First Gen Integrated Report 2019

Value Creation

Risks and Opportunities

First Gen identifies and assesses the potential risks and feasible opportunities that underpin value creation. Based on these assessments, the Company designs and executes action plans aimed at addressing these risks and opportunities, and further optimizing business operations.

In reviewing and classifying the risks affecting the Company, First Gen goes through a regular comprehensive risk management process covering all operating plants, projects, and support units. Risks classified as top risks are regularly reported to senior management and the Board Risk Oversight Committee (BROC). For the Group, the Top Risks are:

EXTERNAL ENVIRONMENT RISKS

▷ Depletion of Indigenous Resources

  • Operations are highly dependent on the consistent availability of the plants’ required fuels, particularly natural gas.

MITIGATING MEASURES

▷ Gas Plants

  • In anticipation of the expiry of the Service Contract of the Malampaya Gas Field in the next 5 years, the Company remains on-track with its proposed LNG project, having completed the pre-development work to make the site construction-ready.
  • The plants (except for San Gabriel) are dual-fired, which means that they can operate using liquid fuel in the absence of natural gas.
▷ Geothermal Plants
  • Maximize modern technology to optimize steam extraction from the wells.
  • Undertake continuous drilling and non-drilling workovers to ensure steam supply.

▷ Regulatory Risks

  • The regulatory landscape, including that of power and energy, remains challenging as various regulatory issuances and amendments have either been delayed or are constantly changing.

▷ Continually engage various regulators and local government officials who are involved in the power and energy sector.

▷ Participate in TWG with various regulations in development.

▷ Closely coordinate with regulatory groups and institutions in order to aid the progress of key issues.

 

▷ Climate Change and Natural Catastrophes (NatCat)

  • Climate change has been observed to lead to climate variability and extreme weather, and consequently, higher probability of natural disasters.

▷ To reduce vulnerability to climate change and its effect on water supply, the Company is developing a pump storage hydro project that will support its existing hydropower plants.

▷ Conduct various natural calamity studies (e.g., typhoon, earthquake, flood, tsunami, etc.).

▷ Continuously modify the plants’ design and implement various weather-proofing initiatives to safeguard against effects of NatCat incidents.

▷ Obtain/maintain natural catastrophe insurance cover (to the extent necessary and possible) for the various sites.

▷ Intense Competition & Increased Market Votality

  • Competitors continue to expand capacity
    and vie for the same contracts.

▷ Institute systematic and targeted customer
acquisition while improving customer stickiness
through data-driven analytics for existing customers.

▷ Improve plant flexibility to cater to different types of
contracts or energy demands.

BUSINESS ACTIVITIES / OPERATIONS RISKS

▷ Plant & Equipment Reliability

  • Many of the plants are over 20 years old and may need more frequent maintenance and rehabilitation

MITIGATING MEASURES

▷ Operations & Maintenance systems and processes abide by world-class standards in operational management.

▷ As the plants age, the Company proactively implements a more stringent preventive maintenance program to ensure that the plants meet or exceed international performance standards.

▷ Strengthen the program to monitor rating and reliability of aging equipment.

▷ Obtain/maintain insurance cover for business interruption, machine breakdown, etc.

▷ Financial Risks

  • The Company has relied on debt-financing, particularly for large projects.

▷ Continued and timely paydown of debt through the Company’s deleveraging program.

▷ FX Risk

  •  Majority of operations is naturally hedged; active management of the Finance & Treasury Group through close monitoring and engaging in hedging transactions.

▷ Interest Rate Risk

  • Good mix of fixed and floating rate loans; close monitoring of interest rate movements and regularly engaging Senior Management on funding plans.

▷ Liquidity Risk

  • Prepayment of loans as possible; refinancing bulky maturities to smoothen the repayment profile

▷ Cybersecurity Risk

  • There is increasing dependence on information systems, plant modernization and construction of new plants with increasing dependence on automation and internet-linked machinery and equipment.

▷ Conducted IT and OT Vulnerability Assessment Studies and implementation of recommended mitigation plans.

▷ Development of related frameworks and policies for cascading to the whole organization.

Opportunities for First Gen

There are situations in the Philippines’ energy industry that First Gen can address with its clean and renewable energy portfolio. The following were identified as the top opportunities First Gen prioritized in developing its strategy:

OPPORTUNITIES

The limited supply of indigenous natural gas in the Philippines is compromising the energy security of the country. The Malampaya gas field’s depleting supply is becoming more evident in its increasing unreliability. In 2019, it was strained to its capacity and, at times, unable to fulfill the requirement of operating natural gas plants.

ACTION PLANS

First Gen, through its subsidiary FGEN LNG, is developing the FGEN Batangas LNG Terminal Project which could bring LNG to the Philippines as early as the 3rd quarter of 2022.

The Company is proposing to construct an Interim Offshore LNG Terminal that involves the modification of its existing liquid fuel jetty and the development of an adjunct onshore gas receiving facility. This interim terminal will allow First Gen to bring in a FSRU on an interim basis to serve the existing and future requirements of gas-fired power plants. This also serves as the initial phase of the project.

The project will ensure that existing gas-fired power plants will continue producing power after the expiration of the Malampaya service contract in 2024. The project will also enable First Gen to take advantage of lower LNG prices due to an oversupplied market in the 2020s by importing LNG to produce cost-competitive baseload and/or mid-merit power.

In March 2020, the Company filed its application for a PCERM with the DOE. Once the PCERM is granted, the Company will be able to commence the construction of the project. The target commissioning date for the interim terminal is in the 3rd quarter of 2022.

Increase in energy demand in the medium to long term

The on-going development of the approximately 1,200-MW Santa Maria CCGT Power Plant Project is expected to provide more flexible and efficient capacity, suited to the needs of a grid that is expected to increasingly rely on intermittent renewable energy sources.

First Gen’s subsidiary, EDC, is working on the addition of binary plants, which will enable EDC’s existing geothermal facilities to maximize the geothermal steam it is harnessing. Binary plants may add up to 45 MW of capacity to the existing facilities and leverages on existing power facilities so it is easier and faster to develop. EDC is currently securing the necessary permits and are completing its technical requirements.

OPPORTUNITIES

The need to provide stability to the grid as variable renewable energy projects increase in numbers

ACTION PLANS

First Gen, through its subsidiary FG Hydro, has launched the development of Project Aya, a 100-MW Pumped-Storage Project. The project is envisioned to be the pioneering variable-speed pump-storage facility that can provide power during peak periods and Ancillary Services to the grid for security and stability. It is currently in the development stage.

For more information on Project Aya, please refer to our discussion of the hydro platforms performance on page 46 of this report.

The need to store excess power generated by variable
renewable energy projects for later use

Another component of Project Aya is the utilization of the
Aya Lake as power storage which has an expected storage capacity equivalent to 8 hours – a capacity unmatched by traditional battery systems.

The implementation of the Clean Development Mechanism, where emission reduction projects in developing countries earn saleable certified emission reduction credits (CER) or carbon credits

First Gen has registered all its qualified projects under the Clean Development Mechanism – Energy-Related Projects. This includes the 20MW Nasulo Geothermal Project, the Pantabangan Hydroelectric Power Plant Refurbishment and Plant Upgrade Project, the 300MW Puyo Hydropower Project, the Bac-Man 3 Geothermal Power Project, the Burgos Wind Projects, and the 50MW Mindanao Geothermal Power Plant 3.

OPPORTUNITIES

The implementation of the Renewable Energy Law of 2008 (RE Law) that aims to accelerate the exploration, development, and increased utilization of RE sources to effectively prevent or reduce harmful emissions

ACTION PLANS

There are several incentives under the RE Law including the Renewable Portfolio Standards (RPS), the Green Energy Option Program (GEOP), and the Feed-in-Tariff (FiT) Scheme. First Gen is qualified to avail these incentives.

The RPS require DUs, RESs, and generation companies for Directly Connected Customers to achieve a minimum annual incremental RE Percentage equal to 1 percent of Net Electricity Sales from the previous year. This is in view of the long-term objective to achieve at least 35 percent Renewable Energy share in the energy mix by 2030. First Gen currently has over 300 MW of capacity eligible for RPS that will generate equivalent Renewable Energy Certificates (RECs). Half of this capacity is under the FiT scheme while the other half can be contracted with mandated RPS participants.

The GEOP is a mechanism established by the DOE to provide end-users the option to choose RE resources as their source of energy. The end-users with an average peak demand of 100 kW and above may directly enter a GEOP supply contract with RE facilities for their energy requirements. This will be distributed through their respective DUs, or with any eligible RE supplier, on a voluntary basis. Currently, all of First Gen’s RE facilities are eligible to participate under the GEOP and can cater to customers with the demand level of 100 kW and above and customers requiring 100 percent RE supply.

The FiT Scheme is a renewable energy policy mechanism that allows electricity generated from emerging RE technologies to be included in the supply of power at a guaranteed fixed rate per kWh, applicable for a period of 20 years. This policy mechanism aims to accelerate the development of emerging RE resources such as wind, solar, ocean, run-of-river hydropower, and biomass energy resources in order to lessen the country’s dependence on imported fossil fuels. EDC’s Burgos Wind and Solar Plants enjoy the rates under the FiT scheme. First Gen is also looking to take advantage of the possible DOE extension of FiT for hydro technologies with its several hydro projects in the pipeline.

Inadequate access to electricity

First Gen supports the Sikat Solar Challenge Foundation (Sikat), a non-profit organization whose mission is to uplift the lives of Filipinos living in rural communities that do not have access to electricity. The Company works with various organizations and helps them deliver innovative and sustainable renewable energy systems. Sikat recently supported a local NGO install a solar- powered community health clinic in the foothills of Mindoro.

GRI 102-15, 201-2, EU10