Will the Power Sector Survive a Recession?

The COVID-19 pandemic is more than just a health crisis. It is also an economic one given that the lockdowns and restrictions have resulted in the loss of jobs and livelihood of people.

In the Philippines, the long enhanced community quarantine (ECQ) paralyzed the economy and caused a sharp economic contraction for the second quarter at 16.5%. According to Acting Secretary of the National Economic Development Authority (NEDA), Karl Kendrick Chua, 8.8 million jobs were lost between January until April “because of the very strict quarantine.” The country’s average unemployment rate in 2020 to date is at 11%, 6% up from the normal 5%.

Unfortunately, it is the masses, the rank-and-file employees, and the micro, small, and medium enterprises (MSMEs) that are particularly affected by the economic recession. A survey from Publicus Asia revealed that 78% of survey respondents said at least a member of their family who earns Php9,500 to Php 19,040,00 per month and 65% of those earning between Php19,040 to Php 38,080 have lost their jobs due to the ECQ.

In terms of businesses, only 22.1% is on full operation according to the Department of Trade and Industry (DTI). Around26% are closed and 52% are only partially operating. Professor Eric Soriano, a World Bank Consultant, in a webinar with the Philippine Chamber of Commerce and Industry (PCCI) said that it is the MSMEs that have been the hardest hit. The MSMEs contribute 40% of the GDP and employ 70% of the workforce.

The magnitude of the job losses and business closures means that many poor and low-income families are having a hard time making ends meet, and have barely enough to eat. With no source of income, how will they afford to pay their utility bills?

In the United States, the report from the National Rural Electric Cooperative Association (NRECA) showed that U.S. electric cooperatives could take a financial hit of approximately $10 billion through 2022. “As GDP growth falls below pre-COVID-19 projections, electric co-op electricity sales are projected to decline,” NRECA noted.

The group said that high rates of utility bill delinquency along with service disconnection moratoria in some states and the surge in unemployment is making it difficult for electric coops to continue providing services. “Lost revenue can severely constrain the ability of certain electric co-ops to meet the needs of their community,” the NRECA said in a letter addressed to lawmakers.

Local utility companies are facing the same challenges. Many utility companies for months now are experiencing a significant drop in their collection rates and surviving with considerably less cashflow. Eventually, these companies will have no option but to discontinue their services for those who cannot pay. So, how will utilities survive?

Perhaps we should look at our government’s response to address the impacts of high unemployment rates and business closure.

The International Labor Organization (ILO), in its policy paper entitled “COVID-19 and the world of work: Impact and policy responses” stressed that epidemics and economic crisis tend to have disproportionate impact on some segments of the population, exacerbating the worsening wealth inequality.

ILO said government policy responses should have two immediate goals: Health protection measures and economic support on both the demand and supply side.

The organization noted that stimulating the economy and labor demand through economic and employment policies to stabilize economic activity, through active fiscal policies and particularly social protection measures is necessary. Governments must protect employment and incomes for enterprises and workers negatively impacted by the indirect effects

Yes, one might argue that we have the Bayanihan To Heal as One Act One signed into law last March that provided cash aid to displaced workers. Plus, we have the newly signed Bayanihan Act II with a Php 140 billion allotment to help revive the economy and fight COVID-19.

However, are those enough? Some experts agree that the Bayanihan Act is too small and too late. 

University of the Philippines (UP) economics professor and former NEDA chief Solita Monsod pointed out that the first Bayanihan law is only equivalent to 1.93 percent of the gross domestic product (GDP) a measly amount when compared to other countries that are allocating funds equal to 5 to 21 percent of the GDP. She stressed that “But my God, Bayanihan 2 if you add it all together, is only 0.7 percent of GDP.” 

The UP economist said that the government fears that the debt figure will balloon and the credit ratings will suffer is a misguided fiscal conservatism. “We spent 1.3 percent (of GDP) in the first half and got nowhere. You think we’ll get somewhere by spending only 0.7 percent?” she added.

JC Punongbayan, a teaching fellow at the UP School of Economics echoed the thoughts of Monsod. “Good though its intentions are, Bayanihan 2 is too small. It’s not nearly enough to shore up our embattled economy.”

He pointed out that only Php 6 billion are being allotted for the Department of Social Welfare and Development’s various aid programs including emergency subsidies for poor households but only households in granular lockdowns will receive cash aid.

Punongbayan said that that economic managers are banking on the multiplier effects wherein a peso spent on business loans for companies can generate Php8 to 10 in economic activity, which is why the government thinks it does not need to shell out much more to revive the economy. However, he noted that there is no government study to back up this claim.

Both economists agree that the bill does little to help already struggling Filipino families. And in the words of Monsod, “The people, especially the poor, are always the last priority. The first priority, I tell you, seems to be the credit rating of the country,” she added.

I am no economist but I do know that joblessness during the pandemic brings economic hardships to low-income families and that it is the government’s job to provide aid to them. Economists have been giving their opinions on the meager amount allotted to help Filipinos and revive the economy, which the government must pay attention to.

From a utility standpoint, loss of jobs and business closures definitely have a negative impact not only on the collection of utilities since the consumers’ ability to pay for basic utilities will also erode over time. When the population no longer can pay basic utilities, how can these utilities survive? 

The answer to the above question is beyond the power sector of which I belong to. This is exactly why I included the economists’ thoughts on our government’s response to the health and economic crisis. But let me point out that utility companies are suffering too when consumers do not have enough in their pockets to pay for their basic needs. NRECA CEO, Jim Matheson said it best “The economic health of electric co-ops is directly tied to the wellbeing of their local communities.”

Thus, we need to find a way to help the Filipinos struggling to pay for food and other basic needs. And as Matheson stressed, “As the economic impact of this pandemic spreads, electric co-ops will be increasingly challenged as they work to keep the lights on for hospitals, grocery stores, and millions of new home offices.” In the end, power companies, which are essential in economic development and nation building might also be left with nothing.

References:

https://rappler.com/voices/thought-leaders/analysis-bayanihan-2-here-yet-too-small-late

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/nreca-says-us-electric-co-ops-may-take-10b-financial-hit-from-covid-19-58152700

NCR COVID-19 Survey 3: ECQ job loss affects 69% of households surveyed

Opportunities for the RE Sector In The Time of COVID-19

Global renewable energy capacity increased by 176 gigawatts (GW) last year, reaching a total of 2,537 GW. According to the International Renewable Energy (IRENA), renewables accounted for 72% of all power expansions last year with solar and wind power providing 90% of the growth.

These numbers were promising and it looked like renewable energy’s growth trajectory was likely to continue in 2020. But this all changed with the COVID-19 pandemic.

Just like with many industries, renewable power is taking a hit with the construction of new power plants being halted due to the imposed lockdown around the world. There’s also the growing fear that the pandemic will likely affect clean energy investments negatively given the depressed prices of fossil fuels in the market.

But experts also warn that it’s too early to predict the extent of the impact of the Coronavirus on energy markets. They also stressed that there are opportunities for clean power to flourish in spite of the global economic slowdown caused by stay-at-home orders or lockdown, or what we call the Enhanced Community Quarantine in the Philippines.

The Global Head and Managing Director, Cleantech Coverage of Standard Charter, Sujay Shah points out that 70% of the world’s energy investments are driven by governments. With the stimulus packages being offered by governments, a total of USD7 trillion and counting, provide a “once in a generation opportunity for all industry participants including developers, investors, and financiers to shape this spending to accelerate the energy transition and low-carbon agenda.”

There are also opportunities, too for Southeast Asia (SEA) renewable energy market, which has one of the fastest energy growth rates in the world with a yearly 6% growth according to the International Energy Agency (IEA). SEA’s power demand has grown by 80 % since 2000.

Daine Loh, power and renewable analyst for Fitch Solutions as quoted by a Channel News Asia article says that there is a downside risk to the completion of new large scale-thermal and hydropower projects over the medium term, which will probably result in delays or cancellation of government-funded RE projects.

But she also stresses that the weakened power demand for this year due to the slowdown in economic activities could reduce pressures to peak demand outputs, thus freeing up some policy space for government to pursue their energy transition plans. “(It) may put pressure on governments to amend regulations to boost private sector investment in renewables in an effort to support growth in the market over the longer term.”

It also helps that getting financing for traditional power sources has been difficult in recent years. Loh says financial pressures could further weaken investments in fossil fuel power projects and give momentum for RE project financing.

Speaking of financing, access to capital is likely to be cheaper, too with interest rates dropping. The cost of borrowing for capital-intensive RE projects could be attractive.

The RE sector could benefit from the rebuilding of economies since increased construction activities would provide more jobs. As the economy recovers, countries will also have higher energy demand, and governments anticipating this demand may turn to renewable power that can provide more affordable power rates say Krib Sitathani, a project manager with the United Nations Development Programme in Thailand. “There is also the possibility that many governments to take this opportunity to manage their risks to stabilize their energy costs through increasing renewable energy production to not only stabilize their power production but also to ensure a more predictable cost,” he said.

For the Philippines, one of the possible negative scenario of the COVID-19 crisis is that Indonesia, where we source 90% of our coal closes down all its ports. We are okay as of today because there’s a drop in demand.  So I presume we have a lot of coal inventory already in the Philippines. But if this crisis worsens and Indonesia will have to close all its ports, then we are in for an insurmountable problem. 

Weforum.org

The RE sector could benefit from the rebuilding of economies as increased construction activities would provide jobs. Photo c/o http://www.weforum.org

 

To mitigate this threat, our government should order the immediate development of indigenous sources of energy: solar, wind, and geothermal.  To do this, the power sales procurement rules should be amended. Ultimately this is where the development of RE will have to depend unless the government adopts more draconian measures like requiring a much higher percentage of RE in all the portfolios of the distribution utilities. 

The current rules in evaluating PSAs do not differentiate between indigenous and imported energy.  Technically, this should be differentiated because from a risk perspective these are two different types of energy sources.  However, the current evaluation rules and, in fact, the evaluation skills of the utilities will not allow this differentiation. 

To enforce this policy, the Energy Regulatory Commission (ERC) should require utilities procuring power to testify that there are no indigenous resources within its immediate vicinity, or franchise area, or that it has not received any offers from indigenous energy source within the country. This testimony must be made in public and under oath, which will then be submitted together with the application for PA for the signed PSA. This means that utilities must bid or negotiate with indigenous sources of energy providers before doing any procurement from imported-energy sources.

The implication of this policy will be the development of indigenous energy of the country thus reducing risks of non-supply such what we are facing today.  The traditional economic analysis of imported versus local (if it is cheaper to import, import) can no longer stand the scrutiny of today’s reality.

The COVID-19 pandemic is causing so much uncertainty for the whole world. For us, in the renewable energy sector, we can take comfort that the world sees the value in investing in clean energy and that many governments know that RE is the way forward to providing affordable and reliable power. Thus, while there may temporary setbacks due to the virus in 2020, as with almost all industries, there remains high optimism for the long-term growth of the RE sector.

References:

https://www.channelnewsasia.com/news/asia/covid19-southeast-asia-renewable-energy-nuclear-asean-12617520

https://www.sc.com/en/trade-beyond-borders/covid-19-clean-energy-challenges-and-opportunities/

https://www.cnbc.com/2020/04/06/the-coronavirus-is-hitting-renewable-energy-supply-chains-factories.html