September 19, 2019 | 12:31 am By
Victor V. Saulon Sub-Editor
HEAVY RELIANCE on imported fossil
fuels, high financing costs and uncompetitive market structures have
contributed to make electricity prices in the Philippines among the highest in
Southeast Asia, according to a report of a global research institute.
“If renewables enter the market,
they have the potential to cut wholesale power prices by 30% and could
dramatically change the structure of the market,” the Institute for Energy
Economics and Financial Analysis (IEEFA) said in a report released on
Wednesday.
The report by Sara Jane Ahmed,
energy finance analyst at the institute, cited these as among the three key
trends in understanding the current outlook of the Philippine power sector and
how its prospects have improved for the country’s energy transition.
The trends include legal challenges
that have encouraged policies to spur competition through transparent bidding
and to reduce electricity prices for consumers and industry may bring real
competition.
IEEFA also pointed to Manila
Electric Co. (Meralco), the country’s largest power distribution utility, as
setting the trend for how it is adapting to market pressures. It said the
company, which is also an independent power producer, could emerge as “a big
winner or a damaged laggard.”
On electricity prices, it said the
Philippines’ electricity cost at P10 per kilowatt-hour (/kWh) has remained
relatively high against global standards.
For instance, a 167.4-megawatt (MW)
coal-fired power plant was expected to deliver P3.96/kWh based on the agreed
price in a 2016 power supply agreement (PSA). But on average, the plant delivered
P2/kWh above the agreed price, sometimes reaching P7.11/kWh.
“This variance in price is currently
permitted under market rules under the ‘pass-through provision’ which allows
fluctuations in fuel price and FX (foreign exchange) rates to be passed onto
consumers and industry,” it said.
As a result, from May 2018 to May
2019, the unpredictability of coal prices led to consumers paying more than
P788.7 million compared to what was originally estimated.
The entry of renewables could change
this situation, the institute said, citing the feed-in-tariff and prioritized
dispatch for renewable energy sources at the wholesale electricity spot market
that have led to a reduction in prices by P1.47/kWh for consumers.
The reduced prices led to savings or
avoided costs of P44.3 billion from November 2014 to October 2015.
“New catalysts for change are
coming, not from the marketplace, but from legal challenges which have
validated the government’s intention to spur competition through transparent
bidding to reduce electricity prices for consumers and industry,” the IEEFA
report said.
It said more retail competition is
in the cards and the role of grid operators can also be forced to change as
they may be barred from passing on fuel price and foreign exchange risk.
“This is as a result of a challenge
by consumer groups in 2017 to the Energy Regulatory Commission (ERC) focused on
the transparency and competitiveness of the process used to sign PSAs from 30
July 2015 onward,” it said.
On May 6, 2019, the Supreme Court
ruled in favor of the consumer groups, effectively voiding all PSAs that were
submitted after Nov. 5, 2015, including the 3.5-gigawatt (GW) Meralco coal
pipeline, mainly backed by large corporate players including company-owned
subsidiaries and affiliates.
IEEFA said the best way to monitor
current trends is to track Meralco. It said the company is changing its
procurement style to better manage the risk profile of coal plants.
“Meralco has vertically integrated
across the power sector, dominating the distribution and retail sectors, and is
formally entering the generation sector with three coal power plants in its
pipeline through subsidiaries,” it said.
Last month, the company issued three
procurement requests to source 2.9 GW of generation capacity through auction
using a two-part electricity tariff composed of fixed and variable elements
with a minimum of 200 MW per bid with high efficiency, low emission technology.
“These three major trend-setters
have the potential to reshape the economics of power in the Philippines,” it
said, adding that the timing is highly sensitive because of the financial risk
associated with the pipeline of new coal-fired capacity.
“Not only could changing economics
impose losses on investors, they could blight the main Luzon grid with stranded
assets that would pre-empt market innovation and burden the economy for decades
to come,” it said.
It said making smarter policy
decisions about the true cost of long-lived power asset investments like
Meralco’s coal pipeline could be crucial to the competitive potential of the
Philippine economy.
“One important reform would be to
analyze the risk profile of take-or-pay imported fuel agreements. They
represent fixed long-term obligations that should be balanced against the
Philippines’ unique potential to benefit from newer technologies that are just
coming to market,” it said.
IEEFA conducts global research and
analyses on financial and economic issues related to energy and the
environment. It mission is to accelerate the transition to a diverse,
sustainable and profitable energy economy.
Separately on Wednesday, Meralco
said the PSA signing for contracts to supply its 500 MW of mid-merit capacity
is projected to bring total savings to consumers of around P13.86 billion per
year, or a rate reduction of P0.41 per kWh.
The contracts take effect on Dec.
26, 2019 for a term of five years.
Ray C. Espinosa, Meralco president
and chief executive officer, said that prices resulting from competitive
selection are significantly lower than the average generation cost today of
around P5.88/kWh, inclusive of value-added tax.
“The contracts’ all-in rate already
includes line rental and VAT and the cost of replacement power for all plant
outages. The generator companies will also be liable to pay a fine if they are
unable to deliver power, which will be used to reduce the generation cost to
the consumers,” he said in a statement.
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