Energy Security Series, Part 4: Supply Issues

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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.