DoE’s risky proposals

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Ben D. Kritz

ENERGY Secretary Alfonso Cusi’s latest recommendations deserve some credit for trying to anticipate the country’s energy needs in the near future, but they should be considered conversation starters rather than viable plans.

At the end of last week, Cusi aired two ideas: First, he wants to encourage investment in what are colloquially called “merchant power plants,” generating plants that are built on a speculative basis without a designated customer base, or traders who sell power on the open market.

Second, Cusi recommended lowering the financial threshold for “projects of national significance” for power generating and related infrastructure to P3.5 billion in order to speed up approval and development.

The Department of Energy said last year that the Philippines would need 17,338 megawatts of additional electricity-generating capacity by 2030, about 10,700 MW for Luzon, and the rest divided between the Visayas and Mindanao. Since the biggest power plants that seem to be practical for the Philippines are in the 1,000 to 1,200-MW capacity range, then at least 14 to 17 new power plants will have to be built in the next dozen years.
That would be an unprecedented building boom; Cusi does not seem to believe it is possible under the current administrative and regulatory structure, and he is probably right. But it is unlikely that his proposals as presented would be an effective solution.

Merchant power plants developed after electricity deregulation in the US, and they do have more positive attributes than negative ones. Given that they face a bigger challenge to turn in a profit than power plants with captive customer bases, their owners tend to focus on efficiency and cost reduction; at least in US experience, plants in this category are cleaner, use less fuel, and are more reliable than existing generating systems, and as a result, they can hypothetically sell their power at lower cost.

Competition helps pull down prices as well, which was the point Cusi focused on in discussing the idea. At present, more than 90 percent of the electricity generated in the Philippines is sold under power supply agreements, with about 10 percent traded on the Wholesale Electricity Spot Market (WESM). Under these circumstances, the market-traded power is usually purchased as emergency supply in times of heavy demand or unexpected shortages, and is sold at much higher than ordinary rates.

Cusi wants that percentage to increase to 20 to 30 percent, which would help lower prices, but whether that is a proportion that has been determined by proper analysis to have the desired effect or is just a figure Cusi pulled out of the air is not known. On the face of it, it seems it would have only a minimally positive effect, particularly in light of Cusi’s next point, which was that merchant power producers would likely trade on the open market only until they secured the more preferable fixed power supply agreements.

In fact, based on the history of merchant power in the US, it is probably inevitable that market trading would be short-lived, because of the financing risk for merchant plants. Meralco President Oscar Reyes touched on that point (in an interview with another newspaper) when he noted that the success of the plan would depend on banks’ risk appetite. Judging from the US industry, that appetite is not great; virtually no merchant power plant has ever been built without the operator first securing some sort of a market – even if it doesn’t account for the entire capacity of the new plant, a large anchor customer like a mall, industrial enterprise, or particular franchise area is a prerequisite for financing in the absence of government support.

Cusi’s second suggestion – projects with a price tag of P3.5 billion – is even more problematic, because lowering the threshold to that price will mean that virtually any power infrastructure-related project will qualify as a “project of national significance.” As a point of comparison, two small power plants being planned by Alsons in Mindanao, one of 105 MW capacity and the other 210 MW, have a combined price tag of about $600 million (P30 billion).

Lowering the threshold to a mere P3.5 billion (about $70 million) opens the designation – and the incentives and regulatory shortcuts that go along with it – to all sorts of abuse to an industry that is already generally considered unfriendly to consumers. Likewise, one of those shortcuts that Cusi proposed, deputizing the DOE to issue environmental compliance certificates for energy projects rather than the DENR, is a frankly terrible idea. If a project is truly “nationally significant,” then the inputs and authority of other agencies in their areas of expertise should not be bypassed.

Rather than set a monetary limit, the DOE should, instead, designat e particular kinds of projects – generation facilities or major transmission projects, for instance – as qualifying for the “national significance” tag, in line with the goal of installing the needed capacity. Cusi’s proposals are a good start toward developing a workable plan, but they are far from being ideal, and much more work is needed.

ben.kritz@manilatimes.net

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1 Comment

  1. Amnata Pundit on

    The goal should be to lower our power costs to a level that is competitive with our neighbors, but ideas for the energy sector are straitjacketed by privatization, and since privatization is sacrosanct, we are forever stuck with the highest power rates in the world. Any discussion towards this goal that doesn’t include the possible ditching of this privatization policy is nothing but intellectual masturbation.

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