The Philippines: Powering up

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News that the Philippines is set for higher electricity prices this year has sparked protest from legislators and consumers alike, but the rate increases could actually foretell their eventual decline as the segment increases its efficiency.

Already bridled with the world’s highest residential rates and second only to Singapore for commercial premises in Asia, industry bodies argue that electricity prices continue to undermine the nation’s competiveness and deter investment.

Following the sale of 88% of the National Power Company’s (NPC) assets, worth $3.47bn, over the last two decades, the Philippines’ power generation and distribution industries have seen a surge in investment from new players in the market. The NPC fire sale exceeded its 70% target, demonstrating strong investor confidence in the sector’s future. The government has long argued that this will lead to greater efficiencies and lower costs for the consumer.

The first steps along this path are already under way. The Department of Energy recorded a 99% increase in non-NPC power generation assets in 2010, alongside a 9.5% spike in electricity consumption year-on-year. President Benigno Aquino III’s government has also thrown its full support behind the sector, offering the industry a rare thread of continuity in policy from his predecessor.

The Philippines now has one of the most liberalised power sectors in South-east Asia and is set to undergo a period of modernisation and expansion. Facing investors and providers, however, is a consumer-led economy. Energy-hungry industry that has long served as the power sector’s baseline of demand in other economies is largely absent in the Philippines. Without this, Philippine power providers contend with large non-peak hour surpluses that erode profitable efficiencies.

The government previously sought to offset these surpluses through transition supply contracts with NPC purchasers’ assets, thus guaranteeing their rates. But these contracts are now expiring and providers are upping their rates, ostensibly to fund infrastructure upgrades and expansion. The government maintains that higher prices have been necessary to keep the sector competitive and attractive to investors.

But with average residential rates already at $0.18 per KWh and $0.13 per KWh for businesses, such hikes are widely unpopular. The Aquino administration has made severe cuts to energy subsidies, a mainstay of governments in South-east Asia, both to offset burdens on the treasury and allow for a more competitive market economy to emerge. Yet further government intervention in the energy sector cannot be discounted given the admitted failure of the 2001 Electric Power Industry Reform Act to reduce prices. With the House Energy Committee laying blame at the feet of the Energy Regulatory Commission and the Power Sector Assets and Liabilities Management Corporation last year, President Aquino’s penchant for intervention and reform may kick in, upsetting market dynamics.

A number of other obstacles may also frustrate investors’ plans, especially the infrastructure costs of powering the islands. Since the Philippine archipelago consists of more than 7000 islands (many of which are uninhabited) the market is fractured among the islands that need power, resulting in high infrastructure costs to provide them energy. Moreover, having doubled its per capita GDP in just a decade, the Philippines is expecting continued growth in demand, but 51% of this increase remains in rural and outlying areas.

The government is investing almost $300m at $58.71m per year until 2017 in rural electrification projects, but it is starting from a low base. “Never in the history of the Philippines has there been such a huge allocation for electrification,” said the secretary of energy, Jose Rene D Almendras, in October last year.

Local government, the private sector and consumer groups have now been engaged in talks with the central government and NPC that are expected to provide a firm footing for new providers in rural areas. Past rural privatisation efforts have seen mixed results. Just two of 14 island projects have been met with commercial success, according to industry observers who spoke to OBG last year.

The development of the energy sector by regulators has also been artificially weighted in favour of the renewable segment. This may have earned the Philippines deserved acclaim, yet the immediate limitations of the market combined with high investment and technology costs have necessitated further subsidies.

Universally applied feed-in tariff rates of $0.13 per KWh, which are set to be introduced by 2014 to protect green power projects, have resulted in much public outcry on power-rate hikes, and this segment will need to develop rapidly if it is to thrive beyond the publicly funded subsidises. Moreover, the green power projects have yet to prove cost-effective against more traditional fuels.

Coal and natural gas remain the favoured fuel source, and thousands of megawatts of coal-fired capacity are included in the National Grid Corporation’s national development plan. In line with Aquino’s long-term energy plans, use of domestic reserves in support of self-sufficiency will be prioritised. By the middle of this year the government expects to award 15 new service contracts for drilling rights in 10m ha covering the Sulu Sea basins, and north-west and east Palawan.

Released for bidding last year, the Fourth Philippine Energy Contracting Round (PECR4) may bring the Philippines into direct confrontation with China because the latter has claimed the entire Spratly Islands, part of which is included in PECR4. However, the politics involved are complicated and expectations are mixed, especially given the US’s intervention in favour of Vietnam’s own territorial claims and multi-lateral negotiations in July 2010.

Just how distant that possibility seems is evident in the multi-national corporations lining up to bid, supported by Aquino’s Philippine Upstream Petroleum Taskforce, established to streamline government rules and regulations on exploration. The taskforce includes the likes of Shell, Total, BHP Billiton and Exxon, which could have a chance tap the region’s estimated 28bn barrels of oil and 900trn cu ft of natural gas reserves.

The Aquino administration, however, is now more cautious. Past projects have sometimes lacked serious bidders, so qualification criteria are higher and more stringently enforced. This may mean fewer bidders, but competition for a piece of the Philippines’ energy sector has already powered up.

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