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 thermal 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.   

  • Opportunities and Challenges on the Power and Gas Sector:

    • Status of COVID-19 in the Philippines: No light at the end of the tunnel yet, but power demand has largely rebounded in 2021. 

    • 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, we forecast that WESM price may increase to $150-190/MWh (i.e 7.5-9.5 peso/kWh) in Q2 2022.  The WESM prices will likely normalize to $80-100/MWh (i.e. 4-5 peso/kWh) from late 2023 onwards.  

    • Market Fundamentals:

      • Near-term (2022-2024): The commission of GNPower Dinginin coal units in late 2021 and 2022 can mitigate potential power shortage in the Philippines.   As demand grows, the market fundamental is tightening.  

      • Medium- and long-term:   Decarbonization push and the expiry of Malampaya take-or-pay gas contracts in 2024 can create a lot of opportunities and challenges in the market.  

    • 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. 

    • 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.

      • To acquire privatized assets.   PSALM has a mandate to privatize its assets under EPIRA, and it planned to privatize 150 MW Casecnan hydro asset,  797 MW CBK pumped storage hydro and 200 MW Mindanao coal power IPP contracts in 2022-2024.  The bidding for the 150 MW Casecnan hydro project is scheduled in 2022.