The DOE’s Search for the Philippines Energy Mix Strategy Needs a Comprehensive Approach

David Celestra Tan, MSK

23 December 2016

We have been seeing a lot of press on the Department of Energy’s new energy mix policy of 70% base-load, 20% intermediate, and 10% peaking. As opposed to the old energy mix goals of 30% coal, 30% natural gas, 30% renewable, and 10% neutral that was being promoted by the previous administration.

The DOE’s new energy mix is variously referred to as a flexible energy mix, technology-neutral mix policy, and even competition-laden policy. May we add functional mix because it sets goals for each function in the grid supply, base-load, intermediate, and peaking. We would like to throw in “reserves”.

An Energy Mix is a means to an end so maybe we should start with an energy objective for the country. Yes we all want adequate and reliable electricity supply. And we need least cost power that is competitive with our neighbors. But there are issues beyond that.

1. Security of Supply through Diversity in Fuel

Assuring adequate and reliable power supply doesn’t mean simply building power plants. It means achieving security of supply. That means diversifying our fuel sources so that the country is not overly dependent on one kind of fuel. If we build too many coal plants as Meralco planned to do and something goes wrong with the international supply of coal, it would be disastrous for the country. Of course they don’t care because all cost consequence are passed on to the consumers.

If we depend too much on hydro and El Nina comes, we suffer shortages and the emergency power is too expensive. If we want natural gas, we cannot be totally dependent on Malampaya that periodically shuts down and for some reason the consumers pay for more expensive replacements.

The DOE’s new flexible energy mix seems to mean only that it is not putting goals for each technology and fuel. Only the availability and competitiveness. And since it is not taking a position on Meralco’s CSP and its 3,551mw of midnight power supply contracts using coal, we wonder if the supposed new flexible energy mix only means it does not want to be “straight jacketed” into imposing a 30% numerical limit on coal.

We believe there is still a need to diversify our fuel dependence among coal, natural gas, hydro, geothermal, clean energy.

2. Foreign vs Indigenous fuel

For energy security, there is also a need to balance imported and local fuel. Local being hydro, natural gas, geothermal. We similarly need to hedge our bet by developing indigenous coal instead of importing all of them from Indonesia and Australia. Certainly we need to diversify into natural gas which means developing both indigenous gas and providing the infrastructure for foreign gas importation. There is a need for encouragement of more geothermal gas development and large hydro development.

What the country should be aiming for is flexibility to use more of favorable fuel in case some of them become scarce or expensive.

3. Least Cost Power as a National and Industrial Policy

While we always hear the government talk about competitive and least cost power, it is not actually a national and industrial policy. If low cost power is say a national objective for Mindanao, they would be enhancing its vast Agus hydro resources and complementing it with diesel power as back up power in case the water is low. Instead the government gave away the 400mw or so of fully paid diesel plants that would have been perfect complementary facilities for the 900mw Agus Hydro.

The way things are going, Mindanao will be mainly using coal and geothermal and when the Agus hydro complex falls into private hands as powerful vested groups want, it will become a peaking and reserve plant, like in Luzon, selling power at WESM rates of about P4.00 to 6.00 per kwh instead of the current P1.90 per kwh. It will deny the Mindanaoans of the blessings of its bountiful hydro resources.

4. Government vs Private Generation

Real security of supply require that the government retain a level of strategic generation as a calibrator of supply and prices to protect the people from the natural tendency of the private sector to exploit opportunities for maximized profits. The vested interests succeeded in incapacitating the government from getting into generation under Section 71 of the Epira Law. Privatized or not the reality of electricity as an essential public service, is that the people is expecting the government to step up and come up with solutions whenever there are supply and price problems. The government must recognize this reality and must amend the law to allow the government to maintain strategic generation assets.

5. Base-Load, Intermediate, and Peaking Technologies

The DOE needs to sort out what technologies are best for intermediate and peaking power. Hydro, natural gas turbines, bunker c plants, geothermal? This cannot be left to the choice of the profit oriented private sector. How about “reserve” power which is equally essential in assuring reliable supply when those base-load plants breaksdown? How about the voltage regulating reserves that are needed to support the output fluctuations of the 1,000mw of FIT subsidized solar whenever cloud cover passes over them?

6. Climate Change

The country’s energy mix must consider the blending of clean and polluting fuel and technologies. This is an important part of the energy equation and we hope the DOE is factoring this humankind-issue in its flexible energy mix.

According to the Press, the Department of Energy (DOE) is batting for a flexible energy mix based on the country’s power requirements to foster competition as well as maintain an adequate and reliable electricity supply.

Energy Secretary Alfonso Cusi said the agency has formed an energy mix comprising of 70 percent baseload, 20 percent mid-merit and 10 percent peaking, instead of setting a cap per technology.

Baseload power plants can provide the minimum level of demand in a power grid over 24 hours while mid-merit plants are those that can fill the gap between baseload and peaking plants which run during peak hours.

“What we see is we want it to be competitive so we’re not putting a quota per technology,” Energy Secretary Alfonso Cusi said despite calls from the industry to come out with energy mix policy soon to direct power developers to invest in specific technologies.

Under such scenario, each technology will compete with each other and therefore bring down the cost of electricity, Cusi said.

This leaves the decision to power developers on which technology they will be investing in as long as they meet the country’s power requirements.

“We want an energy mix where there will be competition so coal, gas, geothermal, hydropower or nuclear can compete in that 70 percent baseload. They are going to compete with each other and then you will really experience the CSP (competitive selection process) aimed to lower power rates,” Cusi said.

Specifically for baseload, this will ensure ample power supply for the country to prepare for industrialization. (Emphasis in Italics ours).

7. Making it Happen

While we talk about a comprehensive energy mix for the country, we have to wonder how the DOE is going to implement it. It talks about a resulting competition among technologies and assurance of supply. Under its current mandate it can only use persuasion to make the private sector, especially the overpowering MVP Group, to comply.

The DOE has finally acquired the power to impose its energy mix strategy by using the CSP policy especially with the cooperation of an honest ERC. But so far while the new policy is expressing hope that it will bring competition, without CSP the DOE has no way to make Meralco tow the line. Unless the real intention for a technology-neutral energy mix policy is for the DOE to effectively dodge taking a position on Meralco’s 4,006 mw of coal contracts that will exceed coal’s share in the energy mix to over 80%?

8. The Devil is in the Implementation

Just like the Epira Law that gave out hope for a truly competitive power sector with rules on anti-competition, monopoly, abuse of market power, cartelization, Secretary’s Alfonso Cusi new flexible energy mix policy evokes hope. Let us see how it is implemented.

It could be his Happy New Year gift to the Filipino people.

Formulating an Energy Mix Strategy needs some soul searching and a comprehensive approach.

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