The Philippine Peso has been hogging the headlines for many weeks now.
As I write this, the Philippine peso has dropped to a 17-year low, closing again at more than PhP56 to $1.
Naturally, media outfits are getting experts to discuss what a weak peso means for our country’s economy. There are the Overseas Filipino Workers (OFWs) who are enjoying higher purchasing power and exporters increasing their peso revenues.
However, a weaker peso also means more expensive imports. And for a country that relies heavily on imported fuel like the Philippines, a weak peso means higher energy prices.
A few weeks ago, Meralco, the country’s biggest power distributor, already said that the falling value of the Philippine peso versus the US dollar is driving the power rates up for July. This is because some of Meralco’s suppliers have their rates denominated in US dollars. Plus, international coal prices continue to surge. Both the weak peso and the high global coal prices are the causes of the higher generation fees.
Let me show what this means in figures. Let us say we are looking at the cost of fuel for a coal-fired power plant. It used to be that coal prices were at US$70 per metric ton. At P50 to a dollar, it means that the cost of fuel assuming it takes 700 grams of coal to produce 1 kilowatt-hour, l will be around P2.45/kwh.
If the peso depreciates against the dollar, that cost will be around P2.74/kwh. If we now calculate based on the current coal prices, which I heard is around US$350/metric ton, that cost will balloon to P13.72/kwh! And that is just the fuel component. If one checks the prices at the WESM, the spot prices will be hovering around that number.
There’s some relief though for the consumers as the Energy Regulatory Commission’s (ERC) order of refunding PhP21.8 billion will offset the higher generation fee caused by the foreign exchange rate and high coal prices. Without the refund, many Filipinos will have to shell out more for their power bills at a time when commodity prices are so expensive. However, we need to ask if indeed that refundable amount is all that is due to the consumers.
We knew of these risks for a long time now. Time and time again, I have been stressing that our reliance on imported fossil fuels along with the fixed price contracts with pass-on provisions of Power Sales Agreements (PSAs) will always be detrimental to Filipino consumers.
There will inevitably be times that the global prices of coal will spike or the peso will fall significantly against the dollar. Or worse, both will happen at the same time as what we are experiencing now.
We could have mitigated the risks of a weak peso and higher global fossil fuel prices years ago.
I have been pushing for many years to have fixed-priced contracts where consumers will pay the same amount for a specific period like 25 years for their power rates. Our current PSAs are what I call floating contracts as they have pass-on provisions, which means consumers pay for higher power charges when the global fossil prices spike and/or the peso falls against the greenback.
Plus, from a budgeting perspective, it will always be easier and more convenient to manage one’s finances when the price is fixed. With fixed-priced contracts, consumers won’t be surprised when their bills come as they are familiar with their monthly consumption. They won’t be caught off guard since they won’t be paying for the costs of importing fossil fuels, which again is more pricey with a weak peso and higher global fossil fuel prices.
Had we opted for more fixed-price contracts, then consumers will have some sort of relief for now as they would be paying the same rate for a fixed period even if the Philippine Peso has become the weakest performing currency in the ASEAN and even if fossil fuel prices go up.
Plus, fixed prices means we are not at the mercy of distribution utilities when it comes to generation charges. Let’s go back again to the refund of Meralco. If we had fixed prices, then DUs can’t be “creative” in the calculation of the charges they will pass on to consumers.
Of course, there’s the problem that the majority of power supply comes from imported fossil fuels. Coal has dominated our power mix, accounting for 57% of the generation output in 2020. Had we developed our indigenous resources and added more renewables in the energy mix, then we wouldn’t be importing so much coal. Now we are at the mercy of higher importing costs as we have no choice since we rely heavily on imported fuels for our power needs.
Sadly, our economy is expected to experience stagflation or the twin problem of high inflation and poor economic growth for quite some time. Filipinos could have had some relief in the form of lower electric prices if only we took seriously the risks of a weakening peso and higher global fossil fuel prices happening at the same time.
We have experienced many “wake-up” calls in the last few years, which should have been more than enough for us to take drastic measures. But we didn’t. With the current economic conditions, sadly, it’s the Filipino consumers who are hurting because of our leaders’ apathy towards the inevitable.