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July 2016
This publication was produced by Nathan Associates Inc. for the US-APEC Technical Assistance
to Advance Regional...
PEER REVIEW ON FOSSIL FUEL
SUBSIDY REFORMS IN THE
PHILIPPINES
FINAL REPORT
DISCLAIMER
This document reflects the recommend...
CONTENTS
Executive Summary ix
1. Introduction and FFSR Peer Review Process 16?
2. Energy Subsidies 5
Identification of Sub...
I I C O N T E N T S
Lessons Learned and Best Practices 62
8. Subsidy 4: Missionary Electrification for Small Power Utiliti...
I N T R O D U C T I O N I I I
Illustrations
Figures
Figure 1-1. Development of IFFSR Peer Review Process in the Philippine...
CAVEATS
The opinions expressed in this report are a consensus view of the APEC Peer Review Panel for the
Philippines after...
ACRONYMS AND INITIALS
ADB Asia Development Bank
APEC Asia-Pacific Economic Cooperation
APRP APEC Peer Review Panel
ARMM Au...
V I P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
MEDP Missionar...
V I I
VAT Value-added tax
VPR/IFFSR Voluntary Peer Review of Inefficient Fossil Fuel Subsidy Reform
WESM Wholesale Electri...
PREFACE
Starting in 2009, APEC Leaders have committed “to rationalize and phase out inefficient fossil fuel
subsidies that...
EXECUTIVE SUMMARY
APEC Leaders in 2013 agreed to build regional capacity to assist APEC economies in rationalizing and
pha...
X P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Table ES-0-1. Ti...
E X E C U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X I
Policy Key Findings End Goal
•PTAP is not currently ac...
X I I P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Based on the...
E X E C U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X I I I
The APRP observed that two of the five reviewed me...
X I V P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
purposes, in...
E X E C U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X V
intergovernmental mechanisms, for the sectors impacted...
1 6 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
1. INTRODUCTIO...
I N T R O D U C T I O N A N D F F S R P E E R R E V I E W P R O C E S S I N T R O D U C T I O N A N D F F S R P E E R R E ...
1 8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Figure 1-1. De...
PART 1: BACKGROUND
Part 1 of the report contains background information for the APEC peer review of the fossil fuel policy...
2. ENERGY SUBSIDIES
Energy subsidies, particularly in low- or middle-income economies, are often assumed to protect
consum...
6 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
rates, thereby g...
E N E R G Y S U B S I D I E S 7
Government
Intervention Example
How the subsidy usually works
Lowers cost of
production
Ra...
8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
the process of r...
E N E R G Y S U B S I D I E S 9
education, health, infrastructure, and social protection. Transparency is a key element of...
3. MACROECONOMICS AND
SOCIODEMOGRAPHICS
This section presents the macroeconomic and the socio-demographic conditions in th...
M A C R O E C O N O M I C S A N D S O C I O D E M O G R A P H I C S 1 1
The Philippines has a tropical maritime climate, w...
1 2 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Figure 3-2. Ph...
M A C R O E C O N O M I C S A N D S O C I O D E M O G R A P H I C S 1 3
workforce, followed by the agricultural sector (30...
4. ENERGY LANDSCAPE OF THE
PHILIPPINES
This section provides an overview of energy use in the Philippines, including energ...
E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 5
Figure 4-1: Total Final Energy Consumption by Sector 199...
1 6 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
The transporta...
E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 7
Figure 4-5: Energy Demand Outlook by Fuel (in MTOE)
Sour...
1 8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Figure 4-6: Th...
E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 9
Arabia and Russia (EIA, 2014). The Philippines is expect...
2 0 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Table 4-1: Nat...
E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 1
the electrical capacity comes from coal, while the Visay...
2 2 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
Figure 4-9: Ph...
E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 3
Table 4-2: Philippines 2014 Capacity by Plant Type
Sourc...
2 4 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S
EPIRA also est...
E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 5
legislation mandates the UC-ME Charge to fund the genera...
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
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APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
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APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
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APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16

  1. 1. July 2016 This publication was produced by Nathan Associates Inc. for the US-APEC Technical Assistance to Advance Regional Integration Project. PEER REVIEW ON FOSSIL FUEL SUBSIDY REFORMS IN THE PHILIPPINES Final Report
  2. 2. PEER REVIEW ON FOSSIL FUEL SUBSIDY REFORMS IN THE PHILIPPINES FINAL REPORT DISCLAIMER This document reflects the recommendations reached by the APEC Fossil Fuels Subsidy Reforms Peer Review Team and does not reflect the opinions of the Team’s respective governments. The contents of the report are the sole responsibility of the author or authors and do not necessarily reflect the views of the U.S. Agency for International Development, the Asia-Pacific Economic Cooperation (APEC) or other governments.
  3. 3. CONTENTS Executive Summary ix 1. Introduction and FFSR Peer Review Process 16? 2. Energy Subsidies 5 Identification of Subsidies 6 Lessons Learned from Fossil Fuel Subsidy Reform 8 3. Macroeconomics and Sociodemographics 10 Macroeconomic Condition 11 Socioeconomic Indicators 13 4. Energy Landscape of The Philippines 14 Energy Consumption 14 Energy Supply 17 Power Generation 20 Transportation 25 Energy Policy 27 5. Subsidy 1: Oil Price Stabilization Fund (OPSF) 30 History and Context 30 Vision 33 Key Findings 33 Recommendations 34 Observations 34 Lessons Learned and Best Practices 35 6. Subsidy 2: Pantawid Pasada: Public Transport Assistance Program 43 History and Context 43 Vision 46 Key Findings 46 Recommendations 47 Observations 48 Lessons Learned and Best Practices 49 7. Subsidy 3: Excise Tax Exemptions 58 History and Context 58 Vision 60 Key Findings 61 Recommendations 61
  4. 4. I I C O N T E N T S Lessons Learned and Best Practices 62 8. Subsidy 4: Missionary Electrification for Small Power Utilities Group 69 History and Context 69 Vision 74 Key Findings 74 Recommendations 75 Observations 76 Lessons Learned and Best Practices 76 9. Subsidy 5: Universal Charge Exemption for Self-Generating Facilities 85 History and Context 85 Vision 88 Key Findings 88 Recommendations 88 Lessons Learned and Best Practices 90 10. Conclusion 97 11. References 99 Appendix A. APRP Meetings for IFFSR Mission, December 2015 Appendix B. Summaries of APRP Meetings in Manila, philippines Appendix C. Peer Review Team Members FFSR Team Leader FFSR Team Members FFSR Secretariat Appendix D. APEC FFSR Evaluation Tables
  5. 5. I N T R O D U C T I O N I I I Illustrations Figures Figure 1-1. Development of IFFSR Peer Review Process in the Philippines 18? Figure 3-1: Philippines Map 10 Figure 3-2. Philippines Annual Percentage Growth Rate of GDP 12 Figure 3-3. GNI per Capita of Philippines, Atlas Method (Current USD) 12 Figure 4-1: Total Final Energy Consumption by Sector 1990-2014 15 Figure 4-2: Total Final Energy Consumption by Fuel Type 1990-2014 15 Figure 4-3: GHG Emissions by Fuel Type from 1990 - 2014 16 Figure 4-4: Energy Demand Outlook by Sector (in MTOE) 16 Figure 4-5: Energy Demand Outlook by Fuel (in MTOE) 17 Figure 4-6: The Philippines Primary Energy Supply 18 Figure 4-7: Philippines Energy Production and Net Imports 18 Figure 4-8: 2014 Philippines Capacity Mix by Grid 21 Figure 4-9: Philippine Power Generation Mix (in gigawatt-hours, GWh) 22 Figure 5-1. Philippines OPSF Balance and other Macroeconomic Indicators 32 Figure 5-2. Philippines Oil Consumption (left) and Energy Productivity (right) 32 Figure 6-1: Indexed Transit Fares and Fuel Prices 44 Tables Table ES-1. Timeline of Peer Review Process x Table ES-2. Key Findings and End Goals for the Three Evaluated Subsidies x Table ES-3. APRP Recommendations for the Five Evaluated Subsidies xii Table ES-4. APRP Observations for the Five Evaluated Subsidies xii Table 2-1: Main Types of Fossil Fuel Subsidies 6 Table 4-1: Natural Gas Production and Consumption as of September 2015 20 Table 4-2: Philippines 2014 Capacity by Plant Type 23 Table 7-1: Prevailing Taxes and Duties on Petroleum Products 59 Table 7-2. Impact of VAT and Offsetting Measures 59 Table 8-1: Existing and Pending Components of the Universal Charge (UC) 70 Table 8-2: ERC-Approved Universal Charges, As of 31 July 2015 71
  6. 6. CAVEATS The opinions expressed in this report are a consensus view of the APEC Peer Review Panel for the Philippines after discussions with the Philippine Government and review of various source documents. These opinions do not represent any single individual on the Review Panel, or the Philippines’ Government, or any other APEC economy or organization with which a review panel member may be associated. Any errors in the report are solely the responsibility of the members of the Review Panel. ACKNOWLEDGMENTS This report was produced by Nathan Associates Inc, in association with ICF International, for the APEC Energy Working Group. Dr. Ananth Chikkatur (ICF) was the team lead for the Secretariat of the APEC Peer Review Panel (APRP). He was supported by Mr. Andrew Eil (ICF), Ms. Alexandra Jamis (ICF), and Ms. Jeannette Paulino (Nathan Associates). The APRP consisted of Dr. Niall Mateer (Team Leader), Mr. David Buckrell (New Zealand), Mr. Noor Iskandarsyah (Indonesia), and Mr. Toshiyuki Shirai (International Energy Agency, IEA). The APRP thanks all of the departments in the Philippines that devoted significant time and effort in supporting the Panel’s activities in Manila. The Department of Energy, in particular, was very helpful in coordinating the APEC Peer Review activities. We are especially grateful to Ms. Melita Obillo and Ms. Luningning Baltazar, who were the primary contacts in the Government of the Philippines for this Peer Review.
  7. 7. ACRONYMS AND INITIALS ADB Asia Development Bank APEC Asia-Pacific Economic Cooperation APRP APEC Peer Review Panel ARMM Autonomous Region in Muslim Mindanao ASEAN Association of Southeast Asian Nations Bcf Billion cubic feet CAR Cordillera Administrative Region CNG Compressed natural gas DOTC Department of Transportation and Communications DU Distribution utility EIA United States Energy Information Administration EPIMB Electric Power Industry Management Bureau EPIRA Electric Power Industry Reform Act of 2001 ERB Energy Regulatory Board ERC Energy Regulatory Commission EWG Energy Working Group EO Executive Order FIT Feed-in tariff FFSR Fossil fuel subsidies reform GDP Gross domestic product GHG Greenhouse gas GNI Gross national income GW Gigawatt GWh Gigawatt-hours ICF ICF International IEA International Energy Agency IECC Inter-Agency Energy Contingency Committee IFFSR Inefficient fossil fuel subsidies reform IMF International Monetary Fund ILP Interruptible Load Program IOPRC Independent Oil Price Review Committee IPP Independent Power Producers LPG Liquefied petroleum gas LTFRB Land Transportation Franchising and Regulatory Board LTO Land Transportation Office MEP Missionary Electrification Plan
  8. 8. V I P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S MEDP Missionary Electrification Development Plan MERALCO Manila Electric Company MMSCF Million standard cubic feet MOPS Mean of Platts Singapore MTOE Million tonnes of oil equivalent MW Megawatt NCR National Capital Region in the Philippines NEA National Electrification Administration NEECP National Energy Efficiency and Conservation Program NGCP National Grid Corporation of the Philippines NPC National Power Corporation NPP New Power Providers NREB National Renewable Energy Board NREP National Renewable Energy Program OECD Organisation for Economic Co-operation and Development OPSF Oil Price Stabilization Fund PDOE Philippine Department of Energy PDOF Philippine Department of Finance PDTI Philippine Department of Trade and Industry PDP Power Development Plan PEP Philippine Energy Plan PNR Philippine National Railways PPCs Pantawid Pasada Cards PPP Purchasing power parity PREE Peer reviews on energy efficiency PSA Philippine Statistics Authority PSALM Power Sector and Asset Liabilities Management Corporation PSP Private Sector Participation program PTA Public Transport Assistance PTAP Public Transport Assistance Program QTP Qualified Third Party program RE Renewable energy RE Act Renewable Energy Act of 2008 RVAT Reformed Valued-Added Tax Law SGF Self-generating facility SPUG Small Power Utilities Group UC Universal Charge UC-ME Universal Charge for missionary electrification UNEP United Nations Environment Programme USAID United States Agency for International Development USD United States dollar
  9. 9. V I I VAT Value-added tax VPR/IFFSR Voluntary Peer Review of Inefficient Fossil Fuel Subsidy Reform WESM Wholesale Electricity Spot Market WTO World Trade Organization WTO SCM World Trade Organization Agreement on Subsidies and Countervailing Measures
  10. 10. PREFACE Starting in 2009, APEC Leaders have committed “to rationalize and phase out inefficient fossil fuel subsidies that encourage wasteful consumption, while recognizing the importance of providing those in need with essential energy services.” In 2011, APEC Leaders agreed to set up a “voluntary reporting mechanism” that they would review annually to assess APEC’s progress toward this goal. APEC Leaders in 2013 agreed to build APEC economies’ regional capacity for meeting the APEC goal on fossil fuel subsidy reforms, and the APEC Energy Working Group (EWG) developed a methodology and adopted guidelines for conducting voluntary peer reviews of inefficient fossil fuel subsidies. Fossil fuel subsidies incentivize fossil fuel production and consumption and can result in increased energy demand. Inefficient subsidies can lead to fiscal pressure on the government, increase harmful emissions and potentially undermine APEC’s sustainable green growth agenda. APEC Energy Ministers noted in their 2012 Ministerial statement that the reduction of inefficient fossil fuel subsidies “will encourage more energy efficient consumption, leading to a positive impact on international energy prices and energy security, and will make renewable energy and technologies more competitive.” Such inefficient fossil fuel subsidies reform (IFFSR) can free up fiscal resources for cleaner energy options or social reforms and can also reduce local pollution and greenhouse gas emissions. Identifying appropriate reforms and implementing them effectively is challenging despite the benefits for individual economies. An APEC voluntary peer review (VPR) on reform of inefficient fossil fuel subsidies can help APEC economies identify options and help disseminate best practices on reform of inefficient fossil fuel subsidies. The VPR can also improve the quality of voluntary reporting to APEC Leaders. The Philippines is the third of several volunteer member economies to participate in the fossil fuel subsidy reform peer review process. The Philippine Government believes, as do other APEC economies, that any measure that promotes wasteful consumption of fossil fuels is ineffective and should be reformed. The objectives of the peer review are consistent with the domestic 2012-2030 Philippine Energy Plan objectives of (1) ensuring energy security, (2) achieving optimal energy pricing, and (3) developing a sustainable energy system consistent with economic development plans. The VPR for fossil fuel subsidies is led by the APEC EWG. This peer review report is the culmination of the activities conducted under APEC EWG, with support from Nathan Associates and ICF International under the United States Agency for International Development (USAID) U.S.-APEC Technical Assistance to Advance Regional Integration Project. Both Nathan Associates and ICF International served as the secretariat for the APEC Peer Review Panel (APRP). The main report is divided into two parts. The first presents the need for fossil fuel subsidy reform, discusses the background to the APEC VPR process, and provides an overview of the Philippines economy, socio-demographics and the energy landscape. The second part details the history and context of the reviewed subsidies, presents the key findings and recommendations from the APRP, and highlights some lessons learned and best practices for reform. Dr. Phyllis Yoshida Lead Shepherd, APEC EWG
  11. 11. EXECUTIVE SUMMARY APEC Leaders in 2013 agreed to build regional capacity to assist APEC economies in rationalizing and phasing out inefficient fossil fuel subsidies that encourage wasteful consumption, while recognizing the importance of providing those in need with essential energy services. As part of such capacity building, APEC set up a voluntary peer review (VPR) process to support the progress of APEC economies toward the group’s shared goal of phasing out inefficient fossil fuel subsidies that encourage wasteful consumption. At its November EWG 2013, the EWG endorsed voluntary peer review of inefficient fossil fuel subsidy reform (VPR/IFFSR) guidelines and set up a Secretariat for purposes of the VPR/IFFSR reviews, first applied with the Peru review in 2014 and followed by the New Zealand review in 2015. At the November 2014 APEC Energy Working Group (EWG) meeting in Port Moresby, Papua New Guinea, the Philippines volunteered to undergo the voluntary peer review (VPR/IFFSR). The VPR/IFFSR Secretariat (hereafter “Secretariat”) worked closely with the EWG Lead Shepherd and the EWG Secretariat to provide technical and logistical support for the peer review activities in the Philippines. The economy-level peer review was conducted in December 2015 in Manila, Philippines. A timeline of activities conducted for this peer review is shown in Table ES-0-1. An APEC Peer Review Panel (APRP) was established under guidance from the EWG Lead Shepherd, consisting of volunteers from the APEC and ASEAN economies. The APRP for the Philippines VPR consisted of four experts from Indonesia, Japan, New Zealand, and the United States. In coordination with the Secretariat and the EWG Lead Shepherd, the Philippines selected five policy instruments for evaluation by the APRP: • The Oil Price Stabilization Fund (OPSF), a pricing mechanism for petroleum products designed to protect Filipino consumers from international oil volatility that is no longer active, but still in consideration for re-instatement; • The Pantawid Pasada: Public Transit Assistance Program (PTAP), a limited cash-transfer mechanism for public transport operators in order to limit transit fare increases due to a rise in oil prices; • Excise Tax Exemptions, referring to the current differentiated excise tax regime where several ‘socially-sensitive’ fuels are exempted from excise taxes; • the Universal Charge for Missionary Electrification (UC-ME) to support the Small Power Utilities Group (SPUG), a cross-subsidy program for supporting electricity access and provision in remote areas, with revenue being raised from fees on grid-connected ratepayers; and • Universal Charge Exemption for Self-Generating Facilities, which are currently exempted from UC fees charged to other rate-paying electric utility customers, pending government review. The Philippines used the VPR/IFFSR process to exchange information and obtain policy recommendations for effectively eliminating any identified subsidies to fossil fuels in the long run. The discussions with APRP were intended to explore best practices or alternatives for addressing the objectives that the instruments cited above were meant to address. The key findings and the end goal for each of the instruments are provided in Table ES-0-2 below.
  12. 12. X P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Table ES-0-1. Timeline of Peer Review Process Table ES-0-2. Key Findings and End Goals for the Five Evaluated Policy Measures Policy Key Findings End Goal Oil Price Stabilization Fund (OPSF) •The OPSF was introduced to provide petroleum products price stability, thereby aiming to achieve macroeconomic stability and protection of the poor from oil price spikes. •This mechanism did not effectively target the poor, but merely stabilized the price of fuels for all citizens, which resulted in a greater benefit to higher income consumers. •In high oil price environments, political resistance kept the fixed price low, resulting in an effective subsidy and a budgetary shortfall as, over time, payouts exceeded saved revenues. •The OPSF has likely caused higher fossil fuel consumption than would otherwise have been the case. •The fund was liquidated in 1998 during the restructuring and liberalization of the oil industry, leading to lasting structural changes in the petroleum market in the Philippines. •There is no desire to reinstate OPSF amongst stakeholders that the APRP met with, especially in the current low oil price environment. •Instead of reinstatement, PDOE has expressed a preference for considering targeted programs for energy security and subsidies to targeted recipients. •De-regulated oil prices which fully reflect the import parity price.. Pantawid Pasada: Public Transit Assistance Program (PTAP) •PTAP was a one-time, targeted subsidy, and the impact of the subsidy was to prevent fare increases on consumers. •PTAP partially subsidized the fuel consumption of identified small-scale public transport groups (excluding buses). •An objective of the Philippine government is to ensure that transit fares do not rise too quickly during times of rising fuel prices. This has been the Activity Month Oct. 2015 Nov. 2015 Dec. 2015 Jan. 2016 Feb. 2016 Mar. 2016 Apr. 2016 APEC EWG Lead Shepherd, Secretariat, and the Philippines’s Department of Energy (PDoE) finalize scope of Peer Review and Planning for the APRP visit to Manila PDoE collects required information and data for submission to Secretariat PDoE and Secretariat coordinate peer review meetings Secretariat produces draft of background paper APRP conducts Peer Review Meetings with technical staff/senior officials from different ministries, and key stakeholders from the power, fuels, and transit sectors APRP draws key conclusions about subsidies and develop recommendations for reforming subsidies Secretariat updates the background material that is included in draft report as “Part 1: Background” section of this report. Secretariat, with APRP input, develops the Draft Report with Key Findings, Recommendations, Observations and Lessons Learned included in chapter 5-10 of this report
  13. 13. E X E C U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X I Policy Key Findings End Goal •PTAP is not currently active. • Reinstatement of this program is not supported by stakeholders that the APRP met with. •Regulated fares do not provide sufficient price signals to consumers, and also do not provide incentives for jeepney owners to modernize their vehicles. primary motivation for regulated transit fares and subsidies such as the PTAP that contribute to fare dampening. Excise Tax Exemptions •The excise tax exemptions do not constitute subsidies. •Excise tax exemptions are likely to have limited impact on domestic markets because of their proportionately small size relative to the market-determined fuel prices. •However, all other things being equal, excise tax exemptions among different fuels create distortions that are likely to be economically inefficient. •The Philippine Government has marshalled many compelling arguments for supporting the imposition of VAT on petroleum products: (1) reducing fossil fuel imports to improve the current account balance; (2) reducing consumption to improve environmental quality and health; (3) phasing out measures that benefit the rich more than the poor; and (4) increasing government revenue for other valuable social programs. Universal Charge for Missionary Electrification (UC- ME) to support the Small Power Utilities Group (SPUG) •The UC-ME is a cross-subsidy designed to provide affordable electricity access in areas across the Philippines without central grid connection. •Regulated tariffs in SPUG areas do not distinguish between consumer classes. •UC-ME, as currently structured, effectively encourages inefficient fossil fuel consumption. •Current regulatory policy on SPUG power procurement favors incumbent diesel infrastructure. •Ratepayer surcharges, including the UC-ME, have been said to undermine the industrial competitiveness of the Philippines relative to other neighboring countries by pushing up electricity costs in the grid-connected areas to among of the highest in the region. •As SPUG areas are expected to progressively be connected to the grid and become commercially viable, the UC-ME issues may become less relevant. •The purpose of the UC-ME subsidy is to support the reliable and efficient provision of electricity at affordable prices to formerly un-electrified areas. •The government has recognized that the current UC-ME cost and subsidy structure are unsustainable. •The eventual goal of the Philippine Government is to bring the operations in all its existing service areas to commercial viability, and to rationalize the utilization and allocation of the UC-ME subsidy. •The government also seeks to interconnect the SPUG regions with the central grid and to privatize SPUG power generation assets when technically and economically feasible to do so. Universal Charge Exemption for Self- Generating Facilities (SGFs) •UC exemption for SGFs does not constitute a subsidy, since the operators of SGFs still bear the cost for electricity tariff determined in the market. •UC exemption for SGFs could undermine the legal credibility of the imposition of UC itself, which requires that all electricity consumers fund it. •The SGF exemption results in distortions in the respective contributions of different electricity consumer classes to the UC. •SGFs serve an important function in balancing load on the grid by providing peak power capacity, and by providing reliable, uninterrupted power to important industries. •The current legal framework mandates that the UC be collected from SGFs. •Concern on undermining industrial competitiveness in the economy, and operational difficulties in collecting UC from SGFs have resulted in unintended extension of exemption from UC for the SGFs. •Hence, it is envisaged that UC should be collected from SGFs, but in a manner consistent with the promotion of domestic industry and private sector growth.
  14. 14. X I I P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Based on the key findings and expected end goals, as defined by the APRP during its deliberations, a set of consensus-driven recommendations was developed. A brief discussion of the five measures and the APRP’s recommendations follows. These ten recommendations are summarized in Table ES-0-3 below. The APRP also made additional observations that are not meant to have the same level of authority as the Recommendations above, and are meant as additional discussion points that the Philippines’ Government may want to consider. See Table ES-0-4. Table ES-0-3. APRP Recommendations for the Five Evaluated Measures Measure Recommendations Oil Price Stabilization Fund (OPSF) R1 – Do not to reinstate the OPSF, regardless of oil price, as it results in wasteful consumption of fossil fuel and fiscal imbalances. Pantawid Pasada: Public Transit Assistance Program (PTAP) R2 – PTAP subsidies should not be reintroduced. Excise Tax Exemptions R3 – Introduce excise taxes on all petroleum products. R4 – Consider developing a strategy on how to effectively use the excise tax proceeds. Universal Charge for Missionary Electrification (UC- ME) to support the Small Power Utilities Group (SPUG) R5 – Further detailed cost-benefit analysis is recommended to evaluate the impacts of the UC-ME as cross- subsidy. R6 – Structure the regulated tariffs closer to the deregulated price. R7 – Expand NPC’s mandate to allow for capital investment in power plant construction and refurbishment to promote efficient power plants in SPUG areas. Universal Charge Exemption for Self- Generating Facilities (SGFs) R8 – A detailed cost-benefit assessment on the UC exemption for SGFs is recommended, as part of the broader cost-benefit analysis of the UC. R9 – If the Universal Charge is maintained, then the SGF exemption should be lifted in order to remove inefficiencies and market distortions. Benefits that SGFs provide should be properly compensated, but should be separated from the SGF universal charge. Some specific options could include: introduce net metering; increase compensation through the ILP; and adjustment payments for grid reliability. R10 – With the removal of the UC exemption for SGFs, a number of complementary measures could be considered to ensure a smooth transition and to address legitimate concerns of businesses and DUs: a step-by- step lifting of the UC exemption to alleviate concerns of industrial and commercial SGF operators; supplementary financial incentives to energy-intensive industries to offset the negative financial burden to industries; and fostering alternative energy/efficient power generators for SGFs to reduce wasteful use of fossil fuels. Table ES-0-4. APRP Observations for the Five Evaluated Policies Policy Observations Oil Price Stabilization Fund (OPSF) O1—A wide range of additional measures can, over time, lower dependence on fuels with volatile prices determined by international markets. O2—Consider price-dampening measures that can protect against economic damage resulting from oil price volatility. Pantawid Pasada: Public Transit Assistance Program (PTAP) O3 – Move towards deregulating jeepney and tricycle fares in a phased manner. O4 – Promote more integrated, intermodal public transit. O5 – Undertake further studies and analysis to underscore the value of deregulating the jeepney/tricycle sector. Excise Tax Exemptions None Universal Charge for Missionary Electrification (UC-ME) to support the Small Power Utilities Group (SPUG) O6 – Implement a comprehensive approach, with more coordination among ministries and local authorities. O7 – Consider reviewing the tendering, contracting, and regulatory approval processes of the current NPP and QTP privatization programs. O8 – Provide better targeted support measures for those in need. Universal Charge Exemption for Self-Generating Facilities (SGFs) None
  15. 15. E X E C U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X I I I The APRP observed that two of the five reviewed measures, the OPSF and the Pantawid Pasada, are no longer in effect, and that the excise tax exemption for socially-sensitive fuels and the UC exemption for SGFs do not constitute subsidies, leaving only the UC-ME electricity subsidy as an active subsidy. The APRP concluded that neither the OPSF nor the Pantawid Pasada should be reinstated, though observed that numerous measures could be taken by the Philippines Government to address the ongoing underlying concerns of fuel and transit price affordability and stability. The APRP recommended that tax and surcharge exemptions (of excise taxes and the UC-ME charge, respectively) both be removed to prevent unfair or undue preferential treatment vis-à-vis other fuels and electricity consumers, which likely leads to market distortions. However, the Peer Review Panel notes that there are many potential reforms and policy options available to the Philippines government to rationalize fuel taxes and electricity surcharges while preserving and pursuing the government’s social, environmental, and fiscal objectives. These measures are explored extensively in the recommendations, observations, case studies and lessons learned. Oil Price Stabilization Fund (OPSF): The OPSF is no longer active and the APRP has recommended that the OPSF should not be re-instated, regardless of oil prices, as it results in wasteful consumption of fossil fuel and fiscal imbalances—this recommendation is consistent with current Philippine policy. Though not intended to be a subsidy, the OPSF’s price stabilization measures, due to political pressures and bureaucratic design, resulted in a fuel subsidy. Further, the OPSF created a drain on governmental assets and to economic dislocations in times of sudden price adjustments. The APRP concluded that the OPSF is likely to have led to wasteful and inefficient use of fossil fuels, although to what extent the APRP was not sure. Pantawid Pasada: Public Transit Assistance Program (PTAP): The PTAP was a one-time, targeted subsidy active from 2011 to 2013 that benefited jeepney and tricycle drivers. The purpose and impact of the subsidy were to prevent fare increases on consumers through limited fuel price subsidies to transit operators. Because of its limited nature in scale and time, PTAP likely did not constitute a significant subsidy. PTAP is not currently active, and reinstatement of this program is not supported by the APRP. The key issue with public transportation in the Philippines is the regulated fares for privately-operated transport fleet, which do not incentivize private transport owners to modernize their vehicles or for fleets to be efficiently run. The APRP observed that a phased deregulation of jeepney and tricycle fares would likely promote the government objective of fare affordability over the medium to long term. Although much more analysis is needed, the APRP expects that there is likely sufficient competition between jeepney owners and franchises to keep fares affordable for consumers (i.e., there will not be monopolistic or oligopolistic pricing behavior). The APRP also observed that many jeepneys and tricycles are fuel-inefficient and have limited exhaust controls. Together with a liberalized fare regime, more social and environmental incentives and/or regulations for reduced pollution and increased transit and vehicle quality could be considered as well to promote private investment in transit modernization. Excise Tax Exemptions for Socially-Sensitive Fuels: While the APRP considers the exemption of excise taxes for socially sensitive fuels to be economically inefficient, this exemption is not a subsidy. Oil prices in the Philippines have been deregulated since 1998 and closely follow movements in international benchmark oil product prices and exchange rate movements. The APRP recommends that excise taxes should be introduced on all petroleum products. Such an imposition removes distortive preferential tax treatment among similar fuels, and the excise taxes would help in addressing the externalities that result from petroleum fuel consumption. Further study should guide how the Philippines should impose such excise taxes, i.e. by volume, energy content, or pollution intensity (CO2 or other exhaust pollutants), among numerous possible schemes. The Philippines could also develop a strategy on how to effectively use the excise tax proceeds. Tax proceeds could be used for social
  16. 16. X I V P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S purposes, including for poor and vulnerable populations currently targeted by the excise tax exemptions. Studies show that targeted social programs are usually more progressive and effective than economy-wide fuel price reductions. Universal Charge for Missionary Electrification (UC-ME): The APRP concluded that the UC-ME leads to wasteful and inefficient use of fossil fuels. The UC-ME, currently structured as a cross-subsidy paid for by grid-connected ratepayers, effectively encourages inefficient fossil fuel consumption due to the fact that most power generators in the SPUG areas are diesel- or fuel oil-powered and that it does not distinguish between consumers. The UC-ME fills the gap between the cost of electricity generation and the regulated electricity tariffs for consumers in SPUG areas (which is below the prevailing tariff in the grid-connected parts of the Philippines). The amount of fossil fuel consumed in the SPUG areas is less than one percent of total fossil fuel consumption for power generation nationwide, meaning that on the scale of the economy, the SPUG electricity subsidy is small. Nevertheless, the UC-ME charges and SPUG subsidies have grown rapidly in recent years and are projected to increase further. The increase in the UC-ME to cover SPUG subsidies not only reflects increasing inefficient subsidies for fossil fuel- powered electricity, but it also threatens the financial viability of the UC-ME and drives up electricity prices for other users. The APRP recommends further a detailed cost-benefit analysis of the UC-ME to evaluate the impacts of the cross-subsidy, which allows for concrete recommendations and alternatives to address financial sustainability and effectiveness of the current Missionary Electrification policy. The APRP recommends that regulated tariffs in the SPUG areas be structured closer to the deregulated (Luzon and Visayas) price, and that NPC’s mandate allow for capital investment in power plant construction and refurbishment to promote efficient power plants in SPUG areas. Further consideration of reforms in the SPUG areas (privatization, cost-plus power procurement, energy efficiency and renewable energy promotion) is encouraged to promote cost-effective and efficient subsidy design and reduction in fossil fuel use. UC-ME Exemption for Self-Generating Facilities (SGFs): The current UC exemption for self-generating facilities (SGFs) does not constitute a subsidy, since the operators of SGFs still pay for the full cost of fuel and bear the cost for electricity tariff determined in the market. The UC exemption for SGFs, however, could undermine the legal credibility of the imposition of UC itself, which requires that all electricity consumers fund it, and the exemption results in distortions in the respective contributions of different electricity consumer classes to the UC. The SGF exemption also may create perverse incentives for industrial and commercial users to disconnect from the grid and, in an extreme scenario, threaten the economic viability of distribution utilities. If the UC is to be maintained, then the APRP recommends that the UC should be imposed on the SGFs in order to remove inefficiencies and market distortions. Where appropriate, SGFs should receive compensatory payments for services they provide to the grid such as grid stability and peak power generation, though these payments should be independent from the UC. There are specific lessons learned and best practices that the Philippines can use in developing its implementation plans for reforms. Many of these can build upon the Philippines’ lengthy and successful history of deregulating and liberalizing energy prices. The report provides some of these best practices and lessons learned, with a focus on those from the Asia-Pacific region and Southeast Asia in particular, but further analysis should be conducted to specifically identify an implementation strategy for the APRP recommendations. The Philippines’ domestic 2012-2030 Philippine Energy Plan, and its objectives of ensuring energy security, achieving optimal energy pricing, and developing a sustainable energy system consistent with the economy’s economic development plans, have laid an excellent foundation and provided the principles for the Philippines’ energy development in the coming 15 years. The task at hand remains to devise specific implementation strategies, developed and executed through these
  17. 17. E X E C U T I V E S U M M A R Y E X E C U T I V E S U M M A R Y X V intergovernmental mechanisms, for the sectors impacted by the subsidy, tax, and pricing policies examined in this peer review. Overall, the APRP developed ten recommendations and made eight observations, as part of this review. The APRP carefully considered the recommendations in order not to be too prescriptive, and the Recommendations represent the compromise position agreed to by all APRP members. The observations are not meant to have the same level of authority as the Recommendations above, and provide additional discussion points that the Philippines’ Government may want to consider. The APRP is confident that there is sufficient capacity within the Philippines to conduct the suggested studies (i.e., on the costs and benefits of the UC-ME and the SGF exemption from it), and consider complementary measures for ensuring a smooth transition with any envisioned changes in policies (e.g., deregulating transit fares or imposing UC on SGFs). The Philippines has been undertaking economic reforms in a progressive fashion for many years, and the APRP recommends a continuation of these reform efforts for the remaining subsidies in place, along with further reviews and analyses of fossil-fuel related policies over time.
  18. 18. 1 6 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S 1. INTRODUCTION AND FFSR PEER REVIEW PROCESS The APEC Energy Working Group (EWG) endorsed a Voluntary Peer Review of Inefficient Fossil Fuel Subsidy Reform (VPR/IFFSR) proposal in March 2013, at the EWG45 meeting in Thailand. The proposal aimed to build regional capacity to assist APEC economies in rationalizing and phasing out inefficient fossil fuel subsidies that encourage wasteful consumption, while recognizing the importance of providing those in need with essential energy services (APEC/EWG, 2013a). The proposal put in place an ongoing series of reviews of inefficient fossil fuel subsidies across APEC economies that volunteer to be a part of this review process. The reviews are “peer reviews”— i.e., the reviewers are from peer APEC economies and relevant institutions, with expertise in energy, fossil fuels, finance and economics. Guidelines for the VPR/IFFSR process were approved at the November 2013 EWG46 meeting in Da Nang, Vietnam (APEC/EWG, 2013b). The VPR/IFFSR guidelines (APEC, 2015a) are modeled after the ongoing APEC peer reviews on energy efficiency (PREE). At the November 2014 EWG48 meeting in Port Moresby, Papua New Guinea, the final report from the first VPR/IFFSR peer review in Peru was presented (APEC, 2015b). At this meeting, the Philippines volunteered to undertake the VPR/IFFSR, and planned for its peer review in late 2015. New Zealand also volunteered for its peer review at the EWG48, and its peer review was conducted in March 2015. The final report from New Zealand was submitted and approved by EWG in September 2015 and announced at the APEC Energy Ministerial meeting in Cebu in October 2015 (APEC, 2015c). As in the Peru review process, the VPR/IFFSR Secretariat (hereafter, the Secretariat) coordinated the activities associated with the VPR in the Philippines. The Secretariat worked closely with the EWG Lead Shepherd and the EWG Secretariat to provide technical and logistical support in the Philippines. The EWG Secretariat issued a call for volunteers for the APEC Peer Review Panel (APRP) members. Five volunteers responded to the call, and four volunteers were selected by the EWG Secretariat, with approval from the EWG Lead Shepherd and agreement of the Government of the Philippines. The APRP consisted of Dr. Niall Mateer (U.S.A.), Mr. David Buckrell (New Zealand), Mr. Noor Iskandarsyah (Indonesia), and Mr. Toshiyuki Shirai (International Energy Agency, IEA). Dr. Niall Mateer was designated as the APRP Team Leader. The biographies of the APRP members and the Secretariat are in Appendix C. In October 2015, the Secretariat also began its interactions with the Philippine Department of Energy (PDOE), to begin planning for the APRP to conduct the peer review in early December 2015. The PDOE was designated as the primary point of contact for the Secretariat. The PDOE and the EWG Secretariat confirmed the dates (December 1-7) for the Peer Review visit to Manila, Philippines. The PDOE had initially suggested a list of ten policies for review by the APRP, but in coordination with the Secretariat, the PDOE selected five different policy instruments for evaluation by the APRP: • a pricing mechanism for petroleum products designed to protect Filipino consumers from international oil volatility (Oil Price Stabilization Fund) that is no longer active, but still in consideration for re- instatement;
  19. 19. I N T R O D U C T I O N A N D F F S R P E E R R E V I E W P R O C E S S I N T R O D U C T I O N A N D F F S R P E E R R E V I E W P R O C E S S 1 7 • a limited cash-transfer mechanism for public transport operators in order to limit transit fare increases due to a rise in oil prices; • a differentiated excise tax regime, where ‘socially-sensitive’ fuels are exempted from excise taxes; • a cross-subsidy program (Universal Charge) for supporting missionary electrification, with revenue being raised from fees on grid-connected ratepayers; and • an exemption for the self-generating facilities from the Universal Charge fees. The selection of the policy instruments by the PDOE was based on their perceived importance. The Secretariat and the APRP (during the meetings) noted that some of the selected policies were not subsidies. Nonetheless, given that there is no universally accepted definition of subsidies and the APEC FFSR guidelines provides sufficient flexibility for volunteer economies to select the policies for review, the APRP was requested to review the selected policies. The APRP assessed the effectiveness and efficiency of the selected policies based on their intended goals and success. Furthermore, a review of the selected policy instruments would be consistent with the Philippines Energy Plan (PDOE, 2012a). The five selected policy instruments vary in effectiveness in achieving their stated goals or objectives, and two of them were no longer in use. The Philippines used the VPR/IFFSR process to exchange information and obtain policy recommendations for effectively eliminating subsidies to fossil fuels in the long run. The discussions with APRP were intended to explore best practices or alternatives for addressing the objectives that instruments were meant to address. These objectives are consistent with those of the APEC VPR/IFFSR process. Figure 1-1 shows the overall approach and process undertaken by the Secretariat and PDOE for the APEC VPR/IFFSR in the Philippines. This process is different to that undertaken in Peru and New Zealand, primarily because the preparation time for the peer review visit was short. As part of the preparation for the APRP visit, the Secretariat also worked with APRP members to finalize their travel logistics, as well as coordinated with the PDOE on the schedule of Peer Review meetings in Manila. The final schedule and the list of participants for the visit are in Appendix A, and meeting summaries are in Appendix B. The APRP and the Secretariat met in Manila with the Government of the Philippines on Monday, November 30, beginning four days of meetings with various government departments and agencies, and other stakeholders. At the end of the visit, the APRP communicated to the Secretary and Undersecretary of Energy the findings and initial recommendations. The APRP has carefully considered the recommendations in order not to be too prescriptive, and the recommendations presented in this report represent the compromise position to which all APRP members agreed. The recommendations, as well as the lessons learned and best practices, provide inputs to the Philippines as it develops reform options for the policy instruments put forward for review. Following the peer review meetings in Manila, the Secretariat worked closely with the APRP members and finalized the draft report for review by the APRP members, EWG Secretariat, EWG Lead Shepherd, and the Philippines Government. Comments by these reviewers are incorporated into this final report.
  20. 20. 1 8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 1-1. Development of IFFSR Peer Review Process in the Philippines
  21. 21. PART 1: BACKGROUND Part 1 of the report contains background information for the APEC peer review of the fossil fuel policy instruments selected by the Philippines. The three sections below are focused on: a) a summary of the need for fossil fuel subsidy reforms in general; b) an overview of the macroeconomics and socio- demographics of the Philippines; and c) a brief overview of the energy landscape in the Philippines. The Government of the Philippines contributed to the information on the Philippine economic and energy context, with additional research undertaken by the Secretariat.
  22. 22. 2. ENERGY SUBSIDIES Energy subsidies, particularly in low- or middle-income economies, are often assumed to protect consumers from sharp increases in energy and other commodity prices (UNEP, 2008; IMF, 2013). Energy subsidies can be placed on both energy production and energy consumption. The provision of stable, low cost sources of domestic energy is often considered a desirable outcome to enable economic development and growth. However, protection of consumers and producers from energy and commodity price fluctuations comes with a price, as the economy has to compensate for the subsidies in some other way. Government expenditures for inefficient energy subsidies can worsen fiscal imbalances, and divert funds from high priority public spending and private investment. Subsidies can also lead to inefficient allocation of resources, and they often lead to overconsumption of energy. Such a situation can drive imbalances in trade for net energy importers, reduce incentives for the adoption of renewable energy and energy efficiency, and accelerate the depletion of natural resources. Finally, the ‘benefits’ of energy subsidies are often not targeted to lower income consumers; instead, most often the benefits are captured by higher income consumers. The subsidies can also lead to perverse incentives. These distributional effects actually extend to future generations in the form of reduced availability of key inputs for future growth and increased damages from greenhouse gas emissions (GHG). Despite the negative aspects of energy subsidies, they are often difficult to reform due to political resistance from those stakeholders who are receiving the most benefit (IMF, 2013; Clements, et al., 2014). Reform efforts may also lack political and public support, reflecting lack of trust in a government’s ability to reallocate expenditures to programs that support broader initiatives to support vulnerable or low-income population groups. Inflationary concerns and competitiveness issues can also dominate the governmental decision process. In many economies undergoing reform, there is often resistance from state-owned or state–operated enterprises, as they are concerned about the effect on their operations in a more competitive business environment. Energy subsidies can account for a significant fraction of global GDP and government revenue in both developed and developing economies, although estimates vary significantly depending on which definition of ‘subsidy’ is used, and there is no globally accepted definition yet. The International Energy Agency (IEA) measures subsidies using a price-gap approach, which involves a comparison between end- user prices paid by consumers and reference prices that correspond to the full cost of supply, or the annual averaged cost of generating electricity adjusted for the costs of transportation and distribution and VAT. The IEA estimates that the global value of subsidies that artificially lower end-user prices for all forms of fossil energy totaled USD493 billion in 2014, of which APEC member countries account for 99 billion (IEA, 2015a). The OECD has a broader concept of ‘support’, which includes any measure that keeps prices for consumers below market levels or for producers above market levels, or that reduces costs for consumers and producers. The OECD definition is broadly in line with the IEA’s definition of an energy subsidy. The OECD estimates that producer and consumer support combined ranged between USD160 billion and USD200 billion per year between 2010 and 2014 for all OECD countries (OECD, 2015). In contrast to the OECD and the IEA, the IMF definition takes a much broader perspective in that it considers ‘post-tax subsidies’, which allow for specific tax subsidies for fossil fuels (i.e. exemption from VAT, excise, or other taxes) even if domestic fossil fuel prices are at or above international market
  23. 23. 6 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S rates, thereby giving fossil fuels a relative price advantage on the domestic market. Post-tax subsidies also includes situations where the price paid by consumers is below the supply cost of energy plus an appropriate “Pigouvian” (or “corrective”) tax that reflects the environmental damage associated with energy consumption and an additional consumption tax that should be applied to all consumption goods for raising revenues. Tax subsidies come in two forms: a) lower taxes on energy compared to other consumer products and b) non-internalized external costs to society that arise from energy consumption (e.g., environmental and health costs, climate change, and road traffic). Using this approach, the IMF estimates total ’post-tax subsidies’ of USD 5.3 trillion in 2015, based on an assumed carbon cost of USD 35 per metric ton (IMF, 2015a; IMF, 2015b). The IMF definition of subsidy has not been used throughout the APEC VPR/IFFSR process in Peru, New Zealand nor the Philippines. Another definition of subsidy comes from the World Trade Organization (WTO). Under the WTO Agreement on Subsidies and Countervailing Measures (WTO SCM), a subsidy is considered to exist if there is a financial contribution by a government which confers a benefit through one of four transfer mechanisms: 1) the direct transfer of funds or liabilities; 2) revenue foregone or not collected; 3) the provision of below-cost goods or services; and 4) the provision of income or price support. In order to be actionable, a subsidy here defined must cause damage or harm to another WTO member. As such, while tax exemptions may constitute a subsidy under the terms of the WTO SCM, that application is not useful when comparing fossil fuel support amongst different countries. While there is no globally accepted definition of subsidies, the approach taken in the APEC VPR/IFFSR reviews of Peru, New Zealand and the Philippines has been to define a subsidy in the same way as the IEA does. Namely, an energy subsidy is deemed to exist when any Government action directed primarily at the energy sector lowers the cost of energy production, raises the price received by energy producers or lowers the price paid by energy consumers. As the APEC Leaders commitment refers to “inefficient fossil fuel subsidies that encourage wasteful consumption”, the emphasis throughout the peer reviews has been to focus on policy instruments that lower the price paid by energy consumers. Consistent with the IEA approach, the APEC VPR/IFFSR undertakes its assessment. Differences in tax rates within an economy or between economies may not be helpful for undertaking an evaluation of fossil fuel subsidies in the context of the APEC VPR/IFFSR. IDENTIFICATION OF SUBSIDIES In order to reform subsidies, one must first identify the subsidy and acknowledge it as such. Table 2-1 has an overview of the classes of subsidies that can be used in the energy sector (UNEP, 2008). The identification of a subsidy requires an understanding of how the subsidy arose, the costs of the subsidy, who receives the subsidy, and the impacts of the subsidy on the economic and energy systems. An inventory provides a natural vehicle for this type of analysis (Kojima, and Koplow, 2015). Even if the impacts of a subsidy are not quantified, the process of inventorying government policy interventions has value by itself: a) it helps government officials and citizens understand the overall scale of public spending and policies promoting particular energy pathways, and b) it helps identify potential leverage points for reform. Table 2-1: Main Types of Fossil Fuel Subsidies. Government Intervention Example How the subsidy usually works Lowers cost of production Raises price to producer Lowers price to consumer Direct financial transfer Grants to producers  Grants to consumers  Low-interest or preferential loans 
  24. 24. E N E R G Y S U B S I D I E S 7 Government Intervention Example How the subsidy usually works Lowers cost of production Raises price to producer Lowers price to consumer Preferential tax treatment Rebates or exemptions on royalties, sales taxes, producer levies and tariffs  Tax credit   Accelerated depreciation allowances on energy supply equipment  Trade restrictions Quotas, technical restrictions, and trade embargoes  Energy-related services provided directly by government at less than full cost Direct investment in energy infrastructure  Public research and development  Liability insurance and facility decommissioning costs  Regulation of the energy sector Demand guarantees and mandated deployment rates   Price controls   Market-access restrictions  Source: UNEP, 2008. Two general methods exist for the identification of fossil fuel subsidies (Kojima and Koplow, 2015). However, rather than having to choose one method over the other, the two methods are actually complementary and should be used together. The International Energy Agency (IEA) uses an ‘effects test’ to determine whether a subsidy exists. The ‘effects test’ is applied by determining whether a policy instrument lowers production costs of energy or raises prices received by energy producers or lowers energy prices to the consumer. It is not sufficient to have a ‘price gap’ between consumer prices and a reference price (IEA, 2014).1 Gaps may occur as a result of any number of causes, so it is necessary to identify a specific policy (i.e., a subsidy or tax) to which the gap can be attributed (Kojima and Koplow, 2015). The alternative approach, the OECD inventory approach, focuses on direct budgetary support and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption, either in absolute terms or relative to other activities or products (OECD, 2013).2 The inventory method is a full accounting framework for producer and consumer support estimates and in fact captures price gaps as market transfers to producers or consumers. Whereas, the ‘effects test’ limits identification of subsidies to a single policy measure, the inventory approach can accommodate the interactions of multiple measures. However, as the OECD points out, not all interventions are necessarily subsidies; its inventory seeks to tabulate all interventions, recognizing that further evaluation is often needed to gauge whether a particular intervention results in subsidies to fossil fuels and whether or not the policy measure achieves its aims (Kojima and Koplow, 2015). Although, there is no consensus on the best way to define and value fossil fuel subsidies, the APEC IFFSR/VPR process has typically focused on Government actions directed at the energy sector that lower the price paid by energy consumers with the assessment undertaken on a pre-tax basis. Reform options need to be defined in terms of new policies (pricing or taxation), and, if complementary policies are required, then the timing and the potential political strategy also need to be considered. Therefore, 1 A reference price is defined as costs of supply inclusive of shipping, distribution, and any value added tax. As a result of this approach, estimates of global subsidies will vary with energy prices, price reform, and increased consumption (IEA, 2014). 2 Rather than referring to their inventory of measures as subsidies, the OECD refers to their inventory as a list of support measures for energy production and consumption (OECD, 2013).
  25. 25. 8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S the process of reform is not a simple process, and requires a structured, sequential, formalized approach (APEC/EWG, 2012). Once reform is underway, continuous monitoring is needed to ensure the desired effects are being obtained and that there are no unintended consequences of reform itself. LESSONS LEARNED FROM FOSSIL FUEL SUBSIDY REFORM Over more than a twenty-year period, well over two dozen economies have attempted fossil fuel subsidy reform. These previous fossil fuel subsidy reform attempts can be classified into three categories3 (Clements, et al., 2014; IMF, 2013): • Success: Reform led to permanent and sustained reductions of a subsidy; • Partial Success: Reform achieved a reduction of the subsidy for at least a year, but then the subsidy re-emerged or remained a policy issue; and • Failure: Reforms rolled back soon after the reform (e.g., resistance to price increases or efforts to improve energy sector efficiency pushed back). The history of previous reforms from various economies can help inform future subsidy reforms. Generally, energy subsidy reforms are more likely to succeed when the following components exist (Clements, et al., 2014; IMF, 2013): o A comprehensive reform plan; o A holistic communications strategy, supported by increased transparency; o Appropriately phased energy price increases that are sequenced differently across different energy products; o Targeted mitigating measures to protect the poor; and, o Depoliticization of energy pricing in order to avoid a situation conducive to a recurrence of subsidies in the future. Most successful reforms have been well planned and based on a clear implementation strategy. A comprehensive reform plan requires: 1) establishing clear long-term objectives, 2) assessing the likely impact of reforms, and 3) extensive consultations with stakeholders (Clements, et al., 2014; IMF, 2013). Successful and durable subsidy reforms often require the effort to be embedded within an agenda of broader economic reforms. As part of the development and implementation strategies for subsidy reforms, it is critical to analyze the impacts of the potential reforms on various stakeholders and identify mitigating measures to reduce adverse impacts (which are often temporary). Such impact analyses need to assess the fiscal and macroeconomic economic impacts, along with identifying potential winners and losers (IMF 2013). Finally, stakeholders should be consulted and involved in the development of a subsidy reform strategy. In order to gain political and public support for the reform effort, it is important to have a comprehensive communications strategy, with as much transparency as possible (Clements, et al., 2014). The likelihood of reform success has shown to be three times higher with strong public support and proactive public communications than without (IMF, 2013).4 The benefits of removing subsidies should be couched in terms of the ability to finance other high-priority spending (investments) on 3 Of the 28 economies studied by the IMF, 12 had fully successful reform attempts; one had only partially successful attempts while the remainder failed (The Economist, 2014, 68–70). Fourteen of the economies were receiving money from the fund, and some of these economies were subject to credit downgrades if reform was not undertaken. 4 Economies with good public information campaigns include Indonesia (text messaging), the Philippines (nationwide road- show), and Uganda (selling the media on subsidies as a social program) (The Economist, 2014).
  26. 26. E N E R G Y S U B S I D I E S 9 education, health, infrastructure, and social protection. Transparency is a key element of any successful communications strategy for subsidy reform. Some of the relevant information that needs to be communicated include: (i) the magnitude of subsidies and how they are funded; (ii) the distribution of subsidy benefits across income groups; (iii) changes in subsidy spending over time; and (iv) the potential environmental and health benefits from subsidy reform (IMF, 2013, pg. 27). The pace and timing of price increases, and the sequencing of the price increases often determines the success of reforms (Clements, et al., 2014). A phased, but consistent, approach to reforms allows sufficient time for households and private enterprises to adjust to the reforms, and for government agencies to build credibility on the reform process and highlight how the subsidy savings can be put to a good use.5 A phased approach also helps reduce the impacts of inflation and allows a government to build other more sustainable social safety nets. Further, sequencing reform for ‘luxury’ products first will shield lower-income groups until later rounds, and further builds public support amongst the lower income population. Sequencing should take into account spill-overs across products and the consequences for environmental goals. Public support for subsidy reforms will build on how well the government implements mitigating efforts to reduce the impacts of energy price increases on the poor (Clements, et al., 2014). Targeted cash transfers (often in the form of vouchers) are often the preferred method of compensation, as such cash transfers not only provide flexibility for recipients, but also remove governments from being directly involved. If cash transfers are not feasible, efforts should be focused on programs that can be expanded quickly such as school meals, public works, reductions in education and health user fees, subsidized mass transit, etc. (IMF, 2013). Subsidy reform will also be more acceptable if it is accompanied by complementary measures that support the reform objective, such as providing alternative sources for cooking (substituting LPG for kerosene) or off-grid electricity access. Finally, initial public reaction to price increases on international energy markets should not be allowed to reverse subsidy reform efforts—i.e., pricing of commodities should be depoliticized (Clements, et al., 2014). Automatic pricing mechanisms can reduce the possibility of subsidy reversal by distancing the government from energy pricing. Consumers need to be confident that domestic price changes are reflecting changes in international markets, which are out of the control of any single government. Further, delegation of such pricing mechanisms to an independent entity ensures that reform can proceed as planned, and smoothing of automatic pricing avoids sharp increases in domestic prices. 5 India is phasing out subsidies slowly and reducing the overall cost of subsidies from 1 percent of GDP in 2013 to less than 0.5 percent in 2016 (The Economist, 2014). At the same time, the net effect on government revenues will be offset by rising food subsidies.
  27. 27. 3. MACROECONOMICS AND SOCIODEMOGRAPHICS This section presents the macroeconomic and the socio-demographic conditions in the Philippines. These elements provide a context for evaluation of the five policy instruments selected by the Philippines, and for the development of recommendations by the peer review panel. The Republic of the Philippines, more commonly known as the Philippines, is an archipelago situated in Southeast Asia that is composed of more than 7,000 islands (see Figure 3-1). The Philippines is broadly divided by three main island groups: Luzon, Visayas, and Mindanao. The Philippines is further subdivided into 17 smaller sub-regions, such as Regions I-XIII, the National Capital Region (NCR), the Cordillera Administrative Region (CAR), and the Autonomous Region in Muslim Mindanao (ARMM). Source: PSA, 2015a. Figure 3-1: Philippines Map
  28. 28. M A C R O E C O N O M I C S A N D S O C I O D E M O G R A P H I C S 1 1 The Philippines has a tropical maritime climate, with hot and humid weather throughout most of the year. The Philippines experiences three seasons: a hot dry season from March to May, a rainy season from June to November, and a cool dry season from December to February. The Philippine economy is primarily agricultural, with the main crops being rice, corn, coconuts, sugarcane, bananas, and other tropical fruits. Because the Philippines is located in the Circum-Pacific Belt, the archipelago experiences frequent volcanic activity, which has allowed the economy to exploit geothermal energy resources. The Philippines is also located along the typhoon belt, resulting in annual torrential rain and storms from July to October. The Philippines’ tropical climate also means that the economy is one of the richest in the world in terms of biodiversity. MACROECONOMIC CONDITION Economic growth in the Philippines has been above 5 percent on average during the last decade, which is significantly higher than the growth rate in previous decades. The positive economic growth in the Philippines has been driven by a stable macroeconomic framework, high employment rates, reduced dependence on exports, resilient domestic consumption, low inflation, a rapidly expanding business outsourcing industry, and rising remittances of millions of overseas Filipino workers. The Philippine economy is the 40th largest in the world, with the 2014 gross domestic product (GDP) in purchasing power parity (PPP) being USD 690 billion (in current international dollars). The GDP per capita in PPP (in current international dollars) was USD 6,969 (World Bank, 2016a; World Bank, 2016b). The annual GDP growth rate in 2014 was 6.1 percent and has been growing at an average rate of 5.9 percent over the last three years, despite global economic slowdowns and natural disasters in the region, see Figure 3-2 (World Bank, 2016c). In addition, the annual GDP growth rate increased by 6 percent between the third quarter of 2014 and 2015 (PSA, 2015b). The Philippine GDP is expected to be over 300 billion in 2016 and reach USD 500 billion by 2020 (in current prices, IMF, 2015c). In 2015, the services sector accounted for 57.3 percent of the GDP, followed by industry (31.4 percent), and agriculture (11.2 percent) (PSA, 2015c). The gross domestic income (GNI) in the Philippines was USD 3,500 in 2014, see Figure 3-3 (PSA, 2015c). The annual inflation rate in the Philippines experienced a downward trend in 2014, driven by lower prices in housing, utilities, food, and beverages. However, the inflation rate increased unexpectedly to 1.5 percent in December 2015, and was the highest inflation rate since May 2015. The inflation rate is expected to increase to 1.92 percent by the end of the first quarter of 2016 and increase to 3.8 percent by 2020 (Trading Economics, 2016). Export sales in the Philippines generated USD 4.6 billion in 2014, with the primary exports being electronic products, components and devices, transport equipment, wood crafts and furniture, copper products, petroleum products, coconut oil, and fruits (PSA, 2016).
  29. 29. 1 2 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 3-2. Philippines Annual Percentage Growth Rate of GDP Source: World Bank, 2016d. Figure 3-3. GNI per Capita of Philippines, Atlas Method (Current USD) Source: World Bank, 2016e. Gross international reserves were at USD 79.5 billion in 2014 and the Philippines’ debt-to-GDP ratio continues to decline to 36.4 percent, as of 2014 (IMF, 2015d). The World Bank has described the Philippines economy as “Characterized by robust economic growth, low and stable inflation, healthy current account surplus, satisfactory international reserves, and a sustainable fiscal position – a combination never before seen in its history – the Philippine economy has outperformed most Association of Southeast Asian Nations (ASEAN) countries in the past few years” (World Bank, 2015). While the economy is a net importer, the Philippines economy has earned investment grade ratings from major credit rating agencies due to its stable macroeconomic fundamentals. The World Bank has stated, “With a solid macroeconomy that has proven to be resilient to some major shocks, the economy can now focus its attention on implementing crucial structural reforms that can sustain inclusive growth, create more and better jobs, and eradicate extreme poverty” (World Bank, 2015). Although primarily agricultural, the Philippines has been transitioning to a more service and manufacturing-based economy. In 2014, the economy’s labor force was at 43 million (the 16th largest labor force in the world). More specifically, the services sector employed 54 percent of the total
  30. 30. M A C R O E C O N O M I C S A N D S O C I O D E M O G R A P H I C S 1 3 workforce, followed by the agricultural sector (30 percent of the workforce), and the industry sector (16 percent) (World Bank, 2016f; PSA, 2015d). In January 2015, employment rates in the Philippines were estimated at 93.4 percent (PSA, 2015d). The Philippines is considered to be one of the fastest growing economies in the ASEAN region. SOCIOECONOMIC INDICATORS In 2015, the population of the Philippines surpassed 100 million, making it the 12th most populated economy in the world (World Bank, 2016f). Half of the economy’s population lives in Luzon, the largest of the three major island groups and home to Manila, the capital of the Philippines. The Philippines’ population growth rate was estimated at 1.6 percent in 2015, and is expected to average 1.5 percent over the next 20 years, reaching a population of 135.2 million by 2035 (APEC, 2013). Despite the economy’s stable economy, its large population size and growth rates may present challenges to urbanization, poverty reduction, energy usage, and environmental degradation. As of 2013, the life expectancy at birth in the Philippines was 68 years for the total population (World Bank, 2016g). Total fertility rates as of 2015 were estimated at 3.09 children per woman with the mean age of pregnancy at 23.1 years (Index Mundi, 2014a; PSA, 2014). Literacy rates in the Philippines are high with 96.3 percent of the population aged 15 and over able to read and write (PSA, 2014). In 2012, the average annual family income was P235,000 (Philippine pesos, USD 5,564), though the income gap between families in the highest income decile and the lowest income decile continues to remain wide PSA, 2013a). In 2012, families in the highest income decile made an annual income of P715,000 (USD 16,931), while families in the lowest income decile earned an average annual income of P69,000 (USD 1,633), (PSA, 2013a). The poverty gap at domestic poverty lines in the Philippines was last measured as 5.10 percent in 2012 (World Bank, 2016h). As of July 2015, employment rates in the Philippines were 93.5 percent (PSA, 2015d). Although unemployment rates in the Philippines have declined in recent years, with rates as low as 6.4 percent in 2015, progress has been unequal throughout the county. NCR, for example, has the highest unemployment rate in the economy, at 9.3 percent, while the ARMM has the lowest unemployment rate at 3.2 percent, as of 2015 (Philstar, 2015a).
  31. 31. 4. ENERGY LANDSCAPE OF THE PHILIPPINES This section provides an overview of energy use in the Philippines, including energy consumption and intensity, primary energy supply, power generation, the transportation sector, and energy policy framework. ENERGY CONSUMPTION Compared to its neighboring APEC member economies, the Philippines has a relatively low energy consumption per capita. Figure 4-1 illustrates total energy consumption in the Philippines from 1990 to 2014, which grew from 18.6 Mtoe (million tonnes of oil equivalent) to 28 Mtoe (PDOE, 2015a). In 1990, the residential sector consumed the greatest share of energy (47.6 percent), followed by the transportation sector (25.2 percent), and the industry sector (22.1 percent) (PDOE, 2015a). Over the past decade, however, energy consumption from the transportation sector has since increased and now requires the greatest share of energy (32.7 percent in 2014). This is likely a result of increased and sustained reliance on petroleum fuels such as gasoline and diesel for transit. According to Figure 4-2, on a fuel basis, oil has consistently maintained its share of total energy consumption, increasing from 42.2 percent in 1990 to 44.5 percent in 2014 (PDOE, 2015a). Today, oil continues to be widely used in the transportation sector. Biomass use, by comparison, has declined as a share of total energy consumption from 45 percent in 1990 to 26 percent in 2014. Total energy consumption has increased since 1990 to 28 Mtoe in 2014, with the transportation sector requiring the largest share of energy (15 Mtoe). The least energy intensive sectors are the agriculture, forestry, and fisheries sectors. Total energy consumption in the Philippines is expected to increase to almost 40 Mtoe by 2030, with oil continuing to dominate as the main fuel (see Figure 4-5) (PDOE, 2015a). Because domestic production of energy will not be enough to sustain the economy’s growing energy needs, the Philippines will need to continue relying on energy imports.
  32. 32. E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 5 Figure 4-1: Total Final Energy Consumption by Sector 1990-2014 Source: PDOE, 2015a Figure 4-2: Total Final Energy Consumption by Fuel Type 1990-2014 Source: PDOE, 2015a Figure 4-3 illustrates total greenhouse gas (GHG) emissions from the major energy sources in the Philippines. In 2014, total GHG emissions reached 89.5 million tonnes of carbon dioxide-equivalent (MTCO2e). GHG emissions have increased at a rate of 3.8 percent annually since 1990 (PDOE, 2015a).6 6 GHG emissions include carbon dioxide (CO2), methane (CH4), and nitrous oxides (N2O).
  33. 33. 1 6 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S The transportation sector accounted for 37 percent of total GHG emissions in 1990 but had fallen to 29 percent by 2014 due to greater use of coal in the power sector. GHG emissions from electricity production increased from 28 percent in 1990 to 48 percent in 2014, most likely due to increased coal use for electricity production. Figure 4-3: GHG Emissions by Fuel Type from 1990 - 2014 Source: PDOE, 2015a. Figure 4-4 illustrates projected total energy demand in the Philippines by sector, and Figure 4-5 illustrates projected total energy demand in the Philippines by fuel. Figure 4-4: Energy Demand Outlook by Sector (in MTOE) Source: PDOE, 2015a.
  34. 34. E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 7 Figure 4-5: Energy Demand Outlook by Fuel (in MTOE) Source: PDOE, 2015a. Since 1990, the energy intensity of the Philippines has decreased by almost 60%.7 This improvement to the economy’s energy intensity is likely due to developments in energy conservation measures, use of energy- efficient technologies, changes to the energy mix, increases in world crude oil prices from 1999 to 2011, and lower energy demand due to the Asian and global financial crises in 2008-2009 (APEC, 2012a). A decreasing energy intensity per GDP is a positive indicator for a healthy economy (APEC, 2012a). ENERGY SUPPLY An economy’s primary energy mix reflects the available energy resources (including those that are domestically produced and foreign-sourced), and the socio-economic and environmental conditions within an economy (PDOE, 2015a). As shown in Figure 4-6, the majority of the Philippines’ total primary energy supply is derived from oil, accounting for one-third of the economy’s energy supply due to high use in the transportation sector. From 1990 to 2014, the Philippines’ primary energy supply increased from 26.7 Mtoe to 47.5 Mtoe. In 1990, the major share of total primary energy supply came from oil (40 percent) and coal (3 percent), with geothermal supplying 18 percent and other renewable energy resources providing 32 percent (PDOE, 2015a). By 2014, use of coal and natural gas increased significantly relative to 1990, such that they accounted for 28 percent of total, with oil (31 percent), geothermal (19 percent), and other renewable energy (17 percent) accounting for the rest (PDOE, 2015a). Currently, hydropower only supplies a small percentage of the total primary energy supply in the Philippines. Oil is predicted to continue leading the primary energy supply until 2025, when coal will surpass oil as the primary energy supply source as a result of high usage for electricity generation (see Figure 4-7). The economy’s total primary energy supply is projected to grow at an annual rate of 3 percent over the next 25 years. 7 Energy intensity is the ratio of total primary energy demand per dollar of GDP (PPP) (PDOE, 2012a).7
  35. 35. 1 8 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 4-6: The Philippines Primary Energy Supply Source: PDOE, 2015a. The Philippines has a unique energy portfolio. The economy has modest domestic fossil fuel resources, producing small volumes of oil, natural gas, and coal. However, due to its geography, the Philippines has a high capacity for domestically producing renewable energy from geothermal and hydropower. Figure 4-7: Philippines Energy Production and Net Imports Source: APEC, 2013 With regard to fossil fuel production, in 2013, the Philippines’ total crude oil production was 26,000 barrels per day (bbl/d) with total oil consumption at 299,000 bbl/d (EIA, 2014). Most of the Philippines’ domestic crude oil comes from four oilfields: the Nido, Matinloc, North Matinloc, and Galoc fields, located offshore in the Palawan Basin, on the northwest coast of Palawan. Currently, Petron Corporation operates the largest oil refinery in the Philippines, the 180,000 bbl/d Bataan refinery, supplying almost 40 percent of the economy’s oil product needs (EIA, 2014). Because of its modest fossil fuel production, the Philippines is a net energy importer, and relies heavily on imported fossil fuels. Most of the Philippines’ crude oil is imported to meet the economy’s petroleum demand. In 2013, it was estimated that the Philippines imported about 270,000 bbl/d of crude oil and petroleum products, 35 percent of which came from Saudi
  36. 36. E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 1 9 Arabia and Russia (EIA, 2014). The Philippines is expected to continue relying heavily on imported fossil fuels, with oil imports reaching 30 Mtoe (around 590,000 bbl/d) by 2035 (see Figure 4-7) (APEC, 2013). In order to reduce dependence on foreign oil, the Philippines invited tenders for eleven oil and gas blocks in 2014 to the Palawan Basin and nearby regions to explore areas that could potentially increase the economy’s oil production to 39,000 bb/d by 2019 (EIA, 2014). In 2013, it was estimated that the Philippines consumed approximately 18 million tons of coal, almost half of which was produced domestically and the rest was imported (EIA, 2014). Most domestic coal is low-grade and is mined from the Semirara Island in the western Visayas. Low-grade coal imports are mainly imported from Indonesia, accounting for 96.7 percent of the total coal imports to the Philippines. Coal imports are currently lower than oil imports; however, coal imports are projected to increase to nearly 25 Mtoe by 2035. The Philippines is currently undergoing efforts to reduce imported coal by 20 percent to reduce dependence on imported energy sources. Specifically, there has been expanded exploration for new oil and gas reserves with the aim of increasing domestic reserves by 20 percent. The Philippines has high potential domestic coal reserves, with total coal resource potential estimated at 2.53 billion tonnes (PDOE, 2016a). Coal consumption in the Philippines is expected to continue increasing due to increased energy demand from domestic coal-fired power plants. Table 4-1 illustrates the Philippines natural gas production and consumption as of September 11, 2015. The Philippines’ demand for natural gas is mostly met by domestic production, which was 3.9 billion cubic meters in 2012 (Index Mundi, 2014b). Natural gas consumption was estimated at 2.8 billion cubic meters in 2010 (Index Mundi, 2014b).8 The Philippines is estimated to have 98.5 billion cubic meters of proven natural gas reserves (Index Mundi, 2014b). The greatest natural gas reserves in the Philippines is the offshore Malampaya deep-water gas-to-power project (west of Palawan), which is the largest gas producing field and the main source of natural gas for the Philippines, providing 30 percent of the Philippine’s power needs. In particular, natural gas from the Malampaya Gas project is used to fuel three natural gas-fired power plants in Southern Luzon, to generate approximately 2,700 megawatts of electricity (Malampaya, 2016). The Malampaya Gas to Power Project is the most significant energy investment in the Philippines’ natural gas industry. This natural gas project opened the door to the Philippines natural gas industry and has allowed the Philippines to use natural gas while reducing dependence on foreign energy sources. While the Malampaya project is the largest operating natural gas project, it is essentially the only operational natural gas project in the Philippines, and is insufficient to meet the energy needs of the economy. Renewable energy resources make up a significant portion of the Philippines’ energy mix. The Philippines passed the Renewable Energy Act of 2008 (RE Act) to help increase the use of renewables in the economy’s energy mix. By 2035, the Philippines hopes that more than 50 percent of the domestic energy supply will come from renewables, such as hydropower, geothermal, solar, and wind power (APEC, 2013). In 2010, the Philippines’ installed geothermal generating capacity was 1,966 megawatts (MW), making the Philippines the second largest geothermal producer in the world, behind the United States (APEC, 2013). The PDOE estimates that the economy’s total potential untapped geothermal resource is about 2,600 MW (PDOE, 2016b). At this time, considerable domestic geothermal resources are under development, but until they are completed, imported fossil fuels will continue to dominate the economy’s energy mix. Geothermal is expected to provide the biggest contribution of renewable energy in the future. 8 Currently, there is no domestic [residential?] use of natural gas, only for industrial, power, and transport uses.
  37. 37. 2 0 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Table 4-1: Natural Gas Production and Consumption as of September 2015 Year Production (MMSCF) Consumption (MMSCF) Power Industrial Transport Total 1994 195 195 0 0 195 1995 188 188 0 0 188 1996 318 318 0 0 318 1997 193 193 0 0 193 1998 329 329 0 0 329 1999 253 253 0 0 253 2000 376 376 0 0 376 2001 4,951 359 0 0 359 2002 62,205 58,120 0 0 58,120 2003 94,807 87,423 0 0 87,423 2004 87,557 83,959 0 0 83,959 2005 115,966 110,217 525 0 110,742 2006 108,606 104,229 2,193 0 106,422 2007 130,211 124,103 3,316 0 127,419 2008 137,073 129,044 2,932 15 131,990 2009 138,030 131,433 3,019 18 134,470 2010 130,008 121,943 3,044 15 125,002 2011 140,368 133,732 3,288 47 137,066 2012 134,563 128,391 2,473 51 130,915 2013 123,944 116,973 2,665 35 119,673 2014 130,351 122,305 3,302 4 125,611 2015 122,541 115,788 2,138 0 117,926 TOTAL 1,663,034 1,573,266 28,892 185 1,602,343 Source: PDOE, 2015b. In addition, the economy’s significant water resources give the Philippines further hydropower potential. Current installed hydropower capacity is at 2,518 MW, with the total untapped hydropower potential of the Philippines estimated at 13,097 MW (PDOE, 2016c). However, large upfront costs, long construction periods, and concerns over environmental degradation have caused the government to focus its attention to small hydro projects, which have an estimated untapped potential of 11,223 MW (PDOE, 2016c). POWER GENERATION The Philippines has the second highest electricity costs in Asia and the fourth highest in the world (IBP Inc., 2015). The high cost of electricity in the Philippines can partly be attributed to the high costs of importing fossil fuels. In 2010, the electrification rate at the household level was 68 percent, though the Philippines hopes to achieve 90 percent household electrification by 2017 (APEC, 2013). Because the Philippines is an archipelago, the major power grids are isolated according to major island groups. In Luzon, the majority of
  38. 38. E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 1 the electrical capacity comes from coal, while the Visayas rely mostly geothermal with coal following a close second, and almost half of Mindanao’s energy comes from hydropower (Figure 4-8).9 Figure 4-8: 2014 Philippines Capacity Mix by Grid Source: PDOE, 2015a. In 2014, the Philippines’ total power generation was 77.3 Terawatt hours (TWh), up from 26.3 TWh in 1990 (PDOE, 2015a). As part of the Philippine Energy Plan, the Philippine Government forecasts an additional 11.4 gigawatts (GW) of capacity by 2030 (PDOE, 2014). The installed electricity generating capacity is expected to increase to over 58 gigawatts (GW) by 2035 (APEC, 2013). As shown in Figure 4-9, oil accounted for 47 percent of the electricity generation in 1990, but this dynamic has shifted and now coal is the dominant energy source (43 percent) for power generation in the Philippines (PDOE, 2015a). Following coal is natural gas, which accounts for 24 percent of electricity generation. After the entry of natural gas to the primary energy supply in 2001, natural gas has helped displace the use of oil for electricity generation. Geothermal and hydropower contributed 13 and 12 percent, respectively, to the electricity generation in 2014. Oil contributed to 7 percent of the electricity generation in 2014, and other renewable energy sources (such as wind, solar, and biomass) accounted for 0.5 percent in 2014. 9 Note that in the Mindanao region, the term “baseload hydro” refers to the fact that there is a consistent use of hydro for meeting baseload demand in this region. In most other cases, hydropower is used mostly for ancillary services.
  39. 39. 2 2 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S Figure 4-9: Philippine Power Generation Mix (in gigawatt-hours, GWh) Source: PDOE, 2015a. Electricity generation from coal is projected to continue dominating the power generation mix, accounting for more than half of the economy’s total power generation by 2035. Natural gas is expected to increase by approximately 1.7 percent annually over the next 25 years (APEC, 2013). Table 4-2, illustrates the power generating capacity by plant type in 2014. Dependable capacity10 was 15,633 MW in 2014, roughly a third of which came from coal plants (PDOE, 2015a). 10 The Philippines often defines dependable capacity as the maximum megawatt output a generating plant can reliably produce when required, assuming all units are in service. Capacity is the maximum electric output an electricity generator can produce under specific conditions. Nameplate capacity is determined by the generator's manufacturer and indicates the maximum output of electricity a generator can produce without exceeding design thermal limits.
  40. 40. E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 3 Table 4-2: Philippines 2014 Capacity by Plant Type Source: PDOE, 2015a. Following a power crisis during the 1990s, the Philippines decided to restructure and privatize the power sector to provide a consistent and adequate electricity supply and incentives for greater investments in power and transmission infrastructure. During the 1990s, the Philippines experienced high electricity prices, growing demand for electricity, looming power supply shortages, and the need for a costly expansion of the transmission and distribution network. In addition, there was a need for increased transparency in electricity prices. Because the Philippines has had, and continues to have one of the highest electricity prices in Asia, unsatisfied customers sought greater transparency in their electricity costs. The government recognized the need for reforms and greater private sector involvement to address these issues in the power sector. As a result, the government passed the Electric Power Industry Reform Act (EPIRA) of 2001, which mandated a restructure of the Philippine electricity sector, privatization of the state-owned National Power Corporation (NPC), and separation of the different sections of the power sector. According to PDOE, the goals of EPIRA were to “sustain investments in the power sector through greater private sector participants to meet growing electricity demand, enhance transparency in electricity rates and charges, improve efficiencies by widening the ownership base in the power sector, and provide customers with the power of choice” (PDOE, 2015a). Under EPIRA, the government was required to sell its equity stake in the Manila Electric Company (Meralco), which is the economy’s largest electricity distribution company, serving Luzon and the metropolitan Manila area. As a result, the economy’s hydro and coal-fired plants were privatized, achieving 43 percent of the targeted 70 percent privatization of NPC’s assets, creating open access and retail competition. This resulted in roughly USD 2.682 billion of funds for the government and allowed the generation of electric power to be competitive and open in the Philippines. Also outlined in EPIRA, the energy sector is mandated to create a Power Development Plan (PDP), which outlines the power sector’s plans to ensure a reliable and quality electricity supply. EPIRA also led to the development of two new entities: the Power Sector and Asset Liabilities Management Corporation (PSALM) and the National Transmission Corporation (Transco). PSALM took over the role of managing the NPC’s generation assets, liabilities, and contracts with independent power producers. PSALM also manages NPC’s outstanding debt and is in charge of privatizing NPC’s generation and transmission assets. Transco, a subsidiary of PSALM, assumed the electricity transmission assets of NPC and acts as the system operator of the nationwide electrical transmission system and sub-transmission system.
  41. 41. 2 4 P E E R R E V I E W O N F O S S I L F U E L S U B S I D Y R E F O R M S I N T H E P H I L I P P I N E S EPIRA also established the Energy Regulatory Commission (ERC), which is responsible for regulating the electricity sector and setting the price of electricity. ERC is also responsible for promoting competition within the power sector and encouraging market development and consumer choice. EPIRA also established the Wholesale Electricity Spot Market (WESM), which serves as a venue where electricity is traded like any other commodity. WESM has allowed for a leveling of the playing field for trading electricity among WESM participants and allows third parties to have access to the power system. MISSIONARY ELECTRIFICATION There are over 4 million households in the Philippines that lack access to modern electricity services. The majority of these households are located in remote off-grid areas and small islands far from the developed population centers of the Philippines. Furthermore, most island localities that do have electricity are limited to diesel-powered mini-grids, which provide limited electricity services for a few hours each day, stemming the potential growth of their local economies (Switch Asia, 2014). Electrification (i.e., the extension of grid power to households) is a major priority for the Philippines. The National Electrification Program is the primary mechanism for expanding electrification (with some support from the National Renewable Energy Board, NREB, and the Small Power Utilities Group, (SPUG), and is funded centrally via budgetary allocations to the National Electrification Administration (NEA). In launching a pair of rural electrification programs in October 2011, President Benigno Aquino III set a target of 100 percent electrification of sitios (smallest administrative units in the Philippines) by early 2016 and 90 percent household electrification by 2017 (PDOE, 2012a). There are 32,400 sitios nationwide. According to the programs, ‘electrification’ constitutes the extension of a power line to a house, and the electrification of a sitio is declared when more than ten households in the sitio have received electricity. As of late 2015, the Philippines had electrified 98 percent of sitios and about 85 percent of households, with over 11 million households connected to electricity (NEA, 2015). In addition, the Sitio Electrification Program, which aims to increase electrification rates in sitios, rural territorial enclaves, attained 98 percent electrification as of December 2015, equivalent to 101,922 sitios (NEA, 2015). To increase electrification to areas not connected to the main transmission grid (missionary areas), EPIRA increased the missionary electrification role of SPUG. Under Section 70 of EPIRA, NPC was allowed to “remain as a National Government-owned and controlled corporation to perform the missionary electrification function through the SPUG and shall be responsible for providing power generation and its associated power delivery systems in areas that are not connected to the transmission system” (PDOE, 2016d, page 19). EPIRA also tasked NPC through SPUG to develop and implement the Missionary Electrification Development Plan to provide adequate electricity to missionary or off-grid areas. Distribution is primarily handled by rural electricity cooperatives, and NEA, a government corporation, is responsible for rural electrification, i.e. grid extension, new grid construction, and distributed off-grid energy access. NEA’s primary mandate is administration of the National Electrification Program, including support for the electricity cooperatives to provide rural electricity access (NEA, 2016). Missionary electrification funding is derived from sales revenue generated in missionary areas and from the Universal Charge for missionary electrification (UC-ME) collected from all electricity customers. The EPIRA
  42. 42. E N E R G Y L A N D S C A P E O F T H E P H I L I P P I N E S 2 5 legislation mandates the UC-ME Charge to fund the generation and transmission of grid electricity to remote and unviable areas, as well as areas not connected to the main transmission system.11 Rapid electrification nationwide, coupled with rapid economic growth driving power demand is leading to an increase in the size and scope of the SPUG regions as more households and villages become electrified. Sustainability of missionary electrification and the need to address budgetary constraints have necessitated the need for private sector participation in missionary electrification via the Private Sector Participation (PSP) program and the Qualified Third Party (QTP) program. The PSP started in 2004 to encourage the entry of the private sector (known as New Power Providers or NPPs) in power generation. NPPs invest in power generation in NPC-SPUG areas. In 2005, the Qualified Third Party (QTP) program was launched to support cost-effective, reliable alternative power providers for small-scale communities in remote and unviable areas.12 The QTP provides power generation and distribution services to missionary areas that are considered unviable by NPC-SPUG. The aim is to gradually replace SPUG activities in off-grid areas through these private players. TRANSPORTATION The Philippines’ transportation sector plays a vital role in connecting the population and economic centers across the islands. The Philippines has developed 897 km of railways, 1,300 public and private ports, and 215 public and private airports (ADB, 2012). Road transport, however, is by far the most dominant transportation subsector, accounting for 98 percent of passenger traffic and 58 percent of cargo traffic (ADB, 2012). The Philippine road infrastructure spans approximately 216,000 km and is categorized by economy-wide highways, provincial roads, city and municipal roads, and barangay (suburban) roads. Most of the highways and expressways in the Philippines are located on the island of Luzon, including the Pan-Philippine Highway, which connects the islands of Luzon, Samar, Leyte, and Mindanao. However a large part of the road network remains unpaved or in poor condition and intermodal integration is generally weak (ADB, 2012). Poor governance of the transport sector also hinders efficient operation and development of this sector. About 15 percent of the economy’s roads are roads that are under the jurisdiction of the Department of Public Works and Highways. The remaining 85 percent of roadways are considered local roads and are under the jurisdiction of various local government units. As of 2011, 79 percent of federal roadways and only 18 percent of local roadways were paved with asphalt or concrete (ADB, 2012). The number of paved roadways has slowly increased from 71 percent in 2011, but this number is well below the economy’s original target of 95 percent paved roads by 2010 (ADB, 2012). In addition, only 45 percent of federal roadways were considered to be in good or fair condition in 2011; a decrease from 2001 when it was 47 percent (ADB, 2012). Annual spending on road infrastructure continues to remain at around 0.6 percent of 11 According to EPIRA, Section 70, the “… NPC shall remain as a National Government-owned and –controlled corporation to perform the missionary electrification function through the Small Power Utilities Group and shall be responsible for providing power generation and its associated power delivery systems in areas that are not connected to the transmission system; The missionary electrification function shall be funded from the revenues from sales in missionary areas and from the universal charge to be collected from all electricity end-users as determined by the ERC.” 12 The QTP program was created by EPIRA to mandate (where viable) and encourage private sector provision of power generation in commercially unviable SPUG areas. A small number of projects, mostly smaller than 2,000 households, have been commissioned to date. (Source: EPIMB presentation, December 2, 2015, slides 52-60.) The Energy Regulatory Commission (ERC) in May 2006 promulgated rules and regulations surrounding such contracting. “Rules for the Regulation of Qualified Third Parties Performing Missionary Electrification in Areas Declared Unviable by the Department of Energy.” (ERC, 2006).

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