Economic Update
The Philippines is on the verge of completing the long-awaited privatisation of its energy sector. Adopted in 2001, the Electricity Power Industry Reform Act mandated the sale of a minimum of 70% of the government-owned power-generating assets held by National Power Corporation (NPC). With the recent sale of the 600-MW Calaca Power Plant to the Consunji-owned DMCI Holdings, the Power Sector Assets and Liabilities Corporation (PSALM), the government body charged with overseeing the sale of government power assets, has reached the 70% threshold.

During a discussion with OBG, Jose C Ibazeta, who currently serves as the president & CEO of PSALM, stated, “With the sale of Calaca complete we will have reached the 70% threshold, and we can proudly state that the conditions for open access will officially be met by early 2010.”

While NPC will no longer operate the bulk of the power-generating assets in the country, it will remain an integral part in the development of the sector. With the private sector catering for most of the local demand, NPC will begin retooling in order to tackle the enormous task of rural electrification in a country of 7107 islands.

According to Froilan A Tampinco, the president of the NPC, “After the privatisation of all major NPC assets is complete, the focus of NPC will turn to providing power to the remote areas of the country.”

Another integral piece of the country’s new energy sector is the Wholesale Electricity Spot Market (WESM). The effectiveness of the WESM to control electricity prices will ultimately determine the perception of how successful the privatisation process was in reducing the country’s high energy costs.

Melinda Ocampo, the newly appointed president of the WESM, stated during an interview with OBG that, “The WESM will serve as a crucial component of the privatised energy sector. Its most essential function is the determination of electricity prices based on actual, up-to-date supply and demand figures – in turn rewarding efficiency and fostering competitiveness in the sector.”

Some analysts are predicting a slight hike in energy costs immediately after the completion of the privatisation process as private sector operators will ultimately need to make large investments to rehabilitate newly acquired NPC assets.

The reduction of power costs is, however, a secondary objective of the privatisation process. Providing energy security to the nation’s growing industries is the primary stated goal of government reform. The recent economic slowdown has provided the region of Luzon, which contains by far the largest amount of demand in the country, with the opportunity to adequately rehabilitate and upgrade the capacity of newly privatised assets.

Jose P de Jesus, the president and COO of Meralco, recently told OBG that, “The shortages that were being anticipated by some energy analysts will be diverted in the short term due to the economic slowdown we have seen recently. This will provide precious time to the private sector to rehabilitate and increase capacity on the privatised NPC assets.”

However, the regions of Visayas and Mindanao are indeed faced with looming power shortages. The Visayas region, which already faces a host of interconnectivity issues because of its geography has secured a short-term energy supply in the form of three new coal-fired plants set to come on-line in stages over the next three years.

The southern region of Mindanao, however still lacks investment in its energy sector. In a recent interview with OBG. Erramon Aboitiz, the president & CEO of Aboitiz Power Corporation, stated, “In Mindanao, there is currently enough power to supply the region, but we predict that the sustainability of supply will wane in the coming years.”

Before the government began privatising its power-generating assets it had already started the process of privatising its oil and gas assets held by the Philippine National Oil Company (PNOC) in 1998. Petron, PNOC’s distribution arm, has already been 60% privatised.

Oil production figures – which have never been high as the country imports 65% of its petroleum needs – have been fairly flat recently. Natural gas production, however, has risen dramatically since the launch of the $4.5bn Malampaya deep-water, gas-to-power project in 2002. If the Philippines hopes to reduce its dependency on outside sources of petroleum it will need to step up its exploration efforts, while simultaneously continuing to develop alternative sources of energy. 

In 2008 the government passed legislation enforcing 1% biodiesel and 5% bioethanol fuel requirements, while it aims to implement 2% and 10% fuel requirements, respectively, by 2010.

Given the economic resilience that the Philippines has shown in continuing to post positive growth figures in a grey economic climate, the country should be set for a return to significant economic expansion in 2010 and 2011. The resulting increase in energy demand should put the new private sector power generators to the test.