FORMOSO, CHRISTOPHER

ECON401SU
Case Study # 1 Energy Security of the Philippines
As recent as late 2014, Philippine President Benigno Aquino, has been seeking
congressional support for special powers to contract additional power capacity to
prevent energy shortage in Luzon in the summer of 2015. The plan was to
contract and install power generating sets that would cover our energy deficit due
to weather conditions (El Nino) and planned maintenance shutdown of the
Malampaya power plants. However finding out this was no longer feasible, the
government and its lawmakers decided revising President Aquinos proposal and
came up with the Interruptible Load Program (ILP) adopted early April 2015.
The ILP was to enable and compensate firms with large enough power demand
to generate its own energy through diesel generators. Thus de-loading the grid of
capacity demand closing the gap with energy supply and demand. As
sophisticated and clever the program might be compared to a blunt and
straightforward approach of the Ramos administration in dealing with the power
crisis of the 90s, at the end of the day it results in higher than regular production
cost which ends up being paid by the general public; a temporary solution to a
fundamental problem of sustainable supply.
Energy Security. The Asia Pacific Energy Research Centre proposed to define
energy security as the ability of an economy to guarantee the availability of
energy resource supply in a sustainable and timely manner with the energy price
being at a level that will not adversely affect the economic performance of the
economy.
Going by this definition without any quantitative comparisons or measures of risk,
we can already conclude our country to be energy insecure just by looking at
price shocks and power outages. The aim of this paper is threefold. Firstly, to
present the facts and figures of how our countrys energy supply is lacking not

only in capacity but also in infrastructure reliability leaving electricity prices high
and open to volatility. Secondly, is to explore the political history of energy in our
country which may have led to our present day situation. And thirdly, is to look at
the different issues and solutions being enacted on today by both the private and
public sectors.
Supply and Demand. In December 2012, the Department of Energy (DOE),
whose main task is to take care of the countrys energy needs under the
leadership of Secretary Petilla, launched the Philippine Energy Plan 2012-2030,
which laid down a roadmap for future demand and capacity addition plans.
According to the plan, installed capacity in the country was 16,250MW back in
2012 and is expected to go up to 25,800MW by 2030. On the other hand, the
same plan also shows that this capacity expansion by 2030 is inadequate for the
projected demand being 29,330MW. The study shows an expected growth rate of
5.28% per year in demand based on a 0.8 elasticity ratio with economic growth of
6.6% GDP.
Alongside the lack of supply there are also a lot of transmission and distribution
problems. The Energy Regulatory Commission (ERC), whose mission is to
protect the long term interests of the consumers, allows downtime in electricity
delivery to customers of 2,700 minutes a year of outage times over 20
occurrences, versus EU regulations allowing only 23 to 100 minutes a year over
0.5 to 2 occurrences after which penalties are applied.
Last June 8, 2015, it was reported by The Manila Standard Today that
municipalities from Luzon, Visayas to Mindanao are experiencing rotating
brownouts with a range of 6-11 hour power outages with a warning that it could
still get worse with lower water levels in hydro plants in Lanao and Bukidnon as a
result of weather disturbances like El Nino.

Price. The Philippines electricity tariffs are said to be among the highest in the
world. In a study prepared by International Energy Consultants (IEC) in June
2012 and commissioned by the Manila Electric Company (Meralco), the countrys
biggest electricity distribution utility company, Meralcos average retail tariffs
pegged at US$0.2026 per kilowatt-hour (kwh) or ~PhP8.82 are ranked ninth
highest in the world and the second highest in Asia (next only to Japan). The
biggest component of this tariff is the generation component, at 65 percent of the
overall retail tariff.
The intrinsically high cost of producing and delivering electricity in Luzon, and the
Philippines generally, owes itself as well to the countrys dependence on
imported fossil fuels. As of end-2011, imported oil and coal plants comprised 49
percent of the energy production mix. Fuel for these plants is paid at full
international market prices. Essentially this leaves our output energy prices highly
dependent upon external market forces we have little to no control.
Though a lot of people are unhappy and quick to point out our disadvantages
with our higher cost of electricity as compared to our Asian neighbors, the IEC
argues that this only means that our tariff rates reflect actual costs of supply.
Countries like Thailand, Indonesia, Malaysia, Korea and Taiwan, enjoy
government subsidies that reduce their tariff rates which the IEC considers as
bad economic practice and ultimately unsustainable.
If high electricity prices actually lead to less economic opportunities for our
country and deter local and/or foreign investments into heavy industries within
our borders, then would it really be that bad? Instead what we do have are a lot
of government taxes contributing about 10% to the total meter price.
Key Players. It is also worth noting that in the Philippines, despite political efforts
of privatizing the energy industry to bring in market forces of efficiency and

competition, there are only a handful of companies who control a majority our
nations power supply. Some might even define this as a classic oligarchy.
The top power producer in the country in 2012 was San Miguel Energy Corp.
who controls 20 percent market share and a part of the giant San Miguel Food
and Beverage Corporation. Second is the Aboitiz Power Corp., a business clan,
who controls 17 percent market share. Third is First Gas/First Gen. of the Lopez
group. Together they control more than half of the Philippine electricity market.
The National Power Corporation. In 1936, Napocor or the National Power
Corporation (NPC) was established to construct, operate and maintain facilities
for the production of electricity. But not until 1972 did the NPCs position in the
power industry concretized during the Marcos regime with the issuance of
Presidential Decree No. 40 (PD 40), which states that NPC now controlled both
the transmission grid and the setting up of power generation capacity within the
grids. The intent was to effectively nationalize the energy industry giving the NPC
full monopoly and control integrating into one system of generation and
transmission.
Yet as with all seemingly good intentions, a decade and a half after PD 40 and
Marcos regime was toppled by the People Power and replaced by Cory Aquino in
1986, NPC had accumulated billions of debt and lacked the financial capability to
operate and maintain all of its power plants as well as build new ones that would
increase capacity for an impending power crisis. To address this, then President
Cory Aquino, mother of our current president, passed Executive Order No. 215
(EO 215) that was to allow and promote private sector participation in power
generation and take back NPCs monopoly.
Three years after the issuance of EO 215 and to bolster private sector
participation in power generation, Republic Act No. 6957 was enacted, more
popularly known as the Build-Operate-and-Transfer Law (BOT Law). It permitted

private contractors to build and operate power generation facilities with certain
guarantees of a reasonable return of its investment and operating and
maintaining costs.
Despite these efforts, demand still largely outpaced supply due to NPCs failure
to maintain its plants running at only 50-70% of its capacity during this period.
To exacerbate the situation further was the decision by the Cory Aquino
administration to mothball the Bataan Nuclear Power Plant (BNPP), which was
then about ready to be completed towards the end of the Marcos regime and of
which debts we still pay today.
All of these factors on top of an underinvested private sector into power
generation led to the power crisis of the 90s that caused up to daily 12-hour
blackouts.
Addressing the power crisis, the Ramos administration strengthened the BOT
Law further and pushed for the implementation of Republic Act No. 7468 or more
popularly known as the Electric Power Crisis Act of 1993, which gave the
President the power to enter into negotiated contracts to build, repair and such
power plants and reorganize the NPC.
This was mostly a success for the Ramos administration being able to attract
more than $6 billion of investments and about 4,800 MW of installed generation
capacity.
Industry Overhaul. In 2001, despite the success of new investments and
generation capacity by the Ramos administration, NPC was still in deep debt.
The NPC owing more than $16 billion to creditors, Congress enacted Republic
Act No. 9136, or the Electric Power Industry Reform Act of 2001 (EPIRA), whose
aim was to deregulate the generation sector, unbundle supply activities, creation

of new government owned transmission company and a new regulatory body, the
ERC. Also, EPIRA introduced the sale of assets and contracts to Independent
Power Producers (IPPs), proceeds of which were used to pay off NPCs debts.
EPIRA has since transferred more than 70% of the remaining assets of the NPC
through the Power Sector Assets and Liabilities Management Corporation
(PSALM) creating more than $10.21 billion in revenue principally used for debt
payments.
Happy Ever After. The transformation of the power industry opened our doors
for direct investments in the energy sector and an opportunity to create a new
competitive landscape to let market forces shape a new industry. Yet here we are
today with the same high prices and power shortages of two decades ago. We
are still sensitive to increases in world oil prices and suffer from asymmetric price
shocks to supply outages.
Theoretically given the strength and intent of the policies we should be in a
different place today after two decades of public and private sector efforts for
energy security. But it seems that the only reason thats being presented to us is
that the implementations have been severely delayed, and were left with our
current Presidents solution thus far thats being implemented is basically a
subsidy for large power consumers to get the off the grid using taxpayers pesos
to temporarily. Clearly something is not working.
Renewable energy has been touted as the savior of our energy crisis with great
long-term national benefits. Feed in Tariff (FIT) and zero-rated Value Added
Taxes (VAT) that lessen business uncertainty to incentivize power producers. But
then theres a limited yearly RE installing cap.
Is this all that we really have for the future of such a critical commodity as
energy?

APA Citations.
Petilla, C. (2013). Electric Power Supply-Demand Outlook for 2012-2030.
http://www.doe.gov.ph/
Afable, P. (2013). The Players : The Philippine Power Industry.
https://www.kpmg.com/
Antonio, H. (2013). History of the Philippine Power Sector.
https://www.kpmg.com/
Molina, J. (2013). Power Pricing in the Philippines. https://www.kpmg.com/
Garcia, B. (2015, June 07). ILP Fails to Lessen Brownout Hours.
http://www.sunstar.com.ph/
Balea, J. (2014, July 29). Power Emergency : What it means.
http://www.rappler.com/
WWF: Renewable Energy Best Solution to Power Crisis. (2015, July 02)
http://wwf.org.ph/
Sector Assessment. (n.d.) Retrieved July 3, 2015.
http://www.adb.org/sites/default/files/linked-documents/cobp-phi-2013-2015-ssa02.pdf
Pernia, E. (2015, May 28). The sun rises and falls.
http://www.econ.upd.edu.ph/perse/?p=4625
Sicat, G. (2014, September 6). The abandoned nuclear power plant, todays high
electricity prices and unsteady supply. http://www.econ.upd.edu.ph/perse/?
p=4083
Sicat, G. (2013, December 22). High cost of power plust the shocking Meralco
bill. http://www.econ.upd.edu.ph/perse/?p=3360
Diokno, B. (2013, December 22). Folly of government subsidy.
http://www.econ.upd.edu.ph/perse/?p=3355
INFOGRAPHIC: Top Power Players in the Philippines. (2013, January 16).
http://www.rappler.com/rich-media/14729-infographic-top-power-players-in-thephilippines
Winzer, C. (2011, July) Conceptualizing Energy Security.
Villanueva, M. (2014, January).
http://www.philstar.com/opinion/2014/01/03/1274564/overtaxed-power-industry