I was invited as a panellist at the recent Philippine Loan Market Conference and our topic was Financing the Philippines’ Energy Transition. It was a great panel, but I also said something that may have caused some discomfort (and possibly quiet agreement) among the audience. I said I am all for financing renewables, but the problem is that we are not giving any incentives to build the baseload and we may end up with power shortages.
My colleague Gabe and I then looked at data from the Department of Energy (DoE) as well as the deals we were financing to determine if my statement was unfounded or a dire warning about the future.
Under the DoE’s latest Philippine Energy Plan (PEP) reference scenario and clean energy scenario, the target is to increase the share of renewable energy in the country’s generation mix to 35%-50% by 2040. For us non-engineers, this means that we need to build annually around 2.5 gigawatts of renewable energy and 1GW of baseload plants.
In support of the government’s thrust, various financial institutions and corporations have provided their respective commitments towards this goal, with BDO Unibank at the forefront. As early as 2010, BDO Unibank established its Sustainable Energy Finance programme in partnership with the International Finance Corporation. Since then, BDO Unibank has supported over 50 projects accounting for over 2GW worth of renewable energy through various financing means, whether it be through lending activities or capital market fundraising. BDO Capital & Investment Corporation has supported the issuances of San Miguel Global Power, ACEN Corporation, Alternergy Holding Corporation, and most recently, Energy Development Corporation’s bond and Citicore Renewable Energy Corporation’s initial public offering.
Supply and demand
BDO as a group has stood at the forefront of supporting companies as they look to reach their energization targets such as ACEN’s 20GW by 2030, Citicore’s 5GW in five years, and other renewable energy players hoping to participate in the government’s Green Energy Auction Programme with over 3GW in capacity for auction and delivery per year. Still, all this begs the question, is energization from purely green means enough to propel the Philippines into growing?
As we draw closer to the DoE’s 2040 target, we take a step back to assess how close or far the target is with a back-of-the-envelope calculation on what it takes to reach the goal. Should GDP grow at the pace of 6% per annum and holding constant the electricity-to-GDP ratio, GDP in 2040 would need to consume three times the gross power generation in 2022 or nearly 320,000 gigawatt-hours. Considering that in 2022, installed capacity attributable to renewable energy of 8.3GW produced 24,684GWh, an oversimplified translation is that we would need roughly 53GW of installed renewable energy capacity by 2040 or an additional 45GW or 2.5GW per year from 2022 to 2040 to get to that 50% renewable energy mix by 2040. This is not exactly far from DoE PEP’s projection that to get to the 35%-50% renewable energy mix, an additional 45.6GW to 73.9GW may be needed to reach the goal.
On top of the sheer amount of renewable energy plants to be built, the power demand cannot be purely supported by additional installed capacity from renewable energy sources since the other side of the equation, or the other 50%, would need to grow as well. Using the same computation, an additional 17GW or nearly 1GW annually of installed capacity from coal, natural gas, or oil-based sources would need to be developed to meet the energy demand in 2040.
This analysis does not begin to factor in that there are three kinds of power, namely baseload, mid-merit and peaking. With current technological limitations, renewable energy is predominantly used to peaking power and, at best, mid-merit. Without coal, natural gas and oil-based sources, as well as liquefied natural gas (LNG), there will be a shortage in baseload power to support the country’s base power requirements. As currently constructed, thermal sources of power are more efficient in producing power on a more consistent basis.
True, this road is paved with good, if not great, intentions – and maybe with solar-powered streetlights and EV cars running through it. But the reality is the sun does not shine 24/7, 365 days a year, the wind doesn’t blow strong in every spot from Aparri to Tawi-Tawi, nor does every river flow strong enough to generate enough power to replace the baseload. With every financial institution supporting the ESG thrust of every client, the current pipeline of renewable energy projects may be enough to reach the target installed capacity to meet the DoE targets, but what happens to the other 50% of that target?
With a coal moratorium in place since 2022 and delays in the development of LNG as the next man up to provide the baseload, what would be the country’s main baseload source as the supply from the Malampaya gas field diminishes? True that LNG depots are being built, but other than the integrated LNG facility of SMC Global Power, Aboitiz Power and Meralco PowergGen, which should generate 2,500MW, and Batangas Clean Energy’s 1,200MW, where will the next sets of generation plants be built and when will these come online?
Alternative sources
The harsh reality is that potential renewable alternatives to the baseload may not be easily constructed in the next five years, such as offshore wind which we understand is three to five times more expensive than onshore wind. We have also spoken to several nuclear manufacturers and discussed with regulators and several conglomerates, but nothing concrete is in place.
Battery energy storage systems (BESS) to help augment power from renewable sources are already being developed, but this approach primarily remains expensive and struggles in commercial viability. Perhaps the DoE can require all new renewable energy plants to build BESS and provide a subsidy or tariff for that? The grid is not in the best condition since various yellow and red alerts in the grid have been announced in the past 30 days, especially at the height of El Niño.
As it is, there is no clear sight on the incremental growth of the other side of the 50% target, nor is there an immediate replacement for coal-powered baseload. There is a need to get clarity about what is the next source of baseload and the timeline for these developments. Should one day we wake up and realize that the replacement isn’t coming yet, would we not wish that we built a thermal plant sooner? Can we consider a temporary lifting of the coal moratorium like how Europe addresses its power shortage to bridge that gap until such time when the replacement has been constructed?
While the green road that the Philippines is currently treading supports sustainability, ensuring that our power supply can provide the necessary baseload support is a must to ensure continued economic progress and avoid a dark (literally) future.
Eduardo Francisco is president and Gabriel Edjawan is deal manager at BDO Capital & Investment Corporation.
