The impact of the Malampaya shutdown

Paco A. Pangalangan, Executive Director, Stratbase ADR Institute

A few weeks before it was set to shut down for preventive maintenance, the Malampaya gas field suddenly stopped supplying fuel to natural gas plants in Luzon. With natural gas output restricted, several large power plants were forced to switch to more expensive fuel sources, reduce output, or stop operating altogether.

Among the plants affected by Malampaya’s abrupt stop were First Gen Corporation’s Sta. Rita (1,000 MW) and San Lorenzo (500 MW) power plants, which both shifted to a high-cost liquid gas alternative. The company’s San Gabriel plant (414 MW) was also temporarily shut down, while KEPCO’s Ilijan power plant operated at reduced capacity.

Watchers of the Philippine power and energy sector feared that Malampaya’s supply restrictions created conditions that would drive up the prices and the volume of spot transactions on the Wholesale Electricity Spot Market (WESM).

At the same time, they also worried that this, coupled with the shift to liquid fuel to keep plants up and running, could lead to higher generation chargers in consumers’ next electricity bills.

Moreover, because natural gas from Malampaya fuels 30% of Luzon’s electricity requirements, or about 20% of the entire country’s power, there are also serious concerns that when the gas field’s supply is halted, restricted, or much worse depleted, prolonged rotating blackouts and increasing generation charges may become even more frequent. This, in turn, could have severe implications for low-income families, and more broadly, on the country’s economic recovery.

Malampaya’s recent natural gas restriction only lasted three days. However, this was not the first time, nor will it be the last, that the Malampaya natural gas field supply has caused concern.

In addition, Malampaya will have a much longer shutdown next month when it will undergo preventive maintenance from October 2 until Oct. 22, 2021.

No doubt, this much longer shutdown will again lead to power plants switching to more expensive fuel sources, reducing output, or stopping their operations. This leaves us with a sizeable 20-day window for the feared power shortages and increased cost of electricity to come to fruition.

However, the recent and upcoming Malampaya situations only speak to the more considerable and precarious challenge of addressing the Philippines’ long-term energy security.

The Philippines has faced reoccurring generation supply tightness for years. In 2019 alone, the Luzon grid dropped below reserve levels and sounded yellow alerts 51 times. Red alerts were also issued 15 times, indicating that the Luzon grid had an insufficient power supply.

In recent years, the supply has been tightest during the summer months. Demand peaks during these hot months, so when plants shut down for maintenance during this period, this immediately triggers grid alerts, if not rotating blackouts.

With the regularity at which these forced and planned outages have triggered alerts over the years, energy regulators and policymakers should no longer view these outages as exceptions to the rule. Instead, they should consider these outages and regular occurrences and plan for them accordingly.

The reality is, sometimes, energy industry outlooks on paper do not reflect what happens on the ground. To this point, many of the power plants in Luzon are 16 years and older. These older plants generate much less than their installed capacity and require more frequent maintenance and repair.

So, while existing power plants may technically have the available capacity to meet demand, history shows that the shutdown or the reduction in output capacity of just a few power plants can already cause power outages.

The generation supply tightness experienced by the Philippines was expected to worsen before the pandemic hit in 2020.

However, there was a significant decrease in demand due to the lockdowns and commercial and industrial operations restrictions. That said, as restrictions were relaxed, power demand has increased and recovered. And as of earlier this year, it has even surpassed pre-pandemic levels.

For sure, as the economy continues its recovery, demand will only increase. But, as demand increases and supply tightens, the risk of rotating blackouts and spikes in generation charges will also increase.

If this happens, it could spell disaster for Filipino families already struggling to make ends meet. For low-income Filipino families, electricity is a significant household expense.

Indeed, many Meralco customers are feeling the recent increase in power costs, which was caused by a 25% rate increase of First Gas plants that provide a third of the distributor’s energy requirements. The situation of the low-income families will only worsen if long-term solutions for the country’s energy supply are not found.

Furthermore, a stable and reliable energy supply is also essential for job-generating industries to recover. Many Filipino families struggling to make ends meet may have seen their breadwinners become unemployed or underemployed when the pandemic hit. Hence, ensuring industries have enough power to ramp up their operations will also have a direct impact on these Filipino families.

With so many struggling, jobless, and hungry, the government should ensure that the country’s energy situation sets the foundation for economic recovery rather than be the cause for even more distress.

Avoiding rotating blackouts and spikes in generation charges once when the Malampaya natural gas field shuts down next month are our immediate concerns. But the greater challenge of ensuring the country’s long-term energy security still lies ahead.

This article was originally published in

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