(This is a slightly shortened version of a speech delivered by John Eric T. Francia, President and Chief Executive Officer of AC Energy Holdings Inc. Mr. Francia was a speaker in “Fueling Future Growth,” the fourth session of the BusinessWorld Economic Forum.)
Let me just introduce these three topics. First is supply and demand, I’ll give you both the good and the bad or the good and the ugly. The good news is there is actually adequate supply at least until the early 2020s nationwide, I’ll go deep into that later. That being said, there are some major risks that we see as we enter the 2020s, particularly, two major risks that I’ll talk about in a bit.
The second theme that I wanted to focus on is about the reforms that have been happening in our sector, particularly, the Power Reform Act – EPIRA [Electric Power Industry Reform Act] and the Renewable Energy Act. EPIRA is working, there is a lot of doubt or some doubt about the effectiveness of EPIRA, but in our experience, and as I show the group later on, it is in fact working. The “but” there is it’s not without challenges. There are still significant challenges, and I’ll give you a flavor of what these key challenges are.
Last but not least, everyone, the hot topic these days is the advent of renewable energy. And when we talk about renewables, naturally, there is also a talk about storage because they do come hand in hand. And that is about to disrupt the sector, but it will take time, that’s the “but”. It will take time to grow and to scale renewables and to deem the conventional technology obsolete if at all. Those are the three things I’d like to have a short discussion on.
Power sector reforms worked
First, on the supply and demand.
Six years ago, actually, the reason why Ayala entered also the power sector, which is six years old, is because we saw the glaring supply-demand gap. We were all seeing, everyone in the sector was seeing potential under supply situation, particularly, hitting us in the mid 2010s, 2016, 2017, 2018. We should be in a shortage situation these days, that was the view six years ago. But what happened? It was a very bleak outlook. But what actually happened was because there was the effectivity of the reforms, I talked about EPIRA and renewable energy law.
Because there was so much liquidity in the system because of how well our economy was doing, in strong flows from remittances and BPO, the banks are so liquid it was able to lend. And because cost of capital dropped from double digits to single digit, and because the Philippine corporates had very strong balance sheets and have the risk appetite, things change so fast. In a matter of three, four years, people were able to build power plants. And, guess what, now as you can see in the picture, we have a more than adequate supply.
If you take a snapshot of May, which is typically the peak period, which is this month — 2017.
In aggregate, although this is over simplification because we operate in different grids, but if you take the whole nation in total, we have roughly a dependable capacity of 17 gigawatts or about 17,000 megawatts, roughly. But the peak demand, between Luzon, Visayas, Mindanao is just around 13 gigawatts. We do have ample excess capacity, a lot of that excess capacity is in Mindanao and the Visayas. Three years ago or even as early as one year ago, Mindanao was severe shortage, but guess what, all the plants, a lot of plants were built, started commercial operations, and more plants, including ours are yet to be completed in terms of construction, it’s coming soon. It’s giving concern to Mr. Moraza because it’s gonna add to the oversupply in Mindanao, but again, this bodes well to the consumers, right? Not necessarily for us, but we’re patient, right? Demand will catch up. So, we’re confident, we take a long view here.
Luzon is slightly a different story. On paper, we have 10 gigawatts of peak demand. We hit that a few weeks ago, in Luzon, and we have a supply of roughly 12 gigawatts. So, on paper we have 20% reserve. So, what’s the problem? Well, the problem is while on paper, there’s enough reserve, we have a lot of aging plants.
In February, after the Malampaya shutdown, when Malampaya was backed up, roughly 40% of the coal plants were down, ironically. Buti na lang, they weren’t down when Malampaya was down. It was really really bad. Imagine, 40% of the coal plants in Luzon were on unscheduled, some of them in scheduled maintenance but a lot of them were unscheduled because these are aging plants, you don’t know when they will crank out like an old car. So, even with the 20%, and it’s a good news, the good thing is this didn’t happen in peak month, like this month. If that happens, again we’ll have trouble.
Again, while on paper we’re okay, the concern of DOE is are we as resilient or reliable. During the earthquake, couple of thousand megawatts were down during that day. So, things like these, we can never sleep very well even if we have oversupply on paper.
Now, the good news is there’s more than three gigawatts of plants being constructed and will be completed on or before 2020. These are real projects so even if you grow five, six percent per year, that’s 13 gigawatts peak demand growing to 16, our 17 gigiawatts of supply will also gonna grow into 20, nationwide. So, we will maintain that balance.
To build or not to build another power plant?
Now, the big however, is what happens after that. We will be okay until 2020, 2021. We have this, what I would call equilibrium. Now, mind you, it takes around three to four years to build a power plant. So, that equation, this so called adequate supply only takes us until 2020, 2021. Beyond that, you need to build extra power plants, maybe 700 megawatts per year assuming 5% growth nationwide. And you need to start building the first 700 megawatts set of plants in the next 12 months because it does take time.
Now, you all read in the news that MERALCO, particularly, has three and a half gigawatts worth of contracts that represent more than four gigawatts of coal-fired power plants across the country, mostly in Luzon. It’s great, we need all that capacity, especially in the early to mid 2020s but those contracts are in limbo. Now, it’s waiting ERC decisions, some of them are awaiting environmental permits. And, it’s giving uncertainty to the rest of the industry because while we have expansion potential for our own power plants, it’s hard to contract if a lot of the other power plants are already contracted with the lights/likes of MERALCO. And, the big decision facing us is, do we build a merchant power plant and run the risk of building into an oversupply situation in the early 2020s?
That’s a very tough call for our board because again, we don’t want to be in an over extreme supply situation.
Big issue number two, the other big number here – three gigawatts.
What does that represent?
Over three gigawatts of our capacity here on Luzon depends on gas plants, and these gas plants depend on Malampaya. Malampaya is supposed to run out in mid 2020s if not early 2020s, we really don’t know. I think the PTAs, the contracts are supposed to run until 2024 but there’s no guarantee that the gas will be there up to 2024. There’s a risk that earlier than 2024, it could decline.
Again, this is a big uncertainty. If these two big uncertainties, the perfect storm, you know, both unravel – four gigawatts get delayed and three gigawatts suddenly run out of gas supply. Pa’no na tayo? So, while we are okay in the next five years, there’s a big question on years six to 10. So, that’s the not so good news.
Coal, gas will not be obsolete anytime soon
Now, the second theme that I want to discuss is EPIRA, and the reforms. It is working, it’s great news for the consumers. There’s now open competition, only focus on one megawatt customers. So, if you’re a one-megawatt user, you can buy at the open market, and you get very good rates, and at some point, that will get to the household level. But again, there’s a lot of legal battles, for example some of the open access (Retail Competition Open Access) is under temporary restraining order. One example is if you have a 750-kilowatt consumer, you cannot transfer even if the retail supplier is cheaper because there’s a temporary restraining order. So, these are some of the challenges that beset the open access while the fare is good and big customers are enjoying good rates because of some legal battles, this is not being maximized up to the broader level.
Last theme is renewables. Again, this is coming soon. To give you an idea, a solar plant in 2010 costs $4 million dollars per megawatts to build. Today, it’s less than $ 1 million dollars per megawatt, and keeps on declining. Storage facility, which is needed to make renewables more reliable so we can use it when you need it as supposed to… it gets produce randomly during the day. Once there is an economic threshold, we believe that it’s three, five years away from now, where this solar storage are wind and storage combination, will be more competitive than coal and gas, as we know coal and gas today, unless coal and gas evolved as well.
Now, while it sounds good news and the dawning of the renewables revolution is upon us, don’t hold your breath, it’s gonna take a long time.
There are challenges clearly – legal, regulatory challenges, our leader. Government leaders must exercise political will to erase these uncertainties.