Bite the Bullet |


The whole world is paying the price.

The conflict may only be between Russia and Ukraine and their supporters, but almost every country is feeling its impact.

In its World Economic Report last July, the International Monetary Fund (IMF) revealed that global output contracted in the second quarter of this year as several shocks hit the global economy already weakened by the pandemic – higher than expected inflation globally, particularly in the US and major European economies triggering tighter financial conditions, a worse than expected slowdown in China reflecting the COVID 19 outbreaks and lockdowns, and further negative fallout of the war in Ukraine.

The IMF said growth is expected to decline from 6.1% last year to 3.2% in 2022, 0.4 percentage points lower than projected in its April report.

At the same time, global inflation has been revised upwards due to higher food and energy prices as well as the persistent imbalance of supply and demand and is expected to reach 6.6% in advanced economies and 9 .5% in emerging and developing economies this year. In 2023, the IMF expects disinflationary monetary policies to bite, with global output rising just 2.9%.

However, for the ASEAN 5 which includes Indonesia, Malaysia, the Philippines, Singapore and Thailand, the IMF projects that growth (in terms of real GDP) will increase from 3.4% in 2021 to 5.3% this year, then slow to 5.1% next time. year.

The IMF also noted that the risks to the outlook are extremely on the downside. “The war in Ukraine could lead to a sudden halt in European gas imports from Russia; inflation could be more difficult to reduce than expected, either if labor markets are tighter than expected, or if inflation expectations are not anchored; tighter global financial conditions could lead to over-indebtedness in emerging and developing countries; new epidemics and closures as well as a further escalation of the crisis in the real estate sector could further dampen Chinese growth; and geopolitical fragmentation could hamper global trade and cooperation,” he said.

The IMF adds: “A plausible alternative scenario in which risks materialize, inflation increases further and global growth declines to around 2.6% and 2% in 2022 and 2023, respectively, would put growth in the bottom 10% results since 1970.”

In the Philippines, the Philippine Statistics Authority has just announced that the country’s inflation rate has continued to accelerate, reaching 6.4% in July, the highest level in four years, due to a faster increase in the prices of food and non-alcoholic beverages. Meanwhile, the purchasing power of the peso fell to 86 centavos.

Not only will this war have no winners, but virtually the entire world will lose.

A critical point of pain for us, apart from food, is energy. For months, many countries around the world have seen record increases in energy costs, such as in Europe, where countries such as the United Kingdom, Germany and Spain have seen their electricity prices increase. from 300 to 400%.

In the Philippines, electricity tariffs have increased by around 50% since 2021. One of the main reasons for this is that around 80% of the electricity supplied by the generators at Meralco comes from traditional fuels imported from various countries. , including coal, whose prices have soared. 128% in the first half of this year compared to 2020.

A World Bank report last July noted that the recent surge in coal and natural gas prices was so rapid that major benchmarks were about three times higher in the second quarter of 2022 compared to a year earlier. The surge in prices, he said, partly reflects the impact of Russia’s invasion of Ukraine and the strength of demand. In 2020, Russia accounted for a quarter of global natural gas exports and a fifth of coal exports.

The International Energy Agency has warned that global coal consumption is expected to rise by 0.7% in 2022 assuming China’s economy recovers. In the European Union, the demand for coal has increased as coal is increasingly used to replace gas that is in short supply. He added that Russian coal boycotts are adding further upward pressure on coal prices.

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Ultimately, consumers must bear the brunt in terms of higher electricity charges, as most power generators have no choice but to sell at higher prices to Meralco.

Two of the Philippines’ major power plants, the coal-fired Sual and the gas-fired Ilijan, are on the verge of running out, largely because they have been the silent saviors of electricity consumers in the over the past year and a half.

However, unlike Meralco’s other power supply contracts, the Power Supply Agreements (PSAs) with these facilities, which include 1,000 megawatts or approximately 30% of Meralco’s total supply, do not permit passing on costs on consumers.

In short, these two power plants have cushioned the impact on consumers of soaring global fuel prices, unlike other producers who have the luxury of passing on their cost increases to consumers.

San Miguel Corp. Chairman Ramon Ang himself recently admitted that the facilities had lost more than 15 billion pesos on the supply contract between SMC Global Power and Meralco to date, adding that the company had absorbed the 10 billion pesos lost in 2021. Unfortunately, no business can operate at a loss for that long.

With the Russian-Ukrainian conflict driving global coal prices to all-time highs yet again, it could only be a matter of time before SMCGP finds itself with no other recourse but to pull out of the PSA, rather than continuing to bleed out money and end up in dire straits. financial difficulties. Among the grounds for termination listed in the PSA is “changed circumstances” which could include external factors beyond its control, such as war-induced fuel price spikes, coal export bans, among others.

The situation at the Ilijan gas plant is essentially the same. Because the Malampaya gas field unilaterally stopped supplying gas to the Ilijan plant, it was forced to source additional capacity from the wholesale electricity spot market (WESM).

Its purchases of WESM triggered spikes in WESM prices, further undermining its cost of supplying Meralco, and the cost of electricity for others, to boot.

Meralco and SMC have both petitioned the Energy Regulatory Commission to be allowed to charge more, citing increases in coal and natural gas used to generate electricity.

If SMC’s power plants are not allowed to raise their prices, the worst-case scenario is that they will stop generating and supplying electricity due to mounting losses. Where will Meralco then get the 1,000 MW that will be lost? If Meralco buys from WESM, it will expose consumers not only to much higher prices and price volatility, but also to supply uncertainty.

The consequences of the intermittency of the power supply, or even outright cuts in the event of insufficient capacity, will have disastrous consequences on our economy already battered by the effects of the Russian-Ukrainian conflict and the pandemic.

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