Fuel Energy Mix. 20 March 2017 Presented by: Chrysogonus F. Herrera Senior Vice President Commercial & Planning Meralco Powergen Corp.

Transcription

1 Fuel Energy Mix 20 March 2017 Presented by: Chrysogonus F. Herrera Senior Vice President Commercial & Planning Meralco Powergen Corp. The information as contained herein may neither be reproduced nor used, in whole or in part, for any other purpose nor furnished to any person(s) without express written permission from MERALCO PowerGen Corporation

2 Contents 1. Do we want a mandated generation mix that provides high energy self-reliance, high share of renewables, and low carbon intensity in generation? 2. Can we impose a generation mix under EPIRA? 3. What would the generation mix be if we let market forces drive it? 4. How do we comply with COP21 and how much would it cost? 5. Where do we go? 2

3 Do we want a mandated generation mix that provides high energy self-reliance, high share of renewables, and low carbon intensity in generation? 3

4 Today in the Philippines, we have a power industry largely shaped by a mandated generation mix that sought energy self-reliance, high share of renewables, and low carbon intensity in generation. And, it s not a pretty place: We suffer high power rates, one of the highest in Asia We underwent premature de-industrialization because high rates cannot support manufacturing Our GDP per capita is lower than our neighbors (Thailand, Malaysia, Indonesia) 4

5 Consumption per capita, kwh/cap We have the lowest kwh per capita and GDP per capita Consumption Vs GDP S. Korea 8000 Singapore Japan 6000 y = ln(x) R² = China Thailand Indonesia Malaysia 0 Philippines Per Capita GDP, constant 2005 US$ Data source: Enerdata (2015) 5

6 Consumption per capita, kwh/cap We have one of the highest Industrial power rates in Asia Bubble ~ Industrial Rate S. Korea USc 7.87/kWh Singapore USc 11.44/kWh China USc 6.38/kWh Thailand USc 5.33/kWh Malaysia USc 6.17/kWh Indonesia USc 4.82/kWh Philippines USc 9.91/kWh Japan USc 16.26/kWh Per Capita GDP, constant 2005 US$ Data source: Enerdata (2015) 6

7 Ratio of Services Value Added to Manfufacturing Value Added High Rates: the cause of our early deindustrialization? Philippines 2.50 Malaysia 2.00 Indonesia Thailand 1.50 China 1.00 Services = Manufacturing , , , , , , GDP per capita (current US$) Indonesia Malaysia Philippines Thailand China Calculated from data taken from databank.worldbank.org;

8 Most countries reached higher GDPs at higher CO2e GDP per capita vs CO2 per capita China Malaysia Thailand Philippines Indonesia - - 2, , , , , , Indonesia Malaysia Philippines Thailand China Data source: databank.worldbank.org 8

9 How did our generation mix get to where we are today? What we have is largely gestated by the Marcos Energy Security Policy (triggered by OPEC and our high dependence on oil in generation in the 70s) Security of Supply was paramount; pursued through Energy Autarky (self-reliance): indigenous energy development hydro, geothermal, local coal Fuel diversity: reduced oil dependence and balanced generation mix from oil, hydro, coal, geothermal and nuclear These foundational guideposts remained as the underpinning framework of the power development programs of government administrations after Marcos. 9

10 Without a government subsidy, achieving the policy objectives became costly We improved energy self-reliance We also incidentally delimited our Carbon intensity We reduced oil dependence with a balanced mix of indigenous energy High Energy Self-reliance + High Share of Renewables + Low Carbon Intensity + Zero Government Subsidy = High Power Rates 10

11 Can we impose a generation mix under EPIRA? 11

12 It s a Buyers Market under EPIRA Pre EPIRA Generally, a Sellers Market State monopoly under NAPOCOR Imperative to reduce oil; replace with indigenous and renewable energy Government market or off-take guaranties to incentivize investors in power Under EPIRA Generally a transformation to Buyers Market Empowering buyers with competition and choice Radical structural reforms: Exit of government in generation and transmission open, competitive and deregulated generation sector, creation of WESM, implementation of RCOA. PSAs and WESM spawn new builds 12

13 A mandated mix does not work under EPIRA WE CANNOT! Unenforceable in a Buyers Market WE SHOULD NOT! Mandated mix distorts the supply market WESM: Dispatches are based on how low the bid offers are and not on fuel type. Dispatches are not made to meet a pre-determined generation mix. RCOA Load Shape: A user matches its demand with its supply (e.g., a high load factor user needs only a baseload supplier) Load Size: Dropping contestability threshold would reach a small size when when the granularity of supply mix loses relevance and price alone matters. A Mandated Generation Mix: allocates market volumes and consequently: removes the intra-fuel pricing competition and competitive tension De-risk generators at the expense of buyers makes government choose winners Impedes a level playing field for generators locks in a traded energy commodity which is detrimental in developing indigenous energy disregards technological advancement 13

14 What would the generation mix be if we let market forces drive it? 14

15 Forecasting the Generation Development Expert forecast by consultants (Poyry and The Lantau Group) Highly experienced in Philippine energy market (from work with power companies, government agencies and regulators) Flashlight period (2016 ~ 2022) Plants under construction Named plants with PSAs, key permits and interconnection ~ 2023 onwards Post-Malampaya: LNG (existing CCGTs are not retired and bid in the WESM at marginal cost) Market allowed to unfold along least cost path; No policy intervention in generation mix except must run and priority dispatch for VREs Solar and Wind achieve grid parity (~ 2024) and become merchant in WESM (at higher entry IRRs); sized just right as not to dampen WESM prices and negate grid parity economics Short term development and scalability favor VREs over generic coal plants Generic coal or oil (or any other generation option) when economics permit entry 15

16 Letting EPIRA work drives the market evolution along least cost 200, , , , , ,000 80,000 60,000 Forecast Generation Development High share of coal High solar penetration Continued need for gas in mid merit supply Market price trending towards the long run marginal cost of coal Projections 40,000 20,000 - Hydro Geothermal Coal Natural Gas Oil-Based VREs Projections from Poyry and the Lantau Group market outlook studies commissioned by MGen 16

17 From oil independence to expensive self-reliance to cheap and reliable energy 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Generation Mix 0% Hydro Geothermal Coal Natural Gas Oil-Based VREs Projections from Poyry and the Lantau Group market outlook studies commissioned by MGen 17

18 More coal in generation will drive the prices to be lower WESM Prices, PhP/MWh Projections ,414 6, ,332 2, WESM Projections from Poyry market outlook study commissioned by MGen 95th 75th 25th 5th Actual Projected 18

19 Importing coal reduces self-reliance 19 25% 62% 72% 52% 23% 23% 0% 10% 20% 30% 40% 50% 60% 70% 80% % Autarky (Self-Reliance) Projections

20 The use of coal will increase carbon intensity 0.80 Carbon Intensity, kg/kwh Projections

21 The trade-off in achieving least cost is more CO2e 140 Generation CO2e, Million Tons Projections Million Tons Generation CO2e, MMT COP21 Reduction Carbon quantity in power calculation by MGen; Total carbon calculated from Worldbank data 21

22 How do we comply with COP21 and how much would it cost? 22

23 Cost of Carbon Intensity Reudction, US$/Ton Deviating from the least cost power development has cost Cost of CO2e Reduction, PhP Billions Reduction in 2030 Generation CO2e % 20% 30% 40% 50% 60% 70% 80% 90% 100% The Social Cost of Carbon (SC-CO 2 ) is an estimate of the economic damages associated with a small increase in carbon dioxide (CO 2 ) emissions, conventionally one metric ton, in a given year Social Cost of Carbon = $ 37/MT, US Gov t estimate for 2016 PhP 0.98/kWh SC-CO2 23

24 What is the least-cost Low Carbon Alternative in the generation mix? Generate from Non-Carbon Producing Energy Sources Reduce Carbon Production in Generation Carbon Sequestration (Tree Planting) 24

25 Non Carbon Producing Generation Levelized Cost of Electricity (PhP/kWh) Nuclear Impounding Hydro Geothermal Solar under CSP (Meralco) Wind (at $ 1540/kW capex) Solar (at $ 1000/kW capex) Wind (Under FIT) Solar (under FIT) Coal

26 Non Carbon Producing Generation Cost of CO2e Displacement, US$/MT Nuclear 53 Impounding Hydro 132 Geothermal 102 Solar under CSP (Meralco) 18 Wind (at $ 1540/kW capex) Solar (at $ 1000/kW capex) Wind (Under FIT) 89 Solar (under FIT) 121 Social Cost of Carbon

27 Reduce Carbon Production in Generation Levelized Cost of Electricity (PhP/kWh) Gas (LNG at $ 9/MMBtu) 4.54 Gas (LNG at $ 12/MMBtu) 5.62 Supercritical Coal 3.79 Carbon Tax (at Tipping Point levy) Tree Planting Incremental Charge Reference Coal

28 Reduce Carbon Production in Generation Cost of CO2e Displacement, US$/MT Gas (LNG at $ 9/MMBtu) Gas (LNG at $ 12/MMBtu) Supercritical Coal Carbon Tax (at Tipping Point levy) Tree Planting Social Cost of Carbon

29 Capacity Factor Gas Parity Price vs Coal, US$/MMBtu (with Carbon Tax at $ 0/MT) Coal Prices, $ MT % % % % % %

30 Cures no worse than the disease Cost of CO2e Displacement, US$/MT Wind (at $ 1540/kW capex) Gas (LNG at $ 9/MMBtu) Solar (at $ 1000/kW capex) Solar under CSP (Meralco) High Efficiency Coal Tree Planting Social Cost of Carbon

31 Where do we go? 31

32 Where do we go? Coal is indispensable in keeping rates low and supply reliable Power, as a policy instrument to achieve national welfare, economic development and global competitiveness, can only be realized if it is affordable and reliable. The economy needs to walk on two legs of industry and services. We need to be pricecompetitive to industrialize and create lasting jobs Establish the path of least cost and the trade-offs if we deviate from it A Generation Mix Policy is a straitjacket to be avoided. It does not help reduce rates. It is a straitjacket that cuts outs agility, negates competition and choice, and promotes rent-seeking. It makes government choose winners It is not enforceable under a WESM and RCOA without distorting the market Let the market under EPIRA sort itself out (after all, it is working and gestating new investments) For DUs, enforce compliance with CSP; efficient generators are more price competitive The ERC can impose efficiency or heat rate caps Imposing an environmental levy on CO2e raises distinct possibility of just making Philippine power rates more expensive and the country less competitive; However, a levy channeled to tree planting may be feasible if cheap or externally co-financed. 32

33 33

34 Current plant economics favor a lot more coal capacity Capacity, MW Energy, GWh % Energy CO2e, Mn Capacity % Capacity Share tons Factor Share Baseload 7, , % % 81.06% Mid Merit 1, , % % 13.36% Peak % % 5.57% Total Demand 8, , % % % Coal: $ 2,200/kW; 9000 Btu/kwh, $ 60/MT coal; Gas: $ 1,000/kW, 7500 Btu/kwh, $ 12/MMBtu LNG 34

35 WESM Prices, PhP/kWh Solar Capex (Poyry), US$/kW Solar grid parity obviates FIT and opens gate for more Solar Captured WESM Prices 1, , , , , Solar Grid Parity WESM Price Solar LCOE th 75th 25th 5th Base Solar LCOE Pory Solar Capex - 35

36 Conventional REs (Geothermal & Hydro) are costly... as well as nuclear! Nuclear Geothermal Hydro Hydro (~50 MW): US$ 3,000/kW; Geothermal (>50 MW): US$ 5,430/kW 36

37 CO2e Cost from Coal, Gas and Oil Plants Particulars Diesel Natural Gas Coal Net Heat Rate, Btu per kwh 10,000 7,500 9,000 CO2e, Kg per Million Btu CO2e, Tonnes per Million kwh Equivalent Power Rate for every US$ 1/MT cost of CO2e, PhP/kWh

38 VRE Displacement of Coal CO2e is expensive Particulars Solar PV WTG Feed In Tariff, PhP/kWh Coal Levelized Rate, PhP/kWh Incremental Cost from VRE Equivalent Power Rate for every US$ 1/MT cost of CO2e from Coal Removal cost from VRE, US$/MT Levelized Rate excludes interconnection charges, LGU taxes With CERs currently at < 5/MT, is it reasonable to pay $ 90~ 121/MT to displace CO2e from coal generation? Solar: US$ 1,660/kW; Wind Turbine: US$ 2,350/kW 38

39 A Caron Levy needs to reach a Tipping Point to work Failing to hit its Goldilocks value only means an unnecessary rate hike 39

40 Carbon Tax channeled to tree-planting may be helpful Carbon tax bears directly on power related choices Make CO2 producing options more expensive till a tipping point is reached US$ 100/MT Carbon Tax Carbon tax bears on out-of-thebox solution Channel Carbon Tax directly in CO2e capture by Forestation US$ 6.63/MT To US$ 47.35/MT A typical tree captures about 22 kg of CO2e per year Cost of care ranges from PhP 7 to 50 per tree per year Requires caring for first 3 years of a tree 40

41 Alternatives to Achieve a Low Carbon Future Power Rate (PhP/kWh) Cost of CO2e Displacement, US$/MT Promote Non-Carbon Producing Generation Variable Renewable Energy (VRE) VRE under FIT subsidy Solar Wind Turbine Generation Merchant VRE Solar (at $ 1000/kW capex) Wind Turbine Generation (at $ 1540/kW capex) Solar under CSP (Meralco) Conventional Renewable Energy Geothermal Impounding Hydro Nuclear Reduce CO2e at its sources High Efficiency Coal Gas (LNG at $ 12/MMBtu vs PC coal at $ 60/MT) Gas (LNG at $ 9/MMBtu vs Supercritical coal at $ 60/MT) Carbon Tax (at Tipping Point levy) CO2e Sequestration Tree Planting The social cost of carbon is the estimated cost of damages to the environment from an incremental release of carbon. It is a helpful benchmark in evaluating whether the cost of an alternative of avoiding CO2e from coal is worthwhile and beneficial. It measures whether the cure is worse than the disease. The US government estimates the social cost of carbon to be $ 37/MT. 41

42 From Import-Dependence to Self-Reliance 90,000 80,000 Energy Generation, EPIRA 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Hydro Geothermal Coal Natural Gas Oil-Based VREs 42

43 We increased our energy self-reliance 100% 90% % Autarky (Self-Reliance) EPIRA 80% 70% 60% 62% 72% 50% 40% 30% 42% 52% 20% 25% 10% 0% 43

44 We also incidentally delimited our Carbon intensity Carbon Intensity, kg/kwh EPIRA

45 Import-Dependence to Self-Reliance 100% 90% Generation Mix EPIRA 80% 70% 60% 50% 40% 30% 20% 10% 0% Hydro Geothermal Coal Natural Gas Oil-Based VREs 45

46 Government Monopoly Mandated Generation Mix Renewable Energy Act EPIRA Renewable Portfolio Standard Feed In Tariff Missionary Electrification Stranded Debt & Costs Value Added Tax Expensive Indigenous Energy Expensive Policy costs No Government Subsidy HIGH POWER RATES 46

47 Demand will double from 2015 to , , , , , ,000 80,000 60,000 40,000 20,000 Long-term Growth Rate ( ) Luzon 3.5% Visayas 3.7% Mindanao 4.8% Philippines 3.7% Energy Demand Projections - Projections from Poyry and the Lantau Group studies commissioned by MGen Luzon Visayas Mindanao 47

48 The Social Cost of Carbon (SC-CO 2 ) The SC-CO 2 is an estimate of the economic damages associated with a small increase in carbon dioxide (CO 2 ) emissions, conventionally one metric ton, in a given year. In the United States and other jurisdictions, the SC-CO 2 is used to estimate the climate benefits of regulations and rulemakings. SC-CO 2 in the US for 2016 = $ 37/MT As a standard, only regulations that cost less than the SC-CO 2 would be deemed worthwhile. It measures whether the cure is worse than the disease. 48

49 Where do we go? Reducing Emission Intensity in GDP = kg CO2e / GDP Increase GDP Have more resources to be resilient Lift more people out of poverty to be less vulnerable 49