As We Usher in a New Administration

The 17th president of the Philippines will take over in a few days.

President-elect Ferdinand “Bongbong” Marcos Jr. will inherit monumental challenges. The new president will deal with stagflation or the twin problem of high inflation and economic stagnation on the economic front. Plus, as the rainy season is already here, we can expect various parts of the country will be hit by typhoons. The new President will have to deal with these issues and so much more.

As we usher in a new administration, here are my thoughts on how the new president can help the Energy sector.

Discouraging floating PSAs

The Filipinos are already dealing with high consumer prices. Last May, the inflation rate reached 5.4%. We need to address the problem of high energy costs to lessen the burden on Filipino consumers.

The best way to reduce the cost of power is simple: discourage floating power sales agreements (PSAs).

Let us keep in mind that our PSAs have “pass-through” or “pass-on” provisions. This means consumers shoulder the fluctuating costs of global fuel prices and foreign exchange so that power producers can recover costs. Keeping contracts with this “pass-through” provision makes power costs more expensive. Today the power cost is already higher because the peso is at its all-time low.

Just look at our dollar exchange rate, for example. As of this writing, the exchange rate is already $1 to PhP54. Consumers will then pay higher since we rely primarily on imported fossil fuels.

We can ease the burden of consumers if we minimize PSAs with “pass-through” or “pass on” costs and replace them with fixed contracts. These “fixed contract” enable consumers to pay the same price as long as the contract is in effect. This way, consumers are not exposed to global coal and fuel prices and foreign exchange rate volatility.

I do admit that this will be difficult in the near term. This transition may be easier if we introduce more gas-fired power plants instead of coal-fired power plants. These plants are not only cleaner but also the most helpful in getting more renewable energy in the system. In addition, because LNG may have a different index, it would be possible to have a less volatile price-wise portfolio when it gets mixed up in the portfolio.

Encouraging competition at the distribution level

The Energy Power Industry Reform Act or EPIRA was signed into law to increase competition in the power sector. However, decades after, the distribution sector remains in an induced state of lethargy as many continue to believe that distribution and transmission are natural monopolies.

Vertical integration was probably proper in the past, but technological advances in recent years should make us rethink this notion. Viewing distribution and transmission sectors as natural monopolies should have been a thing of the past.

We should be heeding the words of Nobel Prize awardee Vernon Smith, who said “There are numerous ways to introduce competition into electric power distribution. Perhaps the most obvious is eliminating state policies granting distributors exclusive operating permits. Customers should have the right to bypass distributors and contract directly with generator owners.”

At present, energy regulators ban other distribution utilities (DUs) from entering a market when a DU has already been granted a franchise. Preventing a second entrant prohibits competition from flourishing.

We need competition at the distribution level. Mainly we need to open already franchised areas to other DUs. After all, there is no incentive for a lone DU to either reduce costs or improve its services. On the other hand, having multiple DUs in the same franchise area will push each distributor to ensure efficient and reliable services and provide competitive rates.

Adopting a proper load profile N-1 configuration

Inefficient power deployment is one of the reasons Filipinos pay more for power rates. The procurement rules are to blame since the Energy Regulatory Commission (ERC) focuses on individual contracts.

The best way to address this issue is to create a Forward Electricity Market (FEM) as it will enable competition among distributors and generators. The FEM will also define long-term contracts for the grid rather than just individual distributors.

The monopolistic market power of MERALCO is a major issue in the power sector today. We need to introduce power suppliers within the franchise areas of MERALCO. Allowing such suppliers, however, might require amending the EPIRA.

More involvement of the private sector in the LNG market

Experts agree that we must diversify our energy mix to achieve a stable energy supply. Thus, adding more natural gas into our energy mix should be a priority. And we can only do this by providing investors with clear policies.

In one forum, former Energy Secretary Lotilla cited the tax issue of the Malampaya gas field, pointing out that a 2011 Commission on Audit decision reversed the rule that the national government should shoulder the corporate income tax.

This reversal, he stressed, has left investors uncertain. Others interested in LNG projects prefer to have clear policies before they shell out money for the exploration and development of other service contracts.

We also need to review the bidding process and exploration contracts. One contentious issue that needs attention is whether to opt for non-exclusive exploration activities as recommended by some experts.

More Distributed Energy Resources (DERs) via indigenous renewable energy and microgrids

Globally, the trend is to integrate distributed energy resources (DERs) in power systems as many countries are moving away from centralized distribution.

At the start of the year, President Duterte signed into law Republic Act 11646 to promote the use of microgrids in underserved and unserved areas. The law is much welcome, but we need more drastic measures to achieve energy security and ensure the disaster resilience of our power systems.

It is then imperative for the government to mandate that barangays put up their DERs and battery source and make use of solar power, particularly for disaster-prone areas.

The distributed nature of DERs bodes well for the Philippines as we are an archipelagic country. More DERs will help ensure cheaper and more effective distribution services, especially those on off-grid islands. Plus, DERs also help us become more resilient against natural disasters.

As we have experienced repeatedly, local government units have a hard time recovering quickly from typhoons as centralized energy systems take longer to repair after a disaster. DERs will be easier to manage after a disaster, and having DERs at the baranggay will help LGUs conduct their relief and rescue efforts more effectively.

The argument that DERs and renewable energy are expensive won’t fly anymore. After all, technological advancements have driven down the costs of RE technologies and storage.

It’s also high time for the government to be more proactive in promoting geothermal energy, given its ability to act as baseload power.

Promoting geothermal energy also requires reviewing how regulators fail to give a premium for investors risks in geothermal exploration. Mainly, regulators should look closely at their use of Beta in the tariff setting of power projects. Currently, ERC uses the exact Beta for all power projects, failing to understand that geothermal exploration is a riskier investment.

It is highly recommended to establish a Geothermal Exploration Guarantee Fund (GEGF) to encourage more private sector investors.

COVID-19 pandemic is still not over and the economy has not yet recovered. A lot of work needs to be done in the next few years. The energy sector plays a crucial role in a country’s economic development, and hopefully, the next administration can look at ways to improve the power industry.

One thought on “As We Usher in a New Administration

  1. On natgas, PH Malampaya off Palawan has a similar natgas situation with the Northwest Shelf which is 1,000 km from Perth, Western Australia. During the time of then DOE Sec Viray, I provided him a copy of the natgas framework for the development and operation of natgas in WA which proved successful at that time. The aim is to cut crude oil import to zero by converting oil fired power plants to natgas and developing the LNG and LPG for transportation and domestic use to also reduce the demand for electricity. For a time, DOE has modeled buses and taxis run by LPG but this did not go off the ground. I wonder what happened? Did the technology reach operational efficiency? Did the competitive framework for natgas industry work to encourage private investment? Then, there is this other issue of the cost of replacing base-load coal-fired power plants with RE power plants.

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