Energy think tank sees lower electricity cost sans Meralco “sweetheart” power deals

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A Hong Kong-based think tank sees an opportunity for millions of customers of Manila Electric Company (Meralco) to enjoy lower electricity cost, if controversial power supply agreements (PSAs) between Meralco and favored generation companies are stopped.

A few business groups earlier warned that delays in approving the controversial PSAs, now facing opposition from civil society groups, pose a risk to the country’s energy security and hold back economic growth.

But the Lantau Group of Hong Kong thinks that non-approval of the Meralco PSAs will create instead what it called a “contracting gap” that will allow “cheaper options to creep into those gaps”.

Lantau, through Sarah Fairhurst, one of the think tank’s founding partners, pointed out the opportunity when she made her group’s presentation during the 2nd Philippine Annual Renewable Energy Conference held recently in Manila.

Reopening the competition

“Non-approval of Meralco PSA’s re-opens the competition,” Fairhurst said in her presentation. Lantau is a consultancy firm with deep expertise in the energy business in Asia.

A number of civil society groups have branded the Meralco PSAs “sweetheart deals” because most of these deals were awarded by Meralco without bidding to Meralco-controlled or –affiliated generation companies (gencos). The seven Meralco PSAs call for 3,551 megawatts of electricity supply.

The civil society groups also consider the supply agreements “midnight deals”, because Meralco and the gencos filed their PSA applications with the Energy Regulatory Commission (ERC) on the last day before the ERC would have required Meralco to bid out the contracts under a competitive selection process (CSP).

ERC itself is under fire from the civil society groups for its equally controversial decision to delay CSP’s implementation – a move that gave Meralco time to award the contracts without bidding.

Due to delays in implementing CSP, Lantau doubts the effectivity of the ERC program in drawing the least cost of electricity for consumers. “A real CSP process allows the cheapest option to win and thus enhances economic options,” Lantau said. “The current PSA approval process …does not result in the least cost procurement.”

“Utterly ineffective”

In the same presentation, Lantau said that “the current CSP is utterly ineffective”, adding that “the delay in [CSP’s] implementation has allowed thousands of MW [megawatts] of contracts to bypass any need for competition”.

The CSP aims to derive the least cost of electricity for consumers by requiring a distribution utility (DU) to receive at least two qualified offers for its supply of electricity.

The bids must come from gencos with which the DU is not prohibited from entering into a power supply contract. Under the Electric Power Industry Reform Act, a DU like Meralco is prohibited from buying electricity from a subsidiary, sister company or affiliate, if such supply exceeds 50 percent of the DU’s electricity demand.

The ERC originally announced CSP’s implementation would start on Nov. 7, 2015. But in March 2016–-or months after the ERC started implementing CSP–the ERC decided to “restate” the program’s start to the last working day of April 2016.

With the restated start of CSP, applications for PSAs that were awarded without bidding swamped the ERC between March and April 2016. Meralco’s PSAs with the seven gencos accounted for the bulk of capacities.

Meralco finalized all seven contracts during the last week of April 2016 (from April 20 to 27) and filed with the ERC on April 29, 2017 – the last working day before CSP’s start.