Report of the President and COO

RBT2017

Richard B. Tantoco
EDC President and COO

Our strength in EDC has always been in making the right choices, starting with that of providing 100 percent clean and renewable energy.

 

Dear Stakeholders,

 

We chose a provocative cover and theme because we believe that we need to communicate and lead to make people think and act in this time of crisis that faces us Filipinos and the rest of humanity. That our world is warming, particularly at an unprecedented rate, is already borne out by data and scientific discourse. Compared to the 1880s, the world is now 1.1 °C warmer. However, this number can be misleading because it is a global average, and averages tend to lull us and give us a false sense that since it is just 1.1 degrees, we do not need to act.

 

The Arctic (Norway, Svalbard, Russia’s Kara Sea, and Northern Canada) was a full 14 °C warmer than normal last fall, attributed to a phenomenon called the “Arctic Amplification” where Arctic conditions become much less Arctic, much more quickly. In March 2017, there were 23,000 square miles less ice than normal compared to 2015, which was already a low base number versus historical trends. There is nothing “average” about extreme temperatures in the Arctic.

 

Speaking of extremes, the Philippines ranks 5th in the list of most at-risk nations to the ravages of climate change, having been visited by 283 typhoons between 1996 and 2015 based on the latest report by Germanwatch. Eight of our most damaging, deadliest typhoons have happened in the last decade. We have no time to waste, to turn a blind eye in the hope that others will do their part without having to show the way. We can no longer greenwash and trumpet Corporate Social Responsibility (CSR) projects while at the same time making fundamentally wrong choices that will have the most severe impact on those with the least resources and resiliency.

 

Our strength in EDC has always been in making the right choices, starting with that of providing 100 percent clean and renewable energy (RE). What sustains us is knowing that we are doing what is right in our industry, for our country, and for future generations. In so doing, it is imperative that we maintain a balance between our environmental stewardship and our responsibility to all our stakeholders.

Our business sits at the intersection of doing what is right, pursuing what is needed, and going where the world is headed. Globally, there is an ongoing shift toward cleaner, renewable sources of energy. According to the report made by the United Nations Environment Programme (UNEP) in collaboration with Bloomberg New Energy Finance (BNEF), global investment in RE capacity reached US$286 billion in 2015. This was more than double the estimated US$130 billion allocated to new coal and gas generation. For the first time, the majority of investments, excluding large hydro, went to renewables. Also for the first time, developing countries led the way with RE investments increasing by 19 percent to a total of US$156 billion. China is particularly keen on RE, boosting its investment by 17 percent to US$102.9 billion as they cut coal production and ramped-down numerous coal plants to below 50 percent capacity due to environmental and health reasons.

 

Higher net income, lower OPEX

In 2016, we posted consolidated revenues of PHP34.24 billion, which is 0.4 percent or PHP0.12 billion lower compared to PHP34.36 billion in 2015. While sales volume increased to 8,531.5 gigawatt hours (GWh) with higher generation of 90.4 GWh, these gains were offset by lower average spot electricity prices of PHP2.78 per kilowatt-hour (kWh) in 2016, compared to PHP3.37/kWh in 2015. The fact that the Wholesale Electricity Spot Market (WESM) was at a five-year low meant we took a hit on the ncontracted capacity of our BacMan and Nasulo power plants, approximately 61 percent of the plants’ net saleable capacity as of December 2016.

 

It is for this reason that going forward, we will contract more aggressively. BacMan is now 85 percent contracted. Nasulo is currently at 57 percent contracted and will be fully contracted by end-2017.

 

Despite the flat revenues, EDC posted a 4 percent gain on recurring net income attributable to equity holders amounting to PHP9.2 billion, an increase of PHP0.4 billion from last year’s PHP8.8 billion. This year’s performance was better than 2015 primarily because of the PHP1.7 billion reduction in operating expenses (OPEX). This was mainly driven by lower steamfield maintenance activities and lower insurance costs given the steep reduction in insurance claims as well as the completion of the major typhoon-proofing works across our assets in BacMan and Leyte.

 

Reliable and efficient assets

We have been investing in our assets to boost reliability and efficiency.

 

Addressing the natural challenges of the reservoirs is a continuing endeavor and in 2016, we were able to improve the steam generation from our Unified Leyte field through measures that include applying and utilizing some technologies outside the geothermal industry.

In 2015, we completed the rehabilitation works on our 130 megawatt (MW) BacMan power plants, increasing capacity in the process by 10 MW and net capacity factor from 62 percent to 88 percent. Three Leyte power plants were next in line: the 232.5 MW Malitbog Power Plant, which had its control systems replaced in 2016, thereby eliminating obsolescence risk; the 112.5 MW Tongonan Power Plant, which began upgrades in major equipment in 2016 will be completely upgraded in 2017; and the 125 MW Upper Mahiao Power Plant with ongoing upgrades of turbine rotors. With these programs, we expect higher levels of generation in the years to come.

 

Low maintenance, high volume

OPEX decreased in all sites, except in Burgos Wind and FG Hydro, where operating and maintenance (O&M) costs increased due to higher levels of generation. In Burgos Wind, OPEX increased by 17 percent or PHP0.2 billion, because sales volume increased by 27 percent. In FG Hydro, OPEX was higher by 1 percent or PHP0.01 billion, and sales volume by 18 percent.

 

The sales volume of the 6.82 MW Burgos Solar Projects I & II nearly doubled on their first full year of operations, improving on their combined revenue contribution to PHP0.09 billion from PHP0.05 billion in 2015.

 

Our Mt. Apo Geothermal Business Unit (MAGBU) also saw a modest increase of 6 percent in revenues, mainly due to increased generation. At year-end, MAGBU’s sales volume of 827 GWh was its highest in five years.

 

Despite the significant excess supply in the 291 MW peak demand of Negros grid due to the presence of 391 MW of solar and the corresponding low WESM prices, Negros Island Geothermal Business Unit (NIGBU) posted its highest revenue at PHP8.2 billion due to increase in contracted volume versus 2015.

 

Growth

Over the past two years, with the prices of coal, the main baseload competitor of geothermal, plummeting from US$94/MT to as low as US$44/MT (Kalimantan Coal), it has been challenging to grow reenfield geothermal assets. There has been a shift in the pricing of coal, driven by changes in Natural Gas supply dynamics and economics. Natural gas from shale gas reserves in the United States can be produced at breakeven price of around US$29 to US$39 per barrel. In effect, shale gas has created a viable substitute to oil, and has set a competitive price cap for both oil and coal. These market dynamics, in combination with rapidly reducing solar panel prices, are providing downward pressure on power prices.

 

For this reason, geothermal has to change its economics fundamentally in order to compete in this new market. Geothermal in the Philippines has only grown during two energy crises — the OPEC embargo of 1973 and the massive power outages of the early 1990s. Going forward though, geothermal needs to be able to develop absent crisis conditions and this will only happen if drilling costs drop, success rates of drilling improve, costs of new plants decrease and operating expenses go down. We have fields that can be developed both in BacMan and Mt. Apo and these require lower cost structures in order to compete. We have made some modest gains in reducing OPEX and improving our drilling success rates, but much more needs to be done. It is against these imperatives that we will put all our efforts going forward.

 

We have also grown our solar business in a rational manner. In areas where we see a good fit between what we bring to the table and our customers’ needs, we have decided to proceed with project development. We had a good debut in the solar rooftop industry with the signing of a 1 MW Power Purchase Agreement (PPA) with Gaisano Capital for their La Paz Mall in Iloilo, so far the largest PPA for a solar rooftop in the country. Completed in December 2016, it is expected to offset 770 tons of CO2 annually, while providing up to 50 percent of the mall’s daytime load. As of this writing, an additional seven solar rooftop plants are being built on malls. 

 

Not too long ago, we had one technology, one product and one customer. Today, we have made investments in 4 technologies: geothermal, which continues to be our core strength, hydro, wind and solar.

 

We now have a total of 57 customers, something we expect to increase with time, particularly when retail competition and open access finally take off. We’ve also been working with First Gen Energy Solutions to sell RE to enlightened corporations , members of the Global Organization such as the RE 100, as well as some local companies that have decided to be powered by clean energy.

 

What is possible becomes doable

Over time and with further advancements in technology driving down costs, we see the share of renewable energy increasing. The International Energy Agency (IEA) reports that global energyrelated CO2 emissions were flat at just over 32.1 billion tonnes for a third straight year in 2016 — even though the global economy grew by 3.1 percent. IEA credits this to the entry of renewables. What’s important to note is that growth in the economy is possible without an increase in emissions. And if we deliberately make the right choices and increase the share of RE generation, then it’s logical that the global economy can grow while reducing its emissions.

 

We at the Lopez Group, and especially at EDC, have resisted the modern gold rush towards coal as we look towards securing a sustainable future. For us, the acceptable energy choice is one that does not harm our environment and our people. We do not believe in making the wrong energy choices, then attempting to offset these with CSR and tree planting.

 

Every single ton of carbon we dump into the atmosphere will affect us all, and especially the most vulnerable and least resilient, those who do not have the resources to build back after a storm. Carbon emissions are threatening our world, but together we can tap our Earth’s clean energy.

 

We thank you, our shareholders, as you continue to put your trust and confidence in us. Together, we can move forward and craft a bigger, better and brighter future for us all.