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

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

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.”