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Business

Power rates: Up, up, and away

BIZLINKS - Rey Gamboa - The Philippine Star

Power rates are likely to increase further in the coming months as the impact of higher coal and crude oil importation costs trickle down to consumers, mainly due to a weak peso that has magnified the effect of high fuel prices for power generation.

In particular, in the seven months since Russia invaded Ukraine, world coal prices have more than tripled, and now remain elevated in solidarity with crude oil and gas prices. Thus, for the Philippines, which is largely dependent on imported fossil fuels (except natural gas), the depreciation of the peso, now already by 14 percent, can be catastrophic.

The peso has been performing badly during the year, reaching new record highs in the last couple of weeks. Recent projections do not see the peso returning to P51 to $1 anytime soon, with some forecasts for the peso breaching the P60 to a dollar mark in the next 12 months.

While a weak peso is seen as favorable to families dependent on foreign currency remittances, especially the US dollar, it can be devastating on import payments as reflected by the continuing decline in the country’s gross international reserves (GIR) and the widening balance of payments record.

While the Philippines is experiencing upheavals not far off what other countries in the region are going through, our government must still be seen as more proactive in mitigating the effect on consumers who will be hardest hit by what is happening.

Recent wage hikes are already not enough to cover for the latest round of transportation fares, more so higher electricity rates even for those considered as subsidized households in Metro Manila and other areas served by Meralco.

Poor households hardest hit

High electricity costs are becoming more apparent throughout the country, even more noticeable in provinces that traditionally experience elevated rates because of a passed-on higher cost of power generation, mainly from diesel, and transmission charges.

In parts of the country served by electric cooperatives, that are non-stock, non-profit entities with a mission to support the government’s rural electrification program, power rates can reach as high as P21 per kilowatt hour (kwh) for their consumers, many of them poor households.

Electric cooperatives besieged by irate customers are clamoring for a review – even a repeal – of the current Electric Power Industry Reform Act (EPIRA) of 2001, which they claim has not only failed to ensure a reliable supply of electricity for the country, but has dismally been unable to bring down prices.

The high cost of electricity in rural areas has been a problem during the last two decades, but has worsened further in recent months because of the high prices of imported coal used by independent power producers (IPPs). A weak peso that is expected to prevail over the next few months will definitely worsen the situation.

Even in urban areas served by large electricity distribution companies like Meralco, the Visayan Electric Company, and the Davao Light & Power Company, commercial rates have inched up because of expensive imported coal.

Other new pressures points are also building up. One comes from SMC Global Power (SMCGP), which operates the 1,200-megawatt coal-fired Sual power plant in Pangasinan that supplies electricity to Meralco under a 2019 fixed-rate power supply agreement based on low coal pricing.

SMCGP, which has applied with the Energy Regulatory Commission (ERC) for a temporary six-month rate increase on its agreement with Meralco, is understandably losing money. According to the power producer, the petitioned increase if granted would result in a P0.30 per kwh rise in rate charges to Meralco.

The ERC will be hard-pressed to ignore SMCGP’s petition, whose last resort is an abrogation of the original agreement to stem further losses. Given the unstable power supply situation in the market, Meralco will be forced to buy power from the electricity spot market, which given its volatility, could result in much higher rates for consumers.

Import directives

The administration of former President Rodrigo Duterte had come up with a slew of inflation-fighting measures on its last month, including the suspension of the seven percent tariff on coal importation from countries outside the ASEAN-India Free Trade Agreement to ease the cost generation pressures on coal power plants. Apparently, this has not been enough to stop coal-dependent IPPs from raising their pass-on generating costs.

Worse, the Bureau of Customs recently issued a new directive on coal import taxes from Indonesia that could result in up to a P1.70 per kwh increase in generating costs. Indonesia is currently the biggest source of coal for the Philippines, and together with Australian coal, accounts for the biggest energy sources of the country’s coal-fired power plants. Coal now fuels over 42 percent of electricity generation in 2021.

It is crucial for the Department of Finance to weigh in on the BOC’s “misguided” directive as quickly as possible to avoid additional pressure on electricity rates. According to IPPs that will be affected, the BOC should recognize that there are different kinds of coal based on calorific values, and as such must be correspondingly taxed.

Many coal-fired power plants built in the Philippines were designed to run on cheaper coal, and if their imports were going to be taxed on higher-priced coal, this would only leave them with no recourse but to pass on the higher cost to consumers.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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