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Breaking down the Philippines power sector reform

“The Philippines has one of the most sustainable energy models in the world, because we do not rely on the government to build our power plants, but instead rely on the free market,” claims Senator Sergio de la Rama Osmeña III, head of the Senate’s energy committee. However, he also notes that the country “has been stumbling along for decades.”

In 2001, the power sector underwent a radical transformation from public to private when The Electric Power Industry Reform Act (EPIRA), considered the most progressive energy legislation to come out of Southeast Asia, was first drafted. EPIRA’s raison d’être was to build a sustainable and reliable power supply in order to lower electricity rates in the long term.

However, actual implementation of EPRIA only occurred in 2008, and the last mandates related to open access to the sector only being met in 2013, and prices have remained exuberantly high. In January 2014, the cost of a unit of electricity from the Luzon grid cost 12.45 PHP/kWh (0.28 USD/kWh). The Philippines consists of three main geographical divisions and subsequently the name of the grids: Luzon, Visayas and Mindanao. Luzon is the wealthiest of the three.

“EPIRA promised energy at a reasonable rate, but the definition of ‘reasonable’ is still unclear,” states Congressman Reynaldo V. Umali, Oriental Mindoro Representative and head of the House’s Energy Committee.

Under EPIRA, subsidies were eliminated and there was a mass unbundling of generation, transmission and distribution, with over 80 percent of assets privatized today.

EPIRA mandated the creation of The Power Sector Assets and Liabilities Management Corporation (PSALM), the new state agency tasked with overseeing the privatization and sale of power assets in order to liquidate the National Power Corporation’s (NPC) financial obligations. NPC’s transmission assets were reassigned to the National Transmission Corporation (TransCo). Subsequently, the privately owned National Grid Corporation (NGCP) won a 50-year franchise to become the operator of the country’s electricity network. However, TransCo kept ownership of all transmission assets.

Another of EPIRA’s creations was the Wholesale Electricity Spot Market (WESM). The spot market (governed by the Philippine Electricity Market Corporation or PEMC) commenced commercial operations on the Luzon grid in 2006 and on the Visayas grid in 2010. Currently, the Interim Market for Energy in Mindanao (IMEM) is attempting to source additional capacity for the southern region.

The Energy Regulatory Commission (ERC), an independent regulatory body that ensures consumer education and protection and promotes competition in the electricity market, was another part of the EPIRA package. It is currently tweaking the remaining guidelines for the highly contested feed-in-tariff (FIT) rules, which it issued in July 2012. In addition, the commission is prioritizing transition issues in the implementation of Retail Competition and Open Access (RCOA), the scheme that allows power users of at least 1 MW in Luzon and Visayas to choose their own power supplier.

“With the RCOA regime slowly unfolding, the impetus for foreign and local investors to invest in the electric power industry will only get stronger,” explains Zenaida Cruz-Ducut, ERC’s Chair.  As more power plants are built, the supply of power will increase and  “eventually, a stronger supply and demand equilibrium position will be reached, for electricity prices to become truly competitive.”

To read more articles and interviews on the Philippines, and to download the latest free report on the country, click here.

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