THE ENERGY Regulatory Commission (ERC) needs to remove the pass-through fuel cost provisions in power purchase agreements (PPAs) to ensure the least cost for consumers, according to a UK-funded report on the Philippines’ energy transition.

“It would be prudent for the ERC to implement mandatory fixed prices for PPAs by removing the automatic (fuel) pass-through,” according to the findings of the report, Analyzing Energy Transition Risks in the Philippine Power Sector.

“Eliminating the pass-through for imported fuel costs avoids the ups and downs of volatile commodity markets, providing valuable price stability,” it added.

A typical PPA between a distribution utility and coal power producer provides for fuel costs incurred by the latter to be automatically passed on to consumers, with pass-through charges based on the prevailing global coal price index.

The report cited the case of Panay Energy Development Corp. whose 167.4-megawatt coal-fired plant sold power at P2 per kilowatt-hour (kWh) more than the agreed PPA price set in 2016, which was P3.96 per kWh.

The pricing difference can be attributed to current market rules which contain a pass-through provision that allowed “fluctuations in fuel price and (foreign exchange) rates to be passed onto consumers and industry.”

Institute for Climate and Sustainable Cities (ICSC) Energy Transition Advisor Alberto R. Dalusung III said that coal power generation facilities must absorb fuel pass-through costs since they are in the “best” position to do so.

He said fuel costs from coal plants can account for more than 50% of the total price of generated power, describing pass-through as a process of transferring risk to end-users.

“The power plant itself (chose) coal as the fuel. They could have chosen natural gas or liquified natural gas. (But) they chose coal. Now that fuel has a cost. It’s imported, and you have to bring it to the Philippines. You (also) have to spend foreign exchange which means that there is a foreign exchange risk (or) currency risk,” he told BusinessWorld in an online interview last week.

He added that the fuel-pass through costs show up in power bills as generation charges.

The proposed removal of pass-through is also thought to deter further coal plant construction, avoiding the risk of having such plants become stranded assets when the energy transition gains momentum.

Other proposals include fast-tracking auctions to ensure new capacity; improving tariff setting to ensure least-cost and flexibility generation; implementing a permanent moratorium on new inflexible power; and improving clarity on who pays for stranded-asset risk.

The ICSC is one of the contributors to the report. Others include the Carbon Tracker Initiative and the Institute for Energy Economics and Financial Analysis. — Angelica Y. Yang