Electricity Price Hikes in the Philippines

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Electricity Price Hikes in the Philippines

Photo by Posztos

The filed petition for a temporary adjustment to the 2019 power supply agreements by SMC and Meralco and its rejection by the regulator are yet more indications of the importance of proper risk management and the drawbacks of relying on fossil fuels in a net-zero-chasing world.

07 November 2022 – by Viktor Tachev

The electricity price in the Philippines is among the highest in Asia. Due to global energy market instability and fossil fuels’ volatility, people are at risk of paying even more for power. Experts warn that the LNG expansion plans in the Philippines risk exacerbating the problem further.

Drops in fossil fuel prices don’t seem to be on the horizon. While the local regulator is trying to tame the situation, there is not much that it can do. The country needs a significant energy policy shift and a transition to renewable energy sources by its leading power utilities or independent power producers. Without those, it will continue paying unreasonably high energy prices and locking itself into a fossil fuel-dependent future.

The Energy Regulatory Commission (ERC) in the Philippines Rejects Electricity Price Hike Proposals by Independent Power Producers

In May 2022, San Miguel Corp. (SMC) and Manila Electric Company (Meralco), the largest distribution utility in the Philippines, filed a joint petition for a temporary adjustment to the 2019 power supply agreements with the ERC.

The cited reason was the increasing prices of coal and natural gas used to produce electricity. In an unaudited financial statement, SMC noted that, due to the higher fuel costs, it has lost around USD 255 million (15 billion Philippine pesos). The SMC admitted that, through the move, it aimed to recover a third of the losses without any margin.

However, the regulator denied the petition. It cited that the two businesses were responsible for having accounted for such potential price spikes in their risk-mitigating strategies. The ERC stated that it “cannot afford relief to any party for its miscalculations, imprudence, or inadvertence, at the cost of consumers”. ERC’s chairperson also added that the petition wasn’t approved, since Meralco and SMC hadn’t exhausted all available options before filing it.

Local consumer group Power for People Coalition welcomed the regulator’s decision. The Center for Energy, Ecology and Development (CEED), along with local clean energy advocates and youth organisations, urged SMC to abandon its fossil gas projects in the pipeline. Instead, they advised the company to help advance renewable energy in the country.

SMC’s Stance on the Rejection

SMC released a statement saying that the company regretted the denial, “not so much” for its own interest but “more for the consumers”. The company accused the ERC, saying it knew “too well” that denying the petition would cripple SMC and burden consumers who “will have to face higher electricity bills”.

Furthermore, SMC claims that had the ERC approved the petition for temporary relief, electricity prices in Luzon would have increased by only 30 centavos/kWh over six months. On the other hand, the denial could lead to a 30% increase in electricity prices.

After the request was declined, Bloomberg reported that SMC risks a funding shortfall of as much as USD 1 billion by June 2023. However, its president and CEO, Ramon Ang, announced that the conglomerate has the money to avoid a capital crunch.

A Situation Long in the Making

The companies claimed the need for the petition was due to a “change in circumstance”. The circumstance included supply disruptions caused by a coal export ban, Russia’s war on Ukraine, and value chain issues triggered by the pandemic. There are arguments that the companies couldn’t have predicted these unforeseen circumstances when executing their power supply contracts.

However, it seems they could have, since experts have warned of fossil fuels’ financial and stranded asset risk. In August, IEEFA cautioned about the potential risk of passing high import fossil fuel prices to consumers. The group noted that such a move would cause higher power prices for Filipino households and businesses. This would potentially stunt economic development.

Sam Reynolds, an energy finance analyst with IEEFA, highlighted that SMC promised a specific price for its LNG-fired power, knowing that LNG prices are highly volatile. The expert urged that if the company couldn’t meet the price of its bid, it should be the one bearing the costs of the skyrocketing fossil fuel prices, not Filipino citizens.

In 2019, SMC’s electricity arm, SMC Global Power Holdings Corporation (SMGCP), entered into two fixed-price agreements to supply energy to Meralco consumers. At the time of the deal, coal prices were around USD 65 per metric ton (MT). Since then, they have risen to over USD 440/MT. Furthermore, the depleting gas field in Malampaya was public knowledge – a fact highlighted by the regulator. The Department of Energy even issued notices on the matter back in 2014 and 2015. Experts believed the company should have known well enough to have accounted for such risks.

In fact, this is a situation that the ERC has already addressed. In 2020, the regulator stressed that power suppliers should bear the risk of market volatility, not consumers.

Renewables as a Way to Avoid Philippines Electricity Price Hikes

In denying the motions, the regulator reminded SMC that it specifically allows it to supply Meralco with electricity from “other, possibly cheaper sources“. The cheaper sources are well-known.

Several analysis pieces by Energy Tracker Asia have highlighted that renewable energy is the viable way out of the high electricity prices in the Philippines. Clean energy is also an effective tool for overcoming the energy crisis and fossil fuel dependency.

Currently, the Philippines’ electricity price is amongst the highest in Southeast Asia and relatively high compared to global standards. As of today, renewables can potentially cut the bill by up to 30%. McKinsey has even considered a 10% per year drop in cost as realistic. The cuts will become even more significant in the future.

Fortunately, the Philippines has massive solar and wind potential. Additionally, the country also has vast geothermal resources. The government already plans for geothermal to make up 40% of all renewables by 2030.

For companies and the country to start making more significant progress, the public and investors should continue being vocal. In particular, investors have the power to influence the board rooms of fossil fuel developers and their backers. Furthermore, they also have the incentive to do so. According to IRENA, every dollar invested in the clean energy transition generates three to eight times the return.

Whether or not investors and developers grab the opportunity is up to them.

by Viktor Tachev

Viktor has years of experience in financial markets and energy finance, working as a marketing consultant and content creator for leading institutions, NGOs, and tech startups. He is a regular contributor to knowledge hubs and magazines, tackling the latest trends in sustainability and green energy.

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