Leveling the playing field in the PHL's power sector

DoE Secretary Alfonso G. Cusi was recently quoted on his willingness to dump the fuel mix policy to boost base-load competition.

“We want it to be competitive, so it’s not possible to have a quota.” 

He said on his watch, industry should get used to a mix that set by a system requirement of 70% base-load, 20% mid-merit and 10% peaking power. 

“We want an energy mix where there will be competition. So coal, gas, geothermal, hydro or nuclear can compete in that 70% base-load,” he added.

Under EPIRA, the Philippine Power Sector was privatized to ensure free market competition.  One of the major policies under the law is  to ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market.

Thus, we commend Secretary Cusi for adhering to the spirit of the law by removing impediments which could stifle competition in the power sector.

The Institute for Climate and Sustainable Cities is fully endorsing the competitive selection process (CSP) to set the prices of electricity.  In Resolution No. 13, Series of 2015, the Energy Regulatory Commission ordered all distribution utilities to conduct a competitive selection process in the procurement of their supply to the captive market.  The implementation of the CSP was postponed several times due to opposition from some sectors, but finally took effect on April 30, 2016.

But will the selection or auction process be truly competitive under the present rate-setting mechanisms? Will all technologies be able to compete on a level playing field?

We don’t think so.

Fossil-fuel plants including coal, are provided with pass-through costing of their fuel and lube costs. The rates are computed based on the actual fuel and lube costs at the time of the approval of the Power Purchase Agreement (PPA).  In the PPA, fuel costs are adjusted based on the Newcastle Price Index and automatically passed on to the consumers. Thus, fossil-fuel power producers bear no fuel costs risk whatsoever.

How about renewable energy power plants? 

Solar, wind, geothermal, hydro, and ocean power plants do not consume fuel. Biomass plants do, but are still subject to a fixed rate under the current feed-in tariff mechanism. Do these renewable energy plants have no resource risks?  Of course, they have.  RE sources are subject to annual and seasonal variations. But the operators absorb all these risks and cannot adjust their prices automatically.

In the manufacturing sector, producers cannot adjust their prices every time their input costs change. They have to reckon with their competition. Manufacturers factor in these input costs fluctuations in their pricing and shoulder the risks of wrong projections.  We can do the same in the power sectors and simply allow market forces to determine pricing.

Under the present low fossil-fuel price regime, coal plants have an undue advantage over all other technologies.  If the government is serious about creating a level playing field all power sources, there are a couple of options to look into. 

Option 1: All technologies undergo bidding at a fixed rate subject only to forex and inflation adjustments over the PPA period.  This is how the Feed-in Tariffs (FIT) for RE was computed.  The fossil-fuel power producers should make projections on future fuel increases and factor these in the financial model approved by ERC.  The financial model to arrive at the FIT rates can be a good starting point.

Option 2: Allow all technologies, including RE,  fuel pass-through costing to adjust their prices automatically.  In previous PPAs, geothermal plants were provided with price adjustments based on the Newcastle Index.

The fixed option is more favorable because it would provide stable prices over the PPA period and consumers will not bear the fluctuations in fuel prices. 

In the Philippines, there is a flawed assumption that RE is unable to provide base-load power.   Geothermal, large hydro, ocean and biomass plants are base-load. Solar can provide base-load from 10 am to 3 pm.  Wind and solar plants when distributed over a wide area can be stable power sources, whose generation can be forecasted with accuracy.

We also encourage the DOE to impose flexible generation conditions on new base-load plants.  With the continuing decline in the prices of wind and solar plants, the increasing influx of these technologies can be expected. Flexible generation and smart grids should be utilized for the smooth integration of diverse power sources.  A comprehensive study of the  proper mix of base-load, mid-merit and peaking plants must be conducted. 

Bloomberg New Energy Finance reported that China is suffering from a coal power plant glut and has wasted US$490 billion in investments. Similarly, excessive coal generation is a concern in Germany with many states mandating the phase-out of coal by 2030.

We fully support Sec. Cusi on his initiatives to provide affordable, sustainable and secure power to the Filipino people. But there is a need to implement a fair and transparent competitive selection process which will result in the best and stable electricity price for the country. — TJD, GMA News

Atty. Pete Maniego is the Senior Policy Adviser of the Institute for Climate and Sustainable Cities. He previously served as the Chairman of the National Renewable Energy Board during the administration of former President Benigno Aquino III.

Maniego is a professional industrial engineer, lawyer, economist, management consultant, and professorial lecturer, with more than 45 years of experience in senior executive positions in various sectors.

The views expressed in this essay are those of the author and do not necessarily reflect the position of this website.