Power rates

Can anyone imagine how bad our situation will be if the government, through Napocor, is still responsible for putting up and running power plants?

Napocor messed up so much that up to today, its stranded obligations remain at P387.371 billion. That’s thanks to corruption and populist decisions by a series of administrations on power rates.

Remember those take-or-pay power supply contracts? Napocor went on a signing spree of supply contracts with independent power producers with no regard to market demand. Consumers are still paying for power that was not used or even generated. Check out universal charges (NPC stranded debts) in your electricity bill.

But giving private investors the sole right to put up power plants hasn’t worked out for consumers. According to Meralco, residential power rates have gone up by 132 percent from P4.87/kWh in 2000 to P11.32/kWh as of April this year, making it among the highest in Asia after Japan. Many potential investors have bypassed us because of our power rates.

Having the most expensive electricity rates in ASEAN is not the worst part. Lack of reliability or the frequency of power failures adds up to the cost of doing business. Investors have to provide for back-up power to make sure operations are not interrupted by failures in the local power grid.

We need to have enough power plants to assure reliable supply. Many of our present power plants are 30-year-old coal plants that are no longer efficient. We ought to be planning to replace them by now with renewable power sources. And it takes at least 5 years and 500 signatures (give or take a hundred or two) to put up a power plant here from scratch.

Anne Estorco Montelibano, president of the Philippine Independent Power Producers Association, Inc. (PIPPA) told a PIDS webinar that the economic consequence of a power interruption is measured by the value of lost load (VoLL) or “the monetary indicator expressing the costs of interruption of electricity supply on a macro level”.

“In 2020, the country’s VoLL was at P20.65 per kilowatt hour (kWh). To put this into perspective, for every five hours of no electricity, our country loses about 500 megawatts, which equates to P556 million in economic losses. It’s a hefty amount to lose for a developing country,” she explained.

Montelibano said the acceptable number of hours of power interruption can be determined and it is known as loss of load expectation (LOLE). The Philippines’ LOLE is 10 days a year. For Singapore, it is one hour in 10 years. That’s how pathetic we are. But Singapore is just the size of Mega Manila and their officials know what they are doing.

“If we aim for a LOLE of one day in a year, then our required capacity addition must be at least 1,164 MW of energy to serve 250 hours in a year. Will generators agree to supply, build, and operate that capacity? The short answer is no because we need to address several factors.”

One of these, Montelibano pointed out, is how generators cannot recover the cost from the Wholesale Electricity Spot Market (WESM) alone with the secondary price cap (SPC) at P6.245/kWh. Generators designated as “Must Run Units” – those required to provide additional energy for the power system’s security and stability – and “Constrained-in Units”– those with limitations that affect its ability to produce electricity – are forced to agree to the market price even if they are operating at a loss.

Actually, the imposition of the SPC shows the failure of EPIRA’s market forces assumption. Imposing it became necessary because the privately driven power sector never really worked as envisioned. It became an oligopoly. That is the unintended consequence of having so few participants willing to invest in putting up power plants.

Now, the SPC is being cited as one reason why there are no new investors. PIPPA, the private sector power industry group, has called for an increase in the SPC, which the Energy Regulatory Commission (ERC) appears to be favorably disposed to grant. The current SPC is at P6.245 per kilowatt-hour (kWh), which is enforced if settlement prices breach the P9/kWh within a three-day rolling average.

But will raising the SPC encourage more investors in power plants? That’s still doubtful. Investing in a significant sized power plant ties up capital long term. And what the SPC would be at any given time isn’t guaranteed.

The SPC was first implemented around a decade ago primarily to protect consumers from the unwarranted increase in electricity prices, mostly when the grids are struggling with tight supply.

ERC chairperson Monalisa Dimalanta noted that the “WESM is there to send us price signals, but if we have the cap, signals are distorted.” It was also deemed as a disincentive to any planned injection of new capital into the generation segment of the power industry by investors.”

Dimalanta observed that for a couple of months in 2022, the SPC was triggered “more than 50 percent of the time – so that means, the signals we’re getting are not the right signals.”

The ERC chairperson said that every time the SPC is triggered, it prevents GenCos from recovering. She added that the SPC does not show the real cost of generation, qualifying that the cost adjustment “is the one we are viewing.”

The ERC chair, whose last job was with a major power company, may be correct on the economics of the issue, but it isn’t simple. The power rate is a political issue. It is like the price of rice. How are consumers protected? Wouldn’t this just fuel the suspicion that the ERC is a captive regulator?

Some legislators, consumer groups and leftists who never believed in EPIRA are calling for EPIRA to be revised to allow the government to return to power generation. If this happens, private investor interest will vanish as no one wants to compete with the government.

Will it be Napocor all over again? That will enable Malacanang to make the populist decision not to increase rates even if Napocor takes a big loss. There is no free lunch, so guess who ends up paying? Should we let history repeat itself?

Can we ever learn from mistakes of the past?

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco