Philippine fuel shock scenario shifts investments to renewables but fossil lock-in remains

Summary

The global energy crisis has exposed the Philippines' dependence on imported coal, LNG, and oil, keeping consumer costs high despite growing renewables.

New modelling shows sustained fuel price shocks accelerate renewables investments while limiting fossil expansion. Solar grows eightfold, and over 12 GW of battery is built over the next 15 years. Yet coal and gas remain locked in, with fuel and variable costs making up 81% of total system costs.

Flexibility becomes a key enabler. Battery storage costs are projected at just 13% of total fossil fuel and variable costs through 2040. Combined with more flexible thermal contracts, batteries enable the system to absorb renewables and open pathways out of fossil lock-in.

These dynamics can be further explored under varying fuel and storage cost assumptions using Scenario Builder.

2022–2026: Two fuel shocks on, the Philippines remains trapped in imported fuel price volatility

The Philippines has nearly 150 GW of solar and wind potential, yet its consumers still pay for imported fuels. Energy self-sufficiency remains below 50%, with coal and oil still largely sourced overseas.

A fuel shock already hit the country in 2022. Captive consumers of distribution utilities (DUs) tied to coal-heavy power contracts saw their bills spike during the crisis. Yet in 2024, DUs continued to sign new coal contracts despite the risks. Policy has barely shifted, with coal moratorium updates now justifying additional coal in the name of supply adequacy.

2026 is another wake-up call: the system remains highly exposed to global fuel prices. As domestic gas declines in the country, liquefied natural gas (LNG) steps in, further exposing the country to volatile prices. LNG entered the system in 2023 and scaled quickly, with imports more than doubling by 2024.

LNG exposure is smaller compared to coal but still significant. The Philippines has only two LNG-to-power contracts to date, yet they cover about 2.4 GW of capacity. Both are tied to the largest distribution utility, affecting millions of households in Luzon, the country’s largest demand centre.

Gas contract prices stayed elevated through 2025 and into early 2026. EERI, the greenfield gas plant commissioned in 2024, shows a clear upward trend, while SPPC (now LNG-based) remains volatile and above historical domestic gas PSA levels.

Recent government responses to the current fuel crisis point to a reactive approach to managing this vulnerability. Market interventions and accelerated renewable deployment followed after periods of price pressure. Coal continues to anchor the country’s power system, with imports relied upon amid rising oil prices.

This raises a key question. If the shift to renewables is already underway, what is holding back a reduction in fossil fuel exposure? And how sensitive is the system to price changes?

Using Scenario Builder, this analysis explores how fossil fuel dependence and contract lock-in influences the system, and what happens when global price pressures intensify.

Model and scenario set-up

Model set-up

Scenario Builder is used to run a least-cost capacity expansion model to examine how elevated fuel prices could reshape investment pathways in the Philippine power system.

The Philippines is represented as a three-node system (Luzon, Visayas, Mindanao), with a modelling horizon from 2026 to 2040 to capture longer-term system impacts.

Scenario Builder incorporates committed capacity additions expected before 2030, while testing how fuel price pressures influence future planning.

Key calibration assumptions are outlined below:

For full details on the input data, please download our documentation here.

Renewables are projected to rise, but lock-in costs linger

Modelling results show a shift in investment under a sustained price pressure until 2040.

Prolonged fossil fuel price shocks arrest coal and gas expansion while driving an eightfold increase in solar capacity

Under the prolonged stress of fossil fuel price increases, the modelled system shifts rapidly away from reliance on fossil fuels. Renewables dominate new investments, driving nearly all capacity additions over the next 15 years.

The model projects solar and batteries leading the buildout, with just 3.14 GW of new fossil capacity added. Solar PV expands from 4.28 GW in 2026 to 34.52 GW by 2040 — an eightfold increase.

This trajectory aligns with recent policy signals. The government aims to fast-track over 1 GW of renewable energy (RE) projects in 2026, recognising that timely delivery can help cushion the impact of fuel price volatility.

In the longer term, the government targets up to 25 GW of renewable capacity by 2035, reinforcing a shift towards strengthening indigenous supply. Realising these benefits, however, depends on effectively utilising renewable capacity within the system.

While some committed coal projects still come online, these reflect pipeline decisions rather than new investment signals, as the model builds only minimal new fossil capacity.

Continued investment in imported fuel-based assets risks locking the system into future price volatility. Proposals to lift the coal moratorium could deepen that exposure by enabling new coal capacity reliant on imported coal.

Coal and gas lock-in could reach US$90.5bn, mostly in fuel and variable costs

Modelling shows fossil assets remain actively utilised, plateauing in the late 2030s and locking in dependence that is hard to shift.

By 2040, over 100 TWh (around 41% of total demand) is projected to be supplied by coal and gas, while renewables account for just 35% of generation, with the remainder coming from other sources.

Even without new fossil capacity buildout, the system cannot quickly escape fuel price exposure. Contract lock-in shows up as utilisation in the model and keeps these plants running for another 15 years. This potentially locks in US$90.5bn in system costs — 81% of which (US$73.4bn) comes from fuel and variable operations.

Fuel shocks not only expose consumers to price volatility but reveal a deeper dependence on fossil fuel imports. They expose how much of the system is locked into fossil fuel contracts, where costs continue to be paid regardless of whether the power remains competitive.

Coal and gas assets mostly remain tied to imported fossil fuels. Until that changes, high and volatile costs will flow through to consumers.

At the same time, accelerating RE rollout and procurement shifts could increase stranded asset risks or drive project cancellations and delays. This tension is already emerging in the project pipeline.

More than 1 GW of gas capacity is listed as committed over the next five years, but delivery remains uncertain, with financing constraints beginning to surface. At least one project has already reported lender issues.

Across Asia, countries are already scaling back LNG exposure. The Philippines faces similar pressures, but its contract structure may slow the response, with risks already beginning to materialise.

The cheapest alternative is not another fuel, it’s storage

Fossil fuel shocks may accelerate the shift to renewables. But without faster deployment of storage and system flexibility, the system stays expensive. Power supply portfolios of most DUs in the country are tied to fossil-fuel-heavy contracts that pass costs and risks directly to consumers rather than utilities.

These contracts typically include fuel pass-through and take-or-pay clauses that limit utilities' exposure to risk and shift it downstream instead. As some fossil fuel fleets are already underutilised and face growing pressure from rapid renewable deployment, existing contracts are likely to shift even more costs onto consumers.

In addition, retailers may continue relying on fossil baseload contracts where slow storage deployment undermines confidence in renewables as a reliable baseload alternative.

The fuel shock scenario points to an alternative pathway.

Battery capacity rises sharply from 0.63 GW in 2026 to over 12 GW by 2040. Most of the buildout occurs after 2035, which coincides with declining fossil generation and a growing need for flexibility to balance variable renewables.

Model results suggest that total system costs from these additional batteries could reach around US$9.57bn. This is equivalent to about 13% of the projected fuel and variable costs for existing coal and gas assets through 2040, and around 10% of total fossil fuel system costs. A relatively small share of system cost could unlock flexibility and displace much larger fuel spending.

The shift to more system flexibility is reinforced by the Department of Energy’s (DOE) recent policy. The DOE now mandates energy storage integration for large renewable projects, requiring systems equivalent to at least 20% of installed capacity to support grid stability and reliability.

This effectively embeds storage into future system planning. As renewable deployment accelerates, the policy ensures the system has the flexibility needed to absorb higher shares of solar and wind.

The challenge now will be in how to deploy storage at scale, integrating it into the grid, while ensuring procurement frameworks value flexibility. How this translates into contract reform and offtake policies will determine whether these gains materialise.

Leveraging the crisis and breaking the cycle of price shocks

After repeated fossil fuel price shocks, this crisis is no longer just a warning.

It exposes how deeply the Philippine power system remains tied to imports. But it also highlights a clear pathway forward. Momentum towards RE is already building. But adding capacity alone is not enough. The system must be able to absorb and use it.

Today, renewables outpace fossil fuels in capacity additions. Yet the system still relies on fossil generation in operation. Supply is no longer the main constraint. It's how the system is operated.

Addressing this requires shifting procurement towards true least-cost outcomes, not just lowest bids. It also calls for improved oversight and calibration of cost pass-through mechanisms. More flexible contract structures are also needed to avoid locking consumers into fuel volatility.

As policy shifts are considered, including changes to coal moratoriums and exemptions for new capacity, the choices made today will shape the power system for decades.

Continued reliance on import-dependent power assets risks reinforcing the very vulnerabilities the crisis has exposed. Creating clear exit pathways for fossil assets is essential. So is enabling renewables to scale and operate efficiently. Together, these will determine whether the country can break free from recurring price shocks and build a more stable, self-reliant energy system.

Build your own scenario

With Scenario Builder, users can explore how the system responds under sustained fuel price pressure, while accounting for system constraints such as limited flexibility, grid bottlenecks, and contract lock-ins.

It also allows testing the impacts of rapid RE rollout, including potential curtailment risks if integration and flexibility do not keep pace. These scenario pathways can be further refined by incorporating policy signals. These could include energy storage policies, alongside detailed regional generation targets and cost assumptions.

Try Scenario Builder now and build your own model for the Philippines.

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