Rethinking ASEAN's approach to energy subsidies

Primary energy demand in South-east Asia is expected to grow by as much as 2.3 times by 2040. To meet this, it is critical that investments in the power sector are sustainable and properly planned.

With this in mind, I led the Philippine delegation to the 10th Singapore International Energy Week and this year's theme - Rethinking Energy; Navigating Change - could not be more apt. Faced with the twin challenges of meeting our energy aspirations while maintaining fiscal prudence, we need to confront the elephant in the room: burgeoning energy subsidy bills in the region.

This is an approach that, for too long, has been the be-all and end-all for policymakers in this part of the world. The numbers speak for themselves. In 2015, fossil fuel subsidies in South-east Asia made up anything between 0.4 per cent and 7.3 per cent of total government expenditures. Absolute energy bills for the region alone were at least US$145.7 billion (S$198.3 billion).

These figures are expected to swell as regional populations grow further, putting governments in the region on unsustainable fiscal paths.

The major stumbling block to reform is political. It has been argued that without subsidies, bills will skyrocket with consumers being hit hard. The evidence says otherwise. In fact, the hidden costs to society are much higher.

A comprehensive critique on subsidies by the International Monetary Fund in 2013 clearly shows that energy subsidies widen budget deficits and crowd out public investments in social infrastructure.

At the same time, they discourage private investments in energy in favour of excessive energy consumption as well as the quicker depletion of natural resources.

For the Philippines, we believe there is an opportunity for developing Asia to rethink its approach to subsidies. We believe that the way to clear this hurdle is to show real ambition to free our markets to ensure that consumers pay only the true cost of power and use energy more wisely.

This is a journey that the Philippines embarked upon when we introduced the Electric Power Industry Reform Act (Epira) in 2001. At the time, the case for reform was urgent. Subsidy bills had ballooned and our debt swelled to the tune of US$16.61 billion.

Through Epira, we introduced sweeping reforms, including the restructuring of the entire power industry and the privatisation of most state-owned power generation and transmission assets. There were three key enablers that allowed us to make this transition.

The first was separating the transmission and distribution sectors, thus preventing any future monopolies. The second was the establishment of a Wholesale Electricity Spot Market, to provide a more competitive environment to bring electricity prices down. And finally, a full-on privatisation of power assets to reduce our national debt.

This journey was not easy but we have obtained the results that we set out to achieve. By 2012, we privatised more than 70 per cent of our capacity generation assets. By 2026, all assets across the generation, transmission and distribution chain will be in private hands.

We have also increased our population's access to basic electricity and brought down tariffs. Today, consumers pay the true cost of power.

Now, the transition has not been perfect. More can be done to bring tariffs down further and remove consumer subsidies for renewable sources.

Achieving transparent markets without subsidies is a continuous process of improvement and necessarily so. Of course, these reforms are not easy. But it is important that we try.

What is required is a commitment to take the path less travelled, to think outside of the box and deliver. If we can do this, if we can rethink our approaches, the aim of securing reliable and competitively priced electricity is something that we in Asean can achieve within our lifetimes.

H.E. Alfonso Cusi is Secretary of Energy for the Philippines. 

This was originally published in The Straits Times on 1 November 2017.

By: Department of Energy, Philippines

         

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