Pedro H. Maniego, Jr. - Best Practices in FIT Design

8/6/2019 Pedro H. Maniego, Jr. - Best Practices in FIT Design

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Best Practices in FIT Design:Best Practices in FIT Design:Technology, Cost and Consumer ImpactTechnology, Cost and Consumer Impact

Pedro H. Maniego, Jr.

Chairman


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Accelerate the development of the countrys renewable energyresources by providing fiscal and non-fiscal incentives to private

sector investors and equipment manufacturers / suppliers.

2Signing of the Renewable Energy Act on 16 December 2008


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One of the most

comprehensive andforward looking RE law inthe world

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rov es su s an a scaand non-fiscal incentives

Non-fiscal incentivesinclude RPS, FIT, REM,

Green Energy Option, NetMetering, Financial

Assistance, RE Trust Fund

& Must/Priority Dispatch.


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Functions of NREB

1. Recommend the feed-in tariff for each

emerging RE technology

2. Recommend, monitor and review

Energy Plan

3. Evaluate, recommend and monitor the

mandated Renewable Portfolio Standards4. Oversee Renewable Energy Trust Fund

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Major Challenge to NREB

How to balance:

Attracting and promoting investments in

Renewable Energy

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-While-

Minimizing the burden to the end-users


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NREB Challenges

Feed-In Tariffwhich would:

Allow RE developers to recover their investments andprovide them with internationally acceptable ROI's

during the FIT period

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cce era e e eve opmen o compe vetechnologies, and

Not unduly burden the consumers with heavy pass-on

charges


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NREB Challenges Installation Targets which are: In compliance with the Renewable Portfolio Standards;

and Consistent with Philippine Energy Plan and the

National Renewable Energy Program

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Renewable Energy Portfolio Standards which would:

Promote the diversification of energy supply,

Help reduce GHG emissions; and

Ensure compliance from the mandated participants


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NREB Challenges

Green Energy Option which would:

Provide End-users the option of choosing RE Resources

as their source of energy

Net Meterin which would:

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Give incentives to End-users to generate electricityfrom eligible on-site RE generating facility anddelivered to the local generation grid;

Generate employment for installers of solar panels,micro wind turbines and other building-installed REequipment


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Sec. 7: FIT System

Feed-In Tariff System

Mandated for electricity produced from

emerging RE resources: Wind

Solar

Ocean

Run-of-River Hydro power,and

Biomass

ERC in consultation with NREB shall formulate

and promulgate FIT system rules.


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Sec. 7: FIT System

NREB to determine

the fixed tariffto be paid to electricity

produced from each type of emerging RE,and

the mandated number of years for the

application of these rates, which shall not beless than 12 years (20 years for initial FIT

period)

The FIT to be used in compliance with theRPS established in accordance with the RPS

rules to be established by DOE.


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FEED-IN TARIFFRULES


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Regulatory Framework

2.2 Per Technology and Size

Technology-specific FITs based on NREBrecommendation

Ma further be differentiated based on the

size of the Eligible RE Plant asrecommended by NREB

May also be differentiated:

Based on feed-stock in the case of biomassBased on whether building-installed or ground-

mounted in the case of solar


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The FIT Determination Process

Received initialproposal fromeach REassociation

In accordance with the ERC FITRulesObtained comments from third

party consultants of the DOEApplied uniform financial model

for all technologies

Based on ERC FITRulesRepresentative

projectSingle rate for each

technology

Proposals

Consultation

andEvaluation

Recommendations

NREB conducted consultation and

verification as follows: Met with developers from

January 2009 to April 2011 Verified the figures from project

submissions by developers to theDOE

Verified from actual cases anddecisions by the ERCApplied international and

historical benchmarking onproject costs, O&M, andtechnical assumptions

FIT Application withERC submitted on16 May 2011


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How Did We Compute for the FIT?

O&M costs and

G&A costs

=X

Less

Production

volumeFIT (?) Revenues

Usin Excels Goal-Net Capacity

Corporate income

tax and local taxes

Target Equity IRR

Annual capital

expenditure anddebt service

After-tax free cash

flow

Equals

Seek function

Present value of cash

flows to equity

investor equals equity

investment cost

Installed Capacity

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Initial Feed-in Tariffs (FITs)

in Php/kWh

Technology

Proposed by REDevelopers

NREB Approved

June2010 Oct.2010 Nov.2010 April2011 April2011 Degression Rates

Biomass1/ 9.84 11.48 9.94 8.22 7.00 0.5% after 2nd year

Run-of-River

Hydro2/ 7.80 7.44 7.40 6.56 6.15 0.5% after 2nd year

Solar3/ 22.64 23.81 20.55 19.11 17.95 6% after 1st year

Wind 11.23 11.92 11.85 11.29 10.37 0.5% after 2nd year

Ocean 18.52 18.52 18.52 18.52 17.65 None

1/For a solid biomass project2/For a project with capacity between 1MW and 10MW3/For a ground-mounted project with more than 500kW capacity


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Impact of the FIT to the FIT-AllFIT-All per Renewable Energy (RE) Resource = FIT Payments Avoided Cost

Projected Total Demand

+ Admin Cost

where:

FIT Payments per Renewable Energy (RE) Resource = Installation Targetper RE Resource X Applicable Capacity Factor X FIT per RE Resource

Avoided Cost =Average WESM Prices at P4.50 X Installation Target per REResource X Applicable Capacity Factor; inflated by 4% per annum.

Projected Total Demand (2010) = 55.266 thousand gWh; inflated by 4.2%per annum


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Initial Installation Targets

in MW

Technology

Proposed by REDevelopers

DOE

NREB

Approved(April 2011)

June2010

November2010

Biomass 357 416 233 250

Run-of-River Hydro 131 131 170 250

Solar 235 542 20 100

Wind 710 710 220 220

Ocean 10 10 10 10

TOTAL 1,443 1,809 653 830


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Indicative Rate Impact of the FIT

Technology

REGeneration

(GWh)(A)

FITPayments

(Php million)(B)

Avoided Cost(Php million)

(C)

FIT-AllContribution(Php million)

(B) (C)

Rate Impactof the FIT(Php/kWh)

(D)

Biomass 1,577 10,982 8,301 2,682 0.0412

Run-of-River Hydro 1,029 6,299 5,419 880 0.0135

Solar 140 2,223 738 1,485 0.0228

Wind 482 4,971 2,536 2,435 0.0374

Ocean 26 464 138 325 0.0050

TOTAL 3,254 24,939 17,132 7,807 0.1198

Notes: 1. Rate impact of the FIT after three years of effectivity of the FITs

2. Avoided cost based on the average WESM price of Php 4.50 / kWh (2010)3. With degression in the FITs


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What is the FIT All? Per Section 2.5 of the FIT Rules promulgated by the ERC under resolution 16

Series of 2010;

Electricity consumers who are supplied with electricity through thedistribution or transmission network shall share in the costs of the FITs inpart through a uniform charge (in Php/kWh) to be referred to as the FITA an app ie to a i e W .

FIT - refers to a renewable energy policy that offers guaranteed payments

on a fixed rate per kWh for emerging renewable energy sources, excludingany generation for own use, or to rate itself as established pursuant tothese Rules.

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What is the FIT All (forecast)?

FIT All = (FIT Rate Market Rate) * RE kWh

__________________________ + othersNational Electricity Sales (kWh)

Where (All forecasts):

FIT Rate = Peso per kWh rate approved by the ERC for each

technology

Market Rate = Price of electricity displaced by FIT generation

National Sales = Total sales of electricity to all on-gird customers

Other = Working capital allowance, Admin fee, Trustee fee 22


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Increase in market rates by Php1.00 / kWh:Technology FIT Rate Installation

Target(MW)

Year 3FIT All

(in centavos)

Solar 17.95 100 2.1

Wind 10.37 220 3.2

Biomass 7.00 250 2.3

Hydro 6.15 250 0.2

Ocean 17.65 10 0.5

TOTAL 830 8.3

For 44% of Meralcos consumers (~100 kWh/month), FIT All will

decrease power bills from ~ Php12.00/ month to ~Php8.30/month

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When market rates go above the FIT Rates RE generation would

even serve as a hedge against price increases

Market price of power

e.g. 8 P/kWh

Market price of

power

Cost difference H:

7 8 = (-1) P / kWh Cost difference B

Pesos H = (-1) P/kWh * Generation (kWh)

Pesos S

FIT Rate

Hydro Plant FIT

6.15 P/kWh

Biomass Plant FIT

7.00 P/kWh

FIT Rate

Pesos B

Market price of

power (Increase

in Fossil Fuel)

Cost difference W Pesos W

Total Pesos

FIT ALL (P/kWh) = Admin

charges

Wind Plant FIT 10.37

P/kWh

FIT RateMarket price of

power

Cost difference S

Solar Plant FIT

17.95 P/kWh

FIT Rate

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Total Php/Yr

Sales in National kWh/Yr


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Increase in market rates by P3.00 / kWh:Technology FIT Rate Installation

Target(MW)

Year 3FIT Impact(in centavos)

Solar 17.95 100 1.7

Wind 10.37 220 1.7

Biomass 7.00 250 (2.5)

Hydro 6.15 250 (3.0)

Ocean 17.65 10 0.4

TOTAL 830 (1.7)

For 44% of Meralcos consumers (~100 kWh/month), the higher

average generation cost versus the FIT would decrease power bills by

~Php1.70/month26


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Is the FIT All at risk of run-away costs like Spain due to

over installation of RE?

In Spain 2,500 MW of Solar PV from 2006 to 2008 from a base of

88 MW can this happen to the Philippines?

Under the FIT Rules, the installation targets set by NREB for the

mechanism to adjust the FITs downwards or upwards.

As part of the FIT submission, degression rates were also included.

6% reduction for Solar One year after FIT rates apply

0.5% reduction for all others Two years after FIT rates apply

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Why not wait for RE costs to come down?

NREB has calibrated the 3 year installation targets to maximize thedeployment of more cost competitive alternatives - hydro & biomass

Technology Proposed(MW)

NREB Approved(MW)

Increase/(Decrease)

Solar 235 100 (57%)

Beyond this, a diverse mix of technologies is critical to the powersystems reliability (e.g. Mindanao's reliance on hydro, sustainability ofbiomass for fuel over 20 yrs).

Wind 710 220 (69%)

Hydro 131 250 90%

Biomass 357 250 (30%)

Ocean 10 10 -

TOTAL 1,443MW 830 MW

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RE assisted by FIT All builds local capacity to scale-up

as RE prices drop and conventional prices increase!Price of non-RE power rises due

to:

- Increase in oil and coal prices1

- A price on carbon- Environmental externality costs

Consumers

are hedged

against

Powerprice

P/kWh

20 Year life of RE power plant (Years)

RE FIT price

increases with

CPI and FOREXonly

FIT All is an Investment to

prepare for wider RE

deployment

increases

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1For a coal plant, a US$10 increase in the price of coal results in a ~21 Centavo / kWh

increase in its electricity price


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FIT and GRID PARITY


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In Summary

44% of Philippine consumers will pay for the deployment of emergingRE resources through the FIT All this will progressively add up to Php0.12/kWh or Php12 / month in 3 years, IF the total installation targetsare attained.

Over the FIT term of 20 years, this investment will most likely berecovered because of the expected continual increase in fossil fuelprices.

of the more expensive RE technologies. Benefits from this aside from making economic sense;

Could even serve as hedge against future price increases of fossil fuels

Local capacity building to the minimize the lag and speed-up large scaledeployment when RE is more cost competitive, thereby, improving economies of

scale. Encourages other nations to act on mitigating CO2 emission considered by many

to be the largest threat faced by mankind!

Lifeline users consuming 100 kWh or less per month in urban areas and50 kWh or less in rural areas could be exempted from paying the FIT-All

contribution. 31


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Thank

You!

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Pedro H. Maniego, Jr. - Best Practices in FIT Design