Divining the power situation in PH

12:45 AM | Monday, November 3rd, 2014

At first glance, the power sector seems simple enough to understand.

Driven by the laws of physics (from the generation of electricity to its transmission, distribution and eventual consumption) and economics (generating attractive returns from major capital outlays in a regulated environment), it should not be difficult to achieve a trouble-free and properly working sector for as long as the necessary components are present and efficient.

Or is it?

The reality is that when fuel supply challenges, consumer concerns, environmental issues, political considerations, historical precedents and geographic constraints are thrown into the mix, it becomes easy to appreciate why the power sector is difficult and challenging to navigate through.

What is sure is that our situation in the Philippines is not unlike that of many other countries around the world.

We read on a regular basis about how economies, both developed and developing, are coping with difficult challenges in their respective power sectors.

I would like to share some observations and insights that may help the lay person understand (just as I have) the challenges that our own power sector faces, in order to gain a better appreciation of the different views being offered.

We are not a baseload economy—we have an uneven load profile.

Since the Philippines’ Gross Domestic product is not driven by manufacturing activity, but by a robust service sector coupled with healthy consumption by the populace, the country’s load or demand profile is quite uneven and cyclical.

Electricity demand typically peaks a couple of times during the day for a few hours at a time, and this means that power plants need to be able and ready to service these demand surges immediately.

Unfortunately, a significant number of our existing plants, which are coal-fired ones, are not necessarily designed to follow this movement of demand from low to high and down again on a daily basis.

Coal-fired plants are typically meant to be run as baseload plants, generating power at a consistently stable and even output throughout the year.

If these plants are made to perform in a manner they were not designed for, especially the old plants that we have in the Philippines, they will start to break down more often and this could lead to power outages.

On the other hand, gas-fired plants-such as the Ilijan, Sta. Rita and San Lorenzo plants in Batangas-are meant to cover the range of mid-merit (power demand just above the baseload demand) to peak power requirements.

Load curve

Gas turbines and gas engines, which we generally consider to be distributed power technologies, are designed to satisfy this workload and bear the stress of ramping up and down to follow the load curve, and even to start and stop at a moment’s notice.

Apart from coal and gas power plants, hydro and geothermal power plants also provide power to the grid.

The challenge with hydropower plants is that these rely on water, and severe droughts can obviously impair their ability to generate power. We see this regularly occur in Mindanao during the summer months, where over 50 percent of the power is generated by hydroelectric plants.

As for geothermal plants, steam from the subsurface is not inexhaustible. The resource is also limited and could deplete in the long run, so there is always the challenge of meaningfully scaling up on generation output from this resource.

Finally, when all of these plants are unable to satisfy power demand at peak periods, there is no recourse but to resort to oil-fired generating plants.

Thus, during the summer months when consumer demand for electricity is at the highest levels, many of these diesel or bunker-fired plants are called into operation.

The drawback of diesel plants, however, is that this is the most expensive generation of all since the fuel feedstock is the most costly and many of these diesel plants are very old and therefore inefficient.

Thus, given our demand profile and the country’s power generation mix, it is important that the appropriate technology is deployed to satisfy the different types of demand.

As with any country’s need to rely on effective urban planning to achieve a properly functioning metropolis and prevent congestion and gridlock, designing the infrastructure for our country’s power needs has to account for the appropriate technical solution for baseload, mid-merit and peak requirements.

Forcing technologies into roles they were not meant for will not serve the country well in the long run.

We have a good mix of fuels in the generation portfolio, but not enough indigenous resources.

As mentioned, power plants run on different fuels such coal, natural gas, diesel, wind, solar energy, and water to generate electricity. The country has a good representation of these in our generation mix, which is strategically sound since it avoids being dependent on any one fuel feedstock.

Thailand, for example, has over 60 percent of its generating capacity running on natural gas.

Should the gas run out one day, it will be challenged to rapidly satisfy the power needs of the country.

As it is, Thailand is already diversifying its fuel mix.

The problem, however, is that except for natural gas, the Philippines imports almost all of these fuels and is therefore at the mercy of price swings in the global segment.

Global prices

Even the Malampaya gas that we use to generate 24 percent of Luzon’s power requirements is slowly running out.

Coal, while currently at economically efficient price levels, is getting more difficult to source.

There is very little the country can do to influence the global prices of these fuels to push them lower.

Providing subsidies has been shown to have long-term negative consequences in economies that have abundant natural resources.

Indonesia, for example, has been trying to reduce its fuel subsidy which is putting enormous pressure on its economy, as is Thailand and Malaysia.

Given that the price of fossil fuels is high and the Philippines does not have enough of these indigenously, it is laudable that the government is aggressively promoting renewable energy, such as wind and solar energy projects to augment the power needs of the grid especially for remote areas.

The fuel source is free and cleaner so this is a good thing.

However, there are limitations that need to be considered as well.

For one, solar and wind energy are both intermittent sources of power. When the sun does not shine or the wind does not blow, power will not be generated.

Moreover, these plants typically require larger space footprints compared to traditional power plants.

While it is good to promote these technologies, it is also important to see how other countries with significant renewable energy generation have fared in terms of power stability, acceptability and cost so we do not repeat their mistakes

Despite reforms, there has been relatively little investment in additional power generation in the last decade.

The Power Reform Law that took effect in 2001 had lofty aims, one of which was to encourage private investment in generation capacity.

However, after more than a decade, there has been little new capacity added to the system.

It is difficult to speculate why investors have been slow to build more power plants, but one possible explanation is that given the enormous capital investment needed to build pow er plants—around $1 million to $2 million per megawatt—it has not been easy to secure financing.

Typically, banks would need to see long-term power purchase agreements in place before lending to power companies.

Given the restructuring of the sector, one of the consequences is that the electric utility companies, or those who purchase the power from the generation companies and distribute to the public, have been cautious in entering into long-term contracts

This is not necessarily a bad thing since the utilities do not wish to commit to purchase power for long periods of time at set prices, especially if new projects are developed with cheaper generation charges. However, the natural consequence is that with shorter contract terms, banks are finding it harder to lend money to these power companies.

Costly delays

Another reason for the slow pace in the development of new capacity is the delays in permits and approvals, which have kept these projects from moving in accordance with their projected timetable.

Projects have been delayed for years because of the numerous permits, approvals and signatures that need to be secured before developers can even break ground.

Considering that it takes anywhere from 20 months to 38 months to build a power plant, the total time that a number of these projects has been languishing is quite mind-boggling.

Given the massive capital needed to finance power projects, it is understandable that the various stakeholders in the transaction need to be absolutely sure that the capital will be well spent and generate acceptable returns.

Fortunately, in the last few years, a number of projects have started development with shorter term power purchase agreements in place.

This means that developers and banks are beginning to appreciate the shift in risk allocation for these types of projects and are willing to develop much-needed power projects. We can only hope for continued development of investments in this direction.

(De Dios is a former undersecretary of the Department of Energy. He is presently CEO of GE Philippines.)