Growth in a Time of Climate Extremes

Can the Philippines Get Its Act Together?

by Lawrence Ang

In my last blogpost, I outlined the current environment shaping the Philippines’ climate and energy future. Since then, SSG Advisors together with the Ateneo School of Government, concluded its joint undertaking to consult sectoral stakeholders, including regulators and major companies in the energy arena, and has now proposed policy guidelines for the Philippines to “Get Its Act Together” and align leadership along the domains of climate, energy, and an enabling environment. The complete policy briefs as well as executive summaries can be found here, much of which have been very well received by policy makers and the press alike.

I end this blog series with the most salient points of the policy studies—that of the intersection between climate change and the pursuit for an optimal energy mix in the Philippines. Excerpts of this article were published previously with my co-authors Atty. Tony La Vina and Atty. Teresa Ira Maris Guanzon here.

 

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The Philippines at the End of the Marrakesch Climate Conference

The Marrakech climate change conference, held early in November 2016, ended on a high note. The “Marrakech Action Proclamation for Our Climate and Sustainable Development” signals a shift towards a new era of implementation and action on climate and sustainable development.

According to the Proclamation: “The Marrakech Conference marks an important inflection point in our commitment to bring together the whole international community to tackle one of the greatest challenges of our time. As we now turn towards implementation and action, we reiterate our resolve to inspire solidarity, hope and opportunity for current and future generations.”

Governments hailed the Paris Agreement, noting its rapid entry into force and its ambitious goals. The Proclamation acknowledged the great momentum on climate change worldwide, a momentum that is unstoppable, driven by governments, science, business, global and local actors.

In a parallel meeting in Marrakech, the Climate Vulnerable Forum, which includes the Philippines, committed “strive to meet 100% domestic renewable energy production as rapidly as possible, while working to end energy poverty and protect water and food security, taking into consideration national circumstances.” They promised “to help each other with our respective transition plans to transform our energy, transport and other sectors, and together ensure support is made available in terms of capacity building, financing and technology.”

This CVF call is exactly right for the Philippines.

While President Duterte has already announced his decision to ratify the Paris Agreement, the Department of Energy (DOE) is not yet on board. This is because Energy Secretary Alfonsi Cusi is concerned that the department will not be able to fulfill its mandate to ensure energy security for the country if we implement the Paris Agreement.

In our view, this is a misappreciation of the Paris Agreement. In fact, if implemented properly, the Paris Agreement will lead us to a more energy secure future.

Moving forward, when we ratify the Paris Agreement, we should accompany it with a declaration that the Intended Nationally Determined Contribution we submitted in Paris is not yet final. The wording of that commitment actually implies that but we should be explicit that we will finalize our reduction number by 2018 after a bottom up process where government departments will submit their contributions to the mitigation commitment based on their respective numbers. That should give comfort to the DOE whose first order of priority should be to ensure sustainable and energy access for everyone in our country, for the private and business sector and for poor and local communities. To achieve that, the right way forward is implementing an optimal energy mix.

 

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Towards an Optimal Energy Mix

In the past months, much has been said and is being done about the country’s optimal energy mix.

The government has called for a review of the unofficial but widely known 30 coal-30 natural gas-30 renewable energy-10 oil energy mix policy to assess whether it meets quality, security, reliability, and affordability – the foremost considerations of this administration.

The current energy mix is composed of coal, renewable energy, natural gas, and oil. Coal appears to be highly favored because it is the cheapest (at least for now) despite opposition mostly from environmental groups. The supply of indigenous natural gas is under threat because of the depletion of the Malampaya reserves.

Renewable energy (RE) (at least solar and wind) costs are rapidly decreasing while the feed-in tariff allowance charged to consumers has surged by 200% (and still faces the possibility of increasing). These are some of the numerous issues facing the varying energy sources of the country amidst the national objective of achieving a rebalanced high-income economy by 2040.

“Optimizing our Energy Mix”, part two of the three-part policy brief series “Getting Our Act Together”. zeroes in on the importance of energy in economic growth, and how an energy mix policy can support that growth. The brief reviews the current energy mix of the country using the internationally accepted standards of the energy trilemma (security, equity, and environmental sustainability). Afterwards, it advocates initial steps for an easier transition towards an energy mix characterized by security, equity, and environmental sustainability.

The country’s energy mix is dominated by coal at 44.51%.

In the short term, coal addresses security (the resource and the power plants are accessible and available) and equity (it is cheap at Php 2.9 to Php 3.5 per kWh) but not sustainability (its external cost to the environment and health is Php 2.78 to 2.82 per kWh). In the long-term, coal fails to satisfy all three components of the energy trilemma. Majority of the coal is imported, and 70% is imported from just one country (due to the lower freight cost). It is more expensive when operated at less than 60% capacity factor (specifically its cost increases to Php 4 to Php 4.8 per kWh).

Still, the country expects a coal-dominated future (with 54% coal in the capacity mix and 66% coal in the energy mix by 2022). This compromises energy security, equity, and sustainability.

Following coal in the energy mix is total RE at 25.44% comprising both of conventional (hydropower and geothermal power) and emerging (solar, wind, run-of-river hydro, and biomass) RE. In the short term, RE addresses sustainability but not security (due to its intermittency and uncertainty) and equity (at least for emerging RE since the cost is pegged to the feed-in tariff rate).

In the long term, RE satisfies all three components of the energy trilemma. Advancements in RE (i.e. capture, collection, and storage technology) have emerged to cope with intermittency and uncertainty. Also, quick developments in technology are bringing the cost of emerging RE down (solar and wind are expected to decrease to about Php 4 per kWh and Php 3 per kWh respectively by 2020). This is followed by the question of whether or not FIT is still needed for solar and wind. It is important to note that conventional RE, which makes up 23.92% of the RE share in the energy mix, has not received any subsidy.

The third largest share in the energy mix is natural gas at 22.91.

In the short term, natural gas addresses the energy trilemma. It is sourced locally, is ideal as a mid-merit plant because of its flexibility, and can compete with coal when the latter is operated at less than 60% capacity factor. It also produces only one-third of the carbon emissions of coal. In the long term, natural gas fails to satisfy energy security (because the country will have to import natural gas once Malampaya is depleted), environmental sustainability (since it is after all a fossil fuel), and possibly equity (just like imported coal, imported natural gas exposes energy supply and price to volatile international market conditions).

The smallest percentage share of the energy mix is oil-based technology at 7.14%. In both the short and long term, oil based technologies fail to address the energy trilemma. Oil is imported. It is the most expensive among the fossil fuels, and its price is extremely volatile. Moreover, it is at par with coal when it comes to greenhouse gas emissions. Still, oil plants are vital because they serve missionary areas and satisfy the peaking requirements of the country’s portfolio (although simple cycle gas plants may equally be capable of doing so.)

 

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Addressing the Energy Trilemma

Considering the Philippines’ growth objectives, the government’s mandate to establish an energy mix that addresses the trilemma, and the current energy mix, it becomes clear that government’s priority should be to diversify.

Three immediate courses of action are required:

  1. Reduce over-dependence on coal to address security and efficiency issues (insofar as coal plants that do not operate as baseload and/or operate at less than 60% capacity factor);
  2. Increase, if not maintain, the share of natural gas (since it addresses the duck curve caused by intermittent RE); and
  3. Set the stage for a flexible environment to capitalize on swift market and technological changes in RE.

Optimizing the coal share in the energy mix and reducing the use of imported coal can be done through the following policies.

First, set a cap on coal plant endorsements using a portfolio based approach. This can be done by limiting the endorsements of new coal plants to the projected baseload demand of each region taking into account the changing needs of the economy.

Second, create a gold standard for coal plants. The gold standard for existing plants would be in the form of (1) performance guards because as coal plants age they become more inefficient and thus more expensive, and (2) implementation of Sec. 13 and 19 of the Clean Air Act. For new plants, the gold standard can be a policy that only ultra-supercritical plants can be built.

Third, compliance of new plants with BOI environmental criteria set in the Investment Priorities Plan and BOI Memorandum Circular 2015-01.

 

Allowing Natural Gas to Compete

Once coal’s share is reduced, natural gas will be allowed to compete and optimize the mid-merit or at the very least, maintain its share in the current energy mix given the expected depletion of the Malampaya reserves.

First, a comprehensive natural gas policy and legislative framework has to be legislated to attract private sector investment. There is a natural gas bill filed in the Senate. Hopefully it will be enacted into law, unlike natural gas bills in the past Congresses.

Second, support for the construction of natural gas infrastructure has to be given. A low hanging fruit would be streamlining and fast tracking the processing of applications for permit for the construction, expansion, operation, maintenance and modification of pipelines, transmission and distribution related facilities of natural gas.

Third, other indigenous natural gas resources have to be explored, developed and produced, and each Philippine Energy Contracting Round (PECR) has to be swiftly resolved. An existing roadblock to the past PECR (and any future PECR) is the tax issue of the Malampaya consortium with the Commission on Audit.

Reducing overdependence on one energy source increases the flexibility to take advantage of rapid RE developments. Increasing both conventional and emerging RE can be done through the full implementation of policies in the RE Act, which include net metering, FIT, renewable portfolio standards, and the green energy option.

Also, incentives and government assistance for development and construction of conventional RE can be provided. Nuclear power can be explored as a new resource in the energy mix since it is reliable and efficient, and can counter the intermittency of variable RE. However, there is a high set-up cost and long-term skill base required for nuclear plants, while special precautions must also be undertaken to avoid any radioactive leaks and/or accidents.

All of these set the stage towards achieving a quality, reliable, affordable, and more sustainable energy mix, which can be easily adjusted to meet innovations in technology, and even unexpected changes in economic growth and population.

It is the responsibility of the government to provide these aforementioned policy directions as it works with the market (contrary to the view of letting the market decide) in order to attain a high-income economy, and energy security, equity, and sustainability.

It’s time to ratify and implement the Paris Agreement. For energy, we begin with aiming for an optimal energy mix.


Lawrence1.jpegLawrence Ang is Director for Asia for SSG Advisors. He brings nearly ten years’ experience at the nexus of sustainable development and private sector engagement in the region.

“The Financial System We Need”–is it finally here?

by Lawrence Ang

“We always underestimate the change that will occur in the next two years as a change that will happen in the next ten.”    –Bill Gates

Last October 25-26, the biggest names in the global financial industry converged in Dubai under the auspices of the United Nations Environment Program-Finance Initiative (UNEP-FI). The setting could not be more apt. Dubai, a land of extreme heat—and, thanks to some clever government policies, extreme wealth—hosted the world’s leading central bank governors, asset managers, institutional investors, banks, insurance providers, and investment advisories, such as SSG, to check-in on an effort launched last 2012 at Rio+20, that is, to build “the financial system we need.”

In the early 2000s, it became apparent that financing sustainable development required a completely new paradigm—one that is able to drive inclusive growth while genuinely, and maybe even profitably, addressing sustainable development challenges. While the idea has long been floated in the nooks and crannies of UN conferences, in whispers in boardrooms and chants from the NGO sector, its urgency quickly rose into the mainstream with the advent of three major global events.

Three major global events signaling a changing financial system

  1. The landmark adoption of the 2030 Sustainable Development Agenda and the Paris Climate Agreement.
  2. The 2008 financial crisis driving public demand for a more resilient and effective financial system.
  3. The rapid evolution of the financial industry itself in light of post-crisis macroeconomic reforms, the increasing influence of developing and emerging countries, and the rise of disruptive technologies and new social expectations across the financial landscape.

“The Financial System We Need”

  • Overall, it will take an estimated USD 5-7 trillion per year to meet global sustainable development goals, of which 60-70% will need to be channeled to developing countries;
  • As one example, it will take about USD 1 trillion per year to decarbonize energy; USD 400 billion per year to ensure resilient infrastructure; and USD 50 billion per year to halt tropical deforestation;
  • Less than a third of these resources are currently flowing and will therefore need to come from private sources;
  • In contrast, banks alone manage $140 trillion of assets and institutional investors over $100 trillion. Capital markets, including bonds and equities, exceed $100 trillion and $73 trillion respectively.

In light of this major financing gap, re-engineering the global financial system now ceases to be an activity reserved for academics and economic theorists, but instead now serves as a marching order for multilateral agencies, central banks, and financial institutions if these same entities are to stay competitive and relevant to their clients’ new realities. As evidenced by the groundswell being orchestrated by no less than the top financial firms in the world, this transformation will require new thinking, new business models, new assets classes, new products, new services, and new tools possibly already existing within the current system. However, it will now need a long-deserved shot in the arm and some fresh political will.

Dubai Roundtable Sentiments Expressed

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At the global roundtable, key personalities from the financial industry shared how a quiet revolution is now taking hold across various pillars of the international financial industry. To paraphrase sentiments expressed:

  • Public debate has rapidly moved forward. Central bank governors, finance ministers and regulators, and finance sector executives are being pressured to explain their contribution to advancing sustainable development.
  • Public interest institutions are playing a more important role in shaping public debate, for example about the risks of ‘stranded assets’.
  • More members of the public are taking up the opportunities to redeploy their own capital aligned to their values and longer-term interests.
  • Sustainability is becoming a major driver in the development of the world’s financial centers, with global and regional centers including Hong Kong, Nairobi, London, Paris and Switzerland exploring how best to develop rules, fiscal measures and market leadership to guide competition in the midst of new opportunities.
  • Collaborative networks are multiplying, forging partnerships and establishing fora to share best practices, information and experiences, for instance, across responsible investment, insurance, and green infrastructure.

From Momentum to Transformation

But perhaps most encouraging are some of the concrete developments happening directly out of the public and private spheres that altogether point to a sea-change in thinking among financial institutions on how a new “financial system that we need” can indeed look like.

  • In 2009, the Financial Stability Board (FSB) was established under the auspices of the G20 to utilize monetary policies to better manage risk and introduce resilience to the global financial system in light of controversies surrounding the “excesses” of the “current system.”
  • In 2015, a dedicated task force to tackle climate-related financial disclosures was set-up under the FSB to dive deeper onto how the global financial system should be compelled to act on sustainable development and be held accountable for climate change.
  • In 2016, green bond issuances totaled an estimated USD 694 billion and growing, signaling the arrival of a new and truly “green financial product.”
  • In 2016, China, arguably one the world’s most powerful economic influencers, signs a national policy package to create a “green finance system” to transform its own financial system. The EU later follows suit with a policy to create its own green financial strategy.
  • As of 2016, 60 stock exchanges across the world have joined the “Sustainable Stock Exchanges Initiative” (SSEI) under the UN to systematically promote sustainable investment and ESG disclosures.
  • And the list goes on…

SSG Advisors’ Role in Developing Promising Solutions

SSG Advisors, as a global development solutions firm and impact investment advisory, is now participating in a series of cross-sectoral discussions between multilateral agencies and investment practitioners looking specifically at “Positive Impact Finance”—an approach which aims to “finance businesses seeking to make a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated.”

SSG’s experience in discovering new business models and facilitating innovative partnerships between the public and private sectors will be shared to the ongoing discourse of identifying practical solutions to solve sustainable development challenges hand-in-hand with businesses and the financial industry. Indeed, impact investing, venture capital, blended finance and environmentally or socially oriented market instruments such as green bonds and development impact bonds will be needed. But as many point out, these may all fall short if the kinds of projects or entities most capable of providing the most promising development returns are not equally capable of providing the typical risk/return profile the mainstream market demands. As part of its participation to the global movement to create “the financial system we need”, we enjoin our colleagues from the private sector to help us imagine creative and profitable ways to make the “unbankable” potentially attractive to mainstream investors as well as connect business to promising solutions in need of urgent financing.

 


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Lawrence Ang is Director for Asia for SSG Advisors. He brings nearly ten years’ experience at the nexus of sustainable development and private sector engagement in the region.