The Ultimate Solution to High

Electricity Costs in the

Philippines
Published on August 22, 2016
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Ocampo Marcial
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Energy and Power Consultant at OMT ENERGY ENTERPRISES

The Ultimate Solution to High Electricity Costs in the Philippines

Further to my previous blog on How to Reduce Electricity Costs, the

following discussion will present the Ultimate Solution to reducing
Philippine electricity costs - the highest rate in Asia.

The yardstick for comparing the various technologies of unequal

lifetimes and capacity is the levelized cost of energy (LCOE) also called
the long run marginal cost (LRMC) which is the sum of annualized
capital cost, fixed O&M, variable O&M and fuel/lube costs. On the
other hand, the short run marginal cost (SRMC) is the sum of all
variable O&M and fuel/lube costs. The LRMC is used in long-term least
cost capacity expansion planning by the DOE while the SRMC is used
in short-term optimal dispatch such as the WESM hourly dispatch by the
market operator (PEMC).

The LCOE or LRMC and SRMC may be computed using a simple cost
formula developed by US NREL or by yours truly (RP MTO price
formula - the grossed-up US NREL cost formula that considers
depreciation and income tax rate). Download this file for data and
formulas:

Cost of power generation technologies

However, in this presentation below, I used the more accurate project

finance model similar to the NREB project finance model template
approved by the ERC to calculate the first year tariff, LRMC, SRMC,
equity and project IRR, NPV and PAYBACK, and DSCR (min, ave,
max).

The following table shows the lowest and most expensive power
generation technology available for adoption into the Philippine
generation mix:

Summary of Inputs and Results for Power Generation Technologies3

(Aug 28, 2015) - Copy

From the above table, it appears that the cheapest conventional and
fossil base load technology is a natural gas-fired combined cycle gas
turbine (CCGT) at P4.42 per kWh, followed by pulverized coal (PC)
ultra-supercritical at 5.24, PC supercritical at 5.46, coal-fired circulating
fluidized bed (CFB) sub-critical at 5.66-5.76, large hydro at 6.00, natural
gas-fired gas thermal 6.63, natural gas-fired simple cycle (open cycle)
gas turbine 8.90, fuel oil-fired oil thermal 11.15, geothermal 12.00, fuel
oil-fired diesel genset 13.88, and diesel oil-fired diesel genset 19.25.
Peaking load power plants include simple cycle gas turbine, oil thermal
and diesel genset.

If we go nuclear, the more popular pressurized heavy water reactor

(PHWR) like the Bataan Nuclear Power Plant (BNPP) will generate
electricity at 6.98 P/kWh.

The rest may be seen above for renewable energy technologies: on-shore
wind farm at 5.34 P/kWh, followed by biomass IGCC 6.38, biomass
cogeneration 6.84, biomass direct combustion 6.87, mini-hydro 5.90,
solar PV 8.09-8.69, biomass gasification (pyrolysis) 13.26, off-shore
wind farm 13.28, biomass waste-to-energy (WTE) 13.34, and ocean
thermal energy conversion (OTEC) 14.93-15.09.

Moreover, the country is blessed with many marginal coal mines with
low BTU coal grades, ranging from lignite to sub-bituminous coals
capable of sustaining anywhere from 50 mw to 150 mw for the next 25-
30 years, the usual economic life of coal-fired power plants using the
CFB clean coal technology.

No amount of doing generation mix optimization and technical audit on

the existing power plants that went off-line due to old age or
investigation to determine any collusion among power producers that
resulted in higher WESM power rates or going renewable will lower our
power costs unless the country will replace ageing power plants
with low capital cost, efficient, reliable, low-fuel cost and secure fuel
supply power generation technologies such as nuclear power and mine-
mouth coal power generation using clean coal technology such as CFB.
Coal right now is among the cheapest power generation technology and
if we eliminate the logistical and transport costs it can go down further.

Since we import coal mostly from Indonesia, the cost of ex-mine coal is
bloated by logistical costs such as ocean freight using 65,000-80,000 mt
PANAMAX size coal tankers or tugboat barges of 8,000-10,000 mt
capacity with freight cost ranging from 3.0-7.0 USD/mt. Likewise, if
locally-mined coal is used, truck-hauling cost ranging from 200-600
PHP/mt depending on hauling distance (100 km round trip) and truck
size (20 mt per trip, 2 trips per day) as well as barging cost of around
300-400 PHP/mt (200 nm round trip) may be incurred to transport
domestic coal to the coal power plants located near our coast line.

Since going nuclear will require more studies, regulatory and

institutional building, and lead time to design, manufacture, install, test
and commission, the next best option is to make use of domestically
produced coal in mine-mouth configuration in order to avoid truck-
hauling and barging costs, and this will drastically reduce coal supply
costs to bare minimum, but this will require additional investment with
attendant line loses for transmission lines to connect the remote mine-
mouth power plant and coal mine to the national grid.
Thus, when using domestically produced coal reserves in Luzon,
Visayas and Mindanao, a coal supply cost to the mine-mouth coal-fired
power plant will be able to reduce generated electricity between 3.00-
3.25 P/kWh for a 150 mw power plant when coal supply cost are in the
order of 12-14 USD/mt (to meet 10-12% p.a. project IRR) with gross
heating value (GHV) of around 6,500 Btu/lb, overnight capital cost (all-
in) of 1,850 USD/kW, CFB mine-mouth power plant efficiency of 34%
(10,000 Btu/kWh plant heat rate). However, since coal is only 40% of
the generation mix and with a current average grid rate of 5-6 P/kWh,
the over-all reduction will be somewhat dampened by the higher grid
rate.

So there you have it, based on available energy resource in the country,
it is possible to lower power costs to 3.00-3.25 P/kWh if local coal is
utilized in a mine-mouth CFB power plant that uses low grade domestic
coal that is cheaper and would otherwise not used economically if
transported over great distances because of low BTU, high moisture
content and high ash content. Also, local coal reserves are known to
have low sulfur content thus requiring minimal limestone requirement to
capture sulfur at the combustion chamber of the CFB. Domestic coal
reserves are usually covered by over-burden rich in limestone formation,
so it makes it doubly economical to mine both limestone and coal seams
at the same time.

The CFB with limestone sulfur capture is thus environmentally benign

and the mined-out area is immediately covered with the spent ash and
covered with the over-burden and the segregated top soil in order to
replant the area with trees and vegetation to bring back the mined-out
areas closer to its original pristine condition.

The use of mine-mouth CFB power plant using low-grade Philippine

coal will be the game-changer that will ensure lower power costs,
encourage foreign investments as well as domestic investments as power
reserves are improved and made affordable and reliable, as it will allow
the retirement of un-reliable power plants that have reached their
economic life such as the bunker-fired Malaya Oil Thermal Power Plant.

In the case of Mindanao, with many areas destroyed by illegal as well as

legal miners as they ship-out raw ore and minerals with low value, it is
now possible to use these cheap sources of power to allow mineral
smelting in the country as what Indonesia has done when they banned
the export of low-grade mineral ores.

The government can now maximize its share of the mineral wealth of
the country when all the valuable content of our mineral ores are
extracted, valued and taxed appropriately. Instead of just exporting
nickel and iron ores, we can now include gold, silver and rare-earth
minerals that command high price in the international market. With
greater value added, the local mining company can operate profitably
and also finance environmental compliance and remedial activities that
would not otherwise be possible with low unprocessed ore values. The
main barrier to local smelting as well as new foreign investments that
provide many jobs and employment and business opportunities is the
lack of adequate and cheaper electric power. Hence, with these mine-
mouth CFB power plants that use coal mined nearby, the Philippines can
effectively reduce the cost of electric power and become globally
competitive.

Instead of using the Malampaya Fund to subsidize power rates to avoid

increase in PSALM funding to liquidate stranded costs due to EPIRA, it
is best to avoid unsustainable subsidies and instead invest in projects that
will truly reduce power rates such as leveraging the Malampaya Fund to
attract both domestic and foreign funding to finance the construction of
mine-mouth CFB clean coal technology power plants, development of
responsible coal-mining activities and mineral and rare-earth mining,
and provision of transmission lines to connect these remote mine-mouth
facilities to the regional and national grids.

The Philippines with its cheap power, highly skilled and motivated
work-force living in an environmentally secure communities, will be a
shining star in the years to come.

Let us make it happen now.

Let us support responsible coal mining as well as mineral and rare-earth

mining in order to lower power costs, spur economic activities in the
countryside, improve the environment, minimize if not eliminate
technical smuggling of our mineral wealth, and promote domestic and
foreign investment in our country.

Please share your thoughts. Many thanks.

Cheers,
Your Energy Technology Selection and Project Finance Modeling
Expert

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