Energy Philippines - Analysis, Technology, Policy

EDC subsidiary acquires the Palinpinon and Tongonan geothermal plants

2009-09-03T09:21:00.002+08:00

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. According to PSALM representative Conrad Tolentino, the winning bid topped the government’s reserve price for the assets.

Green Core is complete 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?

2009-08-30T08:33:00.003+08:00

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

2009-08-25T10:55:00.006+08:00

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

2009-07-28T08:03:00.003+08:00

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?

2009-07-21T17:35:00.003+08:00

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

2009-07-09T11:26:00.004+08:00

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

2009-07-09T08:36:00.005+08:00

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

2009-07-02T19:35:00.002+08:00

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

2009-06-24T05:16:00.002+08:00

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

2009-05-04T06:54:00.007+08:00

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

2009-04-28T08:22:00.001+08:00

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’

2009-04-28T06:47:00.002+08:00

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

2009-04-18T10:10:00.004+08:00

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

2009-04-14T05:40:00.002+08:00

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.

Lanao del Sur power cooperative is best argument against these dinosaurs

2009-03-24T10:15:00.003+08:00

Unbelievable!

One could use more colourful superlatives to describe the Lanao del Sur (LASURECO) power cooperative, but it is not necessary. The bare facts are stranger than fiction. Consider these:

· LASURECO has racked up debt of about P3.7-billion.

· It was considered National Power Corporation’s (NPC ) most delinquent customer with outstanding debt at P2.28 billion as of June 2007 before it was put under management by NPC and the National Electrification Administration (NEA)

· LASURECO’s systems losses had reached a staggering 63% before it was contained down to 30% by NPC and NEA, when the allowed losses for cooperatives should be only up to 14% which is already very generous

· Its receivables collection rate had been a dismal 8%

· It has not been paying its suppliers for years

· It could not even pay its employees on time, if at all

· It has failed to install an electrification project funded by NEA

The situation was so bad that NPC and NEA intervened in the cooperative’s operation in November 2007. Since then, its financial situation has improved a bit. At least it can now pay its current obligations to NPC, according to reports.

It has also started paying P1 million monthly for its P107 million it owes the National Electrification Administration (NEA). It should take the cooperative nine years to pay that obligation if there were no interests.

Well, at least NEA is getting some of its money back.

Before LASURECO came into our radar screens, we thought that the situation with the Albay Electric Cooperative (ALECO) was already the worst.

Save for a very few exceptions, electric cooperatives have not been performing well and are woefully managed. Many of these dinosaurs have been in existence for long, and they should have been declared extinct eons ago.

Our policy makers should have a definite strategy to phase them out as the original business model for these creatures is no longer in tune with modern times.

One could start selling off the bigger of these power cooperatives and make them professionally managed corporations.

Why it is difficult to achieve, we can only guess.

The battle for Meralco: will it matter to you or me?

2009-03-09T23:36:00.006+08:00

The Manila Electric Company, or Meralco (PSE: MER) has been in the limelight in the last few days owing to the ramp up of its share prices from around P60 a few weeks back to a record high of P126 a share last Friday. That day coincides with the cut-off date for soliciting of valuable proxies for voting during the upcoming stockholders meeting.

It is no longer a secret then that there appears to be a bitter struggle for control of Meralco. The battle lines are clearly drawn.

The protagonists are the following: On one side is the embattled Lopez group, the incumbent majority shareholder of the Company until recently. On the other side is the SMC group which has acquired a total of about 38% of the Company’s shares, as against the Lopez’ 33.4%, by the end of last year.

Enter Manny V. Pangilinan (known simply by his initials MVP), head of PLDT and First Pacific of Hong Kong, who appears to be on the side of the Lopezes. Last week, MVP’s group disclosed that it has acquired 37 million shares, equivalent to 3% ownership, of Meralco. Talks in financial circles have it that MVP has been acquiring shares from the market and from various institutional shareholders. This could have been the main cause of rapid appreciation of Meralco shares in the last few days.

Meralco of course has long been in the radar screen of MVP. He had tried to acquire a large chunk of Meralco from Union Fenosa, Lopez group’s erstwhile partner in Meralco, before but failed. Meralco also fits well with PLDT’s plan to use a large swath of the former’s fiber optic network for high speed communications. Besides, many of PLDT’s lines ride on Meralco’s power poles; so it is to the best interest of PLDT to have at least a friendly owner in Meralco.

Whatever the outcome of the current tussle, it is certain that Meralco will end up to be owned by one or two powerful groups. And either of the two groups has fondness for monopolies or businesses with dominant positions in their respective business sectors, for which Meralco is a prime example.

Meralco is the sole franchise holder of electricity distribution in Metro Manila and surrounding provinces. Its franchise covers some 25 cities and 86 municipalities and has some 4.5 million customers.

The Lopez group has been increasing its power generation assets in recent years through First Gen Corporation (PSE: FGEN) by acquiring plants and assets from the government. Its aggressiveness however, has cost it dearly, and the group has piled up huge debt, which it finds difficulty in servicing on time, if we are to go by its recent actions.

It has been raising cash by selling assets like its toll way business, the Pantabangan-Masiway hydro asset to its subsidiary Energy Development Corporation (PSE: EDC), and (unsuccessfully) a chunk of Red Vulcan Holdings which is the vehicle it used in acquiring EDC. In addition is has been trying to raise cash from the debt market.

With its precarious financials, will the Lopez group eventually sell out to MVP?

Meralco has been considered the crown jewel of its empire, but head of the Lopez clan has been quoted to blurt out, “they can have it!” referring to Meralco at the height of Winston Garcia’s GSIS failed takeover of the electricity distributor a year ago.

At an acceptable price, any of the chunks of the Lopez empire appears to be for sale.

It used to be that ownership of Meralco—with the exception of the Lopez family—is restricted to 10% to one entity, by virtue of its being considered a vital service provider.

At the pace the Meralco drama is unfolding, it is just a matter of time, which could be sooner than later, that it would end up in the hands of a single dominant group. Which can be frightening to consumers considering the monopolistic status of Meralco in electricity distribution.

In the end, it will not matter much to customers who will end up owning Meralco. Both protagonists are of similar stripes and are likely to run Meralco in much the same way.

Perhaps it is fitting to revisit the original restriction on ownership sans the Lopezes to make Meralco a truly public company—and perhaps it could then give more accountability to the consumers.

Note added: Tuesday, March 10, 2009—Meralco shareholders named Beneficial Trust Fund and New Gallant Limited reported yesterday their combined 113,313,389 shares of Meralco. An apt name if this pair belongs to a gallant white knight in a shining armor.

Postponement of power crisis is no reason to rejoice

2009-03-02T22:45:00.002+08:00

During a recent industry briefing, Department of Energy Secretary Angelo Reyes announced that brownout in Luzon may only happen next year as the electronics industry, the biggest power user in the island, continues to be pummelled by a lingering financial crisis.

He even considers it a positive side effect of the continuing economic crisis even as power supply in the Visayas and Mindanao has tightened with brownouts already occurring at increasing frequency.

How could he say that?

Trying to assuage fears of consumers of massive power outages by playing up the woes of the electronic sector is not a comforting stance given by no less than the top guy in charge of a Department which is supposed to nurture the power sector to health. Such a blasé attitude could spawn complacency when in fact the power industry should be on a war footing to avert a looming power crisis.

He did promise to give the list of prospective power investors, but couldn’t provide it at the right moment—which is the economic briefing itself. Such ill-preparedness smacks of the attitude the Department has shown in dealing with the problems in the power sector.

What we need is a strategic power development plan, not ad hoc knee-jerk reactions to problems as they tumble along. An important player and a responsible person of the industry should not express glee when a looming crisis was unexpectedly averted due to another crisis.

The Philippine Chamber of Commerce and Industry (PCCI)has already shown that brownouts had started in the Visayas and this year it will be Mindanao’s turn, according to its recent assessment of the prospects and challenges (read: problems) of the power sector. Next year, Luzon will be hard hit.

The Chamber estimates that to avert the crisis, there is an urgent need to build 3,000 MW of capacity in Luzon between now and next year, another 1,000 MW in the Visayas and 1,000 MW in Mindanao. Yet our Energy department chief cannot even provide the potential investors, or even rattle off potential investments from his head—which he should have easily done if he is in tune with the industry. Most likely, there is no such list.

But PCCI vice president Jose Alejandro reminded everyone that conventional base-load power plants with at least 300 MW could take at least three years to build, which is his polite way of saying that the power crisis can no longer be averted.

Our energy department head has apparently not imbibed the crisis mentality during the time of his previous boss, ex-President Fidel Ramos, when the latter had to compromise with high costs of BOT plants as a stopgap measure to a raging power crisis then.

It seems we are now resigned to debilitating power shortages starting this year.

Opposing power projects is becoming a habit

2009-02-28T00:15:00.002+08:00

There is a signature campaign going around mainly in web communities, students and professional groups vehemently opposing the re-opening of the Bataan Nuclear Power Plant (BNPP) and nuclear energy in general. I say vehemently because the organizers listed seven deadly sins of the plant and nuclear energy which ought to be opposed at all costs.

In Bacolod, environmental activists, with the prodding and aid from the clergy, have been mounting a scathing indictment of the geothermal project of Energy Development Corporation (PSE:EDC) in nearby Murcia. Specifically, they are opposing the entry of the geothermal developer into a tiny strip of land called the buffer zone between the existing field and power plant, on one hand and the Kanlaon National Park on the other.

In northern Mindanao, local groups are opposing the setting up a bioethanol plant because it is alleged that the planned processing plant would pollute the city’s watershed.

Why is it that certain groups have been opposing any power development with alarming regularity? It wasn’t too long ago that a prime mover of this coalition has sent a S.W.A.T. unit to deface a coal plant in Luzon. More than a decade back, Kidapawan in North Cotabato had been the eye of a storm of protests against a geothermal plant. Now, that 106 MW geothermal facility has been supplying Mindanao with steady power, with not a whimper from any Philippine eagle that may have strayed within the geothermal reservation.

What is disturbing and disappointing with some of this highly organized opposition is sprinkling their arguments with supposedly scientific basis to make the presentation more palatable to those who are non-technically minded. I just hope that they get all their science right.

For the case of the BNPP, opposition to its opening and against nuclear energy are lumped together, as if these are two intertwined issues. Nothing could be farther from the truth. The construction of the BNPP has been tainted with scandal. Worse, the country ended up paying millions of dollars in loans and interest without getting a single watt of power.

But considering the nuclear option is a different matter altogether. Ever since Three Mile Island and Chernobyl, the nuclear world has changed a lot. Stringent standards have been put in place. Technology has advanced such that safety is becoming a non-issue.

True, the problem of final nuclear waste disposal still hangs—but who says the end user necessary takes the cudgel of burying the waste to oblivion? The usual arrangement is that the supplier could take responsibility of temporary storage.

Temporary storage of nuclear waste has been the bane of contention between the pros and cons, but the industry—if you call it that way—has an enviable record of safety.

Now, you ask, which is cleaner and greener, wind or nuclear energy? Nobody is pulling your leg, but if you go by science—this is probably a heresy—nuclear is cleaner than wind, according to an environmentalist who did the numbers. The carbon footprint of a nuclear plant is far smaller than a wind farm of comparable electrical output. Think of the manufacturing process of thousands of wind turbines and towers to equal the 600 MW size of a BNPP type.

Now, if you power New York City with wind energy, you would need a wind farm the size of New Jersey. Don’t get me wrong. I am not advocating the re-opening of BNPP—that is a political issue—but I am not closing my eyes altogether on the nuclear alternative, especially now that we would be facing a power crunch in the next few years.

For the case of geothermal, nearly all local projects have been met with some opposition. For the Mt. Apo (Mindanao) geothermal project, you needed some trees to cut and strips of land to bulldoze for the roads and pads, just like any other development projects, be it housing for the poor or a bridge to connect a far-flung barangay (village) to civilization.

For the Northern Negros project, some lepidopterans were surely disturbed, but t they have not abandoned their habitat. When the Bacman project was at full throttle, the native bats at Manito, Albay and Sorsogon, were probably irked at the drilling rigs. But since then, they have reclaimed their natural sanctuary.

On geothermal, it is difficult for the opposition to accept that the operator needs to preserve the watersheds, for these are the lifeblood of geothermal power. The hot water you are using to drive the turbines comes from the circulation of surface water which is abetted by a healthy watershed.

Even the greenest of them all, could have objections raised against them. Solar for example, needs hectares of land to be of any consequence to our energy mix.

What about the upcoming thermal ocean power which is slowly creeping into practical use?

Well, the residents of Donsol, Sorsogon would have the butandings to thank for to justify their opposition to a thermal ocean power turbine that could be place between Allen, Samar and the tip of Sorsogon. The residents of Bataan may have to invoke the rights of some melon-headed sharks to oppose the re-opening of BNPP.

No, we are not condoning the use of polluting energy sources. While coal-fired plants are considered among the dirtiest—why do you think that the mighty U.S.A. is helpless in eradicating these smoke- and mercury-belching behemoths? Simple. It’s all about economics. Half of the American electric power comes from coal, and without it, the mightiest economy would grind to a halt.

What is important is we know how much power we need, and if we need to generate that need, we should be at least confident that our choice is the most applicable given all the surrounding circumstances at any given time.

That choice should be grounded on sound science and engineering.

Can PSALM sell Calaca?

2009-02-17T05:34:00.005+08:00

After Suez Energy backed out from the sale of the 600 MW and forfeiting close to $15 million bid bond, the Power Sector Assets and Liabilities Management (PSALM) Corp. which is tasked to privatize government’s power is now in a quandary what to do with the plant.

The failed sale effectively stalled the power sector reforms under the Electric Power Industry Reform Act (EPIRA) because the failure sets back the level of privatization to only 54%, well below the 70% threshold for the open-access regime to take off.

“We will try to re-bid Calaca this year despite the financial market uncertainties,” PSALM president Jose Ibazeta told reporters at the sidelines of a congressional hearing on the failed biddings. He said PSALM, after two failed biddings, has now the option to enter into a negotiated sale with any interested buyer.

Good luck. PSALM needs a lot of it.

Suez’ bid of $787 million through its corporate vehicle Emerald Energy Corp. (EEC) puts the price at $1.31 million per MW of installed electricity which is at the high end of recent privatization sales of power assets. It is only topped slightly by the similar 600-MW coal-fired Masinloc plant at $1.45 million/MW.

But Calaca is much older, and the two 300-MW units are severely battered that PSALM advertised it on an “as-is-where-is” basis which is a polite euphemism of an asset close to junk. The generating plants have been in operation since 1985 and 1995, respectively and are now close to end of their useful life. The former National Power Corporation (NPC) has been notorious for running down the plants under its wings—and it is not only due to lack of funds for proper maintenance.

Apparently, the interested bidders pinned their hopes on the eventual restoration of the units to full capacity which could probably economically justify the acquisition. Six hundred MW running continuously, the generated power easily sold at the wholesale electricity spot market (WESM) and a rosy 5% projected growth in GDP year in, year out—how can you not see green, as in green bucks, all around?

This is asking too much.

The 232-MW coal-fired power plant of STEAG AG in Mindanao was recently built at a cost of $305 million; that puts it at $1.31 million/MW which is exactly equal to the acquisition price of Suez Energy. On this basis, it would have been more prudent to construct a new state of the art, more efficient and less polluting coal-fired plant from scratch.

Even if the units were restored to full capacity, there have been reports that the dispatch of its maximum power would pose some tricky problems due to transmission line limitations. Again, the price could have been hinged on a major upgrade of the transmission line capacity which might not come on line at the proper time based on NPC’s track record or a lack of it.

Suez blamed the deterioration of the plants since the bidding date as its main reason for backing out. And this is supposedly due to the exclusive use of local Semirara coal on the units. Unit 1 of Calaca was designed to use imported, high heating value coal while Unit 2 was designed to use a blend of local and imported coal. Still, it is doubtful if it is the only reason.

So, how much would you buy Calaca for?

During the first round of bidding, the highest bid was $288 million which was rejected as below the (secret) floor price set by PSALM. The plant was originally built at a total cost of $590 million, so the selling agency would have been looking at around this price, including a premium and if some depreciation is considered. This price would also be acceptable to politicians--most of whom have no idea on how to value such assets—and should conform to some silly rules which say in effect that one should not dispose government assets at a loss.

Really, the offers during the first round were already generous—the government should have taken the money and run. At this stage, the possible bidders would already have been doused with cold water after more and more information is revealed on Calaca. The longer the delay, the less chance of a successful sale.

For PSALM to reach the 70% level of privatization once more, it has better chances in Limay co-generation plant and on the geothermal plants slated to be sold this year.

Probably, the asset should now be considered as slightly more valuable that the mothballed diesel plants of the former NPC which have been successfully disposed of.

Palawan power crisis once more highlights weakness of electric cooperatives

2009-02-07T20:52:00.006+08:00

Palawan business leaders have been feeling the pinch of persistent and prolonged power brownouts in the province and the city of Puerto Princesa and warned the problem “could get worse” and could jeopardize efforts to make Palawan a major international tourist destination.

In the past few months, local business leaders have noted that the power interruptions have become longer and more frequent, and have become a major disincentive to business and tourism.

According to the National Power Corporation (NPC), there are some 40 megawatts (MW) of installed electrical capacity in the province while the peak demand reaches only 21 MW, so the problem could only lie within Palawan Electric Cooperative (Paleco), the local distribution unit. NPC is however silent on how much of the installed capacity is dependable, but it is unthinkable that half of it cannot be dispatched.

In many rural areas and island provinces, power supply has been a major complaint regarding basic necessities, and the common denominator of these areas is that power distribution is being handled by poorly managed, inefficient electric cooperatives. Electric cooperatives which have been given passing marks by their consumers are the exception.

Perhaps, it is about time to have a radical re-think about electric cooperatives. With no shareholders breathing on their necks, management of many of these cooperatives does not have real incentives to professionalize its operations. Oftentimes, management and members of the board are handpicked, or beholden to local officials, if not directly controlled.

There seems to be a lack of incentive to modernize the equipment, or at least maintain properly the existing ones. Customer service is farthest from the minds of these minnows pretending to be running a basic service provider.

Why is it that there is no concrete strategy to ultimately privatize these distribution units?

It used to be that these basic services (power distribution, telecommunications, and water) were thought to be a natural monopoly of the state, and therefore, should be run, or at least controlled by local government units. Not anymore, as shown by the telecommunication and water distribution—at least in major urban areas—industries.

Whenever there is clamor to privatize an electric cooperative, there seems to be a helluvah of opposition. But if you listen carefully above the din, the noise one seems to hear is that of local political interests who are likely to lose some perks and wealth once control is transferred to the private sector--not the consumers who silently groan under inefficient services and high rates.

Palawan is but a sorry example of our sordid, highly inefficient electricity distribution systems in many parts of the country.

Petrobras going against the flow; boosts oil exploration spending

2009-02-05T17:36:00.004+08:00

If you were the head of a major oil exploration and development player and crude oil prices have fallen hard from a high of $147 a barrel to the current level of about $41, what would you do?

It’s a no-brainer: cut oil exploration spending which is deemed too risky, right?

Both oil majors like ExxonMobil and ConocoPhillips as well as minors and wildcatters like Marathon Oil and Husky Energy have already announced hefty exploration spending cuts for 2009.

Apparently, CEO Jose Sergio Gabrielli of Brazilian oil giant Petroleo Brasileiro S.A., (SAO.PETR4, NYSE: PBR) better known as Petrobras, begs to disagree.

This was his message in yesterday’s no holds barred grilling by Stephen Sackur of the program Hardtalk in BBC News Channel. There will be no let-up in exploration spending which news wires said that the amount needed is $174.4 billion over the next four years, which is higher than the original $112.4 billion Petrobras had planned for 2008-2012.

More striking is Gabrielli’s revelation that the spending is based not on the recovery of oil prices, but on a crude oil price of $37 a barrel for 2009; $41 in 2010; and only $45 from 2011 onwards. Petrobras therefore sees the current world economic slowdown would linger for many years to come which caps the increase in demand for energy.

However, Gabrielli says people will not stop using their cars, businessmen and tourists (not to mention migrant workers whom we have a-plenty) will still travel by air and goods will have to be transported—and these required old-fashioned fossil fuels. Gabrielli sees the investment plans as “very important for Petrobras’ continuity in growth.

One should take a leaf from Gabrielli’s notebook: One cannot afford to relax one’s investment and development in a very basic necessity such as energy. In fact, the best time to invest in energy infrastructure is when there is an apparent lull in demand.

Gabrielli can afford to be patient. After all, producing an oil field could take several years and even decades since the commencement of exploration.

Also, Petrobras has much oil reserves waiting to be developed, like its deepwater Tupi field, considered the largest oil discovery in the Americas for a very long time, since the discovery of Mexico’s Cantarell field in 1976.

Would it be too expensive to develop such a field? Sackur tried to outbalance Gabrielli. Yes, the latter replied, but over the years Petrobras has developed home-grown talent and accumulated years of experience doing such development—another lesson for energy companies who see technical talent as easily replaceable as a broken rig.

Is Petrobras trying to supplant its neighbor Venezuela, which is a partner in some projects, as the dominant Latin American crude oil producer? Not really, Gabrielli clarified. Petrobras is aiming to be a dominant petroleum refiner where the products generated have more value added, rather than just be a crude oil exporter.

With its strategy, Petrobras may be the “best-positioned” major oil company in the world to benefit during an oil price rebound, according to a Goldman Sachs Group Inc. report.

It is amusing to watch how Gabrielli deftly parries all of Sackur’s underhanded thrusts--from accusations that Petrobras is beholden to the government and politicians, to child labor in its sugar cane suppliers’ farms, and to its pipeline across the Amazon jungle.

One may not agree with Petrobras’ or Gabrielli’s plans and actions, but at least he should be given credit for clearly articulating his company’s mission and vision.

He belongs to a rare breed of bold and talented CEOs who are steering large and influential conglomerates in these perilous times.

____

Note added, Feburary 6, 2009:

Shortly after this item was posted, Bloomberg reported February 5 that Petrobras will take delivery of 33 new oil rigs by 2012, with 11 of them to be delivered this year. The company’s program targets production of 3.66 million barrels a day by 2013, up from 2.4 million barrels a day last year. Many of these wells will be drilled in waters more than 2,000 meters deep, and require deep water floating platforms. The program includes developing the Tupi field.

GreenGold shows the jatropha way

2009-02-03T08:20:00.009+08:00

A little-known company GreenGold Ray Energies, Inc. (Other OTC:GRYE) issued a press release yesterday that its biodiesel refinery in Nasipit, Agusan del Norte should be opening within 90 days. The GRYE Processing and Refinery Plant which is capable of producing 680 million liters (180 million gallons) of biodiesel a year is designed to use jatropha oil as its feedstock.

To support its plant, GreenGold has been acquiring lands and growing jatropha plants in plantations in Mindanao and Marinduque and has forged supply agreements with local jatropha planters. It has also established a research and development center for jatropha in Cagayan de Oro City.

A model of GreenGold's biodiesel refinery

The investment is seen as a response to Republic Act 9367 or the Biofuels Act of 2006, which requires the use of biofuel blends of up to 10% on vehicle engines within four years. The Philippines is projected to need 150 million liters of biodiesel a year for the next few years to meet the Biofuels Act mandate.

While there are several biofuel plants in various stages of development in the country, the only other large-scale biofuel plant in operation is that of Chemrez Technologies Inc. (PSE: COAT) which uses coconut oil as feedstock. It has a capacity of only a third of GreenGold’s refinery.

Jatropha (Jatropha curcas) has been touted as a viable biodiesel plant since it grows almost anywhere, even on marginal lands. Proponents have endorsed it since the oil is inedible, and should be exempt from the food for fuel controversy.

However, agronomists from the UP Los Baños have shown a few years back that jatropha that grows on marginal lands cannot yield commercially-viable biodiesel, and the only way to increase the yield is to grow it as if it were like any other agricultural crop: fertile land, irrigation and use of fertilizers.

The government, through the PNOC Alternative Fuels Corporation has an ongoing jatropha initiative although it has not yet entered into the commercial phase.

Jatropha as biodiesel

Among the advantages of jatropha crude oil over fossil diesel cited by GreenGold engineers are: (1) it is biodegradable; (2) has higher flash point than petrodiesel ; (3) emits less carbon dioxide; and (4) can be used alone or mixed with other fuels for vehicle use.

The disadvantages cited are: (1) it is more expensive than petrodiesel; (2) less suitable in cold weather because it may form a gel; and (3) tends to reduce fuel economy on vehicles running using pure biodiesel.

The potential of jatropha as a viable fule was recently demonstrated when Air New Zealand used a 50/50 mix of jatropha oil and jet fuel is a successful test flight. Last month, Houston-based Continental Airlines tested jatropha fuel on one of its jetliners.

If anything, GreenGold is trying to show that the jatropha plant can be made viable as a source biodiesel if grown scientifically and provided with proper requirements just like any other agricultural crop—and not just letting it grow on marginal lands as the government planners originally proposed.

What's capacitors got to do with energy?

2009-02-01T04:55:00.003+08:00

When specialty capacitor manufacturer KEMET Corporation (Other OTC: KEME) recently announced it has successfully developed a 35V rated polymer tantalum capacitor, it was promptly picked up by Renewableenergyworld.com, a major campaigner for renewable energy. Likewise, the 2009 Advanced Capacitors World Summit 2009 to be held on March 31 to April 2, 2009 at La Jolla, California, merited attention from renewable energy practitioners.

What's the importance of a capacitor--that passive electronic component normally protruding in many printed circuit boards--in energy?

It turns out that capacitors; specifically, tantalum capacitors, could make or unmake the renewable energy industry.

Capacitors used to be bulky electronic components which occupy so much space and have limited range of operating conditions to be effective in modern circuits. However, tantalum capacitors which are characterized by high reliability, low equivalent series resistance (ESR), high volumetric efficiency (high efficiency for a small size) and benign failure modes, among others, have appeared in the 1990s which allows electronic devices to shrink in size. Tantalum capacitors are found in DVD players, cellular phones, game consoles, flat-panel TV displays, laptop computers, MP3 players and virtually in any modern gadget.

There are competing technologies of course like the niobium capacitors, the multi-layer ceramic capacitors (MLCC) and the aluminum-polymer capacitors, but by far, the tantalum capacitors have stood their ground.

The tantalum (and the recent variant the tantalum-polymer) capacitor is robust and can operate at temperatures above 100 degrees centigrade. But until very recently, its maximum voltage rating is around 14V. It was only less than a year ago that the 20V rating barrier was broken. And now, the 35V rating.

Such high voltage rated capacitors could find their way under the hood of hybrid, flex-fuel or electric vehicles; in power supply or filtering circuits in storage systems for intermittent energy sources like wind and solar; in instruments used in drilling for oil and geothermal--just to name a few potential uses.

Their potential applications are only limited by one's imagination and creativity.

This breakthrough in capacitor technology is but a relevant example of a major technical barrier being broken by a development in an unrelated field.

For all we know, the technological barrier to low solar energy efficiency for example, could be solved by developments in nanotechnology or novel synthetic schemes in carbon chemistry.

Breakthroughs, like love, could come from unexpected places.

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

2009-01-29T12:43:00.008+08:00

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

2009-01-19T19:25:00.002+08:00

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

2009-01-14T19:40:00.007+08:00

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.

_____

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

2009-01-12T08:48:00.009+08:00

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

2009-01-07T12:53:00.003+08:00

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!

2009-01-01T00:36:00.002+08:00

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!

Obama chooses Nobel laureate physicist as energy secretary

2008-12-18T09:51:00.007+08:00

US President-elect Barack Obama announced on December 15 his choice, the Nobel Prize winning physicist Steven Chu as his energy secretary to head the Energy Department.

Chu, 60, who is currently the director of the Lawrence Berkeley National Laboratory in California, would be the first Asian-American to lead the department.

His 1985 work on laser trapping of atoms at ultra-low temperatures of a millionth degree above absolute zero, led to his being a co-winner of the Nobel Prize in physics in 1997. That seminal work, together with other techniques like magnetic cooling, laid the foundation for achieving one of the holy grails of statistical physics in 1995; the so-called Bose-Einstein condensation which demonstrates a new form of matter.

The phenomenon was predicted by none other than the great physicist Albert Einstein and then-young Indian physicist S. N. Bose in 1926. Those who achieved the goal in 1995 were awarded the Nobel Prize in 2001.

But will he make a good energy secretary?

Chu is no dyed-in-the-wool, ivory-tower type physicist. He is also one of America’s effective advocates for scientific solutions to global warming and the need for carbon-neutral renewable sources of energy. In this regard, he fits perfectly well into Obama’s green energy agenda which the latter has eloquently espoused during the heated electoral campaign. The new presidency aims for a low-carbon society by building more wind, solar, geothermal, biomass and hydro facilities.

Obama understands that crafting a viable energy policy could make or break his presidency. He also understands that the process is complex and requires the brightest minds to help him steer his energy ship to the right direction. His choice of Chu reflects the importance he gives to energy issues.

In his numerous forays around the globe, Chu has delivered a consistent message centered on “stronger storms, shrinking glaciers, prolonged droughts and rising sea levels” in apparent reference to the dire consequences of global warming.

Since assuming the directorship of Berkeley Lab in August, 2004, Chu has marshaled the Laboratory’s considerable scientific resources on energy security and global climate change, the production of new fuels and electricity from sunlight through non-food plant materials and artificial photosynthesis, energy-efficient technologies and climate science.

University of California Chancellor Robert Birgeneau who has known Chu for decades has this to say about the character of the man: “Steve Chu has been relentless about addressing the technical challenges of renewable energy in a deep way. We will now have an energy policy that can mean the U.S. will have a chance of obtaining energy self-sufficiency through new technology.”

Among other things, Chu was credited with helping establish the Joint BioEnergy Institute (JBEI), a $135 million DOE-funded bioenergy research center and the Energy Biosciences Institute (EBI), which was bankrolled by a $ 500 million grant from British Petroleum.

“Steve Chu has been an incredible visionary and true leader, particularly in the area of energy,” said Jay Keasling, who heads JBEI. “Now the country and the world will benefit from that vision and leadership."

He will be missing the ensconced academic life. But LBL’s loss will be America’s gain when the physicist-energy advocate brings his scientific talent, vision and passion for energy and the environment into the highest chambers of national energy policy.

How we wish that such inspired choice to head a very important government agency would be translated to our local situation!
_____
Note added, December 19, 2008: The papers reported today that the powerful senate Commission on Appointments bypassed the confirmation of Department of Energy Secretary Angelo Reyes and Department of the Environment and Natural Resources (DENR) Secretary Lito Atienza along with three other cabinet members. The most vocal critics of Reyes are energy committee chairperson Senator Miriam Defensor-Santiago and Senator Jinggoy Estrada, whose father was ousted in 2001 and under which Reyes served as Army Chief of Staff. Defensor-Santiago simply said that Reyes is unfit to be an energy secretary.

President Arroyo signs renewable energy bill into law. Will they come?

2008-12-18T04:57:00.003+08:00

If you build it, they will come.

This is probably the hope of this government and our energy policy makers when President Gloria Macapagal-Arroyo signed on Tuesday the Renewable Energy Bill into law nearly two decades after the first semblance of a bill was filed.

As usual, the President herself and her energy minions are quick to take credits and wax eloquent that a flood of new renewable energy investments is just around the corner.

The President claimed the new law is the “first and most comprehensive renewable energy in Southeast Asia” that she hopes could corner a chunk of billions of dollars of energy investment money floating around the world. Her energy secretary, Angelo Reyes, thinks that “it will foster sustainable growth, energy independence and economic security for the country.”

Republic Act 9513, as the new law is officially known, provides for various fiscal and non-fiscal incentives for renewable energy—which includes solar, wind, geothermal, biomass, hydro and ocean energy—developers. Some of the fiscal incentives include the usual tax credits on domestic capital equipment and services, special realty tax rates, duty-free importation of essential equipment and income tax holidays, among others.

The non-fiscal incentives essentially consist of developing the necessary policy infrastructure that supports the growth of renewable energy. Parts of this infrastructure which has been credited with explosive growth in wind and solar energies in more developed countries include: (1) establishment of a renewable portfolio standards (RPS) which would require electricity distributors to include a certain percentage of their supply from renewable energy sources; (2) a feed-in tariff system—which was still absent in the bill’s version passed by the Lower House—which could help renewable energy projects become viable; (3) a green energy option, wherein users can in theory choose energy from green sources to avail of some incentives; (4) net metering, wherein (mainly) large users and independent producers will only be billed on the net usage of power from the grid and can sell their excess power to the grid; and (5) establishment of a renewable energy market wherein green energy credits are validated and certified and wherein these credits can be traded.

For a change, critics of government energy policies are one in heaping praises for the signing of the law. Catherine Maceda of the Renewable Energy Coalition which has been campaigning for the law’s passage, says “it will usher in an era of cleaner energy use in the country” while environmental campaigner Greenpeace Southeast Asia Executive Director Von Hernandez welcomed the development saying it helps addressing climate change.

“The passage of the bill is expected to attract more investors to the industry, and help cement plans of investors who had been waiting for the bill’s approval,” Reyes added.

Not quite.

While the law is grandiose in words and the intentions seem highly noble, nothing in the law aside from the promise of monetary incentives could precipitate energy investors to immediately jump into the renewable energy pool. For one, no firm numbers have been attached to, say to the renewable portfolio standard as to the percentages required, or the feed-in tariff amount that could be used for feasibility studies for green projects. The other major provisions—renewable energy market, green energy option and net metering—are nothing more than plans with no concrete guideposts as to how and when these would established.

Worse, the National Renewable Energy Board, which is specifically created under this law and will put in the numbers, is still to be constituted and convened.

The law can only be really operational when the adjunct implementing rules and regulations (IRR) are in place, and judging by the pace our policy makers create such important documents, it would take time before wee see its light. By this time—or even long before the signing of the bill—draft IRR, or at least well-researched white papers discussing the possible contents of the IRR, should have been floated in public for discussion and debate.

Without demeaning the lofty ideals of the law, we believe the hard work to make the law viable has only just begun.

Petron now in play—but where are the players?

2008-12-16T19:46:00.004+08:00

Petron Corporation (PSE: PCOR) is now officially in play.

That is the investment jargon when a company is in the middle of ownership transition.

On Monday last week, San Miguel Corporation (PSE: SMC) said it is eyeing Ashmore Investments’ 50.1% interest in Petron. That sent PCOR shares flying which made it the top gainer among the listed stocks. It surged by more than a fifth to settle at P5.30 a share by Friday.

The sentiment is up on Petron since San Miguel is perceived to be a big and experienced company that could reverse the fortune of Petron which has been buffeted by intense competition in an industry where margins are razor-thin.

At the same time, Petron announced that it would likely be in the red this year to the tune of P 2 billion owing to falling oil prices. Petron, as well as other oil retailers, also groaned under rising oil prices early this year. That it suffers under which way oil prices are going is not entirely illogical; it is part of the nature of the business. Because oil is a politically- sensitive commodity, retailers cannot easily adjust pump prices in response to oil price movements.

When prices are falling and there is loud clamor for rollback, slow-footed refiners and retailers like Petron are saddled with inventory purchased at higher prices. Likewise, in a regime of rising prices, increases in pump prices cannot be easily implemented owing to political pressures. It is reported that among the major oil players Petron has the largest inventory and the slowest turnover. If so, its present inventories have been purchased at higher prices than current.

In this business, the lean and nimble has a greater chance to survive going forward.

It used to be that the industry is perceived to be lucrative to the big three in oil (Shell, Petron and Chevron) when the scene was like a cartel. With the liberalization of the industry, new players have grabbed a chunk of the pie and the nimblest, most efficient and deep-pocketed among them are continuously making inroads into the turf of the big three.

Among the most aggressive of the new players is Total—which is not exactly a small fry. In the global market, it is considered among the majors. Amidst the gloom brought about by the lingering financial crisis, it has announced a massive expansion of its outlets especially in Luzon and the Visayas. And it can rely upon its mother firm to supply it with enough financial firepower in case of an all-out war which seems to be already unfolding.

In the hinterlands of Mindanao and parts of the Visayas where the tentacles of the big three have tenuous hold, independent player Phoenix Petroleum (PSE: PNX) has spread its wings, slowly increasing its reach.

When it recently signed up boxing hero Manny Pacquiao as its main endorser, it is sending signals to its competitors that it is ready to climb up the oil’s boxing arena for a long fight. It is also reported that Pacquiao will be operating one of Phoenix’ service centers in General Santos City.

If SMC ultimately gains majority ownership of Petron, it would be up against formidable opposition. True, SMC has considerable marketing clout—which is why investors seem to cheer at its entry—but it is becoming more like a lumbering brontosaurus than a springy springbok, even in the food business.

Which is probably why it has announced that it will ultimately get out of its core food business.

In the process, investors have punished SMC since it announced that it is entering businesses like energy, telecoms and infrastructure where it has limited experience. In energy, it has acquired 27% of electricity retailer Meralco (PSE: MER), but failed at getting Transco and geothermal developer Energy Development Corporation (PSE:EDC) which ended up in the hands of the Lopezes. It tried to grab Indonesian coal miner Bumi Resources but apparently bowed out to local interests.

SMC’s erratic moves have not escaped notice from credit ratings agencies. Moody’s Investor Service has downgraded SMC’s local currency rating to negative from stable after it bares its plan to acquire majority control of Petron.

In a statement, the global credit watcher warned of a rating downgrade if San Miguel pursues the investment plan, which it said could hamper the group’s ability to service its debts.

Now it is partnering with—of all companies—Qatar Telecoms for joint projects. Why not any other of the major telecom players?

Now, why is Ashmore selling to SMC when it has exercised it right to acquire the government shares?

Ashmore is about to end up with 90% ownership of Petron after it has indicated that it is exercising its right of first refusal when the government has put up its 40% interest up for grabs. By relinquishing management to a perceived knowledgeable entity in retail, it feels it has a better chance of recovering its investments (with some profits of course). In the first place it is an investment fund, not a management company.

More importantly, it is paving its exit from Petron. By selling a majority block to SMC it can extract concessions from the buyer. Like for example, it can require the buyer to purchase its remaining shares at a later date once it decides to divest completely from the refiner.

We have already considered this scenario in a previous blog entry; only the numbers are somewhat different.

The struggle for Petron ought to be exciting were it not for the circumstances under which it is played as outlined above.

No wonder other players are nowhere in sight.

Regulator reduces systems loss cap—but only in January 2010

2008-12-11T05:46:00.002+08:00

The Energy Regulatory Commission (ERC), the government body which regulates the electricity business, has recently issued an order lowering the cap on electricity system loss to 8.5% down from the present mandated 9.5%--but only starting January 2010. In the same order, the limit for electric cooperatives is reduced to 13% from 14%.

The systems loss, which includes electricity lost to pilferage, antiquated equipment, design faults, administrative inefficiency and actual physical losses in the conductors, is currently passed on to the customers as added cost by distribution utilities at the allowed rate.

Charging of systems loss to the users has been under attack as being unfair from consumer groups, businesses and some government officials.

The recovery of a portion of systems loss by power utilities is allowed under Republic Act 7832 which also penalizes electricity theft.

In a statement, the ERC is also “reviewing other existing policies pertaining to rate-setting, including efficiency models [and] lifeline components of other distribution utilities and the different cost-recovery adjustment mechanisms”.

Republic Act 7832 or the law penalizing electricity theft allows power utilities to recover a portion of their system losses from consumers.

The current loss cap of 9.5% for private utilities and 14% limit for electric cooperatives have been implemented since 1999 and 2000, respectively, without adjustment.

This corner has maintained that a systems cap loss of 7% is fair, achievable and already generous under present inefficiencies, and distribution companies should strive for a systems loss of only 5%. The former figure is the average systems loss in EU countries, which is already high because it is inflated by the inefficient utilities in new member countries from Eastern Europe.

Some distribution companies in the Visayas and one or two cooperatives have actually claimed that they have achieved systems loss of below the mandated 9.5%.

The reduced cap for electric cooperatives is more of a token gesture than a real attempt at forcing more efficiency on these energy dodos. The cap for them should be ultimately aligned with those of the private distribution utilities. A viable option would be to require them to have a systems loss reduction by 1% every year until they achieve parity with the private sector. That could be done in four or five years. A carrot in terms of tax breaks and incentives for equipment upgrade should also be dangled to them.

In summary, the proposed reduction is systems loss cap that could be passed on to consumers is way too high and would unlikely to be felt by the average consumer.

GMA signing of Transco franchise bill into law heralds new era in grid operation

2008-12-08T13:24:00.002+08:00

Philippine President Gloria Macapagal-Arroyo signed on Dec 1 the TransCo Franchise Bill into law that would transfer the operations of the national power grid under a private group, the National Grid Corporation of the Philippines (NGCP), which won the bidding for the rights earlier.

The franchise bill is officially known as Republic Act No. 9511 or "An Act Granting the National Grid Corp. of the Philippines (NGCP) a Franchise to Engage in the Business of Conveying or Transmitting Electricity through High Voltage Back-Bone System of Interconnected Transmission Lines, Substations and Related Facilities, and for Other Purposes."

The signing of the bill culminated years of attempts by the government to privatize the national electricity transmission grid as mandated by the Electric Power Reform Act (EPIRA) of 2001 amidst opposition by nationalist groups and well-meaning individuals to the sale.

The NGCP is composed of Calaca High Power Corp., the Monte Oro Grid Resources Corp., and the State Grid Corp. of China.

The NGCP was granted the franchise "to operate, manage and maintain, and in connection therewith, to engage in the business of conveying or transmitting electricity through high-voltage back-bone system of interconnected transmission lines, substations and related facilities, system operations, and other activities that are necessary to support the safe and reliable operation of a transmission system, to construct, install, finance, manage, improve, expand, operate, maintain, rehabilitate, repair and refurbish the present nationwide transmission system of the Republic of the Philippines."

The franchise is good for 50 years but may be repealed or amended by Congress "when the common good so requires," the law said.

What is significant in the signing is that operating the transmission grid, which is traditionally viewed as a natural monopoly of the state, is now in the hands of the private sector. The grid operations will now be subject to more to economic forces than the previous setup. This is why traditional nationalists, who usually view big business with jaundiced eyes, see danger to security and higher prices for end users due to added profit motives of the new operators. Some of them have gone to the extent of trying to reverse the privatization process.

But this is a short-sighted view.

Grids around the world are increasingly operated by the private sector with better results than the previous state operation. This is to be expected since electricity transmission is not just about connecting power from generators to retail distribution facilities. It is also about efficient and cost effective operation. Increasingly, it is relying more on new technologies and materials.

A state monopoly does not have the nimbleness or savvy to operate in this competitive new world.

Take for example the traditional view that the flow of electrons is just one way: from the generators to the grid lines, to the distribution companies and finally to the user. No longer.

Advanced countries are now moving towards a two-way transmission and distribution systems wherein users who have excess capacity can actually sell it back to the grid. This is made possible by deploying so-called smart meters which could regulate which way electricity is flowing.

Fans of the successful transfer of operations to the private sector see more improved services. For example, they hope that the gridlock (pardon the pun) in transmission which occurred recently as a result of a breakdown in a critical transmission node would no longer recur.

But can the new operator hurdle inconveniences such as the recent court ruling dismantling a major transmission line as a result of a vanity complaint by residents of a plush village in Makati?

The bottom line is, the new grid operator has been given a great responsibility to improve the electricity transmission system of the country. It should not view the franchise awarded as a license to mint money quickly at the expense of the population.

Everybody will be watching you, the new grid operator.

Science loses in court ruling over power line dispute

2008-11-30T06:34:00.007+08:00

Onli in da Pilipins.

A Makati regional court ordered the National Transmission Corp. to effectively dismantle the 230-kilovolt Sucat-Araneta-Balintawak line, on the strength of a Supreme Court ruling favoring Dasmarinas Village in Makati in its petition against the power transmission lines passing near the village.

The well-heeled residents of the Village probably saw an eyesore on the overhead lines, but they could not just petition for their removal without an emotional and hopefully convincing reason. They have found it in anecdotal stories of the supposedly harmful effects of electromagnetic fields (others use the dreaded word radiation which is not applicable here) on health which our esteemed judges apparently agree.

The Trade department warned on hurting the country’s attractiveness as a result of the dismantling of the lines which supply power to large portion of the Makati Business District itself, most of Manila and Quezon City, Bulacan, parts of Caloocan City, and the whole of Novaliches, Malabon and Valenzuela. The Energy department meanwhile worries about the effect on the industry and businesses.

But nobody shows concern regarding a very fundamental worrying trend in local jurisprudence: disregard of science over technicalities, legalities or influence of powerful groups?

Electromagnetic fields comprise of electric (E) and magnetic (H) waves, traveling together at the speed of light and are characterized by a frequency and a wavelength. The frequency, which is the number of oscillations per second is measured in hertz (1 hertz = I cycle per second) while the wavelength is the distance traveled by the wave in one cycle. What is dealt here is extremely low frequency (ELF) fields which are defined as those having frequencies up to 300 Hz. The electrical cycle we use is 50/60 Hz.

At these low frequencies, the wavelengths are very long; 6000 km at 50 Hz and 5000 km at 60 Hz. For all intents and purposes, the electric and magnetic fields are independent from each other and can be discussed separately in the present context.

The electric and field strength is measured in volts per meter (V/m) or kV/m. Magnetic field strength on the other hand is measured in millitesla (mT) or microtesla (uT). The magnetic field itself is created by current flow.

Naturally occurring 50/60 Hz electromagnetic fields have extremely low values of the order of 0.0001 V/m and 0.00001 uT. Underneath transmission lines, the field can be as high as 12 kV/m and 30 uT and around a generating station the values could reach 16 kV/m and 270 uT.

After reviewing all available studies, the World Health Organization found no conclusive evidence linking extremely low frequency (ELF) electromagnetic fields which are found in transmission lines, to any of the purported health effects. The Australian Radiation Protection and Nuclear Safety Agency (ARPANSA) is blunter,saying the scientific evidence does not indicate that exposure to 50 Hz EMFs found around the home, the office or near power lines is a hazard to human health.

Available evidence suggests that the effects electric field strength of up to 20 kV/m are innocuous, while in animals exposed to 100 kV/m over a prolonged time have no deleterious effects on their reproductive cycles. A health effects study on a community which has been in place for at least 10 years under a 400 kV DC Pacific Intertie power line in California shows no significant or consistent relationships between exposure to the high voltage line and the perceived ill health effects (Haupt and Nolte, 1984).

The line is almost double in voltage than in Dasma, and in addition, the DC line is in corona; which means it is generating ions in the vicinity of the conductors that affect the magnitude of surrounding electric fields and ion concentrations.

On magnetic effects, a WHO study which exposed volunteers for several hours to ELF strength of up to 5000 uT (more than 20 times the value in generating stations) show negligible effect on blood changes, ECG, heart rate, blood pressure and body temperature.

For a more detailed discussion on health effects of EMFs, see the ARPANSA website.

The bottom line is the magnitude of the ELF fields in the environment produce current that is less than the currents naturally produced by the body.

So, our judges and lawyers should at least learn enough science or at least consult those with appropriate knowledge before promulgating far-reaching judicial pronouncements.

Since they are terrified of modern conveniences, the Dasma residents should have their electrical supply disconnected for their peace of mind. Then they could celebrate their court victory around a bonfire, much like the victory celebration of Sitting Bull over General Custer at Little Big Horn. They could also have their dinner under candle lights, which is far more romantic than under fluorescent lamps.

They should also refrain from using their high-end 3G phones which are supposed to emit emf waves at much higher frequencies.

The real loser here is science.

Reference:

R. C. Haupt & J. R. Nolte. (1984) The effects of high voltage transmission lines on the health of adjacent resident populations. Am. J. Public Health, 74, 76-78.

Aboitiz Power on the prowl; raises P3 billion

2008-11-24T10:23:00.007+08:00

Looks like Aboitiz Power Corporation (PSE:AP) is on the prowl again for more acquisitions after its Board approved the issuance of P3 billion worth of peso-denominated bonds through a private placement. Proceeds of the fund-raising exercise will become part of its war chest for acquisitions of power assets.

In a disclosure to the Philippine Stock exchange, it said it may increase the issue size depending on the market appetite. The offering is handled by BDO Capital & Investment Corp., BPI Capital Corp., First Metro Investment Corp. and ING Bank N.V. and will run up to the end of the year.

That such a fund-raising campaign is conducted in the middle of a raging financial crisis speaks well of the company. Lesser companies in times like this would rather seal the hatches and ride the storm rather than venture out into the open capital markets.

But it is precisely these times when energy demand is expected to slow down that one should start top build up the necessary infrastructure. The best time to invest is when there is so much blood in the streets; just ask Warren Buffett, the legendary investor.

In the past few years, the Aboitiz group has been actively adding power assets to its portfolio by buying assets from the government or other investors. In July, it bested Energy Development Corporation (PSE:EDC) in acquiring the Tiwi-Makban complex, the first geothermal asset sold by PSALM, the government arm tasked to privatize power assets. It is also the first geothermal asset held by the Aboitiz group.

In a joint venture with SN Power of Norway, Aboitiz Power has taken over the operations of the Ambuklao and Binga hydro plants in Benguet in the middle of the year. Earlier in 2006, it has acquired a significant chunk of ownership in the 232-MW STEAG coal plant in Mindanao.

Aboitiz Power has a large pool of government assets it can cast its net into. Among the assets scheduled for disposal by the government in 2009 include:

the 116-MW Subic and 620-MW Limay diesel plants, both to be sold in January;
the 246-MW Angat hydroelectric plant, in February;
the 310-MW Navotas I and II diesel plants, and the 197.8-MW Naga gas and diesel plants, in April
the 192.5-MW Palinpinon geothermal plant, in July
the 850-MW decommissioned Sucat and the 112.5-MW Tongonan geothermal plant, in August
the 150-MW Bacon-Manito geothermal complex, in September and
the 54-MW decommissioned Cebu diesel plant, in October

In the first nine months of the year, the company reported a P3.17 billion net income, a 35% net income growth year-on-year on the back of the continued expansion of its power generation business. However, it is likely that the overall income for the whole year will be tempered owing to the costs in acquiring the new assets Tiwi-Makban and Ambuklao-Binga.

While the Aboitiz group belongs to an old, well established business clan, its power business is run by a new generation descendant in Luis Miguel Aboitiz, who is young, dynamic and has the required academic and business credentials to run a difficult business in trying times.

Aboitiz Power is one energy company worth watching by investors, consumers and by the energy community at large.

(Disclaimer: The author does not hold any shares in any of the Aboitiz companies and does not intend to invest in them in the near future. He is not connected with the Aboitiz group, and is not tasked to write about them)

Calculating your carbon emission: aviation travel as an example

2008-11-17T16:30:00.006+08:00

Calculating carbon emission is the first step in applying a project as a Clean Development Mechanism (CDM) activity to gain carbon credits. Now that CDM activity has taken root in the country (see previous post), a better understanding of the process of calculating carbon emissions is necessary.

It is not only CDM projects that make such calculations. In the never-ending search for energy efficiency and in efforts to combat global warming, companies ranging from multinationals to rural piggeries, have launched programs to limit their greenhouse gas (GHG) emissions to the extent of making their operations carbon neutral.

Also, big sporting events like the World Cup and the recently concluded Beijing Olympics, and large international conferences like the gathering of G8 leaders in Japan, have been under severe pressures to limit their GHG emissions and minimize their environmental impacts.

Organizers and environmental critics would dearly love to see these events becoming carbon neutral.

SAS, an IT vendor for business intelligence, sensing an upcoming opportunity, has already introduced into the country a carbon calculator, a software that determines a company’s or an event’s carbon footprint.

The first step in hosting a carbon neutral event—say, a conference--is quantifying how much GHG emissions the event would likely generate. The emissions assessment should cover not only during the event itself, but throughout-- from planning, to calculating the two-way travel emissions by the participants, to recycling of materials at the end of the show.

To do this, one should calculate the total carbon emission or footprint of the event using a carbon calculator.

Existing carbon calculators range from order-of-magnitude estimates to fairly sophisticated devices that detail every possible source of emission and the methods backed up by reputable data. There are free carbon calculators usually offered by non-governmental organizations concerned with global warming and government institutions such as the US Environmental Protection Agency (EPA) and there are sophisticated commercial calculators used by carbon market traders, renewable energy project developers applying for carbon credits through the Clean Development Mechanism (CDM) developers, and big business carrying out a corporate program towards carbon neutrality.

Outputs also vary greatly in accuracy depending on the type of event or project being considered, on the assumptions and data used by the calculator developer and on the geographical area where the calculator is to be used.

There are activities or projects such as aviation travel or driving a car to a given distance, wherein the carbon footprint can be calculated with reasonable accuracy. At the other extreme, there are projects wherein the calculations border on faith and questionable assumptions. These include biomass burning, reforestation and carbon sequestration by soils.

In order for offsetting to be credible, the GHG emission has to be calculated accurately. Therefore, the most important consideration is to choose carefully the carbon calculator to be used.

Let us take a fairly simple example relevant to carbon neutral conferences: aviation travel. Jardine (2005, p.2) presented a detailed presentation on how aviation emission per individual is calculated.

The major assumptions in the calculation include the knowledge of the amount of fuel during the flight, the distance traveled, cruising altitude, weather conditions, the passenger and cargo load, the likely aircraft type used, etc. Even if these are accurately known, one cannot simply arrive at a general impact value per passenger.

For example, flight distance does not scale linearly because one has to consider the extra burn required during take-off and landing. Needless to say, direct flight is far more efficient than one with a stop-over.

Different types of aircraft burn fuel at different amount; therefore in Jardine’s (2005, p.3) study, three most likely aircraft types were considered: Boeing 737 for short-haul and Boeing 747 and Airbus 320A for medium and long-haul.

After the emission is determined, the global warming impact has to be determined using a chosen metric. In aviation, the usual metric is radiative forcing which is defined as “the change in the energy balance of the lower atmosphere by a climate change mechanism” and is measured in units of Watts per square meter (W/m²). The ‘climate change mechanism’ is typically the emission of a greenhouse gas (e.g. CO₂ from human activity), or a collection of different gases (e.g. all greenhouse gases from the agricultural sector).

Despite a well defined boundaries or conditions for the calculations, different calculators give different answers. For example, six different calculators gave values ranging from 2 to 6 tons CO₂ tons for a 17,900 km flight.

The differences in the estimates arise from: (a) whether only CO₂ or all GHG gases are considered, (b) including or not non-gas components that could affect the metric used; and (c) setting the boundaries for the calculation—that is, whether the portion of airport services is considered or not.

It is preferable to choose a calculator which is most comprehensive in its calculation.

It is also crucial to choose a provider accredited with a top accepted standard to ensure getting a comprehensive calculator. Some of the stringent standards include the Gold Standard, the Greenhouse Gases Protocol, the International Organization for Standardization (ISO) ISO14064, The Voluntary Carbon Standard (VCS) and The Climate, Community and Biodiversity Standards (CCBS).

After going through the rigors of understanding and choosing the most appropriate carbon calculator, one is now poised to offset his event’s carbon emissions.

Reference:

Jardine, C.N. (2005). Calculating the environmental input of aviation emission, 14. Retrieved August 18, 2008 from http://www.climatecare.org/media/documents/pdf/ Aviation_Emissions_&_Offsets.pdf

__________

Note added, November 18, 2008: On Thursday this week President Gloria Macapagal-Arroyo will preside over an important conference billed Carbon-Cutting Congress vs. Climate Change which will showcase this adminstration's "Green Philippines" program. This program should start calculating the emissions of the 54 congressmen and the whole entourage who will be going to Peru with GMA using the procedure above if Congress is serious about its green program. The gentlemen and ladies will be in for a shock at the number that will be arrived at.

Has CDM come of age in the Philippines?

2008-11-16T14:28:00.002+08:00

During the recently concluded Carbon Forum Asia 2008 held in Suntec City, Singapore, Michael Dreyer, vice president of Koelnmesse-Asia, co-organizer of the conference together with the International Emissions Trading Association (IETA), noted that “from 2006 to 2007, Asia's CDM market grew by nearly 200 percent, signaling the region's emerging dominance in the global Carbon Market".

The market he is referring to is where carbon credits are traded for projects under the Clean Development Mechanism (CDM) which is under the auspices of the Kyoto Protocol. This market has been growing at a torrid pace in the past three years; from $40.1 billion in 2006 to $66.4 billion in 2007 and should easily top the $100 billion mark by the end of this year. Despite this huge elephant of a market, it is largely invisible in the country.

The Conference noted however, that while China and India lead the pack in the number of CDM projects registered at close to 640, the Philippines, Thailand and Vietnam are not too far behind.

This is welcome news. Has CDM come of age here?

The Philippines is not considered a major contributor to the total greenhouse gas (GHG) emissions worldwide simply because we are not huge consumers of energy on a per capita basis. But we do have a large potential for projects that could generate carbon credits as Carbon Emissions Reduction (CER) certificates that could be traded on the Carbon Market.

This potential is being watched by mostly foreign vulture investment funds and financing institutions which smell the fragrance of money. That such is the case can be seen by the keen interests of these foreign financiers to ante these projects.

At the latest count, there are 20 CDM registered projects in the country while much more projects are in the pipeline. Being registered means the project is formally accepted by the Executive Board of the United Nations Framework Convention on Climate Change (UNFCCC), the body in charge of this activity, of a validated project as a CDM project activity. Registration is the prerequisite for the verification, certification and issuance of CERs related to that project activity.

These are, in the order of latest to earliest registered, and the date of registration:

* First Farmers Holding Corporation (FFHC) Bagasse Cogeneration Plan-10 Sep 08

* Makati South Sewage Treatment Plant Upgrade With on-site powerR-24 Jun 08

* Hedcor Sibulan 42.5 MW Hydroelectric-06 Jun 08

* Laguna de Bay Community Waste Management Project: Avoidance of methane production from biomass decay through composting-16 Mar 08

* Quezon City Controlled Disposal Facility Biogas Emission Reduction Project-01 Feb 08

* The Anaerobic Digestion Swine Wastewater Treatment with On-Site Power Bundled Project-17 Dec 07

* Goldi-Lion Agricultural Development Corporation Methane Recovery and Electricity Generation Project-08 Sep 07

* Bondoc Realty Methane Recovery and Electricity Generation Project-07 Sep 07

* Superior Hog Farms Methane Recovery-07 Sep 07

* D&C Concepcion Farms, Inc. Methane Recovery and Electricity Generation Project-26 Aug 07

* Philippine Sinter Corporation Sinter Cooler Waste Heat Recovery Power Generation Project-05 May 07

* San Carlos Renewable Energy-13 Apr 07

* Paramount Integrated Corporation Methane Recovery and Electricity Generation-31 Jan 07

* 20 MW Nasulo Geothermal Project-10 Dec 06

* Gaya Lim Farm Inc. Methane Recovery-30 Oct 06

* Uni-Rich Agro-Industrial Corporation Methane Recovery and Electricity Generation-28 Oct 06

* Joliza Farms Inc. Methane Recovery-23 Oct 06

* Gold Farm Livestocks Corporation Methane Recovery and Electricity Generation-21 Oct 06

* Wastewater treatment using a Thermophilic Anaerobic Digestor at an ethanol plant in the Philippines-01 Oct 06

* NorthWind Bangui Bay Project-10 Sep 06

The biggest in terms of carbon dioxide equivalent reduction is the bagasse co-generation plant at close to 120,000 tons/per annum. Other major ones include Hedcor’s Sibulan hydro (95,174 tons), ethanol plant (95,876 tons) and the Bangui Bay wind farm (56,788 tons). Most of the rest are fairly small with reductions in few thousands tons and the credits are better traded in an alternative voluntary carbon market in which smaller players can participate.

Unfortunately, our businessmen, financial institutions, investment banks and entrepreneurs have not taken advantage of such opportunities mainly through lack of understanding or awareness that such opportunities exist.

DOE proposes to raise the biodiesel blend to 3%

2008-11-11T04:37:00.005+08:00

Over the weekend, Department of Energy (DOE) director Mario Marasigan announced that his agency may propose to increase the minimum required biodiesel blend to 3% by February 2009 to spur investors to pour in more money to the sector.

He revealed that there are now 13 accredited biodiesel manufacturers capable of producing up to 326 million liters which is more than what the 2% blend requires.

“The DOE is studying that with this capacity in place, is it appropriate, rather than two percent mandated blend on February 2009, why don’t we increase it to three percent?,” he said.

Why not? If the blend is indeed that friendly to the environment and it can compete with the usual diesel, why not make it to 5%. Studies suggest that a blend of 6 to 10% works very well with light cars and vehicles, and other countries are mulling to use up to 20% blend (B20) for large buses. In fact many countries start with a mandated 5% blend (B5) and gradually increasing it to B20. A 2% blend is just too dilute to effectively feel a difference in performance, and its avowed benefit may be hardly felt.

But what we, users, must guard against is substandard fuel introduced into the market by unscrupulous individuals or firms out to make a quick buck. True, the DOE has released its adopted biodiesel standards which is, on paper, quite stringent and appears to have been patterned after the European standards. What is uncertain though is whether the DOE has the know-how or the capability to scientifically monitor the blend already on the market.

We mean the technical capability to verify whether these biodiesel blends passed the technical requirements such as fatty acid content, cetane rating, sulfur limits, heavy metals content and the like. Corollary to this is the question whether there are laboratories which can independently check the quality.

These are not routine inquiries, for what is at stake is the integrity of one’s vehicles, not mentioning the projected impact to the environment.

There is also a need for more public discussions on the DOE standards. The consumers need to be clarified whether the standards apply to the diluted blend or to the pure biodiesel (B100) which is the starting material for blending.

As far as I could tell, we are the first and possibly only country to have specified a coco-methyl ester (CME) standard rather than the usual fatty acid methyl ester (FAME) or fatty acid alkyl ester (FAAE) standards. Its formulation smacks of political undertones or lobbying from CME manufacturers in attempts to exclude other biodiesel sources.

There is nothing wrong with protecting our own native coconut industry. The Malaysians have done it with their palm oil and the Americans with their soya oil. What is objectionable though is a protectionist policy that stretches beyond the boundaries of technology to favor certain interests to the ultimate detriment to the consumers whose choice becomes limited.

This outlook apparently crept into the formulation of the cetane rating in which the DOE standard pegs it at 55. The cetane rating measures the relative amounts of easily burnt component in a fuel; in this case the molecular weights of fatty esters. The higher the cetane rating, the better the fuel.

Scientifically, though, the standard vehicle engines work very well with cetane ratings for 46 to 55. This is the reason why the U.S. ASTM standards pegs the cetane rating to only 47—which the soya oil, a major U.S. crop product for biodiesel, passes easily—while some European countries put the minimum at 51. Incidentally, DOE claims that CME has a higher cetane rating than soya or palm oil.

The danger is, such exclusive provisions can be twisted to suit one’s selfish interests and mislead the public. For example, a leading CME manufacturer listed at the Philippine Stock Exchange made it appear that only biodiesel conforming to the CME standards are allowed in the market citing the DOE's revised circular that “only CME conforming to PNS/DOE QS 002:2007 shall be manufactured, sold, offered for sale, dispensed or introduced into commerce as biodiesel in the Philippines.” Apparently the manufacturer’s announcement was in reaction to reports that some firms are importing biodiesel which is not CME-based from Korea and other places, and is trying to protect its turf.

The mandate to use the biodiesel blend in accordance with Republic Act 9367, otherwise known as the Biofuels Act, starts in February 2009. There is still time to conduct public discussions in media to educate the consumers on the pros and cons of biodiesel, and on how they could be protected from unscrupulous dealers.

Will SMC make a run for Bumi Resources?

2008-11-05T08:27:00.006+08:00

Speculation is rife within the energy and investment circles whether San Miguel Corporation (PSE:SMC) is keen on taking a stake at Indonesian coal miner Bumi Resources, by buying the 35% stake owned by PT Bakrie & Brothers, which hopes to raise some $1.3 billion to pay off debts.

In a disclosure yesterday, SMC said it would bid for 35 percent of Indonesia's largest coal miner rivalling an offer led by private equity firm Indonesian-based Northstar Pacific which is run by by former Goldman Sachs banker Patrick Walujo and has a joint venture with U.S. private equity firm TPG Capital LP. The tone is somewhat different than its earlier disclosure that it will initiate talks with Indonesia’s PT Bakrie & Brothers, for an alliance for its PT Bumi Resources operations.

Apparently, SMC is dragged into a bidding war when a Bloomberg report said PT Bakrie & Brothers, the investment arm of Indonesia’s richest family has agreed to sell its stake to Northstar Pacific.

The sources said Indonesian investment bank PT Renaissance Capital might also join the Northstar consortium or bid separately.

PT Bumi Resources Tbk is an Indonesian-based natural resource company engaged in mining, oil, gas and energy-related activities. It owns the world’s largest export coal mine with operations in East and South Kalimantan with 11 billion tons of coal mineable reserves; about 55 million tons in average sales volumes in the last three years; and, a steady cash flow generation, according to the SMC disclosure.

SMC will be like a salmon swimming upstream. It is pitted against a deep-pocketed bidder in Northstar consortium. Worse, its main rival is politically highly connected to the powers that be, and in Indonesia, business and politics are inextricably intertwined.

One of the Bakries, Aburizal Bakrie, is Indonesia's chief social welfare minister and an influential figure in the Golkar Party, which is a key part of President Susilo Bambang Yudhoyono's coalition. Bakrie is considered the country's richest man, with an estimated $9.2 billion fortune.

But will SMC, like the salmon, go against the flow to seed its investment eggs in a fertile new territory?

SMC has declared as far as two years back of its intention to enter into high growth areas which include energy to prop up its bland returns from its food businesses. It has fired an opening salvo by acquiring a 27 percent of the country's largest power distributor Manila Electric Co (PSE:MER) in a cash deal worth 30 billion pesos ($612 million), with payments spread out over three years from the Government Service Insurance System (GSIS).

Indonesia as a target area fits very well into SMC’s sphere of influence. It has a sizable food and beer business there; it can leverage that experience to its new intentions.

Indonesia is also a fertile ground for energy investments as we noted earlier, notwithstanding the difficult environment one has to face.

In a sense, SMC knows very well where the mother lode is likely to be hidden. SMC may face enormous obstacles in its run for Bumi. It may fail altogether. But one has to give credit for SMC for its tack to grow its business despite the lingering global financial crisis.

It is boldness, which can be mistaken for brashness, worth emulating by other local big business groups who are merely content to keep their ongoing concerns here. In a highly globalized environment, rules have changed, and only those who are adept at playing by the new rules are bound to survive and prosper.

___

UPDATE: November 30, 2008: On November 28, Indonesian private equity firm Northstar Pacific said it will assume a "significant" chunk of the $1.2 billion owed by the diversified Bakrie group and will convert it into shares in Bakrie's coal firm, Bumi Resources. This could give Northstar a substantial stake in Bumi, Indonesia's biggest coal miner, while providing a much-needed lifeline for the indebted Bakrie & Brothers, the parent firm. No mention of any other interested party on Bumi was made in the report.

San Miguel buys into Meralco

2008-10-28T08:06:00.002+08:00

Food giant San Miguel Corporation (PSE:SMC) finally gets a foot on energy’s door.

In a disclosure to the Philippine Stock Exchange (PSE) San Miguel said it had entered into an agreement with the Government Service Insurance System (GSIS) to acquire 300,963,189 shares in electricity distributor Meralco (PSE:MER) held by the latter.

It has agreed to pay P90 per share for Meralco, more than double the firm’s closing price of P44.50 yesterday, at the very day that the stock market suffered its worst-ever percentage drop.

Under pressure from its shareholders to deliver decent returns, SMC has said that it is spreading its wings out of its comfort zone that is food, to venture into high-growth areas such as mining, infrastructure and power.

The same report also said it was eyeing a stake in Petron Corp. (PSE: PCOR) and had initiated talks with the Ashmore Group, which earlier this year took control of the refiner.

What do beer and electricity have in common? Nothing, really, except that alcohol can at least be used to power vehicles. But energy needs a lot of cash to move forward—and SMC has lots of it.

But will SMC deliver its promised superior returns with its new foray?

Meralco is in a highly regulated industry where margins, through the return on-rate-base (RORB) scheme, are capped. In addition, issues concerning Meralco’s business are highly politicized; there’s not much leeway to increase profits. If ever, Meralco’s profit drivers would be outside its core business such as those in services. Or if Meralco chooses to expand its franchise by acquiring ailing distribution cooperatives like the Albay Electric Cooperative (ALECO) or others contiguous to its franchise area.

Its interest in Petron would be good for the latter since the government would then be completely out of the refiner and fuel retailer. Petron would be less subject to political interference.

Meralco is also pleased to get a monkey off its back; its nemesis in the person of GSIS head Winston Garcia. Now, it can concentrate more on delivering power.

I have mentioned in a previous blog that Ashmore is unlikely to end up with 90% of PCOR even with its right of first refusal when the government decides to unload its stake by November. Now that SMC is in the picture, Ashmore can very well exercise that option now, and offer some of the shares to SMC. It doesn’t have to be the whole of government’s 40% stake. A possibility would be for Ashmore to offer some 25% stake to SMC and keep the 65% which is still an absolute majority control.

To recall, SMC has been trying to get into the energy business. It has participated in the Transco bidding but lost out to eventual winner Monte Oro Resources. It had its eyes on Tiwi-Makban geothermal complex according to newspaper reports, but did not submit a bid.

Now, would you rate SMC a buy?

So far, SMC is sniffing at the more mature portion of the energy industry. Unless it is willing to get its feet dirty by going into “greenfield” energy projects, alternative energy development, mining or oil field development, SMC wouldn’t merit a ratings upgrade. I would rate it a HOLD. MER would still be a SELL.

What about PCOR? Now that its shares are also battered together with the rest of the market, I would also put it at HOLD, while watching how the SMC interest would pan out.

And maybe, an upgrade to a BUY?

(Disclaimer: These recommendations are not based on financials and not by an analyst. These are given as tongue-in-cheek recommendations. Consult your stockbroker for a more learned opinion. The author is not liable for losses as a result of these recommendations.)

EDC acquires Pantabangan-Masiway hydro complex from First Gen

2008-10-22T14:31:00.008+08:00

Ho-hum. Yawwn.

Excuse me. I know it is impolite to yawn in front of people but I was trying to make some sense of an M & A activity in the energy sector which was supposed to inject life to two of the hottest players in the industry before I nearly dozed off. Let see…

Here it is. A week prior to the big announcement, Francis Giles Puno, First Philippine Holdings Corp. (PSE: FPH) chief finance officer told reporters “we have received some strong expressions of interests from both foreign and local companies” to acquire the 112-MW Pantabangan-Masiway complex its subsidiary, First Gen Corp. (PSE:FGEN) owns through the First Gen Hydro Power Corp. (FGHPC).

Local punters and self-styled analysts expect First Gen to realize between $129 million and $208 million for the asset for a handsome profit. After all, it acquired the hydro plants for a measly $105 million in November 2006 from the Power Sector Assets and Liabilities Management Corp. (PSALM), the privatization arm of the government for the power assets of National Power Corp. (NPC).

A week later, the “foreign and local interests” turned out to be Energy Development Corp. (PSE:EDC)—First Gen’s own subsidiary! The tag price for the complex was a whooping $240 million, more than double the acquisition price.

Actually, First Gen is selling 60% of First Hydro to EDC which is valued at approximately $105 million. First Gen claims that the transaction emanated from an unsolicited offer made by EDC to it. Which is strange, since First Gen effectively owns EDC.

As if to assure us, bystanders, that the deal is good for EDC, Punongbayan and Araullo, the advisory firm tasked to value the transaction said “this ($240 M) is below the range of values we have derived amounting to $262.9 million to $312.4 million.” The decimal point is real; that’s how accurate they are. And to make sure we understand everything, it interpreted its own finding by saying the lower enterprise value “is favorable to EDC from a financial point of view.”

Really?

The higher appraised value of the hydro assets was justified ostensibly because the Lopez group already made some refurbishments that enhanced the operating efficiencies of the two plants.

What did the Lopez group do aside from holding for almost two years the right to operate the assets since winning the bid?

FGHPC has selected Austrian firm Andritz VA Tech Hydro (GmbH) only in February this year to refurbish and upgrade the Pantabangan hydroelectric plant. According to Andritz, the contract calls for the “replacement of the two 52 MW Francis turbines, new generator stator windings and the modernization of the complete electrical equipment including governor system, unit automation with Scada system, new static excitation, generator and transformer protection, new medium-voltage switchgear and low-voltage distribution.”

But the first unit will only be rehabilitated between July and December 2009, while that of the second unit will only be completed by December 2010. There are no misprints of the years mentioned.

If the assets were that good, why is FGEN shuffling it around? For one, it will get $105 million in cash which it could use to pare down its heavy debt load. As of end June, FGEN has $1.6 billion of long-term debt against an equity of $1.2 billion for a long-term debt-to-equity ratio of 1.33. For an infrastructure company in a mature market, this is already a disaster in the making. We don’t appear to be very bearish; we exclude the current liabilities of $820 million which if considered would jack up the total debt-to-equity to 2 or a gearing of 200%!

When the dust clears, the scenario would be something like this: FGEN gets $105-M cash from EDC to pay off a small portion of its debt. That would improve its balance sheet somewhat. EDC becomes a trailblazer into hydro--but it has to wait for two years before some profits from hydro starts to trickle in. It will now pay for the rehabilitation of the hydro complex. All without ceding an iota of control to outsiders.

See how accounting could do wonders?

Because the $105-M cash originates from EDC—surely, the geothermal power producer gets something in return.

Stephen CuUnjieng, vice-chairman for Southeast Asia at Macquarie, which advised EDC, justified the purchase this way: “This is not just about adding 112-MW of power. The reservoir means the hydro plant can expand without having to build a new dam and there will be internal organic growth over the next five years. So EDC becomes a company offering stability with growth rather than just stability, while keeping its green profile.”

A report assures the minority shareholders, among them some friends, that the deal is good for them. They cannot say or do anything during the ceremonial special stockholders meeting to approve the deal. Their combined shares are insignificant compared to those of the majority bloc.

What a brilliant move by EDC. I have always regarded my former employer to be a pro-active and dynamic organization which could seize opportunities the moment they cut across its path, and this should be one of them. So the market (investors) should be jumping for joy.

After the deal was announced, FGEN’s share price promptly fell 4.8% to P15 per share while EDC’s dropped 5.7% to P3.30. Of course, this has to be nothing to do with the deal considering that the market has slumped so much due to the lingering worry of a global economic slowdown. As it were, the share prices for both listed companies are still expensive.

Paul Aquino, EDC’s president and CEO chimed in with his view saying “our entry into hydro power clearly complements our portfolio and provides EDC with vast opportunities for growth.”

But Pantabangan started operating in 1977 and by this time the reservoir should already be highly silted. So First Gen—now EDC—should be hard-pressed to recover the original output of 104 MW.

How could the renewable energy portfolio of EDC grow with Pantabangan? It cannot even apply for carbon credits under the Clean Development Mechanism (CDM) of the Kyoto Protocol because it is already there. It fails the basic requirement of additionality. The term means that a carbon offset credits should be “in addition to” to what is avoided greenhouse gas (GHG) emissions if the project were not implemented in the first place.

EDC is supposed to be developing a wind farm for up to 86 MW in Burgos, Ilocos Norte for years now. Northwind Development Corp. which came in later into the industry, promptly erected the 24-MW Bangui Bay, Ilocos Norte wind project way back in 2006. Now its majestic photos appear frequently on Philippine postcards and on Flickr.

Now would you blame me for falling asleep? Wait, that’s a fine idea. Please wake me up at 10 minutes before 5 or when the boss comes to our cubicles, whichever comes first.

Obama-McCain debates elevate energy issues to highest levels

2008-10-21T14:19:00.004+08:00

One crucial item that bodes well for America from the debates between the U.S. presidential contenders Republican John McCain and Democrat Barack Obama is that issues concerning energy—energy security and climate change among others—have been elevated to the highest levels of discussion.

On energy, Obama said that the country could attain energy self-sufficiency within ten years if it aggressively focuses on developing its renewable energy resources and new drilling could remove the shackles from Middle Eastern and Venezuelan oil. With declining production from Mexico and Canada, their wishes are unlikely to be granted in the foreseeable future.

McCain is seen to be friendly to big oil, and his rallies are punctuated by cries of “drill, baby, drill!”

"We can't simply drill our way out of the problem," Obama countered, noting the US consumes nearly 25% of the world production, but contributes only 3% of the supply.

Obama even puts energy on top of his presidential agenda, ahead of health care and Social Security reform, two of the most emotional issues confronting Americans. And he is willing to commit $150 billion for a rational alternative and renewable energy program.

On the final debate, fully 72% of the viewers agreed with host Bob Schieffer to put energy as a priority topic. This is just below the rating of education (78%) and abortion (74%).

McCain on the other hand, is pushing for massive nuclear development. On the attendant issue of nuclear waste disposal, he simply waived the problem by saying if the Japanese, French and Canadians could do it so does the U. S. He is however silent on the specter of a wider nuclear proliferation.

Perhaps the most pleased American watching the debates could be T. Boone Pickens, who recently unveiled his Plan to wean America from foreign oil by displacing all of electricity from natural gas by wind energy and using the former to fuel the millions of road vehicles. And he made no bones (no pun intended) of aiming earlier to put the energy situation on top of the issues during the current presidential campaign.

Apparently, he is succeeding.

During the heat of the campaign, scientists, military veterans, corporate executives, clergy, Native Americans, movie stars and others have signed a letter to both McCain and Obama to call for and urgent comprehensive action to address global climate change upon taking office as president. The call is inextricably tied to the issues concerning energy usage and policies.

"We must act quickly to invest in a new energy economy that not only generates all the power we need while dramatically reducing greenhouse gas emissions, but also produces millions of new jobs, new industries, new revenues and new opportunities," the letter said.

With the looming presidential elections in 2010 in this country, it doesn’t hurt if we start a campaign now to place our precarious energy situation as the top issue like what is happening in the U. S.

We are more than dependent on foreign oil; with insignificant amount of local production. The much-touted Galoc oil is but a drop of our needs.

The renewable energy bill has just been approved by both the House and the Senate and all it needs is a signature for it to become a law. While the bill leaves much to be desired, at least we have a legal platform now to vigorously push for our own alternative and renewable energy development.

If anything, the Obama-McCain debates should spur us, especially our legislators and politicians aspiring for the highest offices, to examine the energy situation before it gets much worse.

Galoc gushes oil at 22,000 barrels a day--hold off the parties

2008-10-13T03:44:00.006+08:00

The Galoc field off Palawan started producing oil at an initial rate of 22,000 barrels of oil per day (bopd) last October 9, Malacanang, as reported by Energy Secretary Angelo Reyes, gleefully announced during a news conference.

The news comes at a time when the country is shrouded by a pall of gloom as a result of the financial meltdown currently experienced around the globe. It also comes on the heels of the spiraling fuel prices this past year before the price rally was abruptly stopped on its tracks by a looming global economic slowdown.

The main operator said that the production could be in the vicinity of 20,000 bopd which is “equivalent to roughly six percent of the daily oil demand of the country,” Secretary Reyes said.

The palace subalterns are quick to strut like peacocks as if the country has been resurrected from its economic grave.

“The President is optimistic that this new development will positively impact on the administration’s efforts to reduce the country’s annual oil importation of $6 billion,” Presidential Executive Secretary Eduardo Ermita said. This would also translate to about $1.4 billion in foreign exchange savings for the country, for the oil well’s lifetime estimated at about three to five years, he added.

The oil field is developed by Galoc Production which is a joint venture owned by a subsidiary of the Vitol Group and Otto Energy Ltd. It formed a consortium composed of Nido Petroleum Pty Ltd., Oriental Petroleum and Minerals Corp., The Philodrill Corp., Forum Energy Philippines Corp., Alcorn Gold Resources Corp. and PetroEnergy Resources Corp.

GPC, which holds Service Contract 14C, owns 58.29 percent of SC 14, while Australia-based Nido Petroleum Ltd. owns 22.28 percent.

So, is it now time to party as a thanksgiving to our new-found fortune?

“We embrace this significant development as this will help immensely in our pursuit to be energy self-sufficient... We are on the right track in utilizing our indigenous sources,” Reyes said.

Hold on. Before one gets drunk at the news, one should take a second look at the situation while still sober.

The amount quoted was only obtained during initial flow tests which normally do not represent the long-term production potential of the well. At 2,200 meters, the reservoir will not be easily tapped, and at 320 m deep sea water, the location is not exactly shallow.

Galoc’s crude, dubbed Palawan Light, contains undesirable high sulfur at 1.64% which makes it difficult to sell in the open market

The Galoc field was discovered in 1981 by Philippine Cities Service Inc., a wildcatter, and initial oil production between 7,500-10,000 bopd per well was not deemed too attractive for full development due to the low oil prices at the time (about $20 per barrel) and perceived operational risks.

The initial production value can easily sink to unprofitable levels if one studies the history of oil production in the area.

Let us review the history of nearby West Linapacan field. Both fields are within the same service contract area.

At a water depth of 350 m, West Linapacan is situated slightly deeper than Galoc. The field was discovered in October 1990 and was put into commercial production in May 1992.

For the first well, the flow test recovered 2,900 bopd but actual initial production was at 1,700 bopd. Two more well were drilled and these initially produced oil at a total rate of 9,170 bopd. For the whole field the initial production was pegged at 18,700 bopd, which is slightly lower than the projected production of Galoc.

But by December of the same year, the West Linapacan production dropped significantly. For the next few years, the field was just coasting along until 1996 when the field was shut down as production was no longer economical.

The main culprit was inflow of sea water to the production well which makes extraction more difficult and costly. The Palawan oil reservoirs are in a fractured area and sea water contamination is to be expected.

For Galoc, the oil-water interface is tagged at 2,100 m.

The operator of the Malampaya gas field has had misgivings in extracting the oil portion beneath the gas reservoir precisely because of the risks involved which are similar to those at West Linapacan and Galoc.

The delays in Galoc production, which was originally scheduled to start April, already bloated the cost from $86 million to over $210 million.

If the government has readied the food and drinks for the Galoc coming out party, better hold off the corks and just donate the food to the needy.

An unpleasant surprise from Galoc may be in the offing in the next few months.

Selling the tarnished crown jewel

2008-10-11T03:54:00.004+08:00

The government is planning to sell the rest of its holdings in Petron which is held by Philippine National Oil Company (PNOC) by November. It will first be offered to London-based Ashmore Investments who earlier bought the shareholdings of erstwhile partner Saudi Aramco. As a majority shareholder, Ashmore has the right of first refusal for any of the shares which would be divested by PNOC.

The PNOC stake in Petron comprise of 3.75 billion shares which represents a 40% interest is reportedly offered for some P26 billion. At the current exchange rate, this would amount to some $650 million which is higher than the purchase price of $550 million by Ashmore.

In peso terms the government’s offer price translates to 6.93 per share which is far above the recent price quote of 5.20 at the Philippine stock exchange now that stock prices all but collapsed due to the global financial meltdown.

Ashmore has an effective holding of some 50.7% of Petron as a result of the mandatory tender offer to minority investors when it acquired the 40% chunk from Saudi Aramco which puts the former as the majority shareholder.

So, would Ashmore bite the offer?

Unlikely. It already has effective control and besides it could increase its holdings to have an absolute control of the board by simply scooping the shares thrown out at the open market at much cheaper prices. It would be somewhat tricky however, not to push the prices up too much since the amount of float shares is only just below 10% of the total outstanding shares.

ON another note, there are still people who cling to the illusion that Petron is (or used to be) a crown jewel of the government and should not have been sold off in the first place. But there is nothing sparkling about Petron—either getting money for the government coffers or controlling the oil price hikes through the years.

It is more like a liability.

For Petron has not had any dominant position in the industry ever since. Unlike other national oil companies like Pertamina of Indonesia, the Iranian National Oil Company or Hugo Chavez’ Petroleos de Venezuela, Petron does not own any oil producing field either here or outside the country which it can use as a bargaining chip.

It is a refining company where margins are razor thin and are subject to the vagaries of oil price movements. It doesn't even have a significant oil transport business.

Its other main line of business is in retailing which is cutthroat also and highly regulated, with more players entering the market. In this area, customers flock to where service is better among competitors--and my own experience is, Petron service stations do a disservice to the term.

At least Chavez can stand up against the U.S. using his oil, and the Iranians can rattle the market by simple nuclear posturing.

So, what’s so strategic about Petron?

It is better for it to be sold off; at least the government gets some loose change to shore up its perennial budget deficit.

But then, it is doubtful whether the government can command the same price as the price paid for by Ashmore.

It is a basic tenet of investing to sell when you are ahead. Selling the government Petron stake now is more like selling at the bottom of the market.

The U.S. also bails out its renewable energy industry

2008-10-06T08:29:00.007+08:00

Buried within the 400 or so pages of sweeteners that were added to the recent $700 billion bailout package for the U.S. financial sector that has been signed into law by President George W. Bush is a provision which breathes life to an anxious nascent renewable energy industry.

This is the extension of the Production (PTC) and Investment Tax Credits (ITC) which was unexpectedly passed as part of the Emergency Economic Stabilization Act of 2008 (H.R. 1424), as the bailout plan is officially known.

For months renewable energy practitioners--developers, investors, manufacturers and would-be users--could only wring their arms in anguish as they watch the spectacle of legislators bickering among themselves whether to extend or not the tax credits.

They view these tax credits as a lifeline to the whole renewable energy industry--solar, wind geothermal, and now the marine energy technologies--before it gets to its own maturity. The provision will extend the PTC for one year and the ITC for eight years.

The other highlights of the package include:

Eliminating the $2,000 capon the residential ITC
Allowing utilities to obtain ITC
Authorizing $800 million for clean energy bonds for generating facilities using renewable sources
Creating an ITC for so-called marine energy technologies which include tidal, wave current and ocean thermal

The solar energy industry is particularly ecstatic. The legislation "will enable (solar) companies to continue to invest in American production, American jobs and America's energy independence," said Mark Finocchario, president of SCHOTT Solar.

The wind industry considers the tax credits essential to the growth of the industry. In the geothermal sector, these credits encourage aggressive growth and support rapid deployment strategy for building geothermal plants within the decade, said Brent Cook, CEO of geothermal developer Raser Technologies.

That such incentives are vital to the industry can be seen in recent history. In 1999, 2001 and 2003 when Congress didn't renew the tax credits, wind power installations dropped by 93% in 2000 and by 74% in 2004.

Prior to the signing into law of the bailout package, wind developers have been putting projects on hold because financial institutions have been reluctant to fund these projects with only a glimmer of hope that the tax credit will be renewed, said Leon Steinberg, CEO of National Wind, a leading wind energy developer.

The solar industry relies on a 30% credit on new investments. If the credits were not renewed, the solar market could collapse, and solar-technology firms could end belly up, according to an industry insider.

Our honorable senators and House representatives should take heed of the lessons from the U.S. situation. Their dilly-dallying of passing the renewable energy bill has cost the country enormous amount of opportunity losses.

Now that the bill will become law upon its signing, our legislators should realize that their job has only begun. We need to put some substance into the skeleton bill that they have just passed.

Making energy experts out of our legislators

2008-10-02T05:40:00.004+08:00

The Senate has finally passed the renewable energy bill on the third and final reading after languishing for eons at the committee level. Now, it is up for Congress to reconcile both the Senate and House versions before the bill could be signed into law.

The news is a welcome whiff of fresh air; a respite from endless bickering among senators and parade of scandal accusations.

Why should our lawmakers take years to "read" important pieces of legislation? Due to delays in reading, some bills are overtaken by events that they are no longer relevant. An example is the law dismantling the telecommunication monopoly years back. That law requires the new entrants to put up x kilometers of landlines if they wanted a piece of the action. Due to delays, the wireless revolution made many of these landlines virtually useless and nearly drowned those who did the mandatory roll out.

Nowadays in the U.S., energy issues occupy as much prominence and generate as much debate as Iraq and Afghanistan. In July for example, a bill to curb excessive speculation on oil was sponsored at the height of the oil price madness. This comes on the heels of a landmark passing of the energy bill of 2007. On the pipeline are a highly complex legislation on carbon emission through a cap-and-trade program and a carbon tax.

These pieces of legislation are highly involved and demand extensive research and voluminous background material.

What makes the U.S. energy lawmakers seemingly expert in this area whom I would imagine to be of similar breed as our local donkeys?

The September-October issue of EnergyBiz, a leading and award-winning publication in the energy sector, offers an explanation. On complex issues like futures trading, emission offsets and incentives to alternative energy developers, members of Congress usually turn to little-known Congressional Research Service (CRS) office.

Located across the Capitol, the CRS is one of the three major agencies that help Congress perform its job well; the other two being the Government Accountability Office (similar to our Commission on Audit) and the Congressional Budget Office which assists in determining the cost of legislation and other budgetary matters.

What makes it different from the energy committee staff for example, is that it is non-partisan and is not associated with any of the political parties or with the executive branch. The CRS listens to lobbyists but considers their position with healthy skepticism. It shifts through contradictory reports, verifies the veracity of data sources, and is ready to shoot down assumptions forwarded if need be.

For example, during the debate of the Clean Air Act of 1990, the CRS both examined the wide gap between the Environmental Protection Agency's cost estimate of $25 billion for the industry as against a claim of $80 billion by the National Association of Manufacturers.

We need a similar body to advise our honorable ladies and gentlemen in Congress on such matters as energy policies, alternative energy incentives, science development, consumer protection in the face of melamine and endosulfan scares, drugs policy and the like.

On energy, the Department of Energy can only do little, as it is beholden to its boss at Malacanang, and is subject to political machination come appointment time and budgetary allocation.

Like its U.S. counterpart, this proposed body should be composed of experts in energy, and doing full-time work in support of energy legislation. Its professionals should constantly monitor the radar screen of energy development, energy innovation and worldwide trends in energy policy.

If one observes a senate session during those few times when its members are actually talking about sensible legislation, much of the time is spent on points of clarification simply because our lawmakers are not well-grounded on the subject at hand. All the finer points of legislation should have been resolved even before a proposed legislation is brought before the members of a committee--not during a plenary session.

One cannot just pull out an academic teaching heat transfer and declares him a resource person and an expert on energy efficiency. Or hire a fresh graduate in science and ask her to research on energy policy.

Creating meaningful energy legislation cannot be relegated to the same level as the congressmen's favorite bills of renaming streets and towns in honor of their deceased forebears.

More bad news:oil prices tumble back to $96

2008-09-30T08:42:00.005+08:00

It was swift and brutal.

Overnight, oil prices lost 10% to settle back well below the psychological $100 a barrel benchmark. I was about to admonish not to open the champagne bottles when the prices clawed back above $100, but I was overtaken by events in the last few hours.

At Wall Street, it was a massacre worse than any ethnic cleansing or pogrom. The Dow Jones Industrial Index--the most widely followed financial index globally--tumbled a record-breaking 777 points.

The immediate cause was the rejection by the U.S. House of Representatives of the $700 billion bailout of the American financial sector. Stalwart Democrats and dissident Republicans combine to bury what ought to be the biggest bailout plan ever hatched since a similar crisis in the 1930s.

The legislators simply realized that their government cannot afford to foot the bill. And why should the government intervene on a massive scale at the expense of the taxpayers' money failing private financial institutions?

The specter of a financial meltdown is staring at every one's face. But the price to pay was simply too much, the legislators decided.

The financial tremors have already been felt in Europe. Fortis, the biggest European bank is being resuscitated by three countries to the tune of 11.2 billion euros. Mid-sized UK bank Bradford and Bingley is being nationalized by its government while pieces of it are offered to outside investors.

Back home our leaders are putting up a sham face, saying that our financial institutions are intact and robust, which of course rings hollow in the face of global connectivity. Our banks' capitalization is puny compared to even Singapore's or Malaysia's banks.

We are not Mali, Albania or Tuvalu which are almost isolated from the world.

An hour ago, a supposedly analyst from a brokerage house proclaimed in effect, that the local bourse won't be affected much since our local banks do not have significant exposures to AIG, Lehman Brothers, Merrill Lynch or Fortis. he must have forgotten that foreign funds still dominate the stock market, and any asset devaluation globally would hit us hard.

How naive can we get?

While Philamlife may have mostly local clients, still it is a unit of AIG. When the parents tremble, it is the minor siblings which are first to go. AIG is reported to be in negotiations for buyers of its local unit.

Remember the electricity generator Mirant Philippines? The local unit kept on harping that their operations won't be affected by the troubles of its parent. Weeks later, all of Mirant's assets were put up for sale.

We will be sucked into the eddies of a financial meltdown. Much more than our resilient neighbors.

When the 1997 financial crisis unravelled starting with the deflation of the Thai baht, our leaders were then singing the same tune that we have better fundamentals. We ended up being one of the worst hit.

We don't want to appear a doomsayer. But it is better to realize that a storm is approaching.

At least we can start anchoring our houses and filling up the sandbags. It these are not enough we can start packing ready to move to high ground.

New kids on the geothermal block

2008-09-28T17:33:00.005+08:00

The Department of Energy (DOE) last week granted a geothermal service contract (GSC) to partners Aragorn Power and Energy Corp. (APEC) and Guidance Management Corp (GMC) to explore a potential geothermal area in Kalinga-Apayao. This was announced by the listed APC Group, the parent company of Aragorn Power, in a disclosure to the Philippine Stock Exchange (PSE:APC).

This brings to three the number of new entrants to the geothermal sector recently awarded a GSC by the DOE.

Earlier, PSE-listed firm Basic Energy (PSE:BSC), was awarded a geothermal service contract to developed the Mabini, Batangas geothermal prospect while Biliran Geothermal Incorporated (BGI) was awarded a similar contract to explore and develop the geothermal potential of Biliran island province.

At present the major developer and operator of geothermal fields comprise of Lopez-owned Energy Development Corporation (EDC, formerly PNOC-EDC) and Chevron Geothermal (former Philippine Geothermal Inc.).

Who are these new kids on the geothermal block, and how serious are their commitments to develop these resources?

APEC was formed as the vehicle of the parent’s foray into the energy sector. The APC Group was formerly into oil exploration until new investors transformed it into a holding company.

Its partner, GMC, composed of American, Australian, Spanish and Filipino investors, has committed to initially invest $8 million for surface geological and scientific exploration prior to drilling of exploration wells. The investment could go up to $300 million or more to develop geothermal resources in the country, according to GMC chairman Joaquin Rodriguez.

GMC itself has been awarded the rights to develop a target 40 MW geothermal power plant at the Amacan geothermal prospect in Compostela Valley.

Basic energy is aiming to develop 20-40 MW geothermal generation at Mabini prospect which covers 3,841 hectares.

The third company, Biliran Geothermal Inc. (BGI), will spend $15 million to scour a total area of 22,394 ha. for geothermal resources. It hopes to put up at least 100 MW of electric generation if the exploration results prove its feasibility.

BGI is a joint venture company formed between Filtech Energy Drilling Corp. (Filtech) and Envent Holding Philippines, Inc.

Envent is controlled by Reykjavik Energy Invest, which is the energy investment arm of the Reykjavik Energy (Iceland) and Geysir Green Energy, also an Icelandic energy firm which is globally focused on green and alternative energy investments.

Aside from the Philippine project, the Icelandic group has geothermal development initiatives in Indonesia and Djibouti, Africa, among others. It also participated as a partner to the Lopez-group in taking over PNOC Energy Development Corporation from the government through Red Vulcan Holdings but has already divested from the latter.

Filtech meanwhile, was formed by a group of former executives of EDC.

The entry of new investors in the geothermal sector is viewed by industry insiders as a positive development to restart the momentum of geothermal development in the country which has been in the doldrums in the last few years with not much capacity being added.

Career executive now at Napocor’s helm

2008-09-23T17:09:00.004+08:00

Froilan A. Tampinco, vice-president of Power Sector Assets and Liabilities Management Corp. (PSALM) which is tasked to privatize the government’s power assets has been named the new president of the National Power Corporation(Napocor or NPC), it was announced Monday by Malacanang.

He will replace Cyril C. del Callar who has tendered his resignation this month for health reasons, according to the announcement

Tampinco is regarded as a career executive and a technocrat unlike many other appointees in sensitive government positions who have been chosen on the basis of political considerations.

Tampinco is a licenced chemical engineer and holds a postgraduate degree in chemistry from the Catholic University of Leuven in Belgium in 1975. He also obtained a master’s degree in management from the Asian Institute of Management.

Prior to his position at PSALM, he has bee Napocor’s vice-president for sales and services from February 2003 to February 2004. As head of NPC’s Genco 2 group from November 2001 to January 2004, he oversaw the operations of a number of generating assets under the group.

Industry players generally welcomed the news.

The president of Philippine Electricity Market Corp. which operates the wholesale electricity spot market (WESM) , Lasse A. Holopainen, in a text message, said "he should do really well" considering his record

National Transmission Corp. President Arthur N. Aguilar promised full cooperation and support, while Manila Electric Co. president Jesus P. Francisco regards the new NPC head as “very much qualified."

Mr. Tampinco, in a text message, simply said the new job was both a "challenge and a privilege."

Appointment of a career official at NPC should bode well for the industry. Initially, he already has his hands full in resuscitating the financial health of the power firm which has been in the red for most of its existence.

He has also to show that he can lick the perceived shenanigans within the organizations.

Coming from PSALM, he should be able to give the privatization process the much-needed push towards successful completion.

He seems to have the necessary credentials. Let us just hope that he has the will to resist political pressures from above and the resolve to clean Napocor’s Augean stables even if he has to sweep to the dustbins former colleagues involved in running down the power company.

Let us silence our artillery and declare a unilateral truce against NPC to pave the way for the new chieftain to stamp his mark.

But the people will likely not hesitate to resume their missile barrage against it once the new head cannot show proof that he can be a cut above the heads of his predecessors.

Reading the Pickens manifesto

2008-09-19T09:07:00.006+08:00

Amidst great fanfare and hoopla, the much-touted Plan to wean America away from foreign oil by dotting the landscape with thousands of wind turbines was finally formally unveiled last Tuesday in Sweetwater, Texas.

The Pickens Plan, as the audacious move has come to be known, could have been easily dismissed as a pie-in-the sky final wishes of an 80-year-old senile man in his twilight years were it not for the fact that the speaker during the roll out is T. Boone Pickens, the legendary Texan synonymous with oil, corporate raider, philanthropist, greenmail artist and shareholder-activist par excellence.

The logic of his manifesto—the whole plan is succinctly written a la Marx-- is compelling.

"We're paying $700 billion a year for foreign oil,” he declares. The whole strategy is to displace completely the 22% share of electricity production from natural gas with wind farms.

And what to do with the home-produced natural gas?

It should be pumped into the fuel tanks of the millions of vehicles crisscrossing the interstate highways and metropolitan areas of America. He is convinced that natural gas is the cleanest and most viable option to replace the hydrocarbon-based fuels used in most vehicles.

He laments that of the approximately 7 million vehicles now using compressed natural gas (CNG) only 150,000 are in America’s roads. He traces the low conversion mainly to the distribution problems (e.g., lack of refilling stations and storage) and cost which his Plan also takes into consideration.

And to silence detractors of his intentions, he is putting his own money where his mouth is: some $2 billion to put up the world's largest wind farm in nearby Pampa, Texas through Mesa Petroleum, a major energy company he owns—and that is just a start.

Previous to the formal launching, some critics have obliquely pointed out that the Plan would only line up the coffers of his energy hedge funds.

But he does not need the money. After all, he is already 80, ranked No. 117 among America’s richest by Forbes magazine and has some $4 billion in his pocket.

He wants to enlist the whole American population--and to make sure that his movement will not be tainted with politics, he steers clear from political colors. He wants the energy question to be the No. 1 issue in the current presidential campaign, and is prepared to tangle with Democrat hopeful Barack Obama and Republican stalwart John McCain.

It is too early to pronounce a verdict whether the Plan is viable in the long term or not, but the road map is clear. And America is taking notice.

In the few hours since the Plan was publicly launched, some 300,000 have signed up to come aboard Pickens’ gravy train.

And why should we take notice of the Pickens Plan?

It is because our energy situation is far worse. We are completely held hostage by foreign oil and our own energy plan, if we could call it that way, is a mishmash of ill-defined targets and much wishful thinking.

For example, expecting that moneyed foreign investors would put up energy projects given the growing power demand without clearing up the bottlenecks in setting up major businesses in the country and without stabilizing the political and economic uncertainty is certainly expecting too much.

Pickens laments that the energy issues have not been addressed by both the Republicans and Democrats whenever any of them is in power. He should be invited here to speak to our leadership and to our lawmakers who would rather bask in the glory of media talking about unsubstantiated allegations of roads to nowhere or overpricing of housing deals; and when not pointing accusing fingers at each other, are busy castigating foreign investors.

Our esteemed senators could not even pass a rudimentary renewable energy law.

We need a home-grown T. Boone Pickens to shake up our lethargic bureaucracy to address the current and the more dangerous looming energy crisis before it is too late.

Bad news: Oil prices crash through the $100 floor

2008-09-16T11:57:00.006+08:00

For the first time in six months, oil prices dropped below the psychological $100/barrel last Monday and as of this writing, settled at $92.55 a barrel.

The sudden reversal of the oil fortune effectively scratched completely all the gains for the year. From a peak of $147 a barrel just two months ago, oil prices have lost more than 35% of its peak value.

Normally, such news would have been greeted with fireworks, and indeed, locally there have been some muted jubilation with the accelerated pump price reductions effected by fuel retailers. Reduction in fare prices may not be far behind.

The early sign of oil price rollback emerged when initial reports suggested that Hurricane Ike, while devastating a large swath of Texas, virtually left the oil platforms at the Gulf and the refineries unscathed.

U.S. authorities reported Sunday that Ike destroyed at least 10 oil and gas platforms and damaged pipelines in the Gulf of Mexico. But that number is only a fraction of the more than 3,800 production platforms in the Gulf and insignificant compared to the havoc brought about by Hurricanes Katrina and Rita three years ago.

Oil prices continued their downward trajectory even as militants increase their attacks on oil platforms in the Niger Delta.

Not even the expulsion of the U.S. ambassador to Bolivia which draws a similar sympathetic expulsion of the U.S. ambassador to oil-rich Venezuela, by leftist President Hugo Chavez, could halt the slide of oil prices.

But what suddenly triggered the sell-off were dramatic events in Wall Street which signals a looming economic downturn not only in the U.S., but would likely plaster much of the globe.

That is the real bad news.

In Wall Street, the venerable 158-year-old investment bank Lehman Brothers Holdings Inc., an iconic symbol of American capitalism, filed for bankruptcy after failing to find a white knight for its failing business. This came on the heels of the sale of another capitalist icon Merrill Lynch & Co. to Bank of America Corp.

The two bellwethers of the finance world, together with big institutional investors, have been the main participants in pushing the prices of commodities—not only oil but precious and strategic metals and foods as well—to stratospheric levels until signs of economic slowdown abruptly stopped the price train on its tracks.

The upheaval in the financial sector could trigger massive liquidation of commodities amidst the fear that a slowdown could drastically cut the demand for energy and other raw materials futures.

With the mightiest economy in deep trouble, the lesser economies, ours included, would be sucked in the maelstrom of economic downturn.

Therein lays the dreaded looming economic crisis as if we have not suffered enough.

DENR shows pragmatism in approving Panay coal-fired power plant construction

2008-09-14T10:08:00.004+08:00

The Panay Power Corp. has recently been given the go-signal by the Department of natural resources and the Environment (DENR) to proceed with the construction of its 164-megawatt coal-fired power plant in Barangay Ingore, La Paz district in Iloilo.

Rather than bowing to intense pressure from environmentalists and the catholic church, the DENR exercised pragmatism when it granted September 1 the requisite environmental compliance certificate (ECC) to the power plant operator.

The ECC however, carried 16 conditions for the operator to meet, including:

continuing dialogue and interaction with stakeholders, contractors and workers on issues concerning the plant operation;
establishment of a five-meter buffer zone of greenery along the plant’s periphery;
provision of a 20-meter easement for the creek/river in la Paz;
continuous monitoring of temperature and other relevant parameters of cooling water from the plant before discharging;
installation of additional automatic floating buoys capable of measuring water temperature within the mixing zone and boundary areas of the plant;
provision and maintenance of a 900-square meter reserve area for the cooling system; and
addressing climate change and global warming by putting in place a program to mitigate greenhouse gas (GHG) emissions.

Panay island has been reeling from acute power outages.

Its main source of power, the decrepit 146.5 MW Panay diesel power plant owned by the National Power Corporation, is currently under the auction block through the Power Sector Assets and Liabilities Management Corporation (PSALM).

While the island is connected to other power sources like the geothermal plants of Negros Oriental and Leyte as part of the Visayan grid, its power supply is secondary only to the demands of Cebu and Negros.

The installed 49 MW geothermal plant of the Energy Development Corporation (EDC) which is designed to augment the power requirements of Panay, has been shut down due to operational problems in the field.

How to spend P49.1 billion for fuel

2008-09-11T12:44:00.003+08:00

By any metric, P49.1 billion pesos is a huge sum of money.

That is the sum that the government is willing to spend for the Alternative Fuels Program next year, Senator Juan Miguel Zubiri, principal author of the Biofuels Act of 2006, revealed last Tuesday.

The bulk of the allocation goes to biofuels development at P25.6 billion, which is some 21% higher than P21.2 billion budgeted for the purpose this year. Which begs us to ask the following: Has the allocation for this year been exhausted? If so, has the government anything to show for it?

According to Zubiri, P8.7 billion will go to the Natural Gas vehicle Program for Public Transport; the autogas program, or the conversion of fuel engines to LPG use, P4.4 billion; and the hydrogen development program, P10.4 billion.

The Alternative Fuels Program is a key component of the Arroyo administration’s Energy Independence Agenda, which aims to make the country 60 percent energy self-sufficient by 2010.

Why such a big budget for biofuels development, when this activity should rightfully belong to the private sector? Financial incentives for the developers such as income-tax holidays and tax breaks for capital goods importation do cost money, but it would be in the form of reduced taxes for the government, not an upfront cost.

The only huge expenditure that can be thought of is when the government gives a huge dole-out for its biofuel from jathropa program which is being carried out by the government’s PNOC Alternative Fuels Corporation to buy or lease huge tracts of land, machineries and seeds or seedlings. Even then, jathropa cultivation for biofuels is still highly iffy; and according to some UP Los Baños agriculturists who should know what they are talking about, it will not be cost-effective if grown in peripheral soils as envisioned.

Not much enthusiasm for large-scale cultivation has evolved throughout the world. There is some development in Brazil, but ironically, India—to which local enthusiasts are looking up to for seeds and technology—is now keenly watching how the Philippine program is progressing.

As for LPG conversion, the amount may be just right if the plan is to simply replace the thousands of polluting motor cab engines with those using LPG at no cost to the owners and operators. This is a dole out, plain and simple. A complete phase-out of these polluters from major streets and highways to improve our breathing space would only cost a fraction.

As for the P10.4 billion for hydrogen development program—is the government trying to leapfrog over the countries most active in hydrogen power development like the U.S., Germany and Japan, in commercialization of hydrogen-powered cars? Those who allocated this amount are completely clueless to the scientific and technological barriers needed to be hurdled to make the hydrogen car commercially viable.

I wouldn’t be surprised if part of the money would be simply spent to buy a fleet of hybrid cars like Toyota Prius for our congressmen and cabinet officials to test-drive and show off.

If a few millions each would be given as research grants to some science or engineering departments who have alternative energy programs in top universities such as UP. Ateneo, La Salle or Mindanao State University, or even to regional schools like Bicol University or Silliman, the results would likely to be more productive than the current allocation plan.

How to ruin an economy, Chavez-style

2008-09-09T17:49:00.001+08:00

Venezuelan President Hugo Chavez effectively got his wish to nationalize the country’s oil industry completely when his rubber stamp legislative assembly voted to pass a bill putting the wholesale oil trading into the hands of the state.

Under the newly passed bill, the wholesaler oil distributors are mandated to turn over their businesses to Petroleos de Venezuela S.A. (PDVSA), the state oil company within 60 days or face forcible expropriation.

The order covers the local subsidiaries of oil giants including Chevron, Exxon Mobil and BP as well as those of local retailers big or small, and allows PDVSA monopoly control of wholesale fuel distribution. PDVSA becomes the sole oil supplier of two-thirds of Venezuela’s privately-owned retail gas stations.

Apparently, Chavez was emboldened to take further steps to nationalize the whole oil industry when Exxon Mobil lost to Venezuela in March when a London court ordered the lifting of an earlier freeze order on US$12 billion in assets of Venezuela’s state oil monopoly firm.

The freeze order was granted to Exxon by a court in January so cash would be available should it wins in an arbitration case involving compensation when Chavez nationalized an oil project in the Orinoco basin in which Exxon was involved. Other companies including Chevron, Total SA, BP and StatoilHydro ASA had negotiated deals to continue as minority partners in the nationalized projects rather than fight it out in courts.

Venezuela’s latest antics signal a return to state control and a tightening grip of basic industries in that country. Already, control of its telephone system has gone back to state hands.

Venezuela ranks fifth largest oil exporting country and oil accounts for 90% of its exports revenues. At $0.18 a gallon for premium fuel, Venezuela's highly-subsidized pump prices are among the lowest in the world

In the short term, Chavez would endear himself to the poor masses, but in the long term, it would be ruinous to the economy in general, as the government coffers would accumulate deficits over time.

The slide to perdition won’t be felt immediately as long as its oil fields—now in government hands—continue gushing crude to pay for Chavez’ populist policies.

LEST OUR LEADERS start to entertain parallel ideas, let us remind them that we have been there, done that.

We have had an oil price stabilization fund which for a time tamed the oil price spikes in the 70s and 80s, but the country ended with a yawning fiscal deficit.

We tried creating a national oil company to counter a perceived oil monopoly by select multinationals, but market forces were simply too strong to resist. The country was simply helpless against oil prices dictated by world events.

We have already learned bitter lessons about the folly of state control over businesses. Let us hope we won’t be backsliding into that rut.

Compact fluorescent lamps: Green or clean?

2008-09-08T09:34:00.005+08:00

When the Department of Energy (DOE) recently launched its Palit Ilaw program which essentially enjoins government offices and projects to replace incandescent lamps and other energy-hungry lighting fixtures with compact fluorescent lamps (CFLs), there was hardly any ripple of approval even from energy efficiency campaigners or consumer advocates.

This is not really surprising because advocating a support for such a move from our politicians would hardly land them in front of the klieglights of publicity. For consumer advocates it would hardly endear them to the masses who would be asked to replace their dirt-cheap incandescent lamps with expensive compact fluorescent lamps. The masses who are desperately trying to make both ends meet on a month-to-month, or even day-to-day basis wouldn’t have the time or the wherewithal to figure out the long-term economic benefits of the move.

The environmental crusaders on the other hand are somewhat split. The global warming enthusiasts embrace it like a teddy bear, for they have already calculated the amount of carbon dioxide that would be displaced from emissions by fuel-based generators. The ultra-pure green advocates while not openly declaring opposition, snickered when in the course of promoting Al Gore’s opus An Inconvenient Truth, supporters were asked to buy compact fluorescent lamps to replace their incandescent lamps.

They have a point.

CFLs do contain the toxic element mercury, albeit in milligram amounts. The lamp works by exciting mercury atoms to generate UV light. The light in turn strikes at the phosphor coating which gives off the white light we enjoy. Without mercury, there is no light.

Other green campaigners stretch the anti-stance by arguing that disposal of the used CFLs poses environmental hazards and even pointing out that the transport of these mercury-containing lamps emit greenhouse gases (GHG).

The latter is probably stretching the argument too much. We have been using millions of standard linear or circular fluorescent lamps, and CFLs are no different. There will always be some accidents due to breakage and mercury will be spilled and may actually pose some hazards. But simple precautions like not handling the broken glasses containing phosphor and immediate ventilation of the contaminated area should eliminate most of the danger.

There are other household items that contain more mercury such as the common glass thermometer, sphygmomanometer and pressure gauges that have escaped scrutiny from our dear green watchers

Nothing is aseptically clean or immaculately green, whether it is baby products or energy sources. It is just a matter of degree how much dirt or inconvenience we accept or tolerate.

Even the most accepted clean energy sources have their detractors.

A nuclear renaissance has not taken hold mainly because of the dim memories of Three-Mile Island near-disaster and the catastrophic Chernobyl accident. But the former was avoidable while the latter used Soviet-era safety standards and obsolete technology. Some environmental activists even prefer nuclear over fossil fuels power sources.

Even the concern of nuclear waste disposal is probably overblown when the current “temporary” storage could pass the most stringent safety standards ever. So are the new-generation designs of reactors.

About the only serious objection of nuclear power is nuclear proliferation in this age of Al Qaeda.

Geothermal is also a favorite target practice of environmental activists. Sure the wells emit some hydrogen sulfide and carbon dioxide most of which are dissipated through or absorbed by the foliage and soil. Literally along the same breath, the same critics daily inhale from far more dangerous gas emissions from ill-tuned up car engines, motor cabs and diesel-gushing jeepneys.

Well-meaning opposition to geothermal points to some disturbance to vegetation when roads are made and pads are prepared, forgetting the fact that coal mining strips down whole forests and mountains—not in China, or Indonesia but in the most advance country on earth, the United States.

They also point to disturbance to forest dwellers. In the meantime, the rare bats within the Bacman geothermal reservation have not left the area and continue to doze off during the day while the power plants churn electrical power. The snakes and monkeys in Kidapawan have not yet attacked the engineers manning the geothermal plant as an act of environmental revenge.

Even the cleanest of them all—wind power—have critics. Some complain about the extra decibels these turbines are generating completely forgetting that the levels are far lower than a normal traffic. And if some groups object to these structures because some rare migratory bird species from Siberia are disoriented by the low frequency humming—what shall we put up?

SO would, or wouldn’t you shift to CFLs?

The alternative to the modern conveniences is a nomadic life or cave-dwelling. Just be sure to know enough taxonomy to avoid eating rare and protected root crops and using natural herbs listed as endangered by WWF.

Taking electricity systems losses seriously--email from Romania

2008-09-03T04:06:00.004+08:00

I found your two blogs on the Philippines caps for system losses very interesting, so thanks for providing them. Couldn’t agree with you more; negative incentives produce negative results. And I’ve always wondered about the Cooperatives being able to supply electricity efficiently.

You refer to pilferage as a factor in calculating system losses, and that is important. But I am in Utility Vegetation Management (UVM), and I am wondering if contact with vegetation is calculated into the equation in Philippines. My industry focuses on proactive UVM maintenance to control tree-caused outages, but there is not much focus on system losses through daily tree/powerline contact.

Trees can come into contact with powerlines and not cause an outage for years. The trees will simply brush against the lines day after day, burning the foliage as a result of electricity tracking down into the tree. I spent a number of years in New Zealand (I notice you were in Wellington when I was in Christchurch) and many of their DU networks have thousands of trees in this condition. They are not causing outages, so they are not prioritised – in reality, much of New Zealand UVM is reactive rather than proactive. But what I have always maintained is that if a tree is ‘burning’ on powerlines 24-hrs a day and for year after year, this has to be a large contribution to a DU’s system losses.
. . . . .
Just so that you know what I’m talking about, I’ve attached from my documents some pics of New Zealand trees in contact with 11kV conductors, as these are examples of what I’m speaking of. One pic is of fast-growing willow trees that have been burning for at least five years. The other is of slow-growing NZ native trees that have been burning for at least 10 years. I’m just trying to get a rough idea of that kind of contact multiplied by thousands of contacts in terms of systems loss.

Frank

Biochemistry lessons from landfills

2008-09-02T04:30:00.001+08:00

In a recent disclosure to the Philippine Stock Exchange, listed firm Basic Energy Corp. said it is planning to enter into a memorandum of agreement with two local firms, namely New Kanlaon Construction Inc., and Integrated Environmentwaste Processors Corp., and two South Korean firms ReTech Solution Co., Ltd. and Eco-Frontier Co., to conduct a feasibility study for a landfill gas to power project in San Mateo.

The project would harness methane from a closed dumpsite to generate electricity with revenues coming from power sales and carbon credits.

Earlier, in July, Montalban Methane Power Corp. in cooperation with Carbon Capital Markets, a UK-based financier and carbon credits trader, is developing an initial 2 MW power plant using methane coming from the Rodriguez, Rizal landfill at a cost of some P 1.5 billion.

A few years back, I remember some company was looking for methane at the Payatas dump site, but apparently nothing came out of that project.

How could a despicable place where all sorts of waste are thrown in generate enough methane to produce electricity?

Elementary, my dear Watson; it is bacterial decomposition.

The whole process is a wonderful symphony of cooperative bacterial processes which, for tracking purposes can be broken down into four phases.

Phase 1 begins with aerobic (oxygen-loving) bacteria breaking down long molecular chains of complex carbohydrates, proteins and lipids in waste into simpler compounds. In the process, carbon dioxide is produced while oxygen is depleted.

In Phase 2, anaerobic bacteria begins to proliferate in the absence of oxygen and converts the compounds created by the aerobic bacteria into acetic, lactic and formic acids, as well as alcohols like methanol and ethanol. This makes the environment acidic. Under these conditions, certain nutrients are dissolved liberating nitrogen and phosphorous, which are key growth factors of another kind of bacteria which produce carbon dioxide and hydrogen as byproducts of respiration.

Now, if the landfill is disturbed at this stage, the environment becomes oxygenated again and one goes back to Phase 1. This is probably happening at Payatas, where hordes of scavengers continuously disturb the landfill.

No wonder no sufficient methane was found.

We have a little lesson here: human scavenging does not promote decomposition.

In Phase 3, the remaining organic acids are consumed, forming lactates which cause the landfill to become neutral. This promotes the formation of colonies of methane-forming bacteria. The methane- and acid-producing bacteria become symbiotic, delicately waltzing together to the music of a biochemical orchestra. The symbiosis is so well coordinated that the amounts of methane and carbon dioxide produced are near 50-50 in most landfills. The rest of the gases comprising of hydrogen sulfide, nitrogen and hydrogen mostly, does not normally exceed 2 %.

Phase 4 occurs when both the composition and production rates of the gases remain relatively constant. This constancy is used to determine whether a landfill is ripe for picking for methane.

The methane gas can be produced at a stable rate for about 20 years; but can sometimes last up to 50 years after waste has been initially placed. This is the best time to put up that gas-to-power project.

It is an inspiring microbiological and biochemical symbiosis. Years ago, all I thought biochemistry was an unending parade of DNA base pairs. amino acid sequences, and metabolic pathways too complicated to trace, but nevertheless, required to be understood partially to pass the course.

Suppressing the electricity price spikes

2008-08-28T05:23:00.005+08:00

Recently, the Philippine Electricity Market Corp. (PEMC) is mulling to suspend the operation of the country’s wholesale electricity spot market (WESM) of which it is tasked to operate and oversee, to halt “significant’ spikes in trading prices.

PEMC president Lasse Holopainen threatens to impose such halt if the Energy Regulatory Commission does not intervene to smooth out the sudden price upticks in the market.

“That is an option. But we prefer that ERC do something about it first. The ERC can intervene and correct these prices and affect a time-of-use (TOU) rate,” Holopainen said.

Under the WESM guidelines trading in the market can be imposed in extreme cases such as a wholesale failure of the grid system, threat to system security or a force majeure.

But no such event ever occurred to justify any suspension. The mere threat of a temporary stop to trading in a fully functional, open market sets a dangerous precedent and could ultimately derail the ongoing electricity reforms.

The recent price spike was traced to the failure of the San Jose transmission line in Bulacan which prevents the dispatch of power from the” more efficient” (read: lower priced) power plants. However, the plants referred to by the official are the Sual and Masinloc coal-fired plants, with a combined capacity 0f 1,800 MW are hardly the efficient plants around.

The effect of this breakdown was that based on PEMC’s estimates, the settlement prices – the price the trader pays to WESM- have spiked to as high as P18 per kilowatt-hour which could ultimately redound to a higher price for the consumer.

“This is an unusual occurrence and the congestion will be there until September to October. But National Transmission Corp. (TransCo) said they are now repairing it,”
Holopainen said.

We beg to disagree.

Equipment maintenance is a necessary part of doing business and with proper execution and timing, the effects of an “unusual occurrence” such as a breakdown of a major high-voltage transmission line could have at least been mitigated. But what caused the spikes is more than unusual. It is more due to inherent and systemic weaknesses of our electricity grid.

On the transmission side, we do not have much redundancy on the main backbone. While a full redundancy cannot be advisable on economic grounds, at least there should be some backup in highly critical nodes along the backbone such that power could be transmitted on an alternate line. At the very least, the effects of such breakdown can be confined to a limited geographic area.

But the worse problem is on the generation side.

In a normal grid, the operator desires to have some reserve capacity at any given time. Which is obvious since not all plants would be running at peak capacities due to maintenance and technical considerations. But what we have is a reserve capacity which is barely useful when a major plant breaks down. While a reserve capacity of say 2,000 MW looks good on paper, it is no more than the capacity of two major coal-fired or natural gas power plants.

The rated capacities of the existing plants may not dependable at all. Many of the older power plants—coal-fired, diesel-fired and geothermal plants— have actual capacities much lower than their rated capacities. Can anybody tell us how much the Bohol and Panay diesel plants –two plants under auction- are actually generating? For all we know, the old Panay plant could be worth more if sold as junk than being operated as a power plant.

Can anybody guess how much the Bacman I plant (rated more than 100 MW) is currently producing? If you say 50 %, your guess is too high. This one is easier: How much is the Northern Negros geothermal plant (the capacity is 49 MW, or 40 MW, or 26 MW, depending on when you got the information) currently producing? You should have gotten it. The answer is nil.

There are also reserves that may not be delivered to where they are needed most. For example, the abundant power from geothermal in the Visayas could be considered a reserve for the Luzon grid because it is connected to Luzon via a submarine cable. But the history of its performance tells a different story.

What we have is what the industry players call “thinning reserves”. The reserve is there but it is so small that a minor disruption in the supply could send electricity prices at the wholesale electricity spot market (WESM) to the heavens. If you are operating cement or a semiconductor plant, you cannot afford a respite in operations. You need to buy power at exorbitant costs for a hopefully short period of time. The alternative is massive losses.

Then there is the ownership structure of the generating plants. Much of the generating power is still in the hands of the Napocor-PSALM combine, so in theory, a collusion among the traders in the same cabal could influence the price at the spot market. This has been alleged to have happened before.

WHICH brings us back to the question of what to do with the price spikes. Dampening the electrical price oscillations, as the engineers would phrase it, cannot be effected by political intervention. A systemic overhaul is required which include:

1. Broadening the ownership of the generation assets. In the near term, it means hastening the privatization process.

2. Improving the transmission grid. With the privatization of the transmission grid, we could only hope that the new owners would improve the system.

3. Increasing the number of generators. With a more dispersed ownership, one can be assured of a more functional spot market. Collusion would be minimized. The thinning reserves would be “thickened”. But then, encouraging new investments is a different question altogether. Our legislators could re-start the process by passing the renewable energy bill.

We hope to delve more deeply into these matters in the near future.

Google search result: geothermal

2008-08-26T04:30:00.000+08:00

Google uses its vaunted search engine to find an energy source it wants to support and comes up with this result: geothermal.

Google, through its philanthropic arm Google.org, announced US $10.25 million to fund research on energy technology called Enhanced Geothermal Systems (EGS), according to a report in RenewableEnergyWorld.com.

The amount includes funding for research on next-generation geothermal resource mapping, EGS information tools, and a policy agenda for geothermal energy.

Dan Reicher, Director of Climate and Energy Initiatives of Google.org, considers EGS could be the "killer app" of the energy world, saying it has the potential to deliver vast quantities of power 24/7 and available nearly anywhere on the planet.

In contrast to the usual geothermal approach of finding naturally occurring steam and hot water reservoirs as practiced here, the EGS process finds hot rocks, artificially fractures these and circulates water through the system to extract heat energy which can then be converted to electricity.

The recipients of Google's largess include:

AltaRock Energy Inc.: US $6.25 million investment to develop innovative technologies to achieve significant cost reductions and improved performance in EGS projects.

Potter Drilling Inc.: US $4 million investment in two rounds, to develop new approaches to lower the cost and expand the range of deep hard rock drilling.

Southern Methodist University Geothermal Lab: US $489,521 grant to improve understanding of the size and distribution of geothermal energy resources and to update geothermal mapping of North America.

Other countries which are looking at EGS include Australia and France.

HERE, with abundant circulating water, the systems that have been developed or characterized are water-dominated, natural geothermal systems.

SAS introduces green IT software a.k.a. carbon calculator

2008-08-23T06:31:00.009+08:00

SAS, an IT vendor more known for its business intelligence (BI) software and services, has recently introduced in this country a software that supposedly measures a company's eco-friendliness and carbon footprint. Its capabilities, SAS claims, include tracking the level of CO2 emissions of companies and analyzing its impact on its business operations.

Thomas Spiller, SAS senior director for international programs, said the product can be customized to the customer specifications but admitted that since it has just been launched, SAS has yet to sign up a local customer.

Just who are these customers that SAS is targeting, and why should you buy, or not buy, the product?

With the escalating cost of energy and pressures from the environmental movement, big business has started to embrace eco-friendliness and energy efficiency. Going carbon neutral, as the movement is now known, is not just a fad, Spiller assures.

For many companies, moving towards that goal not only enhances their corporate social responsibility (CSR) image, but the bottom line as well from energy savings and increased business.

Usually, the first step towards this direction is to quantify your carbon footprint--that is, how much greenhouse gases (GHG) as typified by CO2, your company is actually producing.

Without saying in so many words, SAS is actually offering a carbon calculator.

A carbon calculator is a device, usually a software, that does what its name implies: calculate the total carbon emission or footprint for a given event, an energy project or a company.

Existing carbon calculators range from order-of-magnitude estimates to fairly sophisticated devices that detail every possible source of emission and the methods backed up by reputable data. There are free carbon calculators usually offered by non-governmental organizations concerned with global warming and government institutions such as the US Environmental Protection Agency (EPA) and there are fairly sophisticated commercial calculators used by carbon market traders, renewable energy project developers applying for carbon credits through the Clean Development Mechanism (CDM) and big business carrying out a corporate program towards carbon neutrality.

Calculating a carbon footprint is not easy. As what any budding software developer is advised, GIGO - garbage in, garbage out. Your results will only be as good as the worst assumption built into the software.

For example, the total carbon footprint of all the employees in a company may be estimated by the average per capita footprint but if the built-in assumption is that for a developed country like Japan or the U.S. where individual energy consumption is far higher, the errors can be very significant.

To be on the conservative side, choose a calculator which is most comprehensive in its coverage. Some calculators for example, fail to take into account such as commuting habit of its employees which can amount to a large number.

If in doubt, ask.

It is also important to choose a provider accredited with a top accepted standard to ensure getting a comprehensive calculator. Some of the stringent standards include the Gold Standard, the Greenhouse Gases Protocol, the International Organization for Standardization (ISO) ISO14064, The Voluntary Carbon Standard (VCS) and The Climate, Community and Biodiversity Standards (CCBS).

You may be passionate about making your company green. Just make sure that you have the right tools in realizing your dream.

Are we ready for CDM?

2008-08-20T04:39:00.012+08:00

Kreditanstalt fur Wiederaufbau (KfW), the German Development Bank, is opening doors for Philippine companies to tap financing for Clean Development Mechanism projects under the Kyoto Protocol during a presentation at a seminar held August 19, 2008 at the Renaissance Hotel in Makati.

Karin Sittler, vice president of the KfW Carbon Fund, said the financing modes could include direct loans, equity investments, assistance in the project preparation or even in helping consolidate small CDM projects.

The latter is required for small projects taken individually which may not qualify under the mechanism.

CDM is a mechanism under the Kyoto Protocol whereby countries that have committed to reduce their greenhouse emissions, but are unable to immediately do so, may buy so-called carbon credits generated by green energy and environmental projects in other countries.
_____________________
The Bangui Bay wind project:

____________________

However, Environment and Natural Resources Undersecretary Manuel Gerochi's opening remarks which stressed the need to ensure that such CDM projects truly benefit the developing country and his distrust over the eventual beneficiaries of the Certified Emissions Reduction (CER) credits underscore the general lack of understanding by our policy makers

“Don’t look at it as an economic good to be traded,” Gerochi said, as quoted by the Philippine Star, adding that such endeavors “must be mutually beneficial to us.”

To put it at a right perspective, the United States, the most industrialized country on earth as well as the United Kingdom, I believe, did not ratify the Kyoto Protocol. This is understandable as the U.S. is responsible for some 22% of greenhouse gases (GHG) emissions worldwide. Despite the reluctance of the federal government to ratify the treaty, many individual states have forged ahead with their green projects initiatives in the energy sector.

The offsetting of GHG emissions is premised on global warming, which means that no matter where the GHG are emitted, these could contribute to climate change. The countries who have ratified the protocol have committed to reduce their GHG emissions by 5.2% p.a. from a baseline level in 1990 until 2012.

The CDM is not a permanent fixture; it is a stopgap measure which arose from a practical realization that GHG emission cannot be done overnight. All the CER certificates generated from such projects will be retired by then.

The CDM allows financing of green projects such as solar, wind, geothermal, or even reforestation, which must be Gerochi's concern, which otherwise would have been prohibitive without it.

The resulting carbon trading offers an upside for the financing entities--that is, it allows them to recover part of the cost of money used in financing. Many of the financing institutions such as the Asian Development Bank or the International Finance Corporation of the World Bank, as well as private Carbon Funds usually arrange to buy the carbon credits generated from these green projects.

The prices of these tradable financial instruments have been rapidly increasing during the past two years owing to increased demand.

That Germany takes a lead in carbon financing is hardly surprising. It pioneered in putting in place renewable energy initiatives starting 1n 1990 which resulted in the explosive growth of solar and wind energy systems in that country.

The report also indicates Gerochi shares the concern the technology for such projects has to be acquired at a substantial cost from the developed countries who themselves do not or are not willing to incur the cost to reduce their own emissions.

We are not sure what the technology Gerochi is talking about. Examples of local projects qualified under the CDM are the 24.75 MW Bangui Bay wind project in northern Philippines, the 20-MW geothermal project of Energy Development Corporation in Negros Oriental and the various small biomass projects at various stages of developments--projects that hardly need expensive technologies. For the case of geothermal, the technology relies on local expertise.

If Gerochi is typical of our policy makers, then it underlines our general lack of appreciation of, and readiness to embrace the CDM and the resulting growth in carbon trading both at the regulated and the voluntary (over-the-counter, or OTC) markets.

Sittler could have merely scratched her head in disbelief.

Vanadium battery catches the sun and the wind

2008-08-19T08:48:00.004+08:00

By J R Ruaya

When the wind dies down or the sun stops shining at night or during cloudy days, the solar collectors and wind turbines stop working. There is just no cost effective way of storing energy from these sources.

Not anymore.

A recent development of energy storage using vanadium electrochemical cells is now about to break into the commercial realm.

In a solar installation photovoltaic solar panels catch the sun’s energy and convert it into electricity. This is then stored into the vanadium battery so that the energy can be used at a later time or pumped into the grid.

A vanadium battery, which works similarly as the familiar battery used in toys and flashlights, has distinct advantages over the other battery cells in the target application. The main advantage is it uses the same elements in both half-cells which eliminates cross-contamination of the two half-cell electrolytes during prolonged use. The positive and the negative half-cells are separated by a proton exchange membrane.

It has high efficiencies of 80 – 90 % in large installations. Furthermore, the costs rapidly goes down as the installation is scaled up. And maintenance is easy.

The battery can also be fully charged or discharged. In cases where time is the essence, the electrolyte solutions can simply be replaced rather than waiting for recharging.
__________________________________________________

Sidebar:

The electrochemistry involved is not too difficult to understand even by undergraduate students of chemistry. The schematic is shown below (courtesy of the University of New South Wales):

The half-reactions are:

At the positive electrode:

VO2+ + 2H+ + e = VO2+ + H2O E° = 1.00V

At the negative electrode:

V3+ + e- = V2+ E° = -0.26 V

The standard cell potential E° (cell) is 1.26 Volts at concentrations of 1 mole per litre and at 25°C, but under actual cell conditions, the open circuit cell voltage is 1.4 Volts at 50% state-of-charge and 1.6 Volts at 100% SOC (Skyllas-Kazacos, 2002, p. 2).
___________________________________________________

Early demonstration projects include a solar-powered housed in Thailand, an electric golf cart, and a back-up power system for a nuclear submarine.

In the United States, which is playing catch up with the technology, a 15-kW photovoltaic installation has just been put up at the Lowry Park Zoo in Tampa, Florida jointly by Tampa Electric and the University of South Florida’s (USF) Power Center for Utility Explorations (PCUE) at a cost of approximately $ 575,000 (Tampa Electric, 2008).

Earlier in June, two similar 5 kWx4hr systems have been installed at the downtown St. Peteresburg campus of USF and at Albert Whitted Park in the same city by the university and Progress Energy of Florida (VRB, 2008).

The vanadium redox battery has been developed and its use pioneered at the University of New South Wales. An engaging historical and scientific account of its development has been presented by Skyllas-Kazacos (2002).

With the technology now available what remains is the development of policy initiatives as embodied in the renewable energy bill still pending in Congress for the solar and wind power to take off in the Philippines.

References

Skyllas-Kazacos, M. (2002, July). An historical overview of the vanadium redox flow battery development at the University of New South Wales, Australia, 13. Retrieved August 19, 2008, from http://www.vrb.unsw.edu.au/overview.htm

Tampa Electric (2008, August 4 news release). Tampa Electric, USF partner with Tampa’s Lowry Park Zoo to develop new renewable energy project. Retrieved August 19, 2008 from http://www.tampaelectric.com/news/article/index.cfm?article=466.

VRB Power Systems Inc. (2008, June 9 press release). Progress Energy and University of South Florida’s Power Center for Utility Explorations unveil two 5kW x 4hr VRB Energy Storage Systems as part of SEEDS project . Retrieved August 19, 2008 from http://www.vrbpower.com/docs/news/2008/news_20080609.pdf

Reducing electricity systems losses : hard but doable

2008-08-18T04:04:00.007+08:00

Early this month, the Energy Regulatory Commission (ERC) issued a draft resolution for public consultation mandating that, among others, the electricity of a distribution utility (DU) is to be treated as an expense and not part of a systems loss, and lowers the maximum recoverable rate of system loss from 9.5 percent to 8 for DUs and from 14 percent to 11 for electric coops, based on the total kilowatt-hour (kWh) generated, purchased and distributed.

This is a welcome development, for the ERC and previous electricity price regulatory bodies have not adjusted the systems loss caps for almost a decade. The high systems loss cap was also pinpointed as one of the reasons for the high power costs exposed during the high of the controversy between GSIS president Winston Garcia and Meralco.

Earlier, we have proposed a stretch target of 5% and an implied reasonable target of 7%, based on the average systems loss of European Union countries. We also maintain that the cooperatives should be treated like any other private DUs which means that they should also have the same caps.

We also reiterate that these business dinosaurs be sold off to private investors.

As to be expected, the distribution utilities cry wolf, saying that this could lead to huge losses.

Aboitiz Power Corp. president Erramon Aboitiz said that its unit the Visayan Electric Company, the DU servicing Cebu City and province, is within the current 9.5% cap, but reducing this to 8 % the company would have to book losses of some P 100 million.

However, he didn't say that it is not doable. In fact, he said that you can reduce systems loss by investing, but one has to make a decent return. Of course.

This was echoed by another Aboitiz firm Davao Light & Power Co. (DLPC) vice president Bienamer Garcia said the proposed lowering of the system loss "would entail a lot of cost” , but the firm's system loss level as of end-June 2008 already stood at 7.91 percent, just within the proposed 8 % cap.

The Aboitiz units want incentives. Fine. But the incentives (e.g., tax breaks for capital importation) should be for improvements specifically targeting reduction of systems losses at the same time that the systems loss caps are lowered.

Garcia said that there is already a performance-based mechanism in place and all that ERC should do is to align the proposed new cap with this.

“Let businesses figure out how to reduce those losses, then give incentives. When you give incentives, you start seeing what people can do. For me, it’s better to provide incentives to companies to reduce system loss,” Aboitiz said.

Amen.