As We Plan for Economic Recovery

The energy sector should also be overhauled to support government efforts to rebuild the economy. Image c/o http://www.benzinga.com

The COVID-19 pandemic resulted in a global recession. Here in the Philippines, the imposed months-long lockdown caused our economy to contract as much as 16.5 percent in the second quarter of 2020. Economists predict that the Philippine economy will likely experience an 8 percent negative growth for 2020.

Our government is banking on its flagship infrastructure program, “Build, Build, Build” to revive our battered economy. It has allocated P1.1 trillion, equivalent to 5.4 percent of our gross domestic product (GDP) to infrastructure projects in 2021.

For the power sector, this means higher demand for electricity as we as build more roads, bridges, ports, railways stations, and airports.

As we start planning for the Philippines’ economic recovery we should also overhaul our energy sector now so we can support our government’s effort to rebuild our economy. We need to address the short-term and long-term price stability so we can meet the demand for more power at cheaper prices.

The Philippine Peso has been touted as the best performing currency in Asia, strengthening 4% against the United States dollar. We can take advantage of the Peso’s strength by purchasing all imported fuel that’s oil-based or indexed to global prices while the Peso is strong. Let us remember that our fossil fuels are based on the U.S. dollar and indexed to global prices, and we have plenty of power plants that are importing coal and oil.

I have always talked about how a weak peso and increasing fuel costs hurt Filipino consumers because our Purchase Sales Agreements (PSAs) have pass-through provisions in previous posts. Consumers end up paying more for a weaker peso and more expensive imports. But a strong peso against the dollar can be used to our advantage as we can now use them to lower electricity prices for the next few years.

The government can order all power plants to buy all their fuel requirements in advance. Doing so will place a cap at fuel prices at today’s prevailing prices and foreign exchange rates. Power plants can buy years worth of their fossil fuel requirements so they can fix their prices at a rate that’s advantageous for their consumers.

This is a short-term solution. To ensure stable prices in the years ahead, the Department of Energy (DOE) and the Energy Regulatory Commission (ERC) should require a higher level of fixed-price contracts. I’ve been advocating for fixed-priced PSAs since the pass-on provisions always burden the consumers when the peso is weak and the global fossil fuel prices increase.

Likewise, the government can also order the off-takers of the Malampaya gas to purchase either part or all of the remaining gas so the prices of power will be pegged at current prices and present forex rates. The reasons are the same as my first suggestion for buying fuel requirements in advance. After all, the Malampaya gas is also based on prevailing forex and oil prices. 

One might argue that distribution utilities may not have enough funding to import fossil fuels and or purchase the Malampaya gas. However, we have our government banks, Land Bank and Development Bank of the Philippines that can lead a consortium of local banks to help purchase fossil fuels in advance.

Pegging fossil fuels at current global prices and forex rates will directly impact households and micro, small, medium enterprises (MSMEs) as they will be paying less for electricity. This is especially beneficial now as most Filipinos have less money to spend due to the economic recession. Taking away uncertainty is always a good option – it is valuable.

And to ensure long-term stable energy prices, our government should allow competition at the power distribution level. We have the Electric Power Industry Reform Act or EPIRA but there’s little competition still. In the past we thought that the wires business is a “natural” monopoly.  Latest developments in technology is showing that it ism not.  There are even non-wire alternatives (NWA) to power distribution.

 Currently, the the thinking is that two or more franchise holders for the same area is harmful. This policy, however, results in a monopoly, which does not benefit consumers. A monopoly doesn’t give the franchise holder any incentive to constantly innovate and improve its services.  Allowing more players will push utility companies to provide better services at cheaper rates to consumers. There are ways to improve the service to consumers through competition.

A clear definition of a load profile will also benefit us all in the long-run. Currently, our current procurement rules do not result in an efficient deployment of our energy resources because the ERC focuses on individual contracts. Consumers are paying more for power because we are not deploying power cost-effectively.

Coal-fired power, which is best used for baseload power is also being used for mid-merit power, thus whatever cost advantage of coal goes away. This happens because current procurement rules do not require ECs or DUS to differentiate the different power requirements. We need to define a load profile and regulate the appropriate levels of baseload, mid-merit, and peaking. The DOE and ERC can work on the limits and ensure that these are reflected in PSAs. The ERC should reject contracts that fall outside these limits. The recent announcement of DOE that there will be a moratorium in the issuance of permits for coal-firepower plants is a step in the right direction.

Reviving our economy requires the cooperation of all. For the power sector, this means ensuring sustainable and affordable electricity. More so since according to the Philippine Energy Plan 2018 to 2040 draft, local electricity demand is set to increase by an average of 6.7% annually. We can only meet this demand while making power rates cheaper by fixing the ills of our sector now.