Mindanao’s power problem needs a Mindanao solution
First published in Mindanao Examiner, Monday, June 16, 2014 09:58:40 PM
Also in Philippine Power Insights blog, July 7, 2014
THE POWER WOES of Mindanao had been taking long to solve because we are trying to force upon them a Luzon solution that had already failed the consumers so colossally.
The Luzon Fiasco
Using in vain the Epira Laws edicts of privatization and deregulation, we allowed the generation mix in Luzon to be dictated purely by the private sector without clear strategic delineation of domination and concerned regulation to protect the consumers and to achieve a competitive cost of power for the country.
Most of the power supply contracts are negotiated sweetheart deals and the captive consumers do not have the benefit of competition. Base load will continuously become coal and natural gas. Future power supply in the national capital region is eerily becoming a hulking and uncontrollable monopoly under which consumers don’t stand real chance.
The 2000mw odd hydro facilities of Luzon that had long been moderating the high cost of fossil based generation, have been relegated to reserve and ancillary service power due to privatization. Metro-Manilans are being denied with a significantly cheaper and cleaner P2.80 per kwh power source in the mix. Now Meralco’s power generation mix ranges from P3.60 to P9.99 per kwh and an average of P5.69. A significant portion of the earthswhile P2.80 per kwh hydro power is diverted to the spot market at market settlement prices that reach P33 per kwh.
We are trying to impose on Mindanao a Luzon style Wholesale Electricity Spot Market structure and rules that had been battering the consumers with P23 to 33 per kwh average rate when no one was looking. Under the ongoing scrutiny Luzon WESM is averaging at a palatable P6.23 per kwh.
The good news and bad news of the Mindanao power situation
The 1st good news for Mindanaoans is that relief is here that summer is almost over and the rains may be coming to enable Agus hydro to produce more power. The bad news is the summer of 2015 is only 7 months away and real addition to their base load power supply would not come until 6 months beyond that.
The 2nd good news is IMEM will be relaunched to mobilize about 286mw of embedded and self-generation facilities. The bad news is the IMEM is a replica of the wild Luzon WESM model and Mindanaoans could pay a lot after an initial honeymoon.
The 3rd good news is a lot of base-load power is being built and planned that you could have a surplus by 2016. The bad news is they are all coal and the cheaper Agus hydro complex is not yet planned to be rehabilitated. Worse, it might be privatized and relegated to being a peaking and reserve plant (just like the Luzon hydro plants).
Finally if we don’t change course, it is bad news that Mindanao’s power mix and costs will be similar to the Meralco area and PEMC intends to install the Luzon style WESM that had been a disaster for Meralco consumers. It can also become an oligopoly. This brings us to the 4th good news. It is not too late to rethink and launch an improved IMEM and later WESM that is sufficiently protective of Mindanao consumers.
What Mindanao needs is a Mindanao solution.
Mindanaos power configuration is fortunately different from Luzon. It offers therefore an opportunity for the government and its people to try a power supply strategy and structure that would be different and more protective of the consumers.
1. Electricity demand of 1,523.1mw for Mindanao is distributed 61.4% by electric cooperatives and 38.4% by private distribution utilities. In Luzon its 8,200mw demand is only 22% by electric coops and 78% by private distribution utilities of which 72% is dominated by Meralco alone in the National Capital Region.
2. Most of the Electric coops and consumer interest groups in Mindanao have demonstrated a genuine concern for its member consumers and appear to be more committed to looking for more cost competitive long term solutions. They refused offers of government financing for temporary generators that will create long term liabilities and higher costs to their members. They protested high ancillary services and peaking power from the now privately owned diesel plants. They are pushing for the rehabilitation of the Agus-Pulangi hydro complex and lobbying against the privatization of the hydro complex.
3. Mindanao still can count on 450mw of cheaper P2.80 per kwh hydro power, approximately 30% of its projected peak load during summers and actually 40% of its base load power needs the whole year. During good water months it will add at least 300mw to the Mindanao grid.
Agus can be rehabilitated to become a reliable source of 850mw of power and there are more than 350mw of more hydro projects that can be developed.
4. IMEM is on hold and WESM is still 2 years away thus allowing for a rethinking of the trading rules and eliminating those that have betrayed the Luzon consumers.
A Mindanao Solution
Mindanao offers the country an opportunity to try a more enlightened privatization, regulatory, and spot market structure that are chastened by the horrific lessons of Luzon.
a. The people of Mindanao should be allowed to continue to enjoy the blessings of their abundant hydro resources. We should not be abandoning the long held policy of low cost power for Mindanao. Their power supply must be built around the Agus-Pulanggi complex as the primary source and only the base-load deficiency being supplied by geothermal and coal. The government should have been supporting the gallant 100mw hydro project of the electric coops in Misamis.
b. It is true El Nino hits regularly and Agus no longer has the 982mw capacity it once had. DOE data shows however that Agus is still good for at least 450mw even during the summer especially if we start maintaining it as we should. So let us give that to the Mindanaoans as their primary base-load supply at P3.00 per kwh.
There is credence to the concerns of Mindanaoans that the delay in the rehabilitation of the Agus-Pulanggi complex and the lack of support for a 100mw hydro project in Misamis are designed to set-up the entry of expensive coal plants and the eventual privatization of what is being painted as the “unreliable” Agus.
c. A Mindanao energy mix
The balance of the 1,150mw of base load capacity needed by Mindanao by 2016 can be supplied by geothermal 150mw and 1,000mw of coal at P5.00 per kwh and the rest with various technologies including diesel plants. San Miguel’s coal project should come in at P4.25 per kwh because it will use Mindanao coal with little transport costs.
The 850mw Agus complex with a summer dependable capacity of 450mw should be supported with a 400mw diesel reserve capacity with lower capacity fees. Most of these are already in place. 200mw of Therma South, 150mw of Alsons, and etc. Just need to insure they charge fair and reasonable capacity fees
The evolving energy mix in Mindanao as openly preferred by the private sector is coal first, geothermal second, diesel third, and hydro last as ancillary and reserve power. This translates to higher average generating cost to the consumers and would be a betrayal of the Mindanaoans. As whats happening in Luzon, those cleaner and cheaper hydro would be mostly sold in the Mindanao WESM at a “market settlement price” of about P6 to 10 per kwh instead of the now P3.00 per kwh as a base-load supply.
d. Creating an Open and Competitive Power Generation Market
Mindanao offers an opportunity to create a truly open and competitive generation market to protect the captive customers, something that has not been done in Luzon. Electric cooperatives can aggregate their power needs and hold joint bidding under the auspices of DOE, NEA, and ERC. They might see the beautiful wonders of a truly competitive market.
Power generators and investors might find that in the long term it will be also good business for them to treat the customers well and to sharpen their competitive skills to provide cost competitive and environment friendly technologies. It must be survival of the fittest and not just the well connected chosen few.
The excess coal capacity planned in Mindanao can be supplied to the Visayas and Luzon through the Leyte Mindanao Grid interconnection when it happens in 2018.
e. Losing an Opportunity to test an Improved IMEM and WESM
Mindanao actually offers our country an opportunity to test a modified Philippine Model for an electricity spot market where we can integrate the lessons learned from the disastrous Luzon WESM.
The declared intent of the Department of Energy in its dogged determination to relaunch the Interim Mindanao Electricity Market or IMEM is good and valid. It can be an organized way as an interim solution to quickly increase supply by harnessing 203mw of embedded generation and 183mw of self-generation facilities.
Mindanaoans is correct in being concerned that there cannot really be a true interplay of supply and demand market forces in a electricity spot market because there is severe shortage of power. This is a prescription for high costs except for the first months. Wait till summer of 2015 hits and they will see a Meralco scale nightmare.
Rethinking Market Settlement Price
DOE, ERC, and PEMC must rethink the adoption of market settlement price under its rule 3.4.4 as the “highest offered price” just like in Luzon. This can only inflate the pass on charges to the detriment of the consumers. Why not pay the offerors only the true price that they offered at which price the offering generators presumably consider viable for them. Then charge the consumers for the average of the offered prices of the dispatched capacity, not the theoretical highest offered price.
The concept of a single pricing system and market settlement price are not problematic by themselves. It is how we compute them. Adopting the highest offered price as the market settlement price is only applicable to commodities where the buyers have the option not to buy.
This is electricity that has become a basic need of our modern society and they are priced AFTER they have been consumed. The country should not treat electricity as a commodity that can be allowed to rise and fall with supply and demand. Demand for electricity after all is inelastic as economists say.
It is only supply that moves and in our country the movements seems to be contrived to drive up rates. That is too volatile for consumers and businesses. Power is a strategic infrastructure that is so vital to the country’s way and standard of living, delivery of essential public services, and national competitiveness.
Perhaps a Mindanao IMEM or WESM should be an excess capacity and reserve market complete with a must offer rule.
Its not too late
We cannot solve Mindanaos power problem with a Luzon style power mix and spot market that have failed. We owe it to our countrymen in the South to think about a Mindanao solution. Why impose on them something that had failed colossally in Luzon? A Mindanao approach might even be the one that will enlighten us towards an overall Philippine power solution that then can be replicated in Luzon.
For now the biggest ray of hope that is standing in the way of total disaster for Mindanao is the evident resolute fight of the electric cooperatives and the concerned consumer groups to assure a better IMEM and better energy mix that features Agus. We don’t have that in Luzon.
For a Mindanao solution to be successful, the “buy-in” or support of Mindanaoans will be needed.
There is no question that investors in power generation facilities must be assured of fair and reasonable returns. However, that should be balanced with the equal right of the consumers to fair and reasonable rates and protection from abuse.
Power generation investors might rediscover that taking good care of customers is actually good for business in the long term. That means cooperating for a cost effective energy mix for the consumers. It is good news that it is not too late. We just need to sufficiently rediscover our ethical, moral, and patriotic compass….enough to care and do the right thing. When will the government get the message?
