23 May 2014

Power supply a challenge to investors

Power outages across the Philippines amid shutdowns at electricity plants and increasing summer demand are raising concern the country’s stunted generation capacity will stifle investment and economic growth.

Two of the Philippines’ three main islands are on “Red Alert” after supply fell below peak demand this week as aging facilities shut for repairs and temperatures rise to near 40 degrees Celsius (104 Fahrenheit). Delays in building new plants may slow the expansion of Asia’s second-fastest growing economy, according to Erramon Aboitiz, president of Aboitiz Power Corp., the nation’s second-largest utility.

“It’s time to worry,” Aboitiz said in an interview at the ASEAN Finance Ministers investor seminar in Manila on May 20. “Investors are always forward-looking and when they see projections of a potential power problem, they’ll decide to put their investments somewhere else.”

The strain this summer on power plants highlights how the Philippines’ under-performing electricity sector threatens the country’s economic growth, which is second only to China in the Asia-Pacific. Gross domestic product rose 7.2 percent in 2013 and is poised to remain among the world’s five fastest-expanding until 2016, according to economists surveyed by Bloomberg.

As the economy expands, so has the country’s demand for electricity. Consumption jumped 50 percent in the 10 years to 2012, more than three times the 16 percent growth rate over that same period for the nation’s generating capacity, according to government data.

Some new projects are being delayed because of environmental concerns, such as Aboitiz Power and Manila Electric Co.’s 600-megawatt coal-fired power plant at the Subic Freeport zone north of the capital, which was blocked by a court order. The companies in July 2011 said the first 300 megawatts of the plant will be available by 2014.

“The power crisis is going to be costly,” Ronald Mendoza, executive director of the Asian Institute of Management Policy Center in Manila, said in a telephone interview yesterday. “It will affect manufacturing and services, so there will be implications on production. Investors may scale back or delay investments.”

With peak power demand forecast to grow about 4 percent annually until 2030, the country will need more than 13,000 megawatts of additional capacity, or 80 percent more than what’s installed, according to Department of Energy data. The government estimates that will require 2.8 trillion pesos ($64 billion) of investment. About 1,800 megawatts of new generation has been committed so far.

The central Visayas region, home to the famous beaches of Boracay island, had zero power reserves yesterday. The southern Mindanao region is on a reserve deficit of nearly 100 megawatts, according to data from National Grid Corp. of the Philippines, a transmission company. Mindanao has suffered from outages for years as a third of supply comes from hydroelectric plants that are unreliable during dry season and subsidized electricity prices discourage constructing new plants. Summer temperatures are driving higher air-conditioning use.

The “Red Alert” warning means outages are to be expected in the two regions. On May 16, the Philippine capital Manila and nearby provinces under Manila Electric’s franchise experienced an hour of rotating power outages.

Aboitiz Power may spend about $5 billion building 2,000 megawatts of new capacity in the next five years, adding to its current portfolio of 2,300 megawatts, Aboitiz said in the interview. Profit in the three months ended March fell for the fifth straight quarter, down 9 percent to 4.2 billion pesos after revaluing its dollar loans and power sales declined. (BLOOMBERG)