The Philippines’ Ill-Advised P1 Trillion New Coal Gamble

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By Sara Jane Ahmed

THE Philippines quest for affordable and reliable electricity is not working so far; it pays among the highest prices in ASEAN – even though millions of its citizens lack access to electricity. This is an untenable situation that has implications for industrialization, overall competitiveness, the current account deficit, and the ability of the Philippine economy to attract foreign direct investments.

High electricity prices are driven by imported fuel and subsidies; electricity surcharges; a national archipelagic geography that hinders scale economies for centralized generation, transmission, and distribution; and regulatory errors.

A report published by the organization I work for, the Institute for Energy Economics and Financial Analysis (IEEFA) – “Electricity-Sector Opportunity in the Philippines: The Case for Wind- and Solar-Powered Small Island Grids” – notes that many small island grids dependent on imported diesel suffer frequently from blackouts and unplanned power outages. Diesel dependence, much like our growing national coal dependence, is a result of subsidies that perpetuate market distortions. The more the Philippines imports diesel and coal-fired power capacity, the more it exposes the electricity system to price volatility, regardless of which foreign supplier we turn to.

Replacing import diesel generation, which ranges from P13 to P28 per kilowatt hour (kWh) for fuel costs alone, with renewable energy generation – especially from run-of-river hydro, solar, and wind – in Small Power Utilities Group (SPUG) areas would save the Filipino people over P10 billion in subsidies per year.

Coal subsidies assure the private sector guaranteed returns but they leave consumers unprotected from subsequent imported fossil fuel inflation. Automatic pass-through of such costs leaves ratepayers absorbing all of the risk; meanwhile, utilities have no incentive to transition away from coal and power generators have no incentive to hedge against price-change and currency risks.

Take, for example, the Power Supply Agreement (PSA) of Panay Energy Development Corporation, a Meralco power supplier, which dictates a delivered rate of P3.96 per kWh but that has loopholes that lets fuel cost and foreign exchange fluctuations be passed onto consumers and – as a result – saw a generation rate for August 2017 of P5.41 per kWh.

Hydro, wind, and solar, by contrast, have no fuel input and therefore no fuel price. Quite the reverse, India is grappling with unexpectedly extreme electricity sector deflation as wind and solar tariffs have halved since the start of 2016 to now be 20% below existing domestic thermal power tariffs.

Eliminating pass-through fuel and foreign exchange fluctuations can level the playing field in line with a call by the Department of Energy and Energy Regulatory Commission (ERC) for open competition via reverse auctions for all slices of demand.

The Luzon grid’s recent Yellow Alert signals fears that there will not be enough power capacity for the region by the summer of 2018 if the PSA approvals for power projects continue to face delays in the ERC. For example, the ERC has yet to approve a 42MW and 20MW baseload geothermal priced at P3.91 and P4.06 per kWh, respectively.

It takes an average of 12+ years to plan and build a nuclear plant and a minimum of five years to plan and bring a coal-fired power plant online, while new solar and wind plants can be made operational within a matter of six to 18 months.

Retail competition, natural gas, and the cost deflation of renewable energy – and the combination of these forces – will continue to disrupt the dominance of coal, which is also being undermined by the proposed increase in the country’s carbon tax. All of these factors are working together to send a clear message to investors.

Meralco is currently underwriting a solar power supply deal for 85 megawatts (MW) at P2.99 per kWh. Geothermal runs from P3.5 to P4.5 per kWh. Run-of-river hydro costs range from P3 and P6.5 per kWh, and a removal of the permitting red tape, which currently takes about five years, will drive that price even lower. These prices, coupled with the recent success and sharp price reduction in offshore wind, point to renewable energy cost deflation will continue to cause coal assets – which produce power at many times the costs of renewables – to become stranded.

In IEEFA’s recent report with the Institute for Climate and Sustainable Cities – “Carving out Coal in the Philippines: Stranded Coal Plant Assets and the Energy Transition” – we see the Philippine’s financial sector as massively exposed now to the eventual stranding of a proposed new coal fleet to the tune of more than 10,000 MW in overcapacity and P1.05 trillion in financial risk, all of which will ultimately be shouldered by electricity ratepayers through higher bills.

Banks in the Philippines do not incorporate stranded-asset risk in project finance underwriting, either by negligence or by design, based on policies ensuring risks are transferred to ratepayers and/or taxpayers instead. It is time for the government to equitably redistribute such risk.

The ERC has clearly failed to protect consumers and industry. Legislation to remove automatic pass-through, along with the implementation of carve-out provisions (to reduce the amount of power a utility must buy from a power generator and exempt distribution utilities from the consequences of coal-plant overbuild), will reduce moral hazard, correct market distortions, and level the playing field.

Sara Jane Ahmed is the Energy Finance Analyst, Institute for Energy Economics and Financial Analysis