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Manila Electric Presses Ahead With Plans to Build Plants

Manila Electric Co. (MER), the Philippines’ largest retailer of electricity, is pressing ahead with a $7 billion plan to build its own plants as blackouts become more frequent and prices spike to a record.

“Capacity is becoming increasingly tight,” President Oscar Reyes said in an interview in Makati City on June 9. “More expensive plants are now being dispatched. We have also noted an increasing incidence of outages.”

The century-old utility, also known as Meralco, is returning to power generation after a four-decade hiatus by building 3,000 megawatts of capacity to cut its dependence on suppliers and boost profit. Producing its own power will also help increase supply in a nation that has seen consumption rise by 50 percent in the 10 years to 2012, dwarfing a 16 percent increase in generation capacity in the same period, according to government data.

Meralco services about a fourth of the Philippines’ 107 million people, while half the country’s $250 billion gross domestic product is generated within its coverage area. The economy expanded 7.2 percent in 2013, the second-fastest in Asia next to China, and is poised to remain among the world’s five fastest-expanding until 2016, according to economists surveyed by Bloomberg.

Prone to Shutdown

Almost all power plants on the main Luzon island, where the company’s franchise is, were built before 2000, making them more prone to maintenance shutdowns and vulnerable to outage. The only new power plant built in Luzon after 2000 was a 600-megawatt coal plant, while demand in the grid has increased by 2,600 megawatt, Meralco’s Reyes said.

Luzon experienced 21 outages and eight scheduled maintenance shutdowns in November and December, pushing prices in the wholesale electricity spot market to a record. Consumers protested the price spikes before the Supreme Court, eventually prompting a recalculation and lowering of the tariffs.

“The entire industry will have to catch up,” said Jomar Lacson, head of research at Campos Lanuza & Co. in Manila. “They’re not building enough capacity. Next year and 2016 may be critical years in terms of power supply, and this will likely mean electricity prices will rise.”

A push last decade to sell state power assets to get the government out of the capital-intensive industry may have prompted fewer investments in new capacity, leading to limited supply today, Reyes said.

Environmental Halt

While Manila Electric’s first plant venture is stalled by an environmental case, the company is moving ahead with three other projects, Reyes said.

Its 600-megawatt coal-fired plant project with Aboitiz Power Corp. (AP) and Taiwan Cogeneration Corp. (8926) can’t proceed just yet because of a complaint pending before the Supreme Court. Originally set for 2015, the plant may be completed by late 2017, Reyes said.

Meralco and partner Electricity Generating PCL (EGCO) of Thailand will soon announce a contractor to build a 460-megawatt coal-fired plant in Quezon province, south of the capital. The plant is targeted for completion as early as the last quarter of 2017, Reyes said.

In “advanced pre-development stage” is a 1,200-megawatt power plant that may run on either coal or gas and will be built together with a partner, Reyes said, declining to elaborate as negotiations are ongoing. Next in the pipeline is an 800-megawatt facility. Both plants are targeted to start running by 2018, Reyes said.

Peak Demand

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. That will require 2.8 trillion pesos ($64 billion) of investment, the government estimates. About 1,800 megawatts of new generation has been committed so far.

Even with the delays, Meralco’s generation plan continues. Last year, it acquired a 28 percent interest in a company that built and is now running an 800-megawatt LNG power plant in Singapore. In May, it announced a plan to increase its stake in Global Business Power Corp., the largest power producer in the Philippines’ Visayas island.

Meralco’s profit in the quarter ended March was little changed at 4.01 billion pesos, compared with a year ago, the company reported in April. Even with power outages, such as the one the capital experienced on May 16 when Luzon was on red alert, electricity demand has been “soft” in the first five months of the year, with growth in electricity sales at less than 1.5 percent, Reyes said.

To contact the reporter on this story: Cecilia Yap in Manila at cyap19@bloomberg.net

To contact the editors responsible for this story: Chua Baizhen at bchua14@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net Iain Wilson, Indranil Ghosh

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