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 47, Renewable energy and the illusion of merit order effect

* This is my article in BusinessWorld last March 03, 2016.

When government intervenes in the pricing of a particular product or service supposedly to protect the consumers from “unwarranted” price hikes, or to pursue some social or environmental goals, the action tends to create more problems than what it intends to solve.

Take the case of government price control of electricity via (a) fixed and guaranteed pricing through feed in tariff (FIT) for solar, wind, biomass, and run of river (ROR) hydro for 20 years, (b) priority or mandatory dispatch of renewables even if cheaper energy is available, and (c) price caps at the Wholesale Electricity Spot Market (WESM).

Items (a) and (b) are in the Renewable Energy (RE) Act of 2008 or RA 9513 while (c) is a recent policy by the Energy Regulatory Commission (ERC).

These three forms of price control are wrong on the following grounds.

1. Technologies on anything keep evolving and changing for the better, and prices of each product model go down through time. So why guarantee and fix the price of solar, wind, biomass, ROR hydro for the next 20 years? Their respective technologies should be capable of bringing down the cost and attain “grid parity” with the conventional sources, as the proponents and developers of new renewables often argue.

2. People want cheap electricity, so when cheap and stable energy sources are available from conventional sources, they should be allowed to come in. But under the “priority dispatch” and “must dispatch” policy under the RE law, the national grid, the distribution utilities, and the electricity consumers are forced to buy the more expensive renewables whenever these are available. In this case, the consumers’ chance to have cheaper electricity is beaten by the political need to subsidize the renewables, for 20 years.

3. People want stable electricity, one that runs 24/7 and not fluctuating per hour or per minute. To make this happen, there should be 100% redundancy in the grid. Suppose that there is a province with daily need of 150 MW on average. RE developers come in and put up a 250 to 300 MW combined power from solar and wind. There should be at least 200 MW of coal or natural gas or big hydro or geothermal power plant nearby, to provide electricity at night and the wind does not blow because the 250-300 MW from solar-wind can become zero, nada.

Power redundancy means expensive electricity -- such as those generated by wind and solar -- are forcibly fed into the grid when they are available. Otherwise, the conventionals come in but they must price their output higher to compensate for hours that they were not running. The higher price on those hours that they run will allow them to stay in business. If not, they will go out of business and close shop, and the people will suffer massive brownouts for many hours, daily.

Here is the average capacity factor or the percentage actually running and producing electricity of wind, solar and biomass, six months of 2015.

In May and June, very low output of only 1% was reported for biomass and 6.5% for wind. Biomass peaks in August and September while wind is inconsistent in monthly output, giving 20% when the wind blows strong. Solar has an average capacity factor of 19%. Zero output for 11-12 hours at night, then average of 40% at day time.

4. The “merit order effect” (MEO) of renewables at WESM is a bloated interpretation of its supposed downward effect on spot electricity pricing. Merit order is the ordering of power sources into the grid from lowest to highest offer price at WESM. Thus, the cheaper base load plants with extra power will come in first (big hydro, geothermal, coal, natural gas) then the peaking plants that run on diesel. Peaking plants are meant to run on peak hours of electricity demand only, say 2-4 hours a day.

The supposed MEO is the result when must-dispatch renewables are inserted into the merit order, then they marginalize and displace the more expensive diesel plants priced at P8/kWh or more. This changes the market clearing price (MCP) from P8/kWh or more to the spot price of baseload plants like natural gas, say at P4-P5/kWh. As a result, customers enjoy savings as reflected in the lower WESM price in their monthly bills.

Based on computations and estimates of the Philippine Electricity Market Corporation (PEMC), while the FIT incurs an additional cost of P4.2B to customers, the MEO results in savings of P8.3 billion. The net effect is P4.1B savings to customers, that translates into P0.0567 (or 5.67 centavos) per kWh per customer.

However, there are oversights in the computation’s assumptions. Consider the following:

a. MEO or drop in spot prices will apply only if the customer has spot exposure and not fully contracted via bilateral contracts. If the customer is fully contracted, then it will still pay the FIT and make zero MEO savings.

b. MEO can also be realized via more and cheaper conventional plants rather than expensive renewables. With conventional plants, there is no need for additional ancillary costs.

c. There will NOT be an MEO if there is sufficient supply of power from cheaper energy sources, both in long-term bilateral and short-term spot price contracts.

FIT is collected nationwide including customers in Mindanao that are not even connected to the Visayas and Luzon grid. The purported savings from MEO are supposed to benefit Meralco customers but people in Mindanao, tens of millions of them, are not Meralco customers and yet they contribute to paying expensive electricity via FIT payment.

The PEMC, which operates WESM, made the study that justifies the role of renewables, which, in turn, is the priority of the DoE, the agency that heads and controls PEMC. And that makes the PEMC study self-serving.

The National Renewable Energy Board (NREB), the multi-stakeholder advisory body seems to be playing along with PEMC in justifying expensive electricity from mandatory renewables.

Now here come the big questions that I myself do not know the exact answers.

1. If Mindanao customers were spared of paying FIT as they are not connected to the Visayas and Luzon grids yet, what could have been the FIT rate since 2015? Definitely higher than the P0.0406/kWh collected.

2. With more FIT-eligible renewables fed into the grid since last year, the cost of FIT allowance will rise this year, by how much? I heard low estimates of P0.10/kWh to medium figures of P0.17, up to P0.25/kWh.

Since there will be a elections this coming May, then there will be no FIT hike, DoE will control it. And the next administration will also postpone the FIT hike as it does not want to be known as having imposed an instant and immediate electricity price hike upon its assumption in power. Postponement of FIT collection to a later date means the FIT rates will have to be higher than if it was collected last January or February 2016. Woe unto the developers of FIT-dependent renewables. The delayed payment they experienced in 2015 will worsen this year.

3. With prolonged postponement of FIT hike implementation, say by August or September 2016, what would be that FIT rate then?

Expensive electricity is wrong. Electricity is the main reason why we enjoy more modern, more convenient life than before. Government policy to impose and justify expensive electricity via FIT guaranteed pricing for 20 years is wrong. The RE law should in fact be amended and FIT and other subsidies should be abolished.

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

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See also:
BWorld 44, Why the Philippines should join the TPP, February 19, 2016 
BWorld 45, Asia Liberty Forum and property rights, February 20, 2016 
BWorld 46, China's debt, central planning and central crashes, February 27, 2016

Energy 56, Cost effectiveness of different energy sources, February 05, 2016 

Energy 57, Tony la Vina's anti-coal alarmism, February 06, 2016 

Energy 58, Sen. Loren Legarda and renewables, February 27, 2016