Friday, January 17, 2014

Energy Econ 11: On the Power Rate Hike

Below are my comments in one thread in Government andTaxes, Liberty and Responsibility facebook group, about the ongoing  debate on electricity  rate hike.

January 12-16, 2014

(1)  Bobi Tiglao (he is in this list) has implied that there should be more government intervention in the power sector, like adopting the Singapore model of vesting contracts.

About the proposal by Cong. Evardone to give the President "emergency powers", Speaker Belmonte has an answer to it: The President is not even asking for it. It's a non-issue, but some legislators, some media can sensationalize it to a big issue.

Take note guys, there WILL be rotating brownouts this coming summer 2014 in Luzon including M.Manila, then another set of brown outs in summer 2015, most likely until summer 2016. The big power plants will come online by 2017 and 2018.

The main problem is in the power generation sector, not in transmission (via NGCP) or in distribution (via Meralco, other electric coops). Some days in 1st week of December 2013, last month, up to 3,800 MW of power was offline due to scheduled + unscheduled shutdowns. Forced shutdowns occur mostly in power plants that are more than 20 years old.

(2) I do not think that the left, the socialists and the pro-nationalization are winning the public debate to re-nationalize power generation and distribution. Government is the most un-trustworthy institution in the country, or even in almost all countries. People are complaining of corruption left and right, from Executive to Legislative to Judiciary, from local to national governments, from armed to non-armed units, and you give heavy political power and control of the important electricity system to the government?

The worst thing that can happen is frequent brown outs. Like what they have in Nepal, N. Korea, and to a certain extent, in Mindanao. People are willing to pay a high price just to have electricity, that's why they buy more expensive gen sets running on expensive diesel. Or the cost of frequent fires because of too many candles is something that the public will hate. A rise of P4/kWh for one month, and perhaps another rise the next month, then back to old rates the next month, is not enough justification for the public to be hoodwinked to the propaganda of the left and socialists.

(3) The typical "nationalize, socialize" argument from the Freedom from Debt Coalition (FDC), no new argument, no studies presented, just press conference.

From, January 13, 2014,

This group btway cannot advocate freedom from borrowings policy. Only spend-tax-borrow, then demand freedom from debt later.

(4)  "Let foreign power companies compete with our own power producers and distributor. For the leftists and protectionist Centrists, a free power sector is a radical solution. I agree, freeing not only the power industry but the whole protected economy is a radical solution, but this is exactly what we need if we are to survive, both politically and economically."
-- VincentonPost,  January 14, 2014

(5) Politicians and legislators tend to have very parochial minds. For any problem, to them the solution is more politics, more government. Can any politician put up a power plant in one month or one year? The main problem here is not enough new power plants. Many are old, bought from NPC, 20 yrs old, 30, 40 yrs old. Some would break down from time to time. 

Instead of asking what government should do, they should ask what government should NOT do, like not imposing too many taxes, fees, royalties, permits, other regulations and restrictions to new power plant projects.

(6) About the projected profits of Meralco, I dont know and I dont care how much they make as profit, but the following are the charges, as of Dec. 2013 billing, in P/kwh:

a. generation charge 7.67
b. distribution charge (meralco) 1.22
c. transmission charge 0.97
d. system loss charge 0.80
e. supply charge 0.60
f. metering charge 0.41
taxes not included yet.

(7) WESM is Wholesale (not retail) Electricity Spot (next hour, not next week or next month) Market contracts. To simplify, I am Batangas or Pampanga Electric Cooperative monopoly (all electric coops and distribution utilities, DUs, incl Meralco in the country are monopolies, no exception). My usual electricity demand in my franchise area is 30 MW hour. I have a bilateral contract with say, 5 different power plants: 10 MW from coal companies A and B, 15 MW from natural gas companies C and D, , 3 MW from hydro company E, 2 MW from geothermal company F, total 30 MW, well and good.

On certain hours of the day, my demand is 33 or 35 MW, the 3 or 5 MW extra is not covered by my bilateral contracts, I have to buy it from... the spot market, WESM.

Here comes coal or diesel power company X with rated capacity of 300 MW but existing bilateral contracts with various DUs including Meralco is only 250 MW, and has extra 50 MW max as spare power supply at anytime, assuming that there is zero mechanical or technical trouble in their plants. Supply meets demand at particular hours (say 11-12noon, then 1-3pm) where extra electricity is needed/demanded and such extra power is supplied. At prices that are contracted 1 or 2 hours ahead of time, not 1 or 2 weeks in advance. The beauty of WESM.

(8) Now one of Batangas or Pampanga Electric Coops' contracted power plant conks out, an old bearing just got broken and damaged other parts of the turbine. The promised 30 MW suddenly becomes 23 MW only, the deficit of 7MW plus peak demand extra of 3-5 MW, the electric coop must buy somewhere else... where else, but from the spot market, WESM. Its beautiful.

Or I am geothermal power company Y, with existing bilateral contracts of 180 MW out of my 200 rated capacity. Suddenly one of my DUs where I deliver electricity, it buys 25 MW of my hourly and daily output, suddenly has zero demand, nada (a heavy typhoon knocked down the electrical posts in that province, other reasons). Where do I sell the extra 25 MW as turning off my turbines would mean foregone revenues? You guess it, at the spot market. If my existing contract says I sell at P4/kwh, I can sell for only P3/kwh for that extra 25 MW, better than zero. The beauty of spot market.

(9) Bobi is wrong in his interpretation of the spot market. If I am Pangasinan Electric Coop and one of my big electricity suppliers will have scheduled/regular maintenance shutdown for 2-3 weeks next month, I can go to other suppliers to give me their extra electricity within those 2-3 weeks. Those suppliers are selling at P4-5/kwh to their long term DU contracts but are selling at P10, 20, 40 at the spot market, especially if its the more expensive diesel power plants, the peaking plants, that do the market clearing. In a situation of tight or thin power reserves, it's generally a suppliers' market. DUs like the various monopoly electric coops have two options: buy the more expensive power at high marginal prices, or get out temporarily and have brown outs to force the reduction in power demand.

(10) From DOE Sec. Petilla's presentation last year. He is saying that if the projected power demand becomes true, or even becomes larger, brown outs are 100% going to happen in Luzon by April-May 2015. His chart says that for this coming Apr-May 2014, reserves will be very thin but sufficient to provide power, assuming not one, not one, of those big power plants will suffer unscheduled shutdown. For power plants that are 20 yrs or older, this assumption is not likely to happen. That is why for some power analysts, they say that this Apr-May 2014, limited brown outs in Luzon incl M.Manila are going to happen.

And many people will complain again. Complain when electricity rates go up, complain when those higher electricity is not provided in exchange for brown outs.

See also:

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