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.
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.
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.