SMC power plants incur losses on rising coal prices

Two power plants of SMC Global Power Holdings Corp (SMCGP) have incurred accumulated losses of 15 billion pesos due to skyrocketing global coal prices and unilateral restrictions on natural gas supplies from the Malambaya gas field.

Of this amount, the SMCGP said it decided to absorb 10 billion paisa and recover the remaining amount, which could lead to an increase in the energy rate if approved by the Energy Regulatory Commission (ERC).

On Monday, SMC conglomerate said the Swal coal plant and Elian natural gas power plant had already incurred combined losses of 15 billion pesos from 2021 to present. She attributed the losses to soaring coal prices that had already crossed the $400/MT level – away from the $60-$65/MT price range and the long-term outlook envisioned at the time of implementing its PSA with Manila Electric (Meralco) ) in 2019.

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

They recently introduced a temporary and partial relief to recover costs only for losses incurred in the January-May period, in the form of an increase in the price of contractual capacity under production sharing agreements to be amortized over a six-month period.

This will allow the power generation facilities to continue to obtain the necessary fuel and allow them to operate and be supplied with power. While this will lead to a temporary increase in prices, the network will continue to have an adequate supply of reliable base load power to keep the lights on for millions of individual consumers, households and industrial facilities,” SMC said.

These PSAs have undergone a competitive selection process (CSP) and were approved by the IER in 2019.

The Saudi Printing and Packaging Company will supply Miralco with 670 MW for a period of 10 years, starting on December 26, 2019 until December 25, 2029. SMEC will supply Miralco with a capacity of 330 MW during the same period.

SMC President and CEO Ramon S. Ang said the company had already decided to absorb more than 10 billion pesos in losses last year after coal prices averaged $176 per metric ton in the second half from $99/metric ton in the first half of 2021. Average coal price in 2019 and 2020 was only $69/mt.

“Unfortunately these prices have gone up more than 500 percent since then. We are not claiming all our losses nor are we asking for a permanent increase. We want to continue supplying Miralco with basic power. What we are asking is just temporary and equitable relief, to allow the power facilities to survive in this period and continue to supply Miralco with energy.

Ang said the continued rise in commodity prices was unprecedented and now, simply unsustainable. We took it upon ourselves to absorb over 10 billion pesos of losses last year when coal prices averaged $176/MT. Apparently, coal prices were between $60 and $65 per metric ton when we entered into these PSAs.

In fact, the widely held view at the time was that coal prices would continue to fall due to the global shift in the energy mix. Well, due to various reasons, coal prices continued to rise in 2021, and recently reached unprecedented levels, reaching $ 440 / metric ton, as happened mainly due to the Russian-Ukrainian conflict. ”

Proposed interest rate hike

ERC is asking for a January-May price increase of P0.80/kwh (to P5.10 from P4.30/kwh) for the contracted base load capacity of 670 MW from the Ilijan plant, averaging P4/kwh (to P8.30 of P4.30/kwh) for the contracted base load capacity of 330 MW from the Swal station. Overall, the company is looking to recover 5.2 billion pesos in losses for the period.

The net price impact on Meralco, assuming this cost recovery claim granted by the IER, is only P0.28/kwh over six months.

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

However, from the outset, this 3.5 percent increase in the fuel price component has long outpaced the massive and sustained escalation of coal prices from 2020 to 2022, which was at an annual rate of 125 percent. As such, the company has never made any money from implementing contracts that would allow it to cushion the blow from the recent unprecedented rise in coal prices, Ang said.

Coal prices during the period of the competitive selection process and contract execution were in the range of US$60 to US$65/metric ton. Price forecasts were also “outdated” or lower than the prevailing spot market.

“At the time, no one could have imagined that it would even exceed $80/MT. It was only expected to average $65/MT over the next 10 years. This is because it is widely known that coal production was in the range of $35 And $40/mt in Indonesia and other regional mines, and there’s also a strong global shift away from coal, which we’re doing as well.”

However, the unprecedented increases in global prices were caused by unusual circumstances, such as the disruptions in commodity markets caused by the coal export ban in Indonesia, the Russian-Ukrainian conflict, and the persistence of value chain problems 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 rose by 300 percent to 400 percent compared to the three-year average. In Australia and Singapore, energy prices rose by 140 percent and 50 percent, respectively.

In the case of the Elian Natural Gas Plant, questionable and unilateral notifications of gas restrictions that reduced or halted delivery of available capacity severely impacted the plant’s net generating capacity forcing it to acquire costly alternative fuels from the wholesale power company. Spot Market (WESM).

Meanwhile, Ang said: “SMC remains focused on maximizing all existing energy assets in our portfolio to continue to provide for the growing needs of the country during this critical period. These include existing renewable capacities and new battery energy storage system facilities, which help reduce energy waste and make variable renewable sources more viable. “

“Most importantly, the ongoing energy crisis we face has made us even more committed to finding sustainable solutions that will dramatically reduce our dependence on traditional sources while meeting the growing demands of our economy toward a clean energy future.”

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