Philippine Energy Industry

It is no secret that the price of electricity in the Philippines is one of the highest in Asia. In fact, among the different cities in the region, Manila has the second highest overall residential electricity tariff, next only to Tokyo (The Lantau Group 2013). Tokyo’s residential energy tariff is only higher than Manila due to the 9.0 magnitude Great East Japan Earthquake in 2011 that lead to the closure of the Fukushima Daiichi Nuclear Power Plant. Aside from this, Manila has the third highest generation cost and the highest grid cost in Asia based on residential electricity tariffs (The Lantau Group 2013). All these cited costs, plus a value added tax of 12% make the price of electricity in the Philippines one of the highest in Southeast Asia. 

The figure below shows the world city residential tariff and its cost components for the year 2013, which shows that among Asian countries, Manila has the second highest cost, as cited in this article.

The figure below shows the cost of residential tariff, generation, grid charges, and value added tax in electricity in some cities in the world, including Manila. It further indicates that even in the value added tax in electricity, Manila is one of the highest in Asia.

This is one of the reasons why foreign multinationals are not investing in the Philippines to the same extent that they are investing in our neighboring Southeast Asian countries. In fact, as per the interview cited by Uy (2016), the high cost and sketchy reliability of electricity supplies in the Philippines are now the main deterrents to investing in the country.

This is the reason why it is important for us to know the rationale behind the high cost of electricity in the country, so we could address it properly. The question now is: why is the cost of electricity in the country so high? 

This was answered in Uy’s  in her thesis paper (2016). As per Ms. Uy, one needs not to look further and just look at our Meralco electric bill (see figure below) and examine the breakdown of the  total electricity charges.


Figure 3. Sample Meralco Electricity Bill

The table below shows the component of the residential energy cost, which are generation, transmission, system loss, distribution, subsidies, government taxes, universal charges and Feed-in-tariff (FIT)-All (Renewable).

As stated earlier, Manila has the third largest generation cost in Asia, which is almost half of the total cost of our electric bill. The cost of generation in the country is sensitive to some economic factors, such as the price of fuel in the international market, since we import most of our power generation needs, as well as the foreign exchange rate. The price of fuel, which is a pass-through charge, is also subjected to some price control if the market is owned by only a few entities. But because of the huge capital investment that is needed before you could participate in the energy sector, there are only a few entities that own and participate in the Philippine energy industry.

Transmission, system loss, and distribution are the components of grid cost which is the highest in Asia. Transmission costs are the charges being paid to the National Grid Corporation of the Philippines (NGCP) to deliver power from generators to the distribution utility through transmission grids. Distribution costs, on the other hand, are the charges being paid to Meralco for delivering electricity from transmission grids to end users. And system loss is the cost of energy lost from the delivery of energy through transmission and distribution lines. By virtue of Republic Act No. 7832, distribution utilities can recover up to 9.5% of their system losses. It was reduced to 8.5% in 2010 through ERC Resolution No. 17 series of 2008 (Meralco, 2019). Due to the centralized nature of our energy system, it is prone to different forms of system losses.

Subsidies, government taxes, universal charges, and FIT-All (renewables) are the components of miscellaneous charges, which is around 15% of the total electricity bill.

Table 2 below shows the components of the miscellaneous charges and the policies that support it.

Lifeline Rate Subsidy, Senior Citizen Subsidy, and Tax Recovery Adjustment Charge (TRAC) are the components of the subsidy in the miscellaneous charges. 

Lifeline subsidy is a socialized pricing mechanism under Section 73 of the Electric Power Industry Reform Act (EPIRA) to benefit marginalized/low-income captive market customers. In the case of Meralco, residential customers using up to 100 kWh in a given month enjoy a Lifeline Discount to be applied to the total of the generation, transmission, system loss, distribution, supply and metering charges.

The problem with this subsidy is that its goal is to benefit the marginalized/low-income captive market customers, but the only criteria to be subsidized is that you need to consume 100 kWh of electricity per month. In reality, not all those who consume that amount of electricity are marginalized and the marginalized might consume electricity of more than the said amount. 

The second subsidy, the Senior Citizen Subsidy, is a socialized pricing mechanism for senior citizens as enacted in Republic Act No. 8884 or the Expanded Senior Citizens Act of 2010. There are two types of this subsidy, one is giving a minimum of 5% discount to a residential account registered under the name of a senior citizen which consume not more than 100kWh a month. Another is providing 50% discount on the electricity bill of senior citizen institutions accredited by the Department of Social Welfare and Development. 

The next subsidy is Tax Recover Adjustment Charge, which is an LGU-specific charge collected from the customers of the different local government units. The billing of TRAC started in April 2012.

Next among miscellaneous charges is the feed-in-tariff (FIT) which is a specialized payment system passed on to consumers to incentivize the development of renewable energy resources (Rappler, 2015).

Next in the miscellaneous charges are universal charges which are then divided into the Missionary Electricity Charge, Environmental Fund, NPC Stranded Contract Costs, NPC Stranded Debts and DU Stranded Contract Costs.

As mandated in Section 70 of EPIRA, the Missionary Electrification Charge is a charge used to fund electrification of off-grid islands in the Philippines. Figure 4 below shows the coverage of the missionary electrification in the Philippines.

While environmental charge is a universal charge that becomes an environmental fund to be used solely for watershed rehabilitation and management. It is pegged at Php0.0025 per kWh as stated in the EPIRA.

The Stranded Debts of National Power Corporation (NPC) is defined by EPIRA as any unpaid financial obligations of NPC which have not been liquidated by the proceeds from the sales and privatization of NPC assets.

EPIRA also defined NPC Stranded Contract Cost as the excess of the contracted cost of electricity under eligible contracts over the actual selling price of the contracted energy output of such contracts in the market. This is due to the fact that in the past, NPC bought the energy produce of independent power producers (IPPs) for a period of time at fixed and variable rates through Power Purchase Agreements. NPC then sold this power to distribution utilities at a loss.

Government taxes are also a part of the miscellaneous charges that end users are paying. This is composed of the Local Franchise Tax and the Value Added Tax.

The Local Franchise Tax is levied by provinces and cities for businesses enjoying a franchise, and paid to such local government units, in accordance with the provisions of the Local Government Code. This is a pass-through charge.

The Value Added Tax, on the other hand, is a consumption tax imposed on the sale of electricity and related services through all the stages of generation, transmission, distribution, and sale of electricity to the end users.

As per Uy (2016), the above analysis of the energy cost component of the Philippines suggests that end-consumers not only pay for the current cost of producing energy but they also shoulder the cost of debts incurred by the government in the past, electrification of underserved areas, as well as subsidizing elderly and marginalized end-users.

The table below shows the significant events in the Philippine Energy Industry that led to debts that end users are still paying up to now through Universal Charges.

The Philippine’s energy industry history shows that the country struggled to find a balance between providing reliable energy supply and affordable electricity rates.

The study of Uy concluded that, “the problem of energy industry in the Philippines is not just a technical and economic problem. It appears that the government incentivizes the private sector by not addressing the oligopoly in the market, providing subsidies and exempting them from sharing the losses the government incurred during the energy crisis preceded by the 1997 Asian economic crisis. Joseph Stiglitz describes this problem as rent seeking, where the private sector is rewarded much more than what they are contributing to society and where those rewards are taken form the less-privileged and uninformed. The private sector creates wealth by taking it from others, not by creating value and in so doing, creates inequality without growing the economy” (2016).

It is apparent from the discussion that the rich and powerful, from businessmen to politicians, want to maintain the status quo for they are equally benefitting from it. And in order to change the status quo, we need a powerful disruption.

Renewable energy as a distributed energy resource has a big potential to be a powerful disruption.

Distributed Energy Planning

Energy planning is the process of finding resources and conversion technologies to meet the energy requirements of a place in an optimal manner (Hiremath et al. 2011), while distributed energy planning use local resources to supply the energy needs of a place (Kazemi and Rabbani 2013). The main goal of a decentralized energy plan is to create an area-based plan with the least economic and environmental costs from renewable energy sources that would satisfy the energy need of a particular place.

Socio-economic features, land use, energy (activities, end use devices, efficiency of devices), biomass production for energy, energy efficiency, energy conversions, energy use, RET (Renewable Energy Technologies) and FF (fossil fuel) technologies, cost of energy systems operation and maintenance, cost and financial value of energy and products, are some of the most important data that is required to create a distributed energy plan model.

A decentralized energy system is characterized by locating energy production facilities closer to the site of energy consumption. It also allows for a more optimal use of renewable energy as well as combined heat and power, reduces fossil fuel use and increases eco-efficiency (UNESCAP 2019).

Decentralized energy system and planning locates power resources closer to the end user, in so doing it also solves some of the inherent problems of the centralized grid system.

The infrastructure component of a distributed energy system are distributed generation, energy storage, and demand response (UNESCAP 2019).

Distributed generation, also known as embedded generation, on-site generation, dispersed generation, and decentralized generation, is the core component of a decentralized energy system. Energy storage is an important element of distributed energy system for such storage techniques like batteries, compressed air, and pumped hydro storage can help keep the grid stable by storing energy when supply exceeds demand and feeding it back into the grid during peak hours; while demand response technologies provide another tool to manage grid stability when decentralized generation is grid connected.

According to the report of the United Nations Economic and Social Commission for Asia and the Pacific (2019) there are environmental, economic, technical, and social benefit that comes from the utilization of distributed energy system that is why it is one of the elements in Low Carbon Green Growth Roadmap for Asia and the Pacific of the United Nations (UN).

At the center of distributed energy system and planning is renewable energy which can be considered as a disruptive technology. In fact, as per Manning (2019), in an era of emerging transformational technologies that promise to have disruptive economic and strategic impacts, renewable energy must be on the top of the list. In fact, in an unusually optimistic study of the US Department of Energy National Renewable Energy Laboratory (US-NREL), it projects that in the best-case scenario, assuming major investments are made in the US energy system, renewables could provide 80 percent of the country’s electricity by 2050 (National Renewable Energy Laboratory (NREL), 2012).

This disruptive technology and accompanying system and implementation could help in addressing the embedded problems in the Philippine Energy Industry. The effects of utilizing distributed energy system is discussed in the Table below. 

Table 4: Effect of utilizing Distributed Energy System to the Residential Energy Cost

Utilizing renewable energy through distributed energy system, in the local setting, will also benefit from the Renewable Energy Law.

The figure below from Development Bank of the Philippines shows the Fiscal and Non-Fiscal Incentives of utilizing renewable energy as mandated by Republic Act 9513 or the Renewable Energy Act of 2008. 

Figure 5: Fiscal and Non-Fiscal Incentives under Renewable Energy Law

Utilizing renewable energy will not just solve the high cost of electricity in the country, it will also promote environmental sustainability through energy efficiency and conservation, and also support a low carbon green growth roadmap that would help alleviate the adverse effects of global warming.

Way Forward

Since renewable energy technologies, particularly solar, wind, storage, and demand response technologies, are not yet fully mature, it is important to plan for a viable transition scenario that will eventually pave the way into the full implementation of distributed energy system in the country. 

Such mechanism was discussed in a white paper issued by the Power Systems Engineering Research Center (2012). The paper compared centralized generation to distributed generation and discussed the benefit of combining the two.

Integrating the distributed energy to a centralized energy system will be a good transition scenario that is needed as we wait for the maturity of the pertinent renewable energy technologies before we could pursue the full implementation of a distributed energy system in the country.

The tables below from (Power Systems Engineering Research Center, 2012) show the comparison on Recommendations on Resiliency, Cost Implication, and Sustainability Factors between centralized generation (CG) and distributed generation (DG).

Table 5: Recommendations of Factors Affecting Resiliency in Combined CG and DGTable 5: Recommendations of Factors Affecting Resiliency in Combined CG and DG

 

Table 6: CG and DG Cost Implications

 

Table 6: Sustainability Factors in CG and DG

The tables above show the benefits of combining DG and CG in terms of cost, resiliency and sustainability which makes it a good transition mechanism towards full implementation of distributed energy once the renewable energy technologies matured.

Conclusion

What a distributed energy system 9utilizing renewable energy resources, with integration to a centralized grid system as a transition mechanism) can do is to solve the social injustice that is the high cost of electricity in the country—a problem that will not be solved by the status quo for it is rooted to a long history of mismanagement, lack of credible planning, and corruption that benefitted a few individuals from the government and the private sector. 

It will also democratize the Philippine energy sector for participation in the energy industry would not require a huge capital. This will result in a truly competitive energy market as envisioned by EPIRA. Additionally, it will address the different technological inefficiencies of a centralized energy system.

It will also lessen the environmental impact of the energy sector due to the utilization of renewable energy resources.

And finally, you, as an end user, will only pay the exact cost of generating your energy consumption. 

 

References

Hiremath, R., Kumar, B., Balachandra, P., & Ravindranath, N. (2011). Implications of Decentralised Energy Planning for Rural India. Journal of Sustainable Energy & Environment 2 , 31-40.

Kazemi, S. M., & Rabbani, M. (2013). An Integrated Decentralized Energy Planning Model considering Demand-Side Management and Environmental Measures. Hindawi Publishing Corporation Journal of Energy.

Manning, R. A. (2019). Renewable Energy’s Coming of Age: A Disruptive Technology? Retrieved from www.atlanticcouncil.org: https://www.atlanticcouncil.org/images/publications/Renewable_Energy.pdf

Meralco. (2019). Meralco Bill Components. Retrieved from Retrieved from http://www.meralco.com.ph/consumer- information/understanding-your-bill/meralco-bill-components.

National Renewable Energy Laboratory (NREL). (2012). Renewable Electricity Futures Study. Retrieved from http://www.nrel.gov/analysis/ re_futures/

Power Systems Engineering Research Center. (2012). Centralized and Distributed Generated Power Systems – A Comparison Approach. Power Systems Engineering Research Center Publication.

Rappler. (2015). Effective January: New electric bill for renewable energy. Retrieved from http://www.rappler.com/business/industries/173-power-and-energy/79787-billing-renewable-energy- january.

The Lantau Group. (2013). Retrieved from https://www.ema.gov.sg/cmsmedia/Electricity/Consumers/Residential/Global_Benchmarking_Study_of_R esidential_Electricity_Tariffs_%202013.pdf

United Nations Economic and Social Commission for Asia and the Pacific. (2019). Low Carbon Green Growth Roadmap for Asia and the Pacific. Retrieved from www.unescap.org: https://www.unescap.org/sites/default/files/14.%20FS-Decentralized-energy-system.pdf

Uy, F. I. (2016). Energy Pricing in the Philippines and its Effect on Economic Growth. Columbia University.