The Philippines develops new energy solutions

Strong, sustained economic growth along with a corresponding rise in consumption and increasing industrial aspirations continue to drive energy demand to new levels across the Philippines, even as local primary energy resources become more difficult to develop. Domestic oil and gas production remains spotty, with very little progress being made in developing and maintaining new production as output from ageing fields declines due to a number of factors contributing to limited progress on oil and gas prospects within the country. The natural gas situation is decidedly more promising than that of crude oil at the moment, thanks in large part to the Malampaya gas field.

Making Plans

However, an increasing appetite for gas and the post-peak output of the country’s largest single gas field is leading the public and private sectors to explore new alternatives for securing more primary energy. Seeking to address these supply and demand issues, the Department of Energy (DoE) formulated the Philippines Energy Plan (PEP) 2012-30, which establishes a comprehensive roadmap that is intended to ensure sustainable, secure, sufficient and accessible energy.

The DoE is also moving towards developing regional energy plans for more responsive strategies that are tailored to the specific needs of and available resources in individual areas of the country. On the electricity side, the much-maligned Luzon power crisis of 2014/15 failed to fully materialise as initially feared, granting a reprieve to the beleaguered system supplying the Metro Manila area as new power generation sources come on-line. This trend is being repeated at the national level, with power distribution and generation spreading ever further afield and especially strong growth being seen in Mindanao.

Hydrocarbons

Total oil production reached 3.07m barrels in 2014, which was a major 63.1% increase over 2013 output. This was due primarily to the additional production from new wells drilled in the Galoc field by operator Nido Petroleum. Testing at the Galoc field was carried out during the first six months of 2015 to optimise the production settings at the field, with gross production from the oilfield by the end of the fourth quarter of 2015 totalling 1.2m barrels of oil, with a gross average production rate of 5707 barrels per day (bpd).

As a result of investments made in the field’s second phase of development starting in 2013, this output is significantly higher than the first-half average of 4693 bpd in 2013. Production in Galoc could be further boosted with the drilling of at least two more exploration and production wells, with Nido Petroleum indicating it could start drilling as early as the second quarter of 2016.

Natural Gas

Gas production likewise increased by 5.2% in 2014, totalling 130.35bn standard cu feet (scf), coming mostly from the Malampaya gas field offshore of Palawan Island, which produced 130.32bn scf, which is equivalent to 99% of gas produced in the country. In addition, the production of associated condensate from the Malampaya gas field amounted to 4.2m barrels.

Natural gas is a key component of the government’s fuel diversification programme and is considered one of the most viable and cleaner alternatives to oil, particularly for use in power generation. The gas from Malampaya already fuels three major power plants in the Batangas province, as well as providing feedstock for compressed natural gas-powered buses. Looking to further stimulate the development of the natural gas industry by improving energy transport infrastructure, the government and the Philippine National Oil Company have already contracted a feasibility study for the Batangas-Manila 1 Pipeline to ease access for natural gas by lowering the logistics costs.

Contracts

To meet the growing energy requirements of the country, the government is continuously expanding the exploration of local fossil fuels – coal, oil and gas – through the regular holding of Philippine Energy Contract Rounds (PECR). These cover a total of 16 sedimentary basins, representing an area of over 700,000 sq km with a combined potential of 4.8bn barrels of oil equivalent, according to the DoE. As of September 2015, the country had 26 active petroleum service contracts and had produced 1.2m barrels of oil, 53.38bn scf of gas and 1.69m barrels of condensate for the year. Oil and condensate taken from producing fields in the north-west Palawan Islands were either exported to South Korea, Singapore and Thailand or refined at the Shell Refinery in Tabangao, Batangas.

Deep Sea Fishing

In order to secure new sources of energy, the government has offered dozens of new blocks up for auction in recent years and is also looking further afield at some considerably larger, but more complicated, prizes. There are two major offshore areas that potentially hold the key to substantial gas reserves which could not only meet the Philippines’ domestic power needs, but also provide enough excess off-take for export or industrial use. The first is the massive 13m-ha area located off Luzon Island’s eastern seaboard known as the Benham Rise, and the second, more complicated, area is the disputed Spratly Islands chain situated in the West Philippine Sea.

Thinking purely in terms of political feasibility and production expediency, the Benham Rise area would be preferable because no other countries have laid claim to the site. From a production standpoint, the extinct volcanic ridges of the site are expected to contain large quantities of solid methane and oil, based on initial studies by the Philippines’ Department of Environment and Natural Resources. The government has been moving on this claim for some time, having submitted an application for territorial sovereignty over the area to the UN in 2008 that was approved in 2012.

Maritime Challenges

In contrast, the Philippines is having a much more difficult time developing the blocks near the Spratly Islands due to diplomatic challenges. Although much the site lies well within the 200-nautical-mile exclusive economic zone recognised by the UN under the Convention on the Law of the Sea, the Chinese government has been aggressively asserting its own claims on the site, which in turn has had a significant chilling effect on potential exploration and production interest. As a result, three blocks bordering the disputed area remain in a state of force majeure due to ongoing intractable arbitration with China, and even larger international oil companies are reticent to engage in the blocks.

These sensitive political issues have had a negative impact on interest in new exploration activities. The fifth and most recent PECR was launched in May 2014 for the exploration of 11 petroleum and 15 coal areas. Out of these 26 potential areas, seven contracts were awarded in December 2014 for the exploration of coal areas in Mindanao.

A total of three companies had submitted offers for new petroleum contracts during the bid submission for the fifth PECR round as of October 2015. The first, Israel’s Ratio Oil Exploration submitted the only offer for area 4, which covers an offshore section of 416,000 ha in the waters east of the province of Palawan. Philippines-based Colossal Petroleum Corporation applied for the 576,000-ha area 5, which is also located offshore in the waters east of Palawan.

The firm was also the sole bidder for the 468, 000-ha area 7, which is notable for being located within the disputed Reed Bank in the West Philippine Sea. Lastly, Yulaga Oil Exploration Enterprises submitted the sole bid for area 1, which covers a 424,000-ha petroleum block in south-east Luzon; however, the firm failed to meet government-set requirements for funding and technical expertise.

Back On Track

Although the Philippines operates one of most liberalised electricity sectors in the region, the country’s challenging and well-dispersed geography, along with limited domestic fuel supplies, continues to create an undersupplied market as demand continues to rise. Since 2001 power consumption has increased steadily from 47,049 GWh to 77,261 GWh in 2014, growth of 64.2%, while installed generation capacity expanded by around half of that rate from some 13,380 MW to 17,944 MW, or 34.1% growth, over the same time period, according to DoE figures.

Looking to address this rising imbalance, the government has rolled out a number of strategic power sector plans, such as the PEP 2012-30, which outlined several measures to increase self-sufficiency in the Philippines overall energy level. In addition, the new National Renewable Energy Programme (NREP) seeks to both diversify and expand renewable energy contributions to the country’s energy mix over the next two decades.

In broad strokes, the plans aim to increase installed capacity of renewable energy sources by 200% on 2011 levels by 2030, which would represent a hike of nearly 10 GW. In working towards this goal, the country is looking to position itself as one of the pre-eminent green power producers in the region by becoming both the world’s largest geothermal energy producer and the largest wind energy producer in South-east Asia.

Under the plan, 1495 MW of geothermal generation capacity is to be constructed by 2030, along with 2345 MW of wind power, 5394 MW of hydro-power, 277 MW from biomass power plants, 350 MW of solar power and 71 MW of ocean power.

Looking past the goals of the NREP, the power sector remains highly dependent upon traditional fossil fuels and is leaning heavily on them for the addition of a number of large thermal power plants scheduled to come on-line over the next five to 10 years. As of 2014, the total installed power capacity of the country is at 17,944 MW, with a dependable capacity of 15,633 MW, according to DoE figures.

Traditional fossil fuels account for the majority of power, with 31.8% of the country’s power plants fuelled by coal, followed by hydro (19.7%), natural gas (15.9%), oil (19.4%), geothermal (10.7%), and wind, biomass and solar making up the remaining 2.5%. Unfortunately, a shortfall of new investments coupled with the deteriorating condition of existing power plants has resulted in stagnant capacity growth in recent years. This trend, along with strong demand, appeared to be steering the Luzon grid system towards catastrophe in 2014/15, when many predicted a massive shortfall of supply during the peak-demand season. However, the negative expectations for the summer of 2014 did not materialise as peak demand failed to trigger rolling blackouts or other drastic consequences.

New Projects

With the initial storm now weathered, the upcoming peak-demand summer season has generated considerably less hand-wringing. This is primarily due to the addition of a moderate amount of new generation capacity now on-line in Luzon, with significantly more in the pipeline for completion over the next few years. At least eight new coal and natural gas units, ranging in size from 300 MW to 660 MW, were under development as of early 2016, and a total aggregate installed capacity of 13,000 MW of natural gas-fired power plants is expected by 2030, compared to 2862 MW in 2014.

The energy arm of the Ayala Corporation announced that it has begun ground clearing operations for its 668-MW coal-fired power plant in Bataan, and the project is expected to come online in 2019. Meralco PowerGen, the electricity generation arm of Meralco Group, the formerly GPU-run vertically integrated power company, is moving forward with three separate power plants. The first of these is the 300-MW Redondo facility located in Subic Bay, which had completed site preparation by the end of 2015. Construction is set to begin in 2016 with a 36-month build time putting initial power delivery at 2019, contingent on the National Grid Corporation of the Philippines completing the power transmission line. Also scheduled to come on-line in 2019, the 460-MW San Bonaventura power plant is being built on the site of the existing Mauban power plant. Under a joint venture between Thailand’s Energy Generating Public Company and Meralco, which holds the majority 51% stake, the project is slated to complete site preparation by early 2016. The largest of the three projects is the 1200-MW Atimonan power plant, consisting of two 600-MW units built in Quezon province. Construction of the wholly owned project is expected to begin in the second half of 2016 or 2017, with production expected by 2020 or 2021. US-based AES is setting aside $750m to expand capacity of its Masinloc facility by 300 MW, while TEAM/Aboitiz is well under way on the 450-MW expansion of its Pagbilao facility in Quezon. Mindanao is also now in the midst of an unprecedented power plant boom with at least 10 new coal-fired generation units of approximately 150 MW each under development. The effect of these new projects will push the balance of power over to excess capacity upon completion in 2017.

Renewable Energy

The Philippines was ahead of the curve in exploiting renewable energy to make major contributions to the national power supply when the country tapped into its significant geothermal resources in the late 1970s. However, interest in alternatives fell by the wayside in subsequent decades, rising oil prices and greater environmental awareness led to a renewed commitment to clean energy by the government with the passage of the Renewable Energy Act of 2008.

This act in turn led to a series of measures designed to foster growth in the sector, including: the creation of the Renewable Energy Management Bureau, the National Renewable Energy Board (NREB) and the National Biofuels Board; implementation of a net metering programme in April 2012; and adoption of a feed-in tariff (FIT) incentive scheme, which was finalised in July 2012.

The NREP counts among its ambitions the tripling of renewable energy installed capacity from 5438 MW in 2010 to 15,304 MW by 2030. Manila-based daily Phil Star reported in September 2015 that a total of 682 renewable energy service contracts had been awarded for the development of 13,574.68 MW of potential capacity. According to the DoE, legacy geothermal power plants make up the bulk of renewable energy power generation, with 1906.19 MW of installed capacity as of December 2015. This was followed by wind with 427 MW, biomass (241.27 MW), hydropower (139.49 MW) and solar (144.4 MW). Another 166 MW of biomass capacity and 2 MW of solar capacity are also operating off the grid for own-use electricity.

A New System

The linchpin of the renewable energy in the power sector is the FIT system, which grants preferential rates for electricity sales for qualified renewable energy producers, and which has been crucial in attracting private investment into the sector. Since an initial period of deliberation begun in June 2010, the Energy Regulatory Commission (ERC) has adjusted rates over the ensuing years in order to maintain an optimal balance between an acceptable rate of return for power producers and end-use pricing for consumers. Initial rates issued in July 2012 granted generators of solar power a FIT rate of P9.68 ($0.21) per KWh, P8.53 ($0.19) per KWh for wind power, P6.63 ($0.15) per KWh for biomass and P5.90 ($0.13) per KWh for run-of-river hydropower.

As the capital costs of some of these technologies have decreased, some of these rates have since been revised, including a new rate of P8.69 ($0.19) per KWh for solar implemented in May 2014. Rather than retroactively punishing solar operations that are already up and running under the old tariff, those projects will maintain their original rates while the new rate will apply to the next 71-500 MW of approved and operational capacity. Phil Star reported in December 2015 that new wind power projects are also seeing a cut, with the next 200 MW of approved projects receiving FIT rates of P7.40 ($0.16) per KWh in accordance with the ERC’s October 2015 decision, lower than the NREB’s recommendation of P7.93 ($0.18).

FIT Competition

In order to qualify for the scheme, producers must meet certain eligibility criteria, such as the requirement for hydro-power projects to be run-of-river power plants (as opposed to large impoundment systems) with installed capacity of between 1 MW and 10 MW. Similarly, solar projects must be ground mounted, rather than rooftop installations, with capacity of 500 KW or greater, and biomass power plants must be powered by solid rather than liquid fuel.

All developers applying for FIT eligibility are vetted, and approved or declined on a first-come-first-served basis regardless of the size of their project. This first-come-first-served method has succeeded in fulfilling its intended goal of reducing speculative project flipping and putting up new renewable generation at an accelerated rate.

“The model for FIT awards has been very beneficial for accelerating development of renewable projects because it prevented players from promising unrealistic outcomes and only allowed serious players to participate with viable technology, sound resources and good partners,” Jose Maria Zabaleta Jr, president of clean energy firm Bronzeoak Philippines, told OBG. “In the past, an unrealistic project could be awarded a contract to the detriment of a sound project undercut by a sales pitch.”

However, competition for the limited pool of FIT capacity has been essentially restricted to larger developers with deep pockets as the costs of financing rises. As a result, smaller firms that have historically been significant drivers pushing the development of renewable energy in new markets have been more or less shut out or restricted in their participation. In addition, the government has also granted a number of other incentives for renewable projects. These include an income tax holiday of seven years and a reduced income tax rate of 10% upon expiration of the holiday; duty-free imports; a special real estate tax rate of less than 1.5%; accelerated depreciation of assets; tax exemption on carbon credits; and tax credits on domestic capital equipment and services. Renewable projects are also given priority in grid connection, as well as guaranteed off-take once the generators begin transmitting to the grid.

Outlook

The Philippines is likely to remain reliant on oil imports for the foreseeable future, with minimal investment in new domestic exploration and development under the current regulatory structure and global conditions. Natural gas production will remain largely static as ongoing development of the Malampaya gas field should maintain constant output over the next decade, although further work in new reserves will be necessary in the long term to stave off the need for natural gas imports in the future.

Substantial investments in power generation are likely to put an end to chronic power shortages and high prices associated with the local electricity sector, particularly in Luzon and Mindanao with tens of thousands of megawatts of new generating capacity coming on-line in the long term. The sector will continue to be reliant on cheaper coal for its base load, although renewables and natural gas power generation will shoulder an increasing amount of this load in the long run.