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.