thesis about renewable energy in the philippines

• Original article
• Open Access
• Published: 09 January 2018

A real options approach to renewable electricity generation in the Philippines

• Casper Boongaling Agaton   ORCID: orcid.org/0000-0003-1153-262X 1 &
• Helmut Karl 2  

Energy, Sustainability and Society volume  8 , Article number:  1 ( 2018 ) Cite this article

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The Philippines is making a significant stride to become energy independent by developing more sustainable sources of energy. However, investment in renewable energy is challenged by competitive oil prices, very high investment cost for renewable energy, and high local electricity prices. This paper evaluates the attractiveness of investing in renewable energy sources over continue using oil for electricity generation.

This paper uses the real options approach to analyze how the timing of investment in renewable energy depends on volatility of diesel price, electricity price, and externality for using oil.

The result presents a positive net present value for renewable energy investment. Under uncertainty in oil prices, dynamic optimization describes how waiting or delaying investment in renewables incurs loses. Decreasing the local electricity price and incorporating negative externality favor investment in renewable energy over continuing the use of oil for electricity generation.

Conclusions

Real options approach highlights the flexibility in the timing of making investment decisions. At the current energy regime in the Philippines, substituting renewable energy is a better option than continue importing oil for electricity generation. Policies should aim at supporting investment in more sustainable sources of energy by imposing externality for using oil or decreasing the price of electricity.

Environmental problems associated with emissions from fossil fuel, along with limited supply, volatile prices, and energy security, prompted developed and developing countries to find more reliable and sustainable sources of energy. Renewable energy (RE) sources, being abundant, inexhaustible, cleaner, and readily available, emerge as a promising alternative energy source. According to International Energy Agency (IEA), RE accounted to 13.7% of the world energy generation mix in 2015 [ 1 ]. With a rapid decline in RE costs, this percentage mix is expected to double by 2040 [ 2 ]. In the Philippines, the development and optimal use of RE resources is an essential part of the country’s low emission strategy and is vital to addressing climate change, energy security, and access to energy [ 3 ]. In 2015, renewable energy accounts to 25% of the country’s total electricity generation mix, only 1% from wind and solar energy [ 4 ]. Since the country is highly dependent on imported fossil fuels, sudden changes in the price of fuels in the world market may eventually affect the country’s energy security. Renewable energy serves as a long-term solution by introducing localized RE sources. However, despite the country’s huge potential for RE generation, investments in RE projects are challenged by competitive prices of fossil fuels, more mature technology for fossil fuels, and very high investment cost for renewable energy. These give us the motivation to make a study that analyzes the attractiveness of RE investments to address the country’s concern on energy sufficiency and sustainability.

One of the most common techniques in analyzing investment projects is the net present value (NPV). This technique is widely used by developers, financial institutions, and government agencies under the condition of definite cash flow. Since RE investment in emerging economies involves high risk from volatile energy prices and changing RE technologies, NPV undervalues investment opportunities and thus considered inappropriate for assessing RE projects in developing countries including the Philippines [ 5 ]. Real options approach (ROA) overcomes this limitation as it combines risks and uncertainties with flexibility in the timing of investment as a potential factor that gives additional value to the project [ 6 ]. Recent studies use ROA renewable energy investment particularly for wind, solar photovoltaic (PV), hydropower, concentrated solar power (CSP), and combination (hybrid) of RE with uncertainties in non-RE cost, certified emission reduction (CER), feed-in tariff (FIT), energy production, operations and maintenance (O&M) cost, research and development (R&D) grants, production tax credit (PTC), RE credit (REC), among others (see Table  1 ).

This paper contributes to the existing literature by proposing a ROA framework for analyzing RE projects for developing countries, particularly, island countries that are highly dependent on imported oil for electricity generation. While previous studies proposed a full system switch to RE [ 7 ] or applied the ROA model to large-scale RE projects [ 8 , 9 , 10 , 11 ], this study takes the case of Palawan island in the Philippines and focuses on a smaller scale project which is particularly more realistic to developing countries. Whereas previous works’ approaches used coal and gas for fuel price uncertainty [ 7 , 9 , 10 , 12 ], this work uses uncertainty in oil prices as the world energy mix is dominated by liquid fuel, more developing countries are dependent on imported oil, and that investments in renewable energy is affected more by volatility in oil prices than coal prices. Finally, this paper proposes an externality tax for using fossil fuels as it more applicable in developing countries than introducing CER price, PTC, REC, CO 2 price, and emission/externality cost as proposed in previous works [ 7 , 9 , 10 , 13 , 14 ].

Applying ROA, this study aims to evaluate whether investing in RE is a better option than continue using diesel for electricity generation by considering various uncertainties in diesel fuel price, local electricity prices, and imposing externality tax for using diesel. This finally aims to recommend various government actions to address environmental problem, supply chain, and national security regarding energy.

Real options approach

Myers [ 15 ] first referred ROA or real options valuation as the application of option pricing theory to valuate non-financial or “real” assets. Real option itself is “as the right, but not the obligation, to take an action (e.g., deferring, expanding, contracting or abandoning) at a predetermined cost, called exercise price, for a predetermined period of time – the life of the option” [ 16 ]. Investment decisions, in the real world, have main characteristics: irreversible, high risk and uncertain, and flexible [ 17 ]. These characteristics are not captured by traditional methods of valuation, such as NPV, discounted cash flow (DCF), internal rate of return (IRR), and return on investment (ROI) leading to poor policy and investment decisions. ROA, on the other hand, combines uncertainty and option flexibility which characterize many investment decisions in the energy sector.

This research applies ROA to analyze investment decisions whether to continue using diesel for electricity generation or invest in RE. We use the uncertainty in diesel prices as a main factor that affects investment decisions. Using dynamic optimization, we evaluate the maximized value of investment at each price of diesel, identify the trigger price for shifting technology from diesel-based electricity to RE, and analyze the value of waiting or delaying to invest in RE. Finally, we incorporate sensitivity analyses with respect to electricity prices and externality tax for using diesel.

• Dynamic optimization

We follow the method described by Dixit and Pindyck [ 18 ] and adopt the work of Detert and Kotani [ 7 ] on optimizing investment decision under uncertainty using dynamic programming. In this research, we describe a model of an investor that identifies the optimal value of either investing in RE or continue using diesel for electricity generation as shown in Eq.  1 (see Table  2 for the list of variables and parameters).

Using this model, we determine the option value, V D , t , by maximizing the investment at each price of diesel, D , from 0 to US$1000/barrel, for each investment period, t . We set the dynamic optimization process to 40 years which represent a situation where an investor is given a period to make an investment decision. After that period, he has no other option but to continue using diesel for electricity generation. The choice is valued for another 25 years to represent the lifetime of power plant using diesel. We set the value of T R to 25 years to represent the number of years of electricity generation using RE. Finally, we solve the problem backwards using dynamic programming from terminal period [ 7 , 19 ]. The uncertainty in diesel prices in Eqs.  2 and 3 as well as the Monte Carlo simulation in the dynamic optimization process is discussed in the next subsection.

Stochastic prices and Monte Carlo simulation

In line with the previous studies, we assume that the price of diesel is stochastic and follow geometric Brownian motion (GBM) [ 20 , 21 , 22 ]. Dixit and Pindyck [ 18 ] present the stochastic price process as

where α and σ represent the mean and volatility of diesel price, dt is the time increment, and dz is the increment of Wiener process equal to \( {\varepsilon}_t\sqrt{dt} \) such that ε t ~ N (0, 1). Using Ito’s lemma, we arrive at

We approximate Eq.  6 in discrete time as

To determine the drift and variance of P , we use the Augmented Dickey-Fuller (ADF) unit root test using the following regression equation

where \( c(1)=\left(\alpha -\frac{1}{2}{\sigma}^2\right)\Delta t \) and \( {e}_t=\sigma {\varepsilon}_t\sqrt{\Delta t} \) . We then estimate the maximum likelihood of the drift \( \alpha =\mu +\frac{1}{2}{s}^2 \) and variance σ  =  s , where α is the mean and s is the standard deviation of the series p t  −  p t  + 1 [ 23 ].

In this research, we use the annual prices of diesel from 1980 to 2016. The result of ADF test as shown in Table  2 implies that the null hypothesis that p t has a unit root at all significant levels cannot be rejected. Therefore, P conforms GBM. We estimate the parameters α  = 0.007614 and σ  = 0.358889 and use in identifying stochastic prices of diesel under GBM (Table  3 ).

We use the Monte Carlo simulation to compute the expected net present value of electricity generation using diesel in Eqs.  2 and 3 . First, we approximate a vector of potential prices of diesel using the stochastic prices of GBM as follows:

This equation illustrates that the previous price affects the current price of diesel. Second, from the initial price of diesel, P D , 0 , we estimate the succeeding prices of diesel in each period using Eq.  9 . We incorporate these prices in Eq. 2 and calculate the present values of using diesel for electricity generation. Finally, we estimate the expected net present value at each initial price node i and repeat the whole process in a sufficiently large number of J  = 10000 times and take the average as given by the equation

Trigger price of diesel

Dynamic optimization process in the previous sections generates the maximized option values of investment. From these simulation results, we identify the trigger price of diesel for switching to RE as follows

where \( {\widehat{P}}_D \) is the trigger price of diesel or the minimum price where the option value in the initial period V 0 ( P D , t ) is equal to the option value in the terminal period of investment \( {V}_{{\mathrm{T}}_R}\left({P}_{D,\mathrm{t}}\right) \) [ 7 , 18 , 24 ]. From the given equation, we define trigger price as the minimum price of diesel that maximizes the profit of shifting the source of electricity from diesel power plant to RE.

Data and scenarios

To determine a suitable set of parameter values for the baseline scenario, we use data from various sources that nearly reflects the investment environment for renewable energy project in Palawan. This is the largest island province in the Philippines composed of 1780 islands and islets that are currently not connected to the national grid and only depend on imported diesel and bunker fuel. The recent Calatagan Solar Farm project in Batangas is set as a benchmark of the data for investment in RE, as this project is the latest RE project in the Philippines and has similar geographic features with Palawan; hence, investment cost estimations are up-to-date and relatively comparable [ 25 ]. This 63.3 MW solar farm, covering a total area of 160 ha, projects to generate 88,620 MWh of electricity per year. It costs US$120 million and will operate for at least 25 years. We use the data from Palawan Electric Cooperative (PALECO) [ 26 ] to approximate the local electricity price and the quantity and costs of generating electricity from diesel.

Electricity prices in the Philippines varies from island to island depending on the source of energy, as well as various charges including the generation, transmission, distribution, metering, and loss. In Palawan, effective power rates also vary across different municipalities [ 26 ]. We employ these variations in the electricity price scenario by changing the electricity price in the baseline model. In this scenario, we aim to describe how policy in imposing electricity price ceiling or price floor affects the investment decisions particularly in introducing RE as a source for electricity generation.

Lastly, we consider the externality tax of electricity generation from diesel. This value represents the negative externality including, but not limiting to, health and environmental problems associated with combustion of diesel. We use the data of the estimated average external costs for electricity generation technologies from European Environmental Agency (EEA) [ 27 ]. For this scenario, we include externality costs, tax for estimating the net present value of using diesel in Eqs.  2 and 3 . We arbitrarily assign values, between 0 (for baseline) to US$ 80/MWh, which are lower than those reported in literature to describe a more realistic condition. We assume that RE source, particularly solar PV, produces minimal or nearly no externality.

Results and discussion

Baseline scenario.

Figure  1 and Table  4 show the result of dynamic optimization at the baseline scenario. The first point of interest is the positive net present value of RE. This implies that, using the traditional valuation method, renewable project is a good investment in the island of Palawan. This result is evident as the installation of solar energy projects grows rapidly in the recent years. In 2016, there are already 538.45 MW installed capacity of solar projects from the 4399.71 potential capacity in the whole country [ 25 ]. Caution must be applied as net present value is not the sole determinant of investment in ROA. The optimal timing that maximizes the value of investment opportunity under uncertainty must also be accounted for [ 18 ].

Option values at the baseline scenario. Legend: base_0: option values of energy investment at the initial period; base_T: option values of energy investment at the terminal period

Figure  1 shows the dynamics of the option values at different initial prices of diesel. Result shows that the option values decrease over diesel price as the cost of generating electricity increases with fuel price. The trigger price as indicated by the intersection of option value curves indicates the minimum price of diesel that maximizes the decision of shifting from diesel based to RE generation. The result in the baseline scenario at US$168/barrel is higher than the current price at US$101.6/barrel. Intuitively, this implies that waiting to invest in RE is a better option than investing at the current price of diesel. However, the value of waiting to invest as describe by the distance between option value curves from initial to terminal period is negative. As seen in Table  4 , the option value at the current price of diesel at the initial period of investment is US$141.38 million and decreases to 104.97 million at the terminal period. This results to a US$36.41 million loss from delaying or waiting to invest. This implies that waiting to invest in RE incurs losses.

Electricity price scenario

This scenario describes how adjusting the local electricity price affects the option values and the trigger price. Figures  2 and 3 show the dynamics of option values with increasing and decreasing electricity prices decreasing electricity prices (see Additional file 1 Table S2 for dynamic optimization result). Result shows that the option values shift upwards with increasing electricity prices. This shows that at higher electricity prices, the value of either renewable energy or diesel-based electricity both increases. However, the trigger prices of diesel also increase to US$172/barrel at US$220/MWh and US$185/barrel at US$250/MWh from the baseline electricity price of US$202/MWh. This suggests that increasing the electricity price encourages waiting or delaying to invest in RE.

Option values at increasing electricity price scenario. Legend: base_0: option values of energy investment at the initial period; base_T: option values of energy investment at the terminal period; elec+1_0: option values at 10% higher electricity price than the base at the initial period; elec+1_T: option values at 10% higher electricity price than the base at the terminal period; elec+2_0: option values at 25% higher electricity price than the base at the initial period; elec+2_T: option values at 25% higher electricity price than the base at the terminal period

Option values at decreasing electricity price scenario. Legend: base_0: option values of energy investment at the initial period; base_T: option values of energy investment at the terminal period; elec−1_0: option values at 10% lower electricity price than the base at the initial period; elec−1_T: option values at 10% lower electricity price than the base at the terminal period; elec−2_0: option values at 25% lower electricity price than the base at the initial period; elec−2_T: option values at 25% lower electricity price than the base at the terminal period; elec−3_0: option values at 40% lower electricity price than the base at the initial period; elec−3_T: option values at 40% lower electricity price than the base at the terminal period

On the other hand, decreasing electricity prices shifts the option value curves downwards and decreasing the trigger price of diesel. This result is apparent as decreasing electricity price results to a lower revenue and thus lower profit for both options. The trigger prices of diesel decrease to US$160/barrel at US$180/MWh, US$150/barrel at US$150/MWh, and US$139/barrel at US$120/MWh price of electricity (Figs.  3 and 4 ). This suggests that lowering the electricity price decreases the timing to invest in renewable energy. Further, the option values become negative at electricity price below US$120/MWh. This implies that policy makers or power producers must not set an electricity price below US$120/MWh, as this will result to a loss for producing electricity from diesel as well as a negative investment for RE.

Trigger prices of diesel over electricity price

Externality scenario

This scenario describes how inclusion of externality tax from combustion of diesel affects the option values and triggers prices in investment in RE projects. The result in Fig.  5 (see Additional file 1 Table S3 for dynamic optimization result) shows that option values shift to the left. First, this implies that imposing externality tax decreases the revenue from electricity generation using diesel and thus decreasing the option values. Second, the unchanged lower boundary of the curves implies externality does not affect the value of investment in renewable energy. This is due to our assumption that electricity generation from RE produces no externality.

Option values at negative externality scenario. Legend: base_0: option values of energy investment with no externality at the initial period; base_T: option values of energy investment with no externality at the terminal period; ex1_0: option values at 20$/MWh externality cost at the initial period; ex1_T: option values at 20$/MWh externality cost at the terminal period; ex2_0: option values at 40$/MWh externality cost at the initial period; ex2_T: option values at 40$/MWh externality cost at the terminal period; ex3_0: option values at 60$/MWh externality cost at the initial period; ex3_T: option values at 60$/MWh externality cost at the terminal period; ex3_0: option values at 80$/MWh externality cost at the initial period; ex4_T: option values at 80$/MWh externality cost at the terminal period

With externality, the trigger prices of diesel decrease to US$140/barrel at US$20/MWh, US$111/barrel at US$40/MWh, US$82/barrel at US$60/MWh, and US$54/barrel at US$80/MWh externality cost (Figs.  5 and 6 ). This implies that imposing externality tax for diesel makes investment in RE more optimal than continue using diesel. Finally, the threshold of externality cost is US$46.55/MWh at the current diesel price of US$101.64/barrel. This is the minimum externality cost that favors immediate investment in RE than continue using diesel.

Trigger prices of diesel over negative externality

We evaluate investment environments and decision-making process for substituting diesel power plant with RE for electricity generation in the Philippines. Using real options approach under uncertainty in diesel prices, we identify the option values, trigger prices of diesel, and value of waiting to invest in RE. We analyze the sensitivity of investment decisions with respect to various electricity prices and addition of externality tax for using diesel.

ROA highlights the flexibility in the timing of making investment decisions. Our analyses conclude that for a developing country that is highly dependent on imported fuel, shifting to RE is a better option than continue using imported diesel. Policies should aim at supporting investment in more sustainable sources of energy by imposing externality for using fossil-based fuel or decreasing the price of electricity. This may negatively affect the power producers but encourage them to shift from diesel to renewable energy.

We summarized a unique approach to energy investment by replacing diesel with RE for electricity generation. We believe that the ROA framework introduced in this research is a good benchmark for further application. First, ROA may take account of environmental and social costs. This may include the cost of deforestation for solar farm, wildlife and habitat loss, air and water pollution, damage to public health, and loss of jobs. Finally, analyzing investment decisions with several RE resources includes dynamic optimization with different scenarios of generation mix from various RE sources. We are optimistic that this research becomes one-step forward for further analysis of investment in more sustainable sources of energy.

Abbreviations

Augmented Dickey-Fuller

Certified emission reduction

Concentrated solar power

Discounted cash flow

European Environmental Agency

Feed-in tariff

Geometric Brownian motion

International Energy Agency

Internal rate of return

Net present value

Operations and maintenance

Palawan Electric Cooperative

Production tax credit

Solar photovoltaic

Research and development

• Renewable energy

Renewable energy credit

Return on investment

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Additional file

Additional file 1:.

Table S1. ADF unit root test result of oil prices from 1981-2016. Table S2. Note: elec+2_0: option values at 25% higher electricity price than the base at the initial period; elec+2_T: option values at 25% higher electricity price than the base at the terminal period elec+1_0: option values at 10% higher electricity price than the base at the initial period; elec+1_T: option values at 10% higher electricity price than the base at the terminal period; base_0: option values of energy investment at the initial period; base_T: option values of energy investment at the terminal period; elec-1_0: option values at 10% lower electricity price than the base at the initial period; elec-1_T: option values at 10% lower electricity price than the base at the terminal period; elec-2_0: option values at 25% lower electricity price than the base at the initial period; elec-2_T: option values at 25% lower electricity price than the base at the terminal period; elec-3_0: option values at 40% lower electricity price than the base at the initial period; elec-3_T: option values at 40% lower electricity price than the base at the terminal period. Table S3. base_0: option values of energy investment with no externality at the initial period; base_T: option values of energy investment with no externality at the terminal period; ex1_0: option values at 20/ MWhexternalitycosttheinitialperiod; ex 1 T : optionvaluesat20/MWh externality cost at the terminal period; ex2_0: option values at 40/ MWhexternalitycosttheinitialperiod; ex 2 T : optionvaluesat40/MWh externality cost at the terminal period; ex3_0: option values at 60/ MWhexternalitycosttheinitialperiod;ex 3 T : optionvaluesat60/MWh externality cost at the terminal period; ex3_0: option values at 80/ MWhexternalitycosttheinitialperiod; ex 4 T : optionvaluesat80/MWh externality cost at the terminal period. (DOCX 95 kb)

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Agaton, C.B., Karl, H. A real options approach to renewable electricity generation in the Philippines. Energ Sustain Soc 8 , 1 (2018). https://doi.org/10.1186/s13705-017-0143-y

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China’s Belt and Road (B&R) initiative provides new ideas and opportunities for international cooperation. Renewable energy plays a crucial role not only in the national sustainable development framework of China and the Philippines but also in bilateral cooperation between them. However, some obstacles still need to be addressed because renewable energy cooperation between China and the Philippines has not been thoroughly and comprehensively studied to date. Based on an in-depth analysis of current renewable energy cooperation between China and the Philippines, this paper employs PESTEL analysis to fully investigate the cooperative advantages and disadvantages by considering politics (P), economy (E), society (S), technology (T), environment (E), and legislation (L) and proposes several constructive suggestions. The ultimate purpose was to design feasible schemes to ensure the sufficient utilization of renewable energy and the construction of integrated power grid systems to meet shortages of electricity supply especially in the isolated small islands in the Philippines through cooperation with China. In particular, it offers valuable advice concerning the U.S.-China trade war and COVID- 19 pandemic, outlining how cooperation in the exploitation of potential renewable energy is vital.

Introduction

In response to the advantages of renewable energy ( Gullberg et al., 2014 ), many countries and regional organizations have entered into cooperative targeted renewable energy initiatives ( Anand et al., 2021 ; Mohan, 2021 ; Sasmita and Sidhartha, 2021 ). Existing research on renewable cooperation ( Feng et al., 2020 ) is mainly focused on a comprehensive analysis of the renewable energy cooperative mechanism between two countries ( Suryanarayana and Saumendra, 2020 ), a country and regional organizations ( Mehdi and Mehdi, 2020 ), and regional organizations ( Indeo, 2019 ), by forecasting the potentiality of cooperation and undertaking analysis via a mathematical model ( Satish and Vinod, 2020 ). However, three existing gaps need to be overcome.

• Most previous studies fail to comprehensively analyze the advantages and disadvantages of renewable energy cooperation between specific countries under B & R.

• Specific suggestions based on the effective factors of cooperation such as politics, economy, society, technology, environment, and legislation have not been proposed.

• The latest factors, including the COVID-19 pandemic and the United States-China trade war, have not been addressed.

This paper focuses on the exploitation of renewable energy cooperation between China and the Philippines, proposing a new perspective in response to this new context and undertakes a comprehensive investigation of a cooperative scheme between two countries. Based on a systematic overview of renewable energy systems in China and the Philippines, including the current situation, existing problems, policies, and plans, the basis and challenges for further cooperation between the two countries are explored ( Renewable Energy Development in the Philippines and Renewable Energy Development Status in China Sections).

The background informing this topic and existing renewable energy cooperation projects between China and the Philippines are addressed, and a Political, Economic, Social, Technological, Environmental, and Legal (PESTEL) analysis is adopted to illustrate the advantages and disadvantages of those factors in cooperation ( The Philippines—China Renewable Energy Cooperation Under Political, Economic, Social, Technological, Environmental, and Legal Analysis Section);

Finally, some feasible and promising suggestions are proposed to deal with emerging problems and opportunities in renewable cooperation between China and the Philippines under B&R ( Political, Economic, Social, Technological, Environmental, and Legal Recommendations Section).

Renewable Energy Development in the Philippines

Current status.

The Philippines stores rich renewable energy which also plays an important role in the energy supply of the country. As Table 1 shows, although the proportion of renewable energy in the total amount of installed capacity is only about 30% and there has been a slight downward trend in the last 3 years, the quantity produced is still steadily growing.

TABLE 1 . The Philippine installed capacity mix (MW) ( The Department of Energy, 2019 ).

Geothermal Energy

The Philippines is located in a tropical low-latitude area at the junction of Asia, Europe, and the Pacific plate, which means the country has rich geothermal energy resources. After many years of development, the installed capacity of geothermal power reached 1,944 MW in 2018, accounting for 13% of the world’s total, and ranking third after the United States and Indonesia ( Ratio et al., 2020 ).

Hydropower Energy

The Philippines has 421 rivers, numerous mountains, rugged terrain, and a rainy climate, which create abundant hydropower resources that contribute the largest portion of installed capacity generated by renewable energy. Although the Philippines already has some large-scale hydropower plants and has made achievements in the development of hydropower infrastructure, there is still 13,097 MW of undeveloped hydropower generation capacity remaining, according to an assessment by the Philippine Department of Energy ( The Department of Energy, 2019 ).

Solar Energy

With solar radiation of 4.0–6.0 kWh/m2/day, the Philippines has abundant solar energy resources which evenly distribute across the country and vary between 10 and 20% every month ( Sharma and Kolhe, 2020 ). Due to the continuous improvement of technology and efficiency of solar photovoltaic (PV) modules, the solar energy industry has achieved scale development and significantly reduced the costs of solar power generation ( Sharma and Kolhe, 2020 ). More and more residents and industrial sectors in the Philippines have started to use small-scale solar PV production.

Problem and Causes

The continuous economic expansion of the Philippines has brought serious problems in the form of insufficient energy supply ( Mondal et al., 2018 ). The Philippines’ GDP in 2018 grew by 6.2%, exceeding 6% for the seventh consecutive year ( GPD, 2019 ). However, more than 11% of the population has no electricity, and a higher proportion suffers from unreliable electricity supply ( Bertheau et al., 2020 ).

Huge reserves and the potential of renewable energy resources have not achieved a satisfying development in the Philippines.

The main reasons for the insufficient utilization of renewable energy, include the fact that the development of renewable energy requires high prepayment and technology costs ( Zafar et al., 2019 ). Moreover, hydropower and geothermal energy, which generate the most electricity, have a very long development cycle ( Barroco and Herrera, 2019 ). Moreover, the Philippines is unable to form an integrated power grid system, which impacts the sufficient transmission of electricity generated by renewable energy. The Philippine power supply system is also divided into “on-grid” and “off-grid” areas. The on-grid is supplied by two separate main power grids which lack a connection with each other. The off-grid covers these areas but suffers from insufficient power or even no power supply at all ( Bertheau et al., 2020 ).

Policies and Plans

The Philippine government has realized the importance of developing renewable energy and has formulated several policies and plans based on the focuses: 1) ensuring energy security, 2) achieving optimal energy pricing, 3) diversifying fuel sources, and 4) developing sustainable energy systems ( The Department of Energy, 2017 ). The National Renewable Energy Program (2011–2030) anticipates that the generation capacity of renewable energy will triple by 2030 ( Wang et al., 2020 ) This has lead to the development of policies including carbon taxes, the improvement of energy efficiency in both generation and consumption, diversification of the energy supply-mix ( Cabalu et al., 2015 ). Those policies and plans not only ensure energy security and reduced reliance on fossil energy they are also milestones in building a greener Philippines.

Renewable Energy Development Status in China

As the second-largest economy in the world, China has abundant renewable energy storage. By the end of 2019, the installed capacity of renewable energy in China was as high as 794.88 GW and has increased by 8.7% since 2018 ( Si et al., 2021 ). The current power generation capacity of each renewable energy source is shown in Figure 1 , and the current situation of China’s renewable energy is shown in Table 2 ( China Renewable Energy Engineering Institute, 2019 ). In 2013, China proposed the B&R initiative, which covers 65 countries in Asia, Africa, and Europe ( Wang et al., 2020 ). More importantly, promoting the green and low-carbon transformation of the energy structure of countries along the B&R is a core content of green construction in the area and a significant measure in improving the ecological environment and supporting global sustainable development ( Yang et al., 2021 ). As a key country along the Maritime Silk Road, the Philippines has also joined the Asian Infrastructure Investment Bank initiated by the Chinese government.

FIGURE 1 . Various types of power generation (A) installed capacity, and (B) proportion.

TABLE 2 . Status of types of renewable energy in China.

After decades of efforts, China has developed innovative approaches to energy and shared these experiences with other countries through the green cooperation of B&R to eliminate dependence on high-carbon growth models.

The advantages of the Chinese approach stem from it being a strong financial power. China has promoted the vigorous development of renewable energy, and in 2018 China became the world’s largest investor in renewable energy for the seventh consecutive year, an investment that accounts for almost one-third of the world’s total, reaching US $91.2 billion ( Si et al., 2021 ). Moreover, China’s renewable energy technology, manufacturing level, and high-quality production capacity have significantly improved in recent years, and a complete industrial chain with international advanced levels has been constructed in the renewable energy sector. This huge renewable energy product market has also contributed to the development of renewable energy worldwide.

In 2005, China enacted the Renewable Energy Law, quickly followed by more than 100 policies, regulating grid subsidies and special fund management measures, including guidance on promoting renewable energy consumption and other aspects as shown in Figure 2 ( China Renewable Energy Engineering Institute, 2019 ). The most important renewable energy plan of China is the 14th Five-year Plan (2021–2025). The key tasks of which include giving priority to the development of renewable energy based on market forces and low costs, systematically evaluating the development conditions and goals of various renewable energy resources, promoting renewable energy technologies and equipment to develop a relative industrial system, etc., ( Liu, 2019 ). In addition to the macro level, specific plans for different types of renewable energy exist that are international and jointly promote the construction of clean energy ( Liu, 2019 ).

FIGURE 2 . Renewable energy policy roadmap in China ( China Renewable Energy Engineering Institute, 2019 ). Abbreviations: National People’s Congress (NPC); State Council (SC); Renewable Energy (RE); Ministry of Finance (MOF); National Development and Reform Commission (NDRC); National Energy Administration (NEA); Exchange rate: 100 (CNY) = 15.4400 (USD) (Date: January 22, 2021).

The Philippines—China Renewable Energy Cooperation Under Political, Economic, Social, Technological, Environmental, and Legal Analysis

Existing cooperation.

China and the Philippines have a history of extensive cooperation in renewable energy, including hydropower, PV, biomass energy, and wind energy, as shown in Table 3 . This includes both the supply of existing equipment and Engineering Procurement Construction (EPC). This has greatly improved the utilization of hydroelectric and PV in the Philippines, and has made up for power shortages in some areas.

TABLE 3 . The Philippines—China renewable energy corporation projects.

Hydropower cooperation is the focus of the China-Philippines renewable energy cooperation agreement. Cooperative projects are mainly large-scale hydropower plants with an installed capacity of over 10 MW. Solar energy has now become the fastest-growing type of renewable energy in the Philippines, which has attracted many Chinese enterprises.

As one of the listed companies affiliated with the State Grid of China, the NARI Group owns several EPC projects of PV power stations in the Philippines. The Hengshun Group, a private company in China, signed an EPC contract of wind power and PV integration with Energy Logics Philippines, Inc. in 2016: the largest PV integration project to date in the Philippines.

Political, Economic, Social, Technological, Environmental, and Legal Analysis of Renewable Energy Cooperation

Under the intensifying forces of globalization and competition, PESTEL has recently evolved from PEST analysis, to consider the environmental and legal factors, with increased potential impact on businesses ( Thakur, 2021 ). The PESTEL analysis model is an effective tool for macro-environmental analysis that can not only analyze the external environment but also identify all forces that have an impact on the organization. This analysis mode mainly analyzes the investment environment of enterprises.

China and the Philippines have established diplomatic relations for 45 years. A mutual friendship formed after the election of Roberto Duterte to President of the Philippines in 2016. Building upon this preexisting relationship, China’s focus on green energy cooperation among countries means that it actively seeks energy cooperation partners in different regions. The Philippines is currently pursuing a green energy development model, implementing a large number of fiscal incentives to attract foreign investment in the renewable energy sector ( Cabalu et al., 2015 ).

Disadvantage

The relevant disputes between China and the Philippines in the South China Sea once froze the bilateral relationship. The current highly friendly relationship benefits from Duterte’s policy towards China, but this might change when Duterte’s term in office ends in 2022. Besides, the Philippines has serious political corruption problems and bureaucracy that may also lead to the unfair treatment of Chinese companies.

The Philippines is one of the most dynamic economies in the East Asia Pacific region. As a beneficiary of the power industry reform of the Philippines, the State Grid Corporation of China holds 40% of the National Grid Corporation of the Philippines. Meanwhile, Chinese energy enterprises have excellent brands and performance advantages. For example, as an active partner cooperating with the Philippines, China Energy Engineering Group Company has experience in power engineering projects and formed a complete industrial chain in international cooperation ( Shang et al., 2020 ).

In 2020, COVID- 19 pandemic caused a recession in the world economy and hindered international cooperation. In addition, the United States-China trade war has seriously affected the world market and greatly increased the trade barriers between economies. These international economic factors are detrimental to the cooperation between the two countries.

The overall economic level of the Philippines is not high, and the per capita GDP ranks 123rd in the world ( International Monetary Fund Philippine GDP per capita, 2019 ). Moreover, the industrial development level of the Philippines is relatively low, and public facilities such as transportation, electricity, and hydropower lag behind other countries. An out-of-date economy and lesser developed technical facilities make cooperation between the Philippines and other countries difficult.

China and the Philippines belong to the East Asian cultural circle and have a long history of cultural exchange. A Cultural Exchange Forum and a series of public welfare activities between the two countries were also held recently ( Sina News, 2018 ). After the COVID- 19 pandemic, China has repeatedly donated medical materials to the Philippines to jointly fight the epidemic.

The Philippines has an abundant labor force and a very young population structure in which the working-age population aged between 15 and 65 has reached 63.6%. In addition, English is the official language of the Philippines, and the literacy rate of Philippines residents is 96.4%, ranking among the highest in Asia ( Ministry of Commerce of the People’s Republic of China, 2019 ).

The domestic security situation of the Philippines is not favorable. There were 8,826 murders and 16,100 robberies in 2017, with 8.40 per 100,000 people ( Ministry of Commerce of the People’s Republic of China, 2019 ). There are also several armed rebel terrors groups.

The price levels and costs in the Philippines are also extremely high. The prices of vegetables and fruits, electricity, and hotel accommodation and meals are 3–4 times, 2–3 times, and 1–2 times higher than that of China, respectively ( Ministry of Commerce of the People’s Republic of China, 2019 ).

Technological

China and the Philippines are technically complementary in terms of energy development and power construction. China’s power technology is in the front ranks of the world and could help power development in the Philippines. For example, the advanced UHVDC power transmission technology could realize a sufficient power supply in the offshore islands, which is highly conducive to the formation of the power grid system in the Philippines. Meanwhile, China’s infrastructure construction, including 5G, the internet of things, and the industrial internet are also very advanced ( Yang et al., 2021 ). The Philippines also attaches great importance to the development of science and technology through active cooperation with technology-developed countries in engineering and scientific projects via higher education.

Due to the limitations of technology and financial resources, the level of large-scale projects independently constructed by the Philippines is very limited. Hence, many projects have been completed with capital and technologies from other countries. Chinese enterprises may lack the most advanced technology and experience in geothermal energy cooperation due to the lack of domestic geothermal resources.

The risks affecting electricity technical standards of design and construction cannot be ignored. The Philippines mainly adopts American standards which are different from those of China and lead to the extension of design and approval time.

Environment

China is a maritime neighbor of the Philippines, and the local time of the Philippines is consistent with Beijing time, which is convenient for cooperation and communication.

Due to its fragile climate and frequent geological disasters, the Philippines is frequently affected by natural disasters resulting in a great loss of human life and property ( Bollettino et al., 2020 ). Besides, the construction of hydropower stations could adversely affect wildlife and plants and lead to geological disasters. Local people and environmental protection organizations are very opposed to the construction of hydropower stations and the development of geothermal energy, which may greatly impact energy cooperation.

China and the Philippines issued the “Renewable Energy Law” in 2005 and 2008, respectively, to vigorously develop renewable energy and ensure energy security and the optimization of the ecological environment. Foreign investment in biomass and garbage power generation projects had a restriction of 40% lifted in November of 2019 after an announcement by the Philippine government. It is anticipated that other renewable energy projects will be further opened to foreign investment in the future ( The Department of Energy Administrative Order, 2020 ).

According to Philippine law, foreign investors are prohibited from buying land ( The Department of Energy Administrative Order, 2020 ). In addition, the Philippines has strict controls over work visas for Chinese, which is not conducive to management and technical personnel traveling there from China. Furthermore, as the main form of contracted projects between Chinese enterprises and the Philippines, government projects can only be established after being approved by the Philippine National Economic Development Agency.

Political, Economic, Social, Technological, Environmental, and Legal Recommendations

First, the Philippines and China should make the most of the existing mutual friendly diplomatic relationship to actively develop cooperation. The B&R and the China-ASEAN Free Trade Area have brought more opportunities and favorable conditions for renewable energy cooperation between the two countries. In terms of disputes in the South China Sea, it is the consensus and commitment of China and the Philippines to settle through negotiation and properly manage their relevant dispute.

Secondly, the renewable energy development strategy could be deepened in the two countries respectively. China should consider renewable energy as a new orientation of developing export trade and investment outward, and actively guide and support overseas cooperation. The Philippines could absorb advanced foreign renewable energy technologies in grid construction while mobilizing domestic resources to develop renewable energy.

With the guidance of the B&R initiative and the help from the Asian Infrastructure Investment Bank, the Philippines could actively carry out infrastructure construction to improve the business environment. In terms of offshore islands, the construction of renewable energy power plants and grids would solve electricity shortages.

Hydropower and geothermal power generation are the main areas of international cooperation in the Philippines. The EPC mode could be an ideal choice in cooperation, which is relatively fixed, and the implementation period is not long. Chinese companies could integrate the upstream and downstream of the industrial chain systematically to achieve sufficient cooperation and expand the scale and benefits of collaboration.

The two countries could continue to carry out cultural exchange under the background of B&R and promote non-government exchange. In addition, China and the Philippines always adhere to the coexistence of diversified culture, mutual learning, and cooperation for shared benefits. Therefore, Chinese companies participating in cooperation should pay attention to local cultural differences, and respect the local customs, religions, and living habits of the Philippines. Besides, the Philippine government needs to increase public security management through the reduction of crime rate, strictly control the possession of guns, and standardize its application administrative procedures.

Firstly, China is an advantageous partner in assisting the Philippines to form a complete power grid that especially aims to increase the power supply of offshore islands. To reduce the technical risk, research and exploitation in major technology should be strengthened. Making good use of a contract to constraint risk, promoting project supervision and construction quality should be the focus of project management.

Secondly, great attention should also be paid to the integration of power standards with international standards. Due to the different situations in each country, integration should not aim to achieve the unity of technical standards but to learn from the international advanced technical standards and increase public knowledge of China’s working practices to continuously optimize and update standards.

Due to the frequent occurrence of natural disasters and tropical epidemic diseases in the Philippines, contractors should pay close attention to local news and take preventive measures to prevent personnel and property losses.

Actively fulfilling social responsibility and strengthening environmental awareness is of great significance, because they develop the local economy and improve local people’s livelihoods. Through appropriate publicity in a local area, the public could be told more about the cooperative project, and gain an understanding of the fact that they will directly experience an improvement in quality of life quality from these projects. This would improve the enterprise’s local popularity and form a positive corporate image.

On the governmental level, an agreement focused on the strategic cooperation of renewable energy and based on the national strategy and security of both two countries could be reached, which may include investment, technology cooperation, grid construction, and trade. Furthermore, governments of China and the Philippines could establish a unified and effective platform to share renewable cooperative information, corresponding policies, and administrative procedures to solve the difficulty of information collection and nontransparent policies faced by potential cooperators or contractors.

In terms of enterprises, Chinese organizations need to fully understand Philippine laws and regulations to ensure they operate legally, including visas, environmental protection, land, and localized employment regulations. Moreover, the restriction of the foreign investment ratio of renewable energy projects should be studied seriously to maximize the profit of the enterprises in accordance with the laws of the Philippines.

This paper is the first to undertake a systematic study of renewable energy cooperation between China and the Philippines under B&R, and draws the following crucial conclusions:

Firstly, the cooperation between China and the Philippines in renewable energy is a mthod of building a greener Philippines and protecting the environment. The coexistence of abundant but undeveloped renewable energy resources and the shortage of electricity supply, especially in the offshore islands, requires deep cooperation with China, as it has superior technological and extensive experience in grid construction. Among various renewable energy, hydropower and geothermal powers are major cooperative areas, in terms of the status of the Philippines. How to explore and utilize renewable energy more economically and efficiently, and realize a sufficient electricity supply are important factors in alleviating dependence on imported fossil fuel energy, a will form a top priority of any cooperative agreement. In addition, the two countries can use the opportunity of renewable energy cooperation to promote cooperation in other industries and achieve mutual benefit and win-win results between the two countries.

Secondly, renewable energy cooperation is the focus of energy cooperation in any B&R initiative. Moreover, a Regional Comprehensive Economic Partnership was established in 2020 and has eliminated trade barriers between Asia-Pacific countries and ASEAN countries. The combination of these initiatives and agreements presents an unprecedented opportunity for China and the Philippines to develop renewable energy cooperation. However, the outbreak of the United States-China trade war and the ongoing COVID- 19 pandemic have brought unprecedented challenges to such potential cooperation initiatives. In response to opportunities and challenges and to achieve a win-win situation, China and the Philippines need to strengthen political and economic cooperation and promote corresponding policies.

Thirdly, a cooperative agreement focused on strategic cooperation concerning renewable energy that is based on national strategy and the security of both two countries may include investment, technology cooperation, grid construction, and trade for renewable energy infrastructure. Furthermore, the Chinese and the Philippine governments could establish a unified and effective platform to share renewable cooperative information, corresponding policies, and administrative procedures to solve the difficulties of collecting information and nontransparent policies faced by potential cooperators or contractors.

Finally, although the disputes between China and the Philippines in the South China Sea once impacted this bilateral relationship seriously, the current friendly relationship has lasted 5 years, creating a positive and timely opportunity for cooperation between the two countries.

Author Contributions

XL: Conceptualization, Writing- Reviewing and Editing. HW: Writing- Original draft preparation, Investigation. YL: Writing- Reviewing and Editing. WL: Supervision, Resources.

Conflict of Interest

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

Publisher’s Note

All claims expressed in this article are solely those of the authors and do not necessarily represent those of their affiliated organizations, or those of the publisher, the editors and the reviewers. Any product that may be evaluated in this article, or claim that may be made by its manufacturer, is not guaranteed or endorsed by the publisher.

Acknowledgments

The authors acknowledge the support of the Talents Training Program of Kunming University of Science and Technology (KKZ3201524007).

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Keywords: the belt and road, the Philippines-China cooperation, renewable energy, PESTEL analysis, renewable energy cooperation

Citation: Li X, Wang H, Lu Y and Li W (2021) A Critical Survey on Renewable Energy Applications in the Philippines and China: Present Challenges and Perspectives. Front. Energy Res. 9:724892. doi: 10.3389/fenrg.2021.724892

Received: 15 June 2021; Accepted: 19 July 2021; Published: 30 July 2021.

Reviewed by:

Copyright © 2021 Li, Wang, Lu and Li. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY). The use, distribution or reproduction in other forums is permitted, provided the original author(s) and the copyright owner(s) are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

*Correspondence: Wanlin Li, [email protected]

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Advanced Optimization and Control for Smart Grids with High Penetration of Renewable Energy Systems

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