Renegotiate IPP contracts, Lower Electricity Rates

The Independent Power Producers (IPP) contracts with the government-owned Napocor is the single biggest reason why electricity prices in the Philippines are hitting the roof. These contracts contain  “take-or-pay” clauses which says that Napocor buy 75% to 90% of a power plants production or else it has to pay the IPP anyway. Napocor is in effect paying for capacity rather than electric power. In practice, what Napocor can avail of is 20 to 40% of the power (because night time consumption is quite low) and ends up paying for the balance. And this expense is passed onto the consumer in higher generating costs or the “PPA charge (Purchased Power Adjustment)”, which is now part of the “Generation Cost” charge in the bill .

To make things even worse, there is the Wholesale Electricity Spot Market (WESM), which is the clearing house for electricity supply, and is supposed to ensure “market” conditions for electricity supply. But IPPs don’t have a real incentive to offer up their electricity for a lower price than they would get anyway if they don’t produce. So, the WESM bids are way above the actual generating price; and the government can’t do anything about it, since the power generating market has been “liberalized”.

So, the combined problems of the IPP contracts’ take-or-pay clauses and the WESM conspire to give us horribly high “generating costs” for electricity, which Meralco and other distributors simply pass on to consumers.

Napocor: renegotiate
It is urgent that Napocor renegotiate the terms of these IPP contracts. Otherwise, the common citizens will continue to suffer, foreign investors will start pulling out of the country, and other bad things will happen because of the high price of electricity.

The problem that government officials have with the idea of renegotiating contracts is that they are afraid that foreign investors will pull out of the Philippine power sector entirely. And the best response to this is: what foreign investors? Most IPPs are consortia of foreign and local investors, with the local partners politically well-placed players. This is why they are able to keep building power plants, and why they are able to ensure that they get lucrative take-or-leave clauses in those contracts. Renegotiating with these IPPs would in essence be renegotiating with local businessmen; so there is no real danger of the “foreign investor” flight.

The bigger problem that government faces in renegotiating contracts is that the investors are politically well-connected. Thus, there will be all kinds of political pressure to maintain the “take-or-pay” clauses of contracts. It will depend on the political will of the coming administration, if they can pull this off.

Terms
To be reasonable: with the big costs of investment needed, there is some need to assure investors that their expensive electricity generating plant will be utilized. I would propose a standard take-or-pay clause to be 50% for the daytime, and 20% for night time. (Now, Napocor pays the IPPs for unused energy, even during the night). And that there be a halt of the building of new IPPs until this minimum is reached (and thus, till PPA charges are o%)

With the lower take-or-pay clauses, the IPPs will then have to resort to selling their electricity in volume through the WESM. And this time, the IPPs will bid their prices down, just to get the Napocor to buy their electricity.

And these steps will result in much lower electricity prices for the general public.

Lowering Electricity Prices

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.

Day/Night Rates
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

Why Meralco rates are high

Philippine electricity rates are high, and Meralco’s is higher than most of the rest. If we take from the blogpost of Chuvaness , her consumption was 3120 KwH and her bill was PhP 41,902, making the net price of electricity in Manila at PhP13.46/kwH, or $0.30/KwH. This would make it among the highest in the world. (In the EU, only 3 countries have rates higher than that – the Netherlands, Germany and Denmark – and it is because of the high taxes they impose on electricity.)

Now, why is it that Philippine electricity prices are so high?

IPPs
The main problem with the electricity prices in the Philippines is the scandalous terms with which the Napocor buys electricity from Independent Power Producers (IPPs). Among these terms is the requirement that Napocor pay the IPPs based on their generating capacity and not on the  actual electricity delivered. So, for example, an IPP would have a rated capacity of 1000 MW, and the grid only required 100 MW. Napocor would still be obliged to pay the IPP the price for 850 MW, even if it only received 100 MW from that IPP. This meant that the Napocor, and by extension, the consumer, would pay way too much for electricity.
Now, with the coming of the so-called deregulation of the electricity market by the setting up of the WESM (Wholesale Electricity Spot Market), the market was deregulated all right, but not to the consumers’ benefit. The IPPs use the WESM to jack up the price of electricity. After all, in a system of monopoly, or rather oligopoly, prices rise to the level of maximizing the profits of the electricity providers.

Lopez-owned IPPs
Meralco sources 50% of its electricity from the Santa Rita and San Lorenzo power stations, both of which are owned by the Lopez family (note: but NOT by Meralco). And these two power stations sell electricity to Meralco at a relatively high price. And the only thing that the Energy Regulatory Commission can regulate are the distribution and other add-on charges on the electricity, leaving the generation charge to the “market”. Thus, the government cannot control the price by which these Lopez-owned IPPs sell electricity to Meralco. So now, with the Lopez’s selling most of their Meralco stake,the Lopez’s get to benefit from Meralco’s rates without having the obligations that Meralco has; since after all, most of their profits come from these IPPs. And everybody blames Meralco, when it is the IPPs that are causing the main rise in electricity rates.
Of course, Meralco itself is also making a lot of profit, through things like distribution charges, charges for “system loss” and other such things; but the main profit still goes to the Lopez’s owned IPPs.

And that is the main reason why Meralco’s rates are so high.

See also: Lowering Electricity Prices