Two years of Duterte energy policies

* This is my column in BusinessWorld on July 26, 2018.

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For the past two years, the Duterte administration has produced a mix of bad and good policies from the perspective of market-oriented reforms envisioned in the EPIRA law of 2001.

Four recent stories in BusinessWorld would serve as jump-off points of this assessment:

  1. Finance dep’t studying carbon-emissions tax (July 20).
  2. Flawed DoE assumption results in baseload bloat (July 16) By Roberto Verzola.
  3. More flaws in the DoE plan raise baseload bloat to 103% (July 23) By Roberto Verzola.
  4. Our looming electricity shortage (July 23) By Ramon L. Clarete.

From #1: DoF Usec Karl Chua said “such taxes are in force in places like the UK, where the tax on diesel represents about 70-80% of the fuel’s retail price. In the Philippines, the tax is equivalent to 5% of retail.”

From #2: “This baseload bloat will lead to stranded assets in the future because those recently constructed coal and nuclear plants will be unable to sell half of their output.”

From #3: “Steadily dropping solar prices will make market-driven solar penetration inevitable. The rising solar share in the capacity mix will initially displace peaking and midrange flexible plants.”

From #4: “Currently, power reserves are at their lowest level, which is 10% of peak demand. The level used to be twice that but even at the higher level, reserves are even lower compared to those in neighboring countries… the prices of coal and petroleum are high… There is big appetite of private investors to invest in LNG-related infrastructure.”

First of all, adding a new “carbon emissions tax” will further distort the energy market because the higher energy taxation under TRAIN law is already wrong. The tax hikes in oil, LPG, and coal have significantly contributed to the country’s current high inflation rate. And that’s just the first round.

The second and third round of the tax increases will be imposed on January 2019 and January 2020, respectively.

Second, there is no “baseload bloat” as claimed by Verzola. The Philippines actually has a “baseload lack” so the current DoE approval of adding more coal plants to the grid is a good policy.

Philippine coal use of only 13 million tons oil equivalent (mtoe) in 2017 is small compared to our neighbors. Malaysia with a population less than 1/3 of the Philippines has coal consumption of 20 mtoe, Vietnam has more than 2x with 28 mtoe, South Korea with one-half of the Philippines’ population has uses coal seven times more than we do, on top of having substantial nuclear power capacity.

Thus, there will never be coal “stranded assets in the future,” even for countries with plans to shift away from coal like South Korea and Japan.

From 2010 to 2017, South Korea’s coal use increased from 76 to 86 mtoe while Japan’s increased from 116 to 121 mtoe over the same period.

Three, “steadily dropping solar prices” have not resulted in cheaper solar energy as evidenced by the continued rise in feed-in-tariff (FIT) rates per kWh for solar 1st batch (granted in 2015): P9.68 in 2015, 9.91 in 2016, P10.26 in 2017, 10.68 in 2018, or 2x the average WESM prices of P5+/kWh in first half of 2018. So the Duterte/DoE policy of not adding more MW capacity for expensive solar-wind energy is good.

Four, Dr. Clarete’s observation on limited reserves is correct and further contradicts the assertion of Mr. Verzola. But Clarete’s “prices of coal and petroleum are high” is not true all the time, prices go up and down and up and hence, are generally temporary. For instance, coal Asian Marker Price (AMP) was $125/ton in 2011 and down to half in 2015, and then rose again to nearly $100/ton in 2017 (see table).

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Inviting private investments, not government, in LNG terminal is a welcome development. DoE should shy away from committing huge taxpayers’ money to develop expensive infrastructure for private power players.

Five, not in recent news but the transition of WESM operation to an Independent Market Operator (IMO) has materialized under the current administration, 17 years after the EPIRA law, a milestone.

I have attended the official announcement by DoE Sec. Cusi last June 25, 2018 at Crowne Plaza Galleria where Atty. Saturnino Juan has been elected as the first President of IMO.

Six, continued bottlenecks in electricity transmission continues until today and this is bad news.

During the Energy Policy and Development Program (EPDP) book launching and sort of “farewell lecture” last week July 19 at the UP School of Statistics, the problem of transmission bottlenecks was among the issues discussed.

As a result, even if investors put up several power plants, their electricity output will never reach the distribution utilities and end-users because of the lack of transmission lines.

As I mentioned earlier, two years under the Duterte administration has resulted in both good and bad energy policies for the country.

We should continue to support the first and rectify the second.

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Lessons from the Energy Policy Development Program

* This is my column in BusinessWorld last July 12, 2018.

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Next week, the Energy Policy Development Program (EPDP), a USAID-funded project implemented by the UP Economics Foundation, will have its last lecture and the launch of a book that incorporates conferences, lectures, and seminars the program has sponsored over the last four years.

Among the EPDP lectures that I enjoyed — all held at the UP School of Economics (UPSE) — were those given by the private sector players. Here are some key points they made followed by my comments.

  1. “Natural gas: Addressing the energy trilemma and powering our energy needs” by Mr. Giles Puno, First Gen, August 2017.

“Government support [is] crucial for LNG development… (1) Holistic and defined energy mix to direct planning and investments, (2) Incentivize LNG through fiscal and non-fiscal policies, (3) Secure LNG Off-take, similar to how Malampaya was underpinned.”

The first two points sounded like they were seeking special treatment from government and this is wrong. Setting the energy mix should be done by the market, not government. Government should stay out of building or financing or guaranteeing the construction of the LNG terminal and let interested private players put their money where their mouth is.

  1. “Retail Competition and Open Access (RCOA): The Power of Choice” by Mr. Miguel Aboitiz, Aboitiz Power, Sept. 14, 2017.

“Benefits of RCOA for contestable customers: (1) they have more choices with respect to pricing and contract structure, (2) they are not subsidizing other customers, (3) they can choose the type of power they want or they can even decide to contract with a financial entity instead of a power plant owner, (4) they can choose from a variety different contract structures, (5) they are in full control of their generation costs.”

True. RCOA is among the best provisions of the EPIRA law of 2001. It liberalizes and allows the contestable customers to move away from geographical monopolies (private DUs or electric cooperatives) and allow them, to choose from three dozen or so retail electricity suppliers (RES).

  1. “Enhancing Fair and Economic Competition” by Dr. Francisco L. Viray, Phinma Energy, Oct. 5, 2017.

“SUPPLY = DEMAND + LOSSES.

Above must be balanced in real time for the power system to be stable (Power System Stability), and it is consistent with ‘Causer’s Pay Principle.’”

The above equation is a big and explicit warning to advocates of “renewables only” lobbyists, activists, and developers. Demand is high in the Philippines with its 106 million population that expands 1.7 million a year, net of death and migration. Losses from scheduled maintenance shutdowns and unscheduled shutdowns can be substantial, especially if the power plants are old and aging. So high demand plus high losses would require high supply at stable, predictable capacity.

  1. “Optimization of Supply” by Mr. Chrysogonus F. Herrera, MGen, Oct. 26, 2017.

“Where do we go?

(1) Let the market under EPIRA sort itself out (after all, it is working and gestating new investments); (2) A mandated “Generation Mix Policy” is a straitjacket to be avoided. It does not help reduce rates; (3) Coal is indispensable in keeping rates low and supply reliable; (4) Cheap and reliable power secures economic development and global competitiveness.”

Amen to Chris’ points. The EPIRA, the Wholesale Electricity Spot Market (WESM), and RCOA are all working and running full steam.

A government-mandated power generation mix is wrong and often cronyism-inspired. Let the electricity consumers decide what is good and desirable for them. Make sure that cheaper and reliable electricity supply is available.

  1. “Delivering Clean and Green Energy to the Philippines” by Mr. Stewart Elliott, Energy World Group (EWG), Nov. 23, 2017.

“Pagbilao LNG Hub Terminal and 650MWCCGTpowerplant…”

Throughout his presentation, Mr. Elliott never mentioned things like “government fiscal and non-fiscal incentives for LNG terminal and development” at all. He just wants stable long-term policies not subject to arbitrary changes midway. Amen to this kind of investment attitude.

  1. “Optimal Investment Decisions in Generation” by Mr. Eric T. Francia, Ayala Energy, Feb. 8, 2018.

“Investment Imperatives: (1) Diversify portfolio, (2) Further expand coal plants for baseload needs, (3) Explore gas/diesel for intermediate, peaking and ancillary, (4) Continue investments in renewables and build capabilities in storage, (5) Geographic diversification, (6) Strengthen balance sheet and multiple sources of funding, (7) Ensure cost competitiveness.”

This is practical advice from one of the country’s biggest business conglomerates, the Ayala Corp. It recognizes the practicality of coal and gas while pushing their corporate advocacy for renewables with storage.

  1. “Cheap Electricity for a First World Philippines: The 24/7 Solar-Storage Revolution” by Mr. Leandro Leviste, Solar Philippines, Feb. 22, 2018.

“Solar is now the least cost for all peaking, mid-merit, and baseload requirements, and will thus comprise the vast majority of additional power generation capacity from hereon in the Philippines.”

Far out. If solar is indeed the “least cost,” we should have abolished the feed-in-tariff (FIT) scheme of guaranteed high price for 20 years for solar, from P9 to P10+/kWh when coal-gas prices are only P4-5/kWh and can be reduced to P2/kWh at off-peak hours.

The continued demonization of coal — articulated explicitly by Mr. Puno and Mr. Leviste in their presentations — is based on emotionalism and desire for government partiality, for two reasons.

One, our coal use until 2017 remained small compared to our Asian neighbors, only 13.1 mtoe or less than 1/2 of Vietnam, only 1/3 of Taiwan, 1/4 of Indonesia, 1/7 of South Korea, 1/9 of Japan, and 1/144 of China. And yet that small coal consumption provided 50% of total electricity production in the Philippines in 2017.

Two, even in developed and “green” Asian economies like Japan, South Korea, and Taiwan, solar and wind energy production remains very small, which speaks of their non-reliability and non-dependability and may even be part of economic underdevelopment, if pursued to the max (see table).

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The market and the consumers, not government, not the environmental activists and renewables developers, should set the appropriate energy mix. This is one of the important lessons, explicit or implicit, that one will derive from attending or reading the various lectures at EPDP.

CoA should consider benefits of Malampaya project

* This is my article in BusinessWorld on July 05, 2018.

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When developing economies attract multinational companies, they reap benefits. These developing economies get to have more commodities and services that otherwise would remain untapped for a long time. And, as a result, they also earn more revenues, taxes, and royalties even if these economies spent very little. Moreover, technology transfer from multinationals to developing economies is enabled as local professionals are hired to operate, maintain, and upgrade facilities.

In the case of Malampaya gas to power project in offshore Palawan, the Philippine government has attained these and other advantages: (1) more electricity production from domestic natural gas, (2) more revenues via Malampaya royalties, 60% of gross production amounting to more than P400 billion over the last 16 years (see table).

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The Department of Energy’s (DoE) actual count of royalties from 2002 to 2017 is P424.7 billion. My computation above of P459.6 billion is only an estimate from a simple multiplication of $ million by the average exchange rate.

The third benefit is that some of Malampaya gas is used to power compressed natural gas (CNG) buses that ply the Manila-Southern Luzon routes. As a result, less pollution is produced.

The fourth benefit from the project is that it employs skilled Filipino professionals and engineers. Onshore Filipino staff also have the knowledge to build smaller platforms for offshore gas rigs.

With these benefits in mind, these two reports among others caught my attention:

“Shell focused on tax fight, not Malampaya extension” (BusinessWorld, Dec. 8, 2017).

“CoA: Malampaya must reimburse government P146 billion” (Philippine Star, May 17, 2018).

Under Service Contract 38 with the Department of Energy, sharing of revenues is 60-40 for the Philippine government and the Malampaya consortium, respectively. The Philippine government spent almost nothing in the high-risk and very costly exploration and drilling for gas in deep waters far out from Palawan mainland. The government just collects 60% of total revenues because it is the government.

The Malampaya consortium spent huge amounts of money and technology, risked their people in the exploration, drilling, development, and laying down heavy pipelines in seabed hundreds of kilometers to Batangas power plants. And they get only 40% of the revenues.

The consortium is composed of three companies with their respective equity participation in parenthesis: Shell Philippines Exploration B.V. (SPEX, 45%), Chevron Malampaya LLC (45%), and Philippine National Oil Co.-Exploration Corp. (PNOC-EC, 10%).

The Commission on Audit (CoA) however, has ruled several years ago that aside from surrendering upfront 60% of gross revenues to the government, the consortium must pay income taxes to the BIR/DOF from their 40% share.

That kind of thinking is scandalous for the following reasons.

One, the law where SC 38 was based, Presidential Decree (PD) 87, “The Oil Exploration and Development Act of 1972,” gives the contractor, the Malampaya consortium, the privilege of bundling the income tax within the 60% share of government.

Two, under PD 87, the government assumes zero investment cost and risk. So if the consortium did not discover huge amounts of natural gas from Malampaya, the government was not required reimburse them for expenses.

Three, it does not recognize that aside from the huge money the Philippine government receives yearly from the consortium, electricity supply is significantly bolstered especially in the Luzon grid. Coal contributes 50% and natural gas contributes another 22% of total electricity production in the Philippines in 2017. These energy sources are stable 24/7 and are not intermittent, unstable, and unreliable such as solar and wind power.

Four, the move by CoA discourages present and future investments in high risk, capital-and technology-intensive sectors that some government agencies can change rules somewhere and demand huge money midstream.

It is good that the DoE, DoF and Office of Solicitor General (OSG) in previous administrations and even in current administration did not think this way.

But the CoA remains persistent and has ordered the consortium to pay P146.8 billion or nearly $3 billion of “unpaid income taxes” from 2002 to 2017.

CoA should stop these moves and consider the many other advantages of the Malampaya gas to the Philippine economy.

There should be more big private investments in the country like the Malampaya gas development, less politics, and intrusive government bureaucracies that discourage investments.

The EPIRA is working

* This is my article in BusinessWorld last June 25, 2018.

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The Electric Power Industry Reform Act (EPIRA) of 2001 or RA 9136 was among the most important pro-market reforms in the Philippines. Before that law, the government-owned National Power Corporation (NPC) was the single-biggest debtor agency and the single-biggest deficit generator, fiscally bleeding the taxpayers while providing unreliable power supply.

EPIRA has significantly changed this, moving away from a state monopoly to a competitive sector with dozens of competing players in power generation alone. Competition can pressure price declines overall while improving electricity supply quality and reliability.

Yet many sectors still glamorize that dark era of state monopoly and endless fiscal deficits. They complain of “continuously rising” electricity prices and then blame EPIRA.

Electricity prices are rising, true.

And while they occasionally spike, the general trend is a price decline.

When prices look “unaffordable” for some, people should realize that the monthly electricity bill contains about a dozen items. These include generation, distribution, and transmission charges — the three costliest items — as well as supply, universal, system loss, and metering charges. The bill also covers VAT and feed in tariffs and so on.

After EPIRA was passed, focus was placed on the privatization of NPC power plants, not in the construction of new ones.

As a result, the country’s installed capacity has hardly improved, from 14.7 GW in 2002 to 15.1 GW in 2003, 15.6 GW in 2009.

Significant capacity additions occurred only in 2010 with 16.4 GW, then 2012 with 17.0 GW, then in 2014 with 17.9 GW, 2015 with 18.8 GW, big jump in 2016 with 21.4 GW then in 2017 with 22.7 GW.

These numbers show the following:

One, installed capacity from 1991 to 2001 — the decade before EPIRA — expanded twice but power generation expanded only by 1.8 times. This suggests low productivity and efficiency under the NPC.

Two, capacity from 2001 to 2011 (EPIRA’s first decade) has expanded only 1.2 times but power generation expansion was 1.8 times. This means the private owners of NPC-privatized power plants were more efficient in optimizing the capacity and efficiency of those plants.

Three, from 2011 to 2017 (last six years), power generation has expanded 1.4 times in lock step with installed capacity despite the fact that many capacity additions were from intermittent, unstable renewables with low capacity factors like wind and solar. This shows again higher efficiency and lower prices by private players.

Fast expansion in power generation means fast expansion in power consumption and electricity prices are more affordable so the people use more electricity. And this debunks the claim by anti-EPIRA groups that electricity prices are “continuously rising.”

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AN INDEPENDENT MARKET OPERATOR, FINALLY

Meanwhile, this Monday, June 25 the Philippine Electricity Market Corporation (PEMC) will hold a press briefing after the PEMC annual membership meeting. The event will include the election of a new set of PEM Board of Directors and handover of market operations and governance functions from the DOE to the new PEM Board.

This will be a very significant event for two reasons.

One, the creation of the Independent Market Operator (IMO) as specified in EPIRA will become a reality after 15 years of foot-dragging by the DOE. Rules of the Wholesale Electricity Spot Market (WESM) were promulgated in 2002 and the PEMC was incorporated one year later. The PEMC was designated by the DOE as the Autonomous Group Market Operator (AGMO) in 2004.

Two, the PEMC will become a real independent market operator (IMO) and not a DOE-designated AGMO. Chairmanship of PEMC will be held by one of the WESM players and will not come from government. This will be a first time since PEMC was created in 2003 or after 15 years.

Under the previous administrations, it may be argued that the DOE partially violated the EPIRA because it made PEMC as government-dependent market operator. So now this anomaly will be corrected.

DoE will still have regulatory power over the IMO through the issuance of related Department Administrative Orders, Memo and Circulars, and via the Energy Regulatory Commission (ERC).

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

Mindanao power development, reality vs illusion

* This is my column in BusinessWorld last Monday, June 11.

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From 2006 to 2013, the Mindanao grid had only 1,900 to 2,000 MW of installed power capacity, mostly sourced from hydropower facilities that provide higher output during the rainy season but declines during the summer.

As a result, power shortages lasting several hours a day are experienced during dry spells.

In 2014, the supply situation improved.

Total installed power capacity increased to 2,211, rising once more to 2,414 MW in 2015.

Starting 2016, the situation improved further with capacity reaching 3,162 MW and later rising to 3,559 MW in 2017, with the help mostly of coal power plants. The last two years showed significant power surpluses that competing power plants were bidding as low as P2.50/kWh in generation cost.

As of end-2017, coal power constituted 39% of installed capacity but actual electricity production was 53% of total because of coal’s reliability and higher capacity factor. Oil-based plants constituted 26% of installed capacity but actual electricity output was only 7% because they were peaking plants and were seldom used.

The committed projects (financing, construction stage) and indicative projects (planning and proposal stage) are shown below.

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The Department of Energy (DoE) projects that from 2016 to 2040, the Mindanao grid will need additional capacity of 10,200 MW (6,300 baseload, 3,200 mid-merit, 700 peaking).

Early this month, a paper was presented at the UP School of Economics (UPSE), entitled “Cost-Effectiveness of Maximum Renewable Energy Penetration in the Mindanao Power Grid” by Dr. Sven Teske of the Institute for Sustainable Futures (ISF), University of Technology, Sydney. The event was sponsored by the Institute for Climate and Sustainable Cities (ICSC) and Mindanao Development Authority.

I was not there so I asked for a copy from UPSE, nothing came and perhaps ICSC did not give them a copy either. A friend of a friend sent me a paper by Dr. Teske last year which could be the basis of his presentation.

The IFS and Dr. Teske made a weird scenario of Mindanao capacity 6x that of DoE scenario. Their scenario is based on heavy renewable energy plus storage (RE+S) and RE plus dispatch (RE+D) and the following assumptions: (1) coal, oil and diesel plants phased out by 2050, (2) of the 3,200 mid-merit target by 2040, half to come from gas plants, half from hydro and biomass, (3) significant increase in solar and wind, (4) increase in storage especially battery (2,491 MW in 2050), and (5) interconnection with neighboring islands.

The weird ISF paper as propagated by the ICSC is obviously a product of the solar-wind lobby, partly by the gas lobby too. Compare what the industry players would actually invest, 410 MW of solar-wind indicative projects, vs what ISF-ICSC lobby of 37,496 MW or 91.5x larger, which is hallucination and illusion.

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Electricity consumers in Mindanao and elsewhere simply want two things: stable electricity available 24/7 no brownout even for a minute, and cheap or competitive.

Solar and wind are not cheap.

If they are, we should have abolished by now the feed-in-tariff (FIT) scheme or guaranteed high price for 20 years, then the planned mandatory or obligatory renewable portfolio standards (RPS).

The 2nd America First Energy Conference (AFEC 2018), Louisiana, August 7

Heartland Institute will organize and sponsor again a big conference, the 2nd America First Energy Conference (AFEC 2018) in Hilton Riverside Hotel, New Orleans, Louisiana, August 7.

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The 1st AFEC 2017 was also organized by Heartland and was held at JW Marriott Houston, Texas on November 9, 2017. I attended that successful conference, seems I was the only Asian in the big room and I have written some proceedings in my column in BusinessWorld last year,

US energy policies and implications in Asia and Philippines
October 31, 2017, http://bworldonline.com/us-energy-policies-implications-asia-philippines/

US energy trading and implications for Asia and Philippines
November 16, 2017, http://bworldonline.com/us-energy-trading-implications-asia-philippines/

The conference also inspired me to further comment on the irrationality of carbon tax, coal tax, other watermelon (green outside, red inside) policies. Like these,

The Habito carbon tax distortion
December 7, 2017, http://bworldonline.com/habito-carbon-tax-distortion/

Energy favoritism under TRAIN
December 19, 2017, http://bworldonline.com/energy-favoritism-train/.

Website of AFEC2018 is http://americafirstenergy.org/
The agenda looks exciting, from the website:

BREAKFAST KEYNOTE
Opening remarks by Heartland Institute President Tim Huelskamp, Ph.D., and a keynote address by Louisiana Attorney General Jeff Landry.

PANEL 1A. THE FUTURE OF COAL, OIL, AND NATURAL GAS
President Donald Trump has unleashed an Energy Freedom agenda for America with the aim of making the United States the world’s leading energy power. There is a lot of positive news on that front, and these speakers will talk about the bright times ahead for the future of coal, petroleum, and natural gas.

PANEL 1B. CARBON TAXES, CAP & TRADE, AND OTHER BAD IDEAS
Carbon taxes and “cap and trade” schemes, are NOT market-based conservative ideas. They are distortions of the market — a ruse embraced by the environmental left to enact command-and-control policies over our use of energy and the economy as a whole.

PANEL 2A. FUELING FREEDOM AND PROSPERITY
America’s freedom and prosperity is literally fueled by this country’s abundant and affordable fossil fuels — coal, petroleum, and natural gas. We’re finally going after it in ways that will fire the engine of America’s economy and still protect the environment.

PANEL 2B. FIDUCIARY MALPRACTICE: THE ‘SUSTAINABLE’ INVESTMENT MOVEMENT
Environmental activists are gaining voting power to convince corporations and universities to divest from fossil fuel companies “to save the planet.” Not only is that not scientifically necessary, publicly traded companies and organizations that divest do a grave disservice to public pensions, ordinary investors, and the American economy. You want a worthy #resistance? Resist this.

PANEL 3. WHY CO2 EMISSIONS ARE NOT CREATING A CLIMATE CRISIS
Burning fossil fuels lifted humanity out of squalor and created modern society. It also adds carbon dioxide to the atmosphere, which is now more than 400 parts per million. But is human-generated CO2 causing a catastrophic climate crisis requiring wholesale conversion of the world’s energy systems? Short answer: No, as three scientists will explain.

LUNCH KEYNOTE
Two VIPs will give speeches at this lunch.

PANEL 4A. REINING IN THE REGULATORS
The Regulations from the Executive In Need of Scrutiny Act (REINS Act) requires legislative approval of regulations that cost the private sector more than a set amount. A federal version sets the bar at $100 million. This is an essential effort that will finally put unaccountable federal and state regulators back in their place.

4B. CAFE STANDARDS: WHY THEY NEED TO GO
TBA

PANEL 5A. CLIMATE LAWSUITS AGAINST ENERGY COMPANIES AND THE GOVERNMENT
Environmental activists are losing the public debate, so (naturally) they run to the courts to get judges to enact their radical agenda. From the “climate trial” in San Francisco, to the case to preserve the planet on behalf of “the children,” the litigation seem endless. What’s the status of these cases? And will they succeed?

PANEL 5B. REAL COLLUSION: RUSSIA AND THE GREEN MOVEMENT
You want to see real Russian Collusion? Look no further than the nexus between the Russian government and radical environmental activists in the United States, the UK, and Australia. The Russians have funneled millions to groups in the West to oppose energy exploration, especially fracking. This panel will expose this woefully underreported story.

PANEL 6. REFORMING EPA: LOTS OF PROGRESS, MORE TO DO
Three members of President Trump’s Transition Team for the Environmental Protection Agency evaluate the reform victories so far, and look ahead at what else needs to be done to reverse the overreach of the Obama administration. This is a moderated plenary discussion.

DINNER KEYNOTE
Two VIPs will give speeches.

Positive and negative disruptions in the electricity market

* This is my article in BusinessWorld last Monday, May 28, 2018.

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Last week, May 22, a BusinessWorld report said “DoE forecast for peak power demand exceeded on May 17” referring to 10,688 MW peak demand in the Luzon grid on May 17 reported by the National Grid Corp. of the Philippines (NGCP) vs peak demand in 2017 of 10,054 MW.

The increase of 634 MW or 6.3% increase can be considered as positive disruption. Demand for electricity to power various economic activities by households and corporations including those with 24/7 operations remains high and they approximate GDP growth.

Reports of more renewable investments and installations, wind-solar especially, are not “disruptors” because in 2017 or nine years after the enactment of RE law of 2008, solar-wind contribution to total electricity generation in the Philippines constituted only a measly and near-negligible two percent (2%).

Reports also of more battery storage for intermittent wind-solar can neither be considered as a “disruptor” because those batteries do not produce electricity. If it is cloudy or raining then there is no extra solar power to store; if the wind does not blow then there is no extra wind power to store.

During the BusinessWorld Economic Forum 2018 last May 18 at Grand Hyatt BGC, among the speakers were Kristine Romano of McKinsey & Company, and Luis Miguel Aboitiz of Aboitiz Power Corporation. Ms. Romano partly mentioned that innovations in the energy sector is among the big disruptors in the world today. Mr. Aboitiz skirted discussing his sector and mentioned more about the challenges and opportunities of endless innovation and disruption in many sectors.

And we go back to renewables touted as disruptor to “save the planet” (save from what, rains and floods?) and there is one belief or myth that continues to persist — that the cost of wind-solar technology is declining quickly so the cost to generate electricity from them will decline too.

Intermittent or variable renewable energy sources (VREs) are given feed in tariff (FIT) or guaranteed price subsidies for 20 years, among many other perks, by the RE law of 2008 (RA 9513). What happened to this scheme?

First, the FIT rates given to RE developers keep rising yearly, despite the touted decline in the cost of wind-solar, and second, the estimated revenues per kWh is are highest for wind-solar and lowest for run of river (RoR) hydro (see table).

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Bangui Wind 1 and 2, built in 2005 then August 2008 or before the enactment of RE law in 2008, a bit anomalous, were also given special FIT rates: P6.63/kWh in 2015; P7.05 in 2016; P7.26 in 2017; and P7.53 in 2018.

Then also last week, May 21, the ERC has granted the rise in FIT-Allowance (FIT-All) in our monthly electricity bill from 18.30 centavos/kWh to 25.32 centavos /kWh starting June 2018 billing. This is to cover under-recoveries in 2017 alone.

And that explains the negative disruption in the Philippines electricity market. Energy coming from “free” solar and wind and “declining” technology cost actually result in even more expensive electricity.

This higher FIT-All rate includes only under-recoveries until 2017. Under-recoveries this year not included yet, so a higher rate of probably 33 centavos/kWh can be expected in late 2018.

The environmental and RE lobbyists succeeded in making cheaper coal become more expensive via higher coal tax of P50/ton in 2018, P100/ton in 2019, and P150/ton in 2020 under the TRAIN law. Taxes for oil used by power plants also went up as well and expanded VAT application to transmission charges.

Expensive electricity is wrong.

Adding more intermittent, brownout-friendly, and expensive VREs like wind-solar is wrong. Adding battery storage will reduce the intermittency but will definitely raise the cost to consumers further.

Government should take the side of consumers who desire cheaper, stable electricity. Government should stop its double standards in energy taxation, slapping higher excise tax for reliable oil and coal plants but exempting from excise tax the unreliable, unstable, intermittent VREs especially wind-solar.