Institute for Climate and Sustainable Cities
[ANALYSIS] ICSC: Meralco-Sta. Rita contract risks continued exposure to rising LNG power costs

QUEZON CITY, 26 January 2026 –– As the one-time interim extension of the power supply agreement (PSA) between Meralco and First Gen Sta. Rita near its end, the Institute for Climate and Sustainable Cities highlights the need for a more thorough and careful planning process for future power procurement, as the reliance on imported liquefied natural gas (LNG) has led to rising electricity costs that are shouldered by Filipino households and businesses. 

The PSA extension to operate until January 31 this year, which was approved by the Energy Regulatory Commission (ERC) last August 27, 2025, allowed the plant to operate at maximum output and maintain supply. Sta. Rita, along with Ilijan and Excellent Energy Resources, Inc., provide the majority of Meralco’s natural gas supply, which comprises around 56% of the distribution utility’s overall generation mix. 

While the Ilijan and Santa Rita plants relied on indigenous natural gas from the Malampaya field, the decline of Malampaya gas reserves and lapse of supply contracts has resulted in the shift to imported LNG. Ilijan began securing its LNG supply via import terminals in June 2023, following the expiration of its Malampaya gas sale contract in June 2022, while Santa Rita and other First Gen plants are commissioning regasified LNG capability in early 2024. 

The transition to imported LNG has led to a substantial increase in power generation costs, from around PHP6/kWh in 2023 to PHP8/kWh in 2025, representing a 33 percent increase. Given that generation accounts for roughly 60 percent of the final electricity bill, this trend directly translates to higher rates for consumers. 

These cost increases are compounded by a critical contractual vulnerability: LNG power supply agreements typically include automatic fuel pass-through mechanisms similar to coal, which allow generators to immediately pass the full cost of global LNG price directly to consumers. LNG is a highly volatile commodity, even more volatile than coal. Hence, the addition of regasification facilities for the use of imported LNG alongside locally sourced natural gas led to a significant increase in generation cost, making it the most expensive resource in Meralco’s energy mix (see Figure 1).

Figure 1: Meralco’s Energy Portfolio in 2025, including Average Generation Cost per Energy Source in Pesos per kWh
LNG had the largest share in Meralco’s energy mix in 2025 while also being the most expensive energy source with an average generation cost of 8.82 ₱/kWh.

What makes this particularly concerning is that the 2025 price increases in Meralco’s supply occurred during a period of relatively low global LNG prices (see Figure 2). For reference, the Japan-Korea Marker LNG Index, which is the spot market price reference for LNG, showed a peak price of USD53.95 per tonne in 2022⏤a 500% increase compared to normal conditions. This raises a critical concern: if geopolitical tensions or market shifts drive the global LNG price index significantly higher, Filipino consumers will bear the full brunt of that increase through their monthly electricity bills.

Figure 2: Coal and Natural Gas Generation Cost in PHP per kWh relative to Japan LNG Global Price Index in USD per tonne
Japan LNG prices (green dashed line) peaked in August 2022 following the Freeport LNG explosion in the U.S., compounding price pressures from the Russia–Ukraine war. At that time, the Philippines had not yet imported LNG, keeping natural gas generation costs (orange line) relatively stable. In June 2023, the first importation of LNG began in Ilijan which exposed the Philippines to global price volatility, resulting in higher generation costs as more regasification facilities were added in early 2024. Today, contract prices for LNG are even higher than those for coal, despite coal contracts also including automatic fuel pass-through clauses. This underscores how fuel price risk is not unique to any single technology, but how portfolios with heavy exposure to imported fuels, whether coal or LNG, remain vulnerable to global market shocks and pass-through mechanisms.

This situation underscores a need to reconsider the role of LNG in the power generation mix, potentially shifting it from baseload operation to mid-merit or peaking use, thereby reducing dependence on imported natural gas. Continuous reliance on LNG alongside coal, which both have automatic fuel pass through mechanisms, will heavily expose the consumers to global market volatility pushing higher electricity prices. More importantly, this also highlights the urgency of accelerating the shift toward renewable energy. Solar, wind, hydro, and other renewable sources offer lower and more predictable generation costs, limit exposure to global fuel price shocks, and reduce dependence on imported fuels. While the recent discovery of additional Malampaya East 1 reserves increases the country’s indigenous natural gas supply, renewable energy provides a solid foundation for  a more affordable, reliable, and secure power system. 

The upcoming expiration of the PSA between Meralco and Sta. Rita provides a clear opportunity for policymakers and regulators to prioritize renewable energy in future power procurement, strengthen support for renewable resources, and design contracts that better protect consumers from fuel price volatility.

A deliberate shift toward renewables—supported by investments in grid, storage, and other flexible resources—can help stabilize electricity prices, enhance energy security, and support the country’s long-term sustainability goals. The choices made ahead of the 2026 PSA will not only determine power prices in the near term but will also shape the Philippines’ energy pathway for decades to come.

ABOUT
The Institute for Climate and Sustainable Cities is a Philippine-based non-governmental organization that advances climate, energy, and low-carbon solutions to enable fair and climate-resilient development at the national and international levels.

CONTACT
Sanaf Marcelo, ICSC: media@icsc.ngo, +63 968 886 3466, +63 917 149 5649 

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