More growth needs more Megawatts

Reposting an article in Manila Standard last Monday by a friend, Orly Oxales of Stratbase-ADRi.

Orly

More growth needs more megawatts
posted May 22, 2017 at 12:01 am by  Orlando Oxales

For many Filipinos, there is something visceral about electricity. We know that it is not free, that modern life has grown dependent on it, and that any fluctuations related to its price will affect the way we budget our routine household expenses.

This is why news of the Energy Regulatory Commission’s version of “dagdag-bawas” will hit a nerve in every consumer. News of a nearly P7-billion refund of over-recoveries by Meralco was quickly negated by the announcement of a consequent rate hike, thanks to an approved increase in Feed-in-Tariff rates.

Needless to say, the two issues have generated their own share of intrigues and controversies. The refund stems from over-recoveries incurred between 2014 and 2016. Meralco officials explained that “timing issues” gave rise to such over-recoveries, as the rate used to compute for the generation charge in a current billing month is based on the generation cost incurred in the previous one. This thus creates a lag.

Meanwhile, the increase in FIT rates, ostensibly to help boost the renewable energy sector, represents what some say are “very fast adjustments” from 4.06 centavos/kWh in 2015 to 12.40 in 2016 and eventually 26 centavos in mid-2017. Critics of the initiative have hit what they describe as excessive intervention from the government, not only in price control but also in the grid prioritization of otherwise intermittent and unstable energy sources.

For many, what this does, effectively, is sacrifice consumer interest and cheaper and stable electricity for corporate interest and “saving the planet,” via guaranteed pricing, a slew of fiscal incentives, and other privileges. Because of this skewed prioritization, some even describe it as anti-consumer.

There are also reports of so-called “Meralco midnight deals” between the ERC and Meralco-affiliated generation companies that allegedly allowed some 3,551 megawatts of negotiated power supply agreements with periods of 20 years to evade a mandated competitive bidding policy. Some lawmakers have hit the delayed implementation of this rule and hinted at a collusion, something that both parties have vehemently denied.

For its part, the ERC maintained that the extension was not meant to favor any particular utility or generation company. Some industry observers say the move is to “proactively” assure sustainable power supply; distribution utilities and electronic cooperatives from across the country have planned for such by entering into supply contracts with suppliers early on in order to not only  decrease exposure from uncertainties of the wholesale electricity spot market but, more importantly, to guarantee the supply requirements of their customers.

After all, some say, an initiative that aims to replace bilateral agreements with competitive bidding will not succeed due to a serious lack of power producers that can adequately supply the country’s growing demand for power. In short, the initiative doesn’t address the problem of supply, which the Duterte administration’s build-build- build mantra will also need to confront. That necessary surge will only be possible in a healthy market environment with enough energy players.

According to some forecasts, the Philippine economy has the capacity for robust long-term economic growth of about 4.5 to 5 percent per year over the 2016 to 2030 time horizon. But this level, pace, and consistency of growth will require an additional 7,000 megawatts of power generation capacity built over the next five years.

For this to materialize, there needs to be a concrete plan to improve from mere sufficiency to a surplus of energy supply. The Department of Energy’s power development plan aims to make this a reality. Aside from the invitation of foreign investors, local players are also bullishly gearing up for this scenario. This should appease industry, at least for now.

For consumers, the DOE Task Force to Lower the Cost of Electricity in its final report has already identified the main elements contributing to the cost of power along the chain, from generation, transmission, to distribution. Their recommendations include the rationalization of taxes and the removal of bureaucratic barriers to encourage more investments in power plants.

Thus, for both industry and consumers, the issue of supply seems to be the epicenter of our persistent power woes and should guide the rethinking of our energy policies.

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Christmas lights, energy mix and electricity production in Asia

* This is my article in BusinessWorld last December 21, 2016.

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The holiday season, among others, is marked by the presence of so many lighted streets, buildings, malls, and houses. These sparkling and glittering Christmas lights and decors — besides adding smiles and happiness — also indicate continuing and rising material prosperity of the Philippines and its cities.

The change in the energy mix policy by the Department of Energy (DoE) is better appreciated in this context. Not only do people want cheaper electricity, they also want 24/7 energy with no brownout even for one minute.

Below is a summary of the policies under resigned Secretary Carlos Jericho Petilla (November 2012-June 2015) then Acting Secretary Zenaida Monsada (July 2015-June 2016), and present Secretary Alfonso Cusi (see Table 1).

There are three important reasons why the Cusi formula of energy mix via system capacity makes more sense.

First and foremost is the price impact to electricity consumers. Forcing and mandating more natural gas, more solar-wind into the grid and the distribution utilities will mean even more expensive electricity and more unstable energy supply because of the intermittency, on-off nature of wind-solar.

Consider the feed in tariff allowance (FiT-All) for the variable REs: four centavos/kWh in 2015, 12.40 centavos/kWh in 2016, and 23 centavos/kWh in 2017 based on Transco petition for FiT-All hike at the Energy Regulatory Commission. The bulk of this rising FiT cost to consumers will go to wind and solar plants because they have the higher rates and higher installed capacity. The 23 centavos is on the assumption that it will be granted by the ERC by January 2017. Further delays for few months will mean more under-recoveries and hence, higher rate of 25 centavos-28 centavos by 2017.

Second, our current power capacity and actual electricity production remains small compared to our more economically significant neighbors in the region, and our coal consumption is also way small compared to their coal use. It is not wise to further restrict our baseload power capacity if we aim to sustain fast economic growth into the next decades to come.

Brunei, Myanmar, and Cambodia are excluded from this list because of their small electricity production (see Table 2).

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Third, the “more renewables to save the planet” argument does not hold water until now. Proof? Whenever I am engaged in a climate and energy debate with various groups and individuals who insist on the anthropogenic or “man-made” global warming/climate change (CC) hypothesis, I ask these two questions:

  1. Of planet Earth’s 4.6 billion years age, when was the time, what period, that there was NO climate change?
  1. What was it like before this “man-made” warming — less rain, no rain, more rains? Less flood, no flood, more floods? Less snow, no snow, more snow? Please cite scientific sources for your two answers above.

One hundred percent of the time, their answer is the sound of silence. Or they will put various links, various reasons, and alibis but none of which answer directly any of the two questions. Which shows that the anthropogenic climate change argument remains shaky and questionable. Even the UN IPCC literatures do not discuss paleo-climate data dating back to millions of years ago. This is because planet Earth’s climate history is characterized by natural climate cycle of warming-cooling, with or without humans and their malls, cars, airplanes and coal power plants.

Mandating “more renewables to save the planet” will only succeed in making the country less developed, since electricity will become costly and supply unstable. Big energy-intensive manufacturing plants and foreign investments would rather locate in Vietnam, Thailand, Malaysia and Indonesia, countries with cheaper electricity and more stable, brownouts-proof energy supply, then export huge volume to the Philippines at zero tariff under the ASEAN Economic Community (AEC).

Of the many Cabinet Secretaries of the Duterte administration, DoE Secretary Cusi is among those standing tall. His energy realism (not alarmism) policies of “appropriate energy mix should be decided by the consumers, not by government” is a market- and growth-friendly philosophy.

Trump transition team questions for US DOE

This is not directly related to energy issues in Asia but US climate and energy policies can reverberate strongly in Asia and other continents/countries. Hence, I am reposting this article by Willis Eschenbach, The DOE vs. Ugly Reality last December 10, 2016, about the 74 questions sent by Mr. Trump’s transition team to the current DOE leadership.

I think those question are frank and highly sensible. But there are many news reports attacking the letter and questions, saying they infringe on DOE scientists’ independence, etc., and they cite only a few of those 74 questions. Good work there, Willis, thank you
————–

usdoe1Questions for DOE

This memo, as you might expect, is replete with acronyms. “DOE” is the Department of Energy. Here are the memo questions and my comments.

  1. Can you provide a list of all boards, councils, commissions, working groups, and FACAs [Federal Advisory Committees] currently active at the Department? For each, can you please provide members, meeting schedules, and authority (statutory or otherwise) under which they were created?

If I were at DOE, this first question would indeed set MY hair on fire. The easiest way to get rid of something is to show that it was not properly established … boom, it’s gone. As a businessman myself, this question shows me that the incoming people know their business, and that the first order of business is to jettison the useless lumber.

  1. Can you provide a complete list of ARPA-E’s projects?

Critical information for an incoming team.

3 Can you provide a list of the Loan Program Office’s outstanding loans, including the parties responsible for paying the loan back, term of the loan, and objective of the loan?

4 Can you provide a list of applications for loans the LPO has received and the status of those applications?

5 Can you provide a full accounting of DOE liabilities associated with any loan or loan guarantee programs?

6 The Department recently announced the issuance of $4.5 billion in loan guarantees for electric vehicles (and perhaps associated infrastructure). Can you provide a status on this effort?

Oh, man, they are going for the jugular. Loan Program Office? If there is any place that the flies would gather, it’s around the honey … it’s good to see that they are looking at loan guarantees for electric vehicles, a $4.5 billion dollar boondoggle that the government should NOT be in. I call that program the “Elon Musk Retirement Fund”.

Folks, for $4.5 billion dollars, we could provide clean water to almost half a million villages around the world … or we could put it into Elon Musk’s bank account or the account of some other electric vehicle manufacturer. I know which one I’d vote for … and I am equally sure which one the poor of the world would prefer.

7 What is the goal of the grid modernization effort? Is there some terminal point to this effort? Is its genesis statutory or something else?

Asking the right questions about vague programs …

8 Who “owns” the Mission Innovation and Clean Energy Ministerial efforts within the Department?
Continue reading

EPDP lecture on energy planning

power3Last Thursday, I went to UPSE to attend this lecture. Great one, as usual. Dir. Irma Exconde is a friend, a fellow UPSE-PDE alumni, her batch in 2002 was 4 years younger than mine.

Dir. Tamang discussed the process in crafting the PH energy plan (PEP) and the Power development plan (PDP). I told Dir. Irma that with the long process of consultations and meetings to produce a national plan, I really would have no patience working in government.

Then Irma discussed the important aspects of the PEP and PDP, 2015-2030. Among the slides she presented, below. In Luzon grid last year 2015, rated or installed capacity by coal was only 35% of total but actual electricity contribution was 49% of total.

power 2015

In contrast, oil/diesel power plants, installed cap was 16% but actual contribution was only 1%. Why, because they are used only as peaking or peak load plants, they run only for few hours a day on weekdays, on high demand hours and are not used during off-peak hours, or weekends and holidays.

For the new renewables, wind + biomass + solar is 3% of installed cap but actual electricity output only 1% of total.

I mentioned during the open forum that the DOE is subjected to environmental terrorism. If they approve more coal power plants, the DENR and CCC will go to media or in Congress to shift the blame to DOE. Known climate junketers and climate negotiators (Tony la Vina, Yeb Sano, etc.) lambast the DOE and the President why they are commissioning more coal power plants.
I also mentioned the need for more dams and hydro power because we are entering a new era of global cooling (warming-cooling cycle, endless climate cycle), meaning more heavy rains, flooding, etc. for many years and decades to come.

Notice that in this slide, renewables like solar and wind, electricity consumers’ demand, transmission, etc. have their respective plans, but no mention of coal development plan. To mention coal in public discussions seems to be “politically incorrect”…

power4
In the “minor” conflict between DENR+CCC+ environmental militants vs. DOE on the latter’s granting of permits for more coal plants. I am on the side of the DOE. In 2015, 49% of total electricity generation in the Luzon grid came from coal power plants. Without those coal plants, or even slashing half of them, will result in massive, large-scale, daily and nightly blackouts in M.Manila and the rest of Luzon.

The anti-coal planet saviors will hate this scenario of course. They want their 24/7 electricity, they hate even a 1 minute brown out and power interruption so that they can do fb and tweet how ugly coal power is. Double talk and hypocrisy is their regular characteristic. The DOE, by allowing more coal plants, is protecting the public by securing more power supply, to be away as much as possible even from 1-minute brown outs.

As mentioned above, the actual contribution to electricity generation by solar+wind + biomass in the Luzon grid is only 1%. In case of massive, large-scale brown outs because of the anti-coal drama of DENR, CCC, climate militants, those big firms, hotels, manufacturing plants, hospitals, condos, etc. will keep their electricity. How? Lots and lots of gensets, noisy gensets that run on diesel, more dirty than coal power plants.

And the poor or lower middle class who get disconnected by Meralco or other distribution utilities (DUs) or electric cooperatives (ECs), for a few days or weeks they have no electricity, what do they use? Candles. More candles mean more fires, more destruction to private property, more injuries, more deaths.

Expensive, unstable electricity supply means more LGUs and villages have little street lights. Dark streets mean more road accidents, more crimes, more rapes and robbery. The anti-coal campaigners don’t want to recognize this social problem.

Cocktails after the lecture. From left: Rodel Meris, Dir. Tamang, Prof. Ruping Alonzo (UPSE faculty and EPDP Fellow), me, Lawrence Fernandez of Meralco, and Irma.

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Room was full. The 1-hour lecture became 2+ hours including Q&A.
Thanks again EPDP, for that fruitful public forum.

WESM as market-oriented, PEMC as bureaucracy-oriented

* This is my article in BusinessWorld last March 23, 2016.

01

Power generation in the Philippines generally kept up with its ASEAN neighbors in the 1980s up to the early 1990s. By 2000, power capacity in many of our neighbors have doubled or tripled while the Philippines’ has less than doubled. By 2010, Indonesia, Thailand, Malaysia, and Vietnam have kept doubling or tripling their power generation levels in just one decade while the Philippines’ has expanded by only 50%.

The figures for China and South Korea are similar, doubling or tripling power capacity every decade. It is not possible to sustain high economic growth without high and stable electricity supply for households and companies.

2

High power production means high or fast growth in power consumption per capita. Or the reverse, slow power capacity expansion means low consumption per capita, and this is what happened in the Philippines. Until 2000, our per capita consumption was higher than Indonesia and Vietnam, and only one-third that of Thailand. By 2010, things turned around: ours were lower than those in Indonesia and Vietnam and only one-fourth of Thailand. Cambodia is catching up with four times expansion of power capacity in just one decade from 2000 to 2010.

3
Note that the Electric Power Industry Reform Act (EPIRA) was enacted in 2001. The law has deregulated and demonopolized power generation where before, Napocor was the single power producer and owner of power transmission nationwide.

So has EPIRA restricted power generation or has the law saved the industry from atrophy? Based on previous columns on the energy sector, various government bureaucracies, local and national, are major contributors to a soured business climate in power generation. Securing nearly 200 different permits and signatures from different agencies over a period of 2-5 years before one can start real power plant construction is no joke.

Power generation companies (gencos) secure bilateral supply contracts with different distribution utilities (DUs) and electric cooperatives (ECs). DUs and ECs are considered as “utilities” and hence, are described as natural monopolies. Zero competition allowed, they just need to secure a Congressional franchise for 25 years, an arrangement that can be renewed.

Outside the contracted power, gencos have extra capacity to produce and sell. DUs too need extra capacity during peak hours on weekdays, or during the hot months of March to May, during fiesta season in many cities and municipalities, and so on.

For such uncontracted power, both gencos and DUs go to the Wholesale Electricity Spot Market (WESM) to buy and sell electricity. The lead time for spot pricing is not one week or one day but only few hours before electricity supply need to be expanded or curtailed.

WESM is governed and administered by the Philippine Electricity Market Corporation (PEMC). It is a weird body because EPIRA of 2001 says there should be an Independent Market Operator (IMO) that should administer WESM, but PEMC has become a bloated government bureaucracy pretending to be a private bureaucracy.

PEMC Board is a 16-man body chaired by the Department of energy (DoE) Secretary plus 15 Directors: 4 from gencos (2 from government, PSALM and NPC, and 2 private), 4 from DUs (2 from ECs and 2 non-ECs), 4 independent of the power industry, 1 from WESM customers including suppliers, 1 from the National Grid Corporation of the Philippines (NGCP) representing the system operator and Transco, and 1 from market operator represented by PEMC itself.

I was able to secure the transcript of three Committee hearings of the Senate Committee on Energy (October and December 2015, and January 2016) headed by Sen. Serge Osmeña, thanks to his staff Vina.

From those transcripts and related readings, I gather these eight questionable or weird things in the PEMC Board and WESM.

First, PEMC is supposed to be an IMO yet there are several government officials sitting on its Board, including the DoE Secretary and representatives from the Power Sector Assets and Liabilities Management Corporation (PSALM) and the National Power Corporation (NPC). The NGCP is a private corporation but it is representing a government corporation, Transco. Then there are advisers to the Board, two of whom are from government, a DoE Undersecretary and the National Electrification Administration (NEA).

Second, the actual power production of PSALM and NPC are small, almost negligible from the genco mix of Meralco for instance, yet they are almost permanent members of the Board.

Third, those 4 independent directors and the consumer representative (5 total) are all appointed by the DoE Secretary and hence, should be friendly to the government.

Fourth, PEMC is regulated by the Energy Regulatory Commission (ERC) which is under the administrative control of the DoE Secretary. So the Secretary heads an agency that is regulated by a government body that is under the Office of the Secretary.

Fifth, all the income of PEMC and WESM is collected from the gencos, especially private gencos, and the private gencos have only two seats. No collection from DUs, from independent Directors, from consumers, from system operator and market operator. The ERC and DoE get a certain percentage from the total WESM revenues.

Sixth, PEMC is pretending to be a private corporation when in reality it is a government-owned and controlled corporation (GOCC). By virtue of its being DoE Secretary-controlled, the presence of several government corporations and agencies in the Board, it is a government-owned bureaucracy pretending to be a private bureaucracy.

Seventh, being a GOCC pretending to be a private corporation, part of its collections or revenues are being used by the DoE and ERC for their respective regulatory and policy formulation functions. PEMC budget is also approved by the ERC, then PEMC should be audited by the Commission on Audit but currently, private auditing firms do the job.

And eighth, gencos pay for all the market fees at WESM and they are subject to price control via primary and secondary price caps. Their peaking plants need to charge higher on those few hours they run to compensate for many hours a day that they are not running and still make a profit, and pay more market fees yet they are restricted from doing this via price control.

So if you are a genco and you are subject to these kinds of policy distortions and bureaucratic interventions at WESM — and paying for all of it — that creates another layer of disincentive to do business.

And that will further put some brakes on an otherwise huge demand for fast and high generation capacity so we can catch up with our neighbors like Vietnam and Indonesia. In this age of ASEAN economic integration, energy-intensive sectors can put up their manufacturing companies in cheaper-energy countries like Indonesia, Vietnam, Cambodia, and Thailand, then export to the Philippines at zero tariff. Also, energy-intensive services like hotels (lights, aircon and elevators running 24/7) and tourism can expand faster in cheaper-energy countries than in expensive-energy countries like the Philippines.

We need less government interventions and distortions in the energy sector. It is among the important prerequisites for the Philippines to grow faster and create more jobs and businesses to the people.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers, a Fellow of the South East Asia Network for Development (SEANET), and a member of the Economic Freedom Network (EFN) Asia. All three entities support the philosophy of classical liberalism in politics and economics.
minimalgovernment@gmail.com

Renewables and the illusion of merit order effect

* This is my article in BusinessWorld last March 03, 2016.

re1
When government intervenes in the pricing of a particular product or service supposedly to protect the consumers from “unwarranted” price hikes, or to pursue some social or environmental goals, the action tends to create more problems than what it intends to solve.

Take the case of government price control of electricity via (a) fixed and guaranteed pricing through feed in tariff (FIT) for solar, wind, biomass, and run of river (ROR) hydro for 20 years, (b) priority or mandatory dispatch of renewables even if cheaper energy is available, and (c) price caps at the Wholesale Electricity Spot Market (WESM).

Items (a) and (b) are in the Renewable Energy (RE) Act of 2008 or RA 9513 while (c) is a recent policy by the Energy Regulatory Commission (ERC).

These three forms of price control are wrong on the following grounds.

  1. Technologies on anything keep evolving and changing for the better, and prices of each product model go down through time. So why guarantee and fix the price of solar, wind, biomass, ROR hydro for the next 20 years? Their respective technologies should be capable of bringing down the cost and attain “grid parity” with the conventional sources, as the proponents and developers of new renewables often argue.

    re2

  1. People want cheap electricity, so when cheap and stable energy sources are available from conventional sources, they should be allowed to come in. But under the “priority dispatch” and “must dispatch” policy under the RE law, the national grid, the distribution utilities, and the electricity consumers are forced to buy the more expensive renewables whenever these are available. In this case, the consumers’ chance to have cheaper electricity is beaten by the political need to subsidize the renewables, for 20 years.
  1. People want stable electricity, one that runs 24/7 and not fluctuating per hour or per minute. To make this happen, there should be 100% redundancy in the grid. Suppose that there is a province with daily need of 150 MW on average. RE developers come in and put up a 250 to 300 MW combined power from solar and wind. There should be at least 200 MW of coal or natural gas or big hydro or geothermal power plant nearby, to provide electricity at night and the wind does not blow because the 250-300 MW from solar-wind can become zero, nada.

Power redundancy means expensive electricity — such as those generated by wind and solar — are forcibly fed into the grid when they are available. Otherwise, the conventionals come in but they must price their output higher to compensate for hours that they were not running. The higher price on those hours that they run will allow them to stay in business. If not, they will go out of business and close shop, and the people will suffer massive brownouts for many hours, daily.

Here is the average capacity factor or the percentage actually running and producing electricity of wind, solar and biomass, six months of 2015.

In May and June, very low output of only 1% was reported for biomass and 6.5% for wind. Biomass peaks in August and September while wind is inconsistent in monthly output, giving 20% when the wind blows strong. Solar has an average capacity factor of 19%. Zero output for 11-12 hours at night, then average of 40% at day time.

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  1. The “merit order effect” (MEO) of renewables at WESM is a bloated interpretation of its supposed downward effect on spot electricity pricing. Merit order is the ordering of power sources into the grid from lowest to highest offer price at WESM. Thus, the cheaper base load plants with extra power will come in first (big hydro, geothermal, coal, natural gas) then the peaking plants that run on diesel. Peaking plants are meant to run on peak hours of electricity demand only, say 2-4 hours a day.

The supposed MEO is the result when must-dispatch renewables are inserted into the merit order, then they marginalize and displace the more expensive diesel plants priced at P8/kWh or more. This changes the market clearing price (MCP) from P8/kWh or more to the spot price of baseload plants like natural gas, say at P4-P5/kWh. As a result, customers enjoy savings as reflected in the lower WESM price in their monthly bills.

Based on computations and estimates of the Philippine Electricity Market Corporation (PEMC), while the FIT incurs an additional cost of P4.2B to customers, the MEO results in savings of P8.3 billion. The net effect is P4.1B savings to customers, that translates into P0.0567 (or 5.67 centavos) per kWh per customer.

However, there are oversights in the computation’s assumptions. Consider the following:

  1. MEO or drop in spot prices will apply only if the customer has spot exposure and not fully contracted via bilateral contracts. If the customer is fully contracted, then it will still pay the FIT and make zero MEO savings.
  1. MEO can also be realized via more and cheaper conventional plants rather than expensive renewables. With conventional plants, there is no need for additional ancillary costs.
  1. There will NOT be an MEO if there is sufficient supply of power from cheaper energy sources, both in long-term bilateral and short-term spot price contracts.

FIT is collected nationwide including customers in Mindanao that are not even connected to the Visayas and Luzon grid. The purported savings from MEO are supposed to benefit Meralco customers but people in Mindanao, tens of millions of them, are not Meralco customers and yet they contribute to paying expensive electricity via FIT payment.

The PEMC, which operates WESM, made the study that justifies the role of renewables, which, in turn, is the priority of the DoE, the agency that heads and controls PEMC. And that makes the PEMC study self-serving.

The National Renewable Energy Board (NREB), the multi-stakeholder advisory body seems to be playing along with PEMC in justifying expensive electricity from mandatory renewables.

Now here come the big questions that I myself do not know the exact answers.

  1. If Mindanao customers were spared of paying FIT as they are not connected to the Visayas and Luzon grids yet, what could have been the FIT rate since 2015? Definitely higher than the P0.0406/kWh collected.
  1. With more FIT-eligible renewables fed into the grid since last year, the cost of FIT allowance will rise this year, by how much? I heard low estimates of P0.10/kWh to medium figures of P0.17, up to P0.25/kWh.

Since there will be a elections this coming May, then there will be no FIT hike, DoE will control it. And the next administration will also postpone the FIT hike as it does not want to be known as having imposed an instant and immediate electricity price hike upon its assumption in power. Postponement of FIT collection to a later date means the FIT rates will have to be higher than if it was collected last January or February 2016. Woe unto the developers of FIT-dependent renewables. The delayed payment they experienced in 2015 will worsen this year.

  1. With prolonged postponement of FIT hike implementation, say by August or September 2016, what would be that FIT rate then?

Expensive electricity is wrong. Electricity is the main reason why we enjoy more modern, more convenient life than before. Government policy to impose and justify expensive electricity via FIT guaranteed pricing for 20 years is wrong. The RE law should in fact be amended and FIT and other subsidies should be abolished.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of the Stratbase-Albert del Rosario Institute (ADRi), and the South East Asia Network for Development (SEANET).minimalgovernment@gmail.com

More on WESM, PEMC and DOE

* This is my article in BusinessWorld last February 11, 2016.

03b

When the Electric Power Industry Reform Act of 2001 (EPIRA, RA 9136) was enacted, among the provisions is the creation of an independent market operator (IMO) to manage the Wholesale Electricity Spot Market (WESM).

EPIRA Section 30 says that “…Not later than one (1) year after the implementation of the wholesale electricity spot market, an independent entity shall be formed and the functions, assets and liabilities of the market operator shall be transferred to such entity with the joint endorsement of the Department of Energy (DoE) and the electric power industry participants.”

WESM was created in June 2006. This means that an IMO should have been in place by June 2007 or nearly nine years ago, but this did not happen. What happened instead was a temporary entity, the Philippine Electricity Market Corporation (PEMC), has become sort of a permanent entity with lots of implicit unwillingness to relinquish its position and privileges. And the DoE Secretary still holds the chairmanship and makes the final decision on many aspects of the body, including who should sit in the board and who cannot.

This insistence by the DoE for this continued non-independent set up in managing WESM has several complications.

One, DoE is overstretching its power to continue chairing an entity that is expressly and explicitly stated by the law to be “independent.”

Aside from DoE as overall regulator in the energy sector, there are other regulators and permits-seeking agencies: (a) Energy Regulatory Commission (ERC) for tariff rates, (b) SEC for corporate matters, (c) DENR for environmental permits, (d) BIR for national taxes and royalties, (e) LGUs for local taxes and permits, and so on.

Two, the ERC has the final say whether generator companies’ long-term pricing via bilateral contracts or spot-pricing via WESM, is “foul” or not. There is no or little need for the DoE to oversee the management of spot pricing.

Three, PEMC does not consider itself a government-owned and controlled corporation (GOCC), but the Governance Commission for GOCCs has identified PEMC as a GOCC. This quickly dispels the notion that PEMC is an independent entity, but rather a state-dependent entity mainly because it is headed by the DoE. Plus two other GOCCs are in the board, the Power Sector Assets and Liabilities Management and the National Power Corp.

Four, the Commission on Audit should now be the main auditor of PEMC, not private auditors like SGV.

The DoE and PEMC should take lessons from other Asia-Pacific countries which have their own electricity exchange markets and their governance structure. These are similar to their respective stock markets and all are independent of government. (See Table 1)

05
A good example of (a) independent of government and (b) independent of stakeholders and players is the EMC of Singapore. The Board is composed of seven prominent individuals, none of whom are from government nor it seems from any energy players (generation, transmission, distribution).

The main advantage here is that the Board can judge independently but the disadvantage is that they may need a long or steep learning curve and their judgment may be affected by such lack of experience.

During the Philippine Electricity Summit (PES) last Dec. 11, 2015 held at Crowne Plaza in Ortigas, one of the presenters was Mr. Alasdair John Macdonald who spoke on “Market Development: Towards an Independent Philippine Electricity Market Operations.”

He showed one table comparing eight different operators, four independent system operators (ISO) and four independent market operators (IMO), and see (a) if they are independent of stakeholders, (b) if for profit, (c) rule change process, and (d) fees collection. Two things are questionable here.

One, when we talk of “independent” entity, the first thing that comes to mind is that the agency is functioning independent of the government, not of stakeholders.

For instance, the Philippine Stock Exchange is independent of government and the Board is composed of major players and stakeholders. But Mr. MacDonald and team defined it the other way, “independent” of stakeholders even if the government rules it. I raised this during the open forum.

Two, it may not help to mix up the ISO with IMO in making this kind of analysis.

In the Philippines, the ISO is the National Grid Corporation of the Philippines, it operates the transmission lines and assets owned by the government-owned National Transmission Corporation. The supposedly IMO is currently an Autonomous Group Market Operator represented by PEMC. The above table is composed of IMOs only, no ISOs.

The DoE has uploaded online last Jan. 29, 2016, an ADB-funded research entitled Subproject: Support for the Establishment of An Independent Market Operator, PHI, published in January 2012.

It was prepared by Alastair Macdonald, et al. I just realized that what he presented in December 2015 was almost exactly what they prepared for the ADB paper in January 2012.

While the DoE may be genuinely concerned in protecting the public from high electricity prices via spot pricing, they should also recognize that there are other factors that are bigger contributors to the unhealthy label of the Philippines as having the “second most expensive electricity in Asia next to Japan.”

And this is where the DoE should train its hands on: multiple taxes, fees, and royalties on energy products; and multiple bureaucracies and permits required from companies that want to put up more power plants and hence, expand the degree of competition among more power plants and power companies.

The Philippines continues to experience “energy poverty” compared to many of its neighbors in the region.

Our per capita electricity consumption in 2013 for instance was larger only than in Cambodia and Myanmar. Total primary energy supply (TPES) is expressed in tons of oil equivalent (toe) per capita. High TPES means higher energy input for agriculture, industry, and services sectors of the economy. (See Table 2)

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Continued dilly-dallying in implementing a real IMO in the Philippines should be among the contributors why there is low power capacity compared to many of our neighbors in the region. Moreover, it is additional proof that there is too much intervention by different government agencies in the energy sector; interventions that can discourage the entry of more players, or cut the output of current players because of uncertainties in several aspects of the electricity market.

Bienvenido S. Oplas, Jr. is the President of Minimal Government Thinkers (MGT), a Fellow of South East Asia Network for Development (SEANET), and Stratbase-Albert del Rosario Institute (ADRi). minimalgovernment@gmail.com.