State of Power Industry or Do WE Have Enough Supply?

David Celestra Tan, MSK
25 March 2018

There is a high profile and obviously high budget media campaign going on to condition the people’s minds that the country needs more and newer power plants. This is amidst the stall in the approval of Meralco’s 3,551mw of coal plants that they negotiated with five (5) companies all controlled by sister Meralco PowerGen or MGen under the midnight loophole created by the ERC In March 2016.

(The inexplicable postponement of the CSP policy by the ERC caused the suspension of the five ERC Commissioners for unduly favoring Meralco and betrayal of public trust. There is now a tug of war in the judicial system over the suspension)

A few months ago CNN Philippines ran a special on the power industry titled “Do we have enough power supply”? We have no argument against the need for more supply and the need to build new ones to meet the country’s growing energy needs.

Just today I chanced upon a  broadcast again on CNN about the “State of the Power Industry”, anchored by Ms. Pia Hontiveros. Featured panelists were Mr. Rogelio Singson, new President of Meralco PowerGen, Sen. Win Gatchalian, Chairman of Senate Energy Committee, Ms. Mylene Capongcol of the DOE, and Atty. Victor Dimagiba of an organization called “Laban Konsyumer”.

Mr. Singson went to great lengths to point out that the country needs newer power plants. That 33% of the country’s power plants are 25 years and older. That the DOE is requiring that the country raise its reserve capacity from the current 15% to 30%. That the country needs dependable and cost efficient base load supply which is coal.

The young and eloquent Sen. Win Gatchalian chimed in that there is too much redtape in getting projects approved and that it takes up to seven (7) years to get a plant to operation. He said there is a bill to legislate the one-stop processing of these approvals so plants can be built within four to five years. It was great to hear the prodigious Senator enunciate that the country needs a balanced approach to power supply and must consider assurance of supply, lower cost of power, and cleaner energy. He pointed out the need for the country to have true competition so everyone can compete.

When Mr. Singson had the chance, he could not help himself but to plug for the approval of the 1,200mw “super critical” power project in Atimonan.  He mentioned about the 455mw expansion in Mauban is almost complete but that the 600mw Peninsula power project had taken more than 10 years to get the approvals. He even mentioned that the high cost of power in the country have driven industries to go to other countries.

DOE Veteran Ms. Mylene Capongcol and new consumer advocate Atty. VicDimagiba spoke about their take on the state of the power industry.

In general we have no argument about most of what was said. Our problem is in what was not said  in the state of true competition in the power generation sector, its cartelization by Meralco,  the adverse impact on the Filipino consumers and the industrial competitiveness of the country.  There cannot be a fair discussion of the State of the Power Industry without addressing these anomalies.

It seemed the CNN specials were designed to hammer into the minds of the people that we need additional and newer coal power plants so that when the seven (7) midnight contracts of MGen and Meralco, and the effective cartelization of power generation, are magically approved despite the deviant process, that the people will not resist and even say thank you.

That’s exactly the problem. We are only being told that we need additional power plants. But there is no argument there. The issue is the process and the lack of consumer protection in the process of contracting those power plants. In ERC’s case, the fact that they apparently facilitated the circumvention of the CSP rules and the consequent denial of competitive power to the consumers.

Do you know that the costs of those expensive media campaigns ironically are paid for by the Meralco consumers through the operating budget approved by the ERC?  Life isn’t fair is it?

State of the Power Industry or Do we have enough supply? What was the real point for the consumers?

 

MatuwidnaSingilsaKuryente Consumer Alliance Inc.
matuwid.org
david.mskorg@yahoo.com

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Meralco’s Lower Rate Temporary, Due to Luck Not Rate Reform

David Celestra Tan, MSK
16 October 2016

We Meralco consumers have been enjoying lower electric rates for more than a year now and it has been God-sent albeit temporary. The current reduction of P1.54 per kwh in generation rates have been due to the opportune drop in world oil prices and can change in cycles. We can achieve a more permanent and enduring P1.50 per kwh reduction through systemic reforms by banning self-negotiated contracts. The MVP Group is cartelizing 100% of Meralco’s power requirements and one day Luzon consumers will wake up with a price shock. Remember Dec 2013?

There is a concerted media campaign touting that Meralco’s rate is now low, that the Philippines is now the 3rd highest rate in Asia and no longer 2nd to Japan. Australian International Energy Consultants once again said it is because the other Asian countries are subsidizing their power. And while IEC is quoted to be saying it is due to the drop in fuel and coal prices, it also gives credit to a claim that Meralco has been aggressively negotiating competitively priced power supply agreements (PSAs) with new suppliers.

The IEC press release is evidently designed to convince President Digong, the DOE and ERC, and consumers that Meralco’s rate is fair and reasonable and that part of it is Meralco’s “aggressive negotiation of competitively priced power supply agreements”.

Let us get past the chaff and go to the grain of Meralco’s rates.

A. Generation Rate

1. It is true, as IEC studied, that between January 2012 and January 2016, Meralco’s generation rate had come down by 28%. MSK’s research showed P5.4643 per kwh in 2012 and down to only P3.9238 per kwh, a reduction of P1.5405 per kwh.

2. It is also true that the major reason is the drop in world oil prices and coal. MSK’s research showed that from 2012 to 2016 world oil prices dropped from $90.72 per barrel to only $34.13, a reduction of 62%. Indonesian Coal prices went from $105.61 per ton to $52.32 in the same period or a drop of 50%.

We dare to say that the ONLY reason for the lower Meralco rates is due to the lucky and opportune drop in world oil prices that also cause reductions in coal prices. A major columnist of Phil Star asked MSK why Meralco’s generation rate is not dropping as much as the big drop in the world oil prices. Good question but the answers were not printed.

B. Systems Loss

1. Since Meralco’s systems loss is a percentage of generation charge, it went down from P0.6594 per kwh to P0.4173. In percentage, 12% in 2012 (0.6593/5.4643) and 10.63% (0.4173/3.9238). Let us grant that the difference of 1.37% can be attributed to Meralco’s operating efficiency.

2. Is the glass half full? Meralco is supposed to have a limit of 8.5% in systems loss. The excess systems loss charge in 2012 was P0.1949 per kwh and in 2016 it is P0.0837 per kwh. Since we already have lowered expectations, yes it is an improvement. As in the generation charge, if the fuel prices go back up, systems loss will also go up. ERC needs to correct the systems loss rules by limiting it to maximum 8.5% to all consumers and by making the computation transparent.

C. Transmission Charge

This is something we are curious about in IEC’s choice of periods to compare. In January 2012, NGCP’s transmission charge was P0.9840 per kwh. In April 2016 it was P0.9549 per kwh. However, for some reason NGCP’s rate dropped unusually to P0.8361 per kwh in that month of January, a difference of 0.1188 per kwh. IEC’s study of the improvement in Meralco’s rate looked much better with its choice of January as the comparison months and this additional reduction of 0.1188 per kwh. We guess IEC serves its master. If they want to do a study in the future, it will be more helpful to see comparative April rates when supply and demand of power will show the true rates.

D. Distribution Charges Plus Supply and Metering Charges

Meralco’s distribution, supply, and metering charges came down by 7% or 0.17 per kwh as a result of the expiration in June 30, 2015 of an P0.1888 per kwh recovery of an under-recovery in 2011. Let us not forget that Meralcos distribution charges are results of the PBR rate setting methodology that we believe is irregular and must be modified. Meralco customers should not be charged profits or advance recovery until the utility actually incur the investments, not projections, not promises.

E. Universal Charges

Various universal charges for missionary subsidy, environmental, RE FIT, and PSALM Stranded Costs totaled 0.4764 in 2016, an increase of P0.36 per kwh from the P0.1188 per kwh in 2012. Watch for Renewable Energy subsidies and PSALM’s stranded costs to rise further. RE is now proposed to be 0.24 per kwh from 0.12 and PSALM has a lot of losses to recover from the people.

Back to the Issue of Meralco’s rate reductions.

1. It is clear that the reduction of P1.54 per kwh in generation rate was due to the lucky drop in world oil prices. OPEC and Iran are inching towards agreements on oil production controls and oil prices are expected to rise sooner than later. Coal and Natural gas will follow suit. Let us enjoy the current lower Meralco rates because it is only temporary.

2. Meralco’s supposed “aggressive negotiation of competitive power supply contracts with new suppliers” sounds good on the surface but since they negotiated exclusively eight (8) coal power supply contracts totaling 4,100mw with their own majority owned new generating companies, it is hardly credible to believe that they would negotiate aggressively with their own selves. (And yes, Meralco continue to claim in its public pronouncements that it does not make money on the generation charge because “it goes to the suppliers”, who will eventually be all “Meralco PowerGen”.)

3. Let us remember that the published rate of these self-negotiated contracts is only what we see now. Tucked in those negotiated contracts are escalators in various provisions that can eventually bloat the actual rate and sock it to the unsuspecting public down the road. Meralco even has the temerity to ask the ERC to make key financial information and formula confidential and not disclosed to the public. This is something that even the Lopez group never tried in their time.

4. MSK Ibaba ng P3 Campaign

On October 8, 2014 the Matuwid na Singil sa Kuryente Consumer Alliance (MSK) shared with the Department of Energy’s Multi-Sectoral Task Force to Find Ways to Reduce Electricity Prices our recommendations on how to reduce Meralco’s power rate by Php 3.00 per kwh. Nothing came out of those months of supposed multi-sectoral meetings in search of reducing rates but the then Energy Secretary Petilla bravely passed a DOE Policy mandating Competitive Selection Process.

Of MSK’s P3.00 per kwh target reduction. 87% or P2.60 will not even come from Meralco’s pockets but from various pass-on charges on which Meralco had been claiming for many years they don’t make money and only act as collectors. Generation charge, transmission charge, systems loss, VAT, universal charges. Only 13% or P0.40 per kwh will come from Meralco’s excess distribution charges due to the questionable “performance based ratemaking” or PBR.

MSK believe that by stopping the anomalous self-negotiation of power supply contracts the generation rate can be reduced at least P1.50 per kwh. Meralco generation had dropped P1.5405 per kwh but that is due to the fortuitous drop in world fuel prices and not due to changes in the regulatory system. For generation, it is the introduction of Competitive Selection Process to replace negotiations. If this were adopted, Meralco’s generation rate would have dropped by about P2.25 to P2.50 per kwh

As part of the Ibaba ng P3 campaign, MSK had filed with the ERC more than a year ago a petition for rules change to modify its Performance Based Rate making system (PBR) for distribution charges. We have yet to hear from the ERC on the public hearings to assess this very important concern of the consumers. We believe the distribution charges of Meralco can be reduced by about P0.40 per kwh by eliminating the improper profits of Meralco on forecasted investments instead of incurred investments as required by Section 25 of the Epira Law.

IEC Studies

As they have done in 2014, the Perth-based International Energy Consultants study as commissioned by their client is to show that Meralco’s generation rate is fair and reasonable.And the Meralco press release is apparently timed to sway public resistance to the seven (7) midnight contracts that the MVP Group hurriedly signed with various new generating companies all majority owned by Meralco PowerGen. So far two columnists have sung the same tune.

We wonder what IEC’s basis was for declaring that Meralco’s lower rate is partly due to Meralco’s “aggressive negotiations for competitive power with new power suppliers”. It must have been a sight to see IEC, being present in the negotiations, watching Meralco negotiateaggressively with its sister company Meralco PowerGen! IEC by the way lists among its major clients EGCO of Thailand and Quezon Power its Philippine subsidiary, EGCO is Meralco PowerGen’s strategic partner for the 460mw Mauban coal expansion called San Buenaventura.

Let us enjoy Meralco’s low power rates now while they last. Let us hope the government will do something now while it still can to stop Meralco’s monopolization, cartelization, and self-negotiated contracts. Let us correct ERC’s anti-consumer rate setting methodologies and systems loss rules. Low world oil and coal prices will not last forever.

We are just currently lucky. What we need for sustainable lower rates are systemic and regulatory reforms.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Matuwid.org

Congratulations to the Philippine Daily Inquirer for its impressive and updated new layout. Tasteful and effective in delivering and emphasizing news. Kudos.

IPP’s Surrender to Meralco’s Market Capture and the Rise of the Power Oligarchy

“We know we wanted to deregulate, we just forgot why we are doing it!” a USA regulator lamented. That in a nutshell is the state of the deregulated and privatized power sector in the Philippines, resulting to one of the highest electricity rates in Asia, and headed towards uncontrolled concentration, domination, and abusive rates and terms.

Concept of the EPIRA Law

The whole idea of the EPIRA law of 2001 is to reduce power costs by creating true competition in the different sectors of the Power Industry. Generation was unbundled from transmission and distribution and there was not supposed to be cross ownership among them to assure this healthy competition for the benefit of the consumers.Assuring there is a fully functioning competition especially in the generation sector, and its spot market called WESM, seems an idea that is totally lost now among the government policy makers, regulators, and legislators.

There can be a functioning competition in the generation sector only if there are enough independent players competing against each other. The private sector however will not do it on their own because alliances, market cooperation, and coordinated strategies will tend to be more convenient and lucrative. It is up to the government to create and guard an industry structure where competition among generators is assured to safeguard consumers.

Self-Contradicting Provisions

One of the most self-contradicting provisions of the Epira law is Section 45 that ironically professed to prohibit market domination and anti-competitive behavior but proceeded under its own paragraph b to allow distribution utilities like Meralco to enter into bilateral contracts with affiliated companies up to 50% of their demand and is silent on the need for competition. Hence, negotiation between affiliated companies obviously became allowed. (What the law does not prohibit, the law allows!) This is the handiwork of the powerful lobbyists to tilt the rules in their favor.

That put Meralco the largest power distributor with 5,000mw demand the ability to choose who they will contract with and 50% or 2500mw allowed to be with their affiliated generators. In essence to also choose who gets in to be major players in the generation sector. That is so much market power. Meralco serves 75% of Luzon, equivalent to 62% of the country’s energy needs.

Independent Power Producers (IPP’s)

Until a few months ago the Philippines had an appearance of a robust generation sector with sufficient independence and competition among them. Top tier Power generators San Miguel Corp, Semirara, AES of USA, EGAT of Thailand, Kepco of Korea, TeamEnergy of Japan, Therma Power of the Aboitiz Group, First Gas of the Lopez Group have power supply contracts with the new Meralco but they are nonetheless independent.

There is also Global Business Power that concentrated in the Visayas, the Ayala Energy in coal and wind in Luzon, Transasia trying to do projects in Luzon and the Visayas, the Filinvest Group of Gotianun mostly in Mindanao, the Alsons Group also in Mindanao, Salcon Power in the Visayas, GN Power in Mariveles and Mindanao. Then there are the 2nd and 3rd tier players in renewable energy mainly solar, run of river hydro, wind, biomass and pocket players in diesel plants.

New Era of an Open and Competitive Power Generation Sector

When the Department of Energy passed in June 2015 a new country policy of requiring mandatory bidding for bilateral power supply agreements specially base-load, it ushered in a new era stopping self-negotiated power supply contracts whose sweetheart rates are passed on to the consumers. It was a major boost of commitment to upright regulation when the then new ERC Chairman Jose Vicente Salazar led the issuance of the ERC Resolution 13 mandating that the DU’s conduct a CSP for the power supply contracts that they will submit to the ERC after November 6, 2015.

The CSP rules created an open and competitive power generation sector where the willing and able power generators, local and foreign, can come into the market by being competitive , efficient, and innovative with technology. No barriers to entry. No need to have special connections with the DU. Just good old fashioned competitively priced power.

While the government was promoting the CSP policy the Meralco group continued announcing its target of 3,000mw of power projects for its subsidiary Meralco PowerGen, as if telling the government “stop us if you can”.

The independent power generators were calculating their moves. Some sharpening their organizations for the open bidding that might happen. Others discussing schemes with Meralco and the MVP group, who cannot be ignored because they “control the gold” of the power generation market which is the power distribution utilities, the largest of which is Meralco. Lets remember the “golden rule”. He who controls the gold makes the rules, courtesy of Section 45 of the EPIRA law.

When independent generator, EGAT of Thailand approached Meralco for a 460mw expansion of the Mauban coal facilities, insiders said they only offered P3.80 per kwh. By the time the negotiation was finished, Meralco PowerGen became the 51% owner of the project and the rate became P4.35 per kwh. Within the same timeframe a group of eight (8) electric coops in the north got a bid of P3.78 per kwh for only 135mw of aggregated demand.

After November 6, 2015, Meralco had been lobbying at both DOE and ERC to be allowed to hold their own CSP bidding, for “swiss challenge” biddings where they preselect the original proponents of an unsolicited proposal which most likely will be their own affiliate, and strong lobby against an independent bid administrator to conduct a bidding as envisioned by the DOE Policy. They also threatened both DOE and ERC to take them to court on the CSP policy.

The independent generators were waiting if the government specially the ERC will be steadfast in its commitment to CSP especially when the ERC Chair was quoted to have said “we lament the failure to see the public’s clear benefit from the CSP. We will respect the legal process even as we seriously consider our own legal options to make sure we defend the public interest, as well

Moving the Midnight and Parting the Red Sea

Things changed however when the ERC announced on March 15, 2016 that it was “restating” the effectivity of the CSP requirement to April 30, 2016. This signaled to the power generators that Meralco and the MVP group can really make things happen, like Moses parting the red sea with the wave of his wand. (Actually some of them heard weeks before March 15 that ERC will move the CSP midnight.)

Even the likes of Ramon Ang of San Miguel, who until then have been a staunch competitor of MVP, can see who is the “Moses” in the power generation landscape and will not be so impractical as not to surrender to the MVP group who obviously can make things happen, has market control, and now regulatory capture.

(As a consumer group we were rooting for Mr. Ang because he represented an entrepreneurial force that can bring consumer-beneficial competition in the cellphone sector with Telstra and the power generation sector, two hopes and dreams that banished)

After clearly one of the most frenetic periods of negotiations to finalize 3,551mw of power supply contracts in 60 days, Meralco and their new subsidiaries and allies signed the PSA’s on April 26, 2016 and filed the applications with the ERC at 7am on the 29th, a day before the April 30 midnight set by the ERC.

1. 300mw with RP Energy in Subic with Aboitiz
2. 400mw with St. Raphael in Calaca with Consunji group
3. 1,200mw with Atimonan One. With Aboitiz or Ayala?
4. 528mw with San Miguel’s Central Luzon Premiere in Pagbilao Quezon
5. 528mw with San Miguel’s Mariveles Power in Mariveles, Bataan
6. 70mw with Panay Energy Development in Iloilo with Global Business
7. 600mw with Global Business Power in La Union

While the 3,551mw of contracts represent only 59% of the projected 6,000mw power demand of Meralco, the minimum off take energy total 24.885 Billion kwh is equivalent to 75% of its energy requirement. If we add the 455mw San Buenaventura and the remaining contracts with QPL and former Affiliate First Gas, most of Meralco’s base-load power requirements for the next 25 years are tied up with these negotiated contracts.

The seven (7) power supply contracts have amazingly identical language, pricing formula, and ERC application, apparently using the 300mw RP Energy as the template that was finalized and signed on April 20, 2016. Imagine five (5) of the largest power generation groups and their lawyers in one room hammering power supply contracts that will tie up the Meralco consumers for the next 25 years in a race to beat the new 45 day opening provided by the ERC. Three of them (Ayala, MVP Group, and RSA Group) just had the competitive barrier broken down among them when they signed the Telstra frequency buy off.

If that is not enough, the new Cartel is trying to push an era of non-transparency in the regulatory approval process. Their ERC applications are asking for identical and unprecedented “motion for confidential treatment of Information”. Among the information being withheld from the public? 1) Purchase Power Rate and breakdown of rates, 2) data on operating and maintenance expenses, 3) cost analysis, and 4) operating expenses. These are critical information needed to determine whether the rates are fair and reasonable.

The Rise of the Power Oligarchy and Oligopoly

The Power generators surrender to Meralco’s imposing market (and now regulatory) power is evidenced by the spate of dizzying controlling acquisitions as everyone succumbs to MVP’s “dealmaking” legacy. Now Meralco, the largest utility supplying the energy needs of the center of commerce and industry of the Philippines with 75% market share in Luzon, is now controlled by a few inter-linked generators.

In May 27, 2016, the MVP Groups affiliate First Pacific bought 56% of Global Business Power of the George Ty Group which in turn bought 15.6% of another Meralco affiliate Metro-Pacific Investment (MPIC). MPIC already owns 49.96% in Meralco in addition to a 50% ownership in Beacon that owns 35% also in Meralco.

Two of the seven (7) midnight power supply contracts of Meralco totaling 670mw were signed with Global Business Power. The 70mw is for a coal plant as far away as Iloilo that will go through 800 kilometers of power transmission and several submarine cable systems. One wonders about the technical and economic advantage to Meralco consumers of buying power that far from the Meralco load center when there are so many other options closer to home for 70mw.

In July 14, the joint venture between Meralco and San Miguel was signed on Mariveles Power Generation which got a 528mw contract. Meralco would own 49% and San Miguel 51%. On July 29, Meralco announced a 50:50% joint venture with DMCI/Semirara for the St.Raphael Power Generation Corp. which got a 400mw among the seven (7) midnight contracts.

Redondo Power that got a 225mw contract is owned 51% by Meralco in partnership with Therma Power of the Aboitiz Group. The Atimonan Energy One to which Meralco assigned 1200mw of power is majority owned by Meralco but it is not yet announced who will be its partner with Aboitiz and Ayala as rumored possibilities.

Before these new joint ventures and alliances, the other Meralco owner with 27.1%, favorite white knight JG Summit, bought 30% of Global Business Power where Meralco PowerGen had bought 20% in 2013. New Meralco partner EGAT of Thailand under its investment arm New Growth BV own 49% of the 455mw San Buenaventura. EGAT had bought 40.95% of Meralco supplier Masinloc Power Partners of the AES Group. EGAT owns 98% of QPL Mauban which has a 460mw coal power contract with Meralco.

Even the Visayas Grid will be dominated by four main players Meralco through GBP, Aboitiz Power, Green Core of the Lopez Group, and Kepco.

It’s all now in a family. How can there be true competition in CSP biddings and even in the WESM? If their cartel and interrelated power players get away with the seven (7) midnight contracts there would be no meaningful CSP biddings for Meralco consumers for the next 25 years, only gesture biddings for minor and shorter term contracts like peaking and reserve power. There would not be a credibly functioning power spot market. Sadly, this is happening at a time when the Philippines just passed The Philippine Competition Act (Republic Act 10667) which defines, prohibits and penalizes three types of anticompetitive conduct: anticompetitive agreements, abuse of dominant position, and anticompetitive mergers and acquisitions. If what is being done to the power generation sector is not against all these, we don’t know what is. If this is not a cartel, we also don’t know what is.

What we have is now a Power Oligarchy and Oligopoly. What chance do the consumers have of getting honestly competitive power?

Things will change only if the government recognizes this crime against consumers and country and would be willing to act to prevent it. This actually is the more productive subject of the Senate investigation on power.

Next: How is Meralco able to negotiate most of its power supply with affiliates? Who is the Culprit?

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

Disclaimer
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 as volunteer in finalizing the Epira Law to some key Senators. Through his blog matuwid.org in retirement he only seeks to share his expertise in power policy and strategy for the public good towards reducing the power cost in the country and eliminating abuses and monopolization. He assures the consumers and participants in the movement that he has no vested interest other than as a consumer and will not benefit financially from any of the advocacies and certainly will not participate directly or indirectly with any potential bidders in a true CSP.

What To Do With The 700mw Stranded Solar Projects?

David Celestra Tan,

16 April 2016

The solar industry lobby group, Solar Alliance is asking the DOE to extend the granting of the premium P8.67 per kwh FIT rate to those solar projects that failed to commission by the March 15, 2016 deadline but had finished 80% of their build-up works. They claim it is about 700mw. This would be on top of the 450mw that met the deadline.

Let us put these into perspective.

1. The 450mw of solar is most of the RE projects that is getting the generous FIT rate that so far is costing the consumers P0.12 per kwh in Renewable Energy Subsidy. That is from the initial P0.045 per kwh “promo rate”.

2. Now about 700mw solar that did not make the March 15, 2016 deadline is asking to be granted the same rate. How much will that cost the consumers? Note that a Feed In Tariff rate of P8.67 means a solar subsidy of at least P4.17 per kwh. That means a total of about P4.5 billion a year of subsidies that will be passed on to the consumers. This will be added to the 0.12 per kwh new FIT subsidy rate.

3. We realize that these solar investors have poured in probably P40 billion into their projects and they are 80% complete. However, they knew coming in that it is a race against time program. In fact it is likely that most of them knew already that they will not be able to build fast enough to meet the March 15, 2016 deadline. They took the risk and must take the consequence. Why should we stick the consumers with the bill for the gamble they took?

4. Having said that, we cannot ignore that these promoters and investors have facilities that are almost finished and in fact had DOE certifications. Perhaps the DOE and ERC must look at those Solar projects that were actually finished 100% but did not meet the March 15, 2016 because of failure to secure timely inspections, testings, and certifications from NGCP and ERC for COC. The government must take some responsibility for the regulatory delays.

5. As to those that are only 50 to 80% finished, we propose that those be allowed to participate in an auction under Competitive Selection Process with a 75 day completion deadline. At least the consumers will be assured of a competitively determined price with a maximum allowable rate of say P7.67 per kwh. This way the solar investors and the consumers would have a reasonable win-win situation. Some solar promoters claim that they can be profitable at P7.00 per kwh.

6. To protect the consumers, we also propose that these solar projects be given a maximum annual energy that they can deliver at the Fit Rate, not an open ended “all energy produced” type of deal that exposes the consumers to uncontrolled subsidy levels. Anything they produced above the eligible energy shall be paid at the market price. There are indications from grid data that solar actually produces energy as early as 9am to 5pm and not the claimed limit of 5 hours from 11 am to 4pm. This output was used to justify the first round of FIT Rate at 9.68 per kwh and the 2nd round of P8.67 per kwh.

At the promo rate of P0.045 per kwh, most of the RE projects are not being paid their full FIT rate. NREB, DOE, and ERC and of course the Philippine Solar Alliance knew all along that the FIT rate will have to rise. Yet they are calling for more and more solar under generous fit rates. The PEMC even released a study saying the consumers are actually benefitting a net of P4 billion a year from the increased supply of 682.9mw of RE to the grid. That benefit claim was based on a FIT subsidy of P0.045 per kwh. Clearly not the true subsidy that so far is P0.12 per kwh.

On top of these, NGCP will eventually have to buy load regulating ancillary services to compensate for the intermittence of solar. Another costs to the consumers caused by solar that must become part of the equation on its costs and benefits. Another hoodwinking of the DOE, ERC, and the consumers. Et tu NREB and PEMC?

The Philippine Solar Alliance is not only lobbying for these 700mw of stranded solar projects but calling for up to 2,000 mw as a solution to the energy supply needs of the country. That is like solving a short term problem with a long 20 year solution and subsidy costs.

Let us not forget that the cost of solar goes beyond the FIT. Meralcos rate is increasing because of the P0.12 per kwh RE subsidy. Would these RE subsidies reach P0.48 per kwh if the lobbyists get their way?

Once again, we are not against clean energy and solar. We feel however that since the industry has matured and the energy efficiency of these RE projects have been proven with empirical operating data under Philippine soil (of sun and wind) that all these, at a minimum. must now be subjected to a proper CSP.

Talking about CSP, now we are wondering whether the DOE and ERC are really committed to the honest to goodness implementation of the CSP policy that gave the Meralco consumers so much hope for the better.

It is about time that the consumers are no longer treated as a silent bottomless pit on whom all consequent costs of government policy and industry lobby will be charged. Let us not forget that in our democracy, it is for the govern that the government must behave and function. Our government officials swore to this when they took their oath of office.

Consider this when resolving the 700mw stranded solar projects.

Matuwid na Singil sa Kuryente Consumer Alliance Inc Matuwid.org – See more at: http://matuwid.org/what-to-do-with-the-700mw-stranded-solar-projects/#sthash.IABkGeOj.dpuf

 

ERC’s Extension of CSP Effectivity Could Be Costly for Consumers and A Big Step Back in Drive Against Monopolization of Generation Sector

David Celestra Tan and Evelyn Viray, MSK
28 March 2016

The ERC issued a new Resolution postponing the effectivity of the mandatory CSP for new power supply contracts to April 30, 2016 from November 30, 2015. What would seem an innocuous extension of a deadline actually have larger implications to consumer rates and the monopolization of the generation sector. That’s a five (5) months delay, a lot of time to allow the exemption of many bilateral contracts and deny the electric consumers the benefit of competition for the long term.

While we agree that there has to be a sane transitional process this must be consistent with always promoting the interest of electric consumers which are the right to adequate supply of power and right to least cost electricity.

MSK therefore wishes to go direct to the crux of the matter of ERC’s five (5) month postponement of the mandatory CSP. The resulting exemption of Meralco’s desired 1,200mw bilateral contract with its sister company Meralco PowerGen in Atimonan, Quezon and who knows maybe another 1,500mw for a natural gas project in Quezon or Batangas. If these long term power supply contracts are allowed by the ERC as a result of Resolution 1 postponement, then we have denied again the right of consumers to least cost power as market-determined through open competitive bidding. The CSP policy would be once again a Pyrrhic victory for the consumers.

ERC’s Resolution 1 of 2016 signed by the five Commissioners on March 15, 2016 took cognizance of the right of captive electric consumers to “least cost power” and its rationale for the postponement of the CSP mandatory date in the following:

“WHEREAS, after judicious study and due consideration of the different perspectives raised in the aforementioned letters, with the end in view of ensuring the successful implementation of the CSP for the benefit of consumers, DUs, and GenCos, the Commission has resolved to allow a period of transition the full implementation of the CSP Resolution and, as such, restates the effectivity date of the CSP Resolution to a later date;”

Once again, we are putting all these new rules supposedly to promote the interest of the consumers and now in the implementation allowing the manipulation in effectivity that will again sell down the consumers. Another case of wanting to mandate CSP but again forgetting why we are doing it?

The issue here is self-negotiated contracts with sister companies as part of a sane transitional process.

ERC’s Resolution 1 of 2016 is not clear on safeguards for protection of electric consumers against negotiated sweetheart deals. As the Epira Law clearly declares supply of electricity is imbued with public interest. And it is the legal duty of the ERC, the DOE, PEMC, and JCPC to look vigilantly after the public interest.

As we stated, a reasonable, practical, and sane transitional process must have two hallmarks to be consistent with public interest and those are:

1) it must help assure adequate supply of power and
2) it must assure least cost electricity.

We agree also that we must be as fair and reasonable to the DU and the generator. However, we must not cross the line towards sacrificing the submissive consumers. Perhaps the ERC can consider some level of safeguards for electric consumers during the transition period.

a. Pending Projects between DU’s and unrelated generators
The pending power supply contracts of DU’s with unrelated power generators may be reasonably presumed to be done on arms-length basis and hence may not be sweetheart in prices and terms. Their implementation may be needed to allow the continuation of power supply development. Yet, we have to assure the consumers rights to least cost power.

In this case, it will be reasonable to allow a CSP as a transitional process called Swiss challenge that is administered independently. This way the DU and its chosen generator caught in the transition period will have nonetheless the vested right to match the winning bidder and the consumers are nonetheless assured of a level of market tested rate. Not perfect but it is a transitional process.

b. Signed Projects of a DU and its sister company generator
The desired contracts of DU-generator groups like Meralco and Aboitiz with their own sister company generators are entirely different matters. They are NOT arms-length and hence with high probability of sweetheart prices and terms that are inimical to the public interest.

Whether or not the proposed projects must be allowed a transitional CSP must be determined by the ERC if they are critical for timely assurance of adequate supply to the particular DU. The other consideration is the public interest.

To respect the right of consumers to least cost power, it would have been appropriate to also subject these sister company contracts to CSP administered independently if Meralco wants their affiliates to participate.

c. Meralco’s 1200mw Coal Project in Atimonan, Quezon
In the case of Meralco and Metro-Pacific they have already gotten away with a total of 1,060mw of coal projects for Redondo Power in Subic and in Mauban, Quezon. The rates approved were P4.26 per kwh compared to a truly competitive bidding done by eight electric cooperatives in the North for only 125mw but got 3.76 per kwh or a difference of P0.50 per kwh. Not satisfied because they really want 3,000mw of negotiated deals for its sister generator Meralco PowerGen. It is evident that they have been lobbying to allowed to do a CSP Swiss Challenge that would be administered by their own people for their 1,200mw coal project in Atimonan, Quezon. This will appear like they are complying with the CSP policy but not in a way that is truly competitive. They don’t even want an independent bid administrator to assure a transparent, honest to goodness, and judicious bidding.

It might be recalled that the CSP policy was adopted by the DOE nine (9) months ago on June 30, 2015. And with all the delays and deliberations the ERC was able to issue its own CSP implementing policy Resolution 13 2015. We would think that during this time period, if Meralco’s 1200mw 3rd project in Atimonan Quezon was really finalized and signed it would have been filed with the ERC during that period.

Press reports said Meralco expects the completion of the 455mw San Buenaventura Power in Mauban in 2019 and the 600mw Redondo Peninsula Energy in Subic in late 2019. These two appear to have been filed with the ERC to beat the November 2015 original deadline. The 1200mw Atimonan One Energy which is announced for completion in late 2020 and another 1500mw natural gas project being pursued by Meralco evidently did not make the already delayed implementation of CSP.

The ERC’s sweeping postponement of the CSP implementation to April 30, 2016 will work out to be even better for Meralco and for Aboitiz.

The extension of the CSP effectivity will also be a big blow to the hoped for reduction in the monopolization of the generation sector. The three projects totaling 2,260mw will corner about 40% of the energy needs of Meralco. Another 1500mw Gas project would carve out another 25%. If we add the 1500mw First Gas and the 440mw Quezon Power also cornering about 30%% that will give a total of 95% of negotiated sweetheart prices passed on to the consumers. Long term the rest of the power generation sector will battle for the minor markets.

How much will these exempted new sweetheart power supply contracts cost the consumers?

We calculate that the total of 2,060mw of coal project that Meralco PowerGen can have at 70% load factor guaranteed power supply agreement will own a minimum of 12.6 billion kwh a year in sales to Meralco. At an overprice of P0.40 per kwh, that means P5 billion a year in additional charges to electric consumers. At a minimum of 20 years, that would mean P100 billion charged to consumers. And that doesn’t count the over prices from 15 million tons a year of Indonesian coal that will be passed on to the consumers without benefit of bidding.

Let us observe how many Meralco and Aboitiz power supply contracts will be filed in April to beat the new ERC deadline.

We hope these facts will not be lost as the ERC tries to implement the CSP aspiration for the country. The larger implication of the extension of the CSP deadline to April 30, 2016 in addition to the 10’s of billions of additional charges to consumers is this could be the final blow to hopes of curtailing the monopolization of the power generation sector in Luzon. With so much market domination in power generation supply the WESM market will just be a peripheral sector.

With our past experience with the Arroyo ERC always letting down the consumers, we cannot be faulted for being suspicious and paranoid. We are willing and will be delighted to be proven wrong. It does not look good though.

We hope the Pnoy ERC Commissioners led by new Chair Salazar would have a wonderful trick up their sleeves that will benefit the consumers. Perhaps the captive consumers of Meralco can somehow be protected by subjecting these Meralco PowerGen projects to a truly competitive CSP administered by a truly independent party if Meralco really wants their sister company to participate.

Author’s notes: This has been edited from yesterday’s draft. We are sorry for the errors in facts.

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

 

Truth and Dangers of PEMC’s P8.29 Billion Benefit of RE to Consumers

PEMC announced in late January to the hapless electric consumers that the Renewable Energy suppliers that are enjoying Feed-In Tariff subsidies have actually saved consumers P8.29 billion for one year from the wholesale electricity market and that it resulted to a net savings of P4.0 billion after deducting the approximately P4.29 billion RE subsidy that are already being charged to the consumers.

If we follow the logic of the announcement the government policy makers must support the implementation of more and more wind and solar projects because they save billions to consumers.

MSK could not believe it because they were talking about solar power that cost the consumers P8.68 to 9.68 per kwh and wind that is subsidized at P8.53 per kwh. The incredible report was released by a certain Jonathan dela Vina, a research specialist at the PEMC that manages the WESM. While wishing to bear out the good news, MSK requested PEMC for clarification on the validity of the claims, the methodology that they used and the accuracy and truthfulness of the claimed benefit.

Is PEMC doing its own hoodwinking of the consumers just like Meralco?

MSK received a clarification from Mr. Robinson Descanso, Vice-President for Corporate Planning and Communications of PEMC. We are posting his full response.

1. Was the claimed P8.29 billion reduction of WESM price due to the fact that the additional supply of 682.91mw was from Renewable Energy or would the reduction also resulted if the 682.91 mw additional supply came from cheaper and non-subsidized power such as coal, natural1 gas, or other sources?

PEMC’s answer:

The market price study did not compare if those 682.9 MW of increased WESM supply were from new coal, natural gas power plants or diesel plants. Although those conventional plants may be said to be cheaper than developing renewable energy, the accelerated development of renewable energy resources in the country through special programs such as the FIT system is a thrust of the government. The integration of FIT-qualified resources, however, also has cost benefits to the system, more specially on WESM prices, as has been experienced in other jurisdictions. The objective of PEMC’s paper is to estimate the benefit on WESM prices based on historical data”.

 

MSK’s concern is giving P8 per kwh RE power the full credit for the reduction when in fact the same reduction could have been achieved if the additional 682.9mw came from cheaper sources at P4.50 per kwh.

2. Did they consider the ancillary services cost for Wind and Solar which comprised 537.9mw or 79% of the 682.9mw supplied?

Mr. Descanso’s response said:

 

we wish to note that no additional cost for ancillary services were assumed in the paper. This assumption is brought about by the fact that the system operator (NGCP) did not file with the ERC for any additional reserve requirements to specifically address intermittency of RE; hence, the assumption is that the current ancillary service supply is sufficient considering the current penetration level of RE in the grid. On the other hand, we do not discount the possibility that the system operator may require additional reserves in the future.”

In other words the claimed net benefit of P4.00 billion to consumers after the subsidy of P4.29 billion is not really accurate because as they admitted the cost of ancillary services to support the intermittent RE have not been considered.

In Meralco’s recent rate increased they disclosed that about P0.08 per kwh of NGCP additional charges were made due to additional ancillary services bought by NGCP. And we assume a big part of those was to support the RE intermittence in the Luzon Grid. If Meralco sells 30 billion kwh a year of power, the P0.08 per kwh translates to P2.4 billion a year, a big bite out of the claimed market savings from RE.

3. PEMC’s P8.29 billion market reduction is based on a value of P1.00 per kwh. How did they determine this?

“the simulation indicates that the diesel plant was required to serve the demand of the system without the FIT-qualified resources, which resulted to a MCP of P / kWh in this example. The conclusion for this example then is that the presence of the FIT-qualified resources resulted to a P 4 / kWh decrease in the spot price for the specific interval.”

In their graphs the price of diesel energy was P8.50 kwh which became the MCP or market clearing price. If we had additional supply from P4.00 per kwh natural gas, the expensive diesel at P8.50 per kwh would not have been the Basis for the market clearing price. Then the valuation of RE energy would not have been exaggerated.

It is very dangerous when government agencies including PEMC would announce tremendous benefits that could mislead the public and the government policy makers on energy regarding the benefits of Renewable Energy. Once again, we caution about lumping the expensive and highly subsidized and system disruptive RE like solar and wind with grid competitive RE such as biomass and mini-hydro.

Let us hope some people at PEMC are not participating in yet another hoodwinking of the electric consumers into thinking that the P8.68 per kwh solar and wind must be implemented in unlimited basis of up to 3,500 mw when they are highly subsidized already by the consumers. There are some facts about the energy output of wind and solar that we should note however based on the response of Mr. Descanso. And should be noted by the ERC when evaluating the economics and returns of Wind for P8.53 per kwh price.

1. Solar generation
solar power plants generate the bulk of their energy from 8AM to 4PM according to WESM data. As a result, the dispatch of diesel plants during those hours were lessened. Based on your simulation, the production from diesel plants were reduced by an average of 22% during the same timeframe (i.e., 8AM to 4 PM) due to the integration of all FIT-qualified resources in the WESM.”

We were told its only from 11 to 5 with low load factors and high needed tariff.

2. Wind generation
“wind power plants generate the bulk of their energy from 12PM to 9 PM according to WESM data. Unlike solar power plants however, wind power plants may still generate around 80% of its peak generation outside those hours.”

Were this energy output and load factors consistent with the claims of the wind developers to the ERC and DOE when they justified the P8.68 per kwh FIT?

We ask PEMC President Mel de Ocampo to look into these misleading releases and half-truths that dangerously lead to wrong policy directions.

The PEMC report was curiously serving the interest of the solar and wind lobbyists who have been wanting an expanded solar and wind program at those subsidy levels that run P4.00 per kwh. Consumers should nonetheless welcome the development of clean energy in the country. However these RE providers must be willing to provide the service cost effectively and not be spoiled by such high rates. They must be willing to deserve the business through CSP as announced by the DOE.

For those interested in the details, we are providing in this website the full text of PEMC’s response as a download.

A blessed Holy week to everybody.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Meralco’s Increasing Rates Due to Outdated “Down and Still Pay” Allowances

David Celestra Tan, MSK
21 February 2016

Meralco recently announced its rate will increase P0.42 per kwh which many consumers and apparently including the ERC and the DOE find inconsistent with the 55% drop in world fuel prices. Of the P0.42 per kwh increase this month, P0.25 or 60% is from generation charges, 0.08 or 19% is from higher transmission charges of NGCP, taxes of 0.05 (12%) , and others of 0.04 per kwh (9%).

Since fuel prices have remained low, the increase could have come only from fixed capacity payments. Meralco had further warned the public to expect more increases because of the coming hot summer months and the scheduled downtimes of more of its contracted power plants. This means Meralco will be paying for capacity fees even during the downtimes for maintenance that the generators are allowed under their power supply agreements. Since there is no output from these plants, the capacity payments will increase the average generation rate passed on to the consumers.

Origins of Guaranteed Capacity Payments during contracted downtime allowances

Guaranteed capacity payments are designed to assure the bankability of power generation projects especially in the aftermath of the power crisis of the 1990s. This is a key provision in the BOT contracts signed by NPC, which is supposed to receive ownership of the plants at the “T” time or transfer. The owners of Meralco followed suit even if their projects with affiliated companies First Gas (1500mw) and QPL (440mw) were BOO, build own and operate and Meralco the off-taker will never gain ownership of the asset. In fact, these two sweetheart contracts were the cause of the mysterious“PPA” charges (Purchased Power Adjustments)that ravaged the consumers in late early 2000’s, when generation charges jumped 50% from the NPC monopoly regime.

It became known as “take or pay” or minimum energy off-take. What most people did not know was that it also included “down and still pay” provisions where the off-taker Meralco or NPC still pay even if there is no service to take. This is in the form of a downtime allowance where the power generator is allowed not to deliver the service during the needed maintenance times whether planned or unplanned. This is normally 30 days for each generating unit and 15 days plant downs. Some plants provide for 45 days for each generating unit.
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What are the drawbacks of these that work against the consumers?

1. With the downtime allowance, the off-taker or DU essentially agrees to pay the capacity fees for 12 months even if the service will be available only for 10 months. Power Generators are entitled to assured payments but only for the times that they are providing the service and not even when they are not. If the plant is available but not dispatched by the off-taker, then it may be fair to pay them. But why pay when they are not running and cannot provide the service?

Downtime for maintenance is normal for power plants since they are mechanical equipment that breakdown and need repair and maintenance. However, downtime provisions should only mean the generator is contractually excused from delivering power but not privileged to continue to be paid by the consumers even if their plant is broken down. There should be no reward for non-performance.

2. With such guarantee, the generators do not have the pressure to minimize his downtime and to make the necessary investments for optimum plant reliability. It is a generator flexibility that leaves consumer vulnerable to undeserved capacity charges.

3. In Meralco’s case, the existence of many sweetheart deals between affiliated companies and the coming 1060mw of Meralco PowerGen’s Redondo Power and Mauban expansion, lends to opportunities for lax and sweetheart monitoring of these outages. There is nothing to guarantee that Meralco will not pay its sister generator even if its downtime is in excess of even the contracted downtime limit. In the case of First Gas, there is continuing doubt that they were paid full capacity fees in its first two years when the plants are reported to be actually not yet finished or NPC did not have transmission capacity in the location First Gas chose. They even sued their contractor for the delayed completion of the plant. There is no safeguard against the possibility that, given a choice between putting income in their own pockets or the pockets of the consuming public, that the owners of the distributor-generator would choose the latter.

4. The capacity rate being evaluated and approved by the ERC do not reflect the true annual cost to the consumer of the power rate. Essentially the true monthly cost is the annual capacity rate divided by 10 months, and not 12 months, since the service will not really be available two months of the year. The true cost to consumers would be higher but it’s better than to make them believe the rate is lower when it is not really. This is one compelling reason for a CSP so the generators can sharpen their pencils and not be spoiled by a 2 months free income.

5. Some Other bilateral contract provisions that need to be updated

a) Sell back of undispatched power to the WESM Since Meralco is already paying for the annual capacity fees in its power supply agreement, how do the consumers insure that the sell back of the unused capacity or energy is credited to the Meralco consumers and not provide a double recovery on the part of the generator?

b) Responsibility for replacement power In the November and December 2013 fiasco of the power market, a good number of Meralco bilateral contractors claimed technical shutdowns due to “boiler leaks”. May be those could not have been easy reasons if they are responsible for replacement power in case they are already in excess of their contracted downtime allowance.

c) competitive procurement of fuel There is no current regulatory rule on assuring that the fuel is truly competitive since this is a pass on charge to the consumers. Reports are that the procurement of coal and distillate fuel replacements are done by the affiliated companies of the generators.

4) control of dispatching of the contracted plants by Meralco by a Meralco subsidiary. This is very dangerous for market manipulation and should be looked into by ERC and PEMC to assure it doesn’t happen

5) For brand new greenfield projects essential for the country’s power development especially those in strategic locations may deserve capacity payments including downtime during the first five years to enhance bankability. However, the proponent must be willing to reduce the price in return. Maybe there should also be ladder rate structure where the price is reduced after the original project financing is paid off.

One thing MSK is not able to reconcile is Meralco announcement of the power plants that had downtimes for January 2016 as part of its explanation for the higher generation rate of P0.25 per kwh.

Meralco had announced the Downtime maintenance schedules of its generators for January 2016.
a) Calaca 1 and 2 600mw
b) Masinloc 1 315mw
c) Sta. Rita 10 257.3mw
d) Sta. Rita 40 264mw
e) Sta. Rita 30 265.5mw

An analysis of the Meralco purchases and the dispatch level of each power supplier showed that only SEM Calaca (600mw) had dropped dispatch to 33.8% and 23.7% in December and January. Masinloc still had 98.4% and 91.7% during those months. Sta. Rita had 84.8% and 75.2%. So why imply that these plants shutdowns caused the increase in rate?

The IPP that increased its kwh rate by P5.00 is the Therma Mobile whose dispatch dropped to 5.7% from 10% in December indicating increased supplies from Meralcos base-load suppliers. WESM’S price also dropped significantly in January indicating ample supply to the grid.

Maybe the reserve capacity contracts being entered into by Meralco with Bauang Power and the Panay Power diesel plant as far away as Panay island also needs to be reviewed by the ERC for their usefulness and costs to Meralco consumers.

For August 2016 the following have scheduled maintenance
a) SPPC- Ilijan 190mw
b) Calaca 1 330mw
c) Sta. Rita 20 255.7mw

For September 2016,
a) Sta. Rita 30 and Calaca 600mw

For October and November 2016
SMC Sual 647mw

The ERC instead of waiting until “hell hits the pan” when these downtimes and their capacity payments had already wrecked havoc on the consumers, maybe should conduct a pre-emptive review of the downtime provisions and capacity payments of these bilateral contracts to assure there are no onerous provisions. They must also evaluate how the contracted DU verifies and monitors the downtime allowances to protect the consumers.

Can they ask these generators to schedule their preventive maintenance during the low demand times of the country like maybe in the 3rd quarter? Why are they all bunched up in January?

We are holding our breadth for the next round of Meralco rate increases caused by these outages.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.