The 6-percent GDP growth in the second quarter, while not yet alarming, was below most government estimates. This development is important given that it occurs amid the Duterte administration’s ambitious infrastructure program, which is expected to rev up soon—and indeed government spend was up near 12 percent in the same period.
But if the relative slowdown offered any lesson, it is that any sort of economic takeoff requires conscientious foresight, especially about anticipated risks and threats (the slowdown was due to higher than expected inflation). Economic planning requires being alert to warning signs so they may be addressed before things become too late.
Something that demands perennial but also immediate attention is the country’s power situation. In the five-year period between 2012 and 2017, the Luzon grid in particular has witnessed demand outpacing capacity. Demand grew by around 2,900 megawatts while supply only grew by 2,600 MW. Department of Energy figures predict around 4.9 percent in additional demand, or almost 25,000 MW in new capacity.
In the first half of 2018, additional installed capacity grew by a measly 3 percent compared to the 8.2-percent demand, resulting in seven yellow alerts compared to the three during the same period last year.
If this trend continues, this will have enormous repercussions in the context of ambitious economic forecasts. If the Philippine economy, as the administration has confidently predicted, is poised to take off, disruptions brought about by something fundamental as inadequate power supply are as disastrous as they are embarrassing. Stable power capacity and affordable rates are a requirement for any robust economy.
And power supply and affordability, studies show, are interconnected. An international survey by Australia-based consulting firm International Energy Consultants revealed that Meralco customers have been among the few in the world that saw their electricity rates go down since 2012 compared to the rest of the region.
The study’s findings show that Meralco residential rates have gone down 18 percent even while the overall Consumer Price Index, which includes other household expenditures like fuel, transportation, education, health, etc, had gone up 19 percent.
In particular, the survey found that Meralco’s average tariff (excluding VAT) has declined 4 percent since January 2016, a far cry from the average increase of 12 percent across the 46 countries covered in the study. This puts the distributor’s average tariff at 24th out of the 46 and 4 percent below the average figure. This means that, excluding subsidies and nuclear power generation, Meralco rates are in fact one of the cheapest in Asia.
Globally, Meralco consumers pay 8 percent the worldwide average, said IEC Managing Director Dr. John Morris, who led the study.
He explained further: “This is an excellent outcome for consumers, considering that the Luzon power market is unsubsidized and the majority of electricity is produced using imported fuel. In peso terms, Meralco’s tariff has increased by only 3 percent despite the twin headwinds of significant fuel price increases and a depreciating local currency.”
What accounted for the tariff reductions are the addition of competitively-priced power supply agreements contracts in the generation portfolio, the study also found.
Overall, Morris added that Meralco “continues to deliver electricity at a fair and reasonable rate” especially in comparison with other markets and versus the true cost of electricity.
For perspective, the governments of Thailand, Indonesia, Malaysia, Korea, and Taiwan heavily subsidize their tariffs—about 41 percent, or some $80 billion—in the form of cash grants, subsidized fuel, and deferred expenditure. These make power rates in the markets “artificially low,” the survey said.
Another crucial finding is how electricity tariff in the Luzon grid will go down further if there are new investments in power generation to meet the rapid demand. This can in turn promote competition at the retail level, and any reduction in wholesale electricity cost can be fully felt by customers.
The study also reiterated that of all the charges in the power bill, only the distribution charge, which accounts for 17 percent of the average tariff, goes to Meralco; the rest of the charges are collected on behalf of third parties.
The lesson here is clear. The combination of resilient macroeconomic fundamentals and the Duterte administration’s determination to curb chronic underspending have led to bullish expectations about the Philippine economy. Power is an important part of this equation, and the government needs to act accordingly lest an already expensive and unstable power situation debilitate any sort of momentum that the economy gains.
In particular, forecasts talk of robust, long-term growth around or even above the 6-percent mark over the 2016 to 2030 horizon. This would require an additional 7,000 MW of power generation capacity over the next five years. Regulators need to start acting on investments in order to move the power situation from sufficiency to surplus. Work also has to be done in areas like the rationalization of taxes and the removal of bureaucratic barriers to spur more investments in the industry.
Sustaining our economic gains will not be possible without a stable and affordable supply of electricity—and before any real takeoff could happen, we need to cut the bureaucratic red tape and build more power plants now! This is the kind of strategic objective that President Duterte’s political capital should be spent.