ERC Now Waivering on CSP?

Matuwid na Singil sa Kuryente

The suspected pro-Aboitiz bias of the new set of Commissioners at the Energy Regulatory Commission will be tested sooner than later on the critical issue of mandating competitive bidding called Competitive Selection Process.

The new rule will effectively outlaw the right of owners of distribution utilities to self-negotiate power supply agreements with sister companies, a practice that in an MSK study of Meralco generation rate purchases resulted to higher pass on generation costs of 23 to 33% to sister generators.

The Department of Energy passed a circular DC2015-06-008 on June 30, 2015 mandating the bidding of power supply contracts. Now it is up to the Energy Regulatory Commission to put in place the enabling regulatory rule to follow the policy set by the DOE, the agency tasked by the Epira Law to set policy in the energy sector including the assurance of true competition and safeguarding of consumers.

It is ominous to consumers that an ERC Commissioner appear to be trying to pre-empt the new ERC Chair Salazar by saying the agency ”will act more prudent” in dealing with the DOE circular on CSP. There could be “far reaching implications”..but if it will compromise certain aspects, then maybe we should revisit it.” We are wondering what those “certain aspects” are that can be compromised. Like the right of the Metro Pacific Group and the Aboitiz group as controlling owners of the two largest distribution utilities supplying 75% of the country electric power market to negotiate among themselves the price that will be passed on to the consumers?

Ironically, the Energy Regulation Commission itself had held public hearings as early as 2013 and 2014 on its own proposed rules for bidding of bilateral power supply contracts under ERC Case No. 2013-005 RM and has in fact a draft rule, albeit with curious loopholes.

It is also reported that an ERC Commissioner attended uninvited a meeting of DOE technical working group that is deliberating on the implementing rules of the CSP to implement DC2015-06-008.

As can be expected those lobbying hard for a “voluntary CSP” are the Metro Pacific group that controls Meralco and has a subsidiary called Meralco PowerGen that has designs on cornering the Meralco market with a 3,000 mw negotiated power supply controls and the Aboitiz group, the 2nd largest distribution utility that controls Davao Light and Visayan Electric in Cebu in addition to some minor DU’s. These two are reported to have made known their threat to challenge in the Supreme Court the legality of such mandated bidding.

It would be a classic legal battle with the two vested groups trying to justify their right to negotiate among themselves the pass on charge to consumers and denying the consumers their right to competitive power. Yeah Yeah we can already hear them argue that they don’t determine the rate, it is the ERC that review and decide on the rate. Very reassuring. As we have written before, competition beats regulation in assuring electric consumers better rates. The ERC reportedly reduced Meralco’s Mauban Coal plant expansion to P4.26 from P4.30 for the 460mw project after rigorous review. Comparatively, 8 electric coops in the North held a competitive bidding for 120mw and they got P3.78 per kwh. That’s a P0.48 per kwh difference or P1.4 billion a year additional charge to consumers for that contract alone.

Hopefully there will be those who will stand up for the consumers. Dipping into rate payers’ pockets is similar to dipping into taxpayers’ pockets.

People believe that the more influential one is the Aboitiz group with whom two commissioners are reported to be identified with through a powerful supporter in Malacanang. Consumers are lucky that from the looks of it there are two commissioners who have hearts for the consumers and not beholden to the big guys (yet!).

The balancing force is new ERC Chair Salazar, who we hope and pray will find his heart for the consumers. We will soon find out his mettle and whether he will be the answer to the prayers of the long suffering consumers.

Meanwhile, consumers will be holding their breadth to see whether this PNoy ERC will be better than the PGMA ERC starting with the CSP that will be a corner stone of a new “matuwid” ERC.

When will the electric consumers get a break?

Solar Power’s Role in the Energy Mix and in Power Cost Reduction

by David Celestra Tan

Consumers are bombarded by publicity touting the cost advantages of solar and the government is similarly bombarded by lobbying from industry groups for more subsidies for solar. It is easy for consumers to get confused on whether solar power is good for consumers and for the country.

We will try to make sense for our consumers on the Solar and what realistically can be expected from it.

Understanding Solar

Solar is one of the Renewable Energies being encouraged and given generous fiscal incentives by the Renewable Energy law of December 2008. Capital goods are duty and VAT free and proponents are exempt 100% from income taxes for the first seven (7) years and only 10% after that.

It produces energy from sunlight through solar panels. Typically they produce power in varying degrees depending on the amount of sunlight and cloud cover. Normally this is from 10am to 5pm. In terms of energy, it produces 20% load factor only.

From the generators standpoint, solar systems have the benefit of faster installation time (6 to 8 months compared to 10 to 12 months for diesel plants and a minimum 24 months for coal power plants. The operation and maintenance costs is much lower because it has infinitely less moving parts than the other fossil-based generating facilities. These on top of the fiscal incentives.

There are two kinds of solar. Roof-top solar and the utility scale or grid-connected solar.

The economic and environmental benefits of roof-top solar is unquestionable. Mainly because in roof-top your avoided cost is retail or commercial rate of the local utility, especially in the Meralco area that has the highest distribution rate in the country. If you are paying P11.50 per kwh and you can get a roof-top solar system that produces at P8.50 per kwh, that’s a 26% reduction in your electric bill.

Net Metering Scheme

This is made possible by the net metering regulation established by the Energy Regulation Commission, one of the most enlightened pro-consumer and facilitative Resolutions set by the regulatory agency since its creation in 2001.

Under net metering rules, you can draw power from the grid or Meralco for your use. However, during the hours that your roof-top solar is generating electricity, you will be consuming electricity from the own solar system or delivering the excess back to the distribution grid. If you draw more power from Meralco than you produced, you may Meralco for the net difference at the Meralco distribution rate.

However if your solar panels produced more energy than you need and you exported to Meralco, the excess power will be paid for at the average generation rate. The limit is 100kw which is big enough for normal restaurants and most mansions.

This actually is not a bad deal because it assures you that at least there is a value to your excess energy and you have the privilege of drawing energy from Meralco’s distribution grid when you need power which is the hours of 6pm to 10am when your roof-top solar is not producing or producing little.

Roof-top systems are good for schools, hospitals, government offices, and businesses that have a lot of roof.

Some people claim a payback period of 5 years if they buy their own systems. If you go through a systems installer/financier, you probably save on electricity by 10 to 15%.

Caution however in choosing who will be your solar power provider. The industry is so new there is a mix of players ranging from the really good ones to the faster talkers. Just be careful and checkout credentials and track record.

Utility Scale or Grid Connected Solar

The current darling of the investment community is the utility scale solar with proposed systems ranging from 20 to 200mw. It takes about 1.2 hectare of land for each megawatt of solar array. Of course most of these proponents have been racing with each other for the Feed-In tariff which started at 9.68 per kwh and now down to 8.68 per kwh.

Secretary Petilla’s Department of Energy was constrained to adopt a first come first serve approach for availment of the Feed-In tariff because a previous Energy Secretary quietly issued 400 licenses for RE projects, most of them speculators. It became a horse race method to separate the men from the boys.

In this large systems, you sell your power to the main power grid.

The main lobbyist for the solar investors is the Philippine Solar Alliance. It is the group that fought hard for a subsidized rate of P19.68 per kwh! Why? Because Germany and Spain agreed to subsidize solar at that level. Had it passed, Filipino consumers would be subsidizing solar investors to the tune of P14.00 per kwh. Can you imagine? I would like to gold-plate everything in my house but I settle with chrome finish because gold is too expensive. Anyway for electricity, electron is electron.

The solar lobby group managed to convince the DOE to increase the installation target for solar from 50mw to 500mw (That’s roughly P3.0 billion a year in subsidies that will be passed on to the electric consumers). And they are asking for more because there are about 2,000mw of proposed solar projects and they threaten the country with the pull out of investors. Well, the Philippines needs the right kind of investors, those who will contribute something positive to the country and not stick the consumers with 20 years of overpriced power.

We are in luck though because the prices of solar panels have dropped dramatically by 65 to 75% in the last 3 years. Solar energy is a good example of market competition at work. Some utility scale solar promoters are floating rates of 6.80 per kwh although most are aiming still for 7.50 per kwh. And who do we owe this good fortune? Whether you like it or not, credit goes to the manufacturing prowess of Mainland China. Germany may have been the technology leader in solar as the pioneer but it is China that brought down the manufacturing cost, which in turn is the reason the solar industry is so viable now. Western countries however still make the more efficient and reliable inverter component of the system.

One thing unusual about large scale solar projects is why their investors are proceeding with construction even if they are not sure of getting P8.68 FIT rate. Our suspicion is because they can get by with an unsubsidized rate of P6.50 per kwh if that is what is necessary.

Solar and RE law

Solar’s right to being comes from its “must be purchased” rights under the Renewable Energy law of 2008. That is one of the hidden costs of solar. The base-load power that it will displace will nonetheless still be paid for the distribution utility and passed on to its consumers. Most people are presuming that RE has priority dispatch over fossil fuel and the latter will have to sacrifice and give way. The RE laws granting of “must be purchased” rights for renewable energy did not mean the utility has a right to violate its contracts with other power generators especially fossil.

Storage Technology on the Horizon

The common knock on solar is it’s intermittence. Cloud cover passes by and the output drops significantly. It can also generate power only when the sun is up and it is usually 10 to 5 pm, with the highest output the four hours in between. It is important for consumers to understand that solar alone cannot serve our 24 hour power needs. We still fossil fuel plants that can deliver power on demand.

Of course we need power 24 hours a day. So there has to be a system of storing power that solar produces during the daytime so that they can be used at nighttime. Fuel cells and storage batteries like the ones used in your car are very expensive but are also increasingly becoming economical.

This means if you want to extend your solar energy service by five (5) hours, you will need to double the size of your installed system and have the battery that will last five hours. We have a suspicion that China’s knack for manufacturing will save the day for extended solar through cheaper storage lithium batteries. That and possibly Eon Musk and his mega battery factory project in Nevada.

Hidden Costs of Solar

Government policy makers and the consumers however must realize that there are hidden costs to solar systems. First, as we said, is the payment for displayed base-load power supply contracts. This will result to higher average price of generation that will be passed on to the consumers. This is a result of the minimum off-take payments guaranteed to the fossil-based generators or its tricky-dick variation called load-factor based pricing that is very common in the Visayas and Mindanao.

The other hidden cost of power is the transmission connection charges of the large solar power systems which normally would be so far away from the grid. NGCP just loves to “classify” those transmission facilities as “transmission assets” which enables them to include it in their “asset base”, upon which their allowed maximum allowable revenue is computed. More transmission charges to consumers. If these practice keep up transmission charges will be the fastest rising item on our monthly electric bill.

Solar power just like other Renewable Energy must be subjected to bidding and not be “allocated”

One thing perplexing is why the Department of Energy is insisting on handing out (or allocating) the feed-in tariff even at the reduced P8.68 per kwh. The time of subsidizing solar energy to encourage there development is over. There are so many interested players now. Let them compete for the privilege. Set P8.68 as the top price and do a reverse auction on 400mw of solar power with government option for an additional 400mw if rates have achieved grid parity. For all we know the market will say there is really no more need to subsidize power.

Summary

In summary, roof-top solar is competitive and here to stay. The finance community must reach its level of comfort with the risk profile of solar. They might consider that solar arrays can be transferred at reasonable cost to another more credit worthy roof owners.

There should also be no limit in solar as long as they achieve grid parity and the DU consider the solar output of five hours in the middle of the day when designing their power supply agreements.

If utility scale solar achieves grid parity, they can play good roles in reducing average power costs and cleaner energy which must increasingly become an essential part of our energy mix.

 

Meralco’s Proposal for Voluntary CSP is a Ruse To Buy Time

Meralco’s President Oscar S. Reyes had reportedly proposed that the Department of Energy’s circular that requires Competitive Selection Process (CSP) in power supply deals be implemented voluntarily for at least 2 to 3 years.

This is clearly a ruse to buy time for Meralco to finalize the various bilateral contracts totaling 3,000 megawatts that its sister company Meralco PowerGen had been announcing is their target. So far they have announced 1060mw, 460mw for Mauban expansion and 600mw for Redondo Power in Subic.

A voluntary implementation for 3 years would give Meralco sufficient time to find minority partners and finalize its bilateral contracts for its project companies that are majority owned by Meralco PowerGen. Within that time frame Meralco would have gotten ERC approval or have at least filed its application with the ERC as required to be exempted by the DOE Circular 2015-06-0008. This would render useless the DOE’s mandate for open competitive bidding of bilateral power supply contracts for captive consumers.

Meralco had announced that they target 3,000mw of 25-year power supply contracts with its sister company Meralco PowerGen, a contract quantity that we estimate will supply about 60% of the energy needs of Meralco for the next 10 years. If we consider that Meralco still has more than 10 years left on the sweetheart deals it signed with the former owners that currently supply at least 40% of the needs of Meralco, in 3 years Meralco would be already cornered 100% of its energy needs by current and former sister companies with their sweetheart contracts. The utility giant will once again outmaneuver reforms that are intended to promote the interest of the consumers and reduce power costs as its former owners had done with the Epira Law in 2001.

The professionally glib Meralco said in the press release that the DOE must allow competitive bidding “to be done side by side with bilateral negotiations if only to set leverage on which ones could really yield a better deal for electricity consumers. It should co-exist with bilaterally-negotiated contracts so that you can have the best of all worlds. If you do that you will see who gets the best contract. Industry will tend to migrate to the best terms and conditions – whether it is bilaterally-negotiated or CSP”. Somehow these supposed soothing words ring hollow to Meralco’s electricity consumers.

We agree however with Meralco CEO Reyes that mandatory bidding “has not been tried before and that it would not be an easy process”. It has never been tried by Meralco since the passing of the Epira Law of 2001 but many electric cooperatives and some private distribution utilities have tried open competitive bidding and the results have been positively advantageous to the consumers.

Surely, Meralco will find it an easier process to just negotiate with a sister company across the breakfast table but it is its duty as a public service utility to supply power in the least cost manner and if that takes the inconvenience of going through a transparent competitive bidding and doing business with unrelated companies, so be it. Meralco should not deny its captive consumers the right to competitive power just because it would not be an easy process.

Mandatory open bidding will take away the control of the generation market by the DU, a market power that intimidates legitimate and truly independent local and foreign power generation investors from competing with the sister company generators of Meralco. While there are gaping loopholes in the Epira Law of 2001 and its Implementing Rules that allowed Meralco and the Aboitiz group( who together must be controlling 70% of the countrys energy needs), to effectively expropriate the power market, there are also sufficient openings in the law that will allow for rectification for the protection and benefit of the electric consumers.

Electric Consumers should thank former Energy Secretary Carlos Jericho Petilla for being bold, prescient, and caring enough to lead the Department of Energy in this historic first step that can set the country on the road to making amends to the long abused and neglected electric consumers.

Mandating the open bidding is NOT prohibited by the Epira law under Section 45(b) and certainly it is in the public interest and the only way Meralco can truly say it will be supplying in the least cost manner. Obviously there are bidding and contracting safeguards that need to be put in place to protect the public but those are mechanics that can be worked out.

Allowing Meralco to voluntarily bid in parallel with its continued right to negotiate with a sister company as they propose will give them a 3-year window to corner its generation market with untold billions excessively charged to the consumers. There is nothing to prevent them from holding token and gesture biddings just to show they are doing a CSP and negotiate its juicy power supply contracts behind the smokescreen.

We estimate the difference in the current generation price of Meralco’s sister company generators and the non-affiliated generators is approximately P13.68 billion a year.

We call on the Energy Regulatory Commission to hold true to its own mandate to protect the public interest and to immediately put in place the regulatory rule requiring mandating open bidding or competitive selection process. It has put in place elaborate competitive mechanisms for the contestable customers. The process of CSP would comparatively be a lot simplier and will benefit 50% of the Meralco consumers that pay 60% of Meralco revenues.

Let us not fall for the Meralco Ruse to buy time to corner its generation market.

Matuwid na Singil sa Kuryente Consumer Alliance Inc.
24 July 2015

Signs of Life and Hope for Meralco Consumers

Matuwid na Singil sa Kuryente Consumer Alliance, Inc.
21 June 2015

Meralco had been highly publicizing recently rate reductions in its average generation rates and in its distribution rates. My Meralco bill shows a generation rate of P 4.4556 per kwh compared to P5.50 six months ago, a more than P1 per kwh reduction. They have asked the ERC to allow a reduction of P0.18 per kwh in its distribution rates. Meralco consumers are of course thankful for any rate reductions specially during this school opening months.

What these rate reductions mean is if Meralco works hard enough and adopts a mantra to truly treat its captive consumers fairly as they should as a public service utility, they can really bring down power cost and not nonchalantly dismiss increases in generation and transmission rates to be beyond their control. For the most part the reduction in generation rates are results of opportune drops in the world oil and coal prices. Even natural gas is in a state of glut and prices have dropped.

Generation rates are within Meralco’s control. They can honestly and vigilantly watch the downtime allowances and the pass-on fuel consumption of their power generation contractors, only paying for capacity if they are truly within their downtime limits especially those that got sweetheart contracts. Shepherding their maintenance schedules to assure availability during critical demand periods. Managing their availment of the WESM spot market prices and themselves assuring their own contractors do not engage in supply and price manipulation. They can monitor the purchasing of substitute fuel by its natural gas generators.

Most importantly Meralco must open their generation market to open competitive bidding. For now it seems they are determined to negotiate 3,000mw of their new power supply requirements through its affiliate Meralco PowerGen which will be the majority stockholders of the generation companies. Meralco negotiated a 460mw expansion of the coal plant Mauban at a rate of P4.30 per kwh. Comparatively eight electric cooperatives in Northern Luzon consolidated their requirement of 105mw and held an open bidding. They got a rate of P3.78 per kwh, P0.52 per kwh less or approximately P1.5 billion a year.

Meralco must excuse its captive consumers if we are not overjoyed by these temporary reductions that can go back up when no one is looking. What consumers are looking for are long term reductions through systemic reforms and corrections of anti-consumer rate making methodologies.

It will take only plant shutdowns and upheaval in energy prices to make all these price reductions disappear.

Many suspect that all these “do good” programs are intended to disarm the public and not pay attention while they are negotiating their 3,000 mw power supply contracts with its own sister companies. Metro Pacific openly announces in its corporate website that it intends to fully take advantage of the opportunities in the generation sector, an “in your face” defiance of the words and spirit of the Epira Laws call for competition and anti-market domination. No one in government seems to care about the clear monopolization of the generation sector.

My electric bill still show a 10% systems loss when it should not be higher than 8.5%. PBR is unfair because it gives them a return on investments they only forecasted and not actually incurred as required by law. Meralco highly publicizes at consumer expense its various rate reduction and energy efficiency programs for large commercial and industrial users. Let us not make no mistake. Those wonderful programs are not really undertaken because they care about these consumers. They have do it to prevent their large consumers from exercising their “open access” options as “contestable markets”, consumers who can go somewhere else for their power supply.

The true measure of Meralco’s commitment to fair and reasonable rates is to undertake programs that will permanently reduce its rates to captive consumers (residential and commercial customers) from which it gets 60% of its revenue. This it can achieve only by agreeing to opening its generation market and to the correction of the various anti-consumer rate methodologies.

For now we can only be content with signs of life and hope at Meralco for the consumers. However, we have been waiting for a long time and things are getting worse.

Clear and Present Danger of Meralco’s Monopolization and Sister Company Generation

David Celestra Tan
18 January 2015

The clear and present danger of Meralco’s bilateral contract monopolization and sister company generation starkly stares all of us in the face. The electricity consumers, government regulators and legislators, and Meralco itself, except the former has been preconditioned by the latter and the middle had been looking the other way.

In the MSK’s advocacy to reduce Meralco’s power rates starting with the generation component where we see a feasible reduction to P4.00 per kwh from the P5.63 per kwh in July 2014, one thing that is surprising is Meralco dismissing it to “have no basis”, the government think tank PIDS also implying that there is no basis, and the ERC itself trying to dismiss the petition to “have no substance”.

Yet the facts and evidence stare us in the face and they are in Meralco’s generation components. Meralco’s PR machinery is currently having a field day trumpeting the reduction in its average generation rate to P4.70 from P5.63 per kwh in July 2014. The reduction though, as we wrote previously, is fortuitous and temporary because of the drop in the global price of coal and diesel and not a result of systemic corrections. It is easy to think it is a non-issue but we must always look at the long term presence of danger.

Meralcos generation cost numbers speak loud and clear

1. Coal power generators

From October 2014 to January 2015, Meralco’s non-affiliated power generation suppliers averaged in price only at P3.4885 per kwh whereas Quezon Power in Mauban averaged P4.65 per kwh or P1.16 per kwh or 33% more. Meralco doesn’t attempt to defend the rate disparity and argues only that QPL is not affiliated with Meralco which is technically true. But the 440mw power contract was negotiated with people close to the then controlling owners of Meralco under same sweetheart deal as the 1,500mw First Gas Power. QPL is now owned by EGAT of Thailand who is now the 49% partner of Meralco PowerGen in the 400mw expansion of the Mauban coal facility.

It is true also that the four (4) other coal suppliers, SEM-Calaca, Masinloc, SMEC Sual, and Therma Luzon Pagbilao, are negotiated contracts but they are nonetheless non-affiliated and the deals were arms-length.

The big price disparity and onerousness to consumers of sweetheart and arms-length power rates is quite clear.

In terms of financial magnitude, Meralco bought 1.01 billion kwh from QPL for the four months October to January. At the higher rate of P1.19 per kwh, the higher cost to the Meralco consumers for QPL power was P1.213 billion! Meralco buys 27.8% of its energy needs from the four (4) cheaper coal suppliers. If it were dedicated to least cost power and dealing on arms-length basis, one would think it would be buying more from these cheaper sources which now averages P3.4885 per kwh. Would they not be asking them to expand cheaper capacity. It chooses to negotiate a power supply contract with its own self for a 400mw Mauban expansion at the rate of P4.30 per kwh.

Meralco PowerGen had announced that it will put up 3,000 mw of new power plants all with negotiated and sweetheart prices and terms with Meralco. All these will be majority owned by Meralco.

If nothing is done by the government, Meralco’s 5500mw power supply will be monopolized by PowerGen at 3,000mw, First Gas at 1,500mw with another 1,000mw expansion, and Summit Group (a significant shareholder of Meralco) at 600mw. The five truly independent power generators (including SPPC-Ilijan) that currently saves consumers approximately P12 billion a year in lower generation rates will practically disappear.

2. Malampaya Natural Gas

Of the three (3) generators selling natural gas power to Meralco, San Miguel’s 1,200mw SPPC Ilijan is non-affiliated and supplies power at P4.4542 per kwh. The Lopez owned First Gas Power are charging P5.4151 per kwh for 1,000mw Sta.Rita and P5.5182 per kwh for the 500mw San Lorenzo, for an average of P5.466 per kwh or a full P1.01 per kwh or 23% higher. They are all using the Malampaya Natural Gas at presumably the same fuel prices and terms.

The two First Gas plants supply 35.6% of the energy purchases of Meralco. That translates to 3.394 billion kwh in the four months. At the higher rate of P1.0124 per kwh, the higher cost to the Meralco consumers is a whopping P3.346 Billion for October to January. The disparity in one year is approximately P10 Billion!

Similarly, all these three contracts were negotiated but again the difference is San Miguel is non-affiliated and the two First Gas contracts were sister company sweetheart deals that will be an albatross on the Meralco consumers for 12 more years.

In total, the Meralco consumers have paid P4.65 billion more for the higher contracted rates for Meralco’s sister company generators just for the four months from October 2014 to January 2015.

Yet, Meralco is trying to say there is no basis for MSK’s petition that the generation rates will be lower if they are not negotiated and subjected to open bidding and monopolization by sister generators are banned. May be that is to be expected from Meralco but for the ERC who is mandated by law to protect the public interest, to appear to be apathetic to the petition, is a great disservice to the people and country. Facts and Figures don’t lie.

It is tragic that no one in government seem to be alarmed in the face of this clear and present danger.

So long Pope Francis. We hope our government leaders and Meralco and Metro Pacific are moved by your wonderful messages on compassion, something deserved by electric consumers. God Bless .

It’s time for a new paradigm on bilateral power supply contracts

Out with the old NPC-Type Bilateral Contracts, In with a New Consumer respectful PSA.

By David Celestra Tan, Matuwid na Singil sa Kuryente Consumer Alliance Inc.

Part 1

My mother used to say the worst time to go grocery shopping is when you are hungry.  She said you tend to overbuy and overpay. Such wisdom.

Most of the bilateral power supply contracts being signed by the distribution utilities, specially by Meralco with its sister companies, First Gas and the Meralco PowerGen projects, are of the Napocor 1990 power crisis BOT vintage, when the country was not only hungry but starving for power supply.  Part of the reason is most of the practitioners in the independent power producers and their bankers are from that era and have been spoiled by the take-or-pay, guaranteed capacity security of those contracts.

Unfortunately those types of contracts have worked to the disadvantage of consumers, to the undue advantage of the power generators, and the avoidance of accountability by the distribution utilities.

NPC’s BOT type contracts contained features that were essential during that time but should be refined under the current market based power generation industry:

1. Guaranteed take-or-pay capacity payments

2. Maintenance Downtime Allowance (planned outage)

3. No Penalties and responsibilities for excess downtimes

4. Pass on charge for fuel costs

Why they were that way

1. Guaranteed take-or-pay capacity payments

The original power supply contracts in 1990’s were actually BOT types. Build operate and transfer.  The private sector builds the power plant, operate it for an agreed “cooperation” period of say 20 years, and then turn it over to the government. Essentially it is a way for the government to finance building power plants that eventually it will own.

Napocor

In this arrangement, the government owned Napocor buys the fuel and turns it over to the plant operator  who converts it to electricity. For this reason the BOT contracts are structured as an “energy conversion agreement” (ECA).  The plant operator guarantees the government a level of efficiency in converting that fuel into energy. This is called heat rate or kwh per quantity of fuel using their calorific value. But all the risks related to fuel procurement and supply are the responsibility of Napocor.

The purpose of this contract is to assure that power generating capacity is available to meet the demands of the country.  That was the time when it was the main responsibility of Napocor as the generation monopoly.  The plant may not be used fully. It is the responsibility of the government whether the power plants are run and its output dispatched.

This BOT arrangement is essentially a financing scheme for the power plant so the government guarantees that its financing is paid in the form of guaranteed capacity payments or take-or-pay, also called “minimum off-take”. The government intended to own the power plant in the end. Napocor’s obligation to make the payments in turn is guaranteed by the national government that owns it, thus these BOT projects were provided “sovereign guarantees”.

The other variants of this BOT scheme were BOO (build, operate, and own), LROM (lease rehabilitee operate and maintain). Under BOO, the ownership of the plant is not transferred to the government at the end of the cooperation period. Between BOT and BOO, the latter is supposed to have lower rates. LROM is used when the government owns an old power plant but wishes to have the private sector rehabilitate and operate it. The property is leased to the operator.

In these cases also the government contracts for the capacity and still supplies the fuel and sells the power.

Meralco

This is the same scheme that was used when Meralco built the 1500mw of natural gas capacity to assure a market for a minimum 2,500mw market that the Shell consortium wanted for the development of the Malampaya  natural gas pipeline from Palawan. Napocor built the 1200mw Ilijan natural gas power plant as a BOT project with bidding winner Korean Power.   The power plants, the 1,000mw Sta.Rita and the 500mw San Lorenzo, were similarly guaranteed capacity payments and supply of fuel.  These Meralco projects were structured as a 25 year BOO  under which Meralco as off-taker guarantees the capacity payments, the fuel supply, and the dispatch of the power plant and the contracting party, First Gas Power, would build finance and operate the power plant.  They however will not turnover the ownership of the plant at the end of the cooperation period.

Project Bankability and cost impact

Typically the power plant costs are built with debt or long term financing of 20 to 25 years to the extent of 70 to 75%. The balance is put up as equity of the project proponents.  To support the project loan there needs to be an assurance of revenue from a credit worthy off-taker.  This is the main rationale for the guaranteed capacity payments, also called take-or-pay and minimum energy off-take or MEOT.

In the case of Napocor, this resulted to huge losses  from its guaranteed take-or-pay obligations when the power plants were not used fully.  The governments losses were aggravated when Meralco renege on its contract to buy power up to 2005 and the government got stuck with the monthly capacity payments on power generating capacity that was not being used.  A net penalty of P19 billion was supposedly agreed between Napocor and Meralco to settle the case.

In the case of Meralco its obligations under the First Gas agreement is completely passed on to its consumers as part of its total purchase of power.  The monthly increases are passed on as “purchase power adjustment” or PPA. Meralco had to pay the guaranteed monthly payments even if the plant was not operating fully or is not dispatched due to the claimed failure of Napocor to make available transmission capacity to deliver the power to the Metro-Manila load center.  Similarly if there is an interruption in fuel supply from Malampaya, they also get paid.  Meralco’s purchased power adjustment (PPA) alone reached P3.00 per kwh in 2002 and 2003 and it was the first consumer upheaval against the Epira Law of 2001.

During the power crisis of the 1990’s these guaranteed payments were essential to assure bankability of the project and debt service cover for the 10 to 12 year loan period specially if it is a BOT where eventually the ownership of the power plant is turned over to the off-taker.

In the case of Napocor many of its 25 year BOT contracts supposedly had ladder capacity payments where payments are reduced after the original loan period.  It does not look like there is such a thing in the contract negotiated between Meralco and its sister generator.

2. Plant downtimes for Planned and unplanned maintenance

These power plants are allowed annual maintenance downtime allowances of 45 to 60 days. Coal power plants have lower downtime allowances because their boilers are supposed to have an annual maintenance of only 20 days as compared to diesel power plants that uses reciprocal engines with infinitely many more moving parts that need maintenance.

The power crisis era BOT type bilateral contracts pay the power plant their capacity fees even during their downtime allowance period.   Napocor was paying Hopewell/Mirant for Sual and Pagbilao, Ilijan, and Caliraya-Botocan.  Meralco was paying for the guaranteed payments to QPL Mauban and the 1000mw Sta. Rita and the 500mw San Lorenzo natural gas plants.  These cause significant uptick in the average generation cost per kwh that Meralco is passing on to the consumer when those plants are down for maintenance.  Meralco paid San Lorenzo P9.99 per kwh when its output went down 85% in November 2013.

A critical issue on these maintenance downtimes is the lack of transparency in monitoring whether these contract power plants are exceeding their downtime allowances.   Between Napocor and its IPP there is at least an “arms length” monitoring of contract performance including fuel efficiency limits.  In the case of Meralco it is hard to assure when their sister company generators are down.  If they choose to nonetheless pay, they can pass that on to consumers as part of their average generation cost.

PPA has been back!

It is not clear whether the public is aware that the PPA (purchased power adjustment) that tortured them in 2003 and 2004 had actually been reinstalled by the Energy Regulation Commission and is now called AGRA (automatic generation rate adjustment). Let’s hope that under the AGRA rules, that there are corresponding safeguards to assure that there is no undue pass on charges and that the DU’s are managing their bilateral contracts properly. It doesn’t seem like there are consumer protection.

In the power fiasco of November and December, there were significant incidences of power generators claiming boiler tube leaks that caused Meralco to buy the shortfall from WESM and there seem to be no interest from the authorities to find out whether there was collusion or market manipulation. The Epira Law mandated the ERC to investigate these types of market abuse and violations.

3.  No Penalties for excessive downtimes

Maintenance downtime is a complex issue because it is hard to tell whether the boiler leaks were a result of legitimate technical failure or actually neglect or cutting corners on due preventive maintenance that responsible power plants should be spending on. It is hard but it can be detected with honest to goodness and vigilant monitoring system.  Some sectors are concerned that the series of boiler leaks among generators were convenient coincidences happening at the same time.

In any case, under the current bilateral contracts, the IPP is not responsible for the cost consequences of their planned and unplanned downtimes.  It is Meralco and the DU’s who have the burden of buying the replacement power which unfortunately is automatically passed on to the consumers.  Meralco non-chalantly tells the public they are helpless and can’t do anything about it and that they are just collectors and do not make money on the generation side.  It is most pathetic to hear the country’s largest public service utility, which has the franchise to provide power in the least cost manner to its customers, cop out and say that for many years.

4. Pass on charge of fuel costs

Under most of these BOT type contracts, the responsibility to buy and supply fuel is with the off-taker, Napocor or Meralco. Changes in prices of fuel including the fluctuations in foreign exchange are passed on to the consumers.  This is actually not necessarily disadvantageous to the consumers.

Where there is no safeguard for the consumers is when there are interruptions in the supply of fuel, which happens when Napocor’s coal suppliers fail to deliver fuel on time in the right specifications or when Malampaya’s gas supply is impaired due to maintenance or other reasons.  Napocor and Meralco still pay the BOO/BOT generating companies their guaranteed capacity fees and fixed costs.  QPL Mauban contracts its own fuel supply.

Between Napocor and its BOT plant operators there is arms-length validation of the fuel conversion efficiency that is guaranteed by the plant operator.  In the case of Meralco and its sister company First Gas Power however, there is no such “arms-length” guarantee that the fuel efficiency is being met. All fuel costs are passed on to the consumers.  Even in the procurement of substitute distillate fuel during the maintenance downtime of Malampaya’s fuel supply as in November and December 2013,  there are no safeguards to assure that the fuel are procured competitively.

Things were these ways because the country was in power crisis and we needed to encourage foreign investors to quickly come in and build power plants.  We were hungry and had to buy. We are in a new market era now and our distribution utilities need to sign bilateral contracts that have evolved from that power desperate era 20 years ago into something more balanced and respectful of consumer rights.

Next:   A need for a new paradigm in bilateral power supply contracts