By Myrna M. Velasco
Published: July 24, 2013
Tiwi-MakBan facilities’ contractual entanglements (Part one)
Rate hikes are usual, bemoaned refrain among electricity consumers.
Such then holds out a nagging reminder to the parties involved in the negotiations for the steam supply contract of the Tiwi and Makiling-Banahaw facilities that they are not there trying to corner concessions that will just serve their respective interests.
The spotlight must be, and rightly so, on the consumers – and how at the end of the day, the outcome of the talks will bring benefits and transformative impact to the greater Filipino public.
Rate hikes ‘anxiety’
Energy Secretary Carlos Jericho L. Petilla admitted that his main worry is the rate increase that may result from the formula proposed in setting the steam cost for the Tiwi-MakBan plants under the geothermal resource sales contract (GRSC) that is being negotiated.
“I have seen the numbers, and based on the computation, the (prospective rate) increase would be more than P1.00 (per kilowatt hour),” he stressed.
The energy chief was referring to the new pricing scheme for steam to be employed under the GRSC formula. The proposed calculation will factor in 75 percent of higher cost coal index (which was originally the Barlow Jonker Index and was later modified to Australian coal’s Newcastle Index) plus 25 percent of Japan Power Utilities (JPU) reference coal index.
Mr. Petilla noted that simulations were presented by AP Renewables, Inc. (APRI) of the Aboitiz team, raising the same worry of probable rate hikes that will likely turn out unacceptable to consumers.
“Aboitiz is doing a good thing,” he said, referring to the calculations. But he just appealed to parties to be more sober-minded in resolving the thorny concerns in their contract negotiations.
Sources from the National Power Corporation and Power Sector Assets and Liabilities Management Corporation tipped off that the GRSC formula was proposed by Philippine Geothermal, Inc. (PGI), the predecessor company of Philippine Geothermal Production Company, Inc. (PGPC) – when they were still negotiating for the transition agreement (TA), which then serves as a forerunner to the GRSC.
Intentionally or not, what the parties may have negated at that time was the financial impact on electricity ratepayers if the steam cost will rise – given the pass-on nature of costs on fuels used for power generation.
The GRSC essentially forms part of the commercial package reached by the parties then in their compromise settlement for Tiwi-MakBan facilities’ operations.
Apparently due to the complicated legal issues as well as portended cost impacts, the previous energy secretaries were “too careful” then not to just abruptly approve the RE contract application of Chevron Geothermal. Even the company’s application for contract conversion via financial or technical assistance agreement (FTAA) has not been given go-signal.
Unraveling the formula
Mr. Juan Alfonso, APRI senior vice president for corporate services, affirmed the possible upward movement in steam cost, yet he qualified that “if the GRSC pricing formula were implemented as is, the actual cost will be lower than the resulting geothermal steam cost.”
The company’s base calculation, as it also sounded off to the Department of Energy (DOE), sets “geothermal steam cost, under the GRSC at P2.21 to P2.25 per kWh depending on the movement of coal indices, compared to the actual coal cost which may range from P1.80 to P2.00 per kWh depending on the type of baseload coal plant.”
Reckoned from the prevailing steam cost of P1.19 per kWh under the TA, the rate increase is already apparent in the presented simulations.
Mr. Alfonso further explained that “the pricing scheme agreed in 2004 was intended to track the price of coal with provision for revision if geothermal steam cost no longer mirrors the baseload fuel in the system.”
Based on documents submitted to the DOE, it was shown that the formula for the steam price under the GRSC will have a base price of US$0.016 and such shall be multiplied by a factor that will include the BJI and JPU coal indices, or what has been referred to as Base Load Generation Index or BLGI. It was raised to government authorities that such pricing formula “creates an artificial pricing for geothermal” that will be dependent on the factors affecting coal prices.
The APRI group, according to DOE sources, has been forthright in its position that with the propounded formula, the Tiwi-MakBan plants may never be dispatched full-time, but only during peak hours.
And while the company may worry about decimated bottom line, the bigger picture also manifests a “no-win” situation for the government because it will be wasting State resource that should have been available and one that is a factor in its pride of attaining higher degree of energy independence.
Resource ‘curse’
Mr. Alfonso said “with high steam cost, the power plants will never be base load.” The downside of this, he proffered, will be un-optimized use of a country resource, which is the steam.
“Because the power plants will no longer be dispatched as base load, the steamfields will have unutilized steam when the adjusted steam prices exceed market conditions,” he explained further.
Mr. Petilla concurred that he is similarly averse to a situation wherein “the steam will be under-utilized” – which will be some sort of a “curse” because it redounds to squandering a country’s natural resource. Lower steam utilization will also mean reduced revenue share for the State coffers.
“I will not allow that…still, I want the parties to agree. Because if not, upon cancellation of the RE contract of Chevron, the government may opt to give the service contract (for the steam resource development) to other parties,” he stressed.
Beyond that, the government may also need to re-evaluate the returns it has been getting from the operation of the steamfield assets, since NPC and then PSALM consistently funded the development of the facilities under a “reimbursement cost-plus capex arrangement” with PGI (and later on with Chevron Geothermal).
As culled from documents, the total amount shelled out primarily by NPC-PSALM for PGPC’s operation of the steam assets in the last decade hovered at more than $800 million or roughly P35 billion (inclusive of capital expenditures, operating expenses, and service fees).
Notwithstanding the heavy funding funneled by government though, steam supply optimization remained a dilemma for the Tiwi-MakBan assets, hence, the plants’ electricity generation had just been constrained at about 400 megawatts, still a far cry from their installed capacities.
Yet on matters relating to any commercial terms of their agreements with NPC-PSALM or the ongoing negotiations with APRI, PGPC president Antonio F. Yee was tightlipped, invoking that these are “under confidentiality agreements.”
Moving forward, PSALM president Emmanuel R. Ledesma Jr. hinted that PGPC and APRI “will still need to reconcile payment arrangements,” based on the terms of the re-assigned GRSC. That was after plans fall through on the proposed setting up of escrow account which should have handled payment remittances to PGPC, including those on miscellaneous fees.
If there is any silver lining to the on-going GRSC negotiations, it is the fact that relevant parties are still willing to continually talk and the promise that the facilities will still run on a seamless manner.
“We will continue to operate in a manner that puts a premium on the safety, security and well-being of the environment and the communities where we operate and harness in a sustainable and efficient manner our country’s geothermal resources,” Mr. Yee said.
APRI’s Mr. Alfonso, on one hand, sounded off his company’s wish for all parties, including the government, “on reaching an agreement that would optimize the Tiwi-MakBan geothermal facilities as baseload, and at prices that are competitive in the market and with reasonable returns to both operators.” source
Rate hikes are usual, bemoaned refrain among electricity consumers.
Such then holds out a nagging reminder to the parties involved in the negotiations for the steam supply contract of the Tiwi and Makiling-Banahaw facilities that they are not there trying to corner concessions that will just serve their respective interests.
The spotlight must be, and rightly so, on the consumers – and how at the end of the day, the outcome of the talks will bring benefits and transformative impact to the greater Filipino public.
Rate hikes ‘anxiety’
Energy Secretary Carlos Jericho L. Petilla admitted that his main worry is the rate increase that may result from the formula proposed in setting the steam cost for the Tiwi-MakBan plants under the geothermal resource sales contract (GRSC) that is being negotiated.
“I have seen the numbers, and based on the computation, the (prospective rate) increase would be more than P1.00 (per kilowatt hour),” he stressed.
The energy chief was referring to the new pricing scheme for steam to be employed under the GRSC formula. The proposed calculation will factor in 75 percent of higher cost coal index (which was originally the Barlow Jonker Index and was later modified to Australian coal’s Newcastle Index) plus 25 percent of Japan Power Utilities (JPU) reference coal index.
Mr. Petilla noted that simulations were presented by AP Renewables, Inc. (APRI) of the Aboitiz team, raising the same worry of probable rate hikes that will likely turn out unacceptable to consumers.
“Aboitiz is doing a good thing,” he said, referring to the calculations. But he just appealed to parties to be more sober-minded in resolving the thorny concerns in their contract negotiations.
Sources from the National Power Corporation and Power Sector Assets and Liabilities Management Corporation tipped off that the GRSC formula was proposed by Philippine Geothermal, Inc. (PGI), the predecessor company of Philippine Geothermal Production Company, Inc. (PGPC) – when they were still negotiating for the transition agreement (TA), which then serves as a forerunner to the GRSC.
Intentionally or not, what the parties may have negated at that time was the financial impact on electricity ratepayers if the steam cost will rise – given the pass-on nature of costs on fuels used for power generation.
The GRSC essentially forms part of the commercial package reached by the parties then in their compromise settlement for Tiwi-MakBan facilities’ operations.
Apparently due to the complicated legal issues as well as portended cost impacts, the previous energy secretaries were “too careful” then not to just abruptly approve the RE contract application of Chevron Geothermal. Even the company’s application for contract conversion via financial or technical assistance agreement (FTAA) has not been given go-signal.
Unraveling the formula
Mr. Juan Alfonso, APRI senior vice president for corporate services, affirmed the possible upward movement in steam cost, yet he qualified that “if the GRSC pricing formula were implemented as is, the actual cost will be lower than the resulting geothermal steam cost.”
The company’s base calculation, as it also sounded off to the Department of Energy (DOE), sets “geothermal steam cost, under the GRSC at P2.21 to P2.25 per kWh depending on the movement of coal indices, compared to the actual coal cost which may range from P1.80 to P2.00 per kWh depending on the type of baseload coal plant.”
Reckoned from the prevailing steam cost of P1.19 per kWh under the TA, the rate increase is already apparent in the presented simulations.
Mr. Alfonso further explained that “the pricing scheme agreed in 2004 was intended to track the price of coal with provision for revision if geothermal steam cost no longer mirrors the baseload fuel in the system.”
Based on documents submitted to the DOE, it was shown that the formula for the steam price under the GRSC will have a base price of US$0.016 and such shall be multiplied by a factor that will include the BJI and JPU coal indices, or what has been referred to as Base Load Generation Index or BLGI. It was raised to government authorities that such pricing formula “creates an artificial pricing for geothermal” that will be dependent on the factors affecting coal prices.
The APRI group, according to DOE sources, has been forthright in its position that with the propounded formula, the Tiwi-MakBan plants may never be dispatched full-time, but only during peak hours.
And while the company may worry about decimated bottom line, the bigger picture also manifests a “no-win” situation for the government because it will be wasting State resource that should have been available and one that is a factor in its pride of attaining higher degree of energy independence.
Resource ‘curse’
Mr. Alfonso said “with high steam cost, the power plants will never be base load.” The downside of this, he proffered, will be un-optimized use of a country resource, which is the steam.
“Because the power plants will no longer be dispatched as base load, the steamfields will have unutilized steam when the adjusted steam prices exceed market conditions,” he explained further.
Mr. Petilla concurred that he is similarly averse to a situation wherein “the steam will be under-utilized” – which will be some sort of a “curse” because it redounds to squandering a country’s natural resource. Lower steam utilization will also mean reduced revenue share for the State coffers.
“I will not allow that…still, I want the parties to agree. Because if not, upon cancellation of the RE contract of Chevron, the government may opt to give the service contract (for the steam resource development) to other parties,” he stressed.
Beyond that, the government may also need to re-evaluate the returns it has been getting from the operation of the steamfield assets, since NPC and then PSALM consistently funded the development of the facilities under a “reimbursement cost-plus capex arrangement” with PGI (and later on with Chevron Geothermal).
As culled from documents, the total amount shelled out primarily by NPC-PSALM for PGPC’s operation of the steam assets in the last decade hovered at more than $800 million or roughly P35 billion (inclusive of capital expenditures, operating expenses, and service fees).
Notwithstanding the heavy funding funneled by government though, steam supply optimization remained a dilemma for the Tiwi-MakBan assets, hence, the plants’ electricity generation had just been constrained at about 400 megawatts, still a far cry from their installed capacities.
Yet on matters relating to any commercial terms of their agreements with NPC-PSALM or the ongoing negotiations with APRI, PGPC president Antonio F. Yee was tightlipped, invoking that these are “under confidentiality agreements.”
Moving forward, PSALM president Emmanuel R. Ledesma Jr. hinted that PGPC and APRI “will still need to reconcile payment arrangements,” based on the terms of the re-assigned GRSC. That was after plans fall through on the proposed setting up of escrow account which should have handled payment remittances to PGPC, including those on miscellaneous fees.
If there is any silver lining to the on-going GRSC negotiations, it is the fact that relevant parties are still willing to continually talk and the promise that the facilities will still run on a seamless manner.
“We will continue to operate in a manner that puts a premium on the safety, security and well-being of the environment and the communities where we operate and harness in a sustainable and efficient manner our country’s geothermal resources,” Mr. Yee said.
APRI’s Mr. Alfonso, on one hand, sounded off his company’s wish for all parties, including the government, “on reaching an agreement that would optimize the Tiwi-MakBan geothermal facilities as baseload, and at prices that are competitive in the market and with reasonable returns to both operators.” source
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