I have no beef with renewables, as I am very much involved in promoting them. Renewables are good for the country because consumers are not exposed to global prices and foreign exchange fluctuations. This allows businesses and consumers to have fixed-price contracts.
The Philippines has legitimate and strategic reasons to develop OSW. We have more areas in our seas, and this technology will not crowd out other uses of our land — for food security and housing development, for example.
Affordability remains key concern
My main concern is that these DOE initiatives place the burden on consumers, not the government. I am sure the ordinary businessman or the ordinary consumer does not care about technological wonders like OSW. What ordinary folks care about is the cost of electricity. Period.
The proposed ceiling price being announced is around P11.00 per kwh. Clearly, Filipino consumers cannot afford that off the bat. Affordability is the key issue. If the government intends to pursue offshore wind, the incremental cost premium over the least-cost alternatives should be funded through the General Appropriations Act (GAA).
As it stands today, GEAP tariffs are like a regressive levy embedded in the generation charges passed on to businesses and ordinary consumers.
Risk of price anchoring
In addition to this fundamental objection, I have two other issues with the GEAP tariff.
First, the derivation of this “reserve” price is a mystery to all. I am sure that somehow the ERC - or DOE - adopted a Discounted Cashflow (DCF) approach. Most likely, then, the Weighted Average Cost of Capital was used to calculate the Levelized Cost of Electricity (LCOE) discount rate.
As I have argued in the past, the use of concepts like WACC and the Capital Asset Pricing Model (CAPM) in determining equity returns —and ultimately the discount rate—results in arbitrary and most likely bloated numbers.
While this “financialization” of the regulatory framework has not been questioned in court, I am sure it will eventually reach the courts and suffer the same fate as the Optimized Depreciation Replacement Cost (ODRC), which the Supreme Court deemed illegal.
Second, announcing the reserve price ahead will result in the P11.00 per kwh becoming a price “anchor” where subsequent bids will likely cluster near the ceiling rather than significantly below it. Especially with OSW, where there are fewer players than in ground-mounted solar plants, the market will be thin, and bidders will likely move toward the ceiling.
Rethinking the auction framework
This is the main problem with a technology-specific auction: prices tend to be high because the market is thin.
The government should just bid out, if at all, a non-technology-specific auction. This will result in the least cost among the renewables.
The ERC and DOE should revisit the GEAP process.
Technology-specific auctions tend to limit the number of bidders and drive up prices. The use of financial formulas can inflate the reserve price.
For esoteric technologies like OSW, the government should fund them from the GAA.
A power industry expert with over 40 years in experience as chief executive officer in firms ranging from banking, power, and advisory services.
