First Gen Integrated Report 2019

Value Creation

Our Market Environment

The climate crisis has driven companies to effect drastic and systemic change. For energy companies, there is greater pressure to decarbonize energy sources. However, this has yet to impact coal plant operations and development in the country, as well as the energy consumption behavior of local consumers.

The Urgency of Climate Crisis

Climate change continues to worsen year on year. The Paris Agreement, fully enacted in 2016, aligned nations to maintain the global temperature rise well below 2 degrees Celsius over pre-industrial levels, or ideally, at 1.5 degrees Celsius. In December 2019, COP25 discussed the widening gap between the goal set by the Paris Agreement and the progress of nations. Aggressive measures to reducing carbon footprint need to be taken. With the energy industry being one of the biggest sources of greenhouse gas (GHG) emissions, there is increasing public pressure on energy companies to be part of the solution.

Without mitigation, the energy sector is projected to have a 64 percent share in the total GHG emissions of the Philippines by 2050.

The Transition to Renewable Energy

With environmental activists like Greta Thunberg sparking discussions around the world to forego fossil fuel use, consumers are now demanding the development of more renewable energy (RE) sources. The share of renewables in the global power mix is projected to rise to over 40 percent by 2040 (World Energy Outlook 2018). This is driven by the rapid technological advancements that make RE more affordable and government policies that support the development of RE sources.

The situation is quite opposite in the Philippines. Based on 2018 data, coal still makes up more than 50 percent of the energy mix and new coal plants are still being built. If these coal projects continue to push through, the Philippines will be farther from achieving the global targets.

Despite this situation, policies are in place, and there are several companies seeking to develop RE sources in the country. The government, through the National Renewable Energy Program (NREP), initially set the target of tripling the 5,438 MW renewable energy capacity to roughly 15,000 MW. In 2019, they announced that the program’s targets are under review. However, they have subsequently disclosed that there is a target increase of renewable capacity to 20,000 MW from 2019 to 2040. Implementation plans are to be determined.

Despite the impending increase in coal production, the National Renewable Energy Board (NREB) remains hopeful for the growth of RE sources in the Philippines. The NREB expects to expedite the development of the country’s RE sources once the Renewable Portfolio Standards (RPS) are fully implemented. If this continues, Bloomberg New Energy Finance (BNEF) projects that the Philippines power mix would be composed of 57 percent RE by 2050.

Continuous Technological Advancements

To decarbonize the country’s energy production, there is a need to invest in the advancement of clean and RE sources. Technological advancements continue to drive down the costs of wind and solar, increasing the viability of these RE sources. Innovations have presented new ways of consuming power, as well. For example, battery developments alone have enabled the increased use of e-vehicles, while the installation of microgrids can provide an additional 2.7 million Filipinos with consistent and reliable power.

On the other hand, natural gas plants have also become more efficient and flexible, making it the best complement to RE as the world undergoes the low carbon transition. The first step to wean off from coal dependency is to invest in liquefied natural gas (LNG). LNG, due to its liquid form, can easily be stored and transported without the use of pipelines. In addition, the industry has recently developed a variety of new LNG projects, technologies, and business models, all of which contribute to a more competitive and flexible market.

Enabling LNG in the Philippines will grant the country access to the expanding global gas market, particularly the development of new gas fields such as shale gas. Shale formations are fine-grained sedimentary rocks that can be rich sources of petroleum and natural gas, derived through hydraulic fracturing. Shale has drastically increased the availability of natural gas in the market, leading to a more robust and abundant gas supply.

Increasing Philippine Energy Demand

As the Philippine economy grows, its energy demand is expected to grow exponentially with it. The DOE projects the Philippine demand to increase by 82.6 percent in 10 years.

This forecast, however, has yet to take into consideration the potential effects of the novel coronavirus (Covid-19) outbreak, which originated from China in December 2019 and became a global pandemic in March 2020. As of publication date, disruptions in the global supply chain were already being felt, even as markets adjusted to oil price cuts and the likelihood of a slowdown in production. Localized lockdowns in several countries, including the Philippines, had also constricted movements, with a subsequent toll on energy, particularly in the transport sector. There is still uncertainty as to the full impact of the situation. Forecasts on energy demand and supply, including for renewables and natural gas, will need to be adjusted accordingly.

Emergence of New Market Segments

The implementation of the retail competition and open access (RCOA) in December 2012 started to change the entire energy landscape of the Philippines. It has opened power generators to a wide and diversified market. At present, those consuming over 750kW per month are now allowed to directly contract their power supply from their chosen generator. However, in 2017, the Supreme Court issued a temporary restraining order (TRO) for RCOA that has stalled the implementation of its latter phases. The Energy Regulatory Commission is currently studying how to move forward with the policy in light of the TRO.

Government regulations and policies continue to have a significant influence on the energy industry as it continues its transition toward increased retail access and decarbonization. The Energy Reform Agenda supports the development of RE sources to attain energy self-sufficiency, energy security, and environmental sustainability. On April 2019, the Congress signed into law the Republic Act No. 11285 or the Energy Efficiency and Conservation Act which aims to regulate the use of energy-efficient technologies in buildings. DOE’s Renewable Energy Management Bureau continuously explores issuances that can reignite the development of the RE sector.