EDC subsidiary acquires the Palinpinon and Tongonan geothermal plants

No surprise there.
Green Core Geothermal Inc. of the Lopez- group, is set to take over the 192.5 MW Palinpinon  and the 112.5 MW Tongonan geothermal power plants as it posted yesterday a higher bid of $220 million over that of its lone rival, according to the Power Sector Assets and Liabilities Management Corp. (PSALM), the government agency tasked to privatize the power assets of the government.
The other bidder was Therma Power Visayas, Inc., a unit of the Abotiz group of companies which is one of the dominant local players in the power industry, which put in a bid of $200 m. According to PSALM representative Conrad Tolentino, the winning bid topped the government’s reserve price for the assets.
Green Core is completely owned by First Luzon Geothermal Energy Corp., which is in turn a full subsidiary of listed geothermal developer Energy Development Corp. (PSE: EDC). EDC, meanwhile, is majority-owned by First Gen Corp. (PSE: FGEN), the power generation arm of the Lopez group.
From the very beginning and from the nature of the assets, bidding is heavily tilted towards EDC.
The Palinpinon geothermal complex consists of the 112.5- MW Palinpinon 1 and the Palinpinon 2 which counts four 20-MW modular generating units.  All the units have been supplied with steam from the production field owned by EDC based on a steam sales agreement between the field operator and the power plant management (formerly, the National Power Corp., or NPC).
The original supply contract calls for a 75% “take-or-pay” in which the steam supplier is guaranteed payment of this amount whether or not the plant operator could operate the plant at rated capacity. Prior to the sale, the steam sales agreement was modified to become similar to that of the contract between the field and plant operators at Tiwi-Makban.
Many potential investors consider the provisions of the contract “onerous” and a major disincentive to acquisition. EDC, upon acquisition of the plants, will be immune to the effects of the provisions since it is the steam supplier in the first place, and has heavily influenced the final outcome of the contract since it is a party to it.
Moreover, being both the steam supplier and power plant operator, EDC will realize synergistic cost benefits which would be absent for any other acquirer.
As an added bonus, EDC can now operate the plants at its maximum capacity. At present, EDC just supplies steam to the plants at about the contractual obligation of 75% capacity. Owing to some provision of the existing contract--in particular, to the proviso that the power plant operator could use steam at no cost the steam gas ejectors (a necessary component to operate the plant)--it would not make perfect economic sense to supply more than the contractual amount. That constraint is now removed.
The Palinpinon plant has been on the auction block for some time. The sale could not proceed however, since an attached steam sales contract (a necessary sweetener to potential investors) still has to be approved by the Joint Congressional Power Commission, and PSALM had no choice but to move back the auction to 2009. With the steam supplier getting the power plant, that issue has become moot and academic.
For the case of the 112.5-MW Tongonan 1 power plant, it sits in the middle of the EDC-owned steam fields, surrounded by other power plants which are now owned by EDC, but which used to be owned by build-operate-transfer (BOT) foreign contractors. The steam sales contract is similar to that with Palinpinon.
Theoretically, the Tongonan-1 plant steam supply would be dictated by EDC, and could be given less priority in distributing steam, when supply becomes tight. At best, it could be supplied with the minimum contractual steam requirement under trying conditions.
Good if steam is plentiful, but this might not be the case.  According to a recent quarterly report filed by EDC to the Philippine Stock Exchange (PSE), its net income has been severely impacted by capital expenditures associated with augmenting the steam supply at the Greater Tongonan geothermal field.
In the end, all these costs and risks are factored in when an outside investor examines the asset for possible acquisition. The bottom line is, the outside investor will have to place a bid which is low enough if one is to reap returns to its shareholders down the road.  This is likely the reason why EDC lost in the Tiwi-Makban bidding, where the field is operated by another party, Chevron.
No such constraint faces the field operator. It can comfortably bid higher than potential rivals knowing that it could reap cost benefits due to synergy. More importantly, it has the built-in advantage of knowing the nature and the cost of production of the fuel—that of steam.
Foreign investors have probably done their due diligence and didn’t like what they see.
So it seems the Palinpinon and Tongonan 1 geothermal plants have been handed to EDC on a silver platter by PSALM.

Is wind energy poised to take off in the Philippines?

Recent pronouncements by various investor groups seem to indicate that wind energy use for power generation in the country is about to blow hard.

Three groups have recently submitted proposals to the Department of Energy (DOE) to undertake wind power projects in various parts of the country. These are: Energy Development Corporation (PSE: EDC) with proposed projects in Burgos, Ilocos Norte; Northern Luzon UPC Asia Corp. in Pagudpud, Ilocos Norte; while PetroEnergy Resources Corp. (PSE: PERC) has identified sites in Sual, Pangasinan, and Nabas, Aklan.

The proposals of these companies have pre-qualified according to the requirements of the DOE, according to Energy Assistant Secretary Mario Marasigan. The DOE is ready to give them the green light to go ahead with the projects.

Waiting in the wings include the local unit of Korea Electric Power Corp. (KEPCO) which plans to undertake renewable energy projects like wind and hydropower with the government-owned Philippine National Oil Co.-Renewable Corp. (PNOC-RC); and Trans-Asia Oil and Energy Corporation (PSE: TA) of the PHINMA group which is reported to have conducted preliminary studies.

The three committed wind projects could generate up to 200-MW of power, according to Marasigan, but this amount is but a fraction of the often-quoted 76,600 MW of wind potential the country could offer.

The growing interest in wind energy could be partly attributed to the passage of the Renewable Energy Act of 2008 which offers fiscal incentives such as income tax-holidays, tax-free importation of capital equipment, and tax-free carbon credits to RE projects. But what could accelerate the growth of such projects are the non-fiscal incentives such as the renewable portfolio standards (RPS) which require electricity distributors to source a percentage of their requirement from RE sources, and feed-in tariff scheme which tries to level the playing field in the power sector for the RE producers against traditional (fossil-fuel) generators.

These two last incentives have been credited with the explosive growth of wind energy particularly in the Unites States, Germany and Spain. However, our own similar policies have not really been given due clarification from responsible agencies of the government. Until, and only when, the implementing rules and regulations for these incentives are sufficiently clear will these companies fast-track their projects.

Northwind Development Corp., the developer and operator of the 33-MW wind farm at Bangui Bay, Ilocos Norte, has shown that given favorable circumstances, a wind project can be viable under local conditions. Aside from supplying 40% of the power needs of Ilocos Norte Electric Cooperative, the wind farm has boosted local tourism with its majestic turbines appearing in postcard pictures posted in Flickr and other websites.

But these wind energy projects can only really take-off given a push of a tail wind in the form of a clear renewable portfolio standards and an attractive feed-in tariff scheme.

PSALM to dispose Limay power plant by end of the month

And then there were...none?

At the rate investor interest is waning on privatization sale of the 620-MW Limay power plant complex in Bataan, the Power Sector Assets and Liabilities Management (PSALM) Corp. would be hard-pressed to successfully conclude the sale to private investors by the end of this month.

Already, this target has moved from last month’ schedule.

This time, “we are hoping to complete the privatization of Limay by the end of this month,” PSALM president Jose Ibazeta said. From the tone of his statement, he might as well cross his fingers and wait for a new investor to come out of the blue to snatch the asset.

In 2008, PSALM counted as many as seven groups showing some interest (read: we’d like to have a peek). But during the actual two past bidding in April and September of 2008, only one bidder submitted the required documents which automatically made the sale failures.

This time should be better since PSALM counted three groups still interested.

One of them, the San Miguel group which has been all over the energy landscape lately picking power assets like apples, has already turned bland on Limay because converting it to use other types of fuel was expensive, according to San Miguel’s consultant Alan Ortiz.

PSALM believes the Aboitiz group is still interested, but the latter has its hands full on other projects like the newly-acquired Tiwi-Makban geothermal complex and hydro projects in Mindanao.

The third group remains unidentified.

What makes Limay a difficult sale?

The power complex is composed of two 310-MW identical modules, each comprising of 3 70-MW gas turbines and a 100-MW steam engine. So, 420-MW of its capacity runs on expensive fuel. To make it competitive, the power generators have to be converted to run on cheaper fuel—coal, for instance. This is probably the conversion cost Ortiz is talking about.

Worse, the plants do not have any power purchase agreement attached to the sale. That is, the new owners would have to sell the generation to the wholesale electricity spot market (WESM) where the cheapest power is likely to be dispatched first.

One could very well create a captive market by developing the surrounding area as an industrial zone. This has been in the blueprint for some time. But unless you are an Andrew Tan or a Henry Sy (or at least you could talk to any of them to cast a few billion pesos) you’d better stake your luck somewhere else. At this point when the image of a recovery in the horizon could only be a mirage on the desert of the worldwide recession, creating an artificial oasis is just nuts.

So what value is left?

You might be wondering why after a building is razed to the ground, an army of scavengers starts circling the devastation. Yes, people could see value amid the destruction—in the form of scrap metal that could be salvaged and recycled.

Selling it as such is not really a bad idea. Many of PSALM’s decommissioned plants ended up on the scrap yard. But Limay was only constructed in 1993; surely there must be value left of it. For some decommissioned plants, the underlying land could be a valuable piece of real estate.

The right to own and operate a power plant in itself is a valuable asset. Try to go through the hassles of getting an ECC (Environmental Compliance Certificate) for a greenfield project. You would probably wait 3-5 years before the cornerstone can be laid down.

The odds of a successful sale of Limay are stacked against PSALM. With luck, it could very well dispose the asset.

But definitely not at the price and terms of its liking.

_______

Note added, August 28, 2009: The other day, reports say that the energy unit of San Miguel offered $13.5 M for the asset. At that ridiculous price, the new owners seemed to have bought scrap metal. PSALM apparently agreed to it. I am reminded of a slogan in a pizza parlor: We have no problem if others sell at a low price; they know what their products are worth.

Added, Sep 6, 2009: An SMC spokesperson said they planned to spend $350 million to convert the plant into gas-fired type. Ah, OK.

Arroyo forgets the fourth “E” in her SONA

Well, almost.

In her supposedly last State of the Nation (SONA) address yesterday before Congress, President Gloria Macapagal-Arroyo talked mainly in glowing terms, about her administration’s achievements since she first came into office in 2001.

Yes, the GDP grew from $86 billion in 2001 to $187 billion as of last year, and we have had 33 quarters of uninterrupted growth. The figures are cast in stone, so it is almost impossible to dispute these. What is not mentioned though is that the GDP number for instance is puny compared to our neighbors’ and it does not tell anything about the distribution of wealth. Our growth rates are tepid at best compared to the sizzle at some of our neighboring countries.

The achievement, she says, were accomplished due to her administration’s focus on three E’s—economy, education and environment—which are considered pillars of the economic progress. What was given a casual mention was the fourth E—energy—which I would consider to be one of the basic infrastructures to be given priority if the country were to progress beyond mediocrity. The other two are transportation and telecommunications.

She touted the passing of the EPIRA—the Electric Power Industry Reform Act of 2001—as a cornerstone on the path of reform, but forgot to point out that after nine years, the promised benefits of the energy liberalization has not taken hold: the target level of 70% of the power asset privatization has not been achieved, while the assigning of Independent Power Producers (IPP) administration has not really budged from first base.

These two requirements have stymied the real opening of a competitive power sector.

She also mentioned the passage of two landmark pieces of legislation on energy—the Biofuels Act of 2006 and the Renewable Energy Act of 2008—as part of her crowning glory, but the situation on the ground is not that impressive.

True, the mandated biodiesel content of 2% and an ethanol mix of 10% have been implemented, but there’s not much push to higher biodiesel or ethanol mix. No, the motorists should not be compelled to use them; but they should be educated on the advantages and limitations of these fuels mix.

The RE Act on the other hand, was passed on the philosophy that if you build it, they will come. No such torrent of new investments in renewable energy sources could be felt. Intentions are there, but laying down upfront cash is altogether different.

Part of the reason is that the implementing rules and regulations (IRR) of the Act has only come out very recently—almost a year since the bill was enacted into law. Even then, the detailed IRR of two of the most important provisions, those of the feed-in tariff and the renewable portfolio standards (RPS), are sorely lacking. Without these, investments in renewable energy resources, in particular, solar and wind could not be expected to take off.

Arroyo claimed that with these twin Acts, the populace should expect lower electricity bills soon. It is not clear however, how this would come about. On the contrary, without an attractive feed-in tariff and a well-defined RPS, investments in renewable energy would in fact jack up the prices of electricity.

Perhaps the lack of firm commitment or a report card on energy is a tacit acknowledgment that much is still needed to be done on this sector, if the country is to leapfrog forward and not just nonchalantly chug along.

Perhaps omission of the fourth “E” in the SONA was deliberate.

India squirms at “legally binding” limits of carbon emissions—shall we?

During the U.S.  Secretary of State Hillary Clinton’, visit to India last Sunday, where she heaped praises to that country’s efforts to curb carbon emissions, the local Environmental Minister Jairam Ramesh loudly thought otherwise. He said his country won’t agree to “legally binding” limits on greenhouse gases (GHG).

That remark couldn’t have come to an importune time as the minister escorted the ever graceful Clinton during the tour at ITC Green Center outside the Indian capital. She called the center “a monument to the future”, a testimony to India’s efforts towards cleaner energy sources.  Ramesh, however, pointed out that India is among the major countries which pledged recently to join the efforts to limit global warming by curbing carbon emissions.

But behind that facade of diplomatese lies a brewing conflict between the developed countries represented by the United States on one hand and the industrializing economies typified by India, over GHG emission limits.

Clinton’s smiles can easily disarm a gentleman like Ramesh, but she did not come to India to relish the splendour of Taj Majal. She was there to arm-twist India to accept her boss U.S. President Barack Obama’s cap-and trade plan as a means of weaning his country from fossil-based “dirty” energy sources like coal and oil.

Briefly, the cap-and-trade plan, which is becoming a contentious issue at par with Afghanistan at Capitol Hill, is a series of proposed legislation that makes power generation from fossil fuels more expensive by capping the amount of GHG emissions allowed from these sources. The polluting sources are only given certain emissions credits which they can trade if they have excess credits—hence the “trade” portion.

The current Obama proposal calls for an eventual 83% reduction from 2005 levels by 2050, and a do-able 14% reduction by 2020. And, yes, his bookies say that the government stands to gain $646 billion between 2012 and 2019 from the auction of carbon credits.

Obama cruised to the presidency partly riding on the promise to the American people of a cleaner future—and he is just doing that with the plan. For the American government, the plan is actually a tightrope policy of appeasing both the green movement and the coal industry which supplies roughly half of the power needs of the country. Outright banning of coal, or even a significant reduction of its use, would severely cripple the mightiest economy on earth.

American legislators know that such plan carries enormous costs, and protagonists from both sides of the divide are cranking out arguments and associated costs to support their contention. Nobody knows what the final costs would be, but one thing is sure: the American people would be facing increased electricity costs, despite the claims that money raised from the exercise could be plowed back into the economy.

To give you an idea on what electricity rates increases Americans could expect from the floated  cap and trade plan, utility operators estimate that price increases could range from a low of 40% to as high as 120% for coal-dependent states such as Oregon.

But what’s India—and the developing countries, including the Philippines—got to do with America’s internal energy policy?

Plenty.  U.S. policymakers and think tanks have already figured out, that with the increase in energy costs, the economy would come to a crawl, and the country’s competitiveness on the global arena would be acutely debased.

Which is why for the plan to be viable, the U.S. must enlist the cooperation of the fastest developing economies like India and China, by urging them to do likewise. Or using strong- arm tactics.

But India, which is growing at an average of 8% a year, cannot afford that its march to progress would be derailed by caps imposed from outside.

No, India is not running away from its commitment to cleaner future; “we are simply not in a position to take on legally binding emission targets,” Ramesh insists.

It may not be readily obvious, but people in the third world, who are consuming a fraction of energy per capita compared to their counterparts in developed economies, couldn’t simply have their angst for more power curtailed. The alternative is further slide into abject poverty.

If it were not for the associated cost, it would be pleasant to dream of fresh air every day throughout one’s life, brought about by clean sources of energy. Yes, Americans may grumble about increased electricity bills. They may have to learn to switch off their plasma TVs when not in use. Some may just bear and grin it, but somehow, other expenses will have to be pruned down. Such scenario could put more strain to people who have borne the brunt of the current recession which is considered the worst since the 1930s.

But for the millions of people in Asia and Africa, curtailing power use could mean complete darkness after dusk, or scaling down production at the micro-enterprises which could barely provide subsistence in the first place. That is, if they already have rudimentary electrical power in the first place.

Yes, mercury is still being emitted by coal plants, but will all of it finds its way to the human ecosystem?  Yes, pound for pound, a coal plant emits far more carbon dioxide than any of the alternative, albeit more costly, sources. The mightiest power on earth knows this, but it is powerless to scale down drastically its own coal usage. And for one reason: cost.

Yes, any sane person would love to dismantle all the fossil-fuel plants for the sake of a healthy future, but then, at this point in time, a major problem facing the country is still lingering poverty.

Would we buckle down and dream on, or be pragmatic like India?

Would I trade an unknown, possibly bright future, with a more horrible present?

And I thought about my country.

I just cringed. 

DMCI Holdings bags Calaca coal-fired plant for $361.7 M

In a terse, one-sentence announcement, publicly-listed DMCI Holdings (PSE:DMC) said today it has acquired the 600-MW coal-fired power plant from the Power Sector Assets and Liabilities Management Corporation (PSALM), the government agency tasked with the privatization of power assets, for $ 361.7 million which is the highest among the participating bids.

DMCI Holdings, controlled by the Consunji family, has interests in construction, tollway operation, water services, coal mining and real estate among others. Its subsidiary, Semirara Mining Corporation (PSE:SCC), is the largest coal producer in the country and supplies coal to local power plants including Calaca.

At the Philippine stock exchange, share prices of DMCI Holdings ballooned to P7.10 per share, up P0.50 or 7.58% while that of SCC climbed P3 to P38, up 8.57%. Apparently, investors have cheered the move since there is expected to be a synergy gained from the Calaca acquisition with SCC a major fuel supplier.

It can be recalled that the present winning bid is much less compared to the earlier winning bid of Suez Energy at $787 million for the same asset. Since then, Suez Energy backtracked on the project, losing a $14 million bid bond in the process.

The current bid is also not much higher than the highest bid at $280 million during the first auction of the asset, which was however rejected by PSALM because the price did not meet its base price. It is also at par with the last privatization, which is that of Tiwi-Makban geothermal complex when the Aboitiz group paid $0.6 million per MW. On a per MW basis, the price paid by DMCI amount exactly to the same amount.


The per-MW price is also reasonable compared to the construction of the similar 232-MW STEAG coal-fired plant in Mindanao at $305 million, or $1.31 million/MW.

It would appear then that our contention that Suez Energy merely cut its potential losses when it returned the assets to PSALM was justified. Including the forfeited bid bond, Suez Energy aborted a potential loss of $420 million if its bid is compared to that of the present winning bid.

At least, some sense of sanity has returned in valuing the power assets for sale by the government.

Minority Galoc partners bail out

If you and your friends discover a treasure trove that could provide you long term income, what would you do?

Sell out to your friends.

At least that was what two of the Filipino minority partners—Alcorn Gold Resources (PSE:APM) and Petroenergy Resources (PSE:PERC)-- in the Galoc oil production field did. On June 24, the consortium operating the Galoc field off Palawan declared the “commerciality” of the resource. Two days later, the aforementioned minority partners sold their interests (at 1.53 and 1.03% interests, respectively) to unnamed consortium members at $800,000 per percentage point.

The other participants in the project with their corresponding interests are as follows: Galoc Production Co. W.L.L. (58.29%); Nido Petroleum Phils Pty Ltd (22.28%); Philodrill Corp. (7.02%); Philodrill Corp. (7.02%; PSE:OV); Oriental Petroleum and Minerals (7.58%; PSE:OPM); and Forum Energy (2.27).

The identical reason cited by the minority partners is that their respective interests are too small to obtain a significant revenue stream considering the risks involved. Which could also be interpreted that the resource is not as good as it is touted to be.

The total amount of oil lifted from the field since October of last year has already exceeded 1.3 million bbls of oil, which is really a decent amount. The Department of Energy has been trumpeting that the field should produce from 17,000 to 20,000 bopd (barrels of oil per day) which corresponds to 6% of the country’s daily demand, but the operators are more circumspect, saying that the average production should be around 12,000 to 14,000 bopd. Nido Petroleum, one of the consortium members, and its parent firm listed at the Australian Stock Exchange (ASX:NDO), has a broader range of production target at 10,000 to 15,000 bopd, for planning purposes.

Unlike our energy planners, investors have not really been giving standing ovation at the seemingly sweet smell of money wafting from the oil patch. From a high of A$ 0.46 near the start of production, NDO’s share prices plummeted down to A$ 0.06 before recovering to current prices of about A$0.13 – 0.14. Share prices of the Filipino partner firms, all of which are listed at the local bourse, have not really been influenced to a significant degree from Galoc announcements.

The bailout of the minority partners tells more about the prospect than the official news.

First, the amount involved.

According to a presentation made by Nido, the revenues to be expected depends on the price of oil as well as the amount of production sown on the plot below at production levels between 10,000 and 15,000 bopd.

At a projected average oil price of between $65 to $70/bbl for the year 2009 (The price has since dropped to about $62, from about a high of $73, but that is another story), Nido’s share of the revenues amounts to around $50 million (a conservative amount), which translates to about $220 million for the whole consortium. That means about $2.2 million per percentage point participation.

This is the amount of revenue expected by, say, PetroEnergy which has a 1.03% interest, for the whole of 2009. Compare this with its revenue of $1.8 million for the first quarter 2009 from its small interest in an oil field in Gabon, Africa, which could be annualized to $7.2 million assuming steady oil prices and production.

Now, according to the existing production sharing agreement, for every $100 oil revenue, $70 goes to cost recovery, $7.50 goes to so-called “Filipino participation incentive allowance"and $11.22 as production allowance to the operator. The rest is booked as profit, with $6.77 of it to the government and $4.51 to the investor participant.

Now, figure out the amount due to the minority participants.

Moneywise, there is a compelling reason to take the money today, and run, “considering the risks involved”, as the backtracking participants put it.

Second, the risks are real. Production has not been consistent, with the wells shut from December to February 25 this year due to technical problems. And lately, there has been an interruption “after the mooring and riser system was detached from its floating production storage and offloading facility”. In layman’s term, a technical problem.

Production wont be accelerated soon. At the moment the consortium is actively looking for a strategic partner to help foot the bill required for further development of the field.

We have also pointed out earlier that a potential field problem that could arise is sea water intrusion owing to the fractured geology of the area, as shown by the adjacent West Linapacan field which only produced a short time.

Bailing out early may prove to be a smart move for the minority participants.

Mindanao’s power woes

The Mindanao power situation is becoming a choice between the devil and the deep blue sea.

The devil of course, is the perceived polluting coal-fired power plants that are mulled to be erected in Mindanao to address the looming power shortage on the island. To be sure, Mindanao is not stuck up solely on coal plants. There are lesser “devils” around like the planned 50 MW Mindanao 3 geothermal plant project of Energy Development Corporation (PSE:EDC), which doesn’t sit well with environmentalists due to its proximity to the Mt. Apo National Park, and a 42-MW hydro project in Davao which has also attracted some opposition from locals.

The deep blue sea is more like pitch darkness due to expected brownouts if none of these projects could take off on time due to local opposition. The year of reckoning is pegged in 2015 by the Department of Energy when power demand completely outstrips supply assuming a conservative power growth of 3 % per annum, and the committed power projects are on track.

The reign of darkness could come earlier by 2012 if one or two of the bigger power projects are derailed. Or if big power-hungry projects like Hanjin’s shipbuilding facilities in Misamis Oriental and big malls come on stream to GenSan and other booming cities in southern Mindanao.

At the same time, the DOE considers this year as critical for the Mindanao power grid with peak demand reaching 1,525 MW.

One of these power projects to help alleviate Mindanao’s power shortage is the recently unveiled 200-MW coal-fired power plant to be built in Sarangani province by the Alcantara-led Conal Holdings Corp. at a cost of $450 million. The proponent claims that the plant is “on track” to operate in three years despite that fact that it is still in the development stage.

Conal Holdings is backed by the Electricity Generating Corporation (EGCO), one of the largest generating companies in Thailand and Southeast Asia.

The plants would be built in two stages: Stage 1 comprises a 100-MW unit and the whole facilities for the power station complex, while Stage 2 would be the second 100-MW unit which would be constructed within 24 months after the commencement of operations of the first unit. The second unit is targeted to be completed in 2014.

If coal plants are considered dirty, then why are these preferred by investor- developers?

Compared to other types of generating plants like hydro or geothermal, coal plants have the shortest time of completion, and theoretically, one could erect them just about everywhere. The fuel is not a problem since one could just get it from the open market.

Mindanao is no stranger to coal plants. The speed in which coal plants can be constructed if so desired is best exemplified by the record completion of the 232-MW STEAG coal-fired power plant in Misamis Oriental, a significant control of which has now been acquired by the Aboitiz group.

The apparent choice of coal is of course dictated in the end by economics. But with not much choice considering the looming crisis, Mindanao may not have much choice but must make a pact with the devil.

Or the people there may have to consider coal plants not the devil himself, but a fallen angel with some hope for redemption. The choice is easily made if one looks at the other side and sees nothing but an abyss of darkness.

Iran’s oil and the street battles

Strangely, world crude oil prices have been dropping since the contested elections in Iran.

Not even graphic pictures of bloodied demonstrators—who have been questioning the avowed re-election of Iran president Ahmadenijad—which have been streaming out of the Islamic Republic despite a clampdown on foreign reporting, could stem the decline.

While democratic proponents and civil liberties workers throughout the world have been watching the political and social developments lately, economists and business leaders have been scouring the market horizons for any signs of an oil price spike.

There ain’t any. It is unlikely that there will be, as a result of the tumultuous events on the streets of Tehran.

The concern is real since Iran is a major crude oil supplier to the world. Logic tells us that should the unrest spreads around the country, it could lead to shutting off the Iranian oil taps from its ports.

But the scenario is unlikely.

Revenues from its oil exports lubricate Iran’s economy, and its entrenched leaders would be ill-advised if the country leverages its oil production for concessions from the outside world. More so now that nagging questions about the veracity of election results, which have been violently expressed on the streets, could lead to more dollar shortage to the Iranian regime.

Whether by force or design, any stoppage of oil deliveries from Iranian ports would at best only cause a blip on world oil prices. Other OPEC countries which have been reining in its own oil production in hopes of improving prices, would gladly take the slack of Iranian oil.

Iran needs oil exports badly that it is finding ways to develop other sources of energy in lieu of oil.

Iran has been insisting that its nuclear program is basically for power production and for other peaceful purposes; and there are reasons for believing that it is so. As a scientist, I have visited the Iran’s atomic energy agency in the late ‘90s, and their world class scientists were more inclined to study non-weapons applications like isotopes production for agricultural and hydrological studies and nuclear power engineering.

They would rather have a large electrical generating plant powered by nuclear fuel than a plutonium enrichment plant. And the oil revenues saved could go a long way towards lining up the state coffers.

And why would the Iranians insist on developing its limited geothermal resources, like the one at Sabalan mountains northeast of Tehran, when it is far easier and cheaper to drill for oil on its vast untapped oil resources to obtain an equivalent amount of electrical power?

With the ugly turn of events on Tehran streets, one would have expected that the president of Iran’s nemesis, the United States, which regards itself as a bastion of democracy, would jump at the opportunity of bashing the Islamic republic. But no; U.S. President Barack Obama’s response to the unfolding events has been muted.

As if returning the complement, Iranian authorities have singled out the U.K.—not the “great Satan” the U.S.—as the prime “meddler” of the country’s internal affairs.

No, the turmoil in Iran wouldn’t cause a spike, or even a slow rise, of oil prices.

Oil prices, as well as stock markets around the globe, have been steadily rising since October of last year mainly due to hopes of recovery for the global economy. Now that signs of economic recovery are more like a mirage on the desert sun, the steady rise in oil prices is beginning to stall and major bourses have begun to take severe pounding lately.

San Miguel takes another pot shot at Indonesian coal

True to its avowed aim at diversification outside its core foods and beverages business, San Miguel Corporation (PSE: SMC) has reportedly trained its sights on acquiring a stake worth about $500 million in PT Adaro Energy (JSE: ADRO), Indonesia’s second=largest coal producer, according to news wires.

San Miguel president Ramon S Ang confirmed that his company is in talks with Goldman Sachs, its financial advisor on its diversification forays, on the planned acquisition but declined to say how much stake it is aiming for.

Bisnis Indonesia has reported that investors Goldman Sachs itself, hedge fund Farallon, Citigroup Global Special Situations Group and Atticus Investments Pte. Ltd. are looking at buyers for their combined 17% stake in the coal firm. Analysts say that these investors, who participated in the coal miner’s $1.3 billion initial public offering (IPO) last year, are looking to sell out at IDR 1,200 per share, given the uncertainty of coal prices amid global economic downturn.

Two members of the same consortium who has a combined 26% at the end of the IPO, the Government of Singapore Investment Corporation and Kerry Coal, are reportedly not keen on selling out at this time.

The other largest holders of the company are PT Saratoga Investama Sedaya which is owned by Indonesian entrepreneur Edwin Soeryadjaya and Teddy Rachmat, one of Indonesia’s richest businessmen, who own 32% each.

That asking price is just slightly above the IPO price of IDR 1,100 a share and the current prices which has hovered at the same level. The selling investors would still reap windfall profits since they have been long-time investors in the coal firm.

The planned sale was already expected given that the lockup period ended in March for these financial sponsors.

Would this foray into an unrelated business from its core food competence be good for San Miguel and its shareholders?

Hard to say at this time.

During the last two years, SMC has weaned itself from the food business by taking a 27% in electricity distributor Manila Electric Company (Meralco, PSE: MER) and planning a majority stake in oil refiner petron Corporation (PSE: PCOR). It has also a joint venture in telecommunications with a foreign partner and is looking at entering the water distribution business locally.

Its intentions in Adaro is its second attempt at getting a foothold at Indonesian coal after its planned acquisition of a significant chunk of PT Bumi Resources (JSE: BUMI), Indonesia’s largest coal producer, fizzled out.

For sure, SMC won’t be calling the shots at Adaro since its planned 17% couldn’t exert significant management influence and control. It would be entering a business firm whose sole product coal is a commodity whose prices are subject to world economic movements.

When oil prices were rising, so did the coal prices. But when commodity prices collapsed, so did the latter.

At this time when the global economic downturn appears to be stretching longer than expected despite pronouncements of an imminent economic recovery, commodity prices including that of coal, may be struck in the doldrums for a long time.

That could mean that, should this deal push through, SMC investors would have to wait patiently before the firm’s Adaro stake could bear fruit.

Dangerously tweaking the EPIRA

The Senate might be treading on tenuous, dangerous grounds when it approved yesterday on third and final reading proposed revisions to Republic Act 9136 or the Electric Power Industry Reform Act (EPIRA).

On a vote of 16 to 3, the Senate passed Senate Bill 2121 which seeks to amend two important provisions of the EPIRA. These amendments are (1) scrapping the provisions that pass on to consumers stranded debts, or unpaid financial obligations; and so-called “stranded costs”; and (2) lowering the threshold percentage level of power assets privatization to 50% from the current 70%.

What are the possible ramifications of these amendments?

Stranded contract costs refer to the excess in contracted cost of electricity agreed on between an independent power producer and the National Power Corporation (NPC), the erstwhile operator of the transmission grid, over the actual selling price in the market of contracted energy. This can arise, for example, when NPC cannot sell the contracted amount of power due to some reasons such as low actual demand or prolonged breakdown in transmission facilities.

The stranded contract cost which applies to all distribution facilities was also scrapped “in order to reflect the true cost of power and avoid additional burden to consumers.”

In other words, according to Senate President Juan Ponce Enrile, if Napocor and the distribution utilities committed errors in contracting electricity costs, they will have to answer for their lapses in judgment. Let their economics be damned. Forget their target internal rate of return or cost of money.

If only the conditions were as simple as that.

Stranded costs are not the machinations of an evil mind. Big power projects have long gestation periods and entail huge capital outlay. For such a project to be viable, there has to be some guarantee that a portion of the output at least has an assured buyer even before the project proponents lays down the first cornerstone. The form could be either a “take-or-pay” provision or a guaranteed price and adjustments.

There are also technical limitations on the amount of power that can be generated. A 20-MW rated turbine running on geothermal steam could not be operated below a minimum output threshold. In a similar way, a high transmission line cannot carry a load below some limit.

During the previous opaque and monopolistic power regime of Napocor, such guarantees could be easily built in into the contract hammered under very amicable circumstances at the expense of the final consumers.

But even if there is no explicit passing on of the costs to the consumers, the generation costs would somehow appear as operating costs. Failure of the generating company to book such costs as expenses could spell the viability (or lack of it) of the project at the outset.

The amendment may dissuade would-be investors from putting up sorely needed additional capacity in the near future.

The other amendment—lowering the privatization threshold to 50%--could have far more dangerous implications. The rationale is that, with the lower threshold, the “open access regime” wherein big consumers can actually choose their source of power would immediately kick in. This is because the actual level of privatization has already been pegged at 57%.

The fatal downside is that Napocor will no longer have to sell its remaining power assets, and thus continue to exert dominance over electricity prices. This would also fell in the hands of the Napocor insiders who seem to be consciously delaying the privatization process for reasons we can only speculate. With this scenario, the open access would ring hollow.

For the investors who have already put up money on the basis of the original EPIRA provisions, they would have to adopt with increased difficulty should the bill be passed into law. Those who are waiting in the wings would have to go back to the drawing board and their financial spreadsheets and assess the changed circumstances. They might back out altogether.

Changing rules in midstream have been the bane of investors. This is why the various foreign chambers of commerce, which represent foreign investors, have been adamant about changing the rules of engagement in the din of battle.

The world economic order is already is disarray and highly uncertain. Investors would like to see some of the uncertainly addressed to by not changing the rules of the game.

Tweaking the EPIRA this time may not deliver the benefits the law is supposed to give. On the contrary, the results could be devastating to the industry and the country.

We just hope that our esteemed senators are actually concerned at the hapless consumers and not looking misty-eyed at the forthcoming 2010 elections.

Meralco shows way in sourcing ‘clean energy’

Can you choose a ‘clean energy’ supplier for your electrical power needs? Theoretically, yes, even if you are tapping the transmission grid.

 Manila Electric Company (PSE: MER), the country’s biggest power distributor that supplies Metro Manila and environs with electricity is showing the ‘clean energy’ path by planning to source part of its electricity load from two more methane-gas recovery plants.

 In a recent press briefing, Meralco president Jose P. De Jesus said the distribution company will source electricity from the methane gas fired plants to be owned and constructed by Montalban Methane Power Corp. (MMPC) which already owns the pioneering plant at the Montalban (Rodriguez) dump site. The new plants will be situated in Malabon and Sta. Rosa, Laguna.

 Recently, Meralco has already signed a contract with MMPC for the latter to supply it with up to 8 MW of power. The supply arrangement would allow Meralco to source relatively cheaper electricity from MMPC as the generated power would be tapped directly into sub-transmission lines already owned by the firm, thereby bypassing the wheeling charges imposed by the grid operator.

 What is more significant though, is that it allows Meralco “to increase its capacity and alleviate global warming through the reduction of carbon emissions during electricity generation.” Part of the statement may be public relations efforts, but the step it is taking would be a prototype of what steps distribution firms should be taking in the future.

 Sourcing from renewable energy sources is now actually embodied in the recently passed Renewable Energy Law under the heading renewable portfolio standards (RPS). Under this concept, a distribution company is compelled to source a percentage of its electricity supply from renewable energy generators (solar, wind, geothermal, biomass) by a given time, say after ten years.

 Our own renewable energy law do not have specific guidelines on how this is to be achieved as the implementing rules and regulations (IRR) have yet to be hammered out. Of course, these rules are not straightforward to craft.

 Some questions that need to be answered are: (1) what is the appropriate percentage? (2) What would be the timeline for the distribution company to achieve the target percentage? (3) Are there available sources for the distributors to reasonably meet the law’s requirements? (4)Will the prices be competitive enough against traditional sources? (5) Would these renewable energy sources be in the “right places?” And so on.

 These questions are inextricably intertwined and need to be addressed to the satisfaction of all the stakeholders from the government, the generator, the distributor and the consuming public.

 Now that Meralco has actually conscientiously contracted a portion of its distribution needs from a renewable energy source, it would be interesting to watch how this arrangement would pan out. Our energy regulatory bodies, especially the recently-convened National Renewable Energy Board which is tasked to oversee the implementation of the renewable energy law, should study in detail the nuances of this experiment—as well as of others, including that of the Bangui Bay wind farm and the biomass projects in the Visayas—to come up with a sound and equitable renewable portfolio standards.

The success of this particular provision could determine whether we would be getting cleaner power or more of the polluting energy sources we already have in the future.

PSALM finds success—in selling decommissioned plants

The Power Sector Assets and Liabilities Management Corporation (PSALM) which is tasked to privatize the government’s power assets under the Electric Power Industry Reform Act (EPIRA)has apparently honed its skills in selling...decommissioned power plants.

On April 17, PSALM announced it has sold the decommissioned 225-MW Bataan Thermal Power Plant in Limay, Bataan through a negotiated sale to Rubenori Inc., a local scrap metals trading firm, for $2.859 million. The amount was reportedly above the reserve price set by the PSALM board.

The sale is for the structures, the plant or whatever is left of it, unusable auxiliary equipment and accessories and dilapidated parts but excluding the underlying lot.

This was the third successful disposal of decommissioned plants after the 200-MW Manila Thermal and the 54-MW Cebu II power plants were sold off on April 25, 2009 and January 22, 2009, respectively, to scrap dealers.

Scheduled to be sold off this year are other decommissioned power assets including the 104-MW Aplaya, the 22.3 MW General Santos diesel and the 850-MW Sucat thermal power plants.

If PSALM follows the same tack it employed in disposing of the Bataan plant, it should find no difficulty in attracting potential buyers. However, the sale of these essentially heaps of scrap metal does not count as part of the power asset disposal required by EPIRA for the power industry open access regime to kick in.

What are more problematic to dispose are those power assets that are still operation—or can still be theoretically rehabilitated to its peak output. These include the 600-MW Calaca coal-fired power plants and the Bacman I and one of the Bacman II modular plants.

For the case of Calaca, we have noted previously that the sale was stymied by PSALM’s insistence that the potential investors meet its reserve price which may not be realistic. Our estimated reserve price based on published accounts for this plant would even approximate the cost of putting up a new plant from scratch so that any level-headed investor would simple balk at the bidding requirements.

The last “winning” bidder simply walked away and forfeited some $14 million bond, when it realized that the plant was in far more sorry condition than expected, and would stand to lose more going forward if it has to operate the plant.

The 110-MW Bacman I geothermal power plant has been operating at very low loads while the 20-MW Cawayan plant, one of the two modular plants of Bacman II, has been shut since 2005 reportedly owing to poor maintenance and lack of funds for critical spare parts. Any engineer would tell you that equipment that is not used and maintained properly for some time rapidly deteriorates in performance and condition.

We have been insisting time and again that it would be in the best interest of PSALM and the power industry if these assets are sold immediately. The benefits that would be realized in privatizing the power assets according to EPIRA far outstrips whatever any short-term loss PSALM incurs by pricing these asset attractively to investors.

The recent sale of the Bataan decommissioned plant should point the way to the right direction in privatizing the remaining power assets of the government.

Electricity prices to go up again

Here we go again.

Expect to receive electric shock from your power bill starting as early as your next bill when the Energy Regulatory Commission has reportedly given the National Power Corporation (NPC) a go signal to increase its generation rates.

Reports said that the increase in NPC’s basic charge would be 46.82 centavos per kilowatt hour for Luzon, P1.15 /kwh for the Visayas and 71.47 centavos for Mindanao.

Part of that cost will be automatically passed on to the ultimate consumers. That’s you and me.

As usual, there will be howls of protest, and the electricity distributors like Meralco, VECO and Davao Light and Power would bear the brunt of consumer anger since these agencies are the one sending us the dreaded bills. For sure, inefficiencies of these distributors—not mentioning the poorly run electric cooperatives—add to the final bill and any improvement to their operations might help lower that.

But if you look closely at your Meralco (or VECO) bill, the generation cost eats up about 50 % of the total while the distribution cost accounts for about 25%. Any significant reduction to the power bill can only be realized if the generation component of the whole power train can be lowered.

It has been pointed time and again that the Philippines has the highest power generation cost in Asia and one of the highest in the world. Any effort at reducing power costs should start at dissecting the causes of high power generation costs.

As to be expected, the loudest reaction to the impending rate increases comes from the business community which is already reeling from the effects of the worldwide financial crisis which is fast becoming into a severe economic downturn.

The Philippine Chamber of Commerce and Industry together with most foreign chambers are in unison in its clamor for lower power rates to make their business globally competitive. Specifically, the business community wants something to be done about the extended value added tax (E-VAT) on power and the royalty on natural gas.

To be sure, our financial managers will be reluctant to roll back the E-VAT rates as the fund generated from this measure has generally kept up the country afloat in the midst of crisis. Tinkering of the E-VAT would have more damaging effects financially in the long run. Value-added taxes are progressive; the more you consume, the more taxes you pay.

And if you reduce the E-VAT on power—who would prevent you from arguing that the taxes on basic telecommunications, water, basic goods, etc., should also be lowered? Think of the catastrophic consequences on basic services if government revenues are suddenly reduced.

Lest it would be misconstrued, this corner is against high and unreasonable taxes. But putting the blame mainly on E-VAT for power sidesteps the issue. The main issue is the inherent cause of generating power here is just too high.

Yes, the royalty tax on natural gas should go. This would be in line with the practice of many countries to encourage the development of their own natural resources. Don’t also forget the various local taxes (the LGU share for example) that add up to cost. What about realty taxes which could add up to millions?

But what really holds up the power generation cost is the uncompetitive industry structure we still have. Despite the EPIRA, the government through the NPC still controls some 70% of generation.

It also helps if our planners understand why out neighbours like Vietnam, China and Malaysia could generate power at a fraction of the cost we need.

We have passed the Renewable Energy Law which ought to foster more investment in the power sector—but where is the set of implementing rules and regulations to guide investors?

To really foster real competition, the government through the Power Sector Assets and Liabilities Management Corporation (PSALM) should fast-track the privatization of power assets. With the given conditions of its remaining power assets like the coal and geothermal power plants, PSALM should not expect investors to bid on them at the price PSALM wants. It can even do away with an unreasonable base price and just let the market dictates the price of these assets.

Disposing of these assets now at a “loss” may in fact augur well for the country moving forward.

And, who knows, the price of power generation might actually come down due to the natural market forces.