Since the FIT is a put option, can its market price be discovered?

Yes, through bidding.

This means that it is possible to envisage a bid process that is not only consistent with the law but also ensures transparency and competition so that the subsidy payments to be collected from consumers are kept as low as possible.

Without bidding, there could be undue injury to consumers, and this would be a basis for holding public officials liable under the laws proscribing graft and corruption (RA 3019). 

Indeed, if a proposed FIT (to be bidded out as a put) is “too high,” the bidders will compete by raising the payment they will consider making for the license to be an eligible RE producer. If, by mistake, the proposed FIT is “too low,” then there would be no bidders. But then, we would have discovered that perhaps the RE option is still not sufficiently viable, and as a matter of public policy, it would be more sensible to wait for technological advances that would reduce production costs from RE sources. A proper bid process is thereby a safeguard against human error in setting the level of the proposed FITs.

Based on newspaper reports that foreign investors are eagerly awaiting the implementation of the FIT scheme, it appears that the proposed FITs are too high. Without bidding, the FITs as puts are in fact “given away,” which would be disadvantageous to the consumer as well as to government (because the latter would have reduced its tax collections by channelling investment toward RE producers paying no or little tax and away from other producers bearing a higher tax burden).

It is submitted that if the FITs are granted without bidding, a civil anti-graft case may be filed against the public officials who refuse to conduct a bid, as well as against the RE investors who conspired with public officials to benefit from a process of licensing conducted without bids. The law declares as unlawful the act of causing undue injury to the government or the public (see Sec. 3(e) of the Anti-Graft and Corrupt Practices Act (RA 3019). The plaintiffs in such a civil case would be electricity consumers who will be forced to pay the FIT-All.

Note: The DOE Secretary recently stated that the FITs will be put up for bidding

What is the effect of bidding out the RE contracts by selling the FIT as a put?

Not only will the RE producers compete against each other and in the process reveal that they can make more than reasonable returns on investment on the basis of the FITs proposed by the NREB. The RE producers will also pay for the right or license to feed into the grid, and the payments for these licenses will then minimize the size of the FIT-All component that consumers would have to pay as a universal charge.

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2 thoughts on “Since the FIT is a put option, can its market price be discovered?

  1. my client majayjay hydropower corp has plunked in P25m in investment for just a measly 1.25mw hydro since 2004 and it has yet to get financing from the DBP and other development banks. that was even before the ok of the RE law. meralco has rejected mhc’s proposed power purchase offer, a sine qua non in the fund ap[plication. this was even before the ok of the FIT. it looks like the RE policy is just one of those things where we keep up with the Joneses in the RE fad and get noticed by the carbon credit moneybags?

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    1. Without specific reference to your client, could a mini-hydro producer not simply get a permit to get on the grid and sell its output into the WESM? Would this be a viable business option, even without long-term contracts with distribution utilities?

      My understanding is that hydro can be quite competitive, if your water geography is right, which explains why Canada, much of Latin America, or Norway are pretty much hydro-based.

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