Best Practices in FIT Design:

Technology, Cost and Consumer Impact

Pedro H. Maniego, Jr.

Chairman

Accelerate the development of the countrys renewable energy resources by providing fiscal and non-fiscal incentives to private sector investors and equipment manufacturers / suppliers.

Signing of the Renewable Energy Act on 16 December 2008

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One of the most comprehensive and forward looking RE law in the world Provides substantial fiscal and non-fiscal incentives Non-fiscal incentives include RPS, FIT, REM, Green Energy Option, Net Metering, 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 implementation of National Renewable Energy Plan 3. Evaluate, recommend and monitor the mandated Renewable Portfolio Standards 4. Oversee Renewable Energy Trust Fund
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Major Challenge to NREB How to balance:

Attracting and promoting investments in Renewable Energy -WhileMinimizing the burden to the end-users
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NREB Challenges
Feed-In Tariff which would:
Allow RE developers to recover their investments and provide them with internationally acceptable ROI's during the FIT period Accelerate the development of competitive RE technologies, and Not unduly burden the consumers with heavy pass-on charges

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 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 Metering which would: Give incentives to End-users to generate electricity from eligible on-site RE generating facility and delivered to the local generation grid; Generate employment for installers of solar panels, micro wind turbines and other building-installed RE equipment
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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.

Sec. 7: FIT System

NREB to determine the fixed tariff to 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 be less than 12 years (20 years for initial FIT period) The FIT to be used in compliance with the RPS established in accordance with the RPS rules to be established by DOE.

FEED-IN TARIFF RULES

Regulatory Framework
2.2 Per Technology and Size
Technology-specific FITs based on NREB recommendation May further be differentiated based on the size of the Eligible RE Plant as recommended by NREB

May also be differentiated:

Based on feed-stock in the case of biomass Based on whether building-installed or groundmounted in the case of solar

The FIT Determination Process

Proposals
Received initial proposal from each RE association

Consultation and Evaluation

In accordance with the ERC FIT Rules Obtained comments from third party consultants of the DOE Applied uniform financial model for all technologies 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 the DOE Verified from actual cases and decisions by the ERC Applied international and historical benchmarking on project costs, O&M, and technical assumptions

Recommendat ions
Based on ERC FIT Rules Representative project Single rate for each technology FIT Application with ERC submitted on 16 May 2011

How Did We Compute for the FIT?

Production volume

FIT (?)

Revenues Less

Net Capacity Factor and Installed Capacity

O&M costs and G&A costs Using Excels GoalSeek function Annual capital expenditure and debt service Corporate income tax and local taxes Equals

Target Equity IRR

Present value of cash flows to equity investor equals equity investment cost

After-tax free cash flow

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Initial Feed-in Tariffs (FITs)

in Php/kWh
Technology

Proposed by RE Developers
June 2010 Oct. 2010 11.48 7.44 23.81 11.92 18.52 Nov. 2010 9.94 7.40 20.55 11.85 18.52 April 2011 8.22 6.56 19.11 11.29 18.52 April 2011 7.00 6.15 17.95 10.37 17.65

NREB Approved Degression Rates 0.5% after 2nd year 0.5% after 2nd year 6% after 1st year 0.5% after 2nd year None

Biomass1/ Run-of-River Hydro2/ Solar3/ Wind Ocean

1/

9.84 7.80 22.64 11.23 18.52

For a solid biomass project a project with capacity between 1MW and 10MW 3/ For a ground-mounted project with more than 500kW capacity
2/ For

Impact of the FIT to the FIT-All

FIT-All per Renewable Energy (RE) Resource = FIT Payments Avoided Cost Projected Total Demand + Admin Cost

where: FIT Payments per Renewable Energy (RE) Resource = Installation Target per RE Resource X Applicable Capacity Factor X FIT per RE Resource Avoided Cost = Average WESM Prices at P4.50 X Installation Target per RE Resource X Applicable Capacity Factor; inflated by 4% per annum. Projected Total Demand (2010) = 55.266 thousand gWh; inflated by 4.2% per annum

Initial Installation Targets

in MW
Proposed by RE Developers Technology June 2010 Biomass Run-of-River Hydro Solar Wind Ocean TOTAL 357 131 235 710 10 1,443 November 2010 416 131 542 710 10 1,809 233 170 20 220 10 653 DOE NREB Approved (April 2011)

250 250 100 220 10 830

Indicative Rate Impact of the FIT

Technology RE Generation (GWh) (A) 1,577 1,029 140 482 26 3,254 FIT-All FIT Avoided Cost Contribution Payments (Php million) (Php million) (Php million) (C) (B) (B) (C) 10,982 6,299 2,223 4,971 464 24,939 8,301 5,419 738 2,536 138 17,132 2,682 880 1,485 2,435 325 7,807 Rate Impact of the FIT (Php/kWh) (D) 0.0412 0.0135 0.0228 0.0374 0.0050 0.1198

Biomass Run-of-River Hydro Solar Wind Ocean TOTAL

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

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 the distribution or transmission network shall share in the costs of the FITs in part through a uniform charge (in Php/kWh) to be referred to as the FIT All and applied to all billed kWh.

FIT - refers to a renewable energy policy that offers guaranteed payments on a fixed rate per kWh for emerging renewable energy sources, excluding any generation for own use, or to rate itself as established pursuant to these Rules.

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What is the FIT All (forecast)?

FIT All = (FIT Rate Market Rate) * RE kWh __________________________ + others National 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
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Based on the FIT Rates and Installation Targets Filed with the ERC
Technology FIT Rate Installation Target (MW) 100 220 250 250 10 830 Year 3 FIT Impact (in centavos) 2.3 3.7 4.1 1.4 0.5 12.0

Solar Wind Biomass Hydro Ocean

17.95 10.37 7.00 6.15 17.65 TOTAL

For 44% of Meralco's consumers (~100 kWh/month), impact of FITs on FIT All would increase power bills by ~Php12.00/month on the 3rd year, if all installation targets are attained.
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Increase in market rates by Php1.00 / kWh:

Technology FIT Rate Installation Target (MW) 100 220 250 250 10 830 Year 3 FIT All (in centavos) 2.1 3.2 2.3 0.2 0.5 8.3

Solar Wind Biomass Hydro Ocean

17.95 10.37 7.00 6.15 17.65 TOTAL

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
Hydro Plant FIT 6.15 P/kWh Pesos H = (-1) P/kWh * Generation (kWh) Biomass Plant FIT 7.00 P/kWh

Cost difference H:

7 8 = (-1) P / kWh

Pesos B

Cost difference B
Market price of power

FIT Rate
Market price of power e.g. 8 P/kWh Pesos S

FIT Rate

Cost difference W

Pesos W

Cost difference S

FIT Rate
Market price of power Solar Plant FIT 17.95 P/kWh

FIT Rate

Market price of power (Increase

Total Pesos

in Fossil Fuel)
Total Php/Yr

Wind Plant FIT 10.37 P/kWh

FIT ALL (P/kWh) =

Sales in National kWh/Yr

Admin charges

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Increase in market rates by P3.00 / kWh:

Technology FIT Rate Installation Target (MW) 100 220 250 250 10 830 Year 3 FIT Impact (in centavos) 1.7 1.7 (2.5) (3.0) 0.4 (1.7)

Solar Wind Biomass Hydro Ocean

17.95 10.37 7.00 6.15 17.65 TOTAL

For 44% of Meralcos consumers (~100 kWh/month), the higher average generation cost versus the FIT would decrease power bills by ~Php1.70/month
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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 initial FIT period of 3 years would serve as a governor or trigger 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 the deployment of more cost competitive alternatives - hydro & biomass
Technology Solar Wind Hydro Biomass Ocean TOTAL Proposed (MW) 235 710 131 357 10 1,443MW NREB Approved (MW) 100 220 250 250 10 830 MW Increase /(Decrease) (57%) (69%) 90% (30%) -

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

Power price P/kWh

Consumers are hedged against future price increases

20 Year life of RE power plant (Years) FIT All is an Investment to prepare for wider RE deployment 1For a coal plant, a US$10 increase in the price of coal results in a ~21 Centavo / kWh increase in its electricity price 29

RE FIT price increases with CPI and FOREX only

FIT and GRID PARITY

In Summary
44% of Philippine consumers will pay for the deployment of emerging RE resources through the FIT All this will progressively add up to Php 0.12/kWh or Php12 / month in 3 years, IF the total installation targets are attained. Over the FIT term of 20 years, this investment will most likely be recovered because of the expected continual increase in fossil fuel prices. Installation targets and periodic review would mitigate the deployment 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 scale deployment 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 and 50 kWh or less in rural areas could be exempted from paying the FIT-All contribution. 31

Thank You!
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