'Job opening: Energy czar'

As election fever begins to take over the nation’s psyche, we are about to witness a change in some highly relevant cabinet positions. Whoever is left standing in June will have the unenviable task of appointing the next Energy Czar. So while it is not clear who will step in and fill the position, there are three relevant items that need the incoming Energy Czar’s immediate attention. The three are:

1. What is the approach for subsidies for renewable energy?

Free market economists hate using the term “subsidies”, but in the world of energy, there is no such thing as unsubsidized electricity. Fossil fuels which provide 80 percent of total global energy have enjoyed favorable tax breaks and other incentives for decades. According to the International Energy Agency, government money used to reduce the price of energy totaled $310 billion in 2007. Now with the wave of renewable energy upon us – shouldn’t these renewable energy companies reap the benefit of subsidies as well?

A specific program needs to be in place on how these renewable energy projects are subsidized. Subsidies would allow these renewable energy companies to build the scale which they need to become profitable. The challenge is that in the near term, these subsidies will have to be significant.

Based on the data provided by Bloomberg New Energy Finance, the cost of producing 1MW of “unsubsidized” energy from renewable energy sources is not cheap. To put things in perspective; the cost before any subsidies of producing 1 Megawatt (MW) of electricity from Solar Power (thin film panels) is about $175/MW, Wave Power costs about $375/MW, Off shore wind power about $175/MW and On-shore wind power costs $75/MW. The cheapest source is still coal which costs $50/MW. The problem is quite clear – for every unit of energy renewable energy produces at its current state – it still needs to be subsidized more heavily than fossil fuel. How significant are these subsidies? According to New Energy Finance, government spending and price supports accounted for about one-third of the roughly $145 billion invested in world wide in clean energy in 2009. (Source: Clean Energy Sources: Sun, Wind and Subsidies by Jeffrey Ball, Wall Street Journal) Unfortunately, it is ultimately the taxpayer who funds these subsidies.

The experience of Germany is a good example of how governments should proceed with caution in terms of offering subsidies. From 2004 to 2009, Germany saw rapid growth in the use of Solar Panels. The reason for this growth is that Germany offered a “feed-in tariff” that offered producers a rate that was above market rates for the power that they produced and sold to the grid. The problem is that as the cost of producing the renewable energy drops, the level of subsidies was locked in for these producers. The result: it is estimated that consumers now have to pay at least 46 percent more than what that conventional energy would have cost. Further estimates put the total cost consumers at around $175 billion from 2008 to 2030. (Source: Clean Energy Sources, Sun, Wind and Subsidies by Jeffrey Ball, Wall Street Journal, 15 January 2010)

A number of governments have explored the option of having feed-in tariffs with regression amounts. Put simply,- the subsidies are reduced by a few percentage points every year. The current provisions for the feed-in tariffs for Renewable Energy projects in the Philippines seem to lean towards this angle.

The question now is: Can the energy sector attract enough renewable energy projects with the proposed level of feed-in tariffs that are scheduled to shrink over time? More importantly, at what point in the future is it safe to say that the costs of producing renewable energy are low enough that subsidies can be lowered? These are basic questions requiring serious answers.

2. What role will nuclear power play in the Philippines?

All throughout history, there have always been detractors towards of nuclear power. We are all familiar with the events at Three Mile Island which had an impact on the Bataan Nuclear Power plant. The repercussions of this event were felt around the world. Just as Thailand’s Energy Generating Authority was about to begin building nuclear power plants in 1977, prevailing global and Thai oppositions to nuclear energy led to the cancellation of these plans. Last April 2009, thousands of protesters from Central Java, Indonesia rallied calling for a stop to the government’s plans to build a nuclear power plant outside of the city.

Despite all the criticism and protests, the allure of nuclear power remains. The International Atomic Energy Agency expects at least 70 new plants worldwide to be opened in the next 15 years. This would result in a doubling of the amount of electricity produced by nuclear plants.

Looking around the region, many of our neighbors included in the Association of Southeast Asian Nations (ASEAN), have leaned towards the direction of nuclear energy. Indonesia is planning four nuclear power plants in the next two decades. The first of these plants will start operation in 2016 in Central Java on the slopes of Mt. Muria. A new law was approved in Vietnam which allows the use of Nuclear energy. Construction of a four turbine nuclear power plant will start in 2015 to be completed in 2025. By this time, Nuclear Power is expected to account for ten percent of Vietnam’s total electricity supply (Source: UPI Asia.com, 3 July 2008, Mong Palatino)

What seems to be even more interesting is that some countries still choose to go the route of using nuclear power despite having an abundance of renewable energy resources. The United Arab Emirates has decided to go the way of nuclear despite having massive amounts of natural gas. The same holds true for Indonesia. In fact, several of our Asian neighbors such as Korea are looking to make nuclear infrastructure among its exports a pillar of its economy much like cars and electronic goods. India is another one of the countries that has expressed their intentions to sell small nuclear reactors to governments in the region. These small nuclear reactors make the promise of being cleaner, cheaper and more efficient than their predecessors.

US-based company Babcock and Wilcox, a subsidiary of McDermott Industries, has recently unveiled its own small nuclear reactor. The industrial company has produced a nuclear reactor the size of a rail car and one tenth the cost of a big nuclear plant. The power output of these plants is 125 to 140 MW of power. (Small Reactors Generate Big Hopes, 18 February 2010, Wall Street Journal)

More recently, US President Barack Obama announced more than $8 billion in loan guarantees that could pave the way for a boom in nuclear power in the US. Mr. Obama has proposed accelerating nuclear development by tripling the amount of federal loan guarantees for reactor construction to $54 billion. (Small Reactors Generate Big Hopes, 18 February 2010, Wall Street Journal)

The trend in nuclear energy seems apparent, the question is: Will we as a country choose to take part in the nuclear renaissance that’s starting to gather momentum?

3. Have we drilled enough for oil?

The Philippines continues to be a largely unexplored country for oil. Only 557 wells have been drilled since we started drilling for oil 100 years ago. Of these, only 17 wells have produced oil and today only four wells are still producing oil. In the 1980s, Indonesia drilled as many as 400 wells a year. From 1991 to 2002, Indonesia has drilled 1,082 wells, Vietnam has drilled 154 wells and Malaysia has drilled 956 wells. Even in terms of density, there is a great discrepancy. In the US, explorers drill one well for every 24 square kilometers of favorable land. The Philippines current rate of drilling is about one well for every 1000 square kilometers. (Source: Atty Eduardo Hernandez, Director, PNOC - EC). In addition, with the results of the United Nations Convention on the Law of the Sea or the UNCLOS, the Philippines could potentially gain an additional 200 square miles or 517 square kilometers from its outermost islands. The potential of having such a vast area to explore cannot be underestimated.

The challenge at hand is quite significant: whoever will hold this position is without a doubt entrusted to provide the direction and set the tone for the investment environment. It is no small task and it is yet to be determined who is really qualified. Ironically, finding the right person for the job can be just as elusive as finding the energy resource itself.

(Fernando Montinola Hernandez is a Senior Manager for Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])