EDC says geothermal not dead but efficiency, incentives crucial

MANILA, Philippines – Energy Development Corporation (EDC), the renewable energy arm of the Lopez family’s First Gen power unit, is adamant that efficiently-run geothermal energy is still commercially viable despite the lack of incentives on the horizon.

The Duterte administration has indicated that it does not favor a 3rd round of renewable energy Feed-in-Tariffs (FIT), preferring instead to focus on keeping prices down for consumers and industry.

Geothermal energy, which makes up 1,169 megawatts (MW) of EDC’s total installed capacity of 1,457.8 MW, is not on the FIT list along with solar, wind, and biomass energy sources.

“I don’t think the absence of incentives means it’s the end, but we really need to do things differently in geothermal,” said EDC president and chief operating officer Richard Tantoco at the firm’s annual stockholders’ meeting on Monday, May 8.

He noted that the most critical point is reducing operational costs, which EDC has been doing for the past few years.

“Maintenance used to cost P50 million. We’re now able to do the same activity for less than P5 million, and we really need to push the envelope in terms of redoing the cost base of geothermal,” he said.

But EDC has not given up hope that incentives will eventually be offered, especially in the current global environment that is so focused on climate change. (READ: Duterte signs Paris climate deal)

“Incentives would be particularly useful in the front end, when a firm is drilling to look for geothermal sources and facing a 50% success rate,” Tantoco said.

He added that other countries are supporting this, particularly in Latin America and Europe, where public funds are made available for expensive drilling, which then become a loan if the drilling was successful and a grant if it weren’t.

“We need things like that to help spur development. We need to work with the agencies to provide these incentives as right now they’re driven to help reduce carbon emissions but our posture in the Philippines has not stayed 100% glued to that vision,” Tantoco explained.

Oversupply in Mindanao, Visayas

At the same time, the rush for cheaper coal energy has created a glut of new power supply in Mindanao and the Visayas.

“We are clearly very concerned with over-capacity [of power supply]. In Mindanao right now there is 3,100 MW installed, heading to 4,000 MW, for a grid where the peak demand is about 1,700 MW. From the point of view of the investor, it’s not an ideal situation. Some would call it an irrational situation,” Tantoco said.

“We’re concerned about cyclical oversupply like what’s happening now in Mindanao, and we don’t want the same thing to happen in Luzon,” he added.

Tantoco said the situation is better for EDC in the Visayas, where it has almost all of its power supply completely contracted. But he pointed out that new coal plants on Panay Island are also creating a glut.

“We’re in a good posture [in the Visayas] but obviously there are plants finished in Panay Island and those plants are causing a bit of oversupply in an inter-island grid that’s highly congested,” he said.

Focusing on efficiency for now

These twin concerns – oversupply and the high financial risk of drilling for new projects – have prompted EDC to focus on maximizing efficiency.

It’s a strategy that already bore fruit in 2016 when EDC recorded a recurring net income increase of 4% to P9.2 billion despite an P800-million drop in revenue during the same year.

Tantoco attributed this primarily to a P1.7-billion drop in operating expenses resulting from more efficient plants.

For 2017, a year which EDC says will be punctuated by plant rehabilitations, it is projecting flat to very modest growth.

“The full-year revenue last year was P34.2 billion. The first quarter [of 2017] hit around P9.6 million so it’s a very strong quarter, but in the coming quarters we have 3 plants shutting down for extended periods so revenue will dampen a little bit and spending for rehabilitating plants will ramp up,” Tantoco said.

The major plant rehabilitations will center on EDC’s 122.5-MW Tongonan plant in Leyte which will have one unit down for 110 days to change turbines and cooling systems.

EDC also plans to upgrade its 125-MW Upper Mahiao geothermal plant, also located in Leyte, for a shorter period.

It’s these plant upgrades that will constitute the majority of EDC’s capital expenditure for this year, which is pegged at around P7 billion – lower than the P8.2 billion it spent last year.

Tantoco noted that following the upgrades, the Tongonan plant will have increased its output by 10 MW, combined with 9% less steam consumption. This will bring down overall costs and make it less susceptible to week-long outages.

“The upgrades may be felt towards the end of the year, but you really will have all the upgrades kicking in on a full-year basis in 2018. This is a transition year with a lot of outages,” he said. – Rappler.com