THE Department of Energy (DOE) and the Energy Regulatory Commission (ERC) are reviewing the competitive selection process (CSP) policy in order to address current and future concerns on unforeseen challenges that affect electricity prices.
As the policy-making body of the energy sector, Energy Secretary Raphael Lotilla said his office is carefully reviewing the DOE’s mandate, and so as the ERC’s.
“We are looking at what is really fully covered by the mandate of the regulatory agency, ERC, and what is really the policy which is covered by the DOE’s mandate. So, we will be issuing clarifications on this particular point in order to guide the public and private sector,” said Lotilla.
The review, he added, might include additional guidelines the ERC can issue regarding the conduct of CSP. “I am confident that the ERC will come out with the proposed solutions in due time,” said the energy chief.
The issue at hand is the temporary rate relief petitions jointly filed by the Manila Electric Company (Meralco) and SMC Global Power Holdings, Corp.’s (SMCGP) units-South Premiere Power Corp. (SPPC) and San Miguel Energy Corp. (SMEC).
They were supposed to implement a fixed-rate over a period of 10 years that supposedly would result in savings for Meralco customers of P0.28 per kilowatt hour (kWh) or P9.46 billion for 10 years.
However, just three years into the 10-year power supply contracts that were approved by the ERC, the supposed savings could actually turn out into power rate increases.
Higher power rates by October
SPPC has asked the ERC for a rate increase from January to May 2022, of P0.80 per kilowatt hour (kWh) from P4.3 to P5.1/kwh for its 670 MW of contracted baseload capacity from the Ilijan plant, and an average of P4.0/kwh, from P4.3 to P8.3/kwh, for SMEC’s 330 MW contracted baseload capacity from the Sual plant.
The net rate impact on Meralco, however, assuming that ERC grants this cost recovery claim, is just P0.28/kwh over a period of six months.
If the ERC fails to act on the joint petitions and SMC’s power units terminate their PSAs with Meralco, electricity prices are still expected to go up by as much as 30 percent starting October, SMC warned.
“With much regret, we have to admit to the public that the current situation is seriously jeopardizing our other critical operations, projects and financial obligations,” SMC President Ramon Ang had said.
Meralco, for its part, said retaining the PSAs with SPPC and SMEC is still the best option. “Meralco supports only what is least cost to consumers. We think we can achieve least cost by preserving the PSAs with SMC even if the relief for adjustment is granted,” Meralco First Vice President and Head of Regulatory Management Office Jose Ronald Valles said in an interview.
Should SMCGP proceed to terminate, effective October 4, its power supply deals with Meralco, the utility firm would have to look for alternative sources, possibly from the Wholesale Electricity Spot Market (WESM), which is more likely to be costlier.
“If our PSAs will be terminated and we are constrained to source the replacement capacity from other suppliers, we can expect that the generation charge and the consequent rate burden to consumers will be much higher,” Valles pointed out.
‘Lessons learned’
When the CSP was conducted in 2019, SPPC and SMEC won because they offered the least cost to consumers.
There are concerns that if the proposed interim rates are approved by ERC, these would not longer be the least cost compared to other bid offers back then.
Asked how the DOE will address such concerns, Lotilla said, “Definitely, there are lessons to be learned from the current situation that we have. I would not want to preempt the ERC, and they are studying these issues intently.”
ERC Chairperson Monalisa Dimalanta said her office will conduct a hearing on the joint applications on Tuesday. “This is what the job is all about—funding that fine balance between business and consumer interests. I think they are not necessarily divergent, actually, but the challenge is to find that point of convergence which is ultimately is the space of sustainable growth for the power industry,” she said in an interview.
The 2019 CSPs also include Meralo’s PSA with Phinma Energy Corp., now ACEN Corp. The Ayala-led power firm has yet to ask the regulators for a similar petition. “We will just have to wait and see,” ACEN President Eric Francia said.
Dimalanta said the Meralco-Phinma PSA is also part of the ongoing review by the ERC. “It is included, that I can assure you. We hope to clarify all issues in the hearing so that we can proceed to rule soon,” she said.
Consumer groups, meanwhile, urged the ERC to prioritize the consumers.
“We challenge Dimalanta to offer relief to electricity consumers by finally prioritizing affordable and reliable renewable energy sources and putting a stop to the ridiculous attempts by energy and fuel companies to pass on charges despite posting billions of income. It’s high time for ERC to study energy price cap, review all coal and gas contracts, and look into moratorium of fuel cost pass-on,” said Power for People Coalition (P4P) convenor Gerry Arances.
He added that if the ERC grants the petition, “we will be basically telling SMC that it is okay to cheat on biddings by offering low prices and then adjusting them after the fact. There should be no relief for cheaters,” said Arances.
Lotilla assured the public that the DOE and the ERC will resolve all issues and concerns raised by the power firms and consumers. “We will be clarifying those matters, which ones should properly be within the mandate of DOE because the CSP rules, if you recall, are also stated in broad terms, and what would properly fall under the mandate of the ERC,” he said.
Reasons for rate hike
Ang stressed that SPPC and SMEC are only seeking partial adjustment in price so the plants can continue supplying to Meralco and minimize the impact of termination on industries and consumers, particularly those from the lower-income households who will get hit harder.
“We just hope the ERC will not merely try to prevent a temporary increase, but will take a whole-of-industry approach. These power plants account for 25 percent of the net reliable capacity of the Luzon grid. They are a major part of the country’s already fragile power supply. We ask that in this time of extraordinary circumstance and difficulty, please, let’s not cripple them,” he said.
The petition cited steep coal prices, spiraling fuel prices amid the Russia-Ukraine war, and natural gas supply restrictions from the Malampaya gas field as reasons for the temporary relief.
Ang said the company had already decided to absorb more than P10 billion in losses last year, which it did not file a claim for, after coal prices averaged $176 per metric ton (MT) in the second half from just $99/MT in the first half of 2021. Average coal price in 2019 and 2020 was only at $69/MT.
“Unfortunately, those prices have increased by over 500 percent since then. We are not asking to recover all our losses, neither are we asking for a permanent increase. What we are asking for is just a temporary and equitable relief, to allow the power facilities to survive this difficult period and continue supplying power to Meralco,” he said.
Coal prices have recently reached unprecedented levels, as high as $440/MT, as triggered primarily by the Russia-Ukraine conflict.
“At the time, no one could have imagined it would even exceed $80/MT. It was only expected to average at $65/MT over the next 10 years. That’s because it is widely known that coal production was at only $35 to $40/MT in Indonesia and other regional mines, and there is even a strong global transition away from coal, which we are also undertaking, Ang said.
However, the unprecedented global price increases were triggered by extraordinary circumstances, such as disruptions in the commodities markets brought about by the Indonesia coal export ban, the Russia-Ukraine conflict, and continuing value chain issues from the Covid-19 pandemic.
In the case of the Ilijan natural gas plant, questionable and unilateral notices of gas restrictions, which caused the deration or the ceasing of delivery of available capacity, had severely affected the plant’s net generation capacity, forcing it to source for costly replacement fuel from the Wholesale Electric Spot Market (WESM).
SMC has presented its side. It is now up to the ERC to approve or not the temporary price hike.
“We know any price increase is unpopular, and normally we never ask for one–which is what we did for all of last year, when we absorbed expanding costs that we do not pass on to consumers,” Ang said.