Overcoming Electricity Issues

Overcoming Rising Filipino Electrical Costs

November 13, 2015

Primary article contributor – Amy Nagus

Team Leader following the Philippines – Cameron Torrens

Keywords: Philippines, Electricity, Electric Rates, Technology Economy, Semiconductor Assembly, Telecommunications  

The Philippines has gained considerable attention as a destination for foreign investments in semiconductor assembly, telecommunications and textiles due to its high economic growth, comparatively low labour costs and improved governmental standing. However, the country is plagued with an unreliable and expensive electricity supply, which has become a main deterrent to investing in the country.

The Philippines has notoriously suffered from unplanned electricity outages and blackouts, especially during peak times in the summer. This is largely due to the country’s insufficient and out-dated power generation infrastructure. This electricity shortage interrupts business and production activity, which can be devastating to foreign investors.

Furthermore, this electricity shortage and inconsistency creates unusually high electricity rates. Unlike in neighbouring countries, the Filipino government does not subsidize electricity. Because of this, high electricity rates in the Philippines create excessive production and operating costs, which make the cheaper rates of neighbouring countries more appealing for investment opportunities. The high cost of these production and operating costs decreases the bottom line for companies and therefore limit investment potential. This has not gone unnoticed by foreign direct investors, as many have chosen to leave the Philippines in order to invest in other Asian countries like Thailand and Vietnam, which boast lower electrical rates and overhead costs.

Even still, investing in Filipino technology industries like telecommunications and semiconductor assembly has many benefits if companies can establish ways to mitigate this financial overhead risk. Established companies can do so by launching cost management initiatives for energy conservation programs. Many companies already include these programs, which include improving machinery and re-evaluating operating hours. Additionally, by investing in backup or standby generators, companies can reduce the impact of potential electricity outages and avoid wasting production time. However, the potential for electrical outages is less likely for many large companies, as they are usually located in more highly electrified areas and thus less vulnerable to extended outages.

Another way to mitigate the risk of high electrical overhead would be to consider investing in a technology sector where overhead costs are minimal. For example, a semiconductor assembly company has high electrical costs from operating machinery, but the labour cost is less important. In comparison, a telecommunications company like a call center would have significantly lower overhead costs and a higher focus on labour cost. With labour cost still less than electrical costs, it may be more advantageous to consider investing in telecommunications companies rather than semiconductor companies for this reason.

It should also be noted that the Filipino government does recognize the immediate need to increase the electrical capacity to overcome this issue, and plans to ensure this increase by the year 2030. Also, the Filipino Energy Regulatory Commission implemented the Interruptible Load Programme, which offers financial incentives for large companies to use their own generators during peak demand times. This financial aid can help offset the cost of using generators during peak times and make generator use more viable to continuing production.

In conclusion, the economic risk associated with the inconsistent and expensive electricity supply in the Philippines can be mitigated by investing in companies with established cost-management initiatives and by investing in companies that have lower electrical costs in general. For firms important risk mitigation strategies include locating facilities in more highly electrified areas as well as investing in backup generators. Finally, the commitment of the Filipino government to reduce electrical costs and provide incentives to large companies provides further affirmation that high overhead costs can be mitigated. Companies must be sure to follow through with these strategies to ensure investments outweigh overhead costs.