During the past two years, almost 80% of the Philippines’ electrical generation and transmission assets have been privatized. While the electrification of the Philippines is still an essential part of Napocor’s mission, the company also acts as a guide to investors – particularly to those interested in renewable energy.
One of the legacies of the Arroyo administration is the overhaul of the energy sector. We have observed the privatization of important public bodies – from the National Transmission Corporation as well as PNOC (Philippine National Oil Company), the Energy Development Corporation and some very important generating and transmission assets from NAPOCOR itself. NAPOCOR has been an active witness, if not an agent of this whole transformation. Could you provide us with your evaluation of the whole privatization process? What do you think will be the large-scale benefits of this whole overhaul of the sector?
In the past few years, the pace of privatization has been fairly significant. In 2005 the number of assets that were privatized was considerable, and to date the number and amount of NAPOCOR’S privatized assets in Visayas and Luzon is already around 87%. The target to bring about a milestone in energy and electricity reform industry is 70%, which is so that open access can take place. Of course another element that needs to be fulfilled is the privatization of IPP (Independent Power Producer) contracts. The agency that is mainly responsible for this has achieved 68% privatized IPP contracts, 2% below the 70% target. That means that in the current year they would have achieved both targets and a year later we will be able to implement an open-access system in the electricity industry which means that any generator can deliver energy to any customer who decides to use its energy. As long as there are wires available to deliver this commodity so to speak, then this will be allowed. There will no longer be franchises so to speak as they exist now.
Overall, the government agencies mandated to roll out privatization of the industry have performed well. Another part of the aim of the reform was that from now on the private sector would now deal with things and deliver the additional greenfield projects and capacities that the country would need. However investments were confined to the acquisition of assets but so far there has not been a considerable amount of effort made for greenfield projects. There are a few, like for example GN Power is going to put up a coal fire plant somewhere in Bataan, and way down south an energy firm is thinking of developing a 200 megawatts coal fire plant. But the participation in this aspect of development has not been as significant as was expected, and that is why we find that the country is still facing a supply shortage.
That shortage of supply can also be because of the shortage in liquidity around the world in the last few years. China has also been quite active.
That is also possible, but if that was the reason then we would have seen certain interest in feasibility studies at least that would indicate that if the proper financing is there, they would go for it. The signals are not exactly there although the market that has been established in Luzon has already indicated from the prices that are reflected in the transactions that the time is right to develop greenfield projects. With this renewable energy law that was passed recently by the Congress, there has been a new wave of investors who have been willing to come in with technologies, and some are even coming in with financing elements to get involved in renewable energy. The attraction may be due to the framework that is being offered to these investors, such as attractive perks. One thing that I suppose had a big influence on this wave of interest is tariffs, because there has been talk about the appropriate feed-in tariff that would be given to investors. At least they were encouraged to come in with their technologies and financing.
It is interesting that you said that, because we have just spoken with one of the biggest investors in the power sector here. He was saying that on the government side, a lot more needs to be done in terms of making the tariffs more attractive, for example. What do you think about this?
I fully agree with that. That is the main reason why Mindanao is now in a critical situation. Unfortunately the consumers there have been used to low-cost electricity, and the main reason is because the generation mix in that area is dominated by hydropower. But now, because of our experience with El Niño, we are observing a drastic decrease in the availability of hydropower and therefore we are largely dependent on thermal energy and diesel and bunker engines which are increasing the cost of power generation quite a lot. Given that there is no market in Mindanao as yet, the regulated tariff is still in place. The regulated tariff is still the same, which translates into the Government absorbing the additional financial burden in order to support this added cost in generating capacity. This discourages new investors from coming in, because they are wondering why they should come in if the tariffs are not right. We need to come up with more realistic tariffs in order for investors to come.
We realize that there are two sectors trying to compete in terms of investment into the country. Companies from the manufacturing sector for example would like to come into the country with low electricity costs, especially if they are largely dependent on power. There is also another set of investors who would like to come in and add to the supply side of electricity, and who would want a higher tariff. We need to balance the two. We cannot talk about lower electricity costs, but reasonable costs – reasonable in the sense that we have to balance the interests of those that are coming in and who could like to invest and create jobs and who use electricity, and the others who are energy generators.
It is a fact that if there is more supply, the cost of energy will decrease.
Eventually it will. That is precisely my opinion. If the generators see our role as the initiators of economic activity, then we should be willing to come in and encourage that economic activity, because when we come in with our basic utility service, we will be the drivers of this activity which will end up with people being able to afford the cost of electricity. There will definitely be a certain period when Government will have to be willing to subsidize.
As governments do with FDI (foreign direct investment). They have tax breaks and you can have tariff breaks.
But in NPC’s (NAPOCOR’s) case right now, because of the pace of privatization, we are getting out of the major grid scene more and more, and we are currently refocusing our corporate strategies on the off-grid and island grid areas.
How much do you think the power crisis in the Philippines has affected the image of the country for foreign investors? Do you think it is a serious concern, or do you think that there are sufficient initiatives that can guarantee that if an investor comes to this country they will have enough energy to set up their plant?
We have heard that it may be easier for investors to come in if they were dealing with entities that enjoy sovereign guarantees, and they could come in and be assured of supply contracts that will assure them of a good cash flow. The current law discourages this aspect of the Government continuing to provide sovereign guarantees, and that is why it has mandated national power to not invest in national projects any longer or get into new power contracts because it would like the private sector to come in with the additional capacities for greenfield projects. However we are learning that this may not be enough and private sector participation in the industry may have to be encouraged by something else, not just the acquisition of assets and opportunities that indicate that additional capacity should be coming in.
There must be an element of ‘how much am I going to make if I come in’. We have to recognize that the potential revenue stream must be present in order for them to be convinced to come in. As I said, the tariff structure has to be attractive enough and as I said earlier, the potential investors in renewable energy are realizing that there can be good opportunities when it comes to recovering their investments in renewable energy, so they are interested in coming in. Maybe that is something that we ought to bring about in the major grid as well in order to attract the base load investors, because we have to accept that we cannot rely entirely on renewables. Renewables are still quite expensive. We still need coal, gas and all the other base loads. The tariff structure must support the overall investment scenario to address the potential players for base load energy. The country is also considering nuclear power and both I and the Department of Energy support this.
You conducted a feasibility study to assess the potential for nuclear power in the future...
We actually have the most expensive nuclear power here in the Philippines, because we built a plant and never used it because of politics.
I think that goes in tandem with the rest of the world and the United States. It is interesting that you mention privatization not being an entire solution. We know that a sort of command economy and socialist and public ownership is not a solution. There is something in the middle, and we see this even in the US and Europe…
It is even in technology, in the areas where we are trying to address the marginalized sectors of society. Renewable energy could very well be the right kind of energy that should be supplied, because it is clean and environmentally friendly, but the cost may not be that attractive. So what do we do? We come up with hybrid systems and a combination of conventional and renewable energy in order to have a sustainable supply of energy which will be beneficial to the community eventually. As we agreed it will spur economic activity and eventually communities will be able to afford higher costs in electricity and investors will be happier because they finally get the returns they want.
So the first thing to do is to bring in investors.
Yes, and support them to a certain extent. I guess the only player who can do that now is the Government and it can either do it by direct subsidies or a tariff structure that will distribute the subsidy burden to all consumers. The impact may not be as great as one would imagine it to be, because the base is quite large. However it will still achieve the objective of being able to provide a form of subsidy to the provision of basic utility services to communities who cannot afford it.
The US has been a big investor in energy in the Philippines. It has not always been as successful as the country would have liked, but they are also a traditional investor in energy sectors all over the world. Last year we have seen a change in Washington towards renewables, cleaner energy and a green mentality. California has been a hub for the development of these technologies for a long time. There is a desire to attract American expertise and know-how into countries like the Philippines. What opportunities are there for American investors in the Filipino energy sector?
A lot! If you say that California is the hub of renewable energy, we would certainly welcome US companies to come in with their technology and financing. NPC is currently focusing its corporate trusts to address the off-grid and island grid areas. We are championing the use of renewable energy in these areas, because the magnitude of the loads that we are addressing is such that using renewable energy would be advantageous for the public as well as potential investors. In order to sustain the delivery of services maybe we ought to adapt the hybrid system approach as I said. Since the nature of the Philippine countryside is archipelagic, if you go from one island to another then you may be able to see that one type of renewable energy is adaptable here but not there. We will therefore have to come up with a profile of all of these islands, and that translates into being able to offer the opportunity to a wide range of technologies related to renewable energy. In fact we already have some Memorandums of Agreements with certain companies on biomass, wind and solar energy. These already exist, and if other companies are willing to come in, why not? Of course, if you do not come in right away you may find that the field is already crowded, and you may have missed the opportunity. I am very bullish about the prospects, because we are actually addressing the plight of the less-fortunate individuals in our society.
I think that is still very much at the core of your company. You have been through a major restructuring transformation and you have been at the forefront of this major overhaul of the sector. As you were saying, you seem to be more focused but you have not lost that character of actually bringing electricity to the users and improving the lives of millions of Filipinos. Can you tell us a little about this?
We have one big advantage - being Government with a certain charter of its own, all partnerships that we develop with investors always carry a sovereign guarantee. That can work for us. As I said, we are preparing an overall plan for all of the islands we have, so when prospective investors come in with their technology and financing, we can say these are the candidate islands you might want to look at, because this is where we do not have any investors at the moment, and it matches with the type of technology that we feel that this island is capable of sustaining. In terms of planning this is something that we are preparing ourselves for in order to offer to prospective investors a clear-cut investment framework. They are not just going to come in blindly, and we do not just tell them that you have to find out where you can have an opportunity and when you find out where it is then we can help you out. We will tell them upfront where the candidate sites for their kind of technology are.
So you guide investors?
Yes. It is quite a challenge but we are going to achieve it.
It is a huge challenge, but for a company like NAPOCOR that has been here for such a long time, you must have a tremendous amount of expertise to share with the private sector.
Exactly, and that is another competitive advantage that we have. We have a wealth of expertise and experience that can be channeled in order to support our new role in the off-grid and island grid areas. Some people might think that we are losing our major role because we have been in the big business, but that is not the point. To me it is about what significance you are making in the development of your country. That is the most important thing, and if you are able to reach out and bring about development in a largely marginalized sector of society, I think that is even more important than when you contribute to the major grid which is already fully developed and has a fully mature market. I would rather go for the pioneering effort of bringing electricity to those who have maybe never heard of it or experienced the advantages.
NAPOCOR has recently signed a deal with Enertime SAS of France; I think you are trying to develop biomass facilities in the Philippines. You said that two companies are looking at putting something like 42 megawatts of power generating capacity, which is not bad at all. This is one of the partnerships that you were seeking, because you have established deals with many. You are also very proactive when it comes to looking for funds by tapping into the International Finance Corporation (IFC) for example. How important are these Washington-based institutions for funding, and are you looking for more partners abroad?
Of course. Before when we were players in the major grid, it was not difficult to see the crucial role that we were playing. It is a different ball game altogether, but we were fortunate enough to be at the same pace as the world that is trying to reshape itself. There is more focus on renewable energy and keeping the environment clean, and that goes well with what we are trying to do right now. We have had initial discussions with the IFC and other multilaterals like ADB (Asian Development Bank), World Bank and even Japan EXIM, although we have not been talking to them directly just yet. I would not anticipate that eventually we will be sitting down across the table with them because this is something that is worth pursuing in this area, whether it be Mindanao Visayas or in Luzon. I would certainly welcome offers of financial assistance by way of certain packages that would allow us to develop the off-grid and island grid areas.
I also anticipate that eventually we will be talking to creditors as well when we seriously think about the development of nuclear power. Personally, when I think of our own nuclear power development I am not thinking of the size of the projects that are being undertaken by China for example, with 1000 megawatt plants or 2 x 1000. I am thinking that given the Philippines’ nature it has got to be medium-sized plants, between 400 and 800 megawatts. That is the kind of size that will suit the nature of our transmission network.
And also in that logic of having diverse energy sources. You mentioned you would like to attract international capital, with potential partnerships and funding?
Right now we are leaning towards the local financing market for our initial capital requirements. Eventually if we go full-scale with our efforts to championing renewable energy in various areas, we might need international financing as well. I foresee that we will go out and do this. We will find out how well we will fare in the market, but here locally it looks like we are doing well. I anticipate that NPC will be successful in the local band flow and eventually as we further develop this area of off-grid and island grids this will certainly ensure international financing. Let me bring your attention to our map. That is Luzon, that big island there. There are criss-cross illustrations and transmission areas on the island; however you will notice that in the eastern part, there is not much.
Why is that so?
In the past it has always been and still is a region that is plagued by typhoons. Whenever typhoons come in from the Pacific, they pass through that area. There are now technologies that will allow you to set up a reliable system that can adapt itself to natural occurrences like typhoons and things like that. To me, that is a corridor of development that can certainly be offered to the international markets. In fact we are starting with some small efforts, because that has largely been considered an off-grid area. There are no major networks there so eventually I see that when small-scale networks are established, we will need major transmission lines. Maybe in that area we will have to adapt the underground networks. It will be more expensive of course, but in the end it will be more cost-effective. That will certainly require a lot of investment.
And there is an abundance of interest there.
Mind you, those areas are beautiful, but they will not be developed into seasonal touristic spots unless there are tourists that want to experience how it feels in the middle of a typhoon!
Is wave power an option?
Of course that is an option. We have already seen wind turbines technologies that can actually be lowered when there is a typhoon so that the equipment will not be unnecessarily exposed to damage by the typhoon. After the typhoon is over you raise it up again.
I could talk with you for hours about the amazing potential that this country has that I believe is still ignored. I see a lot of passion in the work that you do and I know that you have been put in this position and it is not easy.
I can assure you 101% that it is not!
You are the most loved man by many but must also be the most hated, but it is clear that you have been at the eye of the hurricane and you have brought massive transformation to this company and sector. How challenging has this been from a personal point of view and what are your proudest moments in this whole process?
I do not know if you are aware, but I started with National Power as a trainee for the nuclear power project which never came into operation. I carried on with my career, and when I became Vice President I was offered a job so I went there and privatized NPC’s assets. After some time I was brought back to NPC to help them when its assets had practically gone! I had to think of a way to make the corporation proud of its existence and its rich history. Fortunately for me I am aware of what that history is for the period that I have been with the company. Because my heart is with NPC, anything that I am able to accomplish is something that provides me with personal fulfillment. As you know, I am an appointee and once the new leadership in place; I will have to hand in my resignation. I do not expect to be appointed, so I am trying to do as much as I can in my time left here. I am trying to instill a program to change the mindset of people in order to accept that there is still a future for NPC, not in the major grid anymore, but we have to refocus ourselves on our basic competencies and find a new niche for the corporation. This new niche is in the renewable energy area and the off-grid and island grid area and possibly in nuclear power development. If I am able to achieve that, I will be happy.
And I think you have certainly set the ground for that.
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