Collusion

What heretofore was only spoken of in hushed tones was brought out into the open in last Tuesday’s Senate hearing on the energy sector.

For months now, there have been allegations of collusion among the generating companies (gencos) to push up power prices. The allegations grew louder when, in the period from July 26 to August 5, six yellow alerts and three red alerts were declared. A number of brownouts did happen.

During the hearing, the Department of Energy (DOE) said at least eight plants went on forced outages that brought down the supply available to the grid. The amount of generation capacity lost during these outages basically eradicated available reserves. The supply of power was at parity with the demand.

The simultaneous outages called up images of December 2013. At that time the Malampaya gas facility was shut down for maintenance. Quite strangely, other major plants went into unscheduled outages, causing shortages in supply.

As a consequence, the price of power traded at the Wholesale Electricity Spot Market (WESM) spiked by an unprecedented P4 per kilowatt hour. The spike eventually forced the energy authorities to enforce a narrower trading band for power prices – but not before those supplying the grid earned windfall profits.

Since that traumatic shortage, the gencos have come under closer scrutiny. It was not proven with certainty that the other power producers exploited the opportunity to force up electricity prices.

The DOE scrutinized the July-August round of unscheduled outages with the help of volunteer engineers. There is not enough evidence to clearly establish collusion among the gencos. Nevertheless, the clustering of unscheduled plant shutdowns continues to fuel suspicions of inadequate regulation.

What last Tuesday’s Senate hearing did make clear is that our power reserves remain thin and therefore tenuous.

The DOE gives us the numbers. With effective electricity demand of nearly 10,000 MW, we have a current generation capacity of about 13,000 MW.

On that basis, Secretary Al Cusi says we have enough power to keep our economy going. Perhaps, but does that mean our energy security is secure enough to inspire major industrial investments in our economy?

The buffer capacity we currently enjoy is based on the rated capacity of existing facilities. None of the plants deliver fully on their rated capacity. The old plants, on which we rely for much of our baseload capacity, deliver substantially less than their rated capacity.

There seems to be a real need to audit the performance of the plants. Sec. Cusi did admit that some of these plants might need to be “de-rated.” If so, our actual available capacity might be substantially lower than the official figures suggest.

Then there is the matter of our having among the highest power rates in the world. The expensive electricity, more than our history of unreasonable trade union behavior, is a major factor why our industrial sector (and also out export sector) became uncompetitive the past few decades.

Supply

Sec. Cusi says our economy needs 10,000 MW of new generating capacity between now and 2030.

The estimate is based on the assumption of five percent GDP growth in during that period and a population growth rate of 1.5 percent. That means that should our economic expansion move up to seven percent, shortages could happen if generation capacity is not immediately increased.

Too, we have too many ageing power plants that might need to be retired. They are inefficient, their generation process is dirty and the electricity they generate is expensive.

In sum, the generating capacity we need to put in place before 2030 could be significantly more than the 10,000 MW quoted by the DOE. There is, as well, the policy question of how much reserves we must maintain.

In some countries, their energy security policy calls for maintaining reserves amounting to 50 percent over current usage. They recognize that the economic cost of power shortage is much higher than suffering shortages. We should have recognized that when, during the Cory years when brownouts became a way of life, the economy contracted.

Building new plants is not easy given our business environment. Cusi admits 122 signatures are required before an investor could start building. It could take years to gather all the required permits. Then it will take five more years of actual construction before electricity is added to the grid.

In a few years, well over half of the electricity we consume will be supplied by coal-heated plants. Next to nuclear power, coal is the cheapest mode of power generation. But coal is meeting increasing resistance from environmental activists and host communities, creating added uncertainty for investors.

We have no choice but use coal. President Duterte understands that, which is why he railed against the restrictions imposed by the Paris Accord on Climate Change. As a developing country, we need to make compromises on sourcing our energy needs.

Under the current system, the host communities have a final say on building new plants, not only for power generation but for other industrial activities as well. Local governments can make it very difficult for investments to get in. The government of South Cotabato, for instance, banned open-pit mining, effectively stopping exploitation of the world’s largest copper deposit at Tampakan. The construction of the world’s largest and most modern steel rolling mill at Plaridel, Bulacan has been held hostage by local resistance.

Our largest source of coal at Semirara Island is now under threat of closure from the DENR under Gina Lopez. That is not a consideration that will encourage new energy investments.