ArchivesOctober 2011Understanding power rates

Understanding power rates


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The importance of electricity is further magnified during brownouts. This is when people — households and businessmen alike — complain about not being able to do their regular activities, which mostly rely on electricity.

Brownouts generally happen because of inadequate power supply, especially during peak times. Thus, all the inconvenience that people experience during brownouts can be remedied by one thing – secured power supply.

Power distribution companies, including electric cooperatives who wish to ensure continuous and uninterrupted service to its clientele, first have to ensure the security of power supply.

The Negros Oriental Electrical Cooperative (Noreco II) had this in mind when it signed supply contract agreements with Kepco Salcon Power Corp. and Green Core Geothermal Inc., which were independent power producers (IPP) operating in the Visayas grid.

NORECO II had to be forward-looking, and rightly so, because supply uncertainty was at its height when government called for the privatization of the National Power Corp., which was then the sole supplier of Noreco II.

However, Noreco II has recently come under fire for the power rate increases during the first half of 2011.

Specifically, their power supply contract with Green Core is being pinpointed as the sole cause of the rate hikes. Noreco II’s Information & Communications Officer Beverly Gonzales explains that this is not true because power rates have multiple components such as the generation charge, which makes up about 60 percent of the total rate, distribution rates, transmission rates, and universal charges, that roughly make up the remaining about 40 percent.

Aside from those, power rates are also affected by various factors like weather, fuel prices, supply anddemand, and subsidies, to name a few.

For quite some time, the elasticity of power rates to market factors has been camouflaged by the effect of power subsidies. This distorted the price signals and it is just now, after such subsidization has ceased, that the public is starting to feel the true cost of generation.

Anything that is subsidized is, of course, cheaper. Sourcing power from Napocor, with its subsidized rate, is like buying rice from the National Food Authority which is also subsidized by the government. Whereas, sourcing power from IPPs is like buying rice from private rice producers.

For this obvious reason, there is a considerable difference between the prices of services and commodities from subsidized sources, and from regular sources.

But subsidizing power proved too costly for Napocor, resulting to cumulative losses of P261 billion from 1987 to 2004.

These losses had to be absorbed and funded by the government which at some point was 1/3 of the country’s total consolidated public sector debt.

In fact, the RA 9136 of the Electric Power Industry Reform Act was passed mainly because of this, which called for the end of these subsidies being provided to power distribution companies such as electric cooperatives. Thus, Napocor has ceased to subsidize power.

Without the cheap subsidized Napocor power, Noreco II now sources its power from IPPs. Noreco II’s first IPP is Kepco Salcon. But with the growing demand in Noreco II’s service areas, the power sourced from Kepco, which is only 16 megawatts, ran short especially during peak periods.

Because of this the Negros Oriental Chamber of Commerce stressed on Noreco II the need for a supply security to allay the fears of investors.Thus, to ensure the stable supply of power, Noreco II tapped a second supplier, Green Core, to provide 25 megawatts.

Noreco II estimates its average demand at 37 megawatts and its peak demand at 41 megawatts. The combined capacities of the two IPPs allow Noreco II to meet the power demand even during peak periods.

For Noreco II, the assurance that there will be fewer occurrences of brownouts is essential in providing great service to their clientele.

However, without the cushion of subsidies, the unavoidable effect of the true cost of securing the power supply is now fully reflected, and is being directly felt by Noreco II’s customers.

In the beginning of 2011, Noreco II’s power rate increased by 20 percent or 1.46 P/kWh, from 7.44 P/kWh in January2011 to 8.90 P/kWh in June 2011, due to Kepco power rate adjustments which are pegged on volatile coal prices, peso-dollar exchange rates, and US and Philippine inflation rates.

The increase continued in July this year when Noreco II increased its rate by 1.38 P/kWH. For this period, the increase was driven by the combination of the following factors: Green Core power rate adjustment (1.19 P/kWh), Kepco contract quantities, applicable value added tax (0.04 P/kWh), and transmission cost adjustment (0.15 P/kWh).

Noreco II reiterated that even if Green Core’s power rate adjustment accounts for 1.19 out of the total 1.38 P/kWh increase, its rate is still lower than that of Kepco’s.

Green Core’s rate is 4.85 P/kWh while Kepco’s is 5.60 P/kWh (inclusive of VAT).

Noreco II also highlighted that Green Core’s rate is even lower compared to two other potential suppliers: Panay Energy Development Corp., a 162 MW coal plant, at 7.3464 P/kWh, and Cebu Energy Development Corp, a 246 MW coal plant, at 6.6640 P/kWh.

Noreco II also points out that customers can be guaranteed of more secure rates with GCGI from here on because Green Core rates only adjust once every year, pegged on the movement in Philippine annual inflation rates, allowing for greater stability and predictability of power rates in the long run.

While the consumers might be reeling from the increase, Noreco II reiterates that the hike is merely reflective of the true cost of generating power, and ensuring the security and stability of power supply.

NORECO II assures its customers that, as it has done with the Green Core contract, it is actively seeking more proactive ways of ensuring that the supply will be least costly, sufficient, and that there will be fewer occurrences of brownouts. (PR)

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