Philippines coal obligations limit renewables despite fuel price shock

Summary

Market interventions during the energy crisis reinforced coal's role in the system, even as the Philippines accelerates its renewable energy rollout.

Under high fuel prices, coal utilisation dropped by 28%, stranding up to 37 TWh of fossil capacity when combined with gas. Yet minimum stable generation locked in around 3 TWh of coal dispatch regardless of cost, crimping low-cost renewables.

As long as coal obligations and grid constraints persist, low-cost renewables will fall short of their potential. How these dynamics play out can be further tested in Scenario Builder.

Market suspension during fuel crisis addresses volatility but not fuel dependence

The ongoing fuel crisis in the Middle East has put the Philippines' power system to the test.

After the State of National Energy Emergency was declared, the spot market was suspended in March 2026 to protect consumers from price spikes. Operating guidelines shifted to administered pricing, and coal was locked in as the backbone of generation across all grids.

Natural gas continued providing flexibility support, particularly during peak demand, while oil-based peaking plants were almost entirely removed from dispatch.

Household bills reflect the grid's heavy reliance on imported fuels. Rates among the highest-cost distribution utilities (DU) have stayed high, increasing throughout 2026. The Philippines has the second highest electricity prices in Southeast Asia, behind Singapore.

Meralco, the country's largest DU, continues to post the highest residential rates in Luzon, the largest demand centre. In April 2026, coal and gas made up 86% of its purchased electricity, with renewables covering just 8%.

The Philippines' Renewable Energy (RE) Act, enacted nearly two decades ago, laid the foundation for RE development. Renewable portfolio standards (RPS) followed later, obliging electricity suppliers to source a minimum share from RE. Yet most continue to fall short of their targets.

With more renewables scheduled to come online in the next 10 years through government-backed auction programs, a key question emerges: are they being efficiently used when the system is under persistent fuel pressure? Or do existing regulatory constraints continue to limit their role?

In the first blog, we used Scenario Builder to examine how elevated fuel prices reshape long-term investment pathways toward renewables. In this second part, the analysis turns to dispatch modelling to assess potential system inefficiencies under persistent high fuel prices.

Model and scenario set-up

Model set-up

While the first scenario examined sustained high fuel prices across the full modelling period from 2026 to 2040, this second scenario focuses on dispatch modelling in 2027 using Scenario Builder.

That year marks a significant inflection point, with substantial additions of solar, wind, battery storage, and conventional baseload capacity expected to come online across the three grids.

The Philippines is modelled as a three-node system across Luzon, Visayas, and Mindanao, simulating the 2027 dispatch year using a least-cost dispatch model. This examines how elevated fuel prices could impact dispatch of renewables and fossil fuels in the Philippine power system.

Key calibration assumptions are outlined below:

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

High fuel prices could strand fossil capacity at 37 TWh

Under high fuel prices, coal generation falls to 57 TWh in 2027. This is a 28% drop from its practical ceiling imposed in the model, as rising fuel costs make coal increasingly expensive to run.

For context, on-grid coal generated approximately 68 TWh in 2025 and gas-fired plants a further 31 TWh.

By 2027, the pressure of higher fuel costs is visible across the thermal fleet. In the model, total electricity demand for 2027 is 137 TWh, of which renewables meet 49 TWh or 36%. Under high fuel prices, coal and gas are pushed to their minimum floors, stranding roughly 37 TWh and leaving coal to cover just 47% of annual demand.

Subcritical coal faces the steepest underutilisation from high fuel consumption; supercritical coal is held back by fixed maintenance costs that fuel savings alone cannot offset.

Oil-based generation is removed from dispatch entirely. Elevated fuel prices make it too costly to run across all grids, mirroring its effective sidelining during the market suspension in March 2026.

Instead, the system largely absorbs renewable capacity added in 2027. Variable renewable energy (VRE ) like solar and wind are prioritised ahead of costlier thermal alternatives. Non-thermal sources are largely unaffected by the fuel shock. Geothermal runs at 90% and biomass at 78%. Solar, wind, and hydro stay within their resource and capacity limits.

However, these utilisation rates mask a more complicated picture. As the next section highlights, even where clean capacity exists, it is often crowded out by coal's entrenched role in the power system.

The result is a system under high fuel prices that cannot fully use the coal capacity it already has. Yet it still holds back cleaner and cheaper alternatives because of fossil baseload minimum supply obligations.

The system prioritises renewables until fossils compete

Dispatch modelling in this analysis reveals how technologies compete in the merit order on an hourly basis.

The system puts zero marginal-cost wind and solar first and cuts fossil output as far as floor constraints allow. Under high fuel prices, units hit that floor up to 28% of the time. For nearly a third of the year, the system is locked into roughly 3 TWh of minimum coal output under current floor constraints.

Coal runs regardless of RE availability or fuel cost, and its physical limits constrain how far minimum floors can be relaxed. Even when underutilised, renewables do not automatically fill the gap. Ramp rates, grid congestion, and transmission bottlenecks limit how much RE the system can absorb.

Firm renewables face a different constraint. Geothermal and hydro are not affected by fuel spikes. However, their dispatch is crowded out by fossil assets that must maintain a minimum hourly output to keep the grid stable.

Solar leads midday generation while coal dominates overnight, forcing geothermal output as low as 150 MWh. This is not a resource constraint, but because coal's minimum generation requirements leave little room for geothermal in the dispatch order.

Cleaner alternatives exist but cannot displace underutilised coal under current constraints. Yet the same logic could be applied in reverse. Market rules that currently favour fossil assets in crisis could apply to renewables too, given the right policy levers.

RE-rich but coal-reliant: Visayas grid remains vulnerable to fuel and supply shocks

The Visayas grid is RE-rich but coal-dependent and import-reliant in practice.

Geothermal and coal provide a firm baseload backbone, but forced outages on both technologies can push the grid into deficit. Visayas can import only 250 MW from Luzon and 450 MW from Mindanao through its high-voltage direct current (HVDC) links. That leaves little room to absorb local supply shocks.

Under a fuel shock, circulating fluidised bed (CFB) coal becomes costly to run and cannot be substituted by imports it cannot access at scale.

On the highest demand day of the year, the Visayas grid dispatches all available VRE while relying on firm RE and coal to meet baseload demand. Once solar output drops after 16:00, CFB coal generation climbs back to its maximum capacity, leaving the grid dependent on coal through the evening.

On a low-VRE, high-demand day, renewables provide little relief. Coal dispatch remains high throughout the day, with hourly output between 942 MW and 1,346 MW.

However, this balance depends entirely on supply showing up as expected. The dispatch modelled here reflects idealised conditions: no forced outages on geothermal or coal. In practice, geothermal output can fall from 538 MW to 190 MW without warning. This is a shortfall that strains even the combined HVDC import capacity in Visayas.

This vulnerability is reflected in the growing push to build more RE capacity within the region. The Board of Investments has approved ₱33bn worth of RE projects in Eastern Visayas as of May 2026, including solar, wind, and a major geothermal expansion.

Breaking the fossil reflex: why the fuel crisis is an argument for transition, not a reason to delay it

The fuel crisis has exposed something the market interventions could not address: the Philippine power system is structurally committed to coal in ways that persist long after prices normalise.

The suspension has since been lifted, but as prices return to market levels, the structural factors behind the system's crisis response remain worth examining.

Leaning on coal in a crisis follows from decades of built-in infrastructure, long-term contracts, and market rules.

The Department of Energy (DOE) has held the coal ban and pushed for faster RE growth. The direction points toward confidence in the clean energy pipeline and committed coal capacities.

The contracting landscape tells a different story. Most DUs continue to source the vast majority of supply through long-term bilateral agreements, and coal-heavy contracts still dominate those portfolios. Cheap and clean power exists in the market. However, existing contracting arrangements still shape how much of that supply reaches consumers.

The model points to one underappreciated lever: the subcritical coal running closest to their floor under high fuel prices could also be the most logical candidates for managed retirement. Subcritical coal is the oldest and least efficient in the fleet, showing higher heat rates and elevated unplanned outage rates relative to other coal technologies. Freeing that headroom creates space for cleaner alternatives.

Against this backdrop, the DOE has been directed to set a retirement timeline for existing coal plants, weighing their remaining economic life against the need for stable replacement capacity. This is reinforced by the DOE's plan to retire aging plants, particularly those with frequent unplanned outages.

But a managed transition is critical. The grid remains constrained, and retiring capacity faster than transmission and firm generation can absorb it carries its own risk.

The crisis has clarified the problem. What turns policy directions into outcomes goes beyond intent. It requires the contracting, market, and infrastructure conditions to actually support it.

Build your own scenario

Dispatch modelling is computationally intensive, often requiring significant processing time and technical expertise. Scenario Builder is designed to reduce that barrier.

Users can test how dispatch shifts under different fuel price assumptions, adjust minimum output obligations, introduce storage requirements, and explore what each change costs the system.

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

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