SOME interesting comments on Thursday from Rep. Reynaldo Umali, who chairs the House energy committee, might lead to a bit more drama in the Philippines’ power sector over the next couple of years.
Umali’s point of view is that the energy mix the powers-that-be have decided is ideal for the country should not be a matter of law, but of market-driven supply and demand.
(This energy mix consists of coal, natural gas, and renewable energy, each contributing 30 percent, with the remaining 10 percent coming from whatever other sources are available, usually oil- or diesel-fired generators.) Umali’s essential rationale for this is that legislating the energy mix is inflexible; if it is later found to be unsuitable, the process to change it requires more legislation, and the country may not be able to adjust to circumstances in a timely manner.
Umali has a point; a legislated requirement should be one that is at least almost certain to be valid for a known period of time, if not indefinitely, because the cycle of legislative activity to change the requirement, even under the best of circumstances, would take months. However, I think his concern about this particular requirement may be misplaced, and that it might actually be counterproductive to rely on ‘market forces’ to determine the country’s energy mix.
One reason for that was revealed in an uncredited article published in May last year on a website set up for the Disaster and Environment Hazards Mapping Summit Manila, which took place all the way back in December 2014.
The article pointed out that despite having nearly three times the population and eight times the land area of Taiwan, the Philippines has less than half the generating capacity, 17,000 MW, compared with Taiwan’s 45,000 MW. Yet as far back as 2009, World Bank statistics pegged the Philippines’ actual generating capacity at 23,474 kilotons oil equivalent, which works out to a little more than 27,300 MW.
The reason why the World Bank thinks the Philippines has 10,000 MW more generating capacity than it actually does, the article suggested, is perhaps because the WB statistics count power projects it financed or otherwise supported—projects that evaporated for one reason or another before they could be built.
It went on to explain that, “Over the years, projecting enormous income from owning and operating power generation facilities, many entrepreneurs or even public institutions, began their dreams of installing power facilities. The types of these facilities included the non-renewable (mostly diesel-dependent) and renewable power sources, such as biogas, hydro, solar, wind and ocean, among others.
“More than 600 of these startups and big proponents were able to secure licenses and permits from the proper authorities and the consent of the stakeholders. Out of a total 648 power projects, there are around 90 power projects that no longer have any money to proceed with the construction and eventually, the operation of their proposed power plants.”
The abortion of the “around 90” projects was strenuously, though not at all substantially, attributed to corruption ballooning the costs of the lengthy approval process; the assumption the unnamed author made that most of the article’s audience would probably take some degree of corruption for granted does not make for a compelling argument. The speculative activity the article described is enough to explain the failure of a significant number of projects—it is not uncommon for large-scale work to be awarded through corrupt activity, general inefficiency, or simple, bad decision-making to contractors who lack the financial or practical capacity to carry it out.
What has been happening in the past few years is that there is an effort, although not a very aggressive one, to create demand for these moribund power projects. They are being peddled to potential investors as essentially being pre-approved and only needing financing for construction and start-up.
According to Department of Energy estimates, the needed investment in capacity is about 10,000 MW for Luzon, about 470 MW in the Visayas, and about 1,700 in Mindanao, so the “around 90” orphaned projects could conceivably fill those requirements. Whether or not they are actually practically possible is another matter entirely.
For one thing, the terms suggested as a starting point for negotiations are fairly severe: A minimum of P300 million compensation for costs of the approval process; proof of financial capability of no less than $5 million per MW, and 15 percent ownership retention of the original (failed) owner of the project in whatever new entity is created to own and operate the new plant. Even if a prospective investor accepts those terms, there is little guarantee the “approval” is still valid. Some were issued years ago; changes in laws could invalidate their original terms, and no matter what the law says, virtually any power plant project can be challenged on the grounds of environmental or social concerns.
Suggesting that dried-up power projects ought to be raffled off is skirting the comprehensively more important question as to how, exactly, one in seven proposed projects survives the entire approval process—which typically takes several years and several hundred million pesos to successfully complete—and does not proceed. That says less about corruption than it does about the quality of prospective investors and the government’s due diligence in assessing them.
That’s a problem that contraindicates the effectiveness of ‘market forces’ in devising an energy mix; essentially, the market is already skewed by the need to recover a considerable amount of sunk costs in might-have-been projects. In a similar vein, the lingering liabilities of formerly government-operated power assets are another. Therefore, at least on the government planning and regulation side of the equation, prospective power projects have to be assessed with these costs in mind, and if the government follows its mandate to keep costs to the consumer as reasonable as they practically can be, then projects that recover these costs faster – which would be coal, oil, and other tried-and-true options that can be built quickly and generate revenues quickly rather than renewables that take much longer to pay off—would have to be preferred.
That can be overcome by providing bigger incentives—the feed-in tariff is one example—to encourage development of renewables, but ‘market forces’ impose limits on that; price the power too high due to added incentives, and if there is other capacity available, power customers will look elsewhere. This is not such a factor now, but as the number of customers who are considered ‘contestable’ grows—i.e., eligible to select their own power suppliers, rather than being forced to use the one that holds their franchise area—it will become more so.
I can appreciate Rep. Umali’s feeling that markets rather than institutions are the best sources of economic efficiency, because that is usually true. But because the energy mix issue has a significant social component—the goal is not only the most economically advantageous power mix, but the most environmentally and socially sustainable one as well—economic efficiency alone cannot be a complete solution.
Go ahead and make the energy mix a matter of law, Congressman. The country will be glad you did in the long run.