Intelligent Investing

Not yet time to turn bullish on power

/ 05:06 AM April 22, 2019

Various parts of Luzon suffered from brownouts the past few weeks as the island’s grid went on red and yellow alerts due to insufficient operating reserves.

In times like these, power generation companies benefit as those with excess capacity are able to sell power to the Wholesale Electricity Spot Market (WESM) at high prices.


However, despite the ongoing brownouts in the Luzon grid, it is still not yet time to turn bullish on power generation companies.

The main reason why Luzon suffered from brownouts the past few weeks was the unplanned outage of the Sual plant. The Sual plant is old, making it vulnerable to unplanned outages. It is also quite big in terms of capacity, with each of its two units accounting for more than 5 percent of Luzon’s power requirement of 10,600 megawatts. The unplanned outage of one of the Sual plant’s units coupled with the unplanned outages and maintenance shutdowns of some smaller plants in the Luzon grid resulted in operating reserves becoming insufficient to cover demand.

However, there really is no shortage of reserves assuming that all plants in the Luzon grid are operating normally. Moreover, the cause of the Sual plant’s unplanned outage is nothing major. In fact, the problem has already been resolved as of this writing. The government is also no longer allowing power plants to go on maintenance shutdowns starting May, minimizing the risk that Luzon will suffer from consistent brownouts this summer.

Most importantly, there are several power plants that are currently under construction and are expected to come online in the next few years, namely, the first unit of the 2×668-MW supercritical coal-fired power plant of GNPower Dinginin in Bataan and the 640-MW Masinloc coal power generating facility in Zambales. The said plants together have a combined capacity of 1,300 megawatts which is equivalent to around 12 percent of Luzon’s demand. The anticipation that Luzon will eventually suffer from an oversupply is the reason why power generation companies are currently underperforming in the stock market. In fact, power generation companies are encountering difficulties in securing long term contracts at attractive prices.

While Luzon’s power supply situation is expected to be secure the next few years, it is at risk of suffering from a shortage in 2024. Aside from the 4-percent annual growth in power demand, the production of the Malampaya gas field is expected to drop significantly by 2024 as it becomes depleted. Note that the said gas field supplies fuel to power plants with a combined capacity of around 3,200 MW. Since it takes around five years to build a power plant, it is critical for the Energy Regulatory Commission (ERC) to start approving proposals to build new power plants by next year. Assuming that the ERC does not take action, listed power generation companies will benefit as power rates will most likely begin to go up due to expectations of an impending power shortage. However, it will be bad for the economy as the Luzon grid will really suffer from rolling brownouts similar to what happened in the 1990s.

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