NAE Case Study: Philippines, Islanded Distribution by Cooperatives

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Description

Successful electrification in the Philippines was achieved on the basis of central funding and the implementation of islanded distribution systems operated by rural electrification cooperatives. Following a Government commitment to the co-operative model, the National Electrification Authority was formed in 1969 to manage rural electrification.  By 1973, the NEA had established 46 RE co-operatives, and 119 by 1985.  BY 2002, 88% of Filipinos had access to some form of electricity.  To address concerns over poor customer service in some areas, a private sector participation scheme for power generation was introduced based upon the privatization of generation, transparency in pricing, and true cost recovery measures. Under this new scheme, the electric co-operatives were required to outsource their power supply requirements and private sector companies gradually took over the role of generating the required power.  Each of these New Power Producers (NPPs) generates electricity and sells it to a Distribution Utility (DU) for distribution within its franchise area. The NPP is an entity that is financially and technically capable to take over the generation capacity of NPC-SPUG operators in the off-grid areas, either by building a new plant or buying the SPUG assets.  Early public sector support for electric co-operatives has thus established an opportunity for private sector suppliers who are now in a good position to satisfy the needs of a sustainable market.

Context

The Philippines is divided into three electrical grids, one each for Luzon (largest island), Mindanao (second largest) and the group of Visayan Islands.  The total installed capacity in the Philippines (in June 2016) was 20,055MW, of which 14,348 MW was on the Luzon grid. The all-time peak demand on Luzon was 9,726 MW, on Visayas was 1,878 MW, and on Mindanao was 1,593 MW.   The fuel sources for electricity generation are 43% coal, 24% natural gas, 13% geothermal, 12% hydro, 7.5% oil, 0.5% other renewable energy sources (including wind, solar, biomass).  Power generation is zero-rated for value added tax (i.e. not subject to 12% VAT) to ensure lower rates for end-users. Total electrification of the country was announced as a national policy objective in 1960.  This was addressed using the rural electrification co-operative model (based on US experience).  The Electrification Administration (EA) was established by the government in 1960 to implement its new policy.  This became the National Electrification Administration (NEA) in 1969, responsible for implementation. Approximately half of all households in the Philippines, and the majority in rural areas, now rely upon electric cooperatives for power. Power generation is not considered as a public utility operation, which means that interested parties do not need to secure a congressional franchise to operate a power generation company. The National Power Corporation (previously the national utility but, following deregulation, now focussed on non-commercial electrification targets across the country) uses its Small Power Utilities Group (NPC-SPUG) to provide electricity in off-grid areas, particularly in areas where private investors hesitate to come in due to lack of infrastructure and political and security concerns. In 2009, NPC was able to install 12,718 kW of new capacity in 34 SPUG areas nationwide.

Objectives

This initiative aimed to provide sufficient power to meet highly decentralised electricity demand in an efficient and sustainable manner, providing an acceptable customer service whilst reducing the long-term costs and subsidies.  The objective was to supply the off-grid islands in the Philippines in the most cost-effective manner, which initially involved the establishment of electric co-operatives.  Inefficiencies subsequently arising in  power sector meant a revised objective to push a new set of players from the local private sector to invest in the power supply sector by offering them the right incentives, and by convincing them of the strong potential local growth prospects once power infrastructure constraints were addressed.

Legal Basis

Conversion of NEA into a public corporation by Presidential Decree No. 269 in 1973. In 2001, the Electric Power Industry Reform Act (EPIRA), Republic Act No. 9136, was passed by Congress to ensure the quality, reliability, security, and affordability of the supply of electric power. Resolution no.21, Series of 2011: A Resolution Adopting the Amended Guidelines for Setting and Approval of Electricity Generation Rates and Subsidies for Missionary Electrification Areas - provision for electrification costs of SPUG at remote sites to be met by consumers in grid areas (i.e. cross-subsidy) through the UCME component of power bills, as provided by EPIRA.

Institutions, Roles and Responsibilities

In 1969, the National Electrification Administration (NEA) was created as the implementing agency of the country’s total electrification policy.   The NEA was the originator of the programme to establish electric co-operatives as the principle supplier of electricity across the Philippines.  The Co-operative Development Authority (CDA) was created in 1990 as the lead Government agency in advancing and sustaining the growth of the cooperative sector by establishing support systems and strong links with stakeholders.  Co-operatives now had the choice whether to register with NEA and/or CDA.  CDA's vision is a strong cooperative sector that helps to overcome poverty and strengthen the middle class in the Philippines.  The National Power Corporation’s Small Power Utilities Group (NPC SPUG) is in charge of generating power for areas not connected to the main grid.  The SPUG held the electricity supply monopoly in the islands and rural areas before the programme to encourage New Power Producers (NPPs) to increase the efficiency of remote power supply.  NPPs  are private companies that took over and overhauled SPUG’s plants or constructed new power plants, including hydro plants.  The Energy Regulatory Commission is an independent, quasi-judicial regulatory body established to regulate electric power service.  The Power Sector Asset & Liabilities Management Corporation engages in the management, sale, and privatization of existing generation assets of the National Power Corporation (NPC) and independent power producer (IPP) contracts; it also manages the outstanding obligations of the NEA's electric cooperatives.

Interventions

In 1970, NEA drafted a total electrification program, based on electricity supply through co-operatives, which was intended to be realized by 1990.  Under NEA, electric co-operatives (ECs) were designated as the country’s primary electricity distribution system. NEA was given the authority to establish and oversee the ECs, to make loans, to acquire physical property and franchise rights of existing suppliers, to borrow funds, and to extend subsidies to ECs.  It served as a regulator with extensive authority over the development and business conduct of the ECs.  These electric cooperatives are mostly autonomous and governed by democratically elected boards.  Although the original total electrification target was not achieved, only 13% of the 47,000 (districts/villages) remained un-electrified by the end of 2002.  However, a World Bank report in 2000 noted a significant number of areas with poor-performing ECs where numerous households still lacked connections, faced frequent power cuts, and, in general, were poorly served by their ECs.  The study concluded that poor EC performance was largely due to weak corporate governance, particularly political interference in EC management.  The main driver behind subsequent improvement was the introduction of New Power Producers (NPPs) through a competitive selection process for 15-year local concessions that were anchored by a power supply agreement (PSA) with the electric cooperatives.  NPPs were selected based on the lowest true generation cost proposed.  An output-based aid subsidy was offered by the national utility (NPC), aiming to cover the difference between the true generation costs and the price paid by the end-users.  The systems introduced were mostly based on power generation from diesel - no renewable energy project has been proposed so far (due primarily to the lack of awareness of renewable energy options).  NPPs act as market delivery partners of the Government in achieving the goal of facilitating access to electricity even in the remotest areas of the country.  

Impacts Achieved

Prior to the NPPs, the services provided by the SPRUGs were characterized on the generation side by poor reliability and high costs (and therefore the high level of subsidies); and on the distribution side by less-than-efficient distribution utilities or rural electric cooperatives. After the competitive engagement of the private sector NPPs, the prices proposed were much lower than former prices and therefore the level of subsidies also dropped - the service became much more cost-effective.  The objective is to reach a point where the installation would become commercially viable, especially thanks to the strong private development programme that has been implemented.

Lessons Learned

For the initial introduction of the electric co-operatives, the driving force was the commitment from Government and the associated resources allocated to reach the target of total electrification.  Although access to electricity was dramatically improved, there was insufficient guidance to secure the effectiveness of management of the co-operatives in the longer-term.  Concerns over the governance of the co-operatives were highlighted after the World Bank's assessment, which required a new approach to secure greater cost-effectiveness and quality of service.  These issues were successfully addressed by the introduction of the New Power Producers. Key factors making success possible were:

i) project developers remained technologically neutral in order for the private companies to propose their own solutions with their own cost;

ii) developers tried to create transaction structures that served consumers and balanced the interests of the off-taker and the private provider on a sustainable basis;

iii) from inception, a major effort was made by the programme promoters (the Energy ministry and the IFC) to set up information, communication, and education programs for national and local stakeholders.

It was a long process to get local authorities and cooperatives, as well as the private sector, on board for the tranistion required to a more efficient, customer-oriented operation.  From this experience, some of the key constraints that needed to be addressed included the lack of awareness or the most relevant technologies; inefficient distribution utilities or rural electrification cooperatives; and  poor reliability/high costs of systems (and therefore the high level of subsidies required).

Effectiveness

The electric co-operatives provided the basis for widespread access to affordable power supplies in the remote, islanded areas across the country.   The availability of a relatively cheap source of power through this  rural electrification facilitated investments in agricultural infrastructure, business and industrial enterprises, health and environmental sanitation facilities and services, and educational facilities and services which brought about significant changes in productivity, employment, and income. The introduction of New Power Producers significantly improved the cost-benefit for rural electrification.  However, the ongoing cost of required subsidisation remained significant.  In 2016, NPC requested approval to collect approximately US$470m from electricity end-users for 2015 and 2016 in order to cover the subsidies required for rural areas (this is the so-called universal charge for missionary electrification, UCME).  The UCME is included in the bills of all electricity consumers and is needed to cover the subsidy for remote areas.  It is also used to maintain the reliability and stability of sufficient funding sources for NPC's fuel and other cost requirements including guaranteed sufficient payment for NPPs and RE developers.  Overall, although the electrification process introduced with NPPs has achieved great improvements over the previous SPUG-driven approach, the continued dependence upon a significant national subsidy must raise some doubt over its sustainability. 

References


Authors

Authors: Mary Willcox, Dean Cooper

Acknowledgements

The Review was prepared by Mary Willcox and Dean Cooper of Practical Action Consulting working with Hadley Taylor, Silvia Cabriolu-Poddu and Christina Stuart of the EU Energy Initiative Partnership Dialogue Facility (EUEIPDF) and Michael Koeberlein and Caspar Priesemann of the Energising Development Programme (EnDev). It is based on a literature review, stakeholder consultations. The categorization framework in the review tool is based on the EUEI/PDF / Practical Action publication "Building Energy Access Markets - A Value Chain Analysis of Key Energy Market Systems".

A wider range of stakeholders were consulted during its preparation and we would particularly like to thank the following for their valuable contributions and insights: - Jeff Felten, AfDB - Marcus Wiemann and other members, ARE - Guilherme Collares Pereira, EdP - David Otieno Ochieng, EUEI-PDF - Silvia Luisa Escudero Santos Ascarza, EUEI-PDF - Nico Peterschmidt, Inensus - John Tkacik, REEEP - Khorommbi Bongwe, South Africa: Department of Energy - Rashid Ali Abdallah, African Union Commission - Nicola Bugatti, ECREEE - Getahun Moges Kifle, Ethiopian Energy Authority - Mario Merchan Andres, EUEI-PDF - Tatjana Walter-Breidenstein, EUEI-PDF - Rebecca Symington, Mlinda Foundation - Marcel Raats, RVO.NL - Nico Tyabji, Sunfunder -


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Any feedback would be very welcome. If you have any comments or enquires please contact: mary.willcox@practicalaction.org.uk, benjamin.attigah@euei-pdf.org, or caspar.priesemann@giz.de.

Download the Tool as a Power Point: https://energypedia.info/images/a/aa/National_Approaches_to_Electrification_-_Review_of_Options.pptx

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