Privatization of National Power's Generation and TransCo's Transmission Assets

The Philippine power industry, which emerged from a virtually crippling energy crisis in the 1990s, continues to face major challenges that it will have to hurdle if it is to provide consumers a reliable and secure electricity supply at reasonable prices. The privatization of the sector is seen as an appropriate response to these challenges. The strategy is also expected to attract substantial investments in the energy sector to fend off a looming power crisis.

The privatization of the assets assumed by PSALM from the National Power Corporation (NPC) is anticipated to raise this needed capital. For one, the new owners of the privatized assets will have to undertake improvements in their assets to ensure that they remain competitive and viable. On the other hand, the government will be able to use the proceeds from the sold assets to settle the debts of NPC, thereby helping reduce the country's consolidated public sector deficit.

Seen as the key to dismantling the monopoly by government, the privatization of the generation assets is programmed to promote competition in the sector by expanding the ownership base. Republic Act No. 9136, the Electric Power Industry Reform Act (EPIRA), limits the ownership of generation assets by a single owner to only 30% of the generating capacity within a single grid. This means that in any single grid, there can be at least four different owners of generation assets to allow competition. The privatization of the generation assets will help bolster competition as envisioned by the EPIRA. This will also usher in a new regime where open access and retail competition will prevail to enable electricity consumers to enjoy the benefits of a restructured electricity industry.

In summary, the objectives of power privatization are:

Among the tasks that the appointed IPPAs handle are:

  • Orderly and transparent privatization of the government's power and other disposable assets in order to liquidate NPC's financial obligations
  • Broader ownership base
  • Inflow of private capital
  • Reliable and secure power supply
  • Transparent and reasonable electricity prices
  • Competitive operation of the electricity market

  • Ultimately, the privatization of the Philippine power industry will significantly contribute to promoting competition; thus, providing the electricity consumers the "power of choice".

Independent Power Producer Administration

The Independent Power Producer Administrators (IPPAs) are qualified private sector independent entities that will administer and manage the output from the Energy Conversion Agreements (ECAs) and Power Purchase Agreements (PPAs) that NPC entered into with the IPPs. The IPPAs are appointed through public biddings conducted by PSALM.

An opportunity to trade in the WESM without the expense of building a brand new plant

The IPPA process provides successful bidders a way to enter the Wholesale Electricity Spot Market (WESM) for a minimal capital outlay. The approach adopted provides the administrators an opportunity to trade in the WESM without the expense of building a new plant.

The Sual and Pagbilao structure, for example, enables the administrators to pay the monthly fees, both for the opportunity to trade, and the payments for the physical assets, out of cash flow. Thus, no upfront financing is required. This structure was also adopted for the Ilijan, San Roque and Bakun Mini-Hydro.

For Unified Leyte Geothermal Power Plants (ULGPPs) Strips of Energy and Mindanao I and II Geothermal Power Plants, a different structure was adopted since the subject of the bid is only the energy output of the plants.

This is a unique way to enter the WESM. The assets are relatively new, high-quality plants that were built and are well maintained by the best IPP developers in the world. The IPPAs will have most of the benefits of being owners of generating stations, including controlling the supply of fuel and its dispatch, trading, and contracting of the plant, but without maintenance costs or capital upgrades.

Role of IPP Administrators

Among the tasks that the appointed IPPAs handle are:

  • Unfettered ability to trade the IPP energy output in the WESM.
  • Unfettered ability to procure their fuel requirements (coal plants only).
  • Guaranteed revenues for the first few years through the assignment of Transition Supply Contracts (TSCs) (thermal plants only).
  • Freedom to enter into bilateral contracts and seek other markets for the balance of their contracted capacities and energy.
  • Freedom to enter into other forms of financial hedging instruments if desired to manage their position in and exposure to the market.

Who May Qualify as IPPA

  • International and local companies that are financially and technically qualified.
  • Financially qualified international and local companies whose affiliates are technically qualified.
  • IPP sponsors.