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).

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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

BWorld 66, Renewable portfolio standard and electricity prices

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

The key to cheaper prices and/or good services is more competition among more players, more voluntary exchange, and not more price coercion by regulators. If buyers do not like the price of seller A, they can opt out and go to sellers B, C, and so on. Seller A is then pressured to lower his price to compete with other sellers.

The key to expensive prices and/or lousy services is more government regulation and curtailing voluntary exchange. Buyers are forced to buy from expensive sellers and opting out is not allowed. This happens in government-created monopolies like tricycle routes, electric cooperatives, or government-favored sectors like producers of new renewables like solar and wind power.

The Department of Energy (DoE) along with the United States Agency for International Development (USAID) conducted a public consultation last June 16 at Shangri-La at the Fort, Bonifacio Global City about the proposed or draft Department Circular (DC) on the Renewable Portfolio Standard (RPS). The activity was hurriedly organized and was not posted on the DoE’s Web site.

But I heard about it from a friend and then I wrote to DoE’s Mario Marasigan and asked if I could attend it and he said yes. Thank you Sir Mario.

Here is a quick backgrounder of the subject.

1. Under the Renewable Energy (RE) Act of 2008 (RA 9513), RPS is defined as a “policy that requires electricity suppliers to source an agreed portion of their energy supply from eligible RE resources.”

2. Under the Implementing Rules and Regulations (IRR), Section 4, RPS, “...Annual minimum incremental percentage of electricity sold by each RPS-mandated electricity industry participant which is required to be sourced from eligible RE Resources and which shall, in no case, be less than one percent (1%) of its annual energy demand over the next ten (10) years.”

3. Under the draft DC discussed by the DoE last June 16, Section 8. “The minimum annual increment in the RPS level shall be initially set at 2.15% to be applied to the actual total supply portfolio of the Mandated Participant in each grid for the previous year.”

4. Under the Annex table, RPS Calculation, also prepared by the DoE that day, the cumulative RE capacity that will be needed from 2016 to 2030 is a glaring 30,862 MW (30.86 GW) or an average of 2.06 GW/year increase for RE alone (see Table 1).

During the open forum, I asked about many consumers’ concern about expensive electricity. What would be the implication in pricing of the proposed RPS, if they impose a 1.5% annual marginal increment (AMI)? How about at 1.75% or at 2.15% (their proposed rate)? And if they target 30% renewables in the energy mix by 2030, or 32% or 35% (their proposed target), what would be the impact on electricity prices?

The feed in tariff (FIT) without RPS was already four centavos per kilowatt-hour (kWh) last year, 12 centavos per kWh this year, so with FIT + RPS next year, will it become 20 centavos? 25 centavos?

DoE officials answered that no study on price implications has been worked out yet and that it can come out later as the current focus is the mechanisms on how RPS will be implemented, including penalties for violators or non-implementers of RPS.

So it is a weird circular because both the DoE and the National Renewable Energy Board (NREB), the multi-stakeholder body that recommends policy options for the DoE, are pushing for a policy where they admittedly do not have a clear idea on the cost of implementation to energy consumers.

One thing that can be favorable for RPS though is that distribution utilities (DUs) will have more options from among renewable technologies -- biomass, waste to energy, geothermal, run of river hydro, impounded hydro, wind, solar, ocean, hybrid systems, others -- and choose those that are least cost.

The above RPS and RE targets by 2030 are not practical and not viable because the Philippines is still way below many of its neighbors in power generation and we need to grow fast to sustain the economic momentum of recent years and create more businesses, more jobs to more people.

People who push for higher renewables in the national energy mix want to push out coal power as much or as soon as possible. This is a day-dream and illusionary goal because of the big role that coal power contributes to many industrialized and emerging Asian economies. From 2000 to 2015, Indonesia, Malaysia and Vietnam ramped up their coal power capacity from 375% to 609%. The Philippines’ 11.4 gigawatt (GW) coal capacity in 2015 was only one-half that of Vietnam’s 22 GW, only one-third that of Taiwan’s and nearly one-eighth of South Korea’s.

For Table 2, definition of the following terms:

a. 1 terawatt (TW) = 1,000 gigawatt (GW) = 1,000,000 megawatt (MW)

b. MTOE = Million tons of oil equivalent

c. 1 MTOE = produces about 4.4 terawatt-hour (TWh) of electricity in a modern power station.

The share of wind and solar in total electricity production in the Philippines is small, only about 0.8% of the total in 2015, despite their installed power share of around 2.5%-3% of total installed capacity. The explanation for this is the low capacity factor of these new renewables.

Some people insist that there is already “grid parity” by the new renewables with coal and natural gas, that “solar is cheaper than coal” now. If this is true, then why are they asking for another round of energy coercion through high RPS, on top of existing coercions on FIT (guaranteed price for 20 years) + priority dispatch to the grid + fiscal incentives?

A developing country like the Philippines should be given more leeway in building up cheaper and stable energy sources.

Energy poverty and expensive electricity result in lack of jobs because energy-intensive industries and companies would avoid the Philippines and go to energy-stable and competitively-priced economies like Malaysia, Indonesia, Vietnam and Thailand.

The DoE should either implement the minimum 1% of AMI in RPS, or further delay RPS implementation until the price implications are studied and the consumers are not further burdened with higher prices and unstable electricity supply.

Bienvenido S. Oplas, Jr. is a Fellow of SEANET and Stratbase-ADRi, and heads a free market think tank, Minimal Government Thinkers.

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See also: 

BWorld 51, WESM as market-oriented, PEMC as bureaucracy-oriented, March 25, 2016 

BWorld 55, FIT-All, renewables and elections 2016, April 23, 2016 

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 64, The WTO and trade agreements, June 17, 2016 BWorld 65, PH exports growth from 1960-2014, June 22, 2016