Root Cause of Power Plant Shutdowns Financial Not Technical

David Celestra Tan, MSK
6 August 2016

Everytime power supply in the Luzon grid flickers into yellow alert or the WESM spot prices shoot up, it is the shutdowns of power plants that cause them. Calls for investigations will only show them the reasons were technical- both forced or unplanned, meaning plant breakdown or planned maintenance. The real reasons however are financial.

Power Plants do shutdown for technical reasons. That cannot be avoided. Things go wrong with these mechanical equipment. A lot of times coal plants claim “boiler leaks”. And preventive maintenance does need to be done regularly to keep them operating reliably and efficiently. Coal plants normally ask for 30 days and bunker c plants 45 to 60 days downtime allowances per year in their contracts.

The Manila Standard reported that eight (8) plants are down with unplanned outage and capacities totaling 1,297mw. Another four (4) plants are down on planned maintenance totaling 1,100mw. That’s a whopping 2,397mw of power generators down all at the same time. All of them giving technical reasons for the shutdown. And enough to severely reduce power supply and make the spot market prices to surge.

Technical is not where the problem is however. It is the financial aspects of the shutdowns that are the root causes of the periodic yellow and red alerts and the skyrocketing of the WESM prices.

1.Financial Incentives for Shutdowns

What many may not understand is that during these allowed downtime period for maintenance Meralco still pays them the capital recovery fee and fixed costs as part of the contract. And those are of course passed on to you and me the consumers.

This means there is really no pressure to shorten the annual downtimes per year because they get paid anyway if they don’t run during the downtime period. IPP’s calibrate their maintenance expenses according to their downtime allowance. It is much more expensive to keep the downtime of the plants at 15 days a year compared to 30 day or 45 day downtime. And the 10 or 15 day difference happening at the wrong time can wrought havoc on the power supply of Luzon.

These downtimes are reflected by Meralco as load factor rates. This is the reason the kwh rates of their IPP’s like First Gas, San Miguel, Quezon Power, Masinloc, Therma Marine and etc. go up several times a year by up to 20% during their downtime periods because they are paid the same fixed capital recovery fees even if they operate less and deliver lower kwh energy.

The other financial incentive for a shutdown is when a generator has an affiliate who will benefit from the resulting higher prices in the spot market when there is a reduction in power supply as a consequence of the shutdown.

It is a double blade that slices consumers two ways. First they still get charged for the capacity fees paid to the generator during downtime. Then they can hit with higher WESM prices due to the reduced power supply in the market.

2. Origins of the guaranteed payments during downtimes

Downtime allowances provided for in the Power Supply Agreement were standard and accepted provisions during the BOT days of the PSA’s with Napocor. That was when the government had to assure investors, mostly foreign, of security of investments to entice them to invest in the country and solve the power crisis. And the wily American IPP’s just knew how to minimize their risks. These guaranteed payments including take-or-pay were justifiable then to make them bankable.

However, the Philippines is now a mature power generation market with a proven record of honoring its power supply contracts no matter how onerous the terms would turn out. Guaranteed payments for downtimes when the generators are not delivering service are now outdated and are now working against the consumers.

3. Needed refinement in the PSA on downtimes

The solution is to take away the convenient benefit of downtime when they still generate cash flow even if they are not running. It is like rewarding non-performance.

PSA’s must now be written to pay base-load generators like coal and natural gas only when they are delivering energy. There will still be downtime allowances but those will only be intended to excuse the generator from delivering the service for the downtime period but there will be no guaranteed payments for the downtime.

It means the generator will be paid only for 10.5 months energy and not an additional month and a half for fixed capital recovery fees. The true annual cost to the consumer should be the same although the kwh rate is higher. It will be transparent as to its true cost. Under the paid downtime allowance scheme, consumers are made to believe that the coal generators rate is only 4.50 per kwh and on an average it is actually 4.80 per kwh if the downtime capacity payments are included.

This way there is a financial incentive to reducing his downtime and a big disincentive for downtime. This can result to reduction in outages of power plants by 5 to 8 days a year which will be big improvement in avoiding power shortages and the true cost to the consumers would be transparent.

Shorter downtimes also improves available reserve levels contributing to overall grid reliability.

In an industry where the buyer electric distributor and the seller generators are sister companies things get worse for the consumers when the buyer can look the other way for the excess downtimes of sister generators.

Theoretically the regulators can put in audits and validations to safeguard against abuses but the more effective consumer protection is by the contract structure and to financially disincentivize unnecessary downtimes.

The Technical reasons for downtimes are mostly outward manifestations of the financial root causes of the power plant downtime problems especially when the owners of the electric distributor off-taker and the power generators are the same.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
Matuwid.org

David Celestra Tan is a pioneer in the IPP industry and a founder and former President of the Phil.Independent Power Producers Assn. A CPA by education, he has been in the power industry for 35 years and evolved into utility economics. Was active in the finalization of the Epira Law and served as volunteer technical adviser to key Senatorial, Congressional, and Energy officials. Through his blog matuwid.org in retirement he seeks to share his expertise in power policy and strategy towards reducing the power cost in the country and eliminate abuses and monopolization.

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