Estimating electricity price hikes because of TRAIN, Part 2

* This is my article in BusinessWorld on March 19, 2018.

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Part 1 of this short study was published in this column on Feb. 15. Some corrections and adjustments are made here because of (a) lower coal consumption for power generation, and (b) using an incremental increase in coal excise tax.

Total coal consumption in 2016 was 23.2 million tons but one industry player informed me that not all of these were used for coal power plants. Some were used for cement plants and other industrial uses. The estimated amount used for coal power generation is 20 million tons.

Coal excise tax before TRAIN (Tax Reform for Acceleration and Inclusion) was P10/ton, the law has increased this per ton to P50 in 2018, P100 in 2019, and P150 in 2020. The incremental increase is used in the table below.

Meralco computation of oil cost for their captive customers based on November 2017 data was 0.6 centavos/kWh in 2018 when oil tax is only P2.50/liter. There are no projections for 2019-2020 so I estimated the numbers for these years using the respective oil tax rates of P4.50 then P6/liter.

Oil share in Meralco power distribution that period was only 0.9% of total. In 2016, oil share to total power generation nationwide was 6.2%. So a multiplier of 7x (= 6.2/0.9) is used for the national oil tax rate.

Before, VAT on transmission charge was minimal, it applied only on ancillary service. With TRAIN, the VAT is applied on other transmission costs (power delivery, system operator, metering, etc.).

Hike in universal charge is not included here but this might be minimal. Many island provinces and remote islands of big provinces get electricity from gensets running on diesel. The generation cost is naturally high, from P10-20/kwh but residents there are not charged that full amount, a big portion is subsidized and passed on to all other consumers nationwide via the universal charge.

Last month, the Energy Policy Development Program (EPDP) published a new study, “Electricity prices and TRAIN” by Dr. Ramon L. Clarete. It is a neat study because it considered variations in heat content per coal type (Yes, not all coal are the same, the same way that not all dogs are the same). For brevity purposes, I added only a portion of his table 5 which summarize the projected hikes in electricity prices because of TRAIN (see table).

ElectricityTRAIN_031918

So from my estimates, there will be a projected electricity price hike in centavos/kWh of 13.4 this year, nearly 20 in 2019, and 24.6 in 2020.

The estimates by Dr. Clarete are much higher. By 2020, 14 centavos/kWh for coal plants and P1.67/kWh for diesel plants. VAT on these hikes are not included yet, and VAT on transmission charge also not included.

In addition, Dr. Clarete used coal price for 2016 in his study. The average price per ton of thermal coal was $70 in 2014, $58 in 2015, $66 in 2016, $85 in 2017 (Q1-Q3), data from statista.com. In the first three months of 2018 it is around $100 average.

So with 2018 prices about 50% higher than 2016 prices, the projected rise in electricity price from coal plants would be higher than his estimated 14 centavos/kWh, perhaps could go up to 18 centavos or higher.

These costs are for direct household electricity consumption alone. Not included are pass-on rates in the form of higher prices by factories, schools and universities, shops and malls, hotels and restaurants, hospitals and airports, etc. These enterprises consume tens of thousands of kWh per month, the additional electricity cost will be passed on the consumers, which might affect sales and hence, affect future salaries and benefits of workers.

The tax hike for coal and oil products is among the worst mistakes of TRAIN law. Retaining the high 12% VAT is another. Government has no justification in making cheaper energy become expensive. We hope that these mistakes will be recognized soon so that succeeding TRAIN 2, TRAIN 3, etc. will either reverse them, or at least not make them even worse.

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Estimating electricity price hikes resulting from TRAIN

* This is my article in BusinessWorld on February 15, 2018.

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Electricity and energy means development. So an increased electricity supply at a lower, more stable, and more competitive price results in increased development.

Increased development means more businesses and job creation and less unemployment and poverty.

As a result, it is anti-development to impose new or higher taxes that will make electricity prices more expensive.

The new tax law called Tax Reform for Acceleration and Inclusiveness (TRAIN) did just that.

It imposed new taxes or raised existing taxes on oil products, coal, and electricity transmission. But TRAIN played favoritism by exempting from tax hikes natural gas and intermittent energy like wind and solar.

The Philippines inflation rate jumped to 4% in January 2018 from 3.3% in November-December 2017. Other Asian countries experienced flat or lower inflation last month. Why?

The most proximate explanation is the TRAIN law, even if various pass-through costs have yet to take effect. For instance, the hikes in coal tax, bunker fuel tax and VAT on transmission charge will be felt starting February billing. The expected inflationary pressure especially for oil price hikes contributed to this situation.

The table below is an attempt at quantifying the projected electricity price hikes because of TRAIN.

EnergyTRAIN_021518

These estimates are made on certain assumptions that are based on available data. Changes in assumptions and more comprehensive, national data will change the results, upward or downward but the numbers will not be significant.

Based on these estimates, paying an extra 14 centavos/kWh this year, 21 centavos/kWh in 2019, and 27 centavos/kWh in 2020 might appear small for those consuming only 200 kWh/month. This consumption level implies that a household doesn’t have any air-con but maintains a small refrigerator and a few electric lights may have to pay an extra P28/month, P42/month and P54/month in 2018, 2019, and 2020, respectively.

But that is only for direct household electricity consumption. People who live in those small houses may work and/or purchase services in factories, schools, and universities, shops and malls, hotels and restaurants, hospitals and airports, etc. These enterprises consume tens of thousands of kWh per month and the additional electricity cost will be passed on the consumers, which might affect sales and hence, affect future salaries and benefits of workers.

Oplas-021518-768x402TRAIN 1 made a big mistake of raising the cost of energy in the country. The only consolation is that the law did not impose the whole oil tax hike of P6/liter in 2018 because it staggered the hikes in three years. And the law did not follow the distortionary Habito coal tax proposal of P600/ton, or even the Legarda proposal of P100, P200, P300/ton coal tax from 2018-2020.

TRAIN 2 tax bill should not entertain additional energy tax hikes.

Expensive electricity is never a virtue as so many things that we do now require electricity. TRAIN 2 should in fact cut more national and energy taxes because the Duterte administration is serious in its federalism agenda by allowing the states to create their own taxes and their own new government agencies.

With these things in mind, I leave you with a reminder from former US president Ronald Reagan: “The problem is not that the people are taxed too little. The problem is that government spends too much.”