A Tale of Two Systems

“The law of all progress” does not refer to a statute in our books or a particular scientific or economic principle. The concept is lifted from the writings of a Jesuit philosopher, Teilhard de Chardin, and promotes the idea that, put simply, all good things take time and go through stages of instability to reach maturity. In this column, I hope to contribute to a deeper understanding of and/or present alternative approaches on key issues to ultimately liven up democratic discourse and build stronger institutions.

In January 2024, President Ferdinand R. Marcos, Jr. witnessed the ceremonial energization of the 450-MW Mindanao-Visayas Interconnection Project (MVIP) physically linking the power systems of the main islands of Mindanao with that of the Visayas, which has been connected to Luzon via Leyte since 1998. The event was truly historic considering that, for the first time in the country’s history, any excess power from Mindanao can now be exported to the Visayas via the MVIP’s 184 circuit-kilometer (km) submarine transmission line and 500 circuit-km overhead lines, with any further excess sent from the Visayas to augment Luzon’s requirements (or excess from Luzon to the Visayas, as is more often the case).

One can then easily get the impression from this development and from mainstream discussions on the power industry that there exists today a unified power system serving the entire Philippines under a privatized and competitive framework pursuant to the Electric Power Industry Reform Act of 2001 or EPIRA — one interconnected grid, one dynamic market where multiple players compete, all moving towards one energy development jour-ney.

Yet, that is not exactly the case.

While it is true that the MVIP integrates into one power network the main regions of Luzon, Visayas, and Mindanao under the operation of the National Grid Corp. of the Philippines (NGCP), allowing the trading of electricity in the Wholesale Electricity Spot Market (WESM) every five minutes for each day of the year, with an increasing number of customers directly buying their own power supply from WESM or under retail contracts, and attracting significant invest-ments for new generation capacity from foreign and domestic players, a different story plays out in many parts of the country.

In almost 200 municipalities spread over 35 provinces in the Philippines, almost 25 years since the law was passed, a pre-EPIRA set up remains. In these geographically isolated islands or communities, there is no round-the-clock trading of electricity in a WESM — in many areas, power supply is unstable and available only for certain hours of the day. There is no point in talking about electricity exchange or augmentation between or among islands either as there is no transmis-sion system that connects the islands to allow for such power transfers. In these areas, all end-users remain captive customers (under EPIRA terms) of their distribution utilities/electric cooperatives (DUs), with no ability to shop for and con-tract the best price of retail electricity supply since, in many of these areas, only one generator or power supplier operates.

Further, unlike in the main grids where consumers bear the full cost and price volatility of the electricity supply, end-users in the off-grid areas do not pay for the true cost of power. Instead, off-grid consumers pay a fixed rate or the Subsidized Approved Generation Rate (SAGR) for the power supplied by the National Power Corp. (NPC) or private generators — New Power Providers (NPPs) or Qualified Third Parties (QTPs). Any deficiency required to cover the cost of supply from NPC, NPPs, or QTPs is then charged against and collected from all main grid customers under the Universal Charge Missionary Electrification (UCME).

Based on NPC’s filings with the Energy Regulatory Commission to recover the UCME shortfall for 2023, the total cost of supplying power to the off-grid areas was P39.62 billion, around 60% of which was paid to NPPs and QTPs. Yet, out of the P39.62 billion, only P12.67 billion (or 32%) was collected from off-grid consumers via SAGR. This required a UCME funding subsidy of P26.95 billion for 2023.

While efforts to rationalize the SAGR levels and UCME rates are underway, I believe addressing system reliability, supply sufficiency, and price affordability in our off-grid areas requires us to move away from a grid-centric view of ener-gy policy and regulation.

It starts from recognizing fundamentally that we do not have just one power system in the Philippines — we have, perhaps, as many as there are islands in our archipelago! This compels us to adopt a more decentralized ap-proach to address our energy issues, particularly for our off-grid areas. Blanket policies and regulations that do not distinguish in application between the main grid and off-grid areas tend to weaken rather support the realiza-tion of economic development and the culture of compliance. Some examples of key policies that work (most of the time) in the main grid that do not necessarily work when adopted in the off-grid areas are as follows:

1. Competitive Selection Process (CSP) policy for power supply contracting. The 2023 Department of Energy (DoE) CSP policy circular takes concrete steps in recognizing that the conditions for an effective CSP, as implemented in the main grid areas where there are multiple power generators and an operating WESM, do not necessarily exist in the off-grid areas. The policy exempts from the CSP requirement the procurement of power supply for off-grid areas served or to be served by NPPs with less than one megawatt of demand. Yet, this exemption may not be enough considering that the primary condition for a credible CSP (i.e., that there are multiple suppliers competing and offering the best price and ser-vice) may not be present considering that missionary areas, as defined in the EPIRA implementing rules, are unviable in the first place. These are the last mile areas, comprised mainly of residential customers. Perhaps a separate CSP policy for off-grid areas can be developed, one that adopts competition principles for different power supply arrangements, such as those for DU-owned supply, or under equipment lease contracts, or bundling of off-grid areas under a common supplier.

2. Power Supply Procurement Plans (PSPP) by off-grid DUs. Every year, all DUs are required to submit to the DoE their PSPPs to ensure that they anticipate and prepare for changes in the demand requirements in their fran-chise areas. For off-grid DUs, the PSPPs may need to include the implementation and compliance with the DoE’s 2019 subsidy rationalization policy aligned with the Transmission Development Plan to integrate the plan, if any, for interconnecting the island to the main grid.

More than 20 years after the passage of EPIRA, it is clear at this point that an electrification or power supply-only approach is not sufficient to promote sustainable growth in the off-grid areas. This is true most especially if there are no plans, or if it remains unviable in the foreseeable future, to connect certain areas to the main grids. The situation calls for a more comprehensive, integrated plan that requires breaking down silos among stakeholders — DUs, national and local government agencies. It is not enough that DUs extend their networks to the last mile and all households are energized: we need to ensure that employment opportunities and livelihood projects are also introduced in the areas to ensure that households can continue to pay their power bills. This is another route that can be explored as a CSP variant, one where competition can ensue among proponents for power supply and a pilot or anchor industrial, commercial or livelihood project. This can be explored and developed at the level of the regional development councils, allowing for mobilization of resources and stakeholders necessary for these areas to finally graduate from the label of unviability to viability.

Monalisa C. Dimalanta is a senior partner at Puyat Jacinto & Santos Law (PJS Law). She was the chairperson and CEO of the Energy Regulatory Commission from 2022 to 2025, and chairperson of the National Renewable Energy Board from 2019 to 2021.