With 80% of the government’s power generation assets already sold to private owners, the Philippines’ power industry faces the herculean task of building new plants to meet the country’s future electricity needs.
The current construction pipeline includes 2,412 megawatts (MW) of committed projects, and another 13,441MW of proposed developments, which equates to a massive investment of $39 billion over the next 15 years.
“If you also take into account the number of underperforming plants that need to be replaced or reconditioned, the amount of money required is vast,” said Dennis Montecillo, senior managing director at BPI Capital in Manila, and a banker to many large power companies.
The bulk of the new capacity will be located in Luzon, the northern most region of the country, where growth in peak demand is expected to average 4.7% per year between now and 2019. But Mindanao in the south, where brownouts – drops in voltage – are still a daily occurrence, is also in the frame.
The construction frenzy is attracting a slew of new and old players, including some powerful family-owned local conglomerates, such as San Miguel, Aboitiz, GT Capital and Ayala. Operating on the notion that electricity generation is an easy money-spinner, these companies are drawing up plans and scouring the countryside for suitable sites, often teaming up with partners from South Korea, Taiwan and Singapore.
The construction schedule must stay on track and on time if the generators are to ensure a stable supply of electricity.
Analysis by Maybank ATR-Kim Eng shows that, although there are enough new projects to meet peak demand in the next five years, the current stock of old plants is becoming increasingly dilapidated. “65% of our generation capacity comes from aging plants that are 15 years or older,” said Laura Dy-Liacco Santos, an analyst with the Philippine financial firm, warning of an increase in unexpected outages.
Manila residents can already testify to what happens when supply runs thin. In December last year, electricity prices rose by nearly 65% when local supplier Meralco was forced to buy expensive spot-priced power during unscheduled shutdowns at nearby plants. Businesses and residents protested loudly, leading the government to launch a Senate inquiry into the way electricity rates are set.
Many say the price hike could have been avoided had a new 600MW coal-fired plant in Subic Bay been built. The project has been in the pipeline since 2011 and was originally due to be completed towards the end of last year. Instead, it has become bogged down in challenges to its environmental standards and the issue is now before the courts.
“This just shows how slow and tedious the approval process can be,” said Iker Aboitiz, chief financial officer at Aboitiz Power – a part-owner of the plant, along with Taiwan Cogeneration Corp and Meralco, which holds the controlling stake. “We need to see an improvement in this area. The government needs to make the licensing process easier,” he told FinanceAsia.
Asked to be more specific about the reasons behind the delays at Subic Bay, Aboitiz is diplomatic.
“It comes down to knowing who to deal with and how to deal with them,” he said. “Power companies that want to be successful in this game need to make this a core competency. You have to be prepared to leave something on the table for the local community.”
He said the cost of fighting court actions is high. “It ties up resources and leaves the door open for competition. As you wait for things to be resolved, another party might come in and build the capacity ahead of you,” he said.
Power plants on the drawing board (in megawatts)
Delays such as Subic Bay are common, though not every project runs into trouble. Aboitiz Power is building another coal-fired plant in Mindanao, where it was able to gain approval and break ground within 12 months. It expects the first-generation unit to be operational by early 2015.
The Mindanao plant also stands out for the way it is being funded. Instead of seeking project finance, Aboitiz Power has used its own balance sheet and company loans to get the ball rolling. “It isn’t the cheapest option but the banks usually want solid offtake agreements in place before they offer project finance,” Aboitiz said, explaining how prior to decentralisation these agreements were easy to secure. “Back then the government was the largest power purchaser,” he said.
Offtake agreements effectively guarantee a market for the product.
Now, with an open access system in place, there can be up to 100 small offtakers to negotiate with, said Aboitiz. “Many of them won’t sign a watertight agreement until they see evidence that the plant will actually be built. So we fund the construction phase ourselves and then take out project finance as offtake contracts are signed. We did the same thing for our plant in Cebu.”
Having the ability to bankroll a project gives larger players such as Aboitiz a head-start on competitors. In Mindanao, where its plant is almost complete, another project sponsored by Alsons Consolidated Resources has spent three years in the planning stage as Alsons attempts to secure offtake agreements first.
Montecillo at BPI Capital said the need for companies to fund their own projects isn’t due to a shortage of liquidity in the banking system. “The domestic banks are flush with cash. It’s really a matter of lenders getting comfortable with the risks around title, collateral and offtake,” he explains. “Ideally all of these projects will eventually be shifted from company loans to non-recourse loans.”
With so many challenges, it could be assumed that only the biggest companies, or those that fed on the privatisation bonanza, will be the ones that flourish. Conglomerates like San Miguel and Aboitiz are certainly very established in the sector but there are plenty of smaller players that hold one or two assets, and every month there is news of a fresh entrant.
“Being a conglomerate and having deep pockets is a distinct advantage,” Reggie Cariaso, head of capital markets at BPI Capital, said. “Once a plant is built and starts throwing off cash, it is a great business to be in but it can take a lot of perseverance to get there.”
Cariaso predicts some companies will eventually get tired of trying. “They’ll realise they don’t have the capital or the patience to stick it out.”
There is already some evidence of consolidation. Aboitiz Power says it is currently bidding on an asset that is being offloaded by another private sector player. “I can’t say which plant. However it is a competitive auction process and other parties are interested too,” Aboitiz said.
In the future, secondary sales like this might be prompted by government-imposed limits on market share. The limits restrict companies from owning more than 30% of generating capacity in each grid and 25% of overall national capacity. San Miguel is touching on these ceilings in Luzon, and Global Business Power (part of the GT Capital group) is doing the same in Visayas.
The ceilings will encourage the recycling of assets, as long-standing players swap poorer performing units for better ones.
“We are looking at realigning our portfolio in Mindanao,” confirms Aboitiz. “We might sell our power barges, for example, or move them to another location to stay within our capacity limits.”
Aboitiz isn’t entirely convinced that size matters in the power business and says economies of scale are hard to achieve. “Running one plant costs about the same as running two or three plants; there is only so much that can be saved on overheads,” he said. “Where it is possible to save money is to build a larger plant, like a 2,000MW facility rather than a 500MW facility, and I suppose this takes size and access to capital.”
Aboitiz said he would consider a tilt at the Napocor-owned Agus plants in Mindanao if the government decides to put them on the block. “The rest is slim pickings,” he said.