Power shortages, price swings dim energy sector outlook

Posted at 07/29/12 9:51 AM

MANILA, Philippines - Activities and news in the energy sector, which permeates everyone’s life, have been very robust in the first half of the year. It was as vibrant as electricity, as fluid as gasoline and as dynamic as price fluctuations in energy commodities.

Consumers braced for weekly swings in gasoline prices, monthly adjustments in cooking gas prices, and higher electricity rates.

Industry players, for their part, waited for the implementation of reforms in the power and oil sector, hoping to take advantage of new opportunities despite delays and oppositions.

The government, through regulatory agencies and the Department of Energy (DOE), tried to stimulate investor appetite and fine-tune new rules while partially shielding consumers from price volatilities.

News on the power sector got the ball rolling early this year. Concerns on present and future lack of generating capacity gripped the country from north to south.

"The Mindanao grid is experiencing tightness in supply because we do not have resources available for dispatch," DOE Undersecretary Josefina Patricia M. Asirit said in February.

The electricity-starved Mindanao grid suffered two- to four-hour rotating power outages in January to May given a supply shortfall of 20-360 megawatts (MW) on its average demand of 1,300 MW.

Residents of Mindanao, which sources 53 percent of its requirements from cheap hydroelectric power plants that post lower output during the dry season, refuse to buy costly electricity from power barges that use expensive diesel.

"The easiest you can do is move power barges. There are private power barges that are online," Asirit said. "They can have the supply but there is a cost to it."

Since 2010, the DOE has been warning that Mindanao needs additional baseload generating capacity through private investor participation.

But the DOE said there were delays in securing permits from local government units. For instance, Aboitiz Power Corp., Sarangani Energy Corp., and San Miguel Corp. are planning to put up coal-fired power plants in Mindanao but these plans were opposed by host communities amid environmental concerns.

In March, the DOE issued a circular aiming to avert power outages in Mindanao.

A month later, the clamor against rotating brownouts prompted the government to hold the first Mindanao Power Summit in Davao City.

"What we need to realize is that the old days of cheap power are no longer sustainable, but we can maintain reasonable power rates," President Aquino said during the forum.

"Paying a little more for energy will enable us to ensure a stable supply of power for the future of the region," Aquino said.

Going north, the Luzon grid was not immune to power concerns.

In March, a key transformer at the Las Piñas substation (formerly named Zapote) broke down, stoking fears of power outages in Metro Manila. The facility was repaired in May, restoring the reliability of the grid.

In June, parts of Metro Manila suffered from rotating brownouts due low output and unexpected shutdown of several key power plants that supply Luzon.

The DOE reported operational troubles at the Malampaya gas-to-power project in Northwest Palawan, which fuels three power plants with a combined capacity of 2,700 MW equivalent to about 40 percent of Luzon's power generation requirements.

Consumers, particularly those from Metro Manila and adjacent provinces, experienced numerous rate hikes.

The generation charge, which accounts for 56 percent of the customer’s average monthly power bill, rose from P5.5962 per kilowatt-hour (kwh) in May to P6.1392 per kWh in June and P6.4592 per kwh in July.

But the consumers' woes do not end there.

The National Power Corp. has numerous petitions for higher universal charges as it pays more than P1 trillion in debts incurred during unprofitable power generation and transmission operations of the government prior to the passage of the Electric Power Industry Reform Act (EPIRA) in 2001.

"The truth is, we will have to eventually pay for it," DOE Secretary Jose Rene Almendras said, adding that consumers might need to pay universal charges for the next 25 years.

Payments for the power sector's debts are secured through universal charge and debt refinancing schemes.

Moving forward, the continuous lack of additional generating capacity in Mindanao might result in a 100-200-MW shortfall next year amid higher demand, Almendras said.

To solve the power supply concerns, the DOE recommends the resumption of operations and rehabilitation of the 100-MW Iligan diesel power plant; the rehabilitation and transfer of 120-MW of privately-owned power barges; and the transfer to Mindanao of the 96 MW of state-owned power barges.

Luzon, meanwhile, needs Manila Electric Co.’s 600-MW circulating coal plant to be operational in 2015 to avert power outages or spikes in electricity prices in the Luzon grid.

"We need generation capacities as soon as possible. It takes normally three to four years to build a power plant," Almendras said.

"Consumption per capita is even increasing. We need to provide electricity for that," Almendras said.

However, the local government of Olongapo is opposing the non-payment of real property tax in the Subic Bay Freeport Zone.

Consumers of oil and gasoline, for their part, have reasons to feel better as news for the industry were slightly rosier.

Year-to-date, diesel prices recorded a net decrease of P2.16 per liter. Gasoline prices, meanwhile, recorded a net increase of 43 centavos per liter.

Economic woes in the euro zone, China and the United States contributed to lower oil demand.

The 13 consecutive weeks of price rollbacks were snapped by a bigtime price hike early in July.

Prices of liquefied petroleum gas (LPG) have eased to P520 to P640 per 11-kilogram (kg) cylinder as of last week from P691 to P765 per 11-kg. Demand from the US and Europe declined as the winter season ended.


Moving forward, investors and the public are waiting for numerous projects and rules to be implemented and bear fruit.

Reforms also hope to ease the burden on consumers and partially shield the country from the volatility of oil prices.

For instance, new petroleum and oil projects are close to being awarded to new investors.

In April, the DOE received 16 bids under the Philippine Energy Contracting Round 4 which was launched last year, offering 15 new gas exploration areas nationwide that will require around $7.5 billion in investments.

"We are close to finishing the evaluation of the first eight. We may be able to announce results within 60 days," Almendras said last week.

Auctions will follow for three oil and gas projects in the disputed and resource-rich West Philippine Sea, which is being claimed by China.

"We are hopeful given the prospectivity of the blocks located in Northwest Palawan basin. We are hopeful that major players will submit bids," said DOE Undersecretary Jose Layug.

"But at the end of the day the measure of success is if we find oil and gas," Layug said.

"The present reality is today Vietnam has 10 times more oil and gas production activity and exploration activity than in the Philippines," Almendras said.

For decades, foreign groups shied away from the Philippines and instead went to Indonesia, Vietnam and Thailand.

"This is the biggest challenge we face. We have to prove that the Philippines under new management will provide a level playing field," Almendras said.

The DOE expects that if the projects proceed into commercial operations, it would help the country increase its energy self sufficiency rate from the current 58 percent.

“The more exploration activity we have, the more oil we will find,” Almendras said.

To complement this, the government is looking at a liquefied natural gas (LNG) pipeline project for imports and country-produced natural gas.

The Philippine government has been wanting to put up a gas pipeline from Batangas all the way to Subic in Zambales as part of the $2.1-billion push for an LNG development program.

It includes building an integrated Bataan LNG terminal that will handle imports and several LNG-fired power plants.

"We want natural gas for the future. We want natural gas because we have it here, because it is not going to pollute," Almendras said.

It will also be used for the transport sector like compressed natural gas buses and taxis due to increasing oil prices, Almendras said.

Meanwhile, consumer empowerment is the aim of the implementation of the retail competition and open access (RCOA) late this year.

As envisioned in the EPIRA, RCOA will introduce competition in the retail supply segment of the electric power industry.

Under the RCOA, customers can freely choose their electricity service provider. This means that electricity end-users with an average monthly peak demand of one MW can choose from whom to procure their electricity service.

Investors are also expected to flock to renewable energy projects as the feed-in tariff (FIT) rule is implemented.

"Everyone is moving on the angle of sustainability and that is because we know hydrocarbons are finite," Almendras said.

The FIT scheme, whose implementation is already delayed by almost three years, guarantees investments of renewable energy firms through fixed rates that would be shouldered by consumers over a set period of time.

The rates are estimated to add roughly P0.12 per kwh to consumers’ electricity bills.

The DOE already approved a 760-MW installation target for RE projects that will be qualified for FIT.

Rules are already in place and investors are at the doorstep of new oil and power projects.

Moving forward, the consumers and investors are looking at the DOE to take the lead and implement the promises of a better business environment and cheaper prices.