OBG talks to Oscar Reyes, President and CEO, Manila Electric Company (Meralco)

Interview: Oscar Reyes

What kind of incentives need to be put in place to increase the amount of investment in tapping low-carbon and indigenous sources of energy?

OSCAR REYES: The entire electricity supply chain requires sizeable investment, from generation to transmission and then distribution, not only in cities such as Manila but also in rural parts of the country where electrical cooperatives are still the main service providers. Most existing power plants were built before the year 2000, and no new generation capacity has been created since then, with some exceptions such as the 600-MW GN power plant in Bataan and the 135-MW Sem-Calaca plant in Batangas. The government is also putting up a 460-MW coal-fired power plant in Quezon in partnership with the Thai power firm Electricity Generating, as well as planning a 600-MW coal-fired power plant in Subic. Given the 4% annual growth rate in demand and the re-entry of light manufacturing into the country, demand will accelerate and new, more fuel-efficient power plants will be required in the coming years.

Moving forward, the priority must be to create new generation capacity fuelled by indigenous sources of energy given the significant value added that is created for the government and country. Despite significant investments to extend the life of the Malampaya reservoir, more generation capacity is needed in gas, coal, hydroelectric or geothermal power, particularly as reserves are already tight and are forecast to get tighter still until new power plants now in development come into commercial operation by 2016. This is an area where significant investments are required across a range of energy sources. Generation and transmission will also need to complement investments and reinforce existing infrastructure to address congestion.

To what extent will it be possible to rationalise the energy mix to ensure that self-sufficiency objectives are met throughout the Philippines?

REYES: In Luzon, the energy sector needs to meet growing commercial and residential demand at peak hours in addition to supplying a constant 24-hour base load. Of course, the base load tends to increase at a slower pace compared to peak demand, which is when gas-fired or hydropower can play an important role. Conversely, oil-fired plants, like those in Limay in Bataan or Bauang in Pangasinan, are more expensive to run and can only be operated at times of low capacity when a plant shuts down due to equipment or transmission problems. Given that the primary objective is to reduce costs, coal may actually be the best alternative, despite limitations as to how much coal can feasibly be cycled.

By contrast, Mindanao has already introduced cheap hydroelectric power, but this has not been sufficiently dependable due to changes in the local climate and the ageing nature of hydroelectric plants. As a result, the transition to more expensive coal plants to build a stronger, more reliable base-load capacity is challenging. In certain areas, there are also older bunker-fired plants that could be rehabilitated, in addition to the new resources allocated to the Agos hydroelectric plants.

What can industry players do to keep energy prices at a reasonable level while also ensuring the reliable distribution of electricity into rural areas?

REYES: The passage of the Electrical Power Industry Reform Act in 2001 allowed the government to exit the power sector while overseeing significant privatisation of assets. The lack of government subsidies is a major reason for the relatively high energy prices in the Philippines compared to other ASEAN countries where greater involvement by government corporations remains the norm. High prices can addressed through the use of reliable, fuel-efficient plants and transmission systems.

One challenge requiring action is the deficiencies of certain cooperatives that lack the necessary funding and operational skills to carry out efficient distribution in rural areas. In the past, there has been insufficient planning to maintain generation infrastructure or to anticipate future demand growth. This is problematic given that power plants take nearly four years to build.