Compounded

The chain of events following last month’s spike in electricity charges follows a rather disturbing trajectory, saddled with unintended consequences. That trajectory will likely compound the already complex problems besetting our energy sector.

To begin with, the Supreme Court barged into the picture, slapping a temporary restraining order on the electricity price hike. As mentioned in a previous column, the hike does not impact Meralco alone. The main power distributor is merely the collection agent for a host of enterprises in the power sector, including power producers of various sorts, the owners of the national grid and the intermediaries in the wholesale electricity spot market.

The TRO on Meralco’s rate increase will impose great financial pressure on the power distributor. It could create a chain of uncertainty (and possible failures) throughout the energy sector.

It has already been mentioned that if Meralco fails to fully pay its suppliers, the power producers may not have enough financial strength to buy the fuel they need to continue producing electricity. That financial (as distinguished from engineering or mechanical) failure could produce a chain of shutdowns, further tightening our supply problems.

The ordinary consumer often fails to appreciate the fact that electricity is a manufactured commodity. The manufacturers have different cost structures and therefore varying pricing depending on the manner they generate power. The distributor bills on the basis of the average price of the electricity purchased from the power producers.

Unlike ordinary manufactured goods, electricity has no shelf life. It cannot be stored. It must be consumed as soon as it is produced.

Electricity demand varies in the course of the day. It is high during the day when people are in offices and factories consuming the product. It is low at night when most people are asleep and factories are closed.

Some power producers service “base load” capacity, which is the minimum amount of power delivered through the grid to meet core consumer demand. These are usually large plants generally using cheaper means to generate power, such as hydroelectric turbines, natural gas and coal-fired plants and thermal energy installations.

Other (usually smaller) producers specialize in meeting “peak load” demand, the additional electricity required when power usage is at its highest. They include diesel plants (using more expensive fuel) and some of the so-called “green” plants that use wind turbines and even solar power.

All the “goods” they produce pass through the single national grid (the equivalent of highways for ordinary traffic of manufactures), which is a separate business by itself. The grid makes money (as our tollways do) by charging a toll on power conveyed through the grid.

Electricity produced by one producer in indistinguishable from electricity produced by another. Costs are assigned on the basis of supply contracts or sorted out through the wholesale electricity spot market (WESM).

Obviously, the energy sector is a complex ensemble of businesses, with planning at the enterprise level not necessarily consonant with strategic planning at the national level to ensure energy security. There could be failures at any level and unintended consequences arising out of well-meaning policy.

A significant portion of what we consider our reserve capacity, it turns out, are power generators with such high marginal costs they are unable to find buyers —  even in the present high power cost regime. They could, at some point, decide theirs is a failed business, call it a day and force re-nationalization of their plants. That will saddle government with the most uneconomic plants if only to maintain the illusion of ample power reserves. Excluding the Malaya plant, diesel generators account for 830MW of Luzon’s generating capacity.

This is one of several issues brought by the Independent Power Producers Association to the ERC.

The generators likewise pointed out problems that arise because our power distributors are not required to take out supply contracts for all their needs. The distributors assumed that their supply needs could be sourced through the WESM. Experience now shows sourcing through the WESM is not always the most optimal way of doing things.

With a lot of our baseload plants shut down for maintenance, there has been a surge in diesel fuel demand of the “peak load” plants. As a result, the oil companies have imposed a premium of the supplies of fuel going to these plants. Should payment to the small diesel plants be deferred (as a consequence of the TRO), they may be unable to purchase the diesel they need to keep their plants running. A power shortage could happen.

During off-peak periods, diesel generators do not want to make any offers to the WESM to conserve their fuel for peak periods. The WESM, however, maintains a “must-offer” rule that forces the smaller plants to run even if their power could not be sold. This rule needs review.

Also partly because of the “must-offer” rule they had to fill the gap created by the maintenance closure of the gas plants, our hydroelectric power producers have used up their water supply. Water supply might not be enough for these cheaper power plants to meet their production commitments in the dry months from January to May. This is obviously a problem.

During the November-December delivery period (after the gas plants closed for maintenance) some big power generators purchased power through the WESM to cover their contract commitments. The distributor (Meralco) will have to pay them so that they can pay their interim suppliers who for their part will need the money to buy (more expensive) diesel. If payment for Meralco is deferred, payments to the others will have to be deferred as well.

Then there are the tax issues on deferred revenues and other messy little details that must be sorted out.