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Interview

Rick Lacroix, Founder, PowerSource Group, Philippines

Rick LaCroix, founder of PowerSource Group Philippines, offerw creative insights into empowering isolated communities in archipelagic states by mixing hybrid plants with micro-grids. Furthermore, he outlines the significance of ‘dispatchable power’ when devising rural electrification strategies and predicts a healthy future for biomass.

 

Your education and professional career has spanned across many sectors and countries—from being a senior manger at Enron’s international operations, to establishing securities law curriculum at NUS and advising the Singapore stock exchange, to building manufacturing facilities in China and India—What is your vision behind founding PowerSource in the Philippines?

Whilst developing the legal curriculum for the National University of Singapore, I was approached by Enron to deal with Enron’s problematic assets in Asia. The staff there were amongst the most talented individuals I have worked with. The focus of the position was on a number of very large water and power projects. The rights to the contracts for the power projects in particular were subject to intensive competition, and I find the projects supplying power to those in greatest need to be more interesting. The Philippines has 7,000 islands, and Indonesia 14,000. There are remote communities with little or no access to electricity. PowerSource was established with a view to energize such rural communities. Archipelagic states like the Philippines and Indonesia cannot use large unitary power-grids comparable to those found in larger mainland states and because of this, another model is required to service these isolated communities.

How does PowerSource realize this vision?

Under EPIRA, the law governing the ownership of Filipino power assets, there is a clause for ‘qualified third parties’ enabling PowerSource to operate as a bundled utility. PowerSource receives a waiver from local electrical cooperatives for a given area, which allows Powersource effectively to become the alternative monopoly provider for the period of the franchise waiver (typically around 15-20 years). PowerSource will, in that time, build generation, off-take structures, and transmission and distribution lines. The company will also train local staff in line maintenance, connection and disconnection and the means to police line tapping problems. We do not collect from electrical cooperatives, but directly from the consumer. This has a significant deal of risk associated with it, yet despite this, we have achieved 99 percent collection rates since 2005.

The whole operation is effectively a micro-utility. Powersource’s success in this area led to successive, more diverse projects including larger plants of a 20-30 MW scale. These power plants, like our micro-grids, are hybrid power plants. Powersource has raised a great deal of capital to undertake these projects.

Are there any obstacles to PowerSource realizing these projects?

The principle obstacle to PowerSource achieving its goals is the plethora of regulatory steps required before a project can proceed. Each of the agencies we work with employs talented, capable staff, but collectively, the varying regulatory bodies do not represent a ‘one stop shop’ and the repeated efforts to deal with government agencies means transaction costs are multiplied. Regulation that sees transaction costs for a 0.5 MW system equal those for a 100 MW system is not justifiable. Smaller scale projects have a higher risk associated with them, increasing the cost of capital for these projects, and it is for this reason that transaction costs must be limited. Regulatory hurdles are a particularly heavy burden for PowerSource.

There are still many communities without power in the Philippines. Many of the communities who do have electrical access find it prohibitively expensive or available to only a few in the community. What is required is an integrated regulatory environment as the fractured nature current regulation harms not only small power generators such as PowerSource, but players throughout the power industry as well. There is an alphabet soup of regulatory bodies and this curtails efficiency and costs time. This regulatory burden is one reason PowerSource is now aiming at the upstream market as well. Currently, PowerSource has a very extensive project pipeline and this will proceed as quickly as capital can be deployed.

Whilst you clearly have reservations about the regulatory burden here, you still clearly have good relations with the Filipino government. How did you manage to develop the necessary contacts with Filipino Government officials and become the first and only ‘qualified third party” to maintain the mini-grids of the DOE/ERC/NPC?

Prior to PowerSource, I had global experience solving issues at failed rural electrification projects. This culminated with time in the Philippines, assessing the suitability of a large number project sites using the National Electrification Administration’s (NEA) excellent database. Whilst the Electric Power Industry Reform Act (EPIRA) was relatively new at that point, we were able to identify a number of locations where priority projects could go forward. It was at this stage that we initiated the Qualified Third Party (QTP) application process. We remain the sole QTP as of this moment, though I understand several other players have submitted applications as well. This process is, perhaps predictably, administration heavy. The effect of the QTP status is to allow you to access a subsidy, the Universal Charge Missionary Electrification Subsidy. Consumers in the Philippines have a deduction based on the number of KW purchased. That money, principally originating from urban consumers, is then distributed by NPC. This subsidy represents a huge opportunity for socio-economic development in rural areas by mitigating costs incurred due to their remote nature.

The projects that this subsidy is directed towards use a different power model to that of traditional centralized generation schemes, which is more useful in mountainous areas or on islands. There must be some degree of economic viability however, as there is not enough grant money available to connect all rural communities effectively. Public money should be directed at communities that cannot afford private sector energy supplies as the private sector will enter the market wherever viable, which is appropriate and the fastest way to increase the electrification rate. As mentioned before, typically PowerSource has utilized hybrid power models, as more traditional generation systems are more attractive to capital investment. PowerSource marries this capital attraction value with distributed generation systems, often based on renewable sources, as a means of achieving rural electrification.

You speak very passionately about rural electrification. Is this a personal objective for you, and if so, why is it so important?

For me it is a legacy issue. I am motivated for other reasons than simply making money. Obviously any power system must be profitable: there would be no access to capital to construct such a system in the first if it was loss-making, and it would lack longevity if it did not cover costs. The PowerSource model is a small one, adapted to a particular application. The company will be able to scale this model up very rapidly in the future, rolling it out to more and more communities. The communities we work with already have excellent relations with us. The reason we are pursuing this path is to create a model that will see more communities are, figuratively speaking, empowered by electricity.

You mentioned two aspects of your business: communities and profit. To start with profit, the founder of PAMATEC, the largest rural electrification project in the Philippines, said development (educational and economic) is the key to successful projects. How does PowerSource integrate this into the communities it operates in?

The PAMATEC model was nobly conceived, but I do think it contained serious flaws in its execution. It is also a fundamentally different model to PowerSource’s operation, as PAMATEC relied heavily on grant and concessionary funding. In Masbate province, I understand PAMATEC had some serious difficulties engaging with the local community.

One ‘nail on the banister’ as it were, for PowerSource’s community relations has been the Universal Charge Missionary Electrification Subsidy. The application process to receive this subsidy is long and arduous. When PowerSource first starts supplying electricity, it must be at a rate that covers costs and we may supply power concurrently with the process of applying for the subsidy. During that period, we have at times, been accused by local communities of siphoning off the subsidy for the companies’ purposes, when the reality is that bureaucracy has stalled our ability to give this subsidy to the consumer.

PowerSource operates unlike PAMATEC, by firstly identifying communities with a certain critical mass: roughly speaking those with more than 1,000 households. The community needs to have a clear, honest and visionary leadership, perhaps some particularly motivated individuals within the community. The community needs to have a mix of incomes, for example derived through a mix of fishing, farming, tourist enterprises and shops. PowerSource will consult with the local community and, following detailed engagement, ask for the community to consent to PowerSource providing their electricity and for the local cooperative to waive their rights to the energy supply. PowerSource energized the island of Cebu in this manner. On top of providing energy, we also train locals in many of the tasks associated with maintaining a power system—our intervention in these communities is transformative.

Each Community Energiser Program (CEP) serves approximately 1-2,000 households. How many are in operation right now?

We have three CEPs in operation and five are under construction. There are 30 more projects in fast development now—these projects have a significant emphasis on renewable energy. The first project came on-stream in 2005, followed by its successors in 2009 and 2011. Now PowerSource has signed an agreement with the Palau electrical collective for 30 sites. This is a different model because the electrical cooperatives are now able to undertake generation of power and are eager to learn about generation management. We are entering a partnership with Palauco on these

30 sites and will be putting up the majority of the money whilst Palauco will deal with the regulatory side, such as obtaining the waivers for the subsidies, which we have already discussed. This initiative represents an evolution of the model away from a purely private sector model. Whilst we give up equity, we also shed risk.

Has reducing risk been one of your key means to attract capital to PowerSource and what prospects did investment institutions such as CreditSuisse, IFC (World Bank) and US treasury see in PowerSource?

We have worked with different banks at different times—originally we had a letter of commitment from OPEC in Washington and after that, we raised money from Credit Suisse. I had majority control of the company until the end of last year at which point we sold to a very strong Filipino group. Now, Abe Koliko is our Chairman whilst individual investors include Lance Gil Conway, Jesus Louietta and RCBC Bank. Together, along with other players they form a potent group controlling the company, which is useful because it allows the company to be classed as a Filipino enterprise. The Renewable Energy Act, for example, requires that companies involved in the renewable energy industry have a significant indigenous ownership stake: 60 percent. This is problematic because it discourages investment from overseas.

Despite the buzz, clean tech funds worldwide have not yet yielded results as expected, and some say that the global dash for gas will affect renewable energy investment. As the head of a financially viable rural electrification start-up, what is your perspective?

Take, for example, Germany’s objective of moving to renewable energy by 2020: a hugely ambitious target, it will take massive amounts of resources and there are few countries outside the most advanced economies that could afford such an initiative. The Philippines does not have the same resources but is taking the right approach by seeking to increase the proportion of renewables in the energy mix incrementally. It is not certain that renewables are as yet entirely competitive, as they must be cheaper than coal in order to be considered cost-effective. Biomass is currently competitive if one eliminates transport costs, yet the Philippines are an island state and it is inconceivable that transport costs will not be incurred by biomass producers based here. Other sources of power like wind are intermittent, or like many proposed micro-hydro projects we see, not practical.

Biomass is the most cost-effective source of renewable energy in the country at this moment, and that is why personally, I am willing to invest in the technology. Obtaining finance for biomass projects remains difficult as factors such as security of land tenure remain to imperil confidence in this market. However, PowerSource is pursuing biomass as a real option and expectations are that this sector will grow substantially.

Where do you expect PowerSource to be in ten years’ time?

PowerSource will continue to build up many rural power grids and will likely be involved in other technologies constructing embedded power plants to avoid transmission costs. Some of these power units will be captive generation for private sector users and others embedded for utilities. We are, for example building a plant for Lafarge Cement. PowerSource will continue to be aggressive in those areas and will evolve as the markets evolve, reacting to opportunities as they arise. I expect opportunities supporting micro-grids will grow as power lines are extended from the micro-grids that are being seeded by PowerSource now.

 

To read more interviews and articles on the Philippines, and to download the latest free report on the country, click here.

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