Antonie de Wilde, CEO, Emerging Power Inc, Philippines
Antonie de Wilde, CEO of Emerging Power Inc, Philippines explains the significance of geothermal in the Philippines stating that, “geothermal is without a doubt one of the most reliable sources of energy and one that brings significant additional benefits.”
Renewable energy advocate Al Gore recently declared that “geothermal energy is potentially the largest—and presently the most misunderstood—source of energy in the world.” Can you put this into the Filipino context—what is the state of play for geothermal in the Philippines today?
Geothermal is without a doubt one of the most reliable sources of energy and one that brings significant additional benefits. You don’t know when the wind will blow and you don’t know when the sun will shine, but geothermal can always be relied upon to be there. Geothermal is also a secure resource in the sense that it does not suffer from exposure to climate change or from fossil fuel price volatility.
Geothermal energy’s strongest characteristic, however, is the price for consumers and it is this that makes it especially pertinent to the Filipino context. The Philippines is notorious for having the fourth highest electricity rates in the world and, as a result, average unit electricity consumption per Filipino household is half that of Indonesia. According to the Economist’s World Economic Report even Kenyan households consume more energy than their Filipino equivalents.
Here in the Philippines, the maximum price increase for geothermal generated electricity will only be one to two percent because steam is not part of international fuel markets, and therefore there is no price volatility. You cannot sell or buy steam. You have to use it locally and as a result it is protected from the fluctuating cost of other fuels. In our power purchasing agreement, therefore, only minor price increases are included mostly related to changes in the cost of living. In this way, geothermal resources could potentially be harnessed to help alleviate the country’s problem of escalating energy prices. Unfortunately, however, the Philippines is not a very friendly country for investing in renewables and this is really holding back growth of the segment.
What are those challenges to investing in the energy sector, and more specifically geothermal?
The problem is that there is no long-term debt financing available in the Philippines. Secondly the EPIRA system does not facilitate competition. The market is dominated by three main players who do not have to be efficient, and who do not have to plan strategically in purchasing their fuel requirements, as the system has passed on all the inefficiencies of the operators to the consumers. The consumers pay for their losses and pay higher prices when their fuel purchase strategies are bad. In most normal industries, such as the global airline industry for example, companies have to shoulder these risk themselves—airlines have to hedge against higher fuel tariffs or they could go bankrupt, as was the case with Japan Airlines.
Meanwhile the Filipino government is failing in its duty to protect consumers. The Wholesale Electricity Spot Market (WESM) is essentially a monopoly where there is only one buyer and not enough supply. The government is supposed to adhere to an industry standard for reserves, but the reality is that the National Grid and Power Corporation has 30 percent too little power throughout the whole of the WESM so there’s always a shortage, and electricity prices therefore can easily be manipulated. In short, the government is not facilitating sufficient investment for the WESM to reach the required minimum capacity to have a real market where supply and demand provide an even playing field.
Given the uncertain power market and the way that EPIRA has been manipulated, private capital aspiring to invest in geothermal faces almost insurmountable problems. All too often the Filipino government pays lip service, but then fails to do anything of substance. For example, renewables are supposedly eligible for tax incentives, but in the case of Orka Energy’s investment in geothermal, the Ministry of Finance has still not awarded them the certificates that allow them to import tax-free the equipment required for the drilling of geothermal wells, but rather just increases the price to the consumers later, a full eight months after they submitted the application. Meanwhile the Renewable Energy law was passed with a feed–in tariff for wind and geothermal, but you are only entitled to it if you have a power purchase agreement and are actually already operating. This is absurd because it is precisely in the pre–operation phase when developers need to show the bankers at the time of construction, that they have a cash-flow through their PPA and the approved feed-in-tariff, to repay the debt they need to construct the plants.
Even when a company partners with a local conglomerate to obtain financing from the local market they face the problem of the Filipino financial sector simply not being deep enough. The maximum length loan that you can get is seven to eight years. This can be contrasted with countries such as Thailand where the World Bank through the government has lent over one billion dollars to local commercial banks specifically for the purpose of offering long-term finance in excess of 15 years so as to meet renewable energy project’s financing needs. The current administration has done nothing to address this issue of access to long-term loans.
In the Philippines, investors have to shoulder both a geothermal risk and a market risk. In most other emerging countries such as Indonesia, Kenya and Turkey that market risk is covered. This represents a significant deterrence to companies considering entry into the energy sector.
With all of these challenges, why is Emerging Power still here today?
Well, first of all, the geothermal facility we are building in Mindoro is not connected to the grid: we sell directly to an electric cooperative on a take-or-pay basis. Because Mindoro is still dependent on diesel, their current electricity prices are very high and total some 12 to 16 pesos [0.26 to 0.35 USD] per KW hour. However, the Mindorans only pay the socially accepted power tariff that is set by the Energy Regulatory Commission (ERC), which currently stands at 5.64 pesos [0.12 USD]. The rest is subsidized by the rest of the Philippines. With our facility, we are able to offer a price of 5.64 [0.12 USD], which eradicates the need for a Mindoro subsidy and contrasts starkly with the 4 peso [0.09 USD] price hike that Meralco recently announced. Having a power purchasing agreement in place, we are no longer exposed to market risk.
In terms of geothermal risk, we have had to look at innovative financial arrangements. Ordinarily it is very difficult to secure commercial risk insurance for a geothermal plant. We have responded to this situation in the same way that a shopper opts for a sachet of shampoo instead of buying the whole bottle. We possess a duplet production well and a reinjection well and I am currently negotiating a commercial risk insurance for that well to produce a minimum of 3.6 MW based on temperature and flow. Had I chosen to insure my whole field the insurance would have been for some 40 to 50 million USD, but through developing my field on a sachet-by-sachet basis the insurance is for a mere 6 million USD, for which I pay a 15 percent premium. Once I have drilled my first two wells I will close the first insurance and take out coverage at the same rate for my next two wells. This way it becomes much more affordable for all parties concerned.
So far we have managed to make a success out of the geothermal segment despite the adverse legislative environment of the Philippines because we have concentrated on niches and found innovative ways to circumvent the market and geothermal risks. Our use of multiple income streams also gives us some extra leeway. Geothermal fluid happens to be one of the best remedies for a skin complaint called Psoriasis. The Blue Lagoon in Iceland treats over 450,000 visitors annually by bathing in geothermal waters. We are in negotiations with the Blue Lagoon to franchise with a view to attracting not only Philippine customers but also Chinese and Japanese visitors for skin remedies. We will also be selling geothermal fluid to fish farms because the microorganisms in the fluid eliminate the need for using antibiotics in high density farms, producing organically grown good tasting fish.
What should be the ideal public/private investment split?
The ideal public private spilt for geothermal investment is exploration. If you go back to traditional financing, commercial banks normally start to provide debt finance to a geothermal field if 50 percent of the resources are proven. So if you have a field of 110 MW then about 55 MW needs to be drilled before bank finance starts to kick in. The government therefore really needs to take care of that first few wells to prove the geothermal resource.
Meanwhile, the World Bank and International Finance Corporation (IFC) have now provided early financing via instruments such as the Clean Technology Fund (CTF). The CTF program in Indonesia makes long-term finance available for private investors at subsidized interest rates of one to three percent. Here in the Philippines, however, the CTF money has been directed towards establishing an electric car assembly plant, which means not for generating sustainable energy, but for using energy that is not available, thus further increasing the cost of electricity for the customers.
We have also proposed to Meralco the idea of setting up a price stabilization fund. This is a concept that works well in Chile and is even being used in Indonesia. Geothermal may cost more than coal today per KW hour, but in four to five years the fossil fuel price will be above the geothermal price so the idea would be to establish a mechanism that would help finance geothermal development (and other renewables) in the meantime.
What are your aims for Emerging Power over the next five years here in the Philippines?
We are weighing up the possibility of developing two more geothermal projects in other parts of the Philippines. We are also looking at biomass and biogas products. Currently the processing of chicken waste is not controlled, but will soon be regulated under forthcoming environmental legislation. We hope to help the farmers meet their environmental obligations by converting this chicken waste into electricity. Even in the WESM, biogas can be made competitive because it can be stored for up to 12 hours ready for release at peak times.
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