The DOE published on its website the announcement that the Interruptible Load Program, or ILP, will be rolled out in Luzon to address the apparent power generation capacity shortfall in light of the projected increase of demand during the summer months.
The program is a demand-side management system* that allows large power consumers (e.g., industrial plants, malls) which have their own generators to get compensation if they use them. Through ILP, the participating end-users (or the participants) agree with their distribution utility (DU) or electric cooperative (EC) to disconnect from the distribution network (i.e., not get their electricity needs from their DU or EC) and use their generators at agreed times. During such period, the freed up power capacity can then be made available to non-participants, who will pay an additional cost as compensation for the participants. The additional cost is approved by the ERC, based on the formula set in ERC's Resolution No. 8, series of 2010.
The ILP is a manifestation of the economic truism: as demand of goods exceeds its supply, its price will increase. In ILP, this is manifested by the situation that non-participants will have to pay for the electricity consumption of the participants just to enjoy availability of electricity.
You may ask: How come the non-participants have to pay for the fuel used by the participants, considering that the non-participants were not present in the arrangement (i.e., during the participants' application with their distribution utility or electric cooperative.)? Where is the justice in making the smaller users pay for the use of generator of the larger consumers. Is this like against the idea of inclusive growth?
The rationale is that the participants may incur higher costs in the use of their generator sets, and the non-participants get the benefit of avoiding brownouts.
While I cannot argue with the point of "avoiding brownouts," the rationale of compensation for the costs of using the generator sets is questionable for me. Don't businesses consider generator sets as assets, which have to be used to generate revenue? Which means their consumers actually pay for them for every object they buy from that establishment as part of their good's price. I am sure they do. Also, as assets, they have insurance, which the consumers also pay for (again, included in the price of goods).
Just my thoughts.
*Demand-sidemanagement refers to strategies done to reduce demand or affect pattern of demand for electricity. My own rendition only.
Showing posts with label electricity. Show all posts
Showing posts with label electricity. Show all posts
Saturday, April 19, 2014
Tuesday, August 20, 2013
Philippine Power Sector: Generation
In my previous post, I discussed in general how we get access to electricity. In this post, we will look more closely into the generation sub-sector, one of the three (now four, under Retail Competition and Open Access regime, which we will discuss in a later post) entity types in our electric power industry.
As previously stated, the generation sub-sector is mainly the group of companies and GOCCs which own electricity-generating assets. Under this sub-sector, entities can be classified by ownership as follows:
 | ||
| A general schematic of power generation, transmission and distribution, in the United States, which is generally similar to the Philippine system. Image source: Wikipedia |
As previously stated, the generation sub-sector is mainly the group of companies and GOCCs which own electricity-generating assets. Under this sub-sector, entities can be classified by ownership as follows:
- Government-owned and controlled corporation assets (PSALM-owned but National Power Corporation, or NPC-operated)
- NPC-contracted Independent Power Producers (also now PSALM-owned)
- Private generation companies
Initially, power generation was market-driven (For example, MERALCO owned power generation assets in 1905.). Private investments focused mostly on where investor's return was guaranteed, which was mostly in urban areas. Power generation sub-sector development was refocused following the State's realization of their need to lead the development and make electricity available to all. This led to the government takeover of all generation assets (through negotiation and compensation), which gave the NPC its assets prior to 2001.
With NPC as the sole generation provider in 1972 (as declared by Presidential Decree 40, which also nationalized MERALCO), the government took on the risks of the import-dependent power generation sub-sector, while trying to maintain a low price of power for the consumers.
With the power crisis under Pres. Cory Aquino, the government passed RA 6957 ("An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes"), giving the President the authority to enter into contracts with independent producers. In a gist, the arrangement is that investors (called independent power producers, or IPP) will build and operate power generation assets for a certain amount of time, during which they are guaranteed earnings, and then the assets will then be turned over (ownership-wise) to the government. These assets, at this time called NPC-IPP contracted facilities, (or NPC-IPPs) are still owned by the government, but may still have working contracting arrangements. Examples of this are Casecnan Multipurpose Hydro and Benguet Mini Hydro (contract for bidding as of 2012).
In this arrangement, NPC-IPPs build and operate the power plant, sell (in a way) the power to NPC, which then sell the power to consumers.
(Under EPIRA, these NPC-IPPs are also to be privatized.)
With NPC as the sole generation provider in 1972 (as declared by Presidential Decree 40, which also nationalized MERALCO), the government took on the risks of the import-dependent power generation sub-sector, while trying to maintain a low price of power for the consumers.
With the power crisis under Pres. Cory Aquino, the government passed RA 6957 ("An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes"), giving the President the authority to enter into contracts with independent producers. In a gist, the arrangement is that investors (called independent power producers, or IPP) will build and operate power generation assets for a certain amount of time, during which they are guaranteed earnings, and then the assets will then be turned over (ownership-wise) to the government. These assets, at this time called NPC-IPP contracted facilities, (or NPC-IPPs) are still owned by the government, but may still have working contracting arrangements. Examples of this are Casecnan Multipurpose Hydro and Benguet Mini Hydro (contract for bidding as of 2012).
In this arrangement, NPC-IPPs build and operate the power plant, sell (in a way) the power to NPC, which then sell the power to consumers.
(Under EPIRA, these NPC-IPPs are also to be privatized.)
The third type is mostly private investment generation facilities which were built after the passing of the Electric Power Industry Reform Act of 2001 (or EPIRA), which made power a market for interested investors to compete in. Unlike previous arrangement, which is that the government guarantees return of investment to the IPPs, independent investments under EPIRA treat power facility investments as usual market investment with risks, and the government provides no guarantees (although the government provides some technical assistance in terms of commerciality of energy investments, particularly in renewable energy).
The above typologies refer to major and grid-connected power generators. There are also other generation facilities (mostly hydroelectric plants) which are not connected to the main power grids (Luzon, Visayas and Mindanao), and they are called SPUG-areas (Small Power Utility Group, which refers to the wholly-owned subsidiary of the NPC).
Getting into the power generation sub-sector: Official Policy and Processes
Currently, under EPIRA, the government recognizes power generation as a business with public interest. As such, while private capital is encouraged, the government enforces public interests through regulation of the market, as well as technical requirements for incoming and existing players, among others.
Regulation
The government exercises regulation in the whole electricity industry (generation, transmission, distribution, and the new entity, supply) through the Energy Regulatory Commmission, or the ERC.
The ERC is an independent commission where various interests are considered in coming up with decisions pertaining to the energy and power sector. Its main functions are to promote competition, encourage market development, ensure customer choice and penalize abuse of markt power in the restructured electricity industry.
Technical Requirements for Incoming and Existing Players
As a business with public interest, the government requires from generation companies many technical specifications and proofs of their capability to generate electricity continuously. As such, the government requires proof of generally two things: 1) technical expertise in operating a power plant; and 2) the capability to manage risks as they are independent entities which the government assumes no risks in case of financial failure (in business or risk management lingo, "default").
The first part of entering into the power generation business is getting a certificate of endorsement from DOE (if the power plant will utilize a traditional fuel, such as oil and coal). If the power plant is renewable energy-driven, they must also get certificate of commerciality, another certificate which, in a gist, says that based on technical specifications of the plant and the renewable energy available in the area, the company can earn.
(Availability here refers not only if there is available renewable energy, but on the frequency of its availability. For example, there can be strong winds in Metro Manila during storms, but those would not be available year-round, so building wind mills there would not be economically viable.)
DOE requires many documents, as listed in their "Investor's Guidebook" (link below), but for our discussion, the requirements for it being a power generation facility are:
The DOE also endorses the power plant (at this stage, called a power project) to the National Grid Commission of the Philippines (NGCP), the National Transmission Corporation's (TRANSCO) contracted operator, for a Grid Impact Studies (GIS) certification. This process ensures that the power capacity produced by the power plant can and will be accommodated by the system.
While a power plant can be constructed easily, the final authority for it to operate (whether for selling of its power to the public, or the grid, or for internal use) is the certificate of compliance (COC) issued by the ERC. The link on the list of requirements is identified in the "Sources" section below.
Benefits to Host Communities
Power generation (and the energy industry, in general) is an environment-impacting business, and when we say it impacts the environment, it impacts the physical environment and the community which lives there. As such, the government requires that the power generation companies return a certain amount of their earnings to the community, through the "Benefits to Host Communities," or Energy Regulation (ER) 1-94.
The aggregated fund can be utilized for electrification, environmental, and livelihood projects. More information is available in the DOE website, link also available in the "Sources" section.
Business
Power generation, like any business, requires inputs in the form of fuel. For renewable energy plants, which do not require traditional fuel, initial capital is generally more costly compared to fossil-based (oil, coal, natural gas) power plants. As we see, right from the start, investors spend a lot of money to make a power plant, and they have in mind right from the start that they will make money out of it.
The NPC-monopoly era of the government subsidizing the cost of power generation (among others) resulted in NPC's debts. This, among others, led to the government's reviewing the power industry, which led to the EPIRA. Mindanao, which mostly sources from hydro-power plants, sought to exempt themselves from the industry-based power market, and as such, there were not a lot of investors which wanted to compete in a grid which has a very low cost of power being made to consumers by the hydropower sources.
While we do not want to pay for external sources, renewable energy is not as reliable (as in year-round) as baseload (fossil-fuel based) power plants. As such, in power generation, we balance cost of power (lower in renewable energy) with year-long readily-available power (present in baseload plants).
Review
To review, we see that generation was initially a market-driven sub-sector. This was changed into a public utility, and with EPIRA, it was defined as a business with public interest - I guess we can say it was returned to its previous setup but with government roadmap inserted there. The changing nature of electricity (business or public utility) affects its availability as investors or players consider how they are able to earn money from it.
The various generation plants transmit through high-voltage transmission lines, another sub-sector which we will discuss later.
DISCLAIMER:
The above, and all posts in this blog, is the author's best-effort attempt to understand and communicate the power industry, and is not to be used as an official source of opinion or interpretation. The below sources are provided for that purpose.
Sources:
Currently, under EPIRA, the government recognizes power generation as a business with public interest. As such, while private capital is encouraged, the government enforces public interests through regulation of the market, as well as technical requirements for incoming and existing players, among others.
Regulation
The government exercises regulation in the whole electricity industry (generation, transmission, distribution, and the new entity, supply) through the Energy Regulatory Commmission, or the ERC.
The ERC is an independent commission where various interests are considered in coming up with decisions pertaining to the energy and power sector. Its main functions are to promote competition, encourage market development, ensure customer choice and penalize abuse of markt power in the restructured electricity industry.
Technical Requirements for Incoming and Existing Players
As a business with public interest, the government requires from generation companies many technical specifications and proofs of their capability to generate electricity continuously. As such, the government requires proof of generally two things: 1) technical expertise in operating a power plant; and 2) the capability to manage risks as they are independent entities which the government assumes no risks in case of financial failure (in business or risk management lingo, "default").
The first part of entering into the power generation business is getting a certificate of endorsement from DOE (if the power plant will utilize a traditional fuel, such as oil and coal). If the power plant is renewable energy-driven, they must also get certificate of commerciality, another certificate which, in a gist, says that based on technical specifications of the plant and the renewable energy available in the area, the company can earn.
(Availability here refers not only if there is available renewable energy, but on the frequency of its availability. For example, there can be strong winds in Metro Manila during storms, but those would not be available year-round, so building wind mills there would not be economically viable.)
DOE requires many documents, as listed in their "Investor's Guidebook" (link below), but for our discussion, the requirements for it being a power generation facility are:
- DENR's Environmental Clearance Certificate
- SEC Registration
- LGU Clearance
The DOE also endorses the power plant (at this stage, called a power project) to the National Grid Commission of the Philippines (NGCP), the National Transmission Corporation's (TRANSCO) contracted operator, for a Grid Impact Studies (GIS) certification. This process ensures that the power capacity produced by the power plant can and will be accommodated by the system.
While a power plant can be constructed easily, the final authority for it to operate (whether for selling of its power to the public, or the grid, or for internal use) is the certificate of compliance (COC) issued by the ERC. The link on the list of requirements is identified in the "Sources" section below.
Benefits to Host Communities
Power generation (and the energy industry, in general) is an environment-impacting business, and when we say it impacts the environment, it impacts the physical environment and the community which lives there. As such, the government requires that the power generation companies return a certain amount of their earnings to the community, through the "Benefits to Host Communities," or Energy Regulation (ER) 1-94.
The aggregated fund can be utilized for electrification, environmental, and livelihood projects. More information is available in the DOE website, link also available in the "Sources" section.
Business
Power generation, like any business, requires inputs in the form of fuel. For renewable energy plants, which do not require traditional fuel, initial capital is generally more costly compared to fossil-based (oil, coal, natural gas) power plants. As we see, right from the start, investors spend a lot of money to make a power plant, and they have in mind right from the start that they will make money out of it.
The NPC-monopoly era of the government subsidizing the cost of power generation (among others) resulted in NPC's debts. This, among others, led to the government's reviewing the power industry, which led to the EPIRA. Mindanao, which mostly sources from hydro-power plants, sought to exempt themselves from the industry-based power market, and as such, there were not a lot of investors which wanted to compete in a grid which has a very low cost of power being made to consumers by the hydropower sources.
While we do not want to pay for external sources, renewable energy is not as reliable (as in year-round) as baseload (fossil-fuel based) power plants. As such, in power generation, we balance cost of power (lower in renewable energy) with year-long readily-available power (present in baseload plants).
Review
To review, we see that generation was initially a market-driven sub-sector. This was changed into a public utility, and with EPIRA, it was defined as a business with public interest - I guess we can say it was returned to its previous setup but with government roadmap inserted there. The changing nature of electricity (business or public utility) affects its availability as investors or players consider how they are able to earn money from it.
The various generation plants transmit through high-voltage transmission lines, another sub-sector which we will discuss later.
DISCLAIMER:
The above, and all posts in this blog, is the author's best-effort attempt to understand and communicate the power industry, and is not to be used as an official source of opinion or interpretation. The below sources are provided for that purpose.
Sources:
- COA, Sectoral Performance Audit Report on Government Contracts with Independent Power Producers (CY 2005), http://www.coa.gov.ph/GWSPA/2005/IPP2005-09.htm accessed 21 August 2013.
- DOE, 21st EPIRA Implementation Report http://www.doe.gov.ph/doe_files/pdf/01_Energy_Situationer/21st%20EPIRA%20Status%20Report_FINAL.pdf accessed 21 August 2013.
- DOE, "Financial Benefits to Host Communities under ER 1-94, as Amended" http://www.doe.gov.ph/power-and-electrification/benefits-to-host-communities/388-financial-benefits-er-1-94
- DOE, "Energy Investor's Guidebook," http://www.doe.gov.ph/doe_files/pdf/Researchers_Downloable_Files/EnergyPresentation/Energy_Investor's_Guidebook.pdf accessed 21 August 2013.
- ERC, "Documentary Requirements for the Issuance of COC" http://www.erc.gov.ph/Pages/documentary-requirements-for-the-issuance-of-coc accessed 21 August 2013.
- Fabella, R.V. (2002). The Regulatory Environment of the Energy Industry in the Philippines (Working Paper Series of Centre on Regulation and Competition).
- NEA, "Origin of Philippine Electrification," http://www.nea.gov.ph/about-us, accessed 21 August 2013.
- Republic Act 9136.
Saturday, July 27, 2013
The Philippine Power Sector: Part 1
The Process and the Players
(Disclaimer: This is an unofficial, layman-focused attempt to describe how we, ordinary people, get electricity in our homes.)
We Filipinos get power through a “collaboration” of private and public sector facilities. To help us understand how we get electricity and why it costs so much, we will look at how it really is produced, and the business-economics behind it.
Generally, the power is generated by power generation companies with their power plants. The power they generate is transmitted through a network of transmission lines to substations, which then transmit the electricity to distribution utilities (DUs) like Meralco. These DUs will then distribute the electricity to residential and commercial consumers.
Based on this simple description, we could then classify the players in the power sector into power generation, power distribution and power distribution.
Power generation sub-sector involves both private and government-owned entities involved in generating electricity. The most prominent player in this sub-sector is the National Power Corporation, or NPC, which is a government-owned and controlled corporation (GOCC). With the implementation of RA 9136 or the Electric Power Industry Reform Act of 2001 (EPIRA) power generation ceased to be a public utility, and NPC's generation assets (both fossil-based and renewables-based) were to be privatized. The logic of this mandate is to give this utility to the private sector which has better interest in pursuing efficiency and can manage the risks of power generation as a good with fluctuating value in the market (I think).
Transmission sub-sector is mostly a monopoly, with the National Transmission Corporation (TransCo) as the only participant. TransCo, as provided for in EPIRA, has contracted its operation and maintenance responsibilities to the National Grid Corporation of the Philippines (NGCP), while retaining asset ownership of their 19,425 circuit kilometers of transmission lines and 23,853 MVA of substation capacity (as of end-2009).
Distribution sub-sector is a combination of private DUs and public utility cooperatives. Meralco and Davao Light and Power Corporation are two of the few private DUs. In the countryside, electricity is mostly distributed by electric cooperatives (ECs). These private DUs and ECs make electricity available to us, families as well as commercial entities, and we pay them for the whole process--from generation, through transmission, to distribution, as well as the business of doing it.
Of course, not all parts of the Philippines have access to grid power (i.e., power that is received from the nationwide network of electricity supply, or power grid). While President Gloria Arroyo reported in 2009 that 99.99 percent of barangays in the country already have access to grid power (umabot na sa halos lahat ng barangay ang elektrisidad), it is different from access of power on the household level. Yes, it is possible to say that all barangay halls have access to power, but not all households in those barangays have electricity yet. (I will talk about this in another post, “Rural Electrification in the Philippines.”)
For now, we will stop here. So we have three players in this simple process. But how come we have brownouts in this age when there are more cellphones than Filipinos? There is more to it than the obvious.
(Disclaimer: This is an unofficial, layman-focused attempt to describe how we, ordinary people, get electricity in our homes.)
We Filipinos get power through a “collaboration” of private and public sector facilities. To help us understand how we get electricity and why it costs so much, we will look at how it really is produced, and the business-economics behind it.
Generally, the power is generated by power generation companies with their power plants. The power they generate is transmitted through a network of transmission lines to substations, which then transmit the electricity to distribution utilities (DUs) like Meralco. These DUs will then distribute the electricity to residential and commercial consumers.
Based on this simple description, we could then classify the players in the power sector into power generation, power distribution and power distribution.
Power generation sub-sector involves both private and government-owned entities involved in generating electricity. The most prominent player in this sub-sector is the National Power Corporation, or NPC, which is a government-owned and controlled corporation (GOCC). With the implementation of RA 9136 or the Electric Power Industry Reform Act of 2001 (EPIRA) power generation ceased to be a public utility, and NPC's generation assets (both fossil-based and renewables-based) were to be privatized. The logic of this mandate is to give this utility to the private sector which has better interest in pursuing efficiency and can manage the risks of power generation as a good with fluctuating value in the market (I think).
Transmission sub-sector is mostly a monopoly, with the National Transmission Corporation (TransCo) as the only participant. TransCo, as provided for in EPIRA, has contracted its operation and maintenance responsibilities to the National Grid Corporation of the Philippines (NGCP), while retaining asset ownership of their 19,425 circuit kilometers of transmission lines and 23,853 MVA of substation capacity (as of end-2009).
Distribution sub-sector is a combination of private DUs and public utility cooperatives. Meralco and Davao Light and Power Corporation are two of the few private DUs. In the countryside, electricity is mostly distributed by electric cooperatives (ECs). These private DUs and ECs make electricity available to us, families as well as commercial entities, and we pay them for the whole process--from generation, through transmission, to distribution, as well as the business of doing it.
Of course, not all parts of the Philippines have access to grid power (i.e., power that is received from the nationwide network of electricity supply, or power grid). While President Gloria Arroyo reported in 2009 that 99.99 percent of barangays in the country already have access to grid power (umabot na sa halos lahat ng barangay ang elektrisidad), it is different from access of power on the household level. Yes, it is possible to say that all barangay halls have access to power, but not all households in those barangays have electricity yet. (I will talk about this in another post, “Rural Electrification in the Philippines.”)
For now, we will stop here. So we have three players in this simple process. But how come we have brownouts in this age when there are more cellphones than Filipinos? There is more to it than the obvious.
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