Policy Framework for the Electric Power Industry in the Philippines' Nic-hood: Quo Vadis?

The objective of this Paper is to start a national conversation on the electric power industry in the Philippines with 2018-2029 timeline in mind.

The viewpoint taken here is that of the industry. 'Industry,' refers to the set of firms that satisfy the needs, wants, and expectations of the market and system, nationwide. 'Market' peculiarly refers to power industry participants and consumers of electricity. 'System' is the enfranchised concession of transmission and sub-transmission assets managed and operated by private sector. Their ownership to date is with government. (EPIRA, 2001).

The nature of the general problem confronting the industry can be broadly considered as both economic and financial. Without prejudice to claims by other disciplines to the contrary, it is, generally speaking, an allocation problem (Samuelson) saddled with the intricacies considering the huge amounts involved.

Thus, the threshold issue in energy economics in the Philippines is three-fold: 'What to produce? How much to produce? For whom to produce?' (Lipsey and Steiner, Economics). Perforce, policy defined as 'guideline for thinking,' must address these major aspects, three-fold, sine qua non.

To paraphrase, the problem can be in terms of: What kinds of power plants (by fuel type) is the country looking at from 2018-2029? How much electricity production are those plants capable of producing? For whom consumer type, residential or industrial, and considering environmentalists' advocacies versus price concerns, do the power generation players produce in 2018-2029?

In recent decades, power generation in the Philippines is an endeavour which mainly the private sector undertakes. This is in keeping with the thoughts of Adam Smith who held that, 'it is only the royal mail (or post office) that deserves government's attention by way of subsidy.'

Almost always in the recent past, it is the private sector that bears the risks from the time that building a plant is conceptualized, percolating the deal in its Preliminary-Front-End Engineering and Design (Pre-FEED) stage, putting up the early equity, packaging the financing, conferring with suppliers, securing licenses and permits, engineering, procurement, and actual construction (EPC), starting operations, and staying in business.

Consistent with the principle of the risk-return trade off, the higher the risk, therefore, higher returns are required.

Quite the harsh reality that it is, there persists the impression that something similar to the 'tragedy of the commons' can be felt emanating from the power generation industry. Quite simply, this means that rational individual behaviour does not necessarily serve the welfare of society as a whole. (Hardin, Garrett, Tragedy of the Commons).

The Prospect of Emerging Opportunities

Inexorably, opportunities are emerging within the timeline 2018-2029. This is the reason why the proposed national conversation on power generation is relevant and timely.

Extrapolating from the observed 5.6% average GDP growth for the immediate past decade as mentioned in the Department of Energy website (www.doe.gov.ph), it stands to reason that power generation and GDP must grow in tandem. Between 2018-2029, it is imperative that new power plants be constructed for two reasons: one is to replace the old plants; another reason is to supply more electricity to make further growth possible.

It must be emphasized that power plants do not grow overnight. They have to be built brick by brick, from scratch usually, over five or more years, before they can produce electricity. The availability of the grid, its N-1 contingency, is another vital aspect to consider. In fact, the country's Transmission Development Plan (TDP) is envisioned to anticipate growth from 2016 through 2040.

In between, every time that the demand for electricity exceeds the available capacity, the dependable capacity, or the installed capacity, the risk of a power shortage emerges.

The Table below presents the computations of the demand for electricity, year by year, for the period from 2018-2029. The starting point of the computations is based on the actual 2017 figures appearing on the 2017 Power Demand and Supply Highlights in the DOE website.

Table I: Projected Peak Demand, 5.6% Annual Increase, and Cumulative 5.6% Increase, 2018-2029, (In Megawatts of Electricity)

Column A

Column B

Column C

Column D

Year

Peak Demand

6%

Annual Increase

Cumulative 6% Increase

2017

13,789

835 (actual)

2018

14,561

772

772

2019

15,377

815

1,588

2020

16,238

861

2,449

2021

17,147

909

3,358

2022

18,107

960

4,318

2023

19,121

1,014

5,332

2024

20,192

1,071

6,403

2025

21,323

1,131

7,534

2026

22,517

1,194

8,728

2027

23,778

1,261

9,989

2028

25,109

1,332

11,320

2029

26,515

1,406

12,726

Source of baseline 2017 data: Department of Energy website

The above Table projects that demand is expected to increase by 82.10% from 14,561 MW in 2018 to 26,515 MW in 2029, under the assumption of a 5.6 % annual growth, which is a bit lower than the expected growth in GDP. The cumulative growth in demand (12,726 MW) calls for investment in new plants and maintaining the operating efficiency of the existing power plants. Thus, the opportunity is there to recreate and/or reconfigure the power generation industry.

The Table below presents the computations of the available capacity, dependable capacity, and installed capacity for electricity, year by year, for the period from 2018-2029. The starting point...