Key Findings
Green strategies now have the potential to reduce the Philippines' long-term power costs by ending dependence on imported fossil fuels.
New capacity should now prioritize system flexibility and resilience over a single-minded focus on baseload generation.
Executive Summary
The COVID-19 pandemic has exposed serious weaknesses in the design of the Philippines’ power market.
As an importer of fossil fuels, locking in long term guaranteed contracts with large scale fossil fuel facilities has not delivered a least cost system. Instead, it has led to inflexibility, price instability, and negative effects on the balance of trade. In 2019, coal imports represented 7% of the nation’s yearly trade deficit.
The Philippines’ hybrid power market structure has large private players that should, in theory, be more responsive to some market trends. Instead, COVID-19 has exposed the reality that:
- residential and commercial consumers in the largest grids remain highly exposed due to an over-reliance on inflexible baseload coal power;
- electric co-operatives with smaller systems lack the negotiating power and funding to adapt quickly and are highly exposed to inflexible capital and technology.
The biggest challenge for the market has been the need to identify more flexible dispatch strategies to address dramatic changes in demand over the past three months.
Of the three main island groups in the Philippines, Luzon experienced the largest load drops during the COVID-19 lockdown period. MERALCO, the largest utility company, experienced a peak demand drop of almost 40% to 4,516 megawatts (MW) in March 2020 and a further drop to 4,289MW in April. The Department of Energy revealed recently that electricity demand fell by 30% in Luzon, 17% in the Visayas, and 25% in Mindanao.
Power tariffs in the Philippines now average between PHP 9 to PHP 10 per kWh (USD 0.18 to USD 0.20 per kWh) in the main grid—among the highest in Asia.
Now grid operators are looking for ways to adjust to the dramatic decline in power demand over the last three months, as well as answers for questions about the volume and type of power that will be needed in the future.
The Philippines government now has an opportunity to re-visit design options for the market to benefit from new lower-cost technologies and to drive power costs down.
The market has been shaped by regulatory incentives focused almost exclusively on generation capacity rather than system-level resourcing. This has prioritized pricing strategies to mobilize capital for large volumes of baseload capacity resulting in inflexible capacity payments and dependence on baseload coal technology.
This baseload focus, and a reliance on imported fuel, has translated into high tariffs for consumers that can only temporarily be tempered if force majeure provisions are invoked.
Decisions regarding new capacity should prioritize the system’s lack of flexibility and the need for resilience over a single-minded focus on baseload generation.
Green strategies now have the potential to unlock new sources of donor-backed funding that could meaningfully reduce the Philippines’ long-term power costs by ending its dependence on imported fossil fuels.
Timely support for transitioning the energy system to the cost-effective technologies that are currently reshaping global power markets would foster more reliable and competitive power.
If done correctly, the Philippines can come out of the COVID-19 crisis with a focus on recovery and enhanced economic competitiveness. This makes understanding the many cross currents that will shape the Philippines’ response to the effects of COVID-19 even more important.
IEEFA recommends the following measures.
Please view full report PDF for references and sources.
