YEARENDER: Energy sector gets good marks in 2011

MANILA, Philippines – The Aquino administration has worked itself up towards a favorable rating in terms of addressing energy-related concerns and issues in 2011, as challenges remain at its midst in 2012 and the years to come.

While there was a noted decline in the approval rating of Filipinos on President Aquino’s governance, there is still high hope and optimism in most of the energy sector’s stakeholders on the ability of the present administration to come up with concrete solutions to major concerns of the industry such as high power and oil prices.

Government Watch chairman and industrialist Raul T. Concepcion, who has been very vocal on energy issues, gives a two-thumbs-up rating for the Department of Energy efforts in addressing energy concerns this year.

“In the first 100 days of the Aquino administration I give them a four but towards the latter part of the year, I should say I should give them a nine. I believe that they already have full control of everything and they are moving in the right direction. The economy, I believe, will do well in 2012 as well as the DOE’s performance. I am very optimistic that the prospects of the power and oil industry next year would be even better,” says Concepcion.

This sentiment is being shared by Manila Electric Co. (Meralco) chief operating officer Oscar Reyes, who notes the DOE’s intelligent approach in addressing power issues.

“Quite objectively, the government has been quite proactive and positive. I’d place them at between 8.5 to 9,” he says.

Reyes cites that the DOE’s management team has been responding to the industry’s needs appropriately.

“They answer our queries accordingly. If not Secretary (Rene) Almendras, it would be Undersecretary Josefine Patricia Asirit, Jay Layug and Loreta Ayson. They really work as a team,” the Meralco executive says, noting that “they know what they are doing and they are action and results-oriented.”

For his part, Philippine Independent Power Producers Association (PIPPA) president Ernesto Pantangco observes that the DOE is a silent mover.

“I would give them a rating of eight the DOE continues to address major concerns of both oil and gas industries albeit in a quiet way without fanfare,” comments Pantangco.

Peter Wallace, a business consultant and the managing director of International Market Assessment Asia, on the other hand, says he would not want to give his rating but surmised that the DOE “was one of the better performing departments” in 2011.

“The Energy secretary cleverly averted an almost certain power crisis by scheduling all plants to overhaul back to rated capacity, at least in Luzon,”Wallace notes.

Wallace, however, points out that the DOE must still be wary about the unstable power situation in the Visayas and Mindanao.

“Visayas remains critical and Mindanao in the dry season. New power may not be online soon enough,” Wallace says as he points out that higher costs of power would still persist.

He also expressed fears that the present administration may not be able to come up with an immediate way out of it.

“The public must recognize there’s little that can be done about prices, the costs are immutable-sunk capital costs that must be recovered and world fuel prices are beyond government control,” he says.

Wallace likewise warns about jumping in to something that might create further pressure on power rates.

“We must just use energy more efficiently. Renewable energy should not be subsidized, it just adds to our already high cost for little gain,”he notes.

Not content

But if there are industry players who are well satisfied, there are also those who would want to see more actions from the DOE.

National Association of Electricity Consumers for Reforms (Nasecore) president Pete Ilagan said he’s not content with the ability of the government to address issues, especially in the power sector.

“I am giving them a very poor rating of one They are pathetic. The government has to show serious and resolute efforts in ensuring stable, reliable and efficient supply of electricity and just and reasonable rates as the law requires,” he says.

Renato Reyes, secretary general of the militant group Bagong Alyansang Makabayan (Bayan), meanwhile, claims that the government remains weak in shielding consumers against high power costs.

“I’m giving them a rating of five Power firms were again quick to raise rates while government appeared more and more helpless,” Reyes opines.

The Bayan official notes that “this year (2011) marks 10 years of the Electric Power Industry Reform Act (EPIRA), and the reality that power rates doubled since 2011 and there seems to be no significant relief in sight. The government has done almost nothing to stop runaway power rates, not the highest in Asia.”

The EPIRA, passed in 2001, aims at restructuring the power industry with an end-goal of helping bring down electricity costs.

But Energy Secretary Jose Rene Almendras believes that his department has been doing the best it could in keeping up with its role of maintaining reliable supply of two of the country’s basic needs-oil and power.

Though all other administrations before him have been saying that all these issues and problems in oil and power industry have been inherited from the previous ones, Almendras admits challenges could actually still persist even after the end of the Aquino administration in 2016.

Almendras boasts of their ability to curtail power outages. “This year was supposed to be a year of rotating brownouts for Luzon and Mindanao. It’s been a challenging year, as we ended we’ve not had major brownouts. We’ve been able to bridge supply levels, without building a new power plant we were able to augment supply more liquid, and we’ve made the market more efficient,” he adds.

Energy Regulatory Commission (ERC) executive director Francis Saturnino Juan, meantime, recognizes the need to continue carrying out reforms along with all the industry’s stakeholders.

“We faced new challenges this year as we moved closer to the end goal of restructuring process, which is to introduce competition at the retail level. In facing and addressing these challenges,the commission worked closely with all industry participants to see to it that appropriate actions would be undertaken. All in keeping with its mandate to promote consumer interests,” Juan says.

The ERC official sees 2012 as another challenging year.

“The commission expects next year to be challenging and exciting and it hopes for continued support and cooperation of everyone.”

Measures in place

Early this year, the DOE came up with various measures to reduce power shortages in Luzon. It issued Department Circular 2010-03-003 “directing all power generation companies, the transmission service providers, and all distribution utilities to ensure adequate and reliable electric power supply in the country.”

The DOE also required generation companies to submit a so-called grid operating and maintenance program (GOMP) to maintain adequate in-country stock of fuel.

Market surveillance monitoring, the DOE claims, has also greatly improved, allowing consumers to enjoy lower electricity rates due to lower spot prices in the power market.

Corresponding measures, the DOE says, were carried out in the Visayas. The commercial operations of the Wholesale Electricity Spot Market (WESM) in the region started in December 2010 which was believed to have minimized, if not eliminated power outages as it allowed even a power plant’s generating capacity not covered by bilateral contracts to be dispatched through trading in the power spot market.

“This set-up provided a better structure for such market condition which may even yield more investors in addressing future power needs,” Almendras says.

A number of new power plants were also commissioned in the Visayas such as the 246 megawatt coal-fired power plant (CFPP) of Cebu Energy Development Corp. (CEDC) in Cebu; 164-MW CFPP of Panay Energy Development Corp. (PEDC); and Unit 1 (February 2011) and Unit 2 (May 2011) of the 200-MW CFPP of Kepco-Salcon Power Corp. (KSPC). These gave Visayas, to date, a surplus power of about 600 MW.

In Mindanao, the DOE also implemented measures to put an end to perennial power outages in the area. The department issued Circular 2010-10-0011, “mandating the rational utilization of available generation capacity in Mindanao and directing DOE attached agencies, the National Grid Corporation of the Philippines (NGCP) and all industry stakeholders to address the power situation in Mindanao.”

As a result, NGCP was allowed to maximize the dispatch of available capacity, even those contracted for ancilliary services. Power Barges 117 and 118 of Therma Marine Inc. (TMI) of the Aboitizes added 100 MW to the power supply of the grid, as well as uncontracted capacities, while contract negotiations between TMI and electric cooperatives are ongoing. The moves solved the rotating brownouts in Mindanao.

To further efforts of weathering power price increases, the government is also pushing for open access and retail competition (OARC).

It would be noted that developments in the privatization of the National Power Corp. (Napocor) generating assets and Napocor-independent power producer (IPP) contracts prompted the ERC to pursue Sec. 31 of EPIRA, which calls for the implementation of OARC.

Once the ERC officially implements the OARC scheme, most likely by the third quarter of 2012, this will mark the start of competitive retail electricity market in Luzon and the Visayas. Under OARC, all electricity end-users with an average monthly peak demand of one MW will have the right to choose their own electricity suppliers.

Also it was during the year 2011 that the government decided to continue the implementation of the lifeline rate subsidy program up to 2021. This subsidy comes as dole out to low-income and/or marginalized end-users who cannot afford to pay at full cost their electricity bills.

To date, there are around 4.53 million lifeline customers with a total electricity consumption of 158 million kilowatt-hours (kwh). Total subsidies provided by the government under this scheme amounted to P355.28 million, which were funded by around 28.14 million non-lifeline customers.

Downstream Oil Sector

On the downstream oil industry, 2011 was truly another challenging year, according to Almendras, but stressed that the worst has yet to come in terms of fuel pricing.

“I don’t think it’s over, there are new issues and challenges that will come our way. I believe that within the powers and our own capability, we’ve tried our very best to do what is good. We tried to mitigate as much as we could. But the challenge of hydrocarbon price will continue,” Almendras opines.

On April 1, 2011, to provide temporary relief from the recent increases in petroleum prices, Executive Order 32 instituting the public transport assistance program (PTAP) – Pantawid Pasada was promulgated, to implement the P450-million program as a government intervention to provide assistance to the transport sector (jeepneys and tricycles).

Amidst the oil pricing row, Independent Philippine Petroleum Companies Association (IPPCA) chairman Fernando Martinez points out though that no one has to be blamed for the prevailing high oil prices.

“There is no administration that could be blamed on the rise and fall (of oil prices) nor it be attributed to any president, its an international event,” he stresses.

The IPPCA official says it is high time for the government to no longer be affected by issues related to oil deregulation.

“The oil industry is already deregulated. Oil prices should cease to be a political issue. They should stop politicizing (oil price issues),” Martinez says.

Asked to give his rating, Martinez gave a passing mark of 7.5 to DOE for its effort to the contain oil prices.

Martinez also notes that it is also highly inaccurate to conclude that prices are at their highest at this time, when in fact they are 10-12 percent lower than in 2008, when the price of gas rose to P50 per liter compared to the current rate of P45 per liter.

Moreso, he says the government must be commended for its effort to “avert any possible supply disruption.”

On a more positive note, he expresses hopes 2012 would be a better year for the downstream oil industry. “Outlook for next year… I can see it to be better than this year,” he says.

It would be noted that the Organization of Petroleum Exporting Countries (OPEC) scaled down its forecast for 2012 demand growth by 100,000 barrels per day to 1.1 million barrel per day while the International Energy Agency (IEA), which has been cutting its 2012 oil demand growth forecast since July, said demand would grow next year by 1.26 million barrels per day, 40,000 bpd lower than its previous forecast.

For the whole of 2012, the IEA expects global demand for OPEC oil to be at 30.2 million bpd, a cut of 300,000 bpd from the previous oil market report.

There are corresponding changes in the domestic pump prices every time international oil prices move.

As of Dec. 20, 2011, the net increase of gasoline stood at P4.78 per liter while diesel declined to P6.69 per liter.

Upstream Oil Development

While there was a major setback with the pullout of Exxon Mobil Corp. in the exploration activities at its Service Contract 56 in Northwest Palawan, Almendras says 2012 presents brighter prospects in upstream oil development.

“On the area of resource development, I believe this was a very good year, considering that oil and gas exploration has been very well received. The companies that have paid already is over 50 and they paid serious money for the research. We have firm commitments from people who say they really want to go to the Philippines and invest here – that’s for oil and gas and we’ve just started,” declares the energy chief.

On June 30, 2011, the DOE launched the fourth Philippine Energy Contracting Round (PECR) which forms part of President’s Aquino’s long-term plan to address the country’s increasing demand for oil and further reduce its dependence on imported fossil fuels. PECR 4 provides for a transparent and competitive system of tendering onshore and offshore oil and gas blocks for exploration to both local and foreign investors.

A series of three international roadshows were held in Australia, Singapore and Italy to market 15 new oil and gas exploration areas, mostly near South China Sea and Sulu Sea. These areas are: Area 1 in Cagayan; Area 2 in Central Luzon; Area 3 in Northwest Palawan; Area 4 Northwest Palawan; Area 5 Northwest Palawan; Area 6 in Mindoro Cuyo; Area 7 in Mindoro Cuyo; Area 8 in East Palawan; Area 9 in East Palawan; Area 10 in East Palawan; Area 11 in Cotabato; Area 12 in Cotabato; Area 13 in East Palawan; Area 14 in East Palawan and Area 15 in Sulu Sea.

Likewise, PECR 4 for the coal sector was launched on Dec. 1, 2011 where 30 coal areas were declared open for bidding to potential investors.

Renewable Energy

Marred with controversies, the government is still trying to hurdle the development of renewable energy (RE) resources.

“On the renewable side, I know you always ask me about service contracts and I know there’ve been rumors we don’t issue contracts. You realize that I’ve signed over a thousand megawatts of hydropower and mini-hydropower project contracts. In the past few months, we continue to release and sign contracts in areas where it really works,” he says.

The problem before was that the DOE just kept on releasing/issuing service contracts without fixing the peripheral issues. But now we’re trying to make sure that if you have a service contract the chance of you getting that project off the ground really moves. So if there was something we would like to be able to say is – we know we have a lot of problems or challenges – but we have the solutions and implemented the solutions, we’ve tested it and it works, so now it’s just implementing it and we can expect it will continue.”

“Now, renewable energy is still a controversy of sorts, I’ m not in control of the feed-in tariff (FIT), I’m being blamed for all that actions. But as much as I want to, there is an appropriate institution and process for that,” Almendras says.

FIT, which will come in a form of subsidy, is a fixed amount of revenue guaranteed by the government to renewable power producers for a number of years.

Coinciding the issues on FIT, the government unveiled the National Renewable Energy Program (NREP) or the “green energy” roadmap of the Philippines.

To pave the way for NREP’s smooth implementation, the DOE also conducted nationwide public consultations on the rules governing the establishment of the renewable portfolio standards (RPS). This market-based policy, which has yet to be finalized, will require electric power industry participants to source an agreed portion of their energy supply from eligible RE resources.

What’s going to happen in 2012?

Next year is the year for expanding, says Almendras, who expects to award more oil and gas exploration and other energy-related contracts in 2012.

“So this year was a year of studying and taking stack and then putting them together. Next year, the DOE will be in a position that will open its wings and cover now the areas – that’s as far as resource development, and electrification. Next year will continue to be challenging for power, particularly for Mindanao and Luzon.”

Official data show that in 2012, there would be 100 MW of new capacity coming into Mindanao. These would be on top of the total 200 MW that are already in place this year. In 2013, there would be another 200 MW expected to come in to the grid.

Prospects for downstream oil sector, he says, would be the establishment of compressed natural gas (CNG) mother-and-daughter stations all over the country; and the setting up of liquefied natural gas (LNG) terminals in southern part of Luzon. In Mindanao, the DOE has identified Davao City and Saranggani as potential sites for natural gas projects.

On the privatization efforts, Power Sector Assets and Liabilities Management Corp. (PSALM) president and CEO Emmanuel Ledesma Jr., for his part, says the PSALM Board thoroughly reviewed all matters relevant to privatization and we look forward to the very aggressive pursuit of privatization efforts by next year.”

PSALM would put in the auction block in March next year three power barges which would also be used to bridge the supply gap in Mindanao. –Donnabelle L. Gatdula (The Philippine Star)