Suez Energy backtracks on Calaca; loses $14-M bid bond

There goes another potential power sector investor.

Suez Energy, the French power firm which bagged the 600-MW Calaca coal-fired power plant in an auction in October 2007, has backed out of the deal, according to the Power Sector and Liabilities Management Corp. (PSALM) last January 25. In the process, the firm will forfeit its $14-million bid bond.

Emerald Energy Corp., the corporate vehicle of the French firm used to acquire the plant, said in a statement that it will “terminate its purchase of the asset due to the deterioration of the power plant since its bidding date” as well as due to other unresolved issues it claimed. There was already a hint of the firm not pursuing the deal when it failed to pay the upfront payment of 40% of the $787 million winning bid price by the payment deadline on November 9, 2008.

Why the sudden change of heart?

When Emerald cited “deteriorating plant conditions”, it was probably referring to the exclusive use of local Semirara coal in Unit 1 which Suez Energy senior vice president of business development for Southeast Asia and Africa Ramani Hariharan claimed was the main cause of “severe” deterioration.

Coal plants are normally designed with specific coal heating value to be used in mind. In this case, Calaca was designed to use blended coal (local plus imported) to compensate for the low heating value of Semirara coal. Why the PSALM operators shifted fully to local coal and why Suez didn’t notice of it remains unclear.

It is not also established that indeed, the shift to lower grade coal for about a year, assuming that it started right after the bidding, could have singlehandedly caused the “severe deterioration”. There’s probably more reasons for the retreat than the official line.

One, Suez seemed to have overbid for the asset.  At $787 million bid, this was far higher than the highest bid of $280 million during the first aborted auction for Calaca. It is incomprehensible how the asset could have appreciated in value during the transition from the earlier to the later bidding in which Suez was declared the winner.

It is likely that Suez has not done its homework well.

Two, Calaca has been the scene of vigorous opposition to coal power plants in general in the Philippines. Being comprising of very old generating units, the claims of polluting the environment with fly ash, coal particles and airborne toxic mercury would be very hard to refute.

Three, there are more acceptable alternatives for investors and consumers to polluting coal plants. The government has resuscitated the nuclear option. The renewable energy bill has become a law which could give renewable energy sources like geothermal, wind and even hydro, the needed push.

Finally, the financial crisis has affected the growth in power demand, and Suez might have gazed at the future and didn’t like what it sees: It might not be able to dispatch sufficient power to make the investment profitable. The firm itself is likely affected by the financial crisis itself. For one, financing would be hard to come by for infrastructure projects.

The botched deal has a far reaching implication than a simple asset disposal failure.  The failure means that PSALM has to miss its target of 70% asset disposal required for the interim open access (IOA) to kick in, which effectively derails the government’s program of full power industry deregulation. The IOA would have allowed bulk users with above 1 MW requirement to choose their power supplier.

It also freezes on its tracks the whole power assets privatization process since the government would have to re-think the valuation of the assets for disposal and the rules of the game.

For Calaca, PSALM would be hard-pressed to get a sale price neat the Suez bid. For the other assets, the base price would have to be deflated if a successful sale were to push through.

Lessons learned

There are a handful of lessons from this episode.

For the investor, he has to be extra careful during due diligence. The phrase “as is, where is” which describes an item for sale, is actually a euphemism for junk, to be honest about it. So you have to price the item accordingly.

PSALM will have to be more transparent in valuing the assets and it should never kowtow to the demands of politicians to inflate values. The assets that have been sold are nowhere near the crown jewels they are purported to be.

It should not expect high premium for the assets to be sold.

After just a few years, Ashmore Investment is looking at a graceful exit from Petron Corporation (PSE:PCOR). The Icelandic groups who partnered with the Lopez conglomerate--which is into all corners of the power industry—in acquiring geothermal developer Energy Development Corporation (PSE:EDC) made a quick exit from the winning consortium which bid way above the next bidder.

Aboitiz Power Corporation (PSE:AP) entered the geothermal business by acquiring the Tiwi-Makban assets but it has yet to show how to profit from its investment. There are more names that could be added to the list like YNN, and—gracious, me!—San Miguel?

So, is Suez agonizing over the loss of $14 million bond?

Unlikely.

It is more savvy than anyone thought. It is likely to be cutting losses at this early stage than drown in red ink later in the day.  

Energy gets a paltry $60 million out of the $1.336 billion World Bank funding of RP development projects

Ten development projects for the Philippines totaling a combined cost of $1.336 billion have been proposed by the multi-lateral lender World Bank as part of its commitment to the country.

Of these, the biggest funding goes to the proposed $682 million Light Railway Transit (LRT) Line 1 South Extension project which will be implemented by The Light Rail transit Authority (LRTA).  This is followed by the $180 million Cavite-Laguna North-South Highway project to be implemented by the Department of Public Works and Highways.

The energy sector gets a paltry total of $60 million which consists of two projects: one, $40 million is allotted for Additional Financing for Rural Power project which is unspecified, but emphasizes renewable energy and mining and to be implemented by the Department of Energy; and two, the Ethanol Plant Wastewater Biogas project which is to be implemented by Roxol Bioenergy Corp, a private company.

Why, the seemingly lopsided bias against the energy sector?

The energy sector is one of the least developed infrastructures of the country which ought to receive considerable attention from out policy makers.  This underdevelopment is starkly manifested by a not so robust generation and transmission infrastructure and high cost of electricity which is the highest in the region next only to Japan.

The World Bank and other multi-lateral financial institutions count on the host country to provide the necessary input for them to fund the required development projects.

If so, are our energy policy makers blind to the needs of the energy sector?

Off the head, one can recite a litany of projects in the energy sector that demand attention and funding:

·         Energy policy: We have just passed the Renewable Energy Law, yet the implementing rules and regulations as well as associated legislation have yet to be worked out. These are not easy projects. For example, putting in place a viable feed-in tariff or a renewable portfolio standards cannot be made overnight; much research and analysis need to be made. What about net metering and planning a distributed grid?

·         Wind energy: We don’t even have a reliable wind energy map. Shall we just depend on a study of the U.S. National Renewable Energy Laboratory (NREL) to guide us in developing our wind energy resources? A more detailed wind energy map would go a long way towards encouraging private investors to put up wind farms. What about local research?

·         Solar energy: Again, a map of the solar energy distribution in the country is at best, sketchy. What about the development of low-cost solar panels? How about helping the struggling researchers at Ateneo and U.P.?

·         Geothermal energy: While we take pride in being the second in geothermal power production worldwide and having produced local talent, these competitive advantages would easily vaporize into thin air without a sustained effort at continuously studying and developing these indigenous resources.

·         Energy efficiency: We only have a nascent energy efficiency movement.

And so on.

The World Bank cannot be blamed for putting dimes and nickels to our energy sector. We are more to blame of not getting enough financial support if we cannot articulate what needs to be done in the sector.

Raser rapidly deploys geothermal power at its Thermo plant in Utah

Raser Technologies, Inc. (NYSE:RZ) announced on December 30, 2008 that it has completed the initial commissioning process of its 10-MW Thermo geothermal plant at Beaver County, Utah. This will be the company’s first commercial scale power plant.

What makes this significant to the geothermal community worldwide is that the facility was built in only six months, compared to the normal five to seven years’ time using traditional field development and plant construction technology. Raser was able to achieve this breath-taking speed by using 50 off-the-shelf power generation units (the Model 280 PureCycle System) each capable of producing 280 kW of power from United Technologies Corp. (NYSE:UTX). Theoretically, the plant can generate up to 14 MW of power; but about 3 MW are used to run the pumps and other field equipment.

Each of these is actually an organic Rankine cycle (ORC), or binary cycle unit, which uses as organic compound as its secondary fluid. This means that hot geothermal water is used to boil this fluid—which turns the turbines—rather that the water used directly.

The scheme allows the use of very low temperature geothermal resources which hitherto are considered unusable for power generation. This expands significantly the geothermal resources available for power production not only in the U.S. but throughout the world.

Raser makes the impression that it is deploying advanced technology to exploit low temperature geothermal fields—but in fact, ORC has become a standard technology for these types of resources. Turboden of Italy and other turbine manufacturers, have deployed ORC units for low temperature geothermal development in countries such as Italy, Germany, Austria and Switzerland in recent years. These units are also ideal for power generation from waste heat.

What is somewhat new is the use of the refrigerant R-145fa, or 1,1,1,3,3-pentafluoropropane, as the working fluid and the number of units simultaneously deployed. Because the units are factory assembled in modular units, these can be easily transported and installed at the site.

R-145fa, a refrigerant with zero carbon emission and a global warming potential of 950 kg carbon dioxide (low compared to most refrigerants) has become a fluid of choice for most modern refrigeration systems and recently as secondary fluid in binary cycles even if the price is still somewhat high. It has a boiling point of only 15.3 C at atmospheric conditions which allows geothermal water at 91-150 C to be tapped for power generation.

The commissioning is progressing nicely, according to Raser, and should be completed in the next few weeks. During the commissioning, the power generated is taken up by Rocky Mountain Power, a division of PacifiCorp. Under regular operation the power will be dispatched to Anaheim, California under a signed power purchase agreement.

The geothermal world and investors in renewable energy would be watching keenly the interesting development at Beaver County—the Philippines included.

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UPDATE, January 16, 2009: Raser technologies reports January 15 that it expects the local utility which will take up its output will complete the installation of SCADA equipment soon. This will allow Thermo (the geothermal plant) to increase its generation to 3 MW it can send to the grid starting next week. Raser believes that their output can be transmitted to Anaheim within the next few weeks.

Resurrecting the dead (electric car) in a glitzy way

When General Motors forcibly recalled its EV1 electric car from early owners and publicly crushed them in the late ‘90s, it was thought to be the final rites of the environmentalists’ dream of a zero-carbon emission car.

Earlier, its lifeline support was ripped off when California watered down the zero-emissions mandate for electric vehicles (EVs). That triggered complete shutdown of the EV program of bigwig carmakers Toyota, Honda, Ford—and of course, GM. With it, the death of the electric car—and the hopes of weaning away every motorist from the addiction of oil—were pronounced with finality.

It was not to be.

On December 9 last year (only a month ago) San Carlos, California-based Tesla Motors delivered its 100th Roadster unit—a 100% pure electric vehicle—to the president of an internet start-up. The skunk workers at the company, led by its charismatic CEO and top financier Elon Musk, considered the event a coming-out party into the big league. Most early buyers, who include CEOs, big-name Hollywood stars and high-profile investors prefer to remain anonymous.

Tesla? The name doesn’t even register as among the top 50 car makers of the world.

No matter. The bumble bee doesn’t know it cannot fly, according to aerodynamic principles—but keeps on humming nonchalantly, nonetheless. Martin Eberhard, the founder, an inventor and serial entrepreneur, must have felt the same way five years ago when he hatched the idea of a viable electric car. He was subsequently ousted from CEO position in a corporate struggle when capitalist reality caught up with the dreamer’s dream.

The finished product is a sleek sports car powered by 6,831 lithium-ion cells—the same power units in laptops and cell phones—stringed together into a battery pack. Powered by a 248-hp electric motor, the Tesla Roadster can accelerate to 60 miles per hour in 4 seconds flat, cruise at a top speed of 125 mph, and reach a 220-mile destination before recharging.

It is a sight to behold: made from space-age carbon fiber composites, equipped with state-of-the-art electronics and gadgets and given a gleaming finish. Its basic price tag of $109,000 is way beyond the wallets of most motorists—but nobody said that building an electric car comes cheap.

In fact, Eberhard got the idea of tailoring his car for the super rich, the flamboyant and moneyed moguls when he noticed that driveways having a Prius or the Honda Civic hybrid also have a Porsche or another luxury car beside it. These people buying the hybrids are not scrimping on gas. They are out to make an environmental statement; perhaps, also to atone for their gas-guzzling habits.

Whatever. The Tesla Roadster is already on the road.

For sure, there are kinks to be worked out. The powertrain is one. Recharging is another.

For the first problem, a new powertrain is coming out to replace—at no cost to the buyer—the initial one used. For the latter, Tesla is mulling a battery swap station wherein the motorist simply drives his unit onto a position like in car wash and have the battery replaced in 5 minutes—a time less than fully topping up the tank with gasoline.

Why not hybrid?

Musk explained it this way to Popular Science magazine:

“We looked closely at developing a hybrid, but we decided it’s a red herring. If you stay purely electric or purely gasoline, you’re going to make a better car. As soon as you try to split the difference, you have something that’s neither fish nor fowl. A Prius is a weak gasoline car with a little bit of electric charge. And once you’ve used up the electric charge, you have an underpowered gasoline engine or a weak electric car.”

For us the proletariat, we will have to wait for cheaper models. No, Tesla Motors does not really kowtow only to the filthy rich. It was harsh capitalism that forced them to target initially those who do not blink at burning 100K. Nearing production is a sedan priced at half that of a Roadster. And expect cheaper models down the road that should drive oil prices further lower.

The resurrection is well under way.

The wind blows stronger in the north

Recently, the Northwind Power Development Corp., operator of the Bangui Bay wind farm in Ilocos Norte, has announced that it has completed the expansion of its project to 33 MW. Initially, the project started in 2005 with a capacity of 24.75 MW. The wind source provides 40% of the requirement of the local distributor, the Ilocos Norte Electric Cooperative (INEC).

On top of this, the Company will also put up a new 40-MW wind farm project in Aparri, Cagayan this year which costs up to $95 million. This was announced by Northwind chairman Fernando Dumlao who also said that the expansion program will be undertaken by a recently created subsidiary.

“We are pursuing our expansion plans because wind is a renewable form of energy and it is very timely because of the passage of the Renewable Energy Bill,” he said.

We can only heap praises for Northwind for undertaking this initiative to develop aggressively clean energy sources despite the lack of implementing rules and regulations (IRR) in the newly passed Renewable Energy (RE) Law.

As it is, a wind development such as the Bangui Bay project cannot hope to compete with traditional sources such as coal or natural gas-fired power plants without incentives such as those embodied in the RE Law. The project only came to fruition because it was registered under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Under the mechanism, the project has been able to generate so-called carbon or emission reduction (ER) credits which can be traded in a carbon market. The carbon credits represent the amount of avoided carbon dioxide emissions--which totals 356,000 tons over the project life of 10 years--if it were a fossil-fuel based project.

It helps that financing was provided by essentially zero-interest loan from the Danish Development Agency (DANIDA) which contributed to the viability of the project. The covenant of course requires that the project source its wind turbines from Danish manufacturers. Other projects won’t likely have these incentives.

For the case of Bangui Bay project, the ERs generated are purchased by the Prototype Carbon Fund (PCF), a consortium of six governments and 17 private companies, which authorizes the World Bank, as Trustee, to purchase ERs in behalf of the fund. Because the prices of the tradable certificates which represent the ERs generated have escalated rapidly since the start of the project, the Fund (and its investors) would already have profited much from the project. These profits should have gone directly to Northwind and its investors if the ER credits were directly traded by them.

But the CDM has a sunset clause; which means that one could only avail of its benefits within a time span, which I believe, will end in 2012. Beyond that, the project will be on its own, financially.

It would be too risky to put money to a clean energy project where its viability comes solely from the CDM, or through generous governmental loans, as in the case of Bangui Bay. This is where the RE Law should come into the picture.

Two of the major provisions of the RE Law (excepting the usual financial incentives such as tax breaks) that should impact greatly to wind (and solar) energy projects are: the renewable portfolio standards (RPS) wherein electricity distributors are compelled to source a percentage of their supply from renewable energy, and feed-in tariff, which puts a premium on the electricity price from renewable sources.

It is important that the detailed provisions of the RPS would now be established so that a potential developer could now input the effect on the viability of the project. One cannot just pluck a “nice” percentage number out of thin air; the concerns of all the stakeholders—energy producer, distributor, consumers and even the local government units—must be taken into account by those who are tasked to write the provisions.

Determining the feed-in tariff is not straightforward. An in-depth study needs to be made to come up with an amount acceptable to all stakeholders. At present, the tariff paid by INEC to Northwind is set by an electricity supply agreement (ESA). The feed-in tariff is on top of this price.

The Bangui Bay project, being the first wind farm to be established in the country, should be considered the prototype of similar renewable energy projects in the future. It has provided the necessary numbers and insights which could fine tune the new RE Law.

With the trailblazing work of Northwind and the RE Law, we have high hopes that wind power would blow stronger not only in the North but throughout the archipelago as well.

May we have more energy this year!

At the end of each year, pundits are likely to crow about “successes” of their predictions whether they’re about stock market prices, oil prices or weather patterns. At the same time, when they are way off target—which happens more often than not-- they simply keep quiet and hope nobody keeps a scorecard. We are tempted to do the same, but there is really nothing much to gain from chest-beating, except enlarging one’s ego—which is actually dangerous since a burst ego can no longer be inflated.

We prefer to offer some encouraging words of hope for the coming year in the energy arena as this is the reason for our being (the blog, not the person).

Let’s start with the big picture.

When oil prices peaked at $147/bbl, we suggested that prices would slide fast. We were completely wrong—at the rate of decline. Now that it is about $38/bbl, will the price snap back once economies recover?

Theoretically, yes, but historically, periods of economic slowdown take years to complete, and we are just starting to feel the financial crisis which started in the middle of 2008. So don’t expect oil prices to go back to $90 soon. Despite the announced OPEC production cutback. Despite Hugo Chavez. Even despite political pressures on oil-producing Iran.

The Somali pirates may unnerve some owners of oil tankers. But navies of the world would come to the rescue. Oil shippers would gladly fork over pennies for an armed escort than lose a $100 million oil cargo. Besides, if these buccaneers have the misfortune of seizing a British ship, then Her Majesty’s submarines would probably torpedo the rogue galleon ship to oblivion. Come to think of it, might be a swell idea to teach these bastards some good manners.

So, oil prices are likely to be around $25 to $30 per barrel rather than $90. This is because the world is now awash in oil. In fact, in many parts of the world, potable water is more expensive than oil.

The figures also represent more or less the cost of producing oil on the average worldwide. In the U.S., onshore production is about $20/barrel, but offshore and so-called enhanced oil production could cost up to $70/barrel. The effect of this on U.S. upstream oil producers is consolidation. Many of the lesser oil players would groan under low oil costs and difficulty in getting credit and finance; they would end up feast food for the majors like BP or Chevron.

Middle Eastern countries continue to produce at an average of $14/barrel, with Saudi Arabia getting oil at less than $10/barrel. But these countries can only cut back on production so much. They need cash to finance their lifestyles and keep their economies above water. Saudi Arabia has cut its production from 9.7 million bopd in summer to 8.9 million bopd by December 2008. Still, this is way above the target set by the kingdom.

Meanwhile, European and offshore African production costs hover near $30/barrel which could spell trouble to companies operating in these regions.

As an insurance against a repeat of $120/barrel scenario, car makers will continue to develop energy efficient cars, hybrids and even electric vehicles. They are at the same time as Kodak and Fuji—leaders in silver film technology—decided to go heavy on digital cameras.

Renewable energy would take a back seat—for a while. But development would continue, and governments around the world would offer more incentives for renewable energies. Maybe, not directly competitive with fossil fuels, but political pressures and environmental activism would keep the renewable flame lighted. Forget about Obama taxing the windfall profits of oil companies. He will be more focused on keeping American jobs and American soldiers alive in Iraq and Afghanistan.

In the local scene, the passage of the renewable energy law will not cause a flood of new investments. But this will not deter some bold souls to dip into the icy water of alternative energy development. Some who have already started their project in biomass for example, would be more hopeful with the new law.

It might even be a better strategy to start with the feasibility of that wind or solar project. By the time your project is ready to take off, the ground rules on feed-in tariffs or the renewable portfolio standard might be in place. Cross your fingers.

The government policymakers have probably now realized that government control on oil and resources is merely an illusion, fed by political expediency. The government will completely exit from Petron and oil retailing in an abject admission that it cannot control prices. It has gotten out of geothermal business completely after it has disposed of all its holdings in Energy Development Corporation.

For 2009, it will continue disposing its generation assets. But it would be fire sales rather than getting premium from competitive bidding.

The economic slowdown would unexpectedly give us some breathing space in terms of electricity supply. But the tight electricity generation and antiquated distribution would rear their ugly heads in the mid term. The new operator of the transmission grid would soon learn that the business is not easy with rundown equipment and lines.

This year, we would have energy to go by--but for the wrong reasons.

Happy New Year!