Taking Action

All over the world, calls are being made to shift from traditional forms of energy to more sustainable ones in the hope of saving our environment and making energy available for all. In response, various sectors have taken drastic actions and are making great progress in their shift to renewable energy.

The achievements of the private and public sector in transitioning to greener forms of power in recent years are significant. The numbers for 2017 alone are a testament to both sectors commitment to add and use more renewable energy.

Last year was a record-breaking year as renewable power generation capacity had its biggest annual increase of nine percent with an estimated 178 GW added capacity, according to REN21’s study, Renewables 2018 Global Status Report.

More renewable power was added than fossil fuels as renewables accounted for 70 percent of the overall combined global generating capacity. Investments in RE for 2017 reached $279 billion, up from the recorded $274 billion in 2016 as well.

The figures from corporate buying of renewable energy are admirable, too.

For one, the International Renewable Energy Agency report, Corporate Sourcing of Renewable Energy: Market and Industry Trends showed that firms across 75 countries sourced a total of 463 terawatt-hours from renewables in 2017. This volume is enough to power up a country equivalent to the total demand of France.

The report found out that half of the 2,400 large companies analyzed for the study are voluntarily and actively buying or investing in self-generation of renewable energy for their operations. Plus, 200 of these firms source at least 50 percent of their power needs from renewables. “Renewable energy sourcing has become a mainstream pillar of business strategy in recent years,” IRENA Director-General Adnan Z. Amin stressed.

Environmental and sustainability concerns, social responsibility, reputation management, and economic and financial objectives are the top reasons cited by corporations on why they are making the shift to renewable power. “While environmental concerns initiated this growing trend, the strengthening business case and price stability offered by renewables can deliver a competitive advantage to corporations, and support sustainable growth,” Amin added.

There’s definitely an increased appetite for renewable energy as other countries are also gearing up to accommodate more renewables such as in the case of Vietnam.

Recently, Vietnam Prime Minister Nguyen Xuan Phuc reiterated his country ’s commitment to shift to renewable power in an interview with Reuters.

He announced that Vietnam is set to increase electricity generated from renewable sources to 101 kWh billion by 2020 and to 186 kWh billion by 2030 from 58 billion kWh recorded in 2015. The country also aims to reduce the use of coal and petroleum products by 40 million tons by 2030.

Phuc said that the government has already prepared incentive mechanisms as well as policies to promote local and foreign investments into renewable energy development.

The chief executive stressed that this shift is needed despite the country’s push for more economic growth,“It is important that we will not pursue economic growth at the expense of the environment,” Phuc noted.

turkey

Soma Kolin power plant in Turkey’s western province of Manisa. Survey says more Turkish favor greener forms of energy despite the country’s dependence on coal
Photo c/o: http://www.aa.com.tr

There also seems to be greater awareness and appreciation for renewables among citizens in other countries. Turkish, for example, favor greener forms of energy than coal despite Turkey’s dependence on this form of power. The country sources more than 70 percent of power need from fossil fuels since the government named coal as its preferred fuel for the growing energy demand.

A survey conducted by climate information hub İklim Haber and research company Konda revealed that more than half of its citizen oppose the building of additional coal-fired plants as 75 percent of the participants are worried about climate change.

In the Philippines, our government claims to have the appetite for more renewables in our power mix. But that hunger is not correctly matched by government’s actions. It is highly likely that we will remain starved for cleaner forms of energy for now as we have moved down our renewable energy targets.

The Energy Department had announced the target of sourcing 35 percent of our overall power needs from RE by 2030. This goal, however, has been recently pushed back to 2040. This is not surprising as data from BMI report showed that there would be a 10 percent increase of coal in our energy mix in the next decade from below 50 percent in 2017 to more than 55 percent by 2027.

That is unfortunate since now is an excellent time for the Philippines to add more renewables and to take advantage of the falling costs of renewable power prices. Plus, of course, we need stable energy at reasonable prices as we try to industrialize. But then, again, we will remain hungry for cheaper and sustainable forms of power for now.

References:

Renewables 2018, Global Status Report, http://www.ren21.net/gsr-2018/
http://www.vir.com.vn/vietnam-well-positioned-to-develop-renewable-energy-says-pm-59892.html

http://www.climatechangenews.com/2018/06/05/83-turks-favour-renewable-energy-coal-survey-finds/

http://www.irena.org/newsroom/pressreleases/2018/May/Corporate-Sourcing-of-Renewables-Growing-Taking-Place-in-75-Countries

A Timely Reminder

Three years ago, Pope Francis made a strong appeal to the world to address the growing problem of climate change. In his 180-page encyclical, the pope stressed that “Climate change is a global problem with grave implications: environmental, social, economic, political and for the distribution of goods. It represents one of the principal challenges facing humanity in our day.”

Pope Francis recently made the same appeal with investors, oil executives and Vatican experts during an unprecedented conference at the Pontifical Academy of Sciences.

The pontiff had stressed that climate change must be addressed soon and the world has to use a power mix that will combat pollution, promote social justice, and combat pollution. “But that energy should also be clean, by a reduction in the systematic use of fossil fuels. Our desire to ensure energy for all must not lead to the undesired effect of a spiral of extreme climate changes due to a catastrophic rise in global temperatures, harsher environments and increased levels of poverty,” the pope said.

He reminded his audience that development must not come at the expense of the environment “Civilisation requires energy, but energy use must not destroy civilisation.”

The head of the Catholic Church has never wavered in his appeal to the world to make the planet a better place by saving the environment. His recent plea is also timely as studies and reports show that the world has to do more in fighting the effects of climate change.

The recent United Nation (UN), a yearly report entitled ‘The Sustainable Development Goals Report 2018” concluded that climate change along with inequality and conflict are the primary factors in growing hunger and displacement around the world.

The figures in the report showed that the world has a long way to go in combating the effects of climate change including the health hazards. After all, the World Health Organization once tagged climate change as “the defining issue for the 21st century.”

The UN study revealed that in 2016, around the world, 91 percent of the urban population were breathing dirty air or air that failed to meet the WHO Air Quality Guidelines. What’s worse is that more than half of the said population were exposed to air pollution levels that are at least 2.5 times higher than the safety standard. It is not surprising then that around 4.2 million people died due to high levels of ambient air pollution.

The same report showed that renewable power’s share in the final energy consumption had a moderate increase from 17.3 percent in 2014 to only 17.5 percent in 2015.

That’s a sad figure, especially when the more significant use of renewable energy can save lives. Let us remember that both coal and oil power have greater death prints, or what energy expert James Conca defines as the “number of people killed by one kind of energy or another per kilowatt hour (kWh) produced.”

In fact, the mortality rate of coal, which is derived by dividing the trillion kilowatt hour of use, is 100,000 when we get 50 percent or our energy needs from this source. Likewise, oil has a mortality rate of 36,000 for every eight percent of the energy it supplies.

Apparently, the growth of renewables in the world’s energy mix had been slow and more people are literally dying because of it. Clearly, more must be done to combat climate change, which includes developing and using more cleaner forms of energy.

Let us heed the Pope’s call, shall we?

References:

https://www.theguardian.com/world/2018/jun/09/pope-francis-tells-oil-bosses-world-must-wean-itself-off-fossil-fuels

http://sdg.iisd.org/news/sdg-report-2018-finds-conflict-climate-change-inequality-hindering-progress/

https://www.forbes.com/sites/jamesconca/2012/06/10/energys-deathprint-a-price-always-paid/#16e2ea1b709b

 

 

 

 

Missing Out on Benefits

 

renewable-energy-jobs-in-world

10.3 million people were employed in renewable sector says IRENA. Photo c/o https://constructionplacements.com

Renewable energy as experts has been saying bring many benefits. All over the world, big global brands and governments are making the shift to sustainable sources of power because they to help the environment as well as save on power costs.

 

However, more affordable energy prices and a cleaner environment are not the only benefits of choosing renewable energy. Fortunately, opting to build RE plants has a direct on the economy through job generation.

The International Renewable Energy Agency or IRENA report, Renewable Energy and Jobs Annual Review 2018 showed that in 2017 alone, the renewable energy industry generated more than half a million jobs around the world. This number brings the total number of people employed by the sector to 10.3 million as some 500,000 more jobs were created last year by the industry.

The same report noted that United States, China, Brazil, Germany, Japan and India combined accounted for the 70 percent of the jobs. Asia on the other hand accounted for 60 percent of all the renewable jobs having employed three million workers for solar PV energy alone.

These numbers can silence many naysayers who claim that a shift to greener forms of energy could cost many workers their jobs. In fact, the change to cleaner forms of energy is set to create more employment in the next coming decades as noted by Adnan Z. Amin, Director-General of IRENA. “Fundamentally, this data supports our analysis that decarbonisation of the global energy system can grow the global economy and create up to 28 million jobs in the sector by 2050,” Amin stressed.

Locally, the RE sector can create plenty of jobs for the Filipinos, too.

The  Greenpeace report “Green is Gold: How renewable energy can save us money and generate jobs, in 2013, noted that the Philippines, being a tropical country can generate as much as   4.5 to 5.5 kWh/m2/day. Data collected by the research showed that a 10 MW solar power plant usually employs 1000 people during the construction phase that lasts for six months and additional 100 full-time employees.
And this is just for solar power.

Overall, Greenpeace’s report found that the RE sector in the country can provide as much as 6.3 million jobs by 2030. Plus, renewable power in the Philippines can create some 62,625 jobs for every 7.828 RE projects for development

Unfortunately, unless we can fix the problems in the sector, then we cannot expect to reap the full benefits of RE including providing more employment for the Filipino workers.

Inconsistent and unfavorable policies to developers hinder the sector from reaping the economic benefits of harnessing more power from natural sources. The IRENA report stressed this point when it noted: “Employment trends and patterns are shaped by a wide range of technical, economic and policy-driven factors. Where policies become less favorable to renewable energy, change abruptly or invite uncertainty, the result can be job losses or lack of new job creation.”

The developments in the last few months have been a testament to the uncertainty in the energy sector. Just last December, the Commission on Audit suspended the four commissioners of the Energy Regulatory Commission or ERC.  A bill in Congress is seeking to abolish the commission was filed in the lower house after. By February, the Court of Appeals’ granted a temporary restraining order stopping the suspension. The conclusion of this saga remains to be seen.

Plus, we are also dealing with the cha-cha of our government or back and forth of our government in increasing the shares of renewables in our power mix. The Energy Department had a goal of sourcing 35 percent of our overall power needs from RE by 2030 and later pushed the deadline further to 2040.

In fact, in the next decade, the share of coal is set to increase by 10 percent as noted by Fitch-owned, BMI “The share of coal [is]actually increasing over our 10-year forecast period—from just under 50 percent in 2017 to over 55 percent by 2027,” BMI noted. What’s worse is that the contribution of renewables in our energy mix will likely decrease to 16 percent in 2027 from 20 percent in 2020 according to the study.

These numbers do not reflect our goal to source more power from renewable energy. So, we are unlikely to generate more jobs from the RE sector if this projection materializes.

Aside from missing out on having lower energy costs and helping our environment, the Philippines is likely to miss out on the opportunity of providing additional jobs from the development of more renewable energy plants.

If we can only get our act together, then we can surely reap the benefit of having more jobs from harnessing more power from renewables especially since the Philippines is blessed with overflowing natural resources. Doing so will reduce the burden on Filipino households and provide individuals with more jobs and higher disposable income which Filipinos need and deserve.

References:

Greenpeace report “Green is Gold: How renewable energy can save us money and generate jobs

IRENA report, Renewable Energy and Jobs Annual Review 2018

http://www.manilatimes.net/coal-top-55-ph-power-mix-2027/377594/

CAREER EXPO 2018

College of Economics and Management Career Expo Fair 2018
University of the Philippines Los Baños (UPLB)
June 1, 2018

This morning I woke up to the realization that 2 months ago I turned a new leaf in my life: I became a senior citizen. And nothing would have been more profound as a reminder than the fact that you see me in a T Shirt and jeans instead of the suit I was planning to wear to this morning’s affair.

You see, as I was dressing up to come here, I absentmindedly locked the dressing room of my bedroom. At that very moment my wife, who keeps the key, was 30,000 feet in the air on her way to Davao. So rather than come here naked, I decided to wear what was available outside the dressing room.

This is what I wear everyday: T-shirt with jeans, loafers, and no socks. Throughout most of my professional life I wore nothing but suits and barongs. So when I retired in 1998 from being a professional employee to become an entrepreneur, I decide to just live a simple life with simple clothes.

However, I advise you not to follow my example in your first job interview.

My advise: wear comfortable, inexpensive but decent clothes, and most importantly, wear your passion in your face and in your voice.

Passion? Yes, passion.

Passion is what drives you everyday. Passion is why you do what you do everyday.

Maybe it is serendipity that I locked myself out this morning and I was forced to wear this shirt: the UP Vanguard shirt. When I was a student here in UPLB, I pursued advanced ROTC. So for four years while I was pursuing my Agribusiness degree I was also undergoing military training. This training built me into what I am today and I have since embraced the shibboleth of the UP Vanguard: Duty well performed, Honor untarnished and Country above self.

Country above self: this has been my passion, this has been why I go to work everyday.

Before you embark a career whether it is finance, marketing, or whatever, you should know your “why” – what makes you want to wake up every morning and do something useful with your life. Professionally, this is the only way to become happy with your career, with your professional life.

I started as an financial analyst in Davao City for a financing company. Davao at that time was a war zone but that was probably the reason why I was attracted to that city. As a financial analyst I had to do financial projections on yellow columnar sheets using pencils and calculators. No excel spreadsheets – if after working for 5 hours you find that your balance sheet is not balanced, you would have to redo your entire worksheet, by hand. Today you have Excel spreadsheets with all sorts of sophisticated formula in cells; I am sure you find the “Goal seek” function very useful.

My advise: do not jump into your spreadsheets blindly. Learn first the fundamentals – the link between the P&L, the cash flow, and balance sheet. Learn to differentiate between accounting and finance issues.

As I told you, Davao was then a war zone. And all managers from Manila assigned to Davao inevitably resigned because of the peace and order problem. A grenade exploded right in front of our office that blasted the glass walls of our office. We saw people shot in front of us and in many occasions we were pursued by armed men in the countryside.

So there came a time when our Head Office asked me to be the ACTING TEMPORARY OIC. At 21, when my colleagues were struggling as clerks, I accepted the challenge. I became the head of the branch of one of the biggest financing company in the country. Eventually I ran the Mindanao operations, supporting small and medium enterprises, helping them with credit so that they too can help bring goods and service to the people of Mindanao.

I must have done well because when came back after pursuing my masteral degree abroad, the company made me the head of a development bank in Mindanao. I was 26 then. It is one thing to do credit analysis and then market your loans. What is more challenging is to market for deposits and then matching these with loans that you give out. You need to match the risk profile and cost of your deposits with the risk profile and .revenue from your loans.

Many of you will not have the privilege with being given this challenge. Many of you will work for a bank and will be in one of the departments of that bank. While I urge you to work your way all the way to the top, learn the fundamentals of finance: cost and risks.

My deep understanding of this fundamental relationship between cost and risk helped me immensely when at 36, I was asked by President Ramos to run the largest power company of the country: the National Power Corporation that had the biggest problem of the country as well. The country was experiencing 12 hour brownouts, we were short by roughly 4,000 MW that required over US$5B, the company had no cash and in fact was losing money, the government had no money having just come from a series of coup de etats, and protests were in the streets.

Question: how does an Agribusiness graduate of UPLB become part of the solution to an enormous power engineering problem?

Answer: know your calculus, finance, and accounting well enough to know how to understand the relationship between costs and risks. And be a true iskolar ng bayan by being honest in your work. Your honor untarnished.

Let me ask you: what is more expensive: a power source that costs P5.00/kwh and stays at that level in nominal terms for 25 years, or one that costs P4.50/kwh but is indexed to the price of coal and the forex for the next 25 years. How would you evaluate that?

The answer lies in what you have learned in the four years that you have been here. If you cannot figure that now, either you were absent when that subject was being taught or, you are just a late bloomer.

At this point, I want you to stand up. Look at the people to your right, left, and behind or in front of you. Shake their hands, embrace them, but no kissing. Take your seats.

Remember the names of your friends and classmates, and remember them well. Keep in touch. Be active in the alumni. As you go up through your career you will learn that it is not what you know but who you know that eventually will matter. Some people will tell you that this is a harsh reality: “hindi ako na promote kasi hindi ako sipsip.”

But that is reality.

That is marketing: dapat sumpsip ka sa customers mo.

However there is a caveat: a sincere sipsip cannot be shown unless you have the passion to serve your customers, your market. You cannot serve your market and you cannot be good in marketing unless you know why you are doing what you are doing. And only then can you be good in selling whatever it is you are selling as a person or as a company.

This is my take away: if you want to pursue a career in finance make sure you understand the fundaments of risk and cost. A career in marketing will require you to be passionate about what it is you you so that you can relay that passion to your market in whatever form it may be.

The main message is this: be passionate about what you believe in and let that passion drive you. That way you get to meet people and influence their lives positively with whatever it is that you are passionate about. Conquer the world with you passion!

DUTY HONOR COUNTRY: this is my passion

What is yours?

Good morning and good luck to you all.

 

 

 

 

 

Privatizing the Agus and Pulangi Hydropower Plants: An Alternative

Published in Mindanews.com March 7,2015

http://www.mindanews.com/mindaviews/2015/03/07/commentary-privatizing-the-agus-and-pulangi-hydropower-plants-an-alternative/

For those of you old enough to remember, I was appointed to the National Power Corporation (NPC) Board in 1992 by then President Fidel V. Ramos (PFVR) with an unwritten mandate of finding a permanent solution to Mindanao’s power woes. I ended up running the entire company, mandated to solve the power crisis then and find a long-lasting solution to the power crisis not only for Mindanao, but for the entire country.

For the record, I did try to find a long-term solution to Mindanao’s power woes. The current STEAG Coal-fired power plant (in Misamis Oriental) was the last contract I signed a few days before I retired in June 1998. I fought hard for that plant to the point that many politicians, including our very own who are enjoying the benefits of that plant, said it was a “midnight” deal. Of course, hindsight has a 20/20 vision; Mindanao enjoyed a far more stable power supply with the STEAG plant in spite of the crisis that crops up every now and then.

Discussions back then hovered around the creation of Mindanao Power Corporation, a discussion still very much alive today. Of course, privatization and liberalization issues for the Mindanao grid were hot topics in the past, as it is today. That is a topic I may write about another time. Today, in the solitude of my present life as a private citizen, I cannot help, but with a wry smile, think about the complexities of making certain decisions today like the privatization of the Agus and Pulangi complexes.

The Power Sector Assets and Liabilities Management (PSALM) Corp. said it will proceed with the sale of the Agus and Pulangi plants after the approval of its board last year. In previous interviews, PSALM President Emmanuel Ledesma Jr. said that the sale is due in 2017 — the earliest sale date. He also added that an amendment to the EPIRA is the only way to prevent the sale of the hydro power plants.

Can PSALM privatize Agus and Pulangi plants according to its timeline? In fact, should PSALM privatize the plants according to the government’s current plan?

Probably not. For one, those who oppose the privatization of the power plants of Mindanao are many and they raise valid points. There are many who will push for the private sector’s participation in the sector and I would be one of them. If I have hesitations about this current plan, it is because I know there is a better way of privatizing the plants. Hence, much more thought must be put into the plan.

It is a very big challenge privatizing the Mindanao hydropower complexes.

The hydro plants with a combined capacity of 982 megawatts installed capacity is too large to sell to a lone owner. Having the plant owned by a single entity will result in a near monopoly market structure —a situation that the government must avoid since the essence of EPIRA is to promote fair competition among players.

If PSALM does not sell the entire power plant to a single entity or owner, and then it would be forced to sell the plant in parts or in blocs. This too, seems problematic since breaking up the complex will complicate the water management of the entire complex. The Agus complex is essentially a single complex with cascading power plants downstream from Lake Lanao. It is essential for the operations and maintenance activities of the plants to be optimized and synchronized. This will make the operations complex, and the financial contracts even more complicated.

Is there a viable option in privatizing the Agus and Pulangi Plants, one that will keep the interests of the consumers in mind without sacrificing the efficiency of private sector funding and management? I believe there is a possible option, one that we had planned for Mindanao during our time in government.

Privatizing the hydropower complexes must always bear the consumers’ interests in mind, far above the interests of the private investors and the government’s. This is a policy that should be paramount in the privatization of any government monopoly. In the case of Mindanao, the question is this: how can the Mindanawons of today enjoy the benefits of the Agus and Pulangi hydropower complexes in the years to come?

A few weeks before I retired from NPC in 1998, I implemented a power sales policy in NPC where I sold, proportionately, the output of Agus to all the consumers of Mindanao at some fixed rate for the next 20-odd years. The purpose was to “lock in” the low price of hydropower by way of a contract. Unfortunately, only Davao Light then took on that offer; only Davao consumers benefited from this undertaking.

This time around, PSALM must enter into Power Supply Agreements or PSAs with a life of 25 years before it starts selling the hydro plants. This time, this should benefit all existing customers of NPC – electric cooperatives, private utilities, and directly-connected industries. The reason is simple: PSALM should avoid the pitfalls of the government in previous privatization deals where the government sold plants individually without any PSA. Doing this will result in either of the following situations: a) prices will go up immediately after privatization; and/or b) government sale price will be low. Either way, the government and consumers will be the losers in the equation.

The PSA must be signed by all of the NPCs existing customers at the current price with escalating prices based on the consumer price index (CPI) to reflect inflation. This makes the price of the generated power by the power plants determinable in the next 25 years. This makes the economy of Mindanao more stable with relatively determinable costs. Having this type of a PSA where the price is stable will bring down over-all risks of the Mindanao economy and can contribute to a higher GDP growth for the island.

In particular, this will benefit small and medium enterprises (SMEs) that tend to suffer more than large multinationals in times of uncertainty. Studies have shown that stable and predictable prices have a positive effect on the over-all GDP growth of economies. This will, again, be a topic for another time. Suffice it to say that having a long-term PSAs will benefit everyone – for the government and the investing public, the price is easier to determine and establish. For the consumers, they are protected against price spikes in the long-run and will benefit from the stable price that can come from the hydropower complexes.

As for the water management issue, the best option for PSALM is to first obtain the services of an independent water management body that will oversee the protocols of water management. This way, there will be an independent body that will allocate and manage the water based on safety, security, and economic dispatch protocols. And because the PSAs for the complexes have already been signed, there is no need to even have several small “Agus” power companies competing against each other for customers. Asus can have one company efficiently managing the entire complex and Pulangi can have another private company.

Now the bidders will only have to compete based on their capability to rehabilitate and maintain the power plants. Technical competence backed up by experience will drive the bidding which will make the bidding more interesting and beneficial for Mindanao consumers. The current NPC employees with proper financial and management support can very well run these plants. They are the most experienced and competent in the region today.

With this proposed structure, the government now has an option of privatizing the complexes in various ways since the cash inflow is also predetermined for the coming years. For those of us who are familiar with project finance, the structure lends itself to non-recourse financing. Translation: privatization will no longer require investors with large balance sheets because debt financing can be raised through the established PSAs. This means competition for the privatization will be more intense, hopefully increasing the price that investors will be willing to pay for the assets.

In fact, one can think of a scheme where these assets can be sold by way of share sales reminiscent of the way Petron was sold in the past. In that scheme, ordinary Filipinos were able to own shares through SSS and GSIS financing. Privatizing the Mindanao complexes will even be better and easier because of the PSAs – valuation is easier, making financing even easier. One can design a privatization plan where allocation of shares can be done so that every qualified investor in in Mindanao can own a share in these plants.

We have studies done in the past that showed that consumers can actually afford to buy shares from privatized NPC power plants. Every time we pay our electricity bill, a portion actually goes to the capital recovery of these power plants. So why not allocate a portion of this bill to payment of shares? The shares can then be listed in the Philippine Stock Exchange contributing further to the liquidity of the shares and most likely enhancing even further the value of these shares.

I started by saying we studied the different options of creating the Mindanao Power Corporation. We, in fact, went beyond this. We studied the feasibility of creating a market in Mindanao. We eventually ended with this conclusion: given the economic structure of Mindanao, a competitive market may not be feasible. Placing Mindanao as part of the over-all Philippine electricity market may not also be politically feasible; Mindanao has the ability to survive as an autarky in power. The need to physically connect to Luzon or Visayas was not necessary.

These were studies done close to two decades ago. Whether the findings are still valid today may be interesting to re-visit. Maybe, just maybe, the hydropower complex’s privatization may form the roots of a Mindanao Power Corporation. A Mindanao Power Corporation owned by Mindanawons? A great possibility indeed! Just a thought.

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

“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.

MY CSR: EDUCATION AND THE FAMILY

I remember growing up as a boy in Mindanao seeing my father getting on his green bike to go to Ateneo de Zamboanga where he was a Math and English teacher. He must have been a popular teacher because I remember the throngs of students who would come to our house for tutoring. Some of these students are still around today and still commend my father’s influence on their professional and personal lives. He might have been popular, but this popularity was derived from being tough and unrelenting on his students.

My father’s passion for education, I believe, was driven by the fact that as one of the youngest in a family of 11, he was the only one who graduated with a college degree. A high school valedictorian, my father graduated from the Ateneo de Zamboanga as one of its brightest students. It was no wonder that he wanted to “give back” to his alma mater by becoming one of its teachers.  He was later asked to teach at the Ateneo de Cagayan (now Xavier University) where he met my mother, Gloria, also a teacher.

My father was especially tough on us, his children. He would spend nights breathing down on my neck, making sure I got the exercises by Hart (Algebra) correctly and within a defined time limit. That’s the reason I was already tackling college calculus long before my high school classmates could do algebra. Both my sisters went to the Philippine Science High School, and we all went to UP. Jesus P. Delgado was my father, an educator.

My father died many years ago, penniless.

Our house, a nipa one, was however the center of educational excellence. Today, I have a sister who finished law, nursing and a PhD degree in a field I can no longer remember.  I have another sister who must have finished three masteral degrees in applied mathematics and who is mother to two Harvard physics graduates. My mother, who is 83 years old, took up law when she was 64 years old and became  a lawyer shortly before she was 70. She has four other degrees. And while I am not in the habit of trumpeting my own achievements, let me just say today that unlike my father, I am not an educator, and I am not penniless.

My father may have died penniless, but he did not die poor. He gave us what all of us must have in life: a good and proper education. In that he was a very wealthy man, a very wealthy man indeed. And this drives my passion to use my corporate vehicles, my businesses as means to support education in this country.

Education is so basic that if our society cannot give that to our children, to our youth, and then that would be criminal. No one can survive these times without education. A democracy, in fact, requires that its citizenry achieve a certain level of education that will make them intellectually independent to make informed choices when choosing political leaders.  Any country that fails to educate its citizens effectively relegates them to slavery and poverty.  That’s why we find it deplorable to hear of countries that continue to deny education to its citizens on the basis of gender or race.

The challenge of education however, goes beyond our ability to teach or to provide classrooms.  It demands that we have healthy children.  No, in fact, it requires that these children are kept healthy even before they are born. Their mothers must have the proper nourishment to ensure the proper nutrients are provided to the fetus.  Studies have shown that more than half of Filipino children are already bound to fail to get a proper education due to malnourishment.  Their learning capabilities are severely diminished as a result of their poor health.

Malnutrition among Filipino children is still prevalent. Graphics courtesy of Fil

Malnutrition among Filipino children is still prevalent. Graphics courtesy of Rappler.com

 

We need to have a healthy society for education to succeed. Mens sana in corpore sano: a sound mind in a sound body. Our children have lost the fight for better education, even before they started school!

And here lies an even greater challenge: prosperity for all.  Prosperity defined not in the number of cars we own, but defined in our ability to properly feed, bathe, educate, and  raise our  children in a society that respects the dignity of man and the rights of the nuclear family to be together.

Sadly, we fail in many ways.  It pains me when I picture a mother bathing a baby tenderly, with much love who is not hers.  She is an OFW bathing the child of another mother while her own is being bathed by friends, neighbors, and relatives. This is a very painful picture.  I can only imagine how our society will look down the road when the effects of broken families will begin to creep into our labor sector, our government and corporate sectors. How will a citizen who hasn’t felt the nurturing warmth of a mother’s arms or the steady hand of father guiding his children survive?

This assault on the family is what we in the corporate sector should be concerned about. We all have different charities ranging from feeding the street children to providing roofs for the homeless. I believe however, that the simpler strategy is for all of us to focus in protecting our traditional, nuclear family.  The family should have the ability to feed, clothe, and provide basic education to their children. The children must not be deprived the warm bosom of their mother and the steady, guiding hand of their father.  Husbands and wives must be given the chance to freely express their love without the burden of having to define motherhood in terms of pesos and centavos.  Such definition is demeaning for our citizens, for our society.  The state fails when it has to intervene into how a family should express love and practice their faith in order to keep economic and social order. The state exists for me and not the other way around.  Common good defines that the state’s need should be subordinate to that of its citizens.

Corporate citizenship for me, therefore, should be about providing opportunities for the family as a whole.  For me, it is about encouraging and supporting opportunities for entrepreneurship, education, protection and enhancement of God’s gift of nature to us.  We have seen how corporate greed has destroyed homes, families, all over the world.  A secular world devoid of family values has made financial disasters happen.  We must reverse all these.

We must work hard to make our economy so vibrant that we do not have to ask our fathers and mothers to leave for abroad to work.  We must work hard to make this nation of entrepreneurs who create value for the society through creativity and innovation. We must work hard to create an economy that uses God’s gift to the enhancement of humanity’s survival with dignity.