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Rising Electricity Rates and Their Causes

General Report November 3, 2024
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TABLE OF CONTENTS

  1. Summary
  2. Overview of Meralco Rate Changes
  3. Factors Contributing to Rate Increases
  4. Meralco's Mitigation Measures
  5. Regulatory and Consumer Responses
  6. Implications for Consumers
  7. Conclusion

1. Summary

  • Amidst growing electricity consumption, Meralco has implemented significant rate increases as of June 2024, raising the electricity cost for typical households to P12.0575 per kilowatt-hour (kWh). This represents a rise from the prior rate of P11.4139 per kWh, attributable mainly to increased generation charges influenced by the tightened supply in the Wholesale Electricity Spot Market (WESM) and fluctuations from Independent Power Producers (IPPs). A notable factor exacerbating the situation is the peso's depreciation, affecting costs, most notably in dollar-denominated charges. In reaction, Meralco has enacted mitigation measures, including deferring generation costs and establishing interim power supply agreements, aiming to ease financial pressures on consumers. Regulatory bodies, particularly the Energy Regulatory Commission (ERC), have also intervened by approving cost deferrals and reviewing new agreements to curb escalating prices.

2. Overview of Meralco Rate Changes

  • 2-1. Current Electricity Rates for June 2024

  • As of June 2024, the electricity rate for a typical household served by the Manila Electric Company (Meralco) reached P12.0575 per kilowatt-hour (kWh). This marked an increase from the previous month’s average rate of P11.4139 per kWh, which translates to an additional 64 centavos per kWh. Consequently, residential customers utilizing 200 kWh can expect their monthly power bills to rise by approximately P129. This rate increase has been attributed largely to escalating generation charges and tighter supply conditions in the electricity market.

  • 2-2. Historical Context of Rate Fluctuations

  • Historically, fluctuations in Meralco's electricity rates have been driven by various factors, primarily including changes in generation charges from the Wholesale Electricity Spot Market (WESM) and Independent Power Producers (IPPs). For the recent hike in June 2024, it was specifically noted that the generation charge rose by 35 centavos per kWh, primarily due to increased costs from the WESM. Moreover, charges from the IPPs increased by P0.0224 per kWh. However, a decrease of P0.2988 per kWh in charges from Power Supply Agreements (PSAs) helped to attenuate the overall rise in generation costs. The contribution of WESM, IPPs, and PSAs to Meralco's total energy requirements for this period was 33%, 29%, and 38%, respectively.

3. Factors Contributing to Rate Increases

  • 3-1. Wholesale Electricity Spot Market (WESM) Charge Increases

  • Meralco has reported an increase in charges from the Wholesale Electricity Spot Market (WESM), which rose by P1.5203 per kWh in May due to tight supply conditions. Average demand rose significantly, exceeding 1,200 MW during this period. Furthermore, from January to May, the Luzon power grid experienced 12 days on red alert and 27 days on yellow alert. In June, the WESM charges further increased by P1.7913 per kWh as demand surged by 2,401 MW, leading to multiple yellow and red alerts. The generation charge for June increased by P0.3466 due to higher costs from WESM.

  • 3-2. Impact of Independent Power Producers (IPPs)

  • Charges from Independent Power Producers (IPPs) saw a modest increase of P0.0224 per kWh in May. This increase was attributed to lower average dispatch from IPPs, which was influenced by the depreciation of the peso, affecting approximately 98% of IPP costs that are dollar-denominated. However, in June, there was a decrease of P0.6942 per kWh in charges from IPPs, which was a result of higher average dispatch and lower fuel prices during that period.

  • 3-3. Effects of Peso Depreciation

  • The depreciation of the peso continues to impact electricity costs, particularly for dollar-denominated components. In May, the peso noted a decline to the P58 level against the US dollar, contributing to the increases in generation costs. The peso depreciation affected about 14% of Power Supply Agreements (PSAs) costs, adding to the overall costs passed on to consumers.

  • 3-4. Transmission and Ancillary Service Charges

  • There was a net increase of P0.0166 per kWh in the transmission charge, taxes, and other ancillary service charges. These charges are passed through by Meralco to power suppliers and the grid operator. It is important to note that the distribution charge from Meralco remained unchanged since a prior reduction effective from August 2022.

4. Meralco's Mitigation Measures

  • 4-1. Deferred Generation Costs

  • To alleviate higher electricity rates, Meralco, in collaboration with suppliers such as Quezon Power (Philippines) Ltd., San Buenaventura Power Ltd. Co., and South Premiere Power Corporation, has deferred around P500 million in generation costs. This initiative allows the deferred amount to be billed on a staggered basis over three months, resulting in a reduction of the generation charge by P0.1313 per kWh for June 2024. This measure aims to soften the financial burden on consumers facing skyrocketing electricity prices.

  • 4-2. Implementation of Interim Power Supply Agreements

  • Meralco has been proactive in entering interim power supply agreements to effectively manage increasing electricity demand and supply constraints. A significant development is the 400-MW interim power supply agreement with Limay Power, Inc., which is awaiting regulatory approval. This agreement is expected to decrease Meralco's reliance on the Wholesale Electricity Spot Market (WESM) and thereby stabilize generation costs. Additionally, subsidiaries of San Miguel Corporation successfully bid for 1,200 MW of capacity to address rising power demand amid climatic challenges.

  • 4-3. Customer Assistance Programs

  • Meralco has instituted several customer assistance programs designed to mitigate the financial impacts of increased electricity rates on consumers. These programs include deferred billing initiatives that provide temporary relief to consumers struggling with higher electricity costs. The company continuously assesses and implements various support measures to assist consumers in managing their electricity expenses during periods of rate hikes.

5. Regulatory and Consumer Responses

  • 5-1. Actions by the Energy Regulatory Commission (ERC)

  • The Energy Regulatory Commission (ERC) has actively addressed issues related to electricity rates set by Meralco. One key action taken by the ERC was the approval of the deferral of approximately P500 million in generation costs for Meralco. This deferral resulted in a reduction of P0.1313 per kilowatt-hour (kWh) in generation charges for consumers. Additionally, the ERC is currently reviewing a 400-MW interim power supply agreement (PSA) with Limay Power Inc., which, if approved, could significantly lower Meralco's exposure to the Wholesale Electricity Spot Market (WESM) and help in reducing overall generation costs. However, the ERC has faced criticisms regarding the delays in reviewing Meralco's power rates, with concerns raised about the impact of these delays on the affordability of electricity for consumers.

  • 5-2. Consumer Complaints and Criticisms

  • Consumer complaints regarding Meralco's high electricity rates have been persistent. Advocacy groups and individual consumers have criticized Meralco for alleged anti-competitive practices and failure to address pricing issues adequately. For instance, Santa Rosa City Representative Dan Fernandez accused Meralco of not recalculating its weighted average cost of capital (WACC) and maintaining a monopoly on the electricity market. Consumer advocates contend that electricity rates should decline, citing a mandate to supply power at the least cost. However, despite these assertions, data indicates that Meralco's rates have increased, attributed mainly to rising generation and transmission charges, which have been influenced by spikes in fuel prices and an increase in post-pandemic energy demand.

  • 5-3. Responses from Consumer Advocacy Groups

  • Consumer advocacy groups have responded to the rate hikes by pushing for greater scrutiny of Meralco's operations and its compliance with existing regulations. Notable organizations such as Bayan Muna and the National Association of Electricity Consumers for Reforms (Nasecore) have previously challenged the ERC's approvals for rate hikes, arguing these increases lacked due process. Although the courts dismissed the petitions brought forth by these groups, they continue to advocate for more stringent regulatory oversight and consumer protections. Environmental advocacy organizations like Greenpeace and the Center for Renewable Energy and Technology (CREST) have also voiced concerns, urging a transition towards renewable energy to promote cost savings and lessen environmental impacts, criticizing Meralco's continued reliance on fossil fuels.

6. Implications for Consumers

  • 6-1. Impact of Rate Increases on Household Bills

  • The Manila Electric Company (Meralco) announced an increase of P0.4621 per kilowatt-hour in the May 2024 electricity rates, leading the overall rate for a typical household to rise from P10.9518 per kilowatt-hour in April to P11.4139 per kilowatt-hour. For residential customers consuming 200 kilowatt-hours, this adjustment results in an increase of approximately P92 in their total monthly electricity bill. The rise in rates is primarily driven by an increase in the generation charge, which went up by P0.4455 per kilowatt-hour. The generation charge's increase is mainly attributed to heightened costs from the Wholesale Electricity Spot Market (WESM) and various Power Supply Agreements (PSAs). In particular, charges from WESM rose dramatically by P1.7913 per kilowatt-hour due to tight supply conditions in the Luzon grid amid a 2,401 MW increase in demand during the prior month, prompting multiple alerts regarding supply conditions.

  • 6-2. Long-term Trends in Electricity Pricing

  • The recent increases in electricity rates reflect broader long-term trends in electricity pricing, influenced by various factors. The generation charges from PSAs also rose by P0.2871 per kilowatt-hour; this was due to reduced excess energy deliveries, leading to greater reliance on emergency PSAs. Additionally, the peso’s depreciation has impacted approximately 14% of PSA costs, particularly those denominated in dollars, further compounding the increases in electricity rates. Despite a reduction in charges from Independent Power Producers (IPPs) by P0.6942 per kilowatt-hour—attributed to enhanced IPP dispatch and lower fuel prices—the overall trend points toward increasing electricity costs driven by external and market factors. Furthermore, mandatory fees related to transmission and other costs registered a net increase of P0.0166 per kilowatt-hour, while the distribution charge remained constant due to a reduction enacted in August 2022.

Conclusion

  • The examined report underscores that Meralco's recent electricity rate increases are predominantly driven by climbing generation costs from the WESM and IPP-related expenses, coupled with the adverse impacts of a depreciating peso. Despite Meralco’s implementation of mitigating measures such as deferred costs and obtaining interim power agreements, which provide some level of consumer relief, advocacy groups continue to challenge the company's pricing policies. They highlight the necessity for ongoing regulatory scrutiny to ensure fair practices within the power market. For consumers, the resultant rise in electricity bills underscores a pressing financial burden, exacerbated by heightened demand and constrained supply conditions in the energy sector. Future developments hinge on effective regulatory action and strategic shifts towards more sustainable energy practices to stabilize the market. Consumers might benefit from greater regulatory interventions and diversification of supply sources to enhance affordability and predictability in power rates going forward.

Glossary

  • Meralco [Company]: The Manila Electric Company (Meralco) is the largest electric distribution utility in the Philippines. It plays a critical role in supplying electricity to millions of consumers in its franchise area. The company's pricing strategies and operational decisions directly impact electricity costs for residential and commercial users, making it a focal point for discussions about energy pricing and regulation in the Philippines.
  • Energy Regulatory Commission (ERC) [Regulatory Body]: The Energy Regulatory Commission (ERC) is the government agency responsible for regulating the electric power industry in the Philippines. It oversees the operations of electricity providers, including Meralco, and is tasked with ensuring fair pricing, promoting competition, and protecting consumer interests in the energy sector.

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