The WaterRock team understands all the nuances of the Philippine power and gas market through continuous client engagement with commercial investors and large end-users in the past 15 years.  We also have long and deep experience in providing power modelling services to project spot WESM market prices.  Furthermore, we have been engaged to do high profile projects to help shape the regulatory and investment landscape in the Philippines.  For example, in early 2020, we were invited by JBIC to present to the Philippines' Energy Committee of the Senate and Philippines' House of Representatives on the role of natural gas and economics of building new LNG terminals in the Philippines.  

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Summary of market dynamcis:

 

• 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 thermal power projects have almost come to a halt since 2017, and this has led to a tightening market situation.  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.   

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• Opportunities and Challenges on the Power and Gas Sector:

  • COVID-19: Power demand has largely rebounded to 2019 level by 2021, and demand has been growing at 3-6% since 2022. 

  • Investment friendly polices: The 40:60 rule, which cap foreign equity share of RE capacity at 40%, was lifted in 2022.   The latest changes in the top officials in DOE and ERC signal a continuation of policies to shift the energy mix towards renewables.   

  • Coal price spike in March 2022:   The increase of Newcastle coal price from $200/metric tonne (mt) to $350/mt in March 2022 translates to an increase in fuel cost of about $70/MWh for marginal coal plants in the coming days/weeks.  with the higher coal prices, WESM price were increased to 6-9 peso/kWh in Q2 2022-Q3 2023.    

  • Market dynamics: Due to the tight market situation and the need to import expensive spot LNG to supplement the declining domestic gas production, the WESM prices will likely remain high in 2024-2026.  If large new dispatchable capacity can be commissioned from 2026/2027 onwards, time-weighted average prices could normalize to $90-100/MWh (i.e. 5-6 peso/kWh) in the long term.    ​

• • Power Contracting:  

    • ​The government is planning to organize centralized auction via a Green Energy Auction Program to help Distribution Utilities to meet their Renewable Portfolio Standard (RPS). 

    • For direct contracting with DUs, Competitive Selection Process (CSP) needs to be adopted. 

    • RE developers can also sign up medium- and long-term bilateral contracts with end-users (if got retail license) or other retailers. 

  • Investment Opportunities

    • To meet growing demand.    Demand in Luzon, Visayas and Mindanao is expected to grow 4-6 percent on the back of strong economic growth after 2022.  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 and wind capacity as they are economical vs new thermal capacity). 

    • 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.  

    • 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

    • ​​​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.