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Tax reforms to increase power rates in two years

The Independent Electricity Market Operator of the Philippines Inc. warned that the staggered implementation of the government’s tax reform program will hike power rates by P0.2422 per kilowatt-hour in the next two years.

IEMOP president Francis Saturnino Juan said in a recent forum the first phase of the Tax Reform for Acceleration and Inclusion law already raised electricity prices by P0.0904 per kWh based on certain assumptions.

He said electricity prices would further climb by P0.1111 per kWh in 2019 and P0.1311 per kWh in 2020 because of the tax reforms.

“This study was done when Train law was just new, [including] incremental tax that will be imposed under that law, and these are the figures based on certain assumptions. We made use of Meralco assumptions of their supply portfolio and their sourcing between bilateral and WESM [Wholesale Electricity Spot Market],” Juan said.

IEMOP now operates WESM, the country’s trading floor of electricity.

“So these are the incremental amount, but of course if the price of fuel itself will increase, then that will add to this incremental increase...There will be another increase for 2019 and 2020,” he said.

“[It] will further increase in 2019 and 2020 because of the staggered increase in the implementation of the law,” Juan said.

Juan said there was a need to increase generating capacities so that prices at WESM would stabilize.

“There is the better correlation of WESM prices and that is the interplay of supply and demand. If there is a comfortable cushion between the offered capacity and the demand, prices tend to be stable. But every time there is a rise in demand or a reduction in supply, the buffer reduces and there is a corresponding spike or increase in prices,” he said.

Juan said that when the supply and demand gap was reduced to 1,500 megawatts, electricity prices normally started to go up.

“We saw that if there is enough cushion between supply and demand [or] what we call the supply margin, which we derive using the offered capacity less the demand in that trading interval…Once that gap between supply and demand is reduced, say to the level 1,500 to 2000, even if supply is enough, we saw prices kicking up,” he said.

Juan urged market participants to look at the WESM as an indication of the capacities needed to meet the country’s growing demand for power.

“These projections were taken from DoE for Luzon [where] you have a 4.9 growth rate that is forecasted…If no additional [capacity] will be put online by 2022, you will see now that supply margin reducing and you can expect that there will be an increase in WESM prices,” he said.

He said that for Visayas, the supply margin was now almost gone for 2019 and 2020.

“[The] only way to avoid this is for new capacities to come in, but the projects cannot be built in a matter of three to four years and the only available option is to utilize excess capacity from Mindanao, “ he said.

Juan said this would only happen if the Mindanao-Visayas interconnection project undertaken by National Grid Corp. of the Philippines was completed before 2020 that would allow the export of power from Mindanao to Visayas.

Topics: Independent Electricity Market Operator of the Philippines Inc. , Tax reforms , power rates , Tax Reform for Acceleration and Inclusion law , WESM , Wholesale Electricity Spot Market
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