The Philippines pays among the highest electricity prices in ASEAN. This heavy cost burden is holding back economic modernization, limiting overall competitiveness, worsening the current account deficit, and undermining the ability of the Philippine economy to attract foreign direct investments.
And as for the consumer, the impact comes in the form of the large energy bills. Perhaps worst of all, the high cost is unnecessary.
Certainly, the geography of the country poses a challenge, but one of the key reason prices are so high is because the country’s continued dependence on imported coal and oil, instead of developing its own domestic renewable energy supply and natural gas. Perhaps a decade or so ago, there was an argument to be made that in terms of cost the Philippines has little choice but to import coal and diesel.
But latest research by top industry analyst Lazard shows it is more expensive to operate conventional fossil fuel energy sources in developing countries like the Philippines than developed countries.
Coal and diesel are no longer the cheap option. In fact, coal price has literally doubled over the past year, meaning today we are paying almost US$100 per ton compared to a low of just US$50 in 2016. This unforeseen shift could result in the Philippines’ current account deficit increasing by US$1.75 billion per year by 2021.
And while the price of coal is rising, that of solar and wind power in particular have dropped to the cheapest electricity generation sources. Globally, the cost of solar has dropped by 99% since 1977, and a staggering 50% in just the last two years and similar reductions in wind are also widely reported. As scale increases and technology improves the trend shows no sign of slowing.
Home-grown solar is also well adapted for the country’s many small island grids, which are currently served by subsidized, imported diesel generators and suffer from rolling blackouts and unplanned power outages as a result of grid instability and inadequate generation capacity. Fortunately, cleaner and increasingly cheaper options are available with a leadership smart enough to grasp the opportunity instead of being held to ransom by foreign proponents of expensive coal and oil.
The policy question posed here is whether it makes sense for the national government to continue to allow expensive coal and oil to dominate the energy mix of the Philippines. Sound economics suggest it is high time to modernize the electric power sector to ensure affordability and reliability in the face of rapidly declining costs and technological advances in renewable energy, liquefied natural gas (LNG), energy efficiency, and storage. Adopting new innovations to build energy security should be a no-brainer.
The Senate’s sensible approval of a coal tax in the Philippines is a significant step in the right direction and demonstrates this message is beginning to permeate our energy policy. The coal tax sends a clear long-term policy signal to investors to invest in affordable and reliable power infrastructure, building diversified electricity generation and baking in long-term energy sector deflation.
It is important to note that the coal tax is part of the operating cost, not the fuel cost, making coal companies bear the brunt of the costs. As for the electric cooperatives solely supplied by coal or diesel, this is an opportunity to help them reduce electricity costs by incentivizing the procurement of least cost, cleaner options.
Energy infrastructure projects registered with the Bureau of Investment last month alone include three solar and one hydro power projects totaling almost P15 billion. A coal tax will drive more more energy infrastructure projects. We must accelerate sustainable and inclusive development by generating the resources for modern infrastructure.
But there’s much more to be done, especially since our country has 24 coal plant projects, totaling 10,423 megawatts (MW) of legacy coal expansion, in its current pipeline approved by the Aquino administration. This runs on top of a total of 7,419 MW of existing coal-fired capacity.
Given that renewables are increasingly the least-cost option. IEEFA contends these coal plants carry clear stranded asset risks which will result in over P1 trillion of additional unnecessary costs, which the consumer (both industry and household) may end up paying for in the end. But with the swift implementation of simple regulatory changes, this fate is avoidable.
Right now, for instance, regulations allow energy operators in many parts of the country to automatically pass through increased costs from coal to the consumer. Ending this will immediately create an incentive to identify cheaper domestic power options. We must also remove the huge subsidies enjoyed by fossil fuels as well as increase competition to drive down electricity prices. In countries like India, Chile, and Mexico, competition produced record low cost renewable energy auctions in recent months.
Around the world, countries are rapidly shifting to cheap clean energy. We need to transition now or face the massive economic and financial costs of being left behind.
Sara Jane Ahmed is an analyst at the Institute for Energy Economics and Financial Analysis, which conducts research and analyses on financial and economic issues related to energy and the environment.