Quick adoption to Artificial Intelligence must come with digital infrastructure
Data centers are an integral component of national digital (mission-critical) infrastructure. Alongside cell towers and connectivity, data centers provide the processing engine for government and enterprises to function properly in the global economy. Sadly, we do not have enough modern data centers in the Philippines, not by a long shot.
By most metrics we lag behind our regional and global peers in terms of sovereign-focused data centers; not to mention our lack of preparation for the next wave of AI driven industrialization. We love to talk about industrialization as a key component of any government driven development roadmap, but we have glossed over our need for sovereign mission-critical infrastructure to ensure we remain economically resilient and globally competitive across a host of industries, including business process outsourcing. Microsoft and Google recently announced that the Philippines is one of the quickest adopters of AI enabled processes in the world, and not just to write Linkedin posts. Yet, none of that AI infrastructure is located in the Philippines; which we, and I am sure those reading this, will instinctively say is because of our high-power costs.
Over $1Billion investments from major data center companies in the Philippines
Philippine companies are making an effort to catch up to our regional neighbors. STT GDC-Globe (a joint venture between Singapore based STT GDC and Globe Telecom), ePLDT Vitro, Digital Edge (a joint venture between Digital Edge and the Rufino family’s Threadborne), A-Flow (a partnership between Ayala Logistics and FLOW Digital), Digital Halo, and incoming Equinix have made or committed significant capital to the Philippines. These companies have doubled down on enabling the future of the Philippines. Cumulatively, data center operators have either deployed or committed well in excess of $1B in investments into the sector. And this is a drop in the bucket of what the Philippines needs. YCO Cloud counts itself lucky to be a small part of those who are driving investment into the data center space.
But for every pioneer data center company raising the flag for the Philippines, there are those who continue to raise eyebrows at the very idea that a developing country like ours can earn its spot as a data center hub in the world.
Energy regulations and data centers
Power costs have become a convenient excuse, easily trotted out, to waive away our collective failure to deliver true forward-looking infrastructure; the boogeyman scaring off investors and stymying our economic expansion. Those of us in the data center industry are no stranger to those on the fence citing the cost of power as a barrier to entry for hyperscalers into the Philippines.
To be sure, power costs on a household level remain high, relative to our ASEAN neighbors. This is so due to an entire whole host of complex reasons -- not least of which is government does not directly subsidize power prices. And truth be told, historically our power sector is an appropriate scapegoat for many of the woes that bedevil the country. So much so, that despite significant strides in liberalizing and commercializing the power industry, we continue to use power costs as an excuse for a whole host of problems, especially around attracting foreign direct investment and pursuing the development of critical sectors of the broader economy.
To stay on point, we are talking about energy in the Philippines and data centers. Large-scale users. And how the industry as it sits today is one of the more attractive in the region. Despite what we consider as common knowledge, mal mots about high power costs unwittingly ignore the hard-won realities and improvements over the last few decades.
The current realities in the power sector are a mixed bag: bottlenecks in investment into modernizing and expanding our national grid infrastructure exist, a lack of investments into decarbonized baseload power, and there is an argument to be made that our admirable pursuit of integrating large-scale renewable energy into our national power mix could have unintended consequences for our existing infrastructure.
Yet, through a hard won and difficult process, many of us are unaware that the Philippine energy sector sits as one of the most open, market-based in the region. This is in large part thanks to the joint efforts of public and private sector players over the last few decades.
Significant investments from multinational companies and local players
Our energy sector has been decoupled from direct government control, allowing the Philippines to become one of the largest recipients of foreign direct investment into the energy sector in the region. The broader story of power in the Philippines then, becomes a case study both in deregulation and liberalization and an example of just how difficult it is to reform infrastructure for the direct benefit of the Filipino people.
The investment and commitments into the Philippine power sector over the last few years have, by any measure, been massive. Multinational companies like Spanish firm Acciona, German developer Ib-Vogt, and asset managers like Actis and KKR have funneled hundreds of millions dollars into the country. Not to mention the investments coming from homegrown developers and operators both large and small, like ACEN, Aboitiz Power, Citicore REIT, EDC/First Gen, MGEN, to mention a few. The Board of Investments noted in 2024 over P1.35 trillion ($23 billion) in projects were registered. By any measure, the renewable energy sector is booming, and this a critical factor in the attractiveness of the Philippines for data center and digital infrastructure investments. Smart, long-term capital flowing into the country helps deliver financially sound projects on scale, diversifying our power mix sustainably and driving down overall generation cost.
Which leads us back to that old hoary chestnut constantly trotted out: power costs in the Philippines are too high for data centers to flourish. Modern data centers are massive consumers of power, new deployments can be anywhere from 50MW to 100MW per building, with 1GW data centers being developed and built globally. Again, the context of this discussion is power costs for large scale users of power.
The Philippine advantage: All-in cost of power per country for large users
A reputable power sector player in the Philippines recently completed an internal study assessing the readiness and competitiveness of the Philippines to attract and support large-scale data center developments. Frankly, the results are eye-opening, especially for those who continue to cling to the outmoded notion that the Philippines is not competitive from a power cost standpoint. We are competitive in terms of headline power costs for data centers. And, once you dig into the details, it becomes clear we are even more competitive.
First and foremost, for ultra-large users of power (data centers), the Philippine all-in cost of power is approximately $0.11 per kWh, which can be further optimized through competitive bid processes and other such mechanisms. In Singapore, the all-in cost is $0.22 per kWh, in Malaysia is around $0.13 per kWh (since their removal of their government subsidies), and Thailand is $0.12 per kWh (with partial government subsidies).
Further, the Philippines (because our power industry is fully liberalized and market-based) large-scale consumers of power can enter into direct bilateral power purchase agreements; this is a critical differentiator, as our power rates are rooted in commercial contracts, as opposed to government subsidies or grants. This mitigates a key risk factor:Our contracts are not reliant on government subsidies nor is the access to power reliant on the government granting that access. Thus, data center operators, developers, and tenants can be confident in the commercial viability, stability, and transparency of power pricing in the Philippines. We have an active spot and wholesale market, which provides transparent and updated pricing on an almost hourly basis. Again, something that is a differentiator for the Philippines. And finally, because of the significant investments into renewable energy in the Philippines and the fact that offtake agreements are commercial in nature, data centers and their tenants can construct their own power portfolio mix. For example, in the Philippines, a large-scale user of power can source 100% physical renewable energy to service their needs. This contrasts with other countries and another unique attribute of the Philippines.
The Philippines is well positioned to be a data center hub - and we are ready
The Philippines sits in a unique position: One of the most connected and digitally native populations in the world, a hub for business process outsourcing and connectivity in the region, along with one of the most open and market-based power sectors in ASEAN. We sit at the confluence of ASEAN and the West. We export labor, we export services, and now we export our public data and dollars to other countries. Bringing our public data home is imperative, with a critical nuance. The Philippines must protect its position as the crossroads for connectivity and concomitant flow of data between the East and West. Government data must come home, but it is imperative to maintain free flow of private data across our borders. Doing so will entice billions in inbound investment and the creation (directly and indirectly) of millions of jobs.
To further improve the competitiveness of the Philippines, the government, through incentive-granting agencies such as PEZA and the Board of Investments (enabled and empowered by new laws like CREATE MORE) has created a comprehensive package of incentives to attract significant investment into sectors like digital infrastructure and data centers. Robust incentives like expanded income tax holidays are now available, but more critically zero-VAT rating and enhanced deductions (over 100%) of power expenses make the Philippines an even more attractive destination, when you factor in the impact of our incentives. Coupled with our relatively transparent and market based power sector, these specific incentives further reduces the overall cost of power in the Philippines for large-scale consumers. Beyond our competitive direct cost of power, these incentives further mitigate the cost of power in the Philippines, making us an even more attractive investment destination in the region.
One of the key enablers for the Philippines to become the regional and trans-Pacific crossroads for data is our power industry. Our power industry, warts and all, is helping transition the Philippines into the future. Demand power players and regulators do more, do better for the country. We should also recognize the gains made and the resulting competitiveness of the Philippines as a result. The Philippines is ready and it is imperative we recognize it.
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