Windfall fuel tax revenue is insensitive

“These are really difficult times.”

Experts say the unprecedented economic sanctions against Russia, a major oil producer and source of vital raw materials for many industries, will have serious repercussions for the global economy. Rising fuel prices will affect our daily transportation expenses and the cost of operations of all sectors, the most sensitive of which is the electricity sector which is highly dependent on imported fuel.

In a meeting with the Philippine Independent Power Producers Association (PIPPA), the Department of Energy (DOE) warned that the impact of rising fuel prices alone could reach 9 pesos per kWh – given March 3 coal prices at $446 a ton. PIPPA has already called for intervention to avoid substantial electricity rate increases.

It is important to note that not all distribution utilities and electricity cooperatives obtain their majority supply from coal-fired power plants. The government should also carefully assess the impact of soaring international oil prices on the natural gas power plants supplied by the Malampaya facility. While the current share of coal accounts for about 57% of the nation’s generation mix, natural gas in Luzon, where the most productive regions are located, accounts for 27% (DOE 2020 Power Statistics).

Although indigenous, natural gas from Malampaya is priced in US dollars and pegged to international crude oil prices, so it is affected by international price fluctuations and the depreciation of the peso. This means that millions of Meralco and utility customers are more exposed to soaring international crude oil prices since natural gas from Malampaya constitutes at least a third of its supply (MERALCO FY 2021 Financial and Operating Results Presentation ).

Consumer group CitizenWatch Philippines, along with transportation and industry leaders, are calling for urgent government intervention to ease the burden of the fuel spike and the resulting inflationary domino effect on commodity prices and electricity and other utilities. A temporary reprieve by suspending value added tax (VAT) and excise duties on oil and coal is the public outcry.

The Philippine Chamber of Commerce and Industry (PCCI) also recommended that the DOE freeze further increases in Malampaya natural gas prices. To put this into context, when international crude oil prices were at $42/Bbl (one barrel) in 2020 (World Bank “pink sheet” data), Malampaya’s natural gas price was at 6, $7/GJ (one gigajoule of natural gas is roughly equivalent to 27 liters of fuel oil). In 2021, when oil rose to around $69/bbl, the price of natural gas in Malampaya was $7.5/GJ. On March 7, 2022, Brent Crude spiked to $130/BBl on fears of a US and European ban on Russian products and the delay in Iranian nuclear talks. As the Malampaya natural gas price adjusts quarterly, these increases will be charged to producers using Malampaya gas beginning in April 2022, which will then be reflected in the May 2022 production charge to end users.

According to service contract 38 of the Malampaya project, the national government is entitled to a 60% share of the net proceeds of Malampaya operations. Pegged to international crude oil prices in US dollars, rising crude oil prices and depreciating peso will also increase government royalties. According to data from DBM, in 2019 Malampaya royalties recorded as non-tax revenue amounted to 26.569 billion pesos and 19.079 billion pesos in 2020. Since these royalties come from us consumers, it is reasonable that we benefit from it. royalty fee.

Before the full impact of extraordinary fuel price increases hits the country, the government must help relieve consumers by keeping the Malampaya natural gas price at levels that will preserve 2021 royalties and use the Malampaya fund to subsidize end users of electricity.

Even before the recent fuel price spikes, electricity prices were already expected to rise this summer due to the tight electricity supply situation. The government should immediately enter into discussions with the Malampaya operator to freeze Malampaya prices. If not, Malampaya prices will certainly increase in April 2022. If the government uses Malampaya charges to subsidize consumers’ electricity bills, government economic managers should already start working on how the subsidy will reach consumers in time before the seasonal consumption peaks in May and June. .

Power supply during elections is essential. Based on the DOE Power Outlook last January 25, the worst-case scenarios could be Yellow Alerts during the weeks of April 18-24, April 25-May 1, May 30-June 5, and Red Alerts the weeks May 16-22. and from May 23 to 29. No alerts expected election week due to low anticipated demand given hopefully non-working holidays.

DOE is banking on GN Power Dinginin’s coal-fired Unit 2 (668MW) plant to boost supply during its planned Q2 testing and commissioning period – if there is not late.

Given the already dire situation of the vast majority of Filipino consumers, the government would have to forgo windfall tax revenues from lower fuel prices, which would be insensitive in these tough times.