energy sector in the philippines

Understanding External Risks to PH Energy Sector 

/ gaadsblog / 3 Comments

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.  

Philippine Peso has fallen significantly against the US dollar. Photo c/o www. fortune.com

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. 

Apathy Towards the Inevitable

/ gaadsblog / Leave a comment

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.

PH Peso reached a 17-year low in July. Photo c/o http://www.pna.gov.ph

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.

Double Threat: The Ukraine-Russia Crisis

/ gaadsblog / Leave a comment
Aside from inflation, the main impact of the conflict between Russia and Ukraine is energy supply destabilisation. Photo c/o http://www.eenews.net

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.

We Need More Funding and Competition

/ gaadsblog / 1 Comment


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. 

Energy Security Series Part 3: Infrastructure Issue

/ gaadsblog / 1 Comment

Recently, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) released a grim global report on climate change. The report, dubbed by the United Nations as “code red for humanity” revealed that the extreme weather is now being felt around the world and average global temperature increases that could have devastating effects will likely come sooner than expected.

The report said that human-caused climate change is already affecting every region across the world. Extreme weather has become more intense and frequent. And climate change’s effects will get worse over time. The report found that humans have increased the chances of extreme compound weather events like frequency of concurrent fire weather, droughts, and flooding.

Climate change has also brought big changes in the Philippines’ climate patterns. We are seeing massive flooding in recent years.

This December, we experienced the wrath of Typhoon Odette, which left hundreds dead and billions of iin damaged infrastructure. Some three million families are affected by power outages as the typhoon toppled electrical poles, and damaged transmission lines. Of course, it would take a while before power is fully restored in affected areas as the transmission company and electric cooperatives need to wait for floods to subside and to ensure that local conditions are safe enough for linemen and engineers.

Typhoon Odette toppled power lines and damaged transmission facilities. Photo c/o Rappler

The Philippines also experienced deadly and destructive weather disturbances last 2020.

In May of last year, the country had to deal with Typhoon Ambo. It was the first typhoon to hit the Philippines in 2020 and caused Php 2 billion damage to agriculture and infrastructure. It also left around 92,000 families homeless. Power restoration in the affected areas took weeks, months even. Sadly, some electric cooperatives lost their men to power restoration efforts.

There was also Typhoon Ulysses that unleashed torrential rain and powerful winds. This typhoon destroyed thousands of homes, killed dozens of people, and left swathes of Luzon heavily flooded. It was the deadliest tropical cyclone to hit the country in 2020.

Aside from Ulysses, the Philippines was also hit by Typhoons Quinta and Rolly in the last quarter of 2020. The National Electrification Administration (NEA) said that these three typhoons caused some Php500 million worth of damage to the utility system.

Plus, of course, there’s the COVID-19 pandemic that has restricted the movements of everyone. In the early months of the pandemic, there was a big issue about electric bills people received as many consumers received bills that were significantly higher than what they had consumed. Distribution utilities, after all, could not send their employees to read meters during the hard lockdown.

All these point to the fact that the Philippines needs to make its power infrastructure more resilient against natural disasters. We thus need to revisit our energy systems and start investing heavily in smart grids and distributed energy systems.

The global trend is to move away from the traditional central power production model and replace them with distributed energy production. As a country that is more prone to natural disasters, we should join the fray and move to decentralized power systems.

Decentralized power systems will make our infrastructure more resilient to disasters. Centralised power systems, after all, are characterized by power lines spanning long distances and are highly vulnerable to natural disasters. Damage to a single line due to natural disasters will leave thousands of homes without electricity. We only need to remember that it takes power distribution utility companies weeks even months to restore full power in areas affected by storms.

Electric cooperatives, power distributors, and the transmission company have to thoroughly assess the damage to the power line before the linemen can restore power physically. Power restoration after a calamity is a high-risk undertaking. Sadly, many have lost their lives in the physical restoration of electricity.

Centralized power systems, given their massive size, multiply the risk of disruption. A single felled tree can deprive plenty of homes of electricity. In contrast, decentralized systems create redundancies in the power system. Microgrids can easily disconnect from the main grid experiencing outages so they can run without any disruptions until the main grid is up and running again.

Centralized grid systems are also unable to differentiate end users. This means residential users are getting the same quality and amount of power as other establishments like hospitals and government centers. This means that during disasters, the system makes it challenging to provide electricity to the most crucial users or infrastructure.

Centralized grids typically can only be turned on or off, or simply put, either on one or everyone gets power. This inability to differentiate and direct power to the most crucial areas or infrastructure makes emergency and recovery efforts more difficult during calamities. Decentralizing electricity allows for the prioritization of essential infrastructure, cutting down hindrances to quick disaster recovery.

Now more than ever, we should be seeing the role of decentralized energy resources. Cities or towns that have been struck with a natural disaster can function better if essential infrastructure has continuous electricity. Hospitals that are now in full capacity, for example, have one less thing to worry about as they can continue their operations normally despite a disaster.

Aside from disaster resilience, distributed energy systems also offer more cost savings. It is also easily scalable. One study by Vibrant Clean Energy in the United States showed that investing in renewable energy, storage, and distributed energy technologies can save the US around $473 billion in electricity bills from now to 2050.

Plus, distributed energy and other related technologies offer massive employment opportunities. The study of Vibrant Clean Energy showed that distributed energy resources can provide two million jobs if 25 percent of US homes invest in DERs and related technologies.

Consumers also enjoy plenty of benefits in distributed energy systems as they can either receive compensation for allowing the use of their storage systems in stabilizing the grid or by selling back electricity to the main grid.

Distributed energy systems also help in breaking down monopolies in power distribution. As I have discussed in a separate post, power distribution is not monopolistic by nature as monopolies only become a monopoly due to regulation. Distribution energy systems offer better transparency on pricing like energy management systems, advanced metering, dynamic-based pricing, and more options for power consumers.

There are also other tools relying on renewable energy that can be used during disasters. For example, we currently have a technology that can convert any river, lake, contaminated borehole or even flood water into clean drinking water by state-of-the art desalination units running purely on solar power. The desalination units that can be connected to the grid or a combination of solar and grid generator so the units can run 24/7. At a minimum these desalination units can provide potable drinking water for 500 to 700 individuals. The units can be fitted with a 5-kilowatt hour (kWh) Solar Panel system so it can operate round the clock.

The Philippines is always dealing with natural disasters. Year after year we will be facing the same threats, which according to the United Nations are about to get worse over time. The technology we need to make our power infrastructure more resilient is now available. The Philippines only need to realize their value and make the most of what they have to offer.

Leadership is What We Need: UPVI’s webinar on National Energy Security

/ gaadsblog / Leave a comment

Last October 19, UP Vanguard Incorporated (UPVI) with SMC Global Power as a major sponsor, conducted a public webinar entitled “National Energy Security: Reliability and Resiliency in the New Normal”.

We had been fortunate to have a distinguished panel consisting of two former Energy Secretaries, namely Dr. Francisco Viray and Atty. Raphael Lotilla, and outgoing Chief Executive Officer of New York Power Authority, Mr. Gil Quinoñes. The forum was moderated by Atty. Mike Toledo, Director for Government Relations and Public Affairs of Metro Pacific Investment Corporation.

One of the main discussion points in the forum was the transition to clean energy. Panelists and reactors agree that the transition to a carbon-free environment is inevitable. Under the COP 21 Paris Agreement in 2015, countries should aim to limit global warming to preferably 1.5 degrees celsius compared to the pre-industrial level. 

Dr. Viray pointed out that the International Energy Agency has recommended the complete phase-out of all unabated coal and oil power plants by 2040 to reach net-zero global energy-related carbon dioxide emissions by 2050.

He, however, sees three issues in the clean energy transition for the Philippines.

First, is that the mismatch in clean energy investments for whatever reason can impact energy security and price volatility. Second, the availability of cost of non-greenhouse gas emitting technology sharing the same characteristics of fossil fuel-fired plants and balancing the need for VRE sources may be subject to geopolitical challenges as the Philippines will just have to sit and wait on the technology made available by advanced countries. Third, he asked who bears the costs of the energy transition, especially the replacement of capacity generated by fossil fuel plants.

For his part, Atty. Raphael Lotilla said that the transition will not happen overnight and that it must be managed well. The pace of the energy transition will vary from one country to another but the end game is the same: a carbon-free environment.

He raised two points on how the Philippines can manage the clean transition properly. 

First, he noted that the upstream natural gas and petroleum industry sector has a major role to play in the Philippines’ clean energy transition and energy security. Atty. Lotilla stressed that the country needs to provide investors with clear regulatory policies.

He cited the case of the Malampaya gas field’s tax issue where the Commission on Audit’s 2011 decision reversing the rule that the government will assume corporate income tax has caused major uncertainty among investors. The potential investors, he added, need more clarity and certainty before they shell out money for exploration and development work in other service contracts.

One of the reactors, UP Vanguard, Engineer Ray Apostol who is a long-time professional in exploration work, cited alarming statistics on the present administration’s lack of exploration activities.

Mr. Apostol noted that the Philippines is at the bottom among ASEAN countries when it comes to gas exploration. He stressed that there has been no exploration well drilled in the last five and half years. Mr. Apostol recommended that the government should ramp up support for exploration activities and carefully review the bidding process and exploration contracts. Likewise, the government should opt for non-exclusive exploration activities.

There is also a consensus that renewable energy is clearly the way forward for the Philippines. According to Dr. Viray, achieving energy security requires more development of renewables but, unfortunately, our country has no full control to harness and exploit these resources.

Atty. Lotilla stressed that we must allow more foreign investors so we can develop renewable energy sources in the country. He said that the provision in the constitution referring to foreign ownership that should be limited to 40 percent should only be interpreted for finite resources. The constitution talks about “potential energy” and thus must exclude solar and wind as they can be converted immediately to electricity.

One of the reactors, former Energy Undersecretary, Atty. Jay Layug echoed Atty. Lotilla’s point of allowing more foreign investors in the renewable energy sector. 

He lamented the fact that the Philippines imported more oil and coal in the last five years as renewables only accounted for 800 megawatts (MW) out of the 4930 MW capacity added in the last five years. In contrast, from years 2010 to 2016, renewables accounted for 1,500 MW out of the 5180 MW total added capacity.

Atty. Layug stressed that the government cannot afford to adopt a technology-neutral policy. It must instead step up and be an enabler to ensure that the Philippines become more dependent on renewables instead of imported fossil fuels. He added that the country has too many laws but the problem lies with implementation, adding that the National Renewable Energy program is a “bible” that the government must follow.

For his part, Mr. Gil Quinoñes said that it may not be feasible to be 100 percent coal-free by 2050 but what is more doable is for the world to achieve 80 percent electrification from renewables.

He added that clean energy transition may be expensive but the climate crisis requires that problems be addressed as fast as possible.

Mr. Quinoñes stressed that richer countries should advance clean energy technologies that can be adopted by emerging markets like the Philippines.

Another reactor, Bill Lenihan, CEO of ZOLA Electric, a company that offers power solutions in Africa, noted that a centralized grid system won’t solve the emerging markets’ problems. He added that distributed energy and micro grid adaptation in the Philippines will differ from the ways the US and other richer countries have developed these technologies. 

For example, in the United States, micro grids are necessary backups but they can afford to have them as mere backups as they have well-developed grids. On the other hand, the Philippines will need to make distributed energy resources (DERs) and microgrids as the primary source of power in many areas of the country.

In the end, Dr. Viray summed up the Philippines energy security problem best when he said that “We are not lacking in ideas and laws. What we need is to synchronize… Leadership is what we need.”

Energy Security Series, Part 1: High Power Rates

/ gaadsblog / 1 Comment

The Internal Energy Agency (IEA) defines Energy Security as “the uninterrupted availability of energy sources at an affordable price.” Energy security, the agency says, has many aspects. There’s short-term energy security, which the agency defines as “the ability of the energy system to react promptly to sudden changes in the supply-demand balance. There’s also the long-term energy security, primarily concerned about timely investments to supply energy for both economic development and environmental needs

There’s no better time than now to talk about energy security in the Philippines, especially as we are experiencing a lack of power supply, resulting in rotating brownouts and energy price spikes. 

And energy security in the Philippines is what I would like to discuss in this post and succeeding ones.

Personally, the term “energy security” is difficult to define. “Secure” from what? Does the concept pertain to physical threats to power supply or exposure to global prices? What sector are we referring to– transport or electricity? Does energy security pertain to the ability of power utilities to weather economic uncertainties?

Long before the COVID-19 pandemic, the Philippines was already exposed to various risks.

For one, more than 80 percent of our coal is sourced from Indonesia. And at the start of the pandemic, I was worried that our supply from our neighbor could be affected by border closures and hampered supply chain and logistics.

There’s also the big percentage of tariffs on energy regardless of whether they are electricity or fuel that are affected by global supply and prices. These risks are shouldered by consumers.

Let me start tackling energy security in the Philippines by discussing high power rates.

It’s no secret that the Philippines has one of the highest power prices not only in Southeast Asia but also around the world. A report by the Institute for Energy Economics and Financial Analysis (IEEFA) noted that our power rates are higher by Php10 per kilowatt-hour (kWh) when compared to global standards.

The report entitled “Prospects Improve for Energy Transition in the Philippines” said that our reliance on imported fossil fuel, uncompetitive market structures, and high financing costs are causing the high power rates in the country. The pass-through costs have inflated power prices in the country.

Let me expound on this as I have long been saying that the high power rates in the country can be attributed to our cost recovery mechanism in our tariff setting, our dependence on imported coal, and our energy planners’ penchant for the least-cost method.

Let’s start with the least-cost approach, which has failed to live up to its name. If anything it has driven power rates up.

The least-cost approach compares various technologies and prioritizes the “cheapest” power source to produce. It only looks at the upfront and standalone costs and fails to factor in other considerations such as risks of supply shortage, global price fluctuations, and foreign exchange.

The least-cost method favors traditional power plants as the upfront costs of building them are cheaper than developing renewable sources. However, relying on traditional sources such as coal comes with big risks. For one, they are purchased in dollars, and as we all know, foreign exchange fluctuates. Plus, there’s the risk to its supply. Had Indonesia closed down its borders due to the pandemic, then where would we source coal?

The problem with the least coach approach is exacerbated by our Power Sales Agreements (PSAs), which typically last for 25 years. Our PSAs have pass-through provisions, meaning the foreign exchange and higher fuel prices are passed on to consumers to allow power producers to recover costs. This means that for the next 25 years or as long as the PSAs are valid, the consumers are exposed to volatilities of foreign exchange global price risks. It’s what I have been calling the ‘floating contract.’

I have then argued for a fixed contract, which is possible for renewable energy sources. The consumers pay the same prices for as long as the PSA is valid. It minimizes the exposure and likelihood of consumers paying when the peso is weak or when global fuel and coal prices are up.

Some generation companies have started to offer fixed-price contracts. I am not privy on how these companies hedge the coal price and forex risks, but I can imagine that these companies play on portfolio management, tenor of power sales agreements and over-the-counter hedging instruments to allow them to offer fixed price contracts albeit for a shorter period. This augurs well for consumers in the long-run as they will be paying the same rate for a fixed period rather than shoulder the costs of a weaker peso or higher global prices.

However, let us go back to our energy planners’ penchant for the least-cost method has gotten consumers into trouble. Just take this pandemic as an example.

Another study by the IEEFA entitled “Philippines Power Sector Can Reach Resilience by 2021″ revealed the weaknesses of the Philippine Energy sector. It noted that the country’s dependence on large scale fossil plants with guaranteed contracts have resulted in grid inflexibility and price instability

Coal plants are inherently inflexible. And so as the pandemic depressed the power demand, fossil fuel plants turned to their mid-merit load factors, which are more costly to run, increasing the cost per kilowatt-hour. This is allowed as the PSAs have cost recovery mechanisms of coal plants that in the words of IEEFA are “designed to ensure IPPs can recover their capital costs and repay their loans on a timely basis. This means that neither the financial sector nor the power sector is liable for the risk they take, as these are passed on to end-users who are ill-equipped to manage such risk.”

Sadly, 80 percent of our caseload coal plants are inflexible.

Again, our reliance on coal, penchant for the faulty appreciation of the least-cost method, and our pass-on provisions are causing consumers to pay more than what they should. All these have caused price instability. Our regulations allowing pass-on costs to consumers are a disservice to the Filipinos. I am happy to note, however, that there are now concrete plans to put up new gas-fired generation plants. Adding gas-fired power plants will allow the entry of more intermittent renewable energy projects. This, partly addresses some of the issues causing high power rates.

Aside from batting for more fixed-price contracts, we should also push the government to order the immediate development of indigenous sources along with making changes to procurement rules. The Energy Regulatory Commission (ERC) does not differentiate imported energy from indigenous ones. 

The commission should require distribution utilities during procurement to testify that either there are zero offers from indigenous power producers or there are no available indigenous resources in their franchise area.

When we talk about energy security, particularly energy prices then we should look at how favoring the least-cost approach has led us into more trouble. IEEFA in its report said it best “Power sector planners assumed that a large system lock-in such as coal would lead to the least-cost system. Unfortunately, this lock-in for countries that import coal has led to inflexibility, price instability, and high prices.”

What 2020 Taught Us

/ gaadsblog / 1 Comment
Image c/o https://www.sdmmag.com/


To say that the year 2020 was tough is an understatement. But the COVID-19 pandemic along with natural disasters we experienced in the Philippines in the last quarter of the year, have taught as many valuable lessons.

For one, the community quarantine imposed by the government exposed the vulnerabilities of the energy sector. 

The report by the Institute For Energy Economics and Financial Analysis (IEFAA) showed the downside of our inflexible coal baseload plants and long-term guaranteed contracts. 

The study entitled “Philippines Power Sector Can Reach Resilience by 2021” noted that the depressed demand for power due to the lockdown forced coal plants to turn to mid-merit load factor. This in turn increased the power cost per kilowatt-hour. The pass-on provisions of our Power Sales Agreements (PSA) that allow cost recovery for the independent power producers ensured that the higher costs are shouldered by consumers.

Our penchant for large volumes of baseload capacity running on imported fuel did not bode well for us given that 80% of baseload coal plants are inflexible. This means that fuel and other variable expenses in running power plants remained flat regardless of power demand. We may have experienced a depressed demand during the Enhanced Community Quarantine but plants had to run at their minimum operating levels.

The study, released in June, estimated that power consumers could be paying PHP9.679 billion more in power rates if energy sales volume decline by 10% in 2020. 

These illustrate what I have been pointing out as the downside of not having fixed-price contracts and our over-reliance on coal-fired plants. This pandemic served as a wake-up call to fix the problems of the sector for the benefit of consumers

On top of the prolonged lockdown and the ensuing community quarantines, the Filipinos unfortunately also had to deal with natural disasters in the last quarter of 2020. Typhoon Goni, referred to as Super Typhoon Rolly in the Philippines, caused heavy rainfall, landslides, and flooding in Luzon. The super typhoon, considered the strongest landfalling typhoon in the world for 2020 left massive destruction in Luzon especially in Albay, Catanduanes, Camarines Sur, and Quezon. 

Estimates showed that Super typhoon Rolly’s damage to infrastructure reached Php 11.3 billion, causing massive livelihood loss as battered areas rely heavily on the agriculture sector.

As if that wasn’t enough, less than two weeks after Rolly’s devastation, the Philippines was once again battered by Typhoon Vamco. Locally known as Ulysses, this typhoon triggered extensive flooding in many areas like Metro Manila, Rizal, Cagayan Valley and Isabella. Estimates show that its damages are around Php 20 billion, surpassing the damages caused by Typhoon Rolly.

These two typhoons are not the only ones to hit the country last quarter of the year. There were five in total in October and November, costing the Philippine economy Php90 billion in lost output. Plus, there was tropical depression Krovanh, or locally known as Vicky, which claimed lives and caused floods in some parts of CARAGA region just before Christmas.

These weather disturbances are due to the undeniable climate crisis. Our country, unfortunately, is among those most affected by natural disasters exacerbated by climate change, despite our meager contribution to the world’s carbon footprint.

Thus, it is imperative for us to also move fast in implementing effective mitigation. The wide adoption of renewable energy is one of the most effective climate change mitigation actions.

In the words of Finance Secretary Sonny Dominguez, “Severe weather events inflict human, social, and economic costs on the Filipino people. We lose billions every year in damage to crops and infrastructure. These mounting losses dampen our overall economic progress. These costs will continue to accumulate unless we move fast on mitigation measures.”

The need for a swifter shift to more renewable energy use is more emphasized than ever. We may have been survivors of many weather disturbances and natural disasters but this pandemic should fuel action for faster mitigation measures. More so since experts have pointed out that climate change contributes to pandemics. 

We may have experienced some of the worst times, but there are still great lessons and developments to be thankful for.

For one, this pandemic has also accelerated the use of digital technologies locally. 

For example, more payment options now available allow customers to settle bills more conveniently, to avoid crowding in distribution utilities and coops’ offices and there will be more seamless and contactless payment options coming soon. Other technologies soon to be available are contactless meter application and remote reading, activation, and deactivation of power supply, to name a few.

There’s also the announcement of the Department of Energy of the moratorium on approval of new coal contracts. This announcement came as a surprise since the department had been insisting on its technology-neutral stand. 

For years, the Philippines has been lagging in its commitment to shift to renewable energy development. The country may have once been a leader in RE development having passed the RE law, but later failed to advance in renewable energy development.

Following DOE’s announcement is Yuchengco-led Rizal Commercial Banking Corporation (RCBC) surprising declaration that it will stop financing new coal coal-fired power projects in the Philippines. Now RCBC joins the ranks of Citigroup, Mizuho Financial Group, and Japan’s Sumitomo Banking Corporation banks that have already made the same move.

RCBC President and Chief Executive Officer (CEO), Eugene Acevedo made it clear that the bank will shift funding to renewables and gas-fired power facilities. “I’m going to say that moving forward, all our loans for energy projects will be non-coal, it will be 100 percent non-coal.”

It’s a statement that’s highly similar to the strategy of Finance Chief, Sonny Dominguez “Our rule should be simple: projects that are not green and sustainable should not see the light of day.” 

Shying away from financing coal-projects makes financial sense as renewable energy technology prices have been falling in recent years. According to Carbon Tracker, soon it will be cheaper for Southeast Asian countries to build renewable energy plants than continue using existing coal-fired plants. Coal plants run the risk of becoming stranded assets, which eventually will drain resources.

We may have limited control over the many unfortunate events that unfolded this year. But we do have the power to act by learning from them and ensuring that we do things better. Fortunately, recent developments give hope that indeed we are using crises as opportunities to make better policies and programs that are more responsive to modern times.

Wanted: Fast and Reliable Internet Connection

/ gaadsblog / Leave a comment

The Enhanced Community Quarantine or ECQ forced us all to stay indoors. As with the many Filipinos, I stayed inside and worked at home. But work from home means having a slow and unreliable internet connection.

According to Speedtest Global Index, as of February 2020, the Philippines’ mobile, download speed average is 16.66 while upload speed is 6.47 Megabits per second (Mbps). On the other hand, fixed broadband average download speed is31.48 Mbps and upload of 31.42 Mbps.

An internet speed test I did, however, show that my home internet’s download speed was at 1.59 Mbps while upload speed is 11.17 Mbps. I am subscribed and am paying for a plan that’s supposedly up to “100 Mbps”, considered my fast internet that can handle multiple activities online.

Yes, one can argue that with everyone at home there’s heavy usage of the internet. But really, my internet service provider (ISP) seems to be robbing me with my 1.59 and 11. 17 Mbps. My ISP says my subscription is up to 100 Mbps but really, my download speed is just 1.5 percent of what I’m subscribed to. The service I received is even way below than the Philippines’ average. This kind of service is just really absurd.

Clearly, and as everyone knows, we need better internet speed and reliable connection, requiring more investments in IT infrastructure. This isn’t because I simply want to stream in Ultra High Definition for my Netflix, Hulu or Apple TV. We need to invest in our IT infrastructure because our modern world depends on reliable interconnectivity.

In the Energy Sector, high speed and dependable internet is a prerequisite for modernizing the grid.

The Internet of Things or IoT is a game-changer and the internet is the backbone of IoT. Technological advancement has given birth to distributed energy systems, which foregoes the traditional distribution energy of centralized generation and transmission with really long high-powered lines delivering power. Rather, we now have a combined generator and distributor in small and even remote communities.

IoT is needed to empower consumers. There are more choices for everyone if we can leverage on what technology has to offer, allowing even a homemaker to be a generator and distributor at the same time. Imagine a homeowner with solar power or even wind turbines generating excess capacity that can be sold to neighbors.

Speaking of distributed energy, thanks to the internet, grid managers will have visibility over grid functions and performance remotely. Distributions lines and substations are equipped with sensors that can provide real-time data on power consumption helping grid managers make decisions remotely. Even when away from their substations, grid managers can decide real-time on network configuration, load switching, and voltage control, among others.

The Internet allows for virtual troubleshooting, too. We can expect fewer linemen risking their lives trying to fix broken power connections and consumers waiting for days or weeks to get their power back that after a devastating natural disaster.

As for consumers, they now have more information in their hands. With smart devices and meters, they can now know their power consumption and adjust their consumption patterns accordingly. Smart technologies allow them to choose and eventually limit the use power-hungry appliances. Likewise, they can strategize their consumption if they are likely to go over the budget with their power consumption. This is because IoT’s low-powered sensors and internet-connected devices allow for the collection and transmission of data to users quickly.

The case of Chattanooga City in Tennessee illustrates how crucial fast internet is in the modernization of grids and improvement of the community’s economy. In 2008, Chattanooga City rolled out a fiber-optic network that could provide speeds of up to 1000 Mbps. This despite the huge capital needed to install and maintain fiber networks which required new underground wiring and linking to individual homes.

Chatt gridsmart

Chattanooga City is reaping huge benefits from investments in fiber optics and smart grids. Photo c/o http://www.smartgrids.com

Chattanooga’s project was started as the small city wanted to build a “smart” power grid that’s capable of rerouting or switching electricity easily to prevent outages.

The city government opted to operate a city-owned agency, the Electric Power Board (EPB) that would run its own network offering higher-speed service than any private sector players can provide. Naturally, large businesses incapable of providing better service tried to prevent the entry of a new player that would change the competitive landscape. The city government faced lawsuits from US telecom giant, Comcast and local cable operators who tried to block the entry of EPB. But by September 2009, the internet service was already in operation.

A $111 million stimulus grant given to the city by the US Department of Energy saw the completion of the project. EPB managed to roll out its smart grid rapidly. The organization intended to complete the smart grid deployment in 10 years, but only needed three years. “Deploying a network for telecommunications is not fundamentally different from deploying a network for power,” Benoit Felten, a broadband expert with Diffraction Analysis said. “Chattanooga is the prime example of that, and it’s absolutely worked.”

These days, the EPB offers electric, cable, internet and telephone service to the majority of the Hamilton County in Tennessee and eight nearby counties in East Tennessee and Georgia. It manages 3560 miles of transmission line and serves around 178,000 residential and business customers.

Reports say that Chattanooga City is reaping huge benefits from EPB’s investments in fiber optics and smart grids. EPB is credited for being the most influential in Chattanooga’s astonishing economic transformation

The city’s smart grids have helped reduce power outages and incidents in half. This translates to 285 million customer minutes, which means EPB’ customers get to save around $50 million yearly in spoiled food, lower productivity, and other negative impacts.

Chattanooga City’s example shows that there are many benefits to be enjoyed if one invests in a smart grid. The best way to start modernizing the grid is to address the lack of high speed and reliable internet. This is why we need to have better internet services in the country. We need to invest in our internet infrastructure not because we need to stream our entertainment content in Ultra High Definition. But rather because, the Energy Sector needs reliable internet to provide more choices and better services to Filipinos.

What Lack of Competition Means

/ gaadsblog / Leave a comment

A recent World Bank report says that more competition in the power, transportation, telecommunication can boost economic growth in the Philippines.

According to the study, “Fostering Competition in the Philippines: The Challenge of Restrictive Regulation,” the above-mentioned sectors are crucial in improving job generation and services in the country. Unfortunately, there is limited competition in these sectors.  

When compared to other countries, the Philippines’ economy is more concentrated due to the higher proportion of oligopoly, duopoly, and oligopoly in the market, the report added.  The author of the report and World Bank senior economist, Graciela Miralles Murciego stressed that such market structures have hampered productivity growth in the sectors: “The entry of politically connected companies limited productivity.”

The study also emphasized that restrictive regulations and restrictions such as complex regulatory procedures and barriers to trade and investments including foreign equity investments have constrained the growth of the economy. This in turns led to the high prices of services. It also cited that the limitations on foreign direct investment have stunted the development of infrastructure in the energy sector.

The World Bank is not alone in pointing out that more competition is needed in the energy sector. For example, the Massachusetts Institute of Technology released a paper, Utility of the Future by Massachusetts Institute of Technology, which concluded that “the structure of the electricity industry should be carefully re-evaluated to minimize conflict. It is critical to establish a level playing field for the competitive provision of electricity services by traditional generators, network providers, and distributed energy resources.” The report may not be talking about the Philippines directly, but it nevertheless echoes the sentiments of the World Bank.

The MIT study added that there is a need to review electricity markets especially since new technologies can be integrated into the power system. “Wholesale market design should be improved to better integrate distributed resources, reward greater flexibility, and create a level playing field for all technologies.”

I have been vocal about the needed reforms by the power sector so Filipinos can enjoy lower electricity rates. Our rules are skewed to favor the few. 

Take for example the lack of competition in service areas. Currently, another power player is barred from offering its services in an area that is already being served by a distributor. This, in turn, creates a monopoly. And as our economic professor will tell us, monopolistic practices will always put consumers at a disadvantage.

It also does not help that we are not allowing more foreign investments in the power sector. As the World Bank Report stressed, limitations on foreign direct investments have curtailed the growth of energy infrastructure. This is especially true for renewable energy development. 

We have to remember that renewable sources need to be explored (as in the case of geothermal) and plants have to be constructed. These undertakings require new technologies and equipment. Foreign investors can provide these two while we limit the foreign investors’ ownership on the natural resources if they are allowed to do so. This is the best way forward if we are serious in shifting to greater use of cleaner and sustainable energy sources.

Unfortunately, our 1987 constitution limits foreign participation in many industries including power. These provisions, however, are already outdated and needs to be revised. Former National Economic Development Authority chief, Cielito Habito emphasized this need aptly when he said, “The hope is we will be willing to amend economic provisions of the constitution because that is what really is holding us back. It is outdated. Many of the restrictions in foreign advertising, mass media, education, are really out of date. Given the technology in recent years, those rationales don’t apply anymore to the information age.”

Time and time again we are reminded by various experts on the many virtues of competition in various areas including the power sector. But these reminders seem to fall on deaf ears. The Philippines still has one of the highest power rates in Asia, and we all have to thank our regulators and policymakers for that.

References:

https://www.philstar.com/business/2019/03/05/1898614/greater-competition-power-telco-transport-boosts-growth-world-bank#UcJx07M8WylEry0k.99

http://www.bworldonline.com/constitutional-amendments-needed-boost-fdi/