Attractive Conditions For Waste-To-Energy
BMI View : We believe that UK-based waste-to-energy (WTE) developer Advanced Plasma's plan to develop a 60MW WTE plant in the Philippines reflects the attractiveness of the sector. This is because there is significant demand for output from the plant, the returns are relatively attractive and feedstock is readily available. That said, we highlight that there are still a number of challenges left for investors interested in developing WTE and biomass plants, such as the strict regulations governing disposal of waste and the improving supply and cost of coal.
On October 24, Philippine state media reported that UK-based waste-to-energy (WTE) developer Advanced Plasma Power was in talks with a Philippine landfill operator to build a GBP200mn WTE plant in the Philippines. The plant would have a nameplate capacity of 60MW, and would be fed by commercial, industrial and household waste collected from the region. Advanced Plasma intends to begin engineering and design before the end of the year, and has said that construction could start in mid-2014 and be completed before the end of that year. Advanced Plasma has also said that it might establish a unit in South East Asia if there was sufficient interest.
We believe that Advanced Plasma's plan to develop a 60MW WTE plant in the Philippines reflects the attractiveness of the sector. This can be attributed to three main factors:
Demand for new capacity: The electricity demand-supply gap in Philippines is extremely narrow as growth in generating capacity has trailed growth in consumption over the past decade ( see 'Regulatory Reforms Needed For New Investment', August 30 2012). This means that there is significant demand for output from the new WTE plant, and that a power purchase agreement should be easy to secure.
|Narrow Demand-Supply Gap|
|Philippines - Electricity Generation and Consumption, TWh (LHS) and Electric Power Transmission and Distribution Losses, % of output (RHS)|
Attractive returns: The WTE plant will receive a tariff of PHP6.63/kWh (US$0.15) for up to 20 years, under the country's feed-in tariff (FiT) law introduced in July 2012 ( see 'A Leap Forward, But Drags Remain', July 30 2012). This is around the average retail price of electricity, and should allow investors to reap attractive returns.
|Sector||Technology||Tariff (PHP/KWh)||Cumulative Capacity Limit||Payment Period (Years)||Revision|
|Biomass||6.63||250MW for biomass and hydro combined||20||2015|
|Hydro||Run-of-river||5.9||250MW for biomass and hydro combined||20||2015|
|Source: BMI's Feed-In-Tariff Database|
Growing amounts of waste: Per-capita generation of municipal solid waste (MSW) in the Philippines is still relatively low compared to the region, and is expected to increase as economic growth and increasing urbanisation leads to higher consumption. The World Bank forecasts that per-capita MSW generation will double over the next 15 years, making sanitary disposal of waste increasing problematic. This means that feedstock for WTE plants will be readily available, and investors may also profit from charging for waste disposal.
|MSW Generation To Grow|
|Philippines - MSW Generation Per Capita, kg/capita per day (LHS); Composition of MSW, % (RHS)|
We note that there have been a number of WTE and biomass plants in the Philippines over the last year, due to the improving outlook for the technology. Earlier this year, Philippine snack food manufacturer URC announced that it would build a 40MW biomass power plant fuelled by agricultural waste (namely bagasse from sugarcane pulp) from its Sonedco sugar mill in Kabankalan, Negros Occidental. The mill produces over 3,000 tonnes of agricultural waste per day, which the company usually has to pay to dispose off. However, the development of the plant would allow it to dispose of the waste for free, while allowing the plant to reduce its electricity costs ( see 'URC's Foray Into Biomass A Long-Term Play', January 30).
That said, we highlight that there are still a number of challenges left for investors interested in developing WTE and biomass plants. Regulations governing the sector are still extremely strict, including the Clean Air Act of 1999 (Republic Act No. 8749) which bans the incineration of waste. Disposal of waste also comes under the Ecological Solid Waste Management Act of 2000 (Republic Act No. 9003), which sets out safety and sanitation requirements. Investors will have to ensure that the technologies they utilise in WTE and biomass plants meet these stringent standards, forcing them to adopt more advanced (and possibly costlier) technologies such as anaerobic digestion, fermentation and gasification.
We also note that the supply and cost of coal-fired electricity is set to increase in the mid- to long-term, which could undermine the economic viability of WTE. Over the past six months, various utilities and independent power producers have launched a flurry of coal-fired power plant projects. The supply of coal is also set to increase over the mid- to long-term, as the Philippine government has made pertinent moves in unlocking the country's sizeable coal reserves ( see 'ThomasLloyd's Philippine Biomass Play Threatened By Coal', February 13). This leads us to view coal as increasingly important within the country's power mix, and we are forecasting its share in the mix to increase over our forecast period ( see 'Shifting Dynamics Within The Power Sector', February 7).