I’m beginning to wonder if we’ll ever get another hydroelectric IPP project approved by the ERC. Here’s the problem.
The ERC appears to be dictating pricing structure (as opposed to pricing levels). And the pricing structure ERC has mandated for a number of new IPP projects (both hydro and coal) is that investment-cost recovery must be fixed and levelized for the life of the asset (except for movements in foreign exchange). On the other hand, they permit operating costs (such as fuel costs) to be priced at (or indexed to) whatever the day to day market prices for those items are.
Consider for a moment the following two 25-year revenue streams. They provide essentially the same net present value. One starts at P4.0/kWh and escalates at 5% per year. The other starts are P5.5/kWh and escalates at 1% per year.
Mathematically, an IPP would be indifferent as to which contractual revenue stream it receives. It’s project would achieve equivalent returns.
Because indexable components are a higher proportion of coal plant costs than of hydro or wind plant costs, it turns out that the shape of the blue line is representative of hydroelectric or wind tariffs and the shape of the green line (ironically) is representative of coal-fired tariffs, as guided by the ERC methodology.
So even if total life cycle costs of a hydro or wind plant is equivalent to the total life cycle cost of a coal plant, guess which one will get the contract with the electric cooperative (or any distribution utility) if the first year price of one is P4.00 and the first year price of the other is P5.5?
Biomass also benefits from this pricing bias, vis-a-vis hydro/wind.
Certainly the thermal plant proponents are quite happy with the current regulatory bias of market price recovery for fuel and flat recovery of capital and return costs. It gives them a competitive leg up and undermines the ability of wind and hydro to compete.
I understand the ERC’s role in preventing pricing abuse. And certainly IPP pricing has been abusive in the past with respect to full cost recovery. At the same time, the ERC needs to realize that current rules on pricing structure have a technology bias. And if we’re going to have technology biases, are these the ones we want?