Power blackouts in our future

It seems almost inevitable that the final years of P-Noy will end up like that of his mother, Tita Cory --- marked by power blackouts. Even before the Supreme Court TRO, our very thin reserves make power failure a very credible risk.

I was just looking at a presentation of Energy Secretary Jericho Petilla on the demand and supply projections for the Luzon Grid. Petilla was on the optimistic side as he was saying demand will exceed supply only in the summer of 2015. He seems in denial to me.

Depending on how the weather turns out, we could experience those power failures as early as this summer. The effect of the Supreme Court’s TRO, specially if extended through summer, will only make a likely event seem more inevitable. That’s because the expensive diesel fuel plants will be out of the system with the claim they don’t have money to buy fuel.

It may seem like Meralco is blackmailing us with its reported warning of rotating brownouts. But the warning had to be made. It is true that the unfortunate situation in our power sector was made worse by the uncertainty of a potentially prolonged judicial review.

The reality is… peak demand in the Luzon Grid has gone up by 2659 MW from the time EPIRA went into effect over 10 years ago. Yet, as Meralco claims in its reply to the Supreme Court petition, “the increase in installed capacity contributed by additional power plants during the same period only amounted to 652 MW. This situation results in scarcity in the supply of electricity. The increasing demand in the market without the corresponding increase in the supply will inevitably result in price increase.”

A good part of the new reliable capacity on the Grid came from old power plants privatized by government and refurbished by the new private owners to extract more juice from them. But these are essentially still old and prone to sudden hiccups. If those hiccups happen during the most inopportune time as what happened last month, then we are in trouble.

Power industry insiders called it “the perfect storm”. Plants that were on scheduled maintenance or forced outage were enough to spike the spot market prices which affected our Meralco bills.

I was thinking that given Meralco’s big exposure to WESM, it could have elected to just shed some of its load rather than buy at the atrocious P62/kwh top rate of WESM. That would cause brownouts but it would have meant our bills stayed at normal levels.

There will be a public outcry over the brownouts but it wouldn’t have been as long and debilitating as the current outcry. After three days or so when power goes back on line, the problem is out of the front pages.

Unfortunately, these are the hard choices we are faced with these days because the condition of the power sector is less than ideal. For some reason, EPIRA or the way we have implemented the law in spurts, has not provided the right environment to entice more private investors to build power plants.

Outside of EPIRA, many LGUs and environmental groups have also impeded the few brave souls willing to invest the big bucks needed to put up power plants. There is that romantic notion that solar and wind power can replace the big coal plants that we need in a timely and cost effective manner.

We can debate what’s wrong with our power industry until we are blue in the face. But there is no going around the need to add more generation capacity if we want to reduce prices and improve system reliability. As Meralco puts it in their SC reply, “The increase in generation charge is but a symptom of, and a signal for, more basic underlying issues that need to be addressed.”

Because it takes at least five years to get a major power plant on line from date of inception, power shortage in the last two years of P-Noy’s watch is almost inevitable. P-Noy will almost surely inherit the title Prince of Darkness before he bows out of office. Even Petilla’s supply and demand forecast says so.

But P-Noy must show more political will in the face of obstructions at the local level for new power plant constructions to make sure the shortage won’t plague us for years beyond his term. He must actively support new entrants. Otherwise, we just have to accept the fact that on top of having the most expensive power in the region, our supply is also inadequate.

As for what lessons we should have learned from that murderous spike in power rates last month, we need to bear in mind that price stability comes with a price. A truly functioning free market for power where future supplies can be bought and sold should help Meralco and the generators program their operations. It is also necessary to have the distribution utilities and NGCP sign up for more fixed supply contracts for reserves.

Then there should be better maintenance planning, a responsibility of the National Grid. This time around, the NGCP failed to properly plan the maintenance schedules resulting in overlaps with Malampaya and other plants on those crucial days.

People are talking of revising EPIRA to allow government to have the right to own some generation capacity to smoothen out the volatilities in the market. Actually there is no need to revise EPIRA.

Government still owns the 650-MW Malaya plant but the Department of Energy and PSALM were not alert enough to deploy it as back-up. Because they knew our reserves were extremely thin, we can only conclude they were sleeping on the job. Malaya could have covered the shortfall of Meralco that exposed them to the outrageous spot market price. Better coordination could have saved us a lot of grief.

There are also some quirky industry rules I am trying to understand that affected that rate spike. One is the “must offer” rule that requires all plants to offer its available capacity at WESM no matter what. 

So a plant owner cannot say “I will not offer my capacity because I am already fully contracted with a customer”. Or the plant owner does not want to run for an hour and prefer a longer term contract. So what is a plant or its capacity owner to do?

In other markets a fully contracted plant can just decline to submit an offer but not in our market. They go around this rule, as one industry insider explained, by offering its capacity at the highest price possible (P62/kWh). By doing this, there is a good chance it will not be dispatched unless there is no other choice. Although it does not work all the time, it still minimizes how often it is dispatched.

Knowing about this rule, there is this mystery I am trying to understand. Therma Mobile is a diesel plant owned by Aboitiz and fully contracted to Meralco at P8.64/kwh. It was required by the rules to put a bid at WESM during those critical days and it puts in a bid of P62/kwh.

I suppose that is because it doesn’t want to be dispatched because it is fully contracted. But I sort of remember a Senate hearing where Oscar Reyes of Meralco said Therma Mobile puts in a bid at their instruction.

If that is so, why did Meralco in this case, instruct Therma Mobile to bid at P62/kwh which, because of the supply gap, then set the WESM rate?  One theory I heard is that Meralco is actually covered and they merely wanted to screw the other generators who are Meralco’s competitors for the big industrial customers. Because some of their plants are down, those competitors are likely short of their commitments and had to buy at WESM at the high price of P62/kwh.

The problem with this explanation is that Meralco has been telling the public they were short of supply and had to buy 9.5 percent of their requirements from WESM. In setting the WESM price at P62/kwh via the Therma Mobile bid, Meralco was actually responsible for the power rate surge they were blaming on generator charges due to Malampaya, etc.

Of course there is the claim Meralco did not screw itself because it got all the energy dispatched by Therma Mobile at the contracted price of P8.64/kwh while its competitors paid P62/kwh. If that is so, why did our bill go through the roof?

Something doesn’t add up here and the more industry participants I talk to, the murkier it gets. The next Senate hearing on this issue should be very revealing if the senators only ask the right questions.

Boo Chanco’s e-mail address is bchangco@gmail.com. Follow him on Twitter @boochanco