PHILIPPINE ELECTRICITY SHORTAGES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000201390001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 1
• Publication Date: September 10, 1986
• Content Type: MEMO

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Central Intelligence Agency
DATE q
DOC NO 61/4 k(o'~?oa/2_ 25X1
OIR
P$PD1_
Washington, D C. 20505
DIRECTORATE OF INTELLIGENCE
1 0 SEP 1-066
F ROM: 25X1
Director, Office of Global Issues
SUBJECT: Philippine Electricity Shortages
I would like to call the attached report to your
attention. Prepared by members of my staff, this report
assesses the potential for electrical power shortages on the
principal Philippine island of Luzon through the early 1990s.
In our view, serious shortages of electricity during the dry
season, caused by equipment failures and the mothballing of the
Bataan nuclear power plant will constrain economic recovery and
hurt US and Filipino businesses in manila. The situation will
probably not improve until the early 1990s, after new plants are
built and existing plants renovated.' Financing the more than
$1 billion construction and renovation cost will be difficult,
and we believe the Aquino administration will be tempted to
accept recent offers of Soviet financial and construction
assistance unless viable alternative offers are made by the
West. If you or members of your staff have questions concerning
this report, please call Chief, Geography
Division
Attachment:
The Philippines: Electricity Shortages Loomir.
GI M 86-20212, September 1986,
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Central Intelligence Agency
Washington, D C. 20505
DIRECTORATE OF INTELLIGENCE
10 September 1986
The Philippines: Electricity Shortages Looming
Summary
Electric power shortages on the Philippine island of Luzon
are emerging as a serious constraint to any economic recovery.
The Aquino administration's decision to mothball the nearly-
completed Bataan nuclear power plant has left a gap in planned
electrical capacity that will take at least five years to fill,
even if plans for other new plants are implemented quickly.
Moreover, the government-owned National Power Corporation (NPC)--
the national producer and distributor of power to local powers
systems-and the Philippine goverment itself, already saddled with
more than $1.5 billion in debts from the Bataan plant, will be
hard-pressed to pay the more than $1 billion cost of new plants
and renovations. Under these circumstances, Soviet offers of
financial and construction assistance will present a strong
temptation to the Aquino government. Meanwhile, periodic
brownouts and blackouts are likely to worsen--particularly in the
winter-spring dry season--until the new plants come on line.
This memorandum was prepared by Eurasia Branch,
Geography Division, Office of Global Issues. The information
contained herein is updated to 5 September 1986. Comments may be
directed to Chief, Geography Division
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SUBJECT: The Philippines: Electricity Shortages Looming
OGI/GD/ERA (10Sept86)
Distribution:
Original - See Distribution (External)
1 - John C. Monjo, State
1 - Clark Ellis, State
1 - Ann Hollick, State
1 - Charles Salmon, State
1 - Allen Kitchens, State
1 - Dr. Jack Sheerin, State
1 - John Finney, State
1 - M. Peter McPherson, USAID
1 - William Nance, USAID
1 - Jack Vanderryn, USAID
1 - James Conrow, Treasury
1 - Douglas P. Mulholland, Treasury
1 - Steven Canner, Treasury
1 - William McFadden, Treasury
1 - Robert Price, DOE
1 - Charles V. Boykin, DOE
1 - Melvin W. Searls, Commerce
1 - James P. Moore, Commerce
1 - Bryon Jackson, Commerce
1 - William Brown, Commerce
1 - George Paine, Commerce
1 - Henry Misico, Commerce
1 - Warren Moskowitz, Federal Reserve Bank of NY
1 - Russel Price, US Export-Import Bank
1 - Ray Albright, US Export-Import Bank
1 - Gerald West, OPIC
1 - Robert Draggon, OPIC
1 - Peter Allgeier, Assistant US Trade Representative
1 - Harvey Bale, Assistant US Trade Representative
1 - Alexander H. Platt, NSC
1 - Karl Jackson, Defense
1 - Robert Emery, Federal Reserve Board
1 - SA/DDCI (Internal)
1 - Executive Director
1 - DDI
1 - DDI/PES
1 - NIO/East Asia
1 - CPAS/ISS
1 - D/OGI, DD/OGI
1 - OGI/PG/Ch
8 - OGI/PG
1 - Ch/OGI/GD
1 - DCh/OGI/GD
1 - Ch/OGI/GD/ERA
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The Philippines: Electricity Shortages Looming
Luzon's Electrical Woes
Brownouts and blackouts are once again plaguing users of
electricity on Luzon--the northern Philippine island where more
than 90 percent of the country's non-agricultural production
takes place and 75 percent of the nation's electricity is
consumed. Brownouts were a serious problem in the early 1980s
until the economic downturn lowered demand for electricity.
According to US Embassy and press reporting, the recent shortages
began in mid-June and probably contributed to a blackout on 21
August that plunged some 90 percent of the island's residents
into darkness for several hours. Although the onset of monsoonal
rains is increasing hydropower production and decreasing the
frequency of brownouts, the US Embassy reports that businessmen
remain very concerned about the power situation. Officials of
the American Chamber of Commerce report that many companies have
experienced losses from production shutdowns and equipment
damage, and they believe the situation will worsen when the long-
expected economic recovery increases the demand for
electricity. According to the US Embassy, the business community
in Manila cites high power costs--by far the highest in non-
communist East Asia (TABLE l)--and looming shortages as two
reasons why it is not investing as much as expected and adopting
a wait-and-see attitude. The Embassy reports that should
progress be made in resolving labor disputes and calming the
troubled political situation, electricity shortages will move
into the foreground as the major concern of businessmen.
Luzon's electrical problems may also act to increase
Manila's ties with Moscow. According to the US Embassy, the
Soviets recently offered to construct two coal-fired power plants
on Luzon, a proposal endorsed by Manila's ambassador to Moscow as
a means of strengthening Philippine-Soviet economic ties.
According to the Philippine press, a senior energy official will
travel to the USSR and Austria late this year to discuss
financing and constructing one coal-fired plant.
The Luzon electrical supply looks good on paper. Peak
demand--2,300 megawatts (MW)--is only 56 percent of installed
capacity--4,100 MW. The total dependable capacity, however, is
much lower. According to the US Embassy, equipment failures have
reduced the dependable capacity of Luzon's 10 oil-fired plants by
a total of about 500 MW. Dry season conditions--lasting from
roughly December through June--cause a loss of another 500 MW in
hydropower as reservoirs are drawn down. A private sector source
of the US Embassy estimates that weather, maintenance, and other
problems altogether cause a drop in the total dependable capacity
to 2,363 MW in the dry season and 3,042 MW in the rainy season.
Under such conditions the dry season capacity is barely adequate
for meeting existing demand. According to the low growth
scenario of the National Power Corporation (NPC)--the government-
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owned producer and distributor of power to local power systems--
demand will increase to more than 2,750 MW by 1990 (TABLE 2),
resulting in a serious dry season electrical shortfall even in
the unlikely event--given years of deferred maintenance--that all
existing plants will be able to maintain current production
levels. Our own estimate suggests an even greater shortfall.
The Bataan Nuclear Plant
Much of the projected shortfall in electrical capacity over
the next several years can be attributed to the Aquino
administration's decision to mothball the nearly completed Bataan
nuclear power plant, which would have satisfied Luzon's needs
into the early 1990s. The May 1986 cabinet decision followed
months of internal debate. Senior NPC officials advised the
President in April that the plant should be completed, and Mrs.
Aquino distanced herself from an earlier campaign pledge not to
operate the plant. The final decision came in light of the
Chernobyl disaster--and apparently from the advice of a
presidential assistant that mothballing would not jeopardize
Manila's legal actions against Westinghouse, the plant's
contractor, for alleged overbilling and fraudulent encashment of
a Japanese letter of credit.
We believe that the decision to mothball the Bataan plant is
not likely to be reversed for at least the next few years.
Reviving the plant would be politically very costly given the
massive public opposition to it--in part a product of years of
propaganda attacks by leftist groups. Moreover, security would
be a major problem; 18 of the plant's transmission towers have
been toppled by communist insurgents and criminal groups over the
past few ears.
In addition to delaying expansion of Luzon's electrical
capacity, the debt from the Bataan plant constrains Manila's
ability to solve the power problem. According to
= press reporting, the debt totals more than $1.5 billion,
mostly from foreign loans, including a reported $644.4 million
from the US Export-Import Bank. The Philippine government
relieved the NPC of its foreign obligations on the plant on 13
August, according to the US Embassy. Manila hopes to trim the
massive debt servicing costs--currently $114 million per year and
scheduled to rise to an average of $240 million annually between
1987 and 1993--through its legal actions against Westinghouse and
against former members of the Marcos administration.
Manila is
also considering a separate rescheduling of loans for the nuclear
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plant, according to the US Embassy. According to late August
1986 press reporting, the NPC has suspended payments to
Westinghouse and the plant's insurance carriers.
Officials overly optimistic
Philippine energy officials discount reports of impending
electrical shortages. According to the US Embassy, the president
of the NPC insists that the present system can handle increased
demand until new plants come on line and that any shortfalls
could be made up by using emer en- gas turbines. In an Au ust
1986 meeting
the cabinet has
approved NPC's plan to add 400 MW to the Luzon grid by 1991 or
1992. A 300 MW coal-fired plant will be built--possibly with
Soviet assistance--near Batangas, south of Manila, and the other
100 MW will come from expanding Luzon's geothermal capacity. In
the meantime, the NPC will rehabilitate four oil-fired plants.
We question the Philippine optimism. They
do not take into account the fact that existing plants will have
to be shut down or slowed because of equipment failures. Short-
term use of gas turbines to reduce Dower shorts es is technical)
feasible but is extremely expensive
The plans for upgrading the Luzon electrical grid by
adding new plants and renovating existing ones will take several
years to complete--even if implemented quickly--and we believe
such plans will require enormous expenditures that the NPC and
Philippine government will find difficult to pay:
? According to the US Embassy, all 10 existing oil-fired
plants need rehabiliation at a total cost of roughly $1
billion. We believe rehabilitation will require each plant
to be taken off line for at least several months, reducing
the dependable capacity by an average of 150 MW for each
plant. Thus no net power gains can be expected until
several plants have been renovated.
? The planned coal-fired plant near Batangas would cost at
least $250 million, according to the US Embassy, and,
least the early 1 s.
will not be ready until at
? Expansion of geothermal capacity is unlikely, according to
the US Embassy, until the NPC pays the $85 million it owes
UNOCAL, the company that operates Luzon's two geothermal
fields.
? The NPC faces massive financial problems, largely due to
mounting debts of local power cooperatives. According to
the US Embassy, NPC accounts receivable totalled about $270
million in 1985. Manila Electric Company (MERALCO) alone
owes $175 million. In Manila, "social pricing" policies
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used by the Marcos administration and continued by the
present government have resulted in a current rate of less
than $.02 per kilowatt hour (kwh) for the first 130 monthly
kwh consumed--enough for most small residential
consumers. This produces a revenue loss that MERALCO
cannot make up with its sharply higher rates for large
consumers. Additional NPC losses have stemmed from
widespread meter tampering and from the tendency of many
residents in recently electrified rural areas to ignore
electric bills because they believe electricity to be a
gift from the government.
? Although the Philippine government has relieved the NPC of
its $300,000 daily interest payment on the Bataan plant,
the US Embassy reports that the corporation remains in a
poor position to make the expenditures needed to maintain
and renovate the system.
Outlook
Dry season brownouts and blackouts on Luzon will likely
increase until the island's dependable electrical capacity
expands--probably not until the early 1990s. The long lead time
required to plan and construct any large power plant means that
even if financing is found--increasing the government's already
large debt burden--it will be at least 1990 before new plants
cane on line. Renovation of some existing plants can occur
before then, but this alternative is also subject to financing
problems and would require lengthy plant shutdowns. Equipment
failures are likely to cause additional capacity reductions over
the next several years, which would increase shortages even if
demand remained constant.
With the Bataan plant out of the picture, Manila's
alternatives for reducing electric power shortfalls in the next
few years will be of limited effectiveness:
? Raising rates for small consumers and enforcing payment of
electric bills are necessary steps if the NPC is to regain
financial solvency, but both would likely arouse political
opposition. Moreover, neither measure is likely to
forestall electrical shortages in the short-term, and both
could promote additional meter tampering.
? Publicity campaigns to encourage electricity conservation,
especially during dry season peak hours, are a viable,
option, but will probably not shrink demand enough to close
the gap.
? If the NPC and local companies can regulate the timing of
brownouts and provide users with sufficient warning, many
industrial users would be able to work around power
shortages. MERALCO has had only limited success with its
current warning system; US businessmen in Manila report
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that the warnings are often wrong and that most brownouts
occur without warning.
We believe that Luzon's electric power problems will act as
a brake on Philippine economic recovery as existing industries
are unable to operate full-time and as local and foreign
investors hesitate to increase their electrical requirements
until a stable supply is assured. Tb the extent that the economy
starts expanding next year, as widely predicted, and barring
viable offers of assistance from the West, pressure on the
government to find solutions to the energy problem could increase
dramatically, opening the door to Soviet overtures and adding to
the political troubles of the Aquino administration.
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TABLE 1.
East Asian Electrical Power Cost Comparison
Location
Nominal Power Cost
(cents per kilowatt hour)
for large consumers
Manila
Tokyo
Jakarta
Hong Kong
Singapore
Korea
Bangkok
Taiwan
11.54
7.33
6.59
6.57
6.46
5.94
5.78
5.48
100.0
67.3
60.5
60.3
59.3
54.5
53.1
50.3
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TABLE 2.
Luzon Grid Demand Projections: Alternative Scenarios
1986 1987 1988 1989 1990 1991
NPC low GNP
growth rate
scenario (pct.) 1.0 2.0 4.0 5.0 6.0 6.0
Demand with
low economic
growth (MW) 2,335 2,382 2,477 2,601 2,757 2,923
NPC high GNP
growth rate
scenario (pct.) 2.0 4.0 6.0 6.0 6.0 6.0
Demand with
high economic
growth (MW) 2,358 2,452 2,599 2,755 2,920 3,096
CIA GNP growth
rate scenario
(pct.)* 1.6 5.8 4.0 4.0 4.0 4.0
Demand with CIA
growth scenario
(MW) 2,350 2,500 2,605 2,710 2,820 2,930
Dry season
shortfall given
industry estimate
of 2363 MW depen-
dable capacity
and CIA growth
scenario (MW) (13) 137 242 347 452 557
*Note: Our econometric model suggests a GNP growth rate of 1.6
percent this year and almost 6 percent in 1987, but the rate will
probably fall to less than 5 percent beyond 1987 unless major
reforms are made
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