supply chain of the power sector - map agribusiness and ... development/energy...lowering barriers...

1

Overview of the Philippine Power

Sector & related issues

February 12, 2013

2

Supply Chain of the Power

Sector

3

Supply Chain of the

Philippine Power Sector

NPC,

Privatized

GenCo’s, &

IPPs

Wholesale

Electricity

Spot Market

(WESM)

Meralco

Independent

Power

Producers

(IPPs)

Nat’l Grid

Corp of the

Phil (NGCP)

Generation Transmission

Distribution &

SupplyOverview of the unbundled

electric bill

4

5

Supply chain is mirrored by the

unbundled electric bill

Generation

Transmission

Distribution & Supply

End-users

� Section 36 of RA 9136

� “The distribution wheeling charge shall be unbundled from the retail rate …”

� “’Any electric power industry participant shall functionally and structurally unbundle its … rates …”

(from an actual bill of a very large industrial customer) 6

7 8

Pass-through charges and

DU/Meralco chargesPASS-THROUGH

• Generation Charge

• Transmission Charge

• System Loss Charge

• Universal Charges

– Missionary Electrification

– Environmental

• Taxes

– Local Franchise Tax

– Value-Added Tax (VAT)?

• Cross-subsidies

DISTRIBUTION

UTILITY (DU)

• Distribution Charge

• Metering Charge

• Supply Charge

2012 overall average ratePreliminary results

9

The Generation Charge is the single

biggest component of the electric bill



10

Generation Charge moves Generation Charge moves

from month to monthfrom month to monthFebruary 2013 Generation Charge: P5.2414/kWhFebruary 2013 Generation Charge: P5.2414/kWh

Ph

P/k

Wh

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Jan

ua

ry 1

0

Fe

bru

ary

10

Ma

rch

10

Ap

ril

10

Ma

y 1

0

Jun

e 1

0

July

10

Au

gu

st 1

0

Se

pte

mb

er

10

Oct

ob

er

10

No

vem

ber

10

De

cem

be

r 1

0

Jan

ua

ry 1

1

Fe

bru

ary

11

Ma

rch

11

Ap

ril

11

Ma

y 1

1

Jun

e 1

1

July

11

Au

gu

st 1

1

Se

pte

mb

er

11

Oct

ob

er

11

No

vem

ber

11

De

cem

be

r 1

1

Jan

ua

ry 1

2

Fe

bru

ary

12

Ma

rch

12

Ap

ril

12

Ma

y 1

2

Jun

e 1

2

July

12

Au

gu

st 1

2

Se

pte

mb

er

12

Oct

ob

er

12

No

vem

ber

12

De

cem

be

r 1

2

Jan

ua

ry 1

3

Fe

bru

ary

13

Billing Month

Factors affecting the Generation

Charge

11

Reduction mainly due to the Reduction mainly due to the

cheaper PSA ratescheaper PSA rates

Power Supply Agreements Power Supply Agreements

(PSAs)(PSAs)

GENERATING

COMPANY

CONTRACTED

CAPACITY FUEL TERM

Therma Luzon Inc.

(TLI) 350 MW Coal 7 yrs.,

extendable upon

agreement of

parties

San Miguel Energy

Corporation (SMEC) 200-500 MW Coal

Masinloc Power

Partners Co. Ltd.

(MPPCL)

330-430 MW Coal

7 yrs.,

extendable for

another 3 yrs.

SEM-Calaca Power

Corp. (SCPC) 210-420 MW Coal

South Premiere

Power Corp.

(SPPC)

1,180 MW Nat. Gas

Independent Power Producers Independent Power Producers

(IPPs)(IPPs)

GENERATING

COMPANY

CONTRACTED

CAPACITY FUEL

Quezon Power Phils.

Ltd. (QPPL)460 MW Coal

First Gas Power Corp.

Sta. Rita1,000 MW Nat. Gas

FGP Corp.

San Lorenzo500 MW Nat. Gas

Transmission Sector

• Regulated common electricity carrier business

• Subject to regulation by ERC

• Wheeling charges are set using a rate-setting methodology called Performance-Based Regulation (PBR)


16





17

Components of the

Transmission Charge

Transmission ChargeTransmission Charge

Wheeling Charges• Power Delivery Service

• System Operations Charge

• Supply & Metering Charges

Wheeling Charges• Power Delivery Service

• System Operations Charge

• Supply & Metering Charges

Ancillary Service Charges• Dispatchable Reserve

• Contingency Reserve

• Frequency Regulation

• Reactive Power Support

• Black Start

Ancillary Service Charges• Dispatchable Reserve

• Contingency Reserve

• Frequency Regulation

• Reactive Power Support

• Black Start

• Goes to NGCP

• Regulated via Performance-Based

Regulation (PBR)

• Collected by NGCP & paid to

generators

• Regulated via the Ancillary Services

Procurement Plan (ASPP) & AS-Cost

Recovery Mechanism (AS-CRM)


18





19

Recoverable level of distribution

system losses• Republic Act 7832 (Anti-Electricity Pilferage Act)

– Imposes stiffer penalties for electricity pilferage, but sets ceiling on system losses that can be recovered through rates

– System loss caps for private utilities• 1996 14.50 percent

• 1997 13.25

• 1998 11.75

• 1999 up to 2009 9.5

• In December 11, 2009, ERC announced a further reduction of the System Loss Cap

Up to 2009 Starting 2010

Cap Private DU’s 9.5% 8.5%

Coops 14% 13%

Ang liwanag ng bukas

System Loss Cap

� Record system loss at 7.04%, an improvement of 0.31% vs. 2011’s 7.35%� Record system loss at 7.04%, an improvement of 0.31% vs. 2011’s 7.35%

8.5%

9.5%

SAVINGS TO CUSTOMER

2008: P0.36 Bn2009: 1.37 2010: 1.13 2011: 2.38 2012: 3.43

Total : P8.68 Bn(or equivalent to 5.96¢/kWh)

SAVINGS TO CUSTOMERSAVINGS TO CUSTOMER

2008: P0.36 Bn2009: 1.37 2010: 1.13 2011: 2.38 2012: 3.43

Total : P8.68 Bn(or equivalent to 5.96¢/kWh)

7.04

1.4

6%


21





22

Universal Charges, Taxes, &

Lifeline Susibidies• Local Franchise Tax

– Distribution utilities are required to pay local franchise taxes. Goes to local government units

• Value-Added Tax (VAT)?– With Republic Act 9337, VAT was imposed on the power industry, in lieu of the

national franchise tax. Remitted to the national government

• Universal Charges– A non-bypassable charge remitted to the Power Sector Assets and Liabilities

Management Corporation (PSALM)

– Part of this is now in the bills as missionary electrification and environmental charges

• Lifeline Subsidy– Section 73 of EPIRA: “A socialized pricing mechanism called a lifeline rate for the

marginalized end-users shall be set by the ERC, which shall be exempted from the cross subsidy phase-out under this Act for a period of ten (10) years, unless extended by law. The level of consumption and the rate shall be determined by the ERC after due notice and hearing”

– Discounts to marginalized end-users will be subsidized by all other customers of the DU

23 24

Cross-subsidization within the

residential customer class

KWh Consumption

Distribution Charge (P/kWh)

Lifeline Rate Subsidy (P/kWh)

Lifeline Discount

(% of Charge)

1-20 1.1945 - 100%

21-50 1.1945 - 50%

51-70 1.1945 - 35%

71-100 1.1945 - 20%

101-200 1.1945 0.1497 -

201-300 1.5518 0.1497 -

301-400 1.8890 0.1497 -

401 up 2.4763 0.1497 - • Customers with low consumption simultaneously enjoy a lower

distribution charge and a lifeline discount

• On the other hand, larger consumers are both imposed a higher distribution charge and provide a lifeline subsidy

(Figures are for February 2013)

25

Pass-through charges and

Meralco chargesPASS-THROUGH

• Generation Charge

• Transmission Charge

• System Loss Charge

• Universal Charges

– Missionary Electrification

– Environmental

• Taxes

– Local Franchise Tax

– Value-Added Tax (VAT)?

• Cross-subsidies

DISTRIBUTION

UTILITY

• Distribution Charge

• Metering Charge

• Supply Charge

Distribution Sector

• Regulated common carrier business requiring a franchise

• Subject to regulation by ERC

• As of 2009, the distribution sector is composed by– 120 electric cooperatives

– 17 private utilities

– 8 local government-owned utilities

Source: 2009 Distribution Development Plan

• Widely varying in size &

technical/ financial standing

• Different technical standards

(e.g., distribution voltage levels,

metering) from DU to DU

• Widely varying in size &

technical/ financial standing

• Different technical standards

(e.g., distribution voltage levels,

metering) from DU to DU


27





28

Under PBR, there is greater consumer

involvement and transparency

• Rate-setting process under PBR: before each regulatory period (four regulatory years), the ERC evaluates and determines a utility’s:– Forecasted energy sales and demand

– Proposed performance standards

– Annual Revenue Requirement and Maximum Average Prices

Performance standards

• Interruptions

• Voltage regulation

• Time to connect

• Call-center performance

• System loss

Market forecasts• Energy & demand

• Exchange rates

• CPI (US & Phil)

Projections (2012-2015)

• Capital expenditures

• Regulatory asset base

• Operating Expenses

• Taxes & feesAnnual Revenue

Requirement &

Maximum Average

Prices (2012-2015)

Allowed return (WACC)

PBRPBRPBR

Performance standards

• Interruptions

• Voltage regulation

• Time to connect

• Call-center performance

• System loss

Market forecasts• Energy & demand

• Exchange rates

• CPI (US & Phil)

Projections (2012-2015)

• Capital expenditures

• Regulatory asset base

• Operating Expenses

• Taxes & feesAnnual Revenue

Requirement &

Maximum Average

Prices (2012-2015)

Allowed return (WACC)

PBRPBRPBR

29

Performance-Incentive

Scheme (PIS) under PBR• Under PBR, a Performance Incentive Scheme (PIS) is

established to measure the performance of the DU according to key areas of service quality – Customers are financially compensated when the DU fails to

meet performance standards

• Two components of the PIS are in place

Price-Linked Incentive Scheme. Rates are adjusted depending on utility’s actual performance


Guaranteed Service Levels (GSL). Customers are directly

compensated if the utility does not meet performance thresholds

Guaranteed Service Levels (GSL). Customers are directly compensated if the utility does not meet performance thresholds



Guaranteed Service Levels (GSL). Customers are directly

compensated if the utility does not meet performance thresholds

Guaranteed Service Levels (GSL). Customers are directly compensated if the utility does not meet performance thresholds

30

PBR implementation

ERC Final Determination:

Maximum Average Prices (MAP)

International comparison of

power prices

31 32

Source: Joint Foreign Chambers forum (Oct. 28, 2010)

Average Retail Electricity Tariffs (All 44 Markets Surveyed)

June, 2012

Notes

1.Weighted average tariff (all customer categories) excluding VAT2.Tariffs for US (average) and Euro countries are for Nov 11. All other countries/states (incl Hawaii & California) are for Jan 2012

3.Assumes tariffs in 50 US states have no “Other” taxes

4.Estimated subsidies are based on long-run marginal cost of supply (including fuel subsidies) calculated by IEC

Page 33

Regional Comparison of Subsidies

June, 2012

Implied Subsidy

36%37% 51% 54%

50%

A comparison of true cost of supply versus average tariffs shows that many countries

in the region heavily subsidize their electricity rates. These subsidies have been

mainly caused by the inability to pass through fuel price increases during that period

Subsidized Fuel ?

Deferred Capex ?

Additional Debt ? ?

Cash Grant ?

Subsidy Mechanism

Page 34

USAID preliminary study (Oct 2011)

36

Estimated Government Subsidy in Estimated Government Subsidy in Certain CountriesCertain Countries

2010 Subsidy (in billions of dollars)

Country

OilNatural Gas

Coal Electricity Total Subsidy per person ($/person)

Share of GDP (%)

Indonesia 10.15 5.79 15.94 66.50 2.30

Thailand 2.11 0.48 0.44 5.44 8.47 122.70 2.70

Malaysia 3.89 0.97 0.81 5.67 199.60 2.40

Philippines 1.10 1.10 11.80 0.60

Source: International Energy Agency / Institute for Energy Research

Conclusions

• Meralco’s average retail electricity tariff ranks 9th among the 44 markets surveyed &

2nd highest in the Asia region (after Japan which is 17% higher)

• Although Meralco’s tariffs are – in some cases - more than double those of its

regional counterparts, the main reason (>75%) for the difference is government

subsidies that are provided to customers and/or utilities in these markets so that

tariffs remain well below the cost of supply.

• IEC believes that such subsidies are poor economic policy and unsustainable.

Customers accustomed to cheap power in these subsidized markets are likely to

suffer extreme price shocks when subsidies are removed which IEC believes is likely in

the short- to medium-term

• In contrast, Meralco’s tariffs are fully cost-reflective which is sound economic policy

in a high growth market such as Luzon which has limited available capital

• The remaining 25% of the tariff differential is attributable to the higher underlying

cost of supply in the Philippines. (When subsidies are added back to the tariffs in

lower-priced countries, the total cost of supply in these markets is comparable with

or even higher than in Luzon)

• The main causes of the higher underlying cost of supply in Luzon include imported

fuel costs, high cost-of-capital, smaller grid size/volume, transmission cross-subsidies

and challenging geography

June, 2012 Page 37

Conclusions (cont’d)

• Efforts to reduce the total cost of supply should principally focus on

lowering barriers for new generation. The greatest barrier to the entry of

new IPPs in Luzon is the lack of access to long-term, large-scale PPAs with

creditworthy offtakers. Measures to facilitate the entry of new generation

include certainty on the schedule of Retail Open Access and the aggregation

of smaller distribution companies

• IEC notes that very little of the tariff is within the control of Meralco and

monthly rates variations are mainly a function of global fuel and currency

market fluctuations in the generation market

• Based on a comparison of the individual components of Meralco’s tariff

with the intrinsic cost of supply in Luzon and rates/costs in other markets,

IEC judges that Meralco’s rates are currently fair and reasonable

June, 2012 Page 38

What’s Meralco doing?

39

� Securing new competitively priced “Power Supply Agreements”

for 2012-19

� Building up to 2,500 MW +/- on-stream between 2015/6 to 2020

� Highly reliable and fuel efficient

� Coal, CCGT (Nat Gas & LNG), hydro and potentially wind

� Joint ventures with strategic partners

� Seeking new more cost competitive fuel sources (coal, nat gas and

LNG), local or offshore

� Work with industry for synchronized maintenance turnarounds of

Gencos.

POWER SUPPLY RELIABILITY & SUPPLY COST (58% of Ave Customer Bill)

� Flat Distribution charge/kWh over the next 4 years (2012-2015)

� About 60-65% Transmission Charge/kWh will be relatively flat until

2015, the balance of 35-40% constituting ancillary service charges

which may fluctuate.

� Massive Capex/investments in further strengthening T & D system

� P45Bn for Meralco alone over 4 years

� Supporting drive for more effective T & D coordination /

synchronization to minimize supply interruptions

TRANSMISSION & DISTRIBUTION (T&D) RELIABILITY AND COST

(26 % of Ave Customer Bill) � Advocacy for reduced government take in the form of national /

local taxes on electricity, royalty on nat gas, et. al.

� Advocacy for judicious action on any new Universal Charges

TAXES & UNIVERSAL CHARGES (10% of Ave Customer Bill)

� Actively drive energy efficiency and consumption for Industrial,

Commercial and Residential customers

� Energy saving campaigns / conservation-tips for households

� Energy advise and services for commercial and industrial customers

� Piloting Pre-paid Metering for residential customers as part of broader

Smart Grid

� Actively supporting e-Vehicle Programs

CONTAIN CONSUMER SPEND ON POWER

supply chain of the power sector - map agribusiness and ... development/energy...lowering barriers...

Documents