October 25, 2017 Read More →

IEEFA Asia: In the Time of Solar, Ratepayers and Investors Alike Should Be Wary of Philippines Coal Expansion

Stranded Assets in the Making as Global Transition Takes Root

The Philippines, like many of its ASEAN neighbors, is at a crossroads in a potential energy transition that—if managed properly—could lead to more cost-effective electricity for millions of consumers and businesses.

A report we put out last week—“Carving out Coal in the Philippines: Stranded Coal Plant Assets and the Energy Transition—examines the risk the country is taking in proposing a new fleet of over 10,000 megawatss worth of coal plants at a cost US$21 billion.

Filipinos, because the national energy economy is so reliant on imported coal, pay among the highest electricity rates in Asia.

These plants would face imminent “stranding,” with renewable energy generation already cost-competitive for most slices of the load curve in the Philippines in a trend that—within the right regulatory framework—will see costs continue to fall and will put coal-fired power at a distinct disadvtange.

Utilities are beginning, perhaps, to see the light. Manila Electric Company (Meralco), for instance just this month sealed a solar power supply deal for 85 megawatts of capacity at P2.99 per kilowatt-hour (kwh). This contract is a reflection of one of the main drivers of transition—the cost-deflation effect of renewable energy—that will very likely create stranded assets across the coal industry. Another timely example of the existential threat to coal comes by way of a Sunray Power service contract with the Philippines Department of Energy to develop a 100-megawatt solar PV project at Clark Green City in Tarlac.

ADDING RENEWABLES TO ANY ELECTRICITY SYSTEM erodes the utilization rates of coal power because clean energy has become the least-cost option in many countries.

This trend is in stark contrast to coal prices in the Philippines, which soared last year by 60 percent, offering a vivid illustration of how coal-import electricity economies are at the mercy of price volatility. Filipinos already pay among the highest electricity rates in Southeast Asia, and coal price spikes don’t help.

The cost-deflation effect of renewable energy is powerful, and combined with retail competition and the rise of natural gas, is a red flag for coal-fired generation.

Nevertheless, distribution utilities seem bent on signing a power purchase agreement with coal-fired generatorts that could commit the country to 20 more years of reliance on coal. If this plan proceeds ratepayers and taxpayers will end up bearing a disproportionate amount of stranded-asset risk compared to what financiers, developers, and distribution utilities are accepting.

A good place to begin to correct this imbalance is for banks in the Philippines to incorporate stranded-asset risk in project finance underwriting. Banks, either through negligence or by design, have historically not done so, but they can be encouraged by their investors and regulators to update that outmoded practice.

Decisions taken now will have consequences for consumers for decades to come. Prudent policy can equitably redistribute stranded-asset risk and remove coal subsidies that promote moral hazard, distort markets, skew the playing field toward outdated electricity production and ultimately hurt consumers and business across the entire Philippine economy.

Sara Jane Ahmed is an IEEFA energy finance analyst.

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