Efforts to shift to cheaper and cleaner sources of domestic power gain traction in the Philippines

In response to public demand, the administration of President Rodrigo Duterte has expressed its commitment to reducing monthly energy bills, which have long weakened household purchasing power. Previous administrations have endeavoured to improve transparency across the sector and reduce energy costs, evident by the creation of the Electric Power Industry Reform Act (EPIRA) of 2001 and the establishment of the wholesale electricity spot market; however, electricity tariffs in the Philippines are still among the highest in South-east Asia.

While the absence of government subsidies plays a major role in high energy prices, the country’s dependence on oil and coal imports to meet energy demands is also a leading cause of steep prices. According to a 2016 study by International Energy Consultants, the rates charged by Meralco, the country’s largest power distributor, were the third-highest in the region and 16th worldwide. This is despite Meralco’s rates declining by 28% (excluding taxes) from the first quarter of 2012 to the same period in 2016. In 2017 electricity rates for industries averaged P5.84 ($0.12) per KWh, on par with Singapore, while commercial and household rates were significantly higher, at P7.49 ($0.15) per KWh and P8.90 ($0.18) per KWh, respectively.

In an effort to support the national industrial strategy, a number of policy measures have been employed to reduce electricity rates. These initiatives include the passing of the first comprehensive tax reform package that aims to ease the nation’s While the absence of government subsidies plays a major role in high energy prices, the country’s dependence on oil and coal imports to meet energy demands is also a leading cause of steep prices dependence on coal imports, the introduction of a competitive selection process to secure power supply agreements and the reduction of recoverable systems losses charged by electricity cooperatives.

Coal Tax

While increases in electricity prices need to first be approved by the Energy Regulatory Commission (ERC), market price fluctuations for coal have historically been absorbed by consumers, a situation exacerbated by fluctuating commodities prices. According to statistics from the Institute for Climate and Sustainable Cities, in 2017 the Philippines imported 75% of its overall coal supply, with 70% of total imports coming from Indonesia, 15% from Australia, and South Africa and Russia accountWith the intended outcome of limiting carbon emissions and reducing the country’s dependency on fossil fuels, President Duterte signed into law the first package of the tax reform programme, known as the Tax Reform for Acceleration and Inclusion While the primary goal of TRAIN is to create a more efficient and effective system of tax collection, it also raises the tax on coal from P10 ($0.20) per tonne to P50 ($0.99) in 2018, then to P100 ($1.98) in 2019 and P150 ($2.96) in 2020. At the start of 2018 Meralco told its customers to expect rates to increase by P0.08 ($0.002) in February, meaning that the typical household using 200 KWh would pay an additional P16 ($0.32) per month.

For the most part, the tax hike has been applauded by industry experts who expect the bill to reduce dependency on coal and mitigate the risk of coal-powered plants becoming stranded assets. It is also expected to send a clear signal to power companies and encourage them to invest in new technologies and alternative sources of energy.

Future of Coal

While there is much potential to develop new energy sources, power production continues to be dominated by fossil fuels. It could be argued that the Philippines’ goal of closing the power gap could be met by investing in existing and new conventional plants; however, this standpoint is becoming increasingly unpopular as the world moves towards low-carbon energy sources. Despite the global trend, coal-fired power plant capacity in the Philippines is expected to more than double between 2017 and 2040, fuelled by an estimated investment of $20.8bn. In 2017 coal accounted for 35.4% of the country’s gross generation, followed by renewables with a 31.1% share, oil-based with 18.3% and natural gas making up the remaining 15.2%. Over the same period, installed coal generating capacity in Luzon, Visayas and Mindanao accounted for 35.7%, 30.8% and 38.5%, respectively, of total energy capacities in those regions.

Given the increase in the excise tax, imported coal is likely to decrease over the short to mid-term as power companies turn to local sources. Semirara Mining and Power Corporation expects production at its Semirara Island coal mine in Western Visayas to increase in volume by one-third to reach 16m tonnes by 2020 or 2021, solidifying the company as an important provider of fossil fuels to the domestic market in the years ahead.

However, market analysts are optimistic that prospective coal-fired power plant investors will be incentivised to channel funds into developing alternative energy sources instead.

Incentives

While the dominance of fossil fuels is set to persist for the foreseeable future, efforts to identify cheaper and cleaner sources of domestic power have gained traction in recent years, evidenced by the creation of the feed-in-tariff (FIT) incentive programme. Contained in the Philippine Renewable Act of 2008, which wasn’t constitutionalised until 2012, the FIT is paid out to certain qualified renewable energy developers, allowing them to recoup their investments more quickly and guaranteeing priority offtake for any power produced. As a result, the Philippines has witnessed an uptick in renewables projects. In 2017 installed renewable energy capacity in Luzon, Visayas and Mindanao totalled 4156 MW, 1640 MW and 1284 MW, respectively, compared to 4120 MW, 1574 MW and 1264 MW the previous year.

The Philippines’ FIT programme has a lifespan of 20 years; however, it may be extended so that hydropower and biomass projects can reach completion. The installation target for hydropower and biomass projects was met in December 2017, but the DoE extended the scheme to 2019 so that current projects could be completed. According to Francis Giles B Puno, the president and COO of local power generation company First Gen, these projects will need more than two years until they are finished.

Recoverable Systems Loss

Further efforts to reduce electricity bills include Senate Bill (SB) 1623, also known as the Recoverable Systems Loss Act, which was passed by the Senate in early 2018. Effectively amending the EPIRA of 2001, under which millions of Filipinos were required to share the cost of system losses made by companies, SB 1623 is expected to benefit consumers by reducing the amount of system loss charges passed on by electricity cooperatives and public utilities.

If SB 1623 is successfully codified then private distribution utilities will have a limit of 5% on recoverable losses, down from 8.5%, while the cap on losses for electricity cooperatives will be lowered from 13% to 10%. On top of that, the proposed bill will also mandate distribution utilities to submit their system losses every quarter to the ERC, which is expected to implement an incentive scheme to encourage the reduction of system losses. As of mid-May, 2018, the legislative status of SB 1623 was still pending in the House of Representatives.