Bring down electricity prices and the inflation rate will go down

By Roberto Verzola (Yellow Pad) – October 21, 2018 | 10:00 pm
from Business World

A sure way to bring down prices in any market is to replace monopoly with open competition. And if that market supplies a good that almost everyone relies on, then the cascading impact of lower prices will surely pull the inflation rate down.

Open competition does not mean a few big suppliers. It can include a few big suppliers, but it should also be open to more medium-sized suppliers and many smaller suppliers.

The retail electricity market, which is a kilowatt-hour (kWh) market, is now ready for open competition, thanks to rapid technological developments and price declines in distributed generation.

Leading the pack is the solar industry, which has been enjoying open competition for sometime. This is why rooftop solar prices continue to decline, from P100,000/kW a few years ago to lower than P80,000/kW today. This has brought down its levelized cost (cost averaged over a power facility’s lifetime) below P6/kWh, lower than any utility rate anywhere in the country.

If given legal protection by Congress from harassment by powerful distribution utilities and electric coops (DUs/ECs), distributed generation today can bring open competition in the electricity sector through neighborhood grids. These “microgrids” will not only pull down electricity prices and the inflation rate. They can also energize faster the remaining 11% of Filipinos who have been left behind by unresponsive DUs/ECs.

The unique advantages of the solar industry, combined, suit open retail competition:

• It is the most openly competitive industry in the electricity sector, with some big players, more medium-sized players, and many small players, giving consumers a wider choice in prices and quality.

• Since electricity from rooftops go straight to the consumer, it avoids transmission and distribution costs, high system losses and various other charges, making it the cheapest daytime source of electricity today. Declining solar prices will also insulate us from the impacts of volatile oil and coal prices.

• Solar facilities can be built in weeks or months a few days in emergency situations like responding to typhoon aftermath. Thermal power plants take years.

• Solar expansion can be done in kilowatt steps, with capital expenses below P80,000/kW. Other technologies expand in megawatt steps, with capital expenses above P100M/MW. The low incremental expansion costs reduce capital and project risks. This also enables quick adjustments to deal with unexpected changes in demand.

• Solar produces clean power with no local toxic or greenhouse gas emissions.

• Unlike other power sources, rooftop solar reduces demand on the grid. The lower grid demand reduces grid system losses and the need for grid expansion. These also benefit DUs/ECs and other consumers.

• Households do not even need to buy solar panels. It is now possible for solar providers to install solar panels on rooftops, yards and other private space and sell the kilowatt-hours directly to consumers and their neighbors. DUs/ECs treat these microgrids as encroachments on their exclusive franchises. This is why solar industry players need protection from DU/EC harassment, so that open competition can flourish.

Of course, the competition in the kWh market should be opened not only to solar players but to other big, medium and small players that can sell kWh directly to consumers.

Once many players are allowed to compete in direct kWh sales, DUs/ECs will need to do better, or they will lose their market to new players. This is what market competition is all about. This is what will pull down prices and, eventually, the inflation rate.

The government has created small windows, like the qualified third-party (QTP) mechanism or the green energy options (GEO) for this to happen, but the bureaucratic maze, strict requirements, and extra impositions can only be hurdled by a few players.

How can new players be protected from harassment?

First, existing barriers should be removed. Because they see generation embedded within existing DU/EC franchises), microgrids, and rooftop solar as serious threats to their business model, DUs/ECs have put up barriers to the spread of such technologies. They have turned net metering into a net billing system that benefits them and disadvantages solar rooftop owners. Some have refused to implement or pretended ignorance of this provision of the Renewable Energy Act. Others have imposed unnecessary and onerous requirements and fees like distribution impact studies, distribution asset studies, meter reading charges, LGU permitting requirements, and so on. They have installed unidirectional meters, which can double-charge grid-tied solar owners. Congress should declare these barriers to entry anti-competitive and prohibit them.

Second, new players should be allowed to set up rooftop or small ground-mounted solar or other facilities anywhere in the Philippines and to sell the electricity to the rooftop owner and the neighborhood. A 10-kW system (around P800,000) is more than enough to start selling to neighbors. It should not need a congressional franchise. Given the continually declining solar and storage prices, such open competition will keep pulling down electricity prices. It will give even the poorest households access to cheaper electricity.

To be fair, even small electric utilities and coops are hobbled by stifling government regulations and interference in price-setting or production targets. Because of regulatory capture, the biggest DUs can easily deal with government agencies through their vast political connections and sheer market power.

The small DUs/ECs suffer most from the byzantine regulations, which require government approval for the slightest move that might remotely affect prices. This creates opportunities for graft and corruption among government energy officials, even leading a few to suicides. Because of the huge burden of regulations on their backs, small DUs/ECs find it hard to move quickly and efficiently, further adding to the invisible costs of doing business at the expense of consumers. Thus, they cannot compete effectively against highly efficient and technologically-enabled new players, which are increasingly able to offer much better services at lower cost to consumers.

Once open competition is in place, market forces can take care of prices and quantities without need for a government approval process, as big, medium and small microgrid players compete with existing DUs/ECs.

The government’s role is still badly needed in keeping out substandard equipment and components; ensuring technical interconnectivity of equipment and non-discriminatory peer-to-peer interconnectivity between grids; accrediting third-party certifying bodies; and encouraging easier-to-access and lower-cost financing.

House Bill 8179 is now pending in Congress, giving a big solar player a non-exclusive national franchise to sell kWh directly to consumers. The proponent needs the franchise to protect it from harassment by DUs/ECs.

Congress should use the debate around H.B. 8179 to craft and pass legislation introducing open competition in the retail electricity sector and extending the protection that H.B. 8179 provides not just to one big player but to all distributed energy providers.

It is open competition that will bring down retail electricity prices and pull down the country’s inflation rate.

Roberto Verzola is a Senior Fellow of Action for Economic Reforms. The German foundation Friedrich Ebert Stiftung published in 2017 his book Crossing Over: The Energy Transition to Renewable Electricity (second edition, PDF is online). He is currently president of the nonprofit Center for Renewable Energy and Sustainable Technology (CREST).