Situationer and policy proposals to address the energy deficit and high rice prices in the Philippines.

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Energy and Rice Deficiency:
Reform Challenges for the Last Quarter
of the Aquino Administration

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With just 21 months left in the 72-months (six years) of President Benigno Aquino III government, it is approaching its “last
quarter” administration. Nonetheless there is still ample time to introduce some long lasting and meaningful reforms in keeping up
with the liberal and market-friendly agenda of a Liberal leadership.
The President’s 5th State of the Nation Address (SONA) delivered more than a month ago has discussed many issues pertaining
to the achievements, nearly-achieved, and must-achieve programs and projects of the PNoy administration.This paper will discuss
only two of those, among the last three subjects of the SONA – energy deficit and high rice prices.
(1) Energy. The President said,
“We are doing everything in our power to ensure that the growing energy demand in our country is met. In spite of this, there
have been some unforeseen events,that may lead to problems in the next year….DOE to coordinate with the Joint Congressional
Power Commission, the Energy Regulatory Commission, members of industry, and, most importantly, the consumers, in order to
increase our capacity to respond to this problem.”
The President was referring particularly to the projected power shortages in the dry and hot months of April-May 2015 and
2016, including threats of brown outs in the Luzon grid.The problem is primarily on limited power generation, secondarily on
transmission and distribution systems.
Energy and Rice Deficiency:
Reform Challenges for the Last Quarter
of the Aquino Administration1

3. 3
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The Department of Energy (DOE) made a medium-term power
outlook for Luzon grid including Metro Manila. Note the period
April-May 2015, thin reserves between available or existing capacity
(blue curve) and peak demand (red curve).The committed power
projects to be commissioned in late 2014 to 2015 (gray curve)
appear to be sufficient enough to expand power reserves.
A few things to remember when analyzing the graph.
1.Available or existing capacity (blue curve) does not mean that all
power plants will not experience sudden or unscheduled
shutdowns.A number of those facilities just conk out anytime,
especially among the older ones.Thus, actual power production
on certain period is lower than what the blue
line in the chart suggests.
2.The same applies for committed power projects (gray curve). In
addition, many of these committed are wind and biomass,
where actual power generation is very often lower than
their rated or promised capacity.
Let us now analyze power output this year and short term outlook.
The National Grid Corporation of the Philippines (NGCP) issues
alert levels in cases of power deficiency.
Chart 1. Power Supply-Demand in Luzon, 2014-2020, as of June 2014

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“Red alert” means the contingency reserve is near zero, if not negative.“Yellow
alert” means the total power reserves is less than the capacity of the largest
plant online, which for the Luzon grid is 647 megawatts (MW).
NGCP has issued “Yellow Alert” last April 8, May 9, 14, 20 and 26, 2014. It also
issued “Red Alert” (RA) on the following days this year. The reasons
are also provided.
1. RA May 16: Two unscheduled shutdowns, one unit of Sual coal plant
(647 MW) and one unit of Pagbilao coal plant (367 MW), total power
decline was 1,014 MW. Repairs took two to six days.
2. RA June 17: Malampaya Gas Restriction, Manual load dropped 105 MW.
3. RA June 25:Three unscheduled outages: Sual 1 (647 MW), Calaca 1 (300
MW), Masinloc 2 (315 MW).Total power decline of 1,262 MW. Plus
derated capability of GN power (Mariveles) 1&2.
4. RA September 9: Reserves estimated to fall down to as low as 193 MW.
Two unscheduled shutdown on September 8: GNPower Unit 2 (300 MW)
and Ilijan Block A (600 MW). Plus two scheduled maintenance shutdowns:
Sual Unit 2 (647 MW) and Kalayaan Unit 1 (177 MW). Total power decline
was 1,724 MW. Calaca Unit 2 (300 MW) also halted operation early of
September 8 but was quickly revived in the afternoon of same day.
Note these huge power plants that conked out unscheduled: Sual
(15 year old), Pagbilao (18 yo), Masinloc (19 yo) and Calaca (30 yo). Metro
Manila and provinces in the Luzon grid are dependent on power facilities listed
on the left. Many of them are already old (more than 20 years old) and hence,
they either require more frequent maintenance shutdowns or
are prone to unscheduled shutdowns.
Chart 2. Zoom in to 2014 and 2015 Only

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Table 1. Existing Power Plants in Luzon, Early 2014
(Marked in red are power plants that are 20 years or older)
Source: DOE

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Chart 1 is on committed power projects.Wind for late 2014 to 2015 is 253.5 MW (Northwind 18,
Burgos 87, Caparispisan 81, Pillila 67.5).That looks substantial but wind power
is highly unstable and unreliable in delivering power.
Take the case of Germany, possibly the “wind and solar power giant” in the world today based on
their installed capacity. In the chart below, gray is conventional power (coal, nuclear, gas), yellow is solar,
dark blue is wind, light blue is hydro, and green is biomass. Red is actual German consumption.
Notice the huge fluctuations in solar and wind power output.At night there
is no sun and solar output is zero; wind output would show up only
sporadically. It is highly unstable.Thus, it is the conventional power sources
that provide stability and actual electricity to German consumers.
The story is no different for the US and UK.
Chart 3. Electricity Production in Germany in GigaWatts (GW), Mid-July 2014
Source: NoTricks Zone, Germany’s Habitually AWOL Green Energy…InstalledWind/
Solar Often Delivers LessThan 1% Of Rated Capacity!
Chart 4. Installed Power Capacity vs. Actual Energy Output,
Wind and Solar in the US, UK and Germany, 2000-2012
Source:WUWT, Renewable Energy in perspective: Solar andWind power,
August 30, 2014

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So compare the bottom three lines, actual electricity output of wind and solar for
the three countries, vs. other three lines (rated capacity of wind and solar).The
gap is big, and not just for one or two years but for all those years covered.
For the Philippines therefore, the threat of brown outs in the hot months next
year remains.What can government and the public do?
Here are some modest policy proposals.
1. Get more peak-load plants like those mobile diesel power barges. In Luzon,
there is only one existing,Therma Mobile (TMO) of Aboitiz Power. It is an old
power barge actually, bought from Duracom Power and was idle for about five
years until it was rehabilitated and re-commissioned in November 2013 just
to prevent rotating brownouts in Metro Manila and other Luzon provinces
during the Christmas holiday season.
Diesel as fuel of this power plant is expensive compared to coal, natural gas or
hydro.Thus, consumers must be ready to pay higher electricity when these diesel
plants are used, in exchange for no brown outs.The public and the militant
activists should recognize this trade off and not resort to frequent street rallies
or going to the Supreme Court and demand aTemporary Restraining
Order (TRO) for short-term power rate hikes.
2. Reduce power demand on peak hours of those hot months by asking the
heavy users like big industrial zones, mining firms and cement plants, to have
their own power generator sets.The Interruptible Load Program (ILP) seems
to be working, more big companies should volunteer to join the ILP. But
they should be compensated somehow, in the latter months as these
companies would have larger power cost on those periods
that they were using their gen sets.
3.The public, households and commercial offices can help reduce power
demand by using more energy-efficient lights and appliances.
4. Government agencies should reduce the bureaucracies and permits they
require in building and commissioning new power plants. DOE Sec. Petilla
once said that in some projects, some 100 signatures are required to
have one big power plant be put up and keep running.
5. Over the medium term, government should reduce the taxes and royalties
in power as these impositions significantly contribute to high electricity prices.
And the public blame the power companies and even call for “Junk
EPIRA, back to government monopoly in power.”

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(2) Rice Prices. PNoy said,
“…some greedy rice hoarders are stockpiling their supplies
in order to sell them when prices eventually rise…. Our im-
mediate solution: import more rice, supply it to the markets,
reduce the prices and keep them at a reasonable level, and
ultimately drive those who took advantage of the Filipino
people into financial ruin.”
Last November, we imported 500,000 metric tons… all of
this had arrived by March of this year.This February… ad-
ditional 800,000 metric tons,...This July we approved the im-
mediate importation of 500,000 metric tons of rice through
open bidding…. Standby authority to import an additional
500,000 metric tons…”
The anomaly actually here is the Philippine government’s
continuing rice protectionism policy and monopolization or heavy
regulation of rice imports, that largely explains for high rice prices.
Rice protectionism via (1) National Food Authority (NFA) rice
importation monopoly and (2) maintaining quantitative
restrictions (QRs) of our rice imports, and (3) forcing rice
“self-sufficiency” policy, are wrong policies that contribute to
expensive rice.They are anti-liberal policies that the Liberal Party
should in fact discard while PNoy Aquino is still in power.
Beside is a picture of how big our neighborsVietnam andThailand
are as rice exporters.They simply have huge production relative
to their consumption.
Table 2. Rice Production, Trade and Consumption in East Asia, in‘000 Metric Tons
Source: FAOStat, accessed 25 March 2014. It is contained in a report by DBM-DOF-NEDA to the President last April.
While the power companies have their share of blame, the public does not realize that government is partly or
largely to blame for high electricity cost in the country. Aside fromVAT and other national and local
taxes and fees, the royalty for Malampaya gas – effectively an energy tax that the Malampaya gas field
consortium passes to the consumers – can be as high as P1.45/kWh, based on the
USAID-commissioned paper published in April 2013.

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Chart 5. Rice Production per Capita vs. Share of Crop Area
Devoted to Rice, ASEAN
Myanmar and Cambodia are fast catching up as major rice producers
and consumers, which is a good thing.
These four countries –Vietnam,Thailand, Myanmar and Cambodia – plus Laos, are all in
Southeast Asia mainland. The rice import-dependent countries – Indonesia, Malaysia and
Philippines – are all archipelagic and are outside the Southeast Asia mainland.
Is this coincidence or not, that there is an explanation for this?
A paper from Dr. David Dawe of the Food and Agriculture Organization (UN FAO)
and reposted in IRRI magazine,“Rice self-sufficiency:A question of geography?”
says the answer is No. It is not coincidence.
Countries on SE Asia mainland have dominant river deltas that provide huge water and
flat lands, they get big irrigation from Mekong River (water flowing from China
down to Laos, Cambodia,Thailand,Vietnam), also fromTon le Sap river (mainly in
Cambodia).This flat lands plus huge irrigation are highly suitable for rice cultivaton.
Rice land in particular, Vietnam has almost 2x whileThailand has almost
3x that of Philippine rice land area.
Productivity wise, Filipino farmers’ is actually larger than that of their counterparts in
Thailand, although lower than those inVietnam. IfVietnam has the same number of
typhoons per year as the Philippines, its productivity would possibly be similar
to the Philippines.Vietnam has only about 5 typhoons a year or less, vs. the
PH’s 19 typhoons a year on average, about half of which make actual landfall
and knock down thousands of hectares of often harvestable rice,
resulting in high crop losses.
Source: IRRI. http://irri.org/rice-today/rice-self-sufficiency-a-question-of-geography

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If we combine those natural factors – being in SE Asia mainland,
have huge and wide flat lands, have huge irrigation water – those in
the mainland have high rice output relative to their consumption and
hence, rice prices are lower than those in the Philippines.
Why should the Philippine government insist on
expensive rice via trade protectionism?
A report from PhilRice also noted this,
“According to the two PhilRice economists, domestic price of rice
was up to 75% higher than average global rice prices in 2000.The
gap reduced in 2008, but price differential widened again to around
30% in 2012 mainly due to higher import tariffs (of about 50%
beyond quantitative restrictions quota) and higher production costs.’
(source: http://oryza.com/.../philrice-calls-rice-competitiveness...)
Table 3. Rice Land and Output, Comparison among the Philippines,
Thailand and Vietnam
Source: IRRI
Chart 6. Comparative Wholesale Rice Prices, Philippines, Thailand and Vietnam,
2000-2014

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ENDNOTES:
1
Presented at the “Citizens Watch” Roundtable Discussion, September 5, 2014, UP National
College of Public Administration and Governance. Sponsored by the Stratbase Research Insti-
tute and the Office of theVice President for Public Affairs, UP Diliman.
To bring down rice prices and stabilize rice supply, the following modest proposals are advanced.
1. Government should liberalize rice trade and importation, abandon rice protectionism. Remove National Food
Authority (NFA) monopoly in rice imports.
2. End the quantitative restrictions (QRs) and convert it to low tariff, ultimately leading to zero tariff, especially for
rice imports from our neighbors in the ASEAN.
3. In exchange for rice trade liberalization and removing NFA import monopoly, its accumulated debt, around P155
billion, may have to be assumed by the national government.This means taxpayers including those who do not buy
NFA rice, will pay for its debt.
4. Certain NFA assets like some warehouses should be privatized. Proceeds from such privatization should be used
entirely to retire some of its debt and not be used for any old or new food subsidy programs.This way, NFA debt
that will be passed on to the national government and will be paid by taxpayers will be smaller.
Overall conclusions and proposals: To have more power plants, more stable energy supply and cheaper electric-
ity, there should be less government bureaucraties, permits, taxes, royalties and price control in power.And to have
cheaper rice and more stable rice supply, there should be less or no government protectionism and NFA monopoli-
zation of rice trade. Government should embrace free trade in rice.
About the Author
Bienvenido “Nonoy” Oplas, Jr. is the founder and
President of Minimal Government Thinkers, Inc. a free
market think tank .
Mr. Oplas received his AB Economics undergraduate
degree and Diploma in Development Economics
(DipDE) from the University of the Philippines. He is the
author of Health Choices and Responsibilities (Central
Book Supply Inc., 1991, 232 pages) and soon to be
published Liberalism, Rule of Law and Civil Society. He
is also a columnist for interaksyon.com,TV5’s news
portal, under “Fat Free Economics.”