Switching to natural gas: Evidence from Philippine manufacturing firms

First of 2 parts

Since March 2020, the country and the rest of the world have been hit by the unprecedented Covid-19 pandemic. The lower economic growth trajectory (ADB, 2020; World Bank, 2020) means that electricity demand targets are reduced. The outlook for new investments in generation is especially bleak given the current excess capacity (Ravago and Roumasset, 2020).  If and when the economy picks-up, the country may again face a problem of attracting sufficient investment in generation.

Addressing the recovery of energy demand becomes more challenging as production levels from Malampaya gas field, the country’s indigenous natural gas field, are expected to decline starting 2022. Without a replacement energy source, a looming energy crisis is foreseen as the Philippines stand to lose over 3,400 MW from existing gas plants, responsible for about 29 percent of Luzon’s power generation (DOE, 2020). Importing liquefied natural gas (LNG) is seen as the immediate solution to prepare for the eventual depletion of Malampaya.

One sizable group of energy users is the collection of firms in the Special Economic Zones (SEZs). Due to the specialized facilities and technology, energy demand and intensity of firms in SEZs are recognizably greater than firms in non-SEZs. Despite this, most SEZs rely on grid electricity. In a JICA study (2011), grid electricity accounted for almost 83 percent of total fuel used among 82 establishments surveyed along the Batangas-Manila (BatMan 1) gas pipeline. Majority of the establishments preferred sourcing their power from Meralco (largest distribution utility in the country) because it is reliable and it provides special discounted rates to big users of electricity.

The production process in many of the firms in the SEZs includes heating, which currently uses more expensive and less environment-friendly diesel or liquefied petroleum gas (LPG) as fuel.  Thus, LNG is a potential cost-competitive and cleaner substitute for energy sources used in both heating process and electricity requirements of firms in SEZs.

With the foregoing, we endeavored to determine the likelihood of firms to switch to natural gas and determine the profile of power and fuel use among firms in manufacturing and agro-industrial SEZs. There are a number of studies on interfuel substitution discussing the factors that influence likelihood of switching to another lower carbon energy source. Serletis et al. (2009) showed that high-income countries have larger interfuel substitution potential compared to middle- and low-income economies. At the same time, they highlighted that much of interfuel substitution depends on the structure of economy than the level of economic development. Compared to residential and electricity generation sectors, the industrial and transportation sectors exhibited a higher potential of substitution between energy inputs. There is likewise a need for a higher change in prices relative to users such as residential, commercial and industrial to encourage switching toward a lower carbon alternative.

We conducted a primary survey among SEZ manufacturing and agro-industrial firms located in Luzon and Visayas. Given the importance of manufacturing in the structural transformation of an economy (whether from agriculture to industry or to service), it is vital to determine systems and practices that improve productivity and efficiency. Our survey was sent to 61 manufacturing and agro-industrial SEZs with a total of 1,613 operating firms. We obtained a total of 115 firm-respondents. These firms are from 24 SEZs out of the 61 SEZ we targeted. Out of the 115 firm-respondents, a considerable number are from SEZs located in Laguna at 64 percent, followed by firm-respondents in Batangas at 10 percent. The rest are from Cavite, Cebu, Pampanga, Benguet, Bulacan and Metro Manila.

We implemented various probability tests to determine which firm characteristics increase the likelihood of firms to switch to natural gas. Our survey results show that crucial to increasing the probability of switching to natural gas as a primary fuel are the following: (i) the extent of knowledge about natural gas; (ii) its cost competitiveness vis-à-vis alternatives; (iii) whether firms use energy-intensive activities in its production process (particularly, heating), (iv) the type of ecozone firms are in, and (v) the firm’s current electricity provider. These results are telling us that energy-intensive manufacturing firms with more expensive fuel sources are more likely to switch.

Ravago from Department of Economics, Ateneo de Manila University; Fabella and Jandoc from School of Economics, University of the Philippines;  Frias from  School of Statistics, University of the Philippines; and Magadia from Gas Policy Development Project.

Continued next week

Home Opinion Switching to natural gas: Evidence from Philippine manufacturing firms

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