POWER SECTOR RESTRUCTURING

LESSONS LEARNT FROM THE

PHILIPPINES EXPERIENCE

Anthony J Jude

Chair Energy Committee

Senior Advisor concurrent Practice Leader [Energy]

25 November 2013, Bangkok. Thailand

OUTLINE OF PRESENTATION

Genesis of the Reform - Why the power sector reform was needed?

Roadmap of the Reform - Concept, sequence and timeframe

ADB’s Supporting Role - TA, project & program loans, guarantee

Assessment of the Reform - What has been achieved so far?

Lessons Learned and Challenges

Genesis of the Reform

GENESIS OF THE REFORM (1)

• In mid-1980s, the Government scrapped Bataan Nuclear Power Plant (620MW),

$2.3 billion, fully repaid in April 2007;

• In early 1990s, Luzon experienced severe power shortages due to inadequate generation capacity – NPC (No Power Corporation)!

• Emergency power was granted by Congress.

• Government contracted IPPs to resolve the power crisis – over 6,000 MW contracted with take-or-pay provision guaranteed by the Government.

• Meralco also contracted 2,000 MW from IPPs.

GENESIS OF THE REFORM (2)

• The projected peak demand in 2004 for the Luzon, Visayas, and Mindanao grids would be 9,303 megawatts (MW), 1,496 MW, and 1,964 MW, respectively.

• However, the actual peak demand was only 6,728

MW for Luzon (38% below forecast), 1,063 MW for

Visayas (40% below forecast), and 1,278 MW for

Mindanao (53% below forecast) in 2004

• NPC incurred a heavy debt burden, large debt service obligations and take-or-pay contracts of IPPs, and NPC’s long term debts were about 30% of Government’s contingent liabilities in 2004.

Pre-EPIRA Power Sector Structure

Vertically Integrated IPPs are mostly contracted by

NPC NPC owns portfolios of plants Tariffs are regulated Cross Subsidies embedded in

the rates

Customers

Large Industries and Bulk Users

DUs/ECs

IPPs NPC Plants

Roadmap of the Reform

COMPONENTS OF POWER SECTOR

REFORM • Unbundling: generation, transmission, distribution, supply,

metering services

• Independent regulation (technical & price)

• Removal of subsidies and cross subsidies

• Privatization of generation (ownership, cross-ownership

restriction)

• Privatization of transmission (performance-based

regulation)

• Privatization of distribution (performance based regulation)

• Wholesale competition (independent market operator)

• Retail competition/open access

• Liquidation of stranded debt & costs of national power

company

PHILIPPINES VS INDONESIA

Indonesia Electricity Law 2009 Philippines EPIRA 2001

Unbundling May be conducted in an integrated manner" or

in one business type.

Unbundled generation; transmission

Distribution, supply

Open access Transmission open access Transmission and distribution open access

Cross

ownership

No mention No one group can own more than 30% of

the installed capacity

Subsidies or

Cross

subsidies

Electricity prices to take consumers' interest to

account; Special tariffs for underprivileged

consumers

All subsides removed, with exception of

lifeline rate

Regulation By Government or regional Government Energy Regulatory Commission

Pricing

Methodology

Arranged by Government/or regional

Government based on national interests,

consumers' interests, production costs….

competitive pricing for generation, and

supplies; performance based pricing for

transmission/distribution

Privatization No - privatization of government owned

generation assets and transmission

concession

Wholesale

competition

No clear rules, "healthy competition" based on

Government regulation

wholesale spot market (price based

bidding gross pool)

Retail

competition

No mention Retail competition subject to 70% of

privatization of generation capacity

AGMO

GENCOs

NGCP

SUPPLIERS/ AGGREGATORS

S P U G

LEGEND

Enforcement Coordination ERC Reg. Ownership/ Policymaking Operation Supervision Transfer Control

Competitive ERC Regulated

PIOUs/ ECs -CDA

INDUSTRY PARTICIPANTS

ECs

IMO

JCPC

TransCo

Electric Power Industry Structure

OLD PRICING REGIME VS NEW PRICING REGIME

Moving Towards A Competitive Power Market …

26 December 2012

• 79.56 % of NPC GenCos in Luzon and Visayas

• NGCP as the TransCo Concessionaire

• 76.85% transferred to IPP Administrators

Unbundling

Unbundling of NPC rates (26 Mar. 2002)

and Unbundling of DUs rates (June 2003).

Complied with.

Status of EPIRA Implementation

Inter-Grid, Sept. 2002; Intra-Grid, Oct. 2005 and Inter-Class, Oct. 2005

Complied with. Removal of Cross Subsidies

Complied with.

OPEN ACCESS AND RETAIL COMPETITION

• Luzon Commercial Operation on June 2006 • Integration of Visayas Grid, 26 Dec. 2010

Establishment of WESM Complied with.

PHILIPPINES

Update on EPIRA Implementation

NPC31%

PSALM49%

First Gen 11%

QPPL3%

Others6%

Pre-Privatization (2003)

As of March 2013

San Miguel 19%

Aboitiz 15%

First Gas 13%

PSALM 18%

AES 4%

SEM Calaca

4%

GN Power

4%

QPPL 3%

NPC 8%

GBPC 3%

SPC 2%

Others 7%

Installed Capacity Share Monitoring

Update on EPIRA Implementation

Installed Capacity Share Monitoring

Aboititz Group 17%

NPC 51%

PSALM 27%

Others 5%

MIndanao

GBPC 27%

SPC 15%

Green Core 12%

Aboitiz 6%

NPC 2%

PSALM 35%

Others 3%

Visayas

San Miguel 26%

Aboitiz 16%

First Gas 15%

PSALM 14%

AES 5%

GN Power 5%

QPPL 4%

SEM Calaca

5% NPC 2%

Others 8%

Luzon

As of March 2013

ADB’s Supporting Role

ADB LOANS AND GUARANTEE

• December 1998: ADB approved the Power

Sector Restructuring Program for $300 million,

and a project loan of $40 million for

establishing WESM.

• December 2002, ADB approved a partial credit

guarantee (PCG) for US$500 million equivalent.

• December 2006: ADB approved the Power

Development Program for $450 million.

ADB TECHNICAL ASSISTANCE

• Electricity pricing and regulatory practice in a competitive environment ($600,000), 1998

• Consumer impact assessment of PSRP

($720,000), 2000

• Competition Policy for the Electricity Sector ($990,000), 2001

• Transition to Competitive Electricity Markets

($800,000), 2002

• Promoting Good Governance in the Restructured Power Sector ($800,000), 2003

• Institutional Strengthening of ERC and Privatization of NPC ($1,200,000), 2004

Assessment of the Reform

WHAT HAS BEEN ACHIEVED

• Independent Energy Regulatory Commission established

• All inter-grids, intra-grid, inter-class subsidies removed (except lifeline rate)

• WESM operational in Luzon and Visayas

• 23 power plants (3072 MW), i.e. 81% of NPC asset privatized, $3 billion

• Sual (1000 MW), Pagbilao (700MW), San Roque (345 MW), Bakun-Benguet (100 MW),

• 44% of IPP capacity; • IPP Administrators appointed, $2.3 billion

• TRANSCO Concession awarded, $3.95 billion

• Stranded debt: Introduction of Universal Charges (P0.30/kWh for 25 years)

• Interim Mindanao Electricity Market – 26 Sept’13

PRIVATIZATION OF GENCOS

Assets Capacity

(MW)

Winner Bid Price

($ million)

Unit Cost

($ million/MW)

Masinloc Coal 600 AES, USA 930 1.55

Calaca Coal 600 Semirara, PHI 361.7 0.60

Tiwi-Makban

Geothermal

747 Aboitiz, PHI 446.9 0.59

Limay Oil 620 San Miguel, PHI 13.5 0.02

Magat Hydro 360 Aboitiz, PHI 530 1.47

WHAT HAS NOT BEEN ACHIEVED

• Appointment of Independent market Operator (IMO)

• Retail competition subject to 70% of IPPAs

• Weak distribution sector (electric cooperatives)

• Lack of private sector investment for new capacity?

Retail Competition and Open Access

POLICY FRAMEWORK 34

Efficiency and Competition

Effective Governance and

Regulation

Consumer Empowerment

and Protection

35

Provides the Power of Choice to

the Electricity End-Users

Ensures proper environment is in

place

POLICY FRAMEWORK

MARKET DESIGN

RELEVANT RULES FOR CONTESTABLE

CUSTOMERS

37

MANDATORY CONTESTABILITY AND CUSTOMER

CHOICE

38

DOE Department Circular No. DC 2012-05-0005

• Consistent with EPIRA, RCOA should promote customer choice

• The power of choice is conferred to Contestable Customers (CCs) subject to the rules and regulations

Power of Choice

• CCs shall be allowed to choose where to source its supply of electricity

• CCs may source electricity supply requirements from a Supplier duly licensed by ERC, a Local Supplier duly authorized by the ERC, or through the WESM

Customer Empowerment

*Slide Prepared by PEMC

QUALIFIED CONTESTABLE CUSTOMERS

(CCS)

Section 31 EPIRA

DOE Department Circular No. DC 2012-05-0005

• Provides that upon the initial implementation of RCOA, the ERC shall allow all electricity end-users with a monthly average peak demand of at least one megawatt (1 MW) for the preceding twelve (12) months to be the contestable market

Section 31 of EPIRA

• Refers to the electricity end-users who have a choice of a supplier of electricity, as may be determined by the ERC in accordance with the EPIRA

Contestable Market

• Refers to the electricity end-user who is part of the contestable market

Contestable Customer

TIMELINES OF RCOA IMPLEMENTATION

40

FIRST YEAR TIMELINE OF IMPLEMENTATION

Customer Switching Start (26 December 2013 onwards)

Regular Customer Switching

WESM Transactions for Newly Registered Customers

Continuing Registration and Training

SOLR Service or Disconnection

Initial Commercial Operations (26 June 2013 – 25 December 2013)

WESM Transactions for Registered Customers

Retail Supply Contracts

Registration of Non-Registered Customers

No Customer Switching

SOLR Service or Disconnection/Remain with DU

Transition Period (26 December 2012 – 25 June 2013)

Retail Supply Contracts Metering Installations Registration and

Training Trial Operations

Declaration of Open Access Date (26 December 2012)

ERC/DOE Joint Declaration of the Commencement of RCOA

PEMC (as CRB) calls for registration

41

*Slide Prepared by PEMC

ERC TRANSITORY RULES RESOLUTION NO. 11, SERIES OF 2013 DATED 10 JUNE 2013

A CC that fails to enter into an RSC by June 25, 2013

shall be deemed to stay with its current DU until

December 25, 2013, or until such time that it is

able to find a RES, provided that it informs DU of

such fact on or before June 25, 2013.

Continue to pay the regulated rates of the DU.

42

GOVERNMENT INITIATIVES 43

Conduct of Trainings and Information and

Education Campaigns (IECs)

RCOA Get-Together for CCs and RESs

Focus Group IECs

General Public IECs

Continuing Collaboration with ERC and PEMC

Monitoring and Evaluation for Needed Policy

Actions

Recent Developments …

RECENT DEVELOPMENTS 44

From 18 Respondent CCs

Contract duration ranges from 18 months to seven (7) years

Off-Peak Prices: approx. P3.2553 per kWh; Peak Prices: approx.

P6.4642 per kWh; others based on Load Factor

With Pre-Termination Charges and Replacement Power Provision

DOE Supplementary Policy

Allows prospective GenCos to contract with CCs provided

RES License is secured before effective date of the Supply

Contract with CCs; and

Allows Switching when “Superior Offer” comes; ERC to

define “Superior Offer.”

19 licensed

Retail Electricity

Suppliers (RES),

27 SOLR

Providers

and 18 Local RES

The Contestable Market

(November 2012)

Grid No. of

Customers

Power

Demand

(MW)

Luzon 801 2,639

MERALCO 638 1,827

Visayas 96 759

VECO 39 225

UPDATES …

Source: ERC

REGISTRATION

Participant Expected2

Total

Application

Received

Registered

On-Going

Completion of

Requirements

Retail Electricity

Suppliers 19 19 15 4

Local Retail Electricity

Suppliers 18 12 5 7

Retail Metering Services

Providers 39 27 23 4

Contestable Customers 892 297 257 40

Suppliers of Last Resort 27 7 2 5

Total1 995 362 302 60

1 As of 26 September 2013 2 Based on ERC’s RCOA website: www.buyyourelectricty.com

LIST OF LICENSED RES

1. Cabanatuan Electric

Corporation.

2. Masinloc Power Partners Co.

Ltd.

3. Aboitiz Energy Solutions,

Inc.

4. Advent Energy, Inc.

5. Direct Power Services, Inc.

6. Ecozone Power

Management, Inc.

7. Ferro Energy, Inc.

8. First Gen. Energy Solutions,

Inc.

9. Global Energy Supply

Corporation

10. GN Power Ltd. Co.

11. GNPower Mariveles Coal

Plant Ltd. Co.

12. Kratos RES, Inc.

13. Premier Energy Resources

Corp.

14. Prism Energy, Inc.

15. San Miguel Electric

Corporation

16. SEM-Calaca RES Corp.

17. SN Aboitiz Power RES

18. Team Philippines Energy

Corp.

19. Trans-Asia Oil and Energy

Development Corp.

LIST OF LOCAL RES

1. Angeles Electricity Corporation (AEC)

2. Manila Electric Company (MERALCO)

3. Dagupan Electric Corporation (DECORP)

4. Visayan Electric Company (VECO)

5. Subic Enerzone Corporation (SEZ)

6. Bohol Light Company, Inc. (BLCI)

7. Tarlac Electric, Inc. (TEI)

8. San Fernando Electric Light & Power Co. (SFELAPCO)

9. Ilocos Norte Electric Cooperative, Inc. (INEC)

10. Nueva Ecija I Electric Cooperative, Inc. (NEECO I)

11. Cebu I Electric Cooperative, Inc. (CEBECO I)

12. Cebu III Electric Cooperative, Inc. (CEBECO III)

13. Batelec II Electric Cooperative, Inc. (BATELEC II)

14. Benguet Electric Cooperative, Inc. (BENECO)

15. Cebu II Electric Cooperative, Inc. (CEBECO II)

Lessons Learnt and Challenges

LESSONS LEARNT:

ISSUES, SEQUENCE AND TIMEFRAME

• Issues: No mandatory bilateral contract

between NPC power plants and distribution

utilities – investors have no PPA to finance

their purchase

• Sequence: Should WESM be established

before privatization of NPC assets ? – Market

power

• Timeframe: EPIRA’s implementation timeline

totally unrealistic

POWER SECTOR REFORM IN THE

PHILIPPINES - A SUCCESS STORY?

Question: How to judge & measure if power sector reform is

successful?

- Competitive electricity rate?

- Sustainable power supply?

- Promoting renewable energy?

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

Pri

ce

, P/M

Wh

Effective Buying Price Effective Selling Price Cumulative Ave. Buying Price

Effective Settlement Prices

2007 2008 2006

P4,497/MWh

2009

Market Results

CHALLENGES AHEAD

Challenge No.1: Will electricity rate will be cheaper? - probably not, but…

Challenge No. 2: Will private sector accept merchant risk and invest in new capacity?

– yes, with ADB support initially, then the experienced investors will continue

Challenge No.3: Will competitive markets promote renewable energy?

- WESM will include renewable energy market based on renewable energy law

The most expensive power is the power we don’t have.

THANK YOU