“These are really hard times.”
Experts say that the unprecedented economic sanctions against Russia, one of the major producers of oil and source of raw material indispensable to many industries, will have serious repercussions to the global economy. Rising fuel prices will affect our daily transportation expenses and the cost of operations of all sectors, most sensitive of which is the power sector which is largely dependent on imported fuel.
In a meeting with the Philippine Independent Power Producers Association (PIPPA), the Department of Energy (DOE) warned that the impact of rising fuel prices alone could reach P9 per kWh – given the March 3 coal prices at US$446 per ton. PIPPA has already sought for intervention to avoid substantial increases in electricity rates.
It is important to note that not all distribution utilities and electric cooperatives source the majority of their supply from coal power plants. The government should also carefully assess the impact of the surge in international oil prices on natural gas plants powered by the Malampaya facility. While the current share of coal is about 57 percent of the country’s generation mix, natural gas in Luzon, where the most productive regions are located, accounts for 27 percent (DOE 2020 Power Statistics).
Although indigenous, Malampaya natural gas is priced in US dollars and indexed to international crude oil prices, hence it is affected by movements in international prices and peso depreciation. This means that millions of Meralco customers and distribution utilities are more exposed to the surge in international crude oil prices since Malampaya natural gas forms at least a third of its supply (MERALCO FY 2021 Financial and Operating Results Presentation).
Consumer group CitizenWatch Philippines, as well as transportation and industry leaders, are clamoring for urgent government intervention to ease the burden of soaring fuel and the consequent inflationary domino effect on commodities and electricity prices and other utilities. A temporary reprieve by suspending the Value Added Tax, (VAT) and excise tax on oil and coal is the common outcry.
The Philippine Chamber of Commerce and Industry (PCCI) has also recommended to the DOE to freeze further increases in Malampaya Natural gas prices. To put this in context, when international crude oil prices were at $42/Bbl (one barrel) in 2020 (World Bank Commodity “Pink Sheet” data), Malampaya natural gas price was at $6.7/GJ (One gigajoule of natural gas is approximately equivalent to 27 liters of fuel oil). In 2021, when oil increased to about $69/Bbl, Malampaya natural gas price was at $7.5/GJ. On March 7, 2022, Brent Crude soared to $130/BBl due to fears of a US and Europe ban on Russian products and delayed Iran nuclear talks. As Malampaya natural gas price adjusts quarterly, these increases will be charged to generators using Malampaya gas beginning April 2022, which will then be reflected in the May 2022 generation charge to end-users.
According to Service Contract 38 of the Malampaya Project, the national government is entitled to a 60-percent share of net proceeds from Malampaya’s operations. Indexed to international crude oil prices in US dollars, higher crude oil prices and peso depreciation will also increase the government royalties. According to DBM data, in 2019, royalties from Malampaya recorded as non-tax revenues were at P26.569 billion, and P19.079 billion in 2020. Since these royalties come from us consumers, it is but reasonable that we should benefit from these royalties.
Before the full impact of extraordinary increases in fuel prices hits the country, the government must help unburden consumers by maintaining the Malampaya natural gas price at levels that will preserve 2021 royalties and utilize the Malampaya fund to subsidize electricity end-users.
Even before the recent fuel price surges, power prices were already expected to rise this summer due to the tight power supply situation. Government should immediately start discussions with the Malampaya operator to freeze Malampaya prices. Otherwise, Malampaya prices will certainly increase this April 2022. If the government will use Malampaya royalties to subsidize consumers’ electric bills, the government’s economic managers should already start working on how the subsidy will reach consumers in time before seasonal consumption peaks in May and June.
Power supply during the elections is critical. Based on the DOE’s power outlook last January 25, the worst-case scenarios there may be Yellow Alerts during Weeks of April 18-24, April 25-May 1, May 30-June 5, and Red Alerts on weeks of May 16-22 and May 23-29. No alert expected on election week because of anticipated low demand given the non-working holiday, hopefully.
The DOE is banking on GN Power Dinginin’s Unit 2 (668MW) coal plant to augment supply during its testing and commissioning period expected during the 2nd quarter – if there are no delays.
Given the already dire situation of the large majority of Filipino consumers, the government should forego the tax revenue windfalls from souring fuel prices which would be insensitive during these hard times.