Yearender: Energy sector attracted major investments in renewable energy projects

MANILA, Philippines - The influx of major investments in the renewable energy development was one of the high points in the local energy sector in 2009.

Coined in seven-letter acronym, “BIG SHOW”, which stands for Biofuels/ Biomass; Geothermal; Solar; Hydro; Ocean and Wind, the Department of Energy (DOE) took renewable energy (RE) development to greater heights by signing P90 billion worth of RE-related contracts with at least 18 groups, composed of local and foreign investors.

These RE contracts with foreign and local investors pave the way for what had been envisioned 18 years ago before the Renewable Energy Act of 2008 or Republic Act 9513 was signed into law which aims to make the Philippines one of the biggest producers of RE resources in the world.

Based on DOE’s latest projections, RE is foreseen to provide up to 40 percent of the country’s primary energy requirements over the 10-year period beginning in 2003.

RE-based capacity, as projected by the DOE, is expected to reach 9,147 MW by 2013, a dramatic 100-percent increase from its current level of 4,449 MW. 

Since RA 9513 took effect in January this year, there was already a total of 1,636 megawatt (MW) additional power capacity from new RE projects envisioned to be installed within the next five years. Some 379 MW will come from the seven contracts issued to six RE developers in September 2009.

In 2010, the Department of Energy (DOE) is optimistic that it could sign another 60 to 80 more RE contracts. 

Included in the 87 contracts signed by the DOE on Oct. 23, 2009 were Deep Ocean Power Philippines Inc. (DOPPI); Trans-Asia Renewable Energy Corp. (TAREC); Constellation Energy Corp (CEC); Century Peak Energy Corp.; PNOC-Renewables Corp.; Energy Development Corp. (EDC); First Gen Bukidnon Power Corp.; Luzon Hydro Corp.; Lucky PPH International, Inc.; First Gen Mindanao Hydro Power Corp.; AV Garcia Power Systems Corp.; Benguet Electric Cooperative, Inc.; Alternergy Philippine Holdings Corp. (APHC); DOST-Industrial Technology Development Institute; and HEDCOR, Inc. 

Jose Leviste, CEC president, lauds the DOE for taking a bigger step towards the promotion of the use of renewable sources of energy in the country.

Leviste points out that adherence to RE will be consistent to a global initiative on addressing climate change.

“The steps taken by DOE are most welcome. We need to do this green energy. It is the way of the future. Our economy should continuously grow but with less carbon emissions,” the CEC chief stresses.

On the biofuels sector, the San Carlos Bioenergy, Inc. was the first to be registered under RA 9513, while Chemrez Technologies, Inc., Golden Asian Oil International Inc. and Leyte Agri Corp., were issued full accreditation under the Joint Administrative Order (JAO) 2008-1 of RA 9367 or the Biofuels Act of 2006.

Under the said JAO, Cavite Biofuels was also granted a certificate of registration with notice to proceed with its bioethanol project in Magallanes, Cavite which will bring the country’s total annual bioethanol capacity to 73.3 million liters once its ethanol production facility becomes operational.

RE investors, however, are still awaiting for the implementation of various policies and programs of the government such as the feed-in tariff which will serve as a sweetener for providing more capital into this developing sector in the power industry.

The feed-in tariff system is provided under RA 9513 to accelerate the development of emerging RE resources. This tariff mechanism, which should be in place one year after the effectively of the law, will be determined by the Energy Regulatory Commission in consultation with the National Renewable Energy Board (NREB).

Under this system, all emerging RE resources such as wind, solar, ocean, run-of-river hydropower and biomass power will be given priority connections to the grid. It will also be prioritized in the purchase and transmission of and payment for such electricity by the grid system operators.

A fixed tariff rate, which will pass through the rigid scrutiny of the power sector watchdog Energy Regulatory Commission (ERC), will be implemented for 12 years, serving as an incentive to RE developers.

Privatization efforts

Not only in the development of RE that the government did a big show. 

State-run Power Sector Assets and Liabilities Management Corp. (PSALM) had successfully sold about 80 percent of the National Power Corp. (Napocor) power generating assets in Luzon and the Visayas. 

PSALM, an entity created under RA 9136 or the Electric Power Industry Reform Act (EPIRA) of 2001, is mandated to handle the privatization of Napocor assets and at the same time manage the state-owned power firm’s finances.

As of September 2009, PSALM sold 18 assets of Napocor with total privatization proceed of some $3 billion.

This year, PSALM also auctioned off the contracted capacities of Napocor to independent power producer administrators (IPPPAs). As of Dec. 16, it was able to bid out four Napocor contracts with cumulative amount of $2.356 billion.

The successful bidding of the IPPA contracts is considered a major achievement for the country’s power sector restructuring efforts.

Our privatization efforts are going very well,” says Energy Secretary Angelo Reyes, who is also PSALM vice chairman. 

Reyes’ enthusiasm on the success of the privatization initiatives of PSALM is shared by the industry stakeholders.

Privatization of IPP contracts of Napocor was not that easy since the Philippines would be the first one to do this. We had trouble before identifying the right model for it. But eventually, everything went well and it seems that we are on the right track,” observes Ernesto Pantangco, president of the Philippine Independent Power Producers Association (PIPPA).

While heralding positive views on government’s privatization efforts, the PIPPA executive sees a number of challenges that need to be addressed soon.

Pantangco had earlier criticized the government for the delay in the adoption of IMO which was supposed to happen a year after the commercial operations of the wholesale electricity spot market (WESM) or in 2007. WESM is like a stock market but sells electricity instead of shares of a company.

“It would be best for the industry if the electricity market is being managed and operated by the private sector,” Pantangco pointed out.

But Reyes said the DOE had not been remiss in pushing for a market operated by the independent operators.

“We would still like to continue and to push and urge the DOE to proceed with the formation of the IMO for PEMC. That has been delayed. There has to be strong political will to push through with the privatization of the IMO in order to give more confidence not only to the existing investors but also foreign investors to take a look again at investing in the Philippine power industry,” Reyes said.

Aside from the IMO, Pantangco also considers the bringing about of so-called Power Supply Option Program (PSOP) which replaces the proposed interim open access (IOA) as one of the critical hurdles of energy authorities and power regulators in the coming year.

But ERC executive director Francis Saturnino Juan said the implementing rules on PSOP are already in place and should take effect soon.

The PSOP, which is a voluntary program, will replace the proposed IOA filed by various industry stakeholders who aim to usher in IOA while waiting for the actual open access to happen.

The proposed rules approved last Dec. 7 on PSOP will provide the regulatory framework for the effective implementation of the program that was approved by the ERC in its Nov. 10, 2008 decision in lieu of the IOA petitioned by the Independent Power Producers (IPPs) and distribution utilities (DUs) in the Luzon and Visayas grids.

The much-awaited open access, which will allow the bulk power users to choose where to source their electricity, is expected to be realized in the latter part of 2010 when all the requirements under the EPIRA have been accomplished.

Under the power law, open access will only be carried out as soon as 80 percent of Napocor assets and contracts have been privatized. So far, PSALM has only sold 40 percent of Napocor’s IPP contracts. But with the bidding of 1,500 MW Ilijan power plant contracted capacities in the first quarter of next year, open access could be ushered in by the last quarter of 2010.

One more challenge, Pantangco said, is for the government to ensure the reliability of power supply especially during the 2010 elections.

“There may be a degree of uncertainties again on the stability of the power industry as election period is coming to a near,” the PIPPA official opines.

There were apprehensions before that with an annual demand growth of 4.4 percent, the Philippines would need 4,100 MW additional capacity for the period 2008 to 2017.

Of the 4,100 MW, about 3,000 MW would be required in Luzon for the 2008-2017 period; 500 MW for Visayas and 600 MW for Mindanao.

Pantangco fears that if there will not be enough political will, these power needs might not be met.

Transmission constraints

Another significant development in the power sector in 2009 was the taking over of the management and operation of the country’s transmission highway by a Chinese-led consortium.

On Jan. 15, 2009, the National Transmission Corp. (TransCo) officially turned over the management and operation of its nationwide power transmission system to National Grid Corp. of the Philippines (NGCP). The concession period is for 25 years and renewable for another 25 years. 

TransCo is a government-owned and controlled corporation also created by the EPIRA. It assumed the electrical transmission function of the Napocor.

Since its independent operation in March 2003, TransCo opened and managed the power transmission system that links power plants to the electric distribution utilities nationwide.  The same law mandated the privatization of TransCo through a management concession agreement. Ownership of all transmission assets, however, remains with TransCo.

Following the successful public bidding conducted by PSALM on Dec. 12, 2007, the management concession was awarded to the NGCP which eventually secured a congressional franchise through Republic Act 9511.

The NGCP consortium is composed of the State Grid of China Corp. with 40-percent share as the foreign partner, Monte Oro Grid Resources Corp. with 30 percent equity and Calaca High Power Corp. with 30-percent shareholdings as the local partners.

The concession contract amount to $3.95 billion, 25 percent of which, equivalent to $987.5 million was paid on commencement date and the balance semi-annual installments for 20 years.

NGCP is planning to pour in a great amount of investment every year to improve the services of the transmission company.

When NGCP assumes the operations of TransCo early this year, it had been confronted with a number of transmission-related problems such as the bogging down of San Jose substation and the burning of the Dolores substation.

Upstream oil sector

Another big show is evident in the upstream oil sector when the largest exploration firm decided to develop and eventually found hydrocarbons while drilling its first deepwater well in the Philippine South Sulu Sea.

Reyes was particularly proud that they were able to convince Exxon Mobil Corp. to pour in significant amount of investment and put the Philippines back in the list of international sites for oil explorers and developers.

Ian Fischer, managing director of ExxonMobil Exploration Philippines B.V., said that since they have seen an encouraging result of their initial drilling, they may be putting in additional capital to drill another well in their Service Contract (SC) 56.

Logs taken at the Dabakan-1 well indicate that we encountered reservoir sands and hydrocarbons. The well will be drilled further to a total depth of approximately 5,000 meters (16,400 feet), setting the record for the deepest well drilled in the Philippines,” Fischer says, noting that total investment of the company so far may run to $200 million. The Dabakan-1 well is located about 65 kilometers/40miles from Mapun Island, a municipality under the Province of Tawi-Tawi.

ExxonMobil Exploration is the operator of SC-56 with a 50 percent interest. Mitra Energy (Philippines SC-56) Ltd. and BHP Billiton Petroleum (International Exploration) Pty Ltd each have a 25-percent interest. 

Before Dabakan 1, the country has found significant oil and gas reserves in Malampaya and Galoc fields in both offshore Palawan.

During the year, there have been major production of oil in some drilling areas. The Galoc field, being explored by Galoc Production Corp. (GPC) in offshore Palawan, is believed to be the next biggest find after the $4.5-billion Malampaya deep water gas to power project undertaken by the the group of Shell, Chevron and PNOC-Exploration Corp.

In the first semester of 2009, the DOE awarded SC 70 covering the Central Luzon basin to Polyard Petroleum International Co. Ltd. and SC 71 in Mindoro-Cuyo basin to Pitkin Petroleum Ltd.

On top of oil exploration contracts, the DOE has also awarded numerous SC in coal and geothermal under its Philippine Energy Contracting Round (PECR) throughout the year.

Downstream oil industry highlights

Oil prices have been relatively stable coming from a peak of $131 per barrel in July 2008 to as long as $40 this year.

Reyes believes that although the increases have continued, these have been to a more management level, relatively limiting the economy’s vulnerability.

Independent Philippine Petroleum Companies Association (IPPCA) chairman Fernando Martinez echoes this sentiment.

“We have been in a more stable situation, better than last year when volatility was far worst when oil prices hit $70 to $140 per barrel,” he said. “This year relatively better.”

Barring any untoward incidents, Martinez is hopeful that the industry players will be able to sustain their respectively expansion plans.

The energy secretary acknowledges the resiliency of the local oil companies amid some international and local-related challenges.

It would be recalled that this year saw one critical test to petroleum players in the Philippines when they have been brought to court for alleged overpricing.

Oil companies were also forced to comply to an Executive Order (EO) 839 which put a cap on the prices of petroleum products in Luzon.

The EO, which pegged the oil prices to Oct. 15 level and was issued in response to the clamor to maintain prices while Luzon-based consumers were still recuperating from the devastation brought about by typhoons Ondoy and Peping, was lifted several days later and caused huge losses to oil companies.

But a few weeks after the lifting of the EO, the oil firms managed to catch up with the prevailing oil prices abroad.

All of the petroleum players were also directed to carry out various corporate social responsibility projects to compensate for the removal of EO 839.

Indeed, the energy sector is expected to continue to do some more big shows not only next year but in many years to come.