Primer on Feed-In Tariff System

The Feed In Tariff (FIT) system is an implementation of the Renewable Energy Act of 2008, which
aims to promote the development of RE in the Philippines by giving developers and investors
fiscal incentives. In this paper, we will be discussing how the FIT system works and place its
alleged benefits and costs in the context of Philippine social realities.

Renewable Energy Situationer

In electric generation, our renewable energy (RE) matrix is composed of five sources: hydro,
geothermal, wind, solar, and biomass. Of the five, wind, solar, and biomass are considered as
"new" renewable energy sources. Plants utilizing these new RE have the lowest environmental
impact and are virtually self-sustaining. Nevertheless, geothermal and hydro account for the lion's
share of our RE supply. Both sources use mature technologies and have relatively stable output,
making them perfect for base load generation. However environmental impacts then to be
significantly higher. Dams used in hydroelectric generation can displace communities and
ecosystems. The output of dams are severely affected by drought and scaling. Geothermal plants
release toxic fumes as a by-product of the steam extraction process. Removal of large quantities of
fluids from the underground can cause land surface subsidence. Reinjection processes, which
partly alleviates the subsidence problem, can however cause seismic disturbances.1

Power Generation by Fuel Source

80000
Total Generation in GWh

60000

40000

20000

0
2001 2004 2007 2010 2013

Oil Based Hydro Geothermal Coal Wind, Solar, Biomass

Natural Gas

Figure 1. Total electric generation (in GWh) of different sources from 2001 to 2013. Natural
Gas is increasingly becoming one of our main sources of electricity. Source: DOE
For over a decade in the electric generation sector, we've seen a steady decrease in our reliance on
oil based fuels. A large chunk of our electric power now comes from natural gas and coal. In terms
of "new" RE, biomass has the highest output. Wind and biomass have experienced fast growth in
the past three years while solar output remains stagnant.

RE Energy Potential

There are over 10,000 km2 of potential sites in the Philippines with good to excellent wind resource
potential. The US National Renewable Energy Laboratory (NREL) estimates that about 70,000 MW
of installed capacity can be built in the country, generating some 195,000 GWh per year.2 Taking
into account conversion efficiencies of real turbines, then a more realistic expectation is 58,500
GWh/year, which nevertheless can supply 77% of our present demand.

NREL estimates that the Philippines has the potential to generate 5.1 kWh/m2-day of photovoltaic
power. In other words, if a person has a one square meter solar panel, it would generate 5 kWh in a
day. Using a 15% conversion efficiency and assuming that the sun is only reliable for 10 months in
a year, then to meet all our yearly electrical demand we need 32,800 ha or just a measly 0.1% of the
country's land area. 3

A 1999 energy survey of APEC countries has revealed that about 17Mt of biomass (rice hulls,
coconut shells, coconut ) was produced in the country. This is equivalent to 2.6 Mt gasoline,
sufficient to replace 24% of its crude oil imports and 63% of the country's gasoline consumption in
2000.4

Power from New Renewables

Generated Power (GWh)

300

225

150

75

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year

Wind Solar Biomass

Figure 2. Gross Power Generation of Solar, Wind, & Biomass Plants. Source: DOE

Six years since the passage of the Renewable Energy Act, we have witnessed a large increase in
biomass and wind power. Growth in solar on the other hand, has been slow. Development seems
to center on "safer" more conventional RE technologies, with hydropower accounting for 66% of all
RE projects approved by the DOE since the RE law was passed. All in all these projects have a
combined installed capacity of 2,500 MW.
FIT-ALL Mechanism

Figure 3. Components of the FIT Charge. Aside from the Fit Differential, Transco also charges
consumers for the buffer fund (WCA) and the costs incurred in managing the FIT system.
National Forecast Sales is simply the total (predicted) electric demand. Source: Transco

Under FIT, a portion of the electricity produced by an RE plant is bought at above market rates,
with the added cost being distributed among all grid connected customers. The Energy Regulatory
Commission sets a specific rate (in Php/kWh) for each type of energy source/technology. The rates
automatically decrease in value every year as the government expects RE developers to improve
their technology in other to make RE cost-effective. RE developers are guaranteed to be paid in the
FIT rates for at least 20 years.

RE Developers still sell their electricity to WESM at prevailing market rates. The difference
between prevailing market rates and the guaranteed FIT rates is called the FIT Differential (FD).
FD is distributed among all grid customers. It's the principal cost of the FIT charge in one's
monthly bill. Consumer payments to the FIT charge are collected in a fund called the FIT
Allowance (FIT-ALL). On October 10 2014, Transco was given authority to start collecting a FIT
charge of P0.04057/kWh in the January 2015 billing of all electric consumers.

RE Developers not connected to WESM are paid in an amount called the Actual Cost Recovery
Revenue (ACRR). The ACRR is simply the average electric rate of a distribution utility. It is akin to
the generation charge in one's electric bill. The concerned DU collects both an ACRR and FIT
charge from its customers.

Aside from the guarantee of above market prices, RE developers also enjoy: exemption from
income taxes for seven years, duty-free importation of equipment, VAT-free purchases for supplies,
equipment, properties, and services bought, and tax-free carbon credit sales.
Collection Agent

Figure 4. Schedule for FIT charge collection and remittance. Source: Transco

Transco serves as the administrator of the FIT-ALL fund and is responsible for the collection and
disbursement of the the fund. Assisting Transco in the collection of FIT from grid customers are the
collection agents (CA). Billing of the different types of grid customers is undertaken by different
entities: Distribution Utilities and Retail Electric Suppliers collect from their customers, NGCP
collects from directly connected customers, and PEMC handles payments from WESM
Participants. These collection agents remit the paid amount by their end-customers in full to
Transco. Failure to pay will result in fines for the erring CA. In cases where the CA fails to remit
full payment, Transco will use the Working Capital Allowance (WCA) budget of the FIT-ALL fund.
The cost of this buffer fund is included in the FIT Charge.

The RE developer submits a statement of

account to Transco around 20 days after
Source/ Rate Degression the end of the customer’s billing period.
Technology (to be applied
starting 2014) The full amount is then remitted to
Transco around 50 days after the end of
Wind 8.53 0.5% per year the corresponding billing month. Transco
then transfers the payment to the RE
Biomass 6.63 0.5% per year
developer on the same day.
Solar 9.68 6% per year
Impacts
Hydro 5.9 0.5% per year

Table 1. FIT rates for different technologies. Source: ERC Costs to Consumers
Initial calculations seem to suggest that
the impact of FIT is minimal. The Php
0.04/kWh5 FIT levy will raise the current transmission charge for households to Php 1.0174/kWh.
For a regular household with 200 kWh, this would mean an Php 8.00 increase in the total monthly
bill. However looking at the context reveals that such increase, no matter how minimal is an unjust
burden for consumers. Electricity rates in the country are already the highest in South East Asia,
even when taking into account the effect of differing taxes, subsidies, and currencies.6 Wages here
are below the ASEAN average (and are far below the government’s own living wage) yet income
taxes are one of the highest. Fifty-percent of Filipinos identify themselves as poor.7 It's callous for
the government to pass the differential cost of FIT to the general public.
 Comparison of Power Rates
0.4

0.3
PPP$ / kWh

0.2

0.1

0
Philippines Singapore Indonesia Malaysia Thailand

Residential Commercial LV Industrial

HV Industrial

Figure 5. Power Rates between selected ASEAN Countries. The effect of taxes, subsidies, and
purchasing power parity between countries have been accounted for. Source: UP CIDS

Country PPP-Adjusted Costs to the Economy

Monthly Minimum With regards to the economy, this FIT charge can result in
Wage (in $) higher utility costs for our already embattled local
Malaysia 614.29 manufacturing sector. There is also the possibility of a
Thailand 516.70 domino effect, wherein businesses will pass their FIT
Indonesia 255.76 charge to their customers. Based on AGHAM's estimate, the
Philippines 231.42 steel rebar industry alone will face an additional Php 51
Laos 207.64 million increase in its annual electrical expenses. They can
Vietnam 201.99 pass on the cost to their customers (real estate developers)
Cambodia 82.46 who will most likely then pass the cost to home buyers. If
Myanmar 46 the two LRT lines were to pass on the FIT cost to
Table 2. Monthly wages of different passengers, then fare tickets will rise by at least a centavo.
ASEAN countries. Even with the highest
power rates in South East Asia, Filipinos
have to contend with a mediocre wage. The FIT system does not also take into consideration small
Source: Aseanbriefing.com, World Bank
RE-players, which includes households, LGU's, state
colleges and universities, and retail business
establishments. These small RE players have higher efficiencies than RE utilities due to the fact
that they source and consume their energy on-site (e.g. rooftop solar panels). Removing
transmission and distribution cost have been shown to make RE (especially solar) competitive
with coal.

Transco has decided to push through with the collection of FIT charges in spite of the fact that
many approved RE projects have yet to built. In effect the public is being ask to pay the
government for RE projects that are yet to materialise. Estimates peg the total revenue from FIT
charges at a tune of Php Php 2.7 billion a year. 8 The government has clarified that RE developers
will not receive any payment from the FIT-All fund until they are able to deliver power to the grid.
Nevertheless the buffer nature of the fund turns it into a sovereign guarantee for developers,
effectively allocating the project risks to the general public.
Alternatives to Pass Through

AGHAM believes that the responsibility for providing clean energy is a government mandate.

With the increasing danger posed by climate change, lowering our greenhouse gas emissions
becomes ever more important. Financial incentives for the development of renewable energy
projects is a step in the right direction. However specific characteristics of our power industry
makes the pass through aspect of FIT-All.

Multiple studies estimate that with proper reforms, we could see a 20% to 30% reduction in our
power bills, and these are only for the generation charge. If the recent allegation of NGCP
profiteering is addressed then a further Php 100 could be slashed from the monthly bill of a 300
kWh household. If such large decreases in power rates were to happen, then an slight increase due
to feed-in tariff might be justifiable.

For the present case, there are alternative sources of funding. The most obvious is the Malampaya
energy fund, which has been allocated by law for energy related projects. Renewable energy
facilities require significant investment but the environmental and social returns more than make
up for the fiscal burden. Additionally, following the polluter pays principle, Greenhouse gas
(GHG) emitting plants (including coal fired plants, etc.) can be given additional taxes. The levy
should approximate the negative externalized cost of such "dirty" sources. These carbon taxes can
act as a signal to investors to exploit other cleaner forms of power.

Alternatively as a stop-gap measure, the country's utility scale RE requirements can auctioned off
in a Swiss challenge system, similar to what is being done by electric cooperatives with bilateral
contracts.

Present FIT mechanisms favor only big developers. An incentive scheme for households and other
small developers should be implemented in order to take advantage of the cost competitiveness
and higher efficiencies of RE consumption at source. This will also help in the rural electrification
project as it turns vulnerable communities into RE producers.
References

Energy Regulatory Commission, “Case no. 2014-109RC,” 8 June 2015 <http://www.erc.gov.ph/Files/

Render/issuance/6277>.

Energy Regulatory Commission, “A Resolution Adopting Guidelines on the collection of the Feed-In Tariff
Allowance (FiT-ALL) and the disbursement of the FiT-ALL Fund,”8 June 2015 <http://www.transco.ph/
downloads/fitall/ERC-Resolution-No.24-Series-of-2013-FIT-All-Collection-and-Disbursement-
Guidelines.pdf>.

TRANSCO, “Feed-In Tariff Allowance (FIT-ALL)/ ACRR Collection and Remittance,” (Slide presentation,
February 13, 2015).

Naomi Klein, “This Changes Everything: Capitalism vs. the Climate” (New York: Simon & Schuster, 2014).

Wholesale Electricity Spot Market, “WESM Lecture Series on FiT Allowance and Must Dispatch,” (Slide
presentation, February 13, 2015).

Endnotes

1 M. M. El Wakil, “Powerplant Technology” (New York: McGraw-Hill Education, 1985).

2D. Elliott, M. Schwartz, R. George, S. Haymes, D. Heimiller, G. Scott, “Wind Energy Resource Atlas of the
Philippines” (Golden, Colorado: National Renewable Energy Laboratory, February 2001).

3Roberto Verzola, "Crossing Over: The energy transition to renewable electricity" (Pasig: Friedrich-Ebert-Stiftung –
Philippine Office, 2015) p7.

4Anelia Milbrandt, Ralph Overend, “Survey of Biomass Resource Assessments and Assessment Capabilities in
APEC Economies” (Asia Pacific Economic Cooperation, 2008).

5Ritchie Horario, "Power rates to go up this month," The Manila Times, 10 February 2015, 8 June 2015 <http://
www.manilatimes.net/power-rates-to-go-up-this-month/162127/>.

6 Rowel Del Mundo, “Understanding and Reducing Power Rates in the Philippines” (UP Center for Integrative
and Development Studies, Slide presentation, April 16, 2015), 17 April 2015, 21 April 2015 <http://
cids.up.edu.ph/lecture-2015/>.

7Helen Flores, "50% of Pinoys rate themselves poor," Philippine Star, 13 May 2008, 8 June 2015 <http://
www.philstar.com/headlines/61851/50-pinoys-rate-themselves-poor>.

8Juzel L. Danganan, "Meralco to add renewable energy charge of 4 centavos per kWh this February," Interaksyon, 4
February 2015, 8 June 2015 <http://www.interaksyon.com/business/104351/meralco-to-add-renewable-
energy-charge-of-4-centavos-per-kwh-this-february>.
Appendix: Calculations and Estimates

FIT costs in industry

An electric arc steel furnace consumes around 425 kWh to melt a ton of steel.9 The Philippines
consumes around 3 million tons of rebar steel for construction as stated by Steel Asia, the largest
steel company in the country. 10 Assuming that all rebar steel companies use electric arc furnaces,
then the Php 0.04/kWh FIT charge will translate to a Php 51 million/year additional expense. This
is only the increase in melting expenses. It doesn’t include rising utility costs from other energy
intensive processes in rebar production.

Wages Comparison
Comparing wages between countries is not a straightforward process owing to the fact that in
some countries there are multiple wage tiers (ex. regional wage boards in the Philippines). Also
due to currency differences and differing costs of living, a more useful comparison is not the face
value of the wage but what the wage earner can buy with it. Which is why adjusting for PPP can
give a useful estimation. Data from a private entity (aseanbriefing.org) was used to calculate the
monthly minimum wages.11 Where multiple (e.g. regional) minimum wages exist, the lowest was
chosen. In order to adjust for purchasing power, conversion factors from the World Bank were
used.12 A 20 day work month was also assumed.

Data collated by the Department of Labor and Employment was also used to compute the daily
minimum wages. Different rankings were generated from the two data sets. Ultimately data from
aseanbreifing.com was used because it’s more complete (DOLE data did not have Myanmar) and it
reported lower wages for the Philippines than DOLE.

Country Daily Nominal 2013 Exchange PPP Conversion PPP Adjusted

Minimum Wage Rate Factor Minimum Wage
(in $)
Thailand 9.19 32.6315 13.06 22.961982006126
Malaysia 7.18 3.7138 1.59 16.770493081761
Philippines 5.82 44.8270 19.37 13.468928239546
Cambodia 4.18 4,078.6900 1,562.92 10.90837931564
Vietnam 3.28 21,857.9000 8,561.60 8.373891795926
Indonesia 2.79 13,123.4000 4,384.43 8.3509797168617
Laos 1.40 8,292.6200 3,121.10 3.7197359905162
Source: DOLE

Country Monthly 2013 PPP PPP Adjusted

Minimum Exchange Conversion Minimum
Wage (in $) Rate Factor Wage
Malaysia 263 3.7138 1.59 614.29522013
Thailand 206.8 32.6315 13.06 516.70705972
Indonesia 85.45 13,123.4000 4,384.43 255.76746122
Philippines 100 44.8270 19.37 231.42488384
Laos 78.15 8,292.6200 3,121.10 207.6409769
Vietnam 79.12 21,857.9000 8,561.60 201.99460942
Cambodia 31.60 4,078.6900 1,562.92 82.465259898
Myanmar 46 3.7138 285.17 0.599063015
Source: aseanbriefing.org
9 http://www.heattreatconsortium.com/metalsadvisor/iron_and_steel/process_descriptions/
raw_metals_preparation/steelmaking/electric_arc_furnace/electric_arc_furnace_energy_consumption.htm

10 http://www.steelasia.com/news-saup.htm
11 http://www.aseanbriefing.com/news/2013/04/16/minimum-wage-levels-across-asean.html

12 http://data.worldbank.org/indicator/PA.NUS.PRVT.PP