Avoiding a power supply crisis

by Boo Chanco (The Philippine Star), July 1, 2016

Today is the first day of the Duterte administration and there is a mountain range of high expectations. The past administration is leaving behind a number of crisis situations and new ones seem to be erupting every day.

Over the last month, there had been five instances when NGCP declared a yellow alert in the power supply of the Luzon Grid. That means we were in danger of having power outages because a number of large power plants conked out at the same time.

Luckily, we managed to avoid the blackouts but our electricity bills may go up because the rates at the electricity supply spot market went up following the law of supply and demand. Maybe the higher rate is not as bad as having no power. Still, the yellow alerts show how precarious our power situation is.

Early this week, Indonesia ordered a ban on Indonesian vessels going into Philippine waters. That’s because a number of Indonesian sailors are being held hostage for ransom by the Abu Sayyaf.

Indonesia supplies 70 percent of the country’s coal import needs. Coal is 45 percent of our electricity generation mix.

This problem shows very clearly how peace and order directly affects our economy. No Indonesian coal means massive power blackouts for the Philippines. Indonesian officials say the ban will remain until we secure our waters.

Two things come out with this development. First, we have to vastly improve our level of energy independence. When I was working with PNOC and the Ministry of Energy in the early ’80s, the problem was our heavy dependence on oil imported from the politically volatile region of the Middle East. Now it is coal.

It is surprising that Indonesia, an ASEAN country, is effectively restricting supply now because of our inability to resolve the Abu Sayyaf piracy problem. Indonesia and Malaysia were very helpful in assuring our energy supplies during the energy crisis years of the ’80s. We have emergency energy supply agreements with them that gave us a good level of comfort during those unpredictable times.

I think the DOE is whistling in the dark when it tried to downplay the dangers of this emerging crisis. DOE said the government is looking at Australia, Russia and Vietnam as sources of coal after the Indonesian ban. But it takes time to negotiate new supply contracts and organize the logistics of delivering to our power plants.

I hope DOE has the right numbers when it declared the availability of a 20-30 days inventory of coal at the power plant sites. They can also use vessels of other countries to deliver Indonesian coal here, but again it takes time to make alternative arrangements.

More significant is the assurance of Semirara Coal chairman Isidro Consunji that they are ready to divert 700,000 tons of their monthly exports for local use. An energy expert I used to work with in the old days commented to me that the Indonesian ban makes it imperative for us to expand local coal production soonest.

But, he pointed out, only Semirara is in a position to effect a substantial expansion. In Mindanao, the Daguma coal project of the San Miguel group can be developed into another major coal mine, if the provincial board of South Cotabato lifts its ban on open pit mining. That’s not likely to happen any time soon, specially with a tougher DENR Secretary who isn’t fond of mining, and much less coal mining.

But don’t blame our dependence on coal instead of renewables. Our power rates are among the highest in the region. For now, coal has become the default fuel of choice so as not to raise rates too much.

The price of renewables is expected to go down but we are already paying an additional P8.65 per kwh to use solar energy. That’s the subsidy called FIT or Feed in Tariff. The subsidy varies according to energy source, with solar, wind, mini hydro and biomass enjoying different rates.

Sure, let us have a program to phase out coal in favor of renewables. But for now up to the next five or even 10 years, it is still going to be coal.

But good news is on the horizon with solar. Leandro Legarda Leviste, the entrepreneurial son of Sen. Loren Legarda is saying solar is now competitive with coal. New technology, efficient design and low interest rates have all combined to bring down the cost of solar electricity.

Lean reports that last month, the world’s lowest priced solar was bid in Dubai at P1.345 per kilowatt hour. Other bids have resulted in P1.575 in Mexico, and P1.741 in the United States by Warren Buffett’s Berkshire Hathaway.

This happened, Lean explained, because of a 90-percent decrease in panel costs over the past decade, low interest rates, and high levels of sunlight — making solar in those places significantly cheaper than fossil fuel.

Because of this, Lean says that in the Philippines, where coal averages at P4, gas at P6, and diesel at P8, solar is competitive even without the FIT subsidy. The problem with most of the current local solar projects, Lean explains, is that these have been built inefficiently.

Lean promises to change that and cut the cost by up to 50 percent. He pointed out our market has now gained economies of scale. The Philippines had a total four megawatts of solar in 2013, but it has reached 900 MW by mid-2016.

But the problem, he said, is that few companies integrate development, investment, and construction all in-house. Lean thinks that as the market matures, agents, middlemen, and subcontractors will struggle to compete. Local companies investing in solar must vertically integrate to lower costs, he emphasized.

Lean says local projects previously avoided technologies like trackers that follow the sun and increase yield by 20 percent because they were more interested in meeting a deadline for the FIT. Now that they are in, they can sit back and collect the subsidy over 20 years (at 16 percent p.a. guaranteed return) even if, as Lean reveals, costs are more than competitive with coal and other fossil fuels. Economic rent-seeking has shown its ugly head as always.

Lean sneers at this attitude of early solar investors who think keeping prices high for the consumer is in their best interest. Lean rightly believes that if the entire industry lowered prices, solar would grow from a small subsidized market of just one percent of energy demand to 100 percent of the Philippines.

The other thing that will enable solar to effectively compete with fossil fuels is the fast pace of developments in storage technology. Solar needs storage to displace more than just daytime generation and stabilize output.

Lean explains that “today, you can roughly assume that batteries add around P2.50 per kwh to the cost of solar energy; based on current trends, this should drop to P1.25 by 2020, at which point solar and batteries will compete with coal.

“But even with present battery prices, solar can replace all gas, oil, and diesel in the Philippines, saving the Filipino consumer almost P100 billion a year, lowering our generation costs by up to 20 percent.”

Lean cites his solar installation at SM Mall of Asia that is supplying power at 30 percent below utility rates. It’s worth noting that cost-savings are even greater for rooftop, which also saves transmission, distribution, and other charges.

Lean promises to prove the competitiveness of solar in a solar farm in Tarlac, which will be the world’s largest unsubsidized solar farm, replacing expensive gas, oil and diesel.

I checked out Lean’s claims with an energy expert I trust. He said there is no doubt the cost of solar is going down. But he cites the added cost of storage that is needed for 24/7 operation. Anyway, he believes storage cost will go down within the next five years. “Tesla is leading this effort and I have no doubt they can achieve that, maybe even sooner.”

For now my expert friend says solar must be blended with other technologies like natgas/LNG. “This is done in the US and cost is driving out coal plants (together with the environmentalists). Henry hub price is 2 to 5 $/mmbtu compared to Malampaya at 9 $/mmbtu from a high of 14 $/mmbtu.”

So there… the new Energy secretary must learn all these technical stuff quickly so he can provide the strategic vision in a Duterte Energy Plan. I hope Al Cusi is up to the challenge.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco