Energy and Rice Deficiency: Reform Challenges for the Last Quarter of the Aquino Administration

STRATBASE RESEARCH INSTITUTE

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Energy and Rice Deficiency: Reform Challenges for the Last Quarter of the Aquino Administration

Copyright 2014 SRi Stratbase Research Institute. All rights reserved.www.stratbase.com.ph

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With just 21 months left in the 72-months (six years) of President Benigno Aquino III government, it is approaching its “last quarter” administration. Nonetheless there is still ample time to introduce some long lasting and meaningful reforms in keeping up with the liberal and market-friendly agenda of a Liberal leadership.

The President’s 5th State of the Nation Address (SONA) delivered more than a month ago has discussed many issues pertaining to the achievements, nearly-achieved, and must-achieve programs and projects of the PNoy administration. This paper will discuss only two of those, among the last three subjects of the SONA – energy deficit and high rice prices.

(1) Energy. The President said,

“We are doing everything in our power to ensure that the growing energy demand in our country is met. In spite of this, there have been some unforeseen events, that may lead to problems in the next year…. DOE to coordinate with the Joint Congressional Power Commission, the Energy Regulatory Commission, members of industry, and, most importantly, the consumers, in order to increase our capacity to respond to this problem.”

The President was referring particularly to the projected power shortages in the dry and hot months of April-May 2015 and 2016, including threats of brown outs in the Luzon grid. The problem is primarily on limited power generation, secondarily on transmission and distribution systems.

Energy and Rice Deficiency: Reform Challenges for the Last Quarter of the Aquino Administration1

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The Department of Energy (DOE) made a medium-term power outlook for Luzon grid including Metro Manila. Note the period April-May 2015, thin reserves between available or existing capacity (blue curve) and peak demand (red curve). The committed power projects to be commissioned in late 2014 to 2015 (gray curve) appear to be sufficient enough to expand power reserves.

A few things to remember when analyzing the graph.

1. Available or existing capacity (blue curve) does not mean that all power plants will not experience sudden or unscheduled shutdowns. A number of those facilities just conk out anytime, especially among the older ones. Thus, actual power production on certain period is lower than what the blue line in the chart suggests.

2. The same applies for committed power projects (gray curve). In addition, many of these committed are wind and biomass, where actual power generation is very often lower than their rated or promised capacity.

Let us now analyze power output this year and short term outlook. The National Grid Corporation of the Philippines (NGCP) issues alert levels in cases of power deficiency.

Chart 1. Power Supply-Demand in Luzon, 2014-2020, as of June 2014


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“Red alert” means the contingency reserve is near zero, if not negative. “Yellow alert” means the total power reserves is less than the capacity of the largest plant online, which for the Luzon grid is 647 megawatts (MW).

NGCP has issued “Yellow Alert” last April 8, May 9, 14, 20 and 26, 2014. It also issued “Red Alert” (RA) on the following days this year. The reasons are also provided.

1. RA May 16: Two unscheduled shutdowns, one unit of Sual coal plant (647 MW) and one unit of Pagbilao coal plant (367 MW), total power decline was 1,014 MW. Repairs took two to six days.

2. RA June 17: Malampaya Gas Restriction, Manual load dropped 105 MW.

3. RA June 25: Three unscheduled outages: Sual 1 (647 MW), Calaca 1 (300 MW), Masinloc 2 (315 MW). Total power decline of 1,262 MW. Plus derated capability of GN power (Mariveles) 1&2.

4. RA September 9: Reserves estimated to fall down to as low as 193 MW. Two unscheduled shutdown on September 8: GNPower Unit 2 (300 MW) and Ilijan Block A (600 MW). Plus two scheduled maintenance shutdowns: Sual Unit 2 (647 MW) and Kalayaan Unit 1 (177 MW). Total power decline was 1,724 MW. Calaca Unit 2 (300 MW) also halted operation early of September 8 but was quickly revived in the afternoon of same day.

Note these huge power plants that conked out unscheduled: Sual (15 year old), Pagbilao (18 yo), Masinloc (19 yo) and Calaca (30 yo). Metro Manila and provinces in the Luzon grid are dependent on power facilities listed on the left. Many of them are already old (more than 20 years old) and hence, they either require more frequent maintenance shutdowns or are prone to unscheduled shutdowns.

Chart 2. Zoom in to 2014 and 2015 Only


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Table 1. Existing Power Plants in Luzon, Early 2014(Marked in red are power plants that are 20 years or older)

Source: DOE


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Chart 1 is on committed power projects. Wind for late 2014 to 2015 is 253.5 MW (Northwind 18, Burgos 87, Caparispisan 81, Pillila 67.5). That looks substantial but wind power is highly unstable and unreliable in delivering power.

Take the case of Germany, possibly the “wind and solar power giant” in the world today based on their installed capacity. In the chart below, gray is conventional power (coal, nuclear, gas), yellow is solar, dark blue is wind, light blue is hydro, and green is biomass. Red is actual German consumption.

Notice the huge fluctuations in solar and wind power output. At night there is no sun and solar output is zero; wind output would show up only sporadically. It is highly unstable. Thus, it is the conventional power sources that provide stability and actual electricity to German consumers.

The story is no different for the US and UK.

Chart 3. Electricity Production in Germany in GigaWatts (GW), Mid-July 2014

Source: No Tricks Zone, Germany’s Habitually AWOL Green Energy…Installed Wind/Solar Often Delivers Less Than 1% Of Rated Capacity!

Chart 4. Installed Power Capacity vs. Actual Energy Output, Wind and Solar in the US, UK and Germany, 2000-2012

Source: WUWT, Renewable Energy in perspective: Solar and Wind power, August 30, 2014


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7So compare the bottom three lines, actual electricity output of wind and solar for the three countries, vs. other three lines (rated capacity of wind and solar). The gap is big, and not just for one or two years but for all those years covered.

For the Philippines therefore, the threat of brown outs in the hot months next year remains. What can government and the public do?

Here are some modest policy proposals.

1. Get more peak-load plants like those mobile diesel power barges. In Luzon, there is only one existing, Therma Mobile (TMO) of Aboitiz Power. It is an old power barge actually, bought from Duracom Power and was idle for about five years until it was rehabilitated and re-commissioned in November 2013 just to prevent rotating brownouts in Metro Manila and other Luzon provinces during the Christmas holiday season.

Diesel as fuel of this power plant is expensive compared to coal, natural gas or hydro. Thus, consumers must be ready to pay higher electricity when these diesel plants are used, in exchange for no brown outs. The public and the militant activists should recognize this trade off and not resort to frequent street rallies or going to the Supreme Court and demand a Temporary Restraining Order (TRO) for short-term power rate hikes.

2. Reduce power demand on peak hours of those hot months by asking the heavy users like big industrial zones, mining firms and cement plants, to have their own power generator sets. The Interruptible Load Program (ILP) seems to be working, more big companies should volunteer to join the ILP. But they should be compensated somehow, in the latter months as these companies would have larger power cost on those periods that they were using their gen sets.

3. The public, households and commercial offices can help reduce power demand by using more energy-efficient lights and appliances.

4. Government agencies should reduce the bureaucracies and permits they require in building and commissioning new power plants. DOE Sec. Petilla once said that in some projects, some 100 signatures are required to have one big power plant be put up and keep running.

5. Over the medium term, government should reduce the taxes and royalties in power as these impositions significantly contribute to high electricity prices. And the public blame the power companies and even call for “Junk EPIRA, back to government monopoly in power.”


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(2) Rice Prices. PNoy said,

“…some greedy rice hoarders are stockpiling their supplies in order to sell them when prices eventually rise…. Our im-mediate solution: import more rice, supply it to the markets, reduce the prices and keep them at a reasonable level, and ultimately drive those who took advantage of the Filipino people into financial ruin.”

Last November, we imported 500,000 metric tons… all of this had arrived by March of this year. This February… ad-ditional 800,000 metric tons,... This July we approved the im-mediate importation of 500,000 metric tons of rice through open bidding…. Standby authority to import an additional 500,000 metric tons…”

The anomaly actually here is the Philippine government’s continuing rice protectionism policy and monopolization or heavy regulation of rice imports, that largely explains for high rice prices.

Rice protectionism via (1) National Food Authority (NFA) rice importation monopoly and (2) maintaining quantitative restrictions (QRs) of our rice imports, and (3) forcing rice “self-sufficiency” policy, are wrong policies that contribute to expensive rice. They are anti-liberal policies that the Liberal Party should in fact discard while PNoy Aquino is still in power.

Beside is a picture of how big our neighbors Vietnam and Thailand are as rice exporters. They simply have huge production relative to their consumption.

Table 2. Rice Production, Trade and Consumption in East Asia, in ‘000 Metric Tons

Source: FAOStat, accessed 25 March 2014. It is contained in a report by DBM-DOF-NEDA to the President last April.

While the power companies have their share of blame, the public does not realize that government is partly or largely to blame for high electricity cost in the country. Aside from VAT and other national and local taxes and fees, the royalty for Malampaya gas – effectively an energy tax that the Malampaya gas field consortium passes to the consumers – can be as high as P1.45/kWh, based on the USAID-commissioned paper published in April 2013.


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9Chart 5. Rice Production per Capita vs. Share of Crop Area

Devoted to Rice, ASEAN

Myanmar and Cambodia are fast catching up as major rice producers and consumers, which is a good thing.

These four countries – Vietnam, Thailand, Myanmar and Cambodia – plus Laos, are all in Southeast Asia mainland. The rice import-dependent countries – Indonesia, Malaysia and Philippines – are all archipelagic and are outside the Southeast Asia mainland. Is this coincidence or not, that there is an explanation for this?

A paper from Dr. David Dawe of the Food and Agriculture Organization (UN FAO) and reposted in IRRI magazine, “Rice self-sufficiency: A question of geography?” says the answer is No. It is not coincidence.

Countries on SE Asia mainland have dominant river deltas that provide huge water and flat lands, they get big irrigation from Mekong River (water flowing from China down to Laos, Cambodia, Thailand, Vietnam), also from Ton le Sap river (mainly in Cambodia). This flat lands plus huge irrigation are highly suitable for rice cultivaton.

Rice land in particular, Vietnam has almost 2x while Thailand has almost 3x that of Philippine rice land area.

Productivity wise, Filipino farmers’ is actually larger than that of their counterparts in Thailand, although lower than those in Vietnam. If Vietnam has the same number of typhoons per year as the Philippines, its productivity would possibly be similar to the Philippines. Vietnam has only about 5 typhoons a year or less, vs. the PH’s 19 typhoons a year on average, about half of which make actual landfall and knock down thousands of hectares of often harvestable rice, resulting in high crop losses.

Source: IRRI. http://irri.org/rice-today/rice-self-sufficiency-a-question-of-geography


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10If we combine those natural factors – being in SE Asia mainland, have huge and wide flat lands, have huge irrigation water – those in the mainland have high rice output relative to their consumption and hence, rice prices are lower than those in the Philippines. Why should the Philippine government insist on expensive rice via trade protectionism?

A report from PhilRice also noted this,

“According to the two PhilRice economists, domestic price of rice was up to 75% higher than average global rice prices in 2000. The gap reduced in 2008, but price differential widened again to around 30% in 2012 mainly due to higher import tariffs (of about 50% beyond quantitative restrictions quota) and higher production costs.’ (source: http://oryza.com/.../philrice-calls-rice-competitiveness...)

Table 3. Rice Land and Output, Comparison among the Philippines, Thailand and Vietnam

Source: IRRI

Chart 6. Comparative Wholesale Rice Prices, Philippines, Thailand and Vietnam, 2000-2014


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11ENDNOTES:

1 Presented at the “Citizens Watch” Roundtable Discussion, September 5, 2014, UP National College of Public Administration and Governance. Sponsored by the Stratbase Research Insti-tute and the Office of the Vice President for Public Affairs, UP Diliman.

To bring down rice prices and stabilize rice supply, the following modest proposals are advanced.

1. Government should liberalize rice trade and importation, abandon rice protectionism. Remove National Food Authority (NFA) monopoly in rice imports.

2. End the quantitative restrictions (QRs) and convert it to low tariff, ultimately leading to zero tariff, especially for rice imports from our neighbors in the ASEAN.

3. In exchange for rice trade liberalization and removing NFA import monopoly, its accumulated debt, around P155 billion, may have to be assumed by the national government. This means taxpayers including those who do not buy NFA rice, will pay for its debt.

4. Certain NFA assets like some warehouses should be privatized. Proceeds from such privatization should be used entirely to retire some of its debt and not be used for any old or new food subsidy programs. This way, NFA debt that will be passed on to the national government and will be paid by taxpayers will be smaller.

Overall conclusions and proposals: To have more power plants, more stable energy supply and cheaper electric-ity, there should be less government bureaucraties, permits, taxes, royalties and price control in power. And to have cheaper rice and more stable rice supply, there should be less or no government protectionism and NFA monopoli-zation of rice trade. Government should embrace free trade in rice.

About the Author

Bienvenido “Nonoy” Oplas, Jr. is the founder and President of Minimal Government Thinkers, Inc. a free market think tank .

Mr. Oplas received his AB Economics undergraduate degree and Diploma in Development Economics (DipDE) from the University of the Philippines. He is the author of Health Choices and Responsibilities (Central Book Supply Inc., 1991, 232 pages) and soon to be published Liberalism, Rule of Law and Civil Society. He is also a columnist for interaksyon.com, TV5’s news portal, under “Fat Free Economics.”

Energy and Rice Deficiency: Reform Challenges for the Last Quarter of the Aquino Administration

Economy & Finance

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