Why is electricity so expensive in the Philippines?

Why is electricity so expensive in the Philippines?

- in Economy
@Jon Joaquin

Businesses and consumers have long complained of the high cost of electricity in the Philippines. At an average cost of $0.136 per kilowatt hour (kWh), we have the third highest power rate in Asia, next to Singapore and Cambodia. This is worsened by the fact that our gross domestic product (GDP —-) is low relative to the average price of electricity, which means electricity eats up a disproportionately large part of our income.

So why is electricity so expensive in the Philippines? Here are five reasons:

1. Limited fossil fuel production. Most of us probably don’t know that the Philippines does actually produce 20,000 barrels of oil per day, but we also consume 310,000 barrels per day, or a difference of 290,000 barrels. We also produce almost 9 million short tons of coal, but we also consume more than 17 million short tons. This means we have to import a large quantity of fossil fuel to drive our power generators, and this pushes the cost up.

2. Feed-in Tariff (FIT) rates. To address our over-dependence on fossil fuel, the administration of President Benigno Aquino introduced the FIT to encourage the production of renewable energy. But FIT rates, which are given priority and are sold first in the Wholesale Electricity Spot Market (WESM), are more expensive than the generation rates of other energy sources. These rates are then passed on to the consumers as FIT allowance. To make matters worse, there are areas in the country where there are no new renewable power plants, which means residents there pay FIT rates without getting any benefit.

3. System loss. Like it or not, there is a loss in electricity as it is transmitted and distributed from the sources to the end users. In the Philippines, the average is about 10.29%, slightly lower than the Asian average of 11.52%. System losses are translated into added cost for the distribution utilities, which are then passed on to the consumers. Fortunately, government sets a cap for this at 8.5%.

4. Heavy taxes on the Philippine power industry. The government has set the following taxes and different charges, which are passed on to consumers:

a. Universal Charge

b. Value-Added Tax

c. Local Franchise Tax

d. Missionary Electrification Charge

e. Environmental Charge

These are aside from the taxes on all major components of our electric bill:

a. Power generation: Value-Added Tax, Indigenous Fuel Royalties, Imported Fuel Duties, Real Property Tax, Other Taxes and Fees

b. Power Transmission: Franchise Tax, Other Taxes

c. Power Distribution: Value-Added Tax, Franchise Tax, Real Property Tax, Energy Tax, Universal Charges, Feed-in Tariff, Other Taxes and Fees

5. Historical events. It may be bad form to blame the past for our present travails, but it is true that some things that happened before continue to haunt us today. After the 1973 oil crisis, the Marcos government began building the Bataan Nuclear Power Plant (BNPP) to provide enough energy for the country and limit Philippine dependence on oil. But in 1986, President Corazon Aquino decided not to operate the plant due to safety concerns, especially after the Chernobyl Nuclear Power Plant accident in April of the same year. That decision left the country with a $2.3-billion mothballed project that we still had to pay for — without getting any additional energy source. This led to the 1989 power crisis which was characterized by hours-long blackouts throughout the country.

To stimulate growth in the industry, President Fidel Ramos entered into take-or-pay contracts with independent power producers (IPPs) through the Electric Power Crisis Act of 1993. Take-or-pay contracts are agreements that require the government to pay for the entire electricity generation capacity of power plants whether or not it was used. The IPP contracts attracted many investors and helped address the power crisis, but when demand for electricity fell during the 1997 Financial Crisis, supply outpaced demand, and the government had to pay for the excess capacity that was not being generated. This resulted in large debts for the country. The taxes and universal charges that we pay today are a result of these events and the resulting high debts that we incurred.

The good news is that today, power prices are going down due to the drop in fuel prices and in non-fuel generation costs. Also contributing to lowering the charges are reductions in distribution and transmission charges, a slight decrease in system loss, and the depreciation of the Philippine peso. The bad news is that even with the price decrease, power costs are still high because government charges have been increasing since 2011.

So the question is, how do we push down the price of electricity? One solution often put forward is for government to subsidize the power industry. This, however, means our taxes will be used to finance the industry instead of being used for other services that have more direct effects on the people. The power industry itself proposes the facilitation of additional investments in power generation to meet demand growth as well as the promotion of retail competition.

But perhaps the most effective intervention is no intervention at all. There are currently more than 15 major players in the power industry, all competing for opportunities and contracts to supply power to distribution utilities and electric cooperatives. These same players are also now competing to get supply contracts to major customers (1 MW and up) via the Retail Competition and Open Access (RCOA) regime.

Government can simply step back and let these players compete for the limited market. Competition is always good because it forces companies to both improve their services and bring prices down. An atmosphere conducive to competition will mean a more transparent, competitive, and responsive power industry — and ultimately, lower electricity rates.

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