite the implementation of the mandated regulations on renewable portfolio standards (“RPS”) and feed-in tariff (“FiT) rates. The developers are proposing an installation target totaling 1,482-MW from 442-MMW biomass plants, 420-MW solar power plants, 340-MW for wind power plants, 30-MW for ocean and 250-MW hydropower plants.

The DOE Renewable Energy Management Bureau, however, could only confirm a total of 790-megawatt of total generating capacity from 170-MW run-of-river hydropower plants, 370-MW biomass, 20-MW solar photovoltaic systems, 220-MW of wind generating capacity and 10-MW of ocean power generating capacity.  Power plant investments targeted for RE projects could only go as high as 830 MW for the next three years, as the National Renewable Energy Board (“NREB”) set the cap to meet the national grid’s absorptive capacity.  According to the NREB the approval of the 830-MW installation targets was also conditional and could be adjusted depending on the grid impact study to be submitted by the National Grid Corporation of the Philippines.  The grid must have enough buffers to absorb and cover the sudden losses of power supply from RE sources, thus the NREB cannot recommend installation targets that are beyond the grid’s absorptive capacity.

Power consumers may have to bear an additional charge of 11.38 centavos a kilowatt-hour from the use of RE sources once the Energy Regulatory Commission (“ERC”) approve the proposed FiT rates.  The proposed FiT allowance of 11.38 centavos a kWh is actually lower than the industry proposal of 16.45 centavos. Once approved, the FiT-allowance will be implemented by 2014 when all the expected RE facilities that would generate a combined 830 MW would have started operations.

Meanwhile, the ERC is also mulling over the approval of FiT rates for each RE source separately, some earlier than others, to allow developers to move forward and get financial closing for their proposed power projects.  The FiT measure is the most awaited mechanism under the RE Law because it will determine the economic and financial viability of RE projects.  The FiTs intend to mitigate demand-side risks in the face of inherent production variability by ensuring purchase by all grid-connected consumers at a guaranteed long-term fixed price.  However, the PCCI urges government to ensure that the costs of RE will not be too restrictive for consumers.  Injecting RE into the grid could jack up already high electricity prices and further reduce the country’s competitiveness. The PCCI suggested that by careful planning of the country’s RPS, the government should take into consideration the possible impact of RE on both overall generation and transmission costs, as well as the high initial cost of putting RE and the associated developmental costs.

A high FiT rate will tie consumers for the duration of its implementation while the consequence of low FiT rates is that the ERC can fine-tune the pricing in subsequent years. The lack of takers should have no consequence on power supply since RE is not expected to be part of baseload. The cost of RE technologies is expected to decline over time with more efficient technologies still to emerge. Perhaps it would be prudent on the part of regulators not to rush FiT rates or consumers may be facing another backlash similar to the outcome of the take-or-pay provisions entered into by the Philippine government with independent power producers in the early 1990s.  In the meantime, environment advocates, RE developers and consumer groups are eagerly anticipating how the government will address the issue.

Fernando “Ronnie” Peñarroyo is the Managing Partner of Puno and Peñarroyo Law Offices (www.punopenalaw.com).  He acquired his Bachelor of Science in Geology and Bachelor of Laws from the University of the Philippines and Master of Laws from the University of Melbourne.  He specializes in Energy and Resources Law, Project Finance and Business Development.

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