APEC FFSR Peer Review Report Philippines July 2016 (Final)--7-14-16
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
PEER REVIEW ON FOSSIL FUEL
SUBSIDY REFORMS IN THE
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.
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
Energy Policy 27
5. Subsidy 1: Oil Price Stabilization Fund (OPSF) 30
History and Context 30
Key Findings 33
Lessons Learned and Best Practices 35
6. Subsidy 2: Pantawid Pasada: Public Transport Assistance Program 43
History and Context 43
Key Findings 46
Lessons Learned and Best Practices 49
7. Subsidy 3: Excise Tax Exemptions 58
History and Context 58
Key Findings 61
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
Key Findings 74
Lessons Learned and Best Practices 76
9. Subsidy 5: Universal Charge Exemption for Self-Generating Facilities 85
History and Context 85
Key Findings 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
Appendix D. APEC FFSR Evaluation Tables
I N T R O D U C T I O N I I I
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
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
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.
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
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
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
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
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
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
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
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
• 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.
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
•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
•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
•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
•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
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
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
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.
•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
•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
ME) to support the
Small Power Utilities
•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
•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
•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
•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.
Exemption for Self-
•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
•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
•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
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
Oil Price Stabilization
R1 – Do not to reinstate the OPSF, regardless of oil price, as it results in wasteful consumption of fossil fuel and
R2 – PTAP subsidies should not be reintroduced.
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
ME) to support the
Small Power Utilities
R5 – Further detailed cost-benefit analysis is recommended to evaluate the impacts of the UC-ME as cross-
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.
Exemption for Self-
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
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
Excise Tax Exemptions None
Universal Charge for Missionary
Electrification (UC-ME) to support
the Small Power Utilities Group
O6 – Implement a comprehensive approach, with more coordination among ministries and local
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)
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
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
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
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
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-
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.
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
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.
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
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
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
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.
How the subsidy usually works
Lowers cost of
Raises price to
Lowers price to
Direct financial transfer Grants to producers
Grants to consumers
Low-interest or preferential loans
E N E R G Y S U B S I D I E S 7
How the subsidy usually works
Lowers cost of
Raises price to
Lowers price to
Rebates or exemptions on royalties, sales
taxes, producer levies and tariffs
Accelerated depreciation allowances on
energy supply equipment
Trade restrictions Quotas, technical restrictions, and trade
provided directly by
government at less than
Direct investment in energy infrastructure
Public research and development
Liability insurance and facility
Regulation of the energy
Demand guarantees and mandated
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).
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).
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
3. MACROECONOMICS AND
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
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.
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).
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
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
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.
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).
4. ENERGY LANDSCAPE OF THE
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
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.
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).
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.
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).
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
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
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.
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
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).
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
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.
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.
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
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.
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.
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
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.
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
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).