Comment: Key themes & Aurora’s energy forecasts in the Philippine power markets and grid

By Hugo Batten, Managing Director, APAC; Patrick Tan, Market Lead, Wider Asia; James Ha, Research Lead, APAC; Michael Hackwill, Senior Analyst; & Sinn Yen Heng, Analyst

The Philippines presents a series of opportunities and challenges for clean energy investors and developers. As the third installment in the series from the APAC team, we provide a high-level summary of some of the key trends in the Philippine market, including the following topics:

1) Current state of Philippine power market and major shifts over the last 2–3 years

2) Observations on future trends based on Aurora modelling and scenarios

3) Major challenges for the Philippines through the energy transition

Firstly, we would like to thank the almost 50 clients who have contributed general thoughts, insights, and specific feedback on individual input assumptions for our Philippine modelling over the last 6–9 months. Our modelling approach and inputs have been immeasurably improved thanks to our clients’ generosity.

There is also a reading list at the end for readers who are looking for additional information about the Philippine power market and grid.

1) Current state of Philippine power market and major shifts over the last 2–3 years

The Philippine grid is made up of 3 regions: Luzon (approximately 20–21 GW), Visayas (approximately 4–5 GW), and Mindanao (approximately 4–5 GW). As such, there is approximately 30 GW of nameplate capacity across the Philippines, either in operation or very soon to be delivered. Coal is approximately 12 GW of this with gas at 3 GW. The rest of the capacity is made up of a mix of solar, peaking assets, hydro, geothermal, and batteries.

The Philippines has a dynamic wholesale market (the Wholesale Electricity Spot Market [WESM]) but has also seen a number of major policy shifts over the last 5 years, most of which have been centered on decarbonization of the power system—some examples include:

Introduction and identification of Competitive Renewable Energy Zones (CREZ)
Incorporation of Mindanao grid into WESM’s central scheduling
Relaxation of local ownership rules
Introduction of Green Energy Auction Program (GEAP) auctions to accelerate renewable build-out
Introduction of Renewable Portfolio Standard for retailers
Announced targets from the Department of Energy (DoE) of 35% renewables in power generation mix by 2030 and 50% by 2040
Creation of new reserve (ancillary) markets—regulation and contingency
Introduction of a coal moratorium beyond the current pipeline of new coal projects and refurbishments

Aside from policy, there are a set of other factors that are driving changes in the Philippines’ generation mix.

For example, the National Grid Corporation of the Philippines (NGCP) does have a detailed set of transmission augmentations proposed, but, even between the 2022 National Transmission Development Plan and the draft 2023 version, there have been a material set of delays to those expansions and augmentations. Our grid forecasts indicate that without those augmentations, new renewable supply will be constrained.

As another example, the domestic Malampaya gas fields are forecast to decline through the mid-2020s (although new exploratory drilling is occurring), so the Philippines will be increasingly dependent on imported LNG, resulting in the building of seven LNG import terminals accordingly. The Philippines electricity market is forecast then to be more tightly coupled with Asian LNG markets over the medium to long-term.

As a final example, we forecast aggressive demand growth for the Philippine electricity market. Per capita energy consumption is very low, even by ASEAN standards; coupled with economic growth, as well as electrification of transport, we forecast approximately 5% per annum (pa) demand growth over a 20 year period. We would note this is more conservative than DoE forecasts at approximately 6–7% pa in their Clean Energy scenario.

2) Observations on future trends based on Aurora modelling and scenarios

The above results are from our Philippine Central Scenario—we do run a range of other scenarios and sensitivities as part of our Philippine Power & Renewables Market Forecast, but we will largely focus on our Central Scenario though draw insights from other scenarios where there is something of interest to call out. Our Central Scenario takes existing policy configurations and combines these with our Central Scenario on demand, commodity prices, technology costs, etc. It does not include a carbon price or carbon constraint.

Under the Philippine Central scenario, we forecast rapid growth of renewables, as well as low carbon sources of firming, in the Philippines.

Clearly, there is enormous growth potential—we estimate approximately 120 GW of new build capacity between 2024 and 2050. Broadly, we see the evolution of the Philippine power market capacity mix is as three-part story:

A) Baseload technologies: coal plants exit towards the end of their technical lives. The challenge is likely to be that we forecast significant inframarginal rents for the last 5–10 GW of coal with rising demand & higher gas prices. In the absence of a carbon price or other coal closure mechanisms, precise exit timings may be hard to forecast. We forecast some new-build gas to replace exiting coal capacity (at least in our Central Scenario which does not have a binding carbon constraint).

B) Renewables: there is material growth in renewables, and they are forecast to make up approximately 65–70% of generation by 2050. The major constraint on growth over the forecast horizon is network hosting capacity and, over the longer term, price cannibalisation. We see solar take off first; then onshore wind; and then finally offshore wind. Offshore is assumed to require subsidy support for the first 4–6 GW of capacity

C) Flexible assets: We see a significant requirement in fast-ramping assets like battery and gas or diesel peaking plants to help manage the intermittency of renewables and ensure security of supply. We are particularly bullish on battery investment cases given healthy historical and forecast intra-day spreads and high early prices in reserve markets

We also sees a requirement for almost 40 GW of additional dispatchable capacity over the forecast horizon. Peak dispatchable capacity is forecast to grow in step with peak demand due to both relatively low negative correlation of renewables in the Philippines and generally low renewable output in periods of peak demand (i.e., the rainy season).

The below exhibit also highlights the rising impact of seasonal differences with more weather-dependent renewables on the Philippine system. It maps out the differences in generation between a high renewables output week in 2050 in Luzon in the cool dry season and a low renewables output week in the rainy season. The differences in wind output are particularly pronounced, as is the role of batteries and gas in maintaining security of supply and providing fast ramping generation as solar output declines in the afternoon/evening.

In terms of implications for WESM prices, under our Central Scenario, we generally see price outcomes across regions at between ₱5,000–7,000/MWh ($90–125/MWh) over the medium to long term.

In our Low Scenario (lower commodity prices, demand, and CAPEX), we forecast prices at between ₱4,000–5,000/MWh, and in our High Scenario (the inverse of the Low scenario), we forecast prices at between ₱8,000–9,000/MWh.

These long-term averages are forecast to be accompanied by increased intra-day and inter-seasonal price volatility. For example, the below exhibit highlights the emergence and growth of a long-term solar duck-curve, particularly in the cool dry season when solar output is higher and demand is relatively lower.

In our Central Scenario, emissions also trend down to 2060, both in absolute levels and in terms of intensity. Absolute emissions only start to decline when the current coal pipeline is built out and the coal moratorium sees no additional coal built, with the subsequent exit of older assets over time.

3) Major challenges for the Philippines through the energy transition

It is worth noting that to meet the projection outlined in our Central Scenario (never mind scenarios with more aggressive demand forecasts—e.g., DoE Clean Energy scenario), the build rate for both renewables and dispatchable capacity would have to accelerate materially. Historical build rates of renewables over the last 10 years have been anywhere between 300–700MW pa. That would need to increase to 2.7 GW pa between 2024–2040 to meet our Central Scenario, and
4.3 GW pa to meet DoE’s Clean Energy scenario.

Having spoken to over 50 clients (across government departments, regulators, developers, utilities, infrastructure funds, and local project finance banks) about these forecasts, a few consistent themes emerged as to what would be the major challenges to delivery. Most of these are consistent between markets as they go through the energy transition, but some are particularly acute in the Philippines.

a) Challenges in grid expansion

i) As outlined above, the Philippines has mapped out a detailed plan to develop and augment additional transmission infrastructure—the draft National Transmission Development Plan for 2023. It is worth noting that a material number of projects have been delayed between the 2022 and draft 2023, some by up to seven years.

ii) If the National Transmission Development Plan was delivered in full, our initial grid modelling estimates indicate that up to 90 GW of renewables could be accommodated in Competitive Renewable Energy Zones (CREZ) and offshore wind zones.

iii) Having said that, if there are further delays or a material portion of these transmission projects are not delivered, new build renewables will be limited or assets that do build will face increased grid related curtailment.

iv) Assets are getting around this to some degree at the moment by building dedicated networks into the existing transmission backbone, but this is unlikely to be a sustainable solution.

b) Supply chains

i) Feedback from developers, in particular, has been that renewable and battery CAPEX in the Philippines (before factoring in grid connection costs) is approximately 20–30% higher than in Australia or Europe, as example comparators. If the Philippines is to fully deliver on the growth outlined, improvements to and streamlining of green energy supply chains will be required.

c) Finding the right local partners to navigate policy/regulatory and grid complexity

i) A small number of international developers have made long-term commitments to the Philippines and have deep expertise in Philippine regulations and grid and deep networks at key governmental organisations. Having said that, most international players who are looking to enter (as local ownership laws have been eased) are looking to partner with Philippine utilities and developers to leverage their expertise and networks. Navigating the development cycle in the Philippines without that knowledge and those networks can be challenging.

ii) The DoE has even set itself as a ‘match-maker’ between international and local organisations to try to facilitate some of these relationships, although feedback has been mixed on the effectiveness of that process to date.

d) Policy settings & consistency

i) As with any market, the Philippine government and regulators need to ensure that there are sufficient incentives to ensure both adequate reliability and decarbonisation. The GEAP auctions, for example, have provided significant out-of-wholesale market signals to investors, but there is concern that those that have won contracts may not be able to deliver in full and that the auctions need to be run regularly and consistently to fully deliver required capacity. For example, there are relatively few international project finance banks active in Philippine renewables as they struggle to compete in PH pesos. Consequently, big developers have to develop a whole new set of PF relationships if they want debt financing.

ii) Renewable and firming auctions are also only one part of a broader set of policy shifts that are likely to occur—e.g., transmission authorisation and funding; implementation of curtailment rules; new grid services (e.g. inertia); etc.

Hopefully, this has been a helpful, if very brief, overview of the Philippine power market and grid. Please do reach out to the authors if you would like to discuss any of the topics covered here—particularly renewable, battery, pumped hydro, and gas investment cases.

Reading list: