Energy Econ 20: On Slashing the Max Power Generation Charge

When there is thin or very small power reserves on peak demand hours of hot months April-May, there are two options. (1) Have rotating brown outs, kill electricity demand for a few hours in some areas; or (2) get expensive power from peak-load plants like diesel barges and avoid brown-outs.

The P32/kwh max rate (usually for 1 or 2 hours, and used to be P62/kwh) allowed in WESM (vs average price of about P5/kwh) looks exorbitant, true. But if it will help avoid a brown out of 1 or 2 hours, it may look less merciless as other people would describe it. So some businessmen are willing to invest in diesel barges that may run only 1 to 3 hours a day (vs. base load plants like coal and nat gas that run 24 hours a day), in exchange for a higher generation charge.

Now there are moves by the ERC and DOE to slash the max rate to only P6.25/kwh.

A power investor will only put his money in base load plants that run 24/7 and selling at P4-7/kwh, not in peak load plants that may run only 1-3 hours a day on hot months, and zero on rainy and cold months, and be allowed by the ERC to charge only P6+/kwh. When there are no or very few peak load plants to address short-term high electricity demand, frequent brown outs on hot months will happen.

When there is frequent brown out, people will resort to (a) buying generator sets, which are costly and running on costly diesel, or (b) have more candles and experience more fires. People forgetting to attend to their candles which accidental fell down, burned a piece of paper, ultimtely burning the entire house and the neighboring houses.

Electricity supply should be big relative to demand. Electricity prices should be low due to competition among many power generating companies. This thing is not happening yet. DOE itself is part of the problem why power supply is limited.

Three friends made the following comments when I posted the above discussion in my fb wall.

(1) Bembette: noy, as part of the energy family, we have a directive to turn off our aircon for 3 hours everyday, during the peak hours. there has been a decrease in our energy consumption. adverse effect: aircons bogging down because of the constant turning on and off, which means additional cost for repair/replacement.

(2) Grace: During times of extreme heat or cold here, and the power grid looks like it may be overwhelmed; our power companies ask the we "help" by unplugging any unnecessary electric & electronic devices (cable boxes, clocks, DVD players, etc - you're not at home using them). That reduces demand some.

(3) Rose: It's a no win solution for consumers Noy! Grrrr!

(4) Andrew: What about raising prices during peak hours? That would be the Hong Kong solution.

Another adverse result of forced conservation as narrated by Bembette. A government office saves from monthly electricity bill but spends more on appliances maintenance, or replacing them with a new unit.

Grace's observation is correct, it should be done during period of emergencies and unforeseen events. Either the power plants conk out, or there is power but the transmission lines or distribution lines are cut off due to toppled electrical posts. It is different in predictable or foreseen events, like high electricity demand in the hot months of March-April-May, the last two especially.

And this partless addresses the disappointment of Rose. Consumers can bring down their electricity bill by shifting some of their activities to non-peak hours, say doing electric laundry, ironing, electronic work, at non-peak hours.

Andrew's proposal is incorporated in the long term direction of the wholesale electricity spot market (WESM), pricing by the hour. Thus, cheaper monthly electricity bill for those who are using more electricity during non-peak hours. Currently, the distribution utilities like the various electric cooperatives nationwide lump the pricing in one average price for the month. Thus, users of electricity during non-peak hours subsidize those who use more electricity during peak hours.

When investors come in to put up new power plants,

"Petilla said more than 100 signatures are required from various government agencies just so an investor cant push through with a project."

Government is very often, the main cause why there are not enough new power plants in this country. Its bureaucratism, permit-permit-permit, tax-fees-royalties mentality, discourages a number of potential players into power generation.

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See also:

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

Energy Econ 17: Brown outs in Mindanao, Thin Reserves in Luzon, April 11, 2014 

Energy Econ 18: Brown outs in Metro Manila?, April 16, 2014 

Energy Econ 19: Wind Power, Feed in Tariff and Electricity Subsidy, April 23, 2014

More Photos, Forum on Electricity on the Go

Here are more photos from the ETC applicants Datigan batch which organized the forum on "Electricity on the Go: An Assessment of EPIRA" last Thursday, March 06, 2014, at the College of Engineering Theater, UP Diliman, Quezon City.

Atty. Debora Anastacia T. Layugan, Director of Market Operations Service, Energy Regulatory Commission (ERC).

Ms. Maria Teresa "Maitet" Diokno of the Center for Power Issues and Initiatives (CPII) and the Freedom from Debt Coalition (FDC).

During the open forum. I reiterated that many of the electricity angsts of the public were not created by the Electric Power Industry Reform Act of 2001 (EPIRA). For instance, (1) Meralco monopoly is not created by EPIRA but by the Constitution (utilities reserved solely for Filipinos) and Congressional franchising. (2) Multiple taxation of power (royalties on natural gas, local taxes, excise tax, VAT, other taxes that all contribute to expensive electricity, were not created by EPIRA but by various tax laws, national and local. (3) Bureaucracies that make it difficult for new players and generating companies (gencos) to come in resulting in limited competition were not created by EPIRA but by various regulations, enacted by Congress or the various agencies (DOE, DENR, BIR, LGUs, etc.).

In short, calls to repeal EPIRA and go back to government centralization and monopolization of power generation and transmission are misplaced and wrong.

Awarding of Certificate of Appreciation. Signed by Christian Dave Gonzales (right), Batch Head of Datigan 13-B, Khim Carla Bautista and Alyanna Mae Volpane, Project Heads of Electricity on the Go.

The audience. Though held at the College of Engineering, they were mostly Economics majors.

Energy Econ 15: Electricity Angsts, Presentation at UP Diliman

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

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

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

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

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

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

Introspective

By Romeo Bernardo

The way forward for the power industry

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

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

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

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

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

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

What has happened since EPIRA was passed?

Fat Free Econ 53: WESM, Myths and Realities

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

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

Below are some allegations or criticisms about WESM:

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

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

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

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

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

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

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

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

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

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

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

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

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

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