January 23, 2022 | 9:35 pm
Introspective By Romeo L. Bernardo
I am pleased to share with readers a brief we
posted to GlobalSource Partners (GSP) subscribers on the looming power shortage
this summer. GSP (globalsourcepartners.com)
is a network of independent analysts in emerging market countries. Christine
Tang and I assisted by Shane Sia) are their local partners.
“The country entered 2022 with typhoon-related
damage to power facilities that could lead to reserve shortfalls (yellow
alerts) in the Luzon and Visayas grids. This came on top of outstanding issues
related to the contracting of reserve power and the looming expiry of the
supply agreement of the 1,200-megawatt (MW) Ilijan power plant fueled by
Malampaya gas. Now two weeks in, power sector players are again in crisis
management mode following Indonesia’s coal export ban, with the energy
department joining other countries in the region in urging Indonesia to lift
the ban.
“Indonesia
supplies over 95% of the Philippine’s coal imports. Coal-based plants, which
comprise 44% of the power sector’s dependable capacity in 2020 and close to 60%
of power generation, rely mainly on Indonesian coal. Although Indonesia has
started to allow coal shipments to other countries in the region, industry
players tell us that the Philippines is not among the priority destination
countries. Reports indicate that with some plants scheduled for maintenance
shutdown, available coal stocks may still last three weeks to two months, which
from an aggregate perspective would tide the country over until the lifting of
the export ban at end-January. (See the figures.)
“That however has not stopped understandably
concerned power plant operators from planning for contingencies associated with
logistical delays through purchases of coal in the spot market. There is after
all no assurance at this time that the ban will not be extended nor that their
orders will be placed ahead of the queue of countries trying to secure their
own supplies; buyers that include heavyweights China and Japan. Although
sourcing coal supplies from other countries is always an option, technical
experts tell us that the closest alternative, Australian coal, costs more
because of the higher quality, and is not even a perfect substitute, i.e., the
plants were not designed to run on it.
“There is also the worry that this episode will be
a precedent that will be repeated in the future considering all the
uncertainties related to global climate change policy. Hence, the more
policy-oriented are also urging government to make good use of strong
neighborly ties to formalize an energy cooperation agreement with Indonesia or
under the ASEAN framework to bolster Philippine energy security. As it
is, concerns over medium-term energy security are growing with the Malampaya
service contract ending in 2024 and estimates suggesting that remaining
reserves would last only a few more years thereafter.
“The government has rightly stressed attracting new
investments as a necessary condition for the economy’s post-pandemic recovery.
Survey after survey of investment climates reveal the importance of quality infrastructure,
including power supply stability, for attracting FDI.
“Yet, this early in the new year, private players,
including the transmission company NGCP (National Grid Corporation of the
Philippines), the power sector’s system operator, are already again warning of
thin supplies in the summer months and calling for demand side management.”
(End of GSP post.)
There are short term demand management measures to
mitigate the impact of a possible summer power shortage, such as tapping the
backup generation capacity of big firms, voluntary shifting of operations
(peak/off peak pricing), interruptible load programs (first employed by Veco
[Visayan Electric Company], now Meralco), and in the worst case, rotating
brownouts for non-critical areas.
In addition, firm contracting of ancillary services
(to protect us from potential blackouts resulting from a lack of supply because
it ensures that ancillary services are allocated from a separate pool of
capacity), prioritization by NGCP of critical transmission lines, i.e.,
Dinginin, Negros-Cebu interconnection upgrading, Viz-Min interconnection, etc.
will allow stranded generation to be dispatched.
The medium to long term solutions lie with creating
the incentive framework and enforcing the regulations for needed transmission
facilities and new power plants to be built. This includes lifting the caps on
WESM (Wholesale Electricity Spot Market) pricing and allowing more imbedded
generation, bypassing the high voltage transmission lines. Due to the influx of
more variable renewable energy into the grid, regulators must revisit
generation capacity, the mix of energy technologies, and energy storage
requirements to ensure uninterrupted supply of power.
I have written on the subject in two earlier
columns (“Red Alert and EPIRA,” June 13, 2021, https://www.bworldonline.com/red-alert-and-epira/
and “It’s not easy being green: balancing energy security and de carbonization
in an emerging economy,” Nov. 7, 2021, https://www.bworldonline.com/its-not-easy-being-green-balancing-energy-security-and-decarbonization-for-an-emerging-economy/).
EXCERPTING SOME KEY POINTS: On the regulatory
regime (from “Red Alert and EPIRA”):
1.) “Our regulators play an important role in
seeing to it that the rules are properly enforced. On this front, I can only
describe our regulator’s approach as schizophrenic, where they have tended to
over-regulate the competitive part of the industry and under-regulate the
regulated part of the industry.
“EPIRA designed the power generation side to be
competitive, and allow competition to yield lower prices and higher
reliability. There are rules in place, including market power restrictions, to
keep any one player from unfairly prejudicing the consumer. Unfortunately,
since then, the regulators have churned out regulation after regulation to curb
the activities of generators. Each regulation is designed with the consumer in
mind, but, as with many regulations and laws, they often carry unintended
consequences that distort the behavior and incentives of market participants.
When investors do not build new plants or do so slowly because the business
environment has been riddled with regulatory uncertainty and risks, end
consumers and our entire economy lose.”
2.) “On the other hand, the regulators have fallen
short in its responsibility to enforce the rules over NGCP, which has the
monopoly over the transmission lines in the country. Our regulators should
focus on regulating the regulated business of transmission of power and
consider simplifying the rules for gencos to allow the market to work, to
de-risk the environment and to attract more long-term private capital. In
order to ensure that we have adequate reserves, the regulators should compel
the Systems Operator to contract the full, firm reserve requirement. This can
be done within 30 days, as there are genco offers today sitting on the desks at
NGCP. This would ensure that we have the spare reserves the next time that the
supply of power thins.
“Lastly, we need to fast track the implementation
of the transmission line network. A three to four-year year lag creates
significant uncertainty and an imbalance in the market. Correcting this will
de-risk the investment environment and will encourage the entry of more power
capacity into the grid.”
On the managing de-carbonization and the energy
transition for the Philippines (from “It’s not easy being green…”):
1.) “A key consideration is intermittency of new
solar and wind. Given the current state of technology and cost of battery
storage, only fossil fuels can provide the Philippine base load capacity needed
to drive industry. Especially required now as we try to recover from this
pandemic — we need secure and affordable power to attract investment and
quality jobs to lift the quarter of our people who are jobless and in absolute
poverty.
2.) “…We are expected to be hard hit by adverse
effects of climate change and therefore will need to invest considerably in
adapting to what is a global crisis that we alone cannot solve. All of this
points to the conclusion that we should bear considerably less of the cost of
the transition than other countries. To his credit, Finance Secretary Carlos
Dominguez III has recently publicly taken developed countries to task on this
matter. Ultimately, we all share a common goal but our responsibilities will
vary. Let’s learn from the experiences in the developed world and avoid
quick-fix pathways and craft an energy transition with the Filipino people in
mind and that the Filipino people can afford.”
3.) “Our power regulators, financial regulators,
and other public stewards should be mindful of the tradeoffs and high stakes in
climate-related decisions. We all dislike coal and other carbon intensive
industries, but we should dislike seeing our people in abject poverty even more.”
Romeo L. Bernardo was finance undersecretary during
the Cory Aquino and Fidel Ramos Administrations. He serves as a
trustee/director in the Foundation for Economic Freedom, the Management
Association of the Philippines, and the FINEX Foundation. He is an independent
director in a diversified publicly listed holding company with major
investments in power generation (both fossil fuels and renewables) and
distribution. The views herein are his.
