Coal vs renewable energy from a cost perspective

MANILA, Philippines—People often assume that they can save with a variable cost as opposed to taking on a fixed cost over time.

Examples of this tendency is using the normal SLEX route instead of the Skyway or choosing adjustable over fixed mortgage rates.

Implicit in the argument is why someone should sign on to a fixed cost, when he/she can control the variable cost which, in this case, is the amount of gas one uses up in traffic or the interest rate.

For most people, they find that the higher cost of just cruising on a traffic free Skyway is actually cheaper than getting stuck in traffic at over P50/liter of gasoline.

So in most cases, a fixed seemingly expensive cost is cheaper than a variable cost.

Recently, there has been a lot of opposition to the fixed cost rate to be levied to consumers on renewable energy sources called the Feed-in-Tariff (FiT), especially since they say the price of coal-sourced electricity is cheap.

Opponents point to FiT’s similarity to the Take-or-Pay system instituted during the Ramos administration.

In the early 1990s, the government was practically forced to enter into more than 40 Take-or-Pay contracts with Independent Power Producers (IPP) to quickly solve the energy crisis.

Before these new power facilities went online, there were daily brownouts lasting for over 10 hours. The high cost of power supplied by these IPPs is one of the major reasons why the Philippines has one of the highest electricity rates in the world.

But to be fair to the Ramos administration, a well-known adage is that the most expensive power is to have no power available.

In reality, FiT is not the same as Take-or-Pay. The Take-or-Pay scheme entails payment for the electricity whether it is used or not. Such is not the case with FiT.

A more accurate term for FiT is Take-or-Don’t Pay. In the FiT, the generator is only paid when the electricity is actually supplied to the grid.

While FiT is a fixed-cost tariff per kilowatt hour, you only pay for it when you actually use the electricity.

A FiT is a payment mechanism to encourage the development of renewable energy resources.

The FiT System is but one of the incentives provided in the Renewable Act of 2008, which sought to accelerate the development of renewable energy and alleviate the lack of substantial investments in the sector for over 20 years.

Those opposed cite the P17.95 per kwh to be paid to solar energy generators—but this is not what the consumer will eventually pay.

Industry sources such as Solarbuzz reported that solar PV panel prices dropped by about 30 percent, since the FiT petition was filed with the National Renewable Energy Board in May 2011.

Solar panel prices

One may jump to the conclusion that since solar panel prices are dropping, we can assume it will continue this downward spiral. Actually there are no guarantees. The price of solar panels is not simply determined by technological progress in improving efficiencies and cost, but also by business conditions and the fluctuating price of silicon, which is a commodity used by the semiconductor industry.

Although the best solar cells in the market have exceeded a conversion efficiency of just over 20 percent (the percentage of sunlight converted into electricity), in reality subsequent improvements will be reached slowly as there are scientific considerations.

On the business side, solar project contracts are announced, but sometimes these are also canceled, and these developments affect the prices of panels. Bankruptcies in the solar industry, such as that of the US firm Solyndra, may temporarily increase a certain number of cheap panels available in the market, but that is only useful if project developers can get their hands on these cheap panels.

In addition, components such as inverters, etc., remain constant in price. Hence it still makes sense to lock in current installations with a current FiT rate and just adjust the FiT for future solar installations depending on the price of solar panels on the world market at that time.

Solar has the distinct advantage of being the fastest to deploy among the RE technologies. Installation period takes less than a year.

Many areas in Mindanao are experiencing brownouts and had to resort to more expensive, highly polluting bunker oil or diesel generators for their needs.

Due to this, the Philippine Solar Power Alliance has proposed a lower solar FiT rate of P14.59 per kwh to the Energy Regulatory Commission (ERC).

This amount shall be uniformly charged to all consumers in the coverage area, and will be diluted by the lower cost of other renewable energy sources in the total energy mix.

Hydro rates

For example, the proposed FiT rates for hydro and biomass power of P6.15 per kwh and P7.00 per kwh respectively are already lower than the approved electricity rates for coal plants in 2011.

A good analogy is when you dump a bottle of expensive scotch into a vat of cheap scotch. You don’t say that the price of the blended scotch coming from the vat is the same as the price of the imported bottle—remember the expensive part has been diluted by the cheap part.

The FiTs are fixed over a period of time and not subject to the variable pass-through costing on fuel costs allowed for fossil fuel plants.

You won’t get petitions from solar and wind generators to the ERC saying that the imported costs of wind or sunshine or water have increased.

The Department of Energy reported that the installed generating capacity of the country totaled 16,359 megawatts as of 2010.

Compared to this figure, will the solar target of 50 MW during the initial three year installation target period or even the 285 MW projected from 2011 to 2030 really increase power costs significantly?

Dilution is the key word that RE oppositors never talk about. Instead, they continually harp about the price per kwh paid to RE generators when, in fact, that amount is not what the consumer will actually pay.

The simple truth is once the FiT supported renewable energy sources reach grid parity (i.e., equal to the cost of the blended grid power rate) in a matter of years, they will actually reduce and temper the increase in electricity rates.

If the anti-FiT advocates really want to prevent higher electricity rates, why are they opposing the FiT in general and not just the higher cost technologies like solar?

Their incessant mantra is FiT would increase prices. However, did they ever consider that all new power plants including new cleaner coal plants will inevitably increase power rates? So-called cheap coal based power is only true for existing plants whose capital costs are, in most cases, almost fully depreciated.

FiT opponents and coal advocates emphasize the price advantage of coal, which costs less per kwh than other power sources. But that cost advantage does not factor the ill effects of carbon in the atmosphere.

These hidden costs are not borne by the electricity or transport payer, but by those in the community whose health are affected. They also neglect to include the increasing fuel costs which are passed on to consumers.

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. Coal prices are expected to sharply increase parallel with the recent oil price spikes as any increase in fossil fuel cost is passed on to consumers.

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.

Health expenses

Air pollution costs are not factored in what we pay for fossil fuel generated electricity. The Philippine Environment Monitor estimates that air pollution costs the Philippine economy $1.5 billion annually. The Philippines spends over $400 million in direct costs annually—some 0.6 percent of GDP, on health expenses caused by pollution.

The World Bank estimates that 5,000 annual premature deaths comprising 12 percent 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.

Older coal plants are of course less efficient and produce more pollution. RA 8749 or the Philippine Clean Air Act allows looser emission standards for power plants already existing when the law was enacted.

However, newer plants built after the effectivity of the act must adhere to the prescribed emission standards. Thus, older coal plants are much cheaper as their capital expenses had been fully amortized, since only the fuel and operating costs matter. But these older plants built prior to 1993 are allowed by RA 8749 to have higher pollutant emissions than newer plants.

Newer but more expensive ways to process coal for power include fluidized bed technologies (where particles of coal are blown around in turbulent swirls of air to ensure efficient burning), or gasification where the coal is heated with controlled amount of oxygen (so it doesn’t burn and is instead converted to liquid or gaseous fuel that can be burned separately).

But then the cost of these systems can already approach, if not exceed, the per kWh rate of renewable energy systems seeking FiT.

Granted that RE cannot supply our base load power requirements (the power supply that needs to be on 24 hours, 7 days a week), there are opportunities to put in solar for our peaking power needs (the power requirement difference between peak loads and off-peak loads).

Running with renewable energy peaking power plants reduces the costs associated with the Wholesale Electricity Spot Market (WESM) merit order system, where the price at the spot market is fixed by the most expensive seller at any given time. Moreover, the continuing decline in solar PV and battery prices would enable solar to supply power 24/7 in a matter of years. A typical middle-class household in Metro Manila already pays Meralco around P13 per kWh per month. Solar developers expect to be able to match this rate within a few years.

An argument that has been advanced and intensively discussed in the Kyoto Protocol is that the rich developed countries should cut down on fossil fuel use, as they are the ones responsible for climate change.

But the last-minute agreement in Durban, South Africa, does away with this concept. If the new Durban Treaty comes into effect, there will be no more exemptions for countries like the Philippines—all countries will be required to mitigate greenhouse gases.

So which will it be, a fixed-cost spread over time or a variable cost which seems cheap but, in reality, contains all sorts of hidden costs?

(Pete Maniego is chairman of the National Renewable Energy Board. Dennis Posadas is a technology author and consultant.)