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Tuesday, April 24, 2012

The Power Mess: How We Got Into It and How to Get Out

By: Walden Bello*
INQUIRER.net

With the electricity rates in Luzon now among the highest in the world, and Mindanao plagued by daily brownouts, the power situation in the Philippines can only be described as a mess.

How did we work ourselves into this jam?  Well, there are several landmarks on the road to our current power crisis.

Three Landmarks on the Road to Crisis
Bataan Nuclear Power Plant
The first was the decision, during the Marcos period, to build the Bataan Nuclear Power Plant (BNPP).  BNPP, a 620-Megawat (MW) facility, was supposed to fill the additional demand for electricity in Luzon from the 1980's on.  The only problem--and a big one--was that the technology was unsafe and the plant was situated in a seismically active area and on the slope of a volcano--Mt. Natib--that could not be certified as dead.


BNPP had to be cancelled, and the Fukushima tragedy of 2011 proved in retrospect how correct that decision was.  But not surprisingly, with the main power project designed to fill growing demand in Luzon sidelined, rolling brownouts hit the country in the early 1990's.  

The administration of President Fidel Ramos then committed the second big blunder, which was to hurriedly contract independent power producers (IPP's) to fill the power gap.  With their notorious "take-or-pay" provision--meaning, distributors had to pay for a specified amount of power whether they used it all up or not--IPP contracts pushed up the cost of electricity tremendously.  The power retailers, like Meralco, were not about to absorb the added cost, so they passed it on to the consumer.

The third milestone was the privatization of the National Power Corporation (NPC or NAPOCOR) in 2001 via the so-called EPIRA law.

The Faulty Assumption of EPIRA
EPIRA was informed by two heroic assumptions.  The first was that the sale of government energy facilities would result in proceeds that would pay off NAPOCOR's massive debt, which reached P943 billion by 2001.  As President Aquino described it at the 1st Mindanao Power Summit over a week ago, "The idea behind it [EPIRA] was: NAPOCOR would sell its power plants to private investors, and use the proceeds to pay its debt.  This was supposed to put an end to the never-ending, increasing debt."

The second assumption was that privatization would make the generation and delivery of electricity more efficient and thus bring down the cost of power.  Private is better than public; the market is more efficient than the state.  

This was the neo-liberal faith that was so enthusiastically embraced by Philippine technocrats in the 1990's.  This was the mindset that saw not only the surrender of NPC assets to the private sector, but also the sale of the highly profitable Petron oil refining corporation to foreign interests and the ceding of the provision of water in the Metro-Manila area to the Ayalas and the Lopezes by the Metropolitan Waterworks and Sewerage System (MWSS).

The reality that followed differed from the assumptions behind EPIRA.

First of all, the anticipated revenue did not materialize, since NPC facilities were disposed off at fire sale terms.  For instance, according to a report by the renewable energy group MinCARED, the Masinloc Geothermal Plant in Zambales, valued at $390 million, was sold to private investors who made an initial down payment of only 40 per cent, with the balance to be paid in seven years at $80 million yearly--an amount that is actually the average yearly income of the plant itself!

Similarly, the National Grip Corporation of the Philippines (NGCP) put in an initial payment of $987.5 million, or 25 per cent to acquire TRANSCO, NPC's transmission facility.  The remaining $2.92 billion or 148 billion pesos will be paid in 15 years.  TRANSCO is earning an average of 15 billion pesos a year, which is more than enough to cover NGCP's yearly installment payment.  In other words, as the analysis put it, "NGCP has only minimal investment in its acquisition of a highly profitable jewel of our country."

Not surprisingly, the sale of NPC assets at extremely disadvantageous terms to the private sector has produced a situation in which NPC debt has not diminished, but instead, climbed from P943 billion in 2001 to P1.24 trillion in 2009.

The assumption that market forces would result in cheaper electricity owing to greater efficiency likewise did not pan out.  The cross-ownership of power producers and electricity distributors allowed by EPIRA did not lead to greater competition, but to what economist Edna Espos described as "institutionalized oligopoly...where the market is dominated by a small number of players who are able to collectively exert control over supply and market prices."  

A key institution that EPIRA set up was the Wholesale Electricity Spot Market (WESM).  Originally designed to be a mechanism for identifying and setting prices based on quantities of electricity transacted between many power generators and retailers.  WESM's prices actually came to reflect the dynamics of the collusive oligopoly that replaced the state monopoly.

Not surprisingly, the rates of Meralco, the country's biggest power distributor, jumped by 112 percent over 10 years, while the rates charged by NPC went up by 95 per cent.  Instead of dispersal of ownership, only a handful of groups--San Miguel Corp., the Aboitizes, the Lopezes, and "Manny Pangilinan Inc."--control 52 percent of power generation.  

As Rep. Ben Evardone put it in a privilege speech in January of this year, "The EPIRA has obviously only harnessed the domination of only a few corporations in both the generation and distribution of power to the detriment of the Filipino power consumers.  This can be attributed to the watered-down safeguards against monopoly in the electricity sector."

Derailing Renewable Energy
Even as EPIRA floundered, the methods of power generation based on fossil fuels came under criticism for environmental reasons, including their contribution to global warming, of which the Philippines was a prime victim.  


The result of the widely felt need for a new direction in energy policy was the Renewable Energy Act of 2008, which sought to transform the country's energy mix to one that was predominantly reliant on renewable sources, like hydropower, solar, wind, and biomass.

However, half-hearted commitment on the part of the Executive and resistance from businesses, which said renewable energy (RE) development would make power even more expensive, stalemated any move in the direction of RE.  Instead, business interests, notably the Aboitizes, took advantage of projections of electricity demand to promote coal, the dirtiest energy source--both in terms of its impact on health and climate change--as the answer to the power crisis.  

From less than 10 per cent in 1991, coal plants now generate over 30 per cent of the country's power.  There are currently 11 coal-fired plants in the country, and plans are being accelerated to set up more.

Most controversial is the Aboitiz project in the Subic Bay Metropolitan Authority which is projected to produce some 400 to 600 MW to "stave off brownouts in Luzon by 2014," according to Energy Secretary Rene Almendras.

Equally controversial is the Department of Energy's plan for Mindanao, which envisions the installation of 1000 MW of coal-powered energy capacity in the next few years.  Almendraz, a former Aboitiz executive, has become the high priest of coal, though it is probably technocratic belief in the efficacy of coal rather than ties to the company that drives his advocacy.

Mindanao: Battle Ground of Energy Paradigms
Mindanao has now become the site of the battle between pro-RE groups and pro-coal forces brandishing the argument that that energy source is the only way to meet that region's rising demand.  

Currently, Mindanao has the most RE-friendly energy mix, with hydro, geothermal, and other renewable sources accounting for 60 per cent of energy generating capacity, in contrast to 42 per cent in the Visayas and a mere 32 per cent in Luzon, according to UP Professor Clodualdo del Mundo.

Central to the energy complex of the region are the Agus-Pulangi dams, which generate 52 per cent of the region's power supply.  Mindanao's largely hydro-based system also enjoys the lowest generation charge among the country's regions, coming to 2.8 pesos per kilowatt hour--compared to 4.3 pesos in Luzon and 4.0 pesos in the Visayas, where the generation cost is tied to the international price of oil and coal, on which power generation is dependent.

Yet, owing to the deterioration of the Agus-Pulangi dams, supply has become erratic, especially during the dry season.  Rehabilitation of the two dams is badly needed.  Also, siltation of the Agus River in Lanao and the Pulangui River in Bukidnon has deprived the dams of the amount of water needed for them to function at full capacity.  As a consequence, the electricity provided by the hydropower plants has been reduced by about a third from its former level, according to a report in the Manila Times.

Given their central importance to Mindanao, the deteriorating condition of the Agus-Pulangui complex strikes some observers as suspicious.  

As the Freedom from Debt Coalition put it in its Open Letter to President Aquino, "There are indications that vested cartels are positioning themselves to corner a huge share of the electricity market by allowing the intentional decay of said power plants," a development that "will also virtually guarantee long-term high electricity prices, since contracts will be pegged to the volatile oil market and the ever increasing international price of coal."

Distrust is also being sown by DOE's plan to add 1000 MW worth of capacity whereas its estimate of Mindanao's current shortfall is only 100 MW.  Pro-RE advocates suspect that the agency is preparing a major expansion of coal plants, not only to support rising residential and industrial demand, but also respond to the projected demand from the mining operations, including coal mining.  Their suspicions have been further stoked by Almendras' publicly proclaimed goal of making the Philippines' self sufficient in coal and his plan of exploring "30 coal areas" in the country.

The Way Out of the Mess
So, how does Mindanao and the country as a whole fight their way out of the power conundrum?

The following plan, consisting of immediate, medium-term, and long-term components, is distilled from the proposal of a number of groups, such as Freedom from Debt Coalition (FDC), the Mindanao Congress of Advocates for Renewable Energy and Rural Electrification and Development (MinCARED), and Akbayan.

First of all, say RE advocates, there must be a multi-pronged effort to address the immediate crisis.  Secretary Almendras must rescind his recent order to electric coops to fill surplus demand by buying electricity from private power plants and barges at 14 pesos per kilowatt hour.

Two, "the four power barges still under government control, each of which can generate 32 MW, must be deployed to Mindanao, to produce electricity that can be sold to consumers at a price based on a generating cost of 2.8 or 2.9 per kilowatt hour.  Power from these barges, along with power from the Agus-Pulangui should meet most of current demand, with the remainder of the shortfall filled by energy conservation efforts devised by LGU's in cooperation with electric cooperatives."

Three, the NPC must immediately upgrade the Agus-Pulangui hydro units, rehabilitating equipment, dredging the silt from the Agus and Pulangui Rivers, and undertaking watershed reforestation to promote sustained water flow.

Moving to the medium term, under the terms of EPIRA, Mindanao has been given a brief reprieve, meaning NPC's assets there have not yet been sold to the private sector.  This reprieve must be made permanent.  Instead of turning over Agus-Pulangui to the private sector, a body could be set up along the lines of Rep. Maria Isabel Climaco's proposal for a "Mindanao Power Company," which would be a government-owned-and-controlled corporation, but with a multi-sectoral board, that would own, operate and control the Agus-Pulangi hydro power complexes.  The idea, says Climaco, "is to have Mindanaoans be responsible for powering Mindanao."  Part of the financing of the company could come from Mindanao's 26 provincial governments.

In the long term, both for the sake of Mindanao and the whole country, EPIRA must be repealed.  More than a decade after it was enacted, EPIRA has delivered the opposite of what it promised: higher electricity rates, an energy sector unable to cope with growing demand, inefficient provision of electricity, and a greedy oligopoly.

There must also be a decisive reversal of the trend to setting up more coal plants.  While the expansion of coal is being justified as a temporary step as renewable energy projects are waiting to come on stream, the reality is that it will set up a massive fossil-fuel base energy infrastructure that is permanent, with all the damaging consequences for the environment and public health.

The RE Act must, in short, be implemented, immediately.  The feed-in tariff and other investment incentives must be deployed, and the latest innovations in solar, wind, biomass, and mini-hydropower from Europe and China must be adapted to local conditions.

While some RE projects have high start-up costs, in the long run these will fall and make RE equally, if not more efficient than fossil fuels, and without the latter's high environmental costs.

Also important is the institutionalization of citizen and consumer participation at all levels of energy planning to ensure accountability and transparency.  The kind of brazen undermining of the Renewable Energy Act by the DOE in its promoting the expansion of the coal option must never be allowed to happen again.

Financing the Transition
Putting this energy plan into effect will take money.  Where can this be sourced?  Currently, the government is allocating over 20 per cent of the P1.8 trillion budget to creditors, many of whom have been paid many times for loans--including energy sector loans, like the BNPP--that were given at crushingly high interest rates over the last four decades.  A negotiated or unilateral reduction of debt repayments would release the funds much needed for putting in place a renewable energy infrastructure for the 21st century.

An initial step might be the cancellation of fraudulent loans.  As Lidy Nacpil of Jubilee South has pointed out, this is becoming politically feasible: in 2007, Congress actually approved a general appropriations bill with a provision on suspending debt payments for 17 loans that were found to be fraudulent.  From that provision alone the government was expected to save approximately P29.5 billion that it could have devoted to pressing social or energy needs, but the measure was vetoed by then President Arroyo.

Many development economists, among them Nobel laureate Joseph Stiglitz, have increasingly reached the conclusion that countries with massive debt loads will find it very difficult to develop, owing to the channeling of national financial resources to debt repayment.  

In contrast to the Philippine experience, in Argentina, the late President Nestor Kirchner unilaterally reduced the debt burden of the country to foreign bondholders from 100 cents to the dollar to some 25 cents to the dollar in 2003.  The bondholders howled, but they eventually gave in.  The result was an impressive 10 per cent per annum growth rate between 2003 and 2008 as financial resources were rechanneled from debt service to domestic investment.

If our country is to develop, if it is to have a 21st century renewable energy infrastructure, courage, like Kirchner's, needs to be displayed by our leaders. 

[*INQUIRER.net columnist Walden Bello is a member of the House of Representatives representing Akbayan.  He was formerly Chairman of the Freedom from Debt Coalition.]

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