Majah-Leah V Ravago

James A Roumasset

Can COVID-19 spark an energy transition in the Philippines?

The Philippines’ medium-term Development Plan 2017–2022 is anchored in AmBisyon Natin 2040, a long-term vision for attaining high-income status by 2040. The economy was seemingly on track from 2010–2019, growing at an average rate of 6.3 per cent and conquering the boom-and-bust cycles that had previously characterised economic development in the Philippines.

Electricity consumption was also expected to grow to nearly four times its 2018 level by 2040, prompting concerns about attracting generation investments to meet the growing demand. Enter the COVID-19 pandemic, and these concerns are evaporating.

In mid-March 2020, President Rodrigo Duterte, along with local government officials, placed Metro Manila and surrounding provinces under a lockdown known as ‘enhanced community quarantine’ (ECQ). As operations of industrial facilities and commercial establishments slowed — especially in lockdown areas — electricity generation dropped by 20 per cent.

Coal is typically characterised as a ‘baseline’ fuel because of its low fuel cost, high plant cost and high ramping inefficiencies. But during the lockdown period coal is serving as the marginal fuel, dropping from 56 to 48 per cent of generation. Generation with natural gas decreased by 6 per cent, but as a share of total generation increased from 23 to 27 per cent. Other sources stayed about the same, with solar and biomass generation increasing slightly, reflecting new generation capacity.

Since renewables are assured ‘must-dispatch’ status, the system operator is required to accept whatever is generated. While generation by natural gas can adjust to varying demands, what is not flexible is the supply of gas arriving by pipeline. The take-or-pay bilateral contracts with Meralco, the country’s largest distributer, assure that minimum purchases of natural gas generation reflect this inflexibility in gas delivery (and the very limited gas storage capacities).

This leaves the burden of adjustment falling on coal plants, and many have had to temporarily shut down production. The situation may provide the opportunity for the distribution utilities, retail electricity suppliers and other mandated participants to meet the required minimum renewable portfolio standards, which officially take effect this year as per rules of the Department of Energy.

The average wholesale electricity spot market price fell by 55 per cent during the lockdown period. And while wholesale prices used to peak in the afternoon, they now peak in the early evening, reflecting the shifting demand from commercial and industrial to residential consumers.

As for retail prices, rates increased from 8.9 pesos (US$0.18) per kWh in March to 9 pesos per kWh in April in Metro Manila. Since the ECQ was extended to 15 May 2020, Meralco invoked the three-month average rule to bill customers, resulting in widespread confusion and complaints. This prompted a senate investigation and a subsequent order from the sector regulator requiring the issuance of new bills based on actual meter readings.

Outside of Metro Manila, most electric cooperatives and private distribution utilities are also struggling with collections since meter-reading is manual and prevented by the lockdown. Power outages continue to plague parts of Mindanao. When a cooperative in Zamboanga City finally billed its customers, complaints ensued due to grossly increased power prices.

The government is preparing for a ‘new normal’ operation of the economy with the lifting of the ECQ. While resilience and disaster management were incorporated in economic planning for the energy sector under AmBisyon Natin 2040, the current demand shock is far greater than anticipated.

The National Economic and Development Authority recently projected the Philippines’ real GDP growth for 2020 to fall to somewhere between -0.6–4.3 per cent. The nature of the predicted rebound of the economy by 2021 remains highly uncertain.

The lower growth trajectory means that electricity demand targets can be reduced. But investments already in the pipeline may be delayed and new projects may be put off. The outlook for new investments in generation, particularly in coal-fired power plants, is bleak given the current excess capacity. It is then possible that the concern with insufficient generation capacity may resurface in the future.

Some observers are lobbying to permanently phase out coal generation in favour of renewable energy. But the subsidies that would be required at this time would undermine the Electric Power Industry Reform Act’s (EPIRA) goal of ensuring a high quality, reliable, secure and affordable supply of electricity.

In 2017, the Department of Energy adopted a ‘technology neutral’ policy towards new investment in generation, letting the market determine the least-cost fuel mix — which should include the social cost of pollution. Given the rapid reduction in the cost of renewable energy, especially solar, and improvements in storage technology, the government needs to facilitate an efficient energy transition — not to force it prematurely with costly subsidies.

This transition should take into account both the declining cost of renewables and the increasing marginal cost of managing intermittent renewables as the percentage of renewables increases. The Philippines has recently included coal and petroleum excise taxes as part of the 2017 tax reform. The Renewable Energy Act of 2008 has implemented several programs that aim to accelerate the development of renewable energy. While these reforms can accelerate an efficient energy transition, some dimensions run counter to the affordability objectives of EPIRA.

Energy taxes should be based on the social cost of pollution, including both carbon emissions and local pollution that impinges on health. Rules governing subsidies embodied in the renewable energy law should be revised to reflect cost-lowering innovations and modified to include clear sunset clauses. Requiring government-specified quotas from eligible renewable energy resources also runs the risk that dominant renewable energy suppliers would exercise market power and raise prices.

The rather dramatic fall in coal-fired generation may afford an opportunity for the Philippines to meet their renewable targets without resorting to costly subsidies. But if investments in generation are curtailed, the country may find itself with insufficient capacity in the not too distant future.

 

Majah-Leah V Ravago is Associate Professor at the Department of Economics, Ateneo de Manila University.

James A Roumasset is Professor Emeritus at the Department of Economics, The University of Hawaii, Manoa.

 

 

Sourcehttps://www.eastasiaforum.org/2020/06/05/can-covid-19-spark-an-energy-transition-in-the-philippines/