BATAC JUNIOR COLLEGE, Inc.

City of Batac, Ilocos Norte

CHAPTER II

REVIEW OF THE LITERATURE AND CONCEPTUAL FRAMEWORK

This chapter of the paper presents the review of related literature, and the conceptual

framework.

What is Inflation?

Inflation is a continual rise in the general price level of products and services in the

economy. Inflationary tendencies can come as a result of an increase in the cost of

production, which is transferred to final consumers.

Inflation has been on the rise since the pandemic. The global inflation rate has risen

from 3.74% in March 2021 to 9.2% in March 2022, an increase of almost 150%. Small

business owners identify inflation as the biggest risk to their business survival, and 22% of

them are of the opinion that inflation has reached its peak (Alibaba, 2022).

What is Electricity?

Electricity is one of the most powerful forces in our lives. As a matter of fact, it can

even kill you. The most vital part of electricity is called electric energy. This is what we

commonly think of when we hear the word electricity. “Electricity” reminds us of anything

that we plug into the electrical outlet in order to make it work, such as lights, refrigerators,

video games, microwaves, and computers. Scientists discovered ways to produce electric

energy in large amounts in order to make heat, light, and motion. These discoveries have

improved our lives greatly and for many of us it would be difficult to picture what life would

be without electricity (Bartleby, 2022).

1
 BATAC JUNIOR COLLEGE, Inc.
City of Batac, Ilocos Norte

The Importance of Electricity

Electricity is one of the most important blessings that science has given to mankind. It

has also become a part of modern life and one cannot think of a world without it. Electricity

has many uses in our day to day life. It is used for lighting rooms, working fans, and domestic

appliances like using electric stoves, A/C and more. All these provide comfort to people. In

factories, large machines are worked with the help of electricity. Essential items like food,

cloth, paper, and many other things are the product of electricity (Lekshmi, 2010).

Electricity Sources in the Philippines

The Philippines is abundant in natural resources and has a diverse mix of energy

sources. The Philippines derives most of its electricity generation from coal. In 2021, the

fossil fuel accounted for 47.6 percent of total electricity generation in the country. Natural gas

made up another 10.7 percent (Alves, 2022). Some of Luzon’s resources include a 1,200 MW

natural-gas fired Ilijan power plant, a 1,000 MW Sual coal-fired power plant, a 345 MW San

Roque hydropower plant, a 603 MW hydroelectric power plant in Ambuklao and a 52.5 MW

Bacon-Manito geothermal power plant (Global Energy Institute, 2014). Visayas and

Mindanao are largely powered by geothermal and hydroelectric power plants and have a huge

untapped potential for renewable energy (Ibid). Despite the country’s abundance in natural

resources, energy consumption well exceeds energy production by 20 Mtoe (Million Tons of

Oil Equivalent) (Enerdata, 2014). However, in terms of electricity production and

consumption, the inverse is true. In 2013, the Philippines produced 75 terrawatt-hours of

electricity and consumed only 62 terrawatt-hours (Ibid).

2
 BATAC JUNIOR COLLEGE, Inc.
City of Batac, Ilocos Norte

Why is Electricity in the Philippines Expensive and Unreliable?

Philippines’ power system relied on imported coal and diesel. In 2020, coal accounted

for 57% of total power generation in the country, with coal overtaking oil as the biggest

energy source. With the Philippines relying on imported coal and diesel to power up over half

of the country, power rates are made vulnerable to importation costs and rising world market

prices.

Secondly, rotating power outages were still experienced in parts of the country in

2021, and even over the past few years, despite and overcapacity of baseload coal-fired

power plants, leading to significantly high electricity costs. These coal plants have not even

met the newly –mandated allowable outages set by the Energy Regulatory Commission.

People in Luzon, Visayas. And Mindanao have grappled with varying degrees of

power outages. Rising temperatures and the increase of people sheltering at home contributed

to the increase in demand and shortage of supply. Department of Energy (DOE) Secretary

Alfonso Cusi also attributed this to the simultaneous breakdown of four big coal-fired power

plants. Supply was heavily affected by maintenance work and unscheduled outages at key

power plants in Luzon and low gas pressure from the Malampaya gas field (ABS-CBN News,

2021).

Power Rates Increase in Ilocos Norte

The electricity bill of costumers of the Ilocos Norte electric Cooperative (INEC) has

increased in May due to a hike in the cost of electricity generation, rising prices of coal and

gasoline, and the diminishing value of the peso against the dollar.

3
 BATAC JUNIOR COLLEGE, Inc.
City of Batac, Ilocos Norte

According to INEC, the residential power rate in the province jumped to Php16.77 per

kWh from only Php14.31 per kWh in June. The increase exclude the value added tax and

other government charges (Mugas, 2022).

Though Ilocos Norte is host to a number of renewable energy firms such as the wind

farms in Burgos, Bangui and Pagudpud, as well as the solar farm in Currimao town, the

INEC said that as a distribution utility, they could not get their supply directly from them

(Adriano, 2022).

As of the moment, the INEC has a contract of 20 years and is buying its supply from

Masinloc Power Partner Co. Ltd., Wholesale Electricity Spot Market, and its mino-

hydropower plant in Pagudpud town. However, it could only supply less than 2 percent of the

58-MW capacity requirement in the province (Adriano, 2022).

Different Factors Affecting Energy Costs in the Philippines

(1) Cost of fuels. Fuels and electricity go hand in hand in terms of demand and supply.

For electricity, it has to be generated and delivered and in order to process it is to be supplies

by fuels. Whenever the fuel prices vary, it affects the cost of electricity in return.

(2) Power plant costs. The use of power plants has to be built and maintained. With

the impact of electricity, it needs to operate to supply the needs in our household. These will

affect the prices in energy consumption.

(3) Transmission and distribution system costs. Just like power plants, distribution

and delivery systems also need to be built and maintained. This added consumption to the use

of electricity that will take effect in price demand.

(4) Weather. Electricity costs when inclement weather happens. Rain can provide

cheaper hydropower generation while wind keeps turbines spinning. Worst case scenario will

4
 BATAC JUNIOR COLLEGE, Inc.
City of Batac, Ilocos Norte

approach when extreme weather happens. This means the demand for electricity increases

and makes it more expensive.

(5) Regulations. Regulations vary per location. Some service or utility commissions

controlling costs and others implementing both unregulated and regulated prices.

(6) Seasons. Seasons affect us greatly during the summer where the demand of

electricity is high. When more people need more power, the need to efficiently generate and

deliver electricity increases, along with the cost.

(7) Location. Factors like power plant availability, local fuel costs, and regulations all

impact the cost of electricity depends on where you live.

(8) Type of consumer. Consumers who live in industrial type of home usually pay less

per kilowatt houe (kWh) than those who live in commercial and residential. This is because

they can be supplied a larger amount of electricity at one time, making delivery and

generation quicker and cheaper. However, getting power to consumers who use smaller

amounts take more effort, time, and money (Envision, 2021).

Energy Price Inflation

One off the real issues with the energy crisis is its effect upon businesses, particularly

small and medium-sized businesses. The problem is that whereas households are getting

some assistance, as yet nothing has been proposed for businesses, and many of them are

faced with increases in energy costs of up to 80%.

5
 BATAC JUNIOR COLLEGE, Inc.
City of Batac, Ilocos Norte

High Energy Cost and Inflation

According to the labor department report, the 2008 July inflation rate hit the highest

of 5.6% since 1991 (Maura, 2008), which was fueled by high energy prices. The high cost of

energy was attributed to the increasing world oil and gas prices.

We use gasoline and electricity to run machines in our industry. Hence as the cost of

energy rises, the effect is great and in most cases, the burden resulting from the high cost of

energy is felt by the consumer. Producers will always ensure themselves against losses due to

the high cost of energy by increasing consumer prices.

Rising Energy Prices Add to the Costs of Running a Small Business

One of the leading factors in increasing costs is rising energy bills. A survey found

that over a third (36%) of small businesses owners saw their energy bills increase in 2021.

During the year, one in five owners saw an increase of over 15%, and one in then reported a

hike of 20%.

Almost a third (30%) of small businesses owners say they will have to reduce their

energy usage to save on running costs. Yet nearly one in five (17%) said that doing so would

negatively impact their business (Emms, 2022).

Increasing Inflationary Pressures, Higher Energy Costs Affecting Small Businesses

According to the new survey data of small business owners from Goldman Sachs,

“10,000 Small Businesses Voices,” 91% of small business owners say broader economic

trends, such as inflation, supply chain issues, and workforce challenges, are having a negative

impact on their business. Further, nearly three quarters (73%) of small business owners

across all sectors said increasing energy costs are having negative impacts on their bottom

lines.

6
 BATAC JUNIOR COLLEGE, Inc.
City of Batac, Ilocos Norte

Inflation has contributed to workforce challenges, as the high costs of attracting and

retaining employees is affecting small business’ financial health has been negatively

impacted by inflation over the past six months. Of those, 67% have increased wages to retain

employees. To offset these increased costs, 60% have passed them through to the consumer

by raising the prices of goods or services (CBJ Staff, 2022).