The Economics and Politics of

Power Plant Project Approvals

in the Philippines

Adoracion M. Navarro and Laarni C. Escresa

EPDP Conference 2016Towards Inclusive and Sustainable Energy Development

January 12, 2016 | New World Hotel, Makati, Philippines

Outline

Background

Research Question and Objectives

Analytical Framework

Preliminary Results

Next Steps

Background

• Problem of long delays or outright cancellation of power plant projects in the Philippines

- 600 MW coal power plant in Subic – opposition of local community; CA revoked in the ECC in 2013

- 15 MW coal power in Narra, Palawan – opposition of municipal office for marine protected area; plant transferred to Aborlan

• Consensus: lengthy process of securing permits

• Claim: need 160+ clearances; entire process

can stretch to 5 years

Background

• misperception? – permitting process impasse at

the local level- policy response: draft law to declare power projects as

“projects of national significance” and automatic LGU

approvals of some permits

- requiring the local government units (LGUs) to cover

local energy planning in their development plans

• In some cases, local governments do not seem to

be the problem.- Subic impasse due to SBMA opposition

- Bataan: local government more cooperative in hosting

power plants

Research Questions and Objectives

• To analyze the incentives of the different economic agents involved in power plant project approvals andhow such incentives can be misaligned or mismatched.

• To develop a criteria by which to evaluate the different permits and licenses within the Philippine context

- maximize social welfare and minimize transaction costs and opportunistic behavior

• To assess current approval procedures to check how these meet economic considerations like effectiveness of the permits in meeting regulatory objectives, efficiency of the processes in ensuring power supply security, and upholding the welfare of consumers in the overall process

Analytical Framework

• Why regulate electricity generation? due to the following characteristics: its high capital intensity, the existence of economies of scale and scope, and the specificity of technology (Levy and Spiller,1999; Stern and Holder, 1994)

• Electricity is a good used by everyone but the possible negative externalities present at the generation stage is localized, affecting different voting jurisdictions differently. regulatory decisions more exposed to politicization

• Distinguish between the impact of regulatory governance & regulatory content on industry outcomes

- Regulatory governance refers to the regulatory structure and institutions

- Regulatory content includes the price and quantity regulation

Analytical Framework

• Goal: to develop a similar criteria or appraisal system for evaluating regulatory governance in the power generation sector

- number of permits and licenses, and number of days that the whole project approval process takes as main variables

• Classification of the different licenses and permits - Based on technology of the power generation plant, the

stages of development, and their specific locational characteristics

- de jure and de facto purpose, the regulatory authority issuing it and their respective accountability, and the length of time it takes to obtain it

Preliminary Results: Data Analysis

Generation Mix (based on installed capacity), 2015

Source: DOE List of Existing Plants

Luzon grid Visayas

grid

Mindanao grid

Source: DOE List of Existing Plants

Preliminary Results: Data Analysis

Majority of the plants that comprise the generation mix, however, can be considered old.

Out of the 104 power plants, 44 have been existing for more than 20 years. The largest additions to the total capacity (grid-connected and embedded generation) had been built from 1995 to 2005, most of which were built by independent power producers.

42 percent of the power plants are more than 20 years old, of which:

15 percent are in the 20-30 age group

19 percent are in the 30-40 age group, and

8 percent are more than 40 years old.

Age Distribution of Power Plants (number of plants per age group

per technology)

Source: DOE List of Existing Plants

Age

Group

(Years)

CoalOil

based

Natural

GasGeo Hydro Wind

Bio-

massSolar

Coal

Thermal

Total

Number

of Plants

per Age

Group

Percent

Distribut-

ion

< 10 7 7 3 2 5 8 4 1 37 36%

10 - 20 4 9 3 3 3 1 23 22%

20 - 30 1 9 2 4 16 15%

30 - 40 2 6 4 8 20 19%

> 40 8 8 8%

Total 14 31 3 12 25 6 8 4 1 104

Age

Group

(Years)

CoalOil-

based

Natural

GasGeo Hydro Wind

Bio-

massSolar

Coal

Thermal

Total

Capacity

per Age

Group

Percent

distribut

-ion

< 10 3,025.6 760.7 130 22.2 511.5 265.3 153.8 442 5,311.1 16%

10 - 20 6,347 1,011.1 5,620.4 1,299.2 1,132.4 50.4 15,460.5 47%

20 - 30 108.8 3,529.4 275.7 201.4 4,115.3 12%

30 - 40 1,219.8 295.7 1,819.6 3,720.3 7,055.4 21%

> 40 1,305.4 1,305.4 4%

Total 10,701.2 5,596.9 5,620.4 3,524.5 6,381.7 561.9 265.3 153.8 442 33,247.7

Age Distribution of Power Plants (in MW per age group per

technology)

Source: DOE List of Existing Plants

Preliminary Results: Process Evaluation

The permitting process based on intended objectives

Classification Definition Examples

Economic and regulatory

economic regulation and the provision of economic incentives appropriate for the specific characteristics of the power generation sector

PSA approval by ERC;Investment incentives from DTI, FIT

Social net social benefits of the construction of a power plant may be positive, the social cost may be distributed asymmetrically across groups

Permits from barangay and other LGUs, FPIC

Environment and resource regulation

need to optimize the use of natural resources and regulate the quality of the environment across time, between present and its future uses

ECC from DENR;water permit from NWRB

Technical and other related regulations

set of permits related to the specific and technical characteristics of electricity as a good

GIS review by the NGCP; feasibility study review by the DOE

Preliminary Results: Process Evaluation

General Steps in Investing in Power Plants

1. Registration Stage – the permits needed in complying with securities and other economic regulation as well applications to avail of incentives for investments

2. Pre-development Stage – includes but is not limited to feasibility study, FPIC from NCIP, local community approval, ECC from DENR, GIS, permits from BOI

3. Development Stage - The actual construction of the plant can then commence after achieving financial closure. This stage includes FIT application in the case of eligible RE and a PSA with the ERC, application for registration with the WESM and certificate of compliance with WESM rules

Detailed Steps through an Illustration

Hydropower plant investment

• Assumption: investor is a new entrant to the electric power generation business

• We argue that the number of permits and duration of approval are related to the quality of regulatory governance, that is, numerous permits and the lengthy approval process can erode regulatory governance and introduce incentives to extract rents. We also argue that these factors can be a significant barrier to entry.

Illustration of the Process Flow

Hydro – Registration Stage

Illustration of the Process Flow

Hydro – Pre-development Stage

Illustration of the Process Flow

Hydro – Development Stage

Preliminary Results: Data Analysis

Growth in Generation Capacity, 2001-2014

• Why has it not been easy to generate additional capacity?

- DOE estimates that the approval process for a generation investment project, from starting the generation company to actual commencement of the construction, takes as long as three years, possibly longer in practice

- Some of our key informants say it takes two to five years

- It also takes a great deal of time and expertise to untangle the permitting process – knowing the proper flow of the permit application to minimize the risk facing a firm is gained through experience, and may act as a barrier to entry to firms who are just entering the generation industry.

Next Steps

Upcoming:

• evaluation of regulatory quality

• definition of "critical paths"

• evidence of bottlenecks

• KIIs, RTD, and case studies

Emerging recommendations:

• remove redundancies

• streamline the process

• improve the degree of clarity and transparency

• strengthen accountability

• disseminate the info on detailed process flows, including critical paths and bottlenecks

Thank you!

Salamat!