Energy Technology Expert

Shall We Go Nuclear?

Oil Crisis of 2008

The recent oil crisis which saw the rise of crude oil prices to a peak of $147 per barrel in the world market and its attendant effect on raising electricity prices in the Philippines at a rate higher than its competitor economies in the region has brought forth renewed calls to review policies relative to the development of the Philippine Nuclear Industry.

Revive the 600 MW BNPP?

In particular, attention has been directed toward reviving the mothballed 600 MW Bataan Nuclear Power Plant (BNPP) constructed by the National Power Corporation in the early 1980’s. In its desire to be part of the growing list of nuclear power generation nations in the world, the Philippines implemented a national agenda that included the construction of the 600 MW BNPP in tandem with the 300 MW Kalayaan Pumped Storage Hydro Plant in 1982. The pumped storage would serve as a dummy load of the nuclear plant during off-peak periods at night in order to allow for a constant and stable generation of 600 MW of nuclear power throughout the entire day. (In the absence of the “cheap” nuclear electricity, the Laguna Lake water is pumped uphill to Lake Caliraya at night using geothermal, coal and sometimes expensive oil-based electricity in order to have adequate baseload capacity during day-time peak hours.)

Numerous Issues Hounded the BNPP

Unfortunately, or for reasons only Providence could imagine, the BNPP has been hounded with controversy ranging from allegations of overprice and corruption in the construction of the power plant, unsafe plant location being near an inactive volcano (Mt. Natib), being located near an active fault, possible long-term environmental harm to the nearby residents and Luzon populace in the event of accidental release of radio active gases and materials arising from a nuclear accident, unsafe plant design (pressurized water reactor or PWR), expensive electricity arising from its high cost per kW due to overprice (one 600 MW plant for the cost of two 600 MW plants as originally conceived), and of course, how to economically and safely dispose of the spent nuclear fuel material, radioactive control rods and other materials exposed to high levels of radiation.

Downfall of Marcos Regime

The BNPP plant has since then became a social, economic, religious and political issue in the country that were cited among the numerous reasons that caused the ultimate downfall of the Marcos Regime during the EDSA Revolution in 1983.

Constitutional Prohibition

Since the ascent to power by Mrs. Corazon C. Aquino as President of the Philippines and the subsequent adoption of the 1987 Freedom Constitution by a select group of appointed Constitutional Delegates, it has been enshrined in both Executive Directives and Constitutional Provisions that the BNPP be mothballed as its commercial operation would violate its Constitutional provisions.

Ready for Nuclear Fueling

The BNPP was about to be fueled and tested with nuclear fuel rods and materials sometime in 1989, but due to Constitutional issues and Executive fiat, the nuclear plant was never put into commercial operation.

Increased Demand but no New Power Plants

Lacking foresight that the emergence of a new democratic government after the several years of authoritarian rule of Marcos, the Philippines grew by leaps and bounds, so much so that our economy grew resulting in increased demand for energy from electricity and fuels such as petroleum oils, coal, geothermal and hydro. During the time of Pres. Aquino, little or no power generating capacity were added owning to its desire to keep a clean image away from corruption-tainted power projects.

Power Shortages & Rotating Brownouts

Thus, the country suffered debilitating and annoying rotating power outages and brownouts that impacted seriously on the economy and on the confidence of the Filipino people. To correct this abnormal situation, the succeeding Pres. Ramos embarked on a massive power development program anchored on the basis of high economic growth and high energy and electricity demand growth forecast.

Emergency Power & “Take or Pay” Provisions

The Philippine Congress conferred upon the Executive awesome emergency powers to enter into power development and construction contracts that included the unpopular “take or pay” provisions that characterized the construction of a number of the more expensive power plants (diesel power plants, power barges, gas and liquid fueled turbines, hydro plants, natural gas combined cycle gas turbines).

1996 Asian financial Crisis

However, the 1996 Asian Financial Crisis hit the region with such ferocity that Thailand, Indonesia and Philippines suffered negative economic growth and severely devalued currency exchange rates (from PhP 26 to PhP 52 per US$) that electricity demand stagnated or hardly grew for almost a decade. The succeeding regimes of Pres. Estrada and Pres. Arroyo were to suffer the consequences of expensive electricity arising from overcapacity in the power generation sector and expensive “take or pay” electricity generation payments by consumers even for un-delivered electricity.

NPC Subsidies Bloated Government Budget Deficit

Furthermore, government subsidy to the state owned NPC to assist it keep its power rates affordable to the masses and consuming public has already reached an alarming 50% of National Government (NG) budget deficit. Cleary, the situation required political will and ingenious financial re-engineering in order to address this serious fiscal deficit problem of the country.

Peso Exchange Rate and the US Dollar

Its ballooning budget deficit was a cause of concern by Economists and Policy makers from both domestic and international capital markets, and consequently cited as one of the reasons for the continued downward weakening of the Philippine Peso to the US Dollar and other major currencies. It was felt that doing nothing to reduce the NPC debt that required massive NG budget support and consequently bloated NG budget deficit would ultimately bring unimaginable economic and financial consequence to the Philippine Economy and its people as a whole.

Electric Power Industry Reform Act (EPIRA)

In the aftermath of this expensive electricity situation and NPC’s continued dependence on massive NG budget support, the Executive and Legislature in conjunction with the participation of the electricity industry stakeholders, crafted and passed into law the Electric Power Industry Reform Act (EPIRA) to address the concerns of rising electricity costs and providing for measures to be adopted such as the transfer of NPC power generation assets and its liabilities to the PSALM and providing the extraction of a Universal Levy from all generators or consumers of electricity in the country in order to liquidate with finality the enormous accumulated debt of NPC.

NPC has paid all the interests and principal due to the BNPP, yet it has not earned a single centavo from any electricity it would have generated. It is a sunk asset that has been fully paid but could not provide a single centavo of revenue as it was prevented from going into commercial operation by the national leadership.

Universal Levy to Payoff NPC Debts

The NPC problem is a political and economic problem of the country, thus also requiring national political and economic will to resolve it. By extracting a Universal Levy on all generators and users of electricity, the burden of paying off the NPC debts is spread equitably to all generators and users of electricity be it a citizen or foreign resident or transient tourist in the country, unlike NG budget support which penalizes only the law-abiding tax payers. (The Philippines has a small tax-payer base with a large informal underground economy that putting the burden solely on tax payers to fund the NPC debt payments would be grossly unfair.)

Privatization of NPC Plants & Management of Gencos

As a consequence of the Universal Levy paying off the liabilities of NPC, the privatization of NPC power generation assets has to follow in order that the Philippine Government and its citizens recover the cost of paying off the debt of NPC. To-date, the PSALM has privatized the ownership of a number of NPC plants and is now proceeding to privatizing the operation and management of Generation Companies (Genco’s) of the remaining NPC plants in order to encourage competition in power generation.

WESM to Supply 10% of DU Requirement and Open Access

The level of privatization of NPC plants has now exceeded the 70% level and with the operation of the Wholesale Electricity Spot Market (WESM) where Distribution Utilities (DU) have to source 10% of their requirements, it is now ready for open access to enable end-consumers to source their electricity needs from the cheapest possible source of electricity.

Competition and Open Access

Competition among power producers as well as providing end consumers wider choice in selecting their providers will go a long way in reducing electricity rates. This means that ownership of power plants be as diverse as possible and that the smallest possible consumer size may be given the freedom to choose his electricity service (generation/distribution) provider.

2008 Oil Crisis

This time, another Oil Crisis hit the entire world when crude oil prices peaked to over $147 per barrel in July of 2008. Domestic pump prices of gasoline rose to over P60 per liter and diesel likewise to over P50 per liter. Transport fares went up beyond the means of most commuters and electricity rates went past P10 per kWh in most urbanized areas.

Removal of Cross Subsidies

With the unbundling of electricity rates and subsequent removal of inter-grid and intra-grid cross subsidies, electricity rates rose for the subsidized sector as the electricity industry began to reflect the true cost of generated electricity and spreading the burden more uniformly throughout all its customers. A paradigm shift occurred as cross subsidies provided by industry and commercial users were reduced to residential consumers.

True Cost of Generation and Global Competition

This shift in policy thinking was necessitated by the need to keep Philippine industries competitive in a rapidly developing global economy. Local industries need to be competitive by keeping our electricity and energy rates competitive with our neighboring economies. This is one of the steps to preserve jobs in the country and preventing capital investments and employment prospects from transferring to other countries.

2009 Global Financial Meltdown

The aftermath of the 2008 Oil Crisis, together with the bursting of the real estate bubble in the US paved the way for the 2009 Global Financial Meltdown wherein banks themselves don’t lend money to one another anymore as no one trusted the balance sheet and financial soundness of other banks. There is a Crisis in confidence and availability of adequate credit.

“Sub-Prime Mortgage” Losses & US Bank Failures

This meltdown arose from “sub-prime mortgage” losses of US banks that also affected all financial institutions throughout the world that invested in the “asset-backed securities” peddled by greedy US investment houses. The continuing drop in value of US housing units resulted in massive “mark-to-market” losses among banks, insurers, pre-need companies, investment houses and stock markets throughout the world. Restrictive accounting standards required that fresh equity be provided to cover said “mark-to-market’ losses as values of mortgages dropped, further exacerbated the problem. (Philippine monetary and regulatory agencies have addressed this potential problem.)

Electricity Surplus to Vanish by 2012

Without this very recent Global Financial Meltdown, our local energy planners and electricity industry stakeholders have been vocal in warning the country’s political leaders that another round of local electricity shortages and brownouts would revisit the country just like what we experienced in the early 1990s. This time, our perceived existing surplus electricity that resulted in expensive “take or pay” rates would not be enough to tide us over unless new generating capacities are put on stream by 2010-2011.

Vanishing Window of Opportunity

Since it takes at least 5 years to plan, construct and commission a large scale power plant such as coal, geothermal, hydro and natural gas, the window of opportunity to provide that additional generating capacity is fast closing on us. Unless we do something now to provide additional capacity by way of rehabilitating the old plants to their original nameplate capacity and constructing new plants, the country will be experiencing rotating brownouts in the very near future.

Global Financial Meltdown is Temporary and has Limited Effect on Philippine Domestic Economy

Many believe that the Global Financial Meltdown is a temporary thing and will be resolved in due time by 2011 so much so that its impact on the Philippine electricity supply-demand situation is minimal. In fact, economic experts have reported that the Philippine economy is generally isolated from the global meltdown because it is 87% domestic consumption led, and the remaining 13% foreign investments and trade accounts have also significant domestic inputs so much so that overall Philippine dependence is 93% on domestic consumption and investments and only 7% due to foreign economic activities. The dollar inflows from our Overseas Contract Workers (OCWs) continue to provide purchasing power to the urban and rural areas. Home construction and consumer spending continue to rise, albeit at a lesser growth, as a result of the global financial crisis.

Need to Keep Our Focus – Plan and Construct the Power Plants before 2012

Hence, the need to plan and address the looming domestic Energy Crisis by 2012 is a must that we should not let our focus down because of recent global events. The question remains, though, shall the Philippines go nuclear to meet the long-term energy options of the country and be competitive in terms of power rates like its nuclear-powered neighbors or otherwise?

Please leave your Comments and Suggested Action Plans:

Do you support the move to go nuclear power?

If not, what alternative energy resources would you recommend and why?

What is the situation in your country?

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Marcial T. Ocampo

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