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Renewable Energy Investments and Fiscal Reforms will Ensure Sustainable Economic Growth and Avoid Greek-like Financial Meltdown

January 27th, 2012 Posted in renewable energy

Renewable Energy Investments and Fiscal Reforms will Ensure Sustainable Economic Growth and Avoid Greek-like Financial Meltdown

I would like to share my views with the purpose of suggesting what would be the sustainable economic and energy development path for our country, the Philippines.

With the passage of the Renewable Energy (RE) Law, the government thru the DOE, NREB, ERC, NGCP/TRANSCO, PEMC/WESM, NPC/NPC-SPUG, DUs, ECs, power generators (IPPs, IPPAs), NGOs, etc, and with the assistance of donor countries and financial institutions such as the WB, ADB, UNDP, USAID, AUSAID, etc, have developed the IRR and other pertinent regulations for the implementation of the RE Law, including the provision of feed-in-tariff (FIT) that will be paid to RE developers and generators so that it may provide non-fossil power generation to meet future demand of power as well as replace/augment supplies due to retirement of conventional and fossil power generation sources.

On several occasions, it has been articulated by both local and foreign experts that RE power generation is the sustainable way to go to meet the country’s energy and power needs in the future because:

1) Fossil fuels are finite and will be gone within our lifetimes (oil in 50-60 years, natural gas in 60-70 years, coal in 250 years) while nuclear fissile uranium in 500 years (extendable to 1,000 years with breeder reactor technology).

2) To ensure a cost-effective and sustainable energy mix, the country has to embark of expanded RE power generation to meet incremental growth as well as replace the ageing and expensive fossil power generation sources.

3) The country has to show that it is also willing to reduce its greenhouse gas (GHG) emissions such as carbon dioxide (CO2) from power generation as part of its responsibility to the world, as it solicits aid from donor countries for assistance to mitigate climate change and undertake mitigation measures.

4) Fossil and conventional power generation (oil thermal, gas thermal, oil/gas turbines, geothermal) will continue to become expensive since they are all linked or indexed to the world market price of crude oil (diesel, bunker, natural gas, coal and geothermal are indexed in some way to the price of crude oil) and it is estimated that the world price of crude oil will continue to rise from the current US$100 per barrel to over US$200 per barrel within the next few decades.

The following is a step-by-step calculation of the absolute pump price of an oil product:

SUBTOTAL1 = FOB + FRT + INS + WHARFAGE + BOE FEE + OCEAN LOSS + DOC STAMPS + DEMURRAGE + CUSTOMS DUTY + SPECIFIC TAX

VAT1 = (SUBTOTAL1) x 12% (VAT on imported oil)

DPLC = SUBTOTAL1 + VAT1 in $/bbl (duty paid landed cost)

The duty paid landed cost is then converted to equivalent Pesos per liter using the exchange rate and conversion from barrels to liters (1 barrel = 42 gallons, 1 gallon = 3.7854 liters):

DPLC = (SUBTOTAL1 + VAT1) $/bbl x (48.00 PhP/$) x (bbl / 158.9868 liters) = (SUBTOTAL1 + VAT1) x FOREX / 158.9868

The next step is to add the oil company margin (the only portion that actually goes to the oil company since the other cost factors are simply pass-thru charges that go to the supplier, shipper, insurer, port authority, government tax and VAT) and the other local costs and local VAT. 

Based on the author’s monitoring of 2007 annual average MOPS, exchange rate and pump price, the oil company margin as % of DPLC is shown below:

% OIL COMPANY MARGIN = 14.77% 95 RON, 13.17% 93 RON, 15.29% 87 RON, 30.90% kerosene, 1.34% avturbo, 9.07% diesel, 19.79% fuel oil, 29.28% LPG

OIL COMPANY MARGIN = DPLC x (% OIL COMPANY MARGIN)

BIOFUELS = 0.200 PhP/liter for 1% CME in diesel (I have no idea for 10% ETHANOL in gasoline)

DEPOT COST = 0.250 PhP/liter (depends on bulk plant location and type of products carried)

DEALER’S MARGIN = 1.200 PhP/liter for gasoline, kerosene, avturbo and diesel, 1.3640 PhP/kg for LPG

REFILLER’S MARGIN = 0.500 PhP/kg for refillers of LPG

TRANSSHIPMENT = 0.200 PhP/liter for gasoline, kerosene, avturbo and diesel, 0.0897 PhP/liter for fuel oil, 0.3226 PhP/kg for LPG (tankers and barges)

HAULER’S FEE = 0.1140 PhP/liter for gasoline, kerosene, avturbo and diesel, 0.1254 PhP/liter for fuel oil, 0.3059 PhP/kg for LPG

SUBTOTAL2 = OIL COMPANY MARGIN + BIOFUELS + DEPOT COST + DEALER’S MARGIN  + TRANSSHIPMENT + HAULER’S FEE

VAT2 = SUBTOTAL2 x 12% (VAT on local costs)

Finally, the domestic oil pump price is calculated by adding them all up:

PUMP PRICE = DPLC + SUBTOTAL2 + VAT2

                  = (SUBTOTAL1 + VAT1) x FOREX / 158.9868 + SUBTOTAL2 + VAT2

The following formula shows the impact of increase in world prices of crude oil or petroleum finished products and deterioration of foreign exchange rate on domestic prices (at 12% VAT):

ADJ = Change in DPLC + Change in LOCAL COSTS = pump price adjustment

ADJ = { [ FOB(2) x FOREX(2) – FOB(1) x FOREX(1) + (FOREX(2) - FOREX(1)) x FRT ] x (1 + 0.05%) x (1+ 0.10% + 0.50% + 0.15% + 3.00%) + ((FOREX(2) – FOREX(1)) x WHARFAGE } 1.12 / 158.9868 x (1 + % OIL COMPANY MARGIN x 1.12)

5) On the other hand, RE power generation technologies (wind, solar PV, mini-hydro, biomass direct combustion, biomass gasification, biomass cogeneration, ocean thermal energy conversion, etc) would provide electricity rates that are insulated from rising costs of crude oil, and its costs is mainly the recovery of capital cost for its construction and maintenance and operating costs which do not rise at a rate dictated by the price of crude oil.

6) Investing now in RE will surely develop the RE industry in the country (technicians for wind farms, solar PV, biomass plants, mini-hydro, ocean thermal) and propel the country to excellence, that would be otherwise lost if RE is not allowed to grow hand-in-hand with the growth of energy and power demand in the country.

7) If we remove RE power generation by way of eliminating the FIT, the long-term cost of power in the country will rise to high and un-sustainable levels as shown by the following formula:

Long range marginal cost (LRMC, $/kWh) = (CAPITAL COST x CRF + FIX O&M + VAR O&M + Fuel Cost) / Annual Generation

(LRMC, P/kWh) = (LRMC, $/kWh) x (EXCHANGE RATE, P/$)

This formula shows that an RE plant will have a fairly constant cost while fossil power generation will be subject to rising fuel costs over time.

Likewise, undertaking fiscal reforms such as expanding the tax collection efforts and tax base (higher VAT rate of 12%, income tax and corporate tax, property tax, capital gains tax, inheritance and donor’s taxes, specific tax on petroleum products, tax on energy resources, etc.), expanding the exports and trade surplus, increasing overseas remittance from our manpower exports, managing the budget deficit thru zero budgeting, improving competitiveness thru private public infrastructure projects, and eliminating or minimizing graft & corruption will ensure a stable foreign exchange regime as well as prevent a Greek financial meltdown.

Only 4 countries in the world escaped the 2008 Global Financial Meltdown (China, Brazil, Indonesia and Philippines) due to fiscal (China imposes 17% VAT on both domestic products and exports) and banking reforms (30% equity for housing mortgages in the Philippines), investment in RE (China invested in wind and solar energy) and biofuels (Brazil produces gasoline from sugar cane alcohol) and elimination of subsidies in oil products and electricity (Indonesia and Philippines eliminated subsidies on petroleum products and electricity).

The country’s oil industry deregulation that allows full recovery sans subsidy on the petroleum products encourages judicious use and conservation of oil products. Likewise, the reforms in the electric power industry eliminated government subsidies and budget support to the bankrupt NPC by transferring its debts to the PSALM which is being liquidated thru the Universal Charge/Levy. Before the EPIRA, the NPC’s budget support accounts for 50% of the Philippine government’s budget deficit which is un-sustainable and could lead to a Greek-like financial meltdown for the country if the debt continued to be paid thru budget support. With the Universal Charge/Levy, all users of electricity whether local citizens, industries or foreign tourists and visitors will shoulder and carry the burden of liquidating this debt in an equitable manner in the next 25 years (Universal Charge = Debt / [25 years x annual generation]).

There are observations that Philippine electricity rates are second highest in Asia next to Japan(which has cheaper nuclear power) because it reflects the true cost of generation without subsidy and the need to liquidate the NPC debt thru a Universal Charge. I believe that this is a temporary situation which will reverse soon as its Asian neighbors need to adjust their un-sustainable electricity rates to remove subsidies that artificially lowered their power rates compared to the Philippines and with the eventual liquidation of the Debt leading to removal of the Universal Charge in the near future.

8) Not investing in RE now by not adopting FIT will delay approach to break-even point which is estimated by experts to be 7 years. Although solar PV panels and wind turbines will become cheaper in 5 years, not investing on that basis will subject the country to lost opportunities and future costs. Please note that the cost of the FIT x total generation is not the real cost of implementing RE. You have to deduct the cost of the replacement fossil generation without RE, hence the there will be a net positive cost savings in favor of RE.

9) Have a must-run RE as part of the base load will surely bump-off the expensive diesel oil generation, hence, the price setter in the wholesale electricity market (WESM) would be the cheaper non-oil generation such as coal and natural gas, resulting in cheaper spot market prices and savings to the end consumer.

10) Most RE technologies are easier and quicker to implement, thus meeting short-term power shortages such that anticipated inMindanao.

Personally, I believe that the right way forward for the world right now is to promote renewable energy and investments in sustainable energy technologies to address the impending depletion of fossil fuels during our lifetime.

We can extend their lifetimes (ratio of resource to extraction rate) by increasing energy utilization efficiency (use energy efficient cars and not SUVs), avoiding wasteful consumption (don’t drive your vehicle when you can walk or use public transport), and avoid using fossil fuels (use renewable solar, wind, mini-hydro, biomass and ocean thermal).

By investing now in renewable energy, the world will reduce the demand and thus the price of crude oil, as well as prolong the lifetimes of fossil fuels. It will also reduce carbon dioxide emission and other emission of green house gases that promote global warming and climate change.

Likewise, it will help conserve scarce foreign exchange by utilizing abundant renewable energy instead of paying scarce dollars for OPEC crude oil and finished products.

Also, the world needs to consider commercializing now breeder reactor technologies to stretch scarce nuclear uranium fission fuels to over 1,000 years (from current 300-500 years lifetime of uranium fission fuels).

Thus, the future of the world will depend greatly on shale gas and tar sands to expand natural gas LNG, renewable energy to conserve scarce fossil fuels and reduce global warming, and nuclear breeder reactor technologies to stretch scarce uranium fission fuels.

Countries with very cheap energy and electricity are doing the world a great disservice since their citizens are wasting precious fuels and currencies. Subsidies on domestic and imported fuels are not preparing their citizens to the impending scarcity of fuels. Hence, their countries are in great financial crisis since their energy and electricity are not taxed enough to reflect their scarce value and emission of green house gas.

Countries that have high energy and electricity prices due to adequate taxation have financially robust governments and economies. They don’t suffer the budget deficits and national debts such as the USA, Great Britain, Italy, Portugal, Ireland, Greece, and Spain. Taxes on oil and energy products and electricity (customs duty, specific tax, value added tax, excise tax, carbon tax) need to be imposed to balance the national budget and promote energy conservation.

Please share your thoughts on my blog.

One Response to “Renewable Energy Investments and Fiscal Reforms will Ensure Sustainable Economic Growth and Avoid Greek-like Financial Meltdown”

  1. Andrew A. Sailer Says:

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