Ancillary services

In a press briefing, Meralco’s Larry Fernandez, head of Utility Economics, explained that consumers will not feel the full impact of Meralco’s 59-centavo-per-kWh reduction because transmission charge increased by 30 centavos per kwh.

It’s not NGCP’s fault. The increase is largely due to the cost of ancillary services (AS) which is a pass-through charge.

Sixty percent of the money collected and tagged in our bills as transmission cost does not go to NGCP but to power generation companies contracted to provide ancillary services or to the Independent Electricity Market Operator of the Philippines (IEMOP) via the Reserve Market.

NGCP transmission rate data shows the overall transmission charge ranges from roughly P1.35 to P1.68 per kWh.

NGCP’s wheeling rate or what it charges to deliver power is around P0.54 to P0.70 per kWh.

The ancillary service fee, on the other hand that goes strictly toward paying for these idle backup reserves, is around P0.60 to P0.85 per kWh.

What are ancillary services?

Ancillary services are critical support required to stabilize the power grid. They help the grid respond quickly to sudden changes, such as fluctuations in demand, changes in renewable energy output or the unexpected loss of a generating unit. This helps prevent disturbances from escalating into wider power interruptions.

In most international power grids, ancillary services usually account for only five percent to 15 percent of total transmission costs. In our case, they make up about 60 percent of transmission charges.

That anomaly can all be traced to our dysfunctional power system that’s supposed to be market driven. But with very thin reserves that often evaporates completely, basic law of supply and demand dictates atrociously high rates.

Ancillary services are sourced from the same pool of available power supply so it doesn’t even give the insurance we are paying for if the power demand is more than available supply. A power failure still happens.

Our Department of Energy contributed to the abnormally high ancillary rate. DOE mandated NGCP to secure 100 percent firm contracts for backup power to prevent blackouts.

Maintaining firm back-up capacity requires paying generating plants high availability fees, which often exceed the actual physical cost of transmitting electricity (NGCP’s wheeling rate). NGCP is required to pay generators even if they don’t use a single watt in take-or-pay contracts.

DOE’s strict 100 percent firm contract mandate is not standard international practice. While it seems to offer maximum grid reliability, it creates severe economic inefficiency.

DOE issued the mandate because under older, “non-firm” contracts, power plants could choose not to provide backup power if they preferred to sell it elsewhere. A firm contract legally binds them to provide.

But it is rather unreasonable to force consumers to pay a massive premium (“take-or-pay” availability fees) to keep massive power plants idle, just in case they are needed.

Based on NGCP data, the average utilization of firm AS contracts for January to June 2026 is extremely low. For regulating reserve (RR) in Luzon, it is just 13.72 percent; for contingency reserve (CR) it is 10.53 percent and for dispatchable reserve (DR) it is 1.59 percent.

In the Visayas, it is 6.70 percent for RR; 0.69 percent for CR and 20.68 percent for DR.

In Mindanao, it is 4.80 percent for RR; 4.04 percent for CR and 0.78 percent for DR. Like in system losses, we are forced to pay for something we don’t use.

The DOE mandate also creates a seller’s market. Since the oligarchs who own the power plants know the grid operator must contract 100 percent firmly, they can demand exceptionally high-capacity fees.

Unfortunately, the high cost of ancillary services is a financial symptom of a larger physical problem: the country simply does not have enough excess, reliable (non-intermittent) power generation. Our physical shortage of power directly drives up both the spot market prices and the ancillary service costs.

In a properly functioning power grid, there is an “energy market” (for daily electricity) and a “reserve market” (for backup ancillary power). In the Philippines, the tight supply intertwines them.

Our regulators must realize it is not possible to permanently lower ancillary service costs through market rules or regulatory caps alone. Until the supply margin widens, backup power will always command a premium.

How much do these “idle capacity fees” add to the average household electricity bill?

The “idle capacity fees” bundled into Ancillary Services is estimated to currently add roughly P120 to P260 per month to the average household electricity bill in the Philippines.

If the Philippines successfully transitioned to the global standard where ancillary service costs drop to only 10 percent of transmission, this line item would cost an average 200 kWh household only about P15 to P20 a month instead of P150.

Because consumers are forced to pay for a 100 percent firm backup mandate under tight grid supplies, households are effectively paying a structural “reliability premium” every month just to guarantee that an idle fossil fuel plant keeps its engines warm.

Building large-scale Battery Energy Storage Systems (BESS) is one solution.

By separating “emergency backup” (which still requires large physical plants) from “grid stabilization” (which belongs to batteries), the Philippines can tame the ancillary price crisis.

When a traditional coal plant acts as a mandatory ancillary backup, it must constantly keep its boilers hot or engines warm just to stay ready. Consumers pay for that wasted “readiness” fuel.

A battery requires zero fuel to stand by. It sits quietly at 100 percent charge, drawing a tiny fraction of power to maintain its systems. It consumes zero fuel until the exact millisecond the grid experiences a fluctuation.

Introducing large-scale batteries also breaks the oligopoly of coal and natgas power plants. Batteries can rapidly inject competition into the IEMOP Reserve Market.

So, here is another issue after system losses that a review of EPIRA must deal with… the sooner the better for consumers.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco.