AN energy finance analyst has recommended that government adopt a price “guarantee” for merchant plants that sell their output at the Wholesale Electricity Spot Market (WESM) in order to secure financing for their renewable-energy (RE) projects.
Sarah Jane Ahmed of the Institute for Energy Economics and Financial Analysis (IEEFA) said last week in a webinar on energy transition implications on the fiduciary responsibilities of corporate directors that this move could satisfy operators of merchant plants and banking sector’s requirements, while government hits its goal of boosting RE capacity in the Philippines.
“Perhaps a guarantee that is within the spot market system for merchant plants so, in that way, they have their minimum price, whatever that is, to be determined by the regulator [Energy Regulatory Commission], DOE [Department of Energy], as well as feedback from the banks,” she said.
Ahmed explained that this proposal would further unlock the power spot market to function, while bringing in financial surety. Further, she pointed out, this will not support any specific players. “Anyone could have this opportunity and that’s what we want to bring in—new participants in the market. We want to encourage new recognition that renewables has a role to play in our system,” she said.
RE players, particularly those that do not have power-supply contracts, are having difficulty in securing bank financing. If the power plant is not covered by any offtake agreement, the power project’s viability is put at risk. As such, no bank will take a chance to extend financing because most of the banks fund projects that actually make money and are profitable.
For those that do not have supply contracts, they have no choice but to sell their output at the electricity spot market. WESM prices, however, are volatile. For August, WESM prices hover at P5.03 per kilowatt-hour (kWh), lower than July’s P6.52 per kWh.
According to the Independent Electricity Market Operator of the Philippines (IEMOP), WESM price is somehow attributable to supply and demand. The WESM operator noted that the colder weather and implementation of the community quarantine resulted in the lowering of prices as opposed to summer. There was also an increase in average supply for August compared to the previous month.
Bank of the Philippine Islands (BPI) Vice President Jo Ann Eala said WESM prices should be above the borrower’s break-even cost.
“If WESM prices will not give them sufficient money to pay the monthly amortization then that is a problem. To pay, WESM prices should be above your break even cost since you also have to account other possible expenses that have to be added to that break-even production cost,” he said.
Eala added: “We would not take our chances because WESM is a market and there is no floor price. At the end of the day, banks like BPI and BDO are also listed companies and owned by the public. If we get into trouble because of lending left and right, without taking into account those who may not be able to pay, then we will forego our responsibilities to the public as well.”
“If you talk to a private bank with responsibilities to public stakeholders, there are certain limitations as to what we could take,” he said.
Eduardo Francisco, president of BDO Capital, said BDO would continue to look for ways on how it can help RE firms finance their projects. But having no contract makes it difficult to extend financing. “The size of the debt is not a problem. We can amortize it anyway, but if there is no contract, I guess that’s the issue. You have to protect the bank. We want to get paid. Otherwise, it will just be a stranded asset.”
DOE Undersecretary Felix William Fuentebella recognized these challenges. Nonetheless, he urged, everyone to be more understanding. “I know that a lot of RE committed and indicative projects failed to secure financing or achieved financial closing. This is a tough task. There should be a give and take,” he said.
ICSC energy transition advisor Alberto Dalusung III also noted that more and more financial institutions and banks are fleeing the plunging investment prospects associated with fossil fuels. Likewise, he noted that the costs of renewables and battery energy storage system continue to fall providing in more and more cases the most attractive investment option in terms of price and reliability.
Meanwhile, Bangko Sentral ng Pilipinas Assistant Governor Lyn Javier called to enhance risk management by looking at different types of risks, increased transparency to stakeholders, and reskilling of personnel on sustainability agenda. “When we understand risks we also see the opportunities behind investing in sustainable projects.”
Ellie Mulholland, Director of Commonwealth Climate and Law Initiative, commented that energy transition presents risks and opportunities for Filipino banks. “Good governance practice today requires contemporary understanding, proactive inquiry and critical evaluation on a forward-looking basis.”
The key to minimize stranded cost risk and ensure a least-cost power system in the Philippines is proactive policy making, to which ICSC, IEEFA, and CTI offered policy recommendations including the need to fast-track RE auctions, enforce mandatory removal of cost pass-through to end-users, improve tariff setting, build on the current moratorium, and increase clarity on who pays for stranded asset risks. 30