Power, power, power. How much and who owns it in the Philippines

Promoting cross border investments to the Philippines over the years continue to be challenge and an opportunity. On one hand, the opportunity of abundant talent and natural resources are sufficient to attract investors. On the other hand, you have structural and systemic challenges like poor governance, insufficient infrastructure, harsh weather (typhoons, earthquakes, volcanic eruptions) and even legal barriers (foreign ownership restrictions) to discourage and most cases offset whatever attraction present. High power rates is one challenge which continue to exist despite of the best efforts of the government to deregulate and privatise it.

From Flat Planet

High Power Rates, Power Supply Problems Affect Investments in the Philippines

ElectricityThe Philippines’ high electricity rates have not only hurt ordinary consumers, but have also served as among the biggest barriers against investments in the country. Analysts say that what the Philippines needs the most is not more privatization and economic liberalization which have actually exacerbated rather than ameliorated the country’s structural economic weaknesses since the 1990s. What the country needs is a stronger state that (a) can bust oligarchic collusion, and (b) protect the interest of the consumers and productive sectors of the economy. 

Analysis by various research institutions show that the high costs and unreliability of electricity supplies in the Philippines are main deterrents to investing in the country.

According to Enerdata, foreign business leaders see the problem as a persuasive reason to invest elsewhere. Enerdata is an independent information and consulting firm that specializes in the global energy industry and carbon market. Apparently, foreign businesses are not blind to the fact that the power grid network should be upgraded to avoid regular rolling blackouts. The Aquino government also has to add more capacity and by some 1,000 MW every year between now and 2030 if the country is to win against the energy crisis. Foreign investors, it has been pointed out, are deterred by problems concerning power plant capacities as investors are unable to find reliable electricity cooperatives for distribution of their electricity output. This leads to delays in commitments and the risk of energy deficiencies during peak periods.

According to Enerdata, the Philippines is the only country in South-East Asia that does not subsidize electricity companies. Its generating capacity per capita is also relatively low – roughly five times lower than Malaysia and Thailand. Electricity prices at the cost of 18.2 US cents/kWh for industrial supply in 2012 are some of the highest in Asia. When considered that the GDP per capita is US$2,600, electricity rates prices are clearly prohibitive.

“When benchmarking Philippines against similar emerging countries such as Thailand, Indonesia and Malaysia then we can see that Philippines is badly suffering from a dip in foreign direct investment (FDI) into the country with electricity prices playing the part of bad actor. In the 1990s, the Philippines’ FDI were at the same level of the other benchmarked countries and 25 years later, it stayed at a level of US$1.5billion per year with the other three benchmarked countries FDI going up to values between US$7 billion per year to US$18 billion per year,” the report further explained. “Now, the Philippines has committed to install 1,000 MW per year, each year for the next 15 years. Assuming a split 25/75 between new renewable power plants and new thermal power plants, then we are talking about US$2.25 billion per year, that is equivalent to 150% of today FDI values.”

Impact on Businesses

The research institution stated that the Philippine government has some work to do to ensure there is the right balance between energy policies and electricity price to attract more foreign investment coming into the country to support the power generation growth in Philippines. For instance, the Philippines is a preferred BPO destination because of low labor costs, highly skilled and educated work force and high proficiency in spoken English. The growth of the BPO industry fuels demand for office space rentals which also cover electricity costs. The BPO sector is expected to grow and employ 120,000 jobs annually in the next three years.

In April 2013, the Contact Center of the Philippines (CCAP) said that the government, both local and national, should support energy savings and efficiency initiatives for commercial buildings and infrastructure to promote energy savings in the country’s businesses. The CCAP said that there should be four-way cooperation including the government and energy services companies (ESCO) to easily fund energy savings and efficiency initiatives and to give knowledge to small-scale commercial companies, particularly the BPO sector.

In a report in the Manila Times, the CCAP stated that because of building requirements that they be energy efficient, big companies and buildings were going to the point of financing their own energy efficiency and savings initiatives without any help coming from ESCOs or government.

In a related statement, the Filipino Franchisors Inc (AFFI) in April 2014 called on the government to provide power cost relief discounts while long-term plans to put in place low cost sources of energy are underway.” The very high cost of power remains a common complaint of businesses in the Philippines and a very important negative factor for national competitiveness,” the group said.

AFFI also pointed out that the Philippines has eased out Japan as having Asia’s most expensive electricity. The group cited an October 2010 study by the International Energy Consultants showing the average retail rate of electricity at $0.181 per kilowatt-hour (kWh) in the Philippines, as against $0.179 per kWh in Japan.

“Thus, in 2010 a factory in the Philippines likely paid more than twice as much for power than a factory in Indonesia and Vietnam and almost twice as much as a factory in Malaysia and Thailand. This scenario will be even more aggravated by power rate increases,” AFFI said. The group said bringing down overhead costs improves investment returns, allowing companies to employ more people, to re-invest in training, marketing, technology, product development and market expansion.

Exorbitant Electricity Rates

In the meantime, the Manila Electric Co.’s (Meralco) generation charge alone is already higher than the average electricity rates – which include generation and other charges as well as taxes – that American households pay on the average. Based on data released by the IBON research group, the average residential rates in the United States S in 2012 were pegged at 11.88 cents per kilowatt-hour (kWh) or around Php5.03 using that year’s average exchange rate of Php42.37 per US dollar. Meanwhile, IBON said that the average generation charge of Meralco in 2012 was Php5.61 per kWh, or 58 centavos higher than the average US residential rates.

The research group also noted that Meralco’s generation charge was higher than the residential rates paid by American households in 38 of the 51 US states. Meralco’s reported average residential rate for all its customer classes of Php9.64 per kWh in 2012 was almost double the US average during the same period.

Data on US electricity rates were culled by the Energy Information Administration (EIA) of the US, the world’s largest and most industrialized economy. According to IBON, the comparison underscores the extremely high cost of power in the Philippines and the onerous burden that Filipino electricity consumers – and by extension businesses — bear. It blamed the huge generation cost of Meralco to privatization, deregulation and full cost recovery under the Electric Power Industry Reform Act (Epira) of 2001. Meralco’s planned staggered rate hike of Php4.15 per kWh stemmed from its automatic generation rates adjustment (AGRA) which Epira allows.

Privatization and Corruption

Privatization also appears to be a causing problems in the power industry. According to Richard Hadrian foreign affairs and economic analyst in an article in Huffington Post (December 23, 2013), regulatory capture in the electricity industry of the Philippines undermines emerging markets.

Based on reports Heydarian cited, the Philippines’ high electricity rates have not only hurt ordinary consumers, but have also served as among the strongest disincentives against investments in the country, He stated that what the Philippines needs the most is not more privatization and economic liberalization which have actually exacerbated rather than ameliorated the country’s structural economic weaknesses since the 1990s. What the country needs, Heydarian argued, is a stronger state that (a) can bust oligarchic collusion, and (b) protect the interest of the consumers and productive sectors of the economy.

Protests against Relentless Electricity Rates

Various grassroots organizations and consumers groups have launched continuous protests in recent months to denounce corruption in government. When it was announced that the Meralco aims to implement an unprecedented electricity rate hike in three trenches in 2014, there was a massive outcry and the Aquino administration was forced to conduct investigation’s on the issue.

In December 2013, Energy Regulatory Commission (ERC) chief Zenaida Cruz-Ducut came under fire for overseeing the approval of Meralco’s request for rate increases. Ducat was also is implicated in corruption scam involving the Priority Development Assistance Fund (PDAF). She was a former member of the House of Representatives as then appointed to the ERC by the previous Macapagal-Arroyo administration. Ex-president Arroyo remains under hospital arrest and facing charges of corruption and betrayal of public trust.

Heydrian is also critical against privatization in the Philippine power industry. He explained that the power crisis derails the country’s programs for economic development.

“It is not a product of excessive state intervention and public mismanagement. Instead, it is a classic example of how economic liberalization — under the auspices of a corrupt political system and in the absence of a competitive private sector — has handed the key sectors of the economy to a handful of oligarchs, which have prioritized profits over capacity-building and accessibility.”

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