Economy 3 MIN READ

Inflation story: Winter is coming

As Europe enters winter this year, it will have to increasingly switch to coal and liquid natural gas as substitutes to Russian natural gas. This adds pressure to the already rising global demand for these energy commodities, heating up inflation even more.

August 10, 2022By Ina Calabio

The Russia-Ukraine conflict has brought to light the European Union’s (EU’s) dependence on Russia for energy. In 2020, 29% of extra-EU’s crude oil, 43% of natural gas, and 54 % of solid fossil fuel imports were sourced from Russia. With the sanctions imposed on Russia and the end of the war still far from sight, the EU’s energy crisis has triggered volatility in the energy market, pushing up global energy commodity prices.

So far, the EU has shifted to liquefied natural gas (LNG), increasing its imports to compensate for the Russian supply. Meanwhile, Germany is set to revive its coal plants, while other European countries have started boosting their coal imports in preparation for winter, adding to the demand of coal-dependent countries like us.

We already know the drill: a rise in demand will pull up market prices if supply can’t keep up. The EU currently sources coal from Australia, South America, Colombia, and South Africa, while the Philippines mainly imports from Indonesia (98% of coal imports in 2021). Nonetheless, the EU’s entry into the group of countries needing coal and LNG, apart from the supply chain issues faced globally, tightens the global market, leading to higher prices.

This is why, despite efforts to minimize energy consumption, a typical Meralco bill this month might still be the same, or probably be even higher. Coal covers 33% of Meralco’s Power Distribution Utility Fuel Mix (as of 2021) next to natural gas at 49%. But based on statistical analysis, Meralco’s generation charge is more sensitive to coal prices than natural gas.

Natural gas and coal make up more than four-fifths of Meralco’s power distribution utility fuel mix, though the price of electricity generated is more sensitive to the price of coal.

The price of Indonesian coal, which is the country’s primary coal source, has been on the rise since last year (see chart above). On top of that, unlike natural gas, coal is paid in dollars, so there’s also the impact of peso depreciation.

In Meralco’s June 2022 generation cost computation, the average generation cost per kilowatt-hour (kWh) from three coal plants has gone up by 71% compared to last year, pushing up the generation charge for the month. Therefore, as the EU warms up for winter, the Philippines should brace for higher energy prices, especially if a colder winter is forthcoming.

Transition to LNG

While the EU shifts back to coal and pursues other energy sources in preparation for winter, the Philippines faces its own energy problems. With the Malampaya service contract set to expire in 2024 and its natural gas supply to be completely exhausted by 2027, it is a critical time for the country to find other sources to cater to the rising energy demand of Luzon, especially amid rising coal prices.

The good news is, at least in the short run, the Philippines is set to import LNG as the country’s first LNG terminal begins operations this year, and construction of other terminals is underway. The bad news is, the Philippines will likely enter the LNG market at a time when prices are still high as prompted by the EU’s shift to LNG. Moreover, dependence on imports puts the country in a vulnerable position, especially in periods of volatility. Nonetheless, this is the solution for now.

In the long term, there are plans to build new power plants and tap renewable energy sources to improve the country’s energy mix to increase production and meet rapidly increasing demand. It is high time to source for sufficient financing and private sector investment not only to meet current demand but also to push for energy independence.

INA CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

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