The economics of renewable energy

Republic Act 9513 or the Renewable Energy Act of 2008 has the following policy statements: (a) accelerate the exploration and development of renewable energy resources such as, but not limited to, biomass, solar, wind, hydro, geothermal and ocean energy sources, including hybrid systems, to achieve energy self-reliance, through the adoption of sustainable energy development strategies to reduce the country’s dependence on fossil fuels and thereby minimize the country’s exposure to price fluctuations in the international markets, the effects of which spiral down to almost all sectors of the economy; (b) increase the utilization of renewable energy by institutionalizing the development of national and local capabilities in the use of renewable energy systems, and promoting its efficient and cost-effective commercial application by providing fiscal and non-fiscal incentives; (c) encourage the development and utilization of renewable energy resources as tools to effectively prevent or reduce harmful emissions and thereby balance the goals of economic growth and development with the protection of health and the environment; and (d) establish the necessary infrastructure and mechanism to carry out the mandates specified in this Act and other existing laws.

On the first policy statement, my question is what do RA 9513 meant by such statements like “to achieve energy self-reliance” and “to reduce the country’s dependence on fossil fuels”? Does this mean 100 percent energy self-sufficiency and zero dependence on fossil fuels no matter what it will cost to do so? If not, then what is the target? The law has no specific target. It also did not say that while 34 percent of the country’s energy mix is renewable or around 5,300 MW out of the 15,000 MW installed capacity, the global average is less than 10 percent. So where is the urgency? Why aim for more?

I have no objection to the second policy statement. What I object is when it mandated the National Renewable Energy Board to set the minimum percentage of generation from eligible renewable energy resources and determine to which sector RPS shall be imposed on a per-grid basis. Why not just let the market determine this? If REs are not financially viable, they can be made viable through government incentives, which are already also provided in the act. With government incentives, many hydro and geothermal power projects had been put up in the past. How much more with the new incentives?

Now comes the proposal from NREB for REs to have a feed-in tariff of P17.95 per kw/hr for solar, P10.37 for wind, P7.0 for biomass, and P6.15 for Run-of-River sources. This is too much. The current rate for conventional sources is only P5.00 per kw/hr. Who will pay the difference? It is us the people, of course. And we do this in addition to the incentives given to the REs under the law.

What are these incentives? Hold your breath: (a) For the first seven years of its commercial operations, the duly registered RE developer shall be exempt from income taxes levied by the national government; (b) within the first 10 years upon the issuance of a certification of an RE developer, the importation of machinery and equipment, and materials and parts thereof, including control and communication equipment, shall not be subject to tariff duties; (c) any law to the contrary notwithstanding, realty and other taxes on civil works, equipment, machinery, and other improvements of a Registered RE Developer actually and exclusively used for RE facilities shall not exceed one and 1.5 percent of their original cost less accumulated normal depreciation or net book value; (d) The Net Operating Loss Carry-Over (NOLCO) of the RE Developer during the first three years from the start of commercial operation, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next seven consecutive taxable years immediately following the year of such loss; (e) seven years income tax holiday; (e) after seven years of income tax holiday, all RE Developers shall pay a corporate tax of 10 percent on its net taxable income as defined in the National Internal Revenue Act of 1997, as amended by Republic Act No. 9337; (f) if an RE project fails to receive an ITH (Income Tax Holiday) before full operation, it may apply for Accelerated Depreciation in its tax books and be taxed based on such; (g) the sale of fuel or power generated from renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy sources using technologies such as fuel cells and hydrogen fuels, shall be subject to 0 percent value-added tax (VAT), pursuant to the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 9337; (h) a renewable energy developer, established after the effectivity of this act, shall be entitled to a cash generation-based incentive per kilowatt hour rate generated, equivalent to 50 percent of the universal charge for power needed to service missionary areas where it operates the same, to be chargeable against the universal charge for missionary electrification; (i) Tax Exemption of Carbon Credits; and (j) Tax Credit on Domestic Capital Equipment and Services.

So okay, the cost of going into RE projects is really very high and these incentives may not be enough to entice investors. But different REs also differ in cost and there is also a need to protect the interest of the users. So instead of allowing higher feed-in tariff for higher cost REs, why not just allow one rate, which is a little higher than the current rate for conventional REs? In this way, efficient investors with the lowest cost, no matter what type of RE is used, will get in first and eliminate the inefficient ones. Is this not what economics is all about?