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.   

  • Near-term Challenges on the Power and Gas Sector:

    • Status of COVID-19 in the Philippines: No light at the end of the tunnel yet.

    • Impact on GDP: Near-term GDP growth is materially impacted.  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 in Luzon and Visayas was down by 14% and 9% year-on-year in Q2 2020; but load reduction is 5-10 percent during hot summer days

      • Lower demand drives down the WESM prices to 1-2 Php/kWh range from the typical 3-5 Php/kWh before COVID-19 [except during “hot” days]. 

      • Both the daily load and price curves are also “flattened”, with  lower “day-time” peak prices in the afternoon

    • 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.

    • Market Fundametnals:

      • Near-term (2020-2022): market is over-supplied as COVID-19 has reduced demand.  Meanwhile, the committed coal units (Masinloc coal expansion and GNPower Dinginin coal project) will be commissioned in 2020-2021

      • Medium-term (2023-25): The market will quickly tighten with strong demand growth and limited addition of thermal capacity after 2022. Expiry of Malampaya take-or-pay gas will also move about 2 GW of baseload TOP gas generation to mid-merit in 2024, which will increase system flexibility and prices for the shoulder hours.

  • 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 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