ENERPO Energy Economy Series: The Philippines

by Joe Ralbovsky

We here at the ENERPO Journal are excited to introduce the very first installment of our Energy Economies Series – a segment in which ENERPO authors explore the foremost challenges and opportunities of today – and the strategies governments or organizations are employing to make the most of them. Each entry will take a look at a single country and focus on a few notable aspects, attempting to bring light to the larger trends.

The ENERPO Journal will include at least one of these stories each quarter, so be sure to look for the next contribution in the upcoming issue (Vol. 3, Iss. 4).

We go first to the Philippines, a nation battered by storms, dependent on imports, enshrouded in uncertainty, and ripe with opportunity.

Energy in the Philippines

Map of Philippines and Surrounding Countries.

So why start with here? Why is the Philippines important?

The Philippines is not a small country – nor is it a small energy market. With close to 100 million citizens, electricity prices already higher than most of its neighbors, a low power capacity per person, a daily oil consumption of about 227,000 barrels per day, and an economy that has increased between 5-7.5% a year since 2011, the Philippines is in the midst of explosive growth and is consequently in danger of bumping into bottlenecks and shortages of energy supplies.

Nearly 70% of its electricity coming from coal, oil, and gas, and although highly dependent, the Philippines has very little fossil fuels of its own, and is forced to import approximately 90% of what it uses from foreign nations each year.

What’s more, the Philippines is the second largest archipelago system in the world, with 7,107 distinct isles making effective conventional energy infrastructure expensive, difficult to upkeep and modernize, and vulnerable to the damaging tropical storms that periodically persecute the island nation. The cost of failing to maintain critical civil and energy infrastructure weighs heavily on the volatile national economy – contributing to slowed progress with pipelines and grid projects, costing businesses forced to maintain and fuel backup power generators, and causing lost productivity amounting to $20B/year from the effects of poor transportation infrastructure alone. The nation’s geography contributes further to increased fuel use for transportation, which accounts for more than a third of total energy use as a sector.

Like most nations, the Philippines is reliant on a mix of largely fossil fuels with some renewable energies implemented in favorable regions. Nearly 70% of its electricity coming from coal, oil, and gas, and although highly dependent, the Philippines has very little fossil fuels of its own, and is forced to import approximately 90% of what it uses from foreign nations each year, leaving the welfare and security of its economy highly susceptible to fluctuations in price and supply, political maneuvering, and changes in trade routes.

Access to the nation’s main source of fuel has been left exposed to evolving international disputes involving claims to its surrounding ocean.

This is a country where planned power-shutoffs to entire provinces (hundreds of thousands of people) that didn’t pay their bills have occurred as recently as last year, and one where over four and a half million people were left without power from tropical storms just this past summer. To pay for power, provinces have accumulated decades-worth of debt and the populace has become reliant on and/or accustomed to mobile generators. Were this not enough, access to the nation’s main source of fuel has been left exposed to evolving international disputes involving claims to its surrounding ocean. Suffice it to say, that despite recent accomplishments in electrification and economic growth, there is still room for improvement.

In all, the economic success of the Philippines is tied to the nation’s ability to overcome obstacles presented by severe weather, badly needed investment in infrastructure, an imperfect system of energy financing and investment, and shortages of energy resources that threaten to undermine its recent pattern of steady growth.

Speaking of which…

A Looming Crisis

This year, the Philippines energy economy has been a major hotspot of national politics. But the reason is not primarily because of major changes in global energy trends, public disapproval of spending patterns, or even the national government’s active approach to creating energy policy in a nation attempting to rapidly transfer control to the private sector. Rather, the focus of national politics has centered around a looming energy crisis that has the potential to cause widespread brownouts, blackouts, and dramatically slow the rate of GDP growth. Projections from the Philippines Department of Energy (DOE) have forecasted a major energy shortage sometime in the middle of the summer of 2015. While the debate is ongoing as to how much shortage will exist, when it will be worst, and what can be done to prevent negative impacts on the national economy, there are several areas of agreement as to what the problem will be – and the economic dangers it’s likely to pose.

Projections from the Philippines Department of Energy (DOE) have forecasted a major energy shortage sometime in the middle of the summer of 2015.

The electricity shortage, officially estimated to be anywhere from 31 to 300 to even 1004 Megawatts, is both a result of increasing energy demand outpacing available supply and of a shortage of national reserve capacity. To help ameliorate or prevent the shortage, Philippine President Aquino has requested emergency powers from the national Congress, seeking to use the expanded authority to contract additional energy supply to avoid a shortfall, which could manifest itself in widespread brownouts as soon as April 2015. Normally, the federal government is not allowed to dictate or directly influence the behavior of the electricity market, as the Electric Power Industry Reform Act of 2001 placed such decision-making power solely in the hands of the private sector – hence the need for Congress’s approval before moving forward with this approach.

Naturally, the Congress has been hesitant to award emergency powers, and has expressed both interest in alternative solutions to the shortage as well as doubt that emergency powers would be helpful or necessary. This political struggle has been further convoluted by discrepancies as to the exact cause of the shortage, with the total estimated deficit changing regularly depending on which side of the discussion is arguing for what.

So far, rather than grant emergency powers, the national Congress has shown support for other strategies such as the Interruptible Load Program (ILP), wherein large users of electricity would switch from receiving power directly from the grid to relying on their own internal generators during periods of high-demand with the assurance that they’d be compensated for their fuel costs. While this strategy has gained a good deal of support, the overall capacity of the program hovers at about one third of what’s needed to prevent this summer’s expected shortage, meaning it would not serve as an adequate solution should the government’s higher estimates be accurate.

Some projects, like the 81 MW Caparispisan wind farm that opened in late November, do have the potential to lessen the power deficit.

Fortunately, a wide array of viable solutions remains and the shortage may be significantly reduced by a number of promising generation facilities coming online between now and this summer. Such projects, like the 81 MW Caparispisan wind farm that opened in late November, do have the potential to lessen the deficit, but they may not be enough to bridge the gap that is implied by the higher shortfall estimates.

Beyond the difficulties associated with attempting to accurately predict the moving-target of an energy shortfall, concerted efforts on behalf of anti-energy-spending groups that pressure government officials against spending public dollars on improving national energy infrastructure, have caused the constant challenging and re-evaluation of the information behind the warnings as well as the suggested political responses.

With the national economy (and the safety of those depending on the grid) hanging in the balance, the expected the shortage contributes to an uncertain political climate, illustrates the gravity and diversity of the Philippines’ energy challenges, and helps to explain the aggressive approach its national government has taken to solving them as quickly as possible.

The Philippines’ Focus on Ethanol

One way the national government is hoping to address shortfalls is through the aggressive expansion of ethanol production – and while production levels of the fuel have skyrocketed in the past years, the increase hasn’t yet been able to provide a full solution to the looming electricity shortfall or to the nation’s heavy dependence on imports. Despite substantial technical capabilities, mandates and price levels aimed at assisting domestic producers, a relatively cohesive set of producers (there are four), and ambitious fuel-blend goals, production capacity in the Philippines is frankly dwarfed by the nations that supply more than 2/3 of its ethanol – such as Thailand and the U.S. – economies that have, by now become used to exporting unused product. Though the share of ethanol imports remains high, the Philippine government remains undeterred – and may be close to committing even more towards ensuring ethanol become a major part of the national energy economy. Here’s how.

Ethanol production capacity in the Philippines is frankly dwarfed by the nations that supply more than 2/3 of its ethanol – such as Thailand and the U.S. – economies that have, by now become used to exporting unused product.

The national government employs – and importantly – strictly enforces a system of ethanol mandates. Each quarter, the National Fuel Board incorporates expected production levels into buying obligations for gasoline distributors to use in their gasoline mixes. This fuel source is particularly important for the Philippines, where gasoline is widely used not only in combustion engine vehicles, but also in generators to produce electricity. Overall, this strategy is an attempt to encourage increases in ethanol production by giving producers a guaranteed market while also acclimating the national fuel market to higher blends of ethanol in gasoline.

So far, this approached has worked to dramatically ramp up production (with close to a 350% gain from 2012-2013) but it has meant a heavy cost burden for downstream vendors, who would be able to buy similar products at roughly half the price abroad. The ethanol mandates call for the first portion of vendors’ ethanol needs to come from domestic sources; it’s allocated based on historic market share rather than a more seamless market mechanism, and there’s little flexibility allowed.

The national government plans to carry out its original plan of having a nationwide standard of E20 (20% ethanol, 80% gasoline) by 2020.

Having increased the national fuel blend from E5 to E10 in early 2013, this policy has strengthened demand for ethanol – so much so that it has raced past domestic capacity, and forced the import of vast quantities from the U.S., Thailand, and other regional countries. Despite this, the national government plans to carry out its original plan of having a nationwide standard of E20 (20% ethanol, 80% gasoline) by 2020.

While the growth metrics have been impressive, such tactics might prove unsustainable unless other aspects of the production growth are addressed. One feasible next step for improving the efficiency and overall output of ethanol would be to better align the types and quantities of feedstocks Philippine farmers are incentivized to grow and with the ideal feedstocks for ethanol plants that are operational now – or that will be completed in the near future – though this may require an additional degree of governmental involvement.

As of today, the Philippine Sugar Regulatory Agency is developing plans to modernize and develop the nation’s sugar industry – and this might serve as one effective vehicle to take a more market-based or holistic approach to expanding production capacity. Moving forward, this tactic of ethanol expansion will depend not only on the fruitfulness of implemented policies and incentives, but on international market factors as well.

Despite this rapid growth in production and the promise of increased demand assured by future mandates, domestic ethanol producers face an uncertain future. Competitors like Thailand and China are poised to ramp up exports. And the United States just received the go-ahead for ethanol export promotion while simultaneously setting production records in four out of five consecutive weeks during December 2014. This disparity, however real, has not deterred Philippine development of ethanol production capacity, but may lead to different tactics in making the most out of existing facilities and supply chains so as to make the smaller-scale production as cost-effective as possible. Other uses for domestic ethanol may also find wider incorporation, such as co-generation in power plants or generators employed during emergencies or as part of the Interruptible Load Program.

New Tech and Renewables

Despite examples of mismanagement abroad, seemingly insurmountable competition from China, large upfront costs, and rapid changes in conventional energy prices, the Philippine national government has voiced – and continues to stand by – its ardent commitment to rapidly accelerating the development and deployment of renewable technologies like Photovoltaics (PV) and Geothermal.

With plans to nearly triple its portfolio of renewable energy-based capacity to approximately 15.6GW (or roughly 50% of anticipated demand) by 2030, the national government has already taken aggressive action.

Today, most governments claim to support – or at least acknowledge – the value of adding renewable energy into their national mix. But where the leadership of many nations waivers on specific levels of support or legal adherence to international agreements, the Philippines, particularly at the national level, has truly managed to demonstrate the seriousness of its statements.

With plans to nearly triple its portfolio of renewable energy-based capacity to approximately 15.6GW (or roughly 50% of anticipated demand) by 2030, the national government has already taken aggressive action. By successfully introducing a National Feed in Tariff (FIT) to accelerate production of renewable energy generating facilities, the Philippines hopes to grow domestic production of renewable energy – much like with ethanol, but without the direct and sometimes controversial tactics of imposing yearly mandates or deciding prices.

Perhaps an even larger indication of this national commitment is the wide array of enticing incentives for current and would-be developers of renewable energy. Income tax holidays lasting seven years, exemptions on imported parts for renewable energy production, reduced or waived warfing dues, 0% VATs on a wide range of renewable energy transactions (including sales and purchases of equipment from local suppliers), and a comprehensive tax code that is peppered with generous and flexible crediting systems are only some of the measures taken to draw renewables manufacturers, tech developers, and investors to the task of spurring a renewable energy boom. The message that the national government is sending is clear: They are serious about renewable energy.

Were this not enough, the Philippines has also taken serious measures to improve the efficiency of energy use from current sources. From 2005 to 2012, the Philippines succeeded in obtaining a 23% reduction in nation-wide energy intensity – already a full 15% lower than the original ASEAN (Association of Southeast Asian Nations) regional goal of an 8% reduction from 2005 to 2015.

“It is of absolute importance that we continue exploring and investing in clean and renewable energy sources… despite the need to industrialize further and despite our historically low carbon emissions, we are still doing everything in our power to maintain and improve our low-emission development strategy.” – Philippines President Aquino

While much of the action taken by the government is focused on improving long-term prospects for the national energy mix, there have also been several initiatives taken that fall somewhere between the categories of deployment and demonstration – such as the Philippines Energy Efficiency Project (PEEP), which included the distribution of 8.6 million compact fluorescent lamps, retrofitting of dozens of inefficient government buildings, projects to reduce large scale street-light energy use, and more. While these projects do not immediately provide an answer to the country’s growing energy problems, actions like these do serve to lessen short term energy use (potentially important for surviving next year’s shortage) and may serve to encourage a culture of support amongst citizens – a necessary component of changing buying/energy use patterns and securing the public’s meaningful involvement.

In conjunction with hands-on government efforts, international organizations like the International Finance Corporation, the International Monetary Fund, and the Asian Development Bank have contributed millions of dollars in programs and loans intended to facilitate the development of renewable energy and energy efficiency technologies and practices in the Philippines. International partnerships, as well, highlight a growing national commitment – such as the ‘Meet Asia. Meet Renewable Energy’s Future.’ conference in Germany, which the Philippines co-hosted earlier this year. As a result of these collaborations and policies, renewable energy projects are becoming more frequent, larger in scale, more commercially viable, and more commonly incorporated into the national energy strategy.

It may be that the national government will successfully leverage challenges such as deteriorating infrastructure, hard-to-reach energy consumers, and the impending energy shortage to enlist the support of lawmakers, investors, and citizens to create meaningful changes in their nation’s energy policy, and ideally, their economic future.

Even in the face of pointed political opposition, low oil prices, and economic uncertainty, the Philippine government shows little sign of wavering. Says President Aquino,“It is of absolute importance that we continue exploring and investing in clean and renewable energy sources… despite the need to industrialize further and despite our historically low carbon emissions, we are still doing everything in our power to maintain and improve our low-emission development strategy.”

An Era of Opportunity

The Philippines faces significant hurdles that will, in all likelihood, take decades to fix. Fortunately, this presents policy-makers, investors, and engineers alike an opportunity to reinvent much of the nation’s energy economy – and with better technology, better insight, and better governance. Because of the current flurry of activity, the next few years will bring a preponderance of examples – good and bad – that will demonstrate what worked, what failed, and how future leaders can continue to improve upon the experiments of the past. Today, the energy economy of the Philippines exhibits the very opposite of stagnation, and with appropriate participation from both public and private sectors, attention to long-term needs, and strategy that capitalizes on new technology, global trends, and international partnerships, could readily find itself in a phase of rebirth.

Today, the energy economy of the Philippines exhibits the very opposite of stagnation, and with appropriate participation from both public and private sectors, attention to long-term needs, and strategy that capitalizes on new technology, global trends, and international partnerships, could readily find itself in a phase of rebirth.

Not only are the current efforts to enhance affordability, resilience, and sustainability critical to determining the future of the nation’s economy and security, but because the Philippines shares so many issues with dozens of other resource-poor nations (huge dependence on imports, exposure to weather events, failing infrastructure), the successes and failures of its current programs will help to enlighten and inform the roadmaps of other nations struggling with similar obstacles and constraints – and there are many of them.

Joe Ralbovsky is an alumnus of the ENERPO program and a deputy editor of the ENERPO Journal.

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