IN hearings in the Senate and House of Representatives last week and this week, an issue was raised by lawmakers that might be a complete mystery to most consumers, particularly those in Luzon and Mindanao. It is called “line rental,” and is another cost component of consumers’ bills in some parts of the country, mainly in the Visayas. The subject has come up before in the clown school that passes for a legislature in this country but has attracted renewed interest in the past days due to the uproar over system loss and other extra charges on consumers’ electric bills.
What is line rental?
Again, because of the geography of the Philippines, the line rental component of power costs mainly affects customers in the Visayas, where power has to be transmitted across inter-island connections. In Luzon and Mindanao, which have largely contiguous grids, line rental is not an issue; it could be under certain circumstances, or in certain areas, but this is fortunately unlikely. Not so in the Visayas, however.
First of all, the term itself is a bit misleading, because it is not a “rental” of a transmission line, but rather a cost generated from locational pricing differences caused by either congestion of transmission lines or occasional losses of transmission pathways (such as lines knocked out by storms or other damage). Line rental is managed by the Wholesale Electricity Spot Market (WESM) as part of what is called the Locational Marginal Pricing (LMP) framework, in which electricity prices can differ from one “node” to another. To give simple examples, a generation source, such as a large coal or gas plant, would be one “node” while a distribution connection to a local distribution utility or electric cooperative would be another.
Under normal operating conditions, such as on the Luzon and Mindanao grids, which have far more carrying capacity than the available amount of power supply, line rental is not a factor in power prices because a distributor can freely source electricity from lower-cost generators wherever they are on the grid. Thus, the nodal price at the generator end and the distributor end remain basically the same, and there is no differential that would create a line rental adjustment.
In the Visayas, however, due to a shortage of local generation and frequent outages of major generating units, the supply is often located in different areas — sometimes a considerable distance away — from where the demand exists. This leads to a big difference in nodal prices because the supply has to travel across inter-island connections, which can only manage so much power at one time. In effect, the transmission lines become “overbooked,” meaning that, from a distributor’s perspective, if it wants to get its power supply more quickly, it has to pay more, so the price at the distributor node is much higher than at the generation node. The difference between the two is the line rental.
Misplaced blame
The reason the issue of line rental came up in a hearing attended by representatives of the National Grid Corp. of the Philippines (NGCP) was largely due to the mistaken belief that the extra charge for line rental, when it appears on a customer bill, is collected by the NGCP. It is not, and has nothing to do with the NGCP. If it appears on a bill, it is a pass-through charge managed by the WESM as part of the market settlement process, payable to the generator.
A second complaint directed toward the NGCP, and this is one that has also been suggested by the National Transmission Corp. (Transco), is that a significant factor in the existence of line rental charges for customers in the Visayas is that the inter-island connections are of insufficient capacity, implying that the NGCP has planned poorly. While it is true that the current connections are inadequate for conditions that currently exist in the Visayas, this is not the NGCP’s fault, but rather a mismatch between the planning assumptions at the policy (Department of Energy) and regulatory approval (Energy Regulatory Commission) levels years ago and those conditions now.
Big inter-island connections were planned based on forecast demand, generation patterns, reliability standards, and economic considerations for best-estimate normal conditions, which did not contemplate a significant amount of regular supply for the Visayas having to be imported from the other two main grids in Luzon and Mindanao. The inter-island connections were planned and built for the transfer of excess capacity, not base capacity support, which is how they can easily become congested now and result in line rental costs ultimately borne by Visayan customers.
Solutions
Remember, this entire discussion began with a question about line rental charges adding to customer bills, so if reducing power costs is really the objective, then the most obvious answer — increasing interconnection capacity between islands — is not the way to go. It can help address the underlying problem of not enough generating capacity where it is needed in a sort of stopgap way, and in fact, the NGCP is working on expanding interconnections, but “stopgap” in this sense represents years, not months, before the solution is available, and the capacity deficit will eventually catch up. Or worse, the Visayas’ shortfall will become Mindanao’s or Luzon’s.
And expanded interconnections do nothing to reduce power costs because the cost of electricity increases with distance from its source. The national grid is planned the way it is, as functionally three separate grids, because that is the most economically efficient way to do it in the Philippine setting. Interconnections enhance the overall capabilities and security of the grid by providing additional pathways for reserve and emergency power, and making it easier to use surplus capacity for those purposes rather than having to build a dedicated backup supply.
There is no getting around the fact, however, that a fundamental capacity shortage — something that the energy industry and concerned parties in the Visayas have been warning about for years — can only be solved by increasing capacity. Transmission lines and grid connections do not generate power; power plants do, and the Visayas simply does not have enough of them. Policymakers and their enablers in Congress ought to quit kicking that can down the road, and assess what changes to planning, laws and regulations need to be made to accelerate generation capacity growth where it is most needed.
ben.kritz@manilatimes.net
Bluesky: @benkritz.bsky.social
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