But the market environment for C/DE in many countries during this period will be quite different from that of the 1990s when many markets were last buoyant. The emergence of more competitive energy markets, greater uncertainty about energy pricing and ever-changing policy priorities may make the challenge more complicated rather than less. To spice this mix further, C/DE businesses now have abundant opportunity to extend their international reach, but this will require greater knowledge of foreign markets and the strategies required to break into them.
Traditionally, the price of electricity, and in particular the relationship between this and the price of the fuel, has been the main signal for C/DE businesses. The higher the power price, the greater the incentive to generate it on-site. This indicator still holds true almost everywhere, but with energy market conditions changing fast, and becoming more complex, developers and others should try to understand a variety of other factors.
AVOIDING THE 'BOOM AND BUST' TRAP
A factor of new importance is the heightened tendency of C/DE markets to go through 'boom and bust' cycles that track similar cycles in the overall power market. Such cycles are features of commodity markets and are caused when periods of over-investment lead to falling prices, creating periods of under-investment and product scarcity (in this case electricity-generating capacity) that in turn leads again to rising prices and a stampede to invest. This is an increasingly common phenomenon in the world's power markets - as many ex-companies in the C/DE sector could testify. The recent market downturn in Europe has been a destructive period for many companies in the sector.
As improved market conditions return to world markets, companies that want a sustained presence in these markets will have to anticipate 'post-boom' downturns, read the signals and respond to them if they are not to be brought down with the rest. One way in which the new tendency can be exploited is to sell to energy users the benefit of C/DE projects in reducing exposure to the boom-bust price cycle. On-site cogeneration, in particular, offers a potentially useful hedge.
... will alter prospects for on-site energy
Two related sets of institutional change in the Philippines promise dramatically to alter its already significant on-site power production market. The chief outcome will be to change the drivers for the adoption of such technologies, while simultaneously making cogeneration more technically and commercially viable. In addition, on-site power will tend to become more widespread throughout the Philippines, reports Tim Sharp.
The two sets of change are the country's ongoing power sector reform process and a renewed emphasis on renewable energy development. Although the processes are entirely distinct, they have strong cross-linkages in the sense that both will tend to disperse economic growth away from Manila. This will in turn create greater demand for dispersed on-site power and cogeneration even as growth prospects for these activities in the Manila area could moderate.
The more important of the two processes is power sector reform. This is by far the most ambitious and advanced reform programme in South-east Asia. Enabled by the fiercely debated Electric Power Industry Reform Act (EPIRA) that came into force in June 2001, power sector reform is unbundling and privatizing all power generation and distribution functions. It will also this year, perhaps as early as June, establish a wholesale electricity spot market (WESM) whose chief physical base will be a publicly owned transmission grid. The market will have its own independent operator.
Figure 1. The new structure of the electric power industry in the Philippines
The entire system, including WESM, is under the oversight of an energy regulatory commission (ERC) that is an independent quasi-judicial, quasi-legislative body established by EPIRA. ERC's very wide powers allow it to set viable power tariffs, regulate grid operations, and license all power generators and distributors. During the present transitional phase, ERC is working hand-in-glove with the Private Sector Assets and Liabilities Management Corporation (PSALM) that has taken over all generation and transmission assets and liabilities, including IPP contracts, of the National Power Corporation (NPC). As Figure 1 shows, it also liaises with the Department of Energy (DOE) that continues to set national power development policy and goals.