Luis Miguel Aboitiz, President & CEO, Aboitiz, Philippines
Luis Miguel Aboitiz, President & CEO of Aboitiz Philippines, agrees that it is conceivable that in five years’ time, the Philippines will be the most competitive power market in Asia, with eight or nine large major players in power. He also discusses the importance of competition in the market in order to lower prices.
With the president’s two-track program, the Philippines aims to triple renewable energy capacity by 2030. Considering the renewed commercial interest in upstream exploration, is this ambition attainable?
I do not think these goals necessarily collide. The renewable energy directives advocated by the President are primarily driven by subsidies. Considering the gas price, I am not too worried about competing against it as a power source. Looking at the gas price in Asia, the Japan Korea marker stands at around 16.5 USD per MMBtu. This means if you produce gas in the Philippines, and you can produce it at 11 or 12 USD per MMBtu, it is profitable to export it to Japan. Ultimately if that is the local price, any coal or renewable plant can directly compete against that.
For renewable energy generating companies, the problem occurs when the gas producer has a take-or-pay contract with large utility players, which undercuts everybody else in the market.
The ‘big unknown’ is what the impact of a large gas exploration discovery would be and, where that gas is found. If gas is too far to bring to Manila, locals will want a stake in that gas. The upstream company will also need to invest in liquefaction facilities to export abroad. The government also, after costs, receives 60 percent of revenue through tax, after discovery. Ultimately in terms of what prices we set, it would be a game-changer. Furthermore, for the economy, if the tax revenue is spent wisely, it would contribute significantly to the ascendancy of the country.
Gas is experiencing a golden age; it is the source that many energy E&P entities are hunting for growth. As long as the price is reasonable, there will be strong demand.
Given these energy shifts, what do you believe is the optimal energy mix for the Philippines?
The optimal energy mix in the Philippines is a finely balanced challenge. If we want to provide a cheap source of power, coal is the foremost source. Yet, coal has its vices. Firstly, it is imported. This leaves us vulnerable to supply and foreign exchange risk, which subsequently leads to fluctuation in the price of electricity. As a result, we want to ideally integrate a local supply of renewable energy into our power supply matrix. Yet, this comes at a higher cost. Ultimately, a core question is how much more are you willing to pay for energy securit.
Secondly, there are a number of places in the Philippines where you cannot avoid having diesel power plants. As a result, diesel will always contribute a certain proportion to our energy mix.
Thirdly, in line with global trends and to combat global warming, there has been a shift towards clean, renewable energy. This is a challenge that everyone is eager to confront but not everybody can agree how far we should go. On a per-capita basis, we have a large percentage of our energy from gas, hydro and geothermal sources. As such, from a reduced carbon footprint perspective, we are at the front of the pack, including countries in the western world. We are fortunate to be blessed with strong sources of hydro and geothermal energy.
The Aboitiz legacy can be traced back to 1900, when the first stones were laid for a family of discerning businessmen holding stakes in various industries. How has the company evolved since its founding?
Four generations ago there was just a man looking for a job. Then at the Group’s founding, everybody took calculated risks. The market was small, fragmented and ripe for an entrepreneur to capitalize. Back then we had a diverse range of 35 businesses, operating across various industries, from hemp and shipping to a sugar farm, power utilities, and at one point we were selling fuel, equipment and generators. Fortunately, luck and hard work paid off in most of the businesses.
Since 1994 we have been consolidating these businesses. Currently, we have refined our focus to predominately power, food and banking. However, we still hold interests in construction, real estate and shipping businesses.
Why has the Aboitiz Group become increasingly involved in the power market?
The timing was right. The Filipino power market was reformed dramatically during the privatization of the industry. We went from a system where only the government could build power plants and you could only buy power from the government, to basically a privatized generation sector that was still selling through the government. From there the Philippines moved to Open Access and now we are going to lower the limit to .75 MW in June 2015, from the current 1MW limit.
Numerous government assets were suddenly made available and fortunately for us, we were well positioned to capitalize on that market shift.
Specifically for the power sector, what operations are your priorities today?
The power industry is very much a priority for the Aboitiz Group. Today, power contributes around 60 percent of the revenues of the group. Currently, throughout the Philippines, we are building our portfolio of base load generation plants. We have also turned our attention to renewable power generation. We are interested in any kind of power source that is commercially viable. In terms of our subsidiaries, each plant is their own company for primarily contracting and financing reasons. If you count the generating power capacity portions that we own, we probably have around 1,300 MW.
How is your generating power capacity distributed across different power sources?
The coal plants take the biggest share, contributing much to our current growth. Numerically, in relation to the incoming stream of power plants being developed, there is a 50:50 split between renewable and coal plants. Yet it is important to consider that renewable plants are smaller, so in terms of MW produced, they are dwarfed by coal.
The Aboitiz Group is planning to invest PHP 190 billion (approximately USD 4.4 billion) over the next five years to meet escalating demand. What will be the distribution of these investments?
The bulk of our investment capital will be channeled into our coal plants since they are the biggest and most advanced, and a number are being actively developed throughout the country. We have a plant under construction in Davao and we embarking on constructing plants in Cebu and Quezon.
How would you rate the current status of your power infrastructure and the return on your assets?
We are in the process of moving from a government managed to a privately managed assortment of assets. With this shift, the level of availability has increased considerably. As a result of central government budgeting, power plants historically had difficulty improving operations. By contrast in the private sector, providing an investment makes economic sense, then capital will be plowed into the system to improve efficiency. Whereas the availability of government run plants stood at 70 percent, under private conditions, availability has risen to 80 percent.
Certain names in the Philippines are synonymous with particular power source arenas– the Lopez Group is a leader in geothermal and Alcantara is the Mindanao champion, for example. In which way does the Aboitiz Group attempt to position itself?
There is no one area that we have attached ourselves to. We have diversified beyond hydro and today operate across different energy sources. We are also in Mindanao and producing geothermal. Like everyone, we run Independent Power Producers (IPPs). There is no marketing push to try and shape one cohesive image. We will provide power where and when it makes sense to do so.
The Aboitiz Group is consistently recognized in international surveys as one of the best conglomerates in the Philippines. What is the secret behind your success?
Our business model is unique because our operations are diversified. For instance in power, we have not limited ourselves to a specific geographical location or a particular energy technology. This enables us to be adaptable and flexible, whilst also spreading out our risk. Our competitive advantage can be found in this broad strategy. We strive to be low key; we do not want to brand ourselves in one way. As long as our customers are satisfied, we are happy.
As a listed company, how do you balance your financial commitments to your shareholders, as well as your social responsibility to the Philippines?
We focus our CSR efforts in areas where we have a footprint. Wherever we are, we strive to uplift the local community in terms of health, income and power security. Since our plants are located in remote, impoverished areas, we have strong relations with the community as a result.
Considering the wave of competition, how does Aboitiz plan to maintain its leading position in the market?
There is stiff competition but we will continue to invest in and develop new plants. We plan to grow in alignment with the country.
What do you see as the future for power generation in the Philippines?
It is conceivable that in five years’ time, the Philippines will be the most competitive power market in Asia. Over the next few years, we are likely to have eight or nine large major players in power, namely SMC, Lopez, ourselves, Alcantara, Ayala, Filinvest, Trans-Asia Energy, Meralco and DMCI. There are also five different groups trying to put up LNG, which, if successful, will easily advance them to the top two. All of this activity will facilitate competition and thereby lower prices.
Nevertheless, for foreign investors, the market will be difficult to enter because of the market muscle of the existing players: we essentially already have a surplus. There is a gap right now, but capacity construction is already in motion to fill that temporary market hole. Potentially, the gap could be closed as soon as 2017 or 2018.
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