The Energy Regulatory Commission (ERC) has firmed up the intricate ‘tariff-setting parameters’ or price determination methodology that will anchor the 20-year power supply agreements (PSAs) in the third Green Energy Auction (GEA-3) to be administered by the Department of Energy (DOE) -  targeting 100 megawatts of geothermal and a robust 4,375 MW of hydroelectric capacities.

The regulatory body qualified that since geothermal and hydro - as conventional renewable energy (RE) technologies - fall outside the purview of feed-in-tariff (FIT) incentives under the Renewable Energy Law, their pricing will be exclusively governed by the stringent pricing parameters established by the ERC.

ERC Chairperson Monalisa C. Dimalanta indicated that the pricing parameters for geothermal as well as impounding and pumped storage hydro technologies will be released before Christmas; while those of run-of-river of hydro will be issued separately, pending final clarifications with the DOE on certain key issues.

As culled from documents exclusively obtained by the Manila Bulletin, the ERC's price-setting framework leverages a 1,400-megawatt installed capacity as the benchmark plant for pumped storage hydro —aligned with the maximum capacity anticipated from GEA-3 bidders; and the established economic lifespan for the project will be 40 years; with roundtrip efficiency of at least 70%; and degradation rate of 0.50% annually; while construction period is set for 60 months from financial closing.

The industry regulator pegged the operation and maintenance (O&M) cost for this hydro technology at P5,822,745,485.77—equivalent to 2.0% of the total project cost—while also factoring in provisions for spare parts, tools and equipment; then general administrative expenses; average fuel cost; feed rate; and a value-added tax recovery period spanning five years from the plant’s commercial operation date.

Project financing for geothermal and hydro technologies under the GEA-3 capacity bidding hinges on the standard 70:30 debt-to-equity ratio, with an interest rate fixed at 8.8% for both local and foreign loans—a figure meticulously derived by the ERC from the Bangko Sentral ng Pilipinas’ (BSP) average bank lending rates spanning January 2020 to September 2024.

The debt repayment term, encompassing both local and foreign financing, has been structured with a 10-year grace period, while the financial modeling adheres to an average exchange rate of P57.1854 to US$1, reflecting the prevailing currency dynamics.

The equipment cost, inclusive of transportation to the project site and balance-of-plant expenses, for pumped storage hydro has been calculated at P173,300.48 per kilowatt, while funding for switchyard and transformer installations had been estimated at P1.134 billion.

The ERC further set transmission interconnection costs at P120 million per kilometer for a standard 25-km link, while access service roads were priced at P5,704,564.62 per kilometer, adhering to the Department of Public Works and Highways’  design guidelines and pavement construction standards.

For impounding hydro projects, the candidate plant had been classified at 250MW with a 40-year useful lifespan and a net capacity factor of 43.81%, then requiring a capital outlay of P40 million per kilometer for a 25-km transmission interconnection. The cost for establishing switchyards and transformers is projected at P134 million, while O&M expenses had been pegged at P1,447,512,671.80.

Additionally, the contingency allowance has been fixed at a minimum of 5.0% of engineering, procurement, and construction (EPC) costs, or 4.0% of the total project cost.

On the geothermal capacities up for bidding, the ERC strategically divided the offerings into two distinct categories: binary geothermal systems and newly developed geothermal plants, ensuring a tailored approach to each technology's unique development characteristics.

For new geothermal projects, the model plant is set at 25MW reference capacity, aligned with the average output of committed bidders, and is assumed to have useful economic lifespan of 30 years.

The project construction timeline for this facility spans grueling 72 months, with an expected net capacity factor of no less than 82%, while factoring in a plant degradation rate of 2.0% annually.

The cost for equipment, transportation to the project site, and balance of plant has been fixed at P263,052,840 per megawatt, while the investment required for switchyards and transformers hovers at P123,169,000; then for transmission interconnection, a 10-kilometer distance has been factored in, with an anticipated investment of P10,895,988 per km.

The O&M cost for this technology has been estimated at P147,975,771, derived from the average of middle and maximum costs associated with establishing new geothermal power plants - encompassing capital expenditure (capex) for drilling, fluid collection and reinjection systems (FCRS), make-up drilling, as well as workover and well testing.

Then for binary geothermal, the candidate plant is similarly specified at 25MW capacity, but with a more accelerated construction timeline of 48 months from financial closing, a slightly reduced capacity factor of 80%, and a comparable annual degradation rate of 2.0%.

The estimated cost for equipment, transportation to the project site, and balance of plant stands at P172,699,908 per MW, with additional P123,169,000 capital outlay required for switchyard and transformer installations. Furthermore, the 10-kilometer transmission interconnection will command an investment of P10,895,988 per kilometer.

The O&M cost for binary geothermal has been approximated at P97,145,841, with interest rates and debt-to-equity ratios mirroring those set for pumped storage and impounding hydro as well as new geothermal technologies, ensuring consistency across the energy portfolio in the GEA-3 process.

The weighted average cost of capital (WACC) pre-tax rate for this technology is set at 9.0%, with the onshore equity internal rate of return (IRR) nominally pegged at 9.30%, based on the 20-year Treasury bond as of September 2024, and incorporating a 3.0% inflation projection by the National Economic and Development Authority (NEDA) for the 2024-2028 period.

The DOE announced last month the capacity auction for 100MW geothermal; 300MW impounding hydro, 4,000MW pumped storage hydro and 75MW run-of-river hydro with capacity delivery dates ranging from 2027 to 2032 – and the bidding date will be finalized upon the ERC’s issuance of the pricing parameters.

Of all technologies set for capacity bidding under GEA-3, it’s only the run-of-river hydro installations that would be eligible for FIT incentives, as stipulated under the RE law.