Will The Meralco and Solar Phils 2.99 Solar Rate Really Happen? Is there an Inner Revenue game and How will the Regulators determine its “Fair and Reasonableness”?
David Celestra Tan, MSK
16 July 2018
We Meralco consumers all got so excited about the P2.99 per kwh solar rate that Meralco got from Solar Phils in a price challenge type bidding or competitive selection process on 85mw of solar. It was supposed to be a “game changer” that will forever alter the grid connected solar industry in the Philippines. Can you imagine a P2.40 per kwh (44%) improvement from the P5.39 per kwh solar that Meralco signed with the same Solar Phils only a few months earlier?
Lo and Behold, in a “now you see it now you don’t” sleight of hand, Solar Phils much trumpeted P2.99 per kwh rate (actually 2.999 divisoria style pricing) turned out to be really P3.71 per kwh average over its 20 year term as determined by the ERC. Solar Philippines yearly increase scheme increases it to 3.6569 by the 10th year and 4.4577 per kwh in the 20th year. On June 14, 2018 the ERC approved the P2.9999 rate but disapproved the annual 2% increase it wanted in its capital recovery, a long held regulatory policy of not allowing increases in recovery or returns in invested capital.
In a letter dated June 26, 2018, Solar Phils President and Chief Executive Officer Leandro Antonio L. Leviste informed Meralcos CEO Oscar S. Reyes that “pursuant to Section 4.2 of the PSA, SPTC does not accept the ERC’s Provisional Approval because of the disallowance of the annual escalation rate of 2% provided in Section 5.3 of the PSA.
Meralco correspondingly submitted this letter to the ERC through a “manifestation” dated June 29, 2018 in which Meralco reiterated that “in the event the ERC Order is not acceptable Section 4.3 of the PSA provides that SPTC may file a motion for reconsideration which however shall not excuse SPTC from delivering the Product under the PSA”.
What will happen next? It is unlikely that Solar Phils would just abandon the 85mw project. It is bigger than its current 50mw bilateral contract with Meralco at a rate of 5.39 per kwh. Lean Leviste’s letter to Meralco dated June 26, 2018 stated that one of its remedies is “the termination of the PSA under Section 4.3”
As a background, Meralco accepted an unsolicited offer of a groundbreaking P3.50 per kwh for 85mw solar from Citicore. It was just a couple months after Meralco signed a 50mw solar contract with Solar Phils for P5.39 per kwh and another 50mw with PowerSource for P4.7268 per kwh.
Meralco subjected Citicore’s P3.50 per kwh price to a swiss challenge CSP. In a poker gambit, Solar Phils upped the ante by countering with a P2.99 per kwh rate intended to scare off Citicore from matching and they did not.
Solar Phils 2.99 was only for the first year and there would be a 2% increase compounded every year reaching 3.6569 in the 10th year and 4.4577 in the 20th year. The ERC calculated the 20 year average would be 3.71 per kwh. Citicore’s offer started at P3.50 per kwh with a 1.5% increase every year for the first 10 years reaching about P4.0018 and P4.2060 on the 15th year.
Now ERC’s approval is only provisional at the 2.99 per kwh rate with no annual escalations. They can still increase the rate in its final approval which can happen within the first year of the contract. Solar Phils is saying they will not accept the P2.99 provisional rate with no escalation. Meralco on the other hand is saying that their contract provides that Solar Phils should start delivering power while it is appealing the rate with ERC.
Avoided Cost to Consumers
From the consumers point of view, a solar rate of even at P3.50 per kwh will still be a big improvement over the P5.39 Meralco signed with Solar Phils and the P4.7268 it signed with PowerSource. The avoided cost is coal at Meralco’s generation mix of P5.2638 per kwh for July and P4.9766 per kwh. Note that we have to add a prorated VAT which brings the true cost of fossil fuel power to about P5.70 per kwh in July 2018.
The highest rate that ERC can reasonably approve eventually for Solar Phils in this 85mw contract is an average of P3.50 per kwh compared to its current 20 year average of 3.71 per kwh. Remember that Solar Phils is getting a generous P5.39 per kwh from its first 50mw solar project with Meralco so they can be flexible in the 2nd project.
One thing that needs to cleared up at ERC is the amount of annual energy that Solar Phils needs to deliver under its current contract. An 85mw solar facility if run only 4 hours a day in the afternoon for even 300 days a year providing for maintenance and typhoon days should be able to deliver a minimum of 102 million kwh a year. (85,000 kw x4 hrs x 300 days a year)
The Meralco and Solar Phils agreement appear to require only a minimum of 67.5 million kwh a year and a maximum of 85 million kwh a year. That is only 66% to 81% of the conservative energy estimated output for such solar plant based in Luzon island.
Our own estimate is that an 85mw solar facility should have an annual output of 122 million kwh a year. Solar facilities generate electricity for up to 8 hours during high irradiance season like summer. And a low of 4 hours during rainy season. We assume that there is about 14 days a year with zero output due to severe typhoons and 14 days of maintenance downtime. Our estimate of 122 million kwh is quite conservative.
What is the point?
This means Solar Phils can generate an excess energy of 37 million kwh a year (122 million minus the 85 million contracted with Meralco) and sell it to the WESM even at 4.50 per kwh and make an extra P166,500,000 a year. This will result to Solar Phils average revenue from its 122,000,000 kwh annual output to P3.45 per kwh on a combined revenue of P421,415,000 (254,915,000 from Meralco and P166,500,000 from WESM).
Is Meralco part of the game? It appears so. When MSK cross-examined the Meralco witness if there is a minimum energy guarantee that Solar Phils will deliver under the contract, the senior economist actually said NO. Was he mistaken? Now, contractually, Solar Phils need only to deliver 67.5 million kwh as a minimum which it can during the cheap P2.9999 per kwh year specially if the WESM price is high.
When is 85mw only 42mw?
The other inner game that Solar Phils may have played with apparent tolerance of Meralco is presenting the project as 85mw to match the Citicore proposal of 85mw. Actually if you go by the minimum contracted energy of 67.5 million kwh, Solar Phils proposal is only the equivalent of 42mw, half the 85mw. At the maximum contracted 85 million kwh a year, that is only the equivalent of 52 mw solar running at 5 hours a day.
The ERC’s Regulatory Evaluation of these Numbers?
The ERC’s provisional approval of the Solar Phils 85mw solar contract with Meralco under Case No. 2017-094 RC dated June 14, 2018, only compared the rate to the other solar projects and denied for now the escalation formula which the ERC said in its order if will still evaluate.
- Will the ERC base its final decision on the fairness and reasonableness of the rate on the comparative solar projects?
- Will it also apply return on investment using WACC methodologies?
- Will it consider the determination of whether Meralco made a fair comparison of the original proponent and Solar Phils the price challenger?
- Will the ERC consider that the Citicore 85mw proposal is for an existing facility ready to deliver whereas Solar Phils is yet to be built?
- Will it consider that Solar and Meralco only provided for delivery of 67.5mwh to 85 mwh in annual energy delivery compared to Citicore that will deliver the full output of an 85mw plant or an estimated 122 million kwh a year. Will it consider that Solar Phils is effectively only 52mw compared to the true 85mw of Citicore?
- Will the ERC consider the cost of the investment as it normally does for power projects, compare the projected annual revenues? In evaluating Solar Phils return on equity, will it consider the smaller revenue from Meralco and the incremental revenue from WESM?
Price challenge as a CSP is valid only if there is a fair comparison on apples to apples basis of the price bid. Price by themselves should not be the only basis. True volume of energy contracted and capacity need to also be considered.
Will the ERC catch on in the inner revenue game? How will they finally determine fair and reasonableness of the Solar Phils Rate?
MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com
3 Comments
Hi, nice writeup. But I still don’t understand the point. What’s wrong with the ‘inner revenue game’? Aren’t gencos unregulated anyway? I think the belief that excess volumes can be sold to WESM will generate automatic windfall is flawed. It may work for initial years (begging to assume that WESM prices remain the same) but if really proven, economics will correct that as probably other solar cos enter this ‘inner game’ and dilute WESM opportunities. At the end, the gencos face the risk of stranded output. For me, if I were solar phils, I would still bank on full contracted capacity so I can sleep better for the next 20 years.
It can be the above (solar phils taking the risk in WESM), OR it can be just simply the way it is. The agreed contracted output spells only 9-11% utilization. While quite low on the face, it may just simply mean that solar phils is acting extra prudent as contracting 15-20% utilization may spell heavy replacement power losses if they could not deliver. Solar is new anyway at this point where tech risk is high.
Dear PJ
I agree with you that there is nothing basicially wrong with an “inner revenue game” by Solar Phils. That means having excess energy than contracted and selling it to the WESM to generate more income. Nothing wrong with that. Except that in the case of Solar Phils, Meralco agreed that the contracted energy is only 67.5 to 85 million out of this 85mw solar facility. This means Solar Phils only beat the price of Citicore but did not beat the energy delivery which is all the energy output of its existing 85mw plants. Thats means approximately 122 million kwh vs only 85 million kwh committted by Solar Phils. In effect, Meralco consumers is getting only 52mw of solar instead of 85mw. That is not a fair comparison of offers.
Now we know why Meralco elected to call their swiss challenge csp “price challenge”. There seems no end to the lengths of creativity for hoodwinking the public. Lets hope ERC does not fall for it.
too much financial trickery here. it’s fun to read.
keep it up david!