Philippines - Leyte - Cebu Geothermal Project

Document of The World Bank FOR OFFICIAL USE ONLY A / * 3 l7 oo - F/- LAI-370 2- P)t Report No. 11449-PH STAFF APPRAISAL REPORT PHILIPPINES LEYTE-CEBU GEOTHERMAL PROJECT JANUARY 6, 1994 >5f.j::;-r ti'- . :- Industry and Energy Operations Division Country Department I East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of May 31, 1993) Currency Unit = Pesos (e) R 1 US$0.37 US$1 P26.0 WEIGHTS AND MEASURES b/d Barrels per day (1 barrel = 159 liters) BTU British Thermal Unit (0.253 kilo calories) GWh Gigawatt hour (1,000,000 kwh) kg Kilogram (2.205 pounds) km Kilometer (0.62 miles) kw Kilowatt (1,000 watts) kWh Kilowatt-hour(860 kilo-calories) kV Kilovolt (1,000 volts) kVA Kilovolt-ampere (1,000 volt-amperes) M.4MBOE Million Barrels Oil Equivalent=0.144 MMTOE Million Tons Oil Equivalent MVA Megavolt-ampere (1,000 kVA) MW Megawatt (1,000 kilowatts) TOE Tons of oil equivalent tcf Trillion cubic feet Ton Metric Ton (1,000 kilograms) TWh - Tera watt hour (109 watt-hours) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BOT Build-Operate-Transfer BTO Build-Transfer-and-Operate COA Commission on Audit DENR Departnent of Enviromient and Natural Resources DOE Department of Energy DOF Department of Finance ECC Environmental Compliance Certificate EA Environmental Impact Assessment EMB Environmemtal Management Board EOIS Efficiency and Operational Improvement Study ERB Energy Regulatory Board GCMCC Government Corporations Monitoring and Coordinating Committee GDP Gross Domestic Product GOP Government of Philippines IMF International Monetary Fund IPP Independent power producer LRMC Long-run marginal cost NEA National Electrification Administration NEDA National Economic and Development Authority OEA Office of Energy Affairs OPSF Oil Price Stabilization Fund NPC National Power Corporation PNOC Philippine National Oil Company RECs Rural Electrification Cooperatives EDC Energy Developing Cooperation/Subsidary of PNOC FISCAL YEAR Jarnuary 1 to December 31  FOR OMCUIL USE ONLY PHILIPES Leyte-Cebu Geothermal Project Lam and Project Summary !logrowls~: National Power Corporation (NPC) and Philippines National Oil Company (PNOC) Guarantor: Republic of the Philppies Aiamou: US$211 million equivalent (US$147 million to NPC and US$64 million to PNOC). IKms: 20 years, including 5 years of grace, at the Dank's standard variable interest rate. Pro.eet ObIggiftA and Descrintlon: The objectives of the proposed project are to: (a) meet the rapidly increasing demand for power in Cebu and the Vsayas region using indigenous and environmentally superior geothermal energy; (b) strengthen the institutional, planning and financW systems of NPC and PNOC; (c) promote private sector participation in power geneation; (d) improve the performance of the energy sector through better policies and implementing mechanisms, and (e) ensure the financial viability of NPC and PNOC to undake a long-overdue investment program. fiendits and Rbks: The project would establish a reliable, envonmentally superior power supply for the Visayas islands, which include Cebu, the region with the fastest economic growth in the Philippines. It would lay the foundation for ultimately connectng the entire country through the Leyte system, which would dispatch power optimally and reduce the reserve required in the individual systems. The improvement of the sector and NPC's finces and institional systems will provide a solid base for the sector's development. NPC's tardy procurement procedues have often resulted in implementation delays; however, NPC has reorganized its procurement system and all key bids are underway. Further, in order to minimiz such delays, NPC and PNOC have appointed high-level project directors (supported by staff and consultants) to coordinate all project activities. Another risk is that the financing of the BOT could be delayed; however, the BOT contracts have already been signed and their cost is relatively small in relation with other BOT projects in the Philippines. Moreover, these contracts will be guaranteed by large performance bonds as a condition of disbursements for the PNOC loan. A third risk is that the geothermal capacity will be lower than estimated, but the Leyte-Cebu project will only use about one third of the capacity cerdfied by indepedent consultants. Finally, there is a risk that tariffs will not be incrased, but this risk is reduced because of recent decisions taken by the Energy Regulatory Board that approve principles for NPC tariffs and because of the .automatic tariff adjustments to be implemented. The new Government has targeted the energy problem as a top priority and has successfully restored NPC's financial viability. This document has a strcted disbution and may be used by ecipients only in the perfonce of ther officaW duties Its contents may not othwise be discbsed without World Bank authorizaion.  -fi- EstHmated Costs - (us$ minion) Category Local Foreign Total A. PNOC GEOTHERMAL DEVELOPEyNT 15.8 58.9 74.7 Al. GOODS AND EQUIPMENT 2.9 30.4 33.3 1. Drilling Supplies & Mater. 4.8 4.8 2. Pipes and Fittings 0.2 6.0 6.2 3. Valves and Separators 0.2 5.8 6.0 4. Instrum. & Power Supply 1.1 4.0 5.1 5. Pumps & Rotating Machines 0.1 3.3 3 4 6. Insulation 0.7 1.5 2.2 7. Intercoun. Transm. Lines 0.6 5.0 5.6 A2. WORKS 10.2 25.5 35.7 1. Site Preparation .2 3.2 2. Rig Rental 6.3 6.3 3. Civil and Structural 5.7 17.0 22.7 4. Insulation & Laying 1.2 0.5 1.7 5. Technical Services 0.2 1.7 1.9 A3. TECHNICAL ASSIST. & OT8ERS 2.7 3.0 5.7 1. Engineering Consultants 1.3 3.0 4.3 2. Compensation & Relocation 0.4 0.4 3. PNOC Engin. and Admin. 1.0 1.0 B. BOT POWER PLANT (PNOC) 19.2 138.6 157.8 C. NPC COMPONENT 26.4 129.1 155.5 Cl. LEYTE SUPPLY & ERECT CONTRACTS 26.4 111.9 138.3 1. Overhead Transm.Lines 9.2 19.0 28.2 2. Substations 7.1 23.8 30.8 3. Submarine Cable 3.0 56.1 59.0 4. 138 kV Line Strengthen. 2.4 7.4 9.8 5. Line Protection & Cocm. 1.0 5.6 6.6 6. Right of Way & Compens. 1.9 1.9 7. Project Administration 1.9 1.9 C2. INSTITUTIONAL DEVEL. 12.3 12.3 1. Design Hydro Projects 8.3 8.3 2. Implem. & Instit.Support 4.0 4.0 C3. CONTRACTS UNDER ENERGY SECTOR 4.9 4.9 TOTAL COST - 6/1993 PRICES 61.4 326.6 388.0 Physical Contingencies 3.8 20.9 24.6 Price Contingencies 2.4 19.7 22.2 TOTAL COST WITH CONTINGERCIES 11 67.6 367.2 434.8 Interest During Construction 24.1 24.1 TOTAL FINANCING REQUIRED 67.6 391.2 458.9 FINANCING PLAN IBRD-PROC 64.0 64.0 IFRD-NPC 147.0 147.0 BOT-Contract 20.9 153.7 174.7 PROC Internal Cash Generation 17.3 10.0 27.2 NPC Internal Cash Generation 29.5 16.5 46.0 TOTAL FINANCED 67.6 391.2 458.9 11 Due to rounding, the last digit in totals may not add  - iii - E#mated sur_e: Bank Fiscal Year FY94 FY95 EY2 FY97 FY98 (US$ million) ...... Annual 15.3 43.6 80.6 56.5 15.0 Cumulative 15.3 58.9 139.5 196.0 211.0 EanomIC Rate of Retur: 16% Poverty ateJrv: Not Applicable Map: IBRD No. 24925  - Iv - PHILIPPIMES Leyte-Cebu Geothernal Projet Table of Contents eM No. Loan and Project Summary ................................... i I The Energy Sector Overview ..............................1 Resource Endowment ............................. 1 Sector Institutions ............................. I Sector Issues and Reforms ............................. 2 Previous Bank Projects ..................................... 7 Rationale for Bank Parficipation . .................................... 8 H. The Power Sector ............................. 9 Regional Power Systems, Visayas and Cebu ...................I................ 9 the Power Market .................................... 9 The Power Crisis .................................... 10 Power Sales .................................... 10 Gneration Program .................................... 12 Power Supply for Cebu and Visayas .................................... 13 System .............................Loss. 13 Transmission System .................................... 14 ]B. The Borrower ............................. 15 A. Nationl Power Corporation ..................................... 15 NPC Organization and Management .................................... 15 NPC's Reform Program ..................................... 15 Training ................................................ 16 Financial Policies .................................... 17 Financial Management . .................................... 17 B. The Philippine National Oil Company ................................... 17 Organization and Managemet .................................... 18 Finanial Management . .................................... 19 C. PNOC - Energy Developmet Corporation................................. 19 This report is based on the findis of an appraisal mission consisting of Clmudio Fernandez (Principal Financl Analyst), John Irving (Senior Power Engineer), Moiffak Hassan (Petroleum Specialist Engineer), Enrique Crousillat (Enery Specialist) and P. T. Venugopal (Financial Consultant) who visited the Philpines in April 1993. The report was edited by Mrs. Barbara Koeppel. Peer reviewers were Mesus. Rafael Moscote, Albert B. Gulstone and Jamil Sopher. The project was cleared by Mr. Callisto E. Madavo, Director EAI, and Mr. Vineet Nayyar, Chief, EAIIE.  IV. The Yroject .................................................... 20 Project Objectives . ......................................... 20 Leyte Geothermal Development ......................................... 20 2roject Description .2.1............. 21 Cost Estiates .21 Financing Plan .21 Project Implementation .................. I 21 Monitoring and Supervision .23 Procuremert .23 Disbrmsern.nts .24 Environment .. .................................................. 24 V. FinanCes ............................................ 27 (A) NATIONAL POWER CORPORATION .27 Past and Current Financial Performance .27 Capital Expenditu Program .29 Foreign Exchange Exposure .30 Overall Financing Plan .31 Future Finances .31 Financial Sensitity Analysis .32 Monitoring and Evaluation ........................ ................ 32 (B) PHILIPPINE NATIONAL OIL COMPANY ................ 33 Past Financial Performance ................ 33 Future Financial Performance ................ 33 (C) PNOC-EDC ................ 33 Past and Present Financial Performance ................ 33 Future Financial Performnace ................ 34 VI. Project Jusicaton............. 35 Least Cost Analysis ................ 35 Economic Analysis ............... 35 Risks ............... 36 VII. Agreements Reached and Recom.endation............. 37  -vi- Annexes Annex 1 Energy Sector Plan - Implementation Schedule .............................. 39 Annex 2 Energy Production and Consumption ................................ , 45 Annex 3 NPC's Demand (Sales, Geneation. Peak Demand and Capacity) .47 Annex 4 NPC's Power Development Program .......55.............. 55 Annex 5 Transmision Faciities .57 Annex 6 Action Plan .59 Annex 7 Leyte Geothermd Development .60 Annex 8 Projoct Description and Imple.ntation .77 Annex 9 Supervision Plan and Implementation Schedule .82 Annex 10 Prc;e . Cost .83 Annex 11 Disbursement Schedule .86 Annex 12 Total Capital Expenditures .87 Annex 13 NPC's Financial Projections .90 Annex 14 PNOC and Energy Development Corporation Financia Projections .93 Annex 1S Monitoring Indicators .94 Annex 16 Assumptions for Financial Projections .99 Annex 17 Economic Analysis .105 Annex 18 Envionment Summary .114 Annex 19 Tariff Strue and Marginal Cost .121 Annex 20 Terms of Reference of Project Director .124 Annex 21 Terms of Reference Economic Contactng and Dipaching of Power .127 Annex 22 Terms of Refeence Hydro Studies .130 Annex 23 Docmens in Project Pile .146 GHARTS NPC Org^ adon .147 PNOC-EDC Orgiaon .148 MAP: IBRD No. 24925  L The Energy Sector Overview Resource Endowment 1.3 Unlike some of its ASEAN neighbors, the 1.1 Over tLe last decade, commercial energy Philippines is not well endowed with indigenous energy consumpton m the Phipines inreased from 83.4 resources. New resources being developed (in addition million barrels of oil equivalet (MMBOE) in 1980 to to coal an hydropower) are geothermal energy and oil, 104.5 MMBOE in 1990 (Annex 2, Tables I and 2). -a which came into productdon in 1978 and 1979, faster rate (2.3%) than the overall growth in the respectively. Geothermal reserves are not yet fully economy of about 1.6% p.a. Between 1986-91, energy evaluated, but could exceed 6,000 MW; 900 MW are and GDP growth accelerated to 6.8% and 4% p.a., already produced and about 800 MW more are expected respectvely. This was due to substnial incs in from projecs under preparation or construction. Proven industrializion and a reduced share of agriculture on oil reserves amount to only 4 million tons and have been GDP. Most of the ener consumed (75%) was and is declining since 1983. A recent discovery of naura gas derived from oil, but local oil production is minimal offshore of Paawan could provide up to 8 trllion cubic (1.3% of the total) and this causes large economic feet (tcf); however, substanta exploration is needed to shocks wbe intenional oil prices ie confim the size of the field and its economic viability. dramaticaly: For example, in 1991, due to the Guf Total potent coal resources are esdmated at about War, the cost of imported fuel increased by about 60% 1,500 million tons (MMT), but most of this coal is low an the counry registered a 1% decline in GDP gade and expensive to mine. Hydro resources are quite (Annex 2 shows the Philpies' energy balance between substantal, with a theoreical power pote in excess 1980-2000). In 1991, the industial sector accounted for of 10,000 MW, but the better sites are too distant from 51% of total energy demand, followed by tansportation, roads and transmission lines, and their development has with 32%. About 35% of total energy produced was become uncerta given envionmental concerns and electricity (Annex 2, Table 1) and this figure is expected guerBla activities in remote areas. As a result, no single to rise to 38% by 2000. However, electricit generation hydro project has been completed (other than one in depends beavily on oil (60%), which entails considerable Mintao) during the last 12 yeas. About 40 rn-of- fianial risk because of price volatility. Thus, a move river, small hydro projects are being prepared under Lne away from oil and the further development of indigenous Energy Sector Project (Loan 3163-PH), but those that energy are the only significant prospects for limiting the are feasible would not add more than 300 MW. rapid growth of oil imports. Consequerty, the most promising indigenous resource is geotrmal energy. 1.2 A serious power crisis begining in 1991 resulted in substani power outages (para. 1.8) and was partally responsible for low economic growth rates Sector 1nstiudons during the period 1990-93. It is expect that recovery of the Philpine economy will ina GDP growth 1.4 The Energy Coordinaton Council, chaired from 3.5% p.a. between 1990-95 to 5.5% p.a. between by the Presdent's Executive Secretary, and the Office of 1995-2000. Thus, during the decade, eney Energy Affirs (OEA), which reported to the Office of consumption is expected to rise by 6.4% p.a., and it is the President, were responsible for coordinaing the expected that indigenous sources will provide an energy sector from 1987-92. As demonstaed by the increasing share of the total generation (from 9% to 15% power crisis, these institutional arrangements did not for geothermal and from 5.5% to 7.9% for coal). succeed in this task, nor in providing adequate sector Nevertheless, 70% of the energy consumed will still be investments and supervision. The recent establishment of imported by the year 2000 (Annex 2, Table 2). the Deatment of Energy (DOE), under Republic Act  -2- 7638 of December 9, 1992, is a major step to improve (NEA), responsible for financing and providing related conditions; it has been operating since February 1993, technical support to the RECs. To strengthen the replacing the Energy Coordinating Council and the Govenmnent's supervisory role during the current power OEA. DOE has been given a comprehensive mandate for crisis (para. 2.7), the DOE Secretary wil serve as policy formulation, planuing and supervision in the chairman of NPC, PNOC and NA. Other institutions sector. After a long hiatus, the energy sector will be critical to the sector are: (a) 'epartment of Finance represented at the Cabinet by the Secretary of Energy (DOF), which approves locm or foreign borrowng and (parm. 2.05). recommends budgetary contributions; (b) the National Economic and Development Authority (NEDA), which 1.5 The DOE law establishes policies to approves the country's planning (including large energy promote environmentally sound development and projects), and (c) the Environmental Management Bureau conservation of resources, as well as indigenous energy, (EMB), under the Department of h0 Eavironment and privatization and increased private sector participation in Natural Resources (DENR), which has the authority to all energy activities. It also aims to reduce dependence approve the environmental impact assessments (EIAs) on oil-fired plants. The DOE Secretary is an er-officio and issue the environmental compliance certificates member of the National Economic and Develop-nent (ECCs) require for the construction and operation of Authority (NEDA), and is supported by four buws: (a) power projects. the Energy Utilization Management Bureau, for monitoring and assisting with demand management, 1.7 Power Development Strategy. The conservation, the efficient use of energy resources, and Philippine economy depends greaty on petroleum the development of nonconventional energy systems; (b) imports and requires a substantial increase in its power the Energy Resoures Bureau, for formuan policies capacity. Comerned with the need to conserve petoleum and helping develop energy resources; (c) the Energy and use energy optimally, the Government strategy calls Industry Administraon Bureau, for creaing regulatory, for: (a) an environmentally sound and sustinable power financial and fisal policies related to energy supply development pln; (b) large private sector participation entities and for approving non-price regulatory mates, in energy projects; (c) improvements in sector efficiency; and (d) the Energy Planning and Monitoring Bureau, for (d) reduced dependency on oil-fired plants; (e) increased developing and monitring energy plans and demand use of geothermal resowmes, and (f) improved demand foreasts and incorporating national enviranmnal goals management and conservation. This staegy is supported into energy programs. A five-member Council of by the Bank and sector reforms (paras. 1.8-1.27) and is Advisers on Energy Affairs from the private sector was consist with Bank policies to promote satisfactory also established to advise the Presi on energy sector improvements, adequate regulatory systems (para. programs and private sector initiatives. 1.13) and private sector participation (para. 1.14). 1.6 All 135 utilities in power distnbution are private (investor or member-owned), including the Sector Issues and Reforms following: (a) MERALCO (Manila Elecicity Company), a private utwi that distrbutes about 60% of 1.8 Since 1991, the Philippies has been the total electricity to Metro Mandla; (b) 15 private or experiencing a very serious power crisis, which poses a municipal utlites that retail electricity in different cities grave threat to its economic development and stability. and (c) about 120 member-owned rural electrification The crisis has resulted in substantial power outages--6 to cooperatives (RECs), which distrbute power and manage 10 hours per day in Luzon ad Mindanao-and drastic retail sales in mral areas. There are, also, three very curtilmens in supply; in turn, these have curtailed large government corporations in the sector' (a) the industrial production and the development of new National Power Corporation (NPC), which sells power industrial and commercial activities. Thus, in bulk to power utilities and is responsible for power unemployment is rising and economic losses are generation and transmission; (b) the Philippines mounting, esfimated at US$600-$800 million per year by National Oil Company (PNOC), respOnsible for the Bank or about 1.5% of GDP (using C50/kWh as the developing indigenous hydrocarbon ad geothermal cost of unserved energy) and at US$1-1.3 billion by the resources and refining and selling petroleum products, business community. Necessities are jeopardized-not and (c) the National Electification Administration only becauq "f a lack of electricity for reading, cooking  -3- or entrtaiment, but also because other key services that purcsd energy, which would make future tariff depend on electricity (such as traffic management, adjustments largely automatic; (b) the inoduction of an pumped water and sewerage) are also disrupted. The improved tariff struclure with demand charges to reduce power crisis resulted from protracted enviromental peak demand, and (c) exchange rate adjustments (para. approvals for power plants (delayed for several years), 1.17). slow procurement and implementation by NPC and the mothballing of the 605 MW nuclear plant; as a result, 1.12 NPC has also introduced major minimal investment were completed in previous yeas institutional and operational improvements. These (practically no additional power capacity was added include: (a) stremining its stucture by halving the between 1986-92). Under the "Electric Power Crisis Act number of top managers, which eliminated 17 vice of 1993," the President has been granted special powers presidents and about 20 department managers, and to solve the energy crisis, which include facilitating tariff reducing the staff from 16,056 to 14,256 between 1991- increases, speeding-up project approvals, and improving 92. Further reforms and the streamlining of NPC's tecbnical salaries in the sector. management and organization are being impleutented by DOE; (b) ratonalizing functions and providing for 1.9 Inadequate policies blocked Bank lending greater decentalization (particularly for mai'tenane, to the Philppines for several years until 1988-89, when watershed management and accounting); (c) introducing the Bacon Manito Project (Loan 2969-PH) and the stndardized bidding specifications, establshing a Enery Sector Project (Loan 3163-PH) initiated reforms contracts committee and delegating responsibilties for to improve sector coordination and planning, procurement to the regional managers; (d) establishing enviromen monitoring, the technical capabilities of programs and targets to improve combustion efficiency; sector institutions and private power development. (e) improving project implemetation,and (f) performing Despite these reforms, a senous power and financial better internal audits and rotamng staff who exercise crisis persisted and this highlighted the need for further cnrcal financial functions. In addition, an Efficiency reforms and improvements. Therefore, since 1991, the and Operational Improvement Study (BOIS) has been Bank has been discussing these issues and a paper conacted by the Bank to identify and implement further recommending sector improvements'/ was submitted to institutional improvements (par. 3.7). Ag}ea was the new Government in July 1992. reaced at neaotiauons that the Governmen NPC and the Bank would exchanue views on the implementation 1.10 The Energ Sector Plan. Sector reform of the ES? and the EQIS not later than October 1 of and improvements are the highest priority of the new each ear. Agreement was also reached at negotiations adminision. In agreement with the Bank the ta NPC would implement an Action Plan (AMMex 6) in Government approved an Energy Sector Plan (ESP) to a timely fashion. includig proiect. sector and chart the course of actions it will take to improve sector instutional imurovements. operations2/. The ESF lays out policies and defines improvements in all areas of concern as well as their 1.13 Regulatory Framework. Under the DOE completion schedule; these, along with the status of law, an adequate framework has been established for implementation, are shown in Annex 1. The ESP is a regulating the sector. This includes DOE setting policies, corerstone for the development of the power sector and deciding on non-price regulatons, implementing them its implementation is being supported by Bank lending to and supervising Government corporations in the sector. the sector. In addition, the regulatory system has been strengthened, and the Energy Regulatory Board (ERB) is now 1.11 Some key actions of the ESP have already responsible for approving tariffs (using public hearings) been implemented, particularly the establishment of a and regulating energy prices under clear rate-of-return Deparment of Energy and an increase in NPC's tariffs criteria. ERB is a quasi-judicial, autonomous body that to yield an 8% rate of etumr on revalued assets in 1993 has adequately managed oil prices, mainta g a surplus (para. 5.12) and other tariff improvements already in the Ol Price Stabilization Fund (OPSF) and approved approved by NPC's Board. These actions include: (a) the adequate tariffs for private power uilities. The ERB has implementation before Board presentaion of a fuel and just approved on the validity of two tariff increase for purchase cost adjustment (FPCA) mecbanism to NPC that had been pending for two years. This decision compensa for variations in fuel pnces and the cost of will allow NPC to recover the amount foregone during  -4- the past two years by adding a surcharge to current strengthen the staff and or anization of the office for triffs. In deciding this case, the ER established the private sector garticiDaton. to effectivelv analyze and criteria on which future rates will be based, which Mview BOTIBTO projes (Annex 6. Action Plan). In include the rate of ret level, assets revaluation and the future, the proliferation of BOT contas under take- allowed expenses in the rate of return. To perform or-pay conditions may result in complex power dispatch effectively, ERB needs to increase the number of problems and difficulties in allocatng the costs of qualified staff, receive support from advisors and train reserve capacity. DOE is establishing a planning system its staff on tariff analysis and regulatory systems. Grant to avoid either low supply and outages or excessive fmancing for regulatory advisers is also beig sought. supply and costs for unused capacity. Arment was reached at neotiatidons that NPC in coordination with 1.14 Private Sector Participation. The DOE will complete not later than June 30. 1994 a Philippines is one of the few developing countries with consulltanc study on the economic contracting and large private sector participation in the energy sector. disuatch of power menerana plants (Annex 6, Action Except for three govermment corporations (NPC, PNOC Plan). and NEA), all energy activities are managed by 135 companies or utilities in the private sector (including 120 1.16 The large increase in private sector rural electrification cooperatives). Moreover, Petron (the generation has resulted in substantial changes in the largest subsidiary of PNOC) is being privatuzed and NPC power sector structure. In accord with the ESP, a has already included considerable private sector decision on NPC privatizaton was to be taken by the partcipation in its generation activities. Energy end of 1993 and an USAID-funded study (by Price exploration is private and oil refining and distribution Waterhouse) idendfied several initial privatizadon are carried out by two private companies (CALTEX and options for NPC. However, additional studies are Plillppin Shell Petroleum Corporation) in addition to required to evaluate the impact of these alternatives, as Petrn (the oil and main subsidiary of PNOC), which well as the implementation procedures, since there are wiDl be privatized in 1994. The privatization of Petron important constitutional, financial and borrowing would include the sale of one-*ird of its shares to a constaints that must be resolved to ensure a successful foreign oil company, another third would be sold to privatization and that the large investments needed would PNOC's employees and the publc, and the Government be implemented thereafter. Until these studies are would retain about 35%. This privadzaion has been completed and the Government decides if and how NPC supported by the Bank and is expected to repeat the will be privatized, the present strategy of rapidly succossful experience of the recent privatization of some increasing the private sector role in power generation 400 companies or non-performng assets, and the and operational management is appropriate. The Bank additional reduction in the number of goverment has initiated a Power Sector Structure Study to improve corporations from 300 to 75, mainly th their sale the efficiency and competitiveness of private sector or liquidation. participation in power generation and study alternatives for the organization in the power sector. A main 1.15 With about 20 con s signed and several alternative being considered is to split NPC into three others under negotiation with the private sector for the regional companies, and to establish a national construction, financing and operation of power plants transmission grid company, which will also be using Build, Operate and Transfer (BOT) or Build, responsible for contracting and dispatching power from Transfer and Operate (BTO)L/ systems, the Philipines regional or private generation companies and may also is a pioneer in private sector pardcipation in power be responsible for muldpurpose hydro generation. Power genraton. These contracts involve a total capacity of generation would then become fully competive under about 2,500 MW (Annex 4, Table 2) and represent more improved BOT/BTO bidding procedures and independent than 60% of the present generating capacity. Moreover, power suppliers. The 120 RECs and some of the power NPC's Board has approved a policy to offer practically utilities may also merge into some dozen udlities, in all the new power gention plants (except multipurpose order to improve the pumrhasing power and the bydro plants) as BOT contacts, and bids for large coal economies of scale in distribution. There is a need to plants are underway. Anreent was reached at improve policies, reduce the uncerainties and risks faced neaotions that not later tan April 30. 1'994. NPC by the private sector and encourage even wider private would anprove a standard conturt for BRI projects and participation. Under the Power Transmission and  5- Rehabilitation Project (Loan 3626-PH), NPC is 1.19 Distribution Tariffs. Retail power tariffs implementing improved rules ai>i procedures to faciitate in the Manila area, which are indexed with NPC tariffs pnvate sector participation in energy generaton, and the exchange rate, have provided MERALCO a fate including stnadized bidding documents. of remn higher than 8%. The power tariff subsidizes consumption below 50 kWh/month through relatively 1.17 Power Pricing and Finaucial higher rates for large industial and commercial users. bmprovements. Although the NPC Board had at that For the rural areas, under the Rural Electrification time the power to approve its tariffs, the tariff increase Revitalization Project (Loan 3439-PH), substantial tariff in March 1991 was suspended by the Supreme Court, increases have been approved for RECs, many on the which led to NPC's financial crisis (para. 5.4). In order of 40%-50%. These tariffs are generally uniform addition, the January 1992 increase, although for al consumers, regadless of voltage level, resulting implemented, was also submitted for an ERB judgement. in a cross subsidization of low voltage consumers. NEA However, the ERB has now determined that both tariff is introducing new guidelines to improve the structue increases were justified and has approved tariffs that and level of REC taniffs. would achieve at least an 8% rate of return in 1993. Further, the ERB clearly defined the asset base and the 1.20 Oil Pring. The Goverment approved a expenses allowed for the rate of return (the major full deregulation of oil prices by 1996 to improve contenton in the previous two tariff increases), which competition, upgrade oil production and refinery wil avoid future legal challenges on these matters. The facilities and depoliticize the adjustment of oil prices. tariff increases improved NPC's income from a net loss The deregulation will require changes in the legal and of US$135 million in 1991 to a net surplus of US$186 regulatory frameworks, the establishment of new million in 1992 and about US$160 million in 1993. financg mechanisms for crude oil purchases, and the Now, under DOE law, all energy prices will be elimination of the "baggage of the past" (including legal approved by the ERB. Moreover, to avoid delays in cases pending in the Supreme Court). In order to achieve adjustig tariffs for costs that are beyond NPC control a successful deregulaton, steps are included in the ESP, ad to depoliticize such increases, an automatic monthly including energy pricing, industy cost studies and the fuel and purchase cost adjustment has been approved by measures already taken by the ERB to ensure adequate ERB. This will index NPC tariffs with fuel prices and rates of return to the oil companies. In the meantime, it odthe costs representing about 82% of NPC's opertional was important to maintain appropriate prices for oil expenditus (for oil, coal, steam and purchased energy). products. This was achieved durng the last two years, The ESP has endorsed a similar indexation mechanism when prices were above international levels and resulted to compensate for the increase in loan pnpal resulting in a subsntdal OPSF surplus. To ensure the from exchange rate variations, which is 7nder review by continuation of these policies, the Government is ERB for implementation in 1994. These measures would supporng legislation requing automatic adjustments of avoid large ad hoc increases, while implementing small, oil prices when the OPSF fund reaches minimum or monthly adjustments (para. 5.14). maximum liquidity levels; also, ERB is considering indexing its wholesale oil prices with Singapore price 1.18 NPC's Board also approved tariff changes indexes for petroleum products (expressed in pesos that are in line with its long-runmargin cost and are equivalent). This would allow automatic monthly designed to achieve a better price for demand and energy adjustments in oil prices. charges, while providing a lifeline rate for utilities that serve low-income consmers. The practice of 1.21 r Magemet. The establishing charges for peak demand is supported by the Government's polcy is to achieve sustaible ESP and would be implmented under the project (para. development by enforcing enviromental guidelhnes and 5.14). Purdter improvements would require the requiring that a satisfactory environmental impact implementation of dme of day rates for large consumers assessment (EA) be prepared for power projects. (once normal power supply is restored) and the However, many power projects were halted or suffered equalization of rates (at the same voltage levels) among inordinate delays (three years) during the time that industries and utilites. environmental decisions or approvals from the Depamn of Envirnmt_ and Natual Resources (DENR) were being secured. This occurred due to  - 6 - institutional deficiencies, stringent enviromental 1.23 The key for conserving and fostering guideiines and the convoluted process required to obtain efficiency is pricing power appropriately. Measures to the envionmental approval from the communities achieve this have already been implemented and prices involved. Agreement has now been reached to separate are now higher than marginal cost. Moreover, demand the technical and enviromental analyses and approval charges will be introduced by the project to reduce peak (by DENR) from the SOCial and political approval (by the demand. Future actions on energy efficiency and demand regional development councils and NEDA). The side management include: (a) DOE is mandated to cra technical capability and equipment of the EMB are being programs and incentves to conserve energy and its upgraded under the Energy Sector Project (Loan 3165- Energy Utilization Bureau will establish policies to PH) through training and the acquistion of modern promote efficient energy use, monitor energy laboratory and monitoring equipment. DENR will also consumption and provide training and improved need to employ more environmental specialists and technologies; (b) building standards are being revised; review its stringent environmental guidelines. The Bank (c) power utlity losses will be reduced (para. 1.25); (d) has finalized a sector study ("Toward Improved an ongoing technology-transfer, energy-management Environmaental Management" in December 1993) program would finace energy conservation programs, proposingrecommendationsimprovingtheenvironmental document energy savings and disseminate related analysis and find a balance between power supply information; (e) studies are being completed by several requiements and the resistance of most communities to donors and the Bank on further energy conservation and havmg power plants in their backyards. Since a key demand management schemes. concern for power projects is their social acceptability, the President has given instructons to NEDA, DOE, 1.24 OperatlonandMa nce Thepresent DENR and NPC to identify ses for ftmre power plants energy crisis (para. 2.9) is in part due to the lack of which would be more environmentally and socially adequate maintenance, insufficient spare parts and lack acceptable. of qualified technical staff. The problem has been exacerbated by power shortages which have forced NPC 1.22 Eerg Conservation and Demand power plants to operate for long periods without Maagement. The Philippines is already implementing scheduled mainance. Mainteance practices, programs for energy conservation and demand side espeially with regard to procuring essental spare parts management, mainly because of the combination of high when they are needed, must be improved. For this power prices (about twice the level in Washington D.C.) purpose, management contracts with the private sector and the public campaigns for saving energy. Measures have been signed for several plants (Ambuklao, Naga, already in place include reducing air conditioning Bpga and ten powe: generating barges). tmperar in public buildings, the rating the efficiency of electric appliances, using compact fluorescent lighting 1.25 Operational Efficiency. NPC's (CFL, with about 500,000 units sold per year), changing urnsmission losses, net of station use, are just 3.5%, of street lights to halogen, performing energy audits which is satisfactory. However, to improve operational (inhially financed by USAID and now paid from the efficiency in the power sector, old NPC plants would be savings), applying strit conservation measures at public rehabilitated. Because most tbermal plants are very old offices and buying equipment to retrofit electric motors (their average age is 23 years), some may have to be for higher efficiency. PracticaHly all commercial or retired within the next 5-10 years. Also, management industrial establ s are using CFL, while a lage contracts are being considered for two large plants in percentage (80%) of the residental consumers are 1994. Further, MERALCO and te RECs will be already using fluorescent lights. The Bank's Energy required to reduce excessive distribution losses by Sector Management Assistance Program (ESMAP) is upgrading the distnbution system and enforcing sticter curreny studying which additional measures could be controls on metering and billing. Between 1989-92, cost/effective. However, given the Philippines very MERALCO reduced electricity distribution losses fom limited use of electricity (only 3.9% of power is used for 21% to 14% and the RECs from 26% to 22%. These air conditioning and the very low per capita power losses should be gradually reduced to about 10% (12% demand of 371 kWh per year), further reductions in for the RECs). Illegal connections are pardy responsible power demand are likely to be minor. for such losses, since there are practically no penalties for mawdng unauthorized connections or tampering with  meters. To corect the problem, the ESP is supporting Preious Bank Projects ucial anti-pilferage legidation. A _ ml reaced wie h ithe Governm at negotiations that to 1.29 Between 1957-75, the Bank financed three accelerate the romsin of ani-nfere leIsladon. it hydro projects, two tbermal plants, one transmission would cefy it as an Administrative Bill not ler tan project and a mral electrificaton scheme. Three loans Lye3Q. 1994. were also approved for coal, oil and geothermal exploration. Project Performance Audit Reports (PPARs) 1.26 Project mmpn_ The process were pread for two projects with NPC (the fourth and wherby NPC approves conra has been slow. To seventh projects, PPAR No. 0980 and PPAR No. 8574). improve and accelerate p NPC has The major problems identified in the PPARs were standardized bidding documents and specifications, implemeon delays and cost overruns due to project appointed project manages for each project and design changes, cumbersome contract award procedures, implemented a computrized monitoring system and weak project management. Because of a (Artemis) for all investments. Imple ion disagreement on policies, the Bank discontied lending improvements should result from deegating the until 1988 when it approved a geothermal generation constructio of new generaton pla to the pnvate project, Bacon Manito Geothermal (Loan 2969-PH). In sector under BOT/BTO contacts. To expedite future 1988-89, two other projects were approved for the projets, NEDA has apprved the total power Manla Power Distribution System (Loan 3083-PH) and development program for the next few years. for the Energy Sector (Loans 3163-PH, 3164-PH and 3165-PH). These projects financed sector investment 1.27 Staff Salies Salary and benefits for and supported improved sectral policies regarding NPC staff, as well as for employees in other investment strategy, financing and coordination. They Govement corporations, have been reduced are generaly being implemented satisfacorily; power substaniy since 1991, due to a law dtat snudaid generaton in Bacon Manito started in October 1993, but salaries for all Govermment wokers. As a result, many the completion of other transmission lines required to key technical and manageial staff have left (and new extend the closig date for one year and NPC had ones will ne exensive traig programs), mainte problems achieving the covenaned rate of return in has been affected and hiring of qualified staff has 1991. We have endeavored to resolve these problems by become difficult. Under the Power Crisis Act, the establishing an improved regulatory framework, by President was given authority to raise NPC's salaries having NPC place the responsibility for each project based on comparisons with the private sector. A under a Project Director, improving its procureme consultancy study provided recoendatons on tis processes, bidding rnkey conacts rather than separate matter in August 1993, and salary increases of about components, implementing advance contactn and 54% are planed for 1994. implementing automatic tariff increases. The Power Transmission and Rehabilitaion Project (Loan 3626-PH) 1.28 Goothermal BM. The private sector is approved in June 1993 would rehabilitate the Bataan oil already involved in geormal developmet in the plant and is financing key transmission lines required by Philppines, but existng taxes and royalties binder fast-track private generation projects in Luzon. The incrased effors for expanding the private sector project also initatd major secor improvements, involvement. Under geoFthm conts with DOE, includig subsial institutional and financial reforms developers have an income tax hoLday for six yeas but and increased private sector participation. must pay the Govenmment an anmnal fee after that time (corpt icome tax and roaty) equal to 60% of the net value of the steam. A geothermal bill has boen inoduced in Congess to exend the royalty exemtion from the seventh to the ffteenth year (after the income tax holiday during the first six years). This law would allow to expand the private sector development of geothermal energy.  -8- Rationale for Bank Participation 1.31 The Government's eergy strategy closely follows recommendations in the Bank's policy paper for 1.30 Developing adequate infrastructure, the power sector. First, NPC is tansfering almost all its particularly power supply, is among the highest priorities responsibility for increenDtal power generation to the in the Bank's countly assistance strategy; the lack of it private sector (requiring investments of about US$1.2 is the most constraining factor in the country's economic billion per year for power generation). Second, the basis development. The proposed project would help alieviate for future tariff adjustments has been established, which the power crisis, expand base load power capacity will ensure NPC's long-term financial viability, (financed by the private sector) and assist the NPC to including the indexing of its tariffs with fuel costs and expand and reinforce the required transmission system. purchased energy. Third, a anparen regulatory Already, the Government has inplemented far-reaching framework that covers the enire energy sector and reforms in the power sector, as it has adopted policies provides adequate protection for producers, distributors and strategies and made institutional improvements and consumers was created under an independent, quasi- which conform with Bank policy. Bank intervention in judicial regulator (ERB). Fourth, NPC is substantilly the sector has been critical in helping define the improving its corporate policies and commerciaig its improved policies and actions in the Energy Sector operations, such as entenng into management contnrs Action Plan, establishing the DOE, strengthening NPC's with the private sector. Finally, the Energy Sector fnances, improving its efficiency, promoting private Action Plan provides for measures that, along with sector generation of power and prmparing the sector for demand charges, will further improve demand-side a robust implementaion of its power programn. By management and energy conservation. As a result of completing the sector study "Toward Improved these actions, the sector can now grow vigorously and Environmental Policies and Management" the Bank has atmact resources from the private sector, the Bank Group also supported a balance between the country's energy and other bilateral and multilateral agencies. development and sound environmental practices. Endnotes: j1 'Energy Sector Issue and Actions." rnThe ESP was approved by the Cabinet and the President on November 17, 1993. A revised implementation schedule was approved by the Cabinet on January 12, 1993. 3/L In build-operwtenser (BOT) projects, the private sector will build, finance, implement and operate (for 10-20 years) the project facilities and transfer them back to NPC after that period (BOT contracts can be extended). In build-transfer-operate (BTO) projects, the private sector will build, finance and construt power plants. After project compledon, the assets and liabilifies will be transferred to NPC, but the contractor will operate the plant for most of its useful life under a renewable management contract.  - 9 - H. The Power Sector Regional Power Systems, Visayas and Cebu cities and municipalities in Cebu, except the isolated island of Pilar, are served with electricity. NPC sells it 2.1 The Philippines consists of three major electricity in bulk, and the private sector (the Visayan island groups. The main one (in the northeast) is Electric Company and three RECs) distributes it. Most Luzon, where Manila, the capital, is located. Tle other industies in Cebu are labor intensive, but reliable two are the Visayas islands (in the middle) and the power is critical for their development and expansion. Mindanao islands (in the south). A transmission system The main industrial zone is the Mactan industrial estate is under construction to connect Cebu with the main which is planning to triple its area by 1997. islands in the Visayas (Negros, Panay and Bohoy) by the end of 1993. Moreover, most of the country (Luzon The Power Market and Visayas, which account for 85% of the power sales) will be interconnected by 1997 as a result of the 2.4 Power generation in the Philippines is Leyte geothermal projects. Mindanao is expected to be mainly the responsibiliy of NPC, but there is large and linked to the others by 2000. This in on will increasing participation from the private sector. NPC be expensive because of the dstances involved and the supplies power in bulk at high voltages to MERALCO high cost of submarine cables. In the interim, demand and other private utilities, the RECs and some large and capacity for each system have to be planned industrial consumers. independently. The integrated transmission system will benefit the country significandy because the generating 2.5 NPC's Board of Directors has approved a plants will be situated optimally, reducing the total policy to invite private sector bids for future power reserve capacity needed. plants, excluding multipurpose hydro plants. It is therefore projected that of the P850 billion capital 2.2 Cebu is the area with the fastest economic expenditures included in NPC's 1993 Power growth in the Philippines, due to its industrial Development Program (PDP) for 1993-2005, about development, inteational port and airport, good 68% will be undertaken by the private sector and over commumcations, tounst attractions, and highly the long-run NPC's direct investments will only involve productive labor. Key indiaors of its development tmission lines (24% of total) and rehabilitation and show very high annual growth rates (17% p.a.) during other works (8%). However, due to limited commercial the last four years, includig very successful export- lending and the magnitude of the investments required, oriented industrial estates. Traditional exports include a more likely scenario would be joint financial efforts copper concentrates, coconut oil, sugar and copra, but between private and official sources. these have been overtaken by new exports of manufacted products (watches, rattan furniture, 2.6 Demand Side Maagement. To reduce semiconductors, gifts, toys, housewares, clothing, power demand, the Government implemented sevel carrageenan and dried frits). However, power is programs that involved: (a) implementng demand deficient and outages have already started. charges; (b) encouraging commercial and industrial Conequently, Cebu will need to expand its power consumers to use energy-efficient lamps; (c) replacing supply to enable future developing. Moreover, the inefficient street lights; (d) requiring energy audits from proposed project would reduce or eliminae the need for large industries; (e) publshing the efficiency indicators purchasing power at high rates (about 15% higher than for various electric appliances, and (f) conductig the price charged by NPC in the region and 20% higher conservation campaigns, particularly for lighting and air than the unit cost of the proposed project). conditioning. These actions have already produced substaial resuts, as most commercial establishents 2.3 Cebu province had a population of 2.7 and a very large number of households (80%) are now million in 1992, and, after Maila, is the largest using fluorescent lighting, and sales of compact metropolitan region in the Philippines. PracticaUy all fluorescent lights are about one million a year. To  - 10- furthr conservation efforts, ESMAP is preparing recommendations on addional cost-effective ways to MINOANAO POWEP SALES reduce demand, but given the progress already __ achieved, their impact is epected to be minor. The _ _- basic parameters for optimal electricity demand are _ _ _ _ _ already in place; these include appropriate pricg _ LL policies th power charges equal or higher tan the _ marginalcst, ad the PhiLppineshaving the second i highest retailpower tariffs in Asia after JI (and - __ twice the level in Washington D.C.). In additon, - _ - - _ adequate charges for power demand will be introduced - by the project. The impact of such measures will be _ _ _ limitd in th short term becuse much of the population is low-income (per capita GDP was only _a_c____ _ ,___ _I $730 in 1991) and annual per capita consumption was only 371 kWh in 1992, roughly the equivalent to per Figure 2.1 capita electricity used in a period of two weeks in the United States or Canada. BOT/BTOs for the construction of new plants to be completed in 1993-94 with a capacity of 700 MW for The Power Crisis Luzon and 300 MW for Mindanao. These contract involved combustion turbines or diesel systems, which 2.7 A severe power crisis beginning in 1991 were the only generation plants that could be has hampered economic recovery in the Phlippines and commissioned within one year. The added generating its connuation poses a serious threat to the nation's capacity on Mindanao, combined with less severe economic and political stabilization. Substantial drought there have now eliminated the power outages outages-4 to 8 hours per day in Luzon and up to 12 and restored normal sales on the island. (Figure 2.1). hours in Mindanao, (where power sales dropped by one third as a result from record droughts, Figure 2.1). Power Sales These outages adversely affected industrial production and the development of new industri and commercial 2.9 Demand for power grew at an annual rate activides. In addition to delayed environmental of 7% during the 1970s, 4.1% between 198085, and aprovals and weak institonal performance (para. 6% between 1985-90. However, these averages mask 1.8), the mothballing of the already completed Bataan uneven growth in demand, which closely followed nciear plant (605 MW) had a substantial impact. variations in GDP growth (Annex 3, Table 1), although Negotiations with Wesinghouse (the original builder), power growth has been about 2%-3% points higher. regarding the cost to upgrade and operate the plant, The difference is attributed to greater industiali, were unsuccessful; and, regardless of the outcome of higher living stanrds (which translate into the use of these discussions, opening the plant would probably more appliances), and the increase in households have met with public resistance. Therefore, the connected to electricity. In fact, power demand Govermment is considering the conversion of the pant increased, although at a low rate, even during economic and part of its facilities for other fuels (particularly recessions: While GDP decreased by 14% between LNG). This potential generation is not included in the 1983-85, electricity sales increased 0.3%. Most of the current power development program. 1992 electricity consumption of 18,630 GWh was in Luzon (78.2%), where Manila is located, while the two 2.8 "Fast Trk" Genaion Progam. To other large island-systems, Mindanao and Visayas, used solve the crisis, the Govermment very successfully 12.4% and 9.4% (Mindanao will use about 15% when brought the private sector into a "fast-track" power normal supply is restored). generaton program. Since standard power projects require three to six years to complete and do not 2.10 Power outages (seven hours a day in provide short-term solutions, NPC contacted Luzon in July 1993) are expected to be substantially  reduced by early 1994 when the rehabilitation of two 1992: The growth rates applied (in the scenario for large plant, dte "fast track" projects and other power 1993-98) average 8.8% p.a. for Luzon, 14.4% for plants will be completed, adding about 1,100 MW to Mindanao (paly because of previous deficits) and Lumn, 300 MW to Mindanao and 40 MW to Visayas 11.2% for Visayas. Figure 2.2 shows the apraisal are constructed1. Such expanded capacity will forecast sales, which in the case of Luzon are about substantially improve the system, since there had been 13% lower than in the PDP-92, due to the expected practially no icrease in capacity during the last five impact of price elastcity and reduced losses by the years. Once the current unserved demand is met, power utlides. Although the differences in the demand mcreases in power sales are expected to follow previous forecast will not affect the investments to be started in trends with an elasticity of about 1.3 in relation to GDP 1994, an annual review of the least-cost program would increases. be needed before contracting additional capacity. Therefore, the PDP will be updated anually in 2.11 NPC annually updates its demand forecast consultation with the Bank (pan. 2.14) and decisions to model based on statistical analyses of population, initiate new plants will be made annually, based on new industrial and commercial growth, surveys of major forecasts. udlities and industries and the Govenmen's estimate of GDP growth. The demand analysis is included in NPC's Power Development Program (PIDP), which PHILMPPINES ENEG LES determies the least-cost generation expansion program using the WASP model to define an optimal sequence __l of plant additions. The PDP provides details for genuraton and transmission system for each region, transmission grid and independent miand system. In the past, the implemetaion of the PDP suffered i considerable delays due to NPC's slow procurement , ad the long period of time needed to secure l virome and public aporoval (even after financing was in place). 2.12 NEDA is projecting GDP growth of inLaw EWW_O Znm 6.7%, 7.7, 8.2%, 8.8% for the 1994-97 period, and Figure 2.2 10% thereafter-figures that NPC must use and included in its PDP of 1993. However, these rates are much higher than the Bank's (which are 4%, 5% for 1994-94 and 5.5% thereafter). Also, NPC assumed a GDP 2.13 If the high scenario materializes in the elasticity ratio.y of 1.25 for Lawn and a much higher short-term, this would mean higher sales and revenues, one for the total country (1.5); these would require very since existing capacity would be maximized; however, high growth rates in Mindanao and Visayas, which much larger invesments would be needed in the would then account for a large sbare of NPC's future mnedium-temr. NPC's dwect capital expenditrs would sales. But such rates run counter to the experience of not change because, except for the multipupoqse hydro the last 1S years, when Luzon's share remained at plans, all new power generting plans are expected to about 75% of total sales. Moreover, there are otier be built and finaced by the private sector (BOT/BTO financial and infrstuctual constraits that may limit projects). industial development, and power sales are likely to be reduced by the impact of price elasdity and demand 2.14 The direct otacting by the ulities of management programs (pama. 1.22). Therefore, the private power supply in parallel with NPC will require 1993 PDP forecast of a 64% increase in power demand periodic monitoring to ensure an adequate relationhip in Luzon between 1994-98 will be considered as a high between supply and demand of power. First, severa scenario. For the appraisal, the sales forecast and distibution udtlies, industies and industria estates investments needed have been based on the more have signed conacs with independent power realstic figures presened in NPC's PDP of December producers for almost 2,500 MW; however, a wbst  - 12 - part of #ais cpacity may not materialize due to plants using imported coal (which is the least-ost financial, technical or environmental constraints. In solution for the Philippines) and some hydropower (see case that a large fraction of these projects become Fig. 2.2 for the projected capacity mix in Luzon). operational the country may phase the possibility of Power demand and capacity for each grid are presented excessive capacity. Second, NPC's projects could also in Annex 3, Tables 1-8, which include previous years be delayed because of environmenta approvals or and a forecast until 2010 for sales trends, power implementation delays. Third, the economic growth and generation, peak demand, losses and key indicators. corresponding power demand may be much different Annex 4 details the respective plant additions and than projected. However, these ncertainties will not retirements assumed in the appraisal until 2000. affect the projects to be statted this year, but rather the decisions to be taken for new projects from 1994 on. Although independent power projects are not formally 2.16 The capacity added by the -fast track" included in NPC's PDP (due to limited information and program includes diesel and intnal combusuon turbine their perceived unceriy), the appraisal estmated at plants which have low-construction lead tmes and about 30% the likelihood of their being completed, and reduced capit costs but high operatag expenses. As NPC sales were reduced accordingly (Figure 2.3). The soon as they satisfy base power generation needs, some PDP for 1994 will include major consultancy support of these planb would have to be used only for peak financed by an ADB grant. DOE and NPC should generaton or stand-by capacity, although their fixed closely monitor the power demand, and particularly the payments will have to continue. impact of self-generation by industrial or commercial consumers. greement was reached at negotiations that no late than October 1 of each Year. the Government. GENERATION CAPACITY IN LUZON NPC and the Bank would review NPC's PDP. and that NPC and the Government would take the necessar actions to im_glement its recommendations. NPC & PRIVATE ENERGY SALES