Reducing electricity rates in the Philippines is a balancing act that the government of President Rodrigo Duterte must tread. Lowering the rates is a challenge for the administration because cheaper electricity will ultimately ease the burden of the consuming public and boost economic expansion.
Electricity rates in the Philippines, once one of the highest in Asia, have dropped over the last four years based on the narrowing gap between the local cost and those of other countries, according to an international study. But the gap could have been bridged more significantly if the government adopted a more responsive policy and a practical fuel mix.
A survey done by the International Energy Consultants, an Australia-based consulting firm specializing in Asian power markets, showed that the average electricity tariff (excluding VAT) had declined 28 percent since January 2012 versus an average decline of 19 percent across 44 countries covered by the poll.
The drop in local currency terms translated into a 22 percent decrease in the power utility’s average tariff versus an average decline of only one percent across all markets.
IEC managing director Dr. John Morris, who led the study, said electricity rates in Luzon and selected markets from the Indo-Pacific region and other parts of the world were now at closer parity than before.
Luzon’s average electricity tariff is just 11 percent above the survey’s average rate, an improvement from a similar survey done by IEC in 2012 when rates in the island was 24 percent above the average rate of surveyed countries.
“This is an excellent outcome for consumers,” Morris said,“considering that the Luzon power market is unsubsidized and the majority of electricity is produced using imported fuel.”
Morris noted that government subsidies had made power rates artificially low in markets like Thailand, Indonesia, Malaysia, Korea and Taiwan. He estimated the subsidies in those countries at nearly $50 billion in 2015 alone.
The IEC study found that lower fuel costs, mainly coal, was a major contributor to the lower Luzon power prices in 2016. A lower distribution charge, reduced system loss and the utility’s sourcing strategy also contributed significantly to the decline.
Morris said Meralco customers were able to save around P30 billion in power costs. Meralco since 2013 has been aggressively negotiating competitively priced power supply agreements with new generators.
“Electricity tariff in Luzon will further go down should investment in new power generation be made to meet rapid demand growth, and competition at retail level is promoted such that wholesale electricity cost reductions are fully passed on to customers,” Morris said.
Morris noted that the distribution charge, which accounts for 17 percent of the average tariff, was the only charge that accrues to Meralco. All other charges are collected by Meralco on behalf of third parties.
Optimum mix
Meralco’s average tariff, the IEC study shows, now ranks 16th out of 44 markets—a big drop from 2012 when rates were ranked 9th highest.
But Morris stressed that regulators and legislators should focus on facilitating investments in new generation to meet rapid demand growth and promote competition at a retail level so that wholesale electricity cost reductions are fully passed on to consumers
The Philippines still has one of the highest power costs in Southeast Asia—a handicap in attracting foreign investments. A large reason behind this is that generation charge makes up more than 50 percent of the bill compared with 25 percent in New Zealand.
The weighty generation charge is partly the result of the share of renewable energy, one of the highest in the region since 1991. The share of RE in 2014 stood at 33 percent, resulting in low CO2 emissions (0.95 tCO2/cap). The low carbon emissions, however, have a price. RE companies are making a profit at the expense of the consumers, an unfair transfer of wealth.
Based on the IEC study, an ideal policy for alternative fuel mix in 2040 favors increased temporary utilization of the lesser-cost resources but takes into account environmental costs.
The energy mix policy takes advantage of lower-priced sources, and thus, is able to achieve better consumer welfare.
Optimal fuel mix is not constant over time, but it should exploit the opportunities opened up by less-costly resources, while taking into account environmental and health costs to reduce the price of power.
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