philippine geothermal industry: current status and perspectives

Philippine Geothermal Industry: Current Status and Perspectives

Atty. Fernando S. Penarroyo

Seminario Internacional – La Geotermia en Mexico y en el MundoMorelia, Mexico15 October 2015

Puno & Peñarroyo Law Offices

About the Presentor

• Managing Partner, Puno and Penarroyo Law (www.punopenalaw.com)

• Chief Operating Officer, Clean Rock Renewable Energy Resources Corporation

• Director, International Geothermal Association• Trustee, National Geothermal Association of the

Philippines• Professorial Lecturer, De La Salle-FEU MBA-JD

Program, UP National Institute of Geological Sciences• Master of Laws (Univ. of Melbourne), Bachelor of

Laws, BS Geo (UP)• http://www.philippine-resources.com/

Presentation Outline

• Energy Outlook• Geothermal Energy Development in the Philippines• Legal and Regulatory Issues• Recommended Policy Considerations for Philippine

Regulators• Conclusion

ENERGY OUTLOOK

Global Economic and Investment Outlook (Macquarie Research, 2015)

“Philippine economy is still a bright star in a dim sky.” (HSBC) • A.T. Kearney, “Global Economic Outlook 2015-2020”

(June 2015), the next wave of global growth is expected from seven emerging markets, the 2020-Seven: China, Malaysia, Chile, Poland, Peru, Mexico, and the Philippines.

• The economy is expected to expand 5.6% – 6% this year.

- International Monetary Fund 6%

- World Bank 5.8%

- Asian Development Bank 6%

- Standard & Poor's 5.6%

- Moody's 5.7%.

- Deutsche Bank AG 6%.

Cost of Doing Business

• Capital costs: US$4-5M per installed MW

• Operating and maintenance cost: US$0.03 to $0.05/kWh

• Tariff: no FIT rates & reflects costs incurred to obtain market-based financing prices (≈US$0.19/kWh); mainly contracted on Php/kWh; base rate escalated by inflation and forex indices

• Volume: plants are baseload with 90% capacity factor but will depend on the contracted kilowatt hours

• Government share: 1.5% of gross income

Philippine Power Sector Situationer

17,325 MW

2013 INSTALLED

CAPACITY2013 POWER MIX

Coal32.14%

Oil Based19.36%

Natural Gas16.52%

Geothermal 10.78%

Hydro20.32%

Wind0.19%

Solar0.01%

Biomass0.68%

Geothermal13%

Coal43%

Oil-Based6%

Natural Gas25%

Hydro13%

Wind0%

Solar0%

Biomass0%

Top 5 Countries for Installed Capacity (Bertani, WGC 2015)

Country 2010 MWe 2010 GWh 2015 MWe 2015 GWh

USA 3,098 16,603 3,450 16,600

Philippines 1,904 10,311 1,870 9,646

Indonesia 1,197 9,600 1,340 9,600

Mexico 958 7,047 1,017 6,071

New Zealand 762 4,055 1,005 7,000

Power Situation

• The Government’s refusal to subsidize power, heavy reliance on expensive fossil fuel imports, and added transmission cost because of the country’s archipelagic configuration have resulted in electricity prices being among the highest in the world.

• The business community believes that the introduction of retail competition and open access is the logical move to bring the power industry to the next level and establish a competitive market structure.

• The permitting process and transmission capacity remain to be the biggest challenge .

Geothermal

Power

Plants

1,896 MW

Total Installed

Capacity (as of December 2014)

20 MW Maibarara Geothermal Power Project commissioned on February 08, 2014

Newly Commissioned Geothermal Power Plant

Newly-commissioned Power Plant

Expansion Geothermal Power Project

Unveiling the marker (from left to right ) are EDCPresident & COO Richard Tantoco, EDC Chairman & CEOFederico Lopez, Energy Secretary Jericho Petilla & MayorEdgar Teves of the Municipality of Valencia, NegrosOriental

Inauguration of the 49 MWNasulo Geothermal Power Planton 26 September 2014

Expansion Geothermal

Power Plant

Detailed Resource Assessment of Selected Low-Enthalpy Geothermal Areas in the Philippines

• locally-funded project by the Department of Energy

• Implementation period: January 2011 to December 2014

• Mode of implementation: Contracted-out service

• Objectives: A comprehensive data package for future private investor

participation;

Identify the factors needed in the development of low enthalpy geothermal resources for power generation that will serve as the template for future similar projects, and;

Applicability of small scale geothermal power project in rural areas for their local electrical needs

Surface temp. (°C): 61-80Estimated reservoir temp. (°C): tbd

Surface temp. (°C): 60-70Estimated reservoir temp. (°C): 237

Surface temp. (°C): 66-70Estimated reservoir temp. (°C): 196

Detailed Resource Assessment of Selected Low-Enthalpy Geothermal Areas in the Philippines

• Banton Island, Romblon

• Completed the integrated resource assessment, however, nogeothermal resource in the area.

• Balut Island, Davao Occidental

• Completed the integrated resource assessment. Studies confirmthe existence of a geothermal resource with a possible gas cap inthe area. Potential capacity range from 10 to 40 MW

• Maricaban Island, Batangas

• Completed the integrated resource assessment. Recommendedfor drilling of two (2) gradient wells with an accumulated depth of1,500m. The purpose of the drilling is not to prove the existenceof the geothermal reservoir due to its shallow penetration but tocollect core, temperature log and fluid samples

More Investment Opportunities

RP’s estimated geothermal potential: 4,407 MW

The Department of Energy offers Energy Independence Package i.e. Open and Competitive Selection Process in the Award of Renewable Energy Service Contract

4 areas contracted in the 2nd Round, totaling 66-134 MW potential capacities

GEOTHERMAL ENERGY DEVELOPMENT IN THE PHILIPPINES

Investment Trends

• ODA loans from WB and JBIC for exploration to plant commissioning for state energy and power companies

• BOT for power generation, EPIRA, privatization of EDC

• Foreign equity under RE Law

• Traditional energy companies (EDC, Chevron, Aboitiz) and new greenfield developers

• Company equity and risk capital financing for new developers

• Role of Philippine local banks

Cost of Doing Business

• Capital costs: US$4-5M per installed MW

• Operating and maintenance cost: US$0.03 to $0.05/kWh

• Tariff: no FIT rates & reflects costs incurred to obtain market-based financing prices (≈US$0.19/kWh); mainly contracted on Php/kWh; base rate escalated by inflation and forex indices

• Volume: plants are baseload with 90% capacity factor but will depend on the contracted kilowatt hours

• Government share: 1.5% of gross income

LEGAL AND REGULATORY ISSUES

Legal and Regulatory Issues

• Foreign ownership - The government’s ambivalence in opening the geothermal sector to foreign ownership is a test of its resolve and seriousness in attracting investments that will compete with established local companies.

• Environment - Government administrators must work doubly hard to address cognitive barriers, which relate to the low level of awareness, understanding and attention, afforded to the complex array of policy, regulatory, technical financing and organisational factors affecting geothermal projects and their wider economic and environmental benefits.


• Local government - The legal issue of local autonomy in relation to the exploration, development and utilization of natural resources vis a vis the power of control by the executive over LGUs will only be settled by judicial interpretation.

• Indigenous Peoples - Given the complexity in applying the concept of free and prior informed consent, development agencies and the private industry are more inclined to adopt the standard of 'free, prior, and informed consultation resulting in broad community support’ where 'broad community support' is interpreted as requiring 'good faith negotiation with and informed participation of indigenous peoples'.


• Transmission Access - To meet the challenges brought about by lack of transmission infrastructure, delays in grid connection, and curtailment of output in locations where current policies and grid management systems undermine integration, government guarantees on electricity dispatch or priority connection must be put into place. A loan guarantee program for electricity transmission infrastructure expansion would support large-scale capital investment and as a cost reduction and risk mitigation tool.

• Taxation - The national government should also develop a transparent system of accounting for and allocation of sharing of revenues and taxes with LGUs.


• Rules of Procedure for Environmental Cases – In a decision of the Philippine Supreme Court promulgated on 03 February 2015, the SC removed the legal impediment for the construction and operation of the 600-megawatt coal-fired power plant and upheld the validity of an environmental compliance certificate issued in 2008. The SC reversed a Court of Appeals decision that granted the petition for a Writ of Kalikasan, that is a legal remedy granted to petitioners if they show that the environmental damage arising from an activity is of such magnitude that it prejudices the life, health, or property of inhabitants in two or more cities or provinces.


• Amendment of EPIRA - Recommendations made by business groups include reviewing or modifying the WESM Rules and strengthening the capability of the market regulators like the DOE and ERC. The slow process for approval of power projects under the single buyer Power Purchase Agreement-based regime can be addressed by shortening the procedures and requirements for permitting.

- National Grid Corporation of the Philippines takes at least 18 months to finish a Grid Impact Study

- DENR takes at least 2-3 years to issue an ECC

- ERC takes around 12 months to process the review of the Power Supply Agreement

RECOMMENDED POLICY CONSIDERATIONS FOR PHILIPPINE REGULATORS

Recommended Policy Considerations for Philippine Regulators

• Political will – Congress must promulgate a new law in extreme urgency that will set the parameters for “energy project of national significance”. Government should also give assurance that expropriation measures are available as may be necessary, over private lands relevant to the project for steam transportation and electricity transmission. Government needs to address the perceived veto powers on energy and power projects of indigenous peoples and local government units.


• Valuing environmental and social benefits - fossil fuel plants have a shorter lead time making them more attractive but with no allowance for environmental externalities. This places renewable energy at a commercial disadvantage but this can be resolved by regulating and internalising the associated cost of greenhouse gas emissions, noise and air pollution. Emissions trading will assist in creating a value and cost associated with such factors. Another barrier is the non-recognition of environmental benefits, which may flow from RE e.g. amenity value and poverty alleviation.


• Emerging technologies - With the advent of new technology, government regulators should form policies covering hybrid energy relationships to increase geothermal power plants' efficiency and capacity. The government must formulate laws and guidelines that will facilitate geothermal developers to commercially access by-products, which is technically covered by a separate mining legislation. Government regulators should introduce differentiated economic incentive schemes for new and emerging technologies.

Conclusion

• The government may have been overly optimistic in its projections of additional geothermal potential capacity of under the new RE Law contractual regime. This may be due to the over-estimation of the resources or failure to take into consideration the regulatory delays and the permitting process involved in putting the projects on-stream.

• Government must be unequivocal in easing ownership restrictions to foreign capital and exert more political will in its efforts to mitigate social and environmental concerns.

• Regulatory policy should be open to fast-paced development of technology in providing the legal cover and additional incentives to private investors.

Muchas gracias!

Acknowledgment

• Philippine Department of Energy for the facts and figures in this presentation