Falling oil prices have taken the urgency out of the renewable energy push—and that will set back both development of a viable market and industry investment
The Philippines and most of the rest of Asia have finally started falling in love with clean energy. Last December the Philippines enacted the Renewable Energy Act, a new law that took several years to push through the legislature but only gained enough impetus after the 2008 oil crisis.
Now, though, just as the Philippines is jumping on the clean energy bandwagon, the plunge in oil prices threatens to detract from renewable energy's urgency. Developing alternatives to fossil fuels could become, once again, just a nice-to-have initiative. This is a repeat of what happened after the 1970s OPEC oil crisis; after the price of oil stabilized, efforts in renewable energy ended up on the back burner.
Island nations like the Philippines stand to lose out the most from the effects of global warming if clean energy is not adopted fast enough, says former Philippine Environment Secretary and presidential adviser on climate change Heherson Alvarez. "The Philippines is an archipelago with many small, low-lying islands," he says. "From 1984 to 2001, it was devastated by 19 severe tropical storms, with maximum winds of more than 200 kilometers per hour. There were massive floods and mudslides in the provinces of Quezon, Leyte, Camarines Norte, and Surigao." Alvarez attributes these effects to global climate change.
Steady Growth Market Needed
Despite the boost that President Barack Obama's Administration wants to give to the clean energy sector in the U.S., Asia is still an important market for the industry. Without a steady growth market decoupled from the price of oil, though, investors will hesitate to lay down the cash. Yes, innovation is still going on in the clean energy sector, but if we really want to see the combination of economies of scale and innovation similar to what caused the prices of PCs and semiconductors to drop and what moved that technology forward, a strong steady market needs to appear.
One thing that makes clean energy investing attractive in the U.S. and in Europe is the ability of utilities that are mandated to purchase clean energy to pass on these costs to consumers; in some cases these consumers are willing to pay a slightly higher premium for clean energy. Without a willingness by consumers to pay a slight additional premium, it becomes harder for utilities to justify capital investments in clean energy, because the net present value calculations simply do not make it competitive with fossil-fuel-based sources over a period of several years. It also becomes harder for venture capitalists and other investors to justify funding innovation and R&D in renewable energy technologies if the market demand fluctuates. On the other hand, in some places where the price of electricity is already expensive, it is already a nonargument because clean energy has already reached grid parity.
An alternative is traded credits, such as a cap and trade system. In a cap and trade system, early adopters of clean energy systems are able to get credits that they can trade in a market. A cap on emissions set by various governments will penalize those who fail to comply, like companies that never made the investments in clean energy. These companies are typically the ones expected to purchase the credits from those who have them. The question in Asia, though, is what happens if very few entities invest to get the credits. Again the system works in developed societies like the U.S. and Europe, but it still has to be proven in Asia.
Renewable Energy "Must Be Made Relevant"
Another alternative is the Feed-in Tariff system, in which utilities can pass on the increased cost of the mandated renewable energy to their consumers. For the Philippines, like in other countries, a Green Option in the law allows consumers to opt for some clean-energy-generated power in their bill. This assumes that a significant segment of the population will be willing to pay a slight premium to have clean power. In my opinion, though, most Asians will still default to the cheapest power available, namely fossil-fuel-generated electricity.
Antonia Loyzaga, executive director of the Manila Observatory at the Ateneo de Manila University, tracks climate change impact in the Philippines with the assistance of NASA. She says that while renewable energy resources are abundant in countries like the Philippines, "it must be made relevant to the movers—the top 15% of income earners who have the capacity to pay—and to the 85% who have little or no choice at the moment but to buy from an inefficient centralized generation and distribution infrastructure." One thing that could accelerate the adoption of renewable energy, she adds, is a geographic renewable energy resource map that would tell people what types of clean energy are abundant in their areas.
Because the U.S. and Europe have already developed a solid base of supporters for clean energy, their laws have become effective in encouraging the development of clean energy jobs and industries while at the same time cutting back on fossil-fuel emissions. Not so in Asia. Without a massive base of Asians willing to commit to clean energy, these mandates won't realize their full potential. This support base of Asians who will demand clean power from their utilities, and in some cases install it themselves, should ideally number in the millions, so that once and for all we can get over the innovation cost hump.