Press Release
October 12, 2017

Villanueva to file reso to look into the ERC's policy in ensuring stranded coal assets are not passed onto consumers

Senator Joel Villanueva is set to file a resolution looking into the policy of the Energy Regulatory Commission (ERC) in ensuring that banks, developers, and distribution utilities investing in coal-fired projects are not passing on stranded assets to consumers.

"We want to scrutinize if these banks and financiers have looked at the likelihood of stranded assets when they provided support to these power plants in correspondence to the proper implementation of environmental regulation, including a coal tax and a more effective energy competition policy," Villanueva said.

Stranded coal plant assets or assets that are not delivering an economic return in line with the expectations from the project outset is a growing material and inevitable risk in the Philippines.

Villanueva cited the recent report undertaken by the Institute for Energy Economics and Financial Analysis, and Institute for Climate and Sustainable Cities titled "Carving out Coal in the Philippines: Stranded Coal Plant Assets and the Energy Transition" which explains how stranded coal assets is inevitable in the country and faces the possibility of becoming a growing material risk.

Stranded coal asset cost is already being realized in Mindanao due to an oversupply of approximately 700 megawatts (MW) of coal and hydro in an island grid lacking national connectivity. From 2014 to 2016, stranded costs were conservatively equivalent to P3 billion (US$60 million).

Overall, the country has 10,423 MW (US$20.8 billion) of largely imported coal expansion in its current pipeline. This runs on top of a total of 7,419 MW of existing coal-fired capacity.

Citing the said data, Villanueva said the issue "raises serious concerns on the country's energy policy."

"We have to make sure that consumers and taxpayers are not bearing the brunt of the disproportionate amount of risk brought by these stranded assets as compared to financers, developers, and distribution utilities," the senator added.

The report further explained that the surplus of coal fired power has led to a downtrend in utilization rates as compared to original expectations. Conservatively, the underutilization cost in Mindanao alone from 2014 to 2016 is P3 billion (US$60 million). This cost is being borne by power producers and ratepayers.

Moreover, Villanueva seeks to assess the policy of ERC on energy mix and use of renewable energy, and the level of consideration of the said agency and major distribution utilities like Meralco on the competitiveness of LNG (liquefied natural gas) and renewable energy in addressing a significantly rising share of demand growth.

Aside from the possibility of stranded coal assets in leading to higher electricity rates shouldered by consumers, it also runs the risk of acquiring losses for investors.

"Stranded asset risk across the coal-fired electricity-generation sector is rising, driven by an overbuild of coal-fired plants and a trend toward falling power prices, which in turn is driven by the deflationary nature of renewables and accelerating policies on retail competition. These trends may leave ratepayers at risk of having to pay above-market prices or the execution of the carve-out clause which means the project may not deliver an economic return in line with the expectations from the project outset. This may affect the ability to service debt and return prospects of the equity investor," the report explained.

Taxing coal Villanueva also highlighted the situation of coal plants which are running at risk of a coal tax. At present, the Department of Finance is geared to update the 20-year old excise tax on coal. From P10 per metric ton, the Department targets to increase the coal tax to P20 per metric ton.

During the Senate deliberations on Tax Reform for Acceleration and Inclusion (TRAIN), Villanueva reiterated the objective of his filed measure, Senate Bill 1223, which amends PD 972 or the Coal Mining Development Act of 1976 wherein the senator intends to repeal the excise tax exemption enjoyed by coal mining industry for more than 40 years.

"We would like to note that, under the current rate of P10/metric ton, the government had foregone up to P120 million in excise taxes on locally produced coal in 2016, given our local production of 12 million metric ton of coal in the same year," Villanueva stressed.

"Aside from the millions of foregone excise taxes on locally produced coal, government regulations have long neglected the environmental and health impacts caused by coal-fired plants being borne by consumers. Thereby, we deem it necessary to put a marginal increase in coal excise tax in exchange to coal's adverse health and pollution costs," Villanueva said.

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