Factchecker Vera Files has qualified a repeated mantra by energy officials that liquefied natural gas (LNG) was a “cleaner substitute” for traditional fossil fuels. That claim requires deeper scrutiny as the tradeoff between LNG’s lesser carbon dioxide emissions versus its highly toxic methane enters the equation and is integral to the perpetuation of fossils in our energy fuel mix.
It behooves us to review the current mix characterized by inferior quality and infrequent electricity fueled by fossils skewed towards high-priced toxicity.
From the mid-2000s, little to no significant investments were added to baseload capacities or the required ancillary reserves that mitigate fluctuations. Worse, the national grid remained dependent on fossil fuels sourced from the volatile Middle East.
This compelled three influential private sector enterprises to invest in the LNG supply chain and fill in the gaps.
A joint venture agreement (JVA) between Aboitiz Power Corporation (Aboitiz Power) and Meralco PowerGen Corporation (MPGC) involved investing in two LNG facilities — the existing 1,278-megawatt Ilijan power plant, and a new 1,320-megawatt combined cycle facility currently owned by the San Miguel Global Power Holdings Corporation (SMC Global).
Their synergies made sense. Aboitiz, San Miguel and Meralco had invested heavily in high technology endeavors sensitive to outages and fluctuations.
Aboitiz Power’s Project Arkanghel transforms its coal-fired power plants into smart power facilities to optimize performance and reduce downtime. This involves creating digital twins that mimic operating systems. These simulate stress-tests and downtimes and detect faults before they happen.
Cognizant of the constant fluctuations and the need to provide grid-balancing ancillary reserves, SMC Global pioneered massive battery energy storage systems (BESS) that provide grid stability, reduce damaging fluctuations, and catalyze the integration of renewables.
While Meralco remains largely in traditional brick-and-mortar infrastructure, the company has operationalized its Customer Centricity Transformation Program and Digital Projects (CCTP+D) and has created the digital-based Meralco Data Platform.
Its affiliate, the Light Rail Manila Corporation (LRMC), has a digitized contactless ticketing system as well as an Automated Train Operations Metrics System (ATOMS) that provides real-time operational data.
Another affiliate, Metro Pacific Health, the country’s largest private hospital group, operates digital virtual care platforms and hospital information systems. Meanwhile, the Makati Medical Center Foundation has embarked on digital transformation programs in its medical information management systems.
All these rely on affordable, continuous, and unfluctuating power.
Invested in the upstream gas value chain but not a party to the JVA, through a series of acquisitions in the upstream and mid-chain sectors through offshore gas development and solar energy farms, a fourth player wields some amount of substantive dominance.
Prime Energy Resources Development B.V., (Prime Energy) company was declared the LNG aggregator. Subsequently, Gas Aggregator Philippines Incorporated (GAPI) was created as a wholly owned subsidiary of Prime Infrastructure Capital Inc. (Prime Infra). Prime Energy is a subsidiary of Prime Infra, the operator of the Malampaya Gas Fields.
While natural gas accounts for only 4.6% of the energy mix, it is less expensive and is less volatile in price than imported LNG.
Because the Philippines has one of the highest electricity prices in the region, the cost impact of both domestic gas and imported LNG cannot be ignored. Beyond its impact on inflation is its criticality for foreign investors. Among the negative investment factors often cited are high electricity costs, thin to zero reserves, and the reliance on imported, often geopolitically priced fuels.
The un-forecasted outages across the archipelago from the start of the year and projected to remain until 2025 is an example. Note its cost implications.
Last March 2024, Malampaya gas was priced at $12.38 per MMBtu (one million British thermal units) compared to imported LNG priced at $14.55 per MMBtu. The 20% difference bloated prices in the Luzon grid when supply from the Malampaya fell and power plants fueled by it were de-rated.
Let us review the policy framework that causes such volatility.
Under the Corazon Aquino administration, after deregulating and liberalizing to attract foreign investors to modernize, build, own and operate power plants, the government passed the Electric Power Industry Reform Act (EPIRA). At that time, nearly a quarter of a century ago, LNG was merely an emergency fuel for five power plants — the Sta. Rita (1,000 MW), San Lorenzo (500 MW), Ilijan (1,200 MW), San Gabriel (414 MW), and Avion (97 MW).
Indigenous gas was provided by a single source 80.5 kilometers off Palawan from a deep-sea gas field over three kilometers below the water’s surface. This was delivered through a 505-kilometer ultra-deepwater submarine pipeline from two development rigs where three locally incorporated subsidiaries, Shell Philippines Exploration B.V. (SPEX), Chevron Malampaya LLC and PNOC Exploration Corporation (PNOC EC), a wholly owned subsidiary of the Philippine National Oil Company (PNOC), were enjoined through a JVA.
Since the Duterte administration, Shell and Chevron have divested prior to the expiration of their contracts.
These divestments compel analyzing the recent developments in the gas and LNG value chain against the competitive landscape and the need to lower electricity rates to induce foreign direct investments (FDIs), and transition from toxic, imported and expensive fuels.
Unlike Europe, the Philippines does not have pipelines that make gas and LNG distribution cost-effective. Moreover, no Philippine plants transform our indigenous gas to LNG. Building one requires massive build-up infrastructure. The gas-to-LNG infrastructure would lock-in related infrastructure (ports, terminals, and pipelines) CAPEX and require extended payback periods for cost recovery. The locked-in supply chain infrastructure would invariably delay investments in renewables as LNG’s financial viability requires costs capitalized over extended periods.
Worsening matters, our current energy situation is already a toxic disincentive for foreign direct investments (FDI). Since the start of the year, power outages have been widespread and massive.
First, there is the question of perpetuating a dependence on toxic fossils. Other countries like the US and Canada have extensive gas sources that catalyze the transition to LNG. Malampaya is a limited source.
Second, there is the question of toxicity. Last December 2023 as a warning to US officials mulling LNG development, 170 climate scientists declared that LNG is “at least 24% worse for the climate than coal.” A Cornell University study shows that methane negates climate advantages when “leaked into the atmosphere at wellheads, pipelines and other gas industry infrastructure.”
Third, since current analytical models focus on horizontal competition, the existence of vertical competition is virtually denied in anti-trust analysis. Unfortunately, the late economist Robert L. Steiner, in a paper entitled “Vertical Competition, Horizontal Competition, and Market Power,” raised alarms from a virtual cartel with total pricing power, especially relevant where effective domination over LNG value chains is created.
Since market power is a function of vertical and horizontal dominance, against upcoming firms, this discourages needed FDI in power generation as the vertical market dominance raises entry and mobility barriers that limit choices, and lead to cartelized pricing. One example would be the postponement of cleaner albeit higher capital renewables while gas and LNG investments have yet to achieve targeted internal rates of return.
Should our energy officials fail to understand the play between vertical and horizontal competition, this regime of imported dirty and expensive fuels will continue. – Rappler.com
Dean de la Paz is a former investment banker and managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance, and Mathematics professor. He collects Godzilla figures and antique tin robots.
