Recommendations (Power)

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Headline Recommendations

  1. Challenge: There is no substitute for long-term power purchase agreements (PPAs) between creditworthy parties to support financing of new power generation projects. Lenders cannot and will not accept merchant risk or PPAs involving parties that do not have financial wherewithal to fulfill their contractual obligations. Solution: The Department of Energy could formulate policies and plans to address this challenge, such as credit enhancements, guarantees, incentives, and more.
  2. Challenge: Investments in new cost-effective power generation projects require initiation of open access and retail competition. Solution: Fulfill conditions precedent to declaration of Retail Competition and Open Access within 2010. All but one condition precedent has been fulfilled, namely transferring management and control of 70% of IPP contracts with NPC to IPP Administrators.
  3. Challenge: Investments in new cost-effective power generation projects require a viable WESM. The Luzon WESM has functioned well since mid-2006, but initiation of the Visayas WESM has been deferred for more than one year.Solution: Initiate Visayas WESM without further delay and integrate it with Luzon WESM. Initiate Mindanao WESM no later than mid-2011.
  4. Formulate an integrated energy policy plan including all energy sources, plant locations, investment/financing, energy efficiency. Enhance creditworthiness of distribution utilities and cooperatives. Prepare for nuclear power in a decade. Revisit take-or-pay for baseload plants. Remove restrictions on foreign equityin power projects. Develop a large coal plant on a small island with domestic/foreign coal. Introduce LNG for cleaner power and transportation. Privatize Agus and Pulangi dams by 2011.

Recommendations (21)

A. Ensure that EPIRA targets for open access are achieved and declare open access on schedule before the end of 2010.87 The ERC should promulgate the necessary and appropriate Rules and Regulations in a timely manner. (Immediate action DOE, PSALM, and ERC)

B. PSALM should solicit and award bids from the private sector for the Agus and Pulangi hydro facilities during 2010 so that ownership can be transferred in June 2011 as currently authorized by EPIRA.88 (Immediate action DOE and PSALM)

C. Formulate an integrated energy policy and master plan giving clear direction for sources of energy, locations of power plants, capacity each source generates (accounting for future demand), transmission of energy supply, policies to attract large investors and lenders (into LNG, nuclear, coal, renewable energy, and others) and importation of energy. The master plan must take into account the threats and/or challenges of climate change, energy efficiency, and availability of new technology. The priority power sources (biomass, coal, gas, geothermal, hydro, LNG, nuclear, wind, and others) should be strategically located throughout the country taking into account maximum capacity of each source. (Immediate action DOE, NEDA, and private sector)

D. The National Renewable Energy Board should create a roadmap to complement the overall energy master plan of the DOE recommended above. (DOE with private sector)

E. The weak creditworthiness of most distribution utilities and electric cooperatives likely requires some form of credit enhancement to support project financing and power supply agreements of new generating projects with off-take agreements with such parties. Revisit policy disallowing “take-or-pay” or sovereign guarantees, in light of what makes economic sense. (Immediate action DOE and DOF)

F. Strongly encourage industrial, commercial and institutional load customers, distribution utilities, and electric cooperatives to establish their creditworthiness. (Immediate action DOE, DOF, and private sector)

G. Remove all foreign equity restrictions for power projects to create a level playing field and attract more foreign energy players to invest.89 (Medium-term action NEDA and DOE)

H. Ensure that contracts are strictly enforced. Rules and regulations must not change in the middle of project implementation or be reinterpreted retroactively. (Immediate action DOJ and DOE)

I. Partners such as ADB, IFC, and JBIC can help finance the longer tenor – the “tail risk” beyond 10-12 years – when international private banks are only comfortable with shorter tenor. (Immediate action ADB, IFC, JBIC, and private sector)

J. The RP must find ways to comply with the requirements of lending institutions in dealing with climate change issues. Create the Clean Technology Investment Plan and implement thoroughly. (Medium-term action DOE, ADB, and private sector)

K. The DOE needs to implement a policy with assistance from the private sector to assist cooperatives in the transition to a privatized electric power industry. Power generation companies should be interested in the creditworthiness of their clients. Strongly encourage electric cooperatives to establish their creditworthiness. (Immediate action DOE, NEDA, and private sector)

L. Develop a power plant on an isolated island such as Semirara with a supply of indigenous coal and deepwater access to international coal sources. Connect the island to a grid via submarine cables, for example to Mindoro and to Batangas. This will close the loop of Bicol, Samar, Leyte, Cebu, Negros, Panay, Boracay, Semirara, Mindoro, and Batangas. (Long-term action DOE, NGCP, and private sector)

M. Study the potential of LNG in the Philippines and create a comprehensive policy to attract investment in this sub-sector. LNG can be a greener alternative source of energy. Converting public transportation to LNG will generate large savings, have less negative effects on health, and reduce traffic congestion. (Medium-term action DOE and private sector)

N. Merchant plants cannot succeed without a mature spot market to establish the correct price. Investment will not occur in this market if the price is below the long-range marginal cost of a new plant or at or less than the variable cost of plant operations, including fuel. (Immediate action DOE and WESM)

O. Implement open access. EPIRA requires removal of cost subsidies to reflect the true cost of electricity. Over the short term, electricity prices are likely to increase. The only way to bring the price down is for new generators to enter the market with plants that are profitable at a much lower cost per kilowatt-hour, thereby creating an abundant supply of baseload, intermediate, and peaking capacity. This can happen only via open access.

P. The RP should include the development of nuclear power in the national power development plan. Preparations needed for this technology require at least 10 years, and infrastructure, power plant, and transmission require very large investments. The Philippines should come to a decision soon and then strategically prepare for the next 10 years. (Medium-term action DOE)

Q. Congress should pass a resolution supporting consideration of the development of nuclear energy, including small-scale nuclear power options currently under development, while leaving disposition of the Bataan Nuclear Power Plant for the Executive to decide. (Immediate action DOE and Congress)

R. Congress should pass an Energy Efficiency Act after full consultation with stakeholders. The RP should implement foreign donor and national projects to improve energy efficiency. Efforts of distribution utilities to reduce system losses due to theft must be strongly supported. Capital investment in the transmission and distribution systems to reduce systems losses should be incentivized. (Medium-term action DOE, Congress, and private sector)

S. Explore the possibility of WESM sales of freely-tradable forward power supply contracts in relatively small denominations (such as 5 or 10 MW) and applicable for specified timeframes (e.g. short, long, baseload, and peaking) for sale to load customers or investors. Investigate performance security options to protect parties to such forward contracts. (Medium-term action DOE, WESM, and private sector)

T. Interconnect the entire grid to enable producers to transport electricity to other parts of the country via the WESM. With a truly national grid, investors will be able to come in and take advantage of the growing demand for power supply. There must be an abundance of supply for the WESM to be effective in lowering costs of electricity. (Medium-term action DOE, WESM, and NGCP)

U. NGCP and the ERC should accelerate capital investments to resolve constraints limiting the flow of power from Luzon to the Visayas and from southern Luzon to the NCR and from northern Luzon to Metro Manila. NGCP should continuously evaluate the technical and commercial feasibility of interconnecting the Luzon and Visayas grids via submarine cable with the Mindanao grid and/or various isolated grids, such as Mindoro. (Medium-term action NGCP, ERC, and DOE)

Power and Water FGD Participants, Moderator and Secretariat Members
November 17, 2009 Joint Foreign Chambers of the Philippines FOCUS GROUP DISCUSSION ON POWER AND WATER

  1. PSALM achieved privatization of 83.3% of NPC generation assets and 34% of the IPP administrator contracts as of November 2009. The target is to declare open access before the end of 2010.[Top]
  2. The hydro generation facilities in Lanao del Norte and Bukidnon provinces were excluded from privatization for a decade when EPIRA was enacted in 2001. The El Niño experience during late 2009 and 2010 has clearly tested the capacity of these plants. They are excellent assets that will be better managed, maintained and expanded by the private sector, as evidence by hydro generating assets already privatized within the Luzon grid.[Top]
  3. Restrictions on foreign capital placed in the IRRs of the Renewable Energy Act will limit the pace of development of RE power, contrary to the apparent intent of the law, which contains no such provision. Interpretations that dams cannot be foreign-owned, but turbines within them can, should also be re-examined with a view to promoting needed investment.[Top]