Climate Change and Coal Phase-Out in the Philippines

This blog continues our focus on the future of coal in the Asia-Pacific region by looking at the Philippines.

The Philippines was again slammed in 2021 by a super typhoon --Typhoon Rai with 168 mile an hour winds hit the Philippines on December 15, 2021, leaving major flooding and destruction and killing over 200 people. Although 2021 saw fewer storms than the seven major typhoons of 2020, the reality of these intensifying storms has contributed to a turnaround in Philippines government policy on coal power plants; in October 2020, the Ministry of Energy announced a moratorium on new coal projects and stopped accepting proposals for new coal projects. The government further committed to reductions in coal at COP26, announcing, together with Indonesia, a cooperative effort called the “Energy Transition Mechanism” with the Asian Development Bank for a pilot program that would fund the closure or repurposing of existing coal plants. The overall COP26 agreement called for only a “phasing down of coal” but a separate Glasgow agreement pledged to phase out coal by 2040 globally. The Philippines was criticized for not endorsing the provision to phase out coal by 2040 although it signed on to a general transition away from coal. Earlier at the G-20 meeting, China, S. Korea, and Japan, key financiers of coal projects in Asia, agreed along with other OECD countries to stop public financing of overseas coal power projects.

Coal is the largest source of electricity in the Philippines, accounting for 57% of electrical generation in 2020, and is the dominant source in all three main regions: Luzon, Visayas, and Mindanao. Coal’s share in the generation mix has been growing but several planned coal plants have been cancelled since the moratorium. The government’s stance on the approximately 10GW of coal projects that have been approved has been vague. Nevertheless, major Philippines corporations (i.e., San Miguel, Ayala, Aboitiz, and Meralco) which have been involved in the coal power sector are now shifting their focus to producing renewable energy from solar, wind, hydro, and geothermal resources. Aboitiz Power announced plans in August 2021 to invest 390 billion pesos (about US $7.6 billion) to build 3400MW of renewable energy over the next decade. The Philippines investment plan calls for renewable energy to grow from the current 21% to 35% of generation in 2030 and 50% by 2040 with the addition of as much as 34,000MW. Such a transition will require billions of dollars in investment and will require a major commitment by the private sector as well as International Financial Institutions.

Although the Philippines has been carrying out reforms in both the structure and functioning of the power market for decades, there are still obstacles to private investment. One important constraint is the restrictions on ownership in power generation. The foundation law for the sector -- Electric Power Industry Reform Act (EPIRA) -- limits ownership by a single company to 30 percent of generation capacity in each of the three island grids as well as restricts to four the number of different owners. The Philippines has long been characterized by the oligarchic dominance of the economy by a group of family-owned corporations. And this situation is seen in the power sector. A World Bank report concludes: “the market remains concentrated in four major players; and new competitors have slowly entered through the opaque and largely regulated market of bilateral contracts.”

The government has been considering how to increase foreign investment in the energy sector. In 2020, the government decided to allow 100 per cent foreign ownership in geothermal projects. The Philippines is the third largest geothermal producer in the world (after the United States and Indonesia) and the government seeks to increase geothermal capacity in 2030 from the current 1,971 MW by an additional 1,300MW.

To facilitate private investment and increase competition, the Philippines is also moving from a Feed-In-Tariff system for renewables to a competitive auction approach. In December 2021, after months of delay from the original target of June 2021, the Ministry of Energy released rules for the Green Energy Auction Program. The GEAP has two main elements: (1) a green energy tariff that sets a benchmark on renewable energy costs, especially for distribution companies that are permitted to procure a portion of auctioned renewable capacity; and (2) the auctions that identify the eligible RE facilities.

There has an ongoing debate in the Philippines Congress over introducing a carbon price, either through a tax or an emissions trading system. President Duterte did approve an excise tax on coal under the Tax Reform for Acceleration and Inclusion (TRAIN) Program that has put further pressure on coal operators. Indonesia is moving in this direction, and the Philippines should consider action to provide better price incentives for renewable energy development. A carbon tax would however work against plans to import LNG as domestic offshore gas production declines. The Philippines is planning to begin importing LNG in 2022 and several terminal and storage facilities are in construction or planned.

The Biden Administration in gearing up its Indo-Pacific strategy and included decarbonization and clean energy as one of six priority areas for cooperation in its October 27 , 2021 Press Statement at the East Asia Summit. At the 2021 Indo-Pacific Business Forum, USAID announced a planned five-year, $34 million Energy Secure Philippines project that will work with government and private sector partners “to improve the performance and efficiency of energy utilities, deploy renewable energy systems, advance energy efficiency, enhance competition in the power sector, and strengthen energy sector cybersecurity.“ USAID will work with private investors, the US Development Finance Corporation and other institutions to mobilize at least $750 million in private sector investments and help develop at least 500 megawatts of clean energy generation capacity. This is an important new initiative that Congress should support.

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