‘Oil prices, power rates to remain low this year despite supply concerns’

By Lenie Lectura - January 1, 2017

http://www.businessmirror.com.ph/oil-prices-power-rates-to-remain-low-this-year-despite-supply-concerns/

Electricity rates and pump prices are likely to remain low this year, compared with levels recorded in previous years, amid the scheduled shutdown of a gas facility that provides half of Luzon’s power needs and a cut in oil production.

The Independent Philippine Petroleum Companies Association (Ippca) said local fuel prices remain competitive even after the Middle East-led Organization of the Petroleum Exporting Countries (Opec) and other exporters, led by Russia, reached their first deal since 2001 to cut output by almost 1.8 million barrels per day to reduce in oversupply and prop up prices.

Opec nations currently produce a total of 33.7 million barrels of oil per day (mbd). Under the deal, they would bring that down to 32.5 mbd, with Saudi Arabia, Iraq, the United Arab Emirates and Kuwait making the biggest cuts.

Non-Opec producers have agreed to cut 600,000 barrels per day beginning this month, which will come on top of the 1.2 mbd cut from the Opec.

“Notwithstanding the Opec and non-Opec members’ consensus to cut output, an uptrend in world oil prices may not be sustainable as
demand is projected to remain weak, owing to the increase in federal rates, among others,”
Ippca President Fernando Martinez said. Last Tuesday, local oil firms increased prices of petroleum products. Gasoline prices went up by P0.50 per liter, while diesel prices jacked up by P0.25 per liter. This was the sixth consecutive week price hike for gasoline and the fifth for diesel.

Martinez said local fuel prices are still lower by as much as 30 percent to 40 percent lower compared to the price of petroleum products in June 2008, where gasoline and diesel prices reached as much as P60 per liter and P50 per liter, respectively.

Emmanuel de Dios, a former undersecretary of the Department of Energy (DOE), shared the same view. “Fuel prices are still low compared in previous years. Also, from the looks of it, shale producers may pump up additional crude in the coming months amid Opec decision to curb oil output,” he said.

Meanwhile, prices at the Wholesale Electricity Spot Market (WESM) would continue to remain low this year.

In 2016 WESM prices have been on a downtrend. This is expected to continue in the early part of 2017 as cooler temperature will continue in January and February, said Melinda Ocampo, president of the Philippine Electricity Market Corp. (PEMC).

PEMC is the operator of WESM, the country’s trading floor for electricity. Ocampo also cited an adequate capacity power producers, particularly from renewable-energy (RE) projects, which would keep prices low.

“You can see that there is a lot of available capacity at this time. RE also has a big impact on lowering prices, because of the must dispatch and priority dispatch [order],” she said.

Ocampo said the Malampaya gas facility shutdown from January 28 to February 16 would not lead to a repeat of the November 2013 incident  because existing mitigating measures are put in place to prevent abnormal price spikes.

A previous Malampaya 30-day shutdown incident led to the controversial high WESM prices, which led to reforms in the WESM. “There is a threshold that will prevent higher WESM prices,” she said.

WESM’s primary offer cap was originally set at P62 per kWh but regulators lowered it to P32 per
kWh starting December 2013 in a bid to prevent excessive price spikes.

Besides the primary cap, the Energy Regulatory Commission (ERC) also ordered the implementation of a secondary cap to further protect consumers from excessive price spikes triggered by supply tightening.

Called the price threshold mechanism, the P6.245 per kWh secondary cap kicks in the market once an average threshold of P9 per kWh is reached over a 168-hour period.

The thresholds were computed based on historical prices, with allowance for three intervals hitting high market clearing prices.

With these measures, the Manila Electric Co. (Meralco) said rates may not reach the record-high levels. “We don’t expect price spikes like in November and December 2013 supply months because of the lower primary cap in the WESM and the secondary cap,” Meralco Head for Utility Economics Lawrence Fernandez said.

The natural gas plants fueled by Malampaya provide around 40 percent of Meralco’s supply requirements. The rest are sourced from bilateral contracts with generation companies and WESM.

Fernandez said demand for power in the Luzon grid is typically low at this time of the year, because the weather is cool.

“For the Meralco area, the months of low demand has historically been January, February and March,” Fernandez said.

Besides this, he cited Meralco’s Interruptible Load Program (ILP) meant to prevent power outage incidents. ILP works by calling on business customers with loads of at least 1 megawatt    to run their own generator sets, if needed, instead of drawing power from the grid.

With the ILP, power supply from the grid that will not be consumed by participating customers will be available for use by other customers within the franchise area. Through this, the aggregate demand for power from the system will be reduced to a more manageable level, helping ensure the availability of supply.

“My directive was clear—the Malampaya maintenance activities should pose no substantial impact to supply of electricity by using all available resources and remedies, because power is a basic necessity for our countrymen,” Energy Secretary Alfonso G. Cusi said. He added that plans and alternative modes should be in place and ready before the actual shutdown.

“We have to ensure that the program works for Malampaya is within the prescribed schedule given to the DOE. Historically, [Shell Philippines Exploration] completed its maintenance period on time. It is expected that it will do the same this time.” Cusi said preparatory activities among industry stakeholders have started. These activities, he said, is meant to safeguard energy consumers from possible impact on supply and prices of electricity.

On the power situation outlook, the National Grid Corp. of the Philippines (NGCP) was tasked to simulate the possible power-supply scenarios, while PEMC will conduct a simulation on the WESM prices during the Malampaya shutdown. “The simulations will be submitted to the DOE for review and evaluation, so that we will be able to accurately respond to any unwarranted power market behavior,” Cusi said.

“We assure the public that we will continue coordinate all the activities of those affected by the Malampaya shutdown to avert any situation leading to the worst case scenario and to maximize the protection for the energy consuming public.”