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How Will The Philippines Meet Ambitious Electricity Demand?

THE Philippines needs new power plants if it is to provide the electricity that will deliver the government’s ambitious growth plans. The country risks falling behind its neighbors as it competes for foreign direct investment in generation infrastructure. It also faces a future locked into expensive and polluting coal.

The question for government is: “How do we create a level playing field for the development of the electricity supply that delivers cheap and reliable electricity, while enhancing the country’s energy security”?

The answer is to be found in countries that have opened their markets to real competition, where all technologies compete on equal terms.

In Chile, in response to the government’s ambitions to develop renewable energy, the regulator revised the tender rules to enable wind, solar and hydro power to compete in open auctions with coal and gas plants. Over the last three annual auctions for new power, wind and solar plants have offered record low bid prices.

In South Africa, the country’s power procurement process has brought wind and solar projects into the market with prices significantly below that for new coal, and competitive with the country’s existing coal fleet. This process is underpinned by a 10-year energy outlook which allows the government to adjust its procurement plans to ensure the delivery of the lowest cost of generation.

There will always be incumbent players in any market who will complain and seek to protect their preferential position. With a robust independent regulator and clear tender rules, they cannot avoid the inevitable. Either they switch their investments into cheaper wind and solar plant, or they face considerable stranded asset risk.

As the cost of energy from wind and solar plants further undercuts that of coal, these incumbents face very real and very large losses.

The Carbon Tracker’s recent report on coal in the Philippines suggests local investors could lose $13 billion from their existing investments in coal plants, with San Miguel Corp., the Aboitiz Group, and DMCI Holding most at risk in this scenario.

This is in addition to the $20 billion investment in new coal projects that have already been announced locally. These projects must all now be at risk as developers update their financial models to take into account the falling cost of renewables and the rising cost of coal. That is before they look for funding.

Every week brings news of another abandoned coal power project as the sources of funding dry up. Last year, the Word Bank announced it would no longer invest in new coal; the World Bank’s investment arm, the International Finance Corp., also recently announced in Indonesia that it was tightening its lending criteria to broadly exclude coal, and to actively seek out investments in renewable energy.

In September, Marubeni of Japan announced that it would no longer invest in new coal generation; in October, Korean Midland Power indicated it was abandoning a 1,000-MW new coal plant in Indonesia in favor of a plan to convert the site to renewable energy.

In October, Storebrand Asset Management, one of Norway’s largest private asset managers, announced it was joining the exodus from investing in coal. “Coal stocks are toxic,” it said, “and if an energy company extends its coal operations, there is only one option for us: exit.”

As this global retreat from coal continues, the Philippines has an opportunity to be the investment country of choice for infrastructure and pension funds looking to put their money to work building out new renewable power plants. The demand for additional renewable energy investments in South East Asia from 2016 to 2030 is estimated at $3 trillion. Grabbing the largest share of that is a huge prize for this country.

With this investment in power plants will come ancillary investment in the supply chain, enabling the Philippines to bid for the manufacturing the towers and blades for wind turbines, the cabling and power electronics, and the operations and maintenance facilities.

The global retreat from coal and the global advance of renewable energy is inevitable and inexorable. The opportunities for the Philippines are immense and will enable the country to bring cheap, clean and reliable power to homes and businesses in the busiest metros and the smallest islands.

When government levels the playing field and allows renewable energy to compete with coal, there will only be one winner, the electricity customers of the Philippines.

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