energy

The Rise of Renewables

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To be clear, I have no fundamental problems with fossil fuel-based power plants.  In fact, I have built a number of them.  My current focus on renewables stems from the belief that in the long-term, it will be economically more sound for our country and for our planet. My approach is based on a need to look at energy planning that takes on risk as a major parameter. From this perspective, a portfolio approach with renewables as a major part of the country’s energy portfolio will be good for business in particular, and the well-being of our countrymen in general.

Just last year, Pope Francis released a landmark encyclical that warns of the dangers we face for refusing to take care of our environment. The Pontiff also stressed the need for renewable energy development to address the growing concerns about the environment.

Similarly, the COP 21, the largest single gathering of world leaders produced what was considered as the most important agreement of nations in combatting climate change: to hold the increase in the global average temperature to below 2 centigrade above pre-industrial levels. An important agreement since achieving such will result in mitigating the rising atmospheric temperature to help prevent driving poor nations further into poverty.

Perhaps, the greater awareness and the campaigns made by known personalities such as the Pope and our world leaders about climate change and its consequences helped spur the growth of the renewable energy sector. But just how significant the growth of the RE sector will be?

A report by McKinsey solutions showed that energy demand will change significantly in the next 35 years as it is likely to grow only by 0.7 percent annually.  Electricity is seen to account for majority of the energy demand among all energy types and we are likely to see a shift to cleaner energy technologies with coal expected to peak by year 2025, while demand for oil flattens.

Similarly, a recent study conducted by Bloomberg New Energy Finance showed that two-thirds of the total investments in the power sector will be spent on renewable energy development from 2016 to 2040. According to the report, roughly $7.8 trillion are likely to be invested in renewable, an amount significantly higher than the expected $ 1.2 trillion to be invested in coal plants.  Of the $7.8 trillion, wind energy will account for $3.1 trillion, solar for $3.4 trillion and hydro roughly $911 billion.

We are already seeing the rise of the renewable energy sector as early as last year. After all, 2015 was a record year for global investments in renewable energy according to the report, Global Trends in Renewable Energy Investment 2016 published by Frankfurt School of Finance & Management. The report revealed that globally, investments in renewable power capacity in 2015 reached $265.8 billion, almost double than the investments in fossil power of $130 billion.  Plus, developing countries have overtaken developed nations in renewable energy investments. Developing countries, after all, have invested a total of $156 billion last year, which is higher than the $130 billion spent by advanced countries in their RE sector.

As a Renewable Energy developer, it is heart-warming to see that RE development globally are advancing significantly, and that most countries are now taking serious efforts in developing their green resources to replace coal as the main power source.

In our country, the government, too, are somehow making efforts to develop the RE sector. Just recently, a report of the Inquirer said that the Climate Change Commission (CCC) has announced that it has started what it called a “comprehensive review” of the Philippines’ energy policy. The DENR and DOE, along with NEDA are part of the review committee. This undertaking is expected to result in reshaping the power plans of the country, putting RE sources in the forefront to coal. According to the Commission, the review will take roughly six months to complete and a new development framework on energy development will be produced.  Plus, Secretary Emmanuel de Guzman, vice chair of the CCC said that the end goal is to “lay the ground toward clearer procedures away from coal and on the faster way to enhance RE.”

I say that this is a good step in paving the way for more renewable energy development in the country. However, it is also my fervent wish that this review is also accompanied by other reforms in the sector including the lifting on foreign restriction for investments, and other regulatory issues hounding the RE sector, which I have already discussed thoroughly in this blog. It is my hope that this review and major reforms in the sector take place soonest to help the growth of the renewable energy sector.

Bill Gates and Leonardo DiCarpio are on the Same Page

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Photos c/o theguardian.com & mirror.co.uk

Two prominent men, one the World’s Richest according to Forbes and the other, one of the highest paid Hollywood actor and the most recent recipient of Oscar’s best actor award, have something in common. Bill Gates and Leonardo DiCarpio are campaigning hard to save the world from climate change.

Gates in his annual letter, stressed that it has been more than a century since Thomas Edison, invented the light bulb and yet, a big chunk of the world’s seven billion population live without electricity.  In the sub-Saharan Africa alone, 70 percent live in the dark while there are roughly 300 million people in India without electricity.

And it is his wish to see the poorest of the poor have access to power, saying that they would be driven further into poverty and likely to suffer the most with the effects of climate change.

Of course, we already see the points of Gates. In our country, the poorest of the poor are the farmers and the fishermen. Data from the Philippine Statistics Authority shows that the fishermen and farmers in 2012 posted the highest poverty incidence of 39.2% and 38.3% respectively. These fisher folks and farmers are the ones who use kerosene lamps at home, too.

And unfortunately, the farmers are also the ones suffering from this round of El Nino, The Department of Agriculture has recently reported that damage to crop due to the drought already reached P4 billion.

However, Gates, a known philanthropist, does more than lament the lack of electrification in parts of the world and the possible effects of climate change on the poor. After learning that the world must eliminate carbon emission at the end of the century, he did the math and came up with an equation to drive carbon dioxide to zero.

CO2= P x S x E x C

CO2—carbon dioxide

P—world’s population

S—services used by each person

E—energy needed to produce the services

C—carbon dioxide produced by the E

According to Gates, the way to zero CO2 is to have a zero on any of the variables. Unfortunately, one cannot have zero for services and energy needed to provide the services. This means that our greatest chance of producing zero carbon dioxide is to have a value of zero for C.

What does Gates propose to do to keep C at zero?

His proposed solution is to find ways for solar and wind energy to provide energy 24/7.  But he also recognized that this is quite challenging since so far, the solution to having these power supply constant is battery storage, which unfortunately now remains expensive and could increase the cost of electricity as much as three times.

Now, how does he think we can harness the wind and solar energy that can power for 24 hours?  This is where he issued an energy challenge, asking for solutions on how wind and solar energy can be made available at any time of the day at low prices.  In fact, he has already funded the research for this.

Just how optimistic is Bill Gates that we can find a solution to this problem? Very optimistic as he said: “within the next 15 years—and especially if young people get involved—I expect the world will discover a clean energy breakthrough that will save our planet and power our world.”

And he is probably right. There have been significant progress in technology.  For example, recently, Amber Kinetics introduced its multi-hour flywheel battery storage solution, which acts as a reservoir for kinetic energy. The high-speed rotation of its steel rotors lets the system store power that can be drawn out as needed.  This cutting edge battery solutions is very handy these days.

On the other hand, recently awarded Leonardo DiCarpio made waves in his Oscar speech as he campaigned for us to take climate change seriously.  According to DiCarpio, “Climate change is real, it is happening right now. It is the most urgent threat facing our entire species, and we need to work collectively together and stop procrastinating.”

DiCarpio, after all, is a staunch green advocate. His foundation is giving away some $15 million in grants to various organizations involved in finding innovative ways to save the environment. Plus, he is also a United Nations envoy on climate change and has recently inked a deal with Netflix to produce non-fiction documentary and docu-series on the environment.

That’s the world’s richest and one of the best Hollywood actors who are putting their money to save the environment and telling us to do the same. Plus, there’s also Pope Francis with his landmark encyclical on the environment and climate change. Now, who else do we need to tell us that it’s time to roll up our sleeves and get ready to work and shift to renewable energy before we start taking more action?

The War Against Renewable Energy

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According to the Report Global Trends in Renewable Energy, the year 2015 was a record-breaking year for renewable energy (RE). Investments in the sector reached $258.9 billion globally. Of the total capacity installed last year, excluding hydro power, a whopping 53.6% came from renewable energy. There was also a significant increase in the installed capacity for wind and solar photovoltaics last year—rising remarkably from 49 GW to 62 GW for wind and from 45 GW to 56 GW for solar photovoltaics.

There is no denying that the world is starting to make its shift towards renewable energy. However, it seems that there are those who work hard against the tide. An ongoing war in the US hinders the rising demand to harness one of the world’s most constant sources of energy: the sun.

Nevada, which has the highest percentage of solar energy among all the states in the US, is regressing from its commitment to develop renewable energy, especially for solar. Its utility regulator allowed its state utility firm, NV Energy, to increase its fees to solar users arguing that these consumers should be charged for the use of the grid. The energy firm also decreased the amount they pay customers for the solar energy that they place back on the grid. Residents who have invested a lot to install solar rooftops on the premise of cheaper electricity are now at a disadvantageous position, given the change of heart of the state regulator.

Similarly, in 2013, Arizona regulators also approved a $5 monthly fee that was slapped on solar users. Reports also note that utilities in other states are lobbying to curtail the development of RE in their areas.

Why are large utilities battling against solar or perhaps, RE in general? Given the many calls to shift to the cleaner energy sources, energy companies that have been making profits in developing and supplying traditional sources of energy will fight hard to keep their businesses alive. As more people shift towards RE, we can also expect more initiatives launched against it.

Unfortunately, the war against renewable energy is not just confined in the US or other developed nations. I will argue that, locally, the renewable energy sector is facing its own battles.

For example, our local regulators are far from being friendly to redevelopers. Again, as I have stressed before, our regulators make it less enticing for private investors to develop renewable energy plants. Our regulators, unfortunately, do not give importance to the risks taken by RE plant developers when approving the tariff setting. As I have explained before, the ERC uses the same value for the Beta or measure of risk regardless of the technology used for the plant project instead of giving premium. Regulators are unable to reflect the real costs of the risks undertaken by developers in tariff setting. Simply put, the regulators’ behavior is unfair to RE developers as the cost recovery computation does not reflect the real cost of producing RE. RE developers, after all, take higher risks than traditional energy developers.

Similarly, the Competitive Selection Process or CSP implemented by DOE can be construed as a war against renewable energy.  The CSP, the brainchild of former Energy Secretary Jericho Petilla requires aggregation of demand and mandatory bidding to be conducted by a third party. It takes away the power of distribution utilities to contract power on their own. There have been many objections to the CSP by power industry players, and yet, despite consultations, our regulators have decided to implement the CSP (although ERC’s version is different from DOE).

Why do I say that the CSP is a form of war against RE? Keep in mind that under the CSP, demand must be aggregated first and bid out by a third party. The result is a bid for a large quantity of energy. Unfortunately, renewable energy plants relatively have small capacities. Any small power plant would have a difficult time competing against those traditional power plants that can generate large amounts of power. The CSP places RE plants at a disadvantage. Again, as I have expounded on in my previous post, the CSP runs counter to the goal of EPIRA, which is to promote a level playing field among industry players—as the implementation of such measure leaves RE developers in the cold.

Data from the DOE showed that as of 2014, some 43 % of power generated came from coal-fired power plants while geothermal energy and hydropower only accounted for 13% and 11%of the total power generated, respectively. Sadly, other RE technologies only accounted for 1% of the total power generated.

The DOE wants a fuel mix consisting of 30% RE, 30% coal and 30% natural gas by 2030. But it also admitted that if we continue with our usual business of neglecting the RE sector, and then coal will account for 70% of the energy mix.

Such great reliance on coal will obviously have its consequences. For one, we will be at the mercy of global prices of coal prices.

Just recently, Reuters reported that Indonesian authorities have blocked ships from leaving for the Philippines from two Indonesian coal ports for fear of ship hijacking in the Philippines seas by Islamist militants.  Such security concerns have led to the non-approval of shipping permits to the Philippines in these ports. This is an alarming situation as Indonesia supplies 70 percent of our coal. This means that our country might suffer from coal shortage, and likely to face higher electricity prices given that almost half our power are sourced from coal. Again, situations like this leave us vulnerable to energy price spikes.  What we need to do is to end our reliance on coal, and create a stable supply of energy by putting to good use our natural resources.

As they say, no one wins in any war. There will always be casualties and losses—and this case is no exception. It is time to put an end to the hostile environment suffered by RE developers and create a friendlier one for RE developers.

Bridging the Gap between the Academe and RE Sector: The UPLB and IFC RE Forum

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20160226_110844

At the forum with Sen. Loren Legarda, IFC Country Director Jane Xu, Former Energy Usec. Atty. Jay Layug and UPLB Chancellor Dr. Fernando Sanchez Jr.

 

I have always been vocal in my belief that everyone should have equal and unfettered access to God’s gift to us – our environment. On the other hand, we all have the responsibility to take care of our environment and more importantly, to know how to tap the richness of this gift to us. We have to learn; we have to be educated about these things.

That is why I was glad, we at the College of Economics and Management Alumni Foundation Inc. (CEMAFI), was able to host with the International Finance Corporation (IFC) of the World Bank a forum with the theme “Making Renewable Energy a Vehicle for Sustained Inclusive Growth. It was a daylong event attended by energy players, members of the academe and bankers, and moderated by former Energy Undersecretary Jay Layug.

That is why I was glad, we at the College of Economics and Management Alumni Foundation Inc. (CEMAFI), was able to host with the International Finance Corporation (IFC) of the World Bank a forum with the theme “Making Renewable Energy a Vehicle for Sustained Inclusive Growth. It was a daylong event attended by energy players, members of the academe and bankers, and moderated by former Energy Undersecretary Jay Layug.

The event was held at the IFC’s office in BGC last February 26, 2016.
Tapping our environment and produce renewable energy is one of the key drivers of economic growth. This is a concrete way of exercising this belief in our inherent right to use responsibly our environment.And I am not alone in saying this. In fact, a recent report by the International Renewable Agency (IRENA) said that increasing the energy mix to include more renewable energy could mean a global economic boost of as much as 1.1 percent by 2030.

But again, more needs to be done when it comes to developing renewable energy in the country, including relaxing foreign ownership restriction, shifting to a more appropriate tariff mechanism scheme that calculates for the risks of the developers adequately, and a review of the recently implemented CSP, to name a few.

And it is for this reason that I am helping my alma matter, UP Los Baños through our alumni association, UPLB CEMAFI–of which, I am the president–become more proactive in developing renewable energy through various initiatives.
One of the speakers was Senator Loren Legarda, a staunch advocate of green energy in the Senate. During the open forum, Sen. Legarda heard the travails and challenges of developers. She was particularly surprised that the 12% import VAT was obviously very unpopular among the developers.

IFC Philippines Country President Jane Xu emphasized the need for the country to invest more in renewable energy given that the Philippines is the fourth most disaster-prone country in the world according to UN. She emphasized IFC’s commitment to support the renewable energy sector.

On the other hand, UPLB Chancellor Dr. Fernando Sanchez Jr., in his opening remarks, assured everyone of UPLB’s commitment to renewable energy development. His exact words were that the university’s “research and development agenda is focused on accelerating infrastructure development by optimizing resources in investment in the renewable energy sector.”

And I fully support UPLB’s drive to contribute more to the renewable energy sector. Not only because I love my Alma mater, but also because it is my belief that it is time to bridge the divide between the academe and the problems facing the sector in the real world. What do I mean by this?

It is my observation that the academe is detached from the sector: that there are gaps in the real world today in the renewable energy sector that the academe yet and can best address.

For one, no single institution is credible and can provide an independent opinion on RE resources. Renewable energy developers rely heavily on foreign consultants, which has cost implications. The lack of information and competence locally serves as an entry barrier for small RE players.

And this is where the academe can help. In the right intellectual way, the academe can lead the way in lowering that entry barrier, something that the UPLB can offer as a service to the sector. The university too can benefit if it beefs up its competence in generating RE data since the school can charge fees for this information.

We at CEMAFI has taken the responsibility of finding more funds for research to attract more professors to do extensive research. In fact, we have already established the UPLB’s Rural Economic Development and Renewable Energy Center years back. Generating data and selling them for a fee will make the center more self-sufficient when it comes to funding while helping the local RE players.

And this is why, together with our alumni association, we are working together closely to help UPLB meet its objective of “making renewable energy a vehicle for sustained, inclusive growth,” the exact words of Dr. Sanchez during the forum. The recently held forum is just the start of the many initiatives since we recognize that more is needed to develop the sector. We will have more conferences in the coming weeks, as well as other initiatives to help address the obstacles to achieving the sector’s full potential.

Given UPLB’s competencies, I have no doubt that the university can play a pivotal role in addressing the issues hounding the renewable energy sector. And I personally pledge to help the university achieve its goal, and I’m sure fellow alumni will do the same. After all, again, in the words of Dr. Sanchez during his welcome remarks “When like-minded people get together, they get the job done.”

Geothermal Energy Development in the Philippines

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The landscape of the geothermal energy development in the country has changed in recent years due to the privatization of the Energy sector in the country.

Exploration of geothermal energy in the country started somewhere in the 1950s under the helm of Professor Arturo Alcaraz, who headed the Commission of Volcanology. The Commission studied and made an inventory through geological mapping and surveys, and test drilling for the possible sources of geothermal energy.

By 1967, a historic lighting commenced in Tiwi, Albay, signifying the start of the development of geothermal energy in the area and power generation from the new power source commenced in Tiwi in 1979. It was later named as the first water dominated geothermal system that can produce more than 160 megawatts.

Aside from Tiwi, Albay the commission identified other areas where geothermal energy can be harnessed, including Makiling-Banahaw, Maibara, Negros, Leyte, Biliran, and Mindanao.

The government invited the Union Oil Company of California or Unocal for the exploration and development of geothermal energy in the country. The Unocal formed the Philippine Geothermal Inc. (PGI, now known as Chevron) which signed service contracts with the NAPOCOR in 1971. It is useful to stress that under the service contracts entered by the government at that time, the NPC was tasked with building and operating the geothermal plants while the PGI provided technical expertise and minimal capital infusion.

Field in Tiwi, Albay. Photo from www.ngaphil.org

Field in Tiwi. Photo from http://www.ngaphil.org

 
Given the high costs of developing geothermal energy plants, the government decided to develop it without the help of the private sector and created the Philippine National Oil Corporation-Exploration Development Corporation (PNOC-EDC) in 1976. The PNOC-EDC, a GOCC, was tasked to spearhead the development of the said energy resource in 1976.

 
The declaration of Executive Order 215 allowing the private sector to build and operate power plants and RA 6957 establishing the Build-Operator-Transfer scheme turned to be a game-changer. These laws allowed private entities including foreign ones to finance, construct, operate and maintain power plants for a defined period. The exploration, however, remained with the government. The private sector came in only after the exploration was de-risked.

The Unified Leyte Project was the first project developed under the BOT scheme. The EDC partnered with the California Energy to develop the 588.4-megawatt power plant. The unified power plants have been turned over in 2006 and 2007 to EDC after the 10-year cooperation period has expired.


Fast forward to today, and geothermal exploration and development mechanism in the Philippines have changed.
With the decision of the government to stay away from building and operating power plants or the privatization of the energy sector, development geothermal resources are now up to the private sector with some help of the government. What are the implications of this change?


For one, it is up to the private sector to undertake the exploration of new sources of geothermal energy, whereas, in the past, it was the government that spent and spearheaded exploration activities. The same cannot be said now, as it is the private sector that shells out funds to explore possible geothermal sources, which, by the way, is an expensive undertaking. Test drilling a hole alone–is the riskiest and most expensive phase in the exploration process–can cost $5 million. It is the private sector that shoulders both the cost and, of course, assumes the risk that the exploration activities will not yield any return.


Similarly, as pointed out earlier, it was NPC that provided cash for the building of the geothermal power plants and PGI only provided mostly technical expertise. Again, the same cannot be said for present times, as the private sector spends for the building and operation of the geothermal plants. This is on top of spending for the exploration of possible sources.
Simply put, the government previously assumed the costs from preliminary survey of the areas to operation and maintenance of the plants, whereas now, it is the private sector that assumes all the risks involved in developing geothermal energy.


But this is not to say that the government is idle in the development of geothermal energy in the country. The government, for its part, passed RA 9513: Renewable Energy Act of 2008. This law provides incentives to entities that will develop renewable energy products in the country and there are more sweeteners for geothermal energy development.

Incentives under this act, private include seven years tax holidays, 1.5 percent collection from gross sales of geothermal energy and exemption from universal and transmission charges, among others.


Are the incentives enough to offset the risks undertaken by the private sector? Did the passage of RA 9513 address the needs of renewable energy producers and players? These questions will be answered in a separate post.

References:

http://www.ngaphil.org/services/tiwi

GEOTHERMAL DEVELOPMENT IN THE PHILIPPINEShttp://www.jogmec.go.jp/content/300199107.pdf

Geothermal Energy Development in the Philippines with the Energy Development Corporation Embarking into Power Generation by Danilo C. Catigtig

“LEAST COST” IN POWER PLANNING IS NO LONGER VALID TODAY

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“Least cost” is the term the power industry uses in defining what power plants or projects to prioritize. Conventional thought and the resulting software and techniques in the industry use this term to define the least cost of producing electricity.  Given what we see today — the blackouts, the sharp rise in fuel prices — my view is that this two-dimensional and traditional method of calculating “least cost” is no longer valid today.  This traditional approach has exacerbated the problems that we face in the Philippines today.

Almost all software used in energy planning has the same objective: optimize cost or find the least cost. Due to the advent of computers, planners use the Monte Carlo analyzes (the method of approximating probabilities of several outcomes) of thousands of scenarios to calculate “the least cost.”  The scenarios include different seasons, rain fall intensity, temperature, transient faults and coal prices, among others.

There are software that run the above-mentioned scenarios and are available in the market. For example, QuantRisk uses Monte Carlo simulation for calibration, back-testing and execution of risk valuation in energy planning. This software considers all risk indicators that include market and counterparty exposure and credit risks. It can also compute for regulatory risks, but this is hardly applicable in the Philippines since there are no regulatory risks involved as the ERC bilateral rate structure is used for pricing.

Similarly, other software such as Promod and Plexos are also used for forecasting electricity market prices and analyzing market power, production costs and resource operations, and estimate both fuel requirements, as well as air emissions.

In general, these software, once broken down to the basics, use linear algebra in calculating for these numbers– a two-dimension calculation of scenarios and prices.

In energy planning, finding the least cost comes with ensuring the security of the system–making certain that the system does not collapse since there is a continuous power supply available for dispatch. This means that plants that can provide more stable energy supply and are more expensive to run, and plants that cost lower to run but cannot provide a stable source of power are included in the system So, the system will include different power plants that can “secure the system” regardless of the cost of running these plants.

The numbers that will ultimately come out using software for energy planning will show the hierarchy of prices or costs of the different power plants within the system.  So, it is possible that a coal plant may show a price of say P5.00/kWh while a geothermal power plant may show, for example, P5.80/kWh. Conventional wisdom will then tell us that coal is cheaper than geothermal, right?

Not necessarily.  We may be completely wrong.

Geothermal power plant. Geothermal or coal-fired power? www.iwnsvg.com

Geothermal power plant. Geothermal or coal-fired power?  Photo from http://www.iwnsvg.com

Remember my argument about comparing car prices? Each car represents a certain value proposition against a milieu of risks associated with the car. We cannot compare a Chery car against a Volvo as each will have its own characteristics distinctly different from each other and appealing to buyers in different ways.  It will boil down to the personal choices of the buyers.

In the case of the coal versus geothermal example, we then ask whether a fluctuating P5.00/kWh coal-fired power price is really cheaper than a P5.80/kWh geothermal fixed price. Maybe for someone who is looking at a very short-term time frame, and then, the answer is YES.  From a different time perspective, the geothermal fixed price may be more attractive since those who are looking for price stability and predictability, the geothermal price is definitely better than the coal one.

Generally, traditional power planning uses the least cost generation methodology where planners add stand-alone costs. The least cost generation method, however does not compute for the risks involved. The risks are identified and scenarios are calculated according to different scenarios, but the costs of these risks are not calculated into the equation. This is highly problematic. After all, talking about costs without talking about risks is like watching a musical movie without the sound!

A risk, which we never took seriously in the past, is Indonesia’s changing rules about exporting coal.  A few years back, Indonesia suddenly decided that it will not allow the export of certain grades of coal.  This led to a much higher cost for coal-fired power plant operators in the Philippines.  One company started to bleed because its ERC-approved formula did not take into consideration the fundamental change in the base prices.

To look at a price without considering risks behind the price can lead us to a completely wrong decision.

In his book, The Black Swan, Nicholas Taleb speaks of events that are completely coming from the left field that conventional method or processes that try to manage risks are simply no longer adequate.  “Sendong” for Cagayan de Oro was a “Black Swan” event.  Nobody alive today would have thought that it would happen.  And yet, it did.

Calculating the “least cost” for the power sector, in particular, would then be a dangerous process in this age of “Black Swans.”  In a paper he wrote in May 2004, the late Professor Shimon Awerbuch of the University of Sussex clearly stated: “Traditional electricity planning processes focus on finding the least-cost generating alternative. Given today’s dynamic and uncertain environment however it is impossible to correctly identify the 30-year ‘least cost’ option, assuming such an option exists.”

Energy planners should start looking at a portfolio of power plants and calculate the portfolio costs given the different levels of risk. To illustrate, we can compare 100% completely renewable energy system versus a 100% coal-based energy system. From an energy cost perspective, in general, one can say the cost for the 100% renewable energy system is fixed in the long-term. One cannot say the same thing for coal since prices fluctuate everyday.  More so, coal is finite, at least depending on the cost to mine and the resulting global price. On the other hand, higher investments may be required for the renewable energy system compared to the coal-based one.

So which one will be preferred: a fixed price system with higher initial investments, or a fluctuating price with lower CAPEX upfront?

This is hard to say as this will depend on the capacity of the consuming public to take on these risks. Or, in fact, it depends on the individual preferences of the consuming public – some may want renewable energy for a completely different reason e.g. “I love the Earth” that does not come with any mathematical equation.

In Finance, concepts like Markowitz’s Portfolio Theory have been introduced half a century ago to explain how putting individual assets in a portfolio can attain a lower risk or a higher return compared to investing in just one asset. In other words, assets should not be bought on its own merits, but rather on how that asset behaves in a portfolio. In our example, we should not be comparing the renewable energy system versus the coal-based system.  According to this theory, it will be make more sense to look at the costs and the risks of the two systems combined at different proportions.

This is how energy planning should be made: a portfolio approach, rather than a “least cost” approach.  In the view of the late Prof. Awerbuch in the same paper cited above noted that “Energy planning represents an investment- decision problem and investors commonly apply portfolio theory to manage risk and maximize portfolio performance under a variety of unpredictable economic outcomes. Energy planning techniques need to focus less on trying to identify the least-cost alternative and more on developing optimal generating portfolios that minimize cost for given levels of risk.”

In my opinion, unless we abandon this “least-cost” approach, the Philippines will continue to face huge supply and price risks.  Luzon and Visayas will soon suffer the same Mindanao power situation of continuous power interruptions, and this will continue to happen for as long as we insist on this “least-cost” approach.  I agree with the late Prof. Awerbuch since given what we are experiencing today, we really need to re-think and maybe completely abandon traditional stand-alone kWh generating costs measures and go for portfolio planning.

We need a major overhaul in our energy planning, and we need it now.

The Power Crisis in the 90s

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Last year, Energy Secretary Jericho Petilla announced the looming power shortage of roughly 800 megawatts, which would take place during the summer months. This prompted the Energy Secretary to ask the president to seek emergency powers from the Congress. Under the Energy Power Industry Reform Act or EPIRA, the president can search for additional power supply with the authority of the Congress.

The Energy Department is also beefing up on its interruptible load program, asking private entities to use generators during peak hours to free up the load on the grid.

The impending power crisis and the request for emergency powers have revived talks of repealing the EPIRA, which was enacted in 2001 by the Arroyo administration–an offshoot of the policies crafted during the term of President Fidel Ramos.

The expected power shortage is nowhere near what we experienced in the 1990s, and yet, it renews debates about the country’s power supply situation, as well as other issues concerning energy.

The same questions about the power sector are being asked once more such as is it time to scrap EPIRA law? Has EPIRA achieved its objective of de-regulating the industry to promote a more competitive market that drives energy costs down? Was the Ramos administration correct in its handling of the power crisis in the 1990s or his policies resulted in higher electricity rates and lack of supply? These are some of the topics that are once again under discussion.

As such, I wish to share some of my thoughts by providing background and information about the energy sector– insights on the power sector. The articles are not meant to join the mounting criticisms on the government’s failure to provide a stable energy supply. Rather, the articles in this blog will provide insights on the complicated sector that is energy.

What went on before – Mindanao Against Darkness (MAD)

It is best to start the discussions by looking back at what happened in the 1990s when rotating black outs was a staple.

At the height of the power crisis in 1990s, Filipinos –especially those who live in Luzon– experienced around eight to ten hours of rotating brown outs daily. Even before the Luzon crisis, however, what got me into the power sector was the Mindanao power crisis of 1990-1991. At that time, El Niño brought in a long drought that effectively brought down the Agus Complex’s normal capacity from slightly over 700 MW to as low as 300 MW. With a peak capacity at that time of around 800 MW, this resulted to a debilitating 10-12 hour power outages in Mindanao.

NPC at that time had no immediate solution to the problem in Mindanao. So we organized various groups first in Cagayan de Oro and eventually throughout Mindanao to help address the power crisis. We launched a movement called “Mindanao Against Darkness” or

MAD, a play on the popular late evening show of Martin Nievera called “Martin After Dark”.

Our two major programs then were: a) Voluntary Load Shedding Program; and b) Trading of electricity using self-generation. The load shedding program was launched to encourage businesses to voluntarily run their generators during the day so that NPC can conserve the water in Lake Lanao during the evening. This way, residences could have power thus giving young families a chance to have their children prepare and study for school.

The first electricity “trade” in the country was probably between Philippine Sinter Corporation located in the PHIVIDEC Industrial Estate in Misamis Oriental, the city of General Santos, through their electric cooperative, SOCOTECO II. At that time, we asked companies with excess generation to share the energy with utilities that were willing to pay the marginal cost of generating that power. We then asked NPC to allow the “transmission” of that power for free (the concept of “wheeling rates” were foreign then.)

The Cory administration recognized these MAD initiatives and eventually expanded the programs to other cities in Mindanao. The idea and concept of a Mindanao Power Corporation were already brought up and presented to the NPC Board then, as well as to the Cabinet. This proposal was seen as the long-term solution for Mindanao – to finally get away from the clutches of “Imperial Manila.

Little did we know then, that the looming power crisis in Luzon beginning 1991 was going to be as bad and probably even worse than the Mindanao power crisis.

Photo from Philstar.com

Photo from Philstar.com

The Luzon Power Crisis

The Bataan Nuclear Power plant with a generating capacity of 620 megawatts (MW), which was about to start operations was mothballed by President Corazon Aquino due to allegations of corruption in the construction of the said plant. The safety issue – which NPC denied existed at that time – became an issue because the Chernobyl accident of April 1986 happened at that time when the new Cory administration had just taken over. With the leadership of the energy sector decapitated (the department of Energy had been abolished), there was no senior government decision-maker who could stand up to support the opening of the BNPP.

Likewise, the Calaca Coal fire plants were not allowed to be built because the new-found democracy under the Cory administration had to listen to the complaints of various interest groups especially environmental NGOs. The ensuing delay in the construction of the new coal-fired power plants forced the NPC to run its aging power plants. These two major decisions of President Cory Aquino’s cabinet subsequently gave NPC no choice but to postpone the needed maintenance of other existing power plants.

And the inevitable happened—the plants broke down and could not continue their operations. Unfortunately, the Aquino administration failed to provide alternative sources of power. The result was a big power supply deficit resulting in a full blown power crisis

Ironically, the only reason the outages in Metro Manila were not longer than 12 hours was the fact that the economy had stalled as a result of the coup de e’tats that marked the last years of Cory’s term. From a GNP growth of around 6.7% in 1988, this dropped to around 5.7% in 1989 and plummeted to a mere 3% in 1990.

How bad was the power shortage? The Luzon grid, for example, only had an available capacity of 2,300 to 3,100 MW, far less than the installed capacity of 4,321 megawatts. Likewise in Mindanao, the installed capacity was 1053 megawatts, but the available capacity was 600 less than the installed capacity of 1053.

The debt of NPC was growing, too. Between 1987 and 1990 the organization’s revenue losses totaled to P418.63 million. It has accumulated losses of 2.4 billion pesos in 1990 to 1991, which meant that it cannot self-finance and generate enough profits—to cover the demand for investment.

There was a reason for these accumulated losses of NPC. Prior to Cory’s administration, NPC’s tariff was linked to the dollar, as well as other foreign currencies based on its borrowings. Since NPC did not have any regulator, it could, in theory, borrow all the fund funds it needed for as long as the tariff currency mix reflected that of its debt mix.

For some reason (most likely political), NPC delinked its tariff to the dollar and other foreign currencies. Almost immediately after, the peso devalued against the dollar. From 1988 to 1990, the peso devalued something like 25%. The cost of fuel went up from US$18/barrel in 1989 to almost US$32/barrel by 1990 (before falling again) causing a double whammy – it increased costs and devalued the peso. And for the first time in its history, the NPC lost money in 1990 and1991.

The Ramos Administration then was faced with two major challenges. First, there was not enough power; and second, NPC finances were shattered. These twin problems limited severely the options that the Ramos Administration could explore.

Of course, the power shortages had its effect in the country’s economy. According to estimates of the Asian Development Bank, the power crisis from 1989 to 1990 led to a decrease of 6% in the country’s gross domestic product. After all, the unstable power supply caused havoc among industrial centers with some cutting down their days of operations or worse temporarily closing down.

It was then incumbent upon President Ramos to introduce reforms and provide immediate relief to the Filipinos by finding a solution to the power crisis and address the financial woes of the NPC.

Ramos, in his first state of the nation address asked the Congress to grant him emergency powers to address the power crisis. This was highly contested by some members of the congress who claimed that emergency powers are mere tools for more corruption. But due to the political will of President Ramos, the Congress passed the Republic Act No. 7468, or the Electric Power Crisis

Act of 1993 (also known as the Power Crisis Act) by April of the same year. This allowed the executive branch to enter negotiated contracts to fast track the construction, repair, rehabilitation, improvement or maintenance of power plants, projects and facilities.

The Power Crisis Act also mandated the Philippine Amusement and Gaming Corporation or PAGCOR to provide 10 percent of its annual gross earnings to NPC for five years as a form of subsidy.

Aside from this piece of legislation, there was another factor that helped solve the power crisis quickly–the personal attention provided by President Ramos. He intervened when needed particularly in cases where politics were getting into the way of solving the energy problem. President Ramos’ attentiveness helped in speeding up the power projects, which was crucial in lessening the rotating brown outs within six months time.

The Ramos administration also expanded the Build Operate Transfer law, which shortened the procurement process to entice private sector participation (which we will discuss in a later article.)This gave birth to a considerable number of Independent Power Producers (IPP).

Around $6 billion in investments were generated from the IPPs, thus producing a total of 4,800 megawatts. By 1998, there was already a total of 11,988 MW available for the country broken down as follows:

  • 8,619 megawatts in Luzon;
  • 1,554 megawatts in the Visayas and
  • 1,552 megawatts in Mindanao

54 percent of the total generating capacity came from NPC and the rest from the IPPs.

Likewise, the amendments to the BOT law resulted in seven power projects, providing a total of 900 megawatts of power.

Under the amended BOT law, private entities can enter into several types of contract namely:

  • Build-operate- transfer, Build-operate-own (BOO)
  • Build-transfer-operate (BTO)
  • Build-rehabilitate- operate-transfer (BROT)
  • Rehabilitate- operate-maintain (ROM)
  • Rehabilitate- operate-lease (ROL)

Under all these schemes, the private sector takes care of the planning, design, construction and maintenance of the power facilities. On the other hand, the government through the National Power Corporation pays the private proponents for a guaranteed off-take of electricity for the specified cooperation period. There were also other programs implemented to address the power shortage.

The Ramos administration created the Voluntary Load Programs where around 1600 business entities arranged their production shift to adjust with the available times with power.

Additionally, the NPC worked on attaining self-sufficiency in power by diversifying the fuel mix of the NPC-owned generation plants, resulting in the exploration and development of the Camago-Malampaya field off northwest of Palawan and promotion of renewable energy – solar, biogas and geothermal.

The Ramos administration also crafted a 30- year energy plan the ELECTRIC POWER INDUSTRY CODE, which, unfortunately, was not passed by the Congress due to lack of time.

References:

Cayabyab, M. http://newsinfo.inquirer.net/639878/luzon-visayas-may-face-800mw-power-shortage-in-2015
Aldaba, R. , Regulatory Policies and Reforms in the Power and Downstream Oil Industries 2004
FVR column in Manila Bulletin
Energy Guidebook by Myrna Velasco
The Energy Report by KPMG 2013-2014. http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/energy-report-philippines.pdf