Investors await issuance of FIT rates

Several governments around the world have adopted policies aimed at promoting the development of renewable energy sources and reducing their dependence on traditional sources of energy (e.g., fossil fuels).  One of these policies is the adoption of a feed-in tariff (or FIT).

The Philippines is no exception.  The Philippine Renewable Energy Act (RE Act) provides for the establishment of a feed-in tariff (FIT) system.  Under the envisioned system, electricity produced from wind, solar, ocean, run-of-river hydroelectric and biomass energy resources, as well as RE components of hybrid systems, is entitled to priority connection to the Philippine electric grid and to priority purchase, transmission and payment at a fixed price.

The Philippine FIT system has been in the news several times over the past few months.  The specific FIT rates for each type of technology (e.g., for wind and solar) were supposed to have been issued on 31 March 2011.  However, the Department of Energy announced that they would need more time to complete a study on how to feed energy from the various RE technologies into the Philippines’ energy grid without creating problems.  In the meantime, alliances of interested investors in wind and solar technologies have been concentrating their efforts on having favorable rates approved.  The new rates are now targeted to be issued by 15 May 2011.

But how is the FIT system envisioned to work?

Under the rules for the FIT system (the Rules) issued by the Energy Regulatory Commission (ERC) in July 2010, the FITs shall be a fixed tariff (instead of being calculated as a premium over market prices).  The rates shall be set by the ERC in accordance with a prescribed formula.  Differing FITs may also be established for different technologies (e.g., higher or lower rates for wind and solar energy) and time-of-use (for example, different rates will apply for peak hours and off peak hours).

Generally, only generating plants which commenced commercial operations after January 2009 (or which were substantially modified or expanded after such date) are eligible for FITs.  Whenever generation from eligible plants is available, such plants shall be given priority to connect to the network and shall be paid the corresponding FITs based on the actual quantity of energy delivered.  For example, electricity generated by an eligible solar power plant will be given priority over electricity generated by a coal power plant, even if both plants are able to deliver energy required by consumers at a particular time.

Eligible generating plants shall be entitled to the applicable FITs for a period of 20 years.  After this period, the tariffs for these plants shall be based on prevailing market prices or such other prices as the generators may agree with an off-taker.

The ERC shall adjust the FITs annually to adjust for inflation and foreign exchange variations.  The National Renewable Energy Board may also recommend a review and adjustment of the FITs to the ERC under certain conditions.

Who will pay for the FIT?  The Rules envision the establishment of a “feed-in-tariff allowance” (the FIT-All).  The FIT-All is a uniform charge imposed on consumers to ensure that an equitable sharing in the cost of the FITs.  Again, the details of how this mechanism will be implemented are still being worked out.

In the short term, the FITs may result in an increase in electricity prices.  Hopefully, however, the mechanism will be properly managed and reduce the Philippines’ dependence on oil, and in the long run result in more affordable and stable energy prices in the country.