(Conclusion)
MANILA, Philippines – In fact, just last May, a watershed event in the energy world happened quite inauspiciously in Dubai when, at an open tender of DEWA (Dubai Electricity and Water Authority) for 800 MW of solar capacity, the winning bid came in at $0.03/kwh. The bidding results were so close the next best bidders came in at $0.0369, $0.0396, $0.0444, and $0.0448. These results surpassed a previous 200 MW solar PV award of DEWA just 18 months earlier of $0.0565, and even that of their coal-fired plant bidding in Oct 2015 of $0.0451. Solar PV, with the right conditions, is already beating coal-fired power in some parts of the world. In other Middle East countries like Oman, solar energy is already used to pump up oil from their fields, replacing natural gas.
A new energy paradigm is unfolding fast because consumers are responding to the needs of the planet and technology is riding huge cost and experience curves that are rapidly improving their economics.
The Philippines has a golden opportunity to leapfrog into this new paradigm and build an energy infrastructure that’s future-ready. To do this it’s critical we craft a credible glide path that keeps power reliable, available, and affordable. How do we do this? Let’s first take stock of where we are.
The EPIRA and the privatization of our power industry effectively ended the era of subsidized power in the Philippines. What this means is that our power costs look high relative to other countries that have found it difficult or impossible politically to remove subsidies from energy prices (e.g., Indonesia, Malaysia, and many other Asian nations). But keep in mind that subsidies have been more of a benefit for the rich who obviously consume more electricity, allowing them to run their aircons, lights, water heaters, appliances, and swimming pools the whole day.
On the other hand, removing the subsidies on electricity have given the Philippines so much more headroom and ammo to boost social services and infrastructure, effectively tripling and even quintupling expenditures here to the direct benefit of the poorer households in this country. All this, despite the fact that subsidies to poorer lifeline consumers of electricity are continuing, benefitting more than 2.02 million households yearly. Today we even have elbowroom for more infrastructure spending (as much as five percent of GDP today from only 1.7 percent in 2012).
Another fact worth pointing out is that Philippine growth has been services driven. But the power supply that supports such growth doesn’t have, what we term in the industry as, high capacity factors that require a lot of baseload type power. The need is for more flexible power technologies that are also capable of serving mid-merit and peaking type of demand.
This will become even more critical as solar PV costs continue their inevitable descent. Today, given our electricity prices here, it already makes economic sense to install solar PV and even solar water heaters on rooftops. Many here have not woken up to this yet but they will, as PV costs come down even further and, believe me when it does, it will feel like a dam bursting. Whether they be grid-connected or not (the so called behind-the-meter), they will have the effect of muting power demand growth and will change the shape of demand on a daily basis and even on a seasonal yearly basis.
As more renewables come online, we will need battery storage capacity to come along with it to produce power when the sun doesn’t shine at night, on cloudy days, or when the wind isn’t blowing. Costs of battery storage are still high but likewise coming down fast. However, even without economical battery storage, there are already many cost-effective ways grids can choreograph supply to meet this variable and intermittent nature of renewables. Pump storage hydro plants such as CBK in Laguna, demand-shaving schemes and assets like ice-storage air conditioning, and even interruptible load tariffs that incentivize big users with discounts and lower rates, provided they allow themselves to be curtailed with some advance notice. As electric vehicles become more ubiquitous, they will be capable of augmenting both the power and storage requirements of the grid and individual households, provided the utility incorporates these capabilities in their distribution grids.
Many also tend to forget the Philippines is home to clean, renewable energy that today can already run 24/7 and meet baseload, mid-merit, and even peaking requirements of the grid. This complements and strengthens our country’s clean energy future quite well. That technology is geothermal and our very own EDC is a world leader in that domain. The obvious is often overlooked, but let me say there’s more than 2,000 MW of geothermal potential still out here in the Philippines and can be developed with even lower feed-in-tariffs than were granted to all the other renewable energy technologies. Without that, they’ll just sit there unutilized. In fact, many countries covet this and are seeking our help to develop their geothermal resources.
Having more flexible load-following power plants like natural gas-fired turbines (combined cycle or simple cycle) will be a necessity for this type of grid. They are the most efficient power plants in the world today and, thus, have the lowest carbon emissions per kilowatt-hour (half that of the best coal). They also burn much cleaner with regard to other pollutants like Nox, Sox and particulates. They are also capable of faster starts and stops, can follow variable loads more quickly than a coal plant, and can meet peaking, mid-merit, and even baseload demands if required.
Today we already have 2,700 MW of natural gas-fired plants running on local Malampaya gas. These plants are running well and will still be capable of decades of reliable operation when Malampaya runs out in six to eight years. It’s critical that we plan this early and build a capability for importing liquefied natural gas via what will be the country’s first LNG regasification terminal.
First Gen and other companies have plans for this afoot, but the economics gets even better with more parties coming together to use it. Today the economics of a natural gas-fired power plant can beat coal when serving all types of load: baseload, mid-merit and peaking. If we size the terminal to handle more throughput and volume, it only gets better! All this, in addition to being cleaner and healthier for the environment and surrounding communities that even the best coal power plant technology can never match.
On the other hand, many of the coal plants existing and being planned for the country cannot follow grid variability that quickly. Cycling of coal plants up and down will damage them and lead to more unplanned outages or breakdowns as we’ve been seeing lately. Even some of the new ones haven’t been so reliable. As mentioned earlier, many of them notoriously emit more C02, Nox, Sox, and particulates in their operations. The much-touted “clean coal” technology called Carbon Capture and Storage (CCS) is still not economical anywhere in the world and, in fact, the Obama administration abandoned four of the six CCS projects after spending close to $1.137 billion.
As more solar and other renewables are added to the grid, these inflexible coal plants will be used less and less, or they may be kept idling, burning coal even if not needed because of the intermittency (this will escalate emissions and cost of these coal plants even more per kilowatt-hour). Although coal plants’ usefulness to the grid will not disappear overnight, planning for too much, as we seem to be doing today, is creating the prospect of stranded investments. Instead, we should be planning for a rapidly diminishing role of coal and, eventually, even natural gas-fired plants in our grid over a defined timeframe.
Yet another critical aspect of the power industry that should evolve is how distribution utilities (DU) see their business models moving forward. Some utilities in developed countries have seen how the utility’s role is trending more toward being back up supply for consumers with distributed generation resources in their homes and buildings. They are responding by reweighting and reshaping their charges (with the regulators’ help) toward capacity rather than energy charges.
In addition, here in Meralco at least, we see them entering the generation sector to enhance their revenues. I’m not sure if this creates regulatory tension, confusion, or distracts them from what should be a more progressive focus on building utility infrastructure that enables smarter use of electricity, electric vehicles for cleaner, quieter cities, or even the so called energy internet that allows a sharing economy for energy assets to take place. Today, despite our high electricity costs, energy efficiency doesn’t seem to be a priority and as much as 30 percent or even 40 percent of power is wasted needlessly when consumed by end users.
The electric utility world is changing and there is so much opportunity for them and consumers if they embrace and enable the change that’s coming. In the same manner that our telco’s enabled the birth and flourishing of a BPO industry that today employs more than a million Filipinos and generates more than $22 Billion yearly, our DUs can likewise empower Filipinos with a smarter grid that uplifts lives tremendously, if they stay focused on the right things.
These days, it’s critical to stop seeing the power industry through obsolete lenses as imminent threats to the old business models are already at the door. The opportunities, however, are immense and, as much as I see threats, I am likewise excited by the opportunities we have as a country to leapfrog 20th century technology and build for the 21st.
Philippine economic growth need not be dirty, polluted, and “me-too”. We should drive our economy on the basis of our competitive strengths, mindful of the quality of life for our people. Today, our demographics and work force are among the best on the planet; the envy of an aging world. We continue to attract foreign outsourced work to the tune of that $22 billion each year, employing more than 1.1 million Filipinos, and still growing by more than 15 percent annually.
OFW remittances of almost $25.8 billion each year also attest to that. That same demographic and easily trainable workforce has been attracting industries that wish to utilize this unique advantage of our country despite what some doomsayers keep saying are high power costs. Eighty-five percent of manufacturing industries have power costs only representing less than 10 percent of their total costs, so it will not deter a majority them. (In fact the average for all types of manufacturing is only four-five percent. Our industrial park in Batangas is attracting world–class locators with power costs as much as 10-15 percent of their total.)
Tourism, on the other hand, has enormous potential to become a more inclusive source of economic growth. That’s primarily because the education requirements for employment in this industry are less demanding and also because we are naturally warm, hospitable, English speaking, and a nation with so many beautiful destinations to be proud of.
Tourism also has the advantage of dispersing that growth away from Metro Manila and into the countryside and islands, provided we build the infrastructure to connect them better. Let’s remember the lament of the Mayor of Beijing and not lose sight of keeping our cities and towns livable, even as we pursue growth and jobs for our people.
The energy industry is on the cusp of rapid and dramatic change from the twin forces of global warming and exponential technology converging at this point in history. An amazing opportunity is upon us; let’s be deliberate in catching the right waves as they come, and be part of building a stronger country and leaving behind a more livable planet for our children and theirs.
Federico R. Lopez is the FPH Group Chairman and CEO