Despite the turmoil global capital including banks, insurers and asset managers are continuing to exit the financing of coal plants. Just as important, corporates are following suit with Ayala Corporation, through its subsidiary AC Energy, driving the energy transition in the Philippines, with a divestment plan by 2025 and then a full coal exit by 2030 announced Ms Kate Finlayson spokeperson of Institute for Energy Economics and Financial Analysis, a think tank body that analyses issues related to energy markets, trends and policies.
The rapid drop in the cost of renewable energy has opened new possibilities in energy systems around the world, including new opportunities for Philippine conglomerates, said Finlayson.
PHOTO – Ilocos Sur coastal site for renewable wind energy plant
Wise corporate players and investors are steering clear of the coal-fired power as it increasingly results in “stranded” assets – a term which describes projects, such as a coal-fired power stations, suffering from unanticipated write-downs or devaluations, with the associated financial risk either passed on to consumers or retained by the investor, Finlayson added.
Though Ayala Corporation still owns shares in two coal-fired power plants and a third under construction, this company’s transition has been a long-time coming.
In 2018, its subsidiary AC Energy set a goal to sell US$1 billion worth of coal assets by 2025 to rebalance its portfolio while raising capital for regional expansion targeting renewable technologies. AC Energy sold its stake in the 552 megawatt (MW) GNPower Kauswagan’s (GNPK) coal-fired power project to its partner, Power Partners Ltd and more recently completed a partial sale of its 600MW AA Thermal coal-fired power plant to Aboitiz Power Corporation.
So far, AC Energy has diversified its portfolio with 208MW of wind, 495.8MW of solar and 235MW of geothermal in Vietnam, Indonesia and the Philippines. Moreover, AC Energy, which owns a 50% stake in global renewable energy development company UPC Renewables, has a pipeline of 400MW of solar and 800MW of wind in New South Wales, Australia.
Global power demand is expected to fall sharply as a result of the pandemic-induced economic slowdown. In response, global power companies are exercising force majeure clauses to avoid buying power under power supply agreements. This rarely used legal mechanism is designed to provide relief to parties affected by an unavoidable or unforeseeable events and is being used by power companies that are increasingly desperate to preserve cash and profits during the downturn.
In the Philippines, power demand has declined up to 40% in one of the country’s main grids, the Luzon grid. Meralco, the largest utility in the Philippines, has already invoked the force majeure clause in its power supply agreements (PSAs) for April, covering only ten days of the economic lockdown; a conservative request. The Philippine Independent Power Producers Association (PIPPA) has rejected efforts to invoke the force majeure clause as it will affect their ability to pay for fuel, operation costs, and bank loans. In turn, a consumer group has argued that electricity consumers in Luzon should be spared from paying charges for generation capacity not used. In the end, it will be up to the Energy Regulatory Commission (ERC) to determine whether consumers have to help cover the inflexible capital costs of coal plants that supply most of the power in the region.
The committed coal capacity in the Philippines is 3,819MW while the indicative pipeline is 10,463MW. Prior to the coronavirus crisis, the Department of Energy (DOE) Philippines had already noted that an over-reliance on baseload coal capacity was causing grid instability. As a result of the lockdown and the bending of the power demand curve, there is no longer a business case for additional coal capacity over the medium-term. Curbing costly excess coal power capacity is a priority because the country’s high electricity prices will naturally be a focus over the next 18 – 24 months if the Philippines hopes to attract foreign companies with manufacturing capacity looking for a new home in the region.
The pandemic provides an opportune time for the Philippines to delay the building of medium-term import reliant coal plants. The country should instead follow the exit-coal example of corporates like Ayala by encouraging distributed domestic renewable energy to be coordinated with the already planned and approved grid upgrades and expansion.
Out of the disruption comes an opportunity for cheaper, reliable and domestically sourced cleaner power for Filipinos.
Sara Jane Ahmed is an energy finance analyst with IEEFA.