Mike Wootton, CEO, Langogan Power Corporation (LPC), Philippines
Mike Wootton, CEO of Langogan Power Corporation (LPC), an independent developer in the renewables sector, introduces the potential and prospects for run-of-river micro hydropower projects across the Philippines. He describes the challenges that small-scale hydro entrepreneurs face in a post-EPIRA context, advocates an enhanced role for the National Power Corporation (NPC), and speaks about the importance of coopting local communities at all stages of project development.
What are your thoughts on the 2001 EPIRA privatization process, as you have previously advocated that re-nationalization is the only way to sort out the ‘infinite barriers to commercializing renewables’?
My view is that the EPIRA was thoroughly inappropriate to the Filipino context. Basically, the privatizations were completed too fast, too soon and the IMF is partly responsible because they were pushing for wholesale deregulation. The result of EPIRA has been to transform the local power sector into a national family business by concentrating 80 percent of the main power generation in the hands of a handful of private entities that had no prior experience of the power process. San Miguel’s expertise, for example, was in beer and sausages. The energy business is highly complex and no place for amateurs. Underdeveloped economies, like the one we have here in the Philippines, need some sort of glue to stick the power sector together and make it function in a coordinated fashion. The obvious candidate for that role is the NPC.
How then do you evaluate the prospects for hydropower development here in the Philippines?
The Philippines, with its mountains, rivers and more than 7,000 islands, would on the face of it appear to be a great prospect for small scale hydropower development. Nevertheless there remain significant impediments to realizing this potential. On the one hand, large multinational energy companies are never likely to invest in run-of-river hydro because of the small margins of return on investment. Meanwhile many local developers don’t make the grade because they simply don’t have the financial muscle to be able to persevere for the length of time it takes a project to reach fruition. The delay experienced by our Langogan project is a case in point of just how long projects can take before construction can begin; seven years from start of pre-development work to now. Most local entrepreneurs, in spite of their genuine enthusiasm, just don’t have the staying power to remain in the game that long.
Financing often represents a formidable barrier to entry. The Feed in Tarrif (FiT) is simply not fit for purpose. Firstly, the rates themselves are too low to be attractive. Secondly, the requirement to construct 80 percent of the project before you find out whether or not you can even apply for the tariff just serves to play into the hands of the local oligarchs who might gamble on a project in the belief they could fix up the tariff by leveraging their influence with the authorities. The FiT in its existing iteration holds virtually no appeal for most external investors.
Even the concept of project financing is little understood in the Philippines, which is why the recently announced World Bank initiatives to guarantee debt for small hydro projects are so welcome to young entrepreneurs. These are all messages that need to be conveyed to the government and the best way to do that may well be to establish a developer’s lobby group strong enough to make its voice heard.
The regulatory environment for renewables is a big challenge. Coal is a main focus for on-grid areas and this enthusiasm even trickles into the off-grid areas where coal is going to be a much more obvious blot on the environment. The regulations are not stable, new ideas and interpretations of the RE Law are continually being introduced, which lessen the attractiveness for investment in the sector.
In 2008, the Renewable Energy Act was passed, and adopted as Filipino policy. President Aquino subsequently established a two-track program for tripling renewable energy base capacity. Was the decision to set up LPC and invest in hydro due to this sort of government encouragement, or were other factors at play?
A number of interrelated factors governed the decision to start up LPC. Through my work in the NGO sector, I had already become familiar with small-scale renewable projects for rural community electrification and understood their positive impact. Meanwhile, I enjoyed good connections with the National Power Corporation (NPC) from my time with Shell on the Malampaya natural gas development and it was the NPC that granted me access to old feasibility studies for hydro potential in the provinces of Palawan and Kalinga and other areas, including the Mindanao and Visayas regions. From those feasibility studies, Palawan seemed a fine place to start for small-scale run-of-river hydro development. When the Renewable Energy Act came along then that was, of course, an additional bonus.
The idea for your 6.8 MW flagship Langogan hydro project in Palawan was originally conceived back in 2007. The project was then awarded official approval by the Department of Energy in 2010. What is the status of your project portfolio today?
We are now at the stage where we possess two service contracts. One is for that 6.8 MW project near Puerto Princesa City. The other is for a five MW facility in Narra, which will be rolled out in two phases with the second phase adding a further five MW. We have also applied for a third service contract for a 3.5 MW project in Aborlan municipality. This means a total of just over 20 MW for Palawan province where peak demand currently hits 33 MW. We have the financing, permits and contractor bidding in place and are ready to start construction as soon as an appropriate party can be found to sign an electricity sales contract.
Our original intent was, of course, to sign the electricity sales agreement with the local electric cooperative, but sadly that body has shown not only little interest but have also actively resisted buying renewable power. We have therefore decided to instead approach the NPC who are enthusiastic about hydropower and have a presence in Palawan despite their ambiguous position, currently underreview, over the Small Power Utilities Group (SPUG) areas. We will actually be meeting with Energy Secretary Petilla and NPC chief, Ma Gladys Sta-Rita, in the very near future with a view to finalizing these plans.
Why are the electric cooperatives so resistant to renewable energy when that could offer a much more affordable option to the end consumer?
One main reason is that they don’t understand how to integrate renewables into the existing power base. Palawan is primarily diesel fueled at the moment and there is a high degree of wariness on the part of the electric cooperative about how to introduce renewables into that mix, especially as unconventional energy sources tend to be seasonally variable. They don’t have the expertise, know-how or the awareness; for that reason LPC much prefers to work with the NPC who have both an established track record and the requisite understanding.
Another factor is the tendency towards corruption. An average director in an electricity cooperative earns a monthly income of around 10,000 pesos [221 USD]. On top of that, they get paid for attending board meetings at a rate of maybe 1,000 pesos [22 USD] per meeting day. Yet these same people have almost unchecked control over contracts worth in excess of 500 million USD. The temptation to take bribes or influence decision-making in return for monetary reward can be too great. In my own opinion, the moral fiber of the Philippines is not as strong as it might be and this complicates doing business in the energy sector.
There is actually a regulatory move at the moment striving to empower the electric cooperatives in the SPUG areas. I feel this would be a massive step backwards because the electric cooperatives are simply not capable of taking on that level of responsibility at the moment. Their experience is in distribution and the alleviation of brownouts. To suddenly put them in charge of the main transmission systems, generation and dispatch would be a recipe for chaos. The message that I will be conveying to Secretary Petilla when we meet will be to tell him that this is not the time for such a reform. The push to dissolve the NPC has been remorseless and stems from an equally misguided Electric Power Industry Reform Act (EPIRA).
There are a number of highly specialized hydro companies that have successfully infiltrated the Philippines power market. What is LPC’s competitive edge?
We have a good way of relating to the people’s organizations and the NGOs; we can relate to them and I think it fair to say they trust us to deliver whilst still recognizing their own concerns. We also have strong partners, links to money and a sound understanding of the technicalities of hydro. Key partners include Jacobsen Elektro, and a Chinese state-owned hydro contractor, and there are others knocking on the door. What really sets us apart, though, is our attentiveness to social impact and our sense of social responsibility. This is demonstrated by our extensive consultations with the local Palawan community and work on rural electrification, reforestation and initiatives to prevent illegal logging. Over time, we have gained the trust of the locals and become acceptable to the environmentalists and this will be an important contributing factor to the success of our projects.
What is in store for LPC over the next five years?
Getting the sales agreement signed is absolutely critical. Once we’ve done that we can get 20 MW in the pipeline up and running. The next step would be to look towards expanding to 50 MW over a period of a few years. We seem to have established a high profile in small hydro and already we have lots of enthusiastic small-scale local Filipino entrepreneurs asking for commercial guidance and assistance with financing. This is something we are very happy to do. We also have some interest in Indonesia small hydro. The investment environment for renewables is a bit clearer there than it is here.
To read more interviews and articles on the Philippines, and to download the latest free report on the country, click here.