In my last article, I talked about the two external risks facing the local power sector, namely global prices, and foreign exchange rates.
In this post, I will talk about the third risk: natural disasters.
The “Philippines Country Climate Development Report” released by the World Bank stressed that the Philippines is “uniquely vulnerable” to climate change.
World Bank Country Director for the Philippines Ndiame Diop said that “In 2022, the Philippines ranked number one among the countries most affected by extreme weather events…climate change is often called a silent crisis, but in the Philippines, it is not silent. It’s an imposing problem and a real threat,”
Indeed, climate change is a real threat. Just recently our country suffered from the wrath of Tropical Storm Paeng, which affected millions of Filipino families. As of this writing, damage to agriculture alone stands at 4.7 billion pesos.
Over four million Filipinos, too, experienced power interruptions due to Paeng. The Department of Energy (DOE) also said that at least three power generation plants were shut down because of the tropical storm.
The effects of Paeng, however, on the local sector are “mild” when compared to other natural disasters or storms.
Late last year, Typhoon Odette (international name: Rai) devastated large parts of Visayas and Mindanao. Odette left many Filipino families in the dark even months after it struck.
The recent Philippines Country Climate Development Report noted that the Philippines typically experience around 20 tropical cyclones yearly but the country has been experiencing stronger typhoons in recent years.
“Temperatures in the Philippines will continue to rise by the end of the 21st century. Rainfall patterns will change and intensify, and extreme weather will become more frequent. Without action, climate change will impose substantial economic and human costs, affecting the poorest households the most,” Mr. Diop said.
What we should aim for in the local energy sector is resilience. However, this is difficult to achieve.
Just consider what happens every time a natural disaster strike. With poles and transmission lines down, we end up sending teams to restore power. This is risky and, in most cases, has caused the death of our linemen.
We should have learned from these natural disasters from long ago that centralized power distribution no longer works for us. It is an outdated power distribution model. We should be looking at microgrids to make our power systems a lot more resilient to disasters.
Aside from moving away from centralized power systems, we should empower our local government units (LGUs) by letting them lead the redesign of their power distribution infrastructure. LGUs, after all, are the first responders after a disaster
We must consider giving LGUs their own power distribution franchises. This way, they can have more flexibility in designing and getting private concessionaires to build their microgrids.
In previous posts, I have discussed that barangays should be mandated to provide power locally from distributed energy resources (DERs) like solar and battery systems, especially for disaster-prone areas.
Microgrids, and empowering LGUs at the barangay level go a long way in making our electrical systems more resilient. I am aware that the government through the Energy Regulatory Commission (ERC) is coming up with rules on how to implement this. I am wary about such rules as they tend to protect the incumbent utilities thereby robbing consumers of their unfettered access to renewable energy and microgrids in general.
It is highly unlikely that natural disasters, particularly weather disturbances, will be fewer in the next few years. They will inevitably strike us repeatedly and with more ferocity.
Rather than rely on the Filipinos’ resilience to endure hardships, what we must do is make our power systems more resilient. We can do this by veering away from the traditional power systems and instead start building DERs and empowering communities.
The best time to do this was years ago. The next best time is now.
We have long identified the major external risks our power sector faces. We have identified them but did little to mitigate them,
In this blog alone I have spoken of these risks multiple times. But as we continue to bear the brunt of geopolitical tensions and the global economic slowdown, perhaps it is time to revisit these risks and reconsider what must be done right now.
I don’t think there’s a need for me to expound on how the Ukraine and Russia war has affected the world. Inflation, a strong dollar, and high fuel prices have been hogging the headlines for months now.
In a post I published last March, I talked about the double threat brought by this war. The effects of the tension in these two countries clearly illustrate how vulnerable the Philippine power sector is to foreign exchange risks and global coal and oil prices.
The war has destabilized the supply chain. As early as March, thermal coal already reached record-high prices.
Russia produces 15 percent of global coal exports, and it is currently at war, thus pushing global prices up.
Consider that average coal prices for 2019 and 2020 were only $69 per metric ton (MT). In contrast, for the first half of 2022, average coal prices were $176 per MT, higher than the $99 per MT in the first six months of 2021.
And global prices are just one of the external risks. The second is the foreign exchange rates.
Much like other currencies, the Philippine Peso has fallen against the US dollar significantly. The US dollar is now at its strongest in the last two decades. And it’s expected to be even stronger as the Federal Reserve continues ratcheting up interest rates to fight inflation.
Emerging economies like the Philippines are hurting by the US dollar’s strength as most of our commodities are indexed in the US dollar. This is the case with us in the local energy sector. We buy coal and oil in US dollars, which means that as the US dollar strengthens, we will need more pesos to buy commodities in US dollars.
So, aside from the higher-priced coal and oil, we will have to shell out more because of the dollar’s strength.
As of now, these are already driving power rates up. The largest distribution utility, Meralco as early as July said that the foreign exchange rate is already driving power rates up.
We might be facing power outages in a few months. Utilities have been challenged by the pandemic due to low collection rates. But with the effects of the row between Russia and Ukraine, utilities no longer have the cash requirements to pay for the coal they import.
Distribution utilities and electric cooperatives have not been spared from the economic consequences of the COVID-19 pandemic. They have been bleeding financially, too.
Unfortunately, the distribution sector’s problems have worsened because of global developments such as the conflict between Russia and Ukraine, and the weakening of the Philippine Peso.
So, how can the government avert a power crisis despite the strong dollar and high global prices?
What the government can do is implement a Consumer relief fund program. Representative Joey Salceda, proposed this program. It’s a stopgap measure meant to address the problem of increasing power costs.
Utilities and consumers need support in paying for their power. Unlike other countries like the United Kingdom that have implemented some subsidy or support scheme to help households and businesses weather the increasing power costs, the Philippines still has none.
This is how Congressman Salceda envisioned it would work.
Let us assume that the pre-Ukraine generation rate rate of a distribution utility is Php5.00 per kilowatt hour (kWh). However, because of the spike in global coal prices, the cost of generation had already increased to around Php11.50/kWh. So, there is a Php6.50/kWh difference between the pre-Ukraine rate and the current cost of generating power.
There is no doubt that consumers cannot pay for this difference all at once. So, what the distribution utilities can do is allow consumers to amortize this difference over five years at an interest rate of 5% per annum. This is a deferred payment scheme where consumers will pay for the current bill/consumption and the monthly deferred payment.
Here is a breakdown of what consumers must pay:
P5.00/kWh for their current bill
P0.12/kWh for deferred payment
So, for their first monthly bill, consumers will pay P5.12/kWh. Likewise, the increase will only be P0.12/kWh per month assuming their monthly consumption remains the same.
But how can utilities and electric cooperatives implement this scheme? This is where banks come in as this measure requires the government to tap the liquidity of the banking sector.
Utilities can be the borrower and for electric cooperatives (ECs), the National Electrification Administration (NEA) can act as a guarantor for them.
The national government must launch this program in at least the next three months. It will require roughly P160 billion, which the Development Bank of the Philippines (DBP) and Landbank of the Philippines (LBP) and local banks can provide. Even if we plan to have it for one year, the banks have enough liquidity to support a revolving fund of up to P800 Billion.
The President may issue an executive order for this measure, which will have to be endorsed by the Joint Congressional Power Commission. While the amortization is not a tariff, the Energy Regulatory Commission must allow the financing portion of this measure to be a line item in the consumers’ utility bill.
The government must step in to alleviate the power rate increase, and an effective way to do this is to implement Congressman Salceda’s proposal.
This, again I must reiterate is a stop-gap measure. As I have been saying for many years now the long-term solution is to veer away from coal and develop indigenous energy sources.
Rather than rely on imported coal and oil, we can take power into our hands with renewables. Doing so will enable us to delink forex and global price risks as we no longer have to import raw materials for energy production.
However, there must be a law that prohibits the indexing of renewable energy generated to global prices. Otherwise, we would be losing our independence and the value of indigenous energy. Linking indigenous energy like geothermal to global prices would be like importing coal and oil. This is simply unjust for the consumers.
The third external risk hounding the Philippine energy sector is natural disasters, which I will discuss in my next blog.
The Philippine Peso has been hogging the headlines for many weeks now.
As I write this, the Philippine peso has dropped to a 17-year low, closing again at more than PhP56 to $1.
Naturally, media outfits are getting experts to discuss what a weak peso means for our country’s economy. There are the Overseas Filipino Workers (OFWs) who are enjoying higher purchasing power and exporters increasing their peso revenues.
However, a weaker peso also means more expensive imports. And for a country that relies heavily on imported fuel like the Philippines, a weak peso means higher energy prices.
A few weeks ago, Meralco, the country’s biggest power distributor, already said that the falling value of the Philippine peso versus the US dollar is driving the power rates up for July. This is because some of Meralco’s suppliers have their rates denominated in US dollars. Plus, international coal prices continue to surge. Both the weak peso and the high global coal prices are the causes of the higher generation fees.
Let me show what this means in figures. Let us say we are looking at the cost of fuel for a coal-fired power plant. It used to be that coal prices were at US$70 per metric ton. At P50 to a dollar, it means that the cost of fuel assuming it takes 700 grams of coal to produce 1 kilowatt-hour, l will be around P2.45/kwh.
If the peso depreciates against the dollar, that cost will be around P2.74/kwh. If we now calculate based on the current coal prices, which I heard is around US$350/metric ton, that cost will balloon to P13.72/kwh! And that is just the fuel component. If one checks the prices at the WESM, the spot prices will be hovering around that number.
There’s some relief though for the consumers as the Energy Regulatory Commission’s (ERC) order of refunding PhP21.8 billion will offset the higher generation fee caused by the foreign exchange rate and high coal prices. Without the refund, many Filipinos will have to shell out more for their power bills at a time when commodity prices are so expensive. However, we need to ask if indeed that refundable amount is all that is due to the consumers.
We knew of these risks for a long time now. Time and time again, I have been stressing that our reliance on imported fossil fuels along with the floating price contracts with pass-on provisions of Power Sales Agreements (PSAs) will always be detrimental to Filipino consumers.
There will inevitably be times that the global prices of coal will spike or the peso will fall significantly against the dollar. Or worse, both will happen at the same time as what we are experiencing now.
We could have mitigated the risks of a weak peso and higher global fossil fuel prices years ago.
I have been pushing for many years to have fixed-priced contracts where consumers will pay the same amount for a specific period like 25 years for their power rates. Our current PSAs are what I call floating contracts as they have pass-on provisions, which means consumers pay for higher power charges when the global fossil prices spike and/or the peso falls against the greenback.
Plus, from a budgeting perspective, it will always be easier and more convenient to manage one’s finances when the price is fixed. With fixed-priced contracts, consumers won’t be surprised when their bills come as they are familiar with their monthly consumption. They won’t be caught off guard since they won’t be paying for the costs of importing fossil fuels, which again is more pricey with a weak peso and higher global fossil fuel prices.
Had we opted for more fixed-price contracts, then consumers will have some sort of relief for now as they would be paying the same rate for a fixed period even if the Philippine Peso has become the weakest performing currency in the ASEAN and even if fossil fuel prices go up.
Plus, fixed prices means we are not at the mercy of distribution utilities when it comes to generation charges. Let’s go back again to the refund of Meralco. If we had fixed prices, then DUs can’t be “creative” in the calculation of the charges they will pass on to consumers.
Of course, there’s the problem that the majority of power supply comes from imported fossil fuels. Coal has dominated our power mix, accounting for 57% of the generation output in 2020. Had we developed our indigenous resources and added more renewables in the energy mix, then we wouldn’t be importing so much coal. Now we are at the mercy of higher importing costs as we have no choice since we rely heavily on imported fuels for our power needs.
Sadly, our economy is expected to experience stagflation or the twin problem of high inflation and poor economic growth for quite some time. Filipinos could have had some relief in the form of lower electric prices if only we took seriously the risks of a weakening peso and higher global fossil fuel prices happening at the same time.
We have experienced many “wake-up” calls in the last few years, which should have been more than enough for us to take drastic measures. But we didn’t. With the current economic conditions, sadly, it’s the Filipino consumers who are hurting because of our leaders’ apathy towards the inevitable.
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.
Beijing aims to boost coal production. Photo c/o China Dialogue
China is reportedly promoting coal-fired power in an attempt to revive its economy. News reports say that Beijing is planning to boost coal production by 3000 million tonnes this year or equivalent to a 7% increase of the 4.1 billion tonnes output recorded in 2021.
A recently released report also showed that China accounted for 52% of the newly constructed coal-fired plants constructed in 20 countries in 2021. Last year, China’s coal production broke records as miners ramped up their outputs upon the encouragement of the state. In total, China, the world’s largest coal consumer, and producer mined an all-time high of 4.07 billion tonnes in 2021. That’s 4.7% of the recorded output in 2020.
Likewise, China has already ordered its top coal-producing province, Shanxi, to guarantee thermal coal supplies to several industrial hubs located in coastal areas. Miners in the province have been told to ensure coal supply of as much as 47.7 million tonnes to be used by seven provinces between May and December. Coal miners of Shanxi will be allowed to sell their outputs above the existing price caps.
Business news magazine, Caixin reported that cabinet officials approved plans last April 20 to expand coal production in the hope that coal can help Beijing ensure energy security. At the same time, the ruling party wants more coal power plants to keep the economy moving. Slow economic growth, power shortages, and Russia’s recent attack on Ukraine compelled Beijing leaders to demand more coal-fired power.
Many are alarmed at China’s recent move towards more thermal coal. As the top consumer and producer of coal, experts say that global trends are largely affected by Beijing’s moves.
Hopefully, the Philippines won’t find itself on the same path as China. There have been major events that threatened our power supply. The first is Indonesia’s temporary ban on coal imports while the second is the tension between Russia and Ukraine.
On the local renewable energy front, there has been major progress in recent years. In 2020, the government has already placed a moratorium on new coal plants. A few weeks ago, President Rodrigo Duterte also signed into law Republic Act 11646 which promotes the use of microgrids in unserved and underserved areas. This law can help pave the way for greater use of renewables.
These developments are encouraging but the government needs to do more to ensure a swifter shift to renewables.
A study by the Department of Energy (DOE) and World bank released recently showed that the Philippines has the potential to install up to 21 gigawatts of offshore wind power by 2040, which can account for 21 percent of the power supply.
The same report, however, stressed that there are monumental challenges to overcome in getting a large wind industry off the ground. These challenges include foreign ownership restrictions, limited local supply chain, and lack of a transmission network.
There’s nothing new about the challenges cited by the report as they have been hampering the growth of the renewable energy sector for many years.
Take the case of the foreign ownership rule. The DOE and World Bank report noted that “Removing this restriction (foreign ownership) will allow the use of lower-cost international financing and, therefore, help reduce the cost of energy.”
There have been many calls to scrap the 60-40% rule so renewable energy can easily flourish in the Philippines. These calls have been falling on deaf ears and continue to be ignored.
What we should do is take a closer look at how we interpret the foreign ownership provision in our constitution. I am particularly keen on what Former Energy Secretary Atty. Raphael Lotilla said in an energy forum last October.
Atty. Lotilla said that we should only apply the 40% cap on foreign ownership to finite sources since the constitution pertains to “potential energy.” Wind along with solar power should not be subjected to the 40 percent foreign ownership cap since both wind and solar are easily convertible to power, and hence should not be treated as potential power.
As for the challenge of having a limited local supply chain and lack of transmission, we can easily rectify that. As I have said in previous posts, the central distribution power model is no longer apt for the times. Instead, we should be embracing a new design philosophy, which is to put up as many distributed energy resources.
The RA 11646 only allows microgrid system providers to provide integrated power generation and distribution services to underserved and unserved areas. These microgrid system providers are also required to get waivers from existing distribution utilities.
What the government should do is empower local government units, including barangays by allowing them to have their own power franchises and work with a private concessionaire to develop and build their microgrids. This is the best way to move away from the traditional power distribution model, boost disaster resilience, and help affordable and reliable energy supply for the Philippines.
The government has been saying that it is working hard to achieve its goal of increasing renewables’ share in the power mix to 35% and 50% by 2030 and 2040, respectively. However, data shows that fossil fuels accounted for 79% of the country’s power generation mix in 2020.
If the government is indeed serious about having more renewables in the energy mix, then it should put its money where its mouth is. It can start by lifting the foreign ownership rule and setting up more DERs in the country. Neither should our government emulate China’s moves of welcoming more coal to secure its energy supply. The answer does not lie in more centrally-based power plants but inDistributed Energy Resources (DERs)using indigenous and sustainable energy.
Recent events should prompt us to tackle energy security once more. In particular, we should be examining power supply issues.
It’s no secret that the Philippines is heavily reliant on imported fossil fuels for its power supply. Data shows that almost 70 percent of the 42.5 million tonnes of the country’s coal supply in 2020 were imported. Coal also accounts for the majority of the power mix, contributing 57 percent in 2020.
Likewise, oil, which only accounts for two percent of the energy mix in 2020, is also imported.
Recently, two major events threatened our power supply. The first is the temporary ban on coal imports by Indonesia and the second is the Ukraine and Russia tension.
We had a major scare last January after the Indonesian government temporarily halted coal exports. After all, government data shows that we sourced 2.3 million tonnes of coal from Indonesia for our coal plant power plants in 2021. The ban prompted our Department of Foreign Affairs to appeal to the Indonesian government to lift the ban. The ban caused a surge in the prices of coal in China and Australia
Likewise, the Ukraine and Russia war caused major price spikes in oil, coal, and natural gas as Russia provides 15 percent of all global coal exports. Russia is the number two supplier of coal to advanced economies namely, China, Japan, and South Korea.
The Department of Energy (DOE) for its part said that there was a sufficient supply of coal in the country. But at the same time, the department warned that consumers would bear higher power rates by May given the global increase in coal prices.
As early as January and even before these two events happened, the grid operator, National Grid Corporation of the Philippines (NGCP), has already warned of the possibility of a red alert, leading to rotational power interruptions in Luzon.
This, the grid operator says, is largely due to the higher demand for power and unplanned outages of coal plants during the summer months. NGCP back then said that there will be thin operating margins for Luzon from April to June.
These recent developments only show that our heavy reliance on imported fossil fuel indeed has its price. We will always remain vulnerable to global supply shocks.
We need to think about measures to mitigate global supply chain risks. These could include exploration of local oil and gas as well as the development of geothermal power.
In our UP Vanguard Inc (UPVI) forum on energy security last October, former Energy Secretary Atty. Raphael Lotilla said that for the Philippines, the upstream natural gas and petroleum industry sector are crucial to achieving energy security. He, however, noted that the murky regulatory policies are preventing us from getting as many investors as possible.
Another reactor in the same forum, UP Vanguard Engineer Ray Apostol, lamented the lack of exploration activities in the last six years. Engr. Apostol, a seasoned professional in exploration work, stressed that the Philippines is a laggard among ASEAN nations in gas exploration especially since there has been no exploration well drilled in almost six years.
Media recently reported that the Energy Secretary has invited US investors to look closely at business opportunities in PH renewable power sector especially in geothermal projects as it is open to 100 percent foreign ownership for foreign direct investment.
However, it’s not enough to invite investors since we must take a closer look at regulations that would entice foreign investors.
Most private firms stay away from Greenfield exploration because of the high capital costs and local regulators’ lack of appreciation for the risks assumed by geothermal developers in tariff settings.
In a previous post, I have discussed at length how faulty the appreciation of the regulator of the Beta in the computation of the cost of equity under the Capital Asset Pricing Model or CAPM for our tariff setting. In a nutshell, the Energy Regulatory Commission (ERC) uses the same Beta in the tariff equation for all power plants to determine the return on equity, which means the ERC fails to consider the risk profile of the power plant project. In a way, this is similar to DOE’s “technology agnostic” approach to power supply. Given the challenges of Climate Change, we cannot, and should not be agnostic to the type of fuel we use for energy. We should be deliberate in ensuring our long-term energy security by tapping our indigenous sources of energy.
This approach of having a uniform beta (the index for risk) for any type of plant is a wrong use of the CAPM. Specifically, it is disadvantageous to geothermal developers as they are not adequately compensated for the risk of exploration.
It isn’t the lack of natural resources that prevent us from achieving energy self-sufficiency, which is defined as a nation’s ability to fulfill its own energy needs. It’s our regulations that cause our reliance on imported fossil fuels. That and the long-held belief that coal power plants are the least cost of all power sources.
Recent developments should spur our government into action to find long-term solutions to our power supply issues. And long-term solutions entail reviewing and making changes in our regulations.
For the Philippines, it’s not just oil prices we have to worry about. Prices of energy including natural gas, oil, and coal soared as tensions between Russia and Ukraine escalated. Wood Mackenzie, a global natural resources consultancy noted that “The Russia-Ukraine crisis has shocked the coal and the broader energy markets.”
Thermal coal prices are at a record high. Nikkei reports that the benchmark Newcastle coal price has more than doubled before Russia’s assault on Ukraine, and even rose by 46 percent in a single day last March 2.
Russia, after all, is a major producer of coal, providing 15 percent of global exports. The country is also the number two coal supplier to Japan, China, and South Korea. Analysts believe that these three coal importing countries may now turn to Saudi Arabia, Australia, and Indonesia for their coal exports.
Aside from inflation, the main impact of this war is energy supply destabilization. Let us consider that in 2020, coal accounted for 57.2 percent of the Philippines’ energy mix, importing the majority of its needs from Indonesia. But as more coal exporting countries turn to Australia and Indonesia, we can expect global coal export prices to be more expensive.
It also doesn’t’ help that heightened concerns over geopolitical tensions, national elections, and the US Federal Reserve’s tightening are likely to result in the Philippines peso depreciation. ANZ Research noted that the peso is in for a volatile ride in the coming months with the peso trading with the US dollar at an exchange rate at Php 54 to a dollar.
“Our current yearend forecast for the peso is 52.50, which is weaker than consensus estimates. Given the mounting downside pressure from the large external deficit, we see further downside risk to our forecast. A repeat of the 2018 period when the peso depreciated toward 54.40 is a possibility,” ANZ Research noted.
What do these two developments mean for us in terms of energy security?
Geopolitical tensions are likely to increase global coal prices. And since the Philippines exports most of its coal, and as the peso depreciates, then we will be importing coal at a much higher price.
Sadly, it will be Juan dela Cruz who will bear the brunt of higher power rates. Remember that the majority of our power sales agreements (PSAs) have pass on-cost provisions, which means consumers bear the cost of the falling peso against the dollar and the global coal price increases. What makes it worse is that most independent power producers have most of their billings in the US dollar denomination.
Plus, off-grid areas relying on diesel generators will definitely have to pay more for their power in the coming weeks as oil prices continue to rise.
It seems like we are doomed in the near future. But we always knew that our energy security has always been under threat. Recently, it was the temporary ban of Indonesia on coal exports that we were worried about. Now, we have the Ukraine and Russia war and the peso depreciation that threatens our energy security.
We must, once and for all, take aggressive steps in ending our dependence on coal exports. We should have done it many years ago, but we didn’t. Despite a moratorium on new coal plants, the PH energy system will still be relying on coal-fired plants.
Data shows that coal will account for 46.68% or 3,685.4 megawatts (MW) of the f 7,9190.96 MW of new capacity to be added by 2027. In contrast, only 901.27 MW of Renewable Energy will be added. We are supposed to source 35% of our power from RE by 2030 but as of 2020, renewables only accounted for 21 percent of the energy mix. These figures surely speak to the fact that we are failing to develop our renewable energy sources.
Recently, President Rodrigo Duterte has approved the revival of nuclear power to help replace coal plants. Executive Order No 164 says that adding nuclear power into the state’s energy mix for power generation can help ensure energy security. The EO further described nuclear power as a “viable alternative source” of baseload power that can replace coal-fired power plants.
The EO also mandates the Nuclear Energy Program Inter-Agency Committee to study further the possible use of the Bataan Nuclear Power Plan. I have discussed the use of nuclear energy and the re-opening of the BNPP in a previous post. In my opinion, this option has been studied to death.
During my time as CEO of the National Power Corporation, our proposal was to put up a new one right next to the present one if the country wanted to have a nuclear power plant. The security system of the BNPP was close to a quarter of a century old then. By now, the security system is half a century old. To revive nuclear power, we need to craft new legislative and regulatory frameworks as the ones we have are updated. Plus, we don’t have the expertise unless we take the offer of Russia of help in building nuclear power offered years back?
While our national government is in the right direction in trying to diversify energy sources, however, our best bet has always been renewable energy sources. Geothermal, which can act as baseload plants, is a better option than nuclear except that the government or regulation has made geothermal energy development less attractive to investors.
The key to energy security– which the International Energy Agency (IEA) defined as the uninterrupted availability of energy sources at an affordable price– has always been renewable sources. The Philippines, after all, is blessed with natural resources that can be harnessed to ensure a consistent power supply at reasonable prices.
Further, as I said in an earlier blog, Distributed Energy Resources (DERs) and microgrids should be the path we need to take. With DERs, we won’t be reliant on these old coal power plants and won’t have to worry about high energy prices when global coal prices spike. Energy security for the Philippines can be achieved by utilizing renewables, DERs, and microgrids. We should have invested in these a long time ago.
But we insist on the impractical such as relying on imported coal, reopening of BNPP, and investing in floating nuclear plants. We seem to have forgotten that we are one of the top producers of geothermal power in the world and that we are a tropical country. We also have the expertise and laws in place to develop renewable energy sources.
The current tension between Ukraine and Russia should be our final warning. I say final as we should have learned our lessons from previous events and catastrophes like the temporary ban on coal exports by Indonesia. Let us not waste time anymore and take renewable energy, microgrids and DER development seriously.
It’s been two months since Typhoon Odette (international name Rai) devastated large parts of Visayas and Mindanao. Sadly, many families are still living in the dark as power has not been restored in their communities.
Time and time again, natural calamities like Typhoon Odette show us how ill-designed our infrastructure is and how poorly prepared our power sector leadership is in handling power outages and restoration.
As we saw with the disaster response in Typhoon Odette, our government was unable to respond timely mainly because we rely on a centralized power system supported by a transmission and distribution infrastructure designed over a century ago.
Resiliency has always been a challenge in the power sector. Whenever a typhoon damages the poles of the distribution system, there is no other option but for unaffected utilities to send teams to help restore the lines. The Bayanihan Spirit is laudable, but this approach faces many challenges.
For one, just think of the logistics involved in this approach. Volunteer teams need to bring their own vehicles, equipment, food supplies, etc. It’s also quite challenging for these volunteers given that affected areas are usually without food and water.
We also have to take into account that the transmission company, the National Grid Corporation of the Philippines (NGCP), also has limited men and equipment to repair damaged lines and towers.
In the past, the National Power Corporation (NAPOCOR) could mobilize temporary generator sets or even power barges to supply emergency electricity. However, these days, it is unclear who should assume the role of providing emergency sets.
The media has reported that the Energy Regulatory Commission (ERC) cannot allow NGCP to run emergency gensets because that will counter the Electric Power Industry Reform Act’s (EPIRA) intent. As NGCP is prohibited from putting up emergency generators, it is up to the generators to provide emergency power supply, which they will have to sell to the distribution utilities (DUs) or electric cooperatives (ECs).
Sadly, this setup is far from ideal since DUs and ECs have to conduct bidding, award and sign the contract, and seek the approval of the ERC. Unless the Department of Energy (DOE) gives an exemption to the utilities, the entire process of procuring an emergency power supply will take many months.
There is something wrong with this setup. Keep in mind that consumers actually do pay for this “emergency supply” via the ancillary services charged by NGCP. This capacity charge is under the “Reserves” item in everyone’s electricity bill. By this alone, NGCP should be the one to provide this service. Since it obviously could not dispatch the generators, bringing in mobile gensets is a simple extension of that function.
Think about it. Consumers are being short-changed since NGCP is already relieved of the responsibility of providing emergency power that consumers are paying for. The legal definition of NGCP’s function is placing consumers at a real disadvantage. Some power sector luminaries reported that Congress has to pass a resolution to allow NGCP to provide emergency power supply for an extended period. In the meantime, people are dying of hunger and disease while local government units (LGUs) deal with these bureaucratic processes and legalities.
We can draw several conclusions from our experience with Typhoon Odette.
First is that the current design of centralized power distribution is no longer responsive to modern times. The effects of climate change are real, which is why we are experiencing more severe weather disturbances. The centralized power distribution model has not changed in a century but the planet has changed significantly in many ways.
Second, is that LGUs have to be involved in the design and implementation of public utilities in their provinces and cities. We cannot afford to simply rely on utility companies to respond to crises as often they are helpless in times of disasters.
There are no short-term remedies to prevent prolonged suffering of Filipinos should another devastation as Typhoon Odette happens. The actions we need to take are long-term solutions.
Recently, President Rodrigo Duterte signed Republic Act 11646 promoting the use of microgrids in unserved and underserved areas. Under the law, microgrid system providers (MGSP) which are natural or juridical persons can provide integrated power generation and distribution services. These MGCPs do not need to secure a franchise from Congress since they are not considered public utility operations.
They, however, are required to seek waivers from existing distribution utilities to provide unserved and underserved areas as well as an authority to operate from the ERC.
The new law is a step in the right direction as microgrids—small grids independent of the traditional grid — have been proven effective in providing reliable power and can make our power systems more disaster resilient. But it’s not enough as we need to take more drastic actions to make our energy system more resilient to disasters.
We must empower LGUs by including them in the energy planning process. LGUs typically are excluded from planning the power distribution infrastructure, which is ironic as they are the first line of defense and responder when a disaster strikes.
Thus, all LGUs should take to task all local power utilities to redesign their power distribution infrastructure based on a higher level of resiliency; consider possible budgetary allocation from the National Government. The LGUs should determine whether the utilities have considered the human factor in their plans. No current electricity planning tool considers the human element. The LGUs ultimately are answerable to the people. Therefore, planners must consider the human aspect, and only the LGU is competent to do this.
Likewise, LGUs must have their power distribution franchises. They must be allowed to mobilize power assets without fear of violating the EPIRA. Consider what happened after Typhoon Odette. Many governors were searching for interim generations but their hands were tied since they are not licensed generators. Likewise, generation companies could not bring in genset as well as that would still require bidding and approval from the ERC. The lack of power after massive devastation paralyzes the local government’s disaster response.
In contrast, allowing LGU to have their franchises will give them the flexibility to design and have a private concessionaire build the microgrid. Further, the local government can mobilize its resources in emergencies without waiting for the local utilities to act.
Plus, it should be mandated that local barangays are provided electricity locally from solar plus battery systems, or other forms of Distributed Energy Resources( DERs), especially for disaster-prone areas. I have been saying again and again that the century-old design of having a central power plant and the electricity transported through high voltage transmission lines and then brought to the household level is no longer resilient enough for today’s environment.
Also, the NGCP has recently warned of a possible red alert, leading to rotational power interruptions in Luzon during the summer season when several coal-fired plants experience an unplanned outage. The grid operator says it foresees higher demand than actual peak load in Luzon from April to June. The Visayas, on the other hand, could go on yellow alerts.
We often receive warnings like these from NGCP and every time we resort to bandage solutions. We need to think long-term and seriously accept the fact that centralized systems no longer work for us. We need flexibility in our energy system which DERs can provide. When we have DERs, we won’t be at the mercy of these coal plants and won’t have to endure rotating brownouts
Saying that microgrids are too costly just won’t cut it anymore. Technological advancements in renewable energy like solar and wind have brought down costs significantly. Battery technologies meant to complement the intermittency of solar and wind have also brought down storage prices. Together, these technologies can provide baseload power at prices close, if not at par, with conventional baseload power. These Distributed Energy Resources (DERs) make microgrids technically and financially viable.
Of course, aside from cost considerations, we also have to realize that microgrids make us more resilient. Because the microgrid is no longer dependent on the vulnerable NGCP lines, it can immediately have electricity back because households can draw energy from the batteries.
Likewise, homes and small and medium enterprises (SMEs) can invest in rooftop solar to provide their own power needs and sell to neighbors and friends. Microgrids are not only resilient but can socially make a locality economically vibrant.
It’s not only the unserved and underserved areas that must have distributed energy resources as LGUs must have their power distribution franchises. The LGUs role in disaster response can never be stressed enough. And this is why these LGUs must take a more active part in energy planning and be granted their franchises as well.
It’s time to embrace a new design philosophy in the power distribution sector. Doing so will require massive changes but they will be worth it.
Last January 1, Indonesia suspended exports of coal after its state power utility announced dangerously low levels of the fuel among domestic power stations. Indonesia is the world’s largest coal exporter.
The ban on exports pushed coal prices higher in Australia and China. Indonesia’s move also prompted Asian governments like South Korea, China, and the Philippines to make an appeal to Indonesia to lift the export ban. Philippines Energy Secretary Alfonso Cusi asked the Department of Foreign Affairs (DFA) to intercede via the Association of Southeast Asian Nations (ASEAN) cooperation mechanism.
Our Energy Department’s appeal should not come as a surprise. After all, the Philippines remains heavily reliant on coal for power generation and procures most of its needs from Indonesia. Data shows that 70 percent of the Philippines coal supply for 2020 was imported. In 2021, the Philippines sourced roughly 2.4 million tonnes of coal monthly from Indonesia.
Indonesia requires coal mining companies to fulfill their Domestic Market Obligation (DMO) where they need to sell 25 percent of their output locally before they can export. Indonesian authorities are blaming the coal supply problems on miners as they are failing to fulfill their DMOs.
On January 13, Indonesia announced that it would allow 37 vessels loaded with coal to depart, slightly easing the coal export ban. However, this doesn’t mean that the Philippines’ problem is over.
A Citi research note released last January 5 estimated that roughly 490 out of 631 Indonesian coal miners met their DMO, representing 35 to 40 percent of Indonesia’s total coal production. If these companies fail to meet their DMOs then they won’t be allowed to export. There might not be enough supply for major coal importers like the Philippines, and coal prices are likely to surge if the ban continues. For the Philippines, this would result in power outages and higher rates.
I have been warning of this risk for many years now. At the start of the COVID-19 pandemic, I feared that Indonesia would close its ports, which means we cannot export coal. This would have put our power supply at risk. Thankfully, it didn’t happen then. But we all know that our power supply remains under threat as long as we continue our dependence on coal.
There are several ways we can mitigate this threat to our power supply. Our government should have long taken more aggressive measures in developing renewable energy resources. It should have ordered the immediate development of indigenous sources of power— wind, solar and geothermal. At this point, the government should act quickly and start by modifying power sales procurement rules. It must take draconian measures such as requiring distribution utilities to source a higher percentage of renewables.
The Energy Regulatory Commission (ERC) should mandate that all distribution utilities during the procurement stage testify that no indigenous resources within its franchise area or vicinity are available or there are no offers from any indigenous sources. Simply put, the ERC should order that utilities must negotiate or bid with renewable energy providers before purchasing from imported energy sources.
Likewise, we should take a look at how we interpret the constitutional provision on foreign ownership. Former Energy Secretary Atty. Raphael Lotilla in an Energy Forum last October stressed the importance of allowing more foreign investors to enable the Philippines to develop its renewable energy sources. He pointed out that the 40 percent cap on foreign ownership should only be applicable to finite sources as the constitution refers to “potential energy”. Solar and wind, which can be converted quickly to power should not be viewed as potential energy. These energy sources must not be subjected to the 40 percent foreign ownership rule.
Aside from Indonesia’s ban on coal exports, the Philippines is also facing the risk of higher prices of imports. Recently the International Monetary Fund (IMF) noted that emerging markets could be at risk when the US Federal Reserve increases interest rates earlier and faster than it had earlier planned. For the Philippines, this would mean elevated import costs for fuel and other raw materials. In the event, this occurs and Indonesia continues to ban coal exports, then we are doomed.
In the end, the best time to be more aggressive in developing renewable energy sources to ensure continuous supply was many years ago. Asking the Indonesian government to lift its ban on coal exports is a temporary measure as our best bet has always been to become less reliant on coal by developing and harnessing indigent power sources.
The Senate recently approved a bill amending the Public Service Act to allow full foreign ownership in key industries like transport and telecommunication.
With 19 votes, the Upper House voted to pass Senate Bill No. 2094 which will pave the pay for 100% foreign ownership of railways, airlines, shipping firms, subways, and telecommunications. The 1987 Constitution puts a 40% foreign ownership on public utilities. The new bill is making a distinction between public utilities and public services and frees up the latter for 100% foreign ownership
Senator Grace Poe, one of the bill’s principal authors said that “The main purpose of this measure is to provide consumers with choices and I believe that, by opening our economy to a diverse set of investors, we could provide our fellow Filipinos with more and better choices,”
The new bill still treats three main industries as public utilities as they are believed to be “natural monopolies.” These industries include Water Works and Sewerage, Transmission of Electricity, and Distribution of Electricity, and will remain subject to the 60-40 rule on foreign ownership.
I have written about this bill in the past where I have questioned why the Senate is treating electricity distribution as a natural monopoly. I have argued that natural monopoly cannot and should not be regulated as it is a market condition. Natural monopolies, after all, exist due to either high start-up costs or powerful economies of scale. Natural monopolies only exist when a single firm can serve the entire market at a lower cost instead of having multiple firms competing for the same market.
Again should the Philippines still classify power distribution classified as a natural monopoly despite the advancements in technology and global trends?
All we need to do is look at other countries. Take the United States for example where several companies heavily investing in non-wire alternatives (NWAs), which are pushing both start-up and fixed costs down. Several complines like Duke Energy and Con Edison can avoid spending billions on transmission infrastructure by investing heavily in NWAs combined with distributed energy resources (DERs) and mini-grids.
New technologies, after all, are removing barriers to entry in the distribution of electricity, which means more players can enter the market more easily given the lower upfront costs of distributing power.
What we are seeing here is not a case of a natural monopoly actually driven by the market but rather a legal monopoly created by lawmakers and regulators. This is a classic example of what Nobel Prize winner Vermon Sith pointed out in this paper “Currents of Competition in Electricity Markets” where he said that “Regulation has been applied far too broadly to the electric power industry. As a result, policies intended to restrain monopoly power have instead propagated that power.”
In a separate development, President Duterte has also signed an executive order (EO) 156, an electrification EO to enable electric cooperatives to pursue rural electrification. In the EO, the president stresses that underperforming electric cooperatives (ECs) and distribution utilities (DUs) are hampering the electrification efforts of the government.
Aside from transferring the powers to take over the DU’s and EC’s operations from the National Electrification Administration to the Office of the President, the EO also ordered all DUs to submit a comprehensive masterplan for the total electrification of their respective franchise areas including a detailed inventory of all inadequately served areas and action plans to achieve complete electrification.
The EO also directs the Department of Energy (DOE) to craft procedures for the participation of local government and communities in determining whether their areas are inadequately served.
But perhaps an alternative route is to open up competition for the same franchise area. Currently, the government is only allowing a single firm for a franchise area, which means that the franchise holder does not have incentives to improve its services or to innovate. Again, our regulations are what’s creating legal monopolies as we can, in fact, have healthy competition in franchise areas only if the government allows it.
It’s great that the EO is asking the DOE to promulgate regulation for the entry and integration of DERs, microgrids, and other alternative service providers in the electric power industry, but we need as well to consider allowing more competition in the same franchise area. Otherwise, consumers will have to wait for DUs to be deemed as inadequate before they can get alternative DUs, and even then they only get served by a single company, which still will have the monopoly in the franchise area.
Plus, we can actually help solve the problem of lack of access to electricity if we do not create legal monopolies as what the Senate bill is doing to the electricity distribution. We need the technology and expertise of foreign companies in developing DERs, microgrids, NWAs, and other new tools that can easily provide power to off-grid areas.
A reactor in our energy forum sponsored by UPVI last October, Bill Lenihan, CEO of ZOLA Electric, a company that offers power solutions in Africa stressed that centralized grid systems won’t solve emerging markets’ problems. He added that countries like the Philippines must make DERs and microgrids as the main source of power in many underserved areas in the country.
However, developing these technologies will again, as I have mentioned, require funding and technologies that foreign companies can provide. To classify power distribution as a natural monopoly when it is not is like taking away the chance from Juan Dela Cruz from far-flung areas to have access to electricity and lessen his chance of improving his economic condition and that of his community at the soonest time possible.