Moore’s conjecture and renewable energy

Time flies and Moore’s Law applies. Because the cost of computing and other high-tech things, such as solar panels, drop by half about every eighteen months, the feed-in tariff (FIT) component of the Renewable Energy Act of 2008 (RA 9513) will soon be obsolete.

Such obsolescence should be welcomed. When something called “grid parity” has arrived or is at hand, the cost of producing one’s own electricity will have fallen to levels approximating what one now pays the grid. This portends a victory of sorts for the hapless electricity consumer.

The FIT is a guaranteed price to be paid to new plants using renewable energy (RE). It is also a price that is well above the wholesale cost of producing electricity from the usual sources (generally thought to be in the P5/kwh range). The proposed FITs are P7/kwh for biomass, P6.15 for hydro, P10.37 for wind, P17.65 for ocean waves, and P17.95 for solar energy. (For comparison, the residential “all-in” price paid by many consumers is already above P10/kwh.)

These differences in prices result by law in something the consumer on the grid is obliged to pay. That something is set up as a universal charge, which is effectively the means by which consumers subsidize the FITs arranged for new RE producers. To many, the universal charge is an unconscionable burden embedded in the high retail price of electricity.

This month of September, the Energy Regulatory Commission (ERC) has scheduled hearings on the FITs proposed by the National Renewable Energy Board (NREB). To investors, these hearings have inordinately been delayed. To consumers, the delay is welcome relief. Who is right?

There is overall support for renewable energy, so that the main issue at the public hearings is whether the proposed FITs are reasonable. Some consumer groups consider that the FITs for wind, solar, and ocean technology are too high, particularly when compared with those in other countries. For example, Malaysia has a FIT for solar equivalent to about P12/kwh. It is estimated that consumers will pay an extra P7billion to P9 billion because of the proposed high level of the FITs, and that’s just for its first year of operation.

But there are more important issues. One is that of allocating eligibility for FITs. The implementing agency, the Department of Energy (DOE), believes that public bidding should be conducted, whereas some players seem to prefer negotiated contracts.

Economics and public policy suggest that for large players, bidding is the right choice. This is because the approved FIT is equivalent to the strike price of a put option (the RE producer has the right but not the obligation to sell electricity at the FIT price), and a put option has a value, discoverable through an auction. The value of the put is revenue to government that can be used to offset the subsidy burden to be imposed on all consumers.

But perhaps the most important question is whether we should simply avoid the FIT scheme now that grid parity is practically at hand. Grid parity will obviously reduce demand for grid power as consumers produce electricity for own use.

The small consumer sees grid parity in terms of his cost of producing power relative to the retail price. Already there are indications that it will soon be possible to install a 3kw solar panel at a cost of $1/watt, or $3,000, that could generate 10kwh/day. If one adds in installation and capitalized depreciation costs, the 3kw capacity could perhaps cost close to $6,000 or about P250,000. This would allow the consumer to avoid a retail bill of P36,000 per year (10kwh per day, times 365 days, times P10/kwh retail price). The return on investment is about 14% per annum, incentive enough to rely on the grid only for backup. (This also means that the proposed FIT for solar of P17.95/kwh is plainly too high given that a small producer can do it at P10/kwh.)

Grid parity will also benefit larger commercial users who can take advantage of economies of scale.

When consumers produce off-grid power, it becomes obvious that a scenario of supply shortages in the near future is somewhat exaggerated. Grid parity is a blessing that ought not to be wasted by the FIT scheme. Instead, we should encourage consumers, particularly the small ones, to take advantage of grid parity, and in a way that does not impose a subsidy on the rest of us.


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