Grid Modernization in the Philippines: Top-down Cost-Effective Resilience as Policy Drivers

Philippine energy policymakers, and their global counterparts, are facing a new era of policy and technology choices. The era of generation-centric power system planning, where every problem could be answered by building large-scale baseload units, has come to an end. Policymakers will now be called upon to adapt to a more dynamic world where fossil fuel price volatility tilts the balance toward modular renewables and storage, while new market solutions will define new solution portfolios that support actually resilient and cost-effective power systems. Countries that embrace this shift with flexible grid-focused strategies will be able to avoid fossil fuel lock-in while benefiting from a far broader and more responsive range of new technology options. 

The pivot away from baseload generation- to grid-centric planning has been necessitated by three developments that increase the urgency of re-positioning policy in relation to the Philippine electricity grid. The first is the country’s commitment to accelerated emissions reduction targets at the COP 26 meetings last year. During the event, the Philippine delegation committed to reduce its greenhouse gas emissions by 75% by 2030 through actions of which all but 2.75% were conditional. Philippine Secretary of Finance Carlos Dominguez III, who led the country delegation to Glasgow, said “We shifted from theorizing about climate change to executing practical adaptation and mitigation projects on the ground.” Although a new policy direction has been endorsed, gaps remain between the government’s new climate commitments and existing market policies in relation to a modernized grid.

The second development is the emergence of ongoing conflict between generation-centric power supply goals and regulatory and market implementation policies related to the design of a power system that can benefit fully from cost-effective renewables. For instance, although the Department of Energy (DOE) has stopped accepting new applications for coal power plant construction, the agency has nonetheless allowed previously approved coal projects – projects that have struggled to reach financial close and failed to meet project timelines — to move ahead. 

To fill the supply gap and reposition the Philippine’s power market, policies to support technology transfer, modernized market design and financing structures must now be put in place. This is critical to the government’s ability to meet targeted power supply gaps with cost-effective modular renewables solutions. While the DOE has made much of its shift to renewables, it has done little to enable the delivery of renewable solutions that depend on changes in the design and operation of the grids. The net effect of this policy dissonance has been a situation where the market is prepared to offer solutions to meet government policy goals, but is stymied by the lack of progress on grid issues, creating a setting where the market ends up struggling to provide cost-effective solutions that can be funded quickly. 

While there are elements of a transition in Philippine energy policy, unlocking the potential of renewables will require new grid and system management initiatives such as storage.

The lack of coherent policy and effective regulation in recent years has held back investments in the infrastructure needed to quicken the transition. For example, it is not yet clear from the rulings of the Energy Regulatory Commission how developers of essential grid storage may be compensated. The concept of mini-grids has long been in the toolkit of the DOE and has even made its way to the legislature and yet these so-called “mini-grids” refer only to areas outside the current distribution grids and are better known as “off-grid” areas. They do not refer to mini-grids within current distribution systems that are meant to facilitate supply from local, often renewable, sources while still connected to the grid, thereby reinforcing the overall resiliency of supply. 

The third development that should shape energy policy planning is the need for a more resilient power system. Damage from Typhoon Rai once again highlighted the Philippines’ vulnerability to the increasing frequency of adverse weather events. On December 14, 2021, typhoon Rai (local name: Odette) made its first landfall as a Category 5 typhoon in Siargao located in the Southern Philippines. It continued to cut across the entire area, inflicting severe losses on life and property. Power grids were taken down and, in some affected areas, restoration of service was estimated to take 6 months. While many of the initial reports on the damage and estimates of repair referred only to the local distribution grids, the transmission grid and the entire power system were likewise adversely impacted. 

The disaster brings to the fore the question of whether a business-as-usual approach to grid development is still appropriate. The cost of maintaining the grids have soared, while rebuilding them has become even more expensive. More important, where catastrophe insurance is still available, the premium expected by carriers has become so unaffordable to many grid owners their assets are left uncovered. Only continuing subsidies contained in the costs charged by the grids have allowed them to continue to rebuild and operate. It is an untenable situation.

To address these developments, and present a roadmap for new policy development, this Report focuses on the infrastructure needed to implement the transition so the Philippines can meet its COP 26 commitments and, far more importantly, adopt a cost-effective and more resilient system design that will open new clean energy technology pathways that can only enhance affordable, reliable, and secure supply that meets demand and the load profile of the country. While it is true that policy is the starting point of concerted action and that regulation directs that action toward the policy goal, it is also true that both policy and regulation are developed within the horizon of already existing technologies. Efforts should be made to open the system for future technology options. To address this situation, the Report has focused on the technological elements of the power delivery system that will enable the modern grid. 

Policymakers are in a fortunate position despite the challenges. It is important to note many of the critical technologies already exist and have been deployed successfully in global markets. As a result, an enhanced grid strategy can increase functionality and help the Philippines meet the objectives of a more flexible and resilient power system. An example of this can be seen when new rooftop solar units become a catalyst for accelerating bi-directional flows of information and energy that can help system operators find new solutions to urgent system needs. Another example is the way new approaches to managing extreme weather events have prompted increased deployment of sensors that can then be used to increase grid responsiveness. While the Report is detailed in respect of technology in order to widen the field for policy and regulation to develop and enable a modern power system, it also embraces a new role for customers that go beyond restrictive, narrow goals of dependable supply and lower prices that still too many energy specialists confine their proposals to.

Philippine commitments during COP26, the disjointed policies of the DOE, and the damage inflicted by Typhoon Rai, as well as the global conflict in Ukraine highlight the incoherence of the country’s energy policy framework when confronted with the colossal challenges imposed by climate change, extreme weather events, and energy security. It also highlights the need to develop an energy system that can build greater resilience without requiring actions that undermine that very effort. 

The Report focuses on the often-missing piece in the energy and power policy transition that the Philippines must address between 2022 and 2027: the technological requirements of an enhanced delivery system. Aware that technology develops quickly especially when an urgent need exists, the Report aspires only to be directional rather than prescriptive. While technical, its appeal is to the planning imagination because, if the effort to change is wanting, its root is likely in the lack of imagination.

While the idea of a transition and a design for its realization may be widely accepted, it is the effect on the public of its implementation that will ultimately spell success or failure. Already, there are signs of hesitancy on the part of policymakers and business leaders. These can be counteracted, however, by advancing four key points complemented by policy development:

  1. Broad technology partnerships through the promotion of innovative business models and technology transfer; 
  2. Project preparation support from inception to evaluation; 
  3. Bring down the cost of capital through credit strengthening, long-term financing, and local currency financing; and 
  4. Shift fossil fuel subsidies (whether direct or indirect) to building and operating resilient grids and storage.