Power producers face tough times on oversupply, pricing

By Lenie Lectura – September 18, 2017

from Business Mirror

COMPANIES engaged in power generation may face tougher times ahead on account of a foreseen capacity oversupply and tough pricing condition.

AC Energy Holdings Inc., which has installed around 1,000 megawatts (MW) last year, said oversupply is “obviously good for customers and more challenging for suppliers”.

“Current oversupply situation is part of a typical business cycle,” said AC Energy President John Eric Francia in response to questions sent via e-mail by the BusinessMirror. “I would expect this to be the case for the next three years to five years.” The Department of Energy (DOE) has set a power-capacity target of 43,765 megawatts (MW) by year 2040.

“The 43,000 MW is parallel with the Ambisyon Natin [Our Ambition] 2040. As we will build the plants on a yearly basis, [that will be] dependent on the demand,” Energy Secretary Alfonso G.  Cusi said. “Up to 2022, we are forecasting about 12,000 MW of the 43,000 will be in that period. That’s because of the increase in infra building under ‘Build, Build, Build’.”

The Duterte administration’s economic agenda, dubbed Dutertenomics, is mainly a program anchored on the rule of law and driven by a massive infrastructure spending, as captured by the slogan Build, Build, Build.

“Hopefully, with Dutertenomics attracting the adequate level of private investments, we can reach our targeted additional power capacity by year 2040 [of] 43,765 MW,”  Cusi said.

Lower margins?

TO meet massive demand in the coming years, the Philippines should start building power plants annually starting this year, the energy chief said.

While this is good news for consumers, power generators are worried that a possible oversupply could lead to lower margins.

“Oversupply will affect all gencos [generation companies]. There will be idle capacity and may affect viability of some. In situations like this, building of new plants may slow down as well,” said Aboitiz Power Corp. President Antonio Moraza in a text message. “Prices are already very low, particularly in the Wesm [Wholesale Electricity Spot Market]; so margins are dropping.” The power firm, which targets 4,000 MW of net attributable capacity by 2020, is optimistic that business will go on amid a possible oversupply scenario in the power industry.

“We are contracted so we continue to move on,” Moraza added. “However, there is nothing you can do with low margins. You just have to hang on.” The same goes for AC Energy. Francia agreed that locking in a power-supply agreement would help address lower margins.

Most of the country’s power producers prefer to seal a power contract with off-takers in a bid to be sure that the power generated from their new power plants would be sold.

“AC Energy currently has a high percentage of contracted capacity, so the market impact to our business is quite limited,” Francia said, while adding that generators who are “long on power” should have a solid balance sheet during such period to withstand lower utilization and soft prices.

Continuous build

CONGLOMERATE San Miguel Corp. (SMC), meanwhile, continues to build more power plants, some of these are without power contracts with off-takers.

“For as long as I can sell it a cheaper price, then I am not worried. First, I will be able to help the country address its concern on the needed capacity. At the same time, cheap power price will help electric cooperatives and power distributors sell electricity at a lower price too. Eventually, it’s a win-win situation because the rend result would benefit consumers,” said San Miguel President Ramon S. Ang in an earlier interview.

SMC is currently the country’s biggest power producer—combining the force of its power-assets acquisition from the divestments undertaken by the government, as well as the greenfield projects it is currently bringing to completion phases.

Government concern

THE DOE, for its part, said it is also looking at the concerns of the power producers.

“Suppliers look at it from different perspective,” Cusi said in an interview. “The DOE, as regulator, looks at all interest, especially the consumers.”

Still, the energy chief added the agency is seriously looking at these oversupply concerns.

“From how we see it, we have thin reserve thus we are experiencing yellow and  red alerts and some power interruptions from time to time,” he said. “We have set our capacity build up based on the Neda’s [National Economic and Development Authority], GNP [Gross National Product]   projection and infrastructure development. With sufficient supply and reserve, spike of prices can be averted,” Cusi explained.

In fact, the DOE has identified ideal locations for new power plants to meet over 43,000 MW of projected supply needed until 2040 and to avoid transmission congestion in the process.

Lack or glut?

LATEST DOE data showed ideal locations to put up new power plants in Luzon are the National Capital Region and Bicol.

For the Visayas, ideal sites are in Cebu, Bohol and Samar, and for Mindanao, these are Zamboanga Sibugay, Sultan Kudarat and Agusan del Sur.

Factors considered in these locations are the availability of transmission facilities and the projected demand in those areas.

Cusi pointed out that power supply in the country has been tight, with reserves falling below alert levels mostly on account of unplanned power-plant outages and increasing demand.

While additional power plants are scheduled to be completed over the next few years, the question remains if these plants can come on line in time. “I have said it again and again. What problem do you prefer? Glut in power supply or lack of it?” the energy chief emphasized.