First Gen’s external environment mainly consists of global trends that influence the Philippine energy industry and local trends that have impacted business operations in the country, forcing quick adaptation during the 2020 pandemic.
GLOBAL TRENDS
Within the global context, First Gen identified five long-term trends that will continue to impact the way business is done.
Creation of New Markets
New markets have continued to open in the energy industry in the past years due to the implementation of the Electric Power Industry Reform Act (EPIRA). One of these is the Retail Competition and Open Access (RCOA), which allowed customers with a 1MW average monthly consumption to become contestable customers in its first phase. Becoming a contestable customer means that these consumers have the option to choose their power source through a licensed retail electricity supplier (RES). In late 2020, the Energy Regulatory Commission (ERC) has announced the lowering of the threshold even further to 500kW by February 2021, increasing the number of retail customers who can choose their own power.
The Green Energy Options Program (GEOP) is another effort that created a new market specifically for renewable energy. This program gives consumers with an average monthly consumption of 100kW an opportunity to procure renewable energy for their use. This program is expected to create even greater renewable energy usage.
Rebound in Energy Demand
Despite the effects of the pandemic, an increase in energy demand is still projected for the Philippines. While COVID-19 has slowed down the economy— and correspondingly, energy demand in the country— the eventual recovery of the economy will lead to a rebound in energy demand in the future.
Grid Decentralization
Decentralization is a crucial industry trend because it allows for the increased provision of reliable electricity solutions across various areas. Given that the Philippines is an archipelagic country, this trend can help increase electrification and power areas that cannot be viably reached by a centralized grid. Furthermore, innovative decentralized solutions can use sources, such as solar and liquefied natural gas (LNG), which can improve the reliability of island areas and industrial complexes that are typically dependent on unreliable and expensive diesel. Finally, decentralization is recognized as a way of improving the resilience of power systems, as decentralized and localized networks of power sources can better withstand events that would be more widely disruptive for a centralized grid.
“Decentralization is a crucial industry trend because it allows for the increased provision of reliable electricity solutions across various areas.”
The Need for Decarbonization
Studies show that climate change is still worsening. Despite the reprieve in emissions brought about by limited human activity due to community quarantines and lockdowns, experts have concluded that this hardly created a dent in total emission reductions needed. All sectors are expected to contribute to the decarbonization efforts.
The global movement to divest from coal has gained more traction as more financial institutions refuse to fund coal projects with the increased awareness on environment, social, and governance (ESG) standards. According to The Institute of Energy Economics and Financial Analysis, there are now over 130 globally significant1 financial institutions who have publicly announced that they will no longer support coal-related projects.
Digitalization and New Technology
Digitalization and technological developments continue to change the industry—not just in the advancements in power production but also in ways of working. The pandemic has hastened the transition to digital platforms in its first months to ensure that the businesses remain operational. These new platforms enable companies to be more efficient, responsive, and reliable even in extraordinary times.
New technologies in analysis and predictive maintenance are seen to improve plant operations as well.
Apart from that, digitalization has presented various and easier ways of obtaining information, for instance, social media. This allows businesses and consumers to learn about each other almost instantly and constantly.
“The pandemic has hastened the transition to digital platforms in its first months to ensure that the businesses remain operational.”
LOCAL TRENDS
The COVID-19 pandemic disrupted the local energy industry in 2020. Despite this, there were significant steps taken toward the transition to renewable energy. Power demand began to slowly recover in June and by the end of 2020, demand settled at just less than 10.0 percent year-on-year. The pace of recovery in 2021 is expected to remain slow as the nationwide rollout for a COVID-19 vaccine is not expected to be substantial until the third quarter of 2021 and could take well into 2022 or 2023 to be completed.
The Philippine Economy and The Power Demand
In 2020, the Philippines fell into its first and most severe recession in three decades as the economy ground to a virtual halt after lockdowns were imposed in an effort to stop the spread of the deadly COVID-19 pandemic. All forms of travel were severely curtailed, negatively affecting almost all sectors of the economy. As a result, the 2020 GDP of the country decreased by 9.5 percent, the worst since 1947.2
The power sector was no different. Power demand, a leading indicator of economic activity and overall demand, dropped by as much as 26.0 percent at the height of the lockdowns in April and May. In particular, manufacturing and commercial power demand dropped while residential demand increased. This increase, however, did not make up for the lost demand in the other sectors. It is still uncertain when demand will return to its pre-pandemic levels.
Power demand began to slowly recover in June and by the end of 2020, demand settled at just less than 10.0 percent year-on-year. The pace of recovery in 2021 is expected to remain slow as the nationwide rollout for a COVID-19 vaccine is not expected to be substantial until the third quarter of 2021 and could take well into 2022 or 2023 to be completed.
The Country’s Transition to Renewable Energy
The country has made some headway in its transition to renewable energy by declaring a moratorium on new coal power plants. In October 2020, the Department of Energy (DOE) declared that they will no longer accept new proposals for coal plants in order to encourage investment in cleaner power sources. Based on capacity additions in the past ten years, from 2010 to 2019, the total installed capacity that was added to the grid was 9,431MW.3 Coal plants accounted for 66.0 percent of the total additional capacity at 6,194MW.4
The abrupt change the country experienced in its electricity consumption pattern due to the COVID-19 pandemic and the implementation of lockdowns hindered the growth in electricity demand and posed challenges in grid operations.
There is a pronounced need to shift to a more flexible power supply mix to have a more sustainable power system that will be responsive to structural demand changes and accommodate the entry of more renewable energy.
The Philippine government, through the DOE, has provided encouraging support for LNG projects as they recognize natural gas as an essential bridge fuel to transition to renewable energy. Throughout the year, it has granted permits and notices to proceed (NTP) to several LNG projects in different phases and have declared some as energy projects of national significance (EPNS). These are in line with the DOE’s goal of turning the Philippines into a Southeast Asian LNG hub.
1
Globally significant financial institutions are defined as banks and insurers / reinsurers with Asset under Management > USD10 billion.
https://ieefa.org/finance-exiting-coal/
2 https://asia.nikkei.com/Economy/Philippines-GDP-shrinks-9.5-in-2020-worst-since-1947
4 DOE Memo dated December 22, 2020