Strengthening the non-conventional and rural energy development program in the Philippines : a policy framework and action plan

Strengthening the Non-Conventional and Rural Energy Development Program in the Philippines: A Policy Framework and Action Plan ,_, Energy Sector Management Assistance Programme QAA A D Report 243/01 | A AhD t . . .,. August 2001 A-'. 1 1.1  JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) is a special global technical assistance program run as part of the World Bank's Energy, Mining and TelecommLinications Department. ESMAP provides advice to governments on sustainable energy development. Established with the support of UNDP and bilateral official donors in 1983, it focuses on the role of energy in the development process with the objective of contributing to poverty alleviation, improving living conditions and preserving the environment in developing countries and transition economies. ESMAP centers its interventions on three priority areas: sector reform and restructuring; access to modern energy for the poorest; and promotion of sustainable energy practices. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG) composed of representatives of the UNDP and World Bank, other donors, and development experts from regions benefiting from ESMAP's assistance. The ESMAP CG is chaired by a World Bank Vice President, and advised by a Technical Advisory Group (TAG) of four independent energy experts that reviews the Programme's strategic agenda, its work plan, and its achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank to conduct its activities under the guidance of the Manager of ESMAP, responsible for administe,ing the Programme. FUNDING ESMAP is a cooperative effort supported over the years by the World Bank, the UNDP and other United Nations agencies, the European Union, the Organization of American States (OAS), the Latin American Energy Organization (OLADE), and public and private donors from countries including ALstralia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States of America. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information, a copy of the ESMAP Annual Report, or copies of project reports, contact: ESMAP c/o Energy and Water The World Bank 1818 H Street, NW Washington, DC 20433 U.S.A.  Strengthening the Non-Conventional and Rural Energy Development Program in the Philippines: A Policy Framework and Action Plan August 2001 Joint UNDPNVorld Bank Energy Sector Management Assistance Programme (ESMAP)  Copyright C 2001 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing August 2001 ESMAP Reports are published to comnmunicate the results of the ESMAP's work to the development community with the least possible delay. The typescript of the paper therefore has not been prepared in accordance with the procedures appropriate to formal documents. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The Boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgement on the legal status of any territory or the endorsement or acceptance of such boundaries. T'he material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the ESMAP Manager at the address shown in the copyright notice above. ESMAP encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee.  "ESMAP Values your Feedback If you have found this report useful, or would like to provide comments on our reports and services, please - log on to our website at www.esmap.org and leave your feedback. In this way we can better understand our audience's needs and improve the quality of our knowledge products. Thank you. ESMAP Management"   Contents Contents ........................................................v Preface ....................................................... xiii Acknowledgments ....................................................... xv Abbreviations and Acronyms ....................................................... xvii Units of Measure ....................................................... xviii Executive Summary ........................................................1 The Need for a New Public/Private Initiative ........................................................1 Practical Near-Term Technology Choices ........................................................2 Applications for Off-Grid Communities ........................................................2 Grid-Connected Applications ........................................................4 Near-Term Investment Opportunities ........................................................5 Off-Grid Electrification ........................................................5 Grid-Connected Wind Electric Power Development ........................................................6 The Role of Renewables in a Restructured Environment ........................................................6 Recommended Policy Initiatives ........................................................8 Near-Term Initiatives ........................................................8 Recommendations for SPUG's Future Mission and Activities ..............................................9 Policy Considerations for the Long Term ....................................................... 10 Organization of this Report ....................................................... 11 1. Introduction ....................................................... 13 Social and Strategic Justifications for Developing Renewable Energy .................................. 13 Experience with Renewable Energy in the Philippines ....................................................... 15 Beginnings of the Program ....................................................... 15 Recent Experience ....................................................... 15 Other Activities ....................................................... 16 The Need for a New Initiative ....................................................... 17 2. Choosing Renewable Energy Technologies: Practical Options for the Coming Decade ....................................................... 19 Classifications of Renewable Energy Options ....................................................... 20 Renewable Energy Resources in the Philippines ....................................................... 22 Solar Radiation ....................................................... 22 v  W ind . ............................................................ 23 Small, Mini-, and Micro-Hydropower ............................................................. 26 Biomass Residues ............................................................. 26 Ocean Thermal Energy, Marine Currents, and Wave Energy Resources .......................... 27 Commercial Status of Renewable Energy Technologies for Power Generation .................... 29 Power Generation for Off-Grid Applications ............................................................. 29 Large-Scale Grid-Connected Power Applications ............................................................. 34 Projected Contributions of Renewable-Energy-Based Power Generation for Grid-Connected Applications (1999-2008) ............................................................. 39 Projections for Electricity Demand and Supply, 1999-2008 .............................................. 39 The Contribution of Renewable Energy to Bulk Power Generation .................................... 42 NRE Options in the Generation Mix ............................................................. 42 Conclusion: Renewable Energy Techinology Priorities .......................................................... 43 Off-Grid Technologies ............................................................. 43 Grid-Connected Technologies ............................................................. 44 3. Institutional and Policy Framework for Renewable Energy Technologies .................... 45 Energy Sector Jurisdiction ............................................................. 46 Laws, Regulations, and Policies Governing NRE-based Electricity Supply ....................... 50 The Omnibus Electricity Bill and Tthe Electricity Industry Reform Act ................................ 53 Limitations of the Government's NRE Programs ............................................................. 54 Proposed Changes in Govemment Policies ............................................................. 55 Privatization and Competitive Electricity Markets ............................................................. 56 Recommended Policy Initiatives for Off-Grid Renewable Energy Development ................ 58 Recommendations for Grid-Connected Renewable Energy Projects ................................. 63 Proposed Fast- Track Actions Supporting Grid-Connected Generation .............................. 66 4. Near-Term Investment Opportunities in Renewable Energy ........................................... 69 Off-Grid Electrification: Quickest Market Entry-Point for Renewables ................................... 69 An Illustrative Off-Grid Project ............................................................. 70 Implementation ............................................................. 72 Cost Sharing ............................................................. 74 Other Issues ............................................................. 75 Grid-Connected Wind Electric Power Plants: Justifications for Near-Term Development ....................................................................... 76 Illustrative Grid-Connected Windpower Projects ............................................................. 76 Wind Turbines Considered for the Assessment ............................................................. 79 vi  Cost Estimates ................................................................ 80 Conclusions Regarding Wind Electric Power ............................................................... 81 5. Recommended Plan of Action ................................................................ 83 Recommended Policy Initiatives for Off-Grid Renewable Energy Development .................... 83 Recommendations Regarding Grid-Connected Renewable Energy Projects ..................... 89 Annex 1.1: Status of Legislative and Policy Initiatives for Renewable Energy in the Philippines ............................................................... 97 Wind Electric Power Update ............................................................... 97 'Fast-track" Recommendations ................................................................ 98 Revision of Energy Regulation ER 1-94 .................................... ........................... 98 Revision of Energy Regulation ER 1-95 .................................... ........................... 99 Revision of Executive Order 462 (Ocean, Solar, and Wind Energy) ............. ..................... 99 Other Recommendations (Off-Grid Applications) ............................................................... 100 Annex 2.1: Commercial Status of Photovoltaic Power Generation .................................. 103 PV Module Commercial Production and Wholesale Price Trends ....................................... 103 PV Market Applications ................................................................ 103 Recent Advances in Technology and Commerce ............................................................... 105 Building-integrated PV Applications ................................................................ 106 Cost-competitiveness Still a Constraint ............................................................... 106 Annex 2.2: Wind Electric Power Installations Worldwide ................................................ 109 Annex 2.3: Incentives for Wind Electric Power in the United States ................................ 113 Annex 2.4: A Possible Scenario for Wind Power Development in the Philippines ......... 117 Annex 3.1: Board of Investments (BOI) Incentives for Independent Power Generation ............................................................... 121 Fiscal Incentives ............................................................... 121 Tax Exemptions ................................................................ 121 Income-Tax Holiday (ITH) ............................................................... 121 Exemption from Taxes and Duties on Imported Spare Parts ........................................... 122 Exemption from Wharfage Dues and Export Tax, Duty, Impost and Fees ....................... 122 Tax Credits ................................................................ 122 Non-Fiscal Incentives ............................................................... 123 vii  Annex 3.2: Mini-Hydropower Incentives ........................................................ 125 Annex 3.3: Proposed Revision to Executive Order 462 .................................................... 127 Annex 3.4: Policies that Have Been lJsed to Create Initial Markets for Large-Scale Grid-Connected Renewables ........................................................ 131 Non-Fossil Fuel Obligation (NFFO) ........................................................ 131 Benefits of the NFFO ........................................................ 135 Criticisms of the NFFO ........................................................ 135 Lessons from the NFFO ........................................................ 137 Surcharge-Funded Production Incentive (SBC) ........................................................ 138 Califomia ........................................................ 139 Benefits of the SBC ........................................................ 141 Criticisms of the SBC ........................................................ 142 Renewables Portfolio Standard (RPS) ........................................................ 142 Benefits of RPS ........................................................ 143 Criticisms of the RPS ........................................................ 144 Electricity Feed Law (EFL) ........................................................ 145 Standard Offers of California ........................................................ 145 REPI of the United States ........................................................ 146 Germany ........................................................ 146 Spain ........................................................ 147 Benefits of the EFL ........................................................ 148 Criticisms of the EFL ........................................................ 148 Annex 3.5: Renewable Energy Generation in a Pool System .......................................... 151 Structure of Payments in a Pool System ........................................................ 151 The Role of Renewable Energy Generation in a Restructured System ............................... 151 Reliability from Renewable Generators: A Proposed Approach .......................................... 151 Steps to Efficient Pool System Integration of NRE Power Plants ........................................ 152 Annex 4.1: Private Sector Roles in Rural Energy Service Delivery: Alternative Models ........................................................ 157 Objectives for PV Electrification Models ........................................................ 157 Models ........................................................ 158 Consumer Finance (CF) Model ........................................................ 159 Leasing Model ........................................................ 161 Fee-for-Service or RESCO Model ...................................................... 162 Case Studies ........................................................ 164 viii  Consumer Financing: Enersol Associates, Inc ........................................................... 164 Consumer Financing: PT Sudimara, Indonesia ........................................................... 168 Leasing: Indonesia Solar Home System Project (SHS) ................................................... 172 Fee-for-Service: SOLUZ, Inc ............................................................ 176 Fee-for-Service and Leasing: Philippine Rural Electric Cooperatives (RECs) .................. 180 Mixed Approach (Consumer Finance and Leasing): Solar Electric Light Company India (SELCO-India) ........................................................... 181 Capitalizing Rural Energy Service Delivery Operations ....................................................... 183 Micro Credit ........................................................... 184 Rural Savings and Loans (S&L) Cooperatives ........................................................... 184 Commercial Clean Energy Investment Funds ........................................................... 184 Multilateral and Official Institutions ........................................................... 185 Loan Guarantees ........................................................... 185 Annex 4.2: The Argentina Off-Grid Rural Electrification Project: An Example of the Concession System Approach ........................................................ 187 Annex 4.3: Off-Grid Electrification in the Philippines: Barangay Sampling Design Issues ........................................................... 191 Sample Design Issues ........................................................... 191 Sample Design and Confidence Levels ........................................................... 193 Information for Assessing Potential for Renewable Energy ............................................. 193 The Sample Design ........................................................... 193 Conclusion ........................................................... 195 References ........................................................... 197 List of Reports on Completed ESMAP Activities ........................................................... 199 ix  Tables Table 1. Renewable Energy Options for the Philippines (Electricity and Cogeneration) ............ 3 Table 2.1. Renewable Energy Technology Status in 1999 ........................................................ 20 Table 2.2. Renewable Energy Options for the Philippines (Electricity and Cogeneration) ......... 21 Table 2.3. Rice Hull Production and Powfer Generation Potential in the Philippines (1995 data) .................................................................. 28 Table 2.4. Bagasse Production (1993) and Power Generation Potential in the Philippines ....... 28 Table 2.5. Renewable Energy Technologies for Off-grid and Mini-grid Applications ................. 30 Table 2.6. Projected Electricity Demand in the Philippines (GWh per year) ............................. 39 Table 2.7. Projected Peak Power Demand, 1999-2008 (GWe per year) .................................. 39 Table 2.8. Peak Demand (MWe), Peak Generating Capacity (MWe), Spinning Reserve Margin (SRM), and Projected Capacity Savings at Reduced SRM ........................ 40 Table 2.9. Projected Increase in Geothermal and Hydropower Capacity in 2004 and 2008 (MWe) .................................................................. 42 Table 2.10. Grid-Connected New and Renewable Power Generation Systems, DOE Scenario (MWe) .................................................................. 42 Table 2.11. Grid-Connected New and Renewable Power Generation Systems, Modified DOE Scenario (MWe) .................................................................. 43 Table 4.1. Financial Requirements of Illustrative Project ........................................................... 72 Table 4.2. Wind Measurements in llocos Norte .................................................................. 78 Table 4.3. Wind Energy Potential at Other Sites .................................................................. 79 Table 4.4. Ranking of Potential Sites, Measured and Unmeasured ........................................... 79 Table 4.5. Cost Estimates for Two 50-MW Wind Energy Project Sites: Pagali and Subec, llocos Norte, Philippines .................................................................. 80 Table 4.6. Annual Energy Estimates (50-MW Project) .............................................................. 81 Table 2.1.1. Building-Integrated Photovoltaics Worldwide (Aggregate Peak MW between 1990 and 1997) .................................................................. 106 Table 2.2.1. World Wind Energy Capacity by Region .............................................................. 109 Table 2.2.2. Wind Energy Capacity by Country .................................................................. 109 Table 2.2.3. Major Wind Turbine Suppliers and their Principal Products ................................ 111 Table 2.4.1. An Illustrative Scenario for Wind Power Plant Development in the Philippines 1999-2020) with ca. $120 million in Near-Term Investments (through 2005) .................... 119 Table 2.4.2. Comparison of Historical Wind Electric Power Installations in Asia and Europe with the Scenario Projections for the Philippines ................................................... 119 Table 4.1.1. Characteristics of the Energy Service Delivery Models ........................................ 164 Table 4.1.2. Capitalization of Soluz Dominicana .................................................................. 177 Table 4.1.3. Capitalization of SELCO India .................................................................. 182 Table 4.2.1. Financing Plan .................................................................. 188 Table 4.2.2. Technical Assistance Activities Grant-Financed by the GEF (US$ million) ......... 189 Table 4.3.1. Regions Containing a High Number of Barangays without Electricity ................. 192 Table 4.3.2. Representativeness of Barangays Under Different Scenarios (at 95-Percent Confidence Level) .................................................................. 194 Table 4.3.3. Number of Households Required per Barangay (Assumes 250 Barangays and 95% Confidence Level) .................................................................. 195 x  Figures Figure 2.1. Annual Average Solar Energy in the Asia/Pacific Region (kWh/M2 per day) ............ 22 Figure 2.2. Wind Energy Resource Potential in Central Luzon (Taken from the NREL ................. Wind Atlas of the Philippines) .................................................................... 24 Figure 2.3. Bergey 10-kWe Excel Wind Turbine .................................................................. 31 Figure 2.4. Current Prices for Small Wind Electric Power Units (FOB Supplier) ........................ 32 Figure 2.5. Commercial Prototype PVNVind/Diesel Hybrid Power System Developed in Fiji ..... 32 Figure 2.6. Fiji PV/wind/Diesel Hybrid Power Plant ................................................................... 33 Figure 2.7. Wind Electric Power Is Now a Mature Technology .................................................. 34 Figure 2.8. Total Grid-Connected Wind Generation (Scenario for Philippines, 2000-2008) ...... 37 Figure 2.9. Capacity Additions by Generation Type (1999-2008) ............................................. 43 Figure 4.1. The Income Pyramid for Rural Households ............................................................. 73 Figure 2.1.1. Wholesale Price of Photovoltaic Panels (1997 fixed dollars per rated peak watt) ................................................................... 104 Figure 2.1.2. Worldwide Shipments of Photovoltaic Panels (peak megawatts per year) ......... 105 Figure 2.2.1. Global Wind Energy Power Generation Capacity ............................................... 110 Figure 2.2.2. Annual Wind Electric Capacity Additions Worldwide .......................................... 111 Figure 2.4.1. Scenario for Grid-Connected Wind Electric Power (Annual Installations) ......... 118 Figure 2.4.2. Total Grid-Connected Wind Generation (Scenario) ........................................... 118 Figure 2.4.3. Comparison of Historical Wind Electric Power Installations in Asia and Europe with the Scenario Projections for the Philippines ................................................... 120 Figure 3.5.1. Electricity and Payment Flows in a Pool System ................................................ 155 Figure 4.2.1. Argentina Off-Grid Rural Electrification Project: The Concession System .......... 189 Boxes Box 2.1. The Impact of Energy Efficiency and Peak Demand Management on NRE Contributions .................................................................. 41 Box 2.2. Biomass Residue Production Sharing System- A Constraint on Private Development .................................................................. 44 Box 3.1. The Unrealized Potential of Mini-Hydropower: Implementation of RA 7156 ................ 51 Box 3.2. Executive Order 462: Production-Sharing Issues to Do with Ocean, Solar, and Wind Renewable Energy .................................................................. 52 Box 3.5.1. How Much Can Reliable Hydro or Wind Contribute to a Grid System and What Are the Financial Impacts? .................................................................. 154 xi   Preface In early 1998 Francisco Viray, then Secretary of Energy of the Government of the Philippines, formally requested that the World Bank conduct an objective and comprehensive external review of the Philippines' non-conventional energy development program, including technology choices, short- and long-term objectives, institutional coordination and other implementation issues. Viray asked that the review identify near-term opportunities for investment in new and renewable energy (NRE), particularly for its use in bringing energy to remote villages. ESMAP resources were subsequently obtained for this pulpose in mid-1998, and in October 1998 a mission was fielded to discuss next steps with the new DOE secretary, Mario V. Tiaoqui. Secretary Tiaoqui reaffirmed DOE's strong interest in the assistance, emphasizing the urgency of his government's electrification program for some 5,000 off-grid barangays (villages) under the presidentially mandated Energy Resources for the Alleviation of Poverty (ERAP) program. ESMAP subsequently forged an alliance with two other agencies with ongoing technical assistance programs in the Philippines: the U.S. National Renewable Energy Laboratory (NREL) and Winrock International. This alliance led to (1) an exchange of expert information and analysis and (2) the joint conduct of a workshop on renewable energy in Cavite in June 1999. At this workshop, the initial findings and recommendations of ESMAP and its cooperators were discussed with officials and staff of DOE, the National Power Corporation, and the National Electrification Administration. The ESMAP team also helped EASEG staff prepare a Rural Power Sector Policy Note that could identify a potential Bank operation in rural electrification, which may include NRE in off-grid areas. The present report summarizes the final findings and recommendations of the ESMAP team, which consisted of Ernesto Terrado, Task Manager (EMTEG), Christopher Rovero (Winrock International), and Donald Hertzmark and Jerome Weingart (consultants). Where the report draws on the findings and analysis of NREL, Winrock International, and other collaborators, this is duly acknowledged. Note: As of June 8, 2001, the legislature had passed and President Gloria Macapagal-Arroyo had signed into law Republic Act No. 9136, An Act Ordaining Reforms in The Electric Power Industry, Amending for the Purpose Certain Laws and for Other Purposes. This is known as the "Electric Power Industry Reform Act of 2001." The act opens the power sector to significant restructuring and privatization. Among the goals of the act are "to assure socially and environmentally compatible energy sources and infrastructure, and to promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy." Many of the recommendations made in this report were subsequently incorporated or reflected in the act. This report has not been thoroughly revised in light of passage of the act, and does contain discussion of proposed legislation that was incorporated into Act No. 9136. xiii   Acknowledgments The authors thank the following individuals for their valuable contributions to the preparation of this report: Mario Tiaoqui and Francisco Viray, former energy secretaries of the Philippines; Ruben Santos, Adviser, Philippines Departrnent of Energy; Cyril del Callar, Undersecretary of Energy; Francis Benito, Assistant Secretary of Energy; Reuben Quejas, Chief, Nonconventional Energy Division, Philippines Department of Energy; Paul Galen, Laura Vimmerstedt, and Roger Taylor of the U.S. National Renewable Energy Laboratory (NREL); and the Manila office of the United Nations Development Programme (UNDP). The financial support of the Energy Sector Management Assistance Programme (ESMAP) and the U.S. Agency for International Development (USAID) is gratefully acknowledged, as is the editorial assistance of Chris Marquardt. Emesto Terrado Christopher Rovero Jerome Weingart Donald Hertzmark xv   Abbreviations and Acronyms ANEC Associated Non-conventional Energy Center ARMM Autonomous Region of Muslim Mindanao AusAid Australian Agency for Intemational Development BOI Board of Investments BOS balance of system CEPALCO Cagayan Electric Power and Light Company C02 carbon dioxide DENR Department of Environment and Natural Resources DILG Department of Interior and Local Government DOE Department of Energy DBP Development Bank of the Philippines EIAB Energy Industry Administration Bureau (DOE) EO Executive Order ER Energy Regulation ERAP Energy Resources for the Alleviation of Poverty program ERB Energy Regulatory Board ERDC Energy Research and Development Center FINESSE Financing Energy Services for Small-Scale End Users GEF Global Environment Facility GENCO power generation company genset generator set GIS Geographic Information System GOp Government of the Philippines GSIS (Philippine) Govemment Service Insurance System GTZ Gesellschaft fur Technische Zusammenarbeit (Germany) IFC International Finance Corporation ipp independent power producer LBP Land Bank of the Philippines LGU local government unit MMBFOE million barrels of fuel oil equivalent NEA National Electrification Administration NEDA National Economic and Development Authority NGO nongovernmental organization NOFFO Non-Fossil Fuel Obligation Nox nitrogen oxides NPC National Power Corporation NRE new and renewable energy NREL U.S. National Renewable Energy Laboratory OECD Organisation for Economic Co-operation and Development O [law "Oh Light" Rural Electrification Program O&M operation and maintenance PEI Preferred Energy Inc. PCIERD Philippine Council for Industry and Energy Research and Development xvii  PNB Philippines National Bank PNOC Philippine National Oil Company PPA power purchase agreement PSGF private sector generating facility PV photovoltaic RA Republic Act R&D research and development REC rural electric cooperative REPP Renewable Energy Power Program SHS solar home system SIBAT Sibol ng Aghamn at Teknolohiya $02 sulfur dioxide SPUG Strategic Power Utilities Group SSS (Philippine) Social Security System TWG technical working group UNDP United Nations Development Programme USAID United States Agency for International Development VAT value added tax WTP willigness to pay Units of Measure AC altemating curTent DC direct current GWe gigawatt (electric) km kilometer kW kilowatt kWe klowatt (electric) KWh kilowatt-hour m meter mls meters per second Mt metric ton MW megawatt MWe megawatt (electric) MWh megawatt-hour MWp megawatt-peak TWh terawatt-hour W watt We watt (electric) xviii  Executive Summary 1. The broad economic reforns that began in the mid-1980s have profoundly changed the Philippines energy sector. With its oil refining and coal mining operations privatized and petroleum product prices deregulated, the country is now poised to carry out sweeping reforms of the power sector, including the restructuring and privatization of the National Power Corporation (NPC) and the rationalization of the distribution sector. As articulated in the new energy plan for 1999-2008 (DOE 1999), the key sector objectives remain security of energy supply, affordable energy prices, and an energy infrastructure compatible with broader social and environmental objectives. For commercial energy, the plan projects a decline in imported energy supplies from about 80 percent of total requirements in 1999 to 68 percent in 2008. The Plan includes accelerated commercial application of new and renewable energy (NRE) technologies, increasing their contribution from about 70 million barrels of fuel oil equivalent (MMBFOE) in 1999 to 91 MMBFOE in 2008. 2. The projected contributions for electricity supply from NRE technologies comprise both large-scale grid-connected applications, some of which are still commercially undeveloped, and small-scale off-grid applications that are already economic today. In the near and medium terms, the projected contributions are relatively small but can have significant economic, social, and environmental benefits, especially those that improve energy access for people in the countryside. Despite the rapid pace of electrification nationally, about 25 percent of the country's 72 million people remain unserved, almost all of them in rural areas. The Philippines comprises some 7,000 islands spread over 300,000 square kilometers. For cost and technical reasons (e.g., distance from the main network), many rural communities will not be connected to the grid in the foreseeable future, if at all. Small-scale renewable energy systems may be the only practical option for providing basic electricity services to such communities. The Need for a New Public/Private Initiative 3. Although numerous large and small NRE projects have been carried out in the Philippines over the last two decades by both the public and private sectors (see Chapter 1), true commercialization has proved elusive. The projects have typically been "one-off," donor-driven, of subcritical mass, and lacking the financial or technical resources for sustained operation and maintenance. A large part of the problem is exogenous, and thus beyond the control of local planners: only recently have some NRE technologies of interest to the Philippines compiled adequate track records and achieved sufficiently significant reductions in cost to be of interest to investors. 4. The NRE development program in the Philippines has been hindered by the lack of a policy framework that (1) articulates the contribution that renewable energy can realistically make in the short and long terms, (2) provides adequate incentives to the private sector for participation, and (3) supports effective institutional arrangements for carrying out a coherent national program. The purpose of this report is to help the government of the Philippines (GOP) identify key policy gaps and to suggest specific strategies to address them. These policies and strategies require an effective understanding of the technical nature and economic potential for the country of the technologies of interest. Therefore the report also advises on which technologies make practical sense in the immediate, medium, and long terms. I  2 Philppines: Strengthening the Nonconvenlional and Rural Energy Development Program 5. The report deliberately emphasizes the discussions on near-term economic investments in NRE and an action plan to hasten their implementation, particularly NRE applications in off-grid electrification. T his emphasis is dictated by DOE's urgent need to carry out a presidentially-mandated program to energize 10,000 unelectrified barangays (villages) nationwide by 2004. However, some suggestions are also made on what the government's position and strategy should be as regards its support for longer-term, larger-scale NRE technologies. Practical Near-Term Technology Choices 6. Table 1 indicates potentially important renewable energy options that are commercially available for backbone grid connection, distributed minigrid applications, and dispersed freestanding uses. Chapter 2 and the annexes provide more detailed discussions of the technical characteristics and current costs of these technologies. 7. For some renewable energy technologies there is virtually no in-country experience even though the technologies are fully commercial elsewhere and appear to be highly relevant to the Philippines. Examples include large-scale wind electric power plants, small wind turbines, and wind/diesel hybrid power units. Rapidly evolving and commercially available technologies of special relevance to off-grid communities include small (less than 500 kWe) bioelectric systems and hybrid power-generation units running on a combination of solar, wind, and fossil fuel energy. There are other technologies relevant to the renewable energy resource base in the Philippines, but the development of commercial equipment has not yet been achieved internationally, especially for marine energy conversion systems that mobilize marine currents, waves, and ocean thermal gradients. Fo r these still-speculative technologies, the report discusses recent technical developments and suggests practical ways for the GOP to keep abreast of international developments, such as hosting international precommercial trials in Philippine waters. Applications for Off-Grid Communities 8. Effective and lasting poverty reduction is nearly impossible to achieve in rural areas without broad-based economic growth-that is, growth based on generating jobs in efficient and labor-intensive commercial activities and supported by sufficient development of the local infrastructure in general and the energy infrastructure in particular. Even small amounts of electricity, applied strategically, can promote economic activities in isolated areas. The availability of affordable electric lighting for households also contributes to the quality of life in unelectrified areas.  Executive Summary 3 Table 1: Renewable Energy Options for the Philippines (Electricity and Cogeneration) Classification Technologies Primary Commercial and Scale Applications Status Large-scale Wind electric power Bulk power generation Fully commercial, with evolution (> 10 MWe) generation (wind (10-100 MWe) in efficiency, reliability, and cost- farms) effectiveness Biomass-based Cogeneration, with Fully commercial, but each plant power generation and capacity of 10-30 MWe is engineered to reflect unique; cogeneration legal and regulatory impediments Mini-hydro power (up Fully commercial, cost and to 50 MWe) performance highly site-specific Geothermal energy Base-load power Well established in Philippines; conversion policy issues limit expansion Medium-Scale Small windpower Intermittent generation, No experience yet in Philippines, (1-10 MWe) plants connected to local and significant potential likely regional minigrids Wind/diesel hybrid Fully dispatchable Commercially available, power units power, with majority configured and engineered for component from wind specific sites and applications energy Biomass-based Agro-industrial Commercially available, power generation and applications, private configured and engineered for cogeneration power specific sites and applications Mini-geothermal Base-load power Commercially available, at the lower end of the range of typical installations. Small-Scale Wind electric (up to 1 MWe) Photovoltaic PV/wind/diesel hybrid Bioenergy including Local minigrid power Commercially available at 100-, biomass/diesel fuel generation 250-, and 400-kWe hybrids biomass/diesel-fueled gensets Micro-geothermal Distributed Wind electric Residential, community, Fully commercial (100 We to 10 Small-Scale and productive kWe) (< 1 MWe) Photovoltaic activities. Water supply, Fully commercial packaged lighting, refrigeration, systems ice making, telecom stm PV/wind/fossil . Commercially available, hybrids packaged or custom engineered  4 Philippines: Strengthening the Nonconvenlional and Rural Energy Development Program 9. In communities where hcuseholds are widely dispersed and household energy use is low (typically less than 1 kWh per day), NRE technologies such as photovoltaics (PV) or small PV/wind hybrid power units are often less expensive than either grid extension or village A/C minigrids. Where households in the community are geographically more concentrated, small-scale hydropower and bioenergy systems often can compete effectively with fossil fuel options in powering local minigrids. Although rural inhabitants of the Philippines may prefer to have grid electricity at low prices, the current choice for close to 5,000 barangays is either (1) no electricity or (2) basic pre-grid electricity services that are not supplied by a central grid. Locally powered A/C minigrids can delivery electricity of very high quality and reliability, but they are limited by the maximum power generation capabilities of the local electricity sources (e.g., micro-hydro power units). By contrast, central (or "backbone") power grids can deliver power at virtually any level to local communities. This power limitation of isolated minigrids only becomes an issue if the isolated commtnities' demand for electric power exceeds the capability of the local minigrids. 10. Philippine market reforms have been quite effective in reducing costs and extending coverage of electricity supply. However, in other countries that have fully privatized their power sector, the impact on social programs for improving the access of dispersed rural populations to electricity and modem fuels has been invariably negative. New strategies that involve public/private sector partnerships and deployment mechanisms featuring decentralized technologies may be the only way for the GOP to pursue social equity and poverty reduction goals in a privatized energy sector. Thesse concepts are discussed more specifically in Chapter 4. Grid-Connected Applications 11. A number of large-scale grid-connected technologies have recently emerged into full commercial use internationally. Perhaps the most prominent and most promising for the Philippines is wind electric power generation, now with more than 15,000 MWe of installed capacity worldwide, most of it financed commercially. 12. Recent comprehensive wind-mapping data for the Philippines show that wind electric power has the potential to make a significant contribution to the country's power supply. Because wind turbines are modular (typically 0.2 to 2 MWe each), wind power is very adaptable to fast, unpredictable growth in power demand. Wind power is particularly advantageous for small islands compared with the prohibitive costs of expanding national grids and full reliance on imported fuels for diesel generator sets (gensets). 13. As with more developed geothermal energy, the Philippines' new energy plan recognizes local commercial exploitation of large-scale indigenous and renewable energy resources as a way to increase energy self-sufficiency and diversify the energy mix. Chapter 2 discusses the latest information on current and projected technology performance and costs of major NRE technologies of interest to the Philippines. 14. For much of the coming decade there appears to be no need for additional generation capacity for the NPC backbone grid beyond the projects that are under construction or in the pipeline. The Asian economic situation has resulted in lower mid-term growth projections for the Philippines economy. Yet there are important reasons why the Philippines should now encourage the development of wind resources for grid-connected power generation. One reason is the long lead time required for preparatory work. It will take the better part of a decade for the Philippines to have an active wind electric power development program underway and about 500  Executive Summary 5 MWe of wind generation capacity in place. Several years of non-construction preparation are required for wind plant site identification, characterization, and ranking, and for detailed wind resource measurements (typically, two years of detailed data are required as part of the preinvestment activities). Developers, investors, and the government will all want a few years of experience with the initial wind plants before significantly expanding construction activities. If wind electric power is to emerge as a significant, clean option for indigenous power generation in the coming decade, development must begin now. Near-Term Investment Opportunities 15. To give energy planners a "ball-park" (approximate) idea of the physical, financial and implementation requirements of these types of projects, this report outlines two important near-term NRE investment opportunities. These opportunities are in (1) off-grid electrification and (2) grid-connected wind electric power development. Although based on recent data and cost information available for the specific technologies and proposed local sites, the analyses presented are highly conceptual in nature and not intended for use in making immediate investment decisions. Off-Grid Electrification 16. The near-term entry point for practical NRE applications on a significant scale is in off-grid electrification because most of the technologies involved are often already the least- cost options on a life-cycle basis. The conceptual project targets, as an example, 700 off-grid barangays in Region II (Cagayan Valley), Region vm (Eastern Visayas), and Region IX (Western Mindanao). These regions have the largest number of off-grid barangays outside the Autonomous Region of Muslim Mindanao (ARMM). At the end of the conceptual (i.e., hypothetical) project, about 50 percent of the off-grid markets in these regions would have been served. 17. The market in each barangay will comprise (1) households for lighting; (2) public service centers, with one school and one health clinic per barangay; and (3) economically productive applications. The project would cover 126,000 households (at 100-percent market penetration), 1,400 public service centers, and 700 productive applications. It was assumed that 25 percent of the households will be connected to local centralized power systems and that 75 percent will have individual SHS units of 50W each. For costing the microgrids, it was assumed that one-half are powered by pure diesel gensets, 40 percent by centralized PV, 20 percent by micro-hydro, and 5 percent by wind power/hybrids. Each microgrid will have a capacity of about 30 kWe. For simplicity, the individual systems were assumed to be all 50-W solar home systems (SHSs). In a real project, the market for other system capacities should be investigated. The project would be carried out in three phases over five years, with the second and third phases overlapping. Each succeeding phase covers more barangays than in the previous phase, as the costs decline. 18. The analysis shows a required investment of about $90 million' for the modest- sized conceptual project. Given the magnitude of this financial requirement, the implementation plan must be based on principles of cost recovery and maximum contribution from the private sector, through companies that specialize in providing off-grid electrification services. The three All dollar amounts are current U.S. dollars.  6 Philippines: Strengthening the Nonconvenlional and Rural Energy Development Program basic implementation approaches now employed in similar projects elsewhere include (1) dealer sales of equipment, with consumer financing; (2) leasing of equipment to rural users by dealers and/or leasing companies; and (3) "fee-for-service" approaches by rural energy service companies (RESCOs). To attract private sector participation in off-grid projects, the government must develop an appropriate policy and regulatory framework that (1) will permit RESCOs to enter unserved franchise areas of rural electric cooperatives (RECs) and (2) allow charging of tariffs that reflect the true cost of service in such areas. These issues are discussed in more detail in Chapter 4. Grid-Connected Wind Electric Power Development 19. An illustrative project description for a 50-MWe wind electric power project is presented in Chapter 4 and summarized in Chapter 5. The objective of such a modest but commercial-scale pilot project would be to catalyze local commercial development. A consultant study, on which the conceptual project is based, considered 16 potential project sites, through review of available wind data and site visits. The study concludes that Subec and Pagali in Ilocos Norte are both very good candidates for a commercial-scale wind plant. A likely scenario would involve construction at both sites (which are close to each other) since neither appears to be capable of supporting 50 MWe. 20. It is estimated that the 50-MWe wind farm could be built for an installed cost of about $1,000 per kWe (approximately $50 million capital investment), and that the turbines would operate with an average annual capacity factor of about 30 percent. Some 67 turbines, each with a capacity of 700 kW, would be employed. 21. Because such a project would be carried out by independent power producers, the consultant report suggests some specific incentives (see Chapter 5) to attract private industry, including the provision of long-termi power purchase contracts, accelerated depreciation schemes, and investment/production tax credits. Although the World Bank and the GOP do not necessarily endorse all of these fiscal recommendations, they do illustrate the kinds of concerns that the private sector has regarding this area of investment. One recommended action clearly worth pursuing is to examine the potential for matching wind projects with pumped storage hydro projects, to address the intermitteincy issue of the resource. The Role of Renewables in a Restructured Environment 22. The impact on renewables of the impending restructuring of the power sector is mainly on large grid-connected NRE technologies, such as wind power, that are not yet in the system. Some of the potential impacts are negative. In a pool2 system, which is one of the likely forms of the restructured sector, generators are paid only for specific services such as energy, capacity, spinning reserve, black start, and reactive power. Energy prices are based strictly on the marginal cost of energy at a given hour. Capacity payments are normally based on some combination of plant availability, reliability, and a chosen method of calculating periodic capacity cost for the system. Stand-alorke renewable electricity plants will generally receive only energy payments as stand-alone units. Normally, NRE plants cannot provide adequate availability to receive capacity payments under typical pool arrangements. A more complete discussion of this approach appears in Annex 3.5.  Executive Summary 7 23. In general, a power pool arrangement will not be able to give capacity credit to a renewable plant if its availability is below a specified level, usually 85-90 percent.3 Because without capacity payments it will be difficult to finance wind farms, a means must be devised to obtain capacity payments for the renewable plant. One approach is to promote hybrids rather than stand-alone renewables plants. Under the future pool rules a power generation company (GENCO), which may include renewable generating plants ("virtual hybrid" configuration),4 could be responsible for providing capacity from its portfolio of generating assets and not from any specified individual plant. This gives the GENCO an incentive to acquire power plants with very low variable costs, such as renewable generators, that are "reasonably" available and reliable, especially if they can help meet peak period demands. A GENCO could find this approach economically attractive because, over the life of the investment, the lower operating costs of the NRE facility could offset the capital costs of both the NRE and the conventional plant firming up the NRE resource. 24. The chief benefits of this approach for the country are that (1) older oil-fired plants can be retired more quickly without affecting system reliability and (2) the GENCO using the NRE plants may be able to obtain carbon offset payments from the Global Environment Facility (GEF) or other sources as a corporate entity, thereby maximizing the incentive to invest in renewable energy.5 A similar approach integrating dispersed biomass plants into generating companies would enable a GENCO to supply not only active power and energy, but also such auxiliary services as reactive power throughout the grid. Thus the proposed reorganization of the country's electricity system, coupled with planned plant retirements, could in fact create an environment for increased use of renewables-based electricity. 25. Nevertheless, developers of renewable energy generation projects such as windfarms will require long-term power purchase agreements (PPAs) at favorable rates before they will be willing to commit to and invest in a project. This will certainly be the case for a new market, such as the Philippines, where no company will have the locally established infrastructure (e.g., trained local staff), sunk costs, and experience base to enable them to operate on a less risky basis. One possible problem stemming from the restructuring is that it is not apparent whether there will be a government-related entity (e.g., NPC-residual, other) that will be in a position to issue PPA(s) with favorable power purchase rates for wind generation, and possibly serve to channel external resources (such as GEF grants) for renewable generation incentives. It is recommended that this issue be examined closely by the DOE and efforts made 6 to introduce appropriate provisions to the proposed Omnibus Bill. The availability factor (the ability of the plant to produce when called) is often confused with the capacity factor. Plants with low capacity factors (for example, comnbustion turbines operated just a few hundred hours annually) will receive capacity payments because they are highly available to the system when called (usually more than 95 percent). On the other hand, a NRE plant with a high capacity factor, such as a mini-hydro plant that generates 60-70 percent of the hours of the year, might not be sufficiently available to receive a capacity payment. A virtual hybrid is a GENCO with traditional and renewable energy capacity. The transactions costs required to obtain such payments are likely to go beyond the resources of a small NRE generator, whereas a larger company is more likely to have the wherewithal to navigate the application process. The NRE bill referred to in this document is superseded by the recently passed bill discussed in Annex 1.1.  8 Philippines: Strengthening the Nonconvenrional and Rural Energy Development Program Recommended Policy Initiatives Near-Term Initiatives 26. Promoting NRE on a significant scale will require private sector investment; this in turn will require a supportive policy and regulatory environment. There is considerable potential for both grid-connected and (especially) off-grid energy supplies from NRE, but only if the risks and rewards of such investments can be made compatible by appropriate govermnent policies. The main report recommends actions that can be taken now along with rationales for each one. Recommendations include the following: * Revise accreditation requirements for renewable energy projects. This will remove significant obstacles to local private sector investment in NRE. * Revise the definition of renewable energy technologies used by NPC regarding the limitations on hybricl power systems. This will permit the use of a range of hybrid power generation approaches in which renewable energy-dominated power generation will be made reliable and dispatchable through integration of fossil fuel backup equipment. * Complete the revision of Executive Order (EO) 462. This will remove a major obstacle to large-scale investment by both in-country and international investors and developers. * Exercise full DOE powers under the Mini-Hydro Law. The DOE is empowered to be the sole agency charged to carry out policies, rules, and regulations. This will facilitate mini-hydro development. * Consider special favorable treatment of renewable energy generation-for example, permitting distribution utilities to own renewable generation plants up to a certain percentage of Iheir load, providing generation incentives, and allowing for a limited number of new private power agreements (PPAs) for renewable installations. 27. The following recommended initiatives involve primarily off-grid renewable energy applications, and reflect the goals of the DOE's 0 Ilaw rural electrification program: * Open the electrification of small and isolated grids to the private sector. In- country and international companies are prepared to invest in providing electricity services in off-grid regions provided that they can be allowed to do this on a profitable fee-for-service basis. * Address key regulatory issues. It will be essential to allow market-based tariffs for wireless electricity services, and to permit private rural energy service companies to enter unserved REC franchise areas. Promote and facilitate co-investments for social and economic development. The Department of Energy should support the energy component of programs and initiatives that build rural community infrastructure (potable water, health, education, telecommunications, public lighting, etc.) and initiatives that develop and expand economically productive activities. This initiative should include  Executive Summary 9 coordination with other government agencies responsible for these non-energy sectors. * Establish national standards for renewable energy equipment. For large-scale use of NRE to be sustainable in off-grid areas, uniform and enforceable standards must exist for equipment design, installation, and performance. The DOE should expand its efforts in this area and make use of the work of international organizations already developing such standards for Europe, North America, and Japan. * Expand availability of information needed by the private sector. The DOE, on its own and through contracts to others, has developed substantial information related to the market for renewable energy products and services. However, this information is not easily accessible by the private sector. It is recommended that DOE make this information more readily available to the private sector, and expand the information available. This can substantially reduce the time and expense required by companies to make informed NRE investment decisions. Useful actions by DOE would be to (1) further characterize and document renewable energy resources, (2) support socio-economic market characterization and documentation, and (3) support the determination of the willingness and ability to pay for modern energy services (especially through new survey instruments recently developed with DOE). Detailed market characterization is the most important preparatory task for off-grid electrification projects. It is the principal basis of project design and the determinant of whether a convincing case can be made for private sector investment. Recommendations for SPUG's Future Mission and Activities 28. The NPC's Strategic Power Utilities Group (SPUG) is a major player in the electrification of isolated areas (minigrids and individual systems) and apparently will continue to be so in the future. To be consistent with the principles stressed above on maximizing private sector participation, the following changes are recommended in the mission and operation of SPUG: * Give SPUG the mission to expand electrification on a least-cost, maximum- sustainability basis (both technical and financial), using SPUG funding as a lever for other sources of funding rather than, not as the sole source. * Divest NPC and SPUG of design and implementation roles to the extent practicable, and change the role of SPUG to one focused on programming, planning and funding. * Implement the SPUG mission, including isolated grids, through private firms, especially Rural Energy Service Companies (RESCOs), making use of competitive bidding for rights to build and operate systems. * Allow private RESCOs to bid on SPUG franchise areas on the basis of subsidy minimization, subject to certain service standards.  10 Philippines: Strengthening the Nonconventional and Rural Energy Development Program * Permit RESCOs to charg;e prices that will recover all variable costs plus the non- subsidized investment costs and encourage experimentation with different levels of service to recover costs. This consideration needs to be reflected in the proposed Electricity Industry Reform Act. * For areas where RESCOs are not interested in operating, offer subsidy packages to NGOs and communities to encourage project development. * Coordinate expansion activities with the National Electrification Administration (NEA) and the RECs so that the tenure of the RESCOs is long enough to recover investments. 29. Other recommendations are as follows: * Standardize the unit sizes for PV around several widely available sizes. Encourage bilateral donors to contribute to the electrification program overall rather than to small, unconnected pieces; and make effective coordination of project design and implementation efforts among NRE donors a much higher priority. * Adopt standards for performance, efficiency, and reliability that will enable consumers and RESCCis to compare different vendors and even different technologies. * Change the specifications of hybrid (NRE-fuel) systems such that common technically feasible and financially viable designs can meet the requirements for various government incentive programs. Encourage continuity of daily service, rather than peak period lighting, as a design goal to increase the productive uses of electricity. Policy Considerations for the Long Term 30. Internationally, various large-scale grid-connected NRE technologies for power generation are gradually emerging as important long-term options for developing countries such as the Philippines. An important way in which the commercialization of these technologies is being accelerated is through special policy support. An example is the United Kingdom's Non- Fossil Fuel Obligation (NOFFO) initiative, which succeeded in significantly reducing the cost of wind energy and significantly expanding installed capacity in that country. Other examples include (1) the Electricity Feed Law in Germany and Spain and (2) the Systems Benefit Charges and Renewable Portfolio Standards (RPS) now being tried in some parts of the United States (see Annexes). All of these approaches involve some form of mandating increased production of renewable electricity from the power system, with the higher cost being financed by subsidies from various sources and schemes. The financial cost of such initiatives is high and it is not surprising that these programs are all limited to the industrialized countries for now. 31. For the Philippines and other developing countries, it may be possible to conduct similar initiatives to create initial markets for large-scale renewables for power through a new program called the World Bank/GEF Strategic Partnership for Renewable Energy. Under this program, GEF grant support for renewable energy in client countries is being shifted from single  Executive Summary 11 projects to long-term (more than, say, 10 years) development programs that enable market development to occur in progressive phases. It is conceivable, for example, that the Philippines could adopt a "localized" version of the NOFFO or the RPS to accelerate market development of wind power with the incremental cost of development financed by the Strategic Partnership. The Philippines, in fact, is one of four initial countries being considered for participation in this global program, which is budgeted at about $150 million annually. It is recommended that the GOP actively pursue this possibility with the World Banlk/GEF. Note: The present report was completed in April 2000. Since then a number of events have taken place that directly or indirectly affect the recommended plan of action discussed in Chapter 5. Annex 1.1 provides an update of the situation as of June 2000. Organization of this Report 32. The first chapter of this report briefly lays out the social, enviromnental, and economic justifications for developing NRE resources against the backdrop of privatization and reform of the energy sector. It reviews the experience with NRE from the 1 970s to the present, highlighting some important lessons learned from both successful and failed initiatives. 33. The second chapter reviews the commercial status and current and expected costs internationally of NRE technologies of potential usefulness to the Philippines. It distinguishes between immediate and long-term potential, small- and large-scale systems, and rural and urban applications. Because electricity is one of the most important outputs of NRE systems, the chapter reviews the status of several off-grid and grid-connected technologies. On the basis of this review, the chapter makes a more realistic estimate of the medium- to long-term contribution of the various NRE technologies to the energy mix. It concludes with a recommended position of DOE as regards the priority to be accorded to these technologies. 34. The third chapter examines how existing and impending (proposed in the Omnibus Bill) policies, legislation, incentives, procedures and institutional arrangements affect, positively or negatively, the commercialization of NRE in the Philippines. Because commercialization implies a maximized role of the private sector, much of the discussion revolves around the effectiveness (or lack thereof) of various incentives and regulatory mechanisms directed at NRE development. The impact of such incentives on NRE technologies of immediate usefulness, such as mini-hydro and PV systems, is framed within the context of how rural electrification of off-grid areas (where NRE technologies are likely to be more competitive) can encourage the private sector to assume investment and implementation risks. For the medium and long terms, the chapter discusses the possible role of large-scale, grid- connected NRE systems (such as windfarms) in a restructured power sector where generators are organized in a pool system.7 35. The fourth chapter outlines near-term investment possibilities in off-grid electrification and large-scale wind power. The off-grid electrification project considers a slice of the rural electrification program, estimates the physical and financial requirements, and outlines possible technology deployment mechanisms that maximize the role of private players and minimize public subsidies. The windfarm project considers a representative location in the Ilocos This chapter benefited substantially from contributions by Paul Galen, U.S. National Renewable Energy Laboratory (NREL). Mr. Galen is the task leader for the Policy Task in NREL's renewable energy study for the Philippines, supported by USAID.  12 Philippines: Strengthening the Nonconventional and Rural Energy Development Program Region, where wind regime data and site information are sufficient to enable the estimation of physical, financial, and implementation needs. The objective is to give local energy planners and decision makers a more concrete idea of the magnitude of financial and other requirements as well as options for implementation. 36. The final chapter outlines some specific actions that need to be taken to pursue the priority investments identified. These actions include the rectification of certain policies and incentives and the carrying out of specific preparatory work, such as the conduct of systematic market characterization surveys of barcrngays included in the ERAP program and more detailed wind measurements in candidate sites. The chapter then reviews the different multilateral and bilateral assistance mechanisms that could usefully be exploited in the development of environmentally friendly NRE projects.  I Introduction Social and Strategic Justifications for Developing Renewable Energy 1.1 The broad economic reforms that began in the mid-1980s have profoundly changed the Philippines energy sector. Now, with oil refining and coal mining operations privatized and petroleum product prices deregulated, the country is poised to carry out sweeping sector reforms that include the restructuring and privatization of the National Power Corporation (NPC) and the rationalization of the distribution sector. As articulated in the new energy plan for 1999-2008 (DOE 1999), the central sector objectives remain a secure energy supply, affordable energy prices, and energy infrastructures that are compatible with broader social and environmental objectives. For commercial energy, the plan projects a decline in imported energy supplies from about 80 percent of total requirements in 1999 to 68 percent in 2008. 1.2 Among the strategies the plan advances to improve the contribution of domestic supplies is accelerated commercialization of new and renewable energy (NRE) technologies,9 increasing their contribution from about 70 MMBFOE in 1999 to 91 MMvBFOE in 2008. 1.3 The projected increase in absolute terms is not substantial. However, even incremental increases in NRE for certain applications can have significant economic, social, and environmental benefits, especially those applications that help improve access to energy by people in the countryside. For example, despite the rapid pace of electrification nationally, some 25 percent of households of the country's population of 72 million remain unserved, almost all of them in rural areas. The Philippines comprises about 7,000 islands spread over 300,000 square kilometers. For cost and technical reasons (distance from the main network, for example), many rural communities will not be connected to the grid in the foreseeable future, if at all. 1.4 In communities where households are widely dispersed and energy end use is low (typically less than 1 kWh per day), NRE technologies such as photovoltaic (PV) or PV/wind Since the present report was completed in April 2000, a number of events have taken place that directly or indirectly affect the recommended plan of action discussed in Chapter 5. Annex 1.1 provides an update of the situation as of June 2000. The term new and renewable energy (NRE) as used in this report refers to energy from solar; wind; biomass; mini, micro and small hydropower; and small or low-temperature geothermal applications. Renewable large- scale geothermal and large hydropower plants are excluded because they are already the subjects of conventional programs; in fact, the Philippines is a world leader in both technologies. 13  14 Philippines: Strengthening the Nonconventional and Rural Energy Development Program hybrids are often less expensive means of providing basic electricity services than either extending the grid or installing a village minigrid. Where households in the community are more concentrated, small-scale hydropower aid bioenergy systems can compete effectively with fossil fuel options. Thus, purely on a cost basis, in these communities renewables can be an important component of the rural energy supply mix. Furthermore, certain characteristics of NRE systems make them the preferred energy supply option for other off-grid functions, such as electricity for decentralized/distributed community facilities and productive uses (e.g., small-scale irrigation, drying of crops). The annualized cost of NRE service in such areas is often comparable with or lower than fossil fuel alternatives. Rural inhabitants of the Philippines may prefer grid electricity at low prices, but the choice now for close to 5,000 barangays (villages) is either no electricity or electricity services that are not connected to the central grid. 1.5 Market reforms have been quite effective in reducing electrification costs and extending coverage. However, in other countries that have fully privatized their power sectors, the impact on social programs for improving the access of dispersed rural populations to electricity and modern fuels has invariably been negative. New strategies that involve public/private sector partnerships anxd deployment mechanisms featuring decentralized technologies may be the only way for the Philippines to pursue social equity and poverty reduction goals in a privatized energy sector. These concepts will be discussed more specifically in Chapter 4. 1.6 Aside from small-scale applications for off-grid areas, a number of NRE technologies suitable for grid supply have recently reached commercial status internationally and may become economic electricity-generation options for the Philippines in the near-to-medium term. Perhaps the most prominent is wind electric power generation (i.e., wind power), with more than 10,000 MWe of installed capacity worldwide, most of it financed commercially. 1.7 According to recent wind mapping data for the Philippines,10 more than 10,000 kM2 of windy land areas are estimated to have good-to-excellent wind resource potential. Using the conservative assumption of about 7 MW per km2, these areas could support more than 70,000 MW of potential installed capacity. Considering only areas of good-to-excellent wind resource, there are 47 provinces in the Philipp:ines with at least 500 MW of wind potential and 25 provinces with at least 1,000 MW of wind potential. Wind energy is pollution-free, emitting no CO2 or local pollutants such as NO,. or SO2. Because wind turbines are relatively small (typically 0.2 to 2 MWe each, with economically viable wind farms at 20 to 200+ MWe), wind power is very adaptable to fast, unpredictable growth in power demand. Construction time is also short compared with fossil fuel and large hydro alternatives. Wind power is particularly advantageous for small islands compared with the prohibitive costs of expanding national grids and reliance on imported diesel fuels for diesel gensets (generator sets). Finally, the use of renewable energy enhances the national energy security position of the Philippines by using indigenous energy rather than imported fuels. 1.8 As with more-developed geothermal energy, the new energy plan recognizes local commercial exploitation of large-scale indigenous and renewable energy resources as a way to increase energy self-sufficiency and to diversify the energy mix. Chapter 2 reviews the current 10 The assessment was a joint effort of the U.S. National Renewable Energy Laboratory (NREL), The Philippine Council for Industry and Energy Research and Development (PCIERD), Winrock International, The Philippine National Oil Company (PNOC), and the National Power Corporation (NPC).  Introduction 15 and projected technology performance and costs of major NRE technologies of interest to the Philippines. Experience with Renewable Energy in the Philippines Beginnings of the Program 1.9 The first official attempt to carry out a program for renewable energy development was made in 1977 with the promulgation of Presidential Decree 1068. The decree created the Non-Conventional Energy Development Program for research, development, and demonstration of NRE technologies, to be administered by the Ministry of Energy (now the Department of Energy, or DOE). The first five years of the program were devoted more to building capacity than to commercializing NRE technology. Mirroring the general experience of other countries at that time, including industrialized countries with large programs, true commercialization proved difficult to achieve because of the immaturity and high cost of most NRE technologies compared with conventional alternatives. 1.10 Shortly thereafter, extensive and heavily subsidized attempts to commercialize dendrothermal power," biomass gasifiers, and small hydro were launched by agencies other than the Ministry of Energy, but all were unsuccessful and were later abandoned. Although the reasons for failure were many, it was primarily a matter of trying "to do too much too soon." There was inadequate knowledge of the markets, overestimation of technology readiness, and little or no buy-in by the private sector. Recent Experience 1.11 In the 1990s the most significant Philippine government initiative to commercialize NRE was the creation in 1993 of the Renewable Energy Power Program (REPP). REPP was designed to provide up to P750 million in financing for private power projects using solar, wind, biomass, and small hydro resources with a capacity of between 200 kWe and 25 MWe. To administer the program, a DOE Task Force was created consisting of representatives from the DOE, the NPC, the National Electrification Administration (NEA), the Philippine National Oil Corporation's Energy Research and Development Centre (PNOC-ERDC), and the Philippine Council for Industry and Energy Research and Development (PCIERD). The source of funds would be the Government Service Insurance System (GSIS) and Social Security System (SSS); The Philippines National Bank (PNB), Land Bank of the Philippines (LBP), and Development Bank of the Philippines (DBP) were the conduit banks that would lend to project proponents. The DOE would guarantee the purchase of power generated by REPP projects. Expectations were high that the REPP would indeed be the showcase program that would attract private investments in NRE power generation. A dendrothermal power system consists of a wood-burning power plant and a dedicated plantation of short- rotation tree species. About 2,000 hectares planted with a tree species such as Leucaena leucocephala is needed to sustain a 3-MW power plant.  16 Philippines: Strengthening the Nonconventional and Rural Energy Development Program 1.12 Unfortunately, the REPP encountered various difficulties and delays and was never successfully launched. Evaluations of the program12 have identified several barriers in the appraisal and contractual process; these will be discussed in more detail in Chapter 3. Other Activities 1.13 Several ongoing public- and private-sector NRE activities tend to be one-off types initiated because donor grant financing was available for specific projects or because of individual initiative. Most notable in the latter case is the extensive use of biogas systems at the livestock farms of Liberty Flour Mills. Since the 1970s Maya Farms has been biodigesting the wastes from some 60,000 hogs and caLttle, using the methane produced for process heat and electricity. On a smaller scale, about 500 other biogas systems are being used nationwide in private hog and poultry farms. This use of NRE was clearly a practical and economic choice for the farm owners, who felt no need to wait for government assistance or incentives. In contrast, although some commercial establishments use solar water heaters, their economics depends strongly on the price of electricity, fuel oil, or gas; most are not yet competitive. 1.14 Ongoing bilaterally-funded NRE projects include the NEA's "pre-grid electrification" project, launched in 1991 with grant financing from the German GTZ.'3 The project installs individual solar home systems (SHSs) in remote households nationwide. Implemented by the rural electric cooperatives (RECs) under the auspices of the NEA, the project has to date installed about 2,000 units. 1.15 The Australian AID (AuisAid) is providing to the Philippines Municipal Solar Infrastructure Project almost $30 million'4 to finance the installation of about 1,000 packaged PV systems in 390 barangays in the Visayas and Mindanao to supply power to public service centers and other community applications. The project is being executed by the Department of Interior and Local Government (DILG). 1.16 Although they clearly benefit populations in specific sites, the key question for these and similar donor-funded projects is whether the deployment mechanisms used will permit sufficient cost recovery to enable expansion of the project to other areas. Participating communities have made commitmnents to pay the full operation and maintenance costs for the installations, but no capital recovery is required. Consequently, replication of this program will require new financing for the capital costs for equipment and installation. 1.17 The Development Bank of the Philippines (DBP) through its Window In facility has financed a few renewable energy projects. Window HI is a concessional lending facility for socially desirable projects that are too risky for traditional banking facilities. It is funded out of DBP profits. Though many types of NRE projects could meet the loan criteria, so far the applications have been few. The UNDP project "Financing Energy Services for Small-Scale End Users" (FINESSE) is now providing technical assistance to the DBP to revitalize the Window III program for renewable energy by improving the capability of DBP staff to identify and appraise NRE projects and by helping develop a solid project pipeline. See, for example, Proceedings of the Sectoral Workshop-Conference on New and Renewable Energy Systems, April 10-11, Subic, Zambales. 13 Gesellschaftfur Technische Zusammenarbeit. 14 All dollar amounts are in current U.S. dollars.  Introduction 17 The Need for a New Initiative 1.18 Although both the public and private sectors have carried out numerous large and small NRE projects over the last two decades, true commercialization has proved elusive. The projects have been "one-off'; donor-driven; of subcritical mass; often implemented using low- cost and inferior equipment; and lacking in the financial or technical resources for sustained operation, maintenance, and repair. A large part of the problem is exogenous and thus beyond the control of local planners: only recently have some NRE technologies of interest to the Philippines compiled adequate track records and achieved significant enough reductions in cost to be of interest to investors. 1.19 The NRE development program in the Philippines has also been hindered by the lack of a policy framework that (1) articulates the contribution that renewable energy can realistically make in the immediate and long terms, (2) provides incentives sufficient to attract private sector participation, and (3) supports effective institutional arrangements for carrying out a coherent national program. The purpose of this report is to help the government of the Philippines (GOP) identify key policy gaps and suggest specific strategies to address them. It addresses priorities for near-term economic investment in NRE and recommends an action plan to hasten that investment. NRE applications in off-grid electrification are emphasized as a quick entry point to commercialization, taking advantage of the opportunity provided by a presidentially mandated program to energize some 10,000 unelectrified barangays nationwide by 2004.   2 Choosing Renewable Energy Technologies: Practical Options for the Coming Decade 2.1 This chapter selectively explores the potential for mobilizing solar, wind, biomass, small hydro, and marine energy resources in the Philippines. It draws in part on the renewable energy technical assistance project'5 of the U.S. National Renewable Energy Laboratory (NREL) for the Philippines. The Bank ESMAP teamn is collaborating with NREL and other organizations in this work. 2.2 This report is not meant to be yet another technical and economic review of renewables; the Philippines DOE has extensive experience with commercially available renewable energy technologies and has kept abreast of emerging ones. Instead, the emphasis here will be on providing the latest information on technical advances, cost trends, and deployment strategies for technologies of relevance to the Philippines.'6 2.3 The principal purpose is to help the government set priorities for renewable energy development; thus, this is information for decisionmaking, not a technical tutorial. For each technology of potentially strategic significance there is a set of issues that needs to be addressed if large-scale sustainable use of these technologies is to become a reality. 2.4 The depth of discussion varies with the Philippines' experience with the technology. Where there is extensive experience with these technologies in the Philippines (e.g., SHSs, small hydropower), the discussion is concise and focuses on issues related to the challenge of significant scale-up in their use. For some technologies in which the Philippines is a world leader, including large geothermal power and large hydropower development, there is virtually no discussion of technologies or costs; these are well understood by in-country experts in the public and private sectors. For small hydropower applications the resource is well known, with many sites characterized. Development of these sites has been inhibited not by lack of information but by the unfavorable investment environment. 2.5 For some technologies there is little or no in-country experience, although the technology is fully or partially commercial elsewhere and highly relevant to the Philippines. Examples include large-scale wind electric power technology, small wind turbines, and National Renewable Energy Laboratory (NREL) project "Technical Assistance on Renewable Energy- Philippines," supported by the U.S. Agency for International Development/Manila. See Annex 1.1 for an update on the status of wind electric power technology as of June 2001. 19  20 Philippines: Strengthening the Nonconventional and Rural Energy Development Program wind/diesel hybrid power units. For these options the technical and policy requirements for attracting private sector investment in power plant development and sustained operation are discussed in detail. 2.6 There are other technologies relevant to the renewable energy resource base in the Philippines that are not yet commercialized, especially marine energy conversion systems. Here the discussion is of recent technical developments and practical courses of action for the government, such as hosting international precommercial trials in Philippine waters. 2.7 There is also discussion of rapidly evolving technologies of special relevance to off-grid communities; these include small (less than 500 kWe) bioelectric systems and PV/wind/fossil-fuel hybrid power generation units. Classifications of Renewable Energy Options 2.8 As shown in Table 2.1, power generation and thermal-energy production technologies based on renewable energy vary widely in terms of both commercial and technological maturity. For the purposes of this report, these technologies have been classified on an electric and thermal power generation scale geared to applications in the Philippines (see Table 2.2): 1. Large-scale (more than 10 MWe) bulk power and cogeneration for grid-connected applications 2. Medium-scale (1-10 MWe) power generation and cogeneration 3. Small-scale (less than 1 MWe) applications for power generation, cogeneration, and thermal energy production 4. Freestanding applications for off-grid communities. Table 2.1: Renewable Energy Technology Status in 1999 Commercially mature Large geothermal Hydropower (all sizes) Commercially proven and rapidly evolving Large wind-electric power (100-600 kWe units) in wind farms (typically 20-200 MWe) Small-scale wind electric units (0.3-20 kWe) Bioenergy plants (cogeneration, power generation) Photovoltaic power systems (all sizes) Commercially available but not fully proven Minigeothermal power (500 kWe to several MWe) Small-scale biomass power (50 kWe to 500 MWe) PV/wind/diesel hybrid power systems (10 kWe to 5+ MWe) Emerging and speculative renewable energy technologies Wave energy to electricity (50 kWe to several MWe) Ocean thermal energy conversion (OTEC) (5 MWe to 100 MWe+) Ocean current energy conversion (100 kWe to multi-MWe) Tidal current energy conversion  Choosing Renewable Energy Technologies: Practical Options for the Coming Decade 21 Table 2.2: Renewable Energy Options for the Philippines (Electricity and Cogeneration) Classirication Primary Commercial and Scale Technologies Applications Status Large-scale Wind electric power Bulk power generation Fully commercial, with evolution in grid- generation (wind (10-100 MWe) efficiency, reliability, and cost- connected farms) effectiveness > 10 MWe Biomass-based Cogeneration, with Fully commercial, but each plant is power generation capacity of 10-30 MWe engineered to respond to unique legal and cogeneration and regulatory impediments Mini-hydro power Fully commercial; cost and (up to 50 MWe) performance highly site-specific Geothermal energy Base-load power Well-established in Philippines; policy conversion issues limit expansion Medium-scale Small windpower Intermittent generation, No experience yet in Philippines; grid- plants connected to local and significant potential likely. Possible connected regional minigrids economy-of-scale issues (1-10 MWe) Wind/diesel hybrid Fully dispatchable Commercially available; configured power units power, with majority and engineered for specific sites and component from wind applications energy Biomass-based Agro-industrial Commercially available; configured power generation applications, private and engineered for specific sites and and cogeneration power applications Mini-geothermal Base-load power Commercially available; at the lower end of the range of typical installations Small-scale Wind-electric grid- connected Photovoltaic Technically proven; not yet (up to I MWe) economically competitive PV/wind/diesel hybrid Bioenergy including Local minigrid power Commercially available at 100-, 250-, biomass/diesel fuel generation and 400-kWe biomass/diesel-fueled hybrids gensets Micro-geothermal Distributed Wind-electric Residential, Fully commercial (100 We to 10 small-scale community, and kWe); often competitive (off-grid) Photovoltaic productive activities: Fully commercial packaged systems < 1 MWe water supply, lighting, PV/wind/fossil refrigeration, ice Commercially available, packaged or hybrids making, telecom custom engineered 2.9 Non-electric applications of renewable energy provide heat for water and space heating, industrial process heat, and agro-industrial uses (e.g., crop drying, food processing). This chapter also presents recommendations for a DOE position on renewable energy technology options.  22 Philippines: Strengthening the Nonconventional and Rural Energy Development Program 2.10 The off-grid applications for both distributed and decentralized uses discussed have the potential for transforming the conditions of life in unelectrified communities-provided the energy supplied is coupled wit]h income-generating activities and supports priority community services (e.g., potable water, health services, education, telecommunications, and telephony). Renewable Energy Resources in the Philippines 2.11 This section discusses tfhe nature, extent, and magnitude of renewable energy resources in the country, and their potential contribution to power generation. These resources include solar radiation, wind energy, mini-hydropower, biomass residues, and marine energy (ocean thermal energy, wave energy, and ocean currents). Solar Radiation 2.12 The annual average incoming solar radiation (insolation) for the Philippines is in the range of 4 to 5 kWh/m2 per day, with significant geographic (microclimatic) and seasonal variations (see Figure 2.1). On average the country has abundant sunlight and there is relatively little variation from month to month compared with countries in more extreme latitudes, including the United States and much of Europe. Roughly one-half the sunlight at the ground in much of the Philippines is diffuse radiation. In arid desert environments the diffuse component may be as low as 20 percent; in the humid tropics and subtropical regions of Asia atmospheric water vapor increases the scattering of direct solar radiation. This is an important consideration in choice of solar technologies, becauise those that depend on the focusing of direct beam sunlight (e.g., solar thermal electric systems) will not perform nearly as well in the tropics as in arid, sunny regions. Solar thermal flat-plate systems for water heating and PV arrays respond equally well to diffuse and direct (focusable) sunlight. Figure 2.1: Annual Average Solar Energy in the Asia/Pacific Region (kWh/m2 per day) w 11E | I 1E ~Soth SW! :/ PHIaIPINES -* 11)111 4.q oQrlOB i,-.'~~~- T,wtofh PscifI~ gisfidsFEDEATWDSr m~~~~~~~~~~~ E - I  Choosing Renewable Energy Technologies: Practical Options for the Comning Decade 23 Limitations of Available Data 2.13 There is no electronic database of insolation measurements for the Philippines, and no central collection of written data. Experience teaches that solar resources are more than adequate for operation of PV systems and flat-plate solar thermal systems. Their financial performance depends less on the understanding of available solar radiation than on the costs and financing associated with the delivery and support of solar equipment and solar-based energy services. However, because there are significant geographic and seasonal variations in available sunlight, any significant investment in solar energy conversion systems should be preceded by insolation mapping for any proposed site. In this regard, an insolation map of the Philippines would be a useful adjunct to such investment initiatives (e.g., large-scale SHS projects). With support from USALD, NREL is now collaborating with Philippine institutions to establish a national solar resource database.'" Wind 2.14 Until recently, very little was known about the country's wind resources-or "resource," in technical terms. A quantitative atlas titled Wind Energy Resource Atlas of the Philippines was completed early this year under a joint United States/Philippine collaboration; this section draws directly on the text of the atlas."8 An effort of unprecedented scope, the atlas has revealed an extensive wind resource whose size had been largely unsuspected. If only 5 percent of the regions with very good wind resource are suitable for commercial power generation, this could pennit development of at least 5,000 MWe of capacity for commercial wind farms. 2.15 The maps in the atlas were created using a program developed at NREL based on the Geographic Information System (GIS). The mapping program, which combines high- resolution terrain data with formatted meteorological data, highlights areas with favorable wind resource where wind energy projects are likely to be feasible for both utility grid and rural power applications. The entire Philippines archipelago was mapped. An example (a wind resource map for Northern Luzon) is included in this summary report to give a sense of the extent and distribution of the nation's wind resource (see Figure 2.2); the full atlas should be consulted for a detailed review. 2.16 The wind resource over the Philippines, which varies considerably, depends strongly on latitude, topography or elevation, and proximity to the coastline. On an annual basis, the wind resource is best in the islands of Batanes Province north of Luzon; the north and northwest coast of Luzon; the northeast and east coasts of Luzon and Samar; the southeast coast of Mindanao; and the straits between Mindoro and Luzon, Mindoro and Panay, and Panay and Negros (see Figure 2.2). Windpower density ranges from 500-600 W/m2 along the northwest Luzon coast to 250-350 W/m2 between Mindoro and Panay, 250-300 W/m2 along the eastern 17 The task will incorporate Philippine solar data into a Geographic Information System (GIS) using the calculations of monthly average global horizontal solar resources developed from NREL's Climatological Solar Radiation (CSR) Model. The PCIERD, PNOC, United States Department of Energy (USDOE), and USAID sponsored a project in collaboration with Winrock International to accelerate the large-scale use of wind energy technologies in the Philippines by creating an atlas of wind energy resources. The Philippines NPC supported the project by contributing wind-monitoring data collected at 14 prospective wind energy sites and by providing other technical assistance. NREL was the primary analytical author of the report.  24 Philippines: Strengthening the Nonconventional and Rural Energy Development Program coast of Luzon and the northern coast of Samar, and less than 100 W/m2 off the southwest coast of Mindanao. Figure 2.2: Wind Energy Resource Potential in Central Luzon (Taken from the NREL Wind Atlas of the Philippines) 120 _ 1210 1220 1 ~~~~~~~~~~~1 : X Jf' } i PHILIPPINES __ 18___ ____ 174 4 liy> X 117