Accelerating the Energy Transition through Power Purchase Agreement Design: A Philippines Off-Grid Case Study

Abstract

As renewable energy (RE) costs decrease, private non-subsidized revenue sources, such as power purchase agreements (PPA), will increase in off-grid areas. This paper’s objective is to improve policymakers’ and utilities’ understanding of PPA’s role in mitigating private investors’ risks in off-grid areas to accelerate the energy transition. The paper built a PPA dataset for the largest off-grid area in the Philippines and developed novel and efficient techniques to evaluate the risk mitigation ability of a PPA. While oil-based technologies are expensive, they are low-capital-intensive, and the fuel, the bulk of the cost, is passed through to consumers and primarily funded by subsidies. In contrast, the most affordable energy source, RE, requires higher upfront capital investments, financed primarily with equity. Investors chose low-capital-intensive technologies (oil), rehabilitated power plants, and utilized old equipment, all investment decisions to mitigate residual PPA risks, i.e., distribution utilities’ low creditworthiness and capital recovery uncertainty. Presenting the investment as a PPA residual mitigation tool is one of the paper’s contributions to the literature. The distribution utility needs to reduce investors’ uncertainty by covering reasonable investors’ costs. Policymakers need to level the playing field between fossil fuels and RE by reducing subsidies and strengthening distribution utility creditworthiness.