ERC: Diesel plants best buffer vs huge outages

THE Energy Regulatory Commission (ERC) has acknowledged the importance of diesel power plants for preventing a massive power outage, as these can best provide immediate response to restore power when major plants conk out, as what happened last month in Luzon and Visayas.

“I think, we have to admit that during the period that we lost, we expected that we lost our large hydros,” ERC Chairperson Monalisa Dimalanta said, referring to hydroelectric power plants that are normally placed on maintenance shutdown during summer months since water supply running their power generators is usually thin in the dry season. “What we didn’t expect is that even coal and natural gas plants suddenly disappeared, right? What came in, what saved the system, so that we didn’t have system-wide blackouts, were our diesel plants,” she said.

Most of the power plants on forced outage and are running on derated capacity are coal and gas plants. As a result, the National Grid Corporation of the Philippines (NGCP) placed the Luzon and Visayas grids on red and yellow alerts several times since April 16. There had been power outage incidents in some areas, mainly because of thin power reserves.

Essentially, Dimalanta said the diesel plants, albeit their fuel is more expensive, saved both grids from prolonged blackouts.

“We know that the fuel of diesel plants is expensive, even more expensive. So, they are the ones who should be paid because they are the ones who produced the electricity that we used because most of us didn’t experience blackout. So, because we used the diesel plants, it’s our obligation to pay, right?” said the ERC chief.

Among these diesel plants are the 150-megawatt (MW) Ingrid high-speed diesel plant in Pililia, Rizal, owned by ACEN and Marubeni Corp.

ACEN President Eric Francia said the diesel plants are the pragmatic stop gap solution to support increasing demand, at least for the next few years.

“We decided in 2019 to bring in leased diesel plants given the impending shortage in the system especially during peak summer months,” said Francia. However, the economics of diesel plants are challenged because of the market framework,” he said.

ACEN has partnered with Marubeni Corporation to develop the P7billion Ingrid plant. The units are leased from British-based company Aggreko International Projects Limited (Aggreko), which is also the operations and maintenance provider of the diesel plant.

The 150MW Ingrid plant has been operating since October 2021. The plant then signed an ASPA (ancillary services procurement agreement) following NGCP’S competitive selection process in early 2023. However, Ingrid’s bidded ASPA rate has not been approved by ERC.

“The plant is not viable without a proper ASPA contract. In fact, we had to pay standby charges to the unit owner last March in order to keep the units at least for this summer. Given the persistent red alerts and blackouts, it was definitely the right thing to do,” said Francia. “But this model isn’t sustainable; the plant needs to be contracted.”

Francia explained the importance of contracting for diesel plants. “Think of the diesel plant as a rental property that only gets occupied during summer,” said Francia. “That property needs to recover its capital and operating costs for the entire year, but only during the summer months.

This makes an expensive but necessary proposition during summer, and hopefully the market framework considers this nuance.”

Other diesel plants also struggle to make economic returns, and this is deterring new investments. Aboitiz Power Corp.’s diesel units in Luzon and Visayas are offered to the Wholesale Electricity Spot Market (WESM), the trading floor for electricity.

“When the secondary price cap is in effect, plants that have fuel costs higher than the cap can file for cost recovery. If there are opportunities to contract at acceptable terms, we would consider,” company president Emmanuel Rubio said via text message.

The P6.245 per kilowatt hour (kwh) secondary price cap is meant to protect consumers from higher WESM prices, but the imposition of which could curtail new investments in the energy sector.

“Key is to review the secondary price cap rule to make the market more efficient and to allow for price signals in order for new capacities to be considered,” he said. “If the cost recovery application is approved, and in most cases they are albeit delayed, at least you recover your cash costs but not capital recovery,” explained Rubio.

The Alsons Power Group shared the same view.

Alsons Power has 203MW of diesel power plants that can respond to mandatory dispatch from the system operator to fill supply gaps in the Mindanao Grid during the summer months when hydro availability is reduced.

However, its ability do so could be “partially constrained” when the fuel supply of the diesel plant in Zamboanga City runs out, “as we will be unable to adequately replenish our stock in that plant with the significant disparity in the WESM price cap and our fuel cost,” explained company senior vice president for business development and marketing Joseph Nocos via Viber.

For its power plant in Iligan City, however, Alsons Power can sustain its operation throughout and continue providing power to the grid because the plant has a contract approved by the ERC.

“As long as we have an Erc-approved ASPA like in Iligan, yes. Without it, we will have to subsist on the WESM price cap as in the case of the Zamboanga plant. When it runs out of fuel, we will be unable to replenish our inventory and will have to reduce or cease operation of that plant,” Nocos said.

“The irony is that the diesel plants have been helping save the system from bigger blackouts during summer. But could the system help save and retain these critical diesel plants for future summers?”an industry source commented.