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The Energy Regulatory Commission’s continued slow action on proposed power supply agreements (PSAs) between power generating companies and distribution utilities will likely plunge the country back into dark days of power outages.

Unlike in the ’80s when rotating brownouts were more of an irritant to the few manufacturing companies operating in the country, the possibility of another critical power supply shortage when the economy is sailing full speed ahead could be lethal.

The Philippines cannot afford to flounder and lose momentum just because of some bureaucratic incompetence, especially at a critical time when new power plants need to be built and there are companies interested in investing in the power sector even beyond 2020.

It has been known for some time that the ERC has been suffering from internal problems which has hampered its ability to competently do its job. Having ERC chairman Jose Vicente Salazar put in preventive suspension earlier this month should be seen as just part of the solution; the quicker the whole organization is able to get back on its feet, though, the better for the country.

Malampaya field depletion

Everybody in the power sector is talking about how the Luzon power grid will be affected in 2024 by the depletion of the Malampaya natural gas reserves which had a 20-year life when it started operating in 2001, but was extended by three more years recently with two new production wells coming onstream.

Malampaya currently supplies natural gas to three power plants in Batangas owned by First Gen of the Lopez group. All are connected to the Luzon grid, and generate a combined capacity of 2,700 megawatts, which accounts for about a third of the country’s total power supply capability.

With the imminent drying up of the Malampaya natural gas fields, the three power plants will have to rely on imported natural gas which has a significant price difference from what is produced from the offshore Palawan reservoir.

The higher cost of imported natural gas is likely to be passed on to consumers, but the bigger problem will be its uncompetitive price per kilowatthour compared to other power plants that use cheaper fossil fuels like coal.

The Department of Energy, in the meantime, is trying to salvage whatever can be saved from the impending shutdown of the Malampaya fields. This includes striking a deal with other ASEAN members to bring down LNG prices.

Vulnerable

In the meantime, the private power sector is trying its best to anticipate any potential shortfalls in supply by securing financing for new projects that will bridge any foreseen gaps.

The Luzon grid currently faces the biggest supply shortage not only because of the forthcoming Malampaya natural gas field depletion, but also with several baseload power plants’ ageing problems that include rising cost of operations and unreliability.

With the projected five-percent to six-percent GDP growth, the Philippines will need at least 700 megawatts of new power generation sources starting 2021. But with the slow processing of approvals, there is a big danger that the new builds that were expected to start last year will not be ready four years from now when reserves need to be increased.

It takes four to five years for a power plant to be built, and while the previous administration’s ERC had been able to process permits for new power plant projects scheduled to come onstream within the next four years until 2020, there will be a gap after that because of the ERC processing delays.

At present, distribution utility Manila Electric Co. (Meralco) has about 3,500 MW of power supply contracts awaiting approval with the ERC. This includes the 1,200-MW coal-fired power plant in Atimonan, Quezon province of Meralco PowerGen Corp. (MGen), the power generation arm of Meralco.

PSA ‘abuse’

PSAs are deemed crucial by power generating companies that will be shouldering the huge cost of building a power plant. Without an assured buyer of electricity, banks are hesitant about processing loans that the power generating company needs to continue with the project.

Investors in power plant projects not only look to PSAs as a way of ensuring the viability of their investments for a set time duration, but also as a way of keeping a balance in the overall supply and demand environment for electricity.

On the other hand, it had been noted that PSAs need to be scrutinized closely to prevent “sweetheart deals” where the generating company dictates a more favorable selling price at the expense of the distribution company, and ultimately the consuming public.

Since 2013, the ERC has been tightening its vetting system for proposed PSAs. But given the peculiarity of the Philippine power sector where only a few generating companies dominate the industry, the possibility of abuse in PSAs is real.

According to a recent study, four power generating companies account for about 80 percent of total power supply in Luzon. These are San Miguel Power, Aboitiz Power, First Gas, and government-owned PSALM. Incidentally, these four account for 72 percent of country’s total power generation.

This situation gives rise to the possibility of bulk electricity buyers like distribution utilities and electric cooperatives being badgered to accept the price dictated to them by the generating company. Furthermore, distribution utilities are not motivated to haggle for better prices because they can simply pass on their cost to the consumer.

Unreasonable delay

Still, these potential weaknesses are not enough reason for the ERC to withhold decisions on the proposed PSAs, some of which have been pending with the regulatory commission for over a year.

While ERC scrutiny of PSAs is an essential part of its regulatory function, ERC has a responsibility to both the consuming public and power plant investors to perform it without unduly affecting the economy.

I hope the ERC and the energy department will be able to come up soon with a response. Too much time has been wasted.

Reference:

Gamboa, R. (May 30, 2017). Let’s not jinx the economy, please. The Philippine Star. Retrieved from http://www.philstar.com/business/2017/05/30/1704781/lets-not-jinx-economy-please

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