Agham Compre Energy.paper

8/13/2019 Agham Compre Energy.paper

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Samahan ng Nagtataguyod ng Agham at Teknolo hiya para sa Sambayanan132B Matahimik St., Teachers Village, QC [email protected] Telefax: 9263139 www.agham.org

Electric Power, Oil and Gas: Lifeblood of industrialization for sale

Introduction

Energy is a necessary factor for industrialization and the Philippines is rich in a variety of fossil andrenewable energy sources. Despite this no significant industrialization activity has taken place in the country.If we look at the distribution of energy sales (1999), 90.8% of the total energy sales go to households andsmall businesses (residential and commercial) while only 8.2% is coming from sales to industries.

This implies two things: that the country lacks indust ries to utilize the production of energy and it isthe consumer of electric power (mostly households and commercial buildings) t hat are mostaffected by rate increases. The privatization of Napocor through the Electric Power Industry Reform

Act of 2001 or t he Pow er Act therefore has di rect implications on the people's dai ly rout ine (sinceelectricity is a basic utilit y) and has long term strategic implications on our national development.

Electric power is a basic service that is needed by households in everyday activities and is equally importantfor industries to operate. The failure of the government to provide electric power was evident when thecountry faced massive blackouts in the late 1980s and early 1990s due to a shortage of power supply.

The response of the government to this power crisis was not to build the necessary infrastructure to meetthe demand but to contract out power generation to independent power producers or IPPs. Furthermore, ithas made steps to privatize the whole power industry effectively abandoning its role in providing electricpower services and opening up the power industry to private companies.

The Philippines is rich in its natural resources even in its new and renewable energy. We have enoughresources and alternative sources of energy to sustain the needs for pubic utility services. But even thoughour country has potential and rich in energy resources the government fully opens the opportunity to foreignand private investors to build, develop and operate our energy resources and the whole industry, in whichthe only aim is to gain more profit and get incentives from the government like tax holidays, incentives inexporting materials for their use and many more.Thus, our energy industry program is under the framework of privatization and globalization. This means thatour government will fully open to the foreign and big local investors the control to explore, develop, exploitand plunder our natural resources including the NREs, natural gas and oil for the sake of getting more profit,that would result to the ever worsening poverty situation of Filipino people.

EPIRA is a mechanism that would push to our energy industry into privatization. This policy gives thoseforeign and individual investors the power to control the NRE through the Independent Power Prodicers(IPP,s) and Small Power Utility Group (SPUG) of NAPOCOR. It also includes the P177 Billion potentialinvestment in renewable energy for 2004 to 2013 and the 60% of P295 Billion renewable investment. TheShell Petroleum Exploration of Malampaya is one example selling our national patrimony. These was beingcontrolled by Shell at 45% and Chevron Texaco at 45% and the remaining 1O% that the government wantsto sell in KEPCO that are all foreign corporation.

Energy sources of the Philippines

The Energy Information Administration of the Department of Energy of the US has enumerated thefollowing main sources of energy in the Philippines: geothermal, hydropower, coal, oil, and naturalgas. All of these contribute to the countrys energy production, which is concentrated in the electricitysector.

The Philippines is also rich in Renewable Energies. Being an archipelagic country with abundantagricultural and renewable resources, there exist bright prospects and greater opportunities for NREdevelopment, utilization and promotion in the country.

Renewable Energy refer to energy sources that can be obtained from continuously recurring energyprocesses and cycles in the natural environment including energy sources from waste materials and


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the technologies that utilize these energy sources.

Example of this energy are the following, energy that come from flowing water (hydropower), theenergy from the heat of the sun (solar energy) , waste material energy (biomass energy),geothermal energy and energy coming from the wind (wind energy). Aside from these sources, wehave also proven reserves of fossil fuels and indigenous sources such as the coal, natural gas andoil. (Ex. Malampaya natgas)

Oil production in the country remains flat and far below oil consumption. Oil consumption on theother hand has been increasing since 1986 up to the present. Despite small proven oil reserves,companies, like Australia-based Nido Petroleum (formerly Sydney Oil Company Drilling andExploration), that are into oil explorations in the northwest and southwest Palawan Basin, theCagayan Basin, and other small concessions elsewhere in the country believes that significantquantities of oil may be recoverable.

The Philippines has 2.8 trillion cubic feet of proven natural gas reserves. In the largest natural gasdevelopment project in the country and one of the largest-ever foreign investments in the country,Shell Philippines Exploration (operator, with a 45% stake), Texaco (45%), and the PhilippineNational Oil Company (PNOC, 10%) has tapped the Malampaya natural gas fields estimated 2.5trillion-cubic-feet reserves. Gas from Malampaya will fire three power plants with a combined 2,700-MW capacity for the next twenty years, and could replace as much as 50% of the oil that thePhilippines currently imports for power generation.

Coal is the Philippines largest source of fossil energy production but 82% (1998) of total coalconsumption is imported.

Geothermal power accounts for the countrys largest share of indigenous energy production,followed by hydropower, coal, and oil and gas. The Philippines is the worlds second largestproducer of geothermal power, after the United States. The country is located in the volcanicallyactive Ring of Fire. As of April 2000, Geothermal power makes up around 17% of the Philippinesinstalled generation capacity, most of which has been developed by the Philippine National OilCompany-Energy Development Corporation (PNOC-EDC).

The Philippines does have significant amounts of hydroelectric potential. The most notabledevelopment, the Agus units, has been built at the Maria Cristina Falls on northern Mindanao, whichmakes for 32% of the countrys total hydroelectric power as of December 1999. Hydroelectric poweron Luzon accounts for the largest share to the total hydroelectric power generation (1,280 MW,56%).

According to EIA, electricity demand is expected to grow almost 9% per year until 2009,necessitating almost 10,000 MW of new installed electric capacity. As of 1999, the total electricpower generation is 12,050 MW. The National Power Corporation (Napocor) provides a total of5,400 MW (45%) of electricity while various independent power producers (IPPs) provide theremaining 6,650 MW.

Southern Energy, a wholly owned subsidiary of Consolidated Electric Power Asia Ltd. (CEPA) ofGreat Britain, is the Philippines largest IPP and operates five power plants in the country.Southerns new coal-fired Sual plant began commercial operation in late 1999. The 1,218-MW plantis about 130 miles north of Manila and reportedly is the nations largest electricity producer. Napocoris the sole purchaser of Sual electricity.

Texas-based El Paso Energy International and Hawaiian Electric Industries in February 2000 formeda 50-50 joint venture to own and operate five power plants now owned by East Asia PowerResources Corporation, a public Philippine company. The total generation capacity of the venturesholdings will be 390 MW. The plants are located in Manila and Cebu.

Actually, there is an oversupply of power generated by the Napocor power plants and those of theIPPs combined. Honoring its Power Purchase Agreements (PPAs) with the IPPs, the NPC had toretire the operations of its power generating plants to accommodate the higher priced powergenerated by the IPPs. The current demand for power is only around 7,000 MW while the totalsupply is 11,000 MW.

Indeed, the Philippines is rich in energy sources and it seems that explorations for such resources isendless. In late 1999, the Philippine and Spanish governments agreed to a plan whereby Spain


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would assist in bringing solar power to some of the Philippines rural areas. Finland plans to helpfund a project to electrify 10,000 homes in the rural Antipolo area with methane generated by theSan Mateo landfill, following the landfills December 2000 closure. In cooperation with theNetherlands, the Philippine government is planning to expand its wind energy capacity. DOSTestimates that wind resources could generate 70,000 MW of power.

NEW and Renewable Energy

Energy POTENTIALS

Natural gas in the Philippines

Natural gas was the fastest-growing fuel in year 2000 [5], with global consumption rising by 4.8percent, the highest growth rate since 1996. On the other hand, gas production rose by 4.3 percentworldwide in the same year or more than twice the average of the preceding decade. At currentproduction levels, world gas reserves are expected to last for another 61 years, compared to only 40years for oil.

A presentation by the Department of Energy [3] reveals many things about how abundant thePhilippines is in so-called hydrocarbons resources including oil and natural gas. According to thepresentation, the Philippines has two existing gas fields; the 3.7 trillion cubic feet (TCF) Malampayagas field near Palawan and the 2.7 billion cubic feet (BCF) San Antonio gas field in the CagayanValley. One can see also that, aside from the 3.8 TCF of discovered natural gas reserves, thecountry has about 8.1 TCF of hypothetical (mapped) and 16.6 TCF speculative (unmapped) naturalgas resources totaling to around 24.7 TCF of natural gas in undiscovered resources in 16 petroleumor sedimentary basins around the country (see Figure 4).

Based on a joint study by the Philippine Petroleum Resources Assessment Project (PhilPRA), theDepartment of Energy (DOE) and the Norwegian Agency for Development Cooperation, thePhilippines has 16 petroleum basins with estimated total resources of about 28.5 TCF of gas. Theseare located in Northwest and Southwest Palawan, Central Luzon, Cotabato, Agusan-Davao area,Sulu Sea, West Luzon, Ilocos, the Bicol Shelf, the Reed Bank, and the Iloilo-West Masbate area. Ofthe total resources, 3.8 TCF have already been confirmed in wells that have been drilled, mainly inthe Camago-Malampaya gas field, while another 8.1 TCF have a high potential of being found inwells that have yet to be drilled.

The natural gas industry of the Philippines is currently made up of the following: The Malampaya gas field, which is being developed and operated by the consortium of Shell

(Philippines) Exploration BV (SPEX), Texaco Philippines Inc., and the Philippine National OilCompany-Exploration Corporation (PNOC-EC)

A gas field in San Antonio, Isabela, which is being developed and operated by PNOC-EC A 504-km subsea pipeline from the Malampaya gas field to Tabangao, Batangas, constructed by

SPEX The downstream market consisting of the combined-cycle gas turbine (CCGT) plants in Ilijan,

Sta. Rita and San Lorenzo towns in Batangas; and a three-megawatt power plant in San Antonio Electricity consumers in Luzon, where the output of the gas-fired power plants is being sold

PNOC-EC owns and operates the 3-MW San Antonio gas-fired power plant and sells its output to arural electric cooperative in Isabela. The project structure for the Malampaya Gas-to-Power Project,on the other hand, has a more complex arrangement. Specifically, the SPEX-Texaco-PNOC/ECConsortium has a 20-year Service Contract with the government for the development of the

Malampaya gas field, including the construction of the pipeline that will bring the gas to a landing sitein Tabangao, Batangas.

Apart from the Service Contract, the Consortium members also have individual gas supply andpurchase agreements (GSPAs) to supply gas to the three power plants under the Malampayaproject. For the Ilijan plant, for instance, NPC will supply gas to KEILCO, a project company of theKorea Electric Power Corporation, for conversion into electricity under an Energy Conversion

Agreement (ECA). FGHC, for its part, sells the electricity output of the Sta. Rita and San Lorenzopower plants to the Manila Electric Company, an affiliate company, under long-term Power Purchase

Agreements (PPAs).

All in all, the structure governing the Malampaya project demonstrates how market participants can


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secure the risks of investing in a large-scale project in a new market through an array of institutionaland commercial contracts. The wholesale gas and electricity prices specified in these agreementswere negotiated among the parties, but the retail tariffs that will be charged by Meralco to its owncustomers are subject to regulation by the Energy Regulatory Commission (ERC). By formulating acomprehensive policy and regulatory framework, the DOE hopes to institutionalize other measuresto minimize the investment risks and transaction costs resulting from such a complex arrangementand thus encourage more investments across the gas industry chain.

a. The Malampaya Gas Field

With proven reserves of almost three trillion cubic feet (TCF) of gas, 85 million barrels ofcondensate, and two billion barrels of oil, the discovery of the Malampaya gas field in 1989presented an opportunity for the large-scale use of natural gas in the Philippines.

Apart from the promise of long-term energy supply, the Malampaya gas field brings other significantbenefits to the country. In terms of investments, the $4.5-billion Malampaya Gas-to-Power Projectrepresents the single biggest investment package to-date in the Philippines. It calls for the upstreamdevelopment of the gas field, the construction of a 504-kilometer offshore pipeline from Palawan tothe onshore gas processing plant in Tabangao, Batangas, and the construction of associateddownstream facilities, consisting of onshore pipelines and three power plants with a combinedinstalled capacity of 2,700 megawatts (MW). These are the 1,200-MW combined-cycle plant of theNational Power Corporation (NPC) in Ilijan, the 1,000-MW Sta. Rita and the 500-MW San Lorenzoplants of First Gas Holdings Corporation (FGHC), all located in Batangas.

As far as the economy is concerned, the use of the Malampaya natural gas translates to significantforeign exchange savings of as much as $4.5 billion from displaced oil importations. As the owner ofthe gas field, government will moreover earn roughly $8.1 billion in royalties during the 20-yeardevelopment period of the said resource. These funds can then be channeled to other crucial socio-economic services like education, housing, health and livelihood projects.

Geothermal Potenti als

According to DOE our country is the second largest consumer of Geothermal Energy worldwidewhich consume 1,909.23MW. In the year 1999 the countrys geothermal energy generated 10,557gigawatt-hours (GWH) electricity. Base on the record in 1999 aside from 1,909.23MW usedgeothermal energy, there still 2,047MW potential energy reserves and it can go up to 4, 790MWpotential energy reserves. (DOE Website)

At present there are two companies conducting exploration, the Philippine Geothermal, Inc. (PGI)which based on US UNOCAL, California and Philippine National Oil Company-Energy Devy.Corp.(PNOC-EDC) a state own company. These two companies works on research and developingGeothermal Fields. This is also where the NAPOCOR buys their energy powers. Part of their plan isexpanding the scope of the sources of steam for geothermal plants. The Arroyo government throughthe DOE pushes for the privatization of our energy resources. There is a massive expolaration andstudies on those possible areas for geothermal plant.

Target project of DOE (1999-2008)

Locations PotentialsMambucal, Northern Negros 40MWMontelago, Oriental Mindoro 16MWMt. Labo, Camarines SurNorte andQuezon (pinagsama)

21MW

Batong Buhay in Kalinga 20MWTinoc-Hungduan in Ifugao 120MWMt. Cabalian in Southern Leyte 110MWBato Lunas in Leyte 60MW

Amacan in Davao 40MW


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Wind Energy

The country, which is situated on the fringes of the Asia Pacific moonsoonal belt, exhibits a goodpotential for wind energy. The Philippine Atmospheric, Geophysical, Astronomical Services

Administration (PAGASA) data showed that the national average mean wind power density is about31 watts per square meter (W/m2). Moreover, the data indicated that Region I has the highestpotential for wind energy applications with an annual wind power density of 88 W/m2. Other regionswith good wind regimes are Regions VI, CAR, V and III. More specifically, the sites that have beenidentified as areas with high potential for wind energy utilization are Ilocos; Mt. Province; CuyoIsland; Basco, Batanes; Catanduanes; Tagaytay City, Lubang and Cabra Islands off theNorthwestern coast of Mindoro, western portions of Batangas, Guimaras, Masbate, northeast coastof Negros Occidental and Palawan.

Wind energy involves the transformation of rotational mechanical energy from the wind to mechnicalor electric power. The country has a good potential for wind energy applications. As of 1999, therewere about 368 recorded units of operational windpumps and 9 wind turbine systems throughout thecountry. Multi-bladed windpumps have been in the country since the beginning of the century. Theyare mostly used for irrigation of agricultural farms and for domestic water supply. Currently, there areseven local manufacturers and suppliers fabricating and marketing windpumps in various areas inthe country.

A wind resource analysis and mapping study was conducted for the Philippine archipelago by theUnited States National Renewable Energy Laboratory (US-NREL) using Geographic InformationSystem (GIS) technology. The purpose of this study, is to identify potential wind resource areas andquantify the value of that resource within those areas. The wind resource in the Philippines isstrongly dependent on latitude, elevation, and proximity to the coastline. In general, the windresource is best in the north and northeast and lower in the south and southwest of the archipelago.These studies of USNREL was made in collaboration with USDOE and USAID for funding, togetherwith PCIERD-DOST, PNOC and NPC for the Philippines counterpart. It aims to produce a windresource atlas mapping an that can asses the possibility of using the wind as source of electricity.The DOST already release a wind resource toolkit to use as come on for investors.

The wind mapping results show many areas of good-to-excellent wind resource for utility-scaleapplications or excellent wind resource for village power applications, particularly in the northern andcentral regions of the Philippines. The best wind resources are found in several regions: the Batanesand Babuyan Islands north of Luzon; the northwest tip of Luzon (Ilocos Norte); the higher interiorterrain of Luzon, Mindoro, Samar, Leyte, Panay, Negros, Cebu, Palawan, eastern Mindanao, andadjacent islands; well-exposed east facing coastal locations from northern Luzon southward toSamar; the wind corridors between Luzon and Mindoro (including Lubang Island), and betweenMindoro and Panay (including the Semirara Islands; and extending to the Cuyo Islands).

Over 10,000 km of windy land areas have been estimated to exist with good-to-excellent windresource potential. Using conservative assumptions of about 7 MW per km, this windy land couldsupport over 70,000 MW of potential installed capacity. Considering only these areas of good-to-excellent wind resource, there are 47 provinces in the Philippines with at least 500 MW of windpotential and 25 provinces with at least 1,000 MW of wind potential. However, additional studies arerequired to more accurately assess the wind electric potential, considering factors such as theexisting transmission grid and accessibility.

Some of the wind turbines in the country include a 10 kW stand-alone system in the NorthernPhilippines serving 25 households. It is being planned to be connected to the grid by a local electriccooperative. Another 25 kW stand-alone system in Batangas Province has 6 different loads withdifferent priorities depending on the amount of power produced and is without a battery storage. A3kW stand-alone system was put up by a local telecommunication company (PT&T) as a powersupply for its relay station in tandem with a diesel generator.

There are only two known suppliers of small wind electric systems (a few hundred watts). For largerunits direct contact with foreign manufacturers is being done by interested users.

From the study of WWF year 2003, it is said that in 1,038 wind sites there are 7,404MW possiblepotential wind energy. In Luzon there are 28 province that has 686 potential sites that has a capacityto produce 4,900MW. In Visayan region there are 305 wind sites that ha potential to produce2,168MW. It is only in Mindanao that is recorded to have a very low potential rate that give 47 sites


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that can produce 336MW.

Other projects to be made:

PNOC-EDC North Luzon Wind Power ProjectCapacity = 40 MWTransmission = 42 km to nearest substation using 130transmission postsFunding = US$ 48 M Soft Loan from Japan Bank for

International CooperationLocation = Ilocos NorteCommissioning = 2006

NorthWindCapacity = 25 MWLocation = Ilocos NorteCommissioning = 2004

HydroPower

Hydropower is transformation of rotational mechanical energy from moving water to mechnical orelectric power. We can produce electricity through flowing water if we asscociate this with the kindof Philippine map formation that we have, and vast source of flowing water.

Type of Hydropower according to size:

Small (10MW to 50MW) Mini (100kW to 10MW) Micro (under 100kW) Pico (under 10kW)

Type according to development Run-of river Pondage dam Pump storage

At present, there are at least 50 documented micro-hydro installations located throughout the

country with at least 233kW aggregate capacity and at least 51 mini-hydro installations with morethan 80MW of aggregate capacity.

Other projects include the following:

1. Two JICA assisted projects which aims to identify 40 potential micro-hydro sites in NorthernLuzon and the installation of 14 micro-hydro system to electrify 19 barangays in NuevaViscaya, Kalinga, and Ifugao

2. Technical assistance to NEDA-CAR to formulate a master plan towards identifying potentialhydropower sites for investment opportunities

3. Feasibility for 18MW Catuiran Hydro Project (Mindoro), Dugui Mini-Hydro Project inCatanduanes, and a 29MW Timbaban Hydro Project in Aklan

The development cost of micro-hydro systems range from $3,000 to $6,000 per kilowatt. Micro-hydrosystems are justifiable for remote, decentralized power application. There are about 436 potentialmicro-hydro sites all over the country with an estimated capacity to generate around 28 MW.

However, further activities that need to be undertaken shall include: in-depth studies on the potentialof micro-hydro systems and site identification and assessment of socio-economic and environmentalaspects. Currently, there are no specific incentives or privileges being granted by the government formicro-hydro activities.

BIOMASS

The Philippines is well endowed with biomass resources generated by extensive agriculture,livestock and forestry industries. The 1997 figures estimated that there are annual reserves of about131 MMBFOE of these resources. Contributors to this biomass potential are fuelwood, bagasse,


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coconut residues, ricehull, animal waste and municipal solid waste.

Technologies range from the use of bagasse for cogeneration, rice/coconut husks dryers for cropdrying, biomass gasifiers for mechanical and electrical applications, fuelwood and agri-wastes foroven, kiln, furnace, and cookstoves for cooking or heating purposes.

Based on the projections of the Department of Agriculture and the Department of Environment andNatural Resources, the aggregate biomass supply potential in 2000 is equivalent to 253.8 MillionBarrels of Fuel Oil Equivalent (MMBFOE) and still is expected to exhibit a modest growth of 301.5MMBFOE in 2008. Contributors to this aggregate biomass supply potential are woodwastes,bagasse, coconut and rice residues, animal wastes and municipal solid wastes. The geographicalconsideration on biomass supply reveals that there is an abundant supply of bagasse in Regions III,IV, VI, and VII. Coconut residues abound in Regions IV, VIII, IX and XI. Abundance of ricehull on theotherhand is noted in Regions II, III, IV and VI.

Biomass potentials:

Biomassresource

Possiblepowerproduce inMW

Proposed plant

Contribution inMMBFOE (MillionBarrels of Fuel OilEquivalent)

Bagasse 60-90MW 11.24Ricehull 40MW 35MW in

BulacanProv

25-30MW inNueva Ecija

5.05

CoconutResidues(husks/shell/fr onds

20MW 12.15

Wood/woodw

aste

44.69

Animal waste 0.25Charcoal 5.45TOTAL 78.83 MMBFOE

There are two projects that can be seen in Western Visayas Region (Region VI). These are jointprojects of Bronze Oak LTD-United Kingdom and the Venture Factors of Philippines.

1. Victorias Bioenergy Project

Biomass-fired cogeneration plant (Victorias Milling Complex) 50MW Steam Turbine Generator (Boiler Capacity: 161.5 tons per hour of bagasse and cane

trash) Project Cost: US$100 M (includes 138kV Switching Station and 3km tie-line connector) Possible CDM Component: 1.6M CERs for 10 years Operation: October, 2005

2. Talisay Bioenergy Project Biomass-fired cogeneration plant (First Farmers Holdings Corporation) 30MW Steam Turbine Generator (Boiler Capacity: 85 tons per hour of bagasse and cane trash) Project Cost: US$60 M Operation: August, 2006

Solar Energy


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Being located just above the equator, the Philippines likewise has a vast potential for various solarenergy applications. The countrys average daily insolation is around 5 kilowatt hour per squaremeter per day (kwh/m2d). Estimated also from PAG-ASA's weather data, the country's average solarradiation based on sunshine duration is 161.7 W/m2 with a range of 128-203 W/m2 .

Solar Photovoltaics (PV)

About 3,957 systems of various PV applications are located in the country with an equivalentcapacity of 567 kilowatt-peak (kWp). These installations are largely attributed to the initial efforts ofthe Philippine-German Solar Energy Program (PGSEP) in the 1980s. The programs objective wasto demonstrate the technical viability of using PV for electrification. The project likewisedemonstrated and tested various PV applications ranging from telecommunication, battery chargingstations, PV-powered video cinemas, refrigerators, incubators, streetlights and others.

To date, mostly mono- and poly-crystalline modules have been utilized. Amorphous silicon panelshave generally been used in very small applications. The archipelagic nature of the country withmany remote islands and islets as well as presence of remote dispersed small communities in manymountainous areas of the Philippines make the PV technology a very promising option forelectrification of remote rural areas.

A number of local firms in the country are now involved in system integration, design, installation anddistribution of PV modules and products. Most of the products especially PV panels are importedfrom countries such as US, Australia, Germany and Japan. There is also some local capability in themanufacturing of balance of systems and solar batteries.

Solar Home Systems (SHS)

Currently, an estimated 3,455 SHSs have been installed in various locations in the country. With thereal costs of PV project development above the affordability level of most of the rural population (acomplete SHS costs between US$600-800), international cooperation is necessary in the realizationof such projects. Systems have been installed through private companies, local cooperatives (multi-purpose, agricultural, credit, etc.) as well as Rural Electric Cooperatives. The technical potential forSHS is difficult to define and will strongly vary with the system price offered. At present, about 5million rural households have no access to electrical power and could, in principle, be electrifiedthrough SHSs. However, given the on-going conventional electrification by grid-extension and othercompeting alternative options, combined with limited affordability and accessibility of remote ruralhouseholds result to date in a commercial potential of only about 500,000 SHS.

PV for Telecommunications

PV seems especially attractive for back-to-back relay stations for telecom companies in the countrysince most of them operate in their own backbones. From the engineerings point of view, suchrelays are often situated at optimal locations with grid power not readily available (e.g., mountaintops). Two companies (RCPI and PT&T) have pilot tested over a period of almost 10 years to supplypower to their telecom system. The system generated around 2 kWp and backed up by 3 kilovoltamperes (kVA) diesel for emergency purposes. The performance of the PV systems were generallyeven better than expected. Two traditional stations of 4.5 and 5.7 kWp have been added over theyears. The potential market for PV for the telecommunication industry would amount to an estimateof over 100 PV supplies with a capacity of 3 kWp at least. About 119 systems with a total capacity of94 kWp have been recorded.

PV for Water Pumping

PV for irrigation purposes is still considered too costly. Since the PV power supply would stand idlein the large part of the year, other uses would have to be identified in order to make such projectsfinancially viable. However, PV powered drinking water pumping appears to be more promising. Upto now, various cooperators of DOE have installed some 126 systems nationwide with a totalcapacity of 174.8 kWp. One site (Bagtik, Cebu Province) may hold the world record for PV with thehighest head (121 m). However, the economic feasibility of the drinking water project is not clear anddepends on local conditions (presence and depth of subsurface watertable), on willingness to payfor water, etc.

Other Applications

These include about 257 communal battery charging stations, PV powered vaccine refrigerators, PV


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powered incubators (for hatching chicken and duck eggs), PV powered streetlights, lighthouses ofthe Philippine Coastguard and the newly commissioned 28 kWp centralized plant providingelectricity to 200 households of Pangan-an Island, Cebu Province. These additional PV installationshave an estimated aggregate capacity of about 45.2 kWp. Limited market opportunities appear toexist for most of these systems. PV battery charging stations appear to be most suitable for mosteconomically depressed areas since most rural people own a battery and have it recharged in thenearby town. One battery charger can provide sufficient power for a single fluorescent tube for 2weeks before being recharged. Powering a small TV set by battery is an even more popularapplication in the rural areas.

Solar Water Heaters (SWH)

SWHs are mostly used for residential applications (bathing and household uses). Residential SWHsof 200-400 liter capacities are prevalent in affluent households in posh subdivisions. Most of theseare imported from Australia albeit there were some local enterprises before which ventured but werenot successful in manufacturing and marketing SWHs for domestic purposes.

Industrial SWH technology appears to have failed because the initial systems (e.g. for a largechicken dressing plant) did not live up to the expectations due to poor quality of installations and lackof technical back-up services. Besides in all industrial SWHs conventional back-up systems werenecessary. In such cases the investment had to be justified only with the conventional energy saved(electricity, bunker fuel, LPG) in the back-up system.

At present, there exist about 432 SWHs for residential and industrial applications. Among this is ahotel which has installed a SWH system that supplies the hotels hot water needs.

NRE DEMAND

In 2000, NRE consumption is estimated at 72.114 MMBFOE. This is projected to increase to 90.124MMBFOE by 2004. By 2008, biomass shall account for 88.070 MMBFOE or 97.72% percent in thetotal renewable energy share. Other NRE systems such as solar, micro-hydro and wind, on the otherhand, shall provide 0.0114 MMBFOE contribution in 2000 and steadily grow to 2.054 MMBFOE by2008.

INCENTIVES AND GOVERNMENT POLICIES

A. The governments policy and program on natural gas industry

The inauguration of the Malampaya Deep Water Natural Gas-to-Power Project in Palawan inOctober 2001 marked a new era in Philippine energy history [4]. The Malampaya project gave thefirst big example in this millenium of how the Philippine Government under Gloria Macapagal-Arroyois pursuing its policy of complete sell-out of the countrys natural resources, especially mineralsincluding petroleum resources like oil and natural gas, to foreign corporations.

The governments policy on natural gas industry is summarized in the Tokyo presentation of DOE [3]as follows:

Promote natural gas as an environment-friendly, secure, stable and economically efficientsource of energy

Promote competition by liberalizing entry into the industry and by adopting pro-competitive andfair trade measures

Ensure compliance with Philippine environmental laws and regulations and international safetystandards

With the above goals, the government through the DOE plans to achieve the following objectives: Competitive natural gas prices vis--vis other fuels Increased utilization of natural gas as fuel in the power and non-power sectors Increased share of natural gas in the energy mix Adoption of state-of-the- art technology, development of experts and increased employment Enhanced economic benefits to consumers

This policy is contained in the following documents: Executive Order No. 66 designated the DOE as the lead agency for the development of


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the Philippine natural gas industry [10] Interim Rules and Regulations Governing the Transmission, Distribution and Supply of

Natural Gas promulgated August 27, 2002 to provide basic framework to guide initialinvestments and business operations in the downstream gas industry [11]

Natural Gas Bill DOE working with Congress on the passage of the bill into a law that willestablish a more stable legal and institutional framework for gas industry regulation

Philippine Energy Plan provides consistent framework for the development of the NaturalGas Industry along with other energy sub-sectors

Natural Gas Office recently set up as part of institutional strengthening of DOE

Structure of Downstream Industry Downstream gas industry divided into transmission, distribution and supply Vertical integration/cross-ownership in different industry segments allowed Third Party Access to essential facilities mandatory but deferment may be allowed

during the initial years, i.e., 3 years from start of operation for transmission and 5years for distribution with further extension on reasonable grounds

Entry DOE to issue permits for construction, operation and maintenance of pipelines and

related facilities and for supply of natural gas Congressional franchise for transmission and distribution systems required except

for own-use facilitiesPricing

Transmission, distribution and supply prices to be regulated in markets withouteffective competition

Competition cartels/collusion prohibited per se, other anti-competitive conduct as provided for in

existing laws also prohibited

New ard renewables

The Philippine government has enacted and /or developed various legislative measures that areenvisioned to level the playing field for the renewable energy sector in the local energy industry.

EO 462 Enabling private sector participation in the exploration, development, utilization andcommercialization of ocean, solar and wind (OSW) energy resources for power generation.

The program is focused on the intensive utilization of ocean, solar and wind energy resources.Tapping of these resources will serve as a means to achieve the goal of converting the Philippinesinto an energy exporter in the future. Under the program, activities to be undertaken include a)technology assessment and generation through conduct of feasibility studies for wind powergeneration, tidal current and wave energy systems, b) resource assessment on wind energy andocean energy management, c) promotion of OSW manufacturing industries through conduct offeasibility studies on the development of solar PV manufacturing and solar energy testing, d) OSWmarket development through promotion of ASEAN power grid interconnection, demand sidemanagement (DSM) for solar application and OSW promotion and information campaign, e)manpower development through trainings and seminars and scholarship grants, and f)establishment of large-scale OSW energy systems.

R. A. 9136 or the Electric Power Indus try Reform Act

The passage of Republic Act 9136 or the Electric Power Industry Reform Act is seen to benefit theNRE sector particularly those who would like to engage in large-scale renewable-based powerprojects.

First, NRE project proponents shall have an open access to the industry and could operate on itsown pace without having much problems with regards to stringent process of project approval theindustry is currently practicing. The burden of obtaining a Power Purchase Agreement will then berelieved from the NRE proponents. Those who can deliver the best offer shall have all the advantageof getting into business without being bothered by some regulatory policies and procedures beingimplemented by government dealing with power negotiations.

Second, the Act proposes the complete unbundling of the electricity tariff rates. The unbundlingscheme favors renewables as the removal of subsidies and inclusion of the socio-environmentallevies shall reveal the true cost of conventional power rates. Third, the bill that would directly supportthe NRE industry is the establishment of the Countrywide Electrification and Missionary Service


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Company (CEMSCO). CEMSCO shall serve as a mechanism in promoting the use of indigenousand renewable energy as well as the energization of marginalized areas. CEMSCO shall bemandated to undertake these programs in a non-profit basis and in a transparent manner to avoiddistortions in energy prices. Though initially a government-owned and controlled company, the billstrictly stipulates that CEMSCO shall bring its facilities to commercial viability in an area-to-area andsystem-by-system basis through privatization in the earliest possible date.

HB 4839 An act to further promote the development, utilization, and commercialization of new andrenewable energy (NRE) sources and for other purposes.

The Lower House of the Philippine Congress has introduced House Bill 4839 with the correspondingsupport from the Department of Energy. The proposed legislation recognizes the need to provideadequate and sustainable energy services to the greater population still living in the countrysunelectrified barangays. Also, it shall give preferences to the development and utilization of NREresources and technologies in view of its environmental and social objectives. Salient features of theNRE bill are as follows:

Provision of incentives to NRE power producers Requiring private power producers to diversify power generation Establishment of green pricing mechanism to encourage consumer-user participation in

NRE Establishment of NRE Trust Fund to finance various NRE activities Encouraging hybrid system installation to increase systems reliability

II. Under Presid ential Decree (P.D.) 1442 otherwise known as An Act to Promote the Explorationand Development of Geothermal Resources, the current incentives given to a geothermal servicecontractor are as follows:1. Recovery of operating expenses not exceeding 90% of the gross value in any year with carryforward of unrecovered cost. Service fee of up to 40% of net proceeds.2. Walang ibang babayarang tax maliban sa income tax na pinaka-share ng gobyerno.3. Exemption from payment of tariff duties and compensating tax on the importation of machinery,equipment, spare parts and all materials for geothermal operations. Depreciation of capitalequipment over a ten (10)-year period.4. Easy repatriation of capital equipment investment and remittance of earnings. Entry of alientechnical and specialized personnel (including members of immediate families).a. an eight-year holiday on the royalty share of the national government,b. a Filipino participation incentive allowance,c. a development uplift allowance of 60%, andd. a cross cost recovery mechanism,

III. RA 7156 : Mini-Hydroelectric Power Incentives Ac t An act granting incentives to mini-hydro power developers IRR governs the filing and processing of applications for authority to construct and operatemini-hydro plantsGranting of tax incentives

IV. EO 462: Enabling private sector participation in the exploration, development, utilizationand commercialization of OSW energy resources for power generation

Sets the guidelines for OSW projects in private and public domains

OSW Projects are governed by production-sharing contracts Grants incentives under existing laws IRR governs the filing and processing of applications for OSW Projects

V. Tax incentives granted to power projects uti lizing indigenous or renewable energy sourc es(BOI-IPP 1999; RA 7156)

Tax and duty exemptions on imported capital equipment and materials Tax credit on domestic capital equipment Income tax holidays


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Additional deduction from taxable income for development (infrastructure) expenses

VI. Executive Order No. 226 In accordance with Section 39 of Executive Order No. 226, pioneer enterprises may be granted

the following incentives with respect to the extent that the enterprise has been engaged in apreferred area of investment:

1. Income Tax Holiday2. Additional Deduction for Labor Expense3. Tax and Duty Exemption on Imported Capital Equipment4. Exemption from Taxes and Duties on Imported Spare Parts

However, priority has been given to large-scale power development projects and programsutilizing NRE technologies and implemented by pioneer enterprises. Stand alone NREsystems and technologies shall be accorded the same incentives with respect to parametersand criteria set by the BOI and the DTI in consultation with each respective Department ofthe Philippine Government

Privatization and deregulation drives the ever increasing costs of energy

The EPIRA and th e privatization of power

Historical backgroundDuring the late 18 th century, the hacienda system had expanded the control of land by Spain and thisspurred massive plantations of export crops like tobacco, sugarcane, abaca, etc.raw materials for theSpain to compete with other countries. In order to hasten the exchange of goods and extraction of rawmaterials, transportation and communication facilities were developed. They constructed steamships, roads,more efficient seaports, railroads, and so on.

During the later part of 19 th century, due to the urgent need of Spain, the first power corporation was born inthe Philippines, the La Electricista that had 10 60-KW AC steam generators.

When the United States (US) replaced Spain in colonizing the Philippines in 1998 through the Treaty ofParis, it did not change our economic orientation but increase the amount of commercial crops and rawmaterials for export. Manufacturing and processing industries like sugar centrals, coconut oil refineries, ropefactories, and other industries necessary for extracting and exporting raw materials from the Philippineswere maintained.

In 1903, the Manila Electric Railroad and Light Company (MERALCO) was established to provide railtransportation and electric services in Manila. In 1905, after being awarded a 50-year franchise, MERALCOtook over La Electricistas business and its first 2,250-KW power plant was commissioned.

A year after the establishment of Philippine Commonwealth Government in 1935, the Commonwealth ActNo. 120 creating the National Power Corporation or NPC as a non-stock, government-owned corporationwas passed. After two decades, NPC became a stock corporation through RA 2641.

In 1972, two months after Martial Law is declared, PD 40 was enacted. This mandated NPC to constructgeneration and transmission facilities in Luzon, Visayas, and Mindanao. Moreover, NPC was tasked to ownand operate a single integrated network for all power-generating facilities nationwide.

When NPC bought MERALCOs thermal power plants in 1979 and this plant was integrated in the Luzonpower grid, the total generation capacity of NPC increased by 90% and this made NPC the countrysdominant producer and supplier of electricity.

In 1987, EO 215 signed by President Cory Aquino in 1987 effectively deregulated the power generationsector. This was to fulfill the governments commitment to prepare the groundwork for the eventualprivatization of the NPC as pushed by the International Monetary Fund (IMF). The first build-operate-transfer(BOT) contract allowed by the EO was signed in 1988 with Hopewell, a Hong Kong-based firm, to constructand operate a 210-MW power plant (Navotas I).

The issues surrounding the privatization of NPC are mostly related to the power crisis and due to thegovernments efforts to address this critical shortfall in power supply. By 1991, the 6- to 10-hour dailyblackouts were costing the Philippine economy an estimated $1 billion in lost output annually. To stave offthe crisis, RA 7638 or the Department of Energy Act of 1992 was enacted to create the Department of


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Energy (DOE). DOE was tasked to develop and update the existing Philippine Energy Program (PEP) whichshall provide for an integrated and comprehensive exploration, development, utilization, distribution andconservation of energy resources. As its policy response to the power crisis, RA 7648 or the Electric PowerCrisis Act was enacted in the same year that the DOE was created. This further opened the door to entry ofprivate power corporations. DOE was tasked to boost the entry of these private firms in construction andoperation of power plants.

The Electric Power Industry Reform Act or the EPIRA

Due to the pressure by creditors to the Philippine government to fast track the approval of the Power Actbefore they release the power reform program loans to finance the countrys power development program,the Electric Power Industry Reform Act, or the EPIRA, railroaded and signed into law by President GloriaMacapagal Arroyo in 2001 despite intense disapproval from of the people. Major creditors include the JapanExport-Import Bank, Asian Development Bank (ADB), and World Bank (WB). These power sector reformsand the sale of NPC to private business were long standing recommendations of the IMF. Theserecommendations were part of the structural reform program the country has to implement as a pre-condition for more loans.

The EPIRA seeks to restructure the electricity industry and privatize the National Power Company or theNAPOCOR. The governments objective in privatizing NAPOCOR is to cut losses from loans and pass onthe burden of power infrastructure investment to the private sector, while earning revenues from the sale.

Contrary to what has been promised during the passage of the law, the EPIRA has not caused any realdecrease in power rates. Aside from the initial, and fleeting, 30 centavo Power Act reduction, there has beenno decrease in power rates due to the EPIRA. Instead, it has legitimized the PPA through the contractsentered into by the NAPOCOR and have hidden it through the unbundling of rates. Even with theestablishment of the wholesale electricity spot market (WESM) which would purportedly be the mechanismto identify and set the prices between sellers and buyers of electricity, the bilateral contracts betweendistribution utilities would still be honored.

Cross subsidy removal would translate to an increase in power rates to residential consumers which bynumbers would dominate the end-users of electricity. Even with discount schemes within customer classes,the removal of subsidies would at the least translate to a 71 centavo increase within 3 years. Note that thisincrease would already render useless the 30 centavo rate reduction.

The law was designed to reform the power industry not for the benefit of end users and development but itonly seeks to privatize NAPOCOR and deregulate the power industry for the entry of foreign companiesregardless of the costs to the general public. The various highlights of the EPIRA ranging from the creationof the National Transmission Company (TRANSCO), the Power Sector Asset and Liabilities Managementcorporation (PSALM), the Energy Regulatory Commission (ERC), the wholesale electricity spot market(WESM), the unbundling of power rates and the various codes and rules implemented under the EPIRA aredesigned to segregate each saleable part of NAPOCOR, make it attractive to investors and create structuresand offices to facilitate these transactions.

Furthermore, the EPIRA makes the national government assume P 200 B worth of NAPOCOR loans tomake it viable for sale. This P200 B however would be recovered as stranded debts in future bills to endusers.

The law integrates the independent power producers (IPP) and their onerous contracts into the whole powerindustry. These IPPs and the contracts entered into by the government and distribution utilities are thesource of the PPA or the purchased power adjustment. The PPA remains to be a large part of electric powerrates of end-users albeit under different names. With the unbundling scheme ordered by the ERC, the PPAwas hidden and distributed in the various line items in the new electric bill such as the generation charge,the transmission charge, system loss charges, subsidies and franchise taxes.

These IPPs are mostly owned by foreign transnational corporations in partnership with big local powertycoons. At least twenty two out of the 41 IPPs are largely foreign owned. Five are partly or wholly owned byMeralco and some others by regional distribution utilities. Furthermore, in the findings of an inter-agencycommittee tasked to review IPP contracts, only six out of 35 contracts were found to be without any legal orfinancial issues. The rest was supposed to be renegotiated by the government. Privatization actuallyfacilitates the entry and control of national economies by foreign TNCs who, at present, are the dominantplayers among the IPPs. Only these foreign TNCs alongside a number of local power tycoons (Lopez,

Aboitiz, Alcantara, etc) have the financial capacity to operate and maintain power generation, transmissionand distribution, and even buy out the Napocor.


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If we exclude the US, the IPP capacity in the Philippines exceeds that put up over the rest of the worldcombined in terms of installed capacity. This would continue to increase with the full implementation of theEPIRA and the privatization of power generation.

The EPIRA brings about the exploitation and plunder of our natural resources to the benefit of these foreigncompanies. Far from improving our electric power independence by promoting indigenous energy sources, ithas reduced taxes and royalties from those exploiting our resources. This would make our resources free forplunder and profit to all takers which are mostly foreign owned transnational companies.

The EPIRA provides for the equalization of taxes and royalties on the exploitation of natural energy sourceswhich just means the removal of these taxes or the exemption from such taxes of the IPPs. Under the bill toincrease VAT rates to 12% being discussed in Congress, IPPs are already being exempted despite the factthat these companies are paying only 3% of their revenues as taxes.

In addition, the power of eminent domain, as provided for in the act (Sections 6 and 12), granted totransmission and distribution companies gives them prior rights over the countrys land resources and thusmay evict the occupants or owners of the land in question. The dislocation of the indigenous peoples (IPs)from their ancestral domain and of other peasant settlers with the construction of power plants and otherdevelopment projects over their claimed territories has been well documented

The EPIRA favors power industry players over consumer interests. It legitimizes the passing on of costs ofpower generation to end users. The passing on of power generation costs to consumers is legitimized by theEPIRA such as the passing on of system loss charges transfer the inefficiency losses of distribution utilitiesto end users. Other line items in the unbundled bill such as the missionary electrification charge andenvironmental charges passes on the responsibility of rolling our new electric power lines and theenvironmental maintenance of power utilities to the general public. Stranded costs and debts by both theNAPOCOR and utilities are also to be recovered from the general public in the Universal Charge.

The EPIRA has put as policy the full recovery of prudent and reasonable economic costs of a distributionutility. As a result, distribution utilities now recover and pass on currency fluctuations, fuel cost fluctuationsas well as contract obligations (PPA) to the end-users. The mechanisms approved by the ERC such as theGeneration Rate Adjustment Mechanism (GRAM) and the Incremental Currency Exchange Rate Adjustment(ICERA) are concrete examples of these pass on costs to consumers.

The unbundled rates, even with the discounts, hit the smallest end users hardest. Small end users, evenwith the 50% discounted rates, still pay 159% more than their real electricity costs. Higher users of electricitywould pay from 120% (100 kwh) to double (more than 500 kwh) their real electric costs.

The EPIRA has not brought about and will not bring about a stable electricity supply to the whole country. In2003, the total installed capacity in the country is 13,380 megawatts, of which 11,191 megawatts is theactual dependable capacity. Current peak demand is 67% of dependable capacity or 7,497 megawatts. ThePhilippines has an excess capacity of around 11% factoring buffer requirements. This has changed in 2004,where the country's total installed generation capacity stood at 15,763 MW and its dependable capacity at14,008 MW. Our peak demand is 9,069 MW and thus overall, we have the capacity to provide for ourelectricity needs. However, interconnections of major islands are needed to distribute this power capacityover the country.

It is indeed true that the construction of power plants will st ill have to continue but th e governmentand the EPIRA makes sure that the IPPs will p lay a key role in prov iding electrici ty. However, thisdoes not mean that the IPPs would find it viable to build and maintain in the long run a power plant.

As soon as the location becomes a l iabil it y to t he private companys prof it margins , they can and willshut down op erations. This can be seen in the thr eats some years of the Cebu based Cebu PrivatePower Corp (CPPC) that it will shut down operations of its 65 MW plant due to financial constraintsfurther aggravating the projected shortage in the Visayas. Such moves makes the development andindustrialization of our country hos tage to the whims and profit margins of th e private industryplayers.

Why are power rates so high?

In December 2004, it will cost you at least 28% more in electricity bills this compared to the sametime the previous year. A household consuming 150 kWh per month will effectively be paying P7.20per kilowatt hour in year end 2004 compared to P5.61 for each kWh December last year. The 28%increase is mainly due to the provisional authority granted by the Energy Regulatory Commission tothe National Power Corporation (NAPOCOR), increases in transmission rates, previous adjustments


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in generation rates due to the Generation Rate Adjustment Mechanism or GRAM as well asadjustments in the currency exchange rates. Those with 70 and 100 kWh monthly usage are goingto pay 23 % and 22% more, respectively.

Comparative Rates for December 2003 and 2004

These increases in electric rates is a direct result of the Electric Power Industry Reform Act, or theEPIRA, and the rabid implementation of the government of Gloria Macapagal Arroyo of herprivatization policies. Nor had the so-called discounts for users with monthly consumption less than100 kWh, those using 50 kWh will be paying 36% more this year. These discounts are in reality paidfor by other consumers and not the government nor Meralco.

These high power rates have made the Philippines fourth in Asia after Japan, Hongkong andCambodia in terms of residential power rates. Industrial rates are also seventh in Asia according tothe DOE as of June 2004 after Cambodia, Japan, India, Hongkong, Indonesia and China.

Source: 5 th status report on EPIRA Implementation, May 2004-October 2004, Department of Energy

Since 1990, where one kWh costs P1.83, the price of electricity has increased to 300% resulting toat least P5.58 on the average for the country.

Unbundling of rates

With the unbundling of power rates, it is instructive to study the costs of each item in the approvedrate schedule. Although, it is a vital part of the EPIRA and energy privatization, it is worthwhile tonote that the Court of Appeals (CA) annulled the Energy Regulatory Commissions decision tounbundle electric power rates for Meralco. Recently, the CA have denied the motion ofreconsideration of Meralco and the ERC on this decision. This means that the unbundling shouldagain be heard and rates reverted back to its previous levels. Furthermore, consumers should alsobe refunded from rates stemming from the unbundling decision. We estimate the refund to total atleast P 6.4 billion pesos. For a family using 200 kWh per month this would be around P680 pesos forthe 20-month duration since the unbundling up to January 2005.

Electricity rates (usage in kWh/month)MERALCO FRANCHISE AREASAmount Effective amount per kWh

Dec 2003 Dec 2004 Increase % increase Dec 2003 Dec 2004 Increase % increase50 125.76 170.70 44.94 36% 2.52 3.41 0.9 36%70 241.53 296.36 54.83 23% 3.45 4.23 0.78 23%

100 438.36 534.34 95.98 22% 4.38 5.34 0.96 22%202 1207.12 1506.38 299.26 25% 5.98 7.46 1.48 25%


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Other unbundling cases previously approved by the ERC should be reviewed. There are severalelectric cooperatives and distribution utilities whose unbundling should be looked into in the light ofthe CA decision.

With the unbundling of power rates, several recovery mechanism has been prescribed by the ERC,effectively hiding the PPA, and passing on all risks and price fluctuations to the consumers.

The Purchased Power Adjustment (PPA) and IPPs

The junking of the 650-megawatt US$2.2-billion Bataan Nuclear Power Plant in the mid-1980s, nobuffer for increased power demand by industries and households was constructed nor planned. Bythe early 1990s, this resulted in daily 8 to 12-hour blackouts. Citing lack of sufficient funding toconstruct power generation facilities to adequately meet present and future demand, the Ramosadministration enticed foreign and private-sector investors into the countrys electric power industryusing such measures as the Build-Operate-Transfer (BOT) program resulting into the entry ofIndependent Power Producers (IPPs).

An estimated US$6 billion to construct and operate power generation facilities with a total capacity of4,800 MW were built by IPPs around 1998. A year after, half of total energy sales in the countrywere already sourced from IPPs. As of December 2001, Napocors IPPs accounted for 31%, or3,667 MW, of the total generating capacity and non-Napocor IPPs (such as those owned by theLopezes, First Gas and Quezon power) provide the remaining 1,168MW or 10% of the totalgeneration capacity.

This generation capacity was not obtained cheaply. With the onerous take-or-pay provisions, whereoff-take requirements of 70%-85% of contracted capacity, Napocor has to pay the IPPs whetherpower generated was actually consumed or not. Higher tarrifs result from the recovery of theselosses through the controversial Purchased Power Adjustment (PPA). As of June 2002, the PPAwas already more than half of the electricity bills of consumers.

Added costs from these contracts are features such that Napocor has to deliver fuel on-site toprovide tax-exemptions for the IPPs. Furthermore, these contracts are dollar-denominated, makingthese Napocor obligations vulnerable to dollar-peso foreign exchange fluctuations.

Only six out of 35 IPP contracts were found to be without any legal or financial issues after a reviewof these contracts by the Department of Finance. Yet no serious renegotiation to remove the take-or-pay provision was done.

Due to massive protests and outrage, President Arroyo personally mandated in May 2002 for theNAPOCOR to limit its PPA to only 40 cents/kwh when its actual PPA was then P1.25/kwh. TheNAPOCOR itself said that this order directly contributed to losing 85 cents/kwh, or P29B per yearsince 2002. In a hearing in the ERC, the Napocor has admitted under cross examination during thatpart of their losses stem from full payment of contracted power to IPPs despite electricity being notbeing delivered in full to consumers in the form of the Purchased Power Cost Adjustment.

President Arroyo's gambit of reducing the PPCA as her response to protests against the PPA hasnow fallen flat and her financial engineering because this has resulted to the ballooning ofNapocor's debts. These IPP owned by firms such as KEPCO, Edison Global, Mirant and othersbilled us for 27.27 billion kwh while only delivering 19.15 Billion kWh in 2002. Thats around 30% ofwhat we paid never getting to our homes or industries. This is one of the biggest contributors to thelosses NAPOCOR wants to recover from the rate increase.

The Generation Rate Adjustment Mechanism (GRAM)

The GRAM was designed essentially as a replacement for the recovery of the PPA. Like the PPA, itis also an automatic cost recovery mechanism but this time without yet the notoriety that the PPAhas earned among the millions of consumers of NPC, Meralco and the various distribution utilities.

On top of the generation charge, pegged at P 3.4029 during unbundling and consequently increasedthrough the provisional authority last year from the ERC to 3.4236. Factored into the formula forgeneration rate adjustments is the purchased power cost as approved by the ERC. In the PPAformula there is the cost of electricity during a supply month. Both do not make a distinctionwhether the electricity was actually delivered or not as a result of the onerous take or pay provisionsof many IPPs. Both do not also filter out electricity purchased at excessive rates. Certainly neitherthe GRAM nor the PPA formulas strip those amounts of cost expenses that should not be there at


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all but which accountans can easily sneak in.

Thus, through the GRAM, as with the PPA, the consumers, among other things, will continue to payfor electricity that they do not actually use; shoulder the cost of excessive rates of power contractedby NPC and Meralco; and pay for the inefficient operations of IPPs.

The ERC in its its approval of the unbundling of Meralco rates has acknowledged that

The current PPA is allocated between the generation andtransmission rates. The generation component shall beperiodically updated through the Generation Rate AdjustmentMechanism (GRAM).

-ERC Order dated 30 May 2003, page 9

Thus with the unbundling of rates, the PPA is now being paid for under five new line items in theelectricity bill as diagrammed below:

Recovery of foreign currency exchange losses throuigh the ICERA

Automatic recovery of losses, designed and approved by the Energy Regulatory Commission, suchas the ICERA or the incremental currency exchange rate adjustment, spell no relief for the people.The owners of utilities, transmission and generation companies pass on their bloated operationaland maintenance costs to the people and thus our electric bills keep on increasing. Dollar rates havehistorically risen on the average and thus an automatic recovery of forex fluctuations alsoautomaticcally increase power rates.

Far from improving our electric power independence by promoting indigenous energy sources, theEPIRA has reduced taxes and royalties from those exploiting our resources and set these resourcesfor sale and plunder to all takers which are mostly foreign owned transnational companies.

Reduction of cross-subsidies

A 28.52 centavos/kwh increase in the electric bill of the residential consumers starting October 2004was the result of the reduction by 40% of the interclass cross subsidy. The EPIRA mandates that allsubsidies will have to be removed within 3 to 10 years, with the lifeline rate subsidy to theconsumers using less than 100 kwh the last to go. Thus, residential consumers will have to pay anadditional 42.78 centavos by October 2005 and lifeline consumers will lose their discounts around2010. Even the 30 centavos Power Act Discount that the government used to sugarcoat thepassage of the EPIRA bill is now just 16.52 centavos, effectively increasing our rates by 13.48centavos.

The total removal of inter-class subsidies will result in an increase of 71.30 centavos. In fact thissubsidy scheme becomes a milking cow for distributors such Meralco because the amount that theycollect is more than the discounts they give.

The mathematics of power rate discounts: Sweetening power rate increases

Malacanang's attempt to sweeten the blow of the hefty power rate increases on the poor is throughthe so-called 50-percent lifeline rate discount on their rates. This subsidy is taken from 65% of thecustomer base and is not due to any concern or interest of our government to alleviate the burden ofthese power increases. It is more a case of the poor subsidizing the poorer. Commercial andindustrial electric users pass on the costs of these subsidies as price increases to consumers.


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Computing the costs of these discounts for a month in 2003, the revenue lost to Meralco isP134,923,561. But to recover these losses, Meralco collects 7.61 centavos/kWh from the residentialconsumers using 101 kWh and above, from the commercial and industrial consumers. Given thetotal kWh consumption of these consumers in one month so we simply multiply by 7.61 cents/kwhand we get P152,474,582. This is P17,551,021 (or P210,612,252 per year) more than they lost fromthe subsidy.Presently, consumers using 100 kwh and below get the following discounts:

Monthlyconsumption(kWh)

No.ofCustomers(2002)

Discount

collectionfromlifelinerates

0-50661,716

50% -

51-70

299,737

35% -

71-100

465,236

20% -

101-200

1,257,820 -

0.0761

201-300

564,417 -

0.0761

301-400

258,133 -

0.0761

over400

415,648 -

0.0761

These discounts apply to the generation, system loss, distribution, metering and supply charges.The above is called by its technical term, lifeline rate subsidy. Those using above 100 kwh presentlypay an additional 7.61 centavos per kwh that is used to subsidize the lifeline consumers above whoare using less than 100 KWh (which is really a case of one section of consumers subsidizing anothersection of the consumers).

In addition, all residential consumers get a discount of 71.30 centavos per kwh subsidy paid for bycollecting from the commercial and industrial consumers. This will be removed within 3 years underthe Electric Power Industry Reform Act or EPIRA. This means an increase of 71.30 centavos on topof all the recent rate increases.

In this discount scheme, Meralco, NPC and President Arroyo are happy since they earn browniepoints while hiding the reality that none of them gave any centavo to alleviate the burden of highelectric rates. What Malacanang should do, instead of this obfuscation, is to reduce electric powerrates and grant wage hikes to truly address the concerns of the people

Other recovery mechanisms

In summary, the PPA has not been removed. It has been hidden within the generation charge, thetransmission charge, the system loss charge, franchise tax and other charges. If the PPA were trulygone, we would have enjoyed a reduction by almost half in our electric bills. Instead mosthouseholds have received higher bills due to the unbundled power rates.

Now that they have hidden the PPA, any further increase in purchased power cost will be hiddenunder the Generation Rate Adjustment Mechanism (GRAM) charge. This is the new PPA.

Power consumers would have to prepare for the eventual imposition of the Transmission Rate Adjustment Mechanism (TRAM) which would pass off the costs of transmission companies to thepeople, similar to the function of GRAM. Any changes in the cost of the transmission of electricitythrough the transmission towers will be shouldered by the people.


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The other "pass-through" charges are also really pass-on costs to consumers. Generation chargesare computed with a 60-40 mix of National Power Corp. (Napocor) and Meralco power plants. About53 percent of this cost is remitted to Meralco's independent power producers (IPPs), most of whichcharge nearly twice as much per kilowatt-hour as Napocor plants. The Lopezes earns also from thegeneration charge.

The systems loss, including pilfered power and the electricity used by Meralco offices and facilities,is passed on to us at a rate of 69.65 centavos per kWh. This is despite the fact that for the pastyears, Meralco's technical system loss (i.e. excluding pilferage) has not changed from 8%. Thatmeans Meralco has not seriously tried to become more efficient. It goes after pilferage since theycan recover twice of their losses, once from the pass-on cost as part of the systems loss charge,another courtesy of the Anti-Pilferage act which allows them to charge the households the estimatedcost of their pilferage.

The systems loss has several components. One is the electricity lost through pilferage. Another iselectricity lost as they pass through distribution equipment and wires. A third component bundledwith the systems loss charge is electricity consumed by Meralco offices and facilities, technicallycalled company use. The Meralco consumers pay for all this, and it is all legal because thegovernment allows it.

Republic Act 7832 or the Anti-Pilferage of Electricity and Theft of Electric TransmissionLines/Materials Act of 1994 supposedly provides for the rationalization of system losses by settingcaps on recoverable system loss allowed to private electric utilities and electric cooperatives. Thiscap shall be no lower than nine percent.

Essentially this passes on to consumers any inefficiency of a distribution utility like Meralco.Technical losses are losses inherent in the electrical equipment, devices and conductors used in thephysical delivery of electricity. These are losses in sub-transmission lines, substation powertransformers, primary and secondary distribution lines, distribution transformers, service drops,voltage regulators, capacitors, reactors and all other equipments used in the operation of thedistribution of electricity.

On top of these technical losses, load loss due to electric energy pilferage is also considered as partof what is termed as non-technical loss. System loss charges also includes administrative losses(company use) which are the electric consumption of distribution substations, the offices,warehouses and workshops of the distribution utility. Meralcos system losses currently amount to13.38 %.

Our main criticism with regard to system losses is the fact that Meralco and other distribution utilitiespass on these system losses to the public. This pass on charge was part of the PPA previously andthe public is unduly burdened in paying for the inefficiencies of the distribution utility. This part of ourelectric bill is due to energy that never gets used in our homes and is mainly due to any technicalinefficiency in the part of the distributor, their in-house use of electricity and pilferages. Althoughpilferage is being pointed to at by Meralco as a big part of these losses, any violator that will becaught is required to pay consequent fees despite these losses being already collected and paid forby the item for system loss in our bills. If so, why do we still have to be charged for system losses?

More pass-on charges are the metering charge and franchise and local taxes. Universal charges,which include many other components such as the missionary and environmental charge, will alsoinclude in the future stranded cost and debt recoveries that amounts to around 200 billion pesos tobe collected in 15 to 25 years. The missionary charge is a compulsory contribution to a fund to beused for electrifying remote barangays because no businessmen would like to invest in those areaswhere there are only a few customers but requires big capital outlay for the long wires and manyposts. But why are we charged for a job the government should be doing?

This is also true of environmental charges. Why are we charged for the havoc that the generationplants of Napocor or these IPPs do to the environment? Consumers seem to be the perpetualmilking cow of Meralco, Napocor and the IPPs.

Unbundling has increased power rates and it will continue to increase because of the new charges,the passing on of the 200-billion-peso stranded cost and debt recoveries and the eventual reductionof subsidies. All these mean higher electric rates for all.

Spiraling Petroleum Prices: Oil Control by Monopolies, Speculation, and US Aggression


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Petroleum prices have reached unprecedented heights at the national and international levels. OnMarch 16, 2005, oil prices have surpassed the October 2004 high of $55.17, closing at $56.46. OnMarch 18, prices have reached $57.60, 50% higher than their level during the same period last year.

Driven by speculation based on fears of higher demands for oil from China and India, fears that theglobal oil industry was finding less and less new oil, a terrorism/war premium, and supply disruptionsin Iraq, Nigeria, Venezuela, Russia and the U.S. Gulf Coast, price trends indicate that world oil pricehikes will persist until the end of the year or even beyond.

Gasoline and other petroleum-derived products have followed suit. In the U.S., gasoline prices nowaverage $0.59 per liter ($2.24 a gallon) for self-serve regular and is predicted to hit an average of$0.62 per liter ($2.35 a gallon). Here in the Philippines, gasoline prices have already hit $0.563 perliter (PHP 30.80 per liter).

Why have oil prices increased so much? Who controls world market pricing and who benefits fromthese controls?

In a casual reading of the news, one would immediately suspect the Organization of PetroleumExporting Countries (OPEC) of retaining control over oil prices because of its cartel-like operation ofreducing or increasing production of its 11-country organization.

Is there an OPEC Cartel?

While the OPEC controls 40% of world crude oil production, holds 67% of estimated world crude oilreserves and exports 55% of internationally traded crude oil, the trend of increasing oil prices hasshown that OPEC as an entity dictating world oil prices is just a myth.

In recent years, OPEC production has increased to a 25-year record high while production costshave gone down. Despite these, oil prices continue to increase. While oil and energy ministersdecide production adjustments during OPEC meetings, strategic control of oil prices restselsewhere.

This control rests on only a small number of companies. OPEC countries increasing their productionlevels will not necessarily result in falling oil prices. Prices will rise if the six biggest oil companieswho control 186 of 744 (or 25%) refineries in the world fail to run in full capacity, or keep oil in transitor storage. Royal Dutch Shell and British Petroleum control 80% of the tank storage capacity of animportant crude oil storage hub in the US that influences the price of the WTI.

Figure 1: Petroleum prices, 1995-2005 in US$ (Dubai).Production cost is shown in gray band. Source: Yukos, Ibon Databank


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In other words, even if OPEC increases its crude output, the oil firms are still the ones that decidethe price. As of 2003, oil companies account for 19% of global refining capacity of 112.4 millionbarrels per day and 16% of global sales of petroleum products of 79 million barrels per day.

In addition, OPEC oil is bought largely by these same companies. ChevronTexaco gets more than40% of its crude from OPEC, while ExxonMobil, 25 percent. The oil wells of other oil TNCs are alsoin OPEC member-countries.

It is the domination of oil companies in the upstream and downstream levels of the oil industry thatputs them in a position to dictate world market prices, making them virtually invulnerable to theeffects of supply and demand. This oil monopoly allows them to set oil prices independently ofOPECs decision to increase or reduce crude oil production.

Who are these companies?

It was never supply and demand that determined the pricing of oil in the world because the global oilindustry has been dominated by a few giant American and European corporations. ExxonMobil (US),Royal Dutch Shell (Britain-Netherlands), British Petroleum (Britain), Total (France), ChevronTexaco(US), and ConocoPhillips (US) are the six largest oil companies. These oil giants have combinedrevenues of US$788 billion, profits of US$34 billion, assets of US$619 billion, and employ more thanhalf a million workers. The six largest oil companies can produce more than 80 million barrels perday of crude and refine more than 112 million barrels per day of various petroleum products.

These international oil companies comprise the so-called Seven Sisters: Standard Oil of NewJersey (which became Exxon), Standard Oil of California (which became Chevron), Standard Oil ofNew York (which became Mobil), Texaco, Anglo-Persian Oil (which became British Petroleum),Royal Dutch Shell, and Gulf Oil (bought by Chevron).

Company Revenues

ExxonMobil (US) $182B

Royal Dutch Shell (Britain-Netherlands) $179B

British Petroleum (Britain) $179B

ChevronTexaco (US) $97B

Total (France) $92B

ConocoPhillips (US) $58B

Source: Fortune 2003 Global 500

The two largest oil players (ExxonMobil and Royal Dutch Shell) have raked an all-time high profits in2004, US$5.79 billion in profits for ExxonMobil and a 54% increase in earnings for Royal DutchShell. ChevronTexaco and ExxonMobil used to own Saudi Aramco until it was nationalized in 1980.Saudi Aramco still maintains strategic partnerships with the oil majors through joint ventures withShell and ExxonMobil in refining and marketing.

In the Philippines, Caltex (ChevronTexaco), Petron Corporation (Saudi Aramco), Shell (Royal DutchShell) are known as the Big Three of the local oil industry accounting for 83% of the total number ofpump stations nationwide, 86% of petroleum products sold in the domestic market, and 100% of thecountrys refining capacity.

Aside from this strategic control of the oil industry, intense speculation drives oil prices up. The US-led war in Iraq, political troubles in Nigeria, and Venezuela plus the supposed lack of spare capacityhave been used by speculators as reasons that drive oil prices.


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How does speculation dr ive prices up?

Crude prices used to be pushed up and down by the physical requirements of buyers and sellers,such as major oil companies. However, hedge funds and other "non-commercial" players in oilfutures bourses such as London's International Petroleum Exchange and the New York MercantileExchange have added to cost of oil. In 2003, around 60,000 trades of oil futures a day were alreadybeing undertaken by non-commerical players on Nymex reaching 200,000 a day in the first half of2004. These transactions costs billions of dollars on future oil prices and thrive on their pricevolatility.IBON databank cites several ways where speculation affects world market prices: in benchmarks,and in manipulating term contracts and spot and futures makers. Benchmark prices are used intrading crude oil around the world. Three major benchmarks are the Brent, West Texas Intermediate(WTI), and Dubai prices. Brent is based from North Sea prices and is a benchmark for approximately40 to 50 million barrels of crude oil produced or sold daily in Europe, Africa, and Middle East. WTI isa blend of crude oil produced in Texas, New Mexico, Oklahoma, and Kansas and is used for 12 to15 million barrels of crude oil produced or sold each day in the Western Hemisphere. Dubai andOman crude is the benchmark for about 10 to 15 million barrels per day of crude oil produced in theMiddle East and purchased in Asia.

These benchmarks are based on relatively small production sites. Brent, which accounts for 1% ofworld crude production, determines 60% of crude oil trade. These benchmarks thus offers easier

manipulation by oil firms by adjustments on only a small number of sites.Term contracts, on the other hand, determines the trade of at least 67% of physical crude oilcovering multiple transactions between a buyer and a supplier over a specified length of time.Transactions among the different units of the same company (i.e. giant transnational oilcorporations) fall under the term contracts.Spot spot market prices involve agreements to buy or sell one shipment of crude oil at a pricenegotiated at the time of the agreement. Being on the same side of the market, the worlds biggestoil companies acting as both producers and buyers allows them to distort the supply-demandbalance.

In figure 1, the price of Dubai crude has been increasing on the average while production costs areactually low. Without royalties and passed-on exploration costs, production have varied from 4-8USD per barrel. At $50 per barrel, this means that more than $40 are actually windfall profits forthese firms.

Even more intense speculation happen at the futures markets where enormous profits are madethrough buying and selling oil contracts. Futures prices refer to the price of oil traded in the futuresmarket, which involves the purchase and sale of contracts for the future delivery of oil. Giantsecurities firms like Morgan Stanley, Merrill Lynch, Goldman Sachs, and Lehman Brothers;transnational banks like Citigroup, HSBC, BNP Paribas, and Deutsche Bank; and other FortuneGlobal 500 firms join hands with oil firms in speculation on oil prices earning their excess capitalmore profit while driving oil prices up.

The oil firms that both produce and sell crude oil as well those that buy and refine are largely thesame. The futures market can only offer them further means to manipulate the transaction cost of oil.Security fears, supply problems and political and economic woes is reflected in the volatile and oftenuptrend futures oil market.The futures and spot market artificially increase oil prices since majority of (actual) oil traded isthrough long-term supply contracts, which are mostly intra-TNC transactions. Supply and demand asreflected in spot and futures markets just reflect the speculation in the oil exchanges and not actualproduction and transportation costs nor actual fluctuations in demand.Decreasing oil sources

Spending on production has also been falling despite historically high global crude prices. These oilcompanies have not been searching for new oil and gas reserves in the North Sea or elsewhere asthey did in the past. ExxonMobil spent US$1.2 billion on exploration last year, its lowest for fiveyears, while ChevronTexaco spent US$1 billion, almost half of what it spent in 1998.

Yet ExxonMobil is sitting on US$20 billion of cash while rivals such as BP and Shell have maderecord profits but are giving money to investors through share buybacks and major dividend payouts.

Research on alternative sources of energy has always been a low priority for states and is stillmarginalized at best despite a lot of basic research waiting to be developed further into viable


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alternatives to oil.

Securing oil markets and reserves

New routes for oil pipelines and finding new sources of oil and gas fields have not escaped thestrategic eye of the US and its allies.

Americans consume about one-quarter of the world's oil production, and on a per capita basisconsume about double the amount Europeans use. "Oil prices are at record highs and every day wegrow more dependent on foreign sources of oil," says Rep. Joe Barton (R) of Texas, chair of the

House Energy and Commerce Committee. Recently, George W. Bush proposed that new oilrefineries should be constructed on US military bases that are no longer in use to alleviateincreasing oil prices.

Yet the role of these bases on securing oil markets and reserves, are not limited to this new proposalof Bush.

It should be now clear that the war in Iraq was not about weapons of mass destruction nor ofsecuring freedom for Iraqis. The war in Afghanistan was not about the search for the still missingOsama Bin Laden. The war in Chechnya and Georgia, the Balkans and Africa and the interventionsof the US and other countries are not about racial tensions nor peacekeeping. In areas near oilfields, and in those within oil pipelines, the military aggression and interventions were done to securereserves.

Michael T. Klare, in Blood and Oil. states From the vantage of officers and enlisted personnel inthe U.S. Central Command, the invasion of Iraq is only the latest in a series of military engagements

in the Gulf proceeding from the Carter Doctrine... This history helps to explain why the very firstmilitary objective of Operation Iraqi Freedom was to secure control over the oil fields and refineriesof southern Iraq. In April 2003, just weeks after the invasion of Iraq, Vice-President Cheneypredicted that by the end of the year Iraq would be able to raise its oil output as much as fifty percent over prewar levels. This has not materialized to its full levels since the US has still notcompletely secured Iraq.

Securing strategic oil reserves is a key requirement for US imperialisms continued globaldominance. A

Agham Compre Energy.paper

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