BWorld 210, Electricity competition, EPIRA, and WESM

* This is my article in BusinessWorld last week, May 09, 2018.

Last Monday, I discussed business competition in general and the role of the Philippine Competition Commission (PCC).

The theme will be continued in this piece and it will discuss electricity competition in particular, especially after I was able to interview PCC Chairman Arsenio Balisacan, the CEO of the Philippine Electricity Market Corp. (PEMC) and Chairman of Transition Committee Oscar Ala and PEMC Spokesperson Atty. Nino Juan.

The Electric Power Industry Reform Act (EPIRA) of 2001 or RA 9136 has drastically liberalized the Philippines electricity sector with at least three important provisions: (1) deregulation and demonopolization of the power generation sector, (2) creation of the Wholesale Electricity Spot Market (WESM), and (3) liberalization and demonopolization of electricity distribution via Retail Competition and Open Access (RCOA).

With these and other provisions of EPIRA, the questions to ask, among others would be:

(1) Were there many private generation companies (gencos) that entered the market competing with each other?

(2) Were there many retail electricity suppliers (RES) that entered the market competing with each other?

(3) Were there many players, gencos and distributors, that use the WESM spot market competition? And more importantly, (4) Have electricity prices for consumers gone down?

The short answer is YES to all four questions.

For gencos for instance, before EPIRA, the National Power Corp. (Napocor) was the state-owned power generation monopoly, which also incurred huge losses and public debts for many years.

As of April 2018, there were 113 gencos in the Luzon-Visayas grid alone and all of them are WESM participants. Excluded are gencos in the Mindanao grid which is not part of WESM yet. Of these 113 gencos, five players have become more efficient and more moneyed than others, except perhaps the government-owned Power Sector Assets and Liabilities Management Corporation (PSALM), which still owns previous Napocor-owned power plants, mostly hydro facilities in Mindanao and the Malaya plant in Rizal.

For retail competition, the number of contestable customers (CCs) or those with monthly peak demand of 750 KW or higher and have the freedom to pick their own service providers — such as electric cooperatives (ECs) and private distribution utilities (DUs) — have increased. RCOA implementation however, has been issued an indefinite TRO by the Supreme Court in February 2017 and this resulted in a decline in number of CCs.

Here are the numbers for comparative electricity prices that include two types of customers, the captive market (small consumers who must stay with their DUs or ECs) and contestable market (they can leave their DUs or ECs and choose their own RES).

Contestable customers are able to enjoy lower average prices, P6.91/kWh, than captive customers that pay an average price of P7.78/kWh.

So there you see it.

Despite the noise created by certain sectors that EPIRA and WESM are not working, which leads them to call for a return to the old scheme of nationalization, these data show that indeed electricity competition is working.

It is true that Philippine electricity prices in general remain higher than most of our neighbors in the region but that is because of other factors like (a) many taxes especially the high VAT of 12% applied in all parts of the electricity supply chain, from generation to transmission, distribution and supply, even the system loss; (b) many charges in our monthly electricity bill including universal charge, system loss charge, feed-in-tariff (FiT) for favored renewables.

The transition of PEMC, the market operator of WESM, into a real Independent Market Operator (IMO) as explicitly specified in EPIRA may soon become a reality.

As a result, there will be no more government energy agencies and bureaucracies at the PEMC Board. Good work, PEMC Transition Team.

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See also:

BWorld 205, Energy mix and wishful thinking, April 30, 2018

BWorld 207, Fare control and surge cap are wrong, May 10, 2018 

BWorld 208, Consumer choice in electricity supply and prices, May 11, 2018 

BWorld 209, Is the PCC a facilitator or a hindrance to business competition? May 15, 2018

BWorld 208, Consumer choice in electricity supply and prices

* This is my column in BusinessWorld on April 30, 2018.

In several statistics comparing electricity prices in Asia, the Philippines often ranks as the third most expensive in Asia next to Japan, Singapore, or Hong Kong.

Here are numbers from three different sources: (1) The Lantau Group (TLG), “Global Benchmark Study of Residential Electricity Tariffs,” May 2013. The study prepared for the Energy Market Authority (EMA), Singapore; (2) Enerdata, cited by Chris Herrera, “Optimization of Supply” presented at EPDP lecture, UPSE, October 26, 2017; and (3) International Energy Consultants (IEC), “Regional/Global Comparison of Retail Electricity Tariffs: Executive Summary,” May, 2016.

In the IEC study, subsidized markets are Indonesia, Malaysia, Thailand, South Korea, Sri Lanka, Taiwan. Unsubsidized and deregulated markets are Japan, Philippines, and Singapore. Hong Kong is unsubsidized but it is unsure if it’s deregulated.

The Electric Power Industry Reform Act (EPIRA) of 2001 has several provisions to help reduce Philippines’ electricity prices. The deregulation of power generation encouraged many private power producers to compete with each other. The Wholesale Electricity Spot Market (WESM) average prices for instance have been declining, in Pesos/kWh: 6.43 in 2010, 3.80 in 2011, 4.87 in 2012, 3.85 in 2013, 4.40 in 2014, 3.47 in 2015, and 2.84 in 2016.

The retail competition and open access (RCOA) under EPIRA is also an excellent provision. RCOA allows the “contestable consumers” or those with average electricity consumption of 1,000 KW (or 1 MW), a level which will later be reduced to 750 KW a day, to choose their own Retail Electricity Suppliers (RES) and leave their existing private distribution utility (DU) or electric cooperative (EC).

With RCOA, electricity consumers can set their own conditions from their RES.

Some can demand that they be supplied 100% only from renewables even if the price is higher, others can demand that they be supplied only from cheap and stable sources. Small customers can also aggregate their demand or allow an aggregator to pool their combined demand to become contestable customers.

There are two recent reports in BusinessWorld related to this.

(1) SC asked to lift TRO on retail power suppliers (April 24)

(2). DoE may step in as licensing body for retail power suppliers (April 12).

Report #1 is about Bayan Muna (BM) petition at the Supreme Court (SC) that it should lift its indefinite temporary restraining order (TRO) it issued in February 2017 barring the Department of Energy (DoE) and the Energy Regulatory Commission (ERC) from further implementing RCOA and allow the contestable customers to choose their own RES.

I was surprised that the pro-state intervention and pro-big government Bayan Muna suddenly turned around and campaigned for pro-market, pro-consumer choice — that consumers be given more freedom to choose an RES from the 23 short-listed by the ERC. Turns out that Bayan Muna is only doing this to further fight Meralco as a monopoly in electricity distribution in Metro Manila and some surrounding provinces. However, the group is silent about the Constitutional provision granting monopoly power to all other DUs and ECs in the country.

Report #2 is about the DoE studying the legality of being the issuer of licenses for RES. There are no updates about this yet.

The indefinite TRO has a very adverse result, reducing consumer choice, especially the contestable customers.

Those who consume 750-999 KW a day and are willing to move voluntarily to RES cannot do so because they will be disallowed by the ERC and PEMC. And even those who consume 1MW or more per day that are already qualified for RCOA are hesitant to have power contracts with RES because of the continuing uncertainty.

The ERC also does not and cannot issue new RES licenses or renew expiring ones, resulting in reduced RES competition.

Even some DUs also face uncertainties whether to get additional generation contracts or not for contestable customers because these customers can leave them anytime once the TRO is lifted.

Government prohibitions should be kept to the minimum. The EPIRA law has already succeeded in reducing electricity prices and expanded the country’s power supply capacity so why suspend more customer choice and empowerment?

The SC indeed should lift its indefinite TRO because it is anti-consumers and anti-business. Existing DUs have the freedom to put up their own RES so that contestable customers who have left the DU franchise system can still be their customers. Or the SC can strike down certain ERC resolutions so that it can issue new resolutions and regulations to implement RCOA and further expand consumer choice.

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See also:

BWorld 205, Energy mix and wishful thinking, April 30, 2018 

BWorld 206, Intellectual property rights in East Asia, May 09, 2018 

BWorld 207, Fare control and surge cap are wrong, May 10, 2018

BWorld 201, Expanded environmental rights and anti-coal drama

* This is my article in BusinessWorld last Tuesday, April 03, 2018.

Matter is energy … Energy is light … We are all light beings.”

— Albert Einstein

Several recent events in the Philippines energy sector which when implemented, might mean an extended and long-term penitence for electricity consumers nationwide.

One is the planned expanded “environmental rights” to be put in the draft Constitution by Retired Chief Justice and Consultative Committee (ConCom) Chairman Reynato Puno. Two, the Energy Regulatory Commission (ERC) meeting with anti-coal groups Sanlakas and Philippine Movement for Climate Justice (PMCJ) with the ERC saying that it will “explore the possibility of incorporating environmental policies into its relevant upcoming policies…”

The ConCom chairman’s plan will open up a floodgate of endless environmental militance. It will be harder for companies to put up new airports and expressways, new malls and commercial districts, new factories and industrial zones, new universities and residential condos, new coal or gas plants because militants and environmental lobbyists can easily assert that the area is “reserved” for nature. But they can easily lobby to put up expansive “green” solar plants, wind farms, etc.

Chairman Puno said the expanded environmental rights will cover “Right to clean air and clean water, right to a healthy environment and ecology…”

If that is the case, government should prohibit candles and gensets in cases of brownouts. Gensets are noisy and run on diesel and hence, very polluting. Candles often cause fires. People should rely only on intermittent wind-solar as much as possible. If the wind does not blow and if the sun does not shine, people will be then left to endure brownouts.

Chairman Puno also said that there will be “stronger writ of kalikasan in the bill of rights so that it may not be subject to withdrawal or revision by the Congress or the Supreme Court.”

This is related to the second event as there are many anti-coal groups which also hate any brownouts that coal plants precisely want to prevent.

In August 2012, a group of ecologist-militants and allied organizations have successfully stopped the construction of a 600 MW coal power plant in Subic on the “writ of kalikasan” argument issued by the Supreme Court. The delay in the construction of that big power plant has contributed to higher price pressure in the Luzon grid in recent years.

Anti-coal activists think that all MW are the same.

This is wrong.

A 100 MW from wind or solar plant at 11 a.m. can become 20 MW or 5 MW at 11:05 a.m. when the wind suddenly stops blowing, when clouds grow dark, or when it rains. Whereas a 100 MW from coal or gas will be 100 MW for 24 hours whether the wind blows or not, whether it is a sunny or cloudy day or night time.

Below are some numbers for ASEAN countries from the International Energy Agency (IEA). Demand for power generation is in million tons oil equivalent (mtoe), electrical capacity in Gigawatts (1GW = 1,000 MW), and electricity generation in terawatthours (TWh). 2000 and 2015 data are actual, 2016 are estimates, 2025 and 2030 are projections (see table).

Check out the numbers for coal — projected electrical capacity in the region in 2030 is only 29% of total but projected electricity generation is 40% of total. The opposite is the case for other renewables (wind, solar, geothermal), nearly 11% of power capacity in 2030 but projected to produce only 7.4% of actual electricity. If geothermal is removed from this group, electricity generation will become even smaller.

During the S&P Global/Platts’ Philippine Energy Forum last March 20, 2018 at Grand Hyatt BGC, S&P analyst Deepak Kannan observed that from 2000 to 2016 in the ASEAN, “Oil continues to be a dominant source of energy accounting for 34%, coal demand has more than tripled accounting for 17%.”

It is not wise that environmental militance be incorporated in the Constitution. Any environmental advocacy should be done via legislation, not put in the charter. The ERC should also be wary not to commit anything to the anti-coal groups because they hop from one venue to another to promote their ecological-socialist agenda.

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See also:
BWorld 197, Estimating electricity price hikes because of TRAIN, Part 2, March 22, 2018
BWorld 198, Three levels of global disruption, March 24, 2018 
BWorld 199, Charity and giving should not be legislated, March 27, 2018 
BWorld 200, IPR in the ASEAN and plain packaging in the West, April 03, 2018

BWorld 184, ERC paralysis and implications for consumers

* This is my article in BusinessWorld last February 01, 2018.

Despite a significant increase in the Philippines’ power generation capacity in recent years, the country’s installed capacity and electricity production remains small compared to the ASEAN-6 and North East Asian neighbors.

For instance, its installed capacity of 21.2 gigawatt (GW) in 2016 was what Vietnam has about 10 years before. Vietnam now has twice the Philippines’ installed capacity (see table).

A reliable and stable supply of energy results in economic development.

More power plants mean more electricity generation; more electricity generate will mean more competition for power supply and hence, lower electricity prices for the consumers.

However, an unfortunate turn of events might prevent the Philippines from realizing this both in the short- and medium-term. The Ombudsman has issued a one-year suspension for four of five Commissioners of the Energy Regulatory Commission (ERC) last Dec. 21, 2017.

The officials were charged with violation of Republic Act No. 3019 (Anti-Graft and Corrupt Practices Act) in connection with the revised implementation date of the competitive selection process (CSP). The Ombudsman also said the suspended officials favored a few power supply contracts.

With only one Commissioner — Chair Devanadera — allowed to work, here are some of the serious implications and problems.

1. No deliberations and resolutions on applications for approval of power supply agreements (PSAs) and projects for transmission and distribution by the National Grid Corporation of the Philippines (NGCP), distribution utilities, and electric cooperatives. An estimated P1.588 trillion worth of energy-related projects and capital outlays would be affected.

2. The inability to act on petitions for rate adjustments and pass-on charges; consumer complaints, violations of industry players of existing laws and regulations.

3. Non-issuance or renewal of certificates of compliance (CoC) or provisional authorities to operate power plants.

4. The inability to award procurement contracts, like the ERC meter seals and stickers being placed on electric meters of the distribution utilities, among others.

With these problems, among the solutions would be the following:

1. The President should appoint OIC Commissioners to temporarily act on behalf of the four suspended officials until the suspension order has lapsed in late December this year and the suspended officials will be back in office.

2. Despite ERC paralysis, DoE will allow or accredit players with expiring or pending CoCs to operate and trade at the Wholesale Electricity Spot Market (WESM). The required ERC approval of CoCs will resume only when there is quorum already at the Commission. DoE Secretary Cusi said that “about 26 generation companies with a total of 3,314.60 MW generating capacities have expired or have expiring CoCs in 2018… Additional new capacities of at least 720 MWs are also expected to go into commercial operation within the next few months. If not allowed to participate in the WESM, the available electricity supply in the market will be curtailed, which can result in higher market clearing prices.”

4. DoE should also be able to accredit or renew Retail Electricity Suppliers (RES) with pending or expiring licenses, until the ERC paralysis is resolved.

Several government branches and constitutional bodies must always put in mind the welfare of the consumers. The inflationary pressure of TRAIN law (higher oil prices, higher coal generation prices, among others) is already mounting.

The “vested interest” of consumers — cheaper, competitively-priced, and stable energy supplies — should prevail over vested interests of politicians and regulators. There should be more power generation companies and power plants, more electricity distributors and retailers — all competing with each other to meet the consumers’ “vested interest.”

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See also:
BWorld 178, Top 8 energy news of 2017, January 14, 2018 

BWorld 181, Effects of Supreme Court TRO on RCOA, January 22, 2018

BWorld 182, Asia Liberty Forum 2018 in Jakarta, January 31, 2018 

BWorld 183, Why low or zero income tax can mean more development, February 09, 2018

BWorld 178, Top 8 energy news of 2017

* This is my article in BusinessWorld last January 2.

This should have been a “Top 10” list but due to space constraints, I limited it to only eight, divided into four news stories each for global and national.

GLOBAL

 1 “Non-news” to many media outlets but good and big news to me: NO major energy catastrophes in 2017. No major oil spill, no gas blowouts, no reactor meltdowns, no major infrastructure destroyed by natural disasters, and energy prices did not rebound to their 2014-2015 levels.

2 In June 2017, the British Petroleum (BP) Statistical Review of World Energy 2017 was released and among the highlights of that report are: (a) China and US remain the planet’s biggest energy consumers, (b) increases in oil, natural gas, nuclear and renewable energies (REs) but decline in coal use, (c) for big Asian economies, coal use remain very high especially in China, India, Japan, South Korea and Indonesia (see chart).

3 In September 2017, the US Energy Information Administration (EIA) released its “International Energy Outlook 2017” and among its projections are (a) In 2040, fossil fuels (oil, natural gas and coal) and nuclear will supply about 83% of global total energy consumption; 8% from hydro and 9% combined from wind, solar, geothermal, other REs, and (b) coal use is projected to be stable until 2040 and declines in China to be offset by increased use in India.

4 In November 2017, the “America First Energy Conference” was organized by the Heartland Institute in Houston Texas to analyze US President Trump’s pronouncement of US global “energy dominance”. “Energy dominance” is defined on two key goals: (a) meet all US domestic demand and (b) export to markets around the world at a level where they can “influence the market.” The important lessons from the papers presented are that (i) the US can have energy dominance in oil, natural gas and coal, but (ii) US cannot and should not aspire to have dominance in nuclear and REs. It was a very educational conference and I was the only Asian in the conference hall.

NATIONAL

5 Hike in excise tax for oil products and coal under TRAIN but zero excise tax for natural gas even if it is also a fossil fuel. Diesel tax will increase from zero in 2017 to P2.50/liter in 2018, P4.50 in 2019, and P6.00 in 2020. Gasoline tax will increase from P4.35/liter in 2017 to P7 in 2018, P9 in 2019, and P10 in 2020. Coal tax will increase from P10/ton in 2017 to P50 in 2018, P100 in 2019, P150 in 2020. There was successful maneuver by some senators, a known economist and some leftist organizations to spare natural gas from higher taxation, benefitting a big energy gas firm.

6 The feed-in-tariff (FiT) or guaranteed high price for 20 years for wind-solar and other renewables keeps rising, from only 4 centavos/kWh in 2015, became 12.40 centavos in 2016, 18 centavos in mid-2017 and petition for 22 centavos by late 2017 not granted. A pending 29 to 32 centavos/kWh by early 2018 is awaiting approval by the Energy Regulatory Commission (ERC).

7 Continued exemptions from VAT of the energy output of intermittent wind-solar and other renewables but stable fossil fuel sources were still slapped with 12% VAT under TRAIN. Government continues its multiple treatment of energy pricing: High favoritism for wind-solar, medium-favoritism for natgas, and zero favor for oil and coal.

8 Supreme Court issuance of TRO in the implementation of Retail Competition and Open Access (RCOA) provision of the Electric Power Industry Reform Act (EPIRA) of 2001. In particular, the SC TRO covered five ERC Resolutions from June 2015 to November 2016, affecting the voluntary participation of contestable customers (CCs) for 750-999 kW and many Retail Electricity Suppliers (RES) with expiring licenses cannot get new ones yet, reducing potential competition. Data from the Philippine Electricity Market Corporation (PEMC) show that as of Nov. 26, 2017, there were 28 RES, 12 local RES, 862 CCs for 1 MW and higher, and only 78 CCs for 750-999 KW. There should be thousands of CCs in the lower threshold, there should be several dozens of RES nationwide to spur tight competition in electricity supply and distribution.

Overall, EPIRA of 2001 was a good law that introduced competition, broke government monopoly in power generation, broke private geographical monopolies in power distribution. The RE law of 2008, SC TRO 2017 and TRAIN 2017 are partly reversing the gains of EPIRA.

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See also:

BWorld 170, The Habito carbon tax distortion, December 28, 2017 

BWorld 173, Energy favoritism under TRAIN, December 30, 2017 

BWorld 175, Trends in global and Philippine trade, January 05, 2018 

BWorld 176, Road trips and PPP projects, January 06, 2018 
BWorld 177, On MMDA car towing and impounding, January 07, 2018

BWorld 155, Electric cooperatives and system loss

* This is my article in BusinessWorld last Friday.

Three news reports published by BusinessWorld during the past few days indicated that the energy sector in the Philippines and its several neighbors is becoming more efficient, market-oriented, and less bureaucratic. These news articles were (1) “ERC declines to intervene in 4 Meralco power deals” (Sept. 20), “DoE says no plans to extend FiT for biomass, river projects” (Sept. 26), and “Malaysia, Thailand, Laos to sign energy-trading deal” (Sept. 26).

The first article says that the Energy Regulatory Commission (ERC) is upholding its own rule to stop intervention after a deadline for petition against any power supply agreement (PSA) has been met.

The second one says that the Department of Energy (DoE) will not extend the feed in tariff (FiT) or guaranteed high price for renewables for 20 years, for undersubscribed biomass and run of river hydro power. This move will protect electricity consumers from further high electricity prices.

The third story says that electricity trading in the three countries mentioned will mean greater power stability and more price competition among power producers. This is like expanding our Wholesale Electricity Spot Market (WESM) from national to regional trading.

To add to this list of positive news, it has also been reported that power transmission and distribution in the region have become more efficient, cutting down on system losses.

Within a decade, the Philippines, for instance, has managed to chop system losses from 12.9% to 9.4% of electricity output, an efficiency gain of 3.5% (See table).

Source: WB, World Development Indicators, Database 2017.

Based on the table, economies with low system losses have high electricity consumption per capita, except Hong Kong. And vice versa, countries with high system losses of at least 9% tend to have low per capita electricity use.

And this implies that the technology and administrative processes to bring down system losses are generally correlated with the wealth and industrialization of an economy.

There are several attempts both in Congress and the ERC to significantly reduce the distribution system loss by distribution utilities (DUs).

The ERC Draft Rules intend to make high consideration if not outright favoritism of many electric cooperatives (ECs) by giving them (a) high technical loss (mainly conductor loss and no load loss) cap of 5.5-7.0%, (b) high cap on nontechnical loss (illegal connection, direct theft, meter error, billing irregularity) of 4.5%, total of 10-12.5% distribution system loss that can be passed to consumers. In contrast, (c) private DUs will be forced to have a low technical loss cap of only 2.75%, and low nontechnical loss cap of only 1.25% or total of only 4% distribution system loss by private DUs.

This is not a good plan for the following reasons.

One, it institutionalizes a double-standard. Favoring ECs and allowing them to remain wasteful and pass the additional cost of high system loss to the consumers vis-a-vis strict monitoring of private DUs and disallowing them to pass high system losses charges to their consumers.

Two, it does not pressure or discipline the ECs and force them to become more efficient in cutting their system losses. As a result, it is not possible to bring down the system loss to the levels of Thailand, Malaysia, China, Japan, Singapore if this attitude and policy is further adopted.

Three, it does not push many inefficient ECs to be corporatized, to behave like many private corporations that are forced by SEC regulations to be more transparent.

Four, it remains silent on transmission system loss of the sole grid operator, the National Grid Corp. of the Philippines (NGCP).

Government through the ERC should create rules that apply to all players — ECs in the provinces and private DUs in big urban centers — no exceptions or favoritism, and give consumers further reduction in overall electricity prices.

Forcing both provincial ECs and private DUs to have low system loss at uniform rates is consistent with enforcing the rule of law, consistent with encouraging more competition, consistent with the spirit of EPIRA law of 2001.

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See also:

BWorld 152, Cronyism in Renewable energy, gas sectors? September 23, 2017 

BWorld 153, Property rights, trademarks and consumer protection, September 30, 2017 

BWorld 154, Kuala Lumpur, Incheon, JFK airports and lessons for the Philippines, October 01, 2017

BWorld 152, Cronyism in Renewable energy, gas sectors?

* This is my article in BusinessWorld last September 7, 2017.

Last week, the National Transmission Corp. (TransCo), the administrator of feed in tariff (FiT) — which guarantees high prices for 20 years for variable renewable energy (solar, wind, biomass, run of river hydro) filed a petition at the Energy Regulatory Commission (ERC). It sought for an increase in FiT-Allowance to be paid by all electricity consumers nationwide.

FiT-All is one of roughly 12 different charges and taxes in our monthly electricity bill and the one with the fastest increases in recent years: four centavos/kWh in 2015, 12.40 centavos in 2016, 18 centavos this 2017, and 29.32 centavos next year. It is a clear example of renewables’ cronyism that penalizes electricity consumers and rewards renewable energy (RE) developers supposedly to help “save the planet.”

Also last week, I attended the Energy Policy Development Program (EPDP) lecture at UP School of Economics, entitled: “Natural gas: Addressing the energy trilemma and powering our energy needs.” The lecture was delivered by Mr. Giles Puno, President and COO of FirstGen, a big Lopez-owned power company. Mr. Puno covered many topics but I will only focus on the lecture’s three aspects.

One, the lecture mentioned that the cost of wind-solar keeps decreasing so efforts to decarbonize the economy is improving, away from coal power which cannot remain cheap in the long-term.

During the open forum, I said that this is not exactly correct because while it is true that the technology cost of wind-solar is declining, the FiT rates given to wind-solar keeps rising actually. FiT rates for wind batch 1 (2015 entrants) were P8.53/kWh in 2015, this went up to P8.90 in 2016, and P9.19 in 2017. Wind batch 2 (2016 entrants) were P7.40/kWh in 2016 and P7.71 in 2017.

Solar batch 1 (2015 entrants) FiT rates were P9.68/kWh in 2015, P9.91 in 2016, and P10.26 in 2017. Solar batch 2 (2016 entrants) FiT rates were P8.69/kWh in 2016 and P8.89 in 2017.

FiT revenues collected by all RE firms given FiT privilege were P10.22B in 2015, a figure that rose to P18.54B in 2016, and P24.44B in 2017.

Two, to address the energy trilemma (energy security, energy equity/affordability, environmental stability), the lecture questioned the 3,500 MW worth of coal supply in the Meralco power supply agreements (PSA). These PSAs were anathema to environmental stability and energy equity since power rate hikes will be expected since coal prices are expected to rise over the long-term. That government should instead prioritize natural gas development.

I mentioned in the open forum that I saw the World Energy Council (WEC) World Energy Trilemma Index 2016 and out of the 125 countries covered, the Philippines was #1 in environmental sustainability, thanks to our big geothermal and hydro, plus recently added variable REs. But Philippines was #92 in energy equity because of our expensive electricity, 3rd highest in Asia next to Japan and Hong Kong.

So it is wrong to demonize coal (nearly 35% of installed capacity but 48% of actual electricity production in 2016) that contributed to declining prices in generation charge in recent years. For instance, the load-weighted average price (LWAP) at the Wholesale Electricity Spot Market (WESM) was declining from about P5.40/kWh in 2012 to only P2.80 in 2016.

Consider also the fact that Philippines’ coal use is small compared to what our neighbors in the region consume. Vietnam consumes twice the amount of what we use, Taiwan three times, Indonesia five times, South Korea and Japan six times — for 2016 alone (see graph).

Power companies like FirstGen should focus on ensuring that electricity consumers have cheap and stable electricity available 24/7 without any brownouts, even for a minute. Instead of demonizing and suggesting the stopping of more coal power to come on stream.

Third, Mr. Puno and FirsGen want “government support crucial for LNG development and (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 items I consider as cronyist or seeking a crony status from the government. Setting the energy mix should be done by the consumers, not government. The previous Petilla/Monsada plan of 30-30-30-10 energy mix for coal-natural gas-renewable energy-oil respectively is wrong and has no sensible basis. It is good that new DoE Secretary Cusi has dumped it in favor of 70-30-10 energy mix for baseload-mid merit-peaking plants, respectively.

Government taxes should apply to all technology — coal, natgas, hydro, geothermal, etc. — no special privileges of tax breaks and other non-fiscal sweeteners. To ask for tax and non-tax privileges for LNG is asking for crony privileges.

We need less government regulations in setting the energy mix, less government favoritism for expensive wind-solar resulting in more expensive electricity. Government should focus on having energy laws and taxes that apply to all technology and players without any entity enjoying special privileges.

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See also:

BWorld 148, Energy Trilemma Index 2016, September 16, 2017 

BWorld 149, Free tuition and irresponsibility, September 17, 2017 

BWorld 150, Rising state-inspired murders and budget 2018, September 18, 2017 

BWorld 151, Mining taxes per hectare of land, September 22, 2017

BWorld 141, Reducing system loss, Part 2

* This is my article in BusinessWorld last Wednesday.

This is a follow up to a previous piece entitled, “Rule of law in Distribution system loss cap (June 7).” This sequel is prompted by three recent developments: (a) “NEA seeks expanded authority over electricity distributors (BusinessWorld, June 20),” (b) “DoE official backs NEA control over power distributors (BusinessWorld, June 21),” and (c) public hearing early this month by the Energy Regulatory Commission (ERC) to reduce the system loss cap of all distribution utilities (DUs).

The ERC plans to allow higher cap (maximum rate of system loss) for electric cooperatives (ECs) compared to private DUs.

In particular, the ERC plan is to impose a technical loss cap of 3.25% to 7.0% for three clusters of ECs but only 2.75% cap for private DUs and a non-technical loss cap of 4.5% of energy input for all ECs but only 1.25% cap for private DUs.

The message is that the proposed new ERC regulation is to favor ECs, all under the supervision of the National Electrification Administration (NEA), which has the effect of allowing them to incur higher wastes that can be passed on to electricity consumers while forcing private DUs to spend more on higher capex so that their system losses are reduced to the barest minimum.

The NEA and the various provincial ECs are not exactly doing well in consistently reducing the distribution system loss and raising the overall electrification rate in the country.

As of 2013, only 87.5% of all households in the country have electricity, and not all of them have 24/7 electricity, many still suffer from frequent “Earth Hours” -- that is to say power outages -- daily. (See table.)

  

The Philippines’ archipelagic geography is a contributor of course for the rather low electrification rate as many households in far away islands are off-grid and rely on generation sets administered by Napocor-SPUG and small private electricity sellers. More off-grid areas are now using solar.

Still, the absence of 24/7 electricity in many areas covered by ECs as administered by NEA is a problem. When there are frequent brownouts, people use two things: candles and generation sets. Candles are among the major causes of fires in houses and communities while gensets are noisy and are running on more expensive fuel, diesel oil.

The Philippines’ low electricity generation compared to its neighbors in the region (column 4 of the table) is a result of combination of many factors, like the huge bureaucracies face by generation companies putting up new power plants, and rigidities in the electricity distribution system.

Protecting the electricity consumers via lower distribution charge, lower system loss charge, and lower incidence of brownouts can be done via the following measures.

One, both the ERC and the NEA should identify which are the most inefficient, lowest-rating ECs or DUs, push them to be corporatized (not exactly “privatized” because ECs are already private entities). These agencies, in turn, should serve notice to these ECs that if they fail to make their operations more efficient, then they will be corporatized. With these measures, these ECs will be forced to improve their systems loss, collection efficiency, employee-customer ratio, etc.

Two, the government should remove differences in caps of systems losses between DUs and ECs. The ERC has to determine the increase in rates so that DUs can comply with their systems loss cap since they need to put up more expensive equipment to decrease technical systems loss. Having a different system loss cap for ECs and DUs means the ERC will not exactly be protecting the consumers but more of protecting ECs so that their inefficient if not outright wasteful operations are tolerated and rewarded with higher profit.

Three, NEA should not aspire to supervise all DUs including private corporations. It is not exactly good at instilling financial discipline on all ECs as a number of them are inefficient and therefore lose money while charging high costs to their consumers (See “NEA offers P1.7-B loan window for distressed power cooperatives,” BusinessWorld, April 12). NEA in fact should step back and give more supervisory functions to the Securities and Exchange Commission (SEC) via ECs that were corporatized. After all, the SEC has more transparent, more universal corporate rules than NEA.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET and President of Minimal Government Thinkers. Both are members of Economic Freedom Network (EFN) Asia.

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See also:
BWorld 135, On reducing the distribution system loss, June 9, 2017
BWorld 138, PPP vs ODA, Part 2, June 21, 2017 
BWorld 139, State central planning vs household decentralized planning, June 22, 2017 
BWorld 140, Mineral rent and taxation, June 23, 2017

BWorld 135, On reducing the distribution system loss

* This is my article in BusinessWorld last Wednesday.

When matter changes form, there are certain “system loss” that occur. Like a one-kilo dressed chicken becomes less than one-kilo once it is cooked into adobo or tinola. Or a one-kilo green mango or banana becomes lighter than a kilo when it transforms into ripe, yellow mango or banana after a few days.

When electricity is transported or transmitted from a power generation company (genco) some 100+ kilometers away to a private distribution utility (DU) or electric cooperative (EC), there is a transmission system loss. Thus, a 1,000-MW output from a genco may become only 980 MW when it reaches the DU or EC.

Then when electricity is distributed from a DU or EC to houses and offices, there is also a distribution system loss. This loss is divided into (a) Technical loss, inherent in the physical delivery of electric energy including conductor loss, transformer core loss, and technical error in meters, and (b) Nontechnical Loss, energy lost due to pilferage, meter reading errors, meter tampering, others not related to the physical characteristics and functions of the electric system.

The Philippines has a relatively high degree of transmission loss + distribution loss while Singapore, South Korea and Japan have low systems losses, based on World Bank data (see Table 1).

There are several attempts to limit or cap the distribution system loss that is passed on to the consumers. One from the Energy Regulatory Commission (ERC) draft “Rules for Setting the Distribution System Loss Cap and Establishing Performance Incentive Scheme for Distribution Efficiency,” and two from the Senate. Here is a summary of their provisions.

These three measures are problematic and Sen. Pacquiao’s bill is the worst because of its populist posturing, disallowing private DUs to charge any system loss while pampering the ECs to have their system loss. Check again Table 1 above, it shows that none of the advanced countries like Singapore and Japan have zero system loss.

Sen. Gatchalian’s bill is not as bad as Sen. Pacquiao’s but like the ERC draft Rules,it suffers from some populism too, pampering the ECs with higher loss cap compared to private DUs.

Giving differentiated loss cap is favoring the ECs while penalizing private DUs and this is wrong. If the real purpose of the proposed ERC regulation and Sen. Gatchalian’s bill is to protect the consumers from high system loss charge in their monthly electricity bill, then they should slap a uniform low cap for all players, whether private DUs or ECs.

The rule of law is explicit in reminding people that the law applies equally to unequal players and people. Thus, a law against traffic counterflow should apply to all vehicles, from buses to cars, jeepneys, armored vans, tricycles and motorcycles. It should apply also to both private and public/government vehicles.

A law with penalty against non-rehabilitation of mined-out area should apply to all mining entities, whether big, medium, small and artisanal mining.

And a law or regulation on system loss cap should apply to all players, from big corporate DUs to medium or small electric cooperatives.

By slapping differentiated system loss cap, new government regulations will not be exactly protecting the consumers but more of protecting certain ECs so that their inefficient if not outright wasteful distribution system is rewarded with higher profit at the expenses of the consumers.

Ultimately, all ECs should be corporatized. They should be registered with and monitored by the Securities and Exchange Commission (SEC) and not by the National Electrification Administration because SEC has more transparent and realistic rules than NEA. But that will be another topic in the future.

For now, the rule of law, of not making exemptions and differentiation in the imposition of system loss cap, should prevail. And the loss cap that government has in mind should be realistic that DUs and ECs should not be burdened with additional high capital expenditures (CAPEX) and operating expenditures (OPEX) which ultimately will be passed to the consumers in the form of higher distribution charge.

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See also: 

BWorld 128, The quest for more stable and cheaper electricity in the ASEAN, May 08, 2017 

BWorld 131, Why the FiT-All is a burden to consumers, May 18, 2017

BWorld 132, Global commodity prices, trade and growth, May 27, 2017 
BWorld 133, Dissecting Dutertenomics' overspending plan, June 01, 2017 
BWorld 134, PPP vs ODA, June 08, 2017

BWorld 125, On the retail competition and open access (RCOA) and EPIRA

* This is my article in BusinessWorld on April 19, 2017.

Electricity distribution, unlike generation, is defined as a “public utility” and hence, is granted as a monopoly right via congressional franchise. There are more than 120 distribution utilities (DUs) such as Meralco and electric cooperatives.

To dilute this monopoly, the Electric Power Industry Reform Act (EPIRA) which was passed in 2001 came with Section 31, Retail Competition and Open Access (RCOA) that “shall be implemented not later than three (3) years upon the effectivity of this Act,” and Section 29, Supply Sector, “The supply of electricity to the contestable market ...” These are useful, anti-monopoly provisions, thanks to EPIRA.

The RCOA was finally implemented 12 years after, on June 26, 2013. The Department of Energy (DoE) and the Energy Regulatory Commission (ERC) issued orders to implement this beautiful provision.

But somewhere along the way, what should be a competitive scheme has become a “mandatory” order.

Some electricity consumers are unhappy because their choice to stay with their DUs -- especially if these provide them good service and prices -- has been done away with. This is why they went to the Supreme Court (SC) and asked for a Temporary Restraining Order (TRO) against the RCOA.

Below is a summary of these orders (one from DoE, four from ERC, and one from the SC).

The SC TRO has mixed signals. It is good because (a) it stopped the “mandatory migration” to RES by contestable customers (CCs) and thus, they have the option to stay with their DUs or not, and (b) local RES will be allowed again. But it can also be bad because (a) it stopped the voluntary participation of CCs for 750kW (lowered threshold), and (b) some ERC Resolutions suspending earlier prohibitions to Retail Electricity Suppliers (RES) are also removed.

Government prohibitions should be kept to the minimum as much as possible.

These prohibitions would give people -- especially those with very low technical and financial capacities -- the right to become RES which might invite abuse of CCs.

Such prohibitions should not include more RES players, the right of CCs to stay with their DUs or not, and voluntary participation of customers at 750kW.

EPIRA has provided for more customer choices, strengthened consumer empowerment, and demonopolization of electricity generation and distribution. Let this spirit stay in the succeeding orders of the DoE and the ERC.

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See also: 

BWorld 122, Six more myths in the mining debate, April 13, 2017 

BWorld 123, Drug-related murders and criminal justice in Asia, April 23, 2017 

BWorld 124, On Grab, Uber, traffic and LTFRB, May 05, 2017

BWorld 114, Brownouts, ancillary services and transmission charge

* This is my article in BusinessWorld last February 23, 2017.

Rotational and scheduled brownouts for several hours about once a month, then unscheduled short brownouts from time to time, have become a regular experience in the two provinces of Negros island. Despite the installation of many huge solar plants in recent years.

    

I am currently in Sagay hospital in Negros Occidental to visit my seriously sick father. Last night, there was brownout for about 10 minutes, the hospital’s generator set immediately takes over to supply electricity to their patients and staff.

The Facebook page of the Central Negros Electric Cooperative (CENECO) gives frequent advisory of power interruption that lasts for nine hours (8 a.m. to 5 p.m.) until this month.

Stories and testimonies of frequent brownouts in many cities and municipalities of Negros Oriental in 2016 are also reported in dumagueteinfo.com.

In June 2016, the Department of Energy (DoE) said that line congestion is building up in Negros Occidental due to many solar power plants operating in the province. The abrupt influx of solar power plants is causing the main line, transmission and interconnection lines to congest (Sun Star Bacolod, June 10, 2016).

This month, Negros Occidental Electric Cooperative (NOCECO) explained that one of the main reasons of higher electricity is the increase in the transmission charge from P1.0538/kWh in January 2017 to P1.1777/kWh in February 2017 or an increase of 0.1239/kWh. The transmission rate hike is due to the increase in the ancillary service charges of the National Grid Corporation of the Philippines (NGCP).

There are at least two issues here. First is the presence of more brownouts in Negros island despite its having the most number of installed solar power plants per sq. km. of land in the whole country, more than 300 MW.

Solar power is very unstable and intermittent, zero output at night and very low output when it is cloudy, or power fluctuates wildly if clouds come and go in minutes. So there should be more ancillary services or standby power plants, usually natural gas or diesel plants, that should quickly provide power when thick clouds come and when evening comes. Still, this causes power fluctuations that damage machines, engines and appliances running on electricity and the leadership of Negros chamber of commerce and industry have pointed this out to the DoE and NGCP last year.

Second, how is the NGCP regulated and accounted in its transmission charge pricing and assets management?

Power generation is deregulated and hence, the extent of competition among many players is the main regulator of the generation charge. Distribution charge is regulated by the Energy Regulatory Commission (ERC) because distribution utilities (DUs) like Meralco and the roughly 119 electric cooperatives (ECs) nationwide are all monopolies in their respective franchise areas.

So while there are 120+ distribution monopolies composed of private DUs and ECs, the NGCP is a single, national monopoly in power transmission.

There are 12 different charges in our monthly electricity bill. The top six in the table below, and these five charges with lesser rates: (7) universal charge, (8) cross subsidy charge, (9) lifeline rate subsidy, (10) senior citizen subsidy, and (11) feed in tariff allowance (FiT-All). No. (12) are value-added tax (VAT) and other government taxes, these are huge too but not included in the table because they are unrelated to the electricity system.

Of these 12 different charges, subsidies and taxes, the smallest is #10 while the fastest growing is #11, FiT-All: P0.04/kWh in 2015, 0.124/kWh in 2016, and set to rise to P0.23-P0.25/kWh this 2017, the ERC still has to decide on the Transco petition for FiT-All hike (see table).

Notice in the table above the following: (1) In 2013 vs. 2017, all five charges have declined in rates in 2017 except transmission charge which has remained practically the same at P0.91/kWh. And (2) In 2014 vs. 2015, a similar pattern where all five charges have declined in rates in 2015 except transmission charge which has even increased to nearly P1/kWh.

The possible explanations why the transmission charge by NGCP seems to be the odd man out among the top six charges are (1) rising cost of more ancillary services as more intermittent solar-wind power are added into the grid, (2) it passes its own system loss to the transmission charge, (3) it simply behaves like a typical monopoly, revenue-maximizing as consumers and other players have zero option of other service supplier/s.

Brownouts and expensive electricity, these are ironic events in our modern world. We should have stable and cheap electricity, no brownouts even for one minute except after heavy storms and typhoons that knock down electrical posts and power lines.

Government should step back in some heavy regulations like forcing intermittent solar-wind into the grid which can discourage some developers who can build stable and cheaper power like coal and natgas plants. And giving high price guaranty for 20 years to renewables like wind-solar is wrong and punishing the consumers. Technology changes very fast, the costs of solar and wind equipment are falling fast, so why lock the high price for 20 years? This is wrong.

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See also:

BWorld 111, Electric cooperatives and unstable power supply, March 01, 2017

BWorld 112, Asia Liberty Forum 2017 in Mumbai, March 01, 2017 
BWorld 113, Peace talks with CPP-NDF for another 30 years? March 04, 2017

BWorld 51, WESM as market-oriented, PEMC as bureaucracy-oriented

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

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.

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. 

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

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See also:
BWorld 34, Solar power and supply instability, December 24, 2015 
BWorld 39, Coal and renewables complement each other, January 26, 2016
BWorld 43, More on WESM, PEMC and DOE, February 14, 2016
BWorld 47, Renewable energy and the illusion of merit order effect, March 06, 2016BWorld 49, John Locke and Jovito Salonga, March 18, 2016
BWorld 50, Adam Smith and Jovito Salonga, March 21, 2016