Philippines - Leyte - Luzon Geothermal Project

Document of The World Bank FOR OFFICIAL USE ONLY A4 _3 7 z-1 - /7 /A/V Si/7 -y )a-7H Report No. 12568-PH STAFF APPRAISAL REPORT PRILIPPINES LEYTE-LUZON GEOTHERNA. PROJECT MAY 9, 1994 MICROGRAPHICS Report No: 12568 PH Type: SAR Industry and Energy Operations Division Country Department I East Asia and Pacific Regional Office This document has a resticed distibion and may be used by recipients only in the performance of thei offciicl duties. Its contents may not othendse be disclosed whout World Bank authizadon.  CURRENCY EQUIVALENTS (as of December 31, 1993) Currency Unit = Pesos (i) p I = US$0.036 US$1 = p27.6 WEIGHTS AND MEASURES b/d = Barrels per day (I barrel = 159 liters) BTU = British Tnermal 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) MMBOE = 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 ABB Asea Brown Bovery BOT Build-Operate-Transfer BOO Build-Own-Operate BTO Build-Transfer-and-Operate COA Commission on Audit DENR Department of Environment and Natural Resources DOE Department of Energy DOF Department of Finance EA Environmental Impact Assessment ECC Environmental Compliance Certificate ECO Expanded Cofinancing Operation. EDC Energy Development Corporation Subsidary of PNOC EMB Envirornemtal Management Board EOIS Efficiency and Operational Improvement Study ERB Energy Regulatory Board GCMCC Government Corporations Monitoring and Coordinating Committee GDP Gross Domestic Product GEF Global Environment Facility GET Global Environment Trust Fund GOP Government of Philippines IMF International Monetary Fund IPP Independent power producer JEXIM Export and Import Bank of Japan LRMC Long-run marginal cost NEA National Electrification Administration NEDA National Economic and Development Authority NPC National Power Corporation OEA Office of Energy Affairs OPSF Oil Price Stabilization Fund PNOC Philippine National Oil Company RECs Rural Electrification Cooperatives FISCAL YEAR January I to December 31  FOR OFFICIAL USE ONLY PHILPPINES Leyte-Luzon Geothermal Project Loa and Project Summary Borrowers: National Power Corporation (NPC) and Philippines National Oil Company (PNOC) Guaator: Republic of the Philippines Amounlts: US$227 million equivalent, of which US$113 million to NPC and US$114 million to PNOC. PNOC will sign a subsidiary agreement with PNOC-EDC on the same terms and conditions as the Bank loan. Under the proposed ECO, the Bank would provide a put option in favor of the holders of US$100 million of Eurobonds. Terms: 20 years, including 5 years of grace, at the Bank's standard variable interest rate. Project Objectives: The objectives of the proposed Leyte-. dzon Geothermal project are to: (a) meet the rapidly increasing demand for power in Luzon using indigenous and environmentally superior geothermal energy; (b) strengthen the energy sector by implementing instiuional, planning and financial improvements recommended by the ESP; (c) support the large ongoing private sector participation in power generation, and facilitate it by extending the national grid; (d) strengthen NPC's capabilities in environmental and social impact analyses; (e) introduce ECO cofinancing in the Philippines; and (f) ensure the financial viability of NPC and PNOC for undertaking a long-overdue investment program. Project Descrintion: The project includes the following components: (a) PNOC-EDC would develop a 440 MW geothermal energy field to expand Levte geothermal capacity from 200 MW to 640 MW, including: (i) drilling about 65 additional producer and injector wells in Malitbog, Mahanagdong and Alto-Peak; (ii) contracting technical services for geothermal drilling; (iii) constructing steam gathering systems; (iv) constructing the related subtransmission systems in Leyte; (v) constructing a pilot reinjection plant for C02; and (vi) recruiting consultants to assist with project implementation; (b) PNOC-EDC would also enter into BOT contracts with private sector companies to construct and operate 440 MW geothermal power plants; and (c) NPC would (i) contract two high voltage DC (HVDC) monopole converter stations and related electrode stations at Ormoc and Naga, to be financed by a US$100 million Eurobond issue partly supported by an Expanded Cofinancing Operation (ECO) of the Bank; (ii) construct overhead transmission lines in Leyte (about 77 km at 230 kV); (iii) install a submarine cable (about 19 km at 350 kV, 440 MW) crossing the San Bernardino Strait (19 km) and linking the Leyte-Luzon lines; (iv) construct a twin circuit HVDC overhead transmission line from Ormoc to Matnog cable terminal (about 176 km at 350 kV) and from Cabacungan to Naga (about 256 km at 350 kV); (v) rehabilitate the Naga-Tayabas transmission line (about 205 km at 500 kV); (vi) recruit two advisers for strengtbening its environmental and social engineering deparanents; and (vii) recruit consultants to design the Casecnan hydroelectric project and to support project implementation. This docuent has a resricted distribuon and may be used by recipients only in the pefomnc of afficial duties Its contenut not othew be disclosed ithout World Ban auorzaon  Denefits anld Ridc: The project would establish a reliable, environmentally superior power supply to provide base power to the Luzon region, which includes Metro Manila, the largest economic and population center in the Philppines. Through the Leyte project, the total country grid will be interconnected (except Mindanao), dispatch power optimally, and reduce the reserve required in the individual systems. The project would support sector and institutional reforms, covering financial, administrative, legislative and environmental improvements to provide a solid base for the sector's development. In addition it would support considerable private sector investment in power generation. The proposed Expanded Cofinancing Operation (ECO) will also facilitate commercial financing for much of the cost of the converter stations and further expand the financial resources . vailable to the Philippines. In the past, NPC's slow procurement procedures have often delayed implementation; however, NPC has reorganized its procurement system and key bids will be awarded before Board presentation. Further, a substantial part of the project would be inplemented by private BOT contractors and PNOC-EDC; and, to minimize such delays, NPC and PNOC-EDC have appointed high-level Project Directors (supported by staff and consultants) to coordinate all project activities. Another risk is that the large financing required for the project will not materialize, but cofmancing commitments have been received and would be confirmed prior to the loan's effectiveness. The separation into three BOT contracts would facilitate their financing and the replacement, if needed, of any non-performing contractor; moreover, the BOT contracts were awarded in August 1993, and would be signed and guaranteed by substantial performance bonds before loan effectiveness. A third risk is that the geothermal capacity will-be lower -than estimated, but this capacity has been confirmed by PNOC-EDC consultants and certified by independent foreign reviewers; moreover, the Leyte field is expected to yield about 300 MW more geothermal resources in nearby Alto-Peak. Finally, there is a risk that tariffs will not be increased, but this risk has been reduced since present tariffs are adequate, the Energy Regulatory Board has approved the principles for setting NPC's tariffs and automatic tariff adjustments for fuel costs and purchased energy have been approved. The new Government has targeted the energy problem as a top priority and has successfully restored NPC's financial viability.  - iii - Estimated Costs - (US$ Million) l/ Categcry Local Foreign Total A. PNOC-GEOTHERMAL DEVEL. 58.6 205.6 264.2 Al. GOODS AND EOUIPMENT 5.4 136.0 141.4 1. Rig Rental 2.3 40.3 42.6 2. Drilling Supplies 0.S 17.5 18.0 3. Casing and Wellhead 0.7 23.4 24.1 4. Other Drill. Materials 0.1 2.6 2.7 5. Pipes & Fittings 1.0 16.0 17.0 6. Valvee 4 Separators 0.5 12.6 13.1 7. Mechanical Equipment 0.1 2 6 2.7 3. Other eq..lpment 0.2 3.7 3.9 9. Pilot C02 Reinjection 0.0 1.5 1.5 10. Transmissicr, line 0.0 4.6 4.6 11. Substatior.s 0.0 11.3 11.3 A2. WORKS 30.1 65.9 96.0 1. Field Devel.& Prepar. 8.0 0.0 8.0 2. Drilling Tech. Services 0.0 12.4 12.4 3. Civil and Structural 11.3 15.7 27.0 4. Electro-Mechanical 2.4 20.1 22.5 5. Insulation 5.7 2.2 7.9 6. Install. Power Supply 2.7 8.7 11.4 7. Transm. & Substations 0.0 6.8 6.8 A3. TECH. ASSISTANCE & OTHER 23.0 3.8 26.8 1. Engin. & Supervision 0.0 3.8 3.8 2. Compensation & Reloc. 2.2 0.0 2.2 3. Engin. and Management 20.9 0.0 20.9 B. POWER PLANT (BOT) 52.7 482.3 535.0 C. NPC-TRANSMISSION LINES 30.0 256.7 286.7 Cl. SUPPLY & ERECT CONTRACTS 24.9 249.2 274.1 1. Converter Stations 13.4 102.7 116.1 2. Leyte HVDC T/L & Elect. 6.6 47.3 53.9 3. Submarine Cable 1.7 54.8 56.5 4. Naga-Tayabas T/L Rehab. 3.1 44.5 47.6 C2. TECH. ASSISTANCE & OTHER 5.1 7.5 12.6 1. Land & Compensation 3.0 0.0 3.0 2. Technical Assistance 0.0 2.5 2.5 3. Enviromental Advisors 0.0 0.4 0.4 4. Hydro design 0.0 4.6 4.6 5. Engin. and Admin. 2.0 0.0 2.0 ------------------------------------------------------------------- TOTAL COST 141.3 944.6 1085.9 PHYSICAL CONTINGENCIES 8.8 59.5 68.3 PRICE CONTINGENCIES 21.5 91.3 112.8 TOTAL COST WITH cE nrlt CrKB 171.4 1095.5 1266.9 Interest During Construction 66.7 66.7 TOTAL FINANCING RBQUIRED 171.4 1162.2 1333.6 ..._=a= ........=.==========............................... __....=.== ........ . FINANCING PLAN IBRD-PNOC 114.0 114.0 IBRD-NPC 113.0 113.0 Energy Sector Loan (3163-PH)-On going works 13.3 13.3 JEXIM-PNOC 114.0 114.0 JEXIM-NPC 56.0 56.0 BOT-Contract 63.9 556.5 620.4 ECO-Supportec ond Issue-NPC 100.0 100.0 BITS Grant for Converter 26.6 12.4 39.0 GEF Grant PNOC 15.0 15.0 GEF Grant NPC 15.0 15.0 PNOC Internal Cash Generation 71.7 20.3 92.0 NPC Internal Cash Generation 9.2 32.7 41.9 TOTAL FINANCED 171.4 1162.2 1333.6 I/ Totals may not add due to rounding.  - iv - Estimated Dsb-umemllt: Bank Fiscal Year FY94 IFY95 FY% FY97 FY98 FY99 - (US$ miion) ------ Annxual 0.0 30.2 62.8 62.5 56.4 15.0 Cumulative 0.0 303 93.1 155.6 212.0 227.0 Economic Rate of Retum: 11% Poverty gatenorv: Not Applicable Mar: IBRD No. 25290  - v - PHILIPPINES Leyte-Luzon Geothermal Project Table of Contents Pare No. Loan and Project Summary ..................................... i I. The Energy Sector Overview ............................... 1 Resource Endowment ............................... 1 Sectcr Institutions ..................... I Sector Issues and Strategy .......................... 2 Previous Bank Projects ......................... 7 Rationale for Bank Participadon ......................... 8 H. The Power Sub-Sector .................... 9 TMe Power Market ......................... 9 The Power Crisis .......................... 9 Power Sales ....... .............................................. 10 Generation Program ....................11 System Losses ................... 13 Transmission System ................... 13 ]H. The Borrower ............... 15 A. National Power Corporation .......... ..................... 15 NPC Organization and Management ................................ 15 NPC's Reform Progam ............................... 15 Tmining ................................ 16 Financial Policies ............................... 17 Financial Management ............................... 17 B. The Philippine National Oil Company ................................ 8 PNOC Organization and Management ................................ 18 Staff and Training ............................... 19 Financial Management ............................... 19 C. PNOC - Energy Development Corporation ............................... 19 This report is based on the findings of an appraisal mission consisting of Claudio Fernandez (Principal Financial Analyst), John living (Senior Power Engineer), Moiffak Hassan (Petroleum Specialist Engineer), Enrique Crousillat (Energy Economist) and P. T. Venugopal (Financial Consultant) who visited the Philippines in June 1993. The report was edited by Mrs. Barbara Koeppel. Peer reviewers were Messrs. Rafael Moscote, Albert B. Gulstone and Jamil Sopher. The project was cleared by Mr. Callisto E. Madavo, Director EAI, and Mr. Vineet Nayyar, Chief, EA1IE.  - vi- IV. The Project ...................... 20 Project Objective ........................... 20 Leyte Geothermal Development .......................... 20 Project Description ........................... 20 Cost Estimates ..................................... 21 Financing Plan .21 Project Implementation .24 Monitoring and Supervision .24 Procuremwt .24 Disbursements .25 Environment .26 V. Finances .29 (A) NATIONAL POWER CORPORATION .29 Past and Current Financial Performance .29 Capital Expenditure Program ........................................ 31 Foreign Exchange Exposure .................................... 32 Overall Financing Plan .......................................... 33 Future Finances ................................... 33 Financial Sensitity Analysis . ................................... 35 Monitoring and Evaluation .................................... 35 (B) PHILIPPINES NATIONAL OIL COMPANY ............................... 36 Past Financial Performance . ................................... 36 Future Financial Performance . ................................... 36 (C) PNOC-EDC .................................. 36 Past and Present Financial Performance ................................. 36 Future Financial Performnace . ................................... 37 VI. Project Justification ............................ 38 Least Cost Analysis ................................... 38 Economic Analysis ................................... 38 GET Grant Justification ................................... 39 Risks .................................. 39 VII. Agreements Reached and Recommendation .41  - vii - ANNEXES Annex I Energy Sector Plan - Implementation Schedule .............................. 43 Annex 2 Energy Production and Consamption ................................... 49 Annex 3 NPC's Demand (Sales, Generation, Peak Demand aud Capacity) ..... ............. 51 Annex 4 NPC's Power Development Program .............. ..................... 59 Annex 5 Transmission Facilities ........................................... 63 Annex 6 Action Plan ..... ............. ................................ 65 Annex 7 Leyte Geothermal Development . ..................................... 66 Annex 8 Project Description and Implementation - Electric Compoenent ..... ............... 83 Annex 9 Supervision Plan and Implementation Schedule .......... .................... 95 Annex 10 Project Cost ......................................... 96 Annex 11 Disbursement Schedule .... ....................................... 99 Annex 12 Total Capital Expenditures .................... 100 Annex 13 Summary of the Proposed ECO .................... 103 Annex 14 NPC's Financial Projections .................... 105 Annex 15 PNOC and Energy Development Corporation Financial Projections ..... ........... 108 Annex 16 Monitoring Indicators ............................................ 113 Annex 17 Assumptions for Financial Projections ......... ............... ......... 114 Annex 18 Economic Analysis .......................... 120 Annex 19 Environmental Summary .......................... 129 Annex 20 Resettlement and Relocation Plans .......................... 137 Annex 21 GEF Grant Justification .......................... 145 Annex 22 Tariff Structure and Marginal Cost ......................... 157 Annex 23 Terms of Reference of Project Director ............ .............. 160 Annex 24 Documents in Project File ......................... 163 CHARTS 1 - NPC Orgaoization ................. ......................... 164 2 - PNOC-EDC Organization .................. 165 MAP: IBRD No. 25290  I. The Energy Sector Overview Resource Endowment 1.3 Unlike some of its ASEAN neighbors, the 1.1 Commercial energy consumption in the Philippines is not well endowed with indigenous energy Philippines increased from 83.4 million banels of oil resources. New resources being developed (in addition equivalent (MMBOE) in 1980 to 104.5 MMBOE in 1990 to coal and hydropower) are geothermna energy and oil, (Annex 2, Tables I and 2), -a faster rate (2.3% p.a.) which came into production in 1978 and 1979, than the overall growth in the economy (which was respectively. Geothermal reserves are not yet fully about 1.6% p.a.). Between 198691, energy and GDP evaluated, blt could exceed 6,000 MW; 900 MW are growth accelerated to 6.8% and 4% p.a., respectively. already produced and about 800 MW more are expected This was due to substantial increases in industrialization from projects under preparaon or constuon. Proven and a reduced share of agriculture in GDP. In 1991, the oil reserves amount to only 4 million tons and have been industril sector accounted for 51% of total energy declining since 1983. A recent discovery of natural gas demand, followed by transporation, with 32%. Most of offshore of Palawan could provide up to 8 trillion cubic the energy consumed (75%) was and is derived from oil, feet (tcf); however, substantial exploration is needed to but local oil production is minimal (1.3% of the total) confirm the size of the field and its economic viability. and this causes large economic shocks when international Total potenti coal resources are estimated at about oil prices increase dramatically: For example, in 1991, 1,500 million tons (MMI), but most of this coal is low due to the Gulf War, the cost of imported fuel increased grade and expensive to mine. Hydro resources are quite by about 60% and the country registered a 1% decline substantial, with a theoretical power potential in excess in GDP (Annex 2 shows the Philippines' energy balance of 1h,000 MW, but the better sites are too distant from between 1980-2000). About 35% of total energy roads and transmission lines, and their development has produced was electricity (Annex 2, Table 1) and this become uncertain given environmental concems and figure is expected to rise to 38% by 2000. However, guerila activities in remote areas. As a result, no single electricity generation depends heavily on oil (60%), hydro project has been completed (other than one in which entails considerable financi risk because of price Mindanao) during the last 12 years. About 40 run-of- voility. Thus, a move away from oil and the further river, small hydro projects are being prepared under the development of indigenous energy are the only Energy Sector Project (Loan 3'63-PH), but those that significant prospects for limiting the rapid growth of oil are feasible would not add more an 300 MW. imports. Consequendy, the most promising indigenous resource is geothermal energy. 1.2 A serious power crisis beginning in 1991 caused in substantial power outages (para. 1.8) and was partally responsible for low economic growth rates Sector Institutons during the period 1990-93. It is expected that recovery of the Philippine economy will increase GDP growth 1.4 The Energy Coordination Council, chaired from 3.5% p.a. between 1990-95 to 5.5% p.a. between by the President's Executive Secretary, and the Office of 1995-2000. Thus, during the decade, energy Energy Affairs (OEA), which reported to the Office of consumption is expected to rise by 6.4% p.a., and the President, were responsible for coordinating the indigenous sources are expected to provide an ieasing energy sector from 1987-92. As demonstrated by the share of the total generation (from 9% to 15% for power crisis, these institutional arrangements did not geothermal and from 5.5% to 7.9% for coal). succeed, nor did they provide adequate sector Nevertheless, 70% of the energy consumed will still be investments and supervision. However, The recent imported by the year 2000 (Annex 2, Table 2). establishmet of the Department of Energy (DOE), under the Republic Act 7638 of December 9, 1992,  should improve condidons; it has been operating since support to the RECs. To strengthen the Government's February 1993, replacing the Energy Coordinating supervisory role during the current power crisis (para. Council and the OEA. DOE has been given a 2.5), the Secretary of Energy will serve as chairman of comprehensive mandate for policy formulation, planning NPC, PNOC and NEA. Other institutions critical to the and supervision in the sector. After a long hiatus, the sector are: (a) the Department of Finance (DOF), which energy sector will be dinctly represented in the Cabinet. approves local or foreign borrowing and recommends The DOE law establishes policies to promote budgetary contributions; (b) the National Economic and environmentally sound development and conservation of Development Authority (NEDA), which approves the resources, as well as indigenous energy, privatization country's planning (including large energy projects), and and increased private sector participation in all energy (c) the Environmental Management Bureau (EMB), activities. It also aims to reduce dependence on oil-fired under the Department of the Environment and Natural plants. Resources (DENR), which has the authority to approve the enviromnental impact assessments (ELAs) and issue 1.5 The DOE Secretary is an ex-officio the environmental compliance certificates (ECCs) member of the National Economic and Development required for the construction and operation of power Authority (NEDA), and is supported by four bureaus: (a) 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 greatly on petroleum the development of nonconventional energy systems; (b) imports and requires a substantial increase in its power the Energy Resources Bureau, for formulating policies capacity. Concerned with the need to conserve petroleum and helping develop energy resources; (c) the Energy and use energy optimally, the Government strategy calls Industry Administration Bureau, for creating regulatory, for: (a) an environmentally sound and sustainable power fmancial and fiscal policies related to energy supply developmern plan; (b) large private sector participation entities and for approving non-price regulatory matters, in energy projects; (c) improvements in sector efficiency; and (d) the Energy Plannmng and Monitoring Bureau, for (d) reduced dependency on oil-fired plants; (e) increased developing and monitoring energy plans and demand use of geothermal resources, and (f) improved demand forecasts and incorporating national environmenWal goals management and conservation. This strategy is supported into energy programs. A five-member Council of by the Bank and sector reforms (paras. 1.8-1.28) and is Advisers on Energy Affairs from the private sector was censistent with Banik policies to promote satisfactory also established to advise the President 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 that distribute power are Sector Issues and Reforms private (investor or member-owned), including the following: (a) MERALCO (Manila Electricity 1.8 Since 1991, the Philippines has been Company), a private utility that distributes about 60% Of experiencing a very serious power crisis, which poses a the total electricity to Metro Manila; (b) 15 private or grave thrnat to its economic development and stability. municipal utilites that retail electricity in different cities The crisis has resulted in substantial power outages-6 to and (c) about 120 member-owned rural electrification 10 hours per day in Luzon and Mindanao-and drastic cooperatives (RECs), which distribute power and manage curtailments in supply; in turn, these have curtailed retail sales in rural areas. There are also tree very large industial production and the development of new Government corporations in the sector: (a) the National industrial and commercial activities. Thus, Power Corporation (NPC), which sells power in bulk to unemployment is rising and economic losses are electric utilities and is responsible for power generation mouning, estimated at US$600-$800 million per year by and transmission; (b) the Philippines National Oil the Bank or about 1.5% of GDP (using 050/kWh as the Company (PNOC), responsible for developing cost of unserved energy) and at US$1-1.3 billion by the indigenous hydrocarbon and geothermal resources and business community. Necessities are jeopareLzed-not refining and sellinm petroleum products, and (c) the only because of a lack of electricity for reading, cooldng National Electrification Administration (NEA), or entrtament, but also because other key services that responsible for fincing and providing related technical depend on electricity (such as traffic management,  pumped water and sewerage) are also disrupted. The Agreement was reached with the Goverment at power crisis resulted from protracted environmental negotiations that it would car out the ESP, would approvals for power plants (delayed for several years), compiete by June 30 of each year a report on the slow procurement and implementation by NPC and the Progress achieved in carrvinn OUt the ESP durine the mothballing of the 605 MW nuclear plant; as a result, pqreceding vear and exchange views with the Banl in its minimal investments were executed in previous years future iM2lementatlon. (practically no additional power capacity was added between 1986-92). Under the "Electric Power Crisis Act 1.12 NPC has also improved major institutional of 1993, " the President has been granted special powers and operational aspects. These include suramlining its to solve the energy crisis, which include facilinat tariff structure by halving the number of top managers, which increases, speeding up project approvals, and improving eliminated 17 vice presidents and about 20 department salaries of technical staff in the sector. managers, and reducing the staff from 16,056 to 14,256 between 1991-92. Further reforms and the streamlining 1.9 Inadequate policies blocked Bank lending of NPC's management and organizaton are being to the Philippines for several yeas until 1988-89, when implemented by DOE. In addition, it has: (a) the Bacon Manito Project (Loan 2969-PH) and the rationalizing functions and provided for greater Energy Sector Project (Loan 3163-PH) initiated reforms decentralization (particularly for mainace, watershed to improve sector coordination and planning, management and accounting); (b) introduced enviroumental monitoring, the technical capabilities of standardized bidding specifications, establishing a sector institutions and privote power development. contracts committee and delegated responsibilities for Despite these reforms, a serious power and financial procurement to the regional managers; (c) established crisis persisted, thus highlighting the need for further programs and targets to improve combustion efficiency; reforms and improvements. Therefore, since 1991, the (d) improved project implementation, and (e) performed Bank has been discussing these issues and a paper better internal audits and rotated staff who exercise recommending secor improvementsL/ was submitted to critical financial functions. An Efficiency and the new Government in July 1992. Operational Improvement Study (EOIS) identified further areas to be improved (para. 3.7). Agreement was 1.10 The Energy Sector Plan. Sector reform reached at negotiations that NPC would carry out the and improvements are the highest prority of the new aareed recommendations of the EOIS. would provide to administration. In agreement with the Bank, the the Bank on December 31 of each Year an annual repor Government approved an Energy Sector Plan (ESP) to on the nro2ress achieved and discuss with the Bank the chart the course of actions it will take to improve sector measures to complete its implementation. operadonseL. The ESP lays out policies and defies improvements in all areas of concem as well as teir 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 reguating the sector. This includes DOE setting policies, cornerstone for the development of the power sector and deciding on non-price regulations, implementing them its implementtion is being supported by Bank lending. and supevising Government corporations in the sector. In addition, the regulatory system has been stengtened, 1.11 Some key actions of the ESP have already and the Energy Regulatory Board (ERB) is now been implemented, particularly the creation of a responsible for approving tariffs (using public hearings) Department of Energy, an increase in NPC's tariffs to and regulating energy prices under clear rate-of-return yield an 8% rate of return on revalued assets in 1993 criteria. ERB is a quasi-judicial, autonomous body that (para. 5.11). and substanal tariff hikes. Otber actions has adequately managed oil prices, maintained a surplus include: (a) the establishment of a fuel and purchase cost in the Oil Price Stabilization Fund (OPSE) and approved adjustment (FPCA) mechanism to compenste for adequate tariffs for private power utilities. It has just variations in fuel prices and the cost of purchased approved two tariff increases for NPC that had been energy, which would make future tariff adjustments pendig for two years. This decision will allow NPC to largely automatic; (b) the introduction of an improved recover the amount foregone during the past two years tariff structre with demand charges (to reduce peak by adding a surcharge to current tariffs. in deciding this demand), and (c) exchange rate adjustments (para. 1.17). case, the ERB establshed the criteria on wbich future  - 4 - rates will be based, which include the rate of return contracting and dispatch of power generating plants by leve;, the assets revaluation procedures and the expenses June 30, 1994. Given the limited commercial financing allowed in the rate of return. To perform effectively, available to the Philippines and the large sector ERB needs to increase the number of qualified staff, investments needed (US$1.3-2.0 billion per year), an receive support from advisors and train its staff on tariff integrated effort will be needed by the Government and analysis and regulatory systems. Grant fincing for the prvate sector to maintain adequate power supply. regulatory advisers is also being sought. 1.16 The large increase in private sector 1.14 Private Sector Participation. The generation has resulted in substantial changes in the Philippines is one of the few developiag countries with power sector structure. In accord with the ESP, a large private sector participation in the energy sector. decision on NPC privatization was to be taken by the Except for three government corporations (NPC, PNOC end of 1993 and a USAID-funded study (by Price and NEA), all energy activities are managed by 135 Waterhouse) identified several initial options for NPC. companies or utilities in the private sector (para. 1.6). However, additional studies are reqired to evaluate the Energy exploration is private and oil refining and impact of these alternadves, as well as the distribution are carried out by two pnvate companies implementation procedures, since there are important (CALTEX and Philippines Shell Petroleum Corporation) constitutional and financial constraints that must be in addition to Petron (the oil and main subsidiary of resolved to ensure a successful privatization and ensure PNOC). Petron (the largest subsidiary of PNOC) is the implementation of the large investments needed. being privatized and NPC has already included Until these studies are completed and the Government considerable prvate sector participation in its generation decides if and how NPC will be privatized, the presen activities. The privatization of Petron includes the sale of strategy of rapidly increasing the private sector role in 40% of its shares to a foreign oil company (completed in power generation and operational management is March 1994), another 20% would be sold to PNOC's appropriate and has been successful in attracting employees a-id the public dunmg 1994, and the substantal financig under substantial competition. The Government would retain 40%. Bank is completing a Power Sector Structure Study to improve the efficiency and competitiveness of private 1.15 With 35 contracts signed with the private sector participation in power generation and study the sector for the construction, financing, operation and vanous alternatves to organize the power sector. The m..anagement of power plants using Build, Operate and main alternative being considered is to split NPC into Transfer (BOT) or Build, Transfer and Operate three regional companies under the corporate code, (BTO)3/ or other schemes, the Philippines is a pioneer which could later offer their shares to the public, in private sector partation in power generation (27 of establsh a national transmission grid company, which these plants will be in operation by the end of 1994). would also be responsible for dispatching power from These contracts involve a total capacity of about 5,000 regional or private generation companies. Presently MW (Annex 4, Table 2), which is more than the total dispersed distribution companies could also be existing generation capacity. Moreover, NPC's Board is aggregated into larger units, in order to improve their implementing a successful policy of offeringll new purchasing power and achieve economies of scale in power generation plants to the private sector (except distribution. These or other altenatives will require multipurpose hydro plants) and, therefore, about 80% of changes in key laws and these changes would be phased the power generation plants enting into operation over several years. Power generation would then become between 1993-99 would be private (Annex 4, Table 1). fully competitive under improved BOT/BTO bidding However, the proliferation of BOT contas by NPC procedures and the participation of indepedent power and the private utilities under take-or-pay conditions may suppliers. There is a need to improve policies, reduce result in complex power dispatch problems and t-: uncertinties and risks faced by the private sector difficulties in allocating the costs of reserve capacity. and encourage even wider private participation. Under DOE is, therefore, establishing a planning system to the Power Transmission and Rehabiliation Project (Loan avoi4 either low supply and outages or excessive supply 3626-PH), NPC is implementing improved rules and and costs for unused capacity and under the Leyte-Cebu procedures to facilitate private sector particIPion in Geothermal project, NPC in coordination with DOE energy generation, including stndardized bidding would complete a consultancy study on the economic documents.  - 5 - 1.17 Power Pricing and Financial increases have been approved for RECs, many on the Improvements. A Supreme Court decision in March order of 40%-S0%. These tariffs are geny uniform 1991 suspending a tariff increase approved by the NPC for all consums, regardless of voltage level, resulting Board (which was the proper authority at dtat time) in a cross subsidization of low voltage consumers. NEA resulted in a financial crisis ai NPC (pa. 5.3). In is inoducing new gusielines that have improved the addition, a Januaty 1992 increase, although structure and level of REC tariffs. implemented, was also submitted for an ERB judgement. ERB determined that both tariff increases were justfied 1.20 0Oi Prng. The Government approved a and allowed their implementaton. Furher, ERB clearly full deregulation of oil prices for 1996 to improve defined the asset base and the expenses allowed for the competition, upgrade oil production and refmiery rate of reurn (the major contention in the previous two facilities and depoliticize the adjustent of oil pnces. taiff increases), which wil avoid future legal The deeguon wil requre changes in the legal and challenges. The tariff increases raised NPC's net income regulatory frameworks, the establihment of new from a loss of US$135 million in 1991 to a net surplus financing mechanisms for crude oil purchases, and the of US$186 million in 1992 and about US$160 million in elmni on of the "baggage of the past" (induding legal 1993. Under DOE law, all energy prices will be cases pending in the Supreme Court). In order to achieve approved by the ERB. Moreover, to avoid delays in a successful deregulation, steps are included in the ESP, adjusting tariffs for costs that are beyond NPC control, including energy pricig, industry cost sthdies and the and to depoliticize such increases, an automatic monthly measums already taken by the ERB to ensure adequate total fuel and purchase cost adjustent was approved by rates of return to the oil companies. In the meantime, it the ERB. This will index NPC tariffs with fuel prices was impornt to maintain appropriae prices for oil and other costs, which represent about 82% of NPC's products. This was achieved during the last two years, total operational expenditures (for oil, coal, steam and when prices were above internutional levels and resulted purchased energy). The ESP has endorsed a similar in a sbstanial OPSF surplus. To ensure the mndexation mechanism to compensate for the increase in continuaton of these policies, the Government is loan principal (from exchange rate variations) which supporig legislation requiring automatic adjustents of would be implemented in 1994. These measures would oil prices when the OPSF fund reaches minimum or avoid large ad hoc increases, while implementing small, -maximum liquidit levels; also, ERB is considering monthly adjusmes. indexmg its wholesale oil prices with Singapore price indexes for petroleum products (expressed in pesos 1.18 NPC's Board also approved tarff changes equialen). This would allow automatic monthly in line with its longrun margnal cost and designed to adjustme in oil prices. achieve a better prie for demand and energy charges, while providing a lifeline rate for uSties that serve low- 1.21 Gothemal Bi. The private sector is income consumer. The practice of estblishing harges alread involved in geothermal development in the for maximum demand is supported by the ESP and Philippines, but extg taxes and royalties hinder would be implemented under the project (para. 5.12). inas efforts for expanding the private sector Further improvements would require the impe tion involvement. Under geoermal conts with DOE, of time of day rates for large consumers (once normal developers have an income tax holiday for six years but power supply is restored) and the equalization of rates must pay the Govenmnent an anmnal fee after that time (at the same voltage levels) among industies and (corporate income tax and royalty) equal to 60% of the utilities. net value of the steam. These royalties discouage private sector participatior in geothmal development. 1.19 Distribuion Tariffs. Retail powe . is A sisactory geothermal bill has been intoduced in in the Manila area, which are indexed with NPC tariffs Congress to extend the royalty exemption from the and the exchange rate, have provided MERALCO a rate seventh to the fiteenth year (after the income tax holiday of return higher than 8%. The power tariff subsidizes during the first six years). ilry imprnt is the consumption below 50 kWh/month through relatively Government comm_ment for an imuroved angomal higher rates for large industrial and commercal users. royaty bilM ich has been cerified a an Administation For the rural am e, under the Rural Elcifican Bill. to receive prioritv consideration in the Congress Revializaton Prqoet (LAoa 3439-PH), substantial taiff (Annex 6. Acton Plan). This klw, wgedher with the  -6- transmission facilities provided by the projects. would conservation measures at public offices and buying foster private sector development of geothermal energy equipment to retrofit electric motors for higher efficiency. Practically all commercial or industrial 1 22 Environmental Management. The establishments are using CFL, while a large percentage Govermnent's policy is to achieve sustainable (80%) of the residential consumers are already using development by enforcing environmental guidelines and fluorescent lights. The Bank's Energy Sector requiring that a satisfactory environmental impact Management Assistance Program (ESMAP) is currently assessment (EA) be prepared for power projects. studying which additional measures could be cost However, many power projects were halted or suffered effective. However, given the Philippines' very limited inordinate delays (three or four years) during the time use of electricity (only 3.9% of power is used for air that environmental decisions or approvals from the conditioning, and the country has a very low per capita Department of Environment and Natural Resources power demand of 371 kWh per year), further reductions (DENR) were being secured. This occurred due to in power demand are likely to be minor. institutional deficiencies, stringent environmental guidelines and the convoluted process required to obtain 1.24 The key for conserving and fostering the environmental approval from the communities efficiency is pricing power appropriately. Measures to involved. Agreement has now been reached to separate achieve this have already been implemented and prices the technical and environmental analyses and approval are now higher than marginal cost. Moreover, demand (by DENR) from the social and political approval (by the charges will be introduced by the project to reduce peak regional development councils and NEDA). The demand. Future actions on energy efficiency and demand technical capability and equipment of the EMB are being side management include: (a) DOE is mandated to create upgraded under the Energy Sector Project (Loan 3165- programs and incentives to conserve energy and its PH) through training and the acquisition of modern Energy Utilization Bureau will establish policies to laboratory and monitoring equipment. DENR will also promote efficient energy use, monitor energy need to employ more environmental specialists and consumption and provide training and improved review its stringent environmental guidelines. The Bank technologies; (b) building construction standards are has finalized a sector study ("Toward Improved being revised; (c) power utility losses will be reduced Environmental Management" in December 1993) (para. 1.26); (d) an ongoing technology-transfer, energy- proposing recommendations to improve the management program would finance energy conservation environmental analysis and find a balance between power programs, document energy savings and disseminate supply requirements and the resistance of most related information; and (e) studies are being completed communities to having power plants in their backyards. by several donors and the Bank on further energy Since a key concern for power projects is their social conservation and demand management schemes. acceptability, the President has given instructions to NEDA, DOE, DENR and NPC to identify sites for 1.25 Operation and Maintenance. The present future power plants which would be more energy crisis (para. 2.5) is in part due to the lack of enviromentally and socially acceptable. adequate maintenance, insufficient spare parts and lack of qualified technical staff. The problem has been 1.23 Energy Conservation and Demand exacerbated by power shortages which have forced NPC Management. The Philippines is already implementing power plants to operate for long periods without programs for energy conservation and demand side scheduled maintenance. Maintenance practices, management, mainly because of the combination of high especially with regard to procuring essential spare parts power prices (about twice the level of those in when they are needed, must be improved. For this Washington D.C.) and the public campaigns for saving purpose, management contracts with the private sector energy. Measures already in place include raising air have been signed for several plants (Ambuklao, Naga, conditioning temperatures in public buildings, rating the Binga and ten power generating barges). efficiency of electric appliances, using compact fluorescent lighting (CFL, with about 500,000 units sold 1.26 Operational Efficiency. NPC's per year), changing street lights to halogen, performitg transmission losses, net of station use, are just 3.5%, energy audits (initially financed by USAID and now paid which is satisfactory. However, to improve operational from the subprojects' savings), applying strict efficiency in the power sector, old NPC plants would be  -7 - rehabilitated. Because most thermal plants are very old Previous Bank Projects (their average age is 23 years), some may have to be retired within the next 5-10 years. Also, management 1.29 Between 1957-75, the Bank fiancthree contracts are being considered for two large plants in hydro projects, two thermal plants, one transmission 1994. Further, MERALCO and the RECs will be project and one rural electrification scheme. Three loans required to reduce excessive distribution losses by were also approved for coal, oil and geothermal upgrading the distribution system and enforcing stricter exploration. Project Performance Audit Reports (PPARs) controls on metering and billing. Between 1989-92, were prepared for two projects with NPC (the fourth and MERALCO reduced electricity distribution losses from seventh projects, PPAR No. 0980 and PPAR No. 8574). 21% to 14% and the RECs from 26% to 22%. These The major problems identified in the PPARs were losses should be gradually reduced to about 10% (12% implementation delays and cost overruns due to project for the RECs). Illegal connections are partly responsible design changes, cumbersome contract award procedures, for such losses, since there are practically no penalties and weak project management. Because of a for making unauthorized connections or tampering with disagreement on policies, the Bank discontinued lending meters. To correct the problem, the ESP is supporting until 1988, when it approved the Bacon Manito crucial anti-pilferage legislation which has already been Geothermal Project (Loan 2969-PH). In 1988-89,ovo introduced in Congress and is expected to be certified as other projects were approved for the Manila Power an Administration Bill by mid-1994. Distribution System (Loan 3083-PH) and for the Energy Sector (Loans 3163-PH, 3164-PH and 3165-PH). These 1.27 Project Implementation. The process projects financed sector investments and supported whereby NPC approves contracts has been slow. To improved sectoral policies regarding investment strategy. improve and accelerate procurement, NPC has financing and coordination. They are generally being standardized bidding documents and specifications, implemented satisfactorily, but NPC had problems appointed project managers for each project and achieving the covenanted rate of return in 1991, and, in implemented a computerized monitoring system the Bacon Manito project, although power generation (Artemis) for all investments. Implementation should be started satisfactorily in October 1993, the completion of improved from delegating the construction of new other transmission lines required a one year extension of generation plants to the private sector under BOT/BTO the closing date. The Bank has tried to resolve these contracts. To expedite future projects, NEDA has now problems by supporting the establishment of an improved approved the total power dcvelopment program for the regulatory framework, placing the responsibility for each next few years. project under a Project Director, improving procurement processes, bidding turnkey contracts rather than separate 1.28 Staff Salaries. Salary and benefits for components, implementing advance contcting and NPC staff, as well as for employees in other requiring the establishment of automatic tariff increases. Government corporations, have been reduced The Power Transmission and Rehabilitation Project substantially since 1991, due to a law that standardized (Loan 3626-PH) approved in June '993 will support salaries for all Govermnent workers. As a result, many institutional improvements, rehabilhate the Bataan oil key technical and managerial staff have left (and new plant and fmance key transmission lines required by fast- ones will need extensive training programs), maintenance track private-generation projects in Luzon. The Leyte- has been affected and hiring of qualified staff has Cebu Geothermal Project (approved in February 1994) become difficult. Under the Power Crisis Act, the started to develop environmentally preferable geothmal President was given authority to raise NPC's salaries energy in Leyte. Tbrough these projects, the Bank is based on comparisons with the private sector. A supporting major sectoral improvements, including consultancy study provided recommendations on this substantial private sector participation and institutional matter in August 1993, and a request for a salary and financial reforms. increase of about 50% is being considered by the President.  -8 - Rationale for Bank Participation 1.31 The Government's energy strategy closely follows the recommendations in the Bank's policy paper 1.30 The proposed project is consistent with the for the power sector. First, NPC is transferring almost Country Assistance Strategy for the Philippines, aU its responsibility for incremental power generation to discussed by the Board on February 3, 1994. the private sector (requiring investments of about Developing adequate infrastructure, particularly power US$1.2 billion per year for power generation). Second, supply, is one of the highest priority in the Bank's the basis for future tariff adjustments has been country lending strategy; the lack of it is the most established, which will ensure NPC's long-term fnancial constraining factor in the country's economic viability, including the indexing of its tariffs with fuel development. The proposed project would help alleviate costs and purchased energy. Third, a transparent the power crisis, expand base-load power capacity regulatory framework that covers the entire energy (financed by the private sector) and help NPC expand sector and provides adequate protection for producers, and reinforce the transmission system. With Bank distributors and consumers was created under an support, the Government has alremdy implemented far- independent, quasi-judicial regulator (ERB). Fourth, reaching reforms in the power sector, as it has adopted NPC is substantially improving its corporate policies and policies and strategies and made institutional conmiercializing its operations, such as entering into improvements which conform withi Bank policy. Bank management contracts with the private sector. Finally, intervention in the sector has been critcal in helping the Energy Sector Action Plan provides for measures define the improved policies and actions in the Energy that, along with demand charges, will firther improve Sector Action Plan, establishing the DOE and demand-side management and energy conservation. As strengthening NPC's fnances and insttudonal a result of these actions, the sector can now grow arrangements, improving its efficiency and promotng vigorously and attract resources from private sources, private sector generation of power to ensure a robust the Bank Group and other bilateral and multilateral implementation of its power program. Bank support has agencies. also been critical in organizing the financial engineering required for the Leyte-Luzon Project. By completing the sector study, "Toward Improved Environmental Policies and Management", the Bank has also promoted a balance between the country's energy development and sound environmental practices. Endnotes: 1/ 'Energy Sector Issues and Actions." 2/ The 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/ In build-operatetanser (BOT) projects, the private sectr will build, finance, implement, own and operate (for 10-20 years) the project facilitues and tansfer them back to NPC afler that period (BOT contracts can be extended). In build-transfer-operate (BTO) projects, the private sector will build, obtain the required loans to fmnance the project and construct the power plants; after project completion, the assets and liabilties will be transferred to NPC, but the contactor will operate the plant for most of its usefid life under a renewable operation and management contract.  - 9 - II. The Power Sector The Power Market 2.4 Demand Side Management. To reduce power demand, the Government implemented several 2.1 National Grid Interconnection. The programs that involved: (a) implementing demand Philippines consists of three major island groups. The charges; (b) encouraging commercial and industrial main one (in the northeast) is Luzon, where Manila, the consumers to use energy-efficient lamps; (c) replacing capital, is located. The other two are the Visayas inefficient street lights; (d) requiring energy audits from islands (in the middle) and the Mindanao islands (in the large industries; (e) publishing the efficiency indicators south). The main islands in the Visayas (Cebu, for various electric appliances, and (f) conducting Negros, Panay and Bohoy) were interconnected in conservaton campaigns, particularly for lighting and air 1993. The interconnection between the Luzon and the conditioning. These actions have already produced Visayas regions (which account for 85% of the power substantial results, as most commercial establishments sales) would be realized by the ongoing Leyte-Cebu and a very large number of households (80%) are now Geothermal Project (which will interconnected Cebu using fluorescent lighting, and sales of compact with Leyte by 1997) and by the proposed project, fluorescent lights are about one million a year. To which will interconnect Leyte with Luzon by 1998. further these efforts, ESMAP is preparing Mindanao is expected to be linked to the other regions recommendations on additional cost-effective ways to after the year 2000. These interconnections are reduce demand; but, given the progress already expensive because of the distances involved and the achieved, their impact is expected to be minor. The high cost of submarine cables. In the interim, demand basic parameters for optimal electricity demand are for each system has to be planned independently. The already in place; these include appropriate pricing integrated transmission system will benefit the country policies with power charges equal to or higher than the significantly because the geneating plants could be marginal cost, and the Philippines having the second located optimally and the total reserve capacity needed highest retail power tariffs in Asia after Japan (and would be reduced. twice the level in Washington D.C.). In addition, adequate charges for power demand will be introduced 2.2 Power generation in the Philippines is by the project. The impact of such measures will be mainly the responsibility of NPC, but there is large and limited in the short term because much of the increasing participation from the private sector. NPC population is low-income (per capita GDP was only supplies power in bulk at high voltages to MERALCO $730 in 1991) and annual per capita consumption was and other private utilities, the RECs and some large only 371 kWh in 1992, roughly the equivalent to per industrial consumers (para. 1.14). capita electricity used in a period of two weeks in the United States or Canada. 2.3 NPC's Board of Directors has approved a policy to invite private sector bids for future power plants, excluding muldtpurpose hydro plants. It is The Power Crisis therefore projected that of the #850 billion capital expenditures included in NPC's 1993 Power 2.5 A severe power crisis beginning in 1991 Development Program (PDP) for 1993-2005, about has hampered economic recovery in the Philippines and 68% will be undertaken by the private sector and over its continuation poses a serious threat to the nation's the long-run, NPC's direct investments will only economic and political stabilization. Substantial outages involve transmission lines (24% of the total) and occurred 4-8 hours a day in Luzon and up to 12 hours rehabilitation and other works (8%). However, due to in Mindanao, where power sales dropped by one third limited commercial lending and the magnitude of the as a result of record droughts, (Figure 2.1). These investments required, a more likely scenario would be outages adversely affected industrial production and the joint financial efforts between private and official sources. development of new industril and commercial  - 10 - activities. In addition to delayed environmental uneven growth in demand, which closely followed approvals and weak institutional performance (para. variations in GDP growth (Annex 3, Table 1), although 1.8), the mothballing of the already completed Bataan power growth has been about 2% -3% points higher. nuclear plant (605 MW) had a substantial impact. The difference is attributed to greater industrialization, Negotiations with Westinghouse (the original builder), higher living standards (which translate into the use of regarding the cost to upgrade and operate the plant, more appliances), and the increase in households were unsuccessful; and, regardless of the outcome of connected to electricity. In fact, power demand these discussions, opening the plant would probably increased, although at a low rate, even during economic have met with public resistance. Therefore, the recessions: While GDP decreased by 14% between Government is considering the conversion of the plant 1983-85, electricity sales increased 0.3%. Most of the and part of its facilities for other fuels (particularly 1992 electricity consumption of 18,630 GWb was in LNG). This potential generation is not included in the Luzon (78.2%), where Manila is located, while tlhe two current power development program. other large island-systems, Mindanao and Visayas, used 12.4% and 9.4% (Mindanao will use about 15% when normal supply is restored). MINOANAO POWEA SALES -so 2.8 Power outages (seven hours a day in Luzon in July 1993) are expected to be substantially reduced by early 1994 when the rehabilitation of two -GEL on, L b F ffi ^ilarge plants, the "fast track" projects and other power plants wil be completed, adding about 1,100 MW to Y'- -- ----t Luzon, 300 MW to Mindanao and 40 MW to Visayasl'. Such expanded capacity will substantially improve the system, since there had been practically no increase in capacity during the last five years. Once the current unserved demand is met, increases in power sales are expected to follow previous trends with an & V&Y (1F1 1 I elasticity of about 1.3 in relation to GDP increases. Figure 2.1 2.9 Power Development Program. NPC annually updates its demand forecast model based on 2.6 "Fast Track" Generation Program. To statistical analyses of population, industrial and solve the crisis, the Government very successfully commercial growth, surveys of major utilities and brought the private sector into a "fast-track" power industries and the Government's estimate of GDP generation program. Since standard power projects growth. The demand analysis is included in NPC's require 3-6 years to complete and do not provide short- Power Development Program (PDP), which determines term solutions, NPC contracted with BOT/BTOs to the least-cost generation expansion program using the construct new plants to be completed in 1993-94, with a WASP model to define an optimal sequence of plant capacity of 700 MW for Luzon and 300 MW for additions. The PDP provides details for generation and Mindanao. These contracts involved combustion transmission systms for each region, transmission grids turbines or diesel systems, which were the only and independent island systems. In the past, the generation plants that could be commissioned within implementation of the PDP was considerably delayed one year. The added generating capacity on Mindanao, due to NPC's slow procurement and the long period of combined with less severe drought, have climinated the time needed to secure environmental and public power outages and restored normal sales (Figure 2.1). approval (even after financing was in place). Power Sales 2.10 NEDA is projecting GDP growth of 4.5%, 7.7%, 8.2%, 8.8% for the 1994-97 period, and 2.7 Demand for power grew at an annual rate 10% thereafter-figures that NPC had to use and of 7% during the 1970s, 4.1% between 1980-85, and include in its PDP of '993. However, these rates are 6% between 1985-90. However, these averages mask much higher than the Bank's (which are 4% and 5% for  - 11 - 1994-95 and 5.5% thereafter). Also, NPC assumed a 2.12 If the high scenario materializes in the GDP elasticity ratiot of 1.25 for Luzon and a much short-term, this would mean higher sales and revenues, higher one for the total country (1.5); these would since existing capacity would be maximized; however, require very high growth rates in Mindanao and much larger investments would be needed in the Visayas, which would then account for a large share of medium-term. NPC's direct capital expenditures would NPC's future sales. But such rates run counter to the not change because, except for the multipurpose hydro experience of the last 15 years, when Luzon's share plants, atl new power generating plants are expected to remained at about 75% of total sales. Moreover, there be built and financed by the private sector (BOT/BTO are other financial and infrastructural constraints that projects). may limit industrial development, and power sales are likely to be reduced by the impact of price elasticity 2.13 The direct contracting by the utilities of and demand management programs (para. 1.23). private power supply in parallel with NPC will require Therefore, thc 1993 PDP forecast of a 64% increase in periodic monitoring to ensure an adequate relationship power demand in Luzon between 1994-98 is considered between supply and demand of power. Several a high scenario. distribution utilities, industries and industrial estates have signed contracts with independent power PH I L I PP I NE5 ENERGY SALES producers for almost 2,500 MW; however, a substantial part of this capacity may not materialize due to I______________________ financial, technical or environmental constraints. In the even a large portion of these projects materialize, the country may experience excessive capacity. Also, NPC's projects could also be delayed because of environmental approvals or implementation delays. Further, the economic growth and corresponding power demand may be different than projected. Although these uncertanties will not affect ongoing projects, they will affect new projects to be completed after 1998. However, to environmental and particularly financial l constrains, only about 30% of the capacity from Figure 2.2 proposed independent suppliers is expected to be completed by 1998. NPC sales have been reduced to account for this independent generation (Figure 2.3). The PDP for 1994 wil include major consultancy 2.11 For the appraisal, the sales forecast and support financed by an ADB grant, which should investments needed have been based on more substantially improve power planning. DOE and NPC conservative scenarios, which are roughly in line with should closely monitor the power demand, particularly NPC's PDP of December 1992: The growth rates the impact of self-geneation by industrial or applied (in the scenario for 1993-98) average 8.8% p.a. commercial consumers. Aeement was reached at for Luzon, 14.4% for Mindanao (partially because of negotiations that no later than October 1 each year. the previous deficits) and 11.2% for Visayas. Figure 2.2 Government. NPC and the Bank would review NPC's shows the appraisal forecast sales, which in the case of updated PDP. and NPC and take the necessary actions Luzon, are about 13% lower than in the PDP-92, due to carry out the agreed powa development proMram. to the expected impact of price elasticity and reduced losses by the power udlities. Although the differences Generation Program in the demand forecast will not affect the investments initiated in 1994, an annual review of the least-cost 2.14 In the medium-term (by 1996-97), NPC program would be needed before contracting additonal will balance the mix of its generating capacity by capacity. Therefore, the PDP will be updated annuiaRy installing adequate base-load plants (with a heavy focus in consultation with the Bank (para. 2.13) and decisions on geothermal energy), which will be comparable in to initiate new plants will be made annually, based on cost, but envinmentally preferable, to plants that use new forecasts. imported coal. In the long-term, options are limited to  -12 - NPC L PRIVATE ENERGY SALES ENERGY GENERATION IN LUZON - GWH 30 7 ;<~~~~~~~I 111 ^s~~~~~~~~~~~~~~~~~~W lSV 1120 199t4 13 V WVC CESR tD 0 CA9ITY A 1- 9 CA V *.ICH CffC V W_ Figure 2.3 Figure 2.4 plants using imported coal (which is tue least-cost generation and independent power produlcers (Figure solution for the Philippines) and some hydropower (see 2.3). But, given the substantial age of some plants (a Fig. 2.2 for the projected capacity mix in Luzon). number of the oldest may have to be retired before the P'ower demand and capacity for each grid are presented end of the decade) and uncertainties in the availability in Annex 3, Tables 1-8, which include previous years of hydro energy (due to droughts and increased and a forecast until 2010 for sales trends, power domestic, industrial and agricultural use of water), NPC generation, peak demand, losses and Jkey indicators. will have to provide an ample capacity margin (above Annex 4 details the respective plant additions and 30%) to meet acceptable reliability criteria (See Annex r-etirements assumed in the appraisal until 2000. 3, Table 8, for Luzon's energy generation and capacity and Annex 4 for the implementation schedule). Total power generaton and peak demand in the Philippines 2.15 The capacity added by the *fast track- are also expected to double during this period, from program includes diesel and internal combustion turbine 25,570 to 51,470 GWh and from 4,190 to 8,260 MW, plants which have low-construction lead times and respectvely, which will require an additional 4,000 reduced capital costs but high operating expenses. As MW generating capacity. The high scenario (PDP-93) soon as they satisfy base power generation needs, some anticipates a total generation of 62,000 GWh and of these plants would have to be used only for peak requires an additional 6,000 MW by 2,000. But, in generation or stand-by capacity, although their fixed either scenario, the least-cost investment progrmn for payments will have to continue, the next four years will be the same. To improve sector planning, a study on the economic Conrcing and dispatch of power generating plants would be completed 2.16 A major concern is the power supply for by June 30, 1994 (para. 1.15). It is, however, critical Luzon, the center of the country's industrial and to define the power that MERALCO (which distributes commercial development. It is expected that from 1992- more than 60% of the total power in the Philippines) 2000, energy use will double there from 18,630 GWh would buy directly from indepndn power producers to 33,470 GWh (Figure 2.4), with an increase in peak or would purchase from NPC, by signing a ten-year demand from 3,200 MW to 5,700 MW. Most of the contract between these two companies. This would additional capacity needed would be from coal-fired allow DOE and NPC to pla the total power demand plants, with some independent power producers selling and supply, set the schedule for new plants to enter into directly to distribution utilities or industries rather than operation and maintain an adequate balance between to NPC. Such capacity will be ensured or even supply and demand. As a condition for MPC's loan surpassed by projects already signed or currently being effectiveness. NPC and MERALCO would sian a bid, including about 1,000 MW expected from co- saisfactory lona-termcontatfor ower supply.  - 13 - 2.17 In Luzon, the choice of energy sources is Tranmissn Systems shifting. Oil-based power generation has reached a peak and is expected to decline in future energy production, 2.19 NPC transmission system including the dropping from 55% of the total in 1992 to 33% by length of transmission lines for each voltage and the 1997. Geothermal and hydro power, although capacity of the substafions are shown in Annex 5. considerably increased, would only provide about 25% Besides the expansion of the generating capacity, NPC of the power generated by 1997. Thus, additional is carrying out the required expansion of its capacity would be provided by coal plants (increasing transmission systems, financed by several ongoing ADB from 8% in 1993 to 35% by 1997). Because and Bank loans, (Annex 13). The major portion of the geothermal energy is an indigenous resource and is transmission expansion will be at the 230 kV and 138 environmentally more benign than coal, geothermal kV levels. The planned connection between Luzon and plants are expected to increase their output from 900 leyte will operate as a high-voltage DC line (350 kV). MW in 1990 to about 2,000 MW by 1998. Increased With consultancy support under the Power hydro energy will also be generated by a few large Transmission and Rehabilitation Project (Loan 3626- projects that should be completed by the year 2000 PH), NPC is preparing a master plan for its 500 kV (Agbulu Casecnan, Binogan, Kanan and several small high-voltage transmission development. hydro) and will add about 1,000 MW. The newly discovered gas deposits offshore of Palawan offer promising future resources, but their use requires the construction of expensive gas pipelines. GENERATION CAPACITY IN LUZON System Losses 2.18 Total energy losses within the NPC system average about 7%, of which transmission losses are just 3%-3.5%; the difference stems from the in- plant use, which is commensurate with the substantial , requirement for auxiliary power for thermal generation. a At present, MERALCO and the RECs are attempting to reduce distribution losses considerably, and some of