Sustainable solar business investment in Philippines for a Sustainability management Class.

1. Rural Electrification
Solar in Mindanao – A Social Business Model
Global Environmental Markets
Spring 2012

2. Team Members:
Danielle Carille
Lindsey Clark
Esperanza Garcia
Sarah Fackler
Erin A. McNally
Stefano Vrespa
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3. Rural Electrification 4
Solar in Mindanao – A Social Business Model 4
Social business 6
A new kind of capitalism 6
Clean Development Mechanism 7
Environmental market power 7
On-Grid, Off-Grid Financial Model 9
How to make a financially sustainable social business. 9
Risks and Mitigations 13
Conclusions 16
Leading business innovation 16
Sources 17
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4. Rural Electrification
Solar in Mindanao – A Social Business Model
e following is an investment proposal for GE to invest in the construction of solar plants to meet
unmet demand of both on-grid and off-grid electricity customers in the Philippines.
Energy and energy infrastructure is at the core of GE’s success
“Solar energy is the most potential
as a multinational corporation and GE’s history in the and appropriate solution to the power
Philippines dates back to the 1890s, which puts the company crisis in the island.”
in a prime position to participate in the projected growth of the Senator Edgardo Angara
country’s electricity market.
e power problem in Mindanao, one of the three main islands in the Philippines, has been
neglected for years, and today, the region suffers from a 160 MW power deficit where residents
experience power outages of at least two hours a day. In addition, the current energy grid reaches
only 82% of the 94 million people in the Philippines.
Demand for power in Mindanao is projected to increase for the foreseeable future and as such is
considered the fastest growing energy market in all of Southeast Asia.
Despite this, no significant power-generating capacities are expected to be added to the grid within
the next two to three years.
is important yet unaddressed
problem presents a tremendous
opportunity for GE to undertake
a form of social business that
offers solutions for these issues.
e proposed social business
model will achieve the dual benefit
of gaining first mover advantages
in the renewable energy market in
the Philippines and participating
in the international carbon offset
market.
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5. is investment is strategically relevant for GE and its Southeast Asian operations since the
Philippines has committed to an ambitious renewable energy target of 50% under its Renewable
Energy Act by 2030.
is Act is highly championed by experts as the best renewable energy law crafted in Asia, and the
total additional power requirements are expected to rise to a new capacity of 4,100 MW by 2017.
With increasing energy demand and a skyrocketing cost of electricity (power cost in the Philippines
is 75% more than Korea’s $0.08/kWh, 100% more than Malaysia’s $0.07/kWh, and 180% more
than Taiwan’s $0.05/kWh), the Philippines has recognized that it is crucial to invest in and welcome
foreign investment in the development of renewable energy initiatives.
Solar power plants could be deployed in a
matter of months instead of the years it would
take to build a conventional fossil fuel plant.
Along with the minimal impact of solar on the
electricity rate, we believe that solar is the best
option to help address the above issues.
GE – a corporation that has always been at the
forefront of the worldwide energy market –
should take advantage of the opportunity to enter
the growing local Philippines electricity market as
well as the international environmental carbon
offset market by implementing an innovative
social business model.
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6. Social business
A new kind of capitalism
e proposed project embraces the idea of social business as pioneered by professor Muhammad
Yunus.
is type of business model is a non-loss, non-dividend model devoted to solving both a social and
an environmental problem that have been identified in the Philippines: the need to electrify off-grid
rural barangays and reduce greenhouse gas emissions by transitioning to renewable energy sources.
To achieve this, our model entails the
construction of two 5 MW on-grid power plants
on the island of Mindanao to confront unmet
energy demand that will otherwise be met with
fossil fuel generation.
e project’s profits will be reinvested in rural
electrification through the construction of small
off-grid micro scale plants.
A social business must be self-sustaining, and
hence all profits from power generation and
environmental market participation from both on-grid and off-grid plants will be used to build
additional off-grid plants.
e structure of the model provides a unique opportunity to identify and engage GE investors who
are interested in social investment and willing to recoup only their initial investment with no receipt
of dividends. e project also has the potential to be a partnership with GE Foundation.
e project will also allow us to generate certificates through the UNFCCC’s Clean Development
Mechanism (CDM), which will be discussed in the following section. e sale of these certificates
will have a significant impact on the scope of this project and will help us break into the
international environmental market place.
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7. Clean Development Mechanism
Environmental market power
e Clean Development Mechanism emerged from the Kyoto Protocol in 2007 as the new option
to facilitate investment in climate change mitigating projects. It is intended to meet two objectives:
(1) to assist non-Annex I countries in achieving sustainable development and (2) to assist Annex I
countries in achieving compliance with their emission reduction goals and targets through Certified
Emission Reductions credits (CERs).
ese credits can be generated through participating in a number of qualified emission reduction
projects in developing countries. ese projects, typically including renewable energy, energy
efficiency, and fuel switching, open new avenues for rural electrification.
Under the classical structure of CDM,
projects’ registration and verification is
conducted on a project-by-project basis.
e high transaction costs, lengthy
processing time, and registration risks are
all concerns that have been expressed
regarding CDM. In addition, the average
project size and associated energy market
for less developed countries (LDCs),
which further increases the relative
transaction costs associated with each
individual project.
ese factors further increase the cost to apply for a CDM project under the classical structure and
as such, the CDM Executive Board launched a “Programme of Activities” methodology – also
known as Programmatic CDM – to expand the applicability and reduce the transaction costs.
is is achieved by allowing a Managing Entity to define broad parameters for a group of similar
CDM project activities that are included under one umbrella – the Program of Activities – and thus
requiring only one registration as a CDM project.
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8. is type of CDM would provide the financial incentives necessary to make our individual projects
cost effective, as well as provide the flexibility necessary to add individual rural electrification plants
year after year.
Just as with traditional CDM, the projects need to prove that the generated carbon emission
reductions are additional and would not have occurred under a business as usual scenario. e
certificates are only realized through the projects existence, so GE will continuously accrue CERs
over the life of the social business.
To determine additionality, we used the benchmark approach to establish our baseline emissions.
As required by the CDM, each project must use an approved methodology to determine existing
pre-project emissions and monitor ongoing emissions once the project is up and running.
For the on-grid consumers we used, as a baseline scenario, a 300 MW coal power plant recently
endorsed by the Davao City Council.
In determining the off-grid baseline, we used the rural electrification methodology. is
methodology outlines several requirements, such as 75% of consumers have to be households and
each project has to be less than 15 MW total, and is based on the number of facilities electrified, the
given emission factor and the total number of solar plants installed.
e primary market uncertainty lies in the Philippines’ designation as an LDC: due to the current
Philippines GDP growth rate it’s possible that in the next few years the country will no longer be
listed as an LDC.
As long as the Programmatic CDM is approved by the CDM Executive Board while the
Philippines is still considered an LDC, any
projects under the PoA that are constructed
after any potential country designation change
will still be eligible to generate CERs. erefore,
in order for this project to qualify under CDM
as it has been proposed, the Program of
Activities would need to be registered by the
Managing Entity, aka GE, before the end of the
year.
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9. On-Grid, Off-Grid Financial Model
How to make a financially sustainable social business.
A cash-flow analysis has been conducted to evaluate the feasibility of the social business model
proposed and, thus estimate the potential impact of the project on the electrification rate of the rural
off-grid barangays.
e financial model includes two different systems: the two on-grid 5 MW solar power plants; and
multiple 100 kW off-grid solar systems each supplying one barangay.
All financial assumptions for both on-grid and off-grid projects, for as long as the solar plants’
operational life (20 years), can be found in the tables on page 10.
e on-grid system
e cost per MW installed is assumed to be roughly equal to $3.5 million (including hard costs,
soft costs and yearly O&M).
e main revenue stream is generated from the on-grid electricity sales at the price of $0.52/
kWh(1, 2), which includes the feed in tariff ($0.34/kWh), a policy mechanism that is employed
under the Philippines’ Renewable Energy Act to accelerate investment in renewable energy
technologies. is is achieved through the offering of long-term contracts to renewable energy
producers at a preferential price.
As a CDM project, additional income will be
generated through the sales of Certified
Emission Reductions (CERs). e amount of
avoided emissions is calculated assuming the
solar system will offset emissions from a new
coal plant, which has been approved for the
Davao region (3). e following assumptions
were used: average grams of CO2 equivalents
emitted per kWh generated (900g CO2 equiv./
kWh) (4), CER floor price of ~$5 (5).
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10. e off-grid system
Using the information provided by the Philippine Solar Power Alliance – the average number of
households per barangay (200) and the maximum daily electricity consumption (3 kWh/day) – we
were able to determine the off-grid system capacity, its cost, and the average amount of electricity
dispatched per household (2.4 kWh/day).
On-grid data
number of power plant 2
Plant size (GE) 5 MW To further foster the number of off-grid systems
capacity factor 20%
installed, we considered two additional revenues.
kWh produced 17,520,000 kWh/Year
hours 8760 e first is generated by the sale of electricity to
CER price ($) 5.14 $
Coal plant average CO2 em. 900 g/kwh the rural households at a rate 50% lower than the
Avoided emissions 15768 Tons CO2 eq/year
Min CER Revenue 81,093 $ current market price ($0.09/kWh). is income
Cost per plant $ (16,190,373.93)
will cover the O&M expenses for each off-grid
Total cost $ (32,380,747.87)
CDM Approval Cost $ (40,000.00) system.
Operating Cost $ (1,019,971.65)
Average national price $ 0.18 e second source of revenue will be generated
FIT tarif $ 0.34
Degression Rate 6% upon the recognition of the off-grid project as a
Annual Growth in Price 4%
income tax 32% programmatic CDM and upon the likelihood of
selling CER credits on the European market at a
price at least equal to the price floor previously identified.
To quantify this extra source of revenue we determined the total amount of CO2e displaced with
the UNFCCC methodology: Electrification of
Off-grid data
rural communities using renewable energy. (6) average energy provided per household 2.4 KWh/day/household
average barangay 200 households
Plant size (GE) 100 Kw
Since the cost of the off-grid system is
capacity factor 20%
assumed to be proportional to the per MW hours 8760
kWh produced 175200 KWh/year
cost of the on-grid system, the total number CER price 3.6 euro
CER price ($) 5.14 $
of off-grid systems to be constructed is Cost per plant $ (323,807.48)
Operating Cost $ (10,199.72)
determined by the overall net income that can
CDM Approval Cost $ (15,000.00)
be reinvested in rural electrification. Average national price $ 0.18
Price $ 0.09
FIT tarif $ -
Annual Growth in Price 4%
income tax 32%
Cost per household/year $ 78.84
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11. Combined Model
Other major assumptions that drove the overall financial results are: straight-line depreciation for
the on-grid and off-grid system and a 7 year tax exemption for the on-grid power plants under the
Philippine’s Renewable Energy Act/ NREB (7).
e significant impact that the tax exemption has on our net income is apparent in Figure 1 where
the trough of off-grid plants is found when the tax exemption is over in 2020. We also factored in
the full repayment of the ~$32 million in principal received from investors over the 20 year life of
the project with no interest or dividends.
e cash-flow and NPV analysis was conducted over 20 years at which point the on-grid plants
would no longer be in operation.
ree different scenarios were considered to comprehensively evaluate the impact of the overall
project on the social and environmental issues previously identified.
ese scenarios differ in the amount of retained earnings for on-grid reinvestment at the end of the
20 years: (1) no on-grid reinvestment, (2) replacement of 1 on-grid plant or (3) replacement of both
on-grid power plants. In all scenarios we broke even and the project was economically viable.
We included the first scenario to try to evaluate the maximum potential impact on the rural
electrification rate. is case assumes that at the end of the 20-year lifespan of the on-grid plants, all
of the barangays will be connected to the grid and the social business as we initially conceived won’t
be necessary anymore. At this point, the parameters and goals of the social business would either be
adjusted and re-evaluated or GE could decide to shift their focus to a “for-profit” renewable energy
business.
We suggest pursuing the first scenario to foster GE’s position into the Southeast Asian energy
market as the leading socially responsible company by helping to improve the electrification rate of
the Philippines. is will help us gain a privileged position in the marketplace to ensure a future
“for-profit” position in a country that is well on its way to becoming a developed country.
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12. 160.00 14
140.00
12
120.00
10
Total Off-Grid Plants
New Off-Grid Plants
100.00
8
Off-Grid, 1 plant r.
80.00 Off-Grid, 2 plants r.
Off-Grid, no reinv.
6
New Off-Grid plants
60.00
4
40.00
2
20.00
0.00 0
2010 2015 2020 2025 2030 2035
Figure 1: off-grid systems installed per year and overall trend
20000
18000
16000
14000
Tonnes of CO2 eq. avoided
12000
Off-Grid, no reinv.
10000 On-Grid
Off-Grid, 1 plant r.
8000 Off-Grid, 2 plants r.
6000
4000
2000
0
2010 2015 2020 2025 2030 2035
Figure 2: Tons of CO2 equiv. avoided under different scenarios for the on-grid and off-grid
40000
35000
Total Tonnes of CO2 eq. avoided
30000
On-Grid
25000 Off-Grid, no reinv.
Off-Grid, 1 plant r.
Off-Grid, 2 plants r.
20000
15000
10000
2010 2015 2020 2025 2030 2035
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Figure 3: Total Tons of CO2 equiv. avoided under different scenarios.

13. Risks and Mitigations
Risk Assessment
In addition to the various uncertainties that may affect the accuracy of our financial model, a
diversity of risks associated with investing in the CDM market and installing both off-grid and on-
grid solar power plants in Mindanao exist. e CDM-specific risks address licensing and regulatory,
political, as well as market and financial considerations; while project specific risks address
environmental, climate change, as well as operations and management considerations.
CDM-Specific Risks
Licensing and regulatory risks are associated with every stage of a CDM project. e greatest risk
to the viability of our project is the potential to not gain approval late within the project cycle. is
can happen even after a contract for the sale of CERs has been entered, and will result in the loss of
transaction costs. e risk of project delay is also common to the registration phase, as baseline
methodologies must often be revised. Due to the lack of a concrete system for years after 2012, the
allocation of CERs may be reduced at any time. In this sense, the 21-year crediting period of our
project presents an additional challenge.
Political risks encompass those concerning the control of the Philippine government. ese may
include: failure to obtain national approval for CDM, regulatory changes in economic and energy-
related policies related the baseline of the project, or the introduction of a feed-in-tariff or CER tax.
e myriad of risks associated with the CDM market is largely due to its immaturity, and resulting
price uncertainties. For example, the future market price may substantially increase relative to the
contract price at any time, but it is expected that this uncertainty will decrease as market liquidity
increases. Further financial risk presents itself in the use of local currency for sale of CERs, which is
especially high for the Philippines due to the recent depreciation of the peso. Finally, the uncertainty
of the Philippines’ status as an LDC country threatens the viability of the entire project, as it may
soon no longer be able to apply for CDM status.
Project-Specific Risks
e predominant environmental risk to the installation of a solar power plant is that of insufficient
sunlight. While our model assumes only 20% generation for baseline calculations, the seasonal
difference in cloud cover and related solar insolation during the monsoonal (wet) and dry seasons is
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14. substantial. Additional environmental risks include
a variety of natural hazards, such as earthquakes,
landslides, tropical cyclones, floods, and droughts.
Climate change projections indicate an increase in
extreme weather events by the end of the century,
which will likely amplify the risks associated with
these natural hazards and climatic phenomenon.
However, a reduction in rainfall is projected for
Mindanao by the end of the century, which will
reduce the risk concerning insufficient sunlight.
Similar risks present themselves during
the operations and management phase.
Primarily, this includes the underperformance of the solar technology that may reduce potential
gains. Solar project specialists in the Philippines have additionally conveyed to us the common
occurrence of solar panel theft for rural electrification projects as well as the risks associated
with returning to the project site as battery replacement is necessary every 1,000 watt-hours. The
majority of these risks would be inherent to any foreign investment projects in new markets that
involve a great number parties and remote location. Best risk mitigation practices will involve
investing in and communicating with the local communities in order to incentivize cooperation
and spread knowledge and technology transfer.
Risk Mitigation
Further risk mitigation will focus on four areas: 1) Due Diligence, 2) Contract Negotiation, 3)
O&M and Safety Plans, 4) Insurance. Use of these strategies will maximize the chances for a strong
return on investment.
Due Diligence
Due diligence will focus on upfront research, particularly in in terms of weather variability, local
geology, accessibility of our project location to the grid, and local culture. is will ensure the
project’s success and allow us to recoup our initial investment while avoiding unexpected future
costs.
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15. Contract Negotiations
orough contract negotiation will allow the sharing of business risks with associated partners.
Such contracts include power purchase agreements, CDM, Feed-in Tariffs, and construction
contracts. is will focus on negotiating indemnity clauses and requiring partner parties to possess
high levels of insurance. e cost of negotiating contracts however, must be reduced to a minimum
as legal costs and fees can be substantial. Such negotiations also pose the risk of delay for project
implementation if not completed in a timely manner. is may be mitigated by setting strict
deadlines within an action plan.
O&M and Safety Plans
Creating detailed operations and management
(O&M) and safety plans will minimize the
majority of risks presented during the
construction and O&M phases. ese documents
will enable us to educate the local workforce on
safe construction and operation procedures, as
well as allow us to reduce the costs of insurance.
Insurance
Purchasing insurance is one of the most common
ways for business entities to reduce risk. During the construction and operation phase of our project,
the purchase of sufficient insurance such as Builders Risk/Delay in Startup, Property, Construction
Liability, Operational Liability, and Environmental Liability, will be crucial. Depending on cost, a
combination of warranty insurance, weather derivates, and political risk insurance should also be
purchased. Warranty insurance for solar panels will provide an additional layer of protection against
any equipment failure and technology underperformance. e risk of insufficient sunlight may be
mitigated with weather derivatives. Lastly, political insurance will reduce the many risks associated
with environmental markets. Specifically, it may help reduce exposure to feed-in tariffs and the
CDM market.
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16. Conclusions
Leading business innovation
Other multinational companies, including Danone and BASF, have engaged in social businesses
that address identified social and environmental problems by creating a solution based on their core
business. Energy and energy infrastructure are at the core of GE’s success as a multinational
corporation and they have had a presence in the Philippines since the 1890s. e goal of this project
also aligns well with that of our corporate citizenship report and will further propel us into a
leadership role in the realm of corporate sustainability. As with any project, there are risks involved
and in this analysis we have identified various methods to hedge against the full scope of risks posed
by this type of project. GE’s size and expertise in energy and financial markets is sufficient to
participate in the relatively new CDM market as well as the risk mitigation activities we have
proposed.
Partaking in this social business model would put GE at the forefront of an innovative method of
contributing to sustainable development while serving as a pilot project for our environmental
markets strategy. is model represents an opportunity for GE to realize first mover advantages in
one of the fastest growing energy markets in Southeast Asia. After a few meetings held with on-the-
ground Filipino solar advocates, it became clear that in order to ensure a successful, long-term
business in the Philippines it is essential to gain the trust and loyalty of the people and politicians.
Delivering inexpensive energy to poor rural citizens and contributing to the goals of the
government’s renewable energy plan will garner these essential relationships. is strategic move will
put us in a position to be the top supplier of solar in the electricity market as more barangays are
brought onto the national grid and overall energy demand increases.
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17. Sources
1. Senate Economic Planning Office – Electric power at a glance, 2005 – http://
www.senate.gov.ph/publications/AG%202005-07%20-%20Electric%20Power.pdf
2. National Renewable Energy Board – Status of the RE Mechanisms, Sharing Experiences on RE
Promotion – February 2012 – http://eeas.europa.eu/delegations/philippines/documents/
press_corner/renewable_energy_mechanisms_maniego_en.pdf
3. Edith Regalado – Philstar news – 27 October 2011 – http://www.philstar.com/nation/
article.aspx?publicationsubcategoryid=67&articleid=741618
4. Marion, Nsakala, Griffin, Bill – Controlling Power Plant CO2 emissions: a long range view –
http://www.netl.doe.gov/publications/proceedings/01/carbon_seq/1b2.pdf
5. http://www.eex.com/en/Market%20Data/Trading%20Data/Emission%20Rights/Certified
%20Emission%20Reductions%20Futures%20%7C%20Derivatives/Contract%20Information/
futures-info/F2CR/2012.12
6. UNFCCC CDM Executive Board – Indicative simplified baseline and monitoring
methodologies for selected small-scale CDM project activity categories, Electrification of rural
communities using renewable energy – Revision 01.0 – 2 March 2012
7. National Renewable Energy Board – Status of the RE Mechanisms, Sharing Experiences on RE
Promotion – February 2012 – http://eeas.europa.eu/delegations/philippines/documents/
press_corner/renewable_energy_mechanisms_maniego_en.pdf
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