Lowering Electricity Prices
Posted by butalidnl on 14 April 2010
The Philippines has one of the most expensive electricity rates in the whole world. And this is due to corruption, inefficiency, and the onerous contracts the government went into with the IPPs (Independent Power Producers). There are various ways of reducing electricity prices; some are relatively straightforward, while others more complicated. I suggest that people look into these to see which ones should be done.
Abolish the VAT for Electricity
This is the easiest to do in a technical sense. But of course, it all depends on how the government handles its finances. Eliminating VAT for electricity will mean a reduction of at least PhP 1/KwH. This would be great for residential consumers; although it will make no difference for commercial/industrial consumers.
Renegotiate with IPPs
The Philippine government should renegotiate the contracts with the Independent Power Producers (IPPs). The provision that they get paid for capacity instead of actual electricity supplied should be changed. Instead, they should merely be paid for the actual amount of electricity produced. After all, these days, with many shortages, we can safely say that a well-managed electricity supplier will surely be able to find buyers for all the energy they can produce.
The government is afraid to do this because it fears that investors will shun the Philippines as a result. I don’t think this will happen. We are giving investors too good a deal – this is not normal in the world, and the investors are taking unfair advantage of us. I think we should simply offer investors a good deal; and our growing energy market is indeed a good deal in itself. We will offer them a deregulated market, with no upper or lower limits. This should be enough for them.
The electricity distribution companies e.g. Meralco should implement day/night rates. By this, I mean that the rates for use in the evening and at night should be significantly lower than that for the “day”. Let’s say that the day rate will be valid from 7 am to 7pm, and the night rate for 7pm to 7 am. Then, let the electricity during the night be 30% cheaper than during the day. This will encourage consumers to shift their electricity consumption to the nighttime. Thus, washing machines, flatirons, etc. could perhaps be used more at night. Even companies will be encouraged to shift their production when possible to the nighttime.
The advantage of the lower night rates is that it will make the consumption of electricity more distributed across a 24 hour period, thus maximizing the utilization of the grid and the generating power. At the same time, consumers will benefit because part of their consumption will inevitably fall at night. Many BPO companies will benefit a lot from this, since most of their operations are done at night.
The problem with having day and night rates is that consumers need to have new electricity meters installed. This will cost money, and it will take time. I believe, though, that it will all be worth it.
Allow more Direct Sourcing of Electricity
Business of a certain size should be able to directly acquire energy from other providers, and not only the one which holds the distribution system for an area. This would mean, for example, that a hotel should be allowed to source its electricity from some other company than say, Meralco. Or a factory. Or a subdivision. This can be done. It is the system here in the Netherlands. The geographic distributor merely charges a (reasonable) fee for transporting the electricity to the customer. The various providers would then source their electricity from whichever generating source gives the best price.
This way, there would be more competition in the whole system. And Meralco will no longer be able to simply pass on the generating cost charged to them by their suppliers, but would have to shop around for the best source of electricity themselves. And consumers will be able to get a chance to buy electricity directly for the cheapest price possible.
In the Netherlands, the system is such that all customers could shop around for the cheapest energy provider. Thus, the electricity provider for my neighbors are different from ours – and all providers simply pay the holder of the local grid money for transporting electricity.
The possible problem with this approach will be how the distribution companies behave. They could harass consumers who seek to change providers; and they could also harass the other providers by imposing too high transport fees. The government will need to enforce good rules regarding these and other steps that distribution companies will take to hinder the process.
Make Electricity Companies Declare Prices for 6 Months at a Time
Electricity companies should no longer have the present assured profit system. What kind of business is that? Business means risk taking, and electric utilities should be no exception. We should not pay for all the “passed on” costs of these companies. Electric companies should take on longer-term contracts (i.e. 6 months) that have a fixed price for everything from fuel oil to exchange rates. These should all be fixed through longer term contracts, warrants or options. Then, these prices should be offered to the public as a choice. If some people don’t want this, they should have the option (above) of transferring energy providers.
This would make energy distribution more predictable, and prices more stable. And the contracts, warrants or options, if handled correctly should prevent electricity distributors from suffering losses. This is the way pricing is done in other countries; the Philippines is rather unique in that its electricity prices jump from month to month.
See also:Why Meralco Rates are High