Summary:

 

  • Market context: The Electric Power Industry Reform Act (EPIRA) provides a sound legislative framework for the power industry.  In the past ten years, material amount of new coal, and some gas and renewable capacity have entered the market to meet the rapidly growing demand in the Philippines.   However, financing activities for new power projects have almost come to a halt since 2017, and this will lead to a tightening market situation after 2021.  Furthermore, the uncertainty on future gas production can create a lot of price volatility in the wholesale electricity spot market (WESM) and even power shortage if gas supply to the existing 3.2 GW CCGT capacity is curtailed.   

  • Impact of COVID-19 on the Power and Gas Sector:

    • Status of COVID-19 in the Philippines: No light at the end of the tunnel yet – new daily COVID-19 cases has remained 100-300 while fatality rate has declined.

    • Impact on GDP: Near-term GDP growth is negative/close to zero, compared to 5-6 percent expected growth before COVID-19.  Nonetheless, macroeconomic indicators is healthy in the Philippines, so the impact of COVID-19 is likely to be temporary.   Exchange rate of USD/Php has also been stable.

    • Impact on demand and spot price:

      • Power demand shock due to lock-down is around 20% in Luzon, which drives down the WESM prices to 1-2 Php/kWh range from the typical 3-5 Php/kWh before COVID-19. 

      • Both the daily load and price curves are also “flattened” and there are no longer any “peak” prices.

    • Impact on generation:

      • In March 16-29, reduction of the avg hourly generation from coal and gas is 1.5 GW and 0.3 GW, accounting for 80% and 16% of total reduction. The demand shock is mainly absorbed by coal because high take-or-pay gas contractual arrangement means that bulk of gas-fired power plants need to continue generating to consume the take-or-pay gas.

      • Renewable generation (including solar, biofuel, geothermal and wind) is not affected by the demand shock as their operating cost is close to zero and can compete well in a temporarily over-supplied market.

    • Outlook and key themes to watch:

      • Demand and price will likely rebound gradually in H2 2020 and growth rate may be able to return to ‘normal’ level from 2021 onwards

      • Will coal import be disrupted?  85% of coal consumption in the Philippines is imported and about 90% of the imported coal is from Indonesia.  This could potentially lead to price spike

      • When activities will start to resume?

  • Investment opportunities.  With a reducing reserve margin and potential fuel supply issue, we do see multiple opportunities for investors:

    • To meet growing demand.    Demand in Luzon, Visayas and Mindanao is expected to grow 4-6 percent on the back of strong economic growth.  Annual required incremental capacity is 600-800 MW, just to meet the growing demand.  New capacity can include both thermal and renewable options (especially for new solar capacity as it is one of the most economical options).

    • To displace old technology/ infrastructure.   Old coal and gas plants built in the 1990s need to be replaced or refurbished.  Furthermore, domestic gas production is expected to decline after 2022 due to depleting gas reserve; New LNG terminals offer a cost-effective solution to ensure availability of gas to existing and new CCGT capacity.   

    • To acquire privatized assets.   PSALM has a mandate to privatize its assets under EPIRA, and it plans to privatize Malaya oil,  CBK and Casecnan hydro as well as Mindanao coal power plants in 2020-22. 

    • Merger and Acquisition Opportunities.  Merger & acquisition opportunities are likely to be sporadic as most of the “obvious” targets have been divested.  Nonetheless, some “stranded” solar plants built in 2016 without feed-in-tariff may be keen to be divested.

    • Special projects.  Cost of renewable technologies (such as solar and battery energy storage) continues to fall, and thus they are likely to be economical for more applications in the power sector.

WaterRock Energy Economics (HK) Limited  /  S-01, 10/F, Wharf T&T Centre, Harbour City, 7 Canton Rd, Tsim Sha Tsui, HK  /  +852 93658216 / Liutong Zhang (Lucas) lzhang@waterrockenergy.com