High energy prices are wreaking havoc around the world. The magnitude of the crisis varies in different countries, but aggravating circumstances are generally the same—high fuel prices, supply disruptions, power outages, and energy rationing.
Newspaper headlines from around the world: “China cuts power to factories, homes as reservoirs fall.” “US Power Prices Rise Most in 41 Years as Inflation Endures.” “London Tube Services Disrupted Due to Power Supply Issues.” “French Grid Joins With Big Business for Peak Power-Saving Plan.” “Zimbabwe Intensifies Nationwide Power Cuts on Supply Shortage.”
Luckily for us, we are not being threatened by nationwide power outages… yet. But the Luzon grid was placed on red alert on Monday afternoon after seven power plants went on forced outage, while the output of three more plants was “derated”—which means reducing the plant’s available capacity—by the National Grid Corporation of the Philippines. When reserves fall below ideal levels, a yellow alert is placed over the grid. When supply-demand balance worsens, a red alert is declared, which points to severe power deficiency that may lead to rotating power interruptions (Read, “NGCP puts Luzon grid at red alert on 7 power plant outages,” in the BusinessMirror, September 13, 2022).
There was an automatic load dropping (ALD)—a safety procedure wherein power is cut off at certain areas because the power supply is very low—incident on Sunday morning.
According to Meralco, the power outage was due to the decrease of approximately 916MW in its load affecting over 600,000 customers in Caloocan, Makati, Manila, Muntinlupa, Parañaque, Pasay, Pasig, Pateros, Quezon City, Taguig, Bulacan, Cavite, Laguna, Rizal, and Quezon province. ALD was also declared outside of Meralco’s franchise areas.
NGCP Spokesperson Atty. Cynthia Alabanza said in a radio interview that aside from the forced plant outage, scheduled plant shutdown, and derated plant capacity, the transmission system also tripped.
Electricity rates in the Philippines are relatively higher than those in other countries. But urban and rural rates are not the same, which prompted senators to conduct a probe into the alleged poor service and higher power costs in the regions. This came after Senate President Juan Miguel Zubiri delivered a privilege speech raising the alarm on the steep rise of electricity rates in Mindanao and other parts of the country.
Sen. Grace Poe cited the disparity in the prices of electricity rates in Metro Manila and those in the provinces. Poe, who chairs the Committee on Public Services, lamented that electricity fees in Metro Manila had been “significantly lower” than in the provinces, where customers suffer from intermittent power outages and poor services by electric cooperatives.
At the House of Representatives, Congressman Dan Fernandez chided the Energy Regulatory Commission in a recent budget hearing. He wants ERC to lower the weighted average cost of capital of energy players, saying this should lead to lower electricity rates. The WACC is the cost of capital, set by the ERC, which allows the NGCP and other utilities to keep their operations viable and attractive. The government as regulator can reduce the WACC of utilities.
Fernandez is pushing for a WACC rate of 6 percent to 7 percent. Energy players said this is not good because huge investments are needed to ensure the stability and integrity of the entire power system, which will only be feasible with a reasonable WACC. They said a rate below 10 percent will have a net return after tax of around 7.5 percent or lower, which will not be sustainable for utilities as they will have a hard time paying for debt at interest rates of 6 percent to 7 percent. This risks their operational efficiency, and contradicts the Supreme Court decision, which determined that a reasonable rate of return for utilities should be at least 12 percent.
Studies have shown that power rates will go down if generation cost goes down. In general, fuel cost takes up a large portion of the generation cost. Therefore, reducing fuel cost helps bring down the generation cost.
Controlling the power generation mix will also lower the generation cost. For example, the most promising sources of power in reducing generation cost are those from hydroelectric and coal-fired thermal plants. In contrast, the generation cost surges when one relies on diesel generators or imported natural gas.
The NGCP’s announcement of red and yellow alerts in the Luzon grid on Monday puts emphasis on the need to invest and strengthen the country’s generation and transmission system. We all want reliable electricity service with no brownouts and lower power rates. The challenge is how to push power costs down and how to create a good business environment for utilities at a time of high interest rates and high oil prices.