IV.

MARKET AND ECONOMIC ANALYSES

Industry Description and Outlook

The tremendous rise in global energy consumption has sparked worries

about supply issues. Energy has become a valued commodity as a result of
scientific and technological advancements. Until the 1950s, when energy
demand changed dramatically, the world's energy markets were primarily
defined by monopoly-based organizational structures and were largely owned
by the government.

There are several energy sources, including traditional biofuels, coal,

crude oil, natural gas, hydropower, nuclear, wind, solar, and other renewable
sources, are constantly emerging to fulfill consumer demand. Energy markets
arose as a result of the government's efforts to build a competitive energy
industry. Privatization of state-owned enterprises is part of the evolution of
energy markets. As stated by the Department of Finance in 2017, the
Philippines has adopted privatization of its energy sector by implementing the
Electric Power Industry Reform Act of 2001 in an attempt to reduce the
government's yearly subsidies to the power industry by PhP38 billion and to
have lower power rates for both home and industrial users.

Many commercial sectors are now able to participate in the booming

energy market as a result of EPIRA's implementation. The Luzon and Visayas
grids are experiencing an oversupply of energy as power plants continue to
grow in number. This is confirmed by statistics obtained by the Department of
Energy during the first year of WESM in 2003, which showed a total
dependable capacity of 52,941 GWh and a demand of 42,720 GWh in the
Luzon and Visayas grid, resulting in a surplus capacity of 10,221 GWh. The
Luzon and Visayas grid has a total dependable capacity of 82,566 GWh, with a
demand of 77,793 GWh and surplus capacity of 4,773 GWh as of December
2017.
 Mindanao's demand was larger than the available capacity of all
producing units in the region when WESM was established in 2003. This does
not explain the stipulations in the WESM's start-up in Mindanao, which
resulted in the establishment of the Interim Mindanao Electricity Market
(IMEM) under the Philippine Electricity Market Corporation to manage energy
pricing in the region. Bilateral contracts are signed directly between the
generation firm and the distribution companies or contestable consumers who
have a power demand of at least 750KW per hour, rather than purchasing spot
electricity on the market. However, in 2019, energy demand in Mindanao
directly and indirectly exceeds available capacity.

This marks the rise of interest by numerous capitalists to invest in the

power sector of Mindanao. This results to the robust increase of generation
plants in Mindanao causing surplus power supply.

According to the data presented by DOE in December 2019, Mindanao

demand reaches 13,805 GWh.

This leads to uncontracted electric power supply of some generation

plants in Mindanao. Electric cooperatives and other private distribution
companies constitute the distribution sector of the power industry. These are
mainly the direct customers of power plants which straightly purchase the
power requirement under a bilateral contract.

According to data from San Miguel Consolidated Power Corporation as of

September 2018, consumers are only using an average of 70% of their
contracted capacity. Direct customers' invoices in the electricity business are
divided into two categories of charges: the capacity fee and the energy cost. The
capacity charge serves as a deposit for the quantity of electricity that each
customer is entitled to under the contract, whereas the energy cost is based on
the client's actual need for electricity. These charges are added to each
customer's bill.
 The purpose of this study is to determine which factors have a
substantial impact on power purchases by distribution firms and contestable
consumers to generation plants in Mindanao, in order to help San Miguel
Consolidated Power Corporation enhance sales and maximum profitability
based on predicted income derived from contract capacity to reduce power
supply surpluses. The study will benefit not only the company, but also the
end-users, who will be responsible for all generation, transmission, and
distribution costs that are passed on to them.

Target Market

National Grid Corporation of the Philippines (NGCP), the transmission

sector of power, is composed of two parts - the Luzon and Visayas Grid, and
the Mindanao Grid. San Miguel Consolidated Power Corporation is situated in
Barangay Culaman, Malita, Davao Occidental, thus, making the company a
part of Mindanao Grid. The target market of SMCPC is the distribution utilities
and industrial power plants connected with the said grid.

Table 12. 39 Distribution Utilities in Mindanao grid.

Mindanao Grid Connected Distribution Utilities (2019)

ZAMCELCO Zamboanga City Electric Cooperative, Inc.
ZAMSURECO I Zamboanga City Electric Cooperative, Inc.
ZAMSURECO II Zamboanga del Sur II Electric Cooperative,
Inc.
ZANECO Zamboanga del Norte Electric Cooperative,
Inc.
CEPALCO Cagayan Electric Power and Light Company,
Inc.
ILPI Iligan Light and Power, Inc.
BUSECO Bukidnon II Electric Cooperative, Inc.
CAMELCO Camiguin Electric Cooperative, Inc.
FIBECO First Bukidnon Electric Cooperative, Inc.
LANECO Lanao del Norte Electric Cooperative, Inc.
MOELCI I Misamis Occidental I Electric Cooperative,
 Inc.
MOELCI II Misamis Occidental II Electric Cooperative,
Inc.
MORESCO I Misamis Oriental I Rural Electric Cooperative,
Inc.
MORESCO II Misamis Oriental II Electric Cooperative, Inc.
DLPC Davao Light and Power Company
NORDECO Davao del Norte Electric Cooperative, Inc.
DASURECO Davao del Sur Electric Cooperative, Inc.
DORECO Davao Oriental Electric Cooperative, Inc.
CLPC Cotabato Light and Power Company
COTELCO Cotabato Electric Cooperative, Inc.
COTELCO- Cotabato Electric Cooperative, Inc. – PPALMA
PPALMA
SOCOTECO I South Cotabato I Electric Cooperative, Inc.
SOCOTECO II South Cotabato II Electric Cooperative, Inc.
SUKELCO Sultan Kudarat Electric Cooperative, Inc.
ANECO Agusan del Norte Electric Cooperative, Inc.
ASELCO Agusan del Sur Electric Cooperative, Inc.
SIARELCO Siargao Electric Cooperative, Inc.
SURNECO Surigao del Norte Electric Cooperative, Inc
SURSECO I Surigao del Sur I Electric Cooperative, Inc.
SURSECO II Surigao del Sur II Electric Cooperative, Inc.
DIELCO Dinagat Island Electric Cooperative, Inc.
LASURECO Lanao del Sur Electric Cooperative, Inc.
MAGELCO Maguindanao Electric Cooperative, Inc.
BASELCO Basilan Electric Cooperative, Inc.
CASELCO Cagayan de Sulu Electric Cooperative, Inc.
SIASELCO Siasi Electric Cooperative, Inc.
SULECO Sulu Electric Cooperative, Inc.
TAWELCO Tawi-tawi Electric Cooperative, Inc.
Bumbaran Bumbaran Electric Cooperative, Inc.

Market Needs

According to data from San Miguel Consolidated Power Corporation,

consumers are only using an average of 70% of their contracted capacity.
Direct customers' invoices in the electricity business are divided into two
categories of charges: the capacity fee and the energy cost. The capacity charge
serves as a deposit for the quantity of electricity that each customer is entitled
to under the contract, whereas the energy cost is based on the client's actual
need for electricity. These charges are added to each customer's bill. The
remaining 30% is underutilized due to the determinants; namely, existing
contracts to other power plants, expensive price, reliability of the power supply,
low load demand, tripping of feeders due to system fault, forced majeure and
high allocation of renewable energy source, which are mandated to dispatch
first. These are based on empirical evidences observed by the researchers
based on customers’ reports regarding their electric power purchases every end
of the monthly billing period. The underutilized contract capacity by the
customers is still billed based on the 100% contract capacity where there is
still a surplus of supply under the contract.

One of the purpose of the industry analysis is to determine which factors

significantly affect the power purchases of distribution companies and
contestable customers to the generation plants in Mindanao to help increase
the revenue and maximize the profitability of San Miguel Consolidated Power
Corporation as based on the expected revenue established from the contract
capacity to lessen the surplus of power supply. The study will not only benefit
the company but also the end-users who will be the one to pay for all the
generation, transmission and distribution charges passed to the consumers.

By decreasing the gap between the actual sales and the expected sales
based on the contract capacity, the plant will run at a higher loading which
means higher efficiency and lower generation cost. The lower generation cost
will be passed on to the end-user which will also decrease the rate of power per
hour, thereby, lowering the cost of energy which will be paid by the consumers.

Market Growth

Peak power demand in Mindanao hit a record 2,013 megawatts on May

8, 2019 which exceeded the 1,853 MW record on December 13, 2019 based on
the data from Mindanao Power Monitoring Committee (MPMC) report.
 Mindanao Development Authority (MinDA) also projected that 3,500 MW
of new capacity is needed between 2021 and 2030 to support the region’s
infrastructure and industry development.

Furthermore, mindanao is expected to lead to the development of up to

40 20-storey high-rise buildings in Davao City alone requiring at least 5 MW of
electricity within 3-5 years as per Mr. Montenegro.

In 2019 the Covid-19 pandemic hit the Philippines’ consumption-driven

economy hard, with forecasts from the IMF suggesting that real GDP could
contract by as much as 9% in 2020. Strict lockdowns took a heavy toll on the
energy sector in the form of a steep drop in demand for both electricity and
fuel, yet local power providers took steps to ease the financial impact on
customers by lowering rates and extending payment windows. However, in a
positive sign for the sector’s longer-term development, interest was sustained
in oil and gas exploration activities and midstream infrastructure investment
during the pandemic.

Beyond the health crisis, the renewable energy and natural gas segments
present standout opportunities for the coming years as the Philippines looks to
meet rising energy demand and alleviate pressure on the national grid. When
the disruption from Covid-19 eventually subsides, overseas investors may also
be given the opportunity to own up to 100% of assets in public utilities, as
progress was being made in this area during the first quarter of the year before
the pandemic stalled much of the legislative agenda.

In 2020, the demand for power in Mindanao has returned to its pre-
COVID level, a sign that the economy of mindanao was slowly recovering under
a “new normal” with many companies resuming operations at a scaled down
capacity
 According to MinDA Assistant Secretary and MPMC technical working
group head Romeo M. Montenegro the daily power consumption in mindanao is
now averaging between 1,700 and 1,800 megawatts (MW), its pre-COVID
demand, which is higher compared to the average daily consumption of 1,300
MW in the month of May 2020.

In September 2020, throughout the Covid 19 pandemic the National Grid

Corporation of the Philippines reported that Mindanao’s power demand peaked
at 1,772 MW, recording an excess of 1,207 MW out of the 2,979 MW in total
system capacity.

However, despite the increasing demand, MinDA also said that the power
supply remains at comfortable levels with an average of 400-600 MW excess in
supply.

Market Competitors

The following are the market competitors of San Miguel Consolidated

Power Corporation (SMCPC):

Direct Competitors. These are companies offering very similar products

and services where the potential customers are probably currently buying from
these companies. In the power industry, the direct competitors of the company
with coal as a main fuel are Filinvest Development Corporation (FDC), Therma
South Inc. (TSI), Minergy Corporation, Sarangani Energy Corporation (SEC),
and STEAG State Power.

Indirect Competitors. Alternative solutions to the problem in the power

industry do exist. All other types of power plants operated with different
companies can be substitutes. Hence, hydroelectric power plants such as
AGUS 1 to 7, Pulangi, and HEDCOR, geothermal power plants such as Energy
Development Corporation (EDC), solar power plants such as Enfinity Philippine
Renewable Resources, Inc. (EPRRI), Asian Greenergy Corporation, and Kirahon
Solar Energy Corporation are threat of substitutes. Additionally, bunker diesel
generators are also threating as substitute.

Figure 6. Load Sharing of Power Sources.

In Mindanao, coal-fired power plants hold 43% of the total load share
generation followed by hydroelectric power plants with 27% load share.
Moreover, oil or bunker diesel-fired generators follow at 22% and geothermal
power plant at 8%. Solar and biomass have the least load share which are
almost negligible compared to the total load in Mindanao.

Barriers to Entry

In the power industry, the investment is capital extensive or a project

that require a substantial investment. Not all companies can generate billions
of pesos to put up a plant. Therefore, investment is a barrier to entry in the
power industry. Additionally, acquiring contractors’ technology about the
Circulating Fluidized Bed (CFB) can be too expensive for other companies.

Additionally, renewable energy sources such the solar and biomass,

which all depend on the weather to generate electricity and the scarcity of
available biofuel, are limited to 10% of the total generation capacity in
Mindanao due to its unstable capability to supply electricity which can cause
an unstable credibility of the grid. The grid maintains frequency of 60Hz in the
Philippines with allowable range of 59.7Hz – 60.3Hz to avoid damage of plugged
equipment with 60Hz standard frequency in the country. Thus, this limitation
incurs a barrier to entry of the potential substitutes of the energy source.

Moreover, climate change also posed a potential barrier to entry to other

emerging coal-fired power plants. Since the Philippines is highly vulnerable to
the effects of climate change owing to its archipelagic geography, growing
population, and risk from flooding. The government is seeking to address the
country’s contributions to climate change through a variety of targets by which
the DOE is actively promoting compressed natural gas, liquefied petroleum gas,
and e-vehicles through the Alternative Fuels for Transportation Program and
will undertake efforts to expand the public mass transport system.

On 1 March 2017, the Philippines ratified the climate treaty known as

the Paris Agreement and its associated Nationally Determined Contribution
asserts the intention to reduce greenhouse gas (GHG) emissions (CO2
equivalent) by 70% relative to the country’s BAU scenario for 2000–2030.21
(ADB, 2018).

Although this could also pose as a threat in the coal-fired generators

such as San Miguel Consolidated Power Corporation, this could also obstruct
the possibility of other competitors in the investing in the coal-fired generation
field.
Market Trends

In 2016, the Philippines generated 90.8 terawatt-hours of

electricity. By the end of the year, the total installed generating capacity in the
Philippines had reached 21,423 megawatts (MW), a year-on-year increase of
2,665 MW (16.2%).

Figure 7. Power Generation by Source in the Philippines from 1990 to 2016.

The energy sector in the Philippines is highly reliant on coal. Total

consumption of coal reached 20.3 million metric tons (Mt) in 2016, reflecting a
10-year compound annual growth rate of 10.8%. Owing to its affordability, coal
power predominates baseload generation capacity. Despite its rapidly
increasing coal consumption, the Philippines has relatively modest indigenous
reserves with total domestic coal reserves are estimated at 316 Mt and
domestic coal production reached 12.1 Mt in 2016. Domestic coal production is
concentrated on Semirara Island with mines owned and managed by the
Semirara Mining and Power Corporation accounting for around 96% of total
coal production in the country. A large portion of domestically produced coal is
designated for use by just two generating units owned by the SEM-Calaca
Power Corporation, a subsidiary of the Semirara Mining Corporation. Both are
300 MW units, generally operating at 50%–60% utilization.

Coal consumption in the Philippines is expected to increase fivefold by

2040. Acknowledging the importance of the fuel to the power sector and the
reliance on imports from overseas, the government has made a concerted effort
in recent years to expand coal production through additional operating
contract offerings.

The DOE has granted contracts to five companies to operate in seven

new areas in Mindanao. As of July 2016, the DOE had issued 30 coal operating
contracts for development and production and 48 contracts for coal exploration
with 83 small-scale coal mining operators participating.

With this opportunity, San Miguel Consolidated Power Corporation

obtained the following data of distribution utilities (DU) and industrial
customers (IC) and its percentage in the total sales of the company as of
January to May 2019.

Table 13. SMCPC Customer Share (January to May 2019).

 TOTAL SUPPLY (MWh)
Purchased
from FDC,
10,869 , 15%

MQ U1,
30,503 , 42%

MQ U2,
31,251 , 43%

Figure 8. SMCPC’s Supply Chart

Table 13 shows the increasing power purchases, if not steady, of

distribution utilities to SMPC for the first five (5) months of 2019. Figure 8 also
shows the portion of these power purchases generated by each unit of the
company, as well as, the outsourced power in excess of SMCPC’s capacity.
Figure 9. SMCPC’s Monthly Sales in MWh (2019)

The figure above also shows the increasing sales of SMCPC graphically
for the first five (5) months of 2019. It can be observed that sales for the first
four months are greater than the target. However, for the month of May it is
lower since the billing month has not ended yet for the data to be complete.

Expectations for robust demand growth in Mindanao, which is

historically undersupplied and subject to demand curtailment (power outages),
recent additions of coal-fired capacity have eased curtailments and otherwise
unmet demand leading to significantly increased electricity usage. This also
shows in the result of sales in generation (MWh) in the SMCPC data. Peak
demand in Mindanao reached 1,653 MW in 2016.36 This is expected to grow
by 7.54% every year from 2016 to 2040 to reach 3,456 MW by 2025 and
10,225 MW by 2040. Despite the improved supply and demand situation,
Mindanao’s hydropower supplies are subject to variation due to water
availability, particularly in El Niño years. Hydropower accounted for 52% of
generation capacity in 2013, but even the current share of 27% is high enough
to pose a risk of seasonal power shortages in future El Niño years. This also
shows in the resulting sales of SMCPC during the summer season.

On the other hand, 1,289 MW of new capacity could come online by

2019 if all currently “committed” projects materialize and the DOE is tracking a
further pipeline of 3,627 MW of capacity as being “indicative”.