Obama chooses Nobel laureate physicist as energy secretary

US President-elect Barack Obama announced on December 15 his choice, the Nobel Prize winning physicist Steven Chu as his energy secretary to head the Energy Department.

Chu, 60, who is currently the director of the Lawrence Berkeley National Laboratory in California, would be the first Asian-American to lead the department.

His 1985 work on laser trapping of atoms at ultra-low temperatures of a millionth degree above absolute zero, led to his being a co-winner of the Nobel Prize in physics in 1997. That seminal work, together with other techniques like magnetic cooling, laid the foundation for achieving one of the holy grails of statistical physics in 1995; the so-called Bose-Einstein condensation which demonstrates a new form of matter.

The phenomenon was predicted by none other than the great physicist Albert Einstein and then-young Indian physicist S. N. Bose in 1926. Those who achieved the goal in 1995 were awarded the Nobel Prize in 2001.

But will he make a good energy secretary?

Chu is no dyed-in-the-wool, ivory-tower type physicist. He is also one of America’s effective advocates for scientific solutions to global warming and the need for carbon-neutral renewable sources of energy. In this regard, he fits perfectly well into Obama’s green energy agenda which the latter has eloquently espoused during the heated electoral campaign. The new presidency aims for a low-carbon society by building more wind, solar, geothermal, biomass and hydro facilities.

Obama understands that crafting a viable energy policy could make or break his presidency. He also understands that the process is complex and requires the brightest minds to help him steer his energy ship to the right direction. His choice of Chu reflects the importance he gives to energy issues.

In his numerous forays around the globe, Chu has delivered a consistent message centered on “stronger storms, shrinking glaciers, prolonged droughts and rising sea levels” in apparent reference to the dire consequences of global warming.

Since assuming the directorship of Berkeley Lab in August, 2004, Chu has marshaled the Laboratory’s considerable scientific resources on energy security and global climate change, the production of new fuels and electricity from sunlight through non-food plant materials and artificial photosynthesis, energy-efficient technologies and climate science.

University of California Chancellor Robert Birgeneau who has known Chu for decades has this to say about the character of the man: “Steve Chu has been relentless about addressing the technical challenges of renewable energy in a deep way. We will now have an energy policy that can mean the U.S. will have a chance of obtaining energy self-sufficiency through new technology.”

Among other things, Chu was credited with helping establish the Joint BioEnergy Institute (JBEI), a $135 million DOE-funded bioenergy research center and the Energy Biosciences Institute (EBI), which was bankrolled by a $ 500 million grant from British Petroleum.

“Steve Chu has been an incredible visionary and true leader, particularly in the area of energy,” said Jay Keasling, who heads JBEI. “Now the country and the world will benefit from that vision and leadership."

He will be missing the ensconced academic life. But LBL’s loss will be America’s gain when the physicist-energy advocate brings his scientific talent, vision and passion for energy and the environment into the highest chambers of national energy policy.

How we wish that such inspired choice to head a very important government agency would be translated to our local situation!
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Note added, December 19, 2008: The papers reported today that the powerful senate Commission on Appointments bypassed the confirmation of Department of Energy Secretary Angelo Reyes and Department of the Environment and Natural Resources (DENR) Secretary Lito Atienza along with three other cabinet members. The most vocal critics of Reyes are energy committee chairperson Senator Miriam Defensor-Santiago and Senator Jinggoy Estrada, whose father was ousted in 2001 and under which Reyes served as Army Chief of Staff. Defensor-Santiago simply said that Reyes is unfit to be an energy secretary.

President Arroyo signs renewable energy bill into law. Will they come?

If you build it, they will come.

This is probably the hope of this government and our energy policy makers when President Gloria Macapagal-Arroyo signed on Tuesday the Renewable Energy Bill into law nearly two decades after the first semblance of a bill was filed.

As usual, the President herself and her energy minions are quick to take credits and wax eloquent that a flood of new renewable energy investments is just around the corner.

The President claimed the new law is the “first and most comprehensive renewable energy in Southeast Asia” that she hopes could corner a chunk of billions of dollars of energy investment money floating around the world. Her energy secretary, Angelo Reyes, thinks that “it will foster sustainable growth, energy independence and economic security for the country.”

Republic Act 9513, as the new law is officially known, provides for various fiscal and non-fiscal incentives for renewable energy—which includes solar, wind, geothermal, biomass, hydro and ocean energy—developers. Some of the fiscal incentives include the usual tax credits on domestic capital equipment and services, special realty tax rates, duty-free importation of essential equipment and income tax holidays, among others.

The non-fiscal incentives essentially consist of developing the necessary policy infrastructure that supports the growth of renewable energy. Parts of this infrastructure which has been credited with explosive growth in wind and solar energies in more developed countries include: (1) establishment of a renewable portfolio standards (RPS) which would require electricity distributors to include a certain percentage of their supply from renewable energy sources; (2) a feed-in tariff system—which was still absent in the bill’s version passed by the Lower House—which could help renewable energy projects become viable; (3) a green energy option, wherein users can in theory choose energy from green sources to avail of some incentives; (4) net metering, wherein (mainly) large users and independent producers will only be billed on the net usage of power from the grid and can sell their excess power to the grid; and (5) establishment of a renewable energy market wherein green energy credits are validated and certified and wherein these credits can be traded.

For a change, critics of government energy policies are one in heaping praises for the signing of the law. Catherine Maceda of the Renewable Energy Coalition which has been campaigning for the law’s passage, says “it will usher in an era of cleaner energy use in the country” while environmental campaigner Greenpeace Southeast Asia Executive Director Von Hernandez welcomed the development saying it helps addressing climate change.

“The passage of the bill is expected to attract more investors to the industry, and help cement plans of investors who had been waiting for the bill’s approval,” Reyes added.

Not quite.

While the law is grandiose in words and the intentions seem highly noble, nothing in the law aside from the promise of monetary incentives could precipitate energy investors to immediately jump into the renewable energy pool. For one, no firm numbers have been attached to, say to the renewable portfolio standard as to the percentages required, or the feed-in tariff amount that could be used for feasibility studies for green projects. The other major provisions—renewable energy market, green energy option and net metering—are nothing more than plans with no concrete guideposts as to how and when these would established.

Worse, the National Renewable Energy Board, which is specifically created under this law and will put in the numbers, is still to be constituted and convened.

The law can only be really operational when the adjunct implementing rules and regulations (IRR) are in place, and judging by the pace our policy makers create such important documents, it would take time before wee see its light. By this time—or even long before the signing of the bill—draft IRR, or at least well-researched white papers discussing the possible contents of the IRR, should have been floated in public for discussion and debate.

Without demeaning the lofty ideals of the law, we believe the hard work to make the law viable has only just begun.

Petron now in play—but where are the players?

Petron Corporation (PSE: PCOR) is now officially in play.

That is the investment jargon when a company is in the middle of ownership transition.

On Monday last week, San Miguel Corporation (PSE: SMC) said it is eyeing Ashmore Investments’ 50.1% interest in Petron. That sent PCOR shares flying which made it the top gainer among the listed stocks. It surged by more than a fifth to settle at P5.30 a share by Friday.

The sentiment is up on Petron since San Miguel is perceived to be a big and experienced company that could reverse the fortune of Petron which has been buffeted by intense competition in an industry where margins are razor-thin.

At the same time, Petron announced that it would likely be in the red this year to the tune of P 2 billion owing to falling oil prices. Petron, as well as other oil retailers, also groaned under rising oil prices early this year. That it suffers under which way oil prices are going is not entirely illogical; it is part of the nature of the business. Because oil is a politically- sensitive commodity, retailers cannot easily adjust pump prices in response to oil price movements.

When prices are falling and there is loud clamor for rollback, slow-footed refiners and retailers like Petron are saddled with inventory purchased at higher prices. Likewise, in a regime of rising prices, increases in pump prices cannot be easily implemented owing to political pressures. It is reported that among the major oil players Petron has the largest inventory and the slowest turnover. If so, its present inventories have been purchased at higher prices than current.

In this business, the lean and nimble has a greater chance to survive going forward.

It used to be that the industry is perceived to be lucrative to the big three in oil (Shell, Petron and Chevron) when the scene was like a cartel. With the liberalization of the industry, new players have grabbed a chunk of the pie and the nimblest, most efficient and deep-pocketed among them are continuously making inroads into the turf of the big three.

Among the most aggressive of the new players is Total—which is not exactly a small fry. In the global market, it is considered among the majors. Amidst the gloom brought about by the lingering financial crisis, it has announced a massive expansion of its outlets especially in Luzon and the Visayas. And it can rely upon its mother firm to supply it with enough financial firepower in case of an all-out war which seems to be already unfolding.

In the hinterlands of Mindanao and parts of the Visayas where the tentacles of the big three have tenuous hold, independent player Phoenix Petroleum (PSE: PNX) has spread its wings, slowly increasing its reach.

When it recently signed up boxing hero Manny Pacquiao as its main endorser, it is sending signals to its competitors that it is ready to climb up the oil’s boxing arena for a long fight. It is also reported that Pacquiao will be operating one of Phoenix’ service centers in General Santos City.

If SMC ultimately gains majority ownership of Petron, it would be up against formidable opposition. True, SMC has considerable marketing clout—which is why investors seem to cheer at its entry—but it is becoming more like a lumbering brontosaurus than a springy springbok, even in the food business.

Which is probably why it has announced that it will ultimately get out of its core food business.

In the process, investors have punished SMC since it announced that it is entering businesses like energy, telecoms and infrastructure where it has limited experience. In energy, it has acquired 27% of electricity retailer Meralco (PSE: MER), but failed at getting Transco and geothermal developer Energy Development Corporation (PSE:EDC) which ended up in the hands of the Lopezes. It tried to grab Indonesian coal miner Bumi Resources but apparently bowed out to local interests.

SMC’s erratic moves have not escaped notice from credit ratings agencies. Moody’s Investor Service has downgraded SMC’s local currency rating to negative from stable after it bares its plan to acquire majority control of Petron.

In a statement, the global credit watcher warned of a rating downgrade if San Miguel pursues the investment plan, which it said could hamper the group’s ability to service its debts.

Now it is partnering with—of all companies—Qatar Telecoms for joint projects. Why not any other of the major telecom players?

Now, why is Ashmore selling to SMC when it has exercised it right to acquire the government shares?

Ashmore is about to end up with 90% ownership of Petron after it has indicated that it is exercising its right of first refusal when the government has put up its 40% interest up for grabs. By relinquishing management to a perceived knowledgeable entity in retail, it feels it has a better chance of recovering its investments (with some profits of course). In the first place it is an investment fund, not a management company.

More importantly, it is paving its exit from Petron. By selling a majority block to SMC it can extract concessions from the buyer. Like for example, it can require the buyer to purchase its remaining shares at a later date once it decides to divest completely from the refiner.

We have already considered this scenario in a previous blog entry; only the numbers are somewhat different.

The struggle for Petron ought to be exciting were it not for the circumstances under which it is played as outlined above.

No wonder other players are nowhere in sight.

Regulator reduces systems loss cap—but only in January 2010

The Energy Regulatory Commission (ERC), the government body which regulates the electricity business, has recently issued an order lowering the cap on electricity system loss to 8.5% down from the present mandated 9.5%--but only starting January 2010. In the same order, the limit for electric cooperatives is reduced to 13% from 14%.

The systems loss, which includes electricity lost to pilferage, antiquated equipment, design faults, administrative inefficiency and actual physical losses in the conductors, is currently passed on to the customers as added cost by distribution utilities at the allowed rate.

Charging of systems loss to the users has been under attack as being unfair from consumer groups, businesses and some government officials.

The recovery of a portion of systems loss by power utilities is allowed under Republic Act 7832 which also penalizes electricity theft.

In a statement, the ERC is also “reviewing other existing policies pertaining to rate-setting, including efficiency models [and] lifeline components of other distribution utilities and the different cost-recovery adjustment mechanisms”.

Republic Act 7832 or the law penalizing electricity theft allows power utilities to recover a portion of their system losses from consumers.

The current loss cap of 9.5% for private utilities and 14% limit for electric cooperatives have been implemented since 1999 and 2000, respectively, without adjustment.

This corner has maintained that a systems cap loss of 7% is fair, achievable and already generous under present inefficiencies, and distribution companies should strive for a systems loss of only 5%. The former figure is the average systems loss in EU countries, which is already high because it is inflated by the inefficient utilities in new member countries from Eastern Europe.

Some distribution companies in the Visayas and one or two cooperatives have actually claimed that they have achieved systems loss of below the mandated 9.5%.

The reduced cap for electric cooperatives is more of a token gesture than a real attempt at forcing more efficiency on these energy dodos. The cap for them should be ultimately aligned with those of the private distribution utilities. A viable option would be to require them to have a systems loss reduction by 1% every year until they achieve parity with the private sector. That could be done in four or five years. A carrot in terms of tax breaks and incentives for equipment upgrade should also be dangled to them.

In summary, the proposed reduction is systems loss cap that could be passed on to consumers is way too high and would unlikely to be felt by the average consumer.

GMA signing of Transco franchise bill into law heralds new era in grid operation

Philippine President Gloria Macapagal-Arroyo signed on Dec 1 the TransCo Franchise Bill into law that would transfer the operations of the national power grid under a private group, the National Grid Corporation of the Philippines (NGCP), which won the bidding for the rights earlier.

The franchise bill is officially known as Republic Act No. 9511 or "An Act Granting the National Grid Corp. of the Philippines (NGCP) a Franchise to Engage in the Business of Conveying or Transmitting Electricity through High Voltage Back-Bone System of Interconnected Transmission Lines, Substations and Related Facilities, and for Other Purposes."

The signing of the bill culminated years of attempts by the government to privatize the national electricity transmission grid as mandated by the Electric Power Reform Act (EPIRA) of 2001 amidst opposition by nationalist groups and well-meaning individuals to the sale.

The NGCP is composed of Calaca High Power Corp., the Monte Oro Grid Resources Corp., and the State Grid Corp. of China.

The NGCP was granted the franchise "to operate, manage and maintain, and in connection therewith, to engage in the business of conveying or transmitting electricity through high-voltage back-bone system of interconnected transmission lines, substations and related facilities, system operations, and other activities that are necessary to support the safe and reliable operation of a transmission system, to construct, install, finance, manage, improve, expand, operate, maintain, rehabilitate, repair and refurbish the present nationwide transmission system of the Republic of the Philippines."

The franchise is good for 50 years but may be repealed or amended by Congress "when the common good so requires," the law said.

What is significant in the signing is that operating the transmission grid, which is traditionally viewed as a natural monopoly of the state, is now in the hands of the private sector. The grid operations will now be subject to more to economic forces than the previous setup. This is why traditional nationalists, who usually view big business with jaundiced eyes, see danger to security and higher prices for end users due to added profit motives of the new operators. Some of them have gone to the extent of trying to reverse the privatization process.

But this is a short-sighted view.

Grids around the world are increasingly operated by the private sector with better results than the previous state operation. This is to be expected since electricity transmission is not just about connecting power from generators to retail distribution facilities. It is also about efficient and cost effective operation. Increasingly, it is relying more on new technologies and materials.

A state monopoly does not have the nimbleness or savvy to operate in this competitive new world.

Take for example the traditional view that the flow of electrons is just one way: from the generators to the grid lines, to the distribution companies and finally to the user. No longer.

Advanced countries are now moving towards a two-way transmission and distribution systems wherein users who have excess capacity can actually sell it back to the grid. This is made possible by deploying so-called smart meters which could regulate which way electricity is flowing.

Fans of the successful transfer of operations to the private sector see more improved services. For example, they hope that the gridlock (pardon the pun) in transmission which occurred recently as a result of a breakdown in a critical transmission node would no longer recur.

But can the new operator hurdle inconveniences such as the recent court ruling dismantling a major transmission line as a result of a vanity complaint by residents of a plush village in Makati?

The bottom line is, the new grid operator has been given a great responsibility to improve the electricity transmission system of the country. It should not view the franchise awarded as a license to mint money quickly at the expense of the population.

Everybody will be watching you, the new grid operator.