Alternatives to Feed-in Tariffs

Solar panels are sprouting all over Germany and Spain as a result of feed-in tariff programs by their governments. When governments face the need to develop their solar energy, the question comes up if they should consider feed-in tariffs.  Feed-in tariffs is a policy of governments to pay grass-roots producers of solar electricity higher fees (than traditional electricity rates) for the electricity that they generate. This policy has been extremely successful in Spain and Germany, to the point that so many people are putting up solar panels, and have become a major drain on their governments’ budgets.

The Philippines has very recently instituted a system of Feed in Tariffs for Renewable Energy. I think it will not only not work, it will end up raising the price of electricity to consumers, and be an unacceptable burden to the national budget.

I think that a feed-in tariffs policy may have been a good idea in the past; but that we should now use other strategies for promoting solar power. Feed-in tariffs are potentially a big drain to national budgets; but the main reason for not using them now is that the price of solar panels have dropped sharply in recent years, to the point where the price for generating solar electricity is almost the same as ‘grey’ electricity in some times and places. This means that price is no longer the main obstacle to people shifting to solar. Government programs to promote solar energy should address these obstacles directly.

Solar Bank
The biggest obstacle that keeps households or businesses from installing solar panels is the need for a large expense up front. It is similar to having a mobile phone where you pay for 15-20 years worth of service at one time. The mobile phone industry would not have taken off if this was the case. There needs to be a way to ‘cut up’ the expense of solar power to convenient monthly portions.

The government should put up a ‘Solar Bank’ which would pay for the panels, and to which the buyer could make monthly payments. The bank could charge the household for electricity produced, at slightly below the prevailing price of  ‘grey’ electricity(and at a very low interest), until they are fully paid (which should be between 15 and 20 years (solar panels are expected to last at least 25 years) . Included in this contract should also be insurance coverage, so that people will not continue paying if the panels get destroyed or damaged.

Net Metering
Another measure would be to require electricity providers to offer net metering for a modest one-time fee. Net metering is when a user is allowed to sell (excess) electricity to the grid at the same price that he pays for getting electricity.  This is favorable for those who produce electricity themselves,  from solar, wind, biomass etc. Another advantage is that net metering also reduces the need for batteries, which are a significant part of the expense of solar systems.

In Europe, net metering arrangements mean that a household can ‘sell’ excess electricity to the grid, for the same price, but only as long as it does not exceed the household’s monthly consumption. Beyond that, the electricity provider will only pay the ‘generating cost price’ (i.e. excluding transport and taxes )

Business Incentives
Businesses should be stimulated to adopt solar energy.  In a previous blog, I pointed out that, for commercial and industrial users in Metro Manila, the cost of Meralco electricity is sometimes higher than the cost of solar electricity (Solar Cheaper than Meralco in April). This is especially so during the dry season, when cheap hydro-electric power is less abundant. But businessmen consider not only the cost of solar energy; they also have other concerns, which need to be addressed.

Reliability. Solar electricity depends on the presence of the sun; so the panels don’t produce energy at night and only a little during cloudy days. Companies should be able to combine grid and solar electricity to get a very reliable energy supply. And for this, they would need heavy-duty batteries. I propose that the government subsidize the batteries for solar installations of businesses. Perhaps a subsidy from 25% to 50% of the cost of the batteries would be appropriate.

Resale Value. The government could take measures to develop the secondary market for solar panels. This would stimulate businesses to buy and install solar panels. Some businesses may then opt to install second-hand panels that are cheaper. A secondary market would also stimulate businesses to upgrade their panels when technological improvements improve panel efficiency.

One measure to help stimulate the secondary market is to allow panels to be subject to accelerated depreciation. When the panels’ book value reaches zero, businesses may decide to sell them for a tidy profit, and then buy new panels.

Maintenance. Companies may be unwilling to install solar panels because of perceived maintenance costs and hassle. The government should provide them with technical support, and even training programs for building administrators or maintenance staff, to teach them how to maintain the panels properly.

Of course, businesses should also be able to avail of the loans/insurance from the Solar Bank, as well as benefit from net metering.

The Philippines is almost ripe for solar energy

In the Philippines today, solar energy – through photovoltaic (PV) cells – which transform the sun’s rays directly into electricity – is generally a niche product. It is seen mainly as a way of generating electricity for isolated communities e.g. small islands, etc. since these places would cost too much to get physically connected to the electricity grid (through transmission towers or underwater cables). Electricity from PV cells are viewed as too expensive when compared to electricity from the grid.

Electricity from PV cells is almost ripe for widespread installation in Philippine cities.
Some policy and infrastructure need to be put in place, but the underlying technology and economics of solar energy promise to make it ripe for widespread use very soon. Here are some factors:

Lots of sunlight. In contrast to European countries, the Philippines is endowed with a lot of sunlight all year round. And the sun’s rays are more intense, and the sun is nearly overhead at its highest point. This means that the amount of electricity that a PV cell can generate is potentially greater, and that the solar panel does not have to be “aimed” at a certain direction to get enough sunlight (it can simply lay flat on a roof).

Technological advances. Photovoltaic cells have become cheaper than before due to the substitution of expensive materials used (e.g. gallium and indium) with cheaper silicon, carbon and boron; thinner PV cells and easier installation and operation; advances in the efficiency of batteries, etc. Announcements of breakthroughs in the latest “thin film” technology have been made in January, which potentially could reduce the cost of PV cells by half, are a sign of big (and recent) strides in technology.

Rising Cost of Oil, Appreciating Peso. With the present state of PV development and the abundant sunlight in the Philippines, the cost of electricity from PV cells should now be around 12 pesos/KwH. If we compare this to the cost of producing electricity from oil (around 6 pesos/KwH) or coal (less than 4 pesos/kwH), then solar energy from PV cells is still more expensive. In the last two years, the cost of oil has doubled, and the peso has appreciated almost 20% in relation to the dollar. When the cost of oil rises, this would mean an increase in the cost of electricity generated by oil-fired generators. As the peso appreciates, the price of the imported components needed for solar energy generation goes down. If this trend of rising oil prices and appreciating peso is set to continue, the cost difference between solar energy and oil/coal will lessen.

Ripening?
Solar energy may not yet be ripe for widespread use just yet, but the economic and technological changes make it applicable for more and more places in the country. Where before, it may have been cost-effective for very small islands or really remote communities, the changes may mean that it could be cost-effective for less-remote communities. Some islands which are not connected to the national grid may be more dependent on fuel oil generators, which would mean that their retail cost of electricity would be significantly above the national average of 7 pesos/kwH. (assuming full dependence on fuel oil generators, retail prices would be above 9 pesos/KwH]) [in the national grid, about 30% of the electricity is produced from cheap renewable sources like geothermal, wind and hydroelectric]. In these places, solar power achieve grid-parity (which is when the cost of solar power is equivalent to the cost of electricity from the grid) would come earlier than in the main electricity grid.

While electricity from PV cells is still a bit more expensive than that from fuel-oil generators, there are some advantages of using PV cells even now. This would include:
Lesser transmission costs and risk. Solar energy is produced nearer the consumer, which means less cost for transmitting the electricity, and less risk of having power cuts because of problems in the transmission. After all, terrorists, rebels or extortionists could always blow up power lines; or an earthquake or other disaster could happen.

Possibility of having more sunlight, solar cells lasting longer. All the computations re the cost of solar energy are based on the expected amount of sunlight during a 20-year period. If there happen to be lesser cloudy days than the average, the electricity produced by the PV cells would be more, meaning that the cost per KwH would be less. Also, after the 20-year period, the solar cell will most probably still work; any electricity produced after this point is also cheaper.

Funds for projects that reduce CO2 emissions. Under international agreements meant to reduce greenhouse gases, funds are available for projects (especially in the third world) which reduce greenhouse gases. This is only available in cases where they are not (yet) commercially viable. Solar energy projects in the Philippines would qualify for these grants. These payments could easily bridge the gap between the cost of solar power and conventional electricity.

For more on solar energy: Solar Energy Links , Solar Energy in the Philippines

We should seriously take steps to lessen our energy use

In the run-up towards an Energy Summit, which is supposed to be in response to both the crisis of global warming and the skyrocketing price of oil, I am disappointed to note that there doesn’t seem to be much in terms of substantial proposals on the table. The big debate on whether to exempt oil products from the EVAT is quite inconsequential – the resulting price difference would be small anyway. Besides, since the price of oil will continue rising anyway, the response should be more strategic, addressing the whole range of energy use, and not just the present. At this point, it seems that the country’s leadership does not really feel the crisis, and are just taking ineffectual, photo-op measures instead.

The crisis is real, and it calls for real measures.Steps should be taken to reduce the overall use of energy in the country. Some steps that could be taken could include:
Accelerated implementation of mass transit projects. The whole LRT-MRT system should be expanded and inter-connected. More trains should be acquired to accomodate the high demand in the present system. New mass transit systems should be planned and implemented for areas e.g. Metro Cebu, lines north and south of Metro Manila, etc. Mass transit displaces a lot of motor vehicles, as well as allows people to live a bit further from their place of work than otherwise.

Promotion of wind, solar and other alternative energy sources. Wind energy is already being tried out in the Ilocos, and it seems to be working well. It should be expanded to more areas of the country, especially since it potentially can produce electricity that is cheaper than otherwise.
Solar energy could also potentially a big source of energy for the Philippines, with the abundant sun. However, people still think that solar cells are mainly for far-flung areas which the electricity grid cannot reach profitably. This effectively keeps solar energy on the margin. Recent developments have increased the efficiency and reduced the cost of solar energy, making it more mainstream. In California, they have achieved what they call “grid parity”, meaning that the cost of producing electricity from solar cells is the same as that of the electricity grid. Given the proper government policies, it should be possible to produce a lot of solar energy from our urban areas.

Undertaking big-impact energy conservation projects. For instance, it should be possible to cut the electricity use of shopping malls and office buildings by as much as 50%, using technologies that are already available. The government only has to provide the needed push for this to take place. A lot of savings could also be made in street lights’ energy use. Government vehicles could be required to be more efficient, e.g. phasing-in more hybrid or LPG vehicles.

Given enough political will the country could drastically reduce the dependence on fossil-fuels without sacrificing economic growth. We should be able to overcome not only the challenge of the $100/barrel oil, but also any other energy crises in the future.