University of the Philippines
National Engineering Center
Philippine Electric Power Industry
Supply Security and Policy Assessment
Presentation to House of Representatives
Prof. Rowaldo del Mundo & Ms. Edna Espos
December 6, 2011
HOR Speaker Conference Room
Quezon City
Analysis of Supply and Demand
and Reform Proposals
Analysis of Supply and Demand

Reliability Performance of Luzon Grid
• Generation deficiency
started in 2010
• There will be generation
deficiency even with
BacMan rehabilitation and
GNPower new 600 MW
Power plant in 2012 and
2013
Supply Adequacy from
Pre-EPIRA IPP Program
Required Reserve to meet
1 day/year LOLE = 28.7%
LOLE - Probabilistic Expectation
of Generation Deficiency due to
simultaneous scheduled and
forced outages of power plants
that will result in power
curtailment
Year
2011
2012
2013
2014
Capacity
(MW
9583
9624
9657
9657
Demand
(MW)
7581
7827
8085
8356
Reserve
(%)
26.41%
22.96%
19.44%
15.57%
LOLE
(Days/Yr)
5
12
5
82
3
Analysis of Supply and Demand
Luzon Grid
 2010 Risk of Loss-of-Load: 5 days
(against 1 day/year LOLE criteria)
2014 Risk of Loss-of-Load: 82 days
 200 MW Peaking Plant/s needed in 2013
 600 MW Baseload Plant/s in 2015 (on top of 600 MW in 2013)
 600 MW Baseload Plant/s for Malaya Oil Thermal and Limay Oil
CCGT Power Plants Retirements
 Visayas Grid
 Supply until 2016 is adequate
 150 MW Intermediate (Mid-merit Dispatch) Plants in 2017
 Mindanao Grid
 600 MW baseload plant needed ASAP
 20% Capacity Deficiency can be solved in the short-term with
long-term perspectives by Embedded Peaking Power

4
Supply-Demand Balance

Regional Perspective
Type
Dep. Cap
(MW)
Demand (MW)
Margin (%)
NCR
Baseload
1
4,914
-99.98%
Intermediate
Peaking
Total
0
30
31
362
495
5,771
North Luzon
2,611
1,114
-100.00%
-93.94%
-99.46%
600
82
341
112
3,552
1,308
South Luzon
2,301
427
631.12%
203.62%
171.56%
8472.78%
-100.00%
896.30%
Baseload
2,700
31
0
43
5,001
502
Total Luzon
4,913
6,455
Intermediate
Peaking
Total
3,300
371
8,584
593.77%
-43.01%
13.23%
Baseload
Intermediate
Peaking
Total
Baseload
Intermediate
Peaking
Total
476
651
7,581
134.46%
438.42%
-23.88%
5
Analysis of Supply and Demand

Control of Installed Capacity of Power Plants (March 2011)
Luzon
NPC
16%
Visayas
Others
22%
Aboitiz
17%
Lopez
15%
Aboitiz
14%
San
Miguel
30%
Lopez
Group
17%
NPC
83%
Aboitiz
16%
Global SPC
17% 8%
Others
3%
NPC
41%
1%
CEPALCO
Mindanao
6
Analysis of Supply and Demand



Key to Supply Adequacy:
Long-Term Power Supply Contracting
DUs hesitated to pursue long-term power supply contracts
 MERALCO which controls 70% of demand in Luzon did not
sign contracts for future requirements. Risks of loosing 3040% contestable customers
 600 MW in Bataan had 3 years of marketing activities until
11 small electric cooperatives and PDUs signed PSCs
 Visayas Coal Power Plants built after long-term contracts
were signed during crisis
 No long-term contracting yet in Mindanao
WESM did not provide enough signal for new investment in
generation capacity.
 It only provided market for un-contracted demand of DUs
and capacity of existing power Plants
7
Long-Term Power Supply Security
DU Demand
Forecast & PS
Contracts
Qualified
GENCO
Bid
DU
Uncontracted
Demand
Public
Auction
Long-term
PS Contract
Lender
Financing
Power
Plant
Project
Financing
Pre-EPIRA Framework
• NPC Centralized Planning
and Commitment
EPIRA Framework
• Competitive Market
REFORM PROPOSAL
MANDATORY PUBLIC AUCTION OF
DISTRIBUTION UTILITY DEMAND FOR
LONG-TERM POWER SUPPLY
CONTRACT
Investor
Capital
New Power Plant
Power Plant
Dev’t. &
Construction
Baseload: 3-5 Years
Peaking: 1-2 Years
GRID
Additional
Generating
Capacity
8
Short-Term (Hourly) Power Supply Security
REFORM PROPOSAL
GRID
Convert WESM from Gross Pool to Net
Pool (Balancing) and from Nodal to
Zonal Market
DU Demand
• Total Requirement
• Uncontracted (Buy)
• Overcontracted (Sell)
GENCO Capacity and Cost
• Available Capacity
• Uncontracted (Sell)
• Overcontracted (Buy)
NGCP System Security
Requirement
• Spinning & Standby
Reserve
• Priority-Dispatch &
Must-Run Units
Power Plant
Generation
WESM
(Balancing Energy
and Reserve
Market)
NGCP System
Operator
Dispatch
Instructions
Generation &
Reserve Dispatch
Schedule
9
EPIRA RESULTS ASSESSMENT
Colour Coded Scoring
Partly achieved or
Being achieved
Achieved
Not achieved
11
EPIRA OBJECTIVES
Enhanced inflow of
private capital,
private ownership
and broadening of
ownership base
ACHIEVEMENT
SCORE
NPC privatization including transfer of
energy output of IPP contracts to
administrators largely achieved
Only 2,222.8 MY net increase in installed
generating capacity as of April 2010; most
committed before EPIRA
Private control by of installed generation
capacity as of Dec 2010 held by 3 main
groups:
• Luzon (SM 29%, Aboitiz 17%, Lopez
(15%). PSALM/NPC 16%
• Visayas (GBP 17%, Lopez 17%, Aboitiz
14%). PSALM/NPC 41%
• Mindanao (Aboitiz 16%). PSALM/NPC
83%
12
EPIRA OBJECTIVES
Quality, reliability,
security of electricity
supply
ACHIEVEMENT
SCORE
Security targets (for reserve) are deficient and set
using deterministic approach long eschewed by
international experts. (The probabilistic approach
with a 1 day/year LOLE corresponds to a 30%
reserve level vs. current 23.4% adopted by DOE).
LOLE criterion of 1 day per year started to be
violated in 2010 and will likely remain in the near
term
System has achieved about 60% energy autarky
from indigenous energy generation but prices for
about 88% of energy generation including those
from indigenous natural gas and geothermal
steam are indexed to international energy/fuel
prices.
Systems loss standards for distribution and
transmission in place. Power quality and reliability
standards still to be promulgated
13
EPIRA OBJECTIVES
Affordable,
transparent &
reasonable electricity
rates
ACHIEVEMENTS
SCORE
Difficult to assess. No DOE/ERC prior determination of
affordable and reasonable tariff targets . Such targets
could have guided policy (e.g., tariff subsidies from
consumers for rural/missionary electrification, FIT;
government royalties; VAT; etc)
2003 -2010 Average rate increase in MERALCO franchise
area: 26% generation; 49% transmission. Distribution 2010
adjustment 55% higher than 2000.
PH basic generation rates in Luzon/Visayas comparable to
Chile’s final generation rate (app PhP 5.59/kWh). NPC
basic generation rates in Mindanao comparable to Brazil
which is also predominantly hydro-based. Distribution &
transmission tariffs in MERALCO franchise area much
higher than Chile’s and Brazil’s (all 3 apply CPI-X
methodology)
14
EPIRA OBJECTIVE
ACHIEVEMENT
Affordable,
transparent and
reasonable electricity
rates
PBR methodology for PDUS AND NGCP too complex (for
regulator, utilities and consumers) , opaque and not consistent
with international methodology.
SCORE
RSEC-WR and TGP methodology for ECs too arbitrary and
unprecedented. Also retains cash flow methodology (no
depreciation and working capital allowance; no profit margin)
that imperils long term sustainability
Greater utilization of
indigenous energy;
new and renewable
energy
Mainly through natural gas and geothermal generation (about
40% of total). No significant addition since EPIRA enactment
Socially &
environmentally
responsible sources of
energy and
infrastructure
Renewable Energy Act enacted in 2008.
Higher tonnage of CO2 emission largely as a result of more
generation. Privatization of NPC plants resulted in greater
availability, capacity and efficiency of existing generation units.
15
EPIRA OBJECTIVES
ACHIEVEMENTS
Efficient use of energy
& Demand Side
Management
Shifting DOE energy efficiency & conservation targets; no
clarity on their achievement. DSM policy framework not
promulgated. No study of causal relationship between
energy consumption and economic growth or GDP (e.g.;
uni-directional or bi- directional) to guide energy
efficiency policy.
SCORE
Total Electrification
99% barangay electrification as of 2008. Sitio
(100% barangay
electrification at 69% as of 2010. No data on current
electrification by
household electrification
2008; 100% household
electrification by
2017)
Fair & nondiscriminatory
treatment of public
and private entities in
restructuring
No report of discrimination
16
EPIRA OBJECTIVES
Consumer
protection &
competition
through a strong
and independent
regulator
ACHIEVEMENTS
SCORE
Independent regulator (many say too independent to the
extent of making coordination difficult
Defective policies in EPIRA render consumer protection &
competition difficult to achieve; not regulator’s fault (e.g.;
vertical integration of distribution and generation with weak
disciplines; improper sequencing of policy reform that
prioritizes market competition over market development and
generation adequacy, etc.)
Incorrect application of PBR, RSEC-WR/TGP; incorrect
implementation of generation grid limits among others, that
weaken consumer protection
Flawed ERC Competition Rules. Two different definitions of
‘Market’. Neither defines anti-trust market
17
Price impact
Price impact
SUPPLY SHORTAGE
&
OLIGOPOLY
Weak
competition law
& vertical
integration
Ineffective
Competition
NATGAS/
GEOTHERMAL
STEAM INDEX TO
INT’L OIL/COAL
PRICE
PRICE
INCORRECT/
ARBITRARY
RATE
FORMULA
NO POLICY
DEFINITION
OF
AFFORDABL
E RATES
19
POLICY REFORM PROPOSALS
STRATEGY
PROBLEM ADDRESSED
ACTION TYPE
Poor incentive for generation
investment; risk of anti-competitive
conduct of vertically integrated
DUs/generators; weaknesses of WESM
Executive
and/or
Regulatory
enactment
Disincentive to generation investment
and wholesale competition
Legislative
Immediate Reforms
Competitive public auction of
long-term power supply
contracts.
DUs to be 100% contracted
Open access with large users to
mandatorily participate in the
public auction
Doable timeline for effective
retail competition
Market disruption; unclear costs and
benefits
EC ownership restructuring and
change in rate methodology
Inadequacy of finance and Productive
inefficiency
Executive
Limiting ERC adjustment to
installed generating capacity to
permanent de-rating
Incorrect credit of capacity; possible
abuse of market power
Regulatory
21
STRATEGY
PROBLEM ADDRESSED
ACTION TYPE
Correct application of PBR
methodology for PDUs and
Transmission
Tariff Distortions; Utilities’
inefficiency
Regulatory
Amendment of horizontal separation
policy to exclude from grid limits
Persons owning or operating facilities
but without control of output
Unnecessary restriction on
investment
Legislative
LVM interconnection
Reliability and security of supply
Regulatory
Medium Term Reforms
22
STRATEGY
PROBLEM ADDRESSED
ACTION TYPE
Enhance WESM effectiveness
thru amendment in market
architecture (cost based rather
than bid based; balancing
market only) ; creation of
financial capacity market and
reserves market
Impaired price signal for generation
investments; generation market risk;
uncompetitive prices
Executive
Regulatory
Vertical separation of
distribution and generation (if
competitive public auction does
not happen)
Risk of anti-competitive conduct
Legislative
Medium Term Reforms
23
GOVERNANCE REFORM PROPOSALS
STRATEGY
PROBLEM ADDRESSED
ACTION
TYPE
1) DOE to carry out its
mandate under the law
(particularly policy studies
to guide regulation)
Lack of policy guidance and policy gaps that Administrati
compel ERC to fill the void
ve
2) Improved regulatory
governance and
strengthening ERC
administrative capacity
a) Financial autonomy
Weakened independence; Over-reliance on Legislative
external grants ; inability to challenge utility
positions (regulatory re-set experts paid by
utilities; ERC without its own); limited staff
capacity building
b) Balanced expertise of
Commission, Management
& Staff
Inadequate attention to the economic,
technical, financial impact of regulatory
decisions
Legislative
25
STRATEGY
PROBLEM ADDRESSED
ACTION TYPE
c) Relaxation of litigious
approach to rule making
Limited public participation
Administrative
(amendment of
Rules of Practice and
Procedure)
d) Favor simple over
complex rules
Inability of consumers (& even
some utilities) to grasp and
challenge rules that are opaque
due to their complexity
Administrative
e) Dispute Resolution
Accountability rendered weak by
Mechanism/Experts Panel
overly long appeal process
for timely dispute resolution
Administrative
26
27
2011 UPNEC Occasional Paper
Philippine Electric Power Industry Market and Policy Assessment
And
Analysis of International Markets
Prof. Rowaldo D. del Mundo and Ms. Edna A. Espos
Energy Advisors, U.P. National Engineering Center
May 2011
National Forum on Power Reforms
Philippine Electric Power Industry Reforms:
Philippine and International Experience
R. D. del Mundo and
Ms. Edna A. Espos
Hon. Jorge Rodriguez Grossi
Former Minister of Energy, Chile
U.P. College of Engineering Theater
August 12, 2011
Focus Group Discussions (First Round) on
Philippine Electric Power Industry
Assessment of Market, Policy and Regulation
November 8, 2011 (AM) – Consumer Advocacy Groups
November 8, 2011 (PM) – Distribution Sector (PDUs and ECs)
November 9, 2011 (AM) – Generation and Supply Sector
November 9, 2011 (PM) – Government
November 16, 2011 (AM) – Consumer Sector (Commercial & Industrial)
Second Round of FGDs
January 2012
Multi-Stakeholder Round Table Discussion on
Philippine Electric Power Industry Reforms
February 2012
Drafting of Proposed Executive, Regulatory
and Legislative Measures for
Philippine Electric Power Industry Reforms
Multi-Stakeholder Technical Working Group
February - May 2012
National Congress for Power Reforms
May 2012
PHILIPPINE ELECTRIC POWER INDUSTRY
SUPPLY SECURITY AND POLICY ASSESSMENT
Thank you and
Have a nice day
Presentation to House of Representatives
December 6, 2011