Thursday, Nov 23, 2017
Energy | Asia-Pacific | Philippines

Expanding energy in The Philippines

Fueling economic growth in Mindanao


3 months ago

Mr. Tirso G. Santillan, Executive Vice President and CEO Alsons Power Group
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Mr. Tirso G. Santillan

Executive Vice President and CEO Alsons Power Group

Mr. Tirso G. Santillan, Executive Vice President and CEO of The Alsons Power Group, discusses how his company’s generation facilities on the island of Mindanao play a key role in providing electricity to fuel Mindanao’s growing population and expanding economy

The Philippines is currently refocusing its efforts on deeper regional integration. This shift in policy has already resulted in overseas development aid (ODA) worth over $19 billion from China and Japan alone, both of which have also pledged foreign direct investment worth $1.7 billion and $3.9 billion, respectively. Much of the capital inflow will be directed towards socio-economic development of the county, and particularly infrastructure development. What impact do you expect to see from this deeper regional integration and what potential synergies do you see between Japan and the Philippines, especially in the energy sector?

It has ramifications beyond the energy sector. From what I understand regarding the initiatives of the President, he is trying to befriend countries that were not traditional friends of the Philippines, such as Russia and China. I believe his objectives are to reduce tensions in the region, and to access resources from these countries. Among the results of this effort is the said ODA offer from China. But his initiative also encompasses traditional regional partners like Japan. In the case of Japan, the President has gone beyond extending the hand of friendship and has embraced them warmly. These efforts as you point out have yielded positive results.

Japan has been instrumental in the growth of other countries in ASEAN. Thailand is the best example. Its growth has been significantly influenced by Japanese investments. Similarly, Indonesia and Vietnam have also attracted a lot of Japanese capital. Replicating these models is probably what the President is after. He wants to encourage more Japanese ventures into the Philippines.

In these countries, the Japanese have established manufacturing facilities. In Thailand, for instance, the Japanese are big in car manufacturing and assembly.  Thailand is attractive as their infrastructure is so much better than that of the Philippines. To address this, President Duterte has adopted a program to improve infrastructure in a big way - not just limited to physical infrastructure. His program addresses social infrastructure to reduce poverty, government infrastructure to improve services, approval processes and efficiency, and workforce infrastructure to upgrade skills and education.

Economic growth, of course, requires, among others, the availability of power to run growing industrial and agricultural facilities, commercial establishments and residences. In an economy where power is sufficient, load growth usually is a multiple of GDP growth. The President’s initiatives will no doubt lead to a surge in power demand.

 

It is interesting that you also mentioned about the social infrastructure because we see companies coming in from countries like China. They construct infrastructure and may also bring in workers. What is that you would like to see from countries like Japan that are coming into the country? What kind of investment do you want to see them bring in?

I do not know which specific industries should come in, but I have heard it expounded many times – that the solution to raising the standard of living has to come from more than what the manufacturing and agricultural sectors bring. Japan can contribute by establishing more manufacturing facilities here to raise industrial employment and by buying more agricultural produce to increase farm production. While the Japanese have already done a number of these investments, there is still a lot of room for more.

 

Japan is one of the most advanced countries in the world, so they have a lot of offerings in terms of technology exchange and knowledge exchange. Do you see the synergies there between the Philippines and Japan?

At this time, the important contribution needed from Japan is to add to employment through more investment in manufacturing facilities and the purchase of agricultural produce. The main thing is to bring about employment, and once the standard of living goes up, the next target is to get into work requiring higher skills. While delineation between stages is blurred, the transfer of technology becomes more relevant only later. At present, we need to emphasize employment more than technology.

 

It is interesting when you mentioned the manufacturing and agriculture sectors. These sectors do not work without the energy sector, especially here where we can see the energy demand growing rapidly. It is very important for this country to make sure that it is energy self-sufficient in the future. How would you evaluate the energy sector in the Philippines and what does the private sector have to contribute to make the situation better?

As a country, the Philippines lags behind other ASEAN countries in terms of generating capacity and power consumption. Within the country, Luzon has the highest per capita consumption of electricity, which is about three times the consumption level in Mindanao. In Luzon, industry, commercial establishments, and residential areas each take about a third of total energy generated. Mindanao, on the other hand, lacks the corresponding consumption from industrial and commercial establishments, which I believe is indicative of its level of economic development.

After years of severe power shortages, new generating facilities have been constructed in Mindanao. As a result, capacity currently exceeds demand, which should put power a few steps ahead of any surge in demand that may result from increased economic activity.

To propel economic growth, President Duterte has included in his program the improvement of public and social infrastructure in Mindanao. Eventually, he wants the private sector to bring industry to Mindanao, but the biggest obstacle right now is peace and order, or the perception of lack thereof. Although the current conflict is limited to Marawi, investors both foreign and local are wary and cautious about peace and order. Priority should be given to address this problem.

 

The Japanese are especially risk-averse, so it is very important to show them what the real situation is. Apart from security issues, there are also the challenges of very high energy costs and inefficiency, especially in the energy sector. What is it that makes your partners still stay with you? How do new investors still get into the energy sector in Mindanao?

Our partner in the energy business is Toyota. We have been with them since 1991 when we put up our first power plant in Iligan. We have ventured into other power projects since and have come to trust each other.  We have been able to demonstrate through experience that we run our plants well, and because we run them well, we deliver the profits. That is one of the motivations for the continuing relationship. They expect us to be able to stir, manage, and direct the businesses. They trust us because we have put our money there as well.

 

Alsons Power Group has been in Mindanao for a very long time, and has been contributing greatly in the energy sector. You have been growing so much in that region. It is not, however, as easy as Visayas and Luzon to handle. How would you describe yourself as a contributor to President Duterte’s plans of decentralization, security, and building of infrastructure?

We are contributing by building power plants. We also contribute by occasionally trying to help on how things should be done. We cannot leave the subject of power in Mindanao without addressing one of the issues you raised, namely, the high price of electricity in the Philippines.

Being a country made up of many islands, we do not have a single power grid. Thus, we cannot avail or take advantage of economies of scale. The rule of thumb is that no single unit in a grid should exceed 10-20% of the system, otherwise the reserve requirements to protect against a plant outage would become very big.  In Mindanao, our own coal plants are 105 MW per unit, while the largest capacity in the grid is 150 MW. These are small in comparison to other coal plants in larger grids where they may be as large as 1,000 MW and upwards. Economies of scale can bring down the cost of power substantially from our present levels. Aside from advantages like lower capital cost per MW and cheaper bulk transport cost of fuel, it would take almost the same number of people to operate a 1,000 MW plant as a 100 MW plant.

Aside from growth in demand in Mindanao, a fast way to increase grid size is through interconnection between Mindanao and Visayas. When that happens, we can start building bigger plants and enjoy the cost benefit of scale. But in addition, other contributors to the cost of power like transmission and distribution should be looked into and addressed if necessary. In the case of distribution companies, we know of some which have very high systems losses, which means power is being wasted, some of which the consumer has to pay for. That obviously has to be improved.

 

How do you improve it? How are you working on that?

By way of example, we have one particular client, which has systems losses of as high as 24%. The National Electrification Administration’s standard for electric cooperatives is a maximum allowable loss of 13%. That means the utility cannot recover the 11%. The utility will have to absorb that while the consumer has to pay for the 13%. Efficient and well-run utilities can have system losses of as low as 7-9%. In the case of our client with high losses, we are encouraging them to enter into an investment management contract. This contract would allow a private utility management group to take over management of our client. If that effort succeeds, then that will greatly improve the operation of the utility and benefit the consumer through more stable power and lower rates.

 

You have been saying about the economies of scale. It is quite a challenge, because this is what brings investors to them. How can you attract the foreign investors to Mindanao? What is it that may differentiate you?

We are from Mindanao and have been doing business there for over 60 years so we have developed extensive familiarity with the economic and political landscape. That is our main advantage, because in terms of technology, everybody has the same access. Our market acumen is especially important in the light of the current challenges facing Mindanao.

We are currently putting up new coal and hydro power plants in Sarangani and Zamboanga. Our foreign partner, Toyota, currently relies on us for guidance and leadership in the development and implementation of these projects.

 

Japan, due to an energy mix reshuffling towards alternatives to nuclear power, has dramatically increased its consumption and R&D in the fields of renewable energy and LNG. In fact, RE share increased by over 5% since 2011 and Japan has become the world’s 2nd largest consumer of LNG. How could Alsons Power either tap into this growing market or benefit from their expertise?

We are currently developing a 15 MW run-of-river project in Sarangani and have identified potential sites for a total of about 200 MW. Our partner Toyota is keen on participating in these opportunities. We are also discussing with them a 40 MW potential solar project.

We have also looked into LNG as a potential energy source but so far, we have not identified an economically feasible opportunity based on imported natural gas. So far there have been no LNG discoveries in Mindanao.

 

Alsons Power Group plays a key role in fueling the development of Mindanao with its growing population and expanding economy. As the first independent power producer in the region, it has helped lessen the severity of power shortages, operating four power plants of diesel and gas, with a total capacity of over 363 MW. Alsons even provides consultancy services abroad, making it an important stakeholder within the region. How do you see your role as leader within the region and how can your ASEAN neighbors take advantage of your in-depth knowledge of the energy sector?

We do not provide consultancy services. While we had done so on a few occasions upon special request, it is not part of our business plan. But we do provide management services. We have done so in Indonesia, Vietnam and Pakistan to help run diesel power plants. We are currently exploring a similar contract in Myanmar. After we develop experience in operating our own coal plant, we plan to expand our plant management services to include coal.

We currently do not have the size to aspire to take a leadership role in ASEAN. While we are a major player in Mindanao, we are not yet a major player in the Philippines. Our target is to at least maintain 25% share of the Mindanao market and grow this to the EPIRA dictated grid limit of 30%. After coal, our next stage is to grow in renewable energy capacity through run-of-river projects which will involve several sites like these relatively small generating units. We are also exploring solar power.

Solar technology is still growing and improving, and the most important component of which is storage technology – batteries. You cannot rely solely on solar without storage, because it is only good for certain hours of the day, especially if used in a small isolated grid.

 

What is it that your company wants to achieve in the long run? What kind of legacy are you looking forward to in leaving behind?

We see our role as a major and meaningful provider of power in Mindanao. As you have rightly pointed out, energy plays a major role in fueling economic growth. We would like to build our capacity to the maximum allowed by law to become a major provider of power in the grid, to have a mixed portfolio of energy sources to be able to serve the grid needs from base, mid-merit to peaking capacity, and to contribute to the reduction of the cost of power directly at the generation level and indirectly in the other components of cost.


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