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Our looming electricity shortage

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Ramon L. Clarete

Introspective

The Philippines faces an urgent task.

In 2024, the country’s indigenous natural gas from its Malampaya offshore well in Palawan is expected to be significantly short of the gas requirement to run the gas-powered plants in Batangas.

Nearly a quarter of the electricity requirement of Luzon is sourced from these power plants.

Without a replacement well at least as large as Malampaya’s, the country will have to import liquefied natural gas (LNG) from the rest of the world to avoid disruption in electricity supply.

For this to happen, the country has to attract private sector investments in LNG-related infrastructure starting with on ground LNG terminal hubs or floating storage and regasification unit (FSRU). More importantly, the DoE has to develop its capacity to ensure safe and economical use of LNG.

In the next few months, private sector investors are expected to submit their applications to the DoE for permit to construct the facilities.

The urgency of meeting this challenge in less than six years is couched in the potential lost opportunities for the country’s economic growth of inaction or disorganization now.

Displacing a quarter of Luzon’s electricity supply by the time Malampaya’s last gas supply is used takes the country back to the dark days of the 1990s. This without doubt will trash Ambisyon Natin 2040, the government’s program of eradicating poverty by 2040 and upgrade the country to higher middle-income developing country status.

This is over the current problem of low reserves in electricity.

Currently, power reserves are at their lowest level, which is 10% of peak demand. The level used to be twice that but even at the higher level, reserves are even lower compared to those in neighboring countries.

Low reserves reflect our vibrant economy, which is good. Owing to the Aquino III government, the economy has boosted manufacturing, pushing economic growth to at least 6%, and ramping up electricity use. But the precarious reserve situation reflects the bad news that the committed supply of electricity over the medium term has failed to keep pace with vibrant economic growth.

With inaction, the situation deteriorates into pulling down the growth of the country to the dark days of the 1980s and 1990s.

The Department of Energy (DoE) estimates that the country will need to triple the existing installed generation capacity of 23,000 MW by 2040 to meet the country’s anticipated energy needs, increase reserve margins, and support the government’s ambitious but doable target of the country being no longer an exception in East Asia.

OPTIONS POST-MALAMPAYA
The impending dry up of Malampaya is expected to deal a significant blow to the deteriorating supply and use balance in electricity of the country. True, coal or petroleum-fueled power stations can be added to replace the Batangas power plants. But investors would have to break ground soon, and not wait till we have a full-blown shortage.

The timing, however, is not good for investments in capacity using the top alternative fuels for baseload plants, like coal and petroleum. Prices of coal are bid up with petroleum prices.

Currently, the generation companies are locked in long-term purchase agreements at prices well below the petroleum price in the market. Now is not the time to rush and build new coal or petroleum power plants.

Renewables have only limited potential at the moment, with their intermittency problems, to solving the looming electricity shortage.

Well, there is the other possibility.

The owners of the gas plants in Batangas convert their plants into coal or petroleum using plants. This requires new investments and because the prices of coal and petroleum are high, this raises the cost of electricity and lowers return of incremental investments.

Developing new source of indigenous gas would take time, and with our ongoing territorial spat with China, the country would not have a new Malampaya in six years.

Let China develop one for us?

Well, China did that for Myanmar, and at least 80% of the gas supply extracted there was exported to China based on the terms of their agreement.

Like us, Myanmar needs its natural gas now and had expressed its intention to change the terms of its agreement with China. Unfortunately, Myanmar would have to buy out China at a price it could not afford.

Our situation is worse since China considers those potential wells in the West Philippine Sea theirs as well.

LNG SOLUTION
The least cost option is to open the economy to LNG. But this requires doing several tasks now in order to have a seamless transition to LNG by 2040 or earlier.

Let me start with the good news. There is big appetite of private investors to invest in LNG-related infrastructure. From the grapevine, several consortia are developing their proposals to construct LNG facilities. Terminal hubs or FSRUs are the top essential infrastructure, which opens the country to the world market of LNG. There could be subsequent facilities such as gas pipelines from the terminal to sites of industrial users of electricity such as the export processing zones.

The market for LNG has become more attractive recently because of US sanctions in Iran. Natural gas prices have been uncompetitive compared to coal, which explains why the recent added capacities for baseload operations had been coal plants.

But with US sanctions in Iran and OPEC management of its collective production to raise prices, coal prices have lately moved up with petroleum prices. The price premium of natural gas to coal has gone down making gas a viable fuel for baseload plants. The natural gas window has become even more attractive with the expected reduction of gas prices in the world as more LNG related infrastructure are built by exporters and importers of gas, resulting in a more integrated LNG market in the world.

Moreover, recognizing the urgency to expedite the process of establishing LNG facilities, tbe DoE issued and signed Circular No. DC2017-11-0012, known as the Philippine Downstream Natural Gas Regulation (PDNGR) on November 28, 2017. The Circular sets down how the DoE plans to regulate the nascent LNG industry.

Here’s the bad news.

The DoE needs to build up its capability to implement efficiently the circular. The passage of the circular necessitates strengthening DoE’s capacity to evaluate natural gas project applications and monitor the operations of these facilities to ensure public safety and the common good.

There are two sides to this. One is technical: ensuring that the siting, design, construction, expansion, rehabilitation, modification, operation, and maintenance of the LNG related facilities are safe to host communities and the environment.

The other is economic: ensuring that the investments in fixed infrastructure are economically viable without taxpayer money and more importantly, promote competition in the industry.

Batangas is where the competition to being the first-mover advantage of LNG investors is expected to be intense. It has the market, 3.2 gigawatts of capacity. Whoever builds the first terminal or FSRU would have the market.

Others may invest as well, like the owners of the gas plants. They can become vertically integrated from importing LNG to producing electricity. What happens then to the first mover? This is just one of the potential economic policy challenges that DoE would have to hurdle if this country is going to avoid the looming electricity shortage.

The writer appreciates the support of the Energy Policy Development Program (EPDP) which helped him undertake background research.

 

Ramon L. Clarete is a professor at the University of the Philippines School of Economics.