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Racing past massive steel buildings, gleaming malls and boutique cafes, downtown Manila today is more reminiscent of Singapore or Hong Kong than of the white sandy beaches and sparkling crystal waters of other parts of the Philippines. This rapid metropolitan development is a testament to the country’s unprecedented growth: the country posted 7.2 per cent GDP growth for 2013, significantly beating government targets, and in some quarters even surpassing the growth rate of China.
The current administration is feverishly trying to shed any remnants of its ‘Sick Man of Asia’ image and forge ahead, and to some extent, this is working: last year the country received three upgrades to its credit rating and beat India to win the title of the world’s leading call centre destination, according to investment advisory firm Tholons’ 2013 survey.
The power sector, too, is eager to reach the same levels of growth as other Philippine industries. While access to electricity is increasing, problems still remain due partly to staggering electricity prices – among the world’s highest. Poor infrastructure and relatively low purchasing power have led to rotating brownouts in some regions, and massive unpaid bills.
The government aims to attract PHP3.2 trillion ($71 billion) of energy investments by 2030 in order to address some of these problems, but the question is whether investment in the energy sector is all that is needed for it to reach a level of efficiency and profitability that is seen in other countries.
Government alphabet soup
|“The Philippines has one of the most sustainable energy models in the world, because we do not rely on the government to build our power plants, but instead rely on the free market,” claims Senator Sergio de la Rama Osmeña III, head of the Senate’s Energy Committee. However, he also notes that the country’s energy sector “has been stumbling along for decades.”|
Sergio de la Rama Osmeña III
Senator & head of the Senate’s Energy Committee
In 2001, the power sector underwent a radical transformation from public to private when The Electric Power Industry Reform Act (EPIRA), considered the most progressive energy legislation to come out of Southeast Asia, was first drafted. EPIRA’s raison d’être was to build a sustainable and reliable power supply in order to lower electricity rates in the long term.
However, actual implementation of EPIRA only occurred in 2008, and with the last mandates related to open access to the sector only being met in 2013, prices have remained exuberantly high. In January 2014, the cost of a unit of electricity from the Luzon grid cost 12.45PHP/kWh ($0.28/kWh).
The Philippines consists of three main geographical divisions and therefore three grid systems: Luzon, Visayas and Mindanao. Luzon is the wealthiest of the three.
“EPIRA promised energy at a reasonable rate, but the definition of reasonable is still unclear,” states Congressman Reynaldo V. Umali, Oriental Mindoro representative and head of the House’s Energy Committee.
Under EPIRA, subsidies were eliminated and there was a mass unbundling of generation, transmission and distribution, with over 80 per cent of assets privatized today.
EPIRA mandated the creation of The Power Sector Assets and Liabilities Management Corporation (PSALM), a new state agency tasked with overseeing the privatization and sale of power assets in order to liquidate the National Power Corporation’s (NPC) financial obligations. NPC’s transmission assets were reassigned to the National Transmission Corporation (TransCo). Subsequently, the privately owned National Grid Corporation (NGCP) won a 50-year franchise to become the operator of the country’s electricity network. However, TransCo kept ownership of all transmission assets.
The Energy Regulatory Commission (ERC), an independent regulatory body that ensures consumer education and protection, and promotes competition in the electricity market, was another part of the EPIRA package. It is currently tweaking the remaining guidelines for the highly contested feed-in-tariff (FIT) rules, which it issued in July 2012. In addition, the commission is prioritizing transition issues in the implementation of Retail Competition and Open Access (RCOA), the scheme that allows power users of at least 1 MW in Luzon and Visayas to choose their own power supplier.
|“With the RCOA regime slowly unfolding, the impetus for foreign and local investors to invest in the electric power industry will only get stronger,” explains Zenaida Cruz-Ducut, ERC’s chair. As more power plants are built, the supply of power will increase and “eventually, a stronger supply and demand equilibrium position will be reached, enabling electricity prices to become truly competitive.”|
Energy Regulatory Commission (ERC)
|Alsons Power’s Sarangani Watershed Protection Project|
Local conglomerates have thrived in the Philippine power sector thanks to the high visibility of upcoming opportunities, and a smaller exposure to risk than multinational companies face on the ground in the Philippines. It comes as no surprise then that families run the majority of conglomerates and have also taken advantage of the EPIRA law, such as the Aboitiz Group, which is planning to invest PHP190 billion ($4.4 billion) over the next five years.
|“The bulk of our investment capital will be channeled into our coal plants,” says Luis Miguel Aboitiz, first vice-president of Aboitiz Equity Ventures. Although the group has a 50:50 split between renewable and coal plants, “renewable plants are smaller, so in terms of megawatts produced, they are dwarfed by coal,” he says.|
Luis Miguel Aboitiz
Vice President, Aboitiz Equity Ventures
The government’s energy agenda is aligned in much the same way – 17 coal plants are coming on line within the next few years as a more immediate solution to doubling power capacity by 2030, one of the Department of Energy’s (DOE) major thrusts in its Power Energy Plan 2030.
Coal currently reigns, but according to the International Energy Agency, prices for coal have more than doubled since 2010 and are expected to rise, so the pressure on companies using coal technology will increase, resulting in a greater diversification of energy sources used in this market.
|The 98 MW Mapalad Power Corporation diesel plant in Iligan City – one of three Alsons Power diesel plants operating in Mindanao|
Delayed sunrise for foreign players
Between 2011 and 2012, foreign direct investment in the Philippines more than doubled, reaching a record of $2.8 billion in 2012, according to the United Nations Conference on Trade and Development. Despite the increase, the country still lagged significantly behind Vietnam ($8.4 billion), Thailand ($8.6 billion), Malaysia ($10.07 billion), Indonesia ($19.85 billion) and Singapore ($56.65 billion).
Although foreign ownership restrictions can severely impede foreign investment in many industries in the Philippines, including oil and gas, EPIRA has eradicated any barriers for power generators (not including renewables).
Even before EPIRA formally opened the door, the Korea Electric Power Corporation (KEPCO) stood out as the country’s largest foreign power investor to date. The Philippines was the host to its very first overseas venture in the 1990s and since its entry, KEPCO has built what is considered one of the top 12 power plants in its class operating globally— the 1200 MW Ilijan natural gas combined-cycle power station in Batangas, three hours drive from Manila. Ilijan has symbolic status as the Philippine’s largest natural gas-fired facility and the company’s biggest project undertaken outside of South Korea.
|“The quality and reliability of electricity supply has improved since KEPCO has arrived and there are now fewer blackouts,” explains Kyu-Byeng Hwang, president and CEO of KEPCO Philippines.|
President & CEO, KEPCO Philippines
During last year’s visit to the archipelago, Hwan-eik Cho, KEPCO’s global president and CEO, confirmed that the company is planning to invest at least $700 million in the coming years. “The Philippines remains a significant portion of our global operation, providing much of the demand for KEPCO services globally,” affirms Hwang.
Some local conglomerates were more cautious with the gold rush than others, and instead chose to enter the power market later. “What sparked the decision to invest in Mindanao was the perception that the reward will justify the level of risk in this venture,” explains Jesus N. Alcordo, president of FDC Utilities Inc, which has started construction on 405 MW of plants, and also won a bid for 40 MW of geothermal power.
Mindanao is the second largest island in the Philippines, representing a quarter of the country’s 99 million population. It is the least energized region and has been plagued for decades with long-standing, low-intensity conflict between various warring religious factions. Mindanao also has some of the worst performing electric cooperatives in the country, which have racked up billions of pesos of debt.
|“After I took over the position at the NPC, I discovered that 70 per cent of the unpaid bills were coming from…the Autonomous Region in Muslim Mindanao (ARMM),” says Maria Gladys Cruz-Santa Rita, president of NPC. Disconnection of non-paying accounts is taking place, but Rita argues that in addition to a change in mindset in these communities, “the solution is to find investors in these regions that are interested not only in profit, but helping to develop these provinces.”|
Maria Gladys Cruz-Santa Rita
President & CEO, NPC
|Development has also been Congressman Emmanuel D. Pacquiao’s cornerstone agenda, initially prompting him to join politics. Better known as a boxing superstar, renewable energy investment in Mindanao is today one of the congressman’s main priorities, and when asked what Mindanao needs for development, his first answer is “investors.”|
Emmanuel D. Pacquiao
Congressman & Representative Lone District, Sarangani Province
According to the DOE’s 2013 Supply-Demand Outlook, of the three grids, Mindanao has the largest growth rate projection. At 4.57 per cent AAGR, projected peak demand is seen to increase to 2068 MW in 2020 and then to 3250 MW in 2030. Mindanao requires about 2000 MW of additional generation capacity by 2030. It is also the only grid not connected by submarine cables to the two others, presenting further opportunities when the connection is established.
The Alcantara Group has focused on Mindanao since the 1950s. Alsons Consolidated Resources Inc (ACR), the conglomerate’s power generation business, is the largest independent power producer in Mindanao, with approximately 255 MW of diesel capacity. ACR’s prospective investments amount to around $900 million and include coal-fired plants of up to 210 MW in Sarangani and 105 MW in Zamboanga.
|Tirso Santillan, ACR’s executive vice-president, believes a major hurdle to larger-scale development is the small size of the country’s power networks, which creates grid restrictions limiting the size of any one generating unit to 20 per cent of the grid’s total capacity. “In Mindanao in particular, the grid is small and so far the largest generating unit that NGCP has permitted to be connected to the grid is 150 MW,” he adds.|
Tirso G. Santillan
Executive Vice-President, Alsons Consolidated Resources
“One useful means to fund grid improvements would be through transmission charges,” recommends Santillan, “currently, regardless of the distance that electricity is carried, from generator to consumer, the consumer pays a set charge.”
He also adds that “losses of power through the transmission and distribution networks in Mindanao can be as high as 18 per cent; South Korea sees losses nearer to 6 per cent.”
In an effort to evade these issues, ACR has sought to locate generating plants close to large consumers and in doing so it has created what its calls an embedded plant, hence enabling it to avoid transmission costs.
“When our projects are realized, ACR will be growing phenomenally fast, perhaps doubling current revenues.” As EPIRA puts a limit on the proportion of power supplied to the grid (one company can only contribute about one third), “ACR is looking to fill nearly all this capacity and expects to supply around 600 MW of power to Mindanao shortly,” Santillan concludes.
|Alsons Power’s 210 MW Sarangani Energy Corporation coal-fired plant, currently being built in Sarangani Province, will produce a steady stream of reliable baseload power for key areas of Mindanao|
Renewables’ seat at the table
|“The Philippines is already the biggest consumer of renewable energy (RE) in Southeast Asia,” says Mario Marasigan, director of the DOE’s Renewable Energy Management Bureau. However, he admits that all of the 300 projects within the Renewable Energy Bureau’s schedule remain in pre-development.|
Mario C. Marasigan Director,
DOE’s Renewable Energy Management Bureau
“The Philippines is looking for a lead entity to pioneer the rush to renewables…we are confident that private players will emerge without prompting,” Marasigan continues. “Government support is not the complete answer to the problems facing renewable energy here: What is required is for private companies to take up the opportunities that exist,” he adds.
However, the government might be acting more as a hindrance than anything else. “Where there is a law, we will implement it, but there are many policies and procedures that are not yet being implemented or worse that are conflicting with each other,” says Jose Silvestre Natividad, the president of Sunwest Water and Electric Co. Inc. (Suweco), a local, mini-hydro company with 59 projects in different stages of development. “The government needs to stay focused on prioritizing the development for renewable energy,” he adds.
In February 2013, the DOE announced one of the most crushing rules for entrepreneurs in the renewable space: ‘first come, first served.’ The FIT allocation will be given to the developers who first commence commercial operation. To compound matters further, the DOE approved installation caps for run-of-the-river hydro, biomass, wind, solar photovoltaics and for ocean technology in 2011: those that finish completion after the target capacity is reached are simply out of luck.
The clauses were so poorly received that even Pete Maniego, the director of the National Renewable Energy Board has made it his personal mandate to repeal them.
Facing such a curveball, most RE developers, especially those with small pockets, have been forced to seek additional capital investment, many with the country’s largest bank – Banco De Oro (BDO).
|While BDO Capital, its wholly-owned investment bank and the financer of over 90 per cent of the country’s energy projects, is considered most attuned to RE developers’ needs, coal is still its “bread and butter,” says Eduardo Francisco, president of BDO Capital. “Renewable energy is sexy but frankly speaking, the majority of our energy exposure book will still be going to coal,” he admits.|
Eduardo V. Francisco
President, BDO Capital
“The key issue is not really us: rather, the issue has really been because of the change in the DOE rules about when FITs are awarded. It is the classic case of what comes first, the chicken or the egg. They want us to finance the project and then they will decide, only after, if they are giving the FIT,” he says. “It is difficult to give companies financing if we’re not sure that they will be awarded a FIT,” Francisco concludes.
However, RE developers such as E Power Technologies and Hydrocore Corporation (both founded and owned by Edwin Gardiola since 2007) have taken advantage of the FIT. Focused on energizing communities naturally through mini-hydro, their total portfolio of projects in various stages of development amount to 20.5 MW. The Ibulao Hydro (run-of-the river) power project is the first to be commercialized and will be connected to the grid in Q3 of 2015.
|The Philippines’ installed capacity and total generation by fuel source
Credit: Power Energy Plan 2030, DOE
Ring of fire
Although located on the ‘Ring of Fire,’ the Philippines does not have the world’s largest geothermal reserves, but it has become the second largest producer of geothermal energy, after only the US.
According to the International Geothermal Association, the Philippines boasts 1904 MW installed capacity as of 2010, accounting for approximately 17 per cent of its power generation mix. Recent studies indicate that the country has 2047 MW of proven capacity and 4790 MW of potential capacity.
Despite the hype, however, the past two decades have been more cloudy than steamy. Apart from EDC’s 1149 MW installed capacity (accounting for 60 per cent of the country’s total geothermal capacity) and Chevron, the initial pioneers that are still developing and producing geothermal power in southern Luzon (637 MW), little else has emerged. Since the Renewable Energy Act of 2008, only the 20 MW Maibarara geothermal plant has come on line.
Antonie de Wilde, CEO of Emerging Power, the only company to recently win a contract for developing greenfield geothermal reserves, expresses optimism for harnessing geothermal to help mitigate the country’s problem of escalating energy prices.
He postulates that EDC’s decline (25 per cent plant load operation in October 2013) due to “competing interests in providing electricity from fossil fuels that are comparatively much more lucrative in the Philippines” should lead to market space for new entrants.
“But the simple fact remains that investors will only come once EPIRA is changed and the attitude of the government shifts from protecting the generators to protecting the consumers,” he adds.
In essence, de Wilde believes the stability or reliability investors seek can be supplied by geothermal power, but the lack of long-term debt financing, EPIRA not facilitating enough competition and consumers having to shoulder these risk themselves are grave deterrents.
De Wilde recently approached Meralco, the country’s largest electricity distributor, with a proposal to set up a price stabilization fund. “Geothermal may cost more than coal today per kilowatt-hour, but in four to five years the fossil fuel price will be above the geothermal price, so the idea would be to establish a mechanism that would help finance geothermal development, and other renewables, in the meantime,” he explains.
Despite the lag in geothermal development, the DOE’s targets remain high: adding 930 MW in the next six years and 155 MW from 2020 to 2030; effectively a 75 per cent capacity increase by 2030.
Spearheading Biomass: PÖyry Energy
President, Pöyry Energy Philippines
As one of the leading engineering and consulting companies in the energy sector worldwide, Pöyry entered the Philippines back in 1992 under Swiss owners, and in 1997 became a Finnish company.
Nicky Gemperle, president of Pöyry Energy Philippines speaks about the relationship with Bronzeoak, and Pöyry’s evolution in the Philippine market.
Where does the San Carlos BioEnergy project stand today?
The San Carlos BioEnergy project served as a catalyst for new renewable energy contracts in the Philippines. We were the first company to build a bioethanol plant in the Philippines,with the Zabaleta family of Bronzeoak. It was our platform and communication base.
From that project, everybody came to us, which is both good and bad. The difficulty with the EPC projects is that they take a long time to bring to fruition. We took the role of contractor.
In the years that followed, I had six biomass projects on my desk, at least: rice, coconut husk, sugar ‘bagas,’ and so on. But most of them weren’t going anywhere. Biomass projects have been really hard to finance and this is why, as I mentioned before, I come back to my respect for the Zabaletas, since they were able to consistently find solutions.
Where would you like to see Pöyry Energy Philippines in five years?
Most of the work we are doing now in the Philippines is owner’s engineer and lender’s engineer, working for the banks on many coal-fired power plants. However, we are developing another project with Bronzeoak and at the same time, we are working on three wind projects and two solar projects. We do also work for a Singaporean company that is building a bioethanol plant in Cavite.
In the next few years, I would like to see Pöyry Philippines more as a contractor than as a consultant. Today our business is 20 per cent contractor versus 80 per cent consultant. To turn this over is my dream and my objective because it would quintuple our revenues.
Energy from the Deep
Edgar O. Chua
Chairman, Shell Companies, Philippines
The Philippines is certainly not recognized for its oil and gas reserves, but given that it critically needs to reduce its dependency on imported fossil fuels (approximately 60 per cent is imported), the government has prioritized exploration and production. In 2012, the DOE tendered 15 areas under the petroleum sector of the Fourth Philippine Energy Contracting Round (PECR4).
Today, aside from a few small oil fields still producing, Cadlao is the only production imminent field in the Philippines, with its first oil expected by the end of this year.
Abandoned due to economic issues in 1991, “the Cadlao field is expected to hold 3.1 million barrels in P1 reserves, and to produce first oil flows of between 10,000 and 15,000 barrels a day,” says Francis Abad, CEO and owner of VenturOil. In the joint-venture partnership, VenturOil is the minority partner with a 20 per cent stake in Cadlao, while Cadlao Development Corp serves as the operator.
However, in terms of energy self-sufficiency, the Malampaya natural gas development project has been by far the largest mascot, entirely transforming the country’s energy landscape when it began operating in 2001.
“Natural gas from Malampaya is currently used to provide approximately 30 per cent of the country’s power needs,” says Edgar O. Chua, chairman of Shell companies in the Philippines. “What once was a dream of energy independence has been turning into reality,” he adds.
Celebrating 100 years in the Philippines, Shell is not only the biggest multinational, but has been part of arguably the most successful public-private partnership to date, and also represents the largest foreign business investment in Philippine history – $2 billion.
Malampaya project operator Shell Philippines Exploration BV is joined by joint venturs partners Chevron Malampaya LLC (45 per cent) and the PNOC Exploration Corporation, the upstream oil and gas subsidiary of the state-owned Philippine National Oil Company, which has a 10 per cent stake in the gas field.
With untapped hydrocarbon deposits estimated at an impressive $26.3 trillion, and Malampaya reserves set to largely deplete by 2024, exploration and production companies are scurrying to hit the jackpot by finding the next, and perhaps even bigger, Malampaya.
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