The Philippine Electric Power Industry
Monday, September 13, 2004
http://www.doe.gov.ph/power/default.htm
The Philippine power industry is divided into three major sectors: generation, transmission and distribution.
Under the present power industry structure, NPC generates its own electricity and buys electricity from IPPs. Power Statistics 2005 Generation used to be a monopoly of the NPC until the issuance of Executive Order No. 215, which opened the generation sector to private investors.
At present, a number of IPPs generate and sell electricity to NPC and other customers. NPC transmits electricity to distributors and large industrial customers via high-voltage wires. NPC is also responsible for constructing the transmission grid highway interconnecting the main islands nationwide.
Distribution of electricity at its usable voltage to end-consumer is performed by investor-owned electric utilities, notably the Manila Electric Company (Meralco), a few local government-owned utilities and numerous electric cooperatives which sell to households as well as commercial and industrial enterprises located within their franchise areas at retail rates regulated by the Energy Regulatory Board (ERB).
The Department of Energy (DOE) sets policy directions for the energy industry, while the National Electrification Administration (NEA) provides financial and technical assistance to electric cooperatives.
Two major reforms are embodied in RA 9136, namely, the restructuring of the electricity supply industry and the privatization of the National Power Corporation (NPC). The restructuring of the electricity industry calls for the separation of the different components of the power sector namely, generation, transmission, distribution and supply.
On the other hand, the privatization of the National Power Corporation (NPC) involves the sale of the state-owned power firm’s generation and transmission assets (e.g., power plants and transmission facilities) to private investors. These two reforms are aimed at encouraging greater competition and at attracting more private-sector investments in the power industry.
A more competitive power industry will in turn result in lower power rates and a more efficient delivery of electricity supply to end-users.
Below is the report by the World Energy Council on the Electricity Market Design of the Philippines (http://www.worldenergy.org/wec-geis/publications/reports/emd/status/philippines/default.asp#background)
Electricity Market Design
The Philippines is an archipelago of more than 7100 islands in South East Asia. The country is divided into three major island groups. The Luzon group, including Palawan, is the largest, representing about 35% of the total land area of the country. The Mindanao group in the south is the second largest and includes the islands of Sulu and Tawi-Tawi. The Visayas is the third major island group, and includes Cebu, Bohol, Panay, Samar, Negros and Leyte.
The Philippine power system consists of three major island grids, namely Luzon, Visayas and Mindanao; there are also several small island grids. The Luzon grid is the largest, accounting for 75% of total generation and installed capacity. The Visayas grid comprises the islands of Cebu, Leyte, Negros, Panay, Samar and (soon) Bohol. Together they amount to around 10% of total generation and installed capacity. The Mindanao grid accounts for about 15% of total generation and installed capacity.
Luzon, which includes the capital Manila, has about 75% of national electricity demand. Prices are such that industrial and commercial customers subsidise residential customers, and the Luzon grid subsidises those of the Visayas and Mindanao.
Prior to 1987, electricity production was solely the responsibility of the government-owned National Power Corporation (NPC). Although the NPC remains the principal generator, a significant portion of generating capacity is now being operated by independent power producers (IPPs). Responsibility for transmission still remains with the NPC. Since 1995, the NPC has allowed “open access” over the high voltage transmission system, allowing IPPs to sell directly to distributors and large industrial customers.
In 1999, IPP installed capacity stood at almost 50% of total generating capacity, accounting for 50% of the total of around 40 TWh of electricity produced. As a consequence of the Asian economic crisis in 1997, projected load growth did not materialise. The result was that NPC plants are now under-utilised, with the spare capacity margin being about 50% of demand on average.
By about the end of 2000, grid interconnections between the main Visayas group of islands were expected to be completed. The main island of Luzon is interconnected to the Visayas grid through a double circuit 350 kV DC link which now allows transport of about 480 MWe of geothermal energy from the Visayas. Another submarine HVDC link with a capacity of 500 MWe is planned to be in place by 2004 between the Visayas and the hydro-dominated Mindanao grid. In addition, there are also small isolated island grids, predominantly located in the Visayas region, which are served by small diesel generators.
Distribution is performed by 27 private and municipality owned utilities, and also by 119 rural electricity cooperatives. The largest privately owned distribution company by far is the Manila Electric Company, which distributes more than 75% of national sales. About 76% of villages are electrified and connected to the main grids, and the government aims to extend electrification to all villages by 2004.
The Philippines has a large gas field some 500 km off-shore from Luzon. Gas-fuelled generating plants are under construction, and a gas pipeline from the Malampaya gas field in Palawan island is expected to be operational by 2002. By about 2003, good fuel diversity is expected to be achieved between hydro, coal, gas, oil and other sources (e.g. geothermal, wind, etc.). The Philippines is the world’s second largest producer of geothermal power, after the USA.
Historical Drivers for Change
In the early years of the 1990s a significant contributor to the country’s low economic growth of 2% per annum was the power crisis which commenced in 1989. During this period, which lasted until 1993, demand growth outstripped capacity and outages of 4-8 hours a day became commonplace. Inconsistent government policies, political intervention (particularly the non-operation of a 650 MWe nuclear plant) and heavy-handed regulation and control of the NPC were major factors contributing to the failure to deliver a more efficient and productive electricity industry.
Government funding was inadequate and revenue income was insufficient to fund the investments needed to meet the growth in demand, as well as to replace ageing plants. Power shortages were eventually resolved through government liberalisation of the sector, allowing private investment in electricity production. This allowed the NPC to concentrate on transmission and improving the backbone grid systems through interconnection.
By the end of 1994 the private sector had added some 2.5 GWe of capacity, sufficient to meet 40% of the aggregate demand in the three main transmission grids (Luzon, Mindanao and Visayas), and economic growth had risen to 8%. However, the Asian economic crisis during late 1997 and the consequent fall in electricity demand in 1998 resulted in over capacity in generation, leading to NPC plants operating at below optimum levels.
The HVDC interconnection between the Visayas and Mindanao is being pursued to allow the transmission of excess geothermal energy from the Visayas, in anticipation of demand growth in Mindanao and the rest of the grid by about 2004.
The government’s forecast is for an average growth in demand of about 9% over the next 10 years. This will require about 14 GWe of plant construction and further funding of over US$20 billion. The requirement is therefore to create a market environment that encourages private investment to provide this additional capacity. The government wants to reduce its own financial risks by requiring the private sector to assume risks in the future generation market. This would mean doing without long-term contracts with the government or other government guarantees.Similarly, the government wishes to encourage investment in the distribution sector to connect some 10 000 villages to the main system.
Government Policy and Objectives
The matter of restructuring the power sector and privatising the NPC has been the subject of many studies, discussions and public consultations in both the executive and legislative branches of the government.
The objective of the proposed reforms is to make sure the country will have reliable and competitively priced electricity. The strategy is to put an end to monopolies that breed inefficiency, to encourage the entry of many more industry players, and to promote robust competition in generation and supply that will benefit consumers in terms of better rates and efficient services.
The privatisation or sale of NPC’s generating assets to seven independent companies is expected to trigger competition in the generation sector. This will also effectively shift the burden of providing the necessary financing for capital-intensive power generation plants from the government to the private sector.
With the relatively recent power shortages in mind, together with high forecast growth and the country’s present low per capita GDP and electricity consumption, the government’s policy is focused on the requirement to deliver a reliable and secure supply of electrical power. To improve social conditions for the population, another, compatible, requirement is the total electrification of the country.
To deliver these requirements the government has the following enabling objectives:
Increase the investment of private capital in the power industry, while minimising the government’s financial commitment.
Create an environment of competition and accountability.
Deliver competitive and affordable prices.
Improve operational and economic efficiency.
Make transparent the social subsidies.
Share social and other costs among all users.
Present Industry Structure
Under the present industry structure, the NPC operates its own generating plant and also buys additional electricity from IPPs. It provides supplies to distributors, which comprise privately and municipality owned utilities and rural electricity cooperatives, and also to large industrial customers.
The Energy Regulatory Board (ERB) regulates the tariff rates of the NPC, as well as those of the distributors and cooperatives. The Department of Energy (DOE) sets policy direction for the energy industry, while the National Electrification Administration (NEA) provides financial and technical assistance to electricity cooperatives.
Liberalisation Progress
Presidential Decree 40 (issued in 1972), gave the NPC a virtual monopoly over the generation and transmission of electricity. In 1973, the National Electrification Administration (NEA) was created, to implement the government’s national policy on total electrification of the country. The NEA provides financial support for loans to the 119 rural electricity cooperatives. From 1986 petroleum product prices and electricity tariffs were set by the Energy Regulatory Board (ERB) under the Office of the President.
Executive Order 215 of 1987 amended the NPC’s responsibilities to allow private entities to participate in power generation through co-generation, build-operate-transfer (BOT) and build-operate-own (BOO) schemes, though responsibility for strategic development remained with the NPC. Plants built under the NPC’s power development programme must sell their output to the NPC. In 1990, the Build-Operate-Transfer Law was approved to further encourage private sector financing of power infrastructure projects.
In 1992 the Department of Energy was re-established (after it was abolished in 1986), charged with energy planning, accreditation and connection. The Republic Act 7638 stated that the energy programme should be updated to include a policy direction towards the privatisation of government agencies related to energy, and towards deregulation of the power and energy industries.
The Emergency Power Crises Act of 1993 finally addressed the power crisis (which had resulted in daily 12-hour brown-outs) by giving the President special emergency powers to contract with the private sector for the necessary additional generation capacity. It also raised the maximum allowed rate of return of the NPC to 12%, although this has yet to be applied.
From 1995, IPPs were allowed to sell to distribution utilities directly. New regulations also established competitive procurement procedures for power projects and a methodology for calculating the avoided costs of a utility contracting with an IPP. In addition, the range of possible construction contracts was extended from the limited BOT model.
Also in 1995, Congress started to develop a bill to define the future structure of the electrical power industry and the responsibilities of the various agencies and entities. Debate and redrafting has continued, and the legislation had still not been approved in 2000.
Current Objectives
The introduction of IPPs into the Philippines was a success, in that it resulted in the power system being able to meet demand, which was the priority in the early 1990s. However, there are significant concerns over funding, debt repayment and efficiency which remain to be resolved by the industry. These include:
Supply reliability remains a long-term risk due to the massive financial requirements and an over-stretched infrastructure budget.
A significant financial responsibility and market risk continues to fall on the government.
Retail electricity rates are among the highest in Asia.
The pricing structure does not reflect true costs and subsidies are not transparent.
There are inadequate incentives for efficiency due to the absence of true competition.
There is inadequate accountability for reliability, cost, performance and quality of service.
In the short term, the objectives for the electricity sector are:
To continue to encourage greater private sector investment and participation in power sector activities.
To restructure the power sector to promote efficiency and accountability.
To unbundle the NPC’s transmission and generation businesses, prior to privatisation of both.
To pursue the use of natural gas for power generation.
To manage the emerging excess capacity.
In the longer term, the key objective is to provide reliable and efficient supplies of electricity.
This has other supporting objectives:
To diversify energy sources for power generation.
To exploit indigenous fuel resources.
To diversify the sources of both local and imported energy.
In terms of efficiency in pricing, the objectives are:
To unbundle and rationalise electricity prices to encourage efficiency in generation, transmission, distribution and consumption by end users.
To implement marginal cost based electricity tariffs.
Proposed Programme Of Change
Private power investment to date has been successful. To continue this success and expand the benefits of competition, the government has initiated reforms, the objectives of which are:
To create an environment which encourages sufficient investment to meet growth.
To develop a competitive environment to encourage efficiency and reliability.
To develop a regulatory framework to protect customers, while delivering growth by ensuring commercial viability.
These will contribute directly to meeting the government policy objectives presented earlier. The issue of subsidies is being addressed in the present draft legislation, which envisages their removal within three years of the act entering into force. An additional guideline for privatisation of the industry is to ensure the participation of Filipino citizens and corporations.
Under the proposed reforms, generation will be undertaken in future predominantly by IPPs, based on market signals. The government plans to retain a controlling interest over hydro and geothermal generation, as required for national patrimony and by the constitution, but the remainder of the NPC’s generation and transmission assets will be privatised.
Transmission will be the responsibility of an independent National Transmission Company (NTC), which will serve as a common carrier for electricity from generators to distributors and large industrial customers. It will despatch all generating plants connected to the system according to a set of market rules. Partial privatisation of the NTC will be achieved by allowing the entry of a strategic partner.
Electrification of isolated small islands and remote areas where private investment may not be economically viable, and other unavoidable social obligations, will remain with government bodies until such time as appropriate incentives have been established for the private sector to assume responsibility. The DOE will annually update the Philippine Energy Plan and Power Development Program. Projects not backed by private investment but required strategically will also become the responsibility of the government.
Restructuring and Privatisation
Within six months of the reforms being approved, the NPC will form the NTC as a wholly owned subsidiary. This will be a regulated monopoly responsible for grid system management and central despatch of generation. It is expected that for 18 months the NTC will act as the market operator, before the activity becomes independent.
Non-strategic generation assets of the NPC will be allocated to five portfolio generators, two of which will be competing generators on Luzon. The government will retain controlling ownership of indigenous and strategic assets. Missionary generation will be undertaken by a separate state-owned corporation.
Within one year, the DOE will draw up a plan for NTC privatisation within three years. Foreign ownership will be restricted by constitutional limits. This sale will come first to enable the market operator role to be developed prior to the privatisation of generation assets.
Within six months, the DOE will present a plan for the privatisation of generating plants. The privatisation value will be optimised, through sales within three years. At least 70% of generation assets and contracts will be sold. Unsold assets will be retained by a residual NPC generating business.
Market Design and Control
The DOE will establish a market for the sale and purchase of electricity within one year. All generating plants will compete for despatch according to pool rules when market operation commences. The market operator will:
determine the merit order for economic despatch;
establish a clearing price;
administer the market;
amend rules by action of market members.
The NTC will be independent of the generation and distribution sectors, with no cross-ownership. Transmission and distribution operations will be assessed against performance standards. Distributors will have an obligation to supply in a least-cost manner, and rates will be set by return on capital. The draft bill proposes competition initially for customers taking over 1 MWe. Retail access to competition will occur within three years.
Single company ownership of generation assets will be limited to 30% of national capacity and 40% of a single grid’s capacity (i.e. the Luzon, Mindanao or Visayas grids).
Unbundled charges for generation and transmission will appear within six months. Cross-subsidies between islands and between different classes of customers in wheeling charges will be removed within three years.
The role of the regulatory body will be to promulgate rules and regulations to prevent market domination and anti-competitive behaviour. This body will be vested with powers to change the market, suspend its operation and licences, and impose formulated penalties on transgressors.
The regulation of licences, tariffs, the futures market, and competitive activities will be covered by increased powers within the Energy Regulatory Board (ERB). Over recent years the ERB has allowed rates of return of 10% for government-owned utilities and 12% for the NPC and privately owned companies.
Issues
The timescale of almost four years for debate and the redrafting of legislation has raised many issues that will need resolution in due course. Some are points of disagreement on policy, but most are about the methods and timescales for implementation and the degree of liberalisation that should be in place initially when the generation pool is opened.
The following list is extensive and not in any order of priority. Since these issues are all associated with market design and its implications, the timescales associated with their resolution all tend to be less than three years.
The issues are:
The requirement for a universal levy to cover some or all of the following: repayment of NPC’s debts, including stranded costs (proceeds from privatisation of generation companies, with or without debts assigned, will be insufficient to repay the NPC’s total debt); rural electrification; the development of indigenous fuel sources; and further grid interconnections.
How should stranded costs be determined? How should they be recovered and over what transition period?
Raising finance on a market basis may be difficult outside OECD countries, giving large multinational companies an advantage over smaller Philippine national companies.
Transmission constraints may fragment the market and make supporting a national market more problematic.
High tariff rates.
The need for pricing to reflect costs. Tariffs heavily distorted by subsidies and cross-subsidies will not encourage efficiency or fair competition (this applies to transmission charges and sales tariffs).
The level of regulatory control. The balance between commercial freedom and over-regulation in the early stages of market operation will affect investment appetite and privatisation valuations.
How should indigenous energy resources be promoted and defended against competition?
The valuation and viability of electricity cooperatives will be affected by market introduction. Smaller cooperatives may find competitive trading very tough.
Wheeling rates.
Open access.
Generation and distribution companies cannot own transmission, nor vice versa, but what about generation and distribution in common ownership?
How is anti-competitive behaviour defined and how is it addressed?
What should the timetable be for retail competition? How will it be accomplished, and how much will it cost?
A free-bidding generation pool may not burn the “right” fuels according to the government’s fuel policy, and indigenous fuels may be disadvantaged. The national policy on fuel diversity may not be delivered.
posted by philpower @ 11:20 AM,
