The Philippines has taken great strides towards meeting its future energy needs but must do more on implementation, competition and infrastructure to turn its goals into sustainable and affordable reality.
Like many of its Southeast Asian neighbours, the Philippines has enjoyed robust economic growth and a rising consumer class. Another fillip came last year when it won investment grade status from all three major ratings agencies, thanks to reforms to improve transparency and efforts to boost growth.
Growth and investment bring huge benefits to the Philippines but carry equally enormous challenges for energy security as more foreign manufacturers come in, local businesses expand and the population – already above 100 million people – grows in size and prosperity.
Primary energy demand among the 10 countries of the Association of Southeast Asian Nations is projected to double between 2010 and 2035. The rise in the Philippines is expected to be even higher at about 105 percent.
Demand for energy in the Philippines is growing across all sectors and peak electricity consumption is starting to exceed supply. To address the demand, coal-based generation has been increasing and will overtake oil sometime after 2025 to account for the largest share of primary power supply in 2035 at 37.5 percent.
This scenario flies in the face of ASEAN’s intent to pursue a low-carbon energy path but the Philippines is not alone. Fossil fuels dominate, so there is a big gap between ASEAN’s vision for clean energy and the increased use of fossil fuels to sustain growth.
Fast-growing energy demand means finding secure, stable and affordable sources of fossil fuels, especially oil and natural gas. It also requires rehabilitation of old energy infrastructure and the construction of new facilities – along with measures to improve efficiency and conservation.
Obstacles include tight budgets and often tepid interest in the power sector from foreign investors. But governments must realise that energy infrastructure is an imperative that cannot be ignored.
Advanced technologies, building and lighting programmes and appliance labeling improve efficiency and energy security while cutting capacity additions and carbon emissions. But there is no use having a labeling scheme unless it is accompanied by robust monitoring, verification, testing and reporting.
The Philippines is no stranger to energy security challenges. It went through its own crisis in the early 1990s with daily brownouts for three years before stable supply was restored by contracting power from independent power producers.
Then the Electric Power Industry Reform Act of 2001 provided a sound framework to restructure, recapitalise and privatize the National Power Corporation assets and to overhaul the industry as a whole. It set the stage for retail competition and open access, enabling big consumers to pick their electricity providers. This has worked to a certain extent but the challenge is to maintain open access when competition laws are weak and the regulatory body is relatively ineffective.
In 2012, the Philippines spent about $12.6 billion on oil imports – a 14 percent rise from 2011. Imported diesel, fuel oil and coal make electricity generation more expensive and the country vulnerable to supply disruptions and global price shocks. Reliable electricity services at competitive rates are essential to improve the investment climate and ensure the economy continues to grow.
The Philippines has the highest residential power prices in Asia after Japan. This is partly because there are no government subsidies like the ones elsewhere in ASEAN but it also comes down to the costs of imported fossil fuels and of stranded assets that were contracted during the power crisis.
Enhancing energy security and keeping power costs down have been the main drivers for the Philippines to set goals for renewables. The Renewable Energy Act of 2008 was passed to accelerate development of these resources and, under the National Renewable Energy Program, the Department of Energy seeks to triple the output from renewables to 15,300 megawatts by 2030 with geothermal, solar, wind and biomass contributing about 30 percent of new generation capacity.
Progress in energy savings is being made as the country’s energy to gross domestic product ratio fell from 5.4 in 2004 to 3.5 in 2012. The government must adhere strictly to the national conservation programme and encourage energy efficient technologies. The Philippines introduced appliance labeling in the mid-1990s but the scheme has room for improvement and higher efficiency standards.
The Asian Development Bank supported the government’s lighting and building efficiency initiatives in 2009, which helped shave about 300 megawatts from the peak. In 2012, the government brought in an electric vehicles project aimed at transforming public transportation. This will help cut emissions and lower the oil import bill.
Aside from Singapore, the Philippines is the only other ASEAN country with a competitive power market and a privatisation programme. This should promote greater efficiency, improve pricing signals and set the foundation for investments to be driven by market conditions rather than planning assumptions.
Substantial progress has been made in implementing the Electric Power Industry Reform Act, including basic market rules and infrastructure for the wholesale electricity spot market. But much more remains to be done and the initial target dates for reforms and privatisation have proven to be overly ambitious.
Further progress is needed to ensure that long-standing financial issues in the power sector are addressed, the wholesale and retail electricity markets are competitive and a force for efficiency, the participants have the capacity to properly manage risk and there is a sound basis for investment in new capacity to ensure security of supply.
Policy makers in the Philippines and elsewhere in Asia must take climate change seriously and develop policies to support a low-carbon path. It may not be possible to make an immediate shift but it can be done in phases. It may not be possible to shut an inefficient power plant and build a new one but actions can be taken to modernise it and reduce its fuel consumption. Instead of grid extensions to rural areas, an off-grid renewable energy system can be introduced and later integrated into the grid.
All of this can be done to improve energy security, boost efficiency, cut imported fuel costs and reduce emissions. All it needs is political will.
Anthony Jude is Senior Advisor and Practice Leader of Energy at the Asian Development Bank.
This article first appeared in the October issue of Platts Insight.
By: Anthony Jude