Power plants of SMC incur losses on coal price rally

Two power plants of SMC Global Power Holdings Corp. (SMCGP) have accumulated losses amounting to P15 billion due to skyrocketing global coal prices and unilateral natural gas supply restrictions from the Malampaya gas field.

Of the amount, SMCGP said it decided to absorb P10 billion and to recover the remaining amount, which could result in a power rate hike if approved by the Energy Regulatory Commission (ERC).

On Monday, conglomerate SMC said the Sual coal plant and Ilijan natural gas power plant have already incurred combined losses of P15 billion from 2021 up to present. It attributed the losses to spiraling coal prices which have already breached the $400/metric ton (MT) level—way beyond the $60-$65/MT price range and long-term outlook contemplated at the time of the execution of its power supply agreements (PSA) with the Manila Electric Co. (Meralco) in 2019.

San Miguel Energy Corp. (SMEC) is the independent power producer of the 1,200MW Sual plant while the 1,200MW Ilijan plant was turned over recently to South Premiere Power Corp. (SPPC). Both are units of SMCGP, the power arm of SMC.

They recently filed a temporary and partial cost recovery relief only for the losses incurred from January to May, in the form of a rate increase on its contract capacity under the PSAs to be amortized over a period of six months.

“This will allow the power generation facilities to continue sourcing the necessary fuel and allow it to viably operate and supply power. While this will result in temporary increase in prices, the grid would continue to have adequate supply of reliable base load power to keep the lights on for the millions of individual consumers, households and industrial facilities,” SMC said.

These PSAs underwent competitive selection process (CSP) and were approved by the ERC in 2019.

SPPC is supplying Meralco 670 MW for 10 years that started on December 26, 2019 until December 25, 2029. SMEC is supplying 330MW to Meralco over the same period.

SMC President and CEO Ramon S. Ang said the company had already decided to absorb more than P10 billion in losses last year after coal prices averaged $176 per MT in the second half from just $99/MT in the first half of 2021. The average coal price in 2019 and 2020 was only at $69/MT.

“Unfortunately, those prices have increased by over 500 percent since then. We are not asking to recover all our losses, neither are we asking for a permanent increase. We want to continue supplying Meralco with baseload power. What we are asking for is just a temporary and equitable relief, to allow the power facilities to survive this difficult period and continue supplying power to Meralco,” he said.

Ang said the continuing spikes in commodity prices are unprecedented and now, simply untenable. “We have taken it upon ourselves to absorb over P10 billion in losses last year when coal prices reached an average of $176/MT. Apparently, coal prices were just at $60-$65/MT when we entered into these PSAs.

In fact, the widely held outlook at that time is that coal prices will even continue to go down because of a global shift in the energy mix. Well, due to various reasons, coal prices have continued to climb in 2021, and have recently reached unprecedented levels, as high as $440/MT, as triggered primarily by the Russia-Ukraine conflict,” he said.

Proposed rate hike

The company is asking the ERC for a rate increase for the January-to-May period of P0.80/kwh (to P5.10 from P4.30/kwh) for its 670 MW of contracted baseload capacity from the Ilijan plant, and an average of P4/kwh (to P8.30 from P4.30/kwh) for the 330 MW contracted baseload capacity from the Sual plant. Overall, the company is looking to recover P5.2 billion in losses for the period.

The net rate impact to Meralco, assuming that this cost recovery claim is granted by the ERC, is just P0.28/kwh over a period of six months.

Ang said that when its supply agreement was bid out by Meralco in 2019, unlike other bid participants, Sual and Ilijan proposed and adopted an escalation mechanism where the tariff price would start “very low”—to enable consumers to immediately benefit from the competitive selection, and just escalate at a fixed annual rate of 3.5 percent on the fuel price component.

However, from the start, this 3.5-percent fuel price component increase had long been outpaced by the massive and continuing escalation of coal prices from 2020 to 2022, which was at an annualized rate of 125 percent. As such, the company never made any money from contract execution that would allow it to soften the blow of the recent unprecedented spikes in coal prices, Ang said.

Coal prices both during the time of the competitive selection process and contract execution, were in the range of $60 to $65/MT. The price outlook was also “backward-dated” or lower than the prevailing spot market.

“At the time, no one could have imagined it would even exceed $80/MT. It was only expected to average at $65/MT over the next 10 years. That’s because it is widely known that coal production was at only $35 to $40/MT in Indonesia and other regional mines, and there is even a strong global transition away from coal, which we are also undertaking,” Ang said.

However, the unprecedented global price increases were triggered by extraordinary circumstances, such as disruptions in the commodities markets brought about by the Indonesia coal export ban, the Russia-Ukraine conflict, and continuing value chain issues caused by the Covid-19 pandemic.

He noted that in Germany, the United Kingdom, Spain and Nordic countries such as Sweden and Denmark, electricity prices have gone up by 300 percent to 400 percent as against the three-year average.  In Australia and Singapore power prices had gone up 140 percent and 50 percent, respectively.

In the case of the Ilijan natural gas plant, questionable and unilateral notices of gas restrictions which caused the deration or the ceasing of delivery of available capacity, had severely affected the plant’s net generation capacity forcing it to source for costly replacement fuel from the Wholesale Electricty Spot Market (WESM).

Meanwhile, Ang said, “SMC remains focused on maximizing all existing power assets in our portfolio to continue providing for the increasing needs of the country during this critical time. These include our existing renewable capacities and new Battery Energy Storage System facilities, which help limit power wastage and make variable renewable sources more viable.”

“More importantly, the continuing energy crisis we face has made us even more committed to finding sustainable solutions that will significantly reduce our dependence on traditional sources while satisfying the growing demands of our economy towards a clean energy future.”