YEARENDER: Uncertainties continue to hound energy sector

MANILA, Philippines – Uncertainties will still relentlessly hound the energy sector in 2011, according to energy experts.

Foremost in the industry’s incertitude is the the fact that its captain, Energy Secretary Jose Rene Almendras, has yet to fully assume command with his confirmation still pending with the Commission on Appointments in Congress.

“2011 will still be a challenging year,” said Almendras, noting that many struggling issues in the industry may have to be there not only next year but also in the succeeding years.

In the power industry, concerns on lack of supply especially during the critical summer months abound. Major island grids are still susceptible to power outages as reserves are just enough to cover their needs.

The volatility of oil prices, meanwhile, continue to prevail in the downstream oil industry due to external factors such as soaring prices of petroleum in the world market and domestic incidents like the recent oil pipeline leak causing a severe supply problem in the metropolis.

Almendras pointed out that if no concrete steps are done to resolve these issues and problems, the energy sector, which fuels the country’s economy, will slowly lag behind its neighbors.

Formulating a new energy policy agenda

The Energy Department had been manned by three secretaries over the past six years. This somewhat brought a lot of skepticism in the industry as a change in management may also mean modification in existing rules and regulations which normally turns off investors.

Before Almendras, there was Angelo Reyes and Jose Ibazeta, who had then instituted their own set of policies and changes in the industry.

And when Almendras took over the helm of the Energy Department in July this year, he immediately introduced his Energy Reform Agenda (ERA), which will serve as pillars of growth and development in the energy sector at least for the next six years or during the term of President Aquino.

Based on the ERA, the Aquino administration, under the leadership of Almendras, will zero in on lowering the price of electricity.

In a policy declaration on energy, President Aquino has specifically directed the DOE to put in much effort to “work to make energy available and affordable for consumers.”

In addition, the DOE was also mandated to put in place consumer protection programs.

Another policy to be adopted is to ensure there would be a level playing field for investors in the energy sector to increase investments and boost power production.

The new administration will also get rid of “favoritism” in the energy industry.

“Put a stop to cronyism in the power sector and rationalize the permits and clearances processes to make the industry attractive, fair, and competitive,” the ERA noted.

To accomplish this, Aquino’s leadership would bank on a thorough review of all projects in the DOE and its attached agencies in view of a zero-based budgeting system where their budget allocations are shaped by their performance and compliance with Commission on Audit reports.

The reliability of supply would likewise rely heavily on thecompletion of the transmission loop. “The feasibility of establishing a national grid which will link Luzon, Visayas, and Mindanao and achieve energy self-sufficiency,” it said.

The government would also “look into the current national energy development plan and identify areas of improvement which will enhance the affordability, availability, and sustainability of the country’s power resources.”

It also sees a need to review the existing law in the power sector. “(Review) the implementation of the Electric Power Industry Reform Act of 2001 (EPIRA) and possible amendments to the act,” it noted.

There is also a need to complete the privatization process of the National Power Corp. (Napocor).

Among the other policy direction in the energy sector include the drafting of a National Energy Development Plan that will encompass energy self-sufficiency and the extensive use of clean and sustainable sources of energy such as wind and water.

The administration would also ensure that biofuel production in the country will not undermine food production.

The government would also underscore the need to “ensure that the pursuit of alternative sources of energy will be a means to secure the constant supply of power for the country.”

Another important policy t the DOE would push for is the encouragement of investments in the energy sector by tapping more diverse sources of power and lower the cost of energy in the long term.

Among short-term moves being pursued by the DOE include the mitigation of the effects of the power crisis such as leasing power barges; contracting additional generating capacity through cooperatives and private utilities; allowing the National Grid Corporation of the Philippines to use ancillary services such as the contracting of back-up generating capacity; and promoting demand-side management.

Transparency will also be a key policy at the DOE. “Regularly package and disseminate information on agency budgets, bidding, and procurement documents and SALNs of senior government officials, to ensure transparency and accountability.”

Streamlining the bureaucracy will also part of the platform for reform at the DOE.

“Ensure that the DOE and its attached agencies will be streamlined and rationalized to have clear-cut and distinct mandates and that qualification standards, especially eligibility, will be strictly followed,” it said.

Lastly, there would be regular evaluation of performance management to ensure the accountability of government agencies and officials.

For the part of the regulator, Energy Regulatory Commission (ERC) executive director Francis Saturnino Juan said one notable development in power regulation in 2010 was the introduction of the performance-based rate mechanism and when the consumers started to appreciate its significance.

“Though we have been trying to introduce this kind of mechanism, it was only this year that the rate-etting methodology was being explained and accepted by the industry,” Juan pointed out.

But Juan acknowledges the need for the EPIRA to be reviewed to make it attuned with the times.

“The Mindanao power situation, which was worse in the first quarter of this year, for instance, served as an eye-opener. The country had been dependent on one technology, dominating the basket of generation mix which led to power crisis,” said the ERC official. Mindanao has been dependent on hydropower plants that when a prolong drought came, the island suffered brownouts to lasting up to eight hours.

Juan opines that consumers are now aware that any factor affecting demand and supply would definitely affect power rates.

“Its going to be very difficult to explain to consumers that a supply shortage would have impact on rates,” he points out.

Implementation of reforms

Even Trans-Asia Oil and Power Development Corp. president Francisco Viray, who served as Energy Secretary in 1994, could not describe what had actually transpired in the energy sector in 2010.

He could not even think of the prospects for next year since most of the activities at the energy sector were halted due to the uncertainties brought about by the change of administration in the middle of the year.

Existing and new investors alike have basically opted to adopt a wait-and-see attitude as changes in power might mean another set of policies, rules and regulations once new people assume their respective offices in the government.

According to Viray, there is a need for the entry of huge fresh investments in the industry in the near term.

“There’ll be probably investments in the power industry to come in to have the plants ready by 2013 or 2014 or in time for the requirements of the grid,” Viray said.

Viray, however, remains optimistic that “though the projection assumes there will be no additional capacities, the additional (capacity) will come on time.”

“Between 2013 and 2015, the capacities will come online in the Luzon grid. The Visayas is good until 2016. Mindanao, you have the Conal and Aboitiz expanding Steag,” says TA official.

But Viray warns that “the outages will be occasionally similar to what happened during the summer.”

Almendras echoes Viray’s apprehension on another power supply dilemma in the first quarter of 2011.

For power next year, Luzon is really going to be exciting, everybody knows as we’ve declared we have a shortage on the reserves. We need to check on the final plan,” the energy secretary says.

Mindanao, Almendras says, would remain a headache when it comes to ensuring sufficient supply of power.

“For Mindanao, I think it’s going to be challenging. We are short there’s not much that can be done. Although the dam levels are very good, there are a few maintenance work that’s going to be needed. I think we’re looking at March as a peak problem for Mindanao and then another one in June based on the schedules we’ve seen and discussed,” he says.

Among the island grids, Almendras is positive that Visayas’ grid will have reliable supply. “Visayas hopefully the power situation would normalize,” he adds.

On the privatization efforts of Napocor generating assets and supply contracts, Almendras believes the government-run asset management firm, Power Sector Assets and Liabilities Management Corp. (PSALM) would be at its best to dispose of Napocor assets.

“PSALM still wants to push through with some of the privatization initiatives,” the energy chief opines.

“Big ticket items would be the focus of 2011 privatization’s thrust. “Congress wants to discuss a few of the assets – the Agus-Pulangi which has already been resolved – what they want to talk about Unified Leyte. These things are unique because of its size (capacity). Congress wants to evaluate whether it’s true that we can chop it out or what it will create if we push through with it. Agus-Pulangi is definitely on hold, it’s the Unified Leyte that Congress would like to talk about,” he says.

Renewable energy development, on the other hand, hit a snag as industry demands for something faster and cheaper kind of sources of power such as coal to address the immediate need for power.

There would also be a slight delay on the release of the rules on feed-in tariff (FIT) which is crucial for RE developers to ensure a guaranteed return on their investments. With the approval of the ERC, the country’s power sector watchdog, consumers’ would have to shoulder the FIT of renewable energy projects under a uniform fee similar to the Universal Charge now being reflected in consumers’ electric bills.

Studies on nuclear energy is expected to kick off in early 2011. This will signal the Philippines’ first official initiative on nuclear power ventures.

On the fuel side, Almendras remains wary of the impact of international fuel movements on domestic oil prices.

“Unless OPEC decides to increase production, I think we’re going to see a lot of pressure. Why? Everybody is reporting increased demand. Two weeks ago it’s China, now it India and Indonesia, and now everybody’s talking supply tightness in the Asian Region.” -Donnabelle L. Gatdula (The Philippine Star)