The supply lie

Ben D. Kritz

Ben D. Kritz

The latest spin on high electricity costs coming out of the power sector goes something like this: High costs being imposed on electric consumers can ultimately be traced to a less-than-sufficient supply of electricity; when demand is high, electricity supply tightens, which drives up the prices electric distributors must pay at the Wholesale Electricity Spot Market (WESM), and those increases must be passed on to consumers.

With more power plants, greater supply would keep costs down; therefore, the real solution to high energy costs is, obviously, to build more power plants.

This essentially was the explanation given by Aboitiz Power Senior Vice President Luis Miguel Aboitiz, who is also the president of the Philippine Independent Power Producers Association (Pippa), in an article posted by the Philstar on Monday. Aboitiz even helpfully suggested the rate of growth the generation capacity of the Luzon grid should be seeing in order to keep up with demand: between 250 and 300 megawatts (MW) of new baseload capacity per year.

As The Times’ own Rigoberto Tiglao has pointed out in his columns this week (with a little help from a scathing report from the US Agency for International Development), only about 10 percent of the burden of high power costs borne by Filipino consumers and businesses can actually be attributed to transactions that fit the definition of a “spot market” rather than “forward contracts,” despite Aboitiz’s exercising a great deal of semantic calisthenics to explain that “there is no forward market for power in the Philippines.”

Apparently, according to the logic applied by Pippa, something that walks like a duck and quacks like a duck is not actually a duck if one were to call it, say, a “bilateral contract.” According to that same “condition x exists, because I said so” brand of logic, there is a power shortage on the Luzon grid, so essentially what the power sector is trying to make the rest of us believe is this whopper: That high power prices—which the industry is actually responsible for roughly 90 percent of the time through supply-distributor contract arrangements made outside the WESM trading floor—are because the capacity of power producers to enter into those arrangements needs to be increased. Energy Secretary and Hypothetical Resignee Carlos Jericho Petilla, in his role as industry advocate, has also joined the “we need more power” chorus, lately calling for the implementation of an interruptible load program for big users with their own supply capacity (such as retail giants SM and Robinson’s) in Luzon “when supply is tight.”

An interruptible load program (ILP) is actually not a bad idea under any circumstances, which is fortunate, because the reason it is being touted as an attractive option now is complete nonsense. There is no deficit or even “tight supply” on the Luzon grid by any sane definition now, nor is there likely to be for the next several years.

According to Department of Energy (DOE) figures, average peak demand for the Luzon grid at the end of 2012 was 7,969 MW, and that demand is growing at about 4.13 percent per year. Those figures seem a little high; in the month during which the Malampaya gas field was shut down—a month that typically has fairly high demand due to the holiday—peak demand in Luzon varied from a high of 7,391 MW to a low of 6,174 MW, an average of 6,969 MW. Even if we take the higher DOE estimate for granted, the dependable installed generating capacity in Luzon still exceeds average demand by nearly 3,400 MW: There are a total of 55 grid-connected power plants of all types in Luzon, with an installed capacity of 12,528 MW, and a reliable capacity of 11,349 MW. Allowing for a generous reserve capacity of 1,000 MW—which is slightly higher than the actual average reserve of 990 MW, which is in turn far higher than the DOE and National Grid Corp. target of about 647 MW—there will be nothing resembling “tight supply” before 2019 at the earliest, and Luzon will not reach the dire circumstances experienced in Mindanao with demand actually exceeding installed capacity until at least 2023. And all that is only if absolutely no new sources of power are brought on-line between now and then; if only a fraction, say one 250 MW plant, of the 868 MW said to be committed by 2016 is completed, that pushes the critical point back at least a year.

Granted, long-term energy planning will require new sources of electricity and, if policy-makers are being intelligent about it, upgrading or replacing many of the outdated and inefficient facilities that now exist. But the reality certainly is not a crisis that demands a panicked response, so why is the power sector so strongly pushing for “more power right now,” and why does Aboitiz—albeit as the leader of Pippa—seem to be leading that push?

Only a fly on the wall in the backrooms where power deals are made could tell us for sure, but here’s an interesting idea: Under existing rules, no single producer can own more than 25 percent of the installed capacity of any grid (Luzon, Visayas, or Mindanao), or more than 30 percent of installed capacity for the entire country. Both of the two largest power producers in Luzon, San Miguel Energy Corp. and Aboitiz Power Corp., have aggressive expansion plans, but both are flirting with the 25-percent ceiling—San Miguel is actually over the limit with 3,596 MW (28.7 percent), and Aboitiz controls just over 17 percent. Technically, San Miguel should probably divest itself of some its capacity; it can avoid that, however, and even find room for growth if installed capacity increases, which Aboitiz, as the next-largest and next-best funded company, is ideally positioned to accomplish.

That’s just a speculation, of course, but recent accusations of collusion in pricing—including a credible report from a completely external observer which suggests that is exactly what is happening about 90 percent of the time—tend to make it hard to discount, and strongly suggests that the solution to high power rates does not, in fact, lie in the recommendations of those who are producing that power.


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1 Comment

  1. i wish columnists would not pretend to know all specially power business and then write speculations. i think even high school students would know that peak demand occurs during summer months when the need for airconditioning is substantial. we all know that during summer months our big hydro plants cannot operate due to lack of water in the reservoir. ask the people from mindanao who has relied heavyly on the big hydros since time immemorial. now they have to live with 8 hour brownouts every summer. basic 1 plus 1 = 11.

    we need more BASE load – those that are not affected by weather and the likes. nuclear plants are good base load source, cheap. we don’t have that. next? natural gas and coal – we need more of them.

    what will sm and robinsons use if they operate their own generators? diesel. how much will their cost then? prohibitive if you operate if often.

    lets have some sense.