Priority and mandatory indigenous gas use means expensive electricity
October 10, 2024 | 12:00am
https://www.philstar.com/business/2024/10/10/2391332/priority-and-mandatory-indigenous-gas-use-means-expensive-electricity
Consider these three provisions from three energy laws.
“Section 23. Functions of Distribution Utilities…A distribution utility shall have the obligation to supply electricity in the least cost manner to its captive market…” (RA 9136, EPIRA, June 2001).
“Section 1. Guiding Principles… Competitive Selection Process (CSP) in the procurement of PSAs by the DUs… Ascertain least cost outcomes…Protect the interest of the general public.” (DOE DC 2015-06-008, “Mandating all Distribution Utilities to Undergo Competitive Selection Process in Securing their Power Supply Agreements (PSA),” June 2015).
“Section 21. Natural Gas Supply… Procurement and utilization of indigenous natural gas, including without limitation, by gas-fired power plants, shall be prioritized over imported natural gas…Power produced from indigenous natural gas shall have priority over other conventional energy sources…requiring electricity suppliers to source a portion of their energy supply from power plants that use indigenous natural gas and determining the appropriate minimum percentage of the power generation mix that should be supplied by…indigenous natural gas.”
That is from Senate Bill 2793 and Senate Committee Report 304, the “Philippine Natural Gas Industry Development Act.” August 2024.
Notice the big difference?
In provisions (1) and (2), “least cost” for the consumers is the overarching goal, with no mention of where the power supply will come from. In (3), the least-cost provision is absent and ignored, and indigenous natural gas (ING) will be prioritized over imported gas and over other conventional sources like coal.
This means that if imported LNG or coal can sell at P7/kWh or less while ING will sell at P8.50/kWh or more, the latter shall be prioritized. CSP is totally ignored and the protection of consumers and the general public is completely overlooked.
Two examples: In a CSP by Meralco last June that required 1,200 MW of baseload power, the best or lowest offer came from a power plant in Batangas using imported LNG gas, South Premiere Power Corp. with a P7.0718/kWh levelized cost of electricity (LCOE), or an all-in price including VAT and other taxes.
First NatGas Power Corp., using Malampaya gas, also joined the CSP but offered a high price of P8.4489/kWh, which was deemed non-compliant as the offer exceeded the reserve price set for the bidding.
In another CSP by Meralco for 1,800 MW of baseload power, also last June, the best or lowest offer came from a conventional coal plant, GNPower Dinginin, with P6.8580/kWh. This was followed by another coal plant, Mariveles Power, with P6.9971/kWh and a large LNG plant, Excellent Energy Resources Inc., with P7.1094/kWh.
The good thing here is that it was a real CSP with “least cost” for customers as the main criteria. If SB 2793 becomes law, all those “least cost” price biddings will be ignored, and only gas plants that use ING or Malampaya gas with their expensive prices will prevail. If ING is prioritized over imported LNG and conventional coal plants despite the lower prices of the latter, then gas plants using ING can sell at P9 or P10/kWh or higher.
They can dictate their prices and CSP will become irrelevant. The public’s desire for lower electricity prices – whether from residential, commercial or industrial consumers – will become irrelevant. Consequently, the Philippines’ inflation rate could rise again instead of stabilizing.
How can a new LNG bill supplant RA 9136, or EPIRA of 2001, which seeks the “least cost” for consumers? It is anti-competitive, anti-consumer, anti-poor and anti-industrialization. It is only pro-expensive electricity.
I briefly saw on Facebook the Senate plenary discussion on SB 2793. I noticed that Sen. Sherwin Gatchalian raised concerns about certain provisions of the bill, particularly its anti-competitive nature. He is correct. There should be open competition to provide cheap, least-cost electricity to consumers, whether from ING, imported LNG or other conventional sources like coal, geothermal and large hydroelectric plants.
The chairperson of the Senate Energy Committee, Sen. Pia Cayetano, is a fellow UP School of Economics alumna. She is from the batch of 1985 and I am from the batch of 1984. So we probably shared the same professors in similar subjects at the school.
In the Econ 11 or Econ 102 graph of supply-demand, giving priority or a mandate to ING is equivalent to restricting the power supply curve, moving it to the left.
In contrast, allowing imported LNG, ING, coal and geothermal to compete with each other moves the supply curve to the right.
With the demand curve remaining at similar levels, this means that the equilibrium price or market-clearing price for consumers is higher under the “ING priority” model, while the equilibrium price under an agnostic or “no priority” model is lower.
So I hope that the good Senator will consider our basic economic learnings – how supply curves and equilibrium prices move when market and competitive forces are restricted and distorted.
I would also add that the provisions of SB 2793 can be considered an “Inflation Expansion Act.” The economic team – NEDA, DOF, DBM – and the BSP should be aware of this danger.
As a developing country aspiring to industrialize quickly, create more jobs and businesses for our people and significantly reduce poverty, we should focus on reducing inflation. By doing so, household consumption, which comprises 75 percent of GDP, can grow faster, pulling up overall GDP growth and job creation.
------------
