Power Development Should be a 3-legged Tower

By David Celestra Tan 1 July 2014

Developing the Philippines power supply and energy mix must be founded on three equally important legs.

One leg is sufficient power supply, second leg must be lowest cost power, and third leg is environmentally friendly power.

In an ideal world all three (3) legs must be equally pursued for a wholistic and sustainable power generation mix. If only one becomes primordial, the other two is sacrificed and it hurts the interest of the consumers and the country.

Leg One – Sufficient power supply

Surely the country needs continuing additions to its power supply to meet the growing needs of our population and the Philippines robust economy.

That requires the creation of a power plant investment and  structure that encourages new local and foreign private generators and the existing ones to expand and improve the efficiency of their  power plants.

On the government side, they must provide an approval and permitting process that are facilitative of the timely construction of these additional power facilities. More important the Department of Energy must provide a policy direction on energy mix and the strategic locations for power development. The Board of Investments for its part must incentivize this energy mix and locational objectives for new plants in the country.

On the project proponents’ side, they must choose technologies and locations that are respectful of current laws and environmental sentiments of the host communities.

On the distribution utility side, specially Meralco that controls 74% of the Luzon power market, they must provide equal and competitive access to their market to encourage more independent investors and consumer-protective “arms-length” power supply projects. This is the better path to power supply development, not monopolized self-dealing projects.

Leg Two – Lowest Cost Power

The hallmark of reducing power cost is subjecting it to truly competitive processes and the strategic blending of the energy mix where lower cost energy resources are harnessed if they are available.

The problem with Luzon and now Mindanao is there is too much emphasis on building power supply without really considering the cost impact to the consumers.

If power cost is a consideration in Mindanao, they would rehabilitate Agus and supply Mindanao with 800mw of cheap hydro power  during normal months at P3.00 per kwh and 400mw during dry summer months. They will complement this hydro with low capacity cost diesel plants of about 400mw with half in bunker c and half in regular diesel plants that will run only for the 3 hour night peak.  The proposed coal power plants shall supply the 1,000mw balance of base load and intermediate power.  What the powers that be are trying to do now is make the more expensive and dirty coal the base-load power at rates of P5.20 to P6.00 of 1,200mw, bunker c diesel at 200mw, and Agus hydro at 300mw of peaking running only at 3 hour night peak and during the breakdowns of the coal power plants.

In Luzon, Electric Consumers and the government are continually being subjected to the power crisis specter, regularly scaring them of power shortage and brownouts so that they will be so cowered that they will succumb to any sweetheart prices and negotiated power supply contracts.

This is how the coming power supplies are being contracted by the D-G Groups, a privileged group of generators whose affiliates also own large private distribution utilities that emerged as a result of the loopholes of the Epira Law and its IRR. As both Distributor-Generator,  they also control large electric distribution  markets as opposed to the truly independent power generators who have to compete and operate efficiently.

The D-G Groups saw it worked in the power crisis of 1990’s when the country suffered from 12 to 18 hour brownouts and the population and government were so dazed that they were in no position to discern and consider the harmful long term effects of negotiated sweetheart power supply contracts with sister companies.

In the Meralco area, the new Metro Pacific group that now controls 74% of the Luzon distribution market (6,500mw) seems unabashed about monopolizing the future power supplies through Meralco PowerGen and its various partnerships. The Meralco market (62% of the country’s power demand) appear to be essentially conserved for the long term for Meralco’s own power generation projects, with truly independent power producers reportedly being offered only 5 year contracts and Meralco’s own projects 20 and 25 years at negotiated sweetheart prices and terms.

The Meralco generation market is on its way to serious monopolization, market domination and unbridled cross-ownership, a very anti-competitive structure that is an affront to the open market and competitive power aspirations of the Epira Law. This does not bode well for the consumers. We should be shaking in our boots.

If Meralco really wants additional power supply and care to be faithful to its obligation to provide power in the least cost manner to its customers as a public service utility,  it should open its market and call for open competitive bidding to new power investors and truly independent power generators. They have not done so in the last 14 years.

Now the Meralco consumers and the government are being warned  of debilitating brownouts if their projects, like Redondo, do not get fast government approvals and allowed to proceed with their sweetheart contracts and rates.

The only way consumers would have a chance at least cost power is if these power supply contracts are subjected to a truly competitive bidding process. Meralco’s announced new negotiated coal power projects (600mw Redondo, 400mw Mauban, and 400mw Pagbilao,   will most likely be in the P5.00 to P6.00 per kwh range, instead of P3.60 to P4.50 per kwh, despite their secured contract terms of 25 years. It will be as much as P9 per kwh when they are down for maintenance due to negotiated guaranteed capacity payments.

The pronouncements of the Department of Energy and the Energy Regulatory Commission that they are moving to require competitive bidding for power supply are moves in the right direction. However it might be pyrrhic and too late to stop the Meralco market’s rampaging monopolization.

The monopolization is exploiting the crack opened by the Epira IRR’s Rule 11, Section 4(b) that watered down the Epira laws intent to control market domination and harmful monopoly.

Leg Three – Environment Friendly Power

Electric consumers have their hierarchy of needs.First they want sufficient power. Under the torture or threat of heat, brownouts, and business interruption, they ask to be given power “even at a high price”. Soon after they get that, they complain when the power cost is high. It is only when the first two are no longer issues that they begin to be concerned about environmentally friendly power.

The private generators specially the D-G Groups cannot be expected to put a high priority on environmentally friendly power or making environment an equal consideration in developing new projects. They want surer power, less risk, and maximized profits. That is just in the nature of “free enterprise”.

It is really up to the government, in our case the Department of Energy and the Department of Environment and Natural Resources, to provide the rules and encouragement for environmentally friendly power.  This ideal must find its way in an energy mix strategy of the Department of Energy and even in a “locational” strategy for future power plants. It should provide more impetus for natural gas, hydro, and renewable energy development.

It is ironic that the Philippines power development plan, or semblance of it, is so out of tune with the international movement for “climate change” projects as espoused by the World Bank and many development finance institutions.

A clear message must be sent to IPP’s trying to ram their coal projects over the manifest objections of the local communities, to back off and be respectful of the people’s environmental aspirations. If they really want to invest why not look at other power generation fuel and locations.

If clean environment is a consideration in Mindanao, we should be talking about a earnest program to rehabilitate Agus-Pulanggi and increase clean energy generation by 400mw. That is a cheaper way to gain 400mw of carbon neutral power instead of 400mw of solar and wind that requires heavy subsidies for 20 years and without the heavy investment in transmission lines to connect these RE projects that tend to be far away from the existing grid lines.

Grid competitive renewable energy technologies like mini-hydro and renewable energies that do not require Feed-In Tariff subsidies should be encouraged with an express lane to implementation. They can bring 500mw of additional capacity without the subsidy cost of solar and wind.

A solid Power Development strategy needs to stand on these three (3) legs.  All three needs to be achieved or the country’s tower of power for the consumers will topple or hobble.