Philippines - Commercial potential for power production from agricultural residues

:9w -:0ESMAP Energy Sector Management Assistance Programme bec. 129? Philippines Commercial Potential for Power Production from Agricultural Residues Report No. 157193 Results of a Joint Study by ESMAP and the Philippines Department of Energy  JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) was launched in 1983 to complement the Energy Assessment Programme, established three years earlier. ESMAP's original purpose was to implement key recommendations of the Energy Assessment reports and ensure that proposed investments in the energy sector represented the most efficient use of scarce domestic and external resources. In 1990, an international Commission addressed ESMAP's role for the 1990s and, noting the vital role of adequate and affordable energy in economic growth, concluded that the Programme should intensify its efforts to assist developing countries to manage their energy sectors more effectively. The Commission also recommended that ESMAP concentrate on making long-term efforts in a smaller number of countries. The Commission's report was endorsed at ESMAP's November 1990 Annual Meeting and prompted an extensive reorganization and reorientation of the Programme. Today, ESMAP is conducting Energy Assessments, performing preinvestment and prefeasibility work, and providing institutional and policy advice in selected developing countries. Through these efforts, ESMAP aims to assist govermnents, donors, and potential investors in identifying, funding, and implementing economically and environmentally sound energy strategies. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of the UNDP and World Bank, the governments and institutions providing financial support, and representatives of the recipients of ESMAP's assistance. The ESMAP CG is chaired by the World Bank's Vice President, Finance and Private Sector Development, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Programme's strategic agenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energy planners and economists from the Industry and Energy Department of the World Bank. The Director of this Department is also the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nations agencies, the European Community, Organization of American States (OAS), Latin American Energy Organization (OLADE), and countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States. FURTHER INFORMATION For further information or copies of completed ESMAP reports, contact: ESMAP c/o Industry and Energy Department The World Bank 1818 H Street N.W. Washington, D.C. 20433 U.S.A.  Philippines: Commercial Potential for Power Production from Agricultural Residues Results of a Joint Study by ESMAP and the Philippines Department of Energy December 1993  Abbreviations and Acronyms ANECs Affiliated Nonconventional Energy Centers BED Bureau of Energy Development BEU Bureau of Utilization 1301 Board of Investments CARP Comprehensive Agrarian Reform Program CNED Center for Nonconventional Energy Development DOE Departnent of Energy DOST Departnent of Science and Technology DSM Demand side management ECC Energy Coordinating Council EDB Energy Development Board ERDC Energy Research and Development Center ESMAP Energy Sector Management Programme GEF Global Environment Facility GOP Government of the Philippines MOE Ministry of Energy NASUTRA National Sugar Trading Corporation NCRD Nonconventional Resources Division NEA National Electrification Administration NCED Nonconventional Energy Division NEDP Nonconventional Energy Development Program NFA National Food Authority NPC National Power Corporation OEA Office of Energy Affairs P Philippine Peso PCA Philippine Coconut Authority PCIERD Philippine Council for Industry and Energy Research and Development PNOC Philipine National Oil Company REC Rural Electric Cooperative SRA Sugar Regulatory Administration UNDP United Nations Development Program  Currency Equivalents The Philippine currency is the peso (P). The exchange race used in this report is US$1 .00 = P 25.00 Weights and Measures bbl - barrel bcf - billion cubic feet bcm - billion cubic meters bfoe - barrels of fuel oil equivalent ha - hectare GWh - gigawatt-hour (I million kilowatt-hours) kcal - kilocalorie (3.97 British thermal units) kg - kilogram (2.2 pounds) km - kilometer (0.62 miles) kW - kilowatt kWh - kilowatt-hour mcf - million cubic feet mloe - million litres of oil equivalent immb - million barrels mmbfoe - million barrels of fuel oil equivalent r - metric ton ty - metric tons per year MW - megawatt tcd - tons of cane per day tcpy - tons of cane per year toe - tons of oil equivalent Converlon Facton I million tons of oil equivalent is = 1.5 million tons of coal = 3 million tons of lignite = 1.l Ibcm of natural gas = 39.2bcf of natural gas = 12.WOOGWh of electricity  TABLE OF CONTENTS Page FOREWORD ........................... EXECUTIVE SUMMARY .......................i L.BACKGROUND......................... I Introduction ..1........................ Energy Sector Overview ....................... Current Power Situation.......................2 The Case For Biomass Cogeneration.................. 3 Objectives and Methodology of the Study ................. s IL. THlE SUGAR SECTOR.......................6 Sector Profile......................... 8 Mill Operation......................... 8 Cane Residue Availability ..1...................i Sector Segmentation .11..................... Investment Scenarios .......................12 Results of the Economic and Financial Analysis...............13 Implementation Issues.......................15 M. THE RICE SECTOR.......................17 Sector Profile..........................17 Biomiass Residue Availability.....................18 Potential Availability of Rice Hulls .................19 Present Uses of Rice Hulls....................20 Sector Segmnentation .......................20 Investment Scenarios .......................20 Results of the Economic and Financial Analysis ...............23 Other Inplementation Constraints ...................23 IV. THE COCONUT SECTOR.....................25 Sector Profile..........................25 Area Planted and Production ...................28 Coconut Processing and Consumption.................28 Biomass Residue Availability.....................29 Present Uses as Fuel......................30 Non-Fuel Uses........................30 Sector Segmentation .......................31 Coconut Oil Mills.......................31 Coconut Desiccators......................31 Coconut Production Sites ....................32 Investment Scenarios .......................33 Results of the Analysis.......................34 Implernentation Issues.......................35  V. CONCLUSIONS AND RECOMMENDATIONS .......................... 36 General Conclusions.36 Sector Conclusions ............................................. 37 Recommendations.39 ANNEXES A. The Nonconventional Energy Development Program: An Evaluation ............... 41 B. Training on Economic Appraisal of Nonconventional Energy Projects ............... 48 C. Guidelines for Technology Selection ................................... 52 D. Data Tables ................................................... 56 E. Selected Spreadsheets ............................................. 71  FOREWORD This report is one of the outputs of a technical assistance project to the Philippines Office of Energy Affairs (OEA), now the Department of Energy (DOE), executed by the joint World Bank/UNDP Energy Sector Management Programme (ESMAP) and financed by the Netherlands Government. The activity entitled "Nonconventitnnal Energy Planning Technical Assistance" had three components: (a) an evaluation of OEA's nonconventional energy development program, (b) a training course on project economic appraisal and (c) a study of the potential for power production using biomass residues. The study effectively commenced in November 1991. The first component, a brief evaluation of program achievements, constraints and directions, was conducted by Dan Fallen-Bailey, Gregorio Kilayko and Nonnan Brown (consultants). The output of this component was written by Ernesto Terrado and is presented as Annex A. The results of the second cnmponent, a training program for staff of the Nonconventional Resources Division of OEA and of the Affiliated Nonconventional Energy Centers of various provinces, are described in Annex B. The main resource person for this task was Donald Hertzmark (consultant). The main body of this report comprises the bulk of the work done overall. Its purpose was twofold. First, it aimed to determine the realistic potential for energy utilization of key agricultural wastes in the country, namely residues of the sugar, rice and coconut processing industries, given the prolonged power crisis. Second, and more importantly, it aimed to use the process of investigation as a hands-on training tool for OEA staff who previously have never carried out a study of similar complexity. Thus a local team consisting of OEA staff and local consultants was forned in 1992 and interacted closely with the ESMAP team during the course of the work. The local team, led by Conrado Heruela, Marites Cabrera and Eloida Balaniiento, conducted all field surveys, analyzed the data and performed most of the economic and financial calculations. The local consultants were Fernando Corpuz (sugar sector), Levy Trinidad (coconut sector), Mauricio Valdez (rice sector) and Alberto Dalusong (power sector). Technical supervision was provided by Richard Stevenson, a Manila-based consultant. Overall task managernent and technical backstopping were provided by Emesto Terrado and Robert Chronowski (consultant). The final report, based on a draft prepared by the Philippines based team, was written by Ernesto Terrado, Robert Chronowski and Gabriela Martin (consultant).  i EXECUTIVE SUMMARY Overview Other than in the sugar industry, biomass has not received adequate attention as a potential energy resource by either the Government of the Philippines (GOP) or by major lenders mainly because of the relatively small energy production potential at any given project site. While this is a legitimate issue froni the stand-point of regular project lending criteria, the aggregate potential for economic energy production from this indigenous and renewable resource is clearly large enough to warrant more serious consideration. The Philippines has an abundant supply of biomass resources in the form of agricultural crop residues, forest residues, animal wastes, agro-industrial wastes, and aquatic biomass. Some of therse resources are already being exploited. In 1992, biomass, principally bagasse burned in the sugar industry and coconut huskishell used by other industries, contributed about 11 percent of the total national energy supply mix, makling it the country's largest indigenous energy source. However, considerable biomass energy resources remain untapped and are treated as wastes. While the theoretical potential has always been recognized as considerable, the economic potential for energy production was, at the inception of the study, an unknown quantity. The Department of Energy requested assistance to determine the realistic potential for power production from process residues in three major agro-industrial sectors: sugar, rice and coconut. One reason for the interest is the the country's power sector situation, characterized by poor reliability, insufficient capacity to meet demand, rising electricity prices, and heavy reliance on imported fuels. Despite the already massive efforts to address the crisis by a variety of conventional power projects, it was thought important to also explore additional possibilities in less conventional energy production. The sugar, rice and coconut sectors examined in this report all have agricultural waste byproducts that in most cases have minimal or even negative cost (factories sometimes pay for waste disposal). Agro-industrial facilities in the country are generally aged and require replacement of equipment. There is tremendous renewed interest worldwide in cogeneration projects that provide additional revenues to key industries. At an estimated power purchase floor price of P1.80 per kWh, or an avoided electricity cost from P2.00 (purchased electricity cost) to P2.50 per kWh (small diesel based captive electricity production with a commercial, heavily taxed diesel oil price) and possibly higher, there are sufficient revenues or savings potential to seriously consider investments in biomass-derived power generation in all three biomass residue sectors in the country. Also, along with the intent and provisions of recent private power legislation, there appears to be a real opportunity now for biomass power project development that has not been possible in the past. As finally determined by the study. however, the total potential for power production from biomass residues in the three agro-industrial sectors is nowhere near the level required to fully address the current power crisis in the country. Furthermore, because of the relatively large number of individual plants involved, only a small fraction of the potential can be developed in the short-term to help alleviate the power shortage. Nevertheless, many of the biomass projects that were examined are cost-effective and present attractive investment opportunities. They must be viewed as energy efficiency investments that are in themselves worth doing because they are economically viable and environmentally beneficial.  ii Objectives and Methodology of the Study The principal objective of the study is to develop realistic estimates of lhe commercial potential for power generation in thie Philippines from major bionlass residue in the sugar. rice and coconut processing/production industries. Based on techniical and statistical profiles prepared for each sector by a Department of Energy (DOE) team, the industries were segmented into "clusters" or groupings by common characteristics such as size. and several sites were selected from each cluster for the field surveys. The selections represent the ranges of sizes. types of mills and sites in a particular cluster. The study teams from DOE surveyed the selected sites in field visits. Data sets of operational parameters were developed for a prototype mill or site that would most closely represent the particular cluster and enable a broader application of the results of the analyses. Economic and financial analyses were then conducted on each prototype mill to screen the most promising cases. The Sugar Sector The processing se_tor of the sugar industry is composed of 39 mills (exclusive of 2 inoperational mills) spread over 16 provinces. The bulk of the mills is concentrated in Negros, the "Sugar Bowl of the Philippines", which provides about 56 percent of the country's annual sugar production. The mills process from 500 tcd (tonnes of cane per day) to 10,800 tcd, for an average of 4,600 tcd. Bagasse, a by-product of sugarcane processing, is used as the principal fuel for steam production in the sugar mills. Steam is utilized for power production and sugar processing. Investments to improve the efficiency of mill operations can result in excess bagasse that can be utilized to generate electricity for export to the grid. Three investment scenarios were considered for each representative prototype mill. The first scenario eliminates the current boiler makt-up steam and injection water input to the sugar processing steam header, and passes an equivalent amount of steam through a new or existing steam turbine. The second scenario involves the replacement of old plant equipment with new, higher pressure and temperature boilers, and the corresponding topping cycle turbo generator sets. The third scenario would add a new higher pressure boiler with a condensing-extraction steam turbine-generator, allowing year round operation with the use of cane trash as a supplementary fuel. This scenario, for all intents and purposes, means putting up a stand-alone power plant beside the sugar mill. The first two scenarios were limited in the analysis to generation of surplus electricity only during the milling season. It is important to point out that the milling season does coincide with the dry season, such that surplus power is available when the hydro potential is at its lowest. Some of the major conclusions drawn from the analysis are as follows: a) The cases in the first or "bypass steam" scenario obtained the best rates of return, with financial IRRs ranging from 22 to 65 percent. The economics in actual cases may even be better, as the analysis uniformly assumed the purchase of additional turbo-generator capacity and associated equipment to utilize the excess bagasse. b) The "topping cycle" approach of the second scenario, which involves high investments, does not appear to be viable for all mill sizes with electricity production during the processing season only.  iii c) T'he stand-alone condenising cycle plant of the third scenario shows good potential for mills of at least 700,000 tcpy capacity, with financial IRRs betweeni 26 and 31 percent. One reason is the capability to operate year-round using a supplemential fuel such as cane trash or coal in lhe olT-season. The resuli of the analysis Illust be viewed as merely indicative. Only a plant-specific study can confirmii the feasibility of the complex assignment of benefits and inputs between the stand-alone power plant and the sugar mill. 'he feasibility evaluation would consider the bagasse and water as inputs from the mill, with electricity and steam as returns to the mill. The benefiLs arising from use of thesc inputs and returns, the accounting of changes in personnel assignments, and possibly land lease clharges can be accounted for in multiple ways, depending on specific ownership/partnership arrangements. d) Based on the results of this study, the sugar sector can be very conservatively described as having the potential to contribute from 60-90 MW to grid supply from several individual projects in the immediate term. The largest 15 sugar mills (each processing over 500,000 tons of cane annually) would be the most likely contributors to this capacity goal. The total investment requirement for financially viable projects would be at least US$ 112 million. e) The above astimate of MW potential is very likely on the low side as the analysis assumed full investment costs in each case. In reality, many mills will already have the surplus turbine-generator capacity required for Scenario l. and the investment will be significantly below the assumed unit cost of capacity installed. Also, in a situation where a new bagasse boiler needs to be purchased anyway for sugar processing purposes when a mill modernizes, only the incremental cost for achieving the topping cycle pressure rating (and not the total boiler cost) should be charged to electricity production. In that case, the topping cycle will likely become a viable investment scenario because the boiler comprises the major cost element in the total price for the topping cycle equipment. For example, if about half of the mills that were screened out by the financial analysis in Scenario II are assumed to require only half of the regular capital costs for the reasons cited, the total power potential could increase by an additional 25 MW. f) There are few technical risks associated with the use of bagasse for surplus power production. However, the need to employ higher steam pressures and temperatures does add some O&M considerations not normally experienced by the sugar sector in the Philippines. This suggests that some type of improved skills will be required of the steam plant operators employed for these projects. g) The major barrier to cogeneration projects in Philippine sugar mills at this time, besides the presently poor financial condition of many mill companies, would appear to be the cane sharing issue between the farmers and the mill owners. In general, the present system does not provide an incentive for the mills to invest in mill modernization projects, including bagasse cogeneration projects for power export. Rice Sector In 1991, 3.42 million hectares of agricultural land were planted with rice, producing 9.67 million tons, at an average yield of 2.82 tons per hectare. Rice husk or hull constitutes about 20 percent of paddy. About 14,000 rice mills nationwide, most of them small, produce about 1.9 million tons of rice husks annually. The Cono and Rubber Roll types of rice mills that were  iv selected for the analysis constitute about 95 percent of total milling capacity. The cases selected for analysis involve the installation of a rice-hull fired power plant in a mill, ranging from a 75 kW system for the smallest grouping (less than 11.000 tons paddy milled annually) to an 800 kW system for the largest mills (over 41,000 tois). In addition, it was determined from the survey results that it may be possible also to group rice mills under two types 01' schemes, such that the mills in a cluster would contribute rice hulls to a common power plant. The schemes would produce I and 3 MW, respectively. Only the systems above 500 kW are assumed lo generate enough surplus electricity for grid export. The rest would use the clectricity produced internally, displacing diesel-generated electricity. Specific conclusions concerning the rice sector analysis are: a) Most of the potential projects with capacity of 350 kW and above (especially the high- tech option) have economic internal rates of return exceeding the discount rate of 15 percent. even with no revenues from ashl sales. These results indicate rice sector projects involving at least 350 kW would warrant further investigation. Ash sales significantly improve the economics of all cases, raising the financial IRRs by 11-24 percent. This suggests the need to examine more closely the possibilities for marketing rice hull ash in the domestic and export markets. b) For simplicity in the analysis, the cogeneration option was not considered for the rice sector in this study, but the economics would be further improved if steam could be used for rice drying. c) The economics of the investments depend strongly on the utilization of the electricity produced. The locations of many of the rice mills are normally in areas with low power demand where the assumed 85 percent load factor will be difficult to attain. d) Compared to bagasse, there is more technical risk with the use of rice hulls as boiler fuel because of the erosive nature of the rice hulls caused by their high silica content. Unless the equipment is properly specified and carefully operated and maintained, technical difficulties could lead to project failures. There would clearly be a need for more skilled manpower in the rice mills to operate and mnaintain the power plant equipment. e) Based on the results of the present study, the realistic potential aggregate contribution of rice hull-fired capacity is not likely to exceed 40 MW. Because of the large number of instaliations needed to achieve this amount, a progrum in the inmmediate term should target no more than 10 MW total. Unless a significant rice hull ash market can be developed, it is not likely that off-shore entrepreneurs would participate in ventures to exploit this sector's biomass residue resource for energy production. Coconut Sector The coconut sector was the most difficult to deal with in the study because of the uncertainties regarding the structure of the Philippine coconut growing and processing industry and its markets. Although the original intent was to incorporate a cogenerating plant within an individual coconut oil mill or a coconut desiccating plant, this was found to be not feasible for various technical reasons. It was decided instead to investigate two investnent scenarios: (a) installation of a power generating facility within a 7,500 ha. coconut plantation area, and (b)  v installation of a power generating facility integrated with a 7,500 metric tons per year (tfyr) coconut oil mill. Based on biomass-fired power plant designs currently available in the market. two sizes, 500 kW and 1000 kWY, were examined for each of the two scenarios. Specific conclusions drawn from the analysis are: a) The financial IRRs for the four cases range from 10 to 45 percent. which indicates potential for proceeding to site specific analysis. The power plant integrated with an oil mill has a better return than the stand alone case because of a probable higher load factor, and the higher value of the avoided purchase of eectr-city by the oil mill for self use. All of the cases assumed the implementation of the Philippine Coconut Authority (PCA) "nucleus estate" concept. However, any organizational or business arrangement giving the mill access to 7500 ha of coconut production will yield the same result. b) The analysis suggests that the power plants will have to be heavily base loaded to achieve sufficient IRRs. This appears unlikely in most rural areas. Integration of the power plant with a coconut oil mill will only partially solve the load problem. c) On the positive side, the remoteness of the potential power plant sites does suggest that it may be possible on a site specific basis to negotiate a higher power sales rate than the P 1.80 assumed for the analysis. Also, there are very few technical risks with implementing coconut husk fired power projects, even in remote areas. d) The concept of coconut husk-fired power stations is valid, but more analysis is needed to accurately define the potential of this sector. Unless the appropriate resources/load match can be made for the 500 kW and 1,000 kW cases, the aggregate power contribution from this sector will be minm=al. No doubt some viable sites can be identified, but it is likely that the aggregate potential contribution from this sector will be only about 20 MW. Recommendations The biomass power investments discussed in this report are expected to be undertaken mainly by the private sector, once confirmed to be viable in specific situations. However, the Government has an important role to play in promoting the concept and facilitating the identification and implementation of actual projects. Through its line agencies the DOE has been implementing a program for developing onconventional energy resources (see evaluation in Armex A). Given the urgency of the power crisis, it is recommended that grid-connected power generation opportunities using agricultural wastes be given priority attention in that program. A variety of fiscal and other incentives for renewable energy projects already exist. The application of these incentives to the type of biornass projects discussed in this report should be clearly defined and widely publicized. Information dissemination efforts are crucial in order to develop awareness of investment opportunities in the three sectors. It is recommended that the sugar industry, with its relatively better defined potential for development of surplus electricity generation capacity, should be targeted as the top sector for immediate attention. The DOE, along with the Sugar Regulatory Administration (SRA), should help define the type of actions required to resolve the mill/farmer cane sharing issue in an equitable manner that provides the mill owners and their potential off-shore partners with sufficient incentive to make the substantial investments needed to develop the surplus power  vi capacity. An arrangement is needed with all cane suppliers that will allow the millers to invest in a surplus power project with some acceptable minimum revenue sharing liability. The market leaders in the sugar industry are already involved in trying to define viable surplus power projects, and these activities should be fully supported as precedent setting projects. One useful area of assistance would be in the pre-qualification of potential off-shore joint venture partners to avoid wasting time and efforts of the mill owners. For the rice sector, the market leaders should be identified and educational and awareness building activities should be directed toward them. This effort should be coordinated with the National Food Authority (NFA) and its allied industry associations. As an immediate action, it is recommended that suitable demonstration projects involving selected mill sizes and types be identified. Despite the failure of an earlier pilot project on rice-husk fired power production by the NFA, technology advances and operational experience acquired in recent years, combined with a more favorable local climate for private power generation, warrant a re-investigation of this option. To the extent possible, DOE, through its line agencies should serve as a broker between the market leaders with viable sites, the qualified equipment vendors, and the appropriate financing organizations to accelerate implementation of these pilot projects. For the coconut sector, the potential for project investments is closely linked to the implementation of the proposed sector decentralization program. The remoteness of the areas where the coconut husk resource is normally located implies low load factors and suggests that the most promising projects will be those integrated with an oil mill. Identification of precedent- setting projects in this sector must involve close cooperation between the DOE and the Philippine Coconut Authority (PCA). It is recommended that one or two demonstration projects in carefully selected sites be designed and assisted with financing arrangements, perhaps from bilateral donors. It is recommnended that the legal and contractual framework needed to facilitate implementation of relatively small agricultural residue-fired power projects be clearly defined by DOE, starting with the adoption and publication of an appropriate standard power purchase agreement for these types of projects. This should also include a clear delineation of responsibilities between the mills and the utility for interconnection and fault protection requirements. In summary, given that the current national power supply deficit is in the order of 1,000 MW, the total power potential of about 150 MW from agricultural biomass estimated by this study is clearly not going to be a major solution to the energy problems of the Philippines, in either the short or long term. It should be correctly viewed as a small but strategic part of the solution, having good potential for economically and environmentally beneficial capacity contributions. The present study has identified the specific mill situations and investment configurations that will likely result in cost effective projects. Even in situations where incremental power production from biomass projects are just sufficient for internal mill use, they contribute to easing the power crisis by reducing total demand for grid supply. In addition, the projects have the potential to contribute to the economic upliftment of the agro industries by providing an additional revenue-generating activity and new opportunities for rural employment.  -1- I. BACKGROUND Introduction 1.1 The Philippines has an abundant supply of biomass resources in the form of agricultural crop residues, forest residues, animal wastes, agro-industrial wastes, and aquatic biomass. Some of these resources are already being exploited. In 1992, biomass, principally bagasse burned in the sugar industry, contributed about 11 percent to the total national energy supply mix, making it the country's largest indigenous energy source. The bagasse, however, is not fully utilized, nor is its efficiency of use at an optimum level. Considerable biomass energy resources remain untapped and are treated as wastes. The purpose of the present study is to examine the potential for new investment opportunities in the utilization of biomass residues for energy in the Philippines. This study focusses on power generation potential from process residues in three major agro-industrial sectors: sugar, rice and coconut. From the perspective of industry, plant investments in power production from waste biomass would appear to be economically attractive, particularly when they coincide with a modernization program to replace aging equipment and improve overall production efficiency. 1.2 Investigation of the energy potential of biomass resources is important given the current power situation in the country. The Philippines is in the midst of a worsening power crisis that has affected local industries, the commercial sector and residential areas nationwide. The government is accelerating energy projects in a massive effort to solve the power crisis. Although some have predicted that this effort, ironically, may result in surplus capacity in 3-5 years, the government wishes to identify all possible options for power generation, including the use of nonconventional sources of energy. The Department of Energy (DOE) has an ongoing program for nonconventional energy development and, under that program, a priority is determining whether the economic potential of power production from biomass resources is significant. Enerev Sector Overview 1.3 The Philippines remains highly dependent on foreign oil for its energy needs. In 1973, all oil was imported and accounted for 92 percent of the country's energy mix. At that time, national energy consumption was about 70 million barrels of fuel oil equivalent (MMBFOE). By 1991, energy imports (oil and coal) had been reduced substantially but still accounted for 67 percent of the total energy supply. Indigenous conventional energy accounted for about 21 percent of the energy mix, while approximately 13 percent came from nonconventional energy sources. 1.4 In 1991, 37 percent of total energy consumption was used for power generation. Oil-based generation provided 50 percent of total power produced in 1991. With respect to final end-uses. the industrial and transport sectors accounted for the bulk of energy consumption, with shares of 37 percent and 47 percent, respectively, in 1991. 1.5 The Philippine energy outlook will be largely influenced by current energy patterns and the course of future economic expansion. While the growth target for the gross domestic product was scaled down in 1991, there is optimism that the economic recovery efforts will gain strength in succeeding years. By the year 2000, national energy demand is projected to reach 226.73 MMBFOE. almost double the 1991 volume. As noted in Figure 1. 1, oil will remain the leading energy source for the country, although its share is expected to decline.  -2- Figure 1.1 Philippine Energy Mix 0. 7- 09 19.2 0 011 & G EC.I m Hto a G.thkwr.l1 Nflonr.ntIon I Source: Office of Encrgy Affairs (1993) 1.6 The government has embarked on an energy program calling for "sustained efforts in the development of indigenous energy sources and the reduction of oil import dependence." The key institutions involved in the formulation and implementation of the energy program originally consisted of the Energy Coordinating Council (ECC) and its member agencies, namely: the Office of Energy Affairs (OEA), the Philippine National Oil Company (PNOC), the National Power Corporation (NPC), and the National Electrification Administration (NEA). Recently, OEA's core gave rise to the Department of Energy (DOE) and the ECC was abolished. DOE's mandate includes formulation of the nation's energy policy and coordination of all energy programs. Promoting the use of biomass and other nonconventional energy sources also falls under the responsibilities of the DOE, with programs in this area managed by the DOE's Non-Conventional Energy Division. Current Power Situation 1.7 Power demand in the Philippines has grown sharply since 1987 (see Annex D, Figure 1) after the economy emerged from the recession of 1984-1985. Power demand continued to increase until 1989 when the power infrastructure could no longer keep pace with economic growth. There has been no new baseload capacity commissioned since 1985.  -3- 1.8 Consequently, grid power supply has largely stagnated during the last four years. The private sector has resorted to self generation using diesel- and bunker-fired diesel generator sets. Various estimates place this private capacity between 1,500 and 2,500 MW, much of it brought on-line under the tax- and duty-free importation incentive granted by the Board of Investments (BOI). In addition to industrial and commercial self-generation, there has been a significant rise in household generation as seen in the brisk sales of small gasoline and diesel generator sets. 1.9 The power situation in the Philippines worsened further in 1992. Both the number and length of power intermptions increased, particularly in the Luzon grid which represents about two-thirds of total power consumption in the country. The MERALCO franchise area, which accounts for about half the total electricity sales in the country, faced brownouts in 1992 nearly ten times the 1991 level. Unserved energy due to brownouts was approximately 5 percent in 1992. 1.10 In Mindanao, the power situation is even more severe. Heavy dependence on hydro resources and prolonged droughts have led to grid-wide load curtailmnents of 20 to more than 30 percent. Only the Visayan sub-grids (i.e. Leyte-Samar and Negros-Panay) with access to geothemal energy have been spared these levels of brownouts. Cebu, which relies on coal and diesel power plants, suffers fewer power interruptions than Manila. 1.11 To address the energy crisis, the Govermnent's power development program calls for regular baseload capacity projects and several "fast track" projects (essentially oil-based plants) designed to meet shortfalls in the immediate term. The total additional capacity from the fast tract projects alone is about 800 MW, with a target commissioning date of summer 1993. The power outlook in the near future varies from grid to grid but overall - due to various technical, financial, institutional and political factors - there is a general lack of optimism that the official targets will be met. It is also widely recognized that the enormity of the power problem can only be addressed with private sector involvement. The Case For Biomass Cogeneration 1.12 Cogeneration projects are an additional way to allow mobilization of private sector resources to assist the government's power development program. Biomass cogeneration, involving residues generated from the processing of agricultural crops, seems particularly promising with significant potential for excess power sales to the grid. The sugar industry, for example, has been cogenerating since its earliest days, but mainly to meet in-plant power needs. Much of the sugarcane waste that remains after the milling season and is disposed through incineration could be used to generate additional power. 1.13 There are several key factors that make cogeneration investments, using biomass or conventional fuels, attractive to the private sector in the Philippines. 0 Unreiable Power Supply. The discussion in the previous section on the current difficulties of supplying power and the major fossil fuel response provide a strong argument for private companies to venture into cogeneration. Meeting the large unserved demand and reversing the debilitating effects of the shortage on both residential and productive sectors with imported fuel electricity generation, imply a high economic value for supply of additional power generated from an indigenous renewable energy resource.  -4- o High Electriciy Costs. NAPOCOR is scheduled to install over eight hundred megawatts of oil-fired gas turbines and diesel engines in 1993 to augment power capacities in Luzon and Mindanao. These pealing units will in practice be operated as baseload power plants. Power tariff increases to recover the very high running costs of these systems have already been implemented. Furthermore, the Energy Regulatory Board has allowed MERALCO to recover additional costs related to system losses. Finally, NAPOCOR power tariffs are already scheduled for restructuring towards long-run marginal costs. All of these measures will improve the economics of alternative power supply. a Proven Tecwology. Cogeneration has been used worldwide for nore than a hundred years. The current renewed interest in cogeneration has resulted not from technological developments but from new perspectives taken by utilities in sourcing their power supply from outside producers- Private power generation in the industrial setting has proven to be technically and economically feasible. 1.14 Potential cogenerators with access to agricultural andlor by-product wastes have the following additional motivating factors: o Abwzdant low-cost fuel. The sugar, rice and coconut sectors considered in this report all have access to agriwastes which are in most cases by-products of their production processes. These agriwastes have costs that are practically zero or even negaive as factories may pay for waste disposal. o Aging Equipment. Many local applications of cogeneration and agriwaste utilization do not begin to approach the efficiencies of late model equipment. For example, the average age for boilers in the domestic sugar industry is 34 years. In several sugar mills steam generating equipment has been in service for over 70 years. This equipment is ready for replacement, having been operated well beyond its expected economic life. c Source of Process Heat/Steam. The establishment of a cogeneration power plant using biomass residues could provide a source of excess steam for ancillary process heating or sale to nearby steam users. The rice sector, in particular, could benefit from the availability of a heat source for drying purposes. Paddy drying in the countryside remains dependent on sundying practices. This limits the capacity of the mills to process paddy during the rainy season. o Rual Employment Generaion. Many agricultural processing industries have close ties with the community where they operate. Social objectives such as employment generation affect business decisions of such industries. In the Hacienda Luisita project, for example, the company paid for costs to bale and transport field trash at equivalent to fuel oil on an energy basis. Aside from providing the cormmunity with an additional income opportunity, it discouraged the practice of burning the sugarcane in the fields for easier harvesting. Burnt cane loses sucrose content very quickly and therefore has to be processed soon after being brought into the mill.  -5s- Objectives and Methodologv of the Study 1.15 The principal objective of the study is to develop realistic estimates of the commercial potential for power generation in the Philippines from major biomass residues in the sugar, rice and coconut processing/production industries. Whereas most previous studies of power potential from agriwastes have examined the aggregate total of biomass residues available and their theoretical power potential, the present study aims to determine the conditions under which biomass cogeneration investments would be economically and commercially viable. 1.16 The study is a joint effort by ESMAP and the Philippine DOE. Selected staff of DOE- NCED were formed into three project teams. A chief technical adviser and several sector consultants provided guidance and technical support. One team each was assigned to study the sugar, coconut and rice production sectors. Technical and statistical profiles for each sector were prepared. Based on these profiles, the industries were segmented into "rlusters" by common characteristics such as size, and several sites were selected from each cluster for the field surveys. The selections represent a range of sizes, types of mills and sites in a particular cluster. 1.17 Detailed questionnaires were designed in order to gather a wide range of technical, operational and economic information for each sector. The questionnaires were pre-tested in selected plants and modified as needed. The project teams surveyed the selected sites in field visits. After data review and random verification of the responses, data sets of operational parameters were developed for a prototype mill or site that would most closely represent the particular cluster. Economic and financial analyses were conducted on each prototype mill using the data sets as base conditions. Sensitivity analyses were subsequently carried out to detenmine the impact of changes in some key variables. 1.18 The study was a basic screening exercise for quantifying the potential contribution to the power sector from 3 indigenous biomass resources. That a demand for the Kwh produced from the biomass resources will exist was assumed. No attempt was made to so any load flow studies for the various electricity grids, and the boundary for the study analysis was set at the substation for transmission to the grid. The next logical steps would include the use of this study's results to identify opportunities for site specific feasibility evaluation. These follow-up studies would examine load flow implications, and the cost of transmnission in determining final viability.  II. THE SUGAR SECTOR Sector Profile 2.1 The Philippine sugarcane industry existed long before the Canlubang and San Carlos mills began producing centrifugal sugar in 1914. Chinese traders engaged in sugar barter sales during the Spanish era with produce sourced from small animal-drawn mills scattered in Northem and Central Luzon, Panay, Mindoro and Negros Islands. In the 1960's the industry was bustling with activity as smaller mills merged, older ones were phased out, while larger, modem installations were established. Up to the middle 1970's around 15 factories were built. Raw sugar has been the country's strongest export commodity. 2.2 After the 1974 termination of the Laurel-Langley Agreement which guaranteed Philippine sugar a lucrative preferential US market, sugar's contribution to the national economy gradually declined. In the 1930's, 55 percent of the Philippines' total foreign exchange earnings came from sugar. This fell to a mere 1.5 percent of GNP, averaged from 1980 to 1990. The most severe blows to the industry occurred in the mid- 1980's, as the mismanagement of NASUTRA (National Sugar Trading Corporation, the government's monopoly sugar trading entity) resulted in capital flight and a contraction in agricultural land allotted to cane. Coupled with low sugar prices in both domestic and export markets, this period almost spelled the end of the industry. 2.3 Since then, however, investor confidence has been restored and a consistent though gradual increase in production has become apparent during the past cropping seasons. Sugar is slowly regaining its importance in the national economy. As the annual U.S. sugar quota for the Philippines has dwindled from 1.2 million tons to only about 0.2 million tons today, the industry is preparing for the eventual disappearance of this preferential market. About 80 percent of production is now consumed in the domestic market. It is recognized that to improve competitiveness in the intemational free market, production costs have to be reduced by an industry-wide modernization program. Replacement of aging inefficient boilers and power equipment provide opportunities for cogeneration projects that would realize additional revenues through the sale of excess power to the grid. Many sugar millers are keenly interested in this possibility and some have initiated feasibility studies. 2.4 The sector currently supports about 5 million people, providing direct employment to over 530,000 workers in 39 milling districts. Already offering comparatively high wages to its workers, the industry also voluntarily contributes about P105 million annually for socio-economic improvements directed at sugar workers. Furthermore, the industry also pays over P1 billion in taxes annually and provides a yearly subsidy amounting to about P60 million to the government regulatory agency, the Sugar Regulatory Administration (SRA). 2.5 The processing sector of the sugar industry is composed of 39 mills (exclusive of 2 inoperational mills) spread over 16 provinces (see Fig. 2.1). The bulk of the mills is concentrated in Negros, the "Sugar Bowl of the Philippines", which provides about 56 percent of the country's annual sugar production. The mills process from 500 tcd (tonnes of cane per day) to 10,800 tcd, for an average of 4,600 tcd. About 20 million tonnes of cane are ground annually, producing around 1.7 million metric tonnes of sugar. There are ten sugar refineries with a combined capacity rated at 87,000 50-kg bags refined per day or an annual throughput of roughly 15 million 50-kg bags.  -7- Figure 2.1 IPRO3, PHIUPPINES LUNN LOCATION OF SUGAR MILLS AND . ._.n REFINERIES 7 cEma'mammu * ^4~3~q a * 5SUGA I?EE I Sm.^CA.i mmMnwa V wm" , .00-o"Wr o C e2 PmOI?NcAMIS 81~~~~ ~ - ouoe. Ir C.E3.Wxcmim~. 1_is .4a___c_a * r * *t -SUe" e.. n 272 J~twm -A / DZ0 1x1 23Nw _._C - - glRl- ~ ~ ~ ~ ~ ~ ~ ~~~4 _1 0 N -ls CM CAAM NES a 0 a l: :f D2ve ~15 N| r-- -s . ~. 7 *.Zrrn._: cm J 24 SnwIEas&~~~~~~~~~~~~~~~~~~~~~~ Pf