Power outage: Generation capacity has not kept pace with economic growth, leading to potential shortfalls

As the economy has continued its robust growth over the past decade, and spending among the expanding middle class has increased, demand for electricity has risen accordingly. However, while sales have gone up by an annual average of 3.89% from 2001-13, according to the Department of Energy (DoE), power generation capacity growth has lagged far behind, at 2.2%.

CAPACITY CONCERNS: Taking into account DoE assumptions of electricity demand-to-economy elasticity in Luzon of 0.6, the country’s GDP growth rates of 6.8% in 2012 and 7.2% in 2013 equate to an estimated average rise in consumption of 4.1% and 4.3%, respectively. These estimates are within a percentage point of power consumption figures recorded by the DoE. These trends are widely expected to have serious consequences for the sector beginning in 2015. Most concerns are focused on the island of Luzon, which accounts for around 70% of electricity consumption. The peak demand season starts in March and lasts as late as July. Current projections by the DoE for this five-month period indicate that there will be 14 weeks out of 22 where available capacity will be less than the Luzon’s contingency reserve of 647 MW (4% of peak demand), with the system peak demand during the first two weeks in April expected to actually exceed available capacity. As a result, load shedding and brownouts have become a very real possibility for the Luzon grid during peak demand, and emergency measures are being explored in order to best combat the situation.

On paper, the Luzon grid’s installed capacity of 12,769 MW easily outpaces estimated system peak demand in March 2015 of 8201 MW. In reality, however, much official installed capacity is offline or unreliable due to planned maintenance and antiquated facilities. Around 89% of installed capacity, or 11,389 MW, are rated as dependable. The major culprits include fossil fuel-fired thermal power plants, the largest being the 350-MW unit 1 at the Malaya thermal power plant, considered unreliable since March 2014 due to high turbine vibrations. Malaya’s 235-MW unit 2, on the other hand, is projected to be a reliable contributor for the summer of 2015, despite of concerns that it may not be up to the task after constant use during the summer of 2014 extended it beyond its normal operational parameters.

MAINTENANCE WORK: Planned outages due to routine maintenance will exacerbate the problem, as some substantial contributors to the grid are pulled offline. These in include back-to-back shutdowns of the Pagbilao coal-fired thermal power plant’s units 1 and 2 (382 MW each) from May 30 to July 3 and from July 4 to July 31, along with a combined five weeks of down time for two coal-fired 315-MW units at the Masinloc power plant from January to March, and a 326-MW coal unit at GNP Power’s for all of February. One combined-cycle unit will be pulled out of duty for a week in March as well when the Santa Rita power plant completes work on a 265-MW unit. Two hydro power plants have also scheduled outages with the San Roque power plant carrying out work on three of its 137-MW units for a combined total of 19 weeks from end-January to June 26.

Another hydro plant, Magat, will carry out maintenance on its 90-MW unit 3 for five weeks starting in May. The effect will be forced outages ranging from an estimated 631-858 MW each month between March and July 2015, down from the level of actual forced outages seen during the same period in 2014 – of 1251-1624 MW. These deficits come despite the new capacity scheduled to come on-line by early 2015, which is expected to bring hundreds of megawatts to the grid.

WEIGHING THE OPTIONS: Although the exact timing and duration of any outages or shortfalls remain a question of conjecture at this junction, substantive measures will need to be in place by March 2015 to alleviate the expected deficit. Two competing proposals were being considered by the government as of November 2014 to head off this impending crisis.

COMPETING PROPOSALS: The first of these is a proposal from the current administration in September 2014, asking Congress to grant the executive branch emergency powers to contract additional power of up to 900 MW. Although the government is barred from directly participating in the power generation market by the Electric Power Industry Reform Act (EPIRA), the president has cited Section 71 of EPIRA, which states that Congress may authorise the establishment of additional generating capacity if there is an imminent supply shortage. Once installed, the additional capacity would serve as a reliable stopgap for both base load and back-up reserve capacity in peak months.

However, beyond the dangers of creating an essentially open-ended loophole in EPIRA – no termination date or timeline for the emergency powers was included in the request to Congress – there are financial drawbacks to this plan. Notably, any generating capacity would likely have to be contracted for at least two years, meaning that for the majority of non-peak demand time it would sit idle. The DoE estimates that the lease and installation of the requisite diesel-fired modular generators would cost up to P6bn ($135m).

The second avenue being explored is a dramatic expansion of the interruptible load programme (ILP) which relies on large, high-power consumers such as hotels and shopping malls to voluntarily operate their existing back-up generators during peak demand times to alleviate overall demand. Aggregate demand will thereby be reduced to a more manageable level, helping ensure the availability of supply during peak demand season. In return, participating generators would be compensated by the government according to a formula that pays 0.34 litres of diesel per KWh (prices were around P40 [$0.90] per litre in late 2014), along with a maintenance stipend of P0.32 ($0.01) per KWh. Fuel costs are based on litres, as fuel prices fluctuate. Similar programmes have been employed in Mindanao and Cebu, where there were significantly fewer ILP participants, but also lower peak demand. An economic advantage of this scheme is that the generators are only run and paid for during peak demand times. As such, while overall reserve capacity will remain relatively low, generators will only be used for short durations during the crucial summer period, rather than acting as a standby sunk cost throughout the whole year.

NEGOTIATIONS: As of October 2014, Luzon’s primary power provider Meralco had registered 155 MW of ILP participants and was continuing negotiations for another 81 MW of capacity operated by 57 other customers. However, as the majority of these self-generating facilities (SGF) are limited to a four-hour operational span, the ILP power to the grid at any one time is likely much lower than Meralco’s planned 236 MW, with conservative DoE estimates placing it at 118 MW. These figures do not, however, take into account other potential ILP sources, such as contestable customers within the Philippine Economic Zone Authority, the Semiconductor and Electronics Industries in the Philippines Incorporated and the Retail Energy Supply Association, and 319 MW of potential SGF capacity from the Subic, Cavite and Baguio ecozones. Some 60 MW of SGF power located in Batangas, Labuna and Pasig City has also been committed by the domestic conglomerate JG Summit, which also owns a 27.1% stake in Meralco.

While the ILP should provide the Luzon system some relief for its impending power supply shortage, uncertainty over the exact levels of power committed to the grid in times of crisis could also increase the possibility of unstable voltage and frequency levels within the system, particularly if an SGF were to experience an unexpected failure of its generator. Whether the government ultimately decides to go the ILP route or contract additional emergency generation units directly, the problem will likely extend beyond 2015 alone.