Is the Philippines going through a nightmare on its road to long-term power supply?

Is the Philippines going through a nightmare on its road to long-term power
supply?

Developers urge the regulators to get their act together.

When EPIRA was passed in 2001, the Philippines had a different market. Does
the current market environment provide enough incentive to ensure long-term
supply? This is among the sectoral topics discussed in the Manila leg of the
2017 Asian Power Utility Forum held in Makati in February 14, which was
attended by over 50 key representatives from the Philippines' power market.

According to Cynthia Hernandez, principal advisor at KPMG, the Philippines
has three challenges to overcome in making sure that there is long-term
power supply.

Firstly, new generation capacity is installed only when there is a looming
shortage in the power sector. It becomes a "just-in-time" solution, and this
is not healthy for generators as they do not want to be just dispatched 40%
of the time.

Secondly, the pattern of capacity additions to the grids show that
investments are responsive to incentives, yet aside from FIT, there are
currently no incentives to invest in long-term power supply. "Prior to 1990,
there were 19 power plants commissioned with a total capacity of 2,826MW.
Within 1990 to 2003, there were 22 additional power plants commissioned with
a total capacity of 7,681MW. Within 2004 to 2016, there were 45 additional
power plants commissioned but only with a total capacity of 2,602MW,"
Hernandez said. What does this pattern show us? A lot of the plants
commissioned after 2003 were in renewables because it was in response to
incentives given by the government under the renewable energy act. "Some of
them were not in Luzon, so we see a build up of capacity in Visayas where
the smaller islands are. This is the basis for having smaller average
capacities per plant after 2003.," she added.

Thirdly, the question is who has the capacity to put up the 700MW per year
that the country needs? This leads us to the last big hurdle: current major
generation companies are now nearing their 30.0% generation market share
limitation limit for the Luzon grid.

The largest investors who have the financial capacity and the experience to
put additional supply in the grid are actually pushing their generation
limit. For instance, even if SMC Global Power Corporation wants to push
their capacity past 1000MW, they can't do it.

Basically, the major players in the Philippine power sector cannot invest as
much because they're nearing their power generation limit. Given this
situation, it is then an opportunity for the smaller players to step up and
provide more capacity to the grid.

The demand for energy in the Philippines is expected to surpass the
country's dependable and committed capacity in 2022. The total demand and
required reserve for power is expected to amount to a total of 25.6 GW by
2030.

"By 2030, we expect that the national grid will need an additional capacity
of 4 GW to meet the country's demand and required power reserve," Hernandez
said.

If we look at the committed capacities, the Philippines has a weak chance of
having long-term power supply. The major power plants' plans and the
policies that have to be in place before these projects get implemented show
that a long-term supply cannot be realised yet. And this is a cause for
concern, Hernandez said, because 2021-22 is not that far off.

Is renewable energy the answer?

While there's a lot of talk about renewables in the sector, in terms of
actual number of kilowatt hours added to the grid, the share of renewable
energy has actually declined from 28.7% in 2011 to 25.4% in 2015. On the
other hand, coal has jumped from 36.6% in 2011 to 44.5% in 2015. Oil is no
exception too, as it increased from 4.9% to 7.1% in the 4-year period.

"As long as the gap between supply and demand narrows, there will be a
higher dispatch for oil-based plants for peaking power," Hernandez
explained.

Additionally, renewables contribute to grid instability due to its
intermittent nature, causing outages eventually, and it has low utilisation
rates. If you add a 100MW plant to the grid but over one year, you're
actually generating just 30MW.

Solar's spot in the country

The Philippines is a "wonderful place for solar" as the country boasts of
5kWh per square meter per space, according to Dave Maslin, country manager,
Owl Energy. In May 2013, the country released guidelines for feed-in tariff
selection and eligibility. "Rules were in place and for solar, 50MW were
allocated," he said. However, the FIT process had its flaws and foibles. The
process entailed that the first step must be to secure a service contract,
then have DOE approve the project for confirmation of its commerciality. At
this stage there is no obligation for the project to proceed, but it has
been allowed to start building.

By the time that projects get to the third step which is construction,
Maslin said they have got themselves into a "big black hole." "No one knows
what's going in this stage, because during this period you don't have to
tell anyone what is happening," he said. If you are listed, you have to tell
your shareholders. But if you're private, you can start building very
quietly, and it's not until you get to 80% complete that you invite DOE over
for inspection. "And you have to consult the official rulebook what 80%
actually means," Maslin said. After this, projects then get instructed by
the Energy Regulatory Commission to pay FIT.

7 projects got the certificate of eligibility under FIT-1, Maslin said, and
the total capacity was 108.9MW. Seeing the positive turnout, the government
then increased the target to 500MW, giving birth to FIT-2 and by the time
this was announced, there was already 108.9MW on the table. "Investors got
really excited, but there are a few sticky points in this. There was no
clarification on what happens in excess of this new target," Maslin said.
"Additionally, there was no clarity on AC or DC." AC is what the grid buys,
and DC is what you construct in term of panels. When you build 60MW of DC
power, you generate 50MW of AC. In this case, no one knew if it's AC or DC.
"As it was, it was interpreted by the government as DC, and that really made
this target actually a lot lower," he said.

What happened along the way was projects kept coming in, and DOE's issuance
of service contracts went unabated. In March 2015, there were 1630MW of
service contracts issued to developers. By July 2015, there were 2206MW of
contracts. By December 2015, three months before projects had to be
operational, was 4016MW of service contracts. "There was no way that these
are going to be even remotely built under the FIT-2," Maslin explained.
"What this tells us is that people didn't believe that FIT-2 was going to be
the end of the story."

By June 2016, the awarded contracts in total has hit 525.98MW. "The
Philippines went from having no solar industry to speak of, but with a
little bit of hobbyists and enthusiasts and developers coming along, it has
resulted to this," he said. It was an undeniably successful story when you
look at the numbers, but the haste to ramp up solar has given birth to a few
issues. Solar suffered from stability issues and the transmission system
that was developed were never really designed to take on all these solar
plants. "Additionally, the DOE adopted a renewed focus on electricity prices
not going up consequently affecting solar players' security," Maslin said.

Another issue in focus is the interesting and complex situation that has
transpired in the Visayas area. In the Visayan grid, there is 581MW of
renewable energy, but the peak load is nothing close to that, according to
Maslin. This is a case of dispatch curtailment, he added. On top of that, of
the 525MW the DOE got for FIT, 390MW or $700m worth of investment did not
get the FIT.

Should there be new power plants?

Janssen dela Cruz, AVP for business development at Global Business Power
Corp, said that there's about over 3,000MW online, specifically in Luzon.
There's much more coming online in Mindanao and Visayas. "There will be an
overlap between the new plants and the plants that we have which are 20-25
years old. But the problem is, a lot of our very reliable 20-year old plants
will eventually go offline. If we are not prepared for that, there are more
plants that will be offline because they were built within that 5-year
period," he said in a panel discussion with KPMG's Hernandez and Owl
Energy's Maslin.

Right now, the Philippines will not be expecting an excessive ratio of
demand versus supply in the short to medium term, thanks to the new plants
that are being built and those that have just come online. But if the
country doesn't start building more now, considering that it takes about 3
years of plans, 3-5 years to build, and a total of 5-8 years' cycle, then
the long-term view will not be rosy. Security for developers in building
plants will also have to be in place as dela Cruz said that plants that are
being planned right now will be completed by the next administration.

On fuel mix, he added that given the regulatory environment right now that
is rooted on the competitive selection process (CSP), Philippines will be
predominantly coal. "For lack of better term, that means the cheapest guy in
the room wins. Everybody else has the same technology, and for as long as
CSP is there, coal will always have the technological and pricing
advantage," he added.

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Link to Original Article:
http://asian-power.com/people/in-focus/philippines-going-through-nightmare-i
ts-road-long-term-power-supply

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com