Saturday, February 1, 2014

PSALM failed


 (The Philippine Star) 

Things are much clearer now, after the rabble-rousers rested and the cold facts abate the heat of debate.
When electricity prices spiked towards the close of 2013, the usual populist voices raised the usual alarm. The ignorant mouth is always quicker than the examining mind.
A conspiracy theory was immediately floated ahead of the evidence. There was collusion among the power producers to screw the masses, says this theory. It is always convenient to blame the capitalists, the daemons of modern life.
There was a fatal flaw in this theory. It rests on the supposition that power producers stopped producing to create an artificial shortage and force up prices. But if the colluders were not selling power, how might they benefit from the high prices?
A more convenient target for agitprop was Meralco. After all, the distribution company is most visible, being effectively the collecting agent for the power producers.
Part and parcel of the agitprop was to go for a restraining order to stop Meralco from collecting the higher electricity charges. The Supreme Court happily obliged — although, perhaps after acquainting itself with the complexity of the power industry, the power producers were included as respondents. The Court must have noted that the distribution charge, the part of the bill that actually goes to Meralco, remained unchanged for over a year now.
The irony of the Supreme Court TRO on Meralco is that it did not include the electricity cooperatives that distribute power everywhere else outside the Meralco franchise. As a result, the power spike did happen everywhere else except the Meralco franchise area, reflecting the higher generating costs.
Even as oral arguments will be held at the High Court, the Senate conducted its own hearing on the matter of apparently spiraling electricity prices. Here, a different — and possibly more viable —  account of what happened is taking shape.
The culprit, as far as the Senate inquiry goes, is the giant Malaya plant in Rizal. That plant has a rated capacity of 650 MW. This is a large amount of electricity available for dispatch, or at least to boost reserves.
When electricity supply began to run thin after the maintenance closure of Malampaya and consequently the gas generators dependent on it, Malaya should have brought its huge capacity to the grid to prevent panic in the markets. Malaya did not ­— and that set off wrong signals in the electricity market.
The Malaya plant, we now know, is under the PSALM, a government corporation looking after the stranded assets remaining after much of the generation sector was privatized. Although a power plant, it is actually managed by the Department of Finance (DoF) rather than the Department of Energy (DoE). This is because it is treated as an asset government is trying to sell to help pay down Napocor debts.
Malaya may be a large plant, but it is also inefficient. The cost of the power it produces is way above average electricity prices. This is the reason no private investor wants to buy this plant. Each time Malaya operates, and sells below its production costs, government incurs additional expense.
Given the penny-pinching mindset at the DoF, the agency would rather not run the plant (even if the situation did require its generating capacity). Government spends about P600 million annually just maintaining this power plant. If it did operate, the subsidy will kick up significantly.
All the power plants are governed by the “must-offer rule” (MOR). The rule says plants need to offer their capacity to the Wholesale Electricity Spot Market at the price it chooses. The former ceiling as P62 per kilowatt-hour (later decreased to only half that when the electricity price crisis broke out).
Normally, the less efficient generators charge higher during peak hours. Those higher charges account for small portions of the total power bought and sold, resulting in negligible margins in the final consumer power bill.
There are times when generators offer the maximum allowable bid price just so that no one will buy their power and they do not need to operate their plants at a loss. When power supply ran thin in November and December, more and more expensive power had to be absorbed into the consumer bill, resulting in a shocking increase in electricity prices.
In the case of government-owned Malaya power plant, it turns out the MOR was not observed. Malaya simply did not run. Even if it quoted a price for its power, it did not dispatch. Had it did, generating costs could have been P12/kwh instead of the P22/kwh the last two months.
The idle government-owned plant created a market illusion. By sitting there, the plant made it appear there was ample supply. By refusing to dispatch at the last moment, the PSALM-owned plant jerked down actual supply that brought a sense of shortage to the market.
Taxpayers underwrite the P600 million annual cost of maintaining the Malaya plant without running it. The subsidy is similar to what we pay to keep bright red fire trucks at the ready in the event of a fire. The bright red fire trucks, however, roll out quickly when an emergency happens. The Malaya plant just sat idle, forcing the same taxpayers who underwrite the subsidy to shell out more for otherwise avoidable electricity price spikes.
The real story of the electricity price shock should educate those who clamor for some sort re-nationalization of the energy sector. The price shock was not due to market failure. It was due to bureaucratic failure.   source

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