power and water

[ANALYSIS] Seeking the truth behind the electricity subsidy lie

Dean de la Paz

This is AI generated summarization, which may have errors. For context, always refer to the full article.

[ANALYSIS] Seeking the truth behind the electricity subsidy lie

Raffy de Guzman/Rappler

'Despite official misrepresentations, subsidies do exist in our milieu albeit are charged against non-subsidized consumers within the franchise'

Last July, in a forum on the high cost of electricity, a Department of Energy (DOE) official was asked why prices had reached unprecedented levels. Breaching P11 per kilowatt-hour (kwH), prices that should average between P8/kwh to P9/kwH consistently hovered over P10/kwH for almost a year. It was at those levels since a least-cost power generator was literally forced out of the grid, effectively facilitating a way for a higher cost plant with lower dependability ratings to enter the Wholesale Electricity Spot Market (WESM).

At the WESM where generators offer their capacities subject to a dispatch protocol, a second cap was imposed as prices bloated higher than those under bilateral contracts. As a high-price metric, simply count the number of caps and the frequency these are invoked. We have two high-price caps and records show almost a third (28.28%) of the time, the second was needed to forestall astronomical price hikes.

For consumers, power rates remain on a rollercoaster ride, volatile, and prohibitively high relative to our capacity to pay. Understandably, believing we have one of the highest rates in the region, such affects not only household economics but also our attractiveness as a viable destination for critical foreign direct investments (FDI).

Like a bad joke on the existence and impact of power price subsidies, quoting verbatim, a DOE factotum said, “It’s true, our price of electricity is higher than other countries in Asia. First of all, we are not subsidized. If we subsidize, who will subsidize? It will come from us.”

Let us examine that statement. It is not a question of subsidized “apples” against un-subsidized “oranges.” We need to analyze beyond simplistic soundbites.

Invoking the narrowest interpretation of a direct government grant to lower prices, the statement provided an excuse. Unfortunately, the statement is misleading. Heaven forbid, it is a lie. It is not a question of “if” we subsidize. We subsidize. Our billing statements are proof.

Since every centavo in a billing statement is authorized by energy regulators, the current 20% to 100% subsidies selectively granted to poorer consumers in a franchise area represent socialized pricing effectively government-created and imposed.

Categorized under “Subsidies,” lifeline rates were created under RA 9136 and later amended by RA 11552. To recover the discounts, distribution utilities (DU) bill all end-users in their franchise area thus re-channeling from the rich to the poor.

Conceptually questionable, these are applied a Value-Added Tax (VAT) of 12% – a tax on a “tax” as ludicrous as a VAT on systems losses.

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Supply somewhat stabilized when an emergency bilateral agreement between our largest DU and a significant least cost generator was signed. This allowed the latter to average-down power rates.

All would have been hunky-dory had not the agreement been terminated and shortages again loomed. Worsening matters, a Power Supply Agreement (PSA) negotiated through a Competitive Bidding Process for 1,800 megawatts (MW) remained un-approved by government regulators.

Fortunately, private DU rates in Luzon are 33% below the average for 46 other markets including those in the Visayas and Mindanao. Between June and July, rates fell mostly due to the bilateral least cost PSAs and a seasonal reduction in generation charges.

During the cooler rainy season, demand decreases. Hydroelectric plants likewise kick in. This is validated by the 9.21% incidences of breaches of WESM’s secondary price cap.

A study conducted by the International Energy Consultants (IEC) is being cited to justify that our rates are reasonably priced relative to other electricity subsidized economies – a notion that supports the DOE’s declarations on subsidies.

Unfortunately, persistently high rates impact negatively on potential FDI where neighboring economies charge less for power as they consciously trade off subsidizing their markets to attract FDI and incentivize local industry to create jobs, lower inflation, and produce higher per capita GDP and greater manufacturing activity. Vietnam’s subsidy policy is a case in point.

Despite official misrepresentations, subsidies do exist in our milieu albeit are charged against non-subsidized consumers within the franchise. Apparently, these do not rationalize rates enough to attract FDI. During the first nine months of 2023, as rates bloated, FDI fell by 16% from the same period in 2022.

Subsidized communities within a DU’s franchise exist, but what about unconnected off-grid communities?

In rural areas subsidies are existentially critical in providing electricity, even at prohibitive costs where the DOE has failed to connect communities to the national transmission network. These enable electricity cooperatives (EC) to secure debt-capital to establish renewable energy (RE) plants to average down rates, and co-generate or replace higher cost power provided by the state.

A 2021 study from the European Union-Access to Sustainable Energy Program (EU-ASEP) recognizes the existence of subsidies and interestingly, they show a fatal flaw in the DOE’s subsidy program.

For off-grid communities there is a Universal Charge for Missionary Electrification (UCME) for generators and end-consumers to catalyze electrification, and through its subsidized approved generation rate (SAGR), equitable power pricing.

As currently applied, following a flawed uniform subsidy system, the DOE formula grants subsidies as a function of consumption regardless of consumer class. How ridiculous is that? Should an off-grid community host a higher power-consuming enterprise like a quarry, a mill, or a canning facility where these enjoy higher subsidies and given relative cost impacts, the system burdens lesser consuming households who enjoy less subsidies.

Worsening matters, UCME has been increasing exponentially as officials rethink granting subsidies in its entirety. Since UCME provides bankable security for ECs to operate their own debt-capitalized plants, proposals to excise or reduce the UCME would be a death knell for rural ECs.

First, energy officials effectively cursed island grids with expensive diesel-driven decrepit power plants. Now officials deny the existence of subsidies yet lifeline rates, UCME, and SAGR exist. Finally, there is a deal-driven drive to install nuclear plants in communities inadequately electrified yet suffering from the highest power rates. All result from a toxic chemistry of poor policies, misguided prioritization, and misinformation. – Rappler.com

Dean de la Paz is a former investment banker and managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance, and Mathematics professor. He collects Godzilla figures and antique tin robots.

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