The cost of brownouts


MIKE-WOOTTONI MUST admit to being a bit confused on the current status of the emergency powers application to mitigate the effects of the forecast rolling brownouts next year. On the one hand, it looks as if the request has been dropped in respect of the contracting of additional power generation facilities. But on the other, it looks as if the application is still going through the legislative review process. If it is still in progress and some form of emergency powers will be granted, I wonder what form will they be?

There has been some confusion as to whether or not there is a likelihood of a national power shortage. At first there were reports of there being an urgent need for an additional 500 to 600 megawatts or even, I saw, 1000 MW of generation capacity, which then changed to a need for 20 MW or so of additional reserve capacity. A rather large difference. Admittedly though, the Philippine power sector is a rather complex area and I’m quite certain that there are not too many people who have a good grasp of the totality of the situation.

The question came up recently about the effect on the Philippine economy of a period of rotating brownouts. An item in this newspaper on the 22nd of October quoted President Aquino as stating that the economic cost of the forecast generation shortages could be “as high as P23 billion for brownouts of five hours a day over a period of three months.” An important rider to the statement was “excluding foregone revenues in sectors that will be affected by brownouts,” the cost of which is actually the main effect on the economy. So P23 billion, whilst a number that would stick in people’s heads, would be far from the full economic effect of the expected brownouts.

Brownouts have a devastating effect on national economies. A quick look at, for example, the California electricity crisis of 2001/2001 cost the state’s GDP a loss of 3 percent or about $45 billion, and while far from everybody being affected, at its peak it had an impact on about 1.5 million people or 4 percent of the population. The power was off for different durations in different places over a period of a year. The cause of the California problem was not a shortage of generation capacity as forecast for the Philippines. California had 45,000 MW of dependable generation capacity for a peak of 28,000 MW of demand.

The cause of the California problems—and this is interesting because there are some similarities with the electricity price spike of November and December last year here in the Philippines—was manipulation of the newly introduced California WESM (mainly by Enron’s “clever” traders), coincidental maintenance shutdowns of power plants, a sudden rise in the price of natural gas coupled with an increase in demand, and incomplete regulation. In 1999 the cost of the state’s electricity was $7 billion; in 2001 the same amount of power cost $70 billion. There were 3,300 MW of maintenance outages in April 2000 and 15,000 MW in April 2001.

The cost and disruption caused by wide-ranging electricity outages is enormous. In India where they suffer from very frequent outages, the cost has been calculated as about a loss of 6 percent on sales revenue for outages of one hour a day over a year. In the industrialized parts of Europe, a one-hour blackout has an economic cost of anything between $13 billion and $20 billion.

The Philippines sets very low regulatory expectations in the matter of electricity provision. In a “situation normal” scenario, it expects blackouts for 2,700 minutes a year over 20 disruption occasions. In the USA, the mean is 240 minutes a year over 1.5 occasions and in Germany—that paragon of engineering excellence—it is 23 minutes a year on an average of one occasion every two years!

Electricity consumption in the Philippines is extremely low at 620 kWh/person/year compared to, say, Singapore, where consumption is 8,500 kWh/person/year, or Malaysia where it is 4,500 kWh/person/year. This indicates both a low level of industrial development as well as astronomically high electricity prices, both of which will tend to reduce the economic cost of black- or brownouts in real terms. Regardless of that, blackouts need to be avoided as the industrialization of the Philippines is fragile enough as it is and to add even more unreliable service provision to the very high cost of electricity—which already is headlined as a major detriment to foreign direct investment—would be something approaching the “last straw.”

Lest the reader should think otherwise, this is specifically not an argument for contracting short-term additional power generation. Almost certainly there is enough generation as it is to meet the demand peaks, albeit some of the Luzon facilities are on their last legs in terms of age and reliability. New capacity additions are delayed, say the Department of Energy, and indeed they are, but there are bigger problems in the pipeline going forward in that whilst some would claim there are many new capacity additions coming up, the likelihood of successful implementation of them is, in very many cases, extremely low.

I made the point in my previous column on this topic a few weeks ago ( that a reliable longer-term plan needs developing for the power sector as it cannot, even against the regulatory service quality set by the ERC, continue to just wobble along, planning for things that in all likelihood will not come to pass. The sector needs to get its regulatory house in order, level the playing field and plan realistically and objectively—then we might just increase the per capita consumption from 620 kWh/year to, say, 3,000-4,000 kWh/year, we would avoid scaremongering tales of massive damage to the national economy, and the cost of electricity might actually reduce!

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  1. You say there is enough generation to meet demand peaks but you hurry to add that some Luzon facilties are in their last leg of age and reliability. You say that many new capacity additions are coming up but again you add that the likelihood of their implementation in many cases is extremely low. What you are actually saying is we are in a sorry mess in the short term in our generation capacity yet you say that you are not arguing for contracting short term additional generation. You are confusing to read and follow man.

    • Domingo,

      It is the management and planning of the sector which is confusing. “Band-aid” solutions like hastily contracted short term generation do not reflect good planning. Yes, the sector does appear to be in a sorry state. An inadequate sector needs good and careful management whilst it is being transformed into an adequate sector.

  2. It is essential for the government to turn to nuclear power as the solution, but of course that will take enormous political will which this regime is not in possession of. Without a drastic change in policy direction, and given the world class incompetence of these proxies of the oligarchy who have been in charge of the government since EDSA ’86, we will be forced for eternity to endure blackouts combined with the highest power rates in the world. The silver lining is that the people can only endure so much, and we just might see the day when these merciless ogres are hanged from a thousand lampposts.