THE PHILIPPINE POWER INDUSTRY

INDUSTRY ANALYSIS

The Philippine Power Industry

Part I: Introduction
Nature of the Industry
The Philippines practices the geographic area franchise concept which divides the country and
obliges the franchise holders to connect all the households and other potential customers in their
franchise areas, thus creating a transaction of monopoly in each area in the Philippines. This
concept has been rationalized by the theory of natural monopoly (Patalinghug E. E., 2003). It's
an economic term that describes any market situation where the conditions lead to just one
firm supplying a product or service, versus more open competition (Day, 2015). T his
market situation gives the largest supplier in an industry, often the first supplier in a market, an
overwhelming cost advantage over other actual and potential competitors, so a natural monopoly
situation generally leads to an actual monopoly (Perloff, 2012).

The Growing Power Needs of the Philippines

The electric power industry provides electric power to Filipino households and businesses,
driving industrialization and the modern economy. Numerous happenings and issues in the
industry affect the economy at large.Because of this characteristic and the industrys
susceptibility to get driven by market power. It is heavily regulated by the government through
the independent Energy Regulatory Commission (ERC) under the Department of Energy (DOE)
(Limtingco, 2014).

In recent years, the Philippines have proven to be a leading high-growth economy in Southeast
Asia. As many economies faced challenging circumstances, the Philippines continued to prosper
on the heels of strong consumption and growth across sectors. Concurrently, investor interest
improved in early 2013 as shown by the continued record-breaking performance of the
Philippine Stock Exchange. Much attention has been given to the national governments role as
a catalyst in the growing optimism of the countrys business potential (Manabat, 2013).

Higher demand for electricity in the Philippines as a result of an expanding economy is sending
the government strong signals to make sure there will be enough power plants to power
households and industries, according to the latest Department of Energy report. The demand will
come from the mainstream grids of Luzon, Visayas and Mindanao, the department noted in its
2013 Supply-Demand Outlook (GMA, 2013).

II. History of Philippine Industry

Growth of the Industry
Electricity was known to have reached the country in 1890. Sociedad Mercantil which became
La Electricista provided electricity in Manila and nearby provinces. La Electricista was given
rights to Sociedads 20-year contract. MERALCO was established in 1903 and bought La
Electricista the following year. By early 1905, some 40,129 incandescent lights, 495 arc lamps
were installed in both public and private areas (Patalinhug, 2003).

In 1936 the National Power Corporation (NPC) was established to construct, operate and
maintain facilities for the production of electricity (Manabat, The Energy Report Philippines,
2013). In 1939, NPC constructed its first project, the 8 MW Caliraya Storage Hydro Power
station in Lumban, Laguna. NPC continued to build other hydropower facilities, and by 1956
NPC generation accounted for about one-third of the countrys total generation capacity (Cham,
2007).

On June 8, 2001, President Gloria Macapagal-Arroyo signed into law Republic Act 9136, or the
Electric Power Industry Reform of 2001. The said enactment was the culmination of more than
seven years of public hearings and floor deliberation on various versions of the said measure in
Congress (DoE, 2016). These reforms were aimed at eliminating inefficiencies brought about by
monopolies and at encouraging more investments from the private sector in the industry through
(1) the separation of the power sector into generation, transmission, distribution, and supply
components, and (2) the privatization of the National Power Corporation, particularly through

the sale of the NPCs generation and transmission assets to private investors. The Act aims to
not only accelerate the countrys total electrification, but also provide reforms towards more
reliable and competitively priced electricity (COMECCON, 2016).

Philippine Power Industry versus Other Countries

The Philippines remains to have among the most expensive electricity prices in Asia. Here are
data with some breakdown also shown, including the cost of power generation, cost of
grid/transmission, and value added tax (VAT) or gross sales tax (GST). Of the 14 major cities in
North and Southeast Asia plus Australia and New Zealand listed below, Manila has the 3 rd most
expensive electricity prices -- 3rd in overall residential tariff, 3rd in generation cost, 3rd in grid
charges, and 3rd in tax rates Invalid source specified..

III. Electric Industry and Philippine Economy

Economic growth has been impeded in the Philippines by the unreliability and high cost of the
power (Anonymous, 2011). According to (Rivera, 2016), the countrys power demand could
double in the next 15 years as the economy continues to grow by at least six percent per year.
Reliable and secure electricity services at competitive rates are essential to improving the
investment climate in a country that has limited fossil fuel reserves and therefore is highly

dependent on renewable and imported energy (Anonymous, 2016). The Philippines has some of
the most expensive electricity in Southeast Asia, averaging $0.18 per kilowatt-hour in 2009
because (i) archipelagic geography makes electricity costly in some areas; (ii) generation,
transmission, and distribution systems are inefficient; and (iii) investment in the sector is low,
coupled with the high cost of investments made during the countrys power crisis in the 1990s
(Anonymous, 2011). The challenge in the energy sector is to ensure sustainable and reliable
supply at reasonable cost. The Philippines will have nearly 68% of its population living in cities
by 2030. Total household consumption is expected to more than double under current energy
policies, while adopting energy-efficiency standards could shave as much as 9.5% off residential
power demand. In its 20092030 Philippine Energy Plan (Anonymous, 2006), the Department of
Energy (DOE) forecasts average annual electricity demand growth of 4.6%, which means that
the country will need to add 16,550 MW of generation capacity from 2009 to 2030 (Anonymous,
2011).
The Philippines has several possibilities to get clean and cheap energy. The tropical climate and
geological circumstances are responsible for three different energy resources; (i) solar energy
which is cheap and inexhaustible, (ii) natural gas which an enormous mass can be found in
Palawan and (iii) relatively cheap geothermal energy.
Solar Energy is perhaps the most recognized renewable energy source. Energy from the sun is
captured using cells made from special materials (silicon is quite popular right now) and then
converted into electricity. The biggest factor in solar cell production is cost. However, with
technological advancements solar is becoming more cost efficient, and high efficiency solar cells
are being developed. This is important, since high efficiency cells are hard to come by. New
materials are providing solar cells that are easier to transport and install (Marquit, 2009).

Geothermal energy is created below Earth's surface, and efforts are being made to extract and use
this power (Marquit, 2009). Likewise, the Philippines is located in a relatively active seismic
area. Geothermal energy allows the country to use this to its advantage. Currently, the
Philippines is the second highest producer of geothermal energy. The government has set a goal
to surpass the United States as the highest producer in the world (White, 2016).

Lastly, natural gas deposits in the Philippines are located offshore, above the country's deep-sea
oil reserves. The Philippines possesses 3.9 trillion cubic feet of natural gas reserves. Although
extraction only began in 2000, production has been able to meet demand every year without
imports. Even larger natural gas deposits may be held in another offshore location (White, 2016).

IV. Industry Supply and Stakeholder

The restructured electric power industry is composed of four sectors: generation, transmission,
distribution, and supply (Somani, 2013).

The generation sector is composed of generation companies, co-generation companies, and

independent power producers. The Philippine electric power industry used to be dominated by
the National Power Corporation (NPC) in the generation sector. All generating plants were
owned by NPC and Independent Power Producers (IPPs) were restricted from directly
connecting to the electric distribution utility.

The transmission sector is a regulated common electricity carrier business and subject to the
ratemaking powers of ERC. Presently, the generation and transmission sectors are dominated by
the state-owned National Power Corporation (NPC).

Distribution of electricity to end-users is a regulated common carrier business. Distribution

utilities are composed of private utilities, electric cooperatives, LGU-operated utilities, and other
duly authorized entities. It can merge, consolidate, integrate, and enter into management contract,
bulk procurement and joint ventures, subject to ERC guidelines. The distribution sector is
composed of 17 private investor-owned electric utilities, 119 electric cooperatives, and 10 local
governments owned or operated electric utilities. MERALCO is the most dominant player in the
distribution sector.

Supply of electricity to end-users is a competitive and contestable market. An electricity supplier

has to obtain a license from ERC to engage in the selling, brokering or marketing of electricity in
the competitive or contestable market. ERC will evaluate the performance of the market, and
may reduce the threshold level until it reaches the household demand level. An electricity
supplier shall not be required to secure a national franchise. The prices to be charged by
electricity suppliers for the supply of electricity in a competitive environment are market-driven
and shall not be subject to regulation by ERC (Patalinghug E. , 2003).

Regulatory Framework

The entry and operation conditions of electric utilities are generally governed by the Public
Service Law which is administered by ERC. In addition, Foreign Investments Law, Power
Cogeneration Law, Electricity Power Crisis Act, BOT Law and Expanded BOT Law improve
entry conditions by providing a fair rate of return to private investors. The old ERB, and now
ERC, was and is given power to adopt and implement technical, customer service and financial
standards for TRANSCO, generating companies, distribution utilities, and suppliers to ensure the
quality, reliability, security, and affordability of the supply of electric power, and to safeguard
against the risk of financial non-performance. R.A. 9136 mandates that ERC shall regulate the
retail rates charged by distribution utilities, the distribution wheeling charges of distribution
utilities, and the transmission charge imposed by TRANSCO (Oplas, 2016). There are few
administrative restrictions on access to inputs for electric power operators. NPC and electric
cooperatives often enjoy tax exemptions and subsidies under existing laws. The importation of
coal, electric generator sets, new and renewable technologies, and other electric power
equipment has been liberalized. Electric generation and distribution are given access to official

development assistance (ODA) provided that they are given high priority by the National
Economic and Development Authority (NEDA) and that they are economically but not
financially feasible. Proposed projects requiring foreign-loan financing must be financially and
economically viable and must been endorsed by the Regional Development Council. This rule
also applies to projects funded by NPC and NEA (James, 2016).

V. Problems and Prospects

Power Shortage
The shortage is part of a decades-old weakness in the Philippine power sector (Moss, 2014).

Source: Platts World Electric Power Plant Database (December 2014 release)
Note: Planned additions reflect projects currently under construction.
As the 12th largest nation in the world, the Philippines has a population of more than 100
million people spread over 7,000 islands, which faces several electricity infrastructure challenges

(Jell, 2015). This could only mean that the countrys concern over resource sufficiency in its
power sector is challenged to add supply quickly enough to keep up with growing demand.

Source: U.S. Energy Information Administration, based on Department of

Energy.

The three main island regions of Luzon, Visayas, and Mindanao each have distinct
generation profiles. In the northern part of the country, Luzons capacity is mainly
powered by fossil fuels, with anticipated capacity additions of more than 500 MW, most
of which will be coal-fired. Visayas, in central Philippines, currently relies heavily on its
geothermal resources, but has plans to add 300 MW of coal capacity by 2017. In the
south, Mindanao relies heavily on its hydropower resources, with plans for both
additional hydropower capacity and additional coal-fired generation to increase system
reliability. (Morris, 2015)

However, one of the problems facing the Philippines Electric Industry is the power shortage.
Instances like dry seasons would reduce the power supply. As Rood (2015) states that,
hydropower and other major gas production facility supplying power plants will be shut down,
so that electricity reserves will be running lower during dry seasons. Moreover, the latest major
power shortage was triggered by a breakdown of several critical power plants in the country
(Ronquillo, 1992). The shutdown of (i) 300-MW Malaya oil thermal unit 1; (ii) 100-Limay Unit
1; (iii) 382-Pagbilao Unit 1 and lastly 264-MW Sta. Rita gas plant module 40 of Luzon power
grid (Olchondra, 2015). Moreover, 6-8 hour outage or known as blackouts plague Mindanao
(Regalado, 2016). Likewise, hundreds of power plants been damaged by natural calamities such
as 1990 killer earthquake and more especially in the powerful typhoon Uring that swept the
Visayas.
The Remedies to the Power Crisis
The nation's power sector has been through years of transformation. One of the pillars under the
ERA of the Aquino Administration is ensuring energy security. This means that the government
is considering and looking at various options that will address the countrys increasing energy
demand (Ricardo, 2016). In Luzon, a total of 2,300 megawatts will be added to the grid from
June this year until September 2019 (De Guzman, 2015). In 2009, 647 cities and towns in the
Philippines and some 15 million Filipinos participated in the Earth Hour, saving 611 megawatthours of electricity during the one-hour period (Alano, 2015). According to Anonymous (2014),
renewable energy is the best solution to power crisis. Renewable energy can provide a stable
source of electricity at a constant price for years to come (Ibay, Yan, & NG, 2016). This is also a
good solution because the Philippine government would appreciate not having to deal with
constant rolling blackouts (Blaine, 2016).

Renewable energy in the Philippines is affordable in long term (Santos, 2013). This would also
lower the amount of money the Philippines would have to pay to get the electricity to power the
country. Besides, Philippines is a good place for renewable energy investment because the
economy is growing quite fast. Then there is also a market, the electricity demand is there
(Jalandoni, 2015). This may not be the best solution to the other countries but it would be a great
help and a good solution for the Philippines.
The Renewable Energy
There is abundant coal in many parts of the world, but with the constraints imposed by concern
about global warming, it is likely that this will increasingly be seen as chemical feedstock and its
large-scale use for electricity production will be scaled down. Current proposals for 'clean coal'
technologies may change this outlook. The main technology involves the capture and subsequent

storage of the carbon dioxide from the flue gas. Elements of the technology are proven but the
challenge is to actually commercialize it and bring the cost down sufficiently to compete with
nuclear power.
Natural gas is also reasonably abundant, especially with the advent of technologies for tapping
that in coal seams and shale, but is so valuable for direct use after being reticulated to the point
where heat is required, and as a chemical feedstock, that its large-scale use for power generation
makes little sense and is arguably unsustainable. However, while abundant supply keeps prices
down in the short to medium-term, it is the most economical means of generating electricity in
some places, notably North America.
Fuel for nuclear power is abundant, and uranium is even available from sea water at costs which
would have little impact on electricity prices. Furthermore, if well-proven but currently
uneconomic fast neutron reactor technology is used, or thorium becomes a nuclear fuel, the
supply is almost limitless (Anonymous, 2009).

Bibliography
Anonymous. (2016). ADB. Retrieved from Proposed Program Cluster Loan to the Republic of
the Philippines for Power Sector Development: https://www.adb.org/sites/default/files/linkeddocuments/cps-phi-2011-2016-ssa-02.pdf
Anonymous. (2006). Department of Energy PH. Retrieved from Energy Supply and Demand
Outlook: https://www.doe.gov.ph/energy-supply-and-demand-outlook
Anonymous. (2011). SSA: Philippines: Country Partnership Strategy (2011-2016). Retrieved
from adb.org: https://www.adb.org/sites/default/files/linked-documents/cps-phi-2011-2016-ssa02.pdf
Anonymous. (2009). World Nuclear. Retrieved from Energy and Environment:
http://www.world-nuclear.org/information-library/energy-and-the-environment/sustainableenergy.aspx
Cham, M. R. (2007). The Philippine power sector:issues and solutions. the Philippine Review of
Economics , 33-63.
COMECCON. (2016). The Philippine Energy Industry and EPIRA. Retrieved October 1, 2016,
from Commercial Economics Consulting: http://www.comeccon.com/the-philippine-energyindustry-and-epira/
Day, R. (2015, March 30). The rise of choices and the end of natural monopolies. Retrieved
October 7, 2016, from Greentechmedia: http://www.greentechmedia.com/articles/read/the-riseof-choices-and-the-end-of-natural-monopolies
DoE. (2016). EPIRA (R.A. 9136). Retrieved October 1, 2016, from Department of Energy [PH]:
https://www.doe.gov.ph/epira-ra-9136
GMA. (2013, February 4). Higher demand for electricity grow as PHL economy expands Energy Dept. Retrieved October 1, 2016, from GMA News Online:
http://www.gmanetwork.com/news/story/293312/money/economy/higher-demand-for-electricityto-grow-as-phl-economy-expands-energy-dept
James, B. (2016, March 2). The Philippine Energy Industry and EPIRA. Retrieved from
comeccon: http://www.comeccon.com/the-philippine-energy-industry-and-epira/
Jell, S. (2015, March 6). Supply shortages lead to rolling power outages in the Philippines.
Retrieved from eia: http://www.eia.gov/todayinenergy/detail.cfm?id=20252
Limtingco, E. (2014, March 5). The Philippine powerd distribution industry. Retrieved October
1, 2016, from The Freeman: http://www.philstar.com:8080/cebubusiness/2014/03/05/1297314/philippine-power-distribution-industry

Manabat, R. (2013). The energy report Philippines. Retrieved September 15, 2016, from KPMG
Global Energy Institute:
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/energyreport-philippines.pdf
Manabat, R. (2013). The Energy Report Philippines. Retrieved September 20, 2016, from
KPMG:
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/energyreport-philippines.pdf
Marquit, M. (2009, March 8). 5 Feasible Renewable Energy Sources. Retrieved from PhysOrg:
http://phys.org/news/2009-05-feasible-renewable-energy-sources.html
Morris, B. (2015, March 7). Philippines has 2,000 inhabited islands, struggles with power
shortages. Retrieved October 12, 2016, from Politics in Zero:
http://polizeros.com/2015/03/07/philippines-has-2000-inhabited-islands-struggles-with-powershortages/
Moss, T. (2014, September 17). Philippines Power Crisis: The Battle to Keep the Lights On.
Retrieved from The wall street journal: http://www.wsj.com/articles/philippines-power-crisis-thebattle-to-keep-the-lights-on-1410989402
N/A. (2016, July 19). Luzon grid placed on yellow alert. Retrieved October 12, 2016, from
PhilStar: http://www.philstar.com/business/2016/07/19/1604478/luzon-grid-placed-yellow-alert
Olchondra, R. T. (2015, June 27). Luzon power grid placed on yellow alert. Retrieved October
12, 2016, from PhilStar: http://newsinfo.inquirer.net/701101/luzon-power-grid-on-yellow-alert
Oplas, B. (2016, March 23). Philippine Power Generation Capacity. Retrieved from Business
world online: http://www.bworldonline.com/content.php?section=Opinion&title=philippinepower-generation-capacity-has-been-reduced-under-wesm&id=124926
P. Kharecha, J. H. (1998). Prevented Mortality and Greenhouse Gas Emissions from Historical
and Projected Nuclear Power. In A. Gabbard, Environ. Sci. Technol (pp. pp 48894895).
Patalinghug, E. E. (2003, October 13-15). An Analysis of the Philippine Electric Power Industry.
Retrieved from Ombudsman: http://www.ombudsman.gov.ph/UNDP4/wpcontent/uploads/2013/01/An-Analysis-of-the-Philippine-Electric_Patilinhug.pdf
Patalinghug, E. (2003, March 31). ombudsman.gov. Retrieved from An Analysis of the Philippine
Electric Power Industry: http://www.ombudsman.gov.ph/UNDP4/wpcontent/uploads/2013/01/An-Analysis-of-the-Philippine-Electric_Patilinhug.pdf

Patalinhug, E. (2003, October 15). An Analysis of the Philippine Electric Power Industry.
Retrieved September 20, 2016, from Ombudsman: http://www.ombudsman.gov.ph/UNDP4/wpcontent/uploads/2013/01/An-Analysis-of-the-Philippine-Electric_Patilinhug.pdf
Perloff, J. (2012). Microeconomics. England: Pearson Education.
Ricardo, J. (2016). Nuclear Power Plant Development in the Philippines. Retrieved from
iaea.org: https://www.iaea.org/NuclearPower/Downloadable/Meetings/2016/2016-02-02-02-05NIDS/S8_BR4_Yap-Ricardo_Philippines.pdf
Rivera, A. (2016, June 23). Philippines needs $30 B investments in power, says MVP. Retrieved
from Phil Star Global: http://www.philstar.com/business/2016/06/23/1595597/philippines-needs30-b-investments-power-says-mvp
Ronquillo, A. (1992, November 11). The Philippines: In search for sustainable energy options.
Retrieved from World information service on energy: https://www.wiseinternational.org/nuclearmonitor/383/philippines-search-sustainable-energy-options
Rood, S. (2015, March 18). Energy Crisis in the Philippines: An Electricity or Presidential
Power Shortage? Retrieved from The Asia Foundation:
http://asiafoundation.org/2015/03/18/energy-crisis-in-the-philippines-an-electricity-orpresidential-power-shortage/
Somani, S. (2013). Growth and Opportunities in the Philippine Electric Power Sector. Retrieved
from kmpg.com:
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/energyreport-philippines.pdf
White, B. (2016). Energy Sources in the Philippines. Retrieved from People of our Everyday
Life: http://peopleof.oureverydaylife.com/energy-sources-philippines-10284.html