1984 in 2011, or How Moore’s Law will break the bank

This is a fictional story of a greedy lobby gone bad. Some parts of the story are either not true or cannot be proved to be true. But the story seems to make sense.

Some foreign investors, sensing that they can put one over the Filipino public, bribed certain legislators and other officials to approve a law that would generate gargantuan profits. For the investors, the bribes were an ordinary cost of doing business to be more than covered by anticipated profits.

How was the scam supposed to work?

First, there had to be a cover story. That was the fad that “green” energy is good for the environment, and Filipinos should do their part to contribute to keeping the planet safe. Fossil fuels supposedly add to the “carbon footprint” and the risks of global warming. Renewable energy (RE) – from hydropower, the sun, the wind – would therefore be the energy source of choice. Thus was enacted the Renewable Energy Act of 2008.

Second, there would be something in the new law that would generate profits that could be sold as relatively painless. That something is called the feed-in tariff or FIT.

The FIT is a guaranteed price that would be paid an investor producing electricity from RE sources. The FIT would be set well above the cost of producing electricity from fossil fuels, and also above the true cost of producing electricity from renewable energy.

Of course, this second part can work only if the public, including the officials tasked with implementing the new law, are unaware of the true cost of production in the renewable energy sector.

The FIT would also be sold as almost painless. For example, the difference between the cost of producing RE electricity and “normal” electricity was estimated at P8B in the first year of the law’s operation (expected to continue over at least several years thereafter). This is a subsidy that would be covered by something called FIT-Allowance (FIT-All), a “universal charge” to be paid for by all consumers on the electricity grid. The FIT-All for the first-year P8B of subsidy for the FIT was calculated at a very small 10 centavos per kwh, or something like 1% of the current retail price of about P10/kwh.

This 1% of added cost to the average consumer translates into P7B to P8B of subsidy paid to the “lucky” RE producers. Of course, not all the P8B would be “free and clear” profit. Something like P5B may well represent the true “extra” cost of going green, since for now, green energy is supposedly more expensive than fossil-fuel energy. Still, the remaining P3B should be enough to line investors’ pockets and pay bribes.

But the scam has not succeeded. At least not yet. This month of September, public hearings are scheduled. Some consumer groups suspect the scam and called it out, pretty much like the child who said the Emperor had no clothes. But it is up to certain government officials, this time at the Energy Regulatory Commission (ERC), to approve the FITs proposed. Subsequently, it is up to investors to negotiate contracts with government officials to be part of the FIT system. And then it would be a case of “laughing all the way to the bank.”

The scam is “on hold” because the lead agency, the Department of Energy, through its head, the Secretary, opined that the way to choose which investors get to play would be by public bidding. This has caused the investor community sleepless nights. Do they have to pay more bribes and also to collude with each other so that they would win the bidding? What if the payments they have to make would more than wipe out their anticipated profits? What if they avoided the bidding altogether?

In the meantime, time marches on. The new RE law was enacted in 2008, and still it has not come into effect. Moore’s Law operates in the high tech sector, and this law states that per unit costs (of computing, energy, etc.) tend to halve every 18 months or so. For example, the cost per watt of a solar panel has fallen by 70% since 2008 when it was $4, pretty much in line with Moore’s Law.

But what’s wrong with Moore’s Law? Nothing. Eventually, something called “grid parity” arrives, which is the moment when the cost of RE electricity falls enough to be equal that of fossil-fuel electricity. At that point, any accountant or economist can testify before the proper tribunal, the ERC, that the FIT scheme would be an obvious fraud on the consumer. Under the country’s anti-graft laws, a conspiracy between investors and certain public officials to implement the FIT scheme would be unlawful because it would cause undue injury to the public. If the accused conspired with willful intent, it is a criminal offense; without intent, the conspiracy would still result in civil liability.

So, will the greedy lobby get its way?

It seems there is a kind of moral lesson to the story. The FIT was a brainchild of the environment lobby, and it was designed to work in favor of individuals and small consumers who wanted to produce their own solar/wind/water power, thereby reducing the overall demand for electricity. It worked well this way in many countries, especially in Germany, where many homes now have solar panels on their roofs. But if the FIT is used to favor the big players, well, that seems to be something else.

There is a second moral lesson. Grid parity is around the corner, if only because the universal charges for the old take-or-pay IPP contracts are still around to bedevil the hapless electricity consumer. For the small consumer, when the cost of do-it-yourself RE electricity is down to P10/kwh, it pays to produce for own consumption, and rely on the grid only as a backup. But this means there will be an incipient consumer revolt if government officials cannot contain the universal charges.

The nice thing is that the RE Act of 2008 will now favor the small consumer because one of its provisions mandates the duty-free importation of equipment for use in RE electricity production. Here, the law is well made, and the legislators who were bribed to vote for it can secretly absolve themselves because this time they are heroes!

The above is a work of fiction. But what if the would-be perpetrators roundly deny the scam, and it is thereby avoided? The denial wouldn’t exonerate, but estoppel would apply. And a fiction would have worked like a charm.  

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