BWorld 226, The EPIRA is working

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

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

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

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

Electricity prices are rising, true.

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

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

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

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

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

These numbers show the following:

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

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

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

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

AN INDEPENDENT MARKET OPERATOR, FINALLY

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

This will be a very significant event for two reasons.

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

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

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

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

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

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See also:

BWorld 216, Positive and negative disruptions in the electricity market, May 31, 2018 

BWorld 221, Mindanao power development, reality vs illusion, June 16, 2018

BWorld 223, Ease of setting up and closing down business, July 9, 2018 

BWorld 224, China mercantilism and US free trade challenge, July 10, 2018

BWorld 225, Anti-reason of Duterte’s anti-tambay order, July 11, 2018

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 128, The quest for more stable and cheaper electricity in the ASEAN

* This is my article in BusinessWorld last April 28, 2017.

High economic growth means high energy demand coming from stable supply and competitively priced energy, not unstable, intermittent, and expensive energy. This is what the Association of Southeast Asian Nations (ASEAN) economies need as their high GDP growth of 4.7% in 2016 is projected to improve to 4.8% this year and 5% in 2018 (ADB data), much faster than the projected growth of other regions and economic blocs.

One week before the ASEAN 50th Summit Meeting, the 7th Annual Meeting of the Nuclear Energy Cooperation Sub-Sector Network (NEC-SSN) hosted by the Department of Energy (DoE) was held. A pre-feasibility study showed that many ASEAN countries are in favor of using nuclear energy for commercial use. The ASEAN Center for Energy (ACE) also sees nuclear energy as a long-term power source for the member-countries.

The intensive infrastructure projects of the Duterte administration require huge amount of energy. The proposed 25-km. subway in Metro Manila by the Japan government alone would require high energy supply for the dozens of trains running simultaneously below the ground plus dozens of train stations below and above ground.

Lots of base-load power plants, those that can run 24-7 all year round except when they are on scheduled shut down for maintenance, will be needed. These baseload plants include coal, natural gas, geothermal, and nuclear. Hydro plants too but only during the rainy season.

How reliable and how costly are the different power generation plants that the Philippines and other ASEAN countries will need? This table will help provide the answer as I have not seen data for the ASEAN yet.

Power reliability is represented by plant capacity factor or actual power output relative to its installed capacity. So unstable, intermittent sources like wind and solar have low capacity factor, not good for manufacturing plants, hotels, hospitals, malls, shops, and houses that require steady electricity supply.

Power cost is represented by the levelized cost of electricity (LCOE), composed of capital expenditures (capex), fixed and regular operation and maintenance (O&M), variable O&M, and transmission investment. CCS means carbon capture and sequestration.

The cost of ancillary services for intermittent sources, the standby power plants if the wind does not blow or if it rains make solar plants temporarily inutile, does not seem to be reflected in the transmission cost though.

ASEAN countries like the Philippines will need those power plants that have (a) high reliability, high capacity factor, (b) low LCOE, and (c) low or zero need for ancillary services.

However, more ASEAN countries are entertaining more solar PV and wind onshore since they were convinced to believe that they need unstable yet expensive electricity to “save the planet.”

During the Energy Policy Development Program (EPDP) lecture last April 20 at the UP School of Economics (UPSE), Ms. Melinda L. Ocampo, president of the Philippine Electricity Market Corp. (PEMC) talked about “Electricity Trading and Pricing in the Philippine WESM.” Ms. Ocampo discussed among others, the new management system where the interval for electricity dispatch has been improved from one hour to only five minutes.

I pointed during the open forum that the imposition of the lousy scheme feed-in-tariff (FiT) or more expensive electricity for favored renewables was unleashed even to consumers in Mindanao, which is not part of WESM, and is not connected to the Luzon-Visayas grids. The FiT-Allowance that is reflected in our monthly electricity bill has risen from 4 centavos/kWh in 2015 to 12.40 centavos in 2016 and this year, we should brace for at least 26 centavos/kWh soon because the 23 centavos petition by Transco starting January 2017 has not been acted by the Energy Regulatory Commission yet.

The issue of stable and affordable energy will be tackled in the forthcoming BusinessWorld Economic Forum this May 19, 2017 at Shangri-La BGC. Session 4 “Fuelling Future Growth”of the conference will have the following speakers: John Eric T. Francia, president & CEO of Ayala Corp. (AC) Energy Holdings, Inc.; Antonio R. Moraza, president & COO of Aboitiz Power Corporation; Josephine Gotianun Yap, president of Filinvest Development Corp., and DoE Secretary Alfonso G. Cusi. Yap and Cusi are still to confirm the invite.

Local energy players will have a big role in ensuring that the Philippines should have stable and competitively priced energy supply today and tomorrow.

-------------

See also: 

BWorld 120, Five myths of solar-wind energy, April 08, 2017

BWorld 125, On the retail competition and open access (RCOA) and EPIRA, May 05, 2017 

BWorld 126, Why mining is appropriate for certain areas and provinces, May 06, 2017 

BWorld 127, Economic freedom in Asia means faster growth, lower prices, May 07, 2017

BWorld 105, Top 10 energy news of 2016

* This is my article in BusinessWorld last January 6, 2017.

Here is my list of 5 international and 5 national or Philippine important energy issues last year.

INTERNATIONAL

1. Donald Trump and his energy policies.

US president-elect Donald Trump’s energy policies are summarized in his major campaign platform, “Seven actions to protect American workers” and these include:

“FIFTH, I will lift the restrictions on the production of $50 trillion dollars’ worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal... SEVENTH, cancel billions in payments to UN climate change programs and use the money to fix America’s water and environmental infrastructure.”

So far some of Mr. Trump’s Cabinet Secretaries are his fellow skeptics of the anthropogenic or “man-made” climate change claim (climate change is largely cyclical and natural or “nature-made”), or simply pro-oil. These include: (a) Environmental Protection Agency (EPA) head is Scott Pruitt, former attorney general of Oklahoma; (b) DoE Secretary is former Texas Governor Rick Perry who is pro-drilling; and (c) Secretary of State is Rex Tillerson, CEO of the oil giant Exxon Mobil Corp.

2. OPEC cut on oil production.

For eight years, OPEC never cut its oil production despite declining oil prices to protect its global market share under intense pressure from huge shale oil supply from the US. In November 2016, OPEC finally blinked and decided to cut their collective oil output by 1.2 million barrels per day (mbpd) hoping for an increase in oil prices. Non-OPEC countries like Russia and Mexico made an agreement with OPEC to cut output by another 0.56 mbpd, for a total projected output cutback of about 1.8 mbpd. So far, price impact was marginal as oil prices before this OPEC decision was already touching $50 a barrel. But once US shale oil output ramps up, this marginal price increase can easily be reversed.

3. More wind-solar means more expensive electricity in selected countries in Europe.

The numbers below show that countries with expensive electricity (1-5) have zero or little nuclear power, have high wind power (except Belgium and Italy), and high solar capacity (except Spain). And cheaper electricity countries (6-10) have high nuclear power (except UK and Netherlands) and low wind (except Sweden), low solar capacity (see Table 1).

4. By 2040, 46% of global energy demand will come from Asia Pacific.

Based on a recent report by Exxon Mobil which grabbed global energy headlines, it said that it expects China, India, and the rest of Asia Pacific (including Japan, ASEAN, and Australia) will increase its global share of total energy demand from 234 quadrillion British thermal units (BTUS) in 2015 to 322 quadrillion BTUs by 2040. The percentage share of the region will rise from 41% of global demand in 2015 to 46% by 2040. In contrast, the share of EU and the US combined will shrink from 28% in 2015 to only 22% by 2040 (see Table 2). 

5. By 2040, wind, solar, biomass, other renewables will contribute only 11% of total global power generation.

Coal will remain the dominant source in power generation worldwide by 2040 but its share will decline from 44% in 2015 to 34% by 2040. The share of natural gas and nuclear power combined will increase from 38% in 2015 to 45% by 2040. The share of wind, solar, geothermal and other renewables will marginally increase from 6% in 2015 to 11% by 2040, despite all the political noise worldwide that these renewables will get “cheaper than coal” and attain “grid parity” with conventional sources like coal and natural gas.

PHILIPPINES

6. Search for an Independent Market Operator (IMO) of WESM.

In the last Congress, then Sen. Serge Osmeña, Chairman of the Senate Committee on Energy conducted a series of meetings until January 2016 about the absence of an IMO that is supposed to manage the Wholesale Electricity Spot Market (WESM). The Philippine Electricity Market Corporation (PEMC) as market operator of WESM remains weird because (a) PEMC Board is chaired by the DoE Secretary, many board members are government officials; (b) Even the supposed four independent directors plus consumer representative (5 total) are all appointed by the DoE Secretary; and (c) PEMC is regulated by the Energy Regulatory Commission (ERC), which is under the administrative control of the DoE Secretary, who chairs the PEMC that is regulated by ERC.

7. WESM Mindanao, IMEM.

Aside from issues on the new Market Management System (MMS) for WESM rules and the transition to a real IMO, the move to create a WESM in Mindanao via the Interim Mindanao Electricity Market (IMEM) is gaining ground. The Mindanao dispatch protocol will have to be spelled out in detail too.

8. Imposition of Renewable Portfolio Standards (RPS).

In June 2016, the DoE issued a draft Department Circular (DC) on RPS, a provision in the RE Act of 2008 (RA 9513) that “requires electricity suppliers to source an agreed portion of their energy supply from eligible RE resources.” This RPS will result in more expensive electricity because wind, solar, biomass, and small hydro that are not given feed in tariff (FiT) privilege of guaranteed price for 20 years can demand higher price for their energy output because distribution utilities will have zero choice but buy from them otherwise the DoE will penalize them.

The draft DC wanted an initial “2.15% to be applied to the total supply portfolio of the Mandated Participant in each grid.” When asked what will be the projected price implication of such policy, DoE and National Renewable Energy Board (NREB) officials answered that no study on price implications has been made yet. A weird proposal where proponents have no clear idea on the cost of implementation to energy consumers, the DC was shelved.

9. Shift in energy mix from energy source to system capability.

During the administration of DoE Secretaries Petilla and Monsada, the DoE wanted an energy mix based on energy source or technology, 30-30-30-10 for coal-natural gas-RE-oil, respectively. This is highly distortionary because many REs are either seasonal (hydro can be baseload only during the rainy season, biomass can be baseload only if feedstock is available) or intermittent like wind and solar. New DoE Secretary Cusi changed the energy mix based on system capability: 70-20-10 for base load-mid merit-peaking plants, respectively. This is a more rational mixture.

10. Endless demand for expanded, higher feed in tariff (FiT).

As more solar farms and wind farms are constructed nationwide, their developers and owners are lobbying hard for an expanded FiT 2 with guaranteed price for 20 years. Even geothermal developers also lobbied that their new plants should also be given FiT. Currently, three wind developers -- Trans-Asia Renewable Energy Corporation (TAREC), Alternergy Wind One Corporation (AWOC), and Petrowind Energy, Inc. (PWEI) are petitioning the ERC that their FiT rate be raised from P7.40/kWh to P7.93/kWh. Three wind farms were lucky or favored to get P8.53/kWh under the original FiT -- EDC Burgos (Lopez group), Northern Luzon UPC Caparispisan (Ayala group) and Northwind Power Bangui (partly Ayala).

---------------

See also:

BWorld 102, Top 10 news of 2016, January 10, 2017

BWorld 103, How to improve the RORO system, January 11, 2017

BWorld 104, Top 10 positive news in Asian trade, January 14, 2017

Energy 83, The PEMC-NGCP Electricity Summit 2016, low ESSPs last October and high FIT-All next year

The annual Electricity Summit jointly organized by the Philippine Electricity Market Corporation (PEMC) and the National Grid Corporation of the Philippines (NGCP) will be held next week in Davao City, the home of President Duterte. PEMC is the market operator, the Wholesale Electricity Spot Market (WESM) while NGCP is the system operator.

I attended theElectricity Summit 2015 held at the Crowne Plaza in Ortigas. Compared to most conferences that I attend, it was an odd or weird one. The organizers and speakers are the energy regulators (DOE, ERC), market operator and system operator, and the audience are the regulated market players. So during the open forum, I think the audience were  hesitant to ask critical questions and comments to the guys who regulate them and operate the system for them. I think I stood 2 or 3 times to ask questions because the huge conference hall has a generally friendly atmosphere to the organizers.

The program this year is a bit different mainly because (1) EPDP is involved, an independent institute, (2) there are speakers from the WB and ADB, and (3) the President is a keynote speaker. Last year, among the key speakers were from (1) the ASEAN Power Grid, (2) the International Energy Agency (IEA), and (3) Mr. MacDonald, the Australian consultant who justified the PEMC structure of many government representatives in the board and still call it an "independent" agency. Provisional program of Summit 2016 as of November 17.

I have heard the presentations by Majah, Laarni and Geoffrey at the recent PH Economic Society (PES) conference last November 8. The WB and ADB guys will likely be talking about "more renewables please to save the planet" and indirectly say "we offer pretty climate and energy loans to save the planet." :-)

What will be new there will be the proposed electricity market and transmission connection for Mindanao. Will the session also tackle the privatization of huge hydro power plants in Mindanao, the Agus-Pulangi plants, others? I doubt it. These plants are still under another government corporation, the Power Sector Assets and Liabilities Management Corp. (PSALM).

Registration is P15,000 per head, not cheap. People from Metro Manila, Visayas must also fly to Davao and get a hotel room for a night or two.

Meanwhile, PEMC sent me their latest press release with a good news: the Effective Settlement Spot Prices (ESSPs) in WESM further fell from PhP2.86/kWH in September to PhP2.48/kWH in October 2016 billing period. Good news, indeed. ESSPs are average prices paid by wholesale customers for energy purchased from WESM. Meralco has been getting more of their power supply from WESM over the past two or three months, something like 15-20% of their power supply. Mura eh, good decision.

Supply – demand dynamics. Higher supply, more competition among gencos, lower prices. Limited supply while demand remains high, higher prices.

This is the power generation mix for October 2016 in the Luzon-Visayas grids, PEMC data. Will the planet saviours who keep insisting on "more wind-solar please to save the planet" be happy with frequent, long hours of blackouts daily, more candles and noisy gensets 365 days a year? Solar + wind can only supply 2.3% of the total electricity need in Luzon-Visayas grids including Metro Manila.

Meanwhile, PEMC will not report that there is a bad news to low ESSPs -- that the FIT-All (feed in tariff allowance) will naturally rise big time next year.

FIT-All = (Total FIT collections by the renewables firms) - (collections from WESM)

So, since the collections from WESM are low because of low ESSPs while the total FIT collections will be high as more solar-wind are added to the grid with their expensive guaranteed price (for 20 years, mind you), FIT-All will naturally rise. From 4 centavos/kWh in 2015 to 12.40 centavos/kWh this year, to about 20 centavos/kWh in 2017?

If we combine these: (a) FIT under-recoveries in 2015 because of the low FIT-All of 4 centavos + (b) FIT under-recoveries in 2016 because of low ESSPs and insufficient 12.40 centavos + (c) more expensive solar-wind power added to the grid, the resulting FIT-All by 2017 will be high.

The FIT administrator is another government firm that owns the country's grid system and assets, the National Transmission Corporation (Transco). I do not know yet how much Transco has petitioned the ERC for the FIT-All next year.

Again, my bottomline: government interventions in setting the energy mix, in setting fixed and guaranteed pricing for the variable renewables (solar, wind, biomass, run-of-river or small hydro), in granting mandatory dispatch for these renewables, are all wrong. They can lead to more expensive electricity, more unstable supply and "brownouts-friendly" electricity.

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See also:
Energy 80, Power outages in 2010, October 21, 2016 
Energy 81, Trump's climate and energy policies, November 12, 2016 
Energy 82, Jarius Bondoc on FIT for renewables, November 14, 2016

BWorld 82, No FIT for geothermal and other renewables, please

* This is my article in BusinessWorld last September 01, 2016

Expensive electricity via government price guarantee for 20 years is wrong. Business is about risks and returns, capitalism is about corporate expansion and bankruptcy, so there is no such thing as guaranteed price nor assured profit for many years in a competitive economy. Only politics and cronyism will try to negate the nature of competition and business reward and punishment.

Last Aug. 17, 2016, it was reported here in BusinessWorld that Geothermal technologies sought to be included in FiT program.

“The National Geothermal Association of the Philippines (NGAP) is asking the government to include emerging geothermal technologies in the feed-in-tariff (FiT) program to address the cost and risks encountered by developers,” the report said.

This is wrong. Other renewables should also not aspire for FiT system. Granting FiT for intermittent renewables like wind and solar for 20 years was already wrong because it exposed consumers to high and rising electricity prices and the grid to volatile power fluctuations within minutes, among others.

The association was correct in calling that “On the policy front, NGAP calls for expedited regulatory action and permit approvals, as well as assurance of peace and order in some of the more remote prospects.”

Let there be less government interventions and bureaucracies for businesses.

Another reason why granting FiT to geothermal and other renewables is wrong is because energy technologies keep improving and hence, their costs keep falling. So why give an assured, guaranteed high price for technologies that evolve towards falling price through time?

The numbers below on levelized cost of electricity (LCoE) will support the above statement. LCoE is not a perfect measurement of the overall cost per technology but it is a good dimension of the overall competitiveness of different power generation technologies.

Some definitions here.

a. Dispatchable energy sources are those that can easily adjust to consumer demand. Non-dispatchable technologies are those that are generally dependent on the weather.

b. Capacity factor means the ratio of actual electricity output over rated or installed capacity.

c. CC means combined cycle for natural gas plants.

d. CCS means carbon capture and storage, it is made mandatory by the US government for all new coal plants and it pushes the capex to high levels, making coal power in the US more costly (see table).

So in the US, the no. 1 geothermal electricity producer in the planet, the LCoE of geothermal is falling fast, the lowest among all energy sources at only $42.3/MWh by 2022. The Philippines is no. 2 geothermal producer in the planet, next only to the US. Technologies also follow the law of diffusion of molecules, making expensive technologies become cheaper through time.

On another note, I wrote in my column last Aug. 17, 2016, Brownouts, coal power and the electricity market, “can we expect PEMC to be more independent, more candid, in assessing the harm, actual and potential, of more REs in WESM and grid stability?... no. The DoE cannot contradict itself and say that REs are necessary and that REs are dangerous to the customers’ pockets and the stability of the national grid.”

The Philippine Electricity Market Corporation (PEMC) through Atty. Phillip C. Adviento replied last Aug. 23, 2016. They said that PEMC “acts only as the Market Operator responsible for the governance and operations of the WESM. The function of maintaining the security, reliability and integrity of the power grid is lodged with the System Operator. Against this context, it is grossly inaccurate to claim that PEMC is expected to study the impact of influx of RE resources in the grid.”

Good point, I recognize that strict distinction between a market operator (of WESM) and system operator (of the national grid). Still, PEMC has the data, it generates that data, of the intermittency per hour and even per minute, of the overall low capacity factor, of the renewables that enter the WESM.

PEMC added that it is “not a government-controlled corporation.”

However, it IS a private but government-controlled corporation. The Governance Commission for GOCCs (GCG) itself said this at the Senate Committee hearing last Jan. 26, 2016, then chaired by former Senator Serge Osmeña III.

Since the DoE Secretary sits as ex officio Chairman of the PEMC Board, the Secretary determines who among the private players can sit and cannot sit on the board, the Secretary has included government-owned energy corporations on the board even if they have minimal or zero contribution to electricity supply at WESM (NPC and PSALM), also TransCo. That makes PEMC a government-controlled corporation.

Government needs to step back from its intervention in the sector. It should reduce the number of permits that firms need to secure so that they can put up new power plants quickly. The government should also cut or abolish the system of guaranteed price for decades for favored renewables, reduce the taxes and fees imposed on energy companies, and the electricity costs paid by the customers.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET and Stratbase-ADRi.

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See also: 

BWorld 66, Renewable portfolio standard and electricity prices, June 26, 2016 
BWorld 70, Wind power firms corner billions of FIT money, July 09, 2016
BWorld 76, Solar can never power the PH and Asia, August 06. 2016 

BWorld 79, Brownouts, coal power and the electricity market, August 21, 2016 

BWorld 80, Declining share of agriculture in GDP, September 11, 2016 

BWorld 81, Property rights are human rights, September 30, 2016

Energy 76, PEMC reply to my article on AEMO, WESM

The Philippine Electricity Market Corp. (PEMC) replied to my article in BWorld, Brownouts, coal power and electricity market, August 17, 2016, below.

  

Dear Editor: We are writing in reference to a column written by Mr. Bienvenido Oplas published on 17 August 2016 entitled, "Brownouts, coal power and the electricity market".

We note the persistent claims made in your column that Philippine Electricity Market Corporation (PEMC) is exactly replicating the Department of Energy's (DOE) efforts to push for more renewable energy (RE) resources into the system. It was also averred in your column that "since PEMC continues to be a government controlled

corporation, can we expect PEMC to be more independent, more candid, in assessing the harm, actual and potential of more REs in the WESM and grid stability?"

In addressing these claims, you used the example of the Australian Energy Market Operator (AEMO) in its initiative to conduct reliability studies. It must be pointed out that the AEMO is not merely a market operator but also a power systems operator that provides critical planning, forecasting, and power systems information. Thus, it can conduct studies on the impact of withdrawal of coal-fired generation capacity cognizant of its responsibility in maintaining the reliability of the Australian power

grid. In contrast to the Australian structure, PEMC acts only as the Market Operator responsible for the governance and operations of the WESM. The function of maintaining the security, reliability and integrity of the power grid is lodged with the System Operator. Against this context, it is grossly inaccurate to claim that PEMC is expected to study the impact of influx of RE resources in the grid.

With regard to the claim that PEMC is pushing for more RE resources in the WESM as a result of its study on "merit order effect" (MOE), this is a non-sequitur. The study published in our electricity journal focused on the impact of FIT incentives based on

the actual generation of FIT-qualified resources in the WESM as a result of priority dispatch accorded by Republic Act No. 9513 otherwise known as the RE Act of 2008. The MOE of the possible lowering of energy prices in the electricity bourse is no form of endorsement of RE resources on PEMC's part. In the study, the impact of MOE on the market affects only those distribution utilities and directly-connected customers that purchased from the market and does not necessarily translate to the direct lowering of retail rates for end-users because of the FIT. The initiative of PEMC in conducting studies and analyses affecting market outcomes is without partiality to any resource.

Lastly, we wish to point out that PEMC remains a private corporation and not a government-controlled corporation. We recognize the DOE's role in the policy oversight of the WESM operations as envisioned pursuant to relevant laws and

regulations.

We understand and appreciate your pursuit of balanced reporting and as such, we deemed it necessary to address the assertions made in your column.

In the interest of unbiased journalism, we request that you allow us to air our side by publishing this letter in your paper, as is and sans comment.

Respectfully yours,

Atty. Phillip C. Adviento,

Manager, Training and Communications

The Philippine Electricity Market Corporation (PEMC) is a non-stock, non-profit corporation which was incorporated in November 2003 upon the initiative of the Department of Energy (DOE) with representatives from the various sectors of the electric power industry to be the governance arm of the Wholesale Electricity Spot Market (WESM). The WESM began Commercial Operations in Luzon in June 2006 and in the Visa yas in December 2010. In June 2013, PEMC launched and integrated the Retail Competition and Open Access (RCOA) into the WESM. The WESM is a centralized venue for buyers and sellers to trade electricity as a commodity where its prices are based on actual use (demand) and availability (supply). The WESM was created by Republic Act 9136, the Electric Power Industry Reform Act (EPIRA) of 2001. This provided for the establishment of an electricity market that reflects the actual cost of electricity and lowers its price through more efficient production through competition.

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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 75, the PH solar confederation, electric coops and Meralco, August 01, 2016

BWorld 79, Brownouts, coal power and the electricity market

* This is my article in BusinessWorld last August 17, 2016.

Brownouts, actual and potential, have returned to some areas of Metro Manila and surrounding provinces in the Luzon grid over the past two weeks. This is unfortunate because electricity demand has somehow declined because of the colder, rainy season and more power plants have been added to the grid.

  

This rare event was caused by heavy stress in the Luzon grid as a result of the unscheduled outage of several coal-fired, hydroelectric, oil, and geothermal power plants in the grid, many of them are already ageing. Among these coal plants were (a) 382 M-W Pagbilao’s unit 2 (U2), (b) 122 M-W South Luzon Thermal’s U1, (c) 140 M-W Southwest Luzon’s U2, and (d) 60 M-W Limay Cogen Block 5.

Among the hydro plants were (a) 50 M-W Angat Main U4 and (b) 180 M-W Kalayaan U1. Then 83 M-W from Makban Geothermal and 280 M-W from Malaya Thermal U1. Almost 1,300 MW of power went on unscheduled or unplanned outage, plus power plants on scheduled or planned maintenance shutdown.

The newly-commissioned wind and solar plants in Luzon cannot and will not be able to fill up the power deficit. If the wind DoEs not blow, wind power is zero; if it is night time or day time but very cloudy, then solar power output is zero or very low.

This situation again highlights the need to continue building new coal and natural gas plants. The proposal and lobbying by certain sectors and environmentalist groups to discontinue building new coal plants and build only intermittent renewable energy (RE) plants like solar and wind is not wise. The Philippines’ fossil fuel consumption remains among the lowest in Asia’s emerging and developed economies plus Australia.

(Correction:  the last 2 columns are for oil, unit in million tonnes, not mtoe)

Last Aug. 11, 2016, the Australian Energy Market Operator (AEMO) released its 2016 Electricity Statement of Opportunities (ESoO) report and it highlighted the growing importance of network and non-network developments to secure future electricity generation. Notable in its report is this warning,

“AEMO has modelled the impact of withdrawing a further 1,360 MW of coal-fired generation capacity to meet the COP 21 commitment under AEMO’s neutral scenario, with results suggesting potential reliability breaches occurring in South Australia from 2019-2020, and New South Wales and Victoria from 2025 onwards.”

“Reliability breaches” is a technical term for power outages or blackouts. And AEMO projects that it will take place in three to four years from now. Replacing coal power with additional RE capacity will not compensate for the loss of coal capacity.

AEMO was candid enough to categorically warn about the dangers of cutting coal power and pushing more renewables into the system. This candor is good because it will prepare both power suppliers and consumers of what’s going to happen few years on the road.

One explanation for such candor by AEMO is its independence from the government as the latter pushes for more REs.

In contrast, the Philippine Electricity Market Corporation (PEMC), AEMO’s counterpart here as electricity market operator, is government-dependent. It is headed and chaired by the DoE (Department of Energy) secretary and many board members are from the government, like the National Power Corp. (NPC), National Transmission Corp. (TransCo), and the Power Sector Assets and Liabilities Management Corp. (PSALM).

Since the DoE is the main implementer of RE Act of 2008 (RA 9513), DoE is naturally pushing for more intermittent REs into the system and that is what PEMC is exactly doing. The latter for instance produced a study in November 2015 saying that REs that are priority dispatch at the Wholesale Electricity Spot Market (WESM) have created the “merit order effect” (MOE) in reducing the market clearing price (MCP) at WESM.

MOE can also be realized via more and cheaper conventional plants like coal rather than expensive and intermittent REs. With conventional plants, there is no need for additional ancillary costs.

So, since PEMC continues to be a government controlled corporation, can we expect PEMC to be more independent, more candid, in assessing the harm, actual and potential, of more REs in WESM and grid stability?

The most logical answer is no. The DoE cannot contradict itself, say that REs are necessary and say at the same time that REs are dangerous to the customers’ pockets and the stability of the national grid.

So the important implication here is that the independent market operator (IMO) as clearly stated in the EPIRA (Electric Power Industry Reform Act) some 15 years ago and now represented by PEMC, should be independent from government like AEMO. The DoE secretary and all other government energy agencies, including those in the “advisory” capacities, should get out of IMO or PEMC board.

Having less government intervention in the energy sector in general and the electricity market operation in particular is pro-consumer. Just give the consumers more choices, no or little coercion and they will choose the least costly, the more stable and reliable energy source.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET and Stratbase-ADRi. minimalgovernment@gmail.com

Mr. Oplas has written about the PEMC, renewable energy, and related issues in his previous columns. To read his pieces entitled “State dependence of Philippine electricity market” and “Renewable energy, expensive electricity, and the merit order effect,” please visit these links http://goo.gl/r0XaLt, http://goo.gl/Hf6DRg, respectively.

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See also:

BWorld 58, INDCs and PH energy realities, May 14, 2016 

BWorld 63, Can renewables only power the PH and Asian markets? June 10, 2016 

BWorld 66, Renewable portfolio standard and electricity prices, June 26, 2016 
BWorld 70, Wind power firms corner billions of FIT money, July 09, 2016
BWorld 76, Solar can never power the PH and Asia, August 06. 2016 
BWorld 78, If the US becomes protectionist, who loses? August 11, 2016

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

BWorld 43, More on WESM, PEMC and DOE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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See also:

BWorld 22, WESM, PEMC and search for competitive electricity prices, November 05, 2015 

BWorld 31, Comparative electricity exchange market in Asia-Pacific, December 13, 2015 

BWorld 39, Coal and renewables complement each other, January 26, 2016

BWorld 40, CCT vs other welfare programs, SSS vs pension deregulation, January 29, 2016

BWorld 41, OFWs, cheap oil and the TPP, February 06, 2016

BWorld 42, World inequality, Oxfam and bad mathematics, February 11, 2016