RATE ANALYSIS OF THE FIT-ALLOWANCE IMPLEMENTATION IN THE PHILIPPINES

25 October 2016 | Bangkok, Thailand

Manila Electric Company Philippines

Backgrounder

v ElectricityrateinthePhilippines

v RenewableEnergyLaw(RELaw)

v Feed-in-Tariff(FIT)scheme

Alookbackonthe-irstyearofFIT-AllowanceimplementationinthePhilippines

Quality Reliability

Security

Affordability

EPIRA Electric Power Industry Reform Act

Sustainability

Average All Markets 13.24 Average Unsubsidized Markets 14.03

Meralco 14.65

0.00

5.00

10.00

15.00

20.00

25.00

Japa

n (K

ansa

i) H

awai

i Ita

ly

Ger

man

y C

alifo

rnia

(PG

&E

) U

nite

d K

ingd

om

Irela

nd

*Aus

tralia

(WA

) C

ypru

s B

elgi

um

Spa

in

Por

tuga

l G

reec

e D

enm

ark

Hon

g K

ong

Mer

alco

M

alta

N

ethe

rland

s A

ustri

a La

tvia

N

Z S

lova

kia

Fran

ce

Luxe

mbo

urg

Can

ada

(Ont

ario

) S

love

nia

*Sri

Lank

a Li

thua

nia

Sin

gapo

re

Pol

and

Cze

ch R

epub

lic

Est

onia

R

oman

ia

*Tha

iland

H

unga

ry

Finl

and

Sw

eden

*S

outh

Kor

ea

US

(Ave

rage

) B

ulga

ria

*Mal

aysi

a *T

aiw

an

*Ind

ones

ia

*Sou

th A

frica

US

c/kW

h (e

xcl V

AT)

Tariff excl Taxes Other Taxes & Charges (excl VAT) Estimated Subsidy Notes 1.  All data for Jan 2016 except EU countries which are H2 2015 and US (average) which is Dec 2015 2.  Australia (WA) is actual subsidy. Other subsidies calculated as estimated cost of supply minus actual tariff * Indicates subsidized (or under-priced) markets. Australia (WA) is actual. Estimated subsidies calculated as 1.37x average estimated cost of supply minus actual residential tariff

MERALCO’s average retail tariff

16th highest out of 44 countries

May 2016 Causesidenti@iedonwhyelectricityratesarehighinthePhilippines:

Nosubsidiesfromgovernment

Geographicalfactors

Highdependenceonimportedfuelforelectricgeneration

Renewable Energy (RE) Law and Feed-in Tariff (FIT) Scheme in the Philippines

RE Law (RA 9513)

Fiscal Incentives

Non-Fiscal Incentives

Net-Metering

FIT Scheme

Renewable Portfolio Std

Green Energy Option

q Guaranteed@ixedrevenueperkWhfor20years

q Fully-fundedbyend-usersthroughgenerationchargesandtheFIT-Allrate

FIT Implementation Timeline in the Philippines

2008 •  RE Act of 2008

2010 •  FIT Rules promulgated by ERC

2012 •  FIT Rates approved by ERC

2014 •  FIT Guidelines promulgated by ERC •  Solar target increased (50MW à 500MW)

2015

•  FIT-All rate: PhP0.0406/kWh or USc 0.0892/kWh •  FIT Rates for Solar 2 approved •  Wind target increased (200MW à 400MW) •  FIT Rates for Wind 2 approved

2016 •  FIT-All rate: PhP0.1240/kWh or USc 0.2603 FIT Rates

AveragespotpricecollectedbyWESMfromthespotmarket

FIT-allowanceratecollectedbyDU&RES

FIT Monitoring Board Summary (as of Jan 2016)

RESOURCE For Nomination /

Conversion With Certificate of Confirmation

of Commerciality

With Certificate of Endorsement

to ERC TOTAL No. of

Projects Capacity

(MW) No. of

Projects Capacity

(MW) No. of

Projects Capacity

(MW)

Solar 18 681.3 30 892.5 6 131.9 1705.7 Wind 7 1,023.6 5 431.0 6 393.9 1,848.5 Biomass - 4 24.4 11 94.3 118.6 Hydro - 66 610.9 4 26.6 637.5 TOTAL 25 1,704.9 105 1,958.8 27 646.7 4,310.3

Installation Targets (MW)

Initial Updated

50 500

200 400

25 250

250 250

750 1,400

TotalcapacityapplyingforFITismorethanthricethecurrentinstallationtarget.

Feed-in Tariff (FIT) Scheme in the Philippines

0

200

400

600

800

1000

1200

1400

1600

Initial Updated

Meg

aWat

t-ho

urs

Solar

Wind

Biomass

ROR Hydro

RE Sources

Installation Targets (MW)

FIT Rates (USc/kWh)

Initial Updated Initial Updated

Solar 50 500 21 19

Wind 200 400 19 16

Biomass 250 15

R-O-R Hydro 250 13

TOTAL 750 1,400

REtechnologieswiththehighestFITratesreceivedincreasesininstallationtargets.

IncreaseinREinstallationtargets•  Whichin@latesenergyvolumethatwouldreceive

guaranteedrevenueundertheFITscheme

ToanalyzetheimpactofpolicychangesontheFIT-Allratepaidbythecustomers

Withconsiderationson:

“Meritordereffect”•  Whichallegedlypressesdownonthe

electricityspotmarketprices

Objective of the Study

Inthisrateanalysis,thefollowingwerenotconsideredaspartofthepaper’sscope:

Useofgridenergybatterystorage

Projectionandcomparisonwithfossilfuelrates

Analysisofpeaksheddingbysolarsources

TheadditionalancillaryservicescoststoaddressintermittencyofREsources

Economiceffectsinthelong-termbychangesininvestmentexpectations

Scope and Limitations

Components of the FIT-Allowance (FIT-All) Rate

FIT-Allowance

FIT Differential

(FD)

Forecast National

Sales Allowances

FIT Differential

(FD)

§  FIT-AllistheFeed-in-TariffAllowance

§  FDistheestimatedFITDifferential

§  WCAistheestimatedWorkingCapitalAllowance

§  AAistheAdministrationAllowance

§  DAistheDisbursementAllowance

§  FNSistheForecastNationalSales,inkWh

FIT-All=FD+WCA+AA+DAFNS

The FIT Differential (FD)

Negativelycorrelated•  FCRR•  (Lowerspotprices~higherFD)

Positivelycorrelated•  ForecastREGen•  (Increasedinstallationtarget~higherFD)

FD(over)/underrecoveryinthepreviousyear

§ ForecastREGenistheforecastedREgenerationofeligibleREPlant,inkWh

§ ForecastFITRateistheFITrate,inPhP/kWh

§ ForecastCostRecoveryRate(FCRR)istheaveragepriceintheelectricityspotmarket,

§ FD(over)/underrecoveryisthevariancebetweentheactualandthecollectedFDinthepreviousyear

We’llexaminetheeffectofmerit-orderonFCRRandFD.

Demand

Capacity

Capacity

Price

Price

The Merit Order Effect (MOE)

*IllustrationfromCleanEnergyWire

InclusionofFITREplantscauseslowerpricesintheelectricityspotmarket.

v FIT-eligibleplantsareconsideredmust-dispatchorprioritydispatch

v ThecapacityofREplantsundertheFITschemedisplacescapacityfromconventionalpowerplants

v Sometimes,evenotherREplants

v TheresultingclearingpriceislowercomparedtowhenFIT-eligibleREgeneratorsarenotincludedinthestack

MOE’s Impact on the FIT Differential

Merit-ordereffectisshort-term.Bene-itsarecancelledoutinfullbytheunderrecoverytermandthelowerFCRR.

v AsdemonstratedintheFeb2016FIT-Allratere-calculation,lowerthanexpectedgenerationcostresultedinunderrecoveryin2015FD.

v Thiswas‘corrected’/addedbackinthe2016FD.

èHigherFDinsucceedingyearèHigherFIT-All

v Byde@inition,lowerspotpricesmeanslowerFCRR.AndsinceFCRRisinverselyproportionaltoFD.

èHigherFDinsucceedingyearèHigherFIT-All

AveragespotpricecollectedbyWESMfromthespotmarket

FIT-allowanceratecollectedbyDU&RES

Scenario-based Analysis of the Impact of Policy Changes on FIT-All

•  AssumedfullsubscriptiontotheinitialinstallationtargetssetbythePhilippineDOE.

Baseline

•  Assumedfullsubscriptiontotheupdatedinstallationtargets,inwhichthePhilippineDOEapprovedtheadditionofsolarandwindcapacityof450MWand200MW,respectively.

Scenario1

•  Aggressivescenario.AssumedfullsubscriptionandaccommodationofallFIT-applicantsbeyondtheinstallationtargets,usingdatafromtheFITmonitoringreportofthePhilippineDOEinJanuary2016.

Scenario2

Scenario-based analysis on the effects of FIT-related policy changes Impact of FIT-related Policy Changes

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

On the 20th year of FIT scheme implementation

Gig

aWat

t-ho

urs

RE Generation

Baseline Scenario 1 Scenario 2

SuddenpolicychangesincreasedFIT-Allprojection.

0.21

0.33

1.38

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2015

20

16

2017

20

18

2019

20

20

2021

20

22

2023

20

24

2025

20

26

2027

20

28

2029

20

30

2031

20

32

2033

20

34

US$

/kW

h

FIT-All rate projection

Baseline Scenario 1 Scenario 2

Key Results v TheFeed-in-Tariff(FIT)policymechanisminthePhilippineshasspurredsubstantialcapacityadditionfromemergingrenewableenergysources.

v SuddenpolicychangeshaveresultedinhigherelectricityratesfortheconsumersthroughtheFIT-Allrate.

v ThemeritordereffectcausedbyFIT-eligibleplants,ontheotherhand,tendedtolowertheclearingpriceinthespotmarket—butonlyashort-termeffectonthegenerationcharges.

v BoththeincreasedvolumeofgenerationofFITplantsandtheresultingreducedspotpriceswouldultimatelydriveuptheFIT-Allratetobecollectedfromend-users.

Conclusions and Recommendations v Abruptchangesinpolicy,suchastheexpansionofinstallationtargets,largelyaffectstheFIT-Allratethatalltheend-usersbear.

v Hence,technicalfeasibilitystudies,followedbyrigorouseconomicimpactstudies,wouldbehelpfulforstateregulatorsandpolicymakerstomakeinformedpolicydecisionsthattakeintoaccountthewelfareofallstakeholdersespeciallythecustomers.

v TheRELawaimstopromoteinvestmentsinRE,butthissupporttosustainableenergysourcesshouldbebalancedwithconsumerinterestssuchthat-inancialburdenareendeavoredtobeminimized.

Maramingsalamatpo.