Nearly a month after typhoon Mangkhut battered northern Luzon, around 100,000 households are still without power. Their plight speaks to the failure of power privatisation in the Philippines, where blackouts and high costs are likely to persist, despite a government scramble to build generating capacity. 

The government will continue to struggle to keep the lights on outside Metro Manila as a strong economy, a growing population and President Rodrigo Duterte’s multi-billion-dollar  infrastructure agenda strain the country’s energy needs. Supply is unreliable because of an outdated and inefficient transmission and distribution system, while a weak currency is only adding to the fuel bill. 

New transmission lines are unlikely to be finished in the coming two years. Yet, even when they do come on line, the government still faces the challenge of distributing power across an archipelago of around 2,000 inhabited islands. 

Paying the price 

In 2017, the Philippines sourced about 60 per cent of its power from oil and coal, around 80 per cent of which is imported. Unlike neighbouring Indonesia and Vietnam, which subsidise their power sectors, the Philippines scrapped fuel subsidies in 1998 to alleviate huge budget deficits. In 2001, the government began selling its debt-ridden power plants and privatised the energy sector to ensure stable supplies and lower rates. 

But privatisation has not worked. Power costs remain the highest in the Asean 5, in part because consumers are helping privatised power plants pay down debt. Although generating capacity is sufficient overall, areas in the Visayas and Mindanao islands still suffer rotating blackouts because of low power reserves. 

To address these challenges, the Duterte administration has abandoned the previous government’s preference for renewable energies and expedited approval of power projects, regardless of the energy source. Once in retreat, oil and coal use is making up a bigger share of energy use while renewable energy is declining. 

The government sees this as the most cost-effective way to generate power and foster competition, eventually leading to lower rates. But years of supply expansion have failed to stop the blackouts or lower the cost of electricity. The latest push is unlikely to be successful without improved transmission and distribution systems. 

Transmission failure 

Existing transmission lines, privatised in 2009, are old, badly maintained and do not stand up to strong winds. New lines are unlikely to come on line before 2020, when around 3,600mW of additional power will be available. 

Although transmission companies have gradually become more efficient, the Philippines has far fewer lines than other Asean 5 countries. Additional lines have not kept pace with the growth in power generation and demand. Part of the difficulty in constructing new lines is that the Philippines has more than 7,000 islands, of which some 2,000 are inhabited. 

In the Visayas, underwater cables are planned to connect the island to Mindanao, where surplus power can be tapped. The project, inherited from previous administrations, is set to be finished by 2020, but unresolved right-of-way issues for lines on land suggest that completion will be delayed. The delays suggest that plans to increase the length of transmission lines by nearly 70 per cent by 2040 are over ambitious. 

A power surplus in Mindanao is itself a result of transmission problems. The Institute for Energy Economics and Financial Analysis, a US think-tank, said 700mW of coal and hydro power plants lie idle in Mindanao, where only 74 per cent of households had access to power as of 2017. The National Grid Corporation of the Philippines (NGCP), the private transmission operator, said in a report that “proximity to transmission facilities” is a common problem for renewable energy plants. 

Hosing consumers 

Not only do consumers not benefit from idle plants, they also pay for them. Distribution companies typically agree to buy a certain amount of electricity from power plants which they are then obliged to pay for, whether the power is used or not. These costs go on to consumers’ bills. Investments in new power plants are also at risk if there are no transmission companies to buy their output.

Consumers are also paying for power lost during transmission and distribution. Under current regulations, utilities can charge consumers an extra 8.5 per cent for power that is lost during transmission. Bills pending in congress aim to lower the rate to 5 per cent, which would be the lowest in the Asean 5, but deliberations are still at an early stage and we do not see the bills being passed into law soon. 

Furthermore, a new round of increases for coal and oil excise levies planned for next year and in 2020 will mean even higher costs. Combined with a weak peso that increases the cost of importing fuel, the price of electricity is unlikely to fall any time soon. 

— Prinz Magtulis, Philippines Researcher, FT Confidential Research

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.