EPIRA clause blocking further investments in Mindanao power sector

A clause in the Electric Power Industry Reform Act of 2001 is keeping foreign investments in the power sector from coming into Mindanao by artificially keeping power rates in the Mindanao grid low with the operation of the Agus and Pulangi hydro-electric power complexes.

Rep. Alipio Badelles (1st District, Lanao del Norte/Iligan), house energy committee chairman said the hydro-electric power plants of the National Power Corporation in the Agus and Pulangi rivers are excluded for 10 years from the Power Sector Assets & Liabilities Management Corporation (PSALM) privatization program.

Even after this ten year period has passed, the consent of Congress is still needed to privatize the hydro-electric plants in Mindanao,” Badelles said.

The basis for excluding the Agus and Pulangi complexes from PSALM’s privatization program is that they provide cheap electricity that would serve to attract industries who would otherwise not have located in Mindanao given its comparatively underdeveloped status compared to Luzon and the Visayas, Badelles explained.

In a press conference earlier this week hosted by the newly inaugurated Steag State Power Inc. (SPI) Mindanao Coal-fired power plant, Engr. Emmanuel Abellanosa, assistant vice president, operations and maintenance, National Transmission Corp. (Transco) voiced a similar concern regarding the urgent need to address unsettled pricing problems concerning hydro power plants which are keeping foreign investors from investing in the island’s power generating sector.

PSALM Corp.’s 10- yr privatization program is already in its fifth year, and we have five to go,” Abellanosa noted. “To address this issue, at least 70 percent of the government’s generation and distribution assets should be privatized to allow free market forces to work and make merchant plants feasible in Mindanao.”

Badelles said the Steag power plant is part of the plan to diversify Mindanao’s electricity production portfolio and make it less sucsceptible to uncontrollable factors like the weather and the world market price for petroleum products.

So far, Mindanao only has hydro-electric power plants and diesel generation stations,” noted Andreas Rubin, SPI president and chief executive officer. “Water is dependent on rain, diesel is a very high grade raw material not intended for primary energy use and very expensive, too. So as a base load power station, the Steag Power plant, (which is) a hard coal fired power plant, is really able to cope with the island’s power requirement, which we mustn’t under estimate.”

Already, the Mindanao grid’s reserve margin has increased to 24.6% from a critical 13.2% due to the start of the Steag plant's commercial operations beginning November 16, 2006. The required reserve margin for Mindanao is 21%.

As a result of the Mindanao grid’s improved power mix brought by Steag’s operations, the island grid’s utilization of oil fired power plants declined to 13% from the previous 26-32%, resulting in potentially considerable savings for all users since oil fired power plants and independent power producers (IPPs) come last in the NPC’s “dispatch order” of power suppliers.

The variable cost for producing one kilowatt hour of energy from hydropower sources in Mindanao is P1.25, compared to P1.35 from coal and P1.90-2.00 from diesel or oil-filed power plants, Abellanosa said.

However, the Energy Department estimates the Mindanao grid would need 850MW additional capacity for the period 2009-2014 to meet the projected 6.4 % average annual growth in peak power demand.

So far, none of the potential power plant projects identified in the country’s Power Development Plan (PDP) are even nearing financial closure. Considering how energy planners are already expecting an energy shortage in the island by 2009, there would be no base load plants on hand to meet the demand and users would again be faced with the prospect of paying more for electricity from oil-fired power barges, which are the only available alternatives at present which can be online by these dates.

In a presentation during a forum hosted by Xavier University, former NPC president Guido Delgado said there will continue to be a dearth of investors for power generation projects in Mindanao unless the following issues are resolved:

a) Lack of an economic incentive to add new capacity in Mindanao because existing grid rates are kept too low by the island’s hydroelectric power plants; b) Absence of creditworthy off-takers since in the absence of wholesale electricity spot market (WESM), there is no standard to measure credit risk, and there is no distribution utility (DU) strong enough unless regulators allow pass-through for market risk; c) Lack of a no long term market because in the absence of a clear regulation, there is no economic incentive for DUs and electric cooperatives (ECs) to contract long-term even for their respective captive markets; and, d) The absence of long term funds in the local market.

Generation requires long term investments and consumers are basically providing long-term financing needed by the industry with no upside potential,” Delgado added.

Not the least, Delgado said that the EPIRA provides that a universal charge to be determined, fixed and approved by the Energy Regulatory Commission (ERC) shall be imposed on all electricity end-users for (among other purposes) the payment of stranded debts in excess of the amount assumed by the National Government and stranded contract costs of NPC as well as qualified stranded contract costs of DUs resulting from the restructuring of the industry.

Under this provision, Delgado said Mindanao power users will pay for the excess capacity of Metro Manila, including the stranded costs of Meralco.

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