BWorld 143, Coal power and economic development

* This is my article in BusinessWorld on July 12, 2017.

Cheaper and stable energy means cheaper production costs for the industrial, agricultural, and services sectors of the economy. Cheaper energy also results in increased convenience for consumers too as many activities now are impossible without stable electricity supply.

In the modern history of Asian economies’ rapid growth, the use of coal power is an important contributor for their economic expansion.

These numbers show three important things:

(1) Countries that have high and fast coal consumption are also those that experienced faster economic expansion (at least three times expansion of GDP size). Most especially China, India, South Korea, Indonesia, Vietnam, Malaysia, and Philippines.

(2) Countries with declining coal use are also those with slow economic expansion (below three times expansion of GDP size). Most notable are the US, Russia, Germany, and UK.

(3) Philippines’ coal use is actually small compared to its neighbors; its 2016 use is just nearly 1/2 of Malaysia and Vietnam’s consumption, just 1/3 of Taiwan’s and almost 1/5 of Indonesia’s. South Korea, Japan, India, and China’s consumption are many times bigger than the Philippines’.

Recently, groups have suddenly scored seven coal power plants that entered into power supply agreements (PSA) with Meralco last year. These coal projects are (1) Atimonan One Energy (A1E) 1,200 MW, (2) Global Luzon (GLEDC) 600 MW, (3) Central Luzon Premiere (CLPPC) 528 MW, (4) Mariveles Power (MPGC) 528 MW, (5) St. Raphael Power (SRPGC) 400 MW, (6) Redondo Peninsula (RPE) 225 MW, and (7) Panay Energy (PEDC) 70 MW.

This covers a total of 3,550 MW of stable and affordable energy that can lead to cheaper and reliable electricity supply for more than 20 million people in Metro Manila, Bulacan, Rizal, Cavite, Laguna, and parts of Batangas and Quezon provinces.

These groups -- Center for Energy, Ecology, and Development (CEED), Philippine Movement for Climate Justice (PMCJ), Sanlakas, Freedom from Debt Coalition (FDC), Koalisyong Pabahay ng Pilipinas (KPP), Power for People (P4P) member organizations, others -- argue that coal plants are detrimental for the people’s health and livelihood as well as bad for the environment.

They are wrong.

What is bad for the people’s health and livelihood are more candles and noisy gensets running on diesel when there are frequent brownouts coming from intermittent, unreliable renewables like solar and wind. Candles are among the major causes of fires in houses and communities.

What is bad for people’s health and security are dark streets at night that contribute to more road accidents, more street robberies, abduction and rapes, murders and other crimes. Many LGUs reduce costs of street lighting when electricity prices are high (ever-rising feed-in-tariff or FiT for renewables, more expensive oil peaking plants are used during peak hours, etc.). Expensive and unstable electricity can kill people today, not 100 years from now.

Seeking to disenfranchise some 3,550 MW of stable and cheaper energy supply from seven coal plants is suspicious. There are no big hydro, geothermal, and biomass plants coming in. Wind and solar are limited by their intermittent nature, have low capacity factors, high capital expenditures, and often are located far away from the main grid. The only beneficiaries of disenfranchising big capacity coal plants then would be the owners of new natural gas plants.

Are natural gas cheaper than coal power? From the recent experience of Mindanao where many big coal plants were commissioned almost simultaneously, the answer seems to be No. The generation price in Mindanao has gone down to below P3/kWh, on certain days even below P2.50/kWh. Which means coal power has big leeway for lower price if competition becomes tighter. This cannot be said of natural gas plants here.

Consumer groups and NGOs should bat for cheaper, stable electricity. If they fight for something else like intermittent and expensive renewables, or more expensive gas plants, then they abdicate their role as representatives of consumer interests. Pathetic.

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

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See also:
BWorld 128, The quest for more stable and cheaper electricity in the ASEAN, May 08, 2017 
BWorld 140, Mineral rent and taxation, June 23, 2017 
BWorld 141, Reducing system loss, Part 2, June 30, 2017 
BWorld 142, PPP vs ODA, Part 3, August 08, 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

Energy 75, the PH solar confederation, electric coops and Meralco

From the DOE website, some group photos showing some of the major players in the PH energy sector. Below, one solar group, the Confederation of Solar Developers of the PH, Inc. (CSDP).

From left: DOE Chief-of-Staff Jesus Cristino Posadas, Engr. Arwin Ardon, Ret. Admiral Reuben Lista, Central Tarlac Biopower Inc. President Don Mario Dia, Equis Manager Craig Marsh, NV-VOGT Phils. President Vivek Chaudhri, North Negros BioPower, Inc. President Arthur N. Aguilar, Reynaldo Casas CSDP President, Aboitiz Equity Ventures Inc. Senior Vice President Juan Antonio Bernad, Carlos Aboitiz of Aboitiz Power, Solar Philippines President Leandro Leviste , SolarPacific Energy Corp. Senior Business Development Officer Dyna Enad, DOE Spokesperson & NASECORE President Pete Ilagan.

There is another solar lobby, the Philippine Solar Power Alliance  (PSPA) headed by Ms. Tetchie Capellan. Meanwhile,...

From the  DOE website, 

Cusi asked both agencies to “go down to the cooperatives” to resolve the issues raised by electric cooperatives namely PHILRECA, QUEZELCO and AMRECO, among others.

 Among the issues raised by the electric cooperatives were ensuring the right of way for electric projects, tax reforms, non-privatization of Agus and Pulangui complexes in Mindanao, the interconnection of SPUG areas to the main grid and the putting up of a one-stop shop and fast lane for the processing of permits and licenses for energy projects.

On the DOE-Meralco partnership in providing electricity connection to relocated informal settlers.

When "free electricity connection" was reported in local media, I asked Joe Zaldariaga what it means -- only the one-time cost of electricity connection plus meter readers are free, or also the monthly electricity bill of the informal settlers. Joe said that only the former is free. The latter, people still have to  pay their monthly electricity bill. This is low anyway because of  the  "lifeline subsidy" for consumers of only 100 kWh a month or less.

Meanwhile, I am curious why the electric  coops would oppose the privatization of hydro power plants in Mindanao? This is long overdue as EPIRA was enacted in 2001 or 15 years ago. Besides, only private players operating in a competitive environment would have enough incentives to really improve the electricity output of those hydro plants, especially when WESM in Mindanao would start operating.
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See also:

Energy 72, FIT-eligible solar plants in the Philippines, June 22, 2016 

Energy 73, Comments to DOE draft Department Circular on RPS, June 27, 2016 

Energy 74, Mindanao business opportunities via coal plants, July 13, 2016

Energy 55, Old renewables and coal are cool, complementary and not contradictory

* This is my article in SPARK by ADRi last January 26, 2016.

Old renewables and coal are cool, they are complementary and not contradictory

January 29, 2016

Bienvenido Oplas, Jr., Stratbase Albert del Rosario Institute (ADRi) Fellow

Darkness and lack of electricity is inhuman. Having expensive and unstable electricity supply when cheaper and stable power sources are available is wrong and lousy. When many streets and roads are dark at night because local governments or private subdivisions are economizing on their monthly electricity bills and power supply is limited, there are two negative social consequences: more vehicular accidents and more crimes. Criminals love darkness where their victims cannot see or recognize them.

And when there is frequent power outages and brownouts, there are two other negative social consequences: more fires when more people use candles more frequently, or more noise and pollution as some people turn on their generator sets that  run on expensive fuel, diesel.

These are crimes against humanity, the poor especially, that the “limit/kill coal” movement does not take into serious consideration.

Among the cheap and stable energy sources that the country should further take advantage of is coal. While many environmental activists view coal as “enemy” of sustainable development, this is a misguided view. In the Philippines, coal power plays a complementary and non-contradictory role to renewables development.   Here’s why.

One, without coal and natural gas, the Philippines will be as dark at night as North Korea and other underdeveloped countries experiencing daily “Earth hours”.

In Luzon grid, coal + natural gas + oil have produced 86.6 percent of total power generation in the first half of 2015. The “old renewables” hydro and geothermal contributed 12.5 percent while the “new renewables” wind, solar and biomass contributed only 1.0 percent, very small.

In the Visayas grid, coal and geothermal provide the bulk of power generation and in Mindanao, it is hydro, oil and coal.

The actual power generation of coal + natural gas of 84.4 percent are much larger than their power capacity of 61.2 percent of total dependable capacity in the Luzon grid. This means that power plants that use these two fuel types are producing more electricity at stable supply and cheaper prices than other power plants that use oil and geothermal, hydro (low supply during dry months) and new renewables (unstable supply and expensive).

Two, in the Meralco generation cost, power plants that run on coal (TLI, MPPC and SCPC) provide cheaper electricity, although power plants that run on natural gas (SPPC-Ilijan, FGPC-Sta. Rita and FGPC-San Lorenzo) provide the bulk of power generation. Exception is QPPLC that also run on coal but the price is comparable to natural gas power plants.

Table 1. Generation Charge (GC) of Meralco’s Power Suppliers, Dec. 2014 vs. Dec. 2015, in P/kWh

Source: Meralco, “Computation of the Generation Charge”, 

http://www.meralco.com.ph/consumer-information/rates-archive

Three, compared to many developed and emerging Asian economies, coal power consumption in the Philippines is actually small. And while coal power consumption of the US, Russia, Germany and Poland have declined compared to a decade ago, the amount remains big.

The claim therefore by some sectors and observers that coal power is the enemy of sustainable growth of the Philippines is based on subjective and non-objective point of view. Their proposal to outright banning of coal and use only renewables (old and new), is based on emotionalism and alarmism.

For now at least, coal-powered plants are still the most dependable sources of power generation. Given the country’s need for immediate additional power generation to meet the demands a growing Philippines, the need for coal-fired plants is still there.

With regard to developing renewables, however, the US National Renewable Energy Laboratory (NREL) projects that the country has vast potentials in three “new” renewables: wind, solar and biomass. Currently, the “traditional” renewables dominate the renewable energy market: large hydropower and geothermal energy.

There is a continuing debate in the country as to how much the new renewables should be inputted in the energy mix. As shown in the above table, while the cost of mostly coal and natural gas from different power plants can be as low as P3.87/kWh, the guaranteed and fixed generation price of solar and wind are P9.68 and P8.53/kWh respectively, or nearly 3x. This will not help the country escape from the unhealthy label of having the “second most expensive electricity in Asia next to Japan.”

So while a balanced energy mix of both renewable and non-renewable sources of energy should be pursued, policy makers should keep in mind these two important factors in determining the optimal mix: stability and affordability of power for the consumers and businesses alike.

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See also:

Energy 51, More on solar power and supply instability, December 29, 2015

Energy 52, Renewables to "save the planet", Germany and UK cases, January 16, 2016

Energy 53, Expensive electricity + mandatory renewables, Philippine case, January 17, 2016

Energy 54, Need for cheaper, reliable energy sources, January 18, 2016

Business 360-33, Cheap energy now and in the future, January 28, 2016

BWorld 15, The PH electricity market

* This is my article yesterday in BusinessWorld Weekender.
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The Philippine electricity market: MONOPOLY AND COMPETITION

  

ENERGY is development, and that includes electricity. It is not possible for an economy to grow fast and have sustainable development if its power supply and distribution are unstable and costly. Thus, having sufficient, stable, and affordable electricity is a necessary though not sufficient condition for economic development.

The Philippines remains to have among the most expensive electricity prices in Asia. Here are data with some breakdown also shown, including the cost of power generation, cost of grid/transmission, and value added tax (VAT) or gross sales tax (GST). Of the 14 major cities in North and Southeast Asia plus Australia and New Zealand listed below, Manila has the 3rd most expensive electricity prices -- 3rd in overall residential tariff, 3rd in generation cost, 3rd in grid charges, and 3rd in tax rates. 

Some reasons why other Asian cities and countries have lower electricity prices than the Philippines are as follows:

One, their government subsidizes electricity while the Philippine government imposes multiple taxes, royalties, and fees on power. The VAT rates are shown above, and royalties alone for Malampaya natural gas are as high as P1.45/kWh, and this is ultimately passed on to the consumers.

Two, Philippines power generation capacity is low, with total primary energy supply (TPES) in 2012 for instance only 0.44 tons of oil equivalent (toe) per person per year. Indonesia has twice, Thailand has four times, Malaysia has six times, and Singapore has 11 times that amount.

So with these two factors -- high electricity prices and low power gen. -- average electricity consumption is also low, only 668 kWh per person per year in 2012. 

SUSPICIONS

The Philippine power and electricity sector is characterized by a mixture of competition and monopolies. Power generation is generally competitive with many generation companies (gencos) slugging at each other. Power transmission is a national monopoly via the National Gird Corporation of the Philippines (NGCP). And electricity distribution is reserved to geographical monopolies, mainly the 120 electric cooperatives (ECs) nationwide, the biggest of which, Manila Electric Company (Meralco), accounts for about 75 percent of total electricity sales in Luzon and about 55 percent nationwide.

The issue of high electricity prices in the country has resurfaced once again but in a different angle. In current practices, the various ECs and distribution utilities (DUs) have bilateral contracts with different gencos, and such bilateral arrangement is sometimes suspected of being “sweetheart deals,” wherein both the gencos and DUs benefit to the disadvantage of the consumers.

To address this concern, the Department of Energy (DoE), on the watch of then secretary Carlos Jericho L. Petilla, issued Circular No. DC2015-06-0008, “Mandating All Distribution Utilities to Undergo Competitive Selection Process (CSP) in Securing Power Supply Agreements (PSA).” The order was dated June 11, 2015, or about two weeks before Mr. Petilla’s resignation.

The general principles behind this circular are to (a) increase transparency in the procurement process, (b) promote and instill competition in the procurement and supply of electric power to end-users, (c) ascertain least-cost outcomes, and (d) protect public interest.

Entities that will be covered are ECs, private investment-owned distribution utilities (PIOUs), multipurpose cooperatives, entities within economic zones, and other authorized entities engaged in the distribution of electricity.

Aside from suspicions of “sweetheart deals,” some DUs and ECs have their own gencos. Cross-ownership of DUs and gencos is allowed in the Electric Power Industry Reform Act (EPIRA) of 2001. Two examples here.

One is Meralco, whose wholly owned subsidiary, Meralco PowerGen Corp. (MGen), is targeting a portfolio of 3,000 MW by 2020. MGen is planning or constructing two other big power plants, the 1,200-MW Atimonan, Quezon, coal plant, and the 500-MW San Buenaventura, Quezon, coal plant, both slated for 2018. Another consortium, the Redondo Peninsula Energy, Inc., is slated to open its $1.2-billion, 600-MW coal power plant in Subic in 2018.

Two are the three DUs of Aboitiz Power -- Visayan Electric Co., Subic Enerzone Lima Enerzone, and Davao Light.

TAXES, MONOPOLIES

By forcing the ECs and DUs to undergo competitive bidding for their power supply contracts, the DOE hopes to break or minimize the practice, or at least minimize suspicions, of price-rigging.

This is definitely a welcome move for independent power producers (IPPs) which have little or no cross-ownership and control with ECs and DUs. They will have a fairer and level playing field in getting supply contracts. But while the goal is laudable, the circular will be unable to address other problems and contributors to expensive electricity in the country. Among these are the following.

1. High and multiple taxes, royalties, and fees imposed on natural gas and other energy sources and on electricity generation/transmission/distribution businesses.

2. Expensive electricity is also being imposed recently by RA 9513 or the Renewable Energy (RE) Act of 2008, wherein wind, solar and biomass are given guaranteed prices via feed in tariff (FIT) for 20 years.

3. Monopoly characteristic of ECs and DUs because electricity distribution is considered a “public utility” and, hence, protected by the Constitution and franchise laws. Abuse of power is a possibility that is always second nature to any monopolist. This will require amending the Constitution.

A compromise will have to be made, like having a transition period to allow the maturity of existing power supply contracts.

The long-term measures to address structural problems that lead to expensive electricity is to limit government intervention, to step back. Like amending the tax code to reduce or abolish certain taxes on energy, amending the RE law to abolish the FIT provision, and amending the Constitution to remove economic protectionism.

Bienvenido S. Oplas, Jr. heads a free-market think tank, Minimal Government Thinkers, Inc., and is a fellow of the South East Asia Network for Development (SEANET).

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See also: 

BWorld 11, China's stockmarket and central planning, July 18, 2015 

BWorld 12, Investments, APEC and economic liberalization, July 25, 2015 

BWorld 13, SONA's liberalism, five years after, July 28, 2015 

BWorld 14, OFWs, MERS-CoV and the DFA, August 08, 2015

Energy Econ 39, the UPSE-Ayala forum on the PH power sector, July 25, 2015 
Energy Econ 40, DOE Circular No. DC2015-06-0008, August 03, 2015

Energy Econ 18: Brown outs in Metro Manila?

A friend, Rose, posted this in her fb wall yesterday,

I am totally pissed after hearing the news that Meralco will be implementing a rotating brownout tomorrow starting at 11am? Are they serious?? At the height of the heat we all suffer each day....they will implement THAT?! It's probably because all of these people thinking of this solution have not experience what it is to stew in the heat! I think before they implement this they should first themselves experience what ordinary Filipinos are experiencing each day! All this hullabaloo just so that this government and Meralco can justify what they've all along wanted to impose on the already burdened Filipinos! A P4 increase and more on our electric bill!

Rose's frustration is understandable. In many of our neighboring countries in Asia, they can put plenty of street lights even in less-populated cities because they have so much power supply. Here, we are still talking about brown outs, actual or imaginary.

The main problem here is in power generation (not enough new power plants, many ageing existing plants) and not in power distribution (Meralco, other electric cooperatives). During heavy storms, power interruption  can happen, problem with power transmission (NGCP) or distribution, if the storm would topple electrical towers and posts.

Rose added that  "this should have been addressed by the appropriate branch of government....and I am still not convinced enough that this is not just a scenario created by Meralco...and their friends in government to justify any increases in our electric bill!"

To summarize the situation:

(1) Immediate problem is high electricity prices and/or brown outs, actual or threats.
(2) This is caused by lack of new power plants; the old plants require more frequent maintenance or scheduled shutdowns, or they can easily conk out (unscheduled shutdowns).
(3) And this is caused by (3a) government bureaucratism (DOE, DENR, LGUs, etc) in giving or restricting new power plant permits, and (3b) environmental activism opposing cheap but stable power sources like coal, nuclear.

If one will check the monthly electricity bill, between 50-60% of it is due to generation charge (ie, going to power plants).

For people who remain pissed off with the electricity distribution utilities (DUs) or the electric cooperatives, there are two ways that people can get out of these DUs which, by political nature, are all monopolies (Meralco, Bataan Electric Coop, Cagayan Electric Coop, Cebu Electric Coop,...).

One is to have their own solar system, wind, etc in their homes and/or offices. This is expensive though.

Two is via "open access" which is also in the Electric Power Industry Reform Act of 2001 (EPIRA). A village or an industrial zone can go direct to an electricity producer (say a small coal or solar or wind plant) for demands of less than 1 MW. This way, they can stop paying (a) transmission charge, (b) distribution charge, (c) supply charge, (d) systems loss charge, (e) universal charge, (f) lifeliine subsidy charge, (g) taxes and fees, plus another charge, I forget. So you see, there are about 9 different items in our monthly electricity bill, but people only see Meralco or the electric coop as the villain.

By going through the open access system, people will pay only (a) generation charge to the small power producer, and (b) wheeling charge, for the use of Meralco or other electric coops' electrical lines, from the power plant to the end-users (houses in a village, an industrial zone, a mall, etc.).

If one cannot do any of these two choices, another choice is to reduce electricity consumption by using more energy efficient lights and appliances; have more big and open windows with screen, to allow more sunlight and wind.

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See also:

Energy Econ 14: Power Rate Hike, Who Colluded?, February 22, 2014 

Energy Econ 15: Electricity Angsts, Presentation at UP Diliman, March 08, 2014

Energy Econ 16: Electricity and Development, March 20, 2014 

Energy Econ 17: Brown outs in Mindanao, Thin Reserves in Luzon, April 11, 2014
Business 360 17: Electricity and GDP Growth, April 15, 2014

Energy Econ 15: Electricity Angsts, Presentation at UP Diliman

The other day, I was one of three speakers in a forum on the Electric Power Industry Reform Act of 2001 (EPIRA) at UP Diliman. The two other speakers were Maria Teresa "Maitet" Diokno of the Center for Power Issues and Initiatives (CPII) and Atty. Debora Anastacia Layugan of the Energy Regulatory Commission (ERC).

I knew that Maitet, a fellow UPSE alumni, would be talking critically and negatively about the EPIRA as I have read one of her articles on the subject. And it's good that she spoke ahead of me. She said that the law promised many things but has not delivered. Like bringing down electricity prices but we have more unaffordable electricity rates now.

This table shows that electricity rates are more affordable now, at least in 2013 vs 2012 prices, generation charge. Our monthly electricity bill is composed of about nine items: generation charge, transmission charge, distribution charge, supply charge, metering charge, system loss charge, universal charge, lifeline subsidy, and taxes. Generation charge comprises about 50 percent of the total bill.

I discussed the immediate cause of the power rate hike last December -- a combination of planned/scheduled shutdowns and unplanned/unscheduled shutdowns of several power plants running on natural gas and coal, two of the cheap sources of electricity. Some power plants that run on nat gas had to run on diesel, or oil-fired power plants were tapped, to prevent brownouts.

Energy Econ 14: Power Rate Hike, Who Colluded?

In a fb group, Government and Taxes, Freedom andResponsibility, I had a debate with Troy ZD last February 5 this year. He posted this news report from the Inquirer, http://business.inquirer.net/163008/meralco-admits-telling-therma-mobile-to-sell-at-p62kwh-at-spot-market#ixzz2sPIrwxBR 

and commented that 

 If this and other admissions by Meralco, the ERC etc are not an evidence of collusion that would make the SC strike down the price increase and to force the re-evaluation of EPIRA and particularly the WESM then the SC has sold us out.

I replied that an electricity distribution utility (DU) like Meralco, Batangas Electric Coop, Cagayan Electric Coop, etc., distributes electricity from two sources: (a) from bilateral contracts for its basic, non-peak electricity demand, and (b) from WESM or spot market for its peak demand period (say 5-7am, 6-8pm). In the case of Meralco-TMO bilateral contract, the contract price was P6.20/kwh in Oct 2013 and P8.65/kwh in Nov. 2013. See Table 3, Government and Taxes: Fat Free Econ 51: Ten Things About the Meralco Rate Hike

Of the 286 GWH that Meralco bought from WESM in Nov. 2013, it is not clear how much of it came from TMO at P62/kwh, how much from other diesel power plants at P25 or P40 or 50 or 62. I have not seen the numbers yet.

It is possible that Meralco told TMO and other diesel plants to bid at P62 so that not a single DU, Meralco included, would buy at that max price so that the clearing price would be at a lower amount.

The term "collusion" has been over-used and may be even abused. Who colluded? Meralco and TMO? Meralco and who else? At what volume (in GWH) at what price and when did the collusion happen?

Could it be that a DU bought from a generating company (GenCo) at the max bid price of P62/kwh but only for 2 or 3 GWH volume? If this is the case, can this still be considered as collusion considering the very small volume of electricity involved?

I will be very glad to see explicit answers from those who endlessly suggest there was collusion, like Troy, Bayan Muna, other groups and individuals.

The average clearing price for November 2013 at WESM was P33.22/kwh. Answer the 4 questions above.
1. Who colluded?
2. At what volume (in GWH),
3. At what price the collusion happened?
4. At what days and hours the collusion happened?

Troy replied that it’s what they are trying to find out in the senate and in the SC

Can you beat that? People have been using that term “collusion” since 3 months ago, and until now there is zero proof of collusion? Puro allegation and ngaw ngaw lang? Hoping that endless allegation becomes an accepted "truth"?

If people are honest, they should shut their mouth from endless accusations because they have zero proof. If they are dishonest, they will retain the accusation even if proof is zero.

Troy posted this  quote, no source given:

the assertions from both Meralco and TMO that only 100 MW of capacity have been provided are quite odd. At the beginning of June, Aboitiz Power announced it had completed the rehabilitation of the four power barges, and that they were fully operational at their 242-MW rating. Even as early as September, 2012 TMO informed the ERC that rehabilitation of two of the units had been completed. The claim that only 100 MW has been provided so far (100 MW is, coincidentally, roughly the effective net capacity of the two smallest barges, rated at 57 MW and 52 MW, respectively) begs the question whether the TMO facility may have been another of those supposedly “unplanned” plant outages that forced Meralco to buy higher-priced power from the spot market.

Malaya 1 has been on technical shutdown since July 2013. Even if one DU will beg at P100 or P200/kwh, that plant will never be able to produce electricity. Malaya 2 has been on scheduled maintenance shutdown since late October 2013. See chart 4, http://funwithgovernment.blogspot.com/.../fat-free-econ...

And even assuming that NPC or PSALM (whoever operates Malaya power plant) could produce magic last November and make it run, its generation cost that will be passed to consumers would be something that will make the activists curse and howl. It is an inefficient, costly government power plant that can save us more money if it is not running than it is operating.

So people really point at Meralco-TMO collusion, somehow question #1 is answered, fine. Questions 2 to 4 must be answered to substantiate that there was indeed Meralco-TMO collusion.

People were so hooked on their conspiracy theory. Even if a power plant is 100% incapable of producing electricity, they will say that there is magic somewhere (by Batman? Superman? Spiderman?...) to make it run and save us from the Meralco-TMO-other GenCos collusion conspiracy theory.

I think this is a good explanation why a DU like Meralco with an existing contract to a GenCo like TMO told the latter to bid at the max rate of P62/kwh -- because it does not intend to buy significant volume at that price on non-peak hours. It turnedout that Meralco did buy from TMO at P62 -- at a monster volume of 0.5 kwh! Total purchase of Meralco from WESM in Nov 2013 was 286,000,000 kwh, 0.5 kwh of which was purchased at a "collusion" price of P62/kwh. Nice joke on collusion.

http://www.interaksyon.com/article/80150/power-rate-hike--justices-say-root-of-problem-lies-with-must-offer-rule-regulators

There are at least two lessons here. (1) Remove the "must offer" rule for all GenCos. If they do not want to be dispatched at particular hours because its power supply is already fully contracted, or it wants to do emergency repair on a minor mechanical problem that can become a big problem if not acted upon, then ERC should not compel them to offer.

Or (2) Retain the "must offer" rule but remove the P62/kwh max bid price. Make it indefinite. So that a GenCo that does not want to be dispatched for a particular hour can price its power at P1,000/kwh or P5,000 or higher, precisely so that NO ONE will buy from it.

Nice quote. People will always think the problem is with electricity distribution and the monopoly DUs, when the clear problem facing them is the lack of power generation.

Government is a major contributor to high electricity prices in this country. Aside from VAT and other taxes, it also slaps various mandatory fees under "universal charges."

Malaya power plant can greatly help in this power rate hike debate if it is privatized soon, two benefits: (a) money from privatization proceeds be used to pay back some of the stranded cost so that universal charges will decline. And (b) private operator can make it run more efficiently, more frequently, add to more power supply, while paying taxes to the government. A seldom-operating, government-owned Malaya plant is a costly elephant that adds to more costs than benefits to electricity consumers.

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See also: 

Energy Econ 10: Climate Alarmism and FIT for Renewables, June 28, 2013 

Energy Econ 11: On the Power Rate Hike, January 17, 2014 

Energy Econ 12: EPIRA, WESM, PSALM and DOE Bureaucracy, January 28, 2013 

Energy Econ :13: Universal Charges and Thin Power Reserves, February 13, 2014

Fat Free Econ 51: Ten Things About the Meralco Rate Hike, December 28, 2013 

Fat Free Econ 53: WESM, Myths and Realities, January 22, 2014

Energy Econ 12: EPIRA, WESM, PSALM and DOE Bureaucracy

I like this new article by Romy Bernardo. My comments after his paper, below.
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BUSINESS WORLD, January 26, 2014 10:15:33 PM

Introspective

By Romeo Bernardo

The way forward for the power industry

THE RECENT sharp spike in power rates led to the understandable shock and anger of consumers; most are unfamiliar with the structure and workings of a now market-based power industry. Headline news and public discourse have generated more heat than light. It can be satisfying to embrace conspiracy as a short-cut to thinking about a complex subject which the ideologically opposed to privatization are quick to fan.

What is emerging though from various congress hearings and submissions to the Supreme Court, is that this temporary two month spike was a product of a most unlikely and unfortunate perfect storm of planned and unplanned plant outages on top of already thin reserves. And what failures there were arose not from collusion, but from a bid and offer system that requires further refining, and perhaps, from insufficient diligence.

By way of disclosure, I was Undersecretary of Finance during the last two years of Aquino 1 and the first four years of Ramos administrations, an independent director in one major publicly listed power company and in an unlisted diversified holding company active in the energy business. While in government, I was involved in trying to addresss crippling blackouts in the early 1990’s that led the government to contract Independent Power Producers (IPPs) as part of the solution. Quick solutions had to be found -- the most expensive power was no power. Due to the outages, GDP flatlined for two years, 1990/92, lost output of P800 billion in today’s prices, equivalent to twice the cost of government’s infrastructure budget last year, or 20 years of its conditional cash transfer program. This is not even counting investments that were driven away, and the country’s lost momentum.

I resurrect this dark episode in Philippine economic history as a background to what may ensue if counterproductive actions are taken that lead to underinvestment yet again in power generation. Under the Electric Power Industry Reform Act (EPIRA; 2001) it is private sector players who are expected to deliver electricity under a competitive playing field, with government providing the enabling environment. This national policy was not arrived at willy-nilly but after seven years of debate both within the executive department and in Congress, with the active participation of all affected publics.

Modelled after successful privatizing countries, EPIRA was a recognition of the fiscal and institutional limitations of government in building and running power assets efficiently. As we know, such led to costly under-provision during the blackout years, and expensive stranded costs when the long-term growth forecasts failed to materialize post 1997 Asian Crisis.

Today many questions have been raised on whether EPIRA was a success. I submit that, while there has been a delay, a fair call is “so far, so good.” EPIRA has provided the framework for the restructuring of the Electric Power Industry, including privatization of National Power Corp.’s assets, defining the responsibilities of various government agencies and the private sector, and transitioning to a functioning competitive structure. The end goal was to make sure we had an ample and reliable supply of electricity, at reasonable and competitive rates.

What has happened since EPIRA was passed?

Fat Free Econ 53: WESM, Myths and Realities

* This is my article yesterday in interaksyon.com
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With the debate on whether the power generation rate increase -- mistakenly referred to as "Meralco rate hike" -- is justified or not, the role of WESM has been put under question.

The Wholesale Electricity Spot Market was created under Sec. 30 of Republic Act 9136 or the Electric Power Industry Reform Act of 2001 (EPIRA). Power generators, distribution utilities (DUs) and electric cooperatives, bulk consumers, similar entities authorized by the Energy Regulatory Commission (ERC) can participate there.

Below are some allegations or criticisms about WESM:

1.  DUs or electric cooperatives like Meralco collude with certain power generators and bid up the price at WESM.

2.  DUs and bulk consumers can easily buy forward contracts or buy electricity for specified short periods in the future to cover any foreseen exposure they may have. This is on top of their long-term bilateral contracts with power generators.

3.  DUs who buy at WESM would know who supplied them power at any time, any day.

4.  It is “a misnomer, a huge farce: More than 90 percent of its transactions aren’t spot trading transactions at all. They are bilateral contracts, with the price and quantity not having anything to do with market conditions at any given time.”

5.  The rule that WESM “must offer all available electricity capacity to the spot market” is mocked and disobeyed by many power companies by offering the maximum bid of P62 per kilowatt-hour (kWh).

6. WESM and its high rates in the November-December period could have been bypassed by running the state-owned Malaya power plants.

How true or valid are these allegations? Let us tackle each of them -- with hard data.

1.  The allegation of collusion between some DUs like Meralco and power generators is belied by the average generation cost in 2013 -- P5.52 per kWh – which was lower than the P5.76 in 2012. The spike in the December billing – which was based on the November generation cost -- was mainly due to the absence of cheaper natural gas from Malampaya, and the purchase of more expensive power from diesel plants, so that brownouts would be avoided.

To prove “collusion,” one must show who colluded. Barring this, collusion is simply an allegation. Item number three below will illustrate why identifying who colluded is impossible. 

2.  DUs and bulk consumers can buy or contract electricity at WESM – say about 10 percent of their projected demand -- just one or two hours ahead, not weeks or months ahead. There is an allowance if some of its contracted generator plants will conk out or suffer output reduction due to mechanical problems, or the demand would suddenly go up.  It is a spot market and as such is characterized by price volatility. But at least power supply is delivered, and disruption or a brownout, is avoided. When supply exceeds demand by a wide margin, the price goes down. When this margin narrows, the price goes up.

Here is a short history of WESM prices from July 2006 to November 2013. The three outliers, January 2009 – when prices were very low -- and February-March 2010 and November-December 2013 – when prices were very high -- are explained in bold sentences. Note the lower cost of WESM load-weighted average price (LWAP) compared to average Napocor rates.

3.  Knowing who sold power and by how much at WESM is fungible. When you buy, you no longer know from which plant and how much power is coming, so there is no way Meralco or ERC can know. Suppose there are 10 generators (excluding those covered by bilateral contracts) supplying WESM in a given hour, and there are 60 buyers (excluding those covered by bilateral contracts) during the same hour, it is impossible to attribute to one generator any output bought by a buyer.

Take this case. On December 6 -- or two days before Typhoon ‘Yolanda’ struck Eastern and Central Visayas -- coal and hydro plants could produce less than 5,000 MW in Luzon, while demand stood at 5,400 MW. More than 3,200 MW of power were either on planned/scheduled shutdown or on forced outage. The oil/diesel plants provided the power to address demand that coal and hydro could not supply. But the supply came at a higher price, in exchange for no brownout that day in Luzon.

Knowing which among the various oil-based power plants supplied how much energy to different DUs and bulk consumers at different prices at different hours of the day cannot be determined. DUs decide whether to buy at that particular price that hour, or beg off on those hours and suffer brownouts in certain cities and municipalities of their franchise area. 

Fat Free Econ 51: Ten Things About the Meralco Rate Hike

* This is my article the other day in interaksyon.com.

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1. The P4.15 per kilowatt-hour (kwh) electricity rate increase is short-term. It should have applied for only a month (if the increase had not been staggered) while the Malampaya natural gas platform was under maintenance. After that, the original lower rates, other things being equal, should return. Thus, contrary to public opinion, the rate hike is not long term.

2. The rate increase stems mainly from the generation charge, partly from the transmission charge, but nothing from the distribution charge. As distributor, Meralco is on the last stage of the electricity supply chain and is the collecting agent for all players (including the taxes that the government levies), and so naturally receives the brunt of public anger.

Table 1. Schedule of Rates for December 2013 

Source: Meralco

Compare the December rates above with the November rates below. Supply charge remained at P0.6043/kwh or P19.88/customer/month, while metering charge also stayed at P0.4066/kwh or P5.00/customer/month.

Table 2. Schedule of Rates for November 2013

Source: Meralco

The generation charge from November to December this year increased by P2.00/kwh, transmission charge by P0.0372, and system loss charge by P0.1950. As for the distribution charge, no increase.

Last October, the per kwh charges were as follows: generation charge, P4.6832; transmission charge, P0.8652; and system loss charge, P0.5050 -- all lower than the November rates. But the September rates were slightly higher than those of October, as part of the normal fluctuation in prices per month.

3. Lack or absence of competition is bad. Electricity distribution in the Philippines is always a monopoly, given to a specific entity through a congressional franchise. The Meralco monopoly is an example. In addition, there is a Constitutional restriction, as foreign equity is not allowed.

4. Meralco largely relies on natural gas-run power generation plants.

Table 3. Generation Cost for October and November 2013

Source: Meralco

Multiple Taxes on Electricity

On July 08, 2007, I wrote this in my other (now inactive) blog:

Why a tax on system losses?

Last June, our electricity bill was P3,457.00 for a consumption of 364 kwh. This was higher than our average monthly electricity consumption. The biggest items there were: (a) generation 46.6%, (b) distribution (Meralco) 20.5%, (c) transmission 9.6%, taxes 8.8%, and (d) system loss 7.7%.

The per kwh charges were: (a) generation charge P4.43; (b) distribution charge P1.16; (c) transmission charge P0.92; (d) system loss charge P0.73.

System loss, in my understanding, arise from (a) electricity uses of the power generating plants, transmission lines, and perhaps by distribution utilities like Meralco, and (b) pilfered electricity passed on to legitimate users. I am just wondering why is government imposing a tax on electricity that was not used by users, whether residential, industrial or commercial.

The government VAT rate for the following are as follows: (a) generation charge 9.56%; (b) transmission charge 10.65%; (c) distribution charge & subsidies 12%; and (d) system loss charge 9.76%. In our case, out of total of P305 VAT collection, P89.56 was VAT on system loss. 

VAT is a tax on value-added. When a tomato is transformed and processed into tomato paste then tomato sauce or ketchup, there was “value added” to the consumer who bought and consumed the tomato ketchup. Thus, the consumer is billed by the government a tax on the values added to the raw tomato. When a chicken was transformed and cooked into chicken adobo or chicken cube, there was “value added” to ordinary dressed chicken.

But when an electricity was used by a power plant or a transmission line, or stolen by some people, there was zero value added to legitimate electricity users because they have already paid the generation charge, transmission charge, and distribution charge. We can possibly call this “value subtracted”, not “value-added”, because consumers were billed for an electricity they never used. Consumers could tolerate this. But when government imposes a tax on an unused electricity (or other services), this is adding salt to the injury.

I hope this analysis is wrong. Otherwise, I will conclude that this practice by the government is just one of those numerous rip-off and robbery of consumers and taxpayers.

Then I followed it up the next day, July 09, 2007:

Value-Subtracted Tax (VST), not VAT

This anomaly of taxing unused electricity (or water or other services) should be reviewed by the BIR, and/or Congress, the House of Reps. especially. I think this defect was made in the expanded VAT law's implementing rules and regulations (IRR).

My friend and former classmate from UPSE, Raymund Addun, concocted the term Value Subtracted Tax or VST (short for vuwisit), which jibes with the ugly practice of government taxing value-subtracted, not value-added, service. Raymund added that "Its like we're short changed (or better short circuited) from the start."

My posting yesterday was not against charging to consumers the system loss. The consumers could tolerate it. I could tolerate it. With those stolen electricity by some people, especially in squatter areas in cahoots with some Meralco people actually, someone has to pay, and that's the legitimate electricity users. It's part of enduring the negative externalities of being provided electricity by a natural monopoly.

In the case of taxing system loss, the villain is not Meralco but the government.Charging to consumers system loss is already painful. Taxing that unused electricity makes it doubly painful.

Last month, our electricity bill was P3,470 for the 323 kwh consumed. It was higher than our usual monthly bill. Here is the breakdown of costs, in descending order:

1. Generation charge, P4.862/kwh, P1,571

2. Distribution charge, P1.724/kwh, P557

3. Transmission charge, P1.076/kwh, P348

4. Government taxes, (from 8 to 12%), P323

5. System loss charge, P0.656/kwh, P212

6. Supply charge, P0.635/kwh, P205

7. Metering charge, P0.466/kwh, P150

8. Subsidies, P0.139/kwh, P 45

Others (fixed supply charge, fixed metering charge, universal charges,...)

T O T A L P3,469.80

As usual, my main beef is the high government taxes, VAT (P307) + local franchise tax (P16), representing 9.3 percent of our total bill. The VAT applies on generation, distribution and system loss. Transmission is VAT-exempt.

I have argued above that passing on the system loss (including those stolen and unpaid electricity) to the public is somehow unfair, but taxing the system loss is adding insult to the injury. The government is so callous that it even taxes electricity that was never used by the consumers.

And don't forget, power generation companies, power transmission company/ies and power distribution companies pay various taxes to the government -- corporate income tax, VAT, franchise tax, documentary stamp tax, real property tax, business permit fees, etc.). All those taxes are costs that they already pass on to the consumers and reflected in the per kwh charge that they bill us.

If those taxes on those companies are added to the direct taxes consumed by the public, I will not be surprised if they reach nearly 20 percent of our total bill.

Yes, government cares a lot for us. It makes things more expensive and more costly for us. Long live BIG government.