Filipinos should stop holding their breath hoping for power rates to go down. It’s not going to happen, at least not in the next 15 to 20 years.
That was the revelation made by Department of Energy (DOE) Secretary Jericho Petilla during an interview in our radio program “Karambola sa DWIZ” (882AM) a few weeks ago.
Petilla says the problem can be traced to high-priced “offtake” contracts—or the agreement between power producers (generation companies) and electric distribution companies like Meralco to buy and sell a certain amount of “future” electricity produced by power generators.
Petilla adds most of these offtake contracts are generally long-term, (i.e. between 15 to 20 years) because constructing generating plants are capital intensive and investors need an assurance that they can recover their investment by having a guaranteed market for their electricity for several years.
It’s only after offtake contracts expire that electric distributors can re-negotiate the supply agreement at cheaper prices.
But that’s not likely to happen anytime soon especially with the country’s current power situation where demand always outstrips supply. And it seems Petilla wants to keep it that way.
During the interview, Petilla says he has “one news for everybody: the country will never have an oversupply of electricity.”
But as everyone knows, letting demand outpace supply creates a seller’s market, which will inevitably result in high electricity prices. That’s because supply shortages allows sellers (i.e. power generators) to demand higher prices for their electricity.
The DOE chief also says that “no country in the world will ever have an oversupply of electricity” since “oversupply is expensive.”
Well, that’s not entirely accurate.
The United States and Canada both have seasonal oversupply of electricity.
France, for instance, has a huge oversupply of electricity— thanks to its 58 nuclear reactors —that it has become the largest electricity exporter in Europe.
Other European nations like Bulgaria, the Netherlands and Germany also generate excess electrical capacity. In fact, electricity was traded virtually for free at the German power exchange last month when it was sold for about “negative” 3.33 euros per megawatt hour (MWh), which meant power generators had to, in effect, pay their customers for buying and using their electricity.
So Petilla was right about oversupply being expensive— for power producers maybe. But definitely not for consumers like us.
Petilla also boasts that the country’s current power structure under R. A. 9136, or the Electric Power Industry Reform Act (Epira) is being emulated by other countries because our electricity costs are no longer being subsidized by the government unlike Indonesia, for example, where 22 percent of the national budget is allocated for energy subsidy.
The DOE chief’s view echoes that of the International Monetary Fund (IMF) which has been urging countries to remove energy subsidies. Which is not surprising considering that it was the IMF that pushed for Epira.
But if removing energy subsidies are good for a country’s economy, why is it that aside from the Philippines, only a few third-world countries like Armenia, Turkey, Kenya and Brazil adopted IMF’s power reform strategy?
Many economists say that having energy subsidies doesn’t always make for bad economic policy.
They cite China, which managed a 7.5 percent GDP growth and attracted some US$112-billion in foreign direct investments (FDI) last year despite being tagged by the IMF as one of the top 3 energy subsidizers in the world at US$279 billion.
Indonesia, derided by Petilla for its huge energy subsidy, pulled off a 6.3 percent GDP growth and received a massive FDI of US$23-billion—second only to top-ranked Singapore.
In contrast, based on the United Nation’s 2013 World Investment Report, the country’s economy grew by 6.8 percent in 2012 but only received US$2.79-billion FDI—a pittance compared to Indonesia’s.
Analysts all agree that the Philippines’ power rates—the highest in Asia—has made the country unattractive to foreign investors. Citing Indonesia’s experience, they argue that economic growth and FDI inflows spurred by cheap power rates could easily finance power subsidies for industries and consumers.
This is probably why Brazil— the country with the third most expensive power rates in the world after it removed energy subsidies like the Philippines— recently did an about-face by cutting electricity charges to industries and residential consumers by 18 to 32 percent— with the price cuts being “financed” (i.e. subsidized) by the Brazilian government.
With cheaper electricity, Brazilian workers and consumers will spend the savings on goods and services thereby boosting the local economy, while companies will profit from the drop in production costs to become globally competitive and encourage foreign investment, and in the process, re-energize its once-booming emerging economy.
Perhaps the Aquino administration should take a cue from the Brazilians—and erase its legacy of the highest ever power rates for Filipinos.