Solar Development in the Philippines 22 nd September. The Lantau Group

Transcription

1 Solar Development in the Philippines 22 nd September

2 Who we are Electricity and Gas Experts Competition, Markets, Regulation, Policy Decisions Support Analysis Disputes Market Analysis Asset Valuation Strategy and Advanced Analytics Offerings: Strategic, commercial, and regulatory support Ability to connect the dots between fuel markets and power The TLG team has experience throughout the Asia Pacific region Office/Presence Senior Advisors Analysis-based recommendations Highly relevant international experience Accessible experts focussed on the region Deeply experienced economic consulting firm to the energy sector based in Asia 1

3 Key assumptions underpinning our analysis The analysis was done in early 216. We explore the potential for solar within the Luzon, Visayas, and Mindanao regions We consider both utility-scale solar, and rooftop solar, using PSPA s current cost of capital for new build. We have also assumed a 1% uplift in costs for Visayas and Mindanao We also expect solar to continue to attract favourable local tax regimes The analysis used unconstrained solar costs, which do not take account of shortages of land, grid connection costs, or the additional costs of ancillary services needed for stability. This was to be part of the next phase of our work. 2

4 Current fuel price projections For our current outlook we have used: Current Brent oil forward prices, to which gas and LNG prices are indexed and correlated The latest World Bank coal price forecasts 1 Current outlook for fuel prices USD 6 LNG (USD / mmbtu) - RHS Coal (USD / mt) USD Oil (USD / bbl)

5 The demand outlook in the Philippines is supported by relatively robust economic fundamentals with the potential for growth to accelerate Our assessment of macroeconomic growth and sectoral trends, alongside DOE projections, paints a relatively strong picture for demand growth Electricity consumption annual growth ( ) Vietnam China Indonesia Malaysia Myanmar Korea, Rep. Thailand Philippines Singapore Hong Kong Australia New Zealand Japan (5) Percent Total consumption per capita vs. GDP per capita ( ) kwh consumption per capita 2,5 Philippines Indonesia Thailand Vietnam 2, Malaysia 1,5 1, GDP per capita (25 PPP US$) Power demand in the Philippines remains relatively low compared to neighbouring nations, yet with potential for demand growth to accelerate given the lower energy intensity per $ of GDP 4

6 Our independent analysis is underpinned by sophisticated modelling of the Philippine market, through which we are able to explore different scenarios QUAFU is an integrated generation dispatch modelling tool that incorporates state-of-the-art optimisation theory grounded in proven techniques 5

7 Agenda Introduction to Scope of work Key assumptions Fuel prices and demand outlook Analytical approach Current projections Luzon Visayas Mindanao The impact of decreasing capital costs Fuel price scenarios and sensitivity analysis Re-profiling solar new build and fuel cost savings Impact on solar when assuming 3 percent gas generation Summary and questions 6

8 Capacity additions (MW) With capital costs for solar remaining at today s levels the new build outlook for Luzon is dominated by coal and solar In Luzon, an excess of committed generation coming online between (largely coal and gas) suppresses WESM prices through to around 222 We hit a turning point in 223 following the expiry of ToP gas contracts from Malampaya, which sees existing CCGT plant price off more expensive gas ( LNG) and operate more in a mid-merit / peaking role. The resultant increase in prices then begins to incentivise new build, in particular for coal and solar 1,75 4, PHP / MWh 1,5 1,25 1, 75 Projected average price 3,5 3, 2,5 2, 1,5 Committed Biofuel Committed Coal Committed Natural Gas Committed Solar Generic Coal 5 1, Generic Natural Gas 25 5 Generic Solar Time-weighted Projected average Priceprice (Luzon) 7 Expiry of Malampaya gas ToP contracts: thereafter gas generation drops from 2 TWh to around 11 TWh per year

9 Capacity additions (MW) However the fundamental outlook in Visayas is markedly different In Visayas, the amount of new solar capacity that could enter the market economically is naturally much lower, with around 4 MW projected between The longer-term outlook for new build (across all fuels) is suppressed by strong capacity margins of between.9 GW and 1.5 GW above peak demand through to , PHP / MWh Committed coal and solar coming online equates to 8% of Visayas peak demand in Projected average price 2,5 2, Committed Coal Committed Natural Gas ,5 1, 5 Committed Solar Generic Coal Generic Natural Gas Generic Solar Time-weighted Projected average Priceprice (Visayas) 8

10 Capacity additions (MW) With a similar picture in Mindanao Similar to Visayas, prices in Mindanao are not supportive of any new build in the short to medium-term 1,1 1, 9 8 Committed coal coming online equates to 8% of Mindanao s peak demand in , 1, 9, 8, PHP / MWh Committed Coal 7 7, Committed Hydro 6 6, Generic Coal 5 4 Projected average price 5, 4, Generic Oil Generic Solar 3 2 3, 2, Time-weighted Projected average Priceprice (Mindanao) 1 1, 9

11 Regional differences in the attractiveness of solar can be explained by the contrasting outlooks in supply-demand balances 1% Regional peak margins as a percentage of peak demand (using installed capacity) 9% 8% Mindanao 7% 6% 5% 4% Visayas Luzon Our analysis shows that as average peak margins fall towards ~ 35%, prices begin to recover and incentive new capacity to be installed 3% 2% 1% In Luzon this occurs much sooner, but much later in Visayas and Mindanao % Luzon Visayas Mindanao

12 as well as regional differences in the shape of the demand profile and the degree of alignment with the solar generation profile In Luzon, peak demand occurs during the middle of the day and is well-aligned to the expected profile of solar generation, allowing it to generate during the typically most profitable hours However in Visayas, a higher relative proportion of residential demand means that peak demand occurs later during evening hours, with solar capacity unable to capture higher prices during the evening peak % of monthly total 16 Hourly solar generation profile and alignment with Luzon demand 8.5 % of monthly total 16 Hourly solar generation profile and alignment with Visayan demand GW 7. 1 GW Hour of day Hour of day 11 Solar output % (avg. May 215) Luzon demand (avg. May 215) Solar output % (avg. May 215) Visayas demand (avg. May 215) Source: PEMC; TLG database and analysis

13 Agenda Introduction to Scope of work Key assumptions Fuel prices and demand outlook Analytical approach Current projections Luzon Visayas Mindanao The impact of decreasing capital costs Fuel price scenarios and sensitivity analysis Re-profiling solar new build and fuel cost savings Impact on solar when assuming 3 percent gas generation Summary and questions 12

14 In reality the cost of new solar is highly likely to continue to fall Solar costs have been on a clear downward trajectory for the last 8 1 years, and are expected to continue to fall, albeit at a more gradual rate We have prudently assumed costs fall by 1.5% pa. until 225, and.75% pa. thereafter Solar costs fall 1.5% pa. until By current costs (PSPA) US $2,29 / kw (rooftop) US $1,4 / KW (utility-scale) 23 projected costs US $1,925 / kw (rooftop) US $1,177 / KW (utility-scale)

15 In turn attracting significant amounts of new build solar, albeit largely in Luzon A gradual decline in the cost of utility-scale solar (to $1,177 per kw by 23) attracts an additional 7.4 GW solar build in Luzon 25 Difference in solar build between fixed and decreasing cost of capital 2 15 Capacity (MW) Luzon Visayas Mindanao

16 Regional cost variations for solar are a limiting factor If the 1% uplift we have assumed for solar costs in Visayas and Mindanao can be surmounted, then there is some further potential for capacity additions 3 Difference in solar build with no regional cost uplift in Visayas and Mindanao 25 2 Capacity (MW) Visayas Mindanao 15

17 Understanding the sensitivity of solar build to future fuel price dynamics is key We modelled a set of fuel price scenarios based around different oil price projections to Fuel price scenarios used in this analysis High Fuel 3 based on a rise in oil prices to $1 High Fuel 2 based on a rise in oil prices to $85 Brent crude (US / bbl) High Fuel 1 based on a rise in oil prices to $7 Current Outlook based on current and implied price forecasts Flat-Lining based on current prices remaining static 2 1 Low Fuel based on a fall in oil prices to $2 by The prices above are nominal and adjusted to real terms in our modelling

18 In Luzon, utility-scale solar is well placed to capitalise on increasing fuel prices, whilst also showing a high level of resilience to falling oil prices 16, 14, 12, 1, Cumulative capacity 8, build (MW) 6, 4, 2, When oil prices fall below $28 we start to see a pronounced decrease in solar, as it becomes displaced by new CCGT gas plant and an increase in generation at existing gas plant Cumulative solar build in Luzon (from 216) In the most bullish scenario, solar displaces around 16 TWh of gas generation between , rising to 4 TWh between GW capacity Current outlook High Fuel 3 High Fuel 2 High Fuel 1 Current Outlook Flat-Lining Low Fuel

19 Rising fuel prices significantly benefit solar build, which sees a significant increase in generation almost entirely at the expense of existing gas-fired plant Again, the expiry of ToP contracts from Malampaya marks a clear turning point, and thereafter gas plant shifts further up the merit order curve 1 Change in generation mix (TWh) in Luzon between Current Outlook and High Fuel 3 scenario TWh generation Natural Gas Coal Solar

20 In Visayas, a bearish supply-demand outlook persists with only small increases 6 Cumulative solar build in Visayas (from 216) MW 4 Cumulative MW High Fuel 3 High Fuel 2 High Fuel 1 Current Outlook Flat-Lining Low Fuel 19

21 Whilst in Mindanao, solar is sensitive to rising fuel prices over the longer term From 224 rising fuel prices begin to support the economic build of solar, displacing what would otherwise be new oil-fired plant additions 2, Cumulative solar build in Mindanao (from 216) 1,8 1,6 1,4 Cumulative MW 1,2 1, GW High Fuel 3 High Fuel 2 High Fuel 1 Current Outlook Flat-Lining Low Fuel

22 USD/GJ, 214 real terms A recovery in the energy complex over the medium-term would provide a unique window for Philippine industry to capitalise on the present situation History has shown oil prices tend to follow strong cyclical patterns, and we appear to have seen a recent bottoming-out of oil prices In each of our scenarios where we forecast a rise in oil prices, the new build of solar becomes increasingly attractive as thermal generation spreads are squeezed and new build is deterred Oil price When comparing the current outlook for fuel prices with the most bullish scenario, we see an additional 5.8 GW of new solar across Luzon, Visayas and Mindanao by 23 (assuming decreasing solar costs) Note: Crude price Saudi Arabian Light, 1979-present Brent Source: TLG analysis 21

23 USD/GJ, 214 real term Whilst staying ahead of the investment cycle of conventional generation is critical When oil prices are juxtaposed with fuel spreads, clear windows exist for conventional new build projects to be developed and come online Thus it is vital for solar new build to get ahead of the next window, displacing the next wave of conventional new build that would ultimately subdue future power prices Oil price Coal price Will gas or solar win the coming round? 2 Coal window Gas window Coal window Gas window? Note: Crude price Saudi Arabian Light, 1979-present Brent; Coal price Newcastle Source: World Bank; TLG analysis 22

24 There may be opportunities to accelerate the addition of capacity, thereby allowing the industry to scale and avoid future supply bottlenecks In practice it may be unrealistic or impractical for industry to install the significant amounts of new solar capacity within such a narrow timeframe Smoothing of solar capacity additions in Luzon, assuming a High Fuel 3 scenario and decreasing solar costs) 2,5 2,25 2, new build capped at 2 GW, with excess built early Projected average price 5, 4,5 4, PHP / MWh Generic Coal 1,75 3,5 Committed Natural Gas 1,5 MW 1,25 3, 2,5 Committed Biofuel Committed Coal Generic Solar 1, 2, Committed Solar Load-weighted Price (Luzon) 75 1,5 Price (without early build) 5 1,

25 USD $m (214 real terms) Additionally, accelerating the new build of solar achieves wider benefits by reducing fuel costs and ultimately the burden on consumers When taking into account the amount of conventional, fossil fuel generation that is displaced by bringing forward solar new build, fuel cost savings amount to around 5% 6, Projected fuel costs 5, 4, Projected fuel cost savings 3, 2, 1, 'High Fuel 3' scenario 'High Fuel 3' scenario with early build of solar in Luzon

26 A government target for 3 percent gas in the generation mix, if it were implemented, has the potential to derail future solar capacity additions Both additional gas capacity, and an increase in existing gas generation, are necessary for gas to achieve 3% of the generation mix This erodes solar new build that would otherwise be required to meet future growth in peak demand Capacity additions across the Philippines when assuming 3% gas in the generation mix (assuming current outlook for fuels) 2,5 4, PHP / MWh 2,25 2, 1,75 Projected average price 3,5 3, Committed Biofuel Committed Hydro 1,5 2,5 Committed Coal MW 1,25 1, The need for any new coal plant additions prior to 23 is also removed 2, 1,5 Committed Natural Gas Committed Solar Generic Coal , Generic Natural Gas Generic Oil 25 5 Generic Solar Time-weighted Projected average Price price (Luzon) (Luzon) 25

27 A government target for 3 percent gas in the generation mix, if it were implemented, has the potential to derail future solar capacity additions 11, Cumulative new build of solar across the Philippines when comparing 3% gas in the generation mix with our current outlook 1, 9, 8, Cumulative MW 7, 6, 5, GW 4, 3, 2, 1, Total solar build (No Min Gas) Total solar build (3% Min Gas Share)

28 Thank You. We look forward to continue playing a key role in the development of solar generation in the Philippines Tower 1, Metroplaza 223 Hing Fong Road Kwai Fong, Hong Kong Tel: