PHILIPPINE POWER SITUATIONERJoint Congressional Power Commission

Ernesto B. Pantangco

President

Philippine Independent Power Producers Association

February 17, 2011

2

OUTLINE

1. PIPPA Background

2. Assessing Power Supply-Demand Balance

3. Lowering Power Rates

4. Revisiting Proposed Amendments to EPIRA

3

Background on PIPPA

PIPPA Philippine Independent Power Producers Association

Organized in mid 90’s as a non stock non profit association

Members have a total Installed Capacity 8,110MW Composed of 9 Board members and 5 officers

representing major players in the industry. Forum to share and discuss common concerns Represent common interests of private sector

power production Coordinate efforts between members and

government institution like DOE, DOF, PSALM, etc.

MEMBERS MWKEPCO 1,850 TeaM Energy 1,953 CBK 793 CE Casecnan 150 HEDCOR 75 FIRST GEN 1,610 QPPL 511 TRANSASIA 50 SN ABOITIZ 360 AES Phils 512 BACMAN 36 ALSONS 150 STEAG 210

TOTAL 8,110

4

OUTLINE

1. PIPPA Background

2. Assessing Power Supply-Demand Balance

3. Lowering Power Rates

4. Revisiting Proposed Amendments to EPIRA

5

LUZON’S SUPPLY-DEMAND BALANCE BARELY MEETS REQUIRED RESERVES, SUPPLY CRUNCH LARGELY AFFECTED BY THE SCHEDULED RETIREMENT OF MALAYA & ENTRY OF COMMITTED POWER PLANTS

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Existing Capacity

10030 9384 9384 9384 9384 9384

Committed Capacity

0 41 41 675 675 675

Reqd Additional Capacity

0 0 374 194 689 1199

Peak Demand

7270 7582 7934 8309 8710 9123

Reqd Reserve Margin

1701 1774 1865 1944 2038 2135

5500

6500

7500

8500

9500

10500

11500

Luzon Supply-Demand Forecast (2011-2015)

MW

Source: Derived from latest DOE forecasts, Demand growth 4.6%

GN POWER: 600MW

BACMAN II: 33.55MWBACMAN II: 40.8MW

6

VISAYAS SUPPLY-DEMAND BALANCE MOVES TOWARDS A SURPLUS WITH 638 MW OF NEW CAPACITIES COMING FROM 2010-2011…

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Existing Capacity

1505 1457 1457 1457 1457 1457

Committed Capacity

240 638 638 638 638 638

Required Additional Capacity

20 0 0 0 0 0

Peak Demand

1430 1448 1486 1545 1603 1666

Required Reserve Margin

335 339 348 361 375 390

250

750

1250

1750

2250

Visayas Supply-Demand Forecast (2011-2015)

MW

CEDC: 240MW

PEDC: 160MWKSPC: 200MW

PANAY BIOMASS: 17.5MWNASULO: 20MW

Source: Derived from latest DOE forecasts, Demand growth 4.6%

7

WITH WESM VISAYAS IN COMMERCIAL OPERATIONS, SINGLE GRID TREATMENT SHOULD SHIFT SURPLUS TO LUZON TO MITIGATE BREACHED REQUIRED RESERVE MARGIN LEVELS

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Existing Capacity

11535 10841 10841 10841 10841 10841

Committed Capacity

240 679 679 1313 1313 1313

Required Additional Capacity

0 0 113 5 572 1160

Peak Demand

8700 9030 9420 9854 10313 10789

Required Reserve Margin

2036 2113 2213 2305 2413 2525

55006500750085009500

10500115001250013500

Luzon-Visayas Supply-Demand Forecast (2011-2015)

MW

Source: Derived from latest DOE forecasts, Demand growth 4.6%

8

MINDANAO IS ALREADY SUFFERING FROM TIGHT RESERVE LEVELS – WILL BE REQUIRING 98MW-401MW IN THE NEXT FIVE YEARS

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Existing Capacity

1682 1682 1682 1682 1682 1682

Committed Capacity

42 50 50 50 100 100

Required Additional Capacity

30 98 179 267 306 401

Peak Demand

1421 1483 1549 1620 1692 1769

Required Reserve Margin

333 347 362 379 396 414

250

750

1250

1750

2250

Mindanao Supply-Demand Forecast (2011-2015)

MW

Source: Derived from latest DOE forecasts, Demand growth 4.6%

SIBULANHYDRO :42MW

CABULIGHYDRO :8MW

MINDANAO III: 50MW

9

HOW MUCH RESERVE CAPACITY DOES A GRID REALLY NEED?

1. AGE AND CONDITION OF POWER PLANTS

2. RELATIVE SIZES OF INDIVIDUAL POWER PLANT UNITS – MORE LARGE-SIZED GENERATING UNITS REQUIRE HIGHER LEVEL OF RESERVES

3. CONDITION/RELIABILITY OF TRANSMISSION SYSTEM

4. GENERATION CAPACITY MIX – HAVING MORE “INTERMITTENT SOURCES” (e.g. HYDRO AND WIND) REQUIRE HIGHER LEVEL OF RESERVES

10

PRESCRIBED RESERVE MARGINS

DOE REQUIRED RESERVE MARGIN

GRID % of PEAK DEMAND

LUZON 23.4%

VISAYAS 23.3%

MINDANAO 21.1%

DOE Supply-Demand Forecasts use a required Reserve Margin based on probabilistic method – Loss of Load Probability (LOLP) or the expected number of days for a specified period in which peak demand is expected to go exceed capacity

GRID CODE AND ERC-APPROVED ANCILLARY SERVICE PROCUREMENT PLAN

TYPE OF RESERVE % of PEAK DEMAND

1. Load following & frequency regulation

2.8%

2. Spinning Reserve* 10.4%3. Back-Up Service 19.6%4. Reactive Support -TOTAL 32.8%

Note: * equivalent to largest single unit for each grid

11

TAKE AWAY POINTS: KEEPING THE LIGHTS ON

LUZON-VISAYAS

THE FOLLOWING WILL SIGNIFICANTLY HELP IN AVOIDING LUZON SUPPLY CRUNCH IN 2011:

1. DELAY/POSTPONE RETIREMENT OF MALAYA2. ON-TIME OPERATIONS OF NEW COAL CAPACITIES IN

VISAYAS3. UNRESTRICTED TRANSFER OF POWER BETWEEN LUZON-

LEYTE HVDC SUBMARINE CABLE LINK4. WESM OPERATIONS IN LUZON-VISAYAS SHOULDCONTINUE,

PRICE SIGNALS INCENTIVIZE POWER PLANTS TO RUN CRITICAL PERIOD STARTS AGAIN IN 2013 COMPLETION OF PROJECTS SHOULD BE MONITORED

12

TAKE AWAY POINTS: KEEPING THE LIGHTS ON

MINDANAO SHORTAGES CAN BE ALLEVIATED THROUGH THE FOLLOWING MEASURES:

1. UTILIZE SELF-GEN CAPACITY – TOTAL OF 50MW-180MW (E.G. DOLE PHILS., PICOP)

2. BRING IN AND UTILIZE IDLE LAND-BASED POWER PLANTS AND POWER BARGES (E.G. ILIGAN DIESEL - 100MW, DURACOM AND EAST ASIA - 200MW)

3. BRING POWER BARGES 117 (NASIPIT, ADN) AND 118 (COMPOSTELA VALLEY, ADN) ON LINE SOON – 200 MW

HOWERVER, WE SHOULD MAKE SURE ANY EXPENSIVE SOLUTIONS TO ADDRESS THE POWER SHORTAGES ARE KEPT SHORT TERM.

ERC SHOULD ASSURE COST RECOVERY OF THESE SOLUTIONS FROM ELECTRICITY CONSUMERS SO THAT GOVERNMENT AND TAXPAYERS NEED NOT SHOULDER THEM

WESM OPERATIONS SHOULD BE PUSHED TO ENABLE OPERATIONS OF UNDERUTILIZED CAPACITIES

DEMAND SIDE MANAGEMENT SHOULD BE SERIOUSLY CONSIDERED, i.e. VECO Interruptible program in Cebu

13

OUTLINE

1. PIPPA Background

2. Assessing Power Supply-Demand Balance

3. Lowering Power Rates

4. Revisiting Proposed Amendments to EPIRA

14

OUR POWER RATES IN MANILA CONTINUES TO BE ONE OF THE HIGHEST IN ASIA…

PHILIPPINES JAPAN SINGAPORE THAILAND MALAYSIA INDONESIA VIETNAM0.000.020.040.060.080.100.120.140.160.180.20

RESIDENTIAL POWER RATES (US Cents/kWh)

SINGAPORE PHILIPPINES JAPAN THAILAND MALAYSIA VIETNAM INDONESIA0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

INDUSTRIAL POWER RATES (US Cents/kWh)

(MERALCO)

(MERALCO)Source: Study conducted by International Energy Consultants , PCCI presentation

15

THIS IS BECAUSE WE HAVE THE HIGHEST INTRINSIC COST OF SUPPLY

1. High dependence on imported fuel sources

2. Higher effective cost of fuel sources (coal, oil) because Philippine government has stopped subsidies – Malaysia and Indonesia use of coal, oil and natural gas for power generation are subsidized

3. Cost of natural gas power generation is priced using a formula which approximates imported Natural Gas price – chunk of which is government royalties

PHILIPPINES MALAYSIA INDONESIA

IMPORT: 34%INDIGENOUS: 66%

IMPORT: 28%INDIGENOUS: 72%

IMPORT: 0%INDIGENOUS: 100%

Source: Study conducted by International Energy Consultants , PCCI presentation

16

COMPARISON OF GOVERNMENT SHARE ON NATURAL GAS DOMESTICALLY USED FOR POWER GENERATION

Sources: 1. US Embassy in Indonesia. Gas sold to domestic market is typically priced 1/3 less than LNG sales.2. Unocal Thailand Fact Sheet. Royalty paid from 1981-2003 is $1.4 Billion for 5.561 Tcf of natural gas.3. Price of gas sold by government owned PVN to government owned EVN is $3.22/MMBtu.4. Petronas. Government subsidy on domestically used natural gas ~$1.72Billion per year.

Gas rate to TNB is RM6.4/MMBtu (~$1.78/MMBtu)*Figures derived 2007

Cost of Natural Gas

Level of Royalties

17

MANY GOVERNMENTS INTERVENE AND SUBSIDIZE – SHIELDING CUSTOMERS FROM PRICE INCREASES

The ECONOMIST. “RECOIL” , “Double, Double, Oil And Trouble” , “Crude Measures”, May 29th 2008

2007 Key Indicators: Inequalities in Asia. ADB

10.92 10.93

Malaysia Indonesia-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

US

$ Bi

llion

Subsidies

-

50

100

150

200

250

300

US $ Billion

7% of GDP

3% of GDP

OUR ASIAN NEIGHBORS HAVE INHERENT ADVANTAGE WITH SUBSTANTIAL AMOUNT OF INDIGENOUS ENERGY SOURCES AND CONSEQUENTLY DEEPER

POCKETS TO SUBSIDIZE DOMESTIC USE OF ENERGY SOURCES…

18

MOREOVER, THE PHILIPPINES ALSO HAS ONE OF THE MORE PROGRESSIVE POWER REFORMS…

1. Operational Wholesale Electricity Spot Market (WESM) in Luzon and Visayas

Excluding market intervention periods, prices reflect full and true cost of power

Nodal Pricing which illustrates high cost of losses caused by archipelagic nature of power grids

2. Generation charges are full pass through with fuel and FOREX adjustments

Removes subsidies and distortions caused by lagged adjustments – e.g. GRAM, ICERA deferred adjustments

Enables financing for new investments

Source: Study conducted by International Energy Consultants , PCCI presentation

OUR “LONG-TERM” POWER REFORM POLICIES ARE MORE SUSTAINABLE - MARKET DISTORTIONS CAUSED BY SUBSIDIES AND “SHORT-TERM” POPULIST POLICES WILL EVENTUALLY EXPERIENCE POWER SHORTAGES AND/OR PRICE SHOCKS

19

1. More plants should be built: Right mix of assets, Right mix of fuels

Eliminate market distortions – correct price signals

Stable and consistent local government policies

2. Push for Open-Access to start3.

Prevent market dominance - increase number of competing generation/supply companies

Choice for customers, more specific matching of customers and suppliers.

Strengthen/Optimize customer sizes (Electric Cooperative loads)

CONCEPTUALLY, THERE TWO WAYS OF BRINGING POWER RATES DOWN: (1) FISCAL POLICY ; AND (2) MARKET COMPETITION

1. Tax parity among fuels:

Natural Gas Royalty reduction – push for Senator Enrile’s SBN 2 of 2010

2. Remove redundant taxation “Double” taxation on distribution

charges and transmission Push for Senator Enrile’s SBN 3 of

2010 or the Uniform Franchise Tax Measure – flat 3% on the gross distribution income of DUs in lieu of all other taxes

FISCAL POLICY COMPETITION

20

OUTLINE

1. PIPPA Background

2. Assessing Power Supply-Demand Balance

3. Lowering Power Rates

4. Revisiting Proposed Amendments to EPIRA

21

ALTHOUGH WE ARE STILL EXPERIENCING TRANSITION PAINS, OUR POWER REFORMS APPEAR TO BE WORKING…

There is an emerging clarity in the rules governing the industry

More level playing field, market dominance of a single entity removed

Increased private sector participation and capacity improvements large investments, translating to improved supply

Excluding market intervention periods, wesm prices reflect true cost of power – price signals enable economic dispatching and operations of “dormant” power plants and underutilized capacities

22

PSALM HAS BEEN ABLE TO MAKE SIGNIFICANT PROGRESS IN PRIVATIZING NPC’S GENERATION

Talomo HEPP• Atty. Ramon I.

Constancio • $0.48 Million ,1.8

MW

Agusan HEPP• First Generation

Holdings • $1.53 Million,1.6

MW

Barit HEPP• Hydro Electric

Devt Corp• $1.37

Million ,3.5MW

Cawayan HEPP

• SORECOII• $0.41 Million ,0.4

MW

Loboc HEPP• Sta. Clara

International Corporation

• $1.42 Million,1.2 MW

TOTAL = 8.5 MW

2004 2006 2007 2008 2009 2010

Pantabangan-Masiway HEPP

• First Gen Hydropower Corporation

• $129 Million • 112 MW• 11/16/2006

Magat HEPP• SN Aboitiz

Power Corporation

• $530 Million• 360 MW• 12/14/2006

TOTAL = 472 MW

Masinloc Coal-Fired Thermal PP• Masinloc-

Power Partners Co. Ltd.

• $930 Million • 600 MW• 7/26/2007Ambuklao-Binga

Hydroelectric Complex • SN Aboitiz

Power Hydro Inc.

• $325 Million • 175 MW• 11/29/2007

TOTAL = 775 MW

Tiwi-MakBan Geothermal PP• AP

Renewables Inc.

• $446.89 Million

• 747.53 MW• 7/31/2008Panay and Bohol

Diesel Power Plants

• SPC Power Corporation

• $5.86 Million• 168.5 MW• 11/12/2008

TOTAL = 916 MW

Angat Hydro Electric PP• Korea Water

Resources Devt. Corp.

• $440.88 Million

• 218 MW• 4/28/2010BacMan

Geothermal PP• Bac-Man Geothermal Inc.

• $28.25 Million

• 150 MW• 5/6/2010TOTAL = 368

MW

Amlan HEPP• ICS Renewables

Inc. • $0.23 Million ,0.8

MW Batangas (Calaca) Coal-Fired Thermal PP

• DMCI Holdings, Inc.• $361.71

Million ,600 MWPower Barge 118

• Therma Marine Inc.

• $14 Million,100 MW

Power Barge 117• Therma Mobile Inc• $16 Million,100

MWLimay Combined-Cycle PP

• SMEC• $13.5 Million,620

MWPalinpinon-Tongonan Geothermal Power Plants• GCGI

• $220 Million,305 MW

Naga Land-Based Gas Turbine Power Plant • SPC Power

Corporation• $1.01 Million, 55

MWTOTAL = 1781 MW

TO DATE, PSALM HAS PRIVATIZED 4320 MW OR 98% OF NPC GENERATING ASSETS IN LUZON AND VISAYAS – SATISFYING 1 OUT OF 2 REMAINING PRECONDITIONS FOR OPEN ACCESS

23

PSALM HAS ALSO BEEN ABLE TO GATHER MOMENTUM IN PRIVATIZING NPC-IPP CONTRACTS IN LUZON AND VISAYAS

2009 2010Ilijan Combined Cycle Power Plant

• San Miguel Corporation• USD870 Million, 1200 MW

TOTAL = 1200 MW

Pagbilao Coal-Fired Power Plant• Therma Luzon Inc.• USD691 Million,700 MW• 8/28/2009

Sual Coal-Fired Power Plant

• San Miguel Energy Corporation• USD1.07 Billion,1000 MW

San Roque Multipurpose Hydro

• Strategic Power Devt. Corp.• USD450 Million,345 MW

Bakun-Benguet hydro plants• Amlan Power Holdings

Corporation• USD145 Million,100.75 MW

TOTAL = 2145.75 MW

PSALM HAS PRIVATIZED 2220 MW OR ~68 % OF NPC-IPP CONTRACTS, WITH CONVERSION OF MALAYA FROM AN IPP-CONTRACT (ROM) TO AN NPC ASSET, ALL

REQUIREMENTS FOR OPEN ACCESS ALREADY MET

24

IMPROVEMENTS IN DEPENDABLE AND AVAILABLE CAPACITES WERE MADE BY PRIVATE COMPANIES WHO TOOK OPERATED POORLY MAINTAINED NPC PLANTS

PERIOD AVE MAXIMUM DEPENDABLE

CAPACITYPEAK DEMAND

AVERAGE RESERVE MARGIN

PRE-PRIVATIZATION(2006-2007) 7,948 6,650 15%

POST PRIVATIZATION(2008-2009)

8,467 6,900 23%

SOURCES OF SUPPLY IMPROVEMENT: PANTABANGAN-MASIWAY, MAGAT, AMBUKLAO-BINGA AND MASINLOC

25

TOTAL NPC FIRST GEN ABOITIZ QPPL OTHER PRIVATE

INSTALLED CAPACITY 12491.195 1493.031 361.979999999999

511 869.388

1,000.00

3,000.00

5,000.00

7,000.00

9,000.00

11,000.00

13,000.00

NATIONAL INSTALLED GENERATING CAPACITY - 2006

(MW

)

IN 2006, THE PLAYING FIELD WAS CLEARLY DOMINATED BY NPC, CONTROLLING ~82% OR 12,491 MW OF THE TOTAL INSTALLED CAPACITY

Source: ERC Res. No. 53, Series of 2006National Market Share Cap – 3, 808 MW

82%

25% NATIONAL MARKET SHARE

CAP

26

NPC SAN MIGUEL

ABOITIZ FIRST GEN

AES DMCI QPPL SALCON

INSTALLED CAPAC-ITY

4217.89 3148.48 2294.29 2066.59 635 600 511 220.5

1,000.00

3,000.00

5,000.00

7,000.00

9,000.00

11,000.00

13,000.00

NATIONAL INSTALLED GENERATING CAPACITY - 2010

(MW

)

BUT BY 2010, THE PLAYING FIELD HAS IMPROVED SIGNIFICANTLY WITH MORE PRIVATE PLAYERS COMPETING IN THE MARKET

Source: Derived from ERC Res. No. 4, Series of 2010National Market Share Cap – 3, 648 MW

25% NATIONAL MARKET

SHARE CAP

27

CURRENT WESM PRICES REFLECT TRUE SUPPLY-DEMAND SITUATION

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-0

9

Sep-0

9

Oct-09

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar

-10

Apr-1

0

May

-10

Jun-

10

Jul-1

0

Aug-1

0

Sep-1

0

Oct-10

Nov-1

0

Dec-1

0

Jan-

11

-6.00

-2.00

2.00

6.00

10.00

14.00

18.00

22.00

P/k

Wh

WESM WEEKLY AVERAGE PRICES (JANUARY 1, 2009 TO JANUARY 31, 2011)

Source: Philippine Electricity Market Corporation

Average Peak Prices Average Prices

High WESM prices due to tight supply caused by: (1) Malampaya outage; (2) DOE mandated Power Plants to conduct maintenance before May elections, (3) Prolonged El Nino lowered hydro power generation

Lower Demand due to Cold Season and Extended

Holidays

Lower prices due to “Limay Must-Run”

situation

Lower prices with normalized supply in the

grid

Baseload Plant Outages

(Masinloc, Calaca, Sual)

Drop in demand due

to colder temperature and holiday

season

28

FULL IMPLEMENTION OF EPIRA SHOULD BE PURSUED BEFORE ANY AMENDMENTS ARE CONTEMPLATED AND EFFECTED. THE INDUSTRY SHOULD ADDRESS OPERATIONAL ISSUES FACED IN THIS TRANSITION:

1. Creation of Independent Market Operator and Independent System Operator

2. Stable Policy Framework – Real Property Tax and Local Government Assessments

3. Industry’s “Readiness” for Open Access 4. Public Ownership of Generators (e.g. Masinloc) – non

coverage of limited partnership5. ERC ruling on TOU pricing specific to GRAM and ICERA

applications6. ERC assistance on VAT issue on BIR7. ERC’s issuance of final approval of Power Supply Agreements 8. WESM Mindanao commercial operations – Agus Pulangi

Privatization

29

END OF PRESENTATION

THANK YOU!!!

30

SUPPORT SLIDES

31

GENERATION MIX: LUZON, VISAYAS AND MINDANAO

LUZON VISAYAS MINDANAO

32

Dep Cap Actual Cap March 2010

Geothermal 108.48 98.7168

Coal 210 210

Hydro 861.798000000003 288.6293

Oil Based 517.678 436.860199999999

100.00

300.00

500.00

700.00

900.00

1,100.00

1,300.00

1,500.00

1,700.00

ALTHOUGH 2011 IS FORECASTED TO BE A WET YEAR, MINDANAO IS STILL MORE VULNERABLE TO CLIMATE AND WEATHER PATTERNS DUE TO ITS HIGH DEPENDENCE ON HYDRO POWER

1,698 MWTOTAL 1,034 MW

DEFICIENT POWER PLANT

CAPACITY MW REASON

UNPLANNED

AGUS 1-7 538 LACK OF WATER – EL NIŇO

ILIGAN DIESEL 100SHUTDOWN – NEEDS SPARE

PARTS

TOTAL – 638 MW

423MWDEFICIT

PEAK DEMAND: 1,457 MW

MARCH 16, 2010