competition and security of supply in philippine ... · 1 prof. rowaldo del mundo university of the...

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Prof. Rowaldo del Mundo University of the Philippines

EPDP Conference 2016

Competition and Security of Supply in Philippine Electricity Market


New World Makati Hotel

12-13 January 2016

Prof. Rowaldo del Mundo

Electrical & Electronics Engineering Institute University of the Philippines

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Energy Security

“The uninterrupted availability of energy sources at an affordable price.”

Long-term energy security mainly deals with timely investments to supply energy in line with economic developments and environmental needs.

Short-term energy security focuses on the ability of the energy system to react promptly to sudden changes in the supply-demand balance.

- International Energy Agency

AVAILABILITY AFFORDABILITY

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Security of Supply: Availability Power Supply Security can be measured by

the Loss-of Load Expectation (LOLE) popularly referred to as LOLP

LOLE - The expected number of times in a year that the

available generation capacity considering scheduled and forced-outages of power plants will not meet system daily peak demand

- number of days in a year that there will be “brownouts” (blackouts) that would be caused by power plant outages

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Source: R. del Mundo, UP College of Engineering (1991)

Optimal Level of Reliability in the Philippines

1 day/year LOLE

US and Europe LOLE ~ 0.3 to 0.1 day/year

Note: Based on study conducted by UPNEC for NEDA in 1991 (System Peak Demand 3,046 MW, Power rates was PHP2/kWh)

Outage Cost (PHP/kWh) =

(0.0086 + 0.0023D)F + 0.1730

Frequency and Duration of Loss of Load

Security of Supply: Availability

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Source: R. del Mundo, UPCOE College of Engineering (1991)

Translating LOLE to Capacity Reserve

In 1990, System Peak Demand of Luzon Grid ~ 3,000 MW

1 day/yr LOLE = 34% Reserve


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Source: R. del Mundo, UPNEC (2011)

Translating LOLE to Capacity Reserve

In 2010, System Peak Demand

of Luzon Grid ~ 7,600 MW

1 day/yr LOLE = 28.7% Reserve

Period Reserve

Requirement

2016-2020 27.8%

2021-2025 26.5%

2026-2030 26.0%

2031-2035 25.0%

2036-2040 22.0%

2041-2045 21.4%

2046-2050 21.3%

Source: R. del Mundo, et. al. UPNEC (2015)

Capacity reserve to maintain 1 day/yr LOLE


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Source: R. del Mundo, UPNEC (2011)

Luzon Grid LOLE

Generation Capacity Addition from IPP Contracts signed

before EPIRA

Supply is deficient in 2001 (when EPIRA was enacted) but supply

was secured from 2002 to 2009


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Source of Data: DOE

Luzon Grid Capacity is secured from

2010 to 2015

Visayas Grid was in power crisis

from 2008-2010 but recovered in 2011

Mindanao Grid security was

breached in 2010 (El Nino Year) and

still in power crisis in 2015

Luzon Grid

YEAR

Dependable

Capacity

(MW)

System Peak

Demand

(MW)

Capacity

Reserve

(%)

2010 10,498 7,656 37%

2011 10,824 7,552 43%

2012 11,349 7,889 44%

2013 11,519 8,305 39%

2014 11,622 8,717 33%

2015 11,868 8,867 34%

Visayas Grid

YEAR

Dependable

Capacity

(MW)

System Peak

Demand

(MW)

Capacity

Reserve

(%)

2010 1,745 1,431 22%

2011 2,036 1,481 37%

2012 2,103 1,551 36%

2013 2,103 1,572 34%

2014 2,160 1,636 32%

2015 2,150 1,614 33%

Mindanao Grid


Mindanao Grid

YEAR

Dependable

Capacity

(MW)

System Peak

Demand

(MW)

Capacity

Reserve

(%)

2010 1,658 1,288 29%

2011 1,616 1,346 20%

2012 1,614 1,321 22%

2013 1,749 1,428 22%

2014 1,838 1,469 25%

2015 1,860 1,502 24%

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Luzon Grid 2015 2016 2017 2018 2019 2020

Peak Demand (MW) 9,011 9,365 9,732 10,114 10,512 10,924

Commited New Capacity (MW) 135 600 460 900 2,100

Total Dependable Capacity (MW) 11,757 11,757 12,357 12,817 13,717 15,817

Capacity Reserve (%) 30% 26% 27% 27% 30% 45%

Visayas Grid 2015 2016 2017 2018 2019 2020

Peak Demand (MW) 1,848 1,949 2,048 2,137 2,226 2,313

Commited New Capacity (MW) 116 153 143



Mindanao Grid 2015 2016 2017 2018 2019 2020

Peak Demand (MW) 1,574 1,645 1,729 1,813 1,902 1,990

Commited New Capacity (MW) 415 751 149 640



Above data excludes several power plants listed by DOE as indicative projects (no financial close yet)

Source of Data: DOE List of Existing Power Plants (2010 to 2014) and IPPs

Critical Supply for Luzon in 2016 to 2018 (Reserve is less than 30%)

Critical Supply for Visayas in 2015 to 2020 (Reserve is les than 30%)

Power Crisis in Mindanao will be solved in 2016 (Reserve is more than 50%) Dependable Capacity in 2014 is 46% Hydro


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Source of Data: DOE List of Existing Power Plants (June 2015)

Security of Supply: Fuel Diversity

Luzon Grid and Visayas Grid

Capacity are secured from point of

view of fuel diversity

Mindanao Grid dominant supply from

hydro and oil-based power plants

does not provide enough diversity

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LUZON GRID CAPACITY 2013 2014

A Dependable Capacity 11,519 MW 11,622 MW

B Peak Demand 8,305 MW 8,717 MW

C Largest Generating Unit 647 MW 647 MW

D Total Capacity of NatGas CCGT 2,760 MW 2,760 MW

Effective Reserve (A – B - C – D) (193) MW (502) MW

System Operating Reserve under Lost of Largest Generating Unit and NatGas Fuel Constraint from Malampaya

Outage Duration

Outage Type

Average Market Price

(PhP/kWh)

Highest Market Price (PhP/kWh)

Feb 10 – Mar 12, 2010 Turn-Around Shutdown 11.18 25.00

October 20 – 26, 2011 Maintenance Shutdown 9.11 45.00

July 13 – 21, 2012 Maintenance Shutdown 7.14 54.01

Nov 11 – Dec 10, 2013 Turn-Around Shutdown 22.85 62.00

Source of Data: WESM Market Data (2010-2013)

Source of Data: DOE Power Statistics (2014)

Diversity in Fuel Type is negated by Diversity in Fuel Source. Single fuel source affecting short-term security of supply

Security of Supply: Fuel Diversity

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Security of Supply: Self-Sufficiency

Total Dependable

Capacity (MW)

Total Indigenous

Capacity (MW)

Self- Sufficiency

(%Indigenous)

Luzon Grid 11,868 6,062 51%

Visayas Grid 2,150 1,027 48%

Mindanao Grid 1,860 945 51%

Total 15,878 8,034 51%

Philippines Self-Sufficiency has reach more than 50% contributed mainly by Renewable Energy and Natural Gas

Source of Data: DOE List of Existing Power Plants (June 2015)

Generating Capacity and Self-Sufficiency (June 2015)

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0

5

10

15

20

25

30 Residential Commercial IndustryUS¢/kWh

Source: ACE as Compiled by IEEJ (2013)

Affordability of Supply: Price

Philippines’ electricity price is almost twice of the average price of the Region

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Source: of Data: USAID CEnergy

Electricity Tariffs

after Removing

Taxes and

Subsidies

Customer Class PH SG IND MAL TH

Residential 0.2066 0.2063 0.0514 0.0713 0.1034

Commercial 0.2133 0.2062 0.1480 0.1365 0.1254

LV Industrial 0.1729 0.1988 0.1144 0.1197 0.1195

HV Industrial 0.1714 0.1784 0.0973 0.1080 0.1075

Residential 0.2066 0.2063 0.0866 0.0808 0.1419

Commercial 0.2133 0.2062 0.1832 0.1461 0.1639

LV Industrial 0.1729 0.1988 0.1496 0.1293 0.1580

HV Industrial 0.1714 0.1784 0.1325 0.1176 0.1461

Residential 100.00% 100.00% 168.39% 113.40% 137.30%

Commercial 100.00% 100.00% 123.78% 107.04% 130.73%

LV Industrial 100.00% 100.00% 130.75% 108.03% 132.26%

HV Industrial 100.00% 100.00% 136.18% 108.90% 135.83%

Residential 100.00% 99.85% 41.90% 39.12% 68.70%

Commercial 100.00% 96.66% 85.87% 68.48% 76.83%

LV Industrial 100.00% 114.98% 86.53% 74.75% 91.36%

HV Industrial 100.00% 104.09% 77.26% 68.59% 85.21%

Pre-tax with Subsidies (USD/kWh)

Pre-tax after Removing Subsidies (USD/kWh)

Percent Change in Electricity Tariffs

Price of Electricity Relative to Philippines

PH Power Rates still higher by 30% compared to Indonesia, Malaysia and Thailand and almost comparable to Singapore

Affordability of Supply:

Price

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Fuel Type IND PH SG TH VIE

Total GWh 182,384 69,176 45,999 155,986 99,179

Coal 44.4% 36.6% 0.0% 22.3% 21.1%

Nat Gas 23.2% 29.8% 78.0% 68.3% 43.9%

Oil 20.3% 4.9% 18.4% 1.3% 4.8%

Hydro 6.8% 14.0% 0.0% 5.2% 30.1%

Other RE 5.2% 14.7% 3.6% 2.8% 0.1%

Cost of Fuel for Generation and Retail Rates (2011)

Generation Mix by Fuel (2011)


Price is affected by Fuel Type

Price in Philippines should be lower than Singapore (96% Oil-based)

Source of Data: ACE as Compiled by IEEJ (2013)

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Year Residential Commercial LV Industrial HV Industrial

2004 5.70 6.87 5.83 5.24

2011 10.25 10.81 9.70 8.37

Ave. Annual Change 8.73% 6.69% 7.54% 6.92%

YEAR 2004 2005 2006 2007 2008 2009 2010 2011 AVE

Inflation Rate 5.70% 7.00% 5.50% 2.80% 6.20% 4.10% 3.70% 3.60% 4.83%

MERALCO Electricity Tariffs (Pesos/kWh)

Source: USAID CEnergy (2013)

Philippines Inflation Rate (2004-2011)

Source: NSCB [Inflation at Year 2000=100]

Electricity Rates Hikes Higher than Inflation Rates


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Affordability of Supply: Price Ave. Monthly Price Settlement in WESM

December 2012 to January 2014

Ave. Monthly Price Settlement in WESM

July 2006 to October 2015

Volatility of Price in WESM affected by Short-Term Security of Supply

Source of Data: WESM

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Affordability of Supply: Consumption

1.5%

3.0%

1.4% 1.7%

1.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Indonesia Philippines Singapore Thailand Japan

Source: JICA-IEEJ (2013)

PHILIPPINES IS SUFFERING FROM “ENERGY POVERTY”

The low per capita consumption of households is highly likely affected by the high cost of electricity

Ratio of Power Consumption Spending to Per Capita Household Expenditure

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0

200

400

600

800

1000

1200

1400

1600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Indonesia Philippine Singapore Thailand Vietnam

kWh/Capita

Source: JICA-IEEJ (2013)

PHILIPPINES has lowest Per

Capita

Consumption

(based on

energy consumed by

residential

consumers)

and PH is not

improving compared to

neighboring

countries in

the ASEAN

Per Capita Electricity Consumption

(based on residential consumption)

Affordability of Supply: Consumption

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Addressing Security of Supply: Availability and Affordability

YEAR SPOT

2006 36%

2007 15%

2008 13%

2009 13%

2010 15%

2011 14%

2012 8%

2013 8%

2014 10%

2015 7%

Source: WESM Monthly Summary Reports

(1) Bilateral Contracts (2) Spot Market

Focus of Reducing Prices should be in Bilateral Contracts!

Philippine Electricity Market

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1. Short Term Power Supply Procurement and Contracting

Bidding Result

Statistics2015 2016 2017 2018

Aggregated

Demand65 MW 78 MW 83 MW 93 MW

Number of Bids

Received3 5 7 7

Total Capacity

Offered57 MW 170 MW 298 MW 308 MW

No. of Winning

Bidders2 3 1 1

Total Power

Supply60 MW 78 MW 83 MW 93 MW

Blended Price

(PhP/kWh)5.70* 5.34 4.01 4.05

*3rd Bidder's Bid from Diesel was rejected.

• 2015 & 2016: Supply is tight. Former Sec. Petillla even recommended to P-Noy to see emergency power from Congress

• 2017 & 2018: New power plants will be commissioned

Outcome of the Power Supply Aggregation and Joint Procurement of Electric Cooperatives


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2. Long Term Power Supply Procurement and Contracting

• Mindanao ECs received “take it or leave it offer” before the Aggregation at PHP5.50 to PHP6.30/kWh

• Existing contracts of Central Luzon, Region1+CAR and Region8 ECs at PHP5.00/kWh (estimated average)

Outcome of the Power Supply Aggregation and Joint

Procurement of Electric Cooperatives


Aggregation

GroupNo. of ECs

Contract

Price

Reference

Date

Mindanao

ECs21 PHP4.12/kWh

October

2011

Central Luzon

ECs11 PHP4.12/kWh August 2013

Region 1 +

CAR ECs8 PHP3.33/kWh

September

2014

Region 8 ECs 11 PHP3.32/kWhSeptember

2014

Note: Contract Price at 100% Capacity Utilization

at FOREX and Fuel Price of Ref. Date

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19.11

15.85 14.74

9.59 11.46

3.09

19.76

9.9 9.17

24.83

19.78

15.23

0

5

10

15

20

25

30

ASEAN Ave. =US¢13.49/kWh

Sources of Data: IEEJ-JICA (2013) and CLECAFLAG/USAID COMPETE (2014)

ASEAN Retail Rates (2011) and CLECAFLAG (2013 and 2019) [U.S. Cents/kWh]

Generation prices will be reduced by 32% in 2019

Retail rates to consumers will be reduced by 20%

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a) Prices from existing power plants remains high

Contributing factors (a) supply-demand balance, (b) less-efficient legacy power plants of NPC, and (c) PSALM privatization which increased the capital of

the power plants even without increasing capacity

Existing plants should be given only short-term

contracts

Lessons from Power Supply Procurement and Contracting of ECs


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b) competitive procurement process and

contracting of the ECs for their long-term power supply demonstrated that the power rates can be

reduced significantly GENCOs in competition seek the least-cost that they offer because they were given the options to select the type, size, site, technology provider, EPC contractor, fuel supplier, and lenders.

Long-term contracts should be given only for new power plants

Lessons from Power Supply Procurement and Contracting of ECs


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1. Least-Cost Power Supply Plan

2. Focus on Objectives: Target Price

3. Market Assessment and Transaction Design

4. Requirements for New Capacity in Long-Term Power Supply Agreements

5. Evaluation Methodology: Level Playing Field

6. Transparent Procurement Process

Addressing Security: Competitive Procurement of Power Supply

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1. Least Cost Power Supply

• Economic Mix of Power Supply

• BASE LOAD Capacity and Energy

• PEAKING Capacity & Energy

• [INTERMEDIATE]

Example: Baseload Plant: Coal & Peaking Plant is Diesel

Baseload Demand: 78% of Peak and 97% of annual energy

Peaking Demand: 22% of Peak and 3% of annual energy


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1. Least Cost Power Supply

• Short Term Power Supply

• Up to 5 Years

• Long Term Power Supply

• Lead time of at least 5 years

• Contract baseload for next 5 years to avoid exposure in WESM

Uncontracted Demand and Timing of Procurement


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2. Focus on Objectives: Target Price

Calculate best new entrant power plant in the grid to set the target price

Target Prices of the ECs Joint Procurement

Mindanao ECs (300 MW): PHP4.20/kWh

Central Luzon ECs (300 MW): PHP3.90/kWh

Region 1 + CAR ECs (106 MW): PHP3.90/kWh

Region 8 ECs (150 MW): PHP3.33/kWh


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“who will bid and what will be the likely bid?” Mindanao ECs experience

Set target price at PhP4.20/kWh

Only 2 GENCOs are interested to join a bidding but already said “take it or leave it at PhP5.50/kWh - PhP6.30 /kWh”

GENCOs in Luzon and Visayas were not interested

Soluution

Design an international procurement process

The most important element in a competition is the TENSION among competitors


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“who will bid and what will be the likely bid?” Central Luzon ECs experience


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Target and Achieved Price after implementing the carefully designed transaction


Aggregation

Group

Aggregated

Demand

Target

Price

Contract

Price

Mindanao

ECs300 PHP4.20/kWh PHP4.12/kWh

Central

Luzon ECs300 PHP3.90/kWh PHP4.12/kWh

Region 1 +

CAR ECs106 PHP3.90/kWh PHP3.33/kWh

Region 8 ECs 150 PHP3.33/kWh PHP3.32/kWh

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4. Requirements for New Capacity in Long-Term Power Supply Agreements

Bid Submission Requirements: Technical Proposal

a) Evidences of Secured Site

b) Evidences of Arrangement with EPC Contractor

c) Evidences of Arrangement with Fuel Supplier

d) Evidences of Arrangement with Lenders


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Elements of Competitive Procurement Process for Power Supply

5. Evaluation Methodology: Level Playing Field

a. Levelized Cost for the duration of contract

b. Capture factors affecting price • Plant Outages (substitute WESM Price) • Value Added Tax for Non-Renewable Energy • Security Deposits (equivalent PHP/kWh) • Value-Added Services for Risk Mitigation

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Elements of Competitive Procurement Process for Power Supply

6. Transparent Procurement Process

a. Organization of procurement process • ECs have Memorandum of Agreement for Joint power

supply planning and procurement

– Joint Board, Joint BAC, Joint TWG and Transaction Advisers

– Commitment to undergo and finish the competitive procurement process

– Follow Procurement Code of Conduct

b. Detailed evaluation methodology • Complete instructions including equations on how the

evaluated price will be calculated • Bidders must be able to prepare a financial model

c. Independent Observers and Auditors

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Conclusion and Recommendations Security (availability and Affordability) of

Supply in the Philippines must be addressed by focusing on Bilateral Contract market

Key to significantly reducing the price of electricity in the Philippines is to prioritize security of supply through:

a) long-term power supply contracting for new generation capacity which avoids the high-priced privatized legacy power plants and IPP contracts of NPC and allows GENCOs to seek the least cost. Existing power plants must be given only short term contracts (1 to 5 years) while long-term contracts (10 to 25 years) must be reserved only to new power generation capacity; and

b) competitive power supply procurement process

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Conclusion and Recommendations A power supply procurement process must

demonstrate the essential elements of competitiveness to achieve the objectives of procurement and fulfill the least-cost supply mandates of distribution utilities:

a) Least-cost power supply plan,

b) target price,

c) market assessment and transaction design

d) Requirements for New Capacity

e) Evaluation Methodology that level playing field

f) transparent procurement process.

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Conclusion and Recommendations Recommendations:

1) Require distribution utilities to prepare and submit annually to Department of Energy (DOE) and Energy Regulatory Commission (ERC) the DU’s least-cost power supply and procurement plan on a regular basis. These shall be the basis for organizing competitive procurement process

2) Mandate the competitive procurement process for the power supply contracting of distribution utilities to meet the uncontracted baseload demand.

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Conclusion and Recommendations Recommendations:

3) DOE and/or ERC must organize the competitive procurement process for the uncontracted demand of the DU if the power supply and procurement plan was not implemented by the DU;

4) If a bilateral contract is submitted to the ERC for approval but without evidence that the DU has conducted a competitive procurement process, the ERC must organize a competitive process such as CSP through comparative proposals.

5) Ensure transparency through clear and well defined rules and evaluation methodology and requiring independent CSP Monitors.

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PROF. ROWALDO “Wali” DEL MUNDO

Electrical & Electronics Engineering Institute University of the Philippines Diliman, Quezon City 1101

Email: [email protected]

competition and security of supply in philippine ... · 1 prof. rowaldo del mundo university of the...

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